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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] 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 940
Central Tower at Williams Square
Irving, Texas 75039
(Address of principal executive offices)
(972) 401-7200
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Exchange on Which Registered
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Common Stock, $0.10 Par Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of March 1, 1999, the aggregate market value of voting and non-voting common
equity held by nonaffiliates of the Registrant was $177,512,688.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of March 1, 1999.
Common Stock, $0.10 par value, 16,519,991
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement relating to its 1999
Annual Meeting of Stockholders are incorporated by reference into Part III
hereof.
ITEM PAGE
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PART I
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Item 1. Business 3
Item 2. Properties 19
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 4A. Executive Officers of the Registrant 22
PART II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 23
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 37
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 68
PART III
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Item 10. Directors and Executive Officers of the Registrant 68
Item 11. Executive Compensation 68
Item 12. Security Ownership of Certain Beneficial Owners and
Management 68
Item 13. Certain Relationships and Related Transactions 68
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 69
Signatures 73
PART I
This Annual Report on Form 10-K contains forward-looking statements as defined
by the Private Securities Litigation Reform Act of 1995. Forward-looking
statements should be read in conjunction with the cautionary statements and
other important factors included in this Form 10-K. See Item 7. "MANAGEMENT'S
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DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CAUTIONARY STATEMENT FOR PURPOSES OF FORWARD-LOOKING STATEMENTS."
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements which are other than statements of historical facts. These
forward-looking statements may be identified by the use of the words
"anticipates," "estimates," "expects," "intends," "plans," "predicts,"
"projects," and similar expressions. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, including management's examination of historical operating
trends, data contained in the Company's records and other data available from
third parties, but there can be no assurance that management's expectations,
beliefs or projections will result or be achieved or accomplished.
ITEM 1. BUSINESS
GENERAL
IMCO Recycling Inc. (the "Company") is the largest aluminum recycler in the
United States and believes that it is the largest aluminum recycler in the
world. The Company's principal business is the processing of aluminum, which
includes used aluminum beverage cans ("UBCs"), scrap, and dross (a by-product of
aluminum production). The Company converts UBCs, scrap and dross into molten
metal in furnaces at facilities owned and/or operated by the Company. While the
aluminum is in molten form, the Company may blend in other metals to prepare a
precise aluminum alloy mixture. The Company then delivers the processed aluminum
to customers in molten form or ingots. The Company recovers magnesium in a
similar process.
With the acquisition of U.S. Zinc Corporation ("U.S. Zinc") in July 1998 (see
"GROWTH OF BUSINESS" below), the Company believes that it is now the largest
recycler of zinc secondaries in the United States. U.S. Zinc uses company-owned
furnaces to convert zinc scrap and dross into various value-added zinc products
such as zinc oxides, dust, and metal.
Most of the Company's processing capacity is utilized to recycle customer-owned
materials, for which the Company charges a fee (a service called "tolling").
During 1998, approximately 68% of the Company's total pounds of metal melted
involved tolling. The balance of the Company's business involves the purchase of
scrap and dross for processing and recycling by the Company for subsequent
resale ("buy/sell" business). Except where the context otherwise requires, the
term "Company" as used herein refers to IMCO Recycling Inc. and its
subsidiaries.
The Company's business has benefited from the trend to include recycled
materials in finished products, the growth in the production and recycling of
UBCs and the increasing utilization of aluminum in automotive components.
According to industry statistics, over the past 25 years, U.S. production of
recycled aluminum has more than tripled to 3.7 million tonnes from 1.0 million
tonnes. In addition, recycled aluminum in the U.S. currently represents
approximately
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37% of the total domestic aluminum supply, compared to 19% in 1972. The U.S. is
the world's leading consumer of zinc, currently consuming about one-sixth of the
world's production, but is only the fifth largest producer. Consequently, the
U.S. is also the largest importer of refined zinc. During the period 1984-1996
world secondary zinc refining activity grew at three times the rate of primary
zinc metal production. Secondary zinc now provides approximately 36% of the
world's refined zinc output and in the U.S., secondary zinc refining is
equivalent to 38% of domestic consumption.
The Company's aluminum customers include some of the world's major aluminum
producers and aluminum fabricators, diecasters, extruders, automotive companies
and other processors. Most of the aluminum metal processed by the Company is
used to produce products for the transportation, packaging and construction
industries, which constitute the three largest aluminum markets. Much of the
Company's recent growth has been directed toward serving the transportation
sector, which has been the largest and fastest-growing aluminum market in recent
years due to the increasing use of aluminum in automotive components. The
Company's principal aluminum customers include Aluminum Company of America
("Alcoa"), Commonwealth Aluminum Corporation ("Commonwealth"), Kaiser Aluminum
Corporation ("Kaiser"), Ford Motor Company ("Ford"), Century Aluminum Company,
General Motors Corporation ("GM"), Toyota Tsusho America, Inc., Nelson Metals,
and Wise Metals Company ("Wise Metals").
The Company's zinc customers include some of the world's major tire and rubber
producers and galvanizers, steel companies and other processors, including
Goodyear Tire & Rubber Co., Michelin Tire, Bethlehem Steel and Dow
Agrosciences.
STRATEGY
The Company's strategy is to participate in sectors of the nonferrous metals
recycling industry in which it believes it can provide customers with a
technology-based, value-added service and in which it can develop significant
market share. The Company believes that it has been successful in
differentiating its aluminum recycling services from those of its competitors
through:
. operational and design technologies that are designed to produce
higher metal recovery yields
. the strategic location of facilities in close proximity to customers,
providing for both stronger ties to its customers and greater
convenience and accessibility for its customers
. the ability to deliver recycled aluminum in molten form for just-in-
time delivery, thereby saving customers the expense of remelting
aluminum ingots
. its environmental technologies and practices, including dedicated
disposal facilities and a proprietary process developed by the Company
used to recover aluminum from by-products of the recycling process
The Company believes that it has been successful in differentiating its zinc
value-added products from those of its competitors through:
. operational and design technologies that are designed to produce lower
cost, higher quality products to be sold at competitive prices
. the strategic location of facilities in close proximity to customers,
providing for both stronger ties to its customers and greater
convenience and accessibility for its customers
. customized packaging that meets customers' specifications, including
customer specific weights and labels
To achieve its objectives, the Company focuses on internal expansion as well as
growth through strategic acquisitions, vertical integration of its operations
and services, and operational efficiencies through technological innovation.
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Expansion. Since 1993, the Company has increased its number of facilities and
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capacity through acquisitions of existing facilities, construction of new
facilities and expansion of existing facilities. As of March 31, 1993, the
Company owned and operated five recycling plants, which had an aggregate annual
processing capacity of 735 million pounds of aluminum and 50 million pounds of
other metals. As of December 31, 1998, the Company owned and operated 22
recycling and processing plants, which have an aggregate annual melting
capacity of approximately 2.6 billion pounds of aluminum and 240 million pounds
of zinc, for a total annual processing capacity of 2.8 billion pounds. In
February 1999, the Company acquired substantially all the assets of an aluminum
alloying facility in Shelbyville, Tennessee, which has an annual capacity of 120
million pounds, and a zinc oxide facility in Clarksville, Tennessee, which has
an annual capacity of approximately 40 million pounds. Additionally, in March
1999, the Company announced plans to construct an aluminum alloying facility in
Saginaw, Michigan to supply molten aluminum to GM under a new long-term supply
agreement. The Company anticipates that its annual capacity for 1999 will be 3.0
billion pounds. In addition, the Company owns a 50% interest in an aluminum
recycling joint venture in Germany, which has an annual melting capacity of 340
million pounds, and has begun operations at its new aluminum recycling facility
in Swansea, Wales, which has an annual melting capacity of 100 million pounds.
The Company expects that currently planned expansions will add approximately 220
million pounds of annual processing capacity during 1999 and 2000. See "GROWTH
OF BUSINESS" below. Expansion of the Company's network of facilities in the U.S.
has enabled the Company to allocate processing work among its facilities,
thereby maximizing utilization of capacity and absorbing excess demand. The
Company intends to continue to expand its business by targeting growing markets,
such as the automotive market, constructing additional recycling facilities,
expanding and improving its existing facilities and acquiring or partnering with
similar recycling businesses or other metals processors. In addition, the
Company plans to continue seeking foreign sites for its recycling facilities
where market conditions warrant.
Vertical Integration. The Company also seeks business opportunities that combine
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its traditional recycling services with downstream processing operations that
more directly serve manufacturers and other end-users. With the Company's
acquisition of Alchem Aluminum, Inc. ("Alchem") in November 1997, the Company
began manufacturing and selling specification aluminum alloy products for
automotive equipment manufacturers. The Shelbyville, Tennessee acquisition in
early 1999 will expand the Company's capacity to serve this market. Further
expansion will occur with the announced plans to construct an aluminum alloying
facility in Saginaw, Michigan.
Technological Innovation. The Company's facilities and equipment have been
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continually improved and updated through plant modernization programs, including
technological advancements designed to improve operational efficiencies. Between
January 1, 1992 and December 31, 1998, the Company made capital expenditures and
joint venture investments totaling $138 million in new plant and equipment
(excluding acquisitions of existing companies or facilities). These investments
have increased the Company's productivity, market share and total processing
capacity.
Customer Service. The Company is dedicated to maintaining customer satisfaction
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and seeks to develop new methods and processes to better serve its customers.
The Company emphasizes a strong commitment to customer service by offering:
. higher metal recovery rates
. higher quality of metal recovered
. more precise specifications for alloyed metals
. advanced environmental technology and practices
. facilities conveniently located near its customers
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. customized packaging.
Through long-term relationships with primary producers and other customers, the
Company maximizes its production capabilities while providing customers with a
reliable source for their product requirements.
Environmental Efficiencies. The Company has committed resources towards
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developing a "closed loop" production system in which virtually all materials
used in the aluminum recycling process are reclaimed or consumed, thus greatly
reducing the need for and expense of landfilling. Management believes that
considerable progress has been made in this area through the operation of the
Company's Kentucky salt cake processing plant and its patented wet-milling
process employed to recycle salt cake at both its Arizona facility and its Solar
Aluminum Technology Services ("SALTS") joint venture in Utah. While no
assurances can be given that an economically efficient closed loop recycling
system will ever be developed for all of the Company's facilities and processes,
management believes that continued progress toward this goal is desirable for
the Company's customers due to the opportunities for cost savings and further
assurances of environmental safety. In addition, customers benefit from the
enhanced environmental facilities employed by the Company, such as the lined
landfill at its Morgantown, Kentucky aluminum facility, which was built to
hazardous waste standards. See "THE RECYCLING PROCESS."
In the zinc manufacturing process by-products which are generated are oxides
and zinc fines. These are either sold to third parties or melted in another
process in the zinc manufacturing cycle. Thus, there is no significant disposal
issue in the zinc process.
GROWTH OF BUSINESS
Since its inception, the Company has increased its number of facilities and
capacity through acquisitions, construction of new facilities and expansion of
existing facilities. See ITEM 2. "PROPERTIES." Beginning in 1995, this growth
strategy was accelerated.
In December 1995, the Company formed a joint venture, VAW-IMCO Gu(beta) und
Recycling GmbH ("VAW-IMCO"), with VAW aluminium AG, the largest aluminum company
in Germany. The Company has a 50% interest in this German venture, which owns
and operates two recycling and foundry alloy facilities. The plants principally
serve the European automotive markets.
In January 1996, the Company completed the construction of its salt cake
processing facility, located adjacent to the Company's Morgantown, Kentucky
plant. This facility processes salt cake, a by-product generated from the
Company's aluminum recycling plants, through use of materials separation
technology, and recovers additional amounts of aluminum for resale that would
otherwise be landfilled. See "ENVIRONMENTAL MATTERS."
In 1996, the Company began construction of an aluminum recycling facility in
Coldwater, Michigan for a joint venture with Alchem. The Coldwater plant reached
full capacity in the fourth quarter of 1997.
In 1997, the Company commenced construction of an aluminum recycling facility in
Swansea, Wales, U.K., through its IMCO Recycling (UK) Ltd. subsidiary, which
reached full capacity in mid-1998. The plant site is adjacent to a plant owned
by a subsidiary of Alcoa, which is the Swansea facility's principal customer
under a long-term tolling agreement.
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In January 1997, the Company acquired IMSAMET, Inc. ("IMSAMET") and Rock Creek
Aluminum, Inc. ("Rock Creek"). IMSAMET owns or has a majority interest in three
aluminum recycling plants located in the western U.S. (i.e., Idaho, Arizona and
Utah), and owns a 50% interest in SALTS, which is a Utah facility that uses a
proprietary process to reclaim materials from salt cake. Rock Creek operates two
facilities in Ohio that utilize milling, shredding, blending, testing and
packaging equipment to process various types of raw materials, including
aluminum dross and scrap, into aluminum products used as metallurgical additions
in the steel making process for steel producers.
In November 1997, the Company acquired Alchem, a producer of specification
aluminum alloys for automotive manufacturers and their suppliers. Through its
acquisition of Alchem, the Company increased its participation in the automotive
industry, broadened its customer base and expanded its product range to include
specification alloys.
In 1997 and 1998, the Company completed expansion programs at certain of its
U.S. facilities and at the VAW-IMCO facilities in Germany. The Sapulpa, Oklahoma
expansion increased the facility's processing capacity by 40 million pounds per
year. In 1997, VAW-IMCO signed a long-term agreement to process dross for a
major rolling mill in Germany and installed a new furnace. During 1998, the
Company constructed a 40-million pound facility at the Company's Loudon,
Tennessee site to supply molten metal to an automobile brake component
manufacturer under a long-term scrap management, tolling and supply agreement.
Additionally during 1998, the Company expanded its Morgantown, Kentucky facility
by adding a reverberatory furnace with an annual capacity of 100 million pounds.
In July 1998, the Company acquired U.S. Zinc which, along with its subsidiaries,
operate five production facilities located in Illinois, Texas and Tennessee.
With the acquisition of U.S. Zinc, the Company has expanded its zinc business,
broadened its customer base and expanded its product range to include various
value-added zinc products.
In February 1999, the Company acquired substantially all of the assets of an
aluminum alloying facility in Shelbyville, Tennessee from Alcan Aluminum
Corporation and acquired substantially all of the assets of a zinc oxide
production facility from North American Oxide, LLC in Clarksville, Tennessee.
In March 1999, the Company announced plans to construct a new aluminum alloying
plant in Saginaw, Michigan, which is expected to begin operations in 2000. This
facility's principal customer will be a GM metal casting plant in Saginaw,
Michigan. This facility will supply molten and ingot aluminum to GM under a new
supply agreement, which expires in 2011. See NOTE O--"SUBSEQUENT EVENTS" of
Notes to Consolidated Financial Statements.
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CERTAIN FACTORS
For descriptions of certain factors affecting the Company, including commitments
and contingencies, which subject the Company to certain continuing risks, see
(i) "ENVIRONMENTAL MATTERS" below, (ii) ITEM 3. "LEGAL PROCEEDINGS," (iii) ITEM
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7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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OPERATIONS--CAUTIONARY STATEMENTS FOR PURPOSES OF FORWARD-LOOKING STATEMENTS"
and (iv) NOTE L--"OPERATIONS" of Notes to Consolidated Financial Statements,
respectively.
SEGMENT REPORTING
With the acquisition of U.S. Zinc in July 1998, the Company has two business
segments that meet the reporting requirements of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." See NOTE M--SEGMENT INFORMATION" of Notes to Consolidated
Financial Statements. The ALUMINUM segment represents all of the Company's
aluminum melting, processing, alloying, brokering and salt cake activities. In
addition, this segment includes the Company's magnesium melting activities,
which represent less than 1% of consolidated revenues and production. The
company's ZINC segment represents all of the Company's zinc melting, processing
and brokering activities.
PRODUCTS AND SERVICES
ALUMINUM. The Company recycles aluminum and delivers the recycled metal to
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customers as molten aluminum or ingots. The Company's customers include most of
the major United States aluminum producers and aluminum diecasters, extruders,
automotive companies and other processors of aluminum products. A principal
element of the Company's strategic plan calls for expanding the Company's
activities in the rapidly growing aluminum automotive components market.
The Company's metal alloying plant in Coldwater, Michigan manufactures
specification aluminum alloy products for automotive equipment manufacturers and
their suppliers. The recent acquisition of the Shelbyville, Tennessee facility
will strengthen the Company's ability to serve this market.
The Company's Rock Creek and Elyria, Ohio facilities manufacture a variety of
aluminum products that are ultimately used as metallurgical additions in the
steel making process, such as slag conditioners, deoxidizers, steel
desulfurizers and hot topping compounds. These facilities utilize milling,
shredding, blending, testing and packaging equipment to process various types of
raw materials, including aluminum dross and scrap, into aluminum products for
the steel industry. In addition, these facilities manufacture a wide range of
proprietary briquetted products and offers toll briquetting services.
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The Company's aluminum business has benefited from the trend to include recycled
materials in finished products, and in particular during its early years, from
the growth in the use and recycling of aluminum beverage conatiners. The
recycling of UBCs in the United States has increased because of numerous
economic, legislative and environmental factors. According to industry
estimates, the number of aluminum beverage cans produced has increased from 34.7
billion in 1979 to an annual average of approximately 100 billion for each of
1996, 1997 and 1998. The number of UBCs recycled increased from 8.5 billion in
1979 to approximately 66.8 billion in 1997.
The major force behind increased demand for recycled aluminum in recent years
has been its greater use in auto and truck components, including body
structures. This trend has made the transportation sector the largest and
fastest-growing aluminum market. The total aluminum shipped to the North
American auto market each year has more than doubled since 1988 to about 3.8
billion pounds.
The average amount of aluminum used per vehicle produced in North America, is
expected to increase to 248 pounds in 1999, some 36 percent above the 138 pound
average in 1991. Major auto makers estimate that this average will double by
2005. Some 65 percent of the aluminum contained in cars and trucks is recycled
metal, but this percentage is expected to move higher in future years as more
usable scrap becomes available.
The Company also recycles magnesium dross for primary magnesium producers. In
addition, it produces a line of magnesium anodes that are recycled from
post-consumer scrap and sold to end-users and independent distributors for
corrosion protection of steel structures.
ZINC. Zinc is used in diecastings, in brass-making as an alloying metal with
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copper and in chemical compounds to produce rubber, ceramics, paints and
fertilizer. However, its most unique quality is its natural ability to
metallurgically bond with iron and steel and protect these metals from
corrosion. With its recent acquisition of U.S. Zinc, the Company manufactures
three main value-added zinc products: oxides, dust and metal.
Zinc oxide is used predominantly in the tire and rubber industries and by the
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specialty chemical, motor oil and ceramics industries. The Company produces two
types of zinc dust: extra low lead dust, which is used in the industrial paint
---------
industry, and regular dust, which is used in paints, specialty chemical and
mining applications. Zinc metal recovered by the Company is used to galvanize
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steel, and by-products generated in the zinc metal recycling process, called
fines, serve the zinc sulfate industry as fertilizer additives.
The Company's zinc business has benefited from the growth of secondary zinc
refining, which has increased at three times the rate of primary zinc
production. According to published industry reports, it is estimated that
secondary zinc now accounts for more than 36% of the world's refined zinc
output, and it is estimated that the consumption of recycled zinc will account
for more than 40% of total worldwide zinc consumption by 2005.
FOREIGN OPPORTUNITIES. The Company continues to evaluate expansion opportunities
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in foreign sites, such as Europe and South America, where market conditions
warrant. General political and economic conditions in foreign countries could
affect the overall financial prospects of the Company. Foreign operations are
generally subject to several risks, including foreign currency exchange rate
fluctuations, distinct environmental regulations, changes in the methods and
amounts of taxation, foreign exchange controls and government restrictions on
the repatriation of hard currency.
SALES AND LONG-TERM CONTRACTS
ALUMINUM-GENERAL. The Company's principal aluminum customers (see "GENERAL"
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above) use recycled aluminum to produce can sheet, building, automotive and
other products. The Company provides products and services to a number of
primary and fabricating facilities of Alcoa. During 1998, 1997 and 1996, Alcoa
accounted for approximately 7%, 9% and 13%, respectively, of the Company's
consolidated revenues, and Ford and its affiliates accounted for approximately
10% and 2% of the Company's consolidated revenues in 1998 and 1997,
respectively. The loss of Alcoa or Ford as customers would have a material
adverse effect upon the business of the Company and its future operating
results.
Customarily, agreements with customers in the aluminum recycling industry have
been short-term. These usually result from a bidding process where aluminum
producers and metal traders
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offer to sell materials or to have materials tolled. Consequently, the Company
historically has maintained no significant backlog of orders.
ALUMINUM-LONG-TERM CONTRACTS. The Company has secured long term commitments for
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its recycling services with Alcoa, Commonwealth, Aluminium Norf GmbH
("AluNorf"), Kaiser, Wise Metals, PBR Automotive USA LLC, Century Aluminum and
GM. For the year ended December 31, 1998 the Company melted 1,077 million pounds
of aluminum pursuant to multi-year contracts with its customers, which
represented approximately 45% of the Company's total 1998 annual aluminum
melting volume.
In 1992, the Company entered into a 10-year supply contract with Commonwealth's
Uhrichsville plant to process all of that facility's scrap aluminum, UBCs and
dross at the Company's adjacent plant. See ITEM 2. "PROPERTIES--RECYCLING AND
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PROCESSING FACILITIES." In 1994, the Company entered into a three-year
processing agreement with Alcoa under which the Company's Rockwood plant
provides secondary metal for Alcoa's Alcoa, Tennessee facility. This agreement
was modified in 1995 and 1998 to include certain additional Company facilities
and to modify certain pricing and volume provisions. This agreement will extend
for additional one-year terms at the end of each contract year unless terminated
by either party. When so terminated, the agreement will continue in effect until
the second anniversary date of the last day of the contract year during which
the termination notice was given.
The Company has also entered into a similar supply agreement with an English
subsidiary of Alcoa pursuant to which the Company's Swansea, Wales facility will
provide Alcoa's adjacent facility with secondary tolled aluminum. The agreement
has a five-year primary term, expiring in 2002, with provisions for automatic
three-year extensions. In September 1997, the VAW-IMCO joint venture entered
into a five-year agreement with AluNorf to process 22,000 metric tons of dross
per year.
In 1997, the Company entered into a five and one-half year agreement with Wise
Metals to deliver ten million pounds of aluminum per month to supply a Kentucky
rolling mill.
The Company's Post Falls, Idaho facility has a processing contract to supply, on
a tolling basis, molten and ingot aluminum to Kaiser's nearby Trentwood,
Washington aluminum fabrication mill. The term of this agreement expires in
September 2000.
In February 1999, the Company entered into a supply agreement with GM to provide
alloyed molten and ingot aluminum to GM's metal casting facility in Saginaw,
Michigan. The agreement expires in 2011 and calls for escalating volumes
beginning in 1999. The Company's planned Saginaw facility, which is expected to
begin production in 2000, will supply GM's Saginaw plant.
Many of these agreements contain cross-indemnity provisions, including
provisions obligating the Company to indemnify the customer for certain
environmental liabilities that the customer may incur in connection with the
transactions contemplated by the agreements.
These agreements also typically contain escalation provisions that are intended
to cover changes in certain of the Company's processing costs. The Company may
seek similar dedicated long-term arrangements with customers in the future.
Increased emphasis on dedicated facilities and dedicated contracts with
customers carries the inherent risk of increased dependence on a single
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or few customers with respect to a particular Company facility. In such cases,
the loss of such a customer could have a material adverse effect on the
Company's financial condition and results of operation, and any timely
replacement of volumes attributable to such a customer could prove difficult.
ZINC. The Company's principal zinc customers use zinc to make tires and other
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rubber products, industrial paints, fertilizers, specialty chemicals, motor oil
and ceramics. Zinc products are also used in the mining and steel galvanizing
industries. Major zinc customers include Goodyear, Michelin, Bethlehem Steel and
Dow Agrosciences. Most of the Company's zinc products are sold directly to end
users. No single zinc customer accounted for more than 10% of the Company's
consolidated revenues in 1998.
Most of the Company's contracts with zinc customers are for a term of one year
or less. The Company historically has maintained no significant backlog of
orders for zinc products.
GENERAL. The primary metals industry and the metals recycling industry are
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subject to cyclical fluctuations, depending upon the availability and price of
unprocessed scrap metal and the level of demand in the metal consuming
industries. Temporary reductions in can stock production by one of the Company's
aluminum customers have previously affected the Company's results of operations,
and no assurances can be given that such conditions will not recur. See ITEM 7.
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
The Company sells to both domestic and international customers. Sales to
customers in foreign locations accounted for approximately 13% of consolidated
revenues in 1998, and aluminum shipments to customers located in Canada
accounted for approximately 9% of consolidated revenues for 1998. Foreign sales
in 1997 and 1996 were immaterial (less than 3%). See "Note M-Segment
Information" of Notes to Consolidated Financial Statements.
THE RECYCLING/MANUFACTURING PROCESS
ALUMINUM. The Company uses two types of furnace technology, rotary and
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reverberatory. Rotary or barrel-like furnaces are able to pour a batch of melted
aluminum from dross and then immediately switch to other types of scrap; they
provide high recovery and excellent product quality. Reverberatory furnaces are
stationary and use both radiation and convection heating to melt the material
being processed. Reverberatory furnaces provide better recovery from shredded
material than a rotary furnace and can take advantage of the heat energy
contained in delacquered shreds.
After the aluminum is melted, the recovered metal is poured directly into an
ingot mold or hot metal crucible for delivery to customers. Magnesium is
recycled by the same method in a rotary furnace at the Sapulpa, Oklahoma plant.
Some of the Company's plants deliver molten aluminum in crucibles directly to
their customers' manufacturing facilities. As of December 1998, the Company had
the capacity to provide approximately 76% of its processed aluminum in molten
form. The molten aluminum is poured directly into the customer's furnace, saving
the customer the time and expense of remelting aluminum ingots. The Company
normally charges an additional fee for transportation and handling of molten
aluminum. The Oklahoma, Arizona, Utah, Illinois and Missouri facilities are
restricted, due to the geographical locations of their customers, to delivering
aluminum in ingot form. See ITEM 2. "PROPERTIES."
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At the Company's metal alloying facilities in Coldwater, Michigan, and
Shelbyville, Tennessee, additional materials are blended with molten aluminum to
produce a metal alloy. The alloyed aluminum is shipped in either molten or ingot
form to its customers. The Coldwater alloying facility generates dross, which is
recycled at the Company's adjacent aluminum recycling plant.
The aluminum recycling process from the Company's rotary furnaces produces a by-
product called "salt cake," which is formed from the contaminants and coatings
on aluminum scrap and dross and the salts added during the aluminum recycling
process. Salt cake is composed of salts, metallic aluminum, aluminum oxide and
small amounts of other materials. The by-product of processing materials through
the reverberatory furnaces is dross.
The Company disposes of its salt cake and certain airborne contaminants
("baghouse dust") in landfills that are used exclusively by the Company or that
are permitted specifically to handle the types of materials generated by the
Company. Salt cake is not currently listed as a "hazardous waste" under the
Resource Conservation and Recovery Act of 1976 ("RCRA") or as a "hazardous
substance" under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA"). The Company has built and operates a lined
landfill at its Morgantown, Kentucky facility, the design of which exceeds
current requirements for disposal of salt cake and meets RCRA Subchapter "C"
hazardous waste standards.
In 1996, the Company completed the construction of a facility adjacent to its
Morgantown plant to further process the salt cake through the use of materials
separation technology and extract additional aluminum that is left after the
melting process. This salt cake processing facility is a critical step needed
for "closed loop recycling," which would involve no or minimal waste disposal.
The facility's process involves crushing the salt cake and separating the
aluminum out of the salt cake. The residual product is then landfilled in the
Company's Morgantown landfill. See "ENVIRONMENTAL MATTERS."
Certain of the Company's facilities also recycle salt cake and other by-products
from the aluminum recycling process. The Goodyear, Arizona facility processes
aluminum scrap and turnings and recycles concentrates from purchased dross and
salt cake. These concentrates are first treated in the facility's patented wet
milling process, which reduces the volume of material handled, thus allowing for
more efficient utilization of capacity. Aluminum oxide, a by-product of the wet
milling process, is further treated and sold for use in the production of
cement.
Located near the Bonneville Salt Flats, the Company's Wendover, Utah facility
processes aluminum concentrates from the adjacent 50%-owned SALTS joint venture
and produces aluminum ingots. The SALTS facility recycles salt cake from the
Company's Idaho and Utah plants into aluminum concentrates, aluminum oxide and
salt brine. The clear brine is delivered to the venture's partner, where its
chemical content is recycled for multiple uses, including reuse as a flux.
ZINC. Zinc oxide is produced by melting top dross, a low-iron content zinc by-
- ---- ----------
product of continuous galvanizing, and re-melt die cast, a high zinc-content
alloy, in a sweat or premelt furnace. The sweat furnace separates the zinc from
other metals contained in the raw material. The molten zinc is then transferred
to a muffle furnace which uses radiant heat to transform the molten zinc into a
vapor. The vaporized zinc is sent to a vapor chamber where, upon contact with
air, it condenses to zinc oxide. The final manufacturing step is to send the
completed
12
product through a vertical cooler to a bag collector where the zinc oxide is
collected and custom packaged for shipment.
The Company manufactures two types of zinc dust: extra low lead and regular.
Zinc dust with extra low lead content, which is preferred by the domestic
industrial paint industry, is produced by converting primary zinc into a molten
form using an Electro Thermal Furnace. The Company manufactures regular zinc
dust by melting bottom dross, an iron-bearing zinc residue, created during the
galvanizing process, and re-melt die cast in a pot or ladle. Next, the molten
zinc is fed into a zinc dust retort furnace where the molten metal is vaporized
and condensed into raw zinc dust. Finally, the raw zinc dust is processed in a
dust mill, where it is screened, sent through a ball mill and then packaged into
custom-sized containers.
Zinc metal at the Houston facility is produced by placing pieces of oxidized
zinc-bearing metals (skimmings) into a ball mill, where the Company separates
the oxidic zinc (zinc fines), which are sold as fertilizer additives. After the
ball mill process, the metallic zinc-bearing material is melted in an electric
induction furnace, which is then transferred to a holding furnace for additional
refining. Finally, the molten zinc is poured into molds and shipped to
galvanizers.
In the Company's Coldwater, Michigan zinc recycling process, continuous
galvanizers' top dross is first melted in an electric induction furnace and then
transferred to a reactor which removes the impurities (iron and zinc oxide,
which are sold as by-products). The remaining molten zinc is poured into a
reverberatory holding furnace from which it is blended and cast into ingots,
which are returned to the customer.
OPERATIONS
ALUMINUM. In its aluminum tolling operations, the Company accepts UBCs, dross
and scrap owned by its customers and processes this material for a tolling
charge per pound of incoming weight. In order to retain control of their metal
supplies, customers have typically desired to toll, rather than sell, their
scrap materials. Tolling requires no metal inventory to be purchased or held by
the Company. In addition, tolling limits the Company's exposure to the risk of
fluctuating metal prices since the Company does not own the material being
processed. For the year ended December 31, 1998, approximately 71% of the
Company's total pounds of aluminum processed involved tolling. The acquisitions
of the Chicago Heights and Sikeston plants, the Coldwater metal alloying plant
and the operation of the Morgantown salt cake processing facility have changed
the Company's historical ratio of tolling to buy/sell business (formerly,
aluminum tolling represented more than 90% of the Company's total annual melting
volumes). See ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------
CONDITION AND RESULTS OF OPERATIONS."
ZINC. The Company's zinc operations primarily consist of buy/sell transactions.
- ----
On an annualized basis, the Company's buy/sell zinc business represents
approximately 91% of its total zinc production. Unlike tolling transactions,
buy/sell transactions increase the Company's exposure to the risk of fluctuating
metal prices and increased working capital requirements. See ITEM 7.
------
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." and ITEM 7A. "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
-------
RISK."
13
GENERAL. The Company's production network of plants have generally achieved high
- -------
overall operating rates due to strong demand for the Company's services and
products and due to the strategic location of many of the Company's plants near
major customers' production facilities. Expansion of the Company's network of
facilities in the U.S. has enabled the Company to allocate processing work among
its facilities, thereby maximizing utilization of available capacity and taking
advantage of excess demand.
The Company believes that its advanced scrap preparation equipment and recycling
technologies have also increased the demand for its services by producing higher
recovery rates and better quality recycled aluminum and zinc products than many
of its competitors.
The Company constantly seeks improvements in operational efficiencies at its
existing plants and at its acquired facilities through technological
advancements, automation of its operational procedures, and modifications in
processing and material throughput methods.
In addition to its increased emphasis on the buy/sell business, the Company has
also entered into an increasing number of metal brokerage transactions pursuant
to which the Company buys metal from primary and other producers, and then sells
the metal to end users. These transactions involve buying and selling metal
without processing it. Additionally, in order to facilitate the acquisition of
metal for its production process, the Company occasionally enters into metal
"swap" transactions whereby the Company agrees to exchange its recycled finished
goods for scrap raw materials.
When purchasing metals in the open market for its buy/sell business, the Company
attempts to reduce the risk of fluctuating metal prices by hedging anticipated
sales of aluminum and zinc and by avoiding large inventories, except to the
extent necessary to allow its plants to operate without interruption. See ITEM
----
7A. "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK."
- --
COMPETITION
GENERAL. The aluminum and zinc recycling industries are fragmented and highly
- -------
competitive. The Company believes that its position as the largest U.S. recycler
of secondary aluminum and zinc is a positive competitive factor.
ALUMINUM. The principal factors of competition in the aluminum segment are
- --------
price, recovery rates, environmental and safety regulatory compliance, and
services (e.g., the ability to deliver molten aluminum). Freight costs also
limit the geographic areas in which the Company can compete effectively.
The major aluminum producers, some of which are the Company's largest customers,
have generally discontinued processing dross, instead focusing their resources
on other aspects of aluminum production. UBCs and other scrap are processed by
both the secondary recycling industry and the major producers. The Company
competes both with other secondary recyclers and their customers when purchasing
and processing scrap for the buy/sell business.
The amount of the Company's aluminum tolling business can vary depending upon
the extent that the major aluminum producers' used metal materials are
internally recycled. The aluminum producers generally vary their rate of
internal recycling depending upon furnace availability,
14
inventory levels, the price of aluminum and their own internal demand for metal.
The major aluminum producers are larger and have greater financial resources
than the Company. A decision by these producers to expand their recycling
operations could reduce demand for certain of the Company's products and
services.
ZINC. The principal factors of competition in the zinc segment are price,
- ----
customer service, and delivery schedules. Competition is generally regionally
focused due to high freight costs.
For zinc oxide, the Company's major competitors are Zinc Corporation of America,
a subsidiary of Horsehead Industries, Inc. and Zochem, a subsidiary of Hudson
Bay Mining & Smelting, Ltd. The Company believes its strong customer
relationships, low cost production capabilities and geographic coverage allow it
to compete effectively in the zinc oxide market.
For zinc dust, the Company's major competitors are Purity Zinc Metals Company,
Ltd. and Meadowbrook Company, a subsidiary of T.L. Diamond Company, Inc. The
Company's Houston, Texas facility is believed to be the largest zinc dust
facility in the world, based on volume.
For zinc metal, the Company considers both primary and secondary zinc producers
to be competitors. However, the Company believes that only a minimal threat
exists from galvanizers recycling their own by-products, since relatively large
capital expenditures, technology costs and internally generated raw material
volume represent real barriers to entry into this market.
SOURCE AND AVAILABILITY OF RAW MATERIALS AND ENERGY
ALUMINUM. The Company has historically not had, and does not anticipate having,
- --------
difficulties in obtaining raw materials for its aluminum operations. In the case
of buy/sell business, the primary sources of aluminum and magnesium for
recycling and alloying are dross and scrap, which are purchased from both the
major aluminum producers and metal traders. Many of the Company's aluminum
suppliers are also customers of the Company.
ZINC. As the largest worldwide purchaser of zinc-bearing secondaries, the
- ----
Company provides its customers an outlet to sell the by-products of their
manufacturing processes. A significant portion of the Company's zinc products
are produced from secondary materials provided by the galvanizing and scrap
metals industries. Secondary zinc-bearing materials consist of top dross
generated by continuous galvanizers, bottom dross and skimmings generated by
"hot dip" galvanizers, and die cast scrap generated by scrap dealers or
remelters. The Company purchases approximately 100,000 tons of these materials
each year. The Company also purchases primary zinc to produce high-grade zinc
oxide in its Hillsboro, Illinois facility and for metals brokerage purposes.
The Company purchases zinc raw materials from numerous suppliers. Many of the
"hot dip" galvanizers, which supply approximately 40% of the aggregate zinc raw
materials, are also customers of the Company. This supplier-customer
relationship is beneficial since the Company competes with other zinc recyclers
for raw materials. The Company believes that its long-term supply contract with
one secondary zinc supplier for re-melt die cast provides the Company with a
stable and cost-efficient supply of raw materials for its Millington, Tennessee
zinc oxide facility. The Company's zinc brokerage unit also procures raw
materials for use in its zinc manufacturing operations. The availability of zinc
dross is dependent upon the demand for galvanized steel,
15
which has historically paralleled fluctuations in customer demand in the
automotive, appliance and construction industries.
GENERAL. The Company's operations are fueled by natural gas, which represents
- -------
the second largest component of operating costs. In an effort to acquire the
most favorable natural gas costs, the Company has secured at fixed prices
commitments for its natural gas requirements. Occasionally, when deemed
necessary, the Company purchases its natural gas on a spot-market basis. Most of
the Company's long-term supply contracts with its customers contain provisions
to reflect fluctuations in natural gas prices. See ITEM 7A. "QUANTITATIVE AND
-------
QUALITATIVE DISCLOSURES ABOUT MARKET RISK." The Company understands that most of
its competitors' operations are also fueled by natural gas; therefore, it
believes that increases in the prices for natural gas do not adversely affect
the Company's competitive position. The Company believes it will continue to
have access to adequate energy supplies to meet its needs for the foreseeable
future.
SEASONALITY
ALUMINUM. UBC collections have historically been highest in the summer months
- --------
and lowest in the winter months. Therefore, the Company has, at times,
experienced lower volumes at certain facilities during the winter. In recent
years, however, the Company's total processing volumes have fluctuated mostly
due to the startup of additional capacity rather than the seasonality of UBC
collections.
A portion of the Company's business that serves the automotive industry has
historically experienced a decline in molten metal deliveries during periods
when its automotive customers stop production to perform new model changeovers
and during the holidays in December.
ZINC. Historically, demand for the Company's zinc products used in the painting
- ----
industry is somewhat lower in the winter months, while demand for zinc products
used in fertilizers is lower in the summer months.
TRANSPORTATION
ALUMINUM AND ZINC. The Company receives incoming metal by both rail and truck.
- -----------------
Most of the Company's plants own their own rail siding or have access to rail
lines nearby. The Company owns and leases various trucks and trailers to support
its business. Customarily, the transportation costs of scrap materials to be
tolled are paid by the Company's customers, while the transportation costs of
metal purchased and sold by the Company may be paid by either customers or the
Company. The Company contracts with third-party transportation firms for hauling
some of its solid waste for disposal.
16
EMPLOYEES
As of January 31, 1999, the Company had 1867 employees, consisting of 428
employees engaged in administrative and supervisory activities and 1439
employees engaged in production and maintenance. Labor relations with employees
have been satisfactory. The production and maintenance employees at the
following Company facilities are represented by the collective bargaining groups
set forth below:
CONTRACT
FACILITY REPRESENTATIVE EXPIRES
- --------------------- ----------------------------------------------------- ------------------
Uhrichsville, OH United Mine Workers of America November 1998*
Chicago, IL United Auto Workers June 1999
Bedford, IN International Brotherhood of Electrical Workers April 2000
Rockwood, TN United Steelworkers of America August 2000
Hillsboro, TN Laborer's International Union of North America August 2000
Sikeston, MO United Steelworkers of America March 2001
* This facility is currently operating without a union agreement, and the
Company is currently negotiating a new collective bargaining agreement.
ENVIRONMENTAL MATTERS
GENERAL. The Company's operations, like those of other basic industries, are
- -------
subject to federal, state, local and foreign laws, regulations and ordinances
that (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 referred to herein, including
future regulations, which are expected to impose stricter emission requirements
on the aluminum industry. While the Company believes that current pollution
control measures at most of the emission sources at its facilities will meet
these anticipated future requirements, additional measures at some of the
Company's facilities may be required.
The Company's operations may generate certain discharges and emissions,
including in some cases off-site dust and odors, which are subject to the
Federal Clean Air Act and other environmental laws. From time to time,
operations of the Company have resulted or may result in certain noncompliance
with applicable requirements under environmental laws. The Company may also
incur liabilities for off-site disposals of salt cake and other materials. In
addition, historical or current operations at, or in the vicinity of, the
Company's facilities, may have resulted in soil or groundwater contamination.
However, based on environmental investigations conducted by the Company and its
consultants and certain indemnities associated with the Company's acquisitions,
the Company believes that any such noncompliance or liability under current
environmental laws would not have a material adverse effect on the Company's
financial position. See ITEM 3. "LEGAL PROCEEDINGS."
------
Due to relatively high costs and limited coverage, the Company does not carry
environmental impairment liability insurance. The Company made capital
expenditures for environmental
17
control facilities of approximately $8,600,000 in 1998, most of which was for
air pollution control equipment and landfill capacity additions. Environmental
expenditures for 1999 and 2000, which primarily relate to the Company's
landfills and air pollution control equipment, are currently estimated to be
approximately $7,200,000 and $5,000,000, respectively.
ALUMINUM. The processing of UBCs, dross and scrap generates solid waste in the
- --------
form of salt cake and baghouse dust. Currently, such material is either disposed
of at off-site landfills or at the Company's permitted Sapulpa and Morgantown
disposal sites. For example, the Rockwood, Loudon, Bedford and Sikeston plants
currently dispose of the majority of their solid waste by transporting it to the
Morgantown plant, where the Company operates a salt cake processing facility
which prepares salt cake for landfilling. See ITEM 2. "PROPERTIES--SOLID WASTE
------
DISPOSAL." At the Uhrichsville plant, under the Company's supply agreement with
Commonwealth, the disposal of all salt cake generated by the Company as a result
of its processing for Commonwealth is the responsibility of Commonwealth. Salt
cake from all other material processed at the Uhrichsville plant is either
shipped to the Morgantown plant for disposal or landfilled with a local solid
waste management firm. The IMSAMET Goodyear facility recycles its own salt cake
and sells the by-products to third parties, and the Sapulpa, Wendover and Post
Falls facilities ship most of their salt cake to the 50%-owned SALTS joint
venture for further processing. See "THE RECYCLING/MANUFACTURING PROCESS."
If salt cake were ever classified as a hazardous waste or substance under RCRA
or CERCLA, the Company's handling and disposal of salt cake would be required to
be modified. To dispose of its salt cake, the Company may then be required to
take other actions including obtaining a RCRA Subchapter "C" permit for its
Morgantown landfill, obtaining other permits (including transportation permits),
and landfilling additional amounts of salt cake with third parties not under the
Company's direct control. Based on current annual processing volumes and
remaining landfill capacity, the estimated remaining life of the landfill at the
Sapulpa plant is two years. The Company has constructed a second landfill cell
at its Morgantown plant, which was expanded in 1998, and estimates its remaining
useful life, based on current utilization, to be approximately nine years. A
planned second expansion is expected to provide an additional seven years of
useful life. Landfill closure costs for the Company-owned landfills are
currently estimated to be approximately $8,000,000. The Company is currently
providing for this expenditure by accruing, on a current basis, these estimated
costs as the landfills are used. See ITEM 2. "PROPERTIES."
------
ZINC. Several of the zinc manufacturing processes create various by-products
- ----
which are either sold to downstream processors or re-used internally. Because
there are virtually no remaining by-products requiring disposal, the zinc
manufacturing process is essentially a "closed loop' process.
18
ITEM 2. PROPERTIES
RECYCLING AND PROCESSING FACILITIES
During 1998, the Company owned and/or operated the following facilities as
detailed below:
- ------------------------------------------------------------------------------------------------------------------
ESTIMATED ESTIMATED
NUMBER MELTING PROCESSING MOLTEN
OWNED OF CAPACITY CAPACITY YEAR YEAR MATERIALS DELIVERY
PLANT ACREAGE FURNACES ( MILLION LBS) (MILLION LBS) BUILT ACQUIRED PROCESSED CAPABILITY
- --------------------------------------------------------------------------------------------------------------------------------
ALUMINUM SEGMENT:
- --------------------------------------------------------------------------------------------------------------------------------
Sapulpa, OK 64 7 210 -- 1962 -- Alum/Mag No
- --------------------------------------------------------------------------------------------------------------------------------
Rockwood, TN 238 6 220 -- 1985 -- Alum Yes
- --------------------------------------------------------------------------------------------------------------------------------
Morgantown, KY 552(a) 7 320 -- 1989 -- Alum Yes
- --------------------------------------------------------------------------------------------------------------------------------
Uhrichsville, OH 42 10 360 -- 1992 -- Alum Yes
- --------------------------------------------------------------------------------------------------------------------------------
Loudon, TN 173 4 220 -- -- 1994 Alum Yes
- --------------------------------------------------------------------------------------------------------------------------------
Bedford,IN 19 4 210 -- -- 1995 Alum Yes
- --------------------------------------------------------------------------------------------------------------------------------
Chicago HTS., IL 9 2 100 -- -- 1995 Alum No
- --------------------------------------------------------------------------------------------------------------------------------
Sikeston, MO 31 2 60 -- -- 1995 Alum No
- --------------------------------------------------------------------------------------------------------------------------------
Morgantown, KY (a) (b) (b) 400 1996 -- Salt Cake (b)
- --------------------------------------------------------------------------------------------------------------------------------
Post Falls, ID 49 4 280 -- -- 1997 Alum Yes
- --------------------------------------------------------------------------------------------------------------------------------
Goodyear, AZ (c) 40(c) 4 70(d) 168 -- 1997 Al/Salt Cake No
- --------------------------------------------------------------------------------------------------------------------------------
Wendover, UT 160(c) 2 70 -- -- 1997 Alum No
- --------------------------------------------------------------------------------------------------------------------------------
Elyria, OH 12 (e) (e) 50 -- 1997 Alum (e)
- --------------------------------------------------------------------------------------------------------------------------------
Rock Creek, OH 11 (e) (e) 100 -- 1997 Alum (e)
- --------------------------------------------------------------------------------------------------------------------------------
Coldwater, MI 75 3 150 -- 1997 -- Alum Yes
- --------------------------------------------------------------------------------------------------------------------------------
Swansea, Wales 5(c) 2 100 -- 1997 -- Alum Yes
- -------------------------------------------------------------------------------------------------------------------------------
Coldwater, MI (alloys) 47 3 200 -- -- 1997 Alum Yes
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ALUM. 2,570 718
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
ZINC SEGMENT:
- -------------------------------------------------------------------------------------------------------------------------------
Coldwater, MI 27 2 40 -- -- 1992 Zinc Metal No
- -------------------------------------------------------------------------------------------------------------------------------
Houston, TX 4 22 50 -- -- 1998 Zinc Dust No
- -------------------------------------------------------------------------------------------------------------------------------
Houston, TX 7 1 20 -- -- 1998 Zinc Metal No
- -------------------------------------------------------------------------------------------------------------------------------
Chicago, IL 2 6 40 -- -- 1998 Zinc Oxide No
- -------------------------------------------------------------------------------------------------------------------------------
Hillsboro, IL 5 3 50 -- -- 1998 Zinc Oxide No
- -------------------------------------------------------------------------------------------------------------------------------
Millington, TN 17 3 40 -- -- 1998 Zinc Oxide No
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ZINC 240 --
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED CAPACITY 2,810 718
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
50% OWNED FACILITIES (ALUMINUM):
- -------------------------------------------------------------------------------------------------------------------------------
VAW-IMCO, Germany 29 13 340(f) -- -- 1996 Alum Yes
- -------------------------------------------------------------------------------------------------------------------------------
SALTS, Wendover, UT 40 (b) (b) 168 -- 1997 Salt Cake (b)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL CAPACITY 3,150 886
- ------------------------------------------------------------------------------------------------------------------
19
NOTES:
- -----
(a) The acreage in Morgantown, Kentucky includes both the aluminum and salt
cake processing facilities as well as landfill cells.
(b) These facilities process salt cake only.
(c) This acreage is leased.
(d) Represents 100% of the capacity of this facility--the facility is 70% owned
by the Company.
(e) These facilities process aluminum products for use in the steel industry.
(f) Represents 100% of the capacity of the two VAW-IMCO facilities located in
Grevenbroich and Toging, Germany.
The average operating rates for all of the Company's facilities for 1998, 1997
and 1996 were 97%, 95% and 92%, respectively, of stated capacity. The operating
rate for 1996 was negatively impacted due to the effect of the closure of the
Company's Corona, California facility during the third quarter of 1996. See ITEM
----
7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- -
OPERATIONS."
Commonwealth has a currently exercisable option to acquire up to a 49% equity
interest in the Uhrichsville plant at a price equal to the equity percentage
amount to be specified by Commonwealth, multiplied by the depreciated book value
of the plant, or the subsidiary owning the plant, plus a premium to compensate
the Company for its recycling technology. The option price may be above or below
the fair value of the Uhrichsville plant. Should Commonwealth exercise its
option, there can be no assurance that the production or earnings attributable
to the purchased interest could be replaced, and the Company's net earnings and
cash flow could be adversely affected. See NOTE D--PROPERTY AND EQUIPMENT of
Notes to Consolidated Financial Statements.
In 1996, the Company began its 50% participation in its VAW-IMCO joint venture
in Germany. The joint venture owns and operates two recycling and foundry alloy
facilities located at Grevenbroich and Toging, Germany. Aggregate annual melting
capacity for these two plants is approximately 340 million pounds.
The Company also has four zinc brokerage offices located in California,
Pennsylvania, Canada and Germany.
SOLID WASTE DISPOSAL
The Company completed a new landfill cell adjacent to its plant in Morgantown,
Kentucky in 1996. All of the waste generated from the salt cake processing
facility at the Morgantown site is deposited in this landfill. Management
anticipates that this new landfill cell, which was expanded during 1998 and is
designed to be expanded again, will serve the Company's landfilling needs for
the majority of the salt cake generated by facilities currently owned by the
Company in the Eastern United States for the next 16 years, based on current
utilization. The Company also owns a landfill at its Sapulpa, Oklahoma plant
which is estimated to have two years' useful life remaining. The Goodyear
facility recycles its
20
own salt cake and sells the by-products to third parties, and the Sapulpa,
Wendover and Post Falls facilities ship their salt cake to the 50%-owned SALTS
joint venture for further processing. See ITEM 1. "BUSINESS--ENVIRONMENTAL
------
MATTERS."
ADMINISTRATIVE
In Irving, Texas, the Company leases approximately 28,200 square feet of office
space for certain of its executive, financial and management functions. This
lease expires in January 2000. In Houston, Texas, the Company owns approximately
30,000 square feet of office space for certain of its financial and management
functions for its zinc operations.
The Company believes that its plants and equipment are maintained in good
operating condition. Properties and improvements at the Company's Sapulpa,
Rockwood, Morgantown, Loudon, Bedford, Chicago Heights and Post Falls plants are
mortgaged to secure senior indebtedness. See ITEM 7. "MANAGEMENT'S DISCUSSION
------
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--LIQUIDITY AND
CAPITAL RESOURCES" and NOTE H--"LONG TERM DEBT AND EXTRAORDINARY LOSS ON EARLY
DEBT RETIREMENT" of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
- ------
In 1996, the Company entered into a settlement agreement with the Missouri
Department of Natural Resources ("MDNR") pertaining to certain air violations at
its Sikeston facility. Since entering into the settlement agreement, the Company
received additional notices of violation from the MDNR, which related to
fugitive dust emissions from its truck loading and unloading operations and
certain other air compliance matters. In addition, the Company responded to a
request for information from the United States Environmental Protection Agency
regarding air issues at the Sikeston facility. Since purchasing the Sikeston
facility in 1995, the Company has made significant upgrades to the air pollution
control equipment and has constructed a new truck loading facility which is
intended to capture fugitive emissions located at the facility. The Company
currently believes that it has fulfilled all of its obligations related to the
settlement agreement and that the Sikeston facility is now operating in full
compliance with MDNR standards. There can be no assurance, however, that future
violations will not occur or that the violations identified by the MDNR will not
result in penalties against the Company.
In 1997, the Illinois Environmental Protection Agency ("IEPA") notified IZI that
it is a potentially responsible party ("PRP") pursuant to the Illinois
Environmental Protection Act for the cleanup of contamination at a site in
Marion County, Illinois to which IZI, among others, in the past sent zinc oxide
for processing and resale. IZI has 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 not yet determined, based on
current cost estimates and information regarding the amount and type of
materials sent to the site by IZI, the Company does not believe, although there
can be no assurance, that its liability at this site will have a material
adverse effect on its financial position or its results of operations. A
subsidiary of U.S. Zinc, which the Company acquired in July 1998, was also
named as a PRP at this site.
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; however, 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.
21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------
No matters were submitted to a vote of security holders of the Company during
the quarter ended December 31, 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
- -------
The executive officers of the Company are listed below, together with brief
accounts of their experience and certain other information. Executive officers
are appointed by the Board of Directors.
Name Age Position
- ---- --- --------
Don V. Ingram 63 Chairman of the Board and Chief
Executive Officer
Richard L. Kerr 56 President and Chief Operating Officer
Paul V. Dufour 59 Executive Vice President--Finance and
Administration, Chief Financial Officer
and Secretary
Thomas W. Rogers 52 Senior Vice President, Marketing and
Sales
Denis W. Ray 50 Senior Vice President, Operations
C. Lee Newton 55 Senior Vice President, Engineering,
Technology and Environmental
Robert R. Holian 46 Vice President and Controller
James B. Walburg 45 Vice President and Treasurer
Don V. Ingram has served as a director of the Company since 1988 and as Chairman
of the Board since 1994. He was elected Chief Executive Officer of the Company
in February 1997. Mr. Ingram played the major role in the formation of the
Company in 1986.
Richard L. Kerr was elected President of the Company in February 1997.
Previously, he served as Executive Vice President and has been Chief Operating
Officer since 1991. In 1994, he became President of the Company's Metals
Division. Mr. Kerr joined International Metal Co., a predecessor of the Company,
in April 1984, and became Executive Vice President of International Metal Co. in
April 1987.
Paul V. Dufour has served as Vice President, Chief Financial Officer and
Secretary of the Company since March 1987. He was promoted to Senior Vice
President in May 1988 and to Executive Vice President in October 1994.
Thomas W. Rogers has served as Senior Vice President of Marketing and Sales of
the Company since July 1988. Mr. Rogers was employed as Plant Manager of the
Sapulpa, Oklahoma plant in October 1986.
Denis W. Ray has served as Senior Vice President of the Company since March
1998. Previously, Mr. Ray served as President of Reynolds Architectural Products
at Reynolds Metals Company from 1997 to 1998, President of Reynolds (Europe)
Ltd. in Switzerland from 1995 to 1997 and Vice President, Operations of Reynolds
(Europe) Ltd. from 1994 to 1995. Prior to his employment with Reynolds Metals
Company and its affiliates, Mr. Ray was employed by Alcoa in various capacities
for 25 years.
C. Lee Newton became Senior Vice President of the Company in 1993. Mr. Newton
was named Vice President in 1990 and was the General Manager of the Morgantown,
Kentucky plant from 1989 to 1993. He was originally employed by the Company as
Plant Manager of its Rockwood, Tennessee plant in 1987.
Robert R. Holian has served as Vice President and Controller since 1994. He
joined the Company in 1990 and was named Controller in 1992.
James B. Walburg has served as Vice President and Treasurer of the Company since
September 1994. Prior to this, Mr. Walburg was employed by NTS, Inc., a
transportation service company, as Vice President, Client Services and
Operations.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------
The Company's Common Stock trades on The New York Stock Exchange (trading
symbol: IMR). The following table sets forth, for the fiscal quarters indicated,
the high and low sales prices for the Company's Common Stock, as reported on The
New York Stock Exchange composite tape from January 1, 1997 through December 31,
1998, and the dividends declared per share during the periods indicated.
CALENDAR PRICE RANGE DIVIDENDS
------------------------
YEAR HIGH LOW DECLARED
- ------------------------- -------- ------- ----------
1997
- ----
FIRST QUARTER $ 17 $ 13 5/8 $ 0.05
SECOND QUARTER 18 7/8 13 3/4 0.05
THIRD QUARTER 20 1/16 17 3/8 0.05
FOURTH QUARTER 21 15 1/4 0.05
1998
- ----
FIRST QUARTER 18 1/2 14 1/4 $ 0.05
SECOND QUARTER 20 15 1/2 0.05
THIRD QUARTER 18 5/8 10 1/4 0.05
FOURTH QUARTER 15 13/16 12 3/16 0.06
Dividends as may be determined by the Board of Directors may be declared and
paid on the Common Stock from time to time out of any funds legally available
therefor. The Company's Amended and Restated Credit Agreement contains
limitations on the Company's ability to declare and pay dividends in cash or
property; however, if there is no default under the agreement, then the Company
is permitted to make cash dividend payments in an aggregate amount of up to
$6,000,000 in 1999, $6,000,000 in 2000, and $8,000,000 in each year thereafter.
See ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------
RESULTS OF OPERATIONS."
No assurances can be given as to future levels of dividends, if any, which may
be declared and paid. The Company intends to continue paying dividends on its
Common Stock, although future dividend declarations are at the discretion of the
Company's Board of Directors and will be based upon the Company's level of
earnings, cash flow, financial requirements, and economic and business
conditions then prevailing, as well as other relevant factors, including the
restrictions contained in the Company's long-term debt instruments.
On March 1, 1999, the outstanding shares of Common Stock were held of record by
473 stockholders.
23
During the fourth quarter of 1998, the Company made no unregistered sales of its
equity securities.
ITEM 6. SELECTED FINANCIAL DATA
- ------
(In thousands, except per share data)
- -------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------
Revenues $568,514 $339,381 $210,871 $141,167 $101,116
Earnings before extraordinary item 19,590 14,127 6,720 12,470 8,471
Earnings per common share before
extraordinary item:
Basic (a) 1.18 1.08 0.57 1.08 0.75
Diluted (a) 1.17 1.06 0.55 1.05 0.74
Total assets 456,558 332,536 164,707 139,877 96,791
Long-term debt (excluding current maturities 168,700 109,194 48,202 29,754 11,860
Dividends declared per common share $ 0.210 $ 0.200 $ 0.200 $ 0.105 $ 0.100
- -------------------------------------------------------------------------------
NOTE:
- -----
(a) The earnings per share amounts prior to 1997 have been restated, as
required, to comply with Statement of Financial Accounting Standards No.
128, Earnings per Share.
The Company's results of operations and financial position have been affected by
acquisitions of existing facilities and companies during the periods presented.
See NOTE B--" ACQUISITIONS AND INVESTMENTS" of Notes to Consolidated Financial
Statements. See also ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------
CONDITION AND RESULTS OF OPERATIONS."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------
RESULTS OF OPERATIONS
GENERAL
Most of the Company's processing consists of aluminum tolled for its customers.
To a lesser (but increasing) extent, the Company's processing also consists of
zinc and aluminum buy/sell business, which involves purchasing scrap metal and
dross for further processing and resale. The Company's zinc processing and
aluminum alloying operations consist primarily of buy/sell transactions. The
Company's buy/sell business revenues include the cost of the metal, the
processing cost and the Company's profit margin. Tolling revenues reflect only
the processing cost and the Company's profit margin. Accordingly, tolling
business produces lower revenues and costs of sales than does the buy/sell
business. Variations in the mix of these two businesses can cause revenues to
change significantly from period to period while not significantly affecting
gross profit, since both types of business generally produce approximately the
same gross profit per pound of metal processed. As a result, the Company
considers processing volume to be a more important determinant of performance
than revenues.
24
The Company's Coldwater, Michigan aluminum alloying facility (acquired in
November 1997) is primarily engaged in buy/sell business, as opposed to tolling,
and with the recent acquisition of U.S. Zinc (see "ACQUISITION" below), the
level of overall buy/sell business, relative to tolling, for the Company
increased during 1998. The higher levels of buy/sell business increase the
Company's working capital requirements and subject the Company to greater risks
associated with price fluctuations in the metals markets.
During the 1990's, aluminum inventories on the worldwide commodity exchanges
fluctuated from severe excesses to relatively balanced positions. In times of
excess, aluminum prices declined, negatively impacting the profitability of the
major aluminum producers who are some of the Company's largest customers.
Environments of low profitability for the Company's customers have inhibited,
during those times, the Company's ability to pass cost increases through to its
customers. During 1997, the U.S. domestic aluminum industry benefited from
increases in aluminum prices and an increase in demand. However, during the
fourth quarter of 1997 and throughout 1998, aluminum prices declined, which
negatively impacted the Company's selling prices of aluminum, especially at its
salt cake processing facility in Kentucky. Also during 1998, zinc prices
declined sharply from their relatively high levels in the third quarter of 1997.
It is not possible to predict the future price of aluminum or zinc, or the level
of worldwide inventories of these metals and whether, or to what extent, such
factors will affect the Company's future business.
The following table sets forth, for the periods indicated, the total pounds of
material processed (aluminum and zinc); the percentage of total pounds processed
represented by pounds tolled and purchased; total revenues; total gross profits
and gross profits as a percentage of revenues (in thousands, except
percentages):
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------------------------------------
Total Pounds Processed 2,516,752 1,988,796 1,451,408
Percent of Total Pounds Processed:
Tolled 68% 82% 83%
Purchased 32% 18% 17%
------------------------------------------
100% 100% 100%
==========================================
Revenues $ 568,514 $ 339,381 $ 210,871
Gross Profits $ 61,520 $ 47,854 $ 25,538
Gross Profit % * 10.8% 14.1% 12.1%
* See NOTE L--"OPERATIONS" of Notes to Consolidated Financial Statements
and RESULTS OF OPERATIONS--Fiscal Year 1998 vs. Fiscal Year 1997 below.
-------------------------------------
In addition to its increased emphasis on the buy/sell business, the Company has
also entered into an increasing number of metal brokerage transactions each year
pursuant to which the Company buys metal from primary and other producers, and
then sells the metal to end users. These transactions involve buying and selling
metal without processing it. Additionally, in order
25
to facilitate acquiring metal for its production process, the Company
occasionally enters into metal "swap" transactions whereby the Company agrees to
exchange its recycled finished goods for scrap raw materials. As with the
buy/sell business, the brokerage business also increases the Company's working
capital requirements and subjects the Company to greater price risk associated
with fluctuations in the metal commodity markets. See ITEM 7A. "QUANTITATIVE AND
-------
QUALITATIVE DISCLOSURES ABOUT MARKET RISK."
The following table sets forth, for the periods indicated, aluminum and zinc
segment information for percentage of total pounds processed, revenues, income
and assets.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
---------------- -------------- --------------
PERCENT OF TOTAL POUNDS PROCESSED:
Tolled Aluminum 67% 81% 82%
Purchased Aluminum 27% 17% 15%
--------------- -------------- --------------
Total Aluminum 94% 98% 97%
--------------- -------------- --------------
Tolled Zinc 1% 1% 1%
Purchased Zinc 5% 1% 2%
--------------- -------------- --------------
Total Zinc 6% 2% 3%
--------------- -------------- --------------
100% 100% 100%
=============== ============== ==============
REVENUES:
Aluminum revenues from external customers $ 465,122 $ 326,522 $ 198,769
Zinc revenues from external customers 103,392 12,859 12,102
--------------- -------------- --------------
Consolidated revenues $ 568,514 $ 339,381 $ 210,871
=============== ============== ==============
INCOME:
Aluminum income $ 54,704 $ 45,728 $ 23,830
Zinc income 6,429 1,127 1,278
Unallocated general and administrative expenses 21,568 16,431 11,458
Unallocated interest expense 9,197 7,331 3,421
Unallocated interest and other income 775 413 623
Net earnings before provision for income taxes,
--------------- -------------- --------------
minority interests and extraordinary item $ 31,143 $ 23,506 $ 10,852
=============== ============== ==============
ASSETS:
Aluminum $ 328,891 $ 314,377 $ 149,822
Zinc 109,398 9,235 5,135
Other unallocated assets 18,269 8,924 9,750
--------------- -------------- --------------
Consolidated assets $ 456,558 $ 332,536 $ 164,707
=============== ============== ==============
26
The accounting policies of the reportable segments are the same as those
described in NOTE A--"SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES" of Notes to
Consolidated Financial Statements. The Company evaluates performance based on
gross profit or loss from operations, net of selling expenses. Provision for
income taxes, interest, corporate general and administrative costs, including
depreciation of corporate assets and amortization of capitalized debt costs, are
not allocated to the reportable segments. Intersegment sales and transfers are
recorded at market value; net profits on intersegment sales and transfers were
immaterial for the periods presented. Consolidated cash, net capitalized debt
costs, net current deferred tax assets and assets located at the Company's
headquarters office in Irving, Texas are not allocated to the reportable
segments. Also, see NOTE M--"SEGMENT INFORMATION" of Notes to Consolidated
Financial Statements for additional segment disclosures.
RESULTS OF OPERATIONS
FISCAL YEAR 1998 VS. FISCAL YEAR 1997
- -------------------------------------
Production. During 1998, the pounds of metal processed by the Company increased
- ----------
27% to 2,517 million pounds, compared to 1,989 million pounds processed in 1997.
Aluminum processing at the Company's newest plants in Coldwater, Michigan (which
began production in the first quarter of 1997) and Swansea, Wales (which began
production in the fourth quarter of 1997) and the acquisitions of the Alchem
Aluminum, Inc. ("Alchem") aluminum alloying facility (which was acquired in
November 1997) and U.S. Zinc facilities (which were acquired in July 1998)
accounted for 74% of the increase in production for 1998. The increase in
production was partially offset by lower production at the Bedford facility due
to a reconfiguration of the furnaces and a work force reorganization at that
facility. In addition, the Company's June and July 1998 production was
negatively impacted by a strike at several of the facilities of GM, a customer
of the Company.
Production by segment is as follows:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
-------- ------- ---------
Pounds Processed (in millions):
Aluminum 2,375 1,952 1,411
Zinc 142 37 40
--------- -------- -----------
2,517 1,989 1,451
========= ======== ===========
Aluminum processing at the Company's newest plants in Coldwater, Michigan;
Swansea, Wales; and the Alchem facility accounted for 68% of the increase in
production for the aluminum segment. Zinc processing at the Company's recently
acquired U.S. Zinc facilities accounted for 96% of the increase in production
for the zinc segment.
Revenues. During 1998, revenues increased 68% to $568,514,000, compared to
- --------
revenues of $339,381,000 in 1997. The acquisitions of Alchem and U.S. Zinc and
operations at the new Coldwater, Michigan and Swansea, Wales plants principally
accounted for this increase; however, this increase was partially offset by
lower aluminum selling prices prevailing during 1998. The percentage increase in
revenues was greater than the relative increase in volumes processed due to
higher levels of buy/sell business during 1998 as compared to 1997. The
27
buy/sell business increased to 32% of total processing for 1998 compared to 18%
for 1997. As discussed above, an increase in buy/sell business generally results
in a much higher increase in revenue than would be generated by a similar
increase in tolling business. The increased levels of buy/sell business were
principally attributable to the acquisitions of Alchem and U.S. Zinc. Prior to
November 1997, materials processed for Alchem at the Company's Coldwater,
Michigan facility were classified as tolling business, but because the Company
acquired Alchem in November 1997, these pounds are now classified as buy/sell
business. The increase in buy/sell activity in 1998 also resulted in higher
inventory, accounts receivable and accounts payable levels.
Sales at the Company's newest plants in Coldwater, Michigan; Swansea, Wales; and
the Alchem facility accounted for 114% of the increase in revenues for the
aluminum segment, which was partially offset by a decrease in aluminum selling
prices. Sales from the Company's recently acquired U.S. Zinc facilities
accounted for virtually all of the increase in revenues for the zinc segment.
Gross Profits. During 1998, gross profits increased 29% to $61,520,000, compared
- -------------
to gross profits of $47,854,000 in 1997. The acquisitions of Alchem and U.S.
Zinc and operations at the new Coldwater plant accounted for virtually all of
the increase in total gross profits and virtually all the increase in profits by
each segment. However, falling aluminum and zinc selling prices reduced the
gross margin per pound of metal sold.
SG&A Expenses. During 1998, selling, general and administrative costs increased
- -------------
35% to $23,705,000, compared to $17,612,000 in 1997. This increase was due
principally to higher employee, selling and goodwill amortization expenses,
principally associated with the acquisitions of Alchem and U.S. Zinc.
Interest. During 1998, interest expense increased 25% to $9,197,000, compared to
- --------
interest expense of $7,331,000 in 1997. The increase in interest expense was
primarily related to higher levels of borrowings outstanding to fund the cash
portion of the U.S. Zinc acquisition ($46,500,000) and to repay $16,000,000 of
U.S. Zinc's outstanding indebtedness (see "LIQUIDITY AND CAPITAL RESOURCES"
below).
Extraordinary Item: In connection with the Company's acquisition in January
- ------------------
1997, the Company borrowed funds under a new long-term credit facility. A
portion of the funds borrowed under this credit facility was used to retire
substantially all of the Company's then-outstanding indebtedness prior to its
stated maturity. This early debt retirement generated an extraordinary loss of
$1,318,000 (net of income tax benefit of $878,000) for the first quarter of
1997. There was no extraordinary item in 1998.
Net Earnings. During 1998, the Company's earnings before provision for income
- ------------
taxes, minority interests and extraordinary item increased 32% to $31,143,000,
compared to $23,506,000 in 1997. The increase was primarily the result of higher
gross profits, due mainly to the Alchem and U.S. Zinc acquisitions, which were
in turn partially offset by the increases in selling, general and administrative
expenses and interest expense (also attributable to these and other recent
acquisitions). The Company's higher earnings before income taxes caused the tax
provision to increase to $11,275,000 in 1998, compared to $9,086,000 in 1997.
The effective tax rate was approximately 36% in 1998 compared to 39% in 1997
primarily due to lower state taxes provided during 1998. During 1998, net
earnings increased 53% to $19,590,000, compared to $12,809,000 in 1997.
28
FISCAL YEAR 1997 VS. FISCAL YEAR 1996
- -------------------------------------
Production. During 1997, the pounds of metal processed by the Company increased
- ----------
37% to 1,989 million pounds, compared to 1,451 million pounds processed in 1996.
Increases in aluminum processing from the Idaho, Utah and Arizona facilities
(which were acquired in January 1997), the Coldwater, Michigan aluminum facility
(which began production during the first quarter of 1997) and the Coldwater
alloying facility (which was acquired in November 1997) were the primary reasons
for the increased production.
Revenues. During 1997, revenues increased 61% to $339,381,000, compared to
- --------
revenues of $210,871,000 in 1996. The acquisitions of the Idaho, Utah and
Arizona plants, the Rock Creek and Elyria, Ohio plants and the Coldwater,
Michigan alloying facility, and the operations at the new Coldwater aluminum
plant, accounted for virtually all of the increase in revenues. During 1997,
higher revenues from the combination of higher aluminum selling prices (relative
to 1996 prices), higher levels of buy/sell business at the Company's remaining
aluminum plants and additional metal for sale from its Kentucky salt cake
processing facility were partially offset by the elimination of revenues at the
Company's Corona, California plant (which was closed in the third quarter of
1996). The percentage increase in revenues was greater than the relative
increase in volumes processed due to higher levels of buy/sell business during
1997 as compared to 1996. The increased level of buy/sell business was
principally attributable to the Coldwater alloying facility acquired in 1997.
Tolling activity for aluminum represented 81% of the Company's total pounds
melted during 1997, as compared to 82% in 1996. The increase in buy/sell
activity in 1997 also resulted in higher inventory levels. Additionally,
revenues increased due to the January 1997 acquisitions of the Rock Creek and
Elyria, Ohio plants.
Gross Profits. During 1997, gross profits increased 87% to $47,854,000, compared
- -------------
to gross profits of $25,538,000 in 1996. Approximately 60% of the increase in
gross profits was due to (1) the January 1997 acquisitions of the Idaho, Utah
and Arizona plants, and the Rock Creek and Elyria, Ohio facilities, (2) the
operations at the new Coldwater, Michigan plant and (3) the November 1997
acquisition of the Coldwater, Michigan alloying facility. In addition, 1997's
gross profits were higher due to (a) the elimination of the losses at the
Company's Corona, California plant (which was closed in the third quarter of
1996), (b) higher aluminum prices, which increased margins from the Company's
buy/sell business and (c) strengthened plant operating efficiencies.
SG&A Expenses. During 1997, selling, general and administrative costs increased
- -------------
50% to $17,612,000, compared to $11,774,000 in 1996. This increase was due
principally to higher employee, professional, consulting and goodwill
amortization expenses associated with the January and November 1997 plant
acquisitions.
Interest. During 1997, interest expense increased 114% to $7,331,000, compared
- --------
to interest expense of $3,421,000 in 1996. The increase in interest expense was
primarily attributable to the additional debt outstanding during 1997 to fund
the January and November 1997 plant acquisitions. See "LIQUIDITY AND CAPITAL
RESOURCES" below.
Extraordinary Item. In connection with the plant acquisitions in January 1997,
- ------------------
the Company borrowed funds under a new Credit Agreement. See "LIQUIDITY AND
CAPITAL RESOURCES" below. A portion of the sums borrowed under the Credit
Agreement was used to
29
retire substantially all of the Company's then-outstanding indebtedness prior to
its stated maturity. This early debt retirement generated an extraordinary loss
of $1,318,000 (net of income tax benefit of $878,000) for the first quarter of
1997. There was no extraordinary item in 1996.
Net Earnings. During 1997, the Company's earnings before provision for income
- ------------
taxes, minority interests and extraordinary item increased 117% to $23,506,000,
compared to $10,852,000 in 1996. This increase in earnings was primarily the
result of higher gross profits, which were in turn partially offset by the
increases in selling, general and administrative expenses and interest expense.
The Company's higher earnings before income taxes caused the tax provision to
increase to $9,086,000 in 1997, compared to $4,132,000 in 1996. The effective
tax rate was approximately 39% in 1997 compared to 38% in 1996. During 1997, net
earnings increased 91% to $12,809,000, compared to $6,720,000 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and capital expenditures
from internally generated cash and its working capital credit facilities and has
financed its acquisitions and capacity expansions from a combination of funds
from long-term borrowings and public stock offerings.
Cash Flows from Operations. During 1998, operations provided cash of
- --------------------------
$53,198,000, compared to $30,368,000 in 1997. Changes in the components of
operating assets and liabilities accounted for 62% of the increase in cash
provided from operations; in 1998, changes in the components of operating assets
and liabilities provided $11,386,000 in cash, compared to using $2,832,000 in
cash during 1997'. In addition, net earnings before extraordinary item increased
39% or $5,463,000, and depreciation and amortization increased 38% or
$6,317,000, compared to 1997's corresponding amounts. The increase in these
items was primarily due to the Company's plant acquisitions during 1998. As of
December 31, 1998, the relationship of current assets to current liabilities, or
current ratio, decreased to 1.93, compared to 2.71 as of December 31, 1997.
For the reasons discussed above, working capital fluctuates as the mix of
buy/sell business, tolling business and metals brokerage activities changes. The
Company anticipates its working capital requirements to further increase in 1999
as a result of higher levels of buy/sell business and metals brokerage
activities and increased processing volumes primarily due to its recent
acquisitions.
Cash Flows from Investing Activities. During 1998, net cash used by investing
- ------------------------------------
activities decreased 25% to $93,873,000, compared to $124,461,000 in 1997. In
July 1998, the Company spent $59,497,000 (net of cash acquired) to purchase U.S.
Zinc. In 1997, the Company spent $59,882,000 (net of cash acquired) to purchase
IMSAMET, Inc. and $25,430,000 (net of cash acquired) to purchase Alchem. In
addition, the Company's total payments for property, plant and equipment
(excluding acquisitions) in 1998 decreased to $35,199,000, compared to
$37,159,000 spent in 1997. During 1998, major projects included the completion
of construction of the Company's new aluminum recycling facility in Swansea,
Wales, installation of a reverberatory furnace and delacquering equipment at the
Morgantown, Kentucky facility, the purchase of environmental equipment, the
expansion of an existing Company-owned landfill and upgrades to various
furnaces.
30
Capital expenditures for property, plant and equipment in 1999 are expected to
total approximately $35,000,000. Major projects include the installation of an
Enterprise Resource Planning (ERP) software system, construction of a new
aluminum alloying plant in Saginaw, Michigan and the installation of a new
furnace at the Millington, Tennessee facility.
Cash Flows from Financing Activities. During 1998, net cash provided from
- ------------------------------------
financing activities decreased 48% to $46,326,000, compared to $89,434,000 in
1997. In July 1998, the Company borrowed approximately $62,000,000 under its
senior credit facility, to fund the cash portion of the acquisition of U.S. Zinc
and to repay a portion of U.S. Zinc's outstanding long-term indebtedness under
its working capital line of credit (approximately $16,000,000). In connection
with its January 1997 acquisitions, the Company entered into a new long-term
credit agreement with certain lenders, borrowing $110,000,000 at the closing and
using approximately $61,000,000 for the IMSAMET, Inc. acquisition and
$49,000,000 to retire substantially all of the Company's then-outstanding debt.
Financing activities also included cash payments of $3,503,000 in dividends
during 1998 compared to $2,702,000 in 1997.
Equity Purchases and Sales. In September 1998, the Company's Board of Directors
- --------------------------
authorized the repurchase in open market or privately-negotiated transactions of
up to 1,000,000 shares of its common stock. As of December 31, 1998, the Company
had spent $6,377,000 to repurchase 488,900 shares. As of February 28, 1999, the
Company had purchased a total of 543,900 shares for an aggregate cumulative
purchase price of $7,026,000. The shares repurchased are being held as treasury
shares to be used to satisfy obligations of the Company under its stock option
and other equity plans, and for general corporate purposes.
In November 1997, the Company issued and sold 2,645,000 (inclusive of 345,000
shares from the exercise of the underwriters' over-allotment option) shares of
its Common Stock through an underwritten public offering at a price to public of
$18.00 per share. The Company received net proceeds of approximately
$44,734,000, after deducting underwriting discounts and commissions and offering
expenses. The Company used the net proceeds to reduce outstanding indebtedness
under its credit agreement. See NOTE H--"LONG-TERM DEBT AND EXTRAORDINARY LOSS
ON EARLY DEBT RETIREMENT" of Notes to Consolidated Financial Statements.
Credit Facilities. The Company's Amended and Restated Credit Agreement provides
- -----------------
for a reducing revolving credit facility of up to $200,000,000, and provides
that the maximum amount of commitments under the facility will be reduced on an
annual basis beginning in December 1999 (e.g. to $180,000,000 on December 31,
1999), so that by December 31, 2002, the maximum amount of aggregate commitments
may not exceed $100,000,000. As of December 31, 1998, the Company had
$152,000,000 in indebtedness outstanding under the Amended and Restated Credit
Agreement and had $46,479,000 available for borrowings. The Amended and Restated
Credit Agreement bears interest, at the Company's option, at fluctuating
interest rates based upon an alternate base rate (which may be the prime rate),
or a rate based upon the applicable LIBOR rate plus a credit margin (6.2% at
December 31, 1998) which is based upon the Company's ratio of total debt to
total capitalization (47% at December 31, 1998). In addition, the Company pays a
commitment fee for unborrowed amounts available under the reducing revolving
facility based upon the Company's ratio of debt to total capitalization.
At December 31, 1998, the Company had standby letters of credit outstanding in
the aggregate amount of $3,442,000. The Company has also entered into an
interest rate cap transaction
31
agreement with Chase Bank of Texas, N.A.. See ITEM 7A. "QUANTITATIVE AND
-------
QUALITATIVE DISCLOSURES ABOUT MARKET RISK."
The Amended and Restated Credit Agreement is secured by a first lien mortgage
and security interest on seven plant facilities owned by the Company, as well as
security interests in equipment, accounts receivable, inventories and certain
intellectual property and general intangibles. The facilities are additionally
secured by a pledge of the capital stock and equity interests of substantially
all of the Company's wholly-owned subsidiaries and certain joint ventures in
which the Company is directly or indirectly a joint venturer. Additionally,
substantially all of the Company's wholly-owned subsidiaries have guaranteed the
Company's obligations under the credit facilities. The Amended and Restated
Credit Agreement provides that if (i) the Company's senior unsecured long-term
indebtedness for borrowed money is rated at least BBB- or Baaa3 by Standard &
Poor's and Moody's, or (ii) during four consecutive fiscal quarters the
Company's leverage ratio and debt to capitalization ratio meet certain
requirements, then the lenders' liens in the collateral may be released upon the
request and at the expense of the Company. See NOTE H--"LONG-TERM DEBT AND
EXTRAORDINARY LOSS ON EARLY DEBT RETIREMENT" of Notes to Consolidated Financial
Statements.
The Amended and Restated Credit Agreement contains certain covenants,
representations and warranties by the Company and its subsidiary guarantors,
including (i) limitations on the ability to dispose of assets of the Company and
its subsidiaries or equity interests of subsidiaries, (ii) limitations on
acquisitions of unaffiliated businesses other than certain scheduled specified
transactions, and additional unscheduled acquisitions and investments not to
exceed $125,000,000 in the aggregate, (iii) restrictions on liens and
indebtedness permitted to be incurred or assumed by the Company and its
subsidiaries, other than as otherwise scheduled or permitted under the Amended
and Restated Credit Agreement, and (iv) restrictions on investments by the
Company and its subsidiaries.
The Amended and Restated Credit Agreement also contains limitations on the
Company's ability to declare and pay dividends in cash or property; however, if
there is no default under the agreement, then the Company is permitted to make
cash dividend payments in an aggregate amount of up to $6,000,000 in 1999,
$6,000,000 in 2000, and $8,000,000 in each year thereafter (see ITEM 5. "MARKET
------
FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS"). The Amended
and Restated Credit Agreement further contains provisions restricting the amount
of capital expenditures that the Company and its subsidiaries may make in any
fiscal year ($35,000,000 for fiscal 1999 and for each fiscal year thereafter,
plus certain allowed carryovers, not including capital expenditures for certain
permitted acquisitions). Finally, the agreement requires the Company to maintain
and comply with certain financial covenants and ratios, including a maximum debt
to capitalization ratio, a minimum interest coverage ratio and a covenant
requiring that certain minimum net worth amounts be maintained.
In May 1996, the Company borrowed $5,740,000 from the issuance of Solid Waste
Disposal Facilities Revenue Bonds (Series 1996) by the City of Morgantown,
Kentucky. These bonds were issued in connection with the Company's construction
of its salt cake processing plant in Morgantown, which was completed in January
1996. The 1996 bonds bear interest at the rate of 7.65% per annum and mature on
May 1, 2016. In April 1997, the Company borrowed an additional $4,600,000 from
the issuance of Solid Waste Disposal Facilities Revenue Bonds (Series 1997) by
the City of Morgantown, Kentucky. These bonds were also issued in connection
with the Company's expansion of its second landfill cell and to fund additional
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construction costs of its salt cake processing facility in Morgantown. The 1997
bonds bear