As filed with the Securities and Exchange Commission on March 8, 2007
Registration No. 333-140194
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549.
Amendment No. 1 To
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
HAYNES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware |
3310 |
06-1185400 |
(State or other
jurisdiction of
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(Primary Standard
Industrial
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(IRS Employer Identification No.) |
1020 West Park Avenue
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Francis J.
Petro
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(Address,
including zip code, and telephone number,
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(Name
and address, including zip code, and telephone number,
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Copies To:
Stephen J. Hackman, Esq.
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Joseph A.
Hall, Esq.
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Approximate date of commencement of proposed sale of the common stock to the public: From time to time after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o
CALCULATION OF REGISTRATION FEE
Title of Each Class of
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Amount to
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Proposed
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Proposed
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Amount of
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Common Stock, par value $0.001 per share |
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2,415,000 shares |
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$ |
64.00 |
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$ |
154,560,000 |
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$ |
15,977 |
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(1) Includes shares the underwriters have the option to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended, based on an estimate of the proposed maximum offering price.
(3) Includes $12,798 which was previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
Subject to completion, dated March 8, 2007
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Prospectus
2,100,000 shares
Haynes International, Inc.
Common stock
This is a public offering of common stock by Haynes International, Inc. and the selling stockholders identified in this prospectus. Haynes is selling 1,100,000 shares and the selling stockholders are selling 1,000,000 shares. Haynes will not receive any proceeds from the sale of shares by the selling stockholders. The estimated public offering price is between $61.00 and $64.00 per share.
We have applied to list our common stock on The NASDAQ Global Market under the symbol HAYN.
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Per share |
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Total |
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Initial public offering price |
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$ |
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$ |
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Underwriting discounts and commissions |
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$ |
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$ |
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Proceeds to Haynes, before expenses |
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$ |
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$ |
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Proceeds to selling stockholders, before expenses |
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$ |
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$ |
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Haynes and the selling stockholders have granted the underwriters an option for a period of 30 days to purchase up to 315,000 additional shares of common stock. If the underwriters exercise this option in full, total underwriting discounts and commissions will be $ , total proceeds to Haynes, before expenses, will be $ and total proceeds to the selling stockholders, before expenses, will be $ .
Investing in our common stock involves a high degree of risk. See Risk factors beginning on page 12.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock to investors on or about , 2007.
JPMorgan |
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Bear, Stearns & Co. Inc. |
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KeyBanc Capital Markets |
, 2007
[INSIDE FRONT COVER]
[Pictures of products in which Haynes alloys are used with the following captions: (i) F100 engine being installed in an F-15 fighter; HAYNES 188 alloy convergent liner is just inside the exit nozzle; (ii) HASTELLOY ® C-22 blenders are used in the processing of pharmaceutical chemicals to eliminate product contamination; (iii) HASTELLOY ® C-22 alloy is used as a thin sheet-liner material in power utility flue-gas desulfurization systems; (iv) HASTELLOY ® B-2 reactor vessels have been used in the production of acetic acid for over 20 years.]
HAYNES, HASTELLOY, and C-22 are all registered
trademarks of Haynes International, Inc.
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12 |
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20 |
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Managements discussion and analysis of financial condition and results of operations |
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29 |
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56 |
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75 |
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88 |
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89 |
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92 |
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102 |
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F-1 |
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You should rely only on the information contained in this prospectus. We have not authorized any person to provide you with different or additional information. If anyone provides you with different or additional information, you should not rely on it. Haynes and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where such offers and sales are permitted. The information in this prospectus is accurate only as of the date on the front cover, regardless of the time of delivery of this prospectus or of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date and may change again.
The following summary highlights information about us and is qualified in its entirety by the more detailed information and consolidated financial statements and notes thereto included elsewhere in this prospectus. You should carefully read and consider this entire prospectus, including the information set forth under the heading Risk Factors. All references to fiscal years in this prospectus refer to our fiscal years which, for all periods presented, ended on September 30. The terms high-performance alloys and "high-performance nickel- and cobalt-based alloys are used interchangeably in this prospectus. As used in this prospectus, the terms our company, we, our, and us include, when the context so requires, Haynes International, Inc. and its consolidated subsidiaries.
Haynes International, Inc. is one of the worlds largest producers of high-performance nickel- and cobalt-based alloys. We are 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. Our 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 industry, gas turbine engines used for power generation and waste incineration, and industrial heating equipment. CRA products are used in applications that require resistance to corrosive environments found in chemical processing, power plant emissions control and hazardous waste treatment. We believe we are one of four principal producers of high-performance alloys in sheet, coil and plate forms, and sales of these forms, in the aggregate, represented approximately 64% of our net revenues in fiscal 2006. We also produce our products as seamless and welded tubulars, and in bar, billet and wire forms.
We have achieved our growth through a combination of capitalizing on the growth of our end markets, increasing value-added services provided to our customers, increasing our presence in international markets and, to a lesser extent, selected strategic initiatives such as our November 2004 acquisition of assets of The Branford Wire and Manufacturing Company, or Branford Wire. For fiscal 2006, our net revenues were $434.4 million, a 33.7% increase over fiscal 2005s net revenue of $325.0 million. For the first three months of fiscal 2007, our net revenues were $120.5 million, a 27.6% increase over the same period of fiscal 2006. As of September 30, 2006, our backlog orders were approximately $206.9 million, compared to approximately $188.4 million as of September 30, 2005 and approximately $93.5 million as of September 30, 2004. As of December 31, 2006, our backlog orders were approximately $207.4 million. See BusinessBacklog for a description of how we calculate backlog.
We have manufacturing facilities in Kokomo, Indiana; Arcadia, Louisiana; and Mountain Home, North Carolina. The Kokomo and Arcadia facilities specialize in flat and tubular products, respectively, and the Mountain Home facility manufactures stainless steel and high-performance alloy wire. We sell our products primarily through our direct sales organization, which includes 11 service and/or sales centers in the United States, Europe, Asia and India. All of these centers are company-operated. In fiscal 2006, approximately 82% of our net revenues was generated by our direct sales organization, and the remaining 18% was generated by a network of independent distributors and sales agents who supplement our direct sales efforts in the United
1
States, Europe and Asia, some of whom have been associated with our company for over 30 years.
The breadth and quality of our products, combined with our superior customer service delivered through our service and sales center network, have resulted in long-standing relationships with many of our customers. We have supplied high-performance alloy products to our top 10 customers, based on fiscal 2006 sales, for an average of 20 years. We supply high-performance alloys that are used by a broad range of end use customers, including General Electric Co.; Pratt & Whitney; Rolls Royce plc; The Boeing Co.; SNECMA; E.I. DuPont de Nemours & Co.; The Dow Chemical Co.; Siemens Westinghouse; Solar Turbines, Inc.; British Petroleum p.l.c.; Celanese AG; and Eli Lilly and Co. None of these customers, or any of our other customers, accounted for more than 10% of our sales in fiscal 2006. Our top 20 customers accounted for approximately 38% of sales in fiscal 2006.
We estimate 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, we compete primarily in the high-performance nickel- and cobalt-based alloy sector which we estimate to represent approximately 200 million pounds of production per annum. Given the technologically advanced nature of the products, strict requirements of the end users and higher-growth end markets, we believe 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. We expect growth in worldwide demand for high-performance alloys to increase significantly over the next ten years based upon increasing demand in the aerospace, chemical processing and land-based gas turbine markets. While stainless steel and general purpose nickel alloy is generally sold in bulk through third-party distributors, our products are sold in smaller-sized orders which are customized and typically handled on a direct-to-customer basis. The high-performance alloy market demands diverse, specialty alloys suitable for use in precision manufacturing. We estimate that, due in part to the above factors, the average selling price per pound of high-performance alloys in 2006 was approximately $17.00, compared to approximately $2.50 for stainless steels and approximately $12.00 for general purpose nickel alloys.
Our primary end markets include the aerospace market, the chemical processing market and the land-based gas turbine market. Demand for our products in the aerospace market is primarily driven by the need for new and replacement parts for jet engines and other maintenance, repair and overhaul needs of operators of commercial and military aircraft. Demand for our products in the chemical processing market is driven by demand in pharmaceuticals, agriculture and the building of new chemical processing facilities as well as the maintenance, repair and overhaul of existing chemical processing facilities. Demand for our products in the land-based gas turbine market is driven by the construction of power generation facilities such as base load for electric utilities or backup sources to fossil fuel-fired utilities during times of peak demand. Our other markets include flue gas desulphurization (or FGD), waste incineration, industrial heat-treating, automotive, medical, and oil and gas.
2
Our goal is to grow our business and increase revenues and profitability while continuing to be our customers provider of choice for high-performance alloys. Our primary end markets have experienced significant expansion and we believe that they will continue to demonstrate attractive fundamentals with demand increasing for aerospace, chemical plants and land-based gas turbines. We intend to penetrate and capitalize on the growth in these end markets by taking advantage of our diverse product offerings and service capabilities and to increase our capacity and lower our costs through strategic investment in our manufacturing facilities. In order to accomplish these goals, we intend to pursue the following:
· Increase productivity through strategic equipment investment . We expect to continue to improve operating efficiencies through ongoing capital investment in our manufacturing facilities and equipment. Recent investment in our equipment has significantly improved our operating efficiency by increasing capacity, reducing downtime and manufacturing costs and improving working capital management and product quality. Because we are one of the few manufacturers with the expertise and facilities to produce high-performance alloys, we believe that our investments will enable us to continue to satisfy increased customer demand for value-added products that meet precise specifications.
· Increase sales by providing value-added processing services . We believe that our network of service and sales centers throughout North America, Europe and Asia distinguishes us from our competitors. Our service and sales centers enable us to develop close customer relationships through direct interaction and to respond to customer orders quickly while providing value-added services such as laser and water jet processing. These services allow our customers to minimize their processing costs and outsource non-core activities. In addition, our rapid response time and enhanced processing services have allowed us to institute value-added pricing resulting in higher-margin sales and enhanced profitability.
· Increase worldwide sales through international service and sales center locations . We intend to continue our efforts to increase our sales to non-U.S. customers and strategically position our service and sales centers in key international locations. We recently opened a service and sales center in China, the first service and sales center operated by any manufacturer of nickel- or cobalt-based alloys in China, and sales centers in Singapore and India. We intend to expand our sales center in India to include service as well as sales.
· Continue to expand our maintenance, repair and overhaul business . We believe that our maintenance, repair and overhaul, or MRO, business serves a growing market and represents both an expanding and recurring revenue stream. Products used in our end markets require periodic replacement due to the extreme environments in which they are used, which drives demand for recurring MRO work. We intend to continue to leverage the capabilities of our service and sales centers to respond quickly to our customers time-sensitive MRO needs to develop new and retain existing business opportunities.
· Increase revenue by developing new products and new applications for existing alloys . We believe that we are the industry leader in developing new alloys designed to meet our customers specialized and demanding requirements. We continue to work closely with customers and end users of our products to identify, develop, manufacture and test new high-performance alloys. Over the last five years, our technical programs have yielded five
3
new proprietary alloys, an accomplishment that we believe distinguishes us from our competitors. We expect our continued emphasis on product innovation to yield similar future results, and we expect to focus our development efforts on specialized automotive products, the biopharmaceutical industry, the energy market for fuel cells and the market for turbine components for higher temperature operations.
· Expand product capability through strategic acquisitions and alliances . We will continue to examine opportunities that enable us to offer customers an enhanced and more competitive product line to complement our core flat products. These opportunities may include product line enhancement, such as that provided by our acquisition of certain assets from Branford Wire in November 2004. We will continue to look for opportunities that will enhance the portfolio of products provided to customers such as wire, tubing, fittings and bar. We will also continue to evaluate strategic relationships with third parties in the industry in order to enhance our competitive position and relationships with customers, including distribution agreements and agreements similar to the 20-year conversion agreement we entered into with Titanium Metals Corporation in November 2006.
Risks associated with our business
The success of our business strategy will be affected by our ability to overcome certain risks. Some of these risks include:
· any significant decrease in customer demand for our products or in demand for our customers products;
· our dependence on production levels at our Kokomo facility and our ability to make capital improvements at that facility;
· rapid increases in the cost of nickel, energy and other raw materials;
· our ability to continue to develop new commercially viable applications and products;
· our ability to recruit and retain key employees;
· our ability to comply, and the costs of compliance, with applicable environmental laws and regulations; and
· economic and market risks associated with foreign operations and U.S. and world economic and political conditions.
More information about these and other risks can be found in Risk factors.
4
Our operations began in 1912 as Haynes Stellite Works, which was purchased by Union Carbide and Carbon Corporation in 1920. In 1970, the operations were sold to Cabot Corporation. In 1987, we were incorporated as a stand-alone corporation in Delaware, and in 1989 we were sold by Cabot Corporation to Morgan Lewis Githens & Ahn Inc., a private investment firm. The Blackstone Group, a private investment firm, purchased our company from Morgan Lewis Githens & Ahn Inc. in 1997.
On March 29, 2004, we and our U.S. subsidiaries and U.S. affiliates as of that date filed voluntary petitions for reorganization relief under Chapter 11 of the U.S. Bankruptcy Code. Our plan of reorganization was confirmed on August 16, 2004, and became effective when we emerged from bankruptcy on August 31, 2004. Because of our emergence from bankruptcy and adoption of fresh start reporting, our historical financial information for periods prior to August 31, 2004 is not comparable to our financial information for periods after August 31, 2004. More detailed information about our reorganization can be found in The reorganization.
Our principal executive offices are located at 1020 West Park Avenue, Kokomo, Indiana 46904, and our telephone number is (765) 456-6000. Our website address is http://www.haynesintl.com . The information contained in, or that can be accessed through, our website is not part of this prospectus.
5
Shares of common stock offered by Haynes
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1,100,000 shares |
Shares of common stock offered by the selling stockholders |
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1,000,000 shares |
Over-allotment option |
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315,000 shares, 100,000 of which will be provided by the Company and 215,000 of which will be provided by the selling stockholders. See Underwriting. |
Common stock to be outstanding after this offering |
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Selling stockholders |
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The selling stockholders include certain officers and directors of Haynes who are exercising options and stockholders that purchased shares of our common stock from a seller who was an affiliate of Haynes at the time of sale. See Principal and selling stockholders. |
Dividend policy |
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We have not declared cash dividends on our common stock in the last five fiscal years. We currently do not anticipate paying any cash dividends or making any other distributions on shares of our common stock in the foreseeable future. See Dividend policy. |
Use of proceeds |
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We intend to use our net proceeds to repay amounts outstanding under our revolving credit facility. We expect to use the amounts available under our U.S. revolving credit facility to make strategic investments in our manufacturing facilities and equipment, to opportunistically make strategic acquisitions and for general corporate purposes. We will not receive any proceeds from the sale of common stock by the selling stockholders. See Use of proceeds. |
Unless we specifically state otherwise, all information in this prospectus assumes that the underwriters do not exercise their over-allotment option.
Common stock to be outstanding after this offering includes 300,000 shares to be issued upon the exercise of existing options and sold by certain of the selling stockholders, or 450,000 such shares if the underwriters exercise their over-allotment option in full.
The aggregate number of shares of our common stock to be outstanding after this offering excludes 680,000 shares issuable pursuant to existing options under our stock option plans that will remain outstanding after this offering, or 530,000 such shares if the underwriters exercise their over-allotment option in full.
6
Summary consolidated financial and other data
Set forth below is summary consolidated financial and other data. This data should be read in conjunction with the consolidated financial statements and related notes thereto and Managements discussion and analysis of financial condition and results of operations included elsewhere in this prospectus.
On March 29, 2004, Haynes and certain of our U.S. subsidiaries and U.S. affiliates as of that date filed for bankruptcy protection. Our plan of reorganization was confirmed by order of the Bankruptcy Court on August 16, 2004 and became effective on August 31, 2004. Our historical consolidated financial statements included elsewhere in this prospectus 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 our plan of reorganization, we began operating our business under a new capital structure, and we adopted fresh start reporting for our financial statements. Because of the emergence from bankruptcy and adoption of fresh start reporting, our historical financial information for periods prior to August 31, 2004 is not comparable to our financial information for periods after August 31, 2004. For more information see The reorganization.
7
The summary historical consolidated financial data as of and for the years ended September 30, 2005 and 2006, as of September 30, 2004 and for the period September 1, 2004 through September 30, 2004 is derived from the audited consolidated financial statements of our company after giving effect to the adoption of fresh start reporting (successor Haynes International, Inc.). The summary historical consolidated financial data for the period October 1, 2003 through August 31, 2004, and as of and for the years ended September 30, 2002 and 2003 is derived from the audited consolidated financial statements of our company prior to the adoption of fresh start reporting (predecessor Haynes International, Inc.). The summary historical consolidated financial data as of and for the three months ended December 31, 2005 and 2006 have been derived from financial statements that are not audited, but, in managements opinion, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations as of such dates and for such periods. The results of operations for the interim periods presented are not necessarily indicative of the results to be obtained for a full year.
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Predecessor |
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Successor |
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(in thousands,
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Year ended Sept. 30, |
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Eleven
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One month
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Year ended Sept. 30, |
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Three months ended
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2002(1) |
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2003(1) |
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2004 |
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2004(2) |
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2005(2) |
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2006(2) |
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2005(2) |
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2006(2) |
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Statement of operations data: |
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Net revenues |
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$ |
225,942 |
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$ |
178,129 |
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$ |
209,103 |
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$ |
24,391 |
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$ |
324,989 |
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$ |
434,405 |
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$ |
94,407 |
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$ |
120,463 |
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Cost of sales(3) |
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175,572 |
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150,478 |
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171,652 |
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26,136 |
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288,669 |
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325,573 |
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77,095 |
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86,842 |
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Selling, general and administrative expense(4) |
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24,628 |
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24,411 |
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24,038 |
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2,658 |
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32,963 |
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40,296 |
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9,391 |
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9,420 |
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Research and technical expense |
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3,697 |
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2,747 |
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2,286 |
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|
|
226 |
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2,621 |
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2,659 |
|
668 |
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697 |
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Restructuring and other charges(5) |
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4,027 |
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|
429 |
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628 |
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Operating income (loss) |
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22,045 |
|
493 |
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7,100 |
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|
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(5,058 |
) |
108 |
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65,877 |
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7,253 |
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23,504 |
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Interest expense, net |
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20,441 |
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19,661 |
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13,929 |
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|
348 |
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6,353 |
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8,024 |
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1,789 |
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1,919 |
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Reorganization items(6) |
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(177,653 |
) |
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Net income (loss)(7) |
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$ |
927 |
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$ |
(72,255 |
) |
$ |
170,734 |
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|
|
$ |
(3,646 |
) |
$ |
(4,134 |
) |
$ |
35,540 |
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$ |
3,333 |
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$ |
13,184 |
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Net income (loss) per share: |
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Basic |
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$ |
9,270 |
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$ |
(722,550 |
) |
$ |
1,707,340 |
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|
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$ |
(0.36 |
) |
$ |
(0.41 |
) |
$ |
3.55 |
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$ |
0.33 |
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$ |
1.32 |
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Diluted |
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$ |
9,270 |
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$ |
(722,550 |
) |
$ |
1,707,340 |
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|
|
$ |
(0.36 |
) |
$ |
(0.41 |
) |
$ |
3.46 |
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$ |
0.33 |
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$ |
1.27 |
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Weighted average shares outstanding: |
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Basic |
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100 |
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100 |
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100 |
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10,000,000 |
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10,000,000 |
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10,000,000 |
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10,000,000 |
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10,000,000 |
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Diluted |
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100 |
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100 |
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100 |
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|
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10,000,000 |
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10,000,000 |
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10,270,642 |
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10,163,993 |
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10,398,994 |
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Other data: |
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Capital expenditures |
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$ |
6,032 |
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$ |
3,638 |
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$ |
4,782 |
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|
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$ |
637 |
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$ |
9,029 |
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$ |
10,668 |
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$ |
2,428 |
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$ |
3,139 |
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EBITDA(8) |
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$ |
28,121 |
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$ |
3,311 |
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$ |
192,527 |
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|
|
$ |
(4,400 |
) |
$ |
8,134 |
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$ |
74,767 |
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$ |
9,324 |
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$ |
25,558 |
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Adjusted EBITDA(8) |
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$ |
37,129 |
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$ |
6,512 |
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$ |
21,521 |
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|
|
$ |
1,258 |
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$ |
38,460 |
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$ |
80,574 |
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$ |
11,933 |
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$ |
26,138 |
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Average nickel price per pound (end of period)(9) |
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$ |
3.02 |
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$ |
4.52 |
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$ |
6.21 |
|
|
|
$ |
6.02 |
|
$ |
6.45 |
|
$ |
13.67 |
|
$ |
6.09 |
|
$ |
15.68 |
|
8
|
|
Predecessor |
|
|
|
Successor |
|
|||||||||||||||
|
|
At September 30, |
|
|
|
At September 30, |
|
At
|
|
|||||||||||||
(in thousands) |
|
2002(1) |
|
2003(1) |
|
|
|
2004(2) |
|
2005(2) |
|
2006(2) |
|
2006(2) |
|
|||||||
Balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Working capital (deficit) |
|
$ |
49,424 |
|
$ |
(99,901 |
) |
|
|
$ |
61,826 |
|
$ |
59,494 |
|
$ |
101,864 |
|
|
$ |
161,075 |
|
Property, plant and equipment, net |
|
42,721 |
|
40,229 |
|
|
|
80,035 |
|
85,125 |
|
88,921 |
|
|
90,389 |
|
||||||
Total assets |
|
230,513 |
|
180,115 |
|
|
|
360,758 |
|
387,122 |
|
445,860 |
|
|
471,364 |
|
||||||
Total debt |
|
189,685 |
|
201,007 |
|
|
|
85,993 |
|
106,383 |
|
120,043 |
|
|
68,927 |
|
||||||
Accrued pension and postretirement benefits(10) |
|
121,717 |
|
127,767 |
|
|
|
120,019 |
|
122,976 |
|
126,488 |
|
|
126,478 |
|
||||||
Stockholders equity (deficiency) |
|
(101,973 |
) |
(172,858 |
) |
|
|
115,576 |
|
111,869 |
|
151,548 |
|
|
166,798 |
|
||||||
(in millions) |
|
2002 |
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
||||||
Backlog at fiscal quarter ended (11) : |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
December 31 |
|
$ |
88.0 |
|
$ |
49.0 |
|
$ |
54.7 |
|
$ |
110.9 |
|
$ |
203.5 |
|
$ |
207.4 |
|
March 31 |
|
77.2 |
|
53.6 |
|
69.6 |
|
134.8 |
|
207.4 |
|
|
|
||||||
June 30 |
|
63.9 |
|
54.5 |
|
82.6 |
|
159.2 |
|
200.8 |
|
|
|
||||||
September 30 |
|
52.5 |
|
50.6 |
|
93.5 |
|
188.4 |
|
206.9 |
|
|
|
||||||
(1) Restated. Effective October 1, 2003, Haynes changed its inventory costing method from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. In accordance with generally accepted accounting principles, the change has been applied by restating the 2002 and 2003 consolidated financial data.
(2) As of August 31, 2004, the effective date of our plan of reorganization, Haynes adopted fresh start reporting for its consolidated financial statements. Because of the emergence from bankruptcy and adoption of fresh start reporting, the historical financial information for periods after August 31, 2004 is not comparable to periods before September 1, 2004. For more information see The reorganization and Managements discussion and analysis of financial condition and results of operationsPro forma financial information.
(3) As part of fresh start reporting, inventory was increased by approximately $30,497 to reflect its fair value at August 31, 2004. The fair value adjustment was recognized ratably in cost of sales as inventory was sold and was fully recognized by the end of the second quarter of fiscal 2005. Cost of sales for the one month ended September 30, 2004 and the year ended September 30, 2005 include non-cash charges of $5,083 and $25,414, respectively, for this fair value adjustment. Also, as part of fresh start reporting, machinery and equipment, buildings and patents were increased by $49,436 to reflect fair value at August 31, 2004. These values will be recognized in cost of sales over periods ranging from 2 to 14 years. Cost of sales for the one month ended September 30, 2004 and the years ended September 30, 2005 and 2006 include $403, $4,788 and $4,802, respectively, for this fair value adjustment. In the first quarter of fiscal 2007, fresh start changes increased cost of sales by $1.0 million compared to $1.2 million for the same period in fiscal 2006.
(4) In fiscal 2003, $676 of terminated acquisition costs were accounted for as selling, general and administrative expense related to a potential acquisition that we did not pursue.
(5) Consists primarily of professional fees and credit facility fees related to the restructuring and refinancing activities.
(6) During fiscal 2004, Haynes recognized approximately $177,653 in reorganization items of which approximately $7,298 were expenses relating to professional fees, amendment fees, travel expenses, directors fees, write offs of bond discount and debt issuance costs, and other expenses, and approximately $184,951 was income relating to the gain on cancellation of 11 ⅝ % senior notes due September 1, 2004 and fresh start reporting adjustments as a result of the reorganization. See Note 8 to the consolidated financial statements included elsewhere in this prospectus for more information.
(7) Reflects a valuation allowance of approximately $60,307 recorded at September 30, 2003 on our U.S. net deferred tax assets as a result of our determination that, as of that date, it was more likely than not that certain future tax benefits would not be realized. See Note 6 to the consolidated financial statements included elsewhere in this prospectus for more information.
(8) EBITDA and adjusted EBITDA are measures used by management to measure operating performance. EBITDA is defined as net income plus net interest, taxes, depreciation, and amortization. Adjusted EBITDA excludes certain non-cash items,
9
restructuring and reorganization items, expense recognition of fresh start accounting adjustments and other items that management does not utilize in assessing our operating performance. Management believes that it is useful to eliminate these items (as well as net interest, taxes, depreciation, and amortization, as noted above) because it allows management to focus on what it deems to be a more reliable indicator of ongoing operating performance. As a result, internal management reports used during monthly operating reviews feature the EBITDA and adjusted EBITDA metrics. However, management uses these metrics in conjunction with traditional operating performance measures determined in accordance with generally accepted accounting principles, or GAAP, as part of its overall assessment of company performance and therefore does not place undue reliance on these non-GAAP measures of operating performance.
Neither EBITDA nor adjusted EBITDA is a recognized term under GAAP and neither purports to be an alternative to net income as an indicator of operating performance or any other GAAP measure. Because not all companies use identical calculations, this presentation of EBITDA and adjusted EBITDA may not be comparable to other similarly titled measures of other companies. EBITDA and adjusted EBITDA are not intended to be measures of free cash flow for managements discretionary use since they do not consider certain cash requirements, such as interest payments, tax payments, debt service requirements and capital expenditures. However, these measures can still be useful in evaluating our performance against our peer companies because management believes the measures provide users with valuable insight into key components of GAAP amounts. For example, eliminating the effects of interest income and expense reduces the impact of a companys capital structure on its performance. In addition, removing the provision for income taxes for EBITDA presentation purposes allows users to assess returns on a pre-tax basis.
All of the items included in the reconciliation from net income to adjusted EBITDA are either (i) non-cash items (e.g., depreciation, amortization, non-cash pension expense, expense recognized from fresh start accounting adjustments and stock-based compensation) or (ii) items that management does not consider to be useful in assessing our ongoing operating performance (e.g., income taxes, restructuring and other charges). In the case of the non-cash items, management believes that investors can better assess our operating performance if the measures are presented without such items because, unlike cash expenses, these adjustments do not affect our ability to generate free cash flow or invest in our business. For example, by eliminating depreciation and amortization from EBITDA, users can compare operating performance without regard to different accounting determinations such as useful life. In the case of the other items, management believes that investors can better assess our operating performance if the measures are presented without these items because their financial impact does not reflect ongoing operating performance.
The table below provides a reconciliation of net income to EBITDA and adjusted EBITDA for the periods indicated.
|
|
Predecessor |
|
|
|
Successor |
|
|||||||||||||||||||||||
|
|
Year ended
|
|
Eleven
|
|
|
|
One
|
|
Year ended
|
|
Three months ended
|
|
|||||||||||||||||
|
|
2002 |
|
2003 |
|
2004 |
|
|
|
2004 |
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
|||||||||||
Net income |
|
$ |
927 |
|
$ |
(72,255 |
) |
$ |
170,734 |
|
|
|
|
$ |
(3,646 |
) |
$ |
(4,134 |
) |
$ |
35,540 |
|
|
$ |
3,333 |
|
|
$ |
13,184 |
|
Interest expense |
|
20,585 |
|
19,724 |
|
13,964 |
|
|
|
|
354 |
|
6,385 |
|
8,121 |
|
|
1,789 |
|
|
1,919 |
|
||||||||
Interest income |
|
(144 |
) |
(63 |
) |
(35 |
) |
|
|
|
(6 |
) |
(32 |
) |
(97 |
) |
|
(1) |
|
|
(110 |
) |
||||||||
Provision for income taxes |
|
677 |
|
49,281 |
|
90 |
|
|
|
|
(1,760 |
) |
(2,111 |
) |
22,313 |
|
|
2,132 |
|
|
8,511 |
|
||||||||
Depreciation and amortization |
|
6,076 |
|
6,624 |
|
7,774 |
|
|
|
|
658 |
|
8,026 |
|
8,890 |
|
|
2,071 |
|
|
2,054 |
|
||||||||
EBITDA |
|
28,121 |
|
3,311 |
|
192,527 |
|
|
|
|
(4,400 |
) |
8,134 |
|
74,767 |
|
|
9,324 |
|
|
25,558 |
|
||||||||
Pension/OPEB non-cash portion(a) |
|
9,008 |
|
3,201 |
|
2,620 |
|
|
|
|
23 |
|
2,982 |
|
3,021 |
|
|
1,958 |
|
|
(113 |
) |
||||||||
Stock based compensation expense(b) |
|
|
|
|
|
|
|
|
|
|
123 |
|
1,302 |
|
2,786 |
|
|
651 |
|
|
693 |
|
||||||||
Restructuring Items(c) |
|
|
|
|
|
4,027 |
|
|
|
|
429 |
|
628 |
|
|
|
|
|
|
|
|
|
||||||||
Reorganization items(d) |
|
|
|
|
|
(177,653 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Fresh start accounting-inventory(e) |
|
|
|
|
|
|
|
|
|
|
5,083 |
|
25,414 |
|
|
|
|
|
|
|
|
|
||||||||
Adjusted EBITDA |
|
$ |
37,129 |
|
$ |
6,512 |
|
$ |
21,521 |
|
|
|
|
$ |
1,258 |
|
$ |
38,460 |
|
$ |
80,574 |
|
|
$ |
11,933 |
|
|
$ |
26,138 |
|
(a) Represents difference between pension expense and cash paid for pension and other post-retirement benefits.
(b) Represents non-cash, stock-based compensation expense.
(c) Represents restructuring items, primarily pre-petition professional fees and credit facility fees related to our Chapter 11 filing.
(d) Represents reorganization items resulting from the bankruptcy petition including gain on cancellation of debt, fresh-start adjustments and professional fees.
(e) Represents expense recognized for fresh-start inventory adjustments.
10
(9) Represents the average price for a cash buyer as reported by the London Metals Exchange for the 30 days ending on the last day of the period presented.
(10) During March 2006, Haynes communicated to employees and plan participants a negative plan amendment that caps our 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 post-retirement benefit liability due to this plan amendment by $46,300, that will be amortized as a reduction to expense over an eight-year period. This amortization period began in April 2006, reducing the amount of expense recognized for the second half of fiscal 2006 and the respective future periods.
(11) We define backlog to include firm commitments from customers for delivery of product at established prices. Approximately 30% of the orders in our backlog at any given time include prices that are subject to adjustment based on changes in raw material costs. Historically, approximately 75% of our backlog orders have shipped within six months and approximately 90% have shipped within 12 months. The backlog figures do not reflect the portion of our business conducted at our service and sales centers on a spot or just-in-time basis.
11
You should carefully consider the risks described below and all other information contained in this prospectus before making an investment decision. If any of the following risks, as well as other risks and uncertainties that are not yet identified or that we currently think are immaterial, actually occur, our business, financial condition and results of operations could be materially and adversely affected. In that event, the trading price of our shares could decline, and you may lose part or all of your investment.
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. For example, due in part to these factors, we encountered liquidity difficulties throughout fiscal 2003 and the first half of fiscal 2004, and could not generate sufficient cash to both satisfy our debt obligations and fund our operations. These liquidity difficulties contributed to our decision to file for reorganization relief under Chapter 11 of the U.S. Bankruptcy Code on March 29, 2004.
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 fiscal 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.
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. 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 58% 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.
12
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, we may not be able to obtain such insurance that will adequately cover such losses.
Capital expenditures are required to continue to improve operating efficiencies.
Prior to fiscal 2005, we experienced periods of liquidity shortages which resulted in a lack of funds for capital improvements at the Kokomo facility. Although we believe that our facilities are generally in good operating condition, in fiscal 2005 and 2006 we started the process of making significant upgrades to our equipment in order to improve operating efficiencies through increased capacity, improved quality capability and reduced operating costs. In addition, we also expect that these upgrades will enable us to improve working capital management. We anticipate continuing to make these upgrades, spending approximately $30.0 million in fiscal 2007 and 2008, as compared to the $5.4 million we spent in fiscal 2004, $11.6 million spent in fiscal 2005 (including the Branford Wire acquisition) and the $10.7 million spent in fiscal 2006. An inability to make these upgrades could have a material adverse impact on the efficiency with which we will be able to manufacture our products and adversely affect our competitive standing within the industry. As we proceed with our capital upgrade program, we will experience some planned equipment downtime, which could affect our financial results in future periods.
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 material cost rises rapidly, there may be a negative effect on our gross profit margins. Nickel, a major component of many of our products, accounts for approximately 51% of our raw material costs, or approximately 30% of our total cost 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. 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, we have experienced rising raw material and energy costs. Nickel, cobalt and molybdenum, the primary raw materials used to manufacture our products, all have experienced significant fluctuations in price. Continued industrial growth in China and other developing economies 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. Haynes uses
13
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, if we experience difficulties that delay or prevent the successful development, commercialization, marketing or 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.
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. 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 cannot assure you that we have been or will at all times be in complete compliance with these laws, regulations or permits. In addition, our facilities are subject to periodic inspection by various regulatory authorities, who from time to time have issued notices of violations of laws, regulations and permits. For example, in the past five years, we have paid administrative fines for alleged violations of requirements relating to the handling and storage of hazardous wastes, requirements relating to the Kokomo facilitys Title V Air Permit, requirements relating to the handling of polychlorinated biphenyls and record keeping and notification requirements relating to industrial waste water discharge. Although none of these violations has had a material effect on our financial condition, alone or in the aggregate, future violations may result in material fines, require additional capital expenditures, or both. In addition, we may be required in the future to comply with certain regulations pertaining to the emission of hazardous air pollutants under the Clean Air Act. However, since these regulations have not been proposed or promulgated, we cannot predict the cost, if any, associated with compliance with such regulations.
Pursuant to certain environmental laws including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, if a release of hazardous substances occurs
14
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, we may be held liable for all costs arising therefrom, and there can be no assurance that the amount of such liability will not 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. We have received permits from the Indiana Department of Environmental Management, or IDEM, and the U.S. Environmental Protection Agency, or EPA, to close and to provide post-closure monitoring and care for certain areas at our Kokomo facility that were used for the storage and disposal of wastes, some of which are classified as hazardous under applicable regulations. We are currently evaluating known groundwater contamination identified at our Kokomo site and are developing a plan to address it. Accordingly, additional corrective action may be required. We also have an application with IDEM pending for approval of closure and post-closure care for another area of the Kokomo site, which may also require corrective action. We have also received permits from the North Carolina Department of Environment and Natural Resources, or NCDENR, and the EPA to close and provide post-closure monitoring and care for a former waste disposal lagoon at our Mountain Home, North Carolina facility. We are required to monitor groundwater and to continue post-closure maintenance of the former disposal areas at this site. Further, if it is determined that site conditions have impacted the groundwater, additional corrective action by us could be required. We are currently 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 would not have a material effect on our financial condition, results of operations or liquidity. Additionally, it is possible that we could be required to undertake other corrective action for any other solid waste management unit existing or determined to exist at any of our facilities.
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, much 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 liability 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 adversely affect our business, results of operations or financial condition. See BusinessEnvironmental matters.
15
Although a collective bargaining agreement is in place for certain employees, union or labor disputes could still disrupt our manufacturing process.
All eligible hourly employees at the Kokomo plant and the Lebanon, Indiana service center (approximately 516 in the aggregate as of September 30, 2006) are covered by a collective bargaining agreement. As part of negotiations with the United Steelworkers of America related to our emergence from bankruptcy, the collective bargaining agreement was extended until June 2007. Even though a collective bargaining agreement is in place, it is still possible that union or labor disputes could disrupt our manufacturing process. We expect to renegotiate the collective bargaining agreement prior to the expiration of the agreement currently in place. We believe that current relations with the union are satisfactory. We cannot assure you, however, that the renegotiation of the collective bargaining agreement will not lead to a labor stoppage and negative effect on earnings. For example, there was a brief labor stoppage in connection with renegotiation of the collective bargaining agreement in fiscal 2002, although there was no such stoppage in connection with the renegotiation in fiscal 2004 as part of our emergence from bankruptcy.
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. This could delay new product and alloy development and commercialization, and hinder our marketing and sales efforts, which would adversely impact our competitiveness and financial results.
U.S. and world economic and political conditions, including acts or threats of terrorism and/or war, could adversely affect our business.
National and international political developments, instability and uncertainties could result in continued economic weakness in the United States and in international markets. These uncertainties include ongoing military activity in Afghanistan and Iraq, threatened hostilities with other countries, political unrest and instability around the world and continuing threats of terrorist attacks. Any actual armed hostilities, and any future terrorist attacks in the United States or abroad, 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.
16
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 of the various countries involved. 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:
· our ability to obtain, and the costs associated with obtaining, U.S. export licenses and other required export or import licenses or approvals;
· changes in duties and tariffs, taxes, trade restrictions, license obligations and other non-tariff barriers to trade;
· burdens of complying with a wide variety of foreign laws and regulations;
· business practices or laws favoring local companies;
· fluctuations in foreign currencies;
· restrictive trade policies of foreign governments;
· longer payment cycles and difficulties collecting receivables through foreign legal systems;
· difficulties in enforcing or defending agreements and intellectual property rights; and
· foreign political or economic conditions.
We cannot ensure 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.
Risks related to our common stock
Our common stock has not been traded on a securities exchange prior to this offering, and the market price of our common stock could be extremely volatile and could decline following this offering, resulting in a substantial loss on, or total loss of, your investment.
17
Prior to this offering, our common stock was not listed on any national securities exchange and was quoted in the pink sheets. Although we intend to list the common stock on The NASDAQ Global Market in connection with this offering, an active trading market for our common stock may never develop or be sustained, which could adversely affect your ability to sell your shares and could depress the market price of your shares. In addition, the public offering price will be determined through negotiations among us, the selling stockholders and the representative of the underwriters, and may bear no relationship to the price at which the common stock will trade upon completion of this offering.
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:
· our operating performance and the performance of other similar companies and companies deemed to be similar;
· fluctuations in the market price of nickel, raw materials or energy;
· market conditions in the end markets into which our customers sell their products, principally aerospace, power generation and chemical processing;
· announcements of technological innovations or new products and services by us or our competitors;
· the operating and stock price performance of other companies that investors may deem comparable to us;
· announcements by us of acquisitions, alliances, joint development efforts or corporate partnerships in the high temperature resistant alloy and corrosion resistant alloy markets;
· market conditions in the technology, manufacturing or other growth sectors; and
· rumors relating to us or our competitors.
You may not receive a return on investment through dividend payments nor upon the sale of your shares of our common stock.
The terms of our current U.S. revolving credit facility restrict us from paying cash dividends, and we do not anticipate paying cash dividends or making any other distributions on shares of our common stock in the foreseeable future. Instead, we intend to retain future earnings for use in the operation and expansion of our business. Therefore, you should not expect to receive a return on your investment in shares of our common stock through the payment of cash dividends. You also may not realize a return on your investment upon selling your shares of our common stock.
18
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 providing for the possible issuance of shares of our preferred stock and regulating the nomination of directors, may make it more difficult for other persons, without the approval of our Board of Directors, to make a tender offer or otherwise acquire a substantial number of shares of our common stock or to launch other 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.
Our historical financial information is not comparable to our current financial information.
As a result of our emergence from bankruptcy, we are operating our business with a new capital structure, and are subject to fresh start reporting requirements prescribed by generally accepted accounting principles. As required by fresh start reporting, assets and liabilities as of August 31, 2004 were recorded at fair value, with the enterprise value being determined in connection with our emergence from bankruptcy. Accordingly, our historical financial information for periods prior to August 31, 2004 is not comparable to our financial information for periods after August 31, 2004.
19
This prospectus contains statements that constitute forward-looking statements as defined by federal securities laws. Those statements appear in a number of places and may include, but are not limited to, statements regarding our intent, belief or current expectations or those of our management with respect to our strategic plans; trends in the demand for our products; trends in the industries that consume our products; our ability to develop new products; and our ability to make capital expenditures and finance operations. You 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 our control.
In addition, we have based these forward-looking statements on our current expectations and projections about future events. Although we believe 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 which may affect the accuracy of forward-looking statements include, but are not limited to the following:
· wide fluctuations in revenues based upon changes in demand for our customers products;
· decreases in demand in the aerospace, land-based gas turbine or chemical processing industries;
· our ability to make capital expenditures to upgrade our primary production facility;
· rapid increases in the price of nickel, our primary raw material;
· increases in the cost of energy or other raw materials;
· unplanned shut-downs or other production problems at our manufacturing facilities;
· changes in and compliance with environmental and safety laws and policies;
· our ability to develop, commercialize, market and sell new applications and new products that meet the needs of our customers;
· foreign currency fluctuations;
· our inability to recruit or retain key personnel;
· war and acts of terrorism; or
· the other factors that we describe under Risk factors.
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
20
Our net proceeds from the sale of 1,100,000 shares of common stock in this offering are estimated to be approximately $64.0 million, assuming a public offering price of $62.50 per share, which is the mid-point of the estimated offering price range shown on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of the shares of common stock by the selling stockholders.
We intend to use all of our net proceeds to repay amounts outstanding under our U.S. revolving credit facility. Availability under the U.S. revolving credit facility will be increased by the amount of the offering proceeds used to repay amounts outstanding. Reducing the amount outstanding under our U.S. revolving credit facility will better position us to execute our strategy. In particular, we intend to use a portion of the available amounts to make strategic investments in our manufacturing facilities and equipment and to opportunistically pursue strategic acquisitions and alliances. The remaining availability under our U.S. revolving credit facility will also be used for general corporate purposes. At February 28, 2007, the amount available under our U.S. and U.K. revolving credit facilities was approximately $68.0 million. Borrowings under the U.S. credit facility as of that date were approximately $70.5 million, and bore interest at 7.57% per annum. There were no borrowings outstanding under our U.K. credit facility as of that date.
The amount and timing of our expenditures will depend upon several factors, including cash flows from our operations and the anticipated growth of our business. Accordingly, our management will have broad discretion in the application of the proceeds of our borrowings under the revolving credit facility and investors will be relying on the judgment of our management regarding the application of these proceeds.
We have not declared cash dividends on our common stock in the last five fiscal years. We intend to retain all future earnings for the operation and expansion of our business, and therefore, we do not anticipate paying cash dividends or making any other distributions on our common stock in the foreseeable future. The payment of dividends will be at the sole discretion of our Board of Directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, any limitations on the payment of dividends present in any current and future credit agreements and other factors that our Board of Directors may deem relevant. We are subject to covenants under our current U.S. revolving credit facility that restrict us from paying cash dividends.
21
Our common stock is not currently listed on any national securities exchange and there is no established trading market for our securities. Our common stock is currently quoted in the pink sheets under the symbol HYNI.PK. Over-the-counter market quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. You are advised to obtain current market quotations for our common stock. No assurance can be given as to the market prices of our common stock at any time after the date of this prospectus.
The following table sets forth the range of high and low closing prices by fiscal quarter for the common stock as reported through Bloomberg L.P.
Fiscal quarter ended: |
|
High |
|
Low |
|
||
March 31, 2007 (through March 7, 2007) |
|
$ |
64.00 |
|
$ |
51.50 |
|
December 31, 2006 |
|
$ |
54.00 |
|
$ |
36.00 |
|
September 30, 2006 |
|
$ |
39.00 |
|
$ |
35.60 |
|
June 30, 2006 |
|
$ |
39.00 |
|
$ |
31.00 |
|
March 31, 2006 |
|
$ |
31.00 |
|
$ |
24.00 |
|
December 31, 2005 |
|
$ |
25.00 |
|
$ |
21.00 |
|
September 30, 2005 |
|
$ |
25.00 |
|
$ |
18.00 |
|
June 30, 2005 |
|
$ |
19.50 |
|
$ |
16.50 |
|
March 31, 2005 |
|
$ |
20.50 |
|
$ |
15.00 |
|
December 31, 2004 (from October 29, 2004) |
|
$ |
15.00 |
|
$ |
9.90 |
|
The last reported sale price of our common stock on March 7, 2007 was $61.50 per share. As of January 12, 2007, there were approximately 14 record holders of our common stock.
22
The following table sets forth our cash and cash equivalents, short-term debt and capitalization as of December 31, 2006:
· on an actual basis; and
· on an adjusted basis to reflect our sale of 1,100,000 shares of common stock at an assumed public offering price of $62.50 per share (the midpoint of the range set forth on the cover page of this prospectus), and application of the net proceeds, after deducting estimated underwriting discounts and commissions and estimated offering expenses, to repay amounts outstanding under our U.S. revolving credit facility, as described under Use of proceeds. Each $1.00 increase (decrease) in the public offering price per share would increase (decrease) the as adjusted figure shown below for cash and cash equivalents additional paid-in capital, total stockholders equity and total capitalization by $1.0 million, after deducting estimated underwriting discounts and commissions. The adjustments also reflect the sale of 300,000 shares of common stock by the selling stockholders in this offering who are exercising options resulting in proceeds to Haynes of $4.1 million.
This table should be read in conjunction with Selected consolidated financial and other data, Managements discussion and analysis of financial condition and results of operations and our consolidated financial statements and notes thereto appearing elsewhere in this prospectus.
December 31, 2006
|
|
Actual |
|
As adjusted |
|
|
|||||
Cash and cash equivalents |
|
$ |
4,982 |
|
|
$ |
7,273 |
|
|
||
Short-term debt: |
|
|
|
|
|
|
|
||||
Revolving credit facility |
|
$ |
65,833 |
|
|
$ |
|
|
|
||
Current maturities of long-term obligations |
|
110 |
|
|
110 |
|
|
||||
Total short-term debt |
|
$ |
65,943 |
|
|
$ |
110 |
|
|
||
Long-term obligations (less current portion) |
|
$ |
2,984 |
|
|
$ |
2,984 |
|
|
||
Stockholders equity: |
|
|
|
|
|
|
|
||||
Common stock, $0.001 par value (40,000,000 shares authorized, 10,000,000 shares issued and outstanding actual, 11,400,000 shares issued and outstanding as adjusted)(1) |
|
10 |
|
|
11 |
|
|
||||
Preferred stock, $0.001 par value (20,000,000 shares authorized, no shares issued and outstanding) |
|
|
|
|
|
|
|
||||
Additional paid-in capital |
|
123,630 |
|
|
191,753 |
|
|
||||
Accumulated earnings |
|
40,944 |
|
|
40,944 |
|
|
||||
Accumulated other comprehensive income |
|
2,214 |
|
|
2,214 |
|
|
||||
Total stockholders equity |
|
166,798 |
|
|
234,922 |
|
|
||||
Total capitalization (including short-term debt) |
|
$ |
235,725 |
|
|
$ |
238,016 |
|
|
||
(1) Common stock includes an additional 20,000,000 shares authorized by our stockholders at our annual meeting on February 20, 2007. Common stock to be outstanding after this offering includes 300,000 shares to be issued upon the exercise of existing options and sold by certain of the selling stockholders, or 450,000 shares if the underwriters exercise their over-allotment option in full. If the underwriters exercise their over-allotment option in full, as adjusted amounts for cash and cash equivalents, additional paid-in capital, total stockholders equity and total capitalization would increase by $7,963 to reflect the sale of 100,000 shares by us pursuant to the over-allotment option, our receipt of the option exercise price on common stock issued pursuant to these options and the application of the amounts received as described above.
23
Our pro forma net tangible book value as of December 31, 2006, was $129.6 million, or $11.80 per share of common stock. Net tangible book value per share represents our net tangible book value (total assets, less goodwill and other intangible assets, less total liabilities) divided by 10,980,000 shares of common stock outstanding after giving effect to the conversion of all outstanding options into shares of common stock.
Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma net tangible book value per share of common stock immediately after the completion of this offering. After giving effect to our sale of 1,100,000 shares of common stock in this offering at an assumed public offering price of $62.50 per share (the midpoint of the range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value as of December 31, 2006 would have been, $193.6 million, or $16.03 per share. This represents an immediate increase in net tangible book value of $4.23 per share to existing stockholders and an immediate dilution in net tangible book value of $46.47 per share to investors purchasing common stock in this offering, as illustrated in the following table:
Initial public offering price per share |
|
|
|
$ |
62.50 |
|
|
Pro forma net tangible book value per share as of December 31, 2006 |
|
$ |
11.80 |
|
|
|
|
Increase per share attributable to new investors |
|
4.23 |
|
|
|
||
Pro forma net tangible book value per share after this offering |
|
|
|
16.03 |
|
||
Dilution per share to new investors |
|
|
|
$ |
46.47 |
|
|
Assuming the exercise in full of the underwriters over allotment option, our adjusted pro forma net tangible book value after this offering as of December 31, 2006 would have been approximately $16.38 per share, representing an immediate increase in pro forma tangible book value of $4.58 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $46.12 per share to investors purchasing in this offering.
The following table presents on a pro forma basis as of December 31, 2006, after giving effect to our sale of 1,100,000 shares, the differences between the existing stockholders and purchasers of shares in this offering with respect to the number of shares purchased from us, the total consideration paid and the average price paid per share:
|
|
Shares purchased |
|
Total consideration |
|
Average
|
|
||||||||||||
|
|
Number |
|
Percent |
|
Amount |
|
Percent |
|
share |
|
||||||||
Existing stockholders |
|
10,980,000 |
|
|
90.9 |
% |
|
$ |
137,840,000 |
|
|
66.7 |
% |
|
|
$ |
12.55 |
|
|
New investors |
|
1,100,000 |
|
|
9.1 |
|
|
68,750,000 |
|
|
33.3 |
|
|
|
62.50 |
|
|
||
Total . |
|
12,080,000 |
|
|
100.0 |
% |
|
$ |
206,590,000 |
|
|
100.0 |
% |
|
|
$ |
17.10 |
|
|
24
Haynes encountered liquidity difficulties throughout fiscal 2003 and the first half of fiscal 2004 due to concurrent down cycles in our largest markets, rising raw material and energy costs, and debt service obligations. We could not generate sufficient cash to both satisfy our debt service obligations and fund our operations. On March 29, 2004, Haynes and certain of its U.S. affiliates and subsidiaries as of that date filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code (11 U.S.C. § 101 et seq .). 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 our 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 our common stock were cancelled, and 10.0 million new shares of our common stock, were issued in connection with our emergence from bankruptcy. Under the terms of the plan of reorganization, each former holder of our 11 5 ¤ 8 % senior notes due September 1, 2004 received its pro rata share of 9.6 million shares of our new common stock in full satisfaction of all of our 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 our 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 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. Further detail concerning the treatment of claims under the plan of reorganization may be obtained through a review of the terms of the plan of reorganization which is filed as an exhibit to the registration statement of which this prospectus is a part.
Accounting impact of the reorganization
Upon implementation of the plan of reorganization, Haynes adopted fresh start reporting in accordance with AICPA Statement of Position 90-7, or SOP 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code , because holders of shares of the common stock of Haynes Holdings, Inc., the former parent of Haynes, immediately prior to confirmation of the plan of reorganization received less than 50% of the shares of our new common stock issued upon emergence from bankruptcy and the reorganization value upon emergence was less than our post-petition liabilities and allowed claims. Under fresh start reporting, the reorganization value was allocated to our net assets based on their relative fair values in a manner similar to the accounting provisions applied to business combinations under Statement of Financial Accounting Standards No. 141, Business Combinations . Our reorganization value was determined based on consideration of numerous factors and various valuation methodologies, including discounted cash flows, believed by management and our financial advisors to be representative of our business and industry. Information regarding the determination of the reorganization value and application of fresh start reporting is included in Note 1 to the consolidated financial statements included elsewhere in this prospectus. As a result of the plan of reorganization and adoption of fresh start reporting, our consolidated balance sheet as of September 30, 2004 is not comparable to our historical balance sheets as of any date prior to September 1, 2004 and our results of operations after August 31, 2004 are not comparable to our results of operations for periods prior to September 1, 2004. For more information see Managements discussion and analysis of financial condition and results of operationPro forma financial information.
25
Selected consolidated financial and other data
Set forth below is selected consolidated financial and other data. This data should be read in conjunction with the consolidated financial statements and related notes thereto and Managements discussion and analysis of financial condition and results of operations included elsewhere in this prospectus.
On March 29, 2004, we and certain of our U.S. subsidiaries and U.S. affiliates as of that date filed for bankruptcy protection. Our plan of reorganization was confirmed by order of the Bankruptcy Court on August 16, 2004 and became effective on August 31, 2004. Our historical consolidated financial statements included elsewhere in this prospectus 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 our plan of reorganization, we began operating our business under a new capital structure, and we adopted fresh start reporting for our financial statements. Because of the emergence from bankruptcy and adoption of fresh start reporting, our historical financial information for periods prior to August 31, 2004 is not comparable to our financial information for periods after August 31, 2004. See The reorganization.
The selected historical consolidated financial data as of and for the years ended September 30, 2005 and 2006, as of September 30, 2004 and for the period September 1, 2004 through September 30, 2004 is derived from the audited consolidated financial statements of our company after giving effect to the adoption of fresh start reporting (successor Haynes International, Inc.). The selected historical consolidated financial data for the period October 1, 2003 through August 31, 2004, and as of and for the years ended September 30, 2002 and 2003 is derived from the audited consolidated financial statements of our company prior to the adoption of fresh start reporting (predecessor Haynes International, Inc.). The summary historical consolidated financial data as of and for the three months ended December 31, 2005 and 2006 have been derived from financial statements that are not audited but, in managements opinion, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations as of such dates and for such periods. The results of operations for the interim periods presented are not necessarily indicative of the results to be obtained for a full year.
26
|
|
Predecessor |
|
|
|
Successor |
|
||||||||||||||||||||
(in thousands, except average
|
|
Year ended
|
|
Eleven
|
|
|
|
One month
|
|
Year ended September 30, |
|
Three months ended
|
|
||||||||||||||
per share information) |
|
2002(1) |
|
2003(1) |
|
2004 |
|
|
|
2004(2) |
|
2005(2) |
|
2006(2) |
|
2005(2) |
|
2006(2) |
|
||||||||
Statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Net revenues |
|
$ |
225,942 |
|
$ |
178,129 |
|
$ |
209,103 |
|
|
|
$ |
24,391 |
|
$ |
324,989 |
|
$ |
434,405 |
|
$ |
94,407 |
|
$ |
120,463 |
|
Cost of sales(3) |
|
175,572 |
|
150,478 |
|
171,652 |
|
|
|
26,136 |
|
288,669 |
|
325,573 |
|
77,095 |
|
86,842 |
|
||||||||
Selling, general and administrative expense(4) |
|
24,628 |
|
24,411 |
|
24,038 |
|
|
|
2,658 |
|
32,963 |
|
40,296 |
|
9,391 |
|
9,420 |
|
||||||||
Research and technical expense |
|
3,697 |
|
2,747 |
|
2,286 |
|
|
|
226 |
|
2,621 |
|
2,659 |
|
668 |
|
697 |
|
||||||||
Restructuring and other charges(5) |
|
|
|
|
|
4,027 |
|
|
|
429 |
|
628 |
|
|
|
|
|
|
|
||||||||
Operating income (loss) |
|
22,045 |
|
493 |
|
7,100 |
|
|
|
(5,058 |
) |
108 |
|
65,877 |
|
7,253 |
|
23,504 |
|
||||||||
Interest expense, net |
|
20,441 |
|
19,661 |
|
13,929 |
|
|
|
348 |
|
6,353 |
|
8,024 |
|
1,789 |
|
1,919 |
|
||||||||
Reorganization items(6) |
|
|
|
|
|
(177,653 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Net income (loss)(7) |
|
927 |
|
(72,255 |
) |
170,734 |
|
|
|
(3,646 |
) |
(4,134 |
) |
35,540 |
|
$ |
3,333 |
|
$ |
13,184 |
|
||||||
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Basic |
|
$ |
9,270 |
|
$ |
(722,550 |
) |
$ |
1,707,340 |
|
|
|
$ |
(0.36 |
) |
$ |
(0.41 |
) |
$ |
3.55 |
|
$ |
0.33 |
|
$ |
1.32 |
|
Diluted |
|
$ |
9,270 |
|
$ |
(722,550 |
) |
$ |
1,707,340 |
|
|
|
$ |
(0.36 |
) |
$ |
(0.41 |
) |
$ |
3.46 |
|
$ |
0.33 |
|
$ |
1.27 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Basic |
|
100 |
|
100 |
|
100 |
|
|
|
10,000,000 |
|
10,000,000 |
|
10,000,000 |
|
10,000,000 |
|
10,000,000 |
|
||||||||
Diluted |
|
100 |
|
100 |
|
100 |
|
|
|
10,000,000 |
|
10,000,000 |
|
10,270,642 |
|
10,163,993 |
|
10,398,994 |
|
||||||||
Other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Capital expenditures |
|
$ |
6,032 |
|
$ |
3,638 |
|
$ |
4,782 |
|
|
|
$ |
637 |
|
$ |
9,029 |
|
$ |
10,668 |
|
$ |
2,428 |
|
$ |
3,139 |
|
Average nickel price per pound (end of period)(8) |
|
$ |
3.02 |
|
$ |
4.52 |
|
$ |
6.21 |
|
|
|
$ |
6.02 |
|
$ |
6.45 |
|
$ |
13.67 |
|
$ |
6.09 |
|
$ |
15.68 |
|
|
|
Predecessor |
|
|
|
Successor |
|
|||||||||||||||
|
|
September 30, |
|
|
|
September 30, |
|
December 31, |
|
|||||||||||||
(in thousands) |
|
2002(1) |
|
2003(1) |
|
|
|
2004(2) |
|
2005(2) |
|
2006(2) |
|
2006(2) |
|
|||||||
Balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Working capital (deficit) |
|
$ |
49,424 |
|
$ |
(99,901 |
) |
|
|
$ |
61,826 |
|
$ |
59,494 |
|
$ |
101,864 |
|
|
$ |
161,075 |
|
Property, plant and equipment, net |
|
42,721 |
|
40,229 |
|
|
|
80,035 |
|
85,125 |
|
88,921 |
|
|
90,389 |
|
||||||
Total assets |
|
230,513 |
|
180,115 |
|
|
|
360,758 |
|
387,122 |
|
445,860 |
|
|
471,364 |
|
||||||
Total debt |
|
189,685 |
|
201,007 |
|
|
|
85,993 |
|
106,383 |
|
120,043 |
|
|
68,927 |
|
||||||
Accrued pension and postretirement benefits(9) |
|
121,717 |
|
127,767 |
|
|
|
120,019 |
|
122,976 |
|
126,488 |
|
|
126,478 |
|
||||||
Stockholders equity (deficiency) |
|
(101,973 |
) |
(172,858 |
) |
|
|
115,576 |
|
111,869 |
|
151,548 |
|
|
166,798 |
|
||||||
(in millions) |
|
2002 |
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
||||||
Backlog at fiscal quarter ended(10): |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
December 31 |
|
$ |
88.0 |
|
$ |
49.0 |
|
$ |
54.7 |
|
$ |
110.9 |
|
$ |
203.5 |
|
$ |
207.4 |
|
March 31 |
|
77.2 |
|
53.6 |
|
69.6 |
|
134.8 |
|
207.4 |
|
|
|
||||||
June 30 |
|
63.9 |
|
54.5 |
|
82.6 |
|
159.2 |
|
200.8 |
|
|
|
||||||
September 30 |
|
52.5 |
|
50.6 |
|
93.5 |
|
188.4 |
|
206.9 |
|
|
|
||||||
(1) Restated . Effective October 1, 2003, Haynes changed its inventory costing method from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. In accordance with generally accepted accounting principles, the change has been applied by restating the 2002 and 2003 consolidated financial data.
27
(2) As of August 31, 2004, the effective date of our plan of reorganization, Haynes adopted fresh start reporting for its consolidated financial statements. Because of the emergence from bankruptcy and adoption of fresh start reporting, the historical financial information for periods after August 31, 2004 is not comparable to periods before September 1, 2004. See The reorganization and Managements discussion and analysis of financial condition and results of operationsPro forma financial information.
(3) As part of fresh start reporting, inventory was increased by approximately $30,497 to reflect its fair value at August 31, 2004. The fair value adjustment was recognized ratably in cost of sales as inventory was sold and was fully recognized by the end of the second quarter of fiscal 2005. Cost of sales for the one month ended September 30, 2004 and the years ended September 30, 2005 and 2006 include non-cash charges of $5,083, $25,414 and $0, respectively, for this fair value adjustment. Also, as part of fresh start reporting, machinery and equipment, buildings and patents were increased by $49,436 to reflect fair value at August 31, 2004. The majority of these values have been recognized, commencing in 2004 and will continue to be recognized in cost of sales over periods ranging from 2 to 14 years. Cost of sales for the one month ended September 30, 2004 and the years ended September 30, 2005 and 2006 include $403, $4,788 and $4,802, respectively, for this fair value adjustment. In the first quarter of fiscal 2007, fresh start charges increased cost of sales by $1.0 million versus $1.2 million for the same period in fiscal 2006.
(4) In fiscal 2003, $676 of terminated acquisition costs were accounted for as selling, general and administrative expense related to a potential acquisition that we did not pursue.
(5) Consists primarily of professional fees and credit facility fees related to the restructuring and refinancing activities.
(6) During fiscal 2004, Haynes recognized approximately $177,653 in reorganization items of which approximately $7,298 were expenses relating to professional fees, amendment fees, travel expenses, directors fees, write offs of bond discount and debt issuance costs, and other expenses, and approximately $184,951 was income relating to the gain on cancellation of 11 5 ¤ 8 % senior notes due September 1, 2004 and fresh start reporting adjustments as a result of the reorganization. See Note 8 to the consolidated financial statements included elsewhere in this prospectus for more information.
(7) Reflects a valuation allowance of approximately $60,307 recorded at September 30, 2003 on our U.S. net deferred tax assets as a result of our determination that, as of that date, it was more likely than not that certain future tax benefits would not be realized. See Note 6 to the consolidated financial statements included elsewhere in this prospectus for more information.
(8) Represents the average price for a cash buyer as reported by the London Metals Exchange for the 30 days ending on the last day of the period presented.
(9) During March 2006, Haynes communicated to employees and plan participants a negative plan amendment that caps our 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 post-retirement benefit liability due to this plan amendment by $46,300, that will be amortized as a reduction to expense over an eight-year period. This amortization period began in April 2006, reducing the amount of expense recognized for the second half of fiscal 2006 and the respective future periods.
(10) We define backlog to include firm commitments from customers for delivery of product at established prices. Approximately 30% of the orders in our backlog at any given time include prices that are subject to adjustment based on changes in raw material costs. Historically, approximately 75% of our backlog orders have shipped within six months and approximately 90% have shipped within 12 months. The backlog figures do not reflect that portion of our business conducted at our service and sales centers on a spot or just-in-time basis.
28
Managements discussion and analysis of financial condition and results of operations
Reorganization and presentation of financial results
On March 29, 2004, Haynes and its U.S. subsidiaries and U.S. affiliates as of that date filed voluntary petitions for reorganization relief under Chapter 11 of the U.S. Bankruptcy Code. Haynes emerged from bankruptcy on August 31, 2004 pursuant to a plan of reorganization. Our historical results for the period from October 1, 2003 through August 31, 2004 (the predecessor company) are being presented along with our financial results from September 1, 2004 through September 30, 2004, full years of fiscal 2005 and fiscal 2006 and the first quarter of fiscal 2007 (the successor company). As of August 31, 2004, the effective date of the plan of reorganization, the successor company began operating under a new capital structure and adopted fresh start reporting for its financial statements. Because of our emergence from bankruptcy and adoption of fresh start reporting, the predecessor companys historical financial information for periods prior to August 31, 2004 is not comparable to the successor companys financial information for periods after August 31, 2004. For more information see The reorganization and Impact of fresh start reporting on cost of sales.
Pro forma financial information
The following unaudited pro forma consolidated statement of operations for the year ended September 30, 2004 is derived from the application of pro forma adjustments to the historical statement of operations of the predecessor Haynes International, Inc. for the period October 1, 2003 to August 31, 2004 as if the effective date of the plan of reorganization were October 1, 2003. The pro forma combined statement of operations for the year ended September 30, 2004 includes the historical results of operations of the successor Haynes International, Inc. for the period September 1, 2004 to September 30, 2004, combined with the pro forma results of operations of the predecessor Haynes International, Inc. for the period October 1, 2003 to August 31, 2004. The pro forma statement of operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this prospectus.
29
The pro forma adjustments are described in the notes to the pro forma statement of operations and are based on available information and assumptions that we believe are reasonable. The pro forma statement of operations is not necessarily indicative of the future results of operations of the successor Haynes International, Inc. or results of operations of the successor Haynes International, Inc. that would have actually occurred had the plan of reorganization been consummated as of October 1, 2003.
|
|
Predecessor |
|
|
|
Successor |
|
|
|
Successor |
|
|||||
(in thousands, except share
|
|
Period
|
|
|
|
Period
|
|
Pro forma |
|
Pro forma
|
|
|||||
|
|
2004 |
|
|
|
2004 |
|
adjustments(1) |
|
2004 |
|
|||||
Statement of operations: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net revenues |
|
$ |
209,103 |
|
|
|
$ |
24,391 |
|
|
$ |
|
|
$ |
233,494 |
|
Cost of sales(2) |
|
171,652 |
|
|
|
26,136 |
|
|
4,433 |
|
202,221 |
|
||||
Selling, general and administrative expense(3) |
|
24,038 |
|
|
|
2,658 |
|
|
1,356 |
|
28,052 |
|
||||
Research and technical expense |
|
2,286 |
|
|
|
226 |
|
|
|
|
2,512 |
|
||||
Restructuring and other charges |
|
4,027 |
|
|
|
429 |
|
|
|
|
4,456 |
|
||||
Operating income (loss) |
|
7,100 |
|
|
|
(5,058 |
) |
|
(5,789 |
) |
(3,747 |
) |
||||
Interest expense(4) |
|
13,964 |
|
|
|
354 |
|
|
(9,363 |
) |
4,955 |
|
||||
Interest income |
|
(35 |
) |
|
|
(6 |
) |
|
|
|
(41 |
) |
||||
Income (loss) before reorganization items and income taxes |
|
(6,829 |
) |
|
|
(5,406 |
) |
|
3,574 |
|
(8,661 |
) |
||||
Reorganization items(5) |
|
177,653 |
|
|
|
|
|
|
(177,653 |
) |
|
|
||||
Income (loss) before income taxes |
|
170,824 |
|
|
|
(5,406 |
) |
|
(174,079 |
) |
(8,661 |
) |
||||
Provision for (benefit from) income taxes(6) |
|
90 |
|
|
|
(1,760 |
) |
|
(1,621 |
) |
(3,291 |
) |
||||
Net income (loss) |
|
$ |
170,734 |
|
|
|
$ |
(3,646 |
) |
|
$ |
(172,458 |
) |
$ |
(5,370 |
) |
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
1,707,340 |
|
|
|
$ |
(0.36 |
) |
|
|
|
$ |
(0.54 |
) |
|
Diluted |
|
$ |
1,707,340 |
|
|
|
$ |
(0.36 |
) |
|
|
|
$ |
(0.54 |
) |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
100 |
|
|
|
10,000,000 |
|
|
|
|
10,000,000 |
|
||||
Diluted |
|
100 |
|
|
|
10,000,000 |
|
|
|
|
10,000,000 |
|
(1) The pro forma adjustments do not include the non-recurring charge to expense of the flow through fair value adjustment to inventory of $25,415. The effect of this adjustment was included in cost of sales during the first five months of fiscal 2005.
(2) To reflect the net change in historical cost of sales of the predecessor company resulting from the application of fresh start reporting. Change is due to an increase in historical depreciation expense of $239 per month for a period of eleven months and the addition of patent amortization expense of $164 per month for a period of eleven months. Each of these adjustments was calculated using the new basis of accounting result from the adoption of fresh start reporting.
(3) To reflect compensation expense for the stock options granted by the successor company of $123 per month for a period of eleven months.
(4) To reflect the elimination of interest expense on the $140,000 11 ⅝ % senior notes due September 1, 2004 of $9,363.
(5) To eliminate reorganization items.
(6) To reflect the net change between the historical income tax benefit and the expected income tax benefit on the pro forma operations in order to achieve our expected effective tax rate of 38%.
30
The global specialty 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, Haynes competes exclusively in the high-performance nickel- and cobalt-based alloy sector, which includes high temperature resistant alloys, or HTA products, and corrosion resistant alloys, or CRA products. HTA and CRA products accounted for 75% and 25%, respectively, of our net revenues in fiscal 2005, and 68% and 32%, respectively, of our net revenues in fiscal 2006 (in each case excluding stainless steel wire). Based on available industry data, we believe that we are one of four principal producers of high-performance alloys in flat product form, which includes sheet, coil and plate forms. Flat products accounted for 72% of shipment pounds and 69% of net revenues in fiscal 2005, and 69% of shipment pounds and 67% of net revenues in fiscal 2006. We also produce our alloys as seamless and welded tubulars, and in bar, billet and wire forms. On an historical basis, flat products have accounted for a majority of our net revenues, and are anticipated to continue to do so on a prospective basis.
We sell our products primarily through our direct sales organization, which includes 11 service and/or sales centers in the United States, Europe, Asia and India. All of these centers are company-operated. During fiscal 2005, we opened our service and sales center in China and our sales center in India. Our direct sales organization generated approximately 81% and 82% of our net revenues in fiscal 2005 and fiscal 2006, respectively. The remaining 19% and 18% of our net revenues in fiscal 2005 and fiscal 2006, respectively, were generated by a network of independent distributors and sales agents who supplement our direct sales efforts in all markets, some of whom have been associated with Haynes for over 30 years. We are currently in the process of evaluating the efficiency of some of our overseas distribution channels, including the appropriate number of distributors, the types of products sold through third party distributors and the distribution partners. On a prospective basis, we expect our direct sales force to continue to generate approximately 80% of total sales. This percentage may increase, however, as we open new service and sales centers.
Our net revenues and net income in fiscal 2005 and fiscal 2006 were generated primarily by our United States operations. Sales to domestic customers comprised approximately 61% of our net revenues in both of these fiscal years. In addition, the majority of our operating costs are incurred in the United States, as all of our manufacturing facilities are located in the United States. Although we expect our international sales to increase as we pursue our business strategy, for the foreseeable future, our net revenues and net income will continue to be highly dependent on our domestic sales and manufacturing facilities in the United States.
Sales to customers outside the United States represented approximately 39% of our net revenues in both fiscal 2005 and fiscal 2006. It is anticipated that sales to customers outside of the United States will continue to grow with our addition of foreign service and sales centers. Although no data is available, we believe a portion of the material that is sold to domestic 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 58%
31
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 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. Our current average lead times from order to shipment for mill-produced products, depending on product form, are approximately 10 to 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.
The following table includes a breakdown of net revenues, shipments and average selling prices to the markets served by Haynes for the periods shown.
Aerospace |
|
$ |
92.8 |
|
|
41.1 |
% |
$ |
80.3 |
|
|
45.1 |
% |
$ |
98.1 |
|
|
42.0 |
% |
$ |
126.1 |
|
|
38.8 |
% |
$ |
165.8 |
|
|
38.2 |
% |
$ |
43.8 |
|
|
36.3 |
% |
Chemical processing |
|
45.8 |
|
|
20.3 |
|
44.6 |
|
|
25.0 |
|
61.4 |
|
|
26.3 |
|
76.2 |
|
|
23.5 |
|
129.4 |
|
|
29.8 |
|
38.8 |
|
|
32.2 |
|
||||||
Land-based gas turbines |
|
52.6 |
|
|
23.3 |
|
26.7 |
|
|
15.0 |
|
41.1 |
|
|
17.6 |
|
67.1 |
|
|
20.6 |
|
77.9 |
|
|
17.9 |
|
20.1 |
|
|
16.7 |
|
||||||
Other markets |
|
32.1 |
|
|
14.1 |
|
25.5 |
|
|
14.3 |
|
31.1 |
|
|
13.3 |
|
53.2 |
|
|
16.4 |
|
56.4 |
|
|
13.0 |
|
15.7 |
|
|
13.1 |
|
||||||
Total product |
|
223.3 |
|
|
98.8 |
|
177.1 |
|
|
99.4 |
|
231.7 |
|
|
99.2 |
|
322.6 |
|
|
99.3 |
|
429.5 |
|
|
98.9 |
|
118.4 |
|
|
98.3 |
|
||||||
Other revenue (2) |
|
2.6 |
|
|
1.2 |
|
1.0 |
|
|
0.6 |
|
1.8 |
|
|
0.8 |
|
2.4 |
|
|
0.7 |
|
4.9 |
|
|
1.1 |
|
2.1 |
|
|
1.7 |
|
||||||
Net revenues |
|
$ |
225.9 |
|
|
100.0 |
% |
$ |
178.1 |
|
|
100.0 |
% |
$ |
233.5 |
|
|
100.0 |
% |
$ |
325.0 |
|
|
100.0 |
% |
$ |
434.4 |
|
|
100.0 |
% |
$ |
120.5 |
|
|
100.0 |
% |
U.S. |
|
$ |
142.4 |
|
|
63.0 |
% |
$ |
103.6 |
|
|
58.2 |
% |
$ |
143.3 |
|
|
61.4 |
% |
$ |
196.5 |
|
|
60.5 |
% |
$ |
265.1 |
|
|
61.0 |
% |
$ |
77.5 |
|
|
64.3 |
% |
Foreign |
|
$ |
83.5 |
|
|
37.0 |
% |
$ |
74.5 |
|
|
41.8 |
% |
$ |
90.2 |
|
|
38.6 |
% |
$ |
128.5 |
|
|
39.5 |
% |
$ |
169.3 |
|
|
39.0 |
% |
$ |
43.0 |
|
|
35.7 |
% |
Shipments by market (millions of pounds): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Aerospace |
|
5.4 |
|
|
32.9 |
% |
4.7 |
|
|
37.6 |
% |
5.5 |
|
|
36.7 |
% |
6.1 |
|
|
29.2 |
% |
7.1 |
|
|
32.9 |
% |
1.8 |
|
|
32.7 |
% |
||||||
Chemical processing |
|
3.8 |
|
|
23.2 |
|
3.9 |
|
|
31.2 |
|
4.2 |
|
|
28.0 |
|
3.8 |
|
|
18.2 |
|
5.0 |
|
|
23.1 |
|
1.5 |
|
|
27.3 |
|
||||||
Land-based gas turbines |
|
5.0 |
|
|
30.5 |
|
2.3 |
|
|
18.4 |
|
3.5 |
|
|
23.3 |
|
4.7 |
|
|
22.5 |
|
4.8 |
|
|
22.2 |
|
1.1 |
|
|
20.0 |
|
||||||
Other markets |
|
2.2 |
|
|
13.4 |
|
1.6 |
|
|
12.8 |
|
1.8 |
|
|
12.0 |
|
6.3 |
|
|
30.1 |
|
4.7 |
|
|
21.8 |
|
1.1 |
|
|
20.0 |
|
||||||
Total shipments |
|
16.4 |
|
|
100.0 |
% |
12.5 |
|
|
100.0 |
% |
15.0 |
|
|
100.0 |
% |
20.9 |
|
|
100.0 |
% |
21.6 |
|
|
100.0 |
% |
5.5 |
|
|
100.0 |
% |
||||||
Average selling price per pound: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Aerospace |
|
$ |
17.19 |
|
|
|
|
$ |
17.09 |
|
|
|
|
$ |
17.84 |
|
|
|
|
$ |
20.63 |
|
|
|
|
$ |
23.28 |
|
|
|
|
$ |
24.62 |
|
|
|
|
Chemical processing |
|
12.05 |
|
|
|
|
11.44 |
|
|
|
|
14.62 |
|
|
|
|
19.84 |
|
|
|
|
25.97 |
|
|
|
|
26.22 |
|
|
|
|
||||||
Land-based gas turbines |
|
10.52 |
|
|
|
|
11.61 |
|
|
|
|
11.74 |
|
|
|
|
14.25 |
|
|
|
|
16.27 |
|
|
|
|
17.55 |
|
|
|
|
||||||
Other markets(3) |
|
14.59 |
|
|
|
|
15.94 |
|
|
|
|
17.28 |
|
|
|
|
8.50 |
|
|
|
|
11.87 |
|
|
|
|
14.88 |
|
|
|
|
||||||
All markets(4) |
|
13.62 |
|
|
|
|
14.17 |
|
|
|
|
15.45 |
|
|
|
|
15.42 |
|
|
|
|
19.84 |
|
|
|
|
$ |
21.69 |
|
|
|
|
(1) This information was derived from and should be read in conjunction with the information under Pro forma financial information.
(2) Other revenue consists of toll conversion, royalty income, and scrap sales.
(3) During fiscal 2005 and 2006, the Other markets category includes $15.8 million and $15.1 million in revenue, respectively, and 4.8 million pounds and 3.2 million pounds, respectively, of stainless steel wire as a result of our November 2004 acquisition of assets of Branford Wire. During the three month period ended December 31, 2006 stainless steel wire represented $4.2 million in revenue and 0.9 million pounds.
(4) Average selling price per pound excludes Other revenue. If Other revenue were included, the total average selling price per pound for all markets would be $15.53 for fiscal 2005, $20.07 for fiscal 2006 and $22.08 for the three months ended December 31, 2006.
32
Aerospace . Demand for our products in the aerospace market is largely driven by orders for new jet engines, as well as requirements for spare parts and replacement parts for jet engines. Haynes experienced strong growth in the late 1990s through fiscal 2001 due to the aerospace demand cycle. As a result of increased new aircraft production during this cycle and maintenance requirements, our net revenues from sales to the aerospace supply chain peaked in fiscal 2001. Our sales to the aerospace market declined throughout fiscal 2002 and fiscal 2003, but started to improve with the turn-around of the aerospace cycle in late fiscal 2003. The improvement continued through fiscal 2006. Excluding any catastrophic economic or political events, based on forecasted engine and airframe build schedules, we believe that the aerospace market should remain strong through fiscal 2007. We view the maintenance, repair and overhaul (or MRO) business as an area of future growth, and expect the number of engines in service to increase in the next ten to twenty years.
Net revenues to the aerospace market in fiscal 2006 increased by 31.5% from fiscal 2005 as commercial aircraft production by the major manufacturers continued to increase from the prior year, resulting in improvements in aircraft orders and aircraft maintenance requirements. Due to these improved market conditions there was a 16.6% increase in the number of pounds shipped in this market and a 12.8% increase in the average selling price per pound, which also reflects generally improved product pricing as a result of changes in product mix and higher raw material costs.
Chemical processing. Growth in the chemical processing market tends to track overall economic activity. Demand for our 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. We believe that the basic elements that drive the use of our products in the chemical processing market are still present, but the focus for new plant construction will be in Asia, while maintenance and debottlenecking projects to avoid capital expansion will be the trend in Europe and North America. Concerns regarding the reliability of chemical processing facilities, their potential impact on the environment and the safety of their personnel, as well as the need for higher chemical throughput, should support future demand for more sophisticated alloys, such as our specialty and proprietary CRA products. Our key proprietary CRA products, including HASTELLOY C-2000, which we believe provides better overall corrosion resistance and versatility than any other readily available CRA product, HASTELLOY B-3, HASTELLOY G-35 and HASTELLOY C-22, are expected to contribute to improving activity in this market.
Net revenues from the chemical processing market in fiscal 2003 represented our lowest levels in the previous five fiscal years. Net revenues from this market have increased steadily since fiscal 2003. In fiscal 2006, our net revenues in the chemical processing market increased by 69.7% from those in fiscal 2005. In fiscal 2006, the number of pounds shipped to customers in the chemical processing market increased 29.7% as compared to fiscal 2005, primarily as a result of improved market conditions. Average selling price per pound in this market increased 30.9% compared to fiscal 2005, due primarily to an improved product mix which included a higher percentage of proprietary alloys and the effect of higher raw material costs.
Land-based gas turbines. We have leveraged our metallurgical expertise to develop land-based gas turbine applications for alloys we have historically sold to the aerospace market. Land-based gas turbines are favored in electric generating facilities due to low capital cost at installation, low cycle installation time, flexibility in use of alternative fuels, and fewer SO2 emissions than
33
traditional fossil fuel-fired facilities. In addition to power generation, land-based gas turbines are required as mechanical drivers primarily for production and transportation of oil and gas, as well as emerging applications in commercial marine propulsion and micro turbines for standby or emergency power systems. We believe these factors have historically been primarily responsible for creating demand for our products in the land-based gas turbine market.
We believe growth in this market will continue as long as global demand for increase in power generation capacity remains strong. With the opening of sales centers in China and India in fiscal 2005, we believe we are well-positioned to take advantage of the growth in those areas of demand for power generation.
Prior to the enactment of the Clean Air Act, land-based gas turbines were used primarily to satisfy peak power requirements. We believe that land-based gas turbines are a clean, low-cost alternative to fossil fuel-fired electric generating facilities. In the early 1990s when Phase I of the Clean Air Act was being implemented, selection of land-based gas turbines to satisfy electric utilities demand helped to establish this power source. We believe that the mandated Phase II of the Clean Air Act and certain advantages of land-based gas turbines compared to coal-fired generating plants will further contribute to demand for our products over the next three to five years.
Beginning in fiscal 2002, there was a decline in the land-based gas turbine market as a result of both the general economic slowdown and the energy crisis precipitated by the Enron bankruptcy. In that year, land-based gas turbine projects which were in progress were completed; however, projects not yet started were put on hold and new projects were not initiated. Since that time, there has been a significant improvement in the market. Specifically, starting in the last half of fiscal 2003, several projects put on hold were restarted and new projects were initiated, which contributed to the significantly improved performance in this market beginning in fiscal 2004. In fiscal 2006, shipments of our products to the land-based gas turbine market increased from those in fiscal 2005 due to a continued increase in demand for maintenance and repair parts for gas turbines. Net revenues from products sold to the land-based gas turbine market increased 16.2% in fiscal 2006 as compared to fiscal 2005, due to a 1.8% increase in the number of pounds shipped and a 14.2% increase in average selling price per pound which reflects generally improved product pricing as a result of market demand, increasing levels of maintenance and repair business and higher raw material costs.
Other markets and other revenues. In addition to the markets described above, we also target a variety of other markets. Representative markets served in fiscal 2006 include flue gas desulphurization (FGD), waste incineration, industrial heat-treating, automotive, medical, and oil and gas. The Clean Air Act and comparable legislation in Europe and Asia, which create regulatory imperatives requiring the reduction of sulfur emissions, are the primary factor in determining the demand for high-performance alloys in the FGD market. The automotive and industrial heat-treating markets are highly cyclical and very competitive. Opportunities continue to exist, however, in the automotive market due to new safety-related technology, higher operating temperatures, engine control systems, and emission control systems. Also, increasing requirements for improved materials performance in industrial heating are expected to increase demand for our products. Our participation in the oil and gas market consists primarily of providing tubular goods for sour gas production.
34
Waste incineration presents opportunities for the use of our alloys to reduce the use of landfill space and to respond to government concerns over land disposal of waste, pollution, chemical weapon stockpiles, and chemical and nuclear waste handling. 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 of our products.
In connection with our acquisition of assets of Branford Wire in the first quarter of fiscal 2005, we acquired a facility that manufactured both stainless steel wire and high-performance alloy wire. We continue to produce stainless steel wire at the Branford facility. The high-performance alloy wire produced 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. Our strategy is to reduce production of stainless steel wire and increase production of high-performance alloy wire due to higher margins obtained from high-performance alloy wire. During fiscal 2006, this category included $15.1 million of net revenue, which represented 3.2 million pounds of stainless steel wire product, as a result of the Branford Wire acquisition, as compared to $15.8 million of net revenue and 4.7 million pounds of stainless steel wire product in fiscal 2005.
In fiscal 2006, net revenues from products sold in the Other Markets category increased by 5.9% when compared to fiscal 2005, primarily as a result of improving market demand and passing through higher raw material and energy costs.
In fiscal 2006, net revenues from our products in the Other Revenues category increased by 104.2% when compared to those in fiscal 2005 primarily due to toll conversion income and scrap sales.
Impact of fresh start reporting on cost of sales
Upon implementation of the plan of reorganization, we adopted fresh start reporting in accordance with SOP 90-7. Under fresh start reporting, the reorganization value is allocated to our 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).
Our operating income was reduced by the recognition of the fair market value adjustments to our assets required by the adoption of fresh start reporting. Cost of sales included $5.5 million, $30.2 million and $4.8 million of these costs in the one month period ended September 30, 2004 and the years ended September 30, 2005 and 2006, respectively. In the first quarter of fiscal 2007, fresh start charges increased cost of sales by $1.0 million versus $1.2 million for the same period in fiscal 2006. See Notes 1 and 2 to the consolidated financial statements included elsewhere in this prospectus for more information.
35
The fair market value adjustments to the historical basis of assets are being recognized as follows (dollars in thousands):
|
|
Fair value
|
|
Recognition
|
|
Expense
|
|
Expense
|
|
Expense
|
|
Expense
|
|
Expense
|
|
||||||||||||||||||
Goodwill(2)(3) |
|
|
$ |
42,265 |
|
|
N/A |
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
Inventory(4) |
|
|
30,497 |
|
|
6 months |
|
|
5,083 |
|
|
|
25,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Machinery and equipment |
|
|
41,628 |
|
|
14 years |
|
|
245 |
|
|
|
2,974 |
|
|
|
3,124 |
|
|
|
743 |
|
|
|
740 |
|
|
||||||
Buildings |
|
|
(859 |
) |
|
12 years |
|
|
(6 |
) |
|
|
(72 |
) |
|
|
(72 |
) |
|
|
(18 |
) |
|
|
(18 |
) |
|
||||||
Land |
|
|
41 |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Trademarks(3) |
|
|
3,800 |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Patents |
|
|
8,667 |
|
|
2 to 14 years |
|
|
164 |
|
|
|
1,886 |
|
|
|
1,750 |
|
|
|
438 |
|
|
|
228 |
|
|
||||||
|
|
|
|
|
|
|
|
|
$ |
5,486 |
|
|
|
$ |
30,202 |
|
|
|
$ |
4,802 |
|
|
|
$ |
1,163 |
|
|
|
$ |
950 |
|
|
(1) Non-cash expenses for inventory, machinery and equipment, buildings and patents are reflected in cost of goods sold.
(2) Goodwill increased by $1,912 due to the finalization of pre-emergence tax returns, which affected net operating loss carry forwards.
(3) Under applicable accounting rules, goodwill and trademarks are not amortized but are assessed to determine impairment at least annually.
(4) Recognition period represents estimated length of time for one complete inventory turn.
36
The following table is presented for comparative purposes.
|
|
Predecessor |
|
|
|
Successor |
|
|||||||||||||||||||
(in thousands, except
|
|
|
|
|
|
One month
|
|
Pro forma
|
|
Year ended September 30, |
|
Three months ended
|
|
|||||||||||||
per share information) |
|
2004 |
|
|
|
2004(1) |
|
2004(2) |
|
2005(1) |
|
2006(1) |
|
2005(1) |
|
2006(1) |
|
|||||||||
Statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Net revenues |
|
$ |
209,103 |
|
|
|
|
$ |
24,391 |
|
|
$ |
233,494 |
|
$ |
324,989 |
|
$ |
434,405 |
|
$ |
94,407 |
|
$ |
120,463 |
|
Cost of sales(3) |
|
171,652 |
|
|
|
|
26,136 |
|
|
202,221 |
|
288,669 |
|
325,573 |
|
77,095 |
|
86,842 |
|
|||||||
Selling, general and administrative expense |
|
24,038 |
|
|
|
|
2,658 |
|
|
28,052 |
|
32,963 |
|
40,296 |
|
9,391 |
|
9,420 |
|
|||||||
Research and technical expense |
|
2,286 |
|
|
|
|
226 |
|
|
2,512 |
|
2,621 |
|
2,659 |
|
668 |
|
697 |
|
|||||||
Restructuring and other charges(4) |
|
4,027 |
|
|
|
|
429 |
|
|
4,456 |
|
628 |
|
|
|
|
|
|
|
|||||||
Operating income (loss) |
|
7,100 |
|
|
|
|
(5,058 |
) |
|
(3,747 |
) |
108 |
|
65,877 |
|
7,253 |
|
23,504 |
|
|||||||
Interest expense, net |
|
13,929 |
|
|
|
|
348 |
|
|
4,914 |
|
6,353 |
|
8,024 |
|
1,788 |
|
1,809 |
|
|||||||
Reorganization items(5) |
|
(177,653 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Provision (benefit) for income taxes |
|
90 |
|
|
|
|
(1,760 |
) |
|
(3,291 |
) |
(2,111 |
) |
22,313 |
|
2,132 |
|
8,511 |
|
|||||||
Net income (loss) |
|
$ |
170,734 |
|
|
|
|
$ |
(3,646 |
) |
|
$ |
(5,370 |
) |
$ |
(4,134 |
) |
$ |
35,540 |
|
$ |
3,333 |
|
$ |
13,184 |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Basic |
|
$ |
1,707,340 |
|
|
|
|
$ |
(0.36 |
) |
|
$ |
(0.54 |
) |
$ |
(0.41 |
) |
$ |
3.55 |
|
$ |
0.33 |
|
$ |
1.32 |
|
Diluted |
|
$ |
1,707,340 |
|
|
|
|
$ |
(0.36 |
) |
|
$ |
(0.54 |
) |
$ |
(0.41 |
) |
$ |
3.46 |
|
$ |
0.33 |
|
$ |
1.27 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Basic |
|
100 |
|
|
|
|
10,000,000 |
|
|
10,000,000 |
|
10,000,000 |
|
10,000,000 |
|
10,000,000 |
|
10,000,000 |
|
|||||||
Diluted |
|
100 |
|
|
|
|
10,000,000 |
|
|
10,000,000 |
|
10,000,000 |
|
10,270,642 |
|
10,163,993 |
|
10,398,994 |
|
(1) As of August 31, 2004, the effective date of the plan of reorganization, Haynes adopted fresh start reporting for its financial statements. Because of the emergence from bankruptcy and adoption of fresh start reporting, the historical financial information for periods after August 31, 2004 is not comparable to periods before September 1, 2004. For more information see The reorganization and Pro forma financial information.
(2) This information was derived from and should be read in conjunction with Pro forma financial information.
(3) As part of fresh start accounting, inventory was increased by approximately $30.5 million to reflect its fair value at August 31, 2004. The fair value adjustment was recognized ratably in cost of sales as inventory was sold and was fully recognized by the end of the second quarter of fiscal 2005. Cost of sales for the one-month period ended September 30, 2004 and the year ended September 30, 2005 include non-cash charges of $5.1 million and $25.4 million, respectively, for this fair value adjustment.
(4) Consists primarily of professional fees and credit facility fees related to the restructuring and refinancing activities.
(5) During fiscal 2004, Haynes recognized approximately $177.7 million in reorganization items of which approximately $7.3 million were expenses relating to professional fees, amendment fees, travel expenses, directors fees, write offs of bond discount and debt issuance costs, and other expenses, and approximately $185.0 million was income relating to the gain on cancellation of 11 5 ¤ 8 % senior notes due September 1, 2004 and fresh start reporting adjustments as a result of the reorganization. See Note 8 to the consolidated financial statements included elsewhere in this prospectus for more information.
37
The following table sets forth, for the periods indicated, consolidated statement of operations data as a percentage of net revenues:
|
|
Predecessor |
|
|
|
Successor |
|
|||||||||||||||||
|
|
Eleven
|
|
|
|
One
|
|
Pro forma
|
|
Year ended September 30, |
|
Three months ended
|
|
|||||||||||
|
|
2004 |
|
|
|
2004(1) |
|
2004(2) |
|
2005(1) |
|
2006(1) |
|
2005 (1) |
|
2006 (1) |
|
|||||||
Statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
100.0 |
% |
|
|
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
Cost of sales |
|
|
82.1 |
|
|
|
|
107.2 |
|
|
86.6 |
|
|
88.8 |
|
|
74.9 |
|
|
81.7 |
|
|
72.1 |
|
Selling, general and administrative expense |
|
|
11.5 |
|
|
|
|
10.9 |
|
|
12.0 |
|
|
10.1 |
|
|
9.3 |
|
|
9.9 |
|
|
7.8 |
|
Research and technical expense |
|
|
1.1 |
|
|
|
|
0.9 |
|
|
1.1 |
|
|
0.8 |
|
|
0.6 |
|
|
0.7 |
|
|
0.6 |
|
Restructuring and other charges |
|
|
1.9 |
|
|
|
|
1.7 |
|
|
1.9 |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
3.4 |
|
|
|
|
(20.7 |
) |
|
(1.6 |
) |
|
0.1 |
|
|
15.2 |
|
|
7.7 |
|
|
19.5 |
|
Interest expense, net |
|
|
6.7 |
|
|
|
|
1.5 |
|
|
2.1 |
|
|
2.0 |
|
|
1.8 |
|
|
1.9 |
|
|
1.5 |
|
Reorganization items |
|
|
(85.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes |
|
|
|
|
|
|
|
(7.2 |
) |
|
(1.4 |
) |
|
(0.6 |
) |
|
5.1 |
|
|
2.3 |
|
|
7.1 |
|
Net income (loss) |
|
|
81.7 |
% |
|
|
|
(15.0 |
)% |
|
(2.3 |
)% |
|
(1.3 |
)% |
|
8.3 |
% |
|
3.5 |
|
|
10.9 |
|
(1) As of August 31, 2004, the effective date of the plan of reorganization, Haynes adopted fresh start reporting for its financial statements. Because of the emergence from bankruptcy and adoption of fresh start reporting, the historical financial information for periods after August 31, 2004 is not comparable to periods before September 1, 2004. For more information see The reorganization and Pro forma financial information.
(2) This information was derived from and should be read in conjunction with Pro forma financial information.
Three months ended December 31, 2006 compared to three months ended December 31, 2005
Net revenues. Net revenues increased by $26.1 million, or 27.6%, to $120.5 million in the first quarter of fiscal 2007 from $94.4 million in the same period of fiscal 2006. Volume for all products increased by 7.8% to 5.5 million pounds in the first quarter of fiscal 2007 from 5.1 million pounds in the same period of fiscal 2006. Volume of high-performance alloys increased by 14.3% to 4.8 million pounds in the first quarter of fiscal 2007 from 4.2 million pounds in the same period of fiscal 2006. Volume of stainless steel wire decreased by 22.2% to 0.7 million pounds in the first quarter of fiscal 2007 from 0.9 million pounds in the same period of fiscal 2006 as a result of our strategy to reduce production of stainless steel wire and increase production of high-performance alloy wire due to the higher average selling price available on high-performance alloy wire. The average selling price per pound for all products increased by 18.3% to $22.08 per pound in the first quarter of fiscal 2007 from $18.66 per pound in the same period of fiscal 2006, due primarily to improved market demand and passing through higher raw material prices. Our consolidated backlog increased by $0.5 million, or 0.2%, to $207.4 million at December 31, 2006 from $206.9 million at September 30, 2006. Order entry increased by $9.4 million, or 8.9%, for the first quarter of fiscal 2007 from the same period of fiscal 2006. Management expects the demand for high-performance alloys to be positively driven by the
38
continuation of favorable trends in the aerospace, chemical processing (including new construction and maintenance) and land-based gas turbine markets.
Sales to the aerospace market increased by 12.6% to $43.8 million in the first quarter of fiscal 2007 from $38.9 million in the same period of fiscal 2006, due to a 17.6% increase in the average selling price per pound, which was partially offset by a 4.2% decrease in volume. The increase in the average selling price per pound is due to improved product mix and the effect of passing through higher raw material costs. Product mix has improved as a result of sales of a higher percentage of products and forms with a higher average selling price when compared to the same period of fiscal 2006, as a result of the generally improved economy. Volume has decreased due to a shift by aerospace fabricators away from large mill-direct orders towards smaller service and sales center orders. Management believes that this shift is a temporary response to fluctuating nickel prices by aerospace fabricators, because it is believed that aerospace fabricators have more flexibility in the purchasing of raw materials in the short-term compared to customers in our other end markets.
Sales to the chemical processing market increased by 41.1% to $38.8 million in the first quarter of fiscal 2007 from $27.5 million in the same period of fiscal 2006, due to a 2.9% increase in the average selling price per pound and a 36.9% increase in volume. The increase in the average selling price is due to improved market demand and the effect of passing through higher raw material costs. This increase was partially offset by a change in product mix, which reflects a higher percentage of lower average selling price products and forms as compared to the same period last year. Volume has improved due to the improved market demand, and particularly as a result of new chemical processing facilities in China.
Sales to the land-based gas turbine market increased by 36.7% to $20.1 million for the first quarter of fiscal 2007 from $14.7 million in the same period of fiscal 2006, due to an increase of 15.0% in the average selling price per pound and a 18.9% increase in volume. The increase in the average selling price is due to improved market demand and the effect of passing through higher raw material cost. Volume improved as a result of the generally improved economy, and higher demand for power generation, oil and gas production and alternative power systems applications.
Sales to other markets increased by 25.6% to $15.7 million in the first quarter of fiscal 2007 from $12.5 million in the same period of fiscal 2006, due to a 38.3% increase in average selling price per pound, which was partially offset by a 9.1% decrease in volume. The increase in average selling price is due to improved market demand for both high-performance alloys and stainless steel wire and passing through higher raw material costs. The primary reason for the reduction in total volume was a decrease in the volume of stainless steel wire as a result of our strategy to reduce production of stainless steel wire to allow greater production of high-performance alloy wire. Volume of stainless steel wire decreased by 22.0%, while volume of high-performance alloys increased 29.7% in the first quarter of fiscal 2007 as compared to the same period of fiscal 2006.
Other revenue. Other revenue increased by 157.9% to $2.1 million in the first quarter of fiscal 2007 from $0.8 million for the same period of fiscal 2006. The increase is due to higher activity in toll conversion, revenue recognized from the TIMET agreement of $0.3 million, scrap sales and miscellaneous sales.
39
Cost of sales. Cost of sales as a percentage of net revenues decreased to 72.1% in the first quarter of fiscal 2007 from 81.7% in the same period of fiscal 2006. The decrease in the percentage of cost of sales can be attributed to a combination of the following factors: (i) improved product pricing combined with an overall improvement in volume, which resulted in the increased absorption of fixed manufacturing costs, (ii) reductions in manufacturing cost resulting from the capital improvements program, and (iii) decreases in energy costs (primarily natural gas). These positive factors were partially offset by higher raw material costs. Higher raw material costs result from a significant increase in the cost of nickel, which makes up approximately 51% of our raw material costs. The average price for a cash buyer of nickel as reported by the London Metals Exchange for the 30 days ending December 31, 2006 was $15.68 compared to $6.09 for the 30 days ending December 31, 2005.
Selling, general and administrative expenses. Selling, general and administrative expenses remained flat at $9.4 million in the first quarter of fiscal 2007 and for the same period of fiscal 2006. Selling, general and administrative expenses as a percentage of net revenues decreased to 7.8% in the first quarter of fiscal 2007 compared to 9.9% for the same period of fiscal 2006 due primarily to the increased level of revenues combined with the successful efforts to control spending.
Research and technical expense. Research and technical expense remained flat at $0.7 million in the first quarter of fiscal 2007 and the same period of fiscal 2006.
Operating income. As a result of the above factors, operating income in the first quarter of fiscal 2007 was $23.5 million compared to $7.3 million in the same period of fiscal 2006.
Interest expense. Interest expense remained flat at $1.8 million in the first quarter of fiscal 2007 and for the same period of fiscal 2006. Although the average interest rate was higher in the first quarter of fiscal 2007 as compared to the same period in fiscal 2006, the higher interest rate was offset by a lower average balance outstanding.
Income taxes. Income tax expense increased to $8.5 million in the first quarter of fiscal 2007 from $2.1 million in the same period of fiscal 2006. The effective tax rate for the first quarter of fiscal 2007 was 39.2% compared to 39.0% in the same period of fiscal 2006. The slight increase in effective tax rate is primarily attributable to more taxable income in the United States at a higher tax rate as compared to foreign taxable income at a lower tax rate.
Net income. As a result of the above factors, net income increased by $9.9 million to $13.2 million in the first quarter of fiscal 2007 from $3.3 million in the same period of fiscal 2006.
Year ended September 30, 2006 compared to year ended September 30, 2005
Net revenues. Net revenues increased by $109.4 million, or 33.7%, to $434.4 million in fiscal 2006 from $325.0 million in fiscal 2005. Volume increased by 3.4% to 21.6 million pounds in fiscal 2006 from 20.9 million pounds in fiscal 2005. Volume of high-performance alloys increased by 12.9% to 18.4 million pounds in fiscal 2006 as compared to 16.3 million pounds in fiscal 2005. Volume of stainless steel wire decreased by 31.9% to 3.2 million pounds in fiscal 2006 as compared to 4.7 million pounds in fiscal 2005 as a result of our strategy to reduce production of stainless steel wire and increase production of high-performance alloy wire due to higher margins obtained from high-performance alloy wire. The average selling price per pound increased by 29.2% to $20.07 per pound in fiscal 2006 from $15.53 per pound in fiscal 2005 due primarily to improved market demand and passing through higher raw material prices. Our backlog increased by $18.5 million, or 9.8%, to $206.9 million at September 30, 2006 from $188.4 million at
40
September 30, 2005. We expect the demand for high-performance alloys to be positively driven by the continuation of favorable trends in the aerospace markets, chemical processing facility construction and maintenance and the energy construction business. These favorable market trends reflect the anticipated growth in the emerging economies of Asia.
Sales to the aerospace market increased by 31.5% to $165.8 million in fiscal 2006 from $126.1 million in fiscal 2005, due to a 12.8% increase in the average selling price per pound combined with a 16.6% increase in volume. The increase in the average selling price per pound is due to improved market demand, a product mix that includes 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 2005, and the effect of passing through higher raw material and energy costs. In addition, as a result of our recent capital improvements, we has been able to increase production of these higher valued alloys, allowing us to take advantage of the increased demand and step up marketing efforts related to these alloys. We believe sales have also increased as a result of a shift in demand by major aerospace fabricators away from large, mill-direct orders toward smaller, more frequent orders from value-added service centers, such as we can provide.
Sales to the chemical processing market increased by 69.7% to $129.4 million in fiscal 2006 from $76.2 million in fiscal 2005, due to a 30.9% increase in the average selling price per pound combined with a 29.7% increase in volume. The increase in the average selling price per pound is due to improved market demand, a change in product mix to higher valued specialty alloys and forms, and the effect of passing through higher raw material and energy costs. We believe that construction of new chemical processing facilities in China has contributed to volume improvement in this market. We believe that product mix has improved as a result of the generally improved economy which has increased the willingness of our customers to invest in products that are more expensive initially, but that are longer-lived and require less maintenance and replacement expense in the future. In addition, as a result of our recent capital improvements, we have been able to increase production of these higher-valued alloys, allowing us to take advantage of the increased demand and step up marketing efforts related to these alloys.
Sales to the land-based gas turbine market increased by 16.2% to $77.9 million for fiscal 2006 from $67.1 million in fiscal 2005, due to an increase of 16.3% in the average selling price per pound. The volume for the land-based gas turbine market on a year-to-year basis is essentially flat, increasing by 1.8%. However, starting with the third quarter of fiscal 2005, volume has increased every quarter, with volume in the fourth quarter of fiscal 2006 reaching almost 1.5 million pounds. Both total volume and ingot volume for this market can fluctuate due, at least in part, to ingot sales, which are influenced based on original equipment manufacturing (or OEM) projects. The overall volume in this market between fiscal 2005 and fiscal 2006 reflects ingot pounds which increased by approximately 34% and an equivalent decrease in the aggregate sheet and plate volumes. This change in product mix from year-to-year is representative of increased OEM business. The average selling price increased for all forms within this market on a year-to-year basis. However, the ingot product form comprised a larger percentage of the total mix in fiscal 2006 versus fiscal 2005 and, because ingots sell at a lower average selling price than the other forms, the effect is to mute the increase in average selling price. The other forms average selling price for this market increased almost 24% between periods. We believe sales have increased due to higher demand from power generation, oil and gas production, and alternative power systems applications.
41
Sales to other markets increased by 5.9% to $56.4 million in fiscal 2006 from $53.2 million in fiscal 2005, due to a 39.6% increase in average selling price per pound, which was partially offset by a 24.2% decrease in volume. The selling price increase is related to improving market demand and passing through higher raw material and energy costs compared to fiscal 2005. The primary reason for the overall reduction in volume was a decrease in the volume of stainless steel wire in fiscal 2006 compared to fiscal 2005 as a result of our strategy to reduce production of stainless steel wire.
Other revenue. Other revenue increased by 106.6% to $4.9 million in fiscal 2006 from $2.4 million for fiscal 2005. The increase is due to higher activity in toll conversion revenue, scrap sales and miscellaneous sales.
Cost of sales. Cost of sales as a percentage of net revenues decreased to 74.9% in fiscal 2006 from 88.8% in fiscal 2005. This decrease can be attributed to a combination of the following factors:
· a $25.4 million decrease of non-cash amortization of fresh start fair value adjustment to $4.8 million in fiscal 2006 from $30.2 million in fiscal 2005,
· improved product pricing,
· overall improvement in volume, resulting in the increased absorption of fixed manufacturing costs, and
· reductions in manufacturing cost gained from the capital improvements program.
These positive factors were partially offset by higher raw material and energy costs. Our energy costs increased by $5.1 million in fiscal 2006 compared to fiscal 2005, primarily due to rising natural gas prices and higher usage. Higher raw material costs as represented by the significant increase year-to-year in the cost of nickel, which makes up approximately 51% of our raw material costs. As reported by the London Metals Exchange, the average price per pound for 30-day cash buyers for nickel at September 30, 2006 was $13.67 compared to $6.45 at September 30, 2005.
Selling, general and administrative expense. Selling, general and administrative expense increased by $7.3 million to approximately $40.3 million in fiscal 2006 from $33.0 million in fiscal 2005. In fiscal 2005, gross selling, general and administrative expense was reduced by a one-time gain of $2.1 million recognized from the sale of land and building at our Openshaw, England facility. The remaining $5.2 million increase in selling, general and administrative expenses was due to a combination of the following factors:
· increased cost of $3.0 million from growth in foreign operations and higher overall business activity,
· an increase of $1.5 million from higher employee compensation cost for stock options,
· an increase of $1.0 million for payments made under the management incentive plan, and
· an increase of $1.1 million related to our evaluation of strategic alternatives.
These increases were partially offset by a decrease from fiscal 2005 of $0.6 million of consulting costs related to compliance with the provisions of the Sarbanes-Oxley Act of 2002 and a decrease
42
of $0.8 million for the preparation and filing of a registration statement with the Securities and Exchange Commission. Selling, general and administrative expense as a percentage of net revenues decreased to 9.3% in fiscal 2006 compared to 10.1% for fiscal 2005 due primarily to the increased level of net revenues.
Research and technical expense. Research and technical expense remained relatively flat at $2.7 million, or 0.6% of net revenues, in fiscal 2006 compared to $2.6 million, or 0.8% of net revenues, in fiscal 2005.
Restructuring and other charges. During fiscal 2005, Haynes incurred $0.6 million of professional fees in connection with the completion of the U.S. operations filing for reorganization relief under Chapter 11 of the U.S. Bankruptcy Code. There was no corresponding expense for fiscal 2006.
Operating income. As a result of the above factors, operating income in fiscal 2006 was $65.9 million compared to $0.1 million in fiscal 2005.
Interest expense. Interest expense increased by $1.7 million to $8.1 million in fiscal 2006 from $6.4 million for fiscal 2005. The increase is due to higher aggregate borrowings on our revolving credit facility and higher interest rates partially offset by interest capitalized on long-term capital projects.
Income taxes. Income taxes increased to an expense of $22.3 million in fiscal 2006 from a benefit of $2.1 million in fiscal 2005. The effective tax rate for fiscal 2006 was 38.6% compared to a tax benefit of 33.8% in fiscal 2005. The increase in effective tax rate is primarily attributable to more taxable income in the United States at a higher tax rate as compared to foreign taxable income at the lower tax rate.
Net income. As a result of the above factors, net income increased by $39.6 million to $35.5 million in fiscal 2006 compared to net loss of $(4.1) million in fiscal 2005.
Year ended September 30, 2005 compared to year ended September 30, 2004 pro forma
The following discussion provides a comparison of the results of operations for the year ended September 30, 2005 and that of the year ended September 30, 2004 on a pro forma basis. The discussion is provided for comparative purposes only, but the value of such comparison may be limited. For more information see The reorganization, Pro forma financial information and Impact of fresh start reporting on cost of sales.
Net revenues. Net revenues increased by approximately $91.5 million or 39.2% to approximately $325.0 million in fiscal 2005 from approximately $233.5 million in fiscal 2004 on a pro forma basis. Volume increased 39.3% to approximately 20.9 million pounds in fiscal 2005 from approximately 15.0 million pounds in fiscal 2004 on a pro forma basis. The average selling price per pound decreased 0.2% to $15.42 per pound in fiscal 2005 from $15.45 per pound in fiscal 2004 on a pro forma basis. Raw material increases resulted in increases to average selling price, but were more than fully offset by the inclusion of stainless steel wire. As discussed under Overview of markets, the reduction in average selling price is due to the inclusion of stainless steel wire of $15.8 million in net revenue and 4.8 million pounds that is not included in the
43
comparable period in fiscal 2004 on a pro forma basis. High-performance alloy volume increased 1.2 million pounds or 8.0%. Our backlog increased by approximately $94.9 million or 101.5% to approximately $188.4 million at September 30, 2005 from approximately $93.5 million at September 30, 2004. Order entry increased by $128.8 million or 46.8% for fiscal 2005, as compared to fiscal 2004 on a pro forma basis.
Sales to the aerospace market increased by 28.5% to approximately $126.1 million in fiscal 2005 from approximately $98.1 million on a pro forma basis for the same period a year earlier. The improvement can be attributed to an increase in the average selling price per pound, which is due to a generally improved market pricing structure, reflecting the higher raw material costs and improved market demand. Additionally, a greater proportion of the volume sold was higher-priced specialty alloys and titanium tubulars as compared to the lower-priced nickel-base alloy product forms sold in the same period a year earlier.
Sales to the chemical processing market increased by 24.1% to approximately $76.2 million in fiscal 2005 from approximately $61.4 million on a pro forma basis for the same period a year earlier due to the combined effects of a 35.7% increase in the average selling price per pound, which was partly offset by a 9.5% decrease in volume. The volume decrease is attributable to our emphasis on more specialty higher-margin product, versus large-project lower-margin commodity grades. The significant increase in the average selling price is due to improved market prices as a result of generally higher raw material costs, and to improving demand in the marketplace for high-end specialty products and improved product mix.
Sales to the land-based gas turbine market increased by 63.3% to approximately $67.1 million in fiscal 2005 from approximately $41.1 million on a pro forma basis for the same period a year earlier, due to an increase in volume of 34.3% and a 21.4% increase in the average selling price per pound. The increase in volume was mainly due to improved global sales of proprietary alloy round products and specialty alloy flat products to domestic fabricators to support the growing demand of the gas turbine manufacturers. The increase in the average selling price is attributed to improved market prices as a result of generally higher raw material costs and improving market demand.
Sales to other markets increased by 71.1% to approximately $53.2 million in fiscal 2005 from approximately $31.1 million on a pro forma basis for the same period a year earlier. The volume and revenue in this category increased during this time period as compared to the same period a year earlier due to the inclusion of the stainless steel wire business and higher selling prices due to increased raw material costs. For fiscal 2005, the Other Markets category includes $15.8 million in net revenue and 4.7 million pounds of stainless steel wire as a result of the Branford Wire acquisition, which were not included in the same period of the prior year.
Cost of sales. Cost of sales as a percent of net revenues increased to 88.8% in fiscal 2005 from 86.6% in fiscal 2004 on a pro forma basis. The increasing percentage of cost of sales as compared to net revenue can be attributed primarily to the non-cash amortization of fresh start fair value adjustments. Improved product pricing and greatly improved volume (which improved absorption of fixed manufacturing costs) were partially offset by unplanned equipment downtime and higher raw material and energy costs between comparable periods. Specifically, the fourth quarter of fiscal 2005 was impacted by unplanned equipment outages costing approximately $3.0 million, which increased cost of sales by approximately 1% for the fiscal year.
44
Selling, general and administrative expense. Selling, general and administrative expense increased by approximately $4.9 million to approximately $33.0 million for fiscal 2005 from approximately $28.1 million for fiscal 2004 on a pro forma basis. The increase in selling, general and administrative expense was due to higher non-recurring professional fees of $1.2 million for preparation and filing of a registration statement with the Securities and Exchange Commission; $1.1 million related to professional and consulting fees for readiness compliance with the Sarbanes Oxley Act of 2002; $1.1 million in higher sales commission expense due to increased sales levels; $1.2 million in selling, general and administrative expense related to the Branford Wire acquisition and $2.4 million in higher costs associated with a higher level of business activity, increased head count required for restoration to proper service levels previously eliminated in market downturns and growth in foreign entities. These increases were partially offset by the gain on sale of land and buildings at our Openshaw, England facility of $2.1 million. Selling, general and administrative expenses as a percentage of net revenues decreased to 10.1% in fiscal 2005 compared to 12.0% in fiscal 2004 on a pro forma basis.
Research and technical expense. Research and technical expense remained relatively flat at $2.6 million or 0.8% of net revenues in fiscal 2005 compared to 1.1% of net revenues in fiscal 2004 on a pro forma basis.
Restructuring and other charges. During fiscal 2005, Haynes incurred approximately $0.6 million of professional fees in connection with the completion of the U.S. operations filing for reorganization relief under Chapter 11 of the U.S. Bankruptcy Code. Corresponding expense for fiscal 2004 on a pro forma basis was $4.5 million.
Operating income (loss). As a result of the above factors, operating income for fiscal 2005 was approximately $0.1 million compared to an operating loss of approximately $(3.7) million for fiscal 2004 on a pro forma basis.
Interest expense. Interest expense increased by approximately $1.5 million to approximately $6.4 million for fiscal 2005 from approximately $4.9 million for fiscal 2004 on a pro forma basis. The $4.9 million of interest expense in fiscal 2004 on a pro forma basis consisted of $1.1 million in non-recurring fees and expenses related to the revolving credit facility put in place upon our emergence from bankruptcy and $3.8 million in interest expense related to our outstanding balances under our credit agreement. Our interest expense increase for fiscal 2005 was due to a higher outstanding balance on our revolving credit facility primarily resulting from high sales growth and increasing raw material cost. Interest expense of approximately $16.3 million in prior years does not exist in fiscal 2005 as the 11 5 ¤ 8 % senior notes were discharged in connection with our emergence from bankruptcy. This discussion does not reflect the elimination of interest on the notes when comparing fiscal 2004 on a pro forma basis to fiscal 2005.
Income taxes. The income tax benefit decreased by approximately $1.2 million to approximately $2.1 million for fiscal 2005 from approximately $3.3 million for fiscal 2004 on a pro forma basis. The effective tax rate was 33.8% for fiscal 2005 compared to 38.0% for fiscal 2004 on a pro forma basis. This decrease is primarily attributable to foreign rate differentials and non deductible restructuring and SEC filing costs.
Net loss. As a result of the above factors, the net loss was approximately $(4.1) million for fiscal 2005 compared to the net loss of approximately $(5.4) million for fiscal 2004 on a pro forma basis.
45
Eleven months ended August 31, 2004 and one month ended September 30, 2004
Other items impacting the predecessor eleven months ended August 31, 2004 or the successor one month period ended September 30, 2004 are discussed below.
Reorganization items. During the eleven months ended August 31, 2004, Haynes incurred approximately $177.7 million in reorganization items, of which $7.3 million was expense relating to professional fees, contract amendment fees, travel expenses, directors fees, and write offs of bond discount and debt issuance costs, and $185.0 million was income relating to the gain on cancellation of the 11 5 ¤ 8 % senior notes due September 1, 2004, fresh start accounting adjustments, and fair value adjustments required as a result of the filing of a petition for reorganization relief pursuant to the Chapter 11 of the U.S. Bankruptcy Code and related emergence from bankruptcy.
Interest expense. Haynes recorded $14.0 million of interest expense during the eleven months ended August 31, 2004. Pursuant to SOP 90-7, $6.9 million of interest expense on the 11 5 ¤ 8 % senior notes due September 1, 2004 was not recorded because payment was not expected to occur.
Income taxes. The income tax expense for the eleven months ended August 31, 2004, was minimal due to the tax treatment for the various items related to our emergence from bankruptcy and the application of fresh start reporting. Haynes recorded income tax expense based upon the U.S. statutory rate adjusted for forgiveness of debt income, fresh start accounting adjustments, non-deductible restructuring costs, foreign tax rate differentials, and state income taxes.
Liquidity and capital resources
Comparative cash flow analysis
The following analysis provides a comparison of cash flow for the years ended September 30, 2006, 2005 and 2004 (on a combined basis for the predecessor company and the successor company) and for the three months ended December 31, 2006.
During fiscal 2006 and fiscal 2005 and the first quarter of fiscal 2007, our primary sources of cash were borrowings under our revolving credit facility with a group of lenders led by Wachovia Capital Finance Corporation (Central) (described below) and cash from operations. Historically issuing debt securities was a source of cash. At December 31, 2006, Haynes had cash and cash equivalents of approximately $5.0 million compared to cash and cash equivalents of approximately $6.2 million at September 30, 2006.
Net cash provided by operating activities was $52.8 million in the first quarter of fiscal 2007, as compared to cash used of $7.3 million in the same period in fiscal 2006. The increase primarily results from an increase of net income of $9.9 million and proceeds net of expenses of the $50.0 million up-front payment received from TIMET. Also, at December 31, 2006, inventory balances were approximately $23.0 million higher than fiscal 2006 year end balances (net of foreign currency adjustments), as a result of the continued increase in the costs of the raw materials (nickel, molybdenum and cobalt), and a higher level of inventory required to be maintained to support the increased level of sales. Net cash used in investing activities was $3.0 million in the first quarter of fiscal 2007, primarily as a result of the continuing capital expenditure program.
46
Net cash used in financing activities primarily resulted from the repayment of borrowings on the revolving credit facility of $51.0 million as a result of cash generated from operations plus the proceeds, net of expenses, of the $50.0 million up-front payment received from TIMET. Taxes will be paid related to the TIMET transaction primarily in fiscal year 2008.
Net cash used in operating activities was $4.8 million in fiscal 2005, as compared to $23.9 million in fiscal 2004. At September 30, 2005, inventory balances, including the effects of the Branford Wire acquisition, were approximately $14.2 million higher than fiscal 2004 year end balances, as a result of our $42.5 million net cash investment in inventory during the period, which was offset by $25.4 million of non-cash fresh start accounting adjustments to inventory required by SOP 90-7 upon our emergence from bankruptcy recognized as expense during the period. The amount of our net cash investment in inventory was affected by rising costs of the raw materials nickel, molybdenum and cobalt, and a higher level of inventory required to be maintained to support the increased level of sales. The increase in cash used in operating activities was partially offset by an increase in accounts payable of approximately $10.4 million due to the increasing cost of raw materials and the rising level of sales activity. Net cash used in investing activities in fiscal 2005 was $14.7 million, which includes capital expenditures of $9.0 million and $8.3 million for the Branford Wire acquisition (which includes $2.6 million for property, plant and equipment), partially offset by proceeds from sales of property of $2.3 million. In fiscal 2005, net cash used in operating and investing activities was funded by cash from financing activities, primarily borrowings of $22.0 million on our revolving credit facility.
Net cash used in operating activities in fiscal 2004 was approximately $23.9 million, as compared to net cash used in operating activities of approximately $8.0 million in fiscal 2003. The increase in net cash used in operating activities in fiscal 2004 was the result of increased sales activity which resulted in increased accounts receivable balances and increased investments in inventory to support the higher sales levels. Accounts receivable increased from $35.3 million at September 30, 2003 to $54.4 million at September 30, 2004, and inventories increased from $85.8 million at September 30, 2003 to $130.8 million at September 30, 2004. Approximately $25.4 million of the inventory increase is attributable to the non-cash fresh start accounting adjustments required by SOP 90-7 upon emergence from bankruptcy. Higher inventory requirements at higher raw material costs, particularly the cost of nickel, were responsible for the remainder of the increase in inventory balances. The increase in accounts receivable and inventories was partially offset by an increase in accounts payable from $23.2 million at September 30, 2003 to $34.2 million at September 30, 2004 due primarily to rising costs of raw materials and a higher level of inventory due to increasing levels of business.
Our sources of cash for the next twelve months are expected to consist primarily of cash generated from operations and cash on hand, borrowings under both the U.S. revolving credit facility and the U.K. revolving credit facility (described below) and the net proceeds of this offering. The U.S. revolving credit facility and the U.K. revolving credit facility combine to provide borrowings in a maximum amount of $145.0 million, subject to a borrowing base formula and certain reserves. At December 31, 2006, after application of the net proceeds of the $50.0 million up-front payment received from TIMET in the first quarter of fiscal 2007 (for more information see BusinessAgreement with Titanium Metals Corporation), we had access to a total of approximately $78.3 million ($69.1 million in the United States and $9.2 million in the U.K.) under
47
both revolving credit facilities (subject to borrowing base and certain reserves) and cash of approximately $5.0 million. We believe that the resources described above will be sufficient to fund planned capital expenditures and working capital requirements over the next twelve months, although there can be no assurance that this will be the case.
U.S. revolving credit facility. The U.S. revolving credit facility provides for revolving loans in a maximum amount of $130.0 million. Borrowings under this revolving credit facility bear interest at either Wachovia Bank, National Associations 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, at our option. As of December 31, 2006, the U.S. revolving credit facility had an outstanding balance of $64.6 million and bore interest at a weighted average interest rate of 8.44%. In addition, Haynes 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, Haynes 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. We are subject to certain covenants as to 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 our capital stock. As of December 31, 2006, the most recent required measurement date under the agreement documentation, we were in compliance with these covenants. The U.S. revolving credit facility matures on April 12, 2009. Borrowings under this revolving credit facility are collateralized by a pledge of substantially all of the U.S. assets of Haynes, including equity interests in our U.S. subsidiaries, but excluding our, 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 our foreign subsidiaries.
U.K. revolving credit facility. Our U.K. subsidiary, Haynes U.K., has entered into an agreement with a U.K.-based lender providing for a $15.0 million revolving credit facility maturing on April 2, 2007. We are expecting to renew this facility or replace the facility with one of similar availability. Haynes U.K. is required to pay interest on loans made under the revolving credit facility in an amount equal to LIBOR (as calculated in accordance with the terms of the revolving credit facility), plus 3% per annum. As of December 31, 2006, the revolving credit facility had an outstanding balance of $1.2 million and bore interest at a weighted average interest rate of 8.33%. Availability under this revolving credit facility is limited by the receivables available for sale to the lender, the net of stock and inventory and certain reserves established by the lender in accordance with the terms of the revolving credit facility. Haynes U.K. must meet certain financial covenants relating to tangible net worth and cash flow. As of December 31, 2006, the most recent measurement date required under the revolving credit facility, Haynes U.K. was in compliance with these covenants. The revolving credit facility is secured by a pledge of substantially all of the assets of Haynes U.K.
Our primary uses of cash over the next twelve months are expected to consist of expenditures related to:
· increasing levels of working capital due to increased levels of operations and rising raw material cost;
· capital spending to increase capacity, improve reliability and performance of the equipment;
48
· reduction of debt;
· pension plan funding;
· income tax payments, including obligations associated with the TIMET conversion agreement; and
· interest payments on outstanding indebtedness.
Planned fiscal 2007 capital spending is targeted at $13.0 million. The main projects for fiscal 2007 include the completion of the projects already started related to the electroslag remelt equipment, rolling mills and the upgrade of the annealing equipment at the Kokomo, Indiana facility and a new pilger mill at the Arcadia, Louisiana facility. We believe that the completion of these capital projects and the related improvements in the reliability and performance of the equipment will have a positive effect on our profitability and working capital management.
We are also evaluating the desirability of possible additional capital expansion projects to capitalize on current market opportunities. Additionally, acceleration of future capital spending beyond what is currently planned may occur in order to accelerate the realization of the benefits such as improved working capital management, reduced manufacturing cost and increased capacity. Planned downtime is scheduled for fiscal 2007 and 2008 to implement these capital improvements. Management estimates that, if all contemplated capital expenditure projects are completed, total production capacity could increase from 18.5 million pounds per year to 23.5 million pounds per year, primarily in sheet product form. Consideration will also be given to potential acquisitions similar to the Branford Wire acquisition which complement our product line, reduce production costs and increase capacity.
The following table sets forth our contractual obligations for the periods indicated, as of December 31, 2006:
|
|
Payments Due by Period |
|
|||||||||||||||
Contractual Obligations (in thousands) |
|
Total |
|
Less than
|
|
1-3 Years |
|
3-5 Years |
|
More than
|
|
|||||||
Debt obligations
(including
|
|
$ |
80,626 |
|
$ |
5,670 |
|
$ |
74,956 |
|
$ |
|
|
|
$ |
|
|
|
Operating lease obligations |
|
9,055 |
|
3,148 |
|
5,446 |
|
461 |
|
|
|
|
|
|||||
Raw material contracts |
|
81,652 |
|
79,740 |
|
1,912 |
|
|
|
|
|
|
|
|||||
Mill supplies contracts |
|
177 |
|
177 |
|
|
|
|
|
|
|
|
|
|||||
Capital projects |
|
11,945 |
|
10,000 |
|
1,945 |
|
|
|
|
|
|
|
|||||
Pension plan(2) |
|
5,491 |
|
5,091 |
|
400 |
|
|
|
|
|
|
|
|||||
Other post-retirement benefits(3) |
|
50,000 |
|
5,000 |
|
10,000 |
|
10,000 |
|
|
25,000 |
|
|
|||||
Non-compete obligations(4) |
|
440 |
|
110 |
|
220 |
|
110 |
|
|
|
|
|
|||||
Total |
|
$ |
239,386 |
|
$ |
108,936 |
|
$ |
94,879 |
|
$ |
10,571 |
|
|
$ |
25,000 |
|
|
(1) Interest is calculated annually using the principal balance and current interest rates as of December 31, 2006.
(2) Haynes has a current funding obligation to contribute $4.6 million to the domestic pension plan and all benefit payments under the domestic pension plan will come from the plan and not Haynes. Haynes expects its U.K. subsidiary to contribute an additional $0.8 million in fiscal 2007 to the U.K. Pension Plan arising from an obligation in the U.K. revolving credit facility.
(3) Represents expected post-retirement benefits only.
(4) Pursuant to an escrow agreement, as of April 11, 2005, Haynes established an escrow account to satisfy its obligation to make payments under a non-compete agreement entered into as part of the Branford Wire acquisition. This amount is reported as restricted cash.
At December 31, 2006, Haynes also had $0.3 million outstanding under letters of credit. The letters of credit are outstanding primarily in connection with post closure environmental assurance and building lease obligations.
49
Historically, Haynes 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. However, there is no guarantee that Haynes will continue to be able to achieve this in the future.
Critical accounting policies and estimates
Our consolidated financial statements 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, assets, impairments and retirement benefits. 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 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. Haynes constantly reevaluates these significant factors and makes adjustments where facts and circumstances dictate. Actual results may differ from these estimates under different assumptions or conditions.
Our accounting policies are more fully described in Note 2 to the consolidated financial statements included elsewhere in this prospectus. Haynes 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 our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for managements judgment in their application. There are also areas in which managements judgment in selecting any available alternative would not produce a materially different result.
Fresh start reporting
On March 29, 2004, we and certain of our U.S. subsidiaries and U.S. affiliates, filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. As part of our Chapter 11 proceedings, we filed our plan of reorganization and related disclosure statement on May 25, 2004. The plan of reorganization was amended on June 29, 2004 and became effective on August 31, 2004. As a result of the reorganization, we implemented fresh start reporting in accordance with AICPA Statement of Position 90-7, or SOP 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code. Accordingly, our consolidated financial statements for periods subsequent to August 31, 2004 reflect a new basis of accounting and are not
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comparable to our historical consolidated financial statements for periods prior to August 31, 2004.
Under fresh start reporting, the reorganization value is allocated to our net assets based on their relative fair values in a manner similar to the accounting provisions applied to business combinations under Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS No. 141). Information concerning the determination of our reorganization value is included in note 1 to the audited consolidated financial statements included in elsewhere in this prospectus. The reorganization value of $200 million was greater than the fair value of the net assets acquired pursuant to the plan of reorganization. In accordance with SFAS No. 141, the reorganization value was allocated to identifiable assets and liabilities based on their fair values with the excess amount allocated to goodwill. Liabilities existing at the effective date of the plan of reorganization are stated at the present value of amounts to be paid. Deferred taxes are recorded for asset and liability basis differences between book and tax value in conformity with existing generally accepted accounting principles.
Revenue is recognized 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 we have not had any history of returns that have exceeded our recorded allowances.
Pension and post-retirement benefits
Haynes 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, Haynes 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. There were no changes to the terms of these benefits in connection with our emergence from bankruptcy.
The following table demonstrates the estimated effect of a 1% change in the following assumptions:
|
|
Estimated change
|
|
||
Pension plan expense |
|
|
|
|
|
1% change in discount rate |
|
|
$ |
1.5 Million |
|
1% change in the return on assets assumption |
|
|
$ |
1.0 Million |
|
1% change in the salary scale assumption |
|
|
$ |
1.6 Million |
|
Post-retirement medical and life insurance expense |
|
|
|
|
|
1% change in the discount rate |
|
|
$ |
0.65 Million |
|
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We believe the expected rate of return on plan assets of 8.5% is a reasonable assumption based on our asset allocation of 65% equity, 32% fixed income and 3% real estate/other. Our 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.
Salaried employees hired after December 31, 2005 are not covered by the pension plan; however, they are eligible for an enhanced matching program of the defined contribution plan (401(k)).
Impairment of long-lived assets, goodwill and other intangible assets
Haynes 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. Haynes 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 value to the fair value of a reporting unit in which the goodwill resides. If the carrying amount of a reporting unit exceeds its fair value, an impairment charge is recognized to the extent that the implied fair value of the reporting units goodwill exceeds its carrying value. The implied fair value of goodwill is the residual fair value, if any, after allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and all of the liabilities of the reporting unit. The fair value of reporting units is generally determined using a discounted cash flow approach. Assumptions and estimates with respect to estimated future cash flows used in the evaluation of long-lived assets and goodwill impairment are subject to a high degree of judgment and complexity. Haynes reviewed goodwill and trademarks for impairment as of August 31, 2006, and concluded no impairment adjustment was necessary. No events or circumstances have occurred that would indicate the carrying value of goodwill or trademarks may be impaired since its testing date.
Haynes 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 Companys common stock. The original option plan was adopted in 2004 pursuant to the plan of reorganization and provides the grant of options to purchase up to 1,000,000 shares of our common stock. In January 2007, our Board of Directors adopted a new option plan that provides for options to purchase up to 500,000 shares of our common stock. 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, Haynes 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
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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, Haynes 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 calculated under SFAS No. 123 and 148 for pro forma disclosures. 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, and expected lives of the options.
Haynes 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, Haynes 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.
Recently issued accounting pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 seeks to reduce the diversity in practice associated with certain aspects of measuring and recognition in accounting for income taxes. In addition, FIN 48 requires expanded disclosure with respect to the uncertainty in income taxes and is effective as of the beginning of our 2008 fiscal year. We are currently evaluating the impact, if any, that FIN 48 will have on our financial statements.
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 of recognition 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 measure date. The statement is effective for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years. We are required to adopt SFAS 157 beginning on October 1, 2008. We are currently evaluating the impact, if any, of SFAS 157 on our financial position, results of operations and cash flows.
In September 2006, the FASB issued FASB Statement No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158). SFAS 158 requires companies to
53
recognize the funded status of defined benefit pension and other postretirement plans as a net asset or liability in its financial statements. In addition, disclosure requirements related to such plans are affected by SFAS 158. If SFAS 158 had been implemented in fiscal 2006, the estimated impact on our financial position would have been a reduction in pension and postretirement benefits liability of $5.2 million, an increase in stockholders equity accumulated other comprehensive income of $3.2 million, and a reduction of deferred tax asset of $2.0 million. Haynes will begin recognition of the funded status of its defined benefit pension and postretirement plans and will include the required disclosures under the provisions of SFAS 158 at the end of fiscal 2007. The adoption of SFAS 158 is not expected to impact our debt covenants or cash position or significantly affect the results of operations.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (SAB 108), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for the first fiscal year ending after November 15, 2006, which will be our fiscal year ending September 30, 2007. The adoption of this statement is not expected to have a material impact on our financial position or results of operations.
In February 2006, the FASB issued FASB Statement No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140 (SFAS 155), that allows a preparer to elect fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a re-measurement (new basis) event, on an instrument-by-instrument basis, in cases in which a derivative would otherwise have to be bifurcated. It also eliminates the exemption from applying Statement 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. This Statement is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. Haynes does not anticipate that the adoption of SFAS 155 will have an impact on our overall results of operations or financial position.
Internal control over financial reporting
Our management 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 Haynes. 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, 2006, our internal control over financial reporting is effective based on those criteria. In the first quarter of fiscal 2007 there have been no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management has concluded that our disclosure controls and procedures were effective as of December 31, 2006.
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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.
Managements assessment of the effectiveness of internal control over financial reporting as of September 30, 2006 has been audited by Deloitte and Touche LLP, our independent registered public accounting firm, and Deloitte & Touche has issued a report on our managements assessment of our internal control over financial reporting.
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Haynes International, Inc. is one of the worlds largest producers of high-performance nickel- and cobalt-based alloys in sheet, coil and plate forms. We are 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. Our 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 industry, 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. We believe we are 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 64% of our net revenues in fiscal 2006. We also produce our products as seamless and welded tubulars, and in bar, billet and wire forms.
We have achieved our growth through a combination of capitalizing on the growth of our end markets, increasing value-added services provided to our customers, increasing our presence in international markets and, to a lesser extent, selected strategic initiatives such as our November 2004 acquisition of assets of Branford Wire. For fiscal 2006, our net revenues were $434.4 million, a 33.7% increase over fiscal 2005s net revenue of $325.0 million. For the first three months of fiscal 2007, our net revenues were $120.5 million, a 27.6% increase over the same period of fiscal 2006. As of September 30, 2006, our backlog orders were approximately $206.9 million, compared to approximately $188.4 million as of September 30, 2005 and approximately $93.5 million as of September 30, 2004. As of December 31, 2006, our backlog orders were approximately $207.4 million. See BusinessBacklog for a description of how we calculate backlog.
We have manufacturing facilities in Kokomo, Indiana; Arcadia, Louisiana; and Mountain Home, North Carolina. The Kokomo and Arcadia facilities specialize in flat and tubular products, respectively, and the Mountain Home facility manufactures stainless steel and high-performance alloy wire. We sell our products primarily through our direct sales organization, which includes 11 service and/or sales centers in the United States, Europe, Asia and India. All of these centers are company-operated. In fiscal 2006, approximately 82% of our net revenues was generated by our direct sales organization, and the remaining 18% was generated by a network of independent distributors and sales agents who supplement our direct sales efforts in the United States, Europe and Asia, some of whom have been associated with our company for over 30 years.
The breadth and quality of our products, combined with our superior customer service delivered through our service and sales center network, have resulted in long-standing relationships with many of our customers. We have supplied high-performance alloys to our top 10 customers, based on fiscal 2006 sales, for an average of 20 years. We supply high-performance alloys that are used by a broad range of end use customers, including General Electric Co.; Pratt & Whitney; Rolls Royce plc; The Boeing Co.; SNECMA; E.I. DuPont de Nemours & Co.; The Dow Chemical Co.; Siemens Westinghouse; Solar Turbines, Inc.; British Petroleum p.l.c.; Celanese AG; and Eli Lilly and
56
Co. None of these customers, or any of our other customers, accounted for more than 10% of our sales in fiscal 2006. Our top 20 customers accounted for approximately 38% of sales in fiscal 2006.
We estimate 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, we compete in the high-performance nickel- and cobalt-based alloy sector which we estimate to represent approximately 200 million pounds of production per annum. Given the technologically advanced nature of the products, strict requirements of the end users and higher-growth end markets, we believe 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. We expect growth in worldwide demand for high-performance alloys to increase significantly over the next ten years based upon increasing demand in the aerospace, chemical processing and land-based gas turbine markets. While stainless steel and general purpose nickel alloy is generally sold in bulk through third-party distributors our products are sold in smaller-sized orders which are customized and typically handled on a direct-to-customer basis. The high-performance alloy market demands diverse, specialty alloys suitable for use in precision manufacturing. We estimate that, due in part to the above factors, the average selling price per pound of high-performance alloy in 2006 was approximately $17.00, compared to approximately $2.50 for stainless steel and approximately $12.00 for general purpose nickel alloys.
Aerospace . Haynes 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 Haynes and its customers in the selection and development of HTA products. As a result, sales to aerospace customers tend to be made through our direct sales force. Demand for our products in the aerospace industry is based on the new and replacement market for jet engines and the maintenance needs of operators of commercial and military aircraft. The hot sections of jet engines are subjected to substantial wear and tear and accordingly require periodic maintenance, replacement and overhaul. Haynes views the maintenance, replacement and overhaul business as an area of continuing growth, and expects the number of engines in service to increase significantly in the next ten to twenty years.
Chemical processing . The chemical processing market represents a large base of customers with diverse CRA applications driven by demand for key end use industries such as automobiles, housing, health care, agriculture and metals production. CRA products supplied by Haynes have been used in the chemical processing market since the early 1930s. Demand for our 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. We believe our extensive worldwide network of company-operated service and sales centers, as well as our network of independent distributors and sales agents who supplement our direct sales efforts in
57
Europe and Asia, is a competitive advantage in marketing our CRA products in the chemical processing market.
Land-based gas turbines. Demand for our 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 our alloys in the land-based gas turbine market 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. We believe this will continue to be an area of growth for us as long as global demand for power generation capacity remains strong. In addition, with the opening of a service and sales center in China and a sales center in India in fiscal 2005, we are well-positioned to take advantage of the growth in those areas in demand for power generation.
Prior to the enactment of the Clean Air Act, land-based gas turbines were used primarily to satisfy peak power requirements. Haynes believes that land-based gas turbines are a clean, low-cost alternative to fossil fuel-fired electric generating facilities. In the early 1990s when Phase I of the Clean Air Act was being implemented, selection of land-based gas turbines to satisfy electric utilities demand firmly established this power source. Haynes believes that the mandated Phase II of the Clean Air Act and certain advantages of land-based gas turbines compared to coal-fired generating plants will further contribute to demand for its products over the next three to five years.
Other markets. Other industries to which Haynes sells its HTA products and CRA products include flue gas desulphurization (or FGD), waste incineration, industrial heat-treating, automotive, medical and oil and gas. The FGD industry has been driven by both legislated and self-imposed standards for lowering emissions from fossil fuel-fired electric generating facilities. With the completion of our currently active capital projects over the next 18 months, Haynes anticipates participating in the growth in the FGD industry due to the increased production capacity and the improved cost structure which will result from the completion of the capital projects. In addition, incineration of municipal, biological, industrial and hazardous waste products typically produces very corrosive conditions that demand high-performance alloys. Haynes also sells its products for use in the oil and gas industry, primarily in connection with sour gas production. 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 our products. As part of the Branford Wire acquisition, we also began selling stainless steel wire, but our strategy is to reduce production of lower margin stainless steel wire and increase production of higher margin high-performance alloy wire.
Our goal is to grow our business and increase revenues and profitability while continuing to be our customers provider of choice for high-performance alloys. Our primary end markets have experienced significant expansion and we believe that they will continue to demonstrate
58
attractive fundamentals with demand increasing for aerospace, chemical plants and land-based gas turbines. We intend to penetrate and capitalize on the growth in these end markets by taking advantage of our diverse product offerings and service capabilities and to increase our capacity and lower our costs through strategic investment in our manufacturing facilities. In order to accomplish these goals, we intend to pursue the following:
· Increase productivity through strategic equipment investment . We expect to continue to improve operating efficiencies through ongoing capital investment in our manufacturing facilities and equipment. Recent investment in our equipment has significantly improved our operating efficiency by increasing capacity, reducing downtime and manufacturing costs and improving working capital management and product quality. Our four-high Steckel mill, one of only two of its kind used to roll high-performance alloys, in conjunction with our sophisticated, multi-stage, melting and refining operation, produces a broad array of sheet, coil and plate products made to exacting specifications. At the same time, our smaller mills enable us to produce customized batch orders, which are generally more profitable, and which often are not practical or economical for our competitors to manufacture. Because we are one of the few manufacturers with the expertise and facilities to produce high-performance alloys, we believe that our investments will enable us to continue to satisfy increased customer demand for value-added products that meet precise specifications. We expect ongoing investment in fiscal 2007 and 2008 to capitalize on and continue to improve our operating efficiencies.
· Increase sales by providing value-added processing services . We believe that our network of service and sales centers throughout North America, Europe and Asia distinguishes us from our competitors. Our service and sales centers enable us to develop close customer relationships through direct interaction and to respond to customer orders quickly. Furthermore, unlike our competitors, who focus on broader markets and non-customized products, our service and sales centers give us the ability to provide precision laser and water jet processing services to cut and shape our products to our customers precise specifications. These services allow our customers to minimize their processing costs and outsource non-core activities. In addition, our rapid response time and enhanced processing services have allowed us to institute value-added pricing resulting in higher-margin sales and enhanced profitability. The value-added processing performed at our service and sales centers also allows us to capture our customers MRO business. Sales through our service and sales centers accounted for approximately 55.0% of our total revenue in fiscal 2006.
· Increase worldwide sales through international service and sales center locations . We intend to continue our efforts to increase our sales to non-U.S. customers and strategically position our service and sales centers in key international locations. We recently opened a service and sales center in China, the first service and sales center operated by any manufacturer of nickel- or cobalt-based alloys in China, and sales centers in Singapore and India. We intend to expand our sales center in India to include service as well as sales.
· Continue to expand our maintenance, repair and overhaul business . We believe that our MRO business serves a growing market and represents both an expanding and recurring revenue stream. Products used in hot section components for the aerospace industry require periodic replacement due to the intense stress of repetitive heating and cooling
59
cycles, which drives a demand for recurring MRO work. In addition, products used in the land-based gas turbine business require significant overhaul approximately every three years, which we expect will further drive the growth of our MRO business. We expect the MRO business to drive our growth in the chemical processing industries in North America and Western Europe as a result of the ongoing need for maintenance of installed capacity in those markets. Over time, we expect that the MRO business will support our growth in the chemical processing industries in China and India, due to the widespread building of chemical plants in those markets. We intend to continue to leverage the capabilities of our service and sales centers to respond quickly to our customers time-sensitive MRO needs to develop new and retain existing business opportunities.
· Increase revenue by developing new products and new applications for existing alloys . We believe that we are the industry leader in developing new alloys designed to meet our customers specialized and demanding requirements. We continue to work closely with customers and end users of our products to identify, develop, manufacture and test new high-performance alloys. Our engineering and technological group is continually developing new products and new applications for existing products and refining our manufacturing processes. The group, comprised of personnel with extensive industry and technological experience, operates from seven separate, fully equipped laboratories, including a process laboratory with a full spectrum of pilot scale melting/remelting equipment and hot and cold working equipment. Over the last five years, our technical programs have yielded five new proprietary alloys, an accomplishment that we believe distinguishes us from our competitors. Four of these new alloys are protected by U.S. patents, and one has a patent pending. We expect our continued emphasis on product innovation to yield similar future results, and we expect to focus our development efforts on specialized automotive products, the biopharmaceutical industry, the energy market for fuel cells and the market for turbine components for higher temperature operations.
· Expand product capability through strategic acquisitions and alliances . We will continue to examine opportunities that enable us to offer customers an enhanced and more competitive product line to complement our core flat products. These opportunities may include product line enhancement, such as that provided by our acquisition of certain assets from Branford Wire in November 2004. The Branford Wire acquisition has enabled us to provide a broader product line to customers, expand our markets, increase our production capacity in the high-margin business of high-performance alloy wire and reduce our cost structure for wire production. We will continue to look for opportunities that enhance the portfolio of products provided to customers such as wire, tubing, fittings and bar. We will also continue to evaluate strategic relationships with third parties in the industry in order to enhance our competitive position and relationships with customers. Such relationships could be similar to our 20-year conversion agreement we entered into with Titanium Metals Corporation in November 2006, which allowed us to monetize a portion of our excess production capacity on the four-high Steckel mill. Other potential strategic relationships could include new or enhanced relationships with long-term distribution sources.
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Agreement with Titanium Metals Corporation
On November 17, 2006, we entered into a 20-year agreement to provide conversion services to Titanium Metals Corporation, or TIMET, for up to ten million pounds of titanium metal annually at prices established by the terms of the agreement. The transaction is documented by an Access and Security Agreement and a Conversion Services Agreement, both dated November 17, 2006. TIMET paid us a $50.0 million up-front fee and will also pay us for its processing services during the term of the agreement at prices established by the terms of the agreement. In addition to the volume commitment, we have granted TIMET a security interest in our four-high Steckel rolling mill, along with certain rights of access. TIMET may exercise an option to have ten million additional pounds of titanium converted annually, provided that it offers to loan up to $12.0 million to us for certain capital expenditures which would be required to expand capacity. We have the option to purchase titanium sheet and plate products from TIMET and have agreed not to manufacture our own titanium products (other than cold reduced titanium tubing). We have 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 $50.0 million (up-front fee) will be recognized in income on a straight-line basis over the 20-year term of the agreement. The portion not recognized in income will be shown as deferred revenue on our consolidated balance sheet. Income taxes associated with the up-front fee will be primarily paid in fiscal 2008. We used the net proceeds of the $50.0 million payment to reduce the balance of our U.S. revolving credit facility. Upon certain instances of a change in control, a violation of the non-compete provisions or a performance default or upon the occurrence of an event of a force majeure which results in a performance default, we are required to return the unearned portion of the up-front fee.
On November 5, 2004, Haynes Wire Company, a wholly owned subsidiary of Haynes, acquired certain assets of The Branford Wire and Manufacturing Company and certain of its affiliates for a purchase price of $8.3 million, which was paid in cash. As part of the transaction, Haynes Wire acquired a wire manufacturing plant in Mountain Home, North Carolina, manufacturing equipment, accounts receivable and inventory.
The Branford Wire acquisition has increased our wire manufacturing capacity. Prior to the acquisition, our high-performance alloy wire production capacity was approximately 500,000 pounds per year. Haynes Wires two-shift manufacturing capacity is estimated to be approximately 2.2 million pounds of finished stainless wire per year, with the capability to expand to approximately 3.0 million pounds per year. The Branford Wire acquisition allowed Haynes to reduce its cost of wire production and improve the quality of the wire it produces. Haynes Wires manufacturing facilities and equipment are designed to produce wire products efficiently and cost-effectively. In addition, the employees at the Mountain Home, North Carolina facility are experienced at producing wire products and are able to maintain high quality standards.
This acquisition provides opportunities for increasing wire sales through improvements in quality and manufacturing processes in the high-performance alloy wires we produce, and by offering the expanded wire product line through our service and sales centers worldwide. Our expertise in producing high quality wire products is enabling us to expand our product offerings and increase our participation in the nickel- and cobalt-based alloy welding market.
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The breadth and quality of our products, combined with our network of service centers which enhance customer service, have resulted in long-standing relationships with many of our customers. We have supplied high-performance alloy products to our top 10 customers, based on fiscal 2006 sales, for an average of 20 years. We supply high-performance alloys to a broad range of end use customers, including General Electric Co.; Pratt & Whitney; Rolls Royce plc; The Boeing Co.; SNECMA; E.I. DuPont de Nemours & Co.; The Dow Chemical Co.; Siemens Westinghouse; Solar Turbines, Inc.; British Petroleum p.l.c.; Celanese AG; and Eli Lilly and Co. None of these customers, or any of our other customers, accounted for more than 10% of our sales in fiscal 2006. Our top 20 customers accounted for approximately 38% of sales in fiscal 2006.
The global specialty 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, Haynes competes exclusively in the high-performance alloy sector, which includes HTA products and CRA products. We believe that the high-performance alloy sector represents 200 million pounds of production volume per annum out of a total specialty alloy market of 38.5 billion pounds of production volume per annum. In fiscal 2004, 2005 and 2006, HTA products accounted for approximately 73%, 75% and 68%, respectively, of our net revenues (excluding stainless steel wire). In fiscal 2003, 2004, and 2005, CRA products accounted for approximately 27%, 25% and 32%, respectively, of our net revenues (excluding stainless steel wire). These percentages of our total product revenue and volume are based on data which include revenue and volume associated with sales by us to our foreign subsidiaries, but exclude revenue and volume associated with sales by foreign subsidiaries to their customers. We believe, however, that the effect of including revenue and volume data associated with sales by our 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
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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 forth information with respect to our significant high temperature resistant alloys, applications and features:
Alloy |
|
Year introduced |
|
End markets and applications(1) |
|
Features |
HAYNES HR-160 Alloy(2) |
|
1990 |
|
Waste incineration/CPI-boiler tube shields |
|
Good resistance to sulfidation at high temperatures |
HAYNES 242 Alloy(2) |
|
1990 |
|
Aero-seal rings |
|
High strength, low expansion and good fabricability |
HAYNES HR-120 Alloy(2) |
|
1990 |
|
LBGT-cooling shrouds |
|
Good strength-to-cost ratio as compared to competing alloys |
HAYNES 230 Alloy(2) |
|
1984 |
|
Aero/LBGT-ducting, combustors |
|
Good combination of strength, stability, oxidation resistance and fabricability |
HAYNES 214 Alloy(2) |
|
1981 |
|
Aero-honeycomb seals |
|
Good combination of oxidation resistance and fabricating among nickel-based alloys |
HAYNES 188 Alloy(2) |
|
1968 |
|
Aero-burner cans, after-burner components |
|
High strength, oxidation resistant cobalt-based 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(2) |
|
1950 |
|
Aero-gas turbine parts, bearings, and various industrial applications |
|
Excellent strength, good oxidation, resistance to 1800 ° F |
(1) Aero refers to the aerospace market; LBGT refers to the land-based gas turbine market; CPI refers to the chemical processing market.
(2) Represents a patented product or a product that we believe has limited or no significant competition.
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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, we believe 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 to certain of our significant corrosion resistant alloys, applications and features:
Alloy |
|
Year introduced |
|
End markets and applications(1) |
|
Features |
|
|
|
|
|
|
|
HASTELLOY Alloy C-2000(2) |
|
1995 |
|
CPI-tanks, mixers, piping |
|
Versatile alloy with good resistance to uniform corrosion |
HASTELLOY Alloy B-3(2) |
|
1994 |
|
CPI-acetic acid plants |
|
Better fabrication characteristics compared to other nickel-molybdenum alloys |
HASTELLOY Alloy D-205(2) |
|
1993 |
|
CPI-plate heat exchangers |
|
Corrosion resistance to hot sulfuric acid |
ULTIMET Alloy(2) |
|
1990 |
|
CPI-pumps, valves |
|
Wear and corrosion resistant nickel-based alloy |
HASTELLOY Alloy C-22 |
|
1985 |
|
CPI/FGD-tanks, mixers, piping |
|
Resistance to localized corrosion and pitting |
HASTELLOY Alloy G-30(2) |
|
1985 |
|
CPI-tanks, mixers, piping |
|
Lower cost alloy with good corrosion resistance in phosphoric acid |
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 |
(1) CPI refers to the chemical processing market; FGD refers to the flue gas desulfurization market.
(2) Represents a patented product or a product that we believe has limited or no significant competition.
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We currently maintain a total of approximately 20 U.S. patents and approximately 200 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. Over the last six years, our technical programs have yielded six new proprietary alloys, three of which are currently commercially available and three of which are being prepared to be brought to market. HAYNES 282 alloy, which we believe has very significant commercial potential, is the subject of a patent application filed in fiscal 2004, which, if granted, will provide protection until 2024. Also, U.S. patent applications were filed in 2006 for a new HYBRID Corrosion-resistant Alloy and a new high-temperature resistant alloy strengthened by a novel technique. Both of these new materials have significant, medium to long-term commercial potential and will be protected until 2026, if these patents are granted. In addition, three additional new proprietary alloys are at the laboratory stages of development. However, while we believe our patents are important to our 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. We believe that the current alloy development program and these noted barriers to entry reduce the potential impact of patent expirations on us.
Trademarks on the names of many of our alloys have also been applied for or granted in certain foreign countries. Patents or other proprietary rights are an essential element of our business. Our strategy is to file patent applications in the United States and any other country that represents an important potential commercial market to us. In addition, we seek to protect our technology which is important to the development of our business. We also rely upon trade secret rights to protect our technologies and our development of new applications and alloys. We protect our trade secrets in part through confidentiality and proprietary information agreements with our customers.
For additional information see Research and technical support.
Sales and marketing and distribution
We sell our products primarily through our direct sales organization, which operates from 13 total locations in the United States, Europe, Asia and India, 11 of which are service and sales centers. All of our service and sales centers are operated either directly by us or though our wholly-owned subsidiaries. Approximately 82% of our net revenues in fiscal 2006 were generated by our direct sales organization. The remaining 18% of our fiscal 2006 net revenues were generated by a network of independent distributors and sales agents who supplement our direct sales in the United States, Europe and Asia, some of whom have been associated with Haynes for over 30 years. We are currently in the process of evaluating the efficiency of some of our overseas distribution channels, including the appropriate number of distributors, the types of products sold through third party distributors and our distribution partners. On a prospective basis, we expect our direct sales force to continue to generate approximately 82% of total sales. This percentage may increase, however, as we open new service and sales centers.
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Providing technical assistance to customers is an important part of our marketing strategy. We provide performance analyses of our products and those of our competitors for our customers. These analyses enable us to evaluate the performance of our products and to make recommendations as to the use of our products in appropriate applications, enabling our products to be included as part of the technical specifications used on the production of customers products. Our market development professionals are assisted by our engineering and technology staff in directing the sales force to new opportunities. We believe our 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 us to obtain direct insight into customers alloy needs and allows us to develop proprietary alloys that provide solutions to our customers problems.
Although there is a concentrated effort to expand foreign sales, the effort to grow domestic business also continues. The majority of revenue and profits continue to be provided by sales to U.S. customers and we continue to pursue opportunities to expand this market. This includes, but is not limited to, continued expansion of ancillary product forms, such as wire through the acquisition of The Branford Wire and Manufacturing Company, the continued development of new high-performance alloys, the utilization of external conversion resources to expand and improve the product form quality of mill produced product, the addition of equipment in U.S. service and sales centers to improve our ability to provide a product closer to the form required by the customer and the continued effort through our technical expertise to find solutions to customer challenges.
The following table sets forth the approximate percentage of our fiscal 2006 net revenues generated through each of our distribution channels.
|
|
Domestic |
|
Foreign |
|
Total |
|
||||||
Haynes mill direct/service and sales centers |
|
|
50 |
% |
|
|
32 |
% |
|
|
82 |
% |
|
Independent distributors/sales agents |
|
|
11 |
% |
|
|
7 |
% |
|
|
18 |
% |
|
Total |
|
|
61 |
% |
|
|
39 |
% |
|
|
100 |
% |
|
Our top twenty customers accounted for approximately 34% and 38% of our net revenues in fiscal 2005 and 2006, respectively. No customer or group of affiliated customers accounted for more than 10% of our net revenues in fiscal 2004, 2005 or 2006
Our net revenues and net income in fiscal 2005 and fiscal 2006 were generated primarily by our U.S. operations. Sales to domestic customers comprised approximately 61% of our net revenues in both of these fiscal years. In addition, the majority of our operating costs are incurred in the United States, as all of our manufacturing facilities are located in the United States. Although we expect our net revenues and net income will continue to be highly dependent on our domestic sales and manufacturing facilities in the United States.
Our foreign and export sales were approximately $90.2 million, $128.5 million and $169.3 million for fiscal 2004, 2005 and 2006, respectively. Additional information concerning foreign operations and export sales is set forth in Note 16 to the consolidated financial statements included elsewhere in this prospectus.
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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. We manufacture our high-performance alloy 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 our 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.
We have a four-high Steckel mill for use in hot rolling material. Our four-high 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 we produce allow the mill to roll numerous widths and gauges to exact specifications without stoppages or changeovers.
We also operate a three-high rolling mill and a two-high rolling mill, each of which is capable of custom processing much smaller quantities of material than the four-high mill. These mills provide us with significant flexibility in running smaller batches of varied products in response to customer requirements. We believe the flexibility provided by the three-high and two-high mills provides us an advantage over our major competitors in obtaining smaller specialty orders.
We define backlog to include firm commitments from customers for delivery of product at established prices. Approximately 30% of the orders in our backlog at any given time include prices that are subject to adjustment based on changes in raw material costs. Historically,
67
approximately 75% of our backlog orders have shipped within six months and approximately 90% have shipped within 12 months. The backlog figures do not reflect that portion of our business conducted at our service and sales centers on a spot or just-in-time basis.
(in millions) |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
||||
Backlog at fiscal quarter ended: |
|
|
|
|
|
|
|
|
|
||||
December 31 |
|
$ |
54.7 |
|
$ |
110.9 |
|
$ |
203.5 |
|
$ |
207.4 |
|
March 31 |
|
69.6 |
|
134.8 |
|
207.4 |
|
|
|
||||
June 30 |
|
82.6 |
|
159.2 |
|
200.8 |
|
|
|
||||
September 30 |
|
93.5 |
|
188.4 |
|
206.9 |
|
|
|
||||
Due to the increase in the cost of raw materials during fiscal 2006, raw material rose as a percentage of cost of sales to 58% from 50% in the prior year. Nickel, a major component of many of our products, accounts for approximately 51% of our raw material costs, or approximately 30% of our total cost of sales. Each pound of high-performance alloy contains, on average, 48% 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 fiscal 2004, 2005 and 2006, was $6.02, $6.45 and $13.67, respectively. The average nickel price per pound for cash buyers for the 30 day period ended December 31, 2006 was $15.68.
Since most of our products are produced pursuant to specific orders, we purchase materials against known production schedules. The materials are purchased from several different suppliers through various arrangements including annual contracts and spot purchases, and involve a variety of pricing mechanisms. Because we maintain a policy of pricing our products at the time of order placement, we attempt 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 rises rapidly, there may be a negative effect on our gross profit margins. We are considering forward purchase opportunities with certain suppliers. See Risk factors.
Effective October 1, 2003, we changed our inventory costing method for domestic inventories from the LIFO method to the FIFO method. We believe that the FIFO method is preferable to LIFO because:
· FIFO inventory values presented in our balance sheet will more closely approximate the current value of inventory,
· cost of sales are still appropriately charged in the period of the related sales, and
· the change to FIFO method for domestic inventories results in our using a uniform method of inventory valuation globally.
Although we believe that FIFO is preferable to LIFO for the reasons stated, the use of FIFO during a period of rapidly rising or falling commodity prices can result in an imprecise matching of revenues and expenses in the short term.
68
Research and technical support
Our technology facilities, located at our Kokomo headquarters, consist of 19,000 square feet of offices and laboratories, as well as an additional 90,000 square feet of paved storage area. We have 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, 2006, the technology, engineering and technological testing staff consisted of 27 persons, 17 of whom have engineering or science degrees, including five 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. Haynes spent approximately $2.5 million, $2.6 million and $2.7 million for research and technical support activities for fiscal 2004, 2005, and 2006 respectively.
During fiscal 2006, 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.
For additional information see Patents and trademarks.
The high-performance alloy market is a highly competitive market in which eight to ten producers participate in various product forms. Our 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. We face strong competition from domestic and foreign manufacturers of both high-performance alloys (similar to those we produce) and other competing metals. We may face additional competition in the future to the extent new materials are developed, such as plastics or ceramics, that may be substituted for our products. We also believe that we 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 we have benefited from a weak United States dollar, which makes the goods of foreign competitors more expensive to import into the United States. In the event that the United States dollar strengthens, we may face increased competition in the United States from foreign competitors.
As of September 30, 2006, we employed approximately 1,072 full-time employees worldwide. All eligible hourly employees at the Kokomo plant and the Lebanon, Indiana service and sales center (approximately 516 in the aggregate) are covered by a collective bargaining agreement. As part of negotiations with the United Steelworkers of America related to our emergence from bankruptcy, the collective bargaining agreement was extended until June 2007. We will
69
renegotiate the collective bargaining agreement in fiscal 2007 prior to the expiration of the agreement currently in place. We believe that current relations with the union are satisfactory. There can be no assurance, however, that the renegotiation of the collective bargaining agreement will not lead to a labor stoppage, which could have a negative effect on earnings. For example, there was a brief labor stoppage in connection with renegotiation of the collective bargaining agreement in fiscal 2002, although there was no such stoppage in connection with the renegotiation in fiscal 2004 as part of our emergence from bankruptcy. None of the employees of our Arcadia, Louisiana, Mountain Home, North Carolina, European or Asian operations are represented by a labor union. We consider our employee relations in each of those facilities to be satisfactory.
We 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, the storage, handling, use, treatment and disposal of hazardous substances and wastes and the health and safety of our employees. In addition, some of these laws and regulations require our facilities to operate under permits that are subject to renewal and modification. Violations of these laws, regulations and permits can result in the imposition of substantial penalties, permit revocations, and facility shutdowns and can require facilities improvements. In addition, we 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, we cannot predict the cost, if any, associated with compliance with such regulations. Expenses related to environmental compliance (including air pollution control improvements, as discussed below) were approximately $1.3 million for fiscal 2005, $1.5 million for fiscal 2006 and are expected to be at a similar level for fiscal 2007.
Our facilities are subject to periodic inspection by various regulatory authorities, who from time to time have issued violations of governing laws, regulations and permits. In the past five years, we have paid administrative fines, none of which has had a material effect on our financial condition, for alleged violations relating to environmental matters, including the handling and storage of hazardous wastes, requirements relating to the Kokomo facilitys 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 $542,000 and $140,000 were made for pollution control improvements during fiscal 2005 and 2006 respectively, with additional expenditures of $150,000 planned for fiscal 2007.
We are conducting remedial activities at our Kokomo, Indiana and our Mountain Home, North Carolina facilities. We have received permits from the Indiana Department of Environmental Management, or IDEM, and the U.S. Environmental Protection Agency, or EPA, 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. Construction of the South Landfill was completed in May 1994 and closure certification was received in fiscal 1999 for one area at the Kokomo facility and post-closure care is ongoing there. We have an application with IDEM pending for approval of closure and post-closure care for another area of our Kokomo facility. In addition, we are currently evaluating
70
known groundwater contamination at our Kokomo site and are developing a plan to address it. Accordingly, additional corrective action may be necessary. We have also received permits from the North Carolina Department of Environmental Natural Resources, or NC DENR, and the EPA to close and provide post-closing monitoring and care for the lagoon at our Mountain Home, North Carolina facility. The lagoon area has been closed and is currently undergoing post-closure monitoring. We are required to monitor groundwater and to continue post closure maintenance of the former disposal areas at this site. As a result, we are aware of elevated levels of certain contaminants in the groundwater and additional corrective action could be required. We are currently unable to estimate the costs of any further corrective action at either site if required. Accordingly, we cannot assure you that the costs of any future corrective action at these or any other current or former sites would not have a material effect on our financial condition, results of operations or liquidity. 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 any of our facilities.
As a condition of the Kokomo and Mountain Home post closure permits, we must provide and maintain assurances to IDEM and EPA of our capability to satisfy closure and post closure groundwater monitoring requirements, including possible future corrective action as necessary. We currently provide these required assurances through a statutory financial assurance test as provided by Indiana law. Additionally, we are also required to provide assurances to the NCDENR and the EPA of our ability to satisfy closure and post closure monitoring requirements, including possible future corrective actions for the closed lagoon at the Mountain Home, North Carolina facility. Although historically we provided these assurances through letters of credit, we recently received approval to satisfy the requirement through a corporate guaranty and satisfaction of a financial condition test. The amount of accrued liabilities for these obligations is approximately $1.5 million as of December 31, 2006.
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, much 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 the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, and state counterparts. CERCLA imposes strict, joint and several liability for investigatory and cleanup costs upon hazardous substance generators, site owners and operators and other potentially responsible parties. We may have generated hazardous substances disposed of at sites subject to CERCLA or equivalent state law remedial action. Thus, 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 those sites would not have a material adverse effect on our financial condition, results of operations of liquidity.
Manufacturing facilities. We own manufacturing facilities in the following locations:
· Kokomo, Indianamanufactures and sells all product forms, other than tubular and wire goods;
71
· Arcadia, Louisianamanufactures and sells welded and seamless tubular goods; and
· Mountain Home, North Carolinamanufactures and sells stainless and nickel alloy wire.
Our Kokomo plant, our 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) our 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.
Our 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.
Our 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 specialty stainless, nickel and a limited amount of cobalt alloy wire products. A limited amount of warehousing is also done at this facility.
Our owned facilities located in the United States are subject to a mortgage which secures our obligations under our U.S. revolving credit facility with a group of lenders led by Wachovia Capital Finance Corporation. For more information see Managements discussion and analysis of financial condition and results of operations and Note 9 to the consolidated financial statements included elsewhere in this prospectus.
Service and sales centers. Our service and sales centers contain equipment capable of precision laser and water jet processing services to cut and shape products to customers precise specifications. We own service and sales centers in the following locations:
· Openshaw, Englandstocks and sells all product forms; and
· Lenzburg, Switzerlandstocks and sells all product forms.
The Openshaw plant, located near Manchester, England, consisted of approximately seven acres of land and over 200,000 square feet of buildings on a single site. Haynes has closed the manufacturing portion of the Openshaw plant 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 our overall operations or financial position. In April 2005, Haynes sold eight 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, we lease service and sales centers in the following locations:
· La Mirada, Californiastocks and sells all product forms;
· Houston, Texasstocks and sells all product forms;
· Lebanon, Indianastocks and sells all product forms;
72
· Paris, Francestocks and sells all product forms;
· Shanghai, Chinastocks and sells all product forms; and
· Windsor, Connecticutstocks and sells all product forms.
Sales centers. We lease sales centers in the following locations:
· Singaporesells all product forms; and
· Chennai, Indiasells all product forms.
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 service centers contain equipment capable of precision laser and water jet processing services to cut and shape products to customers precise specifications. We believe that our existing facilities are suitable for our current business needs.
On March 29, 2004, Haynes and its U.S. subsidiaries and U.S. affiliates as of that date filed voluntary petitions for reorganization relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Indiana (the Bankruptcy Court). Haynes filed for relief under Chapter 11 for a variety of reasons. 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 pre-petition 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, Haynes 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 courts interpretation of the Confirmation Order and the unique circumstances of each case. For more information see The reorganization.
We are 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. We are regularly involved in litigation, both as a plaintiff and as a defendant, relating to our 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 Environmental matters.
Litigation may result in substantial costs and may divert managements 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 our financial position, results of operations or liquidity.
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We are currently, and have in the past, been subject to claims involving personal injuries allegedly relating to our products. For example, we are presently involved in three actions involving welding rod-related injuries. Two lawsuits were filed in California state court against numerous manufacturers, including our 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 case with similar allegations is pending in Texas. We believe that we have defenses to these allegations and, that if we were found liable, the cases would not have a material effect on our financial position, results of operations or liquidity. In addition to these cases, we have in the past been named a defendant in several other lawsuits, including 52 filed in the state of California, alleging that our welding-related products harmed the users of such products through the inhalation of welding fumes containing manganese. We have 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 we contest such lawsuits vigorously, and may have applicable insurance, there are several risks and uncertainties that may affect our 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 we believe the facts of these cases are distinguishable from the facts of our cases, we cannot assure you that any or all claims against us 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 we will be named in additional suits alleging welding-rod injuries. Should such litigation occur, it is possible that the aggregate claims for damages, if we are found liable, could have a material adverse effect on our financial condition, results of operations or liquidity.
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Directors and executive officers
The following table sets forth certain information concerning the persons who served as our directors and executive officers as of the date of this prospectus. 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 |
|
67 |
|
President and Chief Executive Officer; Director |
John C. Corey |
|
59 |
|
Chairman of the Board; Director |
Paul J. Bohan |
|
62 |
|
Director |
Donald C. Campion |
|
58 |
|
Director |
Robert H. Getz |
|
44 |
|
Director |
Timothy J. McCarthy |
|
66 |
|
Director |
William P. Wall |
|
44 |
|
Director |
Ronald W. Zabel |
|
63 |
|
Director |
August A. Cijan |
|
51 |
|
Vice PresidentOperations |
Michael Douglas |
|
54 |
|
Vice PresidentTubular Products |
Anastacia S. Kilian |
|
32 |
|
Vice PresidentGeneral Counsel & Corporate Secretary |
James A. Laird |
|
54 |
|
Vice PresidentInternational Sales & Marketing |
Marlin C. Losch |
|
46 |
|
Vice PresidentNorth America Sales |
Marcel Martin |
|
57 |
|
Vice PresidentFinance, Treasurer, Chief Financial Officer |
Daniel W. Maudlin |
|
40 |
|
Controller and Chief Accounting Officer |
Jean C. Neel |
|
47 |
|
Vice PresidentCorporate Affairs |
Scott R. Pinkham |
|
39 |
|
Vice PresidentManufacturing Planning |
Gregory M. Spalding |
|
51 |
|
Vice PresidentHaynes Wire & Chief Operating Officer |
Charles J. Sponaugle |
|
58 |
|
Vice PresidentBusiness Planning |
Jeffrey L. Young |
|
49 |
|
Vice President & Chief Information Officer |
Mr. Petro was elected President and Chief Executive Officer and a director of Haynes in January 1999. From 1995 to the time he joined Haynes, Mr. Petro was President and Chief Executive Officer of Inco Alloys International, a company owned by The International Nickel Company of Canada. Mr. Petro is also a director of Algoma Steel, Inc.
Mr. Corey has been a director and the Chairman of the Board since our emergence from bankruptcy on August 31, 2004. Mr. Corey also serves as a member of the Corporate Governance Committee of the Board. In January 2006, he became the President, Chief Executive Officer and a
75
director of Stoneridge, Inc., a manufacturer of electrical and electronic components, modules and systems for the automotive, medium- and heavy-duty truck, agricultural and off-highway vehicle markets. From October 2000 through December 2005, Mr. Corey served as the President, Chief Executive Officer and a director of Safety Component International, Inc., a manufacturer of automotive airbags. Before becoming President and Chief Executive Officer of Safety Components International in October 2000, he served as President and Chief Operating Officer.
Mr. Bohan has been a director since our emergence from bankruptcy on August 31, 2004. Mr. Bohan also serves as the Chairman of the Corporate Governance Committee of the Board. He retired as a Managing Director of Citigroup in February 2001. Mr. Bohan currently serves on the Board of Directors of Arena Brands, Inc.; Revlon, Inc.; and the New York Police and Fire Widows and Childrens Benefit Fund.
Mr. Campion has been a director since our emergence from bankruptcy on August 31, 2004. Mr. Campion also serves as the Chairman of the Audit Committee and as a member of the Compensation Committee of the Board. From January 2003 until July 2004, Mr. Campion served as Chief Financial Officer of Verifone, Inc. Mr. Campion previously served as Chief Financial Officer of several companies, including Special Devices, Inc., Cambridge, Inc., Oxford Automotive, Inc., and Delco Electronics Corporation. He has had experience with implementation of internal controls and Sarbanes-Oxley 404 compliance. Mr. Campion also currently serves on the Board of Directors of Catuity, Inc. and McLeod USA, Incorporated.
Mr. Getz has been a director since March 2006. Mr. Getz also serves as a member of the Audit and Compensation Committees of the Board. Mr. Getz is a private investor and since December 1996 has served as a Managing Director and Partner of Cornerstone Equity Investors, LLC, a New York-based private equity investment firm. Prior to the formation of Cornerstone in 1996, Mr. Getz spent nine years at Prudential Equity Investors, Inc. in several roles, most recently serving as a Managing Director. Mr. Getz also serves as a director for Novatel Wireless, Inc. and Sitel Corporation.
Mr. McCarthy has been a director since our emergence from bankruptcy on August 31, 2004. Mr. McCarthy also serves as the Chairman of the Compensation Committee and as a member of the Audit Committee of the Board. Since 1985 he has served as the President and Chief Executive Officer of C.E. Minerals, an industrial mineral business.
Mr. Wall has been a director since our emergence from bankruptcy on August 31, 2004. Mr. Wall also serves on the Audit and Corporate Governance Committees of the Board. Mr. Wall joined Abrams Capital, LLC, a value-oriented investment firm headquartered in Boston, in February 2006, where he serves as general counsel and a director of Abrams Capital International, Ltd. From July 2003 through April 2005, Mr. Wall was a partner in Andover Capital, a hedge fund focused on leveraged companies. Prior to that, he spent seven years at Fidelity Investments in several roles, most recently serving as a Managing Director of Fidelity Capital Investors, a private equity group funded by Fidelity.
Mr. Zabel has been a director since our emergence from bankruptcy on August 31, 2004. Mr. Zabel also serves as a member of the Compensation Committee of the Board. Since November 2005, he has served as the Chief Executive Officer of Springs Industries, and prior to that time served as the President of Springs Window Fashions, LLC starting in 1999. Mr. Zabel also sits on the Board of Directors of Springs Industries.
76
Mr. Cijan has served as Vice PresidentOperations of Haynes since April 1996. Prior to this, Mr. Cijan served as Manufacturing Manager since joining Haynes in 1993.
Mr. Douglas has served as Vice PresidentTubular Products, and is accountable for the operations of the Arcadia Tubular Products Facility since joining Haynes 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 Haynes, 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 PresidentInternational Sales & Marketing of Haynes since July 2000, after having served in various sales and marketing positions with Haynes 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 Haynes 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 Haynes since October 2000. From 1996 to 2000 Mr. Martin was Vice President of Finance and Chief Financial Officer of Duferco Farrell Corporation.
Mr. Maudlin has served as Controller and Chief Accounting Officer effective as of September 20, 2004. Prior to his employment with Haynes, 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 Haynes since April 2000, after having served as Director, Corporate Affairs since joining Haynes in July 1999.
Mr. Pinkham has served as Vice PresidentManufacturing Planning since March 2004, after having served in various manufacturing and production capacities since joining Haynes in August 1999.
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 Haynes in July 1999.
Mr. Sponaugle has served as Vice PresidentBusiness Planning of Haynes since 2000, after having served as Vice President, Sales since June 1998 and in various sales, marketing and manufacturing positions since 1981.
Mr. Young has served as Vice President & Chief Information Officer since November 2005, after having served in various Information Technology positions since joining Haynes in November 1984.
77
Our by-laws authorize the Board of Directors to designate the number of directors to be not less than three nor more than nine. The Board of Directors has set the number of directors at eight. Directors of Haynes serve until their successors are duly elected and qualified or until their earlier resignation or removal. Officers of Haynes serve at the discretion of the Board of Directors, subject, in the case of Mr. Petro, to the terms of his employment contract.
The Board of Directors has established an Audit Committee, a Compensation Committee and a Corporate Governance Committee. The Audit Committee is responsible for retaining, reviewing and dismissing the independent auditors, reviewing, in connection with the independent auditors, the audit plan, the adequacy of internal controls, the audit report and management letter, and undertaking such other incidental functions as the board may authorize. The Audit Committee is also responsible for reviewing and approving conflict of interest transactions for Haynes. The Board of Directors has determined that Mr. Campion is an audit committee financial expert (as defined by Item 401(h) of Regulation S-K). The Compensation Committee is responsible for administering the stock option plans, determining executive compensation policies and administering compensation plans and salary programs, including performing an annual review of the total compensation and recommended adjustments for all executive officers. The Corporate Governance Committee is responsible for assisting the board by overseeing the performance and composition of the board to ensure effective governance. Except for Mr. Petro, all of the members of the Board of Directors, including all of the members of the Audit Committee, the Compensation Committee and the Corporate Governance Committee, meet the criteria for independence set forth in Rule 10A-3(b)(1) of the Securities Exchange Act of 1934, as amended.
78
The following summary compensation table sets forth certain information concerning total compensation paid by us during our last three completed fiscal years to (i) our Chief Executive Officer and (ii) each of our four other most highly compensated executive officers, who served as executive officers as of September 30, 2006 (collectively referred to as the Named Executive Officers).
|
|
|
|
Annual compensation(1) |
|
Long-term
|
|
|
|
|||||||||
Name and principal position |
|
Fiscal
|
|
|
|
Bonus
|
|
Securities
|
|
All other
|
|
|||||||
Francis J. Petro(4) |
|
2006 |
|
$ |
480,000 |
|
$ |
288,000 |
|
|
|
|
|
|
$ |
269,749 |
|
|
President and Chief Executive |
|
2005 |
|
$ |
480,000 |
|
$ |
460,000 |
|
|
|
|
|
|
$ |
343,526 |
|
|
Officer |
|
2004 |
|
$ |
473,077 |
|
$ |
0 |
|
|
200,000 |
|
|
|
$ |
317,084 |
|
|
Marcel Martin |
|
2006 |
|
$ |
196,923 |
|
$ |
85,500 |
|
|
|
|
|
|
$ |
6,543 |
|
|
Vice PresidentFinance, Treasurer |
|
2005 |
|
$ |
190,000 |
|
$ |
140,000 |
|
|
|
|
|
|
$ |
8,021 |
|
|
and Chief Financial Officer |
|
2004 |
|
$ |
163,992 |
|
$ |
0 |
|
|
100,000 |
|
|
|
$ |
3,678 |
|
|
August A. Cijan |
|
2006 |
|
$ |
192,308 |
|
$ |
85,500 |
|
|
|
|
|
|
$ |
6,471 |
|
|
Vice PresidentOperations |
|
2005 |
|
$ |
190,000 |
|
$ |
106,000 |
|
|
|
|
|
|
$ |
8,167 |
|
|
|
|
2004 |
|
$ |
178,051 |
|
$ |
0 |
|
|
100,000 |
|
|
|
$ |
4,171 |
|
|
James A. Laird |
|
2006 |
|
$ |
192,308 |
|
$ |
85,500 |
|
|
|
|
|
|
$ |
5,798 |
|
|
Vice PresidentInternational |
|
2005 |
|
$ |
190,000 |
|
$ |
106,000 |
|
|
|
|
|
|
$ |
6,903 |
|
|
Sales & Marketing |
|
2004 |
|
$ |
157,115 |
|
$ |
0 |
|
|
100,000 |
|
|
|
$ |
5,388 |
|
|
Gregory M. Spalding |
|
2006 |
|
$ |
162,308 |
|
$ |
40,000 |
|
|
|
|
|
|
$ |
5,561 |
|
|
Vice PresidentHaynes Wire & |
|
2005 |
|
$ |
160,000 |
|
$ |
65,000 |
|
|
|
|
|
|
$ |
5,555 |
|
|
Chief Operating Officer |
|
2004 |
|
$ |
149,335 |
|
$ |
0 |
|
|
50,000 |
|
|
|
$ |
2,925 |
|
|
(1) Additional compensation in the form of perquisites was paid to certain of the named officers in the periods presented; however, the amount of such compensation was less than the level required for reporting.
(2) The options set forth in the table were granted on August 31, 2004 pursuant to the plan of reorganization.
(3) Premium payments to the group term life insurance plan, gain sharing payments and relocation reimbursements which were made by Haynes, 401(k) match, executive disability, and 401(m) match.
(4) Includes $289,000, $314,000 and $246,000 for fiscal 2004, 2005 and 2006, respectively which accrued pursuant to our Supplemental Executive Retirement Plan and which is payable upon Mr. Petros retirement. For more information, see Pension PlansSupplemental Executive Retirement Plan.
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The Chief Executive Officer and each of the Named Executive Officers received a cash bonus payment in the first quarter of fiscal 2007 in connection with our fiscal 2006 management incentive plan. The following table shows the amounts of those payments, which were recommended by the Compensation Committee and approved by the Board based upon certain financial indicators of our performance, including EBITDA and revolver availability, as of and for the year ended September 30, 2006:
Named executive officers |
|
Bonus
|
|
|
Francis J. Petro. |
|
$ |
432,000 |
|
Marcel Martin. |
|
$ |
148,500 |
|
August A. Cijan |
|
$ |
135,000 |
|
James A. Laird. |
|
$ |
135,000 |
|
Gregory M. Spalding |
|
$ |
63,750 |
|
As of the date of this prospectus, the non-management members of the Board of Directors of Haynes received a $40,000 per year stipend related to their Board of Directors duties and responsibilities, and $2,000 per meeting. Additionally, there is a $20,000 annual stipend for serving as Chairman of the Board, a $15,000 annual stipend for serving as the chairman of the Audit Committee, and a $10,000 annual stipend for serving as chairman of any other committee of the Board. Directors are reimbursed by Haynes for their out-of-pocket expenses incurred in attending meetings of the Board of Directors. In addition, each non-employee director (other than Mr. Getz) was granted a non-qualified stock option to purchase 15,000 shares of our common stock at a price of $12.80 per share under the Stock Option Plan. Mr. Getz received 15,000 stock options granted on March 31, 2006 at a price of $31.00 per share. Members of the Offering and Pricing Committee will receive $10,000 for their services in such capacity, plus $2,000 for each substantive in-person meeting attended.
Compensation committee interlocks and insider participation
The members of the Compensation Committee as of September 30, 2006 were Timothy J. McCarthy, Ronald W. Zabel and Donald C. Campion. None of the members of the Compensation Committee are now serving or previously have served as employees or officers of Haynes or any subsidiary, and none of our executive officers serve as directors of, or in any compensation related capacity for, companies with which members of the Compensation Committee are affiliated.
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We have two stock option plans that authorize the granting of non-qualified stock options to certain of our key employees and non-employee directors for the purchase of a maximum of 1,500,000 shares of our common stock. Our original option plan was adopted in 2004 pursuant to our plan of reorganization and provides for the grant of options to purchase up to 1,000,000 shares of our common stock. In January 2007, our Board of Directors adopted a new option plan that provides for options to purchase up to 500,000 shares or our common stock. 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 ⅓ % per year over three years from the grant date. Upon our emergence from bankruptcy, options were granted to certain of our executive officers and non-employee directors at that time at $12.80 per share. Options granted thereafter are granted at fair market value on the date of grant. As of the date of this prospectus, options to purchase 980,000 shares of our common stock were outstanding under the option plans and options covering 520,000 shares of our common stock were available for future grants.
Unvested options will become fully vested upon the occurrence of certain acceleration events, including the death or disability (as defined in the Option Plan) of the participant and certain events constituting a Change in Control (as defined in the option plans). The option plans also authorize the Board of Directors to accelerate the vesting of options upon certain Change in Control events in its discretion or to terminate the options and provide for the purchase of options from the option holders for a price equal to the amount that would have been attained by the holder if the option were fully vested. If an employee participant in the option plan ceases to be an employee of Haynes due to a termination for cause (as defined in the option plan), or if such participant terminates his or her employment with Haynes without good reason (as defined in the option plan), all stock options previously granted to such participant, whether or not vested, will be cancelled and will not be exercisable. If an employee participant ceases to be an employee of Haynes for any reason other than for cause or for good reason, the vested portion of all options granted to such participant under the original option plan will remain exercisable for a period of six months and the remaining options will be forfeited. The 2007 option plan includes similar provisions if the employee participant is terminated for cause, but does not provide for vesting of options if the employee participant terminates employment for good reason.
81
Option grants in last fiscal year and fiscal year end option values
None of the executive officers named in the summary compensation table were granted or exercised stock options in fiscal 2006. The following table provides the total number of securities underlying unexercised stock options held by the executive officers named in the summary compensation table as of September 30, 2006:
Termination benefits agreements
Haynes has entered into Termination Benefits Agreements with certain executive officers (including the named executive officers) of Haynes, other than Mr. Petro, the Chief Executive Officer. The Termination Benefits Agreements provide for an initial term expiring September 30, 2007, subject to two-year automatic extensions (unless terminated by Haynes or the eligible employee at least 60 days prior to the renewal date).
The Termination Benefits Agreement provides that if an eligible employees employment with Haynes is terminated by Haynes without Cause (as defined in the Termination Benefits Agreement), by the employee for Good Reason (as defined in the Termination Benefits Agreements) or by reason of such eligible employees disability or death, Haynes will pay the eligible employee (or his estate) his accrued but unpaid Base Salary (as defined in the Termination Benefits Agreement) plus any bonus or incentive compensation earned or payable as of the Date of Termination (as defined in the Termination Benefits Agreement), and a bonus equal to the eligible employees total annual target bonus in the fiscal year of the termination pro rated for the number of days the employee worked in the fiscal year. In the event that the eligible employees employment is terminated by Haynes for Cause, by the employee without Good Reason or due to the employees retirement, Haynes is obligated only to pay the eligible employee his accrued but unpaid Base Salary and any other accrued but unpaid compensation through the Date of Termination. In addition, if within 12 months following a Change in Control (as defined in the Termination Benefits Agreement) the eligible employees employment is terminated by the eligible employee with Good Reason or by Haynes without Cause, Haynes must (among other things):
· pay the eligible employee such eligible employees accrued but unpaid Base Salary and any bonus or incentive compensation earned or payable as of the Date of Termination;
· pay the eligible employee such eligible employees Base Salary that would be payable over the 12 months following the Date of Termination;
82
· pay the eligible employee a bonus equal to the eligible employees total annual target bonus in the fiscal year of the termination; and
· continue to provide life insurance and medical and hospital benefits to the eligible employee for up to 12 months following the Date of Termination.
As a condition to receipt of severance payments and benefits, the Termination Benefits Agreement requires that eligible employees execute a release of all claims.
Pursuant to the Termination Benefits Agreement, each eligible employee agrees that during his employment with Haynes and for an additional one year following the Date of Termination of the eligible employees employment with Haynes, the eligible employee will not, directly or indirectly, engage in any business in competition with the business of Haynes, solicit any customer or employee of Haynes, or disclose any Confidential Information (as defined in the Termination Benefits Agreement).
Employment agreement with our President and Chief Executive Officer
Haynes has entered into an Employment Agreement with its President and Chief Executive Officer, Francis J. Petro, which was entered into August 31, 2004, in connection with our emergence from bankruptcy, and will terminate on September 30, 2007, unless renewed by a subsequent agreement of the parties. Pursuant to this Employment Agreement, Mr. Petros base salary is $480,000 per year, with bonus targets to be determined by the Board of Directors annually prior to or at the commencement of the applicable fiscal year. This compensation is identical to the compensation being paid to Mr. Petro prior to the emergence from bankruptcy.
If Mr. Petros employment is terminated by reason of the expiration of the employment term, Mr. Petro will be entitled to (i) any earned but unpaid base salary and bonuses and reimbursement of business expenses; and (ii) the benefits that he has been granted under our Supplemental Executive Retirement Plan. In addition, any unvested stock options held by Mr. Petro at the time of the expiration of his employment term will terminate immediately and any vested options will remain exercisable for 90 days following termination or until the option expires, whichever is less.
If Mr. Petros employment is terminated by Haynes for cause or he resigns without good reason, Mr. Petro will be entitled to (i) any earned but unpaid base salary and bonuses and reimbursement of business expenses; and (ii) the benefits that he has been granted under the Supplemental Executive Retirement Plan of Haynes. In addition, (i) if Mr. Petros termination is for cause, any vested and unvested stock options will terminate immediately; and (ii) if his termination is for good reason, any unvested stock options will terminate immediately and any vested options will remain exercisable for 30 days following termination or until the option expires, whichever is less.
If Mr. Petros employment is terminated by Haynes without cause or by Mr. Petro without good reason, Mr. Petro will be entitled to (i) any earned but unpaid base salary and bonuses and reimbursement of business expenses; (ii) two times his annual base salary; (iii) two times his average bonus for the two fiscal years preceding his termination; (iv) continuation of certain health and welfare benefits for two years following termination or until comparable benefits are obtained from a new employer, whichever is less; and (v) the benefits that he has been granted
83
under our Supplemental Executive Retirement Plan. In addition, any unvested stock options will vest immediately and all options held by Mr. Petro will remain exercisable for one year following termination or until the option expires, whichever is less.
If Mr. Petros employment is terminated by reason of his death, disability or retirement, Mr. Petro or his heirs, estate, personal representative or legal guardian, as appropriate will be entitled to (i) any earned but unpaid base salary and bonuses and reimbursement of business expenses; and (ii) the benefits that he has been granted under the Supplemental Executive Retirement Plan of Haynes. In addition, any unvested stock options will vest immediately and all options held by Mr. Petro will remain exercisable for one year in the event of death or disability and six months in the event of retirement or until the option expires, whichever is less.
Mr. Petro is subject to a confidentiality restriction during his employment and thereafter, and to non-compete and non-solicitation restrictions during his employment and for two years following termination.
Supplemental executive retirement plan
Effective as of January 1, 2002, Haynes adopted its Supplemental Executive Retirement Plan, which provides benefits to a select group of management and highly compensated employees as selected by our Compensation Committee upon the termination of employment or death of such employee. The benefits to be received by each participant are defined in plan agreements between Haynes and the individual participants. Currently, Francis J. Petro, our President and Chief Executive Officer, is the only participant in the Supplemental Executive Retirement Plan. Pursuant to Mr. Petros Plan Agreement, Mr. Petros benefit under the Supplemental Executive Retirement Plan is equal to 3% of the product of his years of service and his average compensation, reduced by the value of benefits to which Mr. Petro may be entitled under the Companys Pension Plan. The benefit will be paid in an actuarial equivalent lump sum payment upon the termination of employment or death as previously elected by Mr. Petro.
Haynes maintains a defined benefit pension plan for the benefit of eligible domestic employees designated as the Haynes International, Inc. Pension Plan. The pension plan is qualified under Section 401 of the Internal Revenue Code, permitting Haynes to deduct for federal income tax purposes all amounts contributed by it to the pension plan pursuant to funding requirements. Our reorganization did not change the terms of the pension plan.
Under the pension plan, all company employees (except those employed pursuant to a written agreement which provides that the employee shall not be eligible to participate, temporary or seasonal employees, or any employees employed in a job category that includes no pension benefits) are eligible to participate in the plan. Participants are eligible to receive an unreduced pension annuity upon the first to occur of (i) reaching age 65, (ii) reaching age 62 and completing ten years of benefit service, or (iii) completing 30 years of benefit service. The final option is available only for union employees hired before June 11, 1999 or for salaried employees who were plan participants in the pension plan on March 31, 1987.
84
For salaried employees who retire on or after July 2, 2002 under option (i) or (ii) above, and for union employees hired on or after July 3, 1988 who retire on or after July 2, 2002 under option (i), (ii), or (iii) above, the normal monthly pension benefit provided under the pension plan is the greater of (i) 1.4% of the employees average monthly earnings multiplied by years of benefit service, plus an additional 0.5% of the employees average monthly earnings, if any, in excess of Social Security covered compensation multiplied by years of benefit service up to 35 years, or (ii) the employees accrued benefits as of September 30, 2002. For salaried employees who retire on or after July 2, 2002 under option (iii) above (with 30 years of benefit service), the normal monthly pension provided under the pension plan is equal to one of the following as elected by the participant: (i) the accrued benefit as of March 31, 1987 plus any supplemental retirement benefit payable to age 62, (ii) the accrued benefit as of March 31, 1987 plus any supplemental retirement benefit payable to any age elected by the participant (prior to 62) and thereafter the actuarial equivalent of the benefit payable for retirement under options (i) and (ii) above, or (iii) if the participant is at least age 55, the actuarial equivalent of the benefit payable for retirement under options (i) and (ii) above. Salaried employees who commenced employment with Haynes after December 31, 2005 are not eligible to participate in the plan.
There are provisions for delayed retirement, early retirement benefits, disability retirement, death benefits, optional methods of benefits payments, payments to an employee who leaves after five or more years of service, and payments to an employees surviving spouse. Participants interests are vested and they are eligible to receive pension benefits after completing five years of service. However, all participants as of October 1, 2001, became 100% vested in their benefits on that date. Vested benefits are generally paid beginning at or after age 55.
The following table sets forth the range of estimated annual benefits payable upon retirement for graduated levels of average annual earnings and years of service for employees under the plan, based on retirement at age 65 on or after October 1, 2006. The maximum annual salary permitted for 2006 under Section 401(a)(17) of the Code is $220,000. The maximum annual benefit permitted for 2006 under Section 415(b) of the Code is $175,000.
|
|
Years of service |
|
|||||||||||||
Average annual remuneration |
|
15 |
|
20 |
|
25 |
|
30 |
|
35 |
|
|||||
$100,000 |
|
$ |
24,656 |
|
$ |
32,875 |
|
$ |
41,094 |
|
$ |
49,312 |
|
$ |
57,531 |
|
$150,000 |
|
38,906 |
|
51,875 |
|
64,844 |
|
77,812 |
|
90,781 |
|
|||||
$200,000 |
|
53,156 |
|
70,875 |
|
88,594 |
|
106,312 |
|
124,031 |
|
|||||
$250,000 |
|
58,856 |
|
78,475 |
|
98,094 |
|
117,712 |
|
137,331 |
|
|||||
$300,000 |
|
58,856 |
|
78,475 |
|
98,094 |
|
117,712 |
|
137,331 |
|
|||||
$350,000 |
|
58,856 |
|
78,475 |
|
98,094 |
|
117,712 |
|
137,331 |
|
|||||
$400,000 |
|
58,856 |
|
78,475 |
|
98,094 |
|
117,712 |
|
137,331 |
|
|||||
$450,000 |
|
58,856 |
|
78,475 |
|
98,094 |
|
117,712 |
|
137,331 |
|
|||||
85
The estimated credited years of service of each of the named executive officers as of September 30, 2006 are as follows:
Named executive officer |
|
|
|
Francis J. Petro |
|
7 |
|
Marcel Martin |
|
20 |
|
August A. Cijan |
|
13 |
|
James A. Laird |
|
23 |
|
Gregory M. Spalding |
|
7 |
|
Haynes maintains a pension plan for its employees of Haynes International, Ltd., our U.K. subsidiary. The U.K. pension plan is a contributory plan under which eligible employees contribute 3.5% or 6% of their annual earnings. Normal retirement age under the U.K. pension plan is age 65. The annual pension benefit provided at normal retirement age under the U.K. pension plan ranges from 1% to 1 2/3% of the employees final average annual earnings for each year of credited service, depending on the level of employee contributions made each year during the employees period of service with Haynes. The maximum annual pension benefit for employees with at least 10 years of service is two-thirds of the individuals final average annual earnings. Similar to the U.S. pension plan, the U.K. pension plan also includes provisions for delayed retirement benefits, early retirement benefits, disability and death benefits, optional methods of benefit payments, payments to employees who leave after a certain number of years of service, and payments to an employees surviving spouse. The U.K. pension plan also provides for payments to an employees surviving children. Our reorganization did not change the terms of the U.K. pension plan.
Profit sharing and savings plan
We maintain the Haynes International, Inc. Combined Profit Sharing and Savings Plan to provide retirement, tax-deferred savings for eligible domestic employees and their beneficiaries. The profit sharing and savings plan consists of Cabot profit sharing and Cabot PAYSOP accounts attributable to matching made by us under prior plans and profit sharing contributions based on our profits and savings accounts attributable to employee pre-tax deferrals and after-tax contributions. The profit sharing and savings plan is qualified under Section 401 of the Internal Revenue Code, permitting us to deduct for federal income tax purposes all amounts contributed by it to the profit sharing and savings plan. We regularly makes matching contributions based on participant elective pre-tax contributions; however, no profit sharing contributions were made to the profit sharing and savings plan for the fiscal years 2004, 2005, or 2006. Our reorganization did not change the terms of the profit sharing and savings plan.
Under the profit sharing and savings plan, all of our employees (except those employed pursuant to a written agreement which provides that the employee shall not be eligible to participate, those who are classified as an independent contractor even if later determined to be an employee, leased employees, and employees of an affiliated employer who has not adopted the
86
plan in writing) are eligible to participate in the plan. Employees completing a one-month period of employment are eligible to participate in the elective pre-tax, after-tax voluntary, and our matching portions of the plan. Employees completing a 12-month period of employment are eligible to participate in our profit sharing contribution portion of the plan.
Participants may choose to make elective pre-tax contributions to the plan in amounts up to 50% of their plan compensation. Participants may also choose to make after-tax contributions to the plan in amounts up to 20% of their plan compensation. Eligible employees may make a rollover contribution to the plan if accepted by the plan administrator pursuant to the terms of the plan.
Effective June 14, 1999, we agreed to match 50% of a participants elective pre-tax and after-tax contributions to the plan up to a maximum contribution of 3% of the participants plan compensation. Each participants share in our profit sharing allocation, if any, is represented by the percentage, which his or her plan compensation (up to $225,000 in 2007) bears to the total plan compensation of all participants in the profit sharing and savings plan. Salaried employees hired after December 31, 2005 are not covered by the pension plan, but are eligible for an enhanced matching program in the combined profit sharing and savings plan under which Haynes matches 60% of a participants contributions up to a maximum of 6% of the participants compensation.
Participants who elect to make elective pre-tax and/or after-tax contributions to the plan and receive our match are immediately vested in their accounts attributable to those contributions. For plan years starting before January 1, 2007, participants become 100% vested in any of our profit sharing contributions made on their behalf after completing five years of service. For plan years starting on or after January 1, 2007 participants become 100% vested in any of our profit sharing contributions made on their behalf after completing three years of service.
Participants may make withdrawals from their vested accounts while still employed under certain circumstances pursuant to the terms of the profit sharing and savings plan. Under the profit sharing portion of the plan, vested individuals account balances attributable to our contributions may be withdrawn only after the amount to be distributed has been held by the plan trustee in the account for at least 24 consecutive calendar months.
Limitation on liability and indemnification agreements
Effective August 13, 2006, Haynes agreed to indemnify Francis J. Petro, John C. Corey, Timothy J. McCarthy, Donald C. Campion, Paul J. Bohan, Ronald W. Zabel, William P. Wall and Robert H. Getz, each of whom is a member of the Board of Directors, against loss or expense arising from such individuals service to Haynes and its subsidiaries and affiliates, and to advance attorneys fees and other costs of defense to such individuals in respect of claims that may be eligible for indemnification under certain circumstances. We have also entered into an agreement to indemnify Ms. Kilian from any losses arising out of any legal opinion she may give in her capacity as our general counsel.
87
August 2004 registration rights agreement
The following is a summary of certain provisions of the registration rights agreement that we entered into in August 2004 for the benefit of stockholders who were issued shares of our common stock pursuant to our plan of reorganization. Readers are encouraged to review the complete registration rights agreement, which is included as an exhibit to the registration statement of which this prospectus is a part.
In connection with the registration rights agreement, we filed a registration statement with the Securities and Exchange Commission on May 16, 2005 and have maintained the effectiveness of such registration statement. We are permitted to suspend the right of a holder to sell pursuant to that registration statement under certain circumstances relating to pending corporate developments and similar events. Following the closing of the offering, we will no longer be required to maintain the effectiveness of that registration statement, and we intend to terminate it following the closing of the offering.
Parties to the registration rights agreement are entitled to piggyback registration rights relating to this offering, and the selling stockholders in this offering (other than our directors and officers) are exercising these rights.
We have entered into agreements to indemnify our Board of Directors in addition to the indemnification provided for in our amended and restated certificate of incorporation and by-laws. We have also entered into an agreement to indemnify Ms. Kilian from any losses arising out of any legal opinion she may give in her capacity as our general counsel. For more information regarding indemnification matters, see ManagementLimitations on liability and indemnification.
Since August 2004, we have granted options to purchase an aggregate of 980,000 shares of our common stock to our current directors and executive officers, including each of our executive officers named in the Summary Compensation Table, at a weighted-average exercise price of $14.49. For more information see ManagementStock option plan.
We have entered into a formal executive employment agreement with Francis Petro, our President and Chief Executive Officer. For more information see ManagementEmployment agreement with our President and Chief Executive Officer.
88
Principal and selling stockholders
The following table provides, as of the date of this prospectus, information regarding the beneficial ownership of the shares of our common stock by:
· each of our named executive officers and directors,
· all of our directors and executive officers as a group,
· each person known to Haynes to be the beneficial owner of more than five percent of any class of our voting securities as calculated in accordance with Rule 13d-3 under the Securities Exchange Act of 1934 and
· each other selling stockholder.
The information below assumes there will be 11,400,000 shares of common stock outstanding after this offering and assumes no exercise of the underwriters over-allotment option.
|
|
Amount
|
|
Percentage
|
|
Amount
|
|
Percentage
|
|
|
||
Named executive officers and directors(1)(2): |
|
|
|
|
|
|
|
|
|
|
|
|
Francis J. Petro |
|
138,040 |
|
|
1.4 |
% |
|
67,096 |
|
* |
|
|
John C. Corey |
|
10,000 |
|
|
* |
|
|
5,032 |
|
* |
|
|
Paul J. Bohan |
|
10,000 |
|
|
* |
|
|
3,523 |
|
* |
|
|
Donald C. Campion |
|
10,000 |
|
|
* |
|
|
3,774 |
|
* |
|
|
Robert H. Getz |
|
5,000 |
|
|
* |
|
|
|
|
* |
|
|
Timothy J. McCarthy |
|
10,000 |
|
|
* |
|
|
5,032 |
|
* |
|
|
William P. Wall |
|
10,000 |
|
|
* |
|
|
5,032 |
|
* |
|
|
Ronald W. Zabel |
|
10,000 |
|
|
* |
|
|
5,032 |
|
* |
|
|
August A. Cijan |
|
66,667 |
|
|
* |
|
|
33,547 |
|
* |
|
|
James A. Laird |
|
66,667 |
|
|
* |
|
|
33,547 |
|
* |
|
|
Marcel Martin |
|
66,667 |
|
|
* |
|
|
33,547 |
|
* |
|
|
Gregory Spalding |
|
33,333 |
|
|
* |
|
|
16,774 |
|
* |
|
|
All directors and
executive officers as a group
|
|
619,991 |
|
|
6.2 |
% |
|
300,000 |
|
2.8% |
|
|
Principal stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
JANA Partners LLC(4)
|
|
1,501,900 |
|
|
15.0 |
% |
|
700,000 |
|
7.0% |
|
|
89
Jefferies Group, Inc.(5)
|
|
649,991 |
|
|
6.5 |
% |
|
|
|
5.7% |
|
|
Harbinger Capital Partners
Master Fund I, Ltd.(6)
|
|
2,500,000 |
|
|
25.0 |
% |
|
|
|
21.9% |
|
|
Harbinger Capital Partners
Offshore Manager, L.L.C.(7)
|
|
2,500,000 |
|
|
25.0 |
% |
|
|
|
21.9% |
|
|
HMC Investors, L.L.C.(8)
|
|
2,500,000 |
|
|
25.0 |
% |
|
|
|
21.9% |
|
|
Harbert Management
Corporation(9)
|
|
2,800,000 |
|
|
28.0 |
% |
|
|
|
24.6% |
|
|
Philip Falcone(10)
|
|
2,800,000 |
|
|
28.0 |
% |
|
|
|
24.6% |
|
|
Raymond J. Harbert(11)
|
|
2,800,000 |
|
|
28.0 |
% |
|
|
|
24.6% |
|
|
Michael D. Luce(12)
|
|
2,800,000 |
|
|
28.0 |
% |
|
|
|
24.6% |
|
|
JPMorgan Chase &
Co.(13)
|
|
513,837 |
|
|
5.1 |
% |
|
|
|
4.5% |
|
|
Other selling stockholders(1)(14): |
|
|
|
|
|
|
|
|
|
|
|
|
Charles J. Sponaugle, Vice PresidentBusiness Planning |
|
33,623 |
|
|
* |
|
|
16,774 |
|
* |
|
|
Jean C. Neel, Vice PresidentCorporate Affairs |
|
33,333 |
|
|
* |
|
|
16,774 |
|
* |
|
|
Michael Douglas, Vice PresidentTubular Products |
|
16,666 |
|
|
* |
|
|
8,387 |
|
* |
|
|
Scott Pinkham, Vice PresidentManufacturing Planning |
|
33,333 |
|
|
* |
|
|
16,774 |
|
* |
|
|
Jeff Young, Vice PresidentChief Information Officer |
|
24,999 |
|
|
* |
|
|
8,387 |
|
* |
|
|
Daniel E. Maudlin, Controller and Chief Accounting Officer |
|
33,333 |
|
|
* |
|
|
16,774 |
|
* |
|
|
Marlin C. Losch, Vice PresidentNorth American Sales |
|
8,333 |
|
|
* |
|
|
4,194 |
|
* |
|
|
90
* Represents beneficial ownership of less than one percent of the outstanding common stock.
(1) The business address of each person indicated is c/o Haynes International, Inc., 1020 West Park Avenue, Kokomo, Indiana 46904-9013.
(2) Shares beneficially owned before this offering include shares issuable pursuant to options exercisable within 60 days after the date of this prospectus as follows: for Mr. Petro, options to purchase 133,333 shares; for Mr. Corey, options to purchase 10,000 shares; for Mr. Bohan, options to purchase 10,000 shares; for Mr. Campion, options to purchase 10,000 shares; for Mr. Getz, options to purchase 5,000 shares; for Mr. McCarthy, options to purchase 10,000 shares; for Mr. Wall, options to purchase 10,000 shares; for Mr. Zabel, options to purchase 10,000 shares; for Mr. Cijan, options to purchase 66,666 shares; for Mr. Laird, options to purchase 66,666 shares; for Mr. Martin, options to purchase 66,666 shares; and for Mr. Spalding, options to purchase 33,333 shares.
(3) Includes 13,333 shares subject to options exercisable within 60 days of the date of this prospectus.
(4) Based solely upon Form 13F filed with the Securities and Exchange Commission on February 12, 2007. JANA Partners LLC, a Delaware limited liability company, is a private money management firm which holds our common stock in various accounts under its management and control. The principals of JANA Partners LLC are Barry Rosenstein and Gary Claar.
(5) Based solely upon Schedule 13G filed with the Securities and Exchange Commission on October 27, 2006.
(6) Based solely upon Schedule 13D filed with the Securities and Exchange Commission on August 4, 2006. Harbinger Capital Partners Master Fund I, Ltd. (the Master Fund) may be deemed to be the beneficial owner of 2,500,000 shares, constituting 25.0% of our shares, based upon 10,000,000 shares outstanding. The Master Fund has the sole power to vote or direct the vote of 0 shares; has the shared power to vote or direct the vote of 2,500,000 shares; has the sole power to dispose or direct the disposition of 0 shares; and has shared power to dispose or direct the disposition of 2,500,000 shares.
(7) Based solely upon Schedule 13D filed with the Securities and Exchange Commission on August 4, 2006. Harbinger Capital Partners Offshore Manager, L.L.C. (Harbinger Management) is the investment manager of the Master Fund. Harbinger Management may be deemed to be the beneficial owner of 2,500,000 shares, constituting 25.0% of our shares, based upon 10,000,000 shares outstanding. Harbinger Management has the sole power to vote or direct the vote of 0 shares; has the shared power to vote or direct the vote of 2,500,000 shares; has sole power to dispose or direct the disposition of 0 shares; and has shared power to dispose or direct the disposition of 2,500,000 shares. Harbinger Management specifically disclaims beneficial ownership in the shares reported herein except to the extent of its pecuniary interest therein.
(8) Based solely upon Schedule 13D filed with the Securities and Exchange Commission on August 4, 2006. HMC Investors, L.L.C. (HMC Investors) is the managing member of the Master Fund. HMC Investors may be deemed to be the beneficial owner of 2,500,000 shares, constituting 25.0% of our shares, based upon 10,000,000 shares outstanding. HMC Investors has the sole power to vote or direct the vote of 0 shares; has the shared power to vote or direct the vote of 2,500,000 shares; has sole power to dispose or direct the disposition of 0 shares; and has shared power to dispose or direct the disposition of 2,500,000 shares. HMC Investors specifically disclaims beneficial ownership in the shares reported herein except to the extent of its pecuniary interest therein.
(9) Based solely upon Schedule 13D filed with the Securities and Exchange Commission on August 4, 2006. Harbert Management Corporation (HMC) is the managing member of HMC Investors. HMC may be deemed to be the beneficial owner of 2,800,000 shares, constituting 28.0% of our shares, based upon 10,000,000 shares outstanding. HMC has the sole power to vote or direct the vote of 0 shares; has the shared power to vote or direct the vote of 2,800,000 shares; has sole power to dispose or direct the disposition of 0 shares; and has shared power to dispose or direct the disposition of 2,800,000 shares. HMC specifically disclaims beneficial ownership in the shares reported herein except to the extent of its pecuniary interest therein.
(10) Based solely upon Schedule 13D filed with the Securities and Exchange Commission on August 4, 2006. Philip Falcone is a shareholder of HMC and the portfolio manager of the Master Fund and the Harbinger Capital Partners Special Situations Fund, L.P. (Special Situations Fund). Mr. Falcone may be deemed to be the beneficial owner of 2,800,000 shares, constituting 28.0% of our shares, based upon 10,000,000 shares outstanding. Mr. Falcone has the sole power to vote or direct the vote of 0 shares; has the shared power to vote or direct the vote of 2,800,000 shares; has sole power to dispose or direct the disposition of 0 shares; and has shared power to dispose or direct the disposition of 2,800,000 shares. Mr. Falcone specifically disclaims beneficial ownership in the shares reported herein except to the extent of his pecuniary interest therein.
(11) Based solely upon Schedule 13D filed with the Securities and Exchange Commission on August 4, 2006. Raymond J. Harbert is a shareholder of HMC. Mr. Harbert may be deemed to be the beneficial owner of 2,800,000 shares, constituting 28.0% of our shares, based upon 10,000,000 shares outstanding. Mr. Harbert has the sole power to vote or direct the vote of 0 shares; has the shared power to vote or direct the vote of 2,800,000 shares; has sole power to dispose or direct the disposition of 0 shares; and has shared power to dispose or direct the disposition of 2,800,000 shares. Mr. Harbert specifically disclaims beneficial ownership in the shares reported herein except to the extent of his pecuniary interest therein.
(12) Based solely upon Schedule 13D filed with the Securities and Exchange Commission on August 4, 2006. Michael D. Luce is a shareholder of HMC. Mr. Luce may be deemed to be the beneficial owner of 2,800,000 shares, constituting 28.0% of our shares, based upon 10,000,000 shares outstanding. Mr. Luce has the sole power to vote or direct the vote of 0 shares; has the shared power to vote or direct the vote of 2,800,000 shares; has sole power to dispose or direct the disposition of 0 shares; and has shared power to dispose or direct the disposition of 2,800,000 shares. Mr. Luce specifically disclaims beneficial ownership in the shares reported herein except to the extent of his pecuniary interest therein.
(13) Based solely upon Schedule 13G filed with the Securities and Exchange Commission on February 12, 2007.
(14) Shares beneficially owned before this offering include shares issuable pursuant to options exercisable within 60 days after the date of this prospectus as follows: for Messrs. Sponaugle, Pinkham, and Maudlin and Ms. Neel, options to purchase 33,333 shares; for Mr. Young, options to purchase 24,999 shares; for Mr. Douglas, options to purchase 16,666 shares; and for Mr. Losch, options to purchase 8,333 shares.
91
The following information describes our common stock and preferred stock and certain provisions of our restated certificate of incorporation, as amended, and by-laws. This description is a summary. You can obtain more information about our capital stock by reviewing our by-laws and certificate of incorporation, which were filed as exhibits to the registration statement of which this prospectus forms a part.
As of the date of this prospectus, our authorized capital stock consists of 40.0 million shares of common stock, par value $0.001 per share, and 20.0 million shares of preferred stock, par value $0.001 per share.
As of the date of this prospectus, 10.0 million shares of our common stock were issued and outstanding. On February 20, 2007, our stockholders approved an increase in our authorized shares of common stock from 20.0 million to 40.0 million. Our Board of Directors may consider issuance of these shares of common stock to accomplish, among other circumstances, stock splits, stock dividends or distributions, acquisitions, financings, or rights offerings.
After giving effect to the sale of common stock offered by us in this offering, there will be 11.4 million shares of common stock outstanding, or 11.65 million shares if the underwriters exercise their over-allotment option in full. For more information see Underwriting.
The holders of shares of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Our common stockholders have no preemptive, redemption, cumulative voting or conversion rights. Our common stockholders are entitled to receive dividends out of funds legally available for distribution when and if declared by our Board of Directors, in its sole discretion. For more information see Dividend policy.
The holders of shares of our common stock shall share ratably in our assets legally available for distribution to our stockholders in the event of our liquidation, dissolution or winding up, after the payment in full of all debts and distributions and after the holders of all series of outstanding preferred stock have received their liquidation preferences in full.
The transfer agent and registrar for the shares of our common stock is Wells Fargo Bank, N.A. located at 161 North Concord Exchange South, St. Paul, Minnesota 55075 and can be contacted by telephone at (651) 552-6948.
As of the date of this prospectus, there are no shares of preferred stock issued and outstanding, and we have no current plans to issue any shares of our preferred stock. It is not possible to state the actual effect of the issuance of any shares of our preferred stock not currently authorized on the rights of holders of shares of our common stock until the Board of Directors determines the specific rights attached to the shares of any such class of preferred stock. The effects of an issuance by us of preferred stock not currently authorized could include one or more of the following: restricting dividends on shares of our common stock, diluting the voting power of shares of our common stock, impairing the liquidation rights of shares of our common stock, or delaying or preventing a change of control.
92
Our Board of Directors has the authority under our certificate of incorporation, without action by stockholders, to classify or reclassify any unissued shares of our preferred stock from time to time by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of the shares of such preferred stock.
Preferred share purchase rights
At our 2007 Annual Stockholders' Meeting held on February 20, 2007, a majority of our stockholders voted not to approve the ratification and continuation of the Rights Agreement (the "Rights Agreement") between Haynes and Wells Fargo Bank N.A. as rights agent, thereby terminating the Rights Agreement based on its terms. We entered into the Rights Agreement on August 13, 2006, and, in connection therewith, our Board of Directors declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of our common stock, par value $.001 per share (the "Common Stock"). Each Right allowed its holder to purchase from us one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.001 per share ("Preferred Stock"), for $135.00, subject to adjustment under certain conditions, once the Rights became exercisable.
As a result of the vote of our stockholders not to approve the ratification and continuation of the Rights Agreement, the Rights will no longer be exercisable after March 22, 2007. In the period between February 20, 2007 and March 22, 2007, the Rights will not become exerciseable unless and until any of the following has occurred:
· the date which is 10 days after the public announcement that a person or group has (subject to certain exceptions) become an Acquiring Person by obtaining beneficial ownership of 15% or more of the outstanding Common Stock (or with respect to any person or group beneficially owning 15% or more of the outstanding Common Stock at the time of adoption of the Rights Agreement or at any time thereafter and prior to the first public announcement of the adoption of the Rights Agreement, by acquiring beneficial ownership of any additional shares of Common Stock after the first public announcement of the adoption of the Rights Agreement if after giving effect to such acquisition such person or group owns 15% or more of the outstanding Common Stock); or
· the date which is 10 business days (or a later date determined by our Board of Directors before any person or group becomes an Acquiring Person) after a person or group begins a tender or exchange offer which, if completed, would result in that person or group becoming an Acquiring Person.
As of the date of this prospectus, the Rights are exercisable, but the Rights will no longer be exercisable and will not attach to the common stock after March 22, 2007. Therefore, if the closing of the offering contemplated by this prospectus occurs after March 22, 2007, the common stock purchased by investors in this offering will not have Rights attached.
Indemnification of directors and officers
We are a corporation organized under the laws of the State of Delaware. Section 145 of the Delaware General Corporation Law (the DGCL) permits a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending
93
or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise. A corporation may indemnify against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding if the person indemnified acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. In the case of an action or suit by or in the right of the corporation to procure a judgment in its favor, no indemnification may be made in respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery of the State of Delaware, or the court in which such action or suit was brought, shall determine upon application that, despite the adjudication of liability, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Section 145 provides that, to the extent a present or former director or officer of a corporation has been successful in the defense of any action, suit or proceeding referred to above or in the defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys fees) actually and reasonably incurred by him or her in connection therewith.
Pursuant to authority conferred by Delaware law, our certificate of incorporation contains provisions providing that no director shall be liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent that such exemption from liability or limitation thereof is not permitted under Delaware law as then in effect or as it may be amended. This provision is intended to eliminate the risk that a director might incur personal liability to us or our stockholders for breach of the duty of care.
Our certificate of incorporation and by-laws contain provisions requiring us to indemnify and advance expenses to our directors and officers to the fullest extent permitted by law. Among other things, these provisions generally provide indemnification for our directors and officers against liabilities for judgments in and settlements of lawsuits and other proceedings and for the advancement and payment of fees and expenses reasonably incurred by the director or officer in defense of any such lawsuit or proceeding if the director or officer acted in good faith and in a manner he or she reasonably believed to be in or not opposed to our best interests, and in certain cases only if the director or officer is not adjudged to be liable to us.
Delaware anti-takeover law and certain charter and by-law provisions
We are subject to Section 203 of the DGCL, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years following the date that the person became an interested stockholder, unless the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a business combination includes a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. Generally, an interested stockholder is a person who, together with affiliates and associates, owns or, within three years prior to the determination of interested stockholder status, did own 15% or more of a corporations voting stock. The existence of this provision may have an anti-takeover effect with respect to
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transactions not approved in advance by our Board of Directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by stockholders.
Our certificate of incorporation and by-laws provide that vacancies on our Board of Directors during the interim between our annual stockholder meetings or special meetings of our stockholders called for the election of directors may be filled by a vote of a majority of the directors then in office. Furthermore, any director may be removed only for cause by a vote of a majority of the voting power of the shares of our common stock entitled to vote for the election of directors. These provisions of our certificate of incorporation and by-laws could make it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, control of us and therefore may limit the price that certain investors might be willing to pay in the future for shares of our common stock.
Our certificate of incorporation and by-laws do not permit action by our stockholders by written consent. These provisions could have the effect of delaying stockholder actions that are favored by the holders of a majority of our outstanding voting securities until the next annual stockholders meeting, particularly because special meetings of the stockholders may only be called by a resolution adopted by a majority of the Board of Directors, the Chairman of the Board of Directors or the President of Haynes. The ability of the stockholders to call a special meeting of the stockholders is specifically denied. These provisions may also discourage another person or entity from making a tender offer for our stock, because such person or entity, even if it acquired a majority of our outstanding voting securities, would be able to take action as a stockholder (such as election of new directors or approving a merger) only at a duly called stockholders meeting.
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Shares eligible for future sale
Prior to this offering, our common stock was not listed on any national securities exchange and was not actively traded. Future sales of substantial amounts of our common stock in the public market could adversely affect market prices prevailing from time to time. Upon completion of this offering, we will have 11,400,000 shares of common stock outstanding, or 11,650,000 shares assuming the exercise of the underwriters over-allotment option and no exercise of any options and warrants outstanding (other than those exercised by selling stockholders in connection with this offering). All of these shares, other than certain shares held by our officers and directors and 2.8 million shares held by an affiliate, will be freely transferable without restriction or registration under the Securities Act.
In general, under Rule 144 as currently in effect, a person, or persons whose shares are aggregated, who owns shares that were purchased from us, or any affiliate, at least one year previously, is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of our then-outstanding shares of common stock, or the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a notice of the sale on Form 144. Sales under Rule 144 are also subject to manner of sale provisions, notice requirements and the availability of current public information about us. We are unable to estimate the number of shares that will be sold under Rule 144 since this will depend on the market price for our common stock, the personal circumstances of the stockholder and other factors.
Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the three months preceding a sale, and who owns shares within the definition of restricted securities under Rule 144 that were purchased from us, or any affiliate, at least two years previously, would be entitled to sell shares under Rule 144(k) without regard to these volume limitations, manner of sale provisions, public information requirements or notice requirements.
As of the date of this prospectus, options to purchase a total of 980,000 shares of common stock were outstanding. An additional 520,000 shares of common stock are available for future option grants under our stock option plans.
Our executive officers and directors and the selling stockholders, who will beneficially own an aggregate of approximately 1,121,891 shares of our common stock after completion of this offering (assuming no exercise of the underwriters over-allotment option and excluding shares subject to unexercised options), have agreed, subject to limited exceptions, not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, shares of common stock for a period of 90 days after the date of this prospectus, without the prior written consent of J.P. Morgan Securities Inc. For further information, see Underwriting.
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We and the selling stockholders are offering the shares of common stock described in this prospectus through a number of underwriters. J.P. Morgan Securities Inc. is acting as sole book-running manager and representative of the underwriters for this offering. We and the selling stockholders have entered into an underwriting agreement with the underwriters. Subject to the terms and conditions of the underwriting agreement, we and each selling stockholder have severally agreed to sell to each underwriter, and each underwriter has severally agreed to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, the number of shares of our common stock listed next to such underwriters name in the following table:
Name |
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Number of shares |
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J.P. Morgan Securities Inc. |
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Bear, Stearns & Co. Inc. |
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KeyBanc Capital Markets, a division of McDonald Investments Inc. |
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Total |
|
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2,100,000 |
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||
The underwriters are committed to purchase all the shares of common stock offered by us and the selling stockholders if they purchase any shares. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated.
The underwriters propose to offer the shares of common stock directly to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $ per share. Any such dealers may resell shares to certain other brokers or dealers at a discount of up to $ per share from the public offering price. After the public offering of the shares, the offering price and other selling terms may be changed by the underwriters. Sales of shares made outside of the United States may be made by affiliates of the underwriters. The representative has advised us that the underwriters do not intend to confirm discretionary sales in excess of 5% of the common shares offered in this offering.
The underwriters have an option to buy up to 315,000 additional shares of our common stock, comprised of 100,000 shares from the Company and 215,000 shares from the selling stockholders, to cover sales of shares by the underwriters that exceed the number of shares specified in the table above. The underwriters have 30 days from the date of the underwriting agreement to exercise this over-allotment option. If any shares are purchased with this over-allotment option, the underwriters will purchase shares in approximately the same proportion as shown in the table above. If any additional shares of our common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered.
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The underwriting fee is equal to the public offering price per share of common stock less the amount paid by the underwriters per share of common stock. The underwriting fee is $ per share. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters assuming both no exercise and full exercise of the underwriters option to purchase additional shares.
|
|
Without over-allotment
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With full over-allotment
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Per share |
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$ |
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|
$ |
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Total |
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$ |
|
|
$ |
|
|
We estimate that our total expenses of this offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding the underwriting discounts and commissions, will be approximately $ , all of which will be paid by us.
A prospectus and accompanying prospectus in electronic format may be made available on the websites maintained by one or more underwriters, or selling group members, if any, participating in this offering. The underwriters may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the representative to underwriters and selling group members that may make internet distributions on the same basis as other allocations.
We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of J.P. Morgan Securities Inc. for a period of 90 days after the date of this prospectus. In addition, our directors and executive officers and the selling stockholders have entered into lock-up agreements with the underwriters pursuant to which each of these persons, with limited exceptions, for the same 90-day restricted period, may not, without the prior written consent of J.P. Morgan Securities Inc.:
· offer, pledge, announce the intention to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock (including, without limitation, common stock which may be deemed to be beneficially owned by any such person in accordance with the rules and regulations of the Securities and Exchange Commission and securities which may be issued upon exercise of a stock option or warrant) or
· enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the common stock,
whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise.
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The 90-day restricted period described above is subject to extension under certain circumstances. If:
· during the last 17 days of the 90-day restricted period, we issue an earnings release or material news or a material event relating to our company occurs; or
· prior to the expiration of the 90-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 90-day period,
the restrictions described above shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
We and the selling stockholders, jointly and severally, have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933.
We have applied to list our common stock on The NASDAQ Global Market under the symbol HAYN.
In connection with this offering, the underwriters may engage in stabilizing transactions, which involves making bids for, purchasing and selling shares of common stock in the open market for the purpose of preventing or retarding a decline in the market price of the common stock while this offering is in progress. These stabilizing transactions may include making short sales of the common stock, which involves the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering, and purchasing shares of common stock on the open market to cover positions created by short sales. Short sales may be covered shorts, which are short positions in an amount not greater than the underwriters over-allotment option referred to above, or may be naked shorts, which are short positions in excess of that amount. The underwriters may close out any covered short position either by exercising their over-allotment option, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which the underwriters may purchase shares through the over-allotment option. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchase in this offering. To the extent that the underwriters create a naked short position, they will purchase shares in the open market to cover the position.
The underwriters have advised us that, pursuant to Regulation M promulgated by the Securities and Exchange Commission, they may also engage in other activities that stabilize, maintain or otherwise affect the price of the common stock, including the imposition of penalty bids. This means that if the representative of the underwriters purchases common stock in the open market in stabilizing transactions or to cover short sales, the representative can require the underwriters that sold those shares as part of this offering to repay the underwriting discount received by them.
These activities may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock, and, as a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at
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any time. The underwriters may carry out these transactions on The NASDAQ Global Market, in the over-the-counter market or otherwise.
Determination of offering price
Prior to this offering, our common stock was not listed on any national securities exchange, and was quoted in the pink sheets under the symbol HYNI.PK. The initial public offering price of the common stock being offered by this prospectus will be determined by negotiation by us, the selling stockholders and the representative of the underwriters. In determining the initial public offering price, we, the selling stockholders and the representative of the underwriters expect to consider a number of factors including:
· the information set forth in this prospectus and otherwise available to the representative;
· our prospects and the history and prospects for the industry in which we compete;
· an assessment of our management;
· our prospects for future earnings;
· the general condition of the securities markets at the time of this offering;
· the recent market prices of, and demand for, publicly traded common stock of generally comparable companies;
· the historical trading prices of our common stock in the pink sheets, which may not be indicative of prices that will prevail in the trading market for our common stock on The NASDAQ Global Market; and
· other factors deemed relevant by the representative, us and the selling stockholders.
Neither we nor the underwriters can assure investors that an active trading market will develop for our common stock, or that the shares will trade in the public market at or above the initial public offering price.
Certain of the underwriters and their affiliates have provided in the past to us and our affiliates and may provide from time to time in the future certain commercial banking, financial advisory, investment banking and other services for us and such affiliates in the ordinary course of their business, for which they have received and may continue to receive customary fees and commissions. In addition, from time to time, certain of the underwriters and their affiliates may effect transactions for their own account or the account of customers, and hold on behalf of themselves or their customers, long or short positions in our debt or equity securities or loans, and may do so in the future.
An affiliate of J.P. Morgan Securities Inc. is a lender under the U.S. revolving credit facility that we intend to repay with our net proceeds from this offering. As a result, because more than 10% of the net proceeds of this offering may be received by the underwriters or their affiliates, this offering is being conducted in compliance with Rule 2710(h) of the Conduct Rules of the National Association of Securities Dealers, Inc. Rule 2710(h) requires that the price at which an equity issue is to be distributed to the public be established at a price no higher than that recommended by a qualified independent underwriter, as defined by the National Association of Securities Dealers. Bear, Stearns & Co. Inc. is serving in that capacity and has performed due diligence
100
investigations and reviewed and participated in the preparation of the registration statement of which this prospectus forms a part. We have agreed to indemnify Bear, Stearns & Co. Inc. in its capacity as a qualified independent underwriter, and its controlling persons, against certain liabilities, including certain liabilities under the Securities Act of 1933.
An affiliate of J.P. Morgan Securities Inc. owns approximately 5.1% of our common stock as of the date of this prospectus. For more information see Principal and selling stockholders.
Certain sales outside the United States
Each underwriter has agreed that (i) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (the FSMA)) received by it in connection with the issue or sale of any of our common stock in circumstances in which Section 21(1) of the FSMA does not apply to us and (ii) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom.
In relation to each Member State of the European Economic Area (the European Union, Iceland, Norway and Liechtenstein) which has implemented the Prospectus Directive (each, a Relevant Member State), each underwriter has agreed that with effect from and including the date on which the European Union Prospectus Directive (the EU Prospectus Directive) is implemented in that Relevant Member State (the Relevant Implementation Date) it has not made and will not make an offer of our common stock to the public in that Relevant Member State prior to the publication of a prospectus in relation to our common stock which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the EU Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of our common stock to the public in that Relevant Member State at any time:
· to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;
· to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than 43,000,000 and (3) an annual net turnover of more than 50,000,000, as shown in its last annual or consolidated accounts; or
· in any other circumstances which do not require the publication by us of a prospectus pursuant to Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an offer of our common stock to the public in relation to any shares of our common stock in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares of our common stock to be offered so as to enable an investor to decide to purchase or subscribe the shares of our common stock, as the same may be varied in that Member State by any measure implementing the EU Prospectus Directive in that Member State and the expression EU Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
101
The validity of the shares of common stock being offered hereby and certain other matters are being passed upon for us by Ice Miller LLP, Indianapolis, Indiana. Certain legal matters relating to the offering are being passed upon for the underwriters by Davis Polk & Wardwell, New York, New York.
The consolidated financial statements as of September 30, 2006 and 2005, and for the fiscal years ended September 30, 2006 and September 30, 2005, the period September 1, 2004 (inception) to September 30, 2004 (collectively, successor Haynes International, Inc.), the period October 1, 2003 to August 31, 2004, and the fiscal year ended September 30, 2003 (collectively, predecessor Haynes International, Inc.) and managements report on the effectiveness of internal control over financial reporting as of September 30, 2006 included in this prospectus, have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their reports appearing herein (which reports (1) express an unqualified opinion on the consolidated financial statements and includes an explanatory paragraph referring to our application of AICPA Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code , and an explanatory paragraph regarding our change of accounting for share-based payments as required by Statement of Financial Accounting Standards No. 123 (R), Share-Based Payment, (2) express an unqualified opinion on managements assessment regarding the effectiveness of internal control over financial reporting, and (3) express an unqualified opinion on the effectiveness of internal control over financial reporting), and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.
Where you can find more information
Haynes has filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act of 1933 with respect to the shares of common stock offered hereby. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules filed therewith. For further information with respect to Haynes and the common stock offered hereby, please refer to the registration statement. You may read and copy any document Haynes files, including the registration statement, at the SECs public reference rooms at 100 F Street, N.E., Room 1850, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. You may also obtain copies of the registration statement by mail from the Public Reference Section of the SEC, 100 F Street, N.E., Room 1850, Washington, D.C. 20549, at prescribed rates. The SEC also maintains an Internet World Wide Web site that contains reports, information statements and other information about issuers, including Haynes, who file electronically with the SEC. The address of that site is http://www.sec.gov.
We also maintain a website at http://www.haynesintl.com, at which you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information contained in, or that can be accessed through, our website is not part of this prospectus.
102
Haynes International, Inc.
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Page |
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Audited consolidated financial statements of Haynes International, Inc. (Haynessuccessor) as of September 30, 2006 and 2005 and for the years ended September 30, 2006 and September 30, 2005 and for the period September 1, 2004 to September 30, 2004 and Haynes International, Inc. (Haynespredecessor) for the period October 1, 2003 to August 31, 2004 |
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F-2 |
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F-4 |
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F-5 |
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F-6 |
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Consolidated statements of stockholders equity (deficiency) |
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F-7 |
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F-8 |
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F-9 |
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Unaudited consolidated financial statements |
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Consolidated balance sheets as of September 30, 2006 and December 31, 2006 (unaudited) |
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F-43 |
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F-44 |
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F-45 |
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F-46 |
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F-47 |
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F-1
Report of independent registered public
accounting
firm
To The Board of Directors and Stockholders of
Haynes International, Inc.
We have audited the accompanying consolidated balance sheets of Haynes International, Inc. and subsidiaries (Haynessuccessor) as of September 30, 2005 and 2006, and the related consolidated statements of operations, comprehensive income (loss), stockholders equity and cash flows for the period September 1, 2004 (inception) to September 30, 2004 and for the years ended September 30, 2005 and 2006. We have also audited the Haynes International, Inc. and subsidiaries (Haynespredecessor) consolidated statements of operations, comprehensive income (loss), stockholders equity (deficiency) and cash flows for the period October 1, 2003 to August 31, 2004. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, on August 16, 2004, the bankruptcy court entered an order confirming the plan of reorganization of Haynespredecessor which became effective after the close of business on August 31, 2004. Accordingly, the accompanying consolidated balance sheets as of September 30, 2005 and 2006 and the related consolidated statements of operations, comprehensive income (loss), stockholders equity and cash flows of Haynessuccessor for the period September 1, 2004 (inception) to September 30, 2004 and for the years ended September 30, 2005 and 2006, have been prepared in conformity with AICPA Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code , as a new entity with assets, liabilities and capital structure having carrying values not comparable with prior periods.
In our opinion, the consolidated financial statements referred to above of Haynessuccessor present fairly, in all material respects, the financial position of Haynessuccessor as of September 30, 2005 and 2006, and the results of their operations and their cash flows for the period September 1, 2004 (inception) to September 30, 2004 and for the years ended September 30, 2005 and 2006, in conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, the consolidated financial statements referred to above for Haynespredecessor present fairly, in all material respects, the results of their operations and their cash flows for the period October 1, 2003 to August 31, 2004 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, effective October 1, 2005, Haynessuccessor changed its method of accounting for share-based payments as required by Statement of Financial Accounting Standards No. 123(R), Share-Based Payment .
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of September 30, 2006, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 7, 2006 expressed an unqualified opinion on managements assessment of the effectiveness of the Companys internal control over financial reporting and an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Indianapolis, Indiana
December 7, 2006
F- 2
Attestation report of independent registered public accounting firm
To the Board of Directors and Stockholders of
Haynes International, Inc.
We have audited managements assessment, included in the accompanying Managements Annual Report on Internal Control Over Financial Reporting, that Haynes International, Inc. and subsidiaries (the Company) maintained effective internal control over financial reporting as of September 30, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys 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 companys 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 companys 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, managements assessment that the Company maintained effective internal control over financial reporting as of September 30, 2006, is fairly stated, in all material respects, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2006, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended September 30, 2006 of the Company and our report dated December 7, 2006 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Companys change of accounting for share-based payments as required by Statement of Financial Accounting Standards No. 123(R), Share-Based Payment .
/s/ DELOITTE & TOUCHE LLP
Indianapolis, Indiana
December 7, 2006
F-3
Haynes International, Inc. and subsidiaries
consolidated balance sheet
s
At September 30,
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2005 |
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2006 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
2,886 |
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$ |
6,182 |
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Restricted cashcurrent portion |
|
110 |
|
110 |
|
||
Accounts receivable, less allowance for doubtful accounts of $1,514 and $1,751, respectively |
|
58,730 |
|
77,962 |
|
||
Inventories, net |
|
147,860 |
|
179,712 |
|
||
Deferred income taxes |
|
7,298 |
|
10,759 |
|
||
Total current assets |
|
216,884 |
|
274,725 |
|
||
Property, plant and equipment, net |
|
85,125 |
|
88,921 |
|
||
Deferred income taxeslong term portion |
|
27,665 |
|
27,368 |
|
||
Prepayments and deferred charges, net |
|
2,457 |
|
2,719 |
|
||
Restricted cashlong term portion |
|
550 |
|
440 |
|
||
Goodwill |
|
43,055 |
|
42,265 |
|
||
Other intangible assets |
|
11,386 |
|
9,422 |
|
||
Total assets |
|
$ |
387,122 |
|
$ |
445,860 |
|
Liabilities and stockholders equity |
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
||
Accounts payable and accrued expenses |
|
$ |
45,495 |
|
$ |
45,487 |
|
Income taxes payable |
|
399 |
|
2,294 |
|
||
Accrued pension and postretirement benefits |
|
5,527 |
|
8,134 |
|
||
Revolving credit facilities |
|
104,468 |
|
116,836 |
|
||
Current maturities of long term obligations |
|
1,501 |
|
110 |
|
||
Total current liabilities |
|
157,390 |
|
172,861 |
|
||
Long-term obligations (less current portion) |
|
414 |
|
3,097 |
|
||
Accrued pension and postretirement benefits |
|
117,449 |
|
118,354 |
|
||
Total liabilities |
|
275,253 |
|
294,312 |
|
||
Stockholders equity: |
|
|
|
|
|
||
Common stock, $0.001 par value (20,000,000 shares authorized, 10,000,000 shares issued and outstanding) |
|
10 |
|
10 |
|
||
Preferred stock, $0.001 par value (20,000,000 shares authorized, 0 shares issued and outstanding) |
|
|
|
|
|
||
Additional paid-in capital |
|
120,972 |
|
122,937 |
|
||
Accumulated earnings (deficit) |
|
(7,780 |
) |
27,760 |
|
||
Accumulated other comprehensive income (loss) |
|
(512 |
) |
841 |
|
||
Deferred stock compensation |
|
(821 |
) |
|
|
||
Total stockholders equity |
|
111,869 |
|
151,548 |
|
||
Total liabilities and stockholders equity |
|
$ |
387,122 |
|
$ |
445,860 |
|
See notes to consolidated financial statements.
F- 4
Haynes International, Inc. and
subsidiaries
consolidated statements of operations
(in thousands, except per |
|
Predecessor |
|
|
|
|
|
Successor |
|
|||||||
share data) |
|
Period
|
|
|
|
Period
|
|
Year Ended September 30, |
|
|||||||
|
|
2004 |
|
|
|
2004 |
|
2005 |
|
2006 |
|
|||||
Net revenues |
|
$ |
209,103 |
|
|
|
|
$ |
24,391 |
|
$ |
324,989 |
|
$ |
434,405 |
|
Cost of sales |
|
171,652 |
|
|
|
|
26,136 |
|
288,669 |
|
325,573 |
|
||||
Selling, general and administrative |
|
24,038 |
|
|
|
|
2,658 |
|
32,963 |
|
40,296 |
|
||||
Research and technical |
|
2,286 |
|
|
|
|
226 |
|
2,621 |
|
2,659 |
|
||||
Restructuring and other charges |
|
4,027 |
|
|
|
|
429 |
|
628 |
|
|
|
||||
Operating income (loss) |
|
7,100 |
|
|
|
|
(5,058 |
) |
108 |
|
65,877 |
|
||||
Interest expense (contractual interest of $20,876 for the period October 1, 2003 to August 31, 2004) |
|
13,964 |
|
|
|
|
354 |
|
6,385 |
|
8,121 |
|
||||
Interest income |
|
(35 |
) |
|
|
|
(6 |
) |
(32 |
) |
(97 |
) |
||||
Income (loss) before reorganization items and income taxes |
|
(6,829 |
) |
|
|
|
(5,406 |
) |
(6,245 |
) |
57,853 |
|
||||
Reorganization items |
|
177,653 |
|
|
|
|
|
|
|
|
|
|
||||
Income (loss) before income taxes |
|
170,824 |
|
|
|
|
(5,406 |
) |
(6,245 |
) |
57,853 |
|
||||
Provision for (benefit from) income taxes |
|
90 |
|
|
|
|
(1,760 |
) |
(2,111 |
) |
22,313 |
|
||||
Net income (loss) |
|
$ |
170,734 |
|
|
|
|
$ |
(3,646 |
) |
$ |
(4,134 |
) |
$ |
35,540 |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
1,707,340 |
|
|
|
|
$ |
(0.36 |
) |
$ |
(0.41 |
) |
$ |
3.55 |
|
Diluted |
|
$ |
1,707,340 |
|
|
|
|
$ |
(0.36 |
) |
$ |
(0.41 |
) |
$ |
3.46 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
100 |
|
|
|
|
10,000,000 |
|
10,000,000 |
|
10,000,000 |
|
||||
Diluted |
|
100 |
|
|
|
|
10,000,000 |
|
10,000,000 |
|
10,270,642 |
|
See notes to consolidated financial statements.
F- 5
Haynes International, Inc. and
subsidiaries
consolidated statements of comprehensive income (loss)
|
|
Predecessor |
|
|
|
Successor |
|
|||||||||||
(in thousands) |
|
Period
|
|
|
|
Period
|
|
Year Ended September 30, |
|
|||||||||
|
|
2004 |
|
|
|
2004 |
|
2005 |
|
2006 |
|
|||||||
Net income (loss) |
|
|
$ |
170,734 |
|
|
|
|
$ |
(3,646 |
) |
|
$ |
(4,134 |
) |
$ |
35,540 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Minimum pension adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
(217 |
) |
||||
Foreign currency translation adjustment |
|
|
2,124 |
|
|
|
|
363 |
|
|
(875 |
) |
1,570 |
|
||||
Other comprehensive income (loss) |
|
|
2,124 |
|
|
|
|
363 |
|
|
(875 |
) |
1,353 |
|
||||
Comprehensive income (loss) |
|
|
$ |
172,858 |
|
|
|
|
$ |
(3,283 |
) |
|
$ |
(5,009 |
) |
$ |
36,893 |
|
See notes to consolidated financial statements .
F- 6
Haynes International, Inc. and
subsidiaries
consolidated statements of stockholders equity
(in thousands, except
|
|
Common Stock |
|
Additional
|
|
Retained
|
|
Deferred
|
|
Accumulated
|
|
Total
|
|
|||||||||||||
|
|
Shares |
|
Par |
|
Capital |
|
Deficit) |
|
Compensation |
|
Income (Loss) |
|
(Deficiency) |
|
|||||||||||
Predecessor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance October 1, 2003 |
|
100 |
|
$ |
|
|
|
$ |
51,381 |
|
|
$ |
(222,232 |
) |
|
$ |
|
|
|
$ |
(2,007 |
) |
|
$ |
(172,858 |
) |
Net income |
|
|
|
|
|
|
|
|
|
170,734 |
|
|
|
|
|
|
|
|
170,734 |
|
||||||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,124 |
|
|
2,124 |
|
||||||
Plan of reorganization and fresh-start: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Elimination of accumulated deficit |
|
|
|
|
|
|
|
|
|
51,498 |
|
|
|
|
|
(117 |
) |
|
51,381 |
|
||||||
Cancellation of predecessor company shares |
|
(100 |
) |
|
|
|
(51,381 |
) |
|
|
|
|
|
|
|
|
|
|
(51,381 |
) |
||||||
Issuance of stock under plan of reorganization |
|
10,000,000 |
|
10 |
|
|
118,726 |
|
|
|
|
|
|
|
|
|
|
|
118,736 |
|
||||||
Balance August 31, 2004 |
|
10,000,000 |
|
$ |
10 |
|
|
$ |
118,726 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
118,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Successor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance September 1, 2004 |
|
10,000,000 |
|
$ |
10 |
|
|
$ |
118,726 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
118,736 |
|
Net loss |
|
|
|
|
|
|
|
|
|
(3,646 |
) |
|
|
|
|
|
|
|
(3,646 |
) |
||||||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
363 |
|
|
363 |
|
||||||
Grant of stock options |
|
|
|
|
|
|
2,419 |
|
|
|
|
|
(2,419 |
) |
|
|
|
|
|
|
||||||
Amortization of deferred stock compensation |
|
|
|
|
|
|
|
|
|
|
|
|
123 |
|
|
|
|
|
123 |
|
||||||
Balance September 30, 2004 |
|
10,000,000 |
|
$ |
10 |
|
|
$ |
121,145 |
|
|
$ |
(3,646 |
) |
|
$ |
(2,296 |
) |
|
$ |
363 |
|
|
$ |
115,576 |
|
Net loss |
|
|
|
|
|
|
|
|
|
(4,134 |
) |
|
|
|
|
|
|
|
(4,134 |
) |
||||||
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(875 |
) |
|
(875 |
) |
||||||
Forfeiture of stock options |
|
|
|
|
|
|
(173 |
) |
|
|
|
|
173 |
|
|
|
|
|
|
|
||||||
Amortization of deferred stock compensation |
|
|
|
|
|
|
|
|
|
|
|
|
1,302 |
|
|
|
|
|
1,302 |
|
||||||
Balance September 30, 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 |
|
See notes to consolidated financial statements.
F- 7
Haynes International, Inc. and subsidiaries
consolidated statements of cash flow
s
(in thousands) |
|
Predecessor |
|
|
|
Successor |
|
|||||||||||
|
|
Period
|
|
|
|
Period
|
|
Year Ended September 30, |
|
|||||||||
|
|
2004 |
|
|
|
2004 |
|
2005 |
|
2006 |
|
|||||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) |
|
|
$ |
170,734 |
|
|
|
|
$ |
(3,646 |
) |
|
$ |
(4,134 |
) |
$ |
35,540 |
|
Depreciation |
|
|
5,035 |
|
|
|
|
494 |
|
|
6,131 |
|
6,926 |
|
||||
Amortization |
|
|
2,739 |
|
|
|
|
164 |
|
|
1,895 |
|
1,964 |
|
||||
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
1,302 |
|
2,786 |
|
||||
Deferred income taxes |
|
|
0 |
|
|
|
|
(1,648 |
) |
|
(5,655 |
) |
(2,644 |
) |
||||
Loss (gain) on disposition of property |
|
|
(437 |
) |
|
|
|
(13 |
) |
|
(1,937 |
) |
140 |
|
||||
Reorganization items |
|
|
(177,653 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Change in assets and liabilities (net of effects of acquisition): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Accounts receivable |
|
|
(15,281 |
) |
|
|
|
(4,241 |
) |
|
(2,211 |
) |
(18,125 |
) |
||||
Inventories |
|
|
(15,254 |
) |
|
|
|
853 |
|
|
(14,244 |
) |
(30,122 |
) |
||||
Other assets and reorganization items |
|
|
(521 |
) |
|
|
|
503 |
|
|
(374 |
) |
(216 |
) |
||||
Accounts payable and accrued expenses |
|
|
12,864 |
|
|
|
|
6,604 |
|
|
10,364 |
|
(925 |
) |
||||
Income taxes payable |
|
|
(96 |
) |
|
|
|
(88 |
) |
|
1,124 |
|
1,901 |
|
||||
Accrued pension and postretirement benefits |
|
|
480 |
|
|
|
|
312 |
|
|
2,957 |
|
3,043 |
|
||||
Net cash provided (used) in operating activities before reorganization costs |
|
|
(17,390 |
) |
|
|
|
(706 |
) |
|
(4,782 |
) |
268 |
|
||||
Reorganization items paid |
|
|
(5,799 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Net cash provided (used) in operating activities |
|
|
(23,189 |
) |
|
|
|
(706 |
) |
|
(4,782 |
) |
268 |
|
||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Additions to property, plant and equipment |
|
|
(4,782 |
) |
|
|
|
(637 |
) |
|
(9,029 |
) |
(10,668 |
) |
||||
Proceeds from sale of property, plant and equipment |
|
|
1,270 |
|
|
|
|
15 |
|
|
2,326 |
|
|
|
||||
Acquisition of The Branford Wire and Manufacturing Company, net of cash acquired |
|
|
|
|
|
|
|
|
|
|
(8,300 |
) |
|
|
||||
Change in restricted cash |
|
|
1,009 |
|
|
|
|
(12 |
) |
|
337 |
|
110 |
|
||||
Net cash used in investing activities |
|
|
(2,503 |
) |
|
|
|
(634 |
) |
|
(14,666 |
) |
(10,558 |
) |
||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net repayment of short term borrowings |
|
|
(56,815 |
) |
|
|
|
|
|
|
|
|
|
|
||||
Net increase in revolving credit |
|
|
80,296 |
|
|
|
|
1,060 |
|
|
21,986 |
|
12,368 |
|
||||
Changes in long-term obligations |
|
|
|
|
|
|
|
|
|
|
(1,596 |
) |
1,009 |
|
||||
Payment of debt issuance cost |
|
|
|
|
|
|
|
|
|
|
(465 |
) |
|
|
||||
Net cash provided by financing activities |
|
|
23,481 |
|
|
|
|
1,060 |
|
|
19,925 |
|
13,377 |
|
||||
Effect of exchange rates on cash |
|
|
80 |
|
|
|
|
97 |
|
|
(68 |
) |
209 |
|
||||
Increase (decrease) in cash and cash equivalents |
|
|
(2,131 |
) |
|
|
|
(183 |
) |
|
409 |
|
3,296 |
|
||||
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Beginning of period |
|
|
4,791 |
|
|
|
|
2,660 |
|
|
2,477 |
|
2,886 |
|
||||
End of period |
|
|
$ |
2,660 |
|
|
|
|
$ |
2,477 |
|
|
$ |
2,886 |
|
$ |
6,182 |
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash paid during period for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest (net of capitalized interest) |
|
|
$ |
3,426 |
|
|
|
|
$ |
354 |
|
|
$ |
6,377 |
|
$ |
7,992 |
|
Income Taxes |
|
|
$ |
161 |
|
|
|
|
|
|
|
$ |
2,681 |
|
$ |
23,148 |
|
Supplemental disclosures of non-cash activities:
During the period October 1, 2003 to August 31, 2004, the minimum pension liability was eliminated as a result of the adoption of fresh start accounting in accordance with SOP 90-7 Financial Reporting by Entities in Reorganization under the Bankruptcy Code.
During 2006, goodwill decreased and deferred income tax asset increased by $790 due to the finalization of pre-emergence tax returns which affected net operating loss carryforwards.
During 2006 a $310 minimum pension liability was recorded in accumulated other comprehensive income.
See notes to consolidated financial statements.
F- 8
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 Companys products are high-temperature resistant alloys (HTA) and corrosion resistant alloys (CRA). The Companys 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 Companys 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 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 Companys 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.
Basis of presentation
On March 29, 2004 (the Petition Date), the Company and its U.S. subsidiaries and U.S. affiliates filed voluntary petitions for reorganization relief under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the Southern District of Indiana (the Bankruptcy Court). The bankruptcy cases thus commenced were jointly administered under the caption in re Haynes International, Inc., et al., Case No.: 04-5364-AJM-11 (the Bankruptcy Cases). Throughout the Bankruptcy Cases, the Company and its U.S. subsidiaries and U.S. affiliates managed their properties and operated their businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. The Companys European and Singapore operations were not included in the Bankruptcy Cases.
Prior to August 31, 2004, the Company, Haynespredecessor, was a wholly-owned subsidiary of Haynes Holdings, Inc. (Holdings). Effective August 31, 2004 the Company and Holdings were merged as part of the plan of reorganization with the Company emerging as the successor entity (Haynessuccessor). As a result of the Companys emergence from bankruptcy and the Companys implementation of fresh start reporting as described below, the consolidated financial
F- 9
statements of the Company for periods subsequent to August 31, 2004 reflect a new basis of accounting and are not comparable to the historical consolidated financial statements for periods prior to the effective date of the plan of reorganization.
The Company and its U.S. operations filed for reorganization relief because liquidity shortfalls hampered their ability to meet interest and principal obligations on long-term debt obligations. These shortfalls were primarily a result of reduced customer demand caused by a weak economic environment for its products and higher raw material and energy costs.
In connection with the Bankruptcy Cases, motions necessary for the Company and its U.S. subsidiaries and U.S. affiliates operations to conduct normal business activities were filed with and approved by the Bankruptcy Court, including (i) approval of a $100 million debtor-in-possession credit facility for working capital needs and other general corporate purposes, (ii) authorization to pay pre-petition liabilities related to certain essential trade creditors, (iii) authorization to pay most pre-petition payroll and employee related obligations and (iv) authorization to pay certain pre-petition shipping and import/export related obligations.
On April 28, 2004, the Company and its U.S. subsidiaries and U.S. affiliates filed schedules and statements of financial affairs with the Bankruptcy Court setting forth, among other things, the assets and liabilities of the Company and its U.S. subsidiaries and U.S. affiliates. All of the schedules were subject to further amendment or modification. Differences between amounts scheduled by the Company and its U.S. subsidiaries and U.S. affiliates and claims submitted by creditors were investigated and resolved in accordance with an established claims resolution process.
On May 25, 2004, the Company and its U.S. subsidiaries and U.S. affiliates filed a plan of reorganization and related disclosure statement with the Bankruptcy Court. The plan was amended on June 29, 2004, and the Bankruptcy Court entered an order confirming the Company and its U.S. subsidiaries and U.S. affiliates plan of reorganization, as amended, on August 16, 2004. As part of the consummation of the confirmed plan of reorganization, holders of the Companys 11 5 ¤ 8 % Senior Notes due September, 2004 (the Senior Notes) exchanged the $140 million of the Senior Notes outstanding and accrued interest for 96% of the equity in the reorganized Haynessuccessor. The pre-petition majority equity holder of the Companys former parent, Holdings, agreed to cancel its equity interests in exchange for 4% of the equity in Haynessuccessor.
The Company and its U.S. subsidiaries and U.S. affiliates emerged from bankruptcy on August 31, 2004. The Company has determined that it qualified for fresh start accounting under AICPA Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code (SOP 90-7) and applied fresh start accounting on the date of emergence, August 31, 2004. The reorganization value was determined to be $200 million.
The plan of reorganization provided for the following to occur as of the effective date of the plan (or as soon thereafter as practicable):
· The cancellation of all existing stock authorized and outstanding (Old Common Stock) and all existing stock options, warrants, and related rights.
· The authorization for the issuance of ten million shares of new common stock, $0.001 par value per share.
F- 10
· The authorization for the future issuance of an additional ten million shares of new common stock, $0.001 par value per share. Future issuance upon terms to be designated from time to time by the board of directors.
· The authorization of twenty million shares of new preferred stock. Future issuance upon terms to be designated from time to time by the board of directors.
· Senior Note Holders to receive its pro rata share of 96% of the shares of the new common stock in full satisfaction of the debt obligation under the Senior Notes.
· Holders of the Old Common Stock interests to receive their pro rate share of 4% of the new common stock.
· The approval of new collective bargaining agreement with the United Steelworkers of America that contains certain modifications and extends the agreement through June 2007.
· Congress Financial Corporation (Central) to provide exit financing of $100 million for working capital financing subject to reserves and borrowing base restrictions.
· The payment of all pre-petition general unsecured claims at 100%.
· The implementation of a stock option plan for certain key management employees and non-employee directors of the Company.
Fresh start reporting
Upon implementation of the plan of reorganization, fresh start reporting was adopted in accordance with SOP 90-7, since holders of Haynes International, Inc.s common stock immediately prior to confirmation of the plan of reorganization received less than 50% of the voting shares of the successor entity and its reorganization value was less than its post-petition liabilities and allowed claims. Under fresh start reporting, the reorganization value was allocated to the Companys 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 Companys reorganization value exceeded the fair value of the Companys net assets acquired pursuant to the plan of reorganization. In accordance with SFAS No. 141, the excess of the reorganization value over the fair value of the net assets was recorded as goodwill. Liabilities existing at the effective date of the plan of reorganization are stated at the present value of amounts to be paid discounted at appropriate current rates.
In connection with its development of the plan of reorganization, a valuation analysis of Haynes business and the securities to be registered under the plan of reorganization was performed in March 2004. In preparing this analysis, the Company, among other things, (a) reviewed the recent financial and operating results, (b) considered current operations and prospects, (c) reviewed certain operating and financial forecasts including the financial projections contained in Haynes Disclosure Statement, (d) evaluated key assumptions related to the financial projections, (e) evaluated a three year discounted cash flow analysis based on the financial projections, utilizing various discount rates ranging from 10.5% to 14.5% based on a weighted cost of capital analysis and EBITDA terminal multiples of 5.5x to 7.5x based on relevant comparable company
F- 11
projected multiples and trading multiples during recent business cycles, (f) considered the market value of certain publicly traded companies in businesses reasonably comparable to the operating business of Haynes and (g) conducted such other analyses as deemed necessary under the circumstances. The financial projections reflected a significant reduction in interest expense as a result of the reorganization and a post restructuring effective tax rate of 40%.
As a result of such analyses, review, discussions, considerations and assumptions, the total enterprise value of Haynes was within a range of $160 million to $240 million with a mid-point value of $200 million. The Company used the mid-point valuation of $200 million as the basis for its reorganization value for purposes of applying fresh-start reporting. The total enterprise value of $200 million and its derivation was a key element in negotiations with Haynes creditors and equity holders in developing the plan of reorganization which was ultimately approved by Haynes creditors and the Bankruptcy Court. Differences between actual cash flows, interest rates, the effective tax rate and the assumptions used would have a material effect on the reorganization value.
The allocation of the reorganization value as of the effective date of the plan of reorganization is summarized as follows and shown to be less than the Companys post-petition liabilities and allowed claims:
Common equity value |
|
$ |
118,736 |
|
Revolver debt, European debt, and capital leases, less cash |
|
81,264 |
|
|
Reorganization value |
|
$ |
200,000 |
|
Post-petition liabilities and allowed claims |
|
|
|
|
Current liabilities |
|
$ |
116,137 |
|
Pension and postretirement benefits and other long term debt |
|
124,775 |
|
|
Liabilities subject to compromise: |
|
|
|
|
Senior notes |
|
140,000 |
|
|
Accrued interest on senior notes |
|
9,363 |
|
|
Accrued fees to an affiliate of Holdings |
|
1,612 |
|
|
Total liabilities and allowed claims |
|
391,887 |
|
|
Reorganized value |
|
200,000 |
|
|
Excess of liabilities over reorganized value |
|
$ |
191,887 |
|
F- 12
The following table reflects adjustment to the consolidated balance sheet resulting from implementation of the plan of reorganization and application of fresh start reporting on August 31, 2004, the effective date of the reorganization.
|
|
Predecessor |
|
|
|
|
|
Successor |
|
||||||||
|
|
Haynes
|
|
Plan of
|
|
Fresh Start |
|
Haynes
|
|
||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents |
|
|
$ |
2,660 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,660 |
|
Restricted cash |
|
|
1,009 |
|
|
|
|
|
|
|
|
1,009 |
|
||||
Accounts receivable |
|
|
50,087 |
|
|
|
|
|
|
|
|
50,087 |
|
||||
Inventories, net |
|
|
100,603 |
|
|
|
|
|
30,982 |
(b) |
|
131,585 |
|
||||
Refundable income taxes |
|
|
656 |
|
|
|
|
|
|
|
|
656 |
|
||||
Total current assets |
|
|
155,015 |
|
|
|
|
|
30,982 |
|
|
185,997 |
|
||||
Property, plant and equipment, net |
|
|
38,998 |
|
|
|
|
|
40,810 |
(b) |
|
79,808 |
|
||||
Deferred income taxes |
|
|
547 |
|
|
|
|
|
36,143 |
(d) |
|
36,690 |
|
||||
Prepayments and deferred charges, net |
|
|
12,376 |
|
|
|
|
|
(9,891 |
)(b) |
|
2,485 |
|
||||
Goodwill |
|
|
|
|
|
|
|
|
40,353 |
(c) |
|
40,353 |
|
||||
Other intangible assets |
|
|
|
|
|
|
|
|
12,467 |
(b) |
|
12,467 |
|
||||
Total assets |
|
|
$ |
206,936 |
|
|
$ |
|
|
|
$ |
150,864 |
|
|
$ |
357,800 |
|
Liabilities and stockholders equity (deficiency) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Accounts payable and accrued expenses |
|
|
$ |
27,732 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
27,732 |
|
Accrued postretirement benefits |
|
|
4,890 |
|
|
|
|
|
|
|
|
4,890 |
|
||||
Revolving credit facility |
|
|
82,466 |
|
|
|
|
|
|
|
|
82,466 |
|
||||
Deferred income taxes |
|
|
|
|
|
|
|
|
6,692 |
(d) |
|
6,692 |
|
||||
Current maturities of long term debt |
|
|
1,049 |
|
|
|
|
|
|
|
|
1,049 |
|
||||
Total current liabilities |
|
|
116,137 |
|
|
|
|
|
6,692 |
|
|
122,829 |
|
||||
Long term debt |
|
|
1,418 |
|
|
|
|
|
|
|
|
1,418 |
|
||||
Accrued pension and postretirement benefits |
|
|
123,357 |
|
|
|
|
|
(8,540 |
)(b) |
|
114,817 |
|
||||
Liabilities subject to compromise |
|
|
150,975 |
|
|
(150,975 |
) (a) |
|
|
|
|
|
|
||||
Total liabilities |
|
|
391,887 |
|
|
(150,975 |
) |
|
(1,848 |
) |
|
239,064 |
|
||||
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Stockholders equity (deficiency): |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Old common stock, $0.01 par value (100 shares authorized, issued and outstanding) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
New common stock, $0.001 par value (20,000,000 shares authorized, 10,000,000 shares issued and outstanding) |
|
|
|
|
|
10 |
|
|
|
|
|
10 |
|
||||
Preferred stock, $0.001 par value (20,000,000 shares authorized, 0 shares issued and outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Old additional paid-in capital |
|
|
51,381 |
|
|
|
|
|
(51,381 |
) |
|
|
|
||||
New additional paid-in capital |
|
|
|
|
|
118,726 |
(a) |
|
|
|
|
118,726 |
|
||||
Accumulated deficit |
|
|
(236,449 |
) |
|
32,239 |
(a) |
|
204,210 |
|
|
|
|
||||
Accumulated other comprehensive income |
|
|
117 |
|
|
|
|
|
(117 |
) |
|
|
|
||||
Deferred stock compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total stockholders equity (deficiency) |
|
|
(184,951 |
)(c) |
|
150,975 |
(c) |
|
152,712 |
(c) |
|
118,736 |
(c) |
||||
Total liabilities and stockholders equity (deficiency) |
|
|
$ |
206,936 |
|
|
$ |
|
|
|
$ |
150,864 |
|
|
$ |
357,800 |
|
(a) To reflect the cancellation of debt related to the settlement of the pre-petition liabilities subject to compromise:
Liabilities subject to compromise |
|
$ |
150,975 |
|
New common stock and additional paid-in capital |
|
(118,736 |
) |
|
Gain on cancellation of debt |
|
$ |
32,239 |
|
F- 13
(b) To reflect fresh start accounting adjustments related to the revaluation of certain assets and liabilities to fair market value:
Inventories |
|
|
|
|
Fair value adjustments |
|
$ |
30,982 |
|
Property, Plant and Equipment |
|
|
|
|
Fair value adjustmentsMachinery and equipment |
|
$ |
41,628 |
|
Fair value adjustmentsBuildings |
|
(859 |
) |
|
Fair value adjustmentsLand |
|
41 |
|
|
|
|
$ |
40,810 |
|
Prepayments and Deferred Charges |
|
|
|
|
Europe debt issuance cost write-off |
|
$ |
(245 |
) |
Adjust pension assets |
|
(9,646 |
) |
|
|
|
$ |
(9,891 |
) |
Other Intangibles |
|
|
|
|
Fair value adjustmentsPatents |
|
$ |
8,667 |
|
Fair value adjustmentsTrademarks |
|
3,800 |
|
|
|
|
$ |
12,467 |
|
Accrued Pension and Postretirement Benefits |
|
|
|
|
Adjust pension liabilities |
|
$ |
(8,540 |
) |
(c) To reflect the calculation of goodwill:
Predecessor stockholders deficiency at August 31, 2004 |
|
$ |
(184,951 |
) |
Cancellation of debt |
|
150,975 |
|
|
Successor equity at August 31, 2004 |
|
(118,736 |
) |
|
Fresh start reporting and fair value adjustments |
|
(152,712 |
) |
|
Fair value adjustments |
|
84,259 |
|
|
Deferred income tax adjustments |
|
29,451 |
|
|
Debt issuance cost write-off |
|
(245 |
) |
|
Pension adjustments |
|
(1,106 |
) |
|
Goodwill at August 31, 2004 |
|
$ |
(40,353 |
) |
(d) Deferred income tax accounts were adjusted to give effect to temporary differences between the new accounting and carryover tax bases.
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 significant intercompany transactions and balances are eliminated. The Company develops, manufactures, markets and distributes technologically advanced, high-performance alloys primarily for use in the aerospace and chemical processing industries worldwide. 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 a sales office in Singapore and Chennai, India. In October 2003, management decided to close its manufacturing operations in Openshaw, England and operate only as a distribution service center. In April 2005, the Company sold eight acres of the Openshaw site and recorded a gain of $2.1 million which is reflected as a reduction of selling, general and administrative expense.
F- 14
Branford Wire acquisition
On November 5, 2004, Haynes Wire Company (Haynes Wire), a wholly owned subsidiary of the Company, acquired certain assets of The Branford Wire and Manufacturing Company and certain of its affiliates for a purchase price of $8.3 million, which was paid in cash. As part of the transaction, Haynes Wire acquired a wire manufacturing facility in Mountain Home, North Carolina, which includes plant and equipment, accounts receivable and inventory with fair values of $2,615, $2,190, and $3,620, respectively. Because the effect of the acquisition is not material to the consolidated results of operations, supplemental pro forma results of operations information have been omitted. Haynes Wire also entered into a non-compete agreement with the former president and owner, restricting his ability to compete with Haynes Wires operations for a period of seven years following the closing date. The non-compete agreement requires Haynes Wire to make total payments of $770, with $110 paid at closing and the remaining $660 paid in equal installments on the next six anniversaries of the closing date. On April 11, 2005 pursuant to the terms of the non-compete agreement, the Company deposited the remaining $660 of installments to be paid pursuant to the non-compete agreement into an escrow account. Non-compete amortization expense was $84 for fiscal 2006 and $77 for fiscal 2005.
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 customers 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 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. Cost of goods sold for the years ended
F- 15
September 30, 2006 and 2005 and the one month ended September 30, 2004 includes $0, $25,414 and $5,083 respectively of additional costs resulting from fresh start write-up adjustments.
F. Intangible assets and goodwill
Goodwill was created as a result of the Companys reorganization pursuant to Chapter 11 of the U.S. Bankruptcy Code and fresh start accounting. The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. Pursuant to SFAS No. 142 goodwill is not amortized and the value of goodwill be reviewed annually for impairment. If the carrying value exceeds the fair value (determined on a discounted cash flow basis or other fair value method), impairment of goodwill may exist resulting in a charge to earnings to the extent of goodwill impairment.
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 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 trademark may exist resulting in a change to earnings to the extent of impairment. Amortization of the patents and other intangibles was $1,964 for the year ended September 30, 2006; $1,972 for the year ended September 30, 2005 and $164 for the one month period ended September 30, 2004.
Goodwill and trademarks were tested for impairment on August 31, 2006 with no impairment recognized because the fair values exceeded the carrying values. Goodwill decreased during year ended September 30, 2006 by $790 and increased during the year September 30, 2005 by $2,702 due to the finalization of pre-emergence tax returns, which affected net operating loss carryforwards.
The following represents a summary of intangible assets and goodwill at September 30, 2005 and 2006:
September 30, 2005 |
|
Gross Amount |
|
Accumulated
|
|
Adjustments |
|
Carrying
|
|
|||||||
Goodwill |
|
|
$ |
40,353 |
|
|
$ |
|
|
|
$ |
2,702 |
|
$ |
43,055 |
|
Patents |
|
|
8,667 |
|
|
(2,048 |
) |
|
|
|
6,619 |
|
||||
Trademarks |
|
|
3,800 |
|
|
|
|
|
|
|
3,800 |
|
||||
Non-compete |
|
|
590 |
|
|
(77 |
) |
|
|
|
513 |
|
||||
Other |
|
|
465 |
|
|
(11 |
) |
|
|
|
454 |
|
||||
|
|
|
$ |
53,875 |
|
|
$ |
(2,136 |
) |
|
$ |
2,702 |
|
$ |
54,441 |
|
September 30, 2006 |
|
Gross Amount |
|
Accumulated
|
|
Adjustments |
|
Carrying
|
|
|||||||
Goodwill |
|
|
$ |
43,055 |
|
|
$ |
|
|
|
$ |
(790 |
) |
$ |
42,265 |
|
Patents |
|
|
8,667 |
|
|
(3,800 |
) |
|
|
|
4,867 |
|
||||
Trademarks |
|
|
3,800 |
|
|
|
|
|
|
|
3,800 |
|
||||
Non-compete |
|
|
590 |
|
|
(161 |
) |
|
|
|
429 |
|
||||
Other |
|
|
465 |
|
|
(139 |
) |
|
|
|
326 |
|
||||
|
|
|
$ |
56,577 |
|
|
$ |
(4,100 |
) |
|
$ |
(790 |
) |
$ |
51,687 |
|
F- 16
Estimate of Aggregate Amortization Expense: |
|
|
|
|
Year Ending September 30, |
|
|
|
|
2007 |
|
$ |
1,129 |
|
2008 |
|
983 |
|
|
2009 |
|
708 |
|
|
2010 |
|
376 |
|
|
2011 |
|
363 |
|
|
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. Buildings and machinery and equipment for the Company are generally depreciated over estimated useful lives ranging from five to fourteen 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 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.
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 (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. As a result of fresh start reporting, the intangible pension asset of $9,646 was written off and the accrued pension and postretirement liabilities were written down by $8,540 in the eleven month period ended August 31, 2004. Salaried employees hired after December 31, 2005 are not covered by the pension plan; however, they are eligible for an enhanced matching program of the defined contribution plan (401(k)).
F- 17
The Companys foreign operating entities financial statements are stated in the functional currencies of each respective country, which are the local currencies. Substantially all assets and liabilities are translated to U.S. dollars using exchange rates in effect at the end of the year, and revenues and expenses are translated at the weighted average rate for the year. Translation gains or losses are recorded as a separate component of 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 are expensed as incurred. Research and technical costs for the years ended September 30, 2006 and 2005, one month ended September 30, 2004, and the eleven month period ended August 31, 2004, were $2,659, $2,621, $226, and $2,286, respectively.
Income taxes are accounted for under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax impact of temporary differences arising from assets and liabilities whose tax bases are different from financial statement amounts. A valuation allowance is established if it is more likely than not that all or a portion of deferred tax assets will not be realized. Realization of the future tax benefits of deferred tax assets is dependent on the Companys ability to generate taxable income within the carryforward period and the periods in which net temporary differences reverse.
The Company regularly reviews its deferred tax assets in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires the Company to assess all available evidence, both positive and negative, to determine whether a valuation allowance is needed based on the weight of that evidence.
In connection with the plan of reorganization, Haynes-successor has adopted a stock option plan for certain key management employees and non-employee directors pursuant to the terms set forth in the First Amended Joint Plan of Reorganization. The stock option plan authorizes the granting of non-qualified stock options to certain key employees and non-employee directors of the Company to purchase up to 1,000,000 shares of the Companys common stock.
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 calculated under SFAS No. 123 and 148 for pro forma disclosures. Therefore prior periods have not been restated. Compensation expense in prior periods related to stock options continues to be disclosed on a pro forma basis
F- 18
only. 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, and expected lives of the options. See Note 14 to the Consolidated Financial Statements.
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 Companys operating results arising from foreign exchange rate movements. The Company does not engage in foreign currency speculation. At September 30, 2006 and 2005, 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, 2006, 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 Companys debt approximates fair value.
During 2006 and 2005, 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 managements 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.
The Company has approximately 47% of its labor force subject to a collective bargaining agreement that will expire in June 2007. The Company will renegotiate the collective bargaining agreement in fiscal 2007 prior to the expiration of the agreement currently in place. The Company considers its employee relations to be satisfactory. There can be no assurance, however, that the renegotiation of the collective bargaining agreement will not lead to a labor stoppage and negative effect on earnings.
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, 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 or 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
F- 19
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 accounts for earnings per share in accordance with SFAS No. 128, Earnings Per Share. SFAS 128 requires two presentations of earnings per sharebasic 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.
Diluted net loss per share for the one month ended September 30, 2004 and the year ended September 30, 2005 exclude all stock options, because their effect would be anti-dilutive due to the net loss. For the year ended September 30, 2006, weighted average common shares for diluted per share computations were increased by 270,642 shares for the dilutive effect of stock options. Diluted net income per share for the year ended September 30, 2006, excludes 80,000 stock options because their effect would be anti-dilutive. Contingently issuable shares related to stock rights are excluded from the diluted net income per share computation, because the condition under which the stock rights can be exercised has not occurred as of September 30, 2006.
Q. New accounting pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN 48). FIN 48 seeks to reduce the diversity in practice associated with certain aspects of measuring and recognition in accounting for income taxes. In addition, FIN 48 requires expanded disclosure with respect to the uncertainty in income taxes and is effective as of the beginning of our 2008 fiscal year. We are currently evaluating the impact, if any, that FIN 48 will have on our financial statements.
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 of recognition 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 measure date. 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 beginning on October 1, 2008. The Company is currently evaluating the impact, if any, of SFAS 157 on its financial position, results of operations and cash flows.
In September 2006, the FASB issued FASB Statement No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158). SFAS 158 requires companies to recognize the funded status of defined benefit pension and other postretirement plans as a net
F- 20
asset or liability in its financial statements. In addition, disclosure requirements related to such plans are affected by SFAS 158. The Company will begin recognition of the funded status of its defined benefit pension and postretirement plans and include the required disclosures under the provisions of SFAS 158 at the end of fiscal year 2007. The adoption of SFAS 158 is not expected to impact the Companys debt covenants or cash position. If implemented on September 30, 2006, the estimated impact on the Companys financial position would be a reduction in pension and postretirement benefits liability of $5.2 million, an increase in stockholders equity accumulated other comprehensive income of $3.2 million, and a reduction of deferred tax asset of $2.0 million. Additionally, the Company does not expect the adoption of SFAS 158 to significantly affect the results of operations.
In June 2006, the EITF reached consensus on EITF 06-3, Disclosure Requirements for Taxes Assessed by a Government Authority on Revenue-Producing Transactions. EITF 06-3 requires disclosure of a companys accounting policy with respect to presentation of taxes collected on a revenue producing transaction between a seller and a customer. For taxes that are reported on a gross basis (included in revenues and costs), EITF 06-3 also requires disclosure of the amount of taxes included in the financial statements. EITF 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. The Company does not expect the adoption of EITF 06-3 to have a material impact on the Companys consolidated financial statements.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB 108), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for the first fiscal year ending after November 15, 2006, which will be our fiscal year ending September 30, 2007. The adoption of this statement is not expected to have a material impact on the Companys financial position or results of operations.
In February 2006, the FASB issued FASB Statement No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment to FASB Statements No. 133 and 140 (SFAS 155), that allows a preparer to elect fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a re-measurement (new basis) event, on an instrument-by-instrument basis, in cases in which a derivative would otherwise have to be bifurcated. It also eliminates the exemption from applying Statement 144 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. This Statement is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. The Company does not anticipate that the adoption of SFAS 155 will have an impact on the Companys overall results of operations or financial position.
In March 2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of Financial Assetsan amendment of FASB Statement No. 140 (SFAS 156), that applies to the accounting for separately recognized servicing assets and servicing liabilities. This Statement requires that all separately recognized servicing assets and servicing liabilities be initially measured at faire value, if practicable. An entity should adopt this Statement as of the beginning of its first fiscal year that begins after September 15, 2006. The Company does not anticipate that the adoption of SFAS 156 will have an impact on the Companys overall results of operations or financial position.
F- 21
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 minimum pension and foreign currency translation adjustments, net of tax when applicable.
The following is a breakdown of accumulated other comprehensive income:
Year ended September 30, |
|
2005 |
|
2006 |
|
||
Minimum Pension Adjustment |
|
$ |
|
|
$ |
(217 |
) |
Foreign Currency Translation Adjusted |
|
(512 |
) |
1,058 |
|
||
|
|
$ |
(512 |
) |
$ |
841 |
|
Tax included in above amounts |
|
$ |
364 |
|
$ |
474 |
|
As a part of fresh start reporting described in Note 1, inventory was written-up by $30,497 to fair value as of August 31, 2004 and was expensed as the inventory was sold. Expense of $25,414 and $5,083 was recognized for the year ended September 30, 2005 and the one month ended September 30, 2004, respectively, for this fair value adjustment.
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, |
|
2005 |
|
2006 |
|
||||
Raw materials |
|
|
$ |
6,740 |
|
|
$ |
7,214 |
|
Work-in-process |
|
|
83,232 |
|
|
96,674 |
|
||
Finished goods |
|
|
56,517 |
|
|
74,575 |
|
||
Other, net |
|
|
1,371 |
|
|
1,249 |
|
||
|
|
|
$ |
147,860 |
|
|
$ |
179,712 |
|
Note 4 Property, plant and equipment
As part of fresh start reporting described in Note 1, property, plant and equipment was written-up by $40,810 to fair value as of August 31, 2004 and resulted in additional depreciation expense of $3,052 and $2,902 for the years ended September 30, 2006 and 2005, respectively and $239 for the one month period ended September 30, 2004.
F- 22
The following is a summary of the major classes of property, plant and equipment:
September 30, |
|
2005 |
|
2006 |
|
||||
Land and land improvements |
|
|
$ |
2,551 |
|
|
$ |
2,842 |
|
Buildings |
|
|
7,076 |
|
|
7,645 |
|
||
Machinery and equipment |
|
|
73,504 |
|
|
82,290 |
|
||
Construction in process |
|
|
5,624 |
|
|
7,596 |
|
||
|
|
|
88,755 |
|
|
100,373 |
|
||
Less accumulated depreciation |
|
|
(3,630 |
) |
|
(11,452 |
) |
||
|
|
|
$ |
85,125 |
|
|
$ |
88,921 |
|
The Company has no assets under capital leases.
F- 23
Note 5 Accounts payable and accrued expenses
The following is a summary of the major classes of accounts payable and accrued expenses:
September 30, |
|
2005 |
|
2006 |
|
||||
Accounts payable, trade |
|
|
$ |
31,673 |
|
|
$ |
33,528 |
|
Employee compensation |
|
|
4,885 |
|
|
6,669 |
|
||
Taxes, other than income taxes |
|
|
1,087 |
|
|
1,015 |
|
||
Other |
|
|
7,850 |
|
|
4,275 |
|
||
|
|
|
$ |
45,495 |
|
|
$ |
45,487 |
|
The components of income (loss) before provision for income taxes are as follows:
|
|
Predecessor |
|
|
|
Successor |
|
||||||||||||
|
|
Eleven
months
|
|
|
|
One month
|
|
Year ended September 30, |
|
||||||||||
|
|
2004 |
|
|
|
2004 |
|
2005 |
|
2006 |
|
||||||||
Income (loss) before provision for income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. |
|
|
$ |
172,906 |
|
|
|
|
$ |
(6,461 |
) |
|
$ |
(9,950 |
) |
|
$ |
55,282 |
|
Foreign |
|
|
(2,082 |
) |
|
|
|
1,055 |
|
|
3,705 |
|
|
2,571 |
|
||||
Total |
|
|
$ |
170,784 |
|
|
|
|
$ |
(5,406 |
) |
|
$ |
(6,245 |
) |
|
$ |
57,853 |
|
Income tax provision (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Federal |
|
|
$ |
36 |
|
|
|
|
$ |
13 |
|
|
$ |
1,630 |
|
|
$ |
19,466 |
|
Foreign |
|
|
10 |
|
|
|
|
(51 |
) |
|
391 |
|
|
632 |
|
||||
State |
|
|
44 |
|
|
|
|
15 |
|
|
1,541 |
|
|
5,020 |
|
||||
Total |
|
|
90 |
|
|
|
|
(23 |
) |
|
3,562 |
|
|
25,118 |
|
||||
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. Federal |
|
|
|
|
|
|
|
(1,913 |
) |
|
(4,068 |
) |
|
(2,439 |
) |
||||
Foreign |
|
|
|
|
|
|
|
483 |
|
|
183 |
|
|
282 |
|
||||
State |
|
|
|
|
|
|
|
(307 |
) |
|
(1,788 |
) |
|
(648 |
) |
||||
Total |
|
|
|
|
|
|
|
(1,737 |
) |
|
(5,673 |
) |
|
(2,805 |
) |
||||
Total provision (benefit) for income taxes |
|
|
$ |
90 |
|
|
|
|
$ |
(1,760 |
) |
|
$ |
(2,111 |
) |
|
$ |
22,313 |
|
F- 24
The provision (benefit) for income taxes applicable to results of operations differed from the U.S. federal statutory rate as follows:
|
|
Predecessor |
|
|
|
Successor |
|
||||||||||||
|
|
Eleven months
|
|
|
|
One month
|
|
Year ended September 30, |
|
||||||||||
|
|
2004 |
|
|
|
2004 |
|
2005 |
|
2006 |
|
||||||||
Statutory federal tax rate |
|
|
34% |
|
|
|
|
34% |
|
|
34% |
|
|
35% |
|
||||
Tax provision (benefit) at the statutory rate |
|
|
$ |
58,080 |
|
|
|
|
$ |
(1,838 |
) |
|
$ |
(2,123 |
) |
|
$ |
20,248 |
|
Foreign tax rate differentials |
|
|
718 |
|
|
|
|
85 |
|
|
(685 |
) |
|
13 |
|
||||
Provision (benefit) for state taxes, net of federal taxes |
|
|
29 |
|
|
|
|
(193 |
) |
|
(163 |
) |
|
2,987 |
|
||||
U.S. tax on distributed and undistributed earnings of foreign subsidiaries |
|
|
|
|
|
|
|
|
|
|
121 |
|
|
66 |
|
||||
Manufacturers deduction |
|
|
|
|
|
|
|
|
|
|
|
|
|
(665 |
) |
||||
Forgiveness of debt income, fresh start accounting adjustments |
|
|
(62,883 |
) |
|
|
|
|
|
|
|
|
|
|
|
||||
Non-deductible restructuring costs |
|
|
3,295 |
|
|
|
|
165 |
|
|
628 |
|
|
|
|
||||
Other, net |
|
|
851 |
|
|
|
|
21 |
|
|
111 |
|
|
(336 |
) |
||||
Provision at effective tax rate |
|
|
$ |
90 |
|
|
|
|
$ |
(1,760 |
) |
|
$ |
(2,111 |
) |
|
$ |
22,313 |
|
Upon emergence from bankruptcy, the tax bases of assets and liabilities were carried over to Haynessuccessor. Deferred income tax amounts were recorded in fresh start accounting for temporary differences between the accounting and tax bases of assets and liabilities. Goodwill recorded in fresh start accounting is not tax deductible, and therefore, deferred income taxes were not provided.
F- 25
Deferred tax assets (liabilities) are comprised of the following:
September 30, |
|
2005 |
|
2006 |
|
||||
Current deferred tax assets (liabilities): |
|
|
|
|
|
|
|
||
Inventories |
|
|
$ |
3,344 |
|
|
$ |
5,288 |
|
Pension and Postretirement benefits |
|
|
1,932 |
|
|
2,768 |
|
||
Accrued expenses and other |
|
|
574 |
|
|
626 |
|
||
Environmental accrual |
|
|
538 |
|
|
39 |
|
||
Accrued compensation and benefits |
|
|
1,200 |
|
|
1,440 |
|
||
Other foreign related |
|
|
(290 |
) |
|
598 |
|
||
Total net current deferred tax assets (liabilities) |
|
|
7,298 |
|
|
10,759 |
|
||
Noncurrent deferred tax assets (liabilities): |
|
|
|
|
|
|
|
||
Property, plant and equipment, net |
|
|
(17,400 |
) |
|
(16,901 |
) |
||
Intangible assets |
|
|
(4,015 |
) |
|
(3,303 |
) |
||
Other foreign related |
|
|
368 |
|
|
(17 |
) |
||
Undistributed earnings of foreign subsidiary |
|
|
(49 |
) |
|
(281 |
) |
||
Environmental accrual |
|
|
|
|
|
497 |
|
||
Pension and Postretirement benefits |
|
|
45,065 |
|
|
44,964 |
|
||
Alternative minimum tax credit carryforwards |
|
|
1,601 |
|
|
|
|
||
Accrued compensation and benefits |
|
|
1,444 |
|
|
2,192 |
|
||
Debt issuance costs |
|
|
651 |
|
|
217 |
|
||
Total net noncurrent deferred tax assets |
|
|
27,665 |
|
|
27,368 |
|
||
Net deferred tax assets (liabilities) |
|
|
$ |
34,963 |
|
|
$ |
38,127 |
|
At September 30, 2006, the Company evaluated whether the utilization of net deferred tax assets was more likely than not. Based upon the new capital structure and fiscal 2006 results of operations, management believes realization of net deferred tax assets is more likely than not.
During the years ended September 30, 2006 and 2005 deferred tax assets increased by $790 and decreased by $2,702, respectively, due to the finalization of pre-emergence tax returns, which affected net operating loss carryforwards.
The Company has excluded undistributed earnings of $22,457 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.
Note 7 Restructuring and other charges
During the eleven months ended August 31, 2004, Haynespredecessor recorded restructuring and other charges of $4,027, related to its filing for reorganization relief under Chapter 11 of U.S. Bankruptcy Code. These costs consisted of pre-petition professional fees and credit facilities fees. During the one month ended September 30, 2004 and the year ended September 30, 2005, Haynessuccessor recorded restructuring and other charges of $429 and $628, respectively. These costs consisted of professional fees related to its filing for reorganization relief under
F- 26
Chapter 11 of U.S. Bankruptcy Code. No corresponding restructuring and other charges occurred in fiscal 2006.
Reorganization items represent income from fresh-start adjustments and costs incurred by the Company as a result of the filing of a petition for reorganization relief under Chapter 11 of U.S. Bankruptcy Code and are summarized as follows:
|
|
Predecessor |
|
||
|
|
Eleven months ended
|
|
||
Consulting fees |
|
|
$ |
3,982 |
|
Employment costs |
|
|
489 |
|
|
Write off Senior Note discount and debt issuance costs |
|
|
481 |
|
|
Revolver debt issue costs |
|
|
1,599 |
|
|
Amendment fees |
|
|
184 |
|
|
Travel and other expenses |
|
|
104 |
|
|
Fees related to an agreement with previous Chairman |
|
|
430 |
|
|
Directors fees |
|
|
29 |
|
|
Gain on cancellation of debt |
|
|
(32,239 |
) |
|
Fresh Start reporting adjustments and fair value adjustments |
|
|
(152,712 |
) |
|
|
|
|
$ |
(177,653 |
) |
As discussed in Note 1, on March 29, 2004, the Company and its U.S. subsidiaries and U.S. affiliates filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. The Companys $140 million of Senior Notes due on September 1, 2004, accrued and unpaid interest of $9.4 million on the Senior Notes, and accrued and unpaid Blackstone Group monitoring fees of $1.6 million were classified as liabilities subject to compromise. Effective March 29, 2004, the Company ceased accruing interest on the Senior Notes and other U.S. subsidiaries and U.S. affiliates pre-petition debt in accordance with SOP 90-7.
The Company and its U.S. operations had a credit agreement, as amended, (the Prepetition Credit Agreement), with Fleet Capital Corporation, which provided the Company and its U.S. subsidiaries and U.S. affiliates with a $72 million revolving facility.
In April 2004, Congress Financial Corporation (Central) (Congress) agreed to provide the Company with two post-petition facilities maturing in April 2007. Haynes UK entered into a credit agreement (the Haynes UK Credit Agreement) which provides Haynes UK with a $15 million credit facility. In addition, the Company entered into a credit agreement (the Postpetition Credit Agreement) which provides the Company with a $100 million credit facility with a sub-limit of $10 million for letters of credit, all subject to a borrowing base formula and certain reserves. The amounts outstanding under the Haynes UK Credit Agreement facility reduce amounts available to be borrowed under the Postpetition Credit Agreement facility on a dollar for dollar basis. Borrowings under the Postpetition Credit Agreement facility were used to repay the outstanding indebtedness under the Prepetition Credit Agreement.
F- 27
Borrowings under the Postpetition Credit Agreement are either prime rate loans or Eurodollar loans and bear interest at either the prime rate plus up to 1.5% or the adjusted Eurodollar rate used by Congress plus up to 3.0%, at the Companys option. In addition, the Company pays monthly in arrears a commitment fee of 3 ¤ 8% per annum on the unused amount of the Postpetition Facility commitment. For letters of credit, the Company pays 2 1 ¤ 2% per annum on the daily outstanding balance of all issued letters of credit ($972 and $321 at September 30, 2005 and 2006, respectively) plus customary fees for issuance, amendments, and processing.
When the Company emerged from bankruptcy on August 31, 2004, the Postpetition Credit Agreement structure and loan limits continued, and a new $10 million multi-draw equipment acquisition term loan sub-facility was added (collectively, the Post-Effective Date Facility). The Post-Effective Date Facility is subject to a borrowing base formula and certain reserves and is secured by substantially all of the assets of the Company. This credit facility is classified as current pursuant to EITF No. 95-22, Balance Sheet Classification of Borrowings Outstanding Under Revolving Credit Arrangements that Include Both Subjective Acceleration Clause and a Lock-Box Arrangement.
The Postpetition Credit Agreement structure was revised, per Amendment No. 4 dated August 31, 2005, by and among the Company and Wachovia Capital Finance Corporation (Central) (Wachovia), formerly known as Congress. The maximum credit amount under this agreement is $130 million with the maturity date of April 12, 2009.
Debt and long-term obligations consist of the following (in thousands):
September 30, |
|
2005 |
|
2006 |
|
||||
Postpetition Revolving Credit Agreement |
|
|
|
|
|
|
|
||
U.S. Facility, 6.19% 2005; 7.32% 2006, expires April 2009 |
|
|
$ |
104,468 |
|
|
$ |
112,763 |
|
U.K. Facility, 6.97% 2005; 8.34% 2006, expires April 2007 |
|
|
|
|
|
4,073 |
|
||
|
|
|
$ |
104,468 |
|
|
$ |
116,836 |
|
Three year mortgage note, 3.1%, due in December 2008 (Swiss Subsidiary) |
|
|
$ |
1,391 |
|
|
$ |
1,360 |
|
Other long-term obligations |
|
|
524 |
|
|
1,847 |
|
||
|
|
|
1,915 |
|
|
3,207 |
|
||
Less amounts due within one year |
|
|
1,501 |
|
|
110 |
|
||
|
|
|
$ |
414 |
|
|
$ |
3,097 |
|
The credit facility requires that the Company comply with certain financial covenants and restricts the payment of dividends. As of September 30, 2006, the most recent required measuring date, the Company was in compliance with these covenants. The carrying amount of debt approximates fair value, because substantially all debt bears interest at variable interest rates.
At September 30, 2006, the Company had access to approximately $29.5 million ($21.3 million U.S. and $8.2 million U.K.) under its credit agreements (subject to borrowing base and certain reserves). The Companys French subsidiary (Haynes International, SARL) has an overdraft banking facility of 2,770 Euro ($3,513) all of which was available on September 30, 2006. The Companys Swiss subsidiary (Nickel-Contor AG) had an overdraft banking facility of 1,000 Swiss Francs ($800) all of which was available on September 30, 2006.
F- 28
Maturities of long-term debt are as follows at September 30, 2006:
Year ending |
|
|
|
|
2007 |
|
$ |
110 |
|
2008 |
|
1,434 |
|
|
2009 |
|
92 |
|
|
2010 |
|
93 |
|
|
2011 |
|
93 |
|
|
2012 and thereafter |
|
1,385 |
|
|
|
|
$ |
3,207 |
|
Note 10 Pension plan and retirement benefits
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 employees contribution to the plan up to a maximum contribution of 3% of the employees salary, except for salaried employees hired after December 31, 2005 that are not eligible for the pension plan. The Company contributes an amount equal to 60% of an employees contribution to the plan up to a maximum contribution of 6% of the employees salary for this group. Expenses associated with this plan for the eleven months ended August 31, 2004 and the years ended September 30, 2005 and 2006 totaled $474, $545 and $586, respectively. The Company did not contribute to this plan for the one month ended September 30, 2004.
The Company sponsors certain profit sharing plans for the benefit of employees meeting certain eligibility requirements. There were no contributions to these plans the eleven months ended August 31, 2004, the one month ended September 30, 2004 and for the years ended September 30, 2005 and 2006.
F- 29
The Company has non-contributory defined benefit pension plans which cover most employees in the United States and certain foreign subsidiaries. Salaried employees hired after December 31, 2005 are not covered by the pension plan; however, they are eligible for an enhanced matching program of the defined contribution plan (401(k)).
Benefits provided under the Companys domestic defined benefit pension plan are based on years of service and the employees final compensation. The Companys 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 Company has non-qualified pensions for current and former executives of the Company. Non-qualified pension plan expense for the eleven months ended August 31, 2004 and the one-month ended September 30, 2004, and for the years ended September 30, 2005 and 2006 was $1,358, $55, $409 and $297, respectively. Accrued liabilities in the amount of $2,533 and $2,355 for these benefits are included in accrued pension and postretirement benefits at September 30, 2006 and 2005, respectively.
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 Companys 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.
The Company made no contributions to fund its domestic Company-sponsored pension plan for the year ended September 30, 2005 or the year ended September 30, 2006. The Companys U.K. subsidiary made contributions of $1,058 and $1,123 for the year ended September 30, 2005 and the year ended September 30, 2006, respectively, to the U.K. pension plan.
F- 30
The Company uses a September 30 measurement date for its plans. The status of employee pension benefit plans and other post-retirement benefit plans are summarized below:
|
|
Defined benefit
|
|
|
|
Post-retirement
|
|
||||||||
Year ended September 30 |
|
2005 |
|
2006 |
|
|
|
2005 |
|
2006 |
|
||||
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
||||
Projected benefit obligation at beginning of year |
|
$ |
149,601 |
|
$ |
162,701 |
|
|
|
$ |
88,761 |
|
$ |
126,713 |
|
Service cost |
|
3,283 |
|
3,746 |
|
|
|
1,264 |
|
2,152 |
|
||||
Interest cost |
|
8,967 |
|
9,009 |
|
|
|
5,261 |
|
5,904 |
|
||||
Plan amendment |
|
|
|
|
|
|
|
|
|
(46,313 |
) |
||||
Losses (gains) |
|
10,119 |
|
6,002 |
|
|
|
36,747 |
|
(6,486 |
) |
||||
Employee contributions |
|
64 |
|
68 |
|
|
|
|
|
|
|
||||
Benefits paid |
|
(9,333 |
) |
(9,215 |
) |
|
|
(5,320 |
) |
(5,113 |
) |
||||
Projected benefit obligation at end of year |
|
$ |
162,701 |
|
$ |
172,311 |
|
|
|
$ |
126,713 |
|
$ |
76,857 |
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
||||
Fair value of plan assets at beginning of year |
|
$ |
121,550 |
|
$ |
128,814 |
|
|
|
$ |
|
|
$ |
|
|
Actual return on assets |
|
15,476 |
|
9,964 |
|
|
|
|
|
|
|
||||
Employer contributions |
|
1,058 |
|
1,123 |
|
|
|
5,320 |
|
5,113 |
|
||||
Employee contributions |
|
63 |
|
67 |
|
|
|
|
|
|
|
||||
Benefits paid |
|
(9,333 |
) |
(9,215 |
) |
|
|
(5,320 |
) |
(5,113 |
) |
||||
Fair value of plan assets at end of year |
|
$ |
128,814 |
|
$ |
130,753 |
|
|
|
$ |
|
|
$ |
|
|
Funded status of plan: |
|
|
|
|
|
|
|
|
|
|
|
||||
Unfunded status |
|
$ |
(33,887 |
) |
$ |
(41,558 |
) |
|
|
$ |
(126,713 |
) |
$ |
(76,857 |
) |
Unrecognized actuarial loss (gain) |
|
3,163 |
|
9,549 |
|
|
|
36,816 |
|
28,640 |
|
||||
Unrecognized prior service cost |
|
|
|
|
|
|
|
|
|
(43,419 |
) |
||||
Net amount recognized |
|
$ |
(30,724 |
) |
$ |
(32,009 |
) |
|
|
$ |
(89,897 |
) |
$ |
(91,636 |
) |
Amounts recognized in the consolidated balance sheets are as follows:
|
|
Defined benefit
|
|
Post-retirement
|
|
Non-qualified
|
|
All plans
|
|
||||||||||||||||
|
|
September 30, |
|
September 30, |
|
September 30, |
|
September 30, |
|
||||||||||||||||
|
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
||||||||
Accrued benefit liability |
|
$ |
(30,724 |
) |
$ |
(32,319 |
) |
$ |
(89,897 |
) |
$ |
(91,636 |
) |
$ |
(2,355 |
) |
$ |
(2,533 |
) |
$ |
(122,976 |
) |
$ |
(126,488 |
) |
Accumulated other comprehensive income |
|
|
|
310 |
|
|
|
|
|
|
|
|
|
|
|
310 |
|
||||||||
Net amount
|
|
$ |
(30,724 |
) |
$ |
(32,009 |
) |
$ |
(89,897 |
) |
$ |
(91,636 |
) |
$ |
(2,355 |
) |
$ |
(2,533 |
) |
$ |
(122,976 |
) |
$ |
(126,178 |
) |
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 Companys policy is to fund the cost of claims on an annual basis.
F- 31
The components of net periodic pension cost and postretirement health care benefit cost are as follows:
|
|
Defined benefit pension plans |
|
|||||||||||||||||
|
|
Predecessor |
|
|
|
Successor |
|
|||||||||||||
|
|
Eleven
|
|
|
|
One month
|
|
Year ended September 30, |
|
|||||||||||
|
|
2004 |
|
|
|
2004 |
|
2005 |
|
2006 |
|
|||||||||
Service cost |
|
|
$ |
2,933 |
|
|
|
|
$ |
265 |
|
|
$ |
3,283 |
|
|
$ |
3,746 |
|
|
Interest cost |
|
|
7,991 |
|
|
|
|
753 |
|
|
8,967 |
|
|
9,009 |
|
|||||
Expected return on assets |
|
|
(9,095 |
) |
|
|
|
(830 |
) |
|
(9,730 |
) |
|
(10,349 |
) |
|||||
Amortization of unrecognized net gain |
|
|
633 |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Amortization of unrecognized prior service cost |
|
|
763 |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Amortization of unrecognized transition obligation |
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net periodic cost |
|
|
$ |
3,322 |
|
|
|
|
$ |
188 |
|
|
$ |
2,520 |
|
|
$ |
2,406 |
|
|
|
|
Post-retirement health care benefits |
|
||||||||||||||||
|
|
Predecessor |
|
|
|
Successor |
|
||||||||||||
|
|
Eleven |
|
|
|
|
|
|
|
|
|
||||||||
|
|
months
|
|
|
|
One month
|
|
Year ended September 30, |
|
||||||||||
|
|
2004 |
|
|
|
2004 |
|
2005 |
|
2006 |
|
||||||||
Service cost |
|
|
$ |
1,524 |
|
|
|
|
$ |
97 |
|
|
$ |
1,264 |
|
|
$ |
2,152 |
|
Interest cost |
|
|
5,774 |
|
|
|
|
451 |
|
|
5,261 |
|
|
5,904 |
|
||||
Amortization of unrecognized net gain |
|
|
313 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization of unrecognized prior service cost |
|
|
(3,096 |
) |
|
|
|
|
|
|
|
|
|
(2,895 |
) |
||||
Recognized actuarial loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,690 |
|
||||
Net periodic cost |
|
|
$ |
4,515 |
|
|
|
|
$ |
548 |
|
|
$ |
6,525 |
|
|
$ |
6,851 |
|
A 6.8% (7.2%-2005) annual rate of increase for ages under 65 and an 7.5% (8.1%-2005) annual rate of increase for ages over 65 in the costs of covered health care benefits were assumed for 2006, gradually decreasing for both age groups to 5.0% (5.0%-2005) 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 no effect in 2006, due to the negative plan amendment that caps the Company costs at $5,000 per year.
F- 32
The actuarial present value of the projected pension benefit obligation and postretirement health care benefit obligation for the domestic plans at September 30, 2004, 2005, and 2006 were determined based on the following assumptions:
September 30, |
|
2005 |
|
2006 |
|
Discount rate |
|
5.750% |
|
6.000% |
|
Rate of compensation increase (pension plan only) |
|
4.000% |
|
4.000% |
|
The net periodic pension and post-retirement health care benefit costs for the domestic plans were determined using the following assumptions:
|
|
Defined benefit pension and
|
|
||||||||||||
|
|
Predecessor |
|
|
|
Successor |
|
||||||||
|
|
Eleven Months
|
|
|
|
One Month
|
|
Year Ended September 30, |
|||||||
|
|
2004 |
|
|
|
2004 |
|
2005 |
|
2006 |
|
||||
Discount rate |
|
|
6.250% |
|
|
|
|
6.125% |
|
|
6.125% |
|
|
5.750% |
(1) |
Expected return on plan assets |
|
|
9.000% |
|
|
|
|
9.000% |
|
|
8.500% |
|
|
8.500% |
|
Rate of compensation increase (pension plan only) |
|
|
4.000% |
|
|
|
|
4.000% |
|
|
4.000% |
|
|
4.000% |
|
(1) Effective April 1, 2006, the discount rate for the post-retirement health care plan was changed to 6.250% due to the actuarial revaluation for the negative plan amendment.
The accumulated benefit obligation for the pension plans was $153,180 and $146,705 at September 30, 2006 and 2005, respectively. There was an increase in the additional minimum liability included in other comprehensive income of $310 for the year ended September 30, 2006.
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $172,310, $153,180 and $130,753 respectively, as of September 30, 2006, and $162,701, $146,705 and $128,814, respectively, as of September 30, 2005.
Plan Assets and Investment Strategy
The Companys pension plans weighted-average asset allocations by asset category are as follows:
September 30, |
|
2005 |
|
2006 |
|
Equity Securities |
|
63% |
|
65% |
|
Debt Securities |
|
31% |
|
32% |
|
Real Estate |
|
6% |
|
1% |
|
Other |
|
0% |
|
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.
F- 33
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% |
|
(1) From time to time the Company may adjust the target allocation by an amount not to exceed 10%.
Contributions and benefit payments
The Company expects to contribute approximately $2,011 to its domestic pension plans, $5,000 to its domestic other post-retirement benefit plans, and $1,123 to the U.K. pension plan in 2007.
Pension and post-retirement 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 |
|
Post-retirement
|
|
|||
2007 |
|
$ |
9,454 |
|
|
$ |
5,000 |
|
2008 |
|
9,572 |
|
|
5,000 |
|
||
2009 |
|
9,687 |
|
|
5,000 |
|
||
2010 |
|
9,823 |
|
|
5,000 |
|
||
2011 |
|
10,110 |
|
|
5,000 |
|
||
2012 - 2016 (in total) |
|
56,502 |
|
|
25,000 |
|
||
F- 34
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 $2,117, $201, $2,957 and $3,042 for the eleven months ended August 31, 2004, the one month ended September 30, 2004 and for the years ended September 30, 2005 and 2006, respectively. Rent expense does not include income from sub-lease rentals totaling $151, $14, $179 and $180 for the eleven months ended August 31, 2004, the one month ended September 30, 2004 and for the years ended September 30, 2005 and 2006, respectively. Future minimum rental commitments under non-cancelable operating leases at September 30, 2006, are as follows:
Year Ended |
|
Operating |
|
||
2007 |
|
|
$ |
3,201 |
|
2008 |
|
|
2,487 |
|
|
2009 |
|
|
2,403 |
|
|
2010 |
|
|
762 |
|
|
2011 |
|
|
348 |
|
|
2012 and thereafter |
|
|
0 |
|
|
|
|
|
$ |
9,201 |
|
Future minimum rental commitments under non-cancelable operating leases have not been reduced by minimum sub-lease rentals of $875 due in the future.
Note 12 Environmental and legal
The Company is periodically involved in litigation, both as a plaintiff and as a defendant, relating to its business and operations, including environmental matters. Future expenditures for environmental and other legal matters cannot be determined with any degree of certainty; however, based on the facts presently known, management does not believe that such costs will have a material effect on the Companys financial position, results of operations or cash flows.
The Company previously reported that it was a defendant in 52 lawsuits filed in the state of California alleging that the Companys welding-related products harmed the users of such products through the inhalation of welding fumes containing manganese. The suits were instituted against the Company starting in fiscal year 2005. On July 3, 2006, the state court in California issued orders dismissing the Company as a plaintiff in 42 of the lawsuits pending in the state of California. The other ten cases originally filed in California were removed to federal court in the U.S. District Court in Cleveland, in what is called a multidistrict litigation, or MDL. On July 30, 2006, the MDL court dismissed the Company as a defendant in these actions.
The Company is presently involved in two actions involving welding rod-related injuries. One new lawsuit was filed in California state court in May 2006, again alleging that the Companys welding-related products harmed the users of such products through the inhalation of welding fumes containing manganese. A second case with similar allegations is also pending in the state of Texas. The estimated claims for damages in these cases, alone or in the aggregate, do not
F-35
exceed 1% of the Companys current assets as of September 30, 2006. Additionally, the Company believes that it has insurance coverage for these cases.
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 reorganization relief under Chapter 11 of Title 11 of the United States 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 plan of reorganization, 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 of reorganization. The Effective Date occurred on August 31, 2004. The Company intends to pursue the dismissal of all pending and any future lawsuits premised upon claims or causes of action discharged in the Confirmation Order and related plan of reorganization. It is possible, however, that the Company will be named in additional suits in welding-rod litigation cases, in which case, the aggregate claims for damages cannot be estimated and, if the Company is found liable, may have a material adverse effect on the Companys financial statements unless such claims are also subject to insurance coverage and/or subject to dismissal, as discussed above.
The Company has received permits from the Indiana Department of Environmental Management, or IDEM, and the US Environmental Protection Agency, or EPA, to close and to provide post-closure monitoring and care for certain areas at the Kokomo facility that were used for the storage and disposal of wastes, some of which are classified as hazardous under applicable regulations. A closure certification was received in fiscal 1999 for one area at the Kokomo facility and post-closure monitoring is ongoing there. The Company also has an application pending for approval of closure and post-closure care for another area at its Kokomo facility. The Company has also received permits from the North Carolina Department of Environment and Natural Resources, or NCDENR, and the EPA to close and provide post-closure monitoring and care for the lagoon at its Mountain Home, North Carolina facility. The lagoon area has been closed and is currently undergoing post-closure monitoring. The Company is required to monitor groundwater and to continue post-closure maintenance of the former disposal areas at each of these sites. The Company is aware of elevated levels of certain contaminants in the groundwater associated with the closed areas in Kokomo and Mountain Home. If it is determined that the disposal areas or other solid waste management units at the Mountain Home facility or in other areas of the Kokomo facility have impacted the groundwater, additional corrective action by the Company could be required. The Company is unable to estimate the costs of such action, if any. There can be no assurance, however, that the costs of future corrective action would not have a material effect on the Companys financial condition results of operations or liquidity. Additional, 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 of September 30, 2006 and 2005, the Company has accrued $1,483 and $1,363, respectively for post-closure monitoring and maintenance activities. In accordance with SFAS 143, Accounting for Asset Retirement Obligations , accruals for these costs are calculated by estimating the cost to
F-36
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 $1,871 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 $98 per year over the remaining obligation period.
On November 7, 2005, the Compensation Committee of the Board of approved a compensation arrangement whereby members of the Board of Directors who are requested by the Chairman of the Board of Directors to provide services to the Company which are over and above the services that are routinely provided to the Company by its directors are to be compensated in the amount of $1 thousand per day for each day on which such services are provided.
From October 1, 2003 through September 30, 2004, the Company had an agreement with the previous Chairman of the Board to perform services related to implementing various strategic initiatives, including but not limited to financial restructuring. The Company believed that the Chairmans knowledge, skill and experience were essential to achieving the strategic initiatives. Costs relating to this agreement of $430 are included in reorganization items for the eleven months ended August 31, 2004.
Note 14 Stock-based compensation
As discussed in Note 1, the plan of reorganization resulted in the cancellation of all outstanding shares of common stock of Haynes International, Inc., as well as all options to purchase or otherwise receive shares of Haynes-predecessor common stock.
In connection with the plan of reorganization, the Haynessuccessor has adopted a stock option plan for certain key management employees and non-employee directors pursuant to the terms set forth in the First Amended Joint Plan of Reorganization. The stock option plan authorizes the granting of non-qualified stock options to certain key employees and non-employee directors of the Company to purchase up to 1,000,000 shares of the Companys common stock. On August 31, 2004, recipients of the initial grant received 10-year stock options, which will vest at 33 1 ¤ 3 % per year over three years. The exercise price for the initial grant of options was $12.80 per share. The fair value of the Companys common stock on the stock option grant date was $15.37 per share without regard to any adjustment for lack of marketability or minority discount, but based upon a contemporaneous valuation of the enterprise as a whole using the same discounted cash flow method used in determining the reorganization value of the Company as described in Note 1. All grants subsequent to August 31, 2004 had an exercise price equal to or higher than the fair market value of the Companys common stock on the grant date.
On November 7, 2005, the Board of Directors of the Company approved an amendment of the Haynes International, Inc. Stock Option Plan (the Plan), whereby, in the event of a Change in Control (as defined in the Plan) of the Company, all outstanding options to purchase shares of
F-37
the Companys common stock would become and remain exercisable as to all shares covered by such options without regard to any vesting schedule without any action by the Board of Directors or the Compensation Committee. The Plan had previously authorized the Board of Directors to accelerate the vesting of options upon a Change in Control in its discretion. This modification did not result in any incremental compensation. All of the directors and certain executive officers of the Company hold options under the Plan.
Pertinent information covering stock option plans for Haynes-predecessor and Haynes-successor are as follows:
|
|
Number
|
|
Exercise
|
|
Fiscal
|
|
Aggregate
|
|
Weighted
|
|
Weighted
|
|
||||||
Predecessor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Outstanding at October 1, 2003 |
|
769,632 |
|
$ |
2.00 - 10.15 |
|
2003 - 2010 |
|
|
|
|
|
$ |
3.14 |
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Canceled |
|
(769,632 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Outstanding at August 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Successor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Granted |
|
940,000 |
|
12.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Canceled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Outstanding at September 30, 2004 |
|
940,000 |
|
12.80 |
|
2014 |
|
|
|
|
|
12.80 |
|
|
|
|
|||
Granted |
|
60, 000 |
|
19. 00 |
|
2015 |
|
|
|
|
|
19.00 |
|
|
|
|
|||
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Canceled |
|
(100,000 |
) |
12.80 |
|
|
|
|
|
|
|
12.80 |
|
|
|
|
|||
Outstanding at September 30, 2005 |
|
900,000 |
|
12.80 - 19.00 |
|
2014 - 2015 |
|
|
|
|
|
13.21 |
|
|
|
|
|||
Granted |
|
80,000 |
|
25.50 - 31.00 |
|
2014 - 2015 |
|
|
|
|
|
28.88 |
|
|
|
|
|||
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Canceled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Outstanding at September 30, 2006 |
|
980,000 |
|
$ |
12.80 - 31.00 |
|
|
|
|
$ |
24,018 |
|
|
$ |
14.49 |
|
|
8.07 yrs. |
|
Exercisable at September 30, 2006 |
|
580,000 |
|
$ |
12.80 - 19.00 |
|
|
|
|
$ |
15,072 |
|
|
$ |
13.01 |
|
|
7.94 yrs. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38
|
|
Outstanding |
|
Exercisable |
|
|||||||||||||
Grant date |
|
Number of
|
|
Exercise price
|
|
Remaining
|
|
Number of
|
|
Exercise price
|
|
|||||||
August 31, 2004 |
|
|
840,000 |
|
|
$ |
12.80 |
|
|
7.92 |
|
|
560,000 |
|
|
$ |
12.80 |
|
May 5, 2005 |
|
|
60,000 |
|
|
19.00 |
|
|
8.58 |
|
|
20,000 |
|
|
19.00 |
|
||
October 1, 2005 |
|
|
15,000 |
|
|
25.50 |
|
|
9.00 |
|
|
|
|
|
|
|
||
February 21, 2006 |
|
|
50,000 |
|
|
29.25 |
|
|
9.42 |
|
|
|
|
|
|
|
||
March 31, 2006 |
|
|
15,000 |
|
|
31.00 |
|
|
9.50 |
|
|
|
|
|
|
|
||
|
|
|
980,000 |
|
|
|
|
|
|
|
|
580,000 |
|
|
|
|
||
Adoption of SFAS 123(R)
Effective October 1, 2005 under the modified prospective method, the Company adopted the provisions of SFAS 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 . 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 calculated under SFAS No. 123 and 148 for pro forma disclosures. Compensation expense in fiscal 2004 and 2005 related to stock options continues to be disclosed on a pro forma basis only. Using the fair value based method the weighted average fair value of shares granted in fiscal 2004, 2005, and 2006 was $ 8.10 per share, $9.08 per share and $14.11 per share, respectively. The fair value of the option grants is estimated as of the date of the grant using the Black-Scholes option pricing model with the following assumptions:
Grant date |
|
Fair
|
|
Dividend
|
|
Risk-free
|
|
Expected
|
|
Expected
|
|
|||||
August 31, 2004 |
|
$ |
8.10 |
|
|
0% |
|
|
2.74% |
|
|
70.00% |
|
|
3 years |
|
May 5, 2005 |
|
9.08 |
|
|
0% |
|
|
2.74% |
|
|
70.00% |
|
|
3 years |
|
|
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 |
|
|
The stock-based employee compensation expense for year ended September 30, 2006 was $2,786 ($1,699 net of tax) leaving a remaining unrecognized compensation expense at September 30, 2006 of $3,348 to be recognized over a weighted average period of 1.14 years.
F-39
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. Financial statements for prior periods have not been restated.
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.
Prior to the adoption of SFAS 123(R)
During fiscal 2005 the Company had adopted the disclosure only provisions of SFAS No. 123, Accounting for Stock-Based Compensation . The Company had recorded compensation expense for stock options, since the exercise price of the stock options was less than the fair market value of the underlying common stock at the date of grant. Had compensation cost for the plan been determined based on the fair value at the grant dates for awards under the plan consistent with the fair value method of SFAS No. 123, the effect on the Companys net income (loss) would have been the following:
|
|
Predecessor |
|
|
|
Successor |
|
||||||||
|
|
Eleven months
|
|
|
|
One month
|
|
Year ended
|
|
||||||
|
|
2004 |
|
|
|
2004 |
|
2005 |
|
||||||
Net income (loss) as reported |
|
|
$ |
170,734 |
|
|
|
|
$ |
(3,646 |
) |
|
$ |
(4,134 |
) |
Add: Total stock-based employee compensation expense determined under the intrinsic value based method, net of related tax effect |
|
|
|
|
|
|
|
74 |
|
|
788 |
|
|||
Deduct: Total stock-based employee compensation expense determined under the fair value based method, net of related tax effect |
|
|
(22 |
) |
|
|
|
(128 |
) |
|
(1,475 |
) |
|||
Adjusted net income (loss) |
|
|
$ |
170,712 |
|
|
|
|
$ |
(3,700 |
) |
|
$ |
(4,821 |
) |
As reported net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Basic and Diluted |
|
|
$ |
1,707,340 |
|
|
|
|
$ |
(.36 |
) |
|
$ |
(.41 |
) |
Pro forma net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|||
Basic and Diluted |
|
|
$ |
1,707,120 |
|
|
|
|
$ |
(.37 |
) |
|
$ |
(.48 |
) |
Note 15 Quarterly data (unaudited)
The unaudited quarterly results of operations of the Company for the years ended September 30, 2006 and the 2005 are as follows:
Quarter ended 2006 |
|
December 31 |
|
March 31 |
|
June 30 |
|
September 30 |
|
||||||
Net revenues |
|
|
$ |
94,407 |
|
$ |
110,981 |
|
$ |
114,932 |
|
|
$ |
114,085 |
|
Gross profit |
|
|
17,312 |
|
28,593 |
|
33,234 |
|
|
29,693 |
|
||||
Net income |
|
|
3,333 |
|
9,959 |
|
11,975 |
|
|
10,273 |
|
||||
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
|
$ |
0.33 |
|
$ |
1.00 |
|
$ |
1.20 |
|
|
$ |
1.03 |
|
Diluted |
|
|
$ |
0.33 |
|
$ |
0.97 |
|
$ |
1.16 |
|
|
$ |
1.00 |
|
F-40
Quarter ended 2005 |
|
December 31 |
|
March 31 |
|
June 30 |
|
September 30 |
|
|||||||
Net revenues |
|
|
$ |
66,043 |
|
|
$ |
86,196 |
|
$ |
79,638 |
|
|
$ |
93,112 |
|
Gross profit (loss) |
|
|
(2,577 |
) |
|
7,683 |
|
16,938 |
|
|
14,276 |
|
||||
Net income (loss) |
|
|
(8,584 |
) |
|
(2,931 |
) |
5,555 |
|
|
1,826 |
|
||||
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
|
$ |
(0.86 |
) |
|
$ |
(0.29 |
) |
$ |
0.56 |
|
|
$ |
0.18 |
|
Diluted |
|
|
$ |
(0.86 |
) |
|
$ |
(0.29 |
) |
$ |
0.55 |
|
|
$ |
0.18 |
|
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 chemical processing industries. The Company has operations in the United States and Europe, which are summarized below. Sales between geographic areas are made at negotiated selling prices.
September 30 |
|
2005 |
|
2006 |
|
||
Long-lived Assets by Geography: |
|
|
|
|
|
||
United States |
|
$ |
135,519 |
|
$ |
136,628 |
|
Europe |
|
4,047 |
|
3,980 |
|
||
Total long-lived assets |
|
$ |
139,566 |
|
$ |
140,608 |
|
|
|
Predecessor |
|
|
|
Successor |
|
||||||||||||
|
|
Eleven
|
|
|
|
One month
|
|
Year ended September 30, |
|
||||||||||
|
|
2004 |
|
|
|
2004 |
|
2005 |
|
2006 |
|
||||||||
Net Revenue by Geography: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
United States |
|
|
$ |
128,988 |
|
|
|
|
$ |
14,304 |
|
|
$ |
196,477 |
|
|
$ |
265,133 |
|
Europe |
|
|
58,552 |
|
|
|
|
7,091 |
|
|
88,002 |
|
|
101,448 |
|
||||
Other |
|
|
21,563 |
|
|
|
|
2,996 |
|
|
40,510 |
|
|
67,824 |
|
||||
Net Revenues |
|
|
$ |
209,103 |
|
|
|
|
$ |
24,391 |
|
|
$ |
324,989 |
|
|
$ |
434,405 |
|
Net Revenue by Product Group: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
High temperature resistant alloys |
|
|
$ |
152,645 |
|
|
|
|
$ |
17,805 |
|
|
$ |
243,742 |
|
|
$ |
295,395 |
|
Corrosive resistant alloys |
|
|
56,458 |
|
|
|
|
6,586 |
|
|
81,247 |
|
|
139,010 |
|
||||
Net revenues |
|
|
$ |
209,103 |
|
|
|
|
$ |
24,391 |
|
|
$ |
324,989 |
|
|
$ |
434,405 |
|
Note 17 Valuation and qualifying accounts
|
|
Balance at
|
|
Additions
|
|
Deductions(1) |
|
Balance at
|
|
||||||||
Allowance for doubtful accounts receivables: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
September 30, 2006 |
|
|
$ |
1,514 |
|
|
$ |
373 |
|
|
$ |
(136 |
) |
|
$ |
1,751 |
|
September 30, 2005 |
|
|
1,099 |
|
|
733 |
|
|
(318 |
) |
|
1,514 |
|
||||
September 30, 2004 |
|
|
1,221 |
|
|
23 |
|
|
(145 |
) |
|
1,099 |
|
||||
August 31, 2004 |
|
|
974 |
|
|
568 |
|
|
(321 |
) |
|
1,221 |
|
||||
(1) Uncollectible accounts written off net of recoveries.
F-41
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 at prices established in the agreement. The transaction is documented by an Access and Security Agreement and a Conversion Services Agreement, both dated November 17, 2006. TIMET paid the Company a $50.0 million up-front fee and will also pay the Company for its processing services during the term of the agreement at agreed-upon prices. In addition to the volume commitment, the Company has granted TIMET a security interest on its four-high Steckel rolling mill, along with certain rights of access. TIMET may exercise an option to have ten million additional pounds of titanium converted annually, provided that it offers to loan up to $12.0 million to the Company for certain capital expenditures which would be required to expand capacity. The Company has the option to purchase titanium sheet and plate products from TIMET and has agreed not to manufacture its own 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 $50.0 million will be recorded as deferred revenue on the consolidated balance sheet. Pending completion of the Companys evaluation of its capital structure, the Company has used the after-tax proceeds, net of expenses, of the $50 million up-front fee paid by TIMET to reduce the balance of its revolving credit facility. Upon certain instances of a change in control, a violation of the non-compete provisions or a performance default or upon the occurrence of a force majeure which results in a performance default, the Company is required to return the unearned portion (as defined) of the up-front fee.
F-42
Haynes International, Inc. and subsidiaries
(in thousands, except share data) |
|
September 30,
|
|
December 31,
|
|
||||
|
|
|
|
(unaudited) |
|
||||
ASSETS |
|
|
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
|
|
||
Cash and cash equivalents |
|
|
$ |
6,182 |
|
|
$ |
4,982 |
|
Restricted cashcurrent portion |
|
|
110 |
|
|
110 |
|
||
Accounts receivable, less allowance for doubtful accounts of $1,751 and $1,840, respectively |
|
|
77,962 |
|
|
76,283 |
|
||
Inventories, net |
|
|
179,712 |
|
|
203,972 |
|
||
Deferred income taxes |
|
|
10,759 |
|
|
13,719 |
|
||
Total current assets |
|
|
274,725 |
|
|
299,066 |
|
||
Property, plant and equipment (at cost) |
|
|
100,373 |
|
|
103,735 |
|
||
Accumulated depreciation |
|
|
(11,452 |
) |
|
(13,346 |
) |
||
Net property, plant and equipment |
|
|
88,921 |
|
|
90,389 |
|
||
Deferred income taxeslong term portion |
|
|
27,368 |
|
|
24,852 |
|
||
Prepayments and deferred charges, net |
|
|
2,719 |
|
|
5,322 |
|
||
Restricted cashlong term portion |
|
|
440 |
|
|
330 |
|
||
Goodwill |
|
|
42,265 |
|
|
42,265 |
|
||
Other intangible assets |
|
|
9,422 |
|
|
9,140 |
|
||
Total assets |
|
|
$ |
445,860 |
|
|
$ |
471,364 |
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
|
|
||
Accounts payable and accrued expenses |
|
|
$ |
45,487 |
|
|
$ |
48,272 |
|
Income taxes payable |
|
|
2,294 |
|
|
11,185 |
|
||
Accrued pension and postretirement benefits |
|
|
8,134 |
|
|
10,091 |
|
||
Revolving credit facilities |
|
|
116,836 |
|
|
65,833 |
|
||
Deferred revenuecurrent portion |
|
|
|
|
|
2,500 |
|
||
Current maturities of long-term obligations |
|
|
110 |
|
|
110 |
|
||
Total current liabilities |
|
|
172,861 |
|
|
137,991 |
|
||
Long-term obligations (less current portion) |
|
|
3,097 |
|
|
2,984 |
|
||
Deferred revenue (less current portion) |
|
|
|
|
|
47,204 |
|
||
Accrued pension and postretirement benefits |
|
|
118,354 |
|
|
116,387 |
|
||
Total liabilities |
|
|
294,312 |
|
|
304,566 |
|
||
Stockholders equity: |
|
|
|
|
|
|
|
||
Common stock, $0.001 par value (20,000,000 shares authorized, 10,000,000 issued and outstanding) |
|
|
10 |
|
|
10 |
|
||
Preferred stock, $0.001 par value (20,000,000 shares authorized, 0 shares issued and outstanding) |
|
|
|
|
|
|
|
||
Additional paid-in capital |
|
|
122,937 |
|
|
123,630 |
|
||
Accumulated earnings |
|
|
27,760 |
|
|
40,944 |
|
||
Accumulated other comprehensive income |
|
|
841 |
|
|
2,214 |
|
||
Total stockholders equity |
|
|
151,548 |
|
|
166,798 |
|
||
Total liabilities and stockholders equity |
|
|
$ |
445,860 |
|
|
$ |
471,364 |
|
The accompanying notes are an integral part of these financial statements.
F- 43
Haynes International, Inc. and subsidiaries
consolidated statements of operations
|
|
Three Months Ended
|
|
||||
(in thousands, except share data) |
|
2005 |
|
2006 |
|
||
|
|
(unaudited) |
|
(unaudited) |
|
||
Net revenues |
|
$ |
94,407 |
|
$ |
120,463 |
|
Cost of sales |
|
77,095 |
|
86,842 |
|
||
Selling, general and administrative expense |
|
9,391 |
|
9,420 |
|
||
Research and technical expense |
|
668 |
|
697 |
|
||
Operating income |
|
7,253 |
|
23,504 |
|
||
Interest expense |
|
1,789 |
|
1,919 |
|
||
Interest income |
|
(1 |
) |
(110 |
) |
||
Income before income taxes |
|
5,465 |
|
21,695 |
|
||
Provision for income taxes |
|
2,132 |
|
8,511 |
|
||
Net income |
|
$ |
3,333 |
|
$ |
13,184 |
|
Net income per share: |
|
|
|
|
|
||
Basic |
|
$ |
0.33 |
|
$ |
1.32 |
|
Diluted |
|
$ |
0.33 |
|
$ |
1.27 |
|
Weighted average shares outstanding: |
|
|
|
|
|
||
Basic |
|
10,000,000 |
|
10,000,000 |
|
||
Diluted |
|
10,163,993 |
|
10,398,994 |
|
The accompanying notes are an integral part of these financial statements.
F- 44
Haynes International,
Inc. and subsidiaries
consolidated statements of comprehensive income
|
|
Three Months
|
|
||||||
(in thousands) |
|
2005 |
|
2006 |
|
||||
|
|
(unaudited) |
|
(unaudited) |
|
||||
Net income |
|
|
$ |
3,333 |
|
|
$ |
13,184 |
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
||
Foreign currency translation adjustment |
|
|
(768 |
) |
|
1,373 |
|
||
Comprehensive income |
|
|
$ |
2,565 |
|
|
$ |
14,557 |
|
The accompanying notes are an integral part of these financial statements.
F- 45
Haynes International, Inc. and subsidiaries
consolidated statements of cash flows
|
|
Three Months Ended
|
|
||||||
(in thousands) |
|
2005 |
|
2006 |
|
||||
|
|
(unaudited) |
|
(unaudited) |
|
||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
||
Net income |
|
|
$ |
3,333 |
|
|
$ |
13,184 |
|
Depreciation |
|
|
1,579 |
|
|
1,772 |
|
||
Amortization |
|
|
492 |
|
|
282 |
|
||
Stock compensation expense |
|
|
651 |
|
|
693 |
|
||
Deferred revenue |
|
|
|
|
|
49,704 |
|
||
Deferred income taxes |
|
|
222 |
|
|
(544 |
) |
||
Loss on disposal of property |
|
|
|
|
|
42 |
|
||
Change in assets and liabilities: |
|
|
|
|
|
|
|
||
Accounts receivable |
|
|
3,692 |
|
|
2,403 |
|
||
Inventories |
|
|
(14,454 |
) |
|
(23,037 |
) |
||
Other assets |
|
|
(547 |
) |
|
(2,552 |
) |
||
Accounts payable and accrued expenses |
|
|
(4,576 |
) |
|
2,097 |
|
||
Income taxes payable |
|
|
399 |
|
|
8,889 |
|
||
Accrued pension and postretirement benefits |
|
|
1,928 |
|
|
(96 |
) |
||
Net cash provided by (used in) operating activities |
|
|
(7,281 |
) |
|
52,837 |
|
||
Cash flows from investing activities: |
|
|
|
|
|
|
|
||
Additions to property, plant and equipment |
|
|
(2,428 |
) |
|
(3,139 |
) |
||
Change in restricted cash |
|
|
110 |
|
|
110 |
|
||
Net cash used in investing activities |
|
|
(2,318 |
) |
|
(3,029 |
) |
||
Cash flows from financing activities: |
|
|
|
|
|
|
|
||
Net increase (decrease) in revolving credit |
|
|
10,780 |
|
|
(51,003 |
) |
||
Changes in long-term obligations |
|
|
(195 |
) |
|
(147 |
) |
||
Net cash provided by (used in) financing activities |
|
|
10,585 |
|
|
(51,150 |
) |
||
Effect of exchange rates on cash |
|
|
(141 |
) |
|
142 |
|
||
Increase (decrease) in cash and cash equivalents |
|
|
845 |
|
|
(1,200 |
) |
||
Cash and cash equivalents, beginning of period |
|
|
2,886 |
|
|
6,182 |
|
||
Cash and cash equivalents, end of period |
|
|
$ |
3,731 |
|
|
$ |
4,982 |
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
||
Cash paid during period for: Interest (net of capitalized interest) |
|
|
$ |
1,757 |
|
|
$ |
1,419 |
|
Income taxes |
|
|
$ |
1,510 |
|
|
$ |
129 |
|
The accompanying notes are an integral part of these financial statements.
F- 46
Haynes International, Inc. and subsidiaries
notes to consolidated financial statements
(unaudited)
(in thousands, except share and per share data)
Note 1. Basis of Presentation
Interim Financial Statements
The interim financial statements are unaudited and reflect all adjustments (consisting solely of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of results for the interim periods presented. This report includes information in a condensed form and should be read in conjunction with the audited consolidated financial statements for the fiscal year ended September 30, 2006 included in the annual report on Form 10-K, filed by Haynes International, Inc. with the Securities and Exchange Commission (SEC). The results of operations for the three months ended December 31, 2006, are not necessarily indicative of the results to be expected for the full fiscal year ending September 30, 2007 or any interim period.
Principles of Consolidation
The consolidated financial statements include the accounts of Haynes International, Inc. and its wholly-owned subsidiaries (collectively, the Company). All significant intercompany transactions and balances are eliminated.
Note 2. New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN 48). FIN 48 seeks to reduce the diversity in practice associated with certain aspects of measuring and recognition in accounting for income taxes. In addition, FIN 48 requires expanded disclosure with respect to the uncertainty in income taxes and is effective as of the beginning of the 2008 fiscal year. The Company is currently evaluating the impact, if any, that FIN 48 will have on its financial statements.
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 measure date. 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 beginning on October 1, 2008. The Company is currently evaluating the impact, if any, of SFAS 157 on its financial position, results of operations and cash flows.
In September 2006, the FASB issued FASB Statement No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS 158). SFAS 158 requires companies to recognize the funded status of defined benefit pension and other postretirement plans as a net
F- 47
asset or liability in its financial statements. In addition, disclosure requirements related to such plans are affected by SFAS 158. The Company will begin recognition of the funded status of its defined benefit pension and postretirement plans and include the required disclosures under the provisions of SFAS 158 at the end of fiscal year 2007. Based on September 30, 2006 information, the impact on the Companys financial position would be a reduction in pension and postretirement benefits liability of $5.2 million, an increase in stockholders equity accumulated other comprehensive income of $3.2 million, and a reduction of deferred tax asset of $2.0 million. The impact on the financial statements as of the adoption date of September 30, 2007 will be based on information as of September 30, 2007. The adoption of SFAS 158 is not expected to impact the Companys debt covenants or cash position. Additionally, the Company does not expect the adoption of SFAS 158 to significantly affect the results of operations.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB 108), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for the first fiscal year ending after November 15, 2006, which will be the fiscal year ending September 30, 2007. The adoption of this statement is not expected to have a material impact on the Companys financial position or results of operations.
In February 2006, the FASB issued FASB Statement No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140 (SFAS 155), that allows a preparer to elect fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a re-measurement (new basis) event, on an instrument-by-instrument basis, in cases in which a derivative would otherwise have to be bifurcated. It also eliminates the exemption from applying Statement 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. This Statement is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. The adoption of this statement did not have a material impact on the Companys results of operations or financial position.
Note 3. Inventories
The following is a summary of the major classes of inventories:
|
|
September 30, 2006 |
|
December 31, 2006 |
|
||||
Raw Materials |
|
|
$ |
7,214 |
|
|
$ |
13,593 |
|
Work-in-process |
|
|
96,674 |
|
|
108,241 |
|
||
Finished Goods |
|
|
74,575 |
|
|
80,710 |
|
||
Other, net |
|
|
1,249 |
|
|
1,428 |
|
||
|
|
|
$ |
179,712 |
|
|
$ |
203,972 |
|
F- 48
Note 4. Income Taxes
Income tax expense for the three months ended December 31, 2005 and 2006, differed from the U.S. federal statutory rate of 35% primarily due to state income taxes and differing tax rates on foreign earnings.
Note 5. Pension and Post-retirement Benefits
Components of net periodic pension and post-retirement benefit cost for the three months ended December 31, are as follows:
|
|
Three months ended december 31, |
|
||||||||||
|
|
Pension benefits |
|
Other benefits |
|
||||||||
|
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
||||
Service cost |
|
$ |
894 |
|
$ |
990 |
|
$ |
694 |
|
$ |
427 |
|
Interest cost |
|
2,124 |
|
2,306 |
|
1,754 |
|
1,319 |
|
||||
Expected return |
|
(2,407 |
) |
(2,457 |
) |
|
|
|
|
||||
Amortizations |
|
|
|
|
|
354 |
|
(1,221 |
) |
||||
Net periodic benefit cost |
|
$ |
611 |
|
$ |
839 |
|
$ |
2,802 |
|
$ |
525 |
|
The Company contributed $0 to the Company sponsored domestic pension plans, $1,196 to its other post-retirement benefit plans and $281 to the U.K. pension plan for the three months ended December 31, 2006. The Company presently expects to additionally contribute $3,690 to its domestic pension plans, $3,804 to its other post-retirement benefit plans and $842 to the U.K. pension plans for the remainder of fiscal 2007.
During March 2006, the Company communicated to employees and plan participants a negative plan amendment that caps the Companys 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 reduces the accumulated post-retirement 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.
Note 6. Environmental and Legal
The Company is periodically involved in litigation, both as a plaintiff and as a defendant, relating to its business and operations, including environmental matters. Future expenditures for environmental and other legal matters cannot be determined with any degree of certainty; however, based on the facts presently known, management does not believe that such costs will have a material effect on the Companys 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).
F- 49
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 courts 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. One lawsuit was filed in California state court against numerous manufactures, including the Company, in May 2006, 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 second case with similar allegation is pending in Texas. The Company believes that it has defenses to these allegations and, that if 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 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 the Companys liability for claims relating to exposure to welding fumes and manganese. For instance, in recent cases (in which the Company was not a party), at least two courts 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 those cases are distinguishable from the facts of its cases, the Company cannot assure you that the claims against us will be dismissed based upon the Confirmation Order. It is also possible that the Company could 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.
The Company is conducting remedial activities at its Kokomo, Indiana and Mountain Home, North Carolina facilities. The Company has received permits from the Indiana Department of Environmental Management, or IDEM, and the US Environmental Protection Agency, or EPA, 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. Construction of the South Landfill was completed in May 1994 and closure certification was received in fiscal 1999 for one area at the Kokomo facility and post-closure care is ongoing there. The Company has an application with IDEM pending for approval of closure and post-closure care for another area at its Kokomo facility. In addition, the Company is currently evaluating known groundwater contamination at its Kokomo site and is developing a plan to address it. Accordingly, additional corrective action may be necessary. The Company has also received permits from the North Carolina Department of Environmental Natural Resources, or NC DENR, and the EPA to close and provide post-closing monitoring and care for the lagoon at
F- 50
the Mountain Home, North Carolina facility. The lagoon area has been closed and is currently undergoing post-closure monitoring. The Company is required to monitor groundwater and to continue post closure maintenance of the former disposal areas at this site. As a result, the Company is aware of elevated levels of certain contaminants in the groundwater and additional corrective action could be required. The Company is currently unable to estimate the costs of any further corrective action at either site if required. Accordingly, the Company cannot assure you that the costs of any future corrective action at these or any other current or former sites would not have a material effect on its 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 any of its facilities.
As of September 30, 2006 and December 31, 2006, the Company has accrued $1,483 for post-closure monitoring and maintenance activities. In accordance with SFAS 143, Accounting for Asset Retirement Obligations , 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 $1,871 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 $98 per year over the remaining obligation period.
Note 7. 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 at prices established by the terms of the agreement. The transaction is documented by an Access and Security Agreement and a Conversion Services Agreement, both dated November 17, 2006. TIMET paid the Company a $50.0 million 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. In addition to the volume commitment, the Company has granted TIMET a security interest on its four-high Steckel rolling mill, along with certain rights of access. TIMET may exercise an option to have ten million additional pounds of titanium converted annually, provided that it offers to loan up to $12.0 million to the Company for certain capital expenditures which would be required to expand capacity. The Company has the option to purchase titanium sheet and plate products from TIMET and has agreed not to manufacture its own 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 $50.0 million will be recognized in income on a straight-line basis over the 20-year term of the agreement. The portion not recognized in income will be shown as deferred revenue on the consolidated balance sheet. The Company has used the proceeds, net of expenses, of the $50 million up-front fee paid by TIMET to reduce the balance of its U.S. revolving credit facility. Upon certain instances of a change in control, a violation of the non-compete provisions or a performance default or upon the occurrence of a force majeure event which results in a performance default, the Company is required to return
F- 51
the unearned portion (as defined) of the up-front fee. Revenue of $296 has been recognized related to this agreement, during the three months ended December 31, 2006. Taxes will be paid on the up-front fee primarily in fiscal year 2008.
Note 8. Intangible Assets and Goodwill
Goodwill was created as a result of the Companys reorganization pursuant to Chapter 11 of the U.S. Bankruptcy Code and fresh start accounting. The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. Pursuant to SFAS No. 142 goodwill is not amortized and the value of goodwill is reviewed annually for impairment. If the carrying value exceeds the fair value (determined on a discounted cash flow basis or other fair value method), impairment of goodwill may exist resulting in a charge to earnings to the extent of goodwill impairment.
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 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 trademark may exist resulting in a charge to earnings to the extent of impairment. Amortization of the patents and other intangibles was $492 and $282 for the three months ending December 31, 2005 and 2006, respectively.
The following represents a summary of intangible assets and goodwill at September 30, 2006 and December 31, 2006:
September 30, 2006 |
|
Gross Amount |
|
Accumulated
|
|
Adjustments |
|
Carrying
|
|
|||||||
Goodwill |
|
|
$ |
43,055 |
|
|
$ |
|
|
|
$ |
(790 |
) |
$ |
42,265 |
|
Patents |
|
|
8,667 |
|
|
(3,800 |
) |
|
|
|
4,867 |
|
||||
Trademarks |
|
|
3,800 |
|
|
|
|
|
|
|
3,800 |
|
||||
Non-compete |
|
|
590 |
|
|
(161 |
) |
|
|
|
429 |
|
||||
Other |
|
|
465 |
|
|
(139 |
) |
|
|
|
326 |
|
||||
|
|
|
$ |
56,577 |
|
|
$ |
(4,100 |
) |
|
$ |
(790 |
) |
$ |
51,687 |
|
December 31, 2006 |
|
Gross Amount |
|
Accumulated
|
|
Adjustments |
|
Carrying
|
|
|||||||
Goodwill |
|
|
$ |
42,265 |
|
|
$ |
|
|
|
$ |
|
|
$ |
42,265 |
|
Patents |
|
|
8,667 |
|
|
(4,028 |
) |
|
|
|
4,639 |
|
||||
Trademarks |
|
|
3,800 |
|
|
|
|
|
|
|
3,800 |
|
||||
Non-compete |
|
|
590 |
|
|
(182 |
) |
|
|
|
408 |
|
||||
Other |
|
|
465 |
|
|
(172 |
) |
|
|
|
293 |
|
||||
|
|
|
$ |
55,787 |
|
|
$ |
(4,382 |
) |
|
$ |
|
|
$ |
51,405 |
|
F- 52
Estimate of Aggregate Amortization Expense:
|
|
|
|
|
2007 (remainder of fiscal year) |
|
$ |
847 |
|
2008 |
|
983 |
|
|
2009 |
|
708 |
|
|
2010 |
|
376 |
|
|
2011 |
|
363 |
|
|
Note 9. Net Income Per Share
Basic and diluted net income per share were computed as follows:
|
|
Three Months Ended
|
|
||||
(in thousands except share and per share data) |
|
2005 |
|
2006 |
|
||
Numerator: |
|
|
|
|
|
||
Net Income |
|
$ |
3,333 |
|
$ |
13,184 |
|
Denominator: |
|
|
|
|
|
||
Weighted average shares outstandingBasic |
|
10,000,000 |
|
10,000,000 |
|
||
Effect of dilutive stock options |
|
163,993 |
|
398,994 |
|
||
Weighted average shares outstandingDiluted |
|
10,163,993 |
|
10,398,994 |
|
||
Basic net income per share |
|
$ |
0.33 |
|
$ |
1.32 |
|
Diluted net income per share |
|
$ |
0.33 |
|
$ |
1.27 |
|
A total of 6,858 and 0 anti-dilutive weighted average shares with respect to outstanding stock options have been excluded from the computation of diluted net income per share for the three months ended December 31, 2005 and 2006, respectively. Contingently issuable shares related to stock rights are excluded from the diluted net income per share computation, because the condition under which the stock rights can be exercised has not occurred as of December 31, 2006.
F- 53
[Photograph of four high Steckel Mill with the following caption: The four-high Steckel mill is computer-controlled to produce 12 million pounds of separating force to shape and size various alloys to customers exact specifications.]
2,100,000 shares
Common stock
Prospectus
JPMorgan
Bear, Stearns & Co. Inc.
KeyBanc Capital Markets
, 2007
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, common shares only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common shares.
No action is being taken in any jurisdiction outside the United States to permit a public offering of the common shares or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to that jurisdiction.
Until , 2007, all dealers that buy, sell or trade in our common shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Information not required in prospectus
Item 13. Other expenses of issuance and distribution.
The following table sets forth all costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale and distribution of the common stock being registered. All amounts shown are estimates except for the SEC registration fee, the NASD filing fee and The NASDAQ Global Market listing fee.
SEC registration fee |
|
$ |
15,977 |
|
NASD fee |
|
12,460 |
|
|
NASDAQ Global Market listing fee |
|
5,000 |
|
|
Blue sky qualification fees and expenses |
|
|
|
|
Printing and engraving expenses |
|
180,000 |
|
|
Legal fees and expenses |
|
530,000 |
|
|
Accounting fees and expenses |
|
210,000 |
|
|
Road Show and Miscellaneous expenses(1) . |
|
146,563 |
|
|
Total: |
|
$ |
1,100,000 |
|
(1) This amount represents additional expenses that may be incurred by the Company in connection with the offering over and above those specifically listed above, including distribution and mailing costs.
Item 14. Indemnification of directors and officers.
The Company is a corporation organized under the laws of the State of Delaware.
Section 145 of the Delaware General Corporation Law (the DGCL) permits a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise. A corporation may indemnify against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding if the person indemnified acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. In the case of an action or suit by or in the right of the corporation to procure a judgment in its favor, no indemnification may be made in respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery of the State of Delaware, or the court in which such action or suit was brought, shall determine upon application that, despite the adjudication of liability, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Section 145 provides that, to the extent a present or former director or officer of a corporation has been successful in the defense of any action, suit or proceeding referred to above or in the defense of any claim, issue
II-1
or matter therein, he or she shall be indemnified against expenses (including attorneys fees) actually and reasonably incurred by him or her in connection therewith.
Pursuant to authority conferred by Delaware law, the Companys certificate of incorporation contains provisions providing that no director shall be liable to it or its stockholders for monetary damages for breach of fiduciary duty as a director except to the extent that such exemption from liability or limitation thereof is not permitted under Delaware law as then in effect or as it may be amended. This provision is intended to eliminate the risk that a director or member might incur personal liability to the Company or its stockholders for breach of the duty of care.
The Companys certificate of incorporation and by-laws contain provisions requiring it to indemnify and advance expenses to its directors and officers to the fullest extent permitted by law. Among other things, these provisions generally provide indemnification for the Companys directors and officers against liabilities for judgments in and settlements of lawsuits and other proceedings and for the advancement and payment of fees and expenses reasonably incurred by the director or officer in defense of any such lawsuit or proceeding if the director or officer acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the registrant, and in certain cases only if the director or officer is not adjudged to be liable to us.
Effective August 13, 2006, the Company agreed to indemnify Francis J. Petro, John C. Corey, Timothy J. McCarthy, Donald C. Campion, Paul J. Bohan, Ronald W. Zabel, William P. Wall and Robert H. Getz, each of whom is a member of the Companys board of directors, against loss or expense arising from such individuals service to the Company and its subsidiaries and affiliates, and to advance attorneys fees and other costs of defense to such individuals in respect of claims that may be eligible for indemnification under certain circumstances.
Item 15. Recent sales of unregistered securities.
On August 31, 2004, the effective date of the plan of reorganization, the Company issued the following securities:
· Each former holder of our 11 5 ¤ 8 % senior notes due September 1, 2004 received its pro rata share of 9.6 million shares of our common stock in full satisfaction of all of the Companys obligations under the senior notes.
· Each former holder of the shares of common stock of Haynes Holdings, Inc., the former parent of the Company, received its pro rata share of 400,000 shares of our common stock issued in exchange for the outstanding shares of Haynes Holdings, Inc. common stock.
Based upon the exemption provided by Section 1145 of the Bankruptcy Code, we believe that the issuance of these securities was exempt from registration under the Securities Act and state securities laws.
Item 16. Exhibits and financial statements schedules.
(a) Exhibits. Please see Index to Exhibits, which is incorporated herein by reference.
(b) Financial Statements
II-2
All financial statement schedules have been omitted because they are inapplicable or not required or because the information is contained elsewhere in this registration statement.
(a) The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-3
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Kokomo, State of Indiana, on the 8th day of March, 2007.
|
HAYNES INTERNATIONAL, INC. |
|
|
By: |
/s/ MARCEL MARTIN |
|
|
Marcel
Martin
|
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
|
Signature |
|
|
|
Title |
|
|
|
Date |
|
* |
|
President and Chief Executive Officer; |
|
|
||||||
Francis Petro |
|
Director (Principal Executive Officer) |
|
March 8, 2007 |
||||||
/s/ MARCEL MARTIN |
|
Chief Financial Officer (Principal |
|
|
||||||
Marcel Martin |
|
Financial Officer) |
|
March 8, 2007 |
||||||
* |
|
Controller and Chief Accounting Officer |
|
|
||||||
Daniel W. Maudlin |
|
(Principal Accounting Officer) |
|
March 8, 2007 |
||||||
* |
|
|
|
|
||||||
John C. Corey |
|
Chairman of the Board, Director |
|
March 8, 2007 |
||||||
* |
|
|
|
|
||||||
Paul J. Bohan |
|
Director |
|
March 8, 2007 |
||||||
* |
|
|
|
|
||||||
Donald C. Campion |
|
Director |
|
March 8, 2007 |
||||||
* |
|
|
|
|
||||||
Robert H. Getz |
|
Director |
|
March 8, 2007 |
II-4
* |
|
|
|
|
|
Timothy J. McCarthy |
|
Director |
|
March 8, 2007 |
|
* |
|
|
|
|
|
William P. Wall |
|
Director |
|
March 8, 2007 |
|
* |
|
|
|
|
|
Ronald W. Zabel |
|
Director |
|
March 8, 2007 |
|
|
|
|
|
|
|
*By: |
/s/ MARCEL MARTIN |
|
|
|
|
|
Marcel Martin |
|
|
|
|
|
Power of Attorney |
|
|
|
|
II-5
Exhibit Number |
|
Description |
|
1.1 |
|
|
Form of Underwriting Agreement. |
2.1 |
|
|
First Amended Joint Plan of Reorganization of Haynes International, Inc. and its Affiliated Debtors and Debtors-In-Possession dated June 29, 2004. |
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. |
3.1 |
|
|
Restated Certificate of Incorporation of Haynes International, Inc. (reflecting all amendments through February 20, 2007). |
3.2 |
|
|
Amended and Restated By-laws of Haynes International, Inc. |
3.3 |
|
|
Certificate of Designations of Series A Junior Participating Preferred Stock of Haynes International, Inc. |
4.1 |
|
|
Specimen Common Stock Certificate. |
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). |
4.4 |
|
|
Rights Agreement dated as of August 13, 2006 between Haynes International, Inc. and Wells Fargo Bank, N.A., as Rights Agent. |
4.5 |
|
|
Form of Rights Certificate. |
4.6 |
|
|
Certificate of Designations of Series A Junior Participating Preferred Stock of Haynes International, Inc. (incorporated by reference to Exhibit 3.3 hereof). |
5.1 |
|
|
Opinion of Ice Miller LLP. |
10.1 |
|
|
Form of Termination Benefits Agreements by and between Haynes International, Inc. and certain of its employees. |
10.2 |
|
|
Haynes International, Inc. Death Benefit Plan, effective January 1, 2003. |
10.3 |
|
|
Amendment No. One to the Haynes International, Inc. Death Benefit Plan, dated August 30, 2004. |
10.4 |
|
|
Haynes International, Inc. Supplemental Executive Retirement Plan, Plan Document effective January 1, 2002. |
10.5 |
|
|
Amendment No. One to the Haynes International, Inc. Supplemental Executive Retirement Plan, dated August 30, 2004. |
10.6 |
|
|
Haynes International Inc. Supplemental Executive Retirement Plan(s), Master Trust Agreement, effective January 1, 2003. |
10.7 |
|
|
Amendment No. One to the Master Trust Agreement, dated August 30, 2004. |
10.8 |
|
|
Plan Agreement by and between Haynes International, Inc. and Francis J. Petro, effective January 1, 2002. |
10.9 |
|
|
Amendment No. One to the Plan Agreement by and between Haynes International, Inc. and Francis J. Petro, dated August 30, 2004. |
10.10 |
|
|
Amended and Restated Executive Employment Agreement by and between Haynes International, Inc. and Francis J. Petro, dated August 31, 2004. |
10.11 |
|
|
Registration Rights Agreement by and among Haynes International, Inc. and the parties specified on the signature pages thereof, dated August 31, 2004. |
II-6
10.12 |
|
|
Amended and Restated Loan and Security Agreement by and among Haynes International, Inc., certain affiliates of Haynes International, Inc., the Lenders (as defined therein), Congress Financial Corporation (Central), as agent for the Lenders, and Bank One, N.A., as documentation agent, dated August 31, 2004. |
10.13 |
|
|
Amendment No. 1 to Amended and Restated Loan and Security Agreement by and among Haynes International, Inc., certain affiliates of Haynes International, Inc., the Lenders (as defined therein), and Congress Financial Corporation (Central), as agent for the Lenders, dated November 5, 2004. |
10.14 |
|
|
Consulting, Non-Competition and Confidentiality Agreement by and between Richard Harcke and Haynes Wire Company, dated November 5, 2004. |
10.15 |
|
|
Facility Agreement by and between Haynes International Limited and Burdale Financial Limited, dated April 2, 2004. |
10.16 |
|
|
Summary of Compensation of Executive Officers and Directors. |
10.17 |
|
|
Amendment No. 2 to Amended and Restated Loan and Security Agreement by and among Haynes International, Inc., certain affiliates of Haynes International, Inc., the Lenders (as defined therein), and Congress Financial Corporation (Central), as agent for the Lenders named therein, dated January 27, 2005. |
10.18 |
|
|
Amendment No. 3 to Amended and Restated Loan and Security Agreement by and among Haynes International, Inc., certain affiliates of Haynes International, Inc., the Lenders (as defined therein), and Wachovia Capital Finance Corporation (Central), as agent for the other Lenders named therein, dated November 5, 2004. |
10.19 |
|
|
Amendment No. 4 to Amended and Restated Loan and Security Agreement by and among Haynes International, Inc., certain affiliates of Haynes International, Inc., the Lenders (as defined therein), and Wachovia Capital Finance Corporation (Central), as agent for the other Lenders named therein, dated August 31, 2005. |
10.20 |
|
|
Amendment No. 5 to Amended and Restated Loan and Security Agreement, by and among the Company, Haynes Wire Company, the Lenders (as defined therein), and Wachovia Capital Finance Corporation (Central), as agent for the Lenders, dated February 2, 2006. |
10.21 |
|
|
Form of Director Indemnification Agreement between Haynes International, Inc. and certain of its directors named in the schedule to the Exhibit. |
10.22 |
* |
|
Conversion Services Agreement by and between the Company and Titanium Metals Corporation, dated November 17, 2006. Portions of this exhibit have been omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission. |
10.23 |
|
|
Access and Security Agreement by and between the Company and Titanium Metals Corporation, dated November 17, 2006. |
10.24 |
|
|
Amendment No. 6 to Amended and Restated Loan and Security Agreement, by and among the Company, Haynes Wire Company, the Lenders (as defined therein), and Wachovia Capital Finance Corporation (Central), as agent for the Lenders, dated November 17, 2006. |
10.25 |
|
|
Summary of 2007 Management Incentive Plan. |
II-7
10.26 |
|
|
Haynes International, Inc. 2007 Stock Option Plan as adopted by the Board of Directors on January 18, 2007. |
10.27 |
|
|
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. |
10.28 |
|
|
Second Amended and Restated Haynes International, Inc. Stock Option Plan as adopted by the Board of Directors on January 22, 2007. |
10.29 |
|
|
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. |
10.30 |
|
|
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. |
10.31 |
|
|
Form of Indemnification Agreement with Anastacia S. Kilian |
21.1 |
|
|
Subsidiaries of the Registrant. |
23.1 |
|
|
Consent of Ice Miller LLP (included in Exhibit 5.1). |
23.2 |
|
|
Consent of Deloitte & Touche LLP. |
24.1 |
|
|
Power of Attorney, pursuant to which amendments to this Form S-1 may be filed, is included on the signature page contained in Part II of this Form S-1. |
* Confidential treatment has been requested for certain portions of these documents, which have been blacked out in the copy of the exhibit filed with the Securities and Exchange Commission. The omitted information has been filed separately with the Securities and Exchange Commission pursuant to the application for confidential treatment.
Previously Filed.
II-8
Exhibit 1.1
HAYNES INTERNATIONAL, INC.
2,100,000 Shares of Common Stock
Form of Underwriting Agreement
March , 2007
J.P. Morgan Securities Inc.
As Representative of the
several Underwriters listed in
Schedule I hereto
277 Park Avenue
New York, New York 10172
Ladies and Gentlemen:
Haynes International, Inc., a Delaware corporation (the Company ), proposes to issue and sell to the several Underwriters listed in Schedule I hereto (the Underwriters ), for whom you are acting as representative (the Representative ), an aggregate of 1,100,000 shares (the Company Underwritten Shares ) of common stock, par value $0.001 per share (the Stock ), and, at the option of the Underwriters, up to 100,000 additional shares (the Company Option Shares ) of Stock, and the security holders of the Company listed in Schedule II hereto (the Selling Stockholders ) propose to sell to the Underwriters an aggregate of 1,000,000 shares (the Selling Stockholder Underwritten Shares ) of Stock and, at the option of the Underwriters, up to 215,000 additional shares (the Selling Stockholder Option Shares ) of Stock. The number of Selling Stockholder Underwritten Shares to be sold and the number of Selling Stockholder Option Shares that may be sold by each Selling Stockholder are set forth opposite the name of such Selling Stockholder in Schedule II hereto. The Company Underwritten Shares and the Selling Stockholder Underwritten Shares are collectively called the Underwritten Shares , the Company Option Shares and the Selling Stockholder Option Shares are collectively called the Option Shares , and the Underwritten Shares and the Option Shares are collectively called the Shares .
The Company and the Selling Stockholders hereby confirm their agreement with the several Underwriters concerning the purchase and sale of the Shares, as follows:
1. Registration Statement . The Company has prepared and filed with the Securities and Exchange Commission (the Commission ) under the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the Securities Act ), a registration statement on Form S-1 (File No. 333-140194), including a prospectus, relating to the Shares. Such registration statement, as amended at the time it becomes effective, including the information, if any, deemed pursuant to Rule 430A, 430B or 430C under the Securities Act to be part of the registration statement at the time of its effectiveness ( Rule 430 Information ), is referred to herein as the Registration Statement ; and as used herein, the term Preliminary Prospectus means each prospectus included in such registration statement (and any amendments thereto) before it becomes effective, any prospectus filed with the Commission pursuant to Rule 424(a) under the Securities Act and the prospectus included in the Registration Statement at the time of its effectiveness that omits Rule 430 Information, and the term Prospectus means the prospectus in the form first used (or made available upon request of purchasers pursuant to Rule 173 under the Securities Act) in connection with confirmation of sales of the Shares. If the Company has filed an abbreviated registration statement pursuant to Rule 462(b) under the Securities Act (the Rule 462 Registration Statement ), then any reference herein to the term Registration Statement shall be deemed to include such Rule 462 Registration Statement.
At or prior to the time when sales of the Shares were first made (the Time of Sale ), the Company had prepared the following information (the Time of Sale Information ): a Preliminary Prospectus dated March , 2007, and each free-writing prospectus (as defined pursuant to Rule 405 under the Securities Act) listed on Annex A hereto as constituting part of the Time of Sale Information.
2. Purchase of the Shares by the Underwriters . (a)Each of the Company and the Selling Stockholders agrees, severally and not jointly, to sell its respective Underwritten Shares to the several Underwriters as provided in this Agreement, and each Underwriter, on the basis of the representations, warranties and agreements herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from the Company and each Selling Stockholder at a purchase price per share of $ (the Purchase Price ) the number of Underwritten Shares (to be adjusted by you so as to eliminate fractional shares) determined by multiplying the number of Underwritten Shares to be sold by the Company or such Selling Stockholder, as applicable, by a fraction, the numerator of which is the aggregate number of Underwritten Shares to be purchased by such Underwriter as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the aggregate number of Underwritten Shares to be purchased by all the Underwriters hereunder. The public offering price of the Shares is not in excess of the price recommended by Bear, Stearns & Co. Inc. (the Independent Underwriter ), acting as a qualified independent underwriter within the meaning of Rule 2720 of the Rules of Conduct of the National Association of Securities Dealers, Inc. (the NASD ).
In addition, the Company and each Selling Stockholder agrees, severally and not jointly, to sell their Option Shares to the several Underwriters as provided in this Agreement, and the Underwriters shall have the option (the Over-Allotment Option ) to
2
purchase at their election up to 315,000 Option Shares at the Purchase Price, on the basis of the representations, warranties and agreements herein contained, but subject to the conditions hereinafter stated. The Underwriters may exercise the Over-Allotment Option at any time and from time to time on or before the thirtieth day following the date of this Agreement, by written notice from the Representative to the Company and the Attorneys-in-Fact (as defined below). Such notice shall set forth the aggregate number of Option Shares as to which the Over-Allotment Option is being exercised (the Option Exercise Amount ) and the date and time when such Option Shares are to be delivered and paid for, which may be the same date and time as the Closing Date (as defined below) but shall not be earlier than the Closing Date nor later than the tenth full business day (as defined below) after the date of such notice (unless such time and date are postponed in accordance with the provisions of Section 12 hereof). Any such notice shall be given at least two business days prior to the date and time of delivery specified therein. Upon any exercise of the Over-Allotment Option, subject to adjustment by you so as to eliminate fractional shares, (x) the number of Option Shares to be purchased by each Underwriter shall be the number determined by multiplying the Option Exercise Amount by a fraction, the numerator of which is the aggregate number of Underwritten Shares to be purchased by such Underwriter as set forth opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the aggregate number of Underwritten Shares to be purchased by all the Underwriters hereunder; (y) the number of Option Shares to be sold by the Company shall be the number determined by multiplying the total number of Company Option Shares by a fraction, the numerator of which is the Option Exercise Amount and the denominator of which is the aggregate number of Option Shares; and (z) the number of Option Shares to be sold by each Selling Stockholder shall be the number determined by multiplying the total number of such Selling Stockholders Selling Stockholder Option Shares (as set forth opposite the name of such Selling Stockholder in Schedule II hereto) by a fraction, the numerator of which is the Option Exercise Amount and the denominator of which is the aggregate number of Option Shares.
(b) The Company and the Selling Stockholders understand that the Underwriters intend to make a public offering of the Shares as soon after the effectiveness of this Agreement as in the judgment of the Representative is advisable, and initially to offer the Shares on the terms set forth in the Prospectus. The Company and the Selling Stockholders acknowledge and agree that the Underwriters may offer and sell Shares to or through any affiliate of an Underwriter and that any such affiliate may offer and sell Shares purchased by it to or through any Underwriter.
(c) Payment for the Shares shall be made by wire transfer in immediately available funds to the accounts specified to the Representative by the Company, with respect to the Company Underwritten Shares, and by the Attorneys-in-Fact, or any of them, with respect to the Selling Stockholder Underwritten Shares and the Option Shares, at the offices of Davis Polk & Wardwell, New York, New York at 10:00 A.M. New York City time on March , 2007 in the case of the Underwritten Shares,(1) or at
3
such other time or place on the same or such other date, not later than the fifth business day thereafter, as the Representative and the Company and the Attorneys-in-Fact may agree upon in writing or, in the case of the Option Shares, on the date and at the time and place specified by the Representative in the written notice of the Underwriters election to purchase such Option Shares. The time and date of such payment for the Underwritten Shares are referred to herein as the Closing Date and the time and date of such payment for any Option Shares, if other than the Closing Date, are referred to herein as an Additional Closing Date .
Payment for the Shares to be purchased on the Closing Date or an Additional Closing Date, as the case may be, shall be made against delivery of such Shares to the Representative for the respective accounts of the several Underwriters, with any transfer taxes payable in connection with the sale of such Shares duly paid by the Company or the Selling Stockholders, as the case may be, (x) in definitive form registered in such names and in such denominations as the Representative shall request in writing not later than two full business days prior to the Closing Date or such Additional Closing Date, as the case may be, or (y) at the election of the Representative, through the facilities of the Depository Trust Company ( DTC ). Unless the Representative shall have elected to take delivery of the Shares through the facilities of DTC, the certificates for the Shares will be made available for inspection and packaging by the Representative at the office of J.P. Morgan Securities Inc. set forth above not later than 1:00 P.M., New York City time, on the business day prior to the Closing Date or such Additional Closing Date, as the case may be.
(d) Each of the Company and the Selling Stockholders acknowledges and agrees that the Underwriters are acting solely in the capacity of an arms length contractual counterparty to the Company and the Selling Stockholders with respect to the offering of Shares contemplated hereby (including in connection with determining the terms of the offering) and not as a financial advisor or a fiduciary to, or an agent of, the Company, the Selling Stockholders or any other person. Additionally, neither the Representative nor any other Underwriter is advising the Company, the Selling Stockholders or any other person as to any legal, tax, investment, accounting or regulatory matters in any jurisdiction. The Company and the Selling Stockholders shall consult with their own advisors concerning such matters and shall be responsible for making their own independent investigation and appraisal of the transactions contemplated hereby, and the Underwriters shall have no responsibility or liability to the Company or the Selling Stockholders with respect thereto. Any review by the Underwriters of the Company, the transactions contemplated hereby or other matters relating to such transactions will be performed solely for the benefit of the Underwriters and shall not be on behalf of the Company or the Selling Stockholders.
3. Representations and Warranties of the Company . The Company represents and warrants to each Underwriter and the Selling Stockholders that:
(a) Preliminary Prospectus. No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission, and each Preliminary Prospectus, at the time of filing thereof, complied in all material respects with the
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Securities Act and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation or warranty with respect to any statements or omissions made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representative expressly for use in any Preliminary Prospectus.
(b) Time of Sale Information . The Time of Sale Information, at the Time of Sale did not, and at the Closing Date and each Additional Closing Date will not, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation or warranty with respect to any statements or omissions made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representative expressly for use in such Time of Sale Information. No statement of material fact included in the Prospectus has been omitted from the Time of Sale Information and no statement of material fact included in the Time of Sale Information that is required to be included in the Prospectus has been omitted therefrom.
(c) Issuer Free Writing Prospectus. The Company (including its agents and representatives, other than the Underwriters in their capacity as such) has not prepared, made, used, authorized, approved or referred to and will not prepare, make, use, authorize, approve or refer to any written communication (as defined in Rule 405 under the Securities Act) that constitutes an offer to sell or solicitation of an offer to buy the Shares (each such communication by the Company or its agents and representatives (other than a communication referred to in clauses (i) (ii) and (iii) below) an Issuer Free Writing Prospectus ) other than (i) any document not constituting a prospectus pursuant to Section 2(a)(10)(a) of the Securities Act or Rule 134 under the Securities Act, (ii) the Preliminary Prospectus, (iii) the Prospectus, (iv) the documents listed on Annex A hereto as constituting the Time of Sale Information and (v) any electronic road show or other written communications, in each case approved in writing in advance by the Representative. Each such Issuer Free Writing Prospectus complied in all material respects with the Securities Act, has been or will be (within the time period specified in Rule 433) filed in accordance with the Securities Act (to the extent required thereby) and, when taken together with the Preliminary Prospectus accompanying, or delivered prior to delivery of, such Issuer Free Writing Prospectus, did not, and at the Closing Date and any Additional Closing Date, as the case may be, will not, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation or warranty with respect to any statements or omissions made in any such Issuer Free Writing Prospectus in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representative expressly for use in such Issuer Free Writing Prospectus.
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(d) Registration Statement and Prospectus. The Registration Statement has been declared effective by the Commission. No order suspending the effectiveness of the Registration Statement has been issued by the Commission and no proceeding for that purpose or pursuant to Section 8A of the Securities Act against the Company or related to the offering has been initiated or, to the knowledge of the Company, threatened by the Commission; as of the applicable effective date of the Registration Statement and any amendment thereto, the Registration Statement complied and, on each of the Closing Date and each Additional Closing Date, as the case may be, will comply in all material respects with the Securities Act, and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading; and as of the date of the Prospectus and any amendment or supplement thereto and as of the Closing Date and as of each Additional Closing Date, as the case may be, the Prospectus will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation and warranty with respect to any statements or omissions made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representative expressly for use in the Registration Statement and the Prospectus and any amendment or supplement thereto.
(e) Financial Statements. The financial statements and the related notes thereto included in the Registration Statement, the Time of Sale Information and the Prospectus comply in all material respects with the applicable requirements of the Securities Act and the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder (collectively, the Exchange Act ), as applicable, and present fairly in all material respects the financial position of the Company and its subsidiaries as of the dates indicated and the results of their operations and the changes in their cash flows for the periods specified; such financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods covered thereby, and the supporting schedules included in the Registration Statement present fairly in all material respects the information required to be stated therein; the other financial information included in the Registration Statement, the Time of Sale Information and the Prospectus has been derived from the accounting records of the Company and its subsidiaries and presents fairly in all material respects the information shown thereby; and the pro forma financial information and the related notes thereto included in the Registration Statement, the Time of Sale Information and the Prospectus have been prepared in accordance with the applicable requirements of the Securities Act and the Exchange Act, as applicable, and the assumptions underlying such pro forma financial information are reasonable and are set forth in the Registration Statement, the Time of Sale Information and the Prospectus.
(f) No Material Adverse Change . Since the date of the most recent financial statements of the Company included in the Registration Statement,
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the Time of Sale Information and the Prospectus, (i) except as described in the Registration Statement, the Time of Sale Information and the Prospectus (exclusive of any amendment or supplement thereto after the execution and delivery hereof), there has not been any change in the capital stock or long-term debt of the Company or any of its subsidiaries, or any dividend or distribution of any kind declared, set aside for payment, paid or made by the Company on any class of capital stock, or any material adverse change, or any development involving a prospective material adverse change, in or affecting the business, properties, management, financial position, stockholders equity, results of operations or prospects of the Company and its subsidiaries taken as a whole; (ii) neither the Company nor any of its subsidiaries has entered into any transaction or agreement that is material to the Company and its subsidiaries taken as a whole or incurred any liability or obligation, direct or contingent, that is material to the Company and its subsidiaries taken as a whole; and (iii) neither the Company nor any of its subsidiaries has sustained any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor disturbance or dispute or any action, order or decree of any court or arbitrator or governmental or regulatory authority, except in each case as otherwise disclosed in the Registration Statement, the Time of Sale Information and the Prospectus.
(g) Organization and Good Standing. The Company and each of its subsidiaries have been duly organized and are validly existing and in good standing under the laws of their respective jurisdictions of organization, are duly qualified to do business and, where applicable, are in good standing in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification, and have all power and authority necessary to own or hold their respective properties and to conduct the businesses in which they are engaged, except where the failure to be so qualified, in good standing or have such power or authority would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, properties, management, financial position, stockholders equity, results of operations or prospects of the Company and its subsidiaries taken as a whole (a Material Adverse Effect ). The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Exhibit 21 to the Registration Statement. The subsidiaries listed in Schedule III to this Agreement are the only significant subsidiaries of the Company.
(h) Capitalization. The Company has an authorized capitalization as set forth in the Registration Statement, the Time of Sale Information and the Prospectus under the heading Capitalization; all the outstanding shares of capital stock of the Company (including the Shares to be sold by the Selling Stockholders) have been duly and validly authorized and issued and are fully paid and non-assessable and are not subject to any pre-emptive or similar rights; except as described in or expressly contemplated by the Time of Sale Information and the Prospectus, there are no outstanding rights (including, without limitation, pre-emptive rights), warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in the Company or any of its subsidiaries, or any contract, commitment, agreement, understanding or arrangement of any kind relating to the issuance of any capital stock of the Company or any such subsidiary, any such convertible or exchangeable securities or
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any such rights, warrants or options; the capital stock of the Company conforms in all material respects to the description thereof contained in the Registration Statement, the Time of Sale Information and the Prospectus; and all the outstanding shares of capital stock or other equity interests of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable (except, in the case of any foreign subsidiary, for directors qualifying shares and except as otherwise described in the Registration Statement, the Time of Sale Information and the Prospectus) and are owned directly or indirectly by the Company, free and clear of any lien, charge, encumbrance, security interest, restriction on voting or transfer or any other claim of any third party.
(i) Due Authorization . The Company has full right, power and authority to execute and deliver this Agreement and to perform its obligations hereunder; and all action required to be taken for the due and proper authorization, execution and delivery by it of this Agreement and the consummation by it of the transactions contemplated hereby has been duly and validly taken.
(j) Underwriting Agreement . This Agreement has been duly authorized, executed and delivered by the Company.
(k) The Shares . The Shares to be issued and sold by the Company hereunder have been duly authorized by the Company and, when issued and delivered and paid for as provided herein, will be duly and validly issued and will be fully paid and nonassessable and will conform in all material respects to the descriptions thereof in the Registration Statement, the Time of Sale Information and the Prospectus; the issuance of the Shares is not subject to any preemptive or similar rights.
(l) Description of the Underwriting Agreement . This Agreement conforms in all material respects to the description thereof contained in the Registration Statement, the Time of Sale Information and the Prospectus.
(m) No Violation or Default . Neither the Company nor any of its subsidiaries is (i) in violation of its charter or by-laws or similar organizational documents; (ii) in default, and no event has occurred that, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of
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the Company or any of its subsidiaries is subject; or (iii) in violation of any law or statute or any judgment, order, rule or regulation of any court or arbitrator or governmental or regulatory authority, except, in the case of clauses (ii) and (iii) above, for any such default or violation that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(n) No Conflicts . The execution, delivery and performance by the Company of this Agreement, the issuance and sale of the Shares to be sold by the Company hereunder, the issuance by the Company of the Shares to be issued upon exercise of the Options (as defined below) and the consummation by the Company of the transactions contemplated by this Agreement will not (i) conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, (ii) result in any violation of the provisions of the charter or by-laws or similar organizational documents of the Company or any of its subsidiaries or (iii) result in the violation of any law or statute or any judgment, order, rule or regulation of any court or arbitrator or governmental or regulatory authority, except, in the case of clauses (i) and (iii), for any such conflict, breach or violation that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(o) No Consents Required . No consent, approval, authorization, order, registration or qualification of or with any court or arbitrator or governmental or regulatory authority is required for the execution, delivery and performance by the Company of this Agreement, the issuance and sale of the Shares to be sold by the Company hereunder, the issuance by the Company of the Shares to be issued upon the exercise of the Options and the consummation by the Company of the transactions contemplated by this Agreement, except for the registration of the Shares under the Securities Act and such consents, approvals, authorizations, orders and registrations or qualifications as may be required under applicable state securities laws in connection with the purchase and distribution of the Shares by the Underwriters.
(p) Legal Proceedings . (x) Except as described in the Registration Statement, the Time of Sale Information and the Prospectus, there are no legal, governmental or regulatory investigations, actions, suits or proceedings pending to which the Company or any of its subsidiaries is a party or to which any property of the Company or any of its subsidiaries is subject that, individually or in the aggregate, if determined adversely to the Company or any of its subsidiaries, could reasonably be expected to have a Material Adverse Effect or materially and adversely affect the ability of the Company to perform its obligations under this Agreement; to the knowledge of the Company, no such investigations, actions, suits or proceedings are threatened or, contemplated by any governmental or regulatory authority or threatened by others; and (y) (i) there are no current or pending legal, governmental or regulatory actions, suits or proceedings that are required under the Securities Act to be described in the Registration Statement or the
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Prospectus that are not so described in the Registration Statement, the Time of Sale Information and the Prospectus and (ii) there are no statutes, regulations or contracts or other documents that are required under the Securities Act to be filed as exhibits to the Registration Statement or described in the Registration Statement and the Prospectus that are not so filed as exhibits to the Registration Statement or described in the Registration Statement, the Time of Sale Information and the Prospectus.
(q) Independent Accountants . Deloitte & Touche LLP, who have audited certain financial statements of the Company and its subsidiaries, are an independent registered public accounting firm with respect to the Company and its subsidiaries within the applicable rules and regulations adopted by the Commission and the Public Company Accounting Oversight Board (United States) and as required by the Securities Act.
(r) Title to Real and Personal Property . Except as described in the Registration Statement, the Time of Sale Information and the Prospectus, the Company and its subsidiaries have good and marketable title in fee simple to, or have valid rights to lease or otherwise use, all items of real and personal property that are material to the respective businesses of the Company and its subsidiaries, in each case free and clear of all liens, encumbrances, claims and defects and imperfections of title except those that (i) do not materially interfere with the use made and proposed to be made of such property by the Company and its subsidiaries or (ii) could not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect.
(s) Title to Intellectual Property . (x) The Company and its subsidiaries own or possess adequate rights to use all material patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses and know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) necessary for the conduct of their respective businesses; and (y) the conduct of their respective businesses will not conflict in any material respect with any such rights of others, and the Company and its subsidiaries have not received any notice of any claim of infringement or conflict with any such rights of others.
(t) No Undisclosed Relationships . No relationship, direct or indirect, exists between or among the Company or any of its subsidiaries, on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company or any of its subsidiaries, on the other, that is required by the Securities Act to be described in the Registration Statement and the Prospectus and that is not so described in such documents and in the Time of Sale Information.
(u) Investment Company Act . The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Registration Statement, the Time of Sale Information and the Prospectus, will not be an investment company or an entity controlled by an investment company within the meaning of the Investment Company Act of 1940, as amended, and the rules and regulations of the Commission thereunder (collectively, Investment Company Act ).
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(v) Taxes . Except as described in the Registration Statement, the Time of Sale Information and the Prospectus , the Company and its subsidiaries have paid all federal, state, local and foreign taxes and filed all tax returns required to be paid or filed through the date hereof; and except as otherwise disclosed in the Registration Statement, the Time of Sale Information and the Prospectus, there is no tax deficiency that has been, or could reasonably be expected to be, asserted against the Company or any of its subsidiaries or any of their respective properties or assets.
(w) Licenses and Permits . The Company and its subsidiaries possess all licenses, certificates, permits and other authorizations issued by, and have made all declarations and filings with, the appropriate federal, state, local or foreign governmental or regulatory authorities that are necessary for the ownership or lease of their respective properties or the conduct of their respective businesses as described in the Registration Statement, the Time of Sale Information and the Prospectus, except where the failure to possess or make the same would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; and except as described in the Registration Statement, the Time of Sale Information and the Prospectus, neither the Company nor any of its subsidiaries has received notice of any revocation or modification of any such license, certificate, permit or authorization or has any reason to believe that any such license, certificate, permit or authorization will not be renewed in the ordinary course.
(x) No Labor Disputes . No labor disturbance by or dispute with employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is contemplated or threatened, except as would not reasonably expected to have a Material Adverse Effect.
(y) Compliance With Environmental Laws . (i) The Company and its subsidiaries (x) are in compliance with any and all applicable federal, state, local and foreign laws, rules, regulations, requirements, decisions and orders relating to the protection of human health or safety, the environment, natural resources, hazardous or toxic substances or wastes, pollutants or contaminants (collectively, Environmental Laws ); (y) have received and are in compliance with all permits, licenses, certificates or other authorizations or approvals required of them under applicable Environmental Laws to conduct their respective businesses; and (z) except as described in the Registration Statement, the Time of Sale Information and the Prospectus , have not received notice of any actual or potential liability under or relating to any Environmental Laws, including for the investigation or remediation of any disposal or release of hazardous or toxic substances or wastes, pollutants or contaminants, and have no knowledge of any event or condition that would reasonably be expected to result in any such notice; (ii) except as described in the Registration Statement, the Time of Sale Information and the Prospectus , there are no costs or liabilities associated with Environmental Laws of or relating to the Company or its subsidiaries, except in the case of each of (i) and (ii) above, for any such failure to comply, or failure to receive required permits, licenses or approvals, or cost or liability, as would not, individually or in the aggregate, have a Material Adverse Effect; and (iii) except as described in each of the Registration Statement, the Time of Sale Information and the Prospectus, (x) there are no proceedings that are pending, or that are known by the Company to be contemplated, against the Company or any of its
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subsidiaries under any Environmental Laws in which a governmental entity is also a party, other than such proceedings regarding which it is reasonably believed no monetary sanctions of $100,000 or more will be imposed, (y) the Company and its subsidiaries are not aware of any issues regarding compliance with Environmental Laws, or liabilities or other obligations under Environmental Laws or concerning hazardous or toxic substances or wastes, pollutants or contaminants, that could reasonably be expected to have a material adverse effect on the capital expenditures, earnings or competitive position of the Company and its subsidiaries taken as a whole, and (z) none of the Company and its subsidiaries anticipates material capital expenditures relating to any Environmental Laws.
(z) Compliance With ERISA . (i) Each employee benefit plan, within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ( ERISA ), for which the Company or any member of its Controlled Group (defined as any organization which is a member of a controlled group of corporations within the meaning of Section 414 of the Internal Revenue Code of 1986, as amended (the Code )) would have any liability (each, a Plan ) has been maintained in material compliance with its terms and the requirements of any applicable statutes, orders, rules and regulations, including but not limited to ERISA and the Code; (ii) no prohibited transaction, within the meaning of Section 406 of ERISA or Section 4975 of the Code, has occurred with respect to any Plan excluding transactions effected pursuant to a statutory or administrative exemption; (iii) for each Plan that is subject to the funding rules of Section 412 of the Code or Section 302 of ERISA, no accumulated funding deficiency as defined in Section 412 of the Code, whether or not waived, has occurred or is reasonably expected to occur; (iv) the fair market value of the assets of each Plan exceeds the present value of all benefits accrued under such Plan (determined based on those assumptions used to fund such Plan); (v) no reportable event (within the meaning of Section 4043(c) of ERISA) has occurred or is reasonably expected to occur; and (vi) neither the Company nor any member of the Controlled Group has incurred, nor reasonably expects to incur, any liability under Title IV of ERISA (other than contributions to the Plan or premiums to the PBGC, in the ordinary course and without default) in respect of a Plan (including a multiemployer plan, within the meaning of Section 4001(a)(3) of ERISA).
(aa) Disclosure Controls . The Company and its subsidiaries maintain an effective system of disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) that is designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commissions rules and forms, including controls and procedures designed to ensure that such information is accumulated and communicated to the Companys management as appropriate to allow timely decisions regarding required disclosure. The Company and its subsidiaries have carried out evaluations of the effectiveness of their disclosure controls and procedures as required by Rule 13a-15 of the Exchange Act.
(bb) Accounting Controls . The Company and its subsidiaries maintain systems of internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that comply with the requirements of the Exchange Act and have been designed by,
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or under the supervision of, their respective principal executive and principal financial officers, or persons performing similar functions, 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, including, but not limited to internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with managements general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with managements general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as disclosed in the Registration Statement, the Time of Sale Information and the Prospectus, there are no material weaknesses in the Companys internal controls.
(cc) Insurance . The Company and its subsidiaries have insurance covering their respective properties, operations, personnel and businesses, including business interruption insurance, which insurance is in amounts and insures against such losses and risks as are adequate to protect the Company and its subsidiaries and their respective businesses; and neither the Company nor any of its subsidiaries has (i) received notice from any insurer or agent of such insurer that capital improvements or other expenditures are required or necessary to be made in order to continue such insurance or (ii) any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage at reasonable cost from similar insurers as may be necessary to continue its business.
(dd) No Unlawful Payments . Neither the Company nor any of its subsidiaries nor, to the knowledge of the Company, any director, officer, agent, employee or other person associated with or acting on behalf of the Company or any of its subsidiaries has (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; (iii) violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977; or (iv) made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment.
(ee) Compliance with Money Laundering Laws . The operations of the Company and its subsidiaries are and have been conducted at all times in material compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the Money Laundering Laws ) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries with respect to the Money Laundering Laws is pending or, to the knowledge of the Company, threatened.
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(ff) Compliance with OFAC . None of the Company, any of its subsidiaries or, to the knowledge of the Company, any director, officer, agent, employee or Affiliate of the Company or any of its subsidiaries is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury ( OFAC ); and the Company will not directly or indirectly use the proceeds of the offering of the Shares hereunder, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.
(gg) No Restrictions on Subsidiaries . Other than prohibitions or restrictions imposed by applicable law, no subsidiary of the Company is currently prohibited, directly or indirectly, under any agreement or other instrument to which it is a party or is subject, from paying any dividends to the Company, from making any other distribution on such subsidiarys capital stock, from repaying to the Company any loans or advances to such subsidiary from the Company or from transferring any of such subsidiarys properties or assets to the Company or any other subsidiary of the Company.
(hh) No Brokers Fees . Neither the Company nor any of its subsidiaries is a party to any contract, agreement or understanding with any person (other than this Agreement) that would give rise to a valid claim against the Company or any of its subsidiaries or any Underwriter for a brokerage commission, finders fee or like payment in connection with the offering and sale of the Shares.
(ii) No Registration Rights . No person has the right to require the Company or any of its subsidiaries to register any securities for sale under the Securities Act by reason of the filing of the Registration Statement with the Commission or the issuance and sale of the Shares to be sold by the Company hereunder or, to the knowledge of the Company, the sale of the Shares to be sold by the Selling Stockholders hereunder other than (x) any person who has heretofore waived such right in connection with the transactions contemplated by this Agreement and (y) any Selling Stockholder who is exercising such rights in connection with the transactions contemplated hereby.
(jj) No Stabilization . The Company has not taken, directly or indirectly, any action designed to or that could reasonably be expected to cause or result in any stabilization or manipulation of the price of the Shares.
(kk) Forward-Looking Statements . No forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) contained in the Registration Statement, the Time of Sale Information and the Prospectus has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.
(ll) Statistical and Market Data . Nothing has come to the attention of the Company that has caused the Company to believe that the statistical and market-related data included in the Registration Statement, the Time of Sale Information and the Prospectus is not based on or derived from sources that are reliable and accurate in all material respects.
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(mm) The Options . The unissued Shares issuable upon the exercise of options (the Options ) to be exercised by certain of the Selling Stockholders (the Optionholders ) have been duly authorized by the Company and validly reserved for issuance, and at the time of delivery to the Underwriters with respect to such Shares, such Shares will be issued and delivered in accordance with the provisions of the stock option agreements between the Company and such Optionholders pursuant to which such Options were granted (the Option Agreements ) and will be validly issued, fully paid and non-assessable and will conform in all material respects to the description thereof in the Registration Statement, the Time of Sale Information and the Prospectus.
(nn) The Option Agreements . The Option Agreements were duly authorized, executed and delivered and constitute valid and legally binding agreements enforceable against the Company in accordance with their terms except as enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors rights generally or by equitable principles relating to enforceability; and the Options and the Option Agreements conform in all material respects to the descriptions thereof in the Registration Statement, the Time of Sale Information and the Prospectus.
(oo) Sarbanes-Oxley Act . There is and has been no failure on the part of the Company or any of the Companys directors or officers, in their capacities as such, to comply in any material respect with any provision of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated in connection therewith (the Sarbanes-Oxley Act ), including Section 402 related to loans and Sections 302 and 906 related to certifications.
(pp) Status under the Securities Act . The Company is not an ineligible issuer as defined under the Securities Act, in each case at the times specified in the Securities Act in connection with the offering of the Shares. The Company has paid the registration fee for this offering pursuant to Rule 457 under the Securities Act.
4. Representations and Warranties of the Selling Stockholders . Each of the Selling Stockholders severally represents and warrants to each Underwriter and the Company that:
(a) Required Consents; Authority . All consents, approvals, authorizations and orders necessary for the execution and delivery by such Selling Stockholder of this Agreement and the Power of Attorney (the Power of Attorney ) and the Custody Agreement (the Custody Agreement ) hereinafter referred to, and for the sale and delivery of the Shares to be sold by such Selling Stockholder hereunder, have been obtained; and such Selling Stockholder has full right, power and authority to enter into this Agreement, the Power of Attorney and the Custody Agreement and to sell, assign, transfer and deliver the Shares to be sold by such Selling Stockholder hereunder; this Agreement, the Power of Attorney and the Custody Agreement have each been duly authorized, executed and delivered by or on behalf of such Selling Stockholder.
(b) No Conflicts . The execution, delivery and performance by such Selling Stockholder of this Agreement, the Power of Attorney and the Custody Agreement, the sale of the Shares to be sold by such
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Selling Stockholder and the consummation by such Selling Stockholder of the transactions herein and therein contemplated will not (i) conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of such Selling Stockholder pursuant to, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or to which any of the property or assets of such Selling Stockholder is subject, (ii) to the extent applicable, result in any violation of the provisions of the charter or by-laws or similar organizational documents of such Selling Stockholder or (iii) result in the violation of any law or statute or any judgment, order, rule or regulation of any court or arbitrator or governmental or regulatory agency.
(c) Title to Shares . Such Selling Stockholder has good and valid title to the Shares to be sold at the Closing Date or Additional Closing Date, as the case may be, by such Selling Stockholder hereunder (other than the Shares to be issued upon exercise of Options), free and clear of all liens, encumbrances, equities or adverse claims; such Selling Stockholder will have, immediately prior to the Closing Date or Additional Closing Date, as the case may be, assuming due issuance of any Shares to be issued upon exercise of Options, good and valid title to the Shares to be sold at the Closing Date or Additional Closing Date, as the case may be, by such Selling Stockholder, free and clear of all liens, encumbrances, equities or adverse claims; and, upon delivery of the certificates or securities entitlements representing such Shares and payment therefor pursuant hereto, good and valid title to such Shares, free and clear of all liens, encumbrances, equities or adverse claims, will pass to the several Underwriters.
(d) No Stabilization . Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that could reasonably be expected to cause or result in any stabilization or manipulation of the price of the Shares.
(e) Registration Statement and Prospectus . As of the applicable effective date of the Registration Statement and any amendment thereto, the Registration Statement complied and will comply in all material respects with the Securities Act, and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading; and as of the applicable filing date of the Prospectus and any amendment or supplement thereto and as of the Closing Date and as of each Additional Closing Date, as the case may be, the Prospectus will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that such Selling Stockholder makes no representation or warranty with respect to any statements or omissions made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representative expressly for use in the Registration Statement and the Prospectus and any amendment or supplement thereto. The preceding sentence applies only to the extent that any statements in or omissions from the Registration Statement or the Prospectus are based on written information furnished to the Company by such Selling Stockholder specifically for use therein. For all
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purposes of this Agreement, such information is limited to the information set forth under the captions Certain transactions and Principal and selling stockholders insofar as such information relates to such Selling Stockholder and is based on written information furnished to the Company by such Selling Stockholder specifically for use in the Registration Statement or the Prospectus.
(f) Time of Sale Information . The Time of Sale Information, at the Time of Sale did not, and at the Closing Date and each Additional Closing Date will not, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that such Selling Stockholder makes no representation or warranty with respect to any statements or omissions made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representative expressly for use in such Time of Sale Information. The preceding sentence applies only to the extent that any statements in or omissions from the Time of Sale Information are based on written information furnished to the Company by such Selling Stockholder specifically for use therein. For all purposes of this Agreement, such information is limited to the information set forth under the captions Certain transactions and Principal and selling stockholders insofar as such information relates to such Selling Stockholder and is based on written information furnished to the Company by such Selling Stockholder specifically for use in the Time of Sale Information.
(g) Material Information . As of the date hereof, as of the Closing Date and as of each Additional Closing Date, as the case may be, the sale of the Shares by such Selling Stockholder is not and will not be prompted by any material information concerning the Company which is not set forth in the Registration Statement, the Time of Sale Information or the Prospectus.
Each of the Selling Stockholders represents and warrants that certificates or securities entitlements in negotiable form representing all of the Shares to be sold by such Selling Stockholders hereunder, other than any such Shares to be issued upon the exercise of Options, have been, and each of the Selling Stockholders who is selling Shares upon the exercise of Options represents and warrants that duly completed and executed irrevocable Option exercise notices, in the forms specified by the relevant Option Agreement, with respect to such Shares have been, placed in custody under a Custody Agreement relating to such Shares, in the form heretofore furnished to you, duly executed and delivered by such Selling Stockholder to Wells Fargo Bank, N.A., as custodian (the Custodian ), and that such Selling Stockholder has duly executed and delivered Powers of Attorney, in the form heretofore furnished to you, appointing Francis J. Petro, Marcel Martin and Anastacia S. Kilian, and each of them, as such Selling Stockholders attorneys-in-fact (the Attorneys-in-Fact or any one of them the Attorney-in-Fact ) with authority to execute and deliver this Agreement on behalf of such Selling Stockholder, to determine the purchase price to be paid by the Underwriters to the Selling Stockholders as provided herein, to authorize the delivery of the Shares to be sold by such Selling Stockholder hereunder, to authorize (if applicable) the exercise of the Options to be exercised with respect to the Shares to be sold by such Selling Stockholder
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hereunder and otherwise to act on behalf of such Selling Stockholder in connection with the transactions contemplated by this Agreement and the Custody Agreement.
Each of the Selling Stockholders specifically agrees that the Shares represented by the certificates or securities entitlements or the irrevocable Option exercise notice, in either case held in custody for such Selling Stockholder under the Custody Agreement, are subject to the interests of the Underwriters hereunder, and that the arrangements made by such Selling Stockholder for such custody, and the appointment by such Selling Stockholder of the Attorneys-in-Fact by the Power of Attorney, are to that extent irrevocable. Each of the Selling Stockholders specifically agrees that the obligations of such Selling Stockholder hereunder shall not be terminated by operation of law, whether by the death or incapacity of any individual Selling Stockholder, or, in the case of an estate or trust, by the death or incapacity of any executor or trustee or the termination of such estate or trust, or in the case of a partnership, corporation or similar organization, by the dissolution of such partnership, corporation or organization, or by the occurrence of any other event. If any individual Selling Stockholder or any such executor or trustee should die or become incapacitated, or if any such estate or trust should be terminated, or if any such partnership, corporation or similar organization should be dissolved, or if any other such event should occur, before the delivery of the Shares hereunder, certificates or security entitlements representing such Shares shall be delivered by or on behalf of such Selling Stockholder in accordance with the terms and conditions of this Agreement and the Custody Agreement, and actions taken by the Attorneys-in-Fact pursuant to the Powers of Attorney shall be as valid as if such death, incapacity, termination, dissolution or other event had not occurred, regardless of whether or not the Company, the other Selling Stockholders, the Representative, the Underwriters, the Custodian, the Attorneys-in-Fact, or any of them, shall have received notice of such death, incapacity, termination, dissolution or other event.
5. Further Agreements of the Company . The Company covenants and agrees with each Underwriter that:
(a) Required Filings . The Company will file the final Prospectus with the Commission within the time periods specified by Rule 424(b) and Rule 430A, 430B or 430C under the Securities Act, will file any Issuer Free Writing Prospectus to the extent required by Rule 433 under the Securities Act; and the Company will furnish copies of the Prospectus and each Issuer Free Writing Prospectus (to the extent not previously delivered) to the Underwriters in New York City prior to 10:00 A.M., New York City time, on the business day next succeeding the date of this Agreement in such quantities as the Representative may reasonably request.
(b) Delivery of Copies . The Company will deliver, without charge, (i) to the Representative, four signed copies of the Registration Statement as originally filed and each amendment thereto, in each case including all exhibits and consents filed therewith; and (ii) to each Underwriter (A) a conformed copy of the Registration Statement as originally filed and each amendment thereto, in each case including all exhibits and consents filed therewith and (B) during the Prospectus Delivery Period (as defined below), as many copies of the Prospectus (including all amendments and supplements
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thereto) and each Issuer Free Writing Prospectus as the Representative may reasonably request. As used herein, the term Prospectus Delivery Period means such period of time after the first date of the public offering of the Shares as in the opinion of counsel for the Underwriters a prospectus relating to the Shares is required by law to be delivered (or required to be delivered but for Rule 172 under the Securities Act) in connection with sales of the Shares by any Underwriter or dealer.
(c) Amendments or Supplements; Issuer Free Writing Prospectuses . Before making, preparing, using, authorizing, approving, referring to or filing any Issuer Free Writing Prospectus, and before filing any amendment or supplement to the Registration Statement or the Prospectus, the Company will furnish to the Representative and counsel for the Underwriters a copy of the proposed Issuer Free Writing Prospectus, amendment or supplement for review and will not make, prepare, use, authorize, approve, refer to or file any such Issuer Free Writing Prospectus or file any such proposed amendment or supplement to which the Representative reasonably objects.
(d) Notice to the Representative . The Company will advise the Representative promptly, and confirm such advice in writing, (i) when the Registration Statement has become effective; (ii) when any amendment to the Registration Statement has been filed or becomes effective; (iii) when any supplement to the Prospectus or any amendment to the Prospectus or any Issuer Free Writing Prospectus has been filed; (iv) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or the receipt of any comments from the Commission relating to the Registration Statement or any other request by the Commission for any additional information; (v) of the issuance by the Commission of any order suspending the effectiveness of the Registration Statement or preventing or suspending the use of any Preliminary Prospectus or the Prospectus or the initiation or threatening of any proceeding for that purpose or pursuant to Section 8A of the Securities Act; (vi) of the occurrence of any event within the Prospectus Delivery Period as a result of which the Prospectus, the Time of Sale Information or any Issuer Free Writing Prospectus as then amended or supplemented would include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances existing when the Prospectus, the Time of Sale Information or any such Issuer Free Writing Prospectus is delivered to a purchaser, not misleading; and (vii) of the receipt by the Company of any notice with respect to any suspension of the qualification of the Shares for offer and sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and the Company will use its reasonable best efforts to prevent the issuance of any such order suspending the effectiveness of the Registration Statement, preventing or suspending the use of any Preliminary Prospectus or the Prospectus or suspending any such qualification of the Shares and, if any such order is issued, will obtain as soon as possible the withdrawal thereof.
(e) Time of Sale Information . If at any time prior to the Closing Date (i) any event shall occur or condition shall exist as a result of which the Time of Sale Information as then amended or supplemented would include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in
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the light of the circumstances, not misleading or (ii) it is necessary to amend or supplement the Time of Sale Information to comply with law, the Company will immediately notify the Underwriters thereof and forthwith prepare and, subject to paragraph (c) above, file with the Commission (to the extent required) and furnish to the Underwriters and to such dealers as the Representative may designate, such amendments or supplements to the Time of Sale Information as may be necessary so that the statements in the Time of Sale Information as so amended or supplemented will not, in the light of the circumstances, be misleading or so that the Time of Sale Information will comply with law.
(f) Ongoing Compliance . If during the Prospectus Delivery Period (i) any event shall occur or condition shall exist as a result of which the Prospectus as then amended or supplemented would include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances existing when the Prospectus is delivered to a purchaser, not misleading or (ii) it is necessary to amend or supplement the Prospectus to comply with law, the Company will immediately notify the Underwriters thereof and forthwith prepare and, subject to paragraph (c) above, file with the Commission and furnish to the Underwriters and to such dealers as the Representative may designate, such amendments or supplements to the Prospectus as may be necessary so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances existing when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus will comply with law.
(g) Blue Sky Compliance . The Company will qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Representative shall reasonably request and will continue such qualifications in effect so long as required for distribution of the Shares; provided that the Company shall not be required to (i) qualify as a foreign corporation or other entity or as a dealer in securities in any such jurisdiction where it would not otherwise be required to so qualify, (ii) file any general consent to service of process in any such jurisdiction or (iii) subject itself to taxation in any such jurisdiction if it is not otherwise so subject.
(h) Earning Statement . The Company will make generally available to its security holders and the Representative as soon as practicable an earning statement that satisfies the provisions of Section 11(a) of the Securities Act and Rule 158 of the Commission promulgated thereunder covering a period of at least twelve months beginning with the first fiscal quarter of the Company occurring after the effective date (as defined in Rule 158) of the Registration Statement.
(i) Clear Market . For a period of 90 days after the date of the initial public offering of the Shares, the Company will not (i) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Stock or any securities convertible into or exercisable or exchangeable for Stock or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the
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Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Stock or such other securities, in cash or otherwise, without the prior written consent of the Representative, other than the Shares to be sold hereunder and any shares of Stock of the Company issued upon the exercise of options granted under existing employee stock option plans. Notwithstanding the foregoing, if (1) during the last 17 days of the 90-day restricted period, the Company issues an earnings release or material news or a material event relating to the Company occurs; or (2) prior to the expiration of the 90-day restricted period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the 90-day period, the restrictions imposed by this Agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
(j) Use of Proceeds . The Company will apply the net proceeds from the sale of the Shares as described in the Registration Statement, the Time of Sale Information and the Prospectus under the heading Use of Proceeds.
(k) No Stabilization . The Company will not take, directly or indirectly, any action designed to or that could reasonably be expected to cause or result in any stabilization or manipulation of the price of the Shares.
(l) Exchange Listing . The Company will use its best efforts to list the Shares on the NASDAQ Global Market.
(m) Record Retention . The Company will, pursuant to reasonable procedures developed in good faith, retain copies of each Issuer Free Writing Prospectus that is not filed with the Commission in accordance with Rule 433 under the Securities Act.
(n) Filings . The Company will file with the Commission such reports as may be required by Rule 463 under the Securities Act.
6. Further Agreements of the Selling Stockholders . Each of the Selling Stockholders covenants and agrees with each Underwriter that:
(a) Clear Market . For a period of 90 days after the date of the initial public offering of the Shares, such Selling Stockholder will not (i) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Stock or any securities convertible into or exercisable or exchangeable for Stock or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Stock or such other securities, in cash or otherwise or (iii) make any demand for or exercise any right with respect to the registration of any shares of Stock or any security convertible into or exercisable or exchangeable for Stock without the prior written consent of the Representative, in each case other than the Shares to be sold by such Selling Stockholder hereunder. Notwithstanding the foregoing, if (1) during
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the last 17 days of the 90-day restricted period, the Company issues an earnings release or material news or a material event relating to the Company occurs; or (2) prior to the expiration of the 90-day restricted period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the 90-day period, the restrictions imposed by this Agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
(b) Tax Form . Such Selling Stockholder will deliver to the Representative prior to or at the Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by the Treasury Department regulations in lieu thereof) in order to facilitate the Underwriters documentation of their compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 with respect to the transactions herein contemplated.
7. Certain Agreements of the Underwriters . Each Underwriter hereby represents and agrees that:
(a) It has not and will not use, authorize use of, refer to, or participate in the planning for use of, any free writing prospectus, as defined in Rule 405 under the Securities Act (which term includes use of any written information furnished to the Commission by the Company and not incorporated by reference into the Registration Statement and any press release issued by the Company) other than (i) a free writing prospectus that, solely as a result of use by such Underwriter, would not trigger an obligation to file such free writing prospectus with the Commission pursuant to Rule 433, (ii) any Issuer Free Writing Prospectus listed on Annex A or prepared pursuant to Section 3(c) or Section 4(c) above (including any electronic road show), or (iii) any free writing prospectus prepared by such underwriter and approved by the Company in advance in writing (each such free writing prospectus referred to in clauses (i) or (iii), an Underwriter Free Writing Prospectus ).
(b) It is not subject to any pending proceeding under Section 8A of the Securities Act with respect to the offering (and will promptly notify the Company if any such proceeding against it is initiated during the Prospectus Delivery Period).
8. Conditions of Underwriters Obligations . The obligation of each Underwriter to purchase the Underwritten Shares on the Closing Date or the Option Shares on an Additional Closing Date, as the case may be, as provided herein is subject to the performance by the Company and each of the Selling Stockholders of their respective covenants and other obligations hereunder and to the following additional conditions:
(a) Registration Compliance; No Stop Order . No order suspending the effectiveness of the Registration Statement shall be in effect, and no proceeding for such purpose or pursuant to Section 8A under the Securities Act shall be pending before or threatened by the Commission; the Prospectus and each Issuer Free Writing Prospectus shall have been timely filed with the Commission under the Securities Act (in the case of
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an Issuer Free Writing Prospectus, to the extent required by Rule 433 under the Securities Act) and in accordance with Section 5(a) hereof; and all requests by the Commission for additional information shall have been complied with to the reasonable satisfaction of the Representative.
(b) Representations and Warranties . The respective representations and warranties of the Company and the Selling Stockholders contained herein shall be true and correct on the date hereof and on and as of the Closing Date or the Additional Closing Date, as the case may be; and the statements of the Company and its officers and of each of the Selling Stockholders made in any certificates delivered pursuant to this Agreement shall be true and correct on and as of the Closing Date or the Additional Closing Date, as the case may be.
(c) No Downgrade . Subsequent to the earlier of (A) the Time of Sale and (B) the execution and delivery of this Agreement, (i) no downgrading shall have occurred in the rating accorded any securities or preferred stock of or guaranteed by the Company or any of its subsidiaries by any nationally recognized statistical rating organization, as such term is defined by the Commission for purposes of Rule 436(g)(2) under the Securities Act and (ii) no such organization shall have publicly announced that it has under surveillance or review, or has changed its outlook with respect to, its rating of any other securities or preferred stock of or guaranteed by the Company or any of its subsidiaries (other than an announcement with positive implications of a possible upgrading).
(d) No Material Adverse Change . No event or condition of a type described in Section 3(f) hereof shall have occurred or shall exist, which event or condition is not described in the Time of Sale Information (excluding any amendment or supplement thereto) and the Prospectus (excluding any amendment or supplement thereto) and the effect of which in the judgment of the Representative makes it impracticable or inadvisable to proceed with the offering, sale or delivery of the Shares on the Closing Date or the Additional Closing Date, as the case may be, on the terms and in the manner contemplated by this Agreement, the Time of Sale Information and the Prospectus.
(e) Officers Certificate . The Representative shall have received on and as of the Closing Date or the Additional Closing Date, as the case may be, a certificate (i) of the Chief Financial Officer of the Company and one additional senior executive officer of the Company who is satisfactory to the Representative (A) confirming that such officers have carefully reviewed the Registration Statement, the Time of Sale Information and the Prospectus and, to the knowledge of such officers, the representations of the Company set forth in Sections 3(b) and 3(d) hereof are true and correct, (B) confirming that the other representations and warranties of the Company in this Agreement are true and correct and that the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date or the Additional Closing Date, as the case may be, and (C) to the effect set forth in paragraphs (a), (c) and (d) above, (ii) of the General Counsel of the Company confirming that to her knowledge the representations and warranties of the Company in paragraphs (m), (p)(x), (r), (s)(x), (w), (y)(i)(x) and (y)(iii)(x) of Section 3 hereof (provided that no
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statement need be given regarding the violation of the Companys certificate of incorporation or by-laws), subject to the qualifications set forth herein, are true and correct and (iii) of the Selling Stockholders, in form and substance reasonably satisfactory to the Representative, (A) confirming that the representations of such Selling Stockholders set forth in Sections 4(e) and 4(f) hereof are true and correct and (B) confirming that the other representations and warranties of such Selling Stockholders in this agreement are true and correct and that such Selling Stockholders have complied with all agreements and satisfied all conditions on their part to be performed or satisfied hereunder at or prior to such Closing Date or the Additional Closing Date, as the case may be.
(f) Comfort Letters . On the date of this Agreement and on the Closing Date or the Additional Closing Date, as the case may be, Deloitte & Touche LLP shall have furnished to the Representative, at the request of the Company, letters, dated the respective dates of delivery thereof and addressed to the Underwriters, in form and substance reasonably satisfactory to the Representative, containing statements and information of the type customarily included in accountants comfort letters to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement, the Time of Sale Information and the Prospectus; provided that the letter delivered on the Closing Date or the Additional Closing Date, as the case may be, shall use a cut-off date no more than three business days prior to such Closing Date or such Additional Closing Date, as the case may be.
(g) Opinion of General Counsel of the Company . Anastacia S. Kilian, General Counsel of the Company, shall have furnished to the Representative, at the request of the Company, her written opinion, dated the Closing Date or the Additional Closing Date, as the case may be, and addressed to the Underwriters, in form and substance reasonably satisfactory to the Representative, to the effect that the Company is not in violation of its Certificate of Incorporation or by-laws.
(h) Opinion of Counsel for the Company . Ice Miller LLP, counsel for the Company, shall have furnished to the Representative, at the request of the Company, their written opinion, dated the Closing Date or the Additional Closing Date, as the case may be, and addressed to the Underwriters, in form and substance reasonably satisfactory to the Representative, to the effect set forth in Annex B hereto.
(i) Opinion of Counsel for the Selling Stockholders . Ice Miller LLP, or other counsel acceptable to the Representative, as counsel for the Selling Stockholders, shall have furnished to the Representative, at the request of the Selling Stockholders, their written opinion, dated the Closing Date or the Additional Closing Date, as the case may be, and addressed to the Underwriters, in form and substance reasonably satisfactory to the Representative, to the effect set forth in Annex C hereto.
(j) Opinion of Counsel for the Underwriters . The Representative shall have received on and as of the Closing Date or the Additional Closing Date, as the case may be, an opinion of Davis Polk & Wardwell, counsel for the Underwriters, with respect to such matters as the Representative may reasonably request, and such counsel shall
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have received such documents and information as they may reasonably request to enable them to pass upon such matters.
(k) No Legal Impediment to Issuance . No action shall have been taken and no statute, rule, regulation or order shall have been enacted, adopted or issued by any federal, state or foreign governmental or regulatory authority that would, as of the Closing Date or the Additional Closing Date, as the case may be, prevent the issuance or sale of the Shares; and no injunction or order of any federal, state or foreign court shall have been issued that would, as of the Closing Date or the Additional Closing Date, as the case may be, prevent the issuance or sale of the Shares.
(l) Good Standing . The Representative shall have received on and as of the Closing Date or the Additional Closing Date, as the case may be, satisfactory evidence of the good standing of the Company and its significant subsidiaries in their respective jurisdictions of organization and their qualification or good standing, as applicable, in such other jurisdictions as the Representative may reasonably request, in each case in writing or any standard form of telecommunication from the appropriate governmental authorities of such jurisdictions.
(m) Exchange Listing . The Shares to be delivered on the Closing Date or the Additional Closing Date, as the case may be, shall have been approved for listing on the NASDAQ Global Market, subject to official notice of issuance.
(n) Lock-up Agreements . The lock-up agreements, each substantially in the form of Annex D hereto, between you and certain officers and directors of the Company relating to sales and certain other dispositions of shares of Stock or certain other securities, delivered to you on or before the date hereof, shall be in full force and effect on the Closing Date or the Additional Closing Date, as the case may be. (It is understood that, as provided in Section 6(a), the Selling Stockholders are bound by similar lock-up restrictions.)
(o) Additional Documents . On or prior to the Closing Date or the Additional Closing Date, as the case may be, the Company and the Selling Stockholders shall have furnished to the Representative such further certificates and documents as the Representative may reasonably request.
All opinions, letters, certificates and evidence mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Underwriters.
9. Indemnification and Contribution .
(a) Indemnification of the Underwriters by the Company . The Company agrees to indemnify and hold harmless each Underwriter, its affiliates, directors and officers and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, legal fees and other
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expenses incurred in connection with any suit, action or proceeding or any claim asserted, as such fees and expenses are incurred), joint or several, that arise out of, or are based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, not misleading or (ii) any untrue statement or alleged untrue statement of a material fact contained in the Prospectus (or any amendment or supplement thereto), any Issuer Free Writing Prospectus or any Time of Sale Information, or any omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, in each case except insofar as such losses, claims, damages or liabilities arise out of, or are based upon, any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with any information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representative expressly for use therein.
The Company also agrees to indemnify and hold harmless the Independent Underwriter, its affiliates, directors and officers and each person, if any, who controls the Independent Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities incurred as a result of the Independent Underwriters participation as a qualified independent underwriter within the meaning of the Rules of Conduct of the NASD in connection with the offering of the Shares, other than any such losses, claims, damages or liabilities that are found in a final judgment by a court of competent jurisdiction (not subject to further appeal) to have resulted primarily and directly from the gross negligence or willful misconduct of the Independent Underwriter.
(b) Indemnification of the Underwriters by the Selling Stockholders . Each of the Selling Stockholders severally in proportion to the number of Shares to be sold by such Selling Stockholder hereunder agrees to indemnify and hold harmless each Underwriter, its affiliates, directors and officers and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, legal fees and other expenses incurred in connection with any suit, action or proceeding or any claim asserted, as such fees and expenses are incurred), joint or several, that arise out of, or are based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, not misleading or (ii) any untrue statement or alleged untrue statement of a material fact contained in the Prospectus (or any amendment or supplement thereto), any Issuer Free Writing Prospectus or any Time of Sale Information, or caused by any omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, in an aggregate amount not to exceed, as to each Selling Stockholder, the amount of the net proceeds (in accordance with the table on the cover of the Prospectus) received by such Selling Stockholder for the Shares sold hereunder, in each case except insofar as such
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losses, claims, damages or liabilities arise out of, or are based upon, any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with any information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representative expressly for use therein.
(c) Indemnification of the Company and the Selling Stockholders . Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and each of the Selling Stockholders to the same extent as the indemnity set forth in paragraph (a) above (for the avoidance of doubt, without giving effect to the proviso contained therein with respect to information furnished by any Underwriter), but only with respect to any losses, claims, damages or liabilities that arise out of, or are based upon, any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with any information relating to such Underwriter furnished to the Company in writing by such Underwriter through the Representative expressly for use in the Registration Statement and the Prospectus (or any amendment or supplement thereto), any Issuer Free Writing Prospectus or any Time of Sale Information, it being understood and agreed that the only such information consists of the following information in the Prospectus under the caption Underwriting: (1) the paragraph beginning with the phrase The underwriters propose to offer the shares of common stock directly to the public . . .; (2) the paragraph beginning with the phrase In connection with this offering, the underwriters may engage in stabilizing transactions . . .; and (3) the paragraph beginning with the phrase The underwriters have advised us that, pursuant to Regulation M . . ..
(d) Notice and Procedures . If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be brought or asserted against any person in respect of which indemnification may be sought pursuant to either paragraph (a), (b) or (c) above, such person (the Indemnified Person ) shall promptly notify the person against whom such indemnification may be sought (the Indemnifying Person ) in writing; provided that the failure to notify the Indemnifying Person shall not relieve it from any liability that it may have under this Section 9 except to the extent that it has been materially prejudiced (through the forfeiture of substantive rights or defenses) by such failure; and provided further , that the failure to notify the Indemnifying Person shall not relieve it from any liability that it may have to an Indemnified Person otherwise than under this Section 9. If any such proceeding shall be brought or asserted against an Indemnified Person and it shall have notified the Indemnifying Person thereof, the Indemnifying Person shall retain counsel reasonably satisfactory to the Indemnified Person (who shall not, without the consent of the Indemnified Person, be counsel to the Indemnifying Person) to represent the Indemnified Person and any others entitled to indemnification pursuant to Section 9 that the Indemnifying Person may designate in such proceeding and shall pay the fees and expenses of such proceeding and shall pay the fees and expenses of counsel related to such proceeding, as incurred. In any such proceeding, any Indemnified Person shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person
27
unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed to the contrary; (ii) the Indemnifying Person has failed within a reasonable time to retain counsel reasonably satisfactory to the Indemnified Person; (iii) the Indemnified Person shall have reasonably concluded that there may be legal defenses available to it that are different from or in addition to those available to the Indemnifying Person; or (iv) the named parties in any such proceeding (including any impleaded parties) include both the Indemnifying Person and the Indemnified Person and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interest between them. It is understood and agreed that the Indemnifying Person shall not, in connection with any proceeding or related proceeding in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons, and that all such fees and expenses shall be reimbursed as they are incurred; provided however that if indemnity may be sought pursuant to the second paragraph of Section 9(a) in respect of such proceeding, then in addition to such separate firm for the Underwriters, their affiliates, directors, officers and their control persons, the Indemnifying Person shall be liable for the fees and expenses of not more than one separate firm (in addition to any local counsel) for the Independent Underwriter in its capacity as a qualified independent underwriter, its affiliates and all persons, if any, who control the Independent Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act. Any such separate firm for any Underwriter, its affiliates, directors and officers and any control persons of such Underwriter shall be designated in writing by J.P. Morgan Securities Inc., any such separate firm for the Company, its directors, its officers who signed the Registration Statement and any control persons of the Company shall be designated in writing by the Company, any such separate firm for the Selling Stockholders shall be designated in writing by the Attorneys-in-Fact and any such separate firm for the Independent Underwriter, its affiliates and control persons shall be designated in writing by the Independent Underwriter. The Indemnifying Person shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the Indemnifying Person agrees to indemnify each Indemnified Person from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an Indemnified Person shall have requested that an Indemnifying Person reimburse the Indemnified Person for fees and expenses of counsel as contemplated by this paragraph, the Indemnifying Person shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by the Indemnifying Person of such request and (ii) the Indemnifying Person shall not have reimbursed the Indemnified Person in accordance with such request prior to the date of such settlement. No Indemnifying Person shall, without the written consent of the Indemnified Person, effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Person is or could have been a party and indemnification could have been sought hereunder by such Indemnified Person, unless such settlement (x) includes an unconditional release of such Indemnified Person, in form and substance reasonably satisfactory to such Indemnified Person, from all liability on claims that are the subject matter of such proceeding and (y) does not include any
28
statement as to or any admission of fault, culpability or a failure to act by or on behalf of any Indemnified Person.
(e) Contribution . If the indemnification provided for in paragraphs (a), (b) and (c) above is unavailable to an Indemnified Person or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Person under such paragraph, in lieu of indemnifying such Indemnified Person thereunder, shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders, on the one hand, and the Underwriters or the Independent Underwriter in its capacity as a qualified independent underwriter, as the case may be, on the other hand, from the offering of the Shares or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Company and the Selling Stockholders, on the one hand, and the Underwriters or the Independent Underwriter in its capacity as a qualified independent underwriter, as the case may be, on the other hand, in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders, on the one hand, and the Underwriters or the Independent Underwriter in its capacity as a qualified independent underwriter, as the case may be, on the other hand, shall be deemed to be in the same respective proportions as the net proceeds (before deducting expenses) received by the Company and the Selling Stockholders from the sale of the Shares and the total underwriting discounts and commissions received by the Underwriters in connection therewith, in each case as set forth in the table on the cover of the Prospectus, or any fee to be received by the Independent Underwriter in its capacity as a qualified independent underwriter, as the case may be, bear to the aggregate offering price of the Shares. The relative fault of the Company and the Selling Stockholders, on the one hand, and the Underwriters or the Independent Underwriter in its capacity as a qualified independent underwriter, as the case may be, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and the Selling Stockholders, by the Underwriters or by the Independent Underwriter in its capacity as a qualified independent underwriter, as the case may be, and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
(f) Limitation on Liability . The Company, the Selling Stockholders, the Underwriters and the Independent Underwriter agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Selling Stockholders or the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (e) above. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages and liabilities referred to in paragraph (e) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such Indemnified Person in connection with any
29
such action or claim. Notwithstanding the provisions of this Section 9, in no event shall an Underwriter be required to contribute any amount in excess of the amount by which the total underwriting discounts and commissions received by such Underwriter with respect to the offering of the Shares exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters obligations to contribute pursuant to this Section 9 are several in proportion to their respective purchase obligations hereunder and not joint.
(g) Non-Exclusive Remedies . The remedies provided for in this Section 9 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any Indemnified Person at law or in equity.
10. Effectiveness of Agreement . This Agreement shall become effective upon the execution and delivery hereof by the parties hereto.
11. Termination . This Agreement may be terminated in the absolute discretion of the Representative, by notice to the Company and the Selling Stockholders, if after the execution and delivery of this Agreement and prior to the Closing Date or, in the case of the Option Shares, prior to the Additional Closing Date (i) trading generally shall have been suspended or materially limited on or by any of the New York Stock Exchange, the American Stock Exchange, the National Association of Securities Dealers, Inc., the NASDAQ Global Market, the Chicago Board Options Exchange, the Chicago Mercantile Exchange, or the Chicago Board of Trade; (ii) trading of any securities issued or guaranteed by the Company shall have been suspended on any exchange or in any over-the-counter market; (iii) a general moratorium on commercial banking activities shall have been declared by federal or New York State authorities; or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis, either within or outside the United States, that, in the judgment of the Representative, is material and adverse and makes it impracticable or inadvisable to proceed with the offering, sale or delivery of the Shares on the Closing Date or the Additional Closing Date, as the case may be , on the terms and in the manner contemplated by this Agreement, the Time of Sale Information and the Prospectus.
12. Defaulting Underwriter . (a) If, on the Closing Date or the Additional Closing Date, as the case may be, any Underwriter defaults on its obligation to purchase the Shares that it has agreed to purchase hereunder on such date, the non-defaulting Underwriters may in their discretion arrange for the purchase of such Shares by other persons satisfactory to the Company and the Selling Stockholders on the terms contained in this Agreement. If, within 36 hours after any such default by any Underwriter, the non-defaulting Underwriters do not arrange for the purchase of such Shares, then the Company and the Selling Stockholders shall be entitled to a further period of 36 hours within which to procure other persons satisfactory to the non-defaulting Underwriters to purchase such Shares on such terms. If other persons become obligated or agree to purchase the Shares of a defaulting Underwriter, either the non-defaulting Underwriters or
30
the Company and the Selling Stockholders may postpone the Closing Date or the Additional Closing Date, as the case may be, for up to five full business days in order to effect any changes that in the opinion of counsel for the Company, counsel for the Selling Stockholders or counsel for the Underwriters may be necessary in the Registration Statement and the Prospectus or in any other document or arrangement, and the Company agrees to promptly prepare any amendment or supplement to the Registration Statement and the Prospectus that effects any such changes. As used in this Agreement, the term Underwriter includes, for all purposes of this Agreement unless the context otherwise requires, any person not listed in Schedule I hereto that, pursuant to this Section 12, purchases Shares that a defaulting Underwriter agreed but failed to purchase.
(b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by the non-defaulting Underwriters, the Company and the Selling Stockholders as provided in paragraph (a) above, the aggregate number of Shares that remain unpurchased on the Closing Date or the Additional Closing Date, as the case may be does not exceed one-eleventh of the aggregate number of Shares to be purchased on such date, then the Company and the Selling Stockholders shall have the right to require each non-defaulting Underwriter to purchase the number of Shares that such Underwriter agreed to purchase hereunder on such date plus such Underwriters pro rata share (based on the number of Shares that such Underwriter agreed to purchase on such date) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made.
(c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by the non-defaulting Underwriters, the Company and the Selling Stockholders as provided in paragraph (a) above, the aggregate number of Shares that remain unpurchased on the Closing Date or the Additional Closing Date, as the case may be, exceeds one-eleventh of the aggregate amount of Shares to be purchased on such date, or if the Company and the Selling Stockholders shall not exercise the right described in paragraph (b) above, then this Agreement or, with respect to any Additional Closing Date, the obligation of the Underwriters to purchase Shares on the Additional Closing Date, as the case may be, shall terminate without liability on the part of the non-defaulting Underwriters. Any termination of this Agreement pursuant to this Section 12 shall be without liability on the part of the Company and the Selling Stockholders, except that the Company will continue to be liable for the payment of expenses as set forth in Section 13 hereof and except that the provisions of Section 9 hereof shall not terminate and shall remain in effect.
(d) Nothing contained herein shall relieve a defaulting Underwriter of any liability it may have to the Company, the Selling Stockholders or any non-defaulting Underwriter for damages caused by its default.
13. Payment of Expenses . (a) (I) Whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, the Company will pay or cause to be paid all costs and expenses incident to the performance of its obligations and the Selling Stockholders obligations hereunder (other than those
31
which are covered by clause (a)(II) below), including without limitation, (i) the costs incident to the authorization, issuance, sale, preparation and delivery of the Shares and any taxes payable in that connection; (ii) the costs incident to the preparation, printing and filing under the Securities Act of the Registration Statement, the Preliminary Prospectus, any Issuer Free Writing Prospectus, any Time of Sale Information and the Prospectus (including all exhibits, amendments and supplements thereto) and the distribution thereof; (iii) the costs of reproducing and distributing this Agreement; (iv) the fees and expenses of the Companys and Selling Stockholders counsel and independent accountants; (v) the fees and expenses incurred in connection with the registration or qualification and determination of eligibility for investment of the Shares under the laws of such jurisdictions as the Representative may designate and the preparation, printing and distribution of a Blue Sky Memorandum (including the related fees and expenses of counsel for the Underwriters); (vi) the cost of preparing stock certificates; (vii) the costs and charges of any transfer agent and any registrar; (viii) all expenses and application fees incurred in connection with any filing with, and clearance of the offering by, the National Association of Securities Dealers, Inc.; (ix) all expenses incurred by the Company or any Selling Stockholder in connection with any road show presentation to potential investors; and (x) all expenses and application fees related to the listing of the Shares on the NASDAQ Global Market.
(II) Whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, the Selling Stockholders who are Optionholders will pay or cause to be paid all costs and expenses incident to the performance of their obligations hereunder, including without limitation, (i) the costs incident to the sale, preparation and delivery of the Shares to be sold by the Optionholders and any taxes payable in that connection; (ii) the fees and expenses of the Optionholders counsel; and (iii) all expenses incurred by any Optionholder in connection with any road show presentation to potential investors.
(b) If (i) this Agreement is terminated pursuant to Section 11, (ii) the Company or the Selling Stockholders for any reason fail to tender the Shares for delivery to the Underwriters or (iii) the Underwriters decline to purchase the Shares for any reason permitted under this Agreement, the Company agrees to reimburse the Underwriters for all out-of-pocket costs and expenses (including the fees and expenses of their counsel) reasonably incurred by the Underwriters in connection with this Agreement and the transactions contemplated hereby.
14. Persons Entitled to Benefit of Agreement . This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and any controlling persons referred to and the affiliates of each Underwriter and the Independent Underwriter referred to in Section 9 hereof. Nothing in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. No purchaser of Shares from any Underwriter shall be deemed to be a successor merely by reason of such purchase.
32
15. Survival . The respective indemnities, rights of contribution, representations, warranties and agreements of the Company, the Selling Stockholders and the Underwriters contained in this Agreement or made by or on behalf of the Company, the Selling Stockholders or the Underwriters pursuant to this Agreement or any certificate delivered pursuant hereto shall survive the delivery of and payment for the Shares and shall remain in full force and effect, regardless of any termination of this Agreement or any investigation made by or on behalf of the Company, the Selling Stockholders or the Underwriters.
16. Certain Defined Terms . For purposes of this Agreement, (a) except where otherwise expressly provided, the term affiliate has the meaning set forth in Rule 405 under the Securities Act; (b) the term business day means any day other than a day on which banks are permitted or required to be closed in New York City; and (c) the term subsidiary has the meaning set forth in Rule 405 under the Securities Act ; and (d) the term significant subsidiary has the meaning set forth in Rule 1-02 of Regulation S-X under the Exchange Act.
17. Miscellaneous . (a) Authority of the Representative . Any action by the Underwriters hereunder may be taken by J.P. Morgan Securities Inc. on behalf of the Underwriters, and any such action taken by J.P. Morgan Securities Inc. shall be binding upon the Underwriters.
(b) Notices . All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted and confirmed by any standard form of telecommunication. Notices to the Underwriters shall be given to the Representative c/o J.P. Morgan Securities Inc., 277 Park Avenue, New York, New York 10172 (fax: (212) 622-8358); Attention: Syndicate Desk. Notices to the Company shall be given to it at 1020 West Park Avenue, PO Box 9013, Kokomo, Indiana 46904, (fax: (765) 456-6125); Attention: Chief Executive Officer and Chief Financial Officer. Notices to the Selling Stockholders shall be given to the Attorneys-in-Fact c/o Haynes International, Inc., 1020 West Park Avenue, PO Box 9013, Kokomo, Indiana 46904, (fax: (765) 456-6125); Attention: Francis J. Petro, Marcel Martin and Anastacia S. Kilian.
(c) Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of New York.
(d) Counterparts . This Agreement may be signed in counterparts (which may include counterparts delivered by any standard form of telecommunication), each of which shall be an original and all of which together shall constitute one and the same instrument.
(e) Amendments or Waivers . No amendment or waiver of any provision of this Agreement, nor any consent or approval to any departure therefrom, shall in any event be effective unless the same shall be in writing and signed by the parties hereto.
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(f) Headings . The headings herein are included for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement.
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If the foregoing is in accordance with your understanding, please indicate your acceptance of this Agreement by signing in the space provided below.
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Very truly yours, |
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HAYNES INTERNATIONAL, INC. |
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THE SELLING STOCKHOLDERS |
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By: |
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Name: Francis J. Petro |
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By: |
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Name: Marcel Martin |
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By: |
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Name: Anastacia S. Kilian |
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As Attorneys-in-Fact acting on behalf of each of the Selling Stockholders listed in Schedule II hereto. |
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Accepted: March , 2007 |
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J.P. MORGAN SECURITIES INC. |
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For itself and on behalf of the several Underwriters listed in Schedule I hereto. |
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By: |
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Authorized Signatory |
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Accepted: March , 2007 |
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BEAR, STEARNS & CO. INC. |
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As the Independent Underwriter. |
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By: |
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Schedule I
Underwriter |
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Number of
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J.P. Morgan Securities Inc. |
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Bear, Stearns & Co. Inc. |
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KeyBanc Capital Markets, A Division of McDonald Investments Inc. |
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Total |
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2,100,000 |
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Schedule II
Selling Stockholder |
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Number of
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Number of
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Francis J. Petro |
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John C. Corey |
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Paul J. Bohan |
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Donald C. Campion |
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Robert H. Getz |
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Timothy J. McCarthy |
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William P. Wall |
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Ronald W. Zabel |
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August A. Cijan |
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James A. Laird |
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Marcel Martin |
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Gregory Spalding |
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Charles J. Sponangle |
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Jean C. Neel |
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Michael Douglas |
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Scott Pinkham |
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Jeff Young |
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Daniel E. Maudlin |
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Marlin C. Losch |
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JANA Partners, LLC |
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Total |
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1,000,000 |
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215,000 |
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Schedule III |
Significant Subsidiaries |
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None. |
Annex A |
Time of Sale Information |
[list each Issuer Free Writing Prospectus to be included in the Time of Sale Information] |
Annex D
[Form of Lock-Up Agreement]
, 2007
J.P. Morgan Securities Inc.
277 Park Avenue
New York, NY 10172
Re: Haynes International, Inc. Public Offering
Ladies and Gentlemen:
The undersigned understands that you, as Representative of the several Underwriters, propose to enter into an Underwriting Agreement (the Underwriting Agreement ) with Haynes International, Inc., a Delaware corporation (the Company ), and the selling stockholders named therein, providing for the public offering (the Public Offering ) by the several Underwriters named in Schedule I to the Underwriting Agreement (the Underwriters ), of common stock, par value $0.001 per share, of the Company (the Common Stock ).
In consideration of the Underwriters agreement to purchase and make the Public Offering of the Common Stock, and for other good and valuable consideration, receipt of which is hereby acknowledged, the undersigned hereby agrees that, without the prior written consent of J.P. Morgan Securities Inc. on behalf of the Underwriters, the undersigned will not, during the period ending 90 days after the date of the final prospectus relating to the Public Offering (the Prospectus ), (1) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (including without limitation, Common Stock which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the Securities and Exchange Commission and securities which may be issued upon exercise of a stock option or warrant) or (2) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. In addition, the undersigned agrees that, without the prior written consent of J.P. Morgan Securities Inc. on behalf of the Underwriters, it will not, during the period ending 90 days after the date of the Prospectus, make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock.
Notwithstanding the foregoing, if (1) during the last 17 days of the 90-day restricted period, the Company issues an earnings release or material news or a
D-1
material event relating to the Company occurs; or (2) prior to the expiration of the 90-day restricted period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the 90-day period, the restrictions imposed by this Letter Agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.
In furtherance of the foregoing, the Company, and any duly appointed transfer agent for the registration or transfer of the securities described herein, are hereby authorized to decline to make any transfer of securities if such transfer would constitute a violation or breach of this Letter Agreement.
The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Letter Agreement. All authority herein conferred or agreed to be conferred and any obligations of the undersigned shall be binding upon the successors, assigns, heirs or personal representatives of the undersigned.
The undersigned understands that, if the Underwriting Agreement does not become effective, or if the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Common Stock to be sold thereunder, the undersigned shall be released from all obligations under this Letter Agreement.
The undersigned understands that the Underwriters are entering into the Underwriting Agreement and proceeding with the Public Offering in reliance upon this Letter Agreement.
This Letter Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to the conflict of laws principles thereof.
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Very truly yours, |
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D-2
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
HAYNES INTERNATIONAL, INC.
(reflecting all amendments
through February 20, 2007)
* * * * *
Pursuant
to Sections 242, 245 and 303 of
the General Corporation Law of the State of Delaware
* * * * *
The undersigned, on behalf of Haynes International, Inc. (the Corporation), a corporation duly organized and existing under and by virtue of the General Corporation Law of the State of Delaware (DGCL), does hereby certify as follows:
(1) The name of the Corporation is Haynes International, Inc. The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on December 1, 1986; and a Restated Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on July 10, 1987.
(2) This Restated Certificate of Incorporation of the Corporation is being effected pursuant to Sections 242, 245 and 303 of the General Corporation Law of the State of Delaware. The making and filing of this Restated Certificate of Incorporation has been authorized pursuant to the First Amended Joint Plan of Reorganization of Haynes International, Inc. and certain of its subsidiaries and affiliates, Case Nos. 04-05364 through 04-05367 under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code), as confirmed by the United States Bankruptcy Court for the Southern District of Indiana, Indianapolis Division, at a hearing on August 16, 2004 and the Findings of Fact, Conclusions of Law, and Order Under 11 U.S.C. Sections 1129(a) and (b) and Fed. R. Bankr. P. 3020 Confirming the First Amended Plan of Reorganization of Haynes International, Inc. and its Affiliated Debtors and Debtors-in-Possession, dated August 16, 2004.
(3) The text of the certificate of incorporation is restated in its entirety as follows:
FIRST: The name of the Corporation is Haynes International, Inc.
SECOND: The address of the Corporations registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may now or hereafter be organized under the DGCL.
FOURTH: CAPITAL STOCK. (a) AUTHORIZED CAPITAL STOCK. The total number of shares of stock which the Corporation shall have authority to issue is Sixty Million
(60,000,000), which shall be divided into two classes, one to be designated Common Stock, which shall consist of Forty Million (40,000,000) authorized shares, par value $0.001 per share, and a second class to be designated as Preferred Stock, which shall consist of Twenty Million (20,000,000) authorized shares, par value $0.001 per share.
(b) PREFERRED STOCK. The Preferred Stock may be issued from time to time in one or more series, each series to be appropriately designated by a distinguishing number, letter or title prior to the issue of any shares thereof. Each series of Preferred Stock shall consist of such number of shares and have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, as shall be stated in the resolution or resolutions providing for the issuance of such series adopted by the Board of Directors of the Corporation, and the Board of Directors is hereby expressly vested with authority, to the full extent now or hereafter provided by law, to adopt any such resolution or resolutions, provided, however, that the Board of Directors may not decrease the number of shares authorized within a class or series to less than the number of shares within such class or series that are then issued and outstanding and may not increase the number of shares within a series above the total number of authorized shares of the applicable class for which the powers, designations, preferences and rights have not otherwise been set forth herein. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following:
(1) the number of shares constituting that series and the distinctive designation of that series;
(2) the dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series;
(3) whether that series shall have voting rights, in addition to the voting rights provided by law, and if so, the terms of such voting rights;
(4) whether that series shall have conversion privileges and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversation rate in such events as the Board of Directors shall determine;
(5) whether the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates;
(6) whether that series shall have a sinking fund for the redemption or purchase of shares of that series and, if so, the terms and amount of such sinking fund;
(7) the rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding-up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and
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(8) any other relative rights, preferences and limitations of that series.
(c) COMMON STOCK. The powers, preferences and rights, and the qualifications, limitations and restrictions, of the Common Stock are as follows:
(1) (a) VOTING. Except as otherwise expressly required by law or provided in this Restated Certificate of Incorporation, the holders of any outstanding shares of Common Stock shall vote together as a single class on all matters with respect to which stockholders are entitled to vote under applicable law, this Restated Certificate of Incorporation or the By-Laws of the Corporation, as amended from time to time, or upon which a vote of stockholders is otherwise called for by the Corporation. At each annual or special meeting of stockholders, each holder of record of shares of Common Stock on the record date for such meeting shall be entitled to cast one vote in person or by proxy for each share of the Common Stock standing in such holders name on the stock transfer records of the Corporation on such record date. Notwithstanding the foregoing, unless otherwise required by applicable law, no holder of Common Stock, as such, shall be entitled to vote on or consent to any matter submitted to a vote of any series of preferred stock in which the holders of such series of preferred stock, either separately or together with any other series of preferred stock, are entitled to vote pursuant to this Restated Certificate of Incorporation or a certificate of designations of a series of preferred stock, unless otherwise provided herein or in such certificate of designations.
(b) NON-CUMULATIVE. The holders of shares of Common Stock shall not have cumulative voting rights.
(2) DIVIDENDS. Subject to any other provisions of this Restated Certificate of Incorporation, holders of shares of Common Stock shall be entitled to receive such dividends and other distributions in cash, stock or property of the Corporation when, as and if declared thereon by the Board of Directors from time to time out of assets or funds of the Corporation legally available therefor.
(3) LIQUIDATION. In the event of any liquidation, dissolution or winding up (either voluntary or involuntary) of the Corporation, the holders of shares of Common Stock shall be entitled to share equally, on a share for share basis, the assets and funds of the Corporation available for distribution, after payments to creditors and to the holders of any preferred stock of the Corporation that may at the time be outstanding. Neither the consolidation nor the merger of the Corporation with or into any other person, nor the sale, transfer or lease of all or substantially all of the assets of the Corporation shall itself be deemed to be a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this Section 3.
(4) PREEMPTIVE RIGHTS. No holder of shares of Common Stock shall be entitled to preemptive or subscription rights.
(d) PURCHASE AND SALE OF SHARES. Subject to the requirements of applicable law, the Corporation shall have the power to issue and sell all or any part of any shares of any class of stock herein or hereafter authorized to such persons, and for such
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consideration, as the Board of Directors shall from time to time, in its discretion, determine, whether or not greater consideration could be received upon the issue or sale of the same number of shares of another class, and as otherwise permitted by law. Subject to the requirements of applicable law, the Corporation shall have the power to purchase any shares of any class of stock herein or hereafter authorized from such persons, and for such consideration, as the Board of Directors shall from time to time, in its discretion, determine, whether or not less consideration could be paid upon the purchase of the same number of shares of another class, and as otherwise permitted by law.
FIFTH: The Corporation shall not issue any nonvoting equity securities to the extent prohibited by Section 1123 of the Bankruptcy Code as in effect on the effective date of the Plan of Reorganization of Haynes International, Inc. and its Affiliated Debtors and Debtors in Possession (the Reorganization Plan); provided, however, that this Article FIFTH (a) will have no further force and effect beyond that required under Section 1123 of the Bankruptcy Code, (b) will have such force and effect, if any, only for so long as such section of the Bankruptcy Code is in effect and applicable to the Corporation, and (c) in all events may be amended or eliminated in accordance with such applicable law as from time to time may be in effect.
SIXTH: LIABILITY; INDEMNIFICATION (a) A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation therefor is not permitted under the DGCL as the same exists or may hereafter be amended. If the DGCL is amended hereafter to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent authorized by the DGCL, as so amended. Any repeal or modification of this paragraph shall not adversely affect any right or protection of a director of the Corporation existing hereunder with respect to any act or omission occurring prior to such repeal or modification.
(b) Any person who was or is made a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (proceeding) by reason of the fact that such person or person for whom such person is a legal representative, is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, nonprofit entity or other enterprise, including service with respect to employee benefit plans (Covered Person), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent, or in any other capacity while serving as a director, officer, employee or agent shall be indemnified and held harmless by the Corporation to the fullest extent authorized or permitted by applicable law.
(c) The rights conferred on any Covered Person by this Article SIXTH shall not be exclusive of any other rights which any Covered Person may have or hereafter acquire under law, this Restated Certificate of Incorporation, the Amended and Restated By-laws of the Corporation, an agreement, vote of stockholders or disinterested directors, or otherwise.
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(d) Any repeal or amendment of the Article SIXTH by the stockholders of the Corporation or by changes in law, or the adoption of any other provision of this Restated Certificate of Incorporation inconsistent with this Article SIXTH, will, unless otherwise required by law, by prospective only (except to the extent such amendment or change in law permits the Corporation to provide broader indemnification rights on a retroactive basis than permitted prior thereto), and will not in any way diminish or adversely affect any right or protection existing at the time of such repeal or amendment or adoption of such inconsistent provision in respect of any act or omission occurring prior to such repeal or amendment or adoption of such inconsistent provision.
(e) This Article SIXTH shall not limit the right of the Corporation, to the extent and in the manner authorized or permitted by law, to indemnify and to advance expenses to persons other than Covered Persons.
SEVENTH: Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation, and the ability of the stockholders to consent in writing to the taking of any action is hereby specifically denied.
EIGHTH: Meetings of stockholders may be held within or without the State of Delaware, as the By-Laws may provide. The books of the Corporation may be kept (subject to any provision contained in the DGCL) within or without the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the By-Laws of the Corporation.
NINTH: The Corporation reserves the right to amend this Restated Certificate of Incorporation in any manner permitted by the DGCL, as amended from time to time, and all rights and powers conferred herein on stockholders, directors and officers, if any, are subject to this reserved power. Notwithstanding any other provision of this Restated Certificate of Incorporation (and in addition to any other vote that may be required by law), the affirmative vote of the holders of at least a majority of the voting power of the shares entitled to vote in an election of directors shall be required to amend, alter, change or repeal, or to adopt any provision as part of this Restated Certificate of Incorporation.
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EXHIBIT 5.1
March 7, 2007
Board of Directors
Haynes International, Inc.
1020 West Park Avenue
P.O. Box 9013
Kokomo, IN 46904-9013
Re: Registration Statement on Form S-1
Gentlemen:
We have acted as counsel to Haynes International, Inc., a Delaware corporation (the Company), in connection with its registration statement on Form S-1 (File No. 333-140194) (the Registration Statement) filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the 1933 Act), relating to the public offering of up to 2,415,000 shares of common stock, par value $0.001 per share (the Common Stock), by the Company and certain selling stockholders of the Company named in the Registration Statement. Unless otherwise defined herein, capitalized terms used herein shall have the meaning assigned to them in the Registration Statement.
In connection therewith, we have investigated those questions of law as we have deemed necessary or appropriate for purposes of this opinion. We have also examined originals or copies, certified or otherwise identified to our satisfaction, of those documents, corporate or other records, certificates and other papers that we deemed necessary to examine for thepurpose of this opinion, including:
1. The Registration Statement;
2. The Companys Restated Certificate of Incorporation, as amended, certified by the Secretary of State of Delaware on February 23, 2007 to be a true and correct copy thereof;
3. The Amended and Restated By-laws of the Company, as amended to date and currently in effect;
4. Officers Certificate dated March 7, 2007, as to certain factual matters; and
5. Such other documents and matters as we have deemed necessary or appropriate to express the opinion set forth in this letter, subject to the assumptions, limitations and qualifications stated herein.
Board of Directors
Haynes International, Inc.
March 7, 2007
Page 2
We have also relied, without investigation as to the accuracy thereof, on other certificates of, and oral and written communication from, public officials and officers of the Company.
For purposes of this opinion, we have assumed the genuineness of all signatures, the conformity to the originals of all documents reviewed by us as copies, the authenticity and completeness of all original documents reviewed by us in original or copy form and the legal competence of each individual executing a document. We have also assumed that the registration requirements of the 1933 Act and all applicable requirements of state laws regulating the offer and sale of Common Stock will have been duly satisfied.
Based upon the foregoing, we are of the opinion that when the Registration Statement first becomes effective under the 1933 Act, the Common Stock, when sold as contemplated in such Registration Statement, will be legally issued, fully paid and nonassessable.
This opinion has been prepared for your use in connection with the Registration Statement and may not be relied upon for any other purpose. The opinions expressed herein are matters of professional judgment, are not a guarantee of result and are effective only as of the date hereof. We do not undertake to advise you of any matter within the scope of this letter that comes to our attention after the date of this letter and disclaim any responsibility to advise you of any future changes in law or fact that may affect the opinion set forth herein.
We consent to the use of this opinion as an exhibit to the Registration Statement, to the disclosure and summarization of the opinion in the Registration Statement, including in the prospectus, and to the reference to our firm in the Registration Statement under the caption Legal matters. In giving this consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the 1933 Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder.
Very truly yours,
/s/ ICE MILLER LLP
Exhibit 10.23
ACCESS AND SECURITY AGREEMENT
This ACCESS AND SECURITY AGREEMENT (this Agreement ) is made on November 17, 2006 by and between Haynes International, Inc., a Delaware corporation ( Haynes ), and Titanium Metals Corporation, a Delaware corporation ( TIMET ).
WHEREAS, Haynes has excess capacity at its 4-High Steckel rolling mill located at its plant in Kokomo, Indiana and desires to monetize such excess capacity;
WHEREAS, in furtherance of its continuing operations and business objectives, TIMET requires the services capable of being provided by Haynes and the use of the aforementioned 4-High Steckel rolling mill, and requires such services in such capacities, for such duration and on such demand as, for all practical purposes, can only be provided by Haynes and the use of the aforementioned 4-High Steckel rolling mill;
WHEREAS, in furtherance of its desire to utilize its excess capacity of the 4-High Mill, Haynes wishes to make to TIMET the capacity commitments described herein and to agree to supply TIMET with Titanium Conversion Services, as defined in and pursuant to the terms and conditions of that certain Conversion Services Agreement of even date herewith by and between TIMET and Haynes, the form of which is attached hereto as Exhibit A (the Conversion Agreement );
WHEREAS, in order for Haynes to make the commitment and agreements set forth in the Conversion Agreement, Haynes must reserve and not fully utilize the capacity of the 4-High Mill, and Haynes is willing and able to do so only if such excess capacity is monetized such that Haynes does not suffer economic harm by reserving such excess capacity for TIMET;
WHEREAS, TIMET has agreed to monetize such excess capacity by paying the Fee (as defined below) to Haynes in exchange for Haynes execution of the Conversion Agreement and performance thereunder;
WHEREAS, Haynes acknowledges that any delay in the performance of the Titanium Conversion Services or any default by Haynes under the Transaction Documents (as defined below) may cause TIMET irreparable harm and, therefore, Haynes has agreed to provide to TIMET the rights and protections set forth in the Transaction Documents; and
WHEREAS, TIMET acknowledges that Haynes cannot reserve the excess capacity of the 4-High Mill for the benefit of TIMET without TIMETs monetization of such excess capacity without causing Haynes irreparable harm, and that any failure of such monetization, whether by reason of TIMETs default under the Transaction Documents or otherwise, may cause Haynes irreparable harm.
NOW, THEREFORE, in consideration of the foregoing, the agreements, covenants, representations and warranties of the parties set forth herein and in the other Transaction Documents, and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, Haynes and TIMET agree as follows:
1. Defined Terms . The following terms have the indicated meanings, unless the context otherwise requires:
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If to Haynes, to: |
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Haynes International, Inc. |
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1020 West Park Avenue |
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P.O. Box 9013 |
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Kokomo, Indiana 46904-9013 |
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Attn: Marcel Martin, Chief Financial Officer |
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Facsimile: (765) 456-6526 |
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Attn: Stacy S. Kilian, V.P. General Counsel |
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Facsimile: (765) 456-6935 |
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with a copy to: |
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Ice Miller LLP |
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One American Square |
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34 th Floor |
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Indianapolis, IN 46282-0200 |
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Attn: Stephen J. Hackman |
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Facsimile: (317) 592-4666 |
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If to TIMET, to: |
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Titanium Metals Corporation |
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3 Lincoln Centre |
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5430 LBJ Freeway, Suite 1700 |
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Dallas, Texas 75240 |
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Facsimile: (972) 448-1445 |
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Attention: General Counsel |
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with a copy to: |
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Locke Liddell & Sapp LLP |
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2200 Ross Avenue, Suite 2200 |
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Dallas, Texas 75201 |
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Facsimile: (214) 740-8800 |
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Attention: |
Don M. Glendenning, Esq. |
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Toni Weinstein, Esq. |
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.
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HAYNES INTERNATIONAL, INC. |
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By: |
/s/ Francis J. Petro |
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Name: Francis J. Petro |
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Title: President and CEO |
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TITANIUM METALS CORPORATION |
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By: |
/s/ Bobby D. OBrien |
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Name: Bobby D. OBrien |
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Title: Executive Vice President and |
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Chief Financial Officer |
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SCHEDULE 13
LESSORS ACKNOWLEDGMENT AND CONSENT
While not a party to the Access and Security Agreement (the Access Agreement) between Titanium Metals Corporation (TIMET) and Haynes International, Inc. (Haynes) dated November 17, 2006 the undersigned leases certain real estate and/or equipment to Haynes and, in such capacity, the undersigned acknowledges, consents to, and agrees with, and agrees to be bound by, the terms and conditions of the foregoing Agreement, including TIMETs right to use the Operating Assets during an Access Period. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Access Agreement.
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LESSOR |
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By: |
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Name: |
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Title: |
Exhibit 10.28
HAYNES INTERNATIONAL, INC.
SECOND AMENDED AND RESTATED STOCK OPTION PLAN
As adopted by the Board of Directors as of January 22, 2007
The Board of Directors of Haynes International, Inc. (the Company) has determined that the best interests of the Company will be served by making available to eligible employees and directors of the Company and its Subsidiaries a means to acquire shares of the Companys common stock (the Shares) through the granting of stock options. The Haynes International, Inc. Stock Option Plan, as amended or amended and restated from time to time (the Plan), is intended to promote the growth of the Company and its shareholders by attracting and motivating key employees and directors whose efforts are deemed worthy of encouragement through the incentive effects of stock options.
The Shares purchased pursuant to the Plan shall be subject to certain restrictions, the details of which are set forth below. There is currently no public market for the Shares. The future market price, if any, of the Shares may be highly volatile depending on a number of factors. In addition, the ownership of the Company represented by Options may be diluted by the future issuances of Shares or convertible securities.
Accordingly, the Companys Board of Directors adopts this Plan in accordance with the Plan of Reorganization (as defined below), effective as of the Effective Date.
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EXHIBIT A
Position |
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% of Options |
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Option Shares |
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President & CEO |
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20 |
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200,000 |
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VP Finance & CFO |
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10 |
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100,000 |
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VP Marketing & International |
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10 |
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100,000 |
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VP Operations Kokomo |
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10 |
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100,000 |
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VP IT & Business Planning |
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5 |
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50,000 |
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VP Corporate Affairs |
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5 |
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50,000 |
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VP Engr. & Tech. |
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5 |
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50,000 |
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Controller & CAO |
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5 |
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50,000 |
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VP Sales |
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5 |
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50,000 |
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VP Manufacturing Planning |
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5 |
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50,000 |
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GM Arcadia |
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5 |
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50,000 |
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Options reserved for distribution to Directors |
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9 |
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90,000 |
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Options reserved for distribution to Discretionary Participants |
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6 |
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60,000 |
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Total |
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100 |
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1,000,000 |
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EXHIBIT 10.31
FORM OF INDEMNIFICATION AGREEMENT
This Indemnification Agreement (this Agreement ), dated as of this day of March, 2007, is made by and between Haynes International, Inc., a Delaware corporation (the Company ), and Anastacia S. Kilian ( Indemnitee ).
RECITALS:
WHEREAS , Indemnitee, in her capacity as Vice President General Counsel of the Company, may be asked to deliver legal opinions (collectively, the Opinions ) in connection with transactions the Company or its subsidiaries may enter into from time to time, including, without limitation, the public offering of shares of the Companys common stock, par value $0.001 per share, in an offering underwritten by a syndicate of underwriters represented by J.P. Morgan Securities Inc., or any other offering of the Companys securities;
WHEREAS, Indemnitees willingness to provide Opinions is predicated, in substantial part, upon the Companys willingness to indemnify her in connection therewith to the fullest extent permitted by the laws of the State of Delaware, and upon the other undertakings set forth in this Agreement;
WHEREAS, in recognition of the need to provide Indemnitee with substantial protection against personal liability, in order to procure Indemnitees consent to deliver Opinions and in order to provide such protection pursuant to express contract rights, intended to be enforceable irrespective of, among other things, any provision of the Companys Restated Certificate of Incorporation, as amended from time to time, or Amended and Restated By-Laws, as amended from time to time, the Company desires to provide in this Agreement for indemnification of, and advancement of Expenses (as defined below) to, Indemnitee as set forth in this Agreement and for the continued coverage of Indemnitee under the Companys directors and officers liability insurance policies;
NOW, THEREFORE, in consideration of the promises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:
AGREEMENT :
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If to the Company: |
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Haynes International, Inc. |
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1020 West Park Avenue |
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P.O. Box 9013 |
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Kokomo, Indiana 46904-9015 |
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Attn.: Chief Financial Officer |
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Tel.: (765) 456-6129 |
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Fax: (765) 456-6985 |
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If to Indemnitee: |
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Anastacia S. Kilian |
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___________________ |
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___________________ |
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Tel.: _______________ |
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Fax: _______________ |
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[SIGNATURES APPEAR ON FOLLOWING PAGE]
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IN WITNESS WHEREOF , Indemnitee has executed and the Company has caused its duly authorized representative to execute this Agreement as of the date first above written.
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HAYNES INTERNATIONAL, INC. |
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By: |
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Name: Marcel Martin |
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Title: Chief Financial Officer |
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INDEMNITEE |
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Anastacia S. Kilian |
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Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in this Amendment No. 1 to Registration Statement No. 333-140194 on Form S-1 of our reports dated December 7, 2006 relating to the consolidated financial statements of Haynes International, Inc. (which report expresses an unqualified opinion and includes an explanatory paragraph referring to the Companys application of AICPA Statement of Position, 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code , and an explanatory paragraph regarding the Companys change of accounting for share-based payments as required by Statement of Financial Accounting Standards No. 123(R), Share-Based Payments ), and managements report on the effectiveness of internal control over financial reporting, appearing in the Prospectus, which is a part of such Registration Statement, and to the reference to us under the heading Experts in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Indianapolis, Indiana
March 7, 2007