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 June 30, 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 July 31, 2001.
Common Stock, $0.10 par value, 14,728,469
-----------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
-------
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, December 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 4,575 $ 5,014
Accounts receivable, net of allowance of $2,245 and $2,421
at June 30, 2001 and December 31, 2000, respectively. 31,422 21,229
Inventories 45,177 56,318
Deferred income taxes 6,414 3,726
Other current assets 9,118 10,450
------------ ------------
Total Current Assets 96,706 96,737
Property and equipment, net 189,820 196,133
Excess of acquisition cost over the fair value of net
assets acquired, net of accumulated amortization of
$19,258 and $17,215 at June 30, 2001 and December 31,
2000, respectively 115,973 117,845
Investments in joint ventures 16,374 15,249
Other assets, net 5,159 7,707
------------ ------------
$424,032 $433,671
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 82,481 $ 83,552
Accrued liabilities 16,563 13,097
Current maturities of long-term debt 75 112
------------ ------------
Total Current Liabilities 99,119 96,761
Long-term debt 125,587 128,786
Deferred income taxes 16,367 15,899
Other long-term liabilities 10,609 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 June 30, 2001; 17,119,420 issued
at December 31, 2000 1,712 1,712
Additional paid-in capital 105,897 106,137
Retained earnings 101,358 100,807
Accumulated other comprehensive loss, net (10,410) (5,143)
Treasury stock, at cost; 2,399,406 shares at June 30, 2001;
1,789,152 shares at December 31, 2000 (26,207) (21,656)
------------ ------------
Total Stockholders' Equity 172,350 181,857
------------ ------------
$424,032 $433,671
============ ============
Page 2
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share data)
For the three months For the six months
ended June 30, ended June 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues $177,496 $225,819 $364,848 $449,078
Cost of sales 166,351 212,288 345,847 419,445
-------- -------- -------- --------
Gross profits 11,145 13,531 19,001 29,633
Selling, general and administrative expense 6,207 6,417 10,926 13,604
Amortization expense 1,285 1,270 2,573 2,552
Interest expense 2,559 4,629 5,588 8,943
Fees on sales of receivables 916 - 2,127 -
Interest and other income (34) (189) (475) (248)
Equity in net earnings of affiliates (860) (898) (1,897) (1,568)
-------- -------- -------- --------
Earnings before provision for income taxes and
minority interests 1,072 2,302 159 6,350
Provision (benefit) for income taxes 96 608 (460) 1,996
-------- -------- -------- --------
Earnings before minority interests 976 1,694 619 4,354
Minority interests, net of provision for income taxes 58 157 68 253
-------- -------- -------- --------
Net earnings $ 918 $ 1,537 $ 551 $ 4,101
======== ======== ======== ========
Net earnings per common share:
Basic $ 0.06 $ 0.10 $ 0.04 $ 0.27
Diluted $ 0.06 $ 0.10 $ 0.04 $ 0.27
Weighted average shares outstanding:
Basic 15,138 15,267 15,276 15,382
Diluted 15,303 15,334 15,454 15,422
Dividends declared per common share $ 0.00 $ 0.06 $ 0.00 $ 0.12
Page 3
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
For the six months
ended June 30,
--------------------------
2001 2000
---------- ----------
OPERATING ACTIVITIES
Net earnings $ 551 $ 4,101
Depreciation and amortization 14,355 14,444
Provision (benefit) for deferred income taxes 507 (260)
Equity in earnings of affiliates (1,897) (1,579)
Other non-cash charges 363 3,079
Changes in operating assets and liabilities:
Accounts receivable 11,706 (12,123)
Accounts receivable sold (23,000) -
Inventories 11,047 19,767
Other current assets 1,319 (2,967)
Accounts payable and accrued liabilities (4,581) (4,360)
---------- ----------
Net cash from operating activities 10,370 20,102
INVESTING ACTIVITIES
Payments for property and equipment (5,055) (14,476)
Dividend from a non-consolidated subsidiary 1,242 0
Proceeds from sales of property and equipment 1,558 35
Other (189) (688)
---------- ----------
Net cash used by investing activities (2,444) (15,129)
FINANCING ACTIVITIES
Net (payments of) proceeds from long-term revolving credit facility (3,235) 7,000
Principal payments of long-term debt - (68)
Dividends paid - (1,832)
Purchases of treasury stock (4,966) (9,136)
Other 7 324
---------- ----------
Net cash used by financing activities (8,194) (3,712)
---------- ----------
Effect of exchange rate differences on cash and cash equivalents (171) (125)
Net (decrease) increase in cash and cash equivalents (439) 1,136
Cash and cash equivalents at January 1 5,014 2,578
---------- ----------
Cash and cash equivalents at June 30 $ 4,575 $ 3,714
========== ==========
SUPPLEMENTARY INFORMATION
Cash payments for interest $ 6,342 $ 9,001
Cash payments for income taxes $ 527 $ 458
Page 4
IMCO RECYCLING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 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 six month period ended June 30, 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 $67,000,000
and $90,000,000 at June 30, 2001 and December 31, 2000, respectively. For the
three and six month periods ending June 30, 2001, the Company incurred fees on
the sale of its receivables in the amount of $916,000 and $2,127,000,
respectively. See Item 2. - "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations - Fees on Sales of
Receivables."
Page 5
NOTE C - INVENTORIES
The components of inventories are:
June 30, December 31,
2001 2000
------------ ------------
Finished goods $ 18,073 $ 30,357
Raw materials 25,376 23,856
Supplies 1,728 2,105
------------ ------------
$ 45,177 $ 56,318
============ ============
NOTE D - INCOME TAXES
After excluding the effects of its interest in the VAW-IMCO joint venture which
is reported on an after tax basis, the Company recorded a tax benefit of 27% for
the six month period ended June 30, 2001 compared to an effective tax rate of
39% for the comparable period of 2000.
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 Six months ended
June 30, June 30,
------------------ ----------------
2001 2000 2001 2000
------ ------ ------ ------
Weighted average shares outstanding
for basic earnings per share 15,138 15,267 15,276 15,382
Effect of equity forward contract 143 64 166 32
Effect of employee stock options 22 3 12 8
------ ------ ------ ------
Weighted average shares outstanding
for diluted earnings per share 15,303 15,334 15,454 15,422
====== ====== ====== ======
In May 2000, the Company entered into a forward share repurchase agreement,
which was settled on June 7, 2001. The Company purchased 644,500 shares at
$7.70 per share, for a total consideration of $4,965,808, under this agreement.
The purchased shares are included in treasury shares. The effect of the
settlement of this purchase agreement has been considered in determining diluted
EPS.
Page 6
NOTE F - 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 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 30th District, Ingham County, Michigan. The
lawsuit arises out
Page 7
of disputes between the Michigan Department of Environmental Quality and the
Company's subsidiaries located in Coldwater , Michigan (Alchem Aluminum Inc. and
IMCO Recycling of Michigan LLC), 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 to the claims 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 operation.
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 is the possibility that expenditures could be required at
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 G - OTHER COMPREHENSIVE INCOME
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income $ 918 $ 1,537 $ 551 $ 4,101
Hedging, net of tax (5,248) - (4,644) -
Foreign currency translation
adjustment and other (50) 307 (375) (1,008)
Net unrealized loss on long-term
marketable equity securites (76) - (248) -
-------- -------- -------- --------
Comprehensive (loss) income $ (4,456) $ 1,844 $ (4,716) $ 3,093
======== ======== ======== ========
NOTE H - 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 zinc segment represents all of the Company's zinc
melting, processing and brokering activities.
Page 8
There has been no material change in the Company's segment classifications
during 2001.
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
REVENUES:
Aluminum $130,765 $157,850 $265,293 $325,169
Zinc 46,731 67,969 99,555 123,909
-------- -------- -------- --------
Total revenues $177,496 $225,819 $364,848 $449,078
======== ======== ======== ========
INCOME:
Aluminum $ 9,306 $ 7,061 $ 15,061 $ 16,547
Zinc 575 4,284 1,336 8,407
-------- -------- -------- --------
Total segment income 9,881 11,345 16,397 24,954
Unallocated amounts:
General and administrative expense (4,143) (3,360) (6,144) (7,420)
Amortization expense (1,285) (1,270) (2,573) (2,552)
Interest expense (2,559) (4,629) (5,588) (8,943)
Fees on sale of receivables (916) - (2,127) -
Interest and other income 94 216 194 311
-------- ------- -------- --------
Income before provision for income
taxes and minority interests $ 1,072 $ 2,302 $ 159 $ 6,350
======== ======= ======== ========
Page 9
NOTE I - VAW-IMCO
The Company owns a 50% interest in an aluminum recycling joint venture in
Germany, VAW-IMCO Guss und Recycling GmbH ("VAW-IMCO"). For the six month
periods ended June 30, 2001 and 2000, the Company's equity in the net income of
VAW-IMCO was stated at $1,866,000 and $1,275,000, respectively. The following
table represents the condensed income statements for the three and six month
periods ended June 30, 2001 and 2000.
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues $54,987 $46,485 $120,229 $94,747
Gross Profit $ 4,774 $ 5,228 $ 10,807 $ 9,294
Net Income $ 1,701 $ 1,620 $ 3,675 $ 2,569
NOTE J - NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued the Statement of
Financial Accounting Standard 142 "Goodwill and Other Intangible Assets",
effective for fiscal years beginning after December 15, 2001. Under the
provisions of the new standard, goodwill and certain other intangibles will no
longer be amortized, but instead will be reviewed at least annually for
impairment at the reporting unit level and written down (expensed against
earnings) when the implied fair value of a reporting unit, including goodwill
and other related intangibles is less than its carrying amount. The Company will
adopt the new standard on January 1, 2002. The Company has not completed an
analysis of the potential impact of application of the impairment test of
goodwill, however amortization of existing goodwill which was approximately
$1,285,000 and $2,573,000 for the three and six months ended June 30, 2001, and
estimated to be $5,350,000 for fiscal year 2001 will cease upon adoption of the
new standard.
Page 10
NOTE K - DEBT COVENANTS
The Company is currently in compliance with all the terms and conditions of its
Credit Agreement. However, the Credit Agreement provides for more restrictive
covenants beginning at the end of the third quarter of 2001 and it is possible
that the Company may not be able to comply with the more stringent debt
covenants. The Company plans to begin discussions with the lenders to amend the
debt covenants to ensure compliance by the Company at the end of the third
quarter of fiscal year 2001. The Company believes that it will be successful in
amending its Credit Agreement, however there can be no assurances. In the event
the Company is unsuccessful, the loan may be current and the lender could demand
repayment of such amounts.
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. 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 Six months ended
June 30, June 30,
-------------------- ------------------------
2001 2000 2001 2000
-------- -------- ---------- ----------
Pounds processed 632,234 724,374 1,254,909 1,485,535
Percentage of pounds tolled 61% 57% 61% 57%
Revenues $177,496 $225,819 $ 364,848 $ 449,078
Gross profits $ 11,145 $ 13,531 $ 19,001 $ 29,633
Page 11
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000,
AND SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
PRODUCTION. For the three month period ended June 30, 2001, the Company melted
-----------
632.2 million pounds, 13% less metal compared to 724.4 million pounds during the
same period in 2000. For the six month period ended June 30, 2001, the Company
melted 1.25 billion pounds, 16% less metal compared to 1.49 billion pounds
during the same period in 2000. The aluminum and zinc segments accounted for
79% and 21%, respectively, of the overall production decrease for the three
month period and 83% and 17%, respectively, for the six month period. Tolling
activity for both the three and six month periods ended June 30, 2001
represented 61% of total pounds processed, compared to 57% for the same periods
of 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 Six months ended
June 30, June 30,
------------------ ----------------------
2001 2000 2001 2000
------- ------- --------- ---------
Pounds Processed:
Aluminum 579,008 652,124 1,152,561 1,344,438
Zinc 53,226 72,250 102,348 141,097
------- ------- --------- ---------
Total Pounds Processed 632,234 724,374 1,254,909 1,485,535
======= ======= ========= =========
Percentage Tolled:
Aluminum 66% 63% 66% 62%
Zinc 2% 3% 3% 4%
Total Percentage Tolled 61% 57% 61% 57%
ALUMINUM PRODUCTION: For the three month period ended June 30, 2001, the
Company melted 11% less aluminum than it did during the same period in 2000. For
the six month period ended June 30, 2001, the Company melted 14% less aluminum
than in the first six months of 2000. The decrease in aluminum production for
the three and six month periods was due to a reduction in can stock volume,
increased selectivity in scrap purchases by the Company in an attempt to improve
profit margins, lower demand in the specification alloys business due to reduced
automobile production, and to a general slowdown in the U.S. economy which has
reduced industrial 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
Page 12
facility. 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 to the shutdown of primary aluminum
production capacity in the Pacific Northwest.
The increase in aluminum percentage tolled in 2001 compared to the three and six
month periods ended June 30, 2000 is primarily due to the increased capacity and
volumes at the new Saginaw, Michigan plant, which supplies aluminum under a
tolling supply agreement to General Motors.
ZINC PRODUCTION: For the three and six month periods ended June 30, 2001, the
Company melted 26% and 27% less zinc, respectively, than it did during the same
periods in 2000, mainly due to the slowdown of industrial production, higher
natural gas costs and lower zinc prices which limited profitable processing
opportunities.
REVENUES. For the three month period ended June 30, 2001, the Company's
---------
consolidated revenues decreased 21% to $177,496,000 compared to $225,819,000 for
the same period in 2000. For the six month period ended June 30, 2001, revenues
decreased 19% to $364,848,000 compared to $449,078,000 for the same period in
2000. The aluminum and zinc segments accounted for 56% and 44%, respectively,
of the overall revenue decrease for the three month period and 71% and 29%,
respectively, for the six month period. The declines followed the reduction in
processing pounds as described above.
The following table shows the total revenues for the aluminum and zinc segments
(in thousands) (See NOTE I - SEGMENT REPORTING):
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Aluminum $130,765 $157,850 $265,293 $325,169
Zinc 46,731 67,969 99,555 123,909
-------- -------- -------- --------
Total Revenues $177,496 $225,819 $364,848 $449,078
======== ======== ======== ========
ALUMINUM REVENUES: For the three and six month periods ended June 30, 2001, the
Company's aluminum revenues decreased 17% and 18%, respectively, compared to the
same periods in 2000. The decrease was due principally to lower production
volumes and an increase in the tolling percentage, as discussed above.
Page 13
ZINC REVENUES: For the three and six month periods ended June 30, 2001, the
Company's zinc revenues decreased 31% and 20% as compared to the same period in
2000. This decrease was also due to lower production volumes and selling
prices.
GROSS PROFITS. For the three month period ended June 30, 2001, the Company's
--------------
consolidated gross profits decreased 18% to $11,145,000 as compared to
$13,531,000 in the same period in 2000. For the six month period ended June 30,
2001, consolidated gross profits decreased 36% to $19,001,000 compared to
$29,633,000 in the first six months of 2000.
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 Six Months ended
June 30, June 30,
-------------------- ---------------------
2001 2000 2001 2000
------- ------- ------- -------
Segment Income:
Aluminum $ 9,306 $ 7,061 $15,061 $16,547
Zinc 575 4,284 1,336 8,407
------- ------- ------- -------
Total segment income 9,881 11,345 16,397 24,954
Items not included in gross profits:
Plant selling expense 1,245 1,294 2,561 2,729
Management SG&A expense 820 1,764 2,223 3,455
Equity in earnings of affiliates (860) (898) (1,897) (1,568)
Other income 59 26 (283) 63
------- ------- ------- -------
Gross Profits $11,145 $13,531 $19,001 $29,633
======= ======= ======= =======
ALUMINUM INCOME: For the three month period ended June 30, 2001, the Company's
aluminum income increased 32% as compared to the same period in 2000. For the
six month period ended June 30, 2001, aluminum income decreased 9% as compared
to the same period of 2000. In the second quarter, the realization of the
Company's cost reduction programs and a better performance by the specialty
alloys division helped to offset the decline in volumes and resulted in the
increased income. For the first six months of 2001, higher natural gas costs
and weaker profit margins realized earlier in the year led to the decrease in
income compared to the first six months of 2000.
ZINC INCOME: For the three and six month periods ended June 30, 2001, the
Company's zinc income decreased 87% and 84%, respectively, as compared to the
same periods in 2000. These negative variances were due to large increases in
natural gas
Page 14
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 June 30, 2001 were $6,207,000, a decrease of 3% from $6,417,000 for
the comparable period last year. For the six month period ended June 30, 2001,
selling, general and administrative expenses decreased by 20% to $10,926,000 as
compared to $13,604,000 in the same period of 2000. The decrease in these
periods was primarily a result of a reduction in headcount and a reduction in
employee incentive costs.
AMORTIZATION EXPENSE. Amortization expense for the three month period ended
---------------------
June 30, 2001 was $1,285,000, about equal to the $1,270,000 recorded in the same
period last year. For the six month period ended June 30, 2001, amortization
expense was $2,573,000, about equal to the $2,552,000 recorded in the same
period last year.
INTEREST EXPENSE. Interest expense for the three month periods ended June 30,
-----------------
2001 and 2000 was $2,559,000 and $4,629,000, respectively, representing a
decrease of 45% in 2001. For the first six months of 2001, interest expense
decreased 38% to $5,588,000 as compared to $8,943,000 in the same period of
2000. The decrease in these periods is due mainly to lower interest rates and
lower amounts of debt outstanding.
FEES ON SALES OF RECEIVABLES. On November 2, 2000, the Company and certain of
----------------------------
its subsidiaries entered into a Receivables Sale Facility with a special purpose
subsidiary of the Company. Under this arrangement, the Company and each of its
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 incurred in connection with
these transfers for the three and six month periods ended June 30, 2001 were
$916,000 and $2,127,000, respectively (see NOTE B-RECEIVABLES SALE).
INCOME TAXES. After excluding the effects of its interest in the VAW-IMCO joint
--------------
venture which is reported on an after tax basis, the Company recorded a tax
benefit of 27% for the six month period ended June 30, 2001 compared to an
effective tax rate of 39% for the comparable period of 2000.
EQUITY INCOME. Equity income for the three month periods ending June 30, 2001
--------------
and 2000 was $860,000 and $898,000, respectively. Equity income for the six
month period ending the same dates was $1,897,000 and $1,568,000, respectively.
The majority of the Company's equity income is generated from VAW-IMCO. (SEE
NOTE I-VAW-IMCO).
NET EARNINGS. Net earnings decreased 40% to $918,000 for the three month period
-------------
ended June 30, 2001 as compared to net income of $1,537,000 for the same period
in 2000. For the six month period ended June 30, 2001, net earnings decreased
87% to $551,000 compared to $4,101,000 for the same period in 2000. The
decrease in these periods was primarily the result of higher natural gas costs,
lower metal margins and lower production volumes caused by the slowdown in the
U.S. economy.
Page 15
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 half of fiscal 2001, market factors that negatively affected
the Company's results of operations and financial condition included:
. reduced volumes at its aluminum recycling facilities due to lower market
demand from customers serving the aluminum can stock market;
. higher natural gas fuel costs in both the aluminum and zinc
segments;
. 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 since late 2000 been implementing
its program to reduce capacity at less efficient plants and reallocate that
processing work to other facilities. In 2001 it permanently closed its Bedford,
Indiana aluminum facility and its Chicago, Illinois zinc oxide plant. Two
Company furnaces formerly in use at its closed Sikeston, Missouri facility have
been transferred to the Company's new joint venture facility in Monterrey,
Mexico. The Company 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). That facility's dross processing is now being performed by the
Company's Post Falls, Idaho plant. Utility power administrators may extend the
primary producers' shutdown in the Pacific Northwest for as long as two years.
Page 16
For the second half of fiscal 2001, the Company expects many of the conditions
prevailing in its industry to continue. Continued weak demand from can stock
customers and lower volumes in the Company's specialty alloys business, coupled
with prevailing higher fuel costs, should continue to negatively impact the
Company's results of operations. However, there were improvements in processing
volumes and margins in the second quarter of 2001 compared to 2001's first
quarter, particularly in the Company's aluminum segment. The improved margins
resulted from the Company's cost reduction program, lower natural gas prices,
the increasing use of more efficient fuel-burning technology for its furnaces,
and the continuing reallocation of processing volumes among its aluminum plants.
The Company's zinc segment margins, which have been declining since the fourth
quarter of 2000, are expected to show only marginal improvement for the second
half of 2001.
With regards to its cost reduction initiatives, the Company has reduced
personnel headcount by 13% in the first half of 2001, which is in addition to
the 11% reduction carried out late last year. The Company is also focusing on
reducing its selling, general and administrative expenses, its plant operating
expenses and its working capital costs. In addition, the Company is now
recovering additional higher gas costs it experienced in 2000, through
escalation clauses that form a part of some customer contracts.
The operation of the Saginaw, Michigan specialty alloy plant at a higher
capacity in 2001 compared to 2000, resulted in improved results for the aluminum
specialty alloy division. However, specialty alloy volumes for July 2001 are
expected to be lower than previous sequential months' volumes due to traditional
closures of automotive plants in the summertime, coupled with continuing overall
weak demand for companies supplying the automotive sector.
Factors that should positively affect results for the second half of 2001, in
addition to certain of the matters cited above, include potential additional
strengthening in prices for aluminum and zinc, and results reflected by the
Company's cost reduction and plant operational efficiency initiatives. However,
due to expected continued weakness in the Company's major markets, the Company
is currently estimating only marginal profitability for its consolidated results
of operations for the third quarter of 2001, and earnings results similar to the
second quarter's results for the fourth quarter of 2001.
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. Its Mexico joint
venture has commenced preliminary operations, and further expansion in the
United Kingdom as well at VAW-IMCO joint venture facilities are planned
beginning the second half 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.
Page 17
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS. Operations provided $10,370,000 and $20,102,000 of
--------------------------
cash during the first six months of 2001 and 2000, respectively. Changes in
operating assets and liabilities resulted in a net cash use of $3,509,000 for
the six months ended June 30, 2001 compared to providing cash of $317,000 for
the same period in 2000. The extent of the change in operating assets and
liabilities was primarily due to a decrease in accounts receivable of
$11,706,000 for the first six months of 2001 offset by a reduction of
$23,000,000 in cash proceeds from the Company's Receivable Sale Facility
compared to an increase in accounts receivable using $12,123,000 in the first
half of 2000. Inventories were also a contributing factor to the overall change.
Decreases in inventories were $11,047,000 for the six month period ended June
30, 2001 as compared to $19,767,000 for the comparable 2000 period. Net income
of $551,000 for the first six months of 2001 compared to net income of
$4,101,000 for the comparable 2000 period also reduced the overall level of cash
provided from operations.
CASH FLOWS FROM INVESTING ACTIVITIES. During the six month period ended June
------------------------------------
30, 2001, net cash used by investing activities was $2,444,000 as compared to
$15,129,000 for the same period in 2000. The difference in these two periods is
due to a reduction in payments for property, plant and equipment in 2001, as
well as a dividend received from a non-consolidated subsidiary and proceeds from
sales of property and equipment in 2001. The Company's total payments for
property, plant and equipment in the first six months of 2001 decreased to
$5,055,000, as compared to $14,476,000 spent in the first six months of 2000.
Total capital expenditures for property, plant and equipment in 2001 are
expected to approximate $12,000,000.
CASH FLOWS FROM FINANCING ACTIVITIES. Net cash used by financing activities was
------------------------------------
$8,194,000 for the six month period ended June 30, 2001, as compared to
$3,712,000 for the same period of 2000. In the first six months of 2001, the
Company made net payments on its revolving credit facility of $3,235,000. For
the first six months of 2000, the Company had net borrowings of $7,000,000. At
June 30, 2001, the Company had $110,700,000 in indebtedness outstanding under
its long-term revolving credit facility. The Company is currently unable to use
most of the remaining borrowing capacity available under its Credit Agreement
due to limitations imposed under the agreement. In addition, there were standby
letters of credit outstanding with several banks totaling $3,241,000.
Financing activities for the first six months in 2000 included cash payments of
$1,832,000 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 six months of 2001. During the
six month period
Page 18
ended June 30, 2000, $9,136,000 was expended to purchase 790,100 shares of the
Company's common stock in open market transactions. On June 7, 2001, the Company
purchased 644,500 shares of its common stock for a total consideration of
$4,966,000, settling the forward share repurchase agreement entered into last
year.
DEBT COVENANTS
The Company is currently in compliance with all the terms and conditions of its
Credit Agreement. However, the Credit Agreement provides for more restrictive
covenants beginning at the end of the third quarter of 2001 and it is possible
that the Company may not be able to comply with the more stringent debt
covenants. The Company plans to begin discussions with the lenders to amend the
debt covenants to ensure compliance by the Company at the end of the third
quarter of fiscal year 2001. The Company believes that it will be successful in
amending its Credit Agreement, however there can be no assurance. In the event
the Company is unsuccessful, the loan may be current and the lender could demand
repayment of such amounts.
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.
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 30th 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. and IMCO Recycling of Michigan LLC), 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
Page 19
does not believe that this action will have a material adverse effect on its
financial condition or results of operation.
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 is the possibility that expenditures could be required at
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.
NEW ACCOUNTING PRONOUCNEMENT
In June 2001, the Financial Accounting Standards Board issued the Statement of
Financial Accounting Standard 142 "Goodwill and Other Intangible Assets",
effective for fiscal years beginning after December 15, 2001. Under the
provisions of the new standard, goodwill and certain other intangibles will no
longer be amortized, but instead will be reviewed at least annually for
impairment at the reporting unit level and written down (expensed against
earnings) when the implied fair value of a reporting unit, including goodwill
and other related intangibles is less than its carrying amount. The Company will
adopt the new standard on January 1, 2002. The Company has not completed an
analysis of the potential impact of application of the impairment test of
goodwill, however amortization of existing goodwill which was approximately
$1,285,000 and $2,573,000 for the three and six months ended June 30, 2001, and
estimated to be $5,350,000 for fiscal year 2001 will cease upon adoption of the
new standard.
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 the Company's estimated profitability in the third and
fourth quarters of 2001; future profit margins, volumes, revenues, earnings,
costs, energy costs, and expenses (including capital expenditures); 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 burner technologies and furnace designs; the
Company's ability to continue to grow its domestic and foreign business through
expansion, acquisition or partnering; the expected effects of production
shutdowns at Company or customer facilities; future acquisitions, divestitures
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 dividends; potential affects of the Company's metals
brokerage 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,"
Page 20
"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: 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 effects of
any additional capacity reductions, processing work reallocations or reductions
in headcount; the inherent unpredictability of adversarial or administrative
proceedings; effects of environmental and other governmental regulations;
special charges from cost reduction initiatives; competition for raw materials
costs and pricing pressures from competitors; 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; currency exchange rate fluctuations;
customer plant capacity curtailments; 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; 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. 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, general economic
and financial market conditions; work stoppages, maintenance programs and
other production shutdowns at customer facilities; weather conditions 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.
Page 21
* 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 sales of its 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. Also, the market for zinc processing is highly
cyclical.
* Fluctuations in the costs of natural gas, 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 affecting automotive customers of the Company (as well as
customer facility production cutbacks) 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
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 from period to period.
Page 22
REVIEW BY INDEPENDENT ACCOUNTANTS
The Company's independent accountants, Ernst & Young LLP, have reviewed the
Company's consolidated financial statements at June 30, 2001, and for the three
and six month periods then ended prior to filing, and their report is included
herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
------- MARKET RISK
There have been no material changes regarding market risk and the Company's
derivative instruments during the first half of 2001. Accordingly, no
additional disclosures have been provided in accordance with Regulation S-K Item
305 (c).
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------
The Annual Meeting of Stockholders of the Company was held on May 10, 2001, at
which the election of two Class I Directors and the ratification of the
appointment of Ernst & Young LLP as the Company's independent public accountants
for 2001 were considered. Don V. Ingram was elected as a director and received
11,692,008 votes for his election with 1,534,911 votes withheld. John E. Grimes
---------- ---------
was elected as a director and received 11,896,514 votes for his election with
----------
1,330,405 votes withheld. The following directors continued in office: John J.
---------
Fleming, Jeb Hensarling, Don Navarro, Hugh G. Robinson and William Warshauer.
Ernst & Young was ratified as independent public accountants for the Company for
2001 and received 12,682,204 votes for their ratification 502,557 votes against
---------- -------
and 42,158 votes abstaining.
------
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:
Page 23
No Current Reports on Form 8-K were filed during the quarter ended June 30,
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: August 13, 2001 By: /s/ Robert R. Holian
-------------------------------------
Robert R. Holian
Senior Vice President
Controller and Chief Accounting Officer
Page 25