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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, 1997.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 333-5411
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)
(765) 456-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
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
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 19, 1997 was 100.
Documents Incorporated by Reference: None
The Index to Exhibits begins on page 75 in the sequential numbering system.
Total pages: 81
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 17
Item 6. Selected Consolidated Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 20
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
58
PART III
Item 10. Directors and Executive Officers of the Registrant 59
Item 11. Executive Compensation 62
Item 12. Security Ownership of Certain Beneficial Owners and Management 70
Item 13. Certain Relationships and Related Transactions 71
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 72
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 63% of the Company's net
revenues in fiscal 1997. 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 1997 net revenues from products that are protected by United States
patents and derived an additional approximately 17% of its fiscal 1997 net
revenues from sales of products that are not patented, but for which the
Company has limited or no competition.
ACQUISITION BY HOLDINGS
On June 11, 1997 Inco Limited ("Inco") and Blackstone jointly announced
the execution of a definitive agreement for the sale by Inco of 100% of its
Inco Alloy International ("IAI") business unit to Holdings, an affiliate of
Blackstone. Upon consummation of the transaction, Blackstone plans to combine
the operations of IAI and the Company. Completion of the sale will be subject
to a number of conditions and the receipt of regulatory and other approvals,
including anti-trust clearance. Closing of the sale is currently expected to
take place in the first quarter of calendar 1998.
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 1997, HTA and CRA products accounted for
approximately 65% and 35%, 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
at 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 1600 F
HAYNES 718 (1955) Aero-ducting, vanes, nozzles Weldable high strength alloy with good
fabricability
HASTELLOY X (1954) Aero/LBGT-burner cans, transition ducts Good high temperature
strength at relatively low cost
HAYNES Ti 3-2.5 (1950) Aero-aircraft hydraulic and fuel systems 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 jet aircraft engines 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 1997, sales of
these HTA products accounted for approximately 29% 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 1997. 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 1997. 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 are also less effective. In fiscal
1997, 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 1997, 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, Broad resistance to many environments
piping
- -------------
(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.
During fiscal 1997, sales of the CRA alloys HASTELLOY C-276, HASTELLOY
C-22 and HASTELLOY C-4 accounted for approximately 26% 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 1997.
The Company's patented alloy, 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. 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. 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 of 1990 mandates a two-phase program aimed at significantly reducing
suffer dioxide (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 of 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.
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, three 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 79% of the Company's net revenues in fiscal 1997
was generated by the Company's direct sales organization. The remaining 21% of
the Company's fiscal 1997 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 1997 net
revenues generated through each of the Company's distribution channels.
DOMESTIC FOREIGN TOTAL
----------- ---------- --------
Company sales office/direct . . . . . 33% 7% 40%
Company-owned service centers . . . . 19% 20% 39%
Independent distributors/sales agents 12% 9% 21%
Total . . . . . . . . . . . . . . 64% 36% 100%
The top twenty customers not affiliated with the Company accounted for
approximately 39% of the Company's net revenues in fiscal 1997. Sales to
Spectrum Metals, Inc. and Rolled Alloys, Inc., which are affiliated with each
other, accounted for an aggregate of 11% of the Company's net revenues in
fiscal 1997. No other customer of the Company accounted for more than 10% of
the Company's net revenues in fiscal 1997.
The Company's foreign and export sales were approximately $79.6 million,
$84.3 million and $81.4 million for fiscal 1995, 1996 and 1997, respectively.
Additional information concerning foreign operations and export sales is set
forth in Note 13 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 49%, 20%,
11%, 12%, 6% and 2%, respectively, of total volume sold in fiscal 1997 (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, 1997, the Company's backlog orders aggregated
approximately $60.6 million, compared to approximately $53.7 million at
September 30, 1996, and approximately $49.9 million at September 30, 1995. The
increase in backlog orders is primarily due to an increase in orders for
chemical processing and aerospace products worldwide during fiscal 1997.
Substantially all orders in the backlog at September 30, 1997 are expected to
be shipped within the twelve months beginning October 1, 1997. 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.
THE COMPANY'S BACKLOG
AT FISCAL QUARTER END
(IN MILLIONS)
1993 1994 1995 1996 1997
1st $41.5 $29.5 $49.7 $61.2 $63.8
2nd $38.9 $35.5 $64.8 $61.9 $65.4
3rd $31.5 $38.0 $55.8 $57.5 $55.5
4th $31.1 $41.5 $49.9 $53.7 $60.6
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
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.22
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, 1997, 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 $3.8 million, $3.4 million and
$3.0 million for research and technical development activities for fiscal
1997, 1996 and 1995, respectively.
During fiscal 1997, 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 ten years, the Company's technical programs have yielded
nine new proprietary alloys and sixteen United States patents, with an
additional three United States patent applications pending. The Company
currently maintains a total of 40 United States patents and approximately 140
foreign counterpart patents targeted at countries with significant or
potential markets for the patented products. In fiscal 1997, approximately 25%
of the Company's net revenues was derived from the sale of patented products
and an additional approximately 39% 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, HASTELLOY G-50, HASTELLOY G-30, HAYNES 230, HASTELLOY C-22 and
ULTIMET, are protected by United States patents that continue until the years
1998, 2001, 2002, 2008 and 2009, 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, a subsidiary of Allegheny
Teledyne, Inc. and Krupp VDM GmbH, a subsidiary of Thyssen Krupp Stahl AG.
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, 1997, the Company had approximately 951 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, 1997, 481 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.
ENVIRONMENTAL MATTERS
The Company's facilities and operations are subject to certain foreign,
federal, state and local laws and regulations relating to the protection of
human health and the environment, including those governing the discharge of
pollutants into the environment and the storage, handling, use, treatment and
disposal of hazardous substances and wastes. Violations of these laws and
regulations can result in the imposition of substantial penalties and can
require facilities improvements. In addition, the Company may be required in
the future to comply with certain regulations pertaining to the emission of
hazardous air pollutants under the Clean Air Act. However, since these
regulations have not been proposed or promulgated, the Company cannot predict
the cost, if any, associated with compliance with such regulations. Expenses
related to environmental compliance were approximately $1.1 million for fiscal
1997 and are expected to be approximately $1.2 million for 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. 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 the Indiana Department of
Environmental Management ("IDEM") and the U.S. Environmental Protection Agency
("EPA") to close and to provide post-closure monitoring and care for certain
areas at the Kokomo facility used for the storage and disposal of wastes, some
of which are classified as hazardous under applicable regulations. 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.
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 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 site, the large number of PRPs and the prior payments made by
the Company, management does not expect the Company's involvement in this
site 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.
[Remainder of page intentionally left blank.}
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 235 acres of industrial property and includes over one million
square feet of building space. There are three sites consisting of a
headquarters 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 the Notes to Consolidated Financial Statements.
The Openshaw plant, located near Manchester, England, consists of
approximately 15 acres of land and over 200,000 square feet of buildings on a
single site. The plant produces bar and billet using billets produced in
Kokomo as feedstock. Additionally, products not competitive with the Company's
products are processed for third parties. The processes conducted at the
facility require hot rotary forges, bar mills and miscellaneous straightening,
turning and cutting equipment.
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. The Company intends to vigorously defend
against the claims and does not believe that the ultimate outcome will have a
material adverse effect on the financial condition or operations of the
Company.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no established trading market for the common stock of the
Company.
As of December 19, 1997 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, 1997.
The payment of dividends is limited by terms of certain debt agreements
to which the Company is a party. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources" and Note 6 of the Notes to Consolidated Financial Statements of the
Company included in this Annual Report in response to Item 8.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT RATIO DATA)
The following table sets forth selected consolidated financial data of
the Company. The selected consolidated financial data as of and for the years
ended September 30, 1993, 1994, 1995, 1996 and 1997 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, Year Ended September 30,
STATEMENT OF OPERATIONS DATA: 1993 1994
Net revenues $ 162,454 $ 150,578
Cost of sales(1) 137,102 171,957(2)
Selling and administrative expenses 14,569 15,039
Recapitalization expense - -
Research and technical expenses 3,603 3,630
Operating income (loss) 7,180 (40,048)
Other cost, net 400 816
Interest expense, net 18,497 19,582
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle (8,275) (60,866)
Extraordinary item, net of tax benefit
Cumulative effect of change in accounting
principle (net of tax benefit) -- (79,630)(6)
Net income (loss) (8,275) (140,496)
September 30, September 30,
BALANCE SHEET DATA: 1993 1994
Working capital (7) $ 72,131 $ 60,182
Property, plant and equipment, net 51,676 43,119
Total assets 194,200 145,723
Total debt 140,180 148,141
Accrued post-retirement benefits -- 94,148
Stockholder's equity (Capital deficit) 22,938 (116,029)
September 30, September 30,
OTHER FINANCIAL DATA: 1993 1994
Depreciation and amortization (8) $ 13,766 $ 51,555
Capital expenditures 56 771
EBITDA (9) 20,546 10,691
Ratio of EBITDA to interest expense 1.11x 0.55x
Ratio of earnings before fixed
charges to fixed charges (10) -- --
Net cash provided from (used in) operating activities $ 5,711 $ (12,801)
Net cash provided from (used in) investment activities 318 746
Net cash provided from (used in) financing
activities (2,014) 7,102
Year Ended September 30, Year Ended September 30, Year Ended September 30,
STATEMENT OF OPERATIONS DATA: 1995 1996 1997
Net revenues $ 201,933 $ 226,402 $ 235,760
Cost of sales(1) 167,196 181,173 180,504
Selling and administrative expenses 15,475 19,966(5) 18,311
Recapitalization expense - - 8,694(3)
Research and technical expenses 3,049 3,411 3,814
Operating income (loss) 16,213 21,852 24,437
Other cost, net 1,767 590 276
Interest expense, net 19,904 21,102(5) 20,456
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle (6,771) 160 36,315(4)
Extraordinary item, net of tax benefit (7,256)(5) -
Cumulative effect of change in accounting
principle (net of tax benefit) -- -- -
Net income (loss) (6,771) (9,036) 36,315
September 30, September 30, September 30,
BALANCE SHEET DATA: 1995 1996 1997
Working capital (7) $ 62,616 $ 57,307 $ 57,063
Property, plant and equipment, net 36,863 31,157 32,551
Total assets 151,316 161,489 216,319
Total debt 152,477 169,097 184,213
Accrued post-retirement benefits 94,830 95,813 96,201
Stockholder's equity (Capital deficit) (121,909) (130,341) (94,435)
September 30, September 30, September 30,
OTHER FINANCIAL DATA: 1995 1996 1997
Depreciation and amortization (8) $ 9,000 $ 9,042 $ 8,197
Capital expenditures 1,934 2,092 8,863
EBITDA (9) 23,446 32,141 41,302
Ratio of EBITDA to interest expense 1.18x 1.52x 2.02x
Ratio of earnings before fixed
charges to fixed charges (10) -- 1.01x 1.17x
Net cash provided from (used in) operating $ (2,883) $ (5,343) $ (6,596)
activities
Net cash provided from (used in) investment (1,895) (2,025) (8,830)
activities
Net cash provided from (used in) financing
activities 3,912 7,116 14,185
(1) The Company was acquired by Morgan, Lewis, Githens & Ahn ("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 $3,686 and $488 for fiscal 1993 and
1994, respectively; no charges have been recognized since fiscal 1994.
(2) Reflects the write-off of $37,117 of goodwill created in connection with the 1989 Acquisition remaining
at September 30, 1994.
(3) On January 29, 1997, the Company announced that Haynes Holdings, Inc. ("Holdings"), its parent
corporation, had effected the recapitalization of the company and Holdings pursuant to which Blackstone Capital
Partners II Merchant Banking Fund L.P. and two of its affiliates ("Blackstone") acquired 79.9% of Holdings'
outstanding shares (the "Recapitalization"). Certain fees, totaling $6,237, paid by the Company in connection
with the Recapitalization have been accounted for as recapitalization expenses and charged against income in
the period. Also in connection with the Recapitalization, the Company recorded $2,457 of non-cash stock
compensation expense, also included as recapitalization expenses, pertaining to certain modifications to
management stock option agreements which eliminated put and call rights associated with the options.
(4) The Company recorded profit before tax of $3,705 and net income of $36,315. During the third quarter
of fiscal 1997, the Company reversed its deferred income tax valuation allowance of approximately $36,431. See
Note 5 of the Notes to Consolidated Financial Statements of the Company included in this Annual Report in
response to Item 8.
(5) 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 11 % Senior Secured Notes due 1998 and 13 % Senior Subordinated Notes due 1999
(collectively, the "Old Notes") and is comprised of $3,911 of prepayment penalties incurred in connection with
the redemption of the Old Notes and $3,345 of deferred debt issuance costs which were written off upon
consummation of the redemption of the Old Notes, (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.
(6) 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 principle. The tax
benefit recognized was limited to then existing net deferred tax liabilities.
(7) Reflects the excess of current assets over current liabilities as set forth in the Consolidated
Financial Statements.
(8) Reflects (i) depreciation and amortization as presented in the Company's Consolidated Statement of Cash
Flows and set forth in Note (9) 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 (9)
below.
(9) Represents for the relevant period net income plus expenses recognized for interest, taxes,
depreciation, amortization and other non-cash charges plus the refinancing costs set forth in Note 5, part (a)
and (b) for fiscal 1996 plus recapitalization costs outlined in Note 3 and $250 of failed acquisition costs for
fiscal 1997. In addition to net interest expense as listed in the table, the following charges are added to
net income to calculate EBITDA:
1993 1994 1995 1996 1997
Provision for (benefit from) income taxes $(3,442) $ 420 $ 1,313 $ 1,940 $(32,610)
Depreciation 8,650 8,208 8,188 7,751 7,477
Amortization:
Debt issuance costs 2,120 1,680 1,444 4,698 1,144
Goodwill 1,487 38,607 -- -- -
Inventory (see note (1) above) 3,686 488 -- -- -
Prepaid pension costs (57) 314 130 308 333
7,236 41,089 1,574 5,006 (23,656)
SFAS 106-Post-retirement -- 3,938 682 983 387
Amortization of debt issuance costs (2,120) (1,680) (1,444) (4,698) (1,144)
Total $10,324 $51,975 $10,313 $10,982 $(24,413)
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.
(10) For purposes of these computations, earnings before fixed charges consist of income
(loss) before provision for (benefit from) income taxes, extraordinary item and cumulative
effect of change in accounting principle plus fixed charges. Fixed charges consist of
interest on debt, amortization of debt issuance costs and estimated interest portion of
rental expense. Earnings were insufficient to cover fixed charges by $11,717, $60,446, and
$5,458 for fiscal 1993, 1994 and 1995, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Report contains statements that constitute forward looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Those statements appear in a number of places in this Report and may
include statements regarding the intent, belief or current expectations of the
Company or its officers with respect to (i) the Company's strategic plans,
(ii) the policies of the Company regarding capital expenditures, financing and
other matters, and (iii) industry trends affecting the Company's financial
condition or results of operations. Readers are cautioned that any such
forward looking statements are not guarantees of future performance and
involve risks and uncertainties and that actual results may differ materially
from those in the forward looking statements as a result of various factors,
many of which are beyond the control of the Company.
COMPANY BACKGROUND
The Company sells high temperature alloys and corrosion resistant alloys,
which accounted for 65% and 35%, respectively, of the Company's net revenues
in fiscal 1997. 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 1997, flat products accounted for 68% of
shipments and 63% 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 18.5 million pounds in fiscal 1997, 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 $9.0
million in fiscal 1998. 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 79% of the Company's net
revenues in fiscal 1997 was generated by the Company's direct sales
organization. The remaining 21% of the Company's fiscal 1997 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 1997, sales to customers outside the United States
accounted for approximately 35% of the Company's net revenues.
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 (9) 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 1997, 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 1997, these other alloys represented
approximately 17% 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 16 to 18 weeks.
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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: (Note: Markets prior to 1997 have been
reclassified due to improved identification techniques implemented in 1997 by the Company.)
1993 1993 1994 1994 1995 1995 1996 1996 1997 1997
SALES (DOLLARS IN % OF % OF % OF % OF % OF
MILLIONS) AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
Aerospace $ 48.4 29.8% $ 47.9 31.8% $ 68.2 33.8% $ 95.3 42.1% $ 111.2 47.2%
Chemical processing 53.1 32.6 51.9 34.5 74.1 36.7 77.9 34.4 69.3 29.4
Land-based gas
turbines 12.6 7.8 17.0 11.3 14.3 7.1 17.4 7.7 17.2 7.4
Flue gas
desulfurization 17.4 10.7 10.2 6.7 6.6 3.3 8.3 3.7 6.7 2.7
Oil and gas 11.0 6.8 4.2 2.8 4.5 2.2 4.3 1.9 7.8 3.3
Other markets 17.9 11.0 17.3 11.5 30.9 15.3 19.6 8.6 20.1 8.5
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total product 160.4 98.7 148.5 98.6 198.6 98.4 222.8 98.4 232.3 98.5
Other revenue (1) 2.1 1.3 2.1 1.4 3.3 1.6 3.6 1.6 3.5 1.5
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net revenues $ 162.5 100.0% $ 150.6 100.0% $ 201.9 100.0% $ 226.4 100.0% 235.8 100.0%
U.S. $ 109.1 $ 94.8 $ 122.3 $ 142.0 $ 154.3
Foreign $ 53.4 $ 55.8 $ 79.6 $ 84.4 $ 81.5
SHIPMENTS BY MARKET
(MILLIONS OF POUNDS)
Aerospace 3.5 22.9% 3.4 25.6% 4.8 29.4% 6.6 40.2% 8.5 45.9%
Chemical processing 5.3 34.6 5.2 39.1 6.4 39.3 6.0 36.6 5.9 31.9
Land-based gas
turbines 1.2 7.8 1.6 12.0 1.3 8.0 1.5 9.2 1.5 8.1
Flue gas
desulfurization 2.9 19.0 1.5 11.3 0.9 5.5 1.0 6.1 0.7 3.8
Oil and gas 1.1 7.2 0.4 3.0 0.5 3.1 0.3 1.8 0.7 3.8
Other markets 1.3 8.5 1.2 9.0 2.4 14.7 1.0 6.1 1.2 6.5
Total Shipments 15.3 100.0% 13.3 100.0% 16.3 100.0% 16.4 100.0% 18.5 100.0%
AVERAGE SELLING RICE
PER POUND
Aerospace $ 13.83 $ 14.09 $ 14.21 $ 14.44 $ 13.08
Chemical processing 10.02 9.98 11.58 12.98 11.75
Land-based gas 10.50 10.63 11.00 11.60 11.47
turbines
Flue gas
desulfurization 6.00 6.80 7.33 8.30 9.57
Oil and gas 10.00 10.50 9.00 14.33 11.14
Other markets 13.77 14.42 12.88 19.60 16.75
All markets $ 10.48 $ 11.17 $ 12.18 $ 13.59 $ 12.56
- --------------------
(1) Includes toll conversion and royalty income.
Fluctuations in net revenues and volume from fiscal 1993 through fiscal
1997 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 1997 and 1996 increased 16.7% and 39.7%, respectively,
over the preceding period. The aerospace market growth is anticipated to
continue in two sectors: (1) commercial aircraft and (2) gas turbine engines.
Commercial aircraft growth stems from world air travel growth in revenue
passenger miles (RPMs) due to world trade growth, removal of political travel
barriers and improved communication infrastructures. In addition, strong
airline profitability and anticipated aircraft fleet growth from 11,800
aircraft at the end of 1996 to 14,350 at the end of 2001 should keep the
market strong. Stage III noise legislation should also lead to aircraft
retirements over the next five years which could further improve demand for
new aircraft.
Chemical Processing. Demand for the Company's products in the chemical
processing industry tends to track overall economic activity and is driven by
maintenance requirements of chemical processing facilities and the expansion
of existing chemical processing facilities or the construction of new
facilities. 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.
Chemical processing markets are expected to see steady growth in export
markets and specific industry sectors (agricultural chemicals and
pharmaceuticals). The chemicals sector comprises both specialty and basic
organic and inorganic chemicals. Mergers and acquisitions of chemical
companies continue as companies make strategic acquisitions and divestitures
in efforts to enhance their global competitiveness.
The agricultural chemical sector is benefitting from changes in U.S.
agricultural programs that now place fewer limits on farmers' ability to plant
crops they want on the acreage they want. Growth in the pharmaceutical sector
is being spurred by continuing advances in both traditional drug research and
the fast growing biotech sector.
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, 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 limited sales opportunities in the FGD market as deadlines
for Phase II of the Clean Air Act approach in 2000.
The Clean Air Act addresses numerous air quality problems in the United
States that are not entirely covered in earlier legislation. One of these
problems is acid rain caused by sulfur dioxide (SO2) and nitrogen oxides (NOx)
emissions from fossil-fueled electric power. Title IV of the Clean Air Act
created a two-phased plan to reduce acid rain in the U.S. Phase I runs from
1995 through 1999, and Phase II, which is more stringent than Phase I, begins
in 2000. Under Title IV, 435 units were identified for Phase I. Of these,
261 units are required to comply with Phase 1. The remaining 174 units are
participating in Phase I, based on the rules established by the EPA, allowing
a utility to designate substitution or compensating units as part of their
Phase I compliance plans.
The acid rain program allocated emission allowances to Phase I units,
authorizing them to emit one ton of SO2 for each allowance. Some utilities
obtained additional allowances from three auctions and from bonus provisions
in the Act. All 435 generating units had sufficient allowances to comply with
Title IV in 1995. Phase I units significantly reduced their SO2 emissions
compared to previous years; they emitted 5.3 million tons of SO2 in 1995, 45%
less than the 9.7 million tons in 1990.
For Phase II more than 2,000 operating units will be affected. While
many utilities have not finalized their plans to comply with the more
stringent Phase II requirements, most of them have elected to over comply with
Phase I requirements, thus creating a surplus of allowances.
Increased competition has caused the electric utility industry to make
major changes in the way it is structured. On April 26, 1996, the Federal
Energy Regulatory Commission (FERC) issued the final rule, Order No. 888 in
response to provisions of the Energy Policy Act (EPACT) of 1992. Order No.
888 opens wholesale electric power sales to competition and requires each
utility that owns transmission lines to allow buyers and sellers of power the
same access to these lines as the utility provides to its own generation.
In a noncompetitive, regulated environment, state regulators allowed
electric utilities to pass on costs of pollution control requirements to
consumers. In a competitive environment, however, utilities with higher rates
due to environmental controls would be at a relative disadvantage, while those
with lower costs could increase share. With increasing competition and with
Phase II of the Clean Air Act slated for implementation on January 1, 2000,
utilities are showing less interest in making capital investments in expensive
pollution control equipment, are uncertain about cost recovery, and want to be
more competitive.
A number of scrubbers for Phase II are being deferred. The Electric
Power Research Institute (EPRI) estimates that no more than 12 gigawatts to 20
gigawatts of generation capacity may be scrubbed to comply with Phase II
compliance. Planning and building a scrubber takes four years, so in many
cases capital for scrubbers will not be committed until after the year 2000.
Repowering older fossil-fuel units is another alternative to meet Phase II
compliance. It is expected that 2,501.1 megawatts of capacity will be
repowered with natural gas, fuel oil or low sulfur coal over the period from
1996 to 2005.
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 1997 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 Year Ended Year Ended
September 30, September 30, September 30,
1995 1996 1997
Net revenues 100.0% 100.0% 100.0%
Cost of sales 82.8 80.0 76.6
Selling and administrative expenses 7.7 8.8(1) 7.8
Recapitalization expense - - 3.7(2)
Research and technical expenses 1.5 1.5 1.6
Other cost, net 0.9 0.3 0.1
Interest expense 10 9.7(1) 8.7
Interest income (0.2) (0.4)(1) (0.1)
Income (loss) before provision for income
taxes, extraordinary items, and cumulative
effect of change in accounting principle -2.7 0.1 1.6
Provision for (benefit from) income taxes 0.6 0.9 (13.8)
Extraordinary item, net of tax benefit (3.2)(1) -
Net income (loss) (3.3)% (4.0)% 15.4%
- -----------------------------
(1) 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 Old Notes and is comprised of approximately $3.9 million of
prepayment penalties incurred in connection with the redemption of the Old Notes and
approximately $3.4 million of deferred debt issuance costs which were written off upon
consummation of the redemption of the Old Notes; (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) approximately $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 Old Notes.
(2) On January 29, 1997, the Company announced that Holdings, its parent corporation,
had effected the recapitalization of the Company and Holdings pursuant to which Blackstone
acquired 79.9% of Holdings' outstanding shares. Certain fees totaling approximately $6.2
million paid by the Company in connection with the Recapitalization have been accounted for
as recapitalization expenses, and charged against income in the period. Also in connection
with the Recapitalization, the Company recorded approximately $2.5 million of non-cash
stock compensation expense, also included as recapitalization expenses, pertaining to
certain modifications to management stock option agreements which eliminated put and call
rights associated with the options.
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996
Net Revenues. Net revenues increased approximately $9.4 million, or
4.2%, to approximately $235.8 million in fiscal 1997 from approximately $226.4
million in fiscal 1996, primarily as a result of a 12.8% increase in
shipments, from approximately 16.4 million pounds in fiscal 1996 to
approximately 18.5 million pounds in fiscal 1997.
Sales to the aerospace industry for fiscal 1997 increased 16.7%, to
approximately $111.2 million from approximately $95.3 million for fiscal 1996.
The increase in revenue can be attributed to a 28.8% increase in volume to
approximately 8.5 million pounds in fiscal 1997 from approximately 6.6 million
pounds in fiscal 1996. This volume increase offset a decline in average
selling price per pound, caused by a proportionately higher increase in the
volume of the lower-priced, nickel-based alloys and forms, compared to the
higher-priced, cobalt-containing alloys and forms.
Sales to the chemical processing industry during fiscal 1997 declined by
11.0% to approximately $69.3 million from approximately $77.9 million for
fiscal 1996. Volume shipped to the chemical processing industry during fiscal
1997 decreased by 1.7% to approximately 5.9 million pounds, compared to 6.0
million pounds in fiscal 1996. The drop in the average selling price per
pound reflects lower sales of higher cost, higher priced product forms, and
higher sales of lower cost, lower priced product forms. In particular, sales
of tubular products declined, while sales of forged billet and forged bar
products increased during fiscal 1997 compared to the same period a year ago.
Much of the decline in volume in the domestic market can be attributed to
lower sales to key distributors and sharply lower sales for project business
in the agrochemical sector. For the export market, the decline in volume can
be attributed to lower sales to key distributors and a drop in sales to a key
manufacturer of heat exchanger components.
Sales to the LBGT industry during fiscal 1997 increased 1.1% to
approximately $17.6 million from approximately $17.4 million in fiscal 1996.
Volume remained relatively unchanged while average selling prices increased
1.1%. Higher domestic activity offset lower export and European activity.
Sales to the FGD industry declined 24.1% to approximately $6.3 million in
fiscal 1997 from approximately $8.3 million in fiscal 1996. Volume declined
30.0% while average selling price per pound increased 8.4%. The decline in
volume can be attributed to the lack of significant project activity in the
domestic market and heightened competition for foreign projects.
Sales to the oil and gas industry increased 81.4% to approximately $7.8
million for fiscal 1997 from approximately $4.3 million in fiscal 1996. Sales
to this sector are typically linked to sour gas project requirements. These
requirements vary substantially from quarter to quarter and year to year.
Sales to other industries increased 2.6% in fiscal 1997 to approximately
$20.1 million from approximately $19.6 million for the same period a year ago,
as a result of volume increase of 20.0% partially offset by a 14.5% decline in
average selling price. The increase in volume can be attributed to higher
sales for automotive application. The decline in the average selling price
per pound stems from lower sales of higher cost, higher priced products during
fiscal 1997 compared to fiscal 1996.
Cost of Sales. Cost of sales as a percentage of net revenues decreased
to 76.6% in fiscal 1997 compared to 80.0% in fiscal 1996, as a result of lower
raw material costs and higher capacity utilization. Volume in the higher
priced, higher value added, sheet, coil, and seamless forms increased in
fiscal 1997, compared to fiscal 1996. Increased capacity utilization in these
operations led to efficiencies that lowered average per-unit cost.
Selling and Administrative Expenses. Selling and administrative expenses
decreased approximately $1.7 million, or 8.5%, to approximately $18.3 million
for fiscal 1997 from approximately $20.0 million in fiscal 1996. The decrease
was primarily the result of a net decrease of approximately $800,000 for
incentive compensation in fiscal 1997, compared to the same period in fiscal
1996. In addition, selling and administrative expenses in fiscal 1996
included approximately $1.8 million of postponed initial public offering
costs.
Recapitalization Expense. Recapitalization expense of approximately $8.7
million recorded in fiscal 1997 includes approximately $6.2 million of
expenses paid by the Company in connection with the Recapitalization
(discussed below) and approximately $2.5 million in non-cash compensation
expense pertaining to certain modifications to management stock option
agreements which eliminated put and call rights provided therein.
Research and Technical Expenses. Research and technical expenses
increased approximately $400,000, or 11.8%, to approximately $3.8 million in
fiscal 1997 from approximately $3.4 million in fiscal 1996, primarily as a
result of salary increases combined with headcount additions which occurred in
the latter part of fiscal 1996. Also, research efforts sponsored by the
Company at various universities were increased during fiscal 1997, as compared
to the same period a year ago.
Operating Income. As a result of the above factors, the Company
recognized operating income for fiscal 1997 of approximately $24.4 million,
approximately $4.1 million of which was contributed by the Company's foreign
subsidiaries. For fiscal 1996, operating income was approximately $21.9
million, of which approximately $4.9 million was contributed by the Company's
foreign subsidiaries.
Other Costs (Income). Other cost (income), net, decreased approximately
$314,000, or 53.2%, from approximately $590,000 in fiscal 1996 to
approximately $276,000 for fiscal 1997, primarily as a result of foreign
exchange gains realized and lower domestic bank charges in fiscal 1997, as
compared to foreign exchange losses experienced during fiscal 1996.
Interest Expense. Interest expense decreased approximately $1.4 million,
or 6.4%, to approximately $20.6 million for fiscal 1997 from approximately
$22.0 million for fiscal 1996, due primarily to lower interest rates and
reduced debt issue cost amortization achieved as a result of the refinancing
of the Company's long-term debt in fiscal 1996. This decrease was partially
offset by higher revolving credit balances during fiscal 1997, compared to the
same period in fiscal 1996. In addition, interest expense for fiscal 1996
included an additional approximately $1.5 million interest expense incurred
during the period between the issuance of the 11 5/8% Senior Notes due 2004
and the redemption of the Old Notes.
Income Taxes. The provision for (benefit from) income taxes decreased by
approximately $34.6 million during fiscal 1997. During the third quarter of
fiscal 1997, the Company reversed its deferred income tax valuation allowance.
This reversal was due to the Company's assessment of past earnings history and
trends (exclusive of non-recurring charges), sales backlog, budgeted sales and
earnings, stabilization of financial condition, and the periods available to
realize the future tax benefits.
Net Income. As a result of the above factors, the Company recognized net
income for fiscal 1997 of approximately $36.3 million, compared to a net loss
of approximately $9.0 million for fiscal 1996.
[Remainder of Page Intentionally Left Blank.]
YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995
Net Revenues. 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 industry increased by 39.7% to approximately $95.3
million in fiscal 1996 from approximately $68.2 million in fiscal 1995.
Volume increased 37.5% and the average selling price per pound increased 1.6%.
Increased demand for the Company's products in fiscal 1996 from the aerospace
industry was generated primarily by domestic engine producers, as demand in
Europe remained relatively flat.
Sales to the chemical processing industry increased 5.1% to approximately
$77.9 million in fiscal 1996 from approximately $74.1 million in fiscal 1995.
Volume decreased 6.3% due to lower exports to the Asia Pacific Rim. The
average selling price per pound increased 12.1% as a result of higher demand
from both the domestic and European markets.
Sales to the LBGT industry increased 21.7% to approximately $17.4 million
in fiscal 1996 from approximately $14.3 million in fiscal 1995 as a result of
an 15.4% increase in volume and a 5.5% 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 industry increased 25.8% to approximately $8.3 million
in fiscal 1996 from approximately $6.6 million in fiscal 1995. Volume
increased 11.1% and, average selling price per pound increased by 13.2% due to
higher domestic project activity.
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 industries decreased by 36.6% to approximately $19.6
million for fiscal 1996 from approximately $30.9 million in fiscal 1995, as a
result of a 58.3% decrease in volume which was only partially offset by a
52.2% 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 remunerators 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. Cost of sales as a percentage of net revenues decreased
to 80.0% from 82.8% 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. 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. 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.
Operating Income. 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 (Income). 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 Old Notes.
Interest Expense. 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 Company's Revolving 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 Old Notes.
Income Taxes. 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 Loss. Extraordinary loss, net of tax benefit of
approximately $7.3 million, were recorded in fiscal 1996 representing the
extraordinary loss on the redemption of the Old Notes and is comprised of
approximately $3.9 million of prepayment penalties incurred as a result of the
redemption of the Old Notes 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.
Net Loss. As a result of the above factors, the Company recognized a net
loss for fiscal 1996 of approximately $9.0 million, compared to a net loss of
approximately $6.8 million for fiscal 1995.
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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 $8.9 million in fiscal
1997 and are expected to be approximately $9.0 million in fiscal 1998.
Capital expenditures were approximately $1.9 million and $2.1 million for
fiscal 1995 and 1996, respectively. The increased capital investments for
fiscal 1997 and 1998 are for significant new equipment additions and
expenditures of approximately $3.1 million for new integrated information
systems. The top three capital projects in terms of fiscal 1997 spending were
(1) an upgrade to the Company's bright anneal line furnace, (2) a new slab
grinder, and (3) the integrated information system. The Company expects that
the primary benefits of this spending are 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, other than as described above,
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 operating activities in fiscal 1997 was approximately
$6.6 million, as compared to approximately $5.3 million for fiscal 1996. The
negative cash flow from operations for fiscal 1997 was primarily a result of
increases of approximately $20.5 million in inventories which was offset by
non-cash depreciation and amortization expenses of approximately $8.6 million,
an increase in the accounts payable and accrued expenses balance of
approximately $1.0 million a decrease in accounts receivable of approximately
$1.1 million and other adjustments. Cash used for investing activities
increased from approximately $2.0 million in fiscal 1996 to approximately $8.8
million in fiscal 1997, primarily as a result of higher capital expenditures.
Cash provided by financing activities for fiscal 1997 was approximately $14.2
million due primarily to $14.6 million in increased borrowings under the
Revolving Credit Facility. Cash for fiscal 1997 decreased approximately $1.4
million, resulting in a September 30, 1997 cash balance of approximately $3.3
million. Cash in fiscal 1996 decreased approximately $347,000, resulting in a
cash balance of approximately $4.7 million at September 30, 1996.
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 Old Notes on September
23, 1996. On January 24, 1997, the Company amended its Revolving Credit
Facility by increasing the maximum credit from $50.0 million to $60.0 million.
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 EPA. If the EPA or 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 PRP at
one waste disposal site. Based on current information, the Company believes
that its involvement at this site will not have a material adverse effect on
the Company's financial condition, results of operations or liquidity although
there can be no assurance with respect thereto. Expenses related to
environmental compliance were $1.1 million for fiscal 1997 and are expected to
be approximately $1.2 million for 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--Environmental Matters."
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. During the third quarter of
fiscal 1997, the Company reversed its deferred income tax valuation allowance
of approximately $36.4 million. This reversal was due to the Company's
assessment of past earnings history and trends (exclusive of non-recurring
changes) sales backlog, budgeted sales and earnings, stabilization of
financial condition, and the periods available to realize the future tax
benefits.
RECAPITALIZATION
The Company announced on January 29, 1997 that the Recapitalization had
been effected, and that in connection therewith Holdings had completed a stock
purchase transaction with Blackstone Capital Partners II Merchant Banking Fund
L.P. and two of its affiliates ("Blackstone") and a stock redemption
transaction with MLGA Fund II, L.P. and MLGAL Partners L.P., the principal
investors in Holdings prior to the Recapitalization. As part of the
Recapitalization, Holdings redeemed approximately 79.9% of its outstanding
shares of common stock at $10.15 per share in cash and Blackstone purchased a
like number of shares at the same price. Due to this change in ownership, the
Company's ability to utilize its U.S. net operating loss carryforwards will be
limited in the future. In conjunction with the above mentioned transactions,
the maximum amount available under the Company's Revolving Credit Facility was
increased from $50 to $60 million.
ACQUISITION BY HOLDINGS
On June 11, 1997 Inco Limited ("Inco") and Blackstone jointly announced
the execution of a definitive agreement for the sale by Inco of 100% of its
Inco Alloy International ("IAI") business unit to Holdings, an affiliate of
Blackstone. Upon consummation of the transaction, Blackstone plans to combine
the operations of IAI and the Company. Completion of the sale will be subject
to a number of conditions and the receipt of regulatory and other approvals,
including anti-trust clearance. Closing of the sale is currently expected to
take place in the first quarter of calendar 1998.
ACCOUNTING PRONOUNCEMENTS
SFAS No. 129, "Disclosure of Information about Capital Structure",
is effective for the year ending September 30, 1998. SFAS No. 130, "Reporting
Comprehensive Income", and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", are effective for the year ending
September 30, 1999. In the opinion of management, SFAS No. 129, SFAS No. 130,
and SFAS No. 131 will not have a material impact on the Company's financial
position or results of operations, as these three statements are disclosure
oriented.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTS
Board of Directors
Haynes International, Inc.
We have audited the consolidated financial statements and the financial
statement schedule of Haynes International, Inc. (the Company), a wholly owned
subsidiary of Haynes Holdings, Inc., listed in Item 14(a) of this Form 10-K.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule
based