HAYNES INTERNATIONAL INC - Quarter Report: 2007 June (Form 10-Q)

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2007

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ________ to ___________

Commission File Number: 001-33288

HAYNES INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware		06-1185400
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1020 West Park Avenue, Kokomo, Indiana		46904-9013
(Address of principal executive offices)		(Zip Code)

(765) 456-6000

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filler and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer o Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No o

As of August 1, 2007, the registrant had 11,650,000 shares of Common Stock, $.001 par value, outstanding.

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION	Page

Item 1.	Unaudited Condensed Financial Statements

	Haynes International, Inc. and Subsidiaries:

	Unaudited Consolidated Balance Sheets as of September 30, 2006 and June 30, 2007	1

	Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2006 and 2007	2

	Unaudited Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended June 30, 2006 and 2007	3

	Unaudited Consolidated Statements of Cash Flow for the Nine Months Ended June 30, 2006 and 2007	4

	Notes to Consolidated Financial Statements	5

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

Item 4.	Controls and Procedures	31

PART II	OTHER INFORMATION

Item 6.	Exhibits	32

	Signatures	33

	Index to Exhibits	34

PART 1 FINANCIAL INFORMATION

Item 1. Financial Statements

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)

ASSETS	September 30, 2006			June 30, 2007
Current assets:
Cash and cash equivalents	$	6,182		$	5,426
Restricted cash – current portion		110			110
Accounts receivable, less allowance for doubtful accounts of $1,751 and $1,279, respectively		77,962			83,740
Inventories, net		179,712			284,384
Income tax benefit		-			5,729
Deferred income taxes – current portion		10,759			8,489
Total current assets		274,725			387,878

Property, plant and equipment (at cost)		100,373			111,848
Accumulated depreciation		(11,452	)		(17,131	)
Net property, plant and equipment		88,921			94,717

Deferred income taxes – long term portion		27,368			26,562
Prepayments and deferred charges, net		2,719			5,488
Restricted cash – long term portion		440			330
Goodwill		42,265			41,321
Other intangible assets		9,422			8,579
Total assets	$	445,860		$	564,875
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	45,487		$	80,580
Income taxes payable		2,294			-
Accrued pension and postretirement benefits		8,134			7,928
Revolving credit facilities		116,836			17,804
Deferred revenue – current portion		-			2,500
Current maturities of long-term obligations		110			110
Total current liabilities		172,861			108,922

Long-term obligations (less current portion)		3,097			3,006
Deferred revenue (less current portion)		-			45,954
Accrued pension and postretirement benefits		118,354			115,424
Total liabilities		294,312			273,306

Stockholders’ equity:
Common stock, $0.001 par value (20,000,000 and 40,000,000 shares authorized, 10,000,000 and 11,650,000 issued and outstanding at September 30, 2006 and June 30, 2007, respectively)		10			12
Preferred stock, $0.001 par value (20,000,000 shares authorized, 0 shares issued and outstanding)		-			-
Additional paid-in capital		122,937			212,351
Accumulated earnings		27,760			76,089
Accumulated other comprehensive income		841			3,117
Total stockholders’ equity		151,548			291,569
Total liabilities and stockholders’ equity	$	445,860		$	564,875

The accompanying notes are an integral part of these financial statements.

Page 1 of 34

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except share and per share data)

	Three Months Ended June 30,				Nine Months Ended June 30,
	2006		2007		2006		2007
Net revenues	$	114,932	$	141,087	$	320,320	$	398,886
Cost of sales		81,698		104,148		241,181		287,993
Selling, general and administrative expense		10,825		10,871		29,637		29,152
Research and technical expense		622		747		1,957		2,225
Operating income		21,787		25,321		47,545		79,516
Interest expense, net		1,852		263		5,817		3,338
Income before income taxes		19,935		25,058		41,728		76,178
Provision for income taxes		7,960		7,317		16,461		27,849
Net income	$	11,975	$	17,741	$	25,267	$	48,329
Net income per share:
Basic	$	1.20	$	1.52	$	2.53	$	4.55
Diluted	$	1.16	$	1.49	$	2.47	$	4.40
Weighted average shares outstanding:
Basic		10,000,000		11,650,000		10,000,000		10,616,484
Diluted		10,319,344		11,913,310		10,242,849		10,981,509

The accompanying notes are an integral part of these financial statements.

Page 2 of 34

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in thousands)

	Three Months Ended June 30,				Nine Months Ended June 30,
	2006		2007		2006		2007
Net income	$	11,975	$	17,741	$	25,267	$	48,329
Other comprehensive income, net of tax:
Foreign currency translation adjustment		2,314		589		1,958		2,276
Comprehensive income	$	14,289	$	18,330	$	27,225	$	50,605

The accompanying notes are an integral part of these financial statements.

Page 3 of 34

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Nine Months Ended June 30,
Cash flows from operating activities:	2006			2007
Net income	$	25,267		$	48,329
Depreciation		4,888			5,474
Amortization		1,473			843
Stock compensation expense		2,055			2,359
Excess tax benefit from option exercises		—			(7,888	)
Deferred revenue		—			48,454
Deferred income taxes		(4,878	)		2,775
Loss on disposal of property		(224	)		51
Change in assets and liabilities:
Accounts receivable		(16,865	)		(4,412	)
Inventories		(26,522	)		(102,540	)
Other assets		(743	)		(2,695	)
Accounts payable and accrued expenses		(1,927	)		33,693
Income taxes payable		7,604			1,272
Accrued pension and postretirement benefits		3,072			(3,242	)
Net cash provided by (used in) operating activities		(6,800	)		22,473
Cash flows from investing activities:
Additions to property, plant and equipment		(7,246	)		(11,132	)
Change in restricted cash		110			110
Net cash used in investing activities		(7,136	)		(11,022	)
Cash flows from financing activities:
Net increase (decrease) in revolving credit		17,942			(99,032	)
Proceeds from equity offering, net		—			72,753
Proceeds from exercise of stock options		—			6,083
Excess tax benefit from option exercises		—			7,888
Changes in long-term obligations		—			(123	)
Net cash provided by (used in) financing activities		17,942			(12,431	)

Effect of exchange rates on cash		81			224
Increase (decrease) in cash and cash equivalents		4,087			(756	)

Cash and cash equivalents, beginning of period		2,886			6,182
Cash and cash equivalents, end of period	$	6,973		$	5,426

Supplemental disclosures of cash flow information:
Cash paid during period for: Interest (net of capitalized interest)	$	5,764		$	3,198
Income taxes	$	14,115		$	23,818

The accompanying notes are an integral part of these financial statements.

Page 4 of 34

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 accompanying unaudited condensed interim consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and such principles are applied on a basis consistent with information reflected in our Form 10-K for the year ended September 30, 2006 filed with the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations promulgated by the United States Securities and Exchange Commission. In the opinion of the management, the interim financial information includes all adjustments and accruals, consisting only of normal recurring adjustments, which are necessary for a fair presentation of results for the respective interim periods. The results of operations for the three and nine months ended June 30, 2007 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.

Equity Offering

On March 23, 2007, the Company completed an equity offering, which resulted in the issuance of 1,200,000 shares of its common stock at a price of $65.00 per share. The net proceeds to the Company after underwriting discounts, commissions and offering expenses were $72,753. As a part of the offering, certain employees and directors exercised 450,000 stock options and the payment of the exercise price for those stock options resulted in an additional $6,083 in proceeds to the Company.

Note 2. New Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an 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.

Page 5 of 34

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 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 post-retirement 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 Company’s financial position would be a reduction in pension and post-retirement benefits liability of $5,200, an increase in stockholders’ equity-accumulated other comprehensive income of $3,200, and a reduction of deferred tax assets of $2,000. 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 Company’s 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 SEC issued Staff Accounting Bulletin No. 108, Quantifying Misstatements (“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 Company’s financial position or results of operations.

In February 2006, the FASB issued FASB Statement No. 155, Accounting for Certain Hybrid Financial Instruments—an 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 entity’s first fiscal year that begins after September 15, 2006. The adoption of SFAS 155 did not have a material impact on the Company’s results of operations or financial position.

In February 2007, the FASB issued FASB Statement No. 159, Establishing the Fair Value Option for Financial Assets and Liabilities (“SFAS 159”), to permit all entities to choose to elect to measure eligible financial instruments at fair value. SFAS 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS 157, Fair Value Measurements. An entity is prohibited from retrospectively applying SFAS 159, unless it chooses early adoption. Management is currently evaluating the impact of SFAS 159 on the consolidated financial statements.

Page 6 of 34

Note 3. Inventories

The following is a summary of the major classes of inventories:

	September 30, 2006		June 30, 2007
Raw materials	$	7,214	$	17,647
Work-in-process		96,674		162,013
Finished goods		74,575		102,987
Other, net		1,249		1,737
	$	179,712	$	284,384

Note 4. Income Taxes

Income tax expense for the three and nine months ended June 30, 2006 and 2007, differed from the U.S. federal statutory rate of 35% due to state income taxes and differing tax rates on foreign earnings and amended tax returns to claim favorable items from extraterritorial income exclusion and foreign tax credits. During the nine month period ended June 30, 2007, amended returns prior to August 31, 2004 (the date of implementation of fresh start accounting resulting from the plan of reorganization) were recorded as a reduction of goodwill of $944 and an increase to both deferred income tax assets and current income tax benefit.

Note 5. Pension and Post-retirement Benefits

Components of net periodic pension and post-retirement benefit cost for the three and nine months ended June 30, 2006 and 2007 are as follows:

	Three Months Ended June 30,											Nine Months Ended June 30,
	Pension Benefits						Other Benefits					Pension Benefits						Other Benefits
	2006			2007			2006		2007			2006			2007			2006		2007
Service cost	$	842		$	1,044		$	98	$	361		$	2,604		$	3,161		$	1,451	$	1,083
Interest cost		2,276			2,430			262		1,115			7,033			7,361			3,862		3,345
Expected return		(2,533	)		(2,590	)		—		—			(7,829	)		(7,844	)		—		—
Amortization		—			—			66		(1,032	)		—			—			974		(3,096	)
Net periodic benefit cost	$	585		$	884		$	426	$	444		$	1,808		$	2,678		$	6,287	$	1,332

The Company contributed $3,131 to the Company sponsored domestic pension plans, $3,362 to its other post-retirement benefit plans and $842 to the U.K. pension plan for the nine months ended June 30, 2007. The Company presently expects to contribute an additional $560 to its domestic pension plans, $1,638 to its other post-retirement benefit plans and $281 to its U.K. pension plan for the remainder of fiscal 2007.

During March 2006, the Company communicated to employees and plan participants a negative plan amendment that caps the Company’s liability related to total retiree health care costs at $5,000 annually, effective January 1, 2007. An updated actuarial valuation was performed at March 31, 2006, which reduced the accumulated post-retirement benefit liability due to this plan amendment by $46,313, and that amount 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.

Salaried employees hired after December 31, 2005 and hourly employees hired after June 30, 2007 are not eligible to participate in the defined benefit pension plan; however, they are eligible for an enhanced matching benefit pursuant to the 401(k) defined contribution plan.

Page 7 of 34

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 and intellectual property matters. Future expenditures for environmental, intellectual property 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 Company's financial position, results of operations or cash flows.

The Company believes that any and all claims arising out of conduct or activities that occurred prior to March 29, 2004 are subject to dismissal. On March 29, 2004, the Company and certain of its subsidiaries and affiliates filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Indiana (the “Bankruptcy Court”). On August 16, 2004, the Bankruptcy Court entered its Findings of Fact, Conclusions of Law, and Order Under 11 U.S.C. 1129(a) and (b) and Fed. R. Bankr. P. 3020 Confirming the First Amended Joint Plan of Reorganization of Haynes International, Inc. and its Affiliated Debtors and Debtors-in-Possession as Further Modified (the “Confirmation Order”). The Confirmation Order and related Chapter 11 Plan, among other things, provide for the release and discharge of prepetition claims and causes of action. The Confirmation Order further provides for an injunction against the commencement of any actions with respect to claims held prior to the Effective Date of the Plan. The Effective Date occurred on August 31, 2004. When appropriate, the Company pursues the dismissal of lawsuits premised upon claims or causes of action discharged in the Confirmation Order and related Chapter 11 Plan. The success of this strategy is dependent upon a number of factors, including the respective court’s interpretation of the Confirmation Order and the unique circumstances of each case.

The Company is currently, and has in the past, been subject to claims involving personal injuries allegedly relating to its products. In February 2007, the Company, along with numerous other manufacturers, was named in a lawsuit in the state of California involving welding rod-related injuries. In addition, as previously disclosed, the Company is currently a party to similar such lawsuits in California and in Texas. All three cases similarly allege that the welding related products of the defendant manufacturer harmed the users of such products through the inhalation of welding fumes containing manganese. Both of the cases pending in the state of California were removed to federal court in the second fiscal quarter of 2007. The Company believes that it has defenses to the allegations in these three cases 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 lawsuits filed in the state of California, with similar allegations. 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 Company’s 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 pending cases, the Company cannot assure investors that the claims against it 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.

Page 8 of 34

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. Closure certification was received in fiscal 1988 for the South Landfill at the Kokomo facility and post-closure care is permitted and is ongoing there. The Company has permit application with IDEM pending for approval of post-closure care for the North Landfill at its Kokomo facility; closure of the North Landfill was certified in 1999. 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 EPA to close and provide post-closure monitoring and care for the closed hazardous waste lagoon at the Mountain Home, North Carolina facility. The lagoon area has been closed and is currently undergoing post-closure care. The Company is required to monitor groundwater and to continue post closure maintenance of the former disposal area 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 June 30, 2007, 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.

Page 9 of 34

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. 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 $50,000 up-front fee and will also pay the Company for its processing services during the term of the agreement (20 years) at prices established by the terms of the agreement. 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 $12,000 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 $50,000 will be recognized in income on a straight-line basis over the 20-year term of the agreement. The portion of the up-front fee not recognized in income will be shown as deferred revenue on the consolidated balance sheet. The Company has used the proceeds, net of expenses, of the $50,000 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 the unearned portion (as defined) of the up-front fee. Revenue of $1,546 has been recognized as a part of the straight-line recognition of the $50,000 up-front fee related to this agreement, during the nine months ended June 30, 2007. Taxes will be paid on the up-front fee primarily in fiscal 2008.

Note 8. Intangible Assets and Goodwill

Goodwill was created as a result of the Company’s reorganization pursuant to Chapter 11 of the U.S. Bankruptcy Code and fresh start accounting. The Company adopted SFAS No. 142, Goodwill and Other 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 $1,473 and $843 for the nine months ending June 30, 2006 and 2007, respectively.

Goodwill was adjusted due to amended tax returns prior to August 31, 2004 (the date of implementation of fresh start accounting resulting from the plan of reorganization). The adjustment of $944 decreased goodwill and increased both deferred income tax assets and current income tax benefit.

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The following represents a summary of intangible assets and goodwill at September 30, 2006 and June 30, 2007:

September 30, 2006	Gross Amount		Accumulated Amortization			Adjustments		Carrying Amount
Goodwill	$	42,265	$	-		$	-	$	42,265
Patents		8,667		(3,800	)		-		4,867
Trademarks		3,800		-			-		3,800
Non-compete		590		(161	)		-		429
Other		465		(139	)		-		326
	$	55,787	$	(4,100	)	$	-	$	51,687

June 30, 2007	Gross Amount		Accumulated Amortization			Adjustments			Carrying Amount
Goodwill	$	42,265	$	-		$	(944	)	$	41,321
Patents		8,667		(4,484	)		-			4,183
Trademarks		3,800		-			-			3,800
Non-compete		590		(224	)		-			366
Other		465		(235	)		-			230
	$	55,787	$	(4,943	)	$	(944	)	$	49,900

Estimate of Aggregate Amortization Expense:

Year Ended September 30,
2007 (remainder of fiscal year)	$	285
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 June 30,				Nine Months Ended June 30,
(in thousands except share and per share data)	2006		2007		2006		2007
Numerator:
Net Income	$	11,975	$	17,741	$	25,267	$	48,329
Denominator:
Weighted average shares outstanding - Basic		10,000,000		11,650,000		10,000,000		10,616,484
Effect of dilutive stock options		319,344		263,310		242,849		365,025
Weighted average shares outstanding - Diluted		10,319,344		11,913,310		10,242,849		10,981,509

Basic net income per share	$	1.20	$	1.52	$	2.53	$	4.55
Diluted net income per share	$	1.16	$	1.49	$	2.47	$	4.40

Anti-dilutive weighted average shares with respect to outstanding stock options have been properly excluded from the computation of diluted net income per share. A total of 9,438 and 12,745 anti-dilutive weighted average shares were excluded for the three and nine months ended June 30, 2006, respectively. A total of 6,794 and 2,265 anti-dilutive weighted average shares were excluded for the three and nine months ended June 30, 2007, respectively.

Page 11 of 34

Note 10. Stock-Based Compensation

The Company has two stock option plans that authorize the granting of non-qualified stock options to certain key employees and non-employee directors for the purchase of a maximum of 1,500,000 shares of the Company’s common stock. The original option plan was adopted in August 2004 pursuant to the plan of reorganization and provides for the grant of options to purchase up to 1,000,000 shares of the Company’s common stock. In January 2007, the Company’s Board of Directors adopted a second option plan that provides for options to purchase up to 500,000 shares of the Company’s common stock. Each plan provides for the adjustment of the maximum number of shares for which options may be granted in the event of a stock split, extraordinary dividend or distribution or similar recapitalization event. Unless the Compensation Committee determines otherwise, options granted under the option plans are exercisable for a period of ten years from the date of grant and vest 33 1/3% per year over three years from the grant date.

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. The fair value of the option grants was estimated as of the date of the grant using the Black-Scholes option pricing model with the following assumptions:

Grant Date		Fair Value			Dividend Yield			Risk-free Interest Rate			Expected Volatility			Expected Life
March 30, 2007		$	19.06			0	%		4.54	%		30.00	%		3 years

On March 30, 2007, the Company granted 126,000 options at an exercise price of $72.93, the fair market value of the Company’s common stock on the day of the grant. As a part of the equity offering, 450,000 options were exercised which generated $6,084 cash to the Company and increased the shares of common stock outstanding by 450,000 shares.

The stock-based employee compensation expense for the nine months ended June 30, 2007 was $2,359 ($1,404 net of tax or $.13 per fully diluted share) leaving remaining unrecognized compensation expense at June 30, 2007 of $3,390 to be recognized over a weighted average period vesting of 0.91 years.

The following table summarizes the activity under the stock option plans for the nine months ended June 30, 2007:

	Number of Shares			Weighted Average Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding at September 30, 2006		980,000		$	14.54
Granted		126,000			72.93
Exercised		(450,000	)		13.52			$	23,166,466
Outstanding at June 30, 2007		656,000			26.45		7.87 years	$	38,034,684
Vested or expected to vest		656,000			26.45		7.87 years	$	38,034,684
Exercisable at June 30, 2007		164,995			14.59		7.33 years	$	11,523,223

Page 12 of 34

	Outstanding						Exercisable
Grant Date	Number of Shares		Exercise Price Per Share		Remaining Contractual Life in Years		Number of Shares		Exercise Price Per Share
August 31, 2004		421,451	$	12.80		7.17		141,447	$	12.80
May 5, 2005		16,667		19.00		7.83		8,334		19.00
August 15, 2005		23,334		20.25		8.17		-		20.25
October 1, 2005		14,086		25.50		8.25		4,086		25.50
February 21, 2006		39,462		29.25		8.67		6,128		29.25
March 31, 2006		15,000		31.00		8.75		5,000		31.00
March 30, 2007		126,000		72.93		9.75		-		72.93
		656,000						164,995

Page 13 of 34

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

References to years or portions of years in Management's Discussion and Analysis of Financial Condition and Results of Operations refer to the Company's fiscal years ended September 30, unless otherwise indicated.

This discussion contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements appear in a number of places in this discussion and may include, but are not limited to, statements regarding the intent, belief or current expectations of the Company or its management with respect to, but are not limited to (i) the Company’s strategic plans; (ii) any significant change in customer demand for its products or in demand for its customers’ products; (iii) the Company’s dependence on production levels at its Kokomo facility and its ability to make capital improvements at that facility; (iv) rapid increases in the cost of nickel, energy and other raw materials; (v) the Company’s ability to continue to develop new commercially viable applications and products; (vi) the Company’s ability to recruit and retain key employees; (vii) the Company’s ability to comply, and the costs of compliance, with applicable environmental laws and regulations; (viii) economic and market risks associated with foreign operations and U.S. and world economic and political conditions. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of various factors, many of which are beyond the control of the Company.

The Company has based these forward-looking statements on its current expectations and projections about future events. Although the Company believes that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based upon those assumptions also could be incorrect. Risks and uncertainties, some of which are discussed in Item 1A. of Part 1 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2006, and in Part II, Item 1A. of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, may affect the accuracy of forward-looking statements.

The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview and Recent Developments

Haynes International, Inc. is one of the world’s largest producers of high-performance nickel- and cobalt-based alloys. The Company is focused on developing, manufacturing, marketing and distributing technologically advanced, high-performance alloys, which are used primarily in the aerospace, chemical processing and land-based gas turbine industries. The 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, the Company 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. The Company’s principal products are high-performance alloys in sheet, coil and plate forms and, to a lesser extent, seamless and welded tubulars, bar, billet and wire forms.

On June 27, 2007 the Company announced that the membership of the United Steelworkers Local 2958 (USW) ratified a three-year agreement covering approximately 514 employees at the Company’s Kokomo, Indiana plant and the Lebanon, Indiana service center. The new agreement succeeded an existing agreement that ran through June 11, 2007, which was subsequently extended through June 30. The agreement includes a one-time cash bonus of four thousand dollars for each covered employee, wage increases in 2007, 2008 and 2009, increased scheduling flexibility, closing the defined benefit pension plan to new hires, and increasing the pension multiplier for plan participants. Management believes that the economic effect of the new agreement will be neutral to the Company over the long-term. The one-time cash bonus total of $2.2 million (including employer taxes) was expensed as a current period expense due to the fact that it did not lower the wage rate over the term of the agreement.

Page 14 of 34

Haynes International Limited (“Haynes UK”), a wholly-owned subsidiary of the Company based in the United Kingdom, and Burdale Financial Limited (“Burdale”) entered into a Supplemental Agreement (the “Supplement Agreement”) with an effective date of April 30, 2007, which amended certain terms of the revolving credit facility between Haynes UK and Burdale dated April 2, 2004. Specifically, the Supplemental Agreement extended the maturity date of the UK revolving credit facility to April 2, 2008, reduced the margin included in the interest rate from 3% per year to 2.25% per year, and reduced the commitment fee on the daily undrawn and/or unutilized balance of the facility limit from 0.375% to 0.25%.

Capital Spending

As previously disclosed, the Company’s capital spending for fiscal 2007 and fiscal 2008 is expected to approximate $15.0 million per year. Acceleration of future capital spending beyond what is currently planned may occur to accelerate the realization of the benefits such as improved working capital management, reduced manufacturing costs and increased capacity. Subsequent to fiscal 2008, capital spending for maintenance projects is expected to approximate between $5.0 million to $6.0 million per year. Capital projects for expansion will be in addition to these amounts and will be determined on an ongoing basis.

In the fourth quarter of fiscal 2007 the Company has several planned equipment outages scheduled to complete key capital equipment upgrades. These planned equipment upgrades include the electro slag remelt furnaces, the completion of the majority of the upgrades on the primary cold rolling mill, the MKW100, and completion of the upgrades on one of the Company’s two primary annealing furnaces (which are discussed in greater detail under “Future Uses of Liquidity” below). It is not anticipated that these planned outages will materially impact shipments for the quarter. Significant effort and planning has gone into achieving these upgrades with the least possible machine down time and management anticipates that year-to-year volume growth will continue. The rate of growth in volume over the next twelve to fourteen months could be impacted by any number of factors, including but not limited to the duration of the planned outages or by an unanticipated start-up problem.

With the completion of these major equipment projects in fiscal 2007 and with the completion of the upgrade on the second primary annealing furnace in the first half of fiscal 2008, the Company continues on track with increasing sheet production capacity from 9.0 million pounds to 14.0 million pounds and achieving the objective of shipping 23.5 million pounds of high-performance alloys per year beginning sometime in the period between 2009 and 2011. In addition to the increased capacity available for sheet production, it is anticipated that this increased level of capacity will provide improved cost absorption in the sheet finishing operation and in both the melting and hot rolling operations. Further, management believes the improvements in cost absorption will lead to improved gross margin performance. Shipments of high-performance alloys are up 9.1% for the first three quarters of fiscal 2007 compared to the same period of fiscal 2006, due to a combination of improved demand and improved capacity.

Geographic Growth Markets

China continues to be an expanding market opportunity for the Company particularly with the continued strong gross domestic product growth rate of 11% for 2006 (according to the Wall Street Journal, July 20, 2007) and continuing development in the Chinese aerospace, chemical processing and turbine markets. Shipments from the Company’s U.S. operations into China in fiscal 2000 were $0.3 million, growing to approximately $6.6 million in fiscal 2004 and $23.3 million in the first nine months of fiscal 2007. Part of this growth is attributable to the China Service Center which opened in fiscal 2006. In addition, the Company has started a process of evaluating the possibility of opening a second service center in China due, in part, to the continued growth in the Chinese markets.

Page 15 of 34

India continues to also provide opportunities for shipments from the Company’s U.S. operations, due in part to, the development in the country of our primary markets and to the opening of the sales office in fiscal 2006. Sales from the Company’s U.S. operations to India for the first nine months of fiscal 2007 were $3.2 million compared to sales of less than $0.3 million in fiscal 2003. The Company continues to evaluate whether to open a service center in India at some point in the future.

Alloy Development

The Company continued to see progress in the areas of new alloy development during the quarter. HAYNES® 282® alloy, which is believed to have significant commercial potential, is the subject of a patent application filed in fiscal 2004. HAYNES 282 alloy has excellent formability, fabricability and forgeability. The commercial launch of HAYNES 282 alloy occurred in October 2005 and, since that time, there have been approximately 50 customer tests and evaluations of this product for the hot sections of gas turbines in the aerospace and land-based gas turbine markets, as well as for auto and other high-temperature applications. The Company will continue to actively promote HAYNES 282 alloy through customer engineering visits and technical presentations and papers. In addition to HAYNES 282 alloy, U.S. patent applications were filed in 2006 for the HASTELLOY® HYBRID-BC1™ alloy and HAYNES® NS-163™ alloy. Both of these new materials have significant, medium to long-term commercial potential. Commercial scale-up of HYBRID-BC1 alloy, which has applications in the chemical processing industry, continues. Manufacturing trials are ongoing and market introduction is expected in mid-2008. HAYNES NS-163 alloy is a new alloy with extraordinary high-temperature strength in sheet form, which has applications in the aerospace, land-based gas turbine and auto markets. Data generation and fabrication trials will continue through 2008, with test marketing expected to commence in late 2008 and early 2009. Finally, commercialization of HASTELLOY® C-22HS® alloy also continues. The Company has been providing customers with samples of this alloy and making technical presentations since 2004. Testing and evaluation of the alloy is ongoing with special emphasis on applications for the oil and gas market. Although, the above alloys are in the early stages of commercialization and pounds sold to date are very low compared to the Company’s other proprietary alloys, these alloys, (particularly HAYNES 282 alloy) are significantly further along the commercialization curve when compared to historical trends for other proprietary alloys introduced by the Company. In addition to the commercial scale-up of these alloys, the Company continues to research new alloys not yet ready to begin the commercialization process.

Page 16 of 34

Quarterly Market Information

Set forth below is selected data relating to the Company’s backlog, the average nickel price per pound, as well as breakdown of net revenues, shipments and average selling prices to the markets served by Haynes for the periods shown. This data should be read in conjunction with the consolidated financial statements and related notes thereto and the remainder of the “Management’s discussion and analysis of financial condition and results of operations” included in this quarterly report.

	Quarter Ended								Quarter Ended
	December 31, 2005		March 31, 2006		June 30, 2006		September 30, 2006		December 31, 2006		March 31, 2007		June 30, 2007
*Backlog*¹
Dollars (in thousands)	$	203,497	$	207,392	$	200,820	$	206,922	$	206,859	$	237,589	$	258,867
Pounds (in thousands)		8,229		8,306		7,972		8,097		7,575		8,454		8,551
Average selling price per pound	$	24.73	$	24.97	$	25.19	$	25.56	$	27.31	$	28.10	$	30.27

*Average nickel price per pound*
London Metals Exchange ²	$	6.09	$	6.76	$	9.41	$	13.67	$	15.68	$	21.01	$	18.92

The Company defines backlog to include firm commitments from customers for delivery of product at established prices. Approximately 30% of the orders in the backlog at any given time include prices that are subject to adjustment based on changes in raw material costs. Historically, approximately 75% of the backlog orders have shipped within six months and approximately 90% have shipped within 12 months. The backlog figures do not reflect that portion of the business conducted at service and sales centers on a spot or “just-in-time” basis.

Average price for a 30 day cash buyer as reported by the London Metals Exchange.

	Quarter Ended								Quarter Ended
	December 31, 2005		March 31, 2006		June 30, 2006		September 30, 2006		December 31, 2006		March 31, 2007		June 30, 2007
*Net revenues* (in thousands)
Aerospace	$	38,901	$	42,428	$	41,886	$	42,532	$	43,827	$	48,232	$	55,317
Chemical processing		27,530		34,422		38,274		29,196		38,778		37,701		31,495
Land-based gas turbines		14,699		17,122		19,670		26,456		20,076		27,993		26,812
Other markets		12,461		16,118		13,521		14,248		15,671		20,352		24,598
Other revenue		818		891		1,581		1,652		2,110		3,059		2,865
Net revenues	$	94,409	$	110,981	$	114,932	$	114,084	$	120,462	$	137,337	$	141,087

*Shipments by markets*(in thousands of pounds)
Aerospace		1,859		1,802		1,752		1,708		1,780		1,701		1,973
Chemical processing		1,080		1,378		1,452		1,074		1,479		1,322		1,082
Land-based gas turbines		963		1,105		1,234		1,488		1,144		1,382		1,256
Other markets		1,158		1,319		1,220		1,052		1,053		1,320		1,538
Total shipments		5,060		5,604		5,658		5,322		5,456		5,725		5,849

*Average selling price per pound*
Aerospace	$	20.93	$	23.54	$	23.91	$	24.90	$	24.62	$	28.36	$	28.04
Chemical Processing		25.49		24.98		26.36		27.18		26.22		28.52		29.11
Land based gas turbines		15.26		15.50		15.94		17.78		17.55		20.26		21.35
Other markets		10.76		12.22		11.08		13.54		14.88		15.42		15.99

Total average selling price		18.66		19.80		20.31		21.44		22.08		23.99		24.12

Page 17 of 34

Results of Operations for the Three Months Ended June 30, 2007 Compared to the Three Months Ended June 30, 2006.

The following table includes a breakdown of net revenues, shipments, and average selling prices to the markets served by Haynes for the periods shown.

($ in thousands)	Three Months Ended June 30,								Change
	2006				2007				Amount			%
Net revenues	$	114,932	100.0	%	$	141,087	100.0	%	$	26,155			22.8	%
Cost of sales		81,698	71.1			104,148	73.8			22,450			27.5
Selling, general and administrative expense		10,825	9.4			10,871	7.7			46			0.4
Research and technical expense		622	0.5			747	0.5			125			20.1
Operating income		21,787	19.0			25,321	18.0			3,534			16.2
Interest expense, net		1,852	1.6			263	0.2			(1,589	)		(85.8	)
Income before income taxes		19,935	17.3			25,058	17.8			5,123			27.5
Provision for income taxes		7,960	6.9			7,317	5.2			(643	)		(8.1	)
Net income	$	11,975	10.4	%	$	17,741	12.6	%	$	5,766			48.2	%

By market	Three Months Ended June 30,				Change
	2006		2007		Amount			%
*Net revenues* (dollars in thousands)
Aerospace	$	41,886	$	55,317	$	13,431			32.1	%
Chemical processing		38,274		31,495		(6,779	)		(17.7	)
Land-based gas turbines		19,670		26,812		7,142			36.3
Other markets		13,521		24,598		11,077			81.9
Other revenue		1,581		2,865		1,284			81.2
Net revenues	$	114,932	$	141,087	$	26,155			22.8	%

*Pounds by markets*(in thousands)
Aerospace		1,752		1,973		221			12.6	%
Chemical processing		1,452		1,082		(370	)		(25.5	)
Land-based gas turbines		1,234		1,256		22			1.8
Other markets		1,220		1,538		318			26.1
Total shipments		5,658		5,849		191			3.4	%

*Average selling price per pound*
Aerospace	$	23.91	$	28.04	$	4.13			17.3	%
Chemical processing		26.36		29.11		2.75			10.4
Land-based gas turbines		15.94		21.35		5.41			33.9
Other markets		11.08		15.99		4.91			44.3

Total average selling price		20.31		24.12		3.81			18.7

Page 18 of 34

Net Revenues. Net revenues increased by $26.2 million, or 22.8%, to $141.1 million in the third quarter of fiscal 2007 from $114.9 million in the same period of fiscal 2006. Volume for all products increased by 3.4% to 5.8 million pounds in the third quarter of fiscal 2007 from 5.7 million pounds in the same period of fiscal 2006. Volume of high-performance alloys increased by 5.3% to 5.0 million pounds in the third quarter of fiscal 2007 from 4.8 million pounds in the same period of fiscal 2006. Volume of stainless steel wire decreased by 7.0% to 0.82 million pounds in the third quarter of fiscal 2007 from 0.88 million pounds in the same period of fiscal 2006 as a result of the Company’s strategy to reduce production of stainless steel wire and increase production of high-performance alloy wire due to the higher average selling price available on high-performance alloy wire. The average selling price per pound for all products increased by 18.7% to $24.12 per pound in the third quarter of fiscal 2007 from $20.31 per pound in the same period of fiscal 2006, due primarily to continuing good market demand and passing through of higher raw material prices. The Company’s consolidated backlog increased in the third quarter by $21.3 million, or 9.0%, to $258.9 million at June 30, 2007 from $237.6 million at March 31, 2007. Order entry increased by $59.5 million, or 58.5%, for the third quarter of fiscal 2007 from the same period of fiscal 2006. As discussed in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2006, management expects the current level of demand for high-performance alloys to follow the trends currently being experienced in the aerospace and chemical processing markets (which is expected to include both original equipment manufacture and construction, as well as maintenance), and the land-based gas turbine market.

Sales to the aerospace market increased by 32.1% to $55.3 million in the third quarter of fiscal 2007 from $41.9 million in the same period of fiscal 2006, due to a 17.3% increase in the average selling price per pound, combined with a 12.6% increase 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. Volume has improved as a result of the strength in the build rate for new aircraft.

Sales to the chemical processing market decreased by 17.7% to $31.5 million in the third quarter of fiscal 2007 from $38.3 million in the same period of fiscal 2006, due to a 25.5% decrease in volume slightly offset by a 10.4% increase in the average selling price per pound. The increase in the average selling price is primarily due to the effect of passing through higher raw material costs. The decline in volume between quarters is due to the project oriented nature of the market where the comparisons of volume shipped between quarters can be affected by timing, quantity and order size of project business. Sales to the chemical processing market were impacted in the quarter by the fact that a high number of international shipments had not reached their port of destination prior to the end of the quarter. The Company's revenue recognition policy requires that the Company not recognize revenue on certain foreign shipments until title to that shipment has passed at the foreign port. Of the $5.2 million in revenue that was deferred in the quarter as a result of this revenue recognition policy, $4.0 million of the deferral was attributed to the chemical processing market (primarily on shipments to China for project business) as compared to $1.4 million deferred in the chemical processing market in the third quarter of fiscal 2006.

Sales to the land-based gas turbine market increased by 36.3% to $26.8 million for the third quarter of fiscal 2007 from $19.7 million in the same period of fiscal 2006, due to an increase of 33.9% in the average selling price per pound and a 1.8% increase in volume. The increase in the average selling price is due to a change in product form mix from lower average selling priced billet product to a higher average selling priced sheet product and the effect of passing through higher raw material cost. Volume continued to be good 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 81.9% to $24.6 million in the third quarter of fiscal 2007 from $13.5 million in the same period of fiscal 2006, due to a 44.3% increase in average selling price per pound, combined with a 26.1% increase in volume. The increase in average selling price is due to continuing good market demand, a higher proportion of high-performance alloys (rather than stainless steel) as a percent of the total and the passing through of higher raw material costs. The primary reason for the increase in total sales volume of the “other markets” category is due to the Company’s continuing effort to expand the amount sold into this category and the number of other markets within this category the Company services beyond the traditional three major markets typically discussed. In the current quarter, sales dollars and pounds to the flue gas desulphurization (FGD) market increased by $6.9 million and 270,000 pounds respectively, compared to the same period in the prior year. As previously discussed, the volume of stainless steel wire decreased in the third quarter of fiscal 2007 compared to volume in the same period of the prior year as a result of the Company’s strategy to reduce production of stainless steel wire to allow greater production of high-performance alloy wire. Volume of stainless steel wire decreased by 7.0%, while volume of high-performance alloys sold to other markets increased 110.5% in the third quarter of fiscal 2007 as compared to the same period of fiscal 2006.

Page 19 of 34

Other Revenue. Other revenue increased by 81.2% to $2.9 million in the third quarter of fiscal 2007 from $1.6 million for the same period of fiscal 2006. The increase is due to higher activity in toll conversion, revenue recognized from the TIMET agreement, scrap sales and miscellaneous sales.

Cost of Sales. Cost of sales as a percentage of net revenues increased to 73.8% in the third quarter of fiscal 2007 from 71.1% in the same period of fiscal 2006. The increase in the percentage of cost of sales can be attributed to a bonus accrual to union employees upon ratification of the collective bargaining agreement of $2.2 million (or 1.6% of net revenue) and higher raw materials cost resulting from a significant increase in the cost of nickel, which makes up approximately 51% of the Company’s raw material costs. The average price for a cash buyer of nickel as reported by the London Metals Exchange for the 30 days ending June 30, 2007 was $18.92 compared to $9.41 for the 30 days ending June 30, 2006. This increase in cost was partially offset by reductions in manufacturing cost resulting from the capital improvements program.

Selling, General and Administrative Expenses. Selling, general and administrative expenses remained nearly flat, at $10.9 million in the third quarter of fiscal 2007 compared to $10.8 million for the same period of fiscal 2006. The increase is due to increased expenses as a result of increased net revenue, such as commissions. Selling, general and administrative expenses as a percentage of net revenues decreased to 7.7% in the third quarter of fiscal 2007 compared to 9.4% for the same period of fiscal 2006, primarily due to increased revenue.

Research and Technical Expense. Research and technical expense remained nearly flat at $0.7 million in the third quarter of fiscal 2007 compared to $0.6 million for the same period of fiscal 2006. Research and technical expense as a percentage of net revenues remained flat at 0.5%.

Operating Income. As a result of the above factors, operating income in the third quarter of fiscal 2007 was $25.3 million compared to $21.8 million in the same period of fiscal 2006.

Interest Expense. Interest expense decreased to $0.3 million in the third quarter of fiscal 2007 from $1.9 million for the same period of fiscal 2006 due to a lower average balance outstanding.

Income Taxes. Income tax expense decreased to $7.3 million in the third quarter of fiscal 2007 from $8.0 million in the same period of fiscal 2006. The effective tax rate for the third quarter of fiscal 2007 was 29.2% compared to 39.9% in the same period of fiscal 2006. The decrease in effective tax rate primarily relates to (i) amended tax returns during the third quarter to claim favorable items from extraterritorial income exclusion and foreign tax credits and (ii) higher foreign taxable income at a lower tax rate as compared to taxable income in the U.S. at a higher tax rate.

Net Income. As a result of the above factors, net income increased by $5.8 million, or 48.2%, to $17.7 million in the third quarter of fiscal 2007 from $12.0 million in the same period of fiscal 2006. Net income includes stock compensation expense (net of tax benefit) of $0.5 million or $.05 per fully diluted share in the third quarter of fiscal 2007 and $0.4 million of $.04 per fully diluted share in the same period of 2006.

Page 20 of 34

Results of Operations for the Nine Months Ended June 30, 2007 Compared to the Nine Months Ended June 30, 2006.

The following table includes a breakdown of net revenues, shipments and average selling prices to the markets served by Haynes for the periods shown.

($ in thousands)	Nine Months Ended June 30,								Change
	2006				2007				Amount			%
Net revenues	$	320,320	100.0	%	$	398,886	100.0	%	$	78,566			24.5	%
Cost of sales		241,181	75.3			287,993	72.2			46,812			19.4
Selling, general and administrative expense		29,637	9.3			29,152	7.3			(485	)		(1.6	)
Research and technical expense		1,957	0.6			2,225	0.6			268			13.7
Operating income		47,545	14.8			79,516	19.9			31,971			67.2
Interest expense, net		5,817	1.8			3,338	0.8			(2,479	)		(42.6	)
Income before income taxes		41,728	13.0			76,178	19.1			34,450			82.6
Provision for income taxes		16,461	5.1			27,849	7.0			11,388			69.2
Net income	$	25,267	7.9	%	$	48,329	12.1	%	$	23,062			91.3	%

By market	Nine Months Ended June 30,				Change
*Net revenues* (dollars in thousands)	2006		2007		Amount			%
Aerospace	$	123,215	$	147,376	$	24,161			19.6	%
Chemical processing		100,226		107,974		7,748			7.7
Land-based gas turbines		51,491		74,881		23,390			45.4
Other markets		42,102		60,621		18,519			44.0
Other revenue		3,286		8,034		4,748			144.5
Net revenues	$	320,320	$	398,886	$	78,566			24.5	%

*Pounds by markets* (in thousands)
Aerospace		5,413		5,454		41			0.8	%
Chemical processing		3,910		3,883		(27	)		(0.7	)
Land-based gas turbines		3,302		3,782		480			14.5
Other markets		3,697		3,911		214			5.8
Total shipments		16,322		17,030		708			4.3	%
*Average selling price per pound*
Aerospace	$	22.76	$	27.02	$	4.26			18.7	%
Chemical processing		25.63		27.81		2.17			8.5
Land-based gas turbines		15.59		19.80		4.21			27.0
Other markets		11.39		15.50		4.11			36.1
Total average selling price		19.63		23.42		3.80			19.3

Page 21 of 34

Net Revenues. Net revenues increased by $78.6 million, or 24.5%, to $398.9 million in the first nine months of fiscal 2007 from $320.3 million in the same period of fiscal 2006. Volume for all products increased by 4.3% to 17.0 million pounds in the first nine months of fiscal 2007 from 16.3 million pounds in the same period of fiscal 2006. Volume of high-performance alloys increased by 9.1% to 15.0 million pounds in the first nine months of fiscal 2007 from 13.7 million pounds in the same period of fiscal 2006. Volume of stainless steel wire decreased by 21.2% to 2.0 million pounds in the first nine months of fiscal 2007 from 2.6 million pounds in the same period of fiscal 2006 as a result of the Company’s strategy to reduce production of stainless steel wire and increase production of high-performance alloy wire due to the higher average selling price available on high-performance alloy wire. The average selling price per pound for all products increased by 19.3% to $23.42 per pound in the first nine months of fiscal 2007 from $19.63 per pound in the same period of fiscal 2006, due primarily to continued good market demand and passing through of higher raw material prices. The Company’s consolidated backlog increased by $52.0 million, or 25.1%, to $258.9 million at June 30, 2007 from $206.9 million at September 30, 2006. Order entry increased by $121.1 million, or 38.2%, for the first nine months of fiscal 2007 from the same period of fiscal 2006. As discussed in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2006, management expects the current level of demand for high-performance alloys to follow the trends currently being experienced in the aerospace and chemical processing markets (which is expected to include both original equipment manufacture and construction, as well as maintenance), and the land-based gas turbine market.

Sales to the aerospace market increased by 19.6% to $147.4 million in the first nine months of fiscal 2007 from $123.2 million in the same period of fiscal 2006, due to a 18.7% increase in the average selling price per pound, combined with a slight increase in volume of 0.8%. 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. Volume has slightly increased due to continued good market demand.

Sales to the chemical processing market increased by 7.7% to $108.0 million in the first nine months of fiscal 2007 from $100.2 million in the same period of fiscal 2006, due to a 8.5% increase in the average selling price per pound, offset by a 0.7% decrease in volume. The increase in the average selling price is due to continuing good market demand and the effect of passing through higher raw material costs. Volume has slightly decreased due to project oriented nature of the market and higher amount of deferred revenue at the end of the period. Sales to the chemical processing market were impacted in the quarter by the fact that a high number of international shipments had not reached their port of destination prior to the end of the quarter. The Company's revenue recognition policy requires that the Company not recognize revenue on certain foreign shipments until title to that shipment has passed at the foreign port. Of the $5.2 million in revenue that was deferred in the quarter as a result of this revenue recognition policy, $4.0 million of the deferral was attributed to the chemical processing market (primarily on shipments to China for project business), as compared to $1.4 million deferred in the chemical processing market in the third quarter of fiscal 2006.

Sales to the land-based gas turbine market increased by 45.4% to $74.9 million for the first nine months of fiscal 2007 from $51.5 million in the same period of fiscal 2006, due to an increase of 27.0% in the average selling price per pound and a 14.5% 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 44.0% to $60.6 million in the first nine months of fiscal 2007 from $42.1 million in the same period of fiscal 2006, due to a 36.1% increase in average selling price per pound, combined with 5.8% increase in volume. The increase in average selling price is due to continuing good market demand, a higher proportion of high-performance alloys (rather than stainless) as a percent of the total and the passing through of higher raw material costs. The primary reason for the increase in total sales volume of the “other markets” category is due to the Company’s continuing effort to expand the amount sold into this category and the number of other markets within this category the Company services beyond the traditional three major markets typically discussed. In the nine months ended June 30, 2007, sales and pounds to the FGD market increased by $8.7 million and 295,000 pounds, respectively, compared to the same period in the prior year. As previously discussed, the volume of stainless steel wire decreased in the period when compared to the same period in the prior year as a result of the Company’s strategy to reduce production of stainless steel wire to allow greater production of high-performance alloy wire. Volume of stainless steel wire decreased by 21.2%, while volume of high-performance alloys sold to other markets increased 68.0% in the first nine months of fiscal 2007 as compared to the same period of fiscal 2006.

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Other Revenue. Other revenue increased by 144.5% to $8.0 million in the first nine months of fiscal 2007 from $3.3 million for the same period of fiscal 2006. The increase is due to higher activity in toll conversion, revenue recognized from the TIMET agreement, scrap sales and miscellaneous sales.

Cost of Sales. Cost of sales as a percentage of net revenues decreased to 72.2% in the first nine months of fiscal 2007 from 75.3% 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 a bonus accrual to union employees upon ratification of the collective bargaining agreement of $2.2 million (0.6% of net revenue) and higher raw material costs. Higher raw material costs result from a significant increase in the cost of nickel, which makes up approximately 51% of the Company’s raw material costs. The average price for a cash buyer of nickel as reported by the London Metals Exchange for the 30 days ending June 30, 2007 was $18.92 compared to $9.41 for the 30 days ending June 30, 2006.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $29.2 million in the first nine months of fiscal 2007 from $29.6 million for the same period of fiscal 2006 primarily due to a reduction in the allowance for doubtful accounts of $0.5 million to reflect a favorable write-off history of minimal write-offs of receivable. Selling, general and administrative expenses as a percentage of net revenues decreased to 7.3% in the first nine months of fiscal 2007 compared to 9.3% for the same period of fiscal 2006 primarily due to increased revenue.

Research and Technical Expense. Research and technical expense increased to $2.2 million in the first nine months of fiscal 2007 from $2.0 million the same period of fiscal 2006.

Operating Income. As a result of the above factors, operating income in the first nine months of fiscal 2007 was $79.5 million compared to $47.5 million in the same period of fiscal 2006.

Interest Expense. Interest expense decreased to $3.3 million in the first nine months of fiscal 2007 from $5.8 million for the same period of fiscal 2006 due to a lower average balance outstanding.

Income Taxes. Income tax expense increased to $27.8 million in the first nine months of fiscal 2007 from $16.5 million in the same period of fiscal 2006. The effective tax rate for the first nine months of fiscal 2007 was 36.6% compared to 39.4% in the same period of fiscal 2006. The decrease in effective tax rate primarily relates to (i) amended tax returns to claim favorable items from extraterritorial income exclusion and foreign tax credits and (ii) higher foreign taxable income at a lower tax rate as compared to taxable income in the U.S. at a higher tax rate.

Net Income. As a result of the above factors, net income increased by $23.1 million, or 91.3% to $48.3 million in the first nine months of fiscal 2007 from $25.3 million in the same period of fiscal 2006. Net income includes stock compensation expense (net of tax benefit) of $1.4 million or $.13 per fully diluted share in the first nine months of fiscal 2007 and $1.3 million or $.12 per fully diluted share in the same period of fiscal 2006.

Liquidity and Capital Resources

On March 23, 2007, the Company completed an equity offering, which resulted in the issuance of 1,200,000 shares of its common stock at a price of $65.00 per share. The net proceeds to the Company after underwriting discounts, commissions and offering expenses were $72.8 million. As a part of the offering, certain employees and directors exercised 450,000 stock options, and the payment of the exercise price for those stock options resulted in an additional $6.1 million in proceeds to the Company.

Page 23 of 34

Comparative Cash Flow Analysis

During the first nine months of fiscal 2007, the Company’s primary sources of cash were (i) the proceeds from its sale of 1.2 million shares of common stock and the exercise of 450,000 stock options in an underwritten public offering, (ii) cash from operations which included the proceeds, net of expenses, of the $50.0 million up-front payment received from TIMET, and (iii) borrowings under its U.S. revolving credit facility with a group of lenders led by Wachovia Capital Finance Corporation (Central) (described below). At June 30, 2007, the Company had cash and cash equivalents of approximately $5.4 million compared to cash and cash equivalents of approximately $6.2 million at September 30, 2006.

Net cash provided by operating activities was $22.5 million (which includes the proceeds, net of expenses, of the $50.0 million up-front payment received from TIMET) in the first nine months of fiscal 2007, as compared to cash used in operating activities of $6.8 million in the same period of fiscal 2006. At June 30, 2007, inventory balances (net of foreign currency adjustments) were approximately $102.5 million higher than at September 30, 2006, as a result of the continued increase in costs of raw materials (nickel, molybdenum and cobalt), a higher level of inventory required to be maintained to support the increased level of sales and a level of safety stock in order to continue production and shipments through the planned outages related to the scheduled capital upgrades. Slightly offsetting the inventory increase is an increase in accounts payable and accrued expenses, which provided cash of $33.7 million. Net cash used in investing activities was $11.0 million in the first nine months of fiscal 2007, primarily as a result of the continuing capital expenditure program. Borrowings on the revolving credit facility decreased by $99.0 million as a result of application of the proceeds from the Company’s sale of common stock and cash generated from operations, which included the proceeds, net of expenses, of the $50.0 million up-front payment received from TIMET, to reduce borrowings. Taxes will be paid related to the TIMET transaction primarily in fiscal year 2008. Also included in cash from financing activities is $7.9 million for the excess tax benefit from the exercise of 450,000 stock options in the underwritten public offering.

Future Sources of Liquidity

The Company’s sources of cash for the remainder of fiscal 2007 and the first nine months of fiscal 2008 are expected to consist primarily of cash generated from operations, cash on hand, and borrowings under both the U.S. revolving credit facility and the U.K. revolving credit facility (described below). The U.S. revolving credit facility and the U.K. revolving credit facility combine to provide borrowing availability in a maximum amount of $135.0 million, subject to a borrowing base formula and certain reserves. The maximum has decreased by $10.0 million due to the elimination of an add-on participant that provided incremental availability that is no longer necessary. At June 30, 2007, the Company had cash of approximately $5.5 million, an outstanding balance of $17.8 million on the U.S. revolving credit facility, an outstanding balance of zero on the U.K. revolving credit facility and had access to a total of approximately $114.1 million under both facilities ($102.2 million in the United States and $11.9 million in the U.K.) in each case subject to borrowing base and certain reserves. Management believes that the resources described above will be sufficient to fund planned capital expenditures and working capital requirements over the next twelve months.

U.S. revolving credit facility. The U.S. revolving credit facility provides for revolving loans in a maximum amount of $120.0 million. Borrowings under the U.S. revolving credit facility bear interest at either Wachovia Bank, National Association’s “prime rate,” plus up to 1.5% per annum, or the adjusted Eurodollar rate used by the lender, plus up to 3.0% per annum, at the Company’s option. As of June 30, 2007, the U.S. revolving credit facility had an outstanding balance of $17.8 million. During the first nine months of fiscal 2007 it bore interest at a weighted average interest rate of 7.51%. In addition, the Company must pay monthly in arrears a commitment fee of 0.375% per annum on the unused amount of the U.S. revolving credit facility total commitment. For letters of credit, the Company must pay 2.5% per annum on the daily outstanding balance of all issued letters of credit, plus customary fees for issuance, amendments, and processing. The Company is subject to certain covenants as to adjusted EBITDA and fixed charge coverage ratios and other customary covenants, including covenants restricting the incurrence of indebtedness, the granting of liens, the sale of assets and the declaration of dividends and other distributions on the Company’s capital stock. As of June 30, 2007, the most recent required measurement date under the agreement documentation, the Company was in compliance with these covenants. The U.S. revolving credit facility matures on April 12, 2009. Borrowings under the U.S. revolving credit facility are collateralized by a pledge of substantially all of the U.S. assets of the Company, including equity interests in its U.S. subsidiaries, but excluding its four-high Steckel rolling mill and related assets, which are pledged to TIMET. The U.S. revolving credit facility is also secured by a pledge of 65% of the equity interests in each of the Company’s foreign subsidiaries.

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U.K. revolving credit facility. The Company’s U.K. subsidiary, Haynes International, Ltd., or Haynes U.K., has entered into an agreement with a U.K.-based lender providing for a $15.0 million revolving credit facility. During the third quarter, the Company amended the U.K. revolving credit facility, which was set to mature April 2, 2007, to extend the maturity date to April 2, 2008, reduce the margin included in the interest rate from 3% per year to 2.25% per year, and to reduce the commitment fee on the daily undrawn and/or unutilized balance of the facility from 0.375% to 0.25%. Haynes U.K. is required to pay interest on loans made under the U.K. revolving credit facility in an amount equal to LIBOR (as calculated in accordance with the terms of the U.K. revolving credit facility), plus 3% per annum. As of June 30, 2007, the U.K. revolving credit facility had an outstanding balance of zero. Availability under the U.K. 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 U.K. revolving credit facility. Haynes U.K. must meet certain financial covenants relating to tangible net worth and cash flow. As of June 30, 2007, the most recent measurement date required under the U.K. revolving credit facility, Haynes U.K. was in compliance with these covenants. The U.K. revolving credit facility is secured by a pledge of substantially all of the assets of Haynes U.K.

Future Uses of Liquidity

The Company’s 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;

income tax payments, including obligations associated with the TIMET conversion agreement;

capital spending to increase capacity and improve reliability and performance of the equipment;

pension plan funding;

reduction of debt; and

interest payments on outstanding indebtedness.

Planned fiscal 2007 and fiscal 2008 capital spending is targeted at $15.0 million in each year, of which, $11.1 million was spent through June 30, 2007. The main projects for the remainder of fiscal 2007 include completing the upgrade on the electro slag remelt furnaces, completion of the upgrade on the primary cold rolling mill, continuing the upgrade of the two annealing furnaces at the Kokomo, Indiana facility and the purchase of a new pilger mill at the Arcadia, Louisiana facility. Spending on the bright anneal lines and pilger mill will continue into fiscal 2008. The final phase of the upgrade, which started in the later part of June 2007 on annealing line #2 (Drever) is scheduled for completion in mid-August 2007. The final phase of the upgrade on annealing line #1 (Electric) is scheduled to start in November 2007 and take approximately four months to complete. During this four-month period, the #1 annealing line will be out of service. The production of sheet product during this time period will be down slightly from historical levels, however, it is not anticipated that shipments will be unfavorably impacted through this period. Management believes that the completion of these capital projects and the related improvements in reliability and performance of the equipment will have a positive effect on profitability and working capital management. As noted, planned downtime is scheduled for the fourth quarter of fiscal 2007 and the first half of fiscal 2008 to implement and complete these capital improvements.

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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. Consideration will also be given to potential strategic acquisitions similar to the November 2004 acquisition of assets of The Branford Wire and Manufacturing Company which complemented the Company’s product line, reduced production costs and increased capacity.

See “Capital Spending” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information on the impact of these capital projects.

Contractual Obligations

The following table sets forth the Company’s contractual obligations for the periods indicated, as of June 30, 2007:

(in thousands)

	Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1-3 Years		3-5 Years		More than 5 years

Debt obligations (including interest)⁽¹⁾	$	21,771	$	1,521	$	20,250	$	—	$	—
Operating lease obligations		7,291		3,281		3,786		224		—
Raw material contracts		101,428		101,428		—		—		—
Mill supplies contracts		177		177		—		—		—
Capital projects		12,108		12,108		—		—		—
Pension plan⁽²⁾		4,558		3,209		1,349		—		—
Other post-retirement benefits⁽³⁾		50,000		5,000		10,000		10,000		25,000
Non-compete obligations⁽⁴⁾		440		110		220		110		—
Total	$	197,773	$	126,834	$	35,605	$	10,334	$	25,000

(1)

Interest is calculated annually using the principal balance and interest rates as of June 30, 2007.

(2)

The Company has a current funding obligation to contribute $4.3 million to the domestic pension plan and all benefit payments under the domestic pension plan will come from the plan and not the Company. The Company expects its U.K. subsidiary to contribute an additional $0.3 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, the Company 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 June 30, 2007, the Company also had a $30,000 outstanding letter of credit. The letter of credit is in connection with a building lease obligation.

New Accounting Pronouncements

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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 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 Company’s 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 assets 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 Company’s debt covenants or cash position. Additionally, the Company does not expect the adoption of SFAS 158 to significantly affect the results of operations.

In February 2006, the FASB issued FASB Statement No. 155, Accounting for Certain Hybrid Financial Instruments—an 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 entity’s first fiscal year that begins after September 15, 2006. The adoption of this statement did not have a material impact on the Company’s results of operations or financial position.

In February 2007, the FASB issued FASB Statement No. 159, Establishing the Fair Value Option for Financial Assets and Liabilities (“SFAS 159”), to permit all entities to choose to elect to measure eligible financial instruments at fair value. SFAS 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the previsions of SFAS 157, Fair Value Measurements. An entity is prohibited from retrospectively applying SFAS 159, unless it chooses early adoption. Management is currently evaluating the impact of SFAS 159 on the consolidated financial statements.

Critical Accounting Policies and Estimates

Overview

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, intangible valuations, 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 mix and in some cases, actuarial techniques, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company 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.

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The Company’s accounting policies are more fully described in the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2006, filed by the Company with the SEC.

Fresh Start Reporting

On March 29, 2004, the Company and certain of its U.S. subsidiaries and U.S. affiliates, filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. As part of the Company’s Chapter 11 proceedings, it filed its 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, the Company 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, the Company’s consolidated financial statements for periods subsequent to August 31, 2004 reflect a new basis of accounting and are not comparable to the historical consolidated financial statements of the Company for periods prior to August 31, 2004.

Under fresh start reporting, the reorganization value is allocated to the Company’s net assets based on their relative fair values in a manner similar to the accounting provisions applied to business combinations under Statement of Financial Accounting Standards No. 141, Business Combinations (“SFAS No. 141”). Information concerning the determination of the Company’s reorganization value is included in Note 1 to the audited consolidated financial statements included in Form 10-K. 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 Recognition

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 have not had any history of returns that have exceeded recorded allowances.

Pension and Post-Retirement Benefits

The Company has defined benefit pension and post-retirement 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 plans 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 post-retirement 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.

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The following table demonstrates the estimated effect of a 1% change in the following assumptions:

Pension plan expense	Estimated change in expense
1% change in discount rate	$	1.7 Million
1% change in the return on assets assumption	$	1.1 Million
1% change in the salary scale assumption	$	1.7 Million
Post-retirement medical and life insurance expense
1% change in the discount rate	$	0.7 Million

The Company believes the expected rate of return on plan assets of 8.5% is a reasonable assumption based on its target asset allocation of 60% equity and 40% fixed income. The Company’s assumption for expected weighted average rate of return for plan assets for equity and fixed income are 10.125% and 5.75%, 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 and hourly employees hired after June 30, 2007 are not covered by the defined benefit 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

The Company reviews long-lived assets (both with finite and infinite lives) for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of the asset to the undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount exceeds the fair value of the asset. The Company reviews goodwill for impairment annually or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. Recoverability of goodwill is measured by a comparison of the carrying value to the fair value or 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 unit’s 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. The Company 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.

Share-Based Compensation

The Company has two stock option plans that authorize the granting of non-qualified stock options to certain key employees and non-employee directors for the purchase of a maximum of 1,500,000 shares of the Company’s common stock. The original option plan was adopted in August 2004 pursuant to the plan of reorganization and provides the grant of options to purchase up to 1,000,000 shares of the Company’s common stock. In January 2007, the Company’s Board of Directors adopted a second option plan that provides for options to purchase up to 500,000 shares of the Company’s common stock. Each plan provides for the adjustment of the maximum number of shares for which options may be granted in the event of a stock split, extraordinary dividend or distribution or similar recapitalization event. Unless the Compensation Committee determines otherwise, options granted under the option plans are exercisable for a period of ten years for the date of grant and vest 33 1/3% per year over three years from the grant date.

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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. 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.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”), which requires deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between book and tax basis of recorded assets and liabilities. SFAS No. 109 also requires deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The determination of whether or not a valuation allowance is needed is based upon an evaluation of both positive and negative evidence. In addition to the reorganization of the Company, the results of operations have improved due to improved market conditions as evidenced by its increasing backlog. In its evaluation of the need for a valuation allowance, the Company assesses prudent and feasible tax planning strategies. The ultimate amount of deferred tax assets realized could be different from those recorded, as influenced by potential changes in enacted tax laws and the availability of future taxable income.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the potential loss arising from adverse changes in market rates and prices. The Company is exposed to various market risks, including changes in interest rates, foreign currency exchange rates and the price of nickel, which is a commodity.

Changes in interest rates affect the Company’s interest expense on variable rate debt. All of the Company’s outstanding debt is variable rate debt at June 30, 2007. A hypothetical 10% increase in interest rate on variable rate debt would have resulted in additional interest expense of $135,000 for the nine months ended June 30, 2007. The Company has not entered into any derivative instruments to hedge the effects of changes in interest rates.

The foreign currency exchange risk exists primarily because the three foreign subsidiaries maintain receivables and payables denominated in currencies other than their functional currency or the U.S. dollar. The foreign subsidiaries manage their own foreign currency exchange risk. The U.S. operations transact their foreign sales in U.S. dollars, thereby avoiding fluctuations in foreign exchange rates. Any U.S. dollar exposure aggregating more than $500,000 requires approval from the Company’s Chief Financial Officer and Vice President of Finance. Most of the currency contracts to buy U.S. dollars are with maturity dates of less than six months. At June 30, 2007, the Company had no foreign currency exchange contracts outstanding.

Fluctuations in the price of nickel, the Company’s most significant raw material, subject the Company to commodity price risk. The Company manages its exposure to this market risk through internally established policies and procedures, including negotiating raw material escalators within product sales agreements, and continually monitoring and revising customer quote amounts to reflect the fluctuations in market prices for nickel. The Company does not use derivative instruments to manage this market risk. The Company monitors its underlying market risk exposure from a rapid increase in nickel prices on an ongoing basis and believes that it can modify or adapt its strategies as necessary.

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Item 4. Controls and Procedures

The Company has performed, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness and the design and operation of the Company’s disclosure controls and procedures (as defined by Exchange Act rules 13a-15(e) and 15d-15(e)) pursuant to Rule 13a-15(b) of the Exchange Act as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2007 in providing reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

During the fiscal quarter ended June 30, 2007 and since the date of the Company’s most recent evaluation described above and made as of June 30, 2007, there were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls and no corrective actions with regard to significant deficiencies and material weaknesses were taken.

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PART II OTHER INFORMATION

Item 6. Exhibits

Exhibits. See Index to Exhibits.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		HAYNES INTERNATIONAL, INC.

		/s/ Francis J. Petro
		Francis J. Petro
		President and Chief Executive Officer
		Date: August 6, 2007



		/s/ Marcel Martin
		Marcel Martin
		Vice President, Finance Chief Financial Officer Date: August 6, 2007

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INDEX TO EXHIBITS

Number Assigned In Regulation S-K Item 601		Description of Exhibit
(3)	3.01	Restated Certificate of Incorporation of Haynes International, Inc. (incorporated by reference to Exhibit 3.1 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).
	3.02	Amended and Restated By-laws of Haynes International, Inc. (incorporated by reference to Exhibit 3.2 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).
(4)	4.01	Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).
(10)	10.01	Supplemental Agreement by and between Haynes International Limited and Burdale Financial Limited, effective as of April 30, 2007 (incorporated by reference to Exhibit 10.1 to the Haynes International, Inc. Form 8-K filed on May 3, 2007).
	10.02	Executive Employment Agreement by and between Haynes International, Inc. and Francis J. Petro, dated June 8, 2007 (incorporated by reference to Exhibit 10.1 to the Haynes International, Inc. Form 8-K filed June 12, 2007.)
(31)	31.01*	Rule 13a-14(a)/15d-14(a) Certification.
	31.02*	Rule 13a-14(a)/15d-14(a) Certification.
(32)	32.01*	Section 1350 Certifications.

*	Filed herewith

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