HAYNES INTERNATIONAL INC - Quarter Report: 2014 December (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

 

For the quarterly period ended December 31, 2014

 

or

 

 

For the transition period from                to                

 

Commission File Number:  001-33288

 

HAYNES INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code (765) 456-6000

 

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 x  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 February 6, 2015, the registrant had 12,446,300 shares of Common Stock, $.001 par value, outstanding.

 

 

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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, 2014 and December 31, 2014	1
	Unaudited Consolidated Statements of Operations for the Three Months Ended December 31, 2013 and 2014	2
	Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended December 31, 2013 and 2014	3
	Unaudited Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2013 and 2014	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	22
PART II	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 6.	Exhibits	23
	Signatures	24
	Index to Exhibits	25

 

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PART 1                           FINANCIAL INFORMATION

 

Item 1.     Unaudited Condensed Consolidated Financial Statements

 

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share data)

 

		September 30, 2014			December 31, 2014
ASSETS
Current assets:
Cash and cash equivalents		$	45,871		$	38,374
Accounts receivable, less allowance for doubtful accounts of $861 and $951, respectively		72,439			68,921
Inventories		254,027			266,042
Income taxes receivable		3,235			353
Deferred income taxes		6,297			11,333
Other current assets		2,964			3,649
Total current assets		384,833			388,672
Property, plant and equipment, net		174,083			172,373
Deferred income taxes—long term portion		44,639			39,061
Prepayments and deferred charges		2,031			1,633
Other intangible assets, net		5,185			5,081
Total assets		$	610,771		$	606,820
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	41,957		$	35,157
Accrued expenses		13,213			14,078
Revolving credit facility		—			—
Accrued pension and postretirement benefits		4,572			4,572
Deferred revenue—current portion		2,500			2,500
Total current liabilities		62,242			56,307
Long-term obligations (less current portion)		745			745
Deferred revenue (less current portion)		27,829			27,204
Accrued pension benefits		72,315			72,087
Accrued postretirement benefits		100,910			101,103
Total liabilities		264,041			257,446
Commitments and contingencies (Note 6)		—			—
Stockholders’ equity:
Common stock, $0.001 par value (40,000,000 shares authorized, 12,434,748 and 12,467,798 shares issued, 12,418,471 and 12,446,300 shares outstanding at September 30, 2014 and December 31, 2014, respectively)		12			12
Preferred stock, $0.001 par value (20,000,000 shares authorized, 0 shares issued and outstanding)		—			—
Additional paid-in capital		242,387			242,844
Accumulated earnings		166,999			170,642
Treasury stock, 16,277 shares at September 30, 2014 and 21,498 shares at December 31, 2014		(840		)	(1,091		)
Accumulated other comprehensive loss		(61,828		)	(63,033		)
Total stockholders’ equity		346,730			349,374
Total liabilities and stockholders’ equity		$	610,771		$	606,820

 

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
		December 31,
		2013			2014
Net revenues		$	93,700		$	110,676
Cost of sales		88,450			90,405
Gross profit		5,250			20,271
Selling, general and administrative expense		9,956			9,736
Research and technical expense		878			887
Operating income (loss)		(5,584		)	9,648
Interest income		(46		)	(23		)
Interest expense		18			16
Income (loss) before income taxes		(5,556		)	9,655
Provision for (benefit from) income taxes		(2,064		)	3,274
Net income (loss)		$	(3,492	)	$	6,381
Net income (loss) per share:
Basic		$	(0.29	)	$	0.51
Diluted		$	(0.29	)	$	0.51
Dividend declared per common share		$	0.22		$	0.22

 

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 December 31
		2013			2014
Net income (loss)		$	(3,492	)	$	6,381
Other comprehensive income (loss), net of tax:
Pension and post-retirement		711			1,254
Foreign currency translation adjustment		1,290			(2,459		)
Comprehensive income (loss)		$	(1,491	)	$	5,176

 

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)

 

		Three Months Ended December 31,
		2013			2014
Cash flows from operating activities:
Net income (loss)		$	(3,492	)	$	6,381
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		3,606			4,278
Amortization		104			104
Pension and post-retirement expense — U.S. and U.K.		2,611			3,203
Stock compensation expense		437			457
Excess tax benefit from option exercises and restricted stock vesting		(253		)	—
Deferred revenue		(625		)	(625		)
Deferred income taxes		(4,668		)	(177		)
Loss on disposition of property		17			113
Change in assets and liabilities:
Accounts receivable		20,462			2,616
Inventories		3,541			(13,344		)
Other assets		(1,010		)	(308		)
Accounts payable and accrued expenses		3,822			(5,188		)
Income taxes		2,119			2,910
Accrued pension and postretirement benefits		(2,606		)	(1,246		)
Net cash provided by (used in) operating activities		24,065			(826		)
Cash flows from investing activities:
Additions to property, plant and equipment		(9,313		)	(3,214		)
Net cash used in investing activities		(9,313		)	(3,214		)
Cash flows from financing activities:
Dividends paid		(2,720		)	(2,738		)
Proceeds from exercise of stock options		589			—
Payment for purchase of treasury stock		(335		)	(251		)
Excess tax benefit from option exercises and restricted stock vesting		253			—
Net cash used in financing activities		(2,213		)	(2,989		)
Effect of exchange rates on cash		158			(468		)
Increase (decrease) in cash and cash equivalents		12,697			(7,497		)
Cash and cash equivalents, beginning of period		68,326			45,871
Cash and cash equivalents, end of period		$	81,023		$	38,374
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest (net of capitalized interest)		$	2		$	0
Income taxes paid (net of refunds)		$	376		$	535
Capital expenditures incurred but not yet paid		$	3,941		$	1,032

 

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

 

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HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

NOTES TO CONDENSED 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 Annual Report on Form 10-K for the fiscal year ended September 30, 2014 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 months ended December 31, 2014 are not necessarily indicative of the results to be expected for the full fiscal year ending September 30, 2015 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 intercompany transactions and balances are eliminated.

 

Note 2.         New Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The objective of the update is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the methods of adoption allowed by the new standard and the effect, if any, on its consolidated financial statements

 

In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815).  The objective of the update is to set forth the definition of a derivative instrument and specify how to account for such instruments, including derivatives embedded in hybrid instruments.  In addition, this update establishes when reporting entities, in certain limited, well-defined circumstances, may apply hedge accounting to a relationship involving a designated hedging instrument and hedged exposure.  It is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period.  The Company does not anticipate a material impact to the consolidated financial statements upon adoption.

 

In November 2014, the FASB issued ASU 2014-17, Business Combinations (Topic 805).  The objective of the update is to provide guidance on whether and at what threshold an acquired entity that is a business or nonprofit activity can apply pushdown accounting in its separate financial statements.  It became effective on November 18, 2014.  This update did not result in a material impact to the consolidated financial statements or the related disclosures.

 

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Note 3.         Inventories

 

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

 

		September 30, 2014			December 31, 2014
Raw Materials		$	25,050		$	29,093
Work-in-process		144,285			132,844
Finished Goods		83,674			103,049
Other		1,018			1,056
		$	254,027		$	266,042

 

Note 4.         Income Taxes

 

Income tax expense for the three months ended December 31, 2013 and 2014 differed from the U.S. federal statutory rate of 35% primarily due to state income taxes, differing tax rates on foreign earnings and discrete tax items that impacted income tax expense in these periods. The effective tax rate for the three months ended December 31, 2014 was 33.9% compared to 37.1% in the same period of fiscal 2014.  This decrease is attributable to a change in our manufacturer’s deduction in the first quarter of fiscal 2014.

 

Note 5.         Pension and Post-retirement Benefits

 

Components of net periodic pension and post-retirement benefit cost for the three months ended December 31, 2013 and 2014 are as follows:

 

		Three Months Ended December 31,
		Pension Benefits						Other Benefits
		2013			2014			2013			2014
Service cost		$	993		$	975		$	67		$	84
Interest cost		2,855			2,641			1,145			1,096
Expected return		(3,578		)	(3,563		)	—			—
Amortizations		1,354			1,361			(225		)	609
Net periodic benefit cost		$	1,624		$	1,414		$	987		$	1,789

 

The Company contributed zero to Company sponsored domestic pension plans, $987 to its other post-retirement benefit plans and $236 to the U.K. pension plan for the three months ended December 31, 2014. The Company presently expects future contributions of $3,490 to its other post-retirement benefit plan and $739 to the U.K. pension plan for the remainder of fiscal 2015 and is evaluating possible contribution amounts to the U.S. pension plan. The Company has a minimum contribution requirement of approximately $0.8 million in fiscal 2015 to the U.S. pension plan.

 

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, commercial, employment, and federal and/or state Equal Employment Opportunity Commission (EEOC) administrative actions. Future expenditures for environmental, employment, 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 and processes. 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 is also involved in two actions related to asbestos in its facilities, which were filed in 2012 and 2014, respectively. The Company believes

 

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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 and which was renewed in 2012. 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 additional area of concern and one additional solid waste management unit. The RFI commenced in fiscal 2008 and is ongoing. Based on preliminary results, the Company has determined that additional testing and further source remediation are necessary.

 

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.

 

On August 3, 2012, the Company received an information request from the United States Environmental Protection Agency, or EPA, relating to the Company’s compliance with laws relating to air quality. The Company has responded to the request, and there has been no further action by the EPA.

 

As of September 30, 2014 and December 31, 2014, the Company has accrued $823 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 post-closure monitoring.

 

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 first priority 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 hot-rolling 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 liquidated damages of $25,000 and the Company being required to return the unearned portion of the up-front fee. The Company considered each provision and the likelihood of the occurrence of a default that would result in liquidated damages.  Based on the nature of the events that could trigger the liquidated damages clause, and the availability of the cure periods set forth in the agreement, the Company determined and continues to believe that none of these circumstances are reasonably likely to occur.  Therefore, events resulting in liquidated damages have not been factored in as a reduction to the amount of revenue recognized over the life of the contract.  The cash received of $50,000 is recognized in income on a straight-line basis over the 20-year term of the agreement.  If an event of default occurred and was not cured within any applicable grace period, the Company would recognize the impact of the liquidated damages in the period of default and re-evaluate revenue recognition under the contract for future periods. The portion of the up-front 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. The Company reviews patents for impairment whenever events or circumstances indicate that the carrying amount of a patent may not be recoverable. Recoverability of the patent asset

 

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is measured by a comparison of the carrying amount of the asset to the undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount exceeds the fair value of the asset.

 

As the trademarks have an indefinite life, the Company tests them for impairment at least annually as of August 31 (the annual impairment testing date). 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. No impairment was recognized in the years ended September 30, 2013 or 2014 because the fair value exceeded the carrying values. The Company has a non-compete agreement with a remaining life of eight months.

 

Amortization of the patents, non-competes, and other intangibles was $104 for each of the three-month periods ended December 31, 2013 and 2014.

 

The following represents a summary of intangible assets at September 30, 2014 and December 31, 2014:

 

September 30, 2014		Gross Amount			Accumulated Amortization			Carrying Amount
Patents		$	4,030		$	(2,813	)	$	1,217
Trademarks		3,800			—			3,800
Non-compete		500			(452		)	48
Other		330			(210		)	120
		$	8,660		$	(3,475	)	$	5,185

 

December 31, 2014		Gross Amount			Accumulated Amortization			Carrying Amount
Patents		$	4,030		$	(2,883	)	$	1,147
Trademarks		3,800			—			3,800
Non-compete		500			(470		)	30
Other		330			(226		)	104
		$	8,660		$	(3,579	)	$	5,081

 

Estimate of Aggregate Amortization Expense: Year Ended September 30,
2015 (remainder of fiscal year)		304
2016		388
2017		279
2018		279
2019		31
Thereafter		—

 

Note 9.   Net Income (Loss) Per Share

 

The Company accounts for earnings per share using the two-class method. The two-class method is an earnings allocation that determines net income per share for each class of common stock and participating securities according to participation rights in undistributed earnings. Non-vested restricted stock awards that include non-forfeitable rights to dividends are considered participating securities. Per share amounts are computed by dividing net income attributable to common stockholders by the weighted average shares outstanding during each period. Basic earnings per share is computed by dividing net income available to common stockholders for the period by the weighted average number of common shares outstanding for the period. The computation of diluted earnings per share is similar to basic earnings per share, except the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. As aresult of the loss in first quarter of fiscal 2014, no additional common shares or restricted stock awards are included because their effect is antidilutive.

 

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The following table sets forth the computation of basic and diluted earnings per share:

 

		Three Months Ended December 31,
(in thousands, except share and per share data)		2013			2014
Numerator: Basic and Diluted
Net income (loss)		$	(3,492	)	$	6,381
Dividends paid		(2,720		)	(2,738		)
Undistributed income (loss)		$	(6,212	)	$	3,643
Percentage allocated to common shares (a)		100.0		%	99.1		%
Undistributed income (loss) allocated to common shares		$	(6,212	)	$	3,610
Dividends paid on common shares outstanding		2,720			2,713
Net income (loss) available to common shares		$	(3,492	)	$	6,323
Denominator: Basic and Diluted
Weighted average common shares outstanding		12,247,462			12,333,550
Adjustment for dilutive potential common shares		—			12,923
Weighted average shares outstanding - Diluted		12,247,462			12,346,473
Per common share net income (loss)
Basic		$	(0.29	)	$	0.51
Diluted		$	(0.29	)	$	0.51
Number of stock option shares excluded as their effect would be anti-dilutive		238,722			290,255
Number of restrictive stock option shares as their effect would be anti-dilutive		101,950			112,750

 

(a)  Percentage allocated to common shares - weighted average

 

Common shares outstanding		12,247,462		12,333,550
Unvested participating shares		—		112,750
		12,247,462		12,446,300

 

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 grants of shares of the Company’s common stock subject to transfer restrictions, which vest in accordance with the terms and conditions established by the Compensation Committee. The Compensation Committee may set vesting requirements based on the achievement of specific performance goals or the passage of time.

 

Restricted shares are subject to forfeiture if employment or service terminates prior to the vesting date or if any applicable performance goals are not met. The Company will assess, on an ongoing basis, the probability of whether the performance criteria will be achieved. The Company will recognize compensation expense over the performance period if it is deemed probable that the goals will be achieved. The fair value of the Company’s restricted stock is determined

 

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based upon the closing price of the Company’s common stock on the trading day immediately preceding the grant date. The plan provides for the adjustment of the number of shares covered by an outstanding grant and the maximum number of shares for which restricted stock may be granted in the event of a stock split, extraordinary dividend or distribution or similar recapitalization event.

 

On November 25, 2014, the Company granted 41,700 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 of the Company and (b) the Company has met a three-year net income performance goal, if applicable. The shares of restricted stock granted to non-employee directors will vest on the earlier of (a) the first 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 grants were $46.72 per share, the closing price of the Company’s common stock on the trading day immediately preceding the day of the applicable grant.

 

The following table summarizes the activity under the restricted stock plan for the three months ended December 31, 2014:

 

		Number of Shares		Weighted Average Fair Value At Grant Date
Unvested at September 30, 2014		97,150		$	51.96
Granted		41,700		$	46.72
Forfeited / Canceled		(8,650	)	$	55.72
Vested		(17,450	)	$	56.52
Unvested at December 31, 2014		112,750		$	49.07
Expected to vest		89,550		$	48.70

 

Compensation expense related to restricted stock for the three months ended December 31, 2013 and 2014 was $325 and $330, respectively. The remaining unrecognized compensation expense at December 31, 2014 was $3,232, to be recognized over a weighted average period of 1.20 years. During the first quarter of fiscal 2015, the Company repurchased 5,221 shares of stock from employees and directors at an average purchase price of $48.04 to satisfy required withholding taxes upon vesting of restricted stock-based compensation.

 

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 first option plan was adopted in August 2004 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 331/3% per year over three years from the grant date. The amount of compensation cost recognized in the financial statements is measured based upon the grant date fair value.

 

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 expectations 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 quarter of fiscal 2015:

 

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Grant Date		Fair Value			Dividend Yield		Risk-free Interest Rate		Expected Volatility		Expected Life
November 25, 2014		$	8.17		1.90	%	0.96	%	28	%	3 years

 

On November 25, 2014, the Company granted 81,100 options at an exercise price of $46.72, the fair market value of the Company’s common stock the day immediately preceding the day of the grant. During the first quarter of fiscal 2015, no options were exercised.

 

The stock-based employee compensation expense for stock options for the three months ended December 31, 2013 and 2014 was $112 and $126, respectively.  The remaining unrecognized compensation expense at December 31, 2014 was $1,086, to be recognized over a weighted average vesting period of 1.53 years.

 

The following tables summarize the activity under the stock option plans for the three months ended December 31, 2014 and provide information regarding outstanding stock options:

 

		Number of Shares		Aggregate Intrinsic Value (000s)			Weighted Average Exercise Prices			Weighted Average Remaining Contractual Life
Outstanding at September 30, 2014		282,001					$	51.61
Granted		81,100					$	46.72
Exercised		—					—
Canceled		—					—
Outstanding at December 31, 2014		363,101		$	1,085		$	50.52		6.20
Vested or expected to vest		342,016		$	1,046		$	50.66		6.06
Exercisable at December 31, 2014		239,367		$	934		$	51.66		4.51

 

Grant Date		Exercise Price Per Share		Remaining Contractual Life in Years		Outstanding Number of Shares		Exercisable Number of Shares
March 31, 2006		31.00		1.25		10,000		10,000
March 30, 2007		72.93		2.25		47,500		47,500
March 31, 2008		54.00		3.25		58,000		58,000
October 1, 2008		46.83		3.75		20,000		20,000
March 31, 2009		17.82		4.25		12,084		12,084
January 8, 2010		34.00		5.00		12,400		12,400
November 24, 2010		40.26		5.92		19,667		19,667
November 25, 2011		55.88		6.92		19,700		19,700
November 20, 2012		47.96		7.92		35,600		23,734
December 10, 2012		48.39		7.92		1,800		1,200
November 26, 2013		52.78		8.92		45,250		15,082
November 25, 2014		46.72		9.92		81,100		—
						363,101		239,367

 

Note 11.    Dividend

 

In the first quarter of fiscal 2015, the Company declared and paid a quarterly cash dividend. The dividend of $0.22 per outstanding share of the Company’s common stock was paid December 15, 2014 to stockholders of record at the close of business on December 1, 2014.  The dividend cash pay-out was $2,738 for the quarter based on the number of shares outstanding.

 

On February 5, 2015, the Company announced that the Board of Directors declared a regular quarterly cash dividend of $0.22 per outstanding share of the Company’s common stock.  The dividend is payable March 16, 2015 to stockholders of record at the close of business on March 2, 2015.

 

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Note 12.  Fair Value Measurements

 

The fair value hierarchy has three levels based on the inputs used to determine fair value.

 

·                  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. Money market funds included in cash and cash equivalents of $45,871 and $38,374 as of September 30, 2014 and December 31, 2014, respectively, are considered Level 1.

 

Note 13.  Changes in Accumulated Other Comprehensive Income (Loss) by Component

 

Comprehensive income (loss) includes changes in equity that result from transactions and economic events from non-owner sources. Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss) items, including pension and foreign currency translation adjustments, net of tax when applicable.

 

Accumulated Other Comprehensive Income (Loss)

 

		Three Months Ended December 31, 2013
		Pension Plan			Postretirement Plan			Foreign Exchange			Total
Accumulated other comprehensive income (loss) as of September 30, 2013		$	(42,798	)	$	(15,964	)	$	1,963		$	(56,799	)
Other comprehensive income before classifications		—			—			1,290			1,290
Amounts reclassified from accumulated other comprehensive income (loss)		853			(142		)	—			711
Net current-period other comprehensive income (loss)		853			(142		)	1,290			2,001
Accumulated other comprehensive income (loss) as of December 31, 2013		$	(41,945	)	$	(16,106	)	$	3,253		$	(54,798	)

 

		Three Months Ended December 31, 2014
		Pension Plan			Postretirement Plan			Foreign Exchange			Total
Accumulated other comprehensive income (loss) as of September 30, 2014		$	(42,800	)	$	(20,000	)	$	972		$	(61,828	)
Other comprehensive income (loss) before classifications		—			—			(2,459		)	(2,459		)
Amounts reclassified from accumulated other comprehensive income (loss)		872			382			—			1,254
Net current-period other comprehensive income (loss)		872			382			(2,459		)	(1,205		)
Accumulated other comprehensive income (loss) as of December 31, 2014		$	(41,928	)	$	(19,618	)	$	1,487		$	(63,033	)

 

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Reclassifications out of Accumulated Other Comprehensive Income

 

		Three Months Ended  December 31, 2013									Three Months Ended December 31, 2014
		Pension Plan			Post- retirement Plan			Total			Pension Plan			Post- retirement Plan			Total
Amortization of Pension and Postretirement Plan items
Prior Service Costs (a)		$	(202	)	$	724		$	522		$	(202	)	—			$	(202	)
Actuarial (losses) (a)		(1,153		)	(499		)	(1,652		)	(1,183		)	$	(607	)	(1,790		)
Total before tax		(1,355		)	225			(1,130		)	(1,385		)	(607		)	(1,993		)
Tax (expense) or benefit		502			(83		)	419			513			225			738
Total reclassification for the period		$	(853	)	$	142		$	(711	)	$	(872	)	(382		)	$	(1,254	)

 

(a)       These accumulated other comprehensive income components are included in the computation of net periodic pension cost.

 

Note 14.  Subsequent Event - Acquisition

 

On January 7, 2015, the Company acquired the assets and operations of Leveltek Processing, LLC located in LaPorte, Indiana for $14.6 million in cash.  The acquisition of the LaPorte assets will provide the Company control of a significant portion of the sheet stretching, leveling, slitting and cut-to-length capabilities that were previously an outsourced function. Acquisition costs incurred in the first quarter of fiscal 2015 were not significant. The business is being operated under the name LaPorte Custom Metal Processing, LLC (LCMP), a subsidiary of the Company.

 

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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, each as amended. All statements other than statements of historical fact, including statements regarding market and industry prospects and future results of operations or financial position, made in this Form 10-Q are forward-looking.  In many cases, you can identify forward-looking statements by terminology, such as “may”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of such terms and other comparable terminology. The forward-looking information may include, among other information, statements concerning the Company’s outlook for fiscal year 2015 and beyond, overall volume and pricing trends, cost reduction strategies and their anticipated results, capital expenditures and dividends.  There may also be other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.  Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of various factors, many of which are beyond the Company’s control.

 

The Company has based these forward-looking statements on its current expectations and projections about future events.  Although the Company believes that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate. As a result, the forward-looking statements based upon those assumptions also could be incorrect.  Risks and uncertainties may affect the accuracy of forward-looking statements. Some, but not all, of these risks are listed in Item 1A. of Part 1 of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2014.

 

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, gas turbine engines, and industrial heating and heat treatment 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. Management believes Haynes is one of the principal producers of high-performance alloy flat products in sheet, coil and plate forms, and sales of these forms, in the aggregate, represented approximately 58% of net product revenues in fiscal 2014. 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’s products are sold primarily through its direct sales organization, which includes 13 service and/or sales centers in the United States, Europe and Asia. All of these centers are Company operated.

 

Dividends Paid and Declared

 

In the first quarter of fiscal 2015, the Company declared and paid a regular quarterly cash dividend of $0.22 per outstanding share of the Company’s common stock. The dividend was paid December 15, 2014 to stockholders of record at the close of business on December 1, 2014.  The dividend cash pay-out was approximately $2.7 million for the quarter based on the number of shares outstanding and equal to approximately $10.9 million on an annualized basis.

 

On February 5, 2015, the Company announced that the Board of Directors declared a regular quarterly cash dividend of $0.22 per outstanding share of the Company’s common stock.  The dividend is payable March 16, 2015 to

 

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stockholders of record at the close of business on March 2, 2015.

 

Subsequent Event

 

On January 7, 2015, the Company acquired the assets and operations of Leveltek Processing, LLC located in LaPorte, Indiana for $14.6 million in cash.  The acquisition of the LaPorte assets will provide the Company control of a significant portion of the sheet stretching, leveling, slitting and cut-to-length capabilities that were previously an outsourced function. The business is being operated under the name LaPorte Custom Metal Processing, LLC (LCMP), a subsidiary of the Company.

 

Capital Spending

 

The Company’s strategic capital investment projects that were announced in fiscal 2012 are substantially complete and resulted in expansions of flat product capacity in Kokomo, Indiana and tubular production capacity in Arcadia, Louisiana.  The Company has already begun to capture operating leverage on these investments and management expects continued benefits as utilization ramps up on this new capacity. The forecast for capital investments in fiscal 2015 is approximately $22.0 million, excluding the previously-mentioned acquisition of the Leveltek LaPorte assets, which were purchased for $14.6 million in January, 2015. The combined $36.6 million is our projected cash used in investing activities for fiscal 2015.

 

Volumes, Competition and Pricing

 

Business conditions have improved significantly from the first quarter of fiscal 2014.  In that quarter, the Company experienced reduced demand, increased price competition in commodity-type alloys and destocking in the supply chain as customers consumed excess inventory.  In the first quarter of fiscal 2015, the Company experienced better pricing power and a stronger mix of high-value specialty and proprietary alloys in high-value product forms.  Both of these circumstances contributed to an average selling price improvement for product sales of $2.39 per pound sold, a 11.4% improvement.  The price increases that were announced in the second half of fiscal 2014 are favorably impacting the first quarter of fiscal 2015. Product-sales average selling price per pound differs from aggregate selling price per pound, as reported in previous filings, due to the exclusion of other revenue not associated with pounds shipped.

 

The market price of nickel has been declining, which can cause customers to delay orders for the Company’s products in order to receive a lower price in the future.  In addition, the Company values inventory utilizing the first-in, first-out (“FIFO”) inventory costing methodology. In a period of decreasing raw material costs, the FIFO inventory valuation normally results in higher costs of sales as compared to the last-in, first out method.  This could be a headwind for gross margins in the remainder of fiscal year 2015.

 

Net Revenue and Gross Profit Margin Performance

 

		Comparison by Quarter of Gross Profit Margin and Gross Profit Margin Percentage for Fiscal 2014 and 2015
		Quarter Ended
(dollars in thousands)		December 31, 2013			March 31, 2014			June 30, 2014			September 30, 2014			December 31, 2014
Net Revenues		$	93,700		$	115,350		$	126,293		$	120,067		$	110,676
Gross Profit Margin		$	5,250		$	9,064		$	14,061		$	18,923		$	20,271
Gross Profit Margin %		5.6		%	7.9		%	11.1		%	15.8		%	18.3		%

 

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In the first quarter of each fiscal year, the Company’s gross profit margin percentage is typically lower than the preceding quarter due to lower absorption of fixed manufacturing costs that do not decrease in proportion with decreased production levels. Production levels decrease in the first quarter due to the Company’s observance of seasonal holidays and planned equipment downtime for capital upgrades and maintenance projects.

 

While volume shipped in the first quarter of fiscal 2015 was lower in pounds than the fourth quarter of fiscal 2014, the pricing and profitability of the product improved, which helped drive a higher gross margin percentage.  Gross margin dollars for the first quarter of fiscal 2015 were $20.3 million dollars, which increased by $1.3 million compared to the fourth quarter of fiscal 2014 and represented an increase of $15.0 million compared to the first quarter of last year.  Approximately $6.5 million of the increase from the comparable period last fiscal year is attributable to increased pricing and a more profitable mix of products and projects sold in the first quarter of fiscal 2015.  An estimated $8.5 million is attributable to higher-cost inventory charged to cost of sales in the first quarter of fiscal 2014.

 

Backlog

 

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 and a breakdown of net revenues, shipments and average selling prices to the markets served by the Company for the periods shown. The 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, 2013			March 31, 2014			June 30, 2014			September 30, 2014			December 31, 2014
Backlog (1)
Dollars (in thousands)		$	180,150		$	202,283		$	204,680		$	221,322		$	215,529
Pounds (in thousands)		5,875			7,520			8,240			7,835			8,032
Average selling price per pound		$	30.66		$	26.90		$	24.84		$	28.25		$	26.83
Average nickel price per pound
London Metals Exchange(2)		$	6.31		$	7.10		$	8.42		8.20			7.22

 

(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.

 

Backlog was $215.5 million at December 31, 2014, a decrease of approximately $5.8 million, or 2.6%, from $221.3 million at September 30, 2014. The backlog dollars decreased during the first quarter of fiscal 2015 due to a 5.0% decrease in the average selling price per pound, partially offset by a 2.5% increase in pounds.

 

Quarterly Market Information

 

		Quarter Ended
		December 31, 2013			March 31, 2014			June 30, 2014			September 30, 2014			December 31, 2014
Net revenues (in thousands)
Aerospace		$	39,951		$	47,257		$	54,177		$	53,776		$	43,255
Chemical processing		23,073			30,436			30,570			29,330			30,753
Land-based gas turbines		18,145			21,756			24,989			21,853			17,533
Other markets		9,403			11,389			12,626			10,993			14,100
Total product revenue		90,572			110,838			122,362			115,952			105,641
Other revenue		3,128			4,512			3,931			4,115			5,035
Net revenues		$	93,700		$	115,350		$	126,293		$	120,067		$	110,676
Shipments by markets (in thousands of pounds)
Aerospace		1,630			2,226			2,577			2,399			1,809
Chemical processing		1,121			1,528			1,369			1,224			1,182
Land-based gas turbines		1,206			1,515			1,641			1,524			1,084
Other markets		362			423			470			446			447
Total shipments		4,319			5,692			6,057			5,593			4,522
Average selling price per pound
Aerospace		$	24.51		$	21.23		$	21.02		$	22.42		$	23.91
Chemical processing		20.58			19.92			22.33			23.96			26.02
Land-based gas turbines		15.05			14.36			15.23			14.34			16.17
Other markets		25.98			26.92			26.86			24.65			31.54
Total product (excluding other revenue)		20.97			19.47			20.20			20.73			23.36
Total average selling price (including other revenue)		21.69			20.27			20.85			21.47			24.48

 

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