SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file 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 Middle Settlement Road
New Hartford, NY 13413
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(315) 798-2900
--------------
(Registrant's telephone number, including area code)
Not Applicable
----------------------------------------------------
(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 March 31, 2000, 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 MARCH 31, 2000
INDEX
Page
----
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2000 2
and December 31, 1999
Condensed Consolidated Statements of Operations and Retained Earnings
(Accumulated Deficit) for the three months ended March 31, 1999 and
2000 3
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 2000 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Part II. Other Information
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
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, March 31,
1999 2000
--------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 9,064 $ 8,344
Accounts receivable - trade, less allowance for doubtful accounts
of $2,894 in 1999 and $2,760 in 2000 133,172 156,899
Inventories 262,474 272,713
Prepaid expenses and other current assets 25,746 29,091
--------------------------
Total current assets 430,456 467,047
Property, plant and equipment 278,503 271,181
Non-competition agreement, net of accumulated amortization
of $4,317 in 1999 and $5,242 in 2000 32,683 31,758
Other assets 69,645 70,872
--------------------------
Total assets $ 811,287 $ 840,858
==========================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 66,042 $ 75,484
Accrued liabilities 55,611 57,421
Notes payable 3,725 3,144
Current portion of long-term debt and capital lease obligations 21,356 23,845
--------------------------
Total current liabilities 146,734 159,894
Long-term debt and capital lease obligations 259,035 260,306
Subordinated notes payable to affiliate 5,000 27,330
Postretirement benefits obligation 194,524 196,351
Other long-term liabilities 25,223 25,153
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 104,494 106,466
Shareholders' equity:
Common stock, $0.01 par value, 35,000,000 shares authorized, 155 155
15,479,000 shares issued and outstanding
Paid-in surplus 75,712 75,712
Accumulated other comprehensive loss (5,260) (6,412)
Retained earnings (accumulated deficit) 5,670 (4,097)
--------------------------
Total shareholders' equity 76,277 65,358
--------------------------
Total liabilities and shareholders' equity $ 811,287 $ 840,858
==========================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
Special Metals Corporation
Condensed Consolidated Statements of Operations and Retained Earnings
(Accumulated Deficit)
(Unaudited - In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended March 31,
1999 2000
--------------------------------
<S> <C> <C>
Net sales $ 151,708 $ 175,081
Cost of goods sold 151,172 175,048
--------------------------------
536 33
Selling, general and administrative expenses 6,922 7,082
--------------------------------
Operating loss (6,386) (7,049)
Interest income (570) (313)
Interest expense 5,669 7,100
Other income (405) (754)
--------------------------------
Loss before income taxes (11,080) (13,082)
Income tax benefit (4,387) (5,287)
--------------------------------
Net loss (6,693) (7,795)
Accumulated preferred stock dividends 1,606 1,972
--------------------------------
Net loss attributable to common shareholders (8,299) (9,767)
--------------------------------
Retained earnings (accumulated deficit)
Beginning of period 37,403 5,670
--------------------------------
End of period $ 29,104 $ (4,097)
================================
Net loss per share (Basic and Dilutive) $ (0.54) $ (0.63)
================================
Weighted average shares outstanding (Basic and Dilutive) 15,479 15,479
================================
</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>
Three months ended March 31,
1999 2000
-----------------------------
<S> <C> <C>
Operating Activities:
Net loss $ (6,693) $ (7,795)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 8,218 10,187
Other adjustments and changes in assets and liabilities 9,087 (27,137)
-----------------------------
Net cash provided by (used in) operating activities 10,612 (24,745)
Investing Activities:
Capital expenditures (2,726) (700)
Other 352 (640)
-----------------------------
Net cash used in investing activities (2,374) (1,340)
Financing Activities:
Proceeds from (repayment of) term loans and other long-term debt (4,178) 3,459
Proceeds from subordinated notes payable - 22,330
Financing and other deferred costs (37) (204)
Payments on capital lease obligations (152) (177)
-----------------------------
Net cash provided by (used in) financing activities (4,367) 25,408
Net effect of exchange rate changes on cash (994) (43)
-----------------------------
Net increase (decrease) in cash and cash equivalents 2,877 (720)
Cash and cash equivalents at beginning of period 39,622 9,064
-----------------------------
Cash and cash equivalents at end of period $ 42,499 $ 8,344
=============================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements
March 31, 2000
(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 March 31, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000.
Certain reclassifications have been made within the 1999 financial statements to
conform to the 2000 presentation.
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, 1999.
Note 2 - Inventories
Inventories consist of the following (in thousands):
December 31, March 31,
1999 2000
------------------------------
Raw materials and supplies $ 65,167 $ 70,997
Work-in-process 133,436 142,029
Finished goods 73,955 79,078
------------------------------
272,558 292,104
Adjustment to LIFO cost (10,084) (19,391)
------------------------------
$ 262,474 $ 272,713
==============================
5
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
March 31, 2000
(Unaudited)
Note 3 - Business Segment Information
Segment information for the three months ended March 31, 2000 and 1999 is as
follows.
<TABLE>
<CAPTION>
Premium Huntington Wiggin
Alloys Alloys Alloys Corporate Total
----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
1999
Sales to external customers $ 37,731 $ 68,641 $ 45,336 $ - $ 151,708
Intersegment sales 1,934 8,286 4,244 - 14,464
Operating income (loss) 6,497 (12,965) 1,418 (1,336) (6,386)
Interest expense (5,669)
Interest income 570
Other income 405
--------
Loss before income taxes (11,080)
2000
Sales to external customers $ 43,627 $ 88,256 $ 43,198 $ - $ 175,081
Intersegment sales 4,187 14,791 4,436 - 23,414
Operating income (loss) 4,025 (10,851) 1,896 (2,119) (7,049)
Interest expense (7,100)
Interest income 313
Other income 754
--------
Loss before income taxes (13,082)
</TABLE>
6
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
March 31, 2000
(Unaudited)
Note 4 - 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 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 March 31, 2000, 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. The Company's 2000 capital budget provides $2.7 million for
environmental protection and compliance matters. The Company incurred capital
expenditures for environmental matters of $0.5 million during the three months
ended March 31, 2000. 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.
7
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
March 31, 2000
(Unaudited)
The following is a summary of the more significant environmental matters or
proceedings in which the Company is currently involved:
Asbestos Exposure Actions. Huntington Alloys, a domestic subsidiary of
the Company ("Huntington"), is a co-defendant in various consolidated and
unconsolidated actions by plaintiffs, including former employees of Huntington
and former employees of contractors to Huntington, alleging exposure to asbestos
at the Company's Huntington, West Virginia facility. Plaintiffs' counsel have
also informed Huntington 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 Huntington 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.
Manganese Exposure Actions. Huntington is a defendant in sixteen
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 the Company's Huntington, West Virginia facility, while an employee of the
Huntington Sanitary Board. 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 Department of Environmental Conservation (the "DEC") 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. The Company is currently awaiting DEC approval
of the remedial alternative, which will include removal of PCB-impacted soils.
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 $70,000 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. In July of 1999, the DEC decided
not to pursue further at that time its request for the Company to undertake
biota sampling. The DEC retains the right to sample biota. The DEC may renew its
request for the inclusion of biota sampling in the post-closure operations and
maintenance plan.
8
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
March 31, 2000
(Unaudited)
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 flows, this possibility cannot be
excluded.
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 Huntington 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. The division has requested a voluntary
site investigation including subsurface soil sampling and groundwater
monitoring. If such investigation is ultimately required in Huntington, and when
such is required/undertaken 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 Huntington 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 approximately $500,000
and is expected to be incurred in calendar year 2000.
Pennsauken Landfill / Puchack Well Field. The Company recently received
notice that Huntington has been named as a third-party defendant in a lawsuit
filed in New Jersey Superior Court (the "Pennsauken Action"). The plaintiffs in
the Pennsauken Action, the Township of Pennsauken and the Pennsauken Solid Waste
Management Authority, filed the Pennsauken Action in 1991 against various
defendants seeking to hold the defendants liable for the costs of remediation of
the Pennsauken Landfill, the Puchack Well Field and/or surrounding areas. In
September of 1999, two defendants in the Pennsauken Action filed a third-party
complaint against numerous third-party defendants, one of which is Huntington.
Several of the named third-party defendants, including Huntington, had
previously been PRP's at a nearby Superfund site known as the Swope Oil Field.
9
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
March 31, 2000
(Unaudited)
Huntington was a de minimis participant in the Swope Oil Field site and
has, to date, paid less than $70,000 for its share of the remediation.
The third-party complaint in the Pennsauken Action alleges that
contamination at the Swope Oil Field migrated via groundwater to the Pennsauken
Landfill, the Puchack Well Field and/or surrounding areas. The third-party
plaintiffs assert that if they are found to be liable for remediation of those
sites, Huntington and the other third-party defendants which are PRP's at the
Swope Oil Field are in turn liable to the third-party plaintiffs. Huntington has
filed an answer to the third-party complaint. Additionally, a motion has been
filed to have the claims against Huntington and the other Swope third-party
defendants either dismissed without prejudice or severed and stayed, pending the
resolution of the underlying action. This motion is under consideration by the
court. The Company is still in the preliminary stages of investigating the claim
against it. It is not possible at this time to provide a reasonable estimate of
the cost of any investigative or remedial work which may be required, or
Huntington's share.
Wiggin Tube Degreaser. A United Kingdom subsidiary (Special Metals
Wiggin Ltd., "Wiggin") may be required to make an expenditure of approximately
$3.2 million to upgrade its degreasing operations at its facility in Hereford,
England in order to reduce emissions of volatile organic compounds. This
expenditure is unlikely to be incurred before 2003.
Wiggin Electrical Switchgear. The Company expects that the Hereford,
England facility of Wiggin will need to institute a phased program over ten
years to replace its electrical switchgear, including oil-filled manual direct
switchgear, air breakers and all other oil-filled switchgear. The cost of the
program to replace the oil-filled manual direct switches is estimated to be
approximately $0.7 million over the next two years. The cost of a program to
replace the remainder of the electrical switchgear is estimated to be
approximately $4.6 million, to be incurred during the period from 2002 through
2009.
Wiggin Water Drainage Arrangements. The Environment Agency has informed
Wiggin that they are considering improvements for the water drainage
arrangements at the Hereford, England facility of Wiggin. They may require that
Wiggin separate their process and storm water drainage systems.
Consent Order - New Hartford. The New York State Department of
Environmental Conservation has alleged that the Company's New Hartford facility
has violated certain regulations pertaining to hazardous waste management
promulgated under the authority of Environmental Conservation Law Article 27,
Title a. The department is seeking a penalty for the cited violation in the
amount of $54,500. The violations pertain to a number of matters including a
fire and a RCRA inspection.
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.
10
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
March 31, 2000
(Unaudited)
Inco
The Company has filed a lawsuit against Inco Limited ("Inco") and
certain of Inco's subsidiaries (the "Sellers"), alleging that they made
fraudulent and negligent misrepresentations in connection with the IAI
Acquisition and that the Sellers breached the terms of the Stock Purchase
Agreement. The Sellers have moved to dismiss the lawsuit, and the motion is
pending before the court. The Sellers have advised the Company that in the event
the court denies their motion to dismiss, they intend to file a counterclaim
against the Company seeking in excess of $12 million, which the Seller's claim
is owed by the Company under the terms of the Stock Purchase Agreement. The
Company has established a reserve of $12 million for the Seller's potential
counterclaim, although the Company intends to vigorously defend against such a
counterclaim if, in fact, it is filed. Because of the preliminary nature of the
lawsuit, it is not possible at this time to know if the Company may ultimately
be required to pay any or all of the amount sought by the Sellers.
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.
11
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
March 31, 2000
(Unaudited)
Note 5 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share for the three month periods ended March 31, 1999 and 2000:
<TABLE>
<CAPTION>
1999 2000
(In thousands, except per share amounts)
----------------------------------------
<S> <C> <C>
Numerator:
Net loss $ (6,693) $ (7,795)
Preferred stock dividends 1,606 1,972
----------------------------------------
Numerator for basic earnings per share -
loss available to common shareholders (8,299) (9,767)
Effect of dilutive securities -
preferred stock dividends - -
----------------------------------------
Numerator for diluted earnings per share - loss
available to common shareholders after
assumed conversions $ (8,299) $ (9,767)
========================================
Denominator:
Denominator for basic earnings per share -
weighted-average shares outstanding 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
========================================
Basic earnings per share $ (0.54) $ (0.63)
========================================
Diluted earnings per share $ (0.54) $ (0.63)
========================================
</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.
12
<PAGE>
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
March 31, 2000
(Unaudited)
Note 6 - Comprehensive Loss
Comprehensive loss for the three month periods ended March 31, 1999 and 2000
consisted of the following:
1999 2000
----------------------
(In thousands)
Net loss $ (6,693) $ (7,795)
Change in foreign currency translation adjustment (4,017) (1,152)
----------------------
Comprehensive loss $(10,710) $ (8,947)
======================
Accumulated other comprehensive loss consists of the following at December 31,
1999 and March 31, 2000:
1999 2000
----------------------
(In thousands)
Pension adjustment $ (11) $ (11)
Foreign currency translation adjustment $ (5,249) $ (6,401)
----------------------
Accumulated other comprehensive loss $ (5,260) $ (6,412)
13
<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 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 Huntington Alloys 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
Wiggin Alloys 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 three months ended March 31, 2000, the
Premium Alloys Division, the Huntington Alloys Division, and the Wiggin Alloys
Division accounted for 24.9%, 50.4%, and 24.7% respectively, of the Company's
net sales of $175.1 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 three months ended March 31, 2000, sales by domestic businesses of
the Company to purchasers outside of the United States totaled 18.2%.
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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 March 31, 2000, the
Company had open purchase contracts, none of which are expected to be settled in
cash, with a notional principal value of approximately $36.2 million. The fair
value of the material covered by these contracts, based on the March 31, 2000
price quoted on the LME, was approximately $46.1 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, and general corporate administration.
The Company recently completed an analysis of the cost structure of its
Huntington Alloys and Wiggin Alloys Divisions which became a part of Special
Metals as a result of the October 28, 1998 acquisition. As a result of this
analysis, the Company has determined that there were differences between the
Huntington Alloys, Wiggin Alloys and Premium Alloys divisions, with respect to
classification of certain costs. As such, it was determined that certain costs
previously classified under selling, general and administrative expense in the
acquired divisions should more appropriately be classified as cost of goods
sold. For comparative purposes, the Company has revised the 1999 financial
statements to conform to this presentation.
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Results of Operations
The following table sets forth, for the periods indicated, statement of
operations data as a percentage of net sales.
Three months ended
March 31,
1999 2000
----- -----
Net sales 100.0% 100.0%
Costs of goods sold 99.6 100.0
----- -----
Gross profit .4 .0
Selling, general and administrative expenses 4.6 4.0
----- -----
Operating loss (4.2) (4.0)
Interest income (.4) (.2)
Interest expense 3.8 4.1
Other income (.3) (.4)
Loss before income taxes (7.3) (7.5)
----- -----
Income tax benefit (2.9) (3.0)
===== =====
Net loss (4.4) (4.5)
===== =====
Three months ended March 31, 2000 compared with three months ended March 31,
1999.
Net Sales.
Premium Alloys. Net sales increased $5.9 million, or 15.6% from $37.7
million in the three months ended March 31, 1999 to $43.6 million in the three
months ended March 31, 2000. This increase in sales is primarily attributable to
increased sales volumes for high performance metals in the commercial aerospace
market, offset in part by lower average realized selling prices.
Huntington Alloys. Net sales increased $19.6 million, or 28.6% from
$68.7 million in the three months ended March 31, 1999 to $88.3 million in the
three months ended March 31, 2000. This increase in sales may be primarily
attributed to increased sales volumes for high performance metals in the
power/pollution control market, offset in part by lower average realized selling
prices.
Wiggin Alloys. Net sales decreased $2.1 million, or 4.7% from $45.3
million in the three months ended March 31, 1999 to $43.2 million in the three
months ended March 31, 2000. This decrease in sales may be primarily attributed
to reduced sales volumes for high performance metals and lower average realized
selling prices.
Cost of Goods Sold.
Premium Alloys. Cost of goods sold increased $8.0 million, or 27.0%
from $29.5 million in the three months ended March 31, 1999 to $37.5 million in
the three months ended March 31, 2000. As a percentage of net sales, cost of
goods sold increased from 78.3% in the three months ended March 31, 1999 to
86.0% for the three months ended March 31, 2000, primarily as a result of lower
average selling prices and higher raw material costs, principally nickel.
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Huntington Alloys. Cost of goods sold increased $18.3 million, or 23.8%
from $77.2 million in the three months ended March 31, 1999 to $95.5 million in
the three months ended March 31, 2000. As a percentage of net sales, cost of
goods sold decreased from 112.4% in the three months ended March 31, 1999 to
108.2% in the three months ended March 31, 2000, primarily as a result of fixed
costs being absorbed over a higher volume of sales.
Wiggin Alloys. Cost of goods sold decreased $2.5 million, or 5.8% from
$43.1 million in the three months ended March 31, 1999 to $40.6 million in the
three months ended March 31, 2000. As a percentage of net sales, cost of goods
sold decreased from 95.1% in the three months ended March 31, 1999 to 94.1% in
the three months ended March 31, 2000, primarily as a result of efficiencies
gained through cost reduction programs.
Corporate. Cost of goods sold not allocated to an operating segment
were $1.4 million in the three months ended March 31, 1999 and three months
ended March 31, 2000. Cost of goods sold included in this category consists
principally of the amortization of deferred financing costs and amortization of
the covenant not to compete and certain other costs associated with the IAI
acquisition.
Gross Profit (Loss).
Premium Alloys. Gross profit (loss) decreased $2.1 million, or 25.4%
from $8.2 million in the three months ended March 31, 1999 to $6.1 million in
the three months ended March 31, 2000.
Huntington Alloys. Gross profit (loss) decreased $(1.3) million, or
15.0% from $(8.5) million in the three months ended March 31, 1999 to $(7.2)
million in the three months ended March 31, 2000.
Wiggin Alloys. Gross profit (loss) increased $0.4 million, or 16.3%
from $2.2 million in the three months ended March 31, 1999 to $2.6 million in
the three months ended March 31, 2000.
Selling, General and Administrative.
Premium Alloys. Selling, general and administrative expenses increased
$0.4 million, or 23.2% from $1.7 million in the three months ended March 31,
1999 to $2.1 million in the three months ended March 31, 2000 as a result of
increased professional services and consulting expenditures. Selling, general
and administrative expenses as a percentage of net sales increased from 4.5% in
the three months ended March 31, 1999 to 4.8% in the three months ended March
31, 2000.
Huntington Alloys. Selling, general and administrative expenses
decreased $0.8 million, or 18.8% from $4.4 million in the three months ended
March 31, 1999 to $3.6 million in the three months ended March 31, 2000 as a
result of reduced sales and marketing expenditures. Selling, general and
administrative expenses as a percentage of net sales decreased from 6.5% in the
three months ended March 31, 1999 to 4.1% in the three months ended March 31,
2000.
Wiggin Alloys. Selling, general and administrative expenses decreased
$0.1 million, or 15.0% from $0.8 million in the three months ended March 31,
1999 to $0.7 million in the three months ended March 31, 2000 as a result of
reduced sales and marketing expenditures. Selling, general and administrative
expenses as a percentage of net sales decreased from 1.7% in the three months
ended March 31, 1999 to 1.5% in the three months ended March 31, 2000.
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<PAGE>
Corporate. Selling, general and administrative expenses not allocated
to an operating segment increased $0.7 million from zero in the three months
ended March 31, 1999 to $0.7 in the three months ended March 31, 2000 as a
result of consulting expenditures incurred.
Operating Income (Loss).
Premium Alloys. Operating income (loss) decreased $2.5 million, or
38.0% from $6.5 million in the three months ended March 31, 1999 to $4.0 million
in the three months ended March 31, 2000. Operating income (loss) as a
percentage of net sales decreased from 17.2% in the three months ended March 31,
1999 to 9.2% in the three months ended March 31, 2000.
Huntington Alloys. Operating income (loss) decreased $(2.1) million, or
16.3% from $(13.0) million in the three months ended March 31, 1999 to $(10.9)
million in the three months ended March 31, 2000. Operating income (loss) as a
percentage of net sales decreased from (18.9)% in the three months ended March
31, 1999 to (12.3)% in the three months ended March 31, 2000.
Wiggin Alloys. Operating income (loss) increased $0.5 million, or 33.6%
from $1.4 million in the three months ended March 31, 1999 to $1.9 million in
the three months ended March 31, 2000. Operating income (loss) as a percentage
of net sales increased from 3.1% in the three months ended March 31, 1999 to
4.4% in the three months ended March 31, 2000.
Interest Expense.
Interest expense increased $1.4 million, or 25.2% from $5.7 million in
the three months ended March 31, 1999 to $7.1 million in the three months ended
March 31, 2000, primarily due to an increase in indebtedness and interest rates.
Income Taxes (Benefit).
Income tax benefit increased $(0.9) million, or 20.5% from $(4.4)
million in the three months ended March 31, 1999 to $(5.3) million in the three
months ended March 31, 2000, primarily due to the decrease in operating income
and the increase in interest expense. The effective tax rate increased from
39.6% in the three months ended March 31, 1999 to 40.4% in the three months
ended March 31, 2000.
Net Income (Loss).
Net loss increased $(1.1) million, or 16.5% from $(6.7) million in the
three months ended March 31, 1999 to $(7.8) million in the three months ended
March 31, 2000. Net loss as a percentage of net sales increased from (4.4)% in
the three months ended March 31, 1999 to (4.5)% in the three months ended March
31, 2000.
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.
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<PAGE>
Net cash provided by (used in) operating activities was $10.6 million
and $(24.7) million for the three months ended March 31, 1999 and 2000,
respectively. Net cash used in operating activities for the three months ended
March 31, 2000 increased primarily as the result of investment in working
capital.
Capital expenditures were $2.7 million and $0.7 million for the three
months ended March 31, 1999 and 2000, respectively.
The Company's principal sources of funds are (i) funds generated from
operations; (ii) borrowings under the Company's Senior Secured Credit Agreement
with Credit Lyonnais, as agent, and other financial institutions (the "Credit
Agreement"), which the Company entered into in connection with the Acquisition;
and (iii) borrowings under the Company's Subordinated Loan Agreement (the
"Subordinated Loan Agreement") with Societe Industrielle de Materiaux Avances
("SIMA").
The Credit Agreement provides for two term loans (the "Tranche A Term
Loan" and the "Tranche B Term Loan," collectively, the "Term Loans") and a $100
million revolving credit and letter of credit facility (the "Revolving Credit
Facility"). Proceeds from the Term Loans and a portion of the Revolving Credit
Facility were used to finance a portion of the purchase price of the IAI
acquisition.
Under the Revolving Credit Facility, the Company can borrow, repay and
re-borrow from time to time up to $100 million in the aggregate, subject to
certain restrictions described below. The amount the Company may borrow under
the Revolving Credit Facility is reduced by the aggregate amount of any letters
of credit issued for the account of the Company. The Revolving Credit Facility
terminates on October 28, 2003.
Pursuant to an amendment to the Credit Agreement dated as of March 31,
1999 (the "First Amendment"), amounts outstanding on the Tranche A Term Loan and
amounts outstanding under the Revolving Credit Facility bear interest at the
Company's option at (i) a base rate, which is the higher of the bank's
short-term commercial reference rate or the Federal Funds rate plus .50%, plus a
margin of zero to 1.50% depending on the Company's leverage ratio or (ii) the
Eurodollar rate, which is the reserve adjusted New York interbank offered rate,
plus a margin of 0.75% to 2.75% depending on the Company's leverage ratio. The
applicable margins for amounts outstanding on the Tranche B Term Loan are (i)
for base rate loans, either 1.50% or 2.00% depending on the Company's leverage
ratio and (ii) for Eurodollar rate loans, 2.75% or 3.25% depending 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 through 2003 and the Tranche B Term Loan is scheduled to be repaid
in quarterly installments through 2005 as follows (in thousands):
Tranche A Tranche B
Year Term Loan Term Loan Total
---- --------- --------- -----
2000 (remainder of 2000) $ 14,794 $ 1,706 $ 16,500
2001 27,500 1,000 28,500
2002 36,250 1,000 37,250
2003 28,956 12,625 41,581
2004 - 47,500 47,500
2005 - 34,669 34,669
The Company has made all scheduled repayments that have come due.
The Company is required to prepay amounts outstanding under the Credit
Agreement out of the excess cash flow of the Company. Excess cash flow is
defined as consolidated earnings before interest, taxes, depreciation and
amortization ("EBITDA"), minus the sum of debt service for the year, voluntary
prepayments of
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<PAGE>
the Term Loans, capital expenditures, income tax expense, restricted payments
(as defined), and consideration for permitted acquisitions (as defined).
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 Stock Purchase Agreement regarding the IAI Acquisition (the "Stock
Purchase Agreement") sets forth a post-closing procedure for adjusting the
purchase price. The Company is required to prepay amounts outstanding under the
Credit Agreement in an amount equal to any adjustments to the purchase price
received by the Company or credited to the Company, whether payable in cash or
credited or offset against any obligations owed to Inco Limited and certain of
its affiliates (collectively, the "Sellers"), less the expenses reasonably
incurred by the Company in obtaining any adjustment to the purchase price.
During 1999, the Company and the Sellers followed the post-closing procedure
provided in the Stock Purchase Agreement for adjusting the purchase price. As a
result of this process and pursuant to the terms of the Credit Agreement, on May
4, 2000 the Company prepaid $1,043,600 toward the Tranche A Term Loan and
$956,400 toward the Tranche B Term Loan.
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 Credit Agreement also requires the Company to
satisfy certain financial tests relating to, among other things, the Company's
minimum consolidated EBITDA; consolidated leverage ratio; interest coverage
ratio and fixed charge coverage ratio.
At September 30, 1999, the Company was in violation of the minimum
EBITDA and leverage ratio financial tests included in the Credit Agreement. The
lenders under the Credit Agreement (the "Senior Lenders") agreed to amend the
terms of the Credit Agreement and waive the defaults provided the Company agreed
to pursue additional capital in the form of subordinated loans.
Effective December 17, 1999, the Company entered into the Subordinated
Loan Agreement with SIMA, which is the owner of 38.5% of the Company's
outstanding common stock. The Subordinated Loan Agreement provides for $20
million in term loans (the "Subordinated Term Loans") and a $30 million
revolving credit facility (the "Subordinated Revolving Credit Facility").
Proceeds from the Subordinated Term Loans were used for working capital purposes
and to make required repayments to the Senior Lenders. Under the Subordinated
Revolving Credit Facility, the Company can borrow ("Subordinated Revolving
Loans"), repay (subject to certain restrictions) and re-borrow from time to time
up to $30 million in the aggregate.
Amounts outstanding under the Subordinated Loan Agreement bear interest
at a rate per year equal to the three-month London Interbank Offered Rate plus
1%. Accrued interest on both the Subordinated Term Loans and Subordinated
Revolving Loans is to be paid in kind by addition to the principal of the
Subordinated Term Loans on the last day of each calendar quarter. The
Subordinated Term Loans mature on July 28, 2006 (the "Maturity Date"). The
Subordinated Revolving Credit Facility terminates, and any outstanding
Subordinated Revolving Loans mature, on the Maturity Date.
Effective December 29, 1999, the Company entered into the Third
Amendment to Credit Agreement and Limited Waiver (the "Third Amendment"). Among
other things, the Third Amendment: waived the events of default which resulted
from the Company not complying with the minimum EBITDA and leverage ratio
financial tests at September 30, 1999; reduced the maximum amount available to
the Company under the Revolving Credit Facility from $150 million to $100
million; provided that the aggregate amount outstanding under the Revolving
Credit Facility may not exceed $76 million unless Subordinated Revolving Loans
are outstanding in a principal amount of at least $30 million; revised the
minimum EBITDA financial tests through the period ending March 31, 2001, and
suspended all other financial tests until the quarter ended June 30, 2001, at
which time all financial tests as set forth in the First Amendment will again be
effective; limited capital expenditures to a maximum of
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<PAGE>
$15 million in 2000 and $7.5 million during the first six months of 2001, unless
capital expenditures in excess of those amounts are funded by the issuance and
sale of stock of the Company to SIMA or from additional advances by SIMA of
Subordinated Term Loans; and prohibited payments of dividends on the Series A
Convertible Preferred Stock unless such payments are funded by the issuance and
sale of stock of the Company to SIMA or from additional advances by SIMA of
Subordinated Term Loans.
The Third Amendment also prescribes a procedure to be followed in the
event that the Company's actual consolidated EBITDA through the period ending
March 31, 2001 is less than the amounts required by the revised minimum EBITDA
financial tests. As of the end of each quarter during such period, if the
Company's actual consolidated EBITDA for the prior twelve months is less than
the minimum EBITDA levels required by the Third Amendment, any outstanding
Subordinated Revolving Loans will be converted to Subordinated Term Loans in an
amount equal to the difference between the Company's actual consolidated EBITDA
and certain amounts set forth in the Third Amendment. If the amount to be
converted exceeds the outstanding balance of Subordinated Revolving Loans, the
Company shall borrow additional Subordinated Revolving Loans to the extent
necessary to fund the amount to be converted, until SIMA's entire $30 million
commitment to make Subordinated Revolving Loans has been funded. SIMA's
obligation to make Subordinated Revolving Loans to the Company is backed by a
$30 million letter of credit. In the event that the required amount is converted
from Subordinated Revolving Loans to Subordinated Term Loans, the Company will
be deemed to have satisfied the minimum EBITDA financial test for the
twelve-month period, and the amount so converted shall be included for purposes
of calculating whether the Company has satisfied the minimum EBITDA financial
test for succeeding periods through the period ending March 31, 2001.
The Company's obligations under the Subordinated Loan Agreement are
unsecured and expressly subordinated to its obligations under the Credit
Agreement. Pursuant to a Debt Subordination Agreement entered into by SIMA and
the Company for the benefit of the Senior Lenders, the Company may not repay the
Subordinated Term Loans until all amounts due to the Senior Lenders have been
paid. Additionally, the Company may not repay Subordinated Revolving Loans if an
event of default exists under the Credit Agreement or would occur as a result of
the payment or if the aggregate amount outstanding under the Revolving Credit
Facility exceeds $76 million.
At March 31, 2000, the aggregate amount outstanding under the Revolving
Credit Facility was $73.9 million. However, as a result of an outstanding letter
of credit issued under the Revolving Credit Facility, for purposes of
determining borrowing availability the balance outstanding under the Revolving
Credit Facility is deemed to be $76.0 million. The amount outstanding under the
Subordinated Revolving Credit Facility was $7.0 million at March 31, 2000 and
$20.4 million at April 30, 2000. In addition, the aggregate amount outstanding
under the Subordinated Term Loan was $20.3 million at March 31, 2000, due to the
addition of accrued interest on the SIMA loans to the principal amount of the
Subordinated Term Loan, and $22.1 million at April 30, 2000, due to an
additional advance from SIMA to pay dividends on the Company's Senior Preferred
Stock.
The Company's Senior Preferred Stock accrues cumulative dividends at
the rate of 6.625% per annum, payable quarterly each January 28, April 28, July
28 and October 28, commencing January 28, 1999 (each a "Dividend Payment Date").
The Company has the right to defer payment of accumulated dividends. The Company
exercised the right to defer payment on each Dividend Payment Date from the
issuance of the Senior Preferred Stock (October 28, 1998) through the January
28, 2000 Dividend Payment Date. For the April 28, 2000 Dividend Payment Date,
the Company borrowed $1,606,563 from SIMA as an additional advance under the
Subordinated Term Loan and declared and paid a dividend to the holders of the
Senior Preferred Stock with the proceeds of that loan. As of March 31, 2000, the
total amount of dividends accrued and unpaid was $9.5 million. In the event that
the Company defers payment of dividends for more than six quarterly dividend
periods, the number of directors constituting the Company's Board of Directors
will be increased by at least two members, and the holders of the Senior
Preferred Stock will have the special right, voting separately as a single
class, to elect two individuals to fill the newly created directorships.
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<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 " - Forward Looking
Statements."
The Company expects that cash and cash equivalents on hand, cash flow
from operations and borrowing capacity under the Credit Agreement and
Subordinated Loan Agreement will be adequate to meet its anticipated operating
requirements, and planned capital expenditures over the next 12 months. See " -
Forward Looking Statements."
Backlog
As of March 31, 2000, the Company's backlog orders aggregated
approximately $234.3 million, compared to approximately $252.2 million at March
31, 1999. The Company defines backlog as firm orders, which are generally
subject to cancellation by the customer. Substantially all orders in the backlog
at March 31, 2000 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 operations for the periods
presented.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in
market rates and prices, such as commodity prices, foreign currency exchange and
interest rates. The Company is exposed to various market risks, including
changes in commodity prices, foreign currency exchange rates and interest rates.
The Company has entered into financial instrument transactions which attempt to
manage and reduce the impact of changes in commodity prices, foreign currency
exchange rates, and interest rates. The Company does not enter into derivatives
or other financial instruments for trading or speculative purposes.
The Company is exposed to risk from changes in the price of commodities
used in production between the date of a firm sales commitment and the date of
delivery. The Company purchases forward commodity contracts to manage its
exposure to changes in commodity prices, primarily nickel. A substantial portion
of the forward commodity contracts result in the Company actually taking
possession of the material, however, certain of the forward contracts result in
the Company making or receiving payments equal to the net change in the value of
the contract, which fluctuates with the price of the commodity. However, since
these contracts hedge the Company's firm sales commitments, any change in the
fair value of the contracts would be offset by changes in the underlying value
of the transaction being hedged.
A portion of the Company's operations consists of manufacturing and
sales activities in foreign jurisdictions, principally in Europe. As a result,
the Company's financial results could be significantly affected by factors such
as changes in foreign currency exchange rates or weak economic conditions in the
foreign markets in which the Company distributes its products. The Company
enters into forward currency and currency option contracts to mitigate the
effect of currency transaction exposures. An overall 10% fluctuation in exchange
rates would change the fair value of these contracts by approximately $745,000.
However, since these contracts
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<PAGE>
hedge foreign currency denominated transactions, any change in the fair value of
the contracts would be offset by changes in the underlying value of the
transaction being hedged.
At March 31, 2000, the Company has approximately $307 million of
variable rate long-term debt. The Company has entered into interest swap
agreements to manage a portion of its exposure to interest rate changes. At
March 31, 2000, the Company had outstanding interest rate swap agreements with a
notional value of approximately $128 million, maturing in September 2003, which
effectively fix the interest rates on the underlying debt at a weighted average
5.86% plus the applicable margins based on the Company's leverage ratio. Under
these agreements, the Company makes or receives payments equal to the difference
between fixed and variable interest rate payments on the notional amount. A 1%
fluctuation in interest rates would change future interest expense on the $179
million of debt that is not covered by the swap agreements by approximately $1.8
million.
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, 1999 and to Note 4 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
Item 3. Defaults Upon Senior Securities
None
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 May 11, 2000 disclosing certain
information, including certain results of operations and earnings for the fiscal
quarter ended March 31, 2000.
The Company issued a press release dated March 30, 2000 announcing the
appointment of Thomas E. MacDonald to the position of Vice President-
Commercial, responsible for the sales and marketing efforts of the Company's
core nickel alloy and superalloy business worldwide.
The Company issued a press release dated March 16, 2000 announcing the
appointment of Ronald M. Haeberle, Jr. to the position of Vice President -
Specialty Businesses and Director - Strategic Planning.
The Company issued a press release dated March 2, 2000 disclosing certain
information, including certain results of operations and earnings for the fiscal
quarter and year ended December 31, 1999.
The Company issued a press release dated February 11, 2000 announcing an 8
percent across-the-board price increase for all nickel-alloy products, effective
with orders placed as of February 18, 2000.
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The Company issued a press release dated January 7, 2000 announcing the
appointment of Teresa A. Daniel to the newly-created position of Vice President
& Chief Human Resources Officer.
(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 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 for the three months ended March 31, 2000.
27.2 Financial Data Schedule for the three months ended March 31, 1999.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fiscal quarter ended
March 31, 2000.
24
<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: May 15, 2000 By: /s/ Donald R. Muzyka
--------------------------------------
Donald R. Muzyka
President and Chief Executive Officer
Date: May 15, 2000 By: /s/ Donald C. Darling
--------------------------------------
Donald C. Darling
Chief Financial Officer and Chief
Accounting Officer
25
<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>
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 8,344
<SECURITIES> 0
<RECEIVABLES> 159,659
<ALLOWANCES> (2,760)
<INVENTORY> 272,713
<CURRENT-ASSETS> 467,047
<PP&E> 352,708
<DEPRECIATION> (81,527)
<TOTAL-ASSETS> 840,858
<CURRENT-LIABILITIES> 159,894
<BONDS> 260,306
106,466
0
<COMMON> 155
<OTHER-SE> 65,203
<TOTAL-LIABILITY-AND-EQUITY> 840,858
<SALES> 175,081
<TOTAL-REVENUES> 175,081
<CGS> 175,048
<TOTAL-COSTS> 175,048
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,100
<INCOME-PRETAX> (13,082)
<INCOME-TAX> (5,287)
<INCOME-CONTINUING> (7,795)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,795)
<EPS-BASIC> (0.63)
<EPS-DILUTED> (0.63)
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<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 42,499
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<BONDS> 279,835
99,678
0
<COMMON> 155
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<SALES> 151,708
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<TOTAL-COSTS> 151,172
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<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,669
<INCOME-PRETAX> (11,080)
<INCOME-TAX> (4,387)
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<NET-INCOME> (6,693)
<EPS-BASIC> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
