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, 1999.
[ ] 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 23, 1999 was 100.
Documents Incorporated by Reference: None
The Index to Exhibits begins on page 70.
Total pages: 74
1
TABLE OF CONTENTS
Part I Page
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 14
Item 6. Selected Consolidated Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk 31
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 55
Part III
Item 10. Directors and Executive Officers of the Registrant 56
Item 11. Executive Compensation 59
Item 12. Security Ownership of Certain Beneficial Owners and
Management 67
Item 13. Certain Relationships and Related Transactions 68
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 68
2
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 67% of the Company's net revenues in
fiscal 1999. 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 32% of its fiscal
1999 net revenues from products that are protected by United States patents and
approximately 19% of its net revenues from sales of products that are not
patented, but for which the Company has limited or no competition.
Products
The alloy market consists of four primary segments: stainless steel, super
stainless steel, nickel alloys and high performance alloys. The Company competes
exclusively in the high performance alloy segment, which includes HTA and CRA
products. The Company believes that the high performance alloy segment
represents less than 10% of the total alloy market. The percentages of the
Company's total product revenue and volume presented in this section are based
on data which include revenue and volume associated with sales by the Company to
its foreign subsidiaries, but exclude revenue and volume associated with sales
by such foreign subsidiaries to their customers. Management believes, however,
that the effect of including revenue and volume data associated with sales by
its foreign subsidiaries would not materially change the percentages presented
in this section. In fiscal 1999, HTA and CRA products accounted for
approximately 64% and 36%, respectively, of the Company's net revenues.
HTA products are used primarily in manufacturing components for 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.
3
CRA products are used in a variety of applications, such as chemical
processing, power plant emissions control, hazardous waste treatment and sour
gas production. Historically, the chemical processing industry has represented
the largest end-user segment for CRA products. Due to maintenance, safety and
environmental considerations, the Company believes this industry continues to
represent an area of potential long-term growth for the Company. Unlike
aerospace applications within the HTA product market, the development of new
market applications for CRA products generally does not require long lead times.
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 Good resistance to sulfidation at high
shields temperatures
HAYNES 242 (1990) (2) Aero-seal rings High strength, low expansion and good
fabricability
HAYNES HR-120 (1990) (2) LBGT -cooling shrouds Good strength-to-cost ratio as compared
to competing alloys
HAYNES 230 (1984) (2) Aero/LBGT-ducting, combustors Good combination of strength,
stability, oxidation resistance and
fabricability
HAYNES 214 (1981) (2) Aero-honeycomb seals Good combination of oxidation
resistance and fabricability among
nickel-based alloys
HAYNES 188 (1968) (2) Aero-burner cans, after-burner High strength, oxidation resistant
components cobalt-based alloys
HAYNES 625 (1964) Aero/CPI-ducting, tanks, vessels, Good fabricability and general
weld overlays corrosion resistance
HAYNES 263 (1960) Aero/LBGT-components for gas Good ductility and high strength at
turbine hot gas exhaust pan temperatures up to 1600EF
HAYNES 718 (1955) Aero-ducting, vanes, nozzles Weldable high strength alloy with good
fabricability
HASTELLOY X (1954) Aero/LBGT-burner cans, transition Good high temperature strength at
ducts relatively low cost
HAYNES Ti 3-2.5 (1950) Aero-aircraft hydraulic and fuel Light weight, high strength
systems components titanium-based alloy
HAYNES 25 (1925) Aero-gas turbine parts, bearings, Excellent strength good oxidation
and various industrial applications resistance to 1800(degree)F
<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.
</FN>
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 1999, sales of these
HTA products accounted for approximately 23% of the Company's net revenues.
4
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 25 are the most widely used of
the Company's cobalt-based products and accounted for approximately 15% of the
Company's net revenues in fiscal 1999. Three of the more recently introduced HTA
products, HAYNES 242, HAYNES 230 and HAYNES 214, initially developed for the
aerospace and LBGT markets, are still patent-protected and together accounted
for approximately 7% of the Company's net revenues in fiscal 1999. These newer
alloys are continuing to gain 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 waste incineration and industrial heat treating applications,
respectively. HAYNES HR-160 is a higher priced cobalt-containing 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.
Recently, HAYNES HR-120 has been specified for a significant ring application
for a major land-based gas turbine manufacturer. In fiscal 1999, these two
alloys accounted for approximately 3% 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 1999, sales of these
products accounted for approximately 4% of the Company's net revenues.
Corrosion Resistant Alloys The following table sets forth information with
respect to certain of the Company's significant corrosion resistant alloys:
Alloy and Year Introduced End Markets and Applications(1) 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) 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 industry.
(2) Represents a patented product or a product with respect to which the Company
believes it has limited or no competition.
</FN>
During fiscal 1999, sales of the CRA alloys HASTELLOY C-276, HASTELLOY C-22
and HASTELLOY C-4 accounted for approximately 25% of the Company's net revenues.
HASTELLOY C-276, introduced by the Company in 1968, is recognized as a standard
for corrosion protection in the chemical processing industry and is also used
extensively for FGD and oil and gas exploration and production applications.
HASTELLOY C-22, a proprietary alloy of the Company, was introduced in 1985 as an
improvement on HASTELLOY C-276 and is currently sold to the chemical processing
and FGD markets for essentially the same applications as HASTELLOY C-276.
HASTELLOY C-22 offers greater and more versatile corrosion resistance and
therefore has gained market share at the expense of the non-proprietary
HASTELLOY C-276. HASTELLOY C-4 is specified in many chemical processing
applications in Germany and is sold almost exclusively to that market.
5
The Company also produces alloys for more specialized applications in the
chemical processing industry and other industries. For example, HASTELLOY B-2
was introduced in 1970 for use in the manufacture of equipment utilized in the
production of acetic acid and ethyl benzine and is still sold almost exclusively
for those purposes. HASTELLOY B-3 was developed for the same applications and
has greater ease in fabrication. The Company expects HASTELLOY B-3 to eventually
replace HASTELLOY B-2. HASTELLOY G-30 is used primarily in the production of
super phosphoric acid and fluorinated aromatics. HASTELLOY G-50 has gained
acceptance as a lower priced alternative to HASTELLOY C-276 for production of
tubing for use in sour gas wells. These more specialized products accounted for
approximately 8% of the Company's net revenues in fiscal 1999.
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's latest Ni-Cr-Mo alloy, HASTELLOY C-2000, combines many of the
corrosion resistant properties of existing Ni-Cr-Mo alloys, such as HASTELLOY
C-22 and HASTELLOY C-276, making it the most versatile of those alloys. It can
be used in both oxidizing and reducing environments and is expected to be used
extensively in the chemical processing industry and the flue gas desulfurization
(FGD) markets.
End Markets
Aerospace. The Company has manufactured HTA products for the aerospace
market since it entered the market in the late 1930s, and has developed numerous
proprietary alloys for this market. Customers in the aerospace markets tend to
be the most demanding with respect to meeting specifications within very low
tolerances and achieving new product performance standards. Stringent safety
standards and continuous efforts to reduce equipment weight require close
coordination between the Company and its customers in the selection and
development of HTA products. As a result, sales to aerospace customers tend to
be made through the Company's direct sales force. Unlike the FGD and oil and gas
production industries, where large, competitively bid projects can have a
significant impact on demand and prices, demand for the Company's products in
the aerospace industry is based on the new and replacement market for jet
engines and the maintenance needs of operators of commercial and military
aircraft. The hot sections of jet engines are subjected to substantial wear and
tear and accordingly require periodic maintenance and replacement. This
maintenance-based demand, while potentially volatile, is generally less subject
to wide fluctuations than demand in the FGD and sour gas production industries.
Chemical Processing. The chemical processing industry segment represents a
large base of customers with diverse CRA applications driven by demand for key
end use industries such as automobiles, housing, health care, agriculture, and
metals production. CRA products supplied by the Company have been used in the
chemical processing industry since the early 1930s.
Demand for the Company's products in this industry is based on the level of
maintenance, repair and expansion of existing chemical processing facilities as
well as the construction of new facilities. The Company believes the extensive
worldwide network of Company-owned service centers and independent distributors
is a competitive advantage in marketing its CRA products to this market. Sales
of the Company's products in the chemical processing industry tend to be more
stable than the aerospace, FGD and oil and gas markets. Increased concerns
regarding the reliability of chemical processing facilities, their potential
environmental impact and safety hazards to their personnel have led to an
increased demand for more sophisticated alloys, such as the Company's CRA
products.
6
Land-Based Gas Turbines. The LBGT industry continues to be a growing market,
with demand for the Company's products driven by the construction of
cogeneration facilities and electric utilities operating electric generating
facilities. Demand for the Company's alloys in the LBGT industry has also been
driven by concerns regarding lowering emissions from generating facilities
powered by fossil fuels. LBGT generating facilities are gaining acceptance as
clean, low-cost alternatives to fossil fuel-fired electric generating
facilities. The demand for land-based gas turbines is also growing rapidly for
use in power barges with mobility and as temporary base-load-generating units
for countries that have numerous islands and a large coast line. Further demand
growth is generated by natural gas pipeline construction which requires gas
turbines to drive the compressor stations.
Flue Gas Desulfurization. The FGD industry has been driven by both
legislated and self-imposed standards for lowering emissions from fossil
fuel-fired electric generating facilities. In the United States, the Clean Air
Act of 1990, as amended (the "Clean Air Act"), mandates a two-phase program
aimed at significantly reducing sulfur dioxide (SO2) emissions from electric
generating facilities powered by fossil fuels by 2000. Canada and its provinces
have also set goals to reduce emissions of SO2 over the next several years.
Phase I of the Clean Air Act program affected approximately 100 steam-generating
plants representing 261 operating units fueled by fossil fuels, primarily coal.
Of these 261 units, 25 units were retrofitted with FGD systems while the balance
opted mostly for switching to low sulfur coal to achieve compliance. The market
for FGD systems peaked in 1992 at approximately $1.1 billion, and then dropped
sharply in 1993 to a level of approximately $174.0 million due to a curtailment
of activity associated with Phase I. Phase II compliance begins in 2000 and
affects 785 generating plants with more than 2,100 operating units. Options
available under the Clean Air Act to bring the targeted facilities into
compliance with Phase II SO2 emissions requirements include fuel switching,
clean coal technologies, purchase of SO2 allowances, closure of facilities and
off-gas scrubbing utilizing FGD technology.
Oil and Gas. The Company also sells its products for use in the oil and gas
industry, primarily in connection with sour gas production. Sour gas contains
extremely corrosive materials and is produced under high pressure, necessitating
the use of corrosion resistant materials. The demand for sour gas tubulars is
driven by the rate of development of sour gas fields. The factors influencing
the development of sour gas fields include the price of natural gas and the need
to commence drilling in order to protect leases that have been purchased from
either the federal or state governments. As a result, competing oil companies
often place orders for the Company's products at approximately the same time,
adding volatility to the market. This market was very active in 1991, especially
in the offshore sour gas fields in the Gulf of Mexico, but demand for the
Company's products declined significantly thereafter. More recently there has
been less drilling activity and more use of lower performing alloys, which
together have resulted in intense price competition. Demand for the Company's
products in the oil and gas industry is tied to the global demand for natural
gas.
Other Markets. In addition to the industries described above, the Company
also targets a variety of other markets. Other industries to which the Company
sells its HTA products include waste incineration, industrial heat treating,
automotive and instrumentation. Demand in these markets for many of the
Company's lower volume proprietary alloys has grown in recent periods. For
example, incineration of municipal, biological, industrial and hazardous waste
products typically produces very corrosive conditions that demand high
performance alloys. Markets capable of providing growth are being driven by
increasing performance, reliability and service life requirements for products
used in these markets which could provide further applications for the Company's
products.
Sales and Marketing
Providing technical assistance to customers is an important part of the
Company's marketing strategy. The Company provides analyses of its products and
those of its competitors for its customers. These analyses enable the Company to
evaluate the performance of its products and to make recommendations as to the
substitution of Company products for other products in appropriate applications,
enabling the Company's products to be specified for use in the production of
customers' products. Market development professionals are assisted by the
research and development staff in directing the sales force to new
opportunities. The Company believes its combination of direct sales, technical
marketing and research and development customer support provides an advantage
over other manufacturers in the high performance industry. This activity allows
the Company to obtain direct insight into customers' alloy needs and allows the
Company to develop proprietary alloys that provide solutions to customers'
problems.
7
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.
Effective January, 1999, the Company transferred its Kokomo, Indiana service
center to a leased site in Lebanon, Indiana. This new facility has water jet
cutting capability and specialized cutting equipment to service the Company's
customers more efficiently. Effective December, 1999, the Company organized a
wholly-owned subsidiary in Singapore to enhance the sale of its products in the
Pacific Rim. Approximately 81% of the Company's net revenues in fiscal 1999 was
generated by the Company's direct sales organization. The remaining 19% of the
Company's fiscal 1999 net revenues was generated by independent distributors and
licensees in the United States, Europe and Japan, some of whom have been
associated with the Company for over 30 years. The following table sets forth
the approximate percentage of the Company's fiscal 1999 net revenues generated
through each of the Company's distribution channels.
DOMESTIC FOREIGN TOTAL
-------- ------- -----
Company sales office/direct.................. 29% 8% 37%
Company-owned service centers................ 21% 23% 44%
Independent distributors/sales agents........ 12% 7% 19%
---- ---- ----
Total.................................... 62% 38% 100%
==== ==== ====
The top twenty customers not affiliated with the Company accounted for
approximately 41% of the Company's net revenues in fiscal 1999. Sales to
Spectrum Metals, Inc. and Rolled Alloys, Inc., which are affiliated with each
other, accounted for an aggregate of 10% of the Company's net revenues in fiscal
1999. No other customer of the Company accounted for more than 10% of the
Company's net revenues in fiscal 1999.
The Company's foreign and export sales were approximately $81.5 million,
$100.4 million, and $83.1 million for fiscal 1997, 1998 and 1999, respectively.
Additional information concerning foreign operations and export sales is set
forth in Note 14 of the Notes to Consolidated Financial Statements appearing
elsewhere herein.
Manufacturing Process
High performance alloys require a lengthier, more complex melting process
and are more difficult to manufacture than lower performance alloys, such as
stainless steels. The alloying elements in high performance alloys must be
highly refined, and the manufacturing process must be tightly controlled to
produce precise chemical properties. The resulting alloyed material is more
difficult to process because, by design, it is more resistant to deformation.
Consequently, high performance alloys require that greater force be applied when
hot or cold working and are less susceptible to reduction or thinning when
rolling or forging. This results in more cycles of rolling, annealing and
pickling compared to 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 45%, 29%, 7%, 13%, 3% and
3%, respectively, of total volume sold in fiscal 1999 (after giving effect to
the conversion of billet to bar by the Company's U.K. subsidiary).
8
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, 1999, the Company's backlog orders aggregated
approximately $41.8 million, compared to approximately $40.2 million at
September 30, 1998, and approximately $60.6 million at September 30, 1997.
Substantially all orders in the backlog at September 30, 1999 are expected to be
shipped within the twelve months beginning October 1, 1999. 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)
1995 1996 1997 1998 1999
----- ----- ----- ----- -----
1st $49.7 $61.2 $63.8 $60.8 $45.7
2nd $64.8 $61.9 $65.4 $56.2 $46.8
3rd $55.8 $57.5 $55.5 $51.0 $44.5
4th $49.9 $53.7 $60.6 $40.2 $41.8
Raw Materials
Nickel is the primary material used in the Company's alloys. Each pound of
alloy contains, on average, 0.48 of a pound 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.
9
Since most of the Company's products are produced to specific orders, the
Company purchases materials against known production schedules. Materials are
purchased from several different suppliers, through consignment arrangements,
annual contracts and spot purchases. These arrangements involve a variety of
pricing mechanisms, but the Company generally can establish selling prices with
reference to known costs of materials, thereby reducing the risk associated with
changes in the cost of raw materials. The Company maintains a policy of pricing
its products at the time of order placement. As a result, rapidly escalating raw
material costs during the period between the time the Company receives an order
and the time the Company purchases the raw materials used to fill such order,
which averages approximately 30 days, can negatively affect profitability even
though the high performance alloy industry has generally been able to pass raw
material price increases through to its customers.
Raw material costs account for a significant portion of the Company's cost
of sales. The prices of the Company's products are based in part on the cost of
raw materials, a significant portion of which is nickel. Effective October 1,
1998, the Company ceased its hedging activities for nickel due to the low
sustained levels of nickel prices at that time. The following table sets forth
the average per pound price for nickel as reported by the London Metals Exchange
for the fiscal years indicated.
Year Ended
September 30, Average Price
------------- -------------
1988............................................... $4.12
1989............................................... 5.77
1990............................................... 4.29
1991............................................... 4.21
1992............................................... 3.48
1993............................................... 2.53
1994............................................... 2.54
1995............................................... 3.66
1996............................................... 3.56
1997............................................... 3.22
1998............................................... 2.40
1999............................................... 2.29
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, 1999, the research and technical
development staff consisted of 42 persons, 16 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 mainly to efforts to
develop new proprietary alloys, to improve current or develop new manufacturing
methods, to provide technical service to customers, to provide technical support
to the commercial and manufacturing groups and to provide metallurgical training
to engineer and non-engineer employees. The Company spent approximately $3.9
million, $3.9 million and $3.8 million for research and technical development
activities for fiscal 1999, 1998 and 1997, respectively.
During fiscal 1999, exploratory alloy development projects were focused on
new high temperature alloy products for gas turbine and industrial heat service.
Engineering projects include new manufacturing process development, specialized
test data development and application support for large volume projects
involving power generation and radioactive waste containment. The Company is
continuing to develop an extensive database storage and retrieval system to
better manage its corrosion, high temperature and mechanical property data.
10
Over the last ten years, the Company's technical programs have yielded nine
new proprietary alloys and 14 United States patents, with an additional two
United States patent applications pending. The Company currently maintains a
total of about 31 United States patents and approximately 200 foreign
counterpart patents and applications targeted at countries with significant or
potential markets for the patented products. In fiscal 1999, approximately 32%
of the Company's net revenues was derived from the sale of patented products and
an additional approximately 40% was derived from the sale of products for which
patents formerly held by the Company had expired. While the Company believes its
patents are important to its competitive position, significant barriers to entry
continue to exist beyond the expiration of any patent period. Six of the alloys
considered by management to be of future commercial significance, HASTELLOY
G-30, HAYNES 230, HASTELLOY C-22, HAYNES HR-120, HAYNES 242 and ULTIMET, are
protected by United States patents that continue until the years 2001, 2002,
2002, 2008, 2008 and 2009, respectively.
Competition
The high performance alloy market is a highly competitive market in which
eight to ten producers participate in various product forms. The Company faces
strong competition from domestic and foreign manufacturers of both the Company's
high performance alloys and other competing metals. The Company's primary
competitors include Inco Alloys International, Inc., a subsidiary of Special
Metals, Allegheny Ludlum Corporation, a subsidiary of Allegheny Teledyne, Inc.
and Krupp VDM GmbH, a subsidiary of Thyssen Krupp Stahl AG. Prior to fiscal
1994, this competition, coupled with declining demand in several of the
Company's key markets, led to significant erosion in the price for certain of
the Company's products. The Company may face additional competition in the
future to the extent new materials are developed, such as plastics or ceramics,
that may be substituted for the Company's products.
Employees
As of September 30, 1999, the Company had approximately 1,037 employees.
All eligible hourly employees at the Kokomo plant and Lebanon Service Center are
covered by a collective bargaining agreement with the United Steelworkers of
America ("USWA") which was ratified on June 11, 1999, and which expires on June
11, 2002. As of September 30, 1999, 533 employees of the Kokomo and Lebanon
facilities were covered by the collective bargaining agreement. The Company has
not experienced a strike at the Kokomo plant since 1967. None of the employees
of the Company's Arcadia, Louisiana or Openshaw, England plants are represented
by a labor union. Management considers its employee relations in each of the
facilities to be satisfactory.
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 $1.3 million for fiscal
1999 and are expected to be approximately $1.6 million for fiscal year 2000.
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.
11
The Company's facilities are subject to periodic inspection by various
regulatory authorities, who from time to time have issued findings of violations
of governing laws, regulations and permits. In the past five years, the Company
has paid administrative fines, none of which has exceeded $50,000, for alleged
violations relating to environmental matters, including the handling and storage
of hazardous wastes, record keeping requirements relating to, and handling of,
polychlorinated biphenyls and violations of record keeping and notification
requirements relating to industrial waste water discharge. Additions and
improvements may be required at the Kokomo, Indiana Wastewater Treatment
Facility based on proposed restrictions of the local sewer use ordinance.
Although the Company does not believe that similar regulatory or enforcement
actions would have a material impact on its operations, there can be no
assurance that violations will not be alleged or will not result in the
assessment of additional penalties in the future. As of September 30,1999,
capital expenditures of approximately $120,000 and $525,000 were budgeted for
wastewater treatment improvements and for air pollution control improvements,
respectively.
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 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 closure certification was received in
fiscal 1999. The Company is 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 the 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 and the IDEM review 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 the Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("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.
12
In November 1988, the EPA approved start-up of a new waste water treatment
plant at the Arcadia, Louisiana facility, which discharges treated industrial
waste water to the municipal sewage system. After the Company exceeded certain
EPA effluent limitations in 1989, the EPA issued an administrative order in 1992
which set new effluent limitations for the facility. The waste water plant is
currently operating under this order and the Company believes it is meeting such
effluent limitations. However, the Company anticipates that in the future
Louisiana will take over waste water permitting authority from the EPA and may
issue a waste water permit, the conditions of which could require modification
to the plant. Reasonably anticipated modifications are not expected to have a
substantial impact on operations.
Item 2. Properties
The Company's owned facilities, and the products provided at each facility,
are as follows:
Kokomo, Indiana--all product forms, other than tubular goods.
Arcadia, Louisiana--welded and seamless tubular goods.
Openshaw, England--bar and billet for the European market.
Zurich, Switzerland - all product forms.
The Kokomo plant, the primary production facility, is located on
approximately 230 acres of industrial property and includes over one million
square feet of building space. There are three sites consisting of a
headquarters and research lab; melting and annealing furnaces, forge press and
several hot mills; and the four-high mill and sheet product cold working
equipment, including two cold strip mills. All alloys and product forms other
than tubular goods are produced in Kokomo.
The Arcadia plant consists of approximately 42 acres of land and over
135,000 square feet of buildings on a single site. Arcadia uses feedstock
produced in Kokomo to fabricate welded and seamless alloy pipe and tubing and
purchases extruded tube hollows to produce seamless titanium tubing.
Manufacturing processes at Arcadia require cold pilger mills, weld mills,
drawbenches, annealing furnaces and pickling facilities.
The United States facilities are subject to a mortgage which secures the
Company's obligations under the Company's Revolving Credit Facility. See Note 6
of the Notes to Consolidated Financial Statements.
The Openshaw plant, located near Manchester, England, consists of
approximately 15 acres of land and over 200,000 square feet of buildings on a
single site. The plant produces bar and billet using billets produced in Kokomo
as feedstock. Additionally, products not competitive with the Company's products
are processed for third parties. The processes conducted at the facility require
hot rotary forges, bar mills and miscellaneous straightening, turning and
cutting equipment.
The Zurich warehouse consists of over 50,000 square feet of building on a
single site.
Although capacity can be limited from time to time by certain production
processes, the Company believes that its existing facilities will provide
sufficient capacity for current demand.
13
Item 3. Legal Proceedings
A Federal Grand Jury is investigating possible violations of federal
anti-trust laws in the nickel alloy industry. The Company, along with other
companies in this industry, is responding to the Government's request. The
Company has engaged outside legal counsel to represent its interest in the
investigation. Certain costs incurred by the Company in connection with the
investigation have been accounted for as selling and administrative and charged
against income in the period. For the year ended September 30, 1999, these costs
were approximately $3.5 million, of which $2.8 million is included in other
accrued expenses.
While the outcome of the investigation cannot be predicted with certainty,
in the opinion of management there will be no liability incurred in this matter
other than ongoing legal expenses in its defense.
The Company is also involved as the defendant in other various 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.
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 23, 1999 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, 1999 and 1998.
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.
(Remainder of page intentionally left blank.)
14
Item 6. Selected Consolidated 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, 1995, 1996, 1997, 1998 and 1999 are derived from the audited
consolidated financial statements of the Company.
These selected financial data are not covered by the auditors' report and
are qualified in their entirety by reference to, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations", and the Consolidated Financial Statements of the
Company and the related notes thereto included elsewhere in this Form 10-K.
Year Ended September 30,
-----------------------------------------------------------------------------
Statement of Operations Data: 1995 1996 1997 1998 1999
---------- ------------- ----------- ------------ -----------
Net revenues $ 201,933 $ 226,402 $235,760 $246,944 $208,986
Cost of sales 167,196 181,173 180,504 191,849 164,349
Selling and administrative expenses 15,475 19,966(1) 18,311 18,166 25,201(2)
Recapitalization expense -- -- 8,694(3) -- --
Research and technical expenses 3,049 3,411 3,814 3,939 3,883
Operating income 16,213 21,852 24,437 32,990 15,553
Other cost, net 1,767 590 276 952 707
Terminated acquisition costs -- -- -- 6,199(4) 388(4)
Interest expense, net 19,904 21,102(1) 20,456 21,066 20,213
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle (6,771) (1,780) 36,315(5) 2,456 564
Extraordinary item, net of tax benefit (7,256)(1) -- -- --
Cumulative effect of change in accounting
principle (net of tax benefit) -- -- -- (450)(6) --
---------- ------------- ----------- ------------ -----------
Net income (loss) (6,771) (9,036) 36,315 2,006 564
========== ============= =========== ============ ===========
September 30,
-----------------------------------------------------------------------------
Balance Sheet Data: 1995 1996 1997 1998 1999
---------- ------------- ----------- ------------ -----------
Working capital(7) $ 62,616 $ 57,307 $ 57,063 $ 66,974 $ 56,622
Property, plant and equipment, net 36,863 31,157 32,551 29,627 32,572
Total assets 151,316 161,489 216,319 207,263 221,237
Total debt 152,477 169,097 184,213 175,877 183,879
Accrued post-retirement benefits 94,830 95,813 96,201 96,483 97,662
Stockholder's equity (Capital deficiency) (121,909) (130,341) (94,435) (90,938) (90,052)
September 30,
-----------------------------------------------------------------------------
Other Financial Data: 1995 1996 1997 1998 1999
---------- ------------- ----------- ------------ -----------
Depreciation and amortization(8) $ 9,000 $ 9,042 $ 8,197 $ 8,148 $ 5,388
Capital expenditures 1,934 2,092 8,863 5,919 8,102
EBITDA(9) 23,446 32,141 41,302 40,186 25,446
Ratio of EBITDA to interest expense 1.18x 1.52x 2.02x 1.91x 1.26x
Ratio of earnings before fixed charges to fixed
charges(10) -- 1.01x 1.17x 1.22x --
Net cash provided from (used in) operating
activities $ (2,883) $ (5,343) $ (6,596) $ 14,584 $ (509)
Net cash used in investment
activities................................. (1,895) (2,025) (8,830) (5,750) (7,951)
Net cash provided from (used in) financing
activities........... 3,912 7,116 14,185 (8,562) 8,570
15
<FN>
(1) 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 1/4% Senior Secured Notes due 1998, and 13
1/2% Senior Subordinated Notes due 1999 (collectively, the "Old Notes") and
is comprised of $3,911 of prepayment penalties incurred in connection with
the redemption of the Old Notes and $3,345 of deferred debt issuance costs
which were written off upon consummation of the redemption of the Old
Notes; (b) $1,837 of Selling and Administrative Expense which represents
costs incurred with a terminated initial public offering of the Company's
common stock; and (c) $924 of Interest Expense which represents the net
interest expense (approximately $1,500 interest expense, less approximately
$600 interest income) incurred during the period between the issuance of
the Senior Notes and the redemption of the Old Notes.
(2) During fiscal 1999, the Company recorded approximately $3,462 in connection
with a Federal Grand Jury investigation of the nickel alloy industry. These
costs have been accounted for as Selling and administrative expenses and
charged against income during the period. Also, the Company recorded
approximately $1,750 in connection with the resignation of the Company's
former Chief Executive Officer, and the appointment of the Company's new
Chief Executive. Those costs were accounted for as Selling and
administrative expenses and charged against income in the period.
(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 were accounted for as recapitalization expenses and
charged against income in the period. Also in connection with the
recapitalization, the Company recorded $2,457 of non-cash stock
compensation expense, also included as recapitalization expenses,
pertaining to certain modifications to management stock option agreements
which eliminated put and call rights associated with the options.
(4) Terminated acquisition costs of approximately $6,199 and $388 were recorded
in fiscal 1998 and 1999 in connection with the abandoned attempt to acquire
Inco Alloys International by Holdings. These costs previously had been
deferred.
(5) 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.
(6) 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 expenses as incurred. The EITF also consented that
if such costs were previously capitalized, then any remaining unamortized
portion of those identifiable costs should be written off and reported as a
cumulative effect of a change in accounting principle in the first quarter
of fiscal 1998. Accordingly, the Company recorded the cumulative effect of
this accounting change, net of tax, of $450, resulting from a pre-tax
write-off of $750 related to reengineering charges involved in the
implementation of an information technology project.
(7) Reflects the excess of current assets over current liabilities as set forth
in the Consolidated Financial Statements.
(8) Reflects (a) depreciation and amortization as presented in the Company's
Consolidated Statement of Cash Flows and set forth in Note (11) below, plus
or minus (b) other non-cash charges, including the amortization of prepaid
pension costs (which is included in the change in other asset category) and
the amortization of postretirement benefit costs, 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, (i)
plus the refinancing costs set forth in Note (1), part (a) and (b) for
fiscal 1996, (ii) plus recapitalization costs outlined in Note (3), and
$250 of failed acquisition costs for fiscal 1997, and (iii) plus terminated
acquisition costs outlined in Note (4), and $450 of business process
reengineering costs outlined in Note (6) for fiscal 1998, and (iv) plus the
Grand Jury investigation costs and executive transition costs discussed in
Note (2), and terminated acquisition costs outlined in Note (4) for fiscal
1999. In addition to net interest expense as listed in the table, the
following charges are added to net income (loss) to calculate EBITDA:
</FN>
16
1995 1996 1997 1998 1999
-------- -------- --------- -------- --------
Provision for (benefit from) income taxes $ 1,313 $ 1,940 $(32,610) $ 2,317 $(6,319)
Depreciation 8,188 7,751 7,477 8,029 5,145
Amortization:
Debt issuance costs 1,444 4,698 1,144 1,247 1,246
Prepaid pension costs (benefit) 130 308 333 (163) (938)
-------- -------- --------- -------- --------
1,574 5,006 (23,656) 11,430 (866)
SFAS 106 postretirement benefits 682 983 387 282 1,181
Amortization of debt issuance costs (1,444) (4,698) (1,144) (1,247) (1,246)
-------- -------- --------- -------- --------
Total $10,313 $10,982 $(24,413) $10,465 $ (931)
======== ======== ========= ======== ========
<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 a change in accounting
principle, plus fixed charges. Fixed charges consist of interest on debt,
amortization of debt issuance costs and estimated interest portion of
rental expense. Earnings were insufficient to cover fixed charges by $5,458
and $5,850 for fiscal 1995 and 1999, respectively.
</FN>
(Remainder of page intentionally left blank.)
17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report contains statements that constitute forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Those statements appear in a number of places in this Report and may include
statements regarding the intent, belief or current expectations of the Company
or its officers with respect to (i) the Company's strategic plans, (ii) the
policies of the Company regarding capital expenditures, financing and other
matters, and (iii) industry trends affecting the Company's financial condition
or results of operations. Readers are cautioned that any such forward looking
statements are not guarantees of future performance and involve risks and
uncertainties and that actual results may differ materially from those in the
forward looking statements as a result of various factors, many of which are
beyond the control of the Company.
Company Background
The Company sells high temperature alloys and corrosion resistant alloys,
which accounted for 64% and 36%, respectively, of the Company's net revenues in
fiscal 1999. 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 1999, flat products accounted for 70% of
shipments and 67% of net revenues.
The Company's annual production capacity varies depending upon the mix of
alloys, forms, product sizes, gauges and order sizes. Based on the current
product mix, the Company estimates that its annual production capacity, which
has been unchanged for the past five years, is approximately 20.0 million
pounds. As a result of changes in the Company's primary markets, sales volume
has ranged from a high of 18.5 million pounds in fiscal 1998, to a low of 16.3
million pounds in fiscal 1995. The Company is not currently capacity
constrained. See "--Liquidity and Capital Resources."
The Company sells its products primarily through its direct sales
organization, which includes four domestic Company-owned service centers, three
wholly-owned European subsidiaries and sales agents serving the Pacific Rim who
operate on a commission basis. Effective January, 1999, the Company transferred
its Kokomo, Indiana service center to a leased site in Lebanon, Indiana. This
new facility has water jet cutting capability and specialized cutting equipment
to service the Company's customers more efficiently. Effective December, 1999,
the Company organized a wholly owned subsidiary in Singapore to enhance the sale
of its products in the Pacific Rim. Approximately 81% of the Company's net
revenues in fiscal 1999 was generated by the Company's direct sales
organization. The remaining 19% of the Company's fiscal 1999 net revenues was
generated by independent distributors and licensees in the United States, Europe
and Japan, some of whom have been associated with the Company for over 30 years.
The 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 1999, sales to customers outside the United States accounted for
approximately 40% 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.
In fiscal 1999, proprietary products represented approximately 32% 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 1999, these other alloys represented
approximately 19% of the Company's net revenues.
18
Order to shipment lead times can be a competitive factor as well as an
indication of the strength of the demand for high performance alloys. The
Company's current average lead times from order to shipment are approximately 15
to 18 weeks.
Overview of Markets
A breakdown of sales, shipments and average selling prices to the markets
served by the Company for the last five fiscal years is shown in the following
table: (Note: Markets prior to 1997 have been reclassified due to improved
identification techniques implemented in 1997 by the Company.)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
% OF % OF % OF % OF % OF
SALES (DOLLARS IN MILLIONS) AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------ ----- ------ ----- ----- ----- ------ ----- ------ -----
Aerospace $ 68.2 33.8% $95.3 42.1% $111.2 47.2% $111.9 45.3% $87.3 41.8%
Chemical processing 74.1 36.7 77.9 34.4 69.3 29.4 79.7 32.3 71.0 34.0
Land-based gas turbines 14.3 7.1 17.4 7.7 17.2 7.4 17.5 7.1 24.1 11.5
Flue gas desulfurization 6.6 3.3 8.3 3.7 6.7 2.7 8.4 3.4 4.1 2.0
Oil and gas 4.5 2.2 4.3 1.9 7.8 3.3 5.9 2.4 1.2 .6
Other markets 30.9 15.3 19.6 8.6 20.1 8.5 19.8 8.0 16.4 7.8
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total product 198.6 98.4 222.8 98.4 232.3 98.5 243.2 98.5 204.1 97.7
Other revenue(1) 3.3 1.6 3.6 1.6 3.5 1.5 3.7 1.5 4.9 2.3
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net revenues $201.9 100.0% $226.4 100.0% $235.8 100.0% $246.9 100.0% $209.0 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
U.S. $122.3 $142.0 $154.3 $146.5 $125.9
Foreign $ 79.6 $84.4 $81.5 $100.4 $83.1
SHIPMENTS BY MARKET
(MILLIONS OF POUNDS)
Aerospace 4.8 29.4% 6.6 40.2% 8.3 45.9% 7.6 41.1% 6.2 36.7%
Chemical processing 6.4 39.3 6.0 36.6 5.7 31.9 6.7 36.2 6.8 40.2
Land-based gas turbines 1.3 8.0 1.5 9.2 1.4 8.1 1.6 8.7 2.3 13.6
Flue gas desulfurization 0.9 5.5 1.0 6.1 0.7 3.8 1.1 5.9 .5 3.0
Oil and gas 0.5 3.1 0.3 1.8 0.7 3.8 0.5 2.7 .1 .6
Other markets 2.4 14.7 1.0 6.1 1.2 6.5 1.0 5.4 1.0 5.9
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Shipments 16.3 100.0% 16.4 100.0% 18.0 100.0% 18.5 100.0% 16.9 100%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
AVERAGE SELLING PRICE
PER POUND
Aerospace $14.21 $14.44 $13.40 $14.72 $14.08
Chemical processing 11.58 12.98 12.16 11.90 10.44
Land-based gas turbines 11.00 11.60 12.29 10.94 10.48
Flue gas desulfurization 7.33 8.30 9.57 7.64 8.20
Oil and gas 9.00 14.33 11.14 11.80 12.00
Other markets 12.88 19.60 16.75 19.80 16.40
All markets $12.18 $13.59 $12.91 $13.15 $12.08
<FN>
(1) Includes toll conversion and royalty income.
</FN>
Fluctuations in net revenues and volume from fiscal 1995 through fiscal
1999 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.
19
The Company experienced growth beginning in fiscal 1995 due to the
aerospace recovery providing the stimulus for demand improvement. As a result of
increased new aircraft production and maintenance requirements, the Company's
net revenues from sales to the aerospace supply chain peaked in fiscal 1998
having grown 64.1% from the fiscal 1995 base period.
Sales to the aerospace market in fiscal 1999 declined as the commercial
aircraft production by the major manufacturers reached its peak while projecting
fewer deliveries in the future. This condition reduced direct demand and caused
the supply chain to consume excess inventory. However, the Company expects the
impact of aircraft production deferrals and cancellations on the product
requirements will be completed by the end of calendar 1999 establishing a firmer
demand pattern, although there can be no assurance as to these facts.
A consistent stream of Haynes product requirements from the maintenance
and repair of installed engines and the requirements for existing engine "hush
kits" to bring them into Stage III noise compliance would add to the demand.
Chemical Processing. Demand for the Company's products in the chemical
processing industry tends to track overall economic activity and is driven by
maintenance requirements of chemical processing facilities and the expansion of
existing chemical processing facilities or the construction of new facilities.
In fiscal 1999, shipments of the Company's products to the chemical processing
industry declined from those in fiscal 1998. Indicators were that capital
projects would increase during fiscal 1999 but this activity failed to
materialize. The basic elements are still present that drive the increased use
of the Company's products, but the high level of mergers, spin-offs, and
divestment of facilities combined to push out many major projects. 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.
While some indicators are forecasting a small upturn in the chemical
processing industry in fiscal 2000 the Company expects demand for its products
in the chemical processing industry will continue at similar levels to fiscal
1999. In addition, the Company's key proprietary CRA products, including
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 activity in this
market, although there can be no assurance that this will be the case.
Chemical processing markets are only expected by the Company to see small
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; however, falling grain prices are
offsetting this trend. 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 has leveraged its metallurgical
expertise to develop LBGT applications for alloys it had historically sold to
the aerospace industry. Land-based gas turbines are favored in electric
generating facilities due to low capital cost at installation, low cycle
installation time, flexibility in use of alternative fuels, and fewer sulfur
dioxide ("SO2") emissions than traditional fossil fuel-fired facilities. In
addition to power generation, land-based gas turbines are required as mechanical
drivers primarily for production and transportation of oil and gas, as well as
emerging applications in commercial marine propulsion and micro turbines for
standby/emergency power systems. The Company believes these factors are
primarily responsible for creating demand for its products in the LBGT industry.
20
Prior to the enactment of the Clean Air Act, land-based gas turbines were
used primarily to satisfy peak power requirements. The Company believes that
land-based gas turbines are the clean, low-cost alternative to fossil fuel-fired
electric generating facilities. In the early 1990's when Phase I of the Clean
Air Act was being implemented, selection of land-based gas turbines to satisfy
electric utilities demand firmly established this power source. The Company
believes that the mandated 2002 compliance with Phase II of the Clean Air Act
will further contribute to demand for its products.
The Company's revenue from sales to the land-based gas turbine industry
have nearly doubled in the past five years. The Company believes the demand for
Haynes products based on industry projections should continue to increase over
the next several years.
Flue Gas Desulfurization. The Clean Air Act is the primary factor
determining the demand for high performance alloys in the FGD industry. FGD
projects have been undertaken by electric utilities and cogeneration facilities
powered by fossil fuels in the United States, Europe and the Pacific Rim in
response to concerns over emissions. FGD projects are generally highly visible
and as a result are highly price competitive, especially when demand for high
performance alloys in other major markets is weak. The Company anticipates
limited sales opportunities in the FGD market as deadlines for Phase II of the
Clean Air Act approach in 2000 due to the over compliance with Phase I
requirements as discussed below.
The Clean Air Act addresses numerous air quality problems in the United
States that are not entirely covered in earlier legislation. One of these
problems is acid rain caused by SO2 and nitrogen oxides ("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 calendar
year 1999, and Phase II, which is more stringent than Phase I, begins in 2000.
The acid rain program allocated emission allowances to Phase I units,
authorizing them to emit one ton of SO2 for each allowance. Some utilities
obtained additional allowances from three auctions and from bonus provisions in
the Act. During Phase I, utilities that reduced emissions below specified limits
could sell the excess reduction as an allowance to another utility. The cost for
these allowances was generally below the cost of scrubbing. The price for SO2
allowances from 1985 to 1990 was about $100/ton; the cost for scrubbing during
this same time frame was $250/ton. Therefore, many utilities opted to buy annual
allowances rather than add environmental equipment. Under Phase II, there will
be fewer allowances due to the further reduction in sulfur emissions. This has
driven the price for allowances upward. In addition, the price for scrubbers has
also been reduced over the last few years. Currently, the price of SO2
allowances is about $225/ton while the scrubbing cost have also dropped to
around $225/ton. These two trends result in scrubber prices currently being
equivalent to buying allowance. In addition, the price of allowances is expected
to increase further. This should translate into increased equipment purchases
over the next several years.
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, several projects have been announced as in the planning stages
during the last quarter of fiscal 1999.
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 a final rule, Order No. 888, in response
to provisions of the Energy Policy Act ("EPACT") of 1992. Order No. 888 opens
wholesale electric power sales to competition and requires each utility that
owns transmission lines to allow buyers and sellers of power the same access to
these lines as the utility provides for its own generation.
In a noncompetitive, regulated environment, state regulators allowed
electric utilities to pass on costs of pollution control requirements to
consumers. In a competitive environment, however, utilities with higher rates
due to environmental controls would be at a relative disadvantage, while those
with lower costs could increase market share. With increasing competition and
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.
21
Oil and Gas. The Company's participation in the oil and gas industry
consists primarily of providing tubular goods for sour gas production. Demand
for the Company's products in this industry is driven by the rate of development
of sour gas fields, which in turn is driven by the price of natural gas and the
need to commence production in order to protect leases. Due to the volatility of
the oil and gas industry, the Company has chosen not to invest in certain
manufacturing equipment necessary to perform certain intermediate steps of the
manufacturing process for these tubular products. However, the Company can out
source the necessary processing steps in the manufacture of these tubulars when
prices rise to attractive levels. The Company intends to selectively take
advantage of future opportunities as they arise, but plans no capital
expenditures to increase its internal capabilities in this area. The gas
drilling rate remains steady as is the rig count in both the Gulf of Mexico and
inland areas. Demand for natural gas is expected to grow moderately over the
next several years.
Other Markets. In addition to the industries described above, the Company
also targets a variety of other markets. Representative industries served in
fiscal 1999 include waste incineration, industrial heat treating, automotive,
medical and instrumentation. The automotive and industrial heat treating markets
are highly cyclical and very competitive. However, continual growth
opportunities exist in automotive due to new safety, engine controls, and
emission systems technologies. Also, increasing requirements for improved
materials performance in industrial heating are expected to increase demand for
the Company's products. Waste incineration presents opportunities for the
Company's alloys as landfill space is diminishing and government concerns over
pollution, chemical weapon stockpiles, and chemical and nuclear waste handling
are increasing. 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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22
Results of Operations
The following table sets forth, for the periods indicated, consolidated
statements of operations data as a percentage of net revenues:
Year Ended September 30,
-------------------------------------------------
1997 1998 1999
-------- --------- -------
Net revenues 100.0% 100.0% 100.0%
Cost of sales 76.6 77.7 78.6
Selling and administrative expenses 7.8 7.4 12.1
Recapitalization expense 3.7(1) -- --
Research and technical expenses 1.6 1.6 1.9
-------- -------- --------
Operating income 10.3 13.3 7.4
Other cost, net 0.1 0.4 0.3
Terminated acquisition costs -- 2.5(2) 0.2(2)
Interest expense 8.7 8.6 9.7
Interest income (0.1) (0.1) (0.1)
Income (loss) before provision for (benefit from)
income taxes and cumulative effect of a change in
accounting principle 1.6 1.9 (2.7)
Provision for (benefit from) income taxes (13.8) 0.9 (3.0)
Cumulative effect of a change in accounting -- (0.2)(3) --
principle, net of tax benefit
Net income 15.4% .8% .3%
<FN>
(1) On January 29, 1997, the Company announced that Haynes Holdings, Inc.
("Holdings"), its parent corporation, had effected the recapitalization of
the Company and Holdings pursuant to which Blackstone Capital Partners II
Merchant Banking Fund L.P. and two of its affiliates ("Blackstone")
acquired 79.9% of Holdings' outstanding shares. Certain fees totaling
approximately $6.2 million paid by the Company in connection with the
Recapitalization have been accounted for as recapitalization expenses, and
charged against income in the period. Also in connection with the
Recapitalization, the Company recorded approximately $2.5 million of
non-cash stock compensation expense, also included as recapitalization
expenses, pertaining to certain modifications to management stock option
agreements which eliminated put and call rights associated with the
options.
(2) Terminated acquisition costs of approximately $6.2 million and $388,000
were recorded in fiscal 1998 and 1999, respectively, in connection with the
abandoned attempt to acquire Inco Alloys International by Holdings. These
costs previously had been deferred.
(3) 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 expenses as incurred. The EITF also consented that
if such costs were previously capitalized, then any remaining unamortized
portion of those identifiable costs should be written off and reported as a
cumulative effect of a change in accounting principle in the first quarter
of fiscal 1998. Accordingly, the Company recorded the cumulative effect of
this accounting change, net of tax, of $450,000, resulting from a pre-tax
write-off of $750,000 related to reengineering charges involved in the
implementation of an information technology project.
</FN>
23
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
Net Revenues. Net revenues decreased approximately $37.9 million, or
15.4%, to approximately $209.0 million in fiscal 1999 from approximately $246.9
million in fiscal 1998, primarily as a result of an 8.6% decrease in shipments,
from approximately 18.5 million pounds in fiscal 1998 to approximately 16.9
million pounds in fiscal 1999, and an 8.1% decrease in average selling prices,
from approximately $13.15 per pound in fiscal 1998 to approximately $12.08 per
pound in fiscal 1999.
Sales to the aerospace industry for fiscal 1999 decreased to approximately
$87.3 million from approximately $111.9 million for fiscal 1998. The significant
decrease can be attributed to a 17.1% decline in volume to approximately 6.3
million pounds in fiscal 1999 from approximately 7.6 million pounds in fiscal
1998. The lower volume is due to the reduced demand for all product forms in all
geographic sectors by the airframe component fabricators and the gas turbine
manufacturers as the commercial aviation industry adjusts to declining aircraft
build schedules. Also contributing to the decline in sales are lower average
selling prices per pound, falling to approximately $14.08 in fiscal 1999 from
approximately $14.72 in fiscal 1998. This decrease is the result of a reduced
volume of high value cobalt-containing alloys and titanium tubulars.
Sales to the chemical processing industry during fiscal 1999 decreased by
10.9% to approximately $71.0 million from approximately $79.7 million for fiscal
1998. Volume shipped to the chemical processing industry during fiscal 1999
increased by 1.5% to approximately 6.8 million pounds, compared to 6.7 million
pounds in fiscal 1998. The increase in volume can be attributed to increased
project activity in the domestic and European markets which has partially offset
the lower demand in the Asian market. The increase in volume was not sufficient
to offset a 12.0% decline in the average selling price from $11.90 per pound in
fiscal 1998 to $10.44 per pound in fiscal 1999. The decline in the average
selling price per pound is attributable to a higher proportion of lower priced
plate products, compared to sales of higher priced sheet and tubular products.
Sales to the LBGT Industry during fiscal 1999 increased 37.1% to
approximately $24.1 million from approximately $17.5 million in fiscal 1998.
Volume increased by 43.8% to approximately 2.3 million pounds, compared to 1.6
million pounds in fiscal 1998, while average selling prices decreased 4.2%. The
volume increase is primarily attributable to improved sales of one of the
Company's proprietary alloys, HAYNES HR-120(R) alloy, for a major gas turbine
manufacturer. The decrease in average selling price is a result of higher sales
of lower cost, lower priced product forms for the export market.
Sales to the FGD industry decreased 51.2% to approximately $4.1 million in
fiscal 1999 from approximately $8.4 million in fiscal 1998. Volume decreased
57.5% while average selling price per pound increased 7.3% reflecting the highly
cyclical and competitive nature of this market.
Sales to the oil and gas industry decreased 79.7% to approximately $1.2
million for fiscal 1999 from approximately $5.9 million in fiscal 1998 as a
result of lower activity in production of deep sour gas. These are typically
large projects and may vary in number significantly from year to year.
Sales to other industries decreased 17.2% in fiscal 1999 to approximately
$16.4 million from approximately $19.8 million for the same period a year ago.
Volume remained relatively flat compared to fiscal 1998, while the average
selling price per pound decreased to $16.40 in fiscal 1999 from $19.80 per pound
in fiscal 1998, a decline of 17.2%. The decline in the average selling price can
be attributed to proportionately higher sales of lower cost, lower priced
nickel-based alloys relative to sales of higher cost, higher priced cobalt-based
alloys.
Cost of Sales. Cost of sales as a percentage of net revenues increased to
78.6% in fiscal 1999 compared to 77.7% in fiscal 1998. The higher cost of sales
percentage in fiscal 1999 compared to fiscal 1998 resulted from higher
distribution costs associated with the new Midwest Service Center and lower
volumes of higher value added sheet and seamless product forms which were
partially offset by lower raw material costs.
24
Selling and Administrative Expenses. Selling and administrative expenses
increased approximately $7.0 million to approximately $25.2 million for fiscal
1999 from approximately $18.2 million in fiscal 1998 primarily as a result of
expenses related to the Company's response to the Department of Justice's grand
jury investigation into the nickel industry, the transition costs associated
with the change in the Company's executive management and increased domestic and
export selling costs.
Research and Technical Expenses. Research and technical expenses remained
relatively flat at approximately $3.9 million in fiscal 1999 and 1998.
Operating Income. As a result of the above factors, the Company recognized
operating income for fiscal 1999 of approximately $15.6 million, approximately
$4.1 million of which was contributed by the Company's foreign subsidiaries. For
fiscal 1998, operating income was approximately $33.0 million, of which
approximately $5.9 million was contributed by the Company's foreign
subsidiaries.
Other. Other cost, net, decreased approximately $245,000, from
approximately $952,000 in fiscal 1998, to approximately $707,000 for fiscal
1999, primarily as a result of foreign exchange gains realized in fiscal 1999,
as compared to foreign exchange losses experienced during fiscal 1998.
Terminated Acquisition Costs. Terminated acquisition costs of
approximately $388,000 were recorded in fiscal 1999, compared with $6.2 million
for fiscal 1998, in connection with the abandoned attempt by Holdings to acquire
Inco Alloys International.
Interest Expense. Interest expense decreased approximately $900,000, to
approximately $20.3 million for fiscal 1999 from approximately $21.2 million for
fiscal 1998. Lower revolving credit balances and lower interest rates during
fiscal 1999 contributed to the decrease.
Income Taxes. The benefit from income taxes of approximately $6.3 million
for fiscal 1999 decreased by approximately $8.6 million from tax expense of
approximately $2.3 million for fiscal 1998 due to an adjustment of deferred
income taxes for certain foreign earnings that will not be remitted to the
United States.
Net Income. As a result of the above factors, the Company recognized net
income for fiscal 1999 of approximately $564,000, compared to net income of
approximately $2.0 million for fiscal 1998.
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25
Year Ended September 30, 1998 Compared To Year Ended September 30, 1997
Net Revenues. Net revenues increased approximately $11.2 million, or 4.7%,
to approximately $246.9 million in fiscal 1998 from approximately $235.8 million
in fiscal 1997, primarily as a result of a 2.8% increase in shipments, from
approximately 18.0 million pounds in fiscal 1997 to approximately 18.5 million
pounds in fiscal 1998, and a 1.9% increase in average selling prices, from
approximately $12.91 per pound in fiscal 1997 to approximately $13.15 per pound
in fiscal 1998.
Sales to the aerospace industry for fiscal 1998 increased slightly to
approximately $111.9 million from approximately $111.2 million for fiscal 1997.
The increase in revenue can be attributed to a 9.9% increase in average selling
prices per pound to approximately $14.72 in fiscal 1998 from approximately
$13.40 in fiscal 1997. This increase was due to proportionately more sales of
the higher-priced, cobalt-based alloys and higher value added forms. This price
increase offset an 8.4% decline in volume caused by some slackening in demand
exacerbated by some unplanned production outages. The drop in demand during the
last six months of fiscal 1998 apparently was the result of inventory
corrections by commercial aircraft and component suppliers.
Sales to the chemical processing industry during fiscal 1998 increased by
15.0% to approximately $79.7 million from approximately $69.3 million for fiscal
1997. Volume shipped to the chemical processing industry during fiscal 1998
increased by 17.5% to approximately 6.7 million pounds, compared to 5.7 million
pounds in fiscal 1997. The increase in volume stemmed from higher sales to
export markets including project sales through the Company's foreign
subsidiaries. Average selling prices per pound were lower in fiscal 1998
reflecting heightened competition, lower raw material costs, and a higher
percentage of project versus maintenance business.
Sales to the LBGT industry during fiscal 1998 increased 1.7% to
approximately $17.5 million from approximately $17.2 million in fiscal 1997.
Volume increased by 14.3% to approximately 1.6 million pounds, compared to 1.4
million pounds in fiscal 1997 while average selling prices decreased 11.0% The
volume increase was primarily attributable to improved sales during the fourth
quarter of the Company's proprietary alloys (HAYNES(R) 230(R) alloy and HAYNES
HR-120(R) alloy) for a major gas turbine manufacturer. The decrease in average
selling price was a result of higher sales of lower cost, lower priced
iron-based alloys.
Sales to the FGD industry increased 25.4% to approximately $8.4 million in
fiscal 1998 from approximately $6.7 million in fiscal 1997. Volume increased
57.1% while average selling price per pound decreased 20.2% reflecting the
highly cyclical and competitive nature of this market.
Sales to the oil and gas industry decreased 24.4% to approximately $5.9
million for fiscal 1998 from approximately $7.8 million in fiscal 1997 as a
result of lower activity in the production of deep sour gas. These are typically
large projects and may vary in number significantly from year to year.
Sales to other industries decreased 1.5% in fiscal 1998 to approximately
$19.8 million from approximately $20.1 million for the same period a year ago,
as a result of a volume decrease of 16.7% partially offset by an 18.2% increase
in average selling price. The decrease in volume can be attributed to lower
sales for automotive applications. The increase in the average selling price per
pound stemmed from a better mix of higher priced products during fiscal 1998
compared to fiscal 1997.
Cost of Sales. Cost of sales as a percentage of net revenues increased to
77.7% in fiscal 1998 compared to 76.6% in fiscal 1997. Volume in the higher
priced, higher value added sheet and coil forms decreased in fiscal 1998 in part
due to unplanned outages in sheet and coil production equipment. This decrease
was partially offset by reduced material costs, primarily nickel, during fiscal
1998 compared to fiscal 1997.
Selling and Administrative Expenses. Selling and administrative expenses
decreased approximately $100,000 to approximately $18.2 million for fiscal 1998
from approximately $18.3 million in fiscal 1997 primarily as a result of lower
benefit related costs partially offset by increased headcount.
26
Research and Technical Expenses. Research and technical expenses increased
approximately $100,000, to approximately $3.9 million in fiscal 1998 from
approximately $3.8 million in fiscal 1997, primarily as a result of salary
increases.
Operating Income. As a result of the above factors, the Company recognized
operating income for fiscal 1998 of approximately $33.0 million, approximately
$5.9 million of which was contributed by the Company's foreign subsidiaries. For
fiscal 1997, operating income was approximately $24.4 million, of which
approximately $4.1 million was contributed by the Company's foreign
subsidiaries.
Other Costs (Income). Other cost (income), net increased approximately
$676,000, from approximately $276,000 in fiscal 1997 to approximately $952,000
for fiscal 1998, primarily as a result of foreign exchange losses realized in
fiscal 1998, as compared to foreign exchange gains experienced during fiscal
1997.
Terminated Acquisition Costs. Terminated acquisition costs of
approximately $6.2 million were recorded in fiscal 1998 in connection with the
abandoned attempt by Holdings to acquire Inco Alloys International. These costs
previously had been deferred.
Interest Expense. Interest expense increased approximately $600,000, to
approximately $21.2 million for fiscal 1998 from approximately $20.6 million for
fiscal 1997. Higher revolving credit balances during the first nine months of
fiscal 1998 compared to the same period in fiscal 1997 and higher debt issuance
cost amortization in fiscal 1998 contributed to this increase.
Income Taxes. The provision for income taxes of approximately $2.3 million
for fiscal 1998 was primarily due to taxes on higher foreign earnings. The
benefit from income taxes of approximately $32.6 million for fiscal 1997 was due
primarily to the Company's reversal of its deferred tax valuation allowance.
Net Income. As a result of the above factors, the Company recognized net
income for fiscal 1998 of approximately $2.0 million, compared to net income of
approximately $36.3 million for fiscal 1997.
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27
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 $8.1 million in fiscal 1999. Capital expenditures were
approximately $8.9 million and $5.9 million for fiscal 1997 and 1998,
respectively. The largest capital item for fiscal 1999 was $2.6 million for the
Company's flat product production areas, including the four-high mill and cold
finishing areas. Planned fiscal 2000 capital spending is primarily targeted for
the Company's coil inspection of cold finishing products, a tube reducing mill
for the Arcadia tubular facility, the completion of information technology
projects, and an upgrade on the Openshaw rotary forge equipment. The Company
does not expect such capital expenditures will have a material adverse effect on
its long-term liquidity. The Company expects to fund its working capital needs
and capital expenditures with cash provided from operations, supplemented by
borrowings under its Revolving Credit Facility. The Company believes these
sources of capital will be sufficient to fund planned capital expenditures and
working capital requirements over the next 12 months and on a long-term basis,
although there can be no assurance that this will be the case.
Net cash used in operating activities in fiscal 1999 was approximately
$509,000, as compared to net cash provided by operating activities of
approximately $14.6 million for fiscal 1998. The cash used in operating
activities for fiscal 1999 was primarily the result of an increase of
approximately $9.7 million in inventories, an increase of approximately $7.2
million in the deferred income tax asset, a decrease of approximately $5.3
million in accounts and notes receivable, an increase of approximately $5.7
million in accounts payable and accrued expenses and non-cash depreciation and
amortization expenses of approximately $6.4 million and other adjustments. Cash
used for investing activities increased from approximately $5.8 million in
fiscal 1998 to approximately $8.0 million in fiscal 1999, almost entirely due to
increased capital expenditures. Cash provided from financing activities for
fiscal 1999 was approximately $8.6 million due primarily to increased borrowings
under the Revolving Credit Facility. Cash for fiscal 1999 decreased
approximately $144,000, resulting in a September 30, 1999, cash balance of
approximately $3.6 million. Cash in fiscal 1998 increased approximately $439,000
from fiscal 1997, resulting in a cash balance of approximately $3.7 million at
September 30, 1998.
The Company amended its existing Revolving Credit Facility, which
expired on August 23, 1999, by extending the term of the loan agreement to
November 22, 1999. On November 22, 1999, the Company refinanced the Revolving
Credit Facility with Fleet Capital Corporation ("Fleet Revolving Credit
Facility"). The Fleet Revolving Credit Facility's term is three years and the
maximum amount available under the Revolving Line of Credit is $72.0 million.
The terms and conditions of the Fleet Revolving Credit Facility are similar to
the prior facility. The Company also has $140,000 of 11 5/8% Senior Notes due
2004 ("Senior Notes"). 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 in place at September 30, 1999, and Exhibit 10.30 in Part IV,
Item 14, for a description of the Fleet Revolving Credit Facility.
The Senior Notes and the revolving credit facilities 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 $1.3 million for fiscal 1999 and are expected to be
approximately $1.6 million for fiscal 2000. 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."
28
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 charges), sales
backlog, budgeted sales and earnings, stabilization of financial condition, and
the periods available to realize the future tax benefits. During the second
quarter of 1999, the Company recorded a deferred income tax benefit associated
with 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.
Year 2000
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 board approval in early
fiscal 1996 for a $4.4 million new integrated information system to replace the
mainframe (of which approximately $4.0 million had been spent through September
30, 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 was successfully installed December 1, 1999, and is functional and
operating as intended. Moreover, the mill systems and controls that could have
an impact on production have all been tested and verified. The costs for
upgrading the stand-alone manufacturing and lab equipment controls were budgeted
for fiscal 1999 as part of the spending or capital expenditure budgets. The
payroll system became Year 2000 compliant in October, 1998.
29
Over 150 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 customers or suppliers will not be Year 2000 ready.
The total estimated costs as of September 30, 1999 for Year 2000
compliance (other than the $4.4 million integrated information system mentioned
above) is currently estimated at approximately $600,000 for some critical and
all non-critical exposures and $1.65 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 believes that its most reasonably likely worst-case Year 2000
scenario would relate to problems with the systems of third parties rather than
with the Company's internal systems or its products. Because the Company has
less control over assessing and remediating the Year 2000 problems of third
parties, the Company believes the risks are greatest with electricity supply and
telecommunications. Failure of an electricity grid or an uneven supply of power
over a prolonged period of time could have a detrimental effect on the Company's
ability to produce and ship material in a timely and reliable manner. The
Company is not in a position to identify or to avoid all possible scenarios;
however, the Company is taking steps to mitigate the impacts of various
scenarios if they were to occur.
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.
Terminated Acquisition by Holdings
In June 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. 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 fiscal 1998 and 1999.
Accounting Pronouncements
On November 20, 1997, the Financial Accounting Standards Board's ("FASB")
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, the Company recorded
the cumulative effect of this accounting change, net of tax, of $450,000
resulting from a pre-tax write-off of $750,000 related to reengineering charges
involved in the implementation of an information technology project.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income", effective October 1, 1998. SFAS No.
130 requires that changes in the Company's foreign currency translation
adjustment be shown in the financial statements. All prior year financial
statements have been reclassified for comparative purposes.
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which will be effective for fiscal year 2001. SFAS No. 133
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. Management has not yet quantified the effect of
this new standard on the consolidated financial statements.
30
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
At September 30, 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. Prior
to September 30, 1998, the Company also had commodity price risk with respect to
nickel forward contracts, but closed out all existing contracts at September 30,
1998, due to the low sustained levels of nickel prices at that time. The nickel
contracts closed were settled in fiscal 1999 at a loss of approximately $68,000.
If the Company decides to hedge its nickel price exposure in the future, Board
of Director approval will be obtained prior to entering into any contracts.
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 less than six months.
At September 30, 1999, the unrealized gain (loss) on these foreign
currency exchange contracts was not material to the future results of the
Company (see Note 1 of Item 8. Financial Statements and Supplementary Data).
[Remainder of page intentionally left blank.]
31
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
Board of Directors
Haynes International, Inc.
Kokomo, Indiana
We have audited the accompanying consolidated balance sheets of Haynes
International, Inc., a wholly-owned subsidiary of Haynes Holdings, Inc., as of
September 30, 1999, and 1998, and the related consolidated statements of
operations, comprehensive income and cash flows for the years then ended. Our
audits also included the financial statement schedule listed in the Index at
Item 14. These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the 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, such 1999 and 1998 consolidated financial statements
present fairly, in all material respects, the financial position of the Company
as of September 30, 1999 and 1998, and the results of their operations and cash
flows for the years then ended, in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic 1999 and 1998 consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the financial statements, the Company changed
its method of accounting for certain business process reengineering costs
effective October 1, 1997.
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
November 5, 1999
32
INDEPENDENT AUDITORS' REPORT
Board of Directors
Haynes International, Inc.
We have audited the 1997 consolidated financial statements and the
financial statement schedules listed in item 14(a) of this Form 10-K of Haynes
International, Inc. (the Company), a wholly owned subsidiary of Haynes Holdings,
Inc. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, Haynes International, Inc. consolidated results of
operations and cash flows for the year ended September 30, 1997, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
PricewaterhouseCoopers, LLP
Ft. Wayne, Indiana
November 3, 1997
33
HAYNES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
September 30, September 30,
1998 1999
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,720 $ 3,576
Accounts and notes receivable, less allowance for 45,974 40,241
doubtful accounts of $662 and $876, respectively
Inventories 81,861 91,012
---------- ----------
Total current assets 131,555 134,829
---------- ----------
Property, plant and equipment, net 29,627 32,572
Deferred income taxes 36,549 44,137
Prepayments and deferred charges, net 9,532 9,699
---------- ----------
Total assets $ 207,263 $ 221,237
========== ==========
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 20,823 $ 27,966
Accrued postretirement benefits 4,500 4,200
Revolving credit facility 35,273 44,051
Notes payable 1,055 208
Income taxes payable 1,731 263
Deferred income taxes 1,199 1,519
---------- ----------
Total current liabilities 64,581 78,207
---------- ----------
Long-term debt, net of unamortized discount 139,549 139,620
Accrued postretirement benefits 91,983 93,462
---------- ----------
Total liabilities 296,113 311,289
---------- ----------
Redeemable common stock of parent company 2,088
Capital deficiency:
Common stock, $.01 par value (100 shares authorized,
issued and outstanding)
Additional paid-in capital 49,087 51,175
Accumulated deficit (143,000) (142,436)
Accumulated other comprehensive income 2,975 1,209
---------- ----------
Total capital deficiency (90,938) (90,052)
---------- ----------
Total liabilities and capital deficiency $ 207,263 $ 221,237
========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
34
HAYNES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1997 1998 1999
------------- ------------- -------------
Net revenues $235,760 $246,944 $208,986
Cost of sales 180,504 191,849 164,349
Selling and administrative 18,311 18,166 25,201
Recapitalization expense 8,694
Research and technical 3,814 3,939 3,883
--------- --------- ---------
Operating income 24,437 32,990 15,553
Other costs, net 276 952 707
Terminated acquisition costs 6,199 388
Interest expense 20,608 21,171 20,348
Interest income (152) (105) (135)
--------- --------- ---------
Income (loss) before provision for (benefit from)
income taxes and cumulative effect of a change in
accounting principle 3,705 4,773 (5,755)
Provision for (benefit from) income taxes (32,610) 2,317 (6,319)
--------- --------- ---------
Income before cumulative effect of a change in
accounting principle $ 36,315 2,456 564
Cumulative effect of a change in accounting
principle, net of tax benefit (450)
--------- --------- ---------
Net income $ 36,315 $ 2,006 $ 564
========= ========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
35
HAYNES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1997 1998 1999
------------- ------------- -------------
Net income $36,315 $2,006 $564
Other comprehensive income (loss), net of
tax:
Foreign currency translation
adjustment (1,494) 1,474 (1,766)
-------- ------ --------
Other comprehensive income (loss) (1,494) 1,474 (1,766)
-------- ------ --------
Comprehensive income (loss) $34,821 $3,480 ($1,202)
======== ====== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
36
HAYNES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1997 1998 1999
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 36,315 $ 2,006 $ 564
Adjustments to reconcile net income
to net cash provided from (used in)
operating activities:
Cumulative effect of a change in accounting
principle 750
Depreciation 7,477 8,029 5,145
Amortization 1,144 1,247 1,246
Deferred income taxes (35,718) 19 (7,217)
Gain on disposition of property and equipment (39) (105) (138)
Non-cash stock option expense 2,457
Change in assets and liabilities:
Accounts and notes receivable 1,053 (7,086) 5,348
Inventories (20,527) 12,856 (9,676)
Prepayments and deferred charges (97) 327 (1,206)
Accounts payable and accrued expenses 608 (3,915) 5,744
Income taxes payable 344 174 (1,553)
Accrued postretirement benefits 387 282 1,234
--------- --------- --------
Net cash provided from (used in) operating
activities (6,596) 14,584 (509)
--------- --------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (8,863) (5,919) (8,102)
Proceeds from disposals of property, plant,
and equipment 33 169 151
--------- --------- --------
Net cash used in investing activities (8,830) (5,750) (7,951)
--------- --------- --------
Cash flows from financing activities:
Net additions (reductions) of revolving credit 14,567 (10,392) 8,778
Borrowings of long-term debt 1,813
Payment of long-term debt (208)
Payment of debt issuance costs (676)
Capital contribution from parent company of
proceeds from exercise of stock options 294 17
--------- --------- --------
Net cash provided from (used in) financing
activities 14,185 (8,562) 8,570
--------- --------- --------
Effect of exchange rates on cash (166) 167 (254)
--------- --------- --------
Increase (decrease) in cash and cash equivalents (1,407) 439 (144)
Cash and cash equivalents:
Beginning of year 4,688 3,281 3,720
--------- --------- --------
End of year $ 3,281 $ 3,720 $ 3,576
========= ========= ========
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest $ 20,968 $ 19,924 $19,102
========= ========= ========
Income taxes $ 3,040 $ 1,832 $ 2,336
========= ========= ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
37
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
(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. The Company has manufacturing
facilities in Kokomo, Indiana; Arcadia, Louisiana; and Openshaw, England;
with distribution service centers in Lebanon, Indiana; Anaheim, California;
Houston, Texas; Windsor, Connecticut; Paris, France and Zurich,
Switzerland.
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, 1998 and 1999, management considered the
Company's intangible and other long-lived assets to be fully recoverable.
F. 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
comprehensive income and transaction gains and losses are reflected in the
consolidated statement of operations.
38
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
G. 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.
H. 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, 1998 and 1999 was $1,995
and $2,968, respectively.
I. Financial Instruments and Concentrations of Risk
The Company enters into forward currency exchange contracts on a continuing
basis and nickel future contracts on a periodic 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. 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, 1998 and 1999, the Company had $6,800 and $1,400 of
foreign currency exchange contracts, respectively, outstanding, with a
combined net unrealized loss of $295 and $5. With respect to the
consolidated statements 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, 1999, and periodically throughout the
year, the Company has maintained cash balances in excess of federally
insured limits.
During 1997, 1998 and 1999, sales to one group of affiliated customers
approximated $24,854, $23,517, and $19,839 respectively, or 11%, 10% and
10% of net revenues, respectively. The Company generally does not require
collateral and credit losses have been within management's expectations.
The Company does not believe it is significantly vulnerable to the risk of
a near-term severe impact from business concentrations with respect to
customers, suppliers, products, markets or geographic areas.
J. 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.
39
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
K. Change in Accounting Principle
On November 20, 1997, the Financial Accounting Standards Board's ("FASB")
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, the Company recorded the cumulative effect of this
accounting change, net of tax, of $450, resulting from a pre-tax write-off
of $750 related to reengineering charges involved in the implementation of
an information technology project.
L. New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income", effective October 1, 1998. SFAS
No. 130 requires that changes in the Company's foreign currency translation
adjustment be shown in the financial statements. All prior year financial
statements have been reclassified for comparative purposes.
The FASB issued Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for derivative Instruments and Hedging Activities," which
will be effective for fiscal year 2001. SFAS No. 133 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. Management has not yet quantified the
effect of this new standard on the consolidated financial statements.
M. Reclassifications
Certain amounts in prior year consolidated financial statements have been
reclassified to conform with current year presentation.
40
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
Note 2: INVENTORIES
The following is a summary of the major classes of inventories:
September 30, September 30,
1998 1999
------------- -------------
Raw materials $ 3,535 $ 4,883
Work-in-process 35,215 38,876
Finished goods 31,752 41,243
Other 837 952
Amount necessary to increase certain net inventories
to the LIFO method 10,522 5,058
------- -------
$81,861 $91,012
======= =======
Inventories valued using the LIFO method comprise 73% and 77% % of consolidated
inventories at September 30, 1998 and 1999, 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,
1998 1999
------------- -------------
Land and land improvements $ 3,144 $ 3,050
Buildings 8,449 8,466
Machinery and equipment 85,586 92,784
Construction in process 2,565 3,224
--------- ---------
99,744 107,524
Less accumulated depreciation (70,117) (74,952)
--------- ---------
$ 29,627 $ 32,572
========= =========
41
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
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,
1998 1999
------------- -------------
Accounts payable, trade $12,078 $16,662
Employee compensation 2,762 2,521
Taxes, other than income taxes 2,178 2,235
Interest 1,417 1,356
Other 2,388 5,192
------- -------
$20,823 $27,966
======= =======
[Remainder of page intentionally left blank.]
42
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
Note 5: INCOME TAXES
The components of income (loss) before provision for (benefit from) income
taxes and cumulative effect of a change in accounting principle consist of the
following:
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1997 1998 1999
------------- ------------- -------------
Income (loss) before provision for (benefit
from) income taxes and cumulative effect of
a change in accounting principle
U.S. $ (677) $(1,110) $(9,880)
Foreign 4,382 5,883 4,125
--------- -------- --------
Total $ 3,705 $ 4,773 $(5,755)
========= ======== ========
Income tax provision (benefit):
Current:
U.S. Federal $ 1,401 $ 793 $ 19
Foreign 1,285 1,599 869
State 422 (94) 10
--------- -------- --------
Current total 3,108 2,298 898
--------- -------- --------
Deferred:
U. S. Federal (30,294) (42) (6,384)
Foreign (498) 104 199
State (4,926) (43) (1,032)
--------- -------- --------
Deferred total (35,718) 19 (7,217)
--------- -------- --------
Total provision for (benefit from) income
taxes $(32,610) $ 2,317 $(6,319)
========= ======== ========
43
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
The provision for (benefit from) income taxes applicable to results of
operations before cumulative effect of a change in accounting principle differed
from the U.S. federal statutory rate as follows:
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1997 1998 1999
------------- ------------- -------------
Statutory federal tax rate 34% 34% 34%
Tax provision at the statutory rate $ 1, 260 $1,623 $(1,957)
Foreign tax rate differentials (202) (606) (334)
Utilization of alternative minimum tax credit (534)
Utilization of net operating loss (2,705)
Withholding tax on undistributed earnings of
foreign subsidiary 155 225 113
Provision for state taxes, net of federal tax
benefit 422 (49)
Exercise of stock options of parent company (167)
U.S. tax on distributed and undistributed
earnings of foreign subsidiary 1,097 1,443 895
Reversal of U.S. tax on undistributed earnings
of foreign subsidiaries (5,025)
Decrease in valuation allowance related
to continuing operations (31,923)
Other (13) (319) (11)
--------- ------- --------
Provision (benefit) at effective tax rate $(32,610) $2,317 $(6,319)
========= ======= ========
44
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
Deferred income tax assets (liabilities) are comprised of the following:
September 30, September 30,
1998 1999
------------- -------------
Current deferred income tax assets (liabilities):
Inventory capitalization $ 769 $ 771
Postretirement benefits other than pensions 1,778 1,659
Accrued expenses for vacation 636 573
Inventory profit reserve 909 667
Other 720 733
--------- --------
Gross current deferred tax asset 4,812 4,403
--------- --------
Inventory purchase accounting adjustment (5,744) (5,744)
Mark to market reserve (267) (178)
--------- --------
Gross current deferred tax liability (6,011) (5,922)
--------- --------
Total net current deferred tax liability (1,199) (1,519)
--------- --------
Noncurrent deferred income tax assets (liabilities):
Property, plant and equipment, net (3,120) (2,488)
Prepaid pension costs (1,957) (2,328)
Investment in subsidiary (475)
Other foreign related (1,242) (938)
Undistributed earnings of foreign subsidiaries (6,062) (2,506)
--------- --------
Gross noncurrent deferred tax liability (12,856) (8,260)
--------- --------
Postretirement benefits other than pensions 35,702 36,286
Executive compensation 825 825
Investment in subsidiary 604
Net operating loss carryforwards 11,700 14,711
Alternative minimum tax credit carryforwards 534 534
Other 40 41
--------- --------
Gross noncurrent deferred tax asset 49,405 52,397
--------- --------
Total net noncurrent deferred tax asset 36,549 44,137
--------- --------
Total $ 35,350 $42,618
========= ========
As of September 30, 1999, the Company had net operating loss carryforwards
for regular tax purposes of approximately $39,141 (expiring in fiscal years 2007
to 2019), of which approximately $32,441 are available for alternative minimum
tax.
During 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.
During fiscal 1999, the Company reversed approximately $4,460 of its
deferred tax liability associated with the undistributed earnings of two foreign
affiliates. The Company has concluded that the cumulative earnings from these
two affiliates, $12,222, will be permanently invested overseas for the
foreseeable future.
45
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
Note 6: DEBT
Long-term debt consists of the following:
September 30, September 30,
1998 1999
------------- -------------
Revolving Credit Facility, due November 22, 1999 $ 35,273 $ 44,051
======== ========
Senior Notes, 11.625%, due in 2004, net of $2,191 and
$1,918, respectively, unamortized discount (effective
rate of 12.0%) $137,809 $138,082
5 Year Mortgage Note, 4.50%, due in 2003 (Swiss
Subsidiary) 1,813 1,605
Other 982 141
-------- --------
140,604 139,828
Less amounts due within one year 1,055 208
-------- --------
$139,549 $139,620
======== ========
Bank Financing
On January 24, 1997, the Company amended its working capital facility (the
"Revolving Credit Facility") with Congress Financial Corporation ("Congress") 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.
On August 23, 1999, the Company amended its Revolving Credit Facility by
extending the term of the loan agreement to November 22, 1999. The Company is
negotiating a line of credit with terms and conditions similar to the Revolving
Credit Facility. Management anticipates the new line of credit will be in place
upon expiration of the Revolving Credit Facility.
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, 1999, the effective
interest rates for revolving credit loans were 7.88% for $33,000 of the
Revolving Credit Facility, and 8.75% for the remaining $11,051. At September 30,
1998, the effective interest rates for revolving credit loans were 8.09% for
$29,000 of the Revolving Credit Facility, and 9.0% for the remaining $6,273. As
of September 30, 1999, $3,045 in letter of credit reimbursement obligations have
been incurred by the Company. The availability for revolving credit loans at
September 30, 1999 was $4,123.
46
The Revolving Credit Facility contains covenants common to such agreements
including the maintenance of certain net worth levels and limitations on capital
expenditures, investments, incurrence 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 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. The Senior
Notes limit the incurrence of additional indebtedness, restricted payments,
mergers, consolidations and asset sales.
The estimated fair value, based upon an independent market quotation, of
the Company's Senior Notes was approximately $149,800 and $119,000 at September
30, 1998 and 1999, respectively.
Other
In addition to the aforementioned debt, the Company's UK affiliate (Haynes
International, Ltd.) has an overdraft banking facility with Midland Bank that
provides for availability of 550 Pounds Sterling ($906) collateralized by the
assets of the affiliate. This overdraft banking facility was available in its
entirety on September 30, 1999, 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 ($1,956) and utilized 859 French Francs ($141)
of the facility as of September 30, 1999. The Company's Swiss affiliate
(Nickel-Contor AG) has an overdraft banking facility of 3,500 Swiss Francs
($2,340) all of which was available on September 30, 1999.
[Remainder of page intentionally left blank.]
47
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
Note 7: CAPITAL DEFICIENCY
The following is a summary of changes in stockholder's equity (capital
deficiency):
Common Stock Accumulated
------------ Additional Other Total
No. of At Paid in (Accumulated Comprehensive Capital
Shares Par Capital Deficit) Income Deficiency
------ --- ---------- ------------ ------------- ----------
Balance at
October 1, 1996 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 791 791
redeemable common stock
Other comprehensive income
(loss) (1,494) (1,494)
--- - ------- ---------- -------- ----------
Balance at 100 0 49,070 (145,006) 1,501 (94,435)
September 30, 1997
- ------------------
Year ended September 30, 1998:
Net income 2,006 2,006
Capital contribution from parent
company on exercise of stock
option 17 17
Other comprehensive income
(loss) 1,474 1,474
--- - ------- ---------- -------- ----------
Balance at 100 0 49,087 (143,000) 2,975 (90,938)
September 30, 1998
- ------------------
Year ended September 30, 1999:
Net income 564 564
Reclassification of redeemable 2,088 2,088
common stock
Other comprehensive income
(loss) (1,766) (1,766)
--- - ------- ---------- -------- ----------
Balance at
September 30, 1999 100 0 $51,175 $(142,436) $ 1,209 $ (90,052)
- ------------------ === = ======= ========== ======== ==========
48
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
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.
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 status of employee pension benefit plans and other postretirement
benefit plans at September 30 are summarized below:
Pension Benefits Other Benefits
1998 1999 1998 1999
--------- --------- --------- ---------
Change in Benefit Obligation:
Projected benefit obligation at beginning of year $107,347 $123,481 $ 70,261 $ 74,207
Service cost 2,355 2,579 1,265 1,861
Interest cost 7,256 7,115 4,785 4,738
Plan changes 4,247 (4,222) 1,169
(Gains)/losses 13,994 (24,795) 6,315 (10,430)
Benefits paid (7,471) (7,469) (4,197) (3,967)
--------- --------- --------- ---------
Projected benefit obligation at end of year $123,481 $105,158 $ 74,207 $ 67,578
========= ========= ========= =========
Change in Plan Assets:
Fair value of plan assets at beginning of year $143,577 $141,061
Actual return on assets 4,955 14,990
Employer contributions $ 4,197 $ 3,967
Benefits paid (7,471) (7,469) (4,197) (3,967)
--------- --------- --------- ---------
Fair value of plan assets at end of year $141,061 $148,582
========= =========
Funded Status of Plan:
Funded status $ 17,580 $43,424 $(74,207) $(67,578)
Unrecognized actuarial gain (15,330) (44,223) (8,653) (19,082)
Unrecognized prior service cost 2,705 6,692 (13,623) (11,002)
--------- --------- --------- ---------
Net amount recognized $ 4,955 $ 5,893 $(96,483) $(97,662)
========= ========= ========= =========
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 $3,869,
$4,479, and $5,147 for these benefits during fiscal 1997, 1998 and 1999,
respectively.
Net periodic pension cost (benefit) on a consolidated basis was $767, $252,
and $(265) for the years ended September 30, 1997, 1998 and 1999, respectively.
49
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
The components of net periodic pension cost (income) and other
postretirement benefit cost for the years ended September 30, were as follows:
Pension Benefits Other Benefits
1997 1998 1999 1997 1998 1999
-------- -------- --------- -------- -------- --------
Service cost $ 2,156 $ 2,355 $ 2,579 $ 1,130 $ 1,265 $ 1,861
Interest cost 7,370 7,256 7,116 4,653 4,785 4,738
Expected return on assets (9,332) (9,605) (10,892)
Amortization of unrecognized net gain (82) (390) (823) (480)
Amortization of unrecognized prior
service cost 221 221 259 (1,091) (1,091) (1,452)
-------- -------- --------- -------- -------- --------
Net periodic cost (income) $ 333 $ (163) $ (938) $ 3,869 $ 4,479 $ 5,147
======== ======== ========= ======== ======== ========
An 8.6% annual rate of increase for ages under 65 and an 8.3% annual rate
of increase for ages over 65 in the costs of covered health care benefits was
assumed for 1999, gradually decreasing for both age groups to 5.30% by the year
2008. Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one percentage-point change in
assumed health care cost trend rates would have the following effects in fiscal
1999:
1-Percentage Point 1-Percentage Point
Increase Decrease
------------------ ------------------
Effect on total of service and interest cost components $1,225 $(947)
Effect on accumulated postretirement benefit obligation $11,099 $(8,868)
Assumptions used to develop the net periodic pension cost (income) and
other postretirement benefit cost and to value pension obligations as of
September 30 were as follows:
1997 1998 1999
----- ----- -----
Discount rate 7.00% 6.25% 7.75%
Expected return on plan assets 8.25% 7.50% 9.00%
Weighted average rate of increase in
future compensation levels 5.25% 5.25% 4.50%
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, 1999. The
Company sponsors a defined contribution plan for substantially all U.S.
employees. Expenses associated with this plan for the year ended September 30,
1999 totaled $132.
50
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
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 $1,768, $1,691, and $2,107 for the
years ended September 30, 1997, 1998, and 1999, respectively. Rent expense
includes income from sub-lease rentals totaling $431, $44, and $106 for the
years ended September 30, 1997, 1998, and 1999, respectively. Future minimum
rental commitments under non-cancelable leases in effect at September 30, 1999,
are as follows:
2000 $1,833
2001 1,610
2002 1,215
2003 777
2004 and thereafter 447
------
$5,882
======
Future minimum rental commitments under non-cancelable leases have not been
reduced by minimum sub-lease rentals of $717 due in the future.
Note 10: OTHER
Other costs, net, consists of net foreign currency transaction (gains) and
losses in the amounts of $(524), $84, and $(310) for the years ended September
30, 1997, 1998 and 1999, respectively, and miscellaneous costs.
A Federal Grand Jury is investigating possible violations of federal
anti-trust laws in the nickel alloy industry. The Company, along with other
companies in this industry, is responding to the Government's request. The
Company has engaged outside legal counsel to represent its interest in the
investigation. Certain costs incurred by the Company in connection with the
investigation have been accounted for as selling and administrative and charged
against income in the period. For the year ended September 30, 1999, these costs
were approximately $3,462, of which $2,777 is included in other accrued
expenses.
While the outcome of the investigation cannot be predicted with certainty,
in the opinion of management there will be no liability incurred in this matter
other than ongoing legal expenses in its defense.
The Company is also involved as the defendant in other various 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.
51
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
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, and not
to exceed $2,500 in the aggregate, which is included in selling and
administrative expenses, and of which $833 is included in other accrued expenses
at September 30, 1999. 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: TERMINATED ACQUISITION COSTS
On March 3, 1998, the Company announced that Holdings and Blackstone had
abandoned their attempt to acquire Inco Alloys International, a 100% owned
business unit of Inco Limited. Approximately $6,199 and $388 of deferred
acquisition costs were charged to operations for the years ended September 30,
1998 and 1999, respectively.
Note 13: STOCK-BASED COMPENSATION
Holdings has a stock option plan ("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 915,880 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.
52
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
Due to modifications to management's stock option agreements, redeemable
common stock of $2,088 was converted to additional paid in capital during 1999.
Pertinent information covering the Plan is as follows:
Weighted
Number Fiscal Average
of Option Price Year of Shares Exercise
Shares Per Share Expiration Exercisable Prices
------- ------------ ----------- ----------- --------
Outstanding at September 30, 1996 554,114 $ 2.28-3.24 2000 - 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 2000 - 2007 581,000 3.76
Granted 24,632 10.15 10.15
Exercised (7,000) 2.50 2.50
Canceled (4,000) 8.00 8.00
---------
Outstanding at September 30, 1998 594,632 2.50-10.15 2000 - 2008 574,926 4.01
Granted --
Exercised (40,000) 2.50 2.50
Canceled (44,000) 2.50 - 8.00 3.00
---------
Outstanding at September 30, 1999 510,632 2.50 - 10.15 2000 - 2008 495,853 4.22
=========
Options Outstanding at
September 30, 1999 consist of: 125,000 $8.00 125,000
361,000 2.50 361,000
24,632 10.15 9,853
--------- -------
510,632 495,853
========= =======
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, and $7, net of $5 deferred tax
benefit in 1998. These pro forma adjustments were calculated using the minimum
value method to value all stock options granted since October 1, 1995, using the
following assumptions:
1997 1998 1999
------- ------- -------
Risk free interest rate 6.27% 5.53% 5.88%
Expected life of options 5 years 5 years 5 years
53
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1999
Note 14: SEGMENT REPORTING
The Company operates in one business segment: the design, manufacture and
distribution of technologically advanced, high performance metal alloys for use
in the aerospace and chemical processing industries. The Company has operations
in the United States and Europe, which are summarized below. Sales between
geographic areas are made at negotiated selling prices.
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
1997 1998 1999
------------- ------------- -------------
Sales
United States $154,403 $146,574 $129,494
Europe 68,003 87,633 69,727
Other 13,354 12,737 9,765
-------- -------- --------
Net revenues $235,760 $246,944 $208,986
======== ======== ========
Long-lived assets
United States $ 31,557 $ 26,212 $ 29,057
Europe 994 3,415 3,515
-------- -------- --------
Total long-lived assets $ 32,551 $ 29,627 $ 32,572
======== ======== ========
54
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
[Remainder of page intentionally left blank.]
55
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, 1999. 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
---- --- -------------------------
Francis J. Petro............................ 60 President and Chief Executive Officer; Director
John H. Tundermann.......................... 59 Executive Vice President
Joseph F. Barker............................ 52 Chief Financial Officer; Executive Vice President, Finance; & Treasurer
F. Galen Hodge.............................. 61 Vice President, Marketing
Michael F. Rothman.......................... 53 Vice President, Engineering & Technology
Charles J. Sponaugle........................ 51 Vice President, Sales
August A. Cijan............................. 44 Vice President, Operations
Stanton D. Kirk............................. 45 Vice President & General Manager, Republic Engineered Steels
Theodore T. Brown........................... 41 Controller; Chief Accounting Officer
Robert I. Hanson............................ 56 General Manager, Arcadia Tubular Products
R. Steven Linne............................. 56 General Counsel and Secretary
Richard C. Lappin........................... 54 Director
Chinh E. Chu................................ 33 Director, Member Audit Committee
Marshall A. Cohen........................... 64 Director, Member Compensation Committee
Eric Ruttenberg............................. 43 Director, Member Audit Committee
Mr. Petro was elected President, Chief Executive Officer and a director of
the Company in January 1999. From 1995 to the time he joined Haynes, Mr. Petro
was President and CEO of Inco Alloys International, a nickel alloy products
manufacturer owned by The International Nickel Company Of Canada.
Mr. Tundermann was elected Executive Vice President of the Company in March
1999. From 1995 to the time he joined Haynes, Mr. Tundermann was Vice President,
Research and Technology of Inco Alloys International, a nickel alloy products
manufacturer owned by The International Nickel Company of Canada.
Mr. Barker was elected Vice President, Finance, 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, Marketing, in June 1998 after having
served as Vice President of International since 1994. He had served as Vice
President, Technology, since September 1989 and in various technical and
production positions with the Company and its predecessors since 1970.
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, in June 1998 after having
served as Vice President Sales and Marketing since October 1994. He had served
in various quality control and marketing positions since 1985.
56
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 Steel Corporation, a mini hot strip mill owned by
British Steel PLC, from 1987 until he joined the Company in 1993.
Mr. Kirk was elected Vice President and General Manager, Republic
Engineered Steels, Specialty Steels Division, in April 1999. From March 1999
until June 1999 Mr. Kirk was Director of Flat Products management at Special
Metals. From June 1998 until Mach 1999 Mr. Kirk was Director of Sales at Inco
Alloys International.
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. Lappin is currently a Senior Managing Director of The Blackstone Group
L.P., which he joined in 1990. Prior to joining Blackstone, Mr. Lappin served as
President of Farley Industries. Mr. Lappin was elected as a Director of Haynes
International, Inc. in March 1999.
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 Boards of Directors of Haynes
International, Inc., Prime Succession and Rose Hills Company.
Mr. Cohen was elected as a director of Haynes International, Inc. in June
1998. He has served as counsel to Cassels, Brock & Blackwell in Toronto, Canada
since October 1996. From November 1988 to September 1996, Mr. Cohen was
President and Chief Executive Officer of The Molson Companies Limited. He
currently serves on the Boards of Directors of American International Group,
Inc., Lafarge Corporation, Speedy Muffler King Inc., The Goldfarb Corporation,
and The Toronto-Dominion Bank.
Mr. Ruttenberg was elected as a director of Haynes International, Inc. in
June 1998. He is a General Partner of Tinicum, a Ruttenberg family investment
company. He is also a Director of SPS Technologies and Environmental Strategies
Corporation and a Trustee of Mount Sinai Medical Center.
The Amended Stockholder's Agreement by and among Holdings and certain
investors, including Blackstone, adopted on January 31, 1997 (the "Agreement"),
imposes certain transfer restrictions on Holdings' common stock, including
provisions that (i) Holdings common stock may be transferred only to those
persons agreeing to be bound by the 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 (as defined) 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 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.
57
The By-Laws of Haynes International, Inc. ("By-Laws") authorize the board
of directors to designate the number of directors to be not less than three nor
more than eleven. The board currently has five directors. 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. Petro, to the
terms of his employment contract. See "Executive Compensation--Petro 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.)
58
Item 11. Executive Compensation
The following table sets forth certain information concerning the
compensation paid by the Company to all individuals serving as its Chief
Executive Officer during the last completed fiscal year and each of the
Company's four other most highly compensated Executive Officers, who served as
executive officers as of September 30, 1999.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
Annual Compensation (1)
Name Other
and Annual All Other
Principal Fiscal Salary Bonus Compensation Options Compensation
Position Year $ $ $ # $ (2)
--------- ------ ------ ----- ------------- ------- ------------
Francis J. Petro 1999 257,144 120,000 -- -- 22,439
President and Chief
Executive Officer
Michael D. Austin 1999 120,000 -- -- -- 10,688
President and Chief 1998 414,000 42,869 -- -- 8,663
Executive Officer 1997 387,000 81,497 -- -- 9,000
Joseph F. Barker 1999 178,200 -- -- -- 2,440
Executive Vice President 1998 176,275 18,189 -- -- 2,713
Finance; Treasurer 1997 166,625 35,089 -- -- 2,575
Charles J. Sponaugle 1999 154,000 -- -- -- 1,965
Vice President, Sales 1998 152,500 15,719 -- -- 2,079
1997 148,000 30,458 -- -- 1,371
August A. Cijan 1999 157,200 -- -- -- 776
Vice President, 1998 154,700 16,045 -- -- 840
Operations 1997 149,400 31,117 -- -- 812
F. Galen Hodge 1999 154,300 -- -- -- 5,827
Vice President, 1998 149,875 15,749 -- -- 5,116
Marketing 1997 143,500 30,541 -- -- 3,371
<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.
</FN>
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 (as amended) 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 915,880 shares of Holdings' common stock. As of
September 30, 1999, options to purchase 510,632 shares were outstanding under
the Existing Stock Option Plan. Fifty thousand two hundred three (50,203)
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 Existing 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 in no compensation being charged to operations.
59
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;
(ii) ten years and two days after the date of grant; or (iii) at a longer time
as may be determined by the Board of Directors. 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.
No options were granted in fiscal 1999. On October 22, 1996, 133,000
options were granted to certain key management personnel with exercise prices of
$8.00 per share. On June 1, 1998, a total of 24,632 options were granted to
Marshall A. Cohen, Director, at an exercise price of $10.15 per share.
The following table sets forth certain information with respect to stock
options held by the persons named in the Summary Compensation Table. No persons
named in the Summary Compensation Table were granted or exercised stock options
during fiscal 1998.
Stock Option Exercises and Fiscal Year-End Holdings
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Options at Options at
Fiscal Year End Fiscal Year End (1)
---------------------- --------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ----------- ------------- ----------- -------------
Michael D. Austin 160,000 -- $240,000 --
Joseph F. Barker 40,000 -- $ 60,000 --
Charles J. Sponaugle 33,000 -- $ 49,500 --
August A. Cijan 40,000 -- $ 60,000 --
F. Galen Hodge 40,000 -- $ 60,000 --
<FN>
(1) 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
($4.00).
</FN>
60
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, 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.
61
Employment Agreements
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.
The Company has agreements 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.
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,
except those employed pursuant to a written agreement which provides that the
employee shall not be eligible for any retirement plan benefits, 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 June 11, 1999 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
1999. The maximum annual benefit permitted for 1999 under Section 415(b) of the
Code is $125,000.
62
YEARS OF SERVICE
AVERAGE ANNUAL
REMUNERATION
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, 1999 are as follows:
CREDITED
SERVICE
--------
Francis J. Petro................................. < 1
F. Galen Hodge................................... 30
Joseph F. Barker................................. 19
Charles J. Sponaugle............................. 18
August A. Cijan.................................. 6
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. Combined Profit
Sharing and Savings Plan ("Profit Sharing Plan") 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 as discretionary Profit Sharing. No Company
contributions were made to the Profit Sharing Plan for the fiscal years ended
September 30, 1997, 1998 and 1999. The Profit Sharing Plan is 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 Plan.
63
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 Company's annual
allocation, if any, to the Profit Sharing Plan 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 Plan, in amounts
up to 20% of their plan compensation. Effective June 14, 1999, the Company
agreed to match 50% of an employee's contribution to the Plan up to a maximum
contribution of 3% of the employees' salary. Elective salary reduction
contributions may be withdrawn subject to the terms of the Profit Sharing Plan.
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 1997, the Company awarded and paid management bonuses of
approximately $200,000 pursuant to a board resolution. The January bonuses were
calculated based on the Company's fiscal 1996 performance. Additionally, the
Company adopted a management incentive plan effective for fiscal 1997 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 1997, the Company accrued approximately $925,000 for fiscal
1997 which was paid to all domestic employees meeting certain service
requirements on November 12, 1997.
For fiscal 1998, the Board again approved an incentive plan similar to the
1997 plan subject to higher targets. Based on results for fiscal 1998 the
Company accrued $315,000 for fiscal 1998, which was paid to certain domestic
salaried employees meeting specific service requirements on November 18, 1998.
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 fiscal 1997 and 1998, Haynes International, Ltd. made
incentive payments similar to the domestic incentive plan of approximately
$115,000 and $98,000, respectively.
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. Mr. Cohen has a consulting agreement with Holdings under
which he has received 24,632 shares of Holdings common stock.
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.
* * *
64
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 Executive
Vice President, the Executive Vice President, Finance, and Treasurer, the Vice
President, Engineering and Technology, the Vice President, Sales, the Vice
President, Operations, the Vice President and General Manager, Republic
Engineered Steels, 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 other industries. 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 1999 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 1999.
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 1997 and 1998 reflected the accomplishment of corporate and
functional objectives in fiscal 1997 and 1998, respectively.
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. On June 1, 1998, a total of 24,632 options were granted to
Marshall A. Cohen, Director, at an exercise price of $10.15 per share.
SUBMITTED BY THE COMPENSATION COMMITTEE
65
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, 1999, 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,
1999. The address of The Blackstone Partnerships is 345 Park Avenue, 31st Floor,
New York, NY 10154. The address of Mr. Austin is 7611 Lake Road South, Building
1000, Mobile, AL 36609. The address of Messrs. Barker, Cijan, Hodge and
Sponaugle is 1020 W. Park Avenue, P.O. Box 9013, Kokomo, IN 46904-9013.
Shares Beneficially Owned (1)
------------------------------
Name Number Percent
------ -------
The Blackstone Partnerships 5,323,799 73.0
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 directors and executive officers
of the Company as a group 447,264(1) 6.1
- -----------------------------
(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.
66
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. On
June 1, 1998, a total of 24,632 shares of Holdings shares were issued to
Marshall A. Cohen, Director, for consulting services and 24,632 options were
granted at an exercise price of $10.15 per share.
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 Auditors.
Consolidated Balance Sheet as of September 30, 1998 and September 30,
1999.
Consolidated Statements of Operations for the Years Ended September
30, 1997, 1998 and 1999.
Consolidated Statements of Comprehensive Income for the Years Ended
September 30, 1997, 1998 and 1999.
Consolidated Statements of Cash Flows for the Years Ended September
30, 1997, 1998 and 1999.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
Included as outlined in Item 8 of Part II of this report.
Schedule II - 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.
67
HAYNES INTERNATIONAL, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Year Ended Year Ended Year Ended
Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1999
-------------- -------------- --------------
Balance at beginning of period $ 900 $ 657 $ 662
Provisions (6) 221 235
Write-Offs (251) (287) (136)
Recoveries 14 71 115
------ ------ ------
Balance at end of period $ 657 $ 662 $ 876
====== ====== ======
[Remainder of page intentionally left blank.]
68
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/Francis J. Petro
----------------------------
Francis J. Petro, President
Date: December 23, 1999
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/ Francis J. Petro President and Director December 23, 1999
- ----------------------------------------- (Principal Executive Officer)
Francis J. Petro
Executive Vice President, Finance;
/s/ Joseph F. Barker Treasurer December 23, 1999
- ----------------------------------------- (Principal Financial Officer)
Joseph F. Barker
/s/ Theodore T. Brown Controller December 23, 1999
- ----------------------------------------- (Principal Accounting Officer)
Theodore T. Brown
/s/ Richard C. Lappin Director December 23, 1999
- -----------------------------------------
Richard C. Lappin
/s/ Chinh E. Chu Director December 23, 1999
- -----------------------------------------
Chinh E. Chu
/s/ Marshall A. Cohen Director December 23, 1999
- -----------------------------------------
Marshall A. Cohen
/s/ Eric Ruttenberg Director December 23, 1999
- -----------------------------------------
Eric Ruttenberg
69
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 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.
70
(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.)
71
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.)
72
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).
73
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.)
10.28 Facility Management Agreement by and between Republic
Engineered Steels, Inc. and Haynes International, Inc.,
dated April 15, 1999. (Incorporated by reference to
Exhibit 10.18 to Registrant's Form 10-Q Report filed
May 14, 1999, File No. 333-5411)
10.29 Amendment No. 3 to Amended and Restated Loan and
Security Agreement, dated August 23, 1999, 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.
10.30 Credit Agreement by and among Institutions from time
to time party hereto, as Lenders, Fleet Capital
Corporation, as Agent for Lenders, and Haynes
International, Inc., as Borrower.
(11) No Exhibit.
(12) 12.01 Statement re: computation of ratio of earnings before
fixed charges 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.