UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended September 30, 1997.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 333-5411
HAYNES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1185400
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1020 West Park Avenue, Kokomo, Indiana 46904-9013
(Address of principal executive offices) (Zip Code)
(765) 456-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
by Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any Amendment to
this Form 10-K. X
The registrant is a privately held corporation. As such, there is no
practicable method to determine the aggregate market value of the voting stock
held by non-affiliates of the registrant.
The number of shares of Common Stock, $.01 par value, of Haynes International,
Inc. outstanding as of December 19, 1997 was 100.
Documents Incorporated by Reference: None
The Index to Exhibits begins on page 75 in the sequential numbering system.
Total pages: 81
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 17
Item 6. Selected Consolidated Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 20
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
58
PART III
Item 10. Directors and Executive Officers of the Registrant 59
Item 11. Executive Compensation 62
Item 12. Security Ownership of Certain Beneficial Owners and Management 70
Item 13. Certain Relationships and Related Transactions 71
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 72
PART I
ITEM 1. BUSINESS
GENERAL
The Company develops, manufactures and markets technologically advanced,
high performance alloys primarily for use in the aerospace and chemical
processing industries. The Company's products are high temperature alloys
("HTA") and corrosion resistant alloys ("CRA"). The Company's HTA products are
used by manufacturers of equipment that is subjected to extremely high
temperatures, such as jet engines for the aerospace industry, gas turbine
engines used for power generation, and waste incineration and industrial
heating equipment. The Company's CRA products are used in applications that
require resistance to extreme corrosion, such as chemical processing, power
plant emissions control and hazardous waste treatment. The Company produces
its high performance alloy products primarily in sheet, coil and plate forms,
which in the aggregate represented approximately 63% of the Company's net
revenues in fiscal 1997. In addition, the Company produces its alloy products
as seamless and welded tubulars, and in bar, billet and wire forms.
High performance alloys are characterized by highly engineered, often
proprietary, metallurgical formulations primarily of nickel, cobalt and other
metals with complex physical properties. The complexity of the manufacturing
process for high performance alloys is reflected in the Company's relatively
high average selling price per pound, compared to the average selling price of
other metals such as carbon steel sheet, stainless steel sheet and aluminum.
Demanding end-user specifications, a multi-stage manufacturing process and the
technical sales, marketing and manufacturing expertise required to develop new
applications combine to create significant barriers to entry in the high
performance alloy industry. The Company derived approximately 25% of its
fiscal 1997 net revenues from products that are protected by United States
patents and derived an additional approximately 17% of its fiscal 1997 net
revenues from sales of products that are not patented, but for which the
Company has limited or no competition.
ACQUISITION BY HOLDINGS
On June 11, 1997 Inco Limited ("Inco") and Blackstone jointly announced
the execution of a definitive agreement for the sale by Inco of 100% of its
Inco Alloy International ("IAI") business unit to Holdings, an affiliate of
Blackstone. Upon consummation of the transaction, Blackstone plans to combine
the operations of IAI and the Company. Completion of the sale will be subject
to a number of conditions and the receipt of regulatory and other approvals,
including anti-trust clearance. Closing of the sale is currently expected to
take place in the first quarter of calendar 1998.
PRODUCTS
The alloy market consists of four primary segments: stainless steel, super
stainless steel, nickel alloys and high performance alloys. The Company
competes exclusively in the high performance alloy segment, which includes HTA
and CRA products. The Company believes that the high performance alloy segment
represents less than 10% of the total alloy market. The percentages of the
Company's total product revenue and volume presented in this section are based
on data which include revenue and volume associated with sales by the Company
to its foreign subsidiaries, but exclude revenue and volume associated with
sales by such foreign subsidiaries to their customers. Management believes,
however, that the effect of including revenue and volume data associated with
sales by its foreign subsidiaries would not materially change the percentages
presented in this section. In fiscal 1997, HTA and CRA products accounted for
approximately 65% and 35%, respectively, of the Company's net revenues.
HTA products are used primarily in manufacturing components used in the
hot sections of jet engines. Stringent safety and performance standards in the
aerospace industry result in development lead times typically as long as eight
to ten years in the introduction of new aerospace-related market applications
for HTA products. However, once a particular new alloy is shown to possess the
properties required for a specific application in the aerospace industry, it
tends to remain in use for extended periods. HTA products are also used in gas
turbine engines produced for use in applications such as naval and commercial
vessels, electric power generators, power sources for offshore drilling
platforms, gas pipeline booster stations and emergency standby power stations.
CRA products are used in a variety of applications, such as chemical
processing, power plant emissions control, hazardous waste treatment and sour
gas production. Historically, the chemical processing industry has represented
the largest end-user segment for CRA products. Due to maintenance, safety and
environmental considerations, the Company believes this industry represents an
area of potential long-term growth for the Company. Unlike aerospace
applications within the HTA product market, the development of new market
applications for CRA products generally does not require long lead times.
HIGH TEMPERATURE ALLOYS The following table sets forth information with
respect to certain of the Company's significant high temperature alloys:
ALLOY AND YEAR INTRODUCED END MARKETS AND APPLICATIONS (1) FEATURES
HAYNES HR-160 (1990) (2) Waste incineration/CPI-boiler tube shields Good resistance to sulfidation
at high temperatures
HAYNES 242 (1990) (2) Aero-seal rings High strength, low expansion
and good fabricability
HAYNES HR-120 (1990) (2) Industrial heating-heat-treating baskets Good strength-to-cost ratio
as compared to competing alloys
HAYNES 230 (1984) (2) Aero/LBGT-ducting Good combination of strength, stability,
oxidation resistance and fabricability
HAYNES 214 (1981) (2) Aero-honeycomb seals Good combination of
oxidation resistance and
fabricability among
nickel-based alloys
HAYNES 188 (1968) Aero-burner cans, after-burner components High strength, oxidation
resistant cobalt-based alloys
HAYNES 625 (1964) Aero/CPI-ducting, tanks, vessels, weld overlays Good fabricability and general
corrosion resistance
HAYNES 263 (1960) Aero/LBGT-components for gas turbine hot gas Good ductility and high
exhaust pan strength at temperatures up
to 1600 F
HAYNES 718 (1955) Aero-ducting, vanes, nozzles Weldable high strength alloy with good
fabricability
HASTELLOY X (1954) Aero/LBGT-burner cans, transition ducts Good high temperature
strength at relatively low cost
HAYNES Ti 3-2.5 (1950) Aero-aircraft hydraulic and fuel systems Light weight, high strength
components titanium-based alloy
<FN>
- -------------
(1) "Aero" refers to aerospace; "LBGT" refers to land-based gas turbines; "CPI" refers to the chemical processing
industry.
(2) Represents a patented product or a product with respect to which the Company believes it has limited or no
competition.
The higher volume HTA products, including HAYNES 625, HAYNES 718 and
HASTELLOY X, are generally considered industry standards, especially in the
manufacture of jet aircraft engines and LBGT. These products have been used in
such applications since the 1950's and because of their widespread use have
been most subject to competitive pricing pressures. In fiscal 1997, sales of
these HTA products accounted for approximately 29% of the Company's net
revenues.
The Company also produces and sells cobalt-based alloys introduced over
the last three decades, which are more highly specialized and less price
competitive than nickel-based alloys. HAYNES 188 and HAYNES 263 are the most
widely used of the Company's cobalt-based products and accounted for
approximately 10% of the Company's net revenues in fiscal 1997. Three of the
more recently introduced HTA products, HAYNES 242, HAYNES 230 and HAYNES 214,
initially developed for the aerospace and LBGT markets, are still
patent-protected and together accounted for approximately 6% of the Company's
net revenues in fiscal 1997. These newer alloys are gaining acceptance for
applications in industrial heating and waste incineration.
HAYNES HR-160 and HAYNES HR-120 were introduced in fiscal 1990 and
targeted for sale in industrial heat treating applications. HAYNES HR-160 is
a higher priced cobalt-based alloy designed for use when the need for
long-term performance outweighs initial cost considerations. Potential
applications for HAYNES HR-160 include use in key components in waste
incinerators, chemical processing equipment, mineral processing kilns and
fossil fuel energy plants. HAYNES HR-120 is a lower priced, iron-based alloy
and is designed to replace competitive alloys not manufactured by the Company
that may be slightly lower in price, but are also less effective. In fiscal
1997, these two alloys accounted for approximately 1% of the Company's net
revenues.
The Company also produces seamless titanium tubing for use as hydraulic
lines in airframes and as bicycle frames. During fiscal 1997, sales of these
products accounted for approximately 4% of the Company's net revenues.
[Remainder of page intentionally left blank.]
CORROSION RESISTANT ALLOYS The following table sets forth information with respect to certain of the
Company's significant corrosion resistant alloys:
ALLOY AND YEAR INTRODUCED END MARKETS AND APPLICATIONS (1) FEATURES
HASTELLOY C-2000 (1995) (2) CPI-tanks, mixers, piping Versatile alloy with good resistance to
uniform corrosion
HASTELLOY B-3 (1994) (2) CPI-acetic acid plants Better fabrication characteristics
compared to other nickel-molybdenum
alloys
HASTELLOY D-205 (1993) (2) CPI-plate heat exchangers. Corrosion resistance to hot sulfuric acid
ULTIMET (1990) (2) CPI-pumps, valves Wear and corrosion resistant
nickel-based alloy
HASTELLOY G-50 (1989) (2) Oil and gas-sour gas tubulars Good resistance to down hole corrosive
environments
HASTELLOY C-22 (1985) (2) CPI/FGD-tanks, mixers, piping Resistance to localized corrosion and
pitting
HASTELLOY G-30 (1985) (2) CPI-tanks, mixers, piping Lower cost alloy with good corrosion
resistance in phosphoric acid
HASTELLOY B-2 (1974) CPI-acetic acid Resistance to hydrochloric acid and
other reducing acids
HASTELLOY C-4 (1973) CPI-tanks, mixers, piping Good thermal stability
HASTELLOY C-276 (1968) CPI/FGD/oil and gas-tanks, mixers, Broad resistance to many environments
piping
<FN>
- -------------
(1) "CPI" refers to the chemical processing industry; "FGD" refers to flue gas
desulfurization.
(2) Represents a patented product or a product with respect to which the Company
believes it has limited or no competition.
During fiscal 1997, sales of the CRA alloys HASTELLOY C-276, HASTELLOY
C-22 and HASTELLOY C-4 accounted for approximately 26% of the Company's net
revenues. HASTELLOY C-276, introduced by the Company in 1968, is recognized as
a standard for corrosion protection in the chemical processing industry and is
also used extensively for FGD and oil and gas exploration and production
applications. HASTELLOY C-22, a proprietary alloy of the Company, was
introduced in 1985 as an improvement on HASTELLOY C-276 and is currently sold
to the chemical processing and FGD markets for essentially the same
applications as HASTELLOY C-276. HASTELLOY C-22 offers greater and more
versatile corrosion resistance and therefore has gained market share at the
expense of the non-proprietary HASTELLOY C-276. HASTELLOY C-22's improved
corrosion resistance has led to increased sales in semiconductor gas handling
systems, pharmaceutical manufacturing and waste treatment applications.
HASTELLOY C-4 is specified in many chemical processing applications in Germany
and is sold almost exclusively to that market.
The Company also produces alloys for more specialized applications in the
chemical processing industry and other industries. For example, HASTELLOY B-2
was introduced in 1970 for use in the manufacture of equipment utilized in the
production of acetic acid and ethyl benzine and is still sold almost
exclusively for those purposes. Due to its limited use and complex
manufacturing process, there is little competition for sales of this material.
HASTELLOY B-3 was developed for the same applications and has greater ease in
fabrication. The Company expects HASTELLOY B-3 to eventually replace HASTELLOY
B-2. HASTELLOY G-30 is used primarily in the production of super phosphoric
acid and fluorinated aromatics. HASTELLOY G-50 has gained acceptance as a
lower priced alternative to HASTELLOY C-276 for production of tubing for use
in sour gas wells. These more specialized products accounted for approximately
7% of the Company's net revenues in fiscal 1997.
The Company's patented alloy, ULTIMET, is used in a variety of industrial
applications that result in material degradation by "corrosion-wear". ULTIMET
is designed for applications where conditions require resistance to corrosion
and wear and is currently being tested in spray nozzles, fan blades, filters,
bolts, rolls, pump and valve parts where these properties are critical.
HASTELLOY D-205, introduced in 1993, is designed for use in handling hot
concentrated sulfuric acid and other highly corrosive substances.
The Company believes that its most recently introduced alloy, HASTELLOY
C-2000, improves upon HASTELLOY C-22. HASTELLOY C-2000, which the Company
expects will be used extensively in the chemical processing industry, can be
used in both oxidizing and reducing environments.
END MARKETS
Aerospace. The Company has manufactured HTA products for the aerospace
market since it entered the market in the late 1930s, and has developed
numerous proprietary alloys for this market. Customers in the aerospace
markets tend to be the most demanding with respect to meeting specifications
within very low tolerances and achieving new product performance standards.
Stringent safety standards and continuous efforts to reduce equipment weight
require close coordination between the Company and its customers in the
selection and development of HTA products. As a result, sales to aerospace
customers tend to be made through the Company's direct sales force. Unlike the
FGD and oil and gas production industries, where large, competitively bid
projects can have a significant impact on demand and prices, demand for the
Company's products in the aerospace industry is based on the new and
replacement market for jet engines and the maintenance needs of operators of
commercial and military aircraft. The hot sections of jet engines are
subjected to substantial wear and tear and accordingly require periodic
maintenance and replacement. This maintenance-based demand, while potentially
volatile, is generally less subject to wide fluctuations than demand in the
FGD and sour gas production industries.
Chemical Processing. The chemical processing industry segment represents a
large base of customers with diverse CRA applications. CRA products supplied
by the Company have been used in the chemical processing industry since the
early 1930s.
Demand for the Company's products in this industry is based on the level
of maintenance, repair and expansion of existing chemical processing
facilities as well as the construction of new facilities. The Company believes
the extensive worldwide network of Company-owned service centers and
independent distributors is a competitive advantage in marketing its CRA
products to this market. Sales of the Company's products in the chemical
processing industry tend to be more stable than the aerospace, FGD and oil and
gas markets. Increased concerns regarding the reliability of chemical
processing facilities, their potential environmental impact and safety hazards
to their personnel have led to an increased demand for more sophisticated
alloys, such as the Company's CRA products.
Land-Based Gas Turbines. The LBGT industry represents a growing market,
with demand for the Company's products driven by the construction of
cogeneration facilities and electric utilities operating electric generating
facilities. Demand for the Company's alloys in the LBGT industry has also
been driven by concerns regarding lowering emissions from generating
facilities powered by fossil fuels. LBGT generating facilities are gaining
acceptance as clean, low-cost alternatives to fossil fuel-fired electric
generating facilities.
Flue Gas Desulfurization. The FGD industry has been driven by both
legislated and self-imposed standards for lowering emissions from fossil
fuel-fired electric generating facilities. In the United States, the Clean Air
Act of 1990 mandates a two-phase program aimed at significantly reducing
suffer dioxide (SO2) emissions from electric generating facilities powered by
fossil fuels by 2000. Canada and its provinces have also set goals to reduce
emissions of SO2 over the next several years. Phase I of the Clean Air Act
program affected approximately 100 steam-generating plants representing 261
operating units fueled by fossil fuels, primarily coal. Of these 261 units, 25
units were retrofitted with FGD systems while the balance opted mostly for
switching to low sulfur coal to achieve compliance. The market for FGD systems
peaked in 1992 at approximately $1.1 billion, and then dropped sharply in 1993
to a level of approximately $174.0 million due to a curtailment of activity
associated with Phase I. Phase II compliance begins in 2000 and affects 785
generating plants with more than 2,100 operating units. Options available
under the Clean Air Act to bring the targeted facilities into compliance with
Phase II SO2 emissions requirements include fuel switching, clean coal
technologies, purchase of SO2 allowances, closure of facilities and off-gas
scrubbing utilizing FGD technology.
Oil and Gas. The Company also sells its products for use in the oil and
gas industry, primarily in connection with sour gas production. Sour gas
contains extremely corrosive materials and is produced under high pressure,
necessitating the use of corrosion resistant materials. The demand for sour
gas tubulars is driven by the rate of development of sour gas fields. The
factors influencing the development of sour gas fields include the price of
natural gas and the need to commence drilling in order to protect leases that
have been purchased from either the federal or state governments. As a result,
competing oil companies often place orders for the Company's products at
approximately the same time, adding volatility to the market. This market was
very active in 1991, especially in the offshore sour gas fields in the Gulf of
Mexico, but demand for the Company's products declined significantly
thereafter. More recently there has been less drilling activity and more use
of lower performing alloys, which together have resulted in intense price
competition. Demand for the Company's products in the oil and gas industry is
tied to the global demand for natural gas.
Other Markets. In addition to the industries described above, the Company
also targets a variety of other markets. Other industries to which the Company
sells its HTA products include waste incineration, industrial heat treating,
automotive and instrumentation. Other industries to which the Company sells
its CRA products include automotive, medical and instrumentation. Demand in
these markets for many of the Company's lower volume proprietary alloys has
grown in recent periods. For example, incineration of municipal, biological,
industrial and hazardous waste products typically produces very corrosive
conditions that demand high performance alloys. Markets capable of providing
growth are being driven by increasing performance, reliability and service
life requirements for products used in these markets which could provide
further applications for the Company's products.
SALES AND MARKETING
Providing technical assistance to customers is an important part of the
Company's marketing strategy. The Company provides analyses of its products
and those of its competitors for its customers. These analyses enable the
Company to evaluate the performance of its products and to make
recommendations as to the substitution of Company products for other products
in appropriate applications, enabling the Company's products to be specified
for use in the production of customers' products. The market development
engineers, three of whom have doctoral degrees in metallurgy, are assisted by
the research and development staff in directing the sales force to new
opportunities. The Company believes its combination of direct sales, technical
marketing and research and development customer support provides an advantage
over other manufacturers in the high performance industry. This activity
allows the Company to obtain direct insight into customers' alloy needs and
allows the Company to develop proprietary alloys that provide solutions to
customers' problems.
The Company sells its products primarily through its direct sales
organization, which includes four domestic Company-owned service centers,
three wholly-owned European subsidiaries and sales agents serving the Asia
Pacific Rim. Approximately 79% of the Company's net revenues in fiscal 1997
was generated by the Company's direct sales organization. The remaining 21% of
the Company's fiscal 1997 net revenues was generated by independent
distributors and licensees in the United States, Europe and Japan, some of
whom have been associated with the Company for over 25 years. The following
table sets forth the approximate percentage of the Company's fiscal 1997 net
revenues generated through each of the Company's distribution channels.
DOMESTIC FOREIGN TOTAL
----------- ---------- --------
Company sales office/direct . . . . . 33% 7% 40%
Company-owned service centers . . . . 19% 20% 39%
Independent distributors/sales agents 12% 9% 21%
Total . . . . . . . . . . . . . . 64% 36% 100%
The top twenty customers not affiliated with the Company accounted for
approximately 39% of the Company's net revenues in fiscal 1997. Sales to
Spectrum Metals, Inc. and Rolled Alloys, Inc., which are affiliated with each
other, accounted for an aggregate of 11% of the Company's net revenues in
fiscal 1997. No other customer of the Company accounted for more than 10% of
the Company's net revenues in fiscal 1997.
The Company's foreign and export sales were approximately $79.6 million,
$84.3 million and $81.4 million for fiscal 1995, 1996 and 1997, respectively.
Additional information concerning foreign operations and export sales is set
forth in Note 13 of the Notes to Consolidated Financial Statements appearing
elsewhere herein.
MANUFACTURING PROCESS
High performance alloys require a lengthier, more complex melting process
and are more difficult to manufacture than lower performance alloys, such as
stainless steels. The alloying elements in high performance alloys must be
highly refined, and the manufacturing process must be tightly controlled to
produce precise chemical properties. The resulting alloyed material is more
difficult to process because, by design, it is more resistant to deformation.
Consequently, high performance alloys require that greater force be applied
when hot or cold working and are less susceptible to reduction or thinning
when rolling or forging, resulting in more cycles of rolling, annealing and
pickling than a lower performance alloy to achieve proper dimensions. Certain
alloys may undergo as many as 40 distinct stages of melting, remelting,
annealing, forging, rolling and pickling before they achieve the
specifications required by a customer. The Company manufactures products in
sheet, plate, tubular, billet, bar and wire forms, which represented 49%, 20%,
11%, 12%, 6% and 2%, respectively, of total volume sold in fiscal 1997 (after
giving effect to the conversion of billet to bar by the Company's U.K.
subsidiary).
The manufacturing process begins with raw materials being combined, melted
and refined in a precise manner to produce the chemical composition specified
for each alloy. For most alloys, this molten material is cast into electrodes
and additionally refined through electroslag remelting. The resulting ingots
are then forged or rolled to an intermediate shape and size depending upon the
intended final product. Intermediate shapes destined for flat products are
then sent through a series of hot and cold rolling, annealing and pickling
operations before being cut to final size.
The Argon Oxygen Decarburization ("AOD") gas controls in the Company's
primary melt facility remove carbon and other undesirable elements, thereby
allowing more tightly-controlled chemistries which in turn produce more
consistent properties in the alloys. The AOD gas control system also allows
for statistical process control monitoring in real time to improve product
quality.
The Company has a four-high Steckel mill for use in hot rolling material.
The four-high mill was installed in 1982 at a cost of approximately $60.0
million and is one of only two such mills in the high performance alloy
industry. The mill is capable of generating approximately 12.0 million pounds
of separating force and rolling plate up to 72 inches wide. The mill includes
integrated computer controls (with automatic gauge control and programmed
rolling schedules), two coiling Steckel furnaces and five heating furnaces.
Computer-controlled rolling schedules for each of the hundreds of combinations
of alloy shapes and sizes the Company produces allow the mill to roll numerous
widths and gauges to exact specifications without stoppages or changeovers.
The Company also operates a three-high rolling mill and a two-high rolling
mill, each of which is capable of custom processing much smaller quantities of
material than the four-high mill. These mills provide the Company with
significant flexibility in running smaller batches of varied products in
response to customer requirements. The Company believes the flexibility
provided by the three-high and two-high mills provides the Company an
advantage over its major competitors in obtaining smaller specialty orders.
BACKLOG
As of September 30, 1997, the Company's backlog orders aggregated
approximately $60.6 million, compared to approximately $53.7 million at
September 30, 1996, and approximately $49.9 million at September 30, 1995. The
increase in backlog orders is primarily due to an increase in orders for
chemical processing and aerospace products worldwide during fiscal 1997.
Substantially all orders in the backlog at September 30, 1997 are expected to
be shipped within the twelve months beginning October 1, 1997. Due to the
cyclical nature of order entry experienced by the Company, there can be no
assurance that order entry will continue at current levels. The historical
and current backlog amounts shown in the following table are also indicative
of relative demand over the past few years.
THE COMPANY'S BACKLOG
AT FISCAL QUARTER END
(IN MILLIONS)
1993 1994 1995 1996 1997
1st $41.5 $29.5 $49.7 $61.2 $63.8
2nd $38.9 $35.5 $64.8 $61.9 $65.4
3rd $31.5 $38.0 $55.8 $57.5 $55.5
4th $31.1 $41.5 $49.9 $53.7 $60.6
RAW MATERIALS
Nickel is the primary material used in the Company's alloys. Each pound of
alloy contains, on average, 0.48 pounds of nickel. Other raw materials include
cobalt, chromium, molybdenum and tungsten. Melt materials consist of virgin
raw material, purchased scrap and internally produced scrap. The significant
sources of cobalt are the countries of Zambia, Zaire and Russia; all other raw
materials used by the Company are available from a number of alternative
sources.
Since most of the Company's products are produced to specific orders, the
Company purchases materials against known production schedules. Materials are
purchased from several different suppliers, through consignment arrangements,
annual contracts and spot purchases. These arrangements involve a variety of
pricing mechanisms, but the Company generally can establish selling prices
with reference to known costs of materials, thereby reducing the risk
associated with changes in the cost of raw materials. The Company maintains a
policy of pricing its products at the time of order placement. As a result,
rapidly escalating raw material costs during the period between the time the
Company receives an order and the time the Company purchases the raw materials
used to fill such order, which has averaged approximately 30 days in recent
months, can negatively affect profitability even though the high performance
alloy industry has generally been able to pass raw material price increases
through to its customers.
Raw material costs account for a significant portion of the Company's cost
of sales. The prices of the Company's products are based in part on the cost
of raw materials, a significant portion of which is nickel. The Company covers
approximately half its open market exposure to nickel price changes through
hedging activities through the London Metals Exchange. The following table
sets forth the average per pound prices for nickel as reported by the London
Metals Exchange for the fiscal years indicated.
YEAR ENDED
SEPTEMBER 30, AVERAGE PRICE
- ---------------------------------------------------------- -----------------
1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.12
1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.77
1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.29
1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.21
1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.48
1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.53
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.54
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.66
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.56
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.22
RESEARCH AND TECHNICAL DEVELOPMENT
The Company's research facilities are located at the Company's Kokomo
facility and consist of 90,000 square feet of offices and laboratories, as
well as an additional 90,000 square feet of paved storage area. The Company
has ten fully equipped laboratories, including a mechanical test lab, a
metallographic lab, an electron microscopy lab, a corrosion lab and a high
temperature lab, among others. These facilities also contain a reduced scale,
fully equipped melt shop and process lab. As of September 30, 1997, the
research and technical development staff consisted of 37 persons, 15 of whom
have engineering or science degrees, including six with doctoral degrees, with
the majority of degrees in the field of metallurgical engineering.
Research and technical development costs relate to efforts to develop new
proprietary alloys, to improve current or develop new manufacturing methods,
to provide technical service to customers, to maintain quality assurance
methods and to provide metallurgical training to engineer and non-engineer
employees. The Company spent approximately $3.8 million, $3.4 million and
$3.0 million for research and technical development activities for fiscal
1997, 1996 and 1995, respectively.
During fiscal 1997, exploratory alloy development projects were focused
on new CRA products for hydrofluoric and phosphoric acid service. Engineering
projects include manufacturing process development, welding development and
application support for two large volume projects involving the LBGT and steel
making industries. The Company is also developing a computerized database
management system to better manage its corrosion, high temperature and
mechanical property data.
Over the last ten years, the Company's technical programs have yielded
nine new proprietary alloys and sixteen United States patents, with an
additional three United States patent applications pending. The Company
currently maintains a total of 40 United States patents and approximately 140
foreign counterpart patents targeted at countries with significant or
potential markets for the patented products. In fiscal 1997, approximately 25%
of the Company's net revenues was derived from the sale of patented products
and an additional approximately 39% was derived from the sale of products for
which patents formerly held by the Company had expired. While the Company
believes its patents are important to its competitive position, significant
barriers to entry continue to exist beyond the expiration of any patent
period. Five of the alloys considered by management to be of future commercial
significance, HASTELLOY G-50, HASTELLOY G-30, HAYNES 230, HASTELLOY C-22 and
ULTIMET, are protected by United States patents that continue until the years
1998, 2001, 2002, 2008 and 2009, respectively.
COMPETITION
The high performance alloy market is a highly competitive market in which
eight to ten producers participate in various product forms. The Company faces
strong competition from domestic and foreign manufacturers of both the
Company's high performance alloys and other competing metals. The Company's
primary competitors include Inco Alloys International, Inc., a subsidiary of
Inco Limited, Allegheny Ludlum Corporation, a subsidiary of Allegheny
Teledyne, Inc. and Krupp VDM GmbH, a subsidiary of Thyssen Krupp Stahl AG.
Prior to fiscal 1994, this competition, coupled with declining demand in
several of the Company's key markets, led to significant erosion in the price
for certain of the Company's products. The Company may face additional
competition in the future to the extent new materials are developed, such as
plastics or ceramics, that may be substituted for the Company's products.
EMPLOYEES
As of September 30, 1997, the Company had approximately 951 employees. All
eligible hourly employees at the Kokomo plant are covered by a collective
bargaining agreement with the United Steelworkers of America ("USWA") which
was ratified on June 11, 1996 and which expires on June 11, 1999. As of
September 30, 1997, 481 employees of the Kokomo facility were covered by the
collective bargaining agreement. The Company has not experienced a strike at
the Kokomo plant since 1967. None of the employees of the Company's Arcadia or
Openshaw plants are represented by a labor union. Management considers its
employee relations in each of the facilities to be satisfactory.
ENVIRONMENTAL MATTERS
The Company's facilities and operations are subject to certain foreign,
federal, state and local laws and regulations relating to the protection of
human health and the environment, including those governing the discharge of
pollutants into the environment and the storage, handling, use, treatment and
disposal of hazardous substances and wastes. Violations of these laws and
regulations can result in the imposition of substantial penalties and can
require facilities improvements. In addition, the Company may be required in
the future to comply with certain regulations pertaining to the emission of
hazardous air pollutants under the Clean Air Act. However, since these
regulations have not been proposed or promulgated, the Company cannot predict
the cost, if any, associated with compliance with such regulations. Expenses
related to environmental compliance were approximately $1.1 million for fiscal
1997 and are expected to be approximately $1.2 million for fiscal year 1998.
Although there can be no assurance, based upon current information available
to the Company, the Company does not expect that costs of environmental
contingencies, individually or in the aggregate, will have a material adverse
effect on the Company's financial condition, results of operations or
liquidity.
The Company's facilities are subject to periodic inspection by various
regulatory authorities, who from time to time have issued findings of
violations of governing laws, regulations and permits. In the past five years,
the Company has paid administrative fines, none of which has exceeded $50,000,
for alleged violations relating to environmental matters, including the
handling and storage of hazardous wastes, and record keeping requirements
relating to, and handling of, polychlorinated biphenyls. Although the Company
does not believe that similar regulatory or enforcement actions would have a
material impact on its operations, there can be no assurance that violations
will not be alleged or will not result in the assessment of additional
penalties in the future.
The Company has received permits from the Indiana Department of
Environmental Management ("IDEM") and the U.S. Environmental Protection Agency
("EPA") to close and to provide post-closure monitoring and care for certain
areas at the Kokomo facility used for the storage and disposal of wastes, some
of which are classified as hazardous under applicable regulations. The closure
project, essentially complete, entailed installation of a clay liner under the
disposal areas, a leachate collection system and a clay cap and revegetation
of the site. Construction was completed in May 1994 and a closure
certification has been filed with IDEM. Thereafter, the Company will be
required to monitor groundwater and to continue post-closure maintenance of
the former disposal areas. The Company is aware of elevated levels of certain
contaminants in the groundwater. The Company believes that some or all of
these contaminants may have migrated from a nearby superfund site. If it is
determined that the disposal areas have impacted the groundwater underlying
the Kokomo facility, additional corrective action by the Company could be
required. The Company is unable to estimate the costs of such action, if any.
There can be no assurance, however, that the costs of future corrective action
would not have a material effect on the Company's financial condition, results
of operations or liquidity. Additionally, it is possible that the Company
could be required to obtain permits and undertake other closure projects and
post-closure commitments for any other waste management unit determined to
exist at the facility.
As a condition of these closure and post-closure permits, the Company must
provide and maintain assurances to IDEM and EPA of the Company's capability to
satisfy closure and post-closure ground water monitoring requirements,
including possible future corrective action as necessary.
The Company has completed an investigation, pursuant to a work plan
approved by the EPA, of eight specifically identified solid waste management
units at the Kokomo facility. Results of this investigation have been filed
with the EPA. Based on the results of this investigation compared to
Indiana's Tier II clean-up goals, the Company believes that no further actions
will be necessary. Until the EPA reviews the results, the Company is unable
to determine whether further corrective action will be required or, if
required, whether it will have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
The Company may also incur liability for alleged environmental damages
associated with the off-site transportation and disposal of its wastes. The
Company's operations generate hazardous wastes, and, while a large percentage
of these wastes are reclaimed or recycled, the Company also accumulates
hazardous wastes at each of its facilities for subsequent transportation and
disposal off-site by third parties. Generators of hazardous waste transported
to disposal sites where environmental problems are alleged to exist are
subject to claims under CERCLA, and state counterparts. CERCLA imposes strict,
joint and several liability for investigatory and cleanup costs upon waste
generators, site owners and operators and other "potentially responsible
parties" ("PRPs"). Based on its prior shipment of certain hydraulic fluid,
the Company is one of approximately 300 PRPs in connection with the proposed
cleanup of the Fisher-Calo site in Indiana. The PRPs have negotiated a Consent
Decree implementing a remedial design/remedial action plan ("RD/RA") for the
site with the EPA. The Company has paid approximately $138,000 as its share of
the total estimated cost of the RD/RA under the Consent Decree. Based on
information available to the Company concerning the status of the cleanup
efforts at the site, the large number of PRPs and the prior payments made by
the Company, management does not expect the Company's involvement in this
site to have a material adverse effect on the financial condition, results of
operations or liquidity of the Company. The Company may have generated
hazardous wastes disposed of at other sites potentially subject to CERCLA or
equivalent state law remedial action. Thus, there can be no assurance that the
Company will not be named as a PRP at additional sites in the future or that
the costs associated with those sites would not have a material adverse effect
on the Company's financial condition, results of operations or liquidity.
In November 1988, the EPA approved start-up of a new waste water treatment
plant at the Arcadia, Louisiana facility, which discharges treated industrial
waste water to the municipal sewage system. After the Company exceeded certain
EPA effluent limitations in 1989, the EPA issued an administrative order in
1992 which set new effluent limitations for the facility. The waste water
plant is currently operating under this order and the Company believes it is
meeting such effluent limitations. However, the Company anticipates that in
the future Louisiana will take over waste water permitting authority from the
EPA and may issue a waste water permit, the conditions of which could require
modification to the plant. Reasonably anticipated modifications are not
expected to have a substantial impact on operations.
[Remainder of page intentionally left blank.}
ITEM 2. PROPERTIES
The Company's owned facilities, and the products provided at each
facility, are as follows:
Kokomo, Indiana--all product forms, other than tubular goods.
Arcadia, Louisiana--welded and seamless tubular goods.
Openshaw, England--bar and billet for the European market.
The Kokomo plant, the primary production facility, is located on
approximately 235 acres of industrial property and includes over one million
square feet of building space. There are three sites consisting of a
headquarters and research lab; melting and annealing furnaces, forge press and
several hot mills; and the four-high mill and sheet product cold working
equipment, including two cold strip mills. All alloys and product forms other
than tubular goods are produced in Kokomo.
The Arcadia plant consists of approximately 42 acres of land and over
135,000 square feet of buildings on a single site. Arcadia uses feedstock
produced in Kokomo to fabricate welded and seamless alloy pipe and tubing and
purchases extruded tube hollows to produce seamless titanium tubing.
Manufacturing processes at Arcadia require cold pilger mills, weld mills,
drawbenches, annealing furnaces and pickling facilities.
The United States facilities are subject to a mortgage which secures the
Company's obligations under the Company's Revolving Credit Facility. See Note
6 of the Notes to Consolidated Financial Statements.
The Openshaw plant, located near Manchester, England, consists of
approximately 15 acres of land and over 200,000 square feet of buildings on a
single site. The plant produces bar and billet using billets produced in
Kokomo as feedstock. Additionally, products not competitive with the Company's
products are processed for third parties. The processes conducted at the
facility require hot rotary forges, bar mills and miscellaneous straightening,
turning and cutting equipment.
Although capacity can be limited from time to time by certain production
processes, the Company believes that its existing facilities will provide
sufficient capacity for current demand.
[Remainder of page intentionally left blank.]
ITEM 3. LEGAL PROCEEDINGS
In Leslie Baxter, et. al. vs. Haynes International, Inc. and Haynes Group
Insurance Plan, filed July 6, 1995 in the U.S. District Court, Southern
District of Indiana, Indianapolis Division, retirees and the surviving spouse
of a retiree filed suit on behalf of themselves and similarly situated
retirees and surviving spouses for restoration of the retiree health insurance
to benefit levels prevailing before the reduction of those benefit levels on
January 1, 1995 and to maintain the restored insurance benefit levels for the
lives of the covered retirees and their surviving spouses. The suit also seeks
judgment in damages for the benefits that have been lost as a result of the
January 1, 1995 reductions in benefit levels and for the medical expenses,
premiums paid and other damages incurred, including reasonable attorneys' fees
and costs of maintaining the suit. The Company intends to vigorously defend
against the claims and does not believe that the ultimate outcome will have a
material adverse effect on the financial condition or operations of the
Company.
The Company also is involved in other routine litigation incidental to
the conduct of its business, none of which is believed by management to be
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no established trading market for the common stock of the
Company.
As of December 19, 1997 there was one holder of the common stock of the
Company.
There have been no cash dividends declared on the common stock for the
two fiscal years ended September 30, 1997.
The payment of dividends is limited by terms of certain debt agreements
to which the Company is a party. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources" and Note 6 of the Notes to Consolidated Financial Statements of the
Company included in this Annual Report in response to Item 8.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT RATIO DATA)
The following table sets forth selected consolidated financial data of
the Company. The selected consolidated financial data as of and for the years
ended September 30, 1993, 1994, 1995, 1996 and 1997 are derived from the
audited consolidated financial statements of the Company.
These selected financial data are not covered by the auditor's report and
are qualified in their entirety by reference to, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and the related notes thereto included elsewhere in this Form 10-K.
Year Ended September 30, Year Ended September 30,
STATEMENT OF OPERATIONS DATA: 1993 1994
Net revenues $ 162,454 $ 150,578
Cost of sales(1) 137,102 171,957(2)
Selling and administrative expenses 14,569 15,039
Recapitalization expense - -
Research and technical expenses 3,603 3,630
Operating income (loss) 7,180 (40,048)
Other cost, net 400 816
Interest expense, net 18,497 19,582
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle (8,275) (60,866)
Extraordinary item, net of tax benefit
Cumulative effect of change in accounting
principle (net of tax benefit) -- (79,630)(6)
Net income (loss) (8,275) (140,496)
September 30, September 30,
BALANCE SHEET DATA: 1993 1994
Working capital (7) $ 72,131 $ 60,182
Property, plant and equipment, net 51,676 43,119
Total assets 194,200 145,723
Total debt 140,180 148,141
Accrued post-retirement benefits -- 94,148
Stockholder's equity (Capital deficit) 22,938 (116,029)
September 30, September 30,
OTHER FINANCIAL DATA: 1993 1994
Depreciation and amortization (8) $ 13,766 $ 51,555
Capital expenditures 56 771
EBITDA (9) 20,546 10,691
Ratio of EBITDA to interest expense 1.11x 0.55x
Ratio of earnings before fixed
charges to fixed charges (10) -- --
Net cash provided from (used in) operating activities $ 5,711 $ (12,801)
Net cash provided from (used in) investment activities 318 746
Net cash provided from (used in) financing
activities (2,014) 7,102
Year Ended September 30, Year Ended September 30, Year Ended September 30,
STATEMENT OF OPERATIONS DATA: 1995 1996 1997
Net revenues $ 201,933 $ 226,402 $ 235,760
Cost of sales(1) 167,196 181,173 180,504
Selling and administrative expenses 15,475 19,966(5) 18,311
Recapitalization expense - - 8,694(3)
Research and technical expenses 3,049 3,411 3,814
Operating income (loss) 16,213 21,852 24,437
Other cost, net 1,767 590 276
Interest expense, net 19,904 21,102(5) 20,456
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle (6,771) 160 36,315(4)
Extraordinary item, net of tax benefit (7,256)(5) -
Cumulative effect of change in accounting
principle (net of tax benefit) -- -- -
Net income (loss) (6,771) (9,036) 36,315
September 30, September 30, September 30,
BALANCE SHEET DATA: 1995 1996 1997
Working capital (7) $ 62,616 $ 57,307 $ 57,063
Property, plant and equipment, net 36,863 31,157 32,551
Total assets 151,316 161,489 216,319
Total debt 152,477 169,097 184,213
Accrued post-retirement benefits 94,830 95,813 96,201
Stockholder's equity (Capital deficit) (121,909) (130,341) (94,435)
September 30, September 30, September 30,
OTHER FINANCIAL DATA: 1995 1996 1997
Depreciation and amortization (8) $ 9,000 $ 9,042 $ 8,197
Capital expenditures 1,934 2,092 8,863
EBITDA (9) 23,446 32,141 41,302
Ratio of EBITDA to interest expense 1.18x 1.52x 2.02x
Ratio of earnings before fixed
charges to fixed charges (10) -- 1.01x 1.17x
Net cash provided from (used in) operating $ (2,883) $ (5,343) $ (6,596)
activities
Net cash provided from (used in) investment (1,895) (2,025) (8,830)
activities
Net cash provided from (used in) financing
activities 3,912 7,116 14,185
<FN>
(1) The Company was acquired by Morgan, Lewis, Githens & Ahn ("MLGA") and the management of the Company in
August 1989. For financial statement purposes, the 1989 Acquisition was accounted for as a purchase transaction
effective September 1, 1989; accordingly, inventories were adjusted to reflect estimated fair values at that
date. This adjustment to inventories was amortized to cost of sales as inventories were reduced from the base
layer. Non-cash charges for this adjustment included in cost of sales were $3,686 and $488 for fiscal 1993 and
1994, respectively; no charges have been recognized since fiscal 1994.
(2) Reflects the write-off of $37,117 of goodwill created in connection with the 1989 Acquisition remaining
at September 30, 1994.
(3) On January 29, 1997, the Company announced that Haynes Holdings, Inc. ("Holdings"), its parent
corporation, had effected the recapitalization of the company and Holdings pursuant to which Blackstone Capital
Partners II Merchant Banking Fund L.P. and two of its affiliates ("Blackstone") acquired 79.9% of Holdings'
outstanding shares (the "Recapitalization"). Certain fees, totaling $6,237, paid by the Company in connection
with the Recapitalization have been accounted for as recapitalization expenses and charged against income in
the period. Also in connection with the Recapitalization, the Company recorded $2,457 of non-cash stock
compensation expense, also included as recapitalization expenses, pertaining to certain modifications to
management stock option agreements which eliminated put and call rights associated with the options.
(4) The Company recorded profit before tax of $3,705 and net income of $36,315. During the third quarter
of fiscal 1997, the Company reversed its deferred income tax valuation allowance of approximately $36,431. See
Note 5 of the Notes to Consolidated Financial Statements of the Company included in this Annual Report in
response to Item 8.
(5) During fiscal 1996, the Company successfully refinanced its debt with the issuance of $140,000 Senior
Notes due 2004 and an amendment to its Revolving Credit Facility with Congress Financial Corporation
("Congress"). As a result of this refinancing effort, certain non-recurring charges were recorded as follows:
(a) $7,256 was recorded as the aggregate of extraordinary items which represents the extraordinary loss on the
redemption of the Company's 11 % Senior Secured Notes due 1998 and 13 % Senior Subordinated Notes due 1999
(collectively, the "Old Notes") and is comprised of $3,911 of prepayment penalties incurred in connection with
the redemption of the Old Notes and $3,345 of deferred debt issuance costs which were written off upon
consummation of the redemption of the Old Notes, (b) $1,837 of Selling and Administrative Expense which
represents costs incurred with a postponed initial public offering of the Company's common stock; and (c) $924
of Interest Expense which represents the net interest expense (approximately $1,500 interest expense, less
approximately $600 interest income) incurred during the period between the issuance of the Senior Notes and the
redemption of the Old Notes.
(6) During fiscal 1994, the Company adopted SFAS 106. The Company elected to immediately recognize the
transition obligation for benefits earned as of October 1, 1993, resulting in a non-cash charge of $79,630, net
of a $10,580 tax benefit, representing the cumulative effect of the change in accounting principle. The tax
benefit recognized was limited to then existing net deferred tax liabilities.
(7) Reflects the excess of current assets over current liabilities as set forth in the Consolidated
Financial Statements.
(8) Reflects (i) depreciation and amortization as presented in the Company's Consolidated Statement of Cash
Flows and set forth in Note (9) below, plus (ii) other non-cash charges, including the amortization of prepaid
pension costs (which is included in the change in other asset category) and the amortization of inventory
costs as described in Note (1) above, minus amortization of debt issuance costs, all as set forth in Note (9)
below.
(9) Represents for the relevant period net income plus expenses recognized for interest, taxes,
depreciation, amortization and other non-cash charges plus the refinancing costs set forth in Note 5, part (a)
and (b) for fiscal 1996 plus recapitalization costs outlined in Note 3 and $250 of failed acquisition costs for
fiscal 1997. In addition to net interest expense as listed in the table, the following charges are added to
net income to calculate EBITDA:
1993 1994 1995 1996 1997
Provision for (benefit from) income taxes $(3,442) $ 420 $ 1,313 $ 1,940 $(32,610)
Depreciation 8,650 8,208 8,188 7,751 7,477
Amortization:
Debt issuance costs 2,120 1,680 1,444 4,698 1,144
Goodwill 1,487 38,607 -- -- -
Inventory (see note (1) above) 3,686 488 -- -- -
Prepaid pension costs (57) 314 130 308 333
7,236 41,089 1,574 5,006 (23,656)
SFAS 106-Post-retirement -- 3,938 682 983 387
Amortization of debt issuance costs (2,120) (1,680) (1,444) (4,698) (1,144)
Total $10,324 $51,975 $10,313 $10,982 $(24,413)
<FN>
EBITDA should not be construed as a substitute for income from operations, net earnings
(loss) or cash flows from operating activities determined in accordance with generally
accepted accounting principles ("GAAP"). The Company has included EBITDA because it believes
it is commonly used by certain investors and analysts to analyze and compare companies on the
basis of operating performance, leverage and liquidity and to determine a company's ability
to service debt. Because EBITDA is not calculated in the same manner by all entities, EBITDA
as calculated by the Company may not necessarily be comparable to that of the Company's
competitors or of other entities.
(10) For purposes of these computations, earnings before fixed charges consist of income
(loss) before provision for (benefit from) income taxes, extraordinary item and cumulative
effect of change in accounting principle plus fixed charges. Fixed charges consist of
interest on debt, amortization of debt issuance costs and estimated interest portion of
rental expense. Earnings were insufficient to cover fixed charges by $11,717, $60,446, and
$5,458 for fiscal 1993, 1994 and 1995, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Report contains statements that constitute forward looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Those statements appear in a number of places in this Report and may
include statements regarding the intent, belief or current expectations of the
Company or its officers with respect to (i) the Company's strategic plans,
(ii) the policies of the Company regarding capital expenditures, financing and
other matters, and (iii) industry trends affecting the Company's financial
condition or results of operations. Readers are cautioned that any such
forward looking statements are not guarantees of future performance and
involve risks and uncertainties and that actual results may differ materially
from those in the forward looking statements as a result of various factors,
many of which are beyond the control of the Company.
COMPANY BACKGROUND
The Company sells high temperature alloys and corrosion resistant alloys,
which accounted for 65% and 35%, respectively, of the Company's net revenues
in fiscal 1997. Based on available industry data, the Company believes that it
is one of three principal producers of high performance alloys in flat product
form, which includes sheet, coil and plate forms, and also produces its alloys
in round and tubular forms. In fiscal 1997, flat products accounted for 68% of
shipments and 63% of net revenues.
The Company's annual production capacity varies depending upon the mix of
alloys, forms, product sizes, gauges and order sizes. Based on the current
product mix, the Company estimates that its annual production capacity, which
has been unchanged for the past five years, is approximately 20.0 million
pounds. As a result of changes in the Company's primary markets, sales volume
has ranged from a high of 18.5 million pounds in fiscal 1997, to a low of 13.3
million pounds in fiscal 1994. The Company is not currently capacity
constrained, but has planned capital expenditures of approximately $9.0
million in fiscal 1998. See "--Liquidity and Capital Resources."
The Company sells its products primarily through its direct sales
organization, which includes four domestic Company-owned service centers,
three wholly-owned European subsidiaries and sales agents serving the Pacific
Rim who operate on a commission basis. Approximately 79% of the Company's net
revenues in fiscal 1997 was generated by the Company's direct sales
organization. The remaining 21% of the Company's fiscal 1997 net revenues was
generated by independent distributors and licensees in the United States,
Europe and Japan, some of whom have been associated with the Company for over
25 years.
The proximity of production facilities to export customers is not a
significant competitive factor, since freight and duty costs per pound are
minor in comparison to the selling price per pound of high performance alloy
products. In fiscal 1997, sales to customers outside the United States
accounted for approximately 35% of the Company's net revenues.
The high performance alloy industry is characterized by high capital
investment and high fixed costs, and profitability is therefore very sensitive
to changes in volume. The cost of raw materials is the primary variable cost
in the high performance alloy manufacturing process and represents
approximately one-half of total manufacturing costs. Other manufacturing
costs, such as labor, energy, maintenance and supplies, often thought of as
variable, have a significant fixed element. Accordingly, relatively small
changes in volume can result in significant variations in earnings. The
Company's results in fiscal 1994 reflect this sensitivity. While volume
declined by 13% from fiscal 1993 to fiscal 1994, primarily due to declines in
demand for the Company's products in the oil and gas and FGD markets, EBITDA
calculated as described in Note (9) to Selected Consolidated Financial Data,
declined 48%, despite a 7% increase in the average selling price per pound of
the Company's products.
In fiscal 1997, proprietary products represented approximately 25% of the
Company's net revenues. In addition to these patent-protected alloys, several
other alloys manufactured by the Company have little or no direct competition
because they are difficult to produce and require relatively small production
runs to satisfy demand. In fiscal 1997, these other alloys represented
approximately 17% of the Company's net revenues.
Order to shipment lead times can be a competitive factor as well as an
indication of the strength of the demand for high performance alloys. The
Company's current average manufacturing lead time for flat products is
approximately 10 to 12 weeks, although due to current backlog levels, lead
times from order to shipment are approximately 16 to 18 weeks.
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OVERVIEW OF MARKETS
A breakdown of sales, shipments and average selling prices to the markets served by the Company for
the last five fiscal years is shown in the following table: (Note: Markets prior to 1997 have been
reclassified due to improved identification techniques implemented in 1997 by the Company.)
1993 1993 1994 1994 1995 1995 1996 1996 1997 1997
SALES (DOLLARS IN % OF % OF % OF % OF % OF
MILLIONS) AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
Aerospace $ 48.4 29.8% $ 47.9 31.8% $ 68.2 33.8% $ 95.3 42.1% $ 111.2 47.2%
Chemical processing 53.1 32.6 51.9 34.5 74.1 36.7 77.9 34.4 69.3 29.4
Land-based gas
turbines 12.6 7.8 17.0 11.3 14.3 7.1 17.4 7.7 17.2 7.4
Flue gas
desulfurization 17.4 10.7 10.2 6.7 6.6 3.3 8.3 3.7 6.7 2.7
Oil and gas 11.0 6.8 4.2 2.8 4.5 2.2 4.3 1.9 7.8 3.3
Other markets 17.9 11.0 17.3 11.5 30.9 15.3 19.6 8.6 20.1 8.5
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total product 160.4 98.7 148.5 98.6 198.6 98.4 222.8 98.4 232.3 98.5
Other revenue (1) 2.1 1.3 2.1 1.4 3.3 1.6 3.6 1.6 3.5 1.5
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net revenues $ 162.5 100.0% $ 150.6 100.0% $ 201.9 100.0% $ 226.4 100.0% 235.8 100.0%
U.S. $ 109.1 $ 94.8 $ 122.3 $ 142.0 $ 154.3
Foreign $ 53.4 $ 55.8 $ 79.6 $ 84.4 $ 81.5
SHIPMENTS BY MARKET
(MILLIONS OF POUNDS)
Aerospace 3.5 22.9% 3.4 25.6% 4.8 29.4% 6.6 40.2% 8.5 45.9%
Chemical processing 5.3 34.6 5.2 39.1 6.4 39.3 6.0 36.6 5.9 31.9
Land-based gas
turbines 1.2 7.8 1.6 12.0 1.3 8.0 1.5 9.2 1.5 8.1
Flue gas
desulfurization 2.9 19.0 1.5 11.3 0.9 5.5 1.0 6.1 0.7 3.8
Oil and gas 1.1 7.2 0.4 3.0 0.5 3.1 0.3 1.8 0.7 3.8
Other markets 1.3 8.5 1.2 9.0 2.4 14.7 1.0 6.1 1.2 6.5
Total Shipments 15.3 100.0% 13.3 100.0% 16.3 100.0% 16.4 100.0% 18.5 100.0%
AVERAGE SELLING RICE
PER POUND
Aerospace $ 13.83 $ 14.09 $ 14.21 $ 14.44 $ 13.08
Chemical processing 10.02 9.98 11.58 12.98 11.75
Land-based gas 10.50 10.63 11.00 11.60 11.47
turbines
Flue gas
desulfurization 6.00 6.80 7.33 8.30 9.57
Oil and gas 10.00 10.50 9.00 14.33 11.14
Other markets 13.77 14.42 12.88 19.60 16.75
All markets $ 10.48 $ 11.17 $ 12.18 $ 13.59 $ 12.56
<FN>
- --------------------
(1) Includes toll conversion and royalty income.
Fluctuations in net revenues and volume from fiscal 1993 through fiscal
1997 are a direct result of significant changes in each of the Company's major
markets.
Aerospace. Demand for the Company's products in the aerospace industry is
driven by orders for new jet engines as well as requirements for spare parts
and replacement parts for jet engines. Demand for the Company's aerospace
products declined significantly from fiscal 1991 to fiscal 1992, as order
rates for commercial aircraft fell below delivery rates due to cancellations
and deferrals of previously placed orders. The Company believes that, as a
result of these cancellations and deferrals, engine manufacturers and their
fabricators and suppliers were caught with excess inventories. The draw down
of these inventories, and the implementation of just-in-time delivery
requirements by many jet engine manufacturers, exacerbated the decline
experienced by suppliers to these manufacturers, including the Company. Demand
for products used in manufacturing military aircraft and engines also dropped
during this period as domestic defense spending declined following the Persian
Gulf War. These conditions persisted through fiscal 1994.
The Company began to see a recovery in the demand for its aerospace
products at the beginning of fiscal 1995. Reflecting increased aircraft
production and maintenance, the Company's net revenues from sales to the
aerospace industry in 1997 and 1996 increased 16.7% and 39.7%, respectively,
over the preceding period. The aerospace market growth is anticipated to
continue in two sectors: (1) commercial aircraft and (2) gas turbine engines.
Commercial aircraft growth stems from world air travel growth in revenue
passenger miles (RPMs) due to world trade growth, removal of political travel
barriers and improved communication infrastructures. In addition, strong
airline profitability and anticipated aircraft fleet growth from 11,800
aircraft at the end of 1996 to 14,350 at the end of 2001 should keep the
market strong. Stage III noise legislation should also lead to aircraft
retirements over the next five years which could further improve demand for
new aircraft.
Chemical Processing. Demand for the Company's products in the chemical
processing industry tends to track overall economic activity and is driven by
maintenance requirements of chemical processing facilities and the expansion
of existing chemical processing facilities or the construction of new
facilities. Demand for the Company's products used in the chemical processing
industry declined in fiscal 1991 and fiscal 1992, but began to increase in
late fiscal 1993. In fiscal 1996, sales of the Company's products to the
chemical processing industry reached a five-year high, and the Company
believes that the outlook for sales of the Company's products to the chemical
processing industry continues to improve. Concerns regarding the reliability
of chemical processing facilities, their potential impact on the environment
and the safety of their personnel as well as the need for higher throughput
should support demand for more sophisticated alloys, such as the Company's CRA
products.
The Company expects that growth in the chemical processing industry will
result from volume increases and selective price increases as a result of
increased demand. In addition, the Company's key proprietary CRA products, the
recently introduced HASTELLOY C-2000, which the Company believes provides
better overall corrosion resistance and versatility than any other readily
available CRA product, and HASTELLOY C-22, are expected to contribute to the
Company's growth in this market, although there can be no assurance that this
will be the case.
Chemical processing markets are expected to see steady growth in export
markets and specific industry sectors (agricultural chemicals and
pharmaceuticals). The chemicals sector comprises both specialty and basic
organic and inorganic chemicals. Mergers and acquisitions of chemical
companies continue as companies make strategic acquisitions and divestitures
in efforts to enhance their global competitiveness.
The agricultural chemical sector is benefitting from changes in U.S.
agricultural programs that now place fewer limits on farmers' ability to plant
crops they want on the acreage they want. Growth in the pharmaceutical sector
is being spurred by continuing advances in both traditional drug research and
the fast growing biotech sector.
Land-Based Gas Turbines. The Company leveraged its metallurgical expertise
to develop LBGT applications for alloys it had historically sold to the
aerospace industry. Electric generating facilities powered by land-based gas
turbines are less expensive to construct and operate and produce fewer sulfur
dioxide ("SO2") emissions than traditional fossil fuel-fired facilities. The
Company believes these factors are primarily responsible for creating demand
for its products in the LBGT industry. Prior to the enactment of the Clean Air
Act, land-based gas turbines were used primarily to satisfy peak power
requirements. However, legislated standards for lowering emissions from fossil
fuel-fired electric utilities and cogeneration facilities, such as the Clean
Air Act, together with self-imposed standards, contributed to increased demand
for some of the Company's products in the early 1990s, when Phase I of the
Clean Air Act was being implemented. The Company believes that land-based gas
turbines are gaining acceptance as a clean, low-cost alternative to fossil
fuel-fired electric generating facilities. The Company believes that
compliance with Phase II of the Clean Air Act, which begins in 2000, will
further contribute to demand for its products.
Flue Gas Desulfurization. The Clean Air Act is the primary factor
determining the demand for high performance alloys in the FGD industry. FGD
projects have been undertaken by electric utilities and cogeneration
facilities powered by fossil fuels in the United States, Europe and the
Pacific Rim in response to concerns over emissions. FGD projects are generally
highly visible and as a result are highly price competitive, especially when
demand for high performance alloys in other major markets is weak. The
Company anticipates limited sales opportunities in the FGD market as deadlines
for Phase II of the Clean Air Act approach in 2000.
The Clean Air Act addresses numerous air quality problems in the United
States that are not entirely covered in earlier legislation. One of these
problems is acid rain caused by sulfur dioxide (SO2) and nitrogen oxides (NOx)
emissions from fossil-fueled electric power. Title IV of the Clean Air Act
created a two-phased plan to reduce acid rain in the U.S. Phase I runs from
1995 through 1999, and Phase II, which is more stringent than Phase I, begins
in 2000. Under Title IV, 435 units were identified for Phase I. Of these,
261 units are required to comply with Phase 1. The remaining 174 units are
participating in Phase I, based on the rules established by the EPA, allowing
a utility to designate substitution or compensating units as part of their
Phase I compliance plans.
The acid rain program allocated emission allowances to Phase I units,
authorizing them to emit one ton of SO2 for each allowance. Some utilities
obtained additional allowances from three auctions and from bonus provisions
in the Act. All 435 generating units had sufficient allowances to comply with
Title IV in 1995. Phase I units significantly reduced their SO2 emissions
compared to previous years; they emitted 5.3 million tons of SO2 in 1995, 45%
less than the 9.7 million tons in 1990.
For Phase II more than 2,000 operating units will be affected. While
many utilities have not finalized their plans to comply with the more
stringent Phase II requirements, most of them have elected to over comply with
Phase I requirements, thus creating a surplus of allowances.
Increased competition has caused the electric utility industry to make
major changes in the way it is structured. On April 26, 1996, the Federal
Energy Regulatory Commission (FERC) issued the final rule, Order No. 888 in
response to provisions of the Energy Policy Act (EPACT) of 1992. Order No.
888 opens wholesale electric power sales to competition and requires each
utility that owns transmission lines to allow buyers and sellers of power the
same access to these lines as the utility provides to its own generation.
In a noncompetitive, regulated environment, state regulators allowed
electric utilities to pass on costs of pollution control requirements to
consumers. In a competitive environment, however, utilities with higher rates
due to environmental controls would be at a relative disadvantage, while those
with lower costs could increase share. With increasing competition and with
Phase II of the Clean Air Act slated for implementation on January 1, 2000,
utilities are showing less interest in making capital investments in expensive
pollution control equipment, are uncertain about cost recovery, and want to be
more competitive.
A number of scrubbers for Phase II are being deferred. The Electric
Power Research Institute (EPRI) estimates that no more than 12 gigawatts to 20
gigawatts of generation capacity may be scrubbed to comply with Phase II
compliance. Planning and building a scrubber takes four years, so in many
cases capital for scrubbers will not be committed until after the year 2000.
Repowering older fossil-fuel units is another alternative to meet Phase II
compliance. It is expected that 2,501.1 megawatts of capacity will be
repowered with natural gas, fuel oil or low sulfur coal over the period from
1996 to 2005.
Oil and Gas. The Company's participation in the oil and gas industry
consists primarily of providing tubular goods for sour gas production. Demand
for the Company's products in this industry is driven by the rate of
development of sour gas fields, which in turn is driven by the price of
natural gas and the need to commence production in order to protect leases.
This market was very active in fiscal 1991, especially in the offshore sour
gas fields in the Gulf of Mexico, but demand for the Company's sour gas
tubular products has declined significantly since that time. Due to the
volatility of the oil and gas industry, the Company has chosen not to invest
in certain manufacturing equipment necessary to perform certain intermediate
steps of the manufacturing process for these tubular products. However, the
Company can outsource the necessary processing steps in the manufacture of
these tubulars when prices rise to attractive levels. The Company intends to
selectively take advantage of future opportunities as they arise, but plans no
capital expenditures to increase its internal capabilities in this area.
Other Markets. In addition to the industries described above, the Company
also targets a variety of other markets. Representative industries served in
fiscal 1997 include waste incineration, industrial heat treating, automotive,
medical and instrumentation. Many of the Company's lower volume proprietary
alloys are experiencing growing demand in these other markets. Markets capable
of providing growth are being driven by increasing performance, reliability
and service life requirements for products used in these markets, which could
provide further applications for the Company's products.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, consolidated statements of
operations data as a percentage of net revenues:
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1995 1996 1997
Net revenues 100.0% 100.0% 100.0%
Cost of sales 82.8 80.0 76.6
Selling and administrative expenses 7.7 8.8(1) 7.8
Recapitalization expense - - 3.7(2)
Research and technical expenses 1.5 1.5 1.6
Other cost, net 0.9 0.3 0.1
Interest expense 10 9.7(1) 8.7
Interest income (0.2) (0.4)(1) (0.1)
Income (loss) before provision for income
taxes, extraordinary items, and cumulative
effect of change in accounting principle -2.7 0.1 1.6
Provision for (benefit from) income taxes 0.6 0.9 (13.8)
Extraordinary item, net of tax benefit (3.2)(1) -
Net income (loss) (3.3)% (4.0)% 15.4%
<FN>
- -----------------------------
(1) During 1996, the Company refinanced its debt and certain non-recurring charges were
recorded as a result of this refinancing effort as follows: (a) approximately $7.3 million
was recorded as the aggregate of extraordinary items which represents the extraordinary
loss on the redemption of the Old Notes and is comprised of approximately $3.9 million of
prepayment penalties incurred in connection with the redemption of the Old Notes and
approximately $3.4 million of deferred debt issuance costs which were written off upon
consummation of the redemption of the Old Notes; (b) approximately $1.8 million of Selling
and Administrative Expense which represents costs incurred with a postponed initial public
offering of the Company's common stock; and (c) approximately $924,000 of Interest Expense
which represents the net interest expense (approximately $1.5 million interest expense less
approximately $600,000 interest income) incurred during the period between the issuance of
the Senior Notes and the redemption of the Old Notes.
(2) On January 29, 1997, the Company announced that Holdings, its parent corporation,
had effected the recapitalization of the Company and Holdings pursuant to which Blackstone
acquired 79.9% of Holdings' outstanding shares. Certain fees totaling approximately $6.2
million paid by the Company in connection with the Recapitalization have been accounted for
as recapitalization expenses, and charged against income in the period. Also in connection
with the Recapitalization, the Company recorded approximately $2.5 million of non-cash
stock compensation expense, also included as recapitalization expenses, pertaining to
certain modifications to management stock option agreements which eliminated put and call
rights associated with the options.
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996
Net Revenues. Net revenues increased approximately $9.4 million, or
4.2%, to approximately $235.8 million in fiscal 1997 from approximately $226.4
million in fiscal 1996, primarily as a result of a 12.8% increase in
shipments, from approximately 16.4 million pounds in fiscal 1996 to
approximately 18.5 million pounds in fiscal 1997.
Sales to the aerospace industry for fiscal 1997 increased 16.7%, to
approximately $111.2 million from approximately $95.3 million for fiscal 1996.
The increase in revenue can be attributed to a 28.8% increase in volume to
approximately 8.5 million pounds in fiscal 1997 from approximately 6.6 million
pounds in fiscal 1996. This volume increase offset a decline in average
selling price per pound, caused by a proportionately higher increase in the
volume of the lower-priced, nickel-based alloys and forms, compared to the
higher-priced, cobalt-containing alloys and forms.
Sales to the chemical processing industry during fiscal 1997 declined by
11.0% to approximately $69.3 million from approximately $77.9 million for
fiscal 1996. Volume shipped to the chemical processing industry during fiscal
1997 decreased by 1.7% to approximately 5.9 million pounds, compared to 6.0
million pounds in fiscal 1996. The drop in the average selling price per
pound reflects lower sales of higher cost, higher priced product forms, and
higher sales of lower cost, lower priced product forms. In particular, sales
of tubular products declined, while sales of forged billet and forged bar
products increased during fiscal 1997 compared to the same period a year ago.
Much of the decline in volume in the domestic market can be attributed to
lower sales to key distributors and sharply lower sales for project business
in the agrochemical sector. For the export market, the decline in volume can
be attributed to lower sales to key distributors and a drop in sales to a key
manufacturer of heat exchanger components.
Sales to the LBGT industry during fiscal 1997 increased 1.1% to
approximately $17.6 million from approximately $17.4 million in fiscal 1996.
Volume remained relatively unchanged while average selling prices increased
1.1%. Higher domestic activity offset lower export and European activity.
Sales to the FGD industry declined 24.1% to approximately $6.3 million in
fiscal 1997 from approximately $8.3 million in fiscal 1996. Volume declined
30.0% while average selling price per pound increased 8.4%. The decline in
volume can be attributed to the lack of significant project activity in the
domestic market and heightened competition for foreign projects.
Sales to the oil and gas industry increased 81.4% to approximately $7.8
million for fiscal 1997 from approximately $4.3 million in fiscal 1996. Sales
to this sector are typically linked to sour gas project requirements. These
requirements vary substantially from quarter to quarter and year to year.
Sales to other industries increased 2.6% in fiscal 1997 to approximately
$20.1 million from approximately $19.6 million for the same period a year ago,
as a result of volume increase of 20.0% partially offset by a 14.5% decline in
average selling price. The increase in volume can be attributed to higher
sales for automotive application. The decline in the average selling price
per pound stems from lower sales of higher cost, higher priced products during
fiscal 1997 compared to fiscal 1996.
Cost of Sales. Cost of sales as a percentage of net revenues decreased
to 76.6% in fiscal 1997 compared to 80.0% in fiscal 1996, as a result of lower
raw material costs and higher capacity utilization. Volume in the higher
priced, higher value added, sheet, coil, and seamless forms increased in
fiscal 1997, compared to fiscal 1996. Increased capacity utilization in these
operations led to efficiencies that lowered average per-unit cost.
Selling and Administrative Expenses. Selling and administrative expenses
decreased approximately $1.7 million, or 8.5%, to approximately $18.3 million
for fiscal 1997 from approximately $20.0 million in fiscal 1996. The decrease
was primarily the result of a net decrease of approximately $800,000 for
incentive compensation in fiscal 1997, compared to the same period in fiscal
1996. In addition, selling and administrative expenses in fiscal 1996
included approximately $1.8 million of postponed initial public offering
costs.
Recapitalization Expense. Recapitalization expense of approximately $8.7
million recorded in fiscal 1997 includes approximately $6.2 million of
expenses paid by the Company in connection with the Recapitalization
(discussed below) and approximately $2.5 million in non-cash compensation
expense pertaining to certain modifications to management stock option
agreements which eliminated put and call rights provided therein.
Research and Technical Expenses. Research and technical expenses
increased approximately $400,000, or 11.8%, to approximately $3.8 million in
fiscal 1997 from approximately $3.4 million in fiscal 1996, primarily as a
result of salary increases combined with headcount additions which occurred in
the latter part of fiscal 1996. Also, research efforts sponsored by the
Company at various universities were increased during fiscal 1997, as compared
to the same period a year ago.
Operating Income. As a result of the above factors, the Company
recognized operating income for fiscal 1997 of approximately $24.4 million,
approximately $4.1 million of which was contributed by the Company's foreign
subsidiaries. For fiscal 1996, operating income was approximately $21.9
million, of which approximately $4.9 million was contributed by the Company's
foreign subsidiaries.
Other Costs (Income). Other cost (income), net, decreased approximately
$314,000, or 53.2%, from approximately $590,000 in fiscal 1996 to
approximately $276,000 for fiscal 1997, primarily as a result of foreign
exchange gains realized and lower domestic bank charges in fiscal 1997, as
compared to foreign exchange losses experienced during fiscal 1996.
Interest Expense. Interest expense decreased approximately $1.4 million,
or 6.4%, to approximately $20.6 million for fiscal 1997 from approximately
$22.0 million for fiscal 1996, due primarily to lower interest rates and
reduced debt issue cost amortization achieved as a result of the refinancing
of the Company's long-term debt in fiscal 1996. This decrease was partially
offset by higher revolving credit balances during fiscal 1997, compared to the
same period in fiscal 1996. In addition, interest expense for fiscal 1996
included an additional approximately $1.5 million interest expense incurred
during the period between the issuance of the 11 5/8% Senior Notes due 2004
and the redemption of the Old Notes.
Income Taxes. The provision for (benefit from) income taxes decreased by
approximately $34.6 million during fiscal 1997. During the third quarter of
fiscal 1997, the Company reversed its deferred income tax valuation allowance.
This reversal was due to the Company's assessment of past earnings history and
trends (exclusive of non-recurring charges), sales backlog, budgeted sales and
earnings, stabilization of financial condition, and the periods available to
realize the future tax benefits.
Net Income. As a result of the above factors, the Company recognized net
income for fiscal 1997 of approximately $36.3 million, compared to a net loss
of approximately $9.0 million for fiscal 1996.
[Remainder of Page Intentionally Left Blank.]
YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995
Net Revenues. Net revenues increased approximately $24.5 million, or
12.1%, to approximately $226.4 million in fiscal 1996 from approximately
$201.9 million in fiscal 1995, primarily as a result of an 11.6% increase in
the average selling price per pound, from $12.18 to $13.59. Shipments
increased by 0.6% to 16.4 million pounds in fiscal 1996 from 16.3 million
pounds in fiscal 1995, as volume increases in the aerospace, chemical
processing and LBGT markets offset lower volumes in the oil and gas and other
markets.
Sales to the aerospace industry increased by 39.7% to approximately $95.3
million in fiscal 1996 from approximately $68.2 million in fiscal 1995.
Volume increased 37.5% and the average selling price per pound increased 1.6%.
Increased demand for the Company's products in fiscal 1996 from the aerospace
industry was generated primarily by domestic engine producers, as demand in
Europe remained relatively flat.
Sales to the chemical processing industry increased 5.1% to approximately
$77.9 million in fiscal 1996 from approximately $74.1 million in fiscal 1995.
Volume decreased 6.3% due to lower exports to the Asia Pacific Rim. The
average selling price per pound increased 12.1% as a result of higher demand
from both the domestic and European markets.
Sales to the LBGT industry increased 21.7% to approximately $17.4 million
in fiscal 1996 from approximately $14.3 million in fiscal 1995 as a result of
an 15.4% increase in volume and a 5.5% increase in the average selling price
per pound. This reflected strong demand for cleaner burning power generation
from gas turbines. In addition, the Company's sales to this market have been
favorably impacted by its success in marketing HAYNES 230 to European turbine
manufacturers as a replacement for competing alloys.
Sales to the FGD industry increased 25.8% to approximately $8.3 million
in fiscal 1996 from approximately $6.6 million in fiscal 1995. Volume
increased 11.1% and, average selling price per pound increased by 13.2% due to
higher domestic project activity.
Sales to the oil and gas industry decreased 4.4% to approximately $4.3
million in fiscal 1996 from sales of approximately $4.5 million in fiscal
1995. Sales to this market occurred primarily in the third quarter for both
fiscal years due to sour gas projects in Mobile Bay off the coast of Alabama.
Volume decreased 40.0%, while average selling price per pound increased 59.2%
due primarily to a favorable product mix.
Sales to other industries decreased by 36.6% to approximately $19.6
million for fiscal 1996 from approximately $30.9 million in fiscal 1995, as a
result of a 58.3% decrease in volume which was only partially offset by a
52.2% increase in average selling price per pound. The Company benefitted
from a one-time order of approximately $3.5 million for a major waste
treatment facility in Eastern Europe and a $5.1 million one-time order for
defense-related remunerators on M-1 tanks in the first nine months of fiscal
1995. Sales to the waste incineration market increased as a result of greater
use of the Company's products in high temperature corrosion applications. In
addition, increased use of HAYNES HR-120 as a substitute for competing
products (including stainless steel) in the industrial heating market led to
higher sales in that segment.
Cost of Sales. Cost of sales as a percentage of net revenues decreased
to 80.0% from 82.8% in the respective periods as a result of higher average
selling prices and a favorable change in product mix. Volume in the
higher-market high value-added product forms such as sheet, wire and seamless
tubulars increased in fiscal 1996 over fiscal 1995 levels. Increased capacity
utilization in the higher-cost operations used to manufacture these forms led
to efficiencies that lowered the per unit cost. Also, during fiscal 1995 raw
material costs escalated thereby temporarily reducing margins until price
increases could be fully implemented. In fiscal 1996, these increased costs
had been fully passed through to a greater extent as reflected in higher
selling prices.
Selling and Administrative Expenses. Selling and administrative expenses
increased approximately $4.5 million, or 29.0%, to approximately $20.0 million
for fiscal 1996 from approximately $15.5 million in fiscal 1995. The increase
was primarily a result of salary increases and the payment and accrual of
management and employee bonuses of approximately $1.9 million which were
awarded for fiscal 1995 and fiscal 1996 performance. Selling and
administrative expenses also include approximately $1.8 million of costs
incurred in connection with a postponed initial public offering of the
Company's common stock. In addition, sales and marketing personnel were hired
as a part of the Company's efforts to increase market coverage and customer
contact.
Research and Technical Expenses. Research and technical expenses
increased approximately $362,000, or 11.9%, to approximately $3.4 million in
fiscal 1996 from approximately $3.0 million in fiscal 1995, primarily as a
result of salary increases. Headcount increased as part of the Company's
ongoing commitment to technological leadership.
Operating Income. As a result of the above factors, the Company
recognized operating income for fiscal 1996 of approximately $21.9 million,
approximately $4.9 million of which was contributed by the Company's foreign
subsidiaries. For fiscal 1995, operating income was approximately $16.2
million, of which approximately $5.3 million was contributed by the Company's
foreign subsidiaries.
Other Costs (Income). Other costs, net decreased approximately $1.2
million, or 66.6%, to approximately $590,000 for fiscal 1996 from
approximately $1.8 million in the same period in fiscal 1995, primarily as a
result of foreign exchange gains in fiscal 1996 compared to foreign exchange
losses in fiscal 1995 and a $582,000 reduction in other costs associated with
the fiscal 1995 purchase of options to acquire the then outstanding Old Notes.
Interest Expense. Interest expense increased approximately $1.8 million,
or 8.7%, to approximately $22.0 million or fiscal 1996 from approximately
$20.2 million for the same period in fiscal 1995, due primarily to higher
average borrowings under the Company's Revolving Credit Facility and an
additional $1.5 million of interest expense incurred during the period between
the issuance of the Senior Notes and the redemption of the Old Notes.
Income Taxes. The provision for income taxes of approximately $1.9
million for fiscal 1996 increased by approximately $672,000 from approximately
$1.3 million for fiscal 1995, due primarily to taxes on foreign earnings
against which the Company was unable to utilize its U.S. federal income tax
net operating loss carryforwards.
Extraordinary Loss. Extraordinary loss, net of tax benefit of
approximately $7.3 million, were recorded in fiscal 1996 representing the
extraordinary loss on the redemption of the Old Notes and is comprised of
approximately $3.9 million of prepayment penalties incurred as a result of the
redemption of the Old Notes and approximately $3.3 million of deferred debt
issuance costs which were written off upon redemption. No tax benefit was
recognized due to the valuation reserve established for tax reporting
purposes.
Net Loss. As a result of the above factors, the Company recognized a net
loss for fiscal 1996 of approximately $9.0 million, compared to a net loss of
approximately $6.8 million for fiscal 1995.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's near-term future cash needs will be driven by working
capital requirements, which are likely to increase, and planned capital
expenditures. Capital expenditures were approximately $8.9 million in fiscal
1997 and are expected to be approximately $9.0 million in fiscal 1998.
Capital expenditures were approximately $1.9 million and $2.1 million for
fiscal 1995 and 1996, respectively. The increased capital investments for
fiscal 1997 and 1998 are for significant new equipment additions and
expenditures of approximately $3.1 million for new integrated information
systems. The top three capital projects in terms of fiscal 1997 spending were
(1) an upgrade to the Company's bright anneal line furnace, (2) a new slab
grinder, and (3) the integrated information system. The Company expects that
the primary benefits of this spending are to be (i) the expansion of annual
production capacity by 25% from approximately 20.0 million pounds to
approximately 25.0 million pounds, based on the current product mix, (ii)
improved production quality resulting in lower internal rejection rates and
rework costs and (iii) improved coordination among sales, marketing and
manufacturing personnel resulting in more efficient pricing practices. The
Company does not expect such capital expenditures to have a material adverse
effect on its long-term liquidity. Moreover, other than as described above,
the Company does not currently have any significant capital expenditure
commitments. The Company expects to fund its working capital needs and capital
expenditures with cash provided from operations, supplemented by borrowings
under its Revolving Credit Facility. The Company believes these sources of
capital will be sufficient to fund these capital expenditures and working
capital requirements over the next 12 months and on a long-term basis,
although there can be no assurance that this will be the case.
Net cash used in operating activities in fiscal 1997 was approximately
$6.6 million, as compared to approximately $5.3 million for fiscal 1996. The
negative cash flow from operations for fiscal 1997 was primarily a result of
increases of approximately $20.5 million in inventories which was offset by
non-cash depreciation and amortization expenses of approximately $8.6 million,
an increase in the accounts payable and accrued expenses balance of
approximately $1.0 million a decrease in accounts receivable of approximately
$1.1 million and other adjustments. Cash used for investing activities
increased from approximately $2.0 million in fiscal 1996 to approximately $8.8
million in fiscal 1997, primarily as a result of higher capital expenditures.
Cash provided by financing activities for fiscal 1997 was approximately $14.2
million due primarily to $14.6 million in increased borrowings under the
Revolving Credit Facility. Cash for fiscal 1997 decreased approximately $1.4
million, resulting in a September 30, 1997 cash balance of approximately $3.3
million. Cash in fiscal 1996 decreased approximately $347,000, resulting in a
cash balance of approximately $4.7 million at September 30, 1996.
On August 23, 1996, the Company issued $140.0 million of its 11 5/8%
Senior Notes due 2004 and amended its Revolving Credit Facility with Congress
Financial Corporation ("Congress") to increase the maximum amount available
under the Revolving Line of Credit to $50.0 million. With the proceeds from
the issuance of the Senior Notes and borrowings under the Revolving Credit
Facility, the Company redeemed all of its outstanding Old Notes on September
23, 1996. On January 24, 1997, the Company amended its Revolving Credit
Facility by increasing the maximum credit from $50.0 million to $60.0 million.
See Note 6 of the Notes to Consolidated Financial Statements for a description
of the terms of the Senior Notes and the Revolving Credit Facility.
The Senior Notes and the Revolving Credit Facility contain a number of
covenants limiting the Company's access to capital, including covenants that
restrict the ability of the Company and its subsidiaries to (i) incur
additional Indebtedness, (ii) make certain restricted payments, (iii) engage
in transactions with affiliates, (iv) create liens on assets, (v) sell assets,
(vi) issue and sell preferred stock of subsidiaries, and (vii) engage in
consolidations, mergers and transfers.
The Company is currently conducting groundwater monitoring and
post-closure monitoring in connection with certain disposal areas, and has
completed an investigation of eight specifically identified solid waste
management units at the Kokomo facility. The results of the investigation have
been filed with the EPA. If the EPA or IDEM were to require corrective action
in connection with such disposal areas or solid waste management units, there
can be no assurance that the costs of such corrective action will not have a
material adverse effect on the Company's financial condition, results of
operations or liquidity. In addition, the Company has been named as a PRP at
one waste disposal site. Based on current information, the Company believes
that its involvement at this site will not have a material adverse effect on
the Company's financial condition, results of operations or liquidity although
there can be no assurance with respect thereto. Expenses related to
environmental compliance were $1.1 million for fiscal 1997 and are expected to
be approximately $1.2 million for fiscal 1998. See "Business-- Environmental
Matters." Based on information currently available to the Company, the Company
is not aware of any information which would indicate that litigation pending
against the Company is reasonably likely to have a material adverse effect on
the Company's operations or liquidity. See "Business--Environmental Matters."
INFLATION
The Company believes that inflation has not had a material impact on its
operations.
INCOME TAX CONSIDERATIONS
For financial reporting purposes the Company recognizes deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Statement of Financial Accounting Standards ("SFAS") No. 109 requires the
recording of a valuation allowance when it is more likely than not that some
portion or all of a deferred tax asset will not be realized. This statement
further states that forming a conclusion that a valuation allowance is not
needed may be difficult, especially when there is negative evidence such as
cumulative losses in recent years. The ultimate realization of all or part of
the Company's deferred tax assets depends upon the Company's ability to
generate sufficient taxable income in the future. During the third quarter of
fiscal 1997, the Company reversed its deferred income tax valuation allowance
of approximately $36.4 million. This reversal was due to the Company's
assessment of past earnings history and trends (exclusive of non-recurring
changes) sales backlog, budgeted sales and earnings, stabilization of
financial condition, and the periods available to realize the future tax
benefits.
RECAPITALIZATION
The Company announced on January 29, 1997 that the Recapitalization had
been effected, and that in connection therewith Holdings had completed a stock
purchase transaction with Blackstone Capital Partners II Merchant Banking Fund
L.P. and two of its affiliates ("Blackstone") and a stock redemption
transaction with MLGA Fund II, L.P. and MLGAL Partners L.P., the principal
investors in Holdings prior to the Recapitalization. As part of the
Recapitalization, Holdings redeemed approximately 79.9% of its outstanding
shares of common stock at $10.15 per share in cash and Blackstone purchased a
like number of shares at the same price. Due to this change in ownership, the
Company's ability to utilize its U.S. net operating loss carryforwards will be
limited in the future. In conjunction with the above mentioned transactions,
the maximum amount available under the Company's Revolving Credit Facility was
increased from $50 to $60 million.
ACQUISITION BY HOLDINGS
On June 11, 1997 Inco Limited ("Inco") and Blackstone jointly announced
the execution of a definitive agreement for the sale by Inco of 100% of its
Inco Alloy International ("IAI") business unit to Holdings, an affiliate of
Blackstone. Upon consummation of the transaction, Blackstone plans to combine
the operations of IAI and the Company. Completion of the sale will be subject
to a number of conditions and the receipt of regulatory and other approvals,
including anti-trust clearance. Closing of the sale is currently expected to
take place in the first quarter of calendar 1998.
ACCOUNTING PRONOUNCEMENTS
SFAS No. 129, "Disclosure of Information about Capital Structure",
is effective for the year ending September 30, 1998. SFAS No. 130, "Reporting
Comprehensive Income", and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", are effective for the year ending
September 30, 1999. In the opinion of management, SFAS No. 129, SFAS No. 130,
and SFAS No. 131 will not have a material impact on the Company's financial
position or results of operations, as these three statements are disclosure
oriented.
[Remainder of page intentionally left blank.]
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTS
Board of Directors
Haynes International, Inc.
We have audited the consolidated financial statements and the financial
statement schedule of Haynes International, Inc. (the Company), a wholly owned
subsidiary of Haynes Holdings, Inc., listed in Item 14(a) of this Form 10-K.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Haynes International, Inc. as of September 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1997, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Fort Wayne, Indiana
November 3, 1997
HAYNES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, SEPTEMBER 30,
ASSETS 1996 1997
Current assets:
Cash and cash equivalents $ 4,688 $ 3,281
Accounts and notes receivable, less allowance for
Doubtful accounts of $900 and $657, respectively 39,624 38,500
Inventories 74,755 94,081
Total current assets 119,067 135,862
Property, plant and equipment, net 31,157 32,551
Deferred income taxes 37,057
Prepayments and deferred charges, net 11,265 10,849
Total assets $ 161,489 $ 216,319
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 24,814 $ 24,938
Accrued postretirement benefits 4,000 3,900
Revolving credit 30,888 45,239
Note payable 859 1,408
Income taxes payable 1,199 1,566
Deferred income taxes 1,748
Total current liabilities 61,760 78,799
Long-term debt, net of unamortized discount 137,350 137,566
Deferred income taxes 485
Accrued postretirement benefits 91,813 92,301
Total liabilities 291,408 308,666
Redeemable common stock of parent company 422 2,088
Capital deficiency:
Common stock, $.01 par value (100 shares authorized,
Issued and outstanding)
Additional paid-in capital 47,985 49,070
Accumulated deficit (181,321) (145,006)
Foreign currency translation adjustment 2,995 1,501
Total capital deficiency (130,341) (94,435)
Total liabilities and capital deficiency $ 161,489 $ 216,319
<FN>
The accompanying notes are an integral part of these financial statements.
HAYNES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997
Net revenues $ 201,933 $ 226,402 $ 235,760
Costs and expenses:
Cost of sales 167,196 181,173 180,504
Selling and administrative 15,475 19,966 18,311
Recapitalization expense 8,694
Research and technical 3,049 3,411 3,814
Other costs, net 1,767 590 276
Interest expense 20,233 21,991 20,608
Interest income (329) (889) (152)
Total costs and expenses 207,391 226,242 232,055
Income (loss) before provision for (benefit
from) income taxes and extraordinary item (5,458) 160 3,705
Provision for (benefit from) income taxes 1,313 1,940 (32,610)
Income (loss) before extraordinary item (6,771) (1,780) 36,315
Extraordinary item, net of tax benefit (7,256)
Net income (loss) $ (6,771) $ (9,036) $ 36,315
<FN>
The accompanying notes are an integral part of these financial statements.
HAYNES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997
Cash flows from operating activities:
Net income (loss) $ (6,771) $ (9,036) $ 36,315
Adjustments to reconcile net income ( loss)
to net cash used in operating activities:
Extraordinary item 7,256
Depreciation 8,188 7,751 7,477
Amortization 1,444 1,353 1,144
Deferred income taxes 2 213 (35,718)
Gain on disposition of property and equipment (37) (20) (39)
Non-cash stock option expense 2,457
Change in assets and liabilities:
Accounts and notes receivable (7,354) (1,599) 1,053
Inventories (6,480) (15,132) (20,527)
Prepayments and deferred charges 347 335 (97)
Accounts payable and accrued
expenses 6,322 2,543 608
Income taxes payable 774 10 344
Accrued postretirement benefits 682 983 387
Net cash used in operating
activities (2,883) (5,343) (6,596)
Cash flows from investing activities:
Additions to property, plant and equipment (1,934) (2,092) (8,863)
Proceeds from disposals of property, plant, 33
and equipment 39 67
Net cash used in investing activities (1,895) (2,025) (8,830)
Cash flows from financing activities:
Net additions of revolving credit 4,337 18,411 14,567
Borrowings of long-term debt 137,350
Repayments of long-term debt (140,000)
Payment of debt issuance costs (5,408) (676)
Payment of prepayment penalties on debt retirement (3,911)
Capital contribution from parent company of
proceeds from exercise of stock options 674 294
Retirement of stock options (425)
Net cash provided from financing activities 3,912 7,116 14,185
Effect of exchange rates on cash 211 (95) (166)
Decrease in cash and cash equivalents (655) (347) (1,407)
Cash and cash equivalents:
Beginning of year 5,690 5,035 4,688
End of year $ 5,035 $ 4,688 $ 3,281
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest $ 18,840 $ 22,076 $ 20,968
Income taxes $ 560 $ 1,717 $ 3,040
<FN>
The accompanying notes are an integral part of these financial statements.
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
The consolidated financial statements include the accounts of Haynes
International, Inc. and its wholly-owned subsidiaries (collectively, the
"Company"). All significant intercompany transactions and balances are
eliminated. The Company develops, manufactures and markets technologically
advanced, high performance alloys primarily for use in the aerospace and
chemical processing industries worldwide.
B. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investment instruments, including
investments with original maturities of three months or less at acquisition,
to be cash equivalents, the carrying value of which approximates fair value
due to the short maturity of these investments
C. INVENTORIES
Inventories are stated at the lower of cost or market. The cost of domestic
inventories is determined using the last-in, first-out method (LIFO). The
cost of foreign inventories is determined using the first-in, first-out (FIFO)
method and average cost method.
D. PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment are recorded at cost with
depreciation calculated primarily by using the straight-line method based on
estimated economic useful lives. Buildings are generally depreciated over 40
years and machinery and equipment are depreciated over periods ranging from 5
to 14 years.
Expenditures for maintenance and repairs and minor renewals are charged to
expense; major renewals are capitalized. Upon retirement or sale of assets,
the cost of the disposed assets and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is credited or
charged to operations.
E. LONG-LIVED ASSETS
The Company regularly evaluates whether events and circumstances have occurred
which may indicate that the carrying amount of intangible or other long-lived
assets warrant revision or may not be recoverable. When factors indicate that
an asset or assets should be evaluated for possible impairment, an evaluation
would be performed whereby the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying amount to
determine if a write-down to market value is required. As of September 30,
1997 and 1996 management considered the Company's intangible and other
long-lived assets to be fully recoverable.
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
F. ENVIRONMENTAL EXPENDITURES
Environmental expenditures that pertain to current operations or to future
revenues are expensed or capitalized consistent with the Company's
capitalization policy. Expenditures that result from the remediation of an
existing condition caused by past operations and that do not contribute to
current or future revenues are expensed. Liabilities are recognized for
remedial activities, including remediation investigation and feasibility study
costs, when the cleanup is probable and the cost can be reasonably estimated.
Recoveries of expenditures are recognized as receivables when they are
estimable and probable.
In October 1996, Statement of Position 96-1, "Environmental Remediation
Liabilities," was issued and is effective for fiscal 1998. This statement
provides guidance for recognizing, measuring and disclosing environmental
remediation liabilities. The Company does not expect this statement to have a
material effect on its financial position results of operations.
G. FOREIGN CURRENCY EXCHANGE
The Company's foreign operating entities' financial statements are stated
in the functional currencies of each respective country, which are the local
currencies. Substantially all assets and liabilities are translated to U.S.
dollars using exchange rates in effect at the end of the year; and revenues
and expenses are translated at the weighted average rate for the year.
Translation gains or losses are recorded as a separate component of capital
deficiency and transaction gains and losses are reflected in the consolidated
statement of operations.
H. INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in years in which those temporary
differences are expected to be recovered or settled. If it is more likely
than not that some portion or all of a deferred tax asset will not be
realized, a valuation allowance is recognized.
I. DEFERRED CHARGES
Deferred charges consist primarily of debt issuance costs which are amortized
over the terms of the related debt using the effective interest method.
Accumulated amortization at September 30, 1996 and 1997 was $63 and $992,
respectively. During 1996, the Company wrote off approximately $3,345 of
deferred debt issuance costs and capitalized approximately $5,408 of costs
incurred in connection with the refinancing of the Company's debt. During
1997, the Company capitalized approximately $676 of costs incurred in
connection with an increase in the Company's existing revolving line of
credit.
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
J. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK
The Company enters into forward currency exchange contracts and nickel futures
contracts on a continuing basis for periods consistent with contractual
exposures. The effect of this practice is to minimize the variability in the
Company's operating results arising from foreign exchange rate and nickel
price movements. These contracts are considered short-term financial
instruments, the carrying value of which approximates fair value due to the
relatively short duration of the contracts. The Company does not engage in
foreign currency or nickel futures speculation. Gains and losses on these
contracts are reflected in the statement of operations in the month the
contracts are settled. At September 30, 1996 and 1997, the Company had $1,360
and $6,616 of foreign currency exchange contracts, respectively, and $3,512
and $2,328 of nickel futures contracts, respectively, outstanding with a
combined net unrealized loss of $192 and $104, respectively. With respect to
the consolidated statement of cash flows, contracts accounted for as hedges
are classified in the same category as the items being hedged.
Financial instruments which potentially subject the Company to concentrations
of credit risk consist of cash and cash equivalents and accounts receivable.
At September 30, 1997 and periodically throughout the year the Company has
maintained cash balances in excess of federally insured limits.
During 1995, 1996 and 1997, sales to one group of affiliated customers
approximated $23,718, $26,937 and $24,854, respectively, or 12%, 12% and 11%
of net revenues, respectively. The Company generally does not require
collateral and credit losses have been within managements expectations. The
Company does not believe it is significantly vulnerable to certain business
concentrations with respect to customers, suppliers, products, markets or
geographic areas that make the Company vulnerable to the risk of a near-term
severe impact.
K. ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The Company does not
believe that it has assets, liabilities or contingencies that are particularly
sensitive to changes in estimates in the near term.
L. ACCOUNTING PRONOUNCEMENTS
SFAS No. 129, "Disclosure of Information about Capital Structure", is
effective for the year ending September 30, 1998. SFAS No. 130, "Reporting
Comprehensive Income", and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", are effective for the year ending
September 30, 1999. In the opinion of management, SFAS No. 129, SFAS No. 130,
and SFAS No. 131 will not have a material impact on the Company's financial
position, results of operations, or cash flows, as these statements are
disclosure oriented.
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2: INVENTORIES
The following is a summary of the major classes of inventories:
September 30, September 30,
1996 1997
Raw materials $ 4,296 $ 5,012
Work-in-process 37,643 50,240
Finished goods 32,046 33,641
Other 861 984
Amount necessary to increase (decrease) certain
inventories to the LIFO method (91) 4,204
Net inventories $ 74,755 $ 94,081
<FN>
Inventories valued using the LIFO method comprise 74% and 77% of consolidated
FIFO inventories at September 30, 1996 and 1997, respectively.
NOTE 3: PROPERTY, PLANT AND EQUIPMENT
The following is a summary of the major classes of property, plant, and
equipment:
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
Land and land improvements $ 1,918 $ 1,951
Buildings 6,623 6,715
Machinery and equipment 76,336 81,831
Construction in process 900 4,030
85,777 94,527
Less accumulated depreciation (54,620) (61,976)
Property, plant and equipment, net $ 31,157 $ 32,551
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4: ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following is a summary of the major classes of accounts payable and
accrued expenses:
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
Accounts payable, trade $ 15,285 $ 16,990
Employee compensation 4,214 3,476
Taxes, other than income taxes 1,977 2,086
Interest 1,718 1,356
Other 1,620 1,030
Total $ 24,814 $ 24,938
(Remainder of page intentionally left blank.)
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 5: INCOME TAXES
The components of income (loss) before provision for (benefit from) income taxes and
extraordinary item consist of the following:
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997
Income (loss) before provision for (benefit
from) income taxes and extraordinary item
U.S. $ (9,332) $ (4,558) $ (677)
Foreign 3,874 4,718 4,382
Total $ (5,458) $ 160 $ 3,705
Income tax provision (benefit):
Current:
U.S. Federal $ 187 $ 1,401
Foreign $ 1,284 1,509 1,285
State 27 31 422
Current total 1,311 1,727 3,108
Deferred:
U. S. Federal 2 131 (30,294)
Foreign 82 (498)
State (4,926)
Deferred total 2 213 (35,718)
Total provision for income taxes $ 1,313 $ 1,940 $ (32,610)
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The provision for (benefit from) income taxes applicable to results of operations before extraordinary
item differed from the U.S. federal statutory rate as follows:
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1995 1996 1997
Statutory federal tax rate 34% 34% 34%
Tax provision (benefit) at the statutory rate $ (1,856) $ 54 $ 1, 260
Foreign tax rate differentials (162) (24) (202)
Utilization of alternative minimum tax credit (534)
Utilization of net operating loss (2,705)
Withholding tax on undistributed earnings of
Foreign subsidiaries 131 155
Provision for state taxes, net of federal tax benefit 27 31 422
Exercise of stock options of parent company 400 (167)
U.S. tax on distributed and undistributed earnings
of foreign subsidiaries 980 760 1,097
Increase (decrease) in valuation allowance related
to continuing operations 2,057 363 (31,923)
Other 267 225 (13)
Provision (benefit) at effective tax rate $ 1,313 $ 1,940 $ (32,610)
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Deferred income tax assets (liabilities) are comprised of the following:
Current deferred income tax assets (liabilities): SEPTEMBER 30, SEPTEMBER 30,
1996 1997
Inventory capitalization $ 962 $ 1,110
Postretirement benefits other than pensions 1,553 1,541
Accrued expenses for vacation 470 596
Inventory profit reserve 666 1,265
Other 754 475
Gross current deferred tax assets 4,405 4,987
Less: Valuation allowance (2,434)
1,971 4,987
Inventory purchase accounting adjustment (6,304) (6,378)
Mark to market reserve (357)
Gross current deferred tax liability (6,304) (6,735)
Total net current deferred tax liability (4,333) (1,748)
Noncurrent deferred income tax assets (liabilities):
Property, plant and equipment, net (7,069) (4,969)
Prepaid pension costs (1,990) (1,893)
Investment in subsidiary (466) (475)
Other foreign related (556) (690)
Undistributed earnings of foreign subsidiaries (3,420) (4,575)
Gross noncurrent deferred tax liability (13,501) (12,602)
Postretirement benefits other than pensions 35,656 35,827
Executive compensation 164 825
Investment in subsidiary 582 573
Net operating loss carryforwards 14,406 12,434
Alternative minimum tax credit carryforwards 538
Gross noncurrent deferred tax asset 51,346 49,659
Less: Valuation allowance (33,997)
17,349 49,659
Total net noncurrent deferred tax
asset 3,848 37,057
Total $ (485) $ 35,309
<FN>
The valuation allowance used to offset deferred tax assets is as follows:
Allowance at October 1, 1994 $ 30,857
Increase in allowance 2,346
Allowance at October 1, 1995 33,203
Increase in allowance 3,228
Allowance at September 30, 1996 36,431
Decrease in allowance (36,431)
Allowance at September 30, 1997 $ 0
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As of September 30, 1997, the Company had net operating loss
carryforwards for regular tax purposes of approximately $33,206 (expiring in
fiscal years 2007 to 2011), of which $19,800 are available for alternative
minimum tax.
During the third quarter of fiscal 1997, the Company reversed its
deferred income tax valuation allowance of approximately $36,431. 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.
NOTE 6: DEBT
Debt, consists of the following:
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
Revolving Credit Facility $ 30,888 $ 45,239
Senior Notes (due 2004, 11.625%) net of $2,650 and
2,434, respectively, unamortized discount (effective rate
of 12.0%) $ 137,350 $ 137,566
BANK FINANCING
On August 23, 1996, the Company successfully refinanced its then existing
debt with the issuance of $140,000 Senior Notes due 2004 and an amendment to
its working capital facility (the "Revolving Credit Facility") with Congress
Financial Corporation ("Congress").
Certain non recurring charges were recorded as a result of this
refinancing effort as follows:
$7,256 of extraordinary losses which represents the extraordinary loss on
the redemption of the Senior Secured and Senior Subordinated Notes and is
comprised of $3,911 of prepayment penalties incurred with the redemption and
$3,345 of deferred debt issuance costs which were written off upon redemption
of the related debt;
$1,837 of selling and administrative expense which represents costs
incurred with a postponed initial public offering of the Company's common
stock.
$924 of net interest expense incurred during the period between the
issuance of the Senior Notes and the redemption of the Senior Secured and
Senior Subordinated Notes.
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On January 24, 1997, the Company amended its Revolving Credit Facility by
increasing the maximum credit from $50,000 to $60,000. The amount available
for revolving credit loans equals the difference between the $60,000 total
facility amount less any letter of credit reimbursement obligations incurred
by the Company, which are subject to a sub limit of $10,000. The total
availability may not exceed the sum of 85% of eligible accounts receivable
(generally, accounts receivable of the Company from domestic and export
customers that are less than 60 days outstanding) plus 60% of eligible
inventories consisting of finished goods and raw materials, plus 45% of
eligible inventories consisting of work-in-process and semi-finished goods
calculated at the lower of cost or current market value, minus any
availability reserves established by Congress. Unused line of credit fees
during the revolving credit loan period are .375% of the amount by which
$48,000 exceeds the average daily principal balance of the outstanding
revolving loans and letter of credit accommodations.
The Revolving Credit Facility bears interest at a fluctuating per annum
rate equal to a combination of prime rate plus 0.50% and London Interbank
Offered Rates ("LIBOR") plus 2.50%. At September 30, 1997, the effective
interest rates for revolving credit loans were 8.156% for $31,500 of the
Revolving Credit Facility and 9.0% for the remaining $13,739. At September
30, 1996, the effective interest rates for revolving audit loans were 8.238%
for $24,000 of the Revolving Credit Facility and 9.0% for the remaining
$6,888. As of September 30, 1997, $3,042 in letter of credit reimbursement
obligations have been incurred by the Company. The availability for revolving
credit loans at September 30, 1997 was $7,099.
The Revolving Credit Facility contains covenants common to such
agreements including the maintenance of certain net worth levels and
limitations on capital expenditures, investments, incurrences of debt,
impositions of liens, dispositions of assets and payments of dividends and
distributions. The Revolving Credit Facility is collateralized by first
priority security interests on all accounts receivable and inventories
(excluding all accounts receivable and inventories of the Company's foreign
subsidiaries) and fixed assets of the Company and the proceeds therefrom.
The estimated fair value, based upon an independent market quotation, of
the Company's long-term debt was approximately $145,600 and $161,700 at
September 30, 1996 and 1997, respectively. The carrying value of the
Company's Revolving Credit Facility approximates fair value.
SENIOR NOTES DUE 2004
The Senior Notes are uncollateralized obligations of the Company and are
effectively subordinated in right of payment to obligations under the
Revolving Credit Facility. Interest is payable semi-annually on March 1 and
September 1.
The notes are redeemable, in whole or in part, at the Company's option at
any time on or after September 1, 2000 at redemption prices ranging from
105.813% to 100% plus accrued interest to the date of redemption. In
addition, prior to September 1, 1999, in the event one or more public equity
offerings of the Company are consummated, the Company may redeem in the
aggregate up to a maximum of 35% of the initial aggregate principal amount of
the Notes with the net proceeds thereof at a redemption price equal to
111.625% of the principal amount thereof plus accrued and unpaid interest to
the date of redemption; provided that, after giving effect thereto, at least
$85,000 aggregate principal amount of Notes remains outstanding.
The Senior Notes limit the incurrence of additional indebtedness,
restricted payments, mergers, consolidations and asset sales.
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
OTHER
In addition to the aforementioned debt, the Company's UK affiliate
(Haynes International, Ltd.) has a revolving credit agreement with Midland
Bank that provides for availability of 1,000 pounds sterling ($1,674)
collateralized by the assets of the affiliate. This revolving credit
agreement was available in its entirety on September 30, 1997 as a means of
financing the activities of the affiliate including payments to the Company
for intercompany purchases. The Company's French affiliate (Haynes
International, SARL) has an overdraft banking facility of 12,000 french francs
($2,077) and utilized 8,329 french francs ($1,408) of the facility as of
September 30, 1997. The Company's Swiss affiliate (Nickel-Contor AG) has an
overdraft banking facility of 3,800 swiss francs ($2,717) all of which was
available on September 30, 1997.
[Remainder of page intentionally left blank.]
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 7: CAPITAL DEFICIENCY
The following is a summary of changes in stockholder's equity (capital deficiency):
COMMON COMMON STOCK FOREIGN
STOCK
ADDITIONAL CURRENCY TOTAL
NO. OF AT PAID IN (ACCUMULATED TRANSLATION CAPITAL
SHARES PAR CAPITAL DEFICIT) ADJUSTMENT DEFICIENCY
Balance at September 30, 1994 100 $ 0 $ 46,276 $ (165,514) $ 3,211 $ (116,027)
Year ended
September 30, 1995:
Net Loss (6,771) (6,771)
Dividend to parent company
to repurchase stock (70) (70)
Reclassification of
redeemable common stock 100 100
Foreign Exchange 859 859
Balance at
September 30, 1995 100 0 46,306 (172,285) 4,070 (121,909)
Year ended
September 30, 1996:
Net Loss (9,036) (9,036)
Capital contribution from
parent company on exercise
of stock option 674 674
Reclassification of
redeemable common stock 1,005 1,005
Foreign Exchange (1,075) (1,075)
Balance at September 30, 1997 100 0 47,985 (181,321) 2,995 (130,341)
Year ended
September 30, 1997:
Net income 36,315 36,315
Capital contribution from
parent company on exercise
of stock option 294 294
Reclassification of
redeemable common stock 791 791
Foreign Exchange (1,494) (1,494)
Balance at September 30, 1997 100 $ 0 $ 49,070 $ (145,006) $ 1,501 $ (94,435)
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8: PENSION PLAN AND RETIREMENT BENEFITS
The Company has non-contributory defined benefit pension plans which
cover most employees in the United States and certain foreign subsidiaries.
Benefits provided under the Company's domestic defined benefit pension
plan are based on years of service and the employee's final compensation. The
Company's funding policy is to contribute annually an amount deductible for
federal income tax purposes based upon an actuarial cost method using
actuarial and economic assumptions designed to achieve adequate funding of
benefit obligations.
Net periodic pension cost on a consolidated basis was $458, $720, and
$767 for the years ended September 30, 1995, 1996 and 1997, respectively.
For the domestic pension plan, net periodic pension cost was comprised of
the following elements:
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997
Service cost $ 1,713 $ 2,042 $ 2,156
Interest cost 7,060 7,027 7,370
Actual return on plan assets (18,727) (13,431) (22,820)
Net amortization and deferral 10,084 4,670 13,627
Net periodic pension cost $ 130 $ 308 $ 333
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HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table sets forth the domestic pension plan's funded status:
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
Accumulated benefit obligation, including vested
Benefits of $83,516 and $88,576, respectively $ 87,469 $ 92,702
Projected benefit obligation for
Service rendered to date $ (101,922) $ 107,347
Plan assets at fair value
(primarily debt securities) 128,264 143,577
Plan assets in excess of projected
Benefit obligation 26,342 36,230
Unrecognized net gain from past experience different
from that assumed and effects of changes in
assumptions (24,364) (34,364)
Unrecognized prior service costs 3,146 2,926
Prepaid pension cost recognized in the consolidated
balance sheet $ 5,124 $ 4,792
Assumptions:
Weighted average discount rate 7.50% 7.00%
Average rate of increase in compensation levels 5.75% 5.25%
Expected rate of return on plan assets during year 7.75% 8.25%
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees. Substantially
all domestic employees become eligible for these benefits if they reach normal
retirement age while working for the Company. Prior to 1994, the cost of
retiree health care and life insurance benefits was recognized as expense upon
payment of claims or insurance premiums.
The Company follows SFAS No. 106, "Employers Accounting for
Postretirement Benefits Other Than Pensions", which requires the cost of post
retirement benefits to be accrued over the years employees provide service to
the date of their full eligibility for such benefits. The Company's policy is
to fund the cost of claims on an annual basis. Operations were charged
approximately $4,671, $4,823 and $3,869 for these benefits during fiscal 1995,
1996 and 1997, respectively.
Effective January 1, 1995, the Company amended its health care plan by
requiring retirees and surviving spouses to share in the cost of medical care
by paying a portion of the cost of continuing health care insurance
protection. As a result of this amendment, the accumulated postretirement
benefit obligation was reduced by $13,583 and will be amortized to operations
over approximately 12.5 years.
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HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following sets forth the status of the plans in the aggregate
reconciled with amounts reported in the Company's balance sheet:
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
Accumulated post retirement benefit
obligation (APBO):
Retirees and dependents $ 48,380 $ 45,463
Active plan participants eligible to
receive benefits 7,813 8,624
Active plan participants not yet
eligible to receive benefits 16,043 16,487
Total APBO 72,236 70,574
Unrecognized prior service cost 11,582 10,492
Unrecognized net gain 11,995 15,135
Accrued postretirement liability $ 95,813 $ 96,201
Net periodic postretirement benefit cost included the following components:
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997
Service cost $ 1,036 $ 1,131 $ 1,130
Interest cost 5,126 5,089 4,653
Amortization of net gain (582) (306) (823)
Amortization of prior service cost (909) (1,091) (1,091)
Net periodic postretirement benefit cost $ 4,671 $ 4,823 $ 3,869
An 11.00% annual rate of increase for ages under 65 and a 9.00% annual
rate of increase for ages over 65 in the costs of covered health care benefits
was assumed for 1997, gradually decreasing for both age groups to 5.30% by the
year 2009. Increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated post retirement
benefit obligation a of September 30, 1997 by $10,240 and increase the net
periodic post retirement benefit cost for 1997 by $936. A discount rate of
8.0%, 7.5%, and 7.0% was used to determine the accumulated post retirement
benefit obligation at September 30, 1995, 1996, and 1997, respectively.
The Company sponsors certain profit sharing plans for the benefit of
employees meeting certain eligibility requirements. There were no
contributions for these plans for the three years in the period ended
September 30, 1997.
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9: COMMITMENTS
The Company leases certain transportation vehicles, warehouse facilities,
office space and machinery and equipment under cancelable and non-cancelable
leases, most of which expire within 10 years and may be renewed by the
Company. Rent expense under such arrangements totaled $1,431, $1,392 and
$1,768 for the periods ended September 30, 1995, 1996, and 1997,
respectively. Future minimum rental commitments under non-cancelable leases
in effect at September 30, 1997 are as follows:
1998 $1,664
1999 1,259
2000 661
2001 471
2002 and thereafter 1,091
$5,146
NOTE 10: OTHER
Other costs, net consists of net foreign currency transaction (gains) and
losses in the amounts of $207, $(185) and $(524) for the periods ended
September 30, 1995, 1996 and 1997, respectively, and miscellaneous costs.
The Company is involved as the defendant in several legal actions and is
subject to extensive federal, state and local environmental laws and
regulations. Although Company environmental policies and practices are
designed to ensure compliance with these laws and regulations, future
developments and increasingly stringent regulation could require the Company
to make additional unforeseen environmental expenditures.
Although the level of future expenditures for environmental and other
legal matters cannot be determined with any degree of certainty, based on the
facts presently known, management does not believe that such costs will have a
material effect on the Company's financial position, results of operations or
liquidity.
[Remainder of page intentionally left blank.]
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 11: RELATED PARTY
On January 29, 1997, the Company announced that Haynes Holdings, Inc.
("Holdings"), its parent corporation, had effected a 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"). As part of the
Recapitalization, Blackstone agreed to provide financial support and
assistance to the Company. Fees totaling $6,237 paid by the Company to
Blackstone and other unrelated parties in connection with the Recapitalization
have been accounted for as recapitalization expenses and charged against
income in the period. Also in connection with this transaction, the Company
recorded $2,457 of non-cash stock compensation expense, also included as
recapitalization expenses, pertaining to certain modifications to management's
stock options agreements, which eliminated put and call rights associated with
the options. As a result of the Recapitalization, all outstanding unexercised
options were immediately vested as part of the change in control provisions of
the Plan. In addition, the Company has agreed to pay Blackstone an annual
monitoring fee of $500, of which $333 is included in selling and
administrative expenses and other accrued expenses at September 30, 1997. Due
to this change in ownership, the Company's ability to utilize its U.S. federal
net operating loss carryforwards will be limited in the future.
NOTE 12 STOCK-BASED COMPENSATION
Holdings has a stock option plan (the "Plan") which allows for the
granting of options to certain key employees and directors of the Company.
Under the Plan, options to purchase up to 905,880 shares of common stock may
be granted at a price not less than the lower of book value or 50% of fair
market value, as defined in the Plan. The options must be exercised within
ten years from the date of grant and become exercisable on a pro rata basis
over a five year period from the date of grant, subject to approval by the
Board of Directors.
On October 22, 1996, 133,000 options were granted to certain key
management personnel with exercise prices of $8.00 per share, the estimated
fair value on that date. Due to the exercise and/or redemption of some of
these options, redeemable common stock was reduced by $1,005 during 1996.
Redeemable common stock was increased by $1,666 during 1997 after accounting
for the modifications to management's stock option agreements in connection
with the Recapitalization and the redemption and/or exercise of some of the
options.
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Pertinent information covering the Plan is as follows:
OPTION PRICE FISCAL YEAR Weighted
NUMBER PER SHARE OF EXPIRATION SHARES Average
OF EXERCISABLE Exercise
SHARES Prices
Outstanding at September 30, 1994 596,443 2.28-5.00 1999-2004 434,443 $ 4.02
Granted 322,900 5.00 5.00
Redeemed (62,798) 2.28-3.24 2.76
Canceled (36,500) 5.00 5.00
Outstanding at September 30, 1995 820,045 2.28-5.00 1999-2005 377,145 4.46
Granted --- --- -
Exercised (201,931) 2.28-5.00 3.34
Canceled ( 64,000) 2.50 2.50
Outstanding at September 30, 1996 554,114 2.28-3.24 1999-2005 279,794 2.54
Granted 133,000 8.00 8.00
Exercised (106,114) 2.28 - 3.24 2.70
Canceled -
Outstanding at September 30, 1997 581,000 2.50 - 8.00 1999 - 2007 581,000 $ 3.76
Options Outstanding at 133,000 $ 8.00 133,000
September 30, 1997 consist of
448,000 2.50 448,000
581,000 581,000
Effective October 1, 1996, the Company adopted the disclosure only
provisions of SFAS no. 123, "Accounting for Stock-Based Compensation".
Accordingly, no compensation cost has been recognized for the existing stock
option plan under the provisions of this pronouncement as the Company accounts
for stock options under the provisions of Accounting Principles Board Opinion
(APB) No. 25. Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date for awards in accordance
with the provisions of SFAS No. 123, net income would have been reduced by
$167, net of $112 deferred tax benefit, in fiscal 1997. There would have been
no effect on net income in fiscal 1996 as no options were granted. These pro
form adjustments were calculated using the minimum value method to value all
stock options granted since October 1, 1995, using the following assumptions:
1997
Risk free interest rate 6.27%
Expected life of options 5 years
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 13: FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Financial information by geographic area is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997
Sales
United States $ 122,334 $ 142,132 $ 154,403
Export Sales 63,235 66,777 65,199
185,569 208,909 219,602
Europe 42,935 54,173 54,116
228,504 263,082 273,718
Less: Eliminations 26,571 36,680 37,958
Net revenues $ 201,933 $ 226,402 $ 235,760
Operating income (loss) and other cost, net
United States $ 10,825 $ 17,345 $ 19,827
Europe 3,950 4,806 4,486
Total operating income (loss) and other
cost, net 14,775 22,151 24,313
Interest 20,233 21,991 20,608
Income (loss) before provision for (benefit
from) income taxes and extraordinary item $ (5,458) $ 160 $ 3,705
Identifiable assets
United States $ 116,428 $ 122,400 $ 178,343
Europe 29,649 34,314 34,693
General corporate assets* 5,035 4,688 3,281
Equity in affiliates 204 87 2
$ 151,316 $ 161,489 $ 216,319
<FN>
General corporate assets include cash and cash equivalents.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the persons
who served as the directors and executive officers of the Company as of
September 30, 1997. Except as indicated in the following paragraphs, the
principal occupations of these persons have not changed during the past five
years.
NAME AGE POSITION WITH THE COMPANY
Michael D. Austin. . 57 President and Chief Executive Officer; Director
Joseph F. Barker . . 50 Chief Financial Officer; Vice President, Finance; Treasurer
F. Galen Hodge . . . 59 Vice President, International
Michael F. Rothman . 50 Vice President, Engineering & Technology
Charles J. Sponaugle 49 Vice President, Sales and Marketing
Frank J. LaRosa. . . 38 Vice President, Human Resources and Information Technology
August A. Cijan. . . 42 Vice President, Operations
Theodore T. Brown. . 39 Controller; Chief Accounting Officer
Robert I. Hanson . . 53 General Manager, Arcadia Tubular Products
R. Steven Linne. . . 53 General Counsel and Secretary
Glenn H. Hutchins. . 42 Director
David A. Stockman. . 51 Director
Chinh E. Chu . . . . 31 Director
David S. Blitzer.. . 28 Director
Mr. Austin was elected President, Chief Executive Officer and a director
of the Company in September 1993. From 1987 to the time he joined the Company,
Mr. Austin was President and Chief Executive Officer of Tuscaloosa Steel
Corporation, a mini hot strip mill owned by British Steel PLC with
approximately $200 million in annual revenue ("Tuscaloosa").
Mr. Barker was elected Vice President, Finance and a director of the
Company in September 1992 and Treasurer and Secretary in September 1993. Mr.
Barker was also elected Chief Financial Officer in May 1996. He had served as
Controller of the Company and its predecessors since November 1986.
Dr. Hodge was elected Vice President, International in June 1994 after
having served as Vice President of Technology since September 1989.
Mr. Rothman was elected Vice President, Engineering and Technology in
October 1995 after having served as Marketing Manager since 1994. He
previously served in various marketing and technical positions since joining
the Company in 1975.
Mr. Sponaugle was elected Vice President, Sales and Marketing in October
1994 after having served as Quality Control Manager and Total Quality Manager
since September 1992. He previously served as Marketing Manager from 1985 to
1992.
Mr. LaRosa was elected Vice President, Human Resources and Information
Technology in April 1996 after having served as Manager, Human Resources and
Information Technology from June 1994 to April 1996. From September 1993 until
June 1994, Mr. LaRosa served as Manager, Human Resources. From December 1990
until joining the Company in September 1993, he served in various management
capacities at Tuscaloosa.
Mr. Cijan was elected Vice President, Operations in April 1996. He joined
the Company in 1993 as Manufacturing Manager and was Manager, Maintenance and
Engineering for Tuscaloosa from 1987 until he joined the Company in 1993.
Mr. Brown was elected Controller and Chief Accounting Officer of the
Company in May, 1996 after having served as General Accounting Manager since
1992. From 1988 to 1992 he served in various financial capacities with the
Company.
Mr. Hanson was named General Manager, Arcadia Tubular Products Facility in
November 1994. He previously served the Company and its predecessors in
various technical, production and engineering capacities since October 1987.
Mr. Linne was elected General Counsel and Secretary of the Company in
October 1996 after having served as a patent and trademark attorney in private
practice and for the Company and its predecessors since 1989.
Mr. Hutchins is currently a Senior Managing Director of Blackstone, which
he joined in September 1994. Mr. Hutchins was a Managing Director of Thomas
H. Lee Co. from 1987 until 1994. While on leave from Thomas H. Lee Co. during
parts of 1993 and 1994, he was a Special Advisor in the White House. Mr.
Hutchins currently serves on the Boards of Haynes International, Inc.,
American Axle & Manufacturing Inc. (Del.), American Axle & Manufacturing Inc.
(Mich.), Corp Group C.V. and Corp Banca (Argentina) S.A.
Mr. Stockman is currently a Senior Managing Director of Blackstone, which
he joined in 1988. Prior to joining Blackstone, Mr. Stockman was a Managing
Director in the Corporate Finance Department of Salomon Brothers, Inc. from
1985 to 1988 . He currently serves on the Board of Directors of Bar
Technologies, Collins & Aikman, Haynes International, Inc. and American Axle &
Manufacturing, Inc.
Mr. Chu is currently a Managing director of the Blackstone Group L.P.,
which he joined in 1990. Prior to joining The Blackstone Group L.P., Mr. Chu
was a member of the Mergers and Acquisitions Group of Salomon Brothers Inc
from 1988 to 1990. He currently serves on the Board of Directors of Haynes
International, Inc., Prime Succession and Rose Hills Company.
Mr. Blitzer is currently a Vice President at the Blackstone Group L.P.,
which he joined in 1991 as an Analyst. Mr. Blitzer currently serves on the
Board of Directors of Haynes International, Inc. and Volume Services, Inc.
The Amended Stockholder's Agreement by and among Holdings and certain
investors, including Blackstone, adopted on January 31, 1997, imposes certain
transfer restrictions on Holdings' common stock, including provisions that (i)
Holdings common stock may be transferred only to those person agreeing to be
bound by the Stockholder Agreement except if such transfer is pursuant to a
public offering or made following a public offering, or made in compliance
with the Securities Act of 1933, as amended (the "Securities Act"); (ii) the
investors may not grant any proxy or enter into or agree to be bound by any
voting trust with respect to the Holdings common stock; (iii) if the
Blackstone Investors or their permitted transferees, propose to sell any of
their Holdings common stock, the other investors shall in most instances have
the right to participate ratably in the proposed sale or, under certain
circumstances, to sell all of their Holdings common stock in the proposed
sale; and (iv) a majority in interest of the Blackstone Investors may compel
all other such investors to sell their shares under certain circumstances.
The Stockholders' Agreement also contains a commitment on the part of Holdings
to register the shares under the Securities Act upon request by the Blackstone
Investors, subject to certain conditions and limitations. The Stockholder
Agreement terminates on the tenth anniversary of its effective date. Each
member of the board of directors is elected for a term of one year.
The Company's Certificate of Incorporation (the "Certificate") authorizes
the board of directors to designate the number of directors. The board
currently has designated eleven directors, and there are six existing
vacancies on the board of directors, which the Company does not intend to fill
in the near future. Directors of the Company serve until their successors are
duly elected and qualified or until their earlier resignation or removal.
Officers of the Company serve at the discretion of the board of directors,
subject, in the case of Mr. Austin, to the terms of his employment contract.
See "Executive Compensation--Austin Employment Agreement."
The board has established an Audit Committee and a Compensation Committee.
The Audit Committee is responsible for recommending independent auditors,
reviewing, in connection with the independent auditors, the audit plan, the
adequacy of internal controls, the audit report and management letter and
undertaking such other incidental functions as the board may authorize. The
Compensation Committee is responsible for administering the Stock Option
Plans, determining executive compensation policies and administering
compensation plans and salary programs, including performing an annual review
of the total compensation and recommended adjustments for all executive
officers. See Item 11.
[Remainder of page intentionally left blank.}
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid by the Company to its Chief Executive Officer and each of
the Company's four other most highly compensated Executive Officers, who
served as executive officers as of September 30, 1997.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
Name and Other Options All Other
Principal Fiscal Salary Bonus Annual # Compensation
Position Year $ $ Compensation $ $ (2)
Michael D. Austin 1997 387,000 233,704 $ 9,000
President and Chief
Executive Officer
1996 351,167 67,000 -- -- 104,519
1995 314,250 -- -- -- 75,631
Joseph F. Barker 1997 166,625 92,567 2,575
Vice President,
Finance; Treasurer
1996 150,000 27,000 -- -- 2,073
1995 130,500 -- -- 28,400 1,808
Charles J. Sponaugle 1997 148,000 79,967 1,371
Vice President, Sales
1996 134,042 23,100 -- -- 1,191
1995 109,908 -- -- 40,000 1,555
August A. Cijan 1997 149,400 73,482 812
Vice President,
Operations
1996 139,350 25,100 -- -- 743
1995 117,800 -- -- 40,000 55,677
F. Galen Hodge 1997 143,500 51,996 3,371
Vice President,
Marketing
1996 136,750 26,700 -- -- 3,236
1995 129,033 -- -- 23,000 3,651
<FN>
- --------------------------
(1) Additional compensation in the form of perquisites was paid to certain of the named
officers in the periods presented; however, the amount of such compensation was less than the
level required for reporting.
(2) Premium payments to the group term life insurance plan, gainsharing payments and
relocation reimbursements which were made by the Company.
STOCK OPTION PLANS
In 1986, the Company adopted a stock incentive plan, which was amended and
restated in 1987, for certain key management employees (the "Prior Option
Plan"). The Prior Option Plan allowed participants to acquire restricted
common stock from the Company by exercising stock options (the "Prior
Options") granted pursuant to the terms and conditions of the Prior Option
Plan. In connection with the 1989 Acquisition, Holdings established the Haynes
Holdings, Inc. Employee Stock Option Plan (the "Existing Stock Option Plan").
The Existing Stock Option Plan authorizes the granting of options to certain
key employees and directors of Holdings and its subsidiaries (including the
Company) for the purchase of a maximum of 905,880 shares of Holdings' common
stock. As of September 30, 1997, options to purchase 581,000 shares were
outstanding under the Existing Stock Option Plan. Sixteen thousand, eight
hundred thirty-five (16,835) options are available for grant. Upon
consummation of the 1989 Acquisition, the holders of the Prior Options
exchanged all of their remaining Prior Options for options pursuant to the
Stock Option Plan (the "Rollover Options"). Except for the Rollover Options,
the Compensation Committee, which administers the Existing Stock Option Plan,
is authorized to determine which eligible employees will receive options and
the amount of such options. Pursuant to the Existing Stock Option Plan, the
Compensation Committee is authorized to grant options to purchase Common Stock
at any price in excess of the lower of Book Value (as defined in the Existing
Stock Option Plan) or 50% of the Fair Market Value (as defined in the Existing
Stock Option Plan) per share of Common Stock on the date of the award.
However, actual options outstanding under the Existing Stock Option Plan have
been granted at the estimated fair market value per share at the date of
grant, resulting is no compensation being charged to operations.
Subject to earlier exercise upon death, disability or normal retirement,
upon a change of control (as defined in the Existing Stock Option Plan) of
Holdings, upon the determination of the Compensation Committee in its
discretion, or upon the sale of all or substantially all of the assets of the
Company, options granted under the Existing Stock Option Plan (other than the
Rollover Options and options granted to existing Management Holders (as
defined in the Existing Stock Option Plan) that are immediately exercisable)
become exercisable on the third anniversary thereof unless otherwise provided
by the Compensation Committee and terminate on the earlier of (i) three months
after the optionee ceases to be employed by the Company or any of its
subsidiaries or (ii) ten years and two days after the date of grant. Options
granted pursuant to the Existing Stock Option Plan may not be assigned or
transferred by an optionee other than by last will and testament or by the
laws of descent and distribution, and any attempted transfer of such options
may result in termination thereof.
In fiscal 1995, 322,900 options were granted by the Compensation Committee
pursuant to the Existing Stock Option Plan. No options were granted in fiscal
1996. On October 22, 1996, 133,000 options were granted to certain key
management personnel with exercise prices of $8.00 per share.
Certain options were originally granted in December 1994 with an exercise
price of $5.00 per share. In order to provide a meaningful incentive to
management, in January 1996 the Company's board of directors reduced the
exercise price for the options listed in the table (and options to purchase an
additional 191,500 shares of Common Stock granted to other members of the
Company's management) to $2.50 per share, which the board of directors
determined was the fair market value at that time.
The following table sets forth certain information with respect to stock
options exercised and held by the persons named in the Summary Compensation
Table. No persons named in the Summary Compensation Table were granted stock
options during fiscal 1997.
STOCK OPTION EXERCISES AND FISCAL YEAR-END HOLDINGS
Number of Number of
Securities Securities Value of Value of
Underlying Underlying Unexercised Unexercised
Shares Unexercised Unexercised In-The-Money In-The-Money
Acquired Value Options at Options at Options at Options at
On Exercise Realized(1 Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Name # ) End End End (2) End (2)
Exercisable Unexercisable Exercisable Unexercisable
Michael . Austin 40,000 $ 306,000 160,000 -- $ 1,224,000 --
Joseph F. Barker 23,644 $ 186,078 40,000 -- $ 306,000 --
Charles J. Sponaugle 7,000 $ 53,550 33,000 -- $ 252,450 --
August A. Cijan -- - 40,000 -- $ 306,000 --
F. Galen Hodge 35,470 $ 245,098 40,000 -- $ 306,000 --
<FN>
(1) Calculated as fair market value at exercise minus grant price.
(2) Because there is no market for Holdings common stock, the value of unexercised "in the money"
options is based on the most recent value of Holdings common stock determined by the Holdings Board of
Directors ($10.15).
SEVERANCE AGREEMENTS
In connection with the events leading up to the acquisition of the Company
by Morgan Lewis Githens & Ahn and management of the Company in August 1989,
the Company entered into Severance Agreements with certain key employees (the
"Prior Severance Agreements"). In 1995, the Company determined that the
provisions of the Prior Severance Agreements were no longer appropriate for
the key employees who were parties thereto and that several other key
employees who were employed after 1989 should be entitled to severance
benefits. Consequently, during and after July 1995, the Company entered into
Severance Agreements (the "Severance Agreements") with Messrs. Austin, Barker,
Cijan, Hodge, LaRosa and Sponaugle and with certain other key employees of the
Company (the "Eligible Employees"). The Severance Agreements superseded in all
respects the Prior Severance Agreements that were then in effect.
The Severance Agreements provide for an initial term expiring April 30,
1996, subject to one-year automatic extensions (unless terminated by the
Company or the Eligible Employee 60 days prior to May 1 of any year). The
Severance Agreements automatically terminate upon termination of the Eligible
Employee's employment prior to a Change in Control of the Company, as defined
in the Severance Agreements (a "Severance Change in Control"), unless the
termination of employment occurs as a result of action of the Company other
than for Cause (as defined in the Severance Agreements) within 90 days of a
Severance Change in Control. A Severance Change in Control occurs upon a
change in ownership of 50.0% or more of the combined voting power of the
outstanding securities of the Company or Holdings or upon the merger,
consolidation, sale of all or substantially all of the assets or liquidation
of the Company or Holdings.
The Severance Agreements provide that if an Eligible Employee's employment
with the Company is terminated within six months following a Severance Change
in Control by reason of such Eligible Employee's disability, retirement or
death, the Company will pay the Eligible Employee (or his estate) his Base
Salary (as defined in the Severance Agreements) plus any bonuses or incentive
compensation earned or payable as of the date of termination. In the event
that the Eligible Employee's employment is terminated by the Company for Cause
(as defined in the Severance Agreements) within the six-month period, the
Company is obligated only to pay the Eligible Employee his Base Salary through
the date of termination. In addition, if within the six-month period the
Eligible Employee's employment is terminated by the Eligible Employee or the
Company (other than for Cause or due to disability, retirement or death), the
Company must (among other things) (i) pay to the Eligible Employee such
Eligible Employee's full Base Salary and any bonuses or incentive compensation
earned or payable as of the date of termination; (ii) continue to provide life
insurance and medical and hospital benefits to the Eligible Employee for up to
12 months following the date of termination (18 months for Messrs. Austin and
Barker); (iii) pay to the Eligible Employee $12,000 for outplacement costs to
be incurred, (iv) pay to the Eligible Employee a lump sum cash payment equal
to either (a) 150% of the Eligible Employee's Base Salary in the case of
Messrs. Austin and Barker, or (b) 100% of the Eligible Employee's Base Salary
in the case of the other Eligible Employees, provided that the Company may
elect to make such payments in installments over an 18 month period in the
case of Messrs. Austin or Barker or a 12 month period in the case of the other
Eligible Employees. As a condition to receipt of severance payments and
benefits, the Severance Agreements require that Eligible Employees execute a
release of all claims.
Pursuant to the Severance Agreements, each Eligible Employee agrees that
during his employment with the Company and for an additional one year
following the termination of the Eligible Employee's employment with the
Company by reason of disability or retirement, by the Eligible Employee within
six months following a Severance Change in Control or by the Company for
Cause, the Eligible Employee will not, directly or indirectly, engage in any
business in competition with the business of the Company.
AUSTIN EMPLOYMENT AGREEMENT
On September 2, 1993, the board of directors elected Michael D. Austin
President and Chief Executive Officer of the Company. The Company and Holdings
entered into an Executive Employment Agreement with Mr. Austin (the "Executive
Employment Agreement") which provides that, in exchange for his services as
President and Chief Executive Officer of the Company, the Company will pay Mr.
Austin (1) an annual base salary of not less than $325,000, subject to annual
adjustment at the sole discretion of the board of directors, and (2) incentive
compensation as determined by the board of directors based on the actual
results of operations of the Company in relation to budgeted results of
operation of the Company. In addition, Mr. Austin is entitled to receive
vacation leave and to participate in all benefit plans generally applicable to
senior executives of the Company and to receive fringe benefits as are
customary for the position of Chief Executive Officer.
Under the terms of the Executive Employment Agreement, the Company agreed
to pay Mr. Austin the sum of $100,000 as compensation for deferred
compensation forfeited by Mr. Austin at his former employer. The Company also
indemnified Mr. Austin against any loss incurred in the sale of Mr. Austin's
residence at his prior location and paid certain financing costs incurred in
connection with the residence. The Company provided supplemental life, health,
and accident coverage for Mr. Austin until he was eligible to participate in
the Company's benefit plans.
Pursuant to the Executive Employment Agreement, Holdings also granted Mr.
Austin the option to purchase 200,000 shares of Common Stock of Holdings at a
purchase price of $5.00 per share under the Existing Stock Option Plan. In
January 1996, the purchase price for exercise of the option was reduced to
$2.50 per share. These options vest at a rate of 40,000 shares on September 1
of each year commencing September 1, 1994 until fully vested, so long as Mr.
Austin continues to be employed by the Company on such dates and provided that
all options would vest upon a "change in control" as defined in the Existing
Stock Option Plan or certain sales of assets as specified in the Existing
Stock Option Plan. In the event of a change in control and the termination of
Mr. Austin's employment by the Company thereafter, the Company is also
obligated to pay the difference, if any, between the pension benefit payable
to Mr. Austin under the U.S. Pension Plan (as defined below) at the time of
such change in control and the pension benefit that would be payable under the
U.S. Pension Plan if Mr. Austin had completed 10 years of service with the
Company.
On July 15, 1996, the Company, Holdings and Mr. Austin entered into an
amendment of the Executive Employment Agreement which extends its term to
August 31, 1999 (with year to year continuation thereafter unless the Company
or Mr. Austin elects otherwise) and requires the Company to reimburse Mr.
Austin for up to $10,000 for estate or financial planning services. The
amendment of the Executive Employment Agreement also requires that in 1996 the
Company review and evaluate the existing bonus plans and consider, among other
alternatives, a deferred compensation plan for the management of the Company.
If Mr. Austin's employment is terminated by the Company prior to August
31, 1999 without "Cause," as defined in the Executive Employment Agreement, as
amended, Mr. Austin is entitled to continuation of his annual base salary
until the later of August 31, 1999 or 24 months following the date of
termination. Also, if the Company terminates Mr. Austin's employment without
Cause after August 31, 1999 or elects not to renew the Executive Employment
Agreement on a one-year basis, Mr. Austin is entitled to annual base salary
continuation for a period of 12 months following the date of termination of
his employment. In the event that Mr. Austin is entitled to termination
benefits under the Severance Agreement to which he is a party, he is not
entitled to salary continuation or benefits under the Executive Employment
Agreement, as amended.
U.S. PENSION PLAN
The Company maintains for the benefit of eligible domestic employees a
defined benefit pension plan, designated as the Haynes International, Inc.
Pension Plan (the "U.S. Pension Plan"). Under the U.S. Pension Plan, all
Company employees completing at least 1,000 hours of employment in a 12-month
period become eligible to participate in the plan. Employees are eligible to
receive an unreduced pension annuity on reaching age 65, reaching age 62 and
completing 10 years of service, or completing 30 years of service. The final
option is available only for union employees hired before July 3, 1988 or for
salaried employees who were plan participants on March 31, 1987.
For salaried employees employed on or after July 3, 1988, the normal
monthly pension benefit provided under the U.S. Pension Plan is the greater of
(i) 1.31% of the employee's average monthly earnings multiplied by years of
credited service, plus an additional 0.5% of the employee's average monthly
earnings, if any, in excess of Social Security covered compensation multiplied
by years of credited service up to 35 years, or (ii) the employee's accrued
benefit as of March 31, 1987.
There are provisions for delayed retirement benefits, early retirement
benefits, disability and death benefits, optional methods of benefit payments,
payments to an employee who leaves after five or more years of service and
payments to an employee's surviving spouse. Employees are vested and eligible
to receive pension benefits after completing five years of service. Vested
benefits are generally paid beginning at or after age 55; however, benefits
may be paid earlier in the event of disability, death, or completion of 30
years of service prior to age 55.
The following table sets forth the range of estimated annual benefits
payable upon retirement for graduated levels of average annual earnings and
years of service for employees under the plan, based on retirement at age 65
in 1997 The maximum annual benefit permitted for 1997 under Section 415(b) of
the Code is $125,000.
YEARS OF SERVICE
AVERAGE ANNUAL YEARS OF YEARS OF YEARS OF YEARS OF YEARS OF
REMUNERATION SERVICE SERVICE SERVICE SERVICE SERVICE
15 20 25 30 35
100,000. . . . $ 23,800 $ 31,700 $ 39,700 $ 47,600 $ 55,500
150,000. . . . 36,500 48,700 60,900 73,100 85,300
200,000. . . . 49,300 65,700 82,200 98,600 115,000
250,000. . . . 62,000 82,700 103,400 124,100 144,800
300,000. . . . 74,800 99,700 124,700 149,600 174,500
350,000. . . . 87,500 116,700 145,900 175,100 204,300
400,000. . . . 100,300 133,700 167,200 200,600 234,000
450,000. . . . 113,000 150,700 188,400 226,100 263,800
The estimated credited years of service of each of the individuals named
in the Summary Compensation Table as of September 30, 1997 are as follows:
CREDITED
SERVICE
Michael D. Austin. 4
F. Galen Hodge . . . 27
Joseph F. Barker. 16
Charles J. Sponaugle 16
August A. Cijan. . . 3
U.K. PENSION PLAN
The Company maintains a pension plan for its employees in the United
Kingdom (the "U.K. Pension Plan"). The U.K. Pension Plan is a contributory
plan under which eligible employees contribute 3% or 6% of their annual
earnings. Normal retirement age under the U.K. Pension Plan is age 65 for
males and age 60 for females. The annual pension benefit provided at normal
retirement age under the U.K. Pension Plan ranges from 1% to 1 2/3% of the
employee's final average annual earnings for each year of credited service,
depending on the level of employee contributions made each year during the
employee's period of service with the Company. The maximum annual pension
benefit for employees with at least 10 years of service is two-thirds of the
individual's final average annual earnings. Similar to the U.S. Pension Plan,
the U.K. Pension Plan also includes provisions for delayed retirement
benefits, early retirement benefits, disability and death benefits, optional
methods of benefit payments, payments to employees who leave after a certain
number of years of service, and payments to an employee's surviving spouse.
The U.K. Pension Plan also provides for payments to an employee's surviving
children.
PROFIT SHARING AND SAVINGS PLAN
The Company maintains the Haynes International, Inc. Profit Sharing and
Savings Plan and the Haynes International, Inc. Hourly Profit Sharing and
Savings Plan (the "Profit Sharing Plans") to provide retirement, tax-deferred
savings for eligible employees and their beneficiaries.
The board of directors has sole discretion to determine the amount, if
any, to be contributed by the Company. No Company contributions were made to
the Profit Sharing Plans for the fiscal years ended September 30, 1995, 1996
and 1997.
The Profit Sharing Plans are qualified under Section 401 of the Code,
permitting the Company to deduct for federal income tax purposes all amounts
contributed by it to the Profit Sharing Plans.
In general, all salaried employees completing at least 1,000 hours of
employment in a 12-month period are eligible to participate after completion
of one full year of employment. Each participant's share in the annual
allocation, if any, to the Profit Sharing Plans is represented by the
percentage which his or her plan compensation (up to $260,000) bears to the
total plan compensation of all participants in the plan. Employees may also
elect to make elective salary reduction contributions to the Profit Sharing
Plans, in amounts up to 10% of their plan compensation. Elective salary
reduction contributions may be withdrawn subject to the terms of the Profit
Sharing Plans.
Vested individual account balances attributable to Company contributions
may be withdrawn only after the amount to be distributed has been held by the
plan trustee in the profit sharing account for at least 24 consecutive
calendar months. Participants vest in their individual account balances
attributable to Company contributions at age 65, death, disability or on
completing five years of service.
INCENTIVE PLAN
In January 1996, the Company awarded and paid management bonuses of
approximately $439,000 pursuant to its management incentive program. The
January bonuses were calculated based on the Company's fiscal 1995
performance. Additionally, the Company adopted a management incentive plan
effective for fiscal 1996 pursuant to which senior managers and managers in
the level below senior managers will be paid a bonus based on actual EBITDA
compared to budgeted EBITDA. Based on results for fiscal 1996, the Company
accrued approximately $1.5 million for fiscal 1996 which was paid to all
domestic employees meeting certain service requirements on November 15, 1996.
In January 1997, the Company awarded and paid management bonuses of
$200,000 pursuant to a board resolution. Additionally, an incentive plan
similar to the 1996 plan was approved for 1997 subject to higher targets.
Based on results for fiscal 1997, the Company accrued $925,000 for fiscal 1997
which was paid to all domestic employees meeting certain service requirements
on November 12, 1997.
HAYNES INTERNATIONAL, LTD. PLAN
In fiscal 1995, the Company's affiliate Haynes International, LTD
instituted a gainsharing plan. For fiscal 1995 and 1996, the Company made
gainsharing payments pursuant to this plan of approximately $269,000 and
$266,000, respectively. In 1997, Haynes International, Ltd. made incentive
payments similar to the domestic incentive plan of approximately $115,000.
DIRECTOR COMPENSATION
The directors of the Company receive no compensation for their services as
such. The non-management members of the board of directors are reimbursed by
the Company for their out-of-pocket expenses incurred in attending meetings of
the board of directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee are now serving or
previously have served as employees or officers of the Company or any
subsidiary, and none of the Company's executive officers serve as directors
of, or in any compensation related capacity for, companies with which members
of the Compensation Committee are affiliated.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors is responsible for
administering the Existing Stock Option Plan, determining executive
compensation policies and administering compensation plans and salary
programs. The Committee is currently comprised solely of non-employee
directors. The following report is submitted by the members of the
Compensation Committee.
* * *
The Company's executive compensation program is designed to align
executive compensation with the financial performance, business strategies and
objectives of the Company. The Company's compensation philosophy is to ensure
that the delivery of compensation, both in the short- and long-term, is
consistent with the sustained progress, growth and profitability of the
Company and acts as an inducement to attract and retain qualified individuals.
Under the guidance of the Company's Compensation Committee, the Company has
developed and implemented an executive compensation program to achieve these
objectives while providing executives with compensation opportunities that are
competitive with companies of comparable size in related industries.
The Company's executive compensation program has been designed to
implement the objectives described above and is comprised of the following
fundamental three elements:
a base salary that is determined by individual contributions and
sustained performance within an established competitive salary range. Pay for
performance recognizes the achievement of financial goals and accomplishment
of corporate and functional objectives of the Company.
an annual cash bonus, based upon corporate and individual performance
during the fiscal year.
grants of stock options, also based upon corporate and individual
performance during the fiscal year, which focus executives on managing the
Company from the perspective of an owner with an equity position in the
business.
Base Salary. The salary, and any periodic increase thereof, of the
President and Chief Executive Officer was and is determined by the Board of
Directors of the Company based on recommendations made by the Compensation
Committee. The salaries, and any periodic increases thereof, of the Vice
President, Finance, Secretary and Treasurer, the Vice President,
International, the Vice President, Operations, and the Vice President,
Marketing, were and are determined by the Board of Directors based on
recommendations made by the President and Chief Executive Officer and approved
by the Committee.
The Company, in establishing base salaries, levels of incidental and/or
supplemental compensation, and incentive compensation programs for its
officers and key executives, assesses periodic compensation surveys and
published data covering the industry in which the Company operates and
industry in general. The level of base salary compensation for officers and
key executives is determined by both their scope and responsibility and the
established salary ranges for officers and key executives of the Company.
Periodic increases in base salary are dependent on the executive's proficiency
of performance in the individual's position for a given period, and on the
executive's competency, skill and experience.
Compensation levels for fiscal 1997 for the President and Chief Executive
Officer, and for the other executive officers of the Company, reflected the
accomplishment of corporate and functional objectives in fiscal 1996.
Bonus Payments. Bonus awards are determined by the Board of Directors of
the Company based on recommendations made by the Compensation Committee.
Bonus awards for fiscal 1996 and 1997 reflected the accomplishment of
corporate and functional objectives in fiscal 1996 and 1997, respectively,
including the successful refinancing of the Company's debt.
Stock Option Grants. Stock options under the Existing Option Plan are
granted to key executives and officers based upon individual and corporate
performance and are determined by the Board of Directors of the Company based
on recommendations made by the Compensation Committee. On October 22, 1996,
133,000 options were granted to certain key management personnel with exercise
prices of $8.00 per share.
SUBMITTED BY THE COMPENSATION COMMITTEE
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding capital stock of the Company is owned by Holdings.
The only stockholders of record at September 30, 1997 known to be owning more
than five percent of Holdings' outstanding Common Stock were: Blackstone
Capital Partners II Merchant Banking Fund L.P.; Blackstone Offshore Capital
Partners II L.P.; and Blackstone Family Investment Partnership II L.P.
(collectively, "The Blackstone Partnerships"), all of which are limited
partnerships duly organized and existing in good standing under the laws of
the State of Delaware, the Cayman Islands and the State of Delaware,
respectively.
The following table sets forth the number and percentage of shares of
Common Stock of Holdings owned by (i) The Blackstone Partnerships, (ii) each
of the executive officers named in the Summary Compensation Table, and (iii)
all directors and executive officers of the Company as a group, as of
September 30, 1997. The address of The Blackstone Partnerships is 345 Park
Avenue, 31st Floor, New York, NY 10154. The address of Messrs. Austin,
Barker, Cijan, Hodge and Sponaugle is 1020 W. Park Avenue, P.O. Box 9013,
Kokomo, IN 46904-9013.
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED (1) OWNED (1)
NAME NUMBER PERCENT
The Blackstone Partnerships 5,323,799 73.5
Michael D. Austin 160,000(1) 2.2
Joseph F. Barker 40,000(1) (2)
August A. Cijan 40,000(1) (2)
F. Galen Hodge 40,000(1) (2)
Charles J. Sponaugle 38,000(3) (2)
All executive officers of the Company as a 451,000 6.2
group
<FN>
----------------------------
(1) Represents shares of Common Stock underlying options exercisable at
any time which are deemed to be beneficially owned by the holders of such
options. See Item 11 - "Executive Compensation - Stock Option Plans."
(2) Less than 1%.
(3) Includes 33,000 shares of Common Stock underlying options exercisable
at any time which are deemed to be beneficially owned by Mr. Sponaugle. See
Item 11 - "Executive Compensation - Stock Option Plans."
AGREEMENTS AMONG STOCKHOLDERS
The Amended Stockholder's Agreement imposes certain transfer restrictions
on the Holdings common stock, including provisions that (i) Holdings common
stock may be transferred only to those person agreeing to be bound by the
Stockholder Agreement except if such transfer is pursuant to a public offering
or made following a public offering, or made in compliance with the Securities
Act; (ii) the investors may not grant any proxy or enter into or agree to be
bound by any voting trust with respect to the Holdings common stock; (iii) if
the Blackstone Investors or their permitted transferees, propose to sell any
of their Holdings common stock, the other investors shall in most instances
have the right to participate ratably in the proposed sale or, under certain
circumstances, to sell all of their Holdings common stock in the proposed
sale; and (iv) a majority in interest of the Blackstone Investors may compel
all other such investors to sell their shares under certain circumstances.
The Stockholders' Agreement also contains a commitment on the part of Holdings
to register the shares under the Securities Act upon request by the Blackstone
Investors, subject to certain conditions and limitations. The Stockholder
Agreement terminates on the tenth anniversary of its effective date.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is required to pay a monitoring fee to Blackstone Management
Partners L.P. in the amount of $500,000 annually on each anniversary of the
recapitalization date with the aggregate amount not to exceed $2.5 million.
[Remainder of page intentionally left blank.]
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report.
1. Financial Statements:
Included as outlined in Item 8 of Part II of this report.
Report of Independent Accountants.
Consolidated Balance Sheet as of September 30, 1996 and September 30, 1997.
Consolidated Statement of Operations for the Years Ended September 30, 1995,
1996 and 1997.
Consolidated Statement of Cash Flows for the Years Ended September 30, 1995,
1996 and 1997.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
Included as outlined in Item 8 of Part II of this report.
Schedule VIII - Valuation and Qualifying Accounts and Reserves
Schedules other than those listed above are omitted as they are not required,
are not applicable, or the information is shown in the Notes to the
Consolidated Financial Statements.
(b) Reports on Form 8-K. None.
(c) Exhibits. See Index to Exhibits.
[Remainder of page intentionally left blank.]
HAYNES INTERNATIONAL, INC.
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
Year Ended Year Ended Year Ended
Sept. 30, 1995 Sept. 30, 1996 Sept. 30, 1997
Balance at beginning of period $ 520 $ 979 $ 900
Provisions 553 26 (6)
Write-Offs (151) (152) (251)
Recoveries 57 47 14
Balance at end of period $ 979 $ 900 $ 657
[Remainder of page intentionally left blank.]
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HAYNES INTERNATIONAL, INC.
(Registrant)
By:/s/ Michael D. Austin
Michael D. Austin, President
Date: December 19, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
/s/ Michael D. Austin President and Director December 19, 1997
Michael D. Austin (Principle Executive Officer)
/s/ Joseph F. Barker Vice President, Finance; December 19, 1997
Joseph F. Barker Treasurer
(Principle Financial Officer)
/s/ Theodore T. Brown Controller December 19, 1997
Theodore T. Brown (Principle Accounting Officer)
/s/ Glenn H. Hutchins Director December 19, 1997
Glenn H. Hutchins
/s/ David A. Stockman Director December 19, 1997
David A. Stockman
/s/ David S. Blitzer Director December 19, 1997
David S. Blitzer
/s/ Chinh E. Chu Director December 19, 1997
Chinh E. Chu
INDEX TO EXHIBITS
DESCRIPTION OF EXHIBIT SEQUENTIAL
NUMBER NUMBERING
ASSIGNED IN SYSTEM PAGE
REGULATION S-K NUMBER OF
ITEM 601 EXHIBIT
(2) 2.01 Stock Purchase Agreement, dated as of January 24,
1997, among Blackstone Capital Partners II Merchant
Banking Fund L.P., Blackstone Offshore Capital Partners
II Merchant Banking Fund L.P., Blackstone Family
Investment Partnership L.P., Haynes Holdings, Inc. and
Haynes International, Inc. (Incorporated by reference to
Exhibit 2.01 to Registrant's Form 8-K Report, filed
February 13, 1997, File No. 333-5411.)
2.02 Stock Redemption Agreement, dated as of January 24,
1997, among MLGA Fund II, L.P., MLGAL Partners, L.P.
and Haynes Holdings, Inc. (Incorporated by reference to
Exhibit 2.02 to Registrant's Form 8-K Report, filed
February 13, 1997, File No. 333-5411.)
2.03 Exercise and Repurchase Agreement, dated as of
January 24, 1997, among Haynes Holdings, Inc. and the
holders as listed therein. (Incorporated by reference to
Exhibit 2.03 to Registrant's Form 8-K Report, filed
February 13, 1997, File No. 333-5411.)
2.04 Consent Solicitation and Offer to Redeem, dated January
30, 1997. (Incorporated by reference to Exhibit 2.04 to
Registrant's Form 8-K Report, filed February 13, 1997,
File No. 333-5411.)
2.05 Letter of Transmittal, dated January 30, 1997.
(Incorporated by reference to Exhibit 2.05 to
Registrant's Form 8-K Report, filed February 13, 1997,
File No. 333-5411.)
(3) 3.01 Restated Certificate of Incorporation of Registrant.
(Incorporated by reference to Exhibit 3.01 to
Registration Statement on Form S-1, Registration
No. 33-32617.)
3.02 Bylaws of Registrant. (Incorporated by reference to
Exhibit 3.02 to Registration Statement on Form S-1,
Registration No. 33-32617.)
(4) 4.01 Indenture, dated as of August 23, 1996, between
Haynes International, Inc. and National City Bank, as
Trustee, relating to the 11 5.8% Senior Notes Due
2004, table of contents and cross-reference sheet.
Incorporated by reference to Exhibit 4.01 to the
Registrant's Form 10-K Report for the year ended
September 30, 1996, File No. 333-5411.
4.02 Form of 11 5/8% Senior Note Due 2004. Incorporated
by reference to Exhibit 4.02 to the Registrant's Form
10- K Report for the year ended September 30, 1996,
File No. 333-5411.
(9) No Exhibit.
(10) 10.01 Form of Severance Agreements, dated as of March 10,
1989, between Haynes International, Inc. and the
employees of Haynes International, Inc. named in the
schedule to the Exhibit. (Incorporated by reference to
Exhibit 10.03 to Registration Statement on Form S-1,
Registration No. 33-32617.)
10.02 Stock Subscription Agreement, dated as of August 31,
1989, among Haynes Holdings, Inc., Haynes
International, Inc. and the persons listed on the signature
pages thereto (Investors). (Incorporated by reference to
Exhibit 4.07 to Registration Statement on Form S-1,
Registration No. 33-32617.)
10.03 Amendment to the Stock Subscription Agreement To
Add a Party, dated August 14, 1992, among Haynes
Holdings, Inc., Haynes International, Inc., MLGA Fund II,
L.P., and the persons listed on the signature pages
thereto. (Incorporated by reference to Exhibit 10.17 to
Registration Statement on Form S-4, Registration
No. 33-66346.)
10.04 Second Amendment to Stock Subscription Agreement,
dated March 16, 1993, among Haynes Holdings, Inc.,
Haynes International, Inc., MLGA Fund II, L.P., MLGAL
Partners, Limited Partnership, and the persons listed on
the signature pages thereto. (Incorporated by reference
to Exhibit 10.21 to Registration Statement on Form S-4,
Registration No. 33-66346.)
10.05 Fifth Amendment to Stock Subscription Agreement,
dated as of January 29, 1997, among Haynes Holdings,
Inc., Haynes International, Inc. and the persons on the
signature pages thereof. (Incorporated by reference to
Exhibit 4.02 to Registrant's Form 8-K Report, filed
February 13, 1997, File No. 333-5411.)
10.06 Termination of Stock Subscription Agreement, dated
March 31, 1997. (Incorporated by reference to Exhibit
10.06 to Registrant's Form 10-Q Report, filed May 15,
1997, File No. 333-5411.)
10.07 Stockholders Agreement, dated as of August 31, 1989,
among Haynes Holdings, Inc. and the persons listed on
the signature pages thereto (Investors). (Incorporated by
reference to Exhibit 4.08 to Registration Statement on
Form S-1, Registration No. 33-32617.)
10.08 Amendment to the Stockholders Agreement To Add a
Party, dated August 14, 1992, among Haynes Holdings,
Inc., MLGA Fund II, L.P., and the persons listed on the
signature pages thereto. (Incorporated by reference to
Exhibit 10.18 to Registration Statement on Form S-4,
Registration No. 33-66346.)
10.09 Amended Stockholders Agreement, dated as of January
29, 1997, among Haynes Holdings, Inc. and the
investors listed therein. (Incorporated by reference to
Exhibit 4.01 to Registrant's Form 8-K Report, filed
February 13, 1997, File No. 333-5411.)
10.10 First Amendment to the Amended Stockholders'
Agreement, dated march 31, 1997. (Incorporated by
reference to Exhibit 10.10 to Registrant's Form 10-Q
Report, filed may 15, 1997, File No. 33-5411.)
10.11 Investment Agreement, dated August 10, 1992,
between MLGA Fund II, L.P., and Haynes Holdings, Inc.
(Incorporated by reference to Exhibit 10.22 to
Registration Statement on Form S-4, Registration
No. 33-66346.)
10.12 Investment Agreement, dated August 10, 1992,
between MLGAL Partners, Limited Partnership and
Haynes Holdings, Inc. (Incorporated by reference to
Exhibit 10.23 to Registration Statement on Form S-4,
Registration No. 33-66346.)
10.13 Investment Agreement, dated August 10, 1992,
between Thomas F. Githens and Haynes Holdings, Inc.
(Incorporated by reference to Exhibit 10.24 to
Registration Statement on Form S-4, Registration
No. 33-66346.)
10.14 Consent and Waiver Agreement, dated August 14,
1992, among Haynes Holdings, Inc., Haynes
International, Inc., MLGA Fund II, L.P., and the persons
listed on the signature pages thereto. (Incorporated by
reference to Exhibit 10.19 to Registration Statement on
Form S-4, Registration No. 33-66346.)
10.15 Executive Employment Agreement, dated as of
September 1, 1993, by and among Haynes International,
Inc., Haynes Holdings, Inc. and Michael D. Austin.
(Incorporated by reference to Exhibit 10.26 to the
Registration Statement on Form S-4, Registration
No. 33-66346.)
10.16 Amendment to Employment Agreement, dated as of July
15, 1996 by and among Haynes International, Inc.,
Haynes Holdings, Inc. and Michael D. Austin
(Incorporated by reference to Exhibit 10.15 to
Registration Statement on S-1, Registration No. 333-
05411).
10.17 Haynes Holdings, Inc. Employee Stock Option Plan.
(Incorporated by reference to Exhibit 10.08 to
Registration Statement on Form S-1, Registration
No. 33-32617.)
10.18 First Amendment to the Haynes Holdings, Inc. Employee
Stock Option Plan, dated March 31, 1997.
(Incorporated by reference to Exhibit 10.18 to
Registrant's Form 10-Q Report, filed May 15, 1997, File
no. 333-5411.)
10.19 Form of "New Option" Agreements between Haynes
Holdings, Inc. and the executive officers of Haynes
International, Inc. named in the schedule to the Exhibit.
(Incorporated by reference to Exhibit 10.09 to
Registration Statement on Form S-1, Registration
No. 33-32617.)
10.20 Form of "September Option" Agreements between
Haynes Holdings, Inc. and the executive officers of
Haynes International, Inc. named in the schedule to the
Exhibit. (Incorporated by reference to Exhibit 10.10 to
Registration Statement on Form S-1, Registration
No. 33-32617.)
10.21 Form of "January 1992 Option" Agreements between
Haynes Holdings, Inc. and the executive officers of
Haynes International, Inc. named in the schedule to the
Exhibit. (Incorporated by reference to Exhibit 10.08 to
Registration Statement on Form S-4, Registration
No. 33-66346.)
10.22 Form of "Amendment to Holdings Option Agreements"
between Haynes Holdings, Inc. and the executive
officers of Haynes International, Inc. named in the
schedule to the Exhibit. (Incorporated by reference to
Exhibit 10.09 to Registration Statement on Form S-4,
Registration No. 33-66346.)
10.23 Form of March 1997 Amendment to holdings Option
Agreements. (Incorporated by reference to Exhibit
10.23 to Registrant's Form 10-Q Report, filed May 15,
1997, File No. 333-5411).
10.24 March 1997 Amendment to Amended and Restated
holdings Option Agreement, dated March 31, 1997.
(Incorporated by reference to Exhibit 10.24 to
Registrant's Form 10-Q Report, filed May 15, 1997, File
No. 333-5411.)
10.25 Amended and Restated Loan and Security Agreement by
and among CoreStates Bank, N.A. and Congress
Financial Corporation (Central), as lenders, Congress
Financial Corporation (Central), as Agent for lenders, and
Haynes International, inc., as Borrower. (Incorporated
by reference to Exhibit 10.19 to the Registrant's Form
10-K Report for the year ended September 30, 1996,
File No. 333-5411).
10.26 Amendment No. 1 to Amended and Restated Loan and
Security Agreement by and among CoreStates Bank,
N.A. and Congress Financial Corporation (Central), as
Lenders, Congress Financial Corporation (central) as
Agent for Lenders, and Haynes International, Inc., as
Borrower. (Incorporated by reference to Exhibit 10.01
to Registrant's Form 8-K Report, filed January 22, 1997,
File No. 333-5411.)
10.27 Amendment No. 2 to Amended and Restated Loan and
Security Agreement, dated January 29, 1997, among
CoreStates Bank, N.A. and Congress Financial
Corporation (Central), as Lenders, Congress financial
Corporation (Central), as agent for Lenders, and Haynes
International, Inc. (Incorporated by reference to Exhibit
10.01 to Registrant's Form 8-K Report, filed February
13, 1997, File No. 333-5411.)
(11) No Exhibit.
(12) 12.01 Statement re: computation of ratio of earnings to fixed
charges.
(13) No Exhibit.
(16) No Exhibit.
(18) No Exhibit.
(21) 21.01 Subsidiaries of the Registrant. (Incorporated by
Reference to Exhibit 21.01 to Registration Statement on
Form S-1, Registration No. 333-05411.)
(22) No Exhibit.
(23) No Exhibit.
(24) No Exhibit.
(27) 27.01 Financial Data Schedule.
(28) No Exhibit.
(99) No Exhibit.