<PAGE> 1
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 September 30, 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)
<TABLE>
<S> <C>
Delaware 25-1445468
------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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 November 1, 2000, there were 15,479,000 shares of the registrant's common
stock, par value $.01 per share, outstanding.
<PAGE> 2
SPECIAL METALS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2000 2
and December 31, 1999
Condensed Consolidated Statements of Operations and Retained Earnings
(Accumulated Deficit) for the three months and nine months ended
September 30, 1999 and 2000 3
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 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 24
Part II. Other Information
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 28
</TABLE>
1
<PAGE> 3
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,
1999 2000
------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,064 $ 8,100
Accounts receivable - trade, less allowance for doubtful accounts
of $2,894 in 1999 and $3,337 in 2000 133,172 142,858
Inventories 262,474 270,425
Prepaid expenses and other current assets 25,746 21,083
------------------------------
Total current assets 430,456 442,466
Property, plant and equipment 278,503 258,550
Non-competition agreement, net of accumulated amortization
of $4,317 in 1999 and $7,092 in 2000 32,683 29,908
Other assets 69,645 89,743
------------------------------
Total assets $ 811,287 $ 820,667
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 66,042 $ 62,778
Accrued liabilities 55,611 51,347
Notes payable 3,725 2,928
Deferred income taxes - 1,002
Current portion of long-term debt and capital lease obligations 21,356 26,831
------------------------------
Total current liabilities 146,734 144,886
Long-term debt and capital lease obligations 259,035 253,781
Subordinated notes payable to affiliate 5,000 55,372
Postretirement benefits obligation 194,524 199,381
Other long-term liabilities 25,223 24,676
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 104,494 106,746
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) (13,383)
Retained earnings (accumulated deficit) 5,670 (26,659)
------------------------------
Total shareholders' equity 76,277 35,825
------------------------------
Total liabilities and shareholders' equity $ 811,287 $ 820,667
==============================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 4
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 Sept. 30, Nine months ended Sept. 30,
1999 2000 1999 2000
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Net sales $ 139,344 $ 162,241 $ 449,894 $ 514,197
Cost of goods sold 136,002 167,231 435,613 520,008
------------------------------- -------------------------------
3,342 (4,990) 14,281 (5,811)
Selling, general and
administrative expenses 6,947 6,545 19,667 20,187
------------------------------- -------------------------------
Operating loss (3,605) (11,535) (5,386) (25,998)
Interest expense 6,108 8,273 17,471 22,965
Interest income (300) (389) (1,165) (1,083)
Other income (210) (732) (1,491) (3,189)
-------------------------------- --------------------------------
Loss before income taxes (9,203) (18,687) (20,201) (44,691)
Income tax benefit (3,758) (7,347) (7,726) (17,828)
-------------------------------- --------------------------------
Net loss (5,445) (11,340) (12,475) (26,863)
Accumulated preferred stock dividends 1,606 1,748 4,818 5,466
------------------------------- -------------------------------
Net loss attributable to
common shareholders (7,051) (13,088) (17,293) (32,329)
Retained earnings (accumulated deficit)
Beginning of period 27,161 (13,571) 37,403 5,670
-------------------------------- -------------------------------
End of period $ 20,110 $ (26,659) $ 20,110 $ (26,659)
================================ ================================
Net loss per share (Basic and Diluted) $ (0.46) $ (0.85) $ (1.12) $ (2.09)
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> 5
Special Metals Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited - In thousands)
<TABLE>
<CAPTION>
Nine months ended Sept. 30,
1999 2000
------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (12,475) $ (26,863)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 25,320 30,432
Other adjustments and changes in assets and liabilities 1,794 (41,874)
-------------------------------
Net cash provided by (used in) operating activities 14,639 (38,305)
INVESTING ACTIVITIES:
Capital expenditures (8,153) (5,546)
Net change in restricted deposits 352 -
Deferred software and other charges (12,569) (1,897)
-------------------------------
Net cash used in investing activities (20,370) (7,443)
FINANCING ACTIVITIES:
Proceeds from (repayment of) term loans and other long-term debt (12,501) 771
Proceeds from long-term debt 2,000 -
Proceeds from subordinated notes payable - 48,225
Financing and other deferred costs - (24)
Payment of preferred stock dividends - (3,213)
Payments on capital lease obligations (461) (69)
-------------------------------
Net cash provided by (used in) financing activities (10,962) 45,690
Net effect of exchange rate changes on cash (160) (906)
-------------------------------
Net decrease in cash and cash equivalents (16,853) (964)
Cash and cash equivalents at beginning of period 39,622 9,064
------------------------------
Cash and cash equivalents at end of period $ 22,769 $ 8,100
==============================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 6
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements
September 30, 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 September 30, 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):
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------------------------
<S> <C> <C>
Raw materials and supplies $ 65,167 $ 80,020
Work-in-process 133,436 146,819
Finished goods 73,955 71,219
------------------------------
272,558 298,058
Adjustment to LIFO cost (10,084) (27,633)
-------------------------------
$ 262,474 $ 270,425
==============================
</TABLE>
5
<PAGE> 7
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
September 30, 2000
(Unaudited)
NOTE 3 - BUSINESS SEGMENT INFORMATION
Segment information for the nine months ended September 30, 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 $ 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) 4,645 (4,068) (5,386)
Interest expense (17,471)
Interest income 1,165
Other income 1,491
--------------
Loss before income taxes (20,201)
2000
Sales to external customers $ 122,675 $ 274,432 $ 117,090 $ - $ 514,197
Intersegment sales 7,388 43,127 13,913 - 64,428
Operating income (loss) 4,704 (33,412) 7,927 (5,217) (25,998)
Interest expense (22,965)
Interest income 1,083
Other income 3,189
--------------
Loss before income taxes (44,691)
</TABLE>
6
<PAGE> 8
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
September 30, 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 September 30, 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 $1.3 million during the nine months
ended September 30, 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> 9
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
September 30, 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 Huntington's, 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) and the Company is a defendant in one action seeking damages
for alleged health problems resulting from exposure to manganese in welding
products. The 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 New York State 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 seeking DEC approval of
the remedial alternative, which will include removal of soils contaminated by
PCBs. Comments on the remedial alternative have been received from the DEC and
the United States Environmental Protection Agency (the "EPA"). In light of such
comments, the Company has proposed a second recommended remedial alternative for
consideration.
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.
8
<PAGE> 10
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
September 30, 2000
(Unaudited)
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. 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.
The Huntington report was never issued in final form. No action has
been taken by the inspecting agency since January 1996 in the case of
Huntington. Burnaugh has been listed as one of over 1,700 high priority
facilities. The Kentucky Division of Waste Management has revised the RCRA
Facility Assessment report for Burnaugh and considers it to be a finalized
document. A Voluntary Investigation Workplan is being prepared by the Company
for submission to the Department. If an 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 $525,000
and is expected to be incurred in calendar year 2001.
Pennsauken Landfill / Puchack Well Field. Huntington is 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
9
<PAGE> 11
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
September 30, 2000
(Unaudited)
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.
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. The claims
against Huntington and the other Swope third-party defendants have been severed
and stayed, pending the resolution of the underlying action. 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 of such cost, if
any.
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 program to
replace the oil-filled manual direct switches began in 2000 (at a cost of $0.3
million) and will be completed by 2002, at a remaining estimated cost of $0.5
million. 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 DEC 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 and the Company have agreed upon a penalty
for the cited violation in the amount of $25,000. The violations pertain to a
number of matters including a fire and a RCRA inspection.
DEPARTMENT OF JUSTICE INVESTIGATION
The Company received written confirmation from the United States
Department of Justice that the previously disclosed grand jury investigation of
the nickel alloy industry has been terminated with respect to the Company.
10
<PAGE> 12
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
September 30, 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 Company's October 1998
acquisition of the capital stock of the companies which comprised the Inco
Alloys International high performance nickel alloys business unit of Inco (the
"IAI Acquisition"), and that the Sellers breached the terms of the related Stock
Purchase Agreement. In October 2000, the Sellers' motion to dismiss the lawsuit
was denied with respect to the Company's securities fraud, fraud and breach of
contract claims against the Sellers with respect to the IAI Acquisition, but
granted as to the Company's negligent misrepresentation claim. In its decision,
the Court denied the Sellers' request to strike the Company's request for
punitive damages and directed that discovery in the case may now proceed. The
Sellers had previously advised the Company that, in the event the Court denied
their motion to dismiss, they would file a counterclaim against the Company
seeking in excess of $12 million, which the Sellers' 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 Sellers' 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 will recover significant
damages from the Sellers, or 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> 13
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
September 30, 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 and nine month periods ended September 30, 1999 and
2000:
<TABLE>
<CAPTION>
Three months ended Sept. 30, Nine months ended Sept. 30,
1999 2000 1999 2000
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (5,445) $ (11,340) $ (12,475) $ (26,863)
Preferred stock dividends 1,606 1,748 4,818 5,466
------------------------------- -------------------------------
Numerator for basic earnings per share-
loss available to common shareholders (7,051) (13,088) (17,293) (32,329)
Effect of dilutive securities - preferred
stock dividends - - - -
------------------------------- -------------------------------
Numerator for diluted earnings per
share-loss available to common
shareholders after assumed conversions $ (7,051) $ (13,088) $ (17,293) $ (32,329)
================================ ================================
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 $ (0.46) $ (0.85) $ (1.12) $ (2.09)
================================ ================================
Diluted earnings per share $ (0.46) $ (0.85) $ (1.12) $ (2.09)
================================ ================================
</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> 14
Special Metals Corporation
Notes To Condensed Consolidated Financial Statements (Continued)
September 30, 2000
(Unaudited)
NOTE 6 - COMPREHENSIVE LOSS
Comprehensive loss for the three month and nine month periods ended September
30, 1999 and 2000 consisted of the following:
<TABLE>
<CAPTION>
Three months ended Sept. 30, Nine months ended Sept. 30,
1999 2000 1999 2000
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Net loss $ (5,445) $ (11,340) $ (12,475) $ (26,863)
Change in foreign currency translation
adjustment 3,348 (3,154) (3,478) (8,123)
-------------------------------- --------------------------------
Comprehensive loss $ (2,097) $ (14,494) $ (15,953) $ (34,986)
================================ ================================
</TABLE>
Accumulated other comprehensive loss consists of the following at December 31,
1999 and September 30, 2000:
<TABLE>
<CAPTION>
Sept. 30,
1999 2000
-------------------------------
<S> <C> <C>
Pension adjustment $ (11) $ (11)
Foreign currency translation adjustment (5,249) (13,372)
--------------------------------
Accumulated other comprehensive loss $ (5,260) $ (13,383)
================================
</TABLE>
NOTE 7 - EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company is
required to adopt SFAS No. 133 in 2001. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
intended use of the derivative and its designation as either a fair value hedge,
a cash flow hedge, or a foreign currency hedge, will determine when the gains or
losses on the derivatives are to be reported in earnings and when they are to be
reported as a component of other comprehensive income. Management does not
believe that adopting SFAS No. 133 will have a significant impact on the results
of operations of the Company. Based upon its initial analysis, management
believes that the derivative instruments currently held by the Company
(including the interest rate swap agreements, forward currency and currency
option contracts, and forward commodity contracts) will be categorized as cash
flow hedges and, accordingly, any unrealized gains or losses will be deferred
and recorded as a component of other comprehensive income.
13
<PAGE> 15
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 21E 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 demand for the Company's products; 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; and other factors detailed from time to time in the Company's
filings with the Securities and Exchange Commission.
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 nine months ended September 30, 2000, the
Premium Alloys Division, the Huntington Alloys Division, and the Wiggin Alloys
Division accounted for 23.9%, 53.3% and 22.8%, respectively, of the Company's
net sales of $514.2 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 nine months ended September 30, 2000, sales by domestic businesses of
the Company to purchasers outside of the United States totaled 16.3% of the
Company's total net sales.
14
<PAGE> 16
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, 2000,
the Company had open purchase contracts with a notional principal value of
approximately $28.3 million. The fair value of the material covered by these
contracts, based on the September 30, 2000 price quoted on the LME, was
approximately $30.7 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 both became a part of
Special Metals as a result of the IAI 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.
15
<PAGE> 17
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,
1999 2000 1999 2000
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Costs of goods sold 97.6 103.1 96.8 101.1
---------------------------- -----------------------------
Gross profit (loss) 2.4 (3.1) 3.2 (1.1)
Selling, general and
administrative expenses 5.0 4.0 4.4 3.9
------------------------------ -----------------------------
Operating income (loss) (2.6) (7.1) (1.2) (5.0)
Interest expense 4.4 5.1 3.9 4.5
Interest income (.2) (.2) (.3) (.2)
Other income (.2) (.5) (.3) (.6)
------------------------------ ------------------------------
Income (loss) before income taxes (6.6) (11.5) (4.5) (8.7)
Income tax expense (benefit) (2.7) (4.5) (1.7) (3.5)
------------------------------ ------------------------------
Net loss (3.9)% (7.0)% (2.8)% (5.2)%
============================== ===============================
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1999.
NET SALES.
Premium Alloys. Net sales increased $12.7 million, or 49.2%, from $25.7
million in the three months ended September 30, 1999 to $38.4 million in the
three months ended September 30, 2000. This increase in sales is primarily
attributable to increased sales volumes for high performance metals in the
commercial aerospace market.
Huntington Alloys. Net sales increased $11.5 million, or 14.6%, from
$78.7 million in the three months ended September 30, 1999 to $90.2 million in
the three months ended September 30, 2000. This increase in sales is primarily
attributable to increased sales volumes for high performance metals in the power
generation/pollution control and commercial aerospace markets, offset in part by
reduced sales to the chemical processing market.
Wiggin Alloys. Net sales decreased $1.3 million, or 3.7%, from $34.9
million in the three months ended September 30, 1999 to $33.6 million in the
three months ended September 30, 2000. This decrease in sales is primarily
attributable to the continued weakening of European currencies as compared to
the U.S. dollar, weakening of the Euro as compared to the British pound sterling
and increased pressure on prices.
COST OF GOODS SOLD.
Premium Alloys. Cost of goods sold increased $15.4 million, or 67.9%,
from $22.7 million in the three months ended September 30, 1999 to $38.1 million
in the three months ended September 30, 2000. As a percentage of net sales, cost
of goods sold increased from 88.1% in the three months ended September 30, 1999
to 99.1% in the three months ended September 30, 2000, primarily as a result of
higher raw material costs, principally nickel.
16
<PAGE> 18
Huntington Alloys. Cost of goods sold increased $17.7 million, or 22.4%,
from $79.0 million in the three months ended September 30, 1999 to $96.7 million
in the three months ended September 30, 2000, primarily as a result of higher
raw material costs, principally nickel. As a percentage of net sales, cost of
goods sold increased from 100.5% in the three months ended September 30, 1999 to
107.3% in the three months ended September 30, 2000.
Wiggin Alloys. Cost of goods sold decreased $1.9 million, or 5.7%, from
$32.9 million in the three months ended September 30, 1999 to $31.0 million in
the three months ended September 30, 2000. As a percentage of net sales, cost of
goods sold decreased from 94.2% in the three months ended September 30, 1999 to
92.2% in the three months ended September 30, 2000, primarily as a result of
reduced sales volumes and improved manufacturing efficiencies.
Corporate. Cost of goods sold not allocated to an operating segment were
$1.4 million in the three months ended September 30, 1999 and three months ended
September 30, 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 $2.7 million, or 88.3%,
from $3.0 million in the three months ended September 30, 1999 to $0.3 million
in the three months ended September 30, 2000.
Huntington Alloys. Gross profit (loss) increased $(6.2) million from
$(0.3) million in the three months ended September 30, 1999 to $(6.5) million in
the three months ended September 30, 2000.
Wiggin Alloys. Gross profit (loss) increased $0.6 million, or 29.7%, from
$2.0 million in the three months ended September 30, 1999 to $2.6 million in the
three months ended September 30, 2000.
SELLING, GENERAL AND ADMINISTRATIVE.
Premium Alloys. Selling, general and administrative expenses increased
$0.2 million from $2.1 million in the three months ended September 30, 1999 to
$2.3 million in the three months ended September 30, 2000 as a result of a
non-recurring charge associated with the retirement of the Company's former
President and CEO, offset in part by reduced sales and marketing, professional
services and research and development expenditures. Selling, general and
administrative expenses as a percentage of net sales decreased from 8.3% in the
three months ended September 30, 1999 to 5.9% in the three months ended
September 30, 2000.
Huntington Alloys. Selling, general and administrative expenses decreased
$0.3 million, or 6.2%, from $4.1 million in the three months ended September 30,
1999 to $3.8 million in the three months ended September 30, 2000 as a result of
reduced research and development expenditures, offset in part by increased sales
and marketing expenditures. Selling, general and administrative expenses as a
percentage of net sales decreased from 5.1% in the three months ended September
30, 1999 to 4.2% in the three months ended September 30, 2000.
Wiggin Alloys. Selling, general and administrative expenses decreased
$0.3 million, or 38.5%, from $0.8 million in the three months ended September
30, 1999 to $0.5 million in the three months ended September 30, 2000 as a
result of reduced sales and marketing expenditures. Selling, general and
administrative expenses as a percentage of net sales decreased from 2.2% in the
three months ended September 30, 1999 to 1.4% in the three months ended
September 30, 2000.
Corporate. Selling, general and administrative expenses not allocated to
an operating segment were zero in the three months ended September 30, 1999 and
three months ended September 30, 2000.
17
<PAGE> 19
OPERATING INCOME (LOSS).
Premium Alloys. Operating income (loss) decreased $2.9 million from $0.9
million in the three months ended September 30, 1999 to $(2.0) million in the
three months ended September 30, 2000. Operating income (loss) as a percentage
of net sales decreased from 3.6% in the three months ended September 30, 1999 to
(5.0)% in the three months ended September 30, 2000.
Huntington Alloys. Operating income (loss) increased $(5.9) million from
$(4.4) million in the three months ended September 30, 1999 to $(10.3) million
in the three months ended September 30, 2000. Operating income (loss) as a
percentage of net sales increased from (5.6)% in the three months ended
September 30, 1999 to (11.5)% in the three months ended September 30, 2000.
Wiggin Alloys. Operating income (loss) increased $0.9 million, or 71.9%,
from $1.2 million in the three months ended September 30, 1999 to $2.1 million
in the three months ended September 30, 2000. Operating income (loss) as a
percentage of net sales increased from 3.5% in the three months ended September
30, 1999 to 6.4% in the three months ended September 30, 2000.
INTEREST EXPENSE.
Interest expense increased $2.2 million, or 35.4%, from $6.1 million in
the three months ended September 30, 1999 to $8.3 million in the three months
ended September 30, 2000, primarily due to an increase in indebtedness and
interest rates.
INCOME TAX EXPENSE (BENEFIT).
Income tax benefit increased $(3.5) million from $(3.8) million in the
three months ended September 30, 1999 to $(7.3) million in the three months
ended September 30, 2000, primarily due to the decrease in operating income and
the increase in interest expense.
NET LOSS.
Net loss increased $(5.9) million from $(5.4) million in the three months
ended September 30, 1999 to $(11.3) million in the three months ended September
30, 2000. Net loss as a percentage of net sales increased from (3.9)% in the
three months ended September 30, 1999 to (7.0)% in the three months ended
September 30, 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1999.
NET SALES.
Premium Alloys. Net sales increased $26.4 million, or 27.4%, from $96.3
million in the nine months ended September 30, 1999 to $122.7 million in the
nine months ended September 30, 2000. This increase in sales is primarily
attributable to increased sales volumes for high performance metals in the
commercial aerospace market.
Huntington Alloys. Net sales increased $42.0 million, or 18.1%, from
$232.4 million in the nine months ended September 30, 1999 to $274.4 million in
the nine months ended September 30, 2000. This increase in sales is primarily
attributable to increased sales volumes for high performance metals in the power
generation/pollution control and commercial aerospace markets, offset in part by
reduced sales to the chemical
18
<PAGE> 20
processing market. In addition, sales for the nine month period ended September
30, 1999 included the effects of an 11-week strike at the Company's Huntington,
West Virginia facility.
Wiggin Alloys. Net sales decreased $4.1 million, or 3.4%, from $121.2
million in the nine months ended September 30, 1999 to $117.1 million in the
nine months ended September 30, 2000. This decrease in sales is primarily
attributable to reduced sales volumes for high performance metals, the continued
weakening of European currencies as compared to the U.S. dollar, weakening of
the Euro as compared to the British pound sterling and increased pressure on
prices.
COST OF GOODS SOLD.
Premium Alloys. Cost of goods sold increased $30.9 million, or 38.3%,
from $80.8 million in the nine months ended September 30, 1999 to $111.7 million
in the nine months ended September 30, 2000. As a percentage of net sales, cost
of goods sold increased from 83.9% in the nine months ended September 30, 1999
to 91.0% in the nine months ended September 30, 2000, primarily as a result of
higher raw material costs, principally nickel.
Huntington Alloys. Cost of goods sold increased $60.1 million, or 25.4%,
from $236.6 million in the nine months ended September 30, 1999 to $296.7
million in the nine months ended September 30, 2000, primarily as a result of
higher raw material costs, principally nickel. As a percentage of net sales,
cost of goods sold increased from 101.8% in the nine months ended September 30,
1999 to 108.1% in the nine months ended September 30, 2000.
Wiggin Alloys. Cost of goods sold decreased $6.7 million, or 5.8%, from
$114.1 million in the nine months ended September 30, 1999 to $107.4 million in
the nine months ended September 30, 2000. As a percentage of net sales, cost of
goods sold decreased from 94.2% in the nine months ended September 30, 1999 to
91.7% in the nine months ended September 30, 2000, primarily as a result of
reduced sales volumes and improved manufacturing efficiencies.
Corporate. Cost of goods sold not allocated to an operating segment
increased $0.1 million from $4.1 million in the nine months ended September 30,
1999 to $4.2 million in the nine months ended September 30, 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 $4.5 million, or 29.2%,
from $15.5 million in the nine months ended September 30, 1999 to $11.0 million
in the nine months ended September 30, 2000.
Huntington Alloys. Gross profit (loss) increased $(18.1) million from
$(4.2) million in the nine months ended September 30, 1999 to $(22.3) million in
the nine months ended September 30, 2000.
Wiggin Alloys. Gross profit (loss) increased $2.6 million, or 36.6%, from
$7.1 million in the nine months ended September 30, 1999 to $9.7 million in the
nine months ended September 30, 2000.
SELLING, GENERAL AND ADMINISTRATIVE.
Premium Alloys. Selling, general and administrative expenses increased
$0.6 million, or 9.6%, from $5.7 million in the nine months ended September 30,
1999 to $6.3 million in the nine months ended September 30, 2000 in part as a
result of a non-recurring charge associated with the retirement of the Company's
former President and CEO.
19
<PAGE> 21
Selling, general and administrative expenses as a percentage of net sales
decreased from 6.0% in the nine months ended September 30, 1999 to 5.1% in the
nine months ended September 30, 2000.
Huntington Alloys. Selling, general and administrative expenses decreased
$0.4 million, or 3.1%, from $11.5 million in the nine months ended September 30,
1999 to $11.1 million in the nine months ended September 30, 2000 as a result of
reduced sales and marketing and research and development expenditures. Selling,
general and administrative expenses as a percentage of net sales decreased from
4.9% in the nine months ended September 30, 1999 to 4.0% in the nine months
ended September 30, 2000.
Wiggin Alloys. Selling, general and administrative expenses decreased
$0.7 million, or 28.4%, from $2.5 million in the nine months ended September 30,
1999 to $1.8 million in the nine months ended September 30, 2000 as a result of
reduced sales and marketing expenditures. Selling, general and administrative
expenses as a percentage of net sales decreased from 2.0% in the nine months
ended September 30, 1999 to 1.5% in the nine months ended September 30, 2000.
Corporate. Selling, general and administrative expenses not allocated to
an operating segment increased $1.0 million from zero in the nine months ended
September 30, 1999 to $1.0 million in the nine months ended September 30, 2000
as a result of consulting expenditures incurred.
OPERATING INCOME (LOSS).
Premium Alloys. Operating income (loss) decreased $5.1 million, or 51.9%,
from $9.8 million in the nine months ended September 30, 1999 to $4.7 million in
the nine months ended September 30, 2000. Operating income (loss) as a
percentage of net sales decreased from 10.2% in the nine months ended September
30, 1999 to 3.8% in the nine months ended September 30, 2000.
Huntington Alloys. Operating income (loss) increased $(17.7) million, or
112.1%, from $(15.7) million in the nine months ended September 30, 1999 to
$(33.4) million in the nine months ended September 30, 2000. Operating income
(loss) as a percentage of net sales increased from (6.8)% in the nine months
ended September 30, 1999 to (12.2)% in the nine months ended September 30, 2000.
Wiggin Alloys. Operating income (loss) increased $3.3 million, or 70.6%,
from $4.6 million in the nine months ended September 30, 1999 to $7.9 million in
the nine months ended September 30, 2000. Operating income (loss) as a
percentage of net sales increased from 3.8% in the nine months ended September
30, 1999 to 6.8% in the nine months ended September 30, 2000.
INTEREST EXPENSE.
Interest expense increased $5.5 million, or 31.4%, from $17.5 million in
the nine months ended September 30, 1999 to $23.0 million in the nine months
ended September 30, 2000, primarily due to an increase in indebtedness and
interest rates.
INCOME TAX EXPENSE (BENEFIT).
Income tax benefit increased $(10.1) million, or 130.7%, from $(7.7)
million in the nine months ended September 30, 1999 to $(17.8) million in the
nine months ended September 30, 2000, primarily due to the decrease in operating
income and the increase in interest expense. The effective tax rate increased
from 38.2% in the nine months ended September 30, 1999 to 39.9% in the nine
months ended September 30, 2000.
20
<PAGE> 22
NET LOSS.
Net loss increased $(14.4) million from $(12.5) million in the nine
months ended September 30, 1999 to $(26.9) million in the nine months ended
September 30, 2000. Net loss as a percentage of net sales increased from (2.8)%
in the nine months ended September 30, 1999 to (5.2)% in the nine months ended
September 30, 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.
Net cash provided by (used in) operating activities was $14.6 million and
$(38.3) million for the nine months ended September 30, 1999 and 2000,
respectively. Net cash used in operating activities for the nine months ended
September 30, 2000 increased primarily as the result of investment in working
capital.
Capital expenditures were $8.2 million and $5.5 million for the nine
months ended September 30, 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 IAI
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):
21
<PAGE> 23
<TABLE>
<CAPTION>
Tranche A Tranche B
Year Term Loan Term Loan Total
---- ---------------------------------------------------
<S> <C> <C> <C>
2000 (remainder of 2000) $ 6,250 $ 250 $ 6,500
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
</TABLE>
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 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 and 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 Credit
Agreement.
22
<PAGE> 24
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 $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. Pursuant
to this procedure, as of September 30, 2000, $27.6 million of Subordinated
Revolving Loans were converted to Subordinated Term Loans.
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 September 30, 2000, the aggregate amount outstanding under the
Revolving Credit Facility was $80.9 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
23
<PAGE> 25
deemed to be $83.0 million. The amount outstanding under the Subordinated
Revolving Credit Facility was $2.4 million at September 30, 2000. In addition,
the aggregate amount outstanding under the Subordinated Term Loan was $52.9
million at September 30, 2000, due to the addition of accrued interest on the
SIMA loans to the principal amount of the Subordinated Term Loan, the conversion
of $27.6 million of Subordinated Revolving Loans to Subordinated Term Loans and
additional advances from SIMA to pay dividends on the Company's Senior Preferred
Stock.
The Company's Series A Convertible Preferred Stock (the "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
each of the April 28, July 28, and October 28, 2000 Dividend Payment Dates, the
Company borrowed $1,606,563 from SIMA and declared and paid a dividend to the
holders of Senior Preferred Stock with the proceeds of each loan. As of
September 30, 2000, the total amount of dividends accrued and unpaid was $9.6
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.
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 September 30, 2000, the Company's backlog orders aggregated
approximately $252.7 million, compared to approximately $204.4 million at
September 30, 1999. 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, 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
24
<PAGE> 26
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. At September 30,
2000, a 10% fluctuation in the price of the underlying commodities would change
the fair value of the contracts which are settled in cash by approximately
$60,000. 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. At September 30, 2000, an overall 10%
fluctuation in exchange rates would change the fair value of these contracts by
approximately $1,210,000. However, since these contracts 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 September 30, 2000, the Company had approximately $332.0 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
September 30, 2000, the Company had outstanding interest rate swap agreements
with a notional value of approximately $124.0 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. At September 30, 2000, a 1% fluctuation in interest rates would
change future interest expense on the $208.0 million of debt that is not covered
by the swap agreements by approximately $2.1 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
25
<PAGE> 27
ITEM 5. OTHER INFORMATION
(a) PRESS RELEASES
The Company issued a press release dated November 9, 2000 disclosing certain
information, including certain results of operations for the fiscal quarter
ended September 30, 2000.
The Company issued a press release dated October 19, 2000 announcing the
departure of Donald C. Darling, from his positions as Vice President,
Administration and Chief Financial Officer and as a member of the Company's
Board of Directors. The Company also announced that, Paul A. Totaro, who
currently serves as Controller and Treasurer of the Company, has been named as
acting Chief Financial Officer on an interim basis.
The Company issued a press release dated September 12, 2000 announcing a price
increase ranging from five to eight percent for all nickel-alloy products,
effective with orders placed as of October 1, 2000.
The Company issued a press release dated August 25, 2000 announcing the
retirement of Robert D. Halverstadt from his position as Chairman of the
Company's Board of Directors effective October 1, 2000. The Company also
announced that Philippe Choppin de Janvry, the current Chairman and Chief
Executive Officer of Eramet International, a subsidiary of Eramet, will succeed
Mr. Halverstadt.
The Company issued a press release dated July 20, 2000 announcing the retirement
of Dr. Donald R. Muzyka, from his position as President and Chief Executive
Officer and as a member of the Company's Board of Directors effective September
1, 2000. The Company also announced that, Dr. T. Grant John, who has served as
Executive Vice President and Chief Operating Officer of the Company will succeed
Dr. Muzyka.
(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 demand for the Company's products; 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; and other factors detailed from time to time in the Company's
filings with the Securities and Exchange Commission.
26
<PAGE> 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<S> <C>
10.1 Agreement for Executive Services with Philippe Choppin de Janvry.
27.1 Financial Data Schedule for the nine months ended September 30, 2000.
27.2 Restated Financial Data Schedule for the nine months ended September 30, 1999.
</TABLE>
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated October 19, 2000 announcing
the departure of Donald C. Darling, from his positions as Vice President,
Administration and Chief Financial Officer and as a member of the Company's
Board of Directors. This Form 8-K also reported that Paul A. Totaro has been
named as acting Chief Financial Officer on an interim basis.
The Company filed a Current Report on Form 8-K dated August 25, 2000 announcing
the retirement of Robert D. Halverstadt from his position as Chairman of the
Company's Board of Directors effective October 1, 2000. This Form 8-K also
reported that Philippe Choppin de Janvry has been named to succeed Mr.
Halverstadt.
The Company filed a Current Report on Form 8-K dated July 20, 2000 announcing
the retirement of Dr. Donald R. Muzyka, from his position as President and Chief
Executive Officer and as a member of the Company's Board of Directors.
27
<PAGE> 29
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 14, 2000 By: /s/ T. Grant John
-----------------------------
T. Grant John
President
(Principal Executive Officer)
Date: November 14, 2000 By: /s/ Paul A. Totaro
-----------------------------
Paul A. Totaro
Controller, Treasurer and
Acting Chief Financial Officer
(Principal Accounting Officer)
28
