HAYNES INTERNATIONAL INC - Quarter Report: 2015 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

 

For the quarterly period ended June  30, 2015

 

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 ☒  No ☐

 

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 ☒  No ☐

 

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 ☐ No ☒

 

As of August 6, 2015, the registrant had 12,446,000  shares of Common Stock, $.001 par value, outstanding.

 

 

 

 

---

 

 

 

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

 

---

 

PART 1FINANCIAL 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)

 

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

 

---

 

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

 

 

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

---

 

 

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

 

 

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

 

 

 

 

---

 

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

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

 

 

---

 

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 and nine months ended June 30, 2015 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, 2017, 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. This update is not expected to result in a material impact to the consolidated financial statements or the related disclosures.

 

 

Note 3.Inventories

 

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

 

 

 

 

---

 

Note 4.Income Taxes

 

Income tax expense for the three and nine months ended June 30, 2014 and 2015 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 June 30, 2015 was 39.2% compared to 32.9% in the same period of fiscal 2014.  The higher effective tax rate for the third quarter of fiscal 2015 is primarily attributable to a change in the Indiana tax law that was enacted in May, which decreased the deferred tax asset and increased tax expense by $1.1 million. The effective tax rate for the nine-months ended June 30, 2015 was 34.6% compared to 29.5% in the same period of fiscal 2014.

 

 

Note 5.Pension and Post-retirement Benefits

Components of net periodic pension and post-retirement benefit cost for the three months and nine months ended June 30, 2014 and 2015 are as follows:

 

 

 

The Company has a minimum contribution requirement of approximately $800 in fiscal 2015 to the U.S. pension plan. While the Company has not yet contributed to Company sponsored domestic pension plans, the Company contributed $3,346 to its other post-retirement benefit plans and $694 to the U.K. pension plan for the nine months ended June 30, 2015. The Company presently expects future contributions of $1,500 to its U.S. pension plan, $1,131 to its other post-retirement benefit plan, and $281 to the U.K. pension plan for the remainder of fiscal 2015.

 

 

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 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 that it has defenses to these lawsuits 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. The Company also has 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 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 June 30, 2015, 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.    Goodwill and Other Intangible Assets, Net

 

The Company is required to assess goodwill and any indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. The analysis of potential impairment of goodwill requires a two-step approach. The first is the estimation of fair value of each reporting unit. If step one indicates that impairment potentially exists, the second step is performed to measure the amount of impairment, if any. Goodwill impairment occurs when the estimated fair value of goodwill is less than its carrying value.

 

The valuation methodology and underlying financial information included in our determination of fair value require significant management judgments. We use both market and income approaches to derive fair value. The judgments in these two approaches include, but are not limited to, comparable market multiples, long-term projections of future financial performance, and the selection of appropriate discount rates used to determine the present value of future cash flows. Changes in such estimates or the application of alternative assumptions could produce significantly different results. No impairment charges for goodwill were recorded in period ended June 30, 2015.

 

In addition, 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 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.

 

On January 7, 2015, the Company acquired the assets and operations of Leveltek Processing, LLC in LaPorte, Indiana for $14.6 million in cash (See Note 14, Acquisition).  In connection with the acquisition, the Company recorded goodwill of $4,789 and customer relationships intangible assets of $2,100.  As the customer relationships have a definite life, the Company amortizes them over a period of 16 years under an accelerated method and tests them for impairment at least annually as of August 31 (the annual impairment testing date). 

 

Amortization of the customer relationships, patents, non-competes, and other intangibles was $104 and $144 for the three-month periods ended June 30, 2014 and June 30, 2015, respectively, and $312 and $385 for the nine-month periods ended June 30, 2014 and June 30, 2015, respectively. 

 

The following represents the changes in the carrying value of goodwill for the period ended June 30, 2015:

 

 

 

The following represents a summary of intangible assets at September 30, 2014 and June 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

---

 

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 a result of the loss in the first nine months of fiscal 2014, no additional common shares or restricted stock awards are included because their effect is antidilutive.

 

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

 

 

 

 

 

 

 

 

 

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 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 nine months ended June 30, 2015:

 

 

Compensation expense related to restricted stock for the three months ended June 30, 2014 and 2015 was $325 and $442, respectively, and for the nine months ended June 30, 2014 and 2015 was $1,135 and $1,211, respectively. The remaining unrecognized compensation expense related to restricted stock at June 30, 2015 was $2,339, to be recognized over a weighted average period of 1.42 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:

 

 

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 nine months of fiscal 2015, no options were exercised.

---

 

 

The stock-based employee compensation expense for stock options for the three months ended June 30, 2014 and 2015 was $121 and $136, respectively, and for the nine months ended June 30, 2014 and 2015 was $354 and $398, respectively. The remaining unrecognized compensation expense at June 30, 2015 was $813, to be recognized over a weighted average vesting period of 1.49 years.

 

The following tables summarize the activity under the stock option plans for the nine months ended June 30, 2015 and provide information regarding outstanding stock options:

 

 

 

 

 

 

 

 

 

Note 11.    Dividend

 

In the third 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 June 15, 2015 to stockholders of record at the close of business on June 1, 2015.  The dividend cash pay-out was $2,738 for the quarter based on the number of shares outstanding.

 

On August 6, 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 September 15, 2015 to stockholders of record at the close of business on September 1, 2015.

 

 

Note 12.  Fair Value Measurements

 

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

 

---

 

 

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 $47,235 as of September 30, 2014 and June 30, 2015, 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)

 

 

 

 

 

 

 

 

 

 

 

 

---

 

Note 14.  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 provides the Company control of the sheet stretching, leveling, slitting and cut-to-length operations that were previously an outsourced function. Acquisition costs incurred in the first quarter of fiscal 2015 were not significant. The acquired business is being operated by LaPorte Custom Metal Processing, LLC (LCMP), a wholly-owned subsidiary of the Company. 

 

The following is a summary of the estimated purchase price allocation in connection with the LCMP acquisition.  The allocation is preliminary, pending the finalization of the fair value of property, plant and equipment, the customer relationships intangible and resulting goodwill.  The determination of fair value for acquired assets includes the use of Level 3 inputs, such as the condition and utilization of the property, plant and equipment acquired, management’s projected financial results for LCMP, and the discount rate used to determine the present value of anticipated future cash flows.

 

 

The goodwill recognized in connection with the Leveltek-LaPorte assets consists of the value associated with the addition of the stretching and leveling capabilities as well as increased capacity in slitting and cut-to-length operations to meet customer demand.  The complementary asset capabilities are expected to lead to operating cost synergies as well as expand the Company’s commercial offerings.

 

 

 

Note 15.  Capital lease obligation

 

On January 1, 2015, the company entered into a capital lease agreement for the building that houses the assets and operations of LaPorte Custom Metal Processing (LCMP).  The capital asset and obligation are recorded at the present value of the minimum lease payments.  The asset is included in Property, plant and equipment, net on the Consolidated Balance Sheet and is depreciated over the 20 year lease term.  The long term component of the capital lease obligation is included in Long term obligations. 

 

As of June 30, 2015, future minimum lease rental payments applicable to the capital lease was as follows. 

 

 

The capital lease obligation is included in Long-term obligations (less current portion) on the Consolidated Balance Sheet.

 

 

---

 

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 14 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 third 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 June 15, 2015 to stockholders of record at the close of business on June 1, 2015.  The dividend cash pay-out in the third quarter was approximately $2.7 million based on the number of shares outstanding and equal to approximately $10.9 million on an annualized basis.

 

On August 6, 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 September 15, 2015 to stockholders of record at the close of business on September 1, 2015.

 

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 provides the Company control of a significant portion of the sheet stretching, leveling, slitting and cut-to-length operations that were previously an outsourced function. Acquisition costs incurred were not

---

 

significant. The acquired business is being operated by LaPorte Custom Metals Processing, LLC (LCMP), a wholly-owned subsidiary of the Company. The goodwill recognized in connection with the Leveltek-LaPorte assets consists of the value associated with the addition of the stretching and leveling capabilities as well as increased capacity in slitting and cut-to-length operations to meet customer demand.  The complementary asset capabilities is expected to lead to operating cost synergies as well as expand the Company’s commercial offerings.

 

Capital Spending

 

The Company’s strategic capital investment projects that were announced in fiscal 2012 have been completed and resulted in expansions of flat product capacity in Kokomo, Indiana and tubular production capacity in Arcadia, Louisiana.  These investments have already begun contributing to profitability, and management expects continued benefits as utilization ramps up on this new capacity. The forecast for capital investments in fiscal 2015 is approximately $18.8 million, including amounts spent to date, but excluding the acquisition of the Leveltek-LaPorte assets, which were purchased for $14.6 million in January, 2015. The combined $33.4 million is our projected cash used in investing activities for fiscal 2015.

 

Volumes, Competition and Pricing

 

Business condition were challenging in the third quarter of fiscal 2015 with falling nickel prices and continued headwinds related to foreign currency and lower chemical processing market activity.  Volumes in each of the Company’s major markets were lower in the third quarter of fiscal year 2015 as compared to the same period in fiscal 2014 and as compared to the second quarter of fiscal 2015.  However, a higher-valued product mix helped sustain the average selling price per pound and supported the gross profit as a percentage of net revenues and profitability in the quarter.  The price increases that were announced in the second half of fiscal 2014 also favorably impacted pricing of product that shipped in the third quarter of fiscal 2015.  These circumstances contributed to an average selling price improvement for product sales of $2.86 per pound sold, a 14.2% improvement over the first nine months of fiscal 2014.

 

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.  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.  In addition, falling nickel prices create compression on gross margins due to pressure on selling prices from lower nickel prices, combined with higher cost of sales as we sell off the higher cost inventory acquired in a prior period with higher nickel prices.  This compression occurred in the third quarter and will likely continue to negatively impact gross margins in the remainder of fiscal 2015.

 

During the first nine months of fiscal 2014, 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 nine months of fiscal 2015, the Company experienced higher aerospace volume as well as a stronger mix of high-value specialty and proprietary alloys in high-value product forms in the chemical processing and other markets.   The commodity portion of the chemical processing market remains highly cost competitive with a low volume of available projects.

 

Net Revenue and Gross Profit Margin Performance:

 

 

 

During the third quarter of fiscal 2015, gross margin slightly declined sequentially but still represents a recovery from the prior year.    Gross margin was 19.9% in the third quarter compared to an 11.1% gross margin percentage in the same period last year.  As mentioned above, a stronger mix of high-value specialty and proprietary alloys in high-value product forms contributed to this improvement. The slight reduction compared to the second quarter of fiscal 2015 relates to falling nickel prices.

 

---

 

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.

 

---

 

Backlog was $192.9 million at June 30, 2015, a decrease of approximately $27.5 million, or 12.5%, from $220.4 million at March 31, 2015. The backlog dollars decreased during the third quarter of fiscal 2015 due to an 11.5% decrease in pounds, combined with a 1.1% decrease in the average selling price per pound. The decrease in pounds is due to the continued shipping of some major projects in the third quarter and lower order entry driven presumably by the falling price of nickel.  The decrease in average selling price per pound reflects a change in product mix in the backlog as well as a decline in the market prices of raw materials, primarily nickel. 

 

---

 

Quarterly Market Information

 

 

 

---

 

Results of Operations for the Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30, 2015

 

The following table sets forth certain financial information as a percentage of net revenues for the periods indicated and compares such information between periods. 

 

 

 

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

 

 

 

Net Revenues.   Net revenues were $121.3 million in the third quarter of fiscal 2015, a decrease of 4.0% from $126.3 million in the same period of fiscal 2014.   Volume was 4.8 million pounds in the third quarter of fiscal 2015, a decrease of 21.0% from 6.1 million pounds in the same period of fiscal 2014.  The decrease in volume, which is most pronounced in the chemical processing and land-based gas turbines market, is primarily due to customers holding off orders because of the decline in the market price of nickel prices and lower base-business demand.  The product-sales average selling price was $23.56 per pound in the third quarter of fiscal 2015, an increase of 16.6% from $20.20 per pound in the same period of fiscal 2014.  The average selling price increased as a result of several factors, including the following: change in product mix, representing approximately $5.22 of the increase, partially offset by lower raw

---

 

material market prices, which represented approximately $1.11 per pound of a decrease, along with increased price competition, which represented approximately $0.75 per pound of a decrease. 

 

Sales to the aerospace market were $56.5 million in the third quarter of fiscal 2015, an increase of 4.3% from $54.2 million in the same period of fiscal 2014, due to a 10.2% increase in average selling price per pound partially offset by a 5.4% decrease in volume.  The decrease in volume reflects a prior year single project of lower-priced product in ingot form that shipped in the third quarter of fiscal 2014.  In addition, falling nickel prices will likely cause lower order volume as customers hold orders awaiting a lower price in the future.  The average selling price per pound increase reflects the change to a higher-value product mix in part due to the prior year lower-priced ingot project shipped in the third quarter of fiscal 2014, which represented approximately $3.54 of the increase, partially offset by a decrease in market prices of raw material, which represented approximately $1.00 per pound of a decrease, and price decreases due to increased competition in the commodity alloys, which represented approximately $0.40 of a decrease.

 

Sales to the chemical processing market were $24.2 million in the third quarter of fiscal 2015, a decrease of 21.0% from $30.6 million in the same period of fiscal 2014, due to a 37.8% decrease in volume, partially offset by a 27.0% increase in the average selling price per pound.  Volumes decreased due to a lower-level of small to mid-size project orders compared to the third quarter of fiscal 2014, leaving the remaining volume related to high-value niche activity.  The increase in average selling price primarily reflects the higher-value product mix shipped in the third quarter of fiscal 2015, which represented approximately $10.93 of the increase.  Partially offsetting the increase in average selling price were lower raw material market prices, which represented approximately $1.59 of a decrease, along with competitive pricing on commodity alloys, which represented approximately $3.31 of a decrease.

 

Sales to the land-based gas turbine market were $17.6 million in the third quarter of fiscal 2015, a decrease of 29.5% from $25.0 million for the same period of fiscal 2014, due to a decrease of 37.4% in volume partially offset by an increase of 12.5% in the average selling price per pound. Volumes decreased because of lower levels of transactional business due to falling nickel prices and sporadic demand. The increase in average selling price primarily reflects a change in product mix, which represented approximately $2.37 of an increase, and pricing increases in fiscal 2014 which shipped in the third quarter of fiscal 2015, which represented approximately $0.62 of an increase, partially offset by lower raw material market prices, which represented approximately $1.08 of a decrease.

 

Sales to other markets were $14.5 million in the third quarter of fiscal 2015, an increase of 14.8% from $12.6 million in the same period of fiscal 2014, due to a 15.8% increase in average selling price per pound partially offset by a decrease of 0.9% in volume.  The increase in average selling price reflects a change to a higher-value mix of products, which represented approximately $5.95 of the increase, partially offset by lower raw material market prices, which represented approximately $0.83 of a decrease, and competitive pricing of commodity alloys, which represented approximately $0.88 of a decrease.

 

Other Revenue.   Other revenue was $8.5 million in the third quarter of fiscal 2015, an increase of 116.6% from $3.9 million in the same period of fiscal 2014. The increase is due primarily to higher conversion sales, in part from the acquisition of the Leveltek-LaPorte operations.

 

Cost of Sales.  Cost of sales was $97.1 million, or 80.1% of net revenues, in the third quarter of fiscal 2015 compared to $112.2 million, or 88.9% of net revenues, in the same period of fiscal 2014. Cost of sales in the third quarter of fiscal 2015 decreased by $15.1 million as compared to the same period of fiscal 2014 due to lower volumes and lower raw material costs relative to the same period of fiscal 2014, partially offset by higher manufacturing costs due to the higher-cost mix.

 

Gross Profit.   As a result of the above factors, gross profit was $24.2 million for the third quarter of fiscal 2015, an increase of $10.1 million from the same period of fiscal 2014. Gross margin as a percentage of net revenue increased to 19.9% in the third quarter of fiscal 2015 as compared to 11.1% in the same period of fiscal 2014. The increase is primarily attributable to a more profitable mix of products sold in fiscal 2015 as well as maintaining prices in a falling nickel price environment.

 

Selling, General and Administrative Expense.  Selling, general and administrative expense was $12.4 million for the third quarter of fiscal 2015, an increase of $2.3 million from the same period of fiscal 2014. The increase in expense was primarily driven by higher foreign exchange losses and higher incentive compensation as compared to the third quarter of fiscal 2014. Selling, general and administrative expense as a percentage of net revenues increased to 10.2% for the third quarter of fiscal 2015 compared to 8.0% for the same period of fiscal 2014.

 

Research and Technical Expense.  Research and technical expense was $0.9 million, or 0.7% of revenue, for the third quarter of fiscal 2015, compared to $0.9 million, or 0.7% of revenue, in the same period of fiscal 2014.

 

Operating Income/(Loss).  As a result of the above factors, operating income in the third quarter of fiscal 2015 was $10.9 million compared to $3.1 million in the same period of fiscal 2014.

 

---

 

Income Taxes.  Income tax expense was $4.2 million in the third quarter of fiscal 2015, an increase of $3.2 million from $1.0 million in the third quarter of fiscal 2014.  The effective tax rate for the third quarter of fiscal 2015 was 39.2%, compared to 32.9% in the same period of fiscal 2014.  The higher effective tax rate this quarter was primarily due to a change in the Indiana tax law that was enacted in May, which decreased the deferred tax asset and increased tax expense by $1.1 million.   This change in tax law is expected to have a favorable impact on the Company’s tax rate beginning in fiscal 2017. 

 

Net Income/(Loss).  As a result of the above factors, net income in the third quarter of fiscal 2015 was $6.6 million, an increase of $4.5 million from $2.1 million in the same period of fiscal 2014.

 

Results of Operations for the Nine Months Ended June 30, 2014 Compared to the Nine Months Ended June 30, 2015

 

The following table sets forth certain financial information as a percentage of net revenues for the periods indicated and compares such information between periods. 

 

 

 

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

 

 

 

---

 

Net Revenues.  Net revenues were $370.6 million in the first nine months of fiscal 2015, an increase of 10.5% from $335.3 million in the same period of fiscal 2014 due to an increase in average selling price per pound partially offset by lower volumes.   Volume was 15.2 million pounds in the first nine months of fiscal 2015, a decrease of 5.1% from 16.1 million pounds in the same period of fiscal 2014 with reductions primarily in chemical processing and land-based gas turbine markets.  The product-sales average selling price was $23.01 per pound in the first nine months of fiscal 2015, an increase of 14.2% from $20.15 per pound in the same period of fiscal 2014.  Average selling price increased primarily due to a higher-value product mix, which represented approximately $3.10 of the increase. The Company announced a price increase in the second half of fiscal 2014, which helped improve the price of products shipped in fiscal 2015, and represented approximately $0.12 of the increase.  These increases were partially offset by lower market prices for raw materials, which represented approximately $0.36 of a decrease.

 

Sales to the aerospace market were $160.1 million in the first nine months of fiscal 2015, an increase of 13.2% from $141.4 million in the same period of fiscal 2014, due to a 7.8% increase in volume combined with a 5.0% increase in the average selling price per pound. The increase in volume reflects the better flow of inventory in the aerospace supply chain which was more reflective of end use demand than in prior periods.  The average selling price per pound increase reflects the impact of a higher-value product mix, particularly because of a prior year large project of commodity ingot sales in the second and third quarters of fiscal 2014, which represented approximately $1.76 of the increase, partially offset by lower market raw material prices, which represented approximately $0.34 of a decrease, and by pricing competition, which represented approximately $0.32 of a decrease.

 

Sales to the chemical processing market were $90.5 million in the first nine months of fiscal 2015, an increase of 7.6% from $84.1 million in the same period of fiscal 2014, due to a 27.7% increase in average selling price per pound partially offset by a 15.8% decrease in volume.  The first nine months of fiscal 2015 included several high-value specialty application projects but represented less volume than was shipped in fiscal 2014.  The increase in average selling price was driven predominately by a change in mix to higher-value products and price increases announced in fiscal 2014, which represented approximately $6.34 of the increase, partially offset by lower market prices for raw materials, which represented approximately $0.53 of a decrease.

 

Sales to the land-based gas turbine market were $55.0 million in the first nine months of fiscal 2015, a decrease of 15.2% from $64.9 million for the same period of fiscal 2014, due to a decrease of 23.7% in volume partially offset by an 11.0% increase in the average selling price per pound. Volumes decreased due to lower levels of transactional business resulting from falling nickel prices and sporadic demand.  The increase in average selling price is due to price increases, which represented approximately $1.16 of the increase, and a shift to higher-value product mix, which represented approximately $0.77 of the increase, partially offset by lower market raw material prices, which represented approximately $0.29 of a decrease.

 

Sales to other markets were $45.2 million in the first nine months of fiscal 2015, an increase of 35.1% from $33.4 million in the same period of fiscal 2014, due to a 6.5% increase in average selling price combined with a 26.9% increase in volume.    The increase in volume is due to project orders shipped in fiscal 2015, which reflects the project-oriented nature of these markets.  The increase in average selling price reflects a change to a mix of higher-value alloys and forms sold into the other market category, which represented approximately $3.15 of an increase, partially offset by lower market raw material prices, which represented approximately $0.25 of a decrease, and increased pricing competition, which represented approximately $1.18 of a decrease.

 

Other Revenue.  Other revenue was $19.9 million in the first nine months of fiscal 2015, an increase of 72.1% from $11.6 million in the same period of fiscal 2014, due primarily to increased toll conversion sales, in part from the acquisition of the Leveltek-LaPorte operations.

 

Cost of Sales.  Cost of sales was $298.4 million, or 80.5% of net revenues, in the first nine months of fiscal 2015 compared to $307.0 million, or 91.5% of net revenues, in the same period of fiscal 2014.  Cost of sales in the first nine months of fiscal 2015 decreased by $8.6 million as compared to the same period of fiscal 2014 primarily due to lower volume partially offset by higher-cost product mix sold.

 

Gross Profit.  As a result of the above factors, gross profit was $72.3 million for the first nine months of fiscal 2015, an increase of $43.9 million, or 154.7%, from the same period of fiscal 2014. Gross profit as a percentage of net revenue was 19.5% in the first nine months of fiscal 2015 as compared to 8.5% in the same period of fiscal 2014. The increase in gross profit as a percentage of net revenue is primarily attributable to increased average selling prices and increased volumes of higher-value products, including proprietary and specialty alloy products.

 

Selling, General and Administrative Expense.  Selling, general and administrative expense during the first nine months of fiscal 2015 was $31.8 million, an increase of approximately of $2.2 million, or 7.6%, from $29.5 million in the same period of fiscal 2014. Higher incentive compensation and commissions as compared to the prior year were partially offset by foreign currency gains.  Selling, general and administrative expenses as a percentage of net revenues decreased to 8.6% for the first nine months of fiscal 2015 compared to 8.8% for the same period of fiscal 2014 primarily due to increased revenues.

 

---

 

Research and Technical Expense.  Research and technical expense was $2.7 million, or 0.7% of revenue, for the first nine months of fiscal 2015, compared to $2.6 million, or 0.8% of net revenues, in the same period of fiscal 2014.

 

Operating Income/(Loss).  As a result of the above factors, operating income in the first nine months of fiscal 2015 was $37.8 million, compared to operating loss of $3.8 million in the same period of fiscal 2014. Operating income as a percentage of net revenue was 10.2% in the first nine months of fiscal 2015.

 

Income Taxes.  Income taxes expense was $13.1 million in the first nine months of fiscal 2015, an increase of $14.2 million from an income tax benefit of $1.1 million in the same period of fiscal 2014.  The effective tax rate for the first nine months of fiscal 2015 was 34.6%, compared to 29.5% in the same period of fiscal 2014.  The higher effective tax rate this year was primarily due to a change in the Indiana tax law that was enacted in May, which decreased the deferred tax asset and increased tax expense by $1.1 million. This change in tax law is expected to have a favorable impact on the Company’s tax rate beginning in fiscal 2017.

 

Net Income/(Loss). As a result of the above factors, net income in the first nine months of fiscal 2015 was $24.7 million, an increase of $27.3 million, from a net loss of $2.6 million in the same period of fiscal 2014.

 

Working Capital

 

Controllable working capital, which includes accounts receivable, inventory, accounts payable and accrued expenses, was $276.2 million at June 30, 2015, an increase of $4.9 million or 1.8% from $271.3 million at September 30, 2014. This increase resulted primarily from inventory and accounts receivable increasing $7.0 million and $1.1 million, respectively, partially offset by accrued expenses increasing by $3.8 million during the first nine months of fiscal 2015.

 

Liquidity and Capital Resources

 

Comparative cash flow analysis

 

During the first nine months of fiscal 2015, the Company’s primary sources of cash were cash on-hand and cash provided by operating activities, as detailed below.  At June 30, 2015, the Company had cash and cash equivalents of $47.2 million compared to cash and cash equivalents of $45.9 million at September 30, 2014. As of June 30, 2015, the Company had cash and cash equivalents of $8.2 million that was held by foreign subsidiaries in various currencies.

 

Net cash provided by operating activities was $38.9 million in the first nine months of fiscal 2015 compared to cash provided by operating activities of $24.1 million in the first nine months of fiscal 2014.  Items contributing to the difference included net income of $24.7 million in fiscal 2015 compared to a net loss of $2.6 million in the same period of fiscal 2015 and an increase in inventory of $7.7 million in the first nine months of fiscal 2015 compared to a $13.9 million increase in inventory in the same period of fiscal 2014.  These changes were partially offset by a $4.0 million increase in accounts payable in the first nine months of fiscal 2015 compared to a $23.3 million increase in the same period of fiscal 2014 as well as a $2.3 million increase in accounts receivable in the first nine months of fiscal 2015 compared to a $6.2 million decrease in accounts receivable in the same period of fiscal 2014.  Net cash used in investing activities was $28.6 million in the first nine months of fiscal 2015 compared to $33.3 million in the same period of fiscal 2014 as a result of the ramp-down of our capacity investments in tubular and flat rolled products, partially offset by the investment in the Leveltek-LaPorte operations of $14.6 million.  Net cash used in financing activities in the first nine months of fiscal 2015 of $8.5 million included $8.2 million of dividend payments, in addition to cash used to repurchase treasury stock to satisfy payroll taxes owed as a result of restricted stock vesting.

 

Future sources of liquidity

 

The Company’s sources of liquidity for the remainder of fiscal 2015 are expected to consist primarily of cash generated from operations, cash on-hand and, if needed, borrowings under the U.S. revolving credit facility.  At June 30, 2015, the Company had cash of $47.2 million, an outstanding balance of zero on the U.S. revolving credit facility and access to a total of approximately $120.0 million under the U.S. revolving credit facility, subject to a borrowing base formula and certain reserves that could limit the Company’s borrowing to approximately $105.0 million. Management believes that the resources described above will be sufficient to fund planned capital expenditures and working capital requirements over the next twelve months.

 

U.S. Revolving Credit Facility

 

The Company and Wells Fargo Capital Finance, LLC (“Wells Fargo”), entered into a Third Amended and Restated Loan and Security Agreement (the “Amended Agreement”) with certain other lenders with an effective date of July 14, 2011. The maximum revolving loan amount under the Amended Agreement is $120.0 million, subject to a borrowing base formula and certain reserves. The Amended Agreement permits an increase in the maximum revolving loan amount from $120.0 million up to an aggregate amount of

---

 

$170.0 million at the request of the borrowers. Borrowings under the U.S. revolving credit facility bear interest, at the Company’s option, at either Wells Fargo’s “prime rate”, plus up to 0.75% per annum, or the adjusted Eurodollar rate used by the lender, plus up to 2.0% per annum.  As of June 30, 2015, the U.S. revolving credit facility had an outstanding balance of zero. In addition, the Company must pay monthly, in arrears, a commitment fee of 0.25% per annum on the unused amount of the U.S. revolving credit facility total commitment. For letters of credit, the Company must pay 1.5% per annum on the daily outstanding balance of all issued letters of credit, plus customary fees for issuance, amendments and processing. The Company is subject to certain covenants as to fixed charge coverage ratios and other customary covenants, including covenants restricting the incurrence of indebtedness, the granting of liens and the sale of assets. The covenant pertaining to fixed charge coverage ratios is only effective in the event the amount of excess availability under the revolver is less than 12.5% of the maximum credit revolving loan amount. The Company is permitted to pay dividends and repurchase common stock if certain financial metrics are met (which do not apply in the case of dividends less than $20.0 million in the aggregate in a year and repurchases in connection with the vesting of shares of restricted stock). As of June 30, 2015, the most recent required measurement date under the Amended Agreement, management believes the Company was in compliance with all applicable financial covenants under the Amended Agreement. The U.S. revolving credit facility matures on July 14, 2016. Borrowings under the U.S. revolving credit facility are collateralized by a pledge of substantially all of the U.S. assets of the Company, including the equity interests in its U.S. subsidiaries, but excluding the four-high Steckel rolling mill and related assets, which are pledged to Titanium Metals Corporation (“TIMET’) to secure the performance of the Company’s obligations under a Conversion Services Agreement with TIMET (see discussion of TIMET at Note 7 in the Company’s Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q). The U.S. revolving credit facility is also secured by a pledge of a 65% equity interest in each of the Company’s direct foreign subsidiaries.

 

Future uses of liquidity

 

The Company’s primary uses of cash over the next twelve months are expected to consist of expenditures related to:

 

 

 

On January 7, 2015, the Company acquired the assets and operations of Leveltek Processing, LLC in LaPorte, Indiana for $14.6 million in cash. Excluding that acquisition, capital investment in the first nine months of fiscal 2015 was $14.0 million and the forecast for capital spending in fiscal 2015 is $18.8 million ($33.4 million, including the acquisition).

 

Contractual Obligations

 

The following table sets forth the Company’s contractual obligations for the periods indicated, as of June 30, 2015:

 

 

---

 

---

 

New Accounting Pronouncements

 

See Note 2. New Accounting Pronouncements in the Notes to Consolidated Financial Statements.

 

Critical Accounting Policies and Estimates

 

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Assumptions and estimates were based on the facts and circumstances known at June 30, 2015. However, future events rarely develop exactly as forecasted and the best estimates routinely require adjustment. The accounting policies discussed in Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2014 are considered by management to be the most important to an understanding of the financial statements because their application places the most significant demands on management’s judgment and estimates about the effect of matters that are inherently uncertain. These policies are also discussed in Note 2 of the consolidated financial statements included in Item 8 of that report. There have been no material changes to that information since the end of fiscal 2014.

 

 

Item 3.Quantitative and Qualitative Disclosures about Market Risk

 

As of June 30, 2015, there were no material changes in the market risks described in “Quantitative and Qualitative Disclosures about Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2014.

 

Item 4.Controls and Procedures

 

The Company has performed, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness and the design and operation of the Company’s disclosure controls and procedures (as defined by Exchange Act rules 13a-15(e) and 15d-15(e)) pursuant to Rule 13a-15(b) of the Exchange Act as of the end of the period covered by this report.  Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2015.

 

Effective October 1, 2014 the Company implemented Microsoft Dynamics AX ERP information technology solution for the following functions in the US operations: sales, shipping, accounts receivable and service center operations modules. The implementation of these ERP modules resulted in material changes to the Company’s internal controls over financial reporting (as that term is defined in Rule 13(a)-15(f) or 15(d)-15(f) under the Exchange Act). Therefore, modifications to the design and documentation of internal control processes and procedures relating to the new system to replace and supplement existing internal controls over financial reporting were made as appropriate. Evaluation of the operating effectiveness of these internal controls is ongoing and will be completed by the end of fiscal 2015. The system changes were undertaken to integrate systems and consolidate information, and were not undertaken in response to any actual or perceived deficiencies in the Company’s internal control over financial reporting.

 

There were no other changes in the Company’s internal control over financial reporting during the quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

---

 

PART II OTHER INFORMATION

 

Item 6.Exhibits

 

Exhibits.  See Index to Exhibits.

 

---

 

SIGNATURES

 

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

 

 

 

 

---

 

 

INDEX TO EXHIBITS

 

 

---

*Furnished not filed.

 

---