SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file No. 000-22029
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SPECIAL METALS CORPORATION
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 25-1445468
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4317 Middlesettlement Road
New Hartford, NY 13413
----------------------
(Address of principal executive offices)
(Zip Code)
(315) 798-2900
--------------
(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
As of July 30, 1999, there were 15,479,000 shares of the Issuer's common stock,
par value $.01 per share, outstanding.
<PAGE>
SPECIAL METALS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
Page
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1999 2
and December 31, 1998
Condensed Consolidated Statements of Operations and
Retained Earnings for the three months and six months
ended June 30, 1998 and 1999 3
Condensed Consolidated Statements of Cash Flows for the
three months and six months ended June 30, 1998 and 1999 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Part II. Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
1
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
Special Metals Corporation
Condensed Consolidated Balance Sheets
(Unaudited - In thousands, except share amounts)
December 31, June 30,
1998 1999
----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 39,622 $ 23,783
Restricted deposits 352 --
Accounts receivable - trade, less allowance
for doubtful accounts of $3,179 in 1998
and $2,932 in 1999 137,634 127,507
Inventories 271,812 259,176
Prepaid expenses and other current assets 16,991 20,926
----------------------
Total current assets 466,411 431,392
Property, plant and equipment 309,025 299,366
Non-competition agreement, net of accumulated
amortization of $617 in 1998 and $2,467 in 1999 36,383 34,533
Other assets 28,335 35,863
----------------------
Total assets $ 840,154 $ 801,154
======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 46,753 $ 57,879
Accrued liabilities 79,576 72,221
Notes payable 3,163 2,731
Current portion of long-term debt and
capital leases 13,155 15,510
----------------------
Total current liabilities 142,647 148,341
Long-term debt and capital leases 282,792 249,027
Postretirement benefits obligation 188,748 191,754
Other long-term liabilities 16,537 16,458
Commitments and contingencies
Redeemable, convertible preferred stock, Series A,
nonvoting, $0.01 par value, 10,000,000 shares
authorized, 1,940,000 shares issued and outstanding 98,071 101,283
Shareholders' equity:
Common stock, $0.01 par value, 35,000,000 shares
authorized, 15,479,000 shares issued and
outstanding 155 155
Paid-in surplus 75,712 75,712
Accumulated other comprehensive loss (1,911) (8,737)
Retained earnings 37,403 27,161
----------------------
Total shareholders' equity 111,359 94,291
----------------------
Total liabilities and shareholders' equity $ 840,154 $ 801,154
======================
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
Special Metals Corporation
Condensed Consolidated Statements of Operations and
Retained Earnings (Unaudited - In thousands,
except per share amounts)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1998 1999 1998 1999
--------------------------- -------------------------
<S> <C> <C> <C> <C>
Net sales $ 43,852 $ 158,842 $ 93,043 $ 310,550
Cost of goods sold 35,038 139,391 72,551 282,328
---------------------------------------------------
8,814 19,451 20,492 28,222
Selling, general and
administrative expenses 1,949 14,846 3,769 30,003
---------------------------------------------------
Operating income (loss) 6,865 4,605 16,723 (1,781)
Interest expense 31 5,694 64 11,363
Interest income (154) (295) (331) (865)
Other income (33) (876) (45) (1,281)
---------------------------------------------------
Income (loss) before income taxes 7,021 82 17,035 (10,998)
Income tax expense (benefit) 2,410 419 6,089 (3,968)
---------------------------------------------------
Net income (loss) 4,611 (337) 10,946 (7,030)
Accumulated preferred stock dividends -- 1,606 -- 3,212
---------------------------------------------------
Net income (loss) attributable to
common shareholders 4,611 (1,943) 10,946 (10,242)
Retained earnings
Beginning of period 34,969 29,104 28,634 37,403
---------------------------------------------------
End of period $ 39,580 $ 27,161 $ 39,580 $ 27,161
===================================================
Net income (loss) per share $ 0.30 $ (0.13) $ 0.71 (0.66)
(Basic and Diluted)
Weighted average shares outstanding 15,479 15,479 15,478 15,479
(Basic and Diluted)
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
Special Metals Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited - In thousands)
Six months ended June 30,
1998 1999
--------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 10,946 $ (7,030)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,925 16,800
Other adjustments and changes in assets and liabilities (12,826) 19,827
--------------------
Net cash provided by operating activities 45 29,597
INVESTING ACTIVITIES:
Capital expenditures (6,244) (5,168)
Net change in restricted deposits (821) 352
Deferred software and other charges (246) (7,702)
--------------------
Net cash used in investing activities (7,311) (12,518)
FINANCING ACTIVITIES:
Repayment of term loans and other long--term debt -- (31,804)
Payments on capital lease obligations (146) (384)
--------------------
Net cash used in financing activities (146) (32,188)
Net effect of exchange rate changes on cash -- (730)
--------------------
Net increase (decrease) in cash and cash equivalents (7,412) (15,839)
Cash and cash equivalents at beginning of period 12,237 39,622
--------------------
Cash and cash equivalents at end of period $ 4,825 $ 23,783
====================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements
June 30, 1999
(Unaudited)
NOTE 1 - ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements of
Special Metals Corporation (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Results for the period ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999.
For further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended December
31, 1998.
NOTE 2 - INVENTORIES
Inventories consist of the following (in thousands):
December 31, June 30,
1998 1999
---------------------
Raw materials and supplies $ 67,198 $ 72,424
Work-in-process 151,136 128,651
Finished goods 57,478 61,662
---------------------
275,812 262,737
Adjustment to LIFO cost (4,000) (3,561)
---------------------
$271,812 $259,176
=====================
NOTE 3 - INCO ALLOYS ACQUISITION
On October 28, 1998, the Company acquired the stock of the companies which
comprised the Inco Alloys International high performance nickel alloys business
unit ("IAI") of Inco Limited ("Inco") and entered into a non-competition
agreement with Inco (the "Acquisition").
The Acquisition has been accounted for under the purchase method of accounting,
and the results of operations of IAI have been included in the consolidated
statements of operations since the date of acquisition. The initial $328 million
purchase price has been allocated to the assets acquired and liabilities assumed
based upon their estimated fair values. This allocation, however, is subject to
adjustment based upon the final purchase price adjustment, which is pending.
The following unaudited pro forma information presents the results of operations
of the Company as if the Acquisition had taken place at January 1, 1998. These
pro forma results of operations have been prepared for comparative purposes only
and do not purport to be indicative of the results of operations which actually
would have resulted had the Acquisition occurred on the date indicated, or which
may result in the future.
5
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
June 30, 1999
(Unaudited)
Six months ended
June 30, 1998
(In thousands, except per share amounts)
Net sales $411,769
Net income 18,447
Net income attributable to common shareholders 15,234
Net income per share:
Basic 0.98
Diluted 0.86
NOTE 4 - BUSINESS SEGMENT INFORMATION
Segment information for the six months ended June 30, 1999 is as follows. For
the six months ended June 30, 1998, the Company operated as only the SMC Premium
Alloys segment.
INCO
SMC ALLOYS INCO
PREMIUM NORTH ALLOYS
ALLOYS AMERICA EUROPE CORPORATE TOTAL
-------------------------------------------------
(In thousands)
Sales to external customers $70,571 $153,703 $86,276 $ -- $310,550
Intersegment sales 6,687 16,902 9,353 -- 32,942
Operating income (loss) 8,852 (11,333) 3,403 (2,703) (1,781)
Interest expense (11,363)
Interest income 865
Other income 1,281
--------
Loss before income taxes (10,998)
NOTE 5 - CONTINGENCIES
ENVIRONMENTAL MATTERS
The Company's facilities are engaged in activities regulated by extensive
federal, state, local and foreign environmental and worker safety and health
laws and regulations, including those relating to air emissions, wastewater
discharges, the handling and disposal of solid and hazardous wastes and the
release of hazardous substances (collectively, "Environmental Laws"). In the
United States, for example, such laws include the Federal Clean Air Act, Clean
Water Act, Resource Conservation and Recovery Act ("RCRA"), Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), and analogous
state laws. The Company uses substantial quantities of substances that are
considered hazardous or toxic under Environmental Laws. The Company's operations
pose a continuing risk of accidental releases of, and worker exposure to,
hazardous or toxic substances. There is also a risk that Environmental Laws, or
the enforcement thereof, may become more stringent in the future and that the
Company may be subject to legal proceedings brought by
6
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
June 30, 1999
(Unaudited)
private parties or government agencies with respect to environmental matters.
Although the Company believes that it is in substantial compliance with
applicable requirements of Environmental Laws, there can be no assurance that
some, or all, of the risks discussed under this heading will not result in
liabilities that are material to the Company's business, results of operations,
financial condition or cash flows.
The Company's facilities have been used for industrial purposes for a
substantial period and, over such time, these facilities have used substances or
generated and disposed of wastes which are hazardous. The Company currently
faces potential material environmental remediation liabilities in connection
with certain sites at which the Company's wastes have been allegedly released or
otherwise come to be located. At June 30, 1999, the Company had total reserves
of approximately $10.1 million to cover future costs arising from known
environmental liabilities for investigation, remediation and operation and
maintenance of remediation systems, including costs relating to its own
properties and to certain sites at which the Company's wastes have allegedly
been identified. However, the Company's actual future expenditures for
remediation of environmental conditions existing at its properties and at
offsite waste-disposal locations cannot be conclusively determined at this time.
Furthermore, additional locations at which wastes generated by the Company may
have been released or disposed, and of which the Company is currently unaware,
may in the future become the subject of remediation for which the Company may be
liable, in whole or in part. Accordingly, it is possible that the Company could
become subject to environmental liabilities in the future that could result in a
material adverse effect on the Company's business, results of operations,
financial condition or cash flows.
The Company's policy is to continually strive to improve environmental
performance. From time to time, the Company may be subject to regulatory
enforcement under various Environmental Laws, resolution of which typically
involves the establishment of compliance programs and may involve the payment of
penalties. To date, the Company has incurred no material penalties pursuant to
Environmental Laws. The Company's 1999 capital budget provides $3.6 million for
environmental protection and compliance matters. The Company incurred capital
expenditures for environmental matters of $1.7 million during the six months
ended June 30, 1999. The Company does not expect future costs of compliance with
currently enacted and proposed Environmental Laws to have a material impact on
its liquidity and capital resources. However, changes in Environmental Laws
which result in the imposition of stricter standards or requirements or more
rigorous enforcement of existing Environmental Laws could result in expenditures
in excess of amounts estimated to be required for such matters.
The following is a summary of the more significant environmental
matters or proceedings in which the Company is currently involved:
Asbestos Exposure Actions. The Company's domestic IAI subsidiary (Inco
Alloys International, Inc., "IAII") is a co-defendant in various consolidated
and unconsolidated actions by plaintiffs, including former employees of IAII and
former employees of contractors to IAII, alleging exposure to asbestos at IAII's
Huntington, West Virginia facility. Plaintiffs' counsel have also informed IAII
that they intend to add similar claims by additional plaintiffs. Insurance
coverage is available for some of these proceedings. The Company is not able to
reasonably estimate what the ultimate loss, if any, will be with respect to
these matters. However, the damages sought by plaintiffs in these actions, if
IAII were required to pay them, could have a material adverse effect on the
business, financial condition, results of operations or cash flows of the
Company.
7
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
June 30, 1999
(Unaudited)
Manganese Exposure Actions. IAII is a defendant in thirteen actions
(one not served) by plaintiffs seeking damages for alleged health problems
resulting from exposure to manganese in welding products and one action in which
the plaintiff alleges exposure to manganese originating in wastewater from
IAII's Huntington, West Virginia facility, while an employee of the Huntington
Sanitary Board. One case is scheduled for trial in 1999; the other cases are at
various stages of pleading and discovery. The Company does not believe that
these proceedings are likely to have a material adverse effect on the business,
financial condition, results of operations or cash flows of the Company, but
there can be no assurance that this will be the case.
Ludlow Landfill. The Company has been identified as a potentially
responsible party ("PRP") under CERCLA at the Ludlow Landfill, Clayville, New
York, due to the Company's alleged generation of certain industrial wastes,
including wastes contaminated by polychlorinated biphenyls ("PCBs"), which were
disposed at the landfill (the "Ludlow Site"). CERCLA imposes strict, joint and
several liability upon, inter alia, generators of wastes disposed at a
contaminated site, for investigation and remedial costs.
The Company assumed responsibility for remediation of the Ludlow Site
and has completed remediation except for that of an adjoining property known as
the "North Gravel Pit." The discovery of PCB contamination in the North Gravel
Pit has required further investigation and remediation. The Company's engineers
have submitted to the DEC (the "Department of Environmental Conservation") a
report detailing their investigation pursuant to the work plan and recommending
a remedial alternative. The Company has established a reserve based on the
recommended remedial alternative. However, the DEC has notified the Company that
it did not find the recommended remedial alternative acceptable. The Company
hopes to reach agreement with the DEC on the final remedial alternative, which
may include removal of additional PCB-impacted soils, in 1999. The additional
costs, if any, associated with the modified final remedial alternative can not
be determined until the areas of dispute with the DEC are resolved. Furthermore,
if the EPA, which also has jurisdiction over the Ludlow Site, disagrees with the
final remedial alternative, it may seek to require implementation of a different
remedial alternative.
The Company is also responsible for post-closure operations and
maintenance at the remainder of the Ludlow Site, including groundwater
monitoring, through 2027. These operations and maintenance costs are estimated
at approximately $90,000 per year for a total of approximately $2.6 million. At
June 30, 1999, the Company's reserve in respect of these expenses, based on a
present value calculation using a discount rate of 4%, was $1.3 million. In
addition, the Company may be required to conduct certain post-closure
activities.
The Company and the DEC also disagree concerning the DEC's outstanding
natural resources damage claim. The DEC has requested additional annual biota
sampling for a period in excess of the post-closure operations and maintenance
period, to be incorporated in a revised post-closure operations and maintenance
plan. The Company has disputed this request. The Company cannot determine at
this time whether it will have to undertake this long-term biota sampling. The
DEC retains the right to sample biota.
Though the Company does not believe it likely that liabilities at the
Ludlow Site will have a material adverse effect on the Company's business,
results of operations, financial condition or cash flow, this possibility cannot
be excluded.
8
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
June 30, 1999
(Unaudited)
Universal Waste Site. The owners and operators of the Universal Waste
Site, Utica, New York, conducted a preliminary site assessment pursuant to a
consent order with the DEC, which also conducted a separate preliminary site
assessment. The Company believes that at least four other potentially
responsible parties have been identified with respect to the contamination at
the site. The DEC is dividing the site into two separate sites. The Utica Alloys
site (1.5 acre occupied by the industrial concern known as Utica Alloys, Inc.)
and the Universal Waste site (the remainder of the original site). The Company
has not been obligated to become involved in the investigation. Based upon the
limited information available to it, the Company has established a reserve of
$575,000. However, because of the preliminary nature of the investigation, it is
not possible at this time to provide a reasonable estimate of the ultimate cost
of any investigative or remedial work which will be required, or the Company's
share, if any, of such costs. Therefore, it is possible that liabilities could
arise in respect of this site that could have a material adverse effect on the
business, results of operations, financial condition or cash flows of the
Company.
Huntington and Burnaugh RCRA Facility Assessments. The Huntington, West
Virginia, and Burnaugh, Kentucky facilities of IAII have been subject to site
inspections pursuant to RCRA. Draft reports issued by the respective inspecting
agencies recommended environmental investigation at Huntington and Burnaugh.
Neither report was ever issued in final form. No action has been taken
by the inspecting agency since January 1996 in the case of Huntington. Burnaugh
has recently been listed as one of over 1,700 high priority facilities. The
Kentucky Division of Waste Management is in the process of revising the RCRA
Facility Assessment report for Burnaugh. If such investigation is ultimately
required in Huntington, and when such is required in Burnaugh, the Company could
also be required to undertake significant remediation, the cost of which could
have a material adverse effect on the business, financial condition, results of
operations or cash flows of the Company.
DEPARTMENT OF JUSTICE INVESTIGATION
In March 1999, the Company received a subpoena from a federal grand
jury investigating possible violations of the federal antitrust laws in the
nickel industry. The Company is responding to the subpoena but cannot at this
time determine what further action may be taken by the grand jury or the United
States Justice Department's Antitrust Division, which is submitting evidence to
the grand jury.
OTHER MATTERS
From time to time, the Company is involved in legal proceedings
relating to claims arising out of its operations in the normal course of
business. Except as discussed above, the Company does not believe that it is
presently a party to any proceedings that are likely to have a material adverse
effect on the Company's business, financial condition, results of operation or
cash flows.
9
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
June 30, 1999
(Unaudited)
NOTE 6 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the three month and six month periods ended June 30, 1998 and 1999:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1998 1999 1998 1999
-------------------- -------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 4,611 $ (337) $ 10,946 $ (7,030)
Preferred stock dividends -- 1,606 -- 3,212
------------------- -------------------
Numerator for basic earnings per share-
income available to common shareholders 4,611 (1,943) 10,946 (10,242)
Effect of dilutive securities - preferred
stock dividends -- -- -- --
------------------- -------------------
Numerator for diluted earnings per
share-income available to common
shareholders after assumed conversions $ 4,611 $ (1,943) $ 10,946 $(10,242)
=================== ===================
Denominator:
Denominator for basic earnings per share-
weighted-average shares outstanding 15,479 15,479 15,478 15,479
Effect of dilutive securities:
Employee stock options -- -- -- --
Preferred stock -- -- -- --
------------------- -------------------
Denominator for diluted earnings per
share- adjusted weighted-average shares 15,479 15,479 15,478 15,479
=================== ===================
Basic earnings per share $ 0.30 $ (0.13) $ 0.71 $ (0.66)
=================== ===================
Diluted earnings per share $ 0.30 $ (0.13) $ 0.71 $ (0.66)
=================== ===================
</TABLE>
Potential common shares resulting from stock options and convertible preferred
stock were excluded from the calculation of diluted earnings per share because
their inclusion would have had an antidilutive effect on earnings per share.
10
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
June 30, 1999
(Unaudited)
NOTE 7 - COMPREHENSIVE INCOME
Comprehensive income (loss) for the three month and six month periods ended June
30, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1998 1999 1998 1999
-------------------- ---------------------
<S> <C> <C> <C> <C>
Net income (loss) $4,611 $ (337) $10,946 $ (7,030)
Change in foreign currency
translation adjustment -- (2,809) -- (6,826)
-------------------- ---------------------
Comprehensive income (loss) 4,611 (3,146) 10,946 (13,856)
</TABLE>
Accumulated other comprehensive income (loss) consists of the following at
December 31, 1998 and for the three month and six month periods ended June 30,
1999:
Three months Six months
ended June 30, ended June 30,
1998 1999 1999
-------------------------------------------
Pension adjustment $(1,571) $(1,571) $(1,571)
Foreign currency translation
adjustment (340) (2,809) (7,166)
-------------------------------------------
Accumulated other comprehensive
income (loss) (1,911) (4,380) (8,737)
===========================================
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements included in this Management Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this report that do not
relate to present or historical conditions are "forward looking statements"
within the meaning of that term in Section 21F of the Securities Exchange Act of
1934, as amended. Additional oral or written statements may be made from time to
time, and such statements may be included in documents filed with the Securities
and Exchange Commission. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors, which may cause the actual
results, performance or achievements of the Company to be materially different
from those expressed or implied by such forward-looking statements. Such factors
include economic slowdowns and recessions (especially in the aerospace industry,
in which a substantial portion of the Company's customers are concentrated); the
availability and pricing of raw materials used in the manufacture of the
Company's products; the reliable operation of the Company's manufacturing
facilities and equipment; the Company's ability to evaluate, finance and
integrate acquired businesses, products and companies into the Company's
existing business and operations; the Company's ability to effectively compete
in the industries in which it does business; the Company's ability to
successfully negotiate new labor agreements and otherwise maintain favorable
relations with its employees, a majority of whom are unionized; the Company's
ability to comply with existing and future environmental laws and regulations,
the accuracy of its current estimates of existing environmental liabilities and
the possibility that currently unknown environmental liabilities may be
discovered.
OVERVIEW
The Company manufactures high-performance nickel-based alloys and
superalloys, which are highly engineered metal alloys designed to withstand
extremes of heat, stress, and corrosion. The Company conducts its business
through three principal operating segments. The SMC Premium Alloys Division
manufactures a comprehensive range of premium grade, nickel-based and
cobalt-based wrought superalloy and special alloy long products in billet and
bar forms, which are used primarily in jet engines. This division also produces
shape memory alloys, known as Nitinol, which is used primarily in medical and
dental applications; powder metallurgy superalloy products used principally in
military and the latest generation of large commercial jet engines; and
silver-based amalgamable dental alloys. The Inco Alloys North American Division
manufactures nickel-based alloys in a broad range of product forms, including
billet, bar, rod, sheet, strip, plate, tubing, and rod-in-coil. The division
also manufactures and sells nickel-based welding consumables and
high-performance nickel-based alloy and stainless steel wire products. The Inco
Alloys European Division manufactures nickel-based alloys in billet, bar, rod,
extruded section, narrow strip, rod-in-coil, and tubular product forms. The
organization also includes a network of distribution facilities and service
centers throughout Europe. For the six months ended June 30, 1999, the SMC
Premium Alloys Division, the Inco Alloys North American Division, and the Inco
Alloys European Division accounted for 23%, 49%, and 28% respectively, of the
Company's net sales of $310.6 million.
Net Sales. Net sales include sales of the Company's high-performance
nickel-based alloy, superalloy, and special alloy products, as well as revenue
earned from toll conversion. Sales of the Company's products are made under
conventional purchase orders, one-year supply contracts, long-term firm price
contracts and indexed price contracts. Long-term firm price and indexed price
contracts have become more prevalent in the superalloy industry because jet
engine manufacturers are required to provide firm price quotations to airlines
for jet engines to be delivered several years into the future. To the extent
that it has entered into long-term agreements, the Company has sought pricing
terms which are either indexed or otherwise accommodate changes in product and
raw material markets.
Export sales represent a significant portion of the Company's business.
During the six months ended June 30, 1999, sales to purchasers outside of the
United States totaled 16% of the Company's net sales.
12
<PAGE>
Cost of Goods Sold. The high-performance nickel-based alloy and
superalloy industry is characterized by high capital investment and high fixed
costs, and therefore profitability is significantly affected by changes in
volume. Variable costs such as raw materials, labor, supplies and energy
(primarily electricity) generally account for more than 70 percent of the
Company's cost of goods sold. Fixed costs, such as indirect overhead and
depreciation, constitute the remainder of the Company's cost of goods sold. The
Company has undertaken various initiatives to maintain and improve its
efficiency and cost position over the last few years.
In addition, the Company has recently undertaken new cost-cutting
actions, including a salaried workforce reduction. This reduction is targeted at
a minimum of 10 percent by the end of 1999, to a significant extent through an
early retirement program at the Company's Huntington, West Virginia facility and
job redundancies in its Hereford, England facility. The Company expects $5
million in annual cost savings from the workforce reduction and anticipates
taking a restructuring charge of up to $2.5 million in the third quarter of
1999.
A substantial portion of the Company's raw material used in production
consists of commodities, such as nickel, which are subject to wide price
fluctuations. The price the Company pays for nickel is usually based upon quoted
prices on the London Metals Exchange (the "LME") plus a premium due to quality,
location, and volume purchased. Although the Company's long-term agreements
provide for certain price adjustments to reflect changes in the price of raw
materials, once a customer places an order, the price is generally fixed and not
subject to further adjustment. In an attempt to mitigate the risks associated
with raw material price fluctuations and to match raw material purchases with
firm price product orders, the Company often enters into forward contracts to
manage its exposure to changes in nickel prices and also enters into contracts
for the purchase of scrap with customers. A substantial majority of the nickel
forward contracts result in the Company taking possession of the inventory;
however, certain of these contracts are settled in cash. For the nickel forward
contracts settled in cash, the Company makes or receives payment equal to the
net change in value of the contract at its maturity. Substantially all contracts
are designated as hedges of the Company's firm sales commitments, are timed to
correspond to the commitment period, and are effective in hedging the Company's
exposure to changes in nickel prices during that cycle. At June 30, 1999, the
Company had open purchase contracts with a notional principal value of
approximately $24.6 million. The fair value of the material covered by these
contracts, based on the June 30, 1999 price quoted on the LME, was approximately
$25.4 million. Unrealized gains and losses on the contracts which have been
designated, and are effective, as hedges for firm sales commitments have been
deferred.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses represent costs associated with sales and marketing,
research and development, legal expenses, certain accounting and information
systems expenses, and the office of the president.
13
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, statement of
operations data as a percentage of net sales.
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1998 1999 1998 1999
--------------------------- -------------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Costs of goods sold 79.9 87.8 78.0 90.9
--------------------------- -------------------------
Gross profit 20.1 12.2 22.0 9.1
Selling, general and
administrative expenses 4.4 9.3 4.0 9.7
--------------------------- -------------------------
Operating income (loss) 15.7 2.9 18.0 (.6)
Interest expense .1 3.6 .1 3.7
Interest income (.4) (.2) (.4) (.3)
Other income -- (.6) -- (.4)
--------------------------- -------------------------
Income (loss) before income taxes 16.0 .1 18.3 (3.6)
Income taxes expense (benefit) 5.5 .3 6.5 (1.3)
--------------------------- -------------------------
Net income (loss) 10.5% (.2)% 11.8% (2.3)%
=========================== =========================
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998.
NET SALES. Net sales increased $114.9 million, or 262.2% from $43.9 million in
the three months ended June 30, 1998 to $158.8 million in the three months ended
June 30, 1999. This increase is the result of including sales of IAI, offset in
part by reduced sales of the SMC Premium Alloys Division as a consequence of
global economic pressures which have resulted in reduced volumes and increased
pressure on prices, and customer inventory adjustments in response to earlier
order patterns which led to overstocking in customer plants.
COST OF GOODS SOLD. Cost of goods sold increased $104.4 million, or 297.8% from
$35.0 million in the three months ended June 30, 1998 to $139.4 million in the
three months ended June 30, 1999. This increase is the consequence of including
results of operations for IAI, offset in part by reduced cost of goods sold for
the SMC Premium Alloys Division consistent with the related decrease in net
sales of that division. As a percentage of net sales, cost of goods sold
increased from 79.9% in the three months ended June 30, 1998 to 87.8% in the
three months ended June 30, 1999.
GROSS PROFIT. Gross profit increased $10.7 million, or 120.7% from $8.8 million
in the three months ended June 30, 1998 to $19.5 million in the three months
ended June 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $12.9 million, or 661.7% from $1.9 million in
the three months ended June 30, 1998 to $14.8 million in the three months ended
June 30, 1999. This increase is the consequence of including results of
operations for IAI. Selling, general and administrative expenses as a percentage
of net sales increased from 4.4% in the three months ended June 30, 1998 to 9.3%
in the three months ended June 30, 1999.
OPERATING INCOME (LOSS). Operating income decreased $2.3 million, or 32.9% from
$6.9 million in the three months ended June 30, 1998 to $4.6 million in the
three months ended June 30, 1999. Operating income as a percentage of net sales
decreased from 15.7% in the three months ended June 30, 1998 to 2.9% in the
three months ended June 30, 1999.
14
<PAGE>
INTEREST EXPENSE. Interest expense increased $5.7 million from zero in the three
months ended June 30, 1998 to $5.7 million in the three months ended June 30,
1999. This increase was due to the increase in indebtedness in connection with
the Acquisition.
INCOME TAXES. Income tax expense decreased $2.0 million from $2.4 million in the
three months ended June 30, 1998 to $.4 million in three months ended June 30,
1999. The decrease is due to the decrease in operating income and increase in
interest expense.
NET INCOME (LOSS). Net income (loss) decreased $4.9 million, or 107.3% from $4.6
million in the three months ended June 30, 1998 to $(.3) million in the three
months ended June 30, 1999. Net income (loss) as a percentage of net sales
decreased from 10.5% in the three months ended June 30, 1998 to (.2)% in the
three months ended June 30, 1999.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998.
NET SALES. Net sales increased $217.6 million, or 233.8% from $93.0 million in
the six months ended June 30, 1998 to $310.6 million in the six months ended
June 30, 1999. This increase is the result of including sales of IAI, offset in
part by reduced sales of the SMC Premium Alloys Division as a consequence of
global economic pressures which have resulted in reduced volumes and increased
pressure on prices, and customer inventory adjustments in response to earlier
order patterns which led to overstocking in customer plants.
COST OF GOODS SOLD. Cost of goods sold increased $209.7 million, or 289.1% from
$72.6 million in the six months ended June 30, 1998 to $282.3 million in the six
months ended June 30, 1999. This increase is the consequence of including
results of operations for IAI, offset in part by reduced cost of goods sold for
the SMC Premium Alloys Division consistent with the related decrease in net
sales of that division. As a percentage of net sales, cost of goods sold
increased from 78.0% in the six months ended June 30, 1998 to 90.9% in the six
months ended June 30, 1999.
GROSS PROFIT. Gross profit increased $7.7 million, or 37.7% from $20.5 million
in the six months ended June 30, 1998 to $28.2 million in the six months ended
June 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $26.2 million, or 696.1% from $3.8 million in
the six months ended June 30, 1998 to $30.0 million in the six months ended June
30, 1999. This increase is the consequence of including results of operations
for IAI. Selling, general and administrative expenses as a percentage of net
sales increased from 4.0% in the six months ended June 30, 1998 to 9.7% in the
six months ended June 30, 1999.
OPERATING INCOME (LOSS). Operating income (loss) decreased $18.5 million, or
110.7% from $16.7 million in the six months ended June 30, 1998 to $(1.8)
million in the six months ended June 30, 1999. Operating income (loss) as a
percentage of net sales decreased from 18.0% in the six months ended June 30,
1998 to (.6)% in the six months ended June 30, 1999.
INTEREST EXPENSE. Interest expense increased $11.3 million from $.1 million in
the six months ended June 30, 1998 to $11.4 million in the six months ended June
30, 1999. This increase was due to the increase in indebtedness in connection
with the Acquisition.
INCOME TAXES. Income tax expense decreased $10.1 million from an expense of $6.1
million in the six months ended June 30, 1998 to a benefit of $(4.0) million in
six months ended June 30, 1999. The decrease is due to the decrease in operating
income and increase in interest expense. The effective income tax rate increased
from 35.7% in the six months ended June 30, 1998 to 36.1% in the six months
ended June 30, 1999.
15
<PAGE>
NET INCOME (LOSS). Net income (loss) decreased $17.9 million, or 164.2% from
$10.9 million in the six months ended June 30, 1998 to $(7.0) million in the six
months ended June 30, 1999. Net income (loss) as a percentage of net sales
decreased from 11.8% in the six months ended June 30, 1998 to (2.3)% in the six
months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise primarily from capital investments,
working capital requirements, and principal and interest payments on
indebtedness. The Company has historically met these liquidity requirements with
funds generated from operations and from short-term and long-term debt financing
(including borrowings from its principal stockholders). The Company's business
is capital intensive and requires substantial expenditures for, among other
things, the purchase and maintenance of equipment used in the manufacturing
process and compliance with environmental laws.
Net cash provided by operating activities was zero and $29.6 million
for the six months ended June 30, 1998 and 1999, respectively.
Capital expenditures were $6.2 million and $5.2 million for the six
months ended June 30, 1998 and 1999, respectively.
The Company's principal sources of funds are (i) funds generated from
operations and (ii) borrowings under the Company's Senior Secured Credit
Agreement with Credit Lyonnais, as agent, and other financial institutions (as
amended, the "Credit Agreement"). The Credit Agreement provides for a $125
million term loan (the "Tranche A Term Loan"), a $100 million term loan (the
"Tranche B Term Loan," and, together with the Tranche A Term Loan, the "Term
Loans") and a $150 million revolving credit and letter of credit facility. (the
"Revolving Credit Facility"). Proceeds from the Term Loans were used to finance
a portion of the purchase price of the Acquisition.
Under the Revolving Credit Facility, the Company can borrow, repay and
re-borrow from time to time up to $150 million in the aggregate. The Revolving
Credit Facility terminates on October 28, 2003. The amount the Company may
borrow under the Credit Agreement is reduced by the aggregate amount of any
letters of credit issued for the account of the Company. Interest under the
Credit Agreement is variable based on either a base rate or Eurodollar rate plus
a margin which is dependent upon the Company's leverage ratio. To manage the
exposure to interest rate changes, the Company has entered into interest rate
swap agreements covering approximately $137 million of the variable rate debt
and which mature in September 2003. The interest rate swap agreements
effectively fix the interest rate on approximately $137 million of variable rate
debt at 5.86% plus the applicable margin based on the Company's leverage ratio.
A commitment fee of .375% to .50% per annum, depending on the Company's leverage
ratio, on the unused portion of the Revolving Credit Facility is due quarterly.
The Tranche A Term loan is scheduled to be repaid in quarterly installments over
five years and the Tranche B Term loan is scheduled to be repaid in quarterly
installments over seven years as follows (in thousands):
16
<PAGE>
Tranche A Tranche B
Year Term Loan Term Loan Total
---- --------------------------------
1999 (remainder of year) $ 6,250 $ 500 $ 6,750
2000 17,500 1,000 18,500
2001 27,500 1,000 28,500
2002 36,250 1,000 37,250
2003 30,000 12,625 42,625
2004 -- 47,500 47,500
2005 -- 35,625 35,625
The Company is required to prepay amounts outstanding under the Credit
Agreement out of the excess cash flow of the Company. Prepayments will be
applied first to the Term Loans, pro rata, then to amounts outstanding under the
Revolving Credit Facility and finally as cash collateral against outstanding
letters of credit. So long as any amounts remain outstanding under the Tranche A
Term Loan, lenders under the Tranche B Term Loan may elect not to have their
portion of the Tranche B Term Loan prepaid until the Tranche A Term Loan is paid
in full.
The Company's obligations under the Credit Agreement are secured by all
of the assets of the Company and its domestic subsidiaries and by a pledge of
the capital stock of certain subsidiaries. The Credit Agreement also contains
covenants restricting the ability of the Company to, among other things, make
certain restricted payments, create liens, guarantee indebtedness or enter into
transactions with affiliates. The Company is also subject to certain financial
tests relating to, among other things, its minimum consolidated earnings before
interest, taxes, depreciation and amortization ("EBITDA"); consolidated leverage
ratio; interest coverage ratio and fixed charge coverage ratio.
The Company entered into the First Amendment to Credit Agreement and
Limited Waiver (the "Amendment") with its bank syndicate on March 31, 1999,
which, among other things, waived the event of default which resulted from the
Company not complying with the minimum EBITDA financial test, revised the
financial tests for 1999 and subsequent periods, adjusted the applicable
margins, and will restrict payments of dividends on the Series A Convertible
Preferred Stock for a period through at least the first quarter of 2000, as
specified in the Amendment. The Company remained in compliance with the
covenants contained in the Amendment for the quarter ended June 30, 1999.
Nevertheless, the Company will continue to be challenged to meet the minimum
EBITDA, leverage and other covenants reflected in the Amendment, given the state
of its markets while the Company integrates the IAI acquisition into its
business. Depending on the financial results of the next quarter, the Company
may need to renegotiate these covenants with its credit banks.
Over the next four years, the Company plans to invest up to $124
million in capital expenditures to expand and modernize its melting, forging and
finishing equipment, install new or upgrade existing business information
systems and make other investments to maintain its position as a technical
leader. Certain covenants in the Credit Agreement limit the annual amount of
capital expenditures. In addition to planned capital expenditures, the Company
expects to evaluate, from time to time, potential acquisitions. Potential
acquisitions may include investments in companies, technologies or products
which complement the Company's business or products. Sources of funds for such
acquisitions could include funds generated from operations or alternative
sources of debt or equity capital. Certain covenants in the Credit Agreement may
restrict or limit the Company's ability to enter into or complete an
acquisition. Under such circumstances, the Company would need to amend, obtain a
waiver of, or refinance the Credit Agreement. See Item 5(b). "Forward Looking
Statements."
The Company's results for the remainder of 1999 will depend on many
factors. Scheduled facility shutdowns in the third quarter for maintenance and
capital upgrades will limit production. Reduced summer European demand and a
continued slowness in aerospace orders will also limit shipments in the third
quarter.
17
<PAGE>
Although the Company increased all nickel-alloy product prices 5 percent on
August 2, primarily to recover higher nickel and cobalt costs, the Company
believes that there is excess industry capacity relative to near-term demand for
nickel-based alloys. This, coupled with continuing softness in some consumer
markets, will likely impact the Company's revenues and margins into 2000. In
addition, the Company's results for the remainder of 1999 may be impacted by
pricing pressure, increased raw materials costs, weakness in certain markets and
production and delivery issues, such as the possibility of problems in the final
stages of computer software implementation as the Company installs its new
business enterprise system. See Item 5(b). "Forward Looking Statements."
The Company does not expect the future costs of compliance with
currently enacted environmental laws and adopted or proposed regulations to have
a material impact on its liquidity and capital resources. However, the
imposition of more strict standards or requirements under environmental laws and
the possibility of increased enforcement could result in expenditures in excess
of amounts estimated to be required for such matters. See Note 5 to the
unaudited financial statements included in "Item 1. Financial Statements" above
and " - Forward Looking Statements."
The Company expects that cash and cash equivalents on hand, cash flow
from operations and borrowing capacity under the Credit Agreement will be
adequate to meet its anticipated operating requirements, and planned capital
expenditures over the next 12 months. See Item 5(b). "Forward Looking
Statements."
BACKLOG
As of June 30, 1999, the Company's backlog orders aggregated approximately
$230.0 million, compared to approximately $109.0 million at June 30, 1998. The
increase in backlog orders is primarily due to the IAI acquisition, offset in
part by a decrease in backlog for the SMC Premium Alloys Division. This decrease
in backlog of the SMC Premium Alloys Division is principally due to changes in
customer order patterns. The Company defines backlog as firm orders, which are
generally subject to cancellation by the customer. Substantially all orders in
the backlog at June 30, 1999 are expected to be shipped within the next 12
months. Due to the cyclical nature of order entry experienced by the Company and
its dependence on the aerospace industry, there can be no assurance that order
entry will continue at current levels or that current firm purchase orders will
not be canceled or delayed.
INFLATION
Although the Company's sales and results of operations are affected by the
prices of raw materials used to make its products and the cyclicality of the
aerospace industry, the Company does not believe that general economic inflation
has had a material effect on its results of operation for the periods presented.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
programs in the Company's computer systems and plant equipment systems which
contain time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations resulting in disruptions in manufacturing operations or other
normal business activities.
The Company has undertaken multiple projects aimed at replacing its
current management information systems and information technology
infrastructure. However, the Company also believes that modifications to certain
of its process control computers will be required so that they will function
properly with respect to dates in the year 2000 and thereafter. The Company
presently believes that with modifications to existing software and conversions
to new software, the year 2000 issue will not pose significant operational
problems for its information technology systems and process control systems.
However, if such modifications and conversions are not made, or are not
completed timely, a material impact on the operations of the Company could
result.
18
<PAGE>
The Company's plan to resolve the Year 2000 issues in each of its three
principal operating segments is as follows:
SMC PREMIUM ALLOYS DIVISION
The SMC Premium Alloys Division has undertaken a formal program which
encompasses replacing its current management systems with an enterprise-wide
business information system, related upgrades to its information technology
infrastructure and modifications to its manufacturing process control systems.
The division's plan to resolve the Year 2000 issue includes the following four
phases: assessment, remediation, testing, and implementation. To date, the
division has fully completed its assessment of all computer systems and programs
which could be significantly affected by the Year 2000. Appraisal costs were
expensed prior to the division initiating a formal Year 2000 program. Systems
and programs which require modification have been identified and such
modifications and related testing is expected to be substantially completed by
the third quarter of 1999.
In addition to assessing its Year 2000 readiness, the division has
initiated formal communications with its significant suppliers and large
customers to determine the extent to which the division is vulnerable to those
third parties' failure to remediate their own Year 2000 issues. Although less
than 70% of the division's suppliers and customers have responded, no respondent
indicated that they would not be Year 2000 compliant prior to December 31, 1999.
A second appraisal of significant suppliers and customers was conducted during
the second quarter of 1999 with few additional responses received. A telephone
appraisal of significant suppliers and customers is scheduled for the third
quarter of 1999.
INCO ALLOYS NORTH AMERICAN DIVISION
The Inco Alloys North American Division has established a formal
program which encompasses replacing its current management systems with an
enterprise-wide business information system, related replacements and upgrades
to its information technology infrastructure and modifications to manufacturing
process control systems. The division's plan to resolve the Year 2000 issue
involves the following four phases: assessment, remediation, testing, and
implementation. To date, the division has fully completed its assessment of all
computer systems and programs which could be significantly affected by the Year
2000. The division has also identified all software supplied by outside vendors
which is not currently Year 2000 compliant. With respect to such non-compliant
software, the division has acquired the most recent release and is currently
testing such versions for Year 2000 compliance. Systems and programs which
require modification or replacement have been identified and such modifications
and related testing is expected to be substantially completed by the third
quarter of 1999.
In addition to assessing its Year 2000 readiness, the division has
initiated formal communications with its significant suppliers to determine the
extent to which the division is vulnerable to those third parties' failure to
remediate their own Year 2000 issues. Although less than 60% of the division's
suppliers have responded, no respondent indicated that they would not be Year
2000 compliant prior to December 31, 1999. A second appraisal of the division's
significant suppliers is currently underway. The division has not initiated
formal communications with its customers to determine the extent to which the
division is vulnerable to those third parties' failure to remediate their Year
2000 issues.
INCO ALLOYS EUROPEAN DIVISION
The Inco Alloys European Division has established a formal program for
monitoring and measuring Year 2000 readiness which encompasses replacement,
upgrades and modifications to management information systems, information
technology infrastructure, and manufacturing process control systems. The
division's
19
<PAGE>
resolution phases include assessment, remediation, testing and implementation.
The division has established a comprehensive inventory and risk assessment of
computing platforms and programs which require Year 2000 resolution. All
hardware required for stand alone testing of systems has been installed in order
to provide an off-line production testing environment for Year 2000 program
compliance. The division has also identified all software supplied by outside
vendors which is not currently Year 2000 compliant. With respect to such
non-compliant software, the division has acquired the most recent release and is
currently testing such versions for Year 2000 compliance. Systems and programs
which require modification or replacement have been identified and such
modifications and related testing is expected to be substantially completed by
the third quarter of 1999.
During the second quarter of 1999, an independent third party began a
comprehensive review of the division's overall Year 2000 program. The division
has continued to validate information technology compliance, using mainframe
test facilities to simulate support for mission-critical operations.
In addition to assessing its Year 2000 readiness, the division has
initiated formal communications with its significant suppliers and large
customers to determine the extent to which the division is vulnerable to those
third parties' failure to remediate their own Year 2000 issues. Although less
than 80% of the division's suppliers and customers have responded, no respondent
indicated that they would not be Year 2000 compliant prior to December 31, 1999.
The Company's overall Year 2000 project approach and status for each of
the respective divisions is as follows:
<TABLE>
<CAPTION>
($ millions)
Stage Estimated Timetable Total Costs Incurred
Description of Approach of Completion For Completion Budget To Date
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMPUTER SYSTEMS:
Assess systems for possible Year 2000
impact:
SMC Premium Alloys 100% Completed -- --
Inco Alloys North American 100% Completed -- --
Inco Alloys European 100% Completed -- --
Modify or replace non-compliant
systems and test systems with
system clocks set at current date:
SMC Premium Alloys 85% August 31, 1999 $ 6.5 $ 5.0
Inco Alloys North American 80% August 31, 1999 14.0 10.8
Inco Alloys European 90% August 31, 1999 .4 .3
PROCESS CONTROL SYSTEMS:
Computer-dependent process control
systems assessment and compliance
procedures
SMC Premium Alloys 75% September 30, 1999 $ .5 $ .1
Inco Alloys North American 90% November 1, 1999 .1 .5
Inco Alloys European 80% August 31, 1999 .4 .1
</TABLE>
20
<PAGE>
The Company has determined it expects to have no exposure to
contingencies related to the year 2000 issue for the products it has sold. The
Company expects to utilize both internal and external resources to reprogram, or
replace, and test the software for year 2000 modifications. Except as described
above, the Company at this time has no plan to utilize independent verification
and validation processes to assure reliability of risk and cost estimates, nor
does the Company plan to utilize independent third party verification to test
computer systems for Year 2000 compliance. The Company anticipates completing
the year 2000 project in 1999, prior to any anticipated impact on its operating
systems. Maintenance or modification costs will be expensed as incurred, while
the costs of new information technology will be capitalized and amortized in
accordance with Company policy.
The time frame during which the Company believes it will complete the
year 2000 modifications is based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that the estimated time of
completion will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
The Company currently has no formal contingency plan in place in the
event that it does not complete all phases of the Year 2000 program. A committee
is closely monitoring the progress of enterprise and business process risks to
determine whether a formal contingency plan is necessary. Contingency plans will
be developed in parallel with the testing and remediation efforts should they be
required.
The Company believes it has an effective program in place to resolve
the Year 2000 issue in a timely manner. As noted above, the Company has not yet
completed all necessary phases of the Year 2000 program. In the event that the
Company does not complete any additional phases, the Company's ability to take
customer orders, manufacture and ship products, invoice customers or collect
payments could be impaired. In addition, disruptions caused by third-parties or
disruptions in the economy generally resulting from Year 2000 issues could also
materially adversely affect the Company. The amount of potential liability and
lost revenue cannot be reasonably estimated at this time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Item 7A of the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 for a description of Qualitative and Quantitative
Disclosures About Market Risk.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 and to Note 5 of the Notes to Condensed
Consolidated Financial Statements included in Part I of this Report for
descriptions of certain legal and environmental matters.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
21
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on May 28, 1999 (the
"Annual Meeting"). Holders of Common Stock were entitled to elect two directors.
On all matters which came before the Annual Meeting, holders of Common Stock
were entitled to one vote for each share held. Proxies for 15,252,320 of the
15,479,000 shares of Common Stock entitled to vote were received in connection
with the Annual Meeting.
The following table sets forth the names of the two persons elected at the
Annual Meeting to serve as directors until the first annual meeting of
stockholders of the Company following the end of the Company's fiscal year
ending December 31, 2001 and the number of votes cast for, against or withheld
with respect to each person.
Name of Director For Against Withheld
- ---------------- --- ------- --------
Robert D. Halverstadt 15,230,170 0 22,150
Antoine G. Treuille 15,230,170 0 22,150
The following table sets forth certain additional matters which were submitted
to the shareholders for approval at the Annual Meeting and the tabulation of the
votes with respect to each such matter.
Matter For Against Withheld
- ------ --- ------- --------
Approval of Ernst & Young LLP as 15,245,920 2,400 4,000
independent auditors for the Company
for the fiscal year ending
December 31, 1999.
ITEM 5. OTHER INFORMATION
(A) PRESS RELEASES
The Company issued a press release dated August 12, 1999 disclosing certain
information, including certain results of operations and earnings for the fiscal
quarter ended June 30, 1999.
The Company issued a press release dated July 26, 1999 announcing a 5 percent
product price increase for all nickel alloys, effective with shipments August 2,
1999.
(B) FORWARD-LOOKING STATEMENTS
Certain statements in this Report and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases and in oral
statements made by or with the approval of an authorized executive officer of
the Company constitute "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors, which may
cause the actual results, performance or achievements of the Company to be
materially different from those expressed or implied by such forward-looking
statements. Such factors include economic slowdowns and recessions (especially
in the aerospace industry, in which a substantial portion of the Company's
customers are concentrated); the availability and pricing of raw materials used
in the manufacture of the Company's products; the reliable operation of the
Company's manufacturing facilities and
22
<PAGE>
equipment; the Company's ability to evaluate, finance and integrate acquired
businesses, products and companies into the Company's existing business and
operations; the Company's ability to effectively compete in the industries in
which it does business; the Company's ability to successfully negotiate new
labor agreements and otherwise maintain favorable relations with its employees,
a majority of whom are unionized; the Company's ability to comply with existing
and future environmental laws and regulations, the accuracy of its current
estimates of existing environmental liabilities and the possibility that
currently unknown environmental liabilities may be discovered.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27.1 Financial Data Schedule.
(B) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fiscal quarter ended
June 30, 1999.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SPECIAL METALS CORPORATION
Date: August 13, 1999 By: /s/ Donald R. Muzyka
--------------------------------------
Donald R. Muzyka
President and Chief Executive Officer
Date: August 13, 1999 By: /s/ Donald C. Darling
--------------------------------------
Donald C. Darling
Chief Financial Officer and Chief
Accounting Officer
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Financial Statements contained in the Report to which
this schedule relates and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0001028965
<NAME> SPECIAL METALS CORPORATION
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101,283
0
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