HAYNES INTERNATIONAL INC - Quarter Report: 2017 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-33288

HAYNES INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		06-1185400 (I.R.S. Employer Identification No.)

1020 West Park Avenue, Kokomo, Indiana (Address of principal executive offices)		46904-9013 (Zip Code)

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐		Accelerated filer ☒
Non-accelerated filer (Do not check if a smaller reporting company) ☐		Smaller reporting company☐
		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 3, 2017, the registrant had 12,507,732 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

	Consolidated Balance Sheets (Unaudited) as of September 30, 2016 and June 30, 2017	3

	Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended June 30, 2016 and 2017	4

	Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Nine Months Ended June 30, 2016 and 2017	5

	Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended June 30, 2016 and 2017	6

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	27

PART II	OTHER INFORMATION	28

Item 6.	Exhibits	28

	Signatures	29

	Index to Exhibits	30

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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)


	September 30,		June 30,
	2016		2017
ASSETS
Current assets:
Cash and cash equivalents	$	59,297	$	48,477
Restricted cash (Note 15)		5,446		—
Accounts receivable, less allowance for doubtful accounts of $402 and $573 at September 30, 2016 and June 30, 2017, respectively		61,612		61,076
Inventories		236,558		247,396
Income taxes receivable		538		3,720
Other current assets		2,809		2,714
Total current assets		366,260		363,383
Property, plant and equipment, net		199,182		196,177
Deferred income taxes		71,010		70,591
Prepayments and deferred charges		1,798		1,626
Goodwill		4,789		4,789
Other intangible assets, net		6,562		6,193
Total assets	$	649,601	$	642,759
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	29,925	$	37,084
Accrued expenses		12,880		14,368
Accrued pension and postretirement benefits		5,095		5,095
Deferred revenue—current portion		7,488		2,500
Total current liabilities		55,388		59,047
Long-term obligations (less current portion)		8,256		7,966
Deferred revenue (less current portion)		22,829		20,954
Deferred income taxes		1,578		1,577
Accrued pension benefits (less current portion)		130,134		127,030
Accrued postretirement benefits (less current portion)		120,117		120,187
Total liabilities		338,302		336,761
Commitments and contingencies (Note 6)		—		—
Stockholders’ equity:
Common stock, $0.001 par value (40,000,000 shares authorized, 12,520,308 and 12,542,908 shares issued and 12,491,149 and 12,507,732 outstanding at September 30, 2016 and June 30, 2017, respectively)		12		13
Preferred stock, $0.001 par value (20,000,000 shares authorized, 0 shares issued and outstanding)		—		—
Additional paid-in capital		246,625		248,185
Accumulated earnings		180,565		165,779
Treasury stock, 29,159 shares at September 30, 2016 and 35,176 shares at June 30, 2017		(1,380)		(1,646)
Accumulated other comprehensive loss		(114,523)		(106,333)
Total stockholders’ equity		311,299		305,998
Total liabilities and stockholders’ equity	$	649,601	$	642,759

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 June 30,				Nine Months Ended June 30,
	2016		2017		2016		2017
Net revenues	$	101,255	$	97,977	$	298,836	$	294,444
Cost of sales		87,990		94,315		264,578		270,507
Gross profit		13,265		3,662		34,258		23,937
Selling, general and administrative expense		9,211		10,564		29,011		31,417
Research and technical expense		916		941		2,744		2,875
Operating income (loss)		3,138		(7,843)		2,503		(10,355)
Interest income		(29)		(54)		(74)		(155)
Interest expense		138		234		415		639
Income (loss) before income taxes		3,029		(8,023)		2,162		(10,839)
Provision for (benefit from) income taxes		237		(4,056)		304		(4,310)
Net income (loss)	$	2,792	$	(3,967)	$	1,858	$	(6,529)
Net income (loss) per share:
Basic	$	0.22	$	(0.32)	$	0.15	$	(0.53)
Diluted	$	0.22	$	(0.32)	$	0.15	$	(0.53)
Weighted Average Common Shares Outstanding
Basic		12,370		12,401		12,359		12,394
Diluted		12,372		12,401		12,363		12,394

Dividends declared per common share	$	0.22	$	0.22	$	0.66	$	0.66

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 June 30,				Nine Months Ended June 30,
	2016		2017		2016		2017
Net income (loss)	$	2,792	$	(3,967)	$	1,858	$	(6,529)
Other comprehensive income (loss), net of tax:
Pension and postretirement		1,976		2,580		5,928		7,739
Foreign currency translation adjustment		(3,745)		2,642		(5,911)		451
Other comprehensive income (loss)		(1,769)		5,222		17		8,190
Comprehensive income (loss)	$	1,023	$	1,255	$	1,875	$	1,661

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)



	Nine Months Ended June 30,
	2016		2017
Cash flows from operating activities:
Net income (loss)	$	1,858	$	(6,529)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		15,316		15,980
Amortization		375		369
Pension and post-retirement expense - U.S. and U.K.		14,394		17,557
Change in long-term obligations		38		—
Stock compensation expense		1,432		1,561
Excess tax expense from restricted stock vesting		149		—
Deferred revenue		9,376		(6,863)
Deferred income taxes		4,007		(4,098)
Loss on disposition of property		213		452
Change in assets and liabilities:
Restricted cash		(9,200)		5,446
Accounts receivable		5,830		675
Inventories		(2,133)		(10,678)
Other assets		(144)		259
Accounts payable and accrued expenses		(1,718)		9,257
Income taxes		(3,653)		(3,188)
Accrued pension and postretirement benefits		(9,794)		(8,352)
Net cash provided by operating activities		26,346		11,848
Cash flows from investing activities:
Additions to property, plant and equipment		(22,102)		(14,059)
Net cash used in investing activities		(22,102)		(14,059)
Cash flows from financing activities:
Dividends paid		(8,240)		(8,257)
Proceeds from exercise of stock options		310		—
Payment for purchase of treasury stock		(289)		(266)
Excess tax expense from restricted stock vesting		(149)		—
Payments on long-term obligation		(37)		(111)
Net cash used in financing activities		(8,405)		(8,634)
Effect of exchange rates on cash		(466)		25
Increase (decrease) in cash and cash equivalents:		(4,627)		(10,820)
Cash and cash equivalents:
Beginning of period		49,045		59,297
End of period	$	44,418	$	48,477
Supplemental disclosures of cash flow information:
Interest (net of capitalized interest)	$	366	$	595
Income taxes paid (refunded), net	$	(48)	$	3,429
Capital expenditures incurred but not yet paid	$	2,521	$	789

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 (“GAAP”), and such principles are applied on a basis consistent with information reflected in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016 filed with the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP 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, 2017 are not necessarily indicative of the results to be expected for the full fiscal year ending September 30, 2017 or any interim period.

Principles of Consolidation

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

Note 2.Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 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. ASU 2015-14 deferred the effective date of the update to 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 on its consolidated financial statements.

In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This update removes the requirements to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendment is effective for annual and interim periods within those annual periods beginning after December 15, 2015. Beginning in fiscal 2017, the Company has removed investments in which fair value is measured using net asset value from the fair value hierarchy table within the footnotes to the consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330). The objective of this update is to simplify the measurement of inventory valuation at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. It is effective for annual reporting periods beginning after December 15, 2016 and interim periods within fiscal years beginning after December 15, 2017. The adoption of these changes is not expected to have a material impact to the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of interest (Subtopic 835-30): This update requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. In August 2015, a clarification was released (ASU 2015-15) to address presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. This amendment allows for the reporting entity to defer and present debt issuance costs as an asset and subsequently amortize the debt issuance costs over the term of the line-of-credit agreement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement, including interim periods within that reporting period. It was implemented in the first quarter of fiscal 2017 and did not result in a material impact to the Company’s consolidated financial statements or the related disclosures.

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In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This new guidance will require that a lessee recognize assets and liabilities on the balance sheet for all leases with a lease term of more than twelve months, with the result being the recognition of a right of use asset and a lease liability. The new lease accounting requirements are effective for fiscal years beginning after December 18, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and other (Topic 350). This new guidance simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill, which is currently required if a reporting unit with goodwill fails a Step 1 test comparing the fair value of the reporting unit to its carrying value including goodwill. Under this new guidance, an entity should perform its annual, or interim, goodwill impairment test using only the Step 1 test of comparing the fair value of a reporting unit with its carrying amount. Any goodwill impairment, representing the amount by which the carrying amount exceeds the reporting unit’s fair value, is determined using this Step 1 test. Any goodwill impairment loss recognized would not exceed the total carrying amount of goodwill allocated to that reporting unit. This new guidance is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company adopted this new guidance in 2017. Adoption of this guidance did not result in a material impact to the Company’s consolidated financial statements or the related disclosures.

In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715). This new guidance requires entities to (1) disaggregate the service cost component from the other components of net benefit cost and present it with other current compensation costs for related employees in the income statement and (2) present the other components elsewhere in the income statement and outside of income from operations if that subtotal is presented. In addition, the ASU requires entities to disclose the income statement lines that contain the other components if they are not presented on appropriately described separate lines. This new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

Note 3.Inventories

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


	September 30,		June 30,
	2016		2017
Raw Materials	$	21,587	$	19,679
Work-in-process		118,822		119,346
Finished Goods		94,772		106,977
Other		1,377		1,394
	$	236,558	$	247,396

Note 4.Income Taxes

Income tax expense for the three and nine months ended June 30, 2016 and 2017 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, 2017 was 50.6% compared to 7.8% in the same period of fiscal 2016. The effective tax rate for the nine months ended June 30, 2017 was 39.8% compared to 14.1% in the same period of fiscal 2016. The higher effective tax rate for the third quarter of fiscal 2017 is primarily attributable to the different country locations that have generated losses before income taxes in fiscal 2017 as compared to the country locations that generated income before income taxes in fiscal 2016.

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Note 5.Pension and Post-retirement Benefits

Components of net periodic pension and post-retirement benefit cost for the three and nine months ended June 30, 2016 and 2017 were as follows:


	Three Months Ended June 30,								Nine Months Ended June 30,
	Pension Benefits				Other Benefits				Pension Benefits				Other Benefits
	2016		2017		2016		2017		2016		2017		2016		2017
Service cost	$	1,020	$	1,571	$	58	$	87	$	3,060	$	4,712	$	174	$	261
Interest cost		2,549		2,712		1,149		1,073		8,262		7,853		3,447		3,219
Expected return		(2,978)		(3,699)		—		—		(9,753)		(10,702)		—		—
Amortizations		2,320		3,029		706		1,070		7,086		9,004		2,118		3,210
Net periodic benefit cost	$	2,911	$	3,613	$	1,913	$	2,230	$	8,655	$	10,867	$	5,739	$	6,690

The Company contributed $4,500 to Company-sponsored domestic pension plans, $3,411 to its other post-retirement benefit plans and $586 to the U.K. pension plan for the nine months ended June 30, 2017. The Company expects to make future contributions of $1,500 to its U.S. pension plan, $1,589 to its other post-retirement benefit plan, and $192 to the U.K. pension plan for the remainder of fiscal 2017.

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 (together with a number of other manufacturer defendants) is also involved in one action alleging that asbestos in its facilities harmed the plaintiff. The Company believes that it has defenses to these allegations and that, if the Company were to be found liable, the cases would not have a material effect on its financial position, results of operations or liquidity.

The Company has received permits from the Indiana Department of Environmental Management and the North Carolina Department of Environment and Natural Resources to close and provide post closure environmental monitoring and care for certain areas of its Kokomo, Indiana and Mountain Home, North Carolina facilities, respectively.

The Company is required to, among other things, 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 testing and corrective action by the Company could be required. The Company is unable to estimate the costs of any further corrective action at these sites, if required. Accordingly, the Company cannot assure that the costs of any future corrective action at these, or any other current or former sites, would not have a material effect on the Company’s financial condition, results of operations or liquidity.

As of September 30, 2016 and June 30, 2017, the Company has accrued $683 for post-closure monitoring and maintenance activities, of which $608 is included in long-term obligations as it is not due within one year. Accruals for these costs are calculated by estimating the annual cost to monitor and maintain each post-closure site and multiplying that amount by the number of years remaining in the post-closure monitoring.

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Expected expenditures for post-closure monitoring and maintenance activities (discounted) were as follows at June 30, 2017.


2017	$	75
2018		78
2019		59
2020		50
2021		50
2022 and thereafter		371
	$	683

On February 11, 2016, the Company voluntarily reported to the Louisiana Department of Environmental Quality a leak that it discovered in one of its chemical cleaning operations at its Arcadia, Louisiana facility. As a result of the discovery, the Company is working with that department to determine the extent of the issue and appropriate remediation. Currently, the Company is unable to estimate the potential financial impact.

The Company expects to amend its Amended and Restated By-Laws effective upon receipt of the affirmative note of a majority of its stockholders at the Company’s 2018 Annual Meeting of stockholders. The proposed amendment would remove the requirement that stockholders electing to remove a director must show cause in order to do so. This proposed amendment is in response to a recent decision by the Delaware Court of Chancery.

Note 7.Deferred Revenue

On November 17, 2006, the Company entered into a twenty-year agreement to provide conversion services (“Conversion Services Agreement”) 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 $25.0 million 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 has goodwill, patents, trademarks, customer relationships and other intangibles. As the patents and customer relationships have a definite life, they are amortized over lives ranging from two to sixteen years. The Company reviews patents and customer relationships for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the assets is measured by a comparison of the carrying amount of the asset to the discounted 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.

Goodwill and trademarks (indefinite lived) are tested for impairment at least annually as of January 31 for goodwill and August 31 for trademarks (the annual impairment testing dates), or more frequently if impairment indicators exist. If the carrying value of a trademark exceeds its fair value (determined using an income approach, 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 has been recognized as of June 30, 2017.

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During the first nine months of fiscal 2017, there were no changes in the carrying amount of goodwill.

Amortization of customer relationships, patents, non-competes and other intangibles was $124 for the three-month periods ended June 30, 2016 and 2017, and $375 and $369 for the nine-month periods ended June 30, 2016 and 2017, respectively.

The following represents a summary of intangible assets at September 30, 2016 and June 30, 2017:


	Gross		Accumulated		Carrying
September 30, 2016	Amount		Amortization		Amount
Patents	$	4,030	$	(3,370)	$	660
Trademarks		3,800		—		3,800
Customer relationships		2,100		(275)		1,825
Other		291		(14)		277
	$	10,221	$	(3,659)	$	6,562


	Gross		Accumulated		Carrying
June 30, 2017	Amount		Amortization		Amount
Patents	$	4,030	$	(3,579)	$	451
Trademarks		3,800		—		3,800
Customer relationships		2,100		(391)		1,709
Other		291		(58)		233
	$	10,221	$	(4,028)	$	6,193


Estimated future Aggregate Amortization Expense:
Year Ended September 30,
2017	$	120
2018		485
2019		305
2020		198
2021		194
Thereafter		1,091

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.

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


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
(in thousands, except share and per share data)	2016			2017			2016			2017
Numerator: Basic and Diluted
Net income (loss)	$	2,792		$	(3,967)		$	1,858		$	(6,529)
Dividends paid		(2,748)			(2,752)			(8,240)			(8,257)
Undistributed income (loss)		44			(6,719)			(6,382)			(14,786)
Percentage allocated to common shares (a)		99.0	%		100.0	%		99.0	%		100.0	%
Undistributed income (loss) allocated to common shares		44			(6,719)			(6,321)			(14,786)
Dividends paid on common shares outstanding		2,721			2,725			8,160			8,176
Net income (loss) available to common shares		2,765			(3,994)			1,839			(6,610)
Denominator: Basic and Diluted
Weighted average common shares outstanding		12,370,039			12,400,522			12,358,609			12,394,350
Adjustment for dilutive potential common shares		2,278			—			4,761			—
Weighted average shares outstanding - Diluted		12,372,317			12,400,522			12,363,370			12,394,350

Basic net income (loss) per share	$	0.22		$	(0.32)		$	0.15		$	(0.53)
Diluted net income (loss) per share	$	0.22		$	(0.32)		$	0.15		$	(0.53)

Number of stock option shares excluded as their effect would be anti-dilutive		383,202			299,667			380,302			314,834
Number of restricted stock shares excluded as their effect would be anti-dilutive		121,010			107,210			121,243			108,068
Number of performance share awards excluded as their effect would be anti-dilutive		—			14,250			—			14,250

(a) Percentage allocated to common shares - Weighted average
Common shares outstanding		12,370,039			12,400,522			12,358,609			12,394,350
Unvested participating shares		121,010			—			121,243			—
		12,491,049			12,400,522			12,479,852			12,394,350

Note 10. Stock-Based Compensation

Restricted Stock

On February 23, 2009, the Company adopted a restricted stock plan that reserved 400,000 shares of common stock for issuance. Additionally, on March 1, 2016, the Company adopted the 2016 Incentive Compensation Plan which provides for grants of restricted stock, restricted stock units and performance shares. Up to 275,000 shares of restricted stock, restricted stock units and performance shares may be granted in the aggregate under this plan. Coinciding with the adoption of the 2016 Incentive Compensation Plan, the Company is no longer granting awards from the 2009 restricted stock plan, although awards remain outstanding thereunder.

Grants of restricted stock are comprised 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 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 22, 2016, the Company granted 37,275 shares of time-based restricted stock to certain key employees and non-employee directors. The shares of time-based restricted stock granted to employees will vest on the third anniversary of their grant date if the recipient is still an employee of the Company on such date. 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

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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 was $40.86 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 2009 restricted stock plan and the 2016 Incentive Compensation Plan with respect to restricted stock for the nine months ended June 30 2017:


		Weighted
		Average Fair
	Number of	Value At
	Shares	Grant Date
Unvested at September 30, 2016	121,010	$	44.51
Granted	37,275	$	40.86
Forfeited / Canceled	(12,650)	$	52.32
Vested	(38,425)	$	47.20
Unvested at June 30, 2017	107,210	$	41.36
Expected to vest	80,293	$	40.98

Compensation expense related to restricted stock for the three months ended June 30, 2016 and 2017 was $411 and $130, respectively and for the nine months ended June 30, 2016 and 2017 was $1,045 and $997, respectively. The remaining unrecognized compensation expense related to restricted stock at June 30, 2017 was $1,609, to be recognized over a weighted average period of 0.80 years. During the first quarter of fiscal 2017, the Company repurchased 6,017 shares of stock from employees at an average purchase price of $44.15 to satisfy required withholding taxes upon vesting of restricted stock-based compensation.

Performance Shares

On November 22, 2016, the Company granted a target of 19,000 performance share awards to certain key employees. The number of performance shares that will ultimately be earned, as well as the number of shares that will be distributed in settling those earned performance shares, if any, will not be determined until the end of the performance period. Performance shares earned will depend on the calculated total shareholder return of the Company at the end of the three-year period ending September 30, 2019, as compared to the total shareholder return of the Company’s peer group, as defined by the Compensation Committee. The fair value of the performance shares is $60.09 per share, which is estimated as of the date of the grant using a Monte Carlo simulation model. Compensation expense related to the performance shares for the three months ended June 30, 2016 and 2017 was $0 and $101, respectively, and for the nine months ended June 30, 2016 and 2017 was $0 and $235, respectively. The remaining unrecognized compensation expense related to performance shares at June 30, 2017 was $907, to be recognized over a weighted average period of 2.25 years.

Stock Options

The Company’s 2016 Incentive Compensation Plan and its two previous stock option plans authorize, or formerly authorized, the granting of non-qualified stock options to certain key employees and non-employee directors for the purchase of a maximum of 1,925,000 shares of the Company’s common stock. The first option plan was adopted in August 2004 and provided 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 the grant of options to purchase up to 500,000 shares of the Company’s common stock. Coinciding with the adoption of the 2016 Incentive Compensation Plan, the Company is no longer granting awards from these plans, although awards remain outstanding thereunder. On March 1, 2016, the Company adopted the 2016 Incentive Compensation Plan which provides for grants of up to 425,000 stock options and stock appreciation rights. 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 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 is 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, 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 dividend yield assumption is

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based on the Company’s history and expectations regarding dividend payouts at the time of the grant. The following assumptions were used for grants in the first quarter of fiscal 2017:


	Fair		Dividend		Risk-free		Expected		Expected
Grant Date	Value		Yield		Interest Rate		Volatility		Life
November 22, 2016	$	11.50	2.15	%	1.79	%	37	%	5	years

On November 22, 2016, the Company granted 47,925 options at an exercise price of $40.86, the fair market value of the Company’s common stock on the day of the grant. During the first nine months of fiscal 2017, no options were exercised.

The stock-based employee compensation expense for stock options for the three months ended June 30, 2016 and 2017 was $127 and $105, respectively, and for the nine months ended June 31, 2016 and 2017 was $387 and $329, respectively. The remaining unrecognized compensation expense at June 30, 2017 was $932, to be recognized over a weighted average vesting period of 2.23 years.

The following table summarizes the activity under the stock option plans and the 2016 Incentive Compensation Plan with respect to stock options for the nine months ended June 30, 2017 and provides information regarding outstanding stock options:


						Weighted
		Aggregate		Weighted		Average
		Intrinsic		Average		Remaining
	Number of	Value		Exercise		Contractual
	Shares	(000s)		Prices		Life
Outstanding at September 30, 2016	428,401			$	48.47
Granted	47,925			$	40.86
Exercised	—			$	0.00
Canceled	(48,500)			$	71.76
Outstanding at June 30, 2017	427,826	$	252	$	44.98	5.82	yrs.
Vested or expected to vest	393,969	$	252	$	45.00	5.71	yrs.
Exercisable at June 30, 2017	299,667	$	252	$	46.77	4.63	yrs.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objective of this update was to simplify the accounting for share-based payment transactions, including the income tax consequences of awards as either equity or liabilities, and classification on the statement of cash flows. As permitted, the Company early adopted this standard prospectively for the fiscal year beginning October 1, 2016. Prior periods were not retrospectively adjusted.

Note 11. Dividend

In the third quarter of fiscal 2017, 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, 2017 to stockholders of record at the close of business on June 1, 2017. The dividend cash pay-out was $2,752 for the quarter based on the number of shares outstanding.

On August 3, 2017, 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, 2017 to stockholders of record at the close of business on September 1, 2017.

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

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not available, the valuation model used depends on the specific asset or liability being valued. Cash and money market funds $59,297 and $48,477 as of September 30, 2016 and June 30, 2017, 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, post-retirement and foreign currency translation adjustments, primarily caused by the strengthening of the US dollar against the British pound sterling, net of tax when applicable.

Accumulated Other Comprehensive Income (Loss)


	Three Months Ended June 30, 2016
	Pension		Postretirement		Foreign
	Plan		Plan		Exchange		Total
Accumulated other comprehensive income (loss) as of March 31, 2016	$	(59,926)	$	(20,880)	$	(5,361)	$	(86,167)
Other comprehensive income (loss) before reclassifications		—		—		(3,745)		(3,745)
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of Pension and Postretirement Plan items (a)		202		—		—		202
Actuarial losses (a)		2,218		707		—		2,925
Tax benefit		(891)		(260)		—		(1,151)
Net current-period other comprehensive income (loss)		1,529		447		(3,745)		(1,769)
Accumulated other comprehensive income (loss) as of June 30, 2016	$	(58,397)	$	(20,433)	$	(9,106)	$	(87,936)


	Three Months Ended June 30, 2017
	Pension		Postretirement		Foreign
	Plan		Plan		Exchange		Total
Accumulated other comprehensive income (loss) as of March 31, 2017	$	(70,935)	$	(28,233)	$	(12,387)	$	(111,555)
Other comprehensive income (loss) before reclassifications		—		—		2,642		2,642
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of Pension and Postretirement Plan items (a)		202		—		—		202
Actuarial losses (a)		2,809		1,070		—		3,879
Tax benefit		(1,107)		(394)		—		(1,501)
Net current-period other comprehensive income (loss)		1,904		676		2,642		5,222
Accumulated other comprehensive income (loss) as of June 30, 2017	$	(69,031)	$	(27,557)	$	(9,745)	$	(106,333)


	Nine Months Ended June 30, 2016
	Pension		Postretirement		Foreign
	Plan		Plan		Exchange		Total
Accumulated other comprehensive income (loss) as of September 30, 2015	$	(62,985)	$	(21,773)	$	(3,195)	$	(87,953)
Other comprehensive income (loss) before reclassifications		—		—		(5,911)		(5,911)
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of Pension and Postretirement Plan items (a)		606		—		—		606
Actuarial losses (a)		6,653		2,119		—		8,772
Tax benefit		(2,671)		(779)		—		(3,450)
Net current-period other comprehensive income (loss)		4,588		1,340		(5,911)		17
Accumulated other comprehensive income (loss) as of June 30, 2016	$	(58,397)	$	(20,433)	$	(9,106)	$	(87,936)


	Nine Months Ended June 30, 2017
	Pension		Postretirement		Foreign
	Plan		Plan		Exchange		Total
Accumulated other comprehensive income (loss) as of September 30, 2016	$	(74,742)	$	(29,585)	$	(10,196)	$	(114,523)
Other comprehensive income (loss) before reclassifications		—		—		451		451
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of Pension and Postretirement Plan items (a)		606		—		—		606
Actuarial losses (a)		8,429		3,209		—		11,638
Tax benefit		(3,324)		(1,181)		—		(4,505)
Net current-period other comprehensive income (loss)		5,711		2,028		451		8,190
Accumulated other comprehensive loss as of June 30, 2017	$	(69,031)	$	(27,557)	$	(9,745)	$	(106,333)

^(a)

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

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Note 14. Long-term Obligations

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.

The Company entered into a twenty-year “build-to-suit” lease for a building that will house the assets and operations of the service center to be located in LaPorte, Indiana that is being relocated from Lebanon, Indiana (See Note 16). During the first quarter of fiscal 2017, the Company took occupancy of the building. The Company retained substantially all of the construction risk and was deemed to be the owner of the facility for accounting purposes, even though it is not the legal owner. Construction costs incurred relative to the buildout of the facility of approximately $4,100 are included in Property, plant and equipment, net on the Consolidated Balance Sheet and will be depreciated over the 20-year lease term. The Company accounts for the related build-to-suit liability as a financing obligation.

As of June 30, 2017, future minimum lease rental payments during each fiscal year applicable to the lease obligations were as follows.


2017	$	245
2018		982
2019		989
2020		994
2021		1,001
Thereafter		14,609
Total minimum lease payments		18,820
Less amounts representing interest		(10,537)
Present value of net minimum lease payments		8,283
Less current obligation		(925)
Total long-term lease obligation	$	7,358

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


	September 30,		June 30,
	2016		2017
Capital lease rental payments	$	4,331	$	4,289
Finance lease rental payments		3,700		3,994
Environmental post-closure monitoring and maintenance activities		683		683
Less amounts due within one year		(458)		(1,000)
Long-term obligations (less current portion)	$	8,256	$	7,966

Note 15. Restricted Cash

As of September 30, 2016 and June 30, 2017, the Company had cash of $5,446 and $0, respectively, held in an account that was restricted from use awaiting the fulfillment of a customer order. The remaining obligations to ship were fulfilled in the second quarter of fiscal 2017, and the remaining funds were released from restriction in the third quarter of fiscal 2017.

Note 16. Expansion of LaPorte, Indiana Operations

The Company announced on May 2, 2016 its decision to expand and streamline its distribution footprint by investing in new plant and equipment at its processing facility located in LaPorte, Indiana. In connection with the expansion, the Company plans to relocate its service center operations in Lebanon, Indiana to LaPorte. The project began in the first quarter of fiscal 2016 and is expected to be completed by the end of the first quarter of fiscal 2018.

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Costs associated with the project are estimated to consist of approximately $1,800 to $2,500 relating to equipment relocation and approximately $500 to $1,100 in other costs, including one-time termination benefits, relocation expenses and lease termination costs, for a total of approximately $2,300 to $3,600 in total costs relating to the move. Approximately $340 of these costs was expensed in fiscal 2016 and an additional $564 was expensed in the first nine months of fiscal 2017. The remainder will be recorded as incurred over the project period.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

References to years or portions of years in Management’s Discussion and Analysis of Financial Condition and Results of Operations refer to the Company’s fiscal years ended September 30, unless otherwise indicated.

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, each as amended. All statements other than statements of historical fact, including statements regarding market and industry prospects and future results of operations or financial position, made in this Form 10-Q are forward-looking. In many cases, you can identify forward-looking statements by terminology, such as “may”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of such terms and other comparable terminology. The forward-looking information may include, among other information, statements concerning the Company’s outlook for fiscal 2017 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, 2016.

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 industrial 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 62% of net product revenues in fiscal 2016. The Company also produces its products as seamless and welded tubulars, and in slab, bar, billet and wire forms.

The Company has manufacturing facilities in Kokomo, Indiana; Arcadia, Louisiana; and Mountain Home, North Carolina. The Kokomo facility specializes in flat products, the Arcadia facility specializes in tubular products, and the Mountain Home facility specializes in wire products. The Company’s products are sold primarily through its direct sales organization, which includes 13 service and/or sales centers in the United States, Europe and Asia. All of these centers are Company operated.

Dividends Paid and Declared

In the third quarter of fiscal 2017, 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 on June 15, 2017 to stockholders of record at the close of business on June 1, 2017. The dividend cash pay-out in the second quarter was approximately $2.8 million based on the number of shares outstanding and equal to approximately $11.0 million on an annualized basis.

Capital Spending

During the third quarter of fiscal 2017, the Company continued to execute on its capital expansion projects that were initiated in fiscal 2016. The previously reported $22.0 million planned capital expenditures for fiscal 2017 has been reduced (due to some deferments into fiscal 2018) to $18.1 million, which includes $4.9 million to further increase sheet manufacturing capacity in the

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Kokomo operations, $3.4 million to expand the LaPorte service center operations and $0.2 million for the completion of the manufacturing phase of the IT systems upgrade. The remaining $9.6 million of planned spending is earmarked for continued upgrades throughout the Company’s manufacturing facilities. Capital investment in the first nine months of fiscal 2017 was $14.1 million.

Volumes, Competition and Pricing

Volume in the third quarter of fiscal 2017 was 4.6 million pounds, reflecting weaker conditions driven by lower transactional business activity. Pricing continues to be challenging with high competition, low nickel prices, continued sluggish transactional activity and low levels of high-value specialty application projects. The product average selling price per pound in the third quarter was $19.89 compared to $19.68 in the second quarter of 2017. While this is an increase from the second quarter, it is at a low level compared to the past several quarters. Aerospace volume declined approximately 5% sequentially from the second to the third quarters of fiscal 2017, but volume levels have been relatively consistent with recent high levels. The average selling price per pound in the aerospace market was comparable from the second to the third quarter. Chemical processing volume improved 11.3% sequentially from the second to the third quarter of fiscal 2017, the highest in two years, but levels are approximately 20% lower than normal volume. Our chemical processing market experienced a decrease in average selling price of $(5.95) per pound from the second to the third quarter, which followed the decrease in average selling price of $(8.17) in the second quarter, as compared to the first quarter. These decreases were driven by fewer high-value specialty application projects in each quarter of fiscal 2017 and by a more competitive pricing environment. Industrial gas turbine volume continues to be volatile with a 27.9% decline sequentially from the second to the third quarter after a 35% increase last quarter from the first to the second quarter of fiscal 2017. The average selling price per pound increased in the industrial gas turbine market by $1.86 per pound on lower volumes due to changes in product mix. Volumes in our other markets improved from low levels with a strengthening of the average selling price per pound, primarily due to improving demand in oil & gas related markets.

Set forth below are selected data relating to the Company’s net revenues, gross profit, 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Form 10-Q.

Net Revenue and Gross Profit Margin Performance:


	Comparison by Quarter of Net Revenues, Gross Profit Margin and
	Gross Profit Margin Percentage for Fiscal 2016 and 2017
	Quarter Ended
	December 31,			March 31,			June 30,			September 30,			December 31,			March 31,			June 30,
(dollars in thousands)	2015			2016			2016			2016			2016			2017			2017
Net Revenues	$	95,070		$	102,511		$	101,255		$	107,523		$	93,355		$	103,112		$	97,977
Gross Profit Margin	$	12,088		$	8,905		$	13,265		$	13,322		$	10,487		$	9,788		$	3,662
Gross Profit Margin %		12.7	%		8.7	%		13.1	%		12.4	%		11.2	%		9.5	%		3.7	%

During the third quarter of fiscal 2017, gross profit margin and gross profit margin percentage declined sequentially from the second quarter of fiscal 2017. Gross profit margin percentage was 3.7% in the third quarter of fiscal 2017 compared to 9.5% in the second quarter of fiscal 2017. Lower levels of specialty application projects in the third quarter compared to the second quarter of fiscal 2017 negatively impacted gross margins combined with lower overall volumes, competitive pricing and a less profitable product mix. In addition, due primarily to intensely competitive pricing in the chemical processing market, the Company increased the lower-of-cost-or-market and slow-moving reserve by $1.5 million to adjust the value of the associated inventory, which increased its cost of sales.

Backlog


	Quarter Ended
	December 31,		March 31,		June 30,		September 30,		December 31,		March 31,		June 30,
	2015		2016		2016		2016		2016		2017		2017
Backlog(1)
Dollars (in thousands)	$	204,713	$	193,538	$	187,215	$	168,340	$	167,286	$	170,848	$	180,922
Pounds (in thousands)		6,445		6,248		6,281		6,098		6,795		6,960		7,496
Average selling price per pound	$	31.76	$	30.98	$	29.81	$	27.61	$	24.62	$	24.55	$	24.14
Average nickel price per pound
London Metals Exchange(2)	$	3.94	$	3.95	$	4.04	$	4.63	$	5.00	$	4.64	$	4.05

⁽¹⁾

The Company defines backlog to include firm commitments from customers for delivery of product at established prices. Approximately 30% of the orders in the backlog at any given time include prices that are subject to adjustment based on changes

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in raw material costs. Historically, approximately 75% of the backlog orders have shipped within nine months and approximately 90% have shipped within 12 months. The backlog figures do not reflect that portion of the business conducted at service and sales centers on a spot or “just-in-time” basis.

⁽²⁾

Represents the average price for a cash buyer as reported by the London Metals Exchange for the 30 days ending on the last day of the period presented.

Backlog was $180.9 million at June 30, 2017, an increase of $10.1 million, or 5.9%, from $170.8 million at March 31, 2017. Backlog pounds increased during the third quarter of fiscal 2017 by 7.7%. Aerospace and other markets had higher order entries and improving backlog levels, as compared to the prior quarter. The market price for nickel declined during the third quarter by 12.7% after also declining in the second quarter by 7.2%.

Quarterly Market Information


			Quarter Ended
	December 31,		March 31,		June 30,		September 30,		December 31,		March 31,		June 30,
	2015		2016		2016		2016		2016		2017		2017
Net revenues (in thousands)
Aerospace	$	47,535	$	52,342	$	47,039	$	50,529	$	45,784	$	49,536	$	46,895
Chemical processing		16,200		13,108		20,469		22,539		19,128		18,081		15,017
Industrial gas turbines		16,997		18,960		16,117		15,989		14,593		17,827		14,731
Other markets		9,474		12,304		10,789		12,466		8,429		9,923		14,379
Total product revenue		90,206		96,714		94,414		101,523		87,934		95,367		91,022
Other revenue		4,864		5,797		6,841		6,000		5,421		7,745		6,955
Net revenues	$	95,070	$	102,511	$	101,255	$	107,523	$	93,355	$	103,112	$	97,977

Shipments by markets (in thousands of pounds)
Aerospace		2,064		2,314		2,042		2,300		2,017		2,322		2,207
Chemical processing		714		649		745		708		605		771		858
Industrial gas turbines		1,300		1,365		1,227		1,073		1,039		1,403		1,011
Other markets		308		431		365		361		316		350		501
Total shipments		4,386		4,759		4,379		4,442		3,977		4,846		4,577

Average selling price per pound
Aerospace	$	23.03	$	22.62	$	23.04	$	21.97	$	22.70	$	21.33	$	21.25
Chemical processing		22.69		20.20		27.48		31.83		31.62		23.45		17.50
Industrial gas turbines		13.07		13.89		13.14		14.90		14.05		12.71		14.57
Other markets		30.76		28.55		29.56		34.53		26.67		28.35		28.70
Total product (product only; excluding other revenue)		20.57		20.32		21.56		22.86		22.11		19.68		19.89
Total average selling price (including other revenue)		21.68		21.54		23.12		24.21		23.47		21.28		21.41

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Results of Operations for the Three Months Ended June 30, 2016 Compared to the Three Months Ended June 30, 2017

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


	Three Months Ended June 30,								Change
	2016				2017				Amount		%
Net revenues	$	101,255	100.0	%	$	97,977	100.0	%	$	(3,278)	(3.2)	%
Cost of sales		87,990	86.9	%		94,315	96.3	%		6,325	7.2	%
Gross profit		13,265	13.1	%		3,662	3.7	%		(9,603)	(72.4)	%
Selling, general and administrative expense		9,211	9.1	%		10,564	10.8	%		1,353	14.7	%
Research and technical expense		916	0.9	%		941	1.0	%		25	2.7	%
Operating income (loss)		3,138	3.1	%		(7,843)	(8.0)	%		(10,981)	(349.9)	%
Interest income		(29)	(0.0)	%		(54)	(0.1)	%		(25)	86.2	%
Interest expense		138	0.1	%		234	0.2	%		96	69.6	%
Income (loss) before income taxes		3,029	3.0	%		(8,023)	(8.2)	%		(11,052)	(364.9)	%
Provision for (benefit from) income taxes		237	0.2	%		(4,056)	(4.1)	%		(4,293)	(1,811.4)	%
Net income (loss)	$	2,792	2.8	%	$	(3,967)	(4.0)	%	$	(6,759)	(242.1)	%

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.


	Three Months Ended
	June 30,				Change
By market	2016		2017		Amount		%
Net revenues (in thousands)
Aerospace	$	47,039	$	46,895	$	(144)	(0.3)	%
Chemical processing		20,469		15,017		(5,452)	(26.6)	%
Industrial gas turbine		16,117		14,731		(1,386)	(8.6)	%
Other markets		10,789		14,379		3,590	33.3	%
Total product revenue		94,414		91,022		(3,392)	(3.6)	%
Other revenue		6,841		6,955		114	1.7	%
Net revenues	$	101,255	$	97,977	$	(3,278)	(3.2)	%

Pounds by market (in thousands)
Aerospace		2,042		2,207		165	8.1	%
Chemical processing		745		858		113	15.2	%
Industrial gas turbine		1,227		1,011		(216)	(17.6)	%
Other markets		365		501		136	37.3	%
Total shipments		4,379		4,577		198	4.5	%

Average selling price per pound
Aerospace	$	23.04	$	21.25	$	(1.79)	(7.8)	%
Chemical processing		27.48		17.50		(9.98)	(36.3)	%
Industrial gas turbine		13.14		14.57		1.43	10.9	%
Other markets		29.56		28.70		(0.86)	(2.9)	%
Total product (excluding other revenue)		21.56		19.89		(1.67)	(7.7)	%
Total average selling price (including other revenue)	$	23.12	$	21.41	$	(1.71)	(7.4)	%

Net Revenues. Net revenues were $98.0 million in the third quarter of fiscal 2017, a decrease of 3.2% from $101.3 million in the same period of fiscal 2016. Volume was 4.6 million pounds in the third quarter of fiscal 2017, an increase of 4.5% from 4.4 million pounds in the same period of fiscal 2016. The increase in volume was primarily due to increased demand during the third quarter of fiscal 2017 in most of the markets the Company serves, though offset by continued weak demand in the industrial gas turbine market. The product-sales average selling price was $19.89 per pound in the third quarter of fiscal 2017, a decrease of 7.7% from $21.56 per pound in the same period of fiscal 2016. The average selling price decreased due to a lower value product mix and increased pricing competition, which decreased average selling price per pound by approximately $1.51 and $0.93, respectively, partially offset by higher raw material market prices, primarily cobalt, which increased average selling prices per pound by approximately $0.77.

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Sales to the aerospace market were $46.9 million in the third quarter of fiscal 2017, a decrease of 0.3% from $47.0 million in the same period of fiscal 2016, due to a 7.8% decrease in average selling price per pound, partially offset by an 8.1% increase in volume. The volume increase in the third quarter of fiscal 2017 over the same period of fiscal 2016 reflects the increases in new platform sales. The average selling price per pound decrease reflects a lower-value product mix and increased pricing competition, which decreased average selling price per pound by approximately $1.68 and $0.76, respectively, partially offset by an increase in market prices of raw materials, primarily cobalt, which increased average selling price per pound by approximately $0.65.

Sales to the chemical processing market were $15.0 million in the third quarter of fiscal 2017, a decrease of 26.6% from $20.5 million in the same period of fiscal 2016, due to a 36.3% decrease in average selling price per pound, partially offset by a 15.2% increase in volume. The increase in volume reflects a moderate strengthening, but off of very low volume levels. The average selling price per pound decrease reflects a lower-value product mix due to a proprietary alloy project shipment sold in the third quarter of fiscal 2016, and increased pricing competition, which decreased average selling price per pound by approximately $10.32 and $0.21, respectively, partially offset by a change in market prices of certain raw materials, which increased average selling price per pound by approximately $0.56.

Sales to the industrial gas turbine market were $14.7 million in the third quarter of fiscal 2017, a decrease of 8.6% from $16.1 million for the same period of fiscal 2016, due to a decrease of 17.6% in volume, partially offset by an increase in average selling price per pound of 10.9%. The decrease in volume is primarily due to a decreased level of transactional business in this market. The increase in average selling price per pound primarily reflects a higher-value product form mix due to less ingot product shipped and a change in market prices of raw materials, primarily cobalt, which increased average selling price per pound by approximately $2.58 and $0.97, respectively, partially offset by reduced transactional business and increased pricing competition, which decreased average selling price per pound by approximately $2.12.

Sales to other markets were $14.4 million in the third quarter of fiscal 2017, an increase of 33.3% from $10.8 million in the same period of fiscal 2016, due to a 37.3% increase in volume, partially offset by a 2.9% decrease in average selling price per pound. The increase in volume was primarily due to strength in the oil and gas and flue-gas desulfurization markets. The decrease in average selling price reflects a change to a lower-value product mix and increased pricing competition which decreased average selling price per pound by approximately $1.56 and $0.54, respectively, partially offset by higher raw material market prices, primarily cobalt, which increased average selling price per pound by approximately $1.25.

Other Revenue. Other revenue was $7.0 million in the third quarter of fiscal 2017, an increase of 1.7% from $6.8 million in the same period of fiscal 2016. The increase is due primarily to increased royalty income.

Cost of Sales. Cost of sales was $94.3 million, or 96.3% of net revenues, in the third quarter of fiscal 2017 compared to $88.0 million, or 86.9% of net revenues, in the same period of fiscal 2016. Cost of sales in the third quarter of fiscal 2017 increased by $6.3 million as compared to the same period of fiscal 2016 primarily due to increased volumes of lower margin products, inventory adjustments and lower manufacturing cost absorption.

Gross Profit. As a result of the above factors, gross profit was $3.7 million for the third quarter of fiscal 2017, a decrease of $9.6 million from the same period of fiscal 2016. Gross margin as a percentage of net revenue decreased to 3.7% in the third quarter of fiscal 2017 as compared to 13.1% in the same period of fiscal 2016.

Selling, General and Administrative Expense. Selling, general and administrative expense was $10.6 million for the third quarter of fiscal 2017, an increase of $1.4 million from the same period of fiscal 2016. This increase is attributable to foreign exchange fluctuations of $1.5 million. Selling, general and administrative expense as a percentage of net revenues increased to 10.8% for the third quarter of fiscal 2017 compared to 9.1% for the same period of fiscal 2016.

Research and Technical Expense. Research and technical expense was $0.9 million, or 1.0% of revenue, for the third quarter of fiscal 2017, similar to the same period of fiscal 2016.

Operating Income/(Loss). As a result of the above factors, operating loss in the third quarter of fiscal 2017 was $(7.8) million compared to operating income of $3.1 million in the same period of fiscal 2016.

Income Taxes. Income tax benefit was $4.1 million in the third quarter of fiscal 2017, a difference of $4.3 million from an expense of $0.2 million in the third quarter of fiscal 2016. The effective tax rate for the third quarter of fiscal 2017 was 50.6%, compared to 7.8% in the same period of fiscal 2016. The higher effective tax rate for the third quarter of fiscal 2017 is primarily attributable to the generation of pre-tax losses in tax jurisdictions with higher rates than the tax jurisdictions which incurred pre-tax income.

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Net Income/(Loss). As a result of the above factors, net loss in the third quarter of fiscal 2017 was $(4.0) million, a difference of $6.8 million from net income of $2.8 million in the same period of fiscal 2016.

Results of Operations for the Nine Months Ended June 30, 2016 Compared to the Nine Months Ended June 30, 2017


	Nine Months Ended June 30,								Change
	2016				2017				Amount		%
Net revenues	$	298,836	100.0	%	$	294,444	100.0	%	$	(4,392)	(1.5)	%
Cost of sales		264,578	88.5	%		270,507	91.9	%		5,929	2.2	%
Gross profit		34,258	11.5	%		23,937	8.1	%		(10,321)	(30.1)	%
Selling, general and administrative expense		29,011	9.7	%		31,417	10.7	%		2,406	8.3	%
Research and technical expense		2,744	0.9	%		2,875	1.0	%		131	4.8	%
Operating income (loss)		2,503	0.8	%		(10,355)	(3.5)	%		(12,858)	(513.7)	%
Interest income		(74)	(0.0)	%		(155)	(0.1)	%		(81)	109.5	%
Interest expense		415	0.1	%		639	0.2	%		224	54.0	%
Income (loss) before income taxes		2,162	0.7	%		(10,839)	(3.7)	%		(13,001)	(601.3)	%
Provision for (benefit from) income taxes		304	0.1	%		(4,310)	(1.5)	%		(4,614)	(1,517.8)	%
Net income (loss)	$	1,858	0.6	%	$	(6,529)	(2.2)	%	$	(8,387)	(451.4)	%

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.


	Nine Months Ended
	June 30,				Change
	2016		2017		Amount		%
Net revenues (dollars in thousands)
Aerospace	$	146,916	$	142,215	$	(4,701)	(3.2)	%
Chemical processing		49,777		52,226		2,449	4.9	%
Industrial gas turbine		52,074		47,151		(4,923)	(9.5)	%
Other markets		32,567		32,731		164	0.5	%
Total product revenue		281,334		274,323		(7,011)	(2.5)	%
Other revenue		17,502		20,121		2,619	15.0	%
Net revenues	$	298,836	$	294,444	$	(4,392)	(1.5)	%
Pounds by market (in thousands)
Aerospace		6,420		6,546		126	2.0	%
Chemical processing		2,108		2,234		126	6.0	%
Industrial gas turbine		3,892		3,453		(439)	(11.3)	%
Other markets		1,104		1,167		63	5.7	%
Total shipments		13,524		13,400		(124)	(0.9)	%
Average selling price per pound
Aerospace	$	22.88	$	21.73	$	(1.15)	(5.0)	%
Chemical processing		23.61		23.38		(0.23)	(1.0)	%
Industrial gas turbine		13.38		13.66		0.28	2.1	%
Other markets		29.50		28.05		(1.45)	(4.9)	%
Total product (excluding other revenue)		20.80		20.47		(0.33)	(1.6)	%
Total average selling price (including other revenue)	$	22.10	$	21.97	$	(0.13)	(0.6)	%

Net Revenues. Net revenues were $294.4 million in the first nine months of fiscal 2017, a decrease of 1.5% from $298.8 million in the same period of fiscal 2016. Volume was 13.4 million pounds in the first nine months of fiscal 2017, a decrease of 0.9% from 13.5 million pounds in the same period of fiscal 2016. The decrease in volume is primarily due to the lower level of ingot orders in industrial gas turbines. The product-sales average selling price was $20.47 per pound in the first nine months of fiscal 2017, a decrease of 1.6% from $20.80 per pound in the same period of fiscal 2016. The average selling price decreased as a result of pricing competition and lower levels of specialty application projects, which decreased average selling price per pound by approximately $1.66, partially offset by higher market prices of raw materials and other changes in product mix, which increased average selling price per pound by approximately $0.73 and $0.60 per pound, respectively.

Sales to the aerospace market were $142.2 million in the first nine months of fiscal 2017, a decrease of 3.2% from $146.9 million in the same period of fiscal 2016, due to a 5.0% decrease in average selling price per pound partially offset by a 2.0% increase in volume.

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The increase in volume reflects the increase in new platform sales. The average selling price per pound decrease reflects an increase in pricing competition and a change to a lower-value product mix, which decreased average selling price per pound by approximately $1.37 and $0.53, respectively, partially offset by a change in market prices of raw materials, which increased average selling price per pound by approximately $0.73.

Sales to the chemical processing market were $52.2 million in the first nine months of fiscal 2017, an increase of 4.9% from $49.8 million in the same period of fiscal 2016, due to a 6.0% increase in volume, partially offset by a 1.0% decrease in average selling price per pound. Volumes have increased moderately in the first nine months of fiscal 2017 from the same period of fiscal 2016 but off of very low levels. The average selling price per pound decrease reflects increased pricing competition, which decreased average selling price per pound by approximately $2.51, partially offset by higher-value product mix and a change in market prices of raw materials, which increased average selling price per pound by approximately $1.77 and $0.50, respectively.

Sales to the industrial gas turbine market were $47.2 million in the first nine months of fiscal 2017, a decrease of 9.5% from $52.1 million for the same period of fiscal 2016, due to a decrease of 11.3% in volume, partially offset by a 2.1% increase in average selling price per pound. The decrease in volume is primarily due to a decreased level of transactional business in this market, along with a lower level of ingot orders shipped in the first nine months of fiscal 2017 compared to the same period of fiscal 2016. The increase in average selling price primarily reflects a change to a higher-value product mix and higher raw material market prices, which increased average selling price per pound by approximately $1.50 and $0.79, respectively, partially offset by increased pricing competition, which decreased average selling price per pound by approximately $2.02.

Sales to other markets were $32.7 million in the first nine months of fiscal 2017, an increase of 0.5% from $32.6 million in the same period of fiscal 2016, due to a 5.7% increase in volume partially offset by a decrease of 4.9% in average selling price per pound. The increase in volume was primarily due to small increases in sales to the oil and gas market. The decrease in average selling price reflects a lower-value product mix and competition which decreased average selling price per pound by approximately $1.78 and $0.64, respectively, partially offset by higher raw material market prices, which increased average selling price per pound by approximately $0.97.

Other Revenue. Other revenue was $20.1 million in the first nine months of fiscal 2017, an increase of 15.0% from $17.5 million in the same period of fiscal 2016. The increase is due primarily to increased toll processing revenues.

Cost of Sales. Cost of sales was $270.5 million, or 91.9% of net revenues, in the first nine months of fiscal 2017 compared to $264.6 million, or 88.5% of net revenues, in the same period of fiscal 2016. This $5.9 million increase was primarily due to a higher value product mix, lower manufacturing cost absorption and increased pension and retiree healthcare expenses.

Gross Profit. As a result of the above factors, gross profit was $23.9 million for the first nine months of fiscal 2017, a decrease of $10.3 million from the same period of fiscal 2016. Gross margin as a percentage of net revenue decreased to 8.1% in the first nine months of fiscal 2017 as compared to 11.5% in the same period of fiscal 2017.

Selling, General and Administrative Expense. Selling, general and administrative expense was $31.4 million for the first nine months of fiscal 2017, an increase of $2.4 million from the same period of fiscal 2016. The increase in the first nine months of fiscal 2017 is attributable to fluctuations in foreign currencies of $1.3 million as well as higher spending in information technology and pension expense contributed to the increased expense. Selling, general and administrative expense as a percentage of net revenues increased to 10.7% for the first nine months of fiscal 2017 compared to 9.7% for the same period of fiscal 2016.

Research and Technical Expense. Research and technical expense was $2.9 million, or 1.0% of revenue, for the first nine months of fiscal 2017, compared to $2.7 million, or 0.9% of revenue, in the same period of fiscal 2016.

Operating Income/(Loss). As a result of the above factors, operating loss in the first nine months of fiscal 2017 was $(10.4) million compared to an operating income of $2.5 million in the same period of fiscal 2016.

Income Taxes. Income tax benefit was $4.3 million in the first nine months fiscal 2017, a difference of $4.6 million from the same period of fiscal 2016. The effective tax rate for the first nine months of fiscal 2017 was 39.8%, compared to 14.1% in the same period of fiscal 2016. The higher effective tax rate for the third quarter of fiscal 2017 is primarily attributable to the generation of pre-tax losses in tax jurisdictions with higher rates than the tax jurisdictions which incurred pre-tax income.

Net Income/(Loss). As a result of the above factors, net loss for the first nine months of fiscal 2017 was $(6.5) million, a decrease of $8.4 million from net income of $1.9 million in the same period of fiscal 2016.

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Working Capital

Controllable working capital, which includes accounts receivable, inventory, accounts payable and accrued expenses, was $257.0 million at June 30, 2017, an increase of $1.6 million or 0.6% from $255.4 million at September 30, 2016. This increase resulted primarily from inventory increasing $10.8 million, partially offset by accounts payable and accrued expenses increasing $8.6 million and accounts receivable decreasing by $0.5 million during the first nine months of fiscal 2017.

Liquidity and Capital Resources

Comparative cash flow analysis

During the first nine months of fiscal 2017, the Company’s primary sources of cash were cash on-hand and cash provided by operating activities, as detailed below. At June 30, 2017, the Company had unrestricted cash and cash equivalents of $48.5 million compared to $59.3 million at September 30, 2016. As of June 30, 2017, the Company had cash and cash equivalents of $12.8 million held by foreign subsidiaries in various currencies.

For the first nine months of fiscal 2017, net cash provided by operating activities was $11.8 million compared to net cash provided by operating activities of $26.3 million in the first nine months of fiscal 2016. The primary driver of the decrease was operating earnings excluding the impact of non-cash expenses of $8.3 million in the first nine months of fiscal 2017 compared to $22.6 million during the same period of fiscal 2016. Additionally, income taxes paid of $3.4 million during the first nine months of fiscal 2017 compared to $0.0 million in the same period of fiscal 2016 contributed to $3.4 million of the decrease. Finally, cash used from higher controllable working capital of $0.7 million in the first nine months of fiscal 2017 compared to cash generated from lower controllable working capital of $2.0 million during the same period of fiscal 2016 also contributed to the decrease. Net cash used in investing activities was $14.1 million in the first nine months of fiscal 2017 compared to $22.1 million in the same period of fiscal 2016. The reduction in cash used in investing activities is primarily due to a higher level of investment in sheet manufacturing capacity in the first nine months of fiscal 2016 as compared to the first nine months of fiscal 2017. Net cash used in financing activities in the first nine months of fiscal 2017 of $8.6 million included $8.3 million of dividend payments and approximately $0.3 million of stock re-purchases made to satisfy taxes in relation to the vesting of restricted stock, which is comparable to the prior year.

Future sources of liquidity

The Company’s sources of liquidity for the remainder of fiscal 2017 are expected to consist primarily of cash generated from operations, cash on-hand and, if needed, borrowings under the U.S. revolving credit facility. As of June 30, 2017, the Company had unrestricted cash of $48.5 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. 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. On July 7, 2016, the Company amended the agreement to, among other things, extend the term through July 7, 2021 and reduce unused line fees and certain administrative fees. 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, 2017, the U.S. revolving credit facility had a zero balance.

The Company must pay monthly, in arrears, a commitment fee of 0.20% per annum (0.25% prior to the July 7, 2016 amendment) 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 10.0% of the maximum credit revolving loan amount (12.5% prior to the July 7, 2016 amendment). The Company is permitted to pay dividends and repurchase common stock if certain financial metrics are met (most of which do not apply in the case of regular quarterly 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, 2017, the

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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. 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:

Funding operations;

Capital spending;

Dividends to stockholders; and

Pension and postretirement plan contributions.

Capital investment in the first nine months of fiscal 2017 was $14.1 million, and the forecast for capital spending in fiscal 2017 is $18.1 million. See “Capital Spending” in this Form 10-Q for additional discussion of actual and planned capital spending.

Contractual Obligations

The following table sets forth the Company’s contractual obligations for the periods indicated, as of June 30, 2017:


	Payments Due by Period
			Less than						More than
Contractual Obligations	Total		1 year		1-3 Years		3-5 Years		5 years
	(in thousands)
Credit facility fees(1)	$	1,140	$	280	$	560	$	300	$	—
Operating lease obligations		6,745		2,629		3,602		493		21
Capital and finance lease obligations		18,964		1,014		2,010		2,008		13,932
Raw material contracts (primarily nickel)		21,973		21,973		—		—		—
Capital projects and other commitments		10,907		10,907		—		—		—
Pension plan(2)		138,395		6,000		15,725		26,925		89,745
Non-qualified pension plans		782		95		190		190		307
Other postretirement benefits(3)		50,000		5,000		10,000		10,000		25,000
Environmental post-closure monitoring		683		70		133		158		322
Total	$	249,589	$	47,968	$	32,220	$	40,074	$	129,327

⁽¹⁾

As of June 30, 2017, the revolver balance was zero, therefore no interest is due. However, the Company is obligated to the Bank for unused line fees and quarterly management fees.

⁽²⁾

The Company has a funding obligation to contribute $138,395 to the domestic pension plan. These payments will be tax deductible. All benefit payments under the domestic pension plan are provided by the plan and not the Company.

⁽³⁾

Represents expected post-retirement benefits only based upon anticipated timing of payments.

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, 2017. 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, 2016 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

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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 2016.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

As of June 30, 2017, 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, 2016.

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, 2017.

There were no 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.

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PART II OTHER INFORMATION

Item 6.Exhibits

Exhibits. See Index to Exhibits.

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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.


	HAYNES INTERNATIONAL, INC.


	/s/ Mark Comerford
	Mark Comerford
	President and Chief Executive Officer
	Date: August 3, 2017


	/s/ Daniel Maudlin
	Daniel Maudlin
	Vice President — Finance and Chief Financial Officer
	Date: August 3, 2017

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INDEX TO EXHIBITS


Exhibit Number		Description
3.1		Second Restated Certificate of Incorporation of Haynes International, Inc. (incorporated by reference to Exhibit 3.1 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).
3.2		Amended and Restated By-laws of Haynes International, Inc. (incorporated by reference to Exhibit 3.2 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).
4.1		Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.01 to the Haynes International, Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2009).
4.2		Second Restated Certificate of Incorporation of Haynes International, Inc. (incorporated by reference to Exhibit 3.1 hereof).
4.3		Amended and Restated By-laws of Haynes International, Inc. (incorporated by reference to Exhibit 3.2 hereof).
31.1		Rule 13a-14(a)/15d-4(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1*		Section 1350 Certifications
101		The following materials from the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2016 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Income (Loss); (iv) the Consolidated Statements of Cash Flows; and (v) related notes.

*Furnished not filed.