HAYNES INTERNATIONAL INC - Annual Report: 2021 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

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Commission file number 001-33288

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HAYNES INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

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

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Securities registered pursuant to Section 12(b) of the Act:

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Securities registered pursuant to section 12(g) of the Act: None.

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.☐ Yes     ☒ No

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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes     ☒ No

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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

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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

☒ Yes     ☐ No

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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.

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Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒ Yes     ☐ No

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. ☐

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No

As of March 31, 2021, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $264,030,452 based on the closing sale price as reported on the NASDAQ Global Market. Shares of common stock held by each executive officer and director and by each person who owns 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

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12,565,790 shares of Haynes International, Inc. common stock were outstanding as of November 18, 2021.

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement to be delivered to stockholders in connection with the 2022 Annual Meeting of Stockholders have been incorporated by reference into Part III of this report.

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This Annual Report on Form 10-K 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 Annual Report on Form 10-K are forward-looking. In many cases, you can identify forward-looking statements by terminology, such as “may”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of such terms and other comparable terminology. The forward-looking information may include, among other information, statements concerning the Company’s outlook for fiscal year 2022 and beyond, overall volume and pricing trends, cost reduction strategies and their anticipated results, market and industry trends, capital expenditures, dividends and the impact of the COVID-19 pandemic on the economy, demand for our products and our operations, including the measures taken by governmental authorities to address the pandemic, which may precipitate or exacerbate other risks and/or uncertainties.  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, including, without limitation, those risk factors set forth in Item 1A of this Annual Report on Form 10-K. Actual results may differ materially from those in the forward-looking statements as a result of various factors, risks and uncertainties 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, including our expectations with respect to the impact of the COVID-19 pandemic.  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.

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.

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Part I

Item 1.  Business

Overview

Haynes International, Inc. (“Haynes”, “the Company”, “we”, “our” or “us”) is one of the world’s largest producers of high-performance nickel- and cobalt-based alloys in flat product form such as 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 for the aerospace market, gas turbine engines used for power generation and industrial heating 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 products in sheet, coil and plate forms, and sales of these forms, in the aggregate, represented approximately 60% of net product revenues in fiscal 2021. The Company also produces its products as seamless and welded tubulars, represented approximately 14% of net product revenues and in wire form, represented approximately 10% of net product revenues.  The company also produces in slab, bar and billet form and sales of these forms, in the aggregate, represented approximately 16% of net product revenues.

The Company has significant 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 11 service and/or sales centers in the United States, Europe and Asia. All of these centers are Company-operated. In fiscal 2021, approximately 78% of the Company’s net revenue was generated by its direct sales organization, and the remaining 22% was generated by a network of independent distributors, resellers and sales agents that supplement its direct sales efforts primarily in the United States, Europe and Asia, some of whom have been associated with the Company for over 30 years.

Available Information

The address of the Company’s website is www.haynesintl.com. The Company provides a link to its reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 on its website as soon as reasonably practicable after filing with the U.S. Securities and Exchange Commission. The filings available on the Company’s website date back to February 3, 2011. For all filings made prior to that date, the Company’s website includes a link to the website of the U.S. Securities and Exchange Commission, where such filings are available. Information contained or referenced on the Company’s website is not incorporated by reference into, and does not form a part of this Annual Report on Form 10-K. For a statement of the Company’s profits and losses and total assets, please see the financial statements of the Company included in Item 8 of this Annual Report on Form 10-K.

Business Strategy

The Company has undergone a significant positive transformation driven by a focus on price increases and cost reductions.  One result of this transformation has been a 25% reduction in its volume breakeven point from roughly 5 million pounds shipped to below 4 million pounds with the current product mix; as proven this fiscal year with the Company’s profitable third quarter results at only 3.7 million pounds shipped.  This lower breakeven point may be affected by product mix going forward but is expected to provide favorable incremental gross margin leverage with increasing volumes as anticipated in fiscal year 2022.  

The COVID-19 global pandemic had a significant impact on the Company’s financial results with substantial reductions in volumes and revenue in both fiscal years 2020 and 2021.  During this period, the Company adjusted its strategy to pivot to a cost reduction and cash generation focus.  This proved to be successful as the cash generated allowed for the implementation of a value-creating capital allocation strategy launched in the fourth quarter of fiscal 2021, further

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described below.  The cost reductions achieved that are related to process and yield improvements are expected to be not only sustainable but more fully realized as volumes improve.    

As volumes have begun to improve, the Company has returned to profitability, and the strategy has pivoted back to growing the business by increasing revenues, gross margin percentage and cash flow, while continuing to be the customers’ provider of choice for high-performance alloys and value-added processes. The Company has implemented a series of focus initiatives designed to unlock the potential of the Company by increasing volumes, improving pricing and relentlessly pursuing reduced costs, with the goal of expansion of the gross margin percentage. These goals are pursued within the overarching goal of safety, which continues to be the Company’s core priority.  

While maintaining this focus, the Company continues to evaluate new opportunities and applications for its products, particularly in its core markets of aerospace, chemical processing and industrial gas turbines, but also in the areas of renewable clean energy sources and other developing technologies relating to environmental and climate change issues. This includes new generation jet engines with better fuel efficiency and less emissions, as well as the use or consideration for use of HAYNES^® alloys in advanced ultra-supercritical power plants, concentrated solar power, fuel cells, waste-to-energy and use of supercritical-CO₂ power cycles for energy generation.  Innovation is a foundational strength of the Company with its exceptional technical expertise.

The following provides further discussion on certain focus initiatives that are core to this strategy.

Developing new applications for its new and existing alloys is also a key strength and strategy of the Company. The Company leverages its technical expertise to develop unique applications for its products, especially proprietary and specialty alloys that can yield higher margins. These new applications, including use in unique special projects and new programs, are an important part of the Company’s growth and profitability strategy.

Through development of new alloys and new applications, the Company is seeking to participate in additional markets with new revenue streams beyond the core markets of aerospace, chemical processing and industrial gas turbine. The Company believes that medical/pharmaceutical, consumer electronics, petrochemical and emerging technologies such as renewable and clean energy, hydrogen production and next-generation nuclear power generation all present possible significant growth opportunities for its products.

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Products

The global specialty alloy market includes stainless steel, titanium alloys, general-purpose nickel alloys and high-performance nickel- and cobalt-based alloys. The Company believes that the high-performance alloy sector represents less than 10% of the total alloy market. The Company competes primarily in the high-performance nickel- and cobalt-based alloy sectors, which includes HTA products and CRA products. In each year of fiscal 2019, 2020 and 2021, HTA products accounted for approximately 80%, 81% and 75% of the Company’s net revenues, and sales of the Company’s CRA products accounted for approximately 20%, 19% and 25% of the Company’s net revenues.  These percentages are based on data which include revenue associated with sales by the Company to its foreign subsidiaries, but exclude revenue associated with sales by foreign subsidiaries to their customers. Management believes, however, that the effect of including revenue data associated with sales by its foreign subsidiaries would not materially change the percentages presented in this section.

High-temperature Resistant Alloys.  HTA products are used primarily in manufacturing components for the hot sections of gas turbine engines. Stringent safety and performance standards in the aerospace industry result in development lead times typically as long as eight to ten years in the introduction of new aerospace-related market applications for HTA products. However, once a particular new alloy is shown to possess the properties required for a specific application in the aerospace market, it tends to remain in use for extended periods. HTA products are also used in gas turbine engines produced for use in applications such as naval and commercial vessels, electric power generation, power sources for offshore drilling platforms, gas pipeline booster stations and emergency standby power generators.

Corrosion-resistant Alloys.  CRA products are used in a variety of applications, such as chemical and petrochemical processing, power plant emissions control, hazardous waste treatment, sour gas production and pharmaceutical vessels. Historically, the chemical processing market has represented the largest end-user sector for CRA products. Due to maintenance, safety and environmental considerations, the Company believes this market continues to represent an area of potential long-term growth. In addition to the use of CRA products in the chemical and petrochemical processing industry, the Company has seen an increased demand for some of these alloys in applications such as gas-to-liquid and synthetic gas. For improved efficiency within relevant applications, higher operating temperatures and harsher environmental conditions are required and, as a consequence, high-temperature, corrosion-resistant alloys are used. Some of our HTA products offer excellent resistance to oxidation, sulfidation, metal dusting and other high-temperature degradation modes. The Company expects this area of the chemical and petrochemical industry to represent potential long-term growth opportunities for HTA products. Unlike aerospace applications within the HTA product market, the development of new market applications for CRA products generally does not require long lead times.

Material Resources

Patents and Trademarks

The Company currently maintains a total of approximately 22 published U.S. patents and applications and approximately 295 foreign counterpart patents and applications targeted at countries with significant or potential markets for the patented products. Since fiscal 2003, the Company’s technical programs have yielded nine new proprietary alloys. The alloys being commercialized saw significant further advancement in the process during fiscal 2019, 2020 and 2021. The Company will continue to actively promote its new alloys through customer engineering visits, technical presentations and papers.

In the aerospace, industrial gas turbine and high temperature markets, one of the alloys that has already seen significant commercial success is HAYNES^® 282^® alloy. This alloy has an excellent combination of high temperature strength, formability and fabricability. There have been a significant number of customer tests and evaluations of this product for the hot sections of gas turbines in the aerospace and industrial gas turbine markets, and for other high temperature applications. The alloy has already been specified into major aerospace and industrial gas turbine applications, as well as for certain high temperature components in the automotive and industrial applications.  Another new alloy for use in the aerospace and industrial gas turbine markets is HAYNES^® 244^® alloy. It combines high strength to 1400 degrees Fahrenheit with a low coefficient of thermal expansion.  Commercialization is ongoing for this alloy, and it has been specified into certain aerospace engine programs and is being evaluated on others.

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In the chemical processing industry, customers have found extensive applications for HASTELLOY^® G-35^® alloy, particularly in wet phosphoric acid production. Management expects demand for this alloy will continue to grow. Commercialization is also ongoing for HASTELLOY^® HYBRID-BC1^® alloy. HYBRID-BC1^® alloy is a CRA product with applications in the chemical processing and petrochemical industries that has demonstrated resistance to hydrochloric and sulfuric acid as well as several organic acids.

In the oil and gas industry, HASTELLOY^® C-22HS^® alloy has found multiple applications. Commercialization of this alloy continues as is the testing, evaluation and promotion of this alloy with special emphasis on applications for this industry.

In addition to the successful commercialization of the above alloys, the Company continues to develop applications for four new alloys which are still being scaled up at the mill and are in the early stages of the commercialization process. HAYNES® NS-163® alloy is a nitride dispersion strengthened material that represents an entirely new metallurgical approach to achieving very high creep resistance at high temperatures. Technical process developments are still under investigation. HAYNES® HR-224® alloy is an HTA product with superior resistance to oxidation and excellent fabricability, and is being assessed in certain current and emerging technology applications. HAYNES® HR-235® alloy has excellent resistance to metal dusting in high temperature carbonaceous environments. Good progress in developing new applications for the alloy for petrochemical and syngas production applications has been made this past fiscal year. Most recently, HAYNES® 233^TM alloy was introduced to provide excellent oxidation resistance coupled with superior creep strength at temperatures to 2100°F or higher. This combination of properties is believed not to have been achieved previously in a readily fabricable alloy. Significant progress has been made over the past year in developing applications for this new alloy.

Patents or other proprietary rights are an important element of the Company’s business. The Company’s strategy is to file patent applications in the U.S. and any other country that represents an important potential commercial market to the Company. In addition, the Company seeks to protect technology that is important to the development of the Company’s business. The Company also relies upon trade secret rights to protect its technologies and its development of new processes, applications and alloys. The Company protects its trade secrets in part through confidentiality and proprietary information agreements with its customers and employees. Trademarks on the names of many of the Company’s alloys have also been applied for or granted in the U.S. and certain foreign countries.

While the Company believes its patents are important to its competitive position, significant barriers to entry may exist beyond the expiration of any patent period. These barriers to entry include the unique equipment required to produce these materials and the exacting processes required to achieve the desired metallurgical properties. These processing requirements include optimal melting and thermo-mechanical processing parameters for each alloy. Management believes that the current alloy development programs and these barriers to entry reduce the impact of patent expirations on the Company.

Raw Materials

Raw materials represented an estimated 34% of cost of sales in fiscal 2021. Nickel, a major component of many of the Company’s products, accounted for approximately 45% of raw material costs, or approximately 15% of total cost of sales in fiscal 2021.  Other raw materials include cobalt, chromium, molybdenum and tungsten. Melt materials consist of virgin raw material, purchased scrap and internally produced scrap.

The average nickel price per pound for cash buyers for the 30-day period ended on September 30, 2019, 2020 and 2021, as reported by the London Metals Exchange, was $8.02 $6.74 and $8.80 respectively. Prices for certain other raw materials which are significant in the manufacture of the Company’s products, such as cobalt, chromium and molybdenum were higher in fiscal 2021 compared to fiscal 2020.

The Company’s business model includes mill manufacturing and global distribution facilities, which create a long working capital cycle and contribute to a long position as it relates to commodity price risk, especially for product sold out of distribution facility inventory at spot prices.  In addition, the type of high-performance products the Company produces require multiple production steps to create the final yielded product that is sold to the customer.  These refining steps

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generate high revert scrap pounds that are recycled back through the melt at metal value.  This scrap cycle also contributes to a long position as it relates to commodity price risk.

Although alternative sources of supply are available, the Company currently purchases nickel through an exclusive arrangement with a single supplier to ensure consistent quality and supply. The Company purchases raw materials through various arrangements including fixed-term contracts and spot purchases, which involve a variety of pricing mechanisms. In cases where the Company prices its products at the time of order placement, the Company attempts to establish selling prices with reference to known costs of materials, thereby reducing the risk associated with changes in the cost of raw materials. However, to the extent that the price of nickel fluctuates rapidly, there may be a favorable or unfavorable effect on the Company’s gross profit margins. The Company periodically purchases material forward with certain suppliers in connection with fixed price agreements with customers. In the event a customer fails to meet the expected volume levels or the consumption schedule deviates from the expected schedule, a rapid or prolonged decrease in the price of raw materials could adversely affect the Company’s operating results.

The Company values inventory utilizing the first-in, first-out (“FIFO”) inventory costing methodology. Under the FIFO inventory costing method, the cost of materials included in cost of sales may be different from the current market price at the time of sale of finished product due to the length of time from the acquisition of the raw material to the sale of the finished product. In a period of decreasing raw material costs, the FIFO inventory valuation method normally results in higher costs of sales as compared to last-in, first out method. Conversely, in a period of rising raw material costs, the FIFO inventory valuation method normally results in lower costs of sales.

End Markets

The global specialty alloy market includes stainless steels, titanium alloys, general purpose nickel alloys and high-performance nickel- and cobalt-based alloys. Of this total market, the Company primarily competes in the high-performance nickel- and cobalt-based alloy sector, which demands diverse specialty alloys suitable for use in precision manufacturing. Given the technologically advanced nature of the products, strict requirements of the end users and higher-growth end markets, in general the Company believes the high-performance alloy sector provides greater growth potential, the opportunity for higher profit margins and greater opportunities for service, product and price differentiation as compared to the stainless steels and general-purpose nickel alloys markets. While stainless steel and general-purpose nickel alloys are generally sold in bulk through third-party distributors, the Company’s products are sold in smaller-sized orders which are customized and typically handled on a direct-to-customer basis.

The Company believes it is an industry leader in developing new alloys to meet its customers’ specialized and demanding requirements. The Company continues to work closely with customers and end users of its products to identify opportunities to develop and manufacture new high-performance alloys. The Company’s technical programs have yielded many new proprietary alloys with multiple applications, an accomplishment that the Company believes distinguishes it from its competitors.

Developing new applications for its new and existing alloys is also a key strength and strategy of the Company. The Company leverages its technical expertise to develop unique applications for its products, especially proprietary and specialty alloys that can yield higher margins. These new applications, including use in unique special projects and new programs, are an important part of the Company’s growth and profitability strategy.

Aerospace.  The Company has manufactured HTA products for the aerospace market since the late 1930s and has developed numerous proprietary alloys for this market. Customers in the aerospace market tend to be the most demanding with respect to meeting specification requirements, precise tolerances and achieving new product performance standards. Stringent safety standards and continuous efforts to reduce equipment weight, reduce emissions, and develop more fuel-efficient designs require close coordination between the Company, the aero-engine OEM’s, and its customers in the selection and development of HTA products. As a result, sales to aerospace customers tend to be made through the Company’s direct sales force. Demand for the Company’s products in the aerospace market is based on the new and replacement market for jet engines and the maintenance needs of operators of commercial and military aircraft. The Company’s HTA products are used for static components in the hot sections of the aero-engine. The hot sections are

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subjected to substantial wear and tear and require periodic maintenance, repair and overhaul. The Company views the maintenance, repair and overhaul (MRO) business as an area of continuing long-term growth post-pandemic.

Chemical Processing.  The chemical processing market represents a large base of customers with diverse CRA and HTA applications driven by demand for key end-use markets such as automobiles, housing, health care, biopharmaceuticals, agriculture and metals production. Both CRA and HTA supplied by the Company have been used in the chemical processing market since the early 1930s. Demand for the Company’s products in this market is driven by the level of MRO and expansion requirements of existing chemical processing facilities, as well as the construction of new facilities. The expansion of manufacturing of chemicals from natural gas in North America is expected to be a driver of demand in this market. In addition, the Company believes the extensive worldwide network of Company-owned service and sales centers, as well as its network of independent distributors and sales agents who supplement the Company’s direct sales efforts outside of the U.S., provide a competitive advantage in marketing its CRA and HTA products in the chemical processing market.

Industrial Gas Turbine.  Demand for the Company’s products in the industrial gas turbine market is driven primarily by utility-scale electricity generation, both for base load as well as for backup generation during times of peak power demand.  The benefit of these turbines are their relatively low cost, high efficiency, rapid response and reliability, especially as weather-controlled renewables have become major sources of electricity. An additional demand consideration is the drive to lower emissions from coal-fired generating facilities, since natural gas has gained acceptance as a cleaner, lower-cost alternative to coal.  Industrial gas turbines are also used for power and propulsion in certain classes of ships and ferries, most commonly as derivatives of popular aero turbine engines. Demand is also generated by mechanical drive units used for oil and gas production and pipeline transportation and for back-up sources of power generation for hospitals and shopping malls. The Company also has a strong presence in micro turbine applications, which provide decentralized power and thermal heating for many key markets.  The Company’s products have allowed turbines to operate with higher temperatures and efficiencies for much longer service intervals.

Other Markets.  Other markets in which the Company sells its HTA products and CRA products include flue-gas desulfurization (FGD), oil and gas, waste incineration, industrial heat treating, automotive, thermocouples, sensors and instrumentation, biopharmaceuticals, solar and nuclear fuel. The FGD market has been driven by both legislated and self-imposed standards for lowering emissions from fossil fuel fired electric generating facilities. This market has softened and is expected to continue to soften in the U.S. if the trend to switch from coal to natural gas for power plants continues, but has continued potential in other regions of the world.  The Company also sells its products for use in the oil and gas market, primarily in connection with sour gas production. In addition, incineration of municipal, biological, industrial and hazardous waste products typically produces very corrosive conditions that demand high performance alloys. The Company continues to look for opportunities to introduce and expand the use of its alloys in emerging technologies such as solar, fuel cells, ultra-supercritical steam and supercritical-CO2 power plants, and nuclear fuel applications. Markets capable of providing growth are being driven by increasing performance, reliability and service life requirements for products used in these markets, which could provide further applications for the Company’s products.

Through development of new alloys and new applications, the Company continues to seek to participate in additional markets with new revenue streams beyond the core markets of aerospace, chemical processing and industrial gas turbine industries. The Company believes that medical/pharmaceutical, consumer electronics, petrochemical and emerging technologies such as renewable and clean energy, hydrogen production, next-generation nuclear power generation and additive manufacturing all present possible significant growth opportunities for its products.

Sales and Marketing and Distribution

The Company sells its products primarily through its direct sales organization, which operates from 14 total locations in the U.S., Europe and Asia, 11of which are service and/or sales centers. All of the Company’s service and/or sales centers are operated either directly by the Company or through its directly or indirectly wholly-owned subsidiaries. Approximately 78% of the Company’s net revenue in fiscal 2021 was generated by the Company’s direct sales organization. The remaining 22% of the Company’s fiscal 2021 net revenues was generated by a network of independent distributors and sales agents who supplement the Company’s direct sales in the U.S., Europe and Asia.  Going forward, the Company expects its direct sales force to generate approximately 75% of its total net revenues.

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Providing technical assistance to customers is an important part of the Company’s marketing strategy. The Company provides performance analyses of its products and those of its competitors for its customers. These analyses enable the Company to evaluate the performance of its products enabling the products to be included as part of the technical specifications used in the production of customers’ products. The Company’s market development professionals are assisted by its engineering and technology staff in directing the sales force to new opportunities. Management believes the Company’s combination of direct sales, technical marketing, engineering and customer support provides an advantage over other manufacturers in the high-performance alloy industry. This framework allows the Company to obtain direct insight into customers’ alloy needs and to develop proprietary alloys that provide solutions to customers’ demanding applications.

The Company continues to focus on growing its business in foreign markets, operating from service and sales centers in Asia and Europe (particularly the U.K.).

While the Company is making concentrated efforts to expand foreign sales, the majority of its revenue continues to be provided by sales to U.S. customers. The Company’s domestic expansion effort includes, but is not limited to, the continued expansion of ancillary product forms, the continued development of new high-performance alloys, the addition of equipment in U.S. service and sales centers to improve the Company’s ability to provide a product closer to the form required by the customer and the continued effort, through the technical expertise of the Company, to find solutions to customer challenges.

The following table sets forth the approximate percentage of the Company’s fiscal 2021 net revenues generated through each of the Company’s distribution channels.

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The Company’s top twenty customers accounted for approximately 44%, 43% and 34% of the Company’s net revenues in fiscal 2019, 2020 and 2021, respectively. No customer or group of affiliated customers of the Company accounted for more than 10% of the Company’s net revenues in fiscal 2019, 2020 or 2021.

Manufacturing Process

High performance alloys require an extensive knowledge of both the specific alloy systems, as well as the process parameters required to deliver a tightly controlled product to customer specifications. These products are tightly controlled from a chemistry standpoint, and require specialized equipment capable of delivering the physical and metallurgical properties that our customers require for their specialized applications. The number of process steps are typically more extensive for these high performance alloy systems as compared to what would be required for stainless or carbon steel products. This longer production cycle contributes to slower inventory turns. The Company manufactures its high-performance alloys in various forms, including sheet, coil, plate, billet/ingot, tubular, wire and other forms. The Company also performs value-added cutting services to supply certain customers with product cut to their specification.

At the Kokomo, Indiana facility, the manufacturing process begins with raw materials being combined, melted and refined in a precise manner to produce the chemical composition specified for each high-performance alloy. The Company’s primary melt facility utilizes two different melting processes. The ARC/AOD process utilizes electric melting and gas refinement to remove carbon and other undesirable elements, thereby allowing more tightly-controlled chemistries, which in turn produce more consistent properties in the high-performance alloys. The other primary melt method utilizes vacuum induction melting, which involves the melting of raw materials through electromagnetic induction while under vacuum conditions to produce the desired tightly-controlled chemistry. The control systems allow for statistical process control monitoring in real time to improve product quality. For most high-performance alloys, this molten material is cast into electrodes and additionally refined through electroslag remelting. The resulting ingots are then forged or rolled to an

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intermediate shape and size depending upon the intended final product form. Intermediate shapes destined for flat products are then sent through a series of hot and cold rolling, annealing, pickling, leveling and shearing operations before being cut to final size.

The Company has a four-high Steckel rolling mill for use in hot rolling high-performance alloys, created specifically for that purpose. The four-high Steckel rolling mill was installed in 1982 and is one of the most powerful four-high Steckel rolling mills in the world. The mill is capable of generating over 12.0 million pounds of separating force and rolling a plate up to 72 inches wide. The mill includes integrated computer controls (with automatic gap control and programmed rolling schedules), two coiling Steckel furnaces and seven heating furnaces. Computer-controlled rolling schedules for each of the hundreds of combinations of product shapes and sizes the Company produces allow the mill to roll numerous widths and gauges to exact specifications without stoppages or changeovers.

The Company also operates a three-high hot rolling mill and a two-high hot rolling mill, each of which is capable of custom processing much smaller quantities of material than the four-high Steckel rolling mill. These mills provide the Company with significant flexibility in running smaller batches of varied products in response to customer requirements. The Company believes the flexibility provided by the three-high and two-high mills provides the Company with an advantage over its major competitors in obtaining smaller specialty orders.

The coil and sheet operation includes the ability to cold roll to tight tolerances, bright anneal, oxidize anneal and pickle, along with finishing processes that slit and cut to size.  In recent years, the Company has invested and successfully brought on-line additional cold rolling capability, as well as annealing capacity to support the added rolling capacity. This added annealing capacity gives the Company the ability to offer either bright annealed finish or anneal and pickled finish that will be determined by specifications, application or type of alloy.

The Company also produces bar and billet product through a series of bar mills and a forge press operation that is located at the Kokomo, Indiana facility. 

The Arcadia, Louisiana facility uses feedstock produced at the Kokomo facility as well as outside suppliers to manufacture welded and seamless alloy pipe and tubing and purchases extruded tube hollows to produce seamless titanium tubing. The manufacturing processes at Arcadia require cold pilger mills, weld mills, draw benches, annealing furnaces, pickling facilities, and various finishing lines.  The company has also invested in specialized ultrasonic testing, eddy current testing, including its own specimen testing laboratory.

The Mountain Home, North Carolina facility manufactures high-performance alloy wire and small diameter bar products. Finished wire, bar, and powder products are also warehoused at this facility for quick delivery.  The facility has recently made investments in various pieces of equipment to expand their portfolio to include bar products.

Backlog

The Company defines backlog to include firm commitments from customers for delivery of product at established prices.  At any given time, approximately 50% of the orders in the backlog include prices that are subject to adjustment based on changes in raw material costs.  Historically, approximately 70% of the Company’s backlog orders have shipped within six months and approximately 90% have shipped within 12 months. The backlog figures do not typically reflect that portion of the Company’s business conducted at its service and sales centers on a spot or “just-in-time” basis. For additional discussion of backlog, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Annual Report on Form 10-K.

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Consolidated Backlog at Fiscal Quarter End

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Research and Technical Support

The Company’s technology facilities are located at the Kokomo headquarters and consist of 19,000 square feet of offices and laboratories, as well as an additional 90,000 square feet of paved storage area. The Company has six fully equipped technology testing laboratories, including a mechanical and wear test lab, a metallographic lab, an electron microscopy lab, a corrosion lab, a high-temperature lab and a welding lab. These facilities also contain a reduced scale, fully equipped melt shop and process lab. As of September 30, 2021, the technology, engineering and technological testing staff consisted of 26 persons, 13 of whom have engineering or science degrees, including 7 with doctoral degrees, with the majority of degrees in the field of metallurgical engineering or materials science.

During fiscal 2021, research and development projects were focused on new alloy development, new product form development, supportive data generation and new alloy concept validation, relating to products for the aerospace, industrial gas turbine, chemical processing and oil and gas industries. In addition, significant projects were conducted to generate technical data in support of major market application opportunities in areas such as renewable energy, fuel cell systems, biotechnology (including toxic waste incineration and pharmaceutical manufacturing) and power generation.

Competition

The high-performance alloy market is a highly competitive market in which eight to ten major producers participate in various product forms. The Company’s primary competitors in flat rolled products include Special Metals Corporation, a subsidiary of Precision Castparts Corp., Allegheny Technologies, Inc. and VDM Metals GmbH, a subsidiary of Acerinox, S.A.. The Company faces strong competition from domestic and foreign manufacturers of both high-performance alloys (similar to those the Company produces) and other competing metals. The Company may face additional competition in the future to the extent new materials are developed, such as plastics, ceramics or additive manufacturing that may be substituted for the Company’s products. The Company also believes that it will face increased competition from non-U.S. entities in the next five to ten years, especially from competitors located in Eastern Europe and Asia.  Additionally, in past years, the Company’s domestic business has been challenged by a strong U.S. dollar, which makes the goods of foreign competitors less expensive to import into the U.S and makes the Company’s products more expensive to export outside the U.S.    

In recent years, the Company experienced strong price competition from competitors. Increased competition requires the Company to price its products competitively, which pressures the Company’s gross profit margin and net income.  The Company continues to respond to this competition through alloy and application development, increasing emphasis on service centers, offering value-added services, improving its cost structure and striving to improve delivery times and reliability.

With the global effects of the COVID-19 pandemic, pricing pressure has increased in many of the Company’s industries.  The Company’s effectiveness in managing its cost structure and pricing for the value provided will likely be a key determinant of future profitability and competitiveness.

Human Capital Resources

The Company values its workforce as one of its most important assets.  Accordingly, the Company has adopted and maintains a number of programs and practices designed to attract and retain the best available personnel.

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Succession and Recruitment  

The Company has an organizational development and succession planning process in place for human capital strategic planning.  The strategic development process is continually updated and often consists of multi-year succession and development plans for individuals. Such succession plans have been utilized throughout the Company to prepare employees for future roles and leadership opportunities.  

In response to the COVID-19 pandemic and other market forces that have altered, and are expected to continue to alter, the workforce and the manner in which it functions, the Company is redefining how many roles within the Company may be performed.  For example, through experience with the COVID-19 pandemic, the Company has learned that many non-production employees are able to perform all or substantially all of their job functions outside of the office.  In addition, virtual meetings have been used to substantially reduce travel as well as in-person contact.  The Company is evaluating the effects of these and other changes on its current and future workforce, including their potential to provide the Company access to a broader recruiting pool for potential new employees, including workers in specialized areas such as metallurgy and others with specialties relating to the Company’s products, flexible role descriptions and/or working arrangements and other matters.

The Company attempts to hire from within when opportunities occur, given employee growth and progression.  The Company also utilizes outside recruiters due to the challenging and competitive hiring environment.  In order to encourage development of a future workforce for the Company, the Company continues to sponsor a Ph.D candidate and Senior Metallurgical Engineers Research Project from Purdue University, as well as providing internships in various departments and locations throughout the Company.

COVID-19 – Pandemic

Economic conditions have limited hiring and succession planning implementation in some areas.  In fiscal 2020 and 2021, the Company predominantly hired new personnel in order to backfill crucial positions.  Hiring for succession planning or bench strength has subsided during the economic downturn in business related to the COVID-19 pandemic and other factors.  

The onset of COVID-19 in the United States in fiscal 2020 and the ongoing economic downturn created additional risk related to key person retention and succession planning.  In response to the economic conditions created by the COVID-19 pandemic, previously implemented voluntary retirement incentives, reductions-in-force, and compensation reductions, created additional challenges to developing and retaining staff.  This creates higher risk of turnover of key employees.  In addition, other industries did not experience the same downturn as the Company did, and alternative opportunities are available for current employees and potential candidates.

Strong competition and limited workforce issues challenge the Company’s acquisition and retention of employees with specific skill sets.  Limited dedicated resources and commitment for developmental positions may also impact the success and rate of succession and development efforts.  Nonetheless, the Company has established formal and informal development activities to promote employee retention and position the Company for success in the long term.

Retirement and Exit Programs

The Company has established a phased retirement program to sustain the Company’s access to institutional knowledge of employees with specialized skill sets who would like to phase into retirement.  At the same time, the program is designed to facilitate a smooth transition for their successors.  This program has been limited in its use but strategically beneficial.  

The Company also utilizes exit interviews and on-boarding interviews to provide feedback regarding turnover and employee desires for growth and development.  Both have recently been strengthened and expanded.  These interviews are also utilized to identify drivers of voluntary turnover and departures from the Company.  Employee turnover rate and reasons, including voluntary and involuntary departures, are monitored annually.  The global turnover rate in fiscal 2021 was 14%, compared to 22% in fiscal 2020 and an average of 14% in the previous two fiscal years.  Both voluntary and

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involuntary terminations, including retirements, are used to calculate the turnover rate.  The reduction-in-force resulting from the COVID-19 pandemic accounted for most of the increased turnover rate in fiscal 2020, however turnover was more normalized in fiscal 2021.  

Compensation Equity

The Company conducts inflation-adjusted compensation analysis to promote competitive compensation.  This analysis takes into account ranges for the geographical area, education level and job title under consideration.  The Company’s Human Resources Department develops offers for new salaried employees and also develops and administers promotions to maintain the internal integrity of the compensation levels for comparable positions.  The Company works with managers to ensure that high potential employees and those individuals with unique talents are appropriately developed and compensated.  For example, the Board of Directors authorized a pool of restricted stock that can be used to compensate high potential employees and for retention purposes.  Further, bonus programs have been implemented at the LaPorte and Mountain Home facilities, as well as those in Europe and Asia, for retention and recognition purposes, and all salaried employees who are not eligible to participate in the Management Incentive Plan were given bonuses in fiscal 2021.  The Compensation Committee, with the recommendation of the full Board in the case of incentive compensation, determines annual salaries and other elements of compensation of the Company’s executive management team, taking into account similarly situated executives employed by a peer group of companies while also considering input of the Compensation Committee’s independent compensation consultant.  

Diversity and Inclusion

The Corporate Governance and Nominating Committee of the Board (the “Governance Committee”) considers diversity as a criteria evaluated as a part of the attributes and qualifications a Board candidate possesses.  The Governance Committee construes the notion of diversity broadly, considering differences in viewpoint, professional experience, education, skills and other individual qualities, in addition to race, gender, age, ethnicity and cultural backgrounds as elements that contribute to a diverse Board.  In keeping with this diversity commitment, the two most recent directors appointed to the Board, each of whom brings substantial experience in the form of executive leadership in the specialty metals industry and the U.S. Air Force, respectively, further the Board’s goal of enhancing diversity.    

Management also considers similar broad concepts of diversity in its hiring practices as well as its selection of vendors, contractors and other service providers.  As a federal government subcontractor, the Company follows federal rules and regulations relating to diversity and other matters, including reporting requirements.  

Company Culture

The Company has controls in place relating to compliance with the Company’s Code of Business Conduct and Ethics, including a requirement for annual employee certification of that code as well as an established whistleblower hotline and related procedures.  In addition, human capital management, and more specifically employee hiring and retention, are included within the Company’s Enterprise Risk Management program, which is subject to Board oversight through regular reporting.  

Community Involvement

The Company has used internships and partnerships with universities to enrich recruiting efforts, particularly for technical roles such as research, alloy development and engineering.  The Company has also utilized outreach and partnerships with local community resources at all major locations such as community and technical colleges, workforce development agencies, industry groups and other entities to strengthen the Company’s hiring process and expand the future workforce candidate pool.

Employee Engagement and Wellness

The Company has a long-standing tuition reimbursement program to assist employees with the continuation of their education.  In addition, employee assistance programs offer counseling for emotional, financial and family issues.  

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Continuing financial planning education is provided by the Company’s 401(k) plan administrator to assist employees in financial and retirement planning.  For many years, the Company’s investment in human capital has involved commitments to worker training, apprenticeship programs and funding college scholarships.

Management and Board Oversight

Management is engaged in the Company’s efforts regarding management of human capital resources at all levels through regular informational meetings, the Company’s Enterprise Risk Management program and organized succession planning.  The Board oversees these activities through regular reports by senior management regarding new or altered programs and as part of the Enterprise Risk Management process.  In addition, the Corporate Governance and Nominating Committee of the Board is actively engaged in monitoring and encouraging diversity at the Board level while the Compensation Committee also focuses on achieving and maintaining internal and external pay equity for the executive team and the Board members while overseeing incentive compensation more broadly throughout the organization.  In promoting external pay equity, the Board and the Compensation Committee make use of peer comparisons and benchmarking measures.

Employee Statistics

As of September 30, 2021, the Company employed 1,073 full-time employees and 37 part-time employees worldwide. All eligible hourly employees at the Kokomo, Indiana and Arcadia, Louisiana plants (539 in the aggregate) are covered by two collective bargaining agreements.

On July 1, 2018, the Company entered into a five-year collective bargaining agreement with the United Steelworkers of America Local 2958, which covers eligible hourly employees at the Kokomo, Indiana plant. This agreement will expire in June 2023.

On December 21, 2020, the Company entered into a collective bargaining agreement with the United Steelworkers of America Local 1505, which covers eligible hourly employees at the Company’s Arcadia, Louisiana plant. This agreement will expire in December 2025.  

Management believes that current relations with the union are satisfactory.

Environmental Compliance

The Company has an enterprise level environmental policy, which focuses on fostering a safe workplace, offering high quality products while protecting the environment, compliance with law and health and safety management systems, utilization of all available resources to improve the quality, environmental, health and safety management systems and setting, implementing and reviewing quality, environmental, health and safety objectives and targets.  This policy is communicated to contractors and vendors who provide services on site, and the Company periodically audits selected suppliers from an environmental compliance perspective.  The Company maintains an environmental management system certified to ISO 14001 standards and, for its Kokomo operations, ISO 50001 standards.  The Company maintains multiple policies designed to comply with the Occupational Safety and Health Administration standards and has ISO 45001 certification.  

The Company’s facilities and operations are subject to various foreign, federal, state and local laws and regulations relating to the protection of human health and the environment, including those governing the discharge of pollutants into the environment and the storage, handling, use, treatment and disposal of hazardous substances and wastes. In the U.S., such laws include, without limitation, the Occupational Safety and Health Act, the Clean Air Act, the Clean Water Act, the Toxic Substances Control Act and the Resource Conservation and Recovery Act. As environmental laws and regulations continue to evolve, it is likely the Company will be subject to increasingly stringent environmental standards in the future, particularly under air quality and water quality laws and standards related to climate change issues, such as reporting of greenhouse gas emissions. Violations of these laws and regulations can result in the imposition of substantial penalties and can require facility improvements. Expenses related to environmental compliance, which are primarily included in Cost of sales on the Consolidated Statements of Operations, were approximately $2.3 million for

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fiscal 2021 and are currently expected to be approximately $3.0 million for fiscal 2022.  

The Company’s facilities are subject to periodic inspection by various regulatory authorities, who from time to time have issued findings of violations of governing laws, regulations and permits. In the past five years, the Company has paid administrative fines, none of which have had a material effect on the Company’s financial condition, for alleged violations relating to environmental matters, requirements relating to its Title V Air Permit and alleged violations of record keeping and notification requirements relating to industrial waste water discharge. Capital expenditures of approximately $1.3 million were made for pollution control improvements during fiscal 2021, with additional expenditures of approximately $2.8 million for similar improvements planned for fiscal 2022.

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 and Mountain Home, North Carolina facilities, respectively.  

The Company is required among other things to monitor groundwater and to continue post-closure maintenance of the former disposal areas at each site. As a result, the Company is aware of elevated levels of certain contaminants in the groundwater on the Company’s property.  These levels are stable or decreasing, but 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.

The Company may also incur liability for alleged environmental damages associated with the off-site transportation and disposal of hazardous substances.  Generators of hazardous substances which are transported to disposal sites where environmental problems are alleged to exist are subject to claims under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, and state counterparts. CERCLA imposes strict, joint and several liabilities for investigatory and cleanup costs upon hazardous substance generators, site owners and operators and other potentially responsible parties. The Company is currently named as a potentially responsible party at one site. There can be no assurance that the Company will not be named as a potentially responsible party at other sites in the future or that the costs associated with those sites would not have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

Legal Compliance

In addition to environmental laws and regulations, the Company must comply with a wide variety of other laws and regulations, including, without limitation, federal and state securities laws, Delaware corporate law and safety laws and regulations.  The Company continues to engage in collaboration with key stakeholders, such as customers and regulators, to adapt to changing regulatory expectations.  Compliance with law and government regulations is not expected to have any material effect upon capital expenditures, earnings or the competitive position of the Company.  

Environmental, Social and Governance Matters

In addition to the information set forth below, further information regarding the Company’s environmental, social and governance activities can be found under the Sustainability tab on the Company’s website at www.haynesintl.com/company-information/sustainability.

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Governance and Social Matters

The Company is committed to a culture of openness, trust and integrity in all aspects of its business. It is critical that all employees, vendors and customers understand and accept that, in everything it does, the Company will conduct itself from the perspective of “doing the right thing for the right reason” at all times.

The Company has a number of policies in place governing social and ethical issues, including, without limitation:

All Company employees must certify compliance with the Code of Business Conduct and Ethics annually, and regular training is provided to employees regarding these and other policies. In addition, the Company maintains a whistleblower hotline with access available on an anonymous basis online or by telephone. 

Environmental Matters

The Company is in the process of installing a 1MW solar fixed ground mount array system to reduce the dependence on nonrenewable energy sources at its wire facility located in Mountain Home, North Carolina.  This solar system should provide over 50% of the electricity needs for the facility. In addition, since fiscal year 2010, the Company has invested more than $2.0 million in energy conservation programs, and as a result, the Company now saves approximately $1.1 million in energy costs per year. The Company has specific targets in place for reducing electricity and natural gas consumption in its energy conservation programs.

The Company has an enterprise level environmental policy, which focuses on fostering a safe workplace, while protecting the environment and complying with laws and health and safety management systems. The Company maintains an environmental management system certified to the ISO 14001:2015 standard, and Kokomo operations are ISO 50001:2018 certified. The Company’s facilities are subject to periodic inspection by various regulatory authorities. The Company utilizes available resources to improve quality, environmental and health and safety management systems, as well as set objectives and targets for each. This policy is communicated to contractors and vendors who provide services on site, and the Company periodically audits selected suppliers from an environmental compliance perspective.

The Company is conscious of its environmental impact and is actively working to lighten its carbon footprint including projects to measure greenhouse gas emissions and develop goals of reduction.  The ever-increasing demand for clean energy generation has led to the development of several emerging technologies that require high-temperature alloys for demanding operating conditions.

Since the invention of HASTELLOY^® X alloy in 1954, the Company’s alloys have made it possible for aerospace engines to run at high temperatures for long periods of time.  This has been further enhanced with alloys used in new generation engines such as HAYNES 282^®.  Engines being placed in service today reportedly consume 15% less fuel,

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produce 50% less pollutants and reduce the noise footprint near airports compared to the previous generation of airplane engines.  The environmental related improvements stem in part from the increased use of alloys, such as HASTELLOY^® X, HAYNES^® 188, 230^®, 282^®, 242^®, 244^® and other Haynes invented alloys.  

In addition to the Company’s alloys for energy production and powering modern aircraft in a more environmentally friendly manner, the Company’s alloys are used in chemical plants that produce ecologically safe agrichemicals which help to feed the world’s growing population.  Company-invented HASTELLOY^® G-35^®, HYBRID-BC1^® and C-276 alloys are commonly used in these applications. In addition, HASTELLOY^® C-22^®, C-2000^® and B-3^® alloys are used by the pharmaceutical companies for production of chemicals.

Renewable power generation offers the promise of producing power from nature’s resources, such as wind, sun, rivers and oceans, with minimal depletion to the Earth’s resources and damage to the environment.  Many renewable energy technologies require the capture of energy at very high temperatures in extreme environments for which the Company’s alloys are well suited.  For example, the Company’s materials withstand intense heat in concentrated solar power plants to facilitate storable thermal power to generate electricity after the sun sets.

Safety Matters

Safety is the Company’s top priority.  Listed below are certain improvement efforts the Company has implemented in order to reduce occurrences of injuries, occupational diseases and work-related fatalities.

The Company extends its health and safety policies to suppliers, visitors and contractors. When suppliers, visitors and contractors come on site, they receive safety training. The training includes a review of relevant policies, required personal protection equipment, emergency procedures and specific hazards that may be encountered.

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Executive Officers of the Company

The following table sets forth certain information concerning the persons who served as executive officers of the Company as of September 30, 2021. Except as indicated in the following paragraphs, the principal occupations of these persons have not changed during the past five years.

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Mr. Shor was elected President and Chief Executive Officer of the Company in September 2018.  Prior to that, he served as interim President and Chief Executive Officer of the Company from May 2018 through September 2018 and Chairman of the Board of the Company from February 2017 through September 2018. Mr. Shor has been a director since 2012.

Mr. Maudlin has served as the Vice President-Finance, Treasurer and Chief Financial Officer of the Company since December 2012.

Ms. Gunst has served as Vice President—General Counsel and Corporate Secretary of the Company since August 2011.

Dr. Ishwar has served as Vice President—Marketing & Technology of the Company since January 2010.

Mr. Losch has served as Vice President—Sales & Distribution of the Company since January 2010.

Ms. Neel has served as Vice President—Corporate Affairs of the Company since April 2000.

Mr. Pinkham has served as Vice President—Tube and Wire Products of the Company since September 2018.  Prior to that, he served as Vice President—Manufacturing of the Company since March 2008.

Mr. Strobel has served as Vice President—Operations of the Company since September 2018.  Prior to that, he was a consultant to manufacturing companies through his company Silver Eagle Consulting. Mr. Strobel was also Senior Vice President and Chief Technology Officer of Carpenter Technology Corporation from June 2015 to August 2016 and Senior Vice President – Operations of Carpenter Technology from September 2011 to June 2015.  

Mr. Tipton has served as Vice President and Chief Information Officer of the Company since January 2019.  Prior to that, he served as Chief Information Officer Americas for Dometic from August 2016 to December 2018 and as Director of Information Technology for Dometic from December 2012 to October 2016.

Mr. Van Bibber has served as Controller and Chief Accounting Officer of the Company since December 2012.

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Item 1A.  Risk Factors

The following risk factors should be considered carefully in addition to the other information contained in this filing.  

The risks and uncertainties described below are not the only ones we face and represent risks that our management believes are material to investors regarding an investment in our Company and our business.  Additional risks and uncertainties not presently known to us or that we currently deem not material may also harm our business.  If any of the following risks actually occur, our business, financial condition or results of operations could be harmed.  

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Risks Related to the COVID-19 Pandemic

Our results of operations, financial condition and cash flows have been and may continue to be adversely affected by pandemics, epidemics or other public health emergencies, such as COVID-19.  

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Our business, results of operations, financial condition, cash flows and stock price have been, and may continue to be, adversely affected by pandemics, epidemics or other public health emergencies, such as the global outbreak of COVID-19.  In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The outbreak resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19.

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The outbreak of COVID-19 and preventive or protective actions taken by governmental authorities may continue to have a material adverse effect on our operations, supply chain, customers and transportation networks, including business shutdowns or disruptions. We have already experienced many effects of COVID-19, including partial shutdowns, quarantine of certain employees, temporary and permanent layoffs, pay cuts and mandatory unpaid furloughs, decreased demand for our products, increased pricing pressures and changes to our business strategies and management attention.  More recently, we have experienced additional effects of the COVID-19 pandemic, including raw material shortages, unavailability of transportation and logistics resources, unusual inflation, shortages of hydrogen or other natural gases necessary in the operation of our business, hiring and retention challenges and limited availability of outside conversion resources. Further, the U.S. government and certain of its agencies have issued orders requiring specific steps to be taken with respect to COVID-19 by certain employers and contractors.  The costs relating to these programs are currently unknown.  These events and others have caused, and may continue to cause, lower revenue and lower volumes, leading to unfavorable fixed cost absorption.  The extent to which COVID-19 may continue to adversely impact our business depends on future developments, which are highly uncertain and, in many cases, beyond our control including the severity and duration of the outbreak and the effectiveness of actions taken globally to contain or mitigate its effects. Over the preceding 18 months, the fluctuation in levels of the virus’s effects on different portions of the global economy have continued to affect our business as well as other businesses.  Management is actively monitoring the impact of the global situation on our financial condition, liquidity, operations, suppliers, industry and workforce.  Given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, we are not able to estimate the effects of the pandemic on our results of operations, financial condition or liquidity in a particular future quarter or year.  

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The aerospace market, our largest market, has been hit particularly hard by the addition of COVID-19 issues to the safety concerns with the Boeing 737 MAX, which remains grounded in China, and we cannot determine what further effect that exacerbating factor will have on the aerospace market.  Even after the COVID-19 pandemic has subsided, we may experience materially adverse impacts to our business due to any resulting economic recession or depression. Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets which has and may continue to adversely impact our stock price and our ability to access capital markets. Our indebtedness may also increase due to our need to increase borrowing to fund operations during a period of reduced revenue.  To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described herein.

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Risks Related to Our Markets

Our revenues may fluctuate widely based upon changes in demand for our customers’ products.

Demand for our products is dependent upon and derived from the level of demand for the machinery, parts and equipment produced by our customers, which are principally manufacturers and fabricators of machinery, parts and equipment for highly specialized applications. Historically, certain of the markets in which we compete have experienced unpredictable, wide demand fluctuations, such as the current conditions in the aerospace industry and in the broader global economy as a result of the COVID-19 pandemic. Because of the comparatively high level of fixed costs associated with our manufacturing processes, significant declines in our markets have had, and may continue to have, a disproportionately adverse impact on our operating results.

We have, in several instances, experienced substantial year-to-year declines in net revenues, primarily as a result of decreases in demand in the industries to which our products are sold. In fiscal 2002, 2003, 2009, 2010, 2013, 2016, 2020 and 2021, our net revenues, when compared to the immediately preceding year, declined by approximately 10.3%, 21.2%, 31.1%, 13.0%, 16.7%, 16.6%, 22.4% and 11.3%, respectively.  We may experience similar fluctuations in our net revenues in the future. Additionally, demand is likely to continue to be subject to substantial year-to-year fluctuations as a consequence of industry cyclicality, as well as other factors such as global economic uncertainty, and such fluctuations may have a material adverse effect on our business.  Currently, the COVID-19 pandemic has significantly decreased demand for our products across all of our markets, but particularly in the aerospace industry, which also continues to be affected by issues relating to the Boeing 737 MAX (which remains grounded in China).  Passenger airline travel has decreased significantly since the beginning of the pandemic and remains volatile.  As a result, volatility in the aerospace market has continued and may continue for an unknown period of time.

Profitability in the high-performance alloy industry is highly sensitive to changes in sales volumes.

The high-performance alloy industry is characterized by high capital investment and high fixed costs. The cost of raw materials is the primary variable cost in the manufacture of our high-performance alloys and, in fiscal 2021, represented approximately 34% of our total cost of sales.  Other manufacturing costs, such as labor, energy, maintenance and supplies, often thought of as variable, have a significant fixed element. Profitability is, therefore, very sensitive to changes in volume, and relatively small changes in volume can result in significant variations in earnings. Our ability to effectively utilize our manufacturing assets depends greatly upon continuing demand in our end markets, successfully increasing our market share in IGT and other areas and continued acceptance of our new products into the marketplace.  The COVID-19 pandemic has significantly decreased demand, and therefore, sales volume of our products.  Failure to effectively utilize our manufacturing assets, including as a result of the COVID-19 pandemic, may continue to negatively impact our business.  

We operate in cyclical markets.

A significant portion of our revenues is derived from the highly cyclical aerospace, power generation and chemical processing markets. Our sales to the aerospace industry constituted 37.9% of our total sales in fiscal 2021.  Our chemical processing and industrial gas turbine sales constituted 18.7% and 19.8%, respectively, of our total sales in fiscal 2021.  Each of these markets has been adversely impacted by the global economic effects of the COVID-19 pandemic.

The commercial aerospace industry is historically driven by demand from commercial airlines for new aircraft. The U.S. and international commercial aviation industries continue to face challenges arising from the global economic climate, the safety issues with the Boeing 737 MAX airliner (which remains grounded in China), competitive pressures and fuel costs. Demand for commercial aircraft is influenced by industry profitability, trends in airline passenger traffic (including the dramatic decrease and subsequent fluctuations and uncertainties caused by COVID-19), the state of U.S. and world economies, the ability of aircraft purchasers to obtain required financing and numerous other factors, including the effects of terrorism and health and safety concerns (including those arising from COVID-19).  Continued supply chain disruptions in this or any of our other markets could materially and adversely affect our results of operations and financial condition.  

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The military aerospace cycle is highly dependent on U.S. and foreign government funding which is driven by, among other factors, the effects of terrorism, a changing global political environment, U.S. foreign policy, the retirement of older aircraft and technological improvements to new engines that increase reliability. Accordingly, the timing, duration and magnitude of cyclical upturns and downturns cannot be forecasted with certainty. Downturns or reductions in demand for our products sold into the aerospace market could have a material adverse effect on our business.

The industrial gas turbine market is also cyclical in nature. Demand for power generation products is global and is affected by the state of the U.S. and world economies, the availability of financing to power generation project sponsors, the increase in renewable energy and the political environments of numerous countries. The availability of fuels and related prices also have a large impact on demand. Decreased demand for our products in the industrial gas turbine industry may have a material adverse effect on our business.  

We also sell products into the chemical processing industry, which is also cyclical in nature. Customer demand for our products in this market may fluctuate widely depending on U.S. and world economic conditions, the availability of financing, and the general economic strength of the end use customers in this market. Cyclical declines or sustained weakness in this market could have a material adverse effect on our business.

Our business depends, in part, on the success of commercial aircraft programs and our ability to accelerate production levels to timely match order increases in new or existing programs.

The success of our business will depend, in part, on the success of new and existing commercial aircraft programs.  We are currently under contract to supply components for a number of commercial aircraft programs.  As a result of COVID-19 and other factors, commercial aircraft build rates have slowed and are not expected to return to pre-COVID levels for several years, particularly in the area of multi-aisle aircraft, the demand for which has decreased more than other aircraft due to the reduced demand for international travel.   Further cancellation, reductions or delays of orders or contracts by our customers or in any of these programs, or regulatory or certification-related groundings or other delays or cancellations to new or existing aircraft programs or to the production schedules for any aircraft programs, including as may be related to any prolonged period of the current decrease in passenger air traffic, could exacerbate the material adverse effect on our business.  Issues with the Boeing 737 MAX passenger airliners continue in parts of the world, particularly China, which has not yet cleared the aircraft for commercial flights.  The effect of any future action on our business is currently unknown, but changes in production schedules to date have had, and future changes may also have, a material adverse effect on our business.  

The competitive nature of our business results in pressure for price concessions to our customers and increased pressure to reduce our costs.

We are subject to substantial competition in all of the markets we serve, and we expect this competition to continue. As a result, we have made price concessions to our customers in the aerospace, chemical processing and power generation markets from time to time, and we expect customer pressure for further price concessions to continue. Maintenance of our market share will depend, in part, on our ability to sustain a cost structure that enables us to be cost-competitive. If we are unable to adjust our costs relative to our pricing, our profitability will suffer. With the global effects of the COVID-19 pandemic, pricing pressure has increased in many of our industries.  Our effectiveness in managing our cost structure and pricing for the value provided will be a key determinant of future profitability and competitiveness.

Aerospace demand is primarily dependent on two manufacturers.

A significant portion of our aerospace products are sold to fabricators and are ultimately used in the production of new commercial aircraft. There are only two primary manufacturers of large commercial aircraft in the world, The Boeing Company and Airbus.  A significant portion of our aerospace sales are dependent on the number of new aircraft built by these two manufacturers, which is in turn dependent on a number of factors over which we have little or no control. Those factors include demand for new aircraft from around the globe, utilization levels of commercial and military aircraft, success of new commercial and military aircraft programs and factors that impact manufacturing capabilities, such as the availability of raw materials and manufactured components, changes in highly exacting performance requirements and

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product specifications, U.S. and world economic conditions, changes in the regulatory environment and labor relations between the aircraft manufacturers and their work forces, most of which have been and continue to be adversely affected by the economic effects of the COVID-19 pandemic.  Significant interruptions and slowdowns in the number of new aircraft built by the aircraft manufacturers has and may continue to have a material adverse effect on our business.  As noted above, future actions relating to the safety issues with the Boeing 737 MAX passenger airliner, as well as the ongoing effects of the COVID-19 pandemic, have had and may continue to have a material adverse effect on our business.  

During periods of lower demand in other alloy markets, some of our competitors may use their available capacity to produce higher volumes of high-performance alloys, which leads to increased competition in the high-performance alloy market.

We have experienced increased competition from competitors who produce both stainless steel and high-performance alloys. As a result of the competition in our markets, we have made price concessions to our customers from time to time, and we expect customer pressure for further price concessions to continue, particularly given the effects of the COVID-19 pandemic. Maintenance of our market share will depend, in part, on our ability to sustain a cost structure that enables us to be cost-competitive. If we are unable to adjust our costs relative to our pricing, our profitability will suffer. Our effectiveness in managing our cost structure through changing circumstances will be a key determinant of future profitability and competitiveness.

Periods of reduced demand and excess supply as well as the availability of substitute lower-cost materials can adversely affect our ability to price and sell our products at the profitability levels we require to be successful.

Additional worldwide capacity and reduced demand for our products could significantly impact future worldwide pricing, which would adversely impact our business.  In recent years, several of our competitors have added capacity that represents direct competition with the Company’s business.  In addition, continued availability of substitute materials may also cause significant fluctuations in future results as our customers opt for a lower-cost alternative.  The impacts of the COVID-19 pandemic have also reduced demand for our products globally and have significantly increased customer requests to reduce pricing or delay delivery.

We change prices on our products as we deem necessary. In addition to the above general competitive impact, other market conditions and various economic factors beyond our control can adversely affect the timing of our pricing actions. The effects of any pricing actions may be delayed due to long manufacturing lead times or the terms of existing contracts. There is no guarantee that the pricing actions we implement will be effective in maintaining our profit margin levels.

Risks Related to Raw Materials

Rapid fluctuations in the prices of nickel, cobalt and other raw materials may materially adversely affect our business.

To the extent that we are unable to adjust to rapid fluctuations in the price of nickel, cobalt and other raw materials that we use in large quantities, there may be a negative effect on our gross profit margins. In fiscal 2021, nickel, a major component of many of our products, accounted for approximately 45% of our raw material costs, or approximately 15% of our total cost of sales. We enter into several different types of sales contracts with our customers, some of which allow us to pass on increases in nickel or other raw material prices to our customers. In other cases, we fix the nickel or other raw materials component of our prices for a period of time through the life of a long-term contract. In yet other cases, we price our products at the time of order, which allows us to establish prices with reference to known costs of our raw material inventory, but which does not allow us to offset an unexpected rise in the price of raw materials. The COVID-19 pandemic has affected raw material pricing by increasing the unpredictability of our profitability, and its future effects are unknown.   We may not be able to successfully offset rapid changes in the price of nickel, cobalt or other raw materials in the future. In the event that raw material price increases occur that we are unable to pass on to our customers, our cash flows or results of operations could be materially adversely affected.

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Our business cycle is long, involving multiple steps.  These refining steps generate high revert scrap pounds that are recycled back through the melt at metal value.  This scrap cycle also contributes to a long position as it relates to commodity price risk.

Our results of operations may also be negatively impacted if both customer demand and raw material prices rapidly fall at the same time. Because we value our inventory utilizing the first-in, first-out inventory costing methodology, a rapid decrease in raw material costs has a negative effect on our operating results. In those circumstances, we recognize higher material cost in cost of sales relative to lower raw material market prices that drive the sales price.

In addition, we periodically enter into forward purchase agreements for our raw material supply. If we enter into a forward purchase agreement which is not matched to one or more customer contracts with fixed raw material prices, a rapid or prolonged decrease in the price of significant raw materials could adversely impact our business.

Our business is dependent on a number of raw materials that may not be available.

We use a number of raw materials in our products which are found in only a few parts of the world and are available from a limited number of suppliers. The availability of these materials may be influenced by private or government cartels, changes in world politics, additional regulation, labor relations between the materials producers and their work force, unstable governments in exporting nations, inflation, general economic conditions and export quotas imposed by governments in nations with rare earth element supplies.  The ability of key material suppliers to meet quality and delivery requirements or to provide materials on terms acceptable to us is beyond our control and can also impact our ability to meet commitments to customers. The COVID-19 pandemic has adversely affected the availability of certain raw materials through its effects on the labor market, availability of transportation for materials and other factors.  Future shortages or price fluctuations in raw materials could result in decreased sales as well as margins, or otherwise adversely affect our business. The enactment of new or increased import duties on raw materials imported by us could also decrease availability, thereby adversely affect our business.

If suppliers are unable to meet our demands, we may not have alternative sources of supply. In some cases, we have entered into exclusive supply agreements with respect to raw materials, which could adversely affect our business if the exclusive supplier cannot meet quality and delivery requirements to provide materials on terms acceptable to us.

The manufacturing of the majority of our products is a complex process and requires long lead times. We may experience delays or shortages in the supply of raw materials. If we are unable to obtain adequate and timely deliveries of required raw materials, we may be unable to timely manufacture sufficient quantities of products. This could cause us to lose sales, incur additional costs, delay new product introductions or suffer harm to our reputation.

Risks Related to Our Production and Operations

Our operations are dependent on production levels at our Kokomo facility.

Our principal assets are located at our primary integrated production facility in Kokomo, Indiana and at our production facilities in Arcadia, Louisiana and in Mountain Home, North Carolina. The Arcadia and Mountain Home plants, as well as all of the domestic and foreign service centers, rely to a significant extent upon feedstock produced at the Kokomo facility. During fiscal 2020, we endured a temporary shut-down of most of the Company’s production operations due to the effects of the COVID-19 pandemic which impacted our operations and financial results.  We have also been affected by shortages of labor, transportation and other services and raw materials in our Kokomo and other production facilities as a result of the COVID-19 pandemic.  Any further production failures, shutdowns (including those associated with COVID-19) or other significant problems at the Kokomo facility could have a material adverse effect on our financial condition and results of operations. We maintain property damage insurance to provide for reconstruction of damaged equipment, as well as business interruption insurance to mitigate losses resulting from any production shutdown caused by an insured loss. Although we believe that our insurance is adequate to cover any such losses, that may not be the case. Additionally, our insurance policies include deductibles that would require us to incur losses that could have an adverse effect on our financial results in the event a significant interruption occurs.  One or more significant uninsured losses at our Kokomo facility may have a material adverse effect on our business.

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In addition, from time to time we schedule planned outages on the equipment at our Kokomo facility for maintenance and upgrades. These projects are subject to a variety of risks and uncertainties, including a variety of market, operational and labor-related factors, many of which may be beyond our control. The COVID-19 pandemic made it necessary for us to shut down portions of our operations in fiscal 2020.  The pandemic, and its effect on our markets and our business, has also required us to temporarily or permanently lay off certain personnel.  Certain portions of our operations continue to be affected by personnel shortages.  Should a planned or unplanned shut down on a significant piece of equipment, or a significant decrease in personnel or lack of necessary new personnel, last substantially longer than originally planned, there could be a material adverse effect on our business.

Our production may be interrupted due to equipment failures, energy or personnel shortages, lack of critical spares, or other events affecting our factories.

Our manufacturing processes depend on certain sophisticated and high-value equipment, some of which has been in operation for a long period of time for which there may be only limited or no production alternatives. Failures of this equipment, or the lack of critical spares or skilled personnel to timely repair this equipment, could result in production delays, revenue loss and significant repair costs. In addition, our factories rely on the availability of electrical power and natural gas, transportation for raw materials and finished products and employee access to our workplace that are subject to interruption in the event of severe weather conditions or other natural or manmade events (including the COVID-19 pandemic). We have recently experienced a significant decrease in the availability of certain industrial gas resources that may impact our operations.  While we maintain backup resources to the extent practicable, a severe or prolonged equipment outage, failure or other interruptive event affecting areas where we have significant manufacturing operations may result in loss of manufacturing or shipping days, which could have a material adverse effect on our business. Natural or manmade events (including the COVID-19 pandemic) that interrupt significant manufacturing operations of our customers also have had, and could continue to have a material adverse effect on our business.

Issues related to our agreements with Titanium Metals Corporation could require us to make significant payments and could disrupt our operations and materially affect our financial results.

We entered into a Conversion Services Agreement and an Access and Security Agreement with Titanium Metals Corporation (TIMET) in November 2006 that provide for the performance of certain titanium conversion services through November 2026. In 2012, TIMET was acquired by Precision Castparts Corp. which owns Special Metals Corporation, a direct competitor of ours. Events of default under the Conversion Services Agreement include (a) a change in control in which the successor does not assume the agreement, (b) a violation by us of certain non-compete obligations relating to the manufacture and conversion of titanium and (c) failure to meet agreed-upon delivery and quality requirements. If an event of default under the Conversion Services Agreement occurs, TIMET could require us to repay the unearned portion of the $50.0 million fee paid to us by TIMET when the agreement was signed, plus liquidated damages of $25.0 million. Our obligations to pay these amounts to TIMET are secured by a security interest in our four-high Steckel rolling mill, through which we process a substantial amount of our products. In addition, the Access and Security Agreement with TIMET includes, among other terms, an access right that would allow TIMET to use certain of our operating assets, including the four-high mill, to perform titanium conversion services in the event of our bankruptcy or the acceleration of our indebtedness. Exercise by TIMET of its rights under its security interest following a default and non-payment of the amounts provided in the Conversion Services Agreement or exercise of the access rights under the Access and Security Agreement could cause significant disruption in our Kokomo operations, which would have a material adverse effect on our business.

In addition, the Conversion Services Agreement contains a requirement that we reserve a significant amount of capacity exclusively for TIMET.  That agreement does not contain a volume commitment on TIMET’s part.  The agreement also severely limits our ability to manufacture titanium for any customer other than TIMET.  In recent years, our levels of business with TIMET have fluctuated.  In fiscal 2020, our levels of business with TIMET decreased as a result of the COVID-19 pandemic and other factors.  Should TIMET continue to underutilize its reserved capacity, we would not be able to reallocate that capacity, which could negatively impact our business.  

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Our operations could result in injury to our workers or third parties.

Our manufacturing operations could result in harm to our workers or third parties in our facilities.  Our manufacturing processes involve the use of heavy equipment, vehicles and chemicals, among other matters, that could lead to harm, injury, death or illness.  In addition to harm to individuals, any such occurrences could result in reputational harm, adverse effects on employee morale, litigation and other costs, any of which could materially and adversely affect our business.  

Although collective bargaining agreements are in place for certain employees, union or labor disputes could still disrupt the manufacturing process.

Our operations rely heavily on our skilled employees. Any labor shortage, disruption or stoppage caused by any deterioration in employee relations or difficulties in the renegotiation of labor contracts could reduce our operating margins and income. Approximately 55% of our U.S. employees are affiliated with unions or covered by collective bargaining agreements. The Company entered into two collective bargaining agreements with the United Steel Workers of America which cover eligible hourly employees at the Company’s Arcadia, Louisiana and Kokomo, Indiana facilities. Failure to negotiate new labor agreements when required could result in a work stoppage at one or more of our facilities. In addition, other Company facilities could be subject to union organizing activity. Although we believe that our labor relations have generally been satisfactory, it is possible that we could become subject to additional work rules imposed by agreements with labor unions, or that work stoppages or other labor disturbances could occur in the future, any of which could reduce our operating margins and income and place us at a disadvantage relative to non-union competitors.  

Product liability and product warranty risks could adversely affect our operating results.

We produce many critical products for commercial and military aircraft, industrial gas turbines, chemical processing plants and pharmaceutical production facilities.  Failure of our products could give rise to substantial product liability and other damage claims as well as reputational harm. We maintain insurance addressing this risk, but our insurance coverage may not be adequate or insurance may not continue to be available on terms acceptable to us.

Additionally, we manufacture our products to strict contractually-established specifications using complex manufacturing processes. If we fail to meet the contractual requirements for a product, we may be subject to warranty costs to repair or replace the product itself and additional costs related to customers’ damages or the investigation and inspection of non-complying products. These costs are generally not insured.

Risks Related to our Research and Technology Activities

Failure to successfully develop, commercialize, market and sell new applications and new products could adversely affect our business.

We believe that our proprietary alloys, technology, applications development, technical services and metallurgical manufacturing expertise provide us with a competitive advantage over other high-performance alloy producers. Our ability to maintain this competitive advantage depends on our ability to continue to offer products and technical services that have equal or better performance characteristics than competing products at competitive prices. Our future growth will depend, in part, on our ability to address the increasingly demanding needs of our customers by inventing new alloys, enhancing the properties of our existing alloys, timely developing new applications for our existing and new alloys, and timely developing, commercializing, marketing and selling new alloys and products. If we are not successful in these efforts, or if our new alloys/products and product enhancements do not adequately meet the requirements of the marketplace and achieve market acceptance, our business could be negatively affected.

Failure to protect our intellectual property rights could adversely affect our business.

We rely on a combination of confidentiality, invention assignment and other types of agreements and trade secret, trademark and patent law to establish, maintain, protect and enforce our intellectual property rights. Our efforts in regard to these measures may be inadequate, however, to prevent others from misappropriating our intellectual property rights.

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In addition, laws in some non-U.S. countries affecting intellectual property are uncertain in their application, which can affect the scope or enforceability of our intellectual property rights. Any of these events or factors could diminish or cause us to lose the competitive advantages associated with our intellectual property, which could have a material adverse effect on our business.

Risks Related to Our Cybersecurity Activities

We are subject to risks relating to our cybersecurity measures and to misappropriation of information generally.

We have put in place a number of systems, processes and practices designed to protect against intentional or unintentional misappropriation or corruption of our systems and information or disruption of our operations including unauthorized access to our networks, servers and data, encryption of network access and the introduction of malware. Despite our cybersecurity efforts, we could be subject to breaches of security systems which may result in unauthorized access, misappropriation, corruption or disruption of the information we are trying to protect, in which case we could suffer material harm. For example, access to our proprietary information regarding new alloy formulations would allow our competitors to use that information in the development of competing products. Current employees have, and former employees may have, access to a significant amount of information regarding our Company which could be disclosed to our competitors or otherwise used to harm us. Any misappropriation or corruption of our systems and information or disruption of our operations could have a material adverse effect on our business.

Our information technology systems could be subject to attack.  

Our information technology systems could be subject to sabotage by employees or third parties, including attacks in which the systems could be shut down with a demand for payment of “ransom”, which could slow or stop production or otherwise adversely affect our business. Any such attack could disrupt our operations and could have a material adverse effect on our business.

We depend on our information technology infrastructure to support the current and future information requirements of our operations which exposes us to risk.

Management relies on our information technology infrastructure, including hardware, network, software, people and processes, to provide useful information to support assessments and conclusions about operating performance. Our inability to produce relevant or reliable measures of operating performance in an efficient, cost-effective and well-controlled fashion may have significant negative impacts on our business.

Risks Related to Our Finance Activities

We value our inventory using the FIFO method, which could put pressure on our margins.

The cost of our inventories is determined using the first-in, first-out (FIFO) method. Under the FIFO inventory costing method, the cost of materials included in cost of sales may be different than the current market price at the time of sale of finished product due to the length of time from the acquisition of raw material to the sale of the finished product.  In a period of decreasing raw material costs, the FIFO inventory valuation normally results in higher costs of sales as compared to the last-in, first-out method.  This could result in compression of the gross margin on our product sales.  

Changes in tax rules and regulations, or interpretations thereof, may adversely affect our effective tax rates.

We are a U.S. based company with customers and suppliers in foreign countries. We import various raw materials used in our production processes, and we export goods to our foreign customers. The United States, the European Commission, countries in the EU, including the United Kingdom, and other countries where we do business may change relevant tax, border tax, accounting and other laws, regulations and interpretations, that may unfavorably impact our effective tax rate or result in other costs to us.  In addition, the Company has deferred tax assets on its balance sheet which could be subjected to unfavorable impacts if tax rates are reduced, such as those that occurred at the end of calendar year 2017.  

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We could be required to make additional contributions to our defined benefit pension plans or recognize higher related expense in our statement of operations as a result of adverse changes in interest rates and the capital markets.

Our estimates of liabilities and expenses for pension benefits incorporate significant assumptions, including the rate used to discount the future estimated liability, the long-term rate of return on plan assets and several assumptions relating to the employee workforce (salary increases, retirement age and mortality). We currently expect that we will be required to make future minimum contributions to our defined benefit pension plans. Many domestic and international competitors do not provide defined benefit plans and/or retiree health plans (which we do provide), and those competitors may have a resulting cost advantage.  A decline in the value of plan investments in the future, an increase in costs or liabilities, including those caused by the lowering of the rate used to discount future payouts, or unfavorable changes in laws or regulations that govern pension plan funding could materially change the timing and amount of required pension funding or the amount of related expense recognized in our statement of operations. A requirement to fund any deficit created in the future could have a material adverse effect on our business.

The carrying value of goodwill and other intangible assets may not be recoverable.

Goodwill and other intangible assets are recorded at fair value on the date of acquisition. We review these assets at least annually for impairment. Impairment may result from, among other things, deterioration in performance, adverse market conditions, adverse changes in applicable laws or regulations and a variety of other factors. A sustained downturn resulting from the COVID-19 pandemic or otherwise may result in the carrying value of our goodwill or other intangible assets exceeding their fair value, which may require us to recognize impairment to those assets.  Any future impairment of goodwill or other intangible assets could have a material adverse effect on our business.  

We may not be able to obtain financing on terms that are acceptable to us.

The global capital markets have been adversely affected, and may continue to be adversely affected, by the economic effects of the COVID-19 pandemic.  Terms for borrowers have become significantly less favorable.  As a result of this and other issues, we may not be able to obtain needed financing on terms that are acceptable to us.

Our working capital requirements may negatively affect our liquidity and capital resources.

Our working capital requirements can vary significantly, depending in part on the timing of our delivery obligations under various customer contracts and the payment terms with our customers and suppliers. If our working capital needs exceed our cash flows from operations, we would look to our cash balances and availability for borrowings under our existing credit facility to satisfy those needs, as well as potential sources of additional capital, which may not be available on satisfactory terms and in adequate amounts, if at all.

Risks Related to Our Global Operations

We are subject to risks associated with global trade matters

We are subject to macroeconomic downturns in the United States and abroad that may affect the general economic climate, our performance and the demand of our customers.  Previous turmoil in the global economy has had, and future turmoil may have, an adverse impact on our business and our financial condition.  In addition to the impact that the global financial crisis previously had, we may face significant challenges if conditions in the global economy worsen.  Economic turmoil has resulted and may continue to result from the COVID-19 pandemic, which has adversely impacted and may continue to adversely impact our business.  Transportation and logistics resources, including shipping and transportation services, have been in short supply, which has had, and may continue to have, and adverse effect on our business.  Further, any global trade wars or similar economic turmoil, including new or existing tariffs, could adversely affect our business.  For example, the U.S. and China have imposed tariffs on large amounts of products imported into each of the countries from one another.  Moreover, these new tariffs, or other changes in trade policy, have resulted in, and may continue to trigger, retaliatory actions on the part of these countries and potentially other countries in the future.  Talks between the two countries are ongoing, but the outcome is highly uncertain and could affect our ability to buy raw materials from China and sell products into the Chinese market.  A “trade war” or other governmental action related to tariffs or

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international trade agreements or policies has the potential to adversely impact demand for our products, our costs, customers, suppliers and/or the U.S. economy or certain sections thereof, and, thus, adversely affect our business.  Our competitors outside of the United States may not be subject to these tariffs or other measures, and therefore, could have a significant competitive advantage over us in that respect.  In addition, the long-term effect of the exit of the United Kingdom from the European Union is currently unknown and could adversely affect our business.

A global recession or disruption in global financial markets could adversely affect us.

A global recession or disruption in the global financial markets, including any significant tariff impositions or trade wars, presents risks and uncertainties that we cannot predict.  During recessionary economic conditions or financial market disruptions, we face risks that may include:

The risks inherent in our international operations may adversely impact our revenues, results of operations and financial condition.

We anticipate that we will continue to derive a significant portion of our revenues from operations in international markets. As we continue to expand internationally, we will need to hire, train and retain qualified personnel for our direct sales efforts and retain distributors and train their personnel in countries where language, cultural or regulatory impediments may exist. Distributors, regulators or government agencies may not continue to accept our products, services and business practices, and costs related to international trade have increased and may continue to increase. In addition, we purchase raw materials on the international market. The sale and shipment of our products and services across international borders, as well as the purchase of raw materials from international sources, subject us to the trade regulations of various jurisdictions, including tariffs and other possible punitive measures. Compliance with such regulations is costly. Any failure to comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments and restrictions on certain business activities. Failure to comply with applicable legal and regulatory obligations could result in the disruption of our shipping, sales and service activities. Our international sales operations expose us and our representatives, agents and distributors to risks inherent in operating in foreign jurisdictions any one or more of which may adversely affect our business, including:

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Any material decrease in our international revenues or inability to expand our international operations as a result of these or other factors would adversely impact our business.

Export sales could present risks to our business.

Export sales account for a significant percentage of our revenues, and we believe this will continue to be the case in the future. Risks associated with export sales include: political and economic instability, including weak conditions in the world’s economies; accounts receivable collection; export controls; changes in legal and regulatory requirements; policy changes affecting the markets for our products; changes in tax laws and tariffs; trade duties; the effect of the United Kingdom’s exit from the European Union and exchange rate fluctuations (which may affect sales to international customers and the value of profits earned on export sales when converted into dollars). Any of these factors could materially adversely affect our business.

Political and social turmoil could adversely affect our business.

The war on terrorism, as well as political and social turmoil (including global recessions or interruptions in financial markets, whether or not related to COVID-19), could put pressure on economic conditions in the United States and worldwide. These political, social and economic conditions could make it difficult for us, our suppliers and our customers to forecast accurately and plan future business activities, and could adversely affect the financial condition of our suppliers and customers and affect customer decisions as to the amount and timing of purchases from us. As a result, our business could be materially adversely affected.

Risks Related to Our Legal and Environmental Activities

We may be adversely impacted by costs related to environmental, health and safety laws, regulations, and other liabilities.

We are subject to various foreign, federal, state and local environmental, health and safety laws and regulations, including those governing the discharge of pollutants into the environment, the storage, handling, use, treatment and disposal of hazardous substances and wastes and the health and safety of our employees. Under these laws and regulations, we may be held liable for all costs arising out of any release of hazardous substances on, under or from any of our current or former properties or any off-site location to which we sent or arranged to be sent wastes for disposal or treatment, and such costs may be material. We could also be held liable for any and all consequences arising out of human exposure to such substances or other hazardous substances that may be attributable to our products or other environmental damage. In addition, some of these laws and regulations require our facilities to operate under permits that are subject to renewal or modification. These laws, regulations and permits can require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment. Violations of these laws, regulations or permits can also result in the imposition of substantial penalties, permit revocations and/or facility shutdowns.

We have received permits from the environmental regulatory authorities in Indiana and North Carolina to close and to provide post-closure monitoring and care for certain areas of our Kokomo and Mountain Home facilities that were used for the storage and disposal of wastes, some of which are classified as hazardous under applicable regulations. We are required to monitor groundwater and to continue post-closure maintenance of the former disposal areas at each site.

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As a result, we are aware of elevated levels of certain contaminants in the groundwater and additional corrective action could be required. Additionally, it is possible that we could be required to undertake other corrective action for any other solid waste management unit or other conditions existing or determined to exist at our facilities. We are unable to estimate the costs of any further corrective action, if required. However, the costs of future corrective action at these or any other current or former sites could have a material adverse effect on our business.

We may also incur liability for alleged environmental damages associated with the off-site transportation and disposal of hazardous substances. Our operations generate hazardous substances, many of which we accumulate at our facilities for subsequent transportation and disposal or recycling by third parties off-site. Generators of hazardous substances which are transported to disposal sites where environmental problems are alleged to exist are subject to liability under CERCLA and state counterparts. In addition, we may have generated hazardous substances disposed of at sites which are subject to CERCLA or equivalent state law remedial action. We have been named as a potentially responsible party at one site. CERCLA imposes strict, joint and several liabilities for investigatory and cleanup costs upon hazardous substance generators, site owners and operators and other potentially responsible parties regardless of fault. If we are named as a potentially responsible party at other sites in the future, the costs associated with those future sites could have a material adverse effect on our business.

Environmental laws are complex, change frequently and have tended to become increasingly stringent over time, including those relating to greenhouse gases. While we have budgeted for future capital and operating expenditures to comply with environmental laws, changes in any environmental law may directly or indirectly increase our costs of compliance and liabilities arising from any past or future releases of, or exposure to, hazardous substances and may materially adversely affect our business. See “Business—Environmental Matters.”

Government regulation is increasing and if we fail to comply with such increased regulation, we could be subject to fines, penalties and expenditures.

The United States Congress has adopted several significant pieces of legislation, such as the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, including conflict minerals regulations, that affect our operation as well as those of other publicly traded companies. In addition, regulations relating to data protection and privacy law have become increasingly stringent.  Further, the government has enacted significant laws and regulations related to the COVID-19 pandemic (including vaccination and other safety-related requirements) with which we must comply.  We may be subject to significant fines and penalties, as well as reputational risks or customer disqualification or dissatisfaction, if we fail to comply with these laws or their implementing regulations, and the increasingly stringent regulations could require us to make additional unforeseen expenditures. Any such fines, penalties or expenditures could have a material adverse effect on our business.

Our business is affected by federal rules, regulations and orders applicable to some of our customers who are government contractors.

A number of our products are manufactured and sold to customers who are parties to U.S. government contracts or subcontracts. Consequently, we are indirectly subject to various federal rules, regulations and orders applicable to government contractors. From time to time, we are also subject to government inquiries and investigations of our business practices due to our participation in government programs. These inquiries and investigations are costly and consuming of internal resources, and costs are expected to increase. Violations of applicable government rules and regulations could result in civil liability, in cancellation or suspension of existing contracts or in ineligibility for future contracts or subcontracts funded in whole or in part with federal funds, any of which could have a material adverse effect on our business.

Our business could be materially and adversely affected by climate change and related matters.

​

We analyze climate change risks in two separate categories: transition risks and physical risks.  Transition risks are those risks relating to the transition of the global economy to a focus on more climate-friendly technologies.  This transition could have adverse financial impacts on us in several ways.  For instance, more stringent environmental policies or regulations could lead to increased expenses relating to green-house gas emissions or other emissions that could increase

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our operating costs.  Enhanced emissions-reporting or shifting technology could require us to write off or impair assets or retire existing assets early. Increased environmental mandates could also increase our exposure to litigation.  We could be required to incur increased costs and significant capital investment to transition to lower emissions technology.  In addition, overall market shifts could increase costs of our raw materials and cause unexpected shifts in energy costs.  Market shifts could also bring a prompt change in our overall revenue mix and sources, resulting in reduced demand in alloys and a decrease in revenues.  Focus on sustainability has increased, and the entire industry could be stigmatized as not friendly to the environment, which could adversely affect our reputation and our business, including due to difficulties in employee hiring and retention and our ability to access capital. Any of these matters could materially and adversely affect our business, financial condition or results of operations.

​

Physical risks from climate change that could affect our business include acute weather events such as floods, tornadoes or other severe weather and ongoing changes such as rising temperatures or extreme variability in weather patterns. These events could lead to increased capital costs from damage to our facilities, increased insurance premiums or reduced revenue from decreased production capacity based on supply chain interruptions.   Any of these events could have a material adverse effect on our business, financial condition or results of operations.

Our business subjects us to risk of litigation claims, including those that might not be covered by insurance.

Litigation claims may relate to the conduct of our business, including claims pertaining to product liability, commercial disputes, employment actions, employee benefits, compliance with domestic and federal laws and personal injury. Due to the uncertainties of litigation, we might not prevail on claims made against us in the lawsuits that we currently face, and additional claims may be made against us in the future. The outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to us. The resolution in any reporting period of one or more of these matters could have a material adverse effect on our business, particularly in the event that adverse outcomes are not covered by insurance.  

Our insurance may not provide enough coverage or may not be available on terms that are acceptable to us.

We maintain various forms of insurance, including insurance covering claims related to our properties and risks associated with our operations. Our existing property and liability insurance coverages contain exclusions and limitations on coverage. From time-to-time, in connection with renewals of insurance, we have experienced additional exclusions and limitations on coverage, larger self-insured retentions and deductibles and significantly higher premiums. Costs associated with cybersecurity insurance coverage have increased dramatically, and we may be required to pay higher premiums or deductibles or accept lower levels, or no, coverage for fiscal 2022.  In the future, our insurance coverage may not cover claims to the extent that it has in the past and the costs that we incur to procure insurance may increase significantly, either of which could have an adverse effect on our business.  Furthermore, the insurance industry, or our carriers specifically, may continue to alter their business models in manners that are unfavorable to us, resulting in insufficient or more costly coverage, which could adversely affect our business.

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General Risk Factors

An interruption in energy services may cause manufacturing curtailments or shutdowns.

We rely upon third parties for our supply of energy resources consumed in the manufacture of our products. The potential for curtailment of certain energy resources exists which could have a material adverse effect on our business.  The prices for and availability of electricity, natural gas, hydrogen, oil and other energy resources are subject to volatile market conditions. These market conditions often are affected by political and economic factors, weather issues and other factors, including those caused by the COVID-19 pandemic, which may be beyond our control. Disruptions in the supply of energy resources have temporarily impaired, and could continue to impair, our ability to manufacture products for customers. Further, increases in energy costs, which are outside of our control, or changes in costs relative to energy costs paid by competitors, has and may continue to adversely affect our business. To the extent that these uncertainties cause suppliers and customers to be more cost sensitive, increased energy prices may have an adverse effect on our business.

If we are unable to recruit, hire and retain skilled and experienced personnel, our ability to effectively manage and expand our business will be harmed.

Our success largely depends on the skills, experience and efforts of our officers and other key employees who may terminate their employment at any time. The loss of any of our senior management team could harm our business. Our ability to retain our skilled workforce and our success in attracting and hiring new skilled employees will be a critical factor in determining whether we will be successful in the future. We face challenges in hiring, training, managing and retaining employees in certain areas including metallurgical researchers, equipment technicians and sales and marketing staff.  We also face hiring challenges relating to the location of our business.  All of these risks have been exacerbated as a result of the COVID-19 pandemic and the cost savings measures the Company has implemented as a result.  In addition, the COVID-19 pandemic has effected significant changes in the U.S. and international workforce which change the way we approach recruitment and retention of talent.  If we are unable to recruit, hire and retain skilled employees, our new product and alloy development and commercialization could be delayed and our marketing and sales efforts could be hindered, which would adversely impact our business.

Healthcare costs, including those related to healthcare legislation, have and may continue to impact our business.

The Patient Protection and Affordable Care Act and other legislation relating to healthcare have increased our annual employee healthcare cost obligations.  In addition, costs associated with healthcare generally, including our retiree healthcare plans, are expected to continue to increase. We may also incur increased healthcare costs pursuant to legislation or rule-making mandated in connection with the COVID-19 pandemic. This area of law is expected to continue to change, and we cannot predict the effect that healthcare legislation or regulation, and the costs of healthcare in general, will ultimately have on our business.

Any significant delay or problems in any future expansion of our operations could materially adversely affect our business, financial condition and results of operations.

We have undertaken, and may continue to undertake, significant capital projects in order to enhance, expand and/or upgrade our facilities and operational capabilities, including rebuilding the A&K line and 4-HI rolling system upgrades. Our ability to achieve the anticipated increased revenues or otherwise realize acceptable returns on these investments or other strategic capital projects that we may undertake is subject to a number of risks, many of which are beyond our control, including the ability of management to ensure the necessary resources are in place to properly execute these projects on time and in accordance with planned costs, the ability of key suppliers to deliver the necessary equipment according to schedule, customer demand (which fluctuates as a result of the cyclical markets in which we operate, as well as other factors) and our ability to implement these projects with minimal impact to our existing operations. In addition, the cost to implement any given strategic capital project ultimately may prove to be greater than originally anticipated. If we are not able to achieve the anticipated results from the implementation of any of our strategic capital projects, or if we incur unanticipated implementation costs or delays, our business may be materially adversely affected.

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We consider acquisitions, joint ventures and other business combination opportunities, as well as possible business unit dispositions, as part of our overall business strategy, which involve uncertainties and potential risks that we cannot predict or anticipate fully.

We intend to continue to strategically position our businesses in order to improve our ability to compete. Strategies we may employ include seeking new or expanding existing specialty market niches for our products, expanding our global presence, acquiring businesses complementary to existing strengths and continually evaluating the performance and strategic fit of our existing business units. From time to time, management of the Company holds discussions with management of other companies to explore acquisitions, joint ventures and other business combination opportunities as well as possible business unit dispositions. As a result, the relative makeup of our business is subject to change. Acquisitions, joint ventures and other business combinations involve various inherent risks, such as: assessing accurately the value, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition or other transaction candidates; the potential loss of key personnel of an acquired business; integration of technological systems; our ability to achieve identified financial and operating synergies anticipated to result from an acquisition or other transaction; diversion of the attention of certain management personnel from their day-to-day duties; and unanticipated changes in business and economic conditions affecting an acquisition or other transaction. International acquisitions could be affected by many additional factors, including, without limitation, export controls, exchange rate fluctuations, domestic and foreign political conditions and deterioration in domestic and foreign economic conditions.

Our stock price is subject to fluctuations that may not be related to our performance as a result of being traded on a public exchange.

The stock market can be highly volatile. The market price of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease in the value of their stock, including decreases unrelated to our operating performance or prospects. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including, but not limited to, those described elsewhere in this “Risk Factors” section and those listed below:

We may not continue to pay dividends at the current rate or at all.

Any future payment of dividends, including the timing and amount thereof, will depend upon our Board of Director’s assessment of the economic environment, our operations, financial condition, projected liabilities, compliance with contractual restrictions in our credit agreement, restrictions imposed by applicable law and other factors.

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Provisions of our certificate of incorporation and by-laws could discourage potential acquisition proposals and could deter or prevent a change in control.

Some provisions in our certificate of incorporation and by-laws, as well as Delaware statutes, may have the effect of delaying, deterring or preventing a change in control. These provisions, including those regulating the nomination of directors, may make it more difficult for other persons, without the approval of our Board of Directors, to launch takeover attempts that a stockholder might consider to be in his or her best interest. These provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock.

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Recent actions by proxy advisory firms and large institutional shareholders may affect our stock price.

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In recent periods, both Institutional Shareholder Services and Glass Lewis, two primary proxy advisory firms, as well as large institutional investors, have emphasized the importance of disclosure regarding the environmental, social and governance actions taken by publicly traded companies.  If we are unable to achieve acceptable scores relating to these matters, our stock price and reputation may be affected.

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Item 1B.  Unresolved Staff Comments

There are no unresolved comments by the staff of the U.S. Securities and Exchange Commission.

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Item 2.  Properties

Manufacturing Facilities.  The Company owns manufacturing facilities in the following locations:

The Kokomo plant, the Company’s primary production facility, is located on approximately 180 acres of industrial property and includes over 1.0 million square feet of building space. There are three sites consisting of (1) a headquarters and research laboratory; (2) primary and secondary melting, forge press and several smaller hot mills; and (3) the Company’s four-high Steckel rolling mill and sheet product cold working equipment, including two cold rolling mills and three annealing furnaces.  All alloys and product forms other than tubular and wire goods are produced in Kokomo.

The Arcadia plant is located on approximately 42 acres of land and includes 202,500 square feet of buildings on a single site. Arcadia uses feedstock produced in Kokomo to fabricate welded and seamless high-performance alloy pipe and tubing and purchases extruded tube hollows to produce seamless titanium tubing. Manufacturing processes at Arcadia require cold pilger mills, weld mills, draw benches, annealing furnaces and pickling facilities.

The Mountain Home plant is located on approximately 29 acres of land and includes approximately 100,000 square feet of building space. The Mountain Home facility is primarily used to manufacture finished high-performance alloy wire. Finished wire products are also warehoused at this facility.

The owned facilities located in the United States are subject to a mortgage which secures the Company’s obligations under its U.S. revolving credit facility with a group of lenders led by JPMorgan Chase Bank, N.A. For more information, see Note 8 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

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Service and Sales Centers.  The service and sales centers, which stock and sell all product forms, contain equipment capable of precision laser and water jet processing services to cut and shape products to customers’ precise specifications.  The Company owns service and sales centers in the following locations:

The Openshaw plant, located near Manchester, England, consists of approximately 5 acres of land and over 85,000 square feet of buildings on a single site.

In addition, the Company leases service and sales centers, which stock and sell all product forms, in the following locations:

Sales Centers.  The Company leases sales centers, which sell all product forms, in the following locations:

During fiscal 2021, the Company consolidated its sales center in Zurich, Switzerland into the Lenzburg, Switzerland service center.

On January 1, 2015, the Company entered into a finance lease agreement for the building that houses the assets and operations of LaPorte Custom Metal Processing (LCMP).  The finance 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 finance lease obligation is included in Long-term obligations (See Note 19. Long-term Obligations).

All owned and leased service and sales centers not described in detail above are single site locations and are less than 100,000 square feet, except for the LaPorte service center which is approximately 230,000 square feet.  

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Item 3.  Legal Proceedings

The Company is subject to extensive federal, state and local laws and regulations. Future developments and increasingly stringent regulations could require the Company to make additional unforeseen expenditures for these matters. The Company is regularly involved in litigation, both as a plaintiff and as a defendant, relating to its business and operations. Such litigation includes, without limitation, federal and state EEOC administrative and judicial actions, litigation of commercial matters, asbestos litigation and litigation and administrative actions relating to environmental

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matters. For more information, see “Item 1. Business—Environmental Matters.” Litigation and administrative actions may result in substantial costs and may divert management’s attention and resources, and the level of future expenditures for legal matters cannot be determined with any degree of certainty.  

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Item 4. Mine Safety Disclosures

Not applicable.

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Part II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company’s common stock is listed on the NASDAQ Global Market (“NASDAQ”) and traded under the symbol “HAYN”.

As of November 1, 2021, there were approximately 56 holders of record of the Company’s common stock.

The Company has historically paid quarterly cash dividends.  Any decision to pay future cash dividends will be made by the Company’s Board of Directors and will depend upon the Company’s earnings, financial condition and other factors.

Set forth below is information regarding the Company’s stock repurchases during the fourth quarter of fiscal 2021.

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Cumulative Total Stockholder Return

The graph below compares the cumulative total stockholder return on the Company’s common stock to the cumulative total return of the Russell 2000 Index, S&P MidCap 400 Index, and Peer Groups for each of the last five fiscal years ended September 30. The cumulative total return assumes an investment of $100 on September 30, 2016 and the reinvestment of any dividends during the period. The Russell 2000 is a broad-based index that includes smaller market capitalization stocks. The S&P MidCap 400 Index is the most widely used index for mid-sized companies. Management believes that the S&P MidCap 400 is representative of companies with similar market and economic characteristics to Haynes. Furthermore, management also believes the Russell 2000 Index is representative of the Company’s current market capitalization status and this index is also provided on a comparable basis. The companies included in the Peer Group Index: Allegheny Technologies, Inc., Howmet Aerospace Inc.(formerly Arconic, Inc)., Carpenter Technology Corp., Commercial Metals, Inc.,  Insteel Industries, Inc., Kaiser Aluminum Corporation, Materion Corporation, Olympic Steel, Inc., and Universal Stainless & Alloy Products, Inc. Management believes that the companies included in the Peer Groups, taken as a whole, provide a meaningful comparison in terms of competition, product offerings and other relevant factors. The total stockholder return for the peer groups is weighted according to the respective issuer’s stock market capitalization at the beginning of each period.

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Item 6.  Selected Financial Data

This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.

Amounts below are in thousands, except backlog, which is in millions, share and per share information and average nickel price.

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Note that the Company implemented ASU 2017-07, Compensation – Retirement Benefits (Topic 715) on October 1, 2018 on a retrospective basis.  This guidance requires non-service costs components of retirement expense to be reclassified outside of operating income to a new category titled “Nonoperating retirement benefit expense” in the statement of operations.  Gross margins were favorably impacted by the reclassification of the non-service cost components of retirement expense.  All prior periods have been adjusted for this change in accounting.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Please refer to page 2 of this Annual Report on Form 10-K for a cautionary statement regarding forward-looking information.

Overview of Business

The Company is one of the world’s largest producers of high-performance nickel- and cobalt-based alloys in flat product form, such as sheet, coil and plate. The Company is focused on developing, manufacturing, marketing and distributing technologically advanced, high-performance alloys, which are used primarily in the aerospace, chemical processing and industrial gas turbine industries. The global specialty alloy market includes stainless steel, titanium alloys, general-purpose nickel alloys and high-performance nickel- and cobalt-based alloys. The Company competes primarily in the high-performance nickel- and cobalt-based alloy sector, which includes high-temperature resistant alloys, or HTA products, and corrosion-resistant alloys, or CRA products. The Company believes it is one of the principal producers of high-performance alloy flat products in sheet, coil and plate forms. The Company also produces its products as seamless and welded tubulars and in 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 and small-diameter bar products. The Company distributes its products primarily through its direct sales organization, which includes 11 service and/or sales centers in the United States, Europe and Asia. All of these centers are Company-operated.

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Overview of Markets

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.

Aerospace demand was moderately impacted in fiscal 2017 due to delays in the transition to new engine platforms combined with some softness in demand driven by lower oil and fuel costs.  Underpinning demand for new engines is a desire for more fuel-efficiency and lower emissions, which had been tempered as a result of previous decreases in fuel prices. The slight pull-back was temporary, and in fiscal 2018, aerospace volume hit record levels, and revenue in that market increased 17.9% in that timeframe.  Growth continued in fiscal 2019, with continued traction of the new generation engine platforms in spite of the grounding of the Boeing 737 MAX aircraft.  One of the Company’s core focus initiatives was to increase prices, which contributed to the revenue increase.  Fiscal 2019 sales into the aerospace market represented a record year in both volume and revenue.  Sales in the first half of fiscal 2020 were reduced with the continued grounding and subsequent production halt of the Boeing 737 MAX aircraft.  Sales in the second half of fiscal 2020 were further severely impacted by the global COVID-19 pandemic causing significant reductions in air travel, which impacted both new plane builds and aftermarket sales.  Sales into the aerospace market have also been impacted by high inventory levels of metal in the supply chain, which take time to work through the inventory and slows order volume to the Company.  Volume shipped into the aerospace market declined 30.1% in fiscal 2020 compared to the prior year.  Volumes continued to decline in the first quarter of fiscal year 2021, then began to increase by the end of fiscal 2021.  Sales into the aerospace market in fiscal year 2021 were 50% of the fiscal year 2019 levels.  Continued growth is expected as the number of people flying has improved and announced aircraft build rates have significantly increased.  Single-aisle aircraft build rates announced in the industry show significant growth in 2022 and back to 2019 levels in 2023.

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Chemical processing revenue in fiscal 2018 increased 12.3% due to recovery in the base business, as well as a moderate increase in specialty application projects.  This growth continued in fiscal 2019 with net revenues into the chemical processing market increasing 13.2%.  The main driver of demand in this market is capital spending in the chemical processing sector, driven by end-user demand for housing, automotive, energy and agricultural products. The chemical processing market is sensitive to oil prices, currency fluctuations and fiscal policies as well as world economic conditions and GDP growth. Additional drivers of demand in this market include the increase in North American production of natural gas liquids and the further downstream processing of chemicals that may utilize equipment that requires high-performance alloys. Increased sales to the chemical processing industry in fiscal 2018 and 2019 were related to improvement in global spending in the chemical processing sector combined with the Company’s focus initiatives aimed at improving volumes.  Fiscal 2020 and 2021 volume and sales were significantly impacted by the global COVID-19 pandemic. Volume shipped into the chemical processing industry market declined 34.9% in fiscal 2020 compared to the prior year and generally remained at that level across fiscal year 2021. Demand in this market is expected to rise with the economic impact of the COVID decreasing (subject to continuing fluctuations) and higher oil prices fueling additional capital expenditures in the chemical industry.

Sales to the industrial gas turbine market declined in years leading up to fiscal 2018, and fiscal 2018 volumes represented less than half the volume of fiscal 2012 peak levels.  Reported significant overcapacity in large-frame turbines primarily used for electrical power generation combined with growth in renewable energy facilities have taken a toll on demand for large-frame gas turbines.  Two of the large OEM producers of large-frame turbines have restructured their power generation businesses due to weak demand.   Sales and volume began to recover in fiscal 2019 and the first half of fiscal 2020.  The recovery included a market share gain which began to gain traction in fiscal 2020.  Industrial gas turbines are beneficial in electricity generating facilities due to low capital cost at installation, fewer emissions than traditional fossil fuel-fired facilities and favorable natural gas prices provided by availability of non-conventional (shale) gas supplies.  The global COVID-19 pandemic impacted this market, however sales declines were mitigated by the Company’s market share gains as well as restocking beginning to occur in the supply chain.  Sales declined only 4.7% in fiscal 2020 compared to the prior year, then increased 18.0% in fiscal 2021 as the market share gain showed its full impact.  The Company continues its push for additional market share going forward.

The industries in the other markets category focus on upgrading overall product quality, improving product performance through increased efficiency, prolonging product life and lowering long-term costs. Companies in these industries are looking to achieve these goals through the use of “advanced materials” which support the increased use of high-performance alloys in an expanding number of applications. Sales into the other markets category improved in both fiscal 2018 and 2019.  Sales in fiscal 2020 were significantly impacted by the global COVID-19 pandemic.  Sales in fiscal year 2021 increased 28.8% as the Company strategically sought increased mill volumes especially in the flue-gas desulphurization industry to help improve fixed costs absorption challenges in the overall low volume environment in early fiscal year 2021.  Going forward, in addition to supporting and expanding the traditional businesses of oil and gas, flue-gas desulfurization, automotive and heat treating, the Company expects increased levels of activity in non-traditional markets such as fuel cells and alternative energy applications in the long term, post pandemic.  

Other revenue consists primarily of toll conversion, but also includes royalty income, scrap sales and revenue recognized from the TIMET agreement. The demand for toll conversion includes TIMET conversion demand completed on the Company’s four-high Steckel hot rolling mill in Kokomo, Indiana, as well as conversion work completed through LaPorte Custom Metal Products.  Other revenue demand levels vary year-to-year based upon demand drivers in the respective markets of the Company’s tolling customers.  The global COVID-19 pandemic impacted tolling revenue, particularly revenue from those tolling customers that sell into the aerospace market.  In fiscal 2021, other revenue represented 6.4% of net sales.  Other revenue does not include associated shipment pounds because the metal is not owned by the Company.

COVID-19 Pandemic

COVID-19 related disruptions negatively impacted the Company’s financial and operating results in the second half of fiscal 2020 and throughout fiscal 2021 and could continue to materially affect the Company’s financial condition and results of operations. In particular, the pandemic negatively impacted the aerospace supply chain. The Company has, during this time period, accepted, with select aerospace customers, requests to delay the shipment of orders and in some

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cases cancellations. Markets other than aerospace have also been depressed with uncertainty and tight cash management impacting customer ordering patterns. The Company has taken significant actions to position itself to manage through the current market disruption caused by COVID-19. 

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Summary of Capital Spending

Capital spending was $9.4 million and $5.9 million in fiscal 2020 and 2021, respectively, and the forecast for capital spending in fiscal 2022 is approximately $17.7 million, which is approaching the Company’s depreciation levels.  

Capital Allocation Strategy

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On July 28, 2021, the Company announced a multi-faceted capital allocation strategy which includes 1) a share repurchase plan because management believes that repurchasing the Company’s stock at current market prices represents an attractive capital allocation strategy for the Company.  Management of the Company feels this is a unique opportunity to repurchase shares well below the intrinsic value of the Company given the outlook of the markets it serves, particularly the anticipated recovery in commercial aerospace, combined with gross margin expansion strategies 2) the recent adoption of a glide path for the U.S. pension plan to help secure improvements in funding percentage realized this fiscal year and 3) a U.S. pension plan accelerated funding strategy with the intention of fully funding the plan in approximately three years or less.  These steps represent significant actions to de-risk the U.S. pension plan and strive to eliminate the largest liability on our balance sheet.

Further details of each strategy are as follows:

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Valuation of the Pension Plan and the Retiree Healthcare Plan

The actuarial valuation of the U.S. pension and retiree healthcare plans on September 30, 2021 included a favorable increase in the discount rates used to measure the plan liabilities along with other favorable items including higher than expected return on plan assets and continued favorable retiree health care spending.  The U.S. defined benefit pension net liabilities decreased from $105.2 million at the beginning of the year to $26.1 million at September 30, 2021.  The funding percentage of assets to benefit obligation increased from 68.0% as of September 30, 2020 to 91.3% as of September 30, 2021.  These amounts do not include the United Kingdom pension plan which is an $8.4 million net asset (shown in other assets on the consolidated balance sheet) or two small nonqualified pension plans with a liability of $0.6 million. In addition, the post-retirement health care liability, which is unfunded, declined from $93.3 million at September 30, 2020 to $83.0 million at September 30, 2021.  This favorable valuation is expected to reduce expense in fiscal 2022 by $6.0 million, reflected primarily in the Nonoperating Retirement Benefit Expense in the Statement of Operations.  

Volumes and Pricing

In fiscal 2019, volume shipped in the fourth quarter was 5.4 million pounds.  Moving into the first half of fiscal 2020, volumes were negatively impacted by the grounding and subsequent production halt of the Boeing 737 MAX aircraft.  The second half of fiscal 2020 was then significantly impacted by the global COVID-19 pandemic, which lowered volumes in the third and fourth quarter.  Moving into fiscal year 2021, the pandemic continued to dramatically impact volumes with first quarter volumes bottoming at 2.8 million pounds.  The second quarter began to improve with 3.5 million pounds, and the third and fourth quarters were 3.7 and 4.0 million pounds shipped, respectively.    

While volumes shipped into the aerospace market began to improve in the fourth quarter of fiscal 2021, significant growth is still expected as the market begins its recovery.  Aerospace volumes in fiscal 2021 were 31.3% below volumes of fiscal year 2020 and 51.7% below volumes of fiscal 2019.  Published build rates of single aisle aircraft show significant growth expected in fiscal year 2022 and generally a return to 2019 levels in fiscal year 2023.  

Volumes in the chemical processing market were relatively flat in fiscal year 2021 compared to 2020 with demand continuing to be impacted by the pandemic as well as weather-related events and supply chain challenges.  Industrial gas turbine volumes were up 25.5% in fiscal year 2021 compared to 2020 driven by market share gain initiatives gaining traction. Volume in other markets grew 62.2% in fiscal year 2021 compared to 2020, led by increases in shipments to the flue gas desulphurization (FGD), oil & gas, nuclear and wear resistant markets. The largest growth occurred in the FGD market as business conditions continue to improve in the aerospace market.  The Company expects to see a reduction in FGD shipments as it utilizes manufacturing capacity on higher-value products.    

The product average selling price per pound in fiscal 2021 was $22.56, which is a 7.3% decrease over last fiscal year.  The decrease is significantly driven by changes in product mix (both alloy and form) to lower value products and markets to increase volumes and combat fixed cost absorption headwinds. This is most evident in other markets with a 20.6% reduction in average selling price per pound to products described in the preceding paragraph in the FGD market.    This lower value mix is expected to improve as the Company utilizes its manufacturing capacity on higher value products when demand in the aerospace market recovers.  Multiple price increases have been announced, which is expected to offset inflation and continue to improve profitability.  

The average market price of nickel as reported by the London Metals Exchange for the 30-days ending September 30, 2021 was $8.80 as compared to the prior year 30-days ending September 30, 2020 average market price of $6.74 per pound.  The Company values inventory utilizing the first-in, first-out (“FIFO”) inventory costing methodology. In a period of decreasing raw material costs, the FIFO inventory valuation normally results in higher costs of sales as compared to the last-in, first out method.  Conversely, in a period of rising prices, the FIFO inventory valuation normally results in lower costs of sales as compared to the last-in, first out method.  

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Gross Profit Margin Trend Performance

The following tables show net revenue, gross profit margin and gross profit margin percentage for fiscal 2020 and fiscal 2021.

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