UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| |X| |
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the quarterly period ended March 31, 2003. |
| | | |
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the transition period from to . |
Commission File Number 33-32617
HAYNES INTERNATIONAL, INC.
(Exact name of the registrant as specified in its charter)
| Delaware | 06-1185400 |
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
| 1020 West Park Avenue, Kokomo, Indiana | 46904-9013 |
| (Address of principle executive offices) |
(Zip Code) |
| (765) 456-6000 | |
| (Registrant's telephone number, including area code) | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes No X
As of May 15, 2003, the registrant had 100 shares of Common Stock, $.01 par value, outstanding.
Page 1 of 19
| Page |
| PART I | FINANCIAL INFORMATION |
| Item 1. | Financial Statements: |
|
Consolidated Condensed Balance Sheets as of September 30, 2002 and March 31, 2003 |
3 |
|
Consolidated Condensed Statements of Operations for the Three Months and Six Months ended March 31, 2002 and 2003 |
4 |
|
Consolidated Condensed Statements of Comprehensive Income for the Three Months and Six Months ended March 31, 2002 and 2003 |
5 |
|
Consolidated Condensed Statements of Cash Flows for the Six Months ended March 31, 2002 and 2003 |
6 |
| Notes to Consolidated Condensed Financial Statements | 7 |
| Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
8 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 14 |
| Item 4. | Controls and Procedures | 14 |
| PART II | OTHER INFORMATION |
| Item 6. | Exhibits and Reports on Form 8-K | 14 |
| Signatures | 15 |
| Index to Exhibits | 16 |
Page 2 of 19
Item 1. Financial Statements
| September 30, 2002 |
March 31, 2003 |
|||||||
|---|---|---|---|---|---|---|---|---|
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 5,199 | $ | 4,217 | ||||
| Accounts receivable, less allowance for doubtful | ||||||||
| accounts of $723 and $809, respectively | 35,345 | 33,594 | ||||||
| Inventories | 90,268 | 88,369 | ||||||
| Refundable income taxes | 46 | --- | ||||||
| Deferred income taxes | 434 | 1,066 | ||||||
| Total current assets | 131,292 | 127,246 | ||||||
| Property, plant and equipment (at cost) | 128,193 | 129,645 | ||||||
| Accumulated depreciation | (85,472 | ) | (88,196 | ) | ||||
| Net property, plant and equipment | 42,721 | 41,449 | ||||||
| Deferred income taxes | 46,398 | 49,757 | ||||||
| Prepayments and deferred charges, net | 14,191 | 14,599 | ||||||
| Total assets | $ | 234,602 | $ | 233,051 | ||||
| LIABILITIES AND CAPITAL DEFICIENCY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 20,598 | $ | 21,068 | ||||
| Accrued postretirement benefits | 4,400 | 4,400 | ||||||
| Revolving credit facility | 46,003 | 45,298 | ||||||
| Notes payable | 1,566 | 1,563 | ||||||
| Total current liabilities | 72,567 | 72,329 | ||||||
| Long-term debt, net of unamortized discount | 142,116 | 142,009 | ||||||
| Accrued pension and postretirement benefits | 117,317 | 121,177 | ||||||
| Total liabilities | 332,000 | 335,515 | ||||||
| Capital deficiency: | ||||||||
| Common stock, $.01 par value (100 shares authorized, | ||||||||
| issued and outstanding) | ||||||||
| Additional paid-in capital | 51,346 | 51,402 | ||||||
| Accumulated deficit | (145,402 | ) | (152,092 | ) | ||||
| Accumulated other comprehensive loss | (3,342 | ) | (1,774 | ) | ||||
| Total capital deficiency | (97,398 | ) | (102,464 | ) | ||||
| Total liabilities and capital deficiency | $ | 234,602 | $ | 233,051 | ||||
The accompanying notes are an integral part of these financial statements.
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| Three Months Ended March 31, |
Six Months Ended March 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2003 | 2002 | 2003 | |||||||||||
| Net revenues | $ | 58,136 | $ | 46,158 | $ | 120,071 | $ | 89,080 | ||||||
| Cost of sales | 43,068 | 40,972 | 90,467 | 76,380 | ||||||||||
| Selling and administrative | 6,229 | 5,851 | 11,754 | 12,029 | ||||||||||
| Research and technical | 939 | 752 | 1,848 | 1,526 | ||||||||||
| Operating income (loss) | 7,900 | (1,417 | ) | 16,002 | (855 | ) | ||||||||
| Interest expense | 5,143 | 4,861 | 10,412 | 9,783 | ||||||||||
| Interest income | (19 | ) | (8 | ) | (35 | ) | (20 | ) | ||||||
| Income (loss) before provision for (benefit | ||||||||||||||
| from) income taxes | 2,776 | (6,270 | ) | 5,625 | (10,618 | ) | ||||||||
| Provision for (benefit from) income taxes | 1,202 | (2,348 | ) | 2,377 | (3,928 | ) | ||||||||
| Net income (loss) | $ | 1,574 | $ | (3,922 | ) | $ | 3,248 | $ | (6,690 | ) | ||||
The accompanying notes are an integral part of these financial statements.
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| Three Months Ended March 31, |
Six Months Ended March 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2003 | 2002 | 2003 | |||||||||||
| Net income (loss) | $ | 1,574 | $ | (3,922 | ) | $ | 3,248 | $ | (6,690 | ) | ||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||
| Foreign currency translation adjustment | (586 | ) | 19 | (982 | ) | 1,568 | ||||||||
| Other comprehensive income (loss) | (586 | ) | 19 | (982 | ) | 1,568 | ||||||||
| Comprehensive income (loss) | $ | 988 | $ | (3,903 | ) | $ | 2,266 | $ | (5,122 | ) | ||||
The accompanying notes are an integral part of these financial statements.
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| Six Months Ended March 31, |
||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2003 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net income (loss) | $ | 3,248 | $ | (6,690 | ) | |||||||||
| Depreciation | 2,300 | 2,632 | ||||||||||||
| Amortization | 653 | 611 | ||||||||||||
| Deferred income taxes | 1,686 | (3,991 | ) | |||||||||||
| Change in: | ||||||||||||||
| Inventories | (8,594 | ) | 2,166 | |||||||||||
| Accounts receivable | 7,178 | 1,999 | ||||||||||||
| Accounts payable and accruals | 1,455 | 4,935 | ||||||||||||
| Other, net | 1,729 | (482 | ) | |||||||||||
| Net cash provided by operating activities | 9,655 | 1,180 | ||||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Additions to property, plant and equipment | (3,237 | ) | (2,065 | ) | ||||||||||
| Proceeds from sale of property, plant and equipment | -- | 704 | ||||||||||||
| Other investing activities | 130 | -- | ||||||||||||
| Net cash used in investing activities | (3,107 | ) | (1,361 | ) | ||||||||||
| Cash flows from financing activities: | ||||||||||||||
| Net decrease in revolving credit and long-term debt | (5,612 | ) | (1,023 | ) | ||||||||||
| Other financing activities | 57 | 56 | ||||||||||||
| Net cash used in financing activities | (5,555 | ) | (967 | ) | ||||||||||
| Effect of exchange rates on cash | (40 | ) | 166 | |||||||||||
| Increase (decrease) in cash and cash equivalents | 953 | (982 | ) | |||||||||||
| Cash and cash equivalents, beginning of period | 171 | 5,199 | ||||||||||||
| Cash and cash equivalents, end of period | $ | 1,124 | $ | 4,217 | ||||||||||
| Supplemental disclosures of cash flow information: | ||||||||||||||
| Cash paid (received) during period for: Interest | $ | 9,852 | $ | 9,154 | ||||||||||
| Income taxes | $ | (67 | ) | $ | (2 | ) | ||||||||
The accompanying notes are an integral part of these financial statements.
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The interim financial statements are unaudited and reflect all adjustments (consisting solely of normal recurring adjustments) that, in the opinion of management, are necessary for a fair statement of results for the interim periods presented. This report includes information in a condensed form and should be read in conjunction with the audited consolidated financial statements included in Form 10-K for the fiscal year ended September 30, 2002, filed by the Company with the Securities and Exchange Commission (“SEC”) on December 20, 2002. The results of operations for the six months ended March 31, 2003, are not necessarily indicative of the results to be expected for the full year or any other interim period.
Certain amounts in prior year financial statements have been reclassified to conform with current year presentation.
The following is a summary of the major classes of inventories:
| September 30, 2002 | March 31, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| (Unaudited) | ||||||||
| Raw materials | $ | 9,414 | $ | 7,623 | ||||
| Work-in-process | 32,321 | 33,120 | ||||||
| Finished goods | 38,583 | 37,712 | ||||||
| Other, net | 9,950 | 9,914 | ||||||
| Net inventories | $ | 90,268 | $ | 88,369 | ||||
The income tax provision (benefit) for the three months and six months ended March 31, 2003 and 2002, differed from the U.S. federal statutory rate of 34% primarily due to state income taxes and differing tax rates on foreign earnings.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
References to years or portions of years in Management’s Discussion and Analysis of Financial Condition and Results of Operations refer to the Company’s fiscal years ended September 30, unless otherwise indicated. This discussion contains statements that constitute forward-looking statements within the meaning of the securities laws. Such statements may include statements regarding the intent, belief or current expectations of the Company or its officers with respect to (i) the Company’s strategic plans, (ii) the policies of the Company regarding capital expenditures, financing or other matters, and (iii) industry trends affecting the Company’s financial condition or results of operations. Readers of this discussion are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward looking statements as a result of various factors. This report should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Form 10-K for the fiscal year ended September 30, 2002, filed by the Company with the Securities and Exchange Commission on December 20, 2002.
Net Revenues. Net revenues decreased approximately $11.9 million to approximately $46.2 million in the second quarter of fiscal 2003 from approximately $58.1 million in the second quarter of fiscal 2002. Volume decreased 28.6% to approximately 3.0 million pounds in the second quarter of fiscal 2003 from approximately 4.2 million pounds in the second quarter of fiscal 2002. The average selling price rose 9.7% to $14.99 per pound in the second quarter of fiscal 2003 from $13.67 per pound in the second quarter of fiscal 2002 primarily due to product mix. The Company’s consolidated backlog has increased approximately $4.6 million or 9.4% to approximately $53.6 million at March 31, 2003 from approximately $49.0 million at December 31, 2002. The consolidated backlog at March 31, 2002 was $77.2 million. Order entry increased $1.2 million or 2.5% for the second quarter of fiscal 2003 as compared to the second quarter of fiscal 2002.
Sales to the aerospace industry decreased by approximately $4.0 million to approximately $21.2 million in the second quarter of fiscal 2003 from approximately $25.2 million in the second quarter of fiscal 2002, due to a 18.7% decrease in volume partially offset by a price improvement of 3.4% due to improvement in the sales market mix. The decrease in volume was attributed to lower domestic and European sales of nickel-base alloy and cobalt-base alloy flat products as the industry continues to adjust to the reduced demand of the commercial aircraft build rates.
Sales to the chemical processing industry increased by approximately $1.1 million to approximately $10.6 million in the second quarter of fiscal 2003 from approximately $9.5 million in the second quarter of fiscal 2002, due to an 11.2% increase in volume. The increase in volume was a result of higher domestic sales of round and tubular products along with improved flat product sales in the European and export markets.
Sales to the land-based gas turbine industry decreased by approximately $9.1 million to approximately $6.9 million in the second quarter of fiscal 2003 from approximately $16.0 million in the second quarter of fiscal 2002, due to a 64.1% decrease in volume partially offset by a price improvement of 19.1% due to improved alloy and form mix. The decrease in volume was due to significantly lower sales of proprietary alloy round products, and lower sales of flat products caused by reduced demand for land-based gas turbine engines.
Sales to other industries remained relatively flat increasing by approximately $100,000 to approximately $7.5 million from approximately $7.4 million when comparing the second quarter of fiscal 2003 to the same period a year earlier.
Cost of Sales. Cost of sales as a percent of net revenues increased to 88.8% in the second quarter of fiscal 2003 from 74.1% in the second quarter of fiscal 2002. The higher cost of sales percentage was the result of higher raw material costs, higher energy costs, and lower absorption of fixed manufacturing cost as a result of lower production levels.
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Selling and Administrative Expenses. Selling and administrative expenses decreased by approximately $300,000 to $5.9 million for the second quarter of fiscal 2003 from approximately $6.2 million for the second quarter of fiscal 2002. The decrease in selling and administrative expenses was due to lower bad debt expenses, offset by higher management fees.
Research and Technical Expenses. Research and technical expense remained relatively flat when comparing the second quarter of fiscal 2003 to the same period a year earlier.
Operating Income (Loss). As a result of the above factors, the Company recognized an operating loss for the second quarter of fiscal 2003 of approximately $1.4 million compared to operating income of approximately $7.9 million for the second quarter of fiscal 2002.
Interest Expense. Interest expense decreased by approximately $200,000 to approximately $4.9 million in the second quarter of fiscal 2003 from approximately $5.1 million in the second quarter of fiscal 2002. Lower revolving credit borrowings and lower interest rates contributed to the decrease when comparing the two quarters.
Income Taxes. Income taxes changed by approximately $3.5 million to an income tax benefit of approximately $2.3 million for the second quarter of fiscal 2003 from an income tax provision of approximately $1.2 million for the second quarter of fiscal 2002, due to the pre-tax loss of approximately $6.3 million for the second quarter of fiscal 2003 compared to the pre-tax income of approximately $2.8 million for the second quarter of fiscal 2002.
Net Income (Loss). As a result of the above factors, the net loss was approximately $3.9 million for the second quarter of fiscal 2003 compared to the net income of approximately $1.6 million for the second quarter of fiscal 2002.
Net Revenues. Net revenues decreased approximately $31.0 million to approximately $89.1 million in the first half of fiscal 2003 from approximately $120.1 million in the first half of fiscal 2002. Volume decreased 30.7% to approximately 6.1 million pounds in the first half of fiscal 2003 from approximately 8.8 million pounds in the first half of fiscal 2002. The average selling price improved 7.3% to $14.48 per pound in the first half of fiscal 2003 from $13.49 per pound in the first half of fiscal 2002 primarily due to product mix. The Company’s consolidated backlog has increased approximately $1.1 million or 2.1% to approximately $53.6 million at March 31, 2003 from approximately $52.5 million at September 30, 2002. The consolidated backlog decreased $24.4 million or 24.0% to approximately $77.2 million at March 31, 2002 from approximately $101.6 million at September 30, 2001. Order entry decreased $7.4 million or 7.6% for the first half of fiscal 2003 as compared to the first half of fiscal 2002.
Sales to the aerospace industry decreased by approximately $9.7 million to approximately $39.5 million for the first half of fiscal 2003 from approximately $49.2 million for the first half of fiscal 2002, due to a 21.1% decrease in volume. The decrease in volume was attributed to a substantial reduction in sales of nickel-base alloy flat products to jet engine fabricators as the industry continues to adjust to the lower demand of commercial aircraft build rates.
Sales to the chemical processing industry decreased by approximately $3.0 million to approximately $20.8 million for the first half of fiscal 2003 from approximately $23.8 million for the first half of fiscal 2002, due to a 13.1% decrease in volume. The decrease in volume was a result of a lack of worldwide project business.
Sales to the land-based gas turbine industry decreased by approximately $14.0 million to approximately $14.8 million for the first half of fiscal 2003 from approximately $28.8 million for the first half of fiscal 2002, due to a 55.0% decrease in volume partially offset by a 14.2% higher price product form mix and lower priced ingot and billet products. The decrease in volume was due to the reduced sales of proprietary alloy round products along with reduced sales of specialty alloy flat products caused by reduced demand for land-based gas turbine engines.
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Sales to other industries decreased by approximately $4.3 million to approximately $14.0 million for the first half of fiscal 2003 from approximately $18.3 million for the first half of fiscal 2002, due to a 25.2% decrease in volume. The decrease in volume was attributed to a project for the supply of tubular products for deep wells in the oil and gas sector in the previous fiscal year that did not repeat in the current fiscal year.
Cost of Sales. Cost of sales as a percentage of net revenues increased to 85.7% in the first half of fiscal 2003 from 75.3% in the first half of fiscal 2002. The higher cost of sales percentage was the result of higher raw material costs, higher energy costs and lower absorption of fixed manufacturing costs as a result of lower production levels.
Selling and Administrative Expenses. Selling and administrative expenses increased approximately $200,000 to approximately $12.0 million for the first half of fiscal 2003 from approximately $11.8 million in the first half of fiscal 2002. The increase in selling and administrative expenses was due to increased management fees, foreign exchange losses and legal costs, offset by lower compensation expense and bad debt expense.
Research and Technical Expense. Research and technical expense decreased by approximately $300,000 to approximately $1.5 million in the first half of fiscal 2003 from approximately $1.8 million in the first half of fiscal 2002. The decrease in research and technical expense was due primarily to lower employee costs.
Operating Income (Loss). As a result of the above factors, the Company recognized an operating loss of approximately $900,000 for the first half of fiscal 2003 as compared to operating income of approximately $16.0 million for the first half of fiscal 2002.
Interest Expense. Interest expense decreased by approximately $600,000 to approximately $9.8 million for the first half of fiscal 2003 from approximately $10.4 million for the first half of fiscal 2002. Lower revolving credit balances and lower interest rates contributed to the decrease when comparing the first half of fiscal 2003 to the first half of fiscal 2002.
Income Taxes. Income taxes changed by approximately $6.3 million to an income tax benefit of approximately $3.9 million for the first half of fiscal 2003 from an income tax provision of approximately $2.4 million for the first half of fiscal 2002, due to the pre-tax loss of approximately $10.6 million for the first half of fiscal 2003 compared to the pre-tax income of approximately $5.6 million for the first half of fiscal 2002.
Net Income (Loss). As a result of the above factors, the Company recognized a net loss of approximately $6.7 million in the first half of fiscal 2003 compared to a net income of approximately $3.2 million for the first half of fiscal 2002.
The Company’s near term future cash needs will be driven by working capital requirements and planned capital expenditures. Capital expenditures were approximately $2.1 million for the first half of fiscal 2003 compared to approximately $3.2 million for the first half of fiscal 2002. The remainder of planned capital spending of approximately $1.9 million for fiscal 2003 is targeted for the Company’s environmental projects and general equipment upgrades. The Company does not expect such capital expenditures to have a material effect on its long term liquidity. The Company expects to fund its working capital needs and capital expenditures with cash provided from operations, supplemented by borrowings under its Revolving Credit Facility. The Company believes these sources of capital will be sufficient to fund planned capital expenditures and working capital requirements over the next 12 months, although there can be no assurance that this will be the case.
Net cash provided by operating activities in the first half of fiscal 2003 was approximately $1.2 million, as compared to $9.7 million for the first half of fiscal 2002. The cash provided by operating activities for the first half of fiscal 2003 was primarily the result of an increase of approximately $4.9 million in accounts payable and accrued expenses, a decrease of approximately $2.2 million in inventories, a decrease of approximately $2.0 million in accounts receivable, and non-cash depreciation and amortization of approximately $3.2 million, which was offset by an increase of approximately $4.0 million in deferred income taxes, a net loss of approximately $6.7 million and approximately $500,000 in other activities. Net cash used for investing activities decreased to approximately $1.4 million for the first half of fiscal 2003 from approximately $3.1 million for the first half of fiscal 2002, due to capital expenditures of approximately $2.1 million partially offset by capital proceeds from the sale of idle equipment of approximately $700,000. Net cash used in financing activities for the first half of fiscal 2003 was approximately $1.0 million, primarily due to net reductions in borrowings under the Revolving Credit Facility.
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Cash for the first half of fiscal 2003 decreased approximately $1.0 million resulting in a March 31, 2003 cash balance of approximately $4.2 million. Cash for the first half of fiscal 2002 increased by approximately $1.0 million resulting in a March 31, 2002 cash balance of approximately $1.1 million.
Total debt at March 31, 2003 was approximately $188.9 million compared to approximately $200.5 million at March 31, 2002, reflecting decreased borrowings under the Revolving Credit Facility and payments on capital lease obligations.
At March 31, 2003, approximately $45.3 million had been borrowed pursuant to the Revolving Credit Facility compared to approximately $56.0 million at March 31, 2002. In addition, as of March 31, 2003, approximately $600,000 in Letter of Credit obligations had been incurred by the Company. The Revolving Credit Facility includes a reserve for accrued interest payable, March 1 and September 1, in connection with the Senior Notes of approximately $1.4 million at March 31, 2003, and a permanent fixed charge reserve which is $2.0 million at March 31, 2003. The Company had available additional borrowing capacity of approximately $16.4 million on the Revolving Credit Facility at March 31, 2003.
The Company has non-contributory defined benefit pension plans which cover most employees in the United States and certain foreign subsidiaries. The expected long-term rate of return on the Company’s Qualified Plan assets is at 9.0% at September 30, 2002, which has historically approximated the actual rate of return on plan assets. In developing the Company’s expected long-term rate of return assumption, the Company evaluated input from its actuaries, asset manager, expectations by several respected consultants as well as historical long-term inflation assumptions. Projected returns by consultants are based on broad equity and bond indices. A hypothetical decrease in the expected long-term rate of return on the Qualified Plan assets by 1.0% would increase pension expense by $1.2 million.
The current asset allocation approximates a 47% equity allocation split between US equities (34%) and international equities (13%) with the remaining 53% being allocated to fixed income instruments split between US fixed income investments (38%) and international fixed income funds (15%). This allocation approximates the planned allocation of 50% equities and 50% fixed income instruments.
The discount rate that the Company utilizes for determining future pension obligations is based on long-term AA bonds rated by a recognized rating agency. The discount rate determined on this basis has decreased from 7.25% at September 30, 2001, to 6.5% at September 30, 2002. A hypothetical reduction in the discount rate from 6.5% to 5.5% would increase pension expense by approximately $1.8 million. Due to the reduction in the funded status of the Company’s Qualified Plan current liability, a contribution to the Plan of $1.9 million will be required prior to June 15, 2004. In fiscal 2002, $4.0 million was funded to the Company’s 401(h) plan from the Qualified Plan assets. No funding from the Qualified Plan assets to the 401(h) Plan will take place in 2003 which should reduce pension expense by $360,000 for fiscal 2003. The Company’s funding of the 401(h) Plan, the majority of which was funded using Qualified Pension Plan Assets in Fiscal 2002, will now be funded from operations of the Company.
As market conditions warrant, the Company and its major equity holders, including Blackstone Capital Partners II Merchant Banking Fund L.P. and its affiliates, may from time to time purchase debt securities issued by the Company, in privately negotiated or open market transactions, by tender offer or otherwise.
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, income taxes, retirement benefits and environmental matters. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, product mix and in some cases, actuarial techniques, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company constantly reevaluates these significant factors and makes adjustments where facts and circumstances dictate. Actual results may differ from these estimates under different assumptions or conditions.
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Our accounting policies are more fully described in Note 1 to the audited consolidated financial statements included in Form 10-K for the fiscal year ended September 30, 2002. During the period ended March 31, 2003, there were no changes to these accounting policies. We have identified certain critical accounting policies which are described below.
Inventories
Inventories are stated at the lower of cost or market. The cost of domestic inventories is determined using the last-in, first-out (LIFO) method. The cost of foreign inventories is determined using the first-in, first-out (FIFO) method and average cost method. In addition, the Company writes down its inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market or scrap value, if applicable, based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. The Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. Management believes the deferred tax assets are fully recoverable and, therefore, no valuation allowance has been recorded. In the event the Company were to determine that it would be unable to realize its deferred tax assets in future periods, an adjustment to the deferred tax asset would be charged to income in the period such a determination was made.
Accounts Receivable
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company markets its products to a diverse customer base, both in the United States of America and overseas. Trade credit is extended based upon evaluation of each customer’s ability to perform its obligation, which is updated periodically. Export credit insurance has been acquired to mitigate future losses. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.