HAYNES INTERNATIONAL INC - Quarter Report: 2010 March (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

 

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” and “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

 

As of May 1, 2010, the registrant had 12,144,079 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 Consolidated Financial Statements
	Haynes International, Inc. and Subsidiaries:
	Unaudited Consolidated Balance Sheets as of September 30, 2009 and March 31, 2010	1
	Unaudited Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2009 and 2010	2
	Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended March 31, 2009 and 2010	3
	Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2009 and 2010	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	28
Item 4.	Controls and Procedures	29
PART II	OTHER INFORMATION
Item 4.	Submission of Matters to a Vote of Security Holders	30
Item 6.	Exhibits	30
	Signatures	31
	Index to Exhibits	32

 

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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, 2009			March 31, 2010
ASSETS
Current assets:
Cash and cash equivalents		$	105,095		$	91,754
Restricted cash—current portion		110			110
Accounts receivable, less allowance for doubtful accounts of $1,310 and $1,129, respectively		47,473			53,904
Inventories		182,771			204,524
Income taxes receivable		24,348			15,781
Deferred income taxes		9,035			9,310
Other current assets		645			2,088
Total current assets		369,477			377,471
Property, plant and equipment, net		105,820			107,401
Deferred income taxes—long term portion		58,843			58,867
Prepayments and deferred charges		2,670			2,848
Restricted cash—long term portion		110			—
Intangible assets, net		7,230			6,951
Total assets		$	544,150		$	553,538
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	29,249		$	49,507
Accrued expenses		10,312			11,721
Accrued pension and postretirement benefits		20,215			19,265
Revolving credit facilities		—			—
Deferred revenue – current portion		2,500			2,500
Current maturities of long-term obligations		110			105
Total current liabilities		62,386			83,098
Long-term obligations (less current portion)		1,482			1,382
Deferred revenue (less current portion)		40,329			39,079
Non-current income taxes payable		292			292
Accrued pension and postretirement benefits		160,862			157,492
Total liabilities		265,351			281,343
Commitments and contingencies (Note 6)		—			—
Stockholders’ equity:
Common stock, $0.001 par value (40,000,000 shares authorized, 12,101,829 and 12,144,079 shares issued and outstanding at September 30, 2009 and March 31, 2010, respectively)		12			12
Preferred stock, $0.001 par value (20,000,000 shares authorized, 0 shares issued and outstanding)		—			—
Additional paid-in capital		227,734			228,480
Accumulated earnings		103,509			98,330
Accumulated other comprehensive loss		(52,456		)	(54,627		)
Total stockholders’ equity		278,799			272,195
Total liabilities and stockholders’ equity		$	544,150		$	553,538

 

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						Six Months Ended
		March 31,						March 31,
		2009			2010			2009			2010
Net revenues		$	120,413		$	94,619		$	254,717		$	175,627
Cost of sales		113,416			84,429			228,970			158,592
Gross profit		6,997			10,190			25,747			17,035
Selling, general and administrative expense		8,292			7,977			18,882			16,163
Research and technical expense		814			712			1,639			1,361
Impairment of goodwill		43,737			—			43,737			—
Operating income (loss)		(45,846		)	1,501			(38,511		)	(489		)
Interest income		(8		)	(69		)	(28		)	(114		)
Interest expense		123			39			479			87
Income (loss) before income taxes		(45,961		)	1,531			(38,962		)	(462		)
Provision for (benefit from) income taxes		(3,072		)	575			(597		)	(132		)
Net income (loss)		$	(42,889	)	$	956		$	(38,365	)	$	(330	)
Net income (loss) per share:
Basic		$	(3.58	)	$	0.08		$	(3.20	)	$	(0.03	)
Diluted		$	(3.58	)	$	0.08		$	(3.20	)	$	(0.03	)
Weighted average shares outstanding:
Basic		11,984,623			12,049,779			11,984,623			12,049,779
Diluted		11,984,623			12,157,971			11,984,623			12,049,779

 

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 March 31						Six Months Ended March 31
		2009			2010			2009			2010
Net income (loss)		$	(42,889	)	$	956		$	(38,365	)	$	(330	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		(1,326		)	(2,303		)	(5,732		)	(2,171		)
Comprehensive income (loss)		$	(44,215	)	$	(1,347	)	$	(44,097	)	$	(2,501	)

 

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)

 

		Six Months Ended March 31,
		2009			2010
Cash flows from operating activities:
Net loss		$	(38,365	)	$	(330	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		4,964			5,619
Amortization		528			279
Impairment of goodwill		43,737			—
Stock compensation expense		588			746
Deferred revenue		(1,251		)	(1,250		)
Deferred income taxes		590			(322		)
Loss on disposal of property		29			157
Change in assets and liabilities:
Accounts receivable		20,863			(7,505		)
Inventories		55,866			(23,387		)
Other assets		589			(1,690		)
Accounts payable and accrued expenses		(17,573		)	22,062
Income taxes		(19,804		)	8,582
Accrued pension and postretirement benefits		(7,591		)	(4,232		)
Net cash provided by (used in) operating activities		43,170			(1,271		)
Cash flows from investing activities:
Additions to property, plant and equipment		(6,118		)	(7,042		)
Change in restricted cash		110			110
Net cash used in investing activities		(6,008		)	(6,932		)
Cash flows from financing activities:
Dividends paid		—			(4,849		)
Net decrease in revolving credit facility		(11,812		)	—
Payment for debt issuance costs		(316		)	—
Changes in long-term obligations		(1,335		)	(105		)
Net cash used in financing activities		(13,463		)	(4,954		)
Effect of exchange rates on cash		(381		)	(184		)
Increase (decrease) in cash and cash equivalents		23,318			(13,341		)
Cash and cash equivalents, beginning of period		7,058			105,095
Cash and cash equivalents, end of period		$	30,376		$	91,754
Supplemental disclosures of cash flow information:
Cash paid during period for:        Interest (net of capitalized interest)		$	453		$	32
Income taxes		$	19,945		$	297

 

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, 2009 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 six months ended March 31, 2010 are not necessarily indicative of the results to be expected for the full fiscal year ending September 30, 2010 or any interim period.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Haynes International, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). All significant intercompany transactions and balances are eliminated.

 

Note 2.   New Accounting Pronouncements

 

In December 2007, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 141 (revised 2007), Business Combinations (“SFAS 141(R)”), which was primarily codified into Topic 805 (Business Combinations) in the Accounting Standards Codification, or ASC.  This guidance 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. This guidance also expands disclosures related to business combinations and will be applied prospectively to business combinations occurring after the beginning of the Company’s fiscal year 2010, except that business combinations consummated prior to the effective date must apply SFAS 141(R) income tax requirements immediately upon adoption. The Company is currently evaluating the impact of SFAS 141(R) related to future acquisitions, if any, on its financial position, results of operations and cash flows.

 

In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets, which is primarily codified into Topic 250 (Intangibles-Goodwill and Other) in the ASC. This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, 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 was effective for the Company on October 1, 2009 and it had no impact on the Company’s consolidated financial statements.

 

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In December 2008, the FASB issued FASB Staff Position No. 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets, which was primarily codified into Topic 715 (Compensation Retirement Benefits) in the ASC. The guidance 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. This guidance was effective for fiscal years and interim periods beginning after December 15, 2009. The adoption of this guidance is expected to increase the Company’s disclosures, but it is not expected to have an impact on the Company’s consolidated financial statements.

 

Note 3.   Inventories

 

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

 

		September 30, 2009			March 31, 2010
Raw Materials		$	13,321		$	17,399
Work-in-process		87,322			106,841
Finished Goods		81,228			79,330
Other		900			954
		$	182,771		$	204,524

 

Note 4.   Income Taxes

 

Income tax expense for the three and six months ended March 31, 2009 and 2010, differed from the U.S. federal statutory rate of 35% primarily due to state income taxes, differing tax rates on foreign earnings and the impact of permanent items with a pretax loss. The effective tax rate for the three months ended March 31, 2010 was 37.6% compared to 6.7% in the same period of fiscal 2009. The effective tax rate for the six months ended March 31, 2010 was 28.6% compared to 1.5% in the same period of fiscal 2009. The increase in the effective tax rate is primarily attributable to the goodwill impairment charge in fiscal 2009.

 

Note 5.   Pension and Post-retirement Benefits

 

Components of net periodic pension and post-retirement benefit cost for the three and six months ended March 31, 2009 and 2010 are as follows:

 

		Three Months Ended March 31,												Six Months Ended March 31,
		Pension Benefits						Other Benefits						Pension Benefits						Other Benefits
		2009			2010			2009			2010			2009			2010			2009			2010
Service cost		$	614		$	899		$	332		$	51		$	1,249		$	1,798		$	664		$	103
Interest cost		2,905			2,809			1,231			1,205			5,904			5,673			2,462			2,410
Expected return		(2,404		)	(2,566		)	—			—			(4,914		)	(5,185		)	—			—
Amortizations		203			1,437			(1,326		)	(949		)	404			2,883			(2,653		)	(1,899		)
Net periodic benefit cost		$	1,318		$	2,579		$	237		$	307		$	2,643		$	5,169		$	473		$	614

 

The Company contributed $7,150 to Company sponsored domestic pension plans, $2,429 to its other post-retirement benefit plans and $477 to the U.K. pension plan for the six months ended March 31, 2010.  The Company presently expects future contributions of $7,050 to its domestic pension plans, $2,371 to its other post-retirement benefit plans and $483 to the U.K. pension plan for the remainder of fiscal 2010. The Pension Protection Act of 2006 requires funding over a seven-year period to achieve 100% funded status.

 

Note 6. Legal, Environmental and Other Contingencies

 

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

 

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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, filed against numerous manufacturers, including the Company, in December 2008 in the Federal MDL Court in Ohio and in California State Court in February 2007, respectively, alleging that the welding-related products of the defendant manufacturers harmed the users of such products through the inhalation of welding fumes containing manganese.  The Company believes that it has defenses to these allegations and, that if the Company were found liable, the cases would not have a material effect on its financial position, results of operations or liquidity. In addition to these cases, the Company has in the past been named a defendant in several other lawsuits, including 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, 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, although the Company may have applicable insurance, 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

 

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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.

 

As of March 31, 2010 and September 30, 2009, the Company has accrued $1,516 for post-closure monitoring and maintenance activities. In accordance with Statement of Position 96-1, Environmental Remediation Liabilities, which was primarily codified into Topic 410-30 (Asset Retirement and Environmental Obligations) in the ASC, 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 $2,123 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 $134 per year over the remaining obligation period.

 

All eligible hourly employees at the Kokomo plant and Lebanon, Indiana service center (approximately 48.3% of the workforce or 454 people in the aggregate as of September 30, 2009), are covered by a collective bargaining agreement which will expire in June 2010.  The Company intends to renegotiate the agreement prior to its expiration.

 

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 SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”) which was primarily codified into Topic 350 (Intangibles - Goodwill and Other) in the ASC. 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.

 

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.

 

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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 stockholder’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.  In connection with 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, which was primarily non-deductible for tax purposes.

 

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 5 to 7 years. Amortization of the patents, non-competes and other intangibles was $528 and $279 for the six months ended March 31, 2009 and 2010, respectively.

 

The following represents a summary of intangible assets at September 30, 2009 and March 31, 2010:

 

September 30, 2009		Gross Amount			Accumulated Amortization			Carrying Amount
Patents		$	8,667		$	(6,040	)	$	2,627
Trademarks		3,800			—			3,800
Non-compete		1,340			(758		)	582
Other		316			(95		)	221
		$	14,123		$	(6,893	)	$	7,230

 

March 31, 2010		Gross Amount			Accumulated Amortization			Carrying Amount
Patents		$	8,667		$	(6,186	)	$	2,481
Trademarks		3,800			—			3,800
Non-compete		1,090			(586		)	504
Other		316			(150		)	166
		$	13,873		$	(6,922	)	$	6,951

 

Estimate of Aggregate Amortization Expense:

 

Year Ended September 30,
2010 (remainder of fiscal year)				$	278
2011				545
2012				359
2013				350
2014				350

 

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Note 9.   Net Income (Loss) Per Share

 

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

 

		Three Months Ended						Six Months Ended
		March 31,						March 31,
(in thousands except share and per share data)		2009			2010			2009			2010
Numerator:
Net Income (loss)		$	(42,889	)	$	956		$	(38,365	)	$	(330	)
Denominator:
Weighted average shares outstanding - Basic		11,984,623			12,049,779			11,984,623			12,049,779
Effect of dilutive stock options		47,310			56,192			53,843			53,805
Effect of dilutive restricted stock		21,000			52,000			21,000			52,000
Adjustment for net loss		(68,310		)	—			(74,843		)	(105,805		)
Weighted average shares outstanding - Diluted		11,984,623			12,157,971			11,984,623			12,049,779
Basic net income (loss) per share		$	(3.58	)	$	0.08		$	(3.20	)	$	(0.03	)
Diluted net income (loss) per share		$	(3.58	)	$	0.08		$	(3.20	)	$	(0.03	)
Number of stock option shares excluded as their effect would be anti-dilutive		334,043			219,132			307,189			213,316
Number of restricted stock shares excluded as their performance goal is not yet met		32,800			42,300			32,800			42,300

 

Anti-dilutive shares with respect to outstanding stock options have been properly excluded from the computation of diluted net income (loss) per share.  Restricted stock with performance goals issued to certain key employees is not included in the computation as the performance goal is deemed not yet achieved.  Restricted stock issued to non-employee directors and certain key employees with no performance goal is included in the computation only when the Company has net income.

 

Note 10.  Stock-Based Compensation

 

Restricted Stock Plan

 

On February 23, 2009, the Company adopted a restricted stock plan that 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 on certain grants 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, if applicable.  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.  Outstanding shares of restricted stock are entitled to receive dividends on shares of common stock.

 

On January 8, 2010, the Company granted 46,000 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) for a portion of the grant, the Company has met a three year net income performance goal. The shares of restricted stock granted to

 

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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 $34.00 per share, the closing price of the Company’s common stock on the day of the grant.

 

The stock-based compensation expense for restricted stock for the three months ended March 31, 2009 and 2010 was $0 and $162, respectively, and for the six months ended March 31, 2009 and 2010 was $0 and $192, respectively. The following table summarizes the activity under the restricted stock plan for the six months ended March 31, 2010:

 

		Number of Shares		Weighted Average Fair Value Per Share At Grant Date
Unvested at September 30, 2009		52,050		$	17.82
Granted		46,000		34.00
Forfeited / Canceled		(3,750	)	17.82
Vested		—
Unvested at March 31, 2010		94,300		$	25.71
Expected to vest		67,000		$	28.93

 

The remaining unrecognized compensation expense at March 31, 2010 was $1,683 to be recognized over a weighted average period of 2.68 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.

 

The fair value of option grants was estimated as of the date of the grant pursuant to FASB No. 123(R), Share-Based Payment, which was primarily codified into Topic 718 (Compensation — Stock Compensation) in the ASC. The Company has elected to use the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected life, risk-free interest rates, expected forfeitures and dividend yields. The volatility is based on historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected term of the stock option granted. The Company uses historical volatility because management believes such volatility is representative of prospective trends. The expected term of an award is based on historical exercise data. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of the awards. The expected forfeiture rate is based upon historical experience. The dividend yield assumption is based on the Company’s history and expectation regarding dividend payouts at the time of the grant.  Valuation of future grants under the Black-Scholes model will include a dividend yield. The following assumptions were used for grants in fiscal year 2010:

 

Grant Date		Fair Value			Dividend Yield		Risk-Free Interest Rate		Expected Volatility		Expected Life
January 8, 2010		$	17.93		2.35	%	1.62	%	89	%	3 years

 

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On January 8, 2010, the Company granted 37,000 options to certain employees at an exercise price of $34.00 per share, the fair market value of the Company’s common stock the day of the grant. During the first six months of fiscal 2010, no options were exercised.

 

The stock-based employee compensation expense for stock options for the three months ended March 31, 2009 and 2010 was $134 and $224, respectively, and for the six months ended March 31, 2009 and 2010 was $588 and $554, respectively.  The remaining unrecognized compensation expense at March 31, 2010 was $1,486 to be recognized over a weighted average vesting period of 0.79 years.

 

The following table summarizes the activity under the stock option plans for the six months ended March 31, 2010:

 

		Number of Shares		Aggregate Intrinsic Value (000s)			Weighted Average Exercise Prices			Weighted Average Remaining Contractual Life
Outstanding at September 30, 2009		394,737					$	40.20
Granted		37,000					$	34.00
Exercised		—
Canceled		(26,584	)
Outstanding at March 31, 2010		405,153		$	3,294		$	38.98		7.12 yrs.
Vested or expected to vest		395,168		$	3,294		$	38.98		7.12 yrs.
Exercisable at March 31, 2010		290,908		$	2,622		$	40.28		6.41 yrs.

 

Grant Date		Exercise Price Per Share			Remaining Contractual Life in Years		Outstanding Number of Shares		Exercisable Number of Shares
August 31, 2004		$	12.80		4.42		86,886		86,886
May 5, 2005		19.00			5.08		8,334		8,334
February 21, 2006		29.25			5.92		25,001		25,001
March 31, 2006		31.00			6.00		10,000		10,000
March 30, 2007		72.93			7.00		74,166		74,166
March 31, 2008		54.00			8.00		91,666		62,492
October 1, 2008		46.83			8.50		20,000		6,666
March 31, 2009		17.82			9.00		52,100		17,363
January 8, 2010		34.00			9.75		37,000		—
							405,153		290,908

 

Note 11.    Dividend

 

In the second quarter of fiscal 2010, the Company declared and paid a regular quarterly cash dividend of $0.20 per outstanding share of the Company’s common stock.  The dividend was paid March 15, 2010 to stockholders of record at the close of business on March 1, 2010. The dividend cash pay-out was $2,429 for the quarter based on shares outstanding. Dividends paid year-to-date for fiscal 2010 are $4,849.

 

The Company announced that the Board of Directors declared a regular quarterly cash dividend of $0.20 per outstanding share of the Company’s  common stock. The dividend is payable June 15, 2010 to stockholders of record at the close of business on June 1, 2010.

 

Note 12.  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 JPMorgan 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.  As of March 31, 2010, 300,000 MMBTU had been settled for a net realized hedging loss of $269.

 

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									Gain or (loss) Recognized in Income (Loss)
		Fair Value							Statement of
		Balance Sheet		September 30,			March 31,		Operations		Six Months Ended March 31,
		Location		2009			2010		Location		2009		2010
Commodity Contracts		Accts Receivable		$	51		—		Cost of Sales		—		$	185
		Accounts Payable		$	(134	)	—

 

Note 13.  Fair Value Measurements

 

On October 1, 2008, the Company adopted the provisions of SFAS No. 157,  Fair Value Measurements , as amended by FSP FAS 157-3, for assets and liabilities measured at fair value on a recurring basis, which was primarily codified into FASB ASC 820-10 (Fair Value Measurements and Disclosures) in the ASC.  This standard does not apply to non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually until October 1, 2009.  FASB ASC 820-10 establishes a framework for measuring fair value, clarifies the definition of fair value within that framework and expands disclosures about the use of fair value measurements.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.

 

FASB ASC 820-10 specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions that other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the Company’s own assumptions of market participant valuation (unobservable inputs). Valuation techniques used to measure fair value under FASB ASC 820-10 must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three levels:

 

·		Level 1 — Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
·		Level 2 — Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and
·		Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

 

When available, the Company uses unadjusted quoted market prices to measure fair value and classifies such items within Level 1. If quoted market prices are not available, fair value is based upon internally-developed models that use, where possible, current market-based or independently-sourced market parameters such as interest rates and currency rates. Items valued using internally-generated models are classified according to the lowest level input or value driver that is significant to the valuation. If quoted market prices are not available, the valuation model used depends on the specific asset or liability being valued.

 

Pursuant to this guidance, the Company measures and reports the commodity swap-cash settlement agreement for natural gas (refer to Note 12 for more information) at fair value.

 

The following table represents the Company’s fair value hierarchy for its financial assets and liabilities (cash equivalents and commodity contracts) measured at fair value on a recurring basis as of September 30, 2009 and March 31, 2010:

 

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		Fair Value Measurements at Reporting Date Using:
September 30, 2009		Level 1			Level 2			Level 3			Total
Assets:
Cash and money market funds		$	105,095		$	—		$	—		$	105,095
Commodity contracts (accounts receivable)		—			51			—			51
Total assets		$	105,095		$	51		$	—		$	105,146
Liabilities:
Commodity contracts (accounts payable)		—			134			—			134
Total liabilities		$	—		$	134		$	—		$	134

 

		Fair Value Measurements at Reporting Date Using:
March 31, 2010		Level 1			Level 2			Level 3			Total
Assets:
Cash and money market funds		$	91,754		$	—		$	—		$	91,754
Total assets		$	91,754		$	—		$	—		$	91,754
Liabilities:
Total liabilities		$	—		$	—		$	—		$	—

 

The Company had no Level 3 assets or liabilities as of September 30, 2009 or March 31, 2010.

 

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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 (this “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. Those statements appear in a number of places in this Form 10-Q 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 strategic plans; revenues; financial results; backlog balances; trends in the industries that consume the Company’s products; global economic and political conditions; production levels at the Company’s Kokomo, Indiana facility; commercialization of the Company’s production capacity; the Company’s ability to develop new products; and labor agreement negotiations.  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, 2009, 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 sold primarily in the aerospace, chemical processing and land-based gas turbine industries. The Company’s products consist of high temperature resistant alloys, or HTA products, and corrosion resistant alloys, or CRA products.  HTA products are used by manufacturers of equipment that is subjected to extremely high temperatures, such as jet engines for the aerospace market, gas turbine engines used for power generation and waste incineration, and industrial heating equipment.  CRA products are used in applications that require resistance to very corrosive media found in chemical processing, power plant emissions control and hazardous waste treatment.  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 slab, bar, billet and wire forms.

 

The Company has manufacturing facilities in Kokomo, Indiana; Arcadia, Louisiana; and Mountain Home, North Carolina. The Kokomo facility specializes in flat products, the Arcadia facility specializes in tubular products and the Mountain Home facility specializes in wire products.  The Company markets its products primarily through its direct sales organization, which includes 12 service and/or sales centers in the United States, Europe, Asia and India. All of these centers are company-operated.

 

Dividend

 

In the second quarter of fiscal 2010, the Company declared and paid a regular quarterly cash dividend of $0.20 per outstanding share of the Company’s common stock.  The dividend was paid March 15, 2010 to stockholders of record at the close of business on March 1, 2010. The aggregate dividend cash pay-out was $2.5 million for the quarter based on shares outstanding. Dividends paid year-to-date for fiscal 2010 total $4.8 million.

 

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The Board of Directors has declared a regular quarterly cash dividend of $0.20 per outstanding share of the Company’s common stock. The dividend is payable June 15, 2010 to stockholders of record at the close of business on June 1, 2010. The aggregate cash pay-out based on current shares outstanding will be approximately $2.5 million this quarter, or approximately $10.0 million on an annualized basis.

 

Outlook

 

General

 

Management expects that net revenues and volume in the third and fourth quarters of fiscal 2010 will be at or above the levels of the second quarter of fiscal 2010.  Both market demand and the mix of products being sold have improved since the fourth quarter of fiscal 2009.  Uncertainty in the marketplace continues; however, the Company’s backlog reflects clear signs that end markets are beginning to improve.

 

Management also expects that net income in the third and fourth quarters will improve from the second fiscal quarter.  Results for each quarter will continue to be unfavorably impacted by reduced absorption of fixed manufacturing costs due to less than optimal volumes.  In addition, the market environment continues to place downward pressure on prices. The unfavorable effect of both these items should continue to decline as the business environment improves.

 

Backlog

 

Increasing order entry activity contributed to improvement in backlog at March 31, 2010 as compared to December 31, 2009.  Backlog dollars were $124.6 million at March 31, 2010, an increase of approximately 12.8% from $110.4 million at December 31, 2009.  This increase is the result of an 18.1% increase in backlog pounds, which was partially offset by a 4.5% decline in backlog average selling price.  Management expects the backlog volumes and pricing to improve modestly through the third and fourth quarters of fiscal 2010.

 

Competition and Pricing

 

Although volumes and pricing improved in the second quarter of fiscal 2010, the Company continued to experience intense price competition in the marketplace. This competition continues to require the Company to aggressively price orders, which has negatively impacted the Company’s gross profit margin and net income. However, the impact of the price competition was less severe in the second quarter of fiscal 2010 than in the first quarter of fiscal 2010 or in fiscal 2009 and prices slightly improved sequentially. If market conditions continue to improve, pricing competition in the high-performance alloy industry may begin to ease further in future quarters.  The Company continues to respond to this competition by increasing emphasis on service centers, offering value-added services, improving its cost structure, and striving to improve delivery-times and reliability.

 

Although the Company has seen an aggregate increase of 5.4% in average selling price between the first and second quarters of fiscal 2010, this increase is more reflective of a higher priced mix of alloys, forms and markets rather than improvement in demand.  Management expects that the impact associated with the December 2009 price increase, if any, will begin to appear beginning in the third and fourth quarters of fiscal 2010.

 

Quarter over Quarter Gross Profit Margin Trend

 

Gross profit margin and gross profit margin percentage continued to improve in the second quarter of fiscal 2010 after declining each quarter starting in the third quarter of fiscal 2008 through the third quarter of fiscal 2009.  Since the fourth quarter of fiscal 2009, both gross profit margin and gross profit margin percentage have increased sequentially compared to the prior quarter.

 

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		Trend of Gross Profit Margin and Gross Profit Margin Percentage for Fiscal 2009 and 2010
		Quarter Ended
(dollars in thousands)		December 31, 2008			March 31, 2009			June 30, 2009			September 30, 2009			December 31, 2009			March 31, 2010
Net Revenues		$	134,304		$	120,413		$	98,325		$	85,591		$	81,008		$	94,619
Gross Profit Margin		$	18,750		$	6,997		$	(8,168	)	$	4,904		$	6,848		$	10,190
Gross Profit Margin %		13.9		%	5.8		%	(8.3		)%	5.7		%	8.5		%	10.8		%

 

The improvement in gross profit margin and gross profit margin percentage since the fourth quarter of fiscal 2009 is primarily due to a combination of rising volume, improved product mix, improved cost structure of the Company and a modestly improving market environment.  Rising volumes are a reflection of increased transactional business, particularly in the aerospace market, due to the significant destocking of the last two years. The Company’s land-based gas turbine market appears to be strengthening, initially in the backlog which has increased over 34.0% since September 30, 2009 and more recently by increasingly higher revenues and volumes during fiscal year 2010. The “Other” market category also reflects both improvement since September 30, 2009 in revenue, due to higher volume and improved pricing as a result of alloy and market mix. These improvements were slightly offset by declines in volumes in the chemical processing industry.

 

Since the fourth quarter of fiscal 2009, cost of goods sold per pound has improved as a result of reduced per pound manufacturing costs resulting primarily from (i) a significant reduction in the amount of higher cost raw material from inventory, which impacted cost of goods sold in fiscal 2009, (ii) manufacturing staffing reductions started in the second quarter of fiscal 2009 which continued through the fourth quarter of fiscal 2009, (iii) operating efficiencies attributable to equipment upgrades, particularly in the sheet finishing operations and (iv) continued implementation of lean manufacturing techniques.  In summary, the modest improvement in market conditions in most of our markets and improved cost structure have resulted in an improving gross profit margin beginning in the fourth quarter of fiscal 2009.

 

Quarterly Market Information

 

Set forth below are 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, 2008			March 31, 2009			June 30, 2009			September 30, 2009			December 31, 2009			March 31, 2010
Backlog (1)
Dollars (in thousands)		$	199,667		$	153,039		$	113,420		$	106,680		$	110,406		$	124,571
Pounds (in thousands)		7,287			5,557			4,468			4,544			4,915			5,805
Average selling price per pound		$	27.40		$	27.54		$	25.39		$	23.48		$	22.46		$	21.46
Average nickel price per pound
London Metals Exchange(2)		$	4.39		$	4.40		$	6.79		$	7.93		$	7.75		$	10.19

 

(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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