SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 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
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
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(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 November 5, 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 SEPTEMBER 30, 1999
INDEX
Page
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30,
1999 and December 31, 1998 2
Condensed Consolidated Statements of Operations and
Retained Earnings for the three months and nine months
ended September 30, 1998 and 1999 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 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 20
Part II. Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
1
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
Special Metals Corporation
Condensed Consolidated Balance Sheets
(Unaudited - In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
-------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 39,622 $ 22,769
Restricted deposits 352 --
Accounts receivable - trade, less allowance for doubtful accounts
of $3,179 in 1998 and $2,965 in 1999 137,634 126,296
Inventories 271,812 278,261
Prepaid expenses and other current assets 16,991 23,551
-------------------------
Total current assets 466,411 450,877
Property, plant and equipment 309,025 297,006
Non-competition agreement, net of accumulated amortization
of $617 in 1998 and $3,392 in 1999 36,383 33,608
Other assets 28,335 38,848
-------------------------
Total assets $ 840,154 $ 820,339
=========================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable - trade $ 46,753 $ 62,315
Accrued liabilities 79,576 66,691
Notes payable 3,163 3,459
Current portion of long-term debt and capital leases 13,155 280,861
-------------------------
Total current liabilities 142,647 413,326
Long-term debt and capital leases 282,792 3,827
Postretirement benefits obligation 188,748 193,611
Other long-term liabilities 16,537 16,098
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 98,071 102,889
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) (5,389)
Retained earnings 37,403 20,110
-------------------------
Total shareholders' equity 111,359 90,588
-------------------------
Total liabilities and shareholders' equity $ 840,154 $ 820,339
=========================
</TABLE>
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 Sept. 30, Nine months ended Sept. 30,
1998 1999 1998 1999
------------------------- --------------------------
<S> <C> <C> <C> <C>
Net sales $ 41,645 $ 139,344 $ 134,688 $ 449,894
Cost of goods sold 33,825 128,377 106,376 410,705
------------------------- --------------------------
7,820 10,967 28,312 39,189
Selling, general and
administrative expenses 1,785 15,210 5,554 45,213
------------------------- --------------------------
Operating income (loss) 6,035 (4,243) 22,758 (6,024)
Interest expense 34 6,108 98 17,471
Interest income (133) (300) (464) (1,165)
Other expense (income) 25 (848) (20) (2,129)
-------------------------- ---------------------------
Income (loss) before income taxes 6,109 (9,203) 23,144 (20,201)
Income tax expense (benefit) 2,020 (3,758) 8,109 (7,726)
-------------------------- ---------------------------
Net income (loss) 4,089 (5,445) 15,035 (12,475)
Accumulated preferred stock dividends -- 1,606 -- 4,818
------------------------- --------------------------
Net income (loss) attributable to
common shareholders 4,089 (7,051) 15,035 (17,293)
Retained earnings
Beginning of period 39,580 27,161 28,634 37,403
------------------------- --------------------------
End of period $ 43,669 $ 20,110 $ 43,669 $ 20,110
========================= ==========================
Net income (loss) per share $ 0.26 $ (0.46) $ 0.97 (1.12)
(Basic and Diluted)
Weighted average shares outstanding 15,479 15,479 15,479 15,479
(Basic and Diluted)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
Special Metals Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited - In thousands)
<TABLE>
<CAPTION>
Nine months ended Sept. 30,
1998 1999
-------------------------
<S> <C> <C>
Operating Activities:
Net income (loss) $ 15,035 $ (12,475)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,910 25,320
Other adjustments and changes in assets and liabilities (8,842) 1,794
-------------------------
Net cash provided by operating activities 9,103 14,639
Investing Activities:
Capital expenditures (8,297) (8,153)
Net change in restricted deposits 76 352
Deferred software and other charges -- (12,569)
Other (1,510) --
-------------------------
Net cash used in investing activities (9,731) (20,370)
Financing Activities:
Repayment of term loans and other long-term debt -- (12,501)
Proceeds from long-term debt -- 2,000
Payments on capital lease obligations (226) (461)
--------------------------
Net cash used in financing activities (226) (10,962)
Net effect of exchange rate changes on cash -- (160)
--------------------------
Net decrease in cash and cash equivalents (854) (16,853)
Cash and cash equivalents at beginning of period 12,237 39,622
-------------------------
Cash and cash equivalents at end of period $ 11,383 $ 22,769
=========================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements
September 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 September 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, September 30,
1998 1999
-------------------------
Raw materials and supplies $ 67,198 $ 64,849
Work-in-process 151,136 141,294
Finished goods 57,478 70,132
-------------------------
275,812 276,275
Adjustment to LIFO cost (4,000) 1,986
-------------------------
$ 271,812 $ 278,261
=========================
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.
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)
September 30, 1999
(Unaudited)
Nine months ended
September 30, 1998
(In thousands, except per share amounts)
----------------------------------------
Net sales $590,593
Net income 18,522
Net income attributable to
common shareholders 13,701
Net income per share:
Basic 0.89
Diluted 0.87
Note 4 - Business Segment Information
Segment information for the nine months ended September 30, 1999 is as follows.
For the nine months ended September 30, 1998, the Company operated as only the
SMC Premium Alloys segment.
<TABLE>
<CAPTION>
Inco
SMC Alloys Inco
Premium North Alloys
Alloys America Europe Corporate Total
---------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Sales to external customers $96,313 $232,398 $121,183 $ -- $449,894
Intersegment sales 14,194 25,654 12,133 -- 51,981
Operating income (loss) 9,791 (15,754) 4,007 (4,068) (6,024)
Interest expense (17,471)
Interest income 1,165
Other income 2,129
--------
Loss before income taxes (20,201)
</TABLE>
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)
September 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 September 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 $2.4 million during the nine months
ended September 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)
September 30, 1999
(Unaudited)
Manganese Exposure Actions. IAII is a defendant in fourteen 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 is
currently negotiating with the DEC concerning the final remedial alternative,
which may include removal of additional PCB-impacted soils. 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. 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)
September 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.
Huntington West Pickle House. The Company expects that the Huntington,
West Virginia facility of IAII will need to install a wet scrubber exhaust
system to remove ammonia vapor directly from an ammonia/water solution tank
within its West Pickle House. The cost is estimated to be between $420,000 and
$470,000 and is expected to be incurred in the first half of 2000.
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 operations or cash flows.
9
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
September 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 nine month periods ended September 30, 1998 and
1999:
<TABLE>
<CAPTION>
Three months ended Sept. 30, Nine months ended Sept. 30,
1998 1999 1998 1999
------------------- -------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 4,089 $ (5,445) $ 15,035 $(12,475)
Preferred stock dividends -- 1,606 -- 4,818
------------------- -------------------
Numerator for basic earnings per share-
income available to common shareholders 4,089 (7,051) 15,035 (17,293)
Effect of dilutive securities - preferred
stock dividends -- -- -- --
------------------- -------------------
Numerator for diluted earnings per
share-income available to common
shareholders after assumed conversions $ 4,089 $ (7,051) $ 15,035 $(17,293)
=================== ===================
Denominator:
Denominator for basic earnings per share-
weighted-average shares outstanding 15,479 15,479 15,479 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 15,479 15,479
=================== ===================
Basic earnings per share $ 0.26 $ (0.46) $ 0.97 $ (1.12)
=================== ===================
Diluted earnings per share $ 0.26 $ (0.46) $ 0.97 $ (1.12)
=================== ===================
</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)
September 30, 1999
(Unaudited)
Note 7 - Comprehensive Income
Comprehensive income (loss) for the three month and nine month periods ended
September 30, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
Three months ended Sept. 30, Nine months ended Sept. 30,
1998 1999 1998 1999
---------------- --------------------
<S> <C> <C> <C> <C>
Net income (loss) $4,089 $(5,445) $15,035 $(12,475)
Change in foreign currency
translation adjustment -- 3,348 -- (3,478)
---------------- --------------------
Comprehensive income (loss) $4,089 $(2,097) $15,035 $(15,953)
================= ====================
</TABLE>
Accumulated other comprehensive income (loss) consists of the following at
December 31, 1998 and September 30, 1999:
December 31, September 30,
1998 1999
--------------------------
Pension adjustment $(1,571) $(1,571)
Foreign currency translation
adjustment (340) (3,818)
--------------------------
Accumulated other comprehensive
income (loss) $(1,911) $(5,389)
==========================
Note 8 - Default Under Credit Agreement
The Company determined and announced on September 27, 1999 that, for the fiscal
quarter ended September 30, 1999, it would not be in compliance with certain
covenants included in its Senior Secured Credit Agreement. As a result, an event
of default has occurred as specified in the Company's Senior Secured Credit
Agreement, and the Company is currently negotiating with Credit Lyonnais and its
bank syndicate to correct this default. Accordingly, the Company has classified
all obligations under the agreement as current in the consolidated balance
sheet.
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
Company's ability to renegotiate its credit agreement with the Company's lenders
or to find an alternative source of liquidity; 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. This
division also includes a network of distribution facilities and service centers
throughout Europe that provide sales and customer services for all three of our
divisions. For the nine months ended September 30, 1999, the SMC Premium Alloys
Division, the Inco Alloys North American Division and the Inco Alloys European
Division accounted for 21%, 52%, and 27% respectively, of the Company's net
sales of $449.9 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 are present 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.
12
<PAGE>
Although the Company increased nickel-alloy product prices on three
occasions during the third quarter of 1999, the Company believes that these
price increases are not keeping up with higher nickel costs, due to a softness
in aerospace and other primary markets.
Export sales represent a significant portion of the Company's business.
During the nine months ended September 30, 1999, sales by domestic businesses of
the Company to purchasers outside of the United States totaled 18%.
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.
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 September 30, 1999,
the Company had open purchase contracts with a notional principal value of
approximately $21.8 million. The fair value of the material covered by these
contracts, based on the September 30, 1999 price quoted on the LME, was
approximately $27.4 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.
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,
for which the Company took a combined pre-tax charge of $1.3 million in the
quarter ended September 30, 1999. This action is expected, long term, to reduce
annual compensation expense by approximately $5 million. For year 2000,
offsetting a significant portion of this savings are expenses related to
transitional staffing and investments being made to further reduce product cycle
times and to improve the strategic planning process. (See Results of
Operations).
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 Sept. 30, Nine months ended Sept. 30,
1998 1999 1998 1999
-------------------- ------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Costs of goods sold 81.2 92.1 79.0 91.3
-------------------- ------------------
Gross profit 18.8 7.9 21.0 8.7
Selling, general and
administrative expenses 4.3 10.9 4.1 10.0
-------------------- ------------------
Operating income (loss) 14.5 (3.0) 16.9 (1.3)
Interest expense .1 4.4 .1 3.9
Interest income (.3) (.2) (.3) (.2)
Other income .1 (.6) (.1) (.5)
-------------------- ------------------
Income (loss) before income taxes 14.6 (6.6) 17.2 (4.5)
Income taxes expense (benefit) 4.8 (2.7) 6.0 (1.7)
-------------------- ------------------
Net income (loss) 9.8% (3.9)% 11.2% (2.8)%
==================== ==================
</TABLE>
Three months ended September 30, 1999 compared with three months ended September
30, 1998.
Net Sales. Net sales increased $97.7 million, or 234.6% from $41.6 million in
the three months ended September 30, 1998 to $139.3 million in the three months
ended September 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 continued softness in the commercial aerospace market and changes
in customer order patterns.
Cost of Goods Sold. Cost of goods sold increased $94.6 million, or 279.5% from
$33.8 million in the three months ended September 30, 1998 to $128.4 million in
the three months ended September 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 81.2% in the three months ended September 30, 1998 to 92.1% in
the three months ended September 30, 1999.
Gross Profit. Gross profit increased $3.1 million, or 40.2% from $7.9 million in
the three months ended September 30, 1998 to $11.0 million in the three months
ended September 30, 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $13.4 million, from $1.8 million in the three
months ended September 30, 1998 to $15.2 million in the three months ended
September 30, 1999. This increase is principally the consequence of including
results of operations for IAI. In addition, the Company recorded a one-time
charge of approximately $1.3 million for costs associated with salaried
workforce reductions in its' Huntington, West Virginia facility. Selling,
general and administrative expenses as a percentage of net sales increased from
4.3% in the three months ended September 30, 1998 to 10.9% in the three months
ended September 30, 1999.
Operating Income (Loss). Operating income (loss) decreased $10.2 million, or
170.3% from $6.0 million in the three months ended September 30, 1998 to $(4.2)
million in the three months ended September 30, 1999. Operating income (loss) as
a percentage of net sales decreased from 14.5% in the three months ended
September 30, 1998 to (3.0)% in the three months ended September 30, 1999.
14
<PAGE>
Interest Expense. Interest expense increased $6.1 million from zero in the three
months ended September 30, 1998 to $6.1 million in the three months ended
September 30, 1999. This increase was due to the increase in indebtedness in
connection with the Acquisition.
Income Taxes. Income tax expense decreased $5.8 million from an expense of $2.0
million in the three months ended September 30, 1998 to a benefit of $(3.8)
million in three months ended September 30, 1999. The decrease is due to the
decrease in operating income and increase in interest expense.
Net Income (Loss). Net income (loss) decreased $9.5 million, or 233.2% from $4.1
million in the three months ended September 30, 1998 to $(5.4) million in the
three months ended September 30, 1999. Net income (loss) as a percentage of net
sales decreased from 9.8% in the three months ended September 30, 1998 to (3.9)%
in the three months ended September 30, 1999.
Nine months ended September 30, 1999 compared with nine months ended September
30, 1998.
Net Sales. Net sales increased $315.2 million, or 234.0% from $134.7 million in
the nine months ended September 30, 1998 to $449.9 million in the nine months
ended September 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 continued softness in the commercial aerospace market and changes
in customer order patterns.
Cost of Goods Sold. Cost of goods sold increased $304.3 million, or 286.1% from
$106.4 million in the nine months ended September 30, 1998 to $410.7 million in
the nine months ended September 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 79.0% in the nine months ended September 30, 1998 to 91.3% in the
nine months ended September 30, 1999.
Gross Profit. Gross profit increased $10.9 million, or 38.4% from $28.3 million
in the nine months ended September 30, 1998 to $39.2 million in the nine months
ended September 30, 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $39.7 million, from $5.5 million in the nine
months ended September 30, 1998 to $45.2 million in the nine months ended
September 30, 1999. This increase is principally the consequence of including
results of operations for IAI. In addition, the Company recorded a one-time
charge of approximately $1.3 million for costs associated with salaried
workforce reductions in its' Huntington, West Virginia facility. Selling,
general and administrative expenses as a percentage of net sales increased from
4.1% in the nine months ended September 30, 1998 to 10.0% in the nine months
ended September 30, 1999.
Operating Income (Loss). Operating income (loss) decreased $28.8 million, or
126.5% from $22.8 million in the nine months ended September 30, 1998 to $(6.0)
million in the nine months ended September 30, 1999. Operating income (loss) as
a percentage of net sales decreased from 16.9% in the nine months ended
September 30, 1998 to (1.3)% in the nine months ended September 30, 1999.
Interest Expense. Interest expense increased $17.4 million from $.1 million in
the nine months ended September 30, 1998 to $17.5 million in the nine months
ended September 30, 1999. This increase was due to the increase in indebtedness
in connection with the Acquisition.
Income Taxes. Income tax expense decreased $15.8 million from an expense of $8.1
million in the nine months ended September 30, 1998 to a benefit of $(7.7)
million in the nine months ended September 30, 1999. The decrease is due to the
decrease in operating income and increase in interest expense. The effective
income tax rate increased from 35.0% in the nine months ended September 30, 1998
to 38.2% in the nine months ended September 30, 1999.
15
<PAGE>
Net Income (Loss). Net income (loss) decreased $27.5 million, or 183.0% from
$15.0 million in the nine months ended September 30, 1998 to $(12.5) million in
the nine months ended September 30, 1999. Net income (loss) as a percentage of
net sales decreased from 11.2% in the nine months ended September 30, 1998 to
(2.8)% in the nine months ended September 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.
The Company determined and announced on September 27, 1999 that, for the
quarter ended September 30, 1999, it would not be in compliance with one or more
EBITDA-related covenants included in its Senior Secured Credit Agreement with
Credit Lyonnais, as agent, and other financial institutions. The Company has
notified Credit Lyonnais and its bank syndicate with respect to this
non-compliance, and is currently negotiating with the banks to resolve this
event of default. As a result of this non-compliance, the banks have notified
the Company that, until this matter is resolved, the Company will be prohibited
from borrowing any additional amounts under the revolving credit facility. As of
September 30, 1999, the Company's total outstanding debt under the credit
facility was $280 million. The banks have indicated that some form of
subordinated debt or equity infusion will be required to cure the default. The
Company continues to review additional financing alternatives. However,
negotiations with the banks continue, and the Company is not able to accurately
predict what the ultimate resolution of this matter will be. The Company
believes it has sufficient working capital to generate funds to operate its
business while it renegotiates its credit facility.
Net cash provided by operating activities was $9.1 million and $14.6
million for the nine months ended September 30, 1998 and 1999, respectively.
Capital expenditures were $8.3 million and $8.2 million for the nine
months ended September 30, 1998 and 1999, respectively.
The Company's ability to fund current operating requirements and planned
capital expenditures over the next twelve months and beyond is significantly
dependent upon its ability to favorably resolve the current default under the
Credit Agreement. See Item 5(b). "Forward Looking Statements."
Over the next four years, the Company has 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. However, 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 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."
16
<PAGE>
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."
Backlog
As of September 30, 1999, the Company's backlog orders aggregated approximately
$204.4 million, compared to approximately $126.5 million at September 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 September 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 that use two
digits rather than four to define the applicable year. Computer programs in the
Company's computer systems and plant equipment systems that contain
date-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 some 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 management information systems, 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.
The Company's plan to resolve the Year 2000 issues in each of its three
principal operating segments is as follows:
17
<PAGE>
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 that require modification have been identified and such
modifications and related testing is substantially completed. The Company's
metallographic, mechanical testing, and certification systems have been
remediated and are currently being transferred to a compliant mainframe computer
in the Company's Huntington, West Virginia facility and is expected to be
completed by December 1, 1999. In addition, the Company's facility in Princeton,
Kentucky is implementing a business information system which is expected to be
substantially completed by December 1, 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.
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 that
require modification or replacement have been identified and such modifications
and related testing is expected to be substantially completed by December 1,
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 60% of the division's suppliers and less than 70% of its large customers
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 was conducted in the third quarter of 1999 with minimal
additional responses received.
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 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.
18
<PAGE>
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
that require modification or replacement have been identified and such
modifications and related testing is expected to be substantially completed by
December 1, 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 received a draft report from the independent third party for review, which
outlines the division's Year 2000 project scope and current status. Final
recommendations from the Year 2000 review will be published in the fourth
quarter of 1999. 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 large 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 95% December 1, 1999 $ 6.5 $ 6.1
Inco Alloys North American 95% December 1, 1999 14.0 16.3
Inco Alloys European 95% December 1, 1999 .4 .3
Process Control Systems:
Computer-dependent process
control systems assessment and
compliance procedures
SMC Premium Alloys 100% Completed $ .5 $ .2
Inco Alloys North American 95% December 1, 1999 .1 .5
Inco Alloys European 95% December 1, 1999 .4 .2
</TABLE>
19
<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 is currently developing a formal contingency plan should
unplanned situations arise as a result of January 1, 2000. Contingency plans are
necessary to ensure that risks associated with Year 2000 are mitigated. A
contingency planning guideline will be established for all Company operating
organizations and affiliates to address critical departmental requirements for
responding to the loss or degradation of systems or services due to Year 2000
issues. The contingency plan involves the preparation and implementation of
alternative work processes which may include manual solutions and/or the use of
alternate compliant business systems located in another Company division. The
Company plans to complete risk assessment and contingency plans during the
fourth quarter of 1999. In addition, the Company has engaged external
consultants to facilitate and benchmark the progress of its Year 2000
contingency planning.
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 all necessary 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 Quantitative and Qualitative
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.
20
<PAGE>
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
The Company has notified Credit Lyonnais and its bank syndicate that for the
quarter ended September 30, 1999, it would not be in compliance with one or more
EBITDA-related covenants included in its credit facility. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources")
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
(a) Press Releases
The Company issued a press release dated November 11, 1999 disclosing, among
other things, certain results of operations and earnings for the fiscal quarter
ended September 30, 1999 and nine months ended September 30, 1999.
The Company issued a press release dated November 1, 1999 announcing a 7 percent
across-the-board price increase for all nickel-alloy products, effective with
orders placed as of November 15, 1999.
The Company issued a press release dated October 18, 1999 announcing the
appointment of James M. Hensler to the position of Vice President of
Manufacturing - Special Metals Huntington Alloys.
The Company issued a press release dated September 27, 1999 announcing that it
intends to commence negotiations with its credit banks to amend the terms of its
$375 million credit facility.
The Company issued a press release dated September 3, 1999 announcing a 5
percent product price increase for all flat rolled nickel-alloys, effective with
shipments September 13, 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 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 successfully negotiate a resolution to the current event of
default under the Company's Credit Agreement, and the Company's ability to
comply, in the future, with the covenants included in the Credit Agreement; and
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.
21
<PAGE>
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
September 30, 1999.
22
<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: November 15, 1999 By: /s/ Donald R. Muzyka
----------------------------------------
Donald R. Muzyka
President and Chief Executive Officer
Date: November 15, 1999 By: /s/ Donald C. Darling
----------------------------------------
Donald C. Darling
Chief Financial Officer and Chief
Accounting Officer
23
<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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 22,769
<SECURITIES> 0
<RECEIVABLES> 129,261
<ALLOWANCES> (2,965)
<INVENTORY> 278,261
<CURRENT-ASSETS> 450,877
<PP&E> 363,815
<DEPRECIATION> (66,809)
<TOTAL-ASSETS> 820,339
<CURRENT-LIABILITIES> 413,326
<BONDS> 3,827
102,889
0
<COMMON> 155
<OTHER-SE> 90,433
<TOTAL-LIABILITY-AND-EQUITY> 820,339
<SALES> 449,894
<TOTAL-REVENUES> 449,894
<CGS> 410,705
<TOTAL-COSTS> 410,705
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,471
<INCOME-PRETAX> (20,201)
<INCOME-TAX> (7,726)
<INCOME-CONTINUING> (12,475)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,475)
<EPS-BASIC> (1.12)
<EPS-DILUTED> (1.12)
</TABLE>
