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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, 1996. (Fee
Required)
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No Fee Required)
Commission File Number: 333-5411
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HAYNES INTERNATIONAL, INC.
- ----------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1185400
- ------------------ ------------------------------
(State or other jurisdiction of (IRS Employer
Identification No.)
incorporation or organization)
1020 West Park Avenue, Kokomo, Indiana 46904-9013
- ------------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
(317) 456-6000
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(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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
by 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
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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 20, 1996 was 100.
Documents Incorporated by Reference: None
The Index to Exhibits begins on page 79 in the sequential numbering system.
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Total pages: 83
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TABLE OF CONTENTS
PART I Page
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Item 1. Business 3
Item 2. Properties 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for Registrant's Common Equity and Related 20
Stockholder Matters
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial 23
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements with Accountants on 62
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 63
Item 11. Executive Compensation 66
Item 12. Security of Ownership of Certain Beneficial Owners and 76
Management
Item 13. Certain Relationships and Related Transactions 79
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports 80
on Form 8-K
PART I
ITEM 1. BUSINESS
GENERAL
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 used for power generation, and 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 65% of the Company's net
revenues in fiscal 1996. 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. The Company derived approximately 25% of its
fiscal 1996 net revenues from products that are protected by United States
patents and derived an additional approximately 19% of its fiscal 1996 net
revenues from sales of products that are not patented, but for which the
Company has limited or no competition.
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. The percentages of the
Company's total product revenue and volume presented in this section 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 such 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. In fiscal 1996, HTA and CRA products accounted for
approximately 61% and 39%, respectively, of the Company's net revenues.
HTA products are used primarily in manufacturing components used in 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, power sources for offshore drilling
platforms, gas pipeline booster stations and emergency standby power stations.
CRA products are used in a variety of applications, such as chemical
processing, power plant emissions control, hazardous waste treatment and sour
gas production. 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 represents 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 certain of the Company's significant high temperature alloys:
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
high temperatures
Haynes 242 (1990) (2) Aero-seal rings High strength, low expansion
and good fabricability
Haynes HR-120 (1990) (2) Industrial heating-heat-treating baskets Good strength-to-cost ratio as
compared to competing alloys
Haynes 230 (1984) (2) Aero/LBGT-ducting Good combination of strength,
stability, oxidation resistance
and fabricability
Haynes 214 (1981) (2) Aero-honeycomb seals Good combination of oxidation
resistance and fabricability
among nickel-based alloys
Haynes 188 (1968) 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 Good ductility and high
exhaust pan strength at temperatures up to
1600EF
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 Light weight, high strength
components titanium-based alloy
- -------------
(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.
The higher volume HTA products, including Haynes 625, Haynes 718 and
Hastelloy X, are generally considered industry standards, especially in the
manufacture of aircraft and LBGT. These products have been used in such
applications since the 1950's and because of their widespread use have been
most subject to competitive pricing pressures. In fiscal 1996, sales of these
HTA products accounted for approximately 25% of the Company's net revenues.
The Company also produces and sells cobalt-based alloys introduced over
the last three decades, which are more highly specialized and less price
competitive than nickel-based alloys. Haynes 188 and Haynes 263 are the most
widely used of the Company's cobalt-based products and accounted for
approximately 10% of the Company's net revenues in fiscal 1996. Three of the
more recently introduced HTA products, Haynes 242, Haynes 230 and Haynes 214,
initially developed for the aerospace and LBGT markets, are still
patent-protected and together accounted for approximately 6% of the Company's
net revenues in fiscal 1996. These newer alloys are gaining acceptance for
applications in industrial heating and waste incineration.
Haynes HR-160 and Haynes HR-120 were introduced in fiscal 1990 and
targeted for sale in industrial heat treating applications. Haynes HR-160 is a
higher priced cobalt-based alloy designed for use when the need for long-term
performance outweighs initial cost considerations. Potential applications for
Haynes HR-160 include use in key components in waste incinerators, chemical
processing equipment, mineral processing kilns and fossil fuel energy plants.
Haynes HR-120 is a lower priced, iron-based alloy and is designed to replace
competitive alloys not manufactured by the Company that may be slightly lower
in price but also less effective. In fiscal 1996, these two alloys accounted
for approximately 1% of the Company's net revenues.
The Company also produces seamless titanium tubing for use as hydraulic
lines in airframes and as bicycle frames. During fiscal 1996, sales of these
products accounted for approximately 4% of the Company's net revenues.
[Remainder of page intentionally left blank.]
CORROSION RESISTANT ALLOYS. The following table sets forth information
with respect to certain of the Company's significant corrosion resistant
alloys:
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) (2) Oil and gas-sour gas tubulars Good resistance to down hole corrosive
environments
Hastelloy C-22 (1985) (2) 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 and gas-tanks, mixers, piping Broad resistance to many environments
- -------------
(1) "CPI" refers to the chemical processing industry; "FGD" refers to flue gas
desulfurization.
(2) Represents a patented product or a product with respect to which the Company
believes it has limited or no competition.
[Remainder of page intentionally left blank.]
During fiscal 1996, sales of the CRA alloys Hastelloy C-276, Hastelloy
C-22 and Hastelloy C-4 accounted for approximately 31% of the Company's net
revenues. Hastelloy C-276, introduced by the Company in 1968, is recognized as
a standard for corrosion protection in the chemical processing industry and is
also used extensively for FGD and oil and gas exploration and production
applications. Hastelloy C-22, a proprietary alloy of the Company, was
introduced in 1985 as an improvement on Hastelloy C-276 and is currently sold
to the chemical processing and FGD markets for essentially the same
applications as Hastelloy C-276. Hastelloy C-22 offers greater and more
versatile corrosion resistance and therefore has gained market share at the
expense of the non-proprietary Hastelloy C-276. Hastelloy C-22's improved
corrosion resistance has led to increased sales in semiconductor gas handling
systems, pharmaceutical manufacturing and waste treatment applications.
Hastelloy C-4 is specified in many chemical processing applications in Germany
and is sold almost exclusively to that market.
The Company also produces alloys for more specialized applications in the
chemical processing industry and other industries. For example, Hastelloy B-2
was introduced in 1970 for use in the manufacture of equipment utilized in the
production of acetic acid and ethyl benzine and is still sold almost
exclusively for those purposes. Due to its limited use and complex
manufacturing process, there is little competition for sales of this material.
Hastelloy B-3 was developed for the same applications and has greater ease in
fabrication. The Company expects Hastelloy B-3 to eventually replace Hastelloy
B-2. Hastelloy G-30 is used primarily in the production of super phosphoric
acid and fluorinated aromatics. Hastelloy G-50 has gained acceptance as a
lower priced alternative to Hastelloy C-276 for production of tubing for use
in sour gas wells. These more specialized products accounted for approximately
7% of the Company's net revenues in fiscal 1996.
The Company's patented Ultimet is used in a variety of industrial
applications that result in material degradation by "corrosion-wear." Ultimet
is designed for applications where conditions require resistance to corrosion
and wear and is currently being tested in spray nozzles, fan blades, filters,
bolts, rolls, pump and valve parts where these properties are critical.
Hastelloy D-205, introduced in 1993, is designed for use in handling hot
concentrated sulfuric acid and other highly corrosive substances.
The Company believes that its most recently introduced alloy, Hastelloy
C-2000, improves upon Hastelloy C-22. Hastelloy C-2000, which the Company
expects will be used extensively in the chemical processing industry, can be
used in both oxidizing and reducing environments.
END MARKETS
Aerospace. The Company has manufactured HTA products for the aerospace
market since it entered the market in the late 1930s, and has developed
numerous proprietary alloys for this market. The Company sold products to
approximately 500 customers in this segment in fiscal 1996, and no one
customer accounted for more than 2% of the Company's net revenues.
Customers in the aerospace markets 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. Unlike the FGD and oil and gas production industries,
where large,competitively bid projects can have a significant impact on demand
and prices, 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. This maintenance-based demand, while
potentially volatile, is generally less subject to wide fluctuations than
demand in the FGD and sour gas production industries.
Chemical Processing. The chemical processing industry segment represents a
large base of customers with diverse CRA applications. The Company sells its
CRA products to hundreds of chemical processing customers worldwide and no one
customer in this industry accounted for over 2% of the Company's net revenues
in fiscal 1996. 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 to this market. Sales of the Company's products in the chemical
processing industry tend to be more stable than the aerospace, FGD and oil and
gas markets. Increased concerns regarding the reliability of chemical
processing facilities, their potential environmental impact and safety hazards
to their personnel have led to an increased demand for more sophisticated
alloys, such as the Company's CRA products.
Land-Based Gas Turbines. The LBGT industry represents a growing market,
with demand for the Company's products driven by the construction of
cogeneration facilities and electric utilities operating electric generating
facilities. 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 are gaining
acceptance as clean,low-cost alternatives to fossil fuel-fired electric
generating facilities.
Flue Gas Desulfurization. The FGD industry has been driven by both
legislated and self-imposed standards for lowering emissions from fossil
fuel-fired electric generating facilities. In the United States, the Clean Air
Act mandates a two-phase program aimed at significantly reducing SO2 emissions
from electric generating facilities powered by fossil fuels by 2000. Canada
and its provinces have also set goals to reduce emissions of SO2 over the next
several years. Phase I of the Clean Air Act program affected approximately 100
steam-generating plants representing 261 operating units fueled by fossil
fuels,primarily coal. Of these 261 units, 25 units were retrofitted with FGD
systems while the balance opted mostly for switching to low sulfur coal to
achieve compliance. The market for FGD systems peaked in 1992 at approximately
$1.1 billion, and then dropped sharply in 1993 to a level of approximately
$174.0 million due to a curtailment of activity associated with Phase I. Phase
II compliance begins in 2000 and affects 785 generating plants with more than
2,100 operating units. Options available under the Clean Air Act to bring the
targeted facilities into compliance with Phase II SO2 emissions requirements
include fuel switching, clean coal technologies, purchase of SO2 allowances,
closure off facilities and off-gas scrubbing utilizing FGD technology.
Oil and Gas. The Company also sells its products for use in the oil and
gas industry, primarily in connection with sour gas production. Sour gas
contains extremely corrosive materials and is produced under high pressure,
necessitating the use of corrosion resistant materials. The demand for sour
gas tubulars is driven by the rate of development of sour gas fields. The
factors influencing the development of sour gas fields include the price of
natural gas and the need to commence drilling in order to protect leases that
have been purchased from either the federal or state governments. As a result,
competing oil companies often place orders for the Company's products at
approximately the same time, adding volatility to the market. This market was
very active in 1991, especially in the offshore sour gas fields in the Gulf of
Mexico, but demand for the Company's products declined significantly
thereafter. More recently there has been less drilling activity and more use
of lower performing alloys, which together have resulted in intense price
competition. Demand for the Company's products in the oil and gas industry is
tied to the global demand for natural gas.
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 products include waste incineration, industrial heat treating,
automotive and instrumentation. Other industries to which the Company sells
its CRA products include automotive, medical and instrumentation. Demand in
these markets for many of the Company's lower volume proprietary alloys has
grown in recent periods. For example, 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.
[Remainder of page intentionally left blank.]
SALES AND MARKETING
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 products
in appropriate applications,enabling the Company's products to be specified
for use in the production of customers' products. The market development
engineers, five of whom have doctoral degrees in metallurgy, are assisted by
the research and development staff in directing the sales force to new
opportunities. The Company believes its combination of direct sales, technical
marketing and research and development customer support provides an advantage
over other manufacturers in the high performance 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,
three wholly-owned European subsidiaries and sales agents serving the Asia
Pacific Rim. Approximately 75% of the Company's net revenues in fiscal 1996
was generated by the Company's direct sales organization. The remaining 25% of
the Company's fiscal 1996 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 25 years. The following table
sets forth the approximate percentage of the Company's fiscal 1996 net
revenues generated through each of the Company's distribution channels.
DOMESTIC FOREIGN TOTAL
--------------- ------------- ----------
Company sales office/direct . . . . . 34% 8% 42%
Company-owned service centers . . . . 13 20 33
Independent distributors/sales agents 17 8 25
---------------- -------------- -----------
Total . . . . . . . . . . . . . . 64% 36% 100%
================ ============== ===========
The top twenty customers not affiliated with the Company accounted for
approximately 41% of the Company's net revenues in fiscal 1996. Sales to
Spectrum Metals, Inc. and Rolled Alloys, Inc., which are affiliated with each
other, accounted for an aggregate of 12% of the Company's net revenues in
fiscal 1996. No other customer of the Company accounted for more than 10% of
the Company's net revenues in fiscal 1996.
The Company's foreign and export sales were approximately $55.7
million,$79.6 million and $84.3 million for fiscal 1994, 1995 and 1996,
respectively. Additional information concerning foreign operations and export
sales is set forth in Note 12 of the Notes to Consolidated Financial
Statements appearing elsewhere herein.
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 greater force be applied
when hot or cold working and are less susceptible to reduction or thinning
when rolling or forging, resulting in more cycles of rolling, annealing and
pickling than 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, tubular, billet, bar and wire forms, which represented 48%, 23%,
12%, 12%, 3% and 2%, respectively, of total volume sold in fiscal 1996 (after
giving effect to the conversion of billet to bar by the Company's
U.K.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. 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 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.
BACKLOG
As of September 30, 1996, the Company's backlog orders aggregated
approximately $53.7 million, compared to approximately $49.9 million at
September 30, 1995,and approximately $41.5 million at September 30, 1994. The
increase in backlog orders is primarily due to an increase in orders for
chemical processing and aerospace products worldwide during fiscal 1996.
Substantially all orders in the backlog at September 30, 1996 are expected to
be shipped within the twelve months beginning October 1, 1996. Due to the
cyclical nature of order entry experienced by the Company, there can be no
assurance that order entry will continue at current levels. The historical
and current backlog amounts shown in the following table are also indicative
of relative demand over the past few years.
HAYNES BACKLOG
AT FISCAL QUARTER END
(IN MILLIONS)
1993 1994 1995 1996
----- ----- ----- -----
1st $41.5 $29.5 $49.7 $61.2
- --- ----- ----- ----- -----
2nd $38.9 $35.5 $64.8 $61.9
----- ----- ----- -----
3rd $31.5 $38.0 $55.8 $57.5
----- ----- ----- -----
4th $31.1 $41.5 $49.9 $53.7
- --- ----- ----- ----- -----
RAW MATERIALS
Nickel is the primary material used in the Company's alloys. Each pound of
alloy contains, on average, 0.48 pounds of nickel. Other raw materials include
cobalt, chromium, molybdenum and tungsten. Melt materials consist of virgin
raw material, purchased scrap and internally produced scrap. The significant
sources of cobalt are the countries of Zambia, Zaire and Russia; all other raw
materials used by the Company are available from a number of alternative
sources.
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. These arrangements involve a variety of
pricing mechanisms, but the Company generally can establish selling prices
with reference to known costs of materials, thereby reducing the risk
associated with changes in the cost of raw materials. The Company maintains a
policy of pricing its products at the time of order placement. As a result,
rapidly escalating raw material costs during the period between the time the
Company receives an order and the time the Company purchases the raw materials
used to fill such order, which has averaged approximately 30 days in recent
months, can negatively affect profitability even though the high performance
alloy industry has generally been able to pass raw material price increases
through to its customers.
Raw material costs account for a significant portion of the Company's cost
of sales. The prices of the Company's products are based in part on the cost
of raw materials, a significant portion of which is nickel. The Company covers
approximately half its open market exposure to nickel price changes through
hedging activities through the London Metals Exchange. The following table
sets forth the average per pound prices for nickel as reported by the London
Metals Exchange for the fiscal years indicated.
YEAR ENDED
SEPTEMBER 30, AVERAGE PRICE
- ---------------------------------------------------------- -----------------
1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.12
1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.77
1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.29
1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.21
1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.48
1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.53
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.54
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.66
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.56
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, 1996, the
research and technical development staff consisted of 37 persons, 15 of whom
have engineering or science degrees, including six with doctoral degrees, with
the majority of degrees in the field of metallurgical engineering.
Research and technical development costs relate to efforts to develop new
proprietary alloys, to improve current or develop new manufacturing methods,
to provide technical service to customers, to maintain quality assurance
methods and to provide metallurgical training to engineer and non-engineer
employees. The Company spent approximately $3.6 million, $3.0 million and
$3.4 million for research and technical development activities for fiscal
1994, 1995 and 1996, respectively.
During fiscal 1996, exploratory alloy development projects were focused
on new CRA products for hydrofluoric and phosphoric acid service. Engineering
projects include manufacturing process development, welding development and
application support for two large volume projects involving the LBGT and steel
making industries. The Company is also developing a computerized database
management system to better manage its corrosion, high temperature and
mechanical property data.
Over the last seven years, the Company's technical programs have yielded
seven new proprietary alloys and seven United States patents, with an
additional three United States patent applications pending. The Company
currently maintains a total of 42 United States patents and approximately 147
foreign counterpart patents targeted at countries with significant or
potential markets for the patented products. In fiscal 1996, approximately 25%
of the Company's net revenues was derived from the sale of patented products
and an additional approximately 46% was derived from the sale of products for
which patents formerly held by the Company had expired. 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 alloys considered by management to be of future commercial
significance, Ultimet, Hastelloy C-22, Haynes 230, Hastelloy G-30 and
Hastelloy G-50, are protected by United States patents that continue until the
years 2009, 2008, 2002, 2001 and 1998, 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 Inco Alloys International, Inc., a subsidiary of
Inco Limited, Allegheny Ludlum Corporation and Krupp VDM GmbH. Prior to fiscal
1994,this competition, coupled with declining demand in several of the
Company's key markets, led to significant erosion in the price for certain of
the Company's products. 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.
EMPLOYEES
As of September 30, 1996, the Company had approximately 931 employees. All
eligible hourly employees at the Kokomo plant are covered by a collective
bargaining agreement with the United Steelworkers of America ("USWA") which
was ratified on June 11, 1996 and which expires on June 11, 1999. As of
September 30, 1996, 474 employees of the Kokomo facility were covered by the
collective bargaining agreement. The Company has not experienced a strike at
the Kokomo plant since 1967. None of the employees of the Company's Arcadia or
Openshaw plants are represented by a labor union. Management considers its
employee relations in each of the facilities to be satisfactory.
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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 $1.3 million for fiscal 1996 and are
expected to be approximately $3.2 million for fiscal year 1997 through fiscal
year 1998. 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 $50,000,
for alleged violations relating to environmental matters, including the
handling and storage of hazardous wastes, and record keeping requirements
relating to, and handling of, polychlorinated biphenyls ("PCBs"). Although the
Company does not believe that similar regulatory or enforcement actions would
have a material impact on its operations, there can be no assurance that
violations will not be alleged or will not result in the assessment of
additional penalties in the future.
The Company has received permits from IDEM and 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. The closure project, essentially
complete, entailed installation of a clay liner under the disposal areas, a
leachate collection system and a clay cap and revegetation of the site.
Construction was completed in May 1994 and a closure certification has been
filed with IDEM. Thereafter, the Company will be 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.
As a condition of these closure and 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. On April 8, 1996,
IDEM issued a Notice of Violation relating to the requirements for the former
disposal areas. An Agreed Order dated July 2, 1996 was entered into between
the Company and the IDEM in resolution of this Notice of Violation. The
Company paid a civil penalty of $15,000 provided for by the Agreed Order.
The Company has completed an investigation, pursuant to a work plan
approved by the EPA, of eight specifically identified solid waste management
units at the Kokomo facility. Results of this investigation have been filed
with the EPA. Based on the results of this investigation compared to
Indiana's Tier II clean-up goals, the Company believes that no further actions
will be necessary. Until the EPA reviews the results, the Company is unable
to determine whether further corrective action will be required or, if
required, whether it will have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
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 wastes, 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 CERCLA, and state counterparts. CERCLA imposes strict,
joint and several liability for investigatory and cleanup costs upon waste
generators, site owners and operators and other "potentially responsible
parties" ("PRPs"). Based on its prior shipment of waste oil contaminated with
PCBs, the Company is one of approximately 700 PRPs in connection with the
cleanup of PCB contamination at the Rose Chemical site in Missouri. The
Company has contributed over $130,000 toward the private cleanup currently
being implemented by a group of many of these PRPs, approximately $52,000 of
which has been refunded, and does not anticipate that further significant
expenditures by the Company will be required in connection with this site.
Based on its prior shipment of certain hydraulic fluid, the Company is one of
approximately 300 PRPs in connection with the proposed cleanup of the
Fisher-Calo site in Indiana. The PRPs have negotiated a Consent Decree
implementing a remedial design/remedial action plan ("RD/RA") for the site
with the EPA. The Company has paid approximately $138,000 as its share of the
total estimated cost of the RD/RA under the Consent Decree. Based on
information available to the Company concerning the status of the cleanup
efforts at the Rose Chemical and Fisher-Calo sites, the large number of PRPs
at each site and the prior payments made by the Company in connection with
these sites, management does not expect the Company's involvement in these
sites to have a material adverse effect on the financial condition, results of
operations or liquidity of the Company. The Company may have generated
hazardous wastes 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 additional 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 or liquidity.
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 to 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 believes it is
meeting such effluent limitations. 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 facilities, and the products provided at each
facility, are as follows:
Kokomo, Indiana--all product forms, other than tubular goods.
Arcadia, Louisiana--welded and seamless tubular goods.
Openshaw, England--bar and billet for the European market.
The Kokomo plant, the primary production facility, is located on
approximately 236 acres of industrial property and includes over one million
square feet of building space. There are three sites consisting of ahead
quarters and research lab; melting and annealing furnaces, forge press and
several hot mills; and the four-high 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 alloy pipe and tubing and
purchases extruded tube hollows to produce seamless titanium tubing.
Manufacturing processes at Arcadia require cold pilger mills, weld mills,
drawbenches, annealing furnaces and pickling facilities.
The United States facilities are subject to a mortgage which secures the
Company's obligations under the Company's Revolving Credit Facility. See Note
6 of 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.
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 demand.
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ITEM 3. LEGAL PROCEEDINGS
In Leslie Baxter, et. al. vs. Haynes International, Inc. and Haynes Group
Insurance Plan, filed July 6, 1995 in the U.S. District Court, Southern
District of Indiana, Indianapolis Division, retirees and the surviving spouse
of a retiree filed suit on behalf of themselves and similarly situated
retirees and surviving spouses for restoration of the retiree health insurance
to benefit levels prevailing before the reduction of those benefit levels on
January 1, 1995 and to maintain the restored insurance benefit levels for the
lives of the covered retirees and their surviving spouses. The suit also seeks
judgment in damages for the benefits that have been lost as a result of the
January 1, 1995 reductions in benefit levels and for the medical expenses,
premiums paid and other damages incurred, including reasonable attorneys' fees
and costs of maintaining the suit. This lawsuit is in the very early stages of
discovery, and the Company is not able at this time to assess the likelihood
that or the extent to which this lawsuit could have an impact on the Company's
financial position or operations. The Company intends to vigorously defend
against the claims.
The Company recently completed an examination by the Internal Revenue
Service ("IRS") for the five taxable years ended September 30, 1993 (the
"Years in Issue"). The IRS has proposed to disallow aggregate deductions
claimed by the Company during the Years in Issue in an amount aggregating
approximately $5.5 million, relating to the amortization of certain loan fees
totaling $10.4 million incurred in connection with the acquisition of the
Company by Morgan, Lewis, Githens & Ahn ("MLGA") and the management of the
Company in August 1989 ("1989 Acquisition"). The Company claimed similar
deductions in 1994 through 1996. The loan fees are being amortized over a
10-year period ending in 1999. In addition to proposed disallowance of
deductions claimed during the Years in Issue, the IRS' position, if sustained,
would prohibit amortization deductions for the years following the Years in
Issue in an aggregate amount of approximately $4.9 million, and the amount of
available net operating loss carryforwards would be reduced accordingly. The
Company has formally protested the disallowance of these deductions. On
August 28, 1996, the Company met with officials from the IRS Appeals Office
and received a favorable verbal confirmation that the deductions would be
allowed as a result of the recent passage of the Small Business Job Protection
Act of 1996. The Company is awaiting written confirmation of the IRS'
position.
The Company also is involved in other routine litigation incidental to the
conduct of its business, none of which is believed by management to be
material.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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 December 26, 1996 there was one holder of the common stock of the
Company.
There have been no cash dividends declared on the common stock for the
two fiscal years ended September 30, 1996.
The payment of dividends is limited by terms of certain debt agreements
to which the Company is a party. See Note 6 to the Consolidated Financial
Statements of the Company included in this Annual Report in response to Item
8.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT RATIO AND OPERATING 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, 1992, 1993, 1994, 1995 and 1996 are derived from the
audited consolidated financial statements of the Company.
These selected financial data are not covered by the auditor's report and
are qualified in their entirety by reference to, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and the related notes thereto included elsewhere in this Form 10-K.
Year Ended September 30,
Statement of Operations Data:
1992 1993 1994 1995 1996
------------ ----------- ------------ --------- -----------
Net revenues $ 169,344 $ 162,454 $ 150,578 $201,933 $ 226,402
Cost of sales 152,911(2) 137,102 171,957(3) 167,196 181,173
Selling and administrative expenses 19,641(2) 14,569 15,039 15,475 19,966
Research and technical expenses 3,894 3,603 3,630 3,049 3,411
Operating income (loss) (7,102) 7,180 (40,048) 16,213 21,852
Other cost, net 882(2) 400 816 1,767 590
Interest expense, net 20,107 18,497 19,582 19,904 21,102
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle (16,771) (8,275) (60,866) (6,771) 160
Extraordinary item, net of tax benefit (7,256)(9)
Cumulative effect of change in accounting
principle (net of tax benefit) -- -- (79,630)(4) -- --
------------ ----------- ------------ --------- -----------
Net loss (16,771) (8,275) (140,496) (6,771) (9,036)
Year Ended September 30,
Balance Sheet Data: 1992 1993 1994 1995 1996
----------- ---------- ---------- ---------- ----------
Working capital (5) $ 39,344 $ 72,131 $ 60,182 $ 62,616 $ 57,307
Property, plant and equipment, net 60,700 51,676 43,119 36,863 31,157
Total assets 214,585 194,200 145,723 151,316 161,489
Total debt 142,194 140,180 148,141 152,477 168,238
Accrued post-retirement benefits -- -- 94,148 94,830 95,813
Stockholder's equity (Capital deficit) 35,162 22,938 (116,029) (121,909) (130,341)
September 30,
Other Financial Data: 1992 1993 1994 1995 1996
--------- ----------- --------- -------- --------
Depreciation and amortization (6) $ 16,484 $ 13,766 $ 51,555 $ 9,000 $ 9,042
Capital expenditures 821 56 771 1,934 2,092
EBITDA (7) 8,500 20,546 10,691 23,446 32,141
Ratio of EBITDA to interest expense 0.42x 1.11x 0.55x 1.18x 1.52x
Ratio of earnings before fixed
charges to fixed charges (8) -- -- -- -- 1.01x
Net cash provided from (used in) operations $ 19,850 $ 5,711 $(12,801) $(2,883) $(5,343)
Net cash provided from (used in) investment activities (757) 318 746 (1,895) (2,025)
Net cash provided from (used in) financing
activities (16,440) (2,014) 7,102 3,912 7,116
(1) The Company was acquired by MLGA and the management of the Company in August 1989. For financial
statement purposes, the 1989 Acquisition was accounted for as a purchase transaction effective September 1,
1989; accordingly, inventories were adjusted to reflect estimated fair values at that date. This adjustment to
inventories was amortized to cost of sales as inventories were reduced from the base layer. Non-cash charges
for this adjustment included in cost of sales were $5,210, $3,686 and $488 for fiscal 1992, 1993 and 1994,
respectively; no charges have been recognized since fiscal 1994.
(2) Includes costs related to the implementation of certain cost reduction measures, the implementation of
a just-in-time and total quality management program and the renegotiation of the terms of the 1989 Acquisition
credit agreement. In fiscal 1992, these charges were reflected in cost of sales, selling and administrative
expenses, and other cost, net in the amounts of $6,937, $1,156 and $603, respectively.
(3) Reflects the write-off of $37,117 of goodwill created in connection with the 1989 Acquisition
remaining at September 30, 1994. See Note 10 of the Notes to Consolidated Financial Statements.
(4) During fiscal 1994, the Company adopted SFAS 106. The Company elected to immediately recognize the
transition obligation for benefits earned as of October 1, 1993, resulting in a non-cash charge of $79,630,
net of a $10,580 tax benefit, representing the cumulative effect of the change in accounting principles. The
tax benefit recognized was limited to then existing net deferred tax liabilities. See Note 8 of the Notes to
Consolidated Financial Statements.
(5) Reflects the excess of current assets over historical and adjusted current liabilities as set forth in
the Consolidated Financial Statements.
(6) Reflects (i) depreciation and amortization as presented in the Company's Consolidated Statement of
Cash Flows and set forth in note (7) below, plus (ii) other non-cash charges, including the amortization of
prepaid pension costs (which is included in the change in other asset category) and the amortization of
inventory costs as described in note (1) above, minus amortization of debt issuance costs, all as set forth in
note (7) below.
(7) Represents for the relevant period net income plus expenses recognized for interest, taxes,
depreciation, amortization and other non-cash charges (excluding any non-cash charges which require accrual or
reserve for cash charges for any future period and excluding the refinancing costs set forth in Note 9, part
(a) and (b) below for fiscal 1996). In addition to net interest expense as listed in the table, the following
charges are added to net income to calculate EBITDA:
1992 1993 1994 1995 1996
--------- -------- -------- -------- --------
Provision for (benefit from) income taxes $(11,320) $(3,442) $ 420 $ 1,313 $ 1,940
Depreciation 8,752 8,650 8,208 8,188 7,751
Amortization:
Debt issuance costs 1,333 2,120 1,680 1,444 4,698
Goodwill 1,490 1,487 38,607 -- --
Inventory (see note (1) above) 5,210 3,686 488 -- --
Prepaid pension costs 1,032 (57) 314 130 308
--------- -------- -------- -------- --------
9,065 7,236 41,089 1,574 5,006
SFAS 106-Post-retirement -- -- 3,938 682 983
Amortization of debt issuance costs (1,333) (2,120) (1,680) (1,444) (4,698)
--------- -------- -------- -------- --------
Total $ 5,164 $10,324 $51,975 $10,313 $10,982
- ------------------------------------------ ========= ======== ======== ======== ========
EBITDA should not be construed as a substitute for income from operations, net earnings
(loss) or cash flows from operating activities determined in accordance with Generally
Accepted Accounting Principles ("GAAP"). The Company has included EBITDA because it believes
it is commonly used by certain investors and analysts to analyze and compare companies on the
basis of operating performance, leverage and liquidity and to determine a company's ability
to service debt. Because EBITDA is not calculated in the same manner by all entities, EBITDA
as calculated by the Company may not necessarily be comparable to that of the Company's
competitors or of other entities.
(8) For purposes of these computations, earnings before fixed charges consist of income
(loss) before provision for (benefit from) income taxes and cumulative effect of change in
accounting principle plus fixed charges. Fixed charges consist of interest on debt and
amortization of debt issuance costs. Earnings were insufficient to cover fixed charges by
$28,091, $11,717, $60,446, and $5,458 for fiscal 1992, 1993, 1994 and 1995, respectively.
(9) During fiscal 1996, the Company successfully refinanced its debt with the issuance of
$140,000 Senior Notes due 2004 and an amendment to its Revolving Credit Facility with
Congress Financial Corporation ("Congress"). As a result of this refinancing effort, certain
non-recurring charges were recorded as follows: (a) $7,256 was recorded as the aggregate of
extraordinary items which represents the extraordinary loss on the redemption of the
Company's 113% Senior Secured Notes due 1998 and 132% Senior Subordinated Notes due 1999
(collectively, the "Old Notes") and is comprised of $3,911 of prepayment penalties incurred
in connection with the redemption and $3,345 of deferred debt issuance costs which were
written off upon consummation of the redemption; (b) $1,837 of Selling and Administrative
Expense which represents costs incurred with a postponed initial public offering of the
Company's common stock; and (c) $924 of Interest Expense which represents the net interest
expense (approximately $1,500 interest expense, less approximately $600 interest income)
incurred during the period between the issuance of the Senior Notes and the redemption of the
Old Notes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPANY BACKGROUND
The Company sells high temperature alloys and corrosion resistant alloys,
which accounted for 61% and 39%, respectively, of the Company's net revenues
in fiscal 1996. Based on available industry data, the Company believes that it
is one of three principal producers of high performance alloys in flat product
form, which includes sheet, coil and plate forms, and also produces its alloys
in round and tubular forms. In fiscal 1996, flat products accounted for 72% of
shipments and 65% of net revenues.
The Company's annual production capacity varies depending upon the mix of
alloys, forms, product sizes, gauges and order sizes. Based on the current
product mix, the Company estimates that its annual production capacity, which
has been unchanged for the past five years, is approximately 20.0 million
pounds. As a result of changes in the Company's primary markets, sales volume
has ranged from a high of 16.4 million pounds in fiscal 1996, to a low of 13.3
million pounds in fiscal 1994. The Company is not currently capacity
constrained, but has planned capital expenditures of approximately $17.6
million from fiscal 1997 through fiscal 1998, one of the principal benefits of
which will be to increase annual capacity by approximately 25% to
approximately 25.0 million pounds. See "--Liquidity and Capital Resources."
The Company sells its products primarily through its direct sales
organization, which includes four domestic Company-owned service centers,
three wholly-owned European subsidiaries and sales agents serving the Pacific
Rim who operate on a commission basis. Approximately 75% of the Company's net
revenues in fiscal 1996 was generated by the Company's direct sales
organization. The remaining 25% of the Company's fiscal 1996 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
25 years.
The proximity of production facilities to export customers is not a
significant competitive factor, since freight and duty costs per pound are
minor in comparison to the selling price per pound of high performance alloy
products. In fiscal 1996, sales to customers outside the United States
accounted for approximately 36% of the Company's net revenues. Sales of
domestically-produced products accounted for approximately 38% of the
Company's foreign sales in fiscal 1996, and the balance of foreign sales was
derived from sales of products produced overseas.
The high performance alloy industry is characterized by high capital
investment and high fixed costs, and profitability is therefore very sensitive
to changes in volume. The cost of raw materials is the primary variable cost
in the high performance alloy manufacturing process and represents
approximately one-half of total manufacturing costs. Other manufacturing
costs, such as labor, energy, maintenance and supplies, often thought of as
variable, have a significant fixed element. Accordingly, relatively small
changes in volume can result in significant variations in earnings. The
Company's results in fiscal 1994 reflect this sensitivity. While volume
declined by 13% from fiscal 1993 to fiscal 1994, primarily due to declines in
demand for the Company's products in the oil and gas and FGD markets, EBITDA
calculated as described in Note (7) to Selected Consolidated Financial Data,
declined 48%, despite a 7% increase in the average selling price per pound of
the Company's products.
In fiscal 1996, proprietary products represented approximately 25% of the
Company's net revenues. In addition to these patent-protected alloys, several
other alloys manufactured by the Company have little or no direct competition
because they are difficult to produce and require relatively small production
runs to satisfy demand. In fiscal 1996, these other alloys represented
approximately 19% of the Company's net revenues.
Order to shipment lead times can be a competitive factor as well as an
indication of the strength of the demand for high performance alloys. The
Company's current average manufacturing lead time for flat products is
approximately 10 to 12 weeks, although due to current backlog levels, lead
times from order to shipment are approximately 14 to 18 weeks.
OVERVIEW OF MARKETS
A breakdown of sales, shipments and average selling prices to the markets
served by the Company for the last five fiscal years is shown in the following
table:
1992 1992 1993 1993 1994 1994 1995 1995 1996
SALES (DOLLARS % of % of % of Total % of Total
IN MILLIONS) Amount Total Amount Total Amount Amount Amount
--------- ------- --------- ------- --------- ------- --------- ------- ---------
Aerospace. . . . . . $ 45.7 27.0% $ 46.7 28.7% $ 46.4 30.8% $ 66.4 32.9% $ 87.1
Chemical processing 52.8 31.2 52.2 32.1 50.1 33.3 72.2 35.8 83.0
Land-based gas 10.7 6.3 12.6 7.8 17.0 11.3 14.3 7.1 16.4
turbines
Flue gas 11.4 6.7 17.4 10.7 10.2 6.7 6.6 3.3 8.2
desulfurization
Oil and gas 18.8 11.1 11.0 6.8 4.2 2.8 4.5 2.2 4.3
Other markets 28.0 16.6 20.5 12.6 20.6 13.7 34.6 17.1 23.8
------ ------ ------ ------ ------ ------ ------ ------ ------
Total product 167.4 98.9 160.4 98.7 148.5 98.6 198.6 98.4 222.8
Other revenue(1) 1.9 1.1 2.1 1.3 2.1 1.4 3.3 1.6 3.6
Net revenues $ 169.3 100.0% $ 162.5 100.0% $ 150.6 100.0% $ 201.9 100.0% $ 226.4
U.S. $ 116.4 $ 109.1 $ 94.8 $ 122.3 $ 142.0
Foreign $ 52.9 $ 53.4 $ 55.8 $ 79.6 $ 84.4
SHIPMENTS BY OF
MARKET (MILLIONS
POUNDS)
Aerospace 3.4 24.5% 3.3 21.6% 3.3 24.8% 4.7 28.8% 5.8
Chemical processing 4.6 33.1 5.2 34.0 5.0 37.6 6.1 37.4 6.6
Land-based gas
turbines 1.3 9.4 1.2 7.8 1.6 12.0 1.3 8.0 1.4
Flue gas
desulfurization 1.6 11.4 2.9 19.0 1.5 11.3 0.9 5.5 0.9
Oil and gas 1.3 9.4 1.1 7.2 0.4 3.0 0.5 3.1 0.3
Other markets 1.7 12.2 1.6 10.4 1.5 11.3 2.8 17.2 1.4
------ ------ ------ ------ ------ ------ ------ ------ ------
Total shipments 13.9 100.0% 15.3 100.0% 13.3 100.0% 16.3 100.0% 16.4
AVERAGE SELLING
PRICE PER POUND
Aerospace. . . . . . $ 13.44 $ 14.15 $ 14.06 $ 14.13 $ 15.02
Chemical processing 11.48 10.04 10.02 11.84 12.58
Land-based gas
turbines 8.23 10.50 10.63 11.00 11.71
Flue gas
desulfurization 7.13 6.00 6.80 7.33 9.11
Oil and gas 14.46 10.00 10.50 9.00 14.33
Other markets 16.47 12.81 13.73 12.36 17.00
All markets 12.04 10.48 11.17 12.18 13.59
1996
SALES (DOLLARS % of
IN MILLIONS) Total
-------
Aerospace. . . . . . 38.5%
Chemical processing 36.7
Land-based gas 7.2
turbines
Flue gas 3.6
desulfurization
Oil and gas 1.9
Other markets 10.5
------
Total product 98.4
Other revenue(1) 1.6
Net revenues 100.0%
U.S.
Foreign
SHIPMENTS BY OF
MARKET (MILLIONS
POUNDS)
Aerospace 35.4%
Chemical processing 40.2
Land-based gas
turbines 8.5
Flue gas
desulfurization 5.5
Oil and gas 1.8
Other markets 8.6
------
Total shipments 100.0%
AVERAGE SELLING
PRICE PER POUND
Aerospace
Chemical processing
Land-based gas
turbines
Flue gas
desulfurization
Oil and gas
Other markets
All markets
- --------------------
(1) Includes toll conversion and royalty income.
Fluctuations in net revenues and volume from fiscal 1992 through fiscal
1996 are a direct result of significant changes in each of the Company's major
markets.
Aerospace. Demand for the Company's products in the aerospace industry is
driven by orders for new jet engines as well as requirements for spare parts
and replacement parts for jet engines. Demand for the Company's aerospace
products declined significantly from fiscal 1991 to fiscal 1992, as order
rates for commercial aircraft fell below delivery rates due to cancellations
and deferrals of previously placed orders. The Company believes that, as a
result of these cancellations and deferrals, engine manufacturers and their
fabricators and suppliers were caught with excess inventories. The draw down
of these inventories, and the implementation of just-in-time delivery
requirements by many jet engine manufacturers, exacerbated the decline
experienced by suppliers to these manufacturers, including the Company. Demand
for products used in manufacturing military aircraft and engines also dropped
during this period as domestic defense spending declined following the Persian
Gulf War. These conditions persisted through fiscal 1994.
The Company began to see a recovery in the demand for its aerospace
products at the beginning of fiscal 1995. Reflecting increased aircraft
production and maintenance, the Company's net revenues from sales to the
aerospace industry in 1996 increased 31.2% over the comparable period in
fiscal 1995.
Chemical Processing. Demand for the Company's products in the chemical
processing industry is driven primarily by maintenance requirements of
chemical processing facilities, and tends to track overall economic activity
due to the diverse nature of chemical products and their applications. Major
projects involving the expansion of existing chemical processing facilities or
the construction of new facilities periodically increase demand for CRA
products in the industry. Demand for the Company's products used in the
chemical processing industry declined in fiscal 1991 and fiscal 1992, but
began to increase in late fiscal 1993. In fiscal 1996, sales of the Company's
products to the chemical processing industry reached a five-year high, and the
Company believes that the outlook for sales of the Company's products to the
chemical processing industry continues to improve. Concerns regarding the
reliability of chemical processing facilities, their potential impact on the
environment and the safety of their personnel as well as the need for higher
throughput should support demand for more sophisticated alloys, such as the
Company's CRA products.
The Company expects that growth in the chemical processing industry will
result from volume increases and selective price increases as a result of
increased demand. In addition, the Company's key proprietary CRA products, the
recently introduced Hastelloy C-2000, which the Company believes provides
better overall corrosion resistance and versatility than any other readily
available CRA product, and Hastelloy C-22, are expected to contribute to the
Company's growth in this market, although there can be no assurance that this
will be the case.
Land-Based Gas Turbines. The Company leveraged its metallurgical expertise
to develop LBGT applications for alloys it had historically sold to the
aerospace industry. Electric generating facilities powered by land-based gas
turbines are less expensive to construct and operate and produce fewer sulfur
dioxide ("SO2") emissions than traditional fossil fuel-fired facilities. The
Company believes these factors are primarily responsible for creating demand
for its products in the LBGT industry. Prior to the enactment of the Clean Air
Act of 1990, as amended (the "Clean Air Act"), land-based gas turbines were
used primarily to satisfy peak power requirements. However, legislated
standards for lowering emissions from fossil fuel-fired electric utilities and
cogeneration facilities, such as the Clean Air Act, together with self-imposed
standards, contributed to increased demand for some of the Company's products
in the early 1990s, when Phase I of the Clean Air Act was being implemented.
The Company believes that land-based gas turbines are gaining acceptance as a
clean, low-cost alternative to fossil fuel-fired electric generating
facilities. The Company believes that compliance with Phase II of the Clean
Air Act, which begins in 2000, will further contribute to demand for its
products.
Flue Gas Desulfurization. The Clean Air Act is the primary factor
determining the demand for high performance alloys in the FGD industry. FGD
projects have been undertaken by electric utilities and cogeneration
facilities powered by fossil fuels in the United States, Europe and the
Pacific Rim in response to concerns over emissions. FGD projects are generally
highly visible and as a result are highly price competitive, especially when
demand for high performance alloys in other major markets is weak. The
Company anticipates increasing sales opportunities in the FGD market as
deadlines for Phase II of the Clean Air Act approach in 2000.
Oil and Gas. The Company's participation in the oil and gas industry
consists primarily of providing tubular goods for sour gas production. Demand
for the Company's products in this industry is driven by the rate of
development of sour gas fields, which in turn is driven by the price of
natural gas and the need to commence production in order to protect leases.
This market was very active in fiscal 1991, especially in the offshore sour
gas fields in the Gulf of Mexico, but demand for the Company's sour gas
tubular products has declined significantly since that time. Due to the
volatility of the oil and gas industry, the Company has chosen not to invest
in certain manufacturing equipment necessary to perform certain intermediate
steps of the manufacturing process for these tubular products. However, the
Company can outsource the necessary processing steps in the manufacture of
these tubulars when prices rise to attractive levels. The Company intends to
selectively take advantage of future opportunities as they arise, but plans no
capital expenditures to increase its internal capabilities in this area.
Other Markets. In addition to the industries described above, the Company
also targets a variety of other markets. Representative industries served in
fiscal 1996 include waste incineration, industrial heat treating, automotive,
medical and instrumentation. Many of the Company's lower volume proprietary
alloys are experiencing growing demand in these other markets. 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.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, consolidated
statements of operations data as a percentage of net revenues:
YEAR ENDED September 30,
----------- ---------- --------
1994 1995 1996
----------- ---------- --------
Net revenues 100.0% 100.0% 100.0%
Cost of sales 89.6(1) 82.8 80.0
Selling and administrative expenses 10.0 7.7 8.8(4)
Research and technical expenses 2.4 1.5 1.5
Other cost, net 0.5 0.9 0.3
Interest expense 13.2 10.0 9.7(4)
Interest income (0.2) (0.2) (0.4)(4)
Goodwill write-off 24.6(2) -- --
Income (loss) before provision for income taxes, extraordinary
items, and cumulative effect of change in accounting principle (40.1) (2.7) 0.1
Provision for (benefit from) income taxes 0.3 0.6 0.9
Extraordinary item, net of tax benefit (3.2)(4)
Cumulative effect of change in accounting principle, (net of tax
benefit) (52.9)(3) -- --
Net loss (93.3)% (3.3)% (4.0)%
- ----------------------------------------------------------------- =========== ========== ========
- -----------------------------
(1) For financial statement purposes, the 1989 Acquisition was accounted for as a purchase
transaction effective September 1, 1989; accordingly, inventories were adjusted to reflect estimated
fair values at that date. This adjustment to inventories was amortized to cost of sales as
inventories were reduced from the base layer. Non-cash charges for this adjustment included in cost
of sales were approximately $488,000 for fiscal 1994 and no charges have been recognized since
fiscal 1994.
(2) Reflects the write-off of $37.1 million of goodwill created in connection with the 1989
Acquisition remaining at September 30, 1994. See Note 10 of the Notes to Consolidated Financial
Statements.
(3) During fiscal 1994, the Company adopted SFAS 106. The Company elected to immediately
recognize the transition obligation for benefits earned as of October 1, 1993, resulting in a
non-cash charge of approximately $79.6 million net of an approximately $10.6 million tax benefit,
representing the cumulative effect of the change in accounting principle. The tax benefit recognized
was limited to then existing net deferred tax liabilities. See Note 8 of the Notes to Consolidated
Financial Statements.
(4) During 1996, the Company refinanced its debt and certain non-recurring charges were recorded
as a result of this refinancing effort as follows: (a) approximately $7.3 million was recorded as
the aggregate of extraordinary items which represents the extraordinary loss on the redemption of
the Senior Secured Notes and Senior Subordinated Notes and is comprised of approximately $3.9
million of prepayment penalties incurred in connection with the redemption and approximately $3.3
million of deferred debt issuance costs which were written off upon consummation of the redemption;
(b) approximately $1.8 million of Selling and Administrative Expense which represents costs incurred
with a postponed initial public offering of the Company's common stock; and (c) $924,000 of Interest
Expense which represents the net interest expense (approximately $1.5 million interest expense less
approximately $600,000 interest income) incurred during the period between the issuance of the
Senior Notes and the redemption of the Senior Secured and Senior Subordinated Notes.
YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995
Net revenues increased approximately $24.5 million, or 12.1%, to
approximately $226.4 million in fiscal 1996 from approximately $201.9 million
in fiscal 1995, primarily as a result of an 11.6% increase in the average
selling price per pound, from $12.18 to $13.59. Shipments increased by 0.6%
to 16.4 million pounds in fiscal 1996 from 16.3 million pounds in fiscal 1995,
as volume increases in the aerospace, chemical processing and LBGT markets
offset lower volumes in the oil and gas and other markets.
Sales to the aerospace market increased by 31.2% to approximately $87.1
millon in fiscal 1996 from approximately $66.4 million in fiscal 1995. Volume
increased 23.4% and the average selling price per pound increased 6.3%.
Increased demand for the Company's products in fiscal 1996 from the aerospace
market was generated primarily by domestic engine producers, as demand in
Europe remained relatively flat.
Sales to the chemical processing industry increased 15.0% to
approximately $83.0 million in fiscal 1996 from approximately $72.2 million in
fiscal 1995. Volume increased 8.2% despite lower exports to the Asia Pacific
Rim. In addition, the average selling price per pound increased 6.3% as a
result of higher demand from both the domestic and European markets.
Sales to the LBGT market increased 14.7% to approximately $16.4 million
in fiscal 1996 from approximately $14.3 million in fiscal 1995 as a result of
an 7.7% increase in volume and a 6.5% increase in the average selling price
per pound. This reflected strong demand for cleaner burning power generation
from gas turbines. In addition, the Company's sales to this market have been
favorably impacted by its success in marketing Haynes 230 to European turbine
manufacturers as a replacement for competing alloys.
Sales to the FGD market increased 24.2% to approximately $8.2 million in
fiscal 1996 from approximately $6.6 million in fiscal 1995. Volume was
essentially unchanged; however, average selling price per pound increased by
24.3%.
Sales to the oil and gas industry decreased 4.4% to approximately $4.3
million in fiscal 1996 from sales of approximately $4.5 million in fiscal
1995. Sales to this market occurred primarily in the third quarter for both
fiscal years due to sour gas projects in Mobile Bay off the coast of Alabama.
Volume decreased 40.0%, while average selling price per pound increased 59.2%
due primarily to a favorable product mix.
Sales to other markets decreased by 31.8% to approximately $23.8 million
for fiscal 1996 from approximately $34.9 million in fiscal 1995, as a result
of a 50.0% decrease in volume which was only partially offset by a 37.5%
increase in average selling price per pound. The Company benefitted from a
one-time order of approximately $3.5 million for a major waste treatment
facility in Eastern Europe and a $5.1 million one-time order for
defense-related recuperators on M-1 tanks in the first nine months of fiscal
1995. Sales to the waste incineration market increased as a result of greater
use of the Company's products in high temperature corrosion applications. In
addition, increased use of Haynes HR-120 as a substitute for competing
products (including stainless steel) in the industrial heating market led to
higher sales in that segment.
Cost of sales increased by approximately $14.0 million, or 8.4% to
approximately $181.2 million in fiscal 1996 from approximately $167.2 million
in fiscal 1995. However, cost of sales as a percent of net revenues decreased
to 80.0% from 82.3% in the respective periods as a result of higher average
selling prices and a favorable change in product mix. Volume in the
higher-market high value-added product forms such as sheet, wire and seamless
tubulars increased in fiscal 1996 over fiscal 1995 levels. Increased capacity
utilization in the higher-cost operations used to manufacture these forms led
to efficiencies that lowered the per unit cost. Also, during fiscal 1995 raw
material costs escalated thereby temporarily reducing margins until price
increases could be fully implemented. In fiscal 1996, these increased costs
had been fully passed through to a greater extent as reflected in higher
selling prices.
Selling and administrative expenses increased approximately $4.5 million,
or 29.0% to approximately $20.0 million for fiscal 1996 from approximately
$15.5 million in fiscal 1995. The increase was primarily a result of salary
increases and the payment and accrual of management and employee bonuses of
approximately $1.9 million which were awarded for fiscal 1995 and fiscal 1996
performance. Selling and administrative expenses also include approximately
$1.8 million of costs incurred in connection with a postponed initial public
offering of the Company's common stock. In addition, sales and marketing
personnel were hired as a part of the Company's efforts to increase market
coverage and customer contact.
Research and technical expenses increased approximately $362,000 or
11.9%, to approximately $3.4 million in fiscal 1996 from approximately $3.0
million in fiscal 1995, primarily as a result of salary increases. Headcount
increased as part of the Company's ongoing commitment to technological
leadership.
As a result of the above factors, the Company recognized operating income
for fiscal 1996 of approximately $21.9 million, approximately $4.9 million of
which was contributed by the Company's foreign subsidiaries. For fiscal 1995,
operating income was approximately $16.2 million, of which approximately $5.3
million was contributed by the Company's foreign subsidiaries.
Other costs, net decreased approximately $1.2 million or 66.6% to
approximately $590,000 for fiscal 1996 from approximately $1.8 million in the
same period in fiscal 1995, primarily as a result of foreign exchange gains in
fiscal 1996 compared to foreign exchange losses in fiscal 1995 and a $582,000
reduction in other costs associated with the fiscal 1995 purchase of options
to acquire the then outstanding Subordinated Notes.
Interest expense increased approximately $1.8 million or 8.7% to
approximately $22.0 million or fiscal 1996 from approximately $20.2 million
for the same period in fiscal 1995, due primarily to higher average borrowings
under the Existing Credit Facility and an additional $1.5 million of interest
expense incurred during the period between the issuance of the Senior Notes
and the redemption of the Senior Secured Notes and Senior Subordinated Notes.
The provision for income taxes of approximately $1.9 million for fiscal
1996 increased by approximately $672,000 from approximately $1.3 million for
fiscal 1995, due primarily to taxes on foreign earnings against which the
Company was unable to utilize its U.S. federal income tax net operating loss
carryforwards.
Extraordinary items, net of tax benefit of approximately $7.3 million,
were recorded in fiscal 1996 representing the extraordinary loss on the
redemption of the Senior Secured Notes and Senior Subordinated Notes and is
comprised of approximately $3.9 million of prepayment penalties incurred as a
result of the redemption and approximately $3.3 million of deferred debt
issuance costs which were written off upon redemption. No tax benefit was
recognized due to the valuation reserve established for tax reporting
purposes.
As a result of the above factors, the Company recognized a net loss for
fiscal 1996 of approximately $9.0 mllion, compared to a net loss of
approximately $6.8 million for fiscal 1995.
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YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO YEAR ENDED SEPTEMBER 30, 1994
Net revenues increased approximately $51.3 million, or 34.1%, to
approximately $201.9 million in fiscal 1995 from approximately $150.6 million
in fiscal 1994, as a result of a 22.6% increase in volume to 16.3 million
pounds from approximately 13.3 million pounds and a 9.0% increase in average
selling price to $12.18 per pound from $11.17 per pound. Volume increases were
due to higher demand in the aerospace, chemical processing, waste incineration
and industrial heating industries. Alloy price increases were implemented in
fiscal 1995 in response to rising raw material costs, which resulted in higher
average selling prices.
Sales to the aerospace market increased 43.1% to approximately $66.4
million in fiscal 1995 from approximately $46.4 million in fiscal 1994 due to
a 42.4% increase in volume as reflected by the increased order backlog for
commercial aircraft and jet engines in fiscal 1995. In addition, the Company
greatly increased its sales to distributors serving the aerospace market by
meeting competitive prices for certain higher volume HTA products. Due to
changes in product mix, the average selling price per pound to the aerospace
market in fiscal 1995 remained essentially flat as compared to fiscal 1994
despite generally higher alloy prices.
Sales to the chemical processing industry increased 44.1% to approximately
$72.2 million in fiscal 1995 from approximately $50.1 million in fiscal 1994
as a result of higher spending in the United States and Europe for smaller
maintenance and improvement projects, as well as along the Pacific Rim for
certain large capacity expansion projects. Volume increased 22.0% and average
selling price per pound increased 18.2%. The large Pacific Rim projects were
very competitively bid upon, resulting in lower average selling prices per
pound for these projects as compared to other projects. The lower average
selling prices for these products were more than offset, however, by higher
prices in smaller projects. In addition, the Company was favorably impacted in
fiscal 1995 by its shift from production of a low-priced duplex stainless
steel that it had manufactured for several years to other higher-priced,
higher-margin products as a result of stronger market demand for such
products.
Sales to the LBGT market decreased 15.9% to approximately $14.3 million in
fiscal 1995 from approximately $17.0 million in fiscal 1994. During fiscal
1995, a few of the larger LBGT manufacturers decreased purchases of alloys as
they reduced their inventories; as a result, the Company's volume decreased
18.8%. Although Haynes 230 was gaining acceptance, especially in Europe, the
Company experienced temporary disruptions in sales of this product due to
production and delivery problems, and as a result the Company's fiscal 1995
average selling price per pound was unchanged as compared to fiscal 1994.
Sales to the FGD market declined 35.3% to approximately $6.6 million in
fiscal 1995 from approximately $10.2 million in fiscal 1994 as a result of a
40.0% decrease in volume and a 7.8% increase in average selling price per
pound. Sharply lower domestic sales were partially offset by increased sales
in Europe and along the Pacific Rim. The weakness in domestic markets
reflected lower demand for wet scrubbing facilities for fossil fuel-fired
electric generating plants.
Demand in the oil and gas market has been weak and orders have been only
sporadic since fiscal 1992, when a major sour gas production project in the
Gulf of Mexico was completed. Sales increased 7.1% in fiscal 1995 as compared
to fiscal 1994 as a result of a 25.0% increase in volume, which was partially
offset by a 14.3% decrease in average selling price per pound.
Sales to other markets increased 68.0% to approximately $34.6 million in
fiscal 1995 from approximately $20.6 million in fiscal 1994 due primarily to a
shipment in fiscal 1995 to a large waste treatment project destined for
installation in Eastern Europe and the completion of a short-term contract in
support of the U.S. Army's M-1 tank program. These projects resulted in an
86.7% increase in volume in fiscal 1995 as compared to fiscal 1994 and a 10.0%
decrease in average selling price per pound for the same periods.
Cost of sales decreased approximately $4.8 million, or 2.8%, to
approximately $167.2 million in fiscal 1995 from approximately $172.0 million
in fiscal 1994. Fiscal 1994 cost of sales included the write-off of goodwill
as discussed in Note 10 of the Notes to Consolidated Financial Statements.
Cost of sales as a percent of the Company's net revenues decreased to 82.8%
from 89.6% in the respective years, excluding the effect of the write-off of
goodwill in fiscal 1994 as discussed above. This was due primarily to
increased capacity utilization and increased profitability in the European
subsidiaries. During the first half of fiscal 1995, raw material costs
escalated rapidly, resulting in lower margins. As a result, the spread between
average selling price and material cost per pound was lower in fiscal 1995
than in fiscal 1994. This was partially offset in the second half of fiscal
1995 as price increases for the Company's alloys became effective. Higher
volume reduced unit fixed costs and led to improved operating efficiencies. In
addition, the European subsidiaries experienced improved volume and margins in
fiscal 1995, reflecting improved business conditions which further improved
the Company's cost of sales as a percent of net revenues.
Selling and administrative expenses increased approximately $436,000, or
2.9%, to approximately $15.5 million in fiscal 1995 from approximately $15.0
million in fiscal 1994 primarily as a result of expenses which previously had
been reported as research and technology expenses in fiscal 1994 being
reclassified as selling and administrative expenses in fiscal 1995.
Research and technical expenses decreased approximately $581,000, or
16.0%, to approximately $3.0 million in fiscal 1995 from approximately $3.6
million in fiscal 1994 due in part to the reclassification of expenses noted
above. In addition, certain costs associated with engineering functions
recorded as manufacturing costs in fiscal 1995 were reported as research and
technical expenses in fiscal 1994.
As a result of the above factors, the Company recognized operating income
in fiscal 1995 of approximately $16.2 million as compared to an operating loss
of approximately $40.0 million in fiscal 1994. Operating loss in fiscal 1994
was approximately $2.9 million prior to the write off of approximately $37.1
million of goodwill as described in Note 10 of the Notes to Consolidated
Financial Statements. Operating income contributed by the Company's foreign
subsidiaries was approximately $5.3 million in fiscal 1995 and approximately
$1.6 million in fiscal 1994.
Other costs, net increased approximately $951,000, or 116.5%, to
approximately $1.8 million in fiscal 1995 from approximately $816,000 in
fiscal 1994, primarily as a result of fluctuations in foreign exchange rates,
which accounted for approximately $150,000 of the increase, and approximately
$478,000 in costs incurred associated with obtaining options to purchase
certain of the Company's Existing Subordinated Notes. The options expired in
October 1995.
Interest expense increased approximately $317,000, or 1.6%, to
approximately $20.2 million in fiscal 1995 from approximately $19.9 million in
fiscal 1994, primarily as a result of higher average borrowings under the
Existing Credit Facility.
The provision for income taxes for fiscal 1995 was approximately $1.3
million compared to approximately $420,000 in fiscal 1994, due primarily to
taxes on foreign earnings against which the Company was unable to utilize its
NOLs.
As a result of the above factors, the Company reported a net loss of
approximately $6.8 million in fiscal 1995 compared to a net loss of
approximately $140.5 million in fiscal 1994, including SFAS 106 expense of
approximately $79.6 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's near-term future cash needs will be driven by working
capital requirements, which are likely to increase, and planned capital
expenditures. Capital expenditures were approximately $2.1 million in fiscal
1996 and are expected to be approximately $8.0 million in fiscal 1997 and
approximately $9.6 million in fiscal 1998. Capital expenditures were
approximately $772,000 and $1.9 million for fiscal 1994 and 1995,
respectively. The increased capital investments for fiscal 1997 and 1998 are
designated for significant new equipment additions and expenditures of
approximately $3.1 million for new integrated information systems. The primary
benefits of this spending are expected to be (i) the expansion of annual
production capacity by 25% from approximately 20.0 million pounds to
approximately 25.0 million pounds, based on the current product mix, (ii)
improved production quality resulting in lower internal rejection rates and
rework costs and (iii) improved coordination among sales, marketing and
manufacturing personnel resulting in more efficient pricing practices. The
Company does not expect such capital expenditures to have a material adverse
effect on its long-term liquidity. Moreover, the Company does not currently
have any significant capital expenditure commitments. 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 these capital expenditures and working capital requirements over the next
12 months and on a long-term basis, although there can be no assurance that
this will be the case.
Net cash used in operations in fiscal 1996 was approximately $5.3 million,
as compared to approximately $2.9 million for fiscal 1995. The negative cash
flow from operations for fiscal 1996 was primarily a result of increases of
approximately $15.1 million in inventories and approximately $1.6 million in
accounts receivable, which were offset by non-cash depreciation and
amortization expenses of approximately $9.1 million, extraordinary item of
$7.3 million, an increase in the accounts payable and accrued expenses balance
of approximately $2.5 million and other adjustments. Cash used for investing
activities increased from approximately $1.9 million in fiscal 1995 to
approximately $2.0 million in fiscal 1996, primarily as a result of higher
capital expenditures. Cash provided by financing activities for fiscal 1996
was approximately $7.1 million due primarily to $18.4 million increased
borrowings under the Revolving Credit Facility offset by a net payment on
refinancing of long-term debt of $12.0 million. Cash for fiscal 1996 decreased
approximately $347,000, resulting in a September 30, 1996 cash balance of
approximately $4.7 million. Cash in fiscal 1995 decreased approximately
$655,000, resulting in a cash balance of approximately $5.0 million at
September 30, 1995.
On August 23, 1996, the Company issued $140.0 million of its 11 5/8%
Senior Notes due 2004 and amended its Revolving Credit Facility with Congress
Financial Corporation ("Congress") to increase the maximum amount available
under the Revolving Line of Credit to $50.0 million. With the proceeds from
the issuance of the Senior Notes and borrowings under the Revolving Credit
Facility, the Company redeemed all of its outstanding Senior Secured Notes and
Senior Subordinated Notes on September 23, 1996. See Note 6 of the Notes to
Consolidated Financial Statements for a description of the terms of the
Senior Notes and the Revolving Credit Facility.
The Senior Notes and the Revolving Credit Facility contain a number of
covenants limiting the Company's access to capital, including covenants that
restrict the ability of the Company and its subsidiaries to (i) incur
additional Indebtedness, (ii) make certain restricted payments, (iii) engage
in transactions with affiliates, (iv) create liens on assets, (v) sell assets,
(vi) issue and sell preferred stock of subsidiaries, and (vii) engage in
consolidations, mergers and transfers.
The Company is currently conducting groundwater monitoring and
post-closure monitoring in connection with certain disposal areas, and has
completed an investigation of eight specifically identified solid waste
management units at the Kokomo facility. The results of the investigation have
been filed with the U.S. Environmental Protection Agency ("EPA"). If the EPA
or the Indiana Department of Environmental Management ("IDEM") were to require
corrective action in connection with such disposal areas or solid waste
management units, there can be no assurance that the costs of such corrective
action will not have a material adverse effect on the Company's financial
condition, results of operations or liquidity. In addition, the Company has
been named as a potentially responsible party at two waste disposal sites.
Although there can be no assurance, based on current information, the Company
believes that its involvement at these two sites will not have a material
adverse effect on the Company's financial condition, results of operations or
liquidity. Expenses related to environmental compliance were $1.3 million for
fiscal 1996 and
are expected to be approximately $3.2 million for fiscal 1997 through fiscal
1998. See "Business-- Environmental Matters." Based on information currently
available to the Company, the Company is not aware of any information which
would indicate that litigation pending against the Company is reasonably
likely to have a material adverse effect on the Company's operations or
liquidity. See "Business--Legal Proceedings."
INFLATION
The Company believes that inflation has not had a material impact on its
operations.
INCOME TAX CONSIDERATIONS
For financial reporting purposes the Company recognizes deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Statement of Financial Accounting Standards ("SFAS") No. 109 requires the
recording of a valuation allowance when it is more likely than not that some
portion or all of a deferred tax asset will not be realized. This statement
further states that forming a conclusion that a valuation allowance is not
needed may be difficult, especially when there is negative evidence such as
cumulative losses in recent years. The ultimate realization of all or part of
the Company's deferred tax assets depends upon the Company's ability to
generate sufficient taxable income in the future.
At September 30, 1996, the Company had a net deferred tax asset
approximating $36.4 million consisting principally of temporary differences
relating to available Net Operating Losses ("NOL's") and accruals for
postretirement benefits other than pensions partially offset by depreciation.
Because of unfavorable operating results in recent years, the Company has
established a 100% valuation allowance to offset the net deferred tax asset,
resulting in a charge to operations and a corresponding reduction of equity.
The Company will periodically evaluate its strategic and business plans in
light of evolving business conditions and actual operating results, and the
valuation allowance may be adjusted for future income expectations resulting
from that process.
As a result, the application of the valuation allowance determination
process could result in recognition of significant income tax provisions or
benefits in a single interim or annual period due to actual operating results
and changes in future income expectations over several years. Such tax
provision or benefit effect could likely be material in the context of the
specific interim or annual financial reporting period in which changes in
judgment about extended future periods are reported. The valuation allowance
determination process is a balance sheet approach and does not have as its
objective the periodic matching of pre-tax income or loss with the related
actual income tax effects.
If the Company's principal markets continue to exhibit improvement, and
such improvement is manifested in positive trends in the value and
profitability of customer orders and backlog, additional tax benefits may be
reported in future periods as the valuation allowance is reduced.
Alternatively, to the extent that the Company's future profit expectations
remain static or are diminished, tax provisions may be charged against pretax
income. In either event, such valuation allowance-related tax provisions or
benefits should not necessarily be viewed as recurring. Further, the amount of
current taxes that the Company expects to pay for the foreseeable future is
minimal, and the Company's carryforward tax attributes are viewed by
management as a significant competitive advantage to the extent that profits
can be sheltered effectively from tax and re-employed in the growth of the
business.
See "Legal Proceedings" with respect to certain other tax matters.
ACCOUNTING PRONOUNCEMENTS
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" are effective for the year ending September 30, 1997. In the
opinion of management, these statements will not impact the Company's
financial position or results of operations.
SFAS No. 123, "Accounting for Stock Based Compensatio