HAYNES INTERNATIONAL INC - FORM 10-Q

Attached files

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EX-32.1 - EX-32.1 - HAYNES INTERNATIONAL INC	hayn-20180331ex321f99f7a.htm
EX-31.2 - EX-31.2 - HAYNES INTERNATIONAL INC	hayn-20180331ex312ea83df.htm
EX-31.1 - EX-31.1 - HAYNES INTERNATIONAL INC	hayn-20180331ex31180ca70.htm
EX-3.2 - EX-3.2 - HAYNES INTERNATIONAL INC	hayn-20180331ex3238f1cb1.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 March 31, 2018


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

For the transition period from to

Commission File Number: 001-33288

HAYNES INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


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

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

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

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

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

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


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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of May 3, 2018, the registrant had 12,520,020 shares of Common Stock, $.001 par value, outstanding.

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QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


		Page
PART I	FINANCIAL INFORMATION

Item 1.	Unaudited Condensed Consolidated Financial Statements of Haynes International, Inc. and Subsidiaries	3

	Consolidated Balance Sheets as of September 30, 2017 and March 31, 2018 (Unaudited)	3

	Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended March 31, 2017 and 2018	4

	Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Six Months Ended March 31, 2017 and 2018	5

	Consolidated Statements of Cash Flows (Unaudited) for the Three and Six Months Ended March 31, 2017 and 2018	6

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	27

PART II	OTHER INFORMATION	28

Item 6.	Exhibits	28

	Index to Exhibits	29

	Signatures	30

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PART 1 FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)


	September 30,		March 31,
	2017		2018
			(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	46,328	$	17,534
Accounts receivable, less allowance for doubtful accounts of $620 and $1,298 at September 30, 2017 and March 31, 2018, respectively		61,602		65,737
Inventories		244,457		267,870
Income taxes receivable		—		10,849
Other current assets		2,781		3,669
Total current assets		355,168		365,659
Property, plant and equipment, net		192,556		187,465
Deferred income taxes		58,133		28,731
Other assets		5,107		5,441
Goodwill		4,789		4,789
Other intangible assets, net		6,066		5,802
Total assets	$	621,819	$	597,887
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	32,802	$	34,235
Accrued expenses		14,108		14,988
Income taxes payable		195		—
Accrued pension and postretirement benefits		5,095		5,095
Deferred revenue—current portion		2,500		2,500
Total current liabilities		54,700		56,818
Long-term obligations (less current portion) (Note 14)		7,896		8,592
Deferred revenue (less current portion)		20,329		19,079
Deferred income taxes		1,741		1,741
Accrued pension benefits (less current portion)		90,957		88,571
Accrued postretirement benefits (less current portion)		112,424		112,881
Total liabilities		288,047		287,682
Commitments and contingencies (Note 6)		—		—
Stockholders’ equity:
Common stock, $0.001 par value (40,000,000 shares authorized, 12,544,933 and 12,562,133 shares issued and 12,509,757 and 12,520,020 shares outstanding at September 30, 2017 and March 31, 2018, respectively)		13		13
Preferred stock, $0.001 par value (20,000,000 shares authorized, 0 shares issued and outstanding)		—		—
Additional paid-in capital		248,733		250,050
Accumulated earnings		159,366		129,256
Treasury stock, 35,176 shares at September 30, 2017 and 42,113 shares at March 31, 2018		(1,646)		(1,869)
Accumulated other comprehensive loss		(72,694)		(67,245)
Total stockholders’ equity		333,772		310,205
Total liabilities and stockholders’ equity	$	621,819	$	597,887

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

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HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)



	Three Months Ended March 31,				Six Months Ended March 31,
	2017		2018		2017		2018
Net revenues	$	103,112	$	110,206	$	196,467	$	199,899
Cost of sales		93,324		98,754		176,192		181,437
Gross profit		9,788		11,452		20,275		18,462
Selling, general and administrative expense		10,541		12,284		20,853		23,054
Research and technical expense		991		965		1,934		1,853
Operating income (loss)		(1,744)		(1,797)		(2,512)		(6,445)
Interest income		(44)		(17)		(101)		(35)
Interest expense		236		229		405		459
Income (loss) before income taxes		(1,936)		(2,009)		(2,816)		(6,869)
Provision for (benefit from) income taxes		(46)		59		(254)		17,725
Net income (loss)	$	(1,890)	$	(2,068)	$	(2,562)	$	(24,594)
Net income (loss) per share:
Basic	$	(0.15)	$	(0.17)	$	(0.20)	$	(1.99)
Diluted	$	(0.15)	$	(0.17)	$	(0.20)	$	(1.99)
Weighted Average Common Shares Outstanding
Basic		12,401		12,422		12,391		12,417
Diluted		12,401		12,422		12,391		12,417

Dividends declared per common share	$	0.22	$	0.22	$	0.44	$	0.44

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

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HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)



	Three Months Ended March 31,				Six Months Ended March 31,
	2017		2018		2017		2018
Net income (loss)	$	(1,890)	$	(2,068)	$	(2,562)	$	(24,594)
Other comprehensive income (loss), net of tax:
Pension and postretirement		2,579		1,311		5,159		2,616
Foreign currency translation adjustment		835		2,316		(2,191)		2,833
Other comprehensive income (loss)		3,414		3,627		2,968		5,449
Comprehensive income (loss)	$	1,524	$	1,559	$	406	$	(19,145)

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

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HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)



	Six Months Ended March 31,
	2017		2018
Cash flows from operating activities:
Net income (loss)	$	(2,562)	$	(24,594)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		10,597		11,449
Amortization		245		264
Pension and post-retirement expense - U.S. and U.K.		11,714		7,107
Stock compensation expense		1,225		1,317
Deferred revenue		(6,238)		(1,250)
Deferred income taxes		3,259		27,858
Loss on disposition of property		431		55
Change in assets and liabilities:
Restricted cash		5,023		—
Accounts receivable		(4,596)		(2,925)
Inventories		(7,653)		(21,548)
Other assets		(833)		(1,184)
Accounts payable and accrued expenses		12,369		2,385
Income taxes		(5,972)		(11,066)
Accrued pension and postretirement benefits		(5,780)		(4,905)
Net cash provided by (used in) operating activities		11,229		(17,037)
Cash flows from investing activities:
Additions to property, plant and equipment		(9,780)		(6,338)
Net cash provided by (used in) investing activities		(9,780)		(6,338)
Cash flows from financing activities:
Dividends paid		(5,505)		(5,509)
Payment for purchase of treasury stock		(266)		(223)
Payments on long-term obligation		(83)		(109)
Net cash provided by (used in) financing activities		(5,854)		(5,841)
Effect of exchange rates on cash		(527)		422
Increase (decrease) in cash and cash equivalents:		(4,932)		(28,794)
Cash and cash equivalents:
Beginning of period		59,297		46,328
End of period	$	54,365	$	17,534
Supplemental disclosures of cash flow information:
Interest (net of capitalized interest)	$	376	$	430
Income taxes paid (refunded), net	$	2,830	$	918
Capital expenditures incurred, but not yet paid	$	1,035	$	1,738

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

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HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(in thousands, except share and per share data)

Note 1.Basis of Presentation

Interim Financial Statements

The accompanying unaudited condensed interim consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), and such principles are applied on a basis consistent with information reflected in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017 filed with the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations promulgated by the SEC related to interim financial statements. In the opinion of management, the interim financial information includes all adjustments and accruals which are necessary for a fair presentation of results for the respective interim periods. The results of operations for the three and six months ended March 31, 2018 are not necessarily indicative of the results to be expected for the full fiscal year ending September 30, 2018 or any interim period.

Principles of Consolidation

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

Note 2.Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The objective of the update is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2015-14 deferred the effective date of the update to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company has chosen to implement this standard on a modified prospective basis beginning on October 1, 2019 and is in the process of evaluating the impact on the financial statements, if any.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330). The objective of this update is to simplify the measurement of inventory valuation at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. It is effective for annual reporting periods beginning after December 15, 2016 and interim periods within fiscal years beginning after December 15, 2017. The Company adopted these changes in the first quarter of fiscal 2018, which did not result in a material impact to the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This new guidance will require that a lessee recognize assets and liabilities on the balance sheet for all leases with a lease term of more than twelve months, with the result being the recognition of a right of use asset and a lease liability. The new lease accounting requirements are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

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

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Note 3.Inventories

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


	September 30,		March 31,
	2017		2018
Raw Materials	$	18,731	$	20,065
Work-in-process		130,019		150,404
Finished Goods		94,331		95,833
Other		1,376		1,568
	$	244,457	$	267,870

Note 4.Income Taxes

On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (“the Act”), which made significant changes to U.S. federal income tax law including, among other things, lowering corporate income tax rates, permitting bonus depreciation that will allow for full expensing of qualified property and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. Beginning October 1, 2017 and continuing through September 30, 2018, the Company’s U.S. income will be taxed at a 24.5% federal tax rate after which time the federal tax rate applicable to the Company will be lowered to 21.0%. Deferred tax assets beginning as of December 31, 2017 were revalued to the lower statutory rates of 24.5% or 21.0%, depending upon the projected timing of the reversal of these assets. The estimated impact of the revaluation of the deferred tax assets has resulted in increased tax expense in the first six months of fiscal 2018 of $17,954. This amount was recorded as a discrete accounting adjustment and will be adjusted throughout the remainder of fiscal 2018 as the timing of the reversal of deferred tax assets becomes known. Other components of the Act, such as the transition tax applied on accumulated earnings and profits of controlled foreign corporations, have not been included in income tax expense as the impact, if any, cannot reasonably be determined at this time. An analysis of accumulated earnings and foreign tax credit pools must be completed before this amount can be determined.

Income tax expense for the three and six months ended March 31, 2017 and 2018 differed from the U.S. federal statutory rates of 35% and 24.5%, respectively, primarily due to state income taxes, differing tax rates on foreign earnings and discrete tax items that impacted income tax expense in these periods. In addition to the deferred tax asset revaluation adjustment of $17,954, current period tax expense was adversely impacted due to a lower rate applied against a pretax loss of $(2,009). Additionally, the low effective tax rate in the second quarter of fiscal 2018 was due to the Company’s pre-tax loss in the United States and pre-tax income in the United Kingdom, which has a lower effective tax rate than the statutory rate. When incurring a pre-tax loss, the effective tax rate of the Company will be lower than the statutory rate if the estimated full-year pre-tax loss in the United States is a partial offset to estimated full year pre-tax income incurred in other jurisdictions. The effective tax rate for the three months ended March 31, 2018 was (2.9)% compared to 2.4% in the same period of fiscal 2017. The effective tax rate for the six months ended March 31, 2018 was (258.0)% compared to 9.0% in the same period of fiscal 2017.

Note 5.Pension and Post-retirement Benefits

Components of net periodic pension and post-retirement benefit cost for the three and six months ended March 31, 2017 and 2018 were as follows:


	Three Months Ended March 31,								Six Months Ended March 31,
	Pension Benefits				Other Benefits				Pension Benefits				Other Benefits
	2017		2018		2017		2018		2017		2018		2017		2018
Service cost	$	1,570	$	1,384	$	87	$	84	$	3,141	$	2,768	$	174	$	168
Interest cost		2,592		2,625		1,073		1,078		5,141		5,231		2,146		2,156
Expected return		(3,531)		(3,665)		—		—		(7,003)		(7,299)		—		—
Amortizations		2,994		1,294		1,070		751		5,975		2,583		2,140		1,500
Net periodic benefit cost	$	3,625	$	1,638	$	2,230	$	1,913	$	7,254	$	3,283	$	4,460	$	3,824

The Company contributed $3,000 to Company-sponsored domestic pension plans, $1,866 to its other post-retirement benefit plans and $421 to the U.K. pension plan for the six months ended March 31, 2018. The Company expects to make future contributions of $3,000 to its U.S. pension plan, $3,134 to its other post-retirement benefit plan and $382 to the U.K. pension plan for the remainder of fiscal 2018.

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Note 6.Legal, Environmental and Other Contingencies

Legal

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

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

Environmental

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

The Company is required to, among other things, monitor groundwater and to continue post-closure maintenance of the former disposal areas at each site. As a result, the Company is aware of elevated levels of certain contaminants in the groundwater, and additional testing and corrective action by the Company could be required. The Company is unable to estimate the costs of any further corrective action at these sites, if required. Accordingly, the Company cannot assure that the costs of any future corrective action at these, or any other current or former sites, would not have a material effect on the Company’s financial condition, results of operations or liquidity.

As of September 30, 2017 and March 31, 2018, the Company has accrued $633 for post-closure monitoring and maintenance activities, of which $531 was included in long-term obligations as it is not due within one year. Accruals for these costs are calculated by estimating the annual cost to monitor and maintain each post-closure site and multiplying that amount by the number of years remaining in the post-closure monitoring period.

Expected expenditures for post-closure monitoring and maintenance activities (discounted) were as follows at March 31, 2018.


2019	$	54
2020		52
2021		60
2022		50
2023 and thereafter		315
	$	531

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

Note 7.Deferred Revenue

On November 17, 2006, the Company entered into a twenty-year agreement to provide conversion services (“Conversion Services Agreement”) to Titanium Metals Corporation (“TIMET”) for up to ten million pounds of titanium metal annually. TIMET paid the Company a $50,000 up-front fee and will also pay the Company for its processing services during the term of the agreement (20 years) at prices established by the terms of the agreement. TIMET may exercise an option to have ten million additional pounds of titanium converted annually, provided that it offers to loan up to $12,000 to the Company for certain capital expenditures which may be required to expand capacity. In addition to the volume commitment, the Company has granted TIMET a first priority security interest in its four-high Steckel rolling mill, along with rights of access if the Company enters into bankruptcy or defaults on any financing arrangements.

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The Company has agreed not to manufacture titanium products (other than cold reduced titanium tubing). The Company has also agreed not to provide titanium hot-rolling conversion services to any entity other than TIMET for the term of the Conversion Services Agreement. The agreement contains certain default provisions which could result in contract termination and damages, including liquidated damages of $25.0 million and the Company being required to return the unearned portion of the up-front fee. The Company considered each provision and the likelihood of the occurrence of a default that would result in liquidated damages. Based on the nature of the events that could trigger the liquidated damages clause, and the availability of the cure periods set forth in the agreement, the Company determined and continues to believe that none of these circumstances are reasonably likely to occur. Therefore, events resulting in liquidated damages have not been factored in as a reduction to the amount of revenue recognized over the life of the contract. The cash received of $50,000 is recognized in income on a straight-line basis over the 20-year term of the agreement. If an event of default occurred and was not cured within any applicable grace period, the Company would recognize the impact of the liquidated damages in the period of default and re-evaluate revenue recognition under the contract for future periods. The portion of the up-front fee not recognized in income is shown as deferred revenue on the consolidated balance sheet.

Note 8.Goodwill and Other Intangible Assets, Net

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

Goodwill and trademarks (indefinite lived) are tested for impairment at least annually as of January 31 for goodwill and August 31 for trademarks (the annual impairment testing dates), or more frequently if impairment indicators exist. If the carrying value of a trademark exceeds its fair value (determined using an income approach, based upon a discounted cash flow of an assumed royalty rate), impairment of the trademark may exist resulting in a charge to earnings to the extent of the impairment. The impairment test for goodwill is performed by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment loss in the event that the carrying amount is greater than the fair value. Any goodwill impairment loss recognized would not exceed the total carrying amount of goodwill allocated to that reporting unit. No impairment has been recognized as of March 31, 2018.

During the first six months of fiscal 2018, there were no changes in the carrying amount of goodwill.

Amortization of customer relationships, patents, non-competes and other intangibles was $122 and $131 for the three-month periods ended March 31, 2017 and 2018, respectively and $245 and $264 for the six-month periods ended March 31, 2017 and 2018, respectively. The following represents a summary of intangible assets at September 30, 2017 and March 31, 2018.


	Gross		Accumulated		Carrying
September 30, 2017	Amount		Amortization		Amount
Patents	$	4,030	$	(3,656)	$	374
Trademarks		3,800		—		3,800
Customer relationships		2,100		(426)		1,674
Other		291		(73)		218
	$	10,221	$	(4,155)	$	6,066


	Gross		Accumulated		Carrying
March 31, 2018	Amount		Amortization		Amount
Patents	$	4,030	$	(3,816)	$	214
Trademarks		3,800		—		3,800
Customer relationships		2,100		(501)		1,599
Other		291		(102)		189
	$	10,221	$	(4,419)	$	5,802

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Estimated future Aggregate Amortization Expense:
Year Ended September 30,
2018	$	263
2019		256
2020		198
2021		180
2022		133
Thereafter		972

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 (losses) per share for the periods indicated:


	Three Months Ended						Six Months Ended
	March 31,						March 31,
(in thousands, except share and per share data)	2017			2018			2017			2018
Numerator: Basic and Diluted
Net income (loss)	$	(1,890)		$	(2,068)		$	(2,562)		$	(24,594)
Dividends paid and accrued		(2,752)			(2,758)			(5,505)			(5,516)
Undistributed income (loss)		(4,642)			(4,826)			(8,067)			(30,110)
Percentage allocated to common shares (a)		100.0	%		100.0	%		100.0	%		100.0	%
Undistributed income (loss) allocated to common shares		(4,642)			(4,826)			(8,067)			(30,110)
Dividends paid on common shares outstanding		2,727			2,722			5,453			5,455
Net income (loss) available to common shares		(1,915)			(2,104)			(2,614)			(24,655)
Denominator: Basic and Diluted
Weighted average common shares outstanding		12,400,522			12,422,485			12,391,264			12,416,627
Adjustment for dilutive potential common shares		—			—			—			—
Weighted average shares outstanding - Diluted		12,400,522			12,422,485			12,391,264			12,416,627

Basic net income (loss) per share	$	(0.15)		$	(0.17)		$	(0.20)		$	(1.99)
Diluted net income (loss) per share	$	(0.15)		$	(0.17)		$	(0.20)		$	(1.99)

Number of stock option shares excluded as their effect would be anti-dilutive		299,667			316,776			322,417			341,776
Number of restricted stock shares excluded as their effect would be anti-dilutive		107,210			97,535			108,498			97,685
Number of deferred restricted stock shares excluded as their effect would be anti-dilutive		—			16,550			—			16,550
Number of performance share awards excluded as their effect would be anti-dilutive		9,500			49,180			14,250			46,490

(a) Percentage allocated to common shares - Weighted average
Common shares outstanding		12,400,522			12,422,485			12,391,264			12,416,627
Unvested participating shares		—			—			—			—
		12,400,522			12,422,485			12,391,264			12,416,627

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Note 10. Stock-Based Compensation

Restricted Stock

On February 23, 2009, the Company adopted a restricted stock plan that reserved 400,000 shares of common stock for issuance. Additionally, on March 1, 2016, the Company adopted the 2016 Incentive Compensation Plan which provides for grants of restricted stock, restricted stock units and performance shares, among other awards. Up to 275,000 shares of restricted stock, restricted stock units and performance shares may be granted in the aggregate under this plan. Following the adoption of the 2016 Incentive Compensation Plan, the Company ceased granting awards from the 2009 restricted stock plan, although awards remain outstanding thereunder.

Grants of restricted stock are comprised of shares of the Company’s common stock subject to transfer restrictions, which vest in accordance with the terms and conditions established by the Compensation Committee. The Compensation Committee may set vesting requirements based on the achievement of specific performance goals or the passage of time.

Restricted shares are subject to forfeiture if employment or service terminates prior to the vesting date or if any applicable performance goals are not met. The Company will assess, on an ongoing basis, the probability of whether the performance criteria will be achieved. The Company will recognize compensation expense over the performance period if it is deemed probable that the goals will be achieved. The fair value of the Company’s restricted stock is determined based upon the closing price of the Company’s common stock on the grant date, which is determined based upon the closing price of the Company’s common stock on the trading date 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.

The shares of time-based restricted stock granted to employees vest on the third anniversary of their grant date if the recipient is still an employee of the Company on such date. The shares of restricted stock granted to non-employee directors will vest on the earlier of (a) the first anniversary of the date of grant or (b) the failure of such non-employee director to be re-elected at an 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 following table summarizes the activity under the 2009 restricted stock plan and the 2016 Incentive Compensation Plan with respect to restricted stock for the six months ended March 31 2018:


		Weighted
		Average Fair
	Number of	Value At
	Shares	Grant Date
Unvested at September 30, 2017	107,210	$	41.36
Granted	31,750	$	31.76
Forfeited / Canceled	(14,550)	$	46.57
Vested	(26,875)	$	44.51
Unvested at March 31, 2018	97,535	$	36.59
Expected to vest	84,868	$	36.42

Compensation expense related to restricted stock for the three months ended March 31, 2017 and 2018 was $451 and $251, respectively and for the six months ended March 31, 2017 and 2018 was $866 and $565, respectively. The remaining unrecognized compensation expense related to restricted stock at March 31, 2018 was $1,695, to be recognized over a weighted average period of 1.18 years. During the first quarter of fiscal 2018, the Company repurchased 6,937 shares of stock from employees at an average purchase price of $32.23 to satisfy required withholding taxes upon vesting of restricted stock-based compensation.

Deferred Restricted Stock

On November 20, 2017, the Company adopted a deferred compensation plan that allows directors and officers the option to defer receipt of cash and stock compensation. On November 21, 2017, the Company granted shares of restricted stock out of the 2016 Incentive Compensation Plan in which elections were made by certain individuals to defer receipt to a future period. Those shares will vest in accordance with the parameters of the 2016 Incentive Compensation Plan, however, receipt of the shares and any corresponding dividends are deferred until the end of the deferral period. In the event the deferred shares are forfeited prior to the vesting date, deferred dividends pertaining to those shares are also forfeited. During the deferral period, the participants who elected to defer shares will not have voting rights with respect to those shares.

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The following table summarizes the activity under the 2016 Incentive Compensation Plan with respect to deferred restricted stock for the six months ended March 31, 2018.


		Weighted
		Average Fair
	Number of	Value At
	Shares	Grant Date
Unvested at September 30, 2017	—	$	—
Granted	16,550	$	31.76
Unvested at March 31, 2018	16,550	$	31.76
Expected to vest	16,550	$	31.76

Compensation expense related to deferred restricted stock for the three months ended March 31, 2017 and 2018 was $0 and $131, respectively and for the six months ended March 31, 2017 and 2018 was $0 and $175, respectively. The remaining unrecognized compensation expense related to restricted stock at March 31, 2018 was $350, to be recognized over a weighted average period of 0.67 years.

Performance Shares

On November 22, 2016 and November 21, 2017, the Company granted a target of 19,000 and 24,800, respectively, performance share awards to certain key employees. The number of performance shares that will ultimately be earned, as well as the number of shares that will be distributed in settling those earned performance shares, if any, will not be determined until the end of the performance period. Performance shares earned will depend on the calculated total shareholder return of the Company at the end of the three-year period ending September 30, 2019 and September 30, 2020, respectively, as compared to the total shareholder return of the Company’s peer group, as defined by the Compensation Committee. The fair value of the performance shares granted on November 22, 2016 and November 21, 2017 is $60.09 and $38.43, per share, respectively, which is estimated as of the date of the grant using a Monte Carlo simulation model. Compensation expense related to the performance shares for the three months ended March 31, 2017 and 2018 was $111 and $185, respectively and for the six months ended March 31, 2017 and 2018 was $134 and $314, respectively. The remaining unrecognized compensation expense related to performance shares at March 31, 2018 was $1,445, to be recognized over a weighted average period of 1.95 years.

Stock Options

The Company’s 2016 Incentive Compensation Plan and its two previous stock option plans authorize, or formerly authorized, the granting of non-qualified stock options to certain key employees and non-employee directors for the purchase of a maximum of 1,925,000 shares of the Company’s common stock. The first option plan was adopted in August 2004 and provided for the grant of options to purchase up to 1,000,000 shares of the Company’s common stock. In January 2007, the Company’s Board of Directors adopted a second option plan that provides for the grant of options to purchase up to 500,000 shares of the Company’s common stock. Following the adoption of the 2016 Incentive Compensation Plan, the Company ceased granting awards from these plans, although awards remain outstanding thereunder. On March 1, 2016, the Company adopted the 2016 Incentive Compensation Plan which provides for grants of up to 425,000 stock options and stock appreciation rights. Each plan provides for the adjustment of the maximum number of shares for which options may be granted in the event of a stock split, extraordinary dividend or distribution or similar recapitalization event. Unless the Compensation Committee determines otherwise, options are exercisable for a period of ten years from the date of grant and vest 331/3% per year over three years from the grant date. The amount of compensation cost recognized in the financial statements is measured based upon the grant date fair value.

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

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based on the Company’s history and expectations regarding dividend payouts at the time of the grant. The following assumptions were used for grants during fiscal years 2017 and 2018:


	Fair		Dividend		Risk-free		Expected		Expected
Grant Date	Value		Yield		Interest Rate		Volatility		Life
November 21, 2017	$	9.74	2.77	%	2.06	%	42	%	5	years
November 22, 2016	$	11.50	2.15	%	1.79	%	37	%	5	years

The stock-based employee compensation expense for stock options for the three months ended March 31, 2017 and 2018 was $105 and $144, respectively and for the six months ended March 31, 2017 and 2018 was $224 and $262, respectively. The remaining unrecognized compensation expense at March 31, 2018 was $1,098, to be recognized over a weighted average vesting period of 1.99 years.

The following table summarizes the activity under the stock option plans and the 2016 Incentive Compensation Plan with respect to stock options for the six months ended March 31, 2018 and provides information regarding outstanding stock options:


						Weighted
		Aggregate		Weighted		Average
		Intrinsic		Average		Remaining
	Number of	Value		Exercise		Contractual
	Shares	(000s)		Prices		Life
Outstanding at September 30, 2017	425,326			$	44.93
Granted	57,550			$	31.76
Exercised	—			$	0.00
Canceled	(50,000)			$	54.00
Outstanding at March 31, 2018	432,876	$	580	$	43.47	6.29	yrs.
Vested or expected to vest	396,141	$	564	$	41.98	6.26	yrs.
Exercisable at March 31, 2018	316,776	$	272	$	44.51	5.32	yrs.

Note 11. Dividend

In the second quarter of fiscal 2018, the Company declared and paid a quarterly cash dividend. The dividend of $0.22 per outstanding share of the Company’s common stock was paid March 15, 2018 to stockholders of record at the close of business on March 1, 2018. The dividend cash pay-out was $2,754 for the quarter based on the number of shares outstanding and $4 of dividends were recorded as deferred in accordance with the Deferred Compensation Plan. In the first six months of fiscal 2018, dividends paid were $5,509 and dividends recorded as deferred were $7.

On May 3, 2018, the Company announced that the Board of Directors declared a regular quarterly cash dividend of $0.22 per outstanding share of the Company’s common stock. The dividend is payable June 15, 2018 to stockholders of record at the close of business on June 1, 2018.

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. The fair value of cash and cash equivalents is determined using Level 1 information. The Company had no Level 2 or Level 3 assets or liabilities as of September 30, 2017 or March 31, 2018.

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U.S. and international equities, fixed income, and other investments held in the Company’s pension plan are held in mutual funds and common / collective funds which are valued using net asset value (NAV) provided by the administrator of the fund. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. These investments are not classified in the fair value hierarchy in accordance with guidance included in ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).

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

Comprehensive income (loss) includes changes in equity that result from transactions and economic events from non-owner sources. Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss) items, including pension, post-retirement and foreign currency translation adjustments, primarily caused by the strengthening of the US dollar against the British pound sterling, net of tax when applicable.

Accumulated Other Comprehensive Income (Loss)


	Three Months Ended March 31, 2017
	Pension		Postretirement		Foreign
	Plan		Plan		Exchange		Total
Accumulated other comprehensive income (loss) as of December 31, 2016	$	(72,838)	$	(28,909)	$	(13,222)	$	(114,969)
Other comprehensive income (loss) before reclassifications		—		—		835		835
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of Pension and Postretirement Plan items (a)		202		—		—		202
Actuarial losses (a)		2,810		1,069		—		3,879
Tax benefit		(1,109)		(393)		—		(1,502)
Net current-period other comprehensive income (loss)		1,903		676		835		3,414
Accumulated other comprehensive income (loss) as of March 31, 2017	$	(70,935)	$	(28,233)	$	(12,387)	$	(111,555)


	Three Months Ended March 31, 2018
	Pension		Postretirement		Foreign
	Plan		Plan		Exchange		Total
Accumulated other comprehensive income (loss) as of December 31, 2017	$	(42,180)	$	(21,217)	$	(7,474)	$	(70,871)
Other comprehensive income (loss) before reclassifications		—		—		2,316		2,316
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of Pension and Postretirement Plan items (a)		94		—		—		94
Actuarial losses (a)		1,221		750		—		1,971
Tax benefit		(477)		(278)		—		(755)
Net current-period other comprehensive income (loss)		838		472		2,316		3,626
Accumulated other comprehensive income (loss) as of March 31, 2018	$	(41,342)	$	(20,745)	$	(5,158)	$	(67,245)


	Six Months Ended March 31, 2017
	Pension		Postretirement		Foreign
	Plan		Plan		Exchange		Total
Accumulated other comprehensive income (loss) as of September 30, 2016	$	(74,742)	$	(29,585)	$	(10,196)	$	(114,523)
Other comprehensive income (loss) before reclassifications		—		—		(2,191)		(2,191)
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of Pension and Postretirement Plan items (a)		404		—		—		404
Actuarial losses (a)		5,620		2,139		—		7,759
Tax benefit		(2,217)		(787)		—		(3,004)
Net current-period other comprehensive income (loss)		3,807		1,352		(2,191)		2,968
Accumulated other comprehensive income (loss) as of March 31, 2017	$	(70,935)	$	(28,233)	$	(12,387)	$	(111,555)


	Six Months Ended March 31, 2018
	Pension		Postretirement		Foreign
	Plan		Plan		Exchange		Total
Accumulated other comprehensive income (loss) as of September 30, 2017	$	(43,012)	$	(21,691)	$	(7,991)	$	(72,694)
Other comprehensive income (loss) before reclassifications		—		—		2,833		2,833
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of Pension and Postretirement Plan items (a)		187		—		—		187
Actuarial losses (a)		2,444		1,500		—		3,944
Tax benefit		(961)		(554)		—		(1,515)
Net current-period other comprehensive income (loss)		1,670		946		2,833		5,449
Accumulated other comprehensive loss as of March 31, 2018	$	(41,342)	$	(20,745)	$	(5,158)	$	(67,245)

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^(a)

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

Note 14. Long-term Obligations

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

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

As of March 31, 2018, future minimum lease rental payments during each fiscal year applicable to the lease obligations were as follows.


2018	$	410
2019		989
2020		994
2021		1,001
2022		1,012
Thereafter		13,678
Total minimum lease payments		18,084
Less amounts representing interest		(9,891)
Present value of net minimum lease payments		8,193
Less current obligation		(137)
Total long-term lease obligation	$	8,056

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


	September 30,		March 31,
	2017		2018
Capital lease rental payments	$	4,275	$	4,242
Finance lease rental payments		4,017		3,951
Environmental post-closure monitoring and maintenance activities		633		633
Less amounts due within one year		(1,029)		(234)
Long-term obligations (less current portion)	$	7,896	$	8,592

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

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

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, each as amended. All statements other than statements of historical fact, including statements regarding market and industry prospects and future results of operations or financial position, made in this Form 10-Q are forward-looking. In many cases, you can identify forward-looking statements by terminology, such as “may”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of such terms and other comparable terminology. The forward-looking information may include, among other information, statements concerning the Company’s outlook for fiscal 2018 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 described in Item 1A. of Part 1 of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017.

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

Business Overview

Haynes International, Inc. (“Haynes” or “the Company”) is one of the world’s largest producers of high-performance nickel and cobalt based alloys in sheet, coil and plate forms. The Company is focused on developing, manufacturing, marketing and distributing technologically advanced, high-performance alloys, which are sold primarily in the aerospace, chemical processing and industrial gas turbine industries. The Company’s products consist of high-temperature resistant alloys, or HTA products, and corrosion-resistant alloys, or CRA products. HTA products are used by manufacturers of equipment that is subjected to extremely high temperatures, such as jet engines, gas turbine engines, and industrial heating and heat treatment equipment. CRA products are used in applications that require resistance to very corrosive media found in chemical processing, power plant emissions control and hazardous waste treatment. Management believes Haynes is one of the principal producers of high-performance alloy flat products in sheet, coil and plate forms, and sales of these forms, in the aggregate, represented approximately 59% of net product revenues in fiscal 2017. 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 12 service and/or sales centers in the United States, Europe and Asia. All of these centers are Company operated.

Dividends Paid and Declared

In the second quarter of fiscal 2018, the Company declared and paid a regular quarterly cash dividend of $0.22 per outstanding share of the Company’s common stock. The dividend was paid on March 15, 2018 to stockholders of record at the close of business on March 1, 2018. The dividend cash pay-out in the second quarter was approximately $2.8 million based on the number of shares outstanding and equal to approximately $11.0 million on an annualized basis.

Capital Spending

During the first six months of fiscal 2018, capital investment was $6.3 million, and total planned capital expenditures for fiscal 2018 are expected to be $12.0 million.

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Impact of the Tax Cuts and Jobs Act on Deferred Tax Assets

On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was signed into law. Among other changes is a permanent reduction in the federal corporate income tax rate from 35% to 21%, which the Company expects will positively impact the Company’s future effective tax rate and after-tax earnings in the United States. As a result of the Act, the Company’s blended rate for fiscal 2018 is 24.5%. The Company may also be affected by certain other aspects of the Act, including, without limitation, provisions regarding repatriation of accumulated foreign earnings and deductibility of capital expenditures. The Company is in the process of determining the effect, if any, those provisions will have on the Company’s financial results, and there can be no assurance of whether such additional effects will be positive or negative.

As a result of the reduction in the corporate income tax rate, the Company was required to revalue its net deferred tax asset to account for the future impact of lower corporate tax rates on this deferred amount and record any change in the value of such asset as a one-time non-cash charge on its income statement. The Company has performed an analysis of its first six months of fiscal 2018 tax provision based on the new tax rate as compared to the previous year’s effective tax rate of 40% (which includes state and foreign taxes), and determined the amount of such expense to be $19.7 million, which reduced the Company’s reported net income for the first six months of fiscal 2018.

Expansion of LaPorte, Indiana Operations

The Company announced on May 2, 2016 its decision to expand and streamline its distribution footprint by investing in new plant and equipment at its processing facility located in LaPorte, Indiana. In connection with the expansion, the Company has relocated its service center operations in Lebanon, Indiana to LaPorte. The project began in the first quarter of fiscal 2016 and was substantially completed by the end of the first quarter of fiscal 2018. During the first six months of fiscal 2018, the Company expensed $1.1 million for costs related to the relocation, including but not limited to, physical relocation costs, employee retention costs and duplicate lease costs.

Volumes, Competition and Pricing

The Company is increasing utilization of its new cold-finished sheet and coil capability. The production rate for cold-finishing over the first six months of fiscal 2018 was 17.3% higher than the same period last year. Volume shipped to the aerospace industry was 2.6 million pounds, which is an 11.0% increase over last fiscal year’s second quarter and a 27.4% increase sequentially over the first quarter of fiscal 2018. In addition, volume shipped into the chemical processing market continues to improve, showing positive signs of a market recovery, with 1.0 million pounds shipped, a 29.7% increase over last fiscal year’s second quarter and a 45.6% increase sequentially over the first quarter of fiscal 2018. Specialty application projects shipped into the CPI market were at a moderately better level in the second quarter of fiscal 2018. In addition, volume shipped into other markets was 0.5 million pounds, which is a 36.9% increase over last fiscal year’s second quarter and a 44.3% increase sequentially over the first quarter of fiscal 2018 primarily due to strength in the flue-gas desulfurization market. Conversely, volume shipped in the industrial gas turbine market declined to 0.6 million pounds, which is 54.4% lower than last fiscal year’s second quarter, and 26.9% lower sequentially than the first quarter of fiscal 2018 as this market continues to suffer from weak demand particularly from the large industrial OEM customers. Overall volume in the second quarter of fiscal 2018 was 4.7 million pounds, which is 3.1% lower than last fiscal year’s second quarter, but 19.9% higher sequentially than the first quarter of fiscal 2018. The product average selling price per pound in the second quarter of fiscal 2018 was $22.28, which is a 13.2% increase over last fiscal year’s second quarter and a 5.3% increase sequentially over the first quarter of fiscal 2018. The year-over-year increase was driven by moderately higher shipments of high-value specialty application projects, the effect of announced price increases and increases under many of the Company’s long-term agreements with customers according to periodic adjustment clauses relating to the market price of certain raw materials, primarily nickel.

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

Net Revenue and Gross Profit Margin Performance:


				Comparison by Quarter of Net Revenues, Gross Profit Margin and
				Gross Profit Margin Percentage for Fiscal 2017 and 2018
				Quarter Ended
	December 31,			March 31,			June 30,			September 30,			December 31,			March 31,
(dollars in thousands)	2016			2017			2017			2017			2017			2018
Net Revenues	$	93,355		$	103,112		$	97,977		$	100,765		$	89,693		$	110,206
Gross Profit Margin	$	10,487		$	9,788		$	3,662		$	5,773		$	7,010		$	11,452
Gross Profit Margin %		11.2	%		9.5	%		3.7	%		5.7	%		7.8	%		10.4	%

The favorable trend of recovering gross profit margins and gross profit margin percentage continued in the second quarter of fiscal 2018 with gross margin dollars at $11.5 million and gross margin percentage at 10.4%, both higher than the previous four quarters. Improvement was largely attributable to better product mix, higher volumes and stronger pricing levels. Continued improvement is expected over the second half of fiscal 2018 with strengthening volumes and rising raw material prices partly offset by the continued shipments of lower-value orders from the backlog that were taken in prior quarters.

Backlog


			Quarter Ended
	December 31,		March 31,		June 30,		September 30,		December 31,		March 31,
	2016		2017		2017		2017		2017		2018
Backlog(1)
Dollars (in thousands)	$	167,286	$	170,848	$	180,922	$	177,300	$	205,718	$	212,312
Pounds (in thousands)		6,795		6,960		7,496		6,453		8,073		7,764
Average selling price per pound	$	24.62	$	24.55	$	24.14	$	27.48	$	25.48	$	27.35
Average nickel price per pound
London Metals Exchange(2)	$	5.00	$	4.64	$	4.05	$	5.10	$	5.18	$	6.08

⁽¹⁾

The Company defines backlog to include firm commitments from customers for delivery of product at established prices. There are orders in the backlog at any given time which include prices that are subject to adjustment based on changes in raw material costs, which can vary from approximately 30% - 50% of the orders. 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 $212.3 million at March 31, 2018, an increase of $6.6 million, or 3.2%, from $205.7 million at December 31, 2017. Backlog pounds decreased during the second quarter of fiscal 2018 by 3.8%, primarily due the shipment of certain special projects. The increase in average selling price of $27.35 per pound at March 31, 2018 compared to $25.48 per pound at December 31, 2017 reflects the widespread price increases that took effect in the second quarter of fiscal 2018 and a higher-value mix of products. Aerospace and other markets had higher order entry and improving backlog levels, as compared to the prior quarter. The average market price for nickel increased during the second quarter by 17.4%.

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Quarterly Market Information


	Quarter Ended
	December 31,		March 31,		June 30,		September 30,		December 31,		March 31,
	2016		2017		2017		2017		2017		2018
Net revenues (in thousands)
Aerospace	$	45,784	$	49,536	$	46,895	$	50,300	$	46,839	$	59,033
Chemical processing		19,128		18,081		15,017		18,241		13,356		21,148
Industrial gas turbines		14,593		17,827		14,731		14,372		13,421		11,755
Other markets		8,429		9,923		14,379		10,472		9,238		12,724
Total product revenue		87,934		95,367		91,022		93,385		82,854		104,660
Other revenue		5,421		7,745		6,955		7,380		6,839		5,546
Net revenues	$	93,355	$	103,112	$	97,977	$	100,765	$	89,693	$	110,206

Shipments by markets (in thousands of pounds)
Aerospace		2,017		2,322		2,207		2,301		2,023		2,578
Chemical processing		605		771		858		929		687		1,000
Industrial gas turbines		1,039		1,403		1,011		1,015		876		640
Other markets		316		350		501		472		332		479
Total shipments		3,977		4,846		4,577		4,717		3,918		4,697

Average selling price per pound
Aerospace	$	22.70	$	21.33	$	21.25	$	21.86	$	23.15	$	22.90
Chemical processing		31.62		23.45		17.50		19.64		19.44		21.15
Industrial gas turbines		14.05		12.71		14.57		14.16		15.32		18.37
Other markets		26.67		28.35		28.70		22.19		27.83		26.56
Total product (product only; excluding other revenue)		22.11		19.68		19.89		19.80		21.15		22.28
Total average selling price (including other revenue)		23.47		21.28		21.41		21.36		22.89		23.46

Results of Operations for the Three Months Ended March 31, 2017 Compared to the Three Months Ended March 31, 2018

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 March 31,								Change
	2017				2018				Amount		%
Net revenues	$	103,112	100.0	%	$	110,206	100.0	%	$	7,094	6.9	%
Cost of sales		93,324	90.5	%		98,754	89.6	%		5,430	5.8	%
Gross profit		9,788	9.5	%		11,452	10.4	%		1,664	17.0	%
Selling, general and administrative expense		10,541	10.2	%		12,284	11.1	%		1,743	16.5	%
Research and technical expense		991	1.0	%		965	0.9	%		(26)	(2.6)	%
Operating income (loss)		(1,744)	(1.7)	%		(1,797)	(1.6)	%		(53)	3.0	%
Interest income		(44)	(0.0)	%		(17)	(0.0)	%		27	(61.4)	%
Interest expense		236	0.2	%		229	0.2	%		(7)	(3.0)	%
Income (loss) before income taxes		(1,936)	(1.9)	%		(2,009)	(1.8)	%		(73)	3.8	%
Provision for (benefit from) income taxes		(46)	(0.0)	%		59	0.1	%		105	(228.3)	%
Net income (loss)	$	(1,890)	(1.8)	%	$	(2,068)	(1.9)	%	$	(178)	9.4	%

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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
	March 31,				Change
By market	2017		2018		Amount		%
Net revenues (in thousands)
Aerospace	$	49,536	$	59,033	$	9,497	19.2	%
Chemical processing		18,081		21,148		3,067	17.0	%
Industrial gas turbine		17,827		11,755		(6,072)	(34.1)	%
Other markets		9,923		12,724		2,801	28.2	%
Total product revenue		95,367		104,660		9,293	9.7	%
Other revenue		7,745		5,546		(2,199)	(28.4)	%
Net revenues	$	103,112	$	110,206	$	7,094	6.9	%

Pounds by market (in thousands)
Aerospace		2,322		2,578		256	11.0	%
Chemical processing		771		1,000		229	29.7	%
Industrial gas turbine		1,403		640		(763)	(54.4)	%
Other markets		350		479		129	36.9	%
Total shipments		4,846		4,697		(149)	(3.1)	%

Average selling price per pound
Aerospace	$	21.33	$	22.90	$	1.57	7.4	%
Chemical processing		23.45		21.15		(2.30)	(9.8)	%
Industrial gas turbine		12.71		18.37		5.66	44.5	%
Other markets		28.35		26.56		(1.79)	(6.3)	%
Total product (excluding other revenue)		19.68		22.28		2.60	13.2	%
Total average selling price (including other revenue)	$	21.28	$	23.46	$	2.18	10.2	%

Net Revenues. Net revenues were $110.2 million in the second quarter of fiscal 2018, an increase of 6.9% from $103.1 million in the same period of fiscal 2017. Volume was 4.7 million pounds in the second quarter of fiscal 2018, a decrease of 3.1% from 4.8 million pounds in the same period of fiscal 2017. The decrease in volume was primarily due to a decline in shipments into the industrial gas turbine market during the second quarter of fiscal 2018 due to continued weak demand. The product-sales average selling price was $22.28 per pound in the second quarter of fiscal 2018, an increase of 13.2% from $19.68 per pound in the same period of fiscal 2017. The average selling price increased primarily due to a higher-value product mix and higher raw material market prices, which increased average selling prices per pound by approximately $1.63 and $1.47, respectively, partially offset by pricing competition and other factors, which decreased average selling price per pound by approximately $0.50.

Sales to the aerospace market were $59.0 million in the second quarter of fiscal 2018, an increase of 19.2% from $49.5 million in the same period of fiscal 2017, due to a 7.4% increase in average selling price per pound, combined with a 11.0% increase in volume. The increase in volume is primarily driven by an increase in the new engine platform sales combined with our enhanced capacity from the cold-finishing capital investment. The average selling price per pound increase reflects an increase in market prices of raw materials and a higher-value product mix, which increased average selling price per pound by approximately $1.53 and $0.41, respectively, partially offset by other pricing factors, which decreased average selling price per pound by approximately $0.37.

Sales to the chemical processing market were $21.1 million in the second quarter of fiscal 2018, an increase of 17.0% from $18.1 million in the same period of fiscal 2017, due to a 29.7% increase in volume, partially offset by a 9.8% decrease in average selling price per pound. The increase in volume reflects a moderate strengthening of project shipments combined with higher volumes of base business. The base-business market improvement put downward pressure on average selling prices, which contributed to increased pricing competition and other factors and a lower-value product mix, which decreased average selling price per pound by approximately $1.90 and $1.58, respectively, partially offset by a change in market prices of certain raw materials, which increased average selling price per pound by approximately $1.18.

Sales to the industrial gas turbine market were $11.8 million in the second quarter of fiscal 2018, a decrease of 34.1% from $17.8 million for the same period of fiscal 2017, due to a decrease of 54.4% in volume, partially offset by an increase in average selling price per pound of 44.5%, or $5.66. The decrease in volume is primarily due to a decreased level of ingot transactional business in this market. The increase in average selling price per pound largely reflects a higher-value product form mix largely due to less ingot

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product shipped and a change in market prices of raw materials, which increased average selling price per pound by approximately $3.21 and $1.57, respectively, and a decrease in pricing competition and other factors, which increased average selling price per pound by approximately $0.88.

Sales to other markets were $12.7 million in the second quarter of fiscal 2018, an increase of 28.2% from $9.9 million in the same period of fiscal 2017, due to a 36.9% increase in volume, partially offset by a 6.3%, or $1.79, decrease in average selling price per pound. The increase in volume was primarily due to strength in the flue-gas desulfurization market. The decrease in average selling price per-pound reflects a lower-value product mix and increased pricing competition and other factors, which decreased average selling price per pound by $3.33 and $0.07, respectively, which was partially offset by higher raw material market prices which increased average selling price per pound by approximately $1.61.

Other Revenue. Other revenue was $5.5 million in the second quarter of fiscal 2018, a decrease of 28.4% from $7.7 million in the same period of fiscal 2017. The decrease is due primarily to decreased toll conversion.

Cost of Sales. Cost of sales was $98.8 million, or 89.6% of net revenues, in the second quarter of fiscal 2018 compared to $93.3 million, or 90.5% of net revenues, in the same period of fiscal 2017. Cost of sales in the second quarter of fiscal 2018 increased by $5.4 million as compared to the same period of fiscal 2017 due to sales of higher-value products and higher raw material costs.

Gross Profit. As a result of the above factors, gross profit was $11.5 million for the second quarter of fiscal 2018, an increase of $1.7 million from the same period of fiscal 2017. Gross margin as a percentage of net revenue increased to 10.4% in the second quarter of fiscal 2018 as compared to 9.5% in the same period of fiscal 2017.

Selling, General and Administrative Expense. Selling, general and administrative expense was $12.3 million for the second quarter of fiscal 2018, an increase of $1.7 million from the same period of fiscal 2017. This increase is primarily attributable to higher management incentive compensation accruals of $0.9 million, higher bad-debt expense of $0.6 million due to the bankruptcy of one customer and higher expense due to foreign exchange losses of $0.3 million. Selling, general and administrative expense as a percentage of net revenues increased to 11.1% for the second quarter of fiscal 2018 compared to 10.2% for the same period of fiscal 2017.

Research and Technical Expense. Research and technical expense was $1.0 million, or 0.9% of revenue, for the second quarter of fiscal 2018, similar to the expense in the same period of fiscal 2017.

Operating Income/(Loss). As a result of the above factors, operating loss in the second quarter of fiscal 2018 was $(1.8) million compared to operating loss of $(1.7) million in the same period of fiscal 2017.

Income Taxes. Income tax benefit was $(0.1) million in the second quarter of fiscal 2018, a difference of $(0.1) million from the second quarter of fiscal 2017. The effective tax rate for the second quarter of fiscal 2018 was (2.9)%, compared to 2.4% in the same period of fiscal 2017. The change in effective tax rate for the second quarter of fiscal 2018 as compared to the same period of fiscal 2017 is primarily attributable to a difference in tax jurisdictions and amounts with which pre-tax losses were incurred.

Net Income/(Loss). As a result of the above factors, net loss in the second quarter of fiscal 2018 was $(2.1) million, a difference of $0.2 million from net loss of $(1.9) million in the same period of fiscal 2017.

Results of Operations for the Six Months Ended March 31, 2017 Compared to the Six Months Ended March 31, 2018


	Six Months Ended March 31,								Change
	2017				2018				Amount		%
Net revenues	$	196,467	100.0	%	$	199,899	100.0	%	$	3,432	1.7	%
Cost of sales		176,192	89.7	%		181,437	90.8	%		5,245	3.0	%
Gross profit		20,275	10.3	%		18,462	9.2	%		(1,813)	(8.9)	%
Selling, general and administrative expense		20,853	10.6	%		23,054	11.5	%		2,201	10.6	%
Research and technical expense		1,934	1.0	%		1,853	0.9	%		(81)	(4.2)	%
Operating income (loss)		(2,512)	(1.3)	%		(6,445)	(3.2)	%		(3,933)	156.6	%
Interest income		(101)	(0.1)	%		(35)	(0.0)	%		66	(65.3)	%
Interest expense		405	0.2	%		459	0.2	%		54	13.3	%
Income (loss) before income taxes		(2,816)	(1.4)	%		(6,869)	(3.4)	%		(4,053)	143.9	%
Provision for (benefit from) income taxes		(254)	(0.1)	%		17,725	8.9	%		17,979	(7,078.3)	%
Net income (loss)	$	(2,562)	(1.3)	%	$	(24,594)	(12.3)	%	$	(22,032)	860.0	%

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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.


	Six Months Ended
	March 31,				Change
	2017		2018		Amount		%
Net revenues (dollars in thousands)
Aerospace	$	95,320	$	105,872	$	10,552	11.1	%
Chemical processing		37,209		34,504		(2,705)	(7.3)	%
Industrial gas turbine		32,420		25,176		(7,244)	(22.3)	%
Other markets		18,352		21,962		3,610	19.7	%
Total product revenue		183,301		187,514		4,213	2.3	%
Other revenue		13,166		12,385		(781)	(5.9)	%
Net revenues	$	196,467	$	199,899	$	3,432	1.7	%
Pounds by market (in thousands)
Aerospace		4,339		4,601		262	6.0	%
Chemical processing		1,376		1,687		311	22.6	%
Industrial gas turbine		2,442		1,516		(926)	(37.9)	%
Other markets		666		811		145	21.8	%
Total shipments		8,823		8,615		(208)	(2.4)	%
Average selling price per pound
Aerospace	$	21.97	$	23.01	$	1.04	4.7	%
Chemical processing		27.04		20.45		(6.59)	(24.4)	%
Industrial gas turbine		13.28		16.61		3.33	25.1	%
Other markets		27.56		27.08		(0.48)	(1.7)	%
Total product (excluding other revenue)		20.78		21.77		0.99	4.8	%
Total average selling price (including other revenue)	$	22.27	$	23.20	$	0.93	4.2	%

Net Revenues. Net revenues were $199.9 million in the first six months of fiscal 2018, an increase of 1.7% from $196.5 million in the same period of fiscal 2017. Volume was 8.6 million pounds in the first six months of fiscal 2018, a decrease of 2.4% from 8.8 million pounds in the same period of fiscal 2017. The decrease in volume was primarily due to a decline in industrial gas turbine shipments due to weak demand. The product-sales average selling price was $21.77 per pound in first six months of fiscal 2018, an increase of 4.8% from $20.78 per pound in the same period of fiscal 2017. The average selling price increased as a result of higher market raw material prices, and a higher-value product mix by approximately $1.23 and $0.51, respectively, partially offset by increased pricing competition and other factors, which decreased average selling price per pound by approximately $0.75.

Sales to the aerospace market were $105.9 million in the first six months of fiscal 2018, an increase of 11.1% from $95.3 million in the same period of fiscal 2017, due to a 4.7%, or $1.04, increase in average selling price per pound combined with a 6.0% increase in volume. The increase in volume reflects the increase in new engine platform sales combined with our enhanced capacity from the cold-finishing capital investment. The average selling price per pound increase reflects a change in market prices of raw materials and higher-value product mix, which increased average selling price per pound by approximately $1.27 and $0.40, respectively, partially offset by an increase in pricing competition and other factors which decreased average selling price per pound by approximately $0.63.

Sales to the chemical processing market were $34.5 million in the first six months of fiscal 2018, a decrease of 7.3% from $37.2 million in the same period of fiscal 2017, due to a 22.6% increase in volume, partially offset by a 24.4%, or $6.59, decrease in average selling price per pound. Base volumes have increased in the first six months of fiscal 2018 from the same period of fiscal 2017. However, specialty application project revenue was lower in the first six months of fiscal 2018 compared to the same period last year due to a relatively large project shipment in the first quarter of fiscal 2017. The average selling price per pound decrease reflects a lower-value product mix driven by the lower special projects and increased pricing competition and other factors, which decreased average selling price per pound by approximately $5.35 and $2.12, respectively, partially offset by a change in market prices of raw materials, which increased average selling price per pound by approximately $0.88.

Sales to the industrial gas turbine market were $25.2 million in the first six months of fiscal 2018, a decrease of 22.3% from $32.4 million for the same period of fiscal 2017, due to a decrease of 37.9% in volume, partially offset by a 25.1%, or $3.33, increase in average selling price per pound. The decrease in volume was primarily due to weak demand, along with a lower level of ingot orders shipped in the first six months of fiscal 2018 compared to the same period of fiscal 2017. The increase in average selling price per pound primarily reflects a change to a higher-value product mix and higher raw material market prices, which increased average selling

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price per pound by approximately $1.82 and $1.31, respectively, combined with other factors, which increased the average selling price per pound by approximately $0.20.

Sales to other markets were $22.0 million in the first six months of fiscal 2018, an increase of 19.7% from $18.4 million in the same period of fiscal 2017, due to a 21.8% increase in volume partially offset by a decrease of 1.7%, or $0.48, in average selling price per pound. The increase in volume was primarily due to increases in sales to the oil and gas and flue-gas desulfurization markets. The decrease in average selling price reflects a lower-value product mix and increased pricing competition which decreased average selling price per pound by approximately $1.77 and $0.38, respectively, partially offset by higher raw material market prices, which increased average selling price per pound by approximately $1.67.

Other Revenue. Other revenue was $12.4 million in the first six months of fiscal 2018, a decrease of 5.9% from $13.2 million in the same period of fiscal 2017. The decrease was due primarily to decreased toll conversion.

Cost of Sales. Cost of sales was $181.4 million, or 90.8% of net revenues, in the first six months of fiscal 2018 compared to $176.2 million, or 89.7% of net revenues, in the same period of fiscal 2017. This $5.2 million increase was primarily due to a higher-value product mix, lower manufacturing cost absorption and costs associated with relocating the Lebanon service center to LaPorte as previously announced.

Gross Profit. As a result of the above factors, gross profit was $18.5 million for the first six months of fiscal 2018, a decrease of $1.8 million from the same period of fiscal 2017. Gross profit as a percentage of net revenue decreased to 9.2% in the first six months of fiscal 2018 as compared to 10.3% in the same period of fiscal 2017.

Selling, General and Administrative Expense. Selling, general and administrative expense was $23.1 million for the first six months of fiscal 2018, an increase of $2.2 million from the same period of fiscal 2017. The increase in the first six months of fiscal 2018 is primarily attributable to higher expense due to foreign exchange losses of $1.2 million, higher management incentive compensation accruals of $1.2 million and higher bad-debt expense of $0.6 million due to the bankruptcy of one customer partially offset by $0.5 million in lower expense due to cost reductions. Selling, general and administrative expense as a percentage of net revenues increased to 11.5% for the first six months of fiscal 2018 compared to 10.6% for the same period of fiscal 2017.

Research and Technical Expense. Research and technical expense was $1.9 million, or 0.9% of revenue, for the first six months of fiscal 2018, compared to a similar amount in the same period of fiscal 2017.

Operating Income/(Loss). As a result of the above factors, operating loss in the first six months of fiscal 2018 was $(6.4) million compared to an operating loss of $(2.5) million in the same period of fiscal 2017.

Income Taxes. Income tax expense was $17.7 million in the first six months fiscal 2018, a difference of $18.0 million from a benefit of $0.3 million in the same period of fiscal 2017. The higher tax expense for the first six months of fiscal 2018 as compared to the same period of fiscal 2017 is primarily attributable to the passage of the Tax Reform and Jobs Act during fiscal 2018, which required the Company to revalue its deferred tax assets based on the lowering of the statutory tax rate of 35% to 21% (24.5% in fiscal 2018). See “Impact of the Tax Cuts and Jobs Act on Deferred Tax Assets” and Note 4 to the condensed consolidated financial statements in the Form 10-Q for the second quarter of fiscal 2018 for additional discussion of the expected impact of the Tax Cuts and Jobs Act.

Net Income/(Loss). As a result of the above factors, net loss for the first six months of fiscal 2018 was $(24.6) million, an increase in loss of $22.0 million from net loss of $(2.6) million in the same period of fiscal 2017.

Working Capital

Working capital increased in conjunction with backlog increasing and corresponding increased production and sales levels. Backlog increased $35.0 million or 19.8% in the first six months of fiscal 2018 and sales revenue increased sequentially from the first quarter to the second quarter of fiscal 2018 by $20.5 million or 22.9%. Controllable working capital, which includes accounts receivable, inventory, accounts payable and accrued expenses, was $284.4 million at March 31, 2018, an increase of $25.2 million or 9.7%, from $259.1 million at September 30, 2017. This increase resulted primarily from inventory increasing $23.4 million and accounts receivable increasing $4.1 million, partially offset by accounts payable and accrued expenses increasing by $2.3 million during the first six months of fiscal 2018. This resulted in a decrease in cash of $28.8 million over the first six months of fiscal 2018. As cash collections increase with the higher second quarter sales, cash balances are expected to improve over the second half of fiscal 2018.

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Liquidity and Capital Resources

Comparative cash flow analysis

During the first six months of fiscal 2018, the Company’s primary source of cash was cash on-hand. At March 31, 2018, the Company had cash and cash equivalents of $17.5 million compared to $46.3 million at September 30, 2017. Of that amount, the Company had cash and cash equivalents of $10.2 million held by foreign subsidiaries in various currencies.

Net cash used in operating activities in the first six months of fiscal 2018 was $(17.0) million compared to net cash provided by operating activities of $11.2 million in the first six months of fiscal 2017. The lower cash provided by (used in) operating activities during the first six months of fiscal 2018 was driven by increases in controllable working capital (inventory, accounts receivable, accounts payable, and accrued expenses) of $22.1 million in the first six months of fiscal 2018 compared to cash generated from controllable working capital of $0.1 million during the same period of fiscal 2017. Also contributing to the difference was lower earnings, excluding non-cash expenses, of $5.2 million during the first six months of fiscal 2018 compared to earnings, excluding non-cash expenses, of $8.7 million during the same period of fiscal 2017. These factors were partially offset by lower cash tax payments of $0.9 million during the first six months of fiscal 2018 compared to $2.8 million during the same period of fiscal 2017.

Net cash used in investing activities was $6.3 million in the first six months of fiscal 2018, which was lower than cash used in investing activities during the same period of fiscal 2017 of $9.8 million as a result of decreased additions to property, plant and equipment, as the Company completed its capacity expansion in sheet manufacturing.

Net cash used in financing activities in the first six months of fiscal 2018 of $5.8 million included $5.5 million of dividend payments and approximately $0.2 million of stock re-purchases made to satisfy taxes in relation to the vesting of restricted stock, which is comparable to the prior year.

Future sources of liquidity

The Company’s sources of liquidity for the remainder of fiscal 2018 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 March 31, 2018, the Company had cash of $17.5 million, an outstanding balance of zero on the U.S. revolving credit facility and access to a total of approximately $120.0 million under the U.S. revolving credit facility, subject to a borrowing base formula and certain reserves. Management believes that the resources described above will be sufficient to fund planned capital expenditures and working capital requirements over the next twelve months.

U.S. Revolving Credit Facility

The Company and Wells Fargo Capital Finance, LLC (“Wells Fargo”) entered into a Third Amended and Restated Loan and Security Agreement (the “Amended Agreement”) with certain other lenders with an effective date of July 14, 2011. On July 7, 2016, the Company amended the agreement to, among other things, extend the term through July 7, 2021 and reduce unused line fees and certain administrative fees. The maximum revolving loan amount under the Amended Agreement is $120.0 million, subject to a borrowing base formula and certain reserves. The Amended Agreement permits an increase in the maximum revolving loan amount from $120.0 million up to an aggregate amount of $170.0 million at the request of the borrowers. Borrowings under the U.S. revolving credit facility bear interest, at the Company’s option, at either Wells Fargo’s “prime rate”, plus up to 0.75% per annum, or the adjusted Eurodollar rate used by the lender, plus up to 2.0% per annum. As of March 31, 2018, the U.S. revolving credit facility had a zero balance.

The Company must pay monthly, in arrears, a commitment fee of 0.20% per annum on the unused amount of the U.S. revolving credit facility total commitment. For letters of credit, the Company must pay 1.5% per annum on the daily outstanding balance of all issued letters of credit, plus customary fees for issuance, amendments and processing.

The Company is subject to certain covenants as to fixed charge coverage ratios and other customary covenants, including covenants restricting the incurrence of indebtedness, the granting of liens and the sale of assets. The covenant pertaining to fixed charge coverage ratios is only effective in the event the amount of excess availability under the revolver is less than 10.0% of the maximum credit revolving loan amount. The Company is permitted to pay dividends and repurchase common stock if certain financial metrics are met (most of which do not apply in the case of regular quarterly dividends less than $20.0 million in the aggregate in a year and repurchases in connection with the vesting of shares of restricted stock). As of March 31, 2018, 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. Borrowings under the U.S. revolving credit facility are collateralized by a pledge of substantially all of the U.S.

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assets of the Company, including the equity interests in its U.S. subsidiaries, but excluding the four-high Steckel rolling mill and related assets, which are pledged to Titanium Metals Corporation (“TIMET”) to secure the performance of the Company’s obligations under a Conversion Services Agreement with TIMET (see discussion of TIMET at Note 7 in the Company’s Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q). The U.S. revolving credit facility is also secured by a pledge of a 65% equity interest in each of the Company’s direct foreign subsidiaries.

Future uses of liquidity

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

Funding operations;

Capital spending;

Dividends to stockholders; and

Pension and postretirement plan contributions.

Capital investment in the first six months of fiscal 2018 was $6.3 million, and the forecast for capital spending in fiscal 2018 is $12.0 million.

Contractual Obligations

The following table sets forth the Company’s contractual obligations for the periods indicated, as of March 31, 2018:


	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)	$	930	$	280	$	560	$	90	$	—
Operating lease obligations		6,839		2,782		3,853		204		—
Capital and finance lease obligations		18,204		1,017		1,995		2,024		13,168
Raw material contracts (primarily nickel)		19,751		19,751		—		—		—
Capital projects and other commitments		10,177		10,177		—		—		—
Pension plan(2)		90,568		6,000		20,050		22,962		41,556
Non-qualified pension plans		729		95		190		190		254
Other postretirement benefits(3)		50,000		5,000		10,000		10,000		25,000
Environmental post-closure monitoring		633		104		112		121		296
Total	$	197,831	$	45,206	$	36,760	$	35,591	$	80,274

⁽¹⁾

As of March 31, 2018, 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 $90,568 to the domestic pension plan. These payments will be tax deductible. All benefit payments under the domestic pension plan are provided by the plan and not the Company.

⁽³⁾

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

New Accounting Pronouncements

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

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Assumptions and estimates were based on the facts and circumstances known at March 31, 2018. 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, 2017 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 2017.

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Item 3.Quantitative and Qualitative Disclosures about Market Risk

As of March 31, 2018, 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, 2017.

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 March 31, 2018.

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

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PART II OTHER INFORMATION

Item 6.Exhibits

Exhibits. See Index to Exhibits.

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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., as amended through February 28, 2018
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).
31.1**		Rule 13a-14(a)/15d-4(a) Certification of Chief Executive Officer
31.2**		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1*		Section 1350 Certifications
101		The following materials from the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2016 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Income (Loss); (iv) the Consolidated Statements of Cash Flows; and (v) related notes.

*Furnished not filed.

** Filed herewith.

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SIGNATURES

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


	HAYNES INTERNATIONAL, INC.


	/s/ Mark Comerford
	Mark Comerford
	President and Chief Executive Officer
	Date: May 3, 2018


	/s/ Daniel Maudlin
	Daniel Maudlin
	Vice President — Finance and Chief Financial Officer
	Date: May 3, 2018

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