Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND 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 thequarterly period ended March 31, 2009**

** **

**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 checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes x   No o

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate website, if any, every Interactive data File required to be submittedand posted pursuant to file 405 of Regulation ST (§ 232.405 of the chapter)during the preceding 12 months (or for such stated period that the registrantwas required to submit and post such files).   Yes o   No o

 

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

 

| Large  accelerated filer  o |   | Accelerated  filer  x         |
|---------------------------------------|--------|-----------------------------------------|
|                                  |   |                                    |
| Non-accelerated  filer  o   |   | Smaller  Reporting Company  o |

 

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

 

Indicate by checkmark whether the registrant has filed all documents and reports required to befiled by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934subsequent to the distribution of securities under a plan confirmed by a court.   Yes x   No o

 

Asof May 1, 2009, the registrant had 12,038,423 shares of Common Stock,$.001 par value, outstanding.

 

 

 

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

**TABLE OFCONTENTS**

** **
| ** **             | ** **                                                                                                                  | **Page**   |
|------------------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| **PART I**        | **FINANCIAL INFORMATION**                                                                                                   | ** ** |
| ** **             | ** **                                                                                                                  | ** ** |
|  Item 1.          | Unaudited Condensed Financial  Statements                                                                                   |       |
|                   |                                                                                                                        |       |
|                   | Haynes  International, Inc. and Subsidiaries:                                                                          |       |
|                   |                                                                                                                        |       |
|                   | Unaudited  Consolidated Balance Sheets as of September 30, 2008 and March 31,  2009                               | 1          |
|                   |                                                                                                                        |       |
|                   | Unaudited  Consolidated Statements of Operations for the Three and Six Months Ended  March 31, 2008 and 2009           | 2          |
|                   |                                                                                                                        |       |
|                   | Unaudited Consolidated  Statements of Comprehensive Income for the Three and Six Months Ended  March 31, 2008 and 2009 | 3          |
|                   |                                                                                                                        |       |
|                   | Unaudited Consolidated Statements of Cash Flows for  the Six Months Ended March 31, 2008 and 2009                      | 4          |
|                   |                                                                                                                        |       |
|                   | Notes to Consolidated Financial Statements                                                                                  | 5          |
|                   |                                                                                                                        |       |
|  Item 2.          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                 | 15         |
|                   |                                                                                                                        |       |
|  Item 3.          | Quantitative  and Qualitative Disclosures About Market Risk                                                                 | 32         |
|                   |                                                                                                                        |       |
|  Item 4.          | Controls and  Procedures                                                                                                    | 32         |
|                   |                                                                                                                        |       |
|  **PART II** | **OTHER INFORMATION**                                                                                                       | ** ** |
|                   | ** **                                                                                                                  | ** ** |
| Item 2.                | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                | 33         |
|                   |                                                                                                                        |       |
| Item 4.                | Submissions  of Matters to a Vote of Security Holders                                                                       | 33         |
|                   |                                                                                                                        |       |
| Item 6.                | Exhibits                                                                                                                    | 33         |
|                   |                                                                                                                        |       |
|                   | Signatures                                                                                                                  | 34         |
|                   |                                                                                                                        |       |
|                   | Index  to Exhibits                                                                                                          | 35         |

 

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**PART 1         FINANCIAL INFORMATION**

Item 1.     Financial Statements

 

**HAYNES INTERNATIONAL, INC. and SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

**(inthousands, except share and per share data)**

 
| ** **                                                                                                                                                                          | ** ** | **September 30,  2008** | ** ** | **March 31,  2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------|------------|
| **ASSETS**                                                                                                                                                                          |       |                         |       |                     |       |
| Current assets:                                                                                                                                                                     |       |                         |       |                     |       |
| Cash and cash  equivalents                                                                                                                                                          |       | $                            | 7,058      |                     | $          | 30,376 |   |
| Restricted cash  — current portion                                                                                                                                             |       | 110                          |       | 110                      |       |
| Accounts  receivable, less allowance for doubtful accounts of $1,354 and $1,330,  respectively                                                                                      |       | 99,295                       |       | 75,035                   |       |
| Inventories                                                                                                                                                                         |       | 304,915                      |       | 243,320                  |       |
| Income taxes  receivable                                                                                                                                                            |       | —                       |       | 12,493                   |       |
| Deferred income  taxes                                                                                                                                                              |       | 9,399                        |       | 8,891                    |       |
| Other current  assets                                                                                                                                                               |       | 2,573                        |       | 1,887                    |       |
| Total current  assets                                                                                                                                                               |       | 423,350                      |       | 372,112                  |       |
|                                                                                                                                                                                |       |                         |       |                     |       |
| Property, plant  and equipment (at cost)                                                                                                                                            |       | 134,523                      |       | 139,247                  |       |
| Accumulated depreciation                                                                                                                                                            |       | (27,221                      | )          | (31,614                  | )          |
| Net property,  plant and equipment                                                                                                                                                  |       | 107,302                      |       | 107,633                  |       |
|                                                                                                                                                                                |       |                         |       |                     |       |
| Deferred income  taxes — long term portion                                                                                                                                     |       | 32,310                       |       | 32,594                   |       |
| Prepayments and  deferred charges                                                                                                                                                   |       | 2,741                        |       | 2,779                    |       |
| Restricted cash  — long term portion                                                                                                                                           |       | 220                          |       | 110                      |       |
| Goodwill                                                                                                                                                                            |       | 43,737                       |       | —                   |       |
| Other intangible  assets, net                                                                                                                                                       |       | 7,907                        |       | 7,695                    |       |
| Total assets                                                                                                                                                                        |       | $                            | 617,567    |                     | $          | 522,923 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                      |       |                         |       |                     |       |
| Current  liabilities:                                                                                                                                                               |       |                         |       |                     |       |
| Accounts payable                                                                                                                                                                    |       | $                            | 41,939     |                     | $          | 22,940 |   |
| Accrued expenses                                                                                                                                                                    |       | 12,729                       |       | 10,234                   |       |
| Income taxes  payable                                                                                                                                                               |       | 7,482                        |       | —                   |       |
| Accrued pension  and postretirement benefits                                                                                                                                        |       | 15,016                       |       | 15,972                   |       |
| Revolving credit  facilities                                                                                                                                                        |       | 11,812                       |       | —                   |       |
| Deferred revenue  — current portion                                                                                                                                            |       | 2,500                        |       | 2,500                    |       |
| Current  maturities of long-term obligations                                                                                                                                        |       | 1,515                        |       | 110                      |       |
| Total current  liabilities                                                                                                                                                          |       | 92,993                       |       | 51,756                   |       |
|                                                                                                                                                                                |       |                         |       |                     |       |
| Long-term  obligations (less current portion)                                                                                                                                       |       | 1,582                        |       | 1,482                    |       |
| Deferred revenue  (less current portion)                                                                                                                                            |       | 42,830                       |       | 41,579                   |       |
| Non-current  income taxes payable                                                                                                                                                   |       | 276                          |       | 276                      |       |
| Accrued pension  and postretirement benefits                                                                                                                                        |       | 100,343                      |       | 91,796                   |       |
| Total  liabilities                                                                                                                                                                  |       | 238,024                      |       | 186,889                  |       |
| Commitments and  contingencies (Note 6)                                                                                                                                             |       | —                       |       | —                   |       |
| Stockholders’  equity:                                                                                                                                                         |       |                         |       |                     |       |
| Common stock,  $0.001 par value (40,000,000 shares authorized, 11,984,623 and 12,038,423  issued and outstanding at September 30, 2008 and March 31, 2009,  respectively) |       | 12                           |       | 12                       |       |
| Preferred stock,  $0.001 par value (20,000,000 shares authorized, 0 shares issued and  outstanding)                                                                                 |       | —                       |       | —                   |       |
| Additional  paid-in capital                                                                                                                                                         |       | 225,821                      |       | 226,409                  |       |
| Accumulated earnings                                                                                                                                                                |       | 155,831                      |       | 117,466                  |       |
| Accumulated  other comprehensive loss                                                                                                                                               |       | (2,121                       | )          | (7,853                   | )          |
| Total  stockholders’ equity                                                                                                                                                    |       | 379,543                      |       | 336,034                  |       |
| Total  liabilities and stockholders’ equity                                                                                                                                    |       | $                            | 617,567    |                     | $          | 522,923 |   |

 

The accompanying notesare an integral part of these financial statements.

 

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**HAYNESINTERNATIONAL, INC. and SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

**(inthousands, except share and per share data)**

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **March 31,**               | ** ** | **March 31,**             | ** ** |
| ** **                                   | ** ** | **2008**                         | ** ** | **2009**                       | ** ** | **2008** | ** ** | **2009** | ** ** |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Net revenues                                 |       | $                                | 163,771    |                           | $          | 120,413 |   | $ | 309,848 |   | $ | 254,717 |   |
| Cost of sales                                |       | 127,851                          |       | 113,416                        |       | 239,723 |   | 228,970 |   |
| Gross profit                                 |       | 35,920                           |       | 6,997                          |       | 70,125 |   | 25,747 |   |
| Selling, general  and administrative expense |       | 10,062                           |       | 8,292                          |       | 20,052 |   | 18,882 |   |
| Research and  technical expense              |       | 839                              |       | 814                            |       | 1,747 |   | 1,639 |   |
| Impairment of  goodwill                      |       | —                           |       | 43,737                         |       | — |   | 43,737 |   |
| Operating income  (loss)                     |       | 25,019                           |       | (45,846                        | )          | 48,326 |   | (38,511 | ) |
| Interest income                              |       | (26                              | )          | (8                             | )          | (57 | ) | (28 | ) |
| Interest expense                             |       | 343                              |       | 123                            |       | 837 |   | 479 |   |
| Income (loss)  before income taxes           |       | 24,702                           |       | (45,961                        | )          | 47,546 |   | (38,962 | ) |
| Provision for  (benefit from) income taxes   |       | 9,639                            |       | (3,072                         | )          | 18,640 |   | (597 | ) |
| Net income  (loss)                           |       | $                                | 15,063     |                           | $          | (42,889 | ) | $ | 28,906 |   | $ | (38,365 | ) |
| Net income  (loss) per share:                |       |                             |       |                           |       |   |   |   |   |
| Basic                                        |       | $                                | 1.27       |                           | $          | (3.58 | ) | $ | 2.44 |   | $ | (3.20 | ) |
| Diluted                                      |       | $                                | 1.25       |                           | $          | (3.58 | ) | $ | 2.41 |   | $ | (3.20 | ) |
| Weighted average  shares outstanding:        |       |                             |       |                           |       |   |   |   |   |
| Basic                                        |       | 11,906,076                       |       | 11,984,623                     |       | 11,863,729 |   | 11,984,623 |   |
| Diluted                                      |       | 12,030,895                       |       | 11,984,623                     |       | 11,998,167 |   | 11,984,623 |   |

 

The accompanying notesare an integral part of these financial statements.

 

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**HAYNESINTERNATIONAL, INC. and SUBSIDIARIES**

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

**(Unaudited)**

**(inthousands)**

** **
| ** **                                      | ** ** | **Three Months Ended  March 31** | ** ** | **Six Months Ended  March 31** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                        | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **2009** | ** ** |
| Net income (loss)                     |       | $                                               | 15,063     |                                          | $          | (42,889 | ) | $ | 28,906 |   | $ | (38,365 | ) |
| Other  comprehensive income (loss), net of tax: |       |                                            |       |                                          |       |   |   |   |   |
| Pension  curtailment                            |       | —                                          |       | —                                        |       | 2,701 |   | — |   |
|                                            |       |                                            |       |                                          |       |   |   |   |   |
| Foreign currency  translation adjustment        |       | 2,475                                           |       | (1,326                                        | )          | 2,276 |   | (5,732 | ) |
| Comprehensive  income (loss)                    |       | $                                               | 17,538     |                                          | $          | (44,215 | ) | $ | 33,883 |   | $ | (44,097 | ) |

 

The accompanying notesare an integral part of these financial statements.

 

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**HAYNESINTERNATIONAL, INC. and SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(inthousands)**

 
| ** **                                                                                | ** **                             | **Six Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------|----------------------------------------|------------------------------------------------|------------|
| ** **                                                                                | ** **                             | **2008**                                       | ** ** | **2009** | ** ** |
| **Cash flows  from operating activities:**                                                |                                   |                                           |       |   |   |
| Net income  (loss)                                                                        |                                   | $                                              | 28,906     |   | $ | (38,365 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |                                   |                                           |       |   |   |
| Depreciation                                                                              |                                   | 4,415                                          |       | 4,964 |   |
| Amortization                                                                              |                                   | 542                                            |       | 528 |   |
| Impairment of  goodwill                                                                   |                                   | —                                         |       | 43,737 |   |
| Stock  compensation expense                                                               |                                   | 700                                            |       | 588 |   |
| Excess tax  benefit from option exercises                                                 |                                   | (2,077                                         | )          | — |   |
| Deferred revenue  - portion recognized                                                    |                                   | (1,250                                         | )          | (1,251 | ) |
| Deferred income  taxes                                                                    |                                   | (5,498                                         | )          | 590 |   |
| Loss on disposal  of property                                                             |                                   | 230                                            |       | 29 |   |
| Change in assets  and liabilities:                                                        |                                   |                                           |       |   |   |
| Accounts  receivable                                                                      |                                   | 4,336                                          |       | 20,863 |   |
| Inventories                                                                               |                                   | (15,535                                        | )          | 55,866 |   |
| Other assets                                                                              |                                   | (495                                           | )          | 589 |   |
| Accounts payable  and accrued expenses                                                    |                                   | (1,515                                         | )          | (17,573 | ) |
| Income taxes                                                                              |                                   | 7,806                                          |       | (19,804 | ) |
| Accrued pension  and postretirement benefits                                              |                                   | (8,454                                         | )          | (7,591 | ) |
| Net cash  provided by operating activities                                                |                                   | 12,111                                         |       | 43,170 |   |
|                                                                                      |                                   |                                           |       |   |   |
| **Cash  flows from investing activities:**                                                |                                   |                                           |       |   |   |
| Additions to  property, plant and equipment                                               |                                   | (9,356                                         | )          | (6,118 | ) |
| Change in  restricted cash                                                                |                                   | 110                                            |       | 110 |   |
| Net cash used in  investing activities                                                    |                                   | (9,246                                         | )          | (6,008 | ) |
|                                                                                      |                                   |                                           |       |   |   |
| **Cash  flows from financing activities:**                                                |                                   |                                           |       |   |   |
| Net decrease in  revolving credit                                                         |                                   | (573                                           | )          | (11,812 | ) |
| Proceeds from  exercise of stock options                                                  |                                   | 1,308                                          |       | — |   |
| Excess tax  benefit from option exercises                                                 |                                   | 2,077                                          |       | — |   |
| Payment for debt  issuance costs                                                          |                                   | —                                         |       | (316 | ) |
| Changes in  long-term obligations                                                         |                                   | (148                                           | )          | (1,335 | ) |
| Net cash  provided by (used in) financing activities                                      |                                   | 2,664                                          |       | (13,463 | ) |
|                                                                                      |                                   |                                           |       |   |   |
| Effect of  exchange rates on cash                                                         |                                   | 251                                            |       | (381 | ) |
| Increase in cash  and cash equivalents                                                    |                                   | 5,780                                          |       | 23,318 |   |
|                                                                                      |                                   |                                           |       |   |   |
| Cash and cash  equivalents, beginning of period                                           |                                   | 5,717                                          |       | 7,058 |   |
| Cash and cash  equivalents, end of period                                                 |                                   | $                                              | 11,497     |   | $ | 30,376 |   |
|                                                                                      |                                   |                                           |       |   |   |
| Supplemental  disclosures of cash flow information:                                       |                                   |                                           |       |   |   |
| Cash paid during  period for:                                                             | Interest (net of capitalized interest) |                                           | $          | 784 |   | $ | 453 |   |
|                                                                                      | Income taxes                           |                                           | $          | 16,370 |   | $ | 19,945 |   |

 

The accompanying notesare an integral part of these financial statements.

 

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** **

**HAYNESINTERNATIONAL, INC. and SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**(inthousands, except share and per share data)**

 

## **Note 1.   Basis of Presentation**

## ** **

*Interim Financial Statements*

 

The accompanyingunaudited condensed interim consolidated financial statements are prepared inconformity with accounting principles generally accepted in the United Statesof America and such principles are applied on a basis consistent withinformation reflected in our Form 10-K for the year ended September 30,2008 filed with the Securities and Exchange Commission (“SEC”). Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted pursuant to the rules andregulations promulgated by the SEC related to interim financial statements. Inthe opinion of management, the interim financial information includes alladjustments and accruals, consisting only of normal recurring adjustments,which are necessary for a fair presentation of results for the respectiveinterim periods. The results of operations for the three and six months ended March 31,2009 are not necessarily indicative of the results to be expected for the fullfiscal year ending September 30, 2009 or any interim period.

 

*Principles of Consolidation*

 

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

 

## **Note 2.   New Accounting Pronouncements**

## ** **

In September 2006, the Financial AccountingStandards Board (“FASB”) issued FASB Statement No. 157, *Fair Value Measurement* (“SFAS 157”). SFAS 157addresses standardizing the measurement of fair value for companies who arerequired to use a fair value measure for recognition or disclosure purposes.The FASB defines fair value as “the price that would be received to sell anasset or paid to transfer a liability in an orderly transaction between marketparticipants at the measure date.”  On February 12,2008, the FASB issued Staff Position 157-2 (“FSP 157-2”) which delays theeffective date of SFAS 157 for all nonfinancial assets and nonfinancialliabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis.  Therefore for financial assetsand liabilities the statement is effective for fiscal years beginning after November 15,2007 and for interim periods within those fiscal years. The Company wasrequired to adopt SFAS 157 (excluding nonfinancial assets and liabilities)beginning on October 1, 2008, which did not have a material impact on theCompany’s financial position, results of operations or cash flows.

 

## **In April 2009, the FASB issued FASB Staff Position157-4, *Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly* (“FSP 157-4”), whichprovides additional guidance for applying the provisions of SFAS No. 157.SFAS No. 157 defines fair value as the price that would be received to sellan asset or paid to transfer a liability in an orderly transaction betweenmarket participants under current market conditions. This FSP requires anevaluation of whether there has been a significant decrease in the volume andlevel of activity for the asset or liability in relation to normal marketactivity for the asset or liability. If there has, transactions or quotedprices may not be indicative of fair value and a significant adjustment mayneed to be made to those prices to estimate fair value. Additionally, an entitymust consider whether the observed transaction was orderly (that is, notdistressed or forced). If the transaction was orderly, the obtained price canbe considered a relevant observable input for determining fair value. If the transactionis not orderly, other valuation techniques must be used when estimating fairvalue. FSP 157-4 must be applied prospectively for interim periods ending afterJune 15, 2009. The Company is currently evaluating  the impact that FSP 157-4 will have on theCompany’s consolidated financial statements.**

 

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## **In February 2007, theFASB issued FASB Statement No. 159, *Establishing the FairValue Option for Financial Assets and Liabilities*(“SFAS 159”)*,* to permit all entities to choose to elect to measureeligible financial instruments at fair value. SFAS 159 applies to fiscal yearsbeginning after November 15, 2007, with early adoption permitted for anentity that has also elected to apply the provisions of SFAS 157, *Fair Value Measurement*. An entity is prohibited fromretrospectively applying SFAS 159, unless it chooses early adoption.  The Company was required to adopt SFAS 159beginning on October 1, 2008, which had no impact on the Company’sfinancial position, results of operations or cash flows.**

## ** **

In December 2007,the FASB issued FASB Statement No. 141 (revised 2007), *Business Combinations* (“SFAS 141(R)”).  SFAS 141(R) requires that the fair valueof the purchase price of an acquisition including the issuance of equitysecurities be determined on the acquisition date; requires that all assets,liabilities, noncontrolling interests, contingent consideration, contingencies,and in-process research and development costs of an acquired business berecorded at fair value at the acquisition date; requires that acquisition costsgenerally be expensed as incurred; requires that restructuring costs generallybe expensed in periods subsequent to the acquisition date; and requires thatchanges in deferred tax asset valuation allowances and acquired income taxuncertainties after the measurement period impact income tax expense. SFAS 141(R) alsoexpands disclosures related to business combinations. SFAS 141(R) will beapplied prospectively to business combinations occurring after the beginning ofthe Company’s fiscal year 2010, except that business combinations consummatedprior to the effective date must apply SFAS 141(R) income tax requirementsimmediately upon adoption. The Company is currently evaluating the affect theadoption of SFAS 141(R) will have on its financial position, results ofoperations and cash flows.

 

In December 2007,the FASB issued FASB Statement No. 160, *NoncontrollingInterests in Consolidated Financial Statements, an Amendment of ARB No. 51*(“SFAS 160”). SFAS 160 requires that noncontrolling interests be reported as aseparate component of equity, that net income attributable to the parent and tothe noncontrolling interest be separately identified in the consolidatedstatement of operations, that changes in a parent’s ownership interest beaccounted for as equity transactions, and that, when a subsidiary isdeconsolidated, any retained noncontrolling equity investment in the formersubsidiary and the gain or loss on the deconsolidation of the subsidiary bemeasured at fair value. SFAS 160 will be applied prospectively, except forpresentation and disclosure requirements which will be applied retrospectively,as of the beginning of the Company’s fiscal year 2010. The Company does notcurrently have noncontrolling interests, and therefore the adoption of SFAS 160is not expected to have an impact on the Company’s financial position, resultsof operations or cash flows.

 

**In March 2008, the FASB issued FASB Statement No. 161,*Disclosures about Derivative Instruments andHedging Activities* (“SFAS 161”)—an amendment of SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities*. SFAS 161 is intended to improve financial reportingtransparency regarding derivative instruments and hedging activities byproviding investors with a better understanding of their effects on financialposition, financial performance, and cash flows. SFAS 161 is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008. The Company will adopt SFAS 161 on October 1,2009 and is currently evaluating the effect the adoption will have on itsconsolidated financial statements.**

** **

**In May 2008, the FASB issued FASB Statement No. 162,*The Hierarchy of Generally Accepted AccountingPrinciples* (“SFAS 162”). SFAS 162 is intended to improvefinancial reporting by identifying a consistent framework, or hierarchy, forselecting accounting principles to be used in preparing financial statementsthat are presented in conformity with U.S. GAAP for non-governmentalentities. Any effect of applying the provisions of SFAS 162 is to bereported as a change in accounting principle in accordance with SFAS No. 154,*Accounting Changes and Error Corrections*.The Company adopted SFAS 162, on November 15, 2008, which had noimpact on the Company’s financial position, results of operation or cash flows.**

** **

In April 2008, theFASB issued FASB Staff Position No. 142-3, *Determinationof the Useful Life of Intangible Assets* (“FSP 142-3”). This FSPamends the factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder SFAS 142. The intent of this FSP is to improve the consistencybetween the useful life of a recognized intangible asset under SFAS 142and 

 

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the period of expectedcash flows used to measure the fair value of the asset under SFAS 141R,and other U.S. GAAP. This FSP is effective for financial statements issuedfor fiscal years beginning after December 15, 2008, and interim periodswithin those fiscal years, and early adoption is prohibited. Accordingly, thisFSP is effective for the Company on October 1, 2009. The Company iscurrently evaluating the effect the adoption will have on its consolidatedfinancial statements.

 

In December 2008,the FASB issued FASB Staff Position No. 132(R)-1, *Employers’ Disclosures about Postretirement BenefitPlan Assets* (“FSP 132(R)-1”).**The FSP requires disclosures ofthe objectives of postretirement benefit plan assets, investment policies andstrategies, categories of plan assets, fair value measurements of plan assets,and significant concentrations of risk. FSP 132(R)-1 is effective for fiscalyears and interim periods beginning after December 15, 2009. The adoptionof FSP 132(R)-1 is expected to increase our disclosures, but it is not expectedto have an impact on our consolidated financial statements.

 

## **Note3.   Inventories**

## ** **

The following is a summary of the major classes ofinventories:

 
| ** **      | ** ** | **September 30, 2008** | ** ** | **March 31, 2009** | ** ** |
|-----------------|------------|----------------------------------|------------|------------------------------|------------|
| Raw Materials   |       | $                                | 20,343     |                         | $          | 21,820 |   |
| Work-in-process |       | 155,782                          |       | 108,989                      |       |
| Finished Goods  |       | 127,653                          |       | 111,515                      |       |
| Other           |       | 1,137                            |       | 996                          |       |
|            |       | $                                | 304,915    |                         | $          | 243,320 |   |

## ** **

## **Note 4.   Income Taxes**

## ** **

Income tax expense for the three and six months ended March 31,2008 and 2009, differed from the U.S. federal statutory rate of 35% partly dueto state income taxes and differing tax rates on foreign earnings. Theeffective tax rate for the first six months of fiscal 2009 was a benefit of1.5% compared to an expense of 39.2% in the same period of fiscal 2008. Thedecrease in the effective tax rate is primarily attributable to the goodwillimpairment charge, a change in the reinvestment policy of a foreign entity andlower U.S. taxable income.

 

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

 

Components of net periodic pension and post-retirement benefit cost forthe three and six months ended March 31, 2008 and 2009 are as follows:

 
| ** **                           | ** ** | **Three Months Ended March 31,** | ** ** | **Six Months Ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                           | ** ** | **Pension Benefits**                            | ** ** | **Other Benefits**                            | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
| ** **                           | ** ** | **2008**                                             | ** ** | **2009**                                           | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** |
| Service cost                         |       | $                                                    | 709        |                                               | $          | 614 |   | $ | 361 |   | $ | 332 |   | $ | 1,415 |   | $ | 1,249 |   | $ | 722 |   | $ | 664 |   |
| Interest cost                        |       | 2,684                                                |       | 2,905                                              |       | 1,115 |   | 1,231 |   | 5,372 |   | 5,904 |   | 2,230 |   | 2,462 |   |
| Expected return                      |       | (2,851                                               | )          | (2,404                                             | )          | — |   | — |   | (5,702 | ) | (4,914 | ) | — |   | — |   |
| Amortizations                        |       | 203                                                  |       | 203                                                |       | (1,032 | ) | (1,326 | ) | 404 |   | 404 |   | (2,064 | ) | (2,653 | ) |
| Curtailment gain                     |       | —                                               |       | —                                             |       | — |   | — |   | (3,659 | ) | — |   | — |   | — |   |
| Net periodic  benefit cost (benefit) |       | $                                                    | 745        |                                               | $          | 1,318 |   | $ | 444 |   | $ | 237 |   | $ | (2,170 | ) | $ | 2,643 |   | $ | 888 |   | $ | 473 |   |

 

The Company contributed$7,216 to the Company sponsored domestic pension plans, $2,446 to its otherpost-retirement benefit plans and $446 to the U.K. pension plan for the sixmonths ended March 31, 2009. The Company presently expects futurecontributions of $4,784 to its domestic pension plans, $1,754 to its otherpost-retirement benefit plans and $621 to the U.K. pension plan for theremainder of fiscal 2009. The Pension Protection Act of 2006 requires fundingover a seven year period to achieve 100% funded status.

 

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*** ***

***On October 2, 2007, the U.S. pensionplan was amended effective December 31, 2007 to freeze benefit accrualsfor all non-union employees in the U.S. and, effective January 1, 2008,the pension multiplier used to calculate the employee’s monthly benefit wasincreased from 1.4% to 1.6%. In addition, the Company began making enhancedmatching contributions to its 401K plan equal to 60% of the non-union and unionplan participant’s salary deferrals, up to 6% of compensation. The Companyestimates the redesign of the pension plan, including previous actions to closethe plan to new non-union and union employees and the adjustment of themultiplier for non-union and union plan participants, will reduce fundingrequirements by $23,000 over fiscal years 2008 through 2013. The offsettingestimated incremental cost of the enhanced 401K match is $2,300 over the samesix year period. As a result of freezing the benefit accruals for all non-unionemployees in the U.S. in the first quarter of fiscal 2008, we recognized areduction of the projected benefit obligation of $8,191, an increase to othercomprehensive income  (before tax) of$4,532 and a curtailment gain (before tax) of $3,659. The impact of themultiplier increase will be charged to pension expense over the estimatedremaining lives of the participants.***

*** ***

OnJanuary 16, 2009, the Company announced that it was taking actions toreduce costs by reducing its worldwide workforce by 12%, and implementing asalary freeze for salaried employees, both of which have been achieved.  As a result of these personnel reductions,the annualized savings to cost of sales is expected to be approximately $8,400,with an impact in fiscal 2009 of approximately $5,300, net of severanceexpense. The annualized savings to selling, general and administrative expenseis expected to be approximately $1,100, with an impact in fiscal 2009 ofapproximately $700, net of severance expense. The full benefit of these costreduction efforts will begin to be reflected in the third quarter of fiscal2009.

 

**Note 6.Environmental and Legal**

 

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

 

The Company believes that any and all claims arisingout of conduct or activities that occurred prior to March 29, 2004 are subjectto dismissal. On March 29, 2004, the Company and certain of its subsidiariesand affiliates filed voluntary petitions for relief under Chapter 11 of Title11 of the United States Bankruptcy Code in the United States Bankruptcy Courtfor the Southern District of Indiana (the “Bankruptcy Court”). On August 16,2004, the Bankruptcy Court entered its Findings of Fact, Conclusions of Law,and Order Under 11 U.S.C. 1129(a) and (b) and Fed. R. Bankr. P. 3020 Confirmingthe First Amended Joint Plan of Reorganization of Haynes International, Inc.and its Affiliated Debtors and Debtors-in-Possession as Further Modified (the“Confirmation Order”). The Confirmation Order and related Chapter 11 Plan,among other things, provide for the release and discharge of prepetition claimsand causes of action. The Confirmation Order further provides for an injunctionagainst the commencement of any actions with respect to claims held prior tothe Effective Date of the Plan. The Effective Date occurred on August 31, 2004.When appropriate, the Company pursues the dismissal of lawsuits premised uponclaims or causes of action discharged in the Confirmation Order and relatedChapter 11 Plan. The success of this strategy is dependent upon a number offactors, including the respective court’s interpretation of the ConfirmationOrder and the unique circumstances of each case.

 

The Company is currently, and has in the past, beensubject to claims involving personal injuries allegedly relating to itsproducts. For example, the Company is presently involved in two actionsinvolving welding rod-related injuries, one filed in California state courtagainst numerous manufacturers, including the Company, in February 2007, and asecond case in U.S. Federal court filed in January 2009, both alleging that thewelding-related products of the defendant manufacturers harmed the users ofsuch products through the inhalation of welding fumes containing manganese. TheCompany believes that it has defenses to these allegations and, that if theCompany were found liable, the cases would not have a material effect on itsfinancial position, results of operations or liquidity. In addition to thesecases, the Company has in the past been named a defendant in several otherlawsuits, including 53 filed in the state of California, alleging that itswelding-related products harmed the users of such products through theinhalation of welding fumes containing manganese. The Company

 

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has since been voluntarily dismissed from all of these lawsuits on thebasis of the release and discharge of claims contained in the ConfirmationOrder. While the Company contests such lawsuits vigorously, and may haveapplicable insurance, there are several risks and uncertainties that may affectits liability for claims relating to exposure to welding fumes and manganese.For instance, in recent cases, at least two courts (in cases not involvingHaynes) have refused to dismiss claims relating to inhalation of welding fumescontaining manganese based upon a bankruptcy discharge order. Although theCompany believes the facts of these cases are distinguishable from the facts ofits cases, there can be no assurance that any or all claims against the Companywill be dismissed based upon the Confirmation Order, particularly claimspremised, in part or in full, upon actual or alleged exposure on or after thedate of the Confirmation Order. It is also possible that the Company will benamed in additional suits alleging welding-rod injuries. Should such litigationoccur, it is possible that the aggregate claims for damages, if the Company isfound liable, could have a material adverse effect on its financial condition,results of operations or liquidity.

 

The Company has received permits from the IndianaDepartment of Environmental Management, or IDEM, to close and to providepost-closure monitoring and care for certain areas at the Kokomo facilitypreviously used for the storage and disposal of wastes, some of which areclassified as hazardous under applicable regulations. Closure certification wasreceived in fiscal 1988 for the South Landfill at the Kokomo facility and post-closuremonitoring and care is ongoing there. Closure certification was received infiscal 1999 for the North Landfill at the Kokomo facility and post-closuremonitoring and care are permitted and ongoing there.  In fiscal 2007, IDEM issued a single post-closurepermit applicable to both the North and South Landfills, which containmonitoring and post-closure care requirements. In addition, IDEM required that a Resource Conservation and RecoveryAct, or RCRA, Facility Investigation, or RFI, be conducted in order to furtherevaluate one area of concern and one solid waste management unit.  The RFI commenced in fiscal 2008 and isongoing.

 

The Company has also received permits from the NorthCarolina Department of Environment and Natural Resources, or NCDENR, to closeand provide post-closure monitoring and care for the hazardous waste lagoon atits Mountain Home, North Carolina facility. The lagoon area has been closed andis currently undergoing post-closure monitoring and care. The Company isrequired to monitor groundwater and to continue post-closure maintenance of theformer disposal areas at each site. As a result, the Company is aware ofelevated levels of certain contaminants in the groundwater and additionalcorrective actions by the Company could be required.

 

Historic nitric acid spills were discovered at theArcadia, Louisiana location in fiscal 2008. Analytical results were received in March 2008 and the site assessmentwas provided to the Louisiana Department of Environmental Quality (“LDEQ”) inMay.  Remediation of the spill, includingthe purchase of new equipment, was substantially complete in fiscal 2008.  A preliminary assessment of the LDEQauthorized the Company’s proposed remedial actions. LDEQ approved the finalremediation plan in February 2009.

 

As of March 31, 2009 and September 30, 2008, theCompany has accrued $1,517 for post-closure monitoring and maintenanceactivities. In accordance with Statement of Position 96-1, EnvironmentalRemediation Liabilities, accruals for these costs are calculated by estimatingthe cost to monitor and maintain each post-closure site and multiplying thatamount by the number of years remaining in the 30 year post-closure monitoringperiod referred to above. At each fiscal year-end, or earlier if necessary, theCompany evaluates the accuracy of the estimates for these monitoring andmaintenance costs for the upcoming fiscal year. The accrual was based upon theundiscounted amount of the obligation of $2,231 which was then discounted usingan appropriate discount rate. The cost associated with closing the sites hasbeen incurred in financial periods prior to those presented, with the remainingcost to be incurred in future periods related solely to post-closure monitoringand maintenance. Based on historical experience, the Company estimates that thecost of post-closure monitoring and maintenance will approximate $125 per yearover the remaining obligation period.

 

**Note 7.  Deferred Revenue**

 

On November 17, 2006, the Company entered into a twenty-yearagreement to provide conversion services to Titanium Metals Corporation (“TIMET”)for up to ten million pounds of titanium metal annually. TIMET paid the Companya $50,000 up-front fee and will also pay the Company for its processingservices during the term of the agreement (20 years) at prices established bythe terms of the agreement. TIMET may exercise an option to have ten millionadditional pounds  of titanium convertedannually, provided that it offers to loan up to $12,000 to the Company forcertain capital expenditures which may be required to expand capacity.  In addition to the volume 

 

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commitment, theCompany has granted TIMET a security interest on its four-high steckel rollingmill, along with rights of access if the Company enters into bankruptcy ordefaults on any financing arrangements. The Company has agreed not to manufacture titanium products (other thancold reduced titanium tubing).  TheCompany has also agreed not to provide titanium conversion services to anyentity other than TIMET for the term of the Conversion Services Agreement.  The agreement contains certain defaultprovisions which could result in contract termination and damages, includingthe Company being required to return the unearned portion of the upfrontfee.  The cash received of $50,000 isrecognized in income on a straight-line basis over the 20-year term of theagreement. The portion of the upfront fee not recognized in income is shown asdeferred revenue on the consolidated balance sheet.  Taxes were paid on the up-front fee primarilyin the first quarter of fiscal 2009.

 

**Note 8.    Intangible Assets andGoodwill**

 

Goodwill was created primarily as a result of theCompany’s reorganization pursuant to Chapter 11 of the U.S. BankruptcyCode and fresh start accounting. The Company has adopted FASB Statement No. 142,*Goodwill and Other Intangible Assets* (“SFAS142”). Pursuant to SFAS 142, goodwill is not amortized and the value ofgoodwill is reviewed at least annually for impairment. If the carrying value ofgoodwill exceeds its fair value, impairment of goodwill may exist resulting ina charge to earnings to the extent of goodwill impairment.  The Company estimates fair value using acombination of a market value approach using quoted market prices and an incomeapproach using discounted cash flow projections.

 

The Company also has patents, trademarks and otherintangibles. As the patents have a definite life, they are amortized over livesranging from two to fourteen years. As the trademarks have an indefinite life,the Company tests them for impairment at least annually. If the carrying valueexceeds the fair value (determined by calculating a fair value based upon adiscounted cash flow of an assumed royalty rate), impairment of the trademarkmay exist resulting in a charge to earnings to the extent of the impairment.The Company has non-compete agreements with lives of 2 to 7 years. Amortizationof the patents, non-competes and other intangibles was $542 and $528 for thesix months ended March 31, 2008 and 2009, respectively.

 

Goodwill and trademarks were tested for impairment on August 31,2008 with no impairment recognized.  Due to uncertaintysurrounding the global economy and volatility in the Company’s stock price, theCompany concluded a triggering event had occurred indicating potentialimpairment and performed an impairment test as of December 31, 2008 of itsgoodwill and trademarks. No impairment was recognized at December 31,2008 because the fair value exceeded the carrying values.

 

During the second quarter of fiscal 2009, theCompany determined that the weakening of the U.S. economy and the global creditcrisis resulted in a reduction of the Company’s market capitalization below itstotal shareholder’s equity value for a sustained period of time, which is anindication that goodwill may be impaired. As a result, the Company performed an interim step one goodwillimpairment analysis as of February 28, 2009 which indicatedimpairment.  With the assistance of athird-party valuation specialist, the Company first determined the fair valueof its one reporting unit using two valuation methodologies: (a) theincome approach, which uses discounted cash flow projections, and (b) themarket  value approach, which uses quotedmarket prices.  The valuationmethodologies and the underlying financial information that are used todetermine fair value require significant judgments to be made bymanagement.  These judgments include, butare not limited to, long-term projections of future financial performance,terminal growth rate and the selection of an appropriate discount rate used tocalculate the present value of the estimated future cash flows of theCompany.  The long-term projections usedin the valuation were developed as a part of the Company’s annual budgeting andforecasting process.  The discount rateused in the valuation was selected based upon an analysis of comparablecompanies and included adjustments made to account for specific attributes ofthe Company such as size and industry.

 

As the second step of the goodwill impairment test,the Company compared the implied fair value of the reporting unit goodwill tothe carrying value of that goodwill and determined that the carrying value ofthe Company’s one reporting unit exceeded its fair value.  As a result, the Company recorded a non-cashcharge of $43,737 for goodwill impairment in the second quarter of fiscal 2009.

 

The following table reflects the change to the carryingamount of goodwill for the six months ended March 31, 2009:

 

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| Goodwill balance  at September 30, 2008 |   | $       | 43,737 |   |
|----------------------------------------------|--------|---------|--------|--------|
| Impairment  charge                           |   | (43,737 | )      |
| Goodwill balance  at March 31, 2009     |   | $       | 0      |   |

 

The following represents a summary of intangible assetsat September 30, 2008 and March 31, 2009:

 
| **September 30, 2008** | ** ** | **Gross Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Carrying  Amount** | ** ** |
|----------------------------------|------------|-----------------------|------------|-------------------------------|------------|----------------------|------------|
| Patents                          |       | $                     | 8,667      |                          | $          | (5,480               | )          | $ | 3,187 |   |
| Trademarks                       |       | 3,800                 |       | —                        |       | 3,800                |       |
| Non-compete                      |       | 1,340                 |       | (488                          | )          | 852                  |       |
| Other                            |       | 465                   |       | (397                          | )          | 68                   |       |
|                             |       | $                     | 14,272     |                          | $          | (6,365               | )          | $ | 7,907 |   |

 
| **March 31, 2009** | ** ** | **Gross Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Carrying  Amount** | ** ** |
|------------------------------|------------|-----------------------|------------|-------------------------------|------------|----------------------|------------|
| Patents                      |       | $                     | 8,667      |                          | $          | (5,760               | )          | $ | 2,907 |   |
| Trademarks                   |       | 3,800                 |       | —                        |       | 3,800                |       |
| Non-compete                  |       | 1,340                 |       | (628                          | )          | 712                  |       |
| Other                        |       | 316                   |       | (40                           | )          | 276                  |       |
|                         |       | $                     | 14,123     |                          | $          | (6,428               | )          | $ | 7,695 |   |

 
| **Estimate of Aggregate Amortization Expense:** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|
| **Year Ended September 30,**                         | ** ** | ** ** | ** ** |
| 2009 (remainder  of fiscal year)                                    |       | $          | 473        |   |
| 2010                                                                |       | 554        |       |
| 2011                                                                |       | 540        |       |
| 2012                                                                |       | 359        |       |
| 2013                                                                |       | 350        |       |
|                                                                     |            |            |            |  |

 

**Note9.   Net Income Per Share**

 

Basic and diluted net income per share were computedas follows:

 
| ** **                                                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                            | ** ** | **March 31,**               | ** ** | **March 31,**             | ** ** |
| **(in thousands except share and per share data)** | ** ** | **2008**                         | ** ** | **2009**                       | ** ** | **2008** | ** ** | **2009** | ** ** |
| Numerator:                                                                            |       |                             |       |                           |       |   |   |   |   |
| Net Income  (loss)                                                                    |       | $                                | 15,063     |                           | $          | (42,889 | ) | $ | 28,906 |   | $ | (38,365 | ) |
| Denominator:                                                                          |       |                             |       |                           |       |   |   |   |   |
|                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Weighted average  shares outstanding - Basic                                          |       | 11,906,076                       |       | 11,984,623                     |       | 11,863,729 |   | 11,984,623 |   |
| Effect of  dilutive stock options                                                     |       | 124,819                          |       | 47,310                         |       | 134,438 |   | 53,843 |   |
| Adjustment for  net loss                                                              |       | —                           |       | (47,310                        | )          | — |   | (53,843 | ) |
| Weighted average  shares outstanding - Diluted                                        |       | 12,030,895                       |       | 11,984,623                     |       | 11,998,167 |   | 11,984,623 |   |
|                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Basic net income  (loss) per share                                                    |       | $                                | 1.27       |                           | $          | (3.58 | ) | $ | 2.44 |   | $ | (3.20 | ) |
| Diluted net  income (loss) per share                                                  |       | $                                | 1.25       |                           | $          | (3.58 | ) | $ | 2.41 |   | $ | (3.20 | ) |
|                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Number of stock  option shares excluded as their effect would be anti-dilutive        |       | 256,000                          |       | 334,043                        |       | 193,500 |   | 307,189 |   |
| Number of  restricted stock shares excluded as their performance goal is not yet met  |       | —                           |       | 53,800                         |       | — |   | 53,800 |   |

 

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Anti-dilutive shares withrespect to outstanding stock options have been excluded from the computation ofdiluted net income per share. Restricted stock is not included in thecomputation as the performance goal has not yet been achieved.

 

## **Note 10.  Stock-Based Compensation**

## ** **

**RestrictedStock Plan**

 

The Company hasadopted a restricted stock plan that has reserved 400,000 shares of commonstock for issuance.  Grants of restrictedstock are rights to acquire shares of the Company’s common stock, which vest inaccordance with the terms and conditions established by the CompensationCommittee.  The Compensation Committeemay set restrictions based on the achievement of specific performance goals andvesting of grants to participants will also be time-based.

 

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

 

On March 31,2009, the Company granted 53,800 shares of restricted stock to certain keyemployees and non-employee directors. The shares of restricted stock granted toemployees will vest on the third anniversary of their grant date, provided that(a) the recipient is still an employee with the Company and (b) theCompany has met a three year net income performance goal. The shares ofrestricted stock granted to directors will vest on the earlier of (a) thethird anniversary of the date of grant or (b) the failure of suchnon-employee director to be re-elected at an annual meeting of the stockholdersof the Company as a result of such non-employee director being excluded fromthe nominations for any reason other than cause. The fair value of the grantwas $17.82, the closing price of the Company’s common stock on the day of thegrant.

 

The followingtable summarizes the activity under the restricted stock plan for the sixmonths ended March 31, 2009:

 
| ** **                          | ** ** | **Number  of  Shares** | ** ** | **Aggregate  Intrinsic  Value** | ** ** | **Weighted  Average  Fair Value** | ** ** |
|-------------------------------------|------------|------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| Unvested at September 30, 2008 |       | 0                      |       |                            |       |                              |       |
| Granted                             |       | 53,800                 |       |                            |       | $                                 | 17.82      |   |
| Vested                              |       | 0                      |       |                            |       |                              |       |
| Unvested at March 31, 2009     |       | 53,800                 |       | $                               | 959        |                              | $          | 17.82 |   |
|                                     |            |                        |            |                                 |            |                                   |            |  |  |

 

Compensationexpense related to restricted stock for the six months ended March 31,2009 was $0 due to the grant occurring on March 31, 2009. The remainingunrecognized compensation expense at March 31, 2009 was $959 to berecognized over a weighted average period of 3.0 years.

 

**StockOption Plans**

 

TheCompany has two stock option plans that authorize the granting of non-qualifiedstock options to certain key employees and non-employee directors for thepurchase of a maximum of 1,500,000 shares of the Company’s common stock. Theoriginal option plan was adopted in August 2004 pursuant to the plan ofreorganization and provides for the grant of options to purchase up to1,000,000 shares of the Company’s 

 

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common stock. In January 2007, the Company’sBoard of Directors adopted a second option plan that provides for options topurchase up to 500,000 shares of the Company’s common stock. Each plan providesfor the adjustment of the maximum number of shares for which options may begranted in the event of a stock split, extraordinary dividend or distributionor similar recapitalization event. Unless the Compensation Committee determinesotherwise, options granted under the option plans are exercisable for a periodof ten years from the date of grant and vest 33 1/3% per year over three yearsfrom the grant date.

 

In the first six monthsof fiscal 2009, the Company granted 82,850 options to certain employees. On October 1,2008, the Company granted 20,000 options at an exercise price of $46.83, thefair market value of the Company’s common stock the day of the grant. Inaddition on March 31, 2009, the Company granted 62,850 options at anexercise price of $17.82, the fair market value of the Company’s common stockon the day of the grant.  During thefirst six months of fiscal 2009 no options were exercised.

 

The fair value of theoption grants was estimated as of the date of the grant pursuant FASB StatementNo. 123 (R), *Share-Based Payment, a replacement of SFAS No. 123,Accounting For Stock-Based Compensation, and rescission of APB Opinion No. 25,Accounting for Stock Issued to Employees* (“SFAS 123(R)”)*,* using the Black-Scholes option pricing model with thefollowing assumptions:

 
| ** **           | ** ** | ** **      | ** ** | ** **          | ** ** | **Risk-free**      | ** ** | ** **               | ** ** | ** **         | ** ** |
|----------------------|------------|-----------------|------------|---------------------|------------|--------------------|------------|--------------------------|------------|--------------------|------------|
| **Grant Date**       | ** ** | **Fair  Value** | ** ** | **Dividend  Yield** | ** ** | **Interest  Rate** | ** ** | **Expected  Volatility** | ** ** | **Expected  Life** | ** ** |
| October 1, 2008 |       | $               | 15.89      |                | 0          | %                  | 2.12       | %                        | 47         | %                  | 3  years   |   |
| March 31, 2009  |       | $               | 9.86       |                | 0          | %                  | 1.15       | %                        | 86         | %                  | 3  years   |   |

 

The stock-based employeecompensation expense for the three months ended March 31, 2008 and 2009was $350 and $134, respectively. The stock-based employee compensation expensefor the six months ended March 31, 2008 and 2009 was $700 and $588,respectively. The remaining unrecognized compensation expense at March 31,2009 was $2,549 to be recognized over a weighted average period vesting of 1.20years.

 

The following tables summarize the activity under thestock option plans for the six months ended March 31, 2009:

 
| ** **                              | ** ** | **Number  of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-----------------------------------------|------------|------------------------|------------|----------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding at  September 30, 2008 |       | 448,377                |       | $                                      | 43.24      |                                                    | 7.83 years |                                | $          | 5,862 |   |
| Granted                                 |       | 82,850                 |       | 24.82                                  |       |                                                    |       |                                |       |
| Exercised                               |       | —                 |       |                                   |       |                                                    |       |                                |       |
| Forfeited/cancelled                     |       | (54,334                | )          |                                   |       |                                                    |       |                                |       |
| Outstanding at  March 31, 2009     |       | 476,893                |       | $                                      | 37.34      |                                                    | 7.65 Years |                                | $          | 686 |   |
| Vested or  expected to vest             |       | 470,608                |       | $                                      | 37.34      |                                                    | 7.65 Years |                                | $          | 686 |   |
| Exercisable at  March 31, 2009     |       | 293,697                |       | $                                      | 33.35      |                                                    | 6.66 Years |                                | $          | 686 |   |

 

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| **Grant Date**     | ** ** | **Exercise  Price Per  Share** | ** ** | **Remaining  Contractual  Life in Years** | ** ** | **Outstanding  Number of  Shares** | ** ** | **Exercisable  Number of  Shares** | ** ** |
|-------------------------|------------|-------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| August 31,  2004   |       | $                                   | 12.80      |                                                | 5.42       |                                    | 136,565    |                                    | 136,565    |   |
| May 5, 2005        |       | 19.00                               |       | 6.08                                                |       | 8,334                                   |       | 8,334                                   |       |
| August 15,  2005   |       | 20.25                               |       | 6.42                                                |       | 10,477                                  |       | 10,477                                  |       |
| October 1,  2005   |       | 25.50                               |       | 6.50                                                |       | 5,000                                   |       | 5,000                                   |       |
| February 21,  2006 |       | 29.25                               |       | 6.92                                                |       | 25,001                                  |       | 25,001                                  |       |
| March 31,  2006    |       | 31.00                               |       | 7.00                                                |       | 10,000                                  |       | 10,000                                  |       |
| March 30,  2007    |       | 72.93                               |       | 8.00                                                |       | 88,999                                  |       | 60,661                                  |       |
| September 1,  2007 |       | 83.53                               |       | 8.42                                                |       | 1,667                                   |       | 1,667                                   |       |
| March 31,  2008    |       | 54.00                               |       | 9.00                                                |       | 108,000                                 |       | 35,992                                  |       |
| October 1,  2008   |       | 46.83                               |       | 9.50                                                |       | 20,000                                  |       | —                                  |       |
| March 31,  2009    |       | 17.82                               |       | 10.00                                               |       | 62,850                                  |       | —                                  |       |
|                    |       |                                |       |                                                |       | 476,893                                 |       | 293,697                                 |       |
|                         |            |                                     |            |                                                     |            |                                         |            |                                         |            |  |

 

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

 

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

 

*This Quarterly Report on Form10-Q contains statements that constitute “forward-looking statements” withinthe meaning of the Private Securities Litigation Reform Act of 1995, Section27A of the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934. All statements other than statements of historical fact, includingstatements regarding industry prospects and future results of operations orfinancial position, made in this Form 10-Q are forward-looking.    In many cases, you can identify forward-lookingstatements by terminology, such as “may”, “should”, “expects”, “intends”,“plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or“continue” or the negative of such terms and other comparable terminology. Theforward-looking information may include, among other information, statementsconcerning the Company’s outlook for fiscal year 2009 and beyond, overallvolume and pricing trends, cost reduction strategies and their anticipatedresults, and capital expenditures.  Theremay also be other statements of expectations, beliefs, future plans andstrategies, anticipated events or trends, and similar expressions concerningmatters that are not historical facts. Readers are cautioned that any such forward-looking statements are notguarantees of future performance and involve risks and uncertainties. Actualresults may differ materially from those in the forward-looking statements as aresult of various factors, many of which are beyond the Company’s control.*

* *

*The Company has based theseforward-looking statements on its current expectations and projections aboutfuture events.  Although the Companybelieves that the assumptions on which the forward-looking statements containedherein are based are reasonable, any of those assumptions could prove to beinaccurate. As a result, the forward-looking statements based upon thoseassumptions also could be incorrect. Risks and uncertainties, some of which are discussed in Item 1A. of Part1 to the Company’s Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2008, may affect the accuracy of forward-looking statements.*

* *

*The Company undertakes noobligation to publicly update or revise any forward-looking statements, whetheras a result of new information, future events or otherwise.*

 

**BusinessOverview**

 

Haynes International, Inc. (“Haynes” or “theCompany”) is one of the world’s largest producers of high-performance nickel-and cobalt-based alloys in sheet, coil and plate forms. The Company is focusedon developing, manufacturing, marketing and distributing technologicallyadvanced, high-performance alloys, which are used primarily in the aerospace,chemical processing and land-based gas turbine industries. The global specialtyalloy market consists of three primary sectors: stainless steel, generalpurpose nickel alloys and high-performance nickel- and cobalt-based alloys. TheCompany competes primarily in the high-performance nickel- and cobalt-basedalloy sector, which includes high temperature resistant alloys, or HTAproducts, and corrosion resistant alloys, or CRA products. The Company believesit is one of four principal producers of high-performance alloys in sheet, coiland plate forms. The Company also produces its products as seamless and weldedtubulars, and in bar, billet and wire forms.

 

The Company has manufacturing facilities in Kokomo,Indiana; Arcadia, Louisiana; and Mountain Home, North Carolina. The Kokomofacility specializes in flat products, the Arcadia facility specializes intubular products and the Mountain Home facility specializes in high-performancealloy wire products. The Company sells its products primarily through itsdirect sales organization, which includes 11 service and/or sales centers inthe United States, Europe, Asia and India. All of these centers arecompany-operated.

 

**Significant Events**

 

*Reductionin Force*

 

On January 16, 2009,the Company announced that is was taking actions to reduce costs by cutting itsworldwide workforce by 12% and implementing a salary freeze of salariedemployees. As a result of these 

 

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actions, the annualizedsavings to cost of goods sold is expected to be approximately $8.4 million,with an impact in fiscal 2009 of approximately $5.3 million, net of severanceexpense. In addition, the annualized savings to selling, general andadministrative expense is expected to be approximately $1.1 million, with animpact in fiscal 2009 of approximately $0.7 million, net of severance expense.

 

*GoodwillImpairment*

 

As of March 31,2009, a non-cash goodwill impairment charge of $43.7 million was recorded, ofwhich only $2.3 million is deductible for tax purposes in future periods. Asdiscussed in Note 8 of this Form 10-Q, $41.4 million of goodwill wascreated primarily as a result of the Company’s reorganization pursuant toChapter 11 of the U.S. Bankruptcy Code and fresh start accounting, and theimpairment of this amount is non-deductible for tax purposes. While thegoodwill impairment charge will reduce fiscal 2009 operating results under U.S.generally accepted accounting principles, the impairment is a non-cash chargeand will not affect the Company’s liquidity position, cash flows from operatingactivities, or compliance with its debt covenants, nor is the charge expectedto have an impact on future operations. Please see Note 8 in the Notes toConsolidated Financial Statements contained elsewhere in this Form 10-Qfor additional information.

 

**SecondQuarter of Fiscal 2009 Gross Profit Margin and Outlook for Remainder of theFiscal Year**

 

*SecondQuarter of Fiscal 2009 Gross Profit Margin*

 

Grossprofit margin has declined quarter over quarter since the 3rd quarter of fiscal2008. The gross profit margin in the second quarter of fiscal 2009 declined to$7.0 million, compared to $18.8 million in the first quarter of fiscal 2009 and$35.9 million in the second quarter of fiscal 2008. The gross profit marginpercentage was 5.8% in the second quarter of fiscal 2009 compared to 14.0% inthe first quarter of fiscal 2009 and 21.9% in the second quarter of fiscal2008. The reduction in gross profit margin from the first quarter of fiscal2009 to the second quarter of fiscal 2009 was due to several factors. First,there was a reduction in revenue of $13.8 million between quarters, primarilyas a result of lower average selling price per pound for the Company’s productsbetween quarters. The average selling price per pound declined by $5.62,although the impact of this decline on net revenues was partially offset byhigher volume between quarters. While average selling price per pound decreasedby $5.62, the average costs of goods sold only declined by $2.96 per pound.Costs of goods sold did not decrease to the same extent as average sellingprice in the second quarter of fiscal 2009 as compared to the first quarter offiscal 2009 due to (i) the impact on average selling price of continuedprice compression due to the economic environment, (ii) continued and increasedrecognition of higher cost raw material from inventory, and (iii) reducedabsorption of fixed manufacturing costs due to lower production of sheetproduct.

 

Higherper pound manufacturing costs due to the recognition of higher raw materialcosts from inventory, which also impacted the first quarter of fiscal 2009, hada more significant impact in the second quarter. The Company anticipates thatthe results for the third quarter of fiscal 2009 will continue to beunfavorably impacted by the recognition of higher cost material flowing throughcost of goods sold, however, to a lesser degree than that of either the firstor second quarter of fiscal 2009. Following the third quarter, it is expectedthat gross profit margin will not be materially affected by this issue,provided that volume and prices stabilize.

 

*Outlookfor the Remainder of Fiscal 2009*

 

General

 

Forthe remainder of fiscal 2009, the Company expects a slow-down in shipments andorder entry as a result of the credit crisis and global recession. Whilemanagement believes the Company can achieve profitability for the fiscal year(excluding the goodwill impairment charge), it is expected that results will besignificantly below those seen in recent years. In particular, managementexpects continued declines in volume and pricing to unfavorably impact theCompany’s financial results for the remainder of fiscal 2009 and into fiscal2010. In addition, management expects third quarter results to be furthernegatively impacted by high-cost inventory and continued reduced absorption,which inflates cost of goods sold.

 

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TheCompany continues to adjust production schedules and reduce costs (as disclosedbelow), and manage cash flow, while still moving forward with initiatives thatare important to our long-term success. The Company also reduced inventoriessubstantially in the second quarter and intends to reduce inventory levelsfurther. As a result of the equipment upgrades, service center value-addedcapabilities and its favorable liquidity position the Company believes it iswell-positioned to deal with the challenges of the down turn.

 

Competition

 

TheCompany has experienced increasing competition since the third quarter offiscal 2007 from competitors who produce both stainless steel andhigh-performance alloys. While competition should lessen from these competitorswhen the stainless market improves, based on the current economic environmentthere is significant uncertainty as to when that may occur and the possibilityexists that the stainless market may continue to deteriorate.  Although the Company continues to respond tothe competition by increasing emphasis on service centers, offering value-addedservices, improving its cost structure, and striving to improve delivery-timesand reliability, continued deterioration in the economy is likely to lead toincreasing levels of competition. Increased competition has required theCompany to lower prices, which has contributed to the reduction in the Company’sgross profit margin and net income.

 

Backlog

 

Areduction in economic activity and the increasingly competitive environmentmanifests itself, in part, as a reduction in the Company’s backlog.  Backlog dollars declined by approximately 23%from December 31, 2008 to March 31, 2009, and backlog pounds declinedby approximately 24% in that same period with the average selling priceremaining essentially equal.  Backlogdollars declined by approximately 39% from June 30, 2008 to March 31,2009, while there was a decline in backlog pounds of approximately 33% and inaverage selling price of approximately 9% in the same period.

 

Themajor contributing factors to the decline in backlog for the periods noted werea reduction in pounds, decreasing activity in the Company’s end markets,increased competition and declining raw material costs.  A reduction in backlog is indicative of areduction in revenue. Management expects that backlog, and therefore revenues,will continue todecline from last year and quarterover quarter, until it stabilizes atsome point in fiscal 2010.

 

Cost Reduction Measures

 

OnJanuary 16, 2009, the Company announced that it was taking actions toreduce costs by reducing its worldwide workforce by 12%, and implementing asalary freeze for salaried employees, both of which have been achieved.  As a result of these actions, the annualizedsavings to cost of sales is expected to be approximately $8.4 million, with animpact in fiscal 2009 of approximately $5.3 million, net of severance expense.The annualized savings to selling, general and administrative expense isexpected to be approximately $1.1 million, with an impact in fiscal 2009 ofapproximately $0.7 million, net of severance expense. The full benefit of thesecost reduction efforts will begin to be reflected in the third quarter offiscal 2009. As aresult of the Company’s expectation of reduced activity in order entry andsales volume through the remainder of fiscal 2009, the Company is planning tofurther reduce employment cost and production hours. These reductions are inthe planning stages, and the Company expects to begin implementation during thethird fiscal quarter.

 

TheCompany continues to evaluate planned capital spending and expects to finishthe year at or below the approximately $15.1 million budget originallytargeted. In the first half of the fiscal year, the Company spent approximately$6.0 million on capital projects.

 

Inaddition, the Company continues to review and evaluate all discretionaryspending in order to identify opportunities of both a short- and long-termnature. These efforts, in conjunction with the application of leanmanufacturing techniques, are intended to result in reduced spending andimproved operating efficiencies beyond those provided by the reduction inworkforce. TheCompany will continue to take targeted action in all areas to align fixed andvariable costs with demand levels and necessary levels of service.

 

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**Quarterly Market Information**

 

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

 
| ** **                       | ** ** | **Quarter Ended**      | ** ** |
|----------------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **December  31, 2007** | ** ** | **March  31, 2008** | ** ** | **June  30, 2008** | ** ** | **September  30, 2008** | ** ** | **December  31, 2008** | ** ** | **March  31, 2009** | ** ** |
| **Backlog********(1)**           |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Dollars (in  thousands)          |       | $                           | 247,775    |   | $ | 254,470 |   | $ | 252,598 |   | $ | 229,196 |   | $ | 199,667 |   | $ | 153,039 |   |
| Pounds (in  thousands)           |       | 8,274                       |       | 8,706 |   | 8,335 |   | 7,575 |   | 7,287 |   | 5,557 |   |
| Average selling  price per pound |       | $                           | 29.95      |   | $ | 29.23 |   | $ | 30.30 |   | $ | 30.26 |   | $ | 27.38 |   | $ | 27.54 |   |
|                             |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Average nickel  price per pound  |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| London Metals  Exchange (2)      |       | $                           | 12.11      |   | $ | 14.16 |   | $ | 10.23 |   | $ | 8.07 |   | $ | 4.39 |   | $ | 4.40 |   |

 

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

(2)   Represents the average price for a cash buyeras reported by the London Metals Exchange for the 30 days ending on the lastday of the period presented.

 

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

 
| ** **                                                | ** ** | **Quarter Ended**      | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                | ** ** | **December  31, 2007** | ** ** | **March  31, 2008** | ** ** | **June  30, 2008** | ** ** | **September  30, 2008** | ** ** | **December  31, 2008** | ** ** | **March  31, 2009** | ** ** |
| **Net  revenues******(in  thousands)                      |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Aerospace                                                 |       | $                           | 59,442     |   | $ | 63,472 |   | $ | 62,857 |   | $ | 61,501 |   | $ | 49,721 |   | $ | 45,200 |   |
| Chemical  processing                                      |       | 40,805                      |       | 37,404 |   | 49,165 |   | 38,718 |   | 30,883 |   | 26,025 |   |
| Land-based gas  turbines                                  |       | 25,505                      |       | 33,506 |   | 31,004 |   | 34,102 |   | 32,145 |   | 28,648 |   |
| Other markets                                             |       | 18,887                      |       | 26,085 |   | 18,811 |   | 22,809 |   | 19,166 |   | 17,562 |   |
| Total product  revenue                                    |       | 144,639                     |       | 160,467 |   | 161,837 |   | 157,130 |   | 131,915 |   | 117,435 |   |
| Other revenue                                             |       | 1,438                       |       | 3,304 |   | 4,503 |   | 3,688 |   | 2,389 |   | 2,978 |   |
| **Net  revenues**                                         |       | $                           | 146,077    |   | $ | 163,771 |   | $ | 166,340 |   | $ | 160,818 |   | $ | 134,304 |   | $ | 120,413 |   |
|                                                      |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| **Shipments  by markets******(in  thousands of pounds)    |       |                        |       |   |   |   |   |   |   |   |
| Aerospace                                                 |       | 2,154                       |       | 2,190 |   | 2,319 |   | 2,188 |   | 1,653 |   | 1,648 |   |
| Chemical  processing                                      |       | 1,312                       |       | 1,287 |   | 1,649 |   | 1,140 |   | 947 |   | 1,170 |   |
| Land-based gas  turbines                                  |       | 1,060                       |       | 1,742 |   | 1,519 |   | 1,641 |   | 1,507 |   | 1,680 |   |
| Other markets                                             |       | 681                         |       | 861 |   | 732 |   | 800 |   | 691 |   | 871 |   |
| **Total  shipments**                                      |       | 5,207                       |       | 6,080 |   | 6,219 |   | 5,769 |   | 4,798 |   | 5,369 |   |
|                                                      |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| **Average  selling price per pound**                      |       |                        |       |   |   |   |   |   |   |   |   |
| Aerospace                                                 |       | $                           | 27.60      |   | $ | 28.98 |   | $ | 27.11 |   | $ | 28.11 |   | $ | 30.08 |   | $ | 27.43 |   |
| Chemical  processing                                      |       | 31.10                       |       | 29.06 |   | 29.82 |   | 33.96 |   | 32.61 |   | 22.24 |   |
| Land-based gas  turbines                                  |       | 24.06                       |       | 19.23 |   | 20.41 |   | 20.78 |   | 21.33 |   | 17.05 |   |
| Other markets                                             |       | 27.73                       |       | 30.30 |   | 25.70 |   | 28.51 |   | 27.74 |   | 20.16 |   |
| **Total  product**(excluding  other revenue)              |       | 27.78                       |       | 26.39 |   | 26.03 |   | 27.24 |   | 27.49 |   | 21.87 |   |
| **Total  average selling price**(including other revenue) |       | 28.05                       |       | 26.94 |   | 26.75 |   | 27.88 |   | 27.99 |   | 22.43 |   |

 

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**Three Months Ended March 31, 2009 Compared tothe Three Months Ended March 31, 2008**

 

**Results of Operations**

  ($ inthousands)

 
|                                         |   | **Three Months Ended** |    |       |   |       |   |
|----------------------------------------------|--------|----------------------------------|---------|------------|--------|------------|--------|
|                                         |   | **March 31,**               |    | **Change** |   |
|                                         |   | **2008**                         |    | **2009**   |   | **Amount** |   | **%** |   |
| Net revenues                                 |   | $                                | 163,771 |       | 100.0  | %          | $      | 120,413 |   | 100.0 | % | $ | (43,358 | ) | (26.5 | )% |
| Cost of sales                                |   | 127,851                          |    | 78.1       | %      | 113,416    |   | 94.2 | % | (14,435 | ) | (11.3 | )% |
| Gross profit                                 |   | 35,920                           |    | 21.9       | %      | 6,997      |   | 5.8 | % | (28,923 | ) | (80.5 | )% |
| Selling, general  and administrative expense |   | 10,062                           |    | 6.1        | %      | 8,292      |   | 6.9 | % | (1,770 | ) | (17.6 | )% |
| Research and  technical expense              |   | 839                              |    | 0.5        | %      | 814        |   | 0.7 | % | (25 | ) | (3.0 | )% |
| Impairment of  goodwill                      |   | —                           |    | —     |   | 43,737     |   | 36.3 | % | 43,737 |   | NA |   |
| Operating income  (loss)                     |   | 25,019                           |    | 15.3       | %      | (45,846    | )      | (38.1 | )% | (70,865 | ) | (283.2 | )% |
| Interest income                              |   | (26                              | )       | —     |   | (8         | )      | — |   | (18 | ) | (69.2 | )% |
| Interest expense                             |   | 343                              |    | 0.2        | %      | 123        |   | 0.1 | % | (220 | ) | (64.1 | )% |
| Income (loss)  before income taxes           |   | 24,702                           |    | 15.1       | %      | (45,961    | )      | (38.2 | )% | (70,663 | ) | (286.1 | )% |
| Provision  (benefit) for income taxes        |   | 9,639                            |    | 5.9        | %      | (3,072     | )      | (2.6 | )% | (12,711 | ) | (131.9 | )% |
| Net income  (loss)                           |   | $                                | 15,063  |       | 9.2    | %          | $      | (42,889 | ) | (35.6 | )% | (57,952 | ) | (384.7 | )% |
|                                              |        |                                  |         |            |        |            |        |  |  |  |  |  |  |  |  |  |

 

**By market**

 
| ** **                                                | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                                                | ** ** | **March31,**                     | ** ** | **Change** | ** ** |
| ** **                                                | ** ** | **2008**                         | ** ** | **2009**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| **Net revenues******(in thousands)                        |       |                             |       |       |       |       |       |   |   |
| Aerospace                                                 |       | $                                | 63,472     |       | $          | 45,200     |       | $ | (18,272 | ) | (28.8 | )% |
| Chemical  processing                                      |       | 37,404                           |       | 26,025     |       | (11,379    | )          | (30.4 | )% |
| Land-based gas  turbines                                  |       | 33,506                           |       | 28,648     |       | (4,858     | )          | (14.5 | )% |
| Other markets                                             |       | 26,085                           |       | 17,562     |       | (8,523     | )          | (32.7 | )% |
| **Total  product revenue**                                |       | 160,467                          |       | 117,435    |       | (43,032    | )          | (26.8 | )% |
| Other revenue                                             |       | 3,304                            |       | 2,978      |       | (326       | )          | (9.9 | )% |
| **Net  revenues**                                         |       | $                                | 163,771    |       | $          | 120,413    |       | $ | (43,358 | ) | (26.5 | )% |
|                                                      |       |                             |       |       |       |       |       |   |   |
| **Pounds  by markets******(in  thousands)                 |       |                             |       |       |       |       |       |   |   |
| Aerospace                                                 |       | 2,190                            |       | 1,648      |       | (542       | )          | (24.7 | )% |
| Chemical  processing                                      |       | 1,287                            |       | 1,170      |       | (117       | )          | (9.1 | )% |
| Land-based gas  turbines                                  |       | 1,742                            |       | 1,680      |       | (62        | )          | (3.6 | )% |
| Other markets                                             |       | 861                              |       | 871        |       | 10         |       | 1.2 | % |
| **Total  shipments**                                      |       | 6,080                            |       | 5,369      |       | (711       | )          | (11.7 | )% |
|                                                      |       |                             |       |       |       |       |       |   |   |
| **Average  selling price per pound**                      |       |                             |       |       |       |       |       |   |   |
| Aerospace                                                 |       | $                                | 28.98      |       | $          | 27.43      |       | $ | (1.56 | ) | (5.4 | )% |
| Chemical  processing                                      |       | 29.06                            |       | 22.24      |       | (6.82      | )          | (23.5 | )% |
| Land-based gas  turbines                                  |       | 19.23                            |       | 17.05      |       | (2.18      | )          | (11.3 | )% |
| Other markets                                             |       | 30.30                            |       | 20.16      |       | (10.13     | )          | (33.4 | )% |
| **Total  product**(excluding  other revenue)              |       | 26.39                            |       | 21.87      |       | (4.52      | )          | (17.1 | )% |
| **Total  average selling price**(including other revenue) |       | 26.94                            |       | 22.43      |       | (4.51      | )          | (16.7 | )% |

 

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*Net Revenues*.  Net revenuesdecreased by $43.4 million, or 26.5%, to $120.4 million in the second quarterof fiscal 2009 from $163.8 million in the same period of fiscal 2008.  Volume decreased by 11.7% to 5.4 millionpounds in the second quarter of fiscal 2009 from 6.1 million pounds in the sameperiod of fiscal 2008.  The averageselling price per pound decreased by 16.7% to $22.43 per pound in the secondquarter of fiscal 2009 from $26.94 per pound in the same period of fiscal 2008.Prior year volume and average selling price for fiscal 2008,  were impacted by a 2.0 million pound orderfor a single customer which is not being repeated in fiscal 2009. In the secondquarter of fiscal 2008 the volume associated with this particular order wasapproximately 0.5 million pounds with a selling price approximately half of theconsolidated average selling price for all products sold in the quarter.  This volume was split between the aerospaceand chemical processing markets on a two thirds, one third basis, respectively.As discussed above under “Overview”, increased competition and the globaleconomic recession unfavorably impacted both volume and average selling pricein the second quarter of fiscal 2009. Average selling price also declined due tothe reduction in raw material costs. The Company’s consolidated backlogdecreased by $46.7 million, or 23.4%, to $153.0 million at March 31, 2009from $199.7 million at December 31, 2008 due to a slow down in order entryactivity.

 

Sales to the aerospacemarket decreased by 28.8% to $45.2 million in the second quarter of fiscal 2009from $63.5 million in the same period of fiscal 2008, due to a 24.7% decreasein volume and a 5.4% decrease in the average selling price per pound. Volumedecreased due to slowing market demand as reflected in the build rate for new aircraft, caused by the globaleconomic recession and exacerbated by disruption to the aerospace supply chainfrom the fall 2008 work stoppage at Boeing.

 

Sales to thechemical processing market decreased by 30.4% to $26.0 million in the secondquarter of fiscal 2009 from $37.4 million in the same period of fiscal 2008,due to an 9.1% decrease in volume, and a 23.5% decrease in the average sellingprice per pound.  Volume declined due toa number of factors, primarily impact of the global economic recession onconstruction and maintenance activity in the market and increased competitionfrom stainless steel producers.

 

Sales to the land-based gas turbine market decreasedby 14.5% to $28.6 million for the second quarter of fiscal 2009 from $33.5million in the same period of fiscal 2008, due to a 3.6% decrease in volume,and an 11.3% decrease in the average selling price per pound.  The decrease in both volume and averageselling price is due to the effect of a change in product mix (both form andalloy) and increased competition.

 

Sales to other markets decreased by 32.7% to $17.6million in the second quarter of fiscal 2009 from $26.1 million in the sameperiod of fiscal 2008, due to a 33.4% decrease in average selling pricepartially offset by a 1.2% increase in volume. The decline in average pricereflects the continuing increase in market competition in many of thesemarkets.

 

*Other Revenue. *Otherrevenue decreased by 9.9% to $3.0 million in the second quarter of fiscal 2009from $3.3 million for the same period of fiscal 2008.

 

*Cost of Sales*. Cost of sales decreased to $113.4 million in the second quarter offiscal 2009, compared to $127.9 million in the same period of fiscal 2008.  Cost of sales were 94.2% of net revenues inthe second quarter of fiscal 2009, compared to 78.1% in the same period offiscal 2008. Cost of sales in the second quarter of fiscal 2009 decreased indollars as compared to the same quarter of the prior year, due to the lowervolume between periods. However, per pound manufacturing costs increased due tothe recognition of higher raw material cost from inventory, a higher percentageof specialty products as a percent of the total mix and reduced absorption offixed manufacturing cost caused by lower production volumes in the secondquarter of fiscal 2009 compared to the same period in fiscal 2008. This higherper pound cost and increased competition combined with weaker demand (whichlowered net revenue and average selling prices), resulted in cost of salesbeing a higher percentage of net revenues as compared to the same period infiscal 2008.

 

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*Gross Profit*. Gross profit decreased to $7.0 million, or 5.8% ofnet revenues, in the second quarter of fiscal 2009, compared to $35.9 million,or 21.9% of net revenues, in the same period of fiscal 2008 as a result of theabove factors.

 

*Selling, General and AdministrativeExpenses*.  Selling, general and administrative expensesdecreased 17.6% to $8.3 million in the second quarter of fiscal 2009 from $10.1million in the same period of fiscal 2008 due to reductions in workforce andother spending reductions. Selling, general and administrative expensesincreased to 6.9% of net revenues in the second quarter of fiscal 2009 comparedto 6.1% for the same period of fiscal 2008 due primarily to a decreased levelof revenues.

 

*Research and Technical Expense*. Research and technical expense decreased 3.0% to $0.8 million in thesecond quarter of fiscal 2009 from $0.8 million in the same period of fiscal2008.

 

*Impairment of Goodwill.*An impairmentcharge of $43.7 million was recorded in the second quarter of fiscal 2009 dueto weakening of the U.S. economy and the global credit crisis resulting in areduction of the Company’s market capitalization below its total shareholder’sequity value for a sustained period of time. Please see Note 8 in the Notes to ConsolidatedFinancial Statements contained elsewhere in this Form 10-Q for additionalinformation.

 

*Operating Income (Loss)*. As a result of the above factors, operating loss in the second quarterof fiscal 2009 was $(45.8) million compared to operating income of $25.0million in the same period of fiscal 2008.

 

*Interest Expense*. Interest expense decreased 64.1% to $0.1 million in the second quarterof fiscal 2009 from $0.3 million in the same period of fiscal 2008.  The decrease is attributable to a loweraverage debt balance during the second quarter of fiscal 2009 (zero debt at March 31,2009).

 

*Income Taxes*. Income tax expense decreased to a benefit of $3.1 million in the secondquarter of fiscal 2009 from an expense of $9.6 million in the same period offiscal 2008 primarily due to a pretax loss. The effective tax rate for the second quarter of fiscal 2009 was 6.7%compared to 39.0% in the same period of fiscal 2008. The decrease in theeffective tax rate is primarily attributable to the impairment of goodwill, achange in the reinvestment policy of a foreign entity and lower U.S. taxableincome.

 

*Net Income (Loss)*. As a result of the above factors, net income decreased by $58.0 millionto a net loss of $(42.9) million in the second quarter of fiscal 2009 from netincome of $15.1 million in the same period of fiscal 2008.

 

**Six Months Ended March 31, 2009 Compared toSix Months Ended March 31, 2008**

 

##### **Results of Operations**

($ in thousands)

 
|                                         |   | **Six Months Ended** |     |       |   |       |    |
|----------------------------------------------|--------|--------------------------------|----------|------------|--------|------------|---------|
|                                         |   | **March 31,**             |     | **Change** |   |
|                                         |   | **2008**                       |     | **2009**   |   | **Amount** |    | **%** |   |
| Net revenues                                 |   | $                              | 3 09,848 |       | 100.0  | %          | $       | 254,717 |   | 100.0 | % | $ | (55,131 | ) | (17.8 | )% |
| Cost of sales                                |   | 239,723                        |     | 77.4       | %      | 228,970    |    | 89.9 | % | (10,753 | ) | (4.5 | )% |
| Gross profit                                 |   | 70,125                         |     | 22.6       | %      | 25,747     |    | 10.1 | % | (44,378 | ) | (63.3 | )% |
| Selling, general  and administrative expense |   | 20,052                         |     | 6.5        | %      | 18,882     |    | 7.4 | % | (1,170 | )  | (5.8 | )% |
| Research and  technical expense              |   | 1,747                          |     | 0.5        | %      | 1,639      |    | 0.6 | % | (108 | ) | (6.2 | )% |
| Impairment of  goodwill                      |   | —                         |     | —     |   | 43,737     |    | 17.2 | % | 43,737 |   | NA |   |
| Operating income  (loss)                     |   | 48,326                         |     | 15.6       | %      | (38,511    | )       | (15.1 | )% | (86,837 | ) | (179.7 | )% |
| Interest  expense, net                       |   | 780                            |     | 0.3        | %      | 451        |    | 0.1 | % | (329 | ) | (42.2 | )% |
| Income (loss)  before income taxes           |   | 47,546                         |     | 15.3       | %      | (38,962    | )       | (15.2 | )% | (86,508 | ) | (181.9 | )% |
| Provision  (benefit) for income taxes        |   | 18,640                         |     | 6.0        | %      | (597       | )       | (0.2 | )% | (19,238 | ) | (103.2 | )% |
| Net income  (loss)                           |   | $                              | 28,906   |       | 9.3    | %          | (38,365 | ) | (15.0 | )% | (67,271 | ) | (232.7 | )% |
|                                              |        |                                |          |            |        |            |         |  |  |  |  |  |  |  |  |  |

 

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*** ***

***The following table includes a breakdownof net revenues, shipments, and average selling prices to the markets served byHaynes for the periods shown.***

 

**Bymarket**

 
| ** **                                                | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------|------------|------------|------------|------------|------------|
| ** **                                                | ** ** | **March 31,**             | ** ** | **Change** | ** ** |
| ** **                                                | ** ** | **2008**                       | ** ** | **2009**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| ***Net revenues*********(in thousands)                    |       |                           |       |       |       |       |       |   |   |
| Aerospace                                                 |       | $                              | 122,914    |       | $          | 94,921     |       | $ | (27,993 | ) | (22.8 | )% |
| Chemical  processing                                      |       | 78,209                         |       | 56,908     |       | (21,301    | )          | (27.2 | )% |
| Land-based gas  turbines                                  |       | 59,011                         |       | 60,793     |       | 1,782      |       | 3.0 | % |
| Other markets                                             |       | 44,972                         |       | 36,728     |       | (8,244     | )          | (18.3 | )% |
| **Total  product revenue**                                |       | 305,106                        |       | 249,350    |       | (55,756    | )          | (18.3 | )% |
| Other revenue                                             |       | 4,742                          |       | 5,367      |       | 625        |       | 13.2 | % |
| **Net  revenues**                                         |       | $                              | 309,848    |       | $          | 254,717    |       | $ | (55,131 | ) | (17.8 | )% |
|                                                      |       |                           |       |       |       |       |       |   |   |
| ***Pounds  by markets***  (in thousands)                  |       |                           |       |       |       |       |       |   |   |
| Aerospace                                                 |       | 4,344                          |       | 3,301      |       | (1,043     | )          | (24.0 | )% |
| Chemical processing                                       |       | 2,599                          |       | 2,117      |       | (482       | )          | (18.5 | )% |
| Land-based gas  turbines                                  |       | 2,802                          |       | 3,187      |       | 385        |       | 13.7 | % |
| Other markets                                             |       | 1,542                          |       | 1,562      |       | 20         |       | 1.3 | % |
| **Total  shipments**                                      |       | 11,287                         |       | 10,167     |       | (1,120     | )          | (9.9 | )% |
|                                                      |       |                           |       |       |       |       |       |   |   |
| ***Average  selling price per pound***                    |       |                           |       |       |       |       |       |   |   |
| Aerospace                                                 |       | $                              | 28.30      |       | $          | 28.76      |       | $ | 0.46 |   | 1.6 | % |
| Chemical  processing                                      |       | 30.09                          |       | 26.88      |       | (3.21      | )          | (10.7 | )% |
| Land-based gas  turbines                                  |       | 21.06                          |       | 19.08      |       | (1.99      | )          | (9.4 | )% |
| Other markets                                             |       | 29.16                          |       | 23.51      |       | (5.65      | )          | (19.4 | )% |
| **Total  product**(excluding  other revenue)              |       | 27.03                          |       | 24.53      |       | (2.50      | )          | (9.2 | )% |
| **Total  average selling price**(including other revenue) |       | 27.45                          |       | 25.05      |       | (2.40      | )          | (8.7 | )% |

 

*Net Revenues*.  Net revenuesdecreased by $55.1 million, or 17.8%, to $254.7 million in the first six monthsof fiscal 2009 from $309.8 million in the same period of fiscal 2008.  Volume for all products decreased by 9.9% to10.2 million pounds in the first six months of fiscal 2009 from 11.3 millionpounds in the same period of fiscal 2008. The  average selling price perpound decreased by 8.7% to $25.05 per pound in the first six months of fiscal2009 from $27.45 per pound in the same period of fiscal 2008.   As discussed above under “Overview”,increased competition and the global economic recession unfavorably impactedboth average selling price and volume in the first six months of fiscal 2009.Raw material costs have also declined due to the weak economic environment,which has contributed to the reduction in average selling prices. The Company’sconsolidated backlog decreased by $76.2 million, or 33.2%, to $153.0 million atMarch 31, 2009 from $229.2 million at September 30, 2008 due to aslow down in order entry and lower average selling price.

 

Sales to the aerospace market decreased by 22.8% to $94.9 million inthe first six months of fiscal 2009 from $122.9 million in the same period offiscal 2008, due to a 24.0% decrease in volume partially offset by a 1.6%increase in average selling price.  Theincrease in the average selling price per pound is due to changes in productmix.  Product mix reflects a higherpercentage of specialty alloy products and forms with a higher average sellingprice when compared to the product mix sold in the same period of fiscal2008.  Volume decreased due to slowingmarket demand as reflected in the build rate for new aircraft.

 

Sales to the chemical processing market decreased by27.2% to $56.9 million in the first six months of fiscal 2009 from $78.2million in the same period of fiscal 2008, due to a 10.7% decrease in theaverage selling price per 

 

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pound and a 18.5%decrease in volume.  Volume declined dueto a number of factors, primarily the impact of the global economic recessionon construction and maintenance activity in the market and increasedcompetition from stainless steel producers.

 

Sales to the land-based gas turbine market increased by 3.0% to $60.8million for the first six months of fiscal 2009 from $59.0 million in the sameperiod of fiscal 2008, due to an increase of 13.7% in volume, partially offsetby a 9.4% decrease in the average selling price. The decrease in the averageselling price and the increase in volume is due to change in product mix to includea higher percentage of billet product in the first six months of fiscal 2009compared to the same period of fiscal 2008.

 

Sales to other markets decreased by 18.3% to $36.7 million in the firstsix months of fiscal 2009 from $45.0 million in the same period of fiscal 2008,due to a 19.4% decrease in average selling price per pound, which was partiallyoffset by a 1.3% increase in volume.  The slight increase in volume of high-performance alloy in the “othermarkets” category is primarily due to the Company’s continuing effort toincrease sales into markets which fall into this category such as flue gasdesulphurization and to expand the number of other markets.  The decrease in average selling price isprimarily due to the continued competition within this category.

 

*Other Revenue. *Otherrevenue increased by 13.2% to $5.4 million in the first six months of fiscal2009 from $4.7 million for the same period of fiscal 2008.  The increase is due to higher toll conversionsales.

 

*Cost of Sales*. Cost of sales decreased to $229.0 million in the first six months offiscal 2009, compared to $239.7 million in the same period of fiscal 2008.  Cost of sales were 89.9% of net revenues inthe first six months of fiscal 2009, compared to 77.4% of net revenues in thesame period of fiscal 2008. Cost of sales in first six months of fiscal 2009decrease in dollars as compared of the same period of the prior year, due tolower volume between periods. However, per pound manufacturing costs increaseddue to a higher raw material cost from inventory, a higher percentage ofspecialty products as a percent of total mix and reduced absorption of fixedmanufacturing costs caused by lower production volumes.  In the first six months of fiscal 2008, costof sales was partially offset by a $3.7 million (1.2% of net revenue) pensioncurtailment gain, which was recorded due to an amendment to freeze futurepension benefit accruals for non-union employees in the U.S.  The higher per pound cost and increasedcompetition combined with weaker demand (which lowered net revenue and averageselling prices), resulted in cost of sales being a higher percentage of netrevenues as compared to the same period of fiscal 2008.

 

*Gross Profit.* Gross profit decreased to $25.7 million, or 10.1% ofnet revenues, for the first six months of fiscal 2009, from $70.1 million, or22.6% of net revenues, in the same period of fiscal 2008 as a result of theabove factors.

 

*Selling, General and AdministrativeExpenses*.  Selling, general and administrative expensesdecreased $1.2 million to $18.9 million in the first six months of fiscal 2009from $20.1 million for the same period of fiscal 2008 due to reductions inworkforce and other spending reductions. Selling, general and administrativeexpenses as a percentage of net revenues increased to 7.4% in the first sixmonths of fiscal 2009 compared to 6.5% for the same period of fiscal 2008 dueprimarily to decreased revenues.

 

*Research and Technical Expense*. Research and technical expense decreased to $1.6 million in the firstsix months of fiscal 2009 from $1.7 million in the same period of fiscal 2008due to the reduction in workforce during the second quarter of fiscal 2009.

 

*Impairment of Goodwill.*An impairmentcharge of $43.7 million was recorded in the second quarter of fiscal 2009 dueto weakening of the U.S. economy and the global credit crisis resulting in areduction of the Company’s market capitalization below its total shareholder’sequity value for a sustained period of time. Please see Note 8 in the Notes to ConsolidatedFinancial Statements contained elsewhere in the Form 10-Q for additionalinformation.

 

*Operating Income (Loss)*. As a result of the above factors, operating loss in the first six monthsof fiscal 2009 was $(38.5) million compared to operating income of $48.3million in the same period of fiscal 2008.

 

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*Interest Expense*. Interest expense decreased to $0.5 million in the first six months offiscal 2009 from $0.8 million for the same period of fiscal 2008.  The decrease is attributable to a loweraverage debt balance during the second quarter of fiscal 2009 (zero debt at March 31,2009).

 

*Income Taxes*. Income tax expense decreased to a benefit of $(0.6) million in the firstsix months of fiscal 2009 from an expense of $18.6 million in the same periodof fiscal 2008 due to a pretax loss. The effective tax rate for the first sixmonths of fiscal 2009 was 1.5% compared to 39.2% in the same period of fiscal2008. The decrease in the effective tax rate is primarily attributable to theimpairment of goodwill, a change in the reinvestment policy of a foreign entityand lower U.S. taxable income.

 

*NetIncome (Loss)*.  As a result of the above factors, net incomedecreased by $67.3 million to a net loss of $(38.4) million in the first sixmonths of fiscal 2009 from net income of $28.9 million in the same period offiscal 2008.

 

**Liquidity and Capital Resources**

 

*Comparative cash flow analysis*

 

During the first six months of fiscal 2009, theCompany’s primary sources of cash were cash from operations and  borrowings under its U.S. revolving creditfacility with a group of lenders led by Wachovia Capital Finance Corporation(Central) (described below).  At March 31,2009, Haynes had cash and cash equivalents of approximately $30.4 millioncompared to cash and cash equivalents of approximately $7.1 million at September 30,2008.

 

Net cash provided by operating activities was $43.2million in the first six months of fiscal 2009 compared to $12.1 million in thesame period of fiscal 2008.  Severalitems contributed to this favorable difference. Cash generatedfrom a decrease in accounts receivable of $20.9 million was $16.6 millionhigher than the same period of fiscal 2008. Cash generated from reducedinventory balances of $55.9 million was $71.4 million higher than the sameperiod of fiscal 2008, as a result of both lower levels of inventory requiredto support a lower sales level,  loweraverage inventory cost per pound as high cost inventory flows through cost ofsales and positive results from efforts to improve inventory management. Netloss of $(38.4) million was $67.3 million lower than prior year net income of$28.9 million, partially offset by the goodwill impairment charge of $43.7million. Also offsetting the positive items were the use of cash from higherincome tax payments of $19.8 million primarily caused by the tax payment of$15.0 million related to the upfront fee paid to the Company pursuant to theconversion services agreement  withTitanium Metals Corporation and $17.6 million use of cash from lower accountspayable caused by lower raw material purchases in both pounds and price. Netcash used in investing activities was $6.0 million in the first six months offiscal 2009 compared to $9.2 million in the same period of fiscal 2008,primarily as a result of lower capital expenditures.  Net cash used in financing activitiesincluded a reduction in borrowings on the revolving credit facility of $11.8million as a result of cash generated from operations, resulting in a balanceon the revolver at March 31, 2009 of zero.

 

*Future sources of liquidity*

 

TheCompany’s sources of cash for fiscal 2009 are expected to consist primarily ofcash generated from operations, cash on hand, and borrowings under the U.S.revolving credit facility.  The U.S.revolving credit facility provides borrowings in a maximum amount of $120.0million, subject to a borrowing base formula and certain reserves. At March 31,2009, the Company had cash of approximately $30.4 million, an outstandingbalance of zero on the U.S. revolving credit facility and access to a total ofapproximately $120.0 million under the U.S. revolving credit facility, subjectto borrowing base and certain reserves. Management believes that the resourcesdescribed above will be sufficient to fund planned capital expenditures andworking capital requirements over the next twelve months.

 

U.S. revolving creditfacility:   Haynes and Wachovia Capital FinanceCorporation (Central) (“Wachovia”) entered into a Second Amended and Restated Loanand Security Agreement (the “Amended Agreement”) with an effective date of November 18,2008, which amended and restated the revolving credit facility between Haynesand Wachovia dated August 31, 2004. Among other items, the AmendedAgreement extended the maturity date

 

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of the U.S. revolving credit facility to September 30, 2011,increased the margin included in the interest rate from 1.5% per annum to 2.25%per annum for LIBOR borrowings, permitted the Company to pay dividends andrepurchase common stock if certain financial metrics are met, and eliminated acovenant requiring the Company to maintain an EBITDA amount of $22.0 millionwhen availability was less than $20.0 million. The maximum revolving loanamount under the Amended Agreement is $120.0 million. Borrowings under the U.S.revolving credit facility bear interest at the Company’s option at eitherWachovia Bank, National Association’s “prime rate,” plus up to 2.25% per annum,or the adjusted Eurodollar rate used by the lender, plus up to 3.0% per annum. Asof March 31, 2009, the U.S. revolving credit facility had an outstandingbalance of zero. During the six month period ended March 31, 2009, it boreinterest at a weighted average interest rate of 5.09%. In addition, the Companymust pay monthly in arrears a commitment fee of 0.375% per annum on the unusedamount of the U.S. revolving credit facility total commitment. For letters ofcredit, the Company must pay 2.5% per annum on the daily outstanding balance ofall issued letters of credit, plus customary fees for issuance, amendments, andprocessing. The Company is subject to certain covenants as to fixed chargecoverage ratios and other customary covenants, including covenants restrictingthe incurrence of indebtedness, the granting of liens, and the sale of assetsand permits the Company to pay dividends and repurchase common stock if certainmetrics are met. As of March 31, 2009, the most recent requiredmeasurement date under the agreement documentation, the Company was incompliance with these covenants. The U.S. revolving credit facility matures on September 30,2011. Borrowings under the U.S. revolving credit facility are collateralized bya pledge of substantially all of the U.S. assets of the Company, includingequity interests in its U.S. subsidiaries, but excluding its four-high Steckelrolling mill and related assets, which are pledged to TIMET. The U.S. revolvingcredit facility is also secured by a pledge of 65% of the equity interests ineach of the Company’s foreign subsidiaries.

 

*Future Uses of Liquidity*

 

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

 

·      fundingoperations;

 

·      capitalspending to improve reliability and performance of the equipment; and

 

·      pension planfunding.

 

Planned capital spendingin fiscal 2009 will be at or below approximately $15.1 million, andapproximately $6.0 million was spent in the first six months of fiscal2009.  The majority of the plannedprojects are maintenance type projects; however, the Company is evaluating thisplanned spending and may postpone certain projects to the latter part of fiscal2009 or possibly fiscal 2010. Projects are being evaluated to ensure that, ifpostponed, there will be no material unfavorable impact to operations either inthe short- or long-term. Keeping the facilities and equipment up to datecontinues to be an important focus for the Company.

 

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*Contractual Obligations*

 

The following table sets forth the Company’s contractualobligations for the periods indicated, as of March 31, 2009:

 

(inthousands)

 
| ** **                              | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations****(1)** | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 years** | ** ** |
| ** **                              | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating lease  obligations            |       | $                                         | 12,704     |   | $ | 3,256 |   | $ | 3,678 |   | $ | 1,823 |   | $ | 3,947 |   |
| Capital lease  obligations              |       | 313                                       |       | 33 |   | 66 |   | 66 |   | 148 |   |
| Raw material  contracts                 |       | 30,836                                    |       | 30,836 |   | — |   | — |   | — |   |
| Mill supplies  contracts                |       | 104                                       |       | 104 |   | — |   | — |   | — |   |
| Capital projects                        |       | 3,285                                     |       | 3,285 |   | — |   | — |   | — |   |
| Pension plan(2)                         |       | 41,137                                    |       | 11,531 |   | 19,234 |   | 10,372 |   | — |   |
| Other  postretirement benefits(3)       |       | 48,000                                    |       | 4,200 |   | 9,000 |   | 9,800 |   | 25,000 |   |
| Non-compete  obligations(4)             |       | 220                                       |       | 110 |   | 110 |   | — |   | — |   |
| Total                                   |       | $                                         | 136,599    |   | $ | 53,355 |   | $ | 32,088 |   | $ | 22,061 |   | $ | 29,095 |   |

 

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(1)    Taxes are not included in the table. The Companyadopted the provisions of FIN No. 48, Accounting for Uncertainty in IncomeTaxes, on October 1, 2007. As of March 31, 2009, the non-current income taxespayable was $276. It is not possible to determine in which period the taxliability might be paid out.

 

(2)    The Company has a funding obligation to contribute anadditional $40,070 to the domestic pension plan arising from the PensionProtection Act of 2006. These payments will be tax deductible. All benefitpayments under the domestic pension plan will come from the plan and not theCompany. The Company expects its U.K. subsidiary to contribute $1,067 in fiscal2009 to the U.K. Pension Plan.

 

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

 

(4)    Pursuant to an escrow agreement, as of April 11, 2005,the Company established an escrow account to satisfy its obligation to makepayments under a non-compete agreement entered into as part of the BranfordAcquisition. This amount is reported as restricted cash.

 

At March 31, 2009, theCompany also had $0.03 million outstanding under a letter of credit. The letterof credit is outstanding in connection with a building lease obligation.

 

**New Accounting Pronouncements**

 

In September 2006, the Financial AccountingStandards Board issued FASB Statement No. 157, *Fair ValueMeasurement* (“SFAS 157”). SFAS 157 addresses standardizingthe measurement of fair value for companies who are required to use a fairvalue measure for recognition or disclosure purposes. The FASB defines fairvalue as “the price that would be received to sell an asset or paid to transfera liability in an orderly transaction between market participants at themeasure date.”  On February 12,2008, the FASB issued Staff Position 157-2 (“FSP 157-2”) which delays theeffective date of SFAS 157 for all nonfinancial assets and nonfinancialliabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis.  Therefore for financial assetsand liabilities the statement is effective for fiscal years beginning after November 15,2007 and for interim periods within those fiscal years. The Company wasrequired to adopt SFAS 157 (excluding nonfinancial assets and liabilities)beginning on October 1, 2008, which did not have a material impact on theCompany’s financial position, results of operations or cash flows.

 

## **In April 2009, the FASB issued FASB Staff Position157-4, *Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly***

 

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## **Table of Contents**

 

## **(“FSP 157-4”), which provides additional guidance forapplying the provisions of SFAS No. 157. SFAS No. 157 defines fairvalue as the price that would be received to sell an asset or paid to transfera liability in an orderly transaction between market participants under currentmarket conditions. This FSP requires an evaluation of whether there has been asignificant decrease in the volume and level of activity for the asset orliability in relation to normal market activity for the asset or liability. Ifthere has, transactions or quoted prices may not be indicative of fair valueand a significant adjustment may need to be made to those prices to estimatefair value. Additionally, an entity must consider whether the observedtransaction was orderly (that is, not distressed or forced). If the transactionwas orderly, the obtained price can be considered a relevant observable inputfor determining fair value. If the transaction is not orderly, other valuationtechniques must be used when estimating fair value. FSP 157-4 must be appliedprospectively for interim periods ending after June 15, 2009. The Companyis currently evaluating  the impact thatFSP 157-4 will have on the Company’s consolidated financial statements.**

## ** **

In December 2007,the FASB issued FASB Statement No. 141 (revised 2007), *Business Combinations* (“SFAS 141(R)”).  SFAS 141(R) requires that the fair valueof the purchase price of an acquisition including the issuance of equitysecurities be determined on the acquisition date; requires that all assets,liabilities, noncontrolling interests, contingent consideration, contingencies,and in-process research and development costs of an acquired business berecorded at fair value at the acquisition date; requires that acquisition costsgenerally be expensed as incurred; requires that restructuring costs generallybe expensed in periods subsequent to the acquisition date; and requires thatchanges in deferred tax asset valuation allowances and acquired income taxuncertainties after the measurement period impact income tax expense. SFAS 141(R) alsoexpands disclosures related to business combinations. SFAS 141(R) will beapplied prospectively to business combinations occurring after the beginning ofthe Company’s fiscal year 2010, except that business combinations consummatedprior to the effective date must apply SFAS 141(R) income tax requirementsimmediately upon adoption. The Company is currently evaluating the impact ofSFAS 141(R) on its financial position, results of operations, and cashflows.

 

        In December 2007, the FASB issued FASB Statement No. 160,*Noncontrolling Interests in Consolidated FinancialStatements, an Amendment of ARB No. 51* (“SFAS 160”). SFAS 160requires that noncontrolling interests be reported as a separate component ofequity, that net income attributable to the parent and to the noncontrollinginterest be separately identified in the consolidated statement of operations,that changes in a parent’s ownership interest be accounted for as equitytransactions, and that, when a subsidiary is deconsolidated, any retainednoncontrolling equity investment in the former subsidiary and the gain or losson the deconsolidation of the subsidiary be measured at fair value. SFAS 160will be applied prospectively, except for presentation and disclosurerequirements which will be applied retrospectively, as of the beginning of theCompany’s fiscal year 2010. The Company does not currently have noncontrollinginterests, and therefore the adoption of SFAS 160 is not expected to have animpact on the Company’s financial position, results of operations, or cashflows.

 

**In March 2008, the FASB issued FASB Statement No. 161,*Disclosures about Derivative Instruments andHedging Activities* (“SFAS 161”)—an amendment of SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities*. SFAS 161 is intended to improve financial reportingtransparency regarding derivative instruments and hedging activities byproviding investors with a better understanding of their effects on financialposition, financial performance, and cash flows. SFAS 161 is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008. The Company will adopt SFAS 161 on October 1,2009 and is currently evaluating the effect the adoption will have on itsconsolidated financial statements.**

** **

In April 2008, theFASB issued FASB Staff Position No. 142-3, *Determinationof the Useful Life of Intangible Assets* (“FSP 142-3”). This FSPamends the factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder SFAS 142. The intent of this FSP is to improve the consistencybetween the useful life of a recognized intangible asset under SFAS 142and the period of expected cash flows used to measure the fair value of theasset under SFAS 141R, and other U.S. GAAP. This FSP is effective forfinancial statements issued for fiscal years beginning after December 15,2008, and interim periods within those fiscal years, and early adoption isprohibited. Accordingly, this FSP is effective for the Company on October 1,2009. The Company is currently evaluating the effect the adoption will have onits consolidated financial statements.

 

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In December 2008, the FASB issued FASB StaffPosition No. 132(R)-1, *Employers’Disclosures about Postretirement Benefit Plan Assets* (“FSP 132(R)-1”)*.*The FSPrequires disclosures of the objectives of postretirement benefit plan assets,investment policies and strategies, categories of plan assets, fair valuemeasurements of plan assets, and significant concentrations of risk. FSP 132(R)-1 is effective for fiscalyears and interim periods beginning after December 15, 2009. The adoptionof FSP 132(R)-1 is expected toincrease our disclosures, but it is not expected to have an impact on ourconsolidated financial statements.

 

**Critical Accounting Policies and Estimates**

 

*Overview*

 

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations discusses the Company’sconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America.  The preparation of these financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments,including those related to bad debts, inventories, income taxes, retirementbenefits and environmental matters.  Theprocess of determining significant estimates is fact specific and takes intoaccount factors such as historical experience, current and expected economicconditions, product mix and in some cases, actuarial techniques, and variousother factors that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from othersources.  The Company constantlyreevaluates these significant factors and makes adjustments where facts andcircumstances dictate.  Actual resultsmay differ from these estimates under different assumptions or conditions.

 

The Company’s accountingpolicies are more fully described in the audited consolidated financialstatements included in the Company’s Annual Report on Form 10-K for thefiscal year ended September 30, 2008, filed by the Company with theSecurities and Exchange Commission.

 

*RevenueRecognition*

 

Revenue isrecognized when title passes to the customer which is generally at the time ofshipment (F.O.B. shipping point) or at a foreign port for certain exportcustomers. Allowances for sales returns are recorded as a component of net revenuesin the periods in which the related sales are recognized. Management determinesthis allowance based on historical experience and have not had any history ofreturns that have exceeded recorded allowances.

 

*Pensionand Post-Retirement Benefits*

 

The Company hasdefined benefit pension and post-retirement plans covering most of its currentand former employees. Significant elements in determining the assets orliabilities and related income or expense for these plans are the expectedreturn on plans assets (if any), the discount rate used to value future paymentstreams, expected trends in health care costs, and other actuarial assumptions.Annually, the Company evaluates the significant assumptions to be used to valueits pension and post-retirement plan assets and liabilities based on currentmarket conditions and expectations of future costs. If actual results are lessfavorable than those projected by management, additional expense may berequired in future periods.

 

In determining theexpected rate of return on plan assets, the Company takes into account the Plan’starget allocation of 60% equities and 40% bonds and the expected rate of returnfor each broad asset class. The Company assumes approximately 3.5% to4% equity risk premium above the broad bond market yields of 5.50% to6.00%.  Note that over very long historical periods the realized riskpremium has been higher. The Company believes that ourassumption of an 8.50% long-term rate of return on plan assets is comparable toother companies, given the target allocation of the plan assets.

 

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In the short-term,substantial decreases in plan assets will result in higher plan fundingcontribution levels and higher pension expense.  A decrease of 25 basispoints in the expected long-term rate of return on plan assets would result inan increase in annual pension expense of about $260.

 

To the extent that the actualreturn on plan assets during the year exceeds or falls short of the assumedlong-term rate of return, an asset gain or loss is created.  Technicallythere is no expected long-term rate of return assumption in a PensionProtection Act (PPA) funding valuation, but actual asset returns above or belowthe effective interest rate will still create amounts of surplus ordeficit.  Under the PPA rules, amounts of surplus or deficit created byasset and other actuarial gains and losses are generally amortized over a7-year period.  For example, each $1 million in asset loss created byunfavorable investment performance results in seven annual payments(contributions) of approximately $180, depending upon the precise effectiveinterest rate in the valuation, and the timing of the contribution.

 

*Impairmentof Long-lived Assets, Goodwill and Other Intangible Assets*

 

The Companyreviews long-lived assets for impairment whenever events or circumstancesindicate that the carrying amount of an asset may not be recoverable.Recoverability of long-lived assets to be held and used is measured by acomparison of the carrying amount of the asset to the undiscounted future cashflows expected to be generated by the asset. If the carrying amount of an assetexceeds its estimated future cash flows, an impairment charge is recognized inthe amount by which the carrying amount exceeds the fair value of the asset.Assumptions and estimates with respect to estimated future cash flows used inthe evaluation of long-lived assets impairment are subject to a high degree ofjudgment and complexity.

 

The Companyreviews goodwill for impairment annually or more frequently if events orcircumstances indicate that the carrying amount of goodwill may be impaired.Recoverability of goodwill is measured by a comparison of the carrying value tothe fair value. If the carrying amount exceeds its fair value, an impairmentcharge is recognized to the extent that the implied fair value exceeds itscarrying value. The implied fair value of goodwill is the residual fair value,if any, after allocating the fair value to all of the assets (recognized andunrecognized) and all of the liabilities. The Company estimates fair valueusing a combination of market value approach using quoted market prices and anincome approach using discounted cash flow projections.

 

The income approach usesa projection of estimated operating results and cash flows that is discountedusing a weighted-average cost of capital that reflects current marketconditions. The projection uses management’s best estimates of economic andmarket conditions over the projected period including growth rates in sales,costs, estimates of future expected changes in operating margins and cashexpenditures. Other significant estimates and assumptions include terminalvalue growth rates, future estimates of capital expenditures and changes infuture working capital requirements. A significant amount of judgment isinvolved in determining if an indicator of impairment has occurred. Suchindicators may include, among others: a significant decline in our expectedfuture cash flows; a sustained, significant decline in our stock price andmarket capitalization; a significant adverse change in the business climate;unanticipated competition; and slower growth rates. Any adverse change in thesefactors could have a significant impact on the recoverability of these assetsand could have a material impact on our consolidated financial statements. Wealso perform sensitivity analyses on our estimated fair value using the incomeapproach. A key assumption in our fair value estimate is the weighted averagecost of capital utilized for discounting our cash flow estimates in our incomeapproach.

 

During the secondquarter of fiscal 2009, the Company determined that the weakening of the U.S.economy and the global credit crisis resulted in a reduction of the Company’smarket capitalization below its total shareholder’s equity value for asustained period of time, which is an indication that goodwill may beimpaired.  As a result, the Companyperformed an interim step one goodwill impairment analysis as of February 28,2009 which indicated impairment.  Withthe assistance of a third-party valuation specialist, the Company determinedthe fair value of its reporting unit using the income and market comparablevaluation methodologies.  The valuationmethodologies and the underlying financial information that are used todetermine the fair value require significant judgments to be made bymanagement.  These judgments include, butare not limited to, long-term projections of future financial performance,terminal growth rate and the selection of an appropriate 

 

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discount rate used tocalculate the present value of the estimated future cash flows of theCompany.  The long-term projections usedin the valuation are developed as a part of the Company’s annual budgeting andforecasting process.  The discount rateused to determine the fair value of the reporting unit is that of ahypothetical market participant which is developed upon an analysis ofcomparable companies and include adjustments made to account for any individualreporting unit specific attributes such as size and industry.

 

The second step ofthe goodwill impairment test compared the implied fair value of the reportingunit goodwill to the carrying value of that goodwill.  The carrying value of the Company’s onereporting unit exceeded the fair value. The Company compared the implied fair value of the goodwill with thecarrying value and a non-cash charge of $43,737 for goodwill impairment wasrecorded in the second quarter of fiscal 2009.

 

The Companyreviews trademarks for impairment annually or more frequently if events orcircumstances indicate that the carrying amount of trademarks may be impaired.If the carrying amount exceeds the fair value (determined by calculating a fairvalue based upon a discounted cash flow of an assumed royalty rate), impairmentof the trademark may exist resulting in a charge to earnings to the extent ofimpairment.

 

The Companyreviewed trademarks for impairment as of August 31, 2008, and concluded noimpairment adjustment was necessary.Due to the presentuncertainty surrounding the global economy and stock price volatilitygenerally, and volatility in our stock price in particular, we concluded atriggering event had occurred indicating potential impairment and performed animpairment test as of December 31, 2008 and again at February 28,2009 of our trademarks. No impairment was recognized at December 31, 2008or March 31, 2009 because the fair value exceeded the carrying values.Even though we determined that there was no trademark impairment as of March 31,2009, declines in sales beyond our current forecasts may result in a futureimpairment charge. Management will continue to evaluate trademarks forimpairment on a quarterly basis if the recent decline in the Company’s salescontinues.

 

*Share-BasedCompensation*

 

The Company hasadopted a restricted stock plan that has reserved 400,000 shares of commonstock for issuance.  Grants of restrictedstock are rights to acquire shares of the Company’s common stock, which vest inaccordance with the terms and conditions established by the CompensationCommittee.  The Compensation Committeemay set restrictions based on the achievement of specific performance goals andvesting of grants to participants will also be time-based.

 

Restricted stockgrants are subject to forfeiture if employment or service terminates prior tothe vesting period or if the performance goal is not met.  The Company will access, on an ongoing basis,the probability of whether the performance criteria will be achieved. TheCompany will recognize compensation expense over the performance period if itis deemed probable that the goal will be achieved. The fair value of theCompany’s restricted stock is determined based upon the closing price of theCompany’s common stock on the grant date. The plan provides for the adjustmentof the number of shares covered by an outstanding grant and the maximum numberof shares for which restricted stock may be granted in the event of a stocksplit, extraordinary dividend or distribution or similar recapitalizationevent.

 

Additionally, theCompany has two stock option plans that authorize the granting of non-qualifiedstock options to certain key employees and non-employee directors for thepurchase of a maximum of 1,500,000 shares of the Company’s common stock. Theoriginal option plan was adopted in 2004 pursuant to the plan of reorganizationand provides the grant of options to purchase up to 1,000,000 shares of theCompany’s common stock. In January 2007, the Company’s Board of Directorsadopted a new option plan that provides for options to purchase up to 500,000shares of the Company’s common stock. Unless the Compensation Committeedetermines otherwise, options granted under the option plans are exercisablefor a period of ten years for the date of grant and vest 33 1/3% per year overthree years from the grant date.

 

On October 1,2005, the Company adopted FASB Statement No. 123 (R), *Share-BasedPayment*, *a replacement of SFAS No. 123*,*Accounting for Stock-Based Compensation*,*and a rescission of APB Opinion No. 25*,*Accounting for Stock Issued to Employees*.The statement requires compensation costs related to share-based

 

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payment transactions tobe recognized in the financial statements. This statement applies to all awardsgranted after the effective date and to modifications, repurchases orcancellations of existing awards. Additionally, under the modified prospectivemethod of adoption, the Company recognizes compensation expense for the portionof outstanding awards on the adoption date for which the requisite serviceperiod has not yet been rendered based on the grant-date fair value of thoseawards calculated under SFAS No. 123 and 148 for pro forma disclosures.The amount of compensation cost will be measured based upon the grant date fairvalue. The fair value of the option grants is estimated on the date of grantusing the Black-Scholes option pricing model with assumptions on dividendyield, risk-free interest rate, expected volatilities, and expected lives ofthe options.

 

*IncomeTaxes*

 

The Companyaccounts for income taxes in accordance with FASB Statement No. 109, *Accounting for Income Taxes* (“SFAS No. 109”), whichrequires deferred tax assets and liabilities be recognized using enacted taxrates for the effect of temporary differences between book and tax basis ofrecorded assets and liabilities. SFAS No. 109 also requires deferred taxassets be reduced by a valuation allowance if it is more likely than not thatsome portion or all of the deferred tax assets will not be realized. Thedetermination of whether or not a valuation allowance is needed is based uponan evaluation of both positive and negative evidence. In its evaluation of theneed for a valuation allowance, the Company assesses prudent and feasible taxplanning strategies. The ultimate amount of deferred tax assets realized couldbe different from those recorded, as influenced by potential changes in enactedtax laws and the availability of future taxable income.

 

On October 1,2007 the Company adopted FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes* (“FIN 48”).**FIN 48 addresses the noncomparability in reporting tax assetsand liabilities resulting from a lack of specific guidance in SFAS No. 109,*Accounting for Income Taxes,*onthe uncertainty in income taxes recognized in an enterprise’s financialstatements*. *Specifically,FIN 48 prescribes (a) a consistent recognition threshold and (b) ameasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return, and providesrelated guidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition.

 

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

 

Market risk is thepotential loss arising from adverse changes in market rates and prices. TheCompany is exposed to various market risks, including changes in interestrates, foreign currency exchange rates and the price of nickel, which is acommodity.

 

Changes ininterest rates affect the Company’s interest expense on variable rate debt. Allof the Company’s outstanding debt was variable rate debt at March 31,2008. A hypothetical 10% increase in the interest rate on variable rate debt wouldhave resulted in additional interest expense of approximately $178,000 for thesix months ended March 31, 2008. The Company’s outstanding variable rate debt was zero at March 31,2009. The Company has not entered into any derivative instruments to hedge theeffects of changes in interest rates.

 

The foreigncurrency exchange risk exists primarily because the three foreign subsidiariesmaintain receivables and payables denominated in currencies other than theirfunctional currency. Each foreign subsidiary manages its own foreign currencyexchange risk. The Company’s U.S. operations transact their foreign sales inU.S. dollars, thereby avoiding fluctuations in foreign exchange rates. Any U.S.dollar exposure aggregating more than $500,000 requires approval from theCompany’s Chief Financial Officer, Vice President of Finance. Most of thecurrency contracts to buy U.S. dollars are with maturity dates less than sixmonths. At March 31, 2009, the Company had no foreign currency exchangecontracts outstanding.

 

Fluctuations inthe price of nickel, our most significant raw material, subject the Company tocommodity price risk. The Company manages its exposure to this market riskthrough internally established policies and procedures, including negotiatingraw material escalators within product sales agreements, and continuallymonitoring and revising customer quote amounts to reflect the fluctuations inmarket prices for nickel. The Company does not use derivative instruments tomanage this market risk. The Company monitors its underlying market riskexposure from a rapid change in nickel prices on an ongoing basis and believesthat it can modify or adapt its strategies as necessary. The Companyperiodically purchases raw material forward with certain suppliers. However,there is a risk that we may not be able to successfully offset a rapid changein the cost of raw material in the future.

 

#### **Item4.**    Controls and Procedures

#### ** **

The Company hasperformed, under the supervision and with the participation of the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, an evaluation of the effectiveness and the design and operation of theCompany’s disclosure controls and procedures (as defined by Exchange Act rules 13a-15(e) and15d-15(e)) pursuant to Rule 13a-15(b) of the Exchange Act as of theend of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the ChiefFinancial Officer concluded that the Company’s disclosure controls and procedureswere effective as of March 31, 2009 in providing reasonable assurance thatinformation required to be disclosed by the Company in the reports that itfiles or submits under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the rules and forms of theSecurities and Exchange Commission, including to ensure that informationrequired to be disclosed by the Company in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the Company’smanagement, including its principal executive and principal financial officers,or persons performing similar functions, as appropriate to allow timelydecisions regarding required disclosure.

 

There have been nochanges in our internal controls over financial reporting during our mostrecent quarter that have materially affected, or are reasonably likely tomaterially affect, our internal controls over financial reporting.

 

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**PART II  OTHER INFORMATION**

 

**Item2.  Unregistered Sales of Equity Securities and Use of Proceeds**

 

On March 31,2009, we awarded restricted stock awards of 53,800 shares of common stock tocertain key employees and non-employee directors of the Company under andpursuant to the Company’s 2009 Restricted Stock Plan.  The shares ofrestricted stock granted to employees will vest on the third anniversary oftheir grant date, provided that (a) the recipient is still an employeewith the Company and (b) the Company has met a three year net incomeperformance goal. The shares of restricted stock granted to directors will veston the earlier of (a) the third anniversary of the date of grant or (b) thefailure of such non-employee director to be re-elected at an annual meeting ofthe stockholders of the Company as a result of such non-employee director beingexcluded from the nominations for any reason other than cause.  Allgrants are subject to the terms and conditions of the Company’s 2009 RestrictedStock Plan. The shares were valued at the fair market value on the date of thegrant at $17.82 per share.  In connection with the issuance of theseshares, no underwriting discounts or commissions were paid or will be paid. Theshares were sold without registration under the Securities Act of 1933, asamended, in reliance on the registration exemption afforded byRegulation D and more specifically Rule 506 of Regulation D.

 

**Item4.  Submission of Matters to a Vote of Security Holders**

 

On February 23,2009, the Annual Meeting of Stockholders of the Company was held at the ConradIndianapolis Hotel. The following matters were voted on at the meeting:

 
| **MATTER**                                                                                                                                                  | ** ** | **VOTES CAST  FOR** | ** ** | **VOTES  AGAINST/  WITHHELD** | ** ** | **ABSTAIN AND  BROKER NON-  VOTES** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------------|------------|-----------------------------------------------|------------|
| Election of  Directors:                                                                                                                                     |       |                     |       |                          |       |                                          |       |
| Paul J. Bohan                                                                                                                                               |       | 11,117,822               |       | 49,874                        |       | 25,938                                        |       |
| Donald C.  Campion                                                                                                                                          |       | 10,123,662               |       | 1,044,034                     |       | 25,938                                        |       |
| Mark M.  Comerford                                                                                                                                          |       | 11,141,358               |       | 26,338                        |       | 25,938                                        |       |
| John C. Corey                                                                                                                                               |       | 11,116,983               |       | 50,713                        |       | 25,938                                        |       |
| Robert H. Getz                                                                                                                                              |       | 11,046,075               |       | 121,621                       |       | 25,938                                        |       |
| Timothy J.  McCarthy                                                                                                                                        |       | 11,044,986               |       | 122,710                       |       | 25,938                                        |       |
| William P. Wall                                                                                                                                             |       | 11,044,242               |       | 123,454                       |       | 25,938                                        |       |
| Approval of the  Haynes International, Inc. 2009 Restricted Stock Plan and the reservation  of 400,000 shares of common stock for issuance thereunder. |       | 9,939,306                |       | 332,116                       |       | 896,274                                       |       |

 

**Item 6.****   ****Exhibits**

 

Exhibits. See Index to Exhibits.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|     | HAYNES INTERNATIONAL, INC.             |
|----------|----------------------------------------|
|     |                                   |
|     |                                   |
| * * | */s/ Mark Comerford*                   |
|     | Mark Comerford                         |
|     | President and Chief  Executive Officer |
|     | Date: May 7, 2009                 |
| * * | * *                               |
| * * | * *                               |
| * * | */s/ Marcel Martin*                    |
|     | Marcel Martin                          |
|     | Vice President, Finance                |
|     | Chief Financial Officer                |
|     | Date: May 7, 2009                 |

 

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**INDEX TOEXHIBITS**

 
| **Number  Assigned In  Regulation  S-K****Item 601** |   |   | **Description of Exhibit**                                                                                                                                                                                                                    |
|------------------------------------------------------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                 |   |   |                                                                                                                                                                                                                                          |
| (3)                                                  | 3.01   |   | Restated  Certificate of Incorporation of Haynes International, Inc. (incorporated  by reference to Exhibit 3.1 to the Haynes International, Inc.  Registration Statement on Form S-1, Registration No. 333-140194). |
|                                                 | 3.02   |   | Amended  and Restated Bylaws of Haynes International, Inc. (incorporated by  reference to Exhibit 3.2 to the Haynes International, Inc.  Registration Statement on Form S-1, Registration No. 333-140194).           |
| (4)                                                  | 4.01   |   | Specimen  Common Stock Certificate (incorporated by reference to Exhibit 4.1 to  the Haynes International, Inc. Registration Statement on Form S-1,  Registration No. 333-140194).                                        |
|                                                 | 4.02   |   | Restated Certificate of  Incorporation of Haynes International, Inc. (incorporated by reference  to Exhibit 2.1 to the Haynes International, Inc. Registration  Statement on Form S-1, Registration No. 333-140194). |
|                                                 | 4.03   |   | Amended and Restated  By-laws of Haynes International, Inc. (incorporated by reference to  Exhibit 2.2 to the Haynes International, Inc. Registration  Statement on Form S-1, Registration No. 333-140194).          |
| (10)                                                 | 10.01  |   | Summary of 2008  Management Incentive Plan (incorporated by reference to Item 5.02 of the  Haynes International, Inc. Form 8-K filed April 3, 2009).                                                                      |
|                                                 | 10.02* |   | Haynes  International, Inc. 2009 Restricted Stock Plan                                                                                                                                                                                   |
| (31)                                                 | 31.01* |   | Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                                                                             |
|                                                 | 31.02* |   | Rule 13a-14(a)/15d-14(a) Certification.                                                                                                                                                                                             |
| (32)                                                 | 32.01* |   | Section 1350  Certifications.                                                                                                                                                                                                            |

 

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* Filed herewith

 

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