UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2008 |
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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 001-33288
HAYNES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization) |
06-1185400
(I.R.S. Employer Identification No.) |
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1020 West Park Avenue, Kokomo, Indiana (Address of principal executive offices) |
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46904-9013 (Zip Code) |
Registrant's telephone number, including area code (765) 456-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
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Common Stock, par value $.001 per share | NASDAQ Global Market |
Securities registered pursuant to section 12(g) of the Act: None .
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
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Yes
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No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act
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Yes
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No
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 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. ý Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer ý |
Non-accelerated filer
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(Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes ý No
As of March 31, 2008, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $653,588,421 based on the closing sale price as reported on the NASDAQ Global Market. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ý Yes o No
11,984,623 shares of Haynes International, Inc. common stock were outstanding as of November 21, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held February 23, 2009 have been incorporated by reference into Part III of this report.
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Part I |
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Item 1. |
Business |
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Item 1A. |
Risk Factors |
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Item 1B. |
Unresolved Staff Comments |
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Item 2. |
Properties |
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Item 3. |
Legal Proceedings |
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Item 4. |
Submission of Matters to a Vote of Security Holders |
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Part II |
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Item 5. |
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
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Item 6. |
Selected Financial Data |
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Item 7. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk |
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Item 8. |
Financial Statements and Supplementary Data |
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Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Item 9A. |
Controls and Procedures |
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Item 9B. |
Other Information |
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Part III |
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Item 10. |
Directors, Executive Officers and Corporate Governance |
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Item 11. |
Executive Compensation |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. |
Certain Relationships and Related Transactions and Director Independence |
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Item 14. |
Principal Accounting Fees and Services |
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Part IV |
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Item 15. |
Exhibits, Financial Statement Schedules |
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Signatures |
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Index to Exhibits |
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This Annual Report on Form 10-K contains statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Those statements appear in a number of places in this Report and may include, but are not limited to, statements regarding the intent, belief or current expectations of the Company or its management with respect to, but are not limited to, strategic plans; trends in the industries that consume the Company's products; global economic and political uncertainties; production levels at the Company's Kokomo, Indiana facility; commercialization of the Company's production capacity; and the Company's ability to develop new products. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in the forward looking statements as a result of various factors, many of which are beyond the Company's control.
The Company has based these forward-looking statements on its current expectations and projections about future events. Although the Company believes that the assumptions on which the forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate. As a result, the forward-looking statements based upon those assumptions also could be incorrect. Risks and uncertainties, some of which are discussed in Item 1.A to this Report, may affect the accuracy of forward-looking statements.
The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
Haynes International, Inc. ("Haynes" or "the Company") is one of the world's largest producers of high-performance nickel- and cobalt-based alloys in sheet, coil and plate forms. The Company is focused on developing, manufacturing, marketing and distributing technologically advanced, high-performance alloys, which are used primarily in the aerospace, chemical processing and land-based gas turbine industries. The Company's products consist of high temperature resistant alloys, or HTA products, and corrosion resistant alloys, or CRA products. HTA products are used by manufacturers of equipment that is subjected to extremely high temperatures, such as jet engines for the aerospace market, gas turbine engines used for power generation and waste incineration, and industrial heating equipment. CRA products are used in applications that require resistance to very corrosive media found in chemical processing, power plant emissions control and hazardous waste treatment. Management believes Haynes is one of four principal producers of high-performance alloy products in sheet, coil and plate forms, and sales of these forms, in the aggregate, represented approximately 63% of net revenues in fiscal 2008. The Company also produces its products as seamless and welded tubulars, and in slab, bar, billet and wire forms.
The Company has manufacturing facilities in Kokomo, Indiana; Arcadia, Louisiana; and Mountain Home, North Carolina. The Kokomo facility specializes in flat products, the Arcadia facility specializes in tubular products, and the Mountain Home facility specializes in wire products. The Company's products are sold primarily through its direct sales organization, which includes 12 service and/or sales centers in the United States, Europe, Asia and India. All of these centers are company-operated. In fiscal 2008, approximately 84% of the Company's net revenues was generated by its direct sales organization, and the remaining 16% was generated by a network of independent distributors and sales agents who supplement its direct sales efforts primarily in the United States, Europe and Asia, some of whom have been associated with the Company for over 30 years.
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Available Information
The address of Company's website is www.haynesintl.com. The Company posts its reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 since May 7, 2007 on its website. For all filings made prior to that date, the Company's website includes a link to the website of the U.S. Securities and Exchange Commission, where such filings are available. Information contained or referenced on the Company's website is not incorporated by reference and does not form a part of this Form 10-K.
Significant Events of Fiscal 2008
The information under the caption "Significant Events of Fiscal 2008" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere in this Form 10-K is incorporated herein by reference.
Business Strategy
The Company's goal is to grow its business and increase revenues and profitability while continuing to be its customers' provider of choice for high-performance alloys. The Company intends to penetrate and capitalize on growth in its end markets by taking advantage of its diverse product offerings and service capabilities and to continue to increase capacity and lower costs through strategic investment in manufacturing facilities. In order to accomplish these goals, the Company intends to pursue the following:
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service and sales centers to respond quickly to its customers' time-sensitive MRO needs to develop new and retain existing business opportunities.
Company History
The Company began operations in 1912 as the Haynes Stellite Works, which was purchased by Union Carbide and Carbon Corporation in 1920. In 1972, the operations were sold to Cabot Corporation. In 1987, Haynes was incorporated as a stand-alone corporation in Delaware, and in 1989 Haynes was sold by Cabot Corporation to Morgan Lewis Githens & Ahn Inc., a private investment firm. The Blackstone Group, a private investment firm, purchased Haynes from Morgan Lewis Githens & Ahn Inc. in 1997. Haynes encountered liquidity difficulties throughout fiscal 2003 and the first half of fiscal 2004. Due to concurrent downcycles in its largest markets, and rising raw material and energy costs, the Company could not generate sufficient cash to both satisfy its debt service obligations and fund operations. On March 29, 2004, Haynes and its U.S. subsidiaries and affiliates as of that date filed voluntary petitions for reorganization relief under Chapter 11 of the U.S. Bankruptcy Code. From March 29, 2004 through August 31, 2004, Haynes continued to operate as debtor-in-possession subject to the supervision of the bankruptcy court. On August 31, 2004, Haynes emerged from bankruptcy pursuant to a court-approved plan of reorganization. Prior to the reorganization, all of the outstanding shares of its common stock were owned by Haynes Holdings, Inc., a Delaware corporation. In connection with the reorganization, Haynes Holdings, Inc. and Haynes International, Inc. were merged, and Haynes was the surviving corporation of the merger. Pursuant to the plan of reorganization, all of the shares of the Company's common stock were cancelled, and 10.0 million new shares of the Company's common stock, were issued in connection with its emergence from bankruptcy. Under the terms of the plan of reorganization, each former holder of the Company's 11 5 / 8 % senior notes due September 1, 2004 received its pro rata share of 9.6 million shares of the Company's new common stock in full satisfaction of all of the Company's obligations under the senior notes. Additionally, each former holder of the shares of common stock of Haynes Holdings, Inc. received its pro rata share of the remaining 400,000 shares of the Company's new common stock in exchange for its outstanding shares of Haynes Holdings, Inc. common stock. The plan of reorganization also provided for the payment or satisfaction of all secured and unsecured claims against Haynes, except as reinstated under
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the plan of reorganization and except with respect to the 11 5 / 8 % senior notes due September 1, 2004, which were exchanged for equity as described above.
In the first quarter of fiscal 2005, Haynes acquired certain assets of the Branford Wire Company (the "Branford Wire Company Acquisition"), including a facility that manufactured both stainless steel wire and high-performance alloy wire. The Company continues to produce stainless steel wire at the Haynes Wire Company, in Mountain Home, North Carolina.
On March 23, 2007, the Company completed an equity offering, which resulted in the issuance of 1,200,000 shares of its common stock. Simultaneously the Company listed its common stock on The NASDAQ Global Market.
Products
The global specialty alloy market consists of three primary sectors: stainless steel, general purpose nickel alloys and high-performance nickel-and cobalt-based alloys. The Company believes that the high-performance alloy sector represents less than 10% of the total alloy market. Except for its stainless steel wire products, the Company competes exclusively in the high-performance nickel- and cobalt-based alloy sectors, which includes HTA products and CRA products. In fiscal 2006, 2007 and 2008, HTA products accounted for approximately 68%, 69% and 73% of the Company's net revenues (excluding stainless steel wire), respectively; and sales of the Company's CRA products accounted for approximately 32%, 31% and 27% of the Company's net revenues (excluding stainless steel wire), respectively. These percentages are based on data which include revenue associated with sales by the Company to its foreign subsidiaries, but exclude revenue associated with sales by foreign subsidiaries to their customers. Management believes, however, that the effect of including revenue data associated with sales by its foreign subsidiaries would not materially change the percentages presented in this section.
High Temperature Resistant Alloys. HTA products are used primarily in manufacturing components for the hot sections of gas turbine 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 market, 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. The following table sets
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forth information with respect to the Company's significant high temperature resistant alloys, applications and features (new HTA development is discussed below under "Patents and Trademarks"):
Alloy and Year Introduced | End Markets and Applications (1) | Features | ||
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HAYNES HR-160 Alloy (1990) (2) | Waste incineration/CPI-boiler tube shields | Good resistance to sulfidation at high temperatures | ||
HAYNES 242 Alloy (1990) (2) | Aero-seal rings | High strength, low expansion and good fabricability | ||
HAYNES HR-120 Alloy (1990) (2) | LBGT-cooling shrouds | Good strength-to-cost ratio as compared to competing alloys | ||
HAYNES 230 Alloy (1984) (2) | Aero/LBGT-ducting, combustors | Good combination of strength, stability, oxidation resistance and fabricability | ||
HAYNES 214 Alloy (1981) (2) | Aero-honeycomb seals | Good combination of oxidation resistance and fabricating among nickel-based alloys | ||
HAYNES 188 Alloy (1968) (2) | Aero-burner cans, after-burner components | High strength, oxidation resistant cobalt-base alloys | ||
HAYNES 625 Alloy (1964) | Aero/CPI-ducting, tanks, vessels, weld overlays | Good fabricability and general corrosion resistance | ||
HAYNES 263 Alloy (1960) | Aero/LBGT-components for gas turbine hot gas exhaust pan | Good ductility and high strength at temperatures up to 1600°F | ||
HAYNES 718 Alloy (1955) | Aero-ducting, vanes, nozzles | Weldable high strength alloy with good fabricability | ||
HASTELLOY X Alloy (1954) | Aero/LBGT-burner cans, transition ducts | Good high temperature strength at relatively low cost | ||
HAYNES Ti 3A1-2.5 Alloy (1950) | Aero-aircraft hydraulic and fuel systems components | Light weight, high strength titanium-based alloy | ||
HAYNES 25 Alloy (1950) (2) | Aero-gas turbine parts, bearings, and various industrial applications | Excellent strength, good oxidation, resistance to 1800°F |
Corrosion Resistant Alloys. CRA products are used in a variety of applications, such as chemical processing, power plant emissions control, hazardous waste treatment, sour gas production and pharmaceutical vessels. Historically, the chemical processing market has represented the largest end-user sector for CRA products. Due to maintenance, safety and environmental considerations, the Company believes this market continues to represent an area of potential long-term growth. Unlike aerospace applications within the HTA product market, the development of new market applications for CRA products generally does not require long lead times. The following table sets forth information with respect
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to certain of the Company's significant corrosion resistant alloys, applications and features (new CRA development is discussed below under "Patents and Trademarks"):
Alloy and Year Introduced | End Markets and Applications (1) | Features | ||
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HASTELLOY Alloy C-2000 (1995) (2) | CPI-tanks, mixers, piping | Versatile alloy with good resistance to uniform corrosion | ||
HASTELLOY Alloy B-3 (1994) (2) | CPI-acetic acid plants | Better fabrication characteristics compared to other nickel-molybdenum alloys | ||
HASTELLOY Alloy D-205 (1993) (2) | CPI-plate heat exchangers | Corrosion resistance to hot sulfuric acid | ||
ULTIMET Alloy (1990) (2) | CPI-pumps, valves | Wear and corrosion resistant nickel-based alloy | ||
HASTELLOY Alloy G-50 (1989) | Oil and gas-sour gas tubulars | Good resistance to down hole corrosive environments | ||
HASTELLOY Alloy C-22 (1985) | CPI/FGD-tanks, mixers, piping | Resistance to localized corrosion and pitting | ||
HASTELLOY Alloy G-30 (1985) (2) | CPI-tanks, mixers, piping | Lower cost alloy with good corrosion resistance in phosphoric acid | ||
HASTELLOY Alloy B-2 (1974) | CPI-acetic acid | Resistance to hydrochloric acid and other reducing acids | ||
HASTELLOY Alloy C-4 (1973) | CPI-tanks, mixers, piping | Good thermal stability | ||
HASTELLOY Alloy C-276 (1968) | CPI/FGD/oil land gas-tanks, mixers, piping | Broad resistance to many environments |
Patents and Trademarks
The Company currently maintains a total of approximately 17 U.S. patents and approximately 150 foreign counterpart patents and applications targeted at countries with significant or potential markets for the patented products and continues to develop, manufacture and test high-performance nickel- and cobalt-based alloys. Since fiscal 2000, the Company's technical programs have yielded six new proprietary alloys, four of which are currently commercially available and two of which are being scaled-up to be brought to market. Of the alloys which are being commercialized, two alloys saw advancement in the process during fiscal 2008. First, HAYNES® 282® alloy, which management believes will have significant commercial potential for the Company in the long-term, is the subject of a patent application filed in fiscal 2004. HAYNES 282 alloy has excellent formability, fabricability and forgeability. The commercial launch of HAYNES 282 alloy occurred in October 2005 and, since that time, there have been approximately 60 customer tests and evaluations of this product for the hot sections of gas turbines in the aerospace and land-based gas turbine markets, as well as for automotive and other high-temperature applications. The Company will continue to actively promote HAYNES 282 alloy through customer engineering visits and technical presentations and papers. In addition, commercialization of HASTELLOY® C-22HS® alloy also continued in fiscal 2008. The Company has been providing customers with samples of this alloy and making technical presentations since 2004. Testing and evaluation of the alloy is ongoing with special emphasis on applications for the oil and gas market. It is important to note, however, that both of these alloys are in the early stages of commercialization and pounds sold to date are very low compared to the Company's other proprietary alloys; furthermore, pounds in the next three to five years are expected to remain at low levels. The Company believes that the alloys (particularly HAYNES 282 alloy) are significantly further along the commercialization curve when compared to historical trends for other proprietary alloys introduced by the
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Company. In addition to HAYNES 282 alloy and HASTELLOY C-22HS alloy, commercialization is also ongoing for both HASTELLOY® G-35® and HASTELLOY® HYBRID-BC1® alloy. HASTELLOY G-35 alloy, a CRA with potential applications in the chemical processing and oil and gas industries, has significant strength after age hardening. HASTELLOY HYBRID-BC1 alloy, a CRA with potential applications in the chemical processing and oil and gas industries, has resistance to hydrochloric and sulfuric acid.
In addition to the commercialization of the above alloys, the Company continues to scale-up new alloys not yet ready to begin the commercialization process. U.S. patent applications were filed in fiscal 2006 for the HAYNES® NS-163 alloy and HAYNES® HR-224 alloy. Both of these new materials are believed to have significant, medium to long-term commercial potential. HAYNES NS-163 alloy is a new alloy with extraordinary high-temperature strength in sheet form, which has applications in the aerospace, land-based gas turbine and automotive markets. Data generation and fabrication trials continued through 2008, with test marketing expected to commence in early 2009. HAYNES HR-224 alloy is an HTA with superior resistance to oxidation.
Patents or other proprietary rights are an important element of the Company's business. The Company's strategy is to file patent applications in the U.S. and any other country that represents an important potential commercial market to the Company. In addition, the Company seeks to protect its technology which is important to the development of the Company's business. The Company also relies upon trade secret rights to protect its technologies and its development of new applications and alloys. The Company protects its trade secrets in part through confidentiality and proprietary information agreements with its customers. Trademarks on the names of many of the Company's alloys have also been applied for or granted in the U.S. and certain foreign countries.
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. These barriers to entry and production include the unique equipment required to produce this material and the exacting process required to achieve the desired metallurgical properties. These processing requirements include such items as specific annealing temperature, processing speeds and reduction per rolling pass. Management believes that the current alloy development program and these noted barriers to entry, reduce the impact of patent expirations on the Company.
End Markets
The Company estimates that the global specialty alloy market, including stainless steels, general purpose nickel alloys and high-performance nickel- and cobalt-based alloys, represents total production volume of approximately 38.5 billion pounds per annum. Of this total market, the Company competes in the high-performance nickel- and cobalt-based alloy sector, which is estimated to represent approximately 200 million pounds of production per annum. The high-performance alloy market demands diverse, specialty alloys suitable for use in precision manufacturing. Given the technologically advanced nature of the products, strict requirements of the end users and higher-growth end markets, the Company believes the high-performance alloy sector provides greater growth potential, higher profit margins and greater means for service, product and price differentiation than stainless steels and general purpose nickel alloys. While stainless steel and general purpose nickel alloy is generally sold in bulk through third-party distributors, the Company's products are sold in smaller-sized orders which are customized and typically handled on a direct-to-customer basis.
Aerospace. The Company has manufactured HTA products for the aerospace market since the late 1930s, and has developed numerous proprietary alloys for this market. Customers in the aerospace market 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
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development of HTA products. As a result, sales to aerospace customers tend to be made through the Company's direct sales force. Demand for the Company's products in the aerospace market 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, replacement and overhaul. The Company views the maintenance, replacement and overhaul business as an area of continuing growth.
Chemical Processing. The chemical processing market represents a large base of customers with diverse CRA applications driven by demand for key end use markets such as automobiles, housing, health care, agriculture, and metals production. CRA products supplied by the Company have been used in the chemical processing market since the early 1930s. Demand for the Company's products in this market is driven by the level of maintenance, repair and expansion requirements of existing chemical processing facilities, as well as the construction of new facilities. The Company believes the extensive worldwide network of Company-owned service and sales centers, as well as its network of independent distributors and sales agents who supplement the Company's direct sales efforts in Europe and Asia, provide a competitive advantage in marketing its CRA products in the chemical processing market.
Land-based Gas Turbines. Demand for the Company's products in this market is driven by the construction of cogeneration facilities such as base load for electric utilities or as backup sources to fossil fuel-fired utilities during times of peak demand. Demand for the Company's alloys in the land-based gas turbine markets has also been driven by concerns regarding lowering emissions from generating facilities powered by fossil fuels. Land-based gas turbine generating facilities have gained acceptance as clean, low-cost alternatives to fossil fuel-fired electric generating facilities. Land-based gas turbines are also used in power barges with mobility and as temporary base-load-generating units for countries that have numerous islands and a large coastline. Further demand is generated in mechanical drive units used for oil and gas production and pipeline transportation, as well as microturbines that are used as back up sources of power generation for hospitals and shopping malls. In addition, with a service center in China and sales centers in India and Singapore, the Company is well positioned to take advantage of the long-term growth potential in those areas in demand for power generation.
Other Markets. Other markets to which the Company sells its HTA products and CRA products include flue gas desulphurization (or FGD), oil and gas, waste incineration, industrial heat treating, automotive and instrumentation. The FGD market has been driven by both legislated and self-imposed standards for lowering emissions from fossil fuel-fired electric generating facilities. With the completion of the Company's recent capital projects, the Company anticipates increasing its participation in the FGD market due to the increased production capacity and the improved cost structure which resulted from the completion of the capital projects. The Company also sells its products for use in the oil and gas market, primarily in connection with sour gas production. In addition, 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. As part of the Branford Wire Company Acquisition, the Company also began selling stainless steel wire, but the Company's strategy has been to reduce production of stainless steel wire and increase production of high-performance alloy wire due to higher average selling price available on high-performance alloy wire. The Company will continue to produce some amount of stainless steel wire, sold to higher-value markets, such as the medical wire market.
Sales and Marketing and Distribution
The Company sells its products primarily through its direct sales organization, which operates from 15 total locations in the U.S., Europe, Asia and India, 12 of which are service and sales centers. All of the Company's service and sales centers are operated either directly by the Company or though its wholly-
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owned subsidiaries. Approximately 84% of the Company's net revenues in fiscal 2008 were generated by the Company's direct sales organization. The remaining 16% of the Company's fiscal 2008 net revenues was generated by a network of independent distributors and sales agents who supplement the Company's direct sales in the U.S., Europe and Asia, some of whom have been associated with the Company for over 30 years. Going forward, the Company expects its direct sales force to continue to generate approximately 85% of its total sales, although this number may increase as new service and/or sales centers are opened.
Providing technical assistance to customers is an important part of the Company's marketing strategy. The Company provides performance 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 use of those products in appropriate applications, enabling the products to be included as part of the technical specifications used in the production of customers' products. The Company's market development professionals are assisted by its engineering and technology staff in directing the sales force to new opportunities. Management believes the Company's combination of direct sales, technical marketing, engineering and customer support provides an advantage over other manufacturers in the high-performance alloy industry. This activity allows the Company to obtain direct insight into customers' alloy needs and to develop proprietary alloys that provide solutions to customers' problems.
The Company continues to focus on growth in foreign markets. In recent years, the Company opened a service and sales center in China, the first service and sales center operated by any manufacturer of nickel- and cobalt-based alloys in China, and sales centers in Singapore, India and Italy. For the long-term, management continues to view China as an expanding market opportunity for the Company, particularly in the event of continued strong gross domestic product growth. Sales from the Company's U.S. operations into China in fiscal 2000 were $0.3 million, growing to approximately $35.9 million in fiscal 2007 and $64.0 million in fiscal 2008. Part of this growth is attributable to the China service center which opened in fiscal 2005, as well as the acquisition and consulting agreements in fiscal 2008 with HW Limited (as described in "Significant Events of Fiscal 2008HW Limited Acquisition" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere in this Form 10-K). In addition, the Company continues to evaluate the possibility of opening a second service center in China, due in part to the continued long-term growth in the Chinese markets, although global economic conditions may delay this decision.
While the Company is making concentrated efforts to expand foreign sales, the process of growing domestic business also continues. The majority of revenue and profits continue to be provided by sales to U.S. customers and the Company continues to pursue opportunities to expand this market. The Company's domestic expansion effort includes, but is not limited to, continued expansion of ancillary product forms (such as wire through the Branford Wire Company Acquisition), the continued development of new high-performance alloys, the utilization of external conversion resources to expand and improve the quality of mill-produced product, the addition of equipment in U.S. service and sales centers to improve the Company's ability to provide a product closer to the form required by the customer and the continued effort through the technical expertise of the Company to find solutions to customer challenges.
The following table sets forth the approximate percentage of the Company's fiscal 2008 net revenues generated through each of the Company's distribution channels.
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Domestic | Foreign | Total | ||||||||
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Company mill direct/service and sales centers |
46 | % | 38 | % | 84 | % | |||||
Independent distributors/sales agents |
8 | % | 8 | % | 16 | % | |||||
Total |
54 | % | 46 | % | 100 | % | |||||
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The Company's top twenty customers accounted for approximately 38%, 33% and 36% of the Company's net revenues in fiscal 2006, 2007 and 2008, respectively. No customer or group of affiliated customers of the Company accounted for more than 10% of the Company's net revenues in fiscal 2006, 2007 or 2008.
Net revenues and net income in fiscal 2006, 2007 and 2008 were generated primarily by the Company's U.S. operations. Sales to domestic customers comprised approximately 61%, 61% and 54% of the Company's net revenues in fiscal 2006, 2007 and 2008, respectively. In addition, the majority of the Company's operating costs are incurred in the U.S., as all of its manufacturing facilities are located in the U.S. It is expected that net revenues and net income will continue to be highly dependent on the Company's domestic sales and manufacturing facilities in the U.S.
The Company's foreign and export sales were approximately $169.3 million, $215.9 million, and $292.9 million for fiscal 2006, 2007 and 2008, respectively. Additional information concerning foreign operations and export sales is set forth in Note 13 to the consolidated financial statements included elsewhere in this Form 10-K.
Manufacturing Process
High-performance alloys require a lengthier, more complex production process and are more difficult to manufacture than lower-performance alloys, such as stainless steel alloys. The alloying elements in high-performance alloys must be highly refined during melting, 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 a greater force be applied when hot or cold working and are less susceptible to reduction or thinning when rolling or forging. This results in more cycles of rolling, annealing and pickling compared to 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 its high-performance alloys in various forms, including sheet, plate, billet/ingot, tubular, wire and other forms.
The manufacturing process begins with raw materials being combined, melted and refined in a precise manner to produce the chemical composition specified for each high-performance alloy. For most high-performance 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 form. 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 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 high-performance alloys. The argon oxygen decarburization gas control system also allows for statistical process control monitoring in real time to improve product quality.
The Company has a four-high Steckel rolling mill for use in hot rolling material. The four-high Steckel mill was installed in 1982 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 a 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 product shapes and sizes the Company produces allow the mill to roll numerous widths and gauges to exact specifications without stoppages or changeovers.
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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 Steckel 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.
Investments in plant and equipment will allow the Company to increase capacity, reduce unplanned equipment outages, produce higher quality products at reduced costs and improve working capital management. The Company spent $16.2 million in fiscal 2007 and $18.7 million in fiscal 2008 on plant and equipment upgrades. The significant investments over the last several years are a result of under-investment in prior years, as well as increases in customer demand. The principal benefits of these investments are increased capacity, improved machine reliability, improved product quality, increased processing efficiency and reduced maintenance costs. The improved reliability will help reduce the risk of unplanned outages similar to those that occurred in the fourth quarter of fiscal 2005. Depending upon economic conditions, the Company may make further equipment upgrades in fiscal 2009; however, capital projects in fiscal 2009 will be focused on improving and maintaining the equipment reliability and will not likely equal the amount spent in either fiscal 2007 or fiscal 2008. At this time, management does not anticipate prolonged planned equipment outages as a result of upgrades in fiscal 2009.
Backlog
The Company defines backlog to include firm commitments from customers for delivery of product at established prices. Approximately 30% of the orders in the backlog at any given time include prices that are subject to adjustment based on changes in raw material costs. Historically, approximately 75% of the Company's backlog orders have shipped within six months and approximately 90% have shipped within 12 months. The backlog figures do not reflect that portion of the Company's business conducted at its service and sales centers on a spot or "just-in-time" basis.
Consolidated Backlog at Fiscal Quarter End
|
2005 | 2006 | 2007 | 2008 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(in millions)
|
||||||||||||
1 st quarter |
$ | 110.9 | $ | 203.5 | $ | 206.9 | $ | 247.8 | |||||
2 nd quarter |
134.8 | 207.4 | 237.6 | 254.5 | |||||||||
3 rd quarter |
159.2 | 200.8 | 258.9 | 252.6 | |||||||||
4 th quarter |
188.4 | 206.9 | 236.3 | 229.2 |
Raw Materials
In fiscal 2008, nickel, a major component of many of the Company's products, accounted for approximately 51% of raw material costs, or approximately 33% of total cost of sales. Each pound of high-performance alloy contain, on average, 45% nickel. Other raw materials include cobalt, chromium, molybdenum and tungsten. Melt materials consist of virgin raw material, purchased scrap and internally produced scrap.
The average nickel price per pound for cash buyers for the 30 day period ended on the last day of the period presented, as reported by the London Metals Exchange for September 30, 2006, 2007 and 2008, was $13.67, $13.40 and $8.07, respectively. While the price of nickel was lower for fiscal 2008 than fiscal 2007, the lower price of nickel was offset by increased prices for other raw materials that are significant in the manufacture of the Company's products such as molybdenum, cobalt and chromium.
Since most of the Company's products are produced pursuant to specific orders, the Company purchases materials against known production schedules. The materials are purchased from several
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different suppliers through various arrangements including annual contracts and spot purchases, and involve a variety of pricing mechanisms. Because the Company maintains a policy of pricing its products at the time of order placement, the Company attempts to establish selling prices with reference to known costs of materials, thereby reducing the risk associated with changes in the cost of raw materials. However, to the extent that the price of nickel fluctuates rapidly, there may be an unfavorable effect on the Company's gross profit margins. The Company periodically purchases material forward with certain suppliers.
Research and Technical Support
The Company's technology facilities are located at the Kokomo headquarters and consist of 19,000 square feet of offices and laboratories, as well as an additional 90,000 square feet of paved storage area. The Company has seven fully equipped technology testing laboratories, including a mechanical test lab, a metallographic lab, an electron microscopy lab, a corrosion lab, a high temperature lab and a welding lab. These facilities also contain a reduced scale, fully equipped melt shop and process lab. As of September 30, 2008, the technology, engineering and technological testing staff consisted of 28 persons, 10 of whom have engineering or science degrees, including 5 with doctoral degrees, with the majority of degrees in the field of metallurgical engineering.
Research and technical support costs primarily relate to efforts to develop new proprietary alloys and in the development of new applications for already existing alloys. The Company spent approximately $2.7 million, $3.1 million and $3.4 million for research and technical support activities for fiscal 2006, 2007 and 2008, respectively.
During fiscal 2008, research and development projects were focused on new alloy development, new product form development and new alloy concept validation, all relating to products for the aerospace, land-based gas turbine, chemical processing and oil and gas industries. In addition, significant projects were conducted to generate technical data in support of major market application opportunities in areas such as solid oxide fuel cells, biotechnology (including waste incineration of toxic properties and manufacturing of pharmaceuticals), chemical processing and power generation.
Competition
The high-performance alloy market is a highly competitive market in which eight to ten producers participate in various product forms. The Company's primary competitors include Special Metals Corporation, which is now a part of Precision Cast Parts, Allegheny Technologies, Inc. and Krupp VDM GmbH, a subsidiary of Thyssen Krupp Stainless. The Company faces strong competition from domestic and foreign manufacturers of both high-performance alloys (similar to those the Company produces) and other competing metals. 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. The Company also believes that it will face increased competition from non-U.S. entities in the next five to ten years, especially from competitors located in Eastern Europe and Asia. Additionally, in recent years the Company has benefited from a weak U.S. dollar, which makes the goods of foreign competitors more expensive to import into the U.S. In the event that the U.S. dollar strengthens, the Company may face increased competition in the U.S. from foreign competitors.
Starting in the fourth quarter of fiscal 2007, the Company experienced increased competition from competitors who produce both stainless steel and high-performance alloys. Due to a continued slowness in the stainless steel market, management believes these competitors increased their production levels and sales activity in high-performance alloys to keep capacity in their mills as full as possible, while offering very competitive prices and delivery times. As a result of this competition, the Company's ability to raise prices on certain products has been limited, and in some cases prices were lowered, in the six most recent
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fiscal quarters. Historically, the Company experienced similar price competition in the 1990's and in the early 2000's, when demand in the stainless market weakened.
Employees
As of September 30, 2008, the Company employed approximately 1,138 full-time employees worldwide. All eligible hourly employees at the Kokomo plant and the Lebanon, Indiana service and sales center (approximately 537 in the aggregate) are covered by a collective bargaining agreement. In July 2007, the Company entered into a new collective bargaining agreement with the United Steelworkers of America, which will expire in June 2010. Management believes that current relations with the union are satisfactory. None of the employees of the Company's Arcadia, Louisiana, Mountain Home, North Carolina, European or Asian operations are represented by a labor union.
Environmental Matters
The Company's facilities and operations are subject to various 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 additional 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 $2.0 million for fiscal 2008 and are expected to be approximately $2.0 million for fiscal 2009. 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 had a material effect on the Company's financial condition, for alleged violations relating to environmental matters, including the handling and storage of hazardous wastes, requirements relating to its Title V Air Permit, requirements relating to the handling of polychlorinated biphenyls and violations of record keeping and notification requirements relating to industrial waste water discharge. Capital expenditures of approximately $0.59 million were made for pollution control improvements during fiscal 2008, with additional expenditures of approximately $2.7 million for similar improvements planned for fiscal 2009.
The Company has received permits from the Indiana Department of Environmental Management, or IDEM, to close and to provide post-closure monitoring and care for certain areas at the Kokomo facility previously used for the storage and disposal of wastes, some of which are classified as hazardous under applicable regulations. Closure certification was received in fiscal 1988 for the South Landfill at the Kokomo facility and post-closure monitoring and care is ongoing there. Closure certification was received in fiscal 1999 for the North Landfill at the Kokomo facility and post-closure monitoring and care are permitted and ongoing there. In fiscal 2007, IDEM issued a single post-closure permit applicable to both the North and South Landfills, which contains monitoring and post-closure care requirements. In addition, IDEM required that a Resource Conservation and Recovery Act, or RCRA, Facility Investigation, or RFI, be conducted in order to further evaluate one area of concern and one solid waste management unit. The RFI commenced in fiscal 2008 and is ongoing.
The Company has also received permits from the North Carolina Department of Environment and Natural Resources, or NCDENR, to close and provide post-closure monitoring and care for the hazardous waste lagoon at its Mountain Home, North Carolina facility. The lagoon area has been closed and is
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currently undergoing post-closure monitoring and care. The Company is required to monitor groundwater and to continue post-closure maintenance of the former disposal areas at each site. As a result, the Company is aware of elevated levels of certain contaminants in the groundwater and additional corrective action by the Company could be required. In addition, in August, 2008, employees discovered an abnormal pH in the sump pumps located in containment pits in the wastewater treatment facility. After testing, it was determined that there was a leak in the pipeline from the cleaning house to the wastewater treatment facility. NCDENR was notified within 24 hours of the verification of the leak. To date, the state has not responded to this disclosure.
Historical nitric acid spills were discovered at the Arcadia, Louisiana location in fiscal 2008. Analytical results were received in March, 2008 and the site assessment was provided to the Louisiana Department of Environmental Quality ("LDEQ") in May. Remediation of the spill, including the purchase of new equipment, was substantially complete in fiscal 2008. A preliminary assessment of the LDEQ authorized the Company's proposed remedial actions. In August, 2008, LDEQ submitted a second round of inquiries after an existing sump pump was removed. The Company is in the process or responding to LDEQ's inquiries.
The Company is unable to estimate the costs of any further corrective action at these sites, if required. Accordingly, the Company can not assure you that the costs of any future corrective action at these or any other current former sites 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 undertake other corrective action commitments for any other solid waste management unit existing or determined to exist at its facilities. As a condition of the post-closure permits, the Company must provide and maintain assurances to IDEM and NCDENR of the Company's capability to satisfy closure and post-closure groundwater monitoring requirements, including possible future corrective action as necessary. The Company provides these required assurances through a statutory financial assurance test as provided by Indiana and North Carolina law.
The Company may also incur liability for alleged environmental damages associated with the off-site transportation and disposal of hazardous substances. The Company's operations generate hazardous substances, and, while a large percentage of these substances are reclaimed or recycled, the Company also accumulates hazardous substances at each of its facilities for subsequent transportation and disposal off-site by third parties. Generators of hazardous substances which are transported to disposal sites where environmental problems are alleged to exist are subject to claims under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, and state counterparts. CERCLA imposes strict, joint and several liabilities for investigatory and cleanup costs upon hazardous substance generators, site owners and operators and other potentially responsible parties. The Company may have generated hazardous substances 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 potentially responsible party at 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 of liquidity.
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Executive Officers
The following table sets forth certain information concerning the persons who served as executive officers as of September 30, 2008. Please see "Significant Events of Fiscal 2008CEO Transition" in Item 7 Management's Discussion and Analysis contained elsewhere in this Form 10-K. Except as indicated in the following paragraphs, the principal occupations of these persons have not changed during the past five years.
Name
|
Age | Position with Haynes International, Inc. | |||
---|---|---|---|---|---|
Francis J. Petro | 68 | President and Chief Executive Officer; Director | |||
August A. Cijan | 53 | Vice PresidentFacilities Planning | |||
Michael Douglas | 56 | Vice PresidentTubular Products | |||
Anastacia S. Kilian | 34 | Vice PresidentGeneral Counsel & Corporate Secretary | |||
James A. Laird | 57 | Vice PresidentMarketing, Research & Development | |||
Marlin C. Losch | 48 | Vice PresidentNorth America Sales | |||
Marcel Martin | 58 | Vice PresidentFinance, Treasurer, Chief Financial Officer | |||
Daniel W. Maudlin | 42 | Controller and Chief Accounting Officer | |||
Jean C. Neel | 49 | Vice PresidentCorporate Affairs | |||
Scott R. Pinkham | 41 | Vice PresidentManufacturing | |||
Cris R. Ostrand | 44 | Vice PresidentInternational Sales | |||
Gregory M. Spalding | 52 | Vice PresidentHaynes Wire & Chief Operating Officer | |||
Jeffrey L. Young | 51 | Vice President & Chief Information Officer |
Mr. Petro was elected President and Chief Executive Officer and a director of the Company in January 1999. From 1995 to the time he joined the Company, Mr. Petro was President and Chief Executive Officer of Inco Alloys International, a company owned by The International Nickel Company of Canada. Mr. Petro retired from his executive positions with the Company, effective September 30, 2008, although he remained as a director.
Mr. Cijan has served as Vice PresidentFacilities Planning of the Company since March 2008. Prior to this, Mr. Cijan served as Vice President of Operations since April 1996 and prior to that also served as Manufacturing Manager since joining the Company in 1993.
Mr. Douglas has served as Vice PresidentTubular Products, operating of the Arcadia Tubular Products Facility since joining the Company in May 2005. From 1994 to 2005, Mr. Douglas was Executive Vice President and Managing Director of Interactive Resource Management. Mr. Douglas has over twenty years of prior executive management experience in the metals industry.
Ms. Kilian has served as Vice PresidentGeneral Counsel & Corporate Secretary since July 2006. Prior to joining the Company, beginning in 2000, Ms. Kilian was a lawyer in private practice with the law firm Ice Miller LLP in Indianapolis, Indiana.
Mr. Laird has served as Vice PresidentMarketing, Research & Development of the Company since September 2007. Prior to this Mr. Laird served as Vice PresidentInternational Sales & Marketing since July 2000, after having served in various sales and marketing positions with the Company since 1983.
Mr. Losch has served as Vice PresidentNorth American Sales since February 2006. Mr. Losch was Midwest Regional Manager prior to this and has served in various marketing, quality, engineering and production positions since joining the Company in February 1988.
Mr. Martin was elected Vice PresidentFinance, Treasurer and Chief Financial Officer on July 1, 2004, after having served as Controller and Chief Accounting Officer of the Company since October 2000. From 1996 to 2000 Mr. Martin was Vice President of Finance and Chief Financial Officer of Duferco Farrell Corporation.
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Mr. Maudlin has served as Controller and Chief Accounting Officer effective as of September 20, 2004. Prior to his employment with the Company, Mr. Maudlin was corporate controller at Jordan Specialty Plastics, Inc. from April, 2001. Prior to that he served as Group Controller for Heritage Environmental Services, Inc. from May 1991 through April 2001. Mr. Maudlin is a licensed CPA in the state of Indiana.
Ms. Neel has served as Vice PresidentCorporate Affairs of the Company since April 2000, after having served as Director, Corporate Affairs since joining the Company in July 1999.
Mr. Pinkham has served as Vice PresidentManufacturing since March 2008. Prior to that he served as Vice PresidentManufacturing Planning, after having served in various manufacturing and production capacities since joining the Company in August 1999.
Mr. Ostrand has served as Vice PresidentInternational Sales since September 1, 2007, after serving as Regional Manager, Midwest Region, since joining the Company in March 2006. Prior to joining the Company, Mr. Ostrand was Vice President of Sales for Triumph Components, a division of Triumph Group, Inc. from 1996 to 2004, and as the Program Manager for Timken Alcor Aerospace Technologies from 2004 to 2006.
Mr. Spalding has served as Vice PresidentHaynes Wire & Chief Operating Officer since February 2006. Prior to this he served as Vice President, North American Sales since he joined the Company in July 1999.
Mr. Young has served as Vice President & Chief Information Officer since November 2005, after having served in various Information Technology positions since joining the Company in November 1984.
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Risks Related to Our Business
Our revenues may fluctuate widely based upon changes in demand for our customers' products.
Demand for our products is dependent upon and derived from the level of demand for the machinery, parts and equipment produced by our customers, which are principally manufacturers and fabricators of machinery, parts and equipment for highly specialized applications. Historically, certain of the markets in which we compete have experienced unpredictable, wide demand fluctuations. Because of the comparatively high level of fixed costs associated with our manufacturing processes, significant declines in those markets have had a disproportionately adverse impact on our operating results.
Since we became an independent company in 1987, we have, in several instances, experienced substantial year-to-year declines in net revenues, primarily as a result of decreases in demand in the industries to which our products are sold. In 1992, 1999, 2002 and 2003, our net revenues, when compared to the immediately preceding year, declined by approximately 24.9%, 15.4%, 10.3% and 21.2%, respectively. We may experience similar fluctuations in our net revenues in the future. Additionally, demand is likely to continue to be subject to substantial year-to-year fluctuations as a consequence of industry cyclicality, as well as other factors, and such fluctuations may have a material adverse effect on our financial condition or results of operation.
Worldwide economic conditions have recently deteriorated significantly and may remain depressed, or could worsen, in the foreseeable future. These conditions may have a material adverse effect on demand for our customers' products and, in turn, on demand for our products. If these conditions persist or worsen, our results of operations and financial condition could be materially adversely affected.
Profitability in the high-performance alloy industry is highly sensitive to changes in sales volumes.
The high-performance alloy industry is characterized by high capital investment and high fixed costs. The cost of raw materials is the primary variable cost in the manufacture of our high-performance alloys and, in fiscal 2008, represented approximately 64% of our total cost of sales. Other manufacturing costs, such as labor, energy, maintenance and supplies, often thought of as variable, have a significant fixed element. Profitability is, therefore, very sensitive to changes in volume, and relatively small changes in volume can result in significant variations in earnings.
We are subject to risks associated with global economic and political uncertainties
Like other companies, we are susceptible to macroeconomic downturns in the United States or abroad that may affect the general economic climate and our performance and the performance of our customers. The global financial crisis may have an impact on our business and financial condition in ways that we currently cannot predict. The continuing credit crisis and related turmoil in the global financial system has had and may continue to have an impact on our business and our financial condition. In addition to the impact that the global financial crisis has already had, we may face significant challenges if conditions in the financial markets do not improve or continue to worsen. For example, an extension of the credit crisis to other industries could adversely impact overall demand for our products, which could have a negative effect on our revenues.
In addition, we are subject to various domestic and international risks and uncertainties, including changing social conditions and uncertainties relating to the current and future political climate. Changes in governmental policies (particularly those that would limit or reduce defense spending) could have an adverse effect on our financial condition and may reduce our customers' demand for our products and/or depress pricing of those products used in the defense industry or which have other military applications, resulting in a material adverse impact on our business, prospects, results of operations, revenues and cash flows. Furthermore, any actual armed hostilities, and any future terrorist attacks in the U.S. or abroad,
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could also have an adverse impact on the U.S. economy, global financial markets and our business. The effects may include, among other things, a decrease in demand in the aerospace industry due to reduced air travel, as well as reduced demand in the other industries we serve. Depending upon the severity, scope and duration of these effects, the impact on our financial position, results of operations, and cash flows could be material.
Risks Associated with the Commercial Aerospace Industry
A significant portion of the sales of our high-performance alloys represent products sold to customers in the commercial aerospace industry. The aerospace industry has historically been cyclical due to factors both external and internal to the airline industry. These factors include general economic conditions, airline profitability, consumer demand for air travel, varying fuel and labor costs, price competition, and international and domestic political conditions such as military conflict and the threat of terrorism. The length and degree of cyclical fluctuation are influenced by these factors and therefore are difficult to predict with certainty. Demand for our products in this segment is subject to these cyclical trends. A downturn in the commercial aerospace industry would adversely affect the prices at which we are able to sell these and other products, and our results of operations, business and financial condition could be materially adversely affected.
Changes in the economic environment and the financial condition of airlines can also result in rescheduling or cancellation of orders. Accordingly, aircraft manufacturer backlogs are not necessarily a reliable indication of near-term business activity, but may be indicative of potential business levels over a longer-term horizon. For example, the Boeing Company experienced a labor strike (which was resolved in October 2008) that has prevented it from building new aircraft, and has experienced delays in the introduction of its new 787 aircraft. These events have created uncertainty in the aerospace supply chain generally and, if they persist for a significant length of time, could have a material adverse effect on our results of operations.
Our operations are dependent on production levels at our Kokomo facility.
Our principal assets are located at our primary integrated production facility in Kokomo, Indiana and at our production facilities in Arcadia, Louisiana and in Mountain Home, North Carolina. The Arcadia and Mountain Home plants rely to a significant extent upon feedstock produced at the Kokomo facility. Any production failures, shutdowns or other significant problems at the Kokomo facility could have a material adverse effect on our financial condition and results of operations. We believe that we maintain adequate property damage insurance to provide for reconstruction of damaged equipment, as well as business interruption insurance to mitigate losses resulting from any production shutdown caused by an insured loss; however, there can be no assurance that such insurance will be adequate to cover such losses which may have a material adverse effect on our financial condition.
Although capital upgrades will allow us to produce more than 23.5 million pounds of high-performance alloys annually, our ability to increase net revenues and profitability depends upon our success in effectively utilizing this new capacity.
We have announced that our capital upgrade program will allow us to increase sheet production capacity from 9 million pounds annually to 14 million pounds annually, increasing total high-performance alloy production capacity to more than 23.5 million pounds. Our ability to utilize this capacity depends greatly upon continuing demand in our end-markets, successfully increasing our market share and continued acceptance of our new products into the marketplace. Any failure to effectively utilize the increased capacity may negatively impact our ability to increase net revenues, profitability and net income.
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During periods of lower demand in other alloy markets, some of our competitors may use their available capacity to produce higher volumes of high-performance alloys, which leads to increased competition in the high-performance alloy market.
In addition to high-performance alloys, our primary competitors also produce and sell a broad range of other alloys, including stainless steel and titanium, while we produce primarily high-performance alloys. There are significant elements of fixed costs in the operating structure of these competitors, which can only be absorbed by keeping production levels high. For that reason, if our competitors are unable to fill their production capacity with their core alloys such as stainless steel and titanium, they are likely to increase their production of high-performance alloys. These higher production levels will lead to increased competition, such as we are experiencing now, in the high-performance alloy market, creating downward pricing pressures as a result of increased product in the market and more aggressive lead times and could have a material adverse effect on our net revenues and results of operations.
Rapid increases in the price of nickel may materially adversely affect our operating results.
To the extent that the price of nickel or other raw materials rises rapidly, there may be a negative effect on our gross profit margins. In fiscal 2008, nickel, a major component of many of our products, accounted for approximately 51% of our raw material costs, or approximately 33% of our total costs of sales. We enter into several different types of sales contracts with our customers, some of which allow us to pass on increases in nickel prices to our customers. In other cases, we price our products at the time of order, which allows us to establish prices with reference to known costs of materials, but which does not allow us to offset an unexpected rise in the price of nickel. We may not be able to successfully offset rapid increases in the price of nickel or other raw materials in the future. In the event that raw material price increases occur that we are unable to pass on to our customers, our cash flows or results of operations would be materially adversely affected.
Increases in energy costs and raw material costs may have a negative impact on our performance and financial condition.
Since fiscal 2003 and through fiscal 2008, our aggregate raw material and energy costs have consistently risen. Nickel, cobalt and molybdenum, the primary raw materials used to manufacture our products, all have experienced significant fluctuations in price. Continued growth in China has contributed to increased demand for many of the raw materials used in our manufacturing processes, which has led to increased prices for these raw materials. The Company uses natural gas in the manufacturing process to reheat material for purposes of annealing and forming. Continuing increases in raw material and energy costs could have a material adverse effect on our cash flows or results of operation.
Failure to successfully develop, commercialize, market and sell new applications and new products could adversely affect our business.
We believe that our proprietary alloys and metallurgical manufacturing expertise provide us with a competitive advantage over other high-performance alloy producers. Our ability to maintain this competitive advantage depends on our ability to continue to offer products that have equal or better performance characteristics than competing products at competitive prices. Our future growth will depend, in part, on our ability to address the increasingly demanding needs of our customers by enhancing the properties of our existing alloys, by timely developing new applications for our existing products, and by timely developing, commercializing, marketing and selling new products. If we are not successful in these efforts, we may experience difficulties that delay or prevent the successful development, commercialization, marketing and selling of these products, or if our new products and product enhancements do not adequately meet the requirements of the marketplace and achieve market acceptance, our revenues, cash flows and results of operations could be negatively affected.
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We may be adversely affected by environmental, health and safety laws, regulations, costs and other liabilities.
We are subject to various foreign, federal, state and local environmental, health and safety laws and regulations, including those governing the discharge of pollutants into the environment, the storage, handling, use, treatment and disposal of hazardous substances and wastes and the health and safety of our employees. Under these laws and regulations, we may be held liable for all costs arising out of any release of hazardous substances on, under or from any of our current or former properties or any off-site location to which we sent or arranged to be sent wastes for disposal or treatment, and such costs may be material. We could also be held liable for any and all consequences arising out of human exposure to such substances or other hazardous substances that may be attributable to our products or other environmental damage. In addition, some of these laws and regulations require our facilities to operate under permits that are subject to renewal or modification. These laws, regulations and permits can require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment. Violations of these laws, regulations or permits can also result in the imposition of substantial penalties, permit revocations and/or facility shutdowns.
We have received permits from the environmental regulatory authorities in Indiana and North Carolina to close and to provide post-closure monitoring and care for certain areas of our Kokomo and Mountain Home facilities that were used for the storage and disposal of wastes, some of which are classified as hazardous under applicable regulations. We are required to monitor groundwater and to continue post-closure maintenance of the former disposal areas at each site. As a result, we are aware of elevated levels of certain contaminants in the groundwater and additional corrective action could be required. Additionally, it is possible that we could be required to undertake other corrective action commitments for any other solid waste management unit existing or determined to exist at our facilities. We are unable to estimate the costs of any further corrective action at either site, if required. Accordingly, we cannot assure you that the costs of future corrective action at these or any other current or former sites will not have a material adverse effect on our financial condition, results of operations or liquidity.
We may also incur liability for alleged environmental damages associated with the off-site transportation and disposal of hazardous substances. Our operations generate hazardous substances, many of which we accumulate at our facilities for subsequent transportation and disposal off-site or recycling by third parties. Generators of hazardous substances which are transported to disposal sites where environmental problems are alleged to exist are subject to liability under CERCLA and state counterparts. In addition, we may have generated hazardous substances disposed of at sites which are subject to CERCLA or equivalent state law remedial action. CERCLA imposes strict, joint and several liabilities for investigatory and cleanup costs upon hazardous substance generators, site owners and operators and other potentially responsible parties regardless of fault. We cannot assure you that we will not be named as a potentially responsible party at sites in the future or that the costs associated with current or future additional sites would not have a material adverse effect on our financial condition, results of operations or liquidity.
Environmental laws are complex, change frequently and have tended to become increasingly stringent over time. While we have budgeted for future capital and operating expenditures to comply with environmental laws, we cannot assure you that environmental laws will not change or become more stringent in the future. Therefore, we cannot assure you that our costs of complying with current and future environmental, health and safety laws, and our liabilities arising from past or future releases of, or exposure to, hazardous substances will not materially adversely affect our business, results of operations or financial condition. See "BusinessEnvironmental Matters."
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We could be required to make additional contributions to our defined benefit pension plans as a result of adverse changes in interest rates and the capital markets.
Our estimates of liabilities and expenses for pension benefits incorporates significant assumptions including the rate used to discount the future estimated liability, the long-term rate of return on plan assets and several assumptions relating to the employee workforce (salary increases, retirement age and mortality). Our results of operations, liquidity, or stockholders' equity in a particular period could be affected by a decline in the rate of return on plan assets, the rate used to discount the future estimated liability, or a reduction in the market value of plan assets.
If we are unable to recruit, hire and retain skilled and experienced personnel, our ability to effectively manage and expand our business will be harmed.
Our success largely depends on the skills, experience and efforts of our officers and other key employees who may terminate their employment at any time. The loss of any of our senior management team could harm our business. The announcement of the loss of one of our key employees could negatively affect our stock price. Our ability to retain our skilled workforce and our success in attracting and hiring new skilled employees will be a critical factor in determining whether we will be successful in the future. We face challenges in hiring, training, managing and retaining employees in certain areas including metallurgical researchers, equipment technicians, and sales and marketing staff. If we are unable to recruit, hire and retain skilled employees, our new product and alloy development and commercialization could be delayed, and our marketing and sales efforts could be hindered, which would adversely impact our competitiveness and financial results.
The risks inherent in our international operations may adversely impact our revenues, results of operations and financial condition.
We anticipate we will continue to derive a significant portion of our revenues from operations in international markets. As we continue to expand internationally, we will need to hire, train and retain qualified personnel for our direct sales efforts and retain distributors and train their personnel in countries where language, cultural or regulatory impediments may exist. We cannot ensure that distributors, regulators or other government agencies will continue to accept our products, services and business practices. In addition, we purchase raw materials on the international market. The sale and shipment of our products and services across international borders, as well as the purchase of raw materials from international sources, subject us to the different trade regulations, including the Foreign Corrupt Practices Act, or FCPA, and other laws. Compliance with such regulations is costly. Any failure to comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments and restrictions on certain business activities. Failure to comply with applicable legal and regulatory obligations could result in the disruption of our shipping, sales and service activities. Our international sales operations expose us and our representatives, agents and distributors to risks inherent in operating in foreign jurisdictions, including:
23
We cannot ensure you that one or more of these factors will not harm our business. Any material decrease in our international revenues or inability to expand our international operations would adversely impact our revenues, results of operations and financial condition.
Although a collective bargaining agreement is in place for certain employees, union or labor disputes could still disrupt the manufacturing process.
All eligible hourly employees at the Kokomo plant and the Lebanon, Indiana service and sales center (approximately 537 in the aggregate as of September 30, 2008) are covered by a collective bargaining agreement. In fiscal 2007, the collective bargaining agreement was extended until June 2010. Even though a collective bargaining agreement is in place, it is still possible that union or labor disputes could disrupt our manufacturing process. We intend to renegotiate the collective bargaining agreement in fiscal 2010 prior to the expiration of the agreement currently in place. Management believes that current relations with the union are satisfactory. We cannot assure you, however, that the renegotiation of the collective bargaining agreement in 2010 will not lead to a labor stoppage and negative effect on earnings.
Risks Related to Shares of Our Common Stock
Our stock price is subject to fluctuations as a result of being traded on a public exchange which may not be related to our performance.
The stock market in general has been highly volatile. As a result, the market price of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease in the value of their stock, including decreases unrelated to our operating performance or prospects. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those listed elsewhere in this "Risk Factors" section and others such as:
24
You may not receive a return on investment through dividend payments nor upon the sale of your shares of our common stock.
We do not anticipate paying any dividends to our stockholders in the near term. Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend on our results of operations, financial conditions, projected liquidity, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. You also may not realize a return on your investment upon selling your shares of our common stock.
Provisions of our certificate of incorporation and by-laws could discourage potential acquisition proposals and could deter or prevent a change in control.
Some provisions in our certificate of incorporation and by-laws, as well as Delaware statutes, may have the effect of delaying, deferring or preventing a change in control. These provisions, including those regulating the nomination of directors, may make it more difficult for other persons, without the approval of our Board of Directors, to launch takeover attempts that a stockholder might consider to be in his or her best interest. These provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock.
Item 1B. Unresolved Staff Comments
None.
Manufacturing Facilities. The Company owns manufacturing facilities in the following locations:
The Kokomo plant, the Company's primary production facility, is located on approximately 180 acres of industrial property and includes over 1.0 million square feet of building space. There are three sites consisting of (1) a headquarters and research laboratory; (2) primary and secondary melting, annealing furnaces, forge press and several smaller hot mills; and (3) the Company's four-high Steckel mill and sheet product cold working equipment, including two cold strip mills. All alloys and product forms other than tubular and wire goods and drawn wire, are produced in Kokomo.
The Arcadia plant is located on approximately 42 acres of land, and includes 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, draw benches, annealing furnaces and pickling facilities.
The Mountain Home plant is located on approximately 29 acres of land, and includes approximately 100,000 square feet of building space. The Mountain Home facility is primarily used to manufacture finished high-performance alloy wire and specialty stainless steel wire. A limited amount of warehousing is also done at this facility.
The owned facilities located in the United States are subject to a mortgage which secures the Company's obligations under its U.S. revolving credit facility with a group of lenders led by Wachovia Capital Finance Corporation. For more information see "Management's Discussion and Analysis of
25
Financial Condition and Results of Operations" and Note 7 to the consolidated financial statements included elsewhere in this Form 10-K.
Service and Sales Centers. The service and sales centers contain equipment capable of precision laser and water jet processing services to cut and shape products to customers' precise specifications. The Company owns service and sales centers in the following locations:
The Openshaw plant, located near Manchester, England, consists of approximately 7 acres of land and over 200,000 square feet of buildings on a single site. The Company closed the manufacturing portion of the Openshaw plant in fiscal 2004 and is sourcing the required bar product for customers from external vendors. This closure did not have a material effect on the overall revenue of the U.K. operation or overall operations or financial position. In April 2005, the Company sold 8 acres of the Openshaw site for a profit of $2.1 million, but retained ownership of the buildings. It is anticipated that Haynes will continue to own and operate the balance of the land, totaling 7 acres, and the buildings.
In addition, the Company leases service and sales centers in the following locations:
Sales Centers. The Company leases sales centers in the following locations:
All owned and leased service and sales centers not described in detail above are single site locations and are less than 100,000 square feet. The Company believes that its existing facilities are suitable for its current business needs.
The Company is subject to extensive federal, state and local laws and regulations. Future developments and increasingly stringent regulations could require us to make additional unforeseen expenditures for these matters. The Company is regularly involved in litigation, both as a plaintiff and as a defendant, relating to its business and operations. Such litigation includes federal and state EEOC administrative actions and litigation and administrative actions relating to environmental matters. For more information see "Item 1. BusinessEnvironmental Matters." Litigation may result in substantial costs and may divert management's attention and resources, and the level of future expenditures for legal matters cannot be determined with any degree of certainty. Nonetheless, based on the facts presently known, management does not believe that expenditures for legal proceedings will have a material effect on its financial position, results of operations or liquidity.
26
The Company is currently, and has in the past, been subject to claims involving personal injuries allegedly relating to its products. For example, the Company is presently involved in two actions involving welding rod-related injuries, both of which were filed in California state court against numerous manufacturers, including the Company, in May 2006 and February 2007, respectively, alleging that the welding-related products of the defendant manufacturers harmed the users of such products through the inhalation of welding fumes containing manganese. The Company believes that it has defenses to these allegations and, that if the Company were found liable, the cases would not have a material effect on its financial position, results of operations or liquidity. In addition to these cases, the Company has in the past been named a defendant in several other lawsuits, including 52 filed in the state of California, alleging that its welding-related products harmed the users of such products through the inhalation of welding fumes containing manganese. The Company has since been voluntarily dismissed from all of these lawsuits on the basis of the release and discharge of claims contained in the confirmation order issued in connection with the Company's emergence from Chapter 11 reorganization. While the Company contests such lawsuits vigorously, and may have applicable insurance, there are several risks and uncertainties that may affect its liability for claims relating to exposure to welding fumes and manganese. For instance, in recent cases, at least two courts (in cases not involving Haynes) have refused to dismiss claims relating to inhalation of welding fumes containing manganese based upon a bankruptcy discharge order. Although the Company believes the facts of these cases are distinguishable from the facts of its cases, it cannot assure you that any or all claims against the Company will be dismissed based upon the Confirmation Order, particularly claims premised, in part or in full, upon actual or alleged exposure on or after the date of the Confirmation Order. It is also possible that the Company will be named in additional suits alleging welding-rod injuries. Should such litigation occur, it is possible that the aggregate claims for damages, if the Company is found liable, could have a material adverse effect on its financial condition, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's stockholders during the fourth quarter of fiscal 2008.
27
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company's common stock is listed on the NASDAQ Global Market ("NASDAQ") and traded under the symbol "HAYN". The following table sets forth, for the periods indicated, the high and low closing prices for the Company's common stock as reported by NASDAQ since the Company's listing on March 23, 2007.
Fiscal quarter ended:
|
High | Low | |||||
---|---|---|---|---|---|---|---|
September 30, 2008 |
$ | 60.44 | $ | 43.00 | |||
June 30, 2008 |
$ | 68.33 | $ | 54.38 | |||
March 31, 2008 |
$ | 67.37 | $ | 43.78 | |||
December 31, 2007 |
$ | 88.77 | $ | 66.60 | |||
September 30, 2007 |
$ | 100.10 | $ | 66.47 | |||
June 30, 2007 |
$ | 92.23 | $ | 69.74 | |||
March 31, 2007 (from March 23) |
$ | 74.40 | $ | 70.51 |
Prior to the Company's listing on NASDAQ and following the Company's emergence from bankruptcy in August 2004, trading in the Company's common stock occurred from time to time on an unsolicited basis on the pink sheets. The following table sets forth the range of high and low closing bid prices by fiscal quarter for the common stock as reported through Pink Sheets LLC. Over-the-counter market quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Fiscal quarter ended:
|
High | Low | |||||
---|---|---|---|---|---|---|---|
March 31, 2007 (through March 23) |
$ | 71.67 | $ | 39.00 | |||
December 31, 2006 |
$ | 54.00 | $ | 36.00 |
The range of the Company's common stock price on NASDAQ from October 1, 2007 to September 30, 2008 was $43.00 to $88.87. The closing price of the common stock was $46.83 on September 30, 2008.
As of October 31, 2008, there were approximately 11 record holders of the Company's common stock.
Since fiscal 2004, the Company has not declared cash dividends on shares of its common stock. The Company does not have any current plans to pay cash dividends or make any other distributions on shares of the Company's common stock in the near term. Instead, the Company intends to retain any earnings for use in the operation and expansion of its business.
The Company did not sell any unregistered securities or repurchase any of its equity securities during fiscal 2008.
28
Equity Compensation Plan Information
The following table provides information as of September 30, 2008 regarding shares of the Company's common stock issuable pursuant to its stock option plans:
Plan Category
|
Number of securities to
be issued upon exercise of outstanding options |
Weighted-average
exercise price of outstanding options |
Number of securities
remaining available for future issuance under equity compensation plans (excluding securities reflected in the second column) |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Equity compensation plans approved by security holders (1) |
448,377 | (2) | $ | 43.24 | 267,000 | (2) |
Cumulative Total Stockholder Return
The graph below compares the cumulative total stockholder return on the Company's common stock to the cumulative total return of the Russell 2000 Index, S&P MidCap Index, and Peer Group for each of the last four fiscal years ended September 30, 2008. The cumulative total return assumes an investment of $100 on September 30, 2004 and the reinvestment of any dividends during the period. The Russell 2000 is a broad-based index that includes smaller market capitalization stocks. The S&P MidCap 400 Index is the most widely used index for mid-sized companies. Management believes that the S&P MidCap 400 is representative of companies with similar market and economic characteristics to Haynes. Furthermore, we also believe the Russell 2000 Index is representative of the Company's current market capitalization status and this index is also provided on a comparable basis. The companies included in the Peer Group Index are: Allegheny Technologies, Inc., Titanium Metals Corporation, RTI International Metals, Inc., Universal Stainless & Alloy Products, Inc. and Carpenter Technologies Corp. Management believes that the companies included in the Peer Group, taken as a whole, provide a meaningful comparison in terms of competition, product offerings and other relevant factors. The total stockholder return for the peer group is weighted according to the respective issuer's stock market capitalization at the beginning of each period.
29
|
2004 | 2005 | 2006 | 2007 | 2008 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Haynes International, Inc. |
100.00 | 227.27 | 354.54 | 776.09 | 425.73 | |||||||||||
Russell 2000 |
100.00 | 116.56 | 126.64 | 140.58 | 123.01 | |||||||||||
S&P MidCap 400 |
100.00 | 120.76 | 127.15 | 149.20 | 126.98 | |||||||||||
Peer Group |
100.00 | 174.76 | 341.76 | 527.51 | 249.67 |
Item 6. Selected Financial Data
On March 29, 2004, the Company and its U.S. subsidiaries and U.S. affiliates on that date filed for reorganization relief under Chapter 11 of the U.S. Bankruptcy Code. A plan of reorganization was filed on May 25, 2004, amended on June 29, 2004, confirmed by order of the bankruptcy court on August 16, 2004, and became effective on August 31, 2004. The historical consolidated financial statements of predecessor Haynes International, Inc. have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business, and, for periods subsequent to March 29, 2004, in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. As of August 31, 2004, the effective date of the plan of reorganization, successor Haynes International, Inc. began operating its business under a new capital structure and adopted fresh start reporting for its consolidated financial statements. Because of the emergence from bankruptcy and adoption of fresh start reporting, the historical consolidated financial information for predecessor Haynes International, Inc. is not comparable to financial information of successor Haynes International, Inc. for periods after August 31, 2004.
Set forth below are selected financial data of predecessor Haynes International, Inc. and successor Haynes International, Inc. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes thereto included elsewhere in this Form 10-K. The selected historical consolidated financial data as of and for the years ended September 30, 2008, 2007, 2006 and 2005 and for the period September 1, 2004 through September 30, 2004 are derived from the consolidated financial statements of successor Haynes International, Inc. The selected historical consolidated financial data for the period October 1, 2003 through August 31, 2004, are derived from the consolidated financial statements of predecessor Haynes International, Inc.
30
Amounts below are in thousands, except backlog, which is in millions, share and per share information and average nickel price.
|
|
|
|
|
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Predecessor | Successor | ||||||||||||||||||
|
Eleven Months
Ended August 31, 2004 |
One Month
Ended September 30, 2004 (1) |
Year Ended
September 30, 2005 (1) |
Year Ended
September 30, 2006 (1) |
Year Ended
September 30, 2007 (1) |
Year Ended
September 30, 2008 (1) |
||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||
Net revenues |
$ |
209,103 |
$ |
24,391 |
$ |
324,989 |
$ |
434,405 |
$ |
559,836 |
$ |
637,006 |
||||||||
Cost of sales |
171,652 | 26,136 | (2) | 288,669 | (2) | 325,573 | (2) | 408,752 | (2) | 492,349 | (2) | |||||||||
Selling, general and administrative expense |
24,038 | 2,658 | 32,963 | 40,296 | 39,441 | 42,277 | ||||||||||||||
Research and technical expense |
2,286 | 226 | 2,621 | 2,659 | 3,116 | 3,441 | ||||||||||||||
Restructuring and other charges (4) |
4,027 | 429 | 628 | | | | ||||||||||||||
Operating income (loss) |
7,100 | (5,058 | ) | 108 | 65,877 | 108,527 | 98,939 | |||||||||||||
Interest expense, net |
13,929 | 348 | 6,353 | 8,024 | 3,939 | 1,025 | ||||||||||||||
Reorganization items (5) |
(177,653 | ) | | | | | | |||||||||||||
Net income (loss) |
170,734 | (3,646 | ) | (4,134 | ) | 35,540 | 66,120 | 62,778 | ||||||||||||
Net income (loss) per share: |
||||||||||||||||||||
Basic |
$ | 1,707,340 | $ | (0.36 | ) | $ | (0.41 | ) | $ | 3.55 | $ | 6.07 | $ | 5.27 | ||||||
Diluted |
$ | 1,707,340 | $ | (0.36 | ) | $ | (0.41 | ) | $ | 3.46 | $ | 5.89 | $ | 5.22 | ||||||
Weighted average shares outstanding: |
||||||||||||||||||||
Basic |
100 | 10,000,000 | 10,000,000 | 10,000,000 | 10,896,067 | 11,903,289 | ||||||||||||||
Diluted |
100 | 10,000,000 | 10,000,000 | 10,270,642 | 11,230,101 | 12,026,440 | ||||||||||||||
|
|
|
|
Successor |
|
|||||||||||||||
|
|
September 30, | ||||||||||||||||||
|
|
2004 (1) | 2005 (1) | 2006 (1) | 2007 (1) | 2008 (1) | ||||||||||||||
Balance Sheet Data (2) : |
||||||||||||||||||||
Working capital |
$ | 61,826 | $ | 59,494 | $ | 101,864 | $ | 299,312 | $ | 330,357 | ||||||||||
Property, plant and equipment, net |
80,035 | 85,125 | 88,921 | 97,860 | 107,302 | |||||||||||||||
Total assets |
360,758 | 387,122 | 445,860 | 586,969 | 617,567 | |||||||||||||||
Total debt |
85,993 | 106,383 | 120,043 | 38,733 | 14,909 | |||||||||||||||
Long-term portion of debt |
2,462 | 414 | 3,097 | 3,074 | 1,582 | |||||||||||||||
Accrued pension and postretirement benefits |
120,019 | 122,976 | 126,488 | (3) | 123,587 | (3) | 115,359 | (3) | ||||||||||||
Stockholders' equity |
115,576 | 111,869 | 151,548 | 316,377 | (6) | 379,543 | ||||||||||||||
|
|
|
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
|||||||
Consolidated Backlog at Fiscal Quarter End (7) : |
||||||||||||||||||||
1 st quarter |
$ | 54.7 | $ | 110.9 | $ | 203.5 | $ | 206.9 | $ | 247.8 | ||||||||||
2 nd quarter |
69.6 | 134.8 | 207.4 | 237.6 | 254.5 | |||||||||||||||
3 rd quarter |
82.6 | 159.2 | 200.8 | 258.9 | 252.6 | |||||||||||||||
4 th quarter |
93.5 | 188.4 | 206.9 | 236.3 | 229.2 | |||||||||||||||
|
|
|
|
Year Ended September 30, |
|
|||||||||||||||
|
|
2004 | 2005 | 2006 | 2007 | 2008 | ||||||||||||||
Average nickel price per pound (8) |
$ | 6.02 | $ | 6.45 | $ | 13.67 | $ | 13.40 | $ | 8.07 |
31
32
Quarterly Market Information
Set forth below is selected data relating to the Company's backlog, the 30 day average nickel price per pound as reported by the London Metals Exchange, as well as breakdown of net revenues, shipments and average selling prices to the markets served by Haynes for the periods shown. These data should be read in conjunction with the consolidated financial statements and related notes thereto and the remainder of the "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Form 10-K.
|
Quarter Ended | Quarter Ended | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 31,
2006 |
March 31,
2007 |
June 30,
2007 |
September 30,
2007 |
December 31,
2007 |
March 31,
2008 |
June 30,
2008 |
September 30,
2008 |
|||||||||||||||||
Backlog (1) |
|||||||||||||||||||||||||
Dollars (in thousands) |
$ | 206,859 | $ | 237,589 | $ | 258,867 | $ | 236,256 | $ | 247,775 | $ | 254,470 | $ | 252,598 | $ | 229,196 | |||||||||
Pounds (in thousands) |
7,575 | 8,454 | 8,551 | 7,397 | 8,274 | 8,706 | 8,335 | 7,575 | |||||||||||||||||
Average selling price per pound |
$ | 27.31 | $ | 28.10 | $ | 30.27 | $ | 31.94 | $ | 29.95 | $ | 29.23 | $ | 30.30 | $ | 30.26 | |||||||||
Average nickel price per pound |
|||||||||||||||||||||||||
London Metals Exchange (2) |
$ | 15.68 | $ | 21.01 | $ | 18.92 | $ | 13.40 | $ | 12.11 | $ | 14.16 | $ | 10.23 | $ | 8.07 |
|
Quarter Ended | Quarter Ended | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 31,
2006 |
March 31,
2007 |
June 30,
2007 |
September 30,
2007 |
December 31,
2007 |
March 31,
2008 |
June 30,
2008 |
September 30,
2008 |
||||||||||||||||||
Net revenues (in thousands) |
||||||||||||||||||||||||||
Aerospace |
$ | 43,827 | $ | 48,232 | $ | 55,317 | $ | 63,796 | $ | 59,442 | $ | 63,472 | $ | 62,857 | $ | 61,501 | ||||||||||
Chemical processing |
38,778 | 37,701 | 31,495 | 39,986 | 40,805 | 37,404 | 49,165 | 38,718 | ||||||||||||||||||
Land-based gas turbines |
20,076 | 27,993 | 26,812 | 28,120 | 25,505 | 33,506 | 31,004 | 34,102 | ||||||||||||||||||
Other markets |
15,671 | 20,352 | 24,598 | 25,638 | 18,887 | 26,085 | 18,811 | 22,809 | ||||||||||||||||||
Total product revenue |
118,352 | 134,278 | 138,222 | 157,540 | 144,639 | 160,467 | 161,837 | 157,130 | ||||||||||||||||||
Other revenue |
2,111 | 3,058 | 2,865 | 3,410 | 1,438 | 3,304 | 4,503 | 3,688 | ||||||||||||||||||
Net revenues |
$ | 120,463 | $ | 137,336 | $ | 141,087 | $ | 160,950 | $ | 146,077 | $ | 163,771 | $ | 166,340 | $ | 160,818 | ||||||||||
Shipments by markets (in thousands of pounds) |
||||||||||||||||||||||||||
Aerospace |
1,780 | 1,701 | 1,973 | 2,206 | 2,154 | 2,190 | 2,319 | 2,188 | ||||||||||||||||||
Chemical processing |
1,479 | 1,322 | 1,082 | 1,238 | 1,312 | 1,287 | 1,649 | 1,140 | ||||||||||||||||||
Land-based gas turbines |
1,144 | 1,382 | 1,256 | 1,311 | 1,060 | 1,742 | 1,519 | 1,641 | ||||||||||||||||||
Other markets |
1,053 | 1,320 | 1,538 | 923 | (1) | 681 | 861 | 732 | 800 | |||||||||||||||||
Total shipments |
5,456 | 5,725 | 5,849 | 5,678 | 5,207 | 6,080 | 6,219 | 5,769 | ||||||||||||||||||
Average selling price per pound |
||||||||||||||||||||||||||
Aerospace |
$ | 24.62 | $ | 28.36 | $ | 28.04 | $ | 28.92 | $ | 27.60 | $ | 28.98 | $ | 27.11 | $ | 28.11 | ||||||||||
Chemical processing |
26.22 | 28.52 | 29.11 | 32.30 | 31.10 | 29.06 | 29.82 | 33.96 | ||||||||||||||||||
Land-based gas turbines |
17.55 | 20.26 | 21.35 | 21.45 | 24.06 | 19.23 | 20.41 | 20.78 | ||||||||||||||||||
Other markets |
14.88 | 15.42 | 15.99 | 27.78 | 27.73 | 30.30 | 25.70 | 28.51 | ||||||||||||||||||
Total product (excluding other revenue) |
21.89 | 23.45 | 23.63 | 27.75 | 27.78 | 26.39 | 26.03 | 27.24 | ||||||||||||||||||
Total average selling price (including other revenue) |
22.08 | 23.99 | 24.12 | 28.35 | 28.05 | 26.94 | 26.75 | 27.88 |
33
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Please refer to page 1 of this Form 10-K for a cautionary statement regarding forward-looking information.
Overview of Business
The global alloy market consists of three primary sectors: stainless steel, general purpose nickel alloys and high-performance nickel- and cobalt-based alloys. Except for its stainless-steel wire products, the Company competes exclusively in the high-performance alloy sector, which includes high-temperature resistant alloys, or HTA, and corrosion resistant alloys, or CRA. HTA and CRA products accounted for 69% and 31%, respectively, of the Company's net revenues in fiscal 2007, and 73% and 27%, respectively, of the Company's net revenues in fiscal 2008 (in each case excluding stainless steel wire). Based on available industry data, the Company believes that it is one of four principal producers of high-performance alloys in flat product form, which includes sheet, coil and plate forms. Flat products accounted for 71% of shipment pounds and 68% of net revenues in fiscal 2007, and 63% of shipment pounds and 63% of net revenues in fiscal 2008. The Company also produces its alloys as seamless and welded tubulars, and in bar, billet and wire forms. On a historical basis, flat products have accounted for a majority of the Company's net revenues, and are anticipated to continue to do so on a prospective basis.
The Company's direct sales organization, which consists of 12 Company-operated service and/or sales centers in the U.S., Europe, Asia and India, generated approximately 82%, 85% and 84% of the Company's net revenues in fiscal 2006, fiscal 2007 and fiscal 2008, respectively. The remaining 18%, 15% and 16% of the Company's net revenues in fiscal 2006, fiscal 2007 and fiscal 2008, respectively, were generated by a network of independent distributors and sales agents who supplement the Company's direct sales efforts in all markets. Going forward, the Company expects its direct sales force to continue to generate approximately 85% of it's of total sales, although this number may increase as new service and sales centers are opened.
Net revenues and net income in fiscal 2007 and fiscal 2008 were generated primarily by the Company's U.S. operations. Sales to domestic customers comprised approximately 61% of net revenues in fiscal 2007 and 54% in fiscal 2008. In addition, the majority of the Company's operating costs are incurred in the U.S., as all of its manufacturing facilities are located in the U.S. Although the Company expects international sales to increase as it pursues its business strategy, for the foreseeable future, net revenues and net income will continue to be highly dependent on domestic sales and manufacturing facilities in the U.S.
Sales to customers outside the U.S. represented approximately 39% of the Company's net revenues in fiscal 2007 and 46% in fiscal 2008. It is anticipated that sales to customers outside of the U.S. will continue to grow with the addition of foreign service and sales centers. Although no data is available, management believes a portion of the material that is sold to U.S. distributors and fabricators is resold and shipped overseas.
The high-performance alloy industry is characterized by high capital investment and high fixed costs. Profitability is, therefore, very sensitive to changes in volume, and relatively small changes in volume can result in significant variations in earnings. The cost of raw materials is the primary variable cost in the manufacture of high-performance alloys and represents approximately 64% in fiscal 2008 of the Company's total cost of sales. Other manufacturing costs, such as labor, energy, maintenance and supplies, often thought of as variable, have a significant fixed element within a certain relevant range of production.
Lead times from order to shipment 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 for mill-produced products, depending on product form, can be as short as 4 weeks and as long as 30 weeks. An order from a service and sales center can be filled in less than one week, depending upon the availability of materials in stock.
34
Significant Events of Fiscal 2008
CEO Transition
The Company announced on April 4, 2008 that Francis Petro had informed the Board of his intention to retire as the Company's President and Chief Executive Officer at the end of his existing employment agreement on September 30, 2008 and to continue to serve as a member of the Board of Directors.
On September 9, 2008, the Company announced that Mark Comerford was appointed as the new President and Chief Executive Officer of the Company reporting directly to the Board of Directors. Mr. Comerford assumed his new position effective upon Mr. Petro's retirement from the Company.
Before joining the Company, Mr. Comerford was President of Alloy Products, the largest business unit within Brush Wellman Inc. Since 1998, Mr. Comerford served in various positions for Brush Wellman Inc. both in the U.S. and Southeast Asia. In addition to his considerable experience at Brush Wellman Inc., Mr. Comerford also held positions at Carpenter Technology and American Brass in various metallurgical engineering, international and commercial management positions.
Gross Profit Margin
Beginning at the end of the second quarter of fiscal 2007 and continuing through the fourth quarter of fiscal 2007, the Company experienced a trend of increasing revenues and average selling price per pound, while gross profit as a percentage of net revenues declined. During the first quarter of fiscal 2008, net revenue and average selling price per pound began to decline along with further erosion in gross profit as a percentage of net revenues. Compared to the first quarter of fiscal 2008, net revenue increased in the second quarter, but average selling price per pound and gross profit as a percentage of net revenue continued to decline. The decline in gross profit as a percentage of net revenue from the first quarter to the second quarter of fiscal 2008 should be analyzed in light of the fact that the first quarter of fiscal 2008 included a one-time benefit of $3.7 million related to a pension curtailment gain. Adjusting for this gain, the gross profit as a percentage of net revenue improved in the second quarter when compared to the first quarter. Although gross profit as a percentage of revenue in the third quarter of fiscal 2008 was lower than the same period in fiscal 2007, it showed improvement over the first and second quarter of fiscal 2008.
Gross profit as a percentage of revenue in the fourth quarter of fiscal 2008 was 21.4%, which is lower than in same period of fiscal 2007 and also lower than the previous quarter of fiscal 2008. It was anticipated that gross profit as a percentage of revenue for the fourth quarter of fiscal 2008 would be approximately 24.4%, which would have been a slight improvement over the third quarter of fiscal 2008 and slightly below 25.0% from the fourth quarter of fiscal 2007. One cause of the shortfall from forecast was reduced production volume of sheet product through the finishing operation as a result of issues associated with new annealing lines, including mechanical commissioning and the preparation of new standard operating procedures. It is anticipated that this process will be completed in the first quarter of fiscal 2009.
In addition to these operational challenges, pricing competition continued to increase in the fourth quarter of fiscal 2008. Starting in the third quarter of fiscal 2007, the Company experienced increasing competition from competitors who produce both stainless steel and high-performance alloys. Due to continued slowness in the stainless steel market, management believes these competitors increased their production levels and sales activity in high-performance alloys to keep capacity in their mills as full as possible, while offering very competitive prices and delivery times. As a result of this competition, the Company's ability to raise prices on certain products has been limited, and in some cases prices were lowered, in the six most recent fiscal quarters. Historically, the Company experienced similar price competition in the 1990's and in the early 2000's, when demand in the stainless market weakened.
This competition should soften as the stainless market improves. However, based on the current economic environment there is significant uncertainty as to when that may occur and the possibility exists that the stainless market may continue to deteriorate. Management believes, however, that the Company
35
continues to improve its ability to respond to the competition as a result of an increased emphasis on service centers, value-added services and an improving cost structure which has resulted from the capital expenditure program. It is anticipated that, with the completion of the upgrade to the second annealing line and improved processing capabilities, the Company's delivery-times and reliability will continue to improve.
HW Limited Acquisition
On June 2, 2008 the Company announced the expansion of its relationship with HW Limited and its affiliated companies in Hong Kong and China for sales of Haynes' products throughout Asia. Under the acquisition agreement (and the related consulting agreement), which became effective on June 1, Haynes' sales and marketing presence in Asia has been greatly expanded. The sales force of HW Limited's Chinese affiliate was integrated into the Haynes operations in China expanding Haynes' direct sales organization by eight people, which Haynes believes will lead to a more effective organization. In addition to overseeing this expanded organization, HW Limited's principal, Helen Wang, will promote Haynes' products and services to customers in select markets in Asia, including China, Taiwan, South Korea, Singapore, Thailand, Laos, Malaysia, Vietnam, Indonesia, Cambodia, Philippines, Australia, and New Zealand. This consulting arrangement is one component of the Company's continued campaign to grow its market presence in China and the rest of Asia. The asset acquisition and related agreements increased fixed assets $0.015 million, increased non-compete agreement by $0.5 million and increased goodwill by $2.5 million.
Capital Spending
Beginning in fiscal 2006, the Company began making significant investments in order to improve reliability and increase capacity in its sheet finishing operations. Upgrades to its cold rolling mill and one of two annealing lines were completed in fiscal 2007. Equipment upgrades to the second annealing line were completed in the third quarter of fiscal 2008, with commissioning starting in the fourth quarter. Due to the complexity of the commissioning process and development of new standard operating procedures, the commission process progressed at a slower pace than expected, and is anticipated to be complete in the first quarter of fiscal 2009. These upgrades to the sheet finishing operations have increased the production capacity for high-performance alloys in sheet form from 9.0 million pounds per year to 14.0 million pounds per year. The Company's objective is to produce and sell at least 23.5 million pounds of high-performance alloys by no later than fiscal 2010. However, based on the current economic environment achieving that goal is uncertain. Management is in the process of evaluating the positive impact of the upgrades to sheet finishing capacity and other capital upgrades since fiscal 2005 on total high-performance alloy capacity across all product forms. Management believes that the upgrades will allow the Company to produce high-performance alloy volumes in excess of the original estimate of 23.5 million pounds which fits well with the long-term growth potential of the Company's markets. In addition, management believes that the completion of these upgrades has had a positive impact on gross profit as a percentage of net revenue due to improved operating efficiency, reduced operating cost, improved quality and expanded product capability.
U.S. Pension Plan Change
During the last two fiscal years, the Company has taken action to reduce the funding requirements of its Defined Benefit Pension Plans. New salaried employees hired after December 31, 2005 and new hourly employees hired after June 30, 2007 are not eligible to participate in the Defined Benefit Pension Plans. Also, on October 2, 2007, the U.S. pension plan was amended effective December 31, 2007 to freeze benefit accruals for all non-union employees in the U.S. and effective January 1, 2008, the pension multiplier used to calculate the employee's monthly benefit was increased from 1.4% to 1.6%. In addition, the Company will make enhanced matching contributions to its 401K plan equal to 60% of the non-union and union plan participant's salary deferrals, up to 6% of compensation. The Company estimates the
36
redesign of the pension plan, including previous actions to close the plan to new non-union and union employees and the adjustment of the multiplier for non-union and union plan participants will reduce funding requirements by $23.0 million over the next six years. The offsetting estimated incremental cost of the enhanced 401K match is $2.3 million over the same six year period. As a result of freezing the benefit accruals for all non-union employees in the U.S. in the first quarter of fiscal 2008, the Company recognized a reduction of the projected benefit obligation of $8.2 million, an increase to other comprehensive income (before tax) of $4.5 million and a curtailment gain (before tax) of $3.7 million. The impact of the multiplier increase will be charged to pension expense over the estimated remaining lives of the participants.
Overview of Markets
The following table includes a breakdown of net revenues, shipments and average selling prices to the markets served by the Company for the periods shown.
|
2004 (1) | 2005 | 2006 | 2007 | 2008 | |||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amount |
% of
Total |
Amount |
% of
Total |
Amount |
% of
Total |
Amount |
% of
Total |
Amount |
% of
Total |
||||||||||||||||||||||
Net Revenues
|
||||||||||||||||||||||||||||||||
Aerospace |
$ | 98.1 | 42.0 | % | $ | 126.1 | 38.8 | % | $ | 165.8 | 38.2 | % | $ | 211.2 | 37.7 | % | $ | 247.3 | 38.8 | % | ||||||||||||
Chemical processing |
61.4 | 26.3 | 76.2 | 23.5 | 129.4 | 29.8 | 148.0 | 26.4 | 166.1 | 26.1 | ||||||||||||||||||||||
Land-based gas turbines |
41.1 | 17.6 | 67.1 | 20.6 | 77.9 | 17.9 | 103.0 | 18.4 | 124.1 | 19.5 | ||||||||||||||||||||||
Other markets |
31.1 | 13.3 | 53.2 | 16.4 | 56.4 | 13.0 | 86.3 | 15.4 | 86.6 | 13.6 | ||||||||||||||||||||||
Total product |
231.7 | 99.2 | 322.6 | 99.3 | 429.5 | 98.9 | 548.5 | 97.9 | 624.1 | 98.0 | ||||||||||||||||||||||
Other revenue (2) |
1.8 | 0.8 | 2.4 | 0.7 | 4.9 | 1.1 | 11.3 | 2.1 | 12.9 | 2.0 | ||||||||||||||||||||||
Net revenues |
$ | 233.5 | 100.0 | % | $ | 325.0 | 100.0 | % | $ | 434.4 | 100.0 | % | $ | 559.8 | 100.0 | % | $ | 637.0 | 100.0 | % | ||||||||||||
U.S. |
$ | 143.6 | 61.5 | % | $ | 196.5 | 60.5 | % | $ | 265.1 | 61.0 | % | $ | 343.9 | 61.4 | % | $ | 344.1 | 54.0 | % | ||||||||||||
Foreign |
$ | 89.9 | 38.5 | % | $ | 128.5 | 39.5 | % | $ | 169.3 | 39.0 | % | $ | 215.9 | 38.6 | % | $ | 292.9 | 46.0 | % | ||||||||||||
Shipments by Market
|
||||||||||||||||||||||||||||||||
Aerospace |
5.5 | 36.7 | % | 6.1 | 29.2 | % | 7.1 | 32.9 | % | 7.7 | 33.9 | % | 8.9 | 38.2 | % | |||||||||||||||||
Chemical processing |
4.2 | 28.0 | 3.8 | 18.2 | 5.0 | 23.1 | 5.1 | 22.5 | 5.4 | 23.2 | ||||||||||||||||||||||
Land-based gas turbines |
3.5 | 23.3 | 4.7 | 22.5 | 4.8 | 22.2 | 5.1 | 22.5 | 6.0 | 25.8 | ||||||||||||||||||||||
Other markets |
1.8 | 12.0 | 6.3 | 30.1 | 4.7 | 21.8 | 4.8 | 21.1 | 3.0 | 12.8 | ||||||||||||||||||||||
Total Shipments |
15.0 | 100.0 | % | 20.9 | 100.0 | % | 21.6 | 100.0 | % | 22.7 | 100.0 | % | 23.3 | 100.0 | % | |||||||||||||||||
Average Selling Price Per Pound |
||||||||||||||||||||||||||||||||
Aerospace |
$ | 17.84 | $ | 20.63 | $ | 23.28 | $ | 27.57 | $ | 27.94 | ||||||||||||||||||||||
Chemical processing |
14.62 | 19.84 | 25.97 | 28.89 | 30.83 | |||||||||||||||||||||||||||
Land-based gas turbines |
11.74 | 14.25 | 16.27 | 20.22 | 20.82 | |||||||||||||||||||||||||||
Other markets |
17.28 | 8.50 | (3) | 11.87 | (3) | 17.84 | (3) | 28.17 | (3) | |||||||||||||||||||||||
Total product (4) |
15.45 | 15.42 | 19.84 | 24.15 | 26.81 | |||||||||||||||||||||||||||
Total average selling price |
15.57 | 15.53 | 20.07 | 24.65 | 27.37 |
37
Demand in the Company's markets remained strong in fiscal 2008, with solid results in net revenues, volume and pricing in fiscal 2008 as compared to fiscal 2007, in spite of increased levels of competition. Management believes that year-to-year improvement in net revenues was driven by several strategies intended to optimize returns and strengthen financial results. For example, with demand solid and the Company's capacity limited as a result of the Company's capital upgrade program, the Company focused on selling the highest volumes into the applications and markets that provided the highest average selling price. In fiscal 2008 this strategy was particularly effective in the chemical processing and flue-gas desulphurization industries. In addition, the Company continued to diversify its market base, expanding the industries served in the "Other Markets" category and also continuing to diversify geographically, focusing on its presence in China and the rest of Asia. This strategy resulted in the increase in export sales from 39% of total sales in fiscal 2007 to 46% of total sales in fiscal 2008.
Although revenue and volumes from quarter-to-quarter through both fiscal 2007 and 2008 tended to show strength, the backlog in the latter portion of fiscal 2008 began to exhibit signs of the weakening economic environment in specific market categories. The backlog at the end of fiscal 2008 declined from the third quarter by approximately 9% in both revenue dollars and pounds, while the average selling price remained essentially flat. Revenue dollars and volumes in the backlog were essentially flat between September 30, 2007 and September 30, 2008, while the average selling price declined approximately 5%, in part as a result of a 40% decline in the cost of nickel between periods. Revenue dollars and volume in the backlog at October 31, 2008 declined by 4% from September 30, 2008, while average selling price remained essentially flat.
Aerospace demand was robust in fiscal 2008, as illustrated by the Company's high level of sales in this market. Haynes is well positioned to continue meeting current levels of demand and the anticipated increased level of demand in the latter part of fiscal 2009 or early fiscal 2010. Internal projects supporting this growth include the completion of upgrades to the Company's cold rolling mill in fiscal 2007 and both annealing lines in fiscal 2008 (which increased flat product finishing capacity by five million pounds), the installation of a new pilger mill at the Arcadia facility, also in fiscal 2008 (which increased capacity of seamless tubing), and continued expansion of the value-added operations in the Company's service centers. Although the order book for both Boeing and Airbus continues to be substantial, the push-out of delivery schedules for the Dreamliner 787 and A380 are having an unfavorable effect on order entry and backlog. Although it is uncertain what the effect will be over the next six to twelve months, it is clear that aerospace revenues and pounds shipped will be lower in fiscal 2009 as compared to fiscal 2008. The aerospace backlog dollars declined by approximately 10% from the end of the third quarter of fiscal 2008 to the end of the fourth quarter of fiscal 2008. The aerospace backlog dollars through the end of October declined another 3% from the end of September, 2008. Even though the commercial OEM portion of the business is likely to slow though at least the first and second quarters of fiscal 2009, management believes the MRO portion is likely to be less as affected because of the required maintenance schedules for engines currently in use.
Pounds shipped in the land-based gas turbine market in fiscal 2008 increased significantly from the previous year. Management believes, subject to global economic conditions, long-term demand in the land-based gas turbine market will continue to be solid, due to higher activity in power generation, oil and gas production, and alternative power systems application. In addition, land-based gas turbines are favored in electric generating facilities due to low capital cost at installation, flexibility in use of alternative fuels
38
and fewer SO 2 emissions than the traditional fossil fuel-fired facilities. However, based on the current economic environment, it is anticipated that volumes for fiscal 2009 will be lower then fiscal 2008 although it is uncertain by how much. The Company's backlog for the land-based gas turbine market declined by 7% from the end of the third quarter to the end of the fourth quarter of fiscal 2008 and declined another 5% from September to October 2008. A portion of this decline is associated with the project business which historically does not recur evenly through the year.
Sales to the chemical processing industry increased year over year, however, pounds shipped in the fourth quarter of fiscal 2008 were lower than the comparable quarter of the prior year and substantially lower than the third quarter of fiscal 2008. This is reflective of the sporadic project business, and the global economic downturn. Although there is some cyclicality as a result of project business expected in this market from quarter to quarter, historically the chemical processing industry slows as a result of an overall economic slowdown as has been seen in recent quarters. Management believes the reduced backlog is the result of a temporary dip in project business, but also a longer-term trend resulting from the economic environment. Backlog dollars declined by 23% from the end of the third fiscal quarter of 2008 to the end of the fourth fiscal quarter of 2008. During the month of October, 2008, the backlog for the chemical processing industry declined by an additional 1%.
The Company also continues its efforts to expand volumes sold into the industries which make up the "Other Markets" category. The industries in this category focus on upgrading overall quality, improving product performance through increased efficiency, prolonging product life, and lowering long-term costs. Companies in these industries are looking to achieve these goals through the use of "Advanced Materials" which supports the increased use of high-performance alloys in an expanding number of applications. On a year-to-year basis, after reducing for pounds of stainless steel wire, volume was essentially flat. Management intends to continue to invest in growing smaller markets included in this category because of the significant long-term opportunities. The backlog level for the "Other Markets" was consistent through fiscal 2008 and increased by 5% from the end of the third quarter of fiscal 2008 to the end of the fourth quarter of fiscal 2008. Although in October, 2008, "Other Markets" backlog dollars declined by 5%.
The Company's financial performance in fiscal 2007 and 2008 is reflective of the strength in the markets it serves. However, as noted in the preceding narrative, the activity in these markets, as reflected in the decline of the backlog, reflects the caution being exhibited by the Company's customers. Going into fiscal 2009, the global financial crisis, overall economic weakness, the competitive environment and the cautious approach of the Company's customers to restocking will make repeating the performance of fiscal 2007 and fiscal 2008 unlikely for net revenues and gross profit. However, the Company is well positioned financially to maintain profit levels during this slowdown and resume strong revenue and earnings growth once conditions improve.
Note on Wire Product
The high-performance alloy wire produced at the Company's wire facility is reflected within the appropriate category where the wire is sold. For example, high-performance alloy wire produced for use in the chemical processing market is reflected in that category. The stainless steel wire is reflected in the "Other Markets" category and reduced the average selling price per pound within that category on a comparative basis. The Company's strategy is to reduce production of stainless steel wire and increase production of high-performance alloy wire due to higher average selling price obtained from high-performance alloy wire. The Company will continue to produce some amount of stainless wire sold to higher-value markets, such as the medical wire market. During fiscal 2008, this category included $2.6 million of net revenue, which represented 0.5 million pounds of stainless steel wire product, as compared to $7.3 million of net revenue and 2.2 million pounds of stainless steel wire product in fiscal 2007.
39
Impact of Fresh Start Reporting on Cost of Sales
Upon implementation of the plan of reorganization, fresh start reporting was adopted by the Company in accordance with SOP-90-7. Under fresh start reporting, the reorganization value is allocated to the Company's net assets based on their relative fair values in a manner similar to the accounting provisions applied to business combinations under Statement of Financial Standards No. 141, Business Combinations ("SFAS No. 141").
The Company's operating income was reduced by the recognition of the fair market value adjustments to the Company's assets required by the adoption of fresh start reporting. Cost of sales included $5.5 million, $30.2 million, $4.8 million, $3.8 million and $3.8 million of these costs in the one month period ended September 30, 2004 and the years ended September 30, 2005, 2006, 2007 and 2008, respectively.
The fair market value adjustments to the historical basis of assets are being recognized as follows (dollars in thousands):
|
Fair Value
Adjustment |
Recognition
Period |
Expense
Recognized from September 1 to September 30, 2004 (3) |
Expense
Recognized from October 1, 2004 to September 30, 2005 (3) |
Expense
Recognized from October 1, 2005 to September 30, 2006 (3) |
Expense
Recognized from October 1, 2006 to September 30, 2007 (3) |
Expense
Recognized from October 1, 2007 to September 30, 2008 (3) |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Goodwill |
$ | 41,252 | N/A | (1) | $ | | $ | | $ | | $ | | $ | | ||||||||
Inventory |
30,497 | 6 months | (2) | 5,083 | 25,414 | | | | ||||||||||||||
Machinery and equipment |
41,628 | 14 years | 245 | 2,974 | 3,124 | 2,975 | 3,084 | |||||||||||||||
Buildings |
(859 | ) | 12 years | (6 | ) | (72 | ) | (72 | ) | (72 | ) | (72 | ) | |||||||||
Land |
41 | N/A | | | | | | |||||||||||||||
Trademarks |
3,800 | N/A | (1) | | | | | | ||||||||||||||
Patents |
8,667 | 2 to 14 years | 164 | 1,886 | 1,750 | 912 | 768 | |||||||||||||||
|
$ | 5,486 | $ | 30,202 | $ | 4,802 | $ | 3,815 | $ | 3,780 | ||||||||||||
40
Results of Operations
Year Ended September 30, 2008 Compared to Year Ended September 30, 2007
The following table includes a breakdown of net revenues, shipments, and average selling prices to the markets served by Haynes for the periods shown.
($ in thousands)
|
Year Ended September 30, | Change | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2007 | 2008 | Amount | % | ||||||||||||||||
Net revenues |
$ | 559,836 | 100.0 | % | $ | 637,006 | 100.0 | % | $ | 77,170 | 13.8 | % | ||||||||
Cost of sales |
408,752 | 73.0 | % | 492,349 | 77.3 | % | 83,597 | 20.5 | % | |||||||||||
Gross profit |
151,084 | 27.0 | % | 144,657 | 22.7 | % | (6,427 | ) | (4.3 | )% | ||||||||||
Selling, general and administrative expense |
39,441 | 7.0 | % | 42,277 | 6.6 | % | 2,836 | 7.2 | % | |||||||||||
Research and technical expense |
3,116 | 0.6 | % | 3,441 | 0.5 | % | 325 | 10.4 | % | |||||||||||
Operating income |
108,527 | 19.4 | % | 98,939 | 15.5 | % | (9,588 | ) | (8.8 | )% | ||||||||||
Interest income |
(227 | ) | 0.0 | % | (188 | ) | 0.0 | % | 39 | 17.2 | % | |||||||||
Interest expense |
4,166 | 0.7 | % | 1,213 | 0.2 | % | (2,953 | ) | (70.9 | )% | ||||||||||
Income before income taxes |
104,588 | 18.7 | % | 97,914 | 15.4 | % | (6,674 | ) | (6.4 | )% | ||||||||||
Provision for income taxes |
38,468 | 6.9 | % | 35,136 | 5.5 | % | (3,332 | ) | (8.7 | )% | ||||||||||
Net income |
$ | 66,120 | 11.8 | % | $ | 62,778 | 9.9 | % | $ | (3,342 | ) | (5.1 | )% | |||||||
By market
|
Year Ended
September 30, |
Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2007 | 2008 | Amount | % | ||||||||||
Net revenues (dollars in thousands) |
||||||||||||||
Aerospace |
$ | 211,172 | $ | 247,272 | $ | 36,100 | 17.1 | % | ||||||
Chemical processing |
147,960 | 166,092 | 18,132 | 12.3 | % | |||||||||
Land-based gas turbines |
103,001 | 124,117 | 21,116 | 20.5 | % | |||||||||
Other markets |
86,259 | 86,592 | 333 | 0.4 | % | |||||||||
Total product revenue |
548,392 | 624,073 | 75,681 | 13.8 | % | |||||||||
Other revenue |
11,444 | 12,933 | 1,489 | 13.0 | % | |||||||||
Net revenues |
$ | 559,836 | $ | 637,006 | $ | 77,170 | 13.8 | % | ||||||
Pounds by markets (in thousands) |
||||||||||||||
Aerospace |
7,660 | 8,851 | 1,191 | 15.5 | % | |||||||||
Chemical processing |
5,121 | 5,388 | 267 | 5.2 | % | |||||||||
Land-based gas turbines |
5,093 | 5,962 | 869 | 17.1 | % | |||||||||
Other markets |
4,834 | 3,074 | (1,760 | ) | (36.4 | )% | ||||||||
Total shipments |
22,708 | 23,275 | 567 | 2.5 | % | |||||||||
Average selling price per pound |
||||||||||||||
Aerospace |
$ | 27.57 | $ | 27.94 | $ | 0.37 | 1.3 | % | ||||||
Chemical processing |
28.89 | 30.83 | 1.94 | 6.7 | % | |||||||||
Land-based gas turbines |
20.22 | 20.82 | 0.60 | 3.0 | % | |||||||||
Other markets |
17.84 | 28.17 | 10.33 | 57.9 | % | |||||||||
Total product (excluding other revenue) |
24.15 | 26.81 | 2.66 | 11.0 | % | |||||||||
Total average selling price (including other revenue) |
24.65 | 27.37 | 2.72 | 11.0 | % |
41
Net Revenues. Net revenues increased by $77.2 million, or 13.8%, to $637.0 million in fiscal 2008 from $559.8 million in fiscal 2007. Volume for all products increased by 2.5% to 23.3 million pounds in fiscal 2008 from 22.7 million pounds in fiscal 2007. Volume of high-performance alloys increased by 11.2% to 22.8 million pounds in fiscal 2008 as compared to 20.5 million pounds in fiscal 2007. Volume of stainless steel wire decreased by 77.3% to 0.5 million pounds in fiscal 2008 as compared to 2.2 million pounds in fiscal 2007 as a result of the Company's strategy to reduce production of stainless steel wire and increase production of high-performance alloy wire due to higher average selling price available on high-performance alloy wire. It is anticipated that there will continue to be a recurring amount of stainless steel wire produced and sold into certain specialty markets. The aggregate average selling price per pound for all products increased by 11.0% to $27.37 per pound in fiscal 2008 from $24.65 per pound in fiscal 2007 because of changes in product mix (including market, form and alloy), an increased level of service center value-added business, and changes in raw material prices. Although nickel prices were lower for fiscal 2008 than fiscal 2007, the lower price of nickel was offset by increased prices for other raw materials that are significant in the manufacture of the Company's products, such as molybdenum, cobalt and chromium. Increased competition unfavorably impacted both average selling price and volume. The Company's consolidated backlog decreased by $7.1 million, or 3.0%, to $229.2 million at September 30, 2008 from $236.3 million at September 30, 2007. This was the result of the combination of a 2% increase in pounds and a 5% decrease in average selling price. Management believes completion of the expansion and upgrade of the Company's sheet finishing operations should continue to help the Company compete more effectively on lead time and cost, resulting in decreasing pricing pressure.
Sales to the aerospace industry increased by 17.1% to $247.3 million in fiscal 2008 from $211.2 million in fiscal 2007, due to a 1.3% increase in the average selling price per pound combined with a 15.5% increase in volume. The increase in the average selling price per pound is due to improved product mix that includes a higher percentage of specialty alloy products which have a higher value and a generally higher average selling price when compared to the product mix sold in fiscal 2007, and the effect of passing through higher raw material costs.
Sales to the chemical processing industry increased by 12.3% to $166.1 million in fiscal 2008 from $148.0 million in fiscal 2007, due to a 6.7% increase in the average selling price per pound combined with a 5.2% increase in volume. The increase in the average selling price per pound is primarily due to the effect of passing through higher raw material costs and changes in product mix (including form and alloy) when compared to the product mix sold in fiscal 2007. Volume in this market is affected by the project oriented nature of the market and economic activity.
Sales to the land-based gas turbine industry increased by 20.5% to $124.1 million for fiscal 2008 from $103.0 million in fiscal 2007, due to an increase of 3.0% in the average selling price per pound combined with a 17.1% increase in volume. The increase in the average selling price per pound is due to improved market demand and changes in form and alloys compared to fiscal 2007. Volume increased as a result of higher billet volume for fiscal 2008 compared to fiscal 2007.
Sales to other markets increased by 0.4% to $86.6 million in fiscal 2008 from $86.3 million in fiscal 2007, due to a 57.9% increase in average selling price per pound, which was partially offset by a 36.4% decrease in volume. The primary reason for the increase in average selling price per pound and the reduction in total volume was a decrease in the volume of stainless steel wire as a result of the Company's strategy to reduce production of stainless steel wire and focus on the production and sale of high-performance alloy wire. Stainless steel wire volume decreased by 77.3%, while volume of high-performance alloys sold to other markets decreased by 2.4% in fiscal 2008 as compared to fiscal 2007. Also contributing to the increase in average selling price is the change in product mix (both form and alloy), market demand and passing through of higher raw material costs compared to fiscal 2007. The primary reason for the decrease in total sales volume of high-performance alloys in the "other markets" category is due to a large FGD project which was included in fiscal 2007 and did not repeat this year.
42
Other Revenue. Other revenue increased by 13.0% to $12.9 million in fiscal 2008 from $11.4 million for fiscal 2007. The increase is due to higher activity in toll conversion, revenue recognized from the twenty year agreement to provide conversion services to Titanium Metals Corporation (as described in Note 13 of the accompanying consolidated financial statements), scrap sales and miscellaneous sales.
Cost of Sales. Cost of sales increased to $492.3 million, or 77.3% of net revenues in fiscal 2008 compared to $408.7 million, or 73.0% of net revenues in fiscal 2007. Cost of sales increased as a result of a combination of the following factors: (i) increased volumes, (ii) increased manufacturing costs due to planned and unplanned equipment outages, (iii) changes in product mix due to an increase in the production and sale of higher-cost alloy and forms, (iv) increased energy costs, and (v) increased raw material costs of molybdenum, cobalt and chromium partially offset by the lower nickel costs. In fiscal 2007 cost of sales was increased due to a one-time bonus accrual to union employees upon ratification of the collective bargaining agreement of $2.2 million (or 0.4% of net revenue), which did not repeat in fiscal 2008. This decrease was partially offset by higher wage rates for union employees and increased fringe benefit costs in fiscal 2008. Cost of sales in fiscal 2008 was also decreased by a $3.7 million (0.6% of net revenue) pension curtailment gain, which was recorded due to an amendment to freeze future pension benefit accruals for non-union employees in the U.S. The overall increase in cost of sales as a percentage of net revenues (and the corresponding decline in gross profit as a percentage of net revenue) can also be attributed to the increased competition (which lowered net revenue) as discussed above under "Overview". While the price of nickel was lower for fiscal 2008 than fiscal 2007, the lower price of nickel was offset by increased prices for other raw materials that are significant in the manufacture of the Company's products, such as molybdenum, cobalt and chromium. As reported by the London Metals Exchange, the average price per pound for 30-day cash buyers of nickel at September 30, 2008 was $8.07 compared to $13.40 at September 30, 2007, and the average price over the course of fiscal 2008 was higher than the 30-day cash average at September 30, 2008.
Selling, General and Administrative Expense. Selling, general and administrative expense increased by $2.8 million to $42.3 million in fiscal 2008 from $39.4 million in fiscal 2007 due to: (i) higher business activity causing commissions and sales expenses to increase $3.9 million, and (ii) the fiscal 2007 reduction in allowance for doubtful accounts of $0.4 million compared to fiscal 2008 to reflect the write-off history. These increases were partially offset by a decrease in stock compensation expense of $1.5 million. Selling, general and administrative expenses as a percentage of net revenues decreased to 6.6% for fiscal 2008 compared to 7.0% for fiscal 2007 due primarily to increased revenues.
Research and Technical Expense. Research and technical expense slightly increased by $0.3 million to $3.4 million, or 0.5% of net revenues, in fiscal 2008 compared to $3.1 million, or 0.6% of net revenues, in fiscal 2007 due to normal inflationary increases and increased staff levels earlier in fiscal 2008 required to support the transition of retiring employees.
Operating Income. As a result of the above factors, operating income in fiscal 2008 was $98.9 million compared to $108.5 million in fiscal 2007.
Interest Expense. Interest expense decreased by $3.0 million to $1.2 million in fiscal 2008 from $4.2 million for fiscal 2007. The decrease is due to a lower average balance outstanding resulting from: (i) the Company's application of proceeds from the equity offering that occurred near the end of the second quarter of fiscal 2007, (ii) cash generated from operations, and (iii) proceeds from the exercise of stock options which were used to reduce the outstanding debt balance.
Income Taxes. Income tax expense decreased to $35.1 million in fiscal 2008 from $38.5 million in fiscal 2007 due to lower pretax income. The effective tax rate for fiscal 2008 was 35.9% compared to 36.8% in fiscal 2007. The decrease in effective tax rate is primarily attributable to (i) lower blended state tax rate in the U.S. due to an apportionment change and (ii) a higher manufacturers deduction for U.S. based facilities.
Net Income. As a result of the above factors, net income decreased by $3.3 million, or 5.1%, to $62.8 million in fiscal 2008 compared to $66.1 million in fiscal 2007.
43
Year Ended September 30, 2007 Compared to Year Ended September 30, 2006
The following table includes a breakdown of net revenues, shipments and average selling prices to the markets served by Haynes for the periods shown.
($ in thousands)
|
Year Ended September 30, | Change | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2006 | 2007 | Amount | % | ||||||||||||||||
Net revenues |
$ | 434,405 | 100.0 | % | $ | 559,836 | 100.0 | % | $ | 125,431 | 28.9 | % | ||||||||
Cost of sales |
325,573 | 74.9 | % | 408,752 | 73.0 | % | 83,179 | 25.5 | % | |||||||||||
Gross profit |
108,832 | 25.1 | % | 151,084 | 27.0 | % | 42,252 | 38.8 | % | |||||||||||
Selling, general and administrative expense |
40,296 | 9.3 | % | 39,441 | 7.0 | % | (855 | ) | (2.1 | )% | ||||||||||
Research and technical expense |
2,659 | 0.6 | % | 3,116 | 0.6 | % | 457 | 17.2 | % | |||||||||||
Operating income |
65,877 | 15.2 | % | 108,527 | 19.4 | % | 42,650 | 64.7 | % | |||||||||||
Interest expense, net |
8,024 | 1.8 | % | 3,939 | 0.7 | % | (4,085 | ) | (50.9 | )% | ||||||||||
Income before income taxes |
57,853 | 13.3 | % | 104,588 | 18.7 | % | 46,735 | 80.8 | % | |||||||||||
Provision for (benefit from) income taxes |
22,313 | 5.1 | % | 38,468 | 6.9 | % | 16,155 | 72.4 | % | |||||||||||
Net income (loss) |
$ | 35,540 | 8.2 | % | $ | 66,120 | 11.8 | % | $ | 30,580 | 86.0 | % | ||||||||
By market
|
Year Ended
September 30, |
Change | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2006 | 2007 | Amount | % | ||||||||||
Net revenues (dollars in thousands) |
||||||||||||||
Aerospace |
$ | 165,747 | $ | 211,172 | $ | 45,425 | 27.4 | % | ||||||
Chemical processing |
129,422 | 147,960 | 18,538 | 14.3 | % | |||||||||
Land-based gas turbines |
77,947 | 103,001 | 25,054 | 32.1 | % | |||||||||
Other markets |
56,350 | 86,259 | 29,909 | 53.1 | % | |||||||||
Total product revenue |
429,466 | 548,392 | 118,926 | 27.7 | % | |||||||||
Other revenue |
4,939 | 11,444 | 6,505 | 131.7 | % | |||||||||
Net revenues |
$ | 434,405 | $ | 559,836 | $ | 125,431 | 28.9 | % | ||||||
Pounds by markets (in thousands) |
||||||||||||||
Aerospace |
7,121 | 7,660 | 539 | 7.6 | % | |||||||||
Chemical processing |
4,984 | 5,121 | 137 | 2.7 | % | |||||||||
Land-based gas turbines |
4,790 | 5,093 | 303 | 6.3 | % | |||||||||
Other markets |
4,749 | 4,834 | 85 | 1.8 | % | |||||||||
Total shipments |
21,644 | 22,708 | 1,064 | 4.9 | % | |||||||||
Average selling price per pound |
||||||||||||||
Aerospace |
$ | 23.28 | $ | 27.57 | $ | 4.29 | 18.4 | % | ||||||
Chemical processing |
25.97 | 28.89 | 2.93 | 11.3 | % | |||||||||
Land-based gas turbines |
16.27 | 20.22 | 3.95 | 24.3 | % | |||||||||
Other markets |
11.87 | 17.84 | 5.98 | 50.4 | % | |||||||||
Total product (excluding other revenue) |
19.84 | 24.15 | 4.31 | 21.7 | % | |||||||||
Total average selling price (including other revenue) |
20.07 | 24.65 | 4.58 | 22.8 | % |
44
Net Revenues. Net revenues increased by $125.4 million, or 28.9%, to $559.8 million in fiscal 2007 from $434.4 million in fiscal 2006. Volume for all products increased by 4.9% to 22.7 million pounds in fiscal 2007 from 21.6 million pounds in fiscal 2006. Volume of high-performance alloys increased by 11.5% to 20.5 million pounds in fiscal 2007 as compared to 18.4 million pounds in fiscal 2006. Volume of stainless steel wire decreased by 32.3% to 2.2 million pounds in fiscal 2007 as compared to 3.2 million pounds in fiscal 2006 as a result of the Company's strategy to reduce production of stainless steel wire and increase production of high-performance alloy wire due to higher average selling price available on high-performance alloy wire. The average selling price per pound for all products increased by 22.8% to $24.65 per pound in fiscal 2007 from $20.07 per pound in fiscal 2006 due primarily to good market demand and passing through higher raw material costs. The Company's consolidated backlog increased by $29.4 million, or 14.2%, to $236.3 million at September 30, 2007 from $206.9 million at September 30, 2006.
Sales to the aerospace industry increased by 27.4% to $211.2 million in fiscal 2007 from $165.8 million in fiscal 2006, due to a 18.4% increase in the average selling price per pound combined with a 7.6% increase in volume. The increase in the average selling price per pound was due to improved product mix that included a higher percentage of specialty alloy products and forms with a higher value and average selling price when compared to the product mix sold in fiscal 2006, and the effect of passing through higher raw material costs. Volume improved due to good market demand as reflected in the strength in the build rate for new aircraft.
Sales to the chemical processing industry increased by 14.3% to $148.0 million in fiscal 2007 from $129.4 million in fiscal 2006, due to a 11.3% increase in the average selling price per pound combined with a 2.7% increase in volume. The increase in the average selling price per pound was due to improved market demand and the effect of passing through higher raw material costs.
Sales to the land-based gas turbine industry increased by 32.1% to $103.0 million for fiscal 2007 from $77.9 million in fiscal 2006, due to an increase of 24.3% in the average selling price per pound combined with a 6.3% increase in volume. The increase in the average selling price per pound was due to improved market demand and the effect of passing through higher raw material costs. Volume improved as a result of the generally improved economy and higher demand from power generation, oil and gas production, and alternative power systems applications.
Sales to other markets increased by 53.1% to $86.3 million in fiscal 2007 from $56.4 million in fiscal 2006, due to a 50.4% increase in average selling price per pound combined with a 1.8% increase in volume. The primary reason for the selling price increase was a decrease in the volume of stainless steel wire of 32.3%, and an increase in volume of high-performance alloys sold to other markets of 75.4% in fiscal 2007 as compared to fiscal 2006. The increase in the average selling price was also due to market demand and passing through of higher raw material costs compared to fiscal 2006. The reason for the increase in total sales volume of the "other markets" category was due to the Company's continuing effort to expand the amount sold into this category and the number of other markets within this category the Company services beyond the traditional three major markets typically discussed. In fiscal 2007 sales to the flue gas desulphurization (FGD) market increased by $14.4 million, or 178.0%, to $22.5 million and volume increased by 120.2%, compared to fiscal 2006. As previously discussed, the volume of stainless steel wire decreased in fiscal 2007 when compared to fiscal 2006 as a result of the Company's strategy to reduce production of stainless steel wire to allow greater production of high-performance wire.
Other Revenue. Other revenue increased by 131.7% to $11.4 million in fiscal 2007 from $4.9 million for fiscal 2006. The increase was due to higher activity in toll conversion, revenue recognized from the TIMET agreement, scrap sales and miscellaneous sales.
Cost of Sales. Cost of sales as a percentage of net revenues decreased to 73.0% in fiscal 2007 from 74.9% in fiscal 2006. This decrease in the percentage was attributed to a combination of the following factors: (i) improved product pricing combined with overall improvement in volume, which resulted in the increased absorption of fixed manufacturing costs, (ii) reductions in manufacturing cost resulting from the
45
capital improvements program, and (iii) decreases in energy costs (primarily natural gas). These positive factors were partially offset by higher raw material costs and a bonus payment to union employees upon ratification of the collective bargaining agreement of $2.2 million (0.4% of net revenue). Raw material costs were significantly higher in fiscal 2007 than in fiscal 2006, primarily as a result of increased prices for nickel, which made up approximately 63% of the Company's raw material costs. Although, as reported by the London Metals Exchange, the average price per pound for 30-day cash buyers of nickel at September 30, 2007 was $13.40 compared to $13.67 at September 30, 2006, the average price over the course of fiscal 2007 was higher than fiscal 2006.
Selling, General and Administrative Expense. Selling, general and administrative expense decreased by $0.9 million to $39.4 million in fiscal 2007 from $40.3 million in fiscal 2006. The decrease was primarily attributable to $1.1 million of costs incurred in fiscal 2006 related to strategic alternatives that did not repeat in fiscal 2007. Selling, general and administrative expense as a percentage of net revenues decreased to 7.0% in fiscal 2007 compared to 9.3% for fiscal 2006 due primarily to the increased level of net revenues.
Research and Technical Expense. Research and technical expense increased slightly by $0.5 million to $3.1 million, or 0.6% of net revenues, in fiscal 2007 compared to $2.7 million, or 0.6% of net revenues, in fiscal 2006.
Operating Income. As a result of the above factors, operating income in fiscal 2007 was $108.5 million compared to $65.9 million in fiscal 2006.
Interest Expense. Interest expense decreased by $4.1 million to $3.9 million in fiscal 2007 from $8.0 million for fiscal 2006. The decrease was due to a lower average balance outstanding slightly offset by a higher interest rate and less interest capitalized on long-term capital projects.
Income Taxes. Income tax expense increased to $38.5 million in fiscal 2007 from $22.3 million in fiscal 2006 due to higher pretax income. The effective tax rate for fiscal 2007 was 36.8% compared to 38.6% in fiscal 2006. The decrease in effective tax rate was primarily attributable to (i) amended tax returns to claim favorable items from extraterritorial income exclusion and foreign tax credits and (ii) higher foreign taxable income at a lower tax rate as compared to taxable income in the U.S. at a higher tax rate.
Net Income. As a result of the above factors, net income increased by $30.6 million, or 86.0%, to $66.1 million in fiscal 2007 compared to $35.5 million in fiscal 2006.
46
Liquidity and Capital Resources
Comparative Cash Flow Analysis
During fiscal 2008, the Company's primary sources of cash were (i) cash from operations (ii) borrowings under its U.S. revolving credit facility with a group of lenders led by Wachovia Capital Finance Corporation (Central) (described below), and (iii) the exercise of an additional 177,386 stock options in fiscal 2008. At September 30, 2008, the Company had cash and cash equivalents of approximately $7.1 million compared to cash and cash equivalents of approximately $5.7 million at September 30, 2007.
Net cash provided by operating activities was $41.3 million in fiscal 2008, as compared to cash provided by operating activities of $4.6 million in fiscal 2007. At September 30, 2008, inventory balances (net of foreign currency adjustments) were approximately $21.6 million higher than at September 30, 2007, as a result of the continued increase in costs of raw materials, a higher level of inventory required to be maintained to support the increased level of sales and a level of safety stock in order to continue production and shipments through the planned outages related to the capital upgrades. In addition, the pension and postretirement benefits balance decreased by $12.5 million due to the payments to the plans and plan amendments. Net cash used in investing activities was $21.6 million in fiscal 2008, as a result of the continuing capital expenditure program and the Asian distribution expansion and acquisition. As a result of the above, borrowings on the revolving credit facility decreased by $23.7 million. Taxes will be paid related to the TIMET transaction primarily in the first quarter of fiscal 2009. Also included in cash from financing activities is $3.2 million for the excess tax benefit from the exercise of 177,386 stock options in fiscal 2008.
Net cash provided by operating activities was $4.6 million (which includes the proceeds, net of expenses, of the $50.0 million up-front payment received from TIMET) in fiscal 2007, as compared to cash provided by operating activities of $0.3 million in fiscal 2006. At September 30, 2007, inventory balances (net of foreign currency adjustments) were approximately $103.1 million higher than at September 30, 2006, as a result of the continued increase in costs of raw materials (nickel, molybdenum and cobalt), a higher level of inventory required to be maintained to support the increased level of sales and a level of safety stock in order to continue production and shipments through the planned outages related to the capital upgrades. In addition, the accounts receivable balance increased by $26.3 million due to the increased level of sales. Slightly offsetting the inventory and accounts receivable increase is an increase in accounts payable and accrued expenses, which provided cash of $12.6 million. Net cash used in investing activities was $16.1 million in fiscal 2007, as a result of the continuing capital expenditure program. Borrowings on the revolving credit facility decreased by $81.0 million as a result of application of the proceeds from the Company's sale of common stock and cash generated from operations, which included the proceeds, net of expenses, of the $50.0 million up-front payment received from TIMET, to reduce borrowings. Taxes will be paid related to the TIMET transaction primarily in the first quarter of fiscal 2009. Also included in cash from financing activities is $10.9 million for the excess tax benefit from the exercise of 450,000 stock options in the underwritten public offering and the exercise of an additional 157,237 stock options in the fourth quarter of fiscal 2007.
Future Sources of Liquidity
The Company's sources of cash for fiscal 2009 are expected to consist primarily of cash generated from operations, cash on hand, and borrowings under the U.S. revolving credit facility. The U.S. revolving credit facility provides borrowings in a maximum amount of $120.0 million, subject to a borrowing base formula and certain reserves. At September 30, 2008, the Company had cash of approximately $7.1 million, an outstanding balance of $11.8 million on the U.S. revolving credit facility and access to a total of approximately $108.2 million under the U.S. revolving credit facility, subject to borrowing base and certain
47
reserves. Management believes that the resources described above will be sufficient to fund planned capital expenditures and working capital requirements over the next twelve months.
U.S. revolving credit facility: The U.S. revolving credit facility provides for revolving loans in a maximum amount of $120.0 million. Borrowings under the U.S. revolving credit facility bear interest at the Company's option at either Wachovia Bank, National Association's "prime rate," plus up to 1.5% per annum, or the adjusted Eurodollar rate used by the lender, plus up to 3.0% per annum. As of September 30, 2008, the U.S. revolving credit facility had an outstanding balance of $11.8 million. During fiscal 2008 it bore interest at a weighted average interest rate of 5.36%. In addition, the Company must pay monthly in arrears a commitment fee of 0.375% per annum on the unused amount of the U.S. revolving credit facility total commitment. For letters of credit, the Company must pay 2.5% per annum on the daily outstanding balance of all issued letters of credit, plus customary fees for issuance, amendments, and processing. The Company is subject to certain covenants as to adjusted EBITDA and fixed charge coverage ratios and other customary covenants, including covenants restricting the incurrence of indebtedness, the granting of liens, the sale of assets and the declaration of dividends and other distributions on the Company's capital stock. As of September 30, 2008, the most recent required measurement date under the agreement documentation, the Company was in compliance with these covenants. The U.S. revolving credit facility matures on April 12, 2009. Borrowings under the U.S. revolving credit facility are collateralized by a pledge of substantially all of the U.S. assets of the Company, including equity interests in its U.S. subsidiaries, but excluding its four-high Steckel rolling mill and related assets, which are pledged to TIMET. The U.S. revolving credit facility is also secured by a pledge of 65% of the equity interests in each of the Company's foreign subsidiaries.
Extension of U.S. Revolving Credit Facility
Haynes and Wachovia Capital Finance Corporation (Central) ("Wachovia") entered into a Second Amended and Restated Loan and Security Agreement (the "Amended Agreement") with an effective date of November 18, 2008, which amended and restated the revolving credit facility between Haynes and Wachovia dated August 31, 2004. Among other items, the Amended Agreement extends the maturity date of the U.S. revolving credit facility to September 30, 2011, increases the margin included in the interest rate from 1.5% per annum to 2.5% per annum, permits the Company to pay dividends and repurchase common stock if certain financial metrics are met, and eliminates the EBITDA covenant. The maximum revolving loan amount under the Amended Agreement continues to be $120.0 million.
Future Uses of Liquidity
The Company's primary uses of cash over the next twelve months are expected to consist of expenditures related to:
Planned fiscal 2009 capital spending is targeted at approximately $15.1 million, most of which is maintenance spending. Depending upon economic conditions, the Company may make further upgrades in fiscal 2009; however, capital projects in fiscal 2009 will be focused on improving and maintaining the equipment reliability and are not planned to equal the amount spent in either fiscal 2007 or fiscal 2008. At this time, management does not anticipate prolonged planned equipment outages as a result of upgrades in fiscal 2009.
48
Contractual Obligations
The following table sets forth the Company's contractual obligations for the periods indicated, as of September 30, 2008:
|
Payments Due by Period | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Obligations
(1)
|
Total |
Less than
1 year |
1-3 Years | 3-5 Years |
More than
5 years |
|||||||||||
|
(in thousands)
|
|||||||||||||||
Debt obligations (including interest) (2) |
$ | 13,522 | $ | 13,522 | $ | | $ | | $ | | ||||||
Operating lease obligations |
10,588 | 3,305 | 3,724 | 1,157 | 2,402 | |||||||||||
Capital lease obligations |
395 | 33 | 66 | 66 | 230 | |||||||||||
Raw material contracts |
70,045 | 55,495 | 14,550 | | | |||||||||||
Mill supplies contracts |
208 | 208 | | | | |||||||||||
Capital projects |
1,387 | 1,387 | | | | |||||||||||
Pension plan (3) |
41,137 | 9,057 | 18,180 | 13,900 | | |||||||||||
Other postretirement benefits (4) |
48,000 | 4,200 | 9,000 | 9,800 | 25,000 | |||||||||||
Non-compete obligations (5) |
330 | 110 | 220 | | | |||||||||||
Total |
$ | 185,612 | $ | 87,317 | $ | 45,740 | $ | 24,923 | $ | 27,632 | ||||||
At September 30, 2008, the Company also had $0.03 million outstanding under a letter of credit. The letter of credit is outstanding in connection with a building lease obligation.
Inflation
Historically, the Company has had the ability to pass on to customers both increases in consumable costs and material costs because of the value-added contribution the material makes to the final product. Material comprises the most significant portion of the product costs. Nickel, cobalt and molybdenum, the primary raw materials used to manufacture the Company's products, all have experienced significant fluctuations in price. Until now the Company has been able to pass the cost on to the customers, however, in the future the Company may not be able to successfully offset rapid increases in the price of nickel or other raw material. In the event that raw material price increases occur that the Company is unable to pass on to its customers, its cash flows or results of operations would be materially adversely affected.
49
Critical Accounting Policies and Estimates
Overview
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, income taxes, asset impairments, retirement benefits, matters related to product liability lawsuits and environmental matters. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, pension asset mix and, in some cases, actuarial techniques, and various other factors that are believed to be reasonable under the circumstances. The results of this process form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company routinely reevaluates these significant factors and makes adjustments where facts and circumstances dictate. Actual results may differ from these estimates under different assumptions or conditions.
The Company's accounting policies are more fully described in Note 2 to the consolidated financial statements included in Item 8 of this Form 10-K. The Company has identified certain critical accounting policies, which are described below. The following listing of policies is not intended to be a comprehensive list of all of the Company's accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management's judgment in their application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result.
Revenue Recognition
Revenue is recognized when collectability is reasonably assured and when title passes to the customer which is generally at the time of shipment (F.O.B. shipping point or at a foreign port for certain export customers). Allowances for sales returns are recorded as a component of net revenues in the periods in which the related sales are recognized. Management determines this allowance based on historical experience and the Company has not had any history of returns that have exceeded its recorded allowances. Should returns increase above historical experience, additional allowances may be required.
Pension and Postretirement Benefits
The Company has defined benefit pension and postretirement plans covering most of its current and former employees. Significant elements in determining the assets or liabilities and related income or expense for these plans are the expected return on plan assets (if any), the discount rate used to value future payment streams, expected trends in health care costs, and other actuarial assumptions. Annually, the Company evaluates the significant assumptions to be used to value its pension and postretirement plan assets and liabilities based on current market conditions and expectations of future costs. If actual results are less favorable than those projected by management, additional expense may be required in future periods.
The Company believes the expected rate of return on plan assets of 8.5% is a reasonable assumption on a long-term perspective based on its asset allocation of 55% equity, 43% fixed income and 2% other. The Company's assumption for expected rate of return for plan assets for equity, fixed income, and real estate/other are 10.25%, 5.5% and 8.5%, respectively. This position is supported through a review of investment criteria, and consideration of historical returns over a several year period.
50
Salaried employees hired after December 31, 2005 and hourly employees hired after June 30, 2007 are not covered by the pension plan; however, they are eligible for an enhanced matching program of the defined contribution plan (401(k)). Effective December 31, 2007, the U.S. pension plan was amended to freeze benefits for all non-union employees in the U.S.
Impairment of Long-lived Assets, Goodwill and Other Intangible Assets
The Company reviews long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of the asset to the undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount exceeds the fair value of the asset. The Company reviews goodwill for impairment annually or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. Recoverability of goodwill is measured by a comparison of the carrying amount to the fair value. If the carrying amount exceeds its fair value, an impairment charge is recognized to the extent that the implied fair value exceeds its carrying amount. The implied fair value of goodwill is the residual fair value, if any, after allocating the fair value to all of the assets (recognized and unrecognized) and all of the liabilities. The fair value is generally determined using a combination of a market value approach using quoted market prices and an income approach using discounted cash flow projections. Changes in the market value and cash flow projections of the Company could have significant impact on whether or not goodwill is impaired and the amount of the impairment. Assumptions and estimates with respect to estimated future cash flows used in the evaluation are subject to a high degree of judgment and complexity. The Company reviewed goodwill and trademarks for impairment as of August 31, 2008, and concluded no impairment adjustment was necessary. However, as a result of a recent decline in the Company's common stock price, goodwill will be evaluated on a quarterly basis for potential impairment if such conditions continue.
Share-Based Compensation
The Company has two stock option plans that authorize the granting of non-qualified stock options to certain key employees and non-employee directors for the purchase of a maximum of 1,500,000 shares of the Company's common stock. The original option plan was adopted in August 2004 pursuant to the plan of reorganization and provides the grant of options to purchase up to 1,000,000 shares of the Company's common stock. In January 2007, the Company's Board of Directors adopted a second option plan that provides for options to purchase up to 500,000 shares of the Company's common stock. Each plan provides for the adjustment of the maximum number of shares for which options may be granted in the event of a stock split, extraordinary dividend or distribution or similar recapitalization event. Unless the Compensation Committee determines otherwise, options granted under the option plans are exercisable for a period of ten years for the date of grant and vest 33 1 / 3 % per year over three years from the grant date.
On October 1, 2005, the Company adopted SFAS No. 123(R), Share-Based Payment , a replacement of SFAS No. 123, Accounting for Stock-Based Compensation , and a rescission of APB Opinion No. 25, Accounting for Stock Issued to Employees . The statement requires compensation costs related to share-based payment transactions to be recognized in the financial statements. This statement applies to all awards granted after the effective date and to modifications, repurchases or cancellations of existing awards. Additionally, under the modified prospective method of adoption, the Company recognizes compensation expense for the portion of outstanding awards on the adoption date for which the requisite service period has not yet been rendered based on the grant-date fair value of those awards. The amount of compensation cost will be measured based upon the grant date fair value. The fair value of the option grants is estimated on the date of grant using the Black-Scholes option pricing model with assumptions on dividend yield, risk-free interest rate, expected volatilities, expected forfeiture rate, and expected lives of the options.
51
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes ("SFAS No. 109"), which requires deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The determination of whether or not a valuation allowance is needed is based upon an evaluation of both positive and negative evidence and the expected reversal date of temporary differences to be deducted on future income tax returns. In its evaluation of the need for a valuation allowance, the Company assesses prudent and feasible tax planning strategies and expected reversal dates. The ultimate amount of deferred tax assets realized could be different from those recorded, as influenced by potential changes in enacted tax laws and the availability of future taxable income.
On October 1, 2007, the Company adopted FASB Interpretation No. 48 (FIN 48) Accounting for Uncertainty in Income Taxes an interpretation of SFAS 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in an income tax return. FIN 48 also provides guidance related to reversal of tax positions, balance sheet classification, interest and penalties, interim period accounting, disclosure and transition.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurement ("SFAS 157"). SFAS 157 addresses standardizing the measurement of fair value for companies who are required to use a fair value measure for recognition or disclosure purposes. The FASB defines fair value as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." On February 12, 2008, the FASB issued Staff Position 157-2 ("FSP 157-2") which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. Therefore for financial assets and liabilities the statement is effective for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years. The Company is required to adopt SFAS 157 (excluding nonfinancial assets and liabilities) beginning on October 1, 2008. The Company does not expect the implementation of SFAS 157 and FSP 157-2 in fiscal 2009 to have a material impact on its financial position, results of operations or cash flows.
In February 2007, the FASB issued FASB Statement No. 159, Establishing the Fair Value Option for Financial Assets and Liabilities ("SFAS 159"), to permit all entities to elect to measure eligible financial instruments at fair value. SFAS 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS 157, Fair Value Measurements . An entity is prohibited from retrospectively applying SFAS 159, unless it chooses early adoption. The Company is required to adopt SFAS 159 beginning October 1, 2008. Due to making no election on any of the Company's instruments, the adoption of SFAS No. 159 on October 1, 2008 had no impact on the Company's consolidated financial statements.
In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), Business Combinations ("SFAS 141(R)"). SFAS 141(R) requires that the fair value of the purchase price of an acquisition including the issuance of equity securities be determined on the acquisition date; requires that all assets, liabilities, noncontrolling interests, contingent consideration, contingencies, and in-process research and development costs of an acquired business be recorded at fair value at the acquisition date; requires that acquisition costs generally be expensed as incurred; requires that restructuring costs generally be expensed in periods subsequent to the acquisition date; and requires that changes in deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax
52
expense. SFAS 141(R) also expands disclosures related to business combinations. SFAS 141(R) will be applied prospectively to business combinations occurring after the beginning of the Company's fiscal year 2010, except that business combinations consummated prior to the effective date must apply SFAS 141(R) income tax requirements immediately upon adoption. The Company is currently evaluating the impact of SFAS 141(R) related to future acquisitions, if any, on its financial position, results of operations and cash flows.
In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51 ("SFAS 160"). SFAS 160 requires that noncontrolling interests be reported as a separate component of equity, that net income attributable to the parent and to the noncontrolling interest be separately identified in the consolidated statement of operations, that changes in a parent's ownership interest be accounted for as equity transactions, and that, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. SFAS 160 will be applied prospectively, except for presentation and disclosure requirements which will be applied retrospectively, as of the beginning of the Company's fiscal year 2010. The Company does not currently have noncontrolling interests, and therefore the adoption of SFAS 160 is not expected to have an impact on the Company's financial position, results of operations or cash flows.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities ("SFAS 161")an amendment of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities . SFAS 161 is intended to improve financial reporting transparency regarding derivative instruments and hedging activities by providing investors with a better understanding of their effects on financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company will adopt SFAS 161 on October 1, 2009 and is currently evaluating the effect the adoption will have on its consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles ("SFAS 162"). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for non-governmental entities. SFAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles . Any effect of applying the provisions of SFAS 162 is to be reported as a change in accounting principle in accordance with SFAS No. 154, Accounting Changes and Error Corrections . The Company will adopt SFAS 162 once it is effective and is currently evaluating the effect the adoption will have on its consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position ("FSP") No. 142-3, Determination of the Useful Life of Intangible Assets ("FSP 142-3"). This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, Business Combinations , and other U.S. GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and early adoption is prohibited. Accordingly, this FSP is effective for the Company on October 1, 2009. The Company is currently evaluating the effect the adoption will have on its consolidated financial statements.
53
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in market rates and prices. The Company is exposed to various market risks, including changes in interest rates, foreign currency exchange rates and the price of nickel, which is a commodity.
Changes in interest rates affect the Company's interest expense on variable rate debt. All of the Company's outstanding debt was variable rate debt at September 30, 2007 and 2008. A hypothetical 10% increase in the interest rate on variable rate debt would have resulted in additional interest expense of approximately $0.3 million for the fiscal year ended September 30, 2007 and $0.1 million for the fiscal year ended September 30, 2008. The Company has not entered into any derivative instruments to hedge the effects of changes in interest rates.
The foreign currency exchange risk exists primarily because the foreign subsidiaries maintain receivables and payables denominated in currencies other than their functional currency or the U.S. dollar. The foreign subsidiaries manage their own foreign currency exchange risk. The U.S. operations transact their foreign sales in U.S. dollars, thereby avoiding fluctuations in foreign exchange rates. Any exposure aggregating more than $500,000 requires approval from the Company's Vice President of Finance. The Company is not currently party to any currency contracts.
Fluctuations in the price of nickel, the Company's most significant raw material, subject the Company to commodity price risk. The Company manages its exposure to this market risk through internally established policies and procedures, including negotiating raw material escalators within product sales agreements, and continually monitoring and revising customer quote amounts to reflect the fluctuations in market prices for nickel. The Company does not use derivative instruments to manage this market risk. The Company monitors its underlying market risk exposure from a rapid change in nickel prices on an ongoing basis and believes that it can modify or adapt its strategies as necessary. The Company periodically purchases raw material forward with certain suppliers. However, there is a risk that the Company may not be able to successfully offset a rapid increase in the cost of raw material in the future as it has been able to in the past.
54
Item 8. Financial Statements and Supplementary Data
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements of Haynes International, Inc. as of September 30, 2008 and 2007 and for the years ended September 30, 2008, September 30, 2007 and September 30, 2006
|
Page | |||
---|---|---|---|---|
Report of Independent Registered Public Accounting Firm |
56 | |||
Consolidated Balance Sheets |
58 |
|||
Consolidated Statements of Operations |
59 |
|||
Consolidated Statements of Comprehensive Income |
60 |
|||
Consolidated Statements of Stockholders' Equity |
61 |
|||
Consolidated Statements of Cash Flows |
62 |
|||
Notes to Consolidated Financial Statements |
63 |
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
Haynes International, Inc.
Kokomo, IN
We have audited the accompanying consolidated balance sheets of Haynes International, Inc. and subsidiaries (the "Company") as of September 30, 2008 and 2007, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2008. We also have audited the Company's internal control over financial reporting as of September 30, 2008, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Haynes International, Inc. and subsidiaries as of September 30, 2008 and
56
2007, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2008, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As discussed in Notes 2 and 8 to the consolidated financial statements, effective October 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes , and effective September 30, 2007, the Company adopted Statement of Financial Accounting Standard No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans .
/s/ DELOITTE & TOUCHE LLP
Indianapolis, IN
November 24, 2008
57
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
|
September 30,
2007 |
September 30,
2008 |
|||||||
---|---|---|---|---|---|---|---|---|---|
ASSETS |
|||||||||
Current assets: |
|||||||||
Cash and cash equivalents |
$ | 5,717 | $ | 7,058 | |||||
Restricted cashcurrent portion |
110 | 110 | |||||||
Accounts receivable, less allowance for doubtful accounts of $1,339 and $1,354 respectively |
106,414 | 99,295 | |||||||
Inventories |
286,302 | 304,915 | |||||||
Income taxes receivable |
1,760 | | |||||||
Deferred income taxes |
10,801 | 9,399 | |||||||
Other current assets |
1,457 | 2,573 | |||||||
Total current assets |
412,561 | 423,350 | |||||||
Property, plant and equipment, net |
97,860 | 107,302 | |||||||
Deferred income taxeslong term portion |
22,738 | 32,310 | |||||||
Prepayments and deferred charges |
3,702 | 2,741 | |||||||
Restricted cashlong term portion |
330 | 220 | |||||||
Goodwill |
41,252 | 43,737 | |||||||
Other intangible assets, net |
8,526 | 7,907 | |||||||
Total assets |
$ | 586,969 | $ | 617,567 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|||||||||
Current liabilities: |
|||||||||
Accounts payable |
$ | 48,254 | $ | 41,939 | |||||
Accrued expenses |
12,189 | 12,729 | |||||||
Income taxes payable |
| 7,482 | |||||||
Accrued pension and postretirement benefits |
14,647 | 15,016 | |||||||
Revolving credit facilities |
35,549 | 11,812 | |||||||
Deferred revenuecurrent portion |
2,500 | 2,500 | |||||||
Current maturities of long-term obligations |
110 | 1,515 | |||||||
Total current liabilities |
113,249 | 92,993 | |||||||
Long-term obligations (less current portion) |
3,074 | 1,582 | |||||||
Deferred revenue (less current portion) |
45,329 | 42,830 | |||||||
Non-current income taxes payable |
| 276 | |||||||
Accrued pension and postretirement benefits |
108,940 | 100,343 | |||||||
Total liabilities |
270,592 | 238,024 | |||||||
Commitments and contingencies (Notes 9 and 10) |
| | |||||||
Stockholders' equity: |
|||||||||
Common stock, $0.001 par value (40,000,000 shares authorized, 11,807,237 and
|
12 | 12 | |||||||
Preferred stock, $0.001 par value (20,000,000 shares authorized, 0 shares issued and outstanding) |
| | |||||||
Additional paid-in capital |
218,504 | 225,821 | |||||||
Accumulated earnings |
93,880 | 155,831 | |||||||
Accumulated other comprehensive income (loss) |
3,981 | (2,121 | ) | ||||||
Total stockholders' equity |
316,377 | 379,543 | |||||||
Total liabilities and stockholders' equity |
$ | 586,969 | $ | 617,567 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
58
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
|
Year Ended
September 30, 2006 |
Year Ended
September 30, 2007 |
Year Ended
September 30, 2008 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Net revenues |
$ | 434,405 | $ | 559,836 | $ | 637,006 | |||||
Cost of sales |
325,573 | 408,752 | 492,349 | ||||||||
Gross profit |
108,832 | 151,084 | 144,657 | ||||||||
Selling, general and administrative expense |
40,296 | 39,441 | 42,277 | ||||||||
Research and technical expense |
2,659 | 3,116 | 3,441 | ||||||||
Operating income |
65,877 | 108,527 | 98,939 | ||||||||
Interest income |
(97 | ) | (227 | ) | (188 | ) | |||||
Interest expense |
8,121 | 4,166 | 1,213 | ||||||||
Income before income taxes |
57,853 | 104,588 | 97,914 | ||||||||
Provision for income taxes |
22,313 | 38,468 | 35,136 | ||||||||
Net income |
$ | 35,540 | $ | 66,120 | $ | 62,778 | |||||
Net income per share: |
|||||||||||
Basic |
$ | 3.55 | $ | 6.07 | $ | 5.27 | |||||
Diluted |
$ | 3.46 | $ | 5.89 | $ | 5.22 | |||||
Weighted average shares outstanding: |
|||||||||||
Basic |
10,000,000 | 10,896,067 | 11,903,289 | ||||||||
Diluted |
10,270,642 | 11,230,101 | 12,026,440 |
The accompanying notes are an integral part of these consolidated financial statements.
59
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
Year Ended
September 30, 2006 |
Year Ended
September 30, 2007 |
Year Ended
September 30, 2008 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Net income |
$ | 35,540 | $ | 66,120 | $ | 62,778 | |||||
Other comprehensive income (loss), net of tax: |
|||||||||||
Pension curtailment |
| | 2,701 | ||||||||
Pension and postretirement |
(217 | ) | 217 | (5,429 | ) | ||||||
Foreign currency translation adjustment |
1,570 | 3,441 | (3,374 | ) | |||||||
Other comprehensive income (loss) |
1,353 | 3,658 | (6,102 | ) | |||||||
Comprehensive income |
$ | 36,893 | $ | 69,778 | $ | 56,676 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
60
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
|
Common Stock |
|
|
|
Accumulated
Other Comprehensive Income (Loss) |
|
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Additional
Paid-in Capital |
Accumulated
Earnings (Deficit) |
Deferred
Stock Compensation |
Total
Stockholders' Equity |
|||||||||||||||||||
|
Shares | Par | |||||||||||||||||||||
Balance October 1, 2005 |
10,000,000 | $ | 10 | $ | 120,972 | $ | (7,780 | ) | $ | (821 | ) | $ | (512 | ) | $ | 111,869 | |||||||
Net income |
35,540 | 35,540 | |||||||||||||||||||||
Other comprehensive income |
1,353 | 1,353 | |||||||||||||||||||||
Reclass reporting of deferred stock compensation |
(821 | ) | 821 | | |||||||||||||||||||
Stock compensation |
2,786 | 2,786 | |||||||||||||||||||||
Balance September 30, 2006 |
10,000,000 | 10 | 122,937 | 27,760 | | 841 | 151,548 | ||||||||||||||||
Net income |
66,120 | 66,120 | |||||||||||||||||||||
Other comprehensive income |
3,658 | 3,658 | |||||||||||||||||||||
Adoption of SFAS No. 158 (net of tax) |
(518 | ) | (518 | ) | |||||||||||||||||||
Equity offering, net |
1,200,000 | 1 | 72,751 | 72,752 | |||||||||||||||||||
Exercise of stock options |
607,237 | 1 | 19,680 | 19,681 | |||||||||||||||||||
Stock compensation |
3,136 | 3,136 | |||||||||||||||||||||
Balance September 30, 2007 |
11,807,237 | 12 | 218,504 | 93,880 | | 3,981 | 316,377 | ||||||||||||||||
Net income |
62,778 | 62,778 | |||||||||||||||||||||
Other comprehensive loss |
(6,102 | ) | (6,102 | ) | |||||||||||||||||||
Adoption of FIN 48 |
(827 | ) | (827 | ) | |||||||||||||||||||
Exercise of stock options |
177,386 | 5,667 | 5,667 | ||||||||||||||||||||
Stock compensation |
1,650 | 1,650 | |||||||||||||||||||||
Balance September 30, 2008 |
11,984,623 | $ | 12 | $ | 225,821 | $ | 155,831 | $ | | $ | (2,121 | ) | $ | 379,543 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
61
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
Year Ended
September 30, 2006 |
Year Ended
September 30, 2007 |
Year Ended
September 30, 2008 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 35,540 | $ | 66,120 | $ | 62,778 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Depreciation |
6,926 | 7,501 | 8,934 | |||||||||
Amortization |
1,964 | 1,146 | 1,119 | |||||||||
Stock compensation expense |
2,786 | 3,136 | 1,650 | |||||||||
Excess tax benefit from option exercises |
| (10,869 | ) | (3,187 | ) | |||||||
Deferred revenue |
| 50,000 | | |||||||||
Deferred revenueportion recognized |
| (2,171 | ) | (2,499 | ) | |||||||
Deferred income taxes |
(2,644 | ) | 3,928 | (7,511 | ) | |||||||
Pension curtailment gain |
| | (3,659 | ) | ||||||||
Loss on disposition of property |
140 | 134 | 321 | |||||||||
Change in assets and liabilities, net of effect from acquisition: |
||||||||||||
Accounts receivable |
(18,125 | ) | (26,308 | ) | 5,121 | |||||||
Inventories |
(30,122 | ) | (103,100 | ) | (21,569 | ) | ||||||
Other assets |
(216 | ) | (2,573 | ) | 28 | |||||||
Accounts payable and accrued expenses |
(925 | ) | 12,558 | (4,021 | ) | |||||||
Income taxes |
1,901 | 8,754 | 12,604 | |||||||||
Accrued pension and postretirement benefits |
3,043 | (3,680 | ) | (8,826 | ) | |||||||
Net cash provided by operating activities |
268 | 4,576 | 41,283 | |||||||||
Cash flows from investing activities: |
||||||||||||
Additions to property, plant and equipment |
(10,668 | ) | (16,226 | ) | (18,685 | ) | ||||||
Asian distribution expansion and acquisition |
| | (3,000 | ) | ||||||||
Change in restricted cash |
110 | 110 | 110 | |||||||||
Net cash used in investing activities |
(10,558 | ) | (16,116 | ) | (21,575 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Net increase (decrease) in revolving credit facility |
12,368 | (81,287 | ) | (23,737 | ) | |||||||
Proceeds from equity offering, net |
| 72,752 | | |||||||||
Proceeds from exercise of stock options |
| 8,478 | 2,480 | |||||||||
Excess tax benefit from option exercises |
| 10,869 | 3,187 | |||||||||
Changes in long-term obligations |
1,009 | (119 | ) | (135 | ) | |||||||
Net cash provided by (used in) financing activities |
13,377 | 10,693 | (18,205 | ) | ||||||||
Effect of exchange rates on cash |
209 | 382 | (162 | ) | ||||||||
Increase (decrease) in cash and cash equivalents |
3,296 | (465 | ) | 1,341 | ||||||||
Cash and cash equivalents: |
||||||||||||
Beginning of period |
2,886 | 6,182 | 5,717 | |||||||||
End of period |
$ | 6,182 | $ | 5,717 | 7,058 | |||||||
Supplemental disclosures of cash flow information: |
||||||||||||
Cash paid during period for: |
||||||||||||
Interest (net of capitalized interest) |
$ | 7,992 | $ | 3,794 | $ | 1,115 | ||||||
Income taxes |
$ | 23,148 | $ | 26,072 | $ | 32,410 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
62
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data and otherwise noted)
Note 1 Background and Organization
Description of Business
Haynes International, Inc. and its subsidiaries (the "Company" or "Haynes") develops, manufactures, markets and distributes technologically advanced, high-performance alloys primarily for use in the aerospace, land-based gas turbine and chemical processing industries. The Company's products are high-temperature resistant 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 for power generation, 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 alloys primarily in sheet, coil and plate forms. In addition, the Company produces its products as seamless and welded tubulars, and in slab, bar, billets 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. The high-performance alloy industry has significant barriers to entry such as the combination of (i) demanding end-user specifications, (ii) a multi-stage manufacturing process, and (iii) the technical sales, marketing and manufacturing expertise required to develop new applications.
Note 2 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. All intercompany transactions and balances are eliminated. The Company has manufacturing facilities in Kokomo, Indiana; Mountain Home, North Carolina; and Arcadia, Louisiana with distribution service centers in Lebanon, Indiana; LaMirada, California; Houston, Texas; Windsor, Connecticut; Paris, France; Openshaw, England; Zurich, Switzerland; and Shanghi, China; and sales offices in Singapore; Milan, Italy; Chennai, India; and Shanghai, China.
Public Offering and Listing on NASDAQ
On March 23, 2007, the Company completed an equity offering, which resulted in the issuance of 1,200,000 shares of its common stock at a price of $65.00 per share. The net proceeds to the Company after underwriting discounts, commissions and offering expenses (aggregating $5,248) were $72,752. As a part of the offering, certain employees and directors exercised 450,000 stock options and the payment of the exercise price for those stock options resulted in an additional $6,083 in proceeds to the Company. Simultaneously, the Company listed its common stock on The NASDAQ Global Market.
HW Limited Acquisition
On June 2, 2008 the Company announced the expansion of its relationship with HW Limited and its affiliated companies in Hong Kong and China for sales of Haynes products throughout Asia. Under the
63
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 2 Summary of Significant Accounting Policies (Continued)
acquisition agreement (and the related consulting agreement), which became effective on June 1, Haynes' sales and marketing presence in Asia has been greatly expanded. The sales force of HW Limited's Chinese affiliate was integrated into the Haynes operations in China expanding Haynes' direct sales organization by eight people, which Haynes believes will lead to a more effective organization. In addition to overseeing this expanded organization, HW Limited's principal, Helen Wang will promote Haynes' products and services to customers in select markets in Asia, including China, Taiwan, South Korea, Singapore, Thailand, Laos, Malaysia, Vietnam, Indonesia, Cambodia, Philippines, Australia, and New Zealand. This arrangement is one component of the Company's continued campaign to grow its market presence in China and the rest of Asia. The purchase price of $3,000 was allocated to fixed assets $15, non-compete agreement $500 and goodwill $2,485.
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. Accounts Receivable
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company markets its products to a diverse customer base, both in the United States of America and overseas. Trade credit is extended based upon evaluation of each customer's ability to perform its obligation, which is updated periodically. The Company purchases credit insurance for certain foreign trade receivables.
D. Revenue Recognition
The Company recognizes revenue when collectability is reasonably assured and when title passes to the customer which is generally at the time of shipment with freight terms of FOB shipping point or at a foreign port for certain export customers. Allowances for sales returns are recorded as a component of net sales in the periods in which the related sales are recognized. The Company determines this allowance based on historical experience and has not had a history of returns that have exceeded recorded allowances.
E. Inventories
Inventories are stated at the lower of cost or market. The cost of inventories is determined using the first-in, first-out ("FIFO") method. The Company writes down its inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market or scrap value, if applicable, based upon assumptions about future demand and market conditions.
F. Intangible Assets and Goodwill
Goodwill was created as a result of the Company's reorganization pursuant to Chapter 11 of the U.S. Bankruptcy Code and fresh start accounting. The Company adopted SFAS No. 142, Goodwill and Other
64
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 2 Summary of Significant Accounting Policies (Continued)
Intangible Assets . Pursuant to SFAS No. 142 goodwill is not amortized and the value of goodwill is reviewed at least annually for impairment. If the carrying amount exceeds the fair value, impairment of goodwill may exist resulting in a charge to earnings to the extent of goodwill impairment. Fair value was estimated using a combination of a market value approach using quoted market prices and an income approach using discounted cash flow projections.
Goodwill was also created in June 2008 related to the acquisition of assets and related agreements entered into with HW Limited and its affiliated companies in Hong Kong and China, including the acquisition of office equipment and non-compete agreements.
The Company also has patents, trademarks and other intangibles. As the patents have a definite life, they are amortized over lives ranging from two to fourteen years. As the trademarks have an indefinite life, the Company tests them for impairment at least annually. If the carrying value exceeds the fair value (determined by calculating a fair value based upon a discounted cash flow of an assumed royalty rate), impairment of the trademarks may exist resulting in a charge to earnings to the extent of impairment. The Company has non-compete agreements with lives of 2 to 7 years. Amortization of the patents, non-competes and other intangibles was $1,964, $1,146, and $1,119 for the years ended September 30, 2006, 2007 and 2008, respectively.
Goodwill and trademarks were tested for impairment on August 31, 2008 with no impairment recognized because the fair values exceeded the carrying values.
The following represents a summary of intangible assets and goodwill at September 30, 2007 and 2008:
September 30, 2007
|
Gross
Amount |
Accumulated
Amortization |
Carrying
Amount |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Goodwill |
$ | 41,252 | $ | | $ | 41,252 | ||||
Patents |
$ | 8,667 | $ | (4,712 | ) | $ | 3,955 | |||
Trademarks |
3,800 | | 3,800 | |||||||
Non-compete |
840 | (266 | ) | 574 | ||||||
Other |
465 | (268 | ) | 197 | ||||||
|
$ | 13,772 | $ | (5,246 | ) | $ | 8,526 | |||
September 30, 2008 |
|
Gross Amount |
|
Accumulated Amortization |
|
Carrying Amount |
|
|||
Goodwill |
$ | 43,737 | $ | | $ | 43,737 | ||||
Patents |
$ | 8,667 | $ | (5,480 | ) | $ | 3,187 | |||
Trademarks |
3,800 | | 3,800 | |||||||
Non-compete |
1,340 | (488 | ) | 852 | ||||||
Other |
465 | (397 | ) | 68 | ||||||
|
$ | 14,272 | $ | (6,365 | ) | $ | 7,907 | |||
65
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 2 Summary of Significant Accounting Policies (Continued)
The following table presents the changes in the carrying amount of goodwill for the year ended September 30, 2008:
Balance at September 30, 2007 |
$ | 41,252 | ||
Acquisition HW Limited |
2,485 | |||
Balance at September 30, 2008 |
$ | 43,737 | ||
Estimate of Aggregate Amortization Expense: Year Ending September 30, |
|
|
|
|
---|---|---|---|---|
2009 |
896 | |||
2010 |
447 | |||
2011 |
434 | |||
2012 |
359 | |||
2013 |
350 |
G. 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 which are generally as follows:
Building and improvements | 40 years | |
Machinery and equipment | 514 years | |
Office equipment and computer software | 310 years | |
Land improvements | 20 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.
The Company records capitalized interest for long-term construction projects to capture the cost of capital committed prior to the placed in service date as a part of the historical cost of acquiring the asset. The amount of interest capitalized was $496, $308 and $642 for the years ended September 30, 2006, 2007 and 2008, respectively.
The Company reviews long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of the asset to the undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount exceeds the fair value of the asset.
66
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 2 Summary of Significant Accounting Policies (Continued)
H. Environmental Remediation
When it is probable that a liability has been incurred or an asset of the Company has been impaired, a loss is recognized assuming the amount of the loss can be reasonably estimated. The measurement of environmental liabilities by the Company is based on currently available facts, present laws and regulations, and current technology. Such estimates take into consideration the expected costs of post-closure monitoring based on historical experience.
I. Pension and Postretirement Benefits
The Company has defined benefit pension and postretirement plans covering most of its current and former employees. Significant elements in determining the assets or liabilities and related income or expense for these plans are the expected return on plan assets, the discount rate used to value future payment streams, expected trends in health care costs, and other actuarial assumptions. Annually, the Company evaluates the significant assumptions to be used to value its pension and postretirement plan assets and liabilities based on current market conditions and expectations of future costs. If actual results are less favorable than those projected by management, additional expense may be required in future periods. Salaried employees hired after December 31, 2005 and hourly employees hired after June 30, 2007 are not covered by the pension plan; however, they are eligible for an enhanced matching program of the defined contribution plan (401(k)). Effective December 31, 2007, the U.S. pension plan was amended to freeze benefits for all non-union employees in the U.S.
J. 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. 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 comprehensive income (loss) and transaction gains and losses are reflected in the consolidated statements of operations.
K. Research and Technical Costs
Research and technical costs related to the development of new products and processes are expensed as incurred. Research and technical costs for the years ended September 30, 2006, 2007 and 2008, were $2,659, $3,116, and $3,441, respectively.
L. Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes ("SFAS No. 109"), which requires deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between book and tax basis of recorded assets and liabilities. SFAS No. 109 also requires deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The determination of whether or not a valuation allowance is needed is based upon an evaluation of both positive and negative evidence. In its evaluation of the need for a valuation allowance, the Company assesses prudent and feasible tax
67
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 2 Summary of Significant Accounting Policies (Continued)
planning strategies. The ultimate amount of deferred tax assets realized could be different from those recorded, as influenced by potential changes in enacted tax laws and the availability of future taxable income.
On October 1, 2007, the Company adopted FASB Interpretation No. 48 (FIN 48) Accounting for Uncertainty in Income Taxes an interpretation of SFAS 109, Accounting for Income Taxes . FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in an income tax return. FIN 48 also provides guidance related to reversal of tax positions, balance sheet classification, interest and penalties, interim period accounting, disclosure and transition. The impact of adoption of FIN 48 on October 1, 2007, was to decrease accumulated earnings by $827, increased goodwill by $675, increase deferred tax asset by $3,316, and increase non-current income taxes payable by $4,818 (including $241 of interest).
M. Stock Based Compensation
The Company has two stock option plans that authorize the granting of non-qualified stock options to certain key employees and non-employee directors for the purchase of a maximum of 1,500,000 shares of the Company's common stock. The original option plan was adopted in August 2004 pursuant to the plan of reorganization and provides the grant of options to purchase up to 1,000,000 shares of the Company's common stock. In January 2007, the Company's Board of Directors adopted a second option plan that provides for options to purchase up to 500,000 shares of the Company's common stock. Each plan provides for the adjustment of the maximum number of shares for which options may be granted in the event of a stock split, extraordinary dividend or distribution or similar recapitalization event. Unless the Compensation Committee determines otherwise, options granted under the option plans are exercisable for a period of ten years from the date of grant and vest 33 1 / 3 % per year over three years from the grant date.
On October 1, 2005, the Company adopted SFAS No. 123(R), Share-Based Payment , a replacement of SFAS No. 123, Accounting for Stock-Based Compensation , and a rescission of APB Opinion No. 25, Accounting for Stock Issued to Employees . The statement requires compensation costs related to share-based payment transactions to be recognized in the financial statements. This statement applies to all awards granted after the effective date and to modifications, repurchases or cancellations of existing awards. Additionally, under the modified prospective method of adoption, the Company recognizes compensation expense for the portion of outstanding awards on the adoption date for which the requisite service period has not yet been rendered based on the grant-date fair value of those awards. The amount of compensation cost is measured based upon the grant date fair value. The fair value of the option grants is estimated on the date of grant using the Black-Scholes option pricing model with assumptions on dividend yield, risk-free interest rate, expected volatilities, expected forfeiture rate, and expected lives of the options.
N. Financial Instruments and Concentrations of Risk
The Company accounts for derivative instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities . The Company may periodically enter into forward currency exchange contracts to minimize the variability in the Company's operating results arising from foreign
68
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 2 Summary of Significant Accounting Policies (Continued)
exchange rate movements. The Company does not engage in foreign currency speculation. At September 30, 2008 and 2007, the Company had no foreign currency exchange options outstanding.
Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. At September 30, 2008, and periodically throughout the year, the Company has maintained cash balances in excess of federally insured limits. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the relatively short maturity of these instruments. In addition, the carrying amount of the Company's debt approximates fair value.
During 2008, 2007 and 2006 the Company did not have sales to any group of affiliated customers that were greater than 10% of net revenues. The Company generally does not require collateral with the exception of letters of credit with certain foreign sales. Credit losses have been within management's expectations. In addition, the Company purchases credit insurance for certain foreign trade receivables. The Company does not believe it is significantly vulnerable to the risk of near-term severe impact from business concentrations with respect to customers, suppliers, products, markets or geographic areas.
O. Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, income taxes, asset impairment, retirement benefits, and environmental matters. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, pension asset mix and in some cases, actuarial techniques, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company routinely reevaluates these significant factors and makes adjustments where facts and circumstances dictate. Actual results may differ from these estimates under different assumptions or conditions.
P. Earnings Per Share
The Company accounts for earnings per share in accordance with SFAS No. 128, Earnings Per Share . SFAS 128 requires two presentations of earnings per share"basic" and "diluted." Basic earnings per share is computed by dividing net income available to common stockholders for the period by the weighted average number of common shares outstanding for the period. The computation of diluted earnings per share is similar to basic earnings per share, except the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued less any treasury stock purchased. The treasury stock method is used, which assumes that the Company will use the proceeds from the exercise of the options to purchase shares of stock for treasury.
69
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 2 Summary of Significant Accounting Policies (Continued)
Basic and diluted net income per share were computed as follows:
|
Years ended September 30, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands, except share and per share data)
|
2006 | 2007 | 2008 | ||||||||
Numerator: |
|||||||||||
Net income |
$ | 35,540 | $ | 66,120 | $ | 62,778 | |||||
Denominator: |
|||||||||||
Weighted average shares outstandingBasic |
10,000,000 | 10,896,067 | 11,903,289 | ||||||||
Effect of dilutive stock options |
270,642 | 334,034 | 123,151 | ||||||||
Weighted average shares outstandingDiluted |
10,270,642 | 11,230,101 | 12,026,440 | ||||||||
Basic net income per share |
$ | 3.55 | $ | 6.07 | $ | 5.27 | |||||
Diluted net income per share |
$ | 3.46 | $ | 5.89 | $ | 5.22 | |||||
Number of shares excluded as their effect would be anti-dilutive |
71,250 | 95,750 | 224,000 |
Anti-dilutive shares with respect to outstanding stock options have been properly excluded from the computation of diluted net income per share.
Q. Recently Issued Accounting Pronouncements
On October 1, 2007, the Company adopted FASB Interpretation No. 48 ("FIN 48") Accounting for Uncertainty in Income Taxes an interpretation of SFAS 109, Accounting for Income Taxes . ("FIN 48") prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in an income tax return. FIN 48 also provides guidance related to reversal of tax positions, balance sheet classification, interest and penalties, interim period accounting, disclosure and transition.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurement ("SFAS 157"). SFAS 157 addresses standardizing the measurement of fair value for companies who are required to use a fair value measure for recognition or disclosure purposes. The FASB defines fair value as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." On February 12, 2008, the FASB issued Staff Position 157-2 ("FSP 157-2") which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. Therefore for financial assets and liabilities the statement is effective for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years. The Company is required to adopt SFAS 157 (excluding nonfinancial assets and liabilities) beginning on October 1, 2008. The Company does not expect the implementation of SFAS 157 and FSP 157-2 in fiscal 2009 to have a material impact on its financial position, results of operations or cash flows.
In February 2007, the FASB issued FASB Statement No. 159, Establishing the Fair Value Option for Financial Assets and Liabilities ("SFAS 159"), to permit all entities to elect to measure eligible financial instruments at fair value. SFAS 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS 157, Fair Value
70
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 2 Summary of Significant Accounting Policies (Continued)
Measurements . An entity is prohibited from retrospectively applying SFAS 159, unless it chooses early adoption. The Company is required to adopt SFAS 159 beginning October 1, 2008. Due to making no election on any of the Company's instruments, the adoption of SFAS No. 159 on October 1, 2008 had no impact on the Company's consolidated financial statements.
In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), Business Combinations ("FAS 141(R)"). FAS 141(R) requires that the fair value of the purchase price of an acquisition including the issuance of equity securities be determined on the acquisition date; requires that all assets, liabilities, noncontrolling interests, contingent consideration, contingencies, and in-process research and development costs of an acquired business be recorded at fair value at the acquisition date; requires that acquisition costs generally be expensed as incurred; requires that restructuring costs generally be expensed in periods subsequent to the acquisition date; and requires that changes in deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. FAS 141(R) also expands disclosures related to business combinations. FAS 141(R) will be applied prospectively to business combinations occurring after the beginning of the Company's fiscal year 2010, except that business combinations consummated prior to the effective date must apply FAS 141(R) income tax requirements immediately upon adoption. The Company is currently evaluating the impact of FAS 141(R) related to future acquisitions, if any, on its financial position, results of operations and cash flows.
In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements , an Amendment of ARB No. 51 ("FAS 160"). FAS 160 requires that noncontrolling interests be reported as a separate component of equity, that net income attributable to the parent and to the noncontrolling interest be separately identified in the consolidated statement of operations, that changes in a parent's ownership interest be accounted for as equity transactions, and that, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. FAS 160 will be applied prospectively, except for presentation and disclosure requirements which will be applied retrospectively, as of the beginning of the Company's fiscal year 2010. The Company does not currently have noncontrolling interests, and therefore the adoption of FAS 160 is not expected to have an impact on the Company's financial position, results of operations or cash flows.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities ("SFAS 161")an amendment of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities . SFAS 161 is intended to improve financial reporting transparency regarding derivative instruments and hedging activities by providing investors with a better understanding of their effects on financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company will adopt SFAS 161 on October 1, 2009 and is currently evaluating the effect the adoption will have on its consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles ("SFAS 162"). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for non-governmental entities. SFAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to
71
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 2 Summary of Significant Accounting Policies (Continued)
AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles . Any effect of applying the provisions of SFAS 162 is to be reported as a change in accounting principle in accordance with SFAS No. 154, Accounting Changes and Error Corrections . The Company will adopt SFAS 162 once it is effective and is currently evaluating the effect the adoption will have on its consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position ("FSP") No. 142-3, Determination of the Useful Life of Intangible Assets ("FSP 142-3"). This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, Business Combinations , and other U.S. GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and early adoption is prohibited. Accordingly, this FSP is effective for the Company on October 1, 2009. The Company is currently evaluating the effect the adoption will have on its consolidated financial statements.
72
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 2 Summary of Significant Accounting Policies (Continued)
R. Comprehensive Income (Loss)
Comprehensive income (loss) includes changes in equity that result from transactions and economic events from non-owner sources. Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss) items, including pension and foreign currency translation adjustments, net of tax when applicable.
|
Year Ended
September 30, 2006 |
Year Ended
September 30, 2007 |
Year Ended
September 30, 2008 |
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Pre-tax | Tax | Net | Pre-tax | Tax | Net | Pre-tax | Tax | Net | ||||||||||||||||||||
Net income |
$ | 35,540 | $ | 66,120 | $ | 62,778 | |||||||||||||||||||||||
Other comprehensive income (loss): |
|||||||||||||||||||||||||||||
Pension curtailment |
$ | | $ | | $ | 4,532 | $ | (1,831 | ) | $ | 2,701 | ||||||||||||||||||
Pension and postretirement |
(310 | ) | 93 | (217 | ) | 310 | (93 | ) | 217 | (8,789 | ) | 3,360 | (5,429 | ) | |||||||||||||||
Foreign currency translation adjustment |
1,951 | (381 | ) | 1,570 | 3,700 | (259 | ) | 3,441 | (3,169 | ) | (205 | ) | (3,374 | ) | |||||||||||||||
Other comprehensive income (loss) |
$ | 1,641 | $ | (288 | ) | $ | 1,353 | $ | 4,010 | $ | (352 | ) | $ | 3,658 | $ | (7,426 | ) | $ | 1,324 | $ | (6,102 | ) | |||||||
Total comprehensive income |
$ | 36,893 | $ | 69,778 | $ | 56,676 | |||||||||||||||||||||||
The following is a breakdown of accumulated other comprehensive income net of the effects:
|
Accumulated
Other Comprehensive Income (Loss) at September 30, 2007 |
Other
Comprehensive Loss for the year ended September 30, 2008 |
Accumulated
Other Comprehensive Income (Loss) at September 30, 2008 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Foreign Currency Translation Adjustment |
$ | 4,499 | $ | (3,374 | ) | $ | 1,125 | |||
Pension and Postretirement |
(518 | ) | (2,728 | ) | (3,246 | ) | ||||
|
$ | 3,981 | $ | (6,102 | ) | $ | (2,121 | ) | ||
Note 3 Inventories
Inventories are stated at the lower of cost or market. The cost of inventories is determined using the first-in, first-out ("FIFO") method. The following is a summary of the major classes of inventories:
|
September 30,
2007 |
September 30,
2008 |
|||||
---|---|---|---|---|---|---|---|
Raw materials |
$ | 16,218 | $ | 20,343 | |||
Work-in-process |
162,266 | 155,782 | |||||
Finished goods |
106,419 | 127,653 | |||||
Other |
1,399 | 1,137 | |||||
|
$ | 286,302 | $ | 304,915 | |||
73
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 4 Property, Plant and Equipment
The following is a summary of the major classes of property, plant and equipment:
|
September 30,
2007 |
September 30,
2008 |
|||||
---|---|---|---|---|---|---|---|
Land and land improvements |
$ | 4,088 | $ | 4,400 | |||
Buildings |
8,908 | 12,527 | |||||
Machinery and equipment |
95,491 | 116,095 | |||||
Construction in process |
8,694 | 1,501 | |||||
|
117,181 | 134,523 | |||||
Less accumulated depreciation |
(19,321 | ) | (27,221 | ) | |||
|
$ | 97,860 | $ | 107,302 | |||
The Company has $844 of assets under a capital lease for equipment related to the service center operation in Shanghai, China.
Note 5 Accrued Expenses
The following is a summary of the major classes of accrued expenses:
|
September 30,
2007 |
September 30,
2008 |
|||||
---|---|---|---|---|---|---|---|
Employee compensation |
$ | 5,819 | $ | 8,310 | |||
Taxes, other than income taxes |
1,396 | 1,511 | |||||
Other |
4,974 | 2,908 | |||||
|
$ | 12,189 | $ | 12,729 | |||
74
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 6 Income Taxes
The components of income before provision for income taxes are as follows:
|
Year Ended
September 30, 2006 |
Year Ended
September 30, 2007 |
Year Ended
September 30, 2008 |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Income before income taxes: |
|||||||||||||
U.S. |
$ | 55,282 | $ | 93,790 | $ | 86,124 | |||||||
Foreign |
2,571 | 10,798 | 11,790 | ||||||||||
Total |
$ | 57,853 | $ | 104,588 | $ | 97,914 | |||||||
Income tax provision (benefit): |
|||||||||||||
Current: |
|||||||||||||
U.S. Federal |
$ | 19,466 | $ | 24,382 | $ | 34,580 | |||||||
Foreign |
632 | 2,571 | 3,038 | ||||||||||
State |
5,020 | 6,689 | 2,273 | ||||||||||
Total |
25,118 | 33,642 | 39,891 | ||||||||||
Deferred: |
|||||||||||||
U.S. Federal |
(2,439 | ) | 3,229 | (6,499 | ) | ||||||||
Foreign |
282 | 367 | 194 | ||||||||||
State |
(648 | ) | 1,230 | 1,550 | |||||||||
Total |
(2,805 | ) | 4,826 | (4,755 | ) | ||||||||
Total provision for income taxes |
$ | 22,313 | $ | 38,468 | $ | 35,136 | |||||||
The provision for income taxes applicable to results of operations differed from the U.S. federal statutory rate as follows:
|
Year Ended
September 30, 2006 |
Year Ended
September 30, 2007 |
Year Ended
September 30, 2008 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Statutory federal tax rate |
35 | % | 35 | % | 35 | % | ||||
Tax provision at the statutory rate |
$ | 20,248 | $ | 36,605 | $ | 34,270 | ||||
Foreign tax rate differentials |
13 | (841 | ) | (894 | ) | |||||
Provision for state taxes, net of federal taxes |
2,987 | 5,153 | 2,987 | |||||||
U.S. tax on distributed and undistributed earnings of foreign subsidiaries |
66 | 743 | 793 | |||||||
Manufacturer's deduction |
(665 | ) | (525 | ) | (1,260 | ) | ||||
Extraterritorial income exclusion |
| (1,021 | ) | | ||||||
Tax credits |
| (573 | ) | (558 | ) | |||||
Other, net |
(336 | ) | (1,073 | ) | (202 | ) | ||||
Provision at effective tax rate |
$ | 22,313 | $ | 38,468 | $ | 35,136 | ||||
During fiscal 2008 the Company's effective tax rate was favorably impacted by amended state tax returns that were filed to take advantage of adjustments to the sales apportionment factors related to
75
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 6 Income Taxes (Continued)
foreign sales. Similarly, during fiscal 2007 the Company's effective tax rate was favorably impacted primarily by amended tax returns that were filed to take advantage of the extraterritorial income exclusion and various tax credits not previously claimed.
Deferred tax assets (liabilities) are comprised of the following:
|
September 30,
2007 |
September 30,
2008 |
|||||||
---|---|---|---|---|---|---|---|---|---|
Current deferred tax assets (liabilities): |
|||||||||
Inventories |
$ | 3,626 | $ | 3,983 | |||||
Pension and postretirement benefits |
5,808 | 3,000 | |||||||
Accrued expenses and other |
419 | 601 | |||||||
Accrued compensation and benefits |
1,144 | 1,419 | |||||||
Tax credit carryforwards |
644 | | |||||||
Other foreign related |
(840 | ) | (568 | ) | |||||
TIMET Agreement |
| 964 | |||||||
Total net current deferred tax assets |
10,801 | 9,399 | |||||||
Noncurrent deferred tax assets (liabilities): |
|||||||||
Property, plant and equipment, net |
(17,587 | ) | (17,660 | ) | |||||
Intangible assets |
(2,971 | ) | (2,523 | ) | |||||
Undistributed earnings of foreign subsidiary |
(1,266 | ) | (1,275 | ) | |||||
Pension and postretirement benefits |
42,538 | 35,092 | |||||||
Accrued compensation and benefits |
1,788 | 1,574 | |||||||
TIMET Agreement |
| 16,522 | |||||||
Other accruals |
236 | 580 | |||||||
Total net noncurrent deferred tax assets |
22,738 | 32,310 | |||||||
Net deferred tax assets (liabilities) |
$ | 33,539 | $ | 41,709 | |||||
The Company has excluded undistributed earnings of $32,018 of three foreign affiliates from its calculation of deferred tax liabilities because they will be permanently invested for the foreseeable future. Should management decide in the future to repatriate all or a portion of these undistributed earnings, the Company would then be required to provide for taxes on such amounts.
On October 1, 2007, the Company adopted FASB Interpretation No. 48 (FIN 48) Accounting for Uncertainty in Income Taxes an interpretation of SFAS 109, Accounting for Income Taxes . FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in an income tax return. FIN 48 also provides guidance related to reversal of tax positions, balance sheet classification, interest and penalties, interim period accounting, disclosure and transition.
The impact of the adoption of FIN 48 on October 1, 2007, was to decrease accumulated earnings by $827, increase goodwill by $675, increase deferred tax assets by $3,316, and increase non-current income taxes payable by $4,818 (including $241 of interest).
76
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 6 Income Taxes (Continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at October 1, 2007 |
$ | 4,577 | ||
Gross Increasescurrent period tax positions |
| |||
Gross Decreasescurrent period tax positions |
| |||
Gross Increasestax positions in prior periods |
| |||
Gross Decreasestax positions in prior periods |
(4,313 | ) | ||
Gross Decreasessettlements with taxing authorities |
| |||
Gross Decreaseslapse of statute of limitations |
| |||
Balance at September 30, 2008 |
$ | 264 | ||
The amount of unrecognized tax benefits changed during fiscal 2008 due to international tax positions being effectively settled, including the reduction of goodwill of $675. The total amount of unrecognized tax benefits that would, if recognized, affect the effective income tax rate is $173 as of September 30, 2008. Additionally, as consistent with prior periods, the Company recognized accrued interest expense and penalties related to the unrecognized tax benefits as additional income tax expense. The total amount of accrued interest and penalties was approximately $12 and $0 respectively, as of September 30, 2008. A decrease in interest of $229 was recognized during the year.
As of September 30, 2008, the Company is open to examination in the U.S. federal income tax jurisdiction for the September 30, 2007 tax year, in the U.K. for the years 2002-2007, in Switzerland for the years 2003-2007, and in France for the years 2006-2007. The Company is also open to examination in Singapore, China, Italy, and India and in various states in the U.S., none of which were individually material. The Company is not currently under audit in any jurisdiction.
Of the unrecognized tax benefits noted above, the Company does not anticipate any significant changes to occur in unrecognized tax benefits over the next 12 months.
Note 7 Debt
U.S. revolving credit facility
The U.S. revolving credit facility provides for revolving loans in a maximum amount of $120.0 million. Borrowings under the U.S. revolving credit facility bear interest at the Company's option at either Wachovia Bank, National Association's "prime rate," plus up to 1.5% per annum, or the adjusted Eurodollar rate used by the lender, plus up to 3.0% per annum. As of September 30, 2008, the U.S. revolving credit facility had an outstanding balance of $11.8 million. During fiscal 2008 it bore interest at a weighted average interest rate of 5.36%. In addition, the Company must pay monthly in arrears a commitment fee of 0.375% per annum on the unused amount of the U.S. revolving credit facility total commitment. For letters of credit, the Company must pay 2.5% per annum on the daily outstanding balance of all issued letters of credit, plus customary fees for issuance, amendments, and processing. The Company is subject to certain covenants as to adjusted EBITDA and fixed charge coverage ratios and other customary covenants, including covenants restricting the incurrence of indebtedness, the granting of liens, the sale of assets and the declaration of dividends and other distributions on the Company's capital stock. As of September 30, 2008, the most recent required measurement date, the Company was in
77
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 7 Debt (Continued)
compliance with these financial covenants. The U.S. revolving credit facility matures on April 12, 2009. Borrowings under the U.S. revolving credit facility are collateralized by a pledge of substantially all of the U.S. assets of the Company, including equity interests in its U.S. subsidiaries, but excluding its four-high Steckel rolling mill and related assets, which are pledged to Titanium Metals Corporation (see discussion of TIMET agreement at Note 15). The U.S. revolving credit facility is also secured by a pledge of 65% of the equity interests in each of the Company's foreign subsidiaries.
Subsequent EventExtension of U.S. Revolving Credit Facility
Haynes and Wachovia Capital Finance Corporation (Central) ("Wachovia") entered into a Second Amended and Restated Loan and Security Agreement (the "Amended Agreement") with an effective date of November 18, 2008, which amended and restated the revolving credit facility between Haynes and Wachovia dated August 31, 2004. Among other items, the Amended Agreement extends the maturity date of the revolving credit facility to September 30, 2011, increases the margin included in the interest rate from 1.5% per annum to 2.5% per annum, permits the Company to pay dividends and repurchase common stock if certain financial metrics are met, and eliminates the EBITDA covenant. The maximum revolving loan amount under the Amended Agreement continues to be $120.0 million.
U.K. revolving credit facility
The Company's U.K. subsidiary, Haynes International, Ltd., or Haynes U.K., previously had an agreement with a U.K.-based lender providing for a $15.0 million revolving credit facility. During April 2008, the term of the U.K. revolving credit facility ended. The Company replaced this facility with a multi-currency overdraft facility. The overdraft facility has a limit of 2.0 million pound sterling ($3,556). Haynes U.K. is required to pay interest on overdrafts in an amount equal to the Bank's Sterling Base Rate (in accordance with the terms facility), plus 1.1% per annum. As of September 30, 2008, the overdraft facility had an outstanding balance of zero.
Debt and long-term obligations consist of the following (in thousands):
|
September 30,
2007 |
September 30,
2008 |
||||||
---|---|---|---|---|---|---|---|---|
Revolving Credit Agreement |
||||||||
U.S. Facility, 7.24% 2007; 4.64% 2008, expires April 2009 |
$ | 35,549 | $ | 11,812 | ||||
Three year mortgage note, 3.1%, due in December 2008 (Swiss Subsidiary) |
$ | 1,409 | $ | 1,405 | ||||
Other long-term obligations |
1,775 | 1,692 | ||||||
|
3,184 | 3,097 | ||||||
Less amounts due within one year |
110 | 1,515 | ||||||
|
$ | 3,074 | $ | 1,582 | ||||
Other long-term obligations primarily represents environmental post-closure monitoring and maintenance activities.
78
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 7 Debt (Continued)
The carrying amount of debt approximates fair value, because substantially all debt bears interest at variable interest rates.
At September 30, 2008, the Company had access to approximately $108,159 under its credit agreement (based on borrowing base and certain reserves). The Company's British subsidiary (Haynes International LTD) has an overdraft facility of 2,000 Sterling ($3,556) all of which was available on September 30, 2008. The Company's French subsidiary (Haynes International, SARL) has an overdraft banking facility of 1,200 Euro ($1,689) of which 418 Euro ($588) was available on September 30, 2008. The Company's Swiss subsidiary (Nickel-Contor AG) had an overdraft banking facility of 1,000 Swiss Francs ($890) all of which was available on September 30, 2008.
Maturities of long-term debt are as follows at September 30, 2008:
Year Ending
|
|
|||
---|---|---|---|---|
2009 |
$ | 1,515 | ||
2010 |
95 | |||
2011 |
95 | |||
2012 |
| |||
2013 |
| |||
2014 and thereafter |
1,392 | |||
|
$ | 3,097 | ||
Note 8 Pension Plan and Retirement Benefits
Defined Contribution Plans
The Company sponsors a defined contribution plan (401(k)) for substantially all U.S. employees. The Company contributes an amount equal to 50% of an employee's contribution to the plan up to a maximum contribution of 3% of the employee's salary, except for all salaried employees and hourly employees hired after June 30, 2007 that are not eligible for the U.S. pension plan. The Company contributes an amount equal to 60% of an employee's contribution to the plan up to a maximum contribution of 6% of the employee's salary for this group. Expenses associated with this plan for the years ended September 30, 2006, 2007 and 2008 totaled $586, $665 and $1,091, respectively.
The Company sponsors certain profit sharing plans for the benefit of employees meeting certain eligibility requirements. There were no contributions to these plans for the years ended September 30, 2006, 2007 and 2008.
79
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 8 Pension Plan and Retirement Benefits (Continued)
Defined Benefit Plans
The Company has non-contributory defined benefit pension plans which cover most employees in the U.S. and certain foreign subsidiaries. In the U.S. salaried employees hired after December 31, 2005 and hourly employees hired after June 30, 2007 are not covered by the pension plan; however, they are eligible for an enhanced matching program of the defined contribution plan (401(k)). On October 3, 2007, the U.S. pension plan was amended effective December 31, 2007 to freeze benefit accruals for all non-union employees in the U.S. and effective January 1, 2008, the pension multiplier used to calculate the employee's monthly benefit was increased from 1.4% to 1.6%. In addition, the Company will make enhanced matching contributions to its 401K plan equal to 60% of the non-union and union plan participant's salary deferrals, up to 6% of compensation. The Company estimates the redesign of the pension plan, including previous actions to close the plan to new non-union and union employees and the adjustment of the multiplier for non-union and union plan participants will reduce funding requirements by $23,000 over the next six years. The offsetting estimated incremental cost of the enhanced 401K match is $2,300 over the same six year period. As a result of freezing the benefit accruals for all non-union employees in the U.S. in the first quarter of fiscal 2008, the Company recognized a reduction of the projected benefit obligation of $8,191, an increase to other comprehensive income (before tax) of $4,532 and a curtailment gain (before tax) of $3,659. The impact of the multiplier increase will be charged to pension expense over the estimated remaining lives of the participants.
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. The Pension Protection Act of 2006 requires funding over a seven year period to achieve 100% funded status.
The Company has non-qualified pensions for current and former executives of the Company. Non-qualified pension plan expense (income) for the years ended September 30, 2006, 2007 and 2008 was $297, $418 and $(129), respectively. Accrued liabilities in the amount of $2,583 and $2,831 for these benefits are included in accrued pension and postretirement benefits at September 30, 2008 and 2007, respectively.
During fiscal 2007 the pension plan for union employees was amended, increasing the pension multiplier used to calculate the employee's monthly benefit from 1.4% to 1.6% for union employees. The impact of the multiplier increase is a plan amendment of $6,195 that will be charged to pension expense over the average remaining service period of employees expected to receive benefits under the plan.
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. During March 2006, the Company communicated to employees and plan participants a negative plan amendment that caps the Company's liability related to total retiree health care costs at $5,000 annually effective January 1, 2007. An updated actuarial valuation was performed at March 31, 2006, which reduced the accumulated postretirement benefit liability due to this plan amendment by $46,313 that will be amortized as a reduction to expense over an eight year period. This amortization period began in April 2006 thus reducing the amount of expense recognized for the second half of fiscal 2006 and the respective future periods.
80
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 8 Pension Plan and Retirement Benefits (Continued)
The Company made contributions of $8,360 and $3,690 to fund its domestic Company-sponsored pension plan for the year ended September 30, 2008 and 2007, respectively. The Company's U.K. subsidiary made contributions of $1,067 and $1,228 for the year ended September 30, 2008 and 2007, respectively, to the U.K. pension plan.
In September 2006, the FASB issued Statement of Financial Accounting Standard No. 158, Employers' Accounting For Defined Pension and Other Post Retirement Plans ("SFAS 158"). SFAS 158 requires employers to recognize the obligations associated with the funded status of a benefit plan in their statement of financial position. The provisions of SFAS 158 were adopted as of September 30, 2007. The impacts of adoption are presented within this note.
The Company uses a September 30 measurement date for its plans. The status of employee pension benefit plans and other postretirement benefit plans are summarized below:
|
Defined Benefit Pension Plans |
|
Postretirement
Health Care Benefits |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Year Ended September 30,
2007 |
Year Ended September 30,
2008 |
|
Year Ended September 30,
2007 |
Year Ended September 30,
2008 |
||||||||||
Change in Benefit Obligation: |
|||||||||||||||
Projected benefit obligation at beginning of year |
$ | 172,311 | $ | 183,993 | $ | 76,857 | $ | 80,044 | |||||||
Service cost |
4,188 | 2,761 | 1,444 | 1,307 | |||||||||||
Interest cost |
9,986 | 10,757 | 4,461 | 4,859 | |||||||||||
Plan amendment |
6,195 | 4,096 | | | |||||||||||
Curtailment gain |
| (8,191 | ) | | | ||||||||||
Actuarial losses (gains) |
562 | (19,339 | ) | 1,694 | (14,394 | ) | |||||||||
Employee contributions |
78 | 62 | | | |||||||||||
Benefits paid |
(9,327 | ) | (9,536 | ) | (4,412 | ) | (4,052 | ) | |||||||
Projected benefit obligation at end of year |
$ | 183,993 | $ | 164,603 | $ | 80,044 | $ | 67,764 | |||||||
Change in Plan Assets: |
|||||||||||||||
Fair value of plan assets at beginning of year |
$ | 130,753 | $ | 143,281 | $ | | $ | | |||||||
Actual return (loss) on assets |
16,859 | (23,643 | ) | | | ||||||||||
Employer contributions |
4,918 | 9,427 | 4,412 | 4,052 | |||||||||||
Employee contributions |
78 | 62 | | | |||||||||||
Benefits paid |
(9,327 | ) | (9,536 | ) | (4,412 | ) | (4,052 | ) | |||||||
Fair value of plan assets at end of year |
$ | 143,281 | $ | 119,591 | $ | | $ | | |||||||
Funded Status of Plan: |
|||||||||||||||
Unfunded status |
$ | (40,712 | ) | $ | (45,012 | ) | $ | (80,044 | ) | $ | (67,764 | ) | |||
81
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 8 Pension Plan and Retirement Benefits (Continued)
Amounts recognized in the consolidated balance sheets are as follows:
|
Defined Benefit
Pension Plans |
Postretirement
Health Care Benefits |
Non-Qualified
Pension Plans |
All Plans
Combined |
|||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||
|
2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | |||||||||||||||||
Accrued benefit liability |
$ | (40,712 | ) | $ | (45,012 | ) | $ | (80,044 | ) | $ | (67,764 | ) | $ | (2,831 | ) | $ | (2,583 | ) | $ | (123,587 | ) | $ | (115,359 | ) | |
Accumulated other comprehensive loss (income) |
9,959 | 24,451 | (8,956 | ) | (19,191 | ) | | | 1,003 | 5,260 | |||||||||||||||
Net amount recognized |
$ | (30,753 | ) | $ | (20,561 | ) | $ | (89,000 | ) | $ | (86,955 | ) | $ | (2,831 | ) | $ | (2,583 | ) | $ | (122,584 | ) | $ | (110,099 | ) | |
Amounts expected to be recognized from AOCI into the statement of operations in the following year: |
|||||||||||||||||||||||||
Amortization of net loss |
$ | | $ | | $ | 1,630 | $ | 482 | $ | | $ | | $ | 1,630 | $ | 482 | |||||||||
Amortization of prior service cost |
1,033 | 808 | (5,789 | ) | (5,789 | ) | | | (4,756 | ) | (4,981 | ) | |||||||||||||
|
$ | 1,033 | $ | 808 | $ | (4,159 | ) | $ | (5,307 | ) | $ | | $ | | $ | (3,126 | ) | $ | (4,499 | ) | |||||
The accumulated benefit obligation for the pension plans was $162,656 and $154,526 at September 30, 2007 and 2008, respectively.
The impact of adopting SFAS No. 158 as of
September 30, 2007 was as follows: |
Before
Application of SFAS No. 158 |
Adjustments |
After
Application of SFAS No. 158 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Deferred income taxes |
$ | 33,054 | $ | 485 | $ | 33,539 | ||||
Total assets |
586,484 | 485 | 586,969 | |||||||
Accrued pension and postretirement benefits |
122,584 | 1,003 | 123,587 | |||||||
Total liabilities |
269,589 | 1,003 | 270,592 | |||||||
Accumulated other comprehensive income, net of tax |
4,499 | (518 | ) | 3,981 | ||||||
Total stockholders' equity |
316,895 | (518 | ) | 316,377 |
The Company follows SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions, which requires the cost of postretirement 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.
82
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 8 Pension Plan and Retirement Benefits (Continued)
The components of net periodic pension cost and postretirement health care benefit cost are as follows:
|
Defined Benefit Pension Plans | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Year Ended
September 30, 2006 |
Year Ended
September 30, 2007 |
Year Ended
September 30, 2008 |
|||||||
Service cost |
$ | 3,746 | $ | 4,188 | $ | 2,761 | ||||
Interest cost |
9,009 | 9,986 | 10,757 | |||||||
Expected return on assets |
(10,349 | ) | (10,512 | ) | (11,432 | ) | ||||
Amortization of prior service cost |
| | 808 | |||||||
Curtailment gain |
| | (3,659 | ) | ||||||
Net periodic cost (benefit) |
$ | 2,406 | $ | 3,662 | $ | (765 | ) | |||
|
Postretirement Health Care Benefits | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Year Ended
September 30, 2006 |
Year Ended
September 30, 2007 |
Year Ended
September 30, 2008 |
|||||||
Service cost |
$ | 2,152 | $ | 1,444 | $ | 1,307 | ||||
Interest cost |
5,904 | 4,461 | 4,859 | |||||||
Amortization of unrecognized prior service cost |
(2,895 | ) | (5,789 | ) | (5,789 | ) | ||||
Recognized actuarial loss |
1,690 | 1,660 | 1,630 | |||||||
Net periodic cost |
$ | 6,851 | $ | 1,776 | $ | 2,007 | ||||
83
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 8 Pension Plan and Retirement Benefits (Continued)
Assumptions
A 6.0% (6.4%-2007) annual rate of increase for ages under 65 and an 6.2% (6.9%-2007) annual rate of increase for ages over 65 in the costs of covered health care benefits were assumed for 2008, gradually decreasing for both age groups to 5.0% (5.0%-2007) by the year 2011. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage-point change in assumed health care cost trend rates would have the following effects in 2008:
|
1-Percentage Point
Increase |
1-Percentage Point
Decrease |
|||||
---|---|---|---|---|---|---|---|
Effect on total of service and interest cost components |
$ | 352 | $ | (268 | ) | ||
Effect on accumulated postretirement benefit obligation |
0 | 0 |
The effect on accumulated postretirement benefit obligation is zero due to the negative plan amendment that caps the Company costs at $5,000 per year.
The actuarial present value of the projected pension benefit obligation and postretirement health care benefit obligation for the domestic plans at September 30, 2007 and 2008 were determined based on the following assumptions:
|
September 30,
2007 |
September 30,
2008 |
|||||
---|---|---|---|---|---|---|---|
Discount rate |
6.25 | % | 7.50 | % | |||
Rate of compensation increase (pension plan only) |
4.00 | % | 4.00 | % |
The net periodic pension and postretirement health care benefit costs for the domestic plans were determined using the following assumptions:
|
Defined Benefit Pension and
Postretirement Health Care Plans |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Year Ended
September 30, 2006 |
Year Ended
September 30, 2007 |
Year Ended
September 30, 2008 |
|||||||
Discount rate |
5.750% | (1) | 6.000 | % | 6.250 | % | ||||
Expected return on plan assets |
8.500 | % | 8.500 | % | 8.500 | % | ||||
Rate of compensation increase (pension plan only) |
4.000 | % | 4.000 | % | 4.000 | % |
84
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 8 Pension Plan and Retirement Benefits (Continued)
Plan Assets and Investment Strategy
The Company's domestic pension plans weighted-average asset allocations by asset category are as follows:
|
September 30, | ||||||
---|---|---|---|---|---|---|---|
|
2007 | 2008 | |||||
Equity Securities |
61 | % | 55 | % | |||
Debt Securities |
37 | % | 43 | % | |||
Real Estate |
0 | % | 0 | % | |||
Other |
2 | % | 2 | % | |||
Total |
100 | % | 100 | % | |||
The primary financial objectives of the Plan are to minimize cash contributions over the long-term and preserve capital while maintaining a high degree of liquidity. A secondary financial objective is, where possible, to avoid significant downside risk in the short-run. The objective is based on a long-term investment horizon so that interim fluctuations should be viewed with appropriate perspective.
The desired investment objective is a long-term real rate of return on assets that is approximately 7.00% greater than the assumed rate of inflation as measured by the Consumer Price Index, assumed to be 1.50%, equaling a nominal rate of return of 8.50%. The target rate of return for the Plan has been based upon an analysis of historical returns supplemented with an economic and structural review for each asset class. The Company realizes that the market performance varies and that a 7.00% real rate of return may not be meaningful during some periods. The Company also realizes that historical performance is no guarantee of future performance.
It is the policy of the Plan to invest assets with an allocation to equities as shown below. The balance of the assets shall be maintained in fixed income investments, and in cash holdings, to the extent permitted below.
Asset classes as a percent of total assets:
Asset Class
|
Target (1) | |||
---|---|---|---|---|
Equity |
60 | % | ||
Fixed Income |
35 | % | ||
Real Estate and Other |
5 | % |
The U.K. pension plan assets use a similar strategy and investment objective.
85
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 8 Pension Plan and Retirement Benefits (Continued)
Contributions and Benefit Payments
The Company expects to contribute approximately $7,990 to its domestic pension plans, $4,200 to its domestic other postretirement benefit plans, and $1,067 to the U.K. pension plan in fiscal 2009.
Pension and postretirement health care benefits (which include expected future service) are expected to be paid out of the respective plans as follows:
Fiscal Year Ending September 30
|
Pension |
Postretirement
Health Care |
|||||
---|---|---|---|---|---|---|---|
2009 |
$ | 10,110 | $ | 4,200 | |||
2010 |
10,328 | 4,400 | |||||
2011 |
10,742 | 4,600 | |||||
2012 |
10,950 | 4,800 | |||||
2013 |
11,427 | 5,000 | |||||
2014-2018 (in total) |
64,166 | 25,000 |
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 $3,042, $3,404 and $3,770 for the years ended September 30, 2006, 2007 and 2008, respectively. Rent expense does not include income from sub-lease rentals totaling $180, $180 and $150 for the years ended September 30, 2006, 2007 and 2008, respectively. Future minimum rental commitments under non-cancelable operating leases at September 30, 2008, are as follows:
|
Operating | |||
---|---|---|---|---|
2009 |
$ | 3,305 | ||
2010 |
2,293 | |||
2011 |
1,431 | |||
2012 |
675 | |||
2013 |
482 | |||
2014 and thereafter |
2,402 | |||
|
$ | 10,588 | ||
Future minimum rental commitments under non-cancelable operating leases have not been reduced by minimum sub-lease rentals of $969 due in the future.
Note 10 Environmental and Legal
The Company is regularly involved in litigation, both as a plaintiff and as a defendant, relating to its business and operations, including environmental and intellectual property matters. Future expenditures for environmental, intellectual property and other legal matters cannot be determined with any degree of
86
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 10 Environmental and Legal (Continued)
certainty; however, 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 cash flows.
The Company believes that any and all claims arising out of conduct or activities that occurred prior to March 29, 2004 are subject to dismissal. On March 29, 2004, the Company and certain of its subsidiaries and affiliates filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Indiana (the "Bankruptcy Court"). On August 16, 2004, the Bankruptcy Court entered its Findings of Fact, Conclusions of Law, and Order Under 11 U.S.C. 1129(a) and (b) and Fed. R. Bankr. P. 3020 Confirming the First Amended Joint Plan of Reorganization of Haynes International, Inc. and its Affiliated Debtors and Debtors-in-Possession as Further Modified (the "Confirmation Order"). The Confirmation Order and related Chapter 11 Plan, among other things, provide for the release and discharge of prepetition claims and causes of action. The Confirmation Order further provides for an injunction against the commencement of any actions with respect to claims held prior to the Effective Date of the Plan. The Effective Date occurred on August 31, 2004. When appropriate, the Company pursues the dismissal of lawsuits premised upon claims or causes of action discharged in the Confirmation Order and related Chapter 11 Plan. The success of this strategy is dependent upon a number of factors, including the respective court's interpretation of the Confirmation Order and the unique circumstances of each case.
The Company is currently, and has in the past, been subject to claims involving personal injuries allegedly relating to its products. For example, the Company is presently involved in two actions involving welding rod-related injuries, both of which were filed in California state court against numerous manufacturers, including the Company, in May 2006 and February 2007, respectively, alleging that the welding-related products of the defendant manufacturers harmed the users of such products through the inhalation of welding fumes containing manganese. A third recently-filed case with similar allegations was pending in the state of Texas, but recently plaintiffs in that case agreed to dismiss their claims against Haynes. The Company believes that it has defenses to these allegations and, that if the Company was found liable, the cases would not have a material effect on its financial position, results of operations or liquidity. In addition to these cases, the Company has in the past been named a defendant in several other lawsuits, including 52 filed in the state of California, alleging that its welding-related products harmed the users of such products through the inhalation of welding fumes containing manganese. The Company has since been voluntarily dismissed from all of these lawsuits on the basis of the release and discharge of claims contained in the Confirmation Order. While the Company contests such lawsuits vigorously, and may have applicable insurance, there are several risks and uncertainties that may affect its liability for claims relating to exposure to welding fumes and manganese. For instance, in recent cases, at least two courts (in cases not involving Haynes) have refused to dismiss claims relating to inhalation of welding fumes containing manganese based upon a bankruptcy discharge order. Although the Company believes the facts of these cases are distinguishable from the facts of its cases, that can be no assurance that any or all claims against the Company will be dismissed based upon the Confirmation Order, particularly claims premised, in part or in full, upon actual or alleged exposure on or after the date of the Confirmation Order. It is also possible that the Company will be named in additional suits alleging welding-rod injuries. Should such litigation occur, it is possible that the aggregate claims for damages, if the Company is found liable, could have a material adverse effect on its financial condition, results of operations or liquidity.
87
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 10 Environmental and Legal (Continued)
The Company has received permits from the Indiana Department of Environmental Management, or IDEM, to close and to provide post-closure monitoring and care for certain areas at the Kokomo facility previously used for the storage and disposal of wastes, some of which are classified as hazardous under applicable regulations. Closure certification was received in fiscal 1988 for the South Landfill at the Kokomo facility and post-closure monitoring and care is ongoing there. Closure certification was received in fiscal 1999 for the North Landfill at the Kokomo facility and post-closure monitoring and care are permitted and ongoing there. In fiscal 2007, IDEM issued a single post-closure permit applicable to both the North and South Landfills, which contains monitoring and post-closure care requirements. In addition, IDEM required that a Resource Conservation and Recovery Act, or RCRA, Facility Investigation, or RFI, be conducted in order to further evaluate one area of concern and one solid waste management unit. The RFI commenced in fiscal 2008 and is ongoing.
The Company has also received permits from the North Carolina Department of Environment and Natural Resources, or NCDENR, to close and provide post-closure monitoring and care for the hazardous waste lagoon at its Mountain Home, North Carolina facility. The lagoon area has been closed and is currently undergoing post-closure monitoring and care. The Company is required to monitor groundwater and to continue post-closure maintenance of the former disposal areas at each site. As a result, the Company is aware of elevated levels of certain contaminants in the groundwater and additional corrective action by the Company could be required. In addition, in August, 2008, employees discovered an abnormal pH in the sump pumps located in containment pits in the wastewater treatment facility. After testing, it was determined that there was a leak in the pipeline from the cleaning house to the wastewater treatment facility. NCDENR was notified within 24 hours of the verification of the leak. To date, the state has not responded to this disclosure.
Historical nitric acid spills were discovered at the Arcadia, Louisiana location in fiscal 2008. Analytical results were received in March, 2008 and the site assessment was provided to the Louisiana Department of Environmental Quality ("LDEQ") in May. Remediation of the spill, including the purchase of new equipment, was substantially complete in fiscal 2008. A preliminary assessment of the LDEQ authorized the Company's proposed remedial actions. In August, 2008, LDEQ submitted a second round of inquiries after an existing sump pump was removed. The Company is in the process or responding to LDEQ's inquiries.
As of September 30, 2007 and September 30, 2008, the Company has accrued $1,519 and $1,517, respectively, for post-closure monitoring and maintenance activities. In accordance with Statement of Position 96-1, Environmental Remediation Liabilities , accruals for these costs are calculated by estimating the cost to monitor and maintain each post-closure site and multiplying that amount by the number of years remaining in the 30 year post-closure monitoring period referred to above. At each fiscal year-end, or earlier if necessary, the Company evaluates the accuracy of the estimates for these monitoring and maintenance costs for the upcoming fiscal year. The accrual was based upon the undiscounted amount of the obligation of $2,231 which was then discounted using an appropriate discount rate. The cost associated with closing the sites has been incurred in financial periods prior to those presented, with the remaining cost to be incurred in future periods related solely to post-closure monitoring and maintenance. Based on historical experience, the Company estimates that the cost of post-closure monitoring and maintenance will approximate $125 per year over the remaining obligation period.
88
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 11 Stock-based Compensation
The Company has two stock option plans that authorize the granting of non-qualified stock options to certain key employees and non-employee directors for the purchase of a maximum of 1,500,000 shares of the Company's common stock. The original option plan was adopted in August 2004 pursuant to the plan of reorganization and provides for the grant of options to purchase up to 1,000,000 shares of the Company's common stock. In January 2007, the Company's Board of Directors adopted a second option plan that provides for options to purchase up to 500,000 shares of the Company's common stock. Each plan provides for the adjustment of the maximum number of shares for which options may be granted in the event of a stock split, extraordinary dividend or distribution or similar recapitalization event. Unless the Compensation Committee determines otherwise, options granted under the option plans are exercisable for a period of ten years from the date of grant and vest 33 1 / 3 % per year over three years from the grant date.
The fair value of option grants was estimated as of the date of the grant pursuant FASB No. 123(R), Share-Based Payment, a replacement of SFAS No. 123, Accounting For Stock-Based Compensation, and rescission of APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company has elected to use the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected life, risk-free interest rates, expected forfeitures and dividend yields. The volatility is based on historical volatility of the Company's common stock over the most recent period commensurate with the estimated expected term of the stock option granted. The Company uses historical volatility because management believes such volatility is representative of prospective trends. The expected term of an award is based on historical exercise data. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of the awards. The expected forfeiture rate is based upon historical experience. The dividend yield assumption is based on the Company's history and expectation regarding dividend payouts. The fair value of option grants include the assumptions for grants in fiscal 2006, 2007, and 2008 are as follows:
Grant Date
|
Fair
Value |
Dividend
Yield |
Risk-free
Interest Rate |
Expected
Volatility |
Expected
Life |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
October 1, 2005 |
$ | 11.81 | 0 | % | 2.74 | % | 70.00 | % | 3 years | |||||
February 21, 2006 |
$ | 14.43 | 0 | % | 4.68 | % | 70.00 | % | 3 years | |||||
March 31, 2006 |
$ | 15.33 | 0 | % | 4.83 | % | 70.00 | % | 3 years | |||||
March 30, 2007 |
$ | 19.06 | 0 | % | 4.54 | % | 30.00 | % | 3 years | |||||
September 1, 2007 |
$ | 21.42 | 0 | % | 4.16 | % | 30.00 | % | 3 years | |||||
March 31, 2008 |
$ | 16.41 | 0 | % | 1.88 | % | 42.00 | % | 3 years |
On March 31, 2008, the Company granted 130,000 options at an exercise price of $54.00, the fair market value of the Company's common stock on the day prior to the date of the grant. During the year ended September 30, 2008 177,386 options were exercised which generated $2,480 cash and increased the shares of common stock by 177,386 shares.
The stock-based employee compensation expense for the years ended September 30, 2006, 2007 and 2008 was $2,786 ($1,699 net of tax or $0.17 per fully diluted share), $3,136 ($1,866 net of tax or $0.17 per fully diluted share), $1,650 ($983 net of tax or $0.08 per fully diluted share), respectively. The remaining unrecognized compensation expense at September 30, 2008 was $3,185 to be recognized over a weighted average vesting period of 1.51 years.
89
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 11 Stock-based Compensation (Continued)
The following table summarizes the activity under the stock option plans:
|
Number of
Shares |
Aggregate
Intrinsic Value |
Weighted
Average Exercise Prices |
Weighted
Average Remaining Contractual Life |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at September 30, 2007 |
503,763 | $ | 30.52 | |||||||||||
Granted |
130,000 | 54.00 | ||||||||||||
Exercised |
(177,386 | ) | $ | 9,400 | 13.98 | |||||||||
Canceled |
(8,000 | ) | ||||||||||||
Outstanding at September 30, 2008 |
448,377 | $ | 5,862 | $ | 43.24 | 7.83 yrs. | ||||||||
Vested or expected to vest |
448,377 | $ | 5,862 | $ | 43.24 | 7.83 yrs. | ||||||||
Exercisable at September 30, 2008 |
210,700 | $ | 4,270 | $ | 26.57 | 6.61 yrs. | ||||||||
Grant Date
|
Exercise Price
Per Share |
Remaining
Contractual Life in Years |
Outstanding
Number of Shares |
Exercisable
Number of Shares |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
August 31, 2004 |
$ | 12.80 | 5.92 | 136,565 | 136,565 | ||||||||
May 5, 2005 |
19.00 | 6.58 | 8,334 | 8,334 | |||||||||
August 15, 2005 |
20.25 | 6.92 | 10,477 | 10,477 | |||||||||
October 1, 2005 |
25.50 | 7.00 | 5,000 | | |||||||||
February 21, 2006 |
29.25 | 7.42 | 25,001 | 8,333 | |||||||||
March 31, 2006 |
31.00 | 7.50 | 10,000 | 5,000 | |||||||||
March 30, 2007 |
72.93 | 8.50 | 121,000 | 40,324 | |||||||||
September 1, 2007 |
83.53 | 8.92 | 5,000 | 1,667 | |||||||||
March 31, 2008 |
54.00 | 9.50 | 127,000 | | |||||||||
|
448,377 | 210,700 | |||||||||||
During the first quarter of fiscal 2006, in accordance with the modified prospective transition method, the Company eliminated its balance in stockholders' equity of deferred stock compensation, which represented unrecognized compensation cost for non-vested stock options.
SFAS 123(R) requires that forfeitures be estimated over the vesting period, rather than being recognized as a reduction of compensation expense when the forfeiture actually occurs. The cumulative effect of the use of the estimated forfeiture method for prior periods upon adoption of SFAS 123(R) was not material.
90
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 12 Quarterly Data (unaudited)
The unaudited quarterly results of operations of the Company for the years ended September 30, 2007 and 2008 are as follows:
|
2007 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Quarter Ended | |||||||||||||
|
December 31 | March 31 | June 30 | September 30 | ||||||||||
Net revenues |
$ | 120,463 | $ | 137,336 | $ | 141,087 | $ | 160,950 | ||||||
Gross profit |
33,621 | 40,333 | 36,939 | (1) | 40,191 | |||||||||
Net income |
13,184 | 17,404 | 17,741 | (2) | 17,791 | |||||||||
Net income per share: |
||||||||||||||
Basic |
$ | 1.32 | $ | 1.70 | $ | 1.52 | $ | 1.53 | ||||||
Diluted |
$ | 1.27 | $ | 1.63 | $ | 1.49 | $ | 1.50 |
|
2008 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Quarter Ended | |||||||||||||
|
December 31 | March 31 | June 30 | September 30 | ||||||||||
Net revenues |
$ | 146,077 | $ | 163,771 | $ | 166,340 | $ | 160,818 | ||||||
Gross profit |
34,205 | 35,920 | 40,117 | 34,415 | ||||||||||
Net income |
13,843 | (3) | 15,063 | 17,564 | 16,308 | |||||||||
Net income per share: |
||||||||||||||
Basic |
$ | 1.17 | $ | 1.27 | $ | 1.47 | $ | 1.36 | ||||||
Diluted |
$ | 1.16 | $ | 1.25 | $ | 1.46 | $ | 1.35 |
Note 13 Segment Reporting
The Company operates in one business segment: the design, manufacture, marketing and distribution of technologically advanced, high-performance alloys for use in the aerospace, land-based gas turbine and
91
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 13 Segment Reporting (Continued)
chemical processing industries. The Company has operations in the United States, Europe and China, which are summarized below. Sales between geographic areas are made at negotiated selling prices.
|
Year Ended
September 30, 2006 |
Year Ended
September 30, 2007 |
Year Ended
September 30, 2008 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Net Revenue by Geography: |
|||||||||||
United States |
$ | 265,133 | $ | 343,920 | $ | 344,118 | |||||
Europe |
117,676 | 142,641 | 167,522 | ||||||||
China |
25,429 | 35,872 | 63,950 | ||||||||
Other |
26,167 | 37,403 | 61,416 | ||||||||
Net Revenues |
$ | 434,405 | $ | 559,836 | $ | 637,006 | |||||
Net Revenue by Product Group: |
|||||||||||
High temperature resistant alloys |
$ | 295,395 | $ | 386,287 | $ | 465,014 | |||||
Corrosive resistant alloys |
139,010 | 173,549 | 171,992 | ||||||||
Net revenues |
$ | 434,405 | $ | 559,836 | $ | 637,006 |
The Net Revenue by Geography for Europe and Other have been restated from $114,026 to $142,641 for Europe and from $66,018 to $37,403 for Other for the year ended September 30, 2007, and from $101,448 to $117,676 for Europe and from $42,395 to $26,167 for Other for the year ended September 30, 2006, as the Company previously used the pre-translation balance from their reporting disclosure support versus the U.S. dollar translated balance in calculating the Europe and Other Net Revenues.
|
September 30,
2007 |
September 30,
2008 |
||||||
---|---|---|---|---|---|---|---|---|
Long-lived Assets by Geography: |
||||||||
United States |
$ | 143,043 | $ | 153,846 | ||||
Europe |
4,262 | 3,856 | ||||||
China |
333 | 1,244 | ||||||
Total long-lived assets |
$ | 147,638 | $ | 158,946 | ||||
Note 14 Valuation and Qualifying Accounts
|
Balance at
Beginning of Period |
Charges
(credits) to Expense |
Deductions(1) |
Balance at
End of Period |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Allowance for doubtful accounts receivables: |
||||||||||||||
September 30, 2008 |
$ | 1,339 | $ | 100 | $ | (85 | ) | $ | 1,354 | |||||
September 30, 2007 |
1,751 | (311 | ) | (101 | ) | 1,339 | ||||||||
September 30, 2006 |
1,514 | 373 | (136 | ) | 1,751 |
92
HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data and otherwise noted)
Note 15 Deferred Revenue
On November 17, 2006, the Company entered into a twenty-year agreement to provide conversion services to Titanium Metals Corporation ("TIMET") for up to ten million pounds of titanium metal annually. TIMET paid the Company a $50,000 up-front fee and will also pay the Company for its processing services during the term of the agreement (20 years) at prices established by the terms of the agreement. TIMET may exercise an option to have ten million additional pounds of titanium converted annually, provided that it offers to loan up to $12,000 to the Company for certain capital expenditures which may be required to expand capacity. In addition to the volume commitment, the Company has granted to TIMET a security interest on its four-high steckel rolling mill, along with rights of access if the Company enters into bankruptcy or defaults on any financing arrangements. The Company has agreed not to manufacture titanium products (other than cold reduced titanium tubing). The Company has also agreed not to provide titanium conversion services to any entity other than TIMET for the term of the Conversion Services Agreement. The cash received of $50,000 is recognized in income on a straight-line basis over the 20-year term of the agreement. The portion of the up-front fee not recognized in income is shown as deferred revenue on the consolidated balance sheet. Taxes will be paid on the up-front fee primarily in the first quarter of fiscal 2009. The agreement contains certain default provisions which could result in contract termination and damages, including the Company being required to return the unearned portion of the up-front fee.
93
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company has performed, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness and the design and operation of the Company's disclosure controls and procedures (as defined by Exchange Act rules 13a-15(e) and 15d-15(e)) pursuant to Rule 13a-15(b) of the Exchange Act as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2008 to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the fourth quarter of fiscal 2008 there were no changes in the Company's internal controls over financial reporting or in other factors that have or are reasonably likely to materially affect these controls.
Management's Annual Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined by Exchange Act rules 13a-15(f) and 15d-15(f)) for the Company. With the participation of the Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations (COSO) of The Treadway Commission. Based on our assessment, management has concluded that, as of September 30, 2008, the Company's internal control over financial reporting is effective based on those criteria.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company's effectiveness of internal control over financial reporting as of September 30, 2008 has been audited by Deloitte and Touche LLP, an independent registered public accounting firm, and Deloitte & Touche has issued a report on the Company's internal control over financial reporting.
Mr. Mark Comerford,
President & Chief Executive Officer November 24, 2008 |
Mr. Marcel Martin,
Chief Financial Officer November 24, 2008 |
The information contained under "LiquidityExtension of U.S. Revolving Credit Facility" in Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations contained elsewhere in this Form 10-K is incorporated herein.
94
Item 10. Directors, Executive Officers and Corporate Governance.
The information included under the caption "BusinessExecutive Officers" in this Form 10-K, and under the captions "Election of Directors", "Section 16(a) Beneficial Ownership Reporting Compliance", "Corporate GovernanceCode of Ethics", "Corporate GovernanceCorporate Governance Committee and Director Nominations", "Corporate GovernanceCommittee Structure", and "Corporate GovernanceIndependence of the Board of Directors and Committee Members" in the Proxy Statement is incorporated herein by reference.
Item 11. Executive Compensation.
The information included under the captions "Executive Compensation", "Corporate GovernanceCompensation Committee Interlocks and Insider Participation" and "Corporate GovernanceDirector Compensation Program" in the Proxy Statement is incorporated herein by reference in response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information contained under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in the Proxy Statement and "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesEquity Compensation Plan Information" in this Form 10-K is incorporated herein by reference in response to this item. For additional information regarding the Company's stock option plans, please see Note 11 in the Notes to Consolidated Financial Statements in this report.
Item 13. Certain Relationships and Related Transactions.
There are no transactions since the beginning of fiscal 2008, or any currently proposed transaction in which the Company is or was a participant in which any "related person", within the meaning of Section 404(a) of Regulation S-K under the Securities Act of 1933, had or will have a material interest. The information contained under the caption "Corporate GovernanceIndependence of Board of Directors and Committee Members" in the Proxy Statement is incorporated herein by reference in response to this item.
Item 14. Principal Accountant Fees and Services.
The information included under the caption "Independent Registered Accounting Firm" in the Proxy Statement is incorporated herein by reference in response to this item.
95
Item 15. Exhibits, Financial Statement Schedules
The Financial Statements are set forth under Item 8 in this Form 10-K.
Financial Statement Schedules are omitted as they are not required, are not applicable, or the information is shown in the Notes to the Consolidated Financial Statements.
96
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities 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. | ||||
|
|
By: |
|
/s/ MARK COMERFORD Mark Comerford President and Chief Executive Officer Date: November 24, 2008 |
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.
Signature
|
Title
|
Date
|
||
---|---|---|---|---|
|
|
|
|
|
/s/ MARK COMERFORD
Mark Comerford |
President and Chief Executive Officer; Director (Principal Executive Officer) | November 24, 2008 | ||
/s/ MARCEL MARTIN Marcel Martin |
|
Chief Financial Officer (Principal Financial Officer) |
|
November 24, 2008 |
/s/ DAN MAUDLIN Dan Maudlin |
|
Controller and Chief Accounting Officer (Principal Accounting Officer) |
|
November 24, 2008 |
/s/ JOHN C. COREY John C. Corey |
|
Chairman of the Board, Director |
|
November 24, 2008 |
/s/ PAUL J. BOHAN Paul J. Bohan |
|
Director |
|
November 24, 2008 |
/s/ DONALD C. CAMPION Donald C. Campion |
|
Director |
|
November 24, 2008 |
/s/ ROBERT H. GETZ Robert H. Getz |
|
Director |
|
November 24, 2008 |
97
Signature
|
Title
|
Date
|
||
---|---|---|---|---|
|
|
|
|
|
/s/ TIMOTHY J. MCCARTHY
Timothy J. McCarthy |
Director | November 24, 2008 | ||
/s/ FRANCIS J. PETRO Francis J. Petro |
|
Director |
|
November 24, 2008 |
/s/ WILLIAM P. WALL William P. Wall |
|
Director |
|
November 24, 2008 |
/s/ RONALD W. ZABEL Ronald W. Zabel |
|
Director |
|
November 24, 2008 |
98
INDEX TO EXHIBITS
|
Exhibit
Number |
Description | |||
---|---|---|---|---|---|
2.1 | First Amended Joint Plan of Reorganization of Haynes International, Inc. and its Affiliated Debtors and Debtors-In-Possession dated June 29, 2004 (incorporated by reference to Exhibit 2.1 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
2.2 | Asset Purchase Agreement by and among Haynes Wire Company, The Branford Wire and Manufacturing Company, Carolina Industries, Inc., and Richard Harcke, dated as of October 28, 2004 (incorporated by reference to Exhibit 2.2 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
3.1 | Restated Certificate of Incorporation of Haynes International, Inc. (reflecting all amendments through February 20, 2007) (incorporated by reference to Exhibit 3.1 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
3.2 | Amended and Restated By-laws of Haynes International, Inc. (incorporated by reference to Exhibit 3.2 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
4.1 | Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
4.2 | Restated Certificate of Incorporation of Haynes International, Inc. (incorporated by reference to Exhibit 3.1 hereof). | ||||
4.3 | Amended and Restated By-laws of Haynes International, Inc. (incorporated by reference to Exhibit 3.2 hereof). | ||||
10.1 | Form of Termination Benefits Agreements by and between Haynes International, Inc. and certain of its employees (incorporated by reference to Exhibit 10.1 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
10.2 | Haynes International, Inc. Death Benefit Plan, effective January 1, 2003 (incorporated by reference to Exhibit 10.2 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
10.3 | Amendment No. One to the Haynes International, Inc. Death Benefit Plan, dated August 30, 2004 (incorporated by reference to Exhibit 10.3 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
10.4 | Haynes International, Inc. Supplemental Executive Retirement Plan, Plan Document effective January 1, 2002 (incorporated by reference to Exhibit 10.4 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
10.5 | Amendment No. One to the Haynes International, Inc. Supplemental Executive Retirement Plan, dated August 30, 2004 (incorporated by reference to Exhibit 10.5 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
10.6 | Haynes International Inc. Supplemental Executive Retirement Plan(s), Master Trust Agreement, effective January 1, 2003 (incorporated by reference to Exhibit 10.6 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
10.7 | Amendment No. One to the Master Trust Agreement, dated August 30, 2004 (incorporated by reference to Exhibit 10.7 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
10.8 | Plan Agreement by and between Haynes International, Inc. and Francis J. Petro, effective January 1, 2002 (incorporated by reference to Exhibit 10.8 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). |
99
|
Exhibit
Number |
Description | |||
---|---|---|---|---|---|
10.9 | Amendment No. One to the Plan Agreement by and between Haynes International, Inc. and Francis J. Petro, dated August 30, 2004 (incorporated by reference to Exhibit 10.9 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
10.10** | Second Amended and Restated Loan and Security Agreement by and among Haynes International, Inc., Haynes Wire Company, the Lenders (as defined therein), Wachovia Capital Finance Corporation (Central), as agent for the Lenders, and Bank One, N.A., as documentation agent, dated November 18, 2008. | ||||
10.11 | Consulting, Non-Competition and Confidentiality Agreement by and between Richard Harcke and Haynes Wire Company, dated November 5, 2004 (incorporated by reference to Exhibit 10.14 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
10.12 | Form of Director Indemnification Agreement between Haynes International, Inc. and certain of its directors named in the schedule to the Exhibit (incorporated by reference to Exhibit 10.21 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
10.13* | Conversion Services Agreement by and between the Company and Titanium Metals Corporation, dated November 17, 2006 (incorporated by reference to Exhibit 10.22 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). Portions of this exhibit have been omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission. | ||||
10.14 | Access and Security Agreement by and between the Company and Titanium Metals Corporation, dated November 17, 2006 (incorporated by reference to Exhibit 10.23 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
10.15 | Summary of 2008 Management Incentive Plan (incorporated by reference to Item 5.02 of the Haynes International, Inc. Form 8-K filed December 6, 2008). | ||||
10.16 | Haynes International, Inc. 2007 Stock Option Plan as adopted by the Board of Directors on January 18, 2007 (incorporated by reference to Exhibit 10.26 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
10.17 | Form of Non-Qualified Stock Option Agreement to be used in conjunction with grants made pursuant to the Haynes International, Inc. 2007 Stock Option Plan (incorporated by reference to Exhibit 10.27 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
10.18 | Second Amended and Restated Haynes International, Inc. Stock Option Plan as adopted by the Board of Directors on January 22, 2007 (incorporated by reference to Exhibit 10.28 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
10.19 | Form of Non-Qualified Stock Option Agreements between Haynes International, Inc. and certain of its executive officers and directors named in the schedule to the Exhibit pursuant to the Haynes International, Inc. Second Amended and Restated Stock Option Plan (incorporated by reference to Exhibit 10.29 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
10.20 | Form of Indemnification Agreement with Anastacia S. Kilian (incorporated by reference to Exhibit 10.31 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
10.21** | Employment Agreement by and between Haynes International, Inc. and Mark Comerford dated September 8, 2008. |
100
|
Exhibit
Number |
Description | |||
---|---|---|---|---|---|
10.22 | Non-Qualified Stock Option Agreement by and between Haynes International, Inc. and Mark Comerford, dated October 1, 2008 (incorporated by reference to Exhibit 10.2 to Haynes International, Inc. Form 8-K filed October 7, 2008). | ||||
10.23 | Amended and Restated Executive Employment Agreement by and between Haynes International, Inc. and Francis J. Petro, dated August 31, 2004 (incorporated by reference to Exhibit 10.10 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
10.24 | Non-Qualified Stock Option Agreement between Haynes International, Inc. and its President and Chief Executive Officer pursuant to the Haynes International, Inc. Second Amended and Restated Stock Option Plan (incorporated by reference to Exhibit 10.30 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194). | ||||
21.1** | Subsidiaries of the Registrant. | ||||
23.1** | Consent of Deloitte & Touche LLP. | ||||
31.1** | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | ||||
31.2** | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | ||||
32.1** | Section 1350 Certifications |
101
Exhibit 10.10
[Execution]
SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
by and among
HAYNES INTERNATIONAL, INC.
HAYNES WIRE COMPANY,
as Borrowers
and
WACHOVIA CAPITAL FINANCE CORPORATION (CENTRAL),
as Agent
JPMORGAN CHASE BANK, N.A.
as Documentation Agent
and
THE LENDERS FROM TIME TO TIME PARTY HERETO
as Lenders
Dated: November 18, 2008
TABLE OF CONTENTS
|
|
Page |
|
|
|
|
|
SECTION 1. |
DEFINITIONS |
1 |
|
|
|
|
|
SECTION 2. |
CREDIT FACILITIES |
33 |
|
|
|
||
2.1 |
Loans |
33 |
|
2.2 |
Letter of Credit Accommodations |
34 |
|
2.3 |
Equipment Purchase Loans |
38 |
|
2.4 |
Commitments |
41 |
|
|
|
||
SECTION 3. |
INTEREST AND FEES |
42 |
|
|
|
||
3.1 |
Interest |
42 |
|
3.2 |
Fees |
43 |
|
3.3 |
Changes in Laws and Increased Costs of Loans |
44 |
|
|
|
||
SECTION 4. |
CONDITIONS PRECEDENT |
46 |
|
|
|
||
4.1 |
Conditions Precedent to Amendment and Restatement |
46 |
|
4.2 |
Conditions Precedent to All Loans and Letter of Credit Accommodations |
47 |
|
|
|
||
SECTION 5. |
GRANT AND PERFECTION OF SECURITY INTEREST |
47 |
|
|
|
||
5.1 |
Grant of Security Interest |
47 |
|
5.2 |
Perfection of Security Interests |
49 |
|
|
|
||
SECTION 6. |
COLLECTION AND ADMINISTRATION |
54 |
|
|
|
||
6.1 |
Borrowers Loan Accounts |
54 |
|
6.2 |
Statements |
54 |
|
6.3 |
Collection of Accounts |
54 |
|
6.4 |
Payments |
55 |
|
6.5 |
Taxes |
57 |
|
6.6 |
Authorization to Make Loans |
60 |
|
6.7 |
Use of Proceeds |
60 |
|
6.8 |
Appointment of Administrative Borrower as Agent for Requesting Loans and Receipts of Loans and Statements |
61 |
|
6.9 |
Illegality |
61 |
|
6.10 |
Pro Rata Treatment |
62 |
|
6.11 |
Sharing of Payments, Etc |
62 |
|
6.12 |
Settlement Procedures |
63 |
|
ii
6.13 |
Obligations Several; Independent Nature of Lenders Rights |
66 |
|
|
|
||
SECTION 7. |
COLLATERAL REPORTING AND COVENANTS |
66 |
|
|
|
||
7.1 |
Collateral Reporting |
66 |
|
7.2 |
Accounts Covenants |
67 |
|
7.3 |
Inventory Covenants |
68 |
|
7.4 |
Equipment and Real Property Covenants |
69 |
|
7.5 |
Power of Attorney |
70 |
|
7.6 |
Right to Cure |
71 |
|
7.7 |
Access to Premises |
71 |
|
|
|
||
SECTION 8. |
REPRESENTATIONS AND WARRANTIES |
72 |
|
|
|
||
8.1 |
Corporate Existence, Power and Authority |
72 |
|
8.2 |
Name; State of Organization; Chief Executive Office; Collateral Locations |
72 |
|
8.3 |
Financial Statements; No Material Adverse Change |
73 |
|
8.4 |
Priority of Liens; Title to Properties |
73 |
|
8.5 |
Tax Returns |
73 |
|
8.6 |
Litigation |
74 |
|
8.7 |
Compliance with Other Agreements and Applicable Laws |
74 |
|
8.8 |
Environmental Compliance |
74 |
|
8.9 |
Employee Benefits |
75 |
|
8.10 |
Bank Accounts |
75 |
|
8.11 |
Intellectual Property |
76 |
|
8.12 |
Subsidiaries; Affiliates; Capitalization |
76 |
|
8.13 |
Labor Disputes |
77 |
|
8.14 |
Restrictions on Subsidiaries |
77 |
|
8.15 |
Material Contracts |
78 |
|
8.16 |
Payable Practices; Retention of Title |
78 |
|
8.17 |
Accuracy and Completeness of Information |
78 |
|
8.18 |
Survival of Warranties; Cumulative |
78 |
|
|
|
||
SECTION 9. |
AFFIRMATIVE AND NEGATIVE COVENANTS |
79 |
|
|
|
||
9.1 |
Maintenance of Existence |
79 |
|
9.2 |
New Collateral Locations |
79 |
|
9.3 |
Compliance with Laws, Regulations, Etc |
80 |
|
9.4 |
Payment of Taxes and Claims |
81 |
|
9.5 |
Insurance |
81 |
|
9.6 |
Financial Statements and Other Information |
81 |
|
iii
9.7 |
Sale of Assets, Consolidation, Merger, Dissolution, Etc |
83 |
|
9.8 |
Encumbrances |
86 |
|
9.9 |
Indebtedness |
88 |
|
9.10 |
Loans, Investments, Etc |
90 |
|
9.11 |
Dividends and Redemptions |
93 |
|
9.12 |
Transactions with Affiliates |
94 |
|
9.13 |
Compliance with ERISA |
95 |
|
9.14 |
End of Fiscal Years; Fiscal Quarters |
95 |
|
9.15 |
Change in Business |
95 |
|
9.16 |
Limitation of Restrictions Affecting Subsidiaries |
95 |
|
9.17 |
Intentionally deleted |
96 |
|
9.18 |
Fixed Charge Coverage Ratio |
96 |
|
9.19 |
After Acquired Real Property |
96 |
|
9.20 |
Effect of Indebtedness of Foreign Subsidiaries |
97 |
|
9.21 |
Costs and Expenses |
97 |
|
9.22 |
Further Assurances |
97 |
|
|
|
||
SECTION 10. |
EVENTS OF DEFAULT AND REMEDIES |
98 |
|
|
|
||
10.1 |
Events of Default |
98 |
|
10.2 |
Remedies |
99 |
|
|
|
||
SECTION 11. |
JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW |
103 |
|
|
|
||
11.1 |
Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver |
103 |
|
11.2 |
Waiver of Notices |
104 |
|
11.3 |
Amendments and Waivers |
104 |
|
11.4 |
Waiver of Counterclaims |
106 |
|
11.5 |
Indemnification |
106 |
|
11.6 |
Currency Indemnity |
107 |
|
|
|
||
SECTION 12. |
THE AGENT |
107 |
|
|
|
||
12.1 |
Appointment, Powers and Immunities |
107 |
|
12.2 |
Reliance by Agent |
108 |
|
12.3 |
Events of Default |
108 |
|
12.4 |
Wachovia in its Individual Capacity |
109 |
|
12.5 |
Indemnification |
109 |
|
12.6 |
Non-Reliance on Agent and Other Lenders |
109 |
|
12.7 |
Failure to Act |
110 |
|
iv
12.8 |
Additional Loans |
110 |
|||
12.9 |
Concerning the Collateral and the Related Financing Agreements |
110 |
|||
12.10 |
Field Audit, Examination Reports and other Information; Disclaimer by Lenders |
110 |
|||
12.11 |
Collateral Matters |
111 |
|||
12.12 |
Agency for Perfection |
113 |
|||
12.13 |
Successor Agent |
113 |
|||
|
|
||||
SECTION 13. |
TERM OF AGREEMENT; MISCELLANEOUS |
113 |
|||
|
|
||||
13.1 |
Term |
113 |
|||
13.2 |
Interpretative Provisions |
115 |
|||
13.3 |
Notices |
117 |
|||
13.4 |
Partial Invalidity |
117 |
|||
13.5 |
Confidentiality |
118 |
|||
13.6 |
Successors |
118 |
|||
13.7 |
Assignments; Participations |
119 |
|||
13.8 |
USA Patriot Act |
121 |
|||
13.9 |
Entire Agreement |
121 |
|||
13.10 |
Counterparts, Etc |
121 |
|||
13.11 |
Code Section 956 Override |
121 |
|||
13.12 |
Bank Products Override |
122 |
|||
|
|
||||
SECTION 14. |
ACKNOWLEDGMENT AND RESTATEMENT |
122 |
|||
|
|
||||
14.1 |
Existing Obligations |
122 |
|||
14.2 |
Acknowledgment of Security Interests |
122 |
|||
14.3 |
Existing Financing Agreements |
122 |
|||
14.4 |
Restatement |
123 |
|||
v
INDEX TO
EXHIBITS AND SCHEDULES
Exhibit A |
Form of Assignment and Acceptance |
|
|
Exhibit B |
Form of Borrowing Base Certificate |
|
|
Exhibit C |
Information Certificate |
|
|
Exhibit D |
Form of Equipment Purchase Note |
|
|
Exhibit E |
Form of Compliance Certificate |
|
|
Exhibit F |
Revolving Loan Commitment |
|
|
Schedule 1.64 |
Existing Financing Agreements |
|
|
Schedule 1.136 |
Timet Collateral |
|
|
Schedule 1.140 |
Timet Option Note |
|
|
Schedule 5.1 |
Commercial Tort Claims |
|
|
Schedule 6.6(b) |
Operating Accounts to Receive Loan Proceeds |
|
|
Schedule 8.12 |
Inactive or Dissolved Subsidiaries |
|
|
Schedule 9.8 |
Tax Liens and Other Non-Consensual Liens |
vi
SECOND AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
This Second Amended and Restated Loan and Security Agreement (this Agreement as hereinafter further defined), dated November 18, 2008, is entered into by and among Haynes International, Inc., a Delaware corporation (Haynes Parent), Haynes Wire Company, a Delaware corporation (Haynes Wire and together with Haynes Parent, collectively, Borrowers), the parties hereto from time to time as lenders, whether by execution of this Agreement or an Assignment and Acceptance (each individually, a Lender and collectively, Lenders as hereinafter further defined), JPMorgan Chase Bank, NA, a national banking association, in its capacity as documentation agent (in such capacity, Documentation Agent as hereinafter further defined), and Wachovia Capital Finance Corporation (Central), formerly known as Congress Financial Corporation (Central), an Illinois corporation, in its capacity as agent for Lenders (in such capacity, Agent as hereinafter further defined).
W I T N E S S E T H:
WHEREAS, Borrowers, Agent and the parties thereto as lenders, are parties to the Amended and Restated Loan and Security Agreement, dated August 31, 2004, as amended (the Existing Loan Agreement);
WHEREAS, Borrowers have requested that Agent and Lenders amend and restate the Existing Loan Agreement pursuant to and in accordance with the terms and conditions set forth herein; and
WHEREAS, each Lender is willing to agree (severally and not jointly) to amend and restate the Existing Loan Agreement and to make such loans and provide such financial accommodations to Borrowers on a pro rata basis according to its Commitment (as defined below) on the terms and conditions set forth herein and Agent is willing to act as agent for Lenders on the terms and conditions set forth herein and the other Financing Agreements (as hereinafter defined);
NOW, THEREFORE, in consideration of the mutual conditions and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:
For purposes of this Agreement, the following terms shall have the respective meanings given to them below:
1.1 Accounts shall mean, as to each Borrower, all present and future rights of such Borrower to payment of a monetary obligation, whether or not earned by performance, which is not evidenced by chattel paper or an instrument, (a) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, (b) for services rendered or to be rendered, (c) for a secondary obligation incurred or to be incurred, or (d) arising out of the use of a credit or charge card or information contained on or for use with the card.
1.2 Adjusted Eurodollar Rate shall mean, with respect to each Interest Period for any Eurodollar Rate Loan, the rate per annum (rounded upwards, if necessary, to the next one thousandth (1/1000) of one (1%) percent) determined by dividing (a) the Eurodollar Rate for such Interest Period by (b) a percentage equal to: (i) one (1) minus (ii) the Reserve Percentage. For purposes hereof, Reserve Percentage shall mean the reserve percentage, expressed as a decimal, prescribed by any United States banking authority for determining the reserve requirement which is or would be applicable to deposits of United States dollars in a non-United States or an international banking office of Reference Bank used to fund a Eurodollar Rate Loan or any Eurodollar Rate Loan made with the proceeds of such deposit, whether or not the Reference Bank actually holds or has made any such deposits or loans. The Adjusted Eurodollar Rate shall be adjusted on and as of the effective day of any change in the Reserve Percentage.
1.3 Administrative Borrower shall mean Haynes International, Inc., a Delaware corporation in its capacity as Administrative Borrower on behalf of itself and Haynes Wire pursuant to Section 6.8 hereof and its successors and assigns in such capacity.
1.4 Affiliate shall mean, with respect to a specified Person, any other Person which directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with such Person, and without limiting the generality of the foregoing, includes (a) any Person which beneficially owns or holds ten (10%) percent or more of any class of Voting Stock of such Person or other equity interests in such Person, (b) any Person of which such Person beneficially owns or holds ten (10%) percent or more of any class of Voting Stock or in which such Person beneficially owns or holds ten (10%) percent or more of the equity interests and (c) any director or executive officer of such Person. For the purposes of this definition, the term control (including with correlative meanings, the terms controlled by and under common control with), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of Voting Stock, by agreement or otherwise.
1.5 Agent shall mean Wachovia Capital Finance Corporation (Central), in its capacity as agent on behalf of Lenders pursuant to the terms hereof and any replacement or successor agent hereunder.
1.6 Agent Payment Account shall mean account no. 5000000030266 of Agent at Wachovia Bank, National Association, or such other account of Agent as Agent may from time to time designate to Administrative Borrower as the Agent Payment Account for purposes of this Agreement and the other Financing Agreements.
1.7 Applicable Margin shall mean, at any time, with respect to Prime Rate Loans and Eurodollar Rate Loans, the applicable percentage (on a per annum basis) set forth below based on the Monthly Average Excess Availability for the immediately preceding month:
Tier |
|
Monthly Average
|
|
Applicable
|
|
Applicable Margin
|
|
1 |
|
Greater than $40,000,000 |
|
1.75 |
% |
2.50 |
% |
|
|
|
|
|
|
|
|
2 |
|
Greater than or equal to $20,000,000 and less than or equal to $40,000,000 |
|
2.00 |
% |
2.75 |
% |
|
|
|
|
|
|
|
|
3 |
|
Less than $20,000,000 |
|
2.25 |
% |
3.00 |
% |
2
provided , that , (i) the Applicable Margin shall be calculated and established on the first day of each month and shall remain in effect until adjusted thereafter at the beginning of the next month and (ii) the Applicable Margin from and including the date hereof through November 30, 2008 shall be the amount for Tier 1 set forth above.
1.8 Approved Fund shall mean with respect to any Lender that is a fund or similar investment vehicle that makes or invests in commercial loans, any other fund or similar investment vehicle that invests in commercial loans which is managed or advised by the same investment advisor as such Lender or by an Affiliate of such investment advisor.
1.9 Arcadia Facility Inventory Availability shall mean, with respect to Eligible Arcadia Inventory, the lesser of:
1.10 Assignment and Acceptance shall mean an Assignment and Acceptance Agreement substantially in the form of Exhibit A attached hereto (with blanks appropriately completed) delivered to Agent in connection with an assignment of a Lenders interest hereunder in accordance with the provisions of Section 13.7 hereof.
3
1.11 Bank Product Obligations shall mean all obligations, liabilities and indebtedness owing by Borrowers to any Bank Product Provider arising in connection with Bank Products.
1.12 Bank Product Provider shall mean Agent, any Affiliate of Agent, any Lender, any Affiliate of any Lender or any other financial institution designated by Borrowers in a writing to the Agent as a Bank Product Provider and which, in each case, is acceptable to Agent and is approved by JPMorgan Chase Bank, N.A. (so long as it is a Lender hereunder) in the case of any Bank Product Provider that is not a Lender or an Affiliate of a Lender or an Affiliate of Agent, which approval by JPMorgan Chase Bank, N.A. shall not be unreasonably withheld or delayed. So long as JPMorgan Chase Bank, N.A. is a Lender, JPMorgan Chase Bank, N.A. and its Affiliates shall be a Bank Product Provider.
1.13 Bank Products shall mean any one or more of the following types of services or facilities provided to a Borrower by a Bank Product Provider (a) credit cards or stored value cards or the processing of credit cards or stored value cards, (b) cash management or related services, including (i) the automated clearinghouse transfer of funds for the account of a Borrower pursuant to agreement or overdraft for any accounts of a Borrower maintained at such Bank Product Provider, and (ii) controlled disbursement services.
1.14 Bankruptcy Code shall mean the United States Bankruptcy Code, being Title 11 of the United States Code (11 U.S.C. Sections 101-1330), as the same now exists or may from time to time hereafter be amended, modified, recodified or supplemented, together with all official rules, regulations and interpretations thereunder or related thereto.
1.15 Benefit Plan shall mean an employee benefit plan (as defined in Section 3(3) of ERISA) which Borrowers sponsor, maintain, or to which it makes, is making, or is obligated to make contributions, or in the case of a Multiemployer Plan has made contributions at any time during the immediately preceding six (6) plan years and to which Borrowers could have any liability.
1.16 Blocked Accounts shall have the meaning set forth in Section 6.3 hereof.
1.17 Borrowers shall mean, collectively (except for purposes of Sections 1.25, 1.30 and 9.6(a) (but only to the extent of the financial statements referenced therein), where the references to Borrowers shall mean only Haynes Parent), the following (together with their respective successors and assigns): (a) Haynes International, Inc., a Delaware corporation, (b) Haynes Wire Company, a Delaware corporation; and (c) any other Person that at any time after the date hereof becomes a Borrower; each sometimes being referred to herein individually as a Borrower.
1.18 Borrowing Base shall mean, at any time, the amount equal to:
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For purposes only of applying the Inventory Loan Limit, Agent may treat the then undrawn amounts of outstanding Letter of Credit Accommodations issued for the purpose of purchasing Eligible Inventory as Loans to the extent Agent is in effect basing the issuance of the Letter of Credit Accommodations on the Value of the Eligible Inventory being purchased with such Letter of Credit Accommodations. In determining the actual amounts of such Letter of Credit Accommodations to be so treated for purposes of the sublimit, the outstanding Loans and Reserves shall be attributed first to any components of the lending formulas set forth above that are not subject to such sublimit, before being attributed to the components of the lending formulas subject to such sublimit. The amounts of Eligible Inventory of Borrowers shall, at Agents option, be determined based on the lesser of the amount of Inventory set forth in the general ledger of Borrowers or the perpetual inventory record maintained by Borrowers.
1.19 Borrowing Base Certificate shall mean a certificate substantially in the form of Exhibit B hereto, as such form may from time to time be modified by Agent in good faith with the consent of each Borrower (which consent shall not be unreasonably withheld, conditioned or delayed), which is duly completed (including all schedules thereto) and executed by the vice-president-finance, chief financial officer, treasurer, assistant treasurer, controller or other financial or senior officer of Administrative Borrower on behalf of Borrowers acceptable to Agent and delivered to Agent.
1.20 Business Day shall mean any day other than a Saturday, Sunday, or other day on which commercial banks are authorized or required to close under the laws of the State of Illinois, or the State of North Carolina, and a day on which Agent is open for the transaction of business, except that if a determination of a Business Day shall relate to any Eurodollar Rate Loans, the term Business Day shall also exclude any day on which banks are closed for dealings in dollar deposits in the London interbank market or other applicable Eurodollar Rate market.
1.21 Capital Expenditures shall mean, with respect to any Person, all expenditures made and liabilities incurred for the acquisition of assets which are not, in accordance with GAAP, treated as expense items for such Person in the year made or incurred or as a prepaid expense applicable to a future year or years; provided , that , Capital Expenditures shall not include expenditures that would otherwise constitute Capital Expenditures to the extent made with proceeds from insurance for an insured loss or proceeds of an award of compensation from a condemnation or eminent domain proceeding to replace or restore the assets that were the subject of the loss giving rise to the payment of such insurance proceeds or the subject of such condemnation or eminent domain proceeding giving rise to the payment of such award.
1.22 Capital Leases shall mean, as applied to any Person, any lease of (or any agreement conveying the right to use) any property (whether real, personal or mixed) by such
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Person as lessee which in accordance with GAAP, is required to be reflected as a liability on the balance sheet of such Person.
1.23 Capital Stock shall mean, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Persons capital stock or partnership, limited liability company or other equity interests at any time outstanding, and any and all rights, warrants or options exchangeable for or convertible into such capital stock or other interests (but excluding any debt security that is exchangeable for or convertible into such capital stock).
1.24 Cash Equivalents shall mean any of the following: (a) any evidence of Indebtedness with a maturity date of ninety (90) days or less issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof or any agency or instrumentality thereof; provided , that , the full faith and credit of the United States of America is pledged in support thereof; (b) certificates of deposit or bankers acceptances with a maturity of ninety (90) days or less (after the date of the purchase thereof) of any financial institution that is a member of the Federal Reserve System, in any case having combined capital and surplus and undivided profits of not less than $250,000,000; (c) commercial paper (including variable rate demand notes) with a maturity of ninety (90) days or less (after the date of the purchase thereof) issued or guaranteed by a corporation (except an Affiliate of any Borrower) organized under the laws of any State of the United States of America, the District of Columbia or a bank organized under the laws of any State of the United States of America or constituting a national banking association under the laws of the United States of America, in each case having a rating of at least A 1 by Standard & Poors Ratings Service, a division of The McGraw Hill Companies, Inc. or at least P 1 by Moodys Investors Service, Inc.; (d) repurchase obligations with a term of not more than thirty (30) days (after the date of the purchase thereof) for underlying securities of the types described in clause (a) above entered into with any financial institution having combined capital and surplus and undivided profits of not less than $250,000,000; (e) repurchase agreements and reverse repurchase agreements relating to marketable direct obligations issued or unconditionally guaranteed by the United States of America or issued by any governmental agency thereof and backed by the full faith and credit of the United States of America in each case maturing within ninety (90) days or less from the date of acquisition; provided , that , the terms of such agreements comply with the guidelines set forth in the Federal Financial Agreements of Depository Institutions with Securities Dealers and Others, as adopted by the Comptroller of the Currency on October 31, 1985; and (f) investments in money market funds and mutual funds which invest substantially all of their assets in securities of the types described in clauses (a) through (e) above.
1.25 Change of Control shall mean (a) the transfer (in one transaction or a series of transactions) of all or substantially all of the assets of any Borrower to any Person or group (as such term is used in Section 13(d)(3) of the Exchange Act); (b) the liquidation or dissolution of any Borrower; (c) the acquisition by any Person or group (as such term is used in Section 13(d)(3) of the Exchange Act) of beneficial ownership, directly or indirectly, of more than fifty (50%) percent of the voting power of the total outstanding Voting Stock of any Borrower; (d) during any period of two (2) consecutive years, individuals who at the beginning of such period constituted the Board of Directors of any Borrower (together with any new directors whose nomination for election by the stockholders of any Borrower was approved by a vote of at least
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sixty six and two thirds (66 2/3%) percent of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of any Borrower then still in office.
1.26 Code shall mean the Internal Revenue Code of 1986, as the same now exists or may from time to time hereafter be amended, modified, recodified or supplemented, together with all governmental rules, regulations and interpretations thereunder or related thereto.
1.27 Collateral shall have the meaning set forth in Section 5 hereof.
1.28 Collateral Access Agreement shall mean an agreement in writing, in form and substance reasonably satisfactory to Agent, from any lessor of premises to each Borrower, or any other person to whom any Collateral is consigned or who has custody, control or possession of any Collateral or is otherwise the owner or operator of any premises on which any Collateral is located, in favor of Agent with respect to the Collateral at such premises or otherwise in the custody, control or possession of such lessor, consignee or other person.
1.29 Commitment shall mean, with respect to each Lender, the principal amount set forth on Exhibit F hereto for such Lender or for any party becoming a Lender after the date hereof the amount of such Lenders Commitment as set forth on Schedule 1 to the Assignment and Acceptance Agreement pursuant to which such Lender may become a Lender hereunder in accordance with the provisions of Section 13.7 of this Agreement; as the same may be adjusted in accordance with the terms hereof; sometimes being collectively referred to as Commitments.
1.30 Consolidated Adjusted Net Income shall mean, with respect to any Person for any period, the aggregate of the net income (loss) of such Person and its Subsidiaries, on a consolidated basis, for such period (excluding to the extent included therein any extraordinary or non recurring gains and non cash charges, including non-cash pension and other non-cash post-employment benefit charges and non-cash restructuring charges and expenses and in the case of Borrowers and its Subsidiaries, such cash charges and non-cash charges in each case in amounts acceptable to Agent in its determination and arising pursuant to events or circumstances beyond the control of Borrowers), after deducting all charges which should be deducted before arriving at the net income (loss) for such period, and after deducting the Provision for Taxes for such period, all as determined in accordance with GAAP; provided , that , (a) the net income of any Person that is not a wholly owned Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid or payable to such Person or a wholly owned Subsidiary of such Person; (b) except to the extent included pursuant to the foregoing clause, the net income of any Person accrued prior to the date it becomes a wholly owned Subsidiary of such Person or is merged into or consolidated with such Person or any of its wholly owned Subsidiaries or that Persons assets are acquired by such Person or by any of its wholly owned Subsidiaries shall be excluded; and (c) the effect of any change in accounting principles adopted by such Person or its Subsidiaries after the date hereof shall be excluded. For the purposes of this definition, net income excludes any gain and non cash loss (but not any cash loss) together with any related Provision for Taxes for such gain and non cash loss (but not any cash loss) realized upon the sale or other disposition of any assets that
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are not sold in the ordinary course of business (including, without limitation, dispositions pursuant to sale and leaseback transactions) or of any capital stock of such Person or a Subsidiary of such Person and any net income realized as a result of changes in accounting principles or the application thereof to such Person.
1.31 Credit Facility shall mean the Loans and Letter of Credit Accommodations provided to or for the benefit of any Borrower pursuant to Sections 2.1 and 2.2 hereof.
1.32 Default shall mean an act, condition or event which with notice or passage of time or both would constitute an Event of Default.
1.33 Defaulting Lender shall have the meaning set forth in Section 6.12(e) hereof.
1.34 Deposit Account Control Agreement shall mean an agreement in writing, in form and substance reasonably satisfactory to Agent, by and among Agent, the Borrowers with a deposit account at any bank and the bank at which such deposit account is at any time maintained which provides that such bank will comply with instructions originated by Agent directing disposition of the funds in the deposit account without further consent by such Borrower and has such other terms and conditions as Agent may reasonably require.
1.35 Direct Remittance Event shall have the meaning set forth in Section 6.3(a) hereof.
1.36 Early Termination Fee shall mean the fee payable by Borrowers pursuant to Section 13.1(b) hereof.
1.37 EBITDA shall mean, as to any Person, with respect to any period, an amount equal to: (a) the Consolidated Adjusted Net Income of such Person and its Subsidiaries for such period, plus (b) depreciation and amortization and other non-cash charges including imputed interest and deferred compensation for such period (to the extent deducted in the computation of Consolidated Adjusted Net Income of such Person), all in accordance with GAAP, plus (c) Interest Expense for such period (to the extent deducted in the computation of Consolidated Adjusted Net Income of such Person), plus (d) the Provision for Taxes for such period (to the extent deducted in the computation of Consolidated Adjusted Net Income of such Person), plus (e) non-recurring cash charges for such period, including any payments made to unionized employees pursuant to a Collective Bargaining Agreement, to be entered into after the date hereof, between Haynes International, Inc. and United Steelworkers of America, for itself and on behalf of its Local No. 2958 as to all of such non-recurring cash charges to the extent deducted in the computation of Consolidated Adjusted Net Income of such Person), provided , that , in no event shall the amount of non-recurring cash charges added pursuant to this clause (f) exceed $10,000,000 in the aggregate for the fiscal year ending September 30, 2009 and each fiscal year thereafter, plus (f) non-cash charges related to fresh-start accounting taken in such period.
1.38 Eligible Accounts shall mean Accounts created by a Borrower that at the time of determination satisfy the criteria set forth below. Accounts shall be Eligible Accounts if:
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9
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The criteria for Eligible Accounts set forth above may only be changed and any new criteria for Eligible Accounts may only be established by Agent in good faith based on either: (i) an event, condition or other circumstance arising after the date hereof, or (ii) an event, condition or other circumstance existing on the date hereof to the extent Agent has no written notice thereof from a Borrower prior to the date hereof, in either case under clause (i) or (ii) which adversely affects or could reasonably be expected to adversely affect the Accounts in the good faith determination of Agent. Any Accounts that are not Eligible Accounts shall nevertheless be part of the Collateral.
1.39 Eligible Arcadia Inventory shall mean Eligible Inventory (a) located at Haynes Parents Arcadia, Louisiana facility; or (b) located at third-party processors of Haynes Parents Inventory used by Haynes Parent in connection with the Arcadia, Louisiana facility and from which processors Agent shall have received a Collateral Access Agreement (except as Agent may otherwise agree); or (c) in transit between Haynes Parents Arcadia, Louisiana facility and such processors location; or (d) in transit from another of Haynes Parents facilities referred to herein to Haynes Parents Arcadia, Louisiana facility.
1.40 Eligible Equipment shall mean all Equipment owned by Borrowers which has been acquired prior to or after the date hereof and which is included in an appraisal of Equipment received by Agent after the date hereof in accordance with Section 7.4(a) hereof and is in good order, repair, running and marketable condition that at all times satisfies the criteria set forth below. In general, Eligible Equipment shall not include: (a) Equipment at premises other than those permitted hereunder and which are either (i) owned and operated by Borrowers, or (ii) leased and operated by Borrowers or (iii) owned and operated by a third person, provided , that , except as Agent may otherwise agree, Agent shall have received a Collateral Access Agreement duly executed and delivered by such third person; (b) Equipment subject to a security interest, lien, charge or other encumbrance in favor of any Person other than Agent except those
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permitted in this Agreement that are subject to an intercreditor agreement, in form and substance satisfactory to Agent, between the holder of such security interest or lien and Agent or as Agent may otherwise specifically agree; (c) Equipment located outside the continental United States of America; (d) Equipment that is not subject to the first priority, valid and perfected security interests and liens of Agent; (e) worn-out, obsolete, damaged or defective Equipment or Equipment not used or usable in the ordinary course of Borrowers business as presently conducted; (f) computer hardware; (g) Equipment that is or becomes a fixture; or (h) Equipment which is Eligible New Equipment. The criteria for Eligible Equipment set forth above may only be changed and any new criteria for Eligible Equipment may only be established by Agent in good faith based on either: (i) an event, condition or other circumstance arising after the date hereof, or (ii) an event, condition or other circumstance existing on the date hereof to the extent Agent has no written notice thereof from Borrowers prior to the date hereof, in either case under clause (i) or (ii) which adversely affects or could reasonably be expected to adversely affect such Equipment in the good faith determination of Agent. Any Equipment that is not Eligible Equipment shall nevertheless be part of the Collateral.
1.41 Eligible Inventory shall mean, as to each Borrower, Inventory owned by such Borrower consisting of finished goods held for resale in the ordinary course of the business of such Borrower, raw materials for such finished goods and work-in-process and semi-finished Inventory, in each case that at all times satisfies the criteria set forth below. In general, Eligible Inventory shall not include (a) spare parts for equipment; (b) packaging and shipping materials; (c) supplies used or consumed in such Borrowers business; (d) Inventory at premises other than those permitted hereunder and which are either (i) owned and operated by Borrowers or (ii) leased and operated by Borrowers or (iii) owned and operated by a third person, provided , that , except as Agent may otherwise agree, as to locations leased and operated by Borrowers or locations owned and operated by a third person, Agent shall have received a Collateral Access Agreement duly executed and delivered by the lessor and owner of such leased locations or by such third person, as the case may be; (e) Inventory subject to a security interest, lien, charge or other encumbrance in favor of any Person other than Agent except those permitted in this Agreement that are subject to an intercreditor agreement in form and substance satisfactory to Agent between the holder of such security interest or lien and Agent or as Agent may otherwise specifically agree; (f) bill and hold goods; (g) unserviceable, obsolete or slow moving Inventory; (h) Inventory that is not subject to the first priority, valid and perfected security interests and liens of Agent; (i) returned, damaged and/or defective Inventory; (j) Inventory purchased or sold on consignment and (k) Inventory of Borrowers located outside the United States of America. The criteria for Eligible Inventory set forth above may only be changed and any new criteria for Eligible Inventory may only be established by Agent in good faith based on either: (i) an event, condition or other circumstance arising after the date hereof, or (ii) an event, condition or other circumstance existing on the date hereof to the extent Agent has no written notice thereof from a Borrower prior to the date hereof, in either case under clause (i) or (ii) which adversely affects or could reasonably be expected to adversely affect the Inventory in the good faith determination of Agent. Any Inventory that is not Eligible Inventory shall nevertheless be part of the Collateral.
1.42 Eligible Kokomo Inventory shall mean Eligible Inventory (a) located at Haynes Parents Kokomo, Indiana facility; or (b) located at third-party processors of Haynes Parents Inventory used by Haynes Parent in connection with the Kokomo, Indiana facility and from which processors Agent shall have received a Collateral Access Agreement (except as Agent
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may otherwise agree); or (c) in transit between Haynes Parents Kokomo, Indiana facility and such processors location; or (d) in transit from another of Haynes Parents facilities referred to herein to Haynes Parents Kokomo, Indiana facility.
1.43 Eligible New Equipment shall mean all new Equipment owned by Borrowers which is or has been acquired on or after October 1, 2008 (the value of which has been included in the calculation of the amount of any Equipment Purchase Loan) and which is not included in the most recent appraisal of Equipment received by Agent after the date hereof in accordance with Section 7.4(a) hereof, and is in good order, repair, running and marketable condition that at all times satisfies the criteria set forth below. In general, Eligible New Equipment shall not include: (a) Equipment at premises other than those permitted hereunder and which are either (i) owned and operated by Borrowers, or (ii) leased and operated by Borrowers or (iii) owned and operated by a third person, provided , that , except as Agent may otherwise agree, Agent shall have received a Collateral Access Agreement duly executed and delivered by such third person; (b) Equipment subject to a security interest, lien, charge or other encumbrance in favor of any Person other than Agent except those permitted in this Agreement that are subject to an intercreditor agreement, in form and substance satisfactory to Agent, between the holder of such security interest or lien and Agent or as Agent may otherwise specifically agree; (c) Equipment located outside the continental United States of America; (d) Equipment that is not subject to the first priority, valid and perfected security interests and liens of Agent; (e) worn-out, obsolete, damaged or defective Equipment or Equipment not used or usable in the ordinary course of Borrowers business as presently conducted; (f) computer hardware; (g) Equipment that is or becomes a fixture; or (h) Equipment which is Eligible Equipment. The criteria for Eligible New Equipment set forth above may only be changed and any new criteria for Eligible New Equipment may only be established by Agent in good faith based on either: (i) an event, condition or other circumstance arising after the date hereof, or (ii) an event, condition or other circumstance existing on the date hereof to the extent Agent has no written notice thereof from Borrowers prior to the date hereof, in either case under clause (i) or (ii) which adversely affects or could reasonably be expected to adversely affect such Equipment in the good faith determination of Agent. Any Equipment that is not Eligible New Equipment shall nevertheless be part of the Collateral.
1.44 Eligible Service Center Inventory shall mean Eligible Inventory (a) located at Haynes Parents existing leased service center locations as of the date hereof in Windsor, Connecticut, Anaheim, California, Houston, Texas and Lebanon, Indiana; or (b) at any new service center location used by Haynes Parent after the date hereof, so long as Agent has received prior written notice of the use of such location, a Collateral Access Agreement from the owner and lessor of such location (except as Agent may otherwise agree) and such new service center is operating with Inventory and in a manner substantially consistent with the existing service center locations of Borrowers as of the date hereof; or (d) in transit from one of Borrowers facilities referred to herein to any of such service center locations.
1.45 Eligible Transferee shall mean (a) any Lender; (b) the parent company of any Lender and/or any Affiliate of such Lender which is at least fifty (50%) percent owned by such Lender or its parent company; (c) any person (whether a corporation, partnership, trust or otherwise) that is engaged in the business of making, purchasing, holding or otherwise investing in bank loans and similar extensions of credit in the ordinary course of its business and is
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administered or managed by a Lender or with respect to any Lender that is a fund which invests in bank loans and similar extensions of credit, any other fund that invests in bank loans and similar extensions of credit and is managed by the same investment advisor as such Lender or by an Affiliate of such investment advisor, and in each case is approved by Agent; (d) any other commercial bank approved by Agent; and (e) any other financial institution or accredited investor (as defined in Regulation D under the Securities Act of 1933) approved by Agent that makes loans and provides similar extensions of credit in the ordinary course of its business and is capable of funding revolving loans; provided , that , (i) neither any Borrower nor any Affiliate of any Borrower shall qualify as an Eligible Transferee and (ii) no Person to whom any Indebtedness which is in any way subordinated in right of payment to any other Indebtedness of any Borrower shall qualify as an Eligible Transferee, except as Agent may otherwise specifically agree.
1.46 Enforcement Action shall mean the exercise by Agent (or its assignee or designee) in good faith and in a commercially reasonable manner of any of its material enforcement rights and remedies as a secured creditor hereunder or under the other Financing Agreements, applicable law or otherwise, in respect of any of the Collateral, at any time following the occurrence of an Event of Default (including, without limitation, the demand for the immediate payment of all or any portion of the Obligations, the solicitation of bids from third parties to conduct the liquidation of any of the Collateral, the engagement or retention of sales brokers, marketing agents, investment bankers, accountants, appraisers, auctioneers or other third parties for the purposes of valuing, marketing, promoting and selling any of the Collateral, the opposition of the sale of assets constituting Collateral in any bankruptcy or insolvency proceeding, the commencement of any action to foreclose on the security interests or liens of Agent in all or any material portion of the Collateral or commencement of any legal proceedings or actions against any Borrower or with respect to all or any portion of the Collateral).
1.47 Environmental Laws shall mean all foreign, Federal, State and local laws, legislation, rules, codes, licenses, permits (including any conditions imposed therein), authorizations, judicial or administrative decisions, injunctions or agreements between any Borrower and any Governmental Authority, (a) relating to pollution and the protection, preservation or restoration of the environment (including air, water vapor, surface water, ground water, drinking water, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), or to human health or safety, (b) relating to the exposure to, or the use, storage, recycling, treatment, generation, manufacture, processing, distribution, transportation, handling, labeling, production, release or disposal, or threatened release, of Hazardous Materials, or (c) relating to all laws with regard to recordkeeping, notification, disclosure and reporting requirements respecting Hazardous Materials.
1.48 Equipment shall mean all of each Borrowers now owned and hereafter acquired equipment, wherever located, including machinery, data processing and computer equipment (whether owned or licensed and including embedded software), vehicles, tools, furniture, fixtures, all attachments, accessions and property now or hereafter affixed thereto or used in connection therewith, and substitutions and replacements thereof, wherever located.
1.49 Equipment Purchase Loan Limit shall mean at any time the lesser of (a) $15,000,000 or (b) the amount equal to: (i) $120,000,000 minus (ii) the sum of (A) the
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Revolving Loans then outstanding, plus (B) the undrawn amount of Letter of Credit Accommodations then outstanding.
1.50 Equipment Purchase Loan Request shall have the meaning set forth in Section 2.3(d) hereof.
1.51 Equipment Purchase Loans shall mean the secured term loans made by Lenders to any Borrower after the date hereof as provided for in Section 2.3; such term loans being from time to time referred to herein individually as an Equipment Purchase Loan.
1.52 Equipment Purchase Notes shall mean, collectively, the Equipment Purchase Notes which may at any time hereafter be issued by any Borrower to Lenders pursuant to Section 2.3 hereof to evidence an Equipment Purchase Loan; such notes being from time to time referred to herein individually as an Equipment Purchase Note.
1.53 ERISA shall mean the Employee Retirement Income Security Act of 1974, together with all rules, regulations and interpretations thereunder or related thereto.
1.54 ERISA Affiliate shall mean any person required to be aggregated with any Borrower or any of their respective Subsidiaries under Sections 414(b), 414(c), 414(m) or 414(o) of the Code.
1.55 ERISA Event shall mean (a) any reportable event described in Section 4043(b) or 4043(c)(1), (2), (5), (6), (8) or (9) of ERISA or the regulations issued thereunder, with respect to a Pension Plan or a Multiemployer Plan; (b) the adoption of any amendment to a Benefit Plan that would require the provision of security pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA; (c) the existence with respect to any Pension Plan of an accumulated funding deficiency (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (d) the filing pursuant to Section 412 of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Pension Plan; (e) the occurrence of a prohibited transaction with respect to which each Borrower or any of its Subsidiaries is a disqualified person (within the meaning of Section 4975 of the Code) or with respect to which each Borrower or any of its Subsidiaries could otherwise be liable; (f) a complete or partial withdrawal by any Borrower or any ERISA Affiliate from a Multiemployer Plan that results in or has a reasonable likelihood of resulting in any liability of any Borrower; (g) the receipt by or on behalf of any Borrower or any ERISA Affiliate of a notice that either: (i) any Multiemployer Plan is in reorganization or insolvent (each within the meaning of ERISA) or (ii) any Multiemployer Plan is or will or is likely to be entering reorganization or becoming insolvent or (iii) any Multiemployer Plan intends to terminate or has been terminated, in the case of each of clauses (g)(i), (ii) or (iii) that result in or has a reasonable likelihood of resulting in any liability of any Borrower; (h) the filing of a notice of intent to terminate, the treatment of a Benefit Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the Pension Benefit Guaranty Corporation to terminate a Pension Plan or any Borrower receiving a notice of or otherwise obtaining knowledge of the commencement of proceedings by the Pension Benefit Guaranty Corporation to terminate a Multiemployer Plan; (i) the occurrence of an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the
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termination of, or the appointment of a trustee to administer, any Pension Plan or any Borrower receiving a notice of or otherwise obtaining knowledge of any such event or condition as to a Multiemployer Plan; (j) the imposition of any liability under Title IV of ERISA, other than the Pension Benefit Guaranty Corporation premiums due but not delinquent under Section 4007 of ERISA, upon any Borrower or any ERISA Affiliate in excess of $250,000.
1.56 Eurodollar Rate shall mean, with respect to any Eurodollar Rate Loan for the Interest Period applicable thereto, the rate appearing on Reuters Screen LIBOR01 Page (or on any successor or substitute page of such service, or any successor to or substitute for such service, providing rate quotations comparable to those currently provided on such page of such service, as determined by Agent from time to time for purposes of providing quotations of interest rates applicable to eurodollar deposits in dollars in the London interbank market) (Page) at approximately 11:00 A.M. (London time) two (2) Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided , that , if more than one rate is specified on such Page for such comparable period, the applicable rate shall be the arithmetic mean of all such rates. In the event that such rate is not available at such time for any reason, then the term Eurodollar Rate shall mean, with respect to any Eurodollar Rate Loan for the Interest Period applicable thereto, the rate of interest per annum at which dollar deposits of $5,000,000 and for a term comparable to such Interest Period are offered by the principal London office of Reference Bank in immediately available funds in the London interbank market at approximately 11:00 a.m. London time two (2) Business Days prior to the commencement of such Interest Period.
1.57 Eurodollar Rate Loans shall mean any Loans or portion thereof on which interest is payable based on the Adjusted Eurodollar Rate in accordance with the terms hereof (including Eurodollar Rate Fixed Asset Loans and Eurodollar Rate Equipment Purchase Loans).
1.58 Eurodollar Rate Equipment Purchase Loans shall mean Equipment Purchase Loans outstanding from time to time that are Eurodollar Rate Loans.
1.59 Eurodollar Rate Fixed Asset Loans shall mean Eurodollar Rate Loans outstanding from time to time based on Fixed Asset Availability.
1.60 Excess Availability shall mean at any time and without duplication, (a) the lesser of: (i) the Borrowing Base and (ii) the Revolving Loan Limit (in each case under (i) or (ii) after giving effect to any applicable Reserves), minus (b) the sum of: (i) the amount of the then outstanding and unpaid principal amount of the Revolving Loans and the undrawn amount of Letter of Credit Accommodations, plus (ii) the aggregate amount of all payables or other obligations outstanding more than forty-five (45) days after the due date therefor, plus (iii) the amount of checks issued by any Borrower to pay payables and other obligations which are more than such number of days past due, but not yet sent (without duplication of amounts included in clause (b)(ii) herein).
1.61 Exchange Act shall mean the Securities Exchange Act of 1934, together with all rules, regulations and interpretations thereunder or related thereto.
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1.62 Exchange Rate shall mean the prevailing spot rate of exchange of such bank as Agent may reasonably select for the purpose of conversion of one currency to another, at or around 11:00 a.m. Chicago time, on the date on which any such conversion of currency is to be made under this Agreement.
1.63 Excluded Taxes shall have the meaning set forth in Section 6.5 hereof.
1.64 Existing Financing Agreements shall mean, collectively (each as amended, modified or supplemented prior to the date hereof); (a) the Existing Loan Agreement, and (b) the other agreements listed on Schedule 1.64 hereto.
1.65 Existing Loan Agreement shall have the meaning set forth in the recitals hereto.
1.66 Fee Letter shall mean the Amended and Restated Fee Letter, dated of even date herewith, by and among Borrowers and Agent, setting forth certain fees payable by Borrowers to Agent for the benefit of itself and Lenders, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced.
1.67 Financing Agreements shall mean, collectively, this Agreement, the Existing Financing Agreements (other than the Existing Loan Agreement), and all notes, guarantees, security agreements, Deposit Account Control Agreements, Investment Property Control Agreements, intercreditor agreements and all other agreements, documents and instruments now or at any time hereafter executed and/or delivered by Borrowers in connection with this Agreement.
1.68 Fixed Asset Availability shall mean, at any time:
1.69 Fixed Charges shall mean, as to any Person and its Subsidiaries with respect to any period, the sum of, without duplication, (a) all cash Interest Expense (which for purposes of this definition shall not include amortizing payments of deferred financing charges that do not constitute interest), plus (b) net cash costs under any Hedge Agreement (in each case as to such Person and its Subsidiaries for such period and to the extent not included in the calculation of EBITDA of such Person and its Subsidiaries for such period), plus (c) all regularly scheduled (as
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determined at the beginning of the respective period) principal payments of Indebtedness for borrowed money and Indebtedness with respect to Capital Leases (and without duplicating in items (a) and (c) of this definition, the interest component with respect to Indebtedness under Capital Leases), plus (d) all Capital Expenditures, plus (e) the cash portion of any Provision for Taxes paid in such period and unpaid amounts of any Provision for Taxes the last date for payment of which before becoming past due occurs during such period, plus (f) all scheduled reductions in the Fixed Asset Availability occurring during such period, plus (g) cash payments in respect of US pension obligations made during such period.
1.70 Fixed Charge Coverage Ratio shall mean, as to any Person, with respect to any period, the ratio of (a) the amount equal to EBITDA of such Person and its Subsidiaries for such period to (b) the Fixed Charges of such Person and its Subsidiaries for such period.
1.71 Foreign Subsidiaries shall mean the Subsidiaries of any Borrower organized or incorporated under the laws of a jurisdiction outside of the United States of America or which have substantially all of their respective assets and operations outside the United States of America; sometimes being referred to herein individually as a Foreign Subsidiary.
1.72 4-High Facility shall mean, collectively, the Mill and the Real Estate, in each case, as defined in the Timet Security Agreement as in effect on the Timet Closing Date.
1.73 4-High Intellectual Property shall mean the Intellectual Property, as defined in the Timet Security Agreement as in effect on the Timet Closing Date.
1.74 GAAP shall mean generally accepted accounting principles in the United States of America as in effect from time to time as set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Board which are applicable to the circumstances as of the date of determination consistently applied; provided , that , for purposes of Sections 9.17 and 9.18 hereof, GAAP shall be determined on the basis of such principles in effect on the date hereof and consistent with those used in the preparation of the most recent audited financial statements delivered to Agent prior to the date hereof.
1.75 Governmental Authority shall mean any nation or government, any state, province, or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.
1.76 Hard Costs shall mean, with respect to the purchase by Borrowers of an item of Eligible New Equipment, the net cash amount actually paid to acquire title to such item, net of all incentives, trade-in allowances, discounts and rebates, and exclusive of freight, delivery charges, installation costs and charges, software costs, charges and fees, warranty costs, taxes, insurance and other incidental costs or expenses and all indirect costs or expenses of any kind.
1.77 Haynes Parent shall mean Haynes International, Inc., a Delaware corporation, and its successors and assigns.
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1.78 Haynes UK shall mean Haynes International Ltd., a company organized under the laws of England and Wales, and its successors and assigns.
1.79 Haynes UK Pension Trustees shall mean, collectively, Haynes UK, John Raymond Woolnough and Jynette Rutherford, and their respective successors and assigns in their respective capacities as trustees for the Haynes Pension Plan established by Haynes UK.
1.80 Haynes Wire shall mean Haynes Wire Company, a Delaware corporation, and its successors and assigns.
1.81 Hazardous Materials shall mean any hazardous, toxic or dangerous substances, materials and wastes, including hydrocarbons (including naturally occurring or man-made petroleum and hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, polychlorinated biphenyls, pesticides, herbicides and any other kind and/or type of pollutants or contaminants (including materials which include hazardous constituents), and including any other substances, materials, or wastes that are classified as hazardous or toxic under any Environmental Law).
1.82 Hedge Agreement shall mean an agreement that is a rate swap agreement, basis swap, forward rate agreement, commodity swap, interest rate option, forward foreign exchange agreement, spot foreign exchange agreement, rate cap agreement rate, floor agreement, rate collar agreement, currency swap agreement, cross currency rate swap agreement, currency option, any other similar agreement (including any option to enter into any of the foregoing or a master agreement for any the foregoing together with all supplements thereto) for the purpose of protecting against or managing exposure to fluctuations in interest or exchange rates, currency valuations or commodity prices; sometimes being collectively referred to herein as Hedge Agreements.
1.83 Indebtedness shall mean, with respect to any Person, whether or not contingent, (a) all indebtedness for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof) or evidenced by bonds, notes, debentures or similar instruments; (b) the balance deferred and unpaid of the purchase price of any property or services (except any such balance that constitutes an account payable to a trade creditor (whether or not an Affiliate) created, incurred, assumed or guaranteed by such Person in the ordinary course of business of such Person in connection with obtaining goods, materials or services that is not overdue by more than one hundred twenty (120) days (unless the trade payable is being contested in good faith (or during the course thereof) will be the date for payment of such payables and as to those payables or other obligations that are subject to a dispute or are not otherwise allowed, prior to the establishment of the due date for such payables or other obligations pursuant to the Plan and the claims administration process, such payables and other obligations shall not be deemed overdue by more than one hundred twenty (120) days for purposes of this definition); (c) the principal component of all leases to which it is a lessee which have been, or should be, in accordance with GAAP recorded as Capital Leases; (d) any contractual obligation, contingent or otherwise, of such Person to pay or be liable for the payment of any indebtedness described in this definition of another Person, including, without limitation, any such indebtedness, directly or indirectly guaranteed, or any agreement to purchase, repurchase, or otherwise acquire such indebtedness, obligation or liability or any
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security therefor, or to provide funds for the payment or discharge thereof, or to maintain solvency, assets, level of income, or other financial condition; (e) all obligations with respect to redeemable stock and redemption or repurchase obligations under any Capital Stock or other equity securities issued by such Person; (f) all reimbursement obligations and other liabilities of such Person with respect to surety bonds (whether bid, performance or otherwise), letters of credit, bankers acceptances, drafts or similar documents or instruments issued for such Persons account; (g) all indebtedness of such Person in respect of indebtedness of another Person for borrowed money or indebtedness of another Person otherwise described in this definition which is secured by any consensual lien, security interest, collateral assignment, conditional sale, mortgage, deed of trust, or other encumbrance on any asset of such Person, whether or not such obligations, liabilities or indebtedness are assumed by or are a personal liability of such Person, all as of such time; (h) all obligations, liabilities and indebtedness of such Person arising under any Hedge Agreements; and (i) the principal and interest portions of all rental obligations of such Person under any synthetic lease or similar off balance sheet financing where such transaction is considered to be borrowed money for tax purposes but is classified as an operating lease in accordance with GAAP.
1.84 Information Certificate shall mean, collectively, the Information Certificate of Haynes Parent and the information certificate of Haynes Wire constituting Exhibit C hereto each containing material information with respect to Borrowers, its business and assets provided by or on behalf of Borrowers to Agent in connection with the preparation of this Agreement and the other Financing Agreements and the financing arrangements provided for herein.
1.85 Intellectual Property shall mean as to each Borrower, such Borrowers now owned and hereafter arising or acquired: patents, patent rights, patent applications, copyrights, works which are the subject matter of copyrights, copyright applications, copyright registrations, trademarks, servicemarks, trade names, trade styles, trademark and service mark applications, and licenses and rights to use any of the foregoing and all applications, registrations and recordings relating to the foregoing as may be filed in the United States Copyright Office, the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof, any political subdivision thereof or in any other country, together with all rights and privileges arising under applicable law with respect to any Borrowers use of any of the foregoing; all extensions, renewals, reissues, divisions, continuations, and continuations-in-part of any of the foregoing; all rights to sue for past, present and future infringement of any of the foregoing; inventions, trade secrets, formulae, processes, compounds, drawings, designs, blueprints, surveys, reports, manuals, and operating standards; goodwill (including any goodwill associated with any trademark or servicemark or the license of any trademark or servicemark); customer and other lists in whatever form maintained; trade secret rights, copyright rights, rights in works of authorship, domain names and domain name registrations; software and contract rights relating to computer software programs, in whatever form created or maintained.
1.86 Interest Expense shall mean, for any period, as to any Person, as determined in accordance with GAAP, the total interest expense of such Person, whether paid or accrued during such period but without duplication (including the interest component of Capital Leases for such period), including, without limitation, discounts in connection with the sale of any Accounts that are sold for purposes other than collection, but excluding interest paid in property other than cash and any other interest expense not payable in cash.
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1.87 Interest Period shall mean for any Eurodollar Rate Loan, a period of approximately one (1), two (2), or three (3) months duration as any Borrower (or Administrative Borrower on behalf of such Borrower) may elect, the exact duration to be determined in accordance with the customary practice in the applicable Eurodollar Rate market; provided , that , such Borrower (or Administrative Borrower on behalf of such Borrower) may not elect an Interest Period which will end after the last day of the then current term of this Agreement.
1.88 Interest Rate shall mean,
1.89 Inventory shall mean, as to each Borrower, all of such Borrowers now owned and hereafter existing or acquired goods, wherever located, which (a) are leased by such Borrower as lessor; (b) are held by such Borrower for sale or lease or to be furnished under a contract of service; (c) are furnished by such Borrower under a contract of service; or (d) consist of raw materials, work-in-process, finished goods or materials used or consumed in its business.
1.90 Inventory Loan Limit shall mean, at any time, $90,000,000.
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1.91 Investment Property Control Agreement shall mean an agreement in writing, in form and substance reasonably satisfactory to Agent in good faith, by and among Agent, any Borrower and any securities intermediary, commodity intermediary or other person who has custody, control or possession of any investment property of such Borrower acknowledging that will comply with entitlement orders originated by Agent with respect to such investment property, or other instructions of Agent, and has such other terms and conditions as Agent may reasonably require.
1.92 Kokomo Facility Inventory Availability shall mean, with respect to Eligible Kokomo Inventory, the lesser of:
1.93 Lenders shall mean the financial institutions who are signatories hereto as Lenders and other persons made a party to this Agreement as a Lender in accordance with Section 13.7 hereof, and their respective successors and assigns; each sometimes being referred to herein individually as a Lender.
1.94 Letter of Credit Accommodations shall mean, collectively, the letters of credit, merchandise purchase or other guaranties which are from time to time either (a) issued or opened by Agent or any Lender for the account of any Borrower or (b) with respect to which Agent or Lenders have agreed to indemnify the issuer or guaranteed to the issuer the performance by Borrower of its obligations to such issuer; sometimes being referred to herein individually as Letter of Credit Accommodation.
1.95 Letter of Credit Fee shall have the meaning set forth in Section 2.2(b) hereof.
1.96 License Agreements shall have the meaning set forth in Section 8.11 hereof.
1.97 Loans shall mean the Revolving Loans and the Equipment Purchase Loans, being sometimes referred to herein individually as a Loan.
1.98 Material Adverse Effect shall mean a material adverse effect on (a) the financial condition, business, performance or operations of Borrowers and their Subsidiaries (taken as a whole); (b) the legality, validity or enforceability of this Agreement or any of the other Financing
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Agreements; (c) the legality, validity, enforceability, perfection or priority of the security interests and liens of Agent upon the Collateral; (d) the Collateral or its value; (e) the ability of any Borrower to repay the Obligations or perform its obligations under this Agreement or any of the other Financing Agreements; or (f) the ability of Agent or any Lender to enforce the Obligations or realize upon the Collateral.
1.99 Material Contract shall mean (a) any contract or other agreement (other than the Financing Agreements), of any Borrower involving monetary liability of or to any Person in an amount in excess of $5,000,000 in any fiscal year and (b) any other contract or other agreement (other than the Financing Agreements), to which any Borrower is a party, as to which the breach, nonperformance, cancellation or failure to renew by any party thereto would have a Material Adverse Effect. For purposes hereof, the breach, non-performance, cancellation or failure to renew by any party will not constitute a Material Adverse Effect if any Borrower is readily able to promptly obtain substitute performance from a third party on terms (taken as a whole) that are not less favorable in any material respect to any Borrower.
1.100 Maturity Date shall have the meaning set forth in Section 13.1 hereof.
1.101 Maximum Credit shall mean $120,000,000.
1.102 Monthly Average Excess Availability shall mean, at any time, the daily average of the aggregate amount of the Excess Availability for the immediately preceding month as calculated by Agent in good faith.
1.103 Mortgages shall mean, individually and collectively, each of the following (as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced): (a) the Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated August 31, 2004, by Haynes Parent in favor of Agent with respect to the Real Property and related assets of Haynes Parent located in Kokomo, Indiana, (b) the Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated August 31, 2004, by Haynes Parent in favor of Agent with respect to the Real Property and related assets of Haynes Parent located in Arcadia, Louisiana, and (c) the Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated November 5, 2004, by Haynes Wire in favor of Agent with respect to the Real Property of Haynes Wire located in Mountain Home, North Carolina.
1.104 Multiemployer Plan shall mean a multi employer plan as defined in Section 4001(a)(3) of ERISA which is or was at any time during the current year or the immediately preceding six (6) years contributed to by any Borrower or any ERISA Affiliate.
1.105 Net Recovery Percentage shall mean the fraction, expressed as a percentage, (a) the numerator of which is the amount equal to the amount of the recovery in respect of the Inventory at such time determined on a net orderly liquidation value basis pursuant to the most recent acceptable appraisal of Inventory or Equipment received by Agent in accordance with Sections 7.3 or 7.4 (as applicable), net of operating expenses, liquidation expenses and commissions (without duplication) likely to be incurred in connection with the liquidation of such Inventory or Equipment as set forth in such appraisal, and (b) the denominator of which is
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the applicable standard cost of the aggregate amount of the Inventory or Equipment subject to such appraisal.
1.106 Non-U.S. Person means a Person that is not a United States person within the meaning of Section 7701(a)(30) of the Code.
1.107 Obligations shall mean (a) any and all Loans, Letter of Credit Accommodations and all other obligations, liabilities and indebtedness of every kind, nature and description owing by Borrowers to Agent or any Lender and/or any of their Affiliates, including principal, interest, charges, fees, costs and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, in each case arising under this Agreement or any of the other Financing Agreements, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of this Agreement or after the commencement of any case with respect to Borrowers under the Bankruptcy Code or any similar statute (and including any principal, interest, fees, costs, expenses and other amounts owed to Agent or any Lender which would accrue and become due but for the commencement of such a case, whether or not such amounts are allowed or allowable in whole or in part in such a case), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and however acquired by Agent or any Lender and (b) for purposes only of Section 5.1 hereof and subject to the priority in right of payment set forth in Section 6.4 hereof, all obligations of any Borrower arising under or pursuant to a Hedge Agreement with a party acceptable to Agent (it being understood that, so long as JPMorgan Chase Bank, N.A. is a Lender, JPMorgan Chase Bank, N.A. and its Affiliates shall be acceptable to Agent for this purpose); provided , that , (i) upon Agents request, Agent shall have entered into an agreement, in form and substance satisfactory to Agent, with such Person that is a counterparty to such Hedge Agreement, as acknowledged and agreed to by Borrowers, providing for the delivery to Agent by such counterparty of information with respect to the amount of such obligations and providing for the other rights of Agent and such Lender, Affiliate or other Person, as the case may be, in connection with such arrangements and (ii) in no event shall the party to such Hedge Agreement to whom such obligations are owed be deemed a Lender for purposes hereof to the extent of and as to such obligations other than for purposes of Section 5.1 hereof and other than for purposes of Sections 12.1, 12.2, 12.3(b), 12.6, 12.7, 12.9 and 12.12 hereof. Without limiting the generality of the foregoing, the term Obligations shall include, without limitation, all Bank Product Obligations; provided , that , any Bank Product Provider to whom such obligations, liabilities and indebtedness are owing be not deemed a Lender for purposes hereof to the extent of and as to such Bank Product Obligations other than for purposes of Section 5.1 hereof and other than for purposes of Section 12.1, 12.2, 12.3(b), 12.6, 12.7, 12.9 and 12.12 hereof.
1.108 Other Taxes shall mean any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any of the other Financing Agreements.
1.109 Participant shall mean any financial institution that acquires and holds a participation in the interest of any Lender in any of the Loans and Letter of Credit
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Accommodations in conformity with the provisions of Section 13.7 of this Agreement governing participations.
1.110 Pension Plan shall mean a pension plan (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA which Borrowers sponsor, maintain, or to which any Borrower or ERISA Affiliate makes, is making, or is obligated to make contributions, other than a Multiemployer Plan.
1.111 Permits shall have the meaning set forth in Section 8.7 hereof.
1.112 Permitted Acquisitions shall mean the purchase by a Borrower or Guarantor (or any Subsidiary created for such purpose) after the date hereof of all or substantially all of the assets of any Person or a business or division of such Person (whether pursuant to a merger or other transaction) or of all or a majority of the Capital Stock of any Person (such assets or Person being referred to herein as the Acquired Business) and in one or a series of transaction that satisfies each of the following conditions as determined in good faith by Agent:
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Borrowers reasonable best estimate of the future Borrowing Base and Excess Availability for the period set forth therein as of the date not more than ten (10) days prior to the date of such acquisition, which projections shall have been prepared on the basis of the assumptions set forth therein which Borrowers believe are fair and reasonable as of the date of preparation in light of current and reasonably foreseeable business conditions and which projections shall show amounts of Excess Availability satisfactory to Agent,
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1.113 Person or person shall mean any individual, sole proprietorship, partnership, corporation (including any corporation which elects subchapter S status under the Code), limited liability company, limited liability partnership, business trust, unincorporated association, joint stock corporation, trust, joint venture or other entity or any government or any agency or instrumentality or political subdivision thereof.
1.114 Prime Rate shall mean the greater of (a) the rate from time to time publicly announced by Wachovia Bank, National Association, or its successors, as its prime rate, whether
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or not such announced rate is the best rate available at such bank or (b) the Adjusted Eurodollar Rate plus 2.50%.
1.115 Prime Rate Equipment Purchase Loans shall mean Prime Rate Loans outstanding from time to time that are Equipment Purchase Loans.
1.116 Prime Rate Fixed Asset Loans shall mean Prime Rate Loans outstanding from time to time based on Fixed Asset Availability.
1.117 Prime Rate Loans shall mean any Loans or portion thereof on which interest is payable based on the Prime Rate in accordance with the terms thereof (including Prime Rate Fixed Asset Loans and Prime Rate Equipment Purchase Loans).
1.118 Pro Rata Share shall mean with respect to a Lenders obligation to make Revolving Loans and Equipment Purchase Loans and to acquire interests in Letter of Credit Accommodations and receive payments of interest and principal with respect thereto, the fraction (expressed as a percentage) the numerator of which is such Lenders Commitment and the denominator of which is the aggregate amount of all of the Commitments, as adjusted from time to time in accordance with the provisions of Section 13.7 hereof; provided , that , if the Commitments have been terminated, the numerator shall be the unpaid amount of such Lenders Revolving Loans and Equipment Purchase Loans and its interest in the Letter of Credit Accommodations and the denominator shall be the aggregate amount of all unpaid Revolving Loans, Equipment Purchase Loans and Letter of Credit Accommodations;
1.119 Provision for Taxes shall mean an amount equal to all taxes imposed on or measured by net income, whether Federal, State, county or local, and whether foreign or domestic, that are paid or payable by any Person in respect of any period in accordance with GAAP.
1.120 Real Property shall mean all now owned and hereafter acquired real property of any Borrower together with all buildings, structures, and other improvements located thereon and all licenses, easements and appurtenances relating thereto, wherever located, including the real property and related assets more particularly described in the Mortgages.
1.121 Receivables shall mean all of the following now owned or hereafter arising or acquired property of each Borrower: (a) all Accounts; (b) all interest, fees, late charges, penalties, collection fees and other amounts due or to become due or otherwise payable in connection with any Account; (c) all payment intangibles of such Borrower; (d) letters of credit, indemnities, guarantees, security or other deposits and proceeds thereof issued payable to any Borrower or otherwise in favor of or delivered to any Borrower in connection with any Account; or (e) all other accounts, contract rights, chattel paper, instruments, notes, general intangibles and other forms of obligations owing to any Borrower, whether from the sale and lease of goods or other property, licensing of any property (including Intellectual Property or other general intangibles), rendition of services or from loans or advances by any Borrower or to or for the benefit of any third person (including loans or advances to any Affiliates or Subsidiaries of any Borrower) or otherwise associated with any Accounts, Inventory or general intangibles of any Borrower (including, without limitation, choses in action, causes of action, tax refunds, tax
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refund claims, any funds which may become payable to any Borrower in connection with the termination of any Benefit Plan or other employee benefit plan and any other amounts payable to any Borrower from any Benefit Plan or other employee benefit plan, rights and claims against carriers and shippers, rights to indemnification, business interruption insurance and proceeds thereof, casualty or any similar types of insurance and any proceeds thereof and proceeds of insurance covering the lives of employees on which any Borrower is a beneficiary).
1.122 Records shall mean, as to each Borrower, all of Borrowers present and future books of account of every kind or nature, purchase and sale agreements, invoices, ledger cards, bills of lading and other shipping evidence, statements, correspondence, memoranda, credit files and other data relating to the Collateral or any account debtor, together with the tapes, disks, diskettes and other data and software storage media and devices, file cabinets or containers in or on which the foregoing are stored (including any rights of Borrowers with respect to the foregoing maintained with or by any other person).
1.123 Reference Bank shall mean Wachovia Bank, National Association, or such other major U.S. Bank as Agent may from time to time designate. For purposes hereof, a major U.S. Bank shall be any commercial bank organized under the laws of the United States, or any State thereof, or the District of Columbia that is a member of the Federal Reserve System and has combined capital and surplus and undivided profits of not less than $500,000,000.
1.124 Required Lenders shall mean, at any time, those Lenders whose Pro Rata Shares aggregate fifty-one (51%) percent or more of the aggregate of the Commitments of all Lenders, or if the Commitments shall have been terminated, Lenders to whom at least fifty-one (51%) percent of the principal amount of the then outstanding Obligations are owing; provided , that , in the event that there are only two (2) Lenders, Required Lenders shall mean both such Lenders.
1.125 Reserves shall mean as of any date of determination, such amounts as Agent may from time to time establish and revise in good faith reducing the amount of Loans and Letter of Credit Accommodations that would otherwise be available to any Borrower under the lending formula(s) provided for herein: (a) to reflect events, conditions, contingencies or risks which, as determined by Agent in good faith, have adversely affected, or are reasonably likely to adversely affect, either (i) the Collateral, its value or the amount that might be received by Agent from the sale or other disposition thereof, or (ii) the business or operations of any Borrower or (iii) the security interests and other rights of Agent or any Lender in the Collateral (including the enforceability, perfection and priority thereof), including, without limitation, the maximum amount of any indebtedness or claim which may have a lien or administrative claim upon property of the estate of any Borrower superior to or on a parity with the lien and security interest or administrative claim of Agent or any Lender therein or thereon or (b) to reflect Agents good faith belief that any collateral report or financial information furnished by or on behalf of any Borrower to Agent is or may have been incomplete, inaccurate or misleading in any material respect or (c) to reflect outstanding Letter of Credit Accommodations as provided in Section 2.2 hereof. Without limiting the generality of the foregoing, Reserves may, at Agents option, be established to reflect: (i) dilution with respect to the Accounts (based on the ratio of the aggregate amount of non-cash reductions in Accounts for any period to the aggregate dollar amount of the sales of such Borrower for such period) as calculated by Agent for any period is or
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is reasonably anticipated to be greater than five (5%) percent; or (ii) that the fair market value of Real Property subject to a Mortgage, or the net orderly liquidation value of the Equipment, as set forth in any appraisals received by Agent with respect thereto after the date hereof (in each case net of operating expenses, liquidation expenses and commissions (without duplication) estimated to be incurred in connection with the liquidation thereof, that are acceptable to Agent for such purpose, has declined so that the Fixed Asset Availability is greater than (A) the percentages with respect to the value of Real Property or Equipment used in establishing the original amounts of the Fixed Asset Availability multiplied by (B) the applicable values set forth in such subsequent appraisals; or (iii) the net orderly liquidation value of any Eligible New Equipment as set forth in any appraisals thereof received by Agent with respect thereto after the date hereof (net of operating expenses, liquidation expenses and commissions without duplication estimated to be incurred in connection with the liquidation thereof) that are acceptable to Agent, for such purpose, has declined so that the Equipment Purchase Loan based on such Eligible New Equipment is greater than the then outstanding principal amount of such Equipment Purchase Loan; or (iv) variances between the Inventory records of any Borrower and the results of test counts or physical counts of Inventory with respect thereto; or (v) variances between the stock ledger Inventory report and general ledger; or (vi) returns, discounts, claims, credits and allowances of any nature that are not paid pursuant to the reduction of Accounts; or (vii) amounts due or to become due in respect of sales, excise, use and/or withholding taxes; or (viii) to the extent that a change in the turnover, age or mix of the categories of Inventory adversely affects the aggregate value of all Inventory or to reflect that the commodity prices of raw materials have decreased; or (ix) any rental payments or other amounts due or to become due to owners and lessors of real property or owners and operators of premises to the extent Inventory, Equipment or Records are located in or on such property or premises and Agent has not received a satisfactory Collateral Access Agreement from the owner or lessor of such real property or owner and operator of such property or premises in possession of such assets ( provided , that , such Reserves will not exceed the aggregate of the amounts payable to such owners and lessors or owners and operators for the next three (3) months from any such time and including in each case amounts, if any, then outstanding and unpaid owed by any Borrower to such owners and lessors or owners and operators, but such limitations will only apply so long as no Event of Default exists or has occurred and is continuing); or (x) obligations (contingent or otherwise) of any Borrower to any Affiliate of Agent or a Lender arising under or in connection with any Hedge Agreement of any Borrower with such Affiliate or Lender or as such Affiliate or Lender may otherwise require in connection therewith to the extent that such obligations constitute Obligations as such term is defined herein or otherwise receive the benefit of the security interest of Agent in any Collateral; provided , that , the amount of the Reserves in respect of such obligations shall be based on the amount of the liability of any Borrower as reported by such Affiliate or Lender in a form and substance satisfactory to Agent; or (xi) Bank Product Obligations. To the extent Agent may revise the lending formulas used to determine the Borrowing Base or establish new criteria or revise existing criteria for Eligible Accounts or Eligible Inventory so as to address any circumstances, condition, event or contingency in a manner satisfactory to Agent, Agent shall not establish a Reserve for the same purpose. The amount of any Reserve established by Agent shall have a reasonable relationship to the event, condition or other matter which is the basis for such reserve as determined by Agent in good faith. In the event that the event, condition or other matter giving rise to the establishment of any Reserve shall cease to exist for a period of thirty (30) consecutive days (unless there is a
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reasonable prospect that such event, condition or other matter will occur again within a reasonable period of time thereafter), the Reserve established pursuant to such event, condition or other matter, shall be discontinued. The term Reserves as used herein shall include in addition, and not in limitation, the Special Availability Reserve. Without limiting the generality of the foregoing, the Revolving Loans and Letter of Credit Accommodations otherwise available to Borrowers shall, at Agents option, be subject to a special reserve, in an amount up to any unpaid interest, fees, costs, expenses or other charges.
1.126 Revolving Loan Limit shall mean, at any time, the amount equal to: (a) $120,000,000 minus (b) the then outstanding aggregate principal amount of the Equipment Purchase Loans.
1.127 Revolving Loans shall mean the loans now or thereafter made by or on behalf of any Lender or by Agent for the account of any Lender, on a revolving basis pursuant to the Credit Facility (including advances, repayments and readvances), as set forth in Section 2.1(a) hereof.
1.128 Secured Parties shall mean, collectively, Agent, Lenders and Bank Product Providers; sometimes being referred to herein individually as a Secured Party.
1.129 Service Center Availability shall mean, with respect to Eligible Service Center Inventory, the lesser of (a) seventy (70%) percent multiplied by the Value of such Eligible Service Center Inventory or (b) eighty-five (85%) percent of the Net Recovery Percentage multiplied by the Value of such Eligible Service Center Inventory.
1.130 Special Agent Advances shall have the meaning set forth in Section 12.11 hereof.
1.131 Special Availability Reserve shall mean, at any time, $1,500,000.
1.132 Subsidiary or subsidiary shall mean, with respect to any Person, any corporation, limited liability company, limited liability partnership or other limited or general partnership, trust, association or other business entity of which an aggregate of at least a majority of the outstanding Capital Stock or other interests entitled to vote in the election of the board of directors of such corporation (irrespective of whether, at the time, Capital Stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency), managers, trustees or other controlling persons, or an equivalent controlling interest therein, of such Person is, at the time, directly or indirectly, owned by such Person and/or one or more subsidiaries of such Person.
1.133 Taxes shall mean any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto imposed by Governmental Authority.
1.134 Timet shall mean Titanium Metals Corporation, a Delaware corporation, and its successors and assigns.
1.135 Timet Closing Date shall mean November 17, 2006.
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1.136 Timet Collateral shall mean, collectively, the Mill, the Contract Rights, the Equipment, the Intellectual Property for Titanium Conversion Services, or any Proceeds thereof to the extent subject to the security interest and lien of Timet under the Timet Security Agreement as in effect on the Timet Closing Date. Each of the capitalized terms used in this definition of the term Timet Collateral shall have the meanings assigned on Schedule 1.136 hereto in the Timet Security Agreement as in effect on the Timet Closing Date.
1.137 Timet Conversion Agreement shall mean the Conversion Services Agreement, dated the Timet Closing Date, by and between Haynes Parent and Timet, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced.
1.138 Timet Debt shall mean, collectively, (a) any outstanding principal balance under the Timet Option Note and any accrued and unpaid interest thereon, if any; (b) the entire unearned portion of the Timet Fee; (c) the amount of any Liquidated Damages (as defined in the Timet Conversion Agreement as in effect on the Timet Closing Date); (d) the amount of any Termination Fee (as defined in the Timet Conversion Agreement as in effect on the Timet Closing Date);(e) the amount of any Non-Compete Amendment Fee (as defined in the Timet Conversion Agreement as in effect on the Timet Closing Date); and (f) any amounts owed by Haynes Parent under Section 5.1 of the Timet Conversion Agreement as in effect on the Timet Closing Date.
1.139 Timet Documents shall mean, collectively, the Timet Conversion Agreement, the Timet Security Agreement, the Timet Option Note and all agreements, documents or instruments at any time executed and/or delivered by Borrowers or any other Person with, to or in favor of Timet in connection therewith or related thereto, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced.
1.140 Timet Option Note shall mean the secured promissory note made by Haynes Parent in favor of Timet in an aggregate principal amount of not more than $12,000,000 pursuant to the Timet Documents, substantially in the form attached hereto as Schedule 1.140 and as the same may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced.
1.141 Timet Security Agreement shall mean the Access and Security Agreement, dated the Timet Closing Date, by and between Haynes Parent and Timet, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced.
1.142 UCC shall mean the Uniform Commercial Code as in effect in the State of Illinois, and any successor statute, as in effect from time to time (except that terms used herein which are defined in the Uniform Commercial Code as in effect in the State of Illinois on the date hereof shall continue to have the same meaning notwithstanding any replacement or amendment of such statute).
1.143 US Dollar Equivalent shall mean at any time (a) as to any amount denominated in US Dollars, the amount thereof at such time, and (b) as to any amount denominated in any other currency, the equivalent amount in US Dollars calculated by Agent at such time using the Exchange Rate in effect on the Business Day of determination.
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1.144 US Dollars, US$ and $ shall each mean lawful currency of the United States of America.
1.145 Value shall mean the US Dollar Equivalent with respect to Inventory, equal to the lower of (a) cost computed on a first-in-first-out basis in accordance with GAAP using standard costs or (b) market value; provided , that , for purposes of the calculation of the Borrowing Base, (i) the Value of the Inventory shall not include: (A) the portion of the value of Inventory equal to the profit earned by any Affiliate on the sale thereof to any Borrower to the extent the same is reflected in the cost of such Inventory or (B) write ups or write downs in value with respect to currency exchange rates and (ii) notwithstanding anything to the contrary contained herein, the cost of the Inventory shall be computed in the same manner and consistent with the most recent appraisal of the Inventory received and accepted by Agent prior to the date hereof, if any.
1.146 Voting Stock shall mean with respect to any Person, (a) one (1) or more classes of Capital Stock of such Person having general voting powers to elect at least a majority of the board of directors, managers or trustees of such Person, irrespective of whether at the time Capital Stock of any other class or classes have or might have voting power by reason of the happening of any contingency, and (b) any Capital Stock of such Person convertible or exchangeable without restriction at the option of the holder thereof into Capital Stock of such Person described in clause (a) of this definition.
1.147 Wachovia shall mean Wachovia Capital Finance Corporation (Central), an Illinois corporation, in its individual capacity, and its successors and assigns.
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Revolving Loan Limit, or the aggregate amount of the outstanding Letter of Credit Accommodations exceed the sublimit for Letter of Credit Accommodations set forth in Section 2.2(e), or the aggregate principal amount of the Revolving Loans outstanding at any time based on Eligible Inventory consisting of work-in-process exceed $50,000,000, or the aggregate principal amount of the Revolving Loans outstanding at any time based on Eligible Inventory exceed the Inventory Loan Limit, in any case such event shall not limit, waive or otherwise affect any rights of Agent or Lenders in such circumstances or on any future occasions and Borrowers shall, upon demand by Agent, which may be made at any time or from time to time, immediately repay to Agent the entire amount of any such excess(es) for which payment is demanded.
Tier |
|
Monthly Average
|
|
LC Fee Rate |
|
1 |
|
Greater than $40,000,000 |
|
2.50 |
% |
2 |
|
Greater than or equal to $20,000,000 and less than or equal to $40,000,000 |
|
2.75 |
% |
3 |
|
Less than $20,000,000 |
|
3.00 |
% |
provided , that , (i) the applicable percentage shall be calculated and established on the first day of each month and shall remain in effect until adjusted thereafter at the beginning of the next month
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acceptable to Agent), the sum of (1) the percentage equal to one hundred (100%) percent minus the then applicable percentage with respect to Eligible Inventory set forth in the definition of the term Borrowing Base multiplied by the Value of such Eligible Inventory, plus (2) freight, taxes, duty and other amounts which Agent estimates must be paid in connection with such Inventory upon arrival and for delivery to one of such Borrowers locations for Eligible Inventory within the United States of America and (B) if the proposed Letter of Credit Accommodation is for any other purpose or the documents of title are not consigned to the issuer (or subject to such other arrangements as are acceptable to Agent) in connection with a Letter of Credit Accommodation for the purpose of purchasing Inventory, an amount equal to one hundred (100%) percent of the face amount thereof and all other commitments and obligations made or incurred by Agent with respect thereto. Effective on the issuance of each Letter of Credit Accommodation, a Reserve shall be established in the applicable amount set forth in Section 2.2(d)(iii)(A) or Section 2.2(d)(iii)(B).
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long as such documents or instruments are held by a customs broker that has executed and delivered a Collateral Access Agreement) or Inventory to Agent unless a Default or Event of Default exists or has occurred and is continuing. At any time that a Default or Event of Default exists or has occurred and is continuing, Borrowers shall also, at Agents request, designate Agent (or the issuer of the Letter of Credit Accommodation with respect thereto as Agent may specify) as the consignee on all bills of lading and other negotiable and non-negotiable documents.
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documents, drafts or acceptances thereunder or any letters of credit included in the Collateral. Agent may take such actions either in its own name or in such Borrowers name.
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hereof, or such lesser amount as to any Equipment Purchase Loan as such Borrower may request. The proceeds of each Equipment Purchase Loan shall be used solely for the payment of the purchase price, or to reimburse such Borrower for the cash previously paid by such Borrower for the purchase price, for the Eligible New Equipment specified in the Equipment Purchase Loan Request applicable to such Equipment Purchase Loan; provided , that , (i) as to any Eligible New Equipment purchased after October 1, 2008 and prior to the date hereof, such Equipment Purchase Loan Request shall be received within thirty (30) days after the date hereof, (ii) as to any Equipment Purchase Loans based on Eligible New Equipment purchased after October 1, 2008 and prior to the date hereof, the aggregate amount of all such Equipment Purchase Loans shall not exceed $2,000,000, (iii) to the extent that the proceeds of any Equipment Purchase Loan are used to reimburse such Borrower for the cash paid by such Borrower for the purchase price of any Eligible New Equipment purchased after the date hereof, such Borrower shall have taken possession of such Eligible New Equipment within ninety (90) days prior to the date of the Equipment Purchase Loan, and (iv) no Equipment Purchase Loan Request shall include any Eligible New Equipment that has been included in any other Equipment Purchase Loan Request. Each Equipment Purchase Loan shall be in an amount of not less than $500,000. A single Equipment Purchase Loan may be used for the purchase price of one or more items constituting Eligible New Equipment specified in the Equipment Purchase Loan Request required to be delivered to Lender pursuant to Section 2.3(d)(i) below and the minimum amount of such Equipment Purchase Loan applies to such Equipment Purchase Loan, not to the purchase price of any individual item of Eligible New Equipment.
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installment completed in accordance with Sections 2.3(e) and 2.3(f) below, as the case may be, which note shall evidence a valid and legally enforceable indebtedness of such Borrower unconditionally owing to Lenders, without offset, defense or counterclaim of any kind, nature or description whatsoever; and
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under Section 502 of the Bankruptcy Code, or (g) any other circumstances which might constitute a legal or equitable discharge or defense of the other Borrower other than to the extent of the gross negligence or willful misconduct of Agent or a Lender as determined pursuant to a final non-appealable order of a court of competent jurisdiction. With respect to the Obligations arising as a result of the joint and several liability of a Borrower hereunder with respect to Loans, Letter of Credit Accommodations or other extensions of credit made to the other Borrower hereunder, each Borrower waives, until the Obligations shall have been paid in full and this Agreement shall have been terminated, any right to enforce any right of subrogation or any remedy which Agent or any Lender now has or may hereafter have against any Borrower and any benefit of, and any right to participate in, any security or collateral given to Agent or any Lender. Upon any Event of Default, and for so long as such Event of Default is continuing, Agent may proceed directly and at once, without notice, against any Borrower to collect and recover the full amount, or any portion of the Obligations, without first proceeding against the other Borrower or any other Person, or against any security or collateral for the Obligations. Each Borrower consents and agrees that Agent and Lenders shall be under no obligation to marshall any assets in favor of Borrower(s) or against or in payment of any or all of the Obligations.
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Provided, that, in each instance set forth above in Section 6.4(a) above so long as no Event of Default has occurred and is continuing, this Section 6.4(a) shall not be deemed to apply to any payment by a Borrower specified by such Borrower to be for the payment of specific Obligations then due and payable (or prepayable) under and in accordance with any provision of this Agreement.
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60
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Each Borrower hereby represents and warrants to Agent and Lenders the following (which shall survive the execution and delivery of this Agreement):
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SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS
(a) Each Borrower shall, and shall cause any Subsidiary to, at all times, comply in all material respects with all laws, rules, regulations, licenses, approvals, orders and other Permits applicable to it and duly observe all requirements of any foreign, Federal, State or local Governmental Authority where the failure to so comply or observe has or could reasonably be expected to have a Material Adverse Effect.
(b) Each Borrower shall give written notice to Agent immediately upon any Borrowers receipt of any notice of, or any Borrower otherwise obtaining knowledge of, (i) the occurrence of any event involving the release, spill or discharge of any Hazardous Material in violation of any applicable Environmental Law or (ii) any investigation, proceeding, complaint, order, directive, claims, citation or notice with respect to: (A) any material non-compliance with or violation of any Environmental Law by any Borrower or (B) any material spill or discharge, threatened or actual, of any Hazardous Material other than in the ordinary course of business and other than as permitted under any applicable Environmental Law. Unless otherwise agreed by any Borrower and Agent, copies of all environmental surveys, audits, assessments, feasibility studies and results of remedial investigations shall be promptly furnished, or caused to be furnished, by Borrower to Agent. Each Borrower shall take prompt action to respond to any material non-compliance with any of the Environmental Laws and shall regularly report to Agent on such response.
(c) Without limiting the generality of the foregoing, whenever Agent reasonably determines that there is material non-compliance, or any condition which requires any action by or on behalf of any Borrower in order to avoid any material non-compliance, with any Environmental Law, Borrowers shall, at Agents reasonable request and Borrowers expense: (i) cause an independent environmental engineer reasonably acceptable to Agent to conduct such tests of the site where such material non-compliance or alleged material non-compliance with such Environmental Laws has occurred as to such material non-compliance and prepare and deliver to Agent a report as to such material non-compliance setting forth the results of such tests, a proposed plan for responding to any environmental problems described therein, and an estimate of the costs thereof and (ii) provide to Agent a supplemental report of such engineer whenever the scope of such material non-compliance, or such Borrowers response thereto or the estimated costs thereof, shall change in any material respect.
(d) Each Borrower shall indemnify and hold harmless Agent and Lenders and their respective directors, officers, employees, agents, invitees, representatives, successors and assigns, from and against any and all losses, claims, damages, liabilities, costs, and expenses (including reasonable attorneys fees and expenses) directly or indirectly arising out of or attributable to the use, generation, manufacture, reproduction, storage, release, threatened release, spill, discharge, disposal or presence of a Hazardous Material, including the costs of any required or necessary repair, cleanup or other remedial work with respect to any property of any Borrower and the preparation and implementation of any closure, remedial or other required plans, except that any Borrower shall not have any obligation under this Section 9.3(d) to indemnify a person otherwise to be indemnified pursuant to the terms hereof with respect to a matter covered hereby resulting solely from the gross negligence or wilful misconduct of such indemnitee as determined pursuant to a final, non appealable order of a court of competent
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jurisdiction (but without limiting the obligations of any Borrower as to any other person hereunder). All representations, warranties, covenants and indemnifications in this Section 9.3 shall survive the payment of the Obligations and the termination of this Agreement.
(a) Each Borrower shall, and shall cause any Subsidiary to, keep proper books and records in which true and complete entries shall be made of all dealings or transactions of or in relation to the Collateral and the business of such Borrower and its Subsidiaries in accordance with GAAP. Borrowers shall promptly furnish to Agent and Lenders all such financial and other information as Agent shall reasonably request relating to the Collateral and the assets, business and operations of Borrowers, and Borrowers shall notify the auditors and accountants of Borrowers that Agent is authorized to obtain such information directly from them, provided that ,
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so long as no Default or Event of Default shall exist or have occurred and be continuing, and Agent shall have otherwise received such information hereunder as it may have requested, Agent shall not exercise its right under this Section 9.6 to contact the accountants and auditors directly to obtain information from them not relating to the Collateral without the prior approval of Borrowers, which approval shall not be unreasonably withheld, conditioned or delayed. Without limiting the foregoing, Borrowers shall furnish or cause to be furnished to Agent, the following: (i) within thirty (30) days after the end of each fiscal month, monthly unaudited consolidated financial statements, and unaudited consolidating financial statements (including in each case balance sheets, statements of income and loss, statements of cash flow, and statements of shareholders equity), all in reasonable detail, fairly presenting in all material respects the financial position and the results of the operations of Borrowers and their Subsidiaries as of the end of and through such fiscal month, certified to be correct by the vice-president-finance, chief financial officer, controller, treasurer, assistant treasurer or other appropriate financial or senior officer of Borrowers, subject to normal year end adjustments and no footnotes and accompanied by a compliance certificate substantially in the form of Exhibit E hereto, along with a schedule in a form reasonably satisfactory to Agent of the calculations used in determining, as of the end of such month, whether Borrowers were in compliance with the covenants set forth in Sections 9.17 and 9.18 of this Agreement for such month and (ii) within ninety (90) days after the end of each fiscal year, audited consolidated financial statements and unaudited consolidating financial statements of Borrowers and its Subsidiaries (including in each case balance sheets, statements of income and loss, statements of cash flow, and statements of shareholders equity), and the accompanying notes thereto, all in reasonable detail, fairly presenting in all material respects the financial position and the results of the operations of Borrowers and their Subsidiaries as of the end of and for such fiscal year, together with the unqualified opinion of independent certified public accountants with respect to the audited consolidated financial statements, which accountants shall be an independent accounting firm selected by Borrowers and reasonably acceptable to Agent, that such audited consolidated financial statements have been prepared in accordance with GAAP, and present fairly in all material respects the results of operations and financial condition of each Borrower and its Subsidiaries as of the end of and for the fiscal year then ended.
(b) Borrowers shall promptly notify Agent in writing of the details of (i) any loss, damage, investigation, action, suit, proceeding or claim relating to Collateral having a value of more than $250,000 or which could reasonably be expect to result in a Material Adverse Effect, (ii) any Material Contract being terminated or amended or any new Material Contract entered into (in which event Borrowers shall provide Agent with a copy of such Material Contract), (iii) any order, judgment or decree in excess of $100,000 shall have been entered against Borrower or any of its or their properties or assets, (iv) any notification of a material violation of laws or regulations received by Borrower, (v) any ERISA Event, and (vi) the occurrence of any Default or Event of Default.
(c) Promptly after the sending or filing thereof, Borrowers shall send to Agent copies of (i) all public information which Borrowers or any of its Subsidiaries sends to its security holders generally, (ii) all Form 10-K, Form 10-Q, Form 8-K, proxy statements, all amendments and supplements thereto or equivalent reports and registration statements which Borrowers or any of its Subsidiaries files with the Securities Exchange Commission, any national or foreign securities exchange or the National Association of Securities Dealers, Inc., and such
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other reports as Agent may hereafter specifically identify to Borrowers that Agent will require be provided to Agent, (iii) all press releases and (iv) all other statements concerning material changes or developments in the business of any Borrower made available by Borrower to the public.
(d) Borrowers shall furnish or cause to be furnished to Agent such budgets, forecasts and projections with respect to the businesses of Borrowers as Agent may from time to time reasonably request prepared on a basis consistent with such budgets, forecasts and projections as are currently prepared by Borrowers, together with such other information respecting the Collateral, as Agent may, from time to time, reasonably request, or such other budgets, forecasts and projections with respect to the businesses of Borrowers as Agent may otherwise require at any time that Excess Availability is less than $5,000,000 or either a Default or Event of Default shall exist or have occurred and be continuing or in connection with any amendment, waiver or consent hereunder or under any of the other Financing Agreements. Agent is hereby authorized to deliver a copy of any financial statement or any other information relating to the business of Borrowers to any court or other Governmental Authority or to any Lender or Participant or prospective Lender or Participant or any Affiliate of any Lender or Participant, subject to Section 13.5 hereof. Each Borrower hereby irrevocably authorizes and directs all accountants or auditors to deliver to Agent, at Borrowers expense, copies of the financial statements of any Borrower and any reports or management letters prepared by such accountants or auditors on behalf of Borrower and to disclose to Agent and Lenders such information as they may have regarding the business of any Borrower. Any documents, schedules, invoices or other papers delivered to Agent or any Lender may be destroyed or otherwise disposed of, subject to Section 13.5 hereof, by Agent or such Lender one (1) year after the same are delivered to Agent or such Lender, except as otherwise designated by Administrative Borrower to Agent or such Lender in writing.
(a) merge into or with or consolidate with any other Person or permit any other Person to merge into or with or consolidate with it except that any Subsidiary of any Borrower may merge with and into or consolidate with Borrowers or any other Subsidiary of any Borrower (in connection with a Permitted Acquisition or otherwise); provided , that , each of the following conditions is satisfied: (i) Agent shall have received not less than ten (10) Business Days prior written notice of the intention of such Borrower or such Subsidiaries to so merge or consolidate, which notice shall set forth in reasonable detail, the persons that are merging or consolidating, which person will be the surviving entity, the locations of the assets of the persons that are merging or consolidating, together with such other information with respect to such merger or consolidation as Agent may reasonably request, (ii) as of the effective date of the merger or consolidation and after giving effect thereto, no Default or Event of Default shall exist or have occurred and be continuing, (iii) Agent shall have received, true, correct and complete copies of all material agreements, documents and instruments relating to such merger or consolidation, including, when available, the certificate or certificates of merger to be filed with each appropriate Secretary of State or similar Governmental Authority, foreign or domestic (with a copy as filed promptly after such filing), (iv) the surviving corporation shall expressly confirm, ratify and assume the Obligations and the Financing Agreements to which it is a party in writing,
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in form and substance reasonably satisfactory to Agent, and Borrowers shall execute and deliver such other agreements, documents and instruments as Agent may reasonably request in connection therewith, (v) in no event shall any Borrower merge with or into or consolidate with, or enter into any similar transaction with, any Foreign Subsidiary, and (vi) in the case of any such merger or consolidation to which such Borrower is a party, (A) such Borrower shall be the surviving corporation, and (B) in no event shall such Borrower become liable for any Indebtedness or other obligations (contingent or otherwise) as a result of all such mergers or consolidations in an aggregate amount in excess of $150,000;
(b) sell, issue, assign, lease, license, transfer, abandon or otherwise dispose of any Capital Stock or Indebtedness to any other Person or any of its assets to any other Person, except for:
(c) wind up, liquidate or dissolve, except that any Subsidiary listed on Schedule 8.12 hereto may wind up, liquidate and dissolve; provided , that , each of the following conditions is satisfied, (i) the winding up, liquidation and dissolution of such Subsidiary shall not violate any law or any order or decree of any court or other Governmental Authority in any material respect and shall not conflict with or result in the breach of, or constitute a default under, any indenture, mortgage, deed of trust, or any other agreement or instrument to which any Borrower is a party or may be bound, (ii) such winding up, liquidation or dissolution shall be done in accordance with the requirements of all applicable laws and regulations, (iii) effective upon such winding up, liquidation or dissolution, all of the assets and properties of such Subsidiary shall be duly and validly transferred and assigned to a Borrower, free and clear of any liens, restrictions or encumbrances other than the security interest and liens of Agent (and Agent shall have received such evidence thereof as Agent may require) and Agent shall have received such deeds, assignments or other agreements as Agent may request to evidence and confirm the transfer of such assets of such Subsidiary to a Borrower, (iv) Agent shall have received all documents and agreements that any Borrower has filed with any Governmental Authority or as are otherwise required to effectuate such winding up, liquidation or dissolution, (v) no Borrower shall assume any Indebtedness, obligations or liabilities as a result of such winding up, liquidation or dissolution, or otherwise become liable in respect of any obligations or liabilities of the entity that is winding up, liquidating or dissolving, unless such Indebtedness is otherwise expressly permitted hereunder, (vi) Agent shall have received not less than ten (10) Business Days prior written notice of the intention of such Subsidiary to wind up, liquidate or dissolve, and (vii) as of the date of such winding up, liquidation or dissolution and after giving effect thereto, no Default or Event of Default shall exist or have occurred and be continuing; or
(d) agree to do any of the foregoing.
(a) the security interests and liens of Agent for the benefit of Secured Parties;
(b) liens securing the payment of taxes, either (i) not yet overdue or the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to such Borrower or such Subsidiary and with respect to which adequate reserves have been set aside on its books or (ii) identified on Schedule 9.8 hereto;
(c) non-consensual statutory liens (other than liens securing the payment of taxes) arising in the ordinary course of such Borrowers or Subsidiarys business (including such liens in favor of landlords, warehousemen and mechanics and similar liens) to the extent such liens secure Indebtedness or other obligations relating to claims or liabilities which are being contested in good faith by appropriate proceedings diligently pursued and available to such Borrower or such Subsidiary, in each case prior to the commencement of foreclosure or other
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similar proceedings and with respect to which adequate reserves have been set aside on its books in accordance with GAAP and other than liens identified on Schedule 9.8 hereof;
(d) zoning restrictions, easements, licenses, covenants and other restrictions affecting the use of Real Property which do not interfere in any material respect with the use of such Real Property or ordinary conduct of the business of such Borrower or such Subsidiary as presently conducted thereon or materially impair the value of the Real Property which may be subject thereto;
(e) purchase money security interests in Equipment (including Capital Leases) and purchase money mortgages on Real Property (including Capital Leases) to secure Indebtedness permitted under Section 9.9(b) hereof;
(f) pledges and deposits of cash by any Borrower or any Subsidiary in the ordinary course of business in connection with workers compensation, unemployment insurance and other types of social security benefits consistent with the current practices of Borrower as of the date hereof;
(g) pledges and deposits of cash by any Borrower or any Subsidiary in the ordinary course of business with any financial institution at which a deposit account of such Borrower or such Subsidiary is maintained to secure obligations of such Borrower to such financial institution in connection with such deposit account and the cash management services provided by such financial institution for which such deposit account is used consistent with the current practices of Borrower or such Subsidiary as of the date hereof;
(h) pledges and deposits of cash by any Borrower or any of Subsidiary of Borrower to secure the performance of tenders, bids, leases, trade contracts (other than for the repayment of Indebtedness), statutory obligations, appeals and other similar obligations in each case in the ordinary course of business of such Borrower; provided , that , in connection with any performance bonds issued by a surety or other person, the issuer of such bond shall not have any rights in or to, or other interest in (whether contingent or otherwise), any of the Collateral other than the pledges or deposits of cash and as to any pledges in respect of an appeal, after giving effect thereto, Excess Availability is not less than $5,000,000;
(i) liens or other security interests arising from (i) operating leases and the precautionary UCC financing statement filings in respect thereof and (ii) equipment or other materials which are not owned by any Borrower or any Subsidiary located on the premises of such Borrower or such Subsidiary (but not in connection with, or as part of, the financing thereof) from time to time in the ordinary course of business and consistent with current practices of such Borrower or any Subsidiary of any Borrower and the precautionary UCC financing statement filings in respect thereof;
(j) judgments and other similar liens arising in connection with court proceedings that do not constitute an Event of Default; provided , that , (i) such liens are being contested in good faith and by appropriate proceedings diligently pursued, (ii) adequate reserves or other appropriate provision, if any, as are required by GAAP have been made therefor, (iii) a stay of enforcement of any such liens is in effect;
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Section 12.11(b) hereof), or release of any Guarantor, in each case, without the consent of Agent and all of Lenders,
(iv) reduce any percentage specified in the definition of Required Lenders or change any of the provisions of any Financing Agreement specifying the number or percentage of Lenders required to waive, amend or modify any rights thereunder or make any determination or grant any consent thereunder, without the consent of Agent and all of Lenders,
(v) consent to the assignment or transfer by any Borrower of any of its rights and obligations under this Agreement, without the consent of Agent and all of Lenders,
(vi) amend, modify or waive any terms of this Section 11.3, without the consent of Agent and all of Lenders,
(vii) increase the advance rates constituting part of the Borrowing Base (other than as provided for in the definition of such terms), amend, waive or modify any provisions of the definition of the term Borrowing Base or any of the defined terms referred to in the definition of the term Borrowing Base, in each case as to any of the foregoing if the effect thereof increases the amount of the Borrowing Base, or increase the sublimits with respect to Loans based on Eligible Inventory or for Letter of Credit Accommodations, without the consent of Agent and all of Lenders,
(viii) increase the Maximum Credit, the Equipment Purchase Loan Limit, the Inventory Loan Limit or the Revolving Loan Limit, without the consent of Agent and all Lenders,
(ix) amend the definition of Excess Availability, Fixed Asset Availability or Pro Rata Share, without the consent of Agent and all of the Lenders, or
(x) amend Sections 6.4(a), 12.8 or 12.11 herein, without the consent of Agent and all of the Lenders.
(b) Agent and Lenders shall not, by any act, delay, omission or otherwise be deemed to have expressly or impliedly waived any of its or their rights, powers and/or remedies unless such waiver shall be in writing and signed as provided herein. Any such waiver shall be enforceable only to the extent specifically set forth therein. A waiver by Agent or any Lender of any right, power and/or remedy on any one occasion shall not be construed as a bar to or waiver of any such right, power and/or remedy which Agent or any Lender would otherwise have on any future occasion, whether similar in kind or otherwise.
(c) Notwithstanding anything to the contrary contained in Section 11.3(a) above, in connection with any amendment, waiver, discharge or termination, in the event that any Lender whose consent thereto is required shall fail to consent or fail to consent in a timely manner (such Lender being referred to herein as a Non-Consenting Lender), but the consent of any other Lenders to such amendment, waiver, discharge or termination that is required are obtained, if any, then Wachovia shall have the right, but not the obligation, to purchase at any time thereafter, and upon the exercise by Wachovia of such right, such Non-Consenting Lender shall have the obligation, to sell, assign and transfer to Wachovia or such Eligible Transferee as
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Wachovia may specify, the Commitment of such Non-Consenting Lender and all rights and interests of such Non-Consenting Lender pursuant thereto. Wachovia shall provide the Non-Consenting Lender with prior written notice of its intent to exercise its right under this Section, which notice shall specify on date on which such purchase and sale shall occur. Such purchase and sale shall be pursuant to the terms of an Assignment and Acceptance (whether or not executed by the Non-Consenting Lender), except that on the date of such purchase and sale, Wachovia, or such Eligible Transferee specified by Wachovia, shall pay to the Non-Consenting Lender (except as Wachovia and such Non-Consenting Lender may otherwise agree) the amount equal to: (i) the principal balance of the Loans held by the Non-Consenting Lender outstanding as for the close of business on the business day immediately preceding the effective date of such purchase and sale, plus (ii) amounts accrued and unpaid in respect of interest and fees payable to the Non-Consenting Lender to the effective date of the purchase (but in no event shall the Non-Consenting Lender be deemed entitled to any early termination fee). Such purchase and sale shall be effective on the date of the payment of such amount to the Non-Consenting Lender and the Commitment of the Non-Consenting Lender shall terminate on such date.
(d) The consent of Agent shall be required for any amendment, waiver or consent affecting the rights or duties of Agent hereunder or under any of the other Financing Agreements, in addition to the consent of the Lenders otherwise required by this Section and the exercise by Agent of any of its rights hereunder with respect to Reserves or Eligible Accounts or Eligible Inventory shall not be deemed an amendment to the advance rates provided for purposes of this Section 11.3.
11.4 Waiver of Counterclaims . Each Borrower waives all rights to interpose any claims, deductions, setoffs or counterclaims of any nature (other then compulsory counterclaims) in any action or proceeding with respect to this Agreement, the Obligations, the Collateral or any matter arising therefrom or relating hereto or thereto.
11.5 Indemnification . Other than with respect to Taxes (for which the indemnification obligations of each Borrower to Agent and Lenders are subject to Section 6.5 hereof) each Borrower shall, jointly and severally, indemnify and hold Agent and each Lender, and its officers, directors, agents, employees, advisors and counsel and their respective Affiliates (each such person being an Indemnitee), harmless from and against any and all losses, claims, damages, liabilities, costs or expenses (including reasonable attorneys fees and expenses) imposed on, incurred by or asserted against any of them in connection with any litigation, investigation, claim or proceeding commenced or threatened related to the negotiation, preparation, execution, delivery, enforcement, performance or administration of this Agreement, any other Financing Agreements, or any undertaking or proceeding related to any of the transactions contemplated hereby or any act, omission, event or transaction related or attendant thereto, including amounts paid in settlement, court costs, and the reasonable fees and expenses of counsel except that Borrowers shall not have any obligation under this Section 11.5 to indemnify an Indemnitee with respect to a matter covered hereby resulting from the gross negligence or willful misconduct of such Indemnitee as determined pursuant to a final, non-appealable judgment of a court of competent jurisdiction (but without limiting the obligations of Borrowers as to any other Indemnitee). To the extent that the undertaking to indemnify, pay and hold harmless set forth in this Section may be unenforceable because it violates any law or public policy, Borrowers shall pay the maximum portion which it is permitted to pay under applicable
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law to Agent and Lenders in satisfaction of indemnified matters under this Section. To the extent permitted by applicable law, no Borrower shall assert, and each Borrower hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any of the other Financing Agreements or any undertaking or transaction contemplated hereby. All amounts due under this Section shall be payable upon demand. The foregoing indemnity shall survive the payment of the Obligations and the termination or non-renewal of this Agreement.
11.6 Currency Indemnity . If, for the purposes of obtaining judgment in any court in any jurisdiction with respect to this Agreement or any of the other Financing Agreements, it becomes necessary to convert into the currency of such jurisdiction (the Judgment Currency) any amount due under this Agreement or under any of the other Financing Agreements in any currency other than the Judgment Currency (the Currency Due), then conversion shall be made at the Exchange Rate prevailing on the Business Day before the day on which judgment is given for the purchase of the Currency Due with the Judgment Currency. In the event that there is a change in the Exchange Rate prevailing between the Business Day before the day on which the judgment is given and the date of receipt by Agent of the amount due, Borrowers will, on the date of receipt by Agent, pay such additional amounts, if any, or be entitled to receive reimbursement of such amount, if any, as may be necessary to ensure that the amount received by Agent and Lenders on such date is the amount in the Judgment Currency which when converted at the Exchange Rate prevailing on the date of receipt by Agent is the amount then due under this Agreement or such other of the Financing Agreements in the Currency Due. If the amount of the Currency Due which Agent is able to purchase is less than the amount of the Currency Due originally due to it, each Borrower shall indemnify and save Agent and Lenders harmless from and against loss or damage arising as a result of such deficiency. The indemnity contained herein shall constitute an obligation separate and independent from the other obligations contained in this Agreement and the other Financing Agreements, shall give rise to a separate and independent cause of action, shall apply irrespective of any indulgence granted by Agent from time to time and shall continue in full force and effect notwithstanding any judgment or order for a liquidated sum in respect of an amount due under this Agreement or any of the other Financing Agreements or under any judgment or order.
12.1 Appointment, Powers and Immunities . Each Secured Party irrevocably designates, appoints and authorizes Wachovia to act as Agent hereunder and under the other Financing Agreements with such powers as are specifically delegated to Agent by the terms of this Agreement and of the other Financing Agreements, together with such other powers as are reasonably incidental thereto. Agent (a) shall have no duties or responsibilities except those expressly set forth in this Agreement and in the other Financing Agreements, and shall not by reason of this Agreement or any other Financing Agreement be a trustee or fiduciary for any Secured Party; (b) shall not be responsible to Secured Parties for any recitals, statements, representations or warranties contained in this Agreement or in any of the other Financing Agreements, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or any other Financing Agreement, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other
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Financing Agreement or any other document referred to or provided for herein or therein or for any failure by any Borrower or any other Person to perform any of its obligations hereunder or thereunder; and (c) shall not be responsible to Secured Parties for any action taken or omitted to be taken by it hereunder or under any other Financing Agreement or under any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith, except for its own gross negligence or willful misconduct as determined by a final non-appealable judgment of a court of competent jurisdiction. Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it in good faith. Agent may deem and treat the payee of any note as the holder thereof for all purposes hereof unless and until the assignment thereof pursuant to an agreement (if and to the extent permitted herein) in form and substance satisfactory to Agent shall have been delivered to and acknowledged by Agent. The designation of any Person as Documentation Agent under this Agreement shall not create any rights in favor of it in such capacity nor subject it to any duties or obligations in such capacity.
12.2 Reliance by Agent . Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telecopy, telex, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by Agent. As to any matters not expressly provided for by this Agreement or any other Financing Agreement, Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder or thereunder in accordance with instructions given by the Required Lenders or all of Secured Parties as is required in such circumstance, and such instructions of such Agents and any action taken or failure to act pursuant thereto shall be binding on all Secured Parties.
12.3 Events of Default .
(a) Agent shall not be deemed to have knowledge or notice of the occurrence of a Default or an Event of Default or other failure of a condition precedent to the Loans and Letter of Credit Accommodations hereunder, unless and until Agent has received written notice from a Lender or Borrowers specifying such Event of Default or any unfulfilled condition precedent, and stating that such notice is a Notice of Default or Failure of Condition. In the event that Agent receives such a Notice of Default or Failure of Condition, Agent shall give prompt notice thereof to the Lenders. Agent shall (subject to Section 12.7) take such action with respect to any such Event of Default or failure of condition precedent as shall be directed by the Required Lenders to the extent provided for herein; provided , that , unless and until Agent shall have received such directions, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to or by reason of such Event of Default or failure of condition precedent, as it shall deem advisable in the best interest of Lenders. Without limiting the foregoing, and notwithstanding the existence or occurrence and continuance of an Event of Default or any other failure to satisfy any of the conditions precedent set forth in Section 4 of this Agreement to the contrary, unless and until otherwise directed by the Required Lenders, Agent may, but shall have no obligation to, continue to make Loans and issue or cause to be issued Letter of Credit Accommodations for the ratable account and risk of Lenders from time to time if Agent believes making such Loans or issuing or causing to be issued such Letter of Credit Accommodations is in the best interests of Lenders.
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(b) Except with the prior written consent of Agent, no Secured Party may assert or exercise any enforcement right or remedy in respect of the Loans, Letter of Credit Accommodations or other Obligations, as against any Borrower or any of the Collateral or other property of any Borrower.
12.4 Wachovia in its Individual Capacity . With respect to its Commitment and the Loans made and Letter of Credit Accommodations issued or caused to be issued by it (and any successor acting as Agent), so long as Wachovia shall be a Lender hereunder, it shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as Agent, and the term Lender or Lenders shall, unless the context otherwise indicates, include Wachovia in its individual capacity as Lender hereunder. Wachovia (and any successor acting as Agent) and its Affiliates may (without having to account therefor to any Lender) lend money to, make investments in and generally engage in any kind of business with Borrowers (and any of its Subsidiaries or Affiliates) as if it were not acting as Agent, and Wachovia and its Affiliates may accept fees and other consideration from any Borrower and any of their Subsidiaries and Affiliates for services in connection with this Agreement or otherwise without having to account for the same to Lenders.
12.5 Indemnification . Secured Parties agree to indemnify Agent (to the extent not reimbursed by Borrowers hereunder and without limiting any obligations of Borrowers hereunder) ratably, in accordance with their Pro Rata Shares, for any and all claims of any kind and nature whatsoever that may be imposed on, incurred by or asserted against Agent (including by any Secured Party) arising out of or by reason of any investigation in or in any way relating to or arising out of this Agreement or any other Financing Agreement or any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby (including the costs and expenses that Agent is obligated to pay hereunder) or the enforcement of any of the terms hereof or thereof or of any such other documents; provided , that , no Secured Party shall be liable for any of the foregoing to the extent it arises from the gross negligence or willful misconduct of the party to be indemnified as determined by a final non-appealable judgment of a court of competent jurisdiction. The foregoing indemnity shall survive the payment of the Obligations and the termination or non-renewal of this Agreement.
12.6 Non-Reliance on Agent and Other Lenders . Each Secured Party agrees that it has, independently and without reliance on Agent or other Secured Party, and based on such documents and information as it has deemed appropriate, made its own credit analysis of Borrowers and has made its own decision to enter into this Agreement and that it will, independently and without reliance upon Agent or any other Secured Party, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or any of the other Financing Agreements. Agent shall not be required to keep itself informed as to the performance or observance by any Borrower of any term or provision of this Agreement or any of the other Financing Agreements or any other document referred to or provided for herein or therein or to inspect the properties or books of any Borrower. Agent will use reasonable efforts to provide Lenders with any information received by Agent from any Borrower which is required to be provided to Lenders or deemed to be requested by Lenders hereunder and with a copy of any Notice of Default or Failure of Condition received by Agent from Borrowers or any Lender; provided , that , Agent shall not be liable to any Lender for any failure to do so, except to the
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extent that such failure is attributable to Agents own gross negligence or willful misconduct as determined by a final non-appealable judgment of a court of competent jurisdiction. Except for notices, reports and other documents expressly required to be furnished to Lenders by Agent or deemed requested by Lenders hereunder, Agent shall not have any duty or responsibility to provide any Lender with any other credit or other information concerning the affairs, financial condition or business of any Borrower that may come into the possession of Agent.
12.7 Failure to Act . Except for action expressly required of Agent hereunder and under the other Financing Agreements, Agent shall in all cases be fully justified in failing or refusing to act hereunder and thereunder unless it shall receive further assurances to its satisfaction from Secured Parties of their indemnification obligations under Section 12.5 hereof against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action.
12.8 Additional Loans . Agent shall not make any Loans or provide any Letter of Credit Accommodations to any Borrower on behalf of Lenders intentionally and with actual knowledge that such Loans or Letter of Credit Accommodations would cause the aggregate amount of the total outstanding Loans and Letter of Credit Accommodations to such Borrower to exceed the Borrowing Base of such Borrower, without the prior consent of all Lenders, except, that, Agent may make such additional Loans or provide such additional Letter of Credit Accommodations on behalf of Lenders, intentionally and with actual knowledge that such Loans or Letter of Credit Accommodations will cause the total outstanding Loans and Letter of Credit Accommodations to such Borrower to exceed the Borrowing Base, as Agent may deem necessary or advisable in its discretion; provided, that: (a) the total principal amount of the additional Loans or additional Letter of Credit Accommodations to Borrowers which Agent may make or provide after obtaining such actual knowledge that the aggregate principal amount of the Loans equal or exceed the Borrowing Base, plus the amount of Special Agent Advances made pursuant to Section 12.11(a)(ii) hereof then outstanding, shall not exceed the aggregate amount equal to $7,500,000 and shall not cause the total principal amount of the Loans and Letter of Credit Accommodations to exceed the Maximum Credit and (b) no such additional Loan or Letter of Credit Accommodation shall be outstanding more than ninety (90) days after the date such additional Loan or Letter of Credit Accommodation is made or issued (as the case may be), except as the Required Lenders may otherwise agree. Each Lender shall be obligated to pay Agent the amount of its Pro Rata Share of any such additional Loans or Letter of Credit Accommodations.
12.9 Concerning the Collateral and the Related Financing Agreements . Each Secured Party authorizes and directs Agent to enter into this Agreement and the other Financing Agreements. Each Secured Party agrees that any action taken by Agent or Required Lenders in accordance with the terms of this Agreement or the other Financing Agreements and the exercise by Agent or Required Lenders of their respective powers set forth therein or herein, together with such other powers that are reasonably incidental thereto, shall be binding upon all of the Secured Parties.
12.10 Field Audit, Examination Reports and other Information; Disclaimer by Lenders . By signing this Agreement, each Lender:
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(a) is deemed to have requested that Agent furnish such Lender, promptly after it becomes available, a copy of each field audit or examination report and report with respect to the Borrowing Base prepared or received by Agent (each field audit or examination report and report with respect to the Borrowing Base being referred to herein as a Report and collectively, Reports), appraisals with respect to the Collateral and financial statements with respect to Borrowers and its Subsidiaries received by Agent;
(b) expressly agrees and acknowledges that Agent (i) does not make any representation or warranty as to the accuracy of any Report, appraisal or financial statement or (ii) shall not be liable for any information contained in any Report, appraisal or financial statement;
(c) expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that Agent or any other party performing any audit or examination will inspect only specific information regarding Borrowers and will rely significantly upon Borrowers books and records, as well as on representations of Borrowers personnel; and
(d) agrees to keep all Reports confidential and strictly for its internal use in accordance with the terms of Section 13.5 hereof, and not to distribute or use any Report in any other manner.
12.11 Collateral Matters .
(a) Agent may, at its option, from time to time, at any time on or after an Event of Default and for so long as the same is continuing or upon any other failure of a condition precedent to the Loans and Letter of Credit Accommodations hereunder, make such disbursements and advances (Special Agent Advances) which Agent, in its sole discretion, (i) deems necessary or desirable either to preserve or protect the Collateral or any portion thereof or (ii) to enhance the likelihood or maximize the amount of repayment by Borrowers of the Loans and other Obligations; provided , that , the aggregate principal amount of the Special Agent Advances pursuant to this clause (ii), plus the then outstanding principal amount of the additional Loans and Letter of Credit Accommodations which Agent may make or provide as set forth in Section 12.8 hereof, shall not exceed the aggregate amount of $7,500,000 or (iii) to pay any other amount chargeable to Borrowers pursuant to the terms of this Agreement or any of the other Financing Agreements consisting of (A) costs, fees and expenses and (B) payments to any issuer of Letter of Credit Accommodations; provided , that , the aggregate principal amount of the Special Agent Advances pursuant to clauses (i), (ii) and (iii) above outstanding at any time, plus the then outstanding amount of Loans and Letter of Credit Accommodations, shall not exceed the Maximum Credit. Special Agent Advances shall be repayable on demand and together with all interest thereon shall constitute Obligations secured by the Collateral. Special Agent Advances shall not constitute Loans but shall otherwise constitute Obligations hereunder. Interest on Special Agent Advances shall be payable at the Interest Rate then applicable to Prime Rate Loans and shall be payable on demand. Without limitation of its obligations pursuant to Section 6.10, each Lender agrees that it shall make available to Agent, upon Agents demand, in immediately available funds, the amount equal to such Lenders Pro Rata Share of each such Special Agent Advance. If such funds are not made available to Agent by such Lender, such Lender shall be deemed a Defaulting Lender and Agent shall be entitled to recover such funds,
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on demand from such Lender together with interest thereon for each day from the date such payment was due until the date such amount is paid to Agent at the Federal Funds Rate for each day during such period (as published by the Federal Reserve Bank of New York or at Agents option based on the arithmetic mean determined by Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by each of the three leading brokers of Federal funds transactions in New York City selected by Agent) and if such amounts are not paid within three (3) days of Agents demand, at the highest Interest Rate provided for in Section 3.1 hereof applicable to Prime Rate Loans.
(b) Lenders hereby irrevocably authorize Agent, at its option and in its discretion to release any security interest in, mortgage or lien upon, any of the Collateral (i) upon termination of the Commitments and payment and satisfaction of all of the Obligations and delivery of cash collateral to the extent required under Section 13.1 below, or (ii) constituting property being sold or disposed of if Borrowers certify to Agent that the sale or disposition is made in compliance with Section 9.7 hereof (and Agent may rely conclusively on any such certificate, without further inquiry), or (iii) constituting property in which any Borrower did not own an interest at the time the security interest, mortgage or lien was granted or at any time thereafter, or (iv) having a value in the aggregate in any twelve (12) month period of less than $2,500,000, and to the extent Agent may release its security interest in and lien upon any such Collateral pursuant to the sale or other disposition thereof, such sale or other disposition shall be deemed consented to by Lenders, or (v) if required or permitted under the terms of any of the other Financing Agreements, including any intercreditor agreement, or (vi) approved, authorized or ratified in writing by all of Lenders. Except as provided above, Agent will not release any security interest in, mortgage or lien upon, any of the Collateral without the prior written authorization of all of Lenders. Upon request by Agent at any time, Lenders will promptly confirm in writing Agents authority to release particular types or items of Collateral pursuant to this Section. Nothing contained herein shall be construed to require the consent of any party providing a Hedge Agreement or any Bank Product Provider to any release of any Collateral or termination of security interests in any Collateral.
(c) Without any manner limiting Agents authority to act without any specific or further authorization or consent by the Required Lenders, each Lender agrees to confirm in writing, upon request by Agent, the authority to release Collateral conferred upon Agent under this Section. Agent shall (and is hereby irrevocably authorized by Lenders to) execute such documents as may be necessary to evidence the release of the security interest, mortgage or liens granted to Agent upon any Collateral to the extent set forth above; provided , that , (i) Agent shall not be required to execute any such document on terms which, in Agents opinion, would expose Agent to liability or create any obligations or entail any consequence other than the release of such security interest, mortgage or liens without recourse or warranty and (ii) such release shall not in any manner discharge, affect or impair the Obligations or any security interest, mortgage or lien upon (or obligations of any Borrower in respect of) the Collateral retained by Borrowers.
(d) Agent shall have no obligation whatsoever to any Lender or any other Person to investigate, confirm or assure that the Collateral exists or is owned by any Borrower or is cared for, protected or insured or has been encumbered, or that any particular items of Collateral meet the eligibility criteria applicable in respect of the Loans or Letter of Credit Accommodations hereunder, or whether any particular reserves are appropriate, or that the liens and security interests granted to Agent pursuant hereto or any of the Financing Agreements or otherwise have
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been properly or sufficiently or lawfully created, perfected, protected or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Agent in this Agreement or in any of the other Financing Agreements, it being understood and agreed that in respect of the Collateral, or any act, omission or event related thereto, subject to the other terms and conditions contained herein, Agent may act in any manner it may deem appropriate, in its discretion, given Agents own interest in the Collateral as a Lender and that Agent shall have no duty or liability whatsoever to any other Lender.
12.12 Agency for Perfection . Each Secured Party hereby appoints Agent and each other Secured Party as agent and bailee for the purpose of perfecting the security interests in and liens upon the Collateral of Agent in assets which, in accordance with Article 9 of the UCC can be perfected only by possession (or where the security interest of a secured party with possession has priority over the security interest of another secured party) and Agent and each Secured Party hereby acknowledges that it holds possession of any such Collateral for the benefit of Agent as secured party. Should any Secured Party obtain possession of any such Collateral, such Secured Party shall notify Agent thereof, and, promptly upon Agents request therefor shall deliver such Collateral to Agent or in accordance with Agents instructions.
12.13 Successor Agent . Agent may resign as Agent upon thirty (30) days notice to Lenders and Borrowers. If Agent resigns under this Agreement, the Required Lenders shall appoint from among the Lenders a successor agent for Lenders. If no successor agent is appointed prior to the effective date of the resignation of Agent, Agent may appoint, after consulting with Lenders and Borrowers, a successor agent from among Lenders. Upon the acceptance by the Lender so selected of its appointment as successor agent hereunder, such successor agent shall succeed to all of the rights, powers and duties of the retiring Agent and the term Agent as used herein and in the other Financing Agreements shall mean such successor agent and the retiring Agents appointment, powers and duties as Agent shall be terminated. After any retiring Agents resignation hereunder as Agent, the provisions of this Section 12 shall inure to its benefit as to any actions taken or omitted by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is thirty (30) days after the date of a retiring Agents notice of resignation, the retiring Agents resignation shall nonetheless thereupon become effective and Lenders shall perform all of the duties of Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above.
13.1 Term .
(a) This Agreement and the other Financing Agreements shall become effective as of the date set forth on the first page hereof and shall continue in full force and effect for a term ending on September 30, 2011 (the Maturity Date), unless sooner terminated pursuant to the terms hereof. In addition, any Borrower may terminate this Agreement at any time upon ten (10) days prior written notice to Agent (which notice shall be irrevocable) and, Agent may, at its option, and shall at the direction of Required Lenders, terminate this Agreement at any time (after giving notice to Borrowers) on or after an Event of Default. Upon the Maturity Date or
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any other effective date of termination of the Financing Agreements, Borrowers shall pay to Agent all outstanding and unpaid Obligations and shall furnish cash collateral to Agent (or at Agents option, a letter of credit issued for the account of any Borrower and at Borrowers expense, in form and substance satisfactory to Agent, by an issuer acceptable to Agent and payable to Agent as beneficiary) in such amounts as Agent determines are reasonably necessary to secure Agent and Lenders from loss, cost, damage or expense, including attorneys fees and expenses, in connection with any contingent Obligations, including issued and outstanding Letter of Credit Accommodations and checks or other payments provisionally credited to the Obligations and/or as to which Agent or any Lender has not yet received and indefeasible payment and any continuing obligations of Agent or any Lender pursuant to any Deposit Account Control Agreement. The amount of such cash collateral (or letter of credit, as Agent may determine) as to any Letter of Credit Accommodations shall be in the amount equal to one hundred five (105%) percent of the amount of the Letter of Credit Accommodations plus the amount of any fees and expenses payable in connection therewith through the end of the latest expiration date of such Letter of Credit Accommodations. Such payments in respect of the Obligations and cash collateral shall be remitted by wire transfer in Federal funds to the Agent Payment Account or such other bank account of Agent, as Agent may, in its discretion, designate in writing to such Borrower for such purpose. Interest shall be due until and including the next Business Day, if the amounts so paid by such Borrower to the Agent Payment Account or other bank account designated by Agent are received in such bank account later than 12:00 noon, Chicago time.
(b) If for any reason this Agreement is terminated prior to the Maturity Date, in view of the impracticality and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Agents and each Lenders lost profits as a result thereof, Borrowers shall pay to Agent, for the account of Lenders (in accordance with the arrangements by and among the Lenders), upon the effective date of such termination, an early termination fee in the amount equal to
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(i) ½% of the Maximum Credit |
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From the date hereof to and including the first anniversary of the date hereof |
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(ii) ¼% of the Maximum Credit |
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From and after the first anniversary of the date hereof to and including the second anniversary of the date hereof. |
Notwithstanding anything to the contrary contained in this Section, in the event of the termination of this Agreement by Borrowers prior to the Maturity Date and the full and final repayment in cash of all of the Obligations and receipt by Agent of cash collateral or at its option a letter of credit for contingent obligations in accordance with the terms hereof with the proceeds of initial loans and advances or other financial accommodations to Borrowers pursuant to a credit facility provided by Wachovia Bank, National Association or its affiliates (or for which
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Wachovia Bank, National Association or any of its affiliates is acting as agent), Borrowers shall not be required to pay the early termination fee provided for above.
(c) No termination of this Agreement or the other Financing Agreements shall relieve or discharge any Borrower of its duties, obligations and covenants under this Agreement or the other Financing Agreements until all Obligations have been fully and finally discharged and paid in cash (other than contingent Obligations as to which Agent shall have received such cash collateral, or letter of credit, as Agent may determine, as is required pursuant to the terms hereof), and Agents continuing security interest in the Collateral and the rights and remedies of Agent and Lenders hereunder, under the other Financing Agreements and applicable law, shall remain in effect until all such Obligations have been fully and finally discharged and paid in cash (other than contingent Obligations as to which Agent shall have received such cash collateral, or letter of credit, as Agent may determine, as is required pursuant to the terms hereof). Accordingly, each Borrower waives any rights it may have under the UCC to demand the filing of termination statements with respect to the Collateral and Agent shall not be required to send such termination statements to Borrowers, or to file them with any filing office, unless and until this Agreement shall have been terminated in accordance with its terms and all Obligations are paid and satisfied in full in immediately available funds (other than contingent Obligations as to which Agent shall have received such cash collateral, or letter of credit, as Agent may determine, as is required pursuant to the terms hereof).
13.2 Interpretative Provisions .
(a) All terms used herein which are defined in Article 1, Article 8 or Article 9 of the UCC shall have the meanings given therein unless otherwise defined in this Agreement.
(b) All references to the plural herein shall also mean the singular and to the singular shall also mean the plural unless the context otherwise requires.
(c) All references to Borrowers pursuant to the definitions set forth in the recitals hereto shall include its successors and assigns. All references to Agent or Lender pursuant to the definitions set forth in the recitals hereto, or to any other person herein, shall include their respective successors and assigns.
(d) The words hereof, herein, hereunder, this Agreement and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not any particular provision of this Agreement and as this Agreement now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced.
(e) The word including when used in this Agreement shall mean including, without limitation and the word will when used in this Agreement shall be construed to have the same meaning and effect as the word shall.
(f) An Event of Default shall exist or continue or be continuing until such Event of Default is waived in accordance with Section 11.3 or is cured. Reference herein to a Default or Event of Default that exists shall only include a Default or Event of Default, as the case may be, that has not been cured or waived in accordance with the terms hereof, so that such Default or
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Event of Default, as the case may be, shall cease to exist and shall not be deemed to be continuing if it has been so cured or waived.
(g) All references to the term good faith used herein when applicable to Agent or any Lender shall mean, notwithstanding anything to the contrary contained herein or in the UCC, honesty-in-fact in the conduct or transaction concerned and observance of reasonable commercial standards of fair dealing based on how an asset-based lender with similar rights providing a credit facility of the type set forth herein would act in similar circumstances at the time with the information then available to it. All references to the term reasonably as applied to any conduct or determination by Agent shall be based on how an asset-based lender with similar rights providing a credit facility of the type set forth herein would act in similar circumstances.
(h) Any accounting term used in this Agreement shall have, unless otherwise specifically provided herein, the meaning customarily given in accordance with GAAP, and all financial computations hereunder shall be computed unless otherwise specifically provided herein, in accordance with GAAP as consistently applied and using the same method for inventory valuation as used in the preparation of the financial statements of Borrowers most recently received by Agent prior to the date hereof. Notwithstanding anything to the contrary contained in GAAP or any interpretations or other pronouncements by the Financial Accounting Standards Board or otherwise, the term unqualified opinion as used herein to refer to opinions or reports provided by accountants shall mean an opinion or report that is not only unqualified but also does not include any explanation, supplemental comment or other comment concerning the ability of the applicable person to continue as a going concern or the scope of the audit.
(i) In the computation of periods of time from a specified date to a later specified date, the word from means from and including, the words to and until each mean to but excluding and the word through means to and including.
(j) Unless otherwise expressly provided herein, (i) references herein to any agreement, document or instrument shall be deemed to include all subsequent amendments, modifications, supplements, extensions, renewals, restatements or replacements with respect thereto, but only to the extent the same are not prohibited by the terms hereof or of any other Financing Agreement, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, recodifying, supplementing or interpreting the statute or regulation.
(k) The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement.
(l) This Agreement and other Financing Agreements may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms.
(m) This Agreement and the other Financing Agreements are the result of negotiations among and have been reviewed by counsel to Agent and the other parties, and are
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the products of all parties. Accordingly, this Agreement and the other Financing Agreements shall not be construed against Agent or Lenders merely because of Agents or any Lenders involvement in their preparation.
(n) From and after the date hereof (i) all payment and indemnity obligations of the Borrower contained herein shall constitute the joint and several obligations of each Borrower, and all other obligations of the Borrower contained herein shall constitute obligations of each Borrower and (ii) all references to information contained on the Information Certificate shall, with respect to each Borrower, be a reference to the Information Certificate delivered by such Borrower.
13.3 Notices . All notices, requests and demands hereunder shall be in writing and deemed to have been given or made: if delivered in person, immediately upon delivery; if by telex, telegram or facsimile transmission, immediately upon sending and upon confirmation of receipt; if by nationally recognized overnight courier service with instructions to deliver the next Business Day, one (1) Business Day after sending; and if by certified mail, return receipt requested, five (5) days after mailing. All notices, requests and demands upon the parties are to be given to the following addresses (or to such other address as any party may designate by notice in accordance with this Section):
If to any
Borrower:
Haynes
International, Inc.
1020 West Park Avenue
Kokomo, Indiana 46904
Attention: Mr. Marcel Martin
VP Finance and CFO
Telephone No.: 765-456-6000
Telecopy No.: 765-456-6985
with a copy to:
Ice
Miller
One American Square
Box 82001
Indianapolis, Indiana 46282-0002
Attention: Steve Hackman, Esq.
Telephone No.: 317-236-2289
Telecopy No.: 317-592-4666
If to Agent:
Wachovia
Capital Finance Corporation
(Central)
150 South Wacker Drive
Chicago, Illinois 60606
Attention: Portfolio Manager
Telephone No.: 312-332-0420
Telecopy No.: 312-332-0424
13.4 Partial Invalidity . If any provision of this Agreement is held to be invalid or unenforceable, such invalidity or unenforceability shall not invalidate this Agreement as a whole, but this Agreement shall be construed as though it did not contain the particular provision held to
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be invalid or unenforceable and the rights and obligations of the parties shall be construed and enforced only to such extent as shall be permitted by applicable law.
13.5 Confidentiality .
(a) Agent and each Lender shall keep confidential, in accordance with its customary procedures for handling confidential information and safe and sound lending practices and consistent with its practices with respect to its own confidential information, any non-public written information supplied to it by any Borrower pursuant to this Agreement; provided , that , nothing contained herein shall limit the disclosure of any such information: (i) to the extent required by statute, rule, regulation, subpoena or court order, (ii) to bank examiners and other regulators, auditors and/or accountants, in connection with any litigation to which Agent or such Lender is a party, (iii) to any Lender or Participant (or prospective Lender or Participant) or to any Affiliate of any Lender so long as such information has been delivered to such Lender or Participant (or prospective Lender or Participant) or Affiliate subject to the written condition that such information shall be treated as confidential or such Lender or Participant (or prospective Lender or Participant) shall have otherwise agreed to treat such information as confidential in accordance with this Section 13.5, or (iv) to counsel for Agent or any Lender or Participant (or prospective Lender or Participant).
(b) In the event that Agent or any Lender receives a request or demand to disclose any confidential information pursuant to any subpoena or court order, Agent or such Lender, as the case may be, agrees (i) to the extent permitted by applicable law, Agent or such Lender will promptly notify Borrowers of such request so that any Borrower may seek a protective order or other appropriate relief or remedy and (ii) if disclosure of such information is required, disclose such information and, subject to reimbursement by Borrowers of Agents or such Lenders expenses, cooperate with Administrative Borrower in the reasonable efforts to obtain an order or other reliable assurance that confidential treatment will be accorded to such portion of the disclosed information which Administrative Borrower so designates.
(c) In no event shall this Section 13.5 or any other provision of this Agreement, any of the other Financing Agreements or applicable law be deemed: (i) to apply to or restrict disclosure of information that has been or is made public by any Borrower or any third party or otherwise becomes generally available to the public other than as a result of a disclosure in violation hereof, (ii) to apply to or restrict disclosure of information that was or becomes available to Agent or any Lender (or any Affiliate of any Lender) on a non-confidential basis from a person other than a Borrower or a person Agent or Lender has actual knowledge has provided such information to Agent or such Lender, as the case may be, in violation of a binding agreement upon such person known to such Agent or Lender to have obtained such information on a confidential basis from a Borrower, and (iii) to require Agent or any Lender to return any materials furnished by a Borrower to Agent or a Lender. The obligations of Agent and Lenders under this Section 13.5 shall supersede and replace the obligations of Agent and Lenders under any confidentiality letter signed prior to the date hereof.
13.6 Successors . This Agreement, the other Financing Agreements and any other document referred to herein or therein shall be binding upon and inure to the benefit of and be enforceable by Agent, Lenders, Borrowers and their respective successors and assigns, except
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that any Borrower may not assign its rights under this Agreement, the other Financing Agreements and any other document referred to herein or therein without the prior written consent of Agent and Lenders. Any such purported assignment without such express prior written consent shall be void. No Lender may assign its rights and obligations under this Agreement without the prior written consent of Agent, except as provided in Section 13.7 below. The terms and provisions of this Agreement and the other Financing Agreements are for the purpose of defining the relative rights and obligations of Borrowers, Agent and Lenders with respect to the transactions contemplated hereby and there shall be no third party beneficiaries of any of the terms and provisions of this Agreement or any of the other Financing Agreements.
13.7 Assignments; Participations .
(a) Each Lender may, with the prior written consent of Agent (which consent shall not be unreasonably withheld, conditioned or delayed), assign all or, if less than all, a portion equal to at least $10,000,000 in the aggregate for the assigning Lender, of such rights and obligations under this Agreement to one or more Eligible Transferees (but not including for this purpose any assignments in the form of a participation), each of which assignees shall become a party to this Agreement as a Lender by execution of an Assignment and Acceptance; provided, that, (i) such transfer or assignment will not be effective until recorded by Agent on the Register and (ii) Agent shall have received for its sole account payment of a processing fee from the assigning Lender or the assignee in the amount of $5,000.
(b) Agent shall maintain a register of the names and addresses of Lenders, their Commitments and the principal amount and interest of their Loans (the Register). Agent shall also maintain a copy of each Assignment and Acceptance delivered to and accepted by it and shall modify the Register to give effect to each Assignment and Acceptance. The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and Borrowers, Agent and Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by any Borrower and any Lender at any reasonable time and from time to time upon reasonable prior notice. This Section 13.7 shall be construed so that the Obligations are at all times maintained in registered form within the meaning of Sections 163(f), 871(h)(2) and 881(c)(2) of the Code and regulations thereunder.
(c) Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, the assignee thereunder shall be a party hereto and to the other Financing Agreements and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations (including, without limitation, the obligation to participate in Letter of Credit Accommodations) of a Lender hereunder and thereunder and the assigning Lender shall, to the extent that rights and obligations hereunder have been assigned by it to an Eligible Transferee pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement.
(d) By execution and delivery of an Assignment and Acceptance, the assignor and assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, the assigning Lender makes no
(e) Each Lender may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement and the other Financing Agreements (including, without limitation, all or a portion of its Commitments and the Loans owing to it and its participation in the Letter of Credit Accommodations, without the consent of Agent or the other Lenders); provided , that , (i) such Lenders obligations under this Agreement (including, without limitation, its Commitment hereunder) and the other Financing Agreements shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, and Borrowers, the other Lenders and Agent shall continue to deal solely and directly with such Lender in connection with such Lenders rights and obligations under this Agreement and the other Financing Agreements, and (iii) the Participant shall not have any rights under this Agreement or any of the other Financing Agreements (the Participants rights against such Lender in respect of such participation to be those set forth in the agreement executed by such Lender in favor of the Participant relating thereto) and all amounts payable by any Borrower hereunder shall be determined as if such Lender had not sold such participation.
(f) Nothing in this Agreement shall prevent or prohibit any Lender from pledging its Loans hereunder to a Federal Reserve Bank in support of borrowings made by such Lenders from such Federal Reserve Bank; provided, that, no such pledge shall release such Lender from any of its obligations hereunder or substitute any such pledgee for such Lender as a party hereto.
(g) Borrowers shall assist Agent or any Lender permitted to sell assignments or participations under this Section 13.7 in whatever manner reasonably necessary in order to enable or effect any such assignment or participation, including (but not limited to) the execution and delivery of any and all agreements, notes and other documents and instruments as shall be
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requested and the delivery of informational materials, appraisals or other documents for, and the participation of relevant management in meetings and conference calls with, potential Lenders or Participants. Borrowers shall certify the correctness, completeness and accuracy, in all material respects, of all descriptions of Borrowers and its affairs provided, prepared or reviewed by any Borrower that are contained in any selling materials and all other information provided by it and included in such materials.
(h) The Lenders signatory hereto that have executed and delivered Assignment and Acceptances with respect to the credit facility under the Existing Financing Agreements hereby confirm that such Assignment and Acceptances are replaced and superseded by the terms hereof.
13.8 USA Patriot Act . Each Lender hereby notifies Borrowers that pursuant to the requirements of the USA Patriot Act, it is required to obtain, verify and record information that identifies Borrowers, which information includes the name and address of Borrowers and other information that will allow such Lender to identify Borrowers in accordance with the requirements of such Act and any other applicable law.
13.9 Entire Agreement . This Agreement, the other Financing Agreements, any supplements hereto or thereto, and any instruments or documents delivered or to be delivered in connection herewith or therewith represents the entire agreement and understanding concerning the subject matter hereof and thereof between the parties hereto, and supersede all other prior agreements, understandings, negotiations and discussions, representations, warranties, commitments, proposals, offers and contracts concerning the subject matter hereof, whether oral or written. In the event of any inconsistency between the terms of this Agreement and any schedule or exhibit hereto, the terms of this Agreement shall govern.
13.10 Counterparts, Etc. This Agreement or any of the other Financing Agreements may be executed in any number of counterparts, each of which shall be an original, but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of this Agreement or any of the other Financing Agreements by telefacsimile shall have the same force and effect as the delivery of an original executed counterpart of this Agreement or any of such other Financing Agreements. Any party delivering an executed counterpart of any such agreement by telefacsimile shall also deliver an original executed counterpart, but the failure to do so shall not affect the validity, enforceability or binding effect of such agreement.
13.11 Code Section 956 Override . Notwithstanding anything to the contrary contained herein or in any of the other Financing Agreements (including any provision that provides that it applies notwithstanding contrary provisions), in no event shall any provision hereof or of any of the other Financing Agreements be construed to provide that (a) any Foreign Subsidiary of any Borrower incorporated under the laws of a jurisdiction outside the United States of America that is a controlled foreign corporation (as such term is defined in Section 957(a) of the Code), referred to herein as a non US Subsidiary, has any obligation to make any payments for or on behalf of any Borrower to the extent that any such obligation would increase the amount of taxes otherwise payable by any Borrower pursuant to the Code; (b) more than sixty five (65%) percent of the voting power of all classes of Capital Stock of a non US Subsidiary are pledged or hypothecated to support any Obligations of any Borrower hereunder or under any of the other Financing Agreements; (c) a security interest or lien upon any assets of a non US Subsidiary have been granted to Agent under this Agreement or any of the other
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Financing Agreements to secure any Obligations of any Borrower and (d) any non US subsidiary has entered into any agreement to guarantee or support the Obligations of any Borrower hereunder or under any of the other Financing Agreements.
13.12 Bank Products Override . Notwithstanding anything to the contrary contained herein or in any of the other Financing Agreements to the contrary, if all of the Obligations have been paid in full and all Commitments terminated, (other than Bank Product Obligations), it shall not be a condition to the release of all or any portion of the Collateral or a requirement to the termination of this Agreement or any of the other Financing Agreements or the exercise of any rights created hereunder that any Bank Product Obligations be paid or cash collateralized; provided that , this Section 13.12 shall in no way be deemed to amend, supplement or otherwise modify any agreement or document evidencing or governing any Bank Product.
14.1 Existing Obligations . Each Borrower hereby acknowledges, confirms and agrees that each Borrower is indebted to Lenders for loans and advances to Borrowers under the Existing Financing Agreements, as of the close of business on November 17, 2008, in the aggregate principal amount of $18,256,383.64 and the aggregate amount of $28,834.89 in respect of Letter of Credit Accommodations (as defined in the Existing Financing Agreements), together with all interest accrued and accruing thereon (to the extent applicable), and all fees, costs, expenses and other charges relating thereto, all of which are unconditionally owing by Borrowers to Lenders, without offset, defense or counterclaim of any kind, nature or description whatsoever.
14.2 Acknowledgment of Security Interests .
(a) Each Borrower hereby acknowledges, confirms and agrees that Agent for the benefit of Secured Parties has and shall continue to have a security interest in and lien upon the Collateral heretofore granted to Agent for the benefit of Secured Parties pursuant to the Existing Financing Agreements to secure the Obligations, as well as any Collateral granted under this Agreement or under any of the other Financing Agreements or otherwise granted to or held by Agent or Secured Parties.
(b) The liens and security interests of Agent in the Collateral shall be deemed to be continuously granted and perfected from the earliest date of the granting and perfection of such liens and security interests to Agent and Secured Parties, whether under the Existing Financing Agreements, this Agreement or any of the other Financing Agreements.
14.3 Existing Financing Agreements . Each Borrower hereby acknowledges, confirms and agrees that: (a) the Existing Financing Agreements have been duly executed and delivered by Borrowers and are in full force and effect as of the date hereof, (b) the agreements and obligations of Borrowers contained in the Existing Financing Agreements constitute the legal, valid and binding obligations of Borrowers enforceable against each in accordance with their respective terms, (c) Borrowers have no valid defense to the enforcement of such obligations and
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(d) Agent and Lenders are entitled to all of the rights and remedies provided for in the Existing Financing Agreements. The acknowledgements contained herein shall not be construed to limit or affect any of the terms of any other agreements of Borrowers with, to or in favor of Agent or any of the Secured Parties. All references to the term Secured Obligations in any of the Existing Financing Agreements shall include, in addition and not in limitation, the Obligations (as defined in this Agreement).
14.4 Restatement .
(a) Except as otherwise stated in Section 14.2 hereof and this Section 14.4, as of the date hereof, the terms, conditions, agreements, covenants, representations and warranties set forth in the Existing Loan Agreement are hereby amended and restated in their entirety, and as so amended and restated, replaced and superseded, by the terms, conditions, agreements, covenants, representations and warranties set forth in this Agreement and the security interests, liens and other interests in the Collateral heretofore granted, pledged and/or assigned by Borrowers, as predecessors to Borrowers or otherwise, to Agent. The amendment and restatement contained herein shall not, in any manner, be construed to constitute payment of, or impair, limit, cancel or extinguish, or constitute a novation in respect of, the Indebtedness and other obligations and liabilities of Borrowers evidenced by or arising under the Existing Financing Agreements, and the liens and security interests of Agent securing such Indebtedness and other obligations and liabilities, which shall not in any manner be impaired, limited, terminated, waived or released, but shall continue in full force and effect in favor of Agent for the benefit of Lenders.
(b) The principal amount of the Loans and the amount of the Letter of Credit Accommodations outstanding as of the date hereof under the Existing Financing Agreements shall be allocated to the Loans and Letter of Credit Accommodations hereunder in such manner and in such amounts as Agent shall determine consistent with the terms hereof.
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IN WITNESS WHEREOF, Agent, Lenders, Borrowers have caused these presents to be duly executed as of the day and year first above written.
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BORROWERS: |
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HAYNES INTERNATIONAL, INC. |
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By: |
/s/ MARCEL MARTIN |
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Title: Vice
President Finance, Treasurer, Chief
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HAYNES WIRE COMPANY |
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By: |
/s/ MARCEL MARTIN |
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Title: Vice
President Finance, Treasurer, Chief
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AGENT:
WACHOVIA CAPITAL FINANCE
CORPORATION
(CENTRAL), as Agent
By: |
/s/ VICKY GEIST |
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Title: Director |
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LENDERS: |
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WACHOVIA CAPITAL FINANCE CORPORATION |
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(CENTRAL) |
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By: |
/s/ VICKY GEIST |
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Title: Director |
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Commitment: $75,000,000 |
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JPMORGAN CHASE BANK N.A. |
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By: |
/s/ LYNNE CIACCIA |
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Title: Vice President |
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Commitment: $45,000,000 |
EXHIBIT A
TO
SECOND AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
ASSIGNMENT AND ACCEPTANCE AGREEMENT
This ASSIGNMENT AND ACCEPTANCE AGREEMENT (this Assignment and Acceptance) dated as of , 200 is made between (the Assignor) and (the Assignee).
W I T N E S S E T H:
WHEREAS, Wachovia Capital Finance Corporation (Central), in its capacity as agent pursuant to the Loan Agreement (as hereinafter defined) acting for and on behalf of the financial institutions which are parties thereto as lenders (in such capacity, Agent), and the financial institutions which are parties to the Loan Agreement as lenders (individually, each a Lender and collectively, Lenders) have entered or are about to enter into financing arrangements pursuant to which Agent and Lenders may make loans and advances and provide other financial accommodations to Haynes International, Inc. and Haynes Wire Company (collectively, Borrowers) as set forth in the Second Amended and Restated Loan and Security Agreement, dated November 18, 2008, by and among Borrowers, JP Morgan Chase Bank, N.A., as Documentation Agent, Agent and Lenders (as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, the Loan Agreement), and the other agreements, documents and instruments referred to therein or at any time executed and/or delivered in connection therewith or related thereto (all of the foregoing, together with the Loan Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, being collectively referred to herein as the Financing Agreements);
WHEREAS, as provided under the Loan Agreement, Assignor committed to making Loans (the Committed Loans) to Borrowers in an aggregate amount not to exceed $ (the Commitment);
WHEREAS, Assignor wishes to assign to Assignee [part of the] [all] rights and obligations of Assignor under the Loan Agreement and other Financing Agreements in respect of its Commitment in an amount equal to $ (the Assigned Commitment Amount) on the terms and subject to the conditions set forth herein and Assignee wishes to accept assignment of such rights and to assume such obligations from Assignor on such terms and subject to such conditions; and
WHEREAS, the Financing Agreements permit such transfer upon the satisfaction and compliance of certain conditions;
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows:
A-1
1. Definitions . Capitalized terms not otherwise defined herein shall have the respective meanings given to such terms in the Loan Agreement.
2. Assignment and Acceptance .
Subject to the terms and conditions of this Assignment and Acceptance, Assignor hereby sells, transfers and assigns to Assignee, and Assignee hereby purchases, assumes and undertakes from Assignor, without recourse and without representation or warranty (except as provided in this Assignment and Acceptance) an interest in (i) the Commitment and each of the Committed Loans of Assignor and (ii) all related rights, benefits, obligations, liabilities and indemnities of the Assignor under and in connection with the Loan Agreement and the other Financing Agreements, so that after giving effect thereto, the Commitment of Assignee shall be as set forth below and the Pro Rata Share of Assignee shall be ( %) percent.
With effect on and after the Effective Date (as defined in Section 6 hereof), Assignee shall be a party to the Loan Agreement and succeed to all of the rights and be obligated to perform all of the obligations of a Lender under the Loan Agreement, including the requirements concerning confidentiality and the payment of indemnification, with a Commitment in an amount equal to the Assigned Commitment Amount. Assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Loan Agreement are required to be performed by it as a Lender. It is the intent of the parties hereto that the Commitment of Assignor shall, as of the Effective Date, be reduced by an amount equal to the Assigned Commitment Amount and Assignor shall relinquish its rights and be released from its obligations under the Loan Agreement to the extent such obligations have been assumed by Assignee; provided , that , Assignor shall not relinquish its rights under Sections 2.2, 6.4, 6.8, 11.5 and 12.5 of the Loan Agreement to the extent such rights relate to the time prior to the Effective Date.
After giving effect to the assignment and assumption set forth herein, on the Effective Date Assignees Commitment will be $ .
After giving effect to the assignment and assumption set forth herein, on the Effective Date Assignors Commitment will be $ (as such amount may be further reduced by any other assignments by Assignor on or after the date hereof).
3. Payments .
(a) As consideration for the sale, assignment and transfer contemplated in Section 1 hereof, Assignee shall pay to Assignor on the Effective Date in immediately available funds an amount equal to $ , representing Assignees Pro Rata Share of the principal amount of all Committed Loans.
(b) Assignee shall pay to Agent the processing fee in the amount specified in Section 13.7(a) of the Loan Agreement.
4. Reallocation of Payments . Any interest, fees and other payments accrued to the Effective Date with respect to the Commitment, Committed Loans and outstanding Letter of Credit Accommodations shall be for the account of Assignor. Any interest, fees and other
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payments accrued on and after the Effective Date with respect to the Assigned Commitment Amount shall be for the account of Assignee. Each of Assignor and Assignee agrees that it will hold in trust for the other party any interest, fees and other amounts which it may receive to which the other party is entitled pursuant to the preceding sentence and pay to the other party any such amounts which it may receive promptly upon receipt.
5. Independent Credit Decision . Assignee acknowledges that it has received a copy of the Loan Agreement and the Schedules and Exhibits thereto, together with copies of the most recent financial statements of and its Subsidiaries, and such other documents and information as it has deemed appropriate to make its own credit and legal analysis and decision to enter into this Assignment and Acceptance and agrees that it will, independently and without reliance upon Assignor, Agent or any Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit and legal decisions in taking or not taking action under the Loan Agreement.
6. Effective Date; Notices .
(a) As between Assignor and Assignee, the effective date for this Assignment and Acceptance shall be , 200 (the Effective Date); provided , that , the following conditions precedent have been satisfied on or before the Effective Date:
(i) this Assignment and Acceptance shall be executed and delivered by Assignor and Assignee;
(ii) the consent of Agent as required for an effective assignment of the Assigned Commitment Amount by Assignor to Assignee shall have been duly obtained and shall be in full force and effect as of the Effective Date;
(iii) written notice of such assignment, together with payment instructions, addresses and related information with respect to Assignee, shall have been given to Borrowers and Agent;
(iv) Assignee shall pay to Assignor all amounts due to Assignor under this Assignment and Acceptance; and
(v) the processing fee referred to in Section 2(b) hereof shall have been paid to Agent.
(b) Promptly following the execution of this Assignment and Acceptance, Assignor shall deliver to Borrowers and Agent for acknowledgment by Agent, a Notice of Assignment in the form attached hereto as Schedule 1.
7. [Agent. [INCLUDE ONLY IF ASSIGNOR IS AN AGENT]
(a) Assignee hereby appoints and authorizes Assignor in its capacity as Agent to take such action as agent on its behalf to exercise such powers under the Loan Agreement as are delegated to Agent by Lenders pursuant to the terms of the Loan Agreement.
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(b) Assignee shall assume no duties or obligations held by Assignor in its capacity as Agent under the Loan Agreement.]
8. Withholding Tax . Assignee (a) represents and warrants to Assignor, Agent and Borrowers that under applicable law and treaties no tax will be required to be withheld by Assignee, Agent or Borrowers with respect to any payments to be made to Assignee hereunder or under any of the Financing Agreements, (b) agrees to furnish (if it is organized under the laws of any jurisdiction other than the United States or any State thereof) to Agent and Borrowers prior to the time that Agent or Borrowers are required to make any payment of principal, interest or fees hereunder, duplicate executed originals of either U.S. Internal Revenue Service Form W 8BEN or W 8ECI, as applicable (wherein Assignee claims entitlement to the benefits of a tax treaty that provides for a complete exemption from U.S. federal income withholding tax on all payments hereunder) and agrees to provide new such forms upon the expiration of any previously delivered form or comparable statements in accordance with applicable U.S. law and regulations and amendments thereto, duly executed and completed by Assignee, and (c) agrees to comply with all applicable U.S. laws and regulations with regard to such withholding tax exemption.
9. Representations and Warranties .
(a) Assignor represents and warrants that (i) it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any security interest, lien, encumbrance or other adverse claim, (ii) it is duly organized and existing and it has the full power and authority to take, and has taken, all action necessary to execute and deliver this Assignment and Acceptance and any other documents required or permitted to be executed or delivered by it in connection with this Assignment and Acceptance and to fulfill its obligations hereunder, (iii) no notices to, or consents, authorizations or approvals of, any Person are required (other than any already given or obtained) for its due execution, delivery and performance of this Assignment and Acceptance, and apart from any agreements or undertakings or filings required by the Loan Agreement, no further action by, or notice to, or filing with, any Person is required of it for such execution, delivery or performance, and (iv) this Assignment and Acceptance has been duly executed and delivered by it and constitutes the legal, valid and binding obligation of Assignor, enforceable against Assignor in accordance with the terms hereof, subject, as to enforcement, to bankruptcy, insolvency, moratorium, reorganization and other laws of general application relating to or affecting creditors rights and to general equitable principles.
(b) Assignor makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Loan Agreement or any of the other Financing Agreements or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Agreement or any other instrument or document furnished pursuant thereto. Assignor makes no representation or warranty in connection with, and assumes no responsibility with respect to, the solvency, financial condition or statements of Borrowers or any of its Affiliates, or the performance or observance by Borrowers or any other Person, of any of its respective obligations under the Loan Agreement or any other instrument or document furnished in connection therewith.
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(c) Assignee represents and warrants that (i) it is an Eligible Transferee, (ii) it is duly organized and existing and it has full power and authority to take, and has taken, all action necessary to execute and deliver this Assignment and Acceptance and any other documents required or permitted to be executed or delivered by it in connection with this Assignment and Acceptance, and to fulfill its obligations hereunder, (iii) no notices to, or consents, authorizations or approvals of, any Person are required (other than any already given or obtained) for its due execution, delivery and performance of this Assignment and Acceptance, and apart from any agreements or undertakings or filings required by the Loan Agreement, no further action by, or notice to, or filing with, any Person is required of it for such execution, delivery or performance; and (iv) this Assignment and Acceptance has been duly executed and delivered by it and constitutes the legal, valid and binding obligation of Assignee, enforceable against Assignee in accordance with the terms hereof, subject, as to enforcement, to bankruptcy, insolvency, moratorium, reorganization and other laws of general application relating to or affecting creditors rights to general equitable principles.
10. Further Assurances . Assignor and Assignee each hereby agree to execute and deliver such other instruments, and take such other action, as either party may reasonably request in connection with the transactions contemplated by this Assignment and Acceptance, including the delivery of any notices or other documents or instruments to Borrowers or Agent, which may be required in connection with the assignment and assumption contemplated hereby.
11. Miscellaneous .
(a) Any amendment or waiver of any provision of this Assignment and Acceptance shall be in writing and signed by the parties hereto. No failure or delay by either party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof and any waiver of any breach of the provisions of this Assignment and Acceptance shall be without prejudice to any rights with respect to any other for further breach thereof.
(b) All payments made hereunder shall be made without any set off or counterclaim.
(c) Assignor and Assignee shall each pay its own costs and expenses incurred in connection with the negotiation, preparation, execution and performance of this Assignment and Acceptance.
(d) This Assignment and Acceptance may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument.
(e) THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF ILLINOIS. Assignor and Assignee each irrevocably submits to the non-exclusive jurisdiction of any State or Federal court sitting in County, over any suit, action or proceeding arising out of or relating to this Assignment and Acceptance and irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such State or Federal court. Each party to this Assignment and Acceptance hereby irrevocably waives, to
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the fullest extent it may effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding.
(f) ASSIGNOR AND ASSIGNEE EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS ASSIGNMENT AND ACCEPTANCE, THE LOAN AGREEMENT, ANY OF THE OTHER FINANCING AGREEMENTS OR ANY RELATED DOCUMENTS AND AGREEMENTS OR ANY COURSE OF CONDUCT, COURSE OF DEALING, OR STATEMENTS (WHETHER ORAL OR WRITTEN).
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IN WITNESS WHEREOF, Assignor and Assignee have caused this Assignment and Acceptance to be executed and delivered by their duly authorized officers as of the date first above written.
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ASSIGNEE |
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SCHEDULE 1
NOTICE OF ASSIGNMENT AND ACCEPTANCE
, 20
Attn.:
Re:
Ladies and Gentlemen:
Wachovia Capital Finance Corporation (Central), in its capacity as agent pursuant to the Loan Agreement (as hereinafter defined) acting for and on behalf of the financial institutions which are parties thereto as lenders (in such capacity, Agent), and the financial institutions which are parties to the Loan Agreement as lenders (individually, each a Lender and collectively, Lenders) have entered or are about to enter into financing arrangements pursuant to which Agent and Lenders may make loans and advances and provide other financial accommodations to Haynes International, Inc. and Haynes Wire Company (collectively, Borrowers) as set forth in the Second Amended and Restated Loan and Security Agreement, dated November 18, 2008, by and among Borrowers, JPMorgan Chase Bank, N.A., as Documentation Agent, Agent and Lenders (as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, the Loan Agreement), and the other agreements, documents and instruments referred to therein or at any time executed and/or delivered in connection therewith or related thereto (all of the foregoing, together with the Loan Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, being collectively referred to herein as the Financing Agreements). Capitalized terms not otherwise defined herein shall have the respective meanings ascribed thereto in the Loan Agreement.
1. We hereby give you notice of, and request your consent to, the assignment by (the Assignor) to (the Assignee) such that after giving effect to the assignment Assignee shall have an interest equal to ( %) percent of the total Commitments pursuant to the Assignment and Acceptance Agreement attached hereto (the Assignment and Acceptance). We understand that the Assignors Commitment shall be reduced by $ , as the same may be further reduced by other assignments on or after the date hereof.
2. Assignee agrees that, upon receiving the consent of Agent to such assignment, Assignee will be bound by the terms of the Loan Agreement as fully and to the same extent as if the Assignee were the Lender originally holding such interest under the Loan Agreement.
3. The following administrative details apply to Assignee:
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4. You are entitled to rely upon the representations, warranties and covenants of each of Assignor and Assignee contained in the Assignment and Acceptance.
IN WITNESS WHEREOF, Assignor and Assignee have caused this Notice of Assignment and Acceptance to be executed by their respective duly authorized officials, officers or agents as of the date first above mentioned.
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ACKNOWLEDGED AND ASSIGNMENT
CONSENTED TO:
WACHOVIA CAPITAL FINANCE CORPORATION
(Central), as Agent
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EXHIBIT D
TO
LOAN AND SECURITY AGREEMENT
[FORM OF] EQUIPMENT PURCHASE NOTE
$ , 20
FOR VALUE RECEIVED, HAYNES INTERNATIONAL, INC., a Delaware company (Haynes Parent) and HAYNES WIRE COMPANY, a Delaware corporation (Haynes Wire and, together with Haynes Parent, each a Debtor and collectively, Debtors) hereby unconditionally promises to pay to the order of WACHOVIA CAPITAL FINANCE CORPORATION (CENTRAL), an Illinois corporation in its capacity as Agent (in such capacity, Payee) acting for and on behalf of the parties to the Loan Agreement (defined below) as lenders (Lenders), at the offices of Payee at 150 South Wacker Drive, Chicago, Illinois 60606, or at such other place as the Payee or any holder hereof may from time to time designate, the principal sum of an amount equal to DOLLARS ($ ) in lawful money of the United States of America and in immediately available funds, in seventy-two (72) consecutive monthly installments (or earlier as hereinafter provided) on the first day of each month commencing , 20 , of which the first seventy-one (71) installments shall each be in the amount of DOLLARS ($ ), and the last (i.e. seventy-second (72nd)) installment shall be in the amount of the entire unpaid balance of this Note); provided , that , the entire unpaid principal amount of this Note and all accrued and unpaid interest thereon shall be due and payable on the effective date of termination or non-renewal of the Financing Agreements or the acceleration of the Obligations.
Each Debtor hereby further promises to pay interest to the order of Payee on the unpaid principal balance hereof at the applicable Interest Rate. Such interest shall be paid in like money at said office or place from the date hereof, commencing with the month immediately following the date on which such Equipment Purchase Loan is made and on the first day of each month thereafter until the indebtedness evidenced by this Note is paid in full. Interest payable upon and after an Event of Default or termination or non-renewal of the Loan Agreement shall be payable upon demand.
For purposes hereof, (i) the term Loan Agreement shall mean the Second Amended and Restated Loan and Security Agreement, dated as of November 18, 2008, among Debtors, Payee and the lender from time to time party thereto, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, (ii) the term Event of Default shall mean an Event of Default as such term is defined in the Loan Agreement, (iii) the term Interest Rate shall mean Interest Rate as such term as defined in the Loan Agreement. Unless otherwise defined herein, all capitalized terms used herein shall have the meaning assigned thereto in the Loan Agreement.
D-1
This Note is issued pursuant to the terms and provisions of the Loan Agreement to evidence the Equipment Purchase Loans made by or on behalf of Lenders. This Note is secured by the Collateral described in the Loan Agreement and all notes, guarantees, security agreements and other agreements, documents and instrument now or at any time hereafter executed and/or delivered by Debtors or any other party in connection therewith (all of the foregoing, together with the Loan Agreement, as the same now exist or may hereafter be amended, modified, supplemented, renewed, extended, restated or replaced, being collectively referred to herein as the Financing Agreements), and is entitled to all of the benefits and rights thereof and of the other Financing Agreements. At the time any payment is due hereunder, at its option, Payee may charge the amount thereof to any account of any Debtor maintained by Payee.
If any Event of Default shall occur for any reason and be continuing, or if the Loan Agreement shall be terminated or not renewed for any reason whatsoever, then and in any such event, in addition to all other rights and remedies of Payee under the other Financing Agreements, applicable law or otherwise, all such rights and remedies being cumulative, not exclusive and enforceable alternatively, successively and concurrently, Payee may, at its option, declare any or all of Debtors obligations, liabilities and indebtedness owing to Lenders and Payee under the Loan Agreement and the other Financing Agreements (the Obligations), including, without limitation, all amounts owing under this Note, to be due and payable, whereupon the then unpaid balance hereof, together with all interest accrued thereon, shall forthwith become due and payable, together with interest accruing thereafter at the then applicable Interest Rate.
Each Debtor (i) waives diligence, demand, presentment, protest and notice of any kind, (ii) agrees that it will not be necessary for Payee to first institute suit in order to enforce payment of this Note and (iii) consents to any one or more extensions or postponements of time of payment, release, surrender or substitution of collateral security, or forbearance or other indulgence, without notice or consent. The pleading of any statute of limitations as a defense to any demand against Debtors is expressly hereby waived by Debtors. Upon any Event of Default or termination or non-renewal of the Loan Agreement, Payee shall have the right, but not the obligation to setoff against this Note all money owed by Lenders and Payee to Debtors.
Payee shall not be required to resort to any Collateral for payment, but may proceed against Debtors and any guarantors or endorsers hereof in such order and manner as Payee may choose. None of the rights of Payee shall be waived or diminished by any failure or delay in the exercise thereof.
The validity, interpretation and enforcement of this Note and any dispute arising in connection herewith or therewith shall be governed by the internal laws of the State of Illinois but excluding any principles of conflicts of law or other rule of law that would result in the application of the law of any jurisdiction other than the laws of the State of Illinois.
Each Debtor irrevocably consents and submits to the non-exclusive jurisdiction of the Circuit Court of Cook County, Illinois and the United States District Court for the Northern District of Illinois, whichever Payee may elect, and waives any objection based on venue or forum non conveniens with respect to any action instituted therein arising under this Note or any
D-2
of the other Financing Agreements or in any way connected with or related or incidental to the dealings of Debtors and Payee in respect of this Note or any of the other Financing Agreements or the transactions related hereto or thereto, in each case whether now existing or hereafter arising, and whether in contract, tort, equity or otherwise, and agrees that any dispute arising out of the relationship among Debtors, Lenders and Payee or the conduct of such persons in connection with this Note or otherwise shall only be heard in the courts described above (except that Payee shall have the right to bring any action or proceeding against any Debtor or its property in the courts of any other jurisdiction which Payee deems necessary or appropriate in order to realize on the Collateral or to otherwise enforce its rights against any Debtor or its property).
Each Debtor hereby waives personal service of any and all process upon it and consents that all such service of process may be made by certified mail (return receipt requested) directed to it and service so made shall be deemed to be completed five (5) days after the same shall have been so deposited in the U.S. mails, or, at Payees option, by service upon Debtors in any other manner provided under the rules of any such courts.
EACH DEBTOR, PAYEE, AND BY ACCEPTING THE BENEFITS HEREOF, LENDERS EACH HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS NOTE OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS AMONG DEBTORS, LENDERS AND PAYEE IN RESPECT OF THIS NOTE OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. EACH DEBTOR AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY.
The execution and delivery of this Note has been authorized by the Board of Directors of each Debtor and by any necessary vote or consent of the stockholders or members of each Debtor. Each Debtor hereby authorizes Payee to complete this Note in any particulars according to the terms of the loans evidenced hereby.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
D-3
This Note shall be binding upon the successors and assigns of Debtors and inure to the benefit of Payee and its successors and assigns. Whenever used herein, the term Debtors shall be deemed to include its successors and assigns and the term Payee shall be deemed to include its successors and assigns. If any term or provision of this Note shall be held invalid, illegal or unenforceable, the validity of all other terms and provisions hereof shall in no way be affected thereby.
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HAYNES INTERNATIONAL, INC. |
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By: |
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Title: |
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HAYNES WIRE COMPANY |
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D-4
EXHIBIT E
TO
SECOND AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
Compliance Certificate
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Wachovia Capital Finance Corporation |
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(Central), as Agent |
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150 South Wacker Drive |
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Chicago, Illinois 60606 |
Ladies and Gentlemen:
I hereby certify to you that I am the duly elected Vice President Finance and Chief Financial Officer of Haynes International, Inc., a Delaware corporation (Haynes Parent). This Compliance Certificate is being delivered to you pursuant to Section 9.6(a) of the Second Amended and Restated Loan and Security Agreement, dated November 18, 2008, by and among Haynes International, Inc. (Haynes Parent), Haynes Wire Company, the parties thereto from time to time as lenders (each individually, a Lender and collectively, Lenders) Bank One, NA, as Documentation Agent and Wachovia Capital Finance Corporation (Central), an Illinois corporation, in its capacity as agent for Lenders (in such capacity, Agent) (as such Second Amended and Restated Loan and Security Agreement is amended, modified or supplemented, from time to time, the Loan Agreement). Capitalized terms that are not otherwise defined shall have the meanings given to such terms in the Loan Agreement.
I hereby further certify on behalf of Haynes Parent and in my capacity as Vice President Finance and Chief Financial Officer thereof, that:
1. I have reviewed the terms of the Loan Agreement and have made, or have caused to be made under my supervision, a review in reasonable detail of the transactions and financial condition of Haynes Parent during the immediately preceding fiscal month.
2. The review described in Section 1 above did not disclose the existence during or at the end of such immediately preceding fiscal month, and I have no knowledge on the date hereof of the existence and continuance on the date hereof of any Default or Event of Default, except as set forth on Schedule I attached hereto. Such Schedule I describes in reasonable detail the nature of the Default or Event of Default, the period during which it has existed and the action which Haynes Parent has taken, is taking, or proposes to take with respect thereto.
3. Haynes Parent has not at any time during or at the end of the immediately preceding fiscal month, except as specifically described on Schedule II attached hereto or as permitted by the Loan Agreement, done any of the following:
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(a) Changed its corporate name or (b) transacted business under any trade name, style, or fictitious name other than any such name previously described to you and set forth in the Financing Agreements;
(b) Changed the location of its chief executive office, changed its jurisdiction of incorporation, changed its type of organization or changed the location of or disposed of any of its properties or assets (other than pursuant to the sale of Inventory in the ordinary course of its business or as otherwise permitted by Section 9.7 of the Loan Agreement), or established any new asset locations.
(c) Materially changed the terms upon which it sells goods (including sales on consignment) or provides services, nor has any vendor or trade supplier to Haynes Parent during or at the end of the immediately preceding fiscal month materially adversely changed the terms upon which it supplies goods to Haynes Parent.
(d) Permitted or suffered to exist any security interest in or liens on any of its properties, whether real or personal, other than as specifically permitted by the Financing Agreements.
(e) Received any notice of, or obtained knowledge of any of the following, in each case not previously disclosed to Agent: (i) the occurrence of any event involving the release, spill or discharge of any Hazardous Material in violation of applicable Environmental Law in a material respect or (ii) any investigation, proceeding, complaint, order, directive, claims, citation or notice with respect to: (A) any non-compliance with or violation of any applicable Environmental Law by Borrowers in any material respect or (B) the release, spill or discharge of any Hazardous Material in violation of applicable Environmental Law in a material respect or (C) the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials in violation of applicable Environmental Laws in a material respect or (D) any other environmental, health or safety matter, which has a material adverse effect on Haynes Parent or its business, operations or assets or any properties at which Haynes Parent transported, stored or disposed of any Hazardous Materials.
5. Attached hereto as Schedule III are the calculations used in determining, as of the end of the immediately preceding fiscal quarter, whether Haynes Parent is in compliance with the covenants set forth in Section 9.17 of the Loan Agreement for such fiscal quarter.
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The foregoing certifications are made and delivered this day of , 20 .
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Very truly yours, |
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HAYNES INTERNATIONAL, INC., |
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Vice President Finance and |
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Chief Financial Officer |
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EXHIBIT F
TO
SECOND AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
Lenders |
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Commitment |
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Wachovia Bank, National Association |
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75,000,000 |
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JPMorgan Chase Bank N.A. |
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45,000,000 |
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I/2256000.1
F-1
Exhibit 10.21
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this Agreement) is entered into as of September 8, 2008, by and between Haynes International, Inc. (the Company), a Delaware corporation, and Mark M. Comerford (the Executive).
PRELIMINARY STATEMENTS
WHEREAS, the Company desires to employ the Executive, and the Executive desires to be employed by the Company, on the terms and conditions set forth herein effective as of October 1, 2008 (the Effective Date).
NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
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Notwithstanding the preceding provisions of this Section 1(f), if the Executive is a specified employee within the meaning of Code Section 409A(a)(2)(B)(i), to the extent required by such Code Section, payments otherwise required by this Section shall be delayed to the earliest date on which such payments are permitted.
Except as specifically provided in this Section 1(f) or required under applicable law, the Executive will not be eligible to receive any salary, bonus or other compensation or benefits described in Section 1(d) with respect to any periods after the Termination Date; provided, however, the Executive shall have the right to receive all compensation and benefits to which he is entitled under any benefit plans of the Company to the extent he is fully vested as of the effective date of the termination of the Executives employment by the Company pursuant to the terms and conditions of such employee benefit plans.
For purposes of this Section 2, the term Company shall include, in addition to the Company, its affiliates, subsidiaries and any of their respective predecessors, successors and assigns. The term Companys Business shall mean the business of developing, manufacturing, selling or distributing high-performance alloys for service in severe corrosion and high temperature applications.
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For purposes of this Section 3, the term Company shall include, in addition to the Company, its affiliates, subsidiaries and any of their respective predecessors, successors and assigns.
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Any and all inventions, improvements, discoveries, designs, works of authorship, concepts or ideas, or expressions thereof; whether or not subject to patents, copyrights, trademarks or service mark protections, and whether or not reduced to practice, that are conceived or developed by the Executive while employed with the Company and which relate to or result from the actual or anticipated business, work, research or investigation of the Company (collectively, Inventions), shall be the sole and exclusive property of the Company. The Executive shall do all things reasonably requested by the Company to assign to and vest in the Company the entire right, title and interest to any such Inventions and to obtain full protection therefor. Notwithstanding the foregoing, the provisions of this Agreement do not apply to an Invention for which no equipment, supplies, facility, or Confidential Information of the Company was used and which was developed entirely on the Executives own time, unless (a) the Invention relates (i) to the Companys Business, or (ii) or the Companys actual or demonstrably anticipated research or development, or (b) the Invention results from any work performed by the Executive for the Company.
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[SIGNATURE PAGE FOLLOWS].
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IN WITNESS WHEREOF, the parties have entered into this Agreement as of the date first written above.
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HAYNES INTERNATIONAL, INC. |
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/s/ JOHN COREY |
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Name: John Corey |
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Chairman, Board of Directors |
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/s/ Mark Comerford |
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Mark M. Comerford |
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32288 Redwood Boulevard |
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EXHIBIT A
RELEASE OF ALL CLAIMS
FOR VALUABLE CONSIDERATION, including the payment to the Executive of certain severance benefits, the Executive hereby makes this Release of All Claims (Release) in favor of Haynes International, Inc. (the Company) and its agents as set forth herein.
Section 1. In consideration of the release and all of the promises and representations made by Executive in this Agreement, the Company will: pay and provide such severance and related benefits as set forth in that certain Executive Employment Agreement by and between the Company and the Executive dated . It is understood and agreed that the severance benefits and other consideration which will be provided to the Executive by the Company pursuant to this Section are consideration provided to him/her in addition to anything of value to which he/she is already entitled.
Section 2. In consideration of the Companys agreement to the payment of the Separation Payment set forth in Section l above and the other good and valuable consideration indicated herein, Executive (for himself/herself and his/her personal representatives, heirs and assigns) RELEASES AND FOREVER DISCHARGES the Company from any and all claims (including, but not limited to, claims for attorneys fees), demands, losses, grievances, damages, injuries (whether personal, emotional or other), agreements, actions, promises or causes of action (known or unknown) which he/she now has or may later discover or which may hereafter exist against the Company, in connection with or arising directly or indirectly out of or in any way related to any and all matters, transactions, events or other things occurring prior to the date hereof, including all those arising out of or in connection with his/her employment or former employment with the Company, or arising out of any events, facts or circumstances which either preceded, flowed from or followed the termination of his/her employment, or which occurred during the course of Executives employment with the Company or incidental thereto or arising out of any other matter or claim of any kind whatsoever and whether pursuant to common law, statute, ordinance, regulation or otherwise. Claims or actions released herein include, but are not limited to, those based on allegations of wrongful discharge, failure to represent, fraud, defamation, promissory estoppel, and/or breach of contract; those alleging discrimination on the basis of race, color, sex, religion, national origin, age, disability or handicap under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967 (ADEA), the Rehabilitation Act of 1973, the Equal Pay Act of 1963, the Americans with Disabilities Act of 1990, the Civil Rights Act of 1991, the Family and Medical Leave Act of 1993, the Fair Labor Standards Act (all as amended) or any other federal, state or local law, ordinance, rule or regulation; and those arising under the Executive Retirement Income Security Act of 1974, all as amended (except for qualified retirement or other benefit plans from which Executive is entitled under the terms of such plans to receive future benefits). Executive agrees and understands that any claims he/she may have under the aforementioned statutes or any other federal, state or local law, ordinance, rule, regulation or common law are effectively waived by this Agreement. No claims under the ADEA arising after the execution of this Agreement are waived hereby.
Section 3. The parties understand that, as used in this Agreement, the Company includes Haynes International, Inc. and all of their past and present officers, directors,
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shareholders, employees, trustees, agents, parent companies, subsidiaries, partners, members, affiliates, principals, insurers, any and all employee benefit plans (and any fiduciary of such plans) sponsored by the aforesaid entities, and each of them, and each entitys subsidiaries, affiliates, predecessors, successors, and assigns, and all other entities, persons, firms, or corporations liable or who might be claimed to be liable, none of whom admit any liability to Executive, but all of whom expressly deny any such liability.
Section 4. Executive agrees that he/she will be solely and individually responsible for compensating any attorney(s) for any services they have rendered to or for him/her in connection with the review of this Agreement or any other matters whatsoever.
Section 5. In further consideration of the Companys agreement to the provisions and payment of the Separation Payment and other consideration set forth in Section 1 above, Executive agrees that he/she will never assert a legal or equitable action in any state or federal court or in any state or federal agency against the Company, or any of the other persons or entities released herein, with respect to the matters herein resolved and settled. Executive further agrees that, if he/she hereafter institutes an action against any of the released entities or persons concerning any of the claims he/she has released in this Agreement, except as provided in Section 13, he/she will repay to the Company the full amount of any Separation Payment received (as described in Section 1 above) and the value of all other benefits received, with legal interest, and will pay the persons or entities for all costs and expenses, including attorneys fees, incurred by them in defending against such claims.
Section 6. It is understood and agreed that the Company has denied and continues to deny that it is liable to Executive on any theory, and that nothing in this Agreement, including, but not limited to, the payment of the Separation Payment and other valuable consideration set forth in Section 1 hereof, constitutes an admission by the Company of any fact, damage or liability to Executive on any theory.
Section 7. Executive hereby certifies that he/she has returned to the Company, all of the Companys property in Executives possession or control, including but not limited to, any equipment, books, computer software, personal digital assistant, Blackberry/Treo, cellular telephone or similar device, computer hardware, documents, drawings, memoranda, manuals, and other records. Executive further agrees that, as a condition of this Agreement, the fact of and terms and provisions of this Agreement are to remain strictly confidential and shall not be disclosed to any person except Executives spouse and legal and/or tax advisor(s), or as required by law or lawfully-issued subpoena. It is further agreed that Executive will not make any negative or disparaging remarks or comments to any other person and/or entity about the Company. Executive agrees that, except as provided in Section 13, in the event that he/she or any attorney, agent or representative of his/her discloses any information to anyone in breach or violation of this Section, he/she will repay to the Company, with legal interest, any Separation Payment paid by it pursuant to Section 1 of this Agreement and the value of all other benefits provided. Executive agrees that he/she will direct all inquiries from prospective employers or other persons directly to .
Section 8. Executive represents and warrants that in the making, negotiation and execution of this Agreement, he/she is not relying upon any representation, statement or
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assertion of fact or opinion made by any agent, attorney, executive or representative of the persons, parties or corporations being released herein, and he/she hereby waives any right to rely upon all prior agreements and/or oral representations made by any agent, attorney, employee or representative of such persons, parties or corporations. Executive is advised hereby that he/she has the legal right to consult with an attorney of his/her choosing prior to executing this Agreement.
Section 9. The parties stipulate and agree that all clauses and provisions of this Agreement are distinct and severable, and Executive understands, and it is his/her intent, that in the event this Agreement is ever held to be invalid or unenforceable (in whole or in part) as to any particular type of claim or as to any particular circumstances, it shall remain fully valid and enforceable as to all other claims and circumstances. As to any actions or claims that would not be released because of the invalidity or unenforceability of this Agreement, Executive understands and agrees that, except as provided in Section 13, if he/she asserts or brings any such actions or claims against the Company, he/she must repay to the Company the Separation Payment paid to him/her pursuant to Section 1 above, with legal interest, along with the value of the other benefits provided, and that the repayment of the Separation Payment paid and the value of the other benefits and consideration given pursuant to Section 1 above, with legal interest, is a prerequisite to asserting or bringing any such actions or claims.
Section 10. This Agreement contains the entire agreement of the parties and supersedes all previous negotiations, whether written or oral. This Agreement may be changed only by an instrument in writing signed by the party against whom the charge, waiver, modification, extension or discharge is sought.
Section 11. This Agreement shall inure to the benefit of, may be enforced by, and shall be binding on the parties and their heirs, executors, administrators, personal representatives, assigns and successors in interest. It is understood and agreed that no breach of this Agreement shall be cause to set it aside or to revive any of the claims being released herein.
Section 12. In the event of any dispute about this Agreement, the laws of the State of Indiana shall govern the validity, performance, enforcement, and all other aspects of this Agreement.
Section 13. Executive and the Company agree that by executing this Agreement, and pursuant to Section 2 hereof, Executive has waived any claim (administrative or otherwise) he/she may have under, among other things, the ADEA. If Executive files a charge alleging a violation of the ADEA with any administrative agency or challenges the validity of this waiver and release of any claim he/she might have had under the ADEA, he/she will not be required to repay to the Company the Separation Payment or other benefits and consideration provided by it pursuant to Section 1 of this Agreement, or pay to the Company any other monetary amounts (such as attorneys fees and/or damages), as a condition precedent to filing such a claim, unless the recovery of any such amounts by the Company is otherwise authorized by law. This Agreement is not to be interpreted by either party or by any third party as an effort to interfere with the protected right to file a charge or participate in an investigation or proceeding under the ADEA.
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Section 14. Executive represents that he/she: has read this Agreement; has been advised in writing to consult with, and review this Agreement with, an attorney of his/her choosing before executing it; fully understands each and every provision of this Agreement; and has voluntarily, on his/her own accord, signed this Agreement. Executive acknowledges that, in entering into this Agreement in return for the Companys Separation Payment and the other good and valuable consideration set forth in Section 1 above, he/she is giving up current and possible future administrative and/or legal claims.
Section 15. The parties hereby acknowledge and agree that Executive will have 21 calendar days to review this Agreement and that this Agreement may be revoked by Executive within 7 calendar days after he/she signs it. This Agreement shall not be effective or enforceable until the 7 calendar-day revocation period has expired. Furthermore, the offer to make the Separation Payment to Executive and provide the other benefits and consideration set forth in Section 1, shall expire and be deemed automatically withdrawn by the Company if not accepted and this Agreement signed within 21 calendar days.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date(s) set forth below.
[EXECUTIVE NAME HERE] |
HAYNES INTERNATIONAL, INC. |
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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
Haynes
International, Inc.
Parent company
Haynes
Wire Company
(Wholly owned subsidiary in Mountain Home, North Carolina)
Haynes
International, Ltd.
(Wholly owned subsidiary in Openshaw, England)
Haynes
International, S.A.R.L.
(Wholly owned subsidiary in Paris, France)
Nickel-Contor
AG
(Wholly owned subsidiary in Zurich, Switzerland)
Haynes
International, S.r.l.
(Wholly owned subsidiary of Nickel-Contor in Italy)
Haynes
Pacific Pte Ltd
(Wholly owned subsidiary in Singapore)
Haynes
International (China) Ltd.
(Wholly owned subsidiary of Haynes Pacific Pte. Ltd.)
Haynes
International, Inc. India Branch Office
(Wholly owned Branch Office in India)
Haynes
Sour Gas Tubulars, Inc.
(Wholly owned subsidiary, Inactive)
Haynes
Specialty Steels Company
(Wholly owned subsidiary, Inactive)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-14599 and No. 333-134989 on Form S-8 of our reports dated November 24, 2008, relating to the consolidated financial statements of Haynes International Inc. (which report expresses an unqualified opinion and includes an explanatory paragraph regarding the adoption of the Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes , effective October 1, 2007, and Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, effective September 30, 2007) and the effectiveness of Haynes International Inc.'s internal control over financial reporting, appearing in the Annual Report on Form 10-K of Haynes International, Inc. for the year ended September 30, 2008.
/s/ DELOITTE & TOUCHE LLP
Indianapolis, IN
November 24, 2008
CERTIFICATIONS
I, Mark Comerford, certify that:
Date: November 24, 2008 | ||
/s/ MARK COMERFORD
Mark Comerford Chief Executive Officer |
CERTIFICATIONS
I, Marcel Martin, certify that:
Date: November 24, 2008 | ||
/s/ MARCEL MARTIN
Marcel Martin Chief Financial Officer |
Certifications Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the
SarbanesOxley Act of 2002
I, Marcel Martin, the Vice President Finance and Chief Financial Officer of Haynes International, Inc., certify that (i) the annual report on Form 10-K for the fiscal year ended September 30, 2008 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Haynes International, Inc. as of the dates and for the periods set forth therein.
/s/ MARCEL MARTIN
Marcel Martin Vice President Finance and Chief Financial Officer |
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November 24, 2008 Date |
I, Mark Comerford, the President and Chief Executive Officer of Haynes International, Inc., certify that (i) the annual report on Form 10-K for the fiscal year ended September 30, 2008 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Haynes International, Inc. as of the dates and for the periods set forth therein.
/s/ MARK COMERFORD
Mark Comerford President and Chief Executive Officer |
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November 24, 2008 Date |