UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended June 30, 1999.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from to .
Commission File Number: 333-5411
HAYNES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1185400
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1020 West Park Avenue, Kokomo, Indiana 46904-9013
(Address of principal executive offices) (Zip Code)
(765) 456-6000
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of August 13, 1999, the registrant had 100 shares of Common Stock, $.01 par
value, outstanding.
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HAYNES INTERNATIONAL, INC.
TABLE OF CONTENTS
<S> <C> <C>
PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of
September 30, 1998 and June 30, 1999 3
Consolidated Condensed Statements of Operations for the Three Months and Nine
Months ended June 30, 1998 and 1999 4
Consolidated Condensed Statements of Comprehensive Income for the Three Months 5
and Nine Months ended June 30, 1998 and 1999
Consolidated Condensed Statements of Cash Flows for the Nine Months ended June
30, 1998 and 1999 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Index to Exhibits 18
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
HAYNES INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(dollars in thousands, except share amounts)
<S> <C> <C>
September 30, June 30,
1998 1999
------------- -----------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 3,720 $ 3,181
Accounts and notes receivable, less allowance for
doubtful accounts of $662 and $882, respectively 45,974 38,346
Inventories 81,861 87,437
--------- ---------
Total current assets 131,555 128,964
--------- ---------
Property, plant and equipment (at cost) 99,744 106,188
Accumulated depreciation (70,117) (73,597)
--------- ---------
Net property, plant and equipment 29,627 32,591
Deferred income taxes 36,549 41,579
Prepayments and deferred charges, net 9,532 9,748
--------- ---------
Total assets $207,263 $212,882
========= =========
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 20,823 $ 29,685
Accrued postretirement benefits 4,500 4,500
Revolving credit 35,273 32,600
Note payable 1,055 65
Income taxes payable 1,731 769
Deferred income taxes 1,199 670
--------- ---------
Total current liabilities 64,581 68,289
--------- ---------
Long-term debt, net of unamortized discount 139,549 139,495
Accrued postretirement benefits 91,983 92,668
--------- ---------
Total liabilities 296,113 300,452
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 49,087 49,087
Accumulated deficit (143,000) (138,767)
Accumulated other comprehensive income 2,975 22
--------- ---------
Total capital deficiency (90,938) (89,658)
--------- ---------
Total liabilities and capital deficiency $207,263 $212,882
========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
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<CAPTION>
HAYNES INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands)
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------- -----------------------
1998 1999 1998 1999
------- -------- -------- --------
Net revenues $60,867 $52,146 $187,146 $156,613
Cost of sales 47,665 40,731 144,833 119,952
Selling and administrative 4,336 6,567 13,520 18,045
Research and technical 891 997 2,780 2,907
------- -------- -------- --------
Operating income 7,975 3,851 26,013 15,709
Other costs, net 359 59 722 344
Terminated acquisition costs 7,500 359
Interest expense 5,244 5,127 15,966 15,292
Interest income (14) (29) (84) (79)
------- -------- -------- --------
Income (loss) before provision for (benefit
from) income taxes and cumulative effect of a
change in accounting principle 2,386 (1,306) 1,909 (207)
Provision for (benefit from) income taxes 1,046 (384) 1,306 (4,440)
------- -------- -------- --------
Income (loss) before cumulative effect of a
change in accounting principle 1,340 (922) 603 4,233
Cumulative effect of a change in accounting
principle, net of tax benefit (450)
------- ------- -------- --------
Net income (loss) $1,340 ($922) $153 $4,233
======= ======== ======== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
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<CAPTION>
HAYNES INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands)
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1998 1999 1998 1999
------ -------- ----- -------
Net Income (loss) $1,340 ($922) $153 $4,233
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment 84 (977) (164) (2,953)
------ -------- ----- -------
Other comprehensive income (loss) 84 (977) (164) (2,953)
------ -------- ----- -------
Comprehensive income (loss) $1,424 ($1,899) ($11) $1,280
====== ======== ===== =======
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
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<CAPTION>
HAYNES INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
<S> <C> <C>
Nine Months Ended
June 30,
-----------------------
1998 1999
-------- --------
Cash flows from operating activities:
Net income $153 $4,233
Depreciation 5,950 4,082
Amortization 933 955
Deferred income taxes 354 (5,466)
Change in:
Inventories 8,901 (6,313)
Accounts receivable (6,462) 6,621
Accounts payable and accruals 96 7,640
Other, net 221 (2,188)
-------- --------
Net cash provided by operating activities 10,146 9,564
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (3,850) (7,387)
Other investing activities 307 343
-------- --------
Net cash used in investing activities (3,543) (7,044)
-------- --------
Cash flows from financing activities:
Net decrease in revolving credit and long-term debt (7,681) (2,865)
Capital contribution of proceeds from exercise of
stock options 18
-------- --------
Net cash used in financing activities (7,663) (2,865)
-------- --------
Effect of exchange rates on cash (11) (194)
-------- --------
Decrease in cash and cash equivalents (1,071) (539)
Cash and cash equivalents, beginning of period 3,281 3,720
-------- --------
Cash and cash equivalents, end of period $ 2,210 $3,181
======== ========
Supplemental disclosures of cash flow information:
Cash paid during period for: Interest $10,964 $10,263
======== ========
Income Taxes $ 1,948 $1,978
======== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
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HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the Nine Months Ended June 30, 1999
Note 1. Basis of Presentation
The interim financial statements are unaudited and reflect all adjustments
(consisting solely of normal recurring adjustments) that, in the opinion of
management, are necessary for a fair statement of results for the interim
periods presented. This report includes information in a condensed form and
should be read in conjunction with the audited consolidated financial statements
included in Form 10-K for the fiscal year ended September 30, 1998, filed by the
Company with the Securities and Exchange Commission ("SEC") on December 22,
1998. The results of operations for the nine months ended June 30, 1999, are not
necessarily indicative of the results to be expected for the full year or any
other interim period.
Note 2. Inventories
The following is a summary of the major classes of inventories:
September 30, 1998 June 30, 1999
------------------ -------------
(Unaudited)
Raw Materials $ 3,535 $3,442
Work-in-process 35,215 38,054
Finished Goods 31,752 36,023
Other, net 11,359 9,918
------- -------
Net inventories $81,861 $87,437
======= =======
Note 3. Income Taxes
The benefit from income taxes for the nine month period ended June 30,
1999, was due to the Company's adjustment in the second quarter of 1999 for
deferred taxes with respect to the undistributed earnings of two foreign
affiliates. The Company has concluded that the earnings of these two affiliates
will be permanently invested overseas for the foreseeable future.
Note 4. Business Process Reengineering Costs
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. Accordingly, in the first quarter of fiscal
1998, the Company recorded the cumulative effect of this accounting change, net
of tax, of $450,000, which resulted from a pre-tax write-off of $750,000 related
to reengineering charges involved in the implementation of an information
technology project.
Note 5. Terminated Acquisition Costs
On March 3, 1998, the Company announced that Haynes Holdings, Inc.
("Holdings"), its parent corporation, and Blackstone Capital Partners II
Merchant Banking Fund L.P. and two of its affiliates ("Blackstone"), had
abandoned their attempt to acquire Inco Alloys International ("IAI"), a 100%
owned business unit of Inco Limited ("Inco"). Certain deferred acquisition costs
were charged to operations in the nine month periods ended June 30, 1998 and
1999.
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HAYNES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
For the Nine Months Ended June 30, 1999
Note 6. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income", effective October 1, 1998. SFAS No.
130 required that changes in the Company's foreign currency translation
adjustment be shown in the financial statements. SFAS No. 130 does not require a
specific format for the financial statement in which comprehensive income is
reported, but does require that an amount representing total comprehensive
income be reported in that statement. All prior year financial statements have
been reclassified for comparative purposes.
[Rest of page intentionally left blank.]
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
References to years or portions of years in Management's Discussion and
Analysis of Financial Condition and Results of Operations refer to the Company's
fiscal years ended September 30, unless otherwise indicated. This discussion
contains statements that constitute forward looking statements within the
meaning of the securities laws. Such statements 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 or other matters, and (iii) industry
trends affecting the Company's financial condition or results of operations.
Readers of this discussion 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. This report should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations included in Form 10-K for the fiscal year
ended September 30, 1998, filed by the Company with the Securities and Exchange
Commission on December 22, 1998.
Results of Operations
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Net Revenues. Net revenues decreased approximately $8.8 million to
approximately $52.1 million in the third quarter of 1999 from approximately
$60.9 million in the third quarter of 1998. The average selling price per pound
declined to $11.40 from $13.35, for the third quarter of 1999 compared to the
same period in 1998, while volume remained relatively flat.
Sales to the aerospace industry in the third quarter of 1999 declined by
31.2% to $19.2 million from $27.9 million for the same period a year earlier.
The decreased revenue can be attributed to a 23.2% reduction in volume, combined
with a 10.1% decrease in the average selling price per pound. The lower average
selling price per pound was caused by increased competition and reduced demand
for aerospace flat products. The major volume decrease was caused by lower
domestic and export sales directly to gas turbine component fabricators and
forge shop reprocessors as the aerospace industry continues to adjust to the
lower commercial aircraft build schedules.
Sales to the chemical processing industry increased by 5.5% from
approximately $18.2 million in the third quarter of 1998 to approximately $19.2
million for the same period in 1999. A 28.9% increase in volume offset an 18.1%
decline in the average selling price per pound. The decline in average selling
price can be attributed to heightened competition, adjustments for lower raw
material prices and a higher proportion of sales of lower cost, lower priced
plate products relative to sales of higher cost, high priced wire and tubular
products.
Sales to the land-based gas turbine industry increased by 74.4% in the
third quarter of 1999 to approximately $6.8 million from $3.9 million for the
comparable period in 1998. The increased revenue can be attributed to a 75.1%
increase in volume, combined with a 1.0% increase in the average selling price.
The increase in volume and average selling price per pound was due to improved
domestic and affiliate shipments of proprietary and specialty alloy plate
products.
Sales to the flue gas desulfurization industry declined from approximately
$2.1 million in the third quarter of 1998 to approximately $900,000 in the third
quarter of 1999, due to the absence of any significant project related business
in Europe. This market is generally characterized by large project requirements
and very modest continuing maintenance needs.
Sales to the oil and gas industry in the third quarter of 1999 decreased to
approximately $400,000 from approximately $3.0 million in the third quarter of
1998. Sales to this industry are typically linked to sour gas project
requirements, which vary significantly from quarter to quarter.
Sales to other industries declined by 9.6% to approximately $4.7 million in
the third quarter of 1999 from approximately $5.2 million in the third quarter
of 1998. An increase in volume related to waste management project activity in
the United States was not sufficient to offset a decline in the average selling
price due to proportionately higher sales of lower cost, lower priced alloy
products.
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Cost of Sales. Cost of sales as a percentage of net revenues decreased to
78.1% for the third quarter of 1999 compared to 78.3% in the same period last
year. Lower raw material prices were partially offset by a greater proportion of
lower priced, lower value added product forms such as plate and billet.
Selling and Administrative Expenses. Selling and administrative expenses
increased approximately $2.3 million to approximately $6.6 million in the third
quarter of 1999 from approximately $4.3 million in the same period a year ago,
primarily as a result of expenses related to the Company's response to the
Department of Justice's grand jury nickel industry investigation which began
during the third quarter of 1999 and increased domestic and export selling
costs.
Research and Technical Expenses. Research and technical expenses increased
approximately $100,000 to approximately $1.0 million in the third quarter of
1999 from approximately $900,000 in the third quarter of 1998, primarily as a
result of increased outside research donations.
Operating Income. As a result of the above factors, the Company recognized
operating income for the third quarter of 1999 of approximately $3.9 million,
approximately $800,000 of which was contributed by the Company's foreign
subsidiaries. For the third quarter of 1998, operating income was approximately
$8.0 million, of which approximately $2.1 million was contributed by the
Company's foreign subsidiaries.
Other. Other cost decreased by approximately $300,000, due in part to
increased foreign exchange gains in the third quarter of 1999.
Interest Expense. Interest expense decreased approximately $200,000 to
approximately $5.1 million for the third quarter of 1999 from approximately $5.3
million for the same period in 1998. Lower revolving credit balances and lower
interest rates during the third quarter of fiscal 1999 contributed to this
decrease.
Income Taxes. An income tax benefit of approximately $400,000 was recorded
for the third quarter of 1999 compared to income tax expense of approximately
$1.0 million in fiscal 1998.
Net Income (Loss). As a result of the above factors, the Company recognized
a net loss for the third quarter of 1999 of approximately $900,000, compared to
net income of approximately $1.3 million for the third quarter of 1998.
[Rest of page intentionally left blank.]
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Nine Months Ended June 30, 1999 Compared to Nine Months Ended June 30, 1998
Net Revenues. Net revenues decreased approximately $30.5 million, or 16.3%,
to approximately $156.6 million in the first nine months of 1999 from
approximately $187.1 million in the first nine months of 1998, primarily as a
result of a 10.0% decrease in shipments, to approximately 12.6 million pounds in
the first nine months of 1999, from approximately 14.0 million pounds in the
first nine months of 1998. Volume decreases occurred in all markets but the
chemical processing and land-based gas turbine markets. Average selling prices
per pound decreased to $12.16 from $13.17 for the first nine months of 1999,
compared to the same period in 1998.
Sales to the aerospace industry in the first nine months of 1999 declined
by 23.0% to $65.8 million from $85.5 million for the same period a year earlier
due to a volume decline and a decrease in average selling prices. The volume
decrease was caused by a reduction in flat products in the domestic market as
the aerospace industry continues to make inventory adjustments for the announced
changes in the commercial aircraft build schedules.
Sales to the chemical processing industry declined by 7.7% from
approximately $59.9 million to approximately $55.3 million due primarily to a
13.0% reduction in the average selling price per pound, partially offset by an
increase in volume due to increased project activity in the United States. The
decline in the average selling price was the result of heightened competition,
combined with adjustments for declining raw material prices.
Sales to the land-based gas turbine industry increased 22.3% for the first
nine months of 1999 compared to the same period in 1998. A 25.3% increase in
volume was slightly offset by a 2.4% decrease in the average selling price per
pound, caused largely by an increased proportion of sales of lower priced
product forms and alloys.
Sales to the flue gas desulfurization industry declined from approximately
$6.4 million to approximately $2.9 million due to the absence of any significant
project business in the nine month period just ended. This market is generally
characterized by large project requirements and very modest continuing
maintenance needs.
Sales to the oil and gas industry in the first nine months of 1999
decreased to approximately $1.1 million from $4.5 million for the same period a
year ago. The decline in sales can be attributed to an absence of any
substantial project business. Volume requirements in this sector vary
substantially from quarter-to-quarter and year-to-year.
Sales to other industries declined by 21.5% to approximately $11.7 million
from approximately $14.9 million due to an average selling price decline. The
lower average selling price can be attributed to proportionately higher sales of
lower cost, lower priced alloys.
Cost of Sales. Cost of sales as a percentage of net revenues decreased to
76.6% for the first nine months of 1999 compared to 77.4% in the same period
last year. Lower raw material prices were partially offset by a greater
proportion of lower priced, lower value added product forms such as plate and
billet.
Selling and Administrative Expenses. Selling and administrative expenses
increased approximately $4.5 million to approximately $18.0 million in the first
nine months of 1999 from approximately $13.5 million in the same period a year
ago as a result of expenses associated with the change in executive management,
higher domestic and export selling costs, and the Company's response to the
Department of Justice's grand jury nickel industry investigation.
Research and Technical Expenses. Research and technical expenses increased
approximately $100,000 in the first nine months of 1999 compared to the first
nine months of 1998 due to increased salary and related benefits.
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Operating Income. As a result of the above factors, the Company recognized
operating income for the first nine months of 1999 of approximately $15.7
million, approximately $3.3 million of which was contributed by the Company's
foreign subsidiaries. For the first nine months of 1998, operating income was
approximately $26.0 million, of which approximately $5.4 million was contributed
by the Company's foreign subsidiaries.
Other. Other costs decreased approximately $400,000 from approximately
$700,000 in the first nine months of 1998 to approximately $300,000 for the
first nine months of 1999, primarily as a result of foreign exchange gains
realized in the first nine months of 1999.
Terminated Acquisition Costs. Terminated acquisition costs of approximately
$7.5 million were recorded in the first nine months of 1998 in connection with
the abandoned attempt to acquire IAI by Holdings. In the first nine months of
1999 additional expenses were incurred of $359,000 related to the terminated
acquisition.
Interest Expense. Interest expense decreased approximately $700,000 to
approximately $15.3 million for the first nine months of 1999 from approximately
$16.0 million for the same period in 1998. Lower revolving credit balances and
lower interest rates contributed to this decrease.
Income Taxes. The benefit from income taxes of approximately $4.4 million
for the first nine months of 1999 decreased by approximately $5.7 million from
tax expense of approximately $1.3 million for the first nine months of 1998 due
primarily to an adjustment of deferred income taxes for certain foreign earnings
that will not be remitted to the United States.
Change in Accounting Principle. The cumulative effect of a change in
accounting principle recorded in 1998 represents the write-off of the cumulative
effect of certain business process reengineering and information technology
transformation costs that were previously capitalized. The cumulative effect
includes $750,000 in costs, reduced by a $300,000 tax benefit, related to
business process reengineering charges incurred in the implementation of an
information technology project.
Net Income. As a result of the above factors, the Company recognized net
income for the first nine months of 1999 of approximately $4.2 million, compared
to net income of approximately $200,000 for the first nine months of 1998.
Liquidity and Capital Resources
The Company's near-term future cash needs will be driven by working capital
requirements, and planned capital expenditures. Capital expenditures were
approximately $7.4 million in the first nine months of 1999, compared to capital
expenditures of approximately $3.9 million for the first nine months of 1998.
The remainder of planned 1999 expenditures will be for improvements in cost,
quality, capacity and reliability of manufacturing operations. The Company does
not expect such capital expenditures to 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 with CoreStates Bank, N.A. and
Congress Financial Corporation (the "Facility"). The Facility expires August 23,
1999. The Company is exploring its options to either renew or refinance the
Facility with terms consistent with the current credit arrangement. The Company
believes these sources of capital will be sufficient to fund these capital
expenditures and working capital requirements over the next 12 months, although
there can be no assurance of this.
Net cash provided by operating activities in the first nine months of 1999
was approximately $9.6 million, as compared to approximately $10.1 million in
the first nine months of 1998. The positive cash flow from operations for 1999
was primarily the result of an increase in accounts payable and accrued expenses
of approximately $7.7 million, a decrease in accounts receivable of
approximately $6.6 million, non-cash depreciation and amortization expense of
approximately $5.1 million, and net income of approximately $4.2 million. The
cash flow was also affected by a non-cash increase in the deferred tax asset of
approximately $5.5 million, an increase in inventories of approximately $6.3
million, and other net adjustments used in operating activities of approximately
$2.2 million.
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Net cash used in investing activities increased to approximately $7.0
million in the fist nine months of 1999 from approximately $3.5 million in the
same period for 1998, primarily as a result of increased capital spending. Net
cash used in financing activities for the first nine months of 1999 was
approximately $2.9 million, compared to approximately $7.7 million for the first
nine months of 1998, primarily as a result of decreased net borrowings by the
Company in support of decreased working capital requirements.
Cash for the first nine months of 1999 decreased approximately $500,000,
resulting in a June 30, 1999 cash balance of approximately $3.2 million. Cash in
the first nine months of 1998 decreased approximately $1.1 million, resulting in
a cash balance of approximately $2.2 million at June 30, 1998.
Total debt at June 30, 1999, was approximately $172.2 million compared to
approximately $176.2 million at June 30, 1998, reflecting decreased borrowing
under the Facility and by the Company's French foreign affiliate.
At June 30, 1999, approximately $32.6 million had been borrowed pursuant to
the Facility compared to approximately $35.7 million at June 30, 1998. In
addition, as of June 30, 1999, approximately $3.3 million in letter of credit
reimbursement obligations had been incurred by the Company. The Company had
available additional borrowing capacity of approximately $12.6 million on the
Facility at June 30, 1999.
Acquisition by Holdings
In June 1997, Inco and Blackstone jointly announced the execution of a
definitive agreement ("Acquisition") for the sale by Inco of 100% of their 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 the period.
Recent Developments
The Company announced on April 15, 1999, that it has entered into a
facility management agreement with the Stainless & Specialty Steels Division of
Republic Technologies International ("Specialty Division"). The Specialty
Division is a leading producer and supplier of stainless, aerospace alloy
steels, tool steels, and forged carbon and alloy steels. These products are
processed in two plants in the United States, one in Baltimore, Maryland and the
other in Canton, Ohio. The broad range of products produced in these two plants
are supplied to aerospace forgers, specialized service centers supplying
aerospace, stainless and tool steel distributors, and original equipment
manufacturers. Until certain legal and financial transactions occur, the
Specialty Division will remain part of Republic Technologies. Ultimately,
ownership is expected to be transferred to the Company.
Grand Jury Investigation
A Federal Grand Jury is investigating possible violations of federal
anti-trust laws in the nickel alloy industry. The Company, along with other
companies in this industry, is responding to the government's request. The
Company has engaged outside legal counsel to represent its interest in the
investigation. Certain costs paid and accrued by the Company in connection with
the investigation have been accounted for as selling and administrative and
charged against income in the period. At June 30, 1999, these costs were
approximately $1.7 million. The Company expects to incur additional costs
through September 30, 1999 with respect to this investigation.
Accounting Pronouncements
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" and SFAS No. 132, "Employers' Disclosures about Pension and Other
Postretirement Benefits", are effective for the year ending September 30, 1999.
In the opinion of management, SFAS No. 131 and SFAS No. 132 will not have a
material impact on the Company's financial position, results of operations or
cash flows, as these statements are principally disclosure oriented.
13
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SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", is effective July 1, 2000. This statement 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. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. Management has not yet quantified the effect of the new standard on
the financial statements.
Year 2000 Costs
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 approval from the Board
of Directors in early fiscal 1996 for a $4.4 million new integrated information
system to replace the mainframe (of which approximately $3.0 million had been
spent through June 30, 1999, including $750,000 of business process
reengineering costs). This project includes new IBM AS/400 equipment and an
enterprise level software package called BPCS(TM), by System Software and
Associates, which is Year 2000 compliant and is slated for completion in October
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.
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 June 30, 1999, 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 $1.2 million for capital expenditures related to
other 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 stand-alone
computer systems, data collection systems, test equipment, and process control
devices used throughout the Company, the cost of which is not known.
14
<PAGE>
Severance Agreement and New Employment Arrangements
On January 13, 1999, Michael D. Austin resigned from the Company and
Holdings, pursuant to an agreement between the Company and Mr. Austin which
provided for (1) certain severance payments and other benefits, (2) certain
consulting services to be performed by Mr. Austin on behalf of the Company, (3)
certain payments to be made to Mr. Austin in the event of the occurrence of
certain change in control transactions affecting the Company or Holdings, (4)
the termination of Mr. Austin's employment agreement and severance agreement
with the Company, and the release by Mr. Austin of all obligations of the
Company and Holdings pursuant to those agreements, and (5) resignations by Mr.
Austin from all positions with the Company, including as a member of the Board
of Directors of those entities. Mr. Austin was replaced as President and Chief
Executive Officer by Francis J. Petro. In addition, John H. Tundermann was hired
as Executive Vice President.
The Company has an understanding with Mr. Petro and Mr. Tundermann pursuant
to which they will be paid an annual base salary of $360,000 and $170,000,
respectively, for calendar year 1999 with certain increases for the next two
years. The Company intends to provide certain standard benefits and other
perquisites to Mr. Petro and Mr. Tundermann.
[Rest of page intentionally left blank.]
15
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At June 30, 1999, 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. The Company
did not have any outstanding commodity contracts at June 30, 1999.
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.
At June 30, 1999, the Company had no foreign currency exchange contracts.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See Index to Exhibits
(b) Reports on Form 8-K. No report on Form 8-K was filed during the
quarter for which this report is filed.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HAYNES INTERNATIONAL, INC.
/s/ Francis J. Petro
-------------------------------------
Francis J. Petro
President and Chief Executive Officer
/s/ Joseph F. Barker
-------------------------------------
J. F. Barker
Vice President, Finance
Chief Financial Officer
Date: August 13, 1999
17
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
<S> <C> <C> <C>
Sequential
Number Numbering
Assigned In System Page
Regulation S-K Number of
Description of Exhibit Exhibit
Item 601
(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 By-laws 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.)
(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.)
18
<PAGE>
10.02 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.)
10.03 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.
333-5411.)
10.04 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.)
10.05 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).
10.06 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.)
10.07 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.)
10.08 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.)
10.09 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.)
10.10 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.)
10.11 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.)
10.12 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.)
10.13 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.)
20
<PAGE>
10.14 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).
10.15 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.)
10.16 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.)
10.17 Agreement by and between Galen Hodge and Haynes
International, dated January 13, 1998
(Incorporated by reference to Exhibit 10.17 to
Registrant's Form 10-Q Report filed February 13,
1998, File No. 333-5411).
10.18 Facility Management Agreement by and between
Republic Engineered Sales, Inc. and Haynes
International, Inc., dated April 15, 1999.
(Incorporated by reference to Exhibit 10.18 to
Registrant's Form 10-Q Report filed May 14, 1999,
File No. 333-5411)
(11) No Exhibit.
(15) No Exhibit.
(18) No Exhibit.
(19) No Exhibit.
(22) No Exhibit.
(23) No Exhibit.
(24) No Exhibit.
(27) 27.01 Financial Data Schedule.
(99) No Exhibit.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1999
<PERIOD-END> SEP-30-1998 JUN-30-1999
<CASH> 3,720 3,181
<SECURITIES> 0 0
<RECEIVABLES> 46,636 39,228
<ALLOWANCES> (662) (882)
<INVENTORY> 81,861 87,437
<CURRENT-ASSETS> 131,555 128,964
<PP&E> 99,744 106,188
<DEPRECIATION> (70,117) (73,597)
<TOTAL-ASSETS> 207,263 212,882
<CURRENT-LIABILITIES> 64,581 68,289
<BONDS> 139,549 139,495
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (90,938) (89,658)
<TOTAL-LIABILITY-AND-EQUITY> 207,263 212,882
<SALES> 246,944 156,613
<TOTAL-REVENUES> 246,944 156,613
<CGS> 191,849 119,952
<TOTAL-COSTS> 213,954 140,904
<OTHER-EXPENSES> 7,151 703
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 21,171 15,292
<INCOME-PRETAX> 4,773 (207)
<INCOME-TAX> 2,317 (4,440)
<INCOME-CONTINUING> 2,456 4,233
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> (450) 0
<NET-INCOME> 2,006 4,233
<EPS-BASIC> 20,060 42,330
<EPS-DILUTED> 20,060 42,330
</TABLE>
