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, 2002
[ ] 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, 2002.
Common Stock, $0.10 par value, 15,309,556
-----------------------------------------
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,
2002 2001
-------------- ---------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 3,327 $ 3,301
Accounts receivable, net of allowance of $1,478 and $2,488 at
March 31, 2002 and December 31, 2001, respectively. 31,922 23,569
Inventories 37,770 39,214
Deferred income taxes 5,531 6,879
Other current assets 12,036 7,570
-------------- ---------------
Total Current Assets 90,586 80,533
Property and equipment, net 182,390 186,931
Excess of acquisition cost over the fair value of net assets acquired,
net of accumulated amortization 49,622 115,562
Investments in joint ventures 15,626 17,892
Other assets, net 5,752 6,036
-------------- ---------------
$ 343,976 $ 406,954
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 71,412 $ 67,299
Accrued liabilities 15,168 13,908
Current maturities of long-term debt 75 75
-------------- ---------------
Total Current Liabilities 86,655 81,282
Long-term debt 122,033 125,314
Deferred income taxes 11,433 19,157
Other long-term liabilities 11,810 12,308
STOCKHOLDERS' EQUITY
Preferred stock; par value $.10; 8,000,000 shares authorized;
none issued - -
Common stock; par value $.10; 40,000,000 shares authorized;
17,135,011 issued at March 31, 2002; 17,131,240 issued
at December 31, 2001 1,714 1,713
Additional paid-in capital 105,750 105,800
Retained earnings 39,736 98,085
Accumulated other comprehensive loss from foreign currency
translation adjustments and deferred hedging gains/losses (8,516) (9,890)
Treasury stock, at cost; 2,478,644 shares at March 31, 2002;
2,494,952 shares at December 31, 2001 (26,639) (26,815)
-------------- ---------------
Total Stockholders' Equity 112,045 168,893
-------------- ---------------
$ 343,976 $ 406,954
============== ===============
Page 2
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
For the three months
ended March 31,
----------------------------
2002 2001
------------- -------------
Revenues $ 157,901 $ 187,352
Cost of sales 149,312 179,496
------------- -------------
Gross profits 8,589 7,856
Selling, general and administrative expense 5,667 4,719
Amortization expense 369 1,288
Interest expense 1,882 3,029
Fees on receivables sale 419 1,211
Interest and other income (102) (441)
Equity in net earnings of affiliates (272) (1,037)
------------- -------------
Earnings (loss) before provision for (benefit from)
income taxes and minority interests 626 (913)
Provision for (benefit from) income taxes 194 (556)
------------- -------------
Earnings (loss) before minority interests 432 (357)
Minority interests, net of provision for income taxes (50) (10)
------------- -------------
Earnings (loss) before accounting change $ 382 $ (367)
------------- -------------
Cumulative effect of accounting change (after tax benefit of $7,132) (58,730) -
------------- -------------
Net loss $ (58,348) $ (367)
============= =============
Net earnings (loss) per common share:
Basic before accounting change $ 0.03 $ (0.02)
Cumulative effect of accounting change $ (4.01) $ -
------------- -------------
Basic earnings per share $ (3.98) $ (0.02)
Diluted before accounting change $ 0.03 $ (0.02)
Cumulative effect of accounting change $ (3.98) $ -
------------- -------------
Diluted earnings per share $ (3.95) $ (0.02)
Weighted average shares outstanding:
Basic 14,651 15,353
Diluted 14,762 15,353
See Notes to Consolidated Financial Statements.
Page 3
IMCO RECYCLING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(in thousands)
For the three months
ended March 31,
----------------------------
2002 2001
------------- -------------
OPERATING ACTIVITIES
Earnings (loss) before accounting change $ 382 $ (367)
Depreciation and amortization 6,094 6,989
Provision for (benefit from) deferred income taxes (130) -
Equity in earnings of affiliates (272) (1,037)
Other non-cash charges (75) (62)
Changes in operating assets and liabilities:
Accounts receivable (6,485) 7,616
Accounts receivable sold (2,200) (16,500)
Inventories 1,451 13,099
Other current assets (4,409) 933
Accounts payable and accrued liabilities 7,631 (3,197)
------------- -------------
Net cash from operating activities 1,987 7,474
INVESTING ACTIVITIES
Payments for property and equipment (1,310) (3,385)
Other 2,524 2,607
------------- -------------
Net cash from (used by) investing activities 1,214 (778)
FINANCING ACTIVITIES
Net (payments of) proceeds from long-term revolving credit facility (3,300) (6,600)
Other 78 67
------------- -------------
Net cash used by financing activities (3,222) (6,533)
------------- -------------
Effect of exchange rate differences on cash and cash equivalents 47 (307)
------------- -------------
Net increase (decrease) in cash and cash equivalents 26 (144)
Cash and cash equivalents at January 1 3,301 5,014
------------- -------------
Cash and cash equivalents at March 31 $ 3,327 $ 4,870
============= =============
SUPPLEMENTARY INFORMATION
Cash payments for interest $ 1,279 $ 3,256
Cash payments for income taxes $ 48 $ 231
Page 4
IMCO RECYCLING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2002
(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, 2002
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2002. 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, 2001. Certain reclassifications have been made to prior period
statements to conform to the current period presentation.
NOTE B - SALE OF RECEIVABLES
The net proceeds under the Company's Receivables Sale Agreement were $63,100,000
and $73,500,000 at March 31, 2002 and 2001, respectively. During the first
quarter of 2002, the Company incurred fees on the sale of its receivables in the
amount of $419,000. During the same quarter of 2001, the Company incurred fees
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,
2002 2001
-------------- --------------
Finished goods $ 17,909 $ 18,073
Raw materials 18,314 19,477
Supplies 1,547 1,664
-------------- --------------
$ 37,770 $ 39,214
============== ==============
NOTE D - INCOME TAXES
The Company recorded an effective tax rate of 31% (excluding the tax effect on
the change in accounting principle) for the three month period ended March 31,
2002 as compared to an effective tax benefit rate of 61% for the comparable
period in 2001. A percentage of the Company's income is 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.
NOTE E - LONG TERM DEBT
As of March 31, 2002, the Company had $107,200,000 in indebtedness outstanding
under its long-term revolving credit facility and had approximately $49,579,000
available for borrowing however, due to financial constraints in the covenants
approximately 20% of this amount was not currently available. In addition, there
were standby letters of credit outstanding with several banks totaling
$3,951,000.
The Company uses its senior revolving credit facility to provide funding for its
short-term liquidity requirements and for letters of credit. The facility is
currently scheduled to expire by its terms on December 31, 2003. It is the
Company's intention to extend the term of the Credit Agreement or replace this
facility prior to its expiration.
On April 26, 2002, the Company amended the terms of the Second Amended and
Restated Credit Agreement. The Fourth Amendment to the Credit Agreement (the
"Fourth Amendment") added new and modified existing provisions of the Credit
Agreement, principally to reclassify certain of the Company's existing foreign
subsidiaries and permit other subsidiaries to be classified as "Unrestricted
Subsidiaries." The Company's Unrestricted Subsidiaries will not be subject to
certain covenants and other restrictions to which the Company and its other
subsidiaries are subject under the Credit Agreement, but revenues and earnings
from these Unrestricted Subsidiaries will generally not be included in
calculating the Company's compliance with certain financial covenants under the
Credit Agreement (except to the extent that certain cash distributions are
received by the Company or its Restricted Subsidiaries).
Page 6
The maximum amount which can be drawn down under the facility is $160,000,000.
The Company is required to prepay the facility from the proceeds of certain debt
or equity financings - the facility indebtedness must be reduced by an amount
equal to 100% of the proceeds from any permitted debt issuance, and 25% of the
proceeds from any equity offering.
The Credit Agreement also imposes on the Company: (i) prohibitions against
incurring certain indebtedness, (ii) limitations on dividends on and repurchases
of shares of capital stock, and (iii) limitations on capital expenditures,
investments and acquisitions. Funding of acquisitions by the Company will be
permitted from future equity offerings, so long as 25% of the proceeds from the
equity offering are applied to reduce the credit facility. Cash dividends on and
cash repurchases of the Company's capital stock will be prohibited until such
time as the Company's total debt to EBITDA ratio falls below 3.0 to 1.0, at
which time the Company will be permitted to pay up to $8,000,000 in dividends or
stock repurchases for each year so long as it remains in compliance with this
ratio requirement, and so long as no default or event of default has occurred or
would result. Excluded from the Credit Agreement's prohibition on the Company's
reacquiring shares are shares surrendered to the Company in payment of (i) the
exercise price of stock options or withholding obligations arising from the
exercise of stock options, and (ii) certain debt obligations incurred by
employees of the Company to exercise stock options under the Company's option
exercise loan program. Capital expenditures for the Company and its Restricted
Subsidiaries will be limited to those funded by the Company's internally
generated cash and its international operations, plus up to $15 million per
annum for maintenance and replacement of existing assets and for new assets
deemed necessary by the Company for the health and safety of its employees or as
required by law.
The indebtedness under the Credit Agreement is currently secured by
substantially all of the Company's personal property (except for accounts
receivables and certain related assets sold under the Company's Receivables Sale
Facility), and first lien mortgages on substantially all of the Company's
domestic operating facilities, plus a pledge of the capital stock of
substantially all of the Company's subsidiaries.
If the Company's Receivables Sale Facility commitment terminates or its
availability terminates, or if the total amount of the commitment or
availability under the Receivables Sale Facility is reduced by an amount greater
than 30% of its availability or commitment as of October 26, 2001, then any such
event will be an event of default under the Credit Agreement.
The Company believes that its cash on hand, the availability of funds under its
revolving credit facility and its anticipated internally generated funds will be
sufficient to fund its current operational needs. However, the present terms of
the Credit Agreement impose constraints on funding the Company's growth plans
for 2002 and beyond. In addition, beginning in the second quarter of 2002, the
current terms of certain financial covenants under the Credit Agreement become
more restrictive, and there can be no assurances that the Company can comply
with these more stringent covenants, unless additional modifications are
obtained. In conjunction with the expiration of the Credit Agreement in 2003 and
more stringent covenants, management for
Page 7
the Company plans to seek additional sources of funds as a means to pay down and
replace the indebtedness under the Credit Agreement and to accomplish the
Company's growth and capital spending plans. If these sources of funds are not
available, or are not available on terms advantageous to the Company, then the
Company may have to curtail its current growth and expansion plans until
economic or credit market conditions improve.
Replacement of the existing credit facility may require the Company to incur
higher interest costs than it currently pays, and may impose further
restrictions on the Company's ability to grow. However, while no assurances can
be given at this time, management believes the Company will be successful in
negotiating a replacement to the existing Credit Agreement.
NOTE F - RECENTLY ADOPTED ACCOUNTING STANDARDS
Effective January 1, 2002, the Company adopted SFAS No. 142 "Goodwill and Other
Intangible Assets." Under this standard, goodwill and intangibles with
indefinite useful lives are no longer amortized. Instead, FAS 142 requires that
goodwill and intangible assets deemed to have an indefinite useful life be
reviewed for impairment upon adoption of FAS 142 and annually thereafter. The
Company will perform its annual impairment review during the fourth quarter of
each year, commencing in the fourth quarter of 2002.
Under FAS 142, goodwill impairment is deemed to exist if the net book value of a
reporting unit exceeds its estimated fair value. In connection with its adoption
of FAS 142, the Company engaged a third-party valuation firm to estimate the
fair value of the Company's reporting units. The valuation firm used a
discounted cash flow model to determine fair value with a discount rate based on
a risk-adjusted weighted average cost of capital for each unit. Because the fair
value of the Company's reporting units, as determined by the valuation firm, was
less than the carrying value of the reporting unit net assets, the Company
performed the second step of the impairment test required by FAS 142 and
determined that an impairment charge was required for each reporting unit. The
cumulative effect adjustment recognized as a result of the impairment charge was
$58,730,000 (after tax), consisting of write-offs for the impairment of goodwill
in the aluminum and zinc segments.
Page 8
The effects of adopting the new standards on net income and diluted earnings per
share for the three-month periods ended March 31, 2002 and 2001 follow:
Net Income Diluted EPS
----------------------- -----------------------
2002 2001 2002 2001
----------- ---------- ----------- ----------
Net loss $ (58,348) $ (367) $ (3.95) $ (0.02)
Less: Cumulative income effect from the
accounting change for goodwill (58,730) - $ (3.98) $ -
----------- ---------- ----------- ----------
Income (loss), excluding cumulative effect 382 (367) $ 0.03 $ (0.02)
Add: Goodwill amortization, net of tax - 894 $ - $ 0.06
----------- ---------- ----------- ----------
Income excluding cumulative effect from the accounting
change in 2002 and goodwill amortization in 2001 $ 382 $ 527 $ 0.03 $ 0.04
========== ========== =========== ==========
Net income for the quarter ended March 31, 2001 would have been $894,000, or six
cents per share higher if goodwill amortization had been discontinued effective
January 1, 2001. Net income for the full year of 2001 would have been
$3,732,000, or twenty-four cents per share, higher if goodwill amortization had
been discontinued effective January 1, 2001.
The amount of the SFAS No. 142 goodwill impairment charge primarily reflects the
decline in the Company's stock price over the last several years. This decline
was the result of several unforeseen factors, which have reduced the Company's
earnings. These factors include excess capacity in the specification alloys
business, energy related closures caused by drought conditions in the United
States Pacific Northwest which have caused capacity reductions for some of the
Company's major customers, increases in the supply of zinc and reduced demand
due to a lower level of economic activity.
Changes to goodwill during the quarter ended March 31, 2002, including the
effects of adopting these new accounting standards, follow:
Goodwill
------------------
Balance at December 31, 2001, net of
accumulated amortization $ 115,562
Write-off of goodwill recognized in
cumulative effect adjustment (65,862)
Translation and other adjustments during the period (78)
Amortization expense -
------------------
Balance at March 31, 2002, net of
accumulated amortization $ 49,622
==================
Page 9
The following table presents goodwill and the related effect of the FAS 142
write-down by segment:
Aluminum Segment Zinc Segment
------------------- ------------------
Goodwill balance at December 31, 2001, net of
accumulated amortization $ 70,185 $ 45,377
Write-off of goodwill recognized in
cumulative effect adjustment (42,237) (23,625)
Translation and other adjustments during the period (1) (77)
---------------- ----------------
Balance at March 31, 2002, net of
accumulated amortization $ 27,947 $ 21,675
================= =================
At March 31, 2002, the carrying value of goodwill, net of accumulated
amortization consisted of $27,947,000 related to the aluminum segment and
$21,675,000 related to the zinc segment.
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement amends previous
accounting and disclosure requirements for impairments and disposals of
long-lived assets. The provisions of this new standard are generally applied
prospectively. The adoption of this standard had no material impact on the
Company's operations.
Page 10
NOTE G - 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,
----------------------------
2002 2001
------------- -------------
Numerators for basic and diluted earnings
(loss) per share:
Net earnings (loss) before cumulative
effect of account change $ 382 $ (367)
Cumulative effect of accounting change (58,730) -
------------- -------------
Net Loss $ (58,348) $ (367)
============= =============
Denominator:
Denominator for basic earnings (loss)
per share-weighted-average shares 14,651,052 15,352,718
Dilutive potential common shares-
stock options 110,638 -
------------- -------------
Denominator for diluted earnings (loss)
per share 14,761,690 15,352,718
============= =============
Net earnings (loss) per share:
Basic before cumulative effect 0.03 (0.02)
Basic after cumulative effect (3.98) (0.02)
Diluted before cumulative effect 0.03 -
Diluted after cumulative effect (3.95) -
NOTE H - 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, 2001.
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.
Page 11
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 had sold 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. Although the site has
not been fully investigated and final cleanup costs have not yet been
determined, 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 ultimate liability at this site 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 Company's Alchem Aluminum, Inc.
subsidiary and Michigan environmental authorities concerning air emission
control permits at the subsidiary's aluminum specialty alloy production
facilities in Coldwater, Michigan. The plaintiff claims injunctive relief and
penalties for alleged non-compliance 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 has filed an answer to
the petition. Discovery is in the preliminary stages. 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.
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 facilities. The NOV addresses the same instances
of alleged 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 emission levels from the two Company facilities located
in Coldwater. In September 2001, the Company filed its response with Region V of
the Environmental Protection Agency.
Additionally, there is 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.
The Company is also a party from time to time to what it believes are routine
litigation and proceedings considered part of the ordinary course of its
business. The Company believes that the outcome of such proceedings would not
have a material adverse effect on the Company's financial position or results of
operations.
Page 12
NOTE I - OTHER COMPREHENSIVE INCOME
Three months ended
March 31,
----------------------------------
2002 2001
----------------- ---------------
Net loss $ (58,348) $ (367)
Hedging, net of tax (1,542) 604
Foreign currency translation
adjustment and other 167 (498)
----------------- ---------------
Comprehensive loss $ (59,723) $ (261)
================= ===============
NOTE J - 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.
There has been no material change in the Company's segment classifications
during 2002.
Three months ended
March 31,
------------------------------------------------
2002 2001
---------------------- -----------------------
REVENUES:
Aluminum $ 121,438 $ 134,528
Zinc 36,463 52,824
---------------------- -----------------------
Total revenues $ 157,901 $ 187,352
====================== =======================
INCOME:
Aluminum $ 6,375 $ 5,756
Zinc 1,095 760
---------------------- -----------------------
Total segment income $ 7,470 $ 6,516
====================== =======================
Unallocated amounts:
General and administrative expenses $ (4,282) $ (2,000)
Amortization expense (369) (1,288)
Interest expense (1,882) (3,029)
Fees on receivables sale (419) (1,211)
Interest and other income 108 99
---------------------- -----------------------
Earnings (loss) before provision for (benefit from)
income taxes and minority interests $ 626 $ (913)
====================== =======================
Page 13
NOTE K - 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, 2002 and
March 31, 2001, the Company's equity in the net income of VAW-IMCO is stated at
$234,000 and $1,009,000, respectively. The following table represents the
condensed income statements for the three month periods ended March 31, 2002 and
2001.
Three months ended
March 31,
---------------------------------------------
2002 2001
--------------------- ---------------------
Revenues $ 52,726 $ 65,242
Gross Profit $ 3,153 $ 6,077
Net Income $ 467 $ 1,974
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------- RESULTS OF OPERATIONS
More than 60% 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 14
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,
----------------------------------------
2002 2001
------------------- ------------------
Pounds processed 611,632 622,674
Percentage of pounds tolled 62% 62%
Revenues $ 157,901 $ 187,352
Gross profits $ 8,589 $ 7,856
CRITICAL ACCOUNTING POLICIES
A summary of the Company's significant accounting policies is included in ITEM
----
7. - "Management's Discussion and Analysis of Financial Condition and Results of
--
Operations" of the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
The preparation of the Company's financial statements in accordance with
generally accepted accounting principles requires management to make judgments,
estimates and assumptions regarding uncertainties that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses. Areas of
uncertainty that require judgments, estimates and assumptions include accounting
for derivatives, inventories, environmental and tax matters as well as the
annual testing of goodwill and other intangibles for impairment. Management uses
historical experience and certain other information available in order to make
these judgments and estimates; actual results will inevitably differ from those
estimates and assumptions that are used to prepare the Company's financial
statements at any given time.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
PRODUCTION. For the three month period ended March 31, 2002, the Company melted
-----------
611.6 million pounds, 2% less metal compared to 622.7 million pounds during the
same period in 2001. Tolling activity for the three month period ended March 31,
2002 represented 62% of total pounds processed, which represented no change from
the same period in 2001.
Page 15
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,
--------------------------------------
2002 2001
----------------- ------------------
Pounds Processed:
Aluminum 555,923 573,553
Zinc 55,709 49,121
----------------- ------------------
Total Pounds Processed 611,632 622,674
================= ==================
Percentage Tolled:
Aluminum 67% 67%
Zinc 3% 3%
Total Percentage Tolled 62% 62%
ALUMINUM PRODUCTION: For the three month period ended March 31, 2002, the
Company processed 3% less aluminum than it did during the same period in 2001.
The decrease in aluminum production for the three-month period was primarily due
to weak demand from can stock producers, increased selectivity in scrap
purchases by the Company in an attempt to improve profit margins and the
continuing shutdown of primary aluminum production capacity in the U.S. Pacific
Northwest.
ZINC PRODUCTION: For the three month period ended March 31, 2002, the Company
processed 13% more zinc than it did during the same period in 2001, mainly due
to an increase in demand from customers in the zinc oxide and zinc dust
businesses.
REVENUES. For the three month period ended March 31, 2002, the Company's
---------
consolidated revenues decreased 16% to $157,901,000 compared to $187,352,000 for
the same period in 2001. The aluminum and zinc segments accounted for 44% and
56%, respectively, of the overall revenue decrease for the three month period.
Most of this decrease is due to lower prices for both aluminum and zinc compared
to the first quarter of 2001.
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 16
The following table shows the total revenues for the aluminum and zinc segments
(in thousands) (See NOTE J - SEGMENT REPORTING):
Three months ended
March 31,
-------------------------------------------------
2002 2001
---------------------- ------------------------
Revenues:
Aluminum $ 121,438 $ 134,528
Zinc 36,463 52,824
---------------------- ------------------------
Total Revenues $ 157,901 $ 187,352
====================== ========================
ALUMINUM REVENUES: For the three month period ended March 31, 2002, the
Company's aluminum revenues decreased 10% as compared to the same three month
period in 2001. The decrease was due principally to lower production volumes and
lower commodity prices, as discussed above.
ZINC REVENUES: For the three month period ended March 31, 2002, the Company's
zinc revenues decreased 31% as compared to the same period in 2001. This
decrease was due to lower zinc selling prices than the same period last year.
Though volumes were slightly higher than in the first quarter of 2001,
prevailing market prices for all of the Company's zinc products were
significantly below levels of a year ago, and more than offset the increase in
processed volumes.
GROSS PROFITS. For the three month period ended March 31, 2002, the Company's
--------------
consolidated gross profits increased 9% to $8,589,000 as compared to $7,856,000
in the same period in 2001. Lower natural gas and other operating expenses were
the primary reasons for the increase in gross profit.
Page 17
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 J - SEGMENT REPORTING):
Three months ended
March 31,
-------------------------------------------------------------
2002 2001
---------------------------- ------------------------------
Segment Income:
Aluminum $ 6,375 $ 5,756
Zinc 1,095 760
---------------------------- ------------------------------
Total segment income $ 7,470 $ 6,516
============================ ==============================
Items not included in gross profits:
Plant selling expense $ 1,106 $ 1,316
Management SG&A expense 280 1,403
Equity in earnings of affiliates (272) (1,037)
Other income 5 (342)
---------------------------- ------------------------------
Gross Profits $ 8,589 $ 7,856
============================ ==============================
ALUMINUM INCOME: For the three month period ended March 31, 2002, the Company's
aluminum income increased 11% as compared to the same period in 2001. The 2002
first quarter's results reflected lower natural gas and other operating costs,
which were partially offset by higher scrap costs.
ZINC INCOME: For the three month period ended March 31, 2002, the Company's zinc
income increased 44% as compared to the same period in 2001. This increase was
due to greater processing volumes and lower natural gas and other operating
costs.
SG&A EXPENSES. Selling, general and administrative expenses for the three month
--------------
period ended March 31, 2002 were $5,667,000, an increase of 20% over $4,719,000
for the comparable period last year. The increase mainly relates to a one-time
reduction in employee compensation costs recorded in the first quarter of 2001.
AMORTIZATION EXPENSE. Amortization expense for the three month period ended
---------------------
March 31, 2002 was $369,000, a decrease of 71% compared to $1,288,000 recorded
in the same period last year. The decrease is due to the adoption of SFAS 142
which requires that the Company no longer amortize goodwill, but test for
impairment on an annual basis. The current amortization expense includes only
amortization of debt issuance costs.
INTEREST EXPENSE. Interest expense for the three month period ended March 31,
-----------------
2002 and 2001 was $1,882,000 and $3,029,000, respectively, representing a
decrease of 38% in 2002. The decrease was due mainly to lower average levels of
outstanding debt and lower interest rates.
FEES ON RECEIVABLES SALE. The Company's Receivables Sale Facility allows the
-------------------------
Company and certain of its subsidiaries to sell receivables and other related
assets to a
Page 18
special purpose subsidiary that, in turn, sells undivided interests therein to
certain financial institutions and other entities. Fees in connection with these
sales for the three month period ended March 31, 2002 were $419,000 as compared
to $1,211,000 in the same period of 2001 due to less receivables sold during
2002, resulting from lower sales volumes and lower commodity prices (see NOTE B
- SALE OF RECEIVABLES).
EARNINGS. Earnings increased to $382,000 before the effect of an accounting
---------
change for the three month period ended March 31, 2002 as compared to a net loss
of $367,000 for the same period in 2001. The increase in this period was
primarily the result of lower natural gas and other operating costs and the
elimination of amortization expense related to goodwill.
The Company recorded an effective tax rate of 31% for the three month period
ended March 31, 2002 as compared to an effective tax benefit of 61% for the
comparable period in 2001. The benefit recorded in 2001 is due to the loss
recorded in the first quarter of 2001 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, 2002 and 2001, the Company's equity in the net earnings of
affiliates was stated at $272,000 and $1,037,000, respectively. This decrease is
due to first quarter equity earnings from VAW-IMCO which declined from the
year-ago level because of higher scrap costs that reduced profit margins and
lower volume that was due in part to unscheduled customer furnace maintenance.
The net loss in the first quarter of 2002 after the cumulative effect of the
accounting change was $58,348,000 or $3.95 per diluted share. The Company
recorded a non-cash charge of $58,730,000 for its adoption of SFAS No. 142. No
similar charge was recorded in the first quarter of 2001. (See NOTE F - RECENTLY
ADOPTED ACCOUNTING STANDARDS)
FISCAL 2002 SPECIAL FACTORS AND OUTLOOK
Certain of the statements below contain projections and estimates based on
current expectations for 2002. 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 entitled "CAUTIONARY STATEMENT FOR PURPOSES OF
FORWARD LOOKING STATEMENTS" below. These statements do not reflect the potential
impact of any acquisitions, investments or divestitures that may be completed,
or unforeseen events that may occur after the date of this filing.
During the first quarter of 2002, market factors that negatively affected the
Company's results of operations and financial condition included:
. reduced volumes at its aluminum facilities principally due to the continuing
downturn in U.S. industrial production;
. high energy costs for its customers in the U.S. Pacific Northwest;
Page 19
. weak market conditions for its customers serving the transportation, can
sheet and construction sectors;
. low margins for its specification aluminum alloys business due to relatively
high costs of scrap and low prices for finished products;
. the continuing over-capacity of specification aluminum alloy suppliers; and
. continuing low margins in the zinc segment.
For the remainder of 2002, the Company expects many of the prevailing industry
conditions to persist. Continued weak domestic industrial production will
negatively impact the Company's results of operations. However, the Company's
ongoing cost reduction program, lower natural gas costs, a more effective use of
commodities hedges, increasing usage of the new North American Special Aluminum
Alloy Contract now trading on the London Metal Exchange (LME), further
utilization of efficient fuel-burning technologies for its furnaces, and the
continued reallocation of processing volumes among its facilities, should have
the effect of further reducing overall operational costs.
The Company is continuing to pursue additional growth opportunities in Europe
and in Latin America through proposed new facilities, expansion of its major
customer relationships and project venture partnering opportunities. The Company
is planning to construct a new facility in the United Kingdom in 2002, and plans
capacity additions at its Mexico joint venture facility in the second half of
2002. The Company is also currently pursuing a business opportunity in Brazil.
The Company expects marginal improvement in its results of operations for the
second quarter of 2002. Until U.S. industrial demand increases (which is not
currently expected until the second half of 2002, at the earliest), the
Company's overall domestic operations should be expected to remain at low levels
of profitability. Assuming the U.S. economy continues its current recovery, the
Company can execute on its international expansion program, and the cost savings
implemented in 2000 and 2001 continue to be realized, profitability should
improve in the second half of 2002. Unexpected defaults and insolvencies
involving its suppliers and customers, which occurred in 2001, would further
weaken the Company's outlook for 2002.
The Company is currently constrained by the terms of the facilities for its
sources of capital with regards to expansion and acquisition opportunities. Both
its revolving credit and receivables sales facilities expire by their terms in
late 2003. See "LIQUIDITY AND CAPITAL RESOURCES" below. Although management
believes that modified or alternative sources of capital funding are available,
no assurances can be given that the terms of those facilities would be
comparable to the terms of its existing facilities or as favorable to the
Company.
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 occurring after
the date of this Form 10-Q.
Page 20
VAW-IMCO
The Company is a 50% joint venture shareholder in VAW-IMCO. VAW aluminium AG is
the other shareholder. On March 15, 2002, Norsk Hydro ASA, a Norwegian oil and
energy, aluminum and fertilizer company, announced that it had completed the
purchase of VAW aluminium AG from its parent company. Under the terms of the
joint venture agreement and the joint venture's organizational documents, upon a
change of control of one shareholder, the remaining shareholder may, if certain
conditions are met, elect to cause the joint venture to redeem the shares held
by the shareholder whose control has changed. The redemption price, which is to
be paid out in five equal installments (plus interest) from current funds and
future cash flows of the joint venture, is to be determined by an evaluation
conducted under a standard issued by the Institute of German Certified Public
Accountants, with both shareholders having the right to commission an auditing
firm to perform its own evaluation.
The Company has undertaken its evaluation procedures and is currently analyzing
its rights and obligations under the relevant documents concerning an election
to cause the joint venture to redeem the shares of VAW aluminium AG. No
understanding or agreement has been made between the parties with respect to the
valuation of these shares, and depending upon the ultimate valuation determined,
no assurances can be given as to whether the Company will cause the redemption
or exercise its other rights under the governing instruments, or the timing
thereof. The redemption of the shares would make VAW-IMCO a wholly-owned
subsidiary of the Company, requiring consolidation of the results of operations
and financial condition of VAW-IMCO with those of the Company's, for financial
accounting purposes.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS. Operations provided $1,987,000 of cash during the
--------------------------
first three months of 2002 compared to $7,474,000 of cash provided from
operations during the first three months of 2001. Changes in operating assets
and liabilities resulted in a net cash usage of $4,012,000 for the three months
ended March 31, 2002, compared to a provision of cash of $1,951,000 for the same
period in 2001. The change in net operating assets and liabilities was primarily
due to a reduction of inventory, providing $11,648,000 less cash in the first
three months of 2002 compared to the first quarter of 2001. This decrease is due
to the Company's cost reduction program that includes reducing working capital.
Reductions in the amount of receivables eligible for sale under the Company's
Receivables Sale Facility during the first quarter of 2002 compared to the same
period in 2001 represented a use of cash of $2,200,000 and $16,500,000,
respectively. Higher levels of accounts payable in 2002 were also a contributing
factor to the overall change. Earnings (before the effect of an accounting
change) of $382,000 for the first quarter of 2002 compared to net loss of
$367,000 for the comparable 2001 period, worked to offset the level of cash used
by operating activities.
CASH FLOWS FROM INVESTING ACTIVITIES. During the three month period ended March
------------------------------------
31, 2002, net cash provided by investing activities was $1,214,000 as compared
to a use of cash of $778,000 for the same period in 2001. The difference in
these two periods is primarily due to a reduction in payments for property,
plant and
Page 21
equipment in 2002. The Company's total payments for property, plant and
equipment in the first three months of 2002 decreased to $1,310,000, compared to
$3,385,000 spent in the first three months of 2001. Capital expenditures for
property, plant and equipment in 2002 are now expected to approximate
$25,000,000, with the majority of the spending dedicated for maintenance and
replacement of existing assets and the remainder for the construction of a new
aluminum recycling facility in Warrington, England and the installation of new
recycling equipment at its joint venture facility in Monterrey, Mexico. In
accordance with the terms of the Fourth Amendment to the Second Amended and
Restated Credit Agreement, these capital expenditures will be funded by cash
flows generated from continuing operations.
CASH FLOWS FROM FINANCING ACTIVITIES. Net cash used by financing activities was
------------------------------------
$3,222,000 for the three month period ended March 31, 2002, compared to using
$6,533,000 for the same period of 2002. In the first three months of 2002 and
2001, the Company made net payments on its revolving credit facility of
$3,300,000 and $6,600,000, respectively. At March 31, 2002, the Company had
$107,200,000 in indebtedness outstanding under its long-term revolving credit
facility and had approximately $49,579,000 available for borrowing. However, due
to financial constraints in the covenants, approximately 20% of this amount was
not currently available. In addition, standby letters of credit with several
banks were outstanding, totaling $3,951,000.
CREDIT AND RECEIVABLES SALE FACILITIES. To fund its operating activities and
--------------------------------------
working capital needs, the Company has in place a senior secured revolving
credit facility and a receivables sale facility. Under the receivables sales
facility, the Company and certain of its originating subsidiaries agreed to
sell, from time to time, their interest in certain trade accounts receivable and
other related assets to a wholly-owned subsidiary of the Company. In turn, this
subsidiary sells an undivided interest in the receivables and assets, in an
aggregate amount of up to $100,000,000, to unaffiliated third-party financial
institutions and other entities. The amount outstanding under the receivables
sale facility at March 31, 2002 was $63,100,000. During the first quarter of
2002, the Company incurred fees on the sale of its receivables in the amount of
$419,000. This facility is scheduled to terminate in November 2003.
The Company uses its senior revolving credit facility to provide funding for its
short-term liquidity requirements and for letters of credit. The facility is
currently scheduled to expire by its terms on December 31, 2003. It is the
Company's intention to extend the term of the Credit Agreement or replace this
facility prior to its expiration.
On April 26, 2002, the Company amended the terms of the Credit Agreement. The
Fourth Amendment to the Credit Agreement added new and modified existing
provisions of the Credit Agreement to reclassify certain of the Company's
existing foreign subsidiaries and to permit other subsidiaries to be classified
as "Unrestricted Subsidiaries." The Company's Unrestricted Subsidiaries will not
be subject to certain covenants and other restrictions to which the Company and
its other subsidiaries are subject under the Credit Agreement, but revenues and
earnings from these Unrestricted Subsidiaries will generally not be included in
calculating the Company's compliance with certain financial covenants under the
Credit Agreement
Page 22
(except to the extent that certain cash distributions are received by the
Company or its Restricted Subsidiaries).
The maximum amount which can be drawn down under the facility is $160,000,000.
The Company is required to prepay the facility from the proceeds of certain debt
or equity financings - the facility indebtedness must be reduced by an amount
equal to 100% of the proceeds from any permitted debt issuance, and 25% of the
proceeds from any equity offering.
The Credit Agreement also imposes on the Company: (i) prohibitions against
incurring certain indebtedness, (ii) limitations on dividends on and repurchases
of shares of capital stock, and (iii) limitations on capital expenditures,
investments and acquisitions. Funding of acquisitions by the Company will be
permitted from future equity offerings, so long as 25% of the proceeds from the
equity offering are applied to reduce the credit facility. Cash dividends on and
cash repurchases of the Company's capital stock will be prohibited until such
time as the Company's total debt to EBITDA ratio falls below 3.0 to 1.0, at
which time the Company will be permitted to pay up to $8,000,000 in dividends or
stock repurchases for each year so long as it remains in compliance with this
ratio requirement, and so long as no default or event of default has occurred or
would result. Excluded from the prohibition on the Company's reacquiring shares
are shares surrendered to the Company in payment of (i) the exercise price of
stock options or withholding obligations arising from the exercise of stock
options, and (ii) certain debt obligations incurred by employees of the Company
to exercise stock options under the Company's option exercise loan program.
Capital expenditures for the Company and its Restricted Subsidiaries will be
limited to those funded by the Company's internally generated cash and its
international operations, plus up to $15 million per annum for maintenance and
replacement of existing assets and for new assets deemed necessary by the
Company for the health and safety of its employees or as required by law.
The indebtedness under the Credit Agreement is currently secured by
substantially all of the Company's personal property (except for accounts
receivables and certain related assets sold under the Company's Receivables Sale
Facility), and first lien mortgages on substantially all of the Company's
domestic operating facilities, plus a pledge of the capital stock of
substantially all of the Company's subsidiaries.
If the Company's Receivables Sale Facility commitment terminates or its
availability terminates, or if the total amount of the commitment or
availability under the Receivables Sale Facility is reduced by an amount greater
than 30% of its availability or commitment as of October 26, 2001, then any such
event will be an event of default under the Credit Agreement.
The Company believes that its cash on hand, the availability of funds under the
credit facility and its anticipated internally generated funds will be
sufficient to fund its current operational needs. However, the present terms of
the Credit Agreement impose constraints on funding the Company's growth plans
for 2002 and beyond. In addition, beginning in the second quarter of 2002, the
current terms of certain financial covenants under the Credit Agreement become
more restrictive, and there can be no assurances that the Company can comply
with these more stringent covenants, unless additional modifications are
obtained. In conjunction with the expiration of the Credit Agreement in 2003 and
these more stringent covenants, management for the Company plans to seek
additional sources of funds as a means to pay down and replace the indebtedness
under the Credit Agreement and to accomplish the
Page 23
Company's growth and capital spending plans. If these sources of funds are not
available, or are not available on terms advantageous to the Company, then the
Company may have to curtail its current growth and expansion plans until
economic or credit market conditions improve.
Replacement of the existing credit facility may require the Company to incur
higher interest costs than it currently pays, and may impose further
restrictions on the Company's ability to grow. However, while no assurances can
be given at this time, management believes the Company will be successful in
negotiating a replacement to the existing Credit Agreement.
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 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, 2001.
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 had sold 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. Although the site has
not been fully investigated and final cleanup costs have not yet been
determined, 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 ultimate liability at this site 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 Company's Alchem Aluminum, Inc.
subsidiary and Michigan environmental authorities concerning air emission
control permits at the subsidiary's aluminum specialty alloy production
facilities in Coldwater, Michigan. The plaintiff claims injunctive relief and
penalties for alleged non-compliance with and violations of
Page 24
federal and state environmental laws. The suit seeks compliance by the Company
as well as potentially substantial monetary penalties. The Company has filed an
answer to the petition. Discovery is in the preliminary stages. 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.
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 facilities. The NOV addresses the same instances
of alleged 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 emission levels from the two Company facilities located
in Coldwater. In September 2001, the Company filed its response with Region V of
the Environmental Protection Agency.
Additionally, there is 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.
The Company is also a party from time to time to what it believes are routine
litigation and proceedings considered part of the ordinary course of its
business. The Company believes that the outcome of such proceedings would not
have a material adverse effect on the Company's financial position or results of
operations.
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 from time to time) may be deemed
to be forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995 and are subject to the "Safe Harbor" provisions in
that legislation. This forward-looking information includes statements regarding
the timing of any improvements in the current economic and business conditions
affecting the Company's aluminum and zinc segments; the redemption of its
venturer's joint venture shares in VAW-IMCO and the timing thereof; future
financing sources for the Company's capital and expansion plans; effects of new
special aluminum alloy contracts trading on the LME; future effects of cost
reductions from commodities hedge programs, work reallocation among facilities
and technological changes affecting fuel usage; future modifications to or
refinancing of its credit facilities; anticipated margin improvements in the
aluminum specification alloy and zinc businesses; expected increased demand from
the automotive sector; the costs of the Company's natural gas; trends for
domestic can sheet
Page 25
demand; international demand for the Company's products and services; future
effects from changes in accounting principles; potential expansion
opportunities; and estimated capital expenditures, profitability and future cash
flows.
Other forward-looking information includes, without limitation, statements
concerning future profit margins, plant capacity, volumes, revenues, earnings,
costs, energy costs and expenses (including capital expenditures); future costs
for scrap and prices for metals; the ability of the Company to be able to
continue to grow its domestic and foreign business through expansion,
acquisition or partnering; access to adequate energy supplies at advantageous
rates; anticipated benefits from new technologies; the expected effects of
strikes, work stoppages or production shutdowns at Company or customer
facilities; future divestitures, acquisitions or corporate combinations and
their expected effects; projected dates for completion of projects and
introduction of anticipated technological advances; future (or extensions of
existing) long-term supply contracts with customers; anticipated environmental
control measures; the outcome of and future liabilities resulting from any
claims, investigations or proceedings against the Company; effects of the
Company's metals brokerage activities on its future results of operations and
financial condition; the future mix of business (product sales vs. tolling);
future costs and asset recoveries; future operations, demand and industry
conditions; 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: uncertainties in the
U.S. and worldwide economies and aluminum and zinc markets; the financial
condition of the Company's customers and suppliers; current industry production
capacity exceeding the demand for aluminum specialty alloy products and aluminum
recycling services; the effects of future energy prices and related fuel costs;
the ability of the Company to successfully hedge against energy price
fluctuations; competition for raw materials costs and pricing pressures from
competitors; 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; retention of major customers; collectibility of
its outstanding receivables; the inherent unpredictability of adversarial or
administrative proceedings; effects of environmental and other governmental
regulations; currency exchange rate and interest rate fluctuations; 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; the continuation
of
Page 26
reduced spreads between primary aluminum prices and aluminum scrap prices; and
future levels and timing of capital expenditures.
These statements are further qualified by the following:
* The Company's operations are capital-intensive and the Company currently
has in place constrained resources to significant sources of capital for
its expansion and acquisition plans. The terms of both the Company's
revolving credit and receivables sales facilities expire in late 2003.
These facilities will have to be amended, or new credit facilities put in
place, possibly at terms less favorable to the Company than the terms of
the facilities currently in effect.
* A continuation or worsening of the downturn in U.S. and foreign industrial
production will have the effect of weakening the financial condition of
many of the Company's suppliers and customers, and could lead to further
defaults in payments owing to the Company for its products and services.
* 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. Many of the factors affecting revenues and
costs are outside of the control of the Company, including: commodity
prices, weather conditions, general economic and financial market
conditions; work stoppages, customer defaults and insolvencies, production
shutdowns at Company and customer facilities; governmental regulation and
factors involved in administrative and adversarial proceedings. The future
mix of product sales and 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
for the Company's product sales business. Prices can be volatile, which
affects the Company's product sales business. The Company's use of
contractual arrangements, including long-term agreements, hedges and
forward contracts, may reduce the Company's exposure to this volatility but
does not eliminate it. Lower market prices for primary metals have
adversely affected demand for the Company's recycling services and recycled
metals.
* The Company's average annual growth rate from 1995 through 2000 should not
be expected to be achieved in the foreseeable future because of the current
Page 27
constraints in place on further Company borrowings and limited access to
other capital sources.
* 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.
* 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 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 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. The remaining useful lives of the Company's two
primary landfill sites at Sapulpa, Oklahoma and Morgantown, Kentucky are
estimated to be approximately three and four years, respectively, although
the Morgantown landfill site can be expanded to provide up to an additional
six years of useful life.
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REVIEW BY INDEPENDENT ACCOUNTANTS
The Company's independent accountants, Ernst & Young LLP, have reviewed the
Company's consolidated financial statements at March 31, 2002, 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
There have been no material changes regarding market risk and the Company's
derivative instruments during the first quarter of 2002. Accordingly, no
additional disclosures have been provided in accordance with Regulation S-K Item
305 (c).
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-------
See Part I. ITEM 2. Management's Discussion and Analysis of Financial Condition
-------------------------------------------------------------------
and Results of Operations - "Liquidity and Capital Resources - Credit and
-------------------------
Receivables Sale Facilities" for a discussion of the Fourth Amendment to the
Second Amended and Restated Credit Agreement with regards to certain
restrictions on the Company's ability to pay cash dividends and repurchase
shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-------
(a) The following exhibits are included herein:
10.1 Fourth Amendment to Second Amended and Restated Credit Agreement
dated April 26, 2002.
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed during the quarter ended March
31, 2002.
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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 15, 2002 By: /s/ Robert R. Holian
--------------------------
Robert R. Holian
Senior Vice President
Controller and Chief Accounting Officer
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