Back to GetFilings.com
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, 1998.
[ ] 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 18, 1998 was 100.
Documents Incorporated by Reference: None
The Index to Exhibits begins on page 72 in the sequential numbering system.
-----
Total pages: 76
------
PAGE
TABLE OF CONTENTS
PART I Page
----
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 14
Item 6. Selected Consolidated Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 31
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants on Accounting 56
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 57
Item 11. Executive Compensation 60
Item 12. Security Ownership of Certain Beneficial Owners and Management 68
Item 13. Certain Relationships and Related Transactions 69
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 69
PAGE
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 1998. 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 28% of its fiscal
1998 net revenues from products that are protected by United States patents and
derived an additional approximately 21% of its fiscal 1998 net revenues from
sales of products that are not patented, but for which the Company has limited
or no competition.
PRODUCTS
The alloy market consists of four primary segments: stainless steel, super
stainless steel, nickel alloys and high performance alloys. The Company competes
exclusively in the high performance alloy segment, which includes HTA and CRA
products. The Company believes that the high performance alloy segment
represents less than 10% of the total alloy market. The percentages of the
Company's total product revenue and volume presented in this section are based
on data which include revenue and volume associated with sales by the Company to
its foreign subsidiaries, but exclude revenue and volume associated with sales
by such foreign subsidiaries to their customers. Management believes, however,
that the effect of including revenue and volume data associated with sales by
its foreign subsidiaries would not materially change the percentages presented
in this section. In fiscal 1998, HTA and CRA products accounted for
approximately 64% and 36%, 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 continues to
represent an area of potential long-term growth for the Company. Unlike
aerospace applications within the HTA product market, the development of new
market applications for CRA products generally does not require long lead times.
PAGE
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) (2) Aero-burner cans, after-burner High strength, oxidation resistant
components cobalt-based alloys
HAYNES 625 (1964) Aero/CPI-ducting, tanks, vessels, weld Good fabricability and general
overlays corrosion resistance
HAYNES 263 (1960) Aero/LBGT-components for gas turbine Good ductility and high strength at
hot gas exhaust pan 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 1998, sales of these
HTA products accounted for approximately 23% 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 11% of the
Company's net revenues in fiscal 1998. 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 7% of the Company's net revenues in fiscal 1998. These newer
alloys are continuing to gain acceptance for applications in industrial heating
and waste incineration.
PAGE
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 1998, these two alloys accounted
for approximately 2% 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 1998, sales of these
products accounted for approximately 4% of the Company's net revenues.
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)
- --------------------------- ------------------------------------------
HASTELLOY C-2000 (1995) (2) CPI-tanks, mixers, piping
HASTELLOY B-3 (1994) (2) CPI-acetic acid plants
HASTELLOY D-205 (1993) (2) CPI-plate heat exchangers.
ULTIMET (1990) (2) CPI-pumps, valves
HASTELLOY G-50 (1989) Oil and gas-sour gas tubulars
HASTELLOY C-22 (1985) (2) CPI/FGD-tanks, mixers, piping
HASTELLOY G-30 (1985) (2) CPI-tanks, mixers, piping
HASTELLOY B-2 (1974) CPI-acetic acid
HASTELLOY C-4 (1973) CPI-tanks, mixers, piping
HASTELLOY C-276 (1968) CPI/FGD/oil and gas-tanks, mixers, piping
ALLOY AND YEAR INTRODUCED FEATURES
- --------------------------- -----------------------------------------------------------------------------
HASTELLOY C-2000 (1995) (2) Versatile alloy with good resistance to uniform corrosion
HASTELLOY B-3 (1994) (2) Better fabrication characteristics compared to other nickel-molybdenum alloys
HASTELLOY D-205 (1993) (2) Corrosion resistance to hot sulfuric acid
ULTIMET (1990) (2) Wear and corrosion resistant nickel-based alloy
HASTELLOY G-50 (1989) Good resistance to down hole corrosive environments
HASTELLOY C-22 (1985) (2) Resistance to localized corrosion and pitting
HASTELLOY G-30 (1985) (2) Lower cost alloy with good corrosion resistance in phosphoric acid
HASTELLOY B-2 (1974) Resistance to hydrochloric acid and other reducing acids
Good thermal stability
HASTELLOY C-4 (1973)
HASTELLOY C-276 (1968) Broad resistance to many environments
- ----------------
(1) "CPI" refers to the chemical processing industry; "FGD" refers to flue gas
desulfurization.
(2) Represents a patented product or a product with respect to which the Company
believes it has limited or no competition.
During fiscal 1998, 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-4 is specified in many chemical processing
applications in Germany and is sold almost exclusively to that market.
PAGE
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. 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 8% of the Company's net revenues in fiscal 1998.
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 driven by demand for key
end use industries such as automobiles, housing, health care, agriculture, and
metals production. CRA products supplied by the Company have been used in the
chemical processing industry since the early 1930s.
Demand for the Company's products in this industry is based on the level of
maintenance, repair and expansion of existing chemical processing facilities as
well as the construction of new facilities. The Company believes the extensive
worldwide network of Company-owned service centers and independent distributors
is a competitive advantage in marketing its CRA products 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. The
demand for land-based gas turbines is also growing rapidly for use in power
barges with mobility and as temporary base-load-generating units for countries
that have numerous islands and a large coast line.
PAGE
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, as amended (the "Clean Air Act"), mandates a two-phase program
aimed at significantly reducing sulfur 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. 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. Market development professionals 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.
PAGE
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. Effective January, 1999, the Company will transfer its Kokomo, Indiana
service center to a leased site in Lebanon, Indiana. This new facility will
have water jet cutting capability and specialized cutting equipment to service
the Company's customers more efficiently. Approximately 78% of the Company's
net revenues in fiscal 1998 was generated by the Company's direct sales
organization. The remaining 22% of the Company's fiscal 1998 net revenues was
generated by independent distributors and licensees in the United States, Europe
and Japan, some of whom have been associated with the Company for over 30 years.
The following table sets forth the approximate percentage of the Company's
fiscal 1998 net revenues generated through each of the Company's distribution
channels.
DOMESTIC FOREIGN TOTAL
------------ ----------- ---------
Company sales office/direct 29% 9% 38%
Company-owned service centers 18% 22% 40%
Independent distributors/sales agents 13% 9% 22%
------------ ----------- ---------
Total 60% 40% 100%
============ =========== =========
The top twenty customers not affiliated with the Company accounted for
approximately 39% of the Company's net revenues in fiscal 1998. Sales to
Spectrum Metals, Inc. and Rolled Alloys, Inc., which are affiliated with each
other, accounted for an aggregate of 10% of the Company's net revenues in fiscal
1998. No other customer of the Company accounted for more than 10% of the
Company's net revenues in fiscal 1998.
The Company's foreign and export sales were approximately $84.3 million,
$81.4 million and $100.4 million for fiscal 1996, 1997 and 1998, respectively.
Additional information concerning foreign operations and export sales is set
forth in Note 14 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 43%, 24%, 10%, 15%, 5% and 3%,
respectively, of total volume sold in fiscal 1998 (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.
PAGE
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, 1998, the Company's backlog orders aggregated
approximately $40.2 million, compared to approximately $60.6 million at
September 30, 1997, and approximately $53.7 million at September 30, 1996. The
decrease in backlog orders is primarily due to a decrease in orders for chemical
processing and aerospace products worldwide during the latter half of fiscal
1998. Substantially all orders in the backlog at September 30, 1998 are expected
to be shipped within the twelve months beginning October 1, 1998. 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)
1994 1995 1996 1997 1998
----- ----- ----- ----- ------
1st $29.5 $49.7 $61.2 $63.8 $ 60.8
2nd $35.5 $64.8 $61.9 $65.4 $ 56.2
3rd $38.0 $55.8 $57.5 $55.5 $ 51.0
4th $41.5 $49.9 $53.7 $60.6 $ 40.2*
*Backlog at October 31, 1998 increased to $48.4.
PAGE
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 averages approximately 30 days, 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 has in the
past, including fiscal 1998, covered approximately 25% to 50% of its open market
exposure to nickel price changes through hedging activities with brokers on the
London Metals Exchange. Effective October 1, 1998, the Company has ceased its
hedging activities for nickel due to the recent low sustained levels of nickel
prices. 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
1998 2.40
PAGE
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, 1998, the research and technical
development staff consisted of 39 persons, 16 of whom have engineering or
science degrees, including seven with doctoral degrees, with the majority of
degrees in the field of metallurgical engineering.
Research and technical development costs relate 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 $3.9 million, $3.8 million and $3.4 million for
research and technical development activities for fiscal 1998, 1997 and 1996,
respectively.
During fiscal 1998, exploratory alloy development projects were focused on
new high temperature alloy products for gas turbine and industrial heat service.
Engineering projects include new manufacturing process development, specialized
test data development and application support for large volume projects
involving power generation and radioactive waste containment. The Company is
continuing to develop an extensive database storage and retrieval system to
better manage its corrosion, high temperature and mechanical property data.
Over the last ten years, the Company's technical programs have yielded nine
new proprietary alloys and 14 United States patents, with an additional two
United States patent applications pending. The Company currently maintains a
total of about 31 United States patents and approximately 200 foreign
counterpart patents and applications targeted at countries with significant or
potential markets for the patented products. In fiscal 1998, approximately 28%
of the Company's net revenues was derived from the sale of patented products and
an additional approximately 42% 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. Six of the
alloys considered by management to be of future commercial significance,
HASTELLOY G-30, HAYNES 230, HASTELLOY C-22, HAYNES HR-120, HAYNES 242 and
ULTIMET, are protected by United States patents that continue until the years
2001, 2002, 2002, 2008, 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 Special
Metals, 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, 1998, the Company had approximately 993 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, 1998, 500 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, Louisiana or
Openshaw, England plants are represented by a labor union. Management considers
its employee relations in each of the facilities to be satisfactory.
PAGE
ENVIRONMENTAL MATTERS
The Company's facilities and operations are subject to certain foreign,
federal, state and local laws and regulations relating to the protection of
human health and the environment, including those governing the discharge of
pollutants into the environment and the storage, handling, use, treatment and
disposal of hazardous substances and wastes. Violations of these laws and
regulations can result in the imposition of substantial penalties and can
require facilities improvements. In addition, the Company may be required in the
future to comply with certain regulations pertaining to the emission of
hazardous air pollutants under the Clean Air Act. However, since these
regulations have not been proposed or promulgated, the Company cannot predict
the cost, if any, associated with compliance with such regulations. Expenses
related to environmental compliance were approximately $1.4 million for fiscal
1998 and are expected to be approximately $1.3 million for fiscal year 1999.
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, record keeping requirements relating to, and handling of,
polychlorinated biphenyls and violations of record keeping and notification
requirements relating to industrial waste water discharge. Additions and
improvements may be required at the Kokomo, Indiana Wastewater Treatment
Facility based on proposed restrictions of the local sewer use ordinance.
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. As of September 30,1998,
capital expenditures of approximately $100,000 are budgeted for wastewater
treatment improvements.
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. At September 30, 1998, approximately $150,000 was
accrued for final closure related costs. Closure certification is anticipated
in fiscal 1999. 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.
PAGE
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.
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.
Zurich, Switzerland--all product forms.
The Kokomo plant, the primary production facility, is located on
approximately 230 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.
The Zurich warehouse consists of over 50,000 square feet of building on a
single site.
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.
PAGE
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 benefits to levels
prevailing before the reduction of those benefit levels on January 1, 1995, and
to maintain the restored benefit levels for the lives of the covered retirees
and their surviving spouses. The parties have settled the lawsuit, and such
lawsuit was dismissed as of September 18, 1998 pursuant to an agreement which
provides that the Company will provide a lifetime medical benefit plan for the
Plaintiffs in exchange for the retirees assuming a greater portion of future
health cost increases.
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 18, 1998 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, 1998 and 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 herein in response to Item 8.
(Remainder of page intentionally left blank.)
PAGE
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, 1994, 1995, 1996, 1997 and 1998 are derived from the audited
consolidated financial statements of the Company.
These selected financial data are not covered by the auditors' report and
are qualified in their entirety by reference to, and should be read in
conjunction with, "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 Year Ended Year Ended Year Ended
September 30, September 30, September 30, September 30,
STATEMENT OF OPERATIONS DATA: 1994 1995 1996 1997
-------------- -------------- -------------- --------------
Net revenues $ 150,578 $ 201,933 $ 226,402 $ 235,760
Cost of sales(1) 171,957(2) 167,196 181,173 180,504
Selling and administrative expenses 15,039 15,475 19,966(3) 18,311
Recapitalization expense - - - 8,694(4)
Research and technical expenses 3,630 3,049 3,411 3,814
Operating income (loss) (40,048) 16,213 21,852 24,437
Other cost, net 816 1,767 590 276
Terminated acquisition costs - - - -
Interest expense, net 19,582 19,904 21,102(3) 20,456
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle (60,866) (6,771) (1,780) 36,315(6)
Extraordinary item, net of tax benefit (7,256)(3) -
Cumulative effect of change in accounting
principle (net of tax benefit) (79,630)(7) - - -
-------------- -------------- -------------- --------------
Net income (loss) (140,496) (6,771) (9,036) 36,315
September 30, September 30, September 30, September 30,
BALANCE SHEET DATA: 1994 1995 1996 1997
-------------- -------------- -------------- --------------
Working capital (9) $ 60,182 $ 62,616 $ 57,307 $ 57,063
Property, plant and equipment, net 43,119 36,863 31,157 32,551
Total assets 145,723 151,316 161,489 216,319
Total debt 148,141 152,477 169,097 184,213
Accrued post-retirement benefits 94,148 94,830 95,813 96,201
Stockholder's equity (Capital deficiency) (116,029) (121,909) (130,341) (94,435)
September 30, September 30, September 30, September 30,
OTHER FINANCIAL DATA: 1994 1995 1996 1997
-------------- -------------- -------------- --------------
Depreciation and amortization (10) $ 51,555 $ 9,000 $ 9,042 $ 8,197
Capital expenditures 771 1,934 2,092 8,863
EBITDA (11) 10,691 23,446 32,141 41,302
Ratio of EBITDA to interest expense 0.55x 1.18x 1.52x 2.02x
Ratio of earnings before fixed
charges to fixed charges (12) - - 1.01x 1.17x
Net cash provided from (used in) operating activities $ (12,801) $ (2,883) $ (5,343) $ (6,596)
Net cash provided from (used in) investment
activities 746 (1,895) (2,025) (8,830)
Net cash provided from (used in) financing
activities 7,102 3,912 7,116 14,185
-------------- -------------- -------------- --------------
PAGE
Year Ended
September 30,
STATEMENT OF OPERATIONS DATA: 1998
--------------
Net revenues $ 246,944
Cost of sales(1) 191,849
Selling and administrative expenses 18,166
Recapitalization expense -
Research and technical expenses 3,939
Operating income (loss) 32,990
Other cost, net 952
Terminated acquisition costs 6,199(5)
Interest expense, net 21,066
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle 2,456
Extraordinary item, net of tax benefit -
Cumulative effect of change in accounting
principle (net of tax benefit) (450)(8)
--------------
Net income (loss) 2,006
September 30,
BALANCE SHEET DATA: 1998
--------------
Working capital (9) $ 66,974
Property, plant and equipment, net 29,627
Total assets 207,263
Total debt 175,877
Accrued post-retirement benefits 96,483
Stockholder's equity (Capital deficiency) (90,938)
September 30,
OTHER FINANCIAL DATA: 1998
--------------
Depreciation and amortization (10) $ 8,148
Capital expenditures 5,919
EBITDA (11) 40,186
Ratio of EBITDA to interest expense 1.91x
Ratio of earnings before fixed
charges to fixed charges (12) 1.22x
Net cash provided from (used in) operating activities $ 14,584
Net cash provided from (used in) investment
activities (5,750)
Net cash provided from (used in) financing
activities (8,562)
--------------
(1) The Company was acquired by Morgan, Lewis, Githens & Ahn ("MLGA") and the management of the Company in August 1989
(the "1989 Acquisition"). 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 $488 for fiscal 1994. 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) 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 terminated 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.
PAGE
(4) 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 were
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.
(5) Terminated acquisition costs of approximately $6,199 were recorded in fiscal 1998 in connection with the abandoned
attempt to acquire Inco Alloys International by Holdings. These costs previously had been deferred.
(6) 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.
(7) 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.
(8) On November 20, 1997, the Financial Accounting Standards Board's Emerging Issues Task Force ("EITF") issued a
consensus ruling which requires that certain business process reengineering and information technology transformation
costs be expensed as incurred. The EITF also consented that if such costs were previously capitalized, then any
remaining unamortized portion of those identifiable costs should be written off and reported as a cumulative effect of
a change in accounting principle in the first quarter of fiscal 1998. Accordingly, the Company recorded the
cumulative effect of this accounting change, net of tax, of $450, resulting from a pre-tax write-off of $750 related
to reengineering charges involved in the implementation of an information technology project.
(9) Reflects the excess of current assets over current liabilities as set forth in the Consolidated Financial
Statements.
(10) Reflects (a) depreciation and amortization as presented in the Company's Consolidated Statement of Cash Flows and
set forth in Note (11) below, plus or minus (b) 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 (11) below.
(11) Represents for the relevant period net income plus expenses recognized for interest, taxes, depreciation,
amortization and other non-cash charges, (i) plus the refinancing costs set forth in Note 3, part (a) and (b) for
fiscal 1996, (ii) plus recapitalization costs outlined in Note 4, and $250 of failed acquisition costs for fiscal
1997, and (iii) plus terminated acquisition costs outlined in Note 5, and $450 of business process reengineering
costs outlined in Note 8 for fiscal 1998. In addition to net interest expense as listed in the table, the following
charges are added to net income to calculate EBITDA:
1994 1995 1996 1997 1998
-------- -------- -------- --------- --------
Provision for (benefit from) income taxes $ 420 $ 1,313 $ 1,940 $(32,610) $ 2,317
Depreciation 8,208 8,188 7,751 7,477 8,029
Amortization:
Debt issuance costs 1,680 1,444 4,698 1,144 1,247
Goodwill 38,607 - - - -
Inventory (see note (1) above) 488 - - - -
Prepaid pension costs 314 130 308 333 (163)
-------- -------- -------- --------- --------
41,089 1,574 5,006 (23,656) 11,430
SFAS 106-Post-retirement 3,938 682 983 387 282
Amortization of debt issuance costs (1,680) (1,444) (4,698) (1,144) (1,247)
-------- -------- -------- --------- --------
Total $51,975 $10,313 $10,982 $(24,413) $10,465
======== ======== ======== ========= ========
PAGE
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.
(12) 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 a 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 $60,446 and $5,458 for fiscal 1994 and
1995, respectively.
(Remainder of page intentionally left blank.)
PAGE
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 64% and 36%, respectively, of the Company's net revenues in
fiscal 1998. 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. The Company also produces its
alloys in round and tubular forms. In fiscal 1998, flat products accounted for
65% of shipments and 62% 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 1998, to a low of 13.3
million pounds in fiscal 1994. The Company is not currently capacity
constrained. 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. Effective January, 1999, the Company will
transfer its Kokomo, Indiana service center to a leased site in Lebanon,
Indiana. This new facility will have water jet cutting capability and
specialized cutting equipment to service the Company's customers more
efficiently. Approximately 78% of the Company's net revenues in fiscal 1998 was
generated by the Company's direct sales organization. The remaining 22% of the
Company's fiscal 1998 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 1998, sales to customers outside the United States accounted for
approximately 41% 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.
PAGE
In fiscal 1998, proprietary products represented approximately 28% 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 1998, these other alloys represented
approximately 21% 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 lead times from order to shipment are approximately 15
to 17 weeks.
OVERVIEW OF MARKETS
A breakdown of sales, shipments and average selling prices to the markets
served by the Company for the last five fiscal years is shown in the following
table: (Note: Markets prior to 1997 have been reclassified due to improved
identification techniques implemented in 1997 by the Company.)
1994 1994 1995 1995 1996 1996 1997 1997 1998 1998
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
SALES (DOLLARS IN % OF % OF % OF % OF % OF
MILLIONS) AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Aerospace $ 47.9 31.8% $ 68.2 33.8% $ 95.3 42.1% $ 111.2 47.2% $ 111.9 45.3%
Chemical processing 51.9 34.5 74.1 36.7 77.9 34.4 69.3 29.4 79.7 32.3
Land-based gas turbines 17.0 11.3 14.3 7.1 17.4 7.7 17.2 7.4 17.5 7.1
Flue gas desulfurization 10.2 6.7 6.6 3.3 8.3 3.7 6.7 2.7 8.4 3.4
Oil and gas 4.2 2.8 4.5 2.2 4.3 1.9 7.8 3.3 5.9 2.4
Other markets 17.3 11.5 30.9 15.3 19.6 8.6 20.1 8.5 19.8 8.0
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total product 148.5 98.6 198.6 98.4 222.8 98.4 232.3 98.5 243.2 98.5
Other revenue (1) 2.1 1.4 3.3 1.6 3.6 1.6 3.5 1.5 3.7 1.5
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net revenues $ 150.6 100.0% $ 201.9 100.0% $ 226.4 100.0% $ 235.8 100.0% $ 246.9 100.0%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
U.S. $ 94.8 $ 122.3 $ 142.0 $ 154.3 $ 146.5
Foreign $ 55.8 $ 79.6 $ 84.4 $ 81.5 $ 100.4
SHIPMENTS BY MARKET (MILLIONS OF
POUNDS)
Aerospace 3.4 25.6% 4.8 29.4% 6.6 40.2% 8.3 45.9% 7.6 41.1%
Chemical processing 5.2 39.1 6.4 39.3 6.0 36.6 5.7 31.9 6.7 36.2
Land-based gas turbines 1.6 12.0 1.3 8.0 1.5 9.2 1.4 8.1 1.6 8.7
Flue gas desulfurization 1.5 11.3 0.9 5.5 1.0 6.1 0.7 3.8 1.1 5.9
Oil and gas 0.4 3.0 0.5 3.1 0.3 1.8 0.7 3.8 0.5 2.7
Other markets 1.2 9.0 2.4 14.7 1.0 6.1 1.2 6.5 1.0 5.4
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total Shipments 13.3 100.0% 16.3 100.0% 16.4 100.0% 18.0 100.0% 18.5 100.0%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
AVERAGE SELLING
PRICE PER POUND
Aerospace $ 14.09 $ 14.21 $ 14.44 $ 13.40 $ 14.72
Chemical processing 9.98 11.58 12.98 12.16 11.90
Land-based gas turbines 10.63 11.00 11.60 12.29 10.94
Flue gas desulfurization 6.80 7.33 8.30 9.57 7.64
Oil and gas 10.50 9.00 14.33 11.14 11.80
Other markets 14.42 12.88 19.60 16.75 19.80
All markets $ 11.17 $ 12.18 $ 13.59 $ 12.91 $ 13.15
------- ------- ------- ------- -------
- --------------------
(1) Includes toll conversion and royalty income.
Fluctuations in net revenues and volume from fiscal 1994 through fiscal 1998
are a direct result of significant changes in each of the Company's major
markets.
PAGE
Aerospace. Demand for the Company's products in the aerospace industry is
driven by orders for new jet engines as well as requirements for spare parts and
replacement parts for jet engines. Demand for the Company's aerospace products
declined significantly from fiscal 1991 to fiscal 1992, as order rates for
commercial aircraft fell below delivery rates due to cancellations and deferrals
of previously placed orders. The Company believes that, as a result of these
cancellations and deferrals, engine manufacturers and their fabricators and
suppliers were caught with excess inventories. The draw down of these
inventories, and the implementation of just-in-time delivery requirements by
many jet engine manufacturers, exacerbated the decline experienced by suppliers
to these manufacturers, including the Company. Demand for products used in
manufacturing military aircraft and engines also dropped during this period as
domestic defense spending declined following the Persian Gulf War. These
conditions persisted through fiscal 1994.
The Company began to see a recovery in the demand for its aerospace products
at the beginning of fiscal 1995. Reflecting increased aircraft production and
maintenance, the Company's net revenues from sales to the aerospace industry in
1996 and 1997 increased 39.7% and 16.7%, respectively, over the preceding
period.
Sales to the aerospace market in fiscal 1998 were negatively affected by
weaker than expected deliveries of commercial aircraft due to deferrals and
cancellations at the major aircraft producers. However, the Company expects the
increase in the number of "in-service" gas turbine engines through fiscal 1998
to provide a consistent stream of maintenance and repair requirements for Haynes
products. In addition, the Company expects continued compliance efforts with
Stage III noise regulations to keep demand strong for Haynes products in the
"hush kit" retrofitting aerospace market segment.
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.
In fiscal 1998, 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
gradually 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 moderate 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 moderate 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
preferred crops on the acreage they choose. 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 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 1990's, 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.
PAGE
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, due to the over-compliance with Phase I
requirements as discussed below.
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 SO2 and nitrogen oxides ("NO") 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.
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 Clean Air Act. To reach compliance, a Phase I utility could use one or more
of the following compliance methods: (1) fuel switching and/or fuel blending
with lower sulfur coal; (2) obtaining additional allowances; (3) installing flue
gas desulfurization equipment (i.e., scrubbers); (4) using previously
implemented emission controls; (5) retiring units; (6) boiler repowering; (7)
substituting Phase II units for Phase I units; and (8) compensating Phase I
units with Phase II units.
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 for 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 market share. With increasing competition and
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. 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.
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. 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. The gas
drilling rate remains strong, as is the rig count in both the Gulf of Mexico and
inland areas. Demand for natural gas is expected to grow moderately over the
next several years.
PAGE
Other Markets. In addition to the industries described above, the Company
also targets a variety of other markets. Representative industries served in
fiscal 1998 include waste incineration, industrial heat treating, automotive,
medical and instrumentation. The automotive and industrial heating markets are
highly cyclical and very competitive. However, continual growth opportunities
exist in the automotive industry due to new safety, engine controls, and
emission systems technologies. Also, increasing requirements for improved
materials performance in industrial heating are expected to increase demand for
the Company's products. Waste incineration presents opportunities for the
Company's alloys as landfill space is diminishing and government concerns over
pollution, chemical weapon stockpiles, and chemical and nuclear waste handling
are heightening. 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.
(Remainder of page intentionally left blank.)
PAGE
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,
1996 1997 1998
------------- ------------- -------------
Net revenues 100.0% 100.0% 100.0%
Cost of sales 80.0 76.6 77.7
Selling and administrative expenses 8.8(1) 7.8 7.4
Recapitalization expense - 3.7(2) -
Research and technical expenses 1.5 1.6 1.6
------------- ------------- -------------
Operating income 9.7 10.3 13.3
Other cost, net 0.3 0.1 0.4
Terminated acquisition costs - - 2.5(3)
Interest expense 9.7(1) 8.7 8.6
Interest income (0.4)(1) (0.1) (0.1)
Income (loss) before provision for income
taxes, extraordinary items, and cumulative
effect of change in accounting principle 0.1 1.6 1.9
Provision for (benefit from) income taxes 0.9 (13.8) 0.9
Extraordinary item, net of tax benefit (3.2)(1) - -
Cumulative effect of a change in
accounting principle - - (0.2)(4)
Net income (loss) (4.0)% 15.4% .8%
- -----------------------------
(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 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. 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.
(3) Terminated acquisition costs of approximately $6.2 million were recorded in fiscal 1998
in connection with the abandoned attempt to acquire Inco Alloys International by Holdings.
These costs previously had been deferred.
(4) On November 20, 1997, the Financial Accounting Standards Board's Emerging Issues Task
Force ("EITF") issued a consensus ruling which requires that certain business process
reengineering and information technology transformation costs be expensed as incurred. The
EITF also consented that if such costs were previously capitalized, then any remaining
unamortized portion of those identifiable costs should be written off and reported as a
cumulative effect of a change in accounting principle in the first quarter of fiscal 1998.
Accordingly, the Company recorded the cumulative effect of this accounting change, net of
tax, of $450,000, resulting from a pre-tax write-off of $750,000 related to reengineering
charges involved in the implementation of an information technology project.
PAGE
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30, 1997
Net Revenues. Net revenues increased approximately $11.2 million, or 4.7%,
to approximately $246.9 million in fiscal 1998 from approximately $235.8 million
in fiscal 1997, primarily as a result of a 2.8% increase in shipments, from
approximately 18.0 million pounds in fiscal 1997 to approximately 18.5 million
pounds in fiscal 1998, and a 1.9% increase in average selling prices, from
approximately $12.91 per pound in fiscal 1997 to approximately $13.15 per pound
in fiscal 1998.
Sales to the aerospace industry for fiscal 1998 increased slightly to
approximately $111.9 million from approximately $111.2 million for fiscal 1997.
The increase in revenue can be attributed to a 9.9% increase in average selling
prices per pound to approximately $14.72 in fiscal 1998 from approximately
$13.40 in fiscal 1997. This increase was due to proportionately more sales of
the higher-priced, cobalt-based alloys and higher value added forms. This price
increase offset an 8.4% decline in volume caused by some slackening in demand
exacerbated by some unplanned production outages. The drop in demand during the
last six months of fiscal 1998 appears to be a result of inventory corrections
by commercial aircraft and component suppliers.
Sales to the chemical processing industry during fiscal 1998 increased by
15.0% to approximately $79.7 million from approximately $69.3 million for fiscal
1997. Volume shipped to the chemical processing industry during fiscal 1998
increased by 17.5% to approximately 6.7 million pounds, compared to 5.7 million
pounds in fiscal 1997. The increase in volume stems from higher sales to export
markets including project sales through the Company's foreign subsidiaries.
Average selling prices per pound were lower in fiscal 1998 reflecting heightened
competition, lower raw material costs, and a higher percentage of project versus
maintenance business.
Sales to the LBGT industry during fiscal 1998 increased 1.7% to
approximately $17.5 million from approximately $17.2 million in fiscal 1997.
Volume increased by 14.3% to approximately 1.6 million pounds, compared to 1.4
million pounds in fiscal 1997 while average selling prices decreased 11.0% The
volume increase is primarily attributable to improved sales during the fourth
quarter of the Company's proprietary alloys (HAYNES 230 alloy and HAYNES
HR-120 alloy) for a major gas turbine manufacturer. The decrease in average
selling price is a result of higher sales of lower cost, lower priced iron-based
alloys.
Sales to the FGD industry increased 25.4% to approximately $8.4 million in
fiscal 1998 from approximately $6.7 million in fiscal 1997. Volume increased
57.1% while average selling price per pound decreased 20.2% reflecting the
highly cyclical and competitive nature of this market.
Sales to the oil and gas industry decreased 24.4% to approximately $5.9
million for fiscal 1998 from approximately $7.8 million in fiscal 1997 as a
result of lower activity in the production of deep sour gas. These are
typically large projects and may vary in number significantly from year to year.
Sales to other industries decreased 1.5% in fiscal 1998 to approximately
$19.8 million from approximately $20.1 million for the same period a year ago,
as a result of a volume decrease of 16.7% partially offset by an 18.2% increase
in average selling price. The decrease in volume can be attributed to lower
sales for automotive applications. The increase in the average selling price
per pound stems from a better mix of higher priced products during fiscal 1998
compared to fiscal 1997.
Cost of Sales. Cost of sales as a percentage of net revenues increased to
77.7% in fiscal 1998 compared to 76.6% in fiscal 1997. Volume in the higher
priced, higher value added sheet and coil forms decreased in fiscal 1998 in part
due to unplanned outages in sheet and coil production equipment. This decrease
was partially offset by reduced material costs, primarily nickel, during fiscal
1998 compared to fiscal 1997.
Selling and Administrative Expenses. Selling and administrative expenses
decreased approximately $100,000 to approximately $18.2 million for fiscal 1998
from approximately $18.3 million in fiscal 1997 primarily as a result of lower
benefit related costs partially offset by increased headcount.
Research and Technical Expenses. Research and technical expenses increased
approximately $100,000, to approximately $3.9 million in fiscal 1998 from
approximately $3.8 million in fiscal 1997, primarily as a result of salary
increases.
Operating Income. As a result of the above factors, the Company recognized
operating income for fiscal 1998 of approximately $33.0 million, approximately
$5.9 million of which was contributed by the Company's foreign subsidiaries.
For fiscal 1997, operating income was approximately $24.4 million, of which
approximately $4.1 million was contributed by the Company's foreign
subsidiaries.
PAGE
Other Costs (Income). Other cost (income), net, increased approximately
$676,000, from approximately $276,000 in fiscal 1997 to approximately $952,000
for fiscal 1998, primarily as a result of foreign exchange losses realized in
fiscal 1998, as compared to foreign exchange gains experienced during fiscal
1997.
Terminated Acquisition Costs. Terminated acquisition costs of
approximately $6.2 million were recorded in fiscal 1998 in connection with the
abandoned attempt by Holdings to acquire Inco Alloys International. These costs
previously had been deferred.
Interest Expense. Interest expense increased approximately $600,000, to
approximately $21.2 million for fiscal 1998 from approximately $20.6 million for
fiscal 1997. Higher revolving credit balances during the first nine months of
fiscal 1998 compared to the same period in fiscal 1997 and higher debt issuance
cost amortization in fiscal 1998 contributed to this increase.
Income Taxes. The provision for income taxes of approximately $2.3 million
for fiscal 1998 was primarily due to taxes on higher foreign earnings. The
benefit from income taxes of approximately $32.6 million for fiscal 1997 was due
primarily to the Company's reversal of its deferred tax valuation allowance.
Net Income. As a result of the above factors, the Company recognized net
income for fiscal 1998 of approximately $2.0 million, compared to net income of
approximately $36.3 million for fiscal 1997.
(Remainder of page intentionally left blank.)
PAGE
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 9.8% increase in shipments, from
approximately 16.4 million pounds in fiscal 1996 to approximately 18.0 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 25.8% increase in volume to
approximately 8.3 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 5.0% to approximately 5.7 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 decreased 1.1% to
approximately $17.2 million from approximately $17.4 million in fiscal 1996.
Volume decreased by 6.7% to approximately 1.4 million pounds, compared to 1.5
million pounds in fiscal 1996, while average selling prices increased 5.9%.
Higher domestic activity was offset by lower export and European activity.
Sales to the FGD industry declined 19.3% to approximately $6.7 million in
fiscal 1997, from approximately $8.3 million in fiscal 1996. Volume declined
30.0% while average selling price per pound increased 15.3%. 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.
PAGE
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.)
PAGE
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 $5.9 million in fiscal 1998 and are
expected to be approximately $14.2 million in fiscal 1999. Capital expenditures
were approximately $2.1 million and $8.9 million for fiscal 1996 and 1997,
respectively. The largest capital item for fiscal 1998 was $2.5 million for the
purchase of the warehouse formerly leased by the Company's Swiss subsidiary,
Nickel Contor AG. Certain anticipated spending was deferred during the
acquisition attempt of Inco Alloys International. Planned fiscal 1999 capital
spending is targeted for the new Midwest Service Center in Lebanon, Indiana and
for the Company's flat product production areas including the four high mill and
cold finishing areas. The Company expects the primary benefits of the four high
mill and cold finishing capital expenditures will be to increase the annual
production capacity of cold finished flat product by 80% from 10 million pounds
to 18 million pounds. The Company does not expect such capital expenditures
will have a material adverse effect on its long-term liquidity. The Company
expects to fund its working capital needs and capital expenditures with cash
provided from operations, supplemented by borrowings under its Revolving Credit
Facility. The Revolving Credit Facility expires August 23, 1999. The Company
expects the facility to be either renewed or refinanced. The Company believes
these sources of capital will be sufficient to fund planned 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 provided from operating activities in fiscal 1998 was
approximately $14.6 million, as compared to net cash used in operating
activities of approximately $6.6 million for fiscal 1997. The positive cash flow
from operations for fiscal 1998 was primarily a result of a decrease of
approximately $12.9 million in inventories and by non-cash depreciation and
amortization expenses of approximately $9.3 million, a decrease in the accounts
payable and accrued expenses balance of approximately $3.9 million, an increase
in accounts receivable of approximately $7.1 million and other adjustments. Cash
used for investing activities decreased from approximately $8.9 million in
fiscal 1997 to approximately $5.8 million in fiscal 1998, almost entirely due to
reduction in capital expenditures. Cash used in financing activities for fiscal
1998 was approximately $8.6 million due primarily to $10.4 million in decreased
borrowings under the Revolving Credit Facility, partially offset by
approximately $1.8 million in long term borrowing by the Company's Swiss
subsidiary. Cash for fiscal 1998 increased approximately $400,000, resulting in
a September 30, 1998 cash balance of approximately $3.7 million. Cash in fiscal
1997 decreased approximately $1.4 million from fiscal 1996, resulting in a cash
balance of approximately $3.3 million at September 30, 1997.
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 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