HAYNES INTERNATIONAL INC - Quarter Report: 2009 June (Form 10-Q)

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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, 2009

 

or

 

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)

 

 

(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 has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o      No  o

 

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

 

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 July 31, 2009, the registrant had 12,096,829 shares of Common Stock, $.001 par value, outstanding.

 

 

 

Table of Contents

 

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

TABLE OF CONTENTS

 

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Financial Statements
	Haynes International, Inc. and Subsidiaries:
	Unaudited Consolidated Balance Sheets as of September 30, 2008 and June 30, 2009	1
	Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2008 and 2009	2
	Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended June 30, 2008 and 2009	3
	Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2008 and 2009	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32
PART II	OTHER INFORMATION
Item 6.	Exhibits	33
	Signatures	34
	Index to Exhibits	35

 

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PART 1         FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share data)

 

		September 30, 2008			June 30, 2009
ASSETS
Current assets:
Cash and cash equivalents		$	7,058		$	83,916
Restricted cash — current portion		110			110
Accounts receivable, less allowance for doubtful accounts of $1,354 and $1,638, respectively		99,295			53,674
Inventories		304,915			198,881
Income taxes receivable		—			21,915
Deferred income taxes		9,399			8,492
Other current assets		2,573			1,255
Total current assets		423,350			368,243
Property, plant and equipment (at cost)		134,523			141,554
Accumulated depreciation		(27,221		)	(34,684		)
Net property, plant and equipment		107,302			106,870
Deferred income taxes — long term portion		32,310			30,720
Prepayments and deferred charges		2,741			2,675
Restricted cash — long term portion		220			110
Goodwill		43,737			—
Other intangible assets, net		7,907			7,457
Total assets		$	617,567		$	516,075
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	41,939		$	26,347
Accrued expenses		12,729			9,836
Income taxes payable		7,482			—
Accrued pension and postretirement benefits		15,016			14,675
Revolving credit facilities		11,812			—
Deferred revenue — current portion		2,500			2,500
Current maturities of long-term obligations		1,515			110
Total current liabilities		92,993			53,468
Long-term obligations (less current portion)		1,582			1,487
Deferred revenue (less current portion)		42,830			40,954
Non-current income taxes payable		276			276
Accrued pension and postretirement benefits		100,343			89,026
Total liabilities		238,024			185,211
Commitments and contingencies (Note 6)		—			—
Stockholders’ equity:
Common stock, $0.001 par value (40,000,000 shares authorized, 11,984,623 and 12,096,829 issued and outstanding at September 30, 2008 and June 30, 2009, respectively)		12			12
Preferred stock, $0.001 par value (20,000,000 shares authorized, 0 shares issued and outstanding)		—			—
Additional paid-in capital		225,821			227,654
Accumulated earnings		155,831			106,522
Accumulated other comprehensive loss		(2,121		)	(3,324		)
Total stockholders’ equity		379,543			330,864
Total liabilities and stockholders’ equity		$	617,567		$	516,075

 

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

 

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HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except share and per share data)

 

		Three Months Ended						Nine Months Ended
		June 30,						June 30,
		2008			2009			2008			2009
Net revenues		$	166,340		$	98,325		$	476,188		$	353,042
Cost of sales		126,223			106,493			365,946			335,463
Gross profit (loss)		40,117			(8,168		)	110,242			17,579
Selling, general and administrative expense		11,007			8,837			31,059			27,719
Research and technical expense		819			757			2,566			2,396
Impairment of goodwill		—			—			—			43,737
Operating income (loss)		28,291			(17,762		)	76,617			(56,273		)
Interest income		(92		)	(42		)	(149		)	(70		)
Interest expense		114			87			951			566
Income (loss) before income taxes		28,269			(17,807		)	75,815			(56,769		)
Provision for (benefit from) income taxes		10,705			(6,863		)	29,345			(7,460		)
Net income (loss)		$	17,564		$	(10,944	)	$	46,470		$	(49,309	)
Net income (loss) per share:
Basic		$	1.47		$	(0.91	)	$	3.91		$	(4.11	)
Diluted		$	1.46		$	(0.91	)	$	3.87		$	(4.11	)
Weighted average shares outstanding:
Basic		11,921,541			12,002,754			11,882,929			11,990,667
Diluted		12,045,253			12,002,754			12,013,792			11,990,667

 

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

 

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HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

 

		Three Months Ended June 30						Nine Months Ended June 30
		2008			2009			2008			2009
Net income (loss)		$	17,564		$	(10,944	)	$	46,470		$	(49,309	)
Other comprehensive income (loss), net of tax:
Pension curtailment		—			—			2,701			—
Foreign currency translation adjustment		(207		)	4,529			2,069			(1,203		)
Comprehensive income (loss)		$	17,357		$	(6,415	)	$	51,240		$	(50,512	)

 

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

 

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HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

			Nine Months Ended June 30,
			2008			2009
Cash flows from operating activities:
Net income (loss)			$	46,470		$	(49,309	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation			6,561			7,649
Amortization			824			766
Impairment of goodwill			—			43,737
Stock compensation expense			1,216			994
Excess tax benefit from option exercises			(2,842		)	9
Deferred revenue - portion recognized			(1,875		)	(1,876		)
Deferred income taxes			1,767			2,858
Loss on disposal of property			223			165
Change in assets and liabilities:
Accounts receivable			11,587			44,591
Inventories			(33,595		)	104,503
Other assets			(934		)	1,388
Accounts payable and accrued expenses			8,953			(17,418		)
Income taxes			4,715			(29,371		)
Accrued pension and postretirement benefits			(12,578		)	(11,658		)
Net cash provided by operating activities			30,492			97,028
Cash flows from investing activities:
Additions to property, plant and equipment			(15,041		)	(7,463		)
Asia distribution expansion and acquisition			(3,000		)	—
Change in restricted cash			110			110
Net cash used in investing activities			(17,931		)	(7,353		)
Cash flows from financing activities:
Net decrease in revolving credit			(13,202		)	(11,812		)
Proceeds from exercise of stock options			1,939			848
Excess tax benefit from option exercises			2,842			(9		)
Payment for debt issuance costs			—			(316		)
Payments on long-term obligations			(139		)	(1,449		)
Net cash used in financing activities			(8,560		)	(12,738		)
Effect of exchange rates on cash			139			(79		)
Increase in cash and cash equivalents			4,140			76,858
Cash and cash equivalents, beginning of period			5,717			7,058
Cash and cash equivalents, end of period			$	9,857		$	83,916
Supplemental disclosures of cash flow information:
Cash paid during period for:	Interest (net of capitalized interest)		$	972		$	512
	Income taxes		$	23,414		$	20,365

 

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

 

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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, 2008 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 SEC related to interim financial statements. In the opinion of 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, 2009 are not necessarily indicative of the results to be expected for the full fiscal year ending September 30, 2009 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 have been eliminated.

 

Note 2.   New Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board (“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.”  On February 12, 2008, the FASB issued Staff Position 157-2 (“FSP 157-2”) which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis.  Therefore for financial assets and liabilities the statement is effective for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years. The Company was required to adopt SFAS 157 (excluding nonfinancial assets and liabilities) beginning on October 1, 2008, which did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

In April 2009, the FASB issued FASB Staff Position 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP 157-4”), which provides additional guidance for applying the provisions of SFAS No. 157. SFAS No. 157 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 under current market conditions. This FSP requires an evaluation of whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. If there has, transactions or quoted prices may not be indicative of fair value and a significant adjustment may need to be made to those prices to estimate fair value. Additionally, an entity must consider whether the observed transaction was orderly (that is, not distressed or forced). If the transaction was orderly, the obtained price can be considered a relevant observable input for determining fair value. If the transaction is not orderly, other valuation techniques must be used when estimating fair value. FSP 157-4 was applied prospectively for interim periods ending after June 15, 2009, which did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

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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 Measurement. An entity is prohibited from retrospectively applying SFAS 159, unless it chooses early adoption.  The Company was required to adopt SFAS 159 beginning on October 1, 2008, which had no impact on the Company’s financial position, results of operations or cash flows.

 

In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), Business Combinations (“SFAS 141(R)”).  SFAS 141(R) requires that the fair value of the purchase price of an acquisition including the issuance of equity securities be determined on the acquisition date; requires that all assets, liabilities, noncontrolling interests, contingent consideration, contingencies, and in-process research and development costs of an acquired business be recorded at fair value at the acquisition date; requires that acquisition costs generally be expensed as incurred; requires that restructuring costs generally be expensed in periods subsequent to the acquisition date; and requires that changes in deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. SFAS 141(R) also expands disclosures related to business combinations. SFAS 141(R) will be applied prospectively to business combinations occurring after the beginning of the Company’s fiscal year 2010, except that business combinations consummated prior to the effective date must apply SFAS 141(R) income tax requirements immediately upon adoption. The Company is currently evaluating the affect the adoption of SFAS 141(R) will have on its financial position, results of operations and cash flows.

 

In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 requires that noncontrolling interests be reported as a separate component of equity, that net income attributable to the parent and to the noncontrolling interest be separately identified in the consolidated statement of operations, that changes in a parent’s ownership interest be accounted for as equity transactions, and that, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. SFAS 160 will be applied prospectively, except for presentation and disclosure requirements which will be applied retrospectively, as of the beginning of the Company’s fiscal year 2010. The Company does not currently have noncontrolling interests, and therefore the adoption of SFAS 160 is not expected to have an impact on the Company’s financial position, results of operations or cash flows.

 

In March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”)—an amendment of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 161 is intended to improve financial reporting transparency regarding derivative instruments and hedging activities by providing investors with a better understanding of their effects on financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company has elected early adoption of SFAS 161 and has included all applicable disclosures in its consolidated financial statements.

 

In May 2008, the FASB issued FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for non-governmental entities. Any effect of applying the provisions of SFAS 162 is to be reported as a change in accounting principle in accordance with SFAS No. 154, Accounting Changes and Error Corrections. The Company adopted SFAS 162, on November 15, 2008, which had no impact on the Company’s financial position, results of operation or cash flows.

 

In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and

 

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the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, and other U.S. GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and early adoption is prohibited. Accordingly, this FSP is effective for the Company on October 1, 2009. The Company is currently evaluating the effect the adoption will have on its consolidated financial statements.

 

In December 2008, the FASB issued FASB Staff Position No. 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (“FSP 132(R)-1”). The FSP requires disclosures of the objectives of postretirement benefit plan assets, investment policies and strategies, categories of plan assets, fair value measurements of plan assets, and significant concentrations of risk. FSP 132(R)-1 is effective for fiscal years and interim periods beginning after December 15, 2009. The adoption of FSP 132(R)-1 is expected to increase our disclosures, but it is not expected to have an impact on our consolidated financial statements.

 

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”), which establishes accounting standards for recognition and disclosure of events that occur after the balance sheet date but before financial statements are issued. These standards are essentially similar to current accounting principles with few exceptions that do not result in a change in general practice. SFAS 165 is effective on a prospective basis for interim or annual financial periods ending after June 15, 2009. The Company adopted this pronouncement effective June 30, 2009, and the adoption of this new standard did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows. Subsequent events were evaluated through August 6, 2009, the date the consolidated financial statements were issued. See Note 12 for identified items.

 

In June 2009, the FASB issued FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“SFAS 168”). The objective of this Statement is to replace SFAS 162 and to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by entities in the preparation of financial statements in conformity with GAAP. SFAS 168 will be effective for financial statements issued for interim and annual periods ending after September 15, 2009. This Statement is not expected to have a significant impact on the Company’s financial statements.

 

Note 3.   Inventories

 

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

 

		September 30, 2008			June 30, 2009
Raw Materials		$	20,343		$	16,680
Work-in-process		155,782			84,391
Finished Goods		127,653			96,842
Other		1,137			968
		$	304,915		$	198,881

 

Note 4.   Income Taxes

 

Income tax expense for the three and nine months ended June 30, 2008 and 2009, differed from the U.S. federal statutory rate of 35% partly due to state income taxes and differing tax rates on foreign earnings. The effective tax rate for the first nine months of fiscal 2009 was a benefit of 13.1% compared to an expense of 38.7% in the same period of fiscal 2008. The decrease in the effective tax rate is primarily attributable to the nondeductible goodwill impairment charge, a change in the reinvestment policy of a foreign entity and lower U.S. taxable income.

 

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, 2008 and 2009, are as follows:

 

		Three Months Ended June 30,												Nine Months Ended June 30,
		Pension Benefits						Other Benefits						Pension Benefits						Other Benefits
		2008			2009			2008			2009			2008			2009			2008			2009
Service cost		$	708		$	597		$	361		$	331		$	2,123		$	1,846		$	1,083		$	995
Interest cost		2,684			2,830			1,115			1,232			8,056			8,734			3,345			3,694
Expected return		(2,852		)	(2,365		)	—			—			(8,554		)	(7,279		)	—			—
Amortizations		202			202			(1,032		)	(1,327		)	606			606			(3,096		)	(3,980		)
Curtailment gain		—			—			—			—			(3,659		)	—			—			—
Net periodic benefit cost (benefit)		$	742		$	1,264		$	444		$	236		$	(1,428	)	$	3,907		$	1,332		$	709

 

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The Company contributed $10,050 to the Company sponsored domestic pension plans, $3,706 to its other post-retirement benefit plans and $683 to the U.K. pension plan for the nine months ended June 30, 2009. The Company presently expects future contributions of $1,950 to its domestic pension plans, $494 to its other post-retirement benefit plans and $384 to the U.K. pension plan for the remainder of fiscal 2009. The Pension Protection Act of 2006 requires funding over a seven year period to achieve 100% funded status.

 

On October 2, 2007, the U.S. pension plan was amended effective December 31, 2007 to freeze benefit accruals for all non-union employees in the U.S. and, effective January 1, 2008, the pension multiplier used to calculate the employee’s monthly benefit was increased from 1.4% to 1.6%. In addition, the Company began making enhanced matching contributions to its 401K plan equal to 60% of the non-union and union plan participant’s salary deferrals, up to 6% of compensation. The Company estimates the redesign of the pension plan, including previous actions to close the plan to new non-union and union employees and the adjustment of the multiplier for non-union and union plan participants, will reduce funding requirements by $23,000 over fiscal years 2008 through 2013. The offsetting estimated incremental cost of the enhanced 401K match is $2,300 over the same six year period. As a result of freezing the benefit accruals for all non-union employees in the U.S. in the first quarter of fiscal 2008, we recognized a reduction of the projected benefit obligation of $8,191, an increase to other comprehensive income  (before tax) of $4,532 and a curtailment gain (before tax) of $3,659. The impact of the multiplier increase will be charged to pension expense over the estimated remaining lives of the participants.

 

Note 6. Environmental and Legal

 

The Company is regularly involved in litigation, both as a plaintiff and as a defendant, relating to its business and operations, including environmental and intellectual property matters. Future expenditures for environmental, intellectual property and other legal matters cannot be determined with any degree of certainty; however, based on the facts presently known, management does not believe that such costs will have a material effect on the Company’s financial position, results of operations or cash flows.

 

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

 

The Company is currently, and has in the past, been subject to claims involving personal injuries allegedly relating to its products. For example, the Company is presently involved in two actions involving welding rod-related injuries, one filed in California state court against numerous manufacturers, including the Company, in February 2007, and a second case in U.S. Federal court filed in January 2009, both alleging that the welding-related

 

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products of the defendant manufacturers harmed the users of such products through the inhalation of welding fumes containing manganese. The Company believes that it has defenses to these allegations and, that if the Company were found liable, the cases would not have a material effect on its financial position, results of operations or liquidity. In addition to these cases, the Company has in the past been named a defendant in several other lawsuits, including 53 filed in the state of California, alleging that its welding-related products harmed the users of such products through the inhalation of welding fumes containing manganese. The Company has since been voluntarily dismissed from all of these lawsuits on the basis of the release and discharge of claims contained in the Confirmation Order. While the Company contests such lawsuits vigorously, and may have applicable insurance, there are several risks and uncertainties that may affect its liability for claims relating to exposure to welding fumes and manganese. For instance, in recent cases, at least two courts (in cases not involving Haynes) have refused to dismiss claims relating to inhalation of welding fumes containing manganese based upon a bankruptcy discharge order. Although the Company believes the facts of these cases are distinguishable from the facts of its cases, there can be no assurance that any or all claims against the Company will be dismissed based upon the Confirmation Order, particularly claims premised, in part or in full, upon actual or alleged exposure on or after the date of the Confirmation Order. It is also possible that the Company will be named in additional suits alleging welding-rod injuries. Should such litigation occur, it is possible that the aggregate claims for damages, if the Company is found liable, could have a material adverse effect on its financial condition, results of operations or liquidity.

 

The Company has received permits from the Indiana Department of Environmental Management, or IDEM, to close and to provide post-closure monitoring and care for certain areas at the Kokomo facility previously used for the storage and disposal of wastes, some of which are classified as hazardous under applicable regulations. Closure certification was received in fiscal 1988 for the South Landfill at the Kokomo facility and post-closure monitoring and care is ongoing there. Closure certification was received in fiscal 1999 for the North Landfill at the Kokomo facility and post-closure monitoring and care are permitted and ongoing there.  In fiscal 2007, IDEM issued a single post-closure permit applicable to both the North and South Landfills, which contain monitoring and post-closure care requirements.  In addition, IDEM required that a Resource Conservation and Recovery Act, or RCRA, Facility Investigation, or RFI, be conducted in order to further evaluate one area of concern and one solid waste management unit.  The RFI commenced in fiscal 2008 and is ongoing.

 

The Company has also received permits from the North Carolina Department of Environment and Natural Resources, or NCDENR, to close and provide post-closure monitoring and care for the hazardous waste lagoon at its Mountain Home, North Carolina facility. The lagoon area has been closed and is currently undergoing post-closure monitoring and care. The Company is required to monitor groundwater and to continue post-closure maintenance of the former disposal areas at each site. As a result, the Company is aware of elevated levels of certain contaminants in the groundwater and additional corrective actions by the Company could be required.

 

Nitric acid leaks were discovered at the Arcadia, Louisiana location in fiscal 2008.  Analytical results were received in March 2008 and the site assessment was provided to the Louisiana Department of Environmental Quality (“LDEQ”) in May.  Remediation of the leaks, including the purchase of new equipment, was substantially complete in fiscal 2008.  A preliminary assessment of the LDEQ authorized the Company’s proposed remedial actions. LDEQ approved the final remediation plan in February 2009. A summary report of remedial actions and testing results was submitted to LDEQ in July 2009, and the Company is awaiting LDEQ’s response.

 

As of June 30, 2009 and September 30, 2008, the Company has accrued $1,517 for post-closure monitoring and maintenance activities. In accordance with Statement of Position 96-1, Environmental Remediation Liabilities, accruals for these costs are calculated by estimating the cost to monitor and maintain each post-closure site and multiplying that amount by the number of years remaining in the 30 year post-closure monitoring period referred to above. At each fiscal year-end, or earlier if necessary, the Company evaluates the accuracy of the estimates for these monitoring and maintenance costs for the upcoming fiscal year. The accrual was based upon the undiscounted amount of the obligation of $2,231 which was then discounted using an appropriate discount rate. The cost associated with closing the sites has been incurred in financial periods prior to those presented, with the remaining cost to be incurred in future periods related solely to post-closure monitoring and maintenance. Based on historical experience, the Company estimates that the cost of post-closure monitoring and maintenance will approximate $125 per year over the remaining obligation period.

 

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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. TIMET paid the Company a $50,000 up-front fee and will also pay the Company for its processing services during the term of the agreement (20 years) at prices established by the terms of the agreement. TIMET may exercise an option to have ten million additional pounds  of titanium converted annually, provided that it offers to loan up to $12,000 to the Company for certain capital expenditures which may be required to expand capacity.  In addition to the volume commitment, the Company has granted TIMET a security interest on its four-high steckel rolling mill, along with rights of access if the Company enters into bankruptcy or defaults on any financing arrangements.  The Company has agreed not to manufacture titanium products (other than cold reduced titanium tubing).  The Company has also agreed not to provide titanium conversion services to any entity other than TIMET for the term of the Conversion Services Agreement.  The agreement contains certain default provisions which could result in contract termination and damages, including the Company being required to return the unearned portion of the upfront fee.  The cash received of $50,000 is recognized in income on a straight-line basis over the 20-year term of the agreement. The portion of the upfront fee not recognized in income is shown as deferred revenue on the consolidated balance sheet.  Taxes were paid on the up-front fee primarily in the first quarter of fiscal 2009.

 

Note 8.   Intangible Assets and Goodwill

 

Goodwill was created primarily as a result of the Company’s reorganization pursuant to Chapter 11 of the U.S. Bankruptcy Code and fresh start accounting. The Company has adopted FASB Statement No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). Pursuant to SFAS 142, goodwill is not amortized and the value of goodwill is reviewed at least annually for impairment. If the carrying value of goodwill exceeds its fair value, impairment of goodwill may exist resulting in a charge to earnings to the extent of goodwill impairment.  The Company estimated fair value using a combination of a market value approach using quoted market prices and an income approach using discounted cash flow projections.

 

The Company also has patents, trademarks and other intangibles. As the patents have a definite life, they are amortized over lives ranging from two to fourteen years. As the trademarks have an indefinite life, the Company tests them for impairment at least annually. If the carrying value exceeds the fair value (determined by calculating a fair value based upon a discounted cash flow of an assumed royalty rate), impairment of the trademark may exist resulting in a charge to earnings to the extent of the impairment. The Company has non-compete agreements with lives of 2 to 7 years. Amortization of the patents, non-competes and other intangibles was $824 and $766 for the nine months ended June 30, 2008 and 2009, respectively.

 

Goodwill was tested for impairment on August 31, 2008 with no impairment recognized.  Due to uncertainty surrounding the global economy and volatility in the Company’s stock price, the Company concluded a triggering event had occurred indicating potential impairment and performed an impairment test as of December 31, 2008 of its goodwill. No impairment was recognized at December 31, 2008 because the fair value exceeded the carrying values.

 

During the second quarter of fiscal 2009, the Company determined that the weakening of the U.S. economy and the global credit crisis resulted in a reduction of the Company’s market capitalization below its total shareholder’s equity value for a sustained period of time, which is an indication that goodwill may be impaired.  As a result, the Company performed an interim step one goodwill impairment analysis as of February 28, 2009 which indicated impairment.  With the assistance of a third-party valuation specialist, the Company first determined the fair value of its one reporting unit using two valuation methodologies: (a) the income approach, which uses discounted cash flow projections, and (b) the market  value approach, which uses quoted market prices.  The valuation methodologies and the underlying financial information that are used to determine fair value require significant judgments to be made by management.  These judgments include, but are not limited to, long-term projections of future financial performance, terminal growth rate and the selection of an appropriate discount rate used to calculate the present value of the estimated future cash flows of the Company.  The long-term projections used in the valuation were developed as a part of the Company’s annual budgeting and forecasting process.  The discount rate used in the valuation was selected based upon an analysis of comparable companies and included adjustments made to account for specific attributes of the Company such as size and industry.

 

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As the second step of the goodwill impairment test, the Company compared the implied fair value of the reporting unit goodwill to the carrying value of that goodwill and determined that the carrying value of the Company’s one reporting unit exceeded its fair value.  As a result, the Company recorded a non-cash charge of $43,737 for goodwill impairment in the second quarter of fiscal 2009.

 

The Company reviewed trademarks for impairment as of August 31, 2008, and concluded no impairment adjustment was necessary. Due to the present uncertainty surrounding the global economy and stock price volatility generally, and volatility in the Company’s stock price in particular, the Company concluded a triggering event had occurred indicating potential impairment and performed an impairment test as of December 31, 2008, February 28, 2009 and again at June 30, 2009 of trademarks. No impairment was recognized because the fair value exceeded the carrying values. Even though it was determined that there was no trademark impairment as of June 30, 2009, declines in sales beyond current forecasts may result in a future impairment charge. Management will continue to evaluate trademarks for impairment on a quarterly basis if the recent decline in the Company’s sales continues.

 

The following table reflects the change to the carrying amount of goodwill for the nine months ended June 30, 2009:

 

Goodwill balance at September 30, 2008		$	43,737
Impairment charge		(43,737		)
Goodwill balance at June 30, 2009		$	0

 

The following represents a summary of intangible assets at September 30, 2008 and June 30, 2009:

 

September 30, 2008		Gross Amount			Accumulated Amortization			Carrying Amount
Patents		$	8,667		$	(5,480	)	$	3,187
Trademarks		3,800			—			3,800
Non-compete		1,340			(488		)	852
Other		465			(397		)	68
		$	14,272		$	(6,365	)	$	7,907
June 30, 2009		Gross Amount			Accumulated Amortization			Carrying Amount
Patents		$	8,667		$	(5,900	)	$	2,767
Trademarks		3,800			—			3,800
Non-compete		1,340			(699		)	641
Other		316			(67		)	249
		$	14,123		$	(6,666	)	$	7,457

 

Estimate of Aggregate Amortization Expense:
Year Ended September 30,
2009 (remainder of fiscal year)		$	235
2010		554
2011		540
2012		359
2013		350

 

Note 9.   Net Income (Loss) Per Share

 

Basic and diluted net income (loss) per share were computed as follows:

 

		Three Months Ended						Nine Months Ended
		June 30,						June 30,
(in thousands except share and per share data)		2008			2009			2008			2009
Numerator:
Net Income (loss)		$	17,564		$	(10,944	)	$	46,470		$	(49,309	)
Denominator:
Weighted average shares outstanding - Basic		11,921,541			12,002,754			11,882,929			11,990,667
Effect of dilutive stock options		123,712			52,223			130, 863			53,303
Adjustment for net loss		—			(52,223		)	—			(53,303		)
Weighted average shares outstanding - Diluted		12,045,253			12,002,754			12,013,792			11,990,667
Basic net income (loss) per share		$	1.47		$	(0.91	)	$	3.91		$	(4.11	)
Diluted net income (loss) per share		$	1.46		$	(0.91	)	$	3.87		$	(4.11	)
Number of stock option shares excluded as their effect would be anti-dilutive		256,000			300,565			214,333			304,981
Number of restricted stock shares excluded as their performance goal is not yet met		—			52,050			—			52,050

 

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Anti-dilutive shares with respect to outstanding stock options have been excluded from the computation of diluted net income per share. Restricted stock is not included in the computation as the performance goal is “deemed” not yet achieved.

 

Note 10.  Stock-Based Compensation

 

Restricted Stock Plan

 

The Company has adopted a restricted stock plan that has reserved 400,000 shares of common stock for issuance.  Grants of restricted stock are rights to acquire shares of the Company’s common stock, which vest in accordance with the terms and conditions established by the Compensation Committee.  The Compensation Committee may set restrictions based on the achievement of specific performance goals and vesting of grants to participants will also be time-based.

 

Restricted stock grants are subject to forfeiture if employment or service terminates prior to the vesting period or if the performance goal is not met.  The Company will assess, on an ongoing basis, the probability of whether the performance criteria will be achieved. The Company will recognize compensation expense over the performance period if it is deemed probable that the goal will be achieved. The fair value of the Company’s restricted stock is determined based upon the closing price of the Company’s common stock on the grant date. The plan provides for the adjustment of the number of shares covered by an outstanding grant and the maximum number of shares for which restricted stock may be granted in the event of a stock split, extraordinary dividend or distribution or similar recapitalization event.

 

On March 31, 2009, the Company granted 53,800 shares of restricted stock to certain key employees and non-employee directors. The shares of restricted stock granted to employees will vest on the third anniversary of their grant date, provided that (a) the recipient is still an employee with the Company and (b) the Company has met a three year net income performance goal. The shares of restricted stock granted to directors will vest on the earlier of (a) the third anniversary of the date of grant or (b) the failure of such non-employee director to be re-elected at an annual meeting of the stockholders of the Company as a result of such non-employee director being excluded from the nominations for any reason other than cause. The fair value of the grant was $17.82, the closing price of the Company’s common stock on the day of the grant.

 

The following table summarizes the activity under the restricted stock plan for the nine months ended June 30, 2009:

 

		Number of Shares		Aggregate Intrinsic Value			Weighted Average Fair Value
Unvested at September 30, 2008		—
Granted		53,800		$	959		$	17.82
Forfeited / Canceled		(1,750	)
Vested		—
Unvested at June 30, 2009		52,050		$	1,234		$	17.82

 

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Compensation expense related to restricted stock for the nine months ended June 30, 2009 was $77. The remaining unrecognized compensation expense at June 30, 2009 was $850 to be recognized over a weighted average period of 2.75 years.

 

Stock Option Plans

 

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.

 

In the first nine months of fiscal 2009, the Company granted 82,850 options to certain employees. On October 1, 2008, the Company granted 20,000 options at an exercise price of $46.83, the fair market value of the Company’s common stock the day of the grant. In addition on March 31, 2009, the Company granted 62,850 options at an exercise price of $17.82, the fair market value of the Company’s common stock on the day of the grant.  During the first nine months of fiscal 2009, 60,156 options were exercised and 69,001 options were forfeited/canceled.

 

The fair value of the option grants was estimated as of the date of the grant pursuant FASB Statement 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 (“SFAS 123(R)”), 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
October 1, 2008		$	15.89		0	%	2.12	%	47	%	3 years
March 31, 2009		$	9.86		0	%	1.15	%	86	%	3 years

 

The stock-based employee compensation expense from stock options for the three months ended June 30, 2008 and 2009 was $515 and $330, respectively. The stock-based employee compensation expense from stock options for the nine months ended June 30, 2008 and 2009 was $1,216 and $917, respectively. The remaining unrecognized compensation expense at June 30, 2009 was $2,044 to be recognized over a weighted average period vesting of 0.99 years.

 

The following tables summarize the activity under the stock option plans for the nine months ended June 30, 2009:

 

		Number of Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding at September 30, 2008		448,377		$	43.24		7.83 years		$	5,862
Granted		82,850		24.82
Exercised		(60,156	)	14.10
Forfeited/cancelled		(69,001	)
Outstanding at June 30, 2009		402,070		$	40.25		7.67 Years		$	1,335
Vested or expected to vest		395,785		$	40.25		7.67 Years		$	1,335
Exercisable at June 30, 2009		230,208		$	37.80		6.67 Years		$	1,335

 

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Grant Date		Exercise Price Per Share			Remaining Contractual Life in Years		Outstanding Number of Shares		Exercisable Number of Shares
August 31, 2004		$	12.80		5.17		86,886		86,886
May 5, 2005		19.00			5.83		8,334		8,334
August 15, 2005		20.25			6.17		—		—
October 1, 2005		25.50			6.25		5,000		5,000
February 21, 2006		29.25			6.67		25,001		25,001
March 31, 2006		31.00			6.75		10,000		10,000
March 30, 2007		72.93			7.75		83,166		57,328
September 1, 2007		83.53			8.17		1,667		1,667
March 31, 2008		54.00			8.75		102,666		35,992
October 1, 2008		46.83			9.25		20,000		—
March 31, 2009		17.82			9.75		59,350		—
							402,070		230,208

 

Note 11. Commodity Contracts

 

On June 11, 2009, to mitigate the volatility of the natural gas markets, the Company entered into a commodity swap-cash settlement agreement with JP Morgan Chase Bank. The Company has agreed to a fixed natural gas price on a total of 300,000 MMBTU, at a settlement rate of 50,000 MMBTU per month for a period spanning October 2009 to March 2010. The Company’s unrealized hedging loss was $84 at June 30, 2009.

 

		As of June 30, 2009					Gain or (Loss) Recognized in Income
		Balance Sheet Location		Fair Value			Statement of Operations Location		Nine Months Ended June 30, 2009
Commodity contracts		Accounts Payable		$	(84	)	Cost of Sales		$	(84	)

 

Note 12. Subsequent Event

 

On August 6, 2009, the Company reduced its worldwide workforce by approximately 6%,  temporarily reduced salaries between 5% and 15% for  salaried employees  and eliminated the cash bonus component of the fiscal 2009 management incentive plan. As a result of these personnel reductions, the annualized savings is expected to be approximately $4,100. The savings that will be reflected in the fourth quarter of fiscal 2009 will be approximately $700 offset by approximately $1.0 million in severance costs.  Subsequent events were evaluated through August 6, 2009, the date the consolidated financial statements were issued.

 

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

 

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

 

This Quarterly Report on Form 10-Q contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this Form 10-Q are forward-looking.    In many cases, you can identify forward-looking statements by terminology, such as “may”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of such terms and other comparable terminology. The forward-looking information may include, among other information, statements concerning the Company’s outlook for fiscal year 2009 and beyond, overall volume and pricing trends, cost reduction strategies and their anticipated results, and capital expenditures.  There may also be other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts.  Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in the forward looking statements as a result of various factors, many of which are beyond the Company’s control.

 

The Company has based these forward-looking statements on its current expectations and projections about future events.  Although the Company believes that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate. As a result, the forward-looking statements based upon those assumptions also could be incorrect.  Risks and uncertainties, some of which are discussed in Item 1A. of Part 1 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2008, 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.

 

Business Overview

 

Haynes International, Inc. (“Haynes” or “the Company”) is one of the world’s largest producers of high-performance nickel- and cobalt-based alloys in sheet, coil and plate forms. The Company is focused on developing, manufacturing, marketing and distributing technologically advanced, high-performance alloys, which are used primarily in the aerospace, chemical processing and land-based gas turbine industries. The global specialty alloy market consists of three primary sectors: stainless steel, general purpose nickel alloys and high-performance nickel- and cobalt-based alloys. The Company competes primarily 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 believes it is one of four principal producers of high-performance alloys in sheet, coil and plate forms. The Company also produces its products as seamless and welded tubulars, and in bar, billet and wire forms.

 

The Company has manufacturing facilities in Kokomo, Indiana; Arcadia, Louisiana; and Mountain Home, North Carolina. The Kokomo facility specializes in flat products, the Arcadia facility specializes in tubular products and the Mountain Home facility specializes in high-performance alloy wire products. The Company sells its products primarily through its direct sales organization, which includes 11 service and/or sales centers in the United States, Europe, Asia and India. All of these centers are company-operated.

 

Quarter over Quarter Gross Profit Margin Trend

 

Gross profit margin has declined quarter over quarter since the 3rd quarter of fiscal 2008. Gross profit margin in the third quarter of fiscal 2009 was a loss of $(8.2) million, compared to a profit of $7.0 million in the second quarter of fiscal 2009. The gross profit margin percentage was negative 8.3% in the third quarter of fiscal 2009 compared to a profit of 5.8% in the second quarter of fiscal 2009. The reduction in gross profit margin from

 

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the second quarter of fiscal 2009 to the third quarter of fiscal 2009 was due to several factors. There was a reduction in revenue of $22.1 million between quarters, primarily as a result of a reduction in pounds shipped with the average selling price per pound declining slightly between quarters. Cost of goods sold per pound increased from the second quarter of fiscal 2009 to the third quarter of fiscal 2009 due to (i) reduced absorption of fixed manufacturing costs primarily due to lower production of sheet product, (ii) higher per pound manufacturing costs due to continued recognition of higher cost raw material from inventory, and (iii) an increase in shipments of certain specialty and proprietary alloys as a percent of total pounds shipped. Also compressing margins is the continued impact on average selling price of the weak economic environment.

 

Higher per pound manufacturing costs due to the recognition of higher raw material costs from inventory impacted the first, second and third quarters of fiscal 2009. Gross profit margin in the fourth quarter is not expected to be materially affected by this issue, provided that volume and prices remain stable.

 

Outlook

 

General

 

The Company expects a continued low level of revenue as a result of the credit crisis and global recession for at least the reminder of fiscal 2009 and first six months of fiscal 2010. Management believes that the Company’s performance through the next three quarters will range from break-even to a small loss in each quarter. It is expected that the weakest results in the next three quarters will occur in the first quarter of fiscal 2010, because typically this quarter is impacted by fewer ship days and extended customer shutdowns. Management expects results in the fourth quarter of fiscal 2009 and first half of fiscal 2010, to be negatively impacted by continued reduced absorption of fixed manufacturing cost, which inflates cost of goods sold, and the competitive environment, which puts downward pressure on prices. However, a portion of this reduced absorption is expected to be offset by lower spending from the cost saving initiatives undertaken in fiscal 2009 (discussed below in further detail).

 

The Company continues to adjust production schedules, reduce costs and manage cash flow, while still moving forward with initiatives that are important to its long-term success. The Company also reduced inventories substantially in the third quarter and intends to reduce inventory levels further. As a result of recent equipment upgrades, service center value-added capabilities and its favorable liquidity position the Company believes it is well-positioned to deal with the challenges of the downturn and ultimately manage the upturn more effectively than in prior periods.

 

Backlog

 

A reduction in economic activity and the increasingly competitive environment manifests itself, in part, as a reduction in the Company’s backlog.  Backlog dollars declined by approximately 26% from March 31, 2009 to June 30, 2009, and backlog pounds declined by approximately 20% in that same period while the backlog average selling price dropped by 8%.  Backlog dollars declined by approximately 55% from June 30, 2008 to June 30, 2009 due to a decline in backlog pounds of approximately 46% and a reduction in backlog average selling price of approximately 16% in the period.

 

The major contributing factors to the decline in backlog for the periods noted were a reduction in pounds, resulting from decreased activity in the Company’s end markets and increased price competition (discussed below).  A reduction in backlog is indicative of a reduction in revenue in the future. Management expects that backlog, and therefore revenues, will continue to decline from last year and quarter over quarter, until stabilizing at some point in fiscal 2010. Based on order entry for the past five months, including July 2009, it appears that the backlog may stabilize by the end of calendar 2009.

 

Competition

 

The Company continued to experience strong price competition from competitors who produce both stainless steel and high-performance alloys in the third fiscal quarter due primarily to weakness in the stainless market.

 

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Increased competition has required the Company to continue lowering prices, which has contributed to the reduction in the Company’s gross profit margin and net income.  There continues to be significant uncertainty as to when the stainless market will improve; however, some financial analysts are writing that the market could begin to see some improvement in the second half of calendar 2009. If that happens, pricing competition in the high-performance alloy industry should begin to ease. The Company continues to respond to the competition by increasing emphasis on service centers, offering value-added services, improving its cost structure, and striving to improve delivery-times and reliability. However, continued weakness in the economy continues to generate intense competitive pricing pressure.

 

Cost Reduction Measures

 

On August 6, 2009, the Company reduced its worldwide workforce by 6%, temporarily reduced  salaries between 5% and 15% for all salaried employees, and eliminated the cash bonus component of the fiscal 2009 management incentive plan.  These measures follow actions on January 16, 2009 which reduced the Company’s workforce by 12% and froze salaries for all remaining employees.

 

The annualized savings of the personnel reductions announced today are expected to be approximately $4.1 million, although these savings are not expected to have a material impact on the results of the fourth fiscal quarter.  The severance expense of approximately $1.0 million associated with the current personnel reduction will be paid in the fourth fiscal quarter.  Total personnel reductions in fiscal 2009 represent cost reductions of approximately $13.6 million on an annualized basis, of which approximately $7.1 million will be included in the results of fiscal 2009.

 

Planned capital spending in fiscal 2009 is expected to be between $10.0 to $12.0 million, compared to an original target of approximately $15.1 million.  The Company evaluated planned spending, postponing certain projects and spending until such time as financial conditions improve.  In light of the significant capital expenditures in recent years to upgrade operations, increase capacity and reduce unplanned downtime, management does not believe that the postponement of the current projects will have a material unfavorable impact on operations in the short- or long-term.

 

In addition to the actions noted, the Company continues to adjust its production schedules for all its manufacturing facilities, initiating planned furloughs and outages ranging from one day to one week in length in order to limit further personnel reductions while continuing to meet customer delivery requirements at these lower sales volumes.  Cost savings associated with these measures will be dependent upon the level of volume, as well as product mix, but are anticipated to be approximately $6.0 million on an annualized basis.

 

Quarterly Market Information

 

Set forth below is selected data relating to the Company’s backlog, the 30-day average nickel price per pound as reported by the London Metals Exchange, as well as a breakdown of net revenues, shipments and average selling prices to the markets served by the Company for the periods shown. These data should be read in conjunction with the consolidated financial statements and related notes thereto and the remainder of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Form 10-Q.

 

		Quarter Ended
		December 31, 2007			March  31, 2008			June 30, 2008			September 30, 2008			December 31, 2008			March 31, 2009			June 30, 2009
Backlog (1)
Dollars (in thousands)		$	247,775		$	254,470		$	252,598		$	229,196		$	199,667		$	153,039		$	113,420
Pounds (in thousands)		8,274			8,706			8,335			7,575			7,287			5,557			4,468
Average selling price per pound		$	29.95		$	29.23		$	30.30		$	30.26		$	27.38		$	27.54		$	25.39
Average nickel price per pound
London Metals Exchange (2)		$	12.11		$	14.16		$	10.23		$	8.07		$	4.39		$	4.40		$	6.79

(1)          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.

 

(2)          Represents the average price for a cash buyer as reported by the London Metals Exchange for the 30 days ending on the last day of the period presented.

 

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Table of Contents

 

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

 

		Quarter Ended
		December 31, 2007			March  31, 2008			June 30, 2008			September 30, 2008			December 31, 2008			March 31, 2009			June 30, 2009
Net revenues (in thousands)
Aerospace		$	59,442		$	63,472		$	62,857		$	61,501		$	49,721		$	45,200		$	34,959
Chemical processing		40,805			37,404			49,165			38,718			30,883			26,025			26,944
Land-based gas turbines		25,505			33,506			31,004			34,102			32,145			28,648			22,087
Other markets		18,887			26,085			18,811			22,809			19,166			17,562			11,529
Total product revenue		144,639			160,467			161,837			157,130			131,915			117,435			95,519
Other revenue		1,438			3,304			4,503			3,688			2,389			2,978			2,806
Net revenues		$	146,077		$	163,771		$	166,340		$	160,818		$	134,304		$	120,413		$	98,325
Shipments by markets (in thousands of pounds)
Aerospace		2,154			2,190			2,319			2,188			1,653			1,648			1,387
Chemical processing		1,312			1,287			1,649			1,140			947			1,170			1,077
Land-based gas turbines		1,060			1,742			1,519			1,641			1,507			1,680			1,405
Other markets		681			861			732			800			691			871			511
Total shipments		5,207			6,080			6,219			5,769			4,798			5,369			4,380
Average selling price per pound
Aerospace		$	27.60		$	28.98		$	27.11		$	28.11		$	30.08		$	27.43		$	25.20
Chemical processing		31.10			29.06			29.82			33.96			32.61			22.24			25.02
Land-based gas turbines		24.06			19.23			20.41			20.78			21.33			17.05			15.72
Other markets		27.73			30.30			25.70			28.51			27.74			20.16			22.56
Total product (excluding other revenue)		27.78			26.39			26.03			27.24			27.49			21.87			21.81
Total average selling price (including other revenue)		28.05			26.94			26.75			27.88			27.99			22.43			22.45

 

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