UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended September 30, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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Commission File Number: 333-5411
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HAYNES INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1185400
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1020 West Park Avenue, Kokomo, Indiana 46904-9013
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(Address of principal executive offices) (Zip Code)
(765) 456-6000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
by Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any Amendment to this
Form 10-K. X
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The registrant is a privately held corporation. As such, there is no
practicable method to determine the aggregate market value of the voting stock
held by non-affiliates of the registrant.
The number of shares of Common Stock, $.01 par value, of Haynes International,
Inc. outstanding as of December 18, 1998 was 100.
Documents Incorporated by Reference: None
The Index to Exhibits begins on page 72 in the sequential numbering system.
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Total pages: 76
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TABLE OF CONTENTS
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PART I Page
----
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 14
Item 6. Selected Consolidated Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 31
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants on Accounting 56
and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 57
Item 11. Executive Compensation 60
Item 12. Security Ownership of Certain Beneficial Owners and Management 68
Item 13. Certain Relationships and Related Transactions 69
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 69
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PAGE
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PART I
ITEM 1. BUSINESS
GENERAL
The Company develops, manufactures and markets technologically advanced,
high performance alloys primarily for use in the aerospace and chemical
processing industries. The Company's products are high temperature alloys
("HTA") and corrosion resistant alloys ("CRA"). The Company's HTA products are
used by manufacturers of equipment that is subjected to extremely high
temperatures, such as jet engines for the aerospace industry, gas turbine
engines used for power generation, and waste incineration and industrial heating
equipment. The Company's CRA products are used in applications that require
resistance to extreme corrosion, such as chemical processing, power plant
emissions control and hazardous waste treatment. The Company produces its high
performance alloy products primarily in sheet, coil and plate forms, which in
the aggregate represented approximately 63% of the Company's net revenues in
fiscal 1998. In addition, the Company produces its alloy products as seamless
and welded tubulars, and in bar, billet and wire forms.
High performance alloys are characterized by highly engineered, often
proprietary, metallurgical formulations primarily of nickel, cobalt and other
metals with complex physical properties. The complexity of the manufacturing
process for high performance alloys is reflected in the Company's relatively
high average selling price per pound, compared to the average selling price of
other metals such as carbon steel sheet, stainless steel sheet and aluminum.
Demanding end-user specifications, a multi-stage manufacturing process and the
technical sales, marketing and manufacturing expertise required to develop new
applications combine to create significant barriers to entry in the high
performance alloy industry. The Company derived approximately 28% of its fiscal
1998 net revenues from products that are protected by United States patents and
derived an additional approximately 21% of its fiscal 1998 net revenues from
sales of products that are not patented, but for which the Company has limited
or no competition.
PRODUCTS
The alloy market consists of four primary segments: stainless steel, super
stainless steel, nickel alloys and high performance alloys. The Company competes
exclusively in the high performance alloy segment, which includes HTA and CRA
products. The Company believes that the high performance alloy segment
represents less than 10% of the total alloy market. The percentages of the
Company's total product revenue and volume presented in this section are based
on data which include revenue and volume associated with sales by the Company to
its foreign subsidiaries, but exclude revenue and volume associated with sales
by such foreign subsidiaries to their customers. Management believes, however,
that the effect of including revenue and volume data associated with sales by
its foreign subsidiaries would not materially change the percentages presented
in this section. In fiscal 1998, HTA and CRA products accounted for
approximately 64% and 36%, respectively, of the Company's net revenues.
HTA products are used primarily in manufacturing components used in the hot
sections of jet engines. Stringent safety and performance standards in the
aerospace industry result in development lead times typically as long as eight
to ten years in the introduction of new aerospace-related market applications
for HTA products. However, once a particular new alloy is shown to possess the
properties required for a specific application in the aerospace industry, it
tends to remain in use for extended periods. HTA products are also used in gas
turbine engines produced for use in applications such as naval and commercial
vessels, electric power generators, power sources for offshore drilling
platforms, gas pipeline booster stations and emergency standby power stations.
CRA products are used in a variety of applications, such as chemical
processing, power plant emissions control, hazardous waste treatment and sour
gas production. Historically, the chemical processing industry has represented
the largest end-user segment for CRA products. Due to maintenance, safety and
environmental considerations, the Company believes this industry continues to
represent an area of potential long-term growth for the Company. Unlike
aerospace applications within the HTA product market, the development of new
market applications for CRA products generally does not require long lead times.
PAGE
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HIGH TEMPERATURE ALLOYS The following table sets forth information with
respect to certain of the Company's significant high temperature alloys:
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ALLOY AND YEAR INTRODUCED END MARKETS AND APPLICATIONS (1) FEATURES
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HAYNES HR-160 (1990) (2) Waste incineration/CPI-boiler tube shields Good resistance to sulfidation at high
temperatures
HAYNES 242 (1990) (2) Aero-seal rings High strength, low expansion and
good fabricability
HAYNES HR-120 (1990) (2) Industrial heating-heat-treating baskets Good strength-to-cost ratio as
compared to competing alloys
HAYNES 230 (1984) (2) Aero/LBGT-ducting Good combination of strength,
stability, oxidation resistance and
fabricability
HAYNES 214 (1981) (2) Aero-honeycomb seals Good combination of oxidation
resistance and fabricability among
nickel-based alloys
HAYNES 188 (1968) (2) Aero-burner cans, after-burner High strength, oxidation resistant
components cobalt-based alloys
HAYNES 625 (1964) Aero/CPI-ducting, tanks, vessels, weld Good fabricability and general
overlays corrosion resistance
HAYNES 263 (1960) Aero/LBGT-components for gas turbine Good ductility and high strength at
hot gas exhaust pan temperatures up to 1600 F
HAYNES 718 (1955) Aero-ducting, vanes, nozzles Weldable high strength alloy with
good fabricability
HASTELLOY X (1954) Aero/LBGT-burner cans, transition ducts Good high temperature strength at
relatively low cost
HAYNES Ti 3-2.5 (1950) Aero-aircraft hydraulic and fuel systems Light weight, high strength
components titanium-based alloy
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(1)"Aero" refers to aerospace; "LBGT" refers to land-based gas turbines; "CPI" refers to the chemical
processing industry.
(2)Represents a patented product or a product with respect to which the Company believes it has limited or no
competition.
</TABLE>
The higher volume HTA products, including HAYNES 625, HAYNES 718 and
HASTELLOY X, are generally considered industry standards, especially in the
manufacture of jet aircraft engines and LBGT. These products have been used in
such applications since the 1950's and because of their widespread use have been
most subject to competitive pricing pressures. In fiscal 1998, sales of these
HTA products accounted for approximately 23% of the Company's net revenues.
The Company also produces and sells cobalt-based alloys introduced over the
last three decades, which are more highly specialized and less price competitive
than nickel-based alloys. HAYNES 188 and HAYNES 263 are the most widely used of
the Company's cobalt-based products and accounted for approximately 11% of the
Company's net revenues in fiscal 1998. Three of the more recently introduced HTA
products, HAYNES 242, HAYNES 230 and HAYNES 214, initially developed for the
aerospace and LBGT markets, are still patent-protected and together accounted
for approximately 7% of the Company's net revenues in fiscal 1998. These newer
alloys are continuing to gain acceptance for applications in industrial heating
and waste incineration.
PAGE
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HAYNES HR-160 and HAYNES HR-120 were introduced in fiscal 1990 and targeted
for sale in industrial heat treating applications. HAYNES HR-160 is a higher
priced cobalt-based alloy designed for use when the need for long-term
performance outweighs initial cost considerations. Potential applications for
HAYNES HR-160 include use in key components in waste incinerators, chemical
processing equipment, mineral processing kilns and fossil fuel energy plants.
HAYNES HR-120 is a lower priced, iron-based alloy and is designed to replace
competitive alloys not manufactured by the Company that may be slightly lower in
price, but are also less effective. In fiscal 1998, these two alloys accounted
for approximately 2% of the Company's net revenues.
The Company also produces seamless titanium tubing for use as hydraulic
lines in airframes and as bicycle frames. During fiscal 1998, sales of these
products accounted for approximately 4% of the Company's net revenues.
CORROSION RESISTANT ALLOYS The following table sets forth information with
respect to certain of the Company's significant corrosion resistant alloys:
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ALLOY AND YEAR INTRODUCED END MARKETS AND APPLICATIONS (1)
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HASTELLOY C-2000 (1995) (2) CPI-tanks, mixers, piping
HASTELLOY B-3 (1994) (2) CPI-acetic acid plants
HASTELLOY D-205 (1993) (2) CPI-plate heat exchangers.
ULTIMET (1990) (2) CPI-pumps, valves
HASTELLOY G-50 (1989) Oil and gas-sour gas tubulars
HASTELLOY C-22 (1985) (2) CPI/FGD-tanks, mixers, piping
HASTELLOY G-30 (1985) (2) CPI-tanks, mixers, piping
HASTELLOY B-2 (1974) CPI-acetic acid
HASTELLOY C-4 (1973) CPI-tanks, mixers, piping
HASTELLOY C-276 (1968) CPI/FGD/oil and gas-tanks, mixers, piping
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ALLOY AND YEAR INTRODUCED FEATURES
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HASTELLOY C-2000 (1995) (2) Versatile alloy with good resistance to uniform corrosion
HASTELLOY B-3 (1994) (2) Better fabrication characteristics compared to other nickel-molybdenum alloys
HASTELLOY D-205 (1993) (2) Corrosion resistance to hot sulfuric acid
ULTIMET (1990) (2) Wear and corrosion resistant nickel-based alloy
HASTELLOY G-50 (1989) Good resistance to down hole corrosive environments
HASTELLOY C-22 (1985) (2) Resistance to localized corrosion and pitting
HASTELLOY G-30 (1985) (2) Lower cost alloy with good corrosion resistance in phosphoric acid
HASTELLOY B-2 (1974) Resistance to hydrochloric acid and other reducing acids
Good thermal stability
HASTELLOY C-4 (1973)
HASTELLOY C-276 (1968) Broad resistance to many environments
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(1) "CPI" refers to the chemical processing industry; "FGD" refers to flue gas
desulfurization.
(2) Represents a patented product or a product with respect to which the Company
believes it has limited or no competition.
</TABLE>
During fiscal 1998, sales of the CRA alloys HASTELLOY C-276, HASTELLOY C-22
and HASTELLOY C-4 accounted for approximately 26% of the Company's net revenues.
HASTELLOY C-276, introduced by the Company in 1968, is recognized as a standard
for corrosion protection in the chemical processing industry and is also used
extensively for FGD and oil and gas exploration and production applications.
HASTELLOY C-22, a proprietary alloy of the Company, was introduced in 1985 as an
improvement on HASTELLOY C-276 and is currently sold to the chemical processing
and FGD markets for essentially the same applications as HASTELLOY C-276.
HASTELLOY C-22 offers greater and more versatile corrosion resistance and
therefore has gained market share at the expense of the non-proprietary
HASTELLOY C-276. HASTELLOY C-4 is specified in many chemical processing
applications in Germany and is sold almost exclusively to that market.
PAGE
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The Company also produces alloys for more specialized applications in the
chemical processing industry and other industries. For example, HASTELLOY B-2
was introduced in 1970 for use in the manufacture of equipment utilized in the
production of acetic acid and ethyl benzine and is still sold almost exclusively
for those purposes. HASTELLOY B-3 was developed for the same applications and
has greater ease in fabrication. The Company expects HASTELLOY B-3 to eventually
replace HASTELLOY B-2. HASTELLOY G-30 is used primarily in the production of
super phosphoric acid and fluorinated aromatics. HASTELLOY G-50 has gained
acceptance as a lower priced alternative to HASTELLOY C-276 for production of
tubing for use in sour gas wells. These more specialized products accounted for
approximately 8% of the Company's net revenues in fiscal 1998.
The Company's patented alloy, ULTIMET, is used in a variety of industrial
applications that result in material degradation by "corrosion-wear". ULTIMET
is designed for applications where conditions require resistance to corrosion
and wear and is currently being tested in spray nozzles, fan blades, filters,
bolts, rolls, pump and valve parts where these properties are critical.
HASTELLOY D-205, introduced in 1993, is designed for use in handling hot
concentrated sulfuric acid and other highly corrosive substances.
The Company believes that its most recently introduced alloy, HASTELLOY
C-2000, improves upon HASTELLOY C-22. HASTELLOY C-2000, which the Company
expects will be used extensively in the chemical processing industry, can be
used in both oxidizing and reducing environments.
END MARKETS
Aerospace. The Company has manufactured HTA products for the aerospace
market since it entered the market in the late 1930s, and has developed numerous
proprietary alloys for this market. Customers in the aerospace markets tend to
be the most demanding with respect to meeting specifications within very low
tolerances and achieving new product performance standards. Stringent safety
standards and continuous efforts to reduce equipment weight require close
coordination between the Company and its customers in the selection and
development of HTA products. As a result, sales to aerospace customers tend to
be made through the Company's direct sales force. Unlike the FGD and oil and gas
production industries, where large, competitively bid projects can have a
significant impact on demand and prices, demand for the Company's products in
the aerospace industry is based on the new and replacement market for jet
engines and the maintenance needs of operators of commercial and military
aircraft. The hot sections of jet engines are subjected to substantial wear and
tear and accordingly require periodic maintenance and replacement. This
maintenance-based demand, while potentially volatile, is generally less subject
to wide fluctuations than demand in the FGD and sour gas production industries.
Chemical Processing. The chemical processing industry segment represents a
large base of customers with diverse CRA applications driven by demand for key
end use industries such as automobiles, housing, health care, agriculture, and
metals production. CRA products supplied by the Company have been used in the
chemical processing industry since the early 1930s.
Demand for the Company's products in this industry is based on the level of
maintenance, repair and expansion of existing chemical processing facilities as
well as the construction of new facilities. The Company believes the extensive
worldwide network of Company-owned service centers and independent distributors
is a competitive advantage in marketing its CRA products to this market. Sales
of the Company's products in the chemical processing industry tend to be more
stable than the aerospace, FGD and oil and gas markets. Increased concerns
regarding the reliability of chemical processing facilities, their potential
environmental impact and safety hazards to their personnel have led to an
increased demand for more sophisticated alloys, such as the Company's CRA
products.
Land-Based Gas Turbines. The LBGT industry represents a growing market, with
demand for the Company's products driven by the construction of cogeneration
facilities and electric utilities operating electric generating facilities.
Demand for the Company's alloys in the LBGT industry has also been driven by
concerns regarding lowering emissions from generating facilities powered by
fossil fuels. LBGT generating facilities are gaining acceptance as clean,
low-cost alternatives to fossil fuel-fired electric generating facilities. The
demand for land-based gas turbines is also growing rapidly for use in power
barges with mobility and as temporary base-load-generating units for countries
that have numerous islands and a large coast line.
PAGE
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Flue Gas Desulfurization. The FGD industry has been driven by both
legislated and self-imposed standards for lowering emissions from fossil
fuel-fired electric generating facilities. In the United States, the Clean Air
Act of 1990, as amended (the "Clean Air Act"), mandates a two-phase program
aimed at significantly reducing sulfur dioxide ("SO2") emissions from electric
generating facilities powered by fossil fuels by 2000. Canada and its provinces
have also set goals to reduce emissions of SO2 over the next several years.
Phase I of the Clean Air Act program affected approximately 100 steam-generating
plants representing 261 operating units fueled by fossil fuels, primarily coal.
Of these 261 units, 25 units were retrofitted with FGD systems while the balance
opted mostly for switching to low sulfur coal to achieve compliance. The market
for FGD systems peaked in 1992 at approximately $1.1 billion, and then dropped
sharply in 1993 to a level of approximately $174.0 million due to a curtailment
of activity associated with Phase I. Phase II compliance begins in 2000 and
affects 785 generating plants with more than 2,100 operating units. Options
available under the Clean Air Act to bring the targeted facilities into
compliance with Phase II SO2 emissions requirements include fuel switching,
clean coal technologies, purchase of SO2 allowances, closure of facilities and
off-gas scrubbing utilizing FGD technology.
Oil and Gas. The Company also sells its products for use in the oil and gas
industry, primarily in connection with sour gas production. Sour gas contains
extremely corrosive materials and is produced under high pressure, necessitating
the use of corrosion resistant materials. The demand for sour gas tubulars is
driven by the rate of development of sour gas fields. The factors influencing
the development of sour gas fields include the price of natural gas and the need
to commence drilling in order to protect leases that have been purchased from
either the federal or state governments. As a result, competing oil companies
often place orders for the Company's products at approximately the same time,
adding volatility to the market. This market was very active in 1991, especially
in the offshore sour gas fields in the Gulf of Mexico, but demand for the
Company's products declined significantly thereafter. More recently there has
been less drilling activity and more use of lower performing alloys, which
together have resulted in intense price competition. Demand for the Company's
products in the oil and gas industry is tied to the global demand for natural
gas.
Other Markets. In addition to the industries described above, the Company
also targets a variety of other markets. Other industries to which the Company
sells its HTA products include waste incineration, industrial heat treating,
automotive and instrumentation. Demand in these markets for many of the
Company's lower volume proprietary alloys has grown in recent periods. For
example, incineration of municipal, biological, industrial and hazardous waste
products typically produces very corrosive conditions that demand high
performance alloys. Markets capable of providing growth are being driven by
increasing performance, reliability and service life requirements for products
used in these markets which could provide further applications for the Company's
products.
SALES AND MARKETING
Providing technical assistance to customers is an important part of the
Company's marketing strategy. The Company provides analyses of its products and
those of its competitors for its customers. These analyses enable the Company to
evaluate the performance of its products and to make recommendations as to the
substitution of Company products for other products in appropriate applications,
enabling the Company's products to be specified for use in the production of
customers' products. Market development professionals are assisted by the
research and development staff in directing the sales force to new
opportunities. The Company believes its combination of direct sales, technical
marketing and research and development customer support provides an advantage
over other manufacturers in the high performance industry. This activity allows
the Company to obtain direct insight into customers' alloy needs and allows the
Company to develop proprietary alloys that provide solutions to customers'
problems.
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The Company sells its products primarily through its direct sales
organization, which includes four domestic Company-owned service centers, three
wholly-owned European subsidiaries and sales agents serving the Asia Pacific
Rim. Effective January, 1999, the Company will transfer its Kokomo, Indiana
service center to a leased site in Lebanon, Indiana. This new facility will
have water jet cutting capability and specialized cutting equipment to service
the Company's customers more efficiently. Approximately 78% of the Company's
net revenues in fiscal 1998 was generated by the Company's direct sales
organization. The remaining 22% of the Company's fiscal 1998 net revenues was
generated by independent distributors and licensees in the United States, Europe
and Japan, some of whom have been associated with the Company for over 30 years.
The following table sets forth the approximate percentage of the Company's
fiscal 1998 net revenues generated through each of the Company's distribution
channels.
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DOMESTIC FOREIGN TOTAL
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Company sales office/direct 29% 9% 38%
Company-owned service centers 18% 22% 40%
Independent distributors/sales agents 13% 9% 22%
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Total 60% 40% 100%
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The top twenty customers not affiliated with the Company accounted for
approximately 39% of the Company's net revenues in fiscal 1998. Sales to
Spectrum Metals, Inc. and Rolled Alloys, Inc., which are affiliated with each
other, accounted for an aggregate of 10% of the Company's net revenues in fiscal
1998. No other customer of the Company accounted for more than 10% of the
Company's net revenues in fiscal 1998.
The Company's foreign and export sales were approximately $84.3 million,
$81.4 million and $100.4 million for fiscal 1996, 1997 and 1998, respectively.
Additional information concerning foreign operations and export sales is set
forth in Note 14 of the Notes to Consolidated Financial Statements appearing
elsewhere herein.
MANUFACTURING PROCESS
High performance alloys require a lengthier, more complex melting process
and are more difficult to manufacture than lower performance alloys, such as
stainless steels. The alloying elements in high performance alloys must be
highly refined, and the manufacturing process must be tightly controlled to
produce precise chemical properties. The resulting alloyed material is more
difficult to process because, by design, it is more resistant to deformation.
Consequently, high performance alloys require that greater force be applied when
hot or cold working and are less susceptible to reduction or thinning when
rolling or forging, resulting in more cycles of rolling, annealing and pickling
than a lower performance alloy to achieve proper dimensions. Certain alloys may
undergo as many as 40 distinct stages of melting, remelting, annealing, forging,
rolling and pickling before they achieve the specifications required by a
customer. The Company manufactures products in sheet, plate, tubular, billet,
bar and wire forms, which represented 43%, 24%, 10%, 15%, 5% and 3%,
respectively, of total volume sold in fiscal 1998 (after giving effect to the
conversion of billet to bar by the Company's U.K. subsidiary).
The manufacturing process begins with raw materials being combined, melted
and refined in a precise manner to produce the chemical composition specified
for each alloy. For most alloys, this molten material is cast into electrodes
and additionally refined through electroslag remelting. The resulting ingots are
then forged or rolled to an intermediate shape and size depending upon the
intended final product. Intermediate shapes destined for flat products are then
sent through a series of hot and cold rolling, annealing and pickling operations
before being cut to final size.
The Argon Oxygen Decarburization ("AOD") gas controls in the Company's
primary melt facility remove carbon and other undesirable elements, thereby
allowing more tightly-controlled chemistries which in turn produce more
consistent properties in the alloys. The AOD gas control system also allows for
statistical process control monitoring in real time to improve product quality.
PAGE
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The Company has a four-high Steckel mill for use in hot rolling material.
The four-high mill was installed in 1982 at a cost of approximately $60.0
million and is one of only two such mills in the high performance alloy
industry. The mill is capable of generating approximately 12.0 million pounds of
separating force and rolling plate up to 72 inches wide. The mill includes
integrated computer controls (with automatic gauge control and programmed
rolling schedules), two coiling Steckel furnaces and five heating furnaces.
Computer-controlled rolling schedules for each of the hundreds of combinations
of alloy shapes and sizes the Company produces allow the mill to roll numerous
widths and gauges to exact specifications without stoppages or changeovers.
The Company also operates a three-high rolling mill and a two-high rolling
mill, each of which is capable of custom processing much smaller quantities of
material than the four-high mill. These mills provide the Company with
significant flexibility in running smaller batches of varied products in
response to customer requirements. The Company believes the flexibility provided
by the three-high and two-high mills provides the Company an advantage over its
major competitors in obtaining smaller specialty orders.
BACKLOG
As of September 30, 1998, the Company's backlog orders aggregated
approximately $40.2 million, compared to approximately $60.6 million at
September 30, 1997, and approximately $53.7 million at September 30, 1996. The
decrease in backlog orders is primarily due to a decrease in orders for chemical
processing and aerospace products worldwide during the latter half of fiscal
1998. Substantially all orders in the backlog at September 30, 1998 are expected
to be shipped within the twelve months beginning October 1, 1998. Due to the
cyclical nature of order entry experienced by the Company, there can be no
assurance that order entry will continue at current levels. The historical and
current backlog amounts shown in the following table are also indicative of
relative demand over the past few years.
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THE COMPANY'S BACKLOG
AT FISCAL QUARTER END
(IN MILLIONS)
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1994 1995 1996 1997 1998
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1st $29.5 $49.7 $61.2 $63.8 $ 60.8
2nd $35.5 $64.8 $61.9 $65.4 $ 56.2
3rd $38.0 $55.8 $57.5 $55.5 $ 51.0
4th $41.5 $49.9 $53.7 $60.6 $ 40.2*
<FN>
*Backlog at October 31, 1998 increased to $48.4.
</TABLE>
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RAW MATERIALS
Nickel is the primary material used in the Company's alloys. Each pound of
alloy contains, on average, 0.48 pounds of nickel. Other raw materials include
cobalt, chromium, molybdenum and tungsten. Melt materials consist of virgin raw
material, purchased scrap and internally produced scrap. The significant sources
of cobalt are the countries of Zambia, Zaire and Russia; all other raw materials
used by the Company are available from a number of alternative sources.
Since most of the Company's products are produced to specific orders, the
Company purchases materials against known production schedules. Materials are
purchased from several different suppliers, through consignment arrangements,
annual contracts and spot purchases. These arrangements involve a variety of
pricing mechanisms, but the Company generally can establish selling prices with
reference to known costs of materials, thereby reducing the risk associated with
changes in the cost of raw materials. The Company maintains a policy of pricing
its products at the time of order placement. As a result, rapidly escalating raw
material costs during the period between the time the Company receives an order
and the time the Company purchases the raw materials used to fill such order,
which averages approximately 30 days, can negatively affect profitability even
though the high performance alloy industry has generally been able to pass raw
material price increases through to its customers.
Raw material costs account for a significant portion of the Company's cost
of sales. The prices of the Company's products are based in part on the cost of
raw materials, a significant portion of which is nickel. The Company has in the
past, including fiscal 1998, covered approximately 25% to 50% of its open market
exposure to nickel price changes through hedging activities with brokers on the
London Metals Exchange. Effective October 1, 1998, the Company has ceased its
hedging activities for nickel due to the recent low sustained levels of nickel
prices. The following table sets forth the average per pound prices for nickel
as reported by the London Metals Exchange for the fiscal years indicated.
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YEAR ENDED
SEPTEMBER 30, AVERAGE PRICE
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1988 $ 4.12
1989 5.77
1990 4.29
1991 4.21
1992 3.48
1993 2.53
1994 2.54
1995 3.66
1996 3.56
1997 3.22
1998 2.40
</TABLE>
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RESEARCH AND TECHNICAL DEVELOPMENT
The Company's research facilities are located at the Company's Kokomo
facility and consist of 90,000 square feet of offices and laboratories, as well
as an additional 90,000 square feet of paved storage area. The Company has ten
fully equipped laboratories, including a mechanical test lab, a metallographic
lab, an electron microscopy lab, a corrosion lab and a high temperature lab,
among others. These facilities also contain a reduced scale, fully equipped melt
shop and process lab. As of September 30, 1998, the research and technical
development staff consisted of 39 persons, 16 of whom have engineering or
science degrees, including seven with doctoral degrees, with the majority of
degrees in the field of metallurgical engineering.
Research and technical development costs relate to efforts to develop new
proprietary alloys, to improve current or develop new manufacturing methods, to
provide technical service to customers, to maintain quality assurance methods
and to provide metallurgical training to engineer and non-engineer employees.
The Company spent approximately $3.9 million, $3.8 million and $3.4 million for
research and technical development activities for fiscal 1998, 1997 and 1996,
respectively.
During fiscal 1998, exploratory alloy development projects were focused on
new high temperature alloy products for gas turbine and industrial heat service.
Engineering projects include new manufacturing process development, specialized
test data development and application support for large volume projects
involving power generation and radioactive waste containment. The Company is
continuing to develop an extensive database storage and retrieval system to
better manage its corrosion, high temperature and mechanical property data.
Over the last ten years, the Company's technical programs have yielded nine
new proprietary alloys and 14 United States patents, with an additional two
United States patent applications pending. The Company currently maintains a
total of about 31 United States patents and approximately 200 foreign
counterpart patents and applications targeted at countries with significant or
potential markets for the patented products. In fiscal 1998, approximately 28%
of the Company's net revenues was derived from the sale of patented products and
an additional approximately 42% was derived from the sale of products for which
patents formerly held by the Company had expired. While the Company believes
its patents are important to its competitive position, significant barriers to
entry continue to exist beyond the expiration of any patent period. Six of the
alloys considered by management to be of future commercial significance,
HASTELLOY G-30, HAYNES 230, HASTELLOY C-22, HAYNES HR-120, HAYNES 242 and
ULTIMET, are protected by United States patents that continue until the years
2001, 2002, 2002, 2008, 2008 and 2009, respectively.
COMPETITION
The high performance alloy market is a highly competitive market in which
eight to ten producers participate in various product forms. The Company faces
strong competition from domestic and foreign manufacturers of both the Company's
high performance alloys and other competing metals. The Company's primary
competitors include Inco Alloys International, Inc., a subsidiary of Special
Metals, Allegheny Ludlum Corporation, a subsidiary of Allegheny Teledyne, Inc.
and Krupp VDM GmbH, a subsidiary of Thyssen Krupp Stahl AG. Prior to fiscal
1994, this competition, coupled with declining demand in several of the
Company's key markets, led to significant erosion in the price for certain of
the Company's products. The Company may face additional competition in the
future to the extent new materials are developed, such as plastics or ceramics,
that may be substituted for the Company's products.
EMPLOYEES
As of September 30, 1998, the Company had approximately 993 employees. All
eligible hourly employees at the Kokomo plant are covered by a collective
bargaining agreement with the United Steelworkers of America ("USWA") which was
ratified on June 11, 1996, and which expires on June 11, 1999. As of September
30, 1998, 500 employees of the Kokomo facility were covered by the collective
bargaining agreement. The Company has not experienced a strike at the Kokomo
plant since 1967. None of the employees of the Company's Arcadia, Louisiana or
Openshaw, England plants are represented by a labor union. Management considers
its employee relations in each of the facilities to be satisfactory.
PAGE
<PAGE>
ENVIRONMENTAL MATTERS
The Company's facilities and operations are subject to certain foreign,
federal, state and local laws and regulations relating to the protection of
human health and the environment, including those governing the discharge of
pollutants into the environment and the storage, handling, use, treatment and
disposal of hazardous substances and wastes. Violations of these laws and
regulations can result in the imposition of substantial penalties and can
require facilities improvements. In addition, the Company may be required in the
future to comply with certain regulations pertaining to the emission of
hazardous air pollutants under the Clean Air Act. However, since these
regulations have not been proposed or promulgated, the Company cannot predict
the cost, if any, associated with compliance with such regulations. Expenses
related to environmental compliance were approximately $1.4 million for fiscal
1998 and are expected to be approximately $1.3 million for fiscal year 1999.
Although there can be no assurance, based upon current information available to
the Company, the Company does not expect that costs of environmental
contingencies, individually or in the aggregate, will have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
The Company's facilities are subject to periodic inspection by various
regulatory authorities, who from time to time have issued findings of violations
of governing laws, regulations and permits. In the past five years, the Company
has paid administrative fines, none of which has exceeded $50,000, for alleged
violations relating to environmental matters, including the handling and storage
of hazardous wastes, record keeping requirements relating to, and handling of,
polychlorinated biphenyls and violations of record keeping and notification
requirements relating to industrial waste water discharge. Additions and
improvements may be required at the Kokomo, Indiana Wastewater Treatment
Facility based on proposed restrictions of the local sewer use ordinance.
Although the Company does not believe that similar regulatory or enforcement
actions would have a material impact on its operations, there can be no
assurance that violations will not be alleged or will not result in the
assessment of additional penalties in the future. As of September 30,1998,
capital expenditures of approximately $100,000 are budgeted for wastewater
treatment improvements.
The Company has received permits from the Indiana Department of
Environmental Management ("IDEM") and the U.S. Environmental Protection Agency
("EPA") to close and to provide post-closure monitoring and care for certain
areas at the Kokomo facility used for the storage and disposal of wastes, some
of which are classified as hazardous under applicable regulations. The closure
project, essentially complete, entailed installation of a clay liner under the
disposal areas, a leachate collection system and a clay cap and revegetation of
the site. Construction was completed in May 1994 and a closure certification
has been filed with IDEM. At September 30, 1998, approximately $150,000 was
accrued for final closure related costs. Closure certification is anticipated
in fiscal 1999. Thereafter, the Company will be required to monitor groundwater
and to continue post-closure maintenance of the former disposal areas. The
Company is aware of elevated levels of certain contaminants in the groundwater.
The Company believes that some or all of these contaminants may have migrated
from a nearby superfund site. If it is determined that the disposal areas have
impacted the groundwater underlying the Kokomo facility, additional corrective
action by the Company could be required. The Company is unable to estimate the
costs of such action, if any. There can be no assurance, however, that the costs
of future corrective action would not have a material effect on the Company's
financial condition, results of operations or liquidity. Additionally, it is
possible that the Company could be required to obtain permits and undertake
other closure projects and post-closure commitments for any other waste
management unit determined to exist at the facility.
As a condition of these closure and post-closure permits, the Company must
provide and maintain assurances to IDEM and EPA of the Company's capability to
satisfy closure and post-closure ground water monitoring requirements, including
possible future corrective action as necessary.
The Company has completed an investigation, pursuant to a work plan approved
by the EPA, of eight specifically identified solid waste management units at the
Kokomo facility. Results of this investigation have been filed with the EPA.
Based on the results of this investigation compared to Indiana's Tier II
clean-up goals, the Company believes that no further actions will be necessary.
Until the EPA reviews the results, the Company is unable to determine whether
further corrective action will be required or, if required, whether it will have
a material adverse effect on the Company's financial condition, results of
operations or liquidity.
PAGE
<PAGE>
The Company may also incur liability for alleged environmental damages
associated with the off-site transportation and disposal of its wastes. The
Company's operations generate hazardous wastes, and, while a large percentage of
these wastes are reclaimed or recycled, the Company also accumulates hazardous
wastes at each of its facilities for subsequent transportation and disposal
off-site by third parties. Generators of hazardous waste transported to disposal
sites where environmental problems are alleged to exist are subject to claims
under CERCLA, and state counterparts. CERCLA imposes strict, joint and several
liability for investigatory and cleanup costs upon waste generators, site owners
and operators and other "potentially responsible parties" ("PRPs"). Based on
its prior shipment of certain hydraulic fluid, the Company is one of
approximately 300 PRPs in connection with the proposed cleanup of the
Fisher-Calo site in Indiana. The PRPs have negotiated a Consent Decree
implementing a remedial design/remedial action plan ("RD/RA") for the site with
the EPA. The Company has paid approximately $138,000 as its share of the total
estimated cost of the RD/RA under the Consent Decree. Based on information
available to the Company concerning the status of the cleanup efforts at the
site, the large number of PRPs and the prior payments made by the Company,
management does not expect the Company's involvement in this site to have a
material adverse effect on the financial condition, results of operations or
liquidity of the Company. The Company may have generated hazardous wastes
disposed of at other sites potentially subject to CERCLA or equivalent state law
remedial action. Thus, there can be no assurance that the Company will not be
named as a PRP at additional sites in the future or that the costs associated
with those sites would not have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
In November 1988, the EPA approved start-up of a new waste water treatment
plant at the Arcadia, Louisiana facility, which discharges treated industrial
waste water to the municipal sewage system. After the Company exceeded certain
EPA effluent limitations in 1989, the EPA issued an administrative order in 1992
which set new effluent limitations for the facility. The waste water plant is
currently operating under this order and the Company believes it is meeting such
effluent limitations. However, the Company anticipates that in the future
Louisiana will take over waste water permitting authority from the EPA and may
issue a waste water permit, the conditions of which could require modification
to the plant. Reasonably anticipated modifications are not expected to have a
substantial impact on operations.
ITEM 2. PROPERTIES
The Company's owned facilities, and the products provided at each facility,
are as follows:
Kokomo, Indiana--all product forms, other than tubular goods.
Arcadia, Louisiana--welded and seamless tubular goods.
Openshaw, England--bar and billet for the European market.
Zurich, Switzerland--all product forms.
The Kokomo plant, the primary production facility, is located on
approximately 230 acres of industrial property and includes over one million
square feet of building space. There are three sites consisting of a
headquarters and research lab; melting and annealing furnaces, forge press and
several hot mills; and the four-high mill and sheet product cold working
equipment, including two cold strip mills. All alloys and product forms other
than tubular goods are produced in Kokomo.
The Arcadia plant consists of approximately 42 acres of land and over
135,000 square feet of buildings on a single site. Arcadia uses feedstock
produced in Kokomo to fabricate welded and seamless alloy pipe and tubing and
purchases extruded tube hollows to produce seamless titanium tubing.
Manufacturing processes at Arcadia require cold pilger mills, weld mills,
drawbenches, annealing furnaces and pickling facilities.
The United States facilities are subject to a mortgage which secures the
Company's obligations under the Company's Revolving Credit Facility. See Note 6
of the Notes to Consolidated Financial Statements.
The Openshaw plant, located near Manchester, England, consists of
approximately 15 acres of land and over 200,000 square feet of buildings on a
single site. The plant produces bar and billet using billets produced in Kokomo
as feedstock. Additionally, products not competitive with the Company's products
are processed for third parties. The processes conducted at the facility require
hot rotary forges, bar mills and miscellaneous straightening, turning and
cutting equipment.
The Zurich warehouse consists of over 50,000 square feet of building on a
single site.
Although capacity can be limited from time to time by certain production
processes, the Company believes that its existing facilities will provide
sufficient capacity for current demand.
PAGE
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In Leslie Baxter, et. al. vs. Haynes International, Inc. and Haynes Group
Insurance Plan, filed July 6, 1995 in the U.S. District Court, Southern District
of Indiana, Indianapolis Division, retirees and the surviving spouse of a
retiree filed suit on behalf of themselves and similarly situated retirees and
surviving spouses for restoration of the retiree health benefits to levels
prevailing before the reduction of those benefit levels on January 1, 1995, and
to maintain the restored benefit levels for the lives of the covered retirees
and their surviving spouses. The parties have settled the lawsuit, and such
lawsuit was dismissed as of September 18, 1998 pursuant to an agreement which
provides that the Company will provide a lifetime medical benefit plan for the
Plaintiffs in exchange for the retirees assuming a greater portion of future
health cost increases.
The Company also is involved in other routine litigation incidental to the
conduct of its business, none of which is believed by management to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no established trading market for the common stock of the Company.
As of December 18, 1998 there was one holder of the common stock of the
Company.
There have been no cash dividends declared on the common stock for the two
fiscal years ended September 30, 1998 and 1997.
The payment of dividends is limited by terms of certain debt agreements to
which the Company is a party. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
and Note 6 of the Notes to Consolidated Financial Statements of the Company
included herein in response to Item 8.
(Remainder of page intentionally left blank.)
PAGE
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT RATIO DATA)
The following table sets forth selected consolidated financial data of the
Company. The selected consolidated financial data as of and for the years ended
September 30, 1994, 1995, 1996, 1997 and 1998 are derived from the audited
consolidated financial statements of the Company.
These selected financial data are not covered by the auditors' report and
are qualified in their entirety by reference to, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations", and the Consolidated Financial Statements of the
Company and the related notes thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Year Ended Year Ended Year Ended Year Ended
September 30, September 30, September 30, September 30,
STATEMENT OF OPERATIONS DATA: 1994 1995 1996 1997
-------------- -------------- -------------- --------------
Net revenues $ 150,578 $ 201,933 $ 226,402 $ 235,760
Cost of sales(1) 171,957(2) 167,196 181,173 180,504
Selling and administrative expenses 15,039 15,475 19,966(3) 18,311
Recapitalization expense - - - 8,694(4)
Research and technical expenses 3,630 3,049 3,411 3,814
Operating income (loss) (40,048) 16,213 21,852 24,437
Other cost, net 816 1,767 590 276
Terminated acquisition costs - - - -
Interest expense, net 19,582 19,904 21,102(3) 20,456
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle (60,866) (6,771) (1,780) 36,315(6)
Extraordinary item, net of tax benefit (7,256)(3) -
Cumulative effect of change in accounting
principle (net of tax benefit) (79,630)(7) - - -
-------------- -------------- -------------- --------------
Net income (loss) (140,496) (6,771) (9,036) 36,315
September 30, September 30, September 30, September 30,
BALANCE SHEET DATA: 1994 1995 1996 1997
-------------- -------------- -------------- --------------
Working capital (9) $ 60,182 $ 62,616 $ 57,307 $ 57,063
Property, plant and equipment, net 43,119 36,863 31,157 32,551
Total assets 145,723 151,316 161,489 216,319
Total debt 148,141 152,477 169,097 184,213
Accrued post-retirement benefits 94,148 94,830 95,813 96,201
Stockholder's equity (Capital deficiency) (116,029) (121,909) (130,341) (94,435)
September 30, September 30, September 30, September 30,
OTHER FINANCIAL DATA: 1994 1995 1996 1997
-------------- -------------- -------------- --------------
Depreciation and amortization (10) $ 51,555 $ 9,000 $ 9,042 $ 8,197
Capital expenditures 771 1,934 2,092 8,863
EBITDA (11) 10,691 23,446 32,141 41,302
Ratio of EBITDA to interest expense 0.55x 1.18x 1.52x 2.02x
Ratio of earnings before fixed
charges to fixed charges (12) - - 1.01x 1.17x
Net cash provided from (used in) operating activities $ (12,801) $ (2,883) $ (5,343) $ (6,596)
Net cash provided from (used in) investment
activities 746 (1,895) (2,025) (8,830)
Net cash provided from (used in) financing
activities 7,102 3,912 7,116 14,185
-------------- -------------- -------------- --------------
PAGE
<PAGE>
<S> <C>
Year Ended
September 30,
STATEMENT OF OPERATIONS DATA: 1998
--------------
Net revenues $ 246,944
Cost of sales(1) 191,849
Selling and administrative expenses 18,166
Recapitalization expense -
Research and technical expenses 3,939
Operating income (loss) 32,990
Other cost, net 952
Terminated acquisition costs 6,199(5)
Interest expense, net 21,066
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle 2,456
Extraordinary item, net of tax benefit -
Cumulative effect of change in accounting
principle (net of tax benefit) (450)(8)
--------------
Net income (loss) 2,006
September 30,
BALANCE SHEET DATA: 1998
--------------
Working capital (9) $ 66,974
Property, plant and equipment, net 29,627
Total assets 207,263
Total debt 175,877
Accrued post-retirement benefits 96,483
Stockholder's equity (Capital deficiency) (90,938)
September 30,
OTHER FINANCIAL DATA: 1998
--------------
Depreciation and amortization (10) $ 8,148
Capital expenditures 5,919
EBITDA (11) 40,186
Ratio of EBITDA to interest expense 1.91x
Ratio of earnings before fixed
charges to fixed charges (12) 1.22x
Net cash provided from (used in) operating activities $ 14,584
Net cash provided from (used in) investment
activities (5,750)
Net cash provided from (used in) financing
activities (8,562)
--------------
<FN>
(1) The Company was acquired by Morgan, Lewis, Githens & Ahn ("MLGA") and the management of the Company in August 1989
(the "1989 Acquisition"). For financial statement purposes, the 1989 Acquisition was accounted for as a purchase
transaction effective September 1, 1989; accordingly, inventories were adjusted to reflect estimated fair values at
that date. This adjustment to inventories was amortized to cost of sales as inventories were reduced from the base
layer. Non-cash charges for this adjustment included in cost of sales were $488 for fiscal 1994. No charges have been
recognized since fiscal 1994.
(2) Reflects the write-off of $37,117 of goodwill created in connection with the 1989 Acquisition remaining at
September 30, 1994.
(3) During fiscal 1996, the Company successfully refinanced its debt with the issuance of $140,000 Senior Notes due
2004 and an amendment to its Revolving Credit Facility with Congress Financial Corporation ("Congress"). As a result
of this refinancing effort, certain non-recurring charges were recorded as follows: (a) $7,256 was recorded as the
aggregate of extraordinary items which represents the extraordinary loss on the redemption of the Company's 11 %
Senior Secured Notes due 1998, and 13 % Senior Subordinated Notes due 1999 (collectively, the "Old Notes") and is
comprised of $3,911 of prepayment penalties incurred in connection with the redemption of the Old Notes and $3,345 of
deferred debt issuance costs which were written off upon consummation of the redemption of the Old Notes; (b) $1,837
of Selling and Administrative Expense which represents costs incurred with a terminated initial public offering of the
Company's common stock; and (c) $924 of Interest Expense which represents the net interest expense (approximately
$1,500 interest expense, less approximately $600 interest income) incurred during the period between the issuance of
the Senior Notes and the redemption of the Old Notes.
PAGE
<PAGE>
(4) On January 29, 1997, the Company announced that Haynes Holdings, Inc. ("Holdings"), its parent corporation, had
effected the recapitalization of the Company and Holdings pursuant to which Blackstone Capital Partners II Merchant
Banking Fund L.P. and two of its affiliates ("Blackstone") acquired 79.9% of Holdings' outstanding shares (the
"Recapitalization"). Certain fees, totaling $6,237, paid by the Company in connection with the Recapitalization were
accounted for as recapitalization expenses and charged against income in the period. Also in connection with the
recapitalization, the Company recorded $2,457 of non-cash stock compensation expense, also included as
recapitalization expenses, pertaining to certain modifications to management stock option agreements which eliminated
put and call rights associated with the options.
(5) Terminated acquisition costs of approximately $6,199 were recorded in fiscal 1998 in connection with the abandoned
attempt to acquire Inco Alloys International by Holdings. These costs previously had been deferred.
(6) The Company recorded profit before tax of $3,705 and net income of $36,315. During the third quarter of fiscal
1997, the Company reversed its deferred income tax valuation allowance of approximately $36,431. See Note 5 of the
Notes to Consolidated Financial Statements of the Company included in this Annual Report in response to Item 8.
(7) During fiscal 1994, the Company adopted SFAS 106. The Company elected to immediately recognize the transition
obligation for benefits earned as of October 1, 1993, resulting in a non-cash charge of $79,630, net of a $10,580 tax
benefit, representing the cumulative effect of the change in accounting principle. The tax benefit recognized was
limited to then existing net deferred tax liabilities.
(8) On November 20, 1997, the Financial Accounting Standards Board's Emerging Issues Task Force ("EITF") issued a
consensus ruling which requires that certain business process reengineering and information technology transformation
costs be expensed as incurred. The EITF also consented that if such costs were previously capitalized, then any
remaining unamortized portion of those identifiable costs should be written off and reported as a cumulative effect of
a change in accounting principle in the first quarter of fiscal 1998. Accordingly, the Company recorded the
cumulative effect of this accounting change, net of tax, of $450, resulting from a pre-tax write-off of $750 related
to reengineering charges involved in the implementation of an information technology project.
(9) Reflects the excess of current assets over current liabilities as set forth in the Consolidated Financial
Statements.
(10) Reflects (a) depreciation and amortization as presented in the Company's Consolidated Statement of Cash Flows and
set forth in Note (11) below, plus or minus (b) other non-cash charges, including the amortization of prepaid pension
costs (which is included in the change in other asset category) and the amortization of inventory costs as described
in Note (1) above, minus amortization of debt issuance costs, all as set forth in Note (11) below.
(11) Represents for the relevant period net income plus expenses recognized for interest, taxes, depreciation,
amortization and other non-cash charges, (i) plus the refinancing costs set forth in Note 3, part (a) and (b) for
fiscal 1996, (ii) plus recapitalization costs outlined in Note 4, and $250 of failed acquisition costs for fiscal
1997, and (iii) plus terminated acquisition costs outlined in Note 5, and $450 of business process reengineering
costs outlined in Note 8 for fiscal 1998. In addition to net interest expense as listed in the table, the following
charges are added to net income to calculate EBITDA:
<CAPTION>
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
-------- -------- -------- --------- --------
Provision for (benefit from) income taxes $ 420 $ 1,313 $ 1,940 $(32,610) $ 2,317
Depreciation 8,208 8,188 7,751 7,477 8,029
Amortization:
Debt issuance costs 1,680 1,444 4,698 1,144 1,247
Goodwill 38,607 - - - -
Inventory (see note (1) above) 488 - - - -
Prepaid pension costs 314 130 308 333 (163)
-------- -------- -------- --------- --------
41,089 1,574 5,006 (23,656) 11,430
SFAS 106-Post-retirement 3,938 682 983 387 282
Amortization of debt issuance costs (1,680) (1,444) (4,698) (1,144) (1,247)
-------- -------- -------- --------- --------
Total $51,975 $10,313 $10,982 $(24,413) $10,465
======== ======== ======== ========= ========
</TABLE>
PAGE
<PAGE>
EBITDA should not be construed as a substitute for income from operations, net
earnings (loss) or cash flows from operating activities determined in accordance
with generally accepted accounting principles ("GAAP"). The Company has included
EBITDA because it believes it is commonly used by certain investors and analysts
to analyze and compare companies on the basis of operating performance, leverage
and liquidity and to determine a company's ability to service debt. Because
EBITDA is not calculated in the same manner by all entities, EBITDA as
calculated by the Company may not necessarily be comparable to that of the
Company's competitors or of other entities.
(12) For purposes of these computations, earnings before fixed charges consist
of income (loss) before provision for (benefit from) income taxes, extraordinary
item and cumulative effect of a change in accounting principle, plus fixed
charges. Fixed charges consist of interest on debt, amortization of debt
issuance costs and estimated interest portion of rental expense. Earnings were
insufficient to cover fixed charges by $60,446 and $5,458 for fiscal 1994 and
1995, respectively.
(Remainder of page intentionally left blank.)
PAGE
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Report contains statements that constitute forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Those statements appear in a number of places in this Report and may include
statements regarding the intent, belief or current expectations of the Company
or its officers with respect to (i) the Company's strategic plans, (ii) the
policies of the Company regarding capital expenditures, financing and other
matters, and (iii) industry trends affecting the Company's financial condition
or results of operations. Readers are cautioned that any such forward looking
statements are not guarantees of future performance and involve risks and
uncertainties and that actual results may differ materially from those in the
forward looking statements as a result of various factors, many of which are
beyond the control of the Company.
COMPANY BACKGROUND
The Company sells high temperature alloys and corrosion resistant alloys,
which accounted for 64% and 36%, respectively, of the Company's net revenues in
fiscal 1998. Based on available industry data, the Company believes that it is
one of three principal producers of high performance alloys in flat product
form, which includes sheet, coil and plate forms. The Company also produces its
alloys in round and tubular forms. In fiscal 1998, flat products accounted for
65% of shipments and 62% of net revenues.
The Company's annual production capacity varies depending upon the mix of
alloys, forms, product sizes, gauges and order sizes. Based on the current
product mix, the Company estimates that its annual production capacity, which
has been unchanged for the past five years, is approximately 20.0 million
pounds. As a result of changes in the Company's primary markets, sales volume
has ranged from a high of 18.5 million pounds in fiscal 1998, to a low of 13.3
million pounds in fiscal 1994. The Company is not currently capacity
constrained. See "--Liquidity and Capital Resources."
The Company sells its products primarily through its direct sales
organization, which includes four domestic Company-owned service centers, three
wholly-owned European subsidiaries and sales agents serving the Pacific Rim who
operate on a commission basis. Effective January, 1999, the Company will
transfer its Kokomo, Indiana service center to a leased site in Lebanon,
Indiana. This new facility will have water jet cutting capability and
specialized cutting equipment to service the Company's customers more
efficiently. Approximately 78% of the Company's net revenues in fiscal 1998 was
generated by the Company's direct sales organization. The remaining 22% of the
Company's fiscal 1998 net revenues was generated by independent distributors and
licensees in the United States, Europe and Japan, some of whom have been
associated with the Company for over 25 years.
The proximity of production facilities to export customers is not a
significant competitive factor, since freight and duty costs per pound are minor
in comparison to the selling price per pound of high performance alloy products.
In fiscal 1998, sales to customers outside the United States accounted for
approximately 41% of the Company's net revenues.
The high performance alloy industry is characterized by high capital
investment and high fixed costs, and profitability is therefore very sensitive
to changes in volume. The cost of raw materials is the primary variable cost in
the high performance alloy manufacturing process and represents approximately
one-half of total manufacturing costs. Other manufacturing costs, such as labor,
energy, maintenance and supplies, often thought of as variable, have a
significant fixed element. Accordingly, relatively small changes in volume can
result in significant variations in earnings.
PAGE
<PAGE>
In fiscal 1998, proprietary products represented approximately 28% of the
Company's net revenues. In addition to these patent-protected alloys, several
other alloys manufactured by the Company have little or no direct competition
because they are difficult to produce and require relatively small production
runs to satisfy demand. In fiscal 1998, these other alloys represented
approximately 21% of the Company's net revenues.
Order to shipment lead times can be a competitive factor as well as an
indication of the strength of the demand for high performance alloys. The
Company's current average lead times from order to shipment are approximately 15
to 17 weeks.
OVERVIEW OF MARKETS
A breakdown of sales, shipments and average selling prices to the markets
served by the Company for the last five fiscal years is shown in the following
table: (Note: Markets prior to 1997 have been reclassified due to improved
identification techniques implemented in 1997 by the Company.)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994 1994 1995 1995 1996 1996 1997 1997 1998 1998
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
SALES (DOLLARS IN % OF % OF % OF % OF % OF
MILLIONS) AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Aerospace $ 47.9 31.8% $ 68.2 33.8% $ 95.3 42.1% $ 111.2 47.2% $ 111.9 45.3%
Chemical processing 51.9 34.5 74.1 36.7 77.9 34.4 69.3 29.4 79.7 32.3
Land-based gas turbines 17.0 11.3 14.3 7.1 17.4 7.7 17.2 7.4 17.5 7.1
Flue gas desulfurization 10.2 6.7 6.6 3.3 8.3 3.7 6.7 2.7 8.4 3.4
Oil and gas 4.2 2.8 4.5 2.2 4.3 1.9 7.8 3.3 5.9 2.4
Other markets 17.3 11.5 30.9 15.3 19.6 8.6 20.1 8.5 19.8 8.0
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total product 148.5 98.6 198.6 98.4 222.8 98.4 232.3 98.5 243.2 98.5
Other revenue (1) 2.1 1.4 3.3 1.6 3.6 1.6 3.5 1.5 3.7 1.5
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net revenues $ 150.6 100.0% $ 201.9 100.0% $ 226.4 100.0% $ 235.8 100.0% $ 246.9 100.0%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
U.S. $ 94.8 $ 122.3 $ 142.0 $ 154.3 $ 146.5
Foreign $ 55.8 $ 79.6 $ 84.4 $ 81.5 $ 100.4
SHIPMENTS BY MARKET (MILLIONS OF
POUNDS)
Aerospace 3.4 25.6% 4.8 29.4% 6.6 40.2% 8.3 45.9% 7.6 41.1%
Chemical processing 5.2 39.1 6.4 39.3 6.0 36.6 5.7 31.9 6.7 36.2
Land-based gas turbines 1.6 12.0 1.3 8.0 1.5 9.2 1.4 8.1 1.6 8.7
Flue gas desulfurization 1.5 11.3 0.9 5.5 1.0 6.1 0.7 3.8 1.1 5.9
Oil and gas 0.4 3.0 0.5 3.1 0.3 1.8 0.7 3.8 0.5 2.7
Other markets 1.2 9.0 2.4 14.7 1.0 6.1 1.2 6.5 1.0 5.4
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total Shipments 13.3 100.0% 16.3 100.0% 16.4 100.0% 18.0 100.0% 18.5 100.0%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
AVERAGE SELLING
PRICE PER POUND
Aerospace $ 14.09 $ 14.21 $ 14.44 $ 13.40 $ 14.72
Chemical processing 9.98 11.58 12.98 12.16 11.90
Land-based gas turbines 10.63 11.00 11.60 12.29 10.94
Flue gas desulfurization 6.80 7.33 8.30 9.57 7.64
Oil and gas 10.50 9.00 14.33 11.14 11.80
Other markets 14.42 12.88 19.60 16.75 19.80
All markets $ 11.17 $ 12.18 $ 13.59 $ 12.91 $ 13.15
------- ------- ------- ------- -------
<FN>
- --------------------
(1) Includes toll conversion and royalty income.
</TABLE>
Fluctuations in net revenues and volume from fiscal 1994 through fiscal 1998
are a direct result of significant changes in each of the Company's major
markets.
PAGE
<PAGE>
Aerospace. Demand for the Company's products in the aerospace industry is
driven by orders for new jet engines as well as requirements for spare parts and
replacement parts for jet engines. Demand for the Company's aerospace products
declined significantly from fiscal 1991 to fiscal 1992, as order rates for
commercial aircraft fell below delivery rates due to cancellations and deferrals
of previously placed orders. The Company believes that, as a result of these
cancellations and deferrals, engine manufacturers and their fabricators and
suppliers were caught with excess inventories. The draw down of these
inventories, and the implementation of just-in-time delivery requirements by
many jet engine manufacturers, exacerbated the decline experienced by suppliers
to these manufacturers, including the Company. Demand for products used in
manufacturing military aircraft and engines also dropped during this period as
domestic defense spending declined following the Persian Gulf War. These
conditions persisted through fiscal 1994.
The Company began to see a recovery in the demand for its aerospace products
at the beginning of fiscal 1995. Reflecting increased aircraft production and
maintenance, the Company's net revenues from sales to the aerospace industry in
1996 and 1997 increased 39.7% and 16.7%, respectively, over the preceding
period.
Sales to the aerospace market in fiscal 1998 were negatively affected by
weaker than expected deliveries of commercial aircraft due to deferrals and
cancellations at the major aircraft producers. However, the Company expects the
increase in the number of "in-service" gas turbine engines through fiscal 1998
to provide a consistent stream of maintenance and repair requirements for Haynes
products. In addition, the Company expects continued compliance efforts with
Stage III noise regulations to keep demand strong for Haynes products in the
"hush kit" retrofitting aerospace market segment.
Chemical Processing. Demand for the Company's products in the chemical
processing industry tends to track overall economic activity and is driven by
maintenance requirements of chemical processing facilities and the expansion of
existing chemical processing facilities or the construction of new facilities.
In fiscal 1998, sales of the Company's products to the chemical processing
industry reached a five-year high, and the Company believes that the outlook for
sales of the Company's products to the chemical processing industry continues to
gradually improve. Concerns regarding the reliability of chemical processing
facilities, their potential impact on the environment and the safety of their
personnel as well as the need for higher throughput should support demand for
more sophisticated alloys, such as the Company's CRA products.
The Company expects that moderate growth in the chemical processing industry
will result from volume increases and selective price increases as a result of
increased demand. In addition, the Company's key proprietary CRA products, the
recently introduced HASTELLOY C-2000, which the Company believes provides better
overall corrosion resistance and versatility than any other readily available
CRA product, and HASTELLOY C-22, are expected to contribute to the Company's
growth in this market, although there can be no assurance that this will be the
case.
Chemical processing markets are expected to see moderate growth in export
markets and specific industry sectors (agricultural chemicals and
pharmaceuticals). The chemicals sector comprises both specialty and basic
organic and inorganic chemicals. Mergers and acquisitions of chemical companies
continue as companies make strategic acquisitions and divestitures in efforts to
enhance their global competitiveness.
The agricultural chemical sector is benefitting from changes in U.S.
agricultural programs that now place fewer limits on farmers' ability to plant
preferred crops on the acreage they choose. Growth in the pharmaceutical sector
is being spurred by continuing advances in both traditional drug research and
the fast growing biotech sector.
Land-Based Gas Turbines. The Company leveraged its metallurgical expertise
to develop LBGT applications for alloys it had historically sold to the
aerospace industry. Electric generating facilities powered by land-based gas
turbines are less expensive to construct and operate and produce fewer SO2
emissions than traditional fossil fuel-fired facilities. The Company believes
these factors are primarily responsible for creating demand for its products in
the LBGT industry. Prior to the enactment of the Clean Air Act, land-based gas
turbines were used primarily to satisfy peak power requirements. However,
legislated standards for lowering emissions from fossil fuel-fired electric
utilities and cogeneration facilities, such as the Clean Air Act, together with
self-imposed standards, contributed to increased demand for some of the
Company's products in the early 1990's, when Phase I of the Clean Air Act was
being implemented. The Company believes that land-based gas turbines are gaining
acceptance as a clean, low-cost alternative to fossil fuel-fired electric
generating facilities. The Company believes that compliance with Phase II of the
Clean Air Act, which begins in 2000, will further contribute to demand for its
products.
PAGE
<PAGE>
Flue Gas Desulfurization. The Clean Air Act is the primary factor
determining the demand for high performance alloys in the FGD industry. FGD
projects have been undertaken by electric utilities and cogeneration facilities
powered by fossil fuels in the United States, Europe and the Pacific Rim in
response to concerns over emissions. FGD projects are generally highly visible
and as a result are highly price competitive, especially when demand for high
performance alloys in other major markets is weak. The Company anticipates
limited sales opportunities in the FGD market as deadlines for Phase II of the
Clean Air Act approach in 2000, due to the over-compliance with Phase I
requirements as discussed below.
The Clean Air Act addresses numerous air quality problems in the United
States that are not entirely covered in earlier legislation. One of these
problems is acid rain caused by SO2 and nitrogen oxides ("NO") emissions from
fossil-fueled electric power. Title IV of the Clean Air Act created a
two-phased plan to reduce acid rain in the U.S. Phase I runs from 1995 through
1999, and Phase II, which is more stringent than Phase I, begins in 2000.
The acid rain program allocated emission allowances to Phase I units,
authorizing them to emit one ton of SO2 for each allowance. Some utilities
obtained additional allowances from three auctions and from bonus provisions in
the Clean Air Act. To reach compliance, a Phase I utility could use one or more
of the following compliance methods: (1) fuel switching and/or fuel blending
with lower sulfur coal; (2) obtaining additional allowances; (3) installing flue
gas desulfurization equipment (i.e., scrubbers); (4) using previously
implemented emission controls; (5) retiring units; (6) boiler repowering; (7)
substituting Phase II units for Phase I units; and (8) compensating Phase I
units with Phase II units.
For Phase II, more than 2,000 operating units will be affected. While many
utilities have not finalized their plans to comply with the more stringent Phase
II requirements, most of them have elected to over-comply with Phase I
requirements, thus creating a surplus of allowances.
Increased competition has caused the electric utility industry to make
major changes in the way it is structured. On April 26, 1996, the Federal
Energy Regulatory Commission ("FERC") issued the final rule, Order No. 888, in
response to provisions of the Energy Policy Act ("EPACT") of 1992. Order No.
888 opens wholesale electric power sales to competition and requires each
utility that owns transmission lines to allow buyers and sellers of power the
same access to these lines as the utility provides for its own generation.
In a noncompetitive, regulated environment, state regulators allowed
electric utilities to pass on costs of pollution control requirements to
consumers. In a competitive environment, however, utilities with higher rates
due to environmental controls would be at a relative disadvantage, while those
with lower costs could increase market share. With increasing competition and
Phase II of the Clean Air Act slated for implementation on January 1, 2000,
utilities are showing less interest in making capital investments in expensive
pollution control equipment, are uncertain about cost recovery, and want to be
more competitive.
A number of scrubbers for Phase II are being deferred. Planning and
building a scrubber takes four years, so in many cases capital for scrubbers
will not be committed until after the year 2000. Repowering older fossil-fuel
units is another alternative to meet Phase II compliance.
Oil and Gas. The Company's participation in the oil and gas industry
consists primarily of providing tubular goods for sour gas production. Demand
for the Company's products in this industry is driven by the rate of development
of sour gas fields, which in turn is driven by the price of natural gas and the
need to commence production in order to protect leases. Due to the volatility
of the oil and gas industry, the Company has chosen not to invest in certain
manufacturing equipment necessary to perform certain intermediate steps of the
manufacturing process for these tubular products. However, the Company can
outsource the necessary processing steps in the manufacture of these tubulars
when prices rise to attractive levels. The Company intends to selectively take
advantage of future opportunities as they arise, but plans no capital
expenditures to increase its internal capabilities in this area. The gas
drilling rate remains strong, as is the rig count in both the Gulf of Mexico and
inland areas. Demand for natural gas is expected to grow moderately over the
next several years.
PAGE
<PAGE>
Other Markets. In addition to the industries described above, the Company
also targets a variety of other markets. Representative industries served in
fiscal 1998 include waste incineration, industrial heat treating, automotive,
medical and instrumentation. The automotive and industrial heating markets are
highly cyclical and very competitive. However, continual growth opportunities
exist in the automotive industry due to new safety, engine controls, and
emission systems technologies. Also, increasing requirements for improved
materials performance in industrial heating are expected to increase demand for
the Company's products. Waste incineration presents opportunities for the
Company's alloys as landfill space is diminishing and government concerns over
pollution, chemical weapon stockpiles, and chemical and nuclear waste handling
are heightening. Many of the Company's lower volume proprietary alloys are
experiencing growing demand in these other markets. Markets capable of providing
growth are being driven by increasing performance, reliability and service life
requirements for products used in these markets, which could provide further
applications for the Company's products.
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PAGE
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, consolidated
statements of operations data as a percentage of net revenues:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998
------------- ------------- -------------
Net revenues 100.0% 100.0% 100.0%
Cost of sales 80.0 76.6 77.7
Selling and administrative expenses 8.8(1) 7.8 7.4
Recapitalization expense - 3.7(2) -
Research and technical expenses 1.5 1.6 1.6
------------- ------------- -------------
Operating income 9.7 10.3 13.3
Other cost, net 0.3 0.1 0.4
Terminated acquisition costs - - 2.5(3)
Interest expense 9.7(1) 8.7 8.6
Interest income (0.4)(1) (0.1) (0.1)
Income (loss) before provision for income
taxes, extraordinary items, and cumulative
effect of change in accounting principle 0.1 1.6 1.9
Provision for (benefit from) income taxes 0.9 (13.8) 0.9
Extraordinary item, net of tax benefit (3.2)(1) - -
Cumulative effect of a change in
accounting principle - - (0.2)(4)
Net income (loss) (4.0)% 15.4% .8%
<FN>
- -----------------------------
(1) During 1996, the Company refinanced its debt and certain non-recurring charges were
recorded as a result of this refinancing effort as follows: (a) approximately $7.3 million
was recorded as the aggregate of extraordinary items which represents the extraordinary loss
on the redemption of the Old Notes and is comprised of approximately $3.9 million of
prepayment penalties incurred in connection with the redemption of the Old Notes and
approximately $3.4 million of deferred debt issuance costs which were written off upon
consummation of the redemption of the Old Notes; (b) approximately $1.8 million of Selling
and Administrative Expense which represents costs incurred with a postponed initial public
offering of the Company's common stock; and (c) approximately $924,000 of Interest Expense
which represents the net interest expense (approximately $1.5 million interest expense less
approximately $600,000 interest income) incurred during the period between the issuance of
the Senior Notes and the redemption of the Old Notes.
(2) On January 29, 1997, the Company announced that Haynes Holdings, Inc. ("Holdings"), its
parent corporation, had effected the recapitalization of the Company and Holdings pursuant to
which Blackstone Capital Partners II Merchant Banking Fund L.P. and two of its affiliates
("Blackstone") acquired 79.9% of Holdings' outstanding shares. Certain fees totaling
approximately $6.2 million paid by the Company in connection with the Recapitalization have
been accounted for as recapitalization expenses, and charged against income in the period.
Also in connection with the Recapitalization, the Company recorded approximately $2.5 million
of non-cash stock compensation expense, also included as recapitalization expenses,
pertaining to certain modifications to management stock option agreements which eliminated
put and call rights associated with the options.
(3) Terminated acquisition costs of approximately $6.2 million were recorded in fiscal 1998
in connection with the abandoned attempt to acquire Inco Alloys International by Holdings.
These costs previously had been deferred.
(4) On November 20, 1997, the Financial Accounting Standards Board's Emerging Issues Task
Force ("EITF") issued a consensus ruling which requires that certain business process
reengineering and information technology transformation costs be expensed as incurred. The
EITF also consented that if such costs were previously capitalized, then any remaining
unamortized portion of those identifiable costs should be written off and reported as a
cumulative effect of a change in accounting principle in the first quarter of fiscal 1998.
Accordingly, the Company recorded the cumulative effect of this accounting change, net of
tax, of $450,000, resulting from a pre-tax write-off of $750,000 related to reengineering
charges involved in the implementation of an information technology project.
</TABLE>
PAGE
<PAGE>
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30, 1997
Net Revenues. Net revenues increased approximately $11.2 million, or 4.7%,
to approximately $246.9 million in fiscal 1998 from approximately $235.8 million
in fiscal 1997, primarily as a result of a 2.8% increase in shipments, from
approximately 18.0 million pounds in fiscal 1997 to approximately 18.5 million
pounds in fiscal 1998, and a 1.9% increase in average selling prices, from
approximately $12.91 per pound in fiscal 1997 to approximately $13.15 per pound
in fiscal 1998.
Sales to the aerospace industry for fiscal 1998 increased slightly to
approximately $111.9 million from approximately $111.2 million for fiscal 1997.
The increase in revenue can be attributed to a 9.9% increase in average selling
prices per pound to approximately $14.72 in fiscal 1998 from approximately
$13.40 in fiscal 1997. This increase was due to proportionately more sales of
the higher-priced, cobalt-based alloys and higher value added forms. This price
increase offset an 8.4% decline in volume caused by some slackening in demand
exacerbated by some unplanned production outages. The drop in demand during the
last six months of fiscal 1998 appears to be a result of inventory corrections
by commercial aircraft and component suppliers.
Sales to the chemical processing industry during fiscal 1998 increased by
15.0% to approximately $79.7 million from approximately $69.3 million for fiscal
1997. Volume shipped to the chemical processing industry during fiscal 1998
increased by 17.5% to approximately 6.7 million pounds, compared to 5.7 million
pounds in fiscal 1997. The increase in volume stems from higher sales to export
markets including project sales through the Company's foreign subsidiaries.
Average selling prices per pound were lower in fiscal 1998 reflecting heightened
competition, lower raw material costs, and a higher percentage of project versus
maintenance business.
Sales to the LBGT industry during fiscal 1998 increased 1.7% to
approximately $17.5 million from approximately $17.2 million in fiscal 1997.
Volume increased by 14.3% to approximately 1.6 million pounds, compared to 1.4
million pounds in fiscal 1997 while average selling prices decreased 11.0% The
volume increase is primarily attributable to improved sales during the fourth
quarter of the Company's proprietary alloys (HAYNES 230 alloy and HAYNES
HR-120 alloy) for a major gas turbine manufacturer. The decrease in average
selling price is a result of higher sales of lower cost, lower priced iron-based
alloys.
Sales to the FGD industry increased 25.4% to approximately $8.4 million in
fiscal 1998 from approximately $6.7 million in fiscal 1997. Volume increased
57.1% while average selling price per pound decreased 20.2% reflecting the
highly cyclical and competitive nature of this market.
Sales to the oil and gas industry decreased 24.4% to approximately $5.9
million for fiscal 1998 from approximately $7.8 million in fiscal 1997 as a
result of lower activity in the production of deep sour gas. These are
typically large projects and may vary in number significantly from year to year.
Sales to other industries decreased 1.5% in fiscal 1998 to approximately
$19.8 million from approximately $20.1 million for the same period a year ago,
as a result of a volume decrease of 16.7% partially offset by an 18.2% increase
in average selling price. The decrease in volume can be attributed to lower
sales for automotive applications. The increase in the average selling price
per pound stems from a better mix of higher priced products during fiscal 1998
compared to fiscal 1997.
Cost of Sales. Cost of sales as a percentage of net revenues increased to
77.7% in fiscal 1998 compared to 76.6% in fiscal 1997. Volume in the higher
priced, higher value added sheet and coil forms decreased in fiscal 1998 in part
due to unplanned outages in sheet and coil production equipment. This decrease
was partially offset by reduced material costs, primarily nickel, during fiscal
1998 compared to fiscal 1997.
Selling and Administrative Expenses. Selling and administrative expenses
decreased approximately $100,000 to approximately $18.2 million for fiscal 1998
from approximately $18.3 million in fiscal 1997 primarily as a result of lower
benefit related costs partially offset by increased headcount.
Research and Technical Expenses. Research and technical expenses increased
approximately $100,000, to approximately $3.9 million in fiscal 1998 from
approximately $3.8 million in fiscal 1997, primarily as a result of salary
increases.
Operating Income. As a result of the above factors, the Company recognized
operating income for fiscal 1998 of approximately $33.0 million, approximately
$5.9 million of which was contributed by the Company's foreign subsidiaries.
For fiscal 1997, operating income was approximately $24.4 million, of which
approximately $4.1 million was contributed by the Company's foreign
subsidiaries.
PAGE
<PAGE>
Other Costs (Income). Other cost (income), net, increased approximately
$676,000, from approximately $276,000 in fiscal 1997 to approximately $952,000
for fiscal 1998, primarily as a result of foreign exchange losses realized in
fiscal 1998, as compared to foreign exchange gains experienced during fiscal
1997.
Terminated Acquisition Costs. Terminated acquisition costs of
approximately $6.2 million were recorded in fiscal 1998 in connection with the
abandoned attempt by Holdings to acquire Inco Alloys International. These costs
previously had been deferred.
Interest Expense. Interest expense increased approximately $600,000, to
approximately $21.2 million for fiscal 1998 from approximately $20.6 million for
fiscal 1997. Higher revolving credit balances during the first nine months of
fiscal 1998 compared to the same period in fiscal 1997 and higher debt issuance
cost amortization in fiscal 1998 contributed to this increase.
Income Taxes. The provision for income taxes of approximately $2.3 million
for fiscal 1998 was primarily due to taxes on higher foreign earnings. The
benefit from income taxes of approximately $32.6 million for fiscal 1997 was due
primarily to the Company's reversal of its deferred tax valuation allowance.
Net Income. As a result of the above factors, the Company recognized net
income for fiscal 1998 of approximately $2.0 million, compared to net income of
approximately $36.3 million for fiscal 1997.
(Remainder of page intentionally left blank.)
PAGE
<PAGE>
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996
Net Revenues. Net revenues increased approximately $9.4 million, or 4.2%,
to approximately $235.8 million in fiscal 1997 from approximately $226.4 million
in fiscal 1996, primarily as a result of a 9.8% increase in shipments, from
approximately 16.4 million pounds in fiscal 1996 to approximately 18.0 million
pounds in fiscal 1997.
Sales to the aerospace industry for fiscal 1997 increased 16.7%, to
approximately $111.2 million from approximately $95.3 million for fiscal 1996.
The increase in revenue can be attributed to a 25.8% increase in volume to
approximately 8.3 million pounds in fiscal 1997 from approximately 6.6 million
pounds in fiscal 1996. This volume increase offset a decline in average selling
price per pound, caused by a proportionately higher increase in the volume of
the lower-priced, nickel-based alloys and forms, compared to the higher-priced,
cobalt-containing alloys and forms.
Sales to the chemical processing industry during fiscal 1997 declined by
11.0% to approximately $69.3 million from approximately $77.9 million for fiscal
1996. Volume shipped to the chemical processing industry during fiscal 1997
decreased by 5.0% to approximately 5.7 million pounds, compared to 6.0 million
pounds in fiscal 1996. The drop in the average selling price per pound reflects
lower sales of higher cost, higher priced product forms, and higher sales of
lower cost, lower priced product forms. In particular, sales of tubular
products declined, while sales of forged billet and forged bar products
increased during fiscal 1997 compared to the same period a year ago. Much of
the decline in volume in the domestic market can be attributed to lower sales to
key distributors and sharply lower sales for project business in the
agrochemical sector. For the export market, the decline in volume can be
attributed to lower sales to key distributors and a drop in sales to a key
manufacturer of heat exchanger components.
Sales to the LBGT industry during fiscal 1997 decreased 1.1% to
approximately $17.2 million from approximately $17.4 million in fiscal 1996.
Volume decreased by 6.7% to approximately 1.4 million pounds, compared to 1.5
million pounds in fiscal 1996, while average selling prices increased 5.9%.
Higher domestic activity was offset by lower export and European activity.
Sales to the FGD industry declined 19.3% to approximately $6.7 million in
fiscal 1997, from approximately $8.3 million in fiscal 1996. Volume declined
30.0% while average selling price per pound increased 15.3%. The decline in
volume can be attributed to the lack of significant project activity in the
domestic market and heightened competition for foreign projects.
Sales to the oil and gas industry increased 81.4% to approximately $7.8
million for fiscal 1997 from approximately $4.3 million in fiscal 1996. Sales
to this sector are typically linked to sour gas project requirements. These
requirements vary substantially from quarter to quarter and year to year.
Sales to other industries increased 2.6% in fiscal 1997 to approximately
$20.1 million from approximately $19.6 million for the same period a year ago,
as a result of volume increase of 20.0% partially offset by a 14.5% decline in
average selling price. The increase in volume can be attributed to higher sales
for automotive application. The decline in the average selling price per pound
stems from lower sales of higher cost, higher priced products during fiscal 1997
compared to fiscal 1996.
Cost of Sales. Cost of sales as a percentage of net revenues decreased to
76.6% in fiscal 1997 compared to 80.0% in fiscal 1996, as a result of lower raw
material costs and higher capacity utilization. Volume in the higher priced,
higher value added, sheet, coil, and seamless forms increased in fiscal 1997,
compared to fiscal 1996. Increased capacity utilization in these operations led
to efficiencies that lowered average per-unit cost.
PAGE
<PAGE>
Selling and Administrative Expenses. Selling and administrative expenses
decreased approximately $1.7 million, or 8.5%, to approximately $18.3 million
for fiscal 1997 from approximately $20.0 million in fiscal 1996. The decrease
was primarily the result of a net decrease of approximately $800,000 for
incentive compensation in fiscal 1997, compared to the same period in fiscal
1996. In addition, selling and administrative expenses in fiscal 1996 included
approximately $1.8 million of postponed initial public offering costs.
Recapitalization Expense. Recapitalization expense of approximately $8.7
million recorded in fiscal 1997 includes approximately $6.2 million of expenses
paid by the Company in connection with the Recapitalization (discussed below)
and approximately $2.5 million in non-cash compensation expense pertaining to
certain modifications to management stock option agreements which eliminated put
and call rights provided therein.
Research and Technical Expenses. Research and technical expenses increased
approximately $400,000, or 11.8%, to approximately $3.8 million in fiscal 1997
from approximately $3.4 million in fiscal 1996, primarily as a result of salary
increases combined with headcount additions which occurred in the latter part of
fiscal 1996. Also, research efforts sponsored by the Company at various
universities were increased during fiscal 1997, as compared to the same period a
year ago.
Operating Income. As a result of the above factors, the Company recognized
operating income for fiscal 1997 of approximately $24.4 million, approximately
$4.1 million of which was contributed by the Company's foreign subsidiaries.
For fiscal 1996, operating income was approximately $21.9 million, of which
approximately $4.9 million was contributed by the Company's foreign
subsidiaries.
Other Costs (Income). Other cost (income), net, decreased approximately
$314,000, or 53.2%, from approximately $590,000 in fiscal 1996 to approximately
$276,000 for fiscal 1997, primarily as a result of foreign exchange gains
realized and lower domestic bank charges in fiscal 1997, as compared to foreign
exchange losses experienced during fiscal 1996.
Interest Expense. Interest expense decreased approximately $1.4 million,
or 6.4%, to approximately $20.6 million for fiscal 1997 from approximately $22.0
million for fiscal 1996, due primarily to lower interest rates and reduced debt
issue cost amortization achieved as a result of the refinancing of the Company's
long-term debt in fiscal 1996. This decrease was partially offset by higher
revolving credit balances during fiscal 1997, compared to the same period in
fiscal 1996. In addition, interest expense for fiscal 1996 included an
additional approximately $1.5 million interest expense incurred during the
period between the issuance of the 11 5/8% Senior Notes due 2004 and the
redemption of the Old Notes.
Income Taxes. The provision for (benefit from) income taxes decreased by
approximately $34.6 million during fiscal 1997. During the third quarter of
fiscal 1997, the Company reversed its deferred income tax valuation allowance.
This reversal was due to the Company's assessment of past earnings history and
trends (exclusive of non-recurring charges), sales backlog, budgeted sales and
earnings, stabilization of financial condition, and the periods available to
realize the future tax benefits.
Net Income. As a result of the above factors, the Company recognized net
income for fiscal 1997 of approximately $36.3 million, compared to a net loss of
approximately $9.0 million for fiscal 1996.
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PAGE
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's near-term future cash needs will be driven by working capital
requirements, which are likely to increase, and planned capital expenditures.
Capital expenditures were approximately $5.9 million in fiscal 1998 and are
expected to be approximately $14.2 million in fiscal 1999. Capital expenditures
were approximately $2.1 million and $8.9 million for fiscal 1996 and 1997,
respectively. The largest capital item for fiscal 1998 was $2.5 million for the
purchase of the warehouse formerly leased by the Company's Swiss subsidiary,
Nickel Contor AG. Certain anticipated spending was deferred during the
acquisition attempt of Inco Alloys International. Planned fiscal 1999 capital
spending is targeted for the new Midwest Service Center in Lebanon, Indiana and
for the Company's flat product production areas including the four high mill and
cold finishing areas. The Company expects the primary benefits of the four high
mill and cold finishing capital expenditures will be to increase the annual
production capacity of cold finished flat product by 80% from 10 million pounds
to 18 million pounds. The Company does not expect such capital expenditures
will have a material adverse effect on its long-term liquidity. The Company
expects to fund its working capital needs and capital expenditures with cash
provided from operations, supplemented by borrowings under its Revolving Credit
Facility. The Revolving Credit Facility expires August 23, 1999. The Company
expects the facility to be either renewed or refinanced. The Company believes
these sources of capital will be sufficient to fund planned capital expenditures
and working capital requirements over the next 12 months and on a long-term
basis, although there can be no assurance that this will be the case.
Net cash provided from operating activities in fiscal 1998 was
approximately $14.6 million, as compared to net cash used in operating
activities of approximately $6.6 million for fiscal 1997. The positive cash flow
from operations for fiscal 1998 was primarily a result of a decrease of
approximately $12.9 million in inventories and by non-cash depreciation and
amortization expenses of approximately $9.3 million, a decrease in the accounts
payable and accrued expenses balance of approximately $3.9 million, an increase
in accounts receivable of approximately $7.1 million and other adjustments. Cash
used for investing activities decreased from approximately $8.9 million in
fiscal 1997 to approximately $5.8 million in fiscal 1998, almost entirely due to
reduction in capital expenditures. Cash used in financing activities for fiscal
1998 was approximately $8.6 million due primarily to $10.4 million in decreased
borrowings under the Revolving Credit Facility, partially offset by
approximately $1.8 million in long term borrowing by the Company's Swiss
subsidiary. Cash for fiscal 1998 increased approximately $400,000, resulting in
a September 30, 1998 cash balance of approximately $3.7 million. Cash in fiscal
1997 decreased approximately $1.4 million from fiscal 1996, resulting in a cash
balance of approximately $3.3 million at September 30, 1997.
On August 23, 1996, the Company issued $140.0 million of its 11 5/8% Senior
Notes due 2004 and amended its Revolving Credit Facility with Congress Financial
Corporation to increase the maximum amount available under the Revolving Line of
Credit to $50.0 million. With the proceeds from the issuance of the Senior
Notes and borrowings under the Revolving Credit Facility, the Company redeemed
all of its outstanding Old Notes on September 23, 1996. On January 24, 1997,
the Company amended its Revolving Credit Facility by increasing the maximum
credit from $50.0 million to $60.0 million. See Note 6 of the Notes to
Consolidated Financial Statements for a description of the terms of the Senior
Notes and the Revolving Credit Facility.
The Senior Notes and the Revolving Credit Facility contain a number of
covenants limiting the Company's access to capital, including covenants that
restrict the ability of the Company and its subsidiaries to (i) incur additional
Indebtedness, (ii) make certain restricted payments, (iii) engage in
transactions with affiliates, (iv) create liens on assets, (v) sell assets, (vi)
issue and sell preferred stock of subsidiaries, and (vii) engage in
consolidations, mergers and transfers.
The Company is currently conducting groundwater monitoring and post-closure
monitoring in connection with certain disposal areas, and has completed an
investigation of eight specifically identified solid waste management units at
the Kokomo facility. The results of the investigation have been filed with the
EPA. If the EPA or IDEM were to require corrective action in connection with
such disposal areas or solid waste management units, there can be no assurance
that the costs of such corrective action will not have a material adverse effect
on the Company's financial condition, results of operations or liquidity. In
addition, the Company has been named as a PRP at one waste disposal site. Based
on current information, the Company believes that its involvement at this site
will not have a material adverse effect on the Company's financial condition,
results of operations or liquidity although there can be no assurance with
respect thereto. Expenses related to environmental compliance were $1.4 million
for fiscal 1998 and are expected to be approximately $1.3 million for fiscal
1999. See "Business-- Environmental Matters." Based on information currently
available to the Company, the Company is not aware of any information which
would indicate that litigation pending against the Company is reasonably likely
to have a material adverse effect on the Company's operations or liquidity. See
"Business--Environmental Matters."
PAGE
<PAGE>
INFLATION
The Company believes that inflation has not had a material impact on its
operations.
INCOME TAX CONSIDERATIONS
For financial reporting purposes the Company recognizes deferred tax assets
and liabilities for the expected future tax consequences of events that have
been recognized in the Company's financial statements or tax returns. Statement
of Financial Accounting Standards ("SFAS") No. 109 requires the recording of a
valuation allowance when it is more likely than not that some portion or all of
a deferred tax asset will not be realized. This statement further states that
forming a conclusion that a valuation allowance is not needed may be difficult,
especially when there is negative evidence such as cumulative losses in recent
years. The ultimate realization of all or part of the Company's deferred tax
assets depends upon the Company's ability to generate sufficient taxable income
in the future. During the third quarter of fiscal 1997, the Company reversed
its deferred income tax valuation allowance of approximately $36.4 million.
This reversal was due to the Company's assessment of past earnings history and
trends (exclusive of non-recurring charges), sales backlog, budgeted sales and
earnings, stabilization of financial condition, and the periods available to
realize the future tax benefits.
YEAR 2000
The Company has recognized that the Year 2000 will affect certain business
systems currently being used and has taken steps to (1) protect the ability of
the Company to do business, (2) minimize the risk to the Company from Year 2000
exposure and (3) enhance or expand capabilities as exposures are eliminated.
The areas of exposure include the Company's computer systems and certain
non-Information Technology ("IT") equipment. The Company's products are not
date sensitive.
Areas considered "critical" to fix are the current mainframe computer in
Kokomo, Indiana, the Argon-Oxygen Decarburization ("AOD") software and the
least-cost melt software in the melt area, the four-high Steckel mill computer
and automatic gauge controls in the hot rolling production area, the power
consumption system, the computer in the Electro-slag remelt area, the gauge
controls for one cold rolling mill, the engineering test lab computer, the
telephone system, and the payroll system.
Areas which present a "slight to negligible" exposure if not fixed include
various non-IT program logic controllers, lab collection computers, various
gauges, various test equipment, electronic scales, desktop software, voice mail,
faxes, copiers, and printers.
The Company has already devoted significant amounts of time to ensure all
exposures are eliminated by December 1999, or sooner. In fiscal 1995, the
Company began its upgrade of the current IBM mainframe and an IBM System/36 used
for the Company's primary business system and received board approval in early
fiscal 1996 for a $4.4 million new integrated information system to replace the
mainframe (of which approximately $2.1 million had been spent through September
30, 1998, including $750,000 of business process reengineering costs). This
project includes new IBM AS/400 equipment and an enterprise level software
package called BPCS , by System Software and Associates, which is Year 2000
compliant and is slated for completion in June 1999. The costs for upgrading
the stand-alone manufacturing and lab equipment controls have been budgeted for
fiscal 1999 as part of the spending or capital expenditure budgets. The payroll
system became Year 2000 compliant in October, 1998.
Over 150 surveys have been completed for the Company's customers and the
Company has sent surveys to its critical suppliers (generally $100,000 in
purchases and above) to assess their Year 2000 readiness. Currently there is no
indication that our suppliers will not be Year 2000 ready.
The total estimated costs as of September 30, 1998 for Year 2000 compliance
(other than the $4.4 million integrated information system mentioned above) are
currently estimated at approximately $600,000 for some critical and all
non-critical exposures and $1.65 million for capital expenditures related to
critical exposures. The Company intends to use its cash availability under its
revolving credit facility to finance these expenditures.
The Company's contingency plan if the Company is not ready by Year 2000 is
to have an immediate upgrade of the current IBM mainframe for its primary
business system and to have an immediate hardware upgrade for as many
stand-alone computer systems, data collection systems, test equipment and
process control devices used throughout the Company, the cost of which is not
known.
PAGE
<PAGE>
RECAPITALIZATION
The Company announced on January 29, 1997 that the Recapitalization had
been effected, and that in connection therewith Holdings had completed a stock
purchase transaction with Blackstone Capital Partners II Merchant Banking Fund
L.P. and two of its affiliates ("Blackstone") and a stock redemption transaction
with MLGA Fund II, L.P. and MLGAL Partners L.P., the principal investors in
Holdings prior to the Recapitalization. As part of the Recapitalization,
Holdings redeemed approximately 79.9% of its outstanding shares of common stock
at $10.15 per share in cash and Blackstone purchased a like number of shares at
the same price. Due to this change in ownership, the Company's ability to
utilize its U.S. net operating loss carryforwards will be limited in the future.
In conjunction with the above mentioned transactions, the maximum amount
available under the Company's Revolving Credit Facility was increased from $50
to $60 million.
TERMINATED ACQUISITION BY HOLDINGS
In June 1997 Inco Limited ("Inco") and Blackstone jointly announced the
execution of a definitive agreement for the sale by Inco of 100% of its Inco
Alloy International ("IAI") business unit to Holdings. On March 3, 1998,
Blackstone and Holdings abandoned their attempt to purchase IAI after the
Department of Justice announced its intention to challenge the proposed
acquisition. Certain fees paid and accrued by the Company in connection with
the Acquisition have been accounted for as terminated acquisition costs and
charged against income in fiscal 1998.
ACCOUNTING PRONOUNCEMENTS
On November 20, 1997, the Financial Accounting Standards Board's ("FASB")
Emerging Issues Task Force ("EITF") issued a consensus ruling which requires
that certain business process reengineering and information technology
transformation costs be expensed as incurred. The EITF also consented that if
such costs were previously capitalized, then any remaining unamortized portion
of those identifiable costs should be written off and reported as a cumulative
effect of a change in accounting principle. Accordingly, the Company recorded
the cumulative effect of this accounting change, net of tax, of $450,000
resulting from a pre-tax write-off of $750,000 related to reengineering charges
involved in the implementation of an information technology project.
The FASB issued Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," SFAS No. 132, "Employers' Disclosures
about Pension and Other Postretirement Benefits, "which will be effective for
the Company's fiscal year 1999 and SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will be effective for the Company's
fiscal year 2000.
SFAS No. 130 requires that all items which are defined as components of
comprehensive income be reported in the financial statements and displayed with
the same prominence as other financial statements. SFAS No. 131 establishes
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 132 standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable. SFAS No. 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
In the opinion of management, SFAS No. 130, 131 and 132 will not have a material
impact on the Company's financial position, results of operations, or cash
flows, as these statements are disclosure oriented. Management has not yet
quantified the effect of SFAS No. 133 on the consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 1998, the Company's primary market risk exposure was
foreign currency exchange rate risk with respect to forward contracts entered
into by the Company's foreign subsidiaries located in England and France. Prior
to September 30, 1998, the Company also had commodity price risk with respect to
nickel forward contracts, but closed out all existing contracts at September 30,
1998, due to the recent low sustained levels of nickel prices. The nickel
contracts closed will be settled in fiscal 1999 at a loss of approximately
$68,000 and this loss is not at risk of changing. If the Company decides to
hedge its nickel price exposure in the future, Board of Director approval will
be obtained prior to entering into any contracts.
The foreign currency exchange risk exists primarily because the two foreign
subsidiaries need U.S. dollars in order to pay for their intercompany purchases
of high performance alloys from the Company's U.S. locations. The foreign
subsidiaries manage their own foreign currency exchange risk. Any U.S. dollar
exposure aggregating more than $500,000 requires approval from the Company's
Vice President of Finance. Most of the currency contracts to buy U.S. dollars
are with maturity dates of less than six months.
PAGE
<PAGE>
At September 30, 1998, the unrealized gain (loss) on these foreign currency
exchange contracts was not material to the future results of the Company (see
Note 1 of Item 8. Financial Statements and Supplementary Data).
(Remainder of page intentionally left blank.)
PAGE
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors
Haynes International, Inc.
Kokomo, Indiana
We have audited the accompanying consolidated balance sheet of Haynes
International, Inc. a wholly owned subsidiary of Haynes Holdings, Inc., as of
September 30, 1998, and the related consolidated statements of operations and of
cash flows for the year then ended. Our audit also included the financial
statement schedule listed in the Index at Item 14. These financial statements
and the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audit. The
financial statements and the financial statement schedule of the Company for the
years ended September 30, 1997 and 1996, were audited by other auditors whose
report, dated November 3, 1997, expressed an unqualified opinion on those
statements and the financial statement schedule.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1998 consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of September
30, 1998, and the results of its operations and cash flows for the year then
ended, in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic 1998 consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for certain business process reengineering costs effective
October 1, 1997.
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
November 6, 1998
PAGE
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Haynes International, Inc.
We have audited the 1997 and 1996 consolidated financial statements and the
financial statement schedules listed in Item 14(a) of this Form 10-K of Haynes
International, Inc. (the Company), a wholly owned subsidiary of Haynes Holdings,
Inc. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Haynes
International, Inc. as of September 30, 1997, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended September 30, 1997, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly, in all material respects, the information
required to be included therein.
PricewaterhouseCoopers LLP
Fort Wayne, Indiana
November 3, 1997
PAGE
<PAGE>
<TABLE>
<CAPTION>
HAYNES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C>
SEPTEMBER 30, SEPTEMBER 30,
ASSETS 1997 1998
--------------- ---------------
Current assets:
Cash and cash equivalents $ 3,281 $ 3,720
Accounts and notes receivable, less allowance for
doubtful accounts of $657 and $662, respectively 38,500 45,974
Inventories 94,081 81,861
--------------- ---------------
Total current assets 135,862 131,555
--------------- ---------------
Property, plant and equipment, net 32,551 29,627
Deferred income taxes 37,057 36,549
Prepayments and deferred charges, net 10,849 9,532
--------------- ---------------
Total assets $ 216,319 $ 207,263
=============== ===============
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 24,938 $ 20,823
Accrued postretirement benefits 3,900 4,500
Revolving credit facility 45,239 35,273
Note payable 1,408 1,055
Income taxes payable 1,566 1,731
Deferred income taxes 1,748 1,199
--------------- ---------------
Total current liabilities 78,799 64,581
--------------- ---------------
Long-term debt, net of unamortized discount 137,566 139,549
Accrued postretirement benefits 92,301 91,983
--------------- ---------------
Total liabilities 308,666 296,113
--------------- ---------------
Redeemable common stock of parent company 2,088 2,088
Capital deficiency:
Common stock, $.01 par value (100 shares authorized,
issued and outstanding)
Additional paid-in capital 49,070 49,087
Accumulated deficit (145,006) (143,000)
Foreign currency translation adjustment 1,501 2,975
--------------- ---------------
Total capital deficiency (94,435) (90,938)
--------------- ---------------
Total liabilities and capital deficiency $ 216,319 $ 207,263
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
PAGE
<PAGE>
<TABLE>
<CAPTION>
HAYNES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998
--------------- --------------- ---------------
Net revenues $ 226,402 $ 235,760 $ 246,944
Cost of sales 181,173 180,504 191,849
Selling and administrative 19,966 18,311 18,166
Recapitalization expense 8,694
Research and technical 3,411 3,814 3,939
--------------- --------------- ---------------
Operating income 21,852 24,437 32,990
Other costs, net 590 276 952
Terminated acquisition costs 6,199
Interest expense 21,991 20,608 21,171
Interest income (889) (152) (105)
--------------- --------------- ---------------
Income before provision for (benefit from)
income taxes, extraordinary item, and
cumulative effect of a change in
accounting principle 160 3,705 4,773
Provision for (benefit from) income taxes 1,940 (32,610) 2,317
--------------- --------------- ---------------
Income (loss) before extraordinary item and
cumulative effect of a change in
accounting principle (1,780) 36,315 2,456
Extraordinary item, net of tax benefit (7,256)
--------------- --------------- ---------------
Income (loss) before cumulative effect of a
change in accounting principle (9,036) 36,315 2,456
Cumulative effect of a change in accounting
principle, net of tax benefit (450)
--------------- --------------- ---------------
Net income (loss) $ (9,036) $ 36,315 $ 2,006
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
PAGE
<PAGE>
<TABLE>
<CAPTION>
HAYNES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998
--------------- --------------- ---------------
Cash flows from operating activities:
Net income (loss) $ (9,036) $ 36,315 $ 2,006
Adjustments to reconcile net income (loss)
to net cash provided from (used in)
operating activities:
Extraordinary item 7,256
Cumulative effect of a change in
accounting principle 750
Depreciation 7,751 7,477 8,029
Amortization 1,353 1,144 1,247
Deferred income taxes 213 (35,718) 19
Gain on disposition of property and
equipment (20) (39) (105)
Non-cash stock option expense 2,457
Change in assets and liabilities:
Accounts and notes receivable (1,599) 1,053 (7,086)
Inventories (15,132) (20,527) 12,856
Prepayments and deferred charges 335 (97) 327
Accounts payable and accrued expenses 2,543 608 (3,915)
Income taxes payable 10 344 174
Accrued postretirement benefits 983 387 282
--------------- --------------- ---------------
Net cash provided from (used in)
operating activities (5,343) (6,596) 14,584
--------------- --------------- ---------------
Cash flows from investing activities:
Additions to property, plant and equipment (2,092) (8,863) (5,919)
Proceeds from disposals of property, plant,
and equipment 67 33 169
--------------- --------------- ---------------
Net cash used in investing activities (2,025) (8,830) (5,750)
--------------- --------------- ---------------
Cash flows from financing activities:
Net additions (reductions) of revolving credit 18,411 14,567 (10,392)
Borrowings of long-term debt 137,350 1,813
Repayments of long-term debt (140,000)
Payment of debt issuance costs (5,408) (676)
Payment of prepayment penalties on debt
retirement (3,911)
Capital contribution from parent company of
proceeds from exercise of stock options 674 294 17
--------------- --------------- ---------------
Net cash provided from (used in) financing
activities 7,116 14,185 (8,562)
--------------- --------------- ---------------
Effect of exchange rates on cash (95) (166) 167
--------------- --------------- ---------------
Increase (Decrease) in cash and cash equivalents (347) (1,407) 439
Cash and cash equivalents:
Beginning of year 5,035 4,688 3,281
--------------- --------------- ---------------
End of year $ 4,688 $ 3,281 $ 3,720
=============== =============== ===============
Supplemental disclosures of cash flow
information:
Cash paid during period for:
Interest $ 22,076 $ 20,968 $ 19,924
=============== =============== ===============
Income taxes $ 1,717 $ 3,040 $ 1,832
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
PAGE
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
The consolidated financial statements include the accounts of Haynes
International, Inc. and its wholly-owned subsidiaries (collectively, the
"Company"). All significant intercompany transactions and balances are
eliminated. The Company develops, manufactures and markets technologically
advanced, high performance alloys primarily for use in the aerospace and
chemical processing industries worldwide. The Company has manufacturing
facilities in Kokomo, Indiana; Arcadia, Louisiana; and Openshaw, England; with
distribution service centers in Anaheim, California; Houston, Texas; Windsor,
Connecticut; Paris, France; and Zurich, Switzerland.
B. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investment instruments, including
investments with original maturities of three months or less at acquisition, to
be cash equivalents, the carrying value of which approximates fair value due to
the short maturity of these investments.
C. INVENTORIES
Inventories are stated at the lower of cost or market. The cost of domestic
inventories is determined using the last-in, first-out method (LIFO). The cost
of foreign inventories is determined using the first-in, first-out (FIFO) method
and average cost method.
D. PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment are recorded at cost with
depreciation calculated primarily by using the straight-line method based on
estimated economic useful lives. Buildings are generally depreciated over 40
years and machinery and equipment are depreciated over periods ranging from 5 to
14 years.
Expenditures for maintenance and repairs and minor renewals are charged to
expense; major renewals are capitalized. Upon retirement or sale of assets, the
cost of the disposed assets and the related accumulated depreciation are removed
from the accounts and any resulting gain or loss is credited or charged to
operations.
E. LONG-LIVED ASSETS
The Company regularly evaluates whether events and circumstances have occurred
which may indicate that the carrying amount of intangible or other long-lived
assets warrant revision or may not be recoverable. When factors indicate that
an asset or assets should be evaluated for possible impairment, an evaluation
would be performed whereby the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying amount to
determine if a write-down to market value is required. As of September 30, 1997
and 1998, management considered the Company's intangible and other long-lived
assets to be fully recoverable.
PAGE
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
F. ENVIRONMENTAL EXPENDITURES
Environmental expenditures that pertain to current operations or to future
revenues are expensed or capitalized consistent with the Company's
capitalization policy. Expenditures that result from the remediation of an
existing condition caused by past operations and that do not contribute to
current or future revenues are expensed. Liabilities are recognized for
remedial activities, including remediation investigation and feasibility study
costs, when the cleanup is probable and the cost can be reasonably estimated.
Recoveries of expenditures are recognized as receivables when they are estimable
and probable.
G. FOREIGN CURRENCY EXCHANGE
The Company's foreign operating entities' financial statements are stated in the
functional currencies of each respective country, which are the local
currencies. Substantially all assets and liabilities are translated to U.S.
dollars using exchange rates in effect at the end of the year; and revenues and
expenses are translated at the weighted average rate for the year. Translation
gains or losses are recorded as a separate component of capital deficiency and
transaction gains and losses are reflected in the consolidated statement of
operations.
H. INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in years in which those temporary
differences are expected to be recovered or settled. If it is more likely than
not that some portion or all of a deferred tax asset will not be realized, a
valuation allowance is recognized.
I. DEFERRED CHARGES
Deferred charges consist primarily of debt issuance costs which are amortized
over the terms of the related debt using the effective interest method.
Accumulated amortization at September 30, 1997 and 1998 was $992 and $1,995,
respectively. During 1996, the Company wrote off approximately $3,345 of
deferred debt issuance costs and capitalized approximately $5,408 of costs
incurred in connection with the refinancing of the Company's debt. During 1997,
the Company capitalized approximately $676 of costs incurred in connection with
an increase in the Company's existing revolving line of credit.
J. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK
The Company enters into forward currency exchange contracts on a continuing
basis and nickel future contracts on a periodic basis for periods consistent
with contractual exposures. The effect of this practice is to minimize the
variability in the Company's operating results arising from foreign exchange
rate and nickel price movements. The Company does not engage in foreign
currency or nickel futures speculation. Gains and losses on these contracts are
reflected in the statement of operations in the month the contracts are settled.
PAGE
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
At September 30, 1997 and 1998, the Company had $6,616 and $6,800 of foreign
currency exchange contracts, respectively, and $2,328 and $0 of nickel futures
contracts, respectively, outstanding, with a combined net unrealized loss of
$104 and $295. With respect to the consolidated statements of cash flows,
contracts accounted for as hedges are classified in the same category as the
items being hedged.
Financial instruments which potentially subject the Company to concentrations of
credit risk consist of cash and cash equivalents and accounts receivable. At
September 30, 1998, and periodically throughout the year, the Company has
maintained cash balances in excess of federally insured limits.
During 1996, 1997 and 1998, sales to one group of affiliated customers
approximated $26,937, $24,854, and $23,517 respectively, or 12%, 11% and 10% of
net revenues, respectively. The Company generally does not require collateral
and credit losses have been within management's expectations. The Company does
not believe it is significantly vulnerable to the risk of a near-term severe
impact from business concentrations with respect to customers, suppliers,
products, markets or geographic areas.
K. ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The Company does not believe
that it has assets, liabilities or contingencies that are particularly sensitive
to changes in estimates in the near term.
L. CHANGE IN ACCOUNTING PRINCIPLE
On November 20, 1997, the Financial Accounting Standards Board's ("FASB")
Emerging Issues Task Force ("EITF") issued a consensus ruling which requires
that certain business process reengineering and information technology
transformation costs be expensed as incurred. The EITF also consented that if
such costs were previously capitalized, then any remaining unamortized portion
of those identifiable costs should be written off and reported as a cumulative
effect of a change in accounting principle. Accordingly, the Company recorded
the cumulative effect of this accounting change, net of tax, of $450, resulting
from a pre-tax write-off of $750 related to reengineering charges involved in
the implementation of an information technology project.
M. NEW ACCOUNTING PRONOUNCEMENTS
The FASB issued Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," SFAS No. 132, "Employers' Disclosures
about Pension and Other Postretirement Benefits,"which will be effective for
fiscal year 1999 and SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which will be effective for fiscal year 2000.
PAGE
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
SFAS No. 130 requires that all items which are defined as components of
comprehensive income be reported in the financial statements and displayed with
the same prominence as other financial statements. SFAS No. 131 establishes
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 132 standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable. In the opinion of
management, SFAS No. 130, 131 and 132 will not have a material impact on the
Company's financial position, results of operations, or cash flows, as these
statements are disclosure oriented.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Management has not yet
quantified the effect of this new standard on the consolidated financial
statements.
(Remainder of page intentionally left blank.)
PAGE
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
NOTE 2: INVENTORIES
The following is a summary of the major classes of inventories:
<TABLE>
<CAPTION>
<S> <C> <C>
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
-------------- --------------
Raw materials $ 5,012 $ 3,535
Work-in-process 50,240 35,215
Finished goods 33,641 31,752
Other 984 837
Amount necessary to increase certain net inventories
to the LIFO method 4,204 10,522
-------------- --------------
$ 94,081 $ 81,861
============== ==============
</TABLE>
Inventories valued using the LIFO method comprise 77% and 73% of consolidated
inventories at September 30, 1997 and 1998, respectively.
NOTE 3: PROPERTY, PLANT AND EQUIPMENT
The following is a summary of the major classes of property, plant, and
equipment:
<TABLE>
<CAPTION>
<S> <C> <C>
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
--------------- ---------------
Land and land improvements $ 1,951 $ 3,144
Buildings 6,715 8,449
Machinery and equipment 81,831 85,586
Construction in process 4,030 2,565
--------------- ---------------
94,527 99,744
Less accumulated depreciation (61,976) (70,117)
--------------- ---------------
$ 32,551 $ 29,627
=============== ===============
</TABLE>
PAGE
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
NOTE 4: ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following is a summary of the major classes of accounts payable and accrued
expenses:
<TABLE>
<CAPTION>
<S> <C> <C>
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
-------------- --------------
Accounts payable, trade $ 16,990 $ 12,078
Employee compensation 3,476 2,762
Taxes, other than income taxes 2,086 2,178
Interest 1,356 1,417
Other 1,030 2,388
-------------- --------------
$ 24,938 $ 20,823
============== ==============
</TABLE>
(Remainder of page intentionally left blank.)
PAGE
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
NOTE 5: INCOME TAXES
The components of income (loss) before provision for (benefit from) income
taxes, extraordinary item, and cumulative effect of a change in accounting
principle consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998
--------------- --------------- ---------------
Income (loss) before provision for (benefit
from) income taxes, extraordinary item,
and cumulative effect of a change in
accounting principle
U.S. $ (4,558) $ (677) $ (1,110)
Foreign 4,718 4,382 5,883
--------------- --------------- ---------------
Total $ 160 $ 3,705 $ 4,773
=============== =============== ===============
Income tax provision (benefit):
Current:
U.S. Federal $ 187 $ 1,401 $ 793
Foreign 1,509 1,285 1,599
State 31 422 (94)
--------------- --------------- ---------------
Current total 1,727 3,108 2,298
--------------- --------------- ---------------
Deferred:
U. S. Federal 131 (30,294) (42)
Foreign 82 (498) 104
State (4,926) (43)
--------------- --------------- ---------------
Deferred total 213 (35,718) 19
--------------- --------------- ---------------
Total provision for (benefit from) income
taxes $ 1,940 $ (32,610) $ 2,317
=============== =============== ===============
</TABLE>
PAGE
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
The provision for (benefit from) income taxes applicable to results of
operations before extraordinary item and cumulative effect of a change in
accounting principle differed from the U.S. federal statutory rate as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998
--------------- --------------- ---------------
Statutory federal tax rate 34% 34% 34%
Tax provision at the statutory rate $ 54 $ 1,260 $ 1,623
Foreign tax rate differentials (24) (202) (606)
Utilization of alternative minimum tax credit (534)
Utilization of net operating loss (2,705)
Withholding tax on undistributed earnings of
foreign subsidiaries 131 155 225
Provision for state taxes, net of federal tax
benefit 31 422 (49)
Exercise of stock options of parent company 400 (167)
U.S. tax on distributed and undistributed
earnings of foreign subsidiaries 760 1,097 1,443
Increase (decrease) in valuation allowance
related to continuing operations 363 (31,923)
Other 225 (13) (319)
--------------- --------------- ---------------
Provision (benefit) at effective tax rate $ 1,940 $ (32,610) $ 2,317
=============== =============== ===============
</TABLE>
PAGE
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
Deferred income tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
Current deferred income tax assets (liabilities): SEPTEMBER 30, SEPTEMBER 30,
1997 1998
--------------- ---------------
Inventory capitalization $ 1,110 $ 769
Postretirement benefits other than pensions 1,541 1,778
Accrued expenses for vacation 596 636
Inventory profit reserve 1,265 909
Other 475 720
--------------- ---------------
Gross current deferred tax assets 4,987 4,812
--------------- ---------------
Inventory purchase accounting adjustment (6,378) (5,744)
Mark to market reserve (357) (267)
--------------- ---------------
Gross current deferred tax liability (6,735) (6,011)
--------------- ---------------
Total net current deferred tax liability (1,748) (1,199)
--------------- ---------------
Noncurrent deferred income tax assets (liabilities):
Property, plant and equipment, net (4,969) (3,120)
Prepaid pension costs (1,893) (1,957)
Investment in subsidiary (475) (475)
Other foreign related (690) (1,242)
Undistributed earnings of foreign subsidiaries (4,575) (6,062)
--------------- ---------------
Gross noncurrent deferred tax liability (12,602) (12,856)
--------------- ---------------
Postretirement benefits other than pensions 35,827 35,702
Executive compensation 825 825
Investment in subsidiary 573 604
Net operating loss carryforwards 12,434 11,700
Alternative minimum tax credit carryforwards 534
Other 40
--------------- ---------------
Gross noncurrent deferred tax asset 49,659 49,405
--------------- ---------------
Total net noncurrent deferred tax asset 37,057 36,549
--------------- ---------------
Total $ 35,309 $ 35,350
=============== ===============
</TABLE>
As of September 30, 1998, the Company had net operating loss carryforwards
for regular tax purposes of approximately $31,519 (expiring in fiscal years 2007
to 2011), of which approximately $21,433 are available for alternative minimum
tax.
During fiscal 1997, the Company reversed its deferred income tax valuation
allowance of approximately $36,431. This reversal was due to the Company's
assessment of past earnings history and trends (exclusive of non-recurring
charges), sales backlog, budgeted sales and earnings, stabilization of financial
condition, and the periods available to realize the future tax benefits.
PAGE
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
NOTE 6: DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, SEPTEMBER 30,
1997 1998
-------------- --------------
Revolving Credit Facility, due August 23, 1999 $ 45,239 $ 35,273
============== ==============
5 Year Mortgage Note, 4.25%, due in 2003 (Swiss
Subsidiary) $ 1,813
Senior Notes, 11.625%, due in 2004, net of $2,434 and
$2,191, respectively, unamortized discount (effective rate
of 12.0%) $ 137,566 137,809
-------------- --------------
137,566 139,622
Less amounts due within one year (Swiss Subsidiary Note) 73
-------------- --------------
$ 137,566 $ 139,549
============== ==============
</TABLE>
BANK FINANCING
- ---------------
On August 23, 1996, the Company successfully refinanced its then existing
debt with the issuance of $140,000 Senior Notes due 2004 and an amendment to its
working capital facility (the "Revolving Credit Facility") with Congress
Financial Corporation ("Congress").
Certain non-recurring charges were recorded as a result of this refinancing
effort as follows:
- $7,256 of extraordinary losses which represents the extraordinary loss
on the redemption of the Senior Secured and Senior Subordinated Notes and is
comprised of $3,911 of prepayment penalties incurred with the redemption and
$3,345 of deferred debt issuance costs which were written off upon redemption of
the related debt.
- $1,837 of selling and administrative expense which represents costs
incurred with a postponed initial public offering of the Company's common stock.
- $924 of net interest expense incurred during the period between the
the issuance of the Senior Notes and the redemption of the Senior Secured and
Senior Subordinated Notes.
On January 24, 1997, the Company amended its Revolving Credit Facility by
increasing the maximum credit from $50,000 to $60,000. The amount available for
revolving credit loans equals the difference between the $60,000 total facility
amount, less any letter of credit reimbursement obligations incurred by the
Company, which are subject to a sub limit of $10,000. The total availability
may not exceed the sum of 85% of eligible accounts receivable (generally,
accounts receivable of the Company from domestic and export customers that are
less than 60 days outstanding), plus 60% of eligible inventories consisting of
finished goods and raw materials, plus 45% of eligible inventories consisting of
work-in-process and semi-finished goods calculated at the lower of cost or
current market value, minus any availability reserves established by Congress.
Unused line of credit fees during the revolving credit loan period are .375% of
the amount by which $48,000 exceeds the average daily principal balance of the
outstanding revolving loans and letter of credit accommodations.
PAGE
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
The Revolving Credit Facility bears interest at a fluctuating per annum
rate equal to a combination of prime rate plus 0.50% and London Interbank
Offered Rates ("LIBOR") plus 2.50%. At September 30, 1998, the effective
interest rates for revolving credit loans were 8.09% for $29,000 of the
Revolving Credit Facility, and 9.0% for the remaining $6,273. At September 30,
1997, the effective interest rates for revolving credit loans were 8.156% for
$31,500 of the Revolving Credit Facility, and 9.0% for the remaining $13,739.
As of September 30, 1998, $3,255 in letter of credit reimbursement obligations
have been incurred by the Company. The availability for revolving credit loans
at September 30, 1998 was $11,637.
The Revolving Credit Facility contains covenants common to such agreements
including the maintenance of certain net worth levels and limitations on capital
expenditures, investments, incurrence of debt, impositions of liens,
dispositions of assets and payments of dividends and distributions. The
Revolving Credit Facility is collateralized by first priority security interests
on all accounts receivable and inventories (excluding all accounts receivable
and inventories of the Company's foreign subsidiaries) and fixed assets of the
Company and the proceeds therefrom.
The carrying value of the Company's Revolving Credit Facility approximates fair
value.
SENIOR NOTES DUE 2004
- ------------------------
The Senior Notes are uncollateralized obligations of the Company and are
effectively subordinated in right of payment to obligations under the Revolving
Credit Facility. Interest is payable semi-annually on March 1 and September 1.
The notes are redeemable, in whole or in part, at the Company's option at
any time on or after September 1, 2000, at redemption prices ranging from
105.813% to 100% plus accrued interest to the date of redemption. In addition,
prior to September 1, 1999, in the event one or more public equity offerings of
the Company are consummated, the Company may redeem in the aggregate up to a
maximum of 35% of the initial aggregate principal amount of the Notes with the
net proceeds thereof at a redemption price equal to 111.625% of the principal
amount thereof, plus accrued and unpaid interest to the date of redemption;
provided that, after giving effect thereto, at least $85,000 aggregate principal
amount of Notes remains outstanding.
The Senior Notes limit the incurrence of additional indebtedness,
restricted payments, mergers, consolidations and asset sales.
The estimated fair value, based upon an independent market quotation, of
the Company's Senior Notes was approximately $161,700 and $149,800 at September
30, 1997 and 1998, respectively.
OTHER
- -----
In addition to the aforementioned debt, the Company's UK affiliate (Haynes
International, Ltd.) has a revolving credit agreement with Midland Bank that
provides for availability of 1,000 pounds sterling ($1,700) collateralized by
the assets of the affiliate. This revolving credit agreement was available in
its entirety on September 30, 1998, as a means of financing the activities of
the affiliate including payments to the Company for intercompany purchases. The
Company's French affiliate (Haynes International, SARL) has an overdraft banking
facility of 10,000 french francs ($1,787) and utilized 5,492 french francs
($981) of the facility as of September 30, 1998. The Company's Swiss affiliate
(Nickel-Contor AG) has an overdraft banking facility of 3,500 swiss francs
($2,538) all of which was available on September 30, 1998.
HAYNES INTERNATIONAL, INC.
PAGE
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
NOTE 7: CAPITAL DEFICIENCY
The following is a summary of changes in stockholder's equity (capital
deficiency):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
COMMON COMMON
STOCK STOCK
------ ------
ADDITIONAL FOREIGN CURRENCY TOTAL
NO. OF AT PAID IN (ACCUMULATED TRANSLATION CAPITAL
SHARES PAR CAPITAL DEFICIT) ADJUSTMENT DEFICIENCY
------ ------ ----------- -------------- ------------------ ------------
Balance at
- ----------------------------------
October 1, 1995 100 0 $ 46,306 $ (172,285) $ 4,070 $ (121,909)
- ----------------------------------
Year ended
September 30, 1996:
Net loss (9,036) (9,036)
Capital contribution from
parent company on exercise of
stock option 674 674
Reclassification of
redeemable common stock 1,005 1,005
Foreign Exchange (1,075) (1,075)
------ ------ ----------- -------------- ------------------ ------------
Balance at
- ----------------------------------
September 30, 1996 100 0 47,985 (181,321) 2,995 (130,341)
- ----------------------------------
Year ended
September 30, 1997:
Net income 36,315 36,315
Capital contribution from
parent company on exercise of
stock option 294 294
Reclassification of
redeemable common stock 791 791
Foreign Exchange (1,494) (1,494)
------ ------ ----------- -------------- ------------------ ------------
Balance at
- ----------------------------------
September 30, 1997 100 0 49,070 (145,006) 1,501 (94,435)
- ----------------------------------
Year ended
September 30, 1998:
Net income 2,006 2,006
Capital contribution from
parent company on exercise of
stock option 17 17
Foreign Exchange 1,474 1,474
------ ------ ----------- -------------- ------------------ ------------
Balance at
- ----------------------------------
September 30, 1998 100 0 $ 49,087 $ (143,000) $ 2,975 $ (90,938)
- ---------------------------------- ====== ====== =========== ============== ================== ============
</TABLE>
PAGE
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
NOTE 8: PENSION PLAN AND RETIREMENT BENEFITS
The Company has non-contributory defined benefit pension plans which cover
most employees in the United States and certain foreign subsidiaries.
Benefits provided under the Company's domestic defined benefit pension plan
are based on years of service and the employee's final compensation. The
Company's funding policy is to contribute annually an amount deductible for
federal income tax purposes based upon an actuarial cost method using actuarial
and economic assumptions designed to achieve adequate funding of benefit
obligations.
Net periodic pension cost on a consolidated basis was $720, $767, and $252
for the years ended September 30, 1996, 1997 and 1998, respectively.
For the domestic pension plan, net periodic pension cost was comprised of
the following elements:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998
--------------- --------------- ---------------
Service cost $ 2,042 $ 2,156 $ 2,355
Interest cost 7,027 7,370 7,256
Actual return on plan assets (13,431) (22,820) (4,955)
Net amortization and deferral 4,670 13,627 (4,819)
--------------- --------------- ---------------
Net periodic pension cost $ 308 $ 333 $ (163)
=============== =============== ===============
</TABLE>
(Remainder of page intentionally left blank.)
PAGE
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
The following table sets forth the domestic pension plan's funded status:
<TABLE>
<CAPTION>
<S> <C> <C>
SEPTEMBER 30, SEPTEMBER 30,
1997 1998
--------------- ---------------
Accumulated benefit obligation, including vested
benefits of $88,576 and $99,910, respectively $ 92,702 $ 103,735
=============== ===============
Projected benefit obligation for service rendered to date $ 107,347 $ 123,481
Plan assets at fair value (primarily debt securities) 143,577 141,061
--------------- ---------------
Plan assets in excess of projected benefit obligation 36,230 17,580
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions (34,364) (15,330)
Unrecognized prior service costs 2,926 2,705
--------------- ---------------
Prepaid pension cost recognized in the consolidated
balance sheet $ 4,792 $ 4,955
=============== ===============
Assumptions:
Weighted average discount rate 7.00% 6.25%
=============== ===============
Average rate of increase in compensation levels 5.25% 5.25%
=============== ===============
Expected rate of return on plan assets during year 8.25% 7.50%
=============== ===============
</TABLE>
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees. Substantially
all domestic employees become eligible for these benefits if they reach normal
retirement age while working for the Company. Prior to 1994, the cost of
retiree health care and life insurance benefits was recognized as expense upon
payment of claims or insurance premiums.
The Company follows SFAS No. 106, "Employers Accounting for Postretirement
Benefits Other Than Pensions," which requires the cost of post retirement
benefits to be accrued over the years employees provide service to the date of
their full eligibility for such benefits. The Company's policy is to fund the
cost of claims on an annual basis. Operations were charged approximately
$4,823, $3,869 and $4,479 for these benefits during fiscal 1996, 1997 and 1998,
respectively.
PAGE
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
The following sets forth the status of the plans in the aggregate
reconciled with amounts reported in the Company's balance sheet:
<TABLE>
<CAPTION>
<S> <C> <C>
SEPTEMBER 30, September 30,
1997 1998
-------------- --------------
Accumulated post retirement benefit obligation (APBO):
Retirees and dependents $ 45,463 $ 46,813
Active plan participants eligible to receive benefits 8,624 9,704
Active plan participants not yet eligible to receive benefits 16,487 17,690
-------------- --------------
Total APBO 70,574 74,207
Unrecognized prior service cost 10,492 13,623
Unrecognized net gain 15,135 8,653
-------------- --------------
Accrued postretirement liability $ 96,201 $ 96,483
============== ==============
</TABLE>
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEAR ENDED YEAR ENDED Year Ended
SEPTEMBER 30, SEPTEMBER 30, September 30,
1996 1997 1998
--------------- --------------- ---------------
Service cost $ 1,131 $ 1,130 $ 1,265
Interest cost 5,089 4,653 4,785
Amortization of net gain (306) (823) (480)
Amortization of prior service cost (1,091) (1,091) (1,091)
--------------- --------------- ---------------
Net periodic postretirement benefit cost $ 4,823 $ 3,869 $ 4,479
=============== =============== ===============
</TABLE>
A 9.00% annual rate of increase for ages under 65 and an 8.60% annual rate
of increase for ages over 65 in the costs of covered health care benefits was
assumed for 1998, gradually decreasing for both age groups to 5.30% by the year
2009. Increasing the assumed health care cost trend rates by one percentage
point in each year would increase the accumulated post retirement benefit
obligation as of September 30, 1998, by $9,350, and increase the net periodic
post retirement benefit cost for 1998 by $961. A discount rate of 7.50%, 7.00%,
and 6.25% was used to determine the accumulated post retirement benefit
obligation at September 30, 1996, 1997, and 1998, respectively.
The Company sponsors certain profit sharing plans for the benefit of
employees meeting certain eligibility requirements. There were no contributions
for these plans for the three years in the period ended September 30, 1998.
PAGE
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
NOTE 9: COMMITMENTS
The Company leases certain transportation vehicles, warehouse facilities,
office space and machinery and equipment under cancelable and non-cancelable
leases, most of which expire within 10 years and may be renewed by the Company.
Rent expense under such arrangements totaled $1,392, $1,768 and $1,691 for the
years ended September 30, 1996, 1997, and 1998, respectively. Future minimum
rental commitments under non-cancelable leases in effect at September 30, 1998,
are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $1,696
2000 1,494
2001 1,095
2002 298
2003 and thereafter 229
------
$4,812
======
</TABLE>
NOTE 10: OTHER
Other costs, net, consists of net foreign currency transaction (gains) and
losses in the amounts of $(185), $(524) and $84 for the years ended September
30, 1996, 1997 and 1998, respectively, and miscellaneous costs.
The Company is involved as the defendant in various legal actions and is
subject to extensive federal, state and local environmental laws and
regulations. Although Company environmental policies and practices are designed
to ensure compliance with these laws and regulations, future developments and
increasingly stringent regulation could require the Company to make additional
unforeseen environmental expenditures.
Although the level of future expenditures for environmental and other legal
matters cannot be determined with any degree of certainty, based on the facts
presently known, management does not believe that such costs will have a
material effect on the Company's financial position, results of operations or
liquidity.
NOTE 11: RELATED PARTY
On January 29, 1997, the Company announced that Haynes Holdings, Inc.
("Holdings"), its parent corporation, had effected a recapitalization of the
Company and Holdings pursuant to which Blackstone Capital Partners II Merchant
Banking Fund L.P. and two of its affiliates ("Blackstone") acquired 79.9% of
Holdings' outstanding shares (the "Recapitalization"). As part of the
Recapitalization, Blackstone agreed to provide financial support and assistance
to the Company. Fees totaling $6,237 paid by the Company to Blackstone and
other unrelated parties in connection with the Recapitalization have been
accounted for as recapitalization expenses and charged against income in the
period. Also in connection with this transaction, the Company recorded $2,457
of non-cash stock compensation expense, also included as recapitalization
expenses, pertaining to certain modifications to management's stock options
agreements, which eliminated put and call rights associated with the options.
As a result of the Recapitalization, all outstanding unexercised options were
immediately vested as part of the change in control provisions of the Plan. In
addition, the Company has agreed to pay Blackstone an annual monitoring fee of
$500, not to exceed $2,500 in the aggregate, which is included in selling and
administrative expenses, and of which $333 is included in other accrued expenses
at September 30, 1998. Due to this change in ownership, the Company's ability
to utilize its U.S. federal net operating loss carryforwards will be limited in
the future.
PAGE
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
NOTE 12: TERMINATED ACQUISITION COSTS
On March 3, 1998, the Company announced that Holdings and Blackstone had
abandoned their attempt to acquire Inco Alloys International, a 100% owned
business unit of Inco Limited. Approximately $6,199 of deferred acquisition
costs were charged to operations in fiscal 1998.
NOTE 13: STOCK-BASED COMPENSATION
Holdings has a stock option plan ("Plan") which allows for the granting of
options to certain key employees and directors of the Company. Under the Plan,
options to purchase up to 915,880 shares of Holdings common stock may be granted
at a price not less than the lower of book value or 50% of fair market value, as
defined in the Plan. The options must be exercised within ten years from the
date of grant and become exercisable on a pro rata basis over a five year period
from the date of grant, subject to approval by the Board of Directors.
On October 22, 1996, 133,000 options were granted to certain key management
personnel with exercise prices of $8.00 per share, the estimated fair value on
that date. Due to the exercise and/or redemption of some of these options,
redeemable common stock was reduced by $1,005 during 1996. Redeemable common
stock was increased by $1,666 during 1997 after accounting for the modifications
to management's stock option agreements in connection with the Recapitalization
and the redemption and/or exercise of some of the options. On June 1, 1998,
Holdings granted 24,632 options to an outside director at an exercise price of
$10.15 per share, which approximates the fair market value at that date.
Pertinent information covering the Plan is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
WEIGHTED
NUMBER AVERAGE
OF OPTION PRICE FISCAL SHARES EXERCISE
SHARES PER SHARE YEAR OF EXPIRATION EXERCISABLE PRICES
--------- ------------- ------------------- ----------- ---------
Outstanding at September 30,
1995 820,045 $ 2.28 - 5.00 1999 - 2005 377,145 $ 4.46
Granted - - -
Exercised (201,931) 2.28 - 5.00 3.34
Canceled ( 64,000) 2.50 2.50
---------
Outstanding at September 30,
1996 554,114 2.28 - 3.24 1999 - 2005 279,794 2.54
Granted 133,000 8.00 8.00
Exercised (106,114) 2.28 - 3.24 2.70
Canceled -
---------
Outstanding at September 30,
1997 581,000 2.50 - 8.00 1999 - 2007 581,000 3.76
Granted 24,632 10.15 10.15
Exercised (7,000) 2.50 2.50
Canceled (4,000) 8.00 8.00
---------
Outstanding at September 30,
1998 594,632 2.50 - 10.15 1999 - 2008 574,926 $ 4.01
=========
Options Outstanding at
September 30, 1998 consist of: 129,000 8.00 129,000
441,000 2.50 441,000
24,632 10.15 4,926
--------- -----------
594,632 574,926
========= ===========
</TABLE>
PAGE
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
Effective October 1, 1996, the Company adopted the disclosure only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the existing stock
option plan under the provisions of this pronouncement as the Company accounts
for stock options under the provisions of Accounting Principles Board Opinion
("APB") No. 25. Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date for awards in accordance
with the provisions of SFAS No. 123, net income would have been reduced by $167,
net of $112 deferred tax benefit, in fiscal 1997, and $7, net of $5 deferred tax
benefit in 1998. There would have been no effect on net income in fiscal 1996
as no options were granted. These pro forma adjustments were calculated using
the minimum value method to value all stock options granted since October 1,
1995, using the following assumptions:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1998
-------- --------
Risk free interest rate 6.27% 5.53%
Expected life of options 5 years 5 years
</TABLE>
(Remainder of page intentionally left blank.)
PAGE
<PAGE>
HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998
NOTE 14: FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Financial information by geographic area is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998
-------------- -------------- ---------------
Sales
United States $ 142,132 $ 154,403 $ 146,574
Export Sales 66,777 65,199 78,187
-------------- -------------- ---------------
208,909 219,602 224,761
Europe 54,173 54,116 63,835
-------------- -------------- ---------------
263,082 273,718 288,596
Less: Eliminations 36,680 37,958 41,652
-------------- -------------- ---------------
Net revenues $ 226,402 $ 235,760 $ 246,944
============== ============== ===============
Operating income and other cost, net
United States $ 17,345 $ 19,827 $ 19,948
Europe 4,806 4,486 5,996
-------------- -------------- ---------------
Total operating income (loss) and other
cost, net 22,151 24,313 25,944
Interest expense 21,991 20,608 21,171
-------------- -------------- ---------------
Income before provision for (benefit from)
income taxes, extraordinary item, and
cumulative effect of a change in
accounting principle $ 160 $ 3,705 $ 4,773
============== ============== ===============
Identifiable assets
United States $ 122,400 $ 178,343 $ 163,881
Europe 34,314 34,693 39,707
General corporate assets* 4,688 3,281 3,720
Equity in affiliates 87 2 (45)
-------------- -------------- ---------------
$ 161,489 $ 216,319 $ 207,263
============== ============== ===============
</TABLE>
* General corporate assets include cash and cash equivalents.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
(Remainder of page intentionally left blank.)
PAGE
<PAGE>
PART III
ITEM 10. DIRECTORS & EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the persons
who served as the directors and executive officers of the Company as of
September 30, 1998. Except as indicated in the following paragraphs, the
principal occupations of these persons have not changed during the past five
years.
<TABLE>
<CAPTION>
<S> <C> <C>
NAME AGE POSITION WITH THE COMPANY
- -------------------------------------------- ----- ---------------------------------------------------------------
Michael D. Austin 58 President and Chief Executive Officer; Director
Joseph F. Barker 51 Chief Financial Officer; Vice President, Finance; Treasurer
F. Galen Hodge 60 Vice President, Marketing
Michael F. Rothman 51 Vice President, Engineering & Technology
Charles J. Sponaugle 50 Vice President, Sales
Frank J. LaRosa 39 Vice President, Human Resources and Information Technology
August A. Cijan 43 Vice President, Operations
Theodore T. Brown 40 Controller; Chief Accounting Officer
Robert I. Hanson 54 General Manager, Arcadia Tubular Products
R. Steven Linne 54 General Counsel and Secretary
Glenn H. Hutchins 43 Director, Member Compensation Committee
David A. Stockman 52 Director
Chinh E. Chu 32 Director, Member Audit Committee
Marshall A. Cohen 63 Director, Member Compensation Committee
Eric Ruttenberg 42 Director, Member Audit Committee
</TABLE>
Mr. Austin was elected President, Chief Executive Officer and a director of
the Company in September 1993. From 1987 to the time he joined the Company, Mr.
Austin was President and Chief Executive Officer of Tuscaloosa Steel
Corporation, a mini hot strip mill owned by British Steel PLC with approximately
$200 million in annual revenue ("Tuscaloosa").
Mr. Barker was elected Vice President, Finance, of the Company in September
1992 and Treasurer and Secretary in September 1993. Mr. Barker was also elected
Chief Financial Officer in May 1996. He had served as Controller of the Company
and its predecessors since November 1986.
Dr. Hodge was elected Vice President, Marketing, in June 1998 after having
served as Vice President of International since 1994. He had served as Vice
President, Technology, since September 1989 and in various technical and
production positions with the Company and its predecessors since 1970.
Mr. Rothman was elected Vice President, Engineering and Technology in
October 1995 after having served as Marketing Manager since 1994. He previously
served in various marketing and technical positions since joining the Company in
1975.
Mr. Sponaugle was elected Vice President, Sales, in June 1998 after having
served as Vice President, Sales and Marketing since October 1994. He had served
in various quality control and marketing positions since 1985.
Mr. LaRosa was elected Vice President, Human Resources and Information
Technology in April 1996 after having served as Manager, Human Resources and
Information Technology from June 1994 to April 1996. From September 1993 until
June 1994, Mr. LaRosa served as Manager, Human Resources. From December 1990
until joining the Company in September 1993, he served in various management
capacities at Tuscaloosa.
Mr. Cijan was elected Vice President, Operations in April 1996. He joined
the Company in 1993 as Manufacturing Manager and was Manager, Maintenance and
Engineering for Tuscaloosa from 1987 until he joined the Company in 1993.
Mr. Brown was elected Controller and Chief Accounting Officer of the Company
in May, 1996, after having served as General Accounting Manager since 1992. From
1988 to 1992 he served in various financial capacities with the Company.
PAGE
<PAGE>
Mr. Hanson was named General Manager, Arcadia Tubular Products Facility in
November 1994. He previously served the Company and its predecessors in various
technical, production and engineering capacities since October 1987.
Mr. Linne was elected General Counsel and Secretary of the Company in
October 1996 after having served as a patent and trademark attorney in private
practice and for the Company and its predecessors since 1989.
Mr. Hutchins is currently a Senior Managing Director of Blackstone, which
he joined in September 1994. Mr. Hutchins was a Managing Director of Thomas H.
Lee Co. from 1987 until 1994. While on leave from Thomas H. Lee Co. during
parts of 1993 and 1994, he was a Special Advisor in the White House. Mr.
Hutchins currently serves on the Boards of Haynes International, Inc., American
Axle & Manufacturing Inc. (Del.), American Axle & Manufacturing Inc. (Mich.),
Corp Group C.V. and Corp Banca (Argentina) S.A.
Mr. Stockman is currently a Senior Managing Director of Blackstone, which
he joined in 1988. Prior to joining Blackstone, Mr. Stockman was a Managing
Director in the Corporate Finance Department of Salomon Brothers, Inc. from 1985
to 1988. He currently serves on the Boards of Directors of Bar Technologies,
Collins & Aikman, Haynes International, Inc. and American Axle & Manufacturing,
Inc.
Mr. Chu is currently a Managing Director of The Blackstone Group L.P.,
which he joined in 1990. Prior to joining The Blackstone Group L.P., Mr. Chu
was a member of the Mergers and Acquisitions Group of Salomon Brothers, Inc.
from 1988 to 1990. He currently serves on the Boards of Directors of Haynes
International, Inc., Prime Succession and Rose Hills Company.
Mr. Cohen was elected as a director of Haynes International, Inc. in June
1998. He has served as counsel to Cassels, Brock & Blackwell in Toronto, Canada
since October 1996. From November 1988 to September 1996, Mr. Cohen was
President and Chief Executive Officer of The Molson Companies Limited. He was
Chairman of Gulf Canada Resources Limited and President of Olympia & York
Enterprises corporation From October 1986 to October 1988. He currently serves
on the Boards of Directors of American International Group, Inc., Lafarge
Corporation, Speedy Muffler King Inc., The Goldfarb Corporation, and The
Toronto-Dominion Bank.
Mr. Ruttenberg was elected as a director of Haynes International, Inc. in
June 1998. He is a General Partner of Tinicum, a Ruttenberg family investment
company. He is also a Director of SPS Technologies and Environmental Strategies
Corporation and a Trustee of mount Sinai Medical Center.
PAGE
<PAGE>
The Amended Stockholder's Agreement by and among Holdings and certain
investors, including Blackstone, adopted on January 31, 1997 (the "Agreement"),
imposes certain transfer restrictions on Holdings' common stock, including
provisions that (i) Holdings common stock may be transferred only to those
persons agreeing to be bound by the Agreement except if such transfer is
pursuant to a public offering or made following a public offering, or made in
compliance with the Securities Act of 1933, as amended (the "Securities Act");
(ii) the investors may not grant any proxy or enter into or agree to be bound by
any voting trust with respect to the Holdings common stock; (iii) if the
Blackstone Investors (as defined) or their permitted transferees propose to sell
any of their Holdings common stock, the other investors shall in most instances
have the right to participate ratably in the proposed sale or, under certain
circumstances, to sell all of their Holdings common stock in the proposed sale;
and (iv) a majority in interest of the Blackstone Investors may compel all other
such investors to sell their shares under certain circumstances. The Agreement
also contains a commitment on the part of Holdings to register the shares under
the Securities Act upon request by the Blackstone Investors, subject to certain
conditions and limitations. The Agreement terminates on the tenth anniversary
of its effective date.
The By-Laws of Haynes International, Inc. ("By-Laws") authorize the board of
directors to designate the number of directors to be not less than three nor
more than eleven. The board currently has six directors. Directors of the
Company serve until their successors are duly elected and qualified or until
their earlier resignation or removal. Officers of the Company serve at the
discretion of the board of directors, subject, in the case of Mr. Austin, to the
terms of his employment contract. See "Executive Compensation--Austin Employment
Agreement."
The board has established an Audit Committee and a Compensation Committee.
The Audit Committee is responsible for recommending independent auditors,
reviewing, in connection with the independent auditors, the audit plan, the
adequacy of internal controls, the audit report and management letter and
undertaking such other incidental functions as the board may authorize. The
Compensation Committee is responsible for administering the Stock Option Plans,
determining executive compensation policies and administering compensation plans
and salary programs, including performing an annual review of the total
compensation and recommended adjustments for all executive officers. See Item
11.
(Remainder of page intentionally left blank.)
PAGE
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid by the Company to its Chief Executive Officer and each of the
Company's four other most highly compensated Executive Officers, who served as
executive officers as of September 30, 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
<S> <C> <C> <C> <C> <C> <C>
Annual Long-Term
Compensation(1) Compensation
Annual Annual Awards
Name Compensation(1) Compensation(1) Other
and Annual
Principal Fiscal Salary Bonus Compensation Options All Other
Position Year $ $ $ # Compensation
- --------------------- ------ --------------- --------------- --------------- ------------ ------------
Michael D. Austin 1998 414,000 42,869 - - $ 8,663
President and Chief 1997 387,000 81,497 - - 9,000
Executive Officer 1996 351,167 233,704 - - 104,519
Joseph F. Barker 1998 176,275 18,189 - - 2,713
Vice President, 1997 166,625 35,089 - - 2,575
Finance; Treasurer 1996 150,000 92,567 - - 2,073
Charles J. Sponaugle 1998 152,500 15,719 - - 2,079
Vice President, Sales 1997 148,000 30,458 - - 1,371
1996 134,042 79,967 - - 1,191
August A. Cijan 1998 154,700 16,045 - - 840
Vice President, 1997 149,400 31,117 - - 812
Operations 1996 139,350 73,482 - - 743
F. Galen Hodge 1998 149,875 15,749 - - 5,116
Vice President, 1997 143,500 30,541 - - 3,371
Marketing 1996 136,750 51,996 - - 3,236
<FN>
- --------------------------
(1) Additional compensation in the form of perquisites was paid to certain of the named officers in the periods
presented; however, the amount of such compensation was less than the level required for reporting.
(2) Premium payments to the group term life insurance plan, gainsharing payments and relocation reimbursements
which were made by the Company.
</TABLE>
PAGE
<PAGE>
STOCK OPTION PLANS
In 1986, the Company adopted a stock incentive plan, which was amended and
restated in 1987, for certain key management employees (the "Prior Option
Plan"). The Prior Option Plan allowed participants to acquire restricted common
stock from the Company by exercising stock options (the "Prior Options") granted
pursuant to the terms and conditions of the Prior Option Plan. In connection
with the 1989 Acquisition, Holdings established the Haynes Holdings, Inc.
Employee Stock Option Plan (the "Existing Stock Option Plan"). The Existing
Stock Option Plan (as amended) authorizes the granting of options to certain
key employees and directors of Holdings and its subsidiaries (including the
Company) for the purchase of a maximum of 915,880 shares of Holdings' common
stock. As of September 30, 1998, options to purchase 594,632 shares were
outstanding under the Existing Stock Option Plan. 6,205 options are available
for grant. Upon consummation of the 1989 Acquisition, the holders of the Prior
Options exchanged all of their remaining Prior Options for options pursuant to
the Existing Stock Option Plan (the "Rollover Options"). Except for the Rollover
Options, the Compensation Committee, which administers the Existing Stock Option
Plan, is authorized to determine which eligible employees will receive options
and the amount of such options. Pursuant to the Existing Stock Option Plan, the
Compensation Committee is authorized to grant options to purchase Common Stock
at any price in excess of the lower of Book Value (as defined in the Existing
Stock Option Plan) or 50% of the Fair Market Value (as defined in the Existing
Stock Option Plan) per share of Common Stock on the date of the award. However,
actual options outstanding under the Existing Stock Option Plan have been
granted at the estimated fair market value per share at the date of grant,
resulting in no compensation being charged to operations.
Subject to earlier exercise upon death, disability or normal retirement,
upon a change of control (as defined in the Existing Stock Option Plan) of
Holdings, upon the determination of the Compensation Committee in its
discretion, or upon the sale of all or substantially all of the assets of the
Company, options granted under the Existing Stock Option Plan (other than the
Rollover Options and options granted to existing Management Holders (as defined
in the Existing Stock Option Plan) that are immediately exercisable) become
exercisable on the third anniversary thereof unless otherwise provided by the
Compensation Committee and terminate on the earlier of (i) three months after
the optionee ceases to be employed by the Company or any of its subsidiaries or
(ii) ten years and two days after the date of grant. Options granted pursuant to
the Existing Stock Option Plan may not be assigned or transferred by an optionee
other than by last will and testament or by the laws of descent and
distribution, and any attempted transfer of such options may result in
termination thereof.
No options were granted in fiscal 1996. On October 22, 1996, 133,000 options
were granted to certain key management personnel with exercise prices of $8.00
per share. On June 1, 1998, a total of 24,632 options were granted to Marshall
A. Cohen, Director, at an exercise price of $10.15 per share.
Certain options were originally granted in December 1994 with an exercise
price of $5.00 per share. In order to provide a meaningful incentive to
management, in January 1996 the Company's board of directors reduced the
exercise price for the options listed in the table (and options to purchase an
additional 191,500 shares of Common Stock granted to other members of the
Company's management) to $2.50 per share, which the board of directors
determined was the fair market value at that time.
(Remainder of page intentionally left blank.)
PAGE
<PAGE>
The following table sets forth certain information with respect to stock
options held by the persons named in the Summary Compensation Table. No persons
named in the Summary Compensation Table were granted or exercised stock options
during fiscal 1998.
STOCK OPTION EXERCISES AND FISCAL YEAR-END HOLDINGS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Number of
Number of Securities Securities Value of Value of
Underlying Underlying Unexercised Unexercised
Unexercised Unexercised In-The-Money In-The-Money
Options at Options at Options at Options at
Fiscal Year End Fiscal Year End Fiscal Year End(1) Fiscal Year End(1)
-------------------- --------------- ------------------- ------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------- -------------------- --------------- ------------------- ------------------
Michael D. Austin 160,000 - $ 1,224,000 -
Joseph F. Barker 40,000 - $ 306,000 -
Charles J. Sponaugle 33,000 - $ 252,450 -
August A. Cijan 40,000 - $ 306,000 -
F. Galen Hodge 40,000 - $ 306,000 -
<FN>
- ----------------------
(1) Because there is no market for Holdings common stock, the value of unexercised "in the
money" options is based on the most recent value of Holdings common stock determined by the Holdings
Board of Directors ($10.15).
</TABLE>
SEVERANCE AGREEMENTS
In connection with the events leading up to the acquisition of the Company
by Morgan Lewis Githens & Ahn and management of the Company in August 1989, the
Company entered into Severance Agreements with certain key employees (the "Prior
Severance Agreements"). In 1995, the Company determined that the provisions of
the Prior Severance Agreements were no longer appropriate for the key employees
who were parties thereto and that several other key employees who were employed
after 1989 should be entitled to severance benefits. Consequently, during and
after July 1995, the Company entered into Severance Agreements (the "Severance
Agreements") with Messrs. Austin, Barker, Cijan, Hodge, and Sponaugle and with
certain other key employees of the Company (the "Eligible Employees"). The
Severance Agreements superseded in all respects the Prior Severance Agreements
that were then in effect.
The Severance Agreements provide for an initial term expiring April 30,
1996, subject to one-year automatic extensions (unless terminated by the Company
or the Eligible Employee 60 days prior to May 1 of any year). The Severance
Agreements automatically terminate upon termination of the Eligible Employee's
employment prior to a Change in Control of the Company, as defined in the
Severance Agreements (a "Severance Change in Control"), unless the termination
of employment occurs as a result of action of the Company other than for Cause
(as defined in the Severance Agreements) within 90 days of a Severance Change in
Control. A Severance Change in Control occurs upon a change in ownership of
50.0% or more of the combined voting power of the outstanding securities of the
Company or Holdings or upon the merger, consolidation, sale of all or
substantially all of the assets or liquidation of the Company or Holdings.
PAGE
<PAGE>
The Severance Agreements provide that if an Eligible Employee's employment
with the Company is terminated within six months following a Severance Change in
Control by reason of such Eligible Employee's disability, retirement or death,
the Company will pay the Eligible Employee (or his estate) his Base Salary (as
defined in the Severance Agreements) plus any bonuses or incentive compensation
earned or payable as of the date of termination. In the event that the Eligible
Employee's employment is terminated by the Company for Cause (as defined in the
Severance Agreements) within the six-month period, the Company is obligated only
to pay the Eligible Employee his Base Salary through the date of termination. In
addition, if within the six-month period the Eligible Employee's employment is
terminated by the Eligible Employee or the Company (other than for Cause or due
to disability, retirement or death), the Company must (among other things) (i)
pay to the Eligible Employee such Eligible Employee's full Base Salary and any
bonuses or incentive compensation earned or payable as of the date of
termination; (ii) continue to provide life insurance and medical and hospital
benefits to the Eligible Employee for up to 12 months following the date of
termination (18 months for Messrs. Austin and Barker); (iii) pay to the Eligible
Employee $12,000 for outplacement costs to be incurred, (iv) pay to the Eligible
Employee a lump sum cash payment equal to either (a) 150% of the Eligible
Employee's Base Salary in the case of Messrs. Austin and Barker, or (b) 100% of
the Eligible Employee's Base Salary in the case of the other Eligible Employees,
provided that the Company may elect to make such payments in installments over
an 18 month period in the case of Messrs. Austin or Barker or a 12 month period
in the case of the other Eligible Employees. As a condition to receipt of
severance payments and benefits, the Severance Agreements require that Eligible
Employees execute a release of all claims.
Pursuant to the Severance Agreements, each Eligible Employee agrees that
during his employment with the Company and for an additional one year following
the termination of the Eligible Employee's employment with the Company by reason
of disability or retirement, by the Eligible Employee within six months
following a Severance Change in Control or by the Company for Cause, the
Eligible Employee will not, directly or indirectly, engage in any business in
competition with the business of the Company.
AUSTIN EMPLOYMENT AGREEMENT
On September 2, 1993, the board of directors elected Michael D. Austin
President and Chief Executive Officer of the Company. The Company and Holdings
entered into an Executive Employment Agreement with Mr. Austin (the "Executive
Employment Agreement") which provides that, in exchange for his services as
President and Chief Executive Officer of the Company, the Company will pay Mr.
Austin (1) an annual base salary of not less than $325,000, subject to annual
adjustment at the sole discretion of the board of directors, and (2) incentive
compensation as determined by the board of directors based on the actual results
of operations of the Company in relation to budgeted results of operation of the
Company. In addition, Mr. Austin is entitled to receive vacation leave and to
participate in all benefit plans generally applicable to senior executives of
the Company and to receive fringe benefits as are customary for the position of
Chief Executive Officer.
Under the terms of the Executive Employment Agreement, the Company agreed
to pay Mr. Austin the sum of $100,000 as compensation for deferred compensation
forfeited by Mr. Austin at his former employer. The Company also indemnified Mr.
Austin against any loss incurred in the sale of Mr. Austin's residence at his
prior location and paid certain financing costs incurred in connection with the
residence. The Company provided supplemental life, health, and accident coverage
for Mr. Austin until he was eligible to participate in the Company's benefit
plans.
Pursuant to the Executive Employment Agreement, Holdings also granted Mr.
Austin the option to purchase 200,000 shares of Common Stock of Holdings at a
purchase price of $5.00 per share under the Existing Stock Option Plan. In
January 1996, the purchase price for exercise of the option was reduced to $2.50
per share. These options are fully vested, and Mr. Austin exercised a portion of
these options to acquire 40,000 shares of Holdings Common Stock in fiscal 1997.
PAGE
<PAGE>
In the event of a change in control and the termination of Mr. Austin's
employment by the Company thereafter, the Company is also obligated to pay the
difference, if any, between the pension benefit payable to Mr. Austin under the
U.S. Pension Plan (as defined below) at the time of such change in control and
the pension benefit that would be payable under the U.S. Pension Plan if Mr.
Austin had completed 10 years of service with the Company.
On July 15, 1996, the Company, Holdings and Mr. Austin entered into an
amendment of the Executive Employment Agreement which extends its term to August
31, 1999 (with year to year continuation thereafter unless the Company or Mr.
Austin elects otherwise) and requires the Company to reimburse Mr. Austin for up
to $10,000 for estate or financial planning services. The amendment of the
Executive Employment Agreement also required that in 1996 the Company review and
evaluate the existing bonus plans and consider, among other alternatives, a
deferred compensation plan for the management of the Company.
If Mr. Austin's employment is terminated by the Company prior to August 31,
1999 without "Cause," as defined in the Executive Employment Agreement, as
amended, Mr. Austin is entitled to continuation of his annual base salary until
the later of August 31, 1999 or 24 months following the date of termination.
Also, if the Company terminates Mr. Austin's employment without Cause after
August 31, 1999 or elects not to renew the Executive Employment Agreement on a
one-year basis, Mr. Austin is entitled to annual base salary continuation for a
period of 12 months following the date of termination of his employment. In the
event that Mr. Austin is entitled to termination benefits under the Severance
Agreement to which he is a party, he is not entitled to salary continuation or
benefits under the Executive Employment Agreement, as amended.
U.S. PENSION PLAN
The Company maintains for the benefit of eligible domestic employees a
defined benefit pension plan, designated as the Haynes International, Inc.
Pension Plan (the "U.S. Pension Plan"). Under the U.S. Pension Plan, all Company
employees completing at least 1,000 hours of employment in a 12-month period
become eligible to participate in the plan. Employees are eligible to receive an
unreduced pension annuity on reaching age 65, reaching age 62 and completing 10
years of service, or completing 30 years of service. The final option is
available only for union employees hired before July 3, 1988 or for salaried
employees who were plan participants on March 31, 1987.
For salaried employees employed on or after July 3, 1988, the normal
monthly pension benefit provided under the U.S. Pension Plan is the greater of
(i) 1.31% of the employee's average monthly earnings multiplied by years of
credited service, plus an additional 0.5% of the employee's average monthly
earnings, if any, in excess of Social Security covered compensation multiplied
by years of credited service up to 35 years, or (ii) the employee's accrued
benefit as of March 31, 1987.
There are provisions for delayed retirement benefits, early retirement
benefits, disability and death benefits, optional methods of benefit payments,
payments to an employee who leaves after five or more years of service and
payments to an employee's surviving spouse. Employees are vested and eligible to
receive pension benefits after completing five years of service. Vested benefits
are generally paid beginning at or after age 55; however, benefits may be paid
earlier in the event of disability, death, or completion of 30 years of service
prior to age 55.
PAGE
<PAGE>
The following table sets forth the range of estimated annual benefits
payable upon retirement for graduated levels of average annual earnings and
years of service for employees under the plan, based on retirement at age 65 in
1998. The maximum annual benefit permitted for 1998 under Section 415(b) of the
Code is $125,000.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS YEARS YEARS YEARS YEARS
OF OF OF OF OF
SERVICE SERVICE SERVICE SERVICE SERVICE
-------- -------- -------- -------- --------
AVERAGE ANNUAL
REMUNERATION 15 20 25 30 35
-------- -------- -------- -------- --------
100,000 $ 23,800 $ 31,700 $ 39,700 $ 47,600 $ 55,500
150,000 36,500 48,700 60,900 73,100 85,300
200,000 49,300 65,700 82,200 98,600 115,000
250,000 62,000 82,700 103,400 124,100 144,800
300,000 74,800 99,700 124,700 149,600 174,500
350,000 87,500 116,700 145,900 175,100 204,300
400,000 100,300 133,700 167,200 200,600 234,000
450,000 113,000 150,700 188,400 226,100 263,800
</TABLE>
The estimated credited years of service of each of the individuals named in
the Summary Compensation Table as of September 30, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
CREDITED
SERVICE
--------
Michael D. Austin 5
F. Galen Hodge 28
Joseph F. Barker 17
Charles J. Sponaugle 17
August A. Cijan 4
</TABLE>
U.K. PENSION PLAN
The Company maintains a pension plan for its employees in the United
Kingdom (the "U.K. Pension Plan"). The U.K. Pension Plan is a contributory plan
under which eligible employees contribute 3% or 6% of their annual earnings.
Normal retirement age under the U.K. Pension Plan is age 65 for males and age 60
for females. The annual pension benefit provided at normal retirement age under
the U.K. Pension Plan ranges from 1% to 1 2/3% of the employee's final average
annual earnings for each year of credited service, depending on the level of
employee contributions made each year during the employee's period of service
with the Company. The maximum annual pension benefit for employees with at least
10 years of service is two-thirds of the individual's final average annual
earnings. Similar to the U.S. Pension Plan, the U.K. Pension Plan also includes
provisions for delayed retirement benefits, early retirement benefits,
disability and death benefits, optional methods of benefit payments, payments to
employees who leave after a certain number of years of service, and payments to
an employee's surviving spouse. The U.K. Pension Plan also provides for payments
to an employee's surviving children.
PAGE
<PAGE>
PROFIT SHARING AND SAVINGS PLAN
The Company maintains the Haynes International, Inc. Combined Profit
Sharing and Savings Plan ("Profit Sharing Plan") to provide retirement,
tax-deferred savings for eligible employees and their beneficiaries.
The board of directors has sole discretion to determine the amount, if any,
to be contributed by the Company. No Company contributions were made to the
Profit Sharing Plan for the fiscal years ended September 30, 1996, 1997 and
1998. The Profit Sharing Plan is qualified under Section 401 of the Code,
permitting the Company to deduct for federal income tax purposes all amounts
contributed by it to the Profit Sharing Plan.
In general, all salaried employees completing at least 1,000 hours of
employment in a 12-month period are eligible to participate after completion of
one full year of employment. Each participant's share in the Company's annual
allocation, if any, to the Profit Sharing Plan is represented by the percentage
which his or her plan compensation (up to $260,000) bears to the total plan
compensation of all participants in the plan. Employees may also elect to make
elective salary reduction contributions to the Profit Sharing Plan, in amounts
up to 20% of their plan compensation. Elective salary reduction contributions
may be withdrawn subject to the terms of the Profit Sharing Plan.
Vested individual account balances attributable to Company contributions
may be withdrawn only after the amount to be distributed has been held by the
plan trustee in the profit sharing account for at least 24 consecutive calendar
months. Participants vest in their individual account balances attributable to
Company contributions at age 65, death, disability or on completing five years
of service.
INCENTIVE PLAN
In January 1996, the Company awarded and paid management bonuses of
approximately $439,000 pursuant to its management incentive program. The January
bonuses were calculated based on the Company's fiscal 1995 performance.
Additionally, the Company adopted a management incentive plan effective for
fiscal 1996 pursuant to which senior managers and managers in the level below
senior managers will be paid a bonus based on actual EBITDA compared to budgeted
EBITDA. Based on results for fiscal 1996, the Company accrued approximately $1.5
million for fiscal 1996 which was paid to all domestic employees meeting certain
service requirements on November 15, 1996.
In January 1997, the Company awarded and paid management bonuses of
$200,000 pursuant to a board resolution. Additionally, an incentive plan
similar to the 1996 plan was approved for 1997 subject to higher targets. Based
on results for fiscal 1997, the Company accrued $925,000 for fiscal 1997 which
was paid to all domestic salaried employees meeting certain service
requirements on November 12, 1997.
For fiscal 1998, the Board again approved an incentive plan similar to the
1997 plan subject to higher targets. Based on results for fiscal 1998 the
Company accrued $315,000 for fiscal 1998, which was paid to certain domestic
salaried employees meeting specific service requirements on November 18, 1998.
HAYNES INTERNATIONAL, LTD. PLAN
In fiscal 1995, the Company's affiliate Haynes International, Ltd.
instituted a gainsharing plan. For fiscal 1995 and 1996, the Company made
gainsharing payments pursuant to this plan of approximately $269,000 and
$266,000, respectively. In fiscal 1997 and 1998, Haynes International, Ltd.
made incentive payments similar to the domestic incentive plan of approximately
$115,000 and $98,000, respectively.
DIRECTOR COMPENSATION
The directors of the Company receive no compensation for their services as
such. The non-management members of the board of directors are reimbursed by the
Company for their out-of-pocket expenses incurred in attending meetings of the
board of directors. Mr. Cohen has a consulting agreement with Holdings under
which he has received 24,632 shares of Holdings common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee are now serving or
previously have served as employees or officers of the Company or any
subsidiary, and none of the Company's executive officers serve as directors of,
or in any compensation related capacity for, companies with which members of the
Compensation Committee are affiliated.
PAGE
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors is responsible for
administering the Existing Stock Option Plan, determining executive compensation
policies and administering compensation plans and salary programs. The
Committee is currently comprised solely of non-employee directors. The following
report is submitted by the members of the Compensation Committee.
* * *
The Company's executive compensation program is designed to align executive
compensation with the financial performance, business strategies and objectives
of the Company. The Company's compensation philosophy is to ensure that the
delivery of compensation, both in the short- and long-term, is consistent with
the sustained progress, growth and profitability of the Company and acts as an
inducement to attract and retain qualified individuals. Under the guidance of
the Company's Compensation Committee, the Company has developed and implemented
an executive compensation program to achieve these objectives while providing
executives with compensation opportunities that are competitive with companies
of comparable size in related industries.
The Company's executive compensation program has been designed to implement
the objectives described above and is comprised of the following fundamental
three elements:
- a base salary that is determined by individual contributions and sustained
performance within an established competitive salary range. Pay for performance
recognizes the achievement of financial goals and accomplishment of corporate
and functional objectives of the Company.
- an annual cash bonus, based upon corporate and individual performance
during the fiscal year.
- grants of stock options, also based upon corporate and individual
performance during the fiscal year, which focus executives on managing the
Company from the perspective of an owner with an equity position in the
business.
Base Salary. The salary, and any periodic increase thereof, of the
President and Chief Executive Officer was and is determined by the Board of
Directors of the Company based on recommendations made by the Compensation
Committee. The salaries, and any periodic increases thereof, of the Vice
President, Finance, Secretary and Treasurer, the Vice President, International,
the Vice President, Operations, and the Vice President, Marketing, were and are
determined by the Board of Directors based on recommendations made by the
President and Chief Executive Officer and approved by the Committee.
The Company, in establishing base salaries, levels of incidental and/or
supplemental compensation, and incentive compensation programs for its officers
and key executives, assesses periodic compensation surveys and published data
covering the industry in which the Company operates and industry in general.
The level of base salary compensation for officers and key executives is
determined by both their scope and responsibility and the established salary
ranges for officers and key executives of the Company. Periodic increases in
base salary are dependent on the executive's proficiency of performance in the
individual's position for a given period, and on the executive's competency,
skill and experience.
Compensation levels for fiscal 1998 for the President and Chief Executive
Officer, and for the other executive officers of the Company, reflected the
accomplishment of corporate and functional objectives in fiscal 1997.
Bonus Payments. Bonus awards are determined by the Board of Directors of
the Company based on recommendations made by the Compensation Committee. Bonus
awards for fiscal 1996, 1997 and 1998 reflected the accomplishment of corporate
and functional objectives in fiscal 1996, 1997 and 1998, respectively.
Stock Option Grants. Stock options under the Existing Stock Option Plan are
granted to key executives and officers based upon individual and corporate
performance and are determined by the Board of Directors of the Company based on
recommendations made by the Compensation Committee. On October 22, 1996, 133,000
options were granted to certain key management personnel with exercise prices of
$8.00 per share. On June 1, 1998, a total of 24,632 options were granted to
Marshall A. Cohen, Director, at an exercise price of $10.15 per share.
SUBMITTED BY THE COMPENSATION COMMITTEE
(Remainder of page intentionally left blank.)
PAGE
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding capital stock of the Company is owned by Holdings.
The only stockholders of record at September 30, 1998 known to be owning more
than five percent of Holdings' outstanding Common Stock were: Blackstone Capital
Partners II Merchant Banking Fund L.P.; Blackstone Offshore Capital Partners II
L.P.; and Blackstone Family Investment Partnership II L.P. (collectively, "The
Blackstone Partnerships"), all of which are limited partnerships duly organized
and existing in good standing under the laws of the State of Delaware, the
Cayman Islands and the State of Delaware, respectively.
The following table sets forth the number and percentage of shares of
Common Stock of Holdings owned by (i) The Blackstone Partnerships, (ii) each of
the executive officers named in the Summary Compensation Table, and (iii) all
directors and executive officers of the Company as a group, as of September 30,
1998. The address of The Blackstone Partnerships is 345 Park Avenue, 31st
Floor, New York, NY 10154. The address of Messrs. Austin, Barker, Cijan, Hodge
and Sponaugle is 1020 W. Park Avenue, P.O. Box 9013, Kokomo, IN 46904-9013.
<TABLE>
<CAPTION>
<S> <C> <C>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED (1) OWNED (1)
------------- -------------
NAME NUMBER PERCENT
- ------------------------------------------- ------------- -------------
The Blackstone Partnerships 5,323,799 73.0
Michael D. Austin 160,000(1) 2.2
Joseph F. Barker 40,000(1) (2)
August A. Cijan 40,000(1) (2)
F. Galen Hodge 40,000(1) (2)
Charles J. Sponaugle 38,000(3) (2)
All directors and executive officers of the
Company as a group 470,632 6.5
<FN>
- ----------------------------
(1) Represents shares of Common Stock underlying options exercisable at any time
which are deemed to be beneficially owned by the holders of such options. See
Item 11 - "Executive Compensation - Stock Option Plans."
(2) Less than 1%.
(3) Includes 33,000 shares of Common Stock underlying options exercisable at any
time which are deemed to be beneficially owned by Mr. Sponaugle. See Item 11 -
"Executive Compensation - Stock Option Plans."
</TABLE>
AGREEMENTS AMONG STOCKHOLDERS
The Amended Stockholders' Agreement imposes certain transfer restrictions
on the Holdings common stock, including provisions that (i) Holdings common
stock may be transferred only to those persons agreeing to be bound by the
Stockholder Agreement except if such transfer is pursuant to a public offering
or made following a public offering, or made in compliance with the Securities
Act; (ii) the investors may not grant any proxy or enter into or agree to be
bound by any voting trust with respect to the Holdings common stock; (iii) if
the Blackstone Investors or their permitted transferees, propose to sell any of
their Holdings common stock, the other investors shall in most instances have
the right to participate ratably in the proposed sale or, under certain
circumstances, to sell all of their Holdings common stock in the proposed sale;
and (iv) a majority in interest of the Blackstone Investors may compel all
other such investors to sell their shares under certain circumstances. The
Stockholders' Agreement also contains a commitment on the part of Holdings to
register the shares under the Securities Act upon request by the Blackstone
Investors, subject to certain conditions and limitations. The Stockholders'
Agreement terminates on the tenth anniversary of its effective date.
PAGE
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is required to pay a monitoring fee to Blackstone Management
Partners L.P. in the amount of $500,000 annually on each anniversary of the
recapitalization date, with the aggregate amount not to exceed $2.5 million. On
June 1, 1998, a total of 24,632 shares of Holdings common stock shares were
issued to Marshall A. Cohen, Director, for consulting services and options
to acquire 24,632 shares of Holdings common stock were granted to Mr. Cohen at
an exercise price of $10.15 per share.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report.
---------------------------------------------
1. Financial Statements:
----------------------
Included as outlined in Item 8 of Part II of this report.
Report of Independent Auditors.
Consolidated Balance Sheets as of September 30, 1997 and September 30,
1998.
Consolidated Statements of Operations for the Years Ended September 30,
1996, 1997 and 1998.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1996, 1997 and 1998.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
-------------------------------
Included as outlined in Item 8 of Part II of this report.
Schedule II - Valuation and Qualifying Accounts and Reserves
Schedules other than those listed above are omitted as they are not
required, are not applicable, or the information is shown in the Notes
to the Consolidated Financial Statements.
(b) Reports on Form 8-K. None.
----------------------
(c) Exhibits. See Index to Exhibits.
--------
(Remainder of page intentionally left blank.)
PAGE
<PAGE>
<TABLE>
<CAPTION>
HAYNES INTERNATIONAL, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<S> <C> <C> <C>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, 1996 SEPT. 30, 1997 SEPT. 30, 1998
---------------- ---------------- ----------------
Balance at beginning of period $ 979 $ 900 $ 657
Provisions 26 (6) 221
Write-Offs (152) (251) (287)
Recoveries 47 14 71
---------------- ---------------- ----------------
Balance at end of period $ 900 $ 657 $ 662
- ------------------------------ ================ ================ ================
</TABLE>
(Remainder of page intentionally left blank.)
PAGE
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HAYNES INTERNATIONAL, INC.
----------------------------
(Registrant)
By:/s/ Michael D. Austin
-------------------------------
Michael D. Austin, President
Date: December 22, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Capacity Date
- --------------------- ------------------------------ -----------------
/s/ Michael D. Austin President and Director December 22, 1998
Michael D. Austin (Principal Executive Officer)
/s/ Joseph F. Barker Vice President, Finance; December 22, 1998
Joseph F. Barker Treasurer
(Principal Financial Officer)
/s/ Theodore T. Brown Controller December 22, 1998
Theodore T. Brown (Principal Accounting Officer)
/s/ Glenn H. Hutchins Director December 22, 1998
Glenn H. Hutchins
/s/ David A. Stockman Director December 22, 1998
David A. Stockman
/s/ Chinh E. Chu Director December 22, 1998
Chinh E. Chu
/s/ Marshall A. Cohen Director December 22, 1998
Marshall A. Cohen
/s/ Eric Ruttenberg Director December 22, 1998
Eric Ruttenberg
</TABLE>
PAGE
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
<S> <C> <C> <C>
SEQUENTIAL
NUMBER NUMBERING
ASSIGNED IN SYSTEM PAGE
REGULATION S-K NUMBER OF
ITEM 601 DESCRIPTION OF EXHIBIT EXHIBIT
- --------------- ------------------------------------------------------------ -----------
(2) 2.01 Stock Purchase Agreement, dated as of January 24,
1997, among Blackstone Capital Partners II Merchant
Banking Fund L.P., Blackstone Offshore Capital Partners
II Merchant Banking Fund L.P., Blackstone Family
Investment Partnership L.P., Haynes Holdings, Inc. and
Haynes International, Inc. (Incorporated by reference to
Exhibit 2.01 to Registrant's Form 8-K Report, filed
February 13, 1997, File No. 333-5411.)
2.02 Stock Redemption Agreement, dated as of January 24,
1997, among MLGA Fund II, L.P., MLGAL Partners, L.P.
and Haynes Holdings, Inc. (Incorporated by reference to
Exhibit 2.02 to Registrant's Form 8-K Report, filed
February 13, 1997, File No. 333-5411.)
2.03 Exercise and Repurchase Agreement, dated as of
January 24, 1997, among Haynes Holdings, Inc. and the
holders as listed therein. (Incorporated by reference to
Exhibit 2.03 to Registrant's Form 8-K Report, filed
February 13, 1997, File No. 333-5411.)
2.04 Consent Solicitation and Offer to Redeem, dated January
30, 1997. (Incorporated by reference to Exhibit 2.04 to
Registrant's Form 8-K Report, filed February 13, 1997,
File No. 333-5411.)
2.05 Letter of Transmittal, dated January 30, 1997.
(Incorporated by reference to Exhibit 2.05 to
Registrant's Form 8-K Report, filed February 13, 1997,
File No. 333-5411.)
(3) 3.01 Restated Certificate of Incorporation of Registrant.
(Incorporated by reference to Exhibit 3.01 to
Registration Statement on Form S-1, Registration
No. 33-32617.)
3.02 Bylaws of Registrant. (Incorporated by reference to
Exhibit 3.02 to Registration Statement on Form S-1,
Registration No. 33-32617.)
(4) 4.01 Indenture, dated as of August 23, 1996, between
Haynes International, Inc. and National City Bank, as
Trustee, relating to the 11 5.8% Senior Notes Due
2004, table of contents and cross-reference sheet.
(Incorporated by reference to Exhibit 4.01 to the
Registrant's Form 10-K Report for the year ended
September 30, 1996, File No. 333-5411.)
4.02 Form of 11 5/8% Senior Note Due 2004. (Incorporated
by reference to Exhibit 4.02 to the Registrant's Form
10- K Report for the year ended September 30, 1996,
File No. 333-5411.)
(9) No Exhibit.
(10) 10.01 Form of Severance Agreements, dated as of March 10,
1989, between Haynes International, Inc. and the
employees of Haynes International, Inc. named in the
schedule to the Exhibit. (Incorporated by reference to
Exhibit 10.03 to Registration Statement on Form S-1,
Registration No. 33-32617.)
10.02 Stock Subscription Agreement, dated as of August 31,
1989, among Haynes Holdings, Inc., Haynes
International, Inc. and the persons listed on the signature
pages thereto (Investors). (Incorporated by reference to
Exhibit 4.07 to Registration Statement on Form S-1,
Registration No. 33-32617.)
10.03 Amendment to the Stock Subscription Agreement To
Add a Party, dated August 14, 1992, among Haynes
Holdings, Inc., Haynes International, Inc., MLGA Fund II,
L.P., and the persons listed on the signature pages
thereto. (Incorporated by reference to Exhibit 10.17 to
Registration Statement on Form S-4, Registration
No. 33-66346.)
10.04 Second Amendment to Stock Subscription Agreement,
dated March 16, 1993, among Haynes Holdings, Inc.,
Haynes International, Inc., MLGA Fund II, L.P., MLGAL
Partners, Limited Partnership, and the persons listed on
the signature pages thereto. (Incorporated by reference
to Exhibit 10.21 to Registration Statement on Form S-4,
Registration No. 33-66346.)
PAGE
<PAGE>
10.05 Fifth Amendment to Stock Subscription Agreement,
dated as of January 29, 1997, among Haynes Holdings,
Inc., Haynes International, Inc. and the persons on the
signature pages thereof. (Incorporated by reference to
Exhibit 4.02 to Registrant's Form 8-K Report, filed
February 13, 1997, File No. 333-5411.)
10.06 Termination of Stock Subscription Agreement, dated
March 31, 1997. (Incorporated by reference to Exhibit
10.06 to Registrant's Form 10-Q Report, filed May 15,
1997, File No. 333-5411.)
10.07 Stockholders Agreement, dated as of August 31, 1989,
among Haynes Holdings, Inc. and the persons listed on
the signature pages thereto (Investors). (Incorporated
by reference to Exhibit 4.08 to Registration Statement
on Form S-1, Registration No. 33-32617.)
10.08 Amendment to the Stockholders Agreement To Add a
Party, dated August 14, 1992, among Haynes Holdings,
Inc., MLGA Fund II, L.P., and the persons listed on the
signature pages thereto. (Incorporated by reference to
Exhibit 10.18 to Registration Statement on Form S-4,
Registration No. 33-66346.)
10.09 Amended Stockholders Agreement, dated as of January
29, 1997, among Haynes Holdings, Inc. and the
investors listed therein. (Incorporated by reference to
Exhibit 4.01 to Registrant's Form 8-K Report, filed
February 13, 1997, File No. 333-5411.)
10.10 First Amendment to the Amended Stockholders'
Agreement, dated March 31, 1997. (Incorporated by
reference to Exhibit 10.10 to Registrant's Form 10-Q
Report, filed may 15, 1997, File No. 33-5411.)
10.11 Investment Agreement, dated August 10, 1992,
between MLGA Fund II, L.P., and Haynes Holdings, Inc.
(Incorporated by reference to Exhibit 10.22 to
Registration Statement on Form S-4, Registration
No. 33-66346.)
10.12 Investment Agreement, dated August 10, 1992,
between MLGAL Partners, Limited Partnership and
Haynes Holdings, Inc. (Incorporated by reference to
Exhibit 10.23 to Registration Statement on Form S-4,
Registration No. 33-66346.)
10.13 Investment Agreement, dated August 10, 1992,
between Thomas F. Githens and Haynes Holdings, Inc.
(Incorporated by reference to Exhibit 10.24 to
Registration Statement on Form S-4, Registration
No. 33-66346.)
10.14 Consent and Waiver Agreement, dated August 14,
1992, among Haynes Holdings, Inc., Haynes
International, Inc., MLGA Fund II, L.P., and the persons
listed on the signature pages thereto. (Incorporated by
reference to Exhibit 10.19 to Registration Statement on
Form S-4, Registration No. 33-66346.)
10.15 Executive Employment Agreement, dated as of
September 1, 1993, by and among Haynes International,
Inc., Haynes Holdings, Inc. and Michael D. Austin.
(Incorporated by reference to Exhibit 10.26 to the
Registration Statement on Form S-4, Registration
No. 33-66346.)
10.16 Amendment to Employment Agreement, dated as of July
15, 1996 by and among Haynes International, Inc.,
Haynes Holdings, Inc. and Michael D. Austin
(Incorporated by reference to Exhibit 10.15 to
Registration Statement on S-1, Registration
No. 333-05411).
10.17 Haynes Holdings, Inc. Employee Stock Option Plan.
(Incorporated by reference to Exhibit 10.08 to
Registration Statement on Form S-1, Registration
No. 33-32617.)
10.18 First Amendment to the Haynes Holdings, Inc. Employee
Stock Option Plan, dated March 31, 1997.
(Incorporated by reference to Exhibit 10.18 to
Registrant's Form 10-Q Report, filed May 15, 1997, File
no. 333-5411.)
10.19 Form of "New Option" Agreements between Haynes
Holdings, Inc. and the executive officers of Haynes
International, Inc. named in the schedule to the Exhibit.
(Incorporated by reference to Exhibit 10.09 to
Registration Statement on Form S-1, Registration
No. 33-32617.)
10.20 Form of "September Option" Agreements between
Haynes Holdings, Inc. and the executive officers of
Haynes International, Inc. named in the schedule to the
Exhibit. (Incorporated by reference to Exhibit 10.10 to
Registration Statement on Form S-1, Registration
No. 33-32617.)
PAGE
<PAGE>
10.21 Form of "January 1992 Option" Agreements between
Haynes Holdings, Inc. and the executive officers of
Haynes International, Inc. named in the schedule to the
Exhibit. (Incorporated by reference to Exhibit 10.08 to
Registration Statement on Form S-4, Registration
No. 33-66346.)
10.22 Form of "Amendment to Holdings Option Agreements"
between Haynes Holdings, Inc. and the executive
officers of Haynes International, Inc. named in the
schedule to the Exhibit. (Incorporated by reference to
Exhibit 10.09 to Registration Statement on Form S-4,
Registration No. 33-66346.)
10.23 Form of March 1997 Amendment to holdings Option
Agreements. (Incorporated by reference to Exhibit
10.23 to Registrant's Form 10-Q Report, filed May 15,
1997, File No. 333-5411.)
10.24 March 1997 Amendment to Amended and Restated
holdings Option Agreement, dated March 31, 1997.
Incorporated by reference to Exhibit 10.24 to
Registrant's Form 10-Q Report, filed May 15, 1997, File
No. 333-5411.)
10.25 Amended and Restated Loan and Security Agreement by
and among CoreStates Bank, N.A. and Congress
Financial Corporation (Central), as lenders, Congress
Financial Corporation (Central), as Agent for lenders, and
Haynes International, Inc., as Borrower. (Incorporated
by reference to Exhibit 10.19 to the Registrant's Form
10-K Report for the year ended September 30, 1996,
File No. 333-5411.)
10.26 Amendment No. 1 to Amended and Restated Loan and
Security Agreement by and among CoreStates Bank,
N.A. and Congress Financial Corporation (Central), as
Lenders, Congress Financial Corporation (central) as
Agent for Lenders, and Haynes International, Inc., as
Borrower. (Incorporated by reference to Exhibit 10.01
to Registrant's Form 8-K Report, filed January 22, 1997,
File No. 333-5411.)
10.27 Amendment No. 2 to Amended and Restated Loan and
Security Agreement, dated January 29, 1997, among
CoreStates Bank, N.A. and Congress Financial
Corporation (Central), as Lenders, Congress financial
Corporation (Central), as agent for Lenders, and Haynes
International, Inc. (Incorporated by reference to Exhibit
10.01 to Registrant's Form 8-K Report, filed February
13, 1997, File No. 333-5411.)
(11) No Exhibit.
(12) 12.01 Statement re: computation of ratio of earnings to fixed
charges.
(13) No Exhibit.
(16) No Exhibit.
(18) No Exhibit.
(21) 21.01 Subsidiaries of the Registrant. (Incorporated by
Reference to Exhibit 21.01 to Registration Statement on
Form S-1, Registration No. 333-05411.)
(22) No Exhibit.
(23) No Exhibit.
(24) No Exhibit.
(27) 27.01 Financial Data Schedule.
(28) No Exhibit.
(99) No Exhibit.
</TABLE>
PAGE
<PAGE>
EXHIBIT 12.01
<TABLE>
<CAPTION>
HAYNES INTERNATIONAL, INC.
RATIO OF EARNINGS BEFORE FIXED CHARGES TO FIXED CHARGES
<S> <C> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
--------- -------- ------- ---------- ----------
Line 1 Income (Loss) before
income taxes,
extraordinary item and
cumulative effect of
change in accounting
principle $(60,446) $(5,458) $ 160 $ 3,705 $ 4,773
Line 2 Interest on indebtedness 18,236 18,789 20,638 19,464 19,924
Line 3 Amortization of debt
issuance costs 1,680 1,444 1,353 1,144 1,247
Line 4 Estimated interest portion
of rental expense 522 477 464 589 564
--------- -------- ------- ---------- ----------
Line 5 Total earnings before
fixed charges $(40,008) $15,252 $22,615 $ 24,902 $ 26,508
Line 6 Interest on indebtedness $ 18,236 $18,789 $20,638 $19,596(1) 19,934(1)
Line 7 Amortization of debt
issuance costs 1,680 1,444 1,353 1,144 1,247
Line 8 Estimated interest portion
of rental expense 522 477 464 589 564
--------- -------- ------- ---------- ----------
Line 9 Total fixed charges $ 20,438 $20,710 $22,455 $ 21,329 $ 21,745
Ratio of earnings before
fixed charges to fixed
charges N/A(2) N/A(2) 1.01 1.17 1.22
<FN>
(1) Includes $132 and $10, for 1997 and 1998, respectively, of capitalized interest
expense.
(2) Earnings before fixed charges were insufficient to cover fixed charges.
</TABLE>
PAGE
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
HAYNES INTERNATIONAL, INC.
FINANCIAL DATA SCHEDULE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The schedule contains summary financial information extracted from the
consolidated condensed financial statements of Haynes International, Inc. and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1998
<PERIOD-END> SEP-30-1997 SEP-30-1998
<CASH> 3,281 3,720
<SECURITIES> 0 0
<RECEIVABLES> 39,157 46,636
<ALLOWANCES> (657) (662)
<INVENTORY> 94,081 81,861
<CURRENT-ASSETS> 135,862 135,555
<PP&E> 94,527 99,744
<DEPRECIATION> (61,976) (70,117)
<TOTAL-ASSETS> 216,319 207,263
<CURRENT-LIABILITIES> 78,799 64,581
<BONDS> 137,566 139,549
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (94,435) (90,938)
<TOTAL-LIABILITY-AND-EQUITY> 216,319 207,263
<SALES> 235,760 246,944
<TOTAL-REVENUES> 235,760 246,944
<CGS> 180,504 191,849
<TOTAL-COSTS> 232,055 242,171
<OTHER-EXPENSES> 276 952
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 20,608 21,171
<INCOME-PRETAX> 3,705 4,773
<INCOME-TAX> (32,610) 2,317
<INCOME-CONTINUING> 36,315 2,456
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 (450)
<NET-INCOME> 36,315 2,006
<EPS-PRIMARY> 363,150 20,060
<EPS-DILUTED> 363,150 20,060
</TABLE>
