HAYNES INTERNATIONAL INC - Quarter Report: 2015 March (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 March 31, 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 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 May 7, 2015, the registrant had 12,446,000 shares of Common Stock, $.001 par value, outstanding.

 

 

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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 March 31, 2015	1
	Unaudited Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2014 and 2015	2
	Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended March 31, 2014 and 2015	3
	Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2014 and 2015	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
PART II	OTHER INFORMATION
Item 6.	Exhibits	27
	Signatures	28
	Index to Exhibits	29

 

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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			March 31, 2015
ASSETS
Current assets:
Cash and cash equivalents		$	45,871		$	32,229
Accounts receivable, less allowance for doubtful accounts of $861 and $932, respectively		72,439			87,509
Inventories		254,027			254,390
Income taxes receivable		3,235			—
Deferred income taxes		6,297			9,361
Other current assets		2,964			3,935
Total current assets		384,833			387,424
Property, plant and equipment, net		174,083			179,881
Deferred income taxes—long term portion		44,639			40,950
Prepayments and deferred charges		2,031			1,711
Goodwill		—			4,789
Other intangible assets, net		5,185			7,044
Total assets		$	610,771		$	621,799
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	41,957		$	40,868
Accrued expenses		13,213			14,947
Income taxes payable		—			1,134
Accrued pension and postretirement benefits		4,572			4,572
Deferred revenue—current portion		2,500			2,500
Total current liabilities		62,242			64,021
Long-term obligations (less current portion)		745			745
Deferred revenue (less current portion)		27,829			26,579
Accrued pension benefits		72,315			71,881
Accrued postretirement benefits		100,910			101,176
Total liabilities		264,041			264,402
Commitments and contingencies (Note 6)		—			—
Stockholders’ equity:
Common stock, $0.001 par value (40,000,000 shares authorized, 12,434,748 and 12,467,498 shares issued, 12,418,471 and 12,446,000 shares outstanding at September 30, 2014 and March 31, 2015, 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			243,418
Accumulated earnings		166,999			179,624
Treasury stock, 16,277 shares at September 30, 2014 and 21,498 shares at March 31, 2015		(840		)	(1,091		)
Accumulated other comprehensive loss		(61,828		)	(64,566		)
Total stockholders’ equity		346,730			357,397
Total liabilities and stockholders’ equity		$	610,771		$	621,799

 

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 per share data)

 

		Three Months Ended						Six Months Ended
		March 31,						March 31
		2014			2015			2014			2015
Net revenues		$	115,350		$	138,688		$	209,050		$	249,364
Cost of sales		106,286			110,851			194,736			201,256
Gross profit		9,064			27,837			14,314			48,108
Selling, general and administrative expense		9,482			9,619			19,438			19,355
Research and technical expense		885			926			1,763			1,813
Operating income (loss)		(1,303		)	17,292			(6,887		)	26,940
Interest income		(41		)	(20		)	(87		)	(43		)
Interest expense		21			16			39			32
Income (loss) before income taxes		(1,283		)	17,296			(6,839		)	26,951
Provision for (benefit from) income taxes		(60		)	5,577			(2,124		)	8,851
Net income (loss)		$	(1,223	)	$	11,719		$	(4,715	)	$	18,100
Net income (loss) per share:
Basic		$	(0.10	)	$	0.94		$	(0.38	)	$	1.45
Diluted		$	(0.10	)	$	0.94		$	(0.38	)	$	1.45
Dividend declared per common share		$	0.22		$	0.22		$	0.44		$	0.44

 

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

 

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HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

 

		Three Months Ended March 31						Six Months Ended March 31
		2014			2015			2014			2015
Net income (loss)		$	(1,223	)	$	11,719		$	(4,715	)	$	18,100
Other comprehensive income (loss), net of tax:
Pension and post-retirement		712			1,253			1,423			2,507
Foreign currency translation adjustment		391			(2,786		)	1,681			(5,245		)
Comprehensive income (loss)		$	(120	)	$	10,186		$	(1,611	)	$	15,362

 

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

 

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HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

		Six Months Ended March 31,
		2014			2015
Cash flows from operating activities:
Net income (loss)		$	(4,715	)	$	18,100
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		7,439			8,846
Amortization		208			241
Pension and post-retirement expense — U.S. and U.K.		5,223			6,420
Stock compensation expense		1,044			1,031
Excess tax benefit from option exercises and restricted stock vesting		(253		)	—
Deferred revenue		(1,250		)	(1,250		)
Deferred income taxes		(8,003		)	(900		)
Loss on disposition of property		29			142
Change in assets and liabilities:
Accounts receivable		4,272			(17,769		)
Inventories		(4,267		)	(3,042		)
Other assets		(1,007		)	(685		)
Accounts payable and accrued expenses		22,568			2,516
Income taxes		5,133			4,451
Accrued pension and postretirement benefits		(3,817		)	(2,605		)
Net cash provided by operating activities		22,604			15,496
Cash flows from investing activities:
Additions to property, plant and equipment		(24,285		)	(8,065		)
Acquisition of Leveltek — LaPorte assets		—			(14,600		)
Net cash used in investing activities		(24,285		)	(22,665		)
Cash flows from financing activities:
Dividends paid		(5,445		)	(5,475		)
Proceeds from exercise of stock options		813			—
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		(4,714		)	(5,726		)
Effect of exchange rates on cash		152			(747		)
Increase (decrease) in cash and cash equivalents		(6,243		)	(13,642		)
Cash and cash equivalents, beginning of period		68,326			45,871
Cash and cash equivalents, end of period		$	62,083		$	32,229
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest (net of capitalized interest)		$	3		$	0
Income taxes paid (net of refunds)		$	567		$	5,219
Capital expenditures incurred but not yet paid		$	1,129		$	833

 

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 and six months ended March 31, 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.

 

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Note 3.         Inventories

 

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

 

		September 30, 2014			March 31, 2015
Raw Materials		$	25,050		$	27,430
Work-in-process		144,285			123,814
Finished Goods		83,674			101,956
Other		1,018			1,190
		$	254,027		$	254,390

 

Note 4.         Income Taxes

 

Income tax expense for the three and six months ended March 31, 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 March 31, 2015 was 32.2% compared to 4.7% in the same period of fiscal 2014.  The lower effective tax rate for the second quarter of fiscal 2014 is primarily attributable to a reduction in the Indiana tax rate, which resulted in a decrease to the deferred tax asset. The effective tax rate for the six-months ended March 31, 2015 was 32.8% compared to 31.0% in the same period of fiscal 2014.  This increase 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 and six months ended March 31, 2014 and 2015 are as follows:

 

		Three Months Ended March 31,												Six Months Ended March 31,
		Pension Benefits						Other Benefits						Pension Benefits						Other Benefits
		2014			2015			2014			2015			2014			2015			2014			2015
Service cost		$	992		$	974		$	66		$	85		$	1,985		$	1,949		$	133		$	169
Interest cost		2,845			2,582			1,144			1,096			5,700			5,223			2,289			2,192
Expected return		(3,566		)	(3,483		)	—			—			(7,144		)	(7,046		)	—			—
Amortizations		1,355			1,355			(224		)	608			2,709			2,716			(449		)	1,217
Net periodic benefit cost		$	1,626		$	1,428		$	986		$	1,789		$	3,250		$	2,842		$	1,973		$	3,578

 

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 $2,096 to its other post-retirement benefit plans and $463 to the U.K. pension plan for the six months ended March 31, 2015. The Company presently expects future contributions of $2,381 to its other post-retirement benefit plan and $512 to the U.K. pension plan for the remainder of fiscal 2015 and is evaluating possible contribution amounts 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

 

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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. 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 March 31, 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.

 

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Note 8.              Goodwill and Other Intangible Assets, Net

 

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.

 

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 March 31, 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. The Company has a non-compete agreement with a remaining life of eight months.

 

Amortization of the customer relationships, patents, non-competes, and other intangibles was $104 and $137 for the three-month periods ended March 31, 2014 and March 31, 2015, respectively, and $208 and $241 for the six-month periods ended March 31, 2014 and March 31, 2015, respectively.

 

The following represents the changes in the carrying value of goodwill for the period ended March 31, 2015:

 

Goodwill at September 30, 2014		$	—
Goodwill acquired — Leveltek-LaPorte Assets		4,789
Adjustments		—
Goodwill at March 31, 2015		$	4,789

 

The following represents a summary of intangible assets at September 30, 2014 and March 31, 2015:

 

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

 

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March 31, 2015		Gross Amount			Accumulated Amortization			Carrying Amount
Patents		$	4,030		$	(2,952	)	$	1,078
Trademarks		3,800			—			3,800
Customer relationships		2,100			(33		)	2,067
Non-compete		500			(488		)	12
Other		330			(243		)	87
		$	10,760		$	(3,716	)	$	7,044

 

Estimate of Aggregate Amortization Expense: Year Ended September 30,
2015 (remainder of fiscal year)		283
2016		432
2017		410
2018		410
2019		232
Thereafter		1,477

 

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 second quarter and first six 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:

 

		Three Months Ended March 31,						Six Months Ended March 31,
(in thousands, except share and per share data)		2014			2015			2014			2015
Numerator: Basic and Diluted
Net income (loss)		$	(1,223	)	$	11,719		$	(4,715	)	$	18,100
Dividends paid		(2,725		)	(2,737		)	(5,445		)	(5,475		)
Undistributed income (loss)		$	(3,948	)	$	8,982		$	(10,160	)	$	12,625
Percentage allocated to common shares (a)		100.0		%	99.1		%	100.0		%	99.1		%
Undistributed income (loss) allocated to common shares		$	(3,948	)	$	8,901		$	(10,160	)	$	12,511
Dividends paid on common shares outstanding		2,725			2,712			5,445			5,426
Net income (loss) available to common shares		$	(1,223	)	$	11,613		$	(4,715	)	$	17,936
Denominator: Basic and Diluted
Weighted average common shares outstanding		12,287,907			12,333,550			12,267,463			12,329,716
Adjustment for dilutive potential common shares		—			11,886			—			12,395
Weighted average shares outstanding - Diluted		12,287,907			12,345,436			12,267,463			12,342,111
Per common share net income (loss)
Basic		$	(0.10	)	$	0.94		$	(0.38	)	$	1.45
Diluted		$	(0.10	)	$	0.94		$	(0.38	)	$	1.45
Number of stock option shares excluded as their effect would be anti-dilutive		221,270			290,255			229,996			290,255
Number of restrictive stock option shares as their effect would be anti-dilutive		97,600			112,450			97,600			112,450

 

(a)  Percentage allocated to common shares - weighted average

 

Common shares outstanding		12,287,907		12,333,550		12,267,463		12,329,716
Unvested participating shares		—		112,450		—		112,450
		12,287,907		12,446,000		12,267,463		12,442,166

 

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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 six months ended March 31, 2015:

 

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		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		(8,950	)	$	55.54
Vested		(17,450	)	$	56.52
Unvested at March 31, 2015		112,450		$	49.07
Expected to vest		89,250		$	48.70

 

Compensation expense related to restricted stock for the three months ended March 31, 2014 and 2015 was $486 and $438, respectively, and for the six months ended March 31, 2014 and 2015 was $811 and $769, respectively. The remaining unrecognized compensation expense related to restricted stock at March 31, 2015 was $2,781, to be recognized over a weighted average period of 1.68 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:

 

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 six months of fiscal 2015, no options were exercised.

 

The stock-based employee compensation expense for stock options for the three months ended March 31, 2014 and 2015 was $121 and $136, respectively and for the six months ended March 31, 2014 and 2015 was $233 and $262, respectively.  The remaining unrecognized compensation expense at March 31, 2015 was $950, to be recognized over a weighted average vesting period of 1.34 years.

 

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The following tables summarize the activity under the stock option plans for the six months ended March 31, 2015 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 March 31, 2015		363,101		$	677		$	50.52		5.95
Vested or expected to vest		342,016		$	665		$	50.66		5.81
Exercisable at March 31, 2015		239,367		$	677		$	51.66		4.26

 

Grant Date		Exercise Price Per Share		Remaining Contractual Life in Years		Outstanding Number of Shares		Exercisable Number of Shares
March 31, 2006		31.00		1.00		10,000		10,000
March 30, 2007		72.93		2.00		47,500		47,500
March 31, 2008		54.00		3.00		58,000		58,000
October 1, 2008		46.83		3.50		20,000		20,000
March 31, 2009		17.82		4.00		12,084		12,084
January 8, 2010		34.00		4.75		12,400		12,400
November 24, 2010		40.26		5.67		19,667		19,667
November 25, 2011		55.88		6.67		19,700		19,700
November 20, 2012		47.96		7.67		35,600		23,734
December 10, 2012		48.39		7.67		1,800		1,200
November 26, 2013		52.78		8.67		45,250		15,082
November 25, 2014		46.72		9.67		81,100		—
						363,101		239,367

 

Note 11.    Dividend

 

In the second 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 March 16, 2015 to stockholders of record at the close of business on March 2, 2015.  The dividend cash pay-out was $2,737 for the quarter based on the number of shares outstanding.

 

On May 7, 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 June 15, 2015 to stockholders of record at the close of business on June 1, 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 $32,229 as of September 30, 2014 and March 31, 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)

 

		Three Months Ended March 31, 2014
		Pension Plan			Postretirement Plan			Foreign Exchange			Total
Accumulated other comprehensive income (loss) as of December 31, 2013		$	(41,945	)	$	(16,106	)	$	3,253		$	(54,798	)
Other comprehensive income (loss) before reclassifications		—			—			391			391
Amounts reclassified from accumulated other comprehensive income (loss)		853			(141		)	—			712
Net current-period other comprehensive income (loss)		853			(141		)	391			1,103
Accumulated other comprehensive income (loss) as of March 31, 2014		$	(41,092	)	$	(16,247	)	$	3,644		$	(53,695	)

 

		Three Months Ended March 31, 2015
		Pension Plan			Postretirement Plan			Foreign Exchange			Total
Accumulated other comprehensive income (loss) as of December 31, 2014		$	(41,928	)	$	(19,618	)	$	(1,487	)	$	(63,033	)
Other comprehensive income before reclassifications		—			—			(2,786		)	(2,786		)
Amounts reclassified from accumulated other comprehensive income (loss)		870			383			—			1,253
Net current-period other comprehensive income (loss)		870			383			(2,786		)	(1,533		)
Accumulated other comprehensive income (loss) as of March 31, 2015		$	(41,058	)	$	(19,235	)	$	(4,273	)	$	(64,566	)

 

		Six Months Ended March 31, 2014
		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 (loss) before reclassifications		—			—			1,681			1,681
Amounts reclassified from accumulated other comprehensive income (loss)		1,706			(283		)	—			1,423
Net current-period other comprehensive income (loss)		1,706			(283		)	1,681			3,104
Accumulated other comprehensive income (loss) as of March 31, 2014		$	(41,092	)	$	(16,247	)	$	3,644		$	(53,695	)

 

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		Six Months Ended March 31, 2015
		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 reclassifications		—			—			(5,245		)	(5,245		)
Amounts reclassified from accumulated other comprehensive income (loss)		1,742			765			—			2,507
Net current-period other comprehensive income (loss)		1,742			765			(5,245		)	(2,738		)
Accumulated other comprehensive income (loss) as of March 31, 2015		$	(41,058	)	$	(19,235	)	$	(4,273	)	$	(64,566	)

 

Reclassifications out of Accumulated Other Comprehensive Income

 

		Three Months Ended  March 31, 2014									Three Months Ended March 31, 2015
		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		)	(500		)	(1,653		)	(1,180		)	(610		)	(1,790		)
Total before tax		(1,355		)	224			(1,131		)	(1,382		)	(610		)	(1,992		)
Tax (expense) or benefit		502			(83		)	419			512			227			739
Total reclassification for the period		$	(853	)	$	141		$	(712	)	$	(870	)	$	(383	)	$	(1,253	)

 

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

 

		Six Months Ended  March 31, 2014									Six Months Ended March 31, 2015
		Pension Plan			Post- retirement Plan			Total			Pension Plan			Post- retirement Plan			Total
Amortization of Pension and Postretirement Plan items
Prior Service Costs (a)		$	(404	)	$	1,447		$	1,043		$	(404	)	$	—		$	(404	)
Actuarial (losses) (a)		(2,305		)	(998		)	(3,303		)	(2,363		)	(1,217		)	(3,580		)
Total before tax		(2,709		)	449			(2,260		)	(2,767		)	(1,217		)	(3,984		)
Tax (expense) or benefit		1,003			(166		)	837			1,025			452			1,477
Total reclassification for the period		$	(1,706	)	$	283		$	(1,423	)	$	(1,742	)	$	(765	)	$	(2,507	)

 

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

 

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.

 

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