10-Q 1 f65531e10-q.txt FORM 10-Q FOR PERIOD DATED 7-31-2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JULY 31, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ COMMISSION FILE NUMBER 333-4513 RENCO METALS, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-3724916 (State or other jurisdiction (IRS Employer of incorporation or Identification No.) organization) 238 NORTH 2200 WEST SALT LAKE CITY, UTAH 84116 (Address of principal executive offices) (Zip Code)

(801) 532-2043 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [ ] YES [X] NO Number of shares outstanding of each of the registrant's classes of common stock, as of September 8, 2000: ~~COMMON STOCK, NO PAR VALUE 1,000 SHARES~~

-1- 2 FORM 10-Q RENCO METALS, INC. QUARTER ENDED JULY 31, 2000 TABLE OF CONTENTS

-2- 3 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS RENCO METALS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The accompanying notes are an integral part of these condensed consolidated financial statements. -3- 4 RENCO METALS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of these condensed consolidated financial statements. -4- 5 RENCO METALS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)

The accompanying notes are an integral part of these condensed consolidated financial statements. -5- 6 RENCO METALS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PRESENTATION The accompanying condensed consolidated financial statements have been prepared from the accounting records of Renco Metals, Inc. (Renco Metals) and its subsidiaries (the Company), Magnesium Corporation of America (Magcorp), and Sabel Industries, Inc. (Sabel), without audit (except where presented data is specifically identified as audited) pursuant to the rules and regulations of the Securities and Exchange Commission. Renco Metals is a 100% owned subsidiary of The Renco Group, Inc. (Group). The financial statements reflect all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K for the fiscal year ended October 31, 1999. Renco Metals' 11.5% Senior Notes due 2003 (Senior Notes) are unconditionally and fully guaranteed, jointly and severally, by both of its subsidiaries, Magcorp and Sabel (the Guarantors), each of which is wholly-owned. Separate financial statements of the Guarantors are not presented because, in management's opinion, such financial statements would not be material to investors because Renco Metals is a holding company with no independent operations and its only assets are cash and its investment in Magcorp and Sabel. Summarized financial information on the combined Guarantors is presented below: SUMMARIZED COMBINED GUARANTOR FINANCIAL INFORMATION

-6- 7 (2) INVENTORIES Inventories consist of the following:

(3) SEGMENT INFORMATION The Company classifies its operations into two operating segments: magnesium production and steel wholesaling and fabrication. Management evaluates a segment's performance based upon operating income. There are no intersegment sales, allocated costs, or jointly used assets. Summarized financial information by operating segment follows.

-7- 8 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS - NINE MONTHS ENDED JULY 31, 2000 COMPARED TO NINE MONTHS ENDED JULY 31, 1999 Sales for the nine-month period ended July 31, 2000 decreased 11.1% over the corresponding prior period. The decrease was attributable to a 16.1% decrease in Magcorp's revenues, partially offset by a 4.0% increase in Sabel's revenues. Magnesium shipments decreased 11.4% and Magcorp's average selling price for magnesium decreased 6.5% when compared to the corresponding nine-month period in 1999. Imports from foreign producers are at record levels, and continue to put pressure on magnesium pricing and volumes. Magnesium pricing and volume are dependent on the overall world market supply and demand, and current trends are likely to continue for the foreseeable future. Sabel's sales increase was attributable primarily to overall price increases in the U.S. steel industry when compared with the corresponding nine-month period in 1999. Cost of sales for the nine-month period ended July 31, 2000 increased 1.7% on a consolidated basis. Magcorp's cost of sales increased 2.6% due primarily to higher unit costs at Magcorp caused by low production levels and high natural gas costs, which increases were partially offset by lower sales volumes. Cost of sales at Magcorp was also adversely affected by a 28.9% increase in sales volume of die cast market recycled magnesium. Magcorp continues to increase its participation in die cast markets, which also requires handling and recycling of die cast customer scrap, increasing costs and decreasing margins. Magcorp's cost of sales increase was partially offset by a 1.2% cost of sales decrease at Sabel attributable to volume decreases incurred while prices increased in the U.S. Steel industry as mentioned above. Depreciation, depletion, and amortization for the nine-month period ended July 31, 2000 decreased 16.8% due to certain long-lived assets originally capitalized at the time of Magcorp's acquisition in 1989 becoming fully depreciated, partially offset by increased depreciation for recently acquired capital equipment additions. Selling, general and administrative expenses for the nine-month period ended July 31, 2000 are relatively fixed in nature, and did not differ significantly with the comparative prior period in the aggregate, but two components did change significantly. Bad debt expense increased $907,000 over the corresponding prior period due primarily to increased charges to allowance for doubtful accounts stemming from one of Magcorp's customers filing for Chapter 11 bankruptcy protection, which increase was offset in large part by decreases in profit-based deferred compensation accruals at Magcorp. Interest income for the nine-month period ended July 31, 2000 decreased $306,000 due to decreased cash and cash equivalent balances on hand. Interest expense for the nine-month period ended July 31, 2000 increased $311,000 due to higher revolving credit facility borrowings at Magcorp. Revolving credit facility rates are based on the prime rate, which also increased during the period. Income taxes. Effective November 1, 1998, the Company was designated as a qualified subchapter S subsidiary by Group. Accordingly, the Company is generally not subject to income taxes. As a result of the subchapter S designation, during the nine months ended July 31, 1999 the Company recognized an income tax benefit of $2.1 million that included the elimination of net deferred tax liabilities recorded as of October 31, 1998. -8- 9 RESULTS OF OPERATIONS - THREE MONTHS ENDED JULY 31, 2000 COMPARED TO THREE MONTHS ENDED JULY 31, 1999 Sales for the three-month period ended July 31, 2000 decreased 15.1% over the corresponding prior period. The decrease was attributable to a 22.0% decrease in Magcorp's revenues, partially offset by a 5.8% increase in Sabel's revenues. Magnesium shipments decreased 17.4% and Magcorp's average selling price for magnesium decreased 8.0% over the corresponding 1999 three-month period. Import competition from foreign producers continues to put pressure on magnesium volumes and pricing. Magnesium pricing and volume are dependent on the overall world market supply and demand, and current trends are likely to continue for the foreseeable future. Sabel's sales increase was due to volume increases and to a lesser extent, increases in prices, which softened in the U.S. Steel industry in July 2000. Cost of sales for the three-month period ended July 31, 2000 increased 1.1% on a consolidated basis. Magcorp's cost of sales increased 0.4% due primarily to higher unit production costs at Magcorp caused by production levels being below capacity and high natural gas costs, partially offset by lower sales volumes. A 3.8% cost of sales increase at Sabel was attributable to sales volume increases described above. Depreciation, depletion, and amortization for the three-month period ended July 31, 2000 decreased 26.0% due to certain long-lived assets originally capitalized at the time of Magcorp's acquisition in 1989 becoming fully depreciated, offset by increased depreciation for recently acquired capital equipment additions at both Sabel and Magcorp. Selling, general and administrative expenses for the three-month period ended July 31, 2000 did not differ significantly with the comparative prior period in the aggregate, but two components did change significantly. Bad debt expense increased $305,000 over the corresponding prior period due primarily to increased charges to allowance for doubtful accounts stemming from one of Magcorp's customers filing for Chapter 11 bankruptcy protection, which increase was offset in large part by decreases in profit-based deferred compensation accruals at Magcorp. Interest income for the three-month period ended July 31, 2000 decreased $67,000 due to decreased cash and cash equivalent balances on hand. Interest expense for the three-month period ended July 31, 2000 increased $204,000 due to higher revolving credit facility borrowings at Magcorp. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity needs arise from working capital requirements, capital investments and long-term debt interest payment obligations. The Company's primary source of liquidity has historically been cash provided by operating activities. Recent liquidity has been provided by the Company's $40.0 million in revolving credit facilities that provide for advances by the lender based on specified percentages of eligible accounts receivable and inventories to a maximum of $33.0 million for Magcorp and $7.0 million for Sabel, net of outstanding letters of credit. As of July 31, 2000, the unused amounts available to Magcorp and Sabel were approximately $10.1 million and $2.9 million, respectively. During the nine-month period ended July 31, 2000, Magcorp and Sabel borrowed net amounts of $13.2 million and $1.2 million, respectively, under their revolving credit facilities. -9- 10 Cash used in operating activities was $10.4 million for the nine-month period ended July 31, 2000 compared to $1.6 million used in operations for the corresponding prior period. The $8.8 million increase in cash used in operations, when compared to the comparable period in 1999, resulted primarily from decreased operating income, partially offset by favorable changes in working capital items, most notably decreased accounts receivable levels and smaller increases in inventory levels. The reduced operating income is attributable to lower sales volume and pricing from increased import competition in the magnesium operations and by lower margins earned on increased participation in die cast market products as discussed above. Magnesium pricing and volume are dependent on the overall market supply and demand, and there is no assurance that current trends will not continue. Capital expenditures were $10.5 million for the nine-month period ended July 31, 2000, and are budgeted to total approximately $15 million for 2000, $15 million for 2001, and $9 million for 2002. Of these capital expenditure amounts, an estimated total of $31 million is related to new electrolytic cell technology that is expected to improve manufacturing efficiencies and ensure compliance with future environmental standards. Original plans for complete plant conversion have been scaled back and timing of the project has been revised to allow some flexibility due to reduced cash flow from operations caused by worsened market conditions. One of four existing electrolytic cell buildings has been stripped and prepared for installation of new cells. Installation of new cells is expected to commence in late fall of 2000 and take place over a period of approximately two years. Associated cost reductions and related manufacturing efficiencies will occur gradually as conversion progresses, but will not be fully realized in the Company's operating results until 2002. Management anticipates that existing cash balances, cash generated from operations, and availability under its revolving credit facilities will be sufficient to finance the Company's liquidity needs through the end of the current fiscal year. Based on current operations and in light of current magnesium market conditions, the Company believes that its present sources of liquidity will not be adequate to meet its projected requirements for working capital, capital expenditures, scheduled debt service requirements and other general corporate purposes for fiscal 2001. The Company therefore is pursuing additional sources of liquidity. In this regard, the Company is currently in discussions with its primary lender to increase availability under its revolving credit facilities. The Company's long-term debt agreements contain numerous covenants and prohibitions that limit the financial activities of the Company, including requirements that the Company satisfy certain financial ratios and limitations on additional indebtedness. The ability of the Company to meet its debt service requirements and to comply with such covenants will be dependent upon future operating performance and financial results of the Company, which will be subject to financial, economic, political, competitive and other factors affecting the Company, many of which are beyond its control. ENVIRONMENTAL MATTERS Title III of the Clean Air Act will establish, on a published schedule, new national emission standards for hazardous air pollutants (NESHAPS). NESHAPS are to be based on maximum achievable control technology as determined by a comparison of installations at similar facilities in specific industry categories. Representatives from the United States Environmental Protection Agency (EPA) have visited Magcorp's facility in preparation for the process of establishing NESHAPS for hydrogen chloride and chlorine emissions. Magcorp has scrubbers operating to reduce pertinent hydrogen chloride emissions, and does not expect that it will be required to incur significant expenditures to meet the new standards. With respect to chlorine emissions, Magcorp expects it will be required to make substantial reductions to meet NESHAPS for primary magnesium refineries that will be promulgated in mid-2002, with an expected three to six year timetable for compliance following establishment of the new standards. -10- 11 In anticipation of the new EPA standards, Magcorp has embarked on a program to install new electrolytic cell technology that will reduce chlorine emissions at the source. The new cells are also expected to significantly reduce costs because they have much higher throughput and are more energy efficient. As noted above, cell installation is expected to commence in late fall of 2000 and take place over approximately two years. Magcorp plans to spend an estimated $30 to $35 million of its total capital expenditure budget through 2002, directly or indirectly, to meet environmental regulatory requirements, primarily for NESHAPS, and for other anticipated future requirements. Cell-related project development expenses to date total $7.0 million. If unforeseen operating problems are encountered with the cell conversion project, it could have a material adverse effect on the Company's financial condition and results of operations. Sampling conducted by Magcorp and by Utah State Department of Environmental Quality (UDEQ) in 1998 and 1999 indicated a low but measurable accumulation of chlorinated hydrocarbons in the form of dioxin/furan compounds in soil and sediment samples from a contained and permitted process wastewater collection and retention system used at the Magcorp plant site for over 25 years. Background levels of the compounds were found in perimeter areas of the facility. While Magcorp does not consider, and believes that UDEQ authorities do not consider, a health hazard to be associated with these sampling results, Magcorp officials are cooperating with EPA in discussions regarding what, if any, action may be required. Management does not expect magnesium refineries to become subject to new regulations regarding these compounds in the near future. If these compounds do become subject to government regulation, the costs of such compliance, if any, could have a material adverse effect on the Company's financial condition and results of operations; however, such costs cannot be assessed at this time. Industrial companies such as Magcorp and Sabel have in recent years become subject to changing and increasingly demanding environmental standards imposed by governmental laws and regulations. The Company cannot currently assess the impact of more stringent standards on its results of operations or financial condition. FORWARD-LOOKING STATEMENTS This report includes "forward-looking statements," which involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among others: general economic and business conditions; industry capacity; demand; industry trends; competition; currency fluctuations; the loss of any significant customers; availability of qualified personnel; changes in environmental regulations; successful completion of planned installation of new technology; major equipment failures, import and customs regulations, and outcome of litigation. These forward-looking statements speak only as of the date of this report. The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such forward-looking statement is based. -11- 12 PART II- OTHER INFORMATION ITEM 1 - LEGAL MATTERS TRADE ISSUES Proceedings involving trade issues that occurred during the quarter for which this report is filed are discussed below. These trade issue updates should be read in conjunction with background information contained in the Company's Form 10-K for the fiscal year ended October 31, 1999. Magnesium from Canada On July 5, 2000, in conjunction with its sunset review, the Department of Commerce (DOC) published its determination that revocation of the existing countervailing duty orders (CVD) on pure and alloy magnesium from Canada and the antidumping duty order on pure magnesium from Canada would be likely to lead to the continuation or recurrence of countervailable subsidies and dumping. On July 13, 2000, the U.S. International Trade Commission (ITC) determined that revocation of the antidumping and CVD orders would be likely to lead to the continuation or recurrence of material injury to the domestic industry within a reasonably foreseeable time. As a result, these orders will remain in place. On August 4, 2000, the Government of Quebec filed appeals of the DOC's final determination of the sunset reviews. The current antidumping duties on pure magnesium from Canada are 0% for Norsk Hydro Canada Inc. (NHCI) and 21% for all others, and current countervailing duty margins on pure and alloy magnesium from Canada are 1.38% for NHCI and 7.34% for all others. Magnesium from China On August 3, 2000, in conjunction with its sunset review, the DOC published its determination that revocation of the existing antidumping duty order on pure magnesium from China would be likely to lead to continuation or recurrence of dumping. On August 22, 2000, the U.S. International Trade Commission (ITC) determined that revocation of the antidumping duty order would be likely to lead to continuation or recurrence of material injury to the domestic industry within a reasonably foreseeable time. As a result, the antidumping duty order on imports of pure magnesium from China will remain in place. The current antidumping duties are 69.53% for one Chinese producer/exporter, Taiyuan Heavy Machinery Import and Export Corporation, and 108.26% for all others. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits A list of exhibits required to be filed as part of this Report on Form 10-Q is set forth in the "Exhibit Index" which immediately precedes such exhibits, and is incorporated herein by reference. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter for which this report is filed. -12- 13 S I G N A T U R E S Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RENCO METALS, INC. (Registrant) September 8, 2000 /s/ Ira Leon Rennert ---------------------------------- ------------------------------------ Date Ira Leon Rennert Chairman of the Board and Principal Executive Officer September 8, 2000 /s/ Roger L. Fay ---------------------------------- ------------------------------------ Date Roger L. Fay Vice President - Finance Principal Financial and Accounting Officer

-13- 14 EXHIBIT INDEX

RENCO METALS INC 10-Q