UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended March 31, 1999.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from to .
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)
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 [ ]
As of May 14, 1999, the registrant had 100 shares of Common Stock, $.01 par
value, outstanding.
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HAYNES INTERNATIONAL, INC.
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION ----
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of
September 30, 1998 and March 31, 1999 3
Consolidated Condensed Statements of Operations for the Three Months
and Six Months ended March 31, 1998 and 1999 4
Consolidated Condensed Statements of Comprehensive Income for the
Three Months and Six Months ended March 31, 1998 and 1999 5
Consolidated Condensed Statements of Cash Flows for the Six Months
ended March 31, 1998 and 1999 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Index to Exhibits 17
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
HAYNES INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands, except share amounts)
September 30, March 31,
1998 1999
------------- -----------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 3,720 $2,407
Accounts and notes receivable, less allowance for
doubtful accounts of $662 and $817, respectively 45,974 $41,255
Inventories 81,861 85,564
------------- -----------
Total current assets 131,555 129,226
------------- -----------
Property, plant and equipment (at cost) 99,744 104,571
Accumulated depreciation (70,117) (72,616)
------------- -----------
Net property, plant and equipment 29,627 31,955
Deferred income taxes 36,549 41,194
Prepayments and deferred charges, net 9,532 9,702
------------- -----------
Total assets $207,263 $212,077
============= ===========
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 20,823 $17,823
Accrued postretirement benefits 4,500 4,500
Revolving credit 35,273 41,012
Note payable 1,055 68
Income taxes payable 1,731 1,729
Deferred income taxes 1,199 899
------------- -----------
Total current liabilities 64,581 66,031
------------- -----------
Long-term debt, net of unamortized discount 139,549 139,494
Accrued postretirement benefits 91,983 92,223
------------- -----------
Total liabilities 296,113 297,748
Redeemable common stock of parent company 2,088 2,088
Capital deficiency:
Common stock, $.01 par value (100 shares authorized,
issued and outstanding)
Additional paid-in capital 49,087 49,087
Accumulated deficit (143,000) (137,845)
Accumulated other comprehensive income 2,975 999
------------- -----------
Total capital deficiency (90,938) (87,759)
------------- -----------
Total liabilities and capital deficiency $207,263 $212,077
============= ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
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HAYNES INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands)
Three Months Ended Six Months Ended
March 31, March 31,
---------------------- --------------------------
1998 1999 1998 1999
----------- --------- --------- ---------
Net revenues $62,039 $55,256 $126,279 $104,467
Cost of sales 47,316 41,925 97,168 79,221
Selling and administrative 4,765 6,537 9,184 11,478
Research and technical 933 998 1,889 1,910
----------- --------- --------- ---------
Operating income 9,025 5,796 18,038 11,858
Other cost (income), net 389 55 363 285
Terminated acquisition costs 7,500 359 7,500 359
Interest expense 5,309 5,111 10,722 10,165
Interest income (30) (29) (70) (50)
----------- --------- --------- ---------
Income (loss) before provision for
(benefit from) income taxes and
cumulative effect of a change in
accounting principle (4,143) 300 (477) 1,099
Provision for (benefit from) income taxes (1,860) (4,675) 260 (4,056)
----------- --------- --------- ---------
Income (loss) before cumulative
effect of a change in accounting
principle (2,283) 4,975 (737) 5,155
Cumulative effect of a change in
accounting principle, net of tax benefit (450)
----------- --------- --------- ---------
Net income (loss) ($2,283) $4,975 ($1,187) $5,155
=========== ========= ========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
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HAYNES INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands)
Three Months Ended Six Months Ended
March 31, March 31,
--------------------- --------------------
1998 1999 1998 1999
--------- -------- -------- -------
Net Income (loss) ($2,283) $4,975 ($1,187) $5,155
Other comprehensive loss, net of tax:
Foreign currency translation adjustment (321) (1,572) (248) (1,976)
--------- -------- -------- -------
Other comprehensive loss (321) (1,572) (248) (1,976)
--------- -------- -------- -------
Comprehensive income (loss) ($2,604) $3,403 ($1,435) $3,179
========= ======== ======== =======
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
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HAYNES INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
Six Months Ended
March 31,
---------------------
1998 1999
--------- ---------
Cash flows from operating activities:
Net income (loss) $(1,187) $5,155
Depreciation 3,944 2,921
Amortization 620 634
Deferred income taxes 63 (4,875)
Change in:
Inventories 2,585 (4,195)
Accounts receivable (7,486) 4,092
Accounts payable and accruals 2,790 (4,373)
Other, net 209 (768)
-------- -------
Net cash (used in) provided by operating activities 1,538 (1,409)
-------- -------
Cash flows from investing activities:
Additions to property, plant and equipment (3,115) (5,469)
Other investing activities 311 220
-------- -------
Net cash used in investing activities (2,804) (5,249)
-------- -------
Cash flows from financing activities:
Net increase (decrease) in revolving credit and
long-term debt (2,037) 5,622
Capital contribution of proceeds from exercise of
stock options 18
-------- -------
Net cash (used in) provided by financing activities (2,019) 5,622
-------- -------
Effect of exchange rates on cash 4 (277)
-------- -------
Decrease in cash and cash equivalents (3,281) (1,313)
Cash and cash equivalents, beginning of period 3,281 3,720
-------- -------
Cash and cash equivalents, end of period $ 0 $2,407
======== =======
Supplemental disclosures of cash flow information:
Cash paid during period for: Interest $10,102 $9,526
======== =======
Income Taxes $ 1,085 $ 808
======== =======
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
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HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the Six Months Ended March 31, 1999
Note 1. Basis of Presentation
The interim financial statements are unaudited and reflect all adjustments
(consisting solely of normal recurring adjustments) that, in the opinion of
management, are necessary for a fair statement of results for the interim
periods presented. This report includes information in a condensed form and
should be read in conjunction with the audited consolidated financial statements
included in Form 10-K for the fiscal year ended September 30, 1998, filed by the
Company with the Securities and Exchange Commission ("SEC") on December 22,
1998. The results of operations for the six months ended March 31,1999, are not
necessarily indicative of the results to be expected for the full year or any
other interim period.
Note 2. Inventories
The following is a summary of the major classes of inventories:
September 30, 1998 March 31, 1999
------------------ --------------
(Unaudited)
Raw Materials $ 3,535 $ 4,913
Work-in-process 35,215 38,552
Finished Goods 31,752 32,001
Other, net 11,359 10,098
------- -------
Net inventories $81,861 $85,564
======= =======
Note 3. Income Taxes
The benefit from income taxes for the three month and six month period
ended March 31, 1999, was due to the Company's current period adjustment for
deferred taxes with respect to the undistributed earnings of two foreign
affiliates. The Company has concluded that the earnings of these two affiliates
will be permanently invested overseas for the foreseeable future.
Note 4. Business Process Reengineering Costs
On November 20, 1997, the Financial Accounting Standards Board's Emerging
Issues Task Force ("EITF") issued a consensus ruling which requires that certain
business process reengineering and information technology transformation costs
be expensed as incurred. The EITF also consented that if such costs were
previously capitalized, then any remaining unamortized portion of those
identifiable costs should be written off and reported as a cumulative effect of
a change in accounting principle. Accordingly, in the first quarter of fiscal
1998, the Company recorded the cumulative effect of this accounting change, net
of tax, of $450,000, which resulted from a pre-tax write-off of $750,000 related
to reengineering charges involved in the implementation of an information
technology project.
Note 5. Terminated Acquisition Costs
On March 3, 1998, the Company announced that Haynes Holdings, Inc.
("Holdings"), its parent corporation, and Blackstone Capital Partners II
Merchant Banking Fund L.P. and two of its affiliates ("Blackstone"), had
abandoned their attempt to acquire Inco Alloys International ("IAI"), a 100%
owned business unit of Inco Limited ("Inco"). Certain deferred acquisition costs
were charged to operations in the quarters ended March 31, 1998 and 1999.
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Note 6. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income", effective October 1, 1998. SFAS No.
130 required that changes in the Company's foreign currency translation
adjustment be shown in the financial statements. SFAS No. 130 does not require a
specific format for the financial statement in which comprehensive income is
reported, but does require that an amount representing total comprehensive
income be reported in that statement. All prior year financial statements have
been reclassified for comparative purposes.
[Rest of page intentionally left blank.]
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
References to years or portions of years in Management's Discussion and Analysis
of Financial Condition and Results of Operations refer to the Company's fiscal
years ended September 30, unless otherwise indicated. This discussion contains
statements that constitute forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements 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 or other
matters, and (iii) industry trends affecting the Company's financial condition
or results of operations. Readers of this discussion 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. This report
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations included in Form 10-K for the
fiscal year ended September 30, 1998, filed by the Company with the Securities
and Exchange Commission on December 22, 1998.
Results of Operations
- ---------------------
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Net Revenues. Net revenues decreased approximately $6.7 million to
approximately $55.3 million in the second quarter of 1999 from approximately
$62.0 million in the second quarter of 1998. The decrease is attributable to a
6.4% decline in volume to approximately 4.4 million pounds in the second quarter
of 1999, from approximately 4.7 million pounds in the second quarter of 1998.
Also, the average selling price per pound declined to $12.28 from $12.95, for
the second quarter of 1999 compared to the same period in 1998.
Sales to the aerospace industry in the second quarter of 1999 declined by
18.8% to $23.4 million from $28.8 million for the same period a year earlier,
primarily due to a volume decline partially offset by an increase in the average
selling price. The volume decrease was caused by lower domestic and export sales
directly to gas turbine component fabricators and forge shop reprocessors as the
aerospace industry adjusts to changes in the commercial aircraft build schedule.
Sales to the chemical processing industry declined by 1.5% from
approximately $19.6 million in the second quarter of 1998 to approximately $19.3
million for the same period in 1999. A 12.5% increase in volume was not
sufficient to offset a decline in the average selling price from $12.06 to
$10.52 per pound. The increase in volume can be attributed to improved sales in
domestic project related business, which tends to be lower priced than smaller
volume maintenance orders.
Sales to the land-based gas turbine industry increased by 23.4% in the
second quarter of 1999 to approximately $5.8 million from $4.7 million for the
comparable period in 1998. The increased revenue can be attributed to a 9.0%
increase in volume, combined with a 12.9% increase in the average selling price.
The increase in volume and average selling price per pound was due to improved
domestic and affiliate shipments of proprietary and specialty alloy plate
products.
Sales to the flue gas desulfurization industry declined from approximately
$2.2 million to approximately $1.6 million due to the absence of any significant
project related business in Europe for the quarter ended March 31, 1999. This
market is generally characterized by large project requirements and very modest
continuing maintenance needs.
Sales to the oil and gas industry in the second quarter of 1999 decreased
to approximately $100,000 from approximately $1.3 million in the second quarter
of 1998. Sales to this industry are typically linked to sour gas project
requirements, which vary significantly from quarter to quarter.
Sales to other industries declined by 20.0% to approximately $3.6 million
from approximately $4.5 million due to both volume and average selling price
declines. The drop in volume is related to a decline in the mining and minerals,
and corrosion wear markets. The lower average selling price can be attributed to
proportionately higher sales of lower cost, lower priced alloy products.
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Cost of Sales. Cost of sales as a percentage of net revenues decreased to
75.9% for the second quarter of 1999 compared to 76.3% in the same period last
year. Lower raw material prices and a greater proportion of higher priced, high
value added product forms such as sheet and coil contributed to the decrease.
Selling and Administrative Expenses. Selling and administrative expenses
increased approximately $1.7 million to approximately $6.5 million in the second
quarter of 1999 from approximately $4.8 million in the same period a year ago,
primarily as a result of transition expenses for the company's executive
management.
Research and Technical Expenses. Research and technical expenses increased
approximately $100,000 to approximately $1.0 million in the second quarter of
1999 from approximately $900,000 in the second quarter of 1998, primarily as a
result of increased salary and related benefits.
Operating Income. As a result of the above factors, the Company recognized
operating income for the second quarter of 1999 of approximately $5.8 million,
approximately $1.2 million of which was contributed by the Company's foreign
subsidiaries. For the second quarter of 1998, operating income was approximately
$9.0 million, of which approximately $1.6 million was contributed by the
Company's foreign subsidiaries.
Other. Other cost decreased by approximately $300,000, due in part to
increased foreign exchange gains in the second quarter of 1999.
Terminated Acquisition Costs. Terminated acquisition costs of approximately
$7.5 million were recorded in the second quarter of 1998 in connection with the
abandoned attempt to acquire IAI by Holdings. In the second quarter of 1999
additional expenses were incurred of $359,000 related to the terminated
acquisition.
Interest Expense. Interest expense decreased approximately $200,000 to
approximately $5.1 million for the second quarter of 1999 from approximately
$5.3 million for the same period in 1998. Lower revolving credit balances during
the second quarter of fiscal 1999 contributed to this decrease.
Income Taxes. An income tax benefit of approximately $4.7 million was
recorded for the second quarter of 1999 compared to approximately $1.9 million
in fiscal 1998 due primarily to an adjustment of deferred income taxes for
certain foreign earnings that will not be remitted to the United States.
Net Income (Loss). As a result of the above factors, the Company recognized
net income for the second quarter of 1999 of approximately $5.0 million,
compared to a net loss of approximately $2.3 million for the second quarter of
1998.
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Six Months Ended March 31, 1999 Compared to Six Months Ended March 31, 1998
Net Revenues. Net revenues decreased approximately $21.8 million, or 17.3%,
to approximately $104.5 million in the first half of 1999 from approximately
$126.3 million in the first half of 1998, primarily as a result of a 14.7%
decrease in shipments, to approximately 8.1 million pounds in the first six
months of 1999, from approximately 9.5 million pounds in the first six months of
1998. Volume decreases occurred in essentially all markets. Average selling
prices per pound decreased to $12.59 from $13.08 for the first six months of
1999, compared to the same period in 1998.
Sales to the aerospace industry in the first half of 1999 declined by 19.1%
to $46.6 million from $57.6 million for the same period a year earlier due
primarily to volume decline partially offset by an increase in average selling
prices. The volume decrease was caused by lower domestic sales of nickel- base
alloys to resellers and forge shop reprocessors as the aerospace industry
continues to make inventory adjustments for the announced changes in the
commercial aircraft build schedules.
Sales to the chemical processing industry declined by 13.4% from
approximately $41.8 million to approximately $36.2 million due to both volume
and average selling price declines. The difference in volume can largely be
attributed to a decline in project related business and to lower sales to key
distributors. The decline in the average selling price stems from adjustments to
pricing for falling raw material prices and heightened competition.
Sales to the land-based gas turbine industry remained relatively flat for
the first six months of 1999 compared to the same period in 1998. A 3.7%
increase in volume was offset by a 3.9% decrease in the average selling price
per pound.
Sales to the flue gas desulfurization industry declined from approximately
$4.3 million to approximately $2.0 million due to the absence of any significant
project business in the six month period just ended. This market is generally
characterized by large project requirements and very modest continuing
maintenance needs.
Sales to the oil and gas industry in the first six months of 1999 decreased
to approximately $700,000 from $1.6 million for the same period a year ago. The
decline in sales can be attributed to a curtailment in drilling activity
associated with natural gas production. Volume requirements in this sector vary
substantially from quarter-to-quarter and year-to-year.
Sales to other industries declined by 28.6% to approximately $7.0 million
from approximately $9.8 million due to both volume and average selling price
declines. The drop in volume is the result of nonrecurring projects associated
with mining and minerals, and waste management during last year's first six
months. The lower average selling price can be attributed to proportionately
higher sales of lower cost, lower priced alloys.
Cost of Sales. Cost of sales as a percentage of net revenues decreased to
75.8% for the first six months of 1999 compared to 76.9% in the same period last
year. Lower raw material prices and a greater proportion of higher priced, high
value added product forms such as sheet and coil contributed to the decrease.
Selling and Administrative Expenses. Selling and administrative expenses
increased approximately $2.3 million to approximately $11.5 million in the first
half of 1999 from approximately $9.2 million in the same period a year ago,
primarily as a result of expenses associated with the change in executive
management and higher domestic and export selling costs.
Research and Technical Expenses. Research and technical expenses were
relatively flat in the first six months of 1999 compared to the first six months
of 1998 as increased salary and related benefits were offset by reduced
operating costs.
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Operating Income. As a result of the above factors, the Company recognized
operating income for the first six months of 1999 of approximately $11.9
million, approximately $2.5 million of which was contributed by the Company's
foreign subsidiaries. For the first six months of 1998, operating income was
approximately $18.0 million, of which approximately $3.3 million was contributed
by the Company's foreign subsidiaries.
Other. Other cost decreased approximately $100,000 from approximately
$400,000 in the first half of 1998 to approximately $300,000 for the first half
of 1999, primarily as a result of foreign exchange gains realized in the first
six months of 1999.
Terminated Acquisition Costs. Terminated acquisition costs of approximately
$7.5 million were recorded in the first six months of 1998 in connection with
the abandoned attempt to acquire IAI by Holdings. In the first six months of
1999 additional expenses were incurred of $359,000 related to the terminated
acquisition.
Interest Expense. Interest expense decreased approximately $500,000 to
approximately $10.2 million for the first half of 1999 from approximately $10.7
million for the same period in 1998. Lower revolving credit balances contributed
to this decrease.
Income Taxes. The benefit from income taxes of approximately $4.1 million
for the first half of 1999 decreased by approximately $4.4 million from tax
expense of approximately $300,000 due primarily to an adjustment of deferred
income taxes for certain foreign earnings that will not be remitted to the
United States.
Change in Accounting Principle. The cumulative effect of a change in
accounting principle recorded in 1998 represents the write-off of the cumulative
effect of certain business process reengineering and information technology
transformation costs that were previously capitalized. The cumulative effect
includes $750,000 in costs, reduced by a $300,000 tax benefit, related to
business process reengineering charges incurred in the implementation of an
information technology project.
Net Income (Loss). As a result of the above factors, the Company recognized
net income for the first half of 1999 of approximately $5.2 million, compared to
net loss of approximately $1.2 million for the first half of 1998.
Liquidity and Capital Resources
The Company's near-term future cash needs will be driven by working capital
requirements, and planned capital expenditures. Capital expenditures were
approximately $5.5 million in the first six months of 1999, compared to capital
expenditures of approximately $3.1 million for the first six months of 1998. The
remainder of planned 1999 expenditures will be for improvements in cost,
quality, capacity and reliability of manufacturing operations. The Company does
not expect such capital expenditures to have a material adverse effect on its
long-term liquidity. The Company expects to fund its working capital needs and
capital expenditures with cash provided from operations, supplemented by
borrowings under its Revolving Credit Facility with CoreStates Bank, N.A. and
Congress Financial Corporation (the "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, although there can be no
assurance of this.
Net cash used in operating activities in the first six months of 1999 was
approximately $1.4 million, as compared to net cash provided by operating
activities of approximately $1.5 million in the first six months of 1998. The
negative cash flow from operations for 1999 was primarily the result of an
increase in the deferred tax asset of approximately $4.9 million. The cash flow
was also affected by a decrease in accounts payable and accrued expenses of
approximately $4.4 million, an increase in inventories of approximately $4.2
million, non-cash depreciation and amortization expense of approximately $3.6
million, net income of approximately $5.2 million, a decrease in accounts
receivable of approximately $4.1 million, and other net adjustments used in
operating activities of approximately $800,000.
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Net cash used in investing activities increased to approximately $5.2
million in the fist six months of 1999 from approximately $2.8 million in the
same period for 1998, primarily as a result of increased capital spending. Net
cash provided by financing activities for the first six months of 1999 was
approximately $5.6 million, compared to net cash used in financing activities of
approximately $2.0 million for the first six months of 1998, primarily as a
result of increased net borrowings by the Company in support of increased
working capital requirements.
Cash for the first six months of 1999 decreased approximately $1.3 million,
resulting in a March 31, 1999 cash balance of approximately $2.4 million. Cash
in the first six months of 1998 decreased approximately $3.3 million.
Total debt at March 31, 1999, was approximately $180.6 million compared to
approximately $182.0 million at March 31, 1998, reflecting decreased borrowing
under the Facility and by the Company's French foreign affiliate.
At March 31, 1999, approximately $41.0 million had been borrowed pursuant
to the Facility compared to approximately $41.4 million at March 31, 1998. In
addition, as of March 31, 1999, approximately $3.4 million in letter of credit
reimbursement obligations had been incurred by the Company. The Company had
available additional borrowing capacity of approximately $4.2 million on the
Facility at March 31, 1999.
Acquisition by Holdings
In June 1997, Inco and Blackstone jointly announced the execution of a
definitive agreement ("Acquisition") for the sale by Inco of 100% of their IAI
business unit to Holdings. On March 3, 1998, Blackstone and Holdings abandoned
their attempt to purchase IAI after the Department of Justice announced its
intention to challenge the proposed acquisition. Certain fees paid and accrued
by the Company in connection with the Acquisition have been accounted for as
terminated acquisition costs and charged against income in the period.
Recent Developments
The Company announced on April 15, 1999, that it has entered into a
facility management agreement with the Stainless & Specialty Steels Division of
Republic Technologies International ("Specialty Division"). The Specialty
Division is a leading producer and supplier of stainless, aerospace alloy
steels, tool steels, and forged carbon and alloy steels. These products are
processed in two plants in the United States, one in Baltimore, Maryland and the
other located at Harrison Avenue in Canton, Ohio. The broad range of products
produced in these two plants are supplied to the aerospace forgers, specialized
service centers supplying aerospace, stainless and tool steel distributors, and
original equipment manufacturers. Until certain legal and financial transactions
occur, the Specialty Division will remain part of Republic Technologies.
Ultimately, ownership will be transferred to the Company.
Accounting Pronouncements
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" and SFAS No. 132, "Employers' Disclosures about Pension and Other
Postretirement Benefits", are effective for the year ending September 30, 1999.
In the opinion of management, SFAS No. 131 and SFAS No. 132 will not have a
material impact on the Company's financial position, results of operations or
cash flows, as these statements are principally disclosure oriented.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. Management has not
yet quantified the effect of the new standard on the financial statements.
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Year 2000 Costs
The Company has recognized that the year 2000 will affect certain business
systems currently being used and has taken steps to (1) protect the ability of
the Company to do business, (2) minimize the risk to the Company from Year 2000
exposure, and (3) enhance or expand capabilities as exposures are eliminated.
The areas of exposure include the Company's computer systems and certain non-
Information Technology ("IT") equipment. The Company's products are not date
sensitive.
Areas considered "critical" to fix are the current mainframe computer in
Kokomo, Indiana, the Argon-Oxygen Decarburization ("AOD") software and the least
cost melt software in the melt area, the four-high Steckel mill computer and
automatic gauge controls in the hot rolling production area, the power
consumption system, the computer in the Electro-slag remelt area, the gauge
controls for one cold rolling mill, the engineering test lab computer, the
telephone system, and the payroll system.
Areas which present a "slight to negligible" exposure if not fixed include
various non-IT program logic controllers, lab collection computers, various
gauges, various test equipment, electronic scales, desktop software, voice mail,
faxes, copiers, and printers.
The Company has already devoted significant amounts of time to ensure all
exposures are eliminated by December 1999, or sooner. In fiscal 1995, the
Company began its upgrade of the current IBM mainframe and an IBM System/36 used
for the Company's primary business system and received approval from the Board
of Directors in early fiscal 1996 for a $4.4 million new integrated information
system to replace the mainframe (of which approximately $2.8 million had been
spent through March 31, 1999, including $750,000 of business process
reengineering costs). This project includes new IBM AS/400 equipment and an
enterprise level software package called BPCS(TM), by System Software and
Associates, which is Year 2000 compliant and is slated for completion in
September 1999. The costs for upgrading the stand-alone manufacturing and lab
equipment controls have been budgeted for fiscal 1999 as part of the spending or
capital expenditure budgets. The payroll system became Year 2000 compliant in
October, 1998.
Surveys have been completed for the Company's customers and the Company has
sent surveys to its critical suppliers (generally $100,000 in purchases and
above) to assess their Year 2000 readiness. Currently there is no indication
that our suppliers will not be Year 2000 ready.
The total estimated costs as of March 31, 1999, for Year 2000 compliance
(other than the $4.4 million integrated information system mentioned above) are
currently estimated at approximately $600,000 for some critical and all
non-critical exposures and $1.2 million for capital expenditures related to
critical exposures. The Company intends to use its cash availability under its
revolving credit facility to finance these expenditures.
The Company's contingency plan if the Company is not ready by Year 2000 is
to have an immediate upgrade of the current IBM mainframe for its primary
business system and to have an immediate hardware upgrade for stand-alone
computer systems, data collection systems, test equipment, and process control
devices used throughout the Company, the cost of which is not known.
Severance Agreement and New Employment Arrangements
On January 13, 1999, Michael D. Austin resigned from the Company and
Holdings, pursuant to an agreement between the Company and Mr. Austin which
provided for (1) certain severance payments and other benefits, (2) certain
consulting services to be performed by Mr. Austin on behalf of the Company, (3)
certain payments to be made to Mr. Austin in the event of the occurrence of
certain change in control transactions affecting the Company or Holdings, (4)
the termination of Mr. Austin's employment agreement and severance agreement
with the Company, and the release by Mr. Austin of all obligations of the
Company and Holdings pursuant to those agreements, and (5) resignations by Mr.
Austin from all positions with the Company, including as a member of the Board
of Directors of those entities. Mr. Austin was replaced as President and Chief
Executive Officer by Francis J. Petro. In addition, John H. Tundermann was hired
as Executive Vice President.
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The Company has an understanding with Mr. Petro and Mr. Tundermann pursuant
to which they will be paid an annual base salary of $360,000 and $170,000,
respectively, for calendar year 1999 with certain increases for the next two
years. The Company intends to provide certain standard benefits and other
perquisites to Mr. Petro and Mr. Tundermann to be evidenced by definitive
employment agreements at a later date.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At March 31, 1999, the Company's primary market risk exposure was foreign
currency exchange rate risk with respect to forward contracts entered into by
the Company's foreign subsidiaries located in England and France. The Company
did not have any outstanding commodity contracts at March 31, 1999.
The foreign currency exchange risk exists primarily because the two foreign
subsidiaries need U.S. dollars in order to pay for their intercompany purchases
of high performance alloys from the Company's U.S. locations. The foreign
subsidiaries manage their own foreign currency exchange risk. Any U.S. dollar
exposure aggregating more than $500,000 requires approval from the Company's
Vice President of Finance. Most of the currency contracts to buy U.S. dollars
are with maturity dates of less than six months.
At March 31, 1999, the unrealized gain on these foreign currency exchange
contracts was $76,000.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
In connection with the change in executive management of the Company
and Holdings, Holdings as the sole stockholder of the Company approved the
reconstitution of the Board of Directors, such that the Board of Directors
of the Company is now composed of the following individuals: Francis J.
Petro, David A. Stockman, Chinh Chu, Marshall A. Cohen, Eric Ruttenberg,
and Richard C. Lappin.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See Index to Exhibits
(b) Reports on Form 8-K. No report on Form 8-K was filed during
the quarter for which this report is filed.
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SIGNATURES
Pursuant to the requirements 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.
/s/ Francis J. Petro
-----------------------------------
Francis J. Petro
President and Chief Executive Officer
/s/ Joseph F. Barker
-----------------------------------
J. F. Barker
Vice President, Finance
Chief Financial Officer
Date: May 14, 1999
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INDEX TO EXHIBITS
Sequential
Number Numbering
Assigned In System Page
Regulation S-K Number of
Item 601 Description of Exhibit 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 By-laws 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.)
(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 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.)
10.03 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.
333-5411.)
10.04 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.)
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10.05 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).
10.06 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.)
10.07 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.)
10.08 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.)
10.09 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.)
10.10 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.)
10.11 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.)
10.12 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.)
10.13 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.)
10.14 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).
10.15 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.)
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10.16 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.)
10.17 Agreement by and between Galen Hodge and Haynes
International, dated January 13, 1998
(Incorporated by reference to Exhibit 10.17 to
Registrant's Form 10-Q Report filed February 13,
1998, File No. 333-5411).
10.18 Facility Management Agreement by and between
Republic Engineered Steels, Inc. and Haynes
International, Inc., dated April 15, 1999.
(11) No Exhibit.
(15) No Exhibit.
(18) No Exhibit.
(19) No Exhibit.
(22) No Exhibit.
(23) No Exhibit.
(24) No Exhibit.
(27) 27.01 Financial Data Schedule.
(99) No Exhibit.
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