HAYNES INTERNATIONAL INC - FORM 10-Q

Attached files

file	filename
EX-31.1 - EX-31.1 - HAYNES INTERNATIONAL INC	hayn-20151231ex3116ded16.htm
EX-32.1 - EX-32.1 - HAYNES INTERNATIONAL INC	hayn-20151231ex321900e16.htm
EX-31.2 - EX-31.2 - HAYNES INTERNATIONAL INC	hayn-20151231ex31242d0a2.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended December 31, 2015


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

For the transition period from to

Commission File Number: 001-33288

HAYNES INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filler” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐		Accelerated filer ☒

Non-accelerated filer ☐		Smaller reporting company ☐

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

As of February 4, 2016, the registrant had 12,481,549 shares of Common Stock, $.001 par value, outstanding.

Table of Contents

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


		Page
PART I	FINANCIAL INFORMATION

Item 1.	Unaudited Condensed Consolidated Financial Statements Haynes International, Inc. and Subsidiaries:

	Unaudited Consolidated Balance Sheets as of September 30, 2015 and December 31, 2015	3

	Unaudited Consolidated Statements of Operations for the Three Months Ended December 31, 2014 and 2015	4

	Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended December 31, 2014 and 2015	5

	Unaudited Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2014 and 2015	6

	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

Item 4.	Controls and Procedures	24

PART II	OTHER INFORMATION

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25

Item 6.	Exhibits	25

	Signatures	26

	Index to Exhibits	27

Table of Contents

PART 1FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share data)


	September 30,		December 31,
	2015		2015
ASSETS
Current assets:
Cash and cash equivalents	$	49,045	$	48,258
Restricted cash (Note 16)		—		9,200
Accounts receivable, less allowance for doubtful accounts of $869 and $859 respectively		75,593		64,496
Inventories		247,836		257,372
Income taxes receivable		3,699		6,857
Deferred income taxes		6,295		—
Other current assets		2,974		4,045
Total current assets		385,442		390,228
Property, plant and equipment, net		185,351		187,676
Deferred income taxes—long term portion		53,958		56,180
Prepayments and deferred charges		1,877		2,026
Goodwill		4,789		4,789
Other intangible assets, net		6,774		6,648
Total assets	$	638,191	$	647,547
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	29,386	$	30,876
Accrued expenses		16,576		11,237
Accrued pension and postretirement benefits		4,965		4,965
Deferred revenue—current portion		2,500		18,569
Total current liabilities		53,427		65,647
Long-term obligations (less current portion)		4,574		4,576
Deferred revenue (less current portion)		25,329		24,704
Deferred income taxes		—		1,707
Accrued pension benefits		107,208		105,910
Accrued postretirement benefits		105,664		105,063
Total liabilities		296,202		307,607
Commitments and contingencies (Notes 9 and 10)		—		—
Stockholders’ equity:
Common stock, $0.001 par value (40,000,000 shares authorized, 12,467,498 and 12,510,708 shares issued and 12,446,000 and 12,481,549 outstanding at September 30, 2015 and December 31, 2015, respectively)		12		12
Preferred stock, $0.001 par value (20,000,000 shares authorized, 0 shares issued and outstanding)		—		—
Additional paid-in capital		244,488		244,958
Accumulated earnings		186,533		184,015
Treasury stock, 21,498 shares at September 30, 2015 and 29,159 shares at December 31, 2015		(1,091)		(1,380)
Accumulated other comprehensive loss		(87,953)		(87,665)
Total stockholders’ equity		341,989		339,940
Total liabilities and stockholders’ equity	$	638,191	$	647,547

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

Table of Contents

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)



	Three Months Ended December 31,
	2014		2015
Net revenues	$	110,676	$	95,070
Cost of sales		90,405		82,982
Gross profit		20,271		12,088
Selling, general and administrative expense		9,736		10,276
Research and technical expense		887		915
Operating income		9,648		897
Interest income		(23)		(26)
Interest expense		16		138
Income before income taxes		9,655		785
Provision for income taxes		3,274		557
Net income	$	6,381	$	228
Net income per share:
Basic	$	0.51	$	0.02
Diluted	$	0.51	$	0.02
Dividends declared per common share	$	0.22	$	0.22

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

Table of Contents

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)



	Three Months Ended December 31,
	2014		2015
Net income	$	6,381	$	228
Other comprehensive income (loss), net of tax:
Pension and postretirement		1,254		1,976
Foreign currency translation adjustment		(2,459)		(1,688)
Other comprehensive income (loss)		(1,205)		288
Comprehensive income	$	5,176	$	516

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

Table of Contents

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)



	Three Months Ended December 31,
	2014		2015
Cash flows from operating activities:
Net income	$	6,381	$	228
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		4,278		5,114
Amortization		104		126
Pension and post-retirement expense - U.S. and U.K.		3,203		4,786
Change in long-term obligations		—		14
Stock compensation expense		457		584
Excess tax expense from restricted stock vesting		—		114
Deferred revenue		(625)		15,444
Deferred income taxes		(177)		4,075
Loss on disposition of property		113		11
Change in assets and liabilities:
Restricted cash		—		(9,200)
Accounts receivable		2,616		10,492
Inventories		(13,344)		(10,657)
Other assets		(308)		(1,236)
Accounts payable and accrued expenses		(5,188)		(3,516)
Income taxes		2,910		(2,676)
Accrued pension and postretirement benefits		(1,246)		(3,558)
Net cash provided by (used in) operating activities		(826)		10,145
Cash flows from investing activities:
Additions to property, plant and equipment		(3,214)		(7,051)
Net cash used in investing activities		(3,214)		(7,051)
Cash flows from financing activities:
Dividends paid		(2,738)		(2,746)
Proceeds from exercise of stock options		—		—
Payment for purchase of treasury stock		(251)		(289)
Excess tax expense from restricted stock vesting		—		(114)
Payments on long-term obligation		—		(12)
Net cash used in financing activities		(2,989)		(3,161)
Effect of exchange rates on cash		(468)		(720)
Decrease in cash and cash equivalents:		(7,497)		(787)
Cash and cash equivalents:
Beginning of period		45,871		49,045
End of period	$	38,374	$	48,258
Supplemental disclosures of cash flow information:
Interest (net of capitalized interest)	$	—	$	122
Income taxes paid (net of refunds)	$	535	$	(796)
Capital expenditures incurred but not yet paid	$	1,032	$	2,346

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

Table of Contents

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(in thousands, except share and per share data)

Note 1.Basis of Presentation

Interim Financial Statements

The accompanying unaudited condensed interim consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, and such principles are applied on a basis consistent with information reflected in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015 filed with the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations promulgated by the SEC related to interim financial statements. In the opinion of management, the interim financial information includes all adjustments and accruals, consisting only of normal recurring adjustments, which are necessary for a fair presentation of results for the respective interim periods. The results of operations for the three months ended December 31, 2015 are not necessarily indicative of the results to be expected for the full fiscal year ending September 30, 2016 or any interim period.

Principles of Consolidation

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

Note 2.New Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The objective of the update is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the methods of adoption allowed by the new standard and the effect, if any, on its consolidated financial statements.

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

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

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The objective of this update was to simplify the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent on the Consolidated Balance Sheet. The Company chose to adopt this standard change prospectively beginning in the first quarter of fiscal 2016.

Table of Contents

Note 3.Inventories

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


	September 30,		December 31,
	2015		2015
Raw Materials	$	27,152	$	25,485
Work-in-process		117,601		112,596
Finished Goods		101,731		117,875
Other		1,352		1,416
	$	247,836	$	257,372

Note 4.Income Taxes

Income tax expense for the three months ended December 31, 2014 and 2015 differed from the U.S. federal statutory rate of 35% primarily due to state income taxes, differing tax rates on foreign earnings and discrete tax items that impacted income tax expense in these periods. The effective tax rate for the three months ended December 31, 2015 was 71.0% compared to 33.9% in the same period of fiscal 2015. The higher effective tax rate for the first quarter of fiscal 2016 is primarily attributable to a change in the federal tax law that was enacted in the first quarter of fiscal 2016, which had a $300 unfavorable impact in the first quarter of fiscal 2016.

Note 5.Pension and Post-retirement Benefits

Components of net periodic pension and post-retirement benefit cost for the three months ended December 31, 2014 and 2015 were as follows:


	Three Months Ended December 31,
	Pension Benefits				Other Benefits
	2014		2015		2014		2015
Service cost	$	975	$	1,020	$	84	$	58
Interest cost		2,641		2,848		1,096		1,149
Expected return		(3,563)		(3,376)		—		—
Amortizations		1,361		2,381		609		706
Net periodic benefit cost	$	1,414	$	2,873	$	1,789	$	1,913

The Company contributed $1,500 to Company-sponsored domestic pension plans, $1,807 to its other post-retirement benefit plans and $226 to the U.K. pension plan for the three months ended December 31, 2015. The Company presently expects future contributions of $4,500 to its U.S. pension plan, $3,063 to its other post-retirement benefit plan, and $456 to the U.K. pension plan for the remainder of fiscal 2016.

Note 6.Legal, Environmental, and Other Contingencies

The Company is regularly involved in litigation, both as a plaintiff and as a defendant, relating to its business and operations, including environmental, commercial, employment and federal and/or state Equal Employment Opportunity Commission administrative actions. Future expenditures for environmental, employment, intellectual property and other legal matters cannot be determined with any degree of certainty; however, based on the facts presently known, management does not believe that such costs will have a material effect on the Company’s financial position, results of operations or cash flows.

The Company is currently, and has in the past been, subject to claims involving personal injuries allegedly relating to its products and processes. For example, the Company is presently involved in two actions involving welding rod-related injuries, which were filed in California state court against numerous manufacturers, including the Company, in May 2006 and February 2007, respectively, alleging that the welding-related products of the defendant manufacturers harmed the users of such products through the inhalation of welding fumes containing manganese. The Company is also involved in three actions related to asbestos in its facilities, which were filed in 2012 and 2014. The Company believes that it has defenses to these lawsuits and that, if the Company were to be found liable, the cases would not have a material effect on its financial position, results of operations or liquidity.

The Company has received permits from the Indiana Department of Environmental Management, or IDEM, to close and to provide post-closure monitoring and care for certain areas at the Kokomo facility previously used for the storage and disposal of wastes, some of which are classified as hazardous under applicable regulations. Closure certification was received in fiscal 1988 for the South Landfill

Table of Contents

at the Kokomo facility, and post-closure monitoring and care is ongoing there. Closure certification was received in fiscal 1999 for the North Landfill at the Kokomo facility, and post-closure monitoring and care are permitted and ongoing there. The Company also has a single post-closure permit applicable to both the North and South Landfills, which contains monitoring and post-closure care requirements. In addition, IDEM required that a Resource Conservation and Recovery Act, or RCRA, Facility Investigation, or RFI be conducted in order to further evaluate one additional area of concern and one additional solid waste management unit. The RFI commenced in fiscal 2008 and is ongoing. Based on preliminary results, the Company has determined that additional testing and further source remediation are necessary.

The Company has also received permits from the North Carolina Department of Environment and Natural Resources, or NCDENR, to close and provide post-closure monitoring and care for the hazardous waste lagoon at its Mountain Home, North Carolina facility. The lagoon area has been closed and is currently undergoing post-closure monitoring and care. The Company is required to monitor groundwater and to continue post-closure maintenance of the former disposal areas at each site. As a result, the Company is aware of elevated levels of certain contaminants in the groundwater, and additional corrective action by the Company could be required.

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

As of September 30, 2015 and December 31, 2015, the Company has accrued $749 for post-closure monitoring and maintenance activities, of which $662 is included in long-term obligations as it is not due within one year. Accruals for these costs are calculated by estimating the cost to monitor and maintain each post-closure site and multiplying that amount by the number of years remaining in the post-closure monitoring.

Expected expenditures for post-closure monitoring and maintenance activities (discounted) included in long-term obligations were as follows at December 31, 2015.


2016	$	—
2017		73
2018		77
2019		58
2020		49
2021 and thereafter		405
	$	662

Note 7. Deferred Revenue

On November 17, 2006, the Company entered into a twenty-year agreement to provide conversion services to Titanium Metals Corporation (“TIMET”) for up to ten million pounds of titanium metal annually. TIMET paid the Company a $50,000 up-front fee and will also pay the Company for its processing services during the term of the agreement at prices established by the terms of the agreement. TIMET may exercise an option to have ten million additional pounds of titanium converted annually, provided that it offers to loan up to $12,000 to the Company for certain capital expenditures which may be required to expand capacity. In addition to the volume commitment, the Company has granted TIMET a first priority security interest in its four-high Steckel rolling mill, along with rights of access if the Company enters into bankruptcy or defaults on any financing arrangements. The Company has agreed not to manufacture titanium products (other than cold reduced titanium tubing). The Company has also agreed not to provide titanium hot-rolling conversion services to any entity other than TIMET for the term of the agreement. The agreement contains certain default provisions which could result in contract termination and damages, including liquidated damages of $25,000 and the Company being required to return the unearned portion of the up-front fee. The Company considered each provision and the likelihood of the occurrence of a default that would result in liquidated damages. Based on the nature of the events that could trigger the liquidated damages clause, and the availability of the cure periods set forth in the agreement, the Company determined and continues to believe that none of these circumstances are reasonably likely to occur. Therefore, events resulting in liquidated damages have not been factored in as a reduction to the amount of revenue recognized over the life of the contract. The cash received of $50,000 is recognized in income on a straight-line basis over the 20-year term of the agreement. If an event of default occurred and was not cured within any applicable grace period, the Company would recognize the impact of the liquidated damages in the period of default and re-evaluate revenue recognition under the contract for future periods. The portion of the up-front fee not recognized in income is shown as deferred revenue on the consolidated balance sheet.

In the first quarter of fiscal 2016, the Company received advance payments of $16,069 related to special projects. Revenue will be recognized as the Company ships the product to the customer.

Table of Contents

Note 8. Goodwill and Other Intangible Assets, Net

The Company has goodwill, patents, trademarks, customer relationships and other intangibles. As the patents and customer relationships have a definite life, they are amortized over lives ranging from two to sixteen years. The company reviews patents and customer relationships for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the assets are measured by a comparison of the carrying amount of the asset to the discounted cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount exceeds the fair value of the asset.

Goodwill and trademarks (indefinite lived) are tested for impairment at least annually as of January 31 for Goodwill and August 31 for trademarks (the annual impairment testing dates), or more frequently if impairment indicators exist. If the carrying value of a trademark exceeds its fair value (determined using an income approach, based upon a discounted cash flow of an assumed royalty rate), impairment of the trademark may exist resulting in a charge to earnings to the extent of the impairment. The impairment test for goodwill is performed using a two-step approach. The first step is the estimation of the fair value of the relevant reporting unit, which is compared to its carrying value. No impairment was recognized in the quarter ended December 31, 2015 because the fair value of the Company’s reporting unit accounting for the Company’s goodwill (as described below) exceeded its carrying value.

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

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


Goodwill at September 30, 2015	$	4,789
Adjustments		—
Goodwill at December 31, 2015	$	4,789

Amortization of the customer relationships, patents, non-competes and other intangibles was $104 and $126 for the three-month periods ended December 31, 2014 and 2015, respectively.

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


	Gross		Accumulated		Carrying
September 30, 2015	Amount		Amortization		Amount
Patents	$	4,030	$	(3,091)	$	939
Trademarks		3,800		—		3,800
Customer relationships		2,100		(119)		1,981
Other		330		(276)		54
	$	10,260	$	(3,486)	$	6,774


	Gross		Accumulated		Carrying
December 31, 2015	Amount		Amortization		Amount
Patents	$	4,030	$	(3,162)	$	868
Trademarks		3,800		—		3,800
Customer relationships		2,100		(159)		1,941
Other		330		(291)		39
	$	10,260	$	(3,612)	$	6,648


Estimate of Aggregate Amortization Expense:
Year Ended September 30,
2016		404
2017		431

Table of Contents

2018		427
2019		246
2020		140
Thereafter		1,200

Note 9. Net Income (Loss) Per Share

The Company accounts for earnings per share using the two-class method. The two-class method is an earnings allocation that determines net income per share for each class of common stock and participating securities according to participation rights in undistributed earnings. Non-vested restricted stock awards that include non-forfeitable rights to dividends are considered participating securities. Per share amounts are computed by dividing net income attributable to common stockholders by the weighted average shares outstanding during each period. Basic earnings per share is computed by dividing net income available to common stockholders for the period by the weighted average number of common shares outstanding for the period. The computation of diluted earnings per share is similar to basic earnings per share, except the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.

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


	Three Months Ended
	December 31,
(in thousands, except share and per share data)	2014			2015
Numerator: Basic and Diluted
Net income	$	6,381		$	228
Dividends paid		(2,738)			(2,746)
Undistributed income (loss)		3,643			(2,518)
Percentage allocated to common shares		99.1	%		99.0	%
Undistributed income (loss) allocated to common shares		3,610			(2,493)
Dividends paid on common shares outstanding		2,713			2,719
Net income available to common shares		6,323			226
Denominator: Basic and Diluted
Weighted average common shares outstanding		12,333,550			12,345,564
Adjustment for dilutive potential common shares		12,923			7,520
Weighted average shares outstanding - Diluted		12,346,473			12,353,084

Basic net income per share	$	0.51		$	0.02
Diluted net income per share	$	0.51		$	0.02

Number of stock option shares excluded as their effect would be anti-dilutive		290,255			374,502
Number of restricted stock shares excluded as their effect would be anti-dilutive		112,750			121,410

(a) Percentage allocated to common shares - Weighted average
Common shares outstanding		12,333,550			12,345,564
Unvested participating shares		112,750			121,410
		12,446,300			12,466,974

Note 10. Stock-Based Compensation

Restricted Stock Plan

On February 23, 2009, the Company adopted a restricted stock plan that reserved 400,000 shares of common stock for issuance. Grants of restricted stock are grants of shares of the Company’s common stock subject to transfer restrictions, which vest in accordance with the terms and conditions established by the Compensation Committee. The Compensation Committee may set vesting requirements based on the achievement of specific performance goals or the passage of time.

Table of Contents

Restricted shares are subject to forfeiture if employment or service terminates prior to the vesting date or if any applicable performance goals are not met. The Company will assess, on an ongoing basis, the probability of whether the performance criteria will be achieved. The Company will recognize compensation expense over the performance period if it is deemed probable that the goals will be achieved. The fair value of the Company’s restricted stock is determined based upon the closing price of the Company’s common stock on the trading day immediately preceding the grant date. The plan provides for the adjustment of the number of shares covered by an outstanding grant and the maximum number of shares for which restricted stock may be granted in the event of a stock split, extraordinary dividend or distribution or similar recapitalization event.

On November 24, 2015, the Company granted 54,310 shares of restricted stock to certain key employees and non-employee directors. The time-based shares of restricted stock granted to employees will vest on the third anniversary of their grant date if the recipient is still an employee of the Company on such date. The performance-based shares will vest in equal installments on the first, second and third anniversaries of their grant date provided that (a) the recipient is still an employee of the Company on such date and (b) the Company has met certain annual net income performance goals, provided that, if the Company has exceeded a total net income performance goal for the three year period, restricted shares that did not vest due to the Company’s failure to meet the annual net income performance goals will vest at the end of such three year period. The shares of restricted stock granted to non-employee directors will vest on the earlier of (a) the first anniversary of the date of grant or (b) the failure of such non-employee director to be re-elected at an annual meeting of the stockholders of the Company as a result of such non-employee director being excluded from the nominations for any reason other than cause. The fair value of the grants was $37.75 per share, the closing price of the Company’s common stock on the trading day immediately preceding the day of the applicable grant.

The following table summarizes the activity under the restricted stock plan for the three months ended December 31, 2015:


		Weighted
		Average Fair
	Number of	Value At
	Shares	Grant Date
Unvested at September 30, 2015	111,450	$	49.07
Granted	54,310	$	37.75
Forfeited / Canceled	(11,100)	$	47.98
Vested	(33,250)	$	47.56
Unvested at December 31, 2015	121,410	$	44.52
Expected to vest	109,310	$	43.61

Compensation expense related to restricted stock for the three months ended December 31, 2014 and 2015 was $330 and $451, respectively. The remaining unrecognized compensation expense related to restricted stock at December 31, 2015 was $3,286, to be recognized over a weighted average period of 1.16 years. During the first quarter of fiscal 2016, the Company repurchased 7,661 shares of stock from employees and directors at an average purchase price of $37.72 to satisfy required withholding taxes upon vesting of restricted stock-based compensation.

Stock Option Plans

The Company has two stock option plans that authorize the granting of non-qualified stock options to certain key employees and non-employee directors for the purchase of a maximum of 1,500,000 shares of the Company’s common stock. The first option plan was adopted in August 2004 and provides for the grant of options to purchase up to 1,000,000 shares of the Company’s common stock. In January 2007, the Company’s Board of Directors adopted a second option plan that provides for options to purchase up to 500,000 shares of the Company’s common stock. Each plan provides for the adjustment of the maximum number of shares for which options may be granted in the event of a stock split, extraordinary dividend or distribution or similar recapitalization event. Unless the Compensation Committee determines otherwise, options granted under the option plans are exercisable for a period of ten years from the date of grant and vest 331/3% per year over three years from the grant date. The amount of compensation cost recognized in the financial statements is measured based upon the grant date fair value.

The fair value of option grants was estimated as of the date of the grant. The Company has elected to use the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected life, risk-free interest rates, expected forfeitures and dividend yields. The volatility is based on historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected term of the stock option granted. The Company uses historical volatility because management believes such volatility is representative of prospective trends. The expected term of an award is based on historical exercise data. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of the awards. The expected forfeiture rate is based upon historical experience. The dividend yield assumption is based on the Company’s history and expectations

Table of Contents

regarding dividend payouts at the time of the grant. Valuation of future grants under the Black-Scholes model will include a dividend yield. The following assumptions were used for grants in the first quarter of fiscal 2016:


	Fair		Dividend		Risk-free		Expected		Expected
Grant Date	Value		Yield		Interest Rate		Volatility		Life
November 24, 2015	$	8.37	2.33	%	1.70	%	30	%	5	years

On November 24, 2015, the Company granted 79,800 options at an exercise price of $37.75, the fair market value of the Company’s common stock the day of the grant. During the first quarter of fiscal 2016, no options were exercised.

The stock-based employee compensation expense for stock options for the three months ended December 31, 2014 and 2015 was $126 and $133, respectively. The remaining unrecognized compensation expense at December 31, 2015 was $1,146 to be recognized over a weighted average vesting period of 1.72 years.

The following tables summarize the activity under the stock option plans for the three months ended December 31, 2015 and provide information regarding outstanding stock options:


						Weighted
		Aggregate		Weighted		Average
		Intrinsic		Average		Remaining
	Number of	Value		Exercise		Contractual
	Shares	(000s)		Prices		Life
Outstanding at September 30, 2015	358,601			$	50.37
Granted	79,800			$	37.75
Exercised	—			$	—
Canceled	—			$	—
Outstanding at December 31, 2015	438,401	$	318	$	48.07	6.10	yrs.
Vested or expected to vest	409,336	$	318	$	48.27	5.95	yrs.
Exercisable at December 30, 2015	289,453	$	318	$	50.93	4.42	yrs.


			Remaining	Outstanding	Exercisable
	Exercise Price		Contractual	Number of	Number of
Grant Date	Per Share		Life in Years	Shares	Shares
March 31, 2006		31.00	0.25	10,000	10,000
March 30, 2007		72.93	1.25	45,500	45,500
March 31, 2008		54.00	2.25	55,500	55,500
October 1, 2008		46.83	2.75	20,000	20,000
March 31, 2009		17.82	3.25	12,084	12,084
January 8, 2010		34.00	4.00	12,400	12,400
November 24, 2010		40.26	4.92	19,667	19,667
November 25, 2011		55.88	5.92	19,700	19,700
November 20, 2012		47.96	6.92	35,600	35,600
December 10, 2012		48.39	6.92	1,800	1,800
November 26, 2013		52.78	7.92	45,250	30,168
November 25, 2014		46.72	8.92	81,100	27,034
November 24, 2015		37.75	9.92	79,800	—
				438,401	289,453

Note 11. Dividend

In the first quarter of fiscal 2016, the Company declared and paid a quarterly cash dividend. The dividend of $0.22 per outstanding share of the Company’s common stock was paid December 15, 2015 to stockholders of record at the close of business on December 1, 2015. The dividend cash pay-out was $2,746 for the quarter based on the number of shares outstanding.

On February 4, 2016, the Company announced that the Board of Directors declared a regular quarterly cash dividend of $0.22 per outstanding share of the Company’s common stock. The dividend is payable March 15, 2016 to stockholders of record at the close of business on March 1, 2016.

Table of Contents

Note 12. Fair Value Measurements

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

Level 1 — Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 — Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and

Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

When available, the Company uses unadjusted quoted market prices to measure fair value and classifies such items within Level 1. If quoted market prices are not available, fair value is based upon internally-developed models that use, where possible, current market-based or independently-sourced market parameters such as interest rates and currency rates. Items valued using internally-generated models are classified according to the lowest level input or value driver that is significant to the valuation. If quoted market prices are not available, the valuation model used depends on the specific asset or liability being valued. Money market funds included in cash and cash equivalents of $49,045 and $48,258 as of September 30, 2015 and December 31, 2015, respectively, and restricted cash of $9,200 as of December 31, 2015 are considered Level 1.

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

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

Accumulated Other Comprehensive Income (Loss)


	Three Months Ended December 31, 2014
	Pension		Postretirement		Foreign
	Plan		Plan		Exchange		Total
Accumulated other comprehensive income (loss) as of September 30, 2014	$	(42,800)	$	(20,000)	$	972	$	(61,828)
Other comprehensive income (loss) before reclassifications		—		—		(2,459)		(2,459)
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of Pension and Postretirement Plan items		202		—		—		202
Actuarial losses		1,183		607		—		1,790
Tax expense or (benefit)		(513)		(225)		—		(738)
Net current-period other comprehensive income (loss)		872		382		(2,459)		(1,205)
Accumulated other comprehensive (loss) as of December 31, 2014	$	(41,928)	$	(19,618)	$	(1,487)	$	(63,033)


	Three Months Ended December 31, 2015
	Pension		Postretirement		Foreign
	Plan		Plan		Exchange		Total
Accumulated other comprehensive (loss) as of September 30, 2015	$	(62,985)	$	(21,773)	$	(3,195)	$	(87,953)
Other comprehensive income (loss) before reclassifications		—		—		(1,688)		(1,688)
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of Pension and Postretirement Plan items		202		—		—		202
Actuarial losses		2,218		706		—		2,924
Tax expense or (benefit)		(890)		(260)		—		(1,150)
Net current-period other comprehensive income (loss)		1,530		446		(1,688)		288
Accumulated other comprehensive loss as of December 31, 2015	$	(61,455)	$	(21,327)	$	(4,883)	$	(87,665)

Note 14. Acquisition

On January 7, 2015, the Company acquired the assets and operations of Leveltek Processing, LLC located in LaPorte, Indiana for $14,600 in cash. The acquisition of the LaPorte assets provides the Company control of the sheet stretching, leveling, slitting and cut-to-length operations that were previously an outsourced function. Acquisition costs incurred in the first quarter of fiscal 2015 were not significant. The acquired business is being operated by LaPorte Custom Metal Processing, LLC (LCMP), a wholly-owned subsidiary of the Company.

Table of Contents

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


		Purchase Price
		Allocation
Property, plant and equipment, net	$	7,563
Customer relationships		2,100
Inventory		148
Total identifiable net assets		9,811
Goodwill		4,789
Total purchase price	$	14,600

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

Note 15. Capital Lease Obligation

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

As of December 31, 2015, future minimum lease rental payments applicable to the capital lease were as follows.


2016	$	357
2017		534
2018		538
2019		545
2020		550
Thereafter		8,100
Total minimum capital lease payments		10,624
Less amounts representing interest		(6,255)
Present value of net minimum capital lease payments		4,369
Less current obligation		(455)
Total long-term capital lease obligation	$	3,914

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


	September 30,		December 31,
	2015		2015
Future capital lease rental payments	$	4,380	$	4,369
Environmental post-closure monitoring and maintenance activities		749		749
Less amounts due within one year		(555)		(542)
Long-term obligations (less current portion)	$	4,574	$	4,576

Table of Contents

Note 16. Restricted Cash

In the first quarter of fiscal 2016, the Company received advance payments of $16,069 related to special projects. Of this amount, the Company is restricted from having access to $9,200 until such time as the Company delivers product to the customer. As the Company begins to fulfill the order, the restricted cash will become unrestricted on a pro-rata basis with the percentage fulfillment of the order.

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

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

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, each as amended. All statements other than statements of historical fact, including statements regarding market and industry prospects and future results of operations or financial position, made in this Form 10-Q are forward-looking. In many cases, you can identify forward-looking statements by terminology, such as “may”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of such terms and other comparable terminology. The forward-looking information may include, among other information, statements concerning the Company’s outlook for fiscal 2016 and beyond, overall volume and pricing trends, cost reduction strategies and their anticipated results, capital expenditures and dividends. There may also be other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of various factors, many of which are beyond the Company’s control.

The Company has based these forward-looking statements on its current expectations and projections about future events. Although the Company believes that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate. As a result, the forward-looking statements based upon those assumptions also could be incorrect. Risks and uncertainties may affect the accuracy of forward-looking statements. Some, but not all, of these risks are listed in Item 1A. of Part 1 of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015.

The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Business Overview

Haynes International, Inc. (“Haynes” or “the Company”) is one of the world’s largest producers of high-performance nickel and cobalt based alloys in sheet, coil and plate forms. The Company is focused on developing, manufacturing, marketing and distributing technologically advanced, high-performance alloys, which are sold primarily in the aerospace, chemical processing and land-based gas turbine industries. The Company’s products consist of high-temperature resistant alloys, or HTA products, and corrosion-resistant alloys, or CRA products. HTA products are used by manufacturers of equipment that is subjected to extremely high temperatures, such as jet engines, gas turbine engines, and industrial heating and heat treatment equipment. CRA products are used in applications that require resistance to very corrosive media found in chemical processing, power plant emissions control and hazardous waste treatment. Management believes Haynes is one of the principal producers of high-performance alloy flat products in sheet, coil and plate forms, and sales of these forms, in the aggregate, represented approximately 60% of net product revenues in fiscal 2015. The Company also produces its products as seamless and welded tubulars, and in slab, bar, billet and wire forms.

The Company has manufacturing facilities in Kokomo, Indiana; Arcadia, Louisiana; and Mountain Home, North Carolina. The Kokomo facility specializes in flat products, the Arcadia facility specializes in tubular products, and the Mountain Home facility specializes in wire products. The Company’s products are sold primarily through its direct sales organization, which includes 14 service and/or sales centers in the United States, Europe and Asia. All of these centers are Company operated.

Table of Contents

Ratification of Labor Agreement

On December 21, 2015, the Company entered into a new collective bargaining agreement with the United Steelworkers of America which covers eligible hourly employees at the Company’s Arcadia, Louisiana plant. This agreement will expire in December 2020.

Dividends Paid and Declared

In the first quarter of fiscal 2016, the Company declared and paid a regular quarterly cash dividend of $0.22 per outstanding share of the Company’s common stock. The dividend was paid December 15, 2015 to stockholders of record at the close of business on December 1, 2015. The dividend cash pay-out in the third quarter was approximately $2.7 million based on the number of shares outstanding and equal to approximately $11.0 million on an annualized basis.

Capital Spending

In fiscal 2015, the Company disclosed plans to increase sheet manufacturing capacity in the Kokomo operations in order to help keep pace with anticipated growth in the aerospace market. During fiscal 2015 and the first quarter of fiscal 2016, the Company was capacity constrained on sheet production, and the Company achieved record sheet/coil production levels during fiscal 2015. In order to respond to expected continued demand, the Company plans to spend $30.0 million in fiscal 2016, which includes investments in the heat treating and cold rolling areas of approximately $16.6 million. The remaining $13.4 million of planned spending is earmarked for the completion of the manufacturing phase of the Company’s IT systems upgrade ($1.7 million) and continued spending throughout the Company’s manufacturing facilities ($11.7 million), which is considered a maintenance level of spending.

Volumes, Competition and Pricing

Deteriorating business conditions combined with the continuing decline in the market price of nickel had a significant adverse impact on the Company’s financial results. Also contributing to the challenging conditions was the strong U.S. dollar and lower demand in both China and Europe. Volumes declined over 30% in the Company’s chemical processing industry market and in the Company’s other markets in the first quarter of fiscal 2016 as compared to the same period in fiscal 2015. Significantly less project-oriented specialty application business contributed to this decrease due to the inherent sporadic nature of these types of projects. The Company has specialty application projects in the pipeline including significant project work added to the backlog during the first quarter (discussed below); however, shipments of those types of projects were low in the first quarter of fiscal 2016. The Company expects low specialty application project shipments in the second quarter followed by improvement in the second half of fiscal 2016. Partially offsetting these challenging headwinds was strength in our aerospace market, with volumes up 14.1%, and in our land-based gas turbine market, with volumes up 19.9% in the first quarter of fiscal 2016, each as compared to the same period in fiscal 2015. The net effect of these factors was overall shipped volume decreased 3.0% in the first quarter of fiscal 2016 as compared to the same period in fiscal 2015.

Deteriorating global economic conditions including the dramatic contraction of the oil and gas industry had an impact on demand in the Company’s chemical processing industry market. During the first quarter of fiscal 2016, the Company experienced reduced demand and increased price competition in base commodity-type alloys most predominantly in the chemical processing industry market and other markets. The commodity portion of the chemical processing market remains highly cost competitive with a low volume of available projects.

The market price of nickel continues to decline, which can cause customers to delay orders for the Company’s products in order to receive a lower price in the future. The Company values inventory utilizing the first-in, first-out (“FIFO”) inventory costing methodology. In a period of decreasing raw material costs, the FIFO inventory valuation normally results in higher costs of sales as compared to the last-in, first-out method. Falling nickel prices create compression on gross margins due to pressure on selling prices from lower nickel prices, combined with higher cost of sales as the Company ships the higher cost inventory acquired in a prior period with higher nickel prices. In addition, falling nickel prices combined with compressed gross margins necessitated inventory valuation adjustments to adjust inventory to lower realizable values.

Table of Contents

These circumstances contributed to an average selling price decrease for product sales of $2.79 per pound sold to $20.57, an 11.9% reduction in the first quarter of fiscal 2016 compared to the same period of fiscal 2015.1

Net Revenue and Gross Profit Margin Performance:


	Comparison by Quarter of Gross Profit Margin and
	Gross Profit Margin Percentage for Fiscal 2015 and 2016

	December 31,			March 31,			June 30,			September 30,			December 31,
(dollars in thousands)	2014			2015			2015			2015			2015
Net Revenues	$	110,676		$	138,688		$	121,270		$	117,001		$	95,070
Gross Profit Margin	$	20,271		$	27,837		$	24,151		$	21,405		$	12,088
Gross Profit Margin %		18.3	%		20.1	%		19.9	%		18.3	%		12.7	%

During the first quarter of fiscal 2016, gross profit margin declined sequentially and gross profit margin percentage was compressed. Gross profit margin percentage was 12.7% in the first quarter of fiscal 2016 compared to an 18.3% gross profit margin percentage in the same period last year. As mentioned above, the dramatic decline in nickel prices, a lower level of specialty application project business and global economic conditions including the stronger U.S. dollar and weaker demand in both China and Europe contributed to this decline.

Backlog

Set forth below are selected data relating to the Company’s backlog, the 30-day average nickel price per pound as reported by the London Metals Exchange and a breakdown of net revenues, shipments and average selling prices to the markets served by the Company for the periods shown. The data should be read in conjunction with the consolidated financial statements and related notes thereto and the remainder of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Form 10-Q.


	Quarter Ended
	December 31,		March 31,		June 30,		September 30,		December 31,
	2014		2015		2015		2015		2015
Backlog(1)
Dollars (in thousands)	$	215,529	$	220,406	$	192,894	$	185,784	$	204,713
Pounds (in thousands)		8,032		7,335		6,492		6,598		6,445
Average selling price per pound	$	26.83	$	30.05	$	29.71	$	28.16	$	31.76
Average nickel price per pound
London Metals Exchange(2)	$	7.22	$	6.23	$	5.80	$	4.49	$	3.94

⁽¹⁾

The Company defines backlog to include firm commitments from customers for delivery of product at established prices. Approximately 30% of the orders in the backlog at any given time include prices that are subject to adjustment based on changes in raw material costs. Historically, approximately 75% of the backlog orders have shipped within nine months and approximately 90% have shipped within 12 months. The backlog figures do not reflect that portion of the business conducted at service and sales centers on a spot or “just-in-time” basis.

⁽²⁾

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

Backlog was $204.7 million at December 31, 2015, an increase of approximately $18.9 million, or 10.2%, from $185.8 million at September 30, 2015. The backlog dollars increased during the first quarter of fiscal 2016 due to a 12.8% increase in the average selling price per pound, partially offset by a 2.3% decrease in pounds. The increase in the backlog includes specialty project orders of approximately $24.0 million that are not expected to ship to customers until the second half of fiscal 2016 and the first half of fiscal 2017. The decrease in overall pounds is primarily due to lower base order entry driven presumably by the continued falling price of nickel combined with the current economic environment. The increase in average selling price per pound reflects a change in product mix in the backlog.

1 Average selling price per pound for product sales differs from aggregate selling price per pound, as reported in previous filings, due to the exclusion of other revenue not associated with pounds shipped. As an example, revenue generated from toll conversion is not included in calculating average selling price per pound for product sales.

Table of Contents

Quarterly Market Information


		Quarter Ended
	December 31,		March 31,		June 30,		September 30,		December 31,
	2014		2015		2015		2015		2015
Net revenues (in thousands)
Aerospace	$	43,255	$	60,320	$	56,484	$	55,003	$	47,535
Chemical processing		30,753		35,575		24,159		21,112		16,200
Land-based gas turbines		17,533		19,858		17,616		19,449		16,997
Other markets		14,100		16,566		14,496		14,632		9,474
Total product revenue		105,641		132,319		112,755		110,196		90,206
Other revenue		5,035		6,369		8,515		6,805		4,864
Net revenues	$	110,676	$	138,688	$	121,270	$	117,001	$	95,070

Shipments by markets (in thousands of pounds)
Aerospace		1,809		2,687		2,439		2,308		2,064
Chemical processing		1,182		1,351		852		913		714
Land-based gas turbines		1,084		1,218		1,028		1,327		1,300
Other markets		447		680		466		470		308
Total shipments		4,522		5,936		4,785		5,018		4,386

Average selling price per pound
Aerospace	$	23.91	$	22.45	$	23.16	$	23.83	$	23.03
Chemical processing		26.02		26.33		28.36		23.12		22.69
Land-based gas turbines		16.17		16.30		17.14		14.66		13.07
Other markets		31.54		24.36		31.11		31.13		30.76
Total product (product only; excluding other revenue)		23.36		22.29		23.56		21.96		20.57
Total average selling price (including other revenue)		24.48		23.36		25.34		23.32		21.68

Table of Contents

Results of Operations for the Three Months Ended December 31, 2014 Compared to the Three Months Ended December 31, 2015

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


	Three Months Ended December 31,								Change
	2014				2015				Amount		%
Net revenues	$	110,676	100.0	%	$	95,070	100.0	%	$	(15,606)	(14.1)	%
Cost of sales		90,405	81.7	%		82,982	87.3	%		(7,423)	(8.2)	%
Gross profit		20,271	18.3	%		12,088	12.7	%		(8,183)	(40.4)	%
Selling, general and administrative expense		9,736	8.8	%		10,276	10.8	%		540	5.5	%
Research and technical expense		887	0.8	%		915	1.0	%		28	3.2	%
Operating income		9,648	8.7	%		897	0.9	%		(8,751)	(90.7)	%
Interest income		(23)	(0.0)	%		(26)	(0.0)	%		(3)	13.0	%
Interest expense		16	0.0	%		138	0.1	%		122	762.5	%
Income before income taxes		9,655	8.7	%		785	0.8	%		(8,870)	(91.9)	%
Provision for income taxes		3,274	3.0	%		557	0.6	%		(2,717)	(83.0)	%
Net income	$	6,381	5.8	%	$	228	0.2	%	$	(6,153)	(96.4)	%

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


	Three Months Ended
	December 31,				Change
By market	2014		2015		Amount		%
Net revenues (in thousands)
Aerospace	$	43,255	$	47,535	$	4,280	9.9	%
Chemical processing		30,753		16,200		(14,553)	(47.3)	%
Land-based gas turbines		17,533		16,997		(536)	(3.1)	%
Other markets		14,100		9,474		(4,626)	(32.8)	%
Total product revenue		105,641		90,206		(15,435)	(14.6)	%
Other revenue		5,035		4,864		(171)	(3.4)	%
Net revenues	$	110,676	$	95,070	$	(15,606)	(14.1)	%

Pounds by market (in thousands)
Aerospace		1,809		2,064		255	14.1	%
Chemical processing		1,182		714		(468)	(39.6)	%
Land-based gas turbines		1,084		1,300		216	19.9	%
Other markets		447		308		(139)	(31.1)	%
Total shipments		4,522		4,386		(136)	(3.0)	%

Average selling price per pound
Aerospace	$	23.91	$	23.03	$	(0.88)	(3.7)	%
Chemical processing		26.02		22.69		(3.33)	(12.8)	%
Land-based gas turbines		16.17		13.07		(3.10)	(19.2)	%
Other markets		31.54		30.76		(0.78)	(2.5)	%
Total product (excluding other revenue)		23.36		20.57		(2.79)	(11.9)	%
Total average selling price (including other revenue)	$	24.48	$	21.68	$	(2.80)	(11.4)	%

Net Revenues. Net revenues were $95.1 million in the first quarter of fiscal 2016, a decrease of 14.1% from $110.7 million in the same period of fiscal 2015. Volume was 4.4 million pounds in the first quarter of fiscal 2016, a decrease of 3.0% from 4.5 million pounds in the same period of fiscal 2015. The decrease in volume is primarily due to the lower level of project orders in chemical processing and other markets shipped in the first quarter of fiscal 2016 as compared to in fiscal 2015, which highlights the sporadic nature of these projects. The product-sales average selling price was $20.57 per pound in the first quarter of fiscal 2016, a decrease of 11.9% from $23.36 per pound in the same period of fiscal 2015. The average selling price decreased as a result of lower raw material

Table of Contents

market prices, which represented approximately $1.81 per pound of a decrease, and a change in product mix, representing approximately $1.28 of a decrease, partially offset by a $0.30 per pound increase due to other pricing factors.

Sales to the aerospace market were $47.5 million in the first quarter of fiscal 2016, an increase of 9.9% from $43.3 million in the same period of fiscal 2015, due to a 14.1% increase in volume partially offset by a 3.7% decrease in average selling price per pound. The increase in volume reflects continued strength in the aerospace market. This strength is partially driven by solid engine build rates including new generation engine production beginning to gain traction with higher-valued alloys that improve the Company’s product mix in this market. The average selling price per pound decrease reflects a change in market prices of raw material, which represented approximately $1.93 of the decrease, partially offset by a change to a higher-value product mix, which represented approximately $0.80 per pound of an increase, and other pricing factors, which represented approximately $0.25 of an increase.

Sales to the chemical processing market were $16.2 million in the first quarter of fiscal 2016, a decrease of 47.3% from $30.8 million in the same period of fiscal 2015, due to a 39.6% decrease in volume combined with a 12.8% decrease in average selling price per pound. Volumes decreased due to a lower level of both base business and project orders shipped compared to the first quarter of fiscal 2015. The higher level of project orders which shipped in the first quarter of fiscal 2015 compared to in fiscal 2016 highlights the sporadic nature of these projects. The average selling price per pound decrease reflects a change in market prices of raw material, which represented approximately $1.55 of the decrease, a decrease due to a lower-value product mix, which represented approximately $1.54 of a decrease; and other pricing factors, which represented approximately $0.24 of a decrease.

Sales to the land-based gas turbine market were $17.0 million in the first quarter of fiscal 2016, a decrease of 3.1% from $17.5 million for the same period of fiscal 2015, due to a decrease of 19.2% in average selling price per pound partially offset by an increase of 19.9% in volume. Volumes increased due to a higher level of ingot orders shipped in the first quarter of fiscal 2016 compared to the same period of fiscal 2015. The decrease in average selling price primarily reflects a change to a lower-value product mix, which represented approximately $2.11 of a decrease and lower market raw material prices, which represented approximately $1.75 of a decrease, partially offset by other pricing factors, which represented approximately $0.76 of an increase.

Sales to other markets were $9.5 million in the first quarter of fiscal 2016, a decrease of 32.8% from $14.1 million in the same period of fiscal 2015, due to a 2.5% decrease in average selling price per pound combined with a decrease of 31.1% in volume. The decrease in volume was primarily due to a lower amount of project business shipped in the first quarter of fiscal 2016, which highlights the sporadic nature of these projects. The decrease in average selling price reflects lower raw material market prices, which represented approximately $1.90 of the decrease, partially offset by a higher-value product mix, which represented approximately $0.87 of an increase, and other pricing factors, which represented approximately $0.25 of an increase.

Other Revenue. Other revenue was $4.9 million in the first quarter of fiscal 2016, a decrease of 3.4% from $5.0 million in the same period of fiscal 2015. The decrease is due primarily to increased sales reserves, partially offset by higher conversion sales.

Cost of Sales. Cost of sales was $83.0 million, or 87.3% of net revenues, in the first quarter of fiscal 2016 compared to $90.4 million, or 81.7% of net revenues, in the same period of fiscal 2015. Cost of sales in the first quarter of fiscal 2016 decreased by $7.4 million as compared to the same period of fiscal 2015 due to lower volumes and lower raw material costs relative to the same period of fiscal 2015, partially offset by higher manufacturing costs and charges to cost of sales from inventory valuation adjustments.

Gross Profit. As a result of the above factors, gross profit was $12.1 million for the first quarter of fiscal 2016, a decrease of $8.2 million from the same period of fiscal 2015. Gross margin as a percentage of net revenue decreased to 12.7% in the first quarter of fiscal 2016 as compared to 18.3% in the same period of fiscal 2015. The decrease is primarily attributable to a less profitable mix of products sold in fiscal 2016 and falling nickel prices. Falling nickel prices created compression on gross margins due to pressure on selling prices from lower nickel prices, combined with higher cost of sales as the Company sells the higher-cost inventory melted in a prior period with higher nickel prices. In addition, the falling nickel prices combined with compressing gross margins necessitated inventory valuation adjustments to adjust inventory to lower net realizable values.

Selling, General and Administrative Expense. Selling, general and administrative expense was $10.3 million for the first quarter of fiscal 2016, an increase of $0.5 million from the same period of fiscal 2015. The increase in expense was primarily driven by changes in foreign exchange. Selling, general and administrative expense as a percentage of net revenues increased to 10.8% for the first quarter of fiscal 2016 compared to 8.8% for the same period of fiscal 2015.

Research and Technical Expense. Research and technical expense was $0.9 million, or 1.0% of revenue, for the first quarter of fiscal 2016, compared to $0.9 million, or 0.8% of revenue, in the same period of fiscal 2015.

Operating Income/(Loss). As a result of the above factors, operating income in the first quarter of fiscal 2016 was $0.9 million compared to $9.6 million in the same period of fiscal 2015.

Table of Contents

Income Taxes. Income tax expense was $0.6 million in the first quarter of fiscal 2016, a decrease of $2.7 million from $3.3 million in the same period of fiscal 2015. The effective tax rate for the first quarter of fiscal 2016 was 71.0%, compared to 33.9% in the same period of fiscal 2015. The higher effective tax rate this quarter was primarily due to a change in federal tax law that was enacted in the first quarter of fiscal 2016, which had a $0.3 million unfavorable impact on the first quarter of 2016.

Net Income. As a result of the above factors, net income in the first quarter of fiscal 2016 was $0.2 million, a decrease of $6.2 million from $6.4 million in the same period of fiscal 2015.

Working Capital

Controllable working capital, which includes accounts receivable, inventory, accounts payable and accrued expenses, was $279.8 million at December 31, 2015, an increase of $2.3 million or 0.8% from $277.5 million at September 30, 2015. This increase resulted primarily from inventory increasing $9.5 million and accrued expenses decreasing $5.3 million, partially offset by accounts receivable decreasing by $11.1 million and accounts payable increasing $1.5 million during the first quarter of fiscal 2016.

Liquidity and Capital Resources

Comparative cash flow analysis

During the first quarter of fiscal 2016, the Company’s primary sources of cash were cash on-hand and cash provided by operating activities, as detailed below. At December 31, 2015, the Company had cash and cash equivalents of $48.3 million (excluding restricted cash of $9.2 million) compared to $49.0 million at September 30, 2015. As of December 31, 2015, the Company had cash and cash equivalents of $17.0 million that was held by foreign subsidiaries in various currencies.

For the first quarter of fiscal 2016, net cash provided by operating activities was $10.1 million compared to cash used by operations of $0.8 million in the first quarter of fiscal 2015. The lower business levels in fiscal 2016 resulted in lower increases in controllable working capital of $3.7 million compared to $15.9 million in the first quarter of fiscal 2015, as well as net income tax refunds of $0.8 million in the first quarter of fiscal 2016 compared to net income taxes paid in the first quarter of fiscal 2015. Additionally, the Company received up-front cash receipts of $16.1 million, of which $9.2 million is recorded as restricted cash, on special projects which was recorded on the balance sheet as deferred revenue. Partially offsetting these factors were lower net income of $0.2 million in the first quarter of 2016 compared to $6.4 million in the first quarter of 2015 and higher pension and post-retirement payments of $3.5 million in the first quarter of fiscal 2016 compared to $1.2 million in the first quarter of fiscal 2015. Net cash used in investing activities was $7.1 million in the first quarter of fiscal 2016 compared to $3.2 million in the same period of fiscal 2015 as a result of the Company’s investments in sheet manufacturing capacity. Net cash used in financing activities in the first quarter of fiscal 2016 of $3.1 million included $2.7 million of dividend payments and approximately $0.3 million of stock re-purchases made to satisfy taxes in relation to the vesting of restricted stock granted to officers and directors.

Future sources of liquidity

The Company’s sources of liquidity for the remainder of fiscal 2016 are expected to consist primarily of cash generated from operations, cash on-hand and, if needed, borrowings under the U.S. revolving credit facility. At December 31, 2015, the Company had cash of $48.3 million, an outstanding balance of zero on the U.S. revolving credit facility and access to a total of approximately $120.0 million under the U.S. revolving credit facility, subject to a borrowing base formula and certain reserves that could limit the Company’s borrowing to approximately $105.0 million. Management believes that the resources described above will be sufficient to fund planned capital expenditures and working capital requirements over the next twelve months.

U.S. Revolving Credit Facility

The Company and Wells Fargo Capital Finance, LLC (“Wells Fargo”), entered into a Third Amended and Restated Loan and Security Agreement (the “Amended Agreement”) with certain other lenders with an effective date of July 14, 2011. The maximum revolving loan amount under the Amended Agreement is $120.0 million, subject to a borrowing base formula and certain reserves. The Amended Agreement permits an increase in the maximum revolving loan amount from $120.0 million up to an aggregate amount of $170.0 million at the request of the borrowers. Borrowings under the U.S. revolving credit facility bear interest, at the Company’s option, at either Wells Fargo’s “prime rate”, plus up to 0.75% per annum, or the adjusted Eurodollar rate used by the lender, plus up to 2.0% per annum. As of December 31, 2015, the U.S. revolving credit facility had an outstanding balance of zero. In addition, the Company must pay monthly, in arrears, a commitment fee of 0.25% per annum on the unused amount of the U.S. revolving credit facility total commitment. For letters of credit, the Company must pay 1.5% per annum on the daily outstanding balance of all issued letters of credit, plus customary fees for issuance, amendments and processing. The Company is subject to certain covenants as to fixed charge coverage ratios and other customary covenants, including covenants restricting the incurrence of indebtedness, the granting of liens and the sale

Table of Contents

of assets. The covenant pertaining to fixed charge coverage ratios is only effective in the event the amount of excess availability under the revolver is less than 12.5% of the maximum credit revolving loan amount. The Company is permitted to pay dividends and repurchase common stock if certain financial metrics are met (which do not apply in the case of dividends less than $20.0 million in the aggregate in a year and repurchases in connection with the vesting of shares of restricted stock). As of December 31, 2015, the most recent required measurement date under the Amended Agreement, management believes the Company was in compliance with all applicable financial covenants under the Amended Agreement. The U.S. revolving credit facility matures on July 14, 2016. Borrowings under the U.S. revolving credit facility are collateralized by a pledge of substantially all of the U.S. assets of the Company, including the equity interests in its U.S. subsidiaries, but excluding the four-high Steckel rolling mill and related assets, which are pledged to Titanium Metals Corporation (“TIMET’) to secure the performance of the Company’s obligations under a Conversion Services Agreement with TIMET (see discussion of TIMET at Note 7 in the Company’s Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q). The U.S. revolving credit facility is also secured by a pledge of a 65% equity interest in each of the Company’s direct foreign subsidiaries.

Future uses of liquidity

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

Funding operations;

Capital spending (discussed below);

Dividends to stockholders; and

Pension and postretirement plan contributions.

Capital investment in the first quarter of fiscal 2016 was $7.1 million and the forecast for capital spending in fiscal 2016 is $30.0 million. See “Capital Spending” in this Form 10-Q for additional discussion of actual and planned capital spending.

Contractual Obligations

The following table sets forth the Company’s contractual obligations for the periods indicated, as of December 31, 2015:


	Payments Due by Period
			Less than						More than
Contractual Obligations	Total		1 year		1-3 Years		3-5 Years		5 years
	(in thousands)
Credit facility fees(1)	$	182	$	182	$	—	$	—	$	—
Operating lease obligations		6,577		2,832		3,056		684		5
Capital lease obligations		10,780		567		1,140		1,111		7,962
Raw material contracts (primarily nickel)		21,930		21,930		—		—		—
Capital projects and other commitments		28,108		28,108		—		—		—
Pension plan(2)		110,456		6,778		14,849		17,511		71,318
Non-qualified pension plans		834		95		190		190		359
Other postretirement benefits(3)		49,870		4,870		10,000		10,000		25,000
Environmental post-closure monitoring		822		89		161		175		397
Total	$	229,559	$	65,451	$	29,396	$	29,671	$	105,041

⁽¹⁾

As of December 31, 2015, the revolver balance was zero, therefore no interest is due. However, the Company is obligated to the Bank for unused line fees and quarterly management fees.

⁽²⁾

The Company has a funding obligation to contribute $110,456 to the domestic pension plan. These payments will be tax deductible. All benefit payments under the domestic pension plan are provided by the plan and not the Company.

⁽³⁾

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

New Accounting Pronouncements

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

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements

Table of Contents

and the reported amounts of revenues and expenses during the reporting period. Assumptions and estimates were based on the facts and circumstances known at December 31, 2015. However, future events rarely develop exactly as forecasted and the best estimates routinely require adjustment. The accounting policies discussed in Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015 are considered by management to be the most important to an understanding of the financial statements because their application places the most significant demands on management’s judgment and estimates about the effect of matters that are inherently uncertain. These policies are also discussed in Note 2 of the consolidated financial statements included in Item 8 of that report. There have been no material changes to that information since the end of fiscal 2015.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

As of December 31, 2015, there were no material changes in the market risks described in “Quantitative and Qualitative Disclosures about Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015.

Item 4.Controls and Procedures

The Company has performed, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness and the design and operation of the Company’s disclosure controls and procedures (as defined by Exchange Act rules 13a-15(e) and 15d-15(e)) pursuant to Rule 13a-15(b) of the Exchange Act as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2015.

Effective November 1, 2015 the Company implemented Microsoft Dynamics AX ERP information technology solution for certain cost accounting and production planning functions at the Arcadia, Louisiana manufacturing location. The implementation resulted in material changes to the Company’s internal controls over financial reporting (as that term is defined in Rule 13(a)-15(f) or 15(d)-15(f) under the Exchange Act). Therefore, modifications to the design and documentation of internal control processes and procedures relating to the new system to replace and supplement existing internal controls over financial reporting were made as appropriate. Evaluation of the operating effectiveness of these internal controls is ongoing and will be completed by the end of fiscal 2016. The system changes were undertaken to integrate systems and consolidate information, and were not undertaken in response to any actual or perceived deficiencies in the Company’s internal control over financial reporting.

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

Table of Contents

PART II OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Set forth below is information regarding the Company’s stock repurchases during the period covered by this report, comprising shares repurchased by the Company from employees and directors to satisfy taxes on share-based compensation.


Period	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Unit	Total Number of Shares (or Units) Purchased as oPart of Publicly Announced Plans of Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
October 1-31, 2015	—	—	—	—
November 1-30, 2015	7,661	37.72	—	—
December 1-31, 2015	—	—	—	—
Total	7,661	37.72	—	—

Item 6.Exhibits

Exhibits. See Index to Exhibits.

Table of Contents

SIGNATURES

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


	HAYNES INTERNATIONAL, INC.


	/s/ Mark Comerford
	Mark Comerford
	President and Chief Executive Officer
	Date: February 4, 2016


	/s/ Daniel Maudlin
	Daniel Maudlin
	Vice President — Finance and Chief Financial Officer
	Date: February 4, 2016

Table of Contents

INDEX TO EXHIBITS


Exhibit Number		Description
3.1		Second Restated Certificate of Incorporation of Haynes International, Inc. (incorporated by reference to Exhibit 3.1 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).
3.2		Amended and Restated By-laws of Haynes International, Inc. (incorporated by reference to Exhibit 3.2 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).
4.1		Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.01 to the Haynes International, Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2009).
4.2		Second Restated Certificate of Incorporation of Haynes International, Inc. (incorporated by reference to Exhibit 3.1 hereof).
4.3		Amended and Restated By-laws of Haynes International, Inc. (incorporated by reference to Exhibit 3.2 hereof).
31.1		Rule 13a-14(a)/15d-4(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1*		Section 1350 Certifications
101		The following materials from the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2015 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Income (Loss); (iv) the Consolidated Statements of Cash Flows; and (v) related notes.

*Furnished not filed.

Attached files

Stock widget

Investing forum

HAYNES INTERNATIONAL INC Reports