Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x****      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the quarterly period ended   March 31, 2011**

 

**or**

 

**o****         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the transition period from                          to**

 

**Commission File Number:    001-33288**

 

**HAYNES INTERNATIONAL, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                    |   | **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) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

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

 

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

 

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

 

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

 

As of May 1, 2011, the registrant had 12,203,346 shares of Common Stock, $.001 par value, outstanding.

 

 

 

----

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, 2010 and March 31, 2011                                        | 1        |
|             |                                                                                                                                 |     |
|             | Unaudited Consolidated   Statements of Operations for the Three and Six Months Ended March 31,   2010 and 2011                  | 2        |
|             |                                                                                                                                 |     |
|             | Unaudited Consolidated   Statements of Comprehensive Income (Loss) for the Three and Six Months Ended   March 31, 2010 and 2011 | 3        |
|             |                                                                                                                                 |     |
|             | Unaudited   Consolidated Statements of Cash Flows for the Six Months Ended March 31,   2010 and 2011                            | 4        |
|             |                                                                                                                                 |     |
|             | Notes to   Consolidated Financial Statements                                                                                         | 5        |
|             |                                                                                                                                 |     |
| Item 2.          | Management’s   Discussion and Analysis of Financial Condition and Results of Operations                                         | 13       |
|             |                                                                                                                                 |     |
| Item 3.          | Quantitative   and Qualitative Disclosures About Market Risk                                                                         | 24       |
|             |                                                                                                                                 |     |
| Item 4.          | Controls and   Procedures                                                                                                            | 24       |
|             |                                                                                                                                 |     |
| **PART II** | **OTHER INFORMATION**                                                                                                                |     |
| ** **       | ** **                                                                                                                           |     |
| Item 6.          | Exhibits                                                                                                                             | 25       |
|             |                                                                                                                                 |     |
|             | Signatures                                                                                                                           | 26       |
|             |                                                                                                                                 |     |
|             | Index to Exhibits                                                                                                                    | 27       |

 

----

Table of Contents

 

**PART 1        FINANCIAL INFORMATION**

 

Item 1.    Financial Statements

**HAYNES INTERNATIONAL, INC. and SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

**(in thousands, except share and per share data)**

 
| ** **                                                                                                                                                                                    | ** ** | **September 30,   2010** | ** ** | **March 31,   2011** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|---------------------------|------------|
| **ASSETS**                                                                                                                                                                                    |       |                          |       |                      |       |
| Current assets:                                                                                                                                                                               |       |                          |       |                      |       |
| Cash and cash   equivalents                                                                                                                                                                   |       | $                             | 63,968     |                      | $          | 47,312 |   |
| Restricted cash—current   portion                                                                                                                                                        |       | 110                           |       | —                    |       |
| Accounts receivable,   less allowance for doubtful accounts of $1,116 and $1,160 respectively                                                                                            |       | 62,851                        |       | 84,047                    |       |
| Inventories                                                                                                                                                                                   |       | 231,783                       |       | 239,964                   |       |
| Income taxes receivable                                                                                                                                                                       |       | 698                           |       | 1,914                     |       |
| Deferred income taxes                                                                                                                                                                         |       | 10,554                        |       | 10,531                    |       |
| Other current assets                                                                                                                                                                          |       | 1,666                         |       | 3,464                     |       |
| Total current assets                                                                                                                                                                          |       | 371,630                       |       | 387,232                   |       |
| Property, plant and   equipment, net                                                                                                                                                          |       | 107,043                       |       | 107,728                   |       |
| Deferred income   taxes—long term portion                                                                                                                                                |       | 62,446                        |       | 59,255                    |       |
| Prepayments and deferred   charges                                                                                                                                                            |       | 3,753                         |       | 2,945                     |       |
| Intangible assets, net                                                                                                                                                                        |       | 6,671                         |       | 6,399                     |       |
| Total assets                                                                                                                                                                                  |       | $                             | 551,543    |                      | $          | 563,559 |   |
| **LIABILITIES AND STOCKHOLDERS’   EQUITY**                                                                                                                                               |       |                          |       |                      |       |
| Current liabilities:                                                                                                                                                                          |       |                          |       |                      |       |
| Accounts payable                                                                                                                                                                              |       | $                             | 34,284     |                      | $          | 43,655 |   |
| Accrued expenses                                                                                                                                                                              |       | 15,780                        |       | 13,282                    |       |
| Accrued pension and   postretirement benefits                                                                                                                                                 |       | 18,758                        |       | 18,758                    |       |
| Deferred revenue —   current portion                                                                                                                                                     |       | 2,500                         |       | 2,500                     |       |
| Current maturities of   long-term obligations                                                                                                                                                 |       | 109                           |       | —                    |       |
| Total current   liabilities                                                                                                                                                                   |       | 71,431                        |       | 78,195                    |       |
| Long-term obligations   (less current portion)                                                                                                                                                |       | 1,324                         |       | 1,324                     |       |
| Deferred revenue (less   current portion)                                                                                                                                                     |       | 37,829                        |       | 36,579                    |       |
| Non-current income taxes   payable                                                                                                                                                            |       | 308                           |       | 308                       |       |
| Accrued pension and   postretirement benefits                                                                                                                                                 |       | 174,802                       |       | 171,332                   |       |
| Total liabilities                                                                                                                                                                             |       | 285,694                       |       | 287,738                   |       |
| Commitments and   contingencies (Note 6)                                                                                                                                                      |       | —                        |       | —                    |       |
| Stockholders’ equity:                                                                                                                                                                    |       |                          |       |                      |       |
| Common stock, $0.001 par   value (40,000,000 shares authorized, 12,144,079 and 12,203,346 shares issued   and outstanding at September 30, 2010 and March 31, 2011,   respectively) |       | 12                            |       | 12                        |       |
| Preferred stock, $0.001   par value (20,000,000 shares authorized, 0 shares issued and outstanding)                                                                                           |       | —                        |       | —                    |       |
| Additional paid-in   capital                                                                                                                                                                  |       | 229,197                       |       | 230,921                   |       |
| Accumulated earnings                                                                                                                                                                          |       | 102,677                       |       | 109,273                   |       |
| Accumulated other   comprehensive loss                                                                                                                                                        |       | (66,037                       | )          | (64,385                   | )          |
| Total stockholders’   equity                                                                                                                                                             |       | 265,849                       |       | 275,821                   |       |
| Total liabilities and   stockholders’ equity                                                                                                                                             |       | $                             | 551,543    |                      | $          | 563,559 |   |

 

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

 

1

----

Table of Contents

 

**HAYNES INTERNATIONAL, INC. and SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

**(in thousands, except share and per share data)**

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | **March 31,**               | ** ** | **March 31,**             | ** ** |
| ** **                                  | ** ** | **2010**                         | ** ** | **2011**                       | ** ** | **2010** | ** ** | **2011** | ** ** |
|                                        |       |                             |       |                           |       |   |   |   |   |
| Net revenues                                |       | $                                | 94,619     |                           | $          | 139,114 |   | $ | 175,627 |   | $ | 245,465 |   |
| Cost of sales                               |       | 84,429                           |       | 118,521                        |       | 158,592 |   | 207,003 |   |
| Gross profit                                |       | 10,190                           |       | 20,593                         |       | 17,035 |   | 38,462 |   |
| Selling, general and administrative expense |       | 7,977                            |       | 10,158                         |       | 16,163 |   | 19,278 |   |
| Research and technical expense              |       | 712                              |       | 862                            |       | 1,361 |   | 1,615 |   |
| Operating income (loss)                     |       | 1,501                            |       | 9,573                          |       | (489 | ) | 17,569 |   |
| Interest income                             |       | (69                              | )          | (21                            | )          | (114 | ) | (101 | ) |
| Interest expense                            |       | 39                               |       | 30                             |       | 87 |   | 59 |   |
| Income (loss) before income taxes           |       | 1,531                            |       | 9,564                          |       | (462 | ) | 17,611 |   |
| Provision for (benefit from) income taxes   |       | 575                              |       | 3,348                          |       | (132 | ) | 6,139 |   |
| Net income (loss)                           |       | $                                | 956        |                           | $          | 6,216 |   | $ | (330 | ) | $ | 11,472 |   |
| Net income (loss) per share:                |       |                             |       |                           |       |   |   |   |   |
| Basic                                       |       | $                                | 0.08       |                           | $          | 0.52 |   | $ | (0.03 | ) | $ | 0.95 |   |
| Diluted                                     |       | $                                | 0.08       |                           | $          | 0.51 |   | $ | (0.03 | ) | $ | 0.94 |   |
| Weighted average shares outstanding:        |       |                             |       |                           |       |   |   |   |   |
| Basic                                       |       | 12,049,779                       |       | 12,065,012                     |       | 12,049,779 |   | 12,057,411 |   |
| Diluted                                     |       | 12,157,971                       |       | 12,231,594                     |       | 12,049,779 |   | 12,214,595 |   |

 

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

 

2

----

Table of Contents

 

**HAYNES INTERNATIONAL, INC. and SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)**

**(Unaudited)**

**(in thousands)**

 
| ** **                                           | ** ** | **Three Months Ended    March 31** | ** ** | **Six Months Ended   March 31** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                           | ** ** | **2010**                                               | ** ** | **2011**                                       | ** ** | **2010** | ** ** | **2011** | ** ** |
| Net income (loss)                                    |       | $                                                      | 956        |                                           | $          | 6,216 |   | $ | (330 | ) | $ | 11,472 |   |
| **Other comprehensive income   (loss), net of tax:** |       |                                                   |       |                                           |       |   |   |   |   |
| Foreign currency translation adjustment              |       | (2,303                                                 | )          | 1,446                                          |       | (2,171 | ) | 1,652 |   |
| Comprehensive income (loss)                          |       | $                                                      | (1,347     | )                                              | $          | 7,662 |   | $ | (2,501 | ) | $ | 13,124 |   |

 

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

 

3

----

Table of Contents

 

**HAYNES INTERNATIONAL, INC. and SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(in thousands)**

 
| ** **                                                                                           | ** ** | **Six Months Ended********March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2010**                                             | ** ** | **2011** | ** ** |
| **Cash flows from operating   activities:**                                                          |       |                                                 |       |   |   |
| Net income (loss)                                                                                    |       | $                                                    | (330       | ) | $ | 11,472 |   |
| Adjustments to reconcile net income (loss) to net   cash provided by (used in) operating activities: |       |                                                 |       |   |   |
| Depreciation                                                                                         |       | 5,619                                                |       | 5,599 |   |
| Amortization                                                                                         |       | 279                                                  |       | 272 |   |
| Stock compensation expense                                                                           |       | 746                                                  |       | 920 |   |
| Excess tax benefit from option exercises                                                             |       | —                                               |       | (139 | ) |
| Deferred revenue                                                                                     |       | (1,250                                               | )          | (1,250 | ) |
| Deferred income taxes                                                                                |       | (322                                                 | )          | 3,064 |   |
| Loss on disposal of property                                                                         |       | 157                                                  |       | 51 |   |
| Change in assets and liabilities:                                                                    |       |                                                 |       |   |   |
| Accounts receivable                                                                                  |       | (7,505                                               | )          | (20,489 | ) |
| Inventories                                                                                          |       | (23,387                                              | )          | (7,034 | ) |
| Other assets                                                                                         |       | (1,690                                               | )          | (935 | ) |
| Accounts payable and accrued expenses                                                                |       | 22,062                                               |       | 6,541 |   |
| Income taxes                                                                                         |       | 8,582                                                |       | (938 | ) |
| Accrued pension and postretirement benefits                                                          |       | (4,232                                               | )          | (3,481 | ) |
| Net cash used in operating activities                                                                |       | (1,271                                               | )          | (6,347 | ) |
|                                                                                                 |       |                                                 |       |   |   |
| **Cash flows from investing   activities:**                                                          |       |                                                 |       |   |   |
| Additions to property, plant and equipment                                                           |       | (7,042                                               | )          | (6,447 | ) |
| Change in restricted cash                                                                            |       | 110                                                  |       | 110 |   |
| Net cash used in investing activities                                                                |       | (6,932                                               | )          | (6,337 | ) |
|                                                                                                 |       |                                                 |       |   |   |
| **Cash flows from financing   activities:**                                                          |       |                                                 |       |   |   |
| Dividends paid                                                                                       |       | (4,849                                               | )          | (4,876 | ) |
| Proceeds from exercise of stock options                                                              |       | —                                               |       | 665 |   |
| Excess tax benefit from option exercises                                                             |       | —                                               |       | 139 |   |
| Changes in long-term obligations                                                                     |       | (105                                                 | )          | (109 | ) |
| Net cash used in financing activities                                                                |       | (4,954                                               | )          | (4,181 | ) |
|                                                                                                 |       |                                                 |       |   |   |
| Effect of exchange rates on cash                                                                     |       | (184                                                 | )          | 209 |   |
| Decrease in cash and cash equivalents                                                                |       | (13,341                                              | )          | (16,656 | ) |
|                                                                                                 |       |                                                 |       |   |   |
| Cash and cash equivalents, beginning of period                                                       |       | 105,095                                              |       | 63,968 |   |
| Cash and cash equivalents, end of period                                                             |       | $                                                    | 91,754     |   | $ | 47,312 |   |
|                                                                                                 |       |                                                 |       |   |   |
| Supplemental disclosures of cash flow information:                                                   |       |                                                 |       |   |   |
| Cash paid during period for:                                                                         |       |                                                 |       |   |   |
| Interest (net of capitalized interest)                                                               |       | $                                                    | 32         |   | $ | 4 |   |
| Income taxes paid (refunded), net                                                                    |       | $                                                    | 297        |   | $ | 3,957 |   |
| Capital expenditures incurred but not yet paid                                                       |       | $                                                    | 1,017      |   | $ | 578 |   |

 

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

 

4

----

Table of Contents

 

**HAYNES INTERNATIONAL, INC. and SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** (Unaudited)**

**(in thousands, except share and per share data)**

 

**Note 1.   Basis of Presentation**

 

*Interim Financial Statements*

 

The accompanying unaudited condensed interim consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and such principles are applied on a basis consistent with information reflected in our Form 10-K for the year ended September 30, 2010 filed with the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations promulgated by the SEC related to interim financial statements. In the opinion of management, the interim financial information includes all adjustments and accruals, consisting only of normal recurring adjustments, which are necessary for a fair presentation of results for the respective interim periods. The results of operations for the three or six months ended March 31, 2011 are not necessarily indicative of the results to be expected for the full fiscal year ending September 30, 2011 or any interim period.

 

*Principles of Consolidation*

 

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

 

**Note 2.   New Accounting Pronouncements**

 

No new accounting pronouncements applicable to the Company were issued in the first six months of fiscal 2011.

 

**Note 3.   Inventories**

 

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

 
| ** **      | ** ** | **September 30,   2010** | ** ** | **March 31,   2011** | ** ** |
|-----------------|------------|-------------------------------|------------|---------------------------|------------|
| Raw Materials   |       | $                             | 20,226     |                      | $          | 23,906 |   |
| Work-in-process |       | 126,626                       |       | 129,277                   |       |
| Finished Goods  |       | 83,971                        |       | 85,894                    |       |
| Other           |       | 960                           |       | 887                       |       |
|            |       | $                             | 231,783    |                      | $          | 239,964 |   |

 

**Note 4.   Income Taxes**

 

Income tax expense for the three and six months ended March 31, 2010 and 2011, differed from the U.S. federal statutory rate of 35% primarily due to state income taxes and differing tax rates on foreign earnings. The effective tax rate for the three months ended March 31, 2011 was 35.0% compared to 37.6% in the same period of fiscal 2010. The effective tax rate for the six months ended March 31, 2011 was 34.9% compared to 28.6% in the same period of fiscal 2010.

 

5

----

Table of Contents

 

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

 

Components of net periodic pension and post-retirement benefit cost for the three and six months ended March 31, 2010 and 2011 are as follows:

 
| ** **                | ** ** | **Three Months Ended March 31,** | ** ** | **Six Months Ended March 31,** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                | ** ** | **Pension Benefits**                            | ** ** | **Other Benefits**                            | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
| ** **                | ** ** | **2010**                                             | ** ** | **2011**                                           | ** ** | **2010** | ** ** | **2011** | ** ** | **2010** | ** ** | **2011** | ** ** | **2010** | ** ** | **2011** | ** ** |
| Service cost              |       | $                                                    | 899        |                                               | $          | 904 |   | $ | 51 |   | $ | 66 |   | $ | 1,798 |   | $ | 1,807 |   | $ | 103 |   | $ | 132 |   |
| Interest cost             |       | 2,809                                                |       | 2,548                                              |       | 1,205 |   | 1,172 |   | 5,673 |   | 5,722 |   | 2,410 |   | 2,344 |   |
| Expected return           |       | (2,566                                               | )          | (2,662                                             | )          | — |   | — |   | (5,185 | ) | (6,067 | ) | — |   | — |   |
| Amortizations             |       | 1,437                                                |       | 1,704                                              |       | (949 | ) | (771 | ) | 2,883 |   | 3,535 |   | (1,899 | ) | (1,541 | ) |
| Net periodic benefit cost |       | $                                                    | 2,579      |                                               | $          | 2,494 |   | $ | 307 |   | $ | 467 |   | $ | 5,169 |   | $ | 4,997 |   | $ | 614 |   | $ | 935 |   |

 

The Company contributed $6,360 to Company sponsored domestic pension plans, $2,520 to its other post-retirement benefit plans and $477 to the U.K. pension plan for the six months ended March 31, 2011.  The Company presently expects future contributions of $6,360 to its domestic pension plans, $2,480 to its other post-retirement benefit plans and $466 to the U.K. pension plan for the remainder of fiscal 2011.

 

**Note 6. Legal, Environmental and Other Contingencies**

 

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

 

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

 

The Company has received permits from the Indiana Department of Environmental Management, or IDEM, to close and to provide post-closure monitoring and care for certain areas at the Kokomo facility previously used for the storage and disposal of wastes, some of which are classified as hazardous under applicable regulations. Closure certification was received in fiscal 1988 for the South Landfill at the Kokomo facility and post-closure monitoring and care is ongoing there. Closure certification was received in fiscal 1999 for the North Landfill at the Kokomo facility and post-closure monitoring and care are permitted and ongoing there. In fiscal 2007, IDEM issued a single post-closure permit applicable to both the North and South Landfills, which contains monitoring and post-closure care requirements. In addition, IDEM required that a Resource Conservation and Recovery Act, or RCRA, Facility Investigation, or RFI, be conducted in order to further evaluate one area of concern and one solid waste management unit. The RFI commenced in fiscal 2008 and is ongoing.

 

6

----

Table of Contents

 

The Company has also received permits from the North Carolina Department of Environment and Natural Resources, or NCDENR, to close and provide post-closure monitoring and care for the hazardous waste lagoon at its Mountain Home, North Carolina facility. The lagoon area has been closed and is currently undergoing post-closure monitoring and care. The Company is required to monitor groundwater and to continue post-closure maintenance of the former disposal areas at each site. As a result, the Company is aware of elevated levels of certain contaminants in the groundwater and additional corrective action by the Company could be required. In addition, in August, 2008, employees discovered an abnormal pH in the sump pumps located in containment pits in the wastewater treatment facility. After testing, it was determined that there was a leak in the pipeline from the cleaning house to the wastewater treatment facility. NCDENR was notified within 24 hours of the verification of the leak. To date, the state has not responded to this disclosure.

 

As of March 31, 2011 and September 30, 2010, the Company has accrued $1,448 for post-closure monitoring and maintenance activities. Accruals for these costs are calculated by estimating the cost to monitor and maintain each post-closure site and multiplying that amount by the number of years remaining in the 30 year post-closure monitoring period referred to above. At each fiscal year-end, or earlier if necessary, the Company evaluates the accuracy of the estimates for these monitoring and maintenance costs for the upcoming fiscal year. The accrual was based upon the undiscounted amount of the obligation of $1,884 which was then discounted using an appropriate discount rate.

 

**Note 7.  Deferred Revenue**

 

On November 17, 2006, the Company entered into a twenty-year agreement to provide conversion services to Titanium Metals Corporation (“TIMET”) for up to ten million pounds of titanium metal annually. TIMET paid the Company a $50,000 up-front fee and will also pay the Company for its processing services during the term of the agreement (20 years) at prices established by the terms of the agreement.  TIMET may exercise an option to have ten million additional pounds  of titanium converted annually, provided that it offers to loan up to $12,000 to the Company for certain capital expenditures which may be required to expand capacity.  In addition to the volume commitment, the Company has granted TIMET a security interest in its four-high steckel rolling mill, along with rights of access if the Company enters into bankruptcy or defaults on any financing arrangements.  The Company has agreed not to manufacture titanium products (other than cold reduced titanium tubing).  The Company has also agreed not to provide titanium conversion services to any entity other than TIMET for the term of the Conversion Services Agreement.  The agreement contains certain default provisions which could result in contract termination and damages, including the Company being required to return the unearned portion of the upfront fee.  The cash received of $50,000 is recognized in income on a straight-line basis over the 20-year term of the agreement. The portion of the upfront fee not recognized in income is shown as deferred revenue on the consolidated balance sheet.

 

**Note 8.    Intangible Assets**

 

The Company has patents, trademarks and other intangibles. As the patents have a definite life, they are amortized over lives ranging from two to fourteen years. As the trademarks have an indefinite life, the Company tests them for impairment at least annually. If the carrying value of a trademark exceeds the fair value (determined by calculating a fair value based upon a discounted cash flow of an assumed royalty rate), impairment of the trademark may exist resulting in a charge to earnings to the extent of the impairment. The Company has non-compete agreements with lives of 5 to 7 years. Amortization of the patents, non-competes and other intangibles was $279 and $272 for the six months ended March 31, 2010 and 2011, respectively.

 

The following represents a summary of intangible assets at September 30, 2010 and March 31, 2011: 

 
| **September 30, 2010** | ** ** | **Gross   Amount** | ** ** | **Accumulated   Amortization** | ** ** | **Carrying   Amount** | ** ** |
|----------------------------------|------------|--------------------|------------|--------------------------------|------------|-----------------------|------------|
| Patents                          |       | $                  | 8,667      |                           | $          | (6,333                | )          | $ | 2,334 |   |
| Trademarks                       |       | 3,800              |       | —                         |       | 3,800                 |       |
| Non-compete                      |       | 1,090              |       | (664                           | )          | 426                   |       |
| Other                            |       | 316                |       | (205                           | )          | 111                   |       |
| ** **                       |       | $                  | 13,873     |                           | $          | (7,202                | )          | $ | 6,671 |   |

 

7

----

Table of Contents

 
| **March 31, 2011** | ** ** | **Gross   Amount** | ** ** | **Accumulated   Amortization** | ** ** | **Carrying   Amount** | ** ** |
|------------------------------|------------|--------------------|------------|--------------------------------|------------|-----------------------|------------|
| Patents                      |       | $                  | 8,667      |                           | $          | (6,473                | )          | $ | 2,194 |   |
| Trademarks                   |       | 3,800              |       | —                         |       | 3,800                 |       |
| Non-compete                  |       | 1,090              |       | (740                           | )          | 350                   |       |
| Other                        |       | 316                |       | (261                           | )          | 55                    |       |
| ** **                   |       | $                  | 13,873     |                           | $          | (7,474                | )          | $ | 6,399 |   |

 
| **Estimate of Aggregate Amortization Expense:** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|
| **Year Ended September 30,**                         | ** ** | ** ** | ** ** |
| 2011 (remainder of   fiscal year)                                   |       | $          | 273        |   |
| 2012                                                                |       | 359        |       |
| 2013                                                                |       | 350        |       |
| 2014                                                                |       | 350        |       |
| 2015                                                                |       | 328        |       |
| 2016                                                                |       | 279        |       |
|                                                                     |            |            |            |  |

 

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

 

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

 
| ** **                                                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                            | ** ** | **March 31,**               | ** ** | **March 31,**             | ** ** |
| **(in thousands except share and per share data)** | ** ** | **2010**                         | ** ** | **2011**                       | ** ** | **2010** | ** ** | **2011** | ** ** |
| Numerator:                                                                            |       |                             |       |                           |       |   |   |   |   |
| Net Income (loss)                                                                     |       | $                                | 956        |                           | $          | 6,216 |   | $ | (330 | ) | $ | 11,472 |   |
| Denominator:                                                                          |       |                             |       |                           |       |   |   |   |   |
| Weighted average shares outstanding - Basic                                           |       | 12,049,779                       |       | 12,065,012                     |       | 12,049,779 |   | 12,057,411 |   |
| Effect of dilutive stock options                                                      |       | 56,192                           |       | 90,032                         |       | 53,805 |   | 80,634 |   |
| Effect of restricted stock shares with no   performance goal                          |       | 52,000                           |       | 76,550                         |       | 52,000 |   | 76,550 |   |
| Adjustment for net loss                                                               |       | —                           |       | —                         |       | (105,805 | ) | — |   |
| Weighted average shares outstanding - Diluted                                         |       | 12,157,971                       |       | 12,231,594                     |       | 12,049,779 |   | 12,214,595 |   |
|                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Basic net income (loss) per share                                                     |       | $                                | 0.08       |                           | $          | 0.52 |   | $ | (0.03 | ) | $ | 0.95 |   |
| Diluted net income (loss) per share                                                   |       | $                                | 0.08       |                           | $          | 0.51 |   | $ | (0.03 | ) | $ | 0.94 |   |
|                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Number of stock option shares excluded as their   effect would be anti-dilutive       |       | 219,132                          |       | 82,660                         |       | 213,316 |   | 148,810 |   |
| Number of restricted stock shares excluded as   their performance goal is not yet met |       | 42,300                           |       | 50,950                         |       | 42,300 |   | 50,950 |   |

 

Anti-dilutive shares with respect to outstanding stock options have been properly excluded from the computation of diluted net income (loss) per share.  Restricted stock issued to certain key employees is not included in the computation as the performance goal is deemed not yet achieved.

 

**Note 10.  Stock-Based Compensation**

 

**Restricted Stock Plan**

 

On February 23, 2009, the Company adopted a restricted stock plan that reserved 400,000 shares of common

 

8

----

Table of Contents

 

stock for issuance.  Grants of restricted stock are rights to acquire shares of the Company’s common stock, which vest in accordance with the terms and conditions established by the Compensation Committee.  The Compensation Committee may set restrictions on certain grants based on the achievement of specific performance goals and vesting of grants to participants will also be time-based.

 

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

 

On November 24, 2010 and December 21, 2010, the Company granted 34,000 and 4,000 shares respectively, of restricted stock to certain key employees and non-employee directors. The shares of restricted stock granted to employees will vest on the third anniversary of their grant date, provided that (a) the recipient is still an employee with the Company and (b) the Company has met a three year net income performance goal. The shares of restricted stock granted to directors will vest on the earlier of (a) the third anniversary of the date of grant or (b) the failure of such non-employee director to be re-elected at an annual meeting of the stockholders of the Company as a result of such non-employee director being excluded from the nominations for any reason other than cause. The fair value of the shares of common stock subject to the November and December grants was $40.26 and $41.55 per share, respectively, the closing price of the Company’s common stock on the day of the grant.

 

The following table summarizes the activity under the restricted stock plan for the six months ended March 31, 2011:

 
| ** **                            | ** ** | **Number of   Shares** | ** ** | **Weighted   Average Fair   Value At********Grant Date** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------------------------|------------|
| Unvested at   September 30, 2010 |       | 94,300                      |       | $                                                                       | 25.71      |   |
| Granted                               |       | 38,000                      |       | 40.40                                                                   |       |
| Forfeited / Canceled                  |       | (4,800                      | )          | 30.10                                                                   |       |
| Vested                                |       | —                      |       |                                                                    |       |
| Unvested at   March 31, 2011     |       | 127,500                     |       | $                                                                       | 29.92      |   |
| Expected to vest                      |       | 101,900                     |       | $                                                                       | 32.96      |   |

 

Compensation expense related to restricted stock for the three months ended March 31, 2010 and 2011 was $162 and $280, respectively, and for the six months ended March 31, 2010 and 2011 was $192 and $459, respectively. The remaining unrecognized compensation expense at March 31, 2011 was $2,322 to be recognized over a weighted average period of 2.33 years. Compensation expense is not being recorded on a March 31, 2009 grant of 25,600 shares to employees as it continues to be not probable that the performance goal will be achieved.

 

**Stock Option Plans**

 

The Company has two stock option plans that authorize the granting of non-qualified stock options to certain key employees and non-employee directors for the purchase of a maximum of 1,500,000 shares of the Company’s common stock. The original option plan was adopted in August 2004 pursuant to the plan of reorganization and provides for the grant of options to purchase up to 1,000,000 shares of the Company’s common stock. In January 2007, the Company’s Board of Directors adopted a second option plan that provides for options to purchase up to 500,000 shares of the Company’s common stock. Each plan provides for the adjustment of the maximum number 

 

9

----

Table of Contents

 

of shares for which options may be granted in the event of a stock split, extraordinary dividend or distribution or similar recapitalization event. Unless the Compensation Committee determines otherwise, options granted under the option plans are exercisable for a period of ten years from the date of grant and vest 33 1/3% per year over three years from the grant date.

 

The fair value of option grants was estimated as of the date of the grant*.* The Company has elected to use the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected life, risk-free interest rates, expected forfeitures and dividend yields. The volatility is based on historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected term of the stock option granted. The Company uses historical volatility because management believes such volatility is representative of prospective trends. The expected term of an award is based on historical exercise data. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of the awards. The expected forfeiture rate is based upon historical experience. The dividend yield assumption is based on the Company’s history and expectation regarding dividend payouts at the time of the grant.  Valuation of future grants under the Black-Scholes model will include a dividend yield. The following assumptions were used for grants in the first six months of fiscal 2011:

 
| **Grant Date**    | ** ** | **Fair   Value** | ** ** | **Dividend   Yield** | ** ** | **Risk-free   Interest Rate** | ** ** | **Expected   Volatility** | ** ** | **Expected   Life** | ** **   |
|------------------------|------------|------------------|------------|----------------------|------------|------------------------------------|------------|---------------------------|------------|---------------------|--------------|
| November 24, 2010 |       | $                | 21.43      |                 | 1.99       | %                                  | 0.69       | %                         | 90         | %                   | 3 years |   |
|                        |            |                  |            |                      |            |                                    |            |                           |            |                     |              |  |

 

On November 24, 2010, the Company granted 27,400 options at an exercise price of $40.26, the fair market value of the Company’s common stock the day of the grant. During the first six months of fiscal 2011, 26,067 options were exercised and 20,134 options were forfeited/canceled.

 

The stock-based employee compensation expense for stock options for the three months ended March 31, 2010 and 2011 was $224 and $260, respectively, and for the six months ended March 31, 2010 and 2011 was $554 and $461, respectively.  The remaining unrecognized compensation expense at March 31, 2011 was $962 to be recognized over a weighted average vesting period of 0.82 years.

 

The following table summarizes the activity under the stock option plans for the six months ended March 31, 2011:

 
| ** **                               | ** ** | **Number of   Shares** | ** ** | **Aggregate   Intrinsic   Value********(000s)** | ** ** | **Weighted   Average   Exercise   Prices** | ** ** | **Weighted   Average   Remaining   Contractual Life** | ** ** |
|------------------------------------------|------------|-----------------------------|------------|-------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------------------------|------------|
| Outstanding at   September 30, 2010 |       | 394,321                     |       |                                            |       | $                                          | 38.25      |                                                       |       |   |
| Granted                                  |       | 27,400                      |       |                                            |       | $                                          | 40.26      |                                                       |       |   |
| Exercised                                |       | (26,067                     | )          |                                            |       |                                       |       |                                                       |       |
| Canceled                                 |       | (20,134                     | )          |                                            |       |                                       |       |                                                       |       |
| Outstanding at   March 31, 2011     |       | 375,520                     |       | $                                               | 7,443      |                                       | $          | 38.40                                                      |       | 6.42 yrs. |   |
| Vested or expected to   vest             |       | 362,945                     |       | $                                               | 7,443      |                                       | $          | 38.40                                                      |       | 6.42 yrs. |   |
| Exercisable at   March 31, 2011     |       | 303,321                     |       | $                                               | 5,878      |                                       | $          | 39.50                                                      |       | 5.85 yrs. |   |

 

10

----

Table of Contents

 
| **Grant Date**    | ** ** | **Exercise   Price Per   Share** | ** ** | **Remaining   Contractual   Life in Years** | ** ** | **Outstanding   Number of   Shares** | ** ** | **Exercisable   Number of   Shares** | ** ** |
|------------------------|------------|---------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| August 31, 2004   |       | $                                     | 12.80      |                                                  | 3.42       |                                      | 86,886     |                                      | 86,886     |   |
| February 21, 2006 |       | 29.25                                 |       | 4.92                                                  |       | 8,334                                     |       | 8,334                                     |       |
| March 31, 2006    |       | 31.00                                 |       | 5.00                                                  |       | 10,000                                    |       | 10,000                                    |       |
| March 30, 2007    |       | 72.93                                 |       | 6.00                                                  |       | 59,500                                    |       | 59,500                                    |       |
| March 31, 2008    |       | 54.00                                 |       | 7.00                                                  |       | 81,000                                    |       | 81,000                                    |       |
| October 1, 2008   |       | 46.83                                 |       | 7.50                                                  |       | 20,000                                    |       | 13,334                                    |       |
| March 31, 2009    |       | 17.82                                 |       | 8.00                                                  |       | 48,900                                    |       | 32,600                                    |       |
| January 8, 2010   |       | 34.00                                 |       | 8.75                                                  |       | 35,000                                    |       | 11,667                                    |       |
| November 24, 2010 |       | 40.26                                 |       | 9.67                                                  |       | 25,900                                    |       | —                                    |       |
| ** **             |       |                                  |       |                                                  |       | 375,520                                   |       | 303,321                                   |       |
|                        |            |                                       |            |                                                       |            |                                           |            |                                           |            |  |

 

**Note 11.    Dividend**

 

In the second quarter of fiscal 2011, the Company declared and paid a quarterly cash dividend. The dividend of $0.20 per outstanding share of the Company’s common stock was paid March 15, 2011 to stockholders of record at the close of business on March 1, 2011.  The dividend cash pay-out was $2,441 for the quarter based on shares outstanding.

 

On May 5, 2011, the Company announced that the Board of Directors declared a regular quarterly cash dividend of $0.20 per outstanding share of the Company’s common stock.  The dividend is payable June 15, 2011 to stockholders of record at the close of business on June 1, 2011.

 

**Note 12.  Fair Value Measurements**

 

On October 1, 2008, the Company adopted guidance for assets and liabilities measured at fair value on a recurring basis.  This guidance does not apply to non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually until October 1, 2009.  This guidance establishes a framework for measuring fair value, clarifies the definition of fair value within that framework and expands disclosures about the use of fair value measurements.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.

 

This guidance specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions that other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the Company’s own assumptions of market participant valuation (unobservable inputs). Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy prioritizes the use of inputs used in valuation techniques into the 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 to measure fair value and classifies such items within Level 1. If quoted market prices are not available, fair value is based upon internally-developed models that use, where possible, current market-based or independently-sourced market parameters such as interest rates 

 

11

----

Table of Contents

 

and currency rates. Items valued using internally-generated models are classified according to the lowest level input or value driver that is significant to the valuation. If quoted market prices are not available, the valuation model used depends on the specific asset or liability being valued.

 

The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2010 and March 31, 2011:

 
| ** **                       | ** ** | **Fair Value Measurements at Reporting Date Using:** | ** ** |
|----------------------------------|------------|------------------------------------------------------------------------------------|------------|
| **September 30, 2010** | ** ** | **Level 1**                                                                   | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| **Assets:**                      | ** ** | ** **                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** |
| Cash and money market   funds    |       | $                                                                                  | 63,968     |   | $ | — |   | $ | — |   | $ | 63,968 |   |
|                                  |            |                                                                                    |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                    | ** ** | **Fair Value Measurements at Reporting Date Using:** | ** ** |
|-------------------------------|------------|------------------------------------------------------------------------------------|------------|
| **March 31, 2011**  | ** ** | **Level 1**                                                                   | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| **Assets:**                   | ** ** | ** **                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** |
| Cash and money market   funds |       | $                                                                                  | 47,312     |   | $ | — |   | $ | — |   | $ | 47,312 |   |
|                               |            |                                                                                    |            |  |  |  |  |  |  |  |  |  |  |

 

The Company had no Level 3 assets as of September 30, 2010 or March 31, 2011.

 

12

----

Table of Contents

 

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

 

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

 

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

 

*The Company has based these forward-looking statements on its current expectations and projections about future events.  Although the Company believes that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate. As a result, the forward-looking statements based upon those assumptions also could be incorrect.  Risks and uncertainties, some of which are discussed in Item 1A. of Part 1 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010, may affect the accuracy of forward looking statements.*

 

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

 

**Business Overview**

 

Haynes International, Inc. (“Haynes” or “the Company”) is one of the world’s largest producers of high-performance nickel- and cobalt-based alloys in sheet, coil and plate forms. The Company is focused on developing, manufacturing, marketing and distributing technologically advanced, high-performance alloys, which are sold primarily in the aerospace, chemical processing and land-based gas turbine industries. The global specialty alloy market consists of three primary sectors: stainless steel, general purpose nickel alloys and high-performance nickel- and cobalt-based alloys. The Company competes primarily in the high-performance nickel- and cobalt-based alloy sector, which includes high temperature resistant alloys, or HTA products, and corrosion resistant alloys, or CRA products.  The Company believes it is one of four principal producers of high-performance alloys in sheet, coil and plate forms. The Company also produces its products as seamless and welded tubulars, and in slab, bar, billet and wire forms.

 

The Company has manufacturing facilities in Kokomo, Indiana; Arcadia, Louisiana; and Mountain Home, North Carolina. The Kokomo facility specializes in flat products, the Arcadia facility specializes in tubular products and the Mountain Home facility specializes in high-performance wire products.  The Company distributes its products primarily through its direct sales organization, which includes 11 service and/or sales centers in the United States, Europe and Asia. All of these centers are company-operated.

 

**Dividend**

 

In the second quarter of fiscal 2011, the Company declared and paid a regular quarterly cash dividend of $0.20 per outstanding share of the Company’s common stock. The dividend was paid March 15, 2011 to stockholders of record at the close of business on March 1, 2011.  The dividend cash payout was approximately $2.4 million for the quarter based on shares outstanding, and equal to approximately $9.8 million on an annualized basis.

 

On May 5, 2011, the Company announced that the Board of Directors declared a regular quarterly cash dividend of $0.20 per outstanding share of the Company’s common stock.  The dividend is payable June 15, 2011

 

13

----

Table of Contents

 

to stockholders of record at the close of business on June 1, 2011.

 

**Outlook**

 

*General*

 

Net revenues, volume and net income improved from quarter-to-quarter through fiscal 2010. The trend of sequential improvement in net revenues continued in the first quarter of fiscal 2011, however, the volume and net income amounts in the first quarter of fiscal 2011 decreased slightly from the fourth quarter of fiscal 2010. Contributing to the lower volume for the first quarter of fiscal 2011 compared to the fourth quarter of fiscal 2010 was a reduced number of production and ship days due to planned equipment downtime, holidays and vacations. The decrease in net income in the first quarter of fiscal 2011 compared to the fourth quarter of fiscal 2010 was due to cost associated with the European restructuring, the manufacturing manpower additions in the first quarter of fiscal 2011 and the lower absorption for the reasons previously noted. In the second quarter of fiscal 2011 net revenues increased by $32.8 million, volume increased by 2.0 million pounds and net income increased by $1.0 million, in each case compared to the first quarter of fiscal 2011. The 44.5% increase in volume from the first quarter to the second quarter of fiscal 2011 was the result of an increase in the number of large project shipments in the second quarter, particularly in the “Chemical Processing” market and the “Other” market categories. Although net income in the second quarter of fiscal 2011 was higher than in the first quarter of fiscal 2011 the gross profit margin percentage was 2.0% lower in the second quarter due to the increased number of large projects invoiced in the second quarter as compared to the first quarter.

 

Management expects that net revenues for the third and fourth quarters of fiscal 2011 will approximate the levels of the second quarter, while volume in each of those quarters is expected to be slightly lower than the volume in the second quarter. However, management anticipates sequential improvement in net income for each of the third and fourth quarters of fiscal 2011 due to fewer large project orders compared to second quarter, a corresponding increase in the amount of transactional business as compared to the second quarter, and the impact of price increases instituted in the second quarter, which should begin to impact the Company’s net income in the third quarter and to an increasing extent in the fourth quarter.

 

*Backlog*

 

Backlog dollars were $241.7 million at March 31, 2011, an increase of approximately 44.7% from $167.0 million at December 31, 2010 due to strong order entry activity during the second quarter.  This increase is the result of a 39.6% increase in backlog pounds and a 3.7% increase in backlog average selling price.

 

The backlog dollars improved in the second quarter due to both a substantial increase in the aerospace and chemical processing market backlogs and because of an improvement in the product mix reflective of higher value alloys and forms.

 

*Working Capital*

 

Controllable working capital, which includes accounts receivable, inventory, accounts payable and accrued expenses, increased during the second quarter of fiscal 2011 as compared to the first quarter of fiscal 2011 primarily as a result of an increase in  the accounts receivable due to the 30.8% increase in sales between the first and second quarter. The increase in accounts receivable in the second quarter was partially offset by the decline in inventory for the quarter. Both inventory turns and days sales outstanding improved in the second quarter of fiscal 2011. Management expects that both accounts receivable and inventories will moderately decline through the balance of the fiscal year.

 

*Competition and Pricing*

 

The Company continues to experience price competition in the marketplace, predominantly associated with mill-direct project business. This competition continues to require the Company to aggressively price large quantity and project business orders, which reduces the Company’s gross profit margin and net income.

 

14

----

Table of Contents

 

Average product selling price decreased 7.7% from the first quarter to the second quarter of fiscal 2011. The average selling price in the second quarter was impacted by the competitively priced project business and the volatility of raw material prices, which tempered price increases. The Company initiated price increases during the second quarter applicable to base prices to recover both the rising cost of raw material and non-raw material items. In addition, the Company continues to respond to the competition by increasing emphasis on service centers, offering value-added services, improving its cost structure and focusing on delivery lead-times and reliability.

 

**Gross Profit Margin Performance**

 

Gross profit margins and gross profit margin percentages have improved in the first half of fiscal 2011 compared to the first half of fiscal 2010 due to a combination of rising volume, improved product mix, improved cost structure and an improving market environment.  Service center transactional business volumes and prices have also improved, particularly in the aerospace market, due to the end of inventory destocking by the Company’s customers and an increase in the commercial aircraft build rate.

 

When comparing the trend of gross profit margin and gross profit margin percentages from the first quarter of fiscal 2011 to the second quarter, the gross profit margin increased by $2.7 million, however, the gross profit margin percentage was 2.0% lower in the second quarter due to the increased number of large projects invoiced in the second quarter as compared to the first quarter. Gross profit margin percentages are expected to improve in subsequent quarters with the expected decline in project business offset by projected increases in higher margin transactional business.

 
| ** **              | ** ** | **Comparison by Quarter of Gross Profit Margin and   Gross Profit Margin Percentage for Fiscal 2010 and 2011** | ** ** |
|-------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **              | ** ** | **Quarter Ended**                                                                                                                                                                    | ** ** |
| **(in thousands)** | ** ** | **December 31,   2009**                                                                                                                                                              | ** ** | **March 31,   2010** | ** ** | **June 30,   2010** | ** ** | **September 30,   2010** | ** ** | **December 31,   2010** | ** ** | **March 31,   2011** | ** ** |
| Net Revenues            |       | $                                                                                                                                                                                         | 81,008     |   | $ | 94,619 |   | $ | 101,271 |   | $ | 104,645 |   | $ | 106,351 |   | $ | 139,114 |   |
| Gross Profit Margin     |       | $                                                                                                                                                                                         | 6,845      |   | $ | 10,190 |   | $ | 16,854 |   | $ | 19,942 |   | $ | 17,869 |   | $ | 20,593 |   |
| Gross Profit Margin %   |       | 8.5                                                                                                                                                                                       | %          | 10.8 | % | 16.6 | % | 19.1 | % | 16.8 | % | 14.8 | % |

 

**Quarterly Market Information**

 

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

 

15

----

Table of Contents

 
| ** **                         | ** ** | **Quarter Ended**       | ** ** |
|------------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **December 31,   2009** | ** ** | **March 31,   2010** | ** ** | **June 30,   2010** | ** ** | **September 30,   2010** | ** ** | **December 31,   2010** | ** ** | **March 31,   2011** | ** ** |
| **Backlog**(1)                     |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Dollars (in thousands)             |       | $                            | 110,406    |   | $ | 124,571 |   | $ | 130,885 |   | $ | 147,958 |   | $ | 166,990 |   | $ | 241,661 |   |
| Pounds (in thousands)              |       | 4,915                        |       | 5,805 |   | 5,675 |   | 5,997 |   | 6,911 |   | 9,648 |   |
| Average selling price   per pound  |       | $                            | 22.46      |   | $ | 21.46 |   | $ | 23.06 |   | $ | 24.67 |   | $ | 24.16 |   | $ | 25.05 |   |
| ** **                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| **Average nickel price per pound** |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| London Metals Exchange(2)          |       | $                            | 7.75       |   | $ | 10.19 |   | $ | 8.79 |   | $ | 10.26 |   | $ | 10.94 |   | $ | 12.16 |   |

 

----

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

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

 
| ** **                                                  | ** ** | **Quarter Ended**       | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                  | ** ** | **December 31,   2009** | ** ** | **March  31,   2010** | ** ** | **June  30,   2010** | ** ** | **September 30,   2010** | ** ** | **December 31,   2010** | ** ** | **March 31,   2011** | ** ** |
| **Net revenues** (in   thousands)                           |       | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
| Aerospace                                                   |       | $                            | 28,375     |   | $ | 33,495 |   | $ | 36,739 |   | $ | 39,793 |   | $ | 44,537 |   | $ | 48,953 |   |
| Chemical processing                                         |       | 20,828                       |       | 18,333 |   | 27,461 |   | 21,062 |   | 20,591 |   | 37,238 |   |
| Land-based gas turbines                                     |       | 14,966                       |       | 20,028 |   | 18,412 |   | 20,802 |   | 21,541 |   | 27,724 |   |
| Other markets                                               |       | 13,080                       |       | 19,426 |   | 15,540 |   | 20,021 |   | 15,217 |   | 21,985 |   |
| Total product revenue                                       |       | 77,249                       |       | 91,282 |   | 98,152 |   | 101,678 |   | 101,886 |   | 135,900 |   |
| Other revenue                                               |       | 3,759                        |       | 3,337 |   | 3,119 |   | 2,968 |   | 4,465 |   | 3,214 |   |
| **Net revenues**                                            |       | $                            | 81,008     |   | $ | 94,619 |   | $ | 101,271 |   | $ | 104,646 |   | $ | 106,351 |   | $ | 139,114 |   |
|                                                        |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| **Shipments by markets** (in   thousands of pounds)         |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Aerospace                                                   |       | 1,221                        |       | 1,435 |   | 1,581 |   | 1,739 |   | 1,688 |   | 2,008 |   |
| Chemical processing                                         |       | 1,155                        |       | 811 |   | 1,372 |   | 870 |   | 914 |   | 1,846 |   |
| Land-based gas turbines                                     |       | 946                          |       | 1,291 |   | 1,106 |   | 1,252 |   | 1,199 |   | 1,664 |   |
| Other markets                                               |       | 605                          |       | 867 |   | 665 |   | 906 |   | 610 |   | 855 |   |
| **Total shipments**                                         |       | 3,927                        |       | 4,404 |   | 4,724 |   | 4,767 |   | 4,411 |   | 6,373 |   |
|                                                        |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| **Average selling price per pound**                         |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Aerospace                                                   |       | $                            | 23.24      |   | $ | 23.34 |   | $ | 23.24 |   | $ | 22.88 |   | $ | 26.38 |   | $ | 24.38 |   |
| Chemical processing                                         |       | 18.03                        |       | 22.61 |   | 20.02 |   | 24.21 |   | 22.53 |   | 20.17 |   |
| Land-based gas turbines                                     |       | 15.82                        |       | 15.51 |   | 16.65 |   | 16.62 |   | 17.97 |   | 16.66 |   |
| Other markets                                               |       | 21.62                        |       | 22.41 |   | 23.37 |   | 22.10 |   | 24.95 |   | 25.71 |   |
| **Total product** (excluding   other revenue)               |       | 19.67                        |       | 20.73 |   | 20.78 |   | 21.33 |   | 23.10 |   | 21.32 |   |
| **Total average selling price** (including   other revenue) |       | 20.63                        |       | 21.48 |   | 21.44 |   | 21.95 |   | 24.11 |   | 21.83 |   |

 

16

----

Table of Contents

 

**Results of Operations for the Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010**

 

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

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                                  | ** ** | **March 31,**               | ** ** | **Change** | ** ** |
| **($ in thousands)**              | ** ** | **2010**                         | ** ** | **2011**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| Net revenues                                |       | $                                | 94,619     |       | 100.0      | %          | $          | 139,114 |   | 100.0 | % | $ | 44,495 |   | 47.0 | % |
| Cost of sales                               |       | 84,429                           |       | 89.2       | %          | 118,521    |       | 85.2 | % | 34,092 |   | 40.4 | % |
| Gross profit                                |       | 10,190                           |       | 10.8       | %          | 20,593     |       | 14.8 | % | 10,403 |   | 102.1 | % |
| Selling, general and administrative expense |       | 7,977                            |       | 8.4        | %          | 10,158     |       | 7.3 | % | 2,181 |   | 27.3 | % |
| Research and technical expense              |       | 712                              |       | 0.8        | %          | 862        |       | 0.6 | % | 150 |   | 21.1 | % |
| Operating income                            |       | 1,501                            |       | 1.6        | %          | 9,573      |       | 6.9 | % | 8,072 |   | 537.8 | % |
| Interest income                             |       | (69                              | )          | (0.1       | )%         | (21        | )          | (0.0 | )% | (48 | ) | (69.6 | )% |
| Interest expense                            |       | 39                               |       | 0.0        | %          | 30         |       | 0.0 | % | (9 | ) | (23.1 | )% |
| Income before income taxes                  |       | 1,531                            |       | 1.6        | %          | 9,564      |       | 6.9 | % | 8,033 |   | 524.7 | % |
| Provision for income taxes                  |       | 575                              |       | 0.6        | %          | 3,348      |       | 2.4 | % | 2,773 |   | 482.3 | % |
| Net income                                  |       | $                                | 956        |       | 1.0        | %          | $          | 6,216 |   | 4.5 | % | 5,260 |   | 550.2 | % |
|                                             |            |                                  |            |            |            |            |            |  |  |  |  |  |  |  |  |  |

 

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

 
| ** **                                                  | ** ** | **Three Months Ended********March 31,** | ** ** | **Change** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------|------------|------------|------------|
| **By market**                                          | ** ** | **2010**                                               | ** ** | **2011**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| **Net   revenues** (in thousands)                           |       |                                                   |       |       |       |   |   |   |   |
| Aerospace                                                   |       | $                                                      | 33,495     |       | $          | 48,953 |   | $ | 15,458 |   | 46.2 | % |
| Chemical processing                                         |       | 18,333                                                 |       | 37,238     |       | 18,905 |   | 103.1 | % |
| Land-based gas turbines                                     |       | 20,028                                                 |       | 27,724     |       | 7,696 |   | 38.4 | % |
| Other markets                                               |       | 19,426                                                 |       | 21,985     |       | 2,559 |   | 13.2 | % |
| **Total product revenue**                                   |       | 91,282                                                 |       | 135,900    |       | 44,618 |   | 48.9 | % |
| Other revenue                                               |       | 3,337                                                  |       | 3,214      |       | (123 | ) | (3.7 | )% |
| **Net revenues**                                            |       | $                                                      | 94,619     |       | $          | 139,114 |   | $ | 44,495 |   | 47.0 | % |
|                                                        |       |                                                   |       |       |       |   |   |   |   |
| **Pounds   by markets****(in   thousands)                   |       |                                                   |       |       |       |   |   |   |   |
| Aerospace                                                   |       | 1,435                                                  |       | 2,008      |       | 573 |   | 39.9 | % |
| Chemical processing                                         |       | 811                                                    |       | 1,846      |       | 1035 |   | 127.6 | % |
| Land-based gas turbines                                     |       | 1,291                                                  |       | 1,664      |       | 373 |   | 28.9 | % |
| Other markets                                               |       | 867                                                    |       | 855        |       | (12 | ) | (1.4 | )% |
| **Total shipments**                                         |       | 4,404                                                  |       | 6,373      |       | 1,969 |   | 44.7 | % |
| ** **                                                  |       |                                                   |       |       |       |   |   |   |   |
| **Average   selling price per pound**                       |       |                                                   |       |       |       |   |   |   |   |
| Aerospace                                                   |       | $                                                      | 23.34      |       | $          | 24.38 |   | $ | 1.04 |   | 4.5 | % |
| Chemical processing                                         |       | 22.61                                                  |       | 20.17      |       | (2.44 | ) | (10.8 | )% |
| Land-based gas turbines                                     |       | 15.51                                                  |       | 16.66      |       | 1.15 |   | 7.4 | % |
| Other markets                                               |       | 22.41                                                  |       | 25.71      |       | 3.30 |   | 14.7 | % |
| **Total product**(excluding other revenue)                  |       | 20.73                                                  |       | 21.32      |       | 0.59 |   | 2.8 | % |
| **Total average selling price** (including   other revenue) |       | 21.48                                                  |       | 21.83      |       | 0.35 |   | 1.6 | % |

 

17

----

Table of Contents

 

*Net Revenues.* Net revenues were $139.1 million in the second quarter of fiscal 2011, an increase of 47.0% from $94.6 million in the same period of fiscal 2010.   Volume was 6.4 million pounds in the second quarter of fiscal 2011, an increase of 44.7% from 4.4 million pounds in the same period of fiscal 2010.  The aggregate average selling price was $21.83 per pound in the second quarter of fiscal 2011, an increase of 1.6% from $21.48 per pound in the same period of fiscal 2010.  Average selling price increased due to improved customer demand, improved product mix and rising raw material costs while volume increased due to improved customer demand.  The Company’s consolidated backlog was $241.7 million at March 31, 2010, an increase of 44.7% from $167.0 million at December 31, 2010.  This increase reflects a 39.6% increase in backlog pounds combined with a 3.7% increase in backlog average selling price.

 

Sales to the aerospace market were $49.0 million in the second quarter of fiscal 2011, an increase of 46.2% from $33.5 million in the same period of fiscal 2010, due to a 39.9% increase in volume combined with a 4.5% increase in the average selling price per pound. The volume increase reflects improving market demand. The increase in the average selling price per pound is due to increased customer demand and higher raw material costs.

 

Sales to the chemical processing market were $37.2 million in the second quarter of fiscal 2011, an increase of 103.1% from $18.3 million in the same period of fiscal 2010, due to a 127.6% increase in volume, which was partially offset by a 10.8% decrease in the average selling price per pound.  Volume was affected by the project-oriented nature of the market where the comparisons of volume shipped between quarters can be affected by timing, quantity and order size of the project business, which also affects average selling price per pound.  In the second quarter of fiscal 2011, there was a higher level of project business for lower cost alloys versus the comparable quarter of fiscal 2010, which increased volume and lowered average selling price per pound.

 

Sales to the land-based gas turbine market were $27.7 million in the second quarter of fiscal 2011, an increase of 38.4% from $20.0 million for the same period of fiscal 2010, due to a 28.9% increase in volume combined with an increase of 7.4% in the average selling price per pound. The increases in both volume and average selling price are due to improved original equipment manufacturer activity, primarily in the marine and pipeline applications of land-based gas turbines.

 

Sales to other markets were $22.0 million in the second quarter of fiscal 2011, an increase of 13.2% from $19.4 million in the same period of fiscal 2010, due to a 14.7% increase in average selling price per pound partially offset by a 1.4% decrease in volume.  The increase in the average selling price reflects a change to a higher-value alloy and form mix shipped into the other markets category.

 

*Other Revenue.*Other revenue was $3.2 million in the second quarter of fiscal 2011, a decrease of 3.7% from $3.3 million in the same period of fiscal 2010.

 

*Cost of Sales.* Cost of sales was $118.5 million, or 85.2% of net revenues, in the second quarter of fiscal 2011 compared to $84.4 million, or 89.2% of net revenues, in the same period of fiscal 2010. Cost of sales in the second quarter of fiscal 2011 increased by $34.1 million as compared to the same period of fiscal 2010 due to higher volume, higher raw material costs and increased production staffing to meet increased product demand.  This increase was partially offset by increased absorption of fixed manufacturing costs as a result of higher production volumes, particularly of sheet product.

 

*Selling, General and Administrative Expense.* Selling, general and administrative expense was $10.2 million for the second quarter of fiscal 2011, an increase of $2.2 million, or 27.3%, from $8.0 million in the same period of fiscal 2010.  A portion of the increases were due to higher personnel costs as a result of headcount

 

18

----

Table of Contents

 

additions, salary increases, recruiting and relocation costs. Also increasing were sales, marketing and additional administrative expenses.  Selling, general and administrative expenses as a percentage of net revenues decreased to 7.3% for the second quarter of fiscal 2011 compared to 8.4% for the same period of fiscal 2010 due primarily to increased revenues.

 

*Research and Technical Expense.* Research and technical expense was $0.9 million, or 0.6% of revenue, for the second quarter of fiscal 2011, an increase of $0.2 million from $0.7 million, or 0.8% of net revenues, in the same period of fiscal 2010.

 

*Operating Income.* As a result of the above factors, operating income in the second quarter of fiscal 2011 was $9.6 million compared to operating income of $1.5 million in the same period of fiscal 2010.

 

*Income Taxes.* Income taxes were an expense of $3.3 million in the second quarter of fiscal 2011, an increase of $2.8 million from $0.6 million in the same period of fiscal 2010, due to higher pretax income generated in fiscal 2011.  The effective tax rate for the second quarter of fiscal 2011 was 35.0%, compared to 37.6% in the same period of fiscal 2010 primarily due to lower state tax rates and higher manufacturing deduction.

 

*Net Income.* As a result of the above factors, net income in the second quarter of fiscal 2011 was $6.2 million, an increase of $5.2 million from $1.0 million in the same period of fiscal 2010.

 

**Results of Operations for the Six Months Ended March 31, 2011 Compared to the Six Months Ended March 31, 2010**

 
| ** **                                  | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|--------------------------------|------------|------------|------------|
| ** **                                  | ** ** | **March 31,**             | ** ** | **Change** | ** ** |
| **($ in thousands)**              | ** ** | **2010**                       | ** ** | **2011**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| Net revenues                                |       | $                              | 175,627    |       | 100.0      | % | $ | 245,465 |   | 100.0 | % | $ | 69,838 |   | 39.8 | % |
| Cost of sales                               |       | 158,592                        |       | 90.3       | %          | 207,003 |   | 84.3 | % | 48,411 |   | 30.5 | % |
| Gross profit                                |       | 17,035                         |       | 9.7        | %          | 38,462 |   | 15.7 | % | 21,427 |   | 125.8 | % |
| Selling, general and administrative expense |       | 16,163                         |       | 9.2        | %          | 19,278 |   | 7.9 | % | 3,115 |   | 19.3 | % |
| Research and technical expense              |       | 1,361                          |       | 0.8        | %          | 1,615 |   | 0.7 | % | 254 |   | 18.7 | % |
| Operating income (loss)                     |       | (489                           | )          | (0.3       | )%         | 17,569 |   | 7.2 | % | 18,058 |   | 3692.8 | % |
| Interest income                             |       | (114                           | )          | (0.1       | )%         | (101 | ) | (0.0 | )% | (13 | ) | (11.4 | )% |
| Interest expense                            |       | 87                             |       | 0.0        | %          | 59 |   | 0.0 | % | (28 | ) | (32.2 | )% |
| Income (loss) before income taxes           |       | (462                           | )          | (0.3       | )%         | 17,611 |   | 7.2 | % | 18,073 |   | 3911.9 | % |
| Provision for (benefit from) income taxes   |       | (132                           | )          | (0.1       | )%         | 6,139 |   | 2.5 | % | 6,271 |   | 4750.8 | % |
| Net income (loss)                           |       | $                              | (330       | )          | (0.2       | )% | $ | 11,472 |   | 4.7 | % | $ | 11,802 |   | 3576.4 | % |

 

19

----

Table of Contents

 

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

 
| ** **                                                  | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------|------------|------------|------------|------------|------------|
| ** **                                                  | ** ** | **March 31,**             | ** ** | **Change** | ** ** |
| **By market**                                          | ** ** | **2010**                       | ** ** | **2011**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| ***Net   revenues*** (in thousands)                         |       |                           |       |       |       |       |       |   |   |
| Aerospace                                                   |       | $                              | 61,870     |       | $          | 93,490     |       | $ | 31,620 |   | 51.1 | % |
| Chemical processing                                         |       | 39,161                         |       | 57,829     |       | 18,668     |       | 47.7 | % |
| Land-based gas turbines                                     |       | 34,994                         |       | 49,265     |       | 14,271     |       | 40.8 | % |
| Other markets                                               |       | 32,506                         |       | 37,202     |       | 4,696      |       | 14.4 | % |
| **Total product revenue**                                   |       | 168,531                        |       | 237,786    |       | 69,255     |       | 41.1 | % |
| Other revenue                                               |       | 7,096                          |       | 7,679      |       | 583        |       | 8.2 | % |
| **Net revenues**                                            |       | $                              | 175,627    |       | $          | 245,465    |       | $ | 69,838 |   | 39.8 | % |
|                                                        |       |                           |       |       |       |       |       |   |   |
| ***Pounds   by markets*** (in   thousands)             |       |                           |       |       |       |       |       |   |   |
| Aerospace                                                   |       | 2,656                          |       | 3,696      |       | 1,040      |       | 39.2 | % |
| Chemical processing                                         |       | 1,966                          |       | 2,760      |       | 794        |       | 40.4 | % |
| Land-based gas turbines                                     |       | 2,237                          |       | 2,863      |       | 626        |       | 28.0 | % |
| Other markets                                               |       | 1,472                          |       | 1,465      |       | (7         | )          | (0.5 | )% |
| **Total shipments**                                         |       | 8,331                          |       | 10,784     |       | 2,453      |       | 29.4 | % |
|                                                        |       |                           |       |       |       |       |       |   |   |
| ***Average   selling price per pound***                     |       |                           |       |       |       |       |       |   |   |
| Aerospace                                                   |       | $                              | 23.29      |       | $          | 25.29      |       | $ | 2.00 |   | 8.6 | % |
| Chemical processing                                         |       | 19.92                          |       | 20.95      |       | 1.03       |       | 5.2 | % |
| Land-based gas turbines                                     |       | 15.64                          |       | 17.21      |       | 1.57       |       | 10.0 | % |
| Other markets                                               |       | 22.08                          |       | 25.39      |       | 3.31       |       | 15.0 | % |
| **Total product**(excluding other revenue)                  |       | 20.23                          |       | 22.05      |       | 1.82       |       | 9.0 | % |
| **Total average selling price** (including   other revenue) |       | 21.08                          |       | 22.76      |       | 1.68       |       | 8.0 | % |

 

*Net Revenues.* Net revenues were $245.5 million in the first six months of fiscal 2011, an increase of 39.8% from $175.6 million in the same period of fiscal 2010 due to increases in volume and average selling price per pound.   Volume was 10.8 million pounds in the first six months of fiscal 2011, an increase of 29.4% from 8.3 million pounds in the same period of fiscal 2010.  The aggregate average selling price was $22.76 per pound in the first six months of fiscal 2011, an increase of 8.0% from $21.08 per pound in the same period of fiscal 2010.  Average selling price increased due to improved customer demand, improved product mix and rising raw material costs while volume increased due to improved customer demand. The Company’s consolidated backlog was $241.7 million at March 31, 2011, an increase of 63.3% from $148.0 million at September 30, 2010.  This increase reflects the combination of a 60.9% increase in backlog pounds and a 1.5% increase in backlog average selling price.

 

Sales to the aerospace market were $93.5 million in the first six months of fiscal 2011, an increase of 51.1% from $61.9 million in the same period of fiscal 2010, due to a 39.2% increase in volume combined with an 8.6% increase in the average selling price per pound. The increase in the average selling price per pound is due to increased customer demand and higher raw material costs while the increase in volume is due to improved customer demand.

 

Sales to the chemical processing market were $57.8 million in the first six months of fiscal 2011, an increase of 47.7% from $39.2 million in the same period of fiscal 2010, due to a 40.4% increase in volume  and a 5.2% increase in the average selling price per pound.  Volume increased due to increases in project business attributed to an improving economic environment and new application development.

 

Sales to the land-based gas turbine market were $49.3 million in the first six months of fiscal 2011, an increase of 40.8% from $35.0 million for the same period of fiscal 2010, due to an increase of 10.0% in the 

 

20

----

Table of Contents

 

average selling price per pound combined with a 28.0% increase in volume. The increase in both volume and average selling price is due to increased original equipment manufacturer activity and rising raw material prices.

 

Sales to other markets were $37.2 million in the first six months of fiscal 2011, an increase of 14.4% from $32.5 million in the same period of fiscal 2010, due to a 15.0% increase in average selling price per pound partially offset by a 0.5% decrease in volume.  The increase in average selling price reflects a change to a mix of higher value alloy and forms sold into the other market category.

 

*Other Revenue.*Other revenue was $7.7 million in the first six months of fiscal 2011, an increase of 8.2% from $7.1 million in the same period of fiscal 2010. The increase is due primarily to higher conversion and miscellaneous sales.

 

*Cost of Sales.* Cost of sales was $207.0 million, or 84.3% of net revenues, in the first six months of fiscal 2011 compared to $158.6 million, or 90.3% of net revenues, in the same period of fiscal 2010. Cost of sales in the first six months of fiscal 2011 increased by $48.4 million as compared to the same period of fiscal 2010 due to higher volume, higher raw material costs and increased production staffing to meet increased demand.  This increase was partially offset by increased absorption of fixed manufacturing costs as a result of higher production volumes, particularly that of sheet product.  Cost of sales as a percentage of net revenues decreased in the first six months of fiscal 2011 as compared to the same period of fiscal 2010 due to improving customer demand.

 

*Selling, General and Administrative Expense.* Selling, general and administrative expense was $19.3 million for the first six months of fiscal 2011, an increase of $3.1 million, or 19.3%, from $16.2 million in the same period of fiscal 2010.  A portion of the increases were due to higher personnel costs as a result of headcount additions, salary increases, recruiting and relocation costs. Also increasing were sales, marketing and additional administrative expenses.  Selling, general and administrative expenses as a percentage of net revenues decreased to 7.9% for the first six months of fiscal 2011 compared to 9.2% for the same period of fiscal 2010 due to increased revenues.

 

*Research and Technical Expense.* Research and technical expense was $1.6 million, or 0.7% of revenue, for the first six months of fiscal 2011, an increase of $0.2 million from $1.4 million, or 0.8% of net revenues, in the same period of fiscal 2010.

 

*Operating Income (Loss).* As a result of the above factors, operating income in the first six months of fiscal 2011 was $17.6 million compared to an operating loss of $(0.5) million in the same period of fiscal 2010.

 

*Income Taxes.* Income taxes were an expense of $6.1 million in the first six months of fiscal 2011, an increase of $6.3 million from a benefit of $0.1 million in the same period of fiscal 2010, due to pretax income generated in fiscal 2011.  The effective tax rate for the first six months of fiscal 2011 was 34.9%, compared to 28.6% in the same period of fiscal 2010, due primarily to the prior year impact of permanent items on near breakeven pretax income.

 

*Net Income (Loss).* As a result of the above factors, net income in the first six months of fiscal 2011 was $11.5 million, an increase of $11.8 million from a net loss of $(0.3) million in the same period of fiscal 2010.

 

**Liquidity and Capital Resources**

 

*Comparative cash flow analysis*

 

During the first six months of fiscal 2011, the Company’s primary sources of cash were cash on-hand and cash from operations as detailed below.  At March 31, 2011, the Company had cash and cash equivalents of $47.3 million compared to cash and cash equivalents of $64.0 million at September 30, 2010.

 

Net cash used in operating activities was $6.3 million in the first six months of fiscal 2011 compared to $1.3 million in the same period of fiscal 2010.  Items contributing to the difference include cash used by higher accounts receivable of $20.5 million which was $13.0 million higher than cash used from accounts receivable in the same period of fiscal 2010.  Cash used from increased inventory balances (net of foreign currency fluctuation) of $7.0 million was $16.4 million lower than cash used from inventory balances in the same period of fiscal 2010.  Inventory has increased to support the Company’s increased order entry, higher backlog levels and higher raw material costs. Cash generated from operations was favorably impacted by net income of $11.5 million, compared to a net loss of $0.3 million in the same period of fiscal 2010. Net cash used in investing activities was $6.3 million 

 

21

----

Table of Contents

 

in the first six months of fiscal 2011 compared to $6.9 million in the first six months of fiscal 2010 as a result of lower capital expenditures.  Net cash used in financing activities in the first six months of fiscal 2011 included dividend payments of $4.9 million.

 

*Future sources of liquidity*

 

The Company’s sources of cash for fiscal 2011 are expected to consist primarily of cash generated from operations, cash on-hand, and, if needed, borrowings under the U.S. revolving credit facility.  The U.S. revolving credit facility provides borrowings in a maximum amount of $120.0 million, subject to a borrowing base formula and certain reserves. At March 31, 2011, the Company had cash of $47.3 million, an outstanding balance of zero on the U.S. revolving credit facility and access to a total of approximately $120.0 million under the U.S. revolving credit facility, subject to borrowing base and certain reserves. Management believes that the resources described above will be sufficient to fund planned capital expenditures and working capital requirements over the next twelve months.

 

U.S. revolving credit facility: The Company and Wells Fargo Capital Finance, LLC (as successor by merger to Wachovia Capital Finance) (“Wells Fargo”) entered into a Second Amended and Restated Loan and Security Agreement (the “Amended Agreement”) with an effective date of November 18, 2008, which amended and restated the revolving credit facility between Haynes and Wells Fargo dated August 31, 2004. The maximum revolving loan amount under the Amended Agreement is $120.0 million subject to a borrowing base formula and certain reserves. Borrowings under the U.S. revolving credit facility bear interest at the Company’s option at either Wells Fargo, National Association’s “prime rate”, plus up to 2.25% per annum (depending on excess availability), or an adjusted LIBOR rate, plus up to 3.0% per annum (depending on excess availability). In addition, the Company must pay monthly in arrears 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 daily outstanding balance of all issued letters of credit, plus customary fees for issuance, amendments, and processing. During the six month period ended March 31, 2011 and as of that date, there were no amounts outstanding under the U.S. revolving credit facility. The Company is subject to certain covenants as to fixed charge coverage ratios and other customary covenants, including covenants restricting the incurrence of indebtedness, the granting of liens, and the sale of assets. The Company is permitted to pay dividends and repurchase common stock if certain financial metrics are met. As of March 31, 2011, the most recent required measurement date under the Amended Agreement, the Company was in compliance with these covenants. The U.S. revolving credit facility matures on September 30, 2011. Borrowings under the U.S. revolving credit facility are collateralized by a pledge of substantially all of the U.S. assets of the Company, including the equity interests in its U.S. subsidiaries, but excluding the four-high Steckel rolling mill and related assets, which are pledged to Titanium Metals Corporation to secure the performance of the Company’s obligations under a Conversion Services Agreement. The U.S. revolving credit facility is also secured by a pledge of a 65% equity interest in each of the Company’s foreign subsidiaries.

 

*Future Uses of Liquidity*

 

The Company’s primary uses of cash over the next twelve months are expected to consist of expenditures related to funding operations, capital spending (detailed below), pension plan funding and dividends to stockholders.

 

At the beginning of fiscal 2010, the Company announced plans to spend, in total, approximately $85.0 million over fiscal years 2010 through 2014 on new strategic initiatives, routine capital maintenance projects and upgrading of the capabilities of the Company’s service centers. This amount includes approximately $30.0 million on upgrades to its four-high Steckel rolling mill and supporting equipment, approximately $25.0 million on other equipment purchases and upgrades and approximately $20.0 million on routine capital maintenance projects. In addition, the Company is finalizing plans to spend approximately $10.0 million over the course of fiscal 2011 and 2012 to upgrade, consolidate and enhance capabilities at its service center operations to improve customer service and return on assets at those operations. Management does not anticipate prolonged equipment outages as a result of upgrades for any of these projects. These projects are expected to improve quality, reduce operating costs, improve delivery performance, improve inventory turns and decrease cycle time. The target for capital 

 

22

----

Table of Contents

 

spending in fiscal 2011 is $15.0 million, plus additional amounts for the upgrade of the Company’s service centers.

 

*Contractual Obligations*

 

The following table sets forth the Company’s contractual obligations for the periods indicated, as of March 31, 2011:

 
| ** **                              | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                 | ** ** | **Total**                                 | ** ** | **Less than   1 year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than   5 years** | ** ** |
| **Contractual Obligations****(1)** |       |                                      |       |   |   |   |   |   |   |   |   |
| Credit facility fees                    |       | $                                         | 255        |   | $ | 255 |   | $ | — |   | $ | — |   | $ | — |   |
| Operating lease obligations             |       | 11,086                                    |       | 2,763 |   | 3,269 |   | 2,211 |   | 2,843 |   |
| Capital lease obligations               |       | 288                                       |       | 33 |   | 66 |   | 66 |   | 123 |   |
| Raw material contracts                  |       | 68,915                                    |       | 68,915 |   | — |   | — |   | — |   |
| Mill supplies contracts                 |       | 61                                        |       | 61 |   | — |   | — |   | — |   |
| Capital projects                        |       | 11,016                                    |       | 11,016 |   | — |   | — |   | — |   |
| Environmental post-closure monitoring   |       | 1,448                                     |       | 122 |   | 252 |   | 246 |   | 828 |   |
| External product conversion source      |       | 4,400                                     |       | 600 |   | 1,200 |   | 1,200 |   | 1,400 |   |
| Pension plan(2)                         |       | 57,103                                    |       | 14,443 |   | 26,220 |   | 16,440 |   | — |   |
| Non-qualified pension plan              |       | 861                                       |       | 95 |   | 190 |   | 190 |   | 386 |   |
| Other postretirement benefits(3)        |       | 50,000                                    |       | 5,000 |   | 10,000 |   | 10,000 |   | 25,000 |   |
| Total                                   |       | $                                         | 205,433    |   | $ | 103,303 |   | $ | 41,197 |   | $ | 30,353 |   | $ | 30,580 |   |

 

----

(1)    Taxes are not included in the table.  The Company adopted the provisions of FIN No. 48, Accounting for Uncertainty in Income Taxes, on October 1, 2007.  As of March 31, 2011, the non-current income taxes payable was $308.  It is not possible to determine in which period the tax liability might be paid out.

(2)    The Company has a funding obligation to contribute $56,160 to the domestic pension plan arising from the Pension Protection Act of 2006. These payments will be tax deductible. All benefit payments under the domestic pension plan are provided by the plan and not the Company. The Company expects its U.K. subsidiary to contribute $943 over the following twelve months to the U.K. Pension Plan.

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

 

**New Accounting Pronouncements**

 

See Note2. New Accounting Pronouncements of the Notes to Consolidated Financial Statements.

 

**Critical Accounting Policies and Estimates**

 

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Assumptions and estimates were based on the facts and circumstances known at March 31, 2011. However, future events rarely develop exactly as forecast, and the best estimates routinely require adjustment. The accounting policies discussed in Item 7 of our annual report on Form 10-K for the year ended September 30, 2010 are considered by management to be the most important to an understanding of the financial statements, because their application places the most significant demands on management’s judgment and estimates about the effect of matters that are inherently uncertain. These policies are also discussed in Note 2 of the consolidated financial statements included in Item 8 of that report. There have been no material changes to that information since the end of fiscal 2010.

 

23

----

Table of Contents

 

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

 

As of March 31, 2011, there were no material changes in the market risks described in “Quantitative and Qualitative Disclosures about Market Risk” in our Form 10-K for the fiscal year ended September 30, 2010.

 

**Item 4.    Controls and Procedures**

 

The Company has performed, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness and the design and operation of the Company’s disclosure controls and procedures (as defined by Exchange Act rules 13a-15(e) and 15d-15(e)) pursuant to Rule 13a-15(b) of the Exchange Act as of the end of the period covered by this report.  Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2011 in providing reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission including to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

There have been no changes in our internal controls over financial reporting during our most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

24

----

Table of Contents

 

**PART II  OTHER INFORMATION**

 

**Item 6.  Exhibits**

 

Exhibits.  See Index to Exhibits.

 

25

----

Table of Contents

 

**SIGNATURES**

 

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

 

 
|   | HAYNES INTERNATIONAL, INC.         |
|--------|-----------------------------------------|
|   |                                    |
|   |                                    |
|   | *  /s/ Mark Comerford*             |
|   | Mark Comerford                          |
|   | President   and Chief Executive Officer |
|   | Date:   May 5, 2011                |
|   |                                    |
|   |                                    |
|   | *  /s/ Marcel Martin*              |
|   | Marcel   Martin                         |
|   | Vice   President, Finance               |
|   | Chief   Financial Officer               |
|   | Date:   May 5, 2011                |

 

26

----

Table of Contents

 

**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).           |
| (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.                                                                                                                                                                                                              |

 

27

----