UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2001
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File No. 1-7170
IMCO Recycling Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
75-2008280
(I.R.S. Employer Identification No.)
5215 North O'Connor Blvd., Suite 1500
Central Tower at Williams Square
Irving, Texas 75039
(Address of principal executive offices) (Zip Code)
(972) 401-7200
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of business on April 30, 2001.
Common Stock, $0.10 par value, 15,929,169
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
-------
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, December 31,
2001 2000
------------------ -------------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 4,870 $ 5,014
Accounts receivable, net of allowance of $2,466 and $2,421 at
March 31, 2001 and December 31, 2000, respectively. Net of
sold receivables of $73,500 and $90,000 at March 31, 2001 and
December 31, 2000, respectively. 29,462 21,229
Inventories 43,151 56,318
Deferred income taxes 3,727 3,726
Other current assets 11,717 10,450
------------------ -------------------
Total Current Assets 92,927 96,737
Property and equipment, net 194,354 196,133
Excess of acquisition cost over the fair value of net assets acquired,
net of accumulated amortization of $18,236 and $17,215 at
March 31, 2001 and December 31, 2000, respectively 116,995 117,845
Investments in joint ventures 15,626 15,249
Other assets, net 5,533 7,707
------------------ -------------------
$425,435 $433,671
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 84,904 $ 83,552
Accrued liabilities 9,841 13,097
Current maturities of long-term debt 112 112
------------------ -------------------
Total Current Liabilities 94,857 96,761
Long-term debt 122,187 128,786
Deferred income taxes 15,899 15,899
Other long-term liabilities 10,722 10,368
STOCKHOLDERS' EQUITY
Preferred stock; par value $.10; 8,000,000 shares authorized;
none issued - -
Common stock; par value $.10; 40,000,000 shares authorized;
17,124,075 issued at March 31, 2001; 17,119,420 issued
at December 31, 2000 1,712 1,712
Additional paid-in capital 99,121 106,137
Retained earnings 100,439 100,807
Accumulated other comprehensive loss from foreign currency
translation adjustments and hedging (4,864) (5,143)
Net unrealized loss on long-term marketable equity securities (173) -
Treasury stock, at cost; 1,194,906 shares at March 31, 2001;
1,789,152 shares at December 31, 2000 (14,465) (21,656)
------------------ -------------------
Total Stockholders' Equity 181,770 181,857
------------------ -------------------
$425,435 $433,671
================== ===================
Page 2
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share data)
For the three months
ended March 31,
-----------------------------------
2001 2000
----------------- --------------
Revenues $ 187,352 $ 223,259
Cost of sales 179,496 207,157
----------------- --------------
Gross profits 7,856 16,102
Selling, general and administrative expense 4,719 7,187
Amortization expense 1,288 1,282
Interest expense 3,029 4,313
Fees on sale of receivables 1,211 -
Interest and other income (441) (57)
Equity in earnings of affiliates (1,037) (670)
----------------- --------------
(Loss) earnings before (benefit) provision for income taxes
and minority interests (913) 4,047
(Benefit) provision for income taxes (556) 1,381
----------------- --------------
(Loss) earnings before minority interests (357) 2,666
Minority interests, net of provision for income taxes 10 102
----------------- --------------
Net (loss) earnings $ (367) $ 2,564
================= ==============
Net (loss) earnings per common share:
Basic $ ( 0.02) $ 0.17
Diluted $ ( 0.02) $ 0.17
Weighted average shares outstanding:
Basic 15,353 15,497
Diluted 15,353 15,510
Dividends declared per common share $ - $ 0.06
Page 3
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
For the three months
ended March 31,
------------------------------------------
2001 2000
--------------- -----------------
OPERATING ACTIVITIES
Net (loss) earnings $ (367) $ 2,564
Depreciation and amortization 6,989 7,126
Provision for deferred income taxes - 134
Equity in earnings of affiliates (1,037) (670)
Other non-cash charges (62) 454
Changes in operating assets and liabilities:
Accounts receivable 7,616 (6,681)
Accounts receivable sold (16,500) -
Inventories 13,099 1,006
Other current assets 933 (1,143)
Accounts payable and accrued liabilities (3,197) (29,017)
--------------- -----------------
Net cash from (used by) operating activities 7,474 (26,227)
INVESTING ACTIVITIES
Payments for property and equipment (3,385) (7,986)
Other 2,607 (1,561)
--------------- -----------------
Net cash used by investing activities (778) (9,547)
FINANCING ACTIVITIES
Net (payments of) proceeds from long-term revolving credit facility (6,600) 46,000
Principal payments of long-term debt - (17)
Dividends paid - (916)
Purchases of treasury stock - (9,136)
Other 67 296
--------------- -----------------
Net cash (used by) from financing activities (6,533) 36,227
Effect of exchange rate differences on cash and cash equivalents (307) (19)
--------------- -----------------
Net (decrease) increase in cash and cash equivalents (144) 434
Cash and cash equivalents at January 1 5,014 2,578
--------------- -----------------
Cash and cash equivalents at March 31 $ 4,870 $ 3,012
=============== =================
SUPPLEMENTARY INFORMATION
Cash payments for interest $ 3,256 $ 3,776
Cash payments for income taxes $ 231 $ 273
Page 4
IMCO RECYCLING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2001
(dollars in tables are in thousands, except per share data)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31,
2001 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2001. The accompanying financial statements include
the accounts of IMCO Recycling Inc. and all of its subsidiaries (collectively,
except where the context otherwise requires, the "Company"). All significant
intercompany accounts and transactions have been eliminated. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000. Certain reclassifications have been made to prior period
statements to conform to the current period presentation.
NOTE B - RECEIVABLES SALE
The net proceeds under the Company's Receivables Sale Agreement were $73,500,000
and $90,000,000 at March 31, 2001 and December 31, 2000, respectively. During
the first quarter of 2001, the Company incurred fees on the sale of its
receivables in the amount of $1,211,000. See Item 2. - "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Results of
Operations - Fees on Receivables Sale."
Page 5
NOTE C - INVENTORIES
The components of inventories are:
March 31, December 31,
2001 2000
----------------- ------------------
Finished goods $ 19,437 $ 30,357
Raw materials 22,013 23,856
Supplies 1,701 2,105
----------------- ------------------
$ 43,151 $ 56,318
================= ==================
NOTE D - INCOME TAXES
The Company recorded an effective tax benefit rate of 61% for the three month
period ended March 31, 2001 as compared to an effective tax rate of 34% for the
comparable period in 2000. The benefit recorded in 2001 is due to lower
earnings in the first quarter and to a greater percentage of the Company's
income derived from the Company's interest in its VAW-IMCO joint venture, which
is reported on an after-tax basis. The tax provision or benefit is calculated
on the Company's domestic income or loss while the effective tax rate percentage
calculation discussed above includes the after-tax income from VAW-IMCO.
NOTE E - NET EARNINGS PER SHARE
The following table sets forth the reconciliation between weighted average
shares used for calculating basic and diluted earnings per share (EPS):
Three months ended
March 31,
---------------------------
2001 2000
---------- ----------
Weighted average shares outstanding
for basic earnings per share 15,353 15,497
Effect of employee stock options - 13
---------- ----------
Weighted average shares outstanding
for diluted earnings per share 15,353 15,510
========== ==========
In May 2000, the Company entered into a forward share repurchase agreement,
which must be settled by May 31, 2001. By the settlement date, the Company plans
to purchase 644,500 shares at $7.70 per share from a financial institution, for
a total consideration of $4,965,808, under this agreement. The purchased shares
will be included in treasury shares. The effect of this purchase agreement has
been considered in determining diluted EPS.
Page 6
NOTE F - DERIVATIVES
Effective January 1, 2001, the Company adopted SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS 138. The
Company generally enters into production derivatives to hedge the cost of energy
and the sales price of certain aluminum and zinc products. It is the Company's
policy not to speculate in hedging activities. All derivatives are documented
when entered into and are designated as either cash flow or fair value hedges.
All derivatives are recognized as either assets or liabilities in the balance
sheet and are measured at fair value. All resulting gains or losses are either
recognized in earnings in the period of change or as a component of other
comprehensive income (loss) based on the type of hedge and effectiveness of the
hedge.
NATURAL GAS RISK MANAGEMENT
The Company uses natural gas forward contracts to manage unanticipated
fluctuations in natural gas prices. These instruments generally cover a period
of one to three years on forecasted usage of natural gas measured in British
Thermal Units ("BTU"). The Company accounts for natural gas forward contracts
as cash flow hedges. Such financial instruments are marked-to-market using
forward prices with the offset to other comprehensive income, net of applicable
income taxes. Subsequently, the gain or loss is recognized as a component of
cost of goods sold in the same period or periods during which the hedged
transaction affects earnings. For the quarter ended March 31, 2001, the Company
recognized approximately $1,618,000 in net gain on its natural gas hedge
program. At March 31, 2001, the Company had natural gas futures contracts
outstanding with an aggregate notional amount of approximately 4,100,000 BTU.
ALUMINUM SALES PRICE RISK MANAGEMENT
The Company uses aluminum forward contracts mostly to hedge the sales price of
aluminum production from our Morgantown, Kentucky Salt Processing Facility
(SPF). These instruments generally cover a period of up to one year of
forecasted production measured in tonnes of aluminum. The Company accounts for
the aluminum forward contracts as cash flow hedges. Such financial instruments
are marked-to-market using forward prices with the offset to other comprehensive
income, net of applicable income taxes. Subsequently, the gain or loss is
recognized as a component of revenues in the same period or periods during which
the hedged transaction affects earnings. For the quarter ended March 31, 2001,
the Company recognized approximately $116,000 in net loss on its aluminum
forward hedging program. At March 31, 2001, the Company had aluminum forward
contracts outstanding with an aggregate notional amount of approximately 1,000
Tonnes.
Page 7
ZINC SALES PRICE RISK MANAGEMENT
The Company uses a combination of zinc forward contracts and zinc call options
contracts to hedge the sales price of zinc production. These instruments
generally cover a period of one to two years of forecasted production measured
in tonnes of zinc. The Company accounts for the zinc forward contracts and call
options contracts as cash flow hedges. Such financial instruments are marked-to-
market using forward/call prices with the offset to other comprehensive income,
net of applicable income taxes. Subsequently, the gain or loss is recognized as
a component of revenues in the same period or periods during which the hedged
transaction affects earnings. For the quarter ended March 31, 2001, the Company
recognized approximately $494,000 in net loss on its zinc forward and call
options hedging program. At March 31, 2001, the Company had zinc forward and
call options contracts outstanding with an aggregate notional amount of
approximately 17,000 Tonnes.
As of March 31, 2001, the Company recorded total hedge assets of $2,191,000 and
liabilities of $1,587,000. The fair value of these contracts at March 31, 2001
resulted in a net gain of $604,000 net of tax, recorded in other comprehensive
income. The ineffective portion of these contracts is considered to be
immaterial. The contracts expire at various dates through May 2003.
NOTE G - OPERATIONS
The Company's operations, like those of other basic industries, are subject to
federal, state, local and foreign laws, regulations and ordinances. These laws
and regulations (1) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes and (2) impose liability
for costs of cleaning up, and certain damages resulting from past spills,
disposals or other releases of hazardous substances. It can be anticipated that
more rigorous environmental laws will be enacted that could require the Company
to make substantial expenditures, in addition to those described in this Form
10-Q and the Company's Form 10-K for the year ended December 31, 2000.
From time to time, operations of the Company have resulted, or may result, in
certain noncompliance with applicable requirements under environmental laws.
However, the Company believes that any such noncompliance under such
environmental laws would not have a material adverse effect on the Company's
financial position or results of operations.
In 1997, the Illinois Environmental Protection Agency ("IEPA") notified the
Company that two of the Company's zinc subsidiaries are potentially responsible
parties ("PRP") pursuant to the Illinois Environmental Protection Act for the
cleanup of contamination at a site in Marion County, Illinois to which these
subsidiaries, among others, in the past sent zinc oxide for processing and
resale. These subsidiaries have joined a group of PRPs
Page 8
that are planning to negotiate with the IEPA regarding the cleanup of the site.
The site has not been fully investigated and final cleanup costs have not yet
been determined. Although no assurances can be made, based on current cost
estimates and information regarding the amount and type of materials sent to the
site by the subsidiaries, the Company does not believe that its potential
liability at this site, if any, will have a material adverse effect on its
financial position or results of operations.
On February 15, 2001, the State of Michigan filed a lawsuit against the Company
in the State Circuit Court for the 30/th/ District, Ingham County, Michigan. The
lawsuit arises out of disputes between the Michigan Department of Environmental
Quality and the Company's subsidiaries located in Coldwater, Michigan (Alchem
Aluminum Inc. ("Alchem") and IMCO Recycling of Michigan LLC ("IMCO Michigan")),
concerning air permits and emissions at the specification aluminum alloy
production facilities in Coldwater, Michigan. The plaintiffs claim injunctive
relief and penalties for alleged noncompliance with and violations of federal
and state environmental laws. The suit seeks compliance by the Company as well
as potentially substantial monetary penalties. The Company believes it has
meritorious defenses and plans a vigorous defense. While no assurances can be
given, the Company does not believe that this action will have a material
adverse effect on its financial condition or results of operations.
In addition, on April 27, 2001, the U.S. Environmental Protection Agency, Region
V, issued to the Company a Notice of Violation ("NOV") alleging violations of
the federal Clean Air Act, primarily for violations of the Michigan State
Implementation Plan at the Company's Coldwater, Michigan facilities. The NOV
addresses the same instances of noncompliance raised in the State of Michigan
lawsuit, alleging that the Company purportedly failed to obtain appropriate
preconstruction air quality permits prior to conducting modifications to the
Alchem production facilities and exceeded permitted emissions from both the
Alchem and IMCO Michigan facilities located in Coldwater. The Company is
currently investigating the allegations contained in the NOV.
Additionally, there exists the possibility that expenditures could be required
at the Coldwater site and at other Company facilities from time to time,
because of new or revised regulations that could require that additional
expenditures be made for compliance purposes. These expenditures could
materially affect the Company's results of operations in future periods.
NOTE H - OTHER COMPREHENSIVE INCOME
Three months ended
March 31,
--------------------------------
2001 2000
--------------- ------------
Net (loss) income $ (367) $ 2,564
Unrealized gain on hedge instruments 604 -
Foreign currency translation adjustment
and other (498) (1,315)
--------------- ------------
Comprehensive (loss) income $ (261) $ 1,249
=============== ============
NOTE I - SEGMENT REPORTING
The Company has two reportable segments: aluminum and zinc. The aluminum
segment represents all of the Company's aluminum melting, processing, alloying,
brokering and salt cake recovery activities, including investments in joint
ventures. The Company's
Page 9
zinc segment represents all of the Company's zinc melting, processing and
brokering activities.
There has been no material change in the Company's segment classifications
during 2001.
Three months ended
March 31,
----------------------------------
2001 2000
--------------- ---------------
Revenues:
Aluminum $ 134,528 $ 167,319
Zinc 52,824 55,940
--------------- ---------------
Total revenues $ 187,352 $ 223,259
=============== ===============
Income:
Aluminum $ 5,756 $ 9,486
Zinc 760 4,123
--------------- ---------------
Total segment income 6,516 13,609
Unallocated amounts:
General and administrative expense (2,000) (4,061)
Amortization expense (1,288) (1,282)
Interest expense (3,029) (4,313)
Fees on sale of receivables (1,211) -
Interest and other income 99 94
--------------- ---------------
(Loss) Earnings before (benefit) provision for income
taxes and minority interests $ (913) $ 4,047
=============== ===============
Page 10
NOTE J - VAW-IMCO
The Company owns a 50% interest in an aluminum recycling joint venture in
Germany, VAW-IMCO Guss und Recycling GmbH ("VAW-IMCO"). At March 31, 2001 and
2000, the Company's equity in the net income of VAW-IMCO is stated as $1,009,000
and $472,000, respectively. The following table represents the condensed income
statements for VAW-IMCO for the three month periods ended March 31, 2001 and
2000.
Three months ended
March 31,
---------------------------------
2001 2000
--------------- ---------------
Revenues $ 65,242 $ 48,262
Gross Profit $ 15,503 $ 11,953
Net Income $ 1,974 $ 949
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------- CONDITION AND RESULTS OF OPERATIONS
A majority of the Company's processing volumes consists of aluminum tolled for
its customers. Tolling revenues reflect only the processing cost and the
Company's profit margin. The Company's processing activities also consist of
the processing, recovery and specialty alloying of aluminum and zinc metal and
the production of other value-added zinc products for sale by the Company. The
revenues from these sales transactions include the cost of the metal, as well as
the processing cost and the Company's profit margin. Accordingly, tolling
business produces lower revenues and costs of sales than the product sales
business. Variations in the mix between these two types of transactions could
cause revenue amounts to change significantly from period to period. As a
result, the Company has traditionally considered processing volume to be a more
important determinant of performance than revenues.
Page 11
The following table shows total pounds processed, the percentage of total pounds
processed represented by tolled metals, total revenues and total gross profits
(in thousands, except percentages):
Three months ended
March 31,
---------------------------------
2001 2000
-------------- --------------
Pounds processed 622,674 766,306
Percentage of pounds tolled 62% 55%
Revenues $ 187,352 $ 223,259
Gross profits $ 7,856 $ 16,102
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
PRODUCTION. For the three month period ended March 31, 2001, the Company melted
-----------
622.7 million pounds, 19% less metal compared to 766.3 million pounds during the
same period in 2000. The aluminum and zinc segments accounted for 86% and 14%,
respectively, of the overall production decrease for the three month period.
Tolling activity for the three month period ended March 31, 2001 represented 62%
of total pounds processed, compared to 55% for the same period in 2000.
The following table shows the total pounds processed and the percentage tolled
for the aluminum and zinc segments (in thousands, except percentages):
Three months ended
March 31,
--------------------------------
2001 2000
-------------- -------------
Pounds Processed:
Aluminum 573,553 697,459
Zinc 49,121 68,847
-------------- -------------
Total Pounds Processed 622,674 766,306
============== =============
Percentage Tolled:
Aluminum 67% 60%
Zinc 3% 6%
Total Percentage Tolled 62% 55%
Page 12
ALUMINUM PRODUCTION: For the three month period ended March 31, 2001, the
Company melted 18% less aluminum than it did during the same period in 2000. The
decrease in aluminum production for the three-month period was primarily due to
a reduction in can stock volume, increased selectivity in scrap purchases by the
Company in an attempt to improve profit margins and lower demand in the
specification alloys business due to reduced automobile production. The
reduction in can stock volume was experienced primarily at the Post Falls, Idaho
facility, where a major customer discontinued its can stock business, and at the
Rockwood, Tennessee facility, where its largest customer reduced the amount of
scrap used in its production mix. Overall production was also impacted by the
closure of the Bedford, Indiana facility and the temporary shutdown of the
Wendover, Utah facility. The Wendover facility was temporarily closed due mainly
to the lack of scrap and dross as a result of the shutdown of primary aluminum
production capacity in the Pacific Northwest.
The increase in aluminum percentage tolled in 2001 compared to the three month
period ending March 31, 2000 is primarily due to the new Saginaw, Michigan
plant, which supplies aluminum under a supply agreement to General Motors.
ZINC PRODUCTION: For the three month period ended March 31, 2001, the Company
melted 29% less zinc than it did during the same period in 2000, mainly due to
higher natural gas costs and lower zinc prices which limited profitable
processing opportunities.
REVENUES. For the three month period ended March 31, 2001, the Company's
---------
consolidated revenues decreased 16% to $187,352,000 compared to $223,259,000 for
the same period in 2000. The aluminum and zinc segments accounted for 91% and
9%, respectively, of the overall revenue decrease for the three month period.
Product sales, compared to tolling transactions, expose the Company to a greater
degree of market risk because of fluctuations in the price of scrap metal which
the Company must buy as raw material, and fluctuations in the then-prevailing
aluminum and zinc market prices at which the Company sells the resulting
processed metal. The Company's aluminum specialty alloying activities, which
serve the transportation market, and the Company's zinc segment operations
primarily consist of product sales business.
Page 13
The following table shows the total revenues for the aluminum and zinc segments
(in thousands) (See NOTE I - SEGMENT REPORTING):
Three months ended
March 31,
-----------------------------
2001 2000
------------- -------------
Revenues:
Aluminum $ 134,528 $ 167,319
Zinc 52,824 55,940
------------- -------------
Total Revenues $ 187,352 $ 223,259
============= =============
ALUMINUM REVENUES: For the three month period ended March 31, 2001, the
Company's aluminum revenues decreased 20% as compared to the same three month
period in 2000. The decrease was due principally to lower production volumes,
as discussed above.
ZINC REVENUES: For the three month period ended March 31, 2001, the Company's
zinc revenues decreased 6% as compared to the same period in 2000. This
decrease was also due to lower production volumes.
GROSS PROFITS. For the three month period ended March 31, 2001, the Company's
--------------
consolidated gross profits decreased 51% to $7,856,000 as compared to
$16,102,000 in the same period in 2000.
Page 14
The following table shows the total income for the aluminum and zinc segments
and a reconciliation of segment income to the Company's consolidated gross
profits (in thousands) (See NOTE I - SEGMENT REPORTING):
Three months ended
March 31,
--------------------------------
2001 2000
-------------- --------------
Segment Income:
Aluminum $ 5,756 $ 9,486
Zinc 760 4,123
-------------- --------------
Total segment income 6,516 13,609
Items not included in gross profits:
Plant selling expense 1,316 1,435
Management SG&A expense 1,403 1,691
Equity in earnings of affiliates (1,037) (670)
Other income (342) 37
-------------- --------------
Gross Profits $ 7,856 $ 16,102
============== ==============
ALUMINUM INCOME: For the three month period ended March 31, 2001, the Company's
aluminum income decreased 39% as compared to the same period in 2000. The first
quarter was affected by higher natural gas costs, lower processing volumes and
weaker profit margins.
ZINC INCOME: For the three month period ended March 31, 2001, the Company's
zinc income decreased 82% as compared to the same period in 2000. This was due
to large increases in natural gas costs, weaker processing volumes and lower
prevailing prices for the Company's zinc products.
SG&A EXPENSES. Selling, general and administrative expenses for the three month
--------------
period ended March 31, 2001 were $4,719,000, a decrease of 34% over $7,187,000
for the comparable period last year. The decrease in this period resulted
primarily from a reduction in headcount and a reduction in employee incentive
costs.
AMORTIZATION EXPENSE. Amortization expense for the three month period ended
---------------------
March 31, 2001 was $1,288,000, about equal to the $1,282,000 recorded in the
same period last year.
Page 15
INTEREST EXPENSE. Interest expense for the three month period ended March 31,
-----------------
2001 and 2000 was $3,029,000 and $4,313,000, respectively, representing a
decrease of 30% in 2001. The decrease in this period is due mainly to lower
borrowing costs, offset by fees on the sale of receivables in 2001 (see FEES ON
RECEIVABLES SALE below).
FEES ON RECEIVABLES SALE. On November 2, 2000, the Company and certain of its
------------------------
subsidiaries entered into a Receivables Sale Facility with a special purpose
subsidiary corporation of the Company, under which the Company and each of those
subsidiaries have sold receivables and other related assets to the special
purpose subsidiary that, in turn has sold undivided interests therein to certain
financial institutions and other entities. Fees in connection with this transfer
for the three month period ended March 31, 2001 were $1,211,000 (see NOTE B-
RECEIVABLES SALE).
NET EARNINGS. Net earnings decreased 114% to a loss of $367,000 for the three
-------------
month period ended March 31, 2001 as compared to net income of $2,564,000 for
the same period in 2000. The decrease in this period was primarily the result
of higher natural gas costs, lower metal margins and lower production volumes.
The Company recorded an effective tax benefit rate of 61% for the three month
period ended March 31, 2001 as compared to an effective tax rate of 34% for the
comparable period in 2000. The benefit recorded in 2001 is due to lower
earnings in the first quarter and to a greater percentage of the Company's
income derived from the Company's interest in its VAW-IMCO joint venture, which
is reported on an after-tax basis. The tax provision or benefit is calculated
on the Company's domestic income or loss while the effective tax rate
calculation includes the after tax income from VAW-IMCO.
At March 31, 2001 and 2000, the Company's equity in the net income of VAW-IMCO
is stated at $1,009,000 and $472,000, respectively (See NOTE J - VAW-IMCO).
SPECIAL FACTORS AND OUTLOOK
Certain of the statements below contain projections and estimates based on
current expectations for the remainder of 2001 and for subsequent periods. These
statements are forward-looking in nature and actual results may differ
materially due to a number of reasons, as more fully described under the section
titled "CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD LOOKING STATEMENTS" below.
These statements do not reflect the potential impact of any acquisitions or
divestitures that may be completed or unforeseen events that may occur after the
date of this filing.
During the first quarter of fiscal 2001, market factors that negatively affected
the Company's results of operations and financial condition included:
. reduced volume at its aluminum recycling facilities due to lower market
demand from customers serving the aluminum can stock market;
Page 16
. higher natural gas fuel costs in both the aluminum and zinc
segments;
. continued weak market conditions for its customers serving the truck,
trailer and construction sectors;
. decisions by the Company not to accept lower margin business;
. higher costs of scrap - coupled with lower selling prices for its
finished aluminum products (due to excess overall alloying industry
capacity) - at the Company's aluminum alloying facilities; and
. lower margins in both the aluminum and zinc segments.
As a result of market factors, the Company has decided to reduce some of its
capacity and reallocate that processing work to other facilities. In January
2001 it permanently closed its Bedford, Indiana aluminum facility and its
Chicago, Illinois zinc oxide plant. It also temporarily shut down its Wendover,
Utah facility, due to a decrease in dross processing from primary aluminum
customers in the Pacific Northwest (caused by capacity curtailments by those
customers due to high power rates). Utility power administrators may extend the
primary producers' shutdown for as long as two years.
For the remainder of fiscal 2001, the Company expects many of the conditions
currently prevailing to continue. Continued weak demand from can stock customers
and lower margins in the alloys business, coupled with higher fuel costs, should
continue to negatively impact the Company's results of operations for its
aluminum alloys and aluminum recycling businesses. However, management
anticipates some margin improvement for its aluminum segment in 2001, due to
cost reductions, changes in Company scrap buying procedures, reduced
inventories, and reallocation of processing volumes among its aluminum plants.
The Company's zinc segment experienced declining margins during the fourth
quarter of 2000 that has continued into 2001, due to the impact of higher fuel
prices and zinc price and volume declines due to weaker U.S. economic
conditions.
The Company is continuing to focus on its cost reduction initiatives. The
Company has reduced personnel headcount by 7% in the first quarter of 2001 which
was in addition to the 11% reduction carried out late last year. The Company is
also focusing on tighter inventory controls, less fuel usage and improvements in
metal recoveries. Closing less efficient facilities and reallocating those
facilities' processing work to other facilities should result in future cost
savings. Additional natural gas hedges have been put in place during the first
quarter. In addition, the Company is beginning to recover a portion of the
higher gas costs it experienced in 2000 through escalation clauses that form a
part of some customer contracts. In certain instances where contracts do not
provide for escalator clauses, the Company has added natural gas surcharges to
its tolling or sales prices.
Page 17
Additional factors that should positively affect fiscal 2001 results include
further restructuring of the Company's processing network that is intended to
raise individual plants' operating rates. Other factors are the addition of new
rotary furnaces designed to consume less energy, and furnace burner technology
retrofits to reduce energy consumption and increase processing productivity.
Financing costs are expected to decline due to the downward trend in interest
rates.
The Company is also reviewing opportunities to dispose of certain assets.
Additionally, the Company is continuing to review expansion opportunities,
particularly in Europe and in Latin America, through expansion of its major
customer relationships, and project venture partnering opportunities. Further
expansions of the VAW-IMCO joint venture facilities are planned in 2001 as well.
Management for the Company currently believes that total processing volumes will
marginally increase and that the Company will be profitable for each of the
remaining three quarters of 2001.
No assurances can be made that any of these anticipated results will actually be
achieved. In addition, the Company disclaims any obligation to update any
forward-looking statements to reflect events or circumstances after the date
hereof.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS. Operations provided $7,474,000 of cash during the
--------------------------
first three months of 2001 and utilized $26,227,000 of cash during the first
three months of 2000. Changes in operating assets and liabilities resulted in a
cash provision of $1,951,000 for the three months ended March 31, 2001 compared
to a use of $35,835,000 for the same period in 2000. The extent of the change in
operating assets and liabilities was primarily due to a reduction of inventory,
providing cash of $13,099,000 for the first three months of 2001 compared to
providing $1,006,000 in the first quarter of 2000. Accounts payable and accrued
liabilities were also a contributing factor to the overall change. Decreases in
accounts payable and accrued liabilities were $3,197,000 for the three month
period ended March 31, 2001 as compared to $29,017,000 for the comparable 2000
period. The net loss of $367,000 for the first quarter of 2001 compared to net
income of $2,564,000 for the comparable 2000 period, worked to reduce the
overall level of cash provided from operations.
A reduction in the amount of receivables eligible for sale under the Company's
Receivables Sales Facility during the first quarter of 2001 represented a use of
$16,500,000 in cash.
CASH FLOWS FROM INVESTING ACTIVITIES. During the three month period ended March
------------------------------------
31, 2001, net cash used by investing activities was $778,000 as compared to
$9,547,000 for the same period in 2000. The difference in these two periods is
primarily
Page 18
due to a reduction in payments for property, plant and equipment in 2001. The
Company's total payments for property, plant and equipment in the first three
months of 2001 decreased to $3,385,000, as compared to $7,986,000 spent in the
first three months of 2000. Capital expenditures for property, plant and
equipment in 2001 are now expected to approximate $12,000,000.
CASH FLOWS FROM FINANCING ACTIVITIES. Net cash used by financing activities was
------------------------------------
$6,533,000 for the three month period ended March 31, 2001, as compared to
providing $36,227,000 for the same period of 2000. In the first three months of
2001, the Company made net payments on its revolving credit facility of
$6,600,000. For the first three months of 2000, the Company had net borrowings
of $46,000,000. The resulting net payments in 2001 versus the net borrowings in
2000 were due primarily to fluctuations in working capital requirements. At
March 31, 2001, the Company had $107,300,000 in indebtedness outstanding under
its long-term revolving credit facility and had approximately $65,474,000
available for borrowing. In addition, there were standby letters of credit
outstanding with several banks totaling $3,066,000. However, the Company is
currently unable to use all of the borrowing capacity available under its Credit
Agreement due to limitations imposed under the Agreement.
Financing activities for the first three months in 2000 included cash payments
of $916,000 for dividends. Due to the Company's Board of Directors' decision to
temporarily suspend its cash dividends on its common stock in February 2001,
there were no dividend payments for the first three months of 2001. During the
three month period ended March 31, 2000, $9,136,000 was expended to purchase
790,100 shares of the Company's common stock in open market transactions. There
were no common shares purchased on the open market during the first quarter of
2001.
The Company believes that its cash on hand, the availability of funds under its
credit facility and its anticipated internally generated funds will be
sufficient to fund its current needs, including its expected capital spending
plans.
ENVIRONMENTAL
The Company's operations, like those of other basic industries, are subject to
federal, state, local and foreign laws, regulations and ordinances. These laws
and regulations (1) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling
and disposal practices for solid and hazardous wastes and (2) impose liability
for costs of cleaning up, and certain damages resulting from past spills,
disposals or other releases of hazardous substances. It should be anticipated
that more rigorous environmental laws will be enacted that could require the
Company to make substantial expenditures for compliance purposes.
From time to time, operations of the Company have resulted, or may result, in
noncompliance in varying degrees with applicable requirements under
environmental laws. However, the Company believes that any such noncompliance
under such environmental laws would not have a material adverse effect on the
Company's financial position or results of operations.
Page 19
In 1997, the IEPA notified the Company that two of the Company's zinc
subsidiaries are PRPs pursuant to the Illinois Environmental Protection Act for
the cleanup of contamination at a site in Marion County, Illinois to which these
subsidiaries, among others, in the past sent zinc oxide for processing and
resale. These subsidiaries have joined a group of PRPs that is planning to
negotiate with the IEPA regarding the cleanup of the site. The site has not
been fully investigated and final cleanup costs have not yet been determined.
Although no assurances can be made, based on current cost estimates and
information regarding the amount and type of materials sent to the site by the
subsidiaries, the Company does not believe that its potential liability at this
site, if any, will have a material adverse effect on its financial position or
results of operations.
On February 15, 2001, the State of Michigan filed a lawsuit against the Company
in the State Circuit Court for the 30/th/ District, Ingham County, Michigan. The
lawsuit arises out of disputes between the Michigan Department of Environmental
Quality and the Company's subsidiaries located in Coldwater, Michigan (Alchem
Aluminum Inc. ("Alchem") and IMCO Recycling of Michigan LLC ("IMCO Michigan")),
concerning air permits and emissions at the specification aluminum alloy
production facilities in Coldwater, Michigan. The plaintiffs claim injunctive
relief and penalties for alleged noncompliance with and violations of federal
and state environmental laws. The suit seeks compliance by the Company as well
as potentially substantial monetary penalties. The Company believes it has
meritorious defenses and plans a vigorous defense. While no assurances can be
given, the Company does not believe that this action will have a material
adverse effect on its financial condition or results of operations.
In addition, on April 27, 2001, the U.S. Environmental Protection Agency, Region
V, issued to the Company a Notice of Violation ("NOV") alleging violations of
the federal Clean Air Act, primarily for violations of the Michigan State
Implementation Plan at the Company's Coldwater, Michigan facilities. The NOV
addresses the same instances of noncompliance raised in the State of Michigan
lawsuit, alleging that the Company purportedly failed to obtain appropriate
preconstruction air quality permits prior to conducting modifications to the
Alchem production facilities and exceeded permitted emissions from both the
Alchem and IMCO Michigan facilities located in Coldwater. The Company is
currently investigating the allegations contained in the NOV.
Additionally, there exists the possibility that expenditures could be required
at the Coldwater site and at other Company facilities from time to time,
because of new or revised regulations that could require that additional
expenditures be made for compliance purposes. These expenditures could
materially affect the Company's results of operations in future periods.
CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS
Certain information contained in ITEM 2. "MANAGEMENT'S DISCUSSION AND ANALYSIS
-------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" (as well as certain oral
statements made by or on behalf of the Company) may be deemed to be forward-
looking statements within the meaning of The Private Securities Litigation
Reform Act of 1995, as amended, and are subject to the "Safe Harbor" provisions
in that enacted legislation. This information includes, without limitation,
statements concerning increases in total processing volumes and profitability in
succeeding quarters, future profit margins, volumes, revenues, earnings, costs,
energy costs, and expenses (including capital expenditures); future financing
costs; future prices for metals; anticipated results of the Company's cost
reduction program; access to adequate energy supplies at advantageous rates;
anticipated cost savings from new and modified furnace designs; the Company's
ability to continue to grow its domestic and foreign business through expansion,
Page 20
acquisition or partnering; the expected effects of production shutdowns at
Company or customer facilities; future acquisitions or corporate combinations;
projected anticipated technological advances; future (or extensions of existing)
long-term supply contracts with its customers; anticipated environmental control
measures; the outcome of and any liabilities resulting from any claims,
investigations or proceedings against the Company or its subsidiaries; future
levels of dividends (if any); potential affects of the Company's metals
brokerage activities or its hedging activities; the future mix of business
(product sales vs. tolling); future costs and asset recoveries; future
operations, demand and industry conditions; future sources of capital and future
financial condition. When used in or incorporated by reference into this
Quarterly Report on Form 10-Q, the words "anticipate," "estimate," "expect,"
"may," "project" and similar expressions are intended to be among the statements
that identify forward-looking statements.
These forward-looking statements are based on current expectations and involve a
number of risks and uncertainties. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to be correct. Important
factors that could affect the Company's actual results and cause actual results
to differ materially from those results that might be projected, forecasted,
estimated or budgeted by the Company in these forward-looking statements
include, but are not limited to, the following: the effects of any additional
capacity reductions or reductions in headcount; special charges from cost
reduction initiatives; competition for raw materials costs and pricing pressures
from competitors; effects of future energy prices and related fuel costs;
fluctuations in operating levels at the Company's facilities; fluctuations in
demand from the automotive, construction and packaging markets, which are more
subject to cyclical pressures; the mix of product sales business as opposed to
tolling business; unforeseen difficulties in the operation or performance of the
Company's ERP software system, and the Company's other operations and reporting
systems; retention and financial condition of major customers; collectibility of
receivables; the inherent unpredictability of adversarial or administrative
proceedings; effects of environmental and other governmental regulations;
currency exchange rate fluctuations; strikes, work stoppages or labor shutdowns
at Company or customer plants; trends in the Company's key markets and the price
of and supply and demand for aluminum and zinc (and their derivatives) on world
markets; the effects of shortages and oversupply in used aluminum beverage
containers and can scrap at facilities; the continuation of reduced spreads
between primary aluminum prices and aluminum scrap prices; business conditions
and growth in the aluminum and zinc industries and recycling industries; and
future levels and timing of capital expenditures.
Page 21
These statements are further qualified by the following:
* Any estimates of future operating rates at the Company's plants are based on
current expectations by management of the Company of future levels of volumes
and prices for the Company's services or metal, and are subject to
fluctuations in customer demand for the Company's services and prevailing
conditions in the metal markets, as well as certain components of the
Company's cost of operations, including energy and labor costs. Certain of
the factors affecting revenues and costs are to a large degree outside of the
control of the Company, including energy commodity prices, weather
conditions, general economic and financial market conditions; work stoppages,
maintenance programs and other production shutdowns at customer facilities;
and governmental regulation and factors involved in administrative and other
proceedings. The future mix of product sales vs. tolling business is
dependent on customers' needs and overall demand, world and U.S. market
conditions then prevailing in the respective metal markets, and the operating
levels at the Company's various facilities at the relevant time.
* The price of primary aluminum, zinc and other metals is subject to worldwide
market forces of supply and demand and other influences. An increase in
demand for raw materials can and has adversely affected profit margins for
the Company's product sales business. Prices can be volatile, which could
affect the Company's product sales business. Lower market prices for primary
metals may adversely affect the demand for the Company's recycling services
and recycled metals.
* The markets for most aluminum and zinc products are highly competitive. The
major primary aluminum producers are larger than the Company in terms of
total assets and operations and have greater financial resources. In
addition, aluminum competes with other materials such as steel, vinyl,
plastics and glass, among others, for various applications in the Company's
key markets. Unanticipated actions or developments by or affecting the
Company's competitors and/or willingness of customers to accept substitutions
for aluminum products could affect the Company's financial position and
results of operations. The market for zinc processing is highly cyclical.
* Fluctuations in the costs of fuels, raw materials and labor can materially
affect the Company's financial position and results of operations from period
to period.
* The Company's key transportation market is cyclical, and sales within that
market in particular can be influenced by economic conditions. Strikes and
work stoppages by automotive customers of the Company may have a material
adverse effect on the Company's financial condition and results of
operations.
* The Company spends substantial capital and operating sums on an ongoing basis
to comply with environmental laws. In addition, the Company is involved in
Page 22
certain investigations and actions in connection with environmental
compliance and past disposals of solid waste. Estimating future environmental
compliance and remediation costs is imprecise due to the continuing evolution
of environmental laws and regulatory requirements and uncertainties about
their application to the Company's operations, the availability and
applicability of technology and the allocation of costs among principally
responsible parties. Unanticipated material legal proceedings or
investigations could affect the Company's financial position and results of
operations.
Page 23
REVIEW BY INDEPENDENT ACCOUNTANTS
The Company's independent accountants, Ernst & Young LLP, have reviewed the
Company's consolidated financial statements at March 31, 2001, and for the three
month period then ended prior to filing, and their report is included
herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
------- MARKET RISK
Approximately 88% of the Company's outstanding long term debt as of March 31,
2001 bears interest at floating rates related to LIBOR plus a margin. The
Company's interest rate cap previously in effect to limit risks associated with
significant increases in LIBOR rates expired on March 31, 2001 and was not
renewed. The Company's earnings are affected by changes in interest rates due to
the impact these changes have on the Company's interest expense from its
variable rate debt instrument.
There have been no material changes regarding market risk and the Company's
derivative instruments during the first quarter of 2001. Accordingly, no
additional disclosures have been provided in accordance with Regulation S-K Item
305 (c).
PART II - OTHER INFORMATION
ITEM 1. LITIGATION
-------
On February 15, 2001, the State of Michigan filed a lawsuit against the Company
in the State Circuit Court for the 30/th/ District, Ingham County, Michigan. The
lawsuit arises out of disputes between the Michigan Department of Environmental
Quality and the Company's subsidiaries located in Coldwater, Michigan (Alchem
Aluminum Inc. ("Alchem") and IMCO Recycling of Michigan LLC ("IMCO Michigan")),
concerning air permits and emissions at the specification aluminum alloy
production facilities in Coldwater, Michigan. The plaintiffs claim injunctive
relief and penalties for alleged noncompliance with and violations of federal
and state environmental laws. The suit seeks compliance by the Company as well
as potentially substantial monetary penalties. The Company believes it has
meritorious defenses and plans a vigorous defense. While no assurances can be
given, the Company does not believe that this action will have a material
adverse effect on its financial condition or results of operations.
In addition, on April 27, 2001, the U.S. Environmental Protection Agency, Region
V, issued to the Company a Notice of Violation ("NOV") alleging violations of
the federal Clean Air Act, primarily for violations of the Michigan State
Implementation Plan at the Company's Coldwater, Michigan facilities. The NOV
addresses the same instances of noncompliance raised in the State of Michigan
lawsuit, alleging that the Company purportedly failed to obtain appropriate
preconstruction air quality permits prior to conducting modifications to the
Alchem production facilities and exceeded permitted emissions from both the
Alchem and IMCO Michigan facilities located in Coldwater. The Company is
currently investigating the allegations contained in the NOV.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-------
(a) The following exhibits are included herein:
15.1 Acknowledgment letter regarding unaudited financial information from
Ernst & Young LLP
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed during the quarter ended
March 31, 2001.
Page 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMCO Recycling Inc.
(Registrant)
Date: May 11, 2001 By: /s/ Robert R. Holian
-------------------------------------
Robert R. Holian
Senior Vice President
Controller and Chief Accounting Officer
Page 25
[LOGO OF ERNST & YOUNG]
Independent Accountants' Review Report
Stockholders and
Board of Directors
IMCO Recycling Inc.
We have reviewed the accompanying consolidated balance sheet of IMCO Recycling
Inc. as of March 31, 2001, and the related consolidated statements of earnings
and cash flows for the three month periods ended March 31, 2001 and 2000. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of IMCO Recycling
Inc. as of December 31, 2000, and the related consolidated statements of
earnings, stockholders' equity, and cash flows for the year then ended, not
presented herein, and in our report dated January 31, 2001, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 2000, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ ERNST & YOUNG LLP
Dallas, Texas
May 11, 2001