HAYNES INTERNATIONAL INC - Quarter Report: 2011 March (Form 10-Q)

Table of Contents

 

 

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   March 31, 2011

 

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)

 

 

 

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, 2011, the registrant had 12,203,346 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, 2010 and March 31, 2011	1
	Unaudited Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2010 and 2011	2
	Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended March 31, 2010 and 2011	3
	Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2010 and 2011	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
PART II	OTHER INFORMATION
Item 6.	Exhibits	25
	Signatures	26
	Index to Exhibits	27

 

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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, 2010			March 31, 2011
ASSETS
Current assets:
Cash and cash equivalents		$	63,968		$	47,312
Restricted cash—current portion		110			—
Accounts receivable, less allowance for doubtful accounts of $1,116 and $1,160 respectively		62,851			84,047
Inventories		231,783			239,964
Income taxes receivable		698			1,914
Deferred income taxes		10,554			10,531
Other current assets		1,666			3,464
Total current assets		371,630			387,232
Property, plant and equipment, net		107,043			107,728
Deferred income taxes—long term portion		62,446			59,255
Prepayments and deferred charges		3,753			2,945
Intangible assets, net		6,671			6,399
Total assets		$	551,543		$	563,559
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	34,284		$	43,655
Accrued expenses		15,780			13,282
Accrued pension and postretirement benefits		18,758			18,758
Deferred revenue — current portion		2,500			2,500
Current maturities of long-term obligations		109			—
Total current liabilities		71,431			78,195
Long-term obligations (less current portion)		1,324			1,324
Deferred revenue (less current portion)		37,829			36,579
Non-current income taxes payable		308			308
Accrued pension and postretirement benefits		174,802			171,332
Total liabilities		285,694			287,738
Commitments and contingencies (Note 6)		—			—
Stockholders’ equity:
Common stock, $0.001 par value (40,000,000 shares authorized, 12,144,079 and 12,203,346 shares issued and outstanding at September 30, 2010 and March 31, 2011, respectively)		12			12
Preferred stock, $0.001 par value (20,000,000 shares authorized, 0 shares issued and outstanding)		—			—
Additional paid-in capital		229,197			230,921
Accumulated earnings		102,677			109,273
Accumulated other comprehensive loss		(66,037		)	(64,385		)
Total stockholders’ equity		265,849			275,821
Total liabilities and stockholders’ equity		$	551,543		$	563,559

 

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,
		2010			2011			2010			2011
Net revenues		$	94,619		$	139,114		$	175,627		$	245,465
Cost of sales		84,429			118,521			158,592			207,003
Gross profit		10,190			20,593			17,035			38,462
Selling, general and administrative expense		7,977			10,158			16,163			19,278
Research and technical expense		712			862			1,361			1,615
Operating income (loss)		1,501			9,573			(489		)	17,569
Interest income		(69		)	(21		)	(114		)	(101		)
Interest expense		39			30			87			59
Income (loss) before income taxes		1,531			9,564			(462		)	17,611
Provision for (benefit from) income taxes		575			3,348			(132		)	6,139
Net income (loss)		$	956		$	6,216		$	(330	)	$	11,472
Net income (loss) per share:
Basic		$	0.08		$	0.52		$	(0.03	)	$	0.95
Diluted		$	0.08		$	0.51		$	(0.03	)	$	0.94
Weighted average shares outstanding:
Basic		12,049,779			12,065,012			12,049,779			12,057,411
Diluted		12,157,971			12,231,594			12,049,779			12,214,595

 

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
		2010			2011			2010			2011
Net income (loss)		$	956		$	6,216		$	(330	)	$	11,472
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		(2,303		)	1,446			(2,171		)	1,652
Comprehensive income (loss)		$	(1,347	)	$	7,662		$	(2,501	)	$	13,124

 

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,
		2010			2011
Cash flows from operating activities:
Net income (loss)		$	(330	)	$	11,472
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		5,619			5,599
Amortization		279			272
Stock compensation expense		746			920
Excess tax benefit from option exercises		—			(139		)
Deferred revenue		(1,250		)	(1,250		)
Deferred income taxes		(322		)	3,064
Loss on disposal of property		157			51
Change in assets and liabilities:
Accounts receivable		(7,505		)	(20,489		)
Inventories		(23,387		)	(7,034		)
Other assets		(1,690		)	(935		)
Accounts payable and accrued expenses		22,062			6,541
Income taxes		8,582			(938		)
Accrued pension and postretirement benefits		(4,232		)	(3,481		)
Net cash used in operating activities		(1,271		)	(6,347		)
Cash flows from investing activities:
Additions to property, plant and equipment		(7,042		)	(6,447		)
Change in restricted cash		110			110
Net cash used in investing activities		(6,932		)	(6,337		)
Cash flows from financing activities:
Dividends paid		(4,849		)	(4,876		)
Proceeds from exercise of stock options		—			665
Excess tax benefit from option exercises		—			139
Changes in long-term obligations		(105		)	(109		)
Net cash used in financing activities		(4,954		)	(4,181		)
Effect of exchange rates on cash		(184		)	209
Decrease in cash and cash equivalents		(13,341		)	(16,656		)
Cash and cash equivalents, beginning of period		105,095			63,968
Cash and cash equivalents, end of period		$	91,754		$	47,312
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest (net of capitalized interest)		$	32		$	4
Income taxes paid (refunded), net		$	297		$	3,957
Capital expenditures incurred but not yet paid		$	1,017		$	578

 

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, 2010 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 or six months ended March 31, 2011 are not necessarily indicative of the results to be expected for the full fiscal year ending September 30, 2011 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

 

No new accounting pronouncements applicable to the Company were issued in the first six months of fiscal 2011.

 

Note 3.   Inventories

 

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

 

		September 30, 2010			March 31, 2011
Raw Materials		$	20,226		$	23,906
Work-in-process		126,626			129,277
Finished Goods		83,971			85,894
Other		960			887
		$	231,783		$	239,964

 

Note 4.   Income Taxes

 

Income tax expense for the three and six months ended March 31, 2010 and 2011, differed from the U.S. federal statutory rate of 35% primarily due to state income taxes and differing tax rates on foreign earnings. The effective tax rate for the three months ended March 31, 2011 was 35.0% compared to 37.6% in the same period of fiscal 2010. The effective tax rate for the six months ended March 31, 2011 was 34.9% compared to 28.6% in the same period of fiscal 2010.

 

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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, 2010 and 2011 are as follows:

 

		Three Months Ended March 31,												Six Months Ended March 31,
		Pension Benefits						Other Benefits						Pension Benefits						Other Benefits
		2010			2011			2010			2011			2010			2011			2010			2011
Service cost		$	899		$	904		$	51		$	66		$	1,798		$	1,807		$	103		$	132
Interest cost		2,809			2,548			1,205			1,172			5,673			5,722			2,410			2,344
Expected return		(2,566		)	(2,662		)	—			—			(5,185		)	(6,067		)	—			—
Amortizations		1,437			1,704			(949		)	(771		)	2,883			3,535			(1,899		)	(1,541		)
Net periodic benefit cost		$	2,579		$	2,494		$	307		$	467		$	5,169		$	4,997		$	614		$	935

 

The Company contributed $6,360 to Company sponsored domestic pension plans, $2,520 to its other post-retirement benefit plans and $477 to the U.K. pension plan for the six months ended March 31, 2011.  The Company presently expects future contributions of $6,360 to its domestic pension plans, $2,480 to its other post-retirement benefit plans and $466 to the U.K. pension plan for the remainder of fiscal 2011.

 

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 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 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, which were filed in California state court against numerous manufacturers, including the Company, in May 2006 and February 2007, respectively, alleging that the welding-related products of the defendant manufacturers harmed the users of such products through the inhalation of welding fumes containing manganese. The Company believes that it has defenses to these allegations and, that if the Company were to be found liable, the cases would not have a material effect on its financial position, 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 contains monitoring and post-closure care requirements. In addition, IDEM required that a Resource Conservation and Recovery Act, or RCRA, Facility Investigation, or RFI, be conducted in order to further evaluate one area of concern and one solid waste management unit. The RFI commenced in fiscal 2008 and is ongoing.

 

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The Company has also received permits from the North Carolina Department of Environment and Natural Resources, or NCDENR, to close and provide post-closure monitoring and care for the hazardous waste lagoon at its Mountain Home, North Carolina facility. The lagoon area has been closed and is currently undergoing post-closure monitoring and care. The Company is required to monitor groundwater and to continue post-closure maintenance of the former disposal areas at each site. As a result, the Company is aware of elevated levels of certain contaminants in the groundwater and additional corrective action by the Company could be required. In addition, in August, 2008, employees discovered an abnormal pH in the sump pumps located in containment pits in the wastewater treatment facility. After testing, it was determined that there was a leak in the pipeline from the cleaning house to the wastewater treatment facility. NCDENR was notified within 24 hours of the verification of the leak. To date, the state has not responded to this disclosure.

 

As of March 31, 2011 and September 30, 2010, the Company has accrued $1,448 for post-closure monitoring and maintenance activities. Accruals for these costs are calculated by estimating the cost to monitor and maintain each post-closure site and multiplying that amount by the number of years remaining in the 30 year post-closure monitoring period referred to above. At each fiscal year-end, or earlier if necessary, the Company evaluates the accuracy of the estimates for these monitoring and maintenance costs for the upcoming fiscal year. The accrual was based upon the undiscounted amount of the obligation of $1,884 which was then discounted using an appropriate discount rate.

 

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 in 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.

 

Note 8.    Intangible Assets

 

The Company 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 of a trademark 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 $279 and $272 for the six months ended March 31, 2010 and 2011, respectively.

 

The following represents a summary of intangible assets at September 30, 2010 and March 31, 2011:

 

September 30, 2010		Gross Amount			Accumulated Amortization			Carrying Amount
Patents		$	8,667		$	(6,333	)	$	2,334
Trademarks		3,800			—			3,800
Non-compete		1,090			(664		)	426
Other		316			(205		)	111
		$	13,873		$	(7,202	)	$	6,671

 

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March 31, 2011		Gross Amount			Accumulated Amortization			Carrying Amount
Patents		$	8,667		$	(6,473	)	$	2,194
Trademarks		3,800			—			3,800
Non-compete		1,090			(740		)	350
Other		316			(261		)	55
		$	13,873		$	(7,474	)	$	6,399

 

Estimate of Aggregate Amortization Expense:
Year Ended September 30,
2011 (remainder of fiscal year)		$	273
2012		359
2013		350
2014		350
2015		328
2016		279

 

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)		2010			2011			2010			2011
Numerator:
Net Income (loss)		$	956		$	6,216		$	(330	)	$	11,472
Denominator:
Weighted average shares outstanding - Basic		12,049,779			12,065,012			12,049,779			12,057,411
Effect of dilutive stock options		56,192			90,032			53,805			80,634
Effect of restricted stock shares with no performance goal		52,000			76,550			52,000			76,550
Adjustment for net loss		—			—			(105,805		)	—
Weighted average shares outstanding - Diluted		12,157,971			12,231,594			12,049,779			12,214,595
Basic net income (loss) per share		$	0.08		$	0.52		$	(0.03	)	$	0.95
Diluted net income (loss) per share		$	0.08		$	0.51		$	(0.03	)	$	0.94
Number of stock option shares excluded as their effect would be anti-dilutive		219,132			82,660			213,316			148,810
Number of restricted stock shares excluded as their performance goal is not yet met		42,300			50,950			42,300			50,950

 

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 issued to certain key employees is not included in the computation as the performance goal is deemed not yet achieved.

 

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

 

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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 end of 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 of restricted stock that may be granted under the plan 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 November 24, 2010 and December 21, 2010, the Company granted 34,000 and 4,000 shares respectively, 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 shares of common stock subject to the November and December grants was $40.26 and $41.55 per share, respectively, 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 six months ended March 31, 2011:

 

		Number of Shares		Weighted Average Fair Value At Grant Date
Unvested at September 30, 2010		94,300		$	25.71
Granted		38,000		40.40
Forfeited / Canceled		(4,800	)	30.10
Vested		—
Unvested at March 31, 2011		127,500		$	29.92
Expected to vest		101,900		$	32.96

 

Compensation expense related to restricted stock for the three months ended March 31, 2010 and 2011 was $162 and $280, respectively, and for the six months ended March 31, 2010 and 2011 was $192 and $459, respectively. The remaining unrecognized compensation expense at March 31, 2011 was $2,322 to be recognized over a weighted average period of 2.33 years. Compensation expense is not being recorded on a March 31, 2009 grant of 25,600 shares to employees as it continues to be not probable that the performance goal will be achieved.

 

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

 

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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. 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 the first six months of fiscal 2011:

 

Grant Date		Fair Value			Dividend Yield		Risk-free Interest Rate		Expected Volatility		Expected Life
November 24, 2010		$	21.43		1.99	%	0.69	%	90	%	3 years

 

On November 24, 2010, the Company granted 27,400 options at an exercise price of $40.26, the fair market value of the Company’s common stock the day of the grant. During the first six months of fiscal 2011, 26,067 options were exercised and 20,134 options were forfeited/canceled.

 

The stock-based employee compensation expense for stock options for the three months ended March 31, 2010 and 2011 was $224 and $260, respectively, and for the six months ended March 31, 2010 and 2011 was $554 and $461, respectively.  The remaining unrecognized compensation expense at March 31, 2011 was $962 to be recognized over a weighted average vesting period of 0.82 years.

 

The following table summarizes the activity under the stock option plans for the six months ended March 31, 2011:

 

		Number of Shares		Aggregate Intrinsic Value (000s)			Weighted Average Exercise Prices			Weighted Average Remaining Contractual Life
Outstanding at September 30, 2010		394,321					$	38.25
Granted		27,400					$	40.26
Exercised		(26,067	)
Canceled		(20,134	)
Outstanding at March 31, 2011		375,520		$	7,443		$	38.40		6.42 yrs.
Vested or expected to vest		362,945		$	7,443		$	38.40		6.42 yrs.
Exercisable at March 31, 2011		303,321		$	5,878		$	39.50		5.85 yrs.

 

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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		3.42		86,886		86,886
February 21, 2006		29.25			4.92		8,334		8,334
March 31, 2006		31.00			5.00		10,000		10,000
March 30, 2007		72.93			6.00		59,500		59,500
March 31, 2008		54.00			7.00		81,000		81,000
October 1, 2008		46.83			7.50		20,000		13,334
March 31, 2009		17.82			8.00		48,900		32,600
January 8, 2010		34.00			8.75		35,000		11,667
November 24, 2010		40.26			9.67		25,900		—
							375,520		303,321

 

Note 11.    Dividend

 

In the second quarter of fiscal 2011, the Company declared and paid a quarterly cash dividend. The dividend of $0.20 per outstanding share of the Company’s common stock was paid March 15, 2011 to stockholders of record at the close of business on March 1, 2011.  The dividend cash pay-out was $2,441 for the quarter based on shares outstanding.

 

On May 5, 2011, 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, 2011 to stockholders of record at the close of business on June 1, 2011.

 

Note 12.  Fair Value Measurements

 

On October 1, 2008, the Company adopted guidance for assets and liabilities measured at fair value on a recurring basis.  This guidance 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.  This guidance 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.

 

This guidance 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 must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy 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

 

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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.

 

The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2010 and March 31, 2011:

 

		Fair Value Measurements at Reporting Date Using:
September 30, 2010		Level 1			Level 2			Level 3			Total
Assets:
Cash and money market funds		$	63,968		$	—		$	—		$	63,968

 

		Fair Value Measurements at Reporting Date Using:
March 31, 2011		Level 1			Level 2			Level 3			Total
Assets:
Cash and money market funds		$	47,312		$	—		$	—		$	47,312

 

The Company had no Level 3 assets as of September 30, 2010 or March 31, 2011.

 

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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 balance; 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; and the Company’s ability to develop new products.  Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of various factors, many of which are beyond the Company’s control.

 

The Company has based these forward-looking statements on its current expectations and projections about future events.  Although the Company believes that the assumptions on which the forward-looking statements 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, 2010, 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 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 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 high-performance wire products.  The Company distributes its products primarily through its direct sales organization, which includes 11 service and/or sales centers in the United States, Europe and Asia. All of these centers are company-operated.

 

Dividend

 

In the second quarter of fiscal 2011, 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, 2011 to stockholders of record at the close of business on March 1, 2011.  The dividend cash payout was approximately $2.4 million for the quarter based on shares outstanding, and equal to approximately $9.8 million on an annualized basis.

 

On May 5, 2011, 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, 2011

 

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to stockholders of record at the close of business on June 1, 2011.

 

Outlook

 

General

 

Net revenues, volume and net income improved from quarter-to-quarter through fiscal 2010. The trend of sequential improvement in net revenues continued in the first quarter of fiscal 2011, however, the volume and net income amounts in the first quarter of fiscal 2011 decreased slightly from the fourth quarter of fiscal 2010. Contributing to the lower volume for the first quarter of fiscal 2011 compared to the fourth quarter of fiscal 2010 was a reduced number of production and ship days due to planned equipment downtime, holidays and vacations. The decrease in net income in the first quarter of fiscal 2011 compared to the fourth quarter of fiscal 2010 was due to cost associated with the European restructuring, the manufacturing manpower additions in the first quarter of fiscal 2011 and the lower absorption for the reasons previously noted. In the second quarter of fiscal 2011 net revenues increased by $32.8 million, volume increased by 2.0 million pounds and net income increased by $1.0 million, in each case compared to the first quarter of fiscal 2011. The 44.5% increase in volume from the first quarter to the second quarter of fiscal 2011 was the result of an increase in the number of large project shipments in the second quarter, particularly in the “Chemical Processing” market and the “Other” market categories. Although net income in the second quarter of fiscal 2011 was higher than in the first quarter of fiscal 2011 the gross profit margin percentage was 2.0% lower in the second quarter due to the increased number of large projects invoiced in the second quarter as compared to the first quarter.

 

Management expects that net revenues for the third and fourth quarters of fiscal 2011 will approximate the levels of the second quarter, while volume in each of those quarters is expected to be slightly lower than the volume in the second quarter. However, management anticipates sequential improvement in net income for each of the third and fourth quarters of fiscal 2011 due to fewer large project orders compared to second quarter, a corresponding increase in the amount of transactional business as compared to the second quarter, and the impact of price increases instituted in the second quarter, which should begin to impact the Company’s net income in the third quarter and to an increasing extent in the fourth quarter.

 

Backlog

 

Backlog dollars were $241.7 million at March 31, 2011, an increase of approximately 44.7% from $167.0 million at December 31, 2010 due to strong order entry activity during the second quarter.  This increase is the result of a 39.6% increase in backlog pounds and a 3.7% increase in backlog average selling price.

 

The backlog dollars improved in the second quarter due to both a substantial increase in the aerospace and chemical processing market backlogs and because of an improvement in the product mix reflective of higher value alloys and forms.

 

Working Capital

 

Controllable working capital, which includes accounts receivable, inventory, accounts payable and accrued expenses, increased during the second quarter of fiscal 2011 as compared to the first quarter of fiscal 2011 primarily as a result of an increase in  the accounts receivable due to the 30.8% increase in sales between the first and second quarter. The increase in accounts receivable in the second quarter was partially offset by the decline in inventory for the quarter. Both inventory turns and days sales outstanding improved in the second quarter of fiscal 2011. Management expects that both accounts receivable and inventories will moderately decline through the balance of the fiscal year.

 

Competition and Pricing

 

The Company continues to experience price competition in the marketplace, predominantly associated with mill-direct project business. This competition continues to require the Company to aggressively price large quantity and project business orders, which reduces the Company’s gross profit margin and net income.

 

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Average product selling price decreased 7.7% from the first quarter to the second quarter of fiscal 2011. The average selling price in the second quarter was impacted by the competitively priced project business and the volatility of raw material prices, which tempered price increases. The Company initiated price increases during the second quarter applicable to base prices to recover both the rising cost of raw material and non-raw material items. In addition, the Company continues to respond to the competition by increasing emphasis on service centers, offering value-added services, improving its cost structure and focusing on delivery lead-times and reliability.

 

Gross Profit Margin Performance

 

Gross profit margins and gross profit margin percentages have improved in the first half of fiscal 2011 compared to the first half of fiscal 2010 due to a combination of rising volume, improved product mix, improved cost structure and an improving market environment.  Service center transactional business volumes and prices have also improved, particularly in the aerospace market, due to the end of inventory destocking by the Company’s customers and an increase in the commercial aircraft build rate.

 

When comparing the trend of gross profit margin and gross profit margin percentages from the first quarter of fiscal 2011 to the second quarter, the gross profit margin increased by $2.7 million, however, the gross profit margin percentage was 2.0% lower in the second quarter due to the increased number of large projects invoiced in the second quarter as compared to the first quarter. Gross profit margin percentages are expected to improve in subsequent quarters with the expected decline in project business offset by projected increases in higher margin transactional business.

 

		Comparison by Quarter of Gross Profit Margin and Gross Profit Margin Percentage for Fiscal 2010 and 2011
		Quarter Ended
(in thousands)		December 31, 2009			March 31, 2010			June 30, 2010			September 30, 2010			December 31, 2010			March 31, 2011
Net Revenues		$	81,008		$	94,619		$	101,271		$	104,645		$	106,351		$	139,114
Gross Profit Margin		$	6,845		$	10,190		$	16,854		$	19,942		$	17,869		$	20,593
Gross Profit Margin %		8.5		%	10.8		%	16.6		%	19.1		%	16.8		%	14.8		%

 

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.

 

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		Quarter Ended
		December 31, 2009			March 31, 2010			June 30, 2010			September 30, 2010			December 31, 2010			March 31, 2011
Backlog (1)
Dollars (in thousands)		$	110,406		$	124,571		$	130,885		$	147,958		$	166,990		$	241,661
Pounds (in thousands)		4,915			5,805			5,675			5,997			6,911			9,648
Average selling price per pound		$	22.46		$	21.46		$	23.06		$	24.67		$	24.16		$	25.05
Average nickel price per pound
London Metals Exchange(2)		$	7.75		$	10.19		$	8.79		$	10.26		$	10.94		$	12.16

 

(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.

 

		Quarter Ended
		December 31, 2009			March  31, 2010			June  30, 2010			September 30, 2010			December 31, 2010			March 31, 2011
Net revenues (in thousands)
Aerospace		$	28,375		$	33,495		$	36,739		$	39,793		$	44,537		$	48,953
Chemical processing		20,828			18,333			27,461			21,062			20,591			37,238
Land-based gas turbines		14,966			20,028			18,412			20,802			21,541			27,724
Other markets		13,080			19,426			15,540			20,021			15,217			21,985
Total product revenue		77,249			91,282			98,152			101,678			101,886			135,900
Other revenue		3,759			3,337			3,119			2,968			4,465			3,214
Net revenues		$	81,008		$	94,619		$	101,271		$	104,646		$	106,351		$	139,114
Shipments by markets (in thousands of pounds)
Aerospace		1,221			1,435			1,581			1,739			1,688			2,008
Chemical processing		1,155			811			1,372			870			914			1,846
Land-based gas turbines		946			1,291			1,106			1,252			1,199			1,664
Other markets		605			867			665			906			610			855
Total shipments		3,927			4,404			4,724			4,767			4,411			6,373
Average selling price per pound
Aerospace		$	23.24		$	23.34		$	23.24		$	22.88		$	26.38		$	24.38
Chemical processing		18.03			22.61			20.02			24.21			22.53			20.17
Land-based gas turbines		15.82			15.51			16.65			16.62			17.97			16.66
Other markets		21.62			22.41			23.37			22.10			24.95			25.71
Total product (excluding other revenue)		19.67			20.73			20.78			21.33			23.10			21.32
Total average selling price (including other revenue)		20.63			21.48			21.44			21.95			24.11			21.83

 

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