Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

** **

**x****      Quarterly Report Pursuant to Section 13 or15(d) of the Securities Exchange Act of 1934**

** **

**For the quarterly period ended June 30, 2010**

** **

**or**

** **

**o****         Transition Report Pursuant to Section 13 or15(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 itscharter)

 

| **Delaware**                    | ** ** | **06-1185400**                    |
|---------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of |       | (IRS Employer Identification No.) |
| incorporation or organization)  |       |                              |

 

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

 

**(765) 456-6000**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Website, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes o  No o

 

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

 

| Large accelerated filer o |   | Accelerated filer x         |
|--------------------------------|--------|----------------------------------|
|                           |   |                             |
| Non-accelerated filer o   |   | Smaller reporting company o |

 

Indicate by check mark whether the registrant isa shell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes o  No x

 

As of August 1, 2010, the registrant had 12,144,079shares of Common Stock, $.001 par value, outstanding.

 

 

 

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Table of Contents

 

**HAYNES INTERNATIONAL, INC.and SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q**

**TABLE OF CONTENTS**

 
| ** **       | ** **                                                                                                                        | ** ** | **Page**   |
|------------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **PART I**  | **FINANCIAL  INFORMATION**                                                                                                        | ** ** | ** ** |
| Item 1.          | Unaudited Condensed  Consolidated Financial Statements                                                                            |       |       |
|             | Haynes International, Inc. and Subsidiaries:                                                                                 |       |       |
|             | Unaudited Consolidated Balance Sheets as of  September 30, 2009 and June 30, 2010                                       |       | 1          |
|             | Unaudited Consolidated Statements of Operations for  the Three and Nine Months Ended June 30, 2009 and 2010                  |       | 2          |
|             | Unaudited Consolidated Statements of Comprehensive  Income (Loss) for the Three and Nine Months Ended June 30, 2009 and 2010 |       | 3          |
|             | Unaudited Consolidated Statements of Cash Flows for  the Nine Months Ended June 30, 2009 and 2010                            |       | 4          |
|             | Notes to Consolidated Financial Statements                                                                                        |       | 5          |
| Item 2.          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                       |       | 15         |
| Item 3.          | Quantitative  and Qualitative Disclosures About Market Risk                                                                       |       | 28         |
| Item 4.          | Controls and  Procedures                                                                                                          |       | 29         |
|             |                                                                                                                              |       |       |
| **PART II** | **OTHER  INFORMATION**                                                                                                            |       |       |
| Item  6.         | Exhibits                                                                                                                          |       | 30         |
|             | Signatures                                                                                                                        |       | 31         |
|             | Index to Exhibits                                                                                                                 |       | 32         |

 

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Table of Contents

 

**PART 1****                           ****FINANCIAL INFORMATION**

Item 1.    FinancialStatements

** **

**HAYNESINTERNATIONAL, INC. and SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(Unaudited)**

**(in thousands, except share andper share data)**

 
| ** **                                                                                                                                                                                | ** ** | **September 30,  2009** | ** ** | **June 30,  2010** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                                                                                                                |       |                         |       |                    |       |
| Current assets:                                                                                                                                                                           |       |                         |       |                    |       |
| Cash and cash  equivalents                                                                                                                                                                |       | $                            | 105,095    |                    | $          | 58,590 |   |
| Restricted cash—current  portion                                                                                                                                                     |       | 110                          |       | 110                     |       |
| Accounts receivable,  less allowance for doubtful accounts of $1,310 and $1,288, respectively                                                                                        |       | 47,473                       |       | 53,497                  |       |
| Inventories                                                                                                                                                                               |       | 182,771                      |       | 235,304                 |       |
| Income taxes receivable                                                                                                                                                                   |       | 24,348                       |       | 14,660                  |       |
| Deferred income taxes                                                                                                                                                                     |       | 9,035                        |       | 9,258                   |       |
| Other current assets                                                                                                                                                                      |       | 645                          |       | 1,150                   |       |
| Total current assets                                                                                                                                                                      |       | 369,477                      |       | 372,569                 |       |
| Property, plant and  equipment, net                                                                                                                                                       |       | 105,820                      |       | 106,285                 |       |
| Deferred income  taxes—long term portion                                                                                                                                             |       | 58,843                       |       | 57,457                  |       |
| Prepayments and deferred  charges                                                                                                                                                         |       | 2,670                        |       | 2,584                   |       |
| Restricted cash—long  term portion                                                                                                                                                   |       | 110                          |       | —                  |       |
| Intangible assets, net                                                                                                                                                                    |       | 7,230                        |       | 6,811                   |       |
| Total assets                                                                                                                                                                              |       | $                            | 544,150    |                    | $          | 545,706 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                            |       |                         |       |                    |       |
| Current liabilities:                                                                                                                                                                      |       |                         |       |                    |       |
| Accounts payable                                                                                                                                                                          |       | $                            | 29,249     |                    | $          | 42,528 |   |
| Accrued expenses                                                                                                                                                                          |       | 10,312                       |       | 13,149                  |       |
| Accrued pension and  postretirement benefits                                                                                                                                              |       | 20,215                       |       | 18,920                  |       |
| Revolving credit  facilities                                                                                                                                                              |       | —                       |       | —                  |       |
| Deferred revenue —  current portion                                                                                                                                                  |       | 2,500                        |       | 2,500                   |       |
| Current maturities of  long-term obligations                                                                                                                                              |       | 110                          |       | 107                     |       |
| Total current  liabilities                                                                                                                                                                |       | 62,386                       |       | 77,204                  |       |
| Long-term obligations  (less current portion)                                                                                                                                             |       | 1,482                        |       | 1,382                   |       |
| Deferred revenue (less  current portion)                                                                                                                                                  |       | 40,329                       |       | 38,455                  |       |
| Non-current income taxes  payable                                                                                                                                                         |       | 292                          |       | 292                     |       |
| Accrued pension and  postretirement benefits                                                                                                                                              |       | 160,862                      |       | 155,804                 |       |
| Total liabilities                                                                                                                                                                         |       | 265,351                      |       | 273,137                 |       |
| Commitments and  contingencies (Note 6)                                                                                                                                                   |       | —                       |       | —                  |       |
| Stockholders’ equity:                                                                                                                                                                |       |                         |       |                    |       |
| Common stock, $0.001 par  value (40,000,000 shares authorized, 12,101,829 and 12,144,079 shares issued  and outstanding at September 30, 2009 and June 30, 2010,  respectively) |       | 12                           |       | 12                      |       |
| Preferred stock, $0.001  par value (20,000,000 shares authorized, 0 shares issued and outstanding)                                                                                        |       | —                       |       | —                  |       |
| Additional paid-in  capital                                                                                                                                                               |       | 227,734                      |       | 228,876                 |       |
| Accumulated earnings                                                                                                                                                                      |       | 103,509                      |       | 99,648                  |       |
| Accumulated other  comprehensive loss                                                                                                                                                     |       | (52,456                      | )          | (55,967                 | )          |
| Total stockholders’  equity                                                                                                                                                          |       | 278,799                      |       | 272,569                 |       |
| Total liabilities and  stockholders’ equity                                                                                                                                          |       | $                            | 544,150    |                    | $          | 545,706 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

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**HAYNES INTERNATIONAL, INC.and SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

**(in thousands, except share andper share data)**

 
| ** **                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Nine Months Ended  June 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                   | ** ** | **2009**                              | ** ** | **2010**                             | ** ** | **2009** | ** ** | **2010** | ** ** |
|                                         |       |                                  |       |                                 |       |   |   |   |   |
| Net revenues                                 |       | $                                     | 98,325     |                                 | $          | 101,271 |   | $ | 353,042 |   | $ | 276,898 |   |
| Cost of sales                                |       | 106,493                               |       | 84,417                               |       | 335,463 |   | 243,009 |   |
| Gross profit (loss)                          |       | (8,168                                | )          | 16,854                               |       | 17,579 |   | 33,889 |   |
| Selling, general and  administrative expense |       | 8,837                                 |       | 9,480                                |       | 27,719 |   | 25,643 |   |
| Research and technical  expense              |       | 757                                   |       | 637                                  |       | 2,396 |   | 1,998 |   |
| Impairment of goodwill                       |       | —                                |       | —                               |       | 43,737 |   | — |   |
| Operating income (loss)                      |       | (17,762                               | )          | 6,737                                |       | (56,273 | ) | 6,248 |   |
| Interest income                              |       | (42                                   | )          | (43                                  | )          | (70 | ) | (157 | ) |
| Interest expense                             |       | 87                                    |       | 36                                   |       | 566 |   | 123 |   |
| Income (loss) before income  taxes           |       | (17,807                               | )          | 6,744                                |       | (56,769 | ) | 6,282 |   |
| Provision for (benefit from)  income taxes   |       | (6,863                                | )          | 2,997                                |       | (7,460 | ) | 2,865 |   |
| Net income (loss)                            |       | $                                     | (10,944    | )                                    | $          | 3,747 |   | $ | (49,309 | ) | $ | 3,417 |   |
| Net income (loss) per share:                 |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                        |       | $                                     | (0.91      | )                                    | $          | 0.31 |   | $ | (4.11 | ) | $ | 0.28 |   |
| Diluted                                      |       | $                                     | (0.91      | )                                    | $          | 0.31 |   | $ | (4.11 | ) | $ | 0.28 |   |
| Weighted average shares  outstanding:        |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                        |       | 12,002,754                            |       | 12,049,779                           |       | 11,990,667 |   | 12,049,779 |   |
| Diluted                                      |       | 12,002,754                            |       | 12,161,957                           |       | 11,990,667 |   | 12,157,708 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

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**HAYNES INTERNATIONAL, INC.and SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOME (LOSS)**

**(Unaudited)**

**(in thousands)**

 
| ** **                                          | ** ** | **Three Months Ended****June 30,** | ** ** | **Nine Months Ended****June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                                          | ** ** | **2009**                                | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2010** | ** ** |
| Net income (loss)                                   |       | $                                       | (10,944    | )                                      | $          | 3,747 |   | $ | (49,309 | ) | $ | 3,417 |   |
| **Other  comprehensive income (loss), net of tax:** |       |                                    |       |                                   |       |   |   |   |   |
| Foreign currency translation  adjustment            |       | 4,529                                   |       | (1,340                                 | )          | (1,203 | ) | (3,511 | ) |
| Comprehensive income (loss)                         |       | $                                       | (6,415     | )                                      | $          | 2,407 |   | $ | (50,512 | ) | $ | (94 | ) |

 

The accompanying notes are an integral part of thesefinancial statements.

 

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**HAYNES INTERNATIONAL, INC.and SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(in thousands)**

 
| ** **                                                                                          | ** **                              | **Nine Months Ended********June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|-----------------------------------------|--------------------------------------------|------------|
| ** **                                                                                          | ** **                              | **2009**                                   | ** ** | **2010** | ** ** |
| **Cash  flows from operating activities:**                                                          |                                    |                                       |       |   |   |
| Net income (loss)                                                                                   |                                    | $                                          | (49,309    | ) | $ | 3,417 |   |
| Adjustments to reconcile net  income (loss) to net cash provided by (used in) operating activities: |                                    |                                       |       |   |   |
| Depreciation                                                                                        |                                    | 7,649                                      |       | 8,458 |   |
| Amortization                                                                                        |                                    | 766                                        |       | 419 |   |
| Impairment of goodwill                                                                              |                                    | 43,737                                     |       | — |   |
| Stock compensation expense                                                                          |                                    | 994                                        |       | 1,142 |   |
| Excess tax benefit from  option exercises                                                           |                                    | 9                                          |       | — |   |
| Deferred revenue                                                                                    |                                    | (1,876                                     | )          | (1,874 | ) |
| Deferred income taxes                                                                               |                                    | 2,858                                      |       | 1,139 |   |
| Loss on disposal of property                                                                        |                                    | 165                                        |       | 157 |   |
| Change in assets and  liabilities:                                                                  |                                    |                                       |       |   |   |
| Accounts receivable                                                                                 |                                    | 44,591                                     |       | (7,782 | ) |
| Inventories                                                                                         |                                    | 104,503                                    |       | (54,945 | ) |
| Other assets                                                                                        |                                    | 1,388                                      |       | (555 | ) |
| Accounts payable and accrued  expenses                                                              |                                    | (17,418                                    | )          | 17,493 |   |
| Income taxes                                                                                        |                                    | (29,371                                    | )          | 9,685 |   |
| Accrued pension and  postretirement benefits                                                        |                                    | (11,658                                    | )          | (6,256 | ) |
| Net cash provided by (used  in) operating activities                                                |                                    | 97,028                                     |       | (29,502 | ) |
|                                                                                                |                                    |                                       |       |   |   |
| **Cash  flows from investing activities:**                                                          |                                    |                                       |       |   |   |
| Additions to property, plant  and equipment                                                         |                                    | (7,463                                     | )          | (9,413 | ) |
| Change in restricted cash                                                                           |                                    | 110                                        |       | 110 |   |
| Net cash used in investing  activities                                                              |                                    | (7,353                                     | )          | (9,303 | ) |
|                                                                                                |                                    |                                       |       |   |   |
| **Cash  flows from financing activities:**                                                          |                                    |                                       |       |   |   |
| Dividends paid                                                                                      |                                    | —                                     |       | (7,278 | ) |
| Net decrease in revolving  credit facility                                                          |                                    | (11,812                                    | )          | — |   |
| Proceeds from exercise of  stock options                                                            |                                    | 848                                        |       | — |   |
| Excess tax benefit option  exercise                                                                 |                                    | (9                                         | )          | — |   |
| Payment for debt issuance  costs                                                                    |                                    | (316                                       | )          | — |   |
| Changes in long-term  obligations                                                                   |                                    | (1,449                                     | )          | (103 | ) |
| Net cash used in financing  activities                                                              |                                    | (12,738                                    | )          | (7,381 | ) |
|                                                                                                |                                    |                                       |       |   |   |
| Effect of exchange rates on  cash                                                                   |                                    | (79                                        | )          | (319 | ) |
| Increase (decrease) in cash  and cash equivalents                                                   |                                    | 76,858                                     |       | (46,505 | ) |
| Cash and cash equivalents,  beginning of period                                                     |                                    | 7,058                                      |       | 105,095 |   |
| Cash and cash equivalents,  end of period                                                           |                                    | $                                          | 83,916     |   | $ | 58,590 |   |
|                                                                                                |                                    |                                       |       |   |   |
| Supplemental disclosures of  cash flow information:                                                 |                                    |                                       |       |   |   |
| Cash paid during period for:                                                                        | Interest (net of capitalized  interest) |                                       | $          | 512 |   | $ | 40 |   |
|                                                                                                | Income taxes                            |                                       | $          | 20,365 |   | $ | 839 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

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**HAYNES INTERNATIONAL, INC.and SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**(in thousands, except share andper share data)**

 

**Note 1.   Basis of Presentation**

 

*Interim Financial Statements*

 

The accompanying unaudited condensed interimconsolidated financial statements are prepared in conformity with accountingprinciples generally accepted in the United States of America and suchprinciples are applied on a basis consistent with information reflected in our Form 10-Kfor the year ended September 30, 2009 filed with the Securities andExchange Commission (“SEC”). Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to the rules and regulationspromulgated by the SEC related to interim financial statements. In the opinionof management, the interim financial information includes all adjustments andaccruals, consisting only of normal recurring adjustments, which are necessaryfor a fair presentation of results for the respective interim periods. Theresults of operations for the three and nine months ended June 30, 2010are not necessarily indicative of the results to be expected for the fullfiscal year ending September 30, 2010 or any other interim period.

 

*Principles of Consolidation*

 

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

 

**Note 2.   New Accounting Pronouncements**

 

In December 2007, the Financial AccountingStandards Board (FASB) issued FASB Statement No. 141 (revised 2007), *Business Combinations* (“SFAS 141(R)”), which was primarilycodified into Topic 805 (*Business Combinations*)in the Accounting Standards Codification, or ASC.  This guidance requires that the fair value ofthe purchase price of an acquisition including the issuance of equitysecurities be determined on the acquisition date; requires that all assets,liabilities, noncontrolling interests, contingent consideration, contingencies,and in-process research and development costs of an acquired business berecorded at fair value at the acquisition date; requires that acquisition costsgenerally be expensed as incurred; requires that restructuring costs generallybe expensed in periods subsequent to the acquisition date; and requires thatchanges in deferred tax asset valuation allowances and acquired income taxuncertainties after the measurement period impact income tax expense. Thisguidance also expands disclosures related to business combinations and will beapplied prospectively to business combinations occurring after the beginning ofthe Company’s fiscal year 2010, except that business combinations consummatedprior to the effective date must apply SFAS 141(R) income tax requirementsimmediately upon adoption. The Company is currently evaluating the impact ofSFAS 141(R) related to future acquisitions, if any, on its financialposition, results of operations and cash flows.

 

In April 2008, the FASB issued FASB Staff PositionNo. 142-3, *Determination of the Useful Life ofIntangible Assets*, which is primarily codified into Topic 250 (*Intangibles-Goodwill and Other*) in the ASC. This guidanceamends the factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder SFAS 142. The intent of this FSP is to improve the consistencybetween the useful life of a recognized intangible asset under SFAS 142and the period of expected cash flows used to measure the fair value of theasset under SFAS 141(R), and other U.S. GAAP. This FSP was effectivefor the Company on October 1, 2009 and it had no impact on the Company’sconsolidated financial statements.

 

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In December 2008, the FASB issued FASB StaffPosition No. 132(R)-1, *Employers’ Disclosuresabout Postretirement Benefit Plan Assets*, which was primarilycodified into Topic 715 (*Compensation RetirementBenefits*) in the ASC. The guidance requires disclosures of theobjectives of postretirement benefit plan assets, investment policies andstrategies, categories of plan assets, fair value measurements of plan assets,and significant concentrations of risk. This guidance was effective for fiscalyears and interim periods beginning after December 15, 2009. The Companyplans to adopt this guidance October 1, 2010. The adoption of thisguidance is expected to increase the Company’s disclosures, but it is notexpected to have an impact on the Company’s consolidated financial statements.

 

**Note 3.   Inventories**

 

The following is a summary of the major classes ofinventories:

 
| ** **      | ** ** | **September 30,  2009** | ** ** | **June 30,  2010** | ** ** |
|-----------------|------------|------------------------------|------------|-------------------------|------------|
| Raw Materials   |       | $                            | 13,321     |                    | $          | 25,328 |   |
| Work-in-process |       | 87,322                       |       | 132,166                 |       |
| Finished Goods  |       | 81,228                       |       | 76,810                  |       |
| Other           |       | 900                          |       | 1,000                   |       |
|            |       | $                            | 182,771    |                    | $          | 235,304 |   |

 

**Note 4.   Income Taxes**

 

Income tax expense for the three and nine months ended June 30,2009 and 2010, differed from the U.S. federal statutory rate of 35% primarilydue to state income taxes, differing tax rates on foreign earnings and theimpact of permanent items with a pretax loss in fiscal 2009. The effective taxrate for the three months ended June 30, 2010 was 44.4% compared to 38.5%in the same period of fiscal 2009. The effective tax rate for the nine monthsended June 30, 2010 was 45.6% compared to 13.1% in the same period offiscal 2009. The increase in the effective tax rate is primarily attributableto a change in the state apportionment factor, which lowered the blended statetax rate resulting in an unfavorable reduction of our deferred tax asset.

 

**Note 5.   Pension and Post-retirement Benefits**

 

Components of net periodic pension and post-retirementbenefit cost for the three and nine months ended June 30, 2009 and 2010are as follows:

 
| ** **                | ** ** | **Three Months Ended  June 30,** | ** ** | **Nine Months Ended June 30,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                | ** ** | **Pension Benefits**                  | ** ** | **Other Benefits**                  | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
| ** **                | ** ** | **2009**                              | ** ** | **2010**                            | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** | **2010** | ** ** |
| Service cost              |       | $                                     | 597        |                                | $          | 898 |   | $ | 331 |   | $ | 51 |   | $ | 1,846 |   | $ | 2,696 |   | $ | 995 |   | $ | 154 |   |
| Interest cost             |       | 2,830                                 |       | 2,752                               |       | 1,231 |   | 1,205 |   | 8,734 |   | 8,425 |   | 3,694 |   | 3,615 |   |
| Expected return           |       | (2,365                                | )          | (2,511                              | )          | — |   | — |   | (7,279 | ) | (7,696 | ) | — |   | — |   |
| Amortizations             |       | 202                                   |       | 1,430                               |       | (1,327 | ) | (949 | ) | 606 |   | 4,313 |   | (3,980 | ) | (2,848 | ) |
| Net periodic benefit cost |       | $                                     | 1,264      |                                | $          | 2,569 |   | $ | 236 |   | $ | 307 |   | $ | 3,907 |   | $ | 7,738 |   | $ | 709 |   | $ | 921 |   |

 

The Company contributed $10,675 to Company sponsoreddomestic pension plans, $3,564 to its other post-retirement benefit plans and$701 to the U.K. pension plan for the nine months ended June 30,2010.  The Company presently expectsfuture contributions of $3,525 to its domestic pension plans, $1,236 to itsother post-retirement benefit plans and $259 to the U.K. pension plan for theremainder of fiscal 2010. The Pension Protection Act of 2006 requires fundingover a seven-year period to achieve 100% funded status.

 

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**Note 6. Legal, Environmental and OtherContingencies**

 

The Company is regularlyinvolved in litigation, both as a plaintiff and as a defendant, relating to itsbusiness and operations, including environmental and intellectual propertymatters. Future expenditures for environmental, intellectual property and otherlegal matters cannot be determined with any degree of certainty; however, basedon the facts presently known, management does not believe that such costs willhave a material effect on the Company’s financial position, results ofoperations or cash flows.

 

The Company believes thatany and all claims arising out of conduct or activities that occurred prior to March 29,2004 are subject to dismissal. On March 29, 2004, the Company and certainof its subsidiaries and affiliates filed voluntary petitions for relief underChapter 11 of Title 11 of the United States Bankruptcy Code in the UnitedStates Bankruptcy Court for the Southern District of Indiana (the “BankruptcyCourt”). On August 16, 2004, the Bankruptcy Court entered its Findings ofFact, Conclusions of Law, and Order Under 11 U.S.C. 1129(a) and (b) andFed. R. Bankr. P. 3020 Confirming the First Amended Joint Plan ofReorganization of Haynes International, Inc. and its Affiliated Debtorsand Debtors-in-Possession as Further Modified (the “Confirmation Order”). TheConfirmation Order and related Chapter 11 Plan, among other things, provide forthe release and discharge of prepetition claims and causes of action. TheConfirmation Order further provides for an injunction against the commencementof any actions with respect to claims held prior to the Effective Date of thePlan. The Effective Date occurred on August 31, 2004. When appropriate,the Company pursues the dismissal of lawsuits premised upon claims or causes ofaction discharged in the Confirmation Order and related Chapter 11 Plan. Thesuccess of this strategy is dependent upon a number of factors, including therespective court’s interpretation of the Confirmation Order and the uniquecircumstances of each case.

 

The Company is currently, and has in the past, beensubject to claims involving personal injuries allegedly relating to itsproducts. For example, the Company is presently involved in two actionsinvolving welding rod-related injuries, filed against numerous manufacturers,including the Company, in December 2008 in the Federal MDL Court in Ohioand in California State Court in February 2007, respectively, allegingthat the welding-related products of the defendant manufacturers harmed theusers of such products through the inhalation of welding fumes containingmanganese.  The Company believes that ithas defenses to these allegations, and that if the Company were found liable,the cases would not have a material effect on its financial position, resultsof operations or liquidity. In addition to these cases, the Company has in thepast been named a defendant in several other lawsuits, including 53 filed inthe state of California, alleging that its welding-related products harmed theusers of such products through the inhalation of welding fumes containingmanganese. The Company has since been voluntarily dismissed from all of theselawsuits on the basis of the release and discharge of claims contained in theConfirmation Order. While the Company contests such lawsuits vigorously, thereare several risks and uncertainties that may affect its liability for claimsrelating to exposure to welding fumes and manganese. For instance, in recentcases, at least two courts (in cases not involving Haynes) have refused todismiss claims relating to inhalation of welding fumes containing manganesebased upon a bankruptcy discharge order. Although the Company believes thefacts of these cases are distinguishable from the facts of its cases, there canbe no assurance that any or all claims against the Company will be dismissedbased upon the Confirmation Order, particularly claims premised, in part or infull, upon actual or alleged exposure on or after the date of the Confirmation Order.It is also possible that the Company will be named in additional suits allegingwelding-rod injuries. Should such litigation occur, although the Company mayhave applicable insurance, it is possible that the aggregate claims fordamages, if the Company is found liable, could have a material adverse effecton its financial condition, results of operations or liquidity.

 

TheCompany has received permits from the Indiana Department of EnvironmentalManagement, or IDEM, to close and to provide post-closure monitoring and carefor certain areas at the Kokomo facility previously used for the storage anddisposal of wastes, some of which are classified as hazardous under applicableregulations. Closure certification was received in fiscal 1988 for the South Landfillat the Kokomo facility and post-closure monitoring and care is ongoing there.Closure certification was received in fiscal 1999 for the North Landfill at theKokomo facility and post-closure monitoring and care are permitted and ongoingthere.  In fiscal 2007, IDEM issueda single post-closure permit applicable to both the North and South Landfills,which contain monitoring and post-closure care requirements.  In addition, IDEM required that aResource Conservation and Recovery Act, or RCRA, Facility Investigation, orRFI, be conducted in order to further evaluate one area of concern and onesolid waste management unit.  The RFIcommenced in fiscal 2008 and is ongoing.

 

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TheCompany has also received permits from the North Carolina Department ofEnvironment and Natural Resources, or NCDENR, to close and provide post-closuremonitoring and care for the hazardous waste lagoon at its Mountain Home, NorthCarolina facility. The lagoon area has been closed and is currently undergoingpost-closure monitoring and care. The Company is required to monitorgroundwater and to continue post-closure maintenance of the former disposalareas at each site. As a result, the Company is aware of elevated levels ofcertain contaminants in the groundwater and additional corrective actions bythe Company could be required.

 

As of June 30, 2010 andSeptember 30, 2009, the Company has accrued $1,516 for post-closuremonitoring and maintenance activities. In accordance with Statement of Position96-1, *Environmental Remediation Liabilities*,which was primarily codified into Topic 410-30 (*AssetRetirement and Environmental Obligations*) in the ASC, accruals forthese costs are calculated by estimating the cost to monitor and maintain eachpost-closure site and multiplying that amount by the number of years remainingin the 30 year post-closure monitoring period referred to above. At each fiscalyear-end, or earlier if necessary, the Company evaluates the accuracy of theestimates for these monitoring and maintenance costs for the upcoming fiscalyear. The accrual was based upon the undiscounted amount of the obligation of$2,123 which was then discounted using an appropriate discount rate. The costassociated with closing the sites has been incurred in financial periods priorto those presented, with the remaining cost to be incurred in future periodsrelated solely to post-closure monitoring and maintenance. Based on historicalexperience, the Company estimates that the cost of post-closure monitoring andmaintenance will approximate $134 per year over the remaining obligationperiod.

 

**Note 7.   Deferred Revenue**

 

OnNovember 17, 2006, the Company entered into a twenty-year agreement toprovide conversion services to Titanium Metals Corporation (“TIMET”) for up toten million pounds of titanium metal annually. TIMET paid the Company a $50,000up-front fee and will also pay the Company for its processing services duringthe term of the agreement (20 years) at prices established by the terms of theagreement.  TIMET may exercise an optionto have ten million additional pounds of titanium converted annually, providedthat it offers to loan up to $12,000 to the Company for certain capitalexpenditures which may be required to expand capacity.  In addition to the volume commitment, theCompany has granted TIMET a security interest on its four-high steckel rollingmill, along with rights of access if the Company enters into bankruptcy ordefaults on any financing arrangements. The Company has agreed not to manufacture titanium products (other thancold reduced titanium tubing).  TheCompany has also agreed not to provide titanium conversion services to any entityother than TIMET for the term of the Conversion Services Agreement.  The agreement contains certain defaultprovisions which could result in contract termination and damages, includingthe Company being required to return the unearned portion of the upfrontfee.  The cash received of $50,000 isrecognized in income on a straight-line basis over the 20-year term of theagreement. The portion of the upfront fee not recognized in income is shown asdeferred revenue on the consolidated balance sheet.  Taxes were paid on the up-front fee primarilyin the first quarter of fiscal 2009.

 

**Note 8.****         ****Intangible Assets and Goodwill**

 

Goodwillwas created primarily as a result of the Company’s reorganization pursuant toChapter 11 of the U.S. Bankruptcy Code and fresh start accounting. TheCompany has adopted SFAS No. 142, *Goodwill and OtherIntangible*Assets (“SFAS 142”) which was primarily codified intoTopic 350 *(Intangibles - Goodwill and Other)* inthe ASC. Pursuant to SFAS 142, goodwill is not amortized and the value ofgoodwill is reviewed at least annually for impairment. If the carrying value ofgoodwill exceeds its fair value, impairment of goodwill may exist resulting ina charge to earnings to the extent of goodwill impairment.  The Company estimated fair value using acombination of a market value approach using quoted market prices and an incomeapproach using discounted cash flow projections.

 

Duringthe second quarter of fiscal 2009, the Company determined that the weakening ofthe U.S. economy and the global credit crisis resulted in a reduction of theCompany’s market capitalization below its total stockholder’s equity value fora sustained period of time, which is an indication that goodwill may beimpaired.  As a result, the Companyperformed an interim step one goodwill impairment analysis as of February 28,2009 which indicated impairment.  Inconnection with the second step of the goodwill impairment test, the Companycompared the implied fair value of the reporting unit goodwill to the carryingvalue of that goodwill and determined that the carrying value of the Company’sone reporting unit exceeded its fair value. As a result, the Company recorded a 

 

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non-cashcharge of $43,737 for goodwill impairment in the second quarter of fiscal 2009,which was primarily non-deductible for tax purposes.

 

TheCompany also has patents, trademarks and other intangibles. As the patents havea definite life, they are amortized over lives ranging from two to fourteenyears. As the trademarks have an indefinite life, the Company tests them forimpairment at least annually. If the carrying value exceeds the fair value(determined by calculating a fair value based upon a discounted cash flow of anassumed royalty rate), impairment of the trademark may exist resulting in acharge to earnings to the extent of the impairment. The Company has non-competeagreements with lives of 5 to 7 years. Amortization of the patents,non-competes and other intangibles was $766 and $419 for the nine months ended June 30,2009 and 2010, respectively.

 

The following represents a summary of intangible assetsat September 30, 2009 and June 30, 2010:

 
| **September 30,  2009** | ** ** | **Gross  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Carrying  Amount** | ** ** |
|------------------------------|------------|-------------------|------------|-------------------------------|------------|----------------------|------------|
| Patents                      |       | $                 | 8,667      |                          | $          | (6,040               | )          | $ | 2,627 |   |
| Trademarks                   |       | 3,800             |       | —                        |       | 3,800                |       |
| Non-compete                  |       | 1,340             |       | (758                          | )          | 582                  |       |
| Other                        |       | 316               |       | (95                           | )          | 221                  |       |
| ** **                   |       | $                 | 14,123     |                          | $          | (6,893               | )          | $ | 7,230 |   |

 
| **June 30,  2010** | ** ** | **Gross  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Carrying  Amount** | ** ** |
|-------------------------|------------|-------------------|------------|-------------------------------|------------|----------------------|------------|
| Patents                 |       | $                 | 8,667      |                          | $          | (6,259               | )          | $ | 2,408 |   |
| Trademarks              |       | 3,800             |       | —                        |       | 3,800                |       |
| Non-compete             |       | 1,090             |       | (625                          | )          | 465                  |       |
| Other                   |       | 316               |       | (178                          | )          | 138                  |       |
| ** **              |       | $                 | 13,873     |                          | $          | (7,062               | )          | $ | 6,811 |   |

 

**Estimate of Aggregate Amortization Expense:**

 
| **Year Ended September 30,** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
| 2010 (remainder of  fiscal year)  |       | $          | 138        |   |
| 2011                              |       | 545        |       |
| 2012                              |       | 359        |       |
| 2013                              |       | 350        |       |
| 2014                              |       | 350        |       |
| 2015                              |       | 329        |       |
|                                   |            |            |            |  |

 

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**Note 9.  Net Income(Loss) Per Share**

 

Basic and diluted net income (loss) per share werecomputed as follows:

 
| ** **                                                                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Nine Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands except share  and per share data)**         | ** ** | **2009**                              | ** ** | **2010**                                  | ** ** | **2009** | ** ** | **2010** | ** ** |
| Numerator:                                                                           |       |                                  |       |                                      |       |   |   |   |   |
| Net Income (loss)                                                                    |       | $                                     | (10,944    | )                                         | $          | 3,747 |   | $ | (49,309 | ) | $ | 3,417 |   |
| Denominator:                                                                         |       |                                  |       |                                      |       |   |   |   |   |
| Weighted average shares  outstanding - Basic                                         |       | 12,002,754                            |       | 12,049,779                                |       | 11,990,667 |   | 12,049,779 |   |
| Effect of dilutive stock  options                                                    |       | 52,223                                |       | 60,178                                    |       | 53,303 |   | 55,929 |   |
| Effect of dilutive  restricted stock                                                 |       | 21,000                                |       | 52,000                                    |       | 21,000 |   | 52,000 |   |
| Adjustment for net loss                                                              |       | (73,223                               | )          | —                                    |       | (74,303 | ) | — |   |
| Weighted average shares  outstanding - Diluted                                       |       | 12,002,754                            |       | 12,161,957                                |       | 11,990,667 |   | 12,157,708 |   |
|                                                                                 |       |                                  |       |                                      |       |   |   |   |   |
| Basic net income (loss) per  share                                                   |       | $                                     | (0.91      | )                                         | $          | 0.31 |   | $ | (4.11 | ) | $ | 0.28 |   |
| Diluted net income (loss)  per share                                                 |       | $                                     | (0.91      | )                                         | $          | 0.31 |   | $ | (4.11 | ) | $ | 0.28 |   |
|                                                                                 |       |                                  |       |                                      |       |   |   |   |   |
| Number of stock option  shares excluded as their effect would be anti-dilutive       |       | 300,565                               |       | 219,132                                   |       | 304,981 |   | 215,255 |   |
| Number of restricted stock  shares excluded as their performance goal is not yet met |       | 52,050                                |       | 42,300                                    |       | 52,050 |   | 42,300 |   |

 

Anti-dilutive shares with respect to outstanding stockoptions have been properly excluded from the computation of diluted net income(loss) per share.  Restricted stock withperformance goals issued to certain key employees is not included in thecomputation as the performance goal is deemed not yet achieved.  Restricted stock issued to non-employeedirectors and certain key employees with no performance goal is included in thecomputation only when the Company has net income.

 

**Note 10.  Stock-Based Compensation**

 

**Restricted Stock Plan**

 

On February 23, 2009, the Company adopted arestricted stock plan that reserved 400,000 shares of common stock forissuance.  Grants of restricted stock arerights to acquire shares of the Company’s common stock, which vest inaccordance with the terms and conditions established by the CompensationCommittee.  The Compensation Committeemay set restrictions on certain grants based on the achievement of specificperformance goals and vesting of grants to participants will also betime-based.

 

Restricted stock grants are subject to forfeitureif employment or service terminates prior to the vesting period or if theperformance goal is not met, if applicable. The Company will assess, on an ongoing basis, the probability of whetherthe performance criteria will be achieved. The Company will recognizecompensation expense over the performance period if it is deemed probable thatthe goal will be achieved. The fair value of the Company’s restricted stock isdetermined based upon the closing price of the Company’s common stock on thegrant date. The plan provides for the adjustment of the number of shares coveredby an outstanding grant and the maximum number of shares for which restrictedstock may be granted in the event of a stock split, extraordinary dividend ordistribution or similar recapitalization event. Outstanding shares of restricted stock are entitled to receive dividendson shares of common stock.

 

On January 8, 2010, the Company granted46,000 shares of restricted stock to certain key employees and non-employeedirectors. The shares of restricted stock granted to employees will vest on thethird anniversary of their grant date, provided that (a) the recipient isstill an employee with the Company and (b) for a portion of the grant, theCompany has met a three year net income performance goal. The shares ofrestricted stock granted to 

 

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directors will vest on the earlier of (a) the thirdanniversary of the date of grant or (b) the failure of such non-employeedirector to be re-elected at an annual meeting of the stockholders of theCompany as a result of such non-employee director being excluded from thenominations for any reason other than cause. The fair value of the grant was$34.00 per share, the closing price of the Company’s common stock on the day ofthe grant.

 

The stock-based compensation expense forrestricted stock for the three months ended June 30, 2009 and 2010 was $77and $162, respectively, and for the nine months ended June 30, 2009 and 2010was $77 and $354, respectively. The following table summarizes the activityunder the restricted stock plan for the nine months ended June 30, 2010:

 
| ** **                           | ** ** | **Number of  Shares** | ** ** | **Weighted Average Fair  Value Per Share At********Grant Date** | ** ** |
|--------------------------------------|------------|----------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| Unvested  at September 30, 2009 |       | 52,050                     |       | $                                                                                             | 17.82      |   |
| Granted                              |       | 46,000                     |       | 34.00                                                                                         |       |
| Forfeited  / Canceled                |       | (3,750                     | )          | 17.82                                                                                         |       |
| Vested                               |       | —                     |       |                                                                                          |       |
| Unvested  at June 30, 2010      |       | 94,300                     |       | $                                                                                             | 25.71      |   |
| Expected  to vest                    |       | 67,000                     |       | $                                                                                             | 28.93      |   |

 

The remaining unrecognized compensation expenseat June 30, 2010 was $1,522 to be recognized over a weighted averageperiod of 2.43 years.

 

**Stock Option Plans**

 

TheCompany has two stock option plans that authorize the granting of non-qualifiedstock options to certain key employees and non-employee directors for thepurchase of a maximum of 1,500,000 shares of the Company’s common stock. Theoriginal option plan was adopted in August 2004 pursuant to the plan ofreorganization and provides for the grant of options to purchase up to1,000,000 shares of the Company’s common stock. In January 2007, theCompany’s Board of Directors adopted a second option plan that provides foroptions to purchase up to 500,000 shares of the Company’s common stock. Eachplan provides for the adjustment of the maximum number of shares for whichoptions may be granted in the event of a stock split, extraordinary dividend ordistribution or similar recapitalization event. Unless the CompensationCommittee determines otherwise, options granted under the option plans areexercisable for a period of ten years from the date of grant and vest 33 1/3%per year over three years from the grant date.

 

The fair value of option grants was estimated as of thedate of the grant pursuant to FASB No. 123(R), *Share-BasedPayment*, which was primarily codified into Topic 718 *(Compensation — Stock Compensation*) in the ASC*.* The Company has elected to use the Black-Scholes optionpricing model, which incorporates various assumptions including volatility,expected life, risk-free interest rates, expected forfeitures and dividend yields.The volatility is based on historical volatility of the Company’s common stockover the most recent period commensurate with the estimated expected term ofthe stock option granted. The Company uses historical volatility becausemanagement believes such volatility is representative of prospective trends.The expected term of an award is based on historical exercise data. Therisk-free interest rate assumption is based upon observed interest ratesappropriate for the expected term of the awards. The expected forfeiture rateis based upon historical experience. The dividend yield assumption is based onthe Company’s history and expectation regarding dividend payouts at the time ofthe grant.  Valuation of future grantsunder the Black-Scholes model will include a dividend yield. The followingassumptions were used for grants in fiscal year 2010:

 
| **Grant Date**   | ** ** | **Fair Value** | ** ** | **Dividend  Yield** | ** ** | **Risk-Free  Interest Rate** | ** ** | **Expected  Volatility** | ** ** | **Expected Life** | ** ** |
|-----------------------|------------|---------------------|------------|---------------------|------------|-----------------------------------|------------|--------------------------|------------|------------------------|------------|
| January 8,  2010 |       | $                   | 17.93      |                | 2.35       | %                                 | 1.62       | %                        | 89         | %                      | 3 years    |   |
|                       |            |                     |            |                     |            |                                   |            |                          |            |                        |            |  |

 

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On January 8, 2010, the Company granted 37,000options to certain employees at an exercise price of $34.00 per share, the fairmarket value of the Company’s common stock the day of the grant. During thefirst nine months of fiscal 2010, no options were exercised.

 

The stock-based employee compensation expense for stockoptions for the three months ended June 30, 2009 and 2010 was $330 and$234, respectively, and for the nine months ended June 30, 2009 and 2010was $917 and $788, respectively. The remaining unrecognized compensationexpense at June 30, 2010 was $1,252 to be recognized over a weightedaverage vesting period of 0.67 years.

 

Thefollowing table summarizes the activity under the stock option plans for thenine months ended June 30, 2010:

 
| ** **                              | ** ** | **Number of  Shares** | ** ** | **Aggregate  Intrinsic  Value********(000s)** | ** ** | **Weighted  Average  Exercise  Prices** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|-----------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------------------|------------|
| Outstanding  at September 30, 2009 |       | 394,737                    |       |                                          |       | $                                       | 40.20      |                                                    |       |   |
| Granted                                 |       | 37,000                     |       |                                          |       | $                                       | 34.00      |                                                    |       |   |
| Exercised                               |       | —                     |       |                                          |       |                                    |       |                                                    |       |
| Canceled                                |       | (26,584                    | )          |                                          |       |                                    |       |                                                    |       |
| Outstanding  at June 30, 2010      |       | 405,153                    |       | $                                             | 2,382      |                                    | $          | 38.98                                                   |       | 6.87 yrs. |   |
| Vested  or expected to vest             |       | 395,168                    |       | $                                             | 2,382      |                                    | $          | 38.98                                                   |       | 6.87 yrs. |   |
| Exercisable  at June 30, 2010      |       | 290,908                    |       | $                                             | 1,931      |                                    | $          | 40.28                                                   |       | 6.16 yrs. |   |

 
| **Grant Date**    | ** ** | **Exercise  Price Per  Share** | ** ** | **Remaining  Contractual  Life in Years** | ** ** | **Outstanding  Number of  Shares** | ** ** | **Exercisable  Number of  Shares** | ** ** |
|------------------------|------------|--------------------------------|------------|-----------------------------------------------------|------------|------------------------------------|------------|-----------------------------------------|------------|
| August 31, 2004   |       | $                              | 12.80      |                                                | 4.17       |                               | 86,886     |                                    | 86,886     |   |
| May 5, 2005       |       | 19.00                          |       | 4.83                                                |       | 8,334                              |       | 8,334                                   |       |
| February 21, 2006 |       | 29.25                          |       | 5.67                                                |       | 25,001                             |       | 25,001                                  |       |
| March 31, 2006    |       | 31.00                          |       | 5.75                                                |       | 10,000                             |       | 10,000                                  |       |
| March 30, 2007    |       | 72.93                          |       | 6.75                                                |       | 74,166                             |       | 74,166                                  |       |
| March 31, 2008    |       | 54.00                          |       | 7.75                                                |       | 91,666                             |       | 62,492                                  |       |
| October 1, 2008   |       | 46.83                          |       | 8.25                                                |       | 20,000                             |       | 6,666                                   |       |
| March 31, 2009    |       | 17.82                          |       | 8.75                                                |       | 52,100                             |       | 17,363                                  |       |
| January 8, 2010   |       | 34.00                          |       | 9.50                                                |       | 37,000                             |       | —                                  |       |
| ** **             |       |                           |       |                                                |       | 405,153                            |       | 290,908                                 |       |
|                        |            |                                |            |                                                     |            |                                    |            |                                         |            |  |

 

**Note 11.  Dividend**

 

In the third quarter of fiscal 2010, the Companydeclared and paid a regular quarterly cash dividend of $0.20 per outstandingshare of the Company’s common stock.  Thedividend was paid June 15, 2010 to stockholders of record at the close ofbusiness on June 1, 2010. The dividend cash pay-out was $2,429 for thequarter based on shares outstanding. Dividends paid year-to-date for fiscal2010 are $7,278.

 

The Company announced that the Board of Directorsdeclared a regular quarterly cash dividend of $0.20 per outstanding share ofthe Company’s common stock. The dividend is payable September 15, 2010 tostockholders of record at the close of business on September 1, 2010.

 

**Note 12.  Commodity Contracts**

 

On June 11, 2009, to mitigate the volatility of thenatural gas markets, the Company entered into a commodity swap-cash settlement agreementwith JPMorgan Chase Bank.  The Companyagreed to a fixed natural gas price on a total of 300,000 MMBTU, at asettlement rate of 50,000 MMBTU per month for a period spanning October 2009to March 2010.  As of June 30,2010, 300,000 MMBTU had been settled for a net realized hedging loss of $269.

 

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| ** **          | ** ** | ** **             | ** ** | ** **             | ** ** | ** **                      | ** ** | **Gain(loss) Recognized in Income (Loss)** | ** **    |
|---------------------|------------|------------------------|------------|------------------------|------------|---------------------------------|------------|----------------------------------------------------------------|---------------|
| ** **          | ** ** | **Fair Value**    | ** ** | **Statement of**  | ** ** | **Nine months Ended** | ** ** |
| ** **          | ** ** | **Balance Sheet** | ** ** | **September 30,** | ** ** | **June 30,**               | ** ** | **Operations**                                                 | ** **    | **June 30,** | ** ** |
| ** **          | ** ** | **Location**           | ** ** | **2009**               | ** ** | **2010**                        | ** ** | **Location**                                                   | ** **    | **2009** | ** ** | **2010** | ** ** |
| Commodity Contracts |       | Accts  Receivable      |       | $                      | 51         |                            | —     |                                                           | Cost of Sales |   | (84 | ) | (185 | ) |
|                |       | Accounts  Payable      |       | $                      | (134       | )                               | —     |                                                           |          |   |   |   |   |   |

 

**Note 13.  Fair Value Measurements**

 

On October 1, 2008, the Company adopted the provisions of SFASNo. 157,*  Fair Value Measurements*, as amended by FSP FAS 157-3, for assets and liabilities measured at fairvalue on a recurring basis, which was primarily codified into FASB ASC 820-10 (*Fair Value Measurements and Disclosures)* in the ASC.  This standard applies to non-financial assetsand non-financial liabilities, except those that are recognized or disclosed inthe financial statements at fair value at least annually beginning October 1,2009.  FASB ASC 820-10 establishes aframework for measuring fair value, clarifies the definition of fair valuewithin that framework and expands disclosures about the use of fair valuemeasurements.  Fair value is defined asthe price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at themeasurement date. A fair value measurement assumes that the transaction to sellthe asset or transfer the liability occurs in the principal market for theasset or liability or, in the absence of a principal market, the mostadvantageous market for the asset or liability.

 

FASB ASC 820-10 specifies a hierarchy of valuation techniques basedupon whether the inputs to those valuation techniques reflect assumptions thatother market participants would use based upon market data obtained fromindependent sources (observable inputs) or reflect the Company’s ownassumptions of market participant valuation (unobservable inputs). Valuationtechniques used to measure fair value under FASB ASC 820-10 must maximize theuse of observable inputs and minimize the use of unobservable inputs. The fairvalue hierarchy prioritizes the use of inputs used in valuation techniques intothe following three levels:

 
| · | 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 tomeasure fair value and classifies such items within Level 1. If quoted marketprices are not available, fair value is based upon internally-developed modelsthat use, where possible, current market-based or independently-sourced marketparameters such as interest rates and currency rates. Items valued usinginternally-generated models are classified according to the lowest level inputor value driver that is significant to the valuation. If quoted market prices arenot available, the valuation model used depends on the specific asset orliability being valued.

 

Pursuant to this guidance*,*the Company measures and reports the commodity swap-cash settlement agreementfor natural gas (refer to Note 12 for more information) at fair value.

 

The following table represents the Company’s fair value hierarchy forits financial assets and liabilities (cash equivalents and commodity contracts)measured at fair value on a recurring basis as of September 30, 2009 and June 30,2010:

 

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| ** **                                 | ** ** | **Fair Value Measurements at Reporting Date Using:** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|
| **September 30,  2009**               | ** ** | **Level 1**                                          | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| **Assets:**                                | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and money market  funds               |       | $                                                    | 105,095    |   | $ | — |   | $ | — |   | $ | 105,095 |   |
| Commodity contracts  (accounts receivable) |       | —                                               |       | 51 |   | — |   | 51 |   |
| Total assets                               |       | $                                                    | 105,095    |   | $ | 51 |   | $ | — |   | $ | 105,146 |   |
| **Liabilities:**                           |       |                                                 |       |   |   |   |   |   |   |
| Commodity contracts  (accounts payable)    |       | —                                               |       | 134 |   | — |   | 134 |   |
| Total liabilities                          |       | $                                                    | —     |   | $ | 134 |   | $ | — |   | $ | 134 |   |

 
| ** **                   | ** ** | **Fair Value Measurements at Reporting Date Using:** | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|
| **June 30,  2010**      | ** ** | **Level 1**                                          | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| **Assets:**                  |       |                                                 |       |   |   |   |   |   |   |
| Cash and money market  funds |       | $                                                    | 58,590     |   | $ | — |   | $ | — |   | $ | 58,590 |   |
| Total assets                 |       | $                                                    | 58,590     |   | $ | — |   | $ | — |   | $ | 58,590 |   |
| **Liabilities:**             |       |                                                 |       |   |   |   |   |   |   |
| Total liabilities            |       | $                                                    | —     |   | $ | — |   | $ | — |   | $ | — |   |

 

The Company had no Level 3 assets or liabilities as of September 30,2009 or June 30, 2010.

 

**Note 14. Subsequent Event**

 

On July 1, 2010, the Company announced that themembership of the United Steelworkers Local 2958 (USW) ratified an agreementcovering approximately 485 employees at the Company’s Kokomo, Indianaplant and the Lebanon, Indiana service center.  The new three-yearagreement includes a lump sum payout of four thousand dollars for coveredemployees and wage increases of 0.0%, 2.0% and 2.0% in 2010, 2011 and2012.  This agreement succeeds an existing agreement that expiredJune 30, 2010.  The one-timelump sum payment total of $2,108 (including employer taxes) was paid in July 2010and will be expensed on a straight-line basis over the three-year life of thecontract as the payment allows for a lower wage increase over the term of theagreement.

 

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**Item 2.            Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

References to years or portions of years inManagement’s Discussion and Analysis of Financial Condition and Results ofOperations refer to the Company’s fiscal years ended September 30, unlessotherwise indicated*.*

 

*This Quarterly Report on Form 10-Q (this “Form 10-Q”)contains statements that constitute “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995, Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934. Those statements appear in a number of places in this Form 10-Qand may include, but are not limited to, statements regarding the intent,belief or current expectations of the Company or its management with respect tostrategic plans; revenues; financial results; backlog balances; trends in theindustries that consume the Company’s products; global economic and politicalconditions; production levels at the Company’s Kokomo, Indiana facility;commercialization of the Company’s production capacity; and the Company’sability to develop new products.  Readersare cautioned that any such forward-looking statements are not guarantees offuture performance and involve risks and uncertainties. Actual results maydiffer materially from those in the forward-looking statements as a result ofvarious factors, many of which are beyond the Company’s control.*

 

*The Company has based these forward-lookingstatements on its current expectations and projections about futureevents.  Although the Company believes that the assumptions on which theforward-looking statements contained herein are based are reasonable, any ofthose assumptions could prove to be inaccurate. As a result, theforward-looking statements based upon those assumptions also could beincorrect.  Risks and uncertainties, some of which are discussed in Item1A. of Part 1 to the Company’s Annual Report on Form 10-K for thefiscal year ended September 30, 2009, may affect the accuracy offorward-looking statements.*

 

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

 

**Business Overview**

 

Haynes International, Inc. (“Haynes” or “theCompany”) 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 focusedon developing, manufacturing, marketing and distributing technologicallyadvanced, high-performance alloys, which are sold primarily in the aerospace,chemical processing and land-based gas turbine industries. The Company’sproducts consist of high temperature resistant alloys, or HTA products, andcorrosion resistant alloys, or CRA products. HTA products are used by manufacturers of equipment that is subjected toextremely high temperatures, such as jet engines for the aerospace market, gasturbine engines used for power generation and waste incineration, andindustrial heating equipment.  CRAproducts are used in applications that require resistance to very corrosivemedia found in chemical processing, power plant emissions control and hazardouswaste treatment.  The Company believes itis one of four principal producers of high-performance alloys in sheet, coiland plate forms. The Company also produces its products as seamless and weldedtubulars, and in slab, bar, billet and wire forms.

 

The Company has manufacturing facilities inKokomo, Indiana; Arcadia, Louisiana; and Mountain Home, North Carolina.The Kokomo facility specializes in flat products, the Arcadia facilityspecializes in tubular products and the Mountain Home facility specializes in wireproducts.  The Company markets itsproducts primarily through its direct sales organization, which includes 12service and/or sales centers in the United States, Europe, Asia and India. Allof these centers are company-operated.

 

**Subsequent Event**

 

On July 1, 2010, the Company announced that themembership of the United Steelworkers Local 2958 (USW) ratified an agreementcovering approximately 485 employees at the Company’s Kokomo, Indianaplant and the Lebanon, Indiana service center.  The new three-year agreement includes a lumpsum payout of four thousand dollars for covered employees and wage increases of0.0%, 2.0% and 2.0% in 2010, 2011 and 2012.  This agreement succeeds anexisting agreement that expired June 30, 2010.  The one-time lump sum payment total of $2.1million 

 

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(including employer taxes) waspaid in July 2010 and will be expensed on a straight-line basis over thethree-year life of the contract as the payment allows for a lower wage increaseover the term of the agreement.

 

**Dividend**

 

In the third quarter of fiscal 2010, the Companydeclared and paid a regular quarterly cash dividend of $0.20 per outstandingshare of the Company’s common stock.  Thedividend was paid June 15, 2010 to stockholders of record at the close ofbusiness on June 1, 2010. The dividend cash pay-out was $2.4 million forthe quarter based on shares outstanding. Dividends paid year-to-date for fiscal2010 are $7.3 million.

 

On August 5, 2010, the Company announced that theBoard of Directors declared a regular quarterly cash dividend of $0.20 peroutstanding share of the Company’s common stock. The dividend is payable September 15,2010 to stockholders of record at the close of business on September 1,2010. The aggregate cash payout based on current shares outstanding will beapproximately $2.4 million, or approximately $9.7 million on an annualizedbasis.

 

**Outlook**

 

*General*

 

Management expects that net revenues and volume in thefourth quarter of fiscal 2010 and first quarter of fiscal 2011 will at leastequal and possibly improve from the levels of the third quarter of fiscal2010.  Market demand and the mix ofproducts being sold have improved since the fourth quarter of fiscal 2009.Improved market demand is primarily reflected by transactional service centerbusiness, where volume and pricing have improved throughout fiscal 2010,contributing to better than anticipated results. Although uncertainty in themarketplace continues, the Company’s backlog is showing signs that our endmarkets, particularly the aerospace market, are improving.

 

Management also expects that net income for the next twofiscal quarters will at least equal and possibly exceed that of the thirdfiscal quarter of 2010. Although volumes have improved, results for eachquarter will continue to be unfavorably impacted by reduced absorption of fixedmanufacturing costs due to less than optimal volumes.  In addition, the market environment continuesto place downward pressure on prices. The unfavorable effect of both theseitems should have less of an impact on the Company’s operating results if thebusiness environment continues to improve.

 

Controllable working capital, which includes accountsreceivable, inventory, accounts payable and accrued expenses, increased duringfiscal 2010. Accounts receivable increased during fiscal 2010 due to increasedsales while days sales outstanding remained flat. Management anticipates thataccounts receivable at fiscal year-end will be approximately equal to thecurrent balance as net revenues are also expected to remain at least flatbetween quarters. Inventory increased significantly during the fiscal yearprimarily due to staging of work-in-process inventory for initiation of theinventory pull process, staging of inventory as safety stock for customers inthe event of a work stoppage associated with the collective bargainingagreement negotiation, and increased sales volumes. The process of reducinginventory started in July and management expects that by the end of fiscal2010, inventory will be reduced by approximately $30.0 million.  Accounts payable and accrued expensesincreased from the beginning of the year to equal $55.7 million at June 30,2010 due to the increased inventory requirements and is anticipated, inconjunction with the inventory reduction, to approximate a balance of $40.0million by the end of fiscal 2010. As a result of the above, and the net effectof other sources and uses of cash, management anticipates that the cash balanceat June 30, 2010 of $58.6 million will increase to approximately $73.0million by the end of fiscal 2010.

 

*Backlog*

 

Increasing order entry activity contributed toimprovement in backlog at June 30, 2010 as compared to March 31,2010.  Backlog dollars were $130.9 million at June 30, 2010, anincrease of approximately 5.1% from $124.6 million at March 31,2010.  This increase is the result of a 7.5% increase in backlog averageselling price, which was partially offset by a 2.2% decline in backlogpounds.  Management expects the backlog dollars and pounds to 

 

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increase modestly through the next two fiscal quarters.

 

*Competition and Pricing*

 

Although volumes and productpricing increased in the third quarter of fiscal 2010, the Company continued toexperience intense price competition in the marketplace, particularly in milldirect project business. This competition continues to require the Company toaggressively price project business orders, which has unfavorably impacted theCompany’s gross profit margin and net income. However, the impact of the pricecompetition was less severe in the third quarter of fiscal 2010 than in thefirst and second quarters of fiscal 2010, which is reflected as improvedproduct pricing in the third quarter.

 

Average selling price hasincreased 5.6% since the first quarter of fiscal 2010. This increase reflectsboth a higher priced mix of alloys and forms and a modest improvement in demandin the Company’s end markets.  Currentselling prices continue to be impacted by both the competitive environment andthe volatility of raw material in the market place, which will continue totemper attempts to increase prices. If market conditions continue to improve,pricing competition in the high-performance alloy industry may begin to easefurther in future quarters.  The Companycontinues to respond to this competition by increasing emphasis on servicecenters, offering value-added services, improving its cost structure, andfocusing on delivery-times and reliability.

 

**Quarter over Quarter Gross ProfitMargin Trend**

 

Gross profit margin and gross profit marginpercentage continued the trend of sequential improvement which began in thefourth quarter of fiscal 2009.

 
| ** **                  | ** ** | **Trend of Gross Profit Margin and****Gross Profit Margin Percentage for Fiscal  2009 and 2010** | ** ** |
|-----------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **Quarter Ended**                                                                                | ** ** |
| **(dollars  in thousands)** | ** ** | **December 31,****2008**                                                                    | ** ** | **March 31,****2009** | ** ** | **June 30,****2009** | ** ** | **September 30,****2009** | ** ** | **December 31,****2009** | ** ** | **March 31,****2010** | ** ** | **June 30,  2010** | ** ** |
| Net Revenues                |       | $                                                                                                | 134,304    |   | $ | 120,413 |   | $ | 98,325 |   | $ | 85,591 |   | $ | 81,008 |   | $ | 94,619 |   | $ | 101,271 |   |
| Gross Profit Margin         |       | $                                                                                                | 18,750     |   | $ | 6,997 |   | $ | (8,168 | ) | $ | 4,904 |   | $ | 6,845 |   | $ | 10,190 |   | 16,854 |   |
| Gross Profit Margin %       |       | 13.9                                                                                             | %          | 5.8 | % | (8.3 | )% | 5.7 | % | 8.5 | % | 10.8 | % | 16.6 | % |
|                             |            |                                                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The continued improvement in gross profit marginand gross profit margin percentage is primarily due to a combination of risingvolume, improved product mix, improved cost structure of the Company and amodestly improving market environment. Service center transactional business volumes and prices have improved,particularly in the aerospace market, due to significant destocking by theCompany’s customers during the last two years. The Company’s sales to theland-based gas turbine market appear to be strengthening, with backlog for thismarket increasing by 22.5% since September 30, 2009. Increased activity inthe repair and maintenance business drove the Company’s revenues from sales tothe chemical processing market to this highest level since the first quarter offiscal 2009. Pounds shipped to the market in the third quarter reached thehighest level of any quarter in fiscal 2009 and 2010. The “Other” marketcategory year-over-year activity for revenues and volume is essentially equalto the comparable period of the last fiscal year.

 

Since the fourth quarter of fiscal 2009, cost ofgoods sold per pound has improved as a result of (i) a significantreduction in the amount of higher cost raw material from inventory, whichimpacted cost of goods sold in fiscal 2009, (ii) manufacturing staffingreductions started in the second quarter of fiscal 2009 which continued throughthe fourth quarter of fiscal 2009, (iii) operating efficienciesattributable to equipment upgrades, particularly in the sheet finishingoperations and (iv) continued implementation of lean manufacturingtechniques.  In summary, the modestimprovement in market conditions in our markets and improved cost structurehave resulted in an improving gross profit margin since the third quarter offiscal 2009.

 

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**Quarterly Market Information**

 

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

 
| ** **                         | ** ** | **Quarter Ended**           | ** ** |
|------------------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **December 31,  2008** | ** ** | **March 31,  2009** | ** ** | **June 30,  2009** | ** ** | **September 30,  2009** | ** ** | **December 31,  2009** | ** ** | **March 31,  2010** | ** ** | **June 30,  2010** | ** ** |
| **Backlog**(1)                     |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Dollars (in thousands)             |       | $                           | 199,667    |   | $ | 153,039 |   | $ | 113,420 |   | $ | 106,680 |   | $ | 110,406 |   | $ | 124,571 |   | $ | 130,885 |   |
| Pounds (in thousands)              |       | 7,287                       |       | 5,557 |   | 4,468 |   | 4,544 |   | 4,915 |   | 5,805 |   | 5,675 |   |
| Average selling price  per pound   |       | $                           | 27.40      |   | $ | 27.54 |   | $ | 25.39 |   | $ | 23.48 |   | $ | 22.46 |   | $ | 21.46 |   | $ | 23.06 |   |
| **Average nickel price per pound** |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| London Metals Exchange(2)          |       | $                           | 4.39       |   | $ | 4.40 |   | $ | 6.79 |   | $ | 7.93 |   | $ | 7.75 |   | $ | 10.19 |   | $ | 8.79 |   |

 

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

(2)             Representsthe average price for a cash buyer as reported by the London Metals Exchangefor the 30 days ending on the last day of the period presented.

 
| ** **                                                 | ** ** | **Market Activity Per Quarter Ended** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                 | ** ** | **December 31,  2008**           | ** ** | **March 31,  2009** | ** ** | **June 30,  2009** | ** ** | **September 30,  2009** | ** ** | **December 31,  2009** | ** ** | **March 31,  2010** | ** ** | **June 30,  2010** | ** ** |
| **Net revenues** (in thousands)                            |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Aerospace                                                  |       | $                                     | 49,721     |   | $ | 45,200 |   | $ | 34,959 |   | $ | 30,158 |   | $ | 28,375 |   | $ | 33,495 |   | $ | 36,739 |   |
| Chemical processing                                        |       | 30,883                                |       | 26,025 |   | 26,944 |   | 25,803 |   | 20,828 |   | 18,333 |   | 27,461 |   |
| Land-based gas turbines                                    |       | 32,145                                |       | 28,648 |   | 22,087 |   | 14,821 |   | 14,966 |   | 20,028 |   | 18,412 |   |
| Other markets                                              |       | 19,166                                |       | 17,562 |   | 11,529 |   | 11,152 |   | 13,080 |   | 19,426 |   | 15,540 |   |
| Total product revenue                                      |       | 131,915                               |       | 117,435 |   | 95,519 |   | 81,934 |   | 77,249 |   | 91,282 |   | 98,152 |   |
| Other revenue                                              |       | 2,389                                 |       | 2,978 |   | 2,806 |   | 3,657 |   | 3,759 |   | 3,337 |   | 3,119 |   |
| **Net revenues**                                           |       | $                                     | 134,304    |   | $ | 120,413 |   | $ | 98,325 |   | $ | 85,591 |   | $ | 81,008 |   | $ | 94,619 |   | $ | 101,271 |   |
|                                                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Shipments by markets** (in thousands of  pounds)         |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Aerospace                                                  |       | 1,653                                 |       | 1,648 |   | 1,387 |   | 1,261 |   | 1,221 |   | 1,435 |   | 1,581 |   |
| Chemical processing                                        |       | 947                                   |       | 1,170 |   | 1,077 |   | 1,337 |   | 1,155 |   | 811 |   | 1,372 |   |
| Land-based gas turbines                                    |       | 1,507                                 |       | 1,680 |   | 1,405 |   | 872 |   | 946 |   | 1,291 |   | 1,106 |   |
| Other markets                                              |       | 691                                   |       | 871 |   | 511 |   | 467 |   | 605 |   | 867 |   | 665 |   |
| **Total shipments**                                        |       | 4,798                                 |       | 5,369 |   | 4,380 |   | 3,937 |   | 3,927 |   | 4,404 |   | 4,724 |   |
|                                                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Average selling price per pound**                        |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Aerospace                                                  |       | $                                     | 30.08      |   | $ | 27.43 |   | $ | 25.20 |   | $ | 23.92 |   | $ | 23.24 |   | $ | 23.34 |   | $ | 23.24 |   |
| Chemical processing                                        |       | 32.61                                 |       | 22.24 |   | 25.02 |   | 19.30 |   | 18.03 |   | 22.61 |   | 20.02 |   |
| Land-based gas turbines                                    |       | 21.33                                 |       | 17.05 |   | 15.72 |   | 17.00 |   | 15.82 |   | 15.51 |   | 16.65 |   |
| Other markets                                              |       | 27.74                                 |       | 20.16 |   | 22.56 |   | 23.88 |   | 21.62 |   | 22.41 |   | 23.37 |   |
| **Total product** (excluding other  revenue)               |       | 27.49                                 |       | 21.87 |   | 21.81 |   | 20.81 |   | 19.67 |   | 20.73 |   | 20.78 |   |
| **Total average selling price** (including other  revenue) |       | 27.99                                 |       | 22.43 |   | 22.45 |   | 21.74 |   | 20.63 |   | 21.48 |   | 21.44 |   |

 

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**Resultsof Operations for the Three Months Ended June 30, 2010 Compared to theThree Months Ended June 30, 2009**

 
| ** **                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Change** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|------------|------------|
| **($ in thousands)**                    | ** ** | **2009**                              | ** ** | **2010**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| Net revenues                                 |       | $                                     | 98,325     |       | 100.0      | % | $ | 101,271 |   | 100 | % | $ | 2,946 |   | 3.0 | % |
| Cost of sales                                |       | 106,493                               |       | 108.3      | %          | 84,417 |   | 83.4 | % | (22,076 | ) | (20.7 | )% |
| Gross profit                                 |       | (8,168                                | )          | (8.3       | )%         | 16,854 |   | 16.6 | % | 25,022 |   | 306.3 | % |
| Selling, general and  administrative expense |       | 8,837                                 |       | 9.0        | %          | 9,480 |   | 9.4 | % | 643 |   | 7.3 | % |
| Research and technical  expense              |       | 757                                   |       | 0.8        | %          | 637 |   | 0.6 | % | (120 | ) | 15.9 | % |
| Operating income (loss)                      |       | (17,762                               | )          | (18.1      | )%         | 6,737 |   | 6.7 | % | 24,499 |   | 137.9 | % |
| Interest income                              |       | (42                                   | )          | 0.0        | %          | (43 | ) | 0.0 | % | (1 | ) | (2.4 | )% |
| Interest expense                             |       | 87                                    |       | 0.0        | %          | 36 |   | 0.0 | % | (51 | ) | (58.6 | )% |
| Income (loss) before income  taxes           |       | (17,807                               | )          | (18.1      | )%         | 6,744 |   | 6.7 | % | 24,551 |   | 137.9 | % |
| Provision for (benefit from)  income taxes   |       | (6,863                                | )          | (7.0       | )%         | 2,997 |   | 3.0 | % | 9,860 |   | 143.7 | % |
| Net income (loss)                            |       | $                                     | (10,944    | )          | (11.1      | )% | $ | 3,747 |   | 3.7 | % | $ | 14,691 |   | 134.2 | % |

 

Thefollowing table includes a breakdown of net revenues, shipments, and averageselling prices to the markets served by Haynes for the periods shown.

 
| ** **                                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Change** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| **By market**                                               | ** ** | **2009**                                   | ** ** | **2010**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| **Net revenues** (in  thousands)                            |       |                                       |       |       |       |   |   |   |   |
| Aerospace                                                   |       | $                                          | 34,959     |       | $          | 36,739 |   | $ | 1,780 |   | 5.1 | % |
| Chemical processing                                         |       | 26,944                                     |       | 27,461     |       | 517 |   | 1.9 | % |
| Land-based gas turbines                                     |       | 22,087                                     |       | 18,412     |       | (3,675 | ) | (16.6 | )% |
| Other markets                                               |       | 11,529                                     |       | 15,540     |       | 4,011 |   | 34.8 | % |
| **Total  product revenue**                                  |       | 95,519                                     |       | 98,152     |       | 2,633 |   | 2.8 | % |
| Other revenue                                               |       | 2,806                                      |       | 3,119      |       | 313 |   | 11.1 | % |
| **Net  revenues**                                           |       | $                                          | 98,325     |       | $          | 101,271 |   | $ | 2,946 |   | 3.0 | % |
|                                                        |       |                                       |       |       |       |   |   |   |   |
| **Pounds by markets****(in thousands)                       |       |                                       |       |       |       |   |   |   |   |
| Aerospace                                                   |       | 1,387                                      |       | 1,581      |       | 194 |   | 14.0 | % |
| Chemical processing                                         |       | 1,077                                      |       | 1,372      |       | 295 |   | 27.4 | % |
| Land-based gas turbines                                     |       | 1,405                                      |       | 1,106      |       | (299 | ) | (21.3 | )% |
| Other markets                                               |       | 511                                        |       | 665        |       | 154 |   | 30.1 | % |
| **Total  shipments**                                        |       | 4,380                                      |       | 4,724      |       | 344 |   | 7.9 | % |
|                                                        |       |                                       |       |       |       |   |   |   |   |
| **Average selling price per pound**                         |       |                                       |       |       |       |   |   |   |   |
| Aerospace                                                   |       | $                                          | 25.20      |       | $          | 23.24 |   | $ | (1.96 | ) | (7.8 | )% |
| Chemical processing                                         |       | 25.02                                      |       | 20.02      |       | (5.00 | ) | (20.0 | )% |
| Land-based gas turbines                                     |       | 15.72                                      |       | 16.65      |       | 0.93 |   | 5.9 | % |
| Other markets                                               |       | 22.56                                      |       | 23.37      |       | 0.81 |   | 3.6 | % |
| **Total  product**(excluding  other revenue)                |       | 21.81                                      |       | 20.78      |       | (1.03 | ) | (4.7 | )% |
| **Total  average selling price** (including other  revenue) |       | 22.45                                      |       | 21.44      |       | (1.01 | ) | (4.5 | )% |

 

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*Net Revenues.* Net revenues were $101.3 million in thethird quarter of fiscal 2010, an increase of 3.0% from $98.3 million in thesame period of fiscal 2009, due to an increase in volume partially offset by adecrease in the average selling price per pound.  Volume was 4.7 million pounds in the thirdquarter of fiscal 2010, an increase of 7.9% from 4.4 million pounds in the sameperiod of fiscal 2009.  The aggregateaverage selling price was $21.44 per pound in the third quarter of fiscal 2010,a decrease of 4.5% from $22.45 per pound in the same period of fiscal2009.  As discussed above under “Outlook”,competition in the Company’s primary markets continued to unfavorably impactthe average selling price in the third quarter of fiscal 2010. The Company’sconsolidated backlog was $130.9 million at June 30, 2010, an increase of5.1% from $124.6 million at March 31, 2010. This increase reflects thecombination of a 7.5% increase in backlog average selling price partiallyoffset by a 2.6% decrease in backlog pounds.

 

Salesto the aerospace market were $36.7 million in the third quarter of fiscal 2010,an increase of 5.1% from $35.0 million in the same period of fiscal 2009, dueto a 14.0% increase in volume, which was partially offset by a 7.8% decrease inthe average selling price per pound. Volume was impacted by increased marketdemand as a result of the aero engine supply chain beginning to restockinventories. The average selling price per pound decreased due to a product mixchange.

 

Salesto the chemical processing market were $27.5 million in the third quarter offiscal 2010, an increase of 1.9% from $26.9 million in the same period offiscal 2009, due to a 27.4% increase in volume offset by a 20.0% decrease inaverage selling price.  Volume wasaffected by an increase in major plant retrofits and increased maintenance andrepair work. However, major plant retrofits are typically competitively bid,which often results in a lower average selling price than transactionalbusiness.

 

Salesto the land-based gas turbine market were $18.4 million in the third quarter offiscal 2010, a decrease of 16.6% from $22.1 million for the same period offiscal 2009, due to a decrease of 21.3% in volume partially offset by a 5.9%increase in the average selling price per pound. The decrease in volume is dueto reduced activity by original equipment manufacturers. The average sellingprice per pound increased due to a product mix change.

 

Salesto other markets were $15.5 million in the third quarter of fiscal 2010, anincrease of 34.8% from $11.5 million in the same period of fiscal 2009, due toa 3.6% increase in average selling price per pound, combined with a 30.1%increase in volume.  These increases aredue to increased sales into the energy market, particularly solar and nuclear,which typically have higher average selling prices due to alloy mix and valueadded work.

 

*Other Revenue.*Other revenue was $3.1 million in the thirdquarter of fiscal 2010, an increase of 11.1% from $2.8 million in the sameperiod of fiscal 2009. The increase in revenue is due to higher scrap andmiscellaneous sales.

 

*Cost of Sales.* Cost of sales was $84.4 million, or 83.4% ofnet revenues, in the third quarter of fiscal 2010 compared to $106.5 million,or 108.3% of net revenues, in the same period of fiscal 2009. Cost of sales inthe third quarter of fiscal 2010 decreased by $22.1 million as compared to thesame period of fiscal 2009 due to lower raw material costs, reducedmanufacturing expense, workforce reductions and a modest amount of improvedabsorption due to improved sheet volume. Offsetting the decrease in cost of sales as a percentage of net revenuein the third quarter of fiscal 2010 compared to the same period of fiscal 2009was increased price competition, which negatively impacted net revenue.

 

*Selling, General and Administrative Expense.* Selling,general and administrative expense was $9.5 million for the third quarter offiscal 2010, an increase of $0.6 million, or 7.3%, from $8.8 million in thesame period of fiscal 2009, due primarily to the increased business activitycausing commissions and sales expenses to increase.  Selling, general and administrative expensesas a percentage of net revenues increased to 9.4% for the third quarter of fiscal2010 compared to 9.0% for the same period of fiscal 2009.

 

*Research and Technical Expense.* Research and technicalexpense was $0.6 million, or 0.6% of revenue, for the third quarter of fiscal2010, a decrease of $0.1 million from $0.8 million, or 0.8% of netrevenues, in the same period of fiscal 2009, due to the reductions in workforceduring the second and fourth quarters of fiscal 2009.

 

*Operating Income (Loss).* As a result of the abovefactors, operating income in the third quarter of fiscal 2010 was $6.7 millioncompared to an operating loss of $(17.8) million in the same period of fiscal2009.

 

*Income Taxes.* Income taxes were an expense of $3.0 millionin the third quarter of fiscal 2010, an increase of $9.9 million from a benefitof $6.9 million in the same period of fiscal 2009,  primarily due to pretax income.

 

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Theeffective tax rate for the third quarter of fiscal 2010 was 44.4%, compared to38.5% in the same period of fiscal 2009 primarily due to a change in the stateapportionment factor, which lowered the blended state tax rate resulting in anunfavorable reduction of our deferred tax asset.

 

*Net Income (Loss).* As a result of the above factors, net income in the third quarter offiscal 2010 was $3.7 million, an increase of $14.7 million from a net loss of$(10.9) million in the same period of fiscal 2009.

 

**Results of Operations for theNine Months Ended June 30, 2010 Compared to the Nine Months Ended June 30,2009**

 
| ** **                                   | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|------------|------------|
| ** **                                   | ** ** | **June 30,**     | ** ** | **Change** | ** ** |
| **($ in thousands)**                    | ** ** | **2009**              | ** ** | **2010**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| Net revenues                                 |       | $                     | 353,042    |       | 100.0      | % | $ | 276,898 |   | 100.0 | % | $ | (76,144 | ) | (21.6 | )% |
| Cost of sales                                |       | 335,463               |       | 95.0       | %          | 243,009 |   | 87.8 | % | (92,454 | ) | (27.6 | )% |
| Gross profit                                 |       | 17,579                |       | 5.0        | %          | 33,889 |   | 12.2 | % | 16,310 |   | 92.8 | % |
| Selling, general and  administrative expense |       | 27,719                |       | 7.9        | %          | 25,643 |   | 9.3 | % | (2,076 | ) | (7.5 | )% |
| Research and technical  expense              |       | 2,396                 |       | 0.7        | %          | 1,998 |   | 0.7 | % | (398 | ) | (16.6 | )% |
| Impairment of goodwill                       |       | 43,737                |       | 12.4       | %          | — |   | — |   | (43,737 | ) | (100.0 | )% |
| Operating income (loss)                      |       | (56,273               | )          | (15.9      | )%         | 6,248 |   | 2.3 | % | 62,521 |   | (111.1 | )% |
| Interest income                              |       | (70                   | )          | 0.0        | %          | (157 | ) | 0.0 | % | (87 | ) | (124.3 | )% |
| Interest expense                             |       | 566                   |       | 0.2        | %          | 123 |   | 0.0 | % | (443 | ) | (78.3 | )% |
| Income (loss) before income  taxes           |       | (56,769               | )          | (16.1      | )%         | 6,282 |   | 2.3 | % | 62,051 |   | (109.3 | )% |
| Provision for (benefit from)  income taxes   |       | (7,460                | )          | (2.1       | )%         | 2,865 |   | 1.0 | % | 10,325 |   | (138.4 | )% |
| Net income (loss)                            |       | $                     | (49,309    | )          | (14.0      | )% | $ | 3,417 |   | 1.2 | % | $ | 52,726 |   | (106.9 | )% |

 

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Thefollowing table includes a breakdown of net revenues, shipments, and averageselling prices to the markets served by Haynes for the periods shown.

 
| ** **                                                  | ** ** | **Nine Months Ended  June 30,** | ** ** | **Change** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------|------------|------------|------------|
| **By market**                                               | ** ** | **2009**                                  | ** ** | **2010**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| ***Net revenues*** (in  thousands)                          |       |                                      |       |       |       |   |   |   |   |
| Aerospace                                                   |       | $                                         | 129,880    |       | $          | 98,609 |   | $ | (31,271 | ) | (24.1 | )% |
| Chemical processing                                         |       | 83,852                                    |       | 66,622     |       | (17,230 | ) | (20.5 | )% |
| Land-based gas turbines                                     |       | 82,880                                    |       | 53,406     |       | (29,474 | ) | (35.6 | )% |
| Other markets                                               |       | 48,257                                    |       | 48,046     |       | (211 | ) | (0.4 | )% |
| **Total  product revenue**                                  |       | 344,869                                   |       | 266,683    |       | (78,186 | ) | (22.7 | )% |
| Other revenue                                               |       | 8,173                                     |       | 10,215     |       | 2,042 |   | 25.0 | % |
| **Net  revenues**                                           |       | $                                         | 353,042    |       | $          | 276,898 |   | $ | (76,144 | ) | (21.6 | )% |
|                                                        |       |                                      |       |       |       |   |   |   |   |
| ***Pounds by markets***(in thousands)                       |       |                                      |       |       |       |   |   |   |   |
| Aerospace                                                   |       | 4,688                                     |       | 4,237      |       | (451 | ) | (9.6 | )% |
| Chemical processing                                         |       | 3,194                                     |       | 3,338      |       | 144 |   | 4.5 | % |
| Land-based gas turbines                                     |       | 4,592                                     |       | 3,343      |       | (1,249 | ) | (27.2 | )% |
| Other markets                                               |       | 2,073                                     |       | 2,137      |       | 64 |   | 3.1 | % |
| **Total  shipments**                                        |       | 14,547                                    |       | 13,055     |       | (1,492 | ) | (10.3 | )% |
|                                                        |       |                                      |       |       |       |   |   |   |   |
| ***Average selling price per pound***                       |       |                                      |       |       |       |   |   |   |   |
| Aerospace                                                   |       | $                                         | 27.70      |       | $          | 23.27 |   | $ | (4.43 | ) | (16.0 | )% |
| Chemical processing                                         |       | 26.25                                     |       | 19.96      |       | (6.29 | ) | (24.0 | )% |
| Land-based gas turbines                                     |       | 18.05                                     |       | 15.98      |       | (2.07 | ) | (11.5 | )% |
| Other markets                                               |       | 23.28                                     |       | 22.48      |       | (0.80 | ) | (3.4 | )% |
| **Total  product**(excluding  other revenue)                |       | 23.71                                     |       | 20.43      |       | (3.28 | ) | (13.8 | )% |
| **Total  average selling price** (including other  revenue) |       | 24.27                                     |       | 21.21      |       | (3.06 | ) | (12.6 | )% |

 

*Net Revenues.* Net revenues were $276.9 million in thefirst nine months of fiscal 2010, a decrease of 21.6% from $353.0 million inthe same period of fiscal 2009, due to decreases in volume and average sellingprice per pound.  Volume was 13.1 millionpounds in the first nine months of fiscal 2010, a decrease of 10.3% from 14.5million pounds in the same period of fiscal 2009.  The aggregate average selling price was$21.21 per pound in the first nine months of fiscal 2010, a decrease of 12.6%from $24.27 per pound in the same period of fiscal 2009.  As discussed above under “Outlook”, increasedcompetition and weakness in customer demand unfavorably impacted both averageselling price and volume in the first nine months of fiscal 2010 in the Company’smarkets as compared to the first nine months of fiscal 2009. The Company’sconsolidated backlog was $130.9 million at June 30, 2010, an increase of22.7% from $106.7 million at September 30, 2009.  This increase reflects a 24.9% increase inbacklog pounds partially offset by a 1.8% decrease in backlog average sellingprice.

 

Salesto the aerospace market were $98.6 million in the first nine months of fiscal2010, a decrease of 24.1% from $129.9 million in the same period of fiscal2009, due to a 16.0% decrease in the average selling price per pound combinedwith a 9.6% decrease in volume. Pricing and volume decreased due to reducedmarket demand in fiscal 2010 as reflected in the reduction in air traffic andleaning out of the aero engine supply chain earlier in fiscal 2010.

 

Salesto the chemical processing market were $66.6 million in the first nine monthsof fiscal 2010, a decrease of 20.5% from $83.9 million in the same period offiscal 2009, due to a 24.0% decrease in the average selling price per poundpartially offset by a 4.5% increase in volume. Volume increased along with theimprovement in the overall economy. Average selling price per pound decreaseddue to continued price competition.

 

Salesto the land-based gas turbine market were $53.4 million in the first ninemonths of fiscal 2010, a decrease of 35.6% from $82.9 million for the sameperiod of fiscal 2009, due to a decrease of 11.5% in the average selling priceper pound combined with a 27.2% decrease in volume. The decrease in both volumeand 

 

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averageselling price is due to reduced activity by original equipment manufacturersand increased price competition.

 

Salesto other markets were $48.0 million in the first nine months of fiscal 2010, adecrease of 0.4% from $48.3 million in the same period of fiscal 2009, due to a3.4% decrease in average selling price per pound partially offset by a 3.1%increase in volume.  The decline inaverage selling price reflects the economic slowdown and the continuedcompetition in many of these markets.

 

*Other Revenue.*Other revenue was $10.2 million in the firstnine months of fiscal 2010, an increase of 25.0% from $8.2 million in the sameperiod of fiscal 2009. The increase is due primarily to higher scrap andmiscellaneous sales.

 

*Cost of Sales.* Cost of sales was $243.0 million, or 87.8%of net revenues, in the first nine months of fiscal 2010 compared to $335.5million, or 95.0% of net revenues, in the same period of fiscal 2009. Cost ofsales in the first nine months of fiscal 2010 decreased by $92.5 million ascompared to the same period of fiscal 2009 due to lower volume, lower rawmaterial costs, reduced manufacturing expense and workforce reductions.  This decrease was partially offset by reducedabsorption of fixed manufacturing costs caused by lower production volumes,particularly that of sheet product.

 

*Selling, General and Administrative Expense.* Selling,general and administrative expense was $25.6 million for the first nine monthsof fiscal 2010, a decrease of $2.1 million, or 7.5%, from $27.7 million in thesame period of fiscal 2009, due primarily to lower business activity causingcommissions and sales expenses to decline and significant workforce reductionsin the second and fourth quarters of fiscal 2009.  Selling, general and administrative expensesas a percentage of net revenues increased to 9.3% for the first nine months offiscal 2010 compared to 7.9% for the same period of fiscal 2009 due primarilyto reduced revenues.

 

*Research and Technical Expense.* Research and technicalexpense was $2.0 million, or 0.7% of revenue, for the first nine months offiscal 2010, a decrease of $0.4 million from $2.4 million, or 0.7% of netrevenues, in the same period of fiscal 2009, due to the reductions in workforceduring the second and fourth quarters of fiscal 2009.

 

*Impairment of Goodwill*.  An impairment charge of $43.7 million wasrecorded in the second quarter of fiscal 2009 due to weakening of the U.S.economy and the global credit crisis resulting in a reduction of the Company’smarket capitalization below its total stockholders’ equity value for asustained period of time.  Please seeNote 8 in the Notes to Consolidated Financial Statements contained elsewhere inthis Form 10-Q for additional information

 

*Operating Income (Loss).* As a result of the abovefactors, operating income in the first nine months of fiscal 2010 was $6.2million compared to operating loss of $(56.3) million in the same period offiscal 2009.

 

*Income Taxes.* Income taxes was an expense of $2.9 millionin the first nine months of fiscal 2010, from a benefit of $(7.5) million inthe same period of fiscal 2009, due to the Company generating pretax incomerather than pretax loss.  The effectivetax rate for the first nine months of fiscal 2010 was 45.6%, compared to 13.1%in the same period of fiscal 2009. The change in the effective tax rate isprimarily attributable to a change in the state apportionment factor, whichlowered the blended state tax rate resulting in an unfavorable reduction of ourdeferred tax asset. In addition, the non-deductible goodwill impairment chargelowered the effective tax rate in the first nine months of fiscal 2009.

 

*Net Income (Loss).* As a result of the above factors, net income in the first nine months offiscal 2010 was $3.4 million, an increase of $52.7 million from a net loss of$(49.3) million in the same period of fiscal 2009.

 

**Liquidity and Capital Resources**

 

*Comparative cash flowanalysis*

 

Duringthe first nine months of fiscal 2010, the Company’s primary sources of cashwere cash from operations and cash on-hand. At June 30, 2010, the Company had cash and cash equivalents ofapproximately $58.6 million compared to cash and cash equivalents ofapproximately $105.1 million at September 30, 2009.

 

Netcash used in operating activities was $29.5 million in the first nine months offiscal 2010 compared to net cash provided by operating activities of $97.0million in the same period of fiscal 2009. Several items contributed to the difference.  Cash used by increased inventory balances (netof foreign currency fluctuation) of $54.9 million 

 

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was$159.4 million higher than cash provided by decreased inventory balances in thesame period of fiscal 2009.  Cash used byincreased accounts receivable of $7.8 million was $52.4 million higher thancash provided by accounts receivable in the same period of fiscal 2009.  Offsetting the above items, cash generatedfrom accounts payable and accrued expenses of $17.5 million was $34.9 millionhigher than cash used in the same period of fiscal 2009 and cash generated fromincome taxes of $9.6 million was $39.1 million higher than cash used by incometaxes in the same period of fiscal 2009. Net cash used in investing activities was $9.3 million in the first ninemonths of fiscal 2010 compared to $7.3 million in the first nine months offiscal 2009 due to higher capital expenditures. Net cash used in financing activities in the first nine months of fiscal2010 included $7.3 million in dividend payments compared to zero in the firstnine months of fiscal 2009.

 

*Future sources of liquidity*

 

TheCompany’s sources of cash for fiscal 2010 are expected to consist primarily ofcash generated from operations and cash on-hand.  In addition, the U.S. revolving creditfacility provides borrowings in a maximum amount of $120.0 million, subject toa borrowing base formula and certain reserves. At June 30, 2010, theCompany had cash of approximately $58.6 million, an outstanding balance of zeroon 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 borrowingbase and certain reserves. Management believes that the resources describedabove will be sufficient to fund planned capital expenditures and workingcapital requirements over the next twelve months.

 

U.S. revolving credit facility:   Haynes and Wachovia Capital FinanceCorporation (Central) (“Wachovia”) entered into a Second Amended and RestatedLoan and Security Agreement (the “Amended Agreement”) with an effective date ofNovember 18, 2008, which amended and restated the revolving credit facilitybetween Haynes and Wachovia dated August 31, 2004. Among other items, theAmended Agreement extends the maturity date of the U.S. revolving creditfacility to September 30, 2011, increases the margin included in theinterest rate from 1.5% per annum to 2.25% per annum for LIBOR borrowings,permits the Company to pay dividends and repurchase common stock if certainfinancial metrics are met, and eliminates the EBITDA covenant. The maximumrevolving loan amount under the Amended Agreement continues to be $120.0million. Borrowings under the U.S. revolving credit facility bear interest atthe Company’s option at either Wachovia Bank, National Association’s “primerate,” plus up to 2.25% per annum, or the adjusted Eurodollar rate used by thelender, plus up to 3.0% per annum.  As ofJune 30, 2010, the U.S. revolving credit facility had an outstandingbalance of zero. During the nine month period ended June 30, 2010 it boreinterest at a weighted average interest rate of 5.00%.  In addition, the Company must pay monthly inarrears a commitment fee of 0.375% per annum on the unused amount of the U.S.revolving credit facility total commitment. For letters of credit, the Company must pay 2.5% per annum on the dailyoutstanding balance of all issued letters of credit, plus customary fees forissuance, amendments, and processing. The Company is subject to certaincovenants as to fixed charge coverage ratios and other customary covenants,including covenants restricting the incurrence of indebtedness, the granting ofliens, and the sale of assets and permits the Company to pay dividends andrepurchase common stock if certain metrics are met.  As of June 30, 2010, the most recentrequired measurement date under the Amended Agreement, the Company was incompliance with these covenants.  TheU.S. revolving credit facility matures on September 30, 2011. Borrowingsunder the U.S. revolving credit facility are collateralized by a pledge ofsubstantially all of the U.S. assets of the Company, including equity interestsin its U.S. subsidiaries, but excluding its four-high Steckel rolling mill andrelated assets, which are pledged to TIMET. The U.S. revolving credit facilityis also secured by a pledge of 65% of the equity interests in each of theCompany’s foreign subsidiaries.

 

*Future uses of liquidity*

 

TheCompany’s primary uses of cash over the next twelve months are expected toconsist of expenditures related to:

 

·                  funding operations;

·                  pension plan funding;

·                  capital spending; and

·                  dividends to stockholders.

 

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In fiscal 2010, capital spending is targeted atapproximately $15.0 million with approximately $9.4 million spent in the firstnine months of fiscal 2010.  The focus ofthe capital spending in fiscal 2010 is on recurring equipment requirements ofapproximately $9.0 million and approximately $6.0 million on the upgrade of thefour-high Steckel rolling mill.  In February 2010,the Company announced plans to spend approximately $85.0 million over the nextfive years on capital projects which focus on improving the capability of theCompany’s production assets. Included in the $85.0 million total spending isapproximately $10.0 million to be spent in fiscal 2011 to restructure,consolidate and enhance capabilities at its service center operations toimprove the return on assets invested in the service centers.  Additionally, the Company plans to spendapproximately $30.0 million (or $6.0 million per year) on upgrades to itsfour-high Steckel rolling mill and supporting equipment, and approximately$25.0 million (or $5.0 million per year) on other equipment purchases andupgrades.  These projects are expected toimprove quality, reduce operating costs, improve delivery performance anddecrease cycle time.  The Companyanticipates that it will continue to spend approximately $4.0 million per yearon routine capital maintenance projects over the same five-year period.  Management does not anticipate prolongedequipment outages as a result of upgrades in fiscal 2010.

 

*ContractualObligations*

 

Thefollowing table sets forth the Company’s contractual obligations for theperiods indicated, as of June 30, 2010:

 

(inthousands)

 
| ** **                              | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations****(1)** | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 years** | ** ** |
|                                    |       |                                      |       |   |   |   |   |   |   |   |   |
| Debt obligations                        |       | $                                         | 638        |   | $ | 510 |   | $ | 128 |   | — |   | — |   |
| Operating lease obligations             |       | 11,613                                    |       | 3,069 |   | 3,411 |   | $ | 2,124 |   | $ | 3,009 |   |
| Capital lease obligations               |       | 313                                       |       | 33 |   | 66 |   | 66 |   | 148 |   |
| Raw material contracts                  |       | 28,026                                    |       | 28,026 |   | — |   | — |   | — |   |
| Mill supplies contracts                 |       | 31                                        |       | 31 |   | — |   | — |   | — |   |
| Capital projects                        |       | 3,216                                     |       | 3,216 |   | — |   | — |   | — |   |
| Pension plan(2)                         |       | 67,005                                    |       | 14,025 |   | 28,440 |   | 21,540 |   | 3,000 |   |
| FAS 87 NQ pension plan                  |       | 821                                       |       | 95 |   | 190 |   | 190 |   | 346 |   |
| Other postretirement benefits(3)        |       | 49,800                                    |       | 4,800 |   | 10,000 |   | 10,000 |   | 25,000 |   |
| Non-compete obligations(4)              |       | 110                                       |       | 110 |   | — |   | — |   | — |   |
| Total                                   |       | $                                         | 161,573    |   | $ | 53,915 |   | $ | 42,235 |   | $ | 33,920 |   | $ | 31,503 |   |

 

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(1)             Taxesare not included in the table.  TheCompany adopted the provisions of FIN No. 48, Accounting for Uncertaintyin Income Taxes, on October 1, 2007. As of June 30, 2010, the non-current income taxes payable was$292.  It is not possible to determine inwhich period the tax liability might be paid out.

(2)             TheCompany has a funding obligation to contribute $66,045 to the domestic pensionplan arising from the Pension Protection Act of 2006. These payments will betax deductible. All benefit payments under the domestic pension plan areprovided by the plan and not the Company. The Company expects its U.K.subsidiary to contribute $960 to the U.K. Pension Plan.

(3)             Representsexpected post-retirement benefits only based upon anticipated timing ofpayments.

(4)             Pursuantto an escrow agreement, as of April 11, 2005, the Company established anescrow account to satisfy its obligation to make payments under a non-competeagreement entered into as part of the Branford Acquisition. This amount isreported as restricted cash.

 

**NewAccounting Pronouncements**

 

In December 2008, the FASB issued FASB StaffPosition No. 132(R)-1, *Employers’ Disclosuresabout Postretirement Benefit Plan Assets*which was primarily codifiedinto Topic 715 *(Compensation Retirement Benefits)*in the ASC.  The guidance requiresdisclosures of the objectives of postretirement benefit plan assets, investmentpolicies and strategies, categories of plan assets, fair value measurements ofplan assets, and significant concentrations of risk.  This guidance was effective for fiscal yearsand interim periods beginning after December 15, 2009. The Company plansto adopt this guidance effective October 1, 2010. The adoption of thisguidance is expected to increase our disclosures, but it is not expected tohave an impact on our consolidated financial statements.

 

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**Critical Accounting Policies andEstimates**

 

*Overview*

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operationsdiscusses the Company’s consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States of America. The preparation of these financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. On an on-going basis,management evaluates its estimates and judgments, including those related tobad debts, inventories, income taxes, asset impairments, retirement benefits,matters related to product liability lawsuits and environmental matters. Theprocess of determining significant estimates is fact specific and takes intoaccount factors such as historical experience, current and expected economicconditions, product mix, pension asset mix and, in some cases, actuarialtechniques, and various other factors that are believed to be reasonable underthe circumstances. The results of this process form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. The Company routinely reevaluates thesesignificant factors and makes adjustments where facts and circumstancesdictate. Actual results may differ from these estimates under differentassumptions or conditions.

 

TheCompany’s accounting policies are more fully described in the auditedconsolidated financial statements included in the Company’s Annual Report on Form 10-Kfor the fiscal year ended September 30, 2009, filed by the Company withthe Securities and Exchange Commission. The Company has identified certaincritical accounting policies, which are described below. The following listingof policies is not intended to be a comprehensive list of all of the Company’saccounting policies. In many cases, the accounting treatment of a particulartransaction is specifically dictated by generally accepted accountingprinciples, with no need for management’s judgment in their application. Thereare also areas in which management’s judgment in selecting any availablealternative would not produce a materially different result.

 

*RevenueRecognition*

 

Revenueis recognized when collectability is reasonably assured and when title passesto the customer which is generally at the time of shipment (F.O.B. shippingpoint or at a foreign port for certain export customers). Allowances for salesreturns are recorded as a component of net revenues in the periods in which therelated sales are recognized. Management determines this allowance based onhistorical experience.  Should returnsincrease above historical experience, additional allowances may be required.

 

*Pensionand Postretirement Benefits*

 

TheCompany has defined benefit pension and postretirement plans covering most ofits current and former employees. Significant elements in determining theassets or liabilities and related income or expense for these plans are theexpected return on plan assets (if any), the discount rate used to value futurepayment streams, expected trends in health care costs, and other actuarialassumptions. Annually, the Company evaluates the significant assumptions to beused to value its pension and postretirement plan assets and liabilities basedon current market conditions and expectations of future costs. If actualresults are less favorable than those projected by management, additionalexpense may be required in future periods.

 

TheCompany believes the expected rate of return on plan assets of 8.5% is areasonable assumption on a long-term perspective based on its asset allocationof 58.0% equity, 41.0% fixed income and 1.0% other. The Company’s assumptionfor expected rate of return for plan assets for equity, fixed income, and realestate/other are 10.25%, 5.5% and 8.5%, respectively. This position issupported through a review of investment criteria, and consideration ofhistorical returns over a several year period.

 

Inthe short-term, substantial decreases in plan assets will result in higher planfunding contribution levels and higher pension expenses.  A decrease of 25 basis points in the expectedlong-term rate of return on plan assets would result in an increase in annualpension expense of about $0.3 million. To the extent that the actual return on plan assets during the yearexceeds or falls short of the assumed long-term rate of return, an asset gainor loss 

 

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iscreated.  Gains and losses are generallyamortized over a 7-year period.  As anexample, each $1.0 million in asset loss created by unfavorable investmentperformance results in seven annual payments (contributions) of approximately$0.2 million depending upon the precise effective interest rate in thevaluation and the timing of the contribution.

 

Salariedemployees hired after December 31, 2005 and hourly employees hired after June 30,2007 are not covered by the pension plan; however, they are eligible for anenhanced matching program of the defined contribution plan (401(k)). Effective December 31,2007, the U.S. pension plan was amended to freeze benefits for all non-unionemployees in the U.S.  Effective September 30,2009, the U.K. pension plan was amended to freeze benefits for fourteen membersof the plan.

 

*Impairmentof Long-lived Assets and Other Intangible Assets*

 

TheCompany reviews long-lived assets for impairment whenever events orcircumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of long-lived assets to be held and used ismeasured by a comparison of the carrying amount of the asset to theundiscounted future cash flows expected to be generated by the asset. If thecarrying amount of an asset exceeds its estimated future cash flows, animpairment charge is recognized in the amount by which the carrying amountexceeds the fair value of the asset. Assumptions and estimates with respect toestimated future cash flows used in the evaluation are subject to a high degreeof judgment and complexity.

 

*Share-Based Compensation*

 

*Restricted Stock Plan*

 

On February 23, 2009, the Company adopted arestricted stock plan that reserved 400,000 shares of common stock forissuance.  Grants of restricted stock arerights to acquire shares of the Company’s common stock, which vest inaccordance with the terms and conditions established by the CompensationCommittee.  The Compensation Committeemay set restrictions based on the achievement of specific performance goals andvesting of grants to participants will also be time-based.

 

Restricted stock grants are subject to forfeitureif employment or service terminates prior to the vesting period or if theperformance goal is not met.  The Companywill assess, on an ongoing basis, the probability of whether the performancecriteria will be achieved. The Company will recognize compensation expense overthe performance period if it is deemed probable that the goal will be achieved.The fair value of the Company’s restricted stock is determined based upon theclosing price of the Company’s common stock on the grant date. The planprovides for the adjustment of the number of shares covered by an outstandinggrant and the maximum number of shares for which restricted stock may be grantedin the event of a stock split, extraordinary dividend or distribution orsimilar recapitalization event.

 

*Stock Option Plans*

 

The Company has two stock option plans thatauthorize the granting of non-qualified stock options to certain key employeesand non-employee directors for the purchase of a maximum of 1,500,000 shares ofthe Company’s common stock. The original option plan was adopted in August 2004pursuant to the plan of reorganization and provides for the grant of options topurchase 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 foroptions to purchase up to 500,000 shares of the Company’s common stock. Eachplan provides for the adjustment of the maximum number of shares for whichoptions may be granted in the event of a stock split, extraordinary dividend ordistribution or similar recapitalization event. Unless the CompensationCommittee determines otherwise, options granted under the option plans areexercisable for a period of ten years from the date of grant and vest 33 1/3%per year over three years from the grant date.

 

On October 1, 2005, the Company adopted Statementof Financial Accounting Standard (“SFAS”) No. 123(R), *Share-BasedPayment*, which was primarily codified into Topic 718 *(Compensation — Stock Compensation)* in the ASC.  The statement requires compensation costsrelated to share-based payment transactions to be recognized in the financialstatements. This statement applies to all awards granted after the effectivedate and to modifications, repurchases or cancellations of existing awards.Additionally, under the modified prospective method of adoption, the Companyrecognizes compensation expense for the portion of outstanding awards on theadoption date for 

 

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whichthe requisite service period has not yet been rendered based on the grant-datefair value of those awards. The amount of compensation cost is measured basedupon the grant date fair value. The fair value of the option grants isestimated on the date of grant using the Black-Scholes option pricing modelwith assumptions on dividend yield, risk-free interest rate, expectedvolatilities, expected forfeiture rate, and expected lives of the options.

 

*Income Taxes*

 

TheCompany accounts for income taxes in accordance with SFAS No. 109, *Accounting for Income Taxes* (“SFAS No. 109”), which wasprimarily codified into Topic 740 (*IncomeTaxes*) in the ASC, which requires deferred tax assets andliabilities be recognized using enacted tax rates for the effect of temporarydifferences between book and tax basis of recorded assets and liabilities. Thisguidance also requires deferred tax assets be reduced by a valuation allowanceif it is more likely than not that some portion or all of the deferred taxassets will not be realized. The determination of whether or not a valuationallowance is needed is based upon an evaluation of both positive and negativeevidence. In its evaluation of the need for a valuation allowance, the Companyassesses prudent and feasible tax planning strategies. The ultimate amount ofdeferred tax assets realized could be different from those recorded, asinfluenced by potential changes in enacted tax laws and the availability offuture taxable income.

 

On October 1, 2007, the Company adopted FASBInterpretation No. 48 (“FIN 48”) *Accounting for Uncertaintyin Income Taxes*, an interpretation of SFAS 109, *Accountingfor Income Taxes* which was primarily codified into Topic 740-10 (*Income Taxes - Overall)* in the ASC.  This guidanceprescribes a recognition threshold and measurement attribute for financialstatement recognition and measurement of tax positions taken or expected to betaken in an income tax return.  It also provides guidance related toreversal of tax positions, balance sheet classification, interest andpenalties, interim period accounting, disclosure and transition.

 

**Item 3.    Quantitative and Qualitative Disclosures about Market Risk**

 

Market risk is the potential loss arising fromadverse changes in market rates and prices. The Company is exposed to variousmarket risks, including changes in interest rates, foreign currency exchangerates and the price of nickel and natural gas.

 

Changes in interest rates affect the Company’sinterest expense on variable rate debt. Interest charged on the Company’scredit facility is subject to a floating interest rate.  The Company’s outstanding variable rate debtwas zero at June 30, 2009 and 2010. The Company has not entered into any derivative instruments to hedge theeffects of changes in interest rates.

 

The foreign currency exchange risk existsprimarily because the foreign subsidiaries maintain receivables and payablesdenominated in currencies other than their functional currency or the U.S.dollar. The foreign subsidiaries manage their own foreign currency exchangerisk. The U.S. operations transact their foreign sales in U.S. dollars, therebyavoiding fluctuations in foreign exchange rates. Any currency exchange rateexposure aggregating more than $500,000 requires approval from the Company’sChief Financial Officer. The Company is not currently party to any currencycontracts.

 

Fluctuations in the price of nickel, the Company’smost significant raw material, subject the Company to commodity price risk. TheCompany manages its exposure to this market risk through internally establishedpolicies and procedures, including negotiating raw material escalators withinproduct sales agreements, and continually monitoring and revising customerquote amounts to reflect the fluctuations in market prices for nickel. TheCompany does not presently use derivative instruments to manage this marketrisk, but may in the future. The Company monitors its underlying market riskexposure from a rapid change in nickel prices on an ongoing basis and believesthat it can modify or adapt its strategies as necessary. The Companyperiodically purchases raw material forward with certain suppliers. However,there is a risk that the Company may not be able to successfully offset a rapidincrease in the cost of raw material in the future.

 

On June 11, 2009, to mitigate the volatilityof the natural gas markets, the Company entered into a commodity swap-cashsettlement agreement with JP Morgan Chase Bank. The Company agreed to a fixed natural gas price on a total of 300,000MMBTU, at a settlement rate of 50,000 MMBTU per month for a period spanning October 2009

 

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to March 2010.  As of June 30, 2010, 300,000 MMBTU hadbeen settled for a net realized hedging loss of $0.3 million.  The Company is not currently a party to anycommodity swap — cash settlement agreements.

 

**Item4.    Controls and Procedures**

 

The Company has performed, under the supervisionand with the participation of the Company’s management, including the Company’sChief Executive Officer and Chief Financial Officer, an evaluation of theeffectiveness and the design and operation of the Company’s disclosure controlsand procedures (as defined by Exchange Act rules 13a-15(e) and15d-15(e)) pursuant to Rule 13a-15(b) of the Exchange Act as of theend of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures were effective as of June 30, 2010 in providing reasonableassurance that information required to be disclosed by the Company in thereports that it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission including to ensure thatinformation required to be disclosed by the Company in the reports that itfiles or submits under the Exchange Act is accumulated and communicated to theCompany’s management, including its principal executive and principal financialofficers, or persons performing similar functions, as appropriate to allowtimely decisions regarding required disclosure.

 

There have been no changes in our internalcontrols over financial reporting during our most recent quarter that havematerially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

 

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**PART II  OTHER INFORMATION**

 

**Item 6.    Exhibits**

 

Exhibits.  See Index to Exhibits.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|     | HAYNES  INTERNATIONAL, INC.      |
|----------|---------------------------------------|
|     |                                  |
| * * |                                  |
|     | */s/ Mark Comerford*                  |
|     | Mark Comerford                        |
|     | President and Chief Executive Officer |
|     | Date:   August 5, 2010      |
|     |                                  |
| * * |                                  |
|     | */s/ Marcel Martin*                   |
|     | Marcel Martin                         |
|     | Vice President, Finance               |
|     | Chief Financial Officer               |
|     | Date:   August 5, 2010      |

 

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**INDEX TO EXHIBITS**

 
| **Number**      | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                    |
|-----------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Assigned In** | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                    |
| **Regulation**  | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                    |
| **S-K**         | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                    |
| **Item  601**   | ** ** | ** ** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                    |
| ** **      | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                    |
| (3)             |       | 3.01       |       | 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). |
|            |       | 3.02       |       | Amended and Restated Bylaws of Haynes  International, Inc. (incorporated by reference to Exhibit 3.2 to  the Haynes International, Inc. Registration Statement on Form S-1,  Registration No. 333-140194).           |
| (4)             |       | 4.01       |       | Specimen Common Stock Certificate (incorporated by  reference to the Haynes International, Inc. Quarterly Report on  Form 10-Q for the quarter ending December 31, 2009, filed  February 8, 2010).                        |
|            |       | 4.02       |       | 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). |
|            |       | 4.03       |       | Amended and Restated By-laws of Haynes  International, Inc. (incorporated by reference to Exhibit 3.2 to  the Haynes International, Inc. Registration Statement on Form S-1,  Registration No. 333-140194).          |
| (31)            |       | 31.01*     |       | Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                                                                             |
|            |       | 31.02*     |       | Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                                                                             |
| (32)            |       | 32.01*     |       | Section 1350 Certifications.                                                                                                                                                                                                             |

 

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