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 June 30, 2003.
or
[ ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from ______________ to ______________.
Commission File Number: 33-32617
HAYNES INTERNATIONAL, INC.
(Exact name of 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 principal 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 August 14, 2003, the registrant had 100 shares of Common Stock, $.01 par value, outstanding.
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HAYNES INTERNATIONAL, INC.
TABLE OF CONTENTS
| PART I. | FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements: | ||
| Consolidated Condensed Balance Sheets as of | |||
| September 30, 2002 and June 30, 2003 | 3 | ||
| Consolidated Condensed Statements of Operations for the | |||
| Three Months and Nine Months ended June 30, 2002 and 2003 | 4 | ||
| Consolidated Condensed Statements of Comprehensive Income (Loss) for the | |||
| Three Months and Nine Months ended June 30, 2002 and 2003 | 5 | ||
| Consolidated Condensed Statements of Cash Flows for the | |||
| Nine Months ended June 30, 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 | 15 | |
| Item 4. | Controls and Procedures | 15 | |
| PART II. | OTHER INFORMATION | ||
| Item 6. | Exhibits and Reports on Form 8-K | 15 | |
| Signatures | 16 | ||
| Index to Exhibits | 17 | ||
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PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements
HAYNES INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands, except share amounts)
| September 30, 2002 |
June 30, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 5,199 | $ | 4,616 | ||||
| Accounts receivable, less allowance for doubtful | ||||||||
| accounts of $723 and $954, respectively | 35,345 | 31,225 | ||||||
| Inventories | 90,268 | 94,301 | ||||||
| Refundable income taxes | 46 | --- | ||||||
| Deferred income taxes | 434 | 1,617 | ||||||
| Total current assets | 131,292 | 131,759 | ||||||
| Property, plant and equipment (at cost) | 128,193 | 130,720 | ||||||
| Accumulated depreciation | (85,472 | ) | (89,831 | ) | ||||
| Net property, plant and equipment | 42,721 | 40,889 | ||||||
| Deferred income taxes | 46,398 | 51,530 | ||||||
| Prepayments and deferred charges, net | 14,191 | 14,045 | ||||||
| Total assets | $ | 234,602 | $ | 238,223 | ||||
| LIABILITIES AND CAPITAL DEFICIENCY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 20,598 | $ | 23,206 | ||||
| Accrued postretirement benefits | 4,400 | 4,400 | ||||||
| Revolving credit facility | 46,003 | 47,562 | ||||||
| Notes payable | 1,566 | 2,258 | ||||||
| Total current liabilities | 72,567 | 77,426 | ||||||
| Long-term debt, net of unamortized discount | 142,116 | 141,894 | ||||||
| Accrued pension and postretirement benefits | 117,317 | 123,108 | ||||||
| Total liabilities | 332,000 | 342,428 | ||||||
| Capital deficiency: | ||||||||
| Common stock, $.01 par value (100 shares authorized, | ||||||||
| issued and outstanding) | ||||||||
| Additional paid-in capital | 51,346 | 51,380 | ||||||
| Accumulated deficit | (145,402 | ) | (154,999 | ) | ||||
| Accumulated other comprehensive loss | (3,342 | ) | (586 | ) | ||||
| Total capital deficiency | (97,398 | ) | (104,205 | ) | ||||
| Total liabilities and capital deficiency | $ | 234,602 | $ | 238,223 | ||||
The accompanying notes are an integral part of these financial statements.
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HAYNES INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands)
| Three Months Ended June 30, |
Nine Months Ended June 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2003 | 2002 | 2003 | |||||||||||
| Net revenues | $ | 52,938 | $ | 43,272 | $ | 173,009 | $ | 132,352 | ||||||
| Cost of sales | 40,728 | 36,912 | 131,195 | 113,292 | ||||||||||
| Selling and administrative | 6,104 | 5,481 | 17,858 | 17,510 | ||||||||||
| Research and technical | 871 | 575 | 2,719 | 2,101 | ||||||||||
| Operating income (loss) | 5,235 | 304 | 21,237 | (551 | ) | |||||||||
| Interest expense | 5,124 | 4,952 | 15,536 | 14,735 | ||||||||||
| Interest income | (8 | ) | (7 | ) | (43 | ) | (27 | ) | ||||||
| Income (loss) before provision for (benefit | ||||||||||||||
| from) income taxes | 119 | (4,641 | ) | 5,744 | (15,259 | ) | ||||||||
| Provision for (benefit from) income taxes | 106 | (1,734 | ) | 2,483 | (5,662 | ) | ||||||||
| Net income (loss) | $ | 13 | $ | (2,907 | ) | $ | 3,261 | $ | (9,597 | ) | ||||
The accompanying notes are an integral part of these financial statements.
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HAYNES INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(dollars in thousands)
| Three Months Ended June 30, |
Nine Months Ended June 30, |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2003 | 2002 | 2003 | |||||||||||
| Net income (loss) | $ | 13 | $ | (2,907 | ) | $ | 3,261 | $ | (9,597 | ) | ||||
| Other comprehensive income: | ||||||||||||||
| Foreign currency translation adjustment | 2,974 | 1,187 | 1,992 | 2,756 | ||||||||||
| Other comprehensive income | 2,974 | 1,187 | 1,992 | 2,756 | ||||||||||
| Comprehensive income (loss) | $ | 2,987 | $ | (1,720 | ) | $ | 5,253 | $ | (6,841 | ) | ||||
The accompanying notes are an integral part of these financial statements.
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HAYNES INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
| Nine Months Ended June 30, |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2003 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | 3,261 | $ | (9,597 | ) | ||||||
| Depreciation | 3,518 | 3,928 | |||||||||
| Amortization | 984 | 906 | |||||||||
| Deferred income taxes (benefit) | 1,778 | (6,315 | ) | ||||||||
| Loss on property disposal | 36 | --- | |||||||||
| Change in: | |||||||||||
| Inventories | (4,576 | ) | (3,459 | ) | |||||||
| Accounts receivable | 9,774 | 4,706 | |||||||||
| Accounts payable and accruals | 358 | 10,384 | |||||||||
| Other, net | 2,551 | (330 | ) | ||||||||
| Net cash provided by operating activities | 17,684 | 223 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Additions to property, plant and equipment | (3,977 | ) | (2,800 | ) | |||||||
| Proceeds from sale of property, plant and equipment | --- | 704 | |||||||||
| Other investing activities | (264 | ) | --- | ||||||||
| Net cash used in investing activities | (4,241 | ) | (2,096 | ) | |||||||
| Cash flows from financing activities: | |||||||||||
| Net increase (decrease) in revolving credit and long-term debt | (10,444 | ) | 1,014 | ||||||||
| Other financing activities | 30 | 35 | |||||||||
| Net cash provided by (used in) financing activities | (10,414 | ) | 1,049 | ||||||||
| Effect of exchange rates on cash | 184 | 241 | |||||||||
| Increase (decrease) in cash and cash equivalents | 3,213 | (583 | ) | ||||||||
| Cash and cash equivalents, beginning of period | 171 | 5,199 | |||||||||
| Cash and cash equivalents, end of period | $ | 3,384 | $ | 4,616 | |||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid during period for: Interest | $ | 10,600 | $ | 9,694 | |||||||
| Income taxes | $ | 248 | $ | 613 | |||||||
The accompanying notes are an integral part of these financial statements.
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HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the nine months ended June 30, 2003
(dollars in thousands)
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 nine months ended June 30, 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 | June 30, 2003 | |||||||
| (Unaudited) | ||||||||
| Raw materials | $ | 9,414 | $ | 9,043 | ||||
| Work-in-process | 32,321 | 34,259 | ||||||
| Finished goods | 38,583 | 39,115 | ||||||
| Other, net | 9,950 | 11,884 | ||||||
| Net inventories | $ | 90,268 | $ | 94,301 | ||||
The income tax provision (benefit) for the three months and nine months ended June 30, 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 $9.6 million to approximately $43.3 million in the third quarter of fiscal 2003 from approximately $52.9 million in the third quarter of fiscal 2002. Volume decreased 18.9% to approximately 3.0 million pounds in the third quarter of fiscal 2003 from approximately 3.7 million pounds in the third quarter of fiscal 2002. The average selling price rose 1.7% to $14.26 per pound in the third quarter of fiscal 2003 from $14.02 per pound in the third quarter of fiscal 2002 primarily due to product mix. The Company’s consolidated backlog has increased approximately $900,000 or 1.7% to approximately $54.5 million at June 30, 2003 from approximately $53.6 million at March 31, 2003. The consolidated backlog at June 30, 2002 was $63.9 million. Order entry increased $2.6 million or 6.3% for the third quarter of fiscal 2003 as compared to the third quarter of fiscal 2002.
Sales to the aerospace industry decreased by approximately $600,000 to approximately $21.9 million in the third quarter of fiscal 2003 from approximately $22.5 million in the third quarter of fiscal 2002, due to a 7.8% decrease in the average selling price per pound, partially offset by a 5.7% increase in volume. The decrease in the average selling price was due to a larger proportion of lower priced nickel-base alloy forms compared to the higher priced specialty and proprietary alloys. The increase in volume was attributed to higher sales in the domestic and European sectors of the nickel-base alloy flat products to jet engine fabricators for maintenance work.
Sales to the chemical processing industry increased by approximately $800,000 to approximately $10.9 million in the third quarter of fiscal 2003 from approximately $10.1 million in the third quarter of fiscal 2002, due to a 31.1% increase in volume partially offset by a 17.8% decrease in the average selling price per pound. The increase in volume was attributed to improved European sales of flat and round products and also higher sales of flat products in the domestic markets because of a higher level of maintenance projects in this quarter versus the same quarter in the prior year. The decrease in the average selling price was due to highly competitive market conditions and a greater proportion of the sales consisting of the lower valued nickel-base alloy flat and round products compared to the higher valued tubular product forms.
Sales to the land-based gas turbine industry decreased by approximately $7.5 million to approximately $5.3 million in the third quarter of fiscal 2003 from approximately $12.8 million in the third quarter of fiscal 2002, due to a 65.6% decrease in volume partially offset by a 20.9% increase in the average selling price per pound caused by a change in product mix. The decrease in volume was due to lower sales of proprietary alloy round products in the domestic and export market and lower shipments of specialty alloy flat products in the domestic market caused by reduced demand for land-based gas turbine engines. The increase in the average selling price was attributed to a larger proportion of the volume being the higher valued nickel-base alloy product forms.
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Sales to other industries decreased by approximately $2.3 million to approximately $5.2 million in the third quarter of fiscal 2003 from approximately $7.5 million in the third quarter of fiscal 2002, due to a 52.7% decrease in volume partially offset by a 48.9% increase in the average selling price per pound. The decrease in volume was caused by the combined effects of lower sales into the flue gas desulfurization industry because of fewer projects than in the previous comparable period, lower oil and gas sales due to a project in the comparable time period a year earlier that did not repeat, and lower sales in the other minor market categories. The increase in the average selling price was due to a larger proportion of the higher valued products in the other minor markets compared to the lower value products in the flue gas desulfurization industry and oil and gas markets.
Cost of Sales. Cost of sales as a percent of net revenues increased to 85.3% in the third quarter of fiscal 2003 from 76.9% in the third 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.
Selling and Administrative Expenses. Selling and administrative expenses decreased by approximately $600,000 to approximately $5.5 million for the third quarter of fiscal 2003 from approximately $6.1 million for the third quarter of fiscal 2002. The decrease in selling and administrative expenses was primarily due to lower employee compensation costs resulting from reduced staffing levels.
Research and Technical Expenses. Research and technical expenses decreased by approximately $300,000 to approximately $600,000 in the third quarter of fiscal 2003 from approximately $900,000 in the third quarter of fiscal 2002. The decrease in research and technical expenses was due to lower employee compensation costs resulting from reduced staffing levels.
Operating Income (Loss). As a result of the above factors, the Company recognized an operating income for the third quarter of fiscal 2003 of approximately $300,000 compared to operating income of approximately $5.2 million for the third quarter of fiscal 2002.
Interest Expense. Interest expense decreased by approximately $100,000 to approximately $5.0 million in the third quarter of fiscal 2003 from approximately $5.1 million in the third 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 $1.8 million to an income tax benefit of approximately $1.7 million for the third quarter of fiscal 2003 from an income tax provision of approximately $100,000 for the third quarter of fiscal 2002, due to the pre-tax loss of approximately $4.6 million for the third quarter of fiscal 2003 compared to the pre-tax income of approximately $100,000 for the third quarter of fiscal 2002.
Net Income (Loss). As a result of the above factors, the net loss was approximately $2.9 million for the third quarter of fiscal 2003 compared to the net income of approximately $13,000 for the third quarter of fiscal 2002.
Net Revenues. Net revenues decreased approximately $40.6 million to approximately $132.4 million in the first nine months of fiscal 2003 from approximately $173.0 million in the first nine months of fiscal 2002. Volume decreased 27.2% to approximately 9.1 million pounds in the first nine months of fiscal 2003 from approximately 12.5 million pounds in the first nine months of fiscal 2002. The average selling price improved 5.6% to $14.41 per pound in the first nine months of fiscal 2003 from $13.65 per pound in the first nine months of fiscal 2002. The Company’s consolidated backlog has increased approximately $2.0 million or 3.8% to approximately $54.5 million at June 30, 2003 from approximately $52.5 million at September 30, 2002. The consolidated backlog decreased $37.7 million or 37.1% to approximately $63.9 million at June 30, 2002 from approximately $101.6 million at September 30, 2001. Order entry decreased $4.8 million or 3.5% for the first nine months of fiscal 2003 as compared to the first nine months of fiscal 2002.
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Sales to the aerospace industry decreased by approximately $10.2 million to approximately $61.4 million in the first nine months of fiscal 2003 from approximately $71.6 million in the first nine months of fiscal 2002, primarily due to a 12.7% 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 $2.2 million to approximately $31.7 million in the first nine months of fiscal 2003 from approximately $33.9 million in the first nine months of fiscal 2002, due to a 6.0% decrease in the average selling price per pound. The decrease in the average selling price was due to the highly competitive market conditions in the domestic and European markets combined with a greater proportion of the lower value commodity alloy billet products.
Sales to the land-based gas turbine industry decreased approximately $21.5 million to approximately $20.1 million in the first nine months of fiscal 2003 from approximately $41.6 million in the first nine months of fiscal 2002, due to a 58.2% decrease in volume partially offset by a 15.8% increase in the average selling price per pound caused by a change in product mix. The decrease in volume was due to the significantly reduced sales of proprietary alloy round products into the domestic and European markets as well as specialty and proprietary alloy flat products into the European fabricators caused by reduced demand for land-based gas turbine engines. The pricing improvements can be attributed to the larger proportion of the higher priced product forms as compared to the lower priced ingot and billet products.
Sales to other industries decreased by approximately $6.7 million to approximately $19.2 million for the first nine months of fiscal 2003 from approximately $25.9 million for the first nine months of fiscal 2002, due to a 32.8% decrease in volume partially offset by a 12.6% increase in the average selling price per pound caused by a change in product mix. The decrease in volume was due to the combination of a major project for the supply of tubular products for deep wells in the oil and gas sector in fiscal 2002 that did not repeat during the current period as well as lower flue gas desulfurization project sales in the export markets. The increase in the average selling price was due to a larger proportion of the higher value products in these markets compared to the lower value products in the flue gas desulfurization industry and oil and gas markets.
Cost of Sales. Cost of sales as a percentage of net revenues increased to 85.6% in the first nine months of fiscal 2003 from 75.8% in the first nine months 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 decreased approximately $400,000 to approximately $17.5 million for the first nine months of fiscal 2003 from approximately $17.9 million in the first nine months of fiscal 2002. The decrease in selling and administrative expenses was due to lower compensation costs and bad debt expense, partially offset by higher professional fees.
Research and Technical Expense. Research and technical expense decreased by approximately $600,000 to approximately $2.1 million in the first nine months of fiscal 2003 from approximately $2.7 million in the first nine months 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 $600,000 for the first nine months of fiscal 2003 as compared to operating income of approximately $21.2 million for the first nine months of fiscal 2002.
Interest Expense. Interest expense decreased by approximately $800,000 to approximately $14.7 million for the first nine months of fiscal 2003 from approximately $15.5 million for the first nine months of fiscal 2002. Lower revolving credit balances and lower interest rates contributed to the decrease when comparing the first nine months of fiscal 2003 to the first nine months of fiscal 2002.
Income Taxes. Income taxes changed by approximately $8.2 million to an income tax benefit of approximately $5.7 million for the first nine months of fiscal 2003 from an income tax provision of approximately $2.5 million for the first nine months of fiscal 2002, due to the pre-tax loss of approximately $15.3 million for the first nine months of fiscal 2003 compared to the pre-tax income of approximately $5.7 million for the first nine months of fiscal 2002.
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Net Income (Loss). As a result of the above factors, the Company recognized a net loss of approximately $9.6 million in the first nine months of fiscal 2003 compared to a net income of approximately $3.3 million for the first nine months 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 $2.8 million for the first nine months of fiscal 2003 compared to approximately $4.0 million for the first nine months of fiscal 2002. The remainder of planned capital spending of approximately $800,000 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 nine months of fiscal 2003 was approximately $200,000, as compared to $17.7 million for the first nine months of fiscal 2002. The cash provided by operating activities for the first nine months of fiscal 2003 was primarily the result of an increase of approximately $10.4 million in accounts payable and accrued expenses, a decrease of approximately $4.7 million in accounts receivable, and non-cash depreciation and amortization of approximately $4.8 million, which was offset by an increase of approximately $3.5 million in inventories, an increase of approximately $6.3 million in deferred income taxes, a net loss of approximately $9.6 million and approximately $300,000 in other activities. Net cash used for investing activities decreased to approximately $2.1 million for the first nine months of fiscal 2003 from approximately $4.2 million for the first nine months of fiscal 2002, due to capital expenditures of approximately $2.8 million partially offset by capital proceeds from the sale of idle equipment of approximately $700,000. Net cash provided by financing activities for the first nine months of fiscal 2003 was approximately $1.0 million, primarily due to a net increase in borrowings under the Revolving Credit Facility.
Cash for the first nine months of fiscal 2003 decreased approximately $600,000 resulting in a June 30, 2003 cash balance of approximately $4.6 million. Cash for the first nine months of fiscal 2002 increased by approximately $3.2 million resulting in a June 30, 2002 cash balance of approximately $3.4 million.
Total debt at June 30, 2003 was approximately $191.7 million compared to approximately $195.5 million at June 30, 2002, reflecting decreased borrowings under the Revolving Credit Facility and payments on capital lease obligations.
At June 30, 2003, approximately $47.6 million had been borrowed pursuant to the Revolving Credit Facility compared to approximately $51.3 million at June 30, 2002. In addition, as of June 30 2003, approximately $1.2 million in Letter of Credit obligations had been incurred by the Company. The Revolving Credit Facility availability calculation includes a reserve for accrued interest payable, March 1 and September 1, in connection with the 11 5/8% Senior Notes due 2004 of approximately $5.4 million at June 30, 2003, and a standard fixed charge reserve which is $2.0 million at June 30, 2003.
The Company had available additional borrowing capacity of approximately $11.6 million on the Revolving Credit Facility at June 30, 2003. Subsequent to June 30, 2003, based on the terms of the Revolving Credit Facility, an additional $5.0 million fixed charge reserve will reduce this borrowing capacity to $6.6 million.
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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 54% equity allocation split between US equities (50%) and international equities (4%) with the remaining 46% being allocated to US fixed income investments. This allocation approximates the planned allocation of 60% equities and 40% 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 total contribution to the Plan of $1.9 million will be required prior to June 15, 2004 of which $375,000 was funded in May of 2003. 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.
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 June 30, 2003, there were no changes to these accounting policies. We have identified certain critical accounting policies which are described below.
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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 mark