UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| |X| |
Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange
Act of 1934 for the fiscal year ended September 30, 2003. |
| | | | Transition Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of 1934. |
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) | |
Securities registered pursuant to Section 12(b) of the Act: None
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
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. X
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b — 2). Yes No X
The registrant is a privately held corporation. As such, there is no practicable method to determine the aggregate market value of the voting stock held by non-affiliates of the registrant.
The number of shares of Common Stock, $.01 par value, of Haynes International, Inc. outstanding as of December 29, 2003 was 100.
Documents Incorporated by Reference: None
TABLE OF CONTENTS
| Page No. | ||||||||
|---|---|---|---|---|---|---|---|---|
| Part I | ||||||||
| Item 1 | Business | 1 | ||||||
| Item 2 | Properties | 10 | ||||||
| Item 3 | Legal Proceedings | 11 | ||||||
| Item 4 | Submission of Matters to a Vote of Security Holders | 12 | ||||||
| Part II | ||||||||
| Item 5 | Market for Registrant’s Common Equity and Related Stockholder Matters | 12 | ||||||
| Item 6 | Selected Consolidated Financial Data | 13 | ||||||
| Item 7 | Management’s Discussion and Analysis of Financial Condition and | |||||||
| Results of Operations | 15 | |||||||
| Item 7a | Quantitative and Qualitative Disclosures About Market Risk | 29 | ||||||
| Item 8 | Financial Statements and Supplementary Data | 30 | ||||||
| Item 9 | Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure |
54 |
||||||
| Item 9a | Controls and Procedures | 54 | ||||||
| Part III | ||||||||
| Item 10 | Directors and Executive Officers of the Registrant | 54 | ||||||
| Item 11 | Executive Compensation | 57 | ||||||
| Item 12 | Security Ownership of Certain Beneficial Owners and Management | 63 | ||||||
| Item 13 | Certain Relationships and Related Transactions | 64 | ||||||
| Part IV | ||||||||
| Item 15 | Exhibits, Financial Statement Schedules and Reports on Form 8-K | 65 | ||||||
| Signatures | 66 | |||||||
| Schedule II | 67 | |||||||
| Index to Exhibits | 68 | |||||||
Part I
Item 1. Business
General
Haynes International, Inc. (“the Company”) develops, manufactures and markets technologically advanced, high performance alloys primarily for use in the aerospace and chemical processing industries. The Company’s products are high temperature alloys (“HTA”) and corrosion resistant alloys (“CRA”). The Company’s HTA products are used by manufacturers of equipment that is subjected to extremely high temperatures, such as jet engines for the aerospace industry, gas turbine engines for power generation, waste incineration, and industrial heating equipment. The Company’s CRA products are used in applications that require resistance to extreme corrosion, such as chemical processing, power plant emissions control and hazardous waste treatment. The Company produces its high performance alloy products primarily in sheet, coil and plate forms, which in the aggregate represented approximately 68% of the Company’s net revenues in fiscal 2003. In addition, the Company produces its alloy products as seamless and welded tubulars, and in bar, billet and wire forms.
High performance alloys are characterized by highly engineered, often proprietary, metallurgical formulations primarily of nickel, cobalt and other metals with complex physical properties. The complexity of the manufacturing process for high performance alloys is reflected in the Company’s relatively high average selling price per pound, compared to the average selling price of other metals, such as carbon steel sheet, stainless steel sheet and aluminum. Demanding end-user specifications, a multi-stage manufacturing process and the technical sales, marketing and manufacturing expertise required to develop new applications combine to create significant barriers to entry in the high performance alloy industry.
Capital Restructuring
The Company’s financial performance over the past year has been adversely impacted by reduced customer demand caused by a weak economic environment, higher raw material cost and rising energy costs. As a result of these circumstances, the Company has entered into several amendments to the Company’s Credit Agreement dated as of November 22, 1999 (the “Credit Agreement”) certain of which provide additional availability, more flexible financial covenant requirements through January 31, 2004, full relief from the Senior Note Interest Reserve through December 31, 2003, and partial relief until February 28, 2004, at which time the full Senior Note Interest Reserve will again be in effect. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” and Note 7 to the consolidated financial statements as of and for the year ended September 30, 2003 included in Item 8 for specific requirements of the amendments to the Credit Agreement.
The Company is highly leveraged. The Company’s 11 5/8% Senior Notes due 2004 (the “Senior Notes”), in the amount of $140 million, are scheduled to be retired on September 1, 2004. In addition, interest payments on the Senior Notes of $8.1 million each are due on March 1, 2004 and September 1, 2004. Finally, the Credit Agreement, with an outstanding amount of $56.8 million as of September 30, 2003, is currently scheduled to terminate on June 3, 2004.
In November 2003, the Company retained Conway, Del Genio, Gries & Co., LLC and Skadden, Arps, Slate, Meagher & Flom (Illinois) and related law practice entities to assist the Company in analyzing and evaluating possible transactions for the principal purpose of restructuring the Company’s balance sheet, which the Company’s management believes is essential to ensure that the Company has adequate working capital to operate its business and capitalize on its position as one of the world leaders in the manufacture of high performance alloys. The Company is currently engaged in discussions with the Credit Agreement lenders about amendments to provide additional liquidity. In addition, the Company anticipates beginning discussions in January 2004 with holders of its Senior Notes regarding possible restructuring transactions. The Company further anticipates that any such restructuring transaction would result in substantial dilution of the interest of the existing equity holders of Haynes Holdings, Inc. There can be no assurance that the Company will be successful in implementing the contemplated balance sheet restructuring or in obtaining new bank financing. See statement in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding forward-looking statements.
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In the event the Company does not succeed in its restructuring efforts, it is likely that liquidity will be inadequate to enable the Company to make the interest payments required with respect to the Senior Notes on March 1, 2004 and September 1, 2004, retire the Senior Notes on September 1, 2004, and repay the Credit Agreement on June 3, 2004. Moreover, one possible outcome of the restructuring would be the deferral or forgiveness of some or all of these obligations in return for other forms of consideration. In addition, in the event the Company is unable to modify the terms of its existing credit facility or obtain other sources of capital and liquidity, it is possible that the Company could be unable to satisfy other obligations as they become due. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding forward-looking statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”.
Due to various factors including the uncertainty regarding the capital restructuring and its effect on liquidity, the auditors’ report on the Company’s consolidated financial statements for the year ended September 30, 2003 is modified because of these uncertainties. See Item 8 “Financial Statements and Supplementary Data” for a copy of the auditors’ report.
Products
The alloy market consists of four primary segments: stainless steel, super stainless steel, nickel alloys and high performance alloys. The Company competes exclusively in the high performance alloy segment, which includes HTA and CRA products. The Company believes that the high performance alloy segment represents less than 10% of the total alloy market. In fiscal 2003, HTA and CRA products accounted for approximately 75% and 25%, respectively, of the Company’s net revenues. These percentages of the Company’s total product revenue and volume are based on data which include revenue and volume associated with sales by the Company to its foreign subsidiaries, but exclude revenue and volume associated with sales by foreign subsidiaries to their customers. Management believes, however, that the effect of including revenue and volume data associated with sales by its foreign subsidiaries would not materially change the percentages presented in this section.
HTA products are used primarily in manufacturing components for the hot sections of jet engines. Stringent safety and performance standards in the aerospace industry result in development lead times typically as long as eight to ten years in the introduction of new aerospace-related market applications for HTA products. However, once a particular new alloy is shown to possess the properties required for a specific application in the aerospace industry, it tends to remain in use for extended periods. HTA products are also used in gas turbine engines produced for use in applications such as naval and commercial vessels, electric power generators, and power sources for offshore drilling platforms, gas pipeline booster stations and emergency standby power stations.
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CRA products are used in a variety of applications, such as chemical processing, power plant emissions control, hazardous waste treatment, sour gas production and pharmaceutical vessels. Historically, the chemical processing industry has represented the largest end-user segment for CRA products. Due to maintenance, safety and environmental considerations, the Company believes this industry continues to represent an area of potential long-term growth for the company. Unlike aerospace applications within the HTA product market, the development of new market applications for CRA products generally does not require long lead times.
High Temperature Alloys The following table sets forth information with respect to the Company’s significant high temperature alloys, applications and features:
| Alloy and Year Introduced | End Markets and Applications(1) | Features |
|---|---|---|
| HAYNES HR-160 (1990) (2) | Waste incineration/CPI-boiler tube shields | Good resistance to sulfidation at high temperatures |
| HAYNES 242 (1990) (2) | Aero-seal rings | High strength, low expansion and good fabricability |
| HAYNES HR-120 (1990) (2) | LBGT-cooling shrouds | Good strength-to-cost ratio as compared to competing alloys |
| HAYNES 230 (1984) (2) | Aero/LBGT-ducting, combustors | Good combination of strength, stability, oxidation resistance and fabricability |
| HAYNES 214 (1981) (2) | Aero-honeycomb seals | Good combination of oxidation resistance and fabricating among nickel-based alloys |
| HAYNES 188 (1968) (2) | Aero-burner cans, after-burner components | High strength, oxidation resistant cobalt-based alloys |
| HAYNES 625 (1964) | Aero/CPI-ducting, tanks, vessels, weld overlays | Good fabricability and general corrosion resistance |
| HAYNES 263 (1960) | Aero/LBGT-components for gas turbine hot gas exhaust pan | Good ductility and high strength at temperatures up to 1600°F |
| HAYNES 718 (1955) | Aero-ducting, vanes, nozzles | Weldable high strength alloy with good fabricability |
| HASTELLOY X (1954) | Aero/LBGT-burner cans, transition ducts | Good high temperature strength at relatively low cost |
| HAYNES Ti 3-2.5 (1950) | Aero-aircraft hydraulic and fuel systems components | Light weight, high strength titanium-based alloy |
| HAYNES 25 (1950)(2) | Aero-gas turbine parts, bearings, and various industrial applications | Excellent strength, good oxidation, resistance to 1800°F |
| (1) | "Aero" refers to aerospace; "LBGT" refers to land-based gas turbines; "CPI" refers to the chemical processing industry. |
| (2) | Represents a patented product or a product with respect to which the Company believes it has limited or no competition. |
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Corrosion Resistant Alloys The following table sets forth information with respect to certain of the Company’s significant corrosion resistant alloys, applications and features:
| Alloy and Year Introduced | End Markets and Applications(1) | Features |
|---|---|---|
| HASTELLOY C-2000 (1995)(2) | CPI-tanks, mixers, piping | Versatile alloy with good resistance to uniform corrosion |
| HASTELLOY B-3 (1994)(2) | CPI-acetic acid plants | Better fabrication characteristics compared to other nickel-molybdenum alloys |
| HASTELLOY D-205 (1993)(2) | CPI-plate heat exchangers | Corrosion resistance to hot sulfuric acid |
| ULTIMET (1990)(2) | CPI-pumps, valves | Wear and corrosion resistant nickel-based alloy |
| HASTELLOY G-50 (1989) | Oil and gas-sour gas tubulars | Good resistance to down hole corrosive environments |
| HASTELLOY C-22 (1985) | CPI/FGD-tanks, mixers, piping | Resistance to localized corrosion and pitting |
| HASTELLOY G-30 (1985)(2) | CPI-tanks, mixers, piping | Lower cost alloy with good corrosion resistance in phosphoric acid |
| HASTELLOY B-2 (1974) | CPI-acetic acid | Resistance to hydrochloric acid and other reducing acids |
| HASTELLOY C-4 (1973) | CPI-tanks, mixers, piping | Good thermal stability |
| HASTELLOY C-276 (1968) | CPI/FGD/oil land gas-tanks, mixers, piping | Broad resistance to many environments |
| (1) | "CPI" refers to the chemical processing industry; "FGD" refers to the flue gas desulfurization industry |
| (2) | Represents a patented product or a product with respect to which the Company believes it has limited or no competition. |
End Markets
Aerospace. The Company has manufactured HTA products for the aerospace market since the late 1930‘s, and has developed numerous proprietary alloys for this market. Customers in the aerospace market tend to be the most demanding with respect to meeting specifications within very low tolerances and achieving new product performance standards. Stringent safety standards and continuous efforts to reduce equipment weight require close coordination between the Company and its customers in the selection and development of HTA products. As a result, sales to aerospace customers tend to be made through the Company’s direct sales force. Demand for the Company’s products in the aerospace industry is based on the new and replacement market for jet engines and the maintenance needs of operators of commercial and military aircraft. The hot sections of jet engines are subjected to substantial wear and tear and accordingly require periodic maintenance and replacement.
Chemical Processing. The chemical processing industry segment represents a large base of customers with diverse CRA applications driven by demand for key end use industries such as automobiles, housing, health care, agriculture, and metals production. CRA products supplied by the Company have been used in the chemical processing industry since the early 1930s. Demand for the Company’s products in this industry is based on the level of maintenance, repair, and expansion of existing chemical processing facilities as well as the construction of new facilities. The Company believes the extensive worldwide network of Company-owned service centers and independent distributors is a competitive advantage in marketing its CRA products.
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Land Based Gas Turbines. Demand for the Company’s products in this market is driven by the construction of cogeneration facilities such as base load for electric utilities or as backup sources to fossil-fuel-fired utilities during times of peak demand. Demand for the Company’s alloys in the LBGT industry has also been driven by concerns regarding lowering emissions from generating facilities powered by fossil fuels. LBGT generating facilities have gained acceptance as clean, low-cost alternatives to fossil fuel-fired electric generating facilities. Land-based gas turbines are also used in power barges with mobility and as temporary base-load-generating units for countries that have numerous islands and a large coastline. Further demand is generated in mechanical drive units used for oil and gas production and pipeline transportation, as well as microturbines that are used as back up sources of power generation for hospitals and shopping malls.
Other Markets. In addition to the industries described above, the Company also targets a variety of other markets. Other industries to which the Company sells its HTA and CRA products include FGD, oil and gas, waste incineration, industrial heat treating, automotive and instrumentation. The FGD industry has been driven by both legislated and self-imposed standards for lowering emissions from fossil fuel-fired electric generating facilities. The Company also sells its products for use in the oil and gas industry, primarily in connection with sour gas production. In addition, incineration of municipal, biological, industrial and hazardous waste products typically produces very corrosive conditions that demand high performance alloys. Markets capable of providing growth are being driven by increasing performance, reliability and service life requirements for products used in these markets which could provide further applications for the Company’s products.
Sales and Marketing and Distribution
Providing technical assistance to customers is an important part of the Company’s marketing strategy. The Company provides analyses of its products and those of its competitors for its customers. These analyses enable the Company to evaluate the performance of its products and to make recommendations as to the substitution of Company products for other materials in appropriate applications, enabling the Company’s products to be specified for use in the production of customers’ products. Market development professionals are assisted by the research and development staff of the Company in directing the sales force to new opportunities. The Company believes its combination of direct sales, technical marketing, research and development, and customer support provides an advantage over other manufacturers in the high performance alloy industry. This activity allows the Company to obtain direct insight into customers’ alloy needs and allows the Company to develop proprietary alloys that provide solutions to customers’ problems.
The Company sells its products primarily through its direct sales organization, which includes four domestic Company-owned service centers, with direct sales coverage in the United States and Canada, three wholly-owned European subsidiaries and a wholly-owned subsidiary in Singapore serving the Pacific Rim. Approximately 80% of the Company’s net revenues in fiscal 2003 were generated by the Company’s direct sales organization. The remaining 20% of the Company’s fiscal 2003 net revenues was generated by independent distributors and licensees in the United States, Europe and Japan, some of whom have been associated with the Company for over 30 years.
The following table sets forth the approximate percentage of the Company’s fiscal 2003 net revenues generated through each of the Company’s distribution channels.
| DOMESTIC | FOREIGN | TOTAL | |
|---|---|---|---|
| Company sales offices/service centers | 52% | 28% | 80% |
| Independent distributors/sales agents | 13% | 7% | 20% |
13% |
7% |
20% | |
| Total | 65% |
35% |
100% |
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The top twenty customers, not affiliated with the Company, accounted for approximately 41% of the Company’s net revenues for fiscal 2003. No customer or group of affiliated customers of the Company accounted for more than 10% of the Company’s net revenues in fiscal 2003.
The Company’s foreign and export sales were approximately $90.5 million, $83.5 million, and $74.5 million for fiscal 2001, 2002, and 2003, respectively. Additional information concerning foreign operations and export sales is set forth in Note 13 to Consolidated Financial Statements included in Item 8.
Manufacturing Process
High performance alloys require a lengthier, more complex melting process and are more difficult to manufacture than lower performance alloys, such as stainless steels. The alloying elements in high performance alloys must be highly refined, and the manufacturing process must be tightly controlled to produce precise chemical properties. The resulting alloyed material is more difficult to process because, by design, it is more resistant to deformation. Consequently, high performance alloys require that a greater force be applied when hot or cold working and are less susceptible to reduction or thinning when rolling or forging. This results in more cycles of rolling, annealing and pickling compared to a lower performance alloy to achieve proper dimensions. Certain alloys may undergo as many as 40 distinct stages of melting, remelting, annealing, forging, rolling and pickling before they achieve the specifications required by a customer. The Company manufactures products in sheet, plate, billet/ingot, tubular, and other forms, which represented 54%, 21%, 13%, 9%, and 3%, respectively, of total volume sold in fiscal 2003 (after giving effect to the conversion of billet to bar by the Company’s UK subsidiary).
The manufacturing process begins with raw materials being combined, melted and refined in a precise manner to produce the chemical composition specified for each alloy. For most alloys, this molten material is cast into electrodes and additionally refined through electroslag remelting. The resulting ingots are then forged or rolled to an intermediate shape and size depending upon the intended final product form. Intermediate shapes destined for flat products are then sent through a series of hot and cold rolling, annealing and pickling operations before being cut to final size.
The Argon Oxygen Decarburization (“AOD”) gas controls in the Company’s primary melt facility remove carbon and other undesirable elements, thereby allowing more tightly-controlled chemistries, which in turn produce more consistent properties in the alloys. The AOD gas control system also allows for statistical process control monitoring in real time to improve product quality.
The Company has a four-high Steckel mill for use in hot rolling material. The four-high mill was installed in 1982 at a cost of approximately $60.0 million and is one of only two such mills in the high performance alloy industry. The mill is capable of generating approximately 12.0 million pounds of separating force and rolling a plate up to 72 inches wide. The mill includes integrated computer controls (with automatic gauge control and programmed rolling schedules), two coiling Steckel furnaces and five heating furnaces. Computer-controlled rolling schedules for each of the hundreds of combinations of alloy shapes and sizes the Company produces allow the mill to roll numerous widths and gauges to exact specifications without stoppages or changeovers.
The Company also operates a three-high rolling mill and a two-high rolling mill, each of which is capable of custom processing much smaller quantities of material than the four-high mill. These mills provide the Company with significant flexibility in running smaller batches of varied products in response to customer requirements. The Company believes the flexibility provided by the three-high and two-high mills provides the Company an advantage over its major competitors in obtaining smaller specialty orders.
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Backlog
As of September 30, 2003, the Company’s backlog orders aggregated approximately $50.6 million, compared to approximately $52.5 million as of September 30, 2002, and approximately $101.6 million as of September 30, 2001. The backlog for the year ending September 30, 2003, was down $1.9 million or 3.8% as compared to the prior year and order entry was down $1.1 million or 0.6% as compared to the prior year. Substantially all orders in the backlog at September 30, 2003 are expected to be shipped within the twelve months beginning October 1, 2003. Due to the cyclical nature of order entry experienced by the Company, there can be no assurance that order entry will continue at historical or current levels. The historical and current backlog amounts shown in the following table are also indicative of relative demand over the past few years. The backlog for past years has been adjusted to reflect the consolidated backlog inclusive of the service centers.
THE COMPANY'S CONSOLIDATED BACKLOG
AT FISCAL QUARTER END
(IN MILLIONS)
| 1999 | 2000 | 2001 | 2002 | 2003 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1st | $ | 57 | .1 | $ | 62 | .4 | $ | 82 | .0 | $ | 88 | .0 | $ | 49 | .0 | ||
| 2nd | $ | 58 | .2 | $ | 82 | .9 | $ | 93 | .5 | $ | 77 | .2 | $ | 53 | .6 | ||
| 3rd | $ | 55 | .9 | $ | 84 | .6 | $ | 92 | .3 | $ | 63 | .9 | $ | 54 | .5 | ||
| 4th | $ | 59 | .9 | $ | 84 | .6 | $ | 101 | .6 | $ | 52 | .5 | $ | 50 | .6 | ||
Raw Materials
Raw material costs account for a significant portion of the Company’s cost of sales with nickel being the primary material used in the Company’s alloys. Each pound of alloy contains, on average, 48% nickel. Other raw materials include cobalt, chromium, molybdenum and tungsten. Melt materials consist of virgin raw material, purchased scrap and internally produced scrap. Historically, the Company’s primary source of nickel has been Falconbridge, U.S., Inc.
The following table sets forth the average per pound price for nickel as reported by the London Metals Exchange for the fiscal years indicated.
| Year Ended September 30, |
Average Price | ||||
|---|---|---|---|---|---|
| 1999 | 2.29 | ||||
| 2000 | 3.98 | ||||
| 2001 | 2.96 | ||||
| 2002 | 3.12 | ||||
| 2003 | 3.76 | ||||
The average per pound price for nickel as reported by the London Metals Exchange for the period from June to September of fiscal 2003 rose from $4.00 per pound to $4.51 per pound while the demand for high performance alloys remained weak thereby diminishing the ability to pass on the rising cost of nickel to the Company's customers. From September 2003 to December 2003 the cost of nickel has risen another $1.50 per pound to approximately $6.00 per pound.
Since most of the Company’s products are produced to specific orders, the Company purchases materials against known production schedules. Materials are purchased from several different suppliers, through consignment arrangements, annual contracts and spot purchases and involve a variety of pricing mechanisms. Because the Company maintains a policy of pricing its products at the time of order placement the Company attempts to establish selling prices with reference to known costs of materials, thereby reducing the risk associated with changes in the cost of raw materials. However, during a period of rapidly escalating raw material costs such as the Company has recently experienced with nickel, margins can be negatively impacted.
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The high performance alloy industry has generally been able to pass raw material price increases through to its customers, however, the rapid rise in nickel cost is not due to a strong market demand for high performance alloys but to a supply of nickel that can not meet demand requirements. Development projects are in process to increase the supply of nickel, however, this additional supply will not be available for several years. A significant impact on the demand for nickel is being driven by increasing purchases of raw and scrap nickel by China to meet the needs of its expanding economy.
Research and Technical Development
The Company’s research facilities are located at the Company’s Kokomo facility and consist of 90,000 square feet of offices and laboratories, as well as an additional 90,000 square feet of paved storage area. The Company has ten fully equipped laboratories, including a mechanical test lab, a metallographic lab, an electron microscopy lab, a corrosion lab and a high temperature lab, among others. These facilities also contain a reduced scale, fully equipped melt shop and process lab. As of September 30, 2003, the research and technical development staff consisted of 32 persons, 12 of whom have engineering or science degrees, including seven with doctoral degrees, with the majority of degrees in the field of metallurgical engineering.
Research and technical development costs relate mainly to efforts to develop new proprietary alloys, to improve current or develop new manufacturing methods, to provide technical service to customers, to provide technical support to the commercial and manufacturing groups and to provide metallurgical training to engineer and non-engineer employees. The Company spent approximately $3.7 million, $3.7 million and $2.7 million for research and technical development activities for fiscal 2001, 2002 and 2003, respectively.
During fiscal 2003, exploratory alloy development projects were focused on new high temperature alloy products for gas turbine, chemical process industry, and industrial heating service industries. Engineering projects include new manufacturing process development, specialized test data development and application support for large volume projects involving power generation and radioactive waste containment. The Company is continuing to develop an extensive database storage and retrieval system to better manage its corrosion, high temperature and mechanical property data.
Over the last thirteen years, the Company’s technical programs have yielded ten new proprietary alloys and 20 United States patents, with four United States patent applications pending. The Company currently maintains a total of about 15 United States patents and approximately 200 foreign counterpart patents and applications targeted at countries with significant or potential markets for the patented products. While the Company believes its patents are important to its competitive position, significant barriers to entry continue to exist beyond the expiration of any patent period. Five of the materials considered by management to be of future commercial significance, HAYNES HR-120, HAYNES 242, ULTIMET, HASTELLOY C-2000 and HASTELLOY B-3 alloys, are protected by United States patents that continue until the years 2008, 2008, 2009, 2018 and 2020, respectively.
Competition
The high performance alloy market is a highly competitive market in which eight to ten producers participate in various product forms. The Company faces strong competition from domestic and foreign manufacturers of both the Company’s high performance alloys and other competing metals. The Company’s primary competitors include Special Metals Corporation, Allegheny Technologies, Inc., and Krupp VDM GmbH, a subsidiary of Thyssen Krupp Stainless. The Company may face additional competition in the future to the extent new materials are developed, such as plastics or ceramics that may be substituted for the Company’s products.
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Employees
As of September 30, 2003, the Company had approximately 898 employees. All eligible hourly employees at the Kokomo plant and Lebanon Service Center are covered by a collective bargaining agreement with the United Steelworkers of America (“USWA”) which was ratified on July 2, 2002, and which expires on June 11, 2005. As of September 30, 2003, 446 employees of the Kokomo and Lebanon facilities were covered by the collective bargaining agreement. None of the employees of the Company’s Arcadia, Louisiana or European operations are represented by a labor union. Management considers its employee relations in each of the facilities to be satisfactory.
Environmental Matters
The Company’s facilities and operations are subject to certain foreign, federal, state and local laws and regulations relating to the protection of human health and the environment, including those governing the discharge of pollutants into the environment and the storage, handling, use, treatment and disposal of hazardous substances and wastes. Violations of these laws and regulations can result in the imposition of substantial penalties and can require facilities improvements. In addition, the Company may be required in the future to comply with certain regulations pertaining to the emission of hazardous air pollutants under the Clean Air Act. However, since these regulations have not been proposed or promulgated, the Company cannot predict the cost, if any, associated with compliance with such regulations. Expenses related to environmental compliance were approximately $1.4 million for fiscal 2003 and are expected to be approximately $1.6 million for fiscal year 2004. Although there can be no assurance, based upon current information available to the Company, the Company does not expect that costs of environmental contingencies, individually or in the aggregate, will have a material adverse effect on the Company’s financial condition, results of operations or liquidity.
The Company’s facilities are subject to periodic inspection by various regulatory authorities, who from time to time have issued findings of violations of governing laws, regulations and permits. In the past five years, the Company has paid administrative fines, none of which has exceeded $60,000, for alleged violations relating to environmental matters, including the handling and storage of hazardous wastes, record keeping requirements relating to Title V Air Permit, record keeping requirements relating to the handling of polychlorinated biphenyls and violations of record keeping and notification requirements relating to industrial waste water discharge. Additions and improvements may be required at the Kokomo, Indiana Wastewater Treatment Facility based on proposed restrictions of the local sewer use ordinance. Therefore, the Company spent $243,000 in water treatment facilities in fiscal 2003 and has budgeted another $135,000 for fiscal 2004.
On July 13, 2000, the Indiana Department of Environmental Management (“IDEM”) issued a notice of violation to the Company imposing monetary sanctions and alleging that the Company had violated various conditions of its Title V air emissions permit. The Company is attempting to resolve these issues with IDEM. Although the Company does not believe this or any similar regulatory enforcement action will have a material impact on its operations, there can be no assurance that additional violations will not be alleged or will not result in the assessment of penalties in the future. As of September 30, 2003, capital expenditures of approximately $3.1 million have been made for air pollution control improvements from fiscal 2001 through 2003, with another $225,000 planned expenditures for 2004.
The Company has received permits from IDEM and the US Environmental Protection Agency (“EPA”) to close and to provide post-closure monitoring and care for certain areas at the Kokomo facility used for the storage and disposal of wastes, some of which are classified as hazardous under applicable regulations. Construction was completed in May 1994 and closure certification was received in fiscal 1999. The Company is required to monitor groundwater and to continue post-closure maintenance of the former disposal areas. The Company is aware of elevated levels of certain contaminants in the groundwater. The Company believes that some or all of these contaminants may have migrated from a nearby superfund site. If it is determined that the disposal areas have impacted the groundwater underlying the Kokomo facility additional corrective action by the Company could be required. The Company is unable to estimate the costs of such action, if any. There can be no assurance, however, that the costs of future corrective action would not have a material effect on the Company’s financial condition, results of operations or liquidity. Additionally, it is possible that the Company could be required to obtain permits and undertake other closure projects and post-closure commitments for any other waste management unit determined to exist at the facility.
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As a condition of the post-closure permits, the Company must provide and maintain assurances to IDEM and EPA of the Company’s capability to satisfy closure and post-closure ground water monitoring requirements, including possible future corrective action as necessary.
The Company may also incur liability for alleged environmental damages associated with the off-site transportation and disposal of its wastes. The Company’s operations generate hazardous substances, and, while a large percentage of these wastes are reclaimed or recycled, the Company also accumulates hazardous wastes at each of its facilities for subsequent transportation and disposal off-site by third parties. Generators of hazardous waste transported to disposal sites where environmental problems are alleged to exist are subject to claims under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), and state counterparts. CERCLA imposes strict, joint and several liabilities for investigatory and cleanup costs upon waste generators, site owners and operators and other potentially responsible parties (“PRPs”). The Company may have generated hazardous substances disposed of at other sites potentially subject to CERCLA or equivalent state law remedial action. Thus, there can be no assurance that the Company will not be named as a PRP at sites in the future or that the costs associated with those sites would not have a material adverse effect on the Company’s financial condition, results of operations of liquidity.
On July 17, 2002, the EPA issued a Pre-filing Notice and Opportunity to Confer to the Company imposing monetary sanctions and alleging that the Company had violated certain requirements of the Resource, Conservation, and Recovery Act. Specifically, the EPA alleged violations concerning hazardous waste record keeping, waste characterization, and hazardous waste disposal at the Kokomo, Indiana facility. The Company negotiated a settlement, paid a fine of $54,000, and has received a final release from the EPA.
In November 1988, the EPA approved start-up of a new waste water treatment plant at the Arcadia, Louisiana facility, which discharges treated industrial waste water into the municipal sewage system. After the Company exceeded certain EPA effluent limitations in 1989, the EPA issued an administrative order in 1992 which set new effluent limitations for the facility. The waste water plant is currently operating under this order and the Company is meeting such effluent limitations and does not expect to have any problems meeting those limitations in the future although there can be no guarantees as such. However, the Company anticipates that in the future Louisiana will take over waste water permitting authority from the EPA and may issue a waste water permit, the conditions of which could require modification to the plant. Reasonably anticipated modifications are not expected to have a substantial impact on operations.
Item 2. Properties
The Company’s owned and leased facilities, and the products and services provided at each facility, are as follows:
| Owned Facilities Kokomo, Indiana – manufactures and sells all product forms, other than tubular goods. Arcadia, Louisiana – manufactures and sells welded and seamless tubular goods. Openshaw, England – manufactures and sells bar and billet for the European market. Zurich, Switzerland –(1) stocks and sells all product forms. |
Leased Facilities Lebanon, Indiana –(1) stocks and sells all product forms Houston, Texas –(1) stocks and sells all product forms Windsor, Connecticut –(1) stocks and sells all product forms Anaheim, California –(1) stocks and sells all product forms Paris, France —(1) stocks and sells all product forms Singapore – sells all product forms (1)Service Centers |
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The Kokomo plant, the primary production facility, is located on approximately 180 acres of industrial property and includes over one million square feet of building space. There are three sites consisting of (1) a headquarters and research laboratory; (2) primary and secondary melting, annealing furnaces, forge press and several smaller hot mills; and (3) the four-high breakdown mill and sheet product cold working equipment, including two cold strip mills. All alloys and product forms other than tubular goods are produced in Kokomo.
The Arcadia plant consists of approximately 42 acres of land and over 135,000 square feet of buildings on a single site. Arcadia uses feedstock produced in Kokomo to fabricate welded and seamless super alloy pipe and tubing and purchases extruded tube hollows to produce seamless titanium tubing. Manufacturing processes at Arcadia require cold pilger mills, weld mills, draw benches, annealing furnaces and pickling facilities.
The facilities located in the United States are subject to a mortgage which secures the Company’s obligations under the Company’s Credit Agreement. See Note 7 of the Notes to Consolidated Financial Statements.
The Openshaw plant, located near Manchester, England, consists of approximately 15 acres of land and over 200,000 square feet of buildings on a single site. The plant produces bar and billet using billets produced in Kokomo as feedstock. Additionally, products not competitive with the Company’s products are processed for third parties. The processes conducted at the facility require hot rotary forges, bar mills and miscellaneous straightening, turning and cutting equipment. The Company is currently in the process of closing the manufacturing portion of the Openshaw plant and sourcing the required bar product for customers from external vendors. This closure will not have a material effect on the overall revenue of the U.K. operation or the overall operation of the Company and the Company's financial position.
All service center warehouses are single site locations and are less than 100,000 square feet.
Although capacity can be limited from time to time by certain production processes, the Company believes that its existing facilities will provide sufficient capacity for current and future demand.
Item 3. Legal Proceedings
The Company is regularly involved in routine litigation, both as a plaintiff and as a defendant, and federal and/or state EEOC administrative actions. In addition, the Company is subject to extensive federal, state and local laws and regulations. While the Company’s policies and practices are designed to ensure compliance with all laws and regulations, future developments and increasingly stringent regulations could require the Company to make additional unforeseen expenditures for these matters.
On July 13, 2000, the Indiana Department of Environmental Management (“IDEM”) issued a notice of violation to the Company imposing monetary sanctions and alleging that the Company has violated various conditions of its Title V air emissions permit. The Company is negotiating to resolve these issues with IDEM.
On July 17, 2002, EPA issued a Pre-filing Notice and Opportunity to Confer to the Company imposing monetary sanctions and alleging that the Company had violated certain requirements of the Resource, Conservation, and Recovery Act. Specifically, the EPA alleged violations concerning hazardous waste record keeping, waste characterization, and hazardous waste disposal at the Kokomo, Indiana facility. The Company negotiated a settlement, paid a fine of $54,000 and has received a final release from the EPA.
Although the level of future expenditures for legal matters cannot be determined with any degree of certainty, based on the facts presently known, management does not believe that such costs will have a material effect on the Company’s financial position, results of operations or liquidity.
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Item 4. Submission of Matters to a Vote of Security Holders
None
Part II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
There is no established trading market for the common stock of the Company.
As of September 30, 2003, Haynes Holdings, Inc. was the only holder of the common stock of the Company.
There have been no cash dividends declared on the common stock for the three fiscal years ended September 30, 2003, 2002, and 2001.
The payment of dividends is limited by terms of certain debt agreements to which the Company is a party. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and Note 6 of the Notes to Consolidated Financial Statements of the Company included in this Annual Report in response to Item 8.
Item 12 “Security Ownership of Certain Beneficial Owners and Management” includes disclosures relating to the Company’s Equity Compensation Plans.
At no time during the three fiscal years ended September 30, 2003, 2002, and 2001 did the Company sell any securities of the Company.
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Item 6. Selected Consolidated Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except ratio data)
The following table sets forth selected consolidated financial data of the Company. The selected consolidated financial data as of and for the years ended September 30, 1999, 2000, 2001, 2002 and 2003 are derived from the audited consolidated financial statements of the Company.
These selected financial data are not covered by the auditors’ report and are qualified in their entirety by reference to, and should be read in conjunction with, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and Item 8 “Consolidated Financial Statements of the Company”and the related notes thereto included elsewhere in this Form 10-K.
| Year Ended September 30, |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Statement of Operations Data: | 1999 | 2000 | 2001 | 2002 | 2003 | |||||||||||||||
| Net revenues | $ | 208,986 | $ | 229,528 | $ | 251,714 | $ | 225,942 | $ | 178,129 | ||||||||||
| Cost of sales | 164,349 | 186,574 | (3) | 196,790 | (3) | 175,577 | (3) | 145,034 | (3) | |||||||||||
| Selling and administrative expenses | 25,908 | (1) | 23,722 | (1)(2) | 27,254 | 24,628 | 24,411 | (2) | ||||||||||||
| Research and technical expenses | 3,883 | 3,752 | 3,710 | 3,697 | 2,747 | |||||||||||||||
| Operating income | 14,846 | 15,480 | 23,960 | 22,040 | 5,937 | |||||||||||||||
| Terminated acquisition costs | 388 | (2) | --- | --- | --- | --- | ||||||||||||||
| Interest expense, net | 20,213 | 22,457 | 23,066 | 20,441 | 19,661 | |||||||||||||||
| Income (loss) before cumulative effect | ||||||||||||||||||||
| of change in accounting principle | 564 | (4,809 | ) | 281 | 922 | (63,005 | )(7) | |||||||||||||
| Cumulative effect of change in | ||||||||||||||||||||
| accounting principle (net of tax | ||||||||||||||||||||
| benefit) | --- | 640 | (3) | --- | --- | --- | ||||||||||||||
| Net income (loss) | $ | 564 | $ | (4,169 | ) | $ | 281 | $ | 922 | $ | (63,005 | ) | ||||||||
| September 30, |
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| Balance Sheet Data: | 1999 | 2000 | ||||||||||||||||||