Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **x**      | ** ** | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**                                                                                                                                                                                          |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                             |
| ** ** | ** ** | **For the quarterly period ended December 31,  2008**                                                                                                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                                             |
| ** ** | ** ** | **or**                                                                                                                                                                                                                                                                                           |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                       |
| **o**      | ** ** | **Transition  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**                                                                                                                                                                                         |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                       |
| ** ** | ** ** | **For the transition period from                     to                     ** |

** **

**Commission File Number:    001-33288**

** **

**HAYNES INTERNATIONAL, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                | ** ** | **06-1185400**                    |
|---------------------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of             |       | (IRS Employer Identification No.) |
| incorporation or organization)              |       |                              |
|                                        |       |                              |
| **1020  West Park Avenue, Kokomo, Indiana** | ** ** | **46904-9013**                    |
| (Address of  principal executive offices)   |       | (Zip Code)                        |

 

**(765) 456-6000**

(Registrant’s telephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes  x  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 filer” and “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 |
|----------------------------|--------------------------|-------------------------------------------------|-----------------------------------|
|                       |                     | (Do not check if a  smaller  reporting company) |                              |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange 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 February 1, 2009, the registrant had 11,984,623 shares of Common Stock,$.001 par value, outstanding.

 

 

 

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

**TABLE OF CONTENTS**

** **
| ** **       | ** ** | ** **                                                                                                             | ** ** | **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 December 31, 2008                        |       | 1          |
|             |       |                                                                                                                   |       |       |
|             |       | Unaudited  Consolidated Statements of Operations for the Three Months Ended  December 31, 2007 and 2008           |       | 2          |
|             |       |                                                                                                                   |       |       |
|             |       | Unaudited Consolidated  Statements of Comprehensive Income for the Three Months Ended  December 31, 2007 and 2008 |       | 3          |
|             |       |                                                                                                                   |       |       |
|             |       | Unaudited  Consolidated Statements of Cash Flows for the Three Months Ended  December 31, 2007 and 2008           |       | 4          |
|             |       |                                                                                                                   |       |       |
|             |       | Notes to Consolidated Financial Statements                                                                             |       | 5          |
|             |       |                                                                                                                   |       |       |
| Item 2.          |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                            |       | 13         |
|             |       |                                                                                                                   |       |       |
| Item 3.          |       | Quantitative  and Qualitative Disclosures About Market Risk                                                            |       | 25         |
|             |       |                                                                                                                   |       |       |
| Item 4.          |       | Controls and  Procedures                                                                                               |       | 26         |
|             |       |                                                                                                                   |       |       |
| **PART II** | ** ** | **OTHER INFORMATION**                                                                                                  | ** ** | 27         |
| ** **       | ** ** | ** **                                                                                                             | ** ** | ** ** |
| Item 1.          |       | Legal Proceedings                                                                                                      |       | 27         |
|             |       |                                                                                                                   |       |       |
| Item 6.          |       | Exhibits                                                                                                               |       | 27         |
|             |       |                                                                                                                   |       |       |
|             |       | Signatures                                                                                                             |       | 28         |
|             |       |                                                                                                                   |       |       |
|             |       | Index to  Exhibits                                                                                                     |       | 29         |

 

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**PART 1****                            FINANCIALINFORMATION**

Item 1.     Financial Statements

 

**HAYNES INTERNATIONAL, INC. and SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

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

 
| ** **                                                                                                                                               | ** ** | **September 30,  2008** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                               | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                          |       |                         |       |                        |       |
| Cash and cash  equivalents                                                                                                                               |       | $                            | 7,058      |                        | $          | 4,853 |   |
| Restricted cash –  current portion                                                                                                                  |       | 110                          |       | 110                         |       |
| Accounts  receivable, less allowance for doubtful accounts of $1,354 and $1,373,  respectively                                                           |       | 99,295                       |       | 78,135                      |       |
| Inventories                                                                                                                                              |       | 304,915                      |       | 291,753                     |       |
| Income taxes  receivable                                                                                                                                 |       | —                       |       | 5,309                       |       |
| Deferred income  taxes                                                                                                                                   |       | 9,399                        |       | 9,261                       |       |
| Other current  assets                                                                                                                                    |       | 2,573                        |       | 2,924                       |       |
| Total current  assets                                                                                                                                    |       | 423,350                      |       | 392,345                     |       |
|                                                                                                                                                     |       |                         |       |                        |       |
| Property, plant  and equipment (at cost)                                                                                                                 |       | 134,523                      |       | 136,810                     |       |
| Accumulated  depreciation                                                                                                                                |       | (27,221                      | )          | (29,317                     | )          |
| Net property,  plant and equipment                                                                                                                       |       | 107,302                      |       | 107,493                     |       |
|                                                                                                                                                     |       |                         |       |                        |       |
| Deferred income  taxes – long term portion                                                                                                          |       | 32,310                       |       | 31,582                      |       |
| Prepayments and  deferred charges                                                                                                                        |       | 2,741                        |       | 3,294                       |       |
| Restricted cash –  long term portion                                                                                                                |       | 220                          |       | 110                         |       |
| Goodwill                                                                                                                                                 |       | 43,737                       |       | 43,737                      |       |
| Other intangible  assets, net                                                                                                                            |       | 7,907                        |       | 7,922                       |       |
| Total assets                                                                                                                                             |       | $                            | 617,567    |                        | $          | 586,483 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                           |       |                         |       |                        |       |
| Current  liabilities:                                                                                                                                    |       |                         |       |                        |       |
| Accounts payable                                                                                                                                         |       | $                            | 41,939     |                        | $          | 35,843 |   |
| Accrued expenses                                                                                                                                         |       | 12,729                       |       | 11,602                      |       |
| Income taxes  payable                                                                                                                                    |       | 7,482                        |       | —                      |       |
| Accrued pension  and postretirement benefits                                                                                                             |       | 15,016                       |       | 16,086                      |       |
| 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                       |       | 66,141                      |       |
|                                                                                                                                                     |       |                         |       |                        |       |
| Long-term  obligations (less current portion)                                                                                                            |       | 1,582                        |       | 1,478                       |       |
| Deferred revenue  (less current portion)                                                                                                                 |       | 42,830                       |       | 42,204                      |       |
| Non-current  income taxes payable                                                                                                                        |       | 276                          |       | 276                         |       |
| Accrued pension  and postretirement benefits                                                                                                             |       | 100,343                      |       | 96,268                      |       |
| Total  liabilities                                                                                                                                       |       | 238,024                      |       | 206,367                     |       |
| Commitments and  contingencies (Note 6)                                                                                                                  |       | —                       |       | —                      |       |
| Stockholders’  equity:                                                                                                                              |       |                         |       |                        |       |
| Common stock,  $0.001 par value (40,000,000 shares authorized, 11,984,623 issued and  outstanding at September 30, 2008 and December 31, 2008) |       | 12                           |       | 12                          |       |
| Preferred stock,  $0.001 par value (20,000,000 shares authorized, 0 shares issued and  outstanding)                                                      |       | —                       |       | —                      |       |
| Additional paid-in  capital                                                                                                                              |       | 225,821                      |       | 226,275                     |       |
| Accumulated  earnings                                                                                                                                    |       | 155,831                      |       | 160,355                     |       |
| Accumulated  other comprehensive loss                                                                                                                    |       | (2,121                       | )          | (6,526                      | )          |
| Total  stockholders’ equity                                                                                                                         |       | 379,543                      |       | 380,116                     |       |
| Total  liabilities and stockholders’ equity                                                                                                         |       | $                            | 617,567    |                        | $          | 586,483 |   |

 

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  December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                            | ** ** | **2008** | ** ** |
|                                         |       |                                                |       |   |   |
| Net revenues                                 |       | $                                                   | 146,077    |   | $ | 134,304 |   |
| Cost of sales                                |       | 111,872                                             |       | 115,554 |   |
| Gross profit                                 |       | 34,205                                              |       | 18,750 |   |
| Selling, general  and administrative expense |       | 9,990                                               |       | 10,590 |   |
| Research and  technical expense              |       | 908                                                 |       | 825 |   |
| Operating income                             |       | 23,307                                              |       | 7,335 |   |
| Interest income                              |       | (31                                                 | )          | (20 | ) |
| Interest expense                             |       | 494                                                 |       | 356 |   |
| Income before  income taxes                  |       | 22,844                                              |       | 6,999 |   |
| Provision for  income taxes                  |       | 9,001                                               |       | 2,475 |   |
| Net income                                   |       | $                                                   | 13,843     |   | $ | 4,524 |   |
|                                         |       |                                                |       |   |   |
| Net income per  share:                       |       |                                                |       |   |   |
| Basic                                        |       | $                                                   | 1.17       |   | $ | 0.38 |   |
| Diluted                                      |       | $                                                   | 1.16       |   | $ | 0.38 |   |
| Weighted average  shares outstanding:        |       |                                                |       |   |   |
| Basic                                        |       | 11,821,842                                          |       | 11,984,623 |   |
| Diluted                                      |       | 11,965,900                                          |       | 12,044,999 |   |

 

The accompanying notesare an integral part of these financial statements.

 

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**HAYNESINTERNATIONAL, INC. and SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

**(Unaudited)**

**(inthousands)**

** **
| ** **                                      | ** ** | **Three Months Ended  December 31** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                           | ** ** | **2008** | ** ** |
| Net income                                      |       | $                                                  | 13,843     |   | $ | 4,524 |   |
| Other  comprehensive income (loss), net of tax: |       |                                               |       |   |   |
| Pension  curtailment                            |       | 2,701                                              |       | — |   |
| Foreign currency  translation adjustment        |       | (199                                               | )          | (4,405 | ) |
| Comprehensive  income                           |       | $                                                  | 16,345     |   | $ | 119 |   |

 

The accompanying notes arean integral part of these financial statements.

 

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**HAYNESINTERNATIONAL, INC. and SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(inthousands)**

 
| ** **                                                                         | ** ** | **Three Months Ended  December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                            | ** ** | **2008** | ** ** |
| **Cash  flows from operating activities:**                                         |       |                                                |       |   |   |
| Net income                                                                         |       | $                                                   | 13,843     |   | $ | 4,524 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                |       |   |   |
| Depreciation                                                                       |       | 2,166                                               |       | 2,454 |   |
| Amortization                                                                       |       | 276                                                 |       | 291 |   |
| Stock  compensation expense                                                        |       | 350                                                 |       | 454 |   |
| Excess tax  benefit from option exercises                                          |       | (2,022                                              | )          | — |   |
| Deferred revenue  - portion recognized                                             |       | (625                                                | )          | (625 | ) |
| Deferred income  taxes                                                             |       | (3,705                                              | )          | 792 |   |
| Loss on disposal  of property                                                      |       | 94                                                  |       | 29 |   |
| Change in assets  and liabilities:                                                 |       |                                                |       |   |   |
| Accounts  receivable                                                               |       | 12,446                                              |       | 18,333 |   |
| Inventories                                                                        |       | (17,673                                             | )          | 9,304 |   |
| Other assets                                                                       |       | (242                                                | )          | (916 | ) |
| Accounts payable  and accrued expenses                                             |       | 902                                                 |       | (5,055 | ) |
| Income taxes                                                                       |       | 11,999                                              |       | (12,653 | ) |
| Accrued pension  and postretirement benefits                                       |       | (6,307                                              | )          | (3,005 | ) |
| Net cash  provided by operating activities                                         |       | 11,502                                              |       | 13,927 |   |
|                                                                               |       |                                                |       |   |   |
| **Cash  flows from investing activities:**                                         |       |                                                |       |   |   |
| Additions to  property, plant and equipment                                        |       | (4,738                                              | )          | (2,796 | ) |
| Change in  restricted cash                                                         |       | 110                                                 |       | 110 |   |
| Net cash used in  investing activities                                             |       | (4,628                                              | )          | (2,686 | ) |
|                                                                               |       |                                                |       |   |   |
| **Cash  flows from financing activities:**                                         |       |                                                |       |   |   |
| Net decrease in  revolving credit                                                  |       | (7,214                                              | )          | (11,812 | ) |
| Proceeds from  exercise of stock options                                           |       | 1,255                                               |       | — |   |
| Excess tax  benefit from option exercises                                          |       | 2,022                                               |       | — |   |
| Payment for debt  issuance costs                                                   |       | —                                              |       | (306 | ) |
| Changes in  long-term obligations                                                  |       | (154                                                | )          | (1,315 | ) |
| Net cash used in  financing activities                                             |       | (4,091                                              | )          | (13,433 | ) |
|                                                                               |       |                                                |       |   |   |
| Effect of  exchange rates on cash                                                  |       | (56                                                 | )          | (13 | ) |
| Increase  (decrease) in cash and cash equivalents                                  |       | 2,727                                               |       | (2,205 | ) |
|                                                                               |       |                                                |       |   |   |
| Cash and cash  equivalents, beginning of period                                    |       | 5,717                                               |       | 7,058 |   |
| Cash and cash  equivalents, end of period                                          |       | $                                                   | 8,444      |   | $ | 4,853 |   |
|                                                                               |       |                                                |       |   |   |
| Supplemental disclosures  of cash flow information:                                |       |                                                |       |   |   |
| Cash paid during  period for: Interest (net of capitalized interest)          |       | $                                                   | 454        |   | $ | 304 |   |
| Income taxes                                                                       |       | $                                                   | 732        |   | $ | 15,787 |   |

 

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.  Basisof 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 months ended December 31,2008 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.  NewAccounting Pronouncements**

## ** **

In September 2006, theFASB issued FASB Statement No. 157, *Fair Value Measurement*(“SFAS 157”). SFAS 157 addresses standardizing the measurement offair value for companies who are required to use a fair value measure forrecognition or disclosure purposes. The FASB defines fair value as “the pricethat would be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measure date.”  On February 12, 2008, the FASB issuedStaff Position 157-2 (“FSP 157-2”) which delays the effective date of SFAS 157for all nonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis.  Therefore for financial assets and liabilities thestatement is effective for fiscal years beginning after November 15, 2007and for interim periods within those fiscal years. The Company was required toadopt SFAS 157 (excluding nonfinancial assets and liabilities) beginningon October 1, 2008, which did not have a material impact on the Company’sfinancial position, results of operations or cash flows.

 

## **In February 2007,the FASB issued FASB Statement No. 159, *Establishingthe Fair Value Option for Financial Assets and Liabilities*(“SFAS159”)*,* to permit all entities to choose toelect to measure eligible financial instruments at fair value. SFAS 159 appliesto fiscal years beginning after November 15, 2007, with early adoptionpermitted for an entity that has also elected to apply the provisions of SFAS157, *Fair Value Measurement*. An entity isprohibited from retrospectively applying SFAS 159, unless it chooses earlyadoption.  The Company was required toadopt SFAS 159 beginning on October 1, 2008, which had no impact on theCompany’s financial position, results of operations or cash flows.**

 

In December 2007,the FASB issued FASB Statement No. 141 (revised 2007), *Business Combinations* (“FAS 141(R)”).  FAS 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;

 

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and requires that changesin deferred tax asset valuation allowances and acquired income taxuncertainties after the measurement period impact income tax expense. FAS 141(R) alsoexpands disclosures related to business combinations. FAS 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 FAS 141(R) income tax requirementsimmediately upon adoption. The Company is currently evaluating the affect theadoption of FAS 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*(“FAS 160”). FAS 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. FAS 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 FAS 160is not expected to have an impact on the Company’s financial position, resultsof operations or cash flows.

 

In March 2008, the FASB issued SFAS 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 SFAS No. 162, *The Hierarchy of Generally Accepted Accounting Principles* (“SFAS 162”).SFAS 162 is intended to improve financial reporting by identifying aconsistent framework, or hierarchy, for selecting accounting principles to beused in preparing financial statements that are presented in conformity withU.S. GAAP for non-governmental entities. SFAS 162 is effective60 days following the SEC’s approval of the Public Company AccountingOversight Board amendments to AU Section 411, *The Meaningof Present Fairly in Conformity With Generally Accepted Accounting Principles*.Any effect of applying the provisions of SFAS 162 is to be reported as achange in accounting principle in accordance with SFAS No. 154, *Accounting Changes and Error Corrections*. The Companyadopted SFAS 162, on November 15, 2008, which had no impact on the Company’sfinancial position, results of operation or cash flows.

** **

In April 2008, theFASB issued FASB Staff Position (“FSP”) 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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## **Note3.  Inventories**

## ** **

The following is a summary of the major classes ofinventories:

 
| ** **      | ** ** | **September 30, 2008** | ** ** | **December 31, 2008** | ** ** |
|-----------------|------------|----------------------------------|------------|---------------------------------|------------|
| Raw Materials   |       | $                                | 20,343     |                            | $          | 23,856 |   |
| Work-in-process |       | 155,782                          |       | 148,817                         |       |
| Finished Goods  |       | 127,653                          |       | 118,136                         |       |
| Other           |       | 1,137                            |       | 944                             |       |
|            |       | $                                | 304,915    |                            | $          | 291,753 |   |

## ** **

## **Note 4.  IncomeTaxes**

## ** **

Income tax expense for the three months ended December 31,2007 and 2008, differed from the U.S. federal statutory rate of 35% primarilydue to state income taxes and differing tax rates on foreign earnings. Theeffective tax rate for the first quarter of fiscal 2009 was 35.4% compared to39.4% in the same period of fiscal 2008. The decrease in the effective tax rateis primarily attributable to favorable adjustments on an amended state taxreturn filed in the three months ended December 31, 2008, combined withthe prior year impact of FIN 48 during the three months ended December 31,2007, which did not occur this fiscal year.

 

**Note5.  Pension and Post-retirement Benefits**

 

Components of netperiodic pension and post-retirement benefit cost for the three months ended December 31,are as follows:

 
| ** **                        | ** ** | **Three Months Ended December 31,** | ** ** |
|-----------------------------------|------------|---------------------------------------------------------|------------|
| ** **                        | ** ** | **Pension Benefits**                               | ** ** | **Other Benefits** | ** ** |
| ** **                        | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** |
| Service cost                      |       | $                                                       | 706        |   | $ | 635 |   | $ | 361 |   | $ | 332 |   |
| Interest cost                     |       | 2,688                                                   |       | 2,999 |   | 1,115 |   | 1,231 |   |
| Expected return                   |       | (2,851                                                  | )          | (2,510 | ) | — |   | — |   |
| Amortizations                     |       | 201                                                     |       | 201 |   | (1,032 | ) | (1,327 | ) |
| Curtailment gain                  |       | (3,659                                                  | )          | — |   | — |   | — |   |
| Net periodic  benefit cost (gain) |       | $                                                       | (2,915     | ) | $ | 1,325 |   | $ | 444 |   | $ | 236 |   |

 

The Company contributed$2,640 to the Company sponsored domestic pension plans, $1,130 to its otherpost-retirement benefit plans and $230 to the U.K. pension plan for the threemonths ended December 31, 2008. The Company presently expects futurecontributions of $9,360 to its domestic pension plans, $3,070 to its otherpost-retirement benefit plans and $837 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 the multiplierfor non-union and union plan participants, will reduce funding requirements by$23,000 over fiscal years 2008 through 2013. The offsetting estimatedincremental cost of the enhanced 401K match is $2,300 over the same six yearperiod. 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.***

 

**Note 6.  Environmental andLegal**

 

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 bedetermined with any degree of certainty; however, based on the facts presentlyknown, management does not believe that such costs will have a material effecton the Company’s financial position, results of operations or cash flows.

 

The Company believes that any and all claims arising outof conduct or activities that occurred prior to March 29, 2004 are subjectto dismissal. On March 29, 2004, the Company and certain of itssubsidiaries and affiliates filed voluntary petitions for relief under Chapter11 of Title 11 of the United States Bankruptcy Code in the United StatesBankruptcy Court for 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 Confirming the First Amended Joint Plan of Reorganization ofHaynes International, Inc. and its Affiliated Debtors andDebtors-in-Possession as Further Modified (the “Confirmation Order”). TheConfirmation Order and related Chapter 11 Plan, among other things, provide forthe release and discharge of prepetition claims and causes of action. TheConfirmation Order further provides for an injunction against the commencementof any actions with respect to claims held prior to the Effective Date of thePlan. The Effective Date occurred on August 31, 2004. When appropriate,the Company pursues the dismissal of lawsuits premised upon claims or causes ofaction discharged in the Confirmation Order and related Chapter 11 Plan. Thesuccess of this strategy is dependent upon a number of factors, including therespective court’s interpretation of the Confirmation Order and the uniquecircumstances of each case.

 

The Company is currently, and has in the past, beensubject to claims involving personal injuries allegedly relating to itsproducts. For example, the Company is presently involved in two actionsinvolving welding rod-related injuries, one filed in California state courtagainst numerous manufacturers, including the Company, in February 2007,and a second case in U.S. Federal court filed in January 2009, bothalleging that the welding-related products of the defendant manufacturersharmed the users of such products through the inhalation of welding fumescontaining manganese. The Company believes that it has defenses to theseallegations and, that if the Company was found liable, the cases would not havea material effect on its financial position, results of operations orliquidity. In addition to these cases, the Company has in the past been named adefendant in several other lawsuits, including 53 filed in the state ofCalifornia, alleging that its welding-related products harmed the users of suchproducts through the inhalation of welding fumes containing manganese. TheCompany 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 Company

 

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will be dismissedbased upon the Confirmation Order, particularly claims premised, in part or infull, upon actual or alleged exposure on or after the date of the ConfirmationOrder. It is also possible that the Company will be named in additional suitsalleging welding-rod injuries. Should such litigation occur, it is possiblethat the aggregate claims for damages, if the Company is found liable, couldhave a material adverse effect on its financial condition, results ofoperations 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 andpost-closure monitoring and care is ongoing there. Closure certification wasreceived in fiscal 1999 for the North Landfill at the Kokomo facility andpost-closure monitoring and care are permitted and ongoing there.  In fiscal 2007, IDEM issued a singlepost-closure permit applicable to both the North and South Landfills, whichcontain monitoring and post-closure care requirements.  In addition, IDEM required that a ResourceConservation and Recovery Act, or RCRA, Facility Investigation, or RFI, beconducted in order to further evaluate one area of concern and one solid wastemanagement unit.  The RFI commenced infiscal 2008 and is ongoing.

 

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 additional correctiveactions by the Company could be required. In addition, in August 2008, employees discovered an abnormal pH inthe sump pumps located in the containment pits in the wastewater treatmentfacility.  After testing, it wasdetermined that there was a leak in the pipeline from the cleaning house to thewastewater treatment facility. NCDENR was notified within 24 hours of thecertification of the leak.  To date, thestate has not responded to this disclosure.

 

Historic nitric acid spills were discovered at theArcadia, Louisiana location in fiscal 2008. Analytical results were received in March 2008 and the siteassessment was provided to the Louisiana Department of Environmental Quality (“LDEQ”)in May.  Remediation of the spill,including the purchase of new equipment, was substantially complete in fiscal2008.  A preliminary assessment of theLDEQ authorized the Company’s proposed remedial actions.  In August 2008, LDEQ submitted a secondround of inquiries after an existing sump pump was removed, which the Companyresponded to. Another round of correspondence with the state is ongoing.

 

As of December 31, 2008 and September 30,2008, the Company has accrued $1,517 for post-closure monitoring andmaintenance activities. In accordance with Statement of Position 96-1, *Environmental Remediation Liabilities*,accruals for these costs are calculated by estimating the cost to monitor andmaintain each post-closure site and multiplying that amount by the number ofyears remaining in the 30 year post-closure monitoring period referred toabove. At each fiscal year-end, or earlier if necessary, the Company evaluatesthe accuracy of the estimates for these monitoring and maintenance costs forthe upcoming fiscal year. The accrual was based upon the undiscounted amount ofthe obligation of $2,231 which was then discounted using an appropriatediscount rate. The cost associated with closing the sites has been incurred infinancial periods prior to those presented, with the remaining cost to beincurred in future periods related solely to post-closure monitoring andmaintenance.  Based on historicalexperience, the Company estimates that the cost of post-closure monitoring andmaintenance will approximate $125 per year over the remaining obligationperiod.

 

**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  mayexercise an option to have ten million additional pounds  of titanium converted annually, provided thatit offers to loan up to $12,000 to the Company for certain capital expenditureswhich may be required to expand capacity. In addition to the volume commitment, the Company has granted TIMET asecurity interest on its four-high steckel rolling mill, along with

 

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rights of accessif the Company enters into bankruptcy or defaults on any financing arrangements.  The Company has agreed not to manufacturetitanium products (other than cold reduced titanium tubing).  The Company has also agreed not to providetitanium conversion services to any entity other than TIMET for the term of theConversion Services Agreement.  Theagreement contains certain default provisions which could result in contracttermination and damages, including the Company being required to return theunearned portion of the upfront fee.  Thecash received of $50,000 is recognized in income on a straight-line basis overthe 20-year term of the agreement. The portion of the upfront fee notrecognized in income is shown as deferred revenue on the consolidated balancesheet.  Taxes were paid on the up-frontfee primarily in the first quarter of fiscal 2009.

 

**Note 8.  IntangibleAssets and Goodwill**

 

Goodwill was created as aresult of the Company’s reorganization pursuant to Chapter 11 of theU.S. Bankruptcy Code and fresh start accounting. The Company adopted FASBStatement No. 142, *Goodwill and OtherIntangible Assets* (“SFAS 142”). Pursuant to SFAS 142, goodwill isnot amortized and the value of goodwill is reviewed at least annually forimpairment. If the carrying value exceeds the fair value, impairment ofgoodwill may exist resulting in a charge to earnings to the extent of goodwillimpairment.  The Company estimates fairvalue using a combination of a market value approach using quoted market pricesand an income approach using discounted cash flow projections.

 

The Company also has patents,trademarks and other intangibles. As the patents have a definite life, they areamortized over lives ranging from two to fourteen years. As the trademarks havean indefinite life, the Company tests them for impairment at least annually. Ifthe carrying value 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 Company has non-compete agreements with lives of 2 to 7 years.Amortization of the patents, non-competes and other intangibles was $276 and$291 for the three months ended December 31, 2007 and 2008, respectively.

 

Goodwill and trademarks weretested for impairment on August 31, 2008 with no impairmentrecognized.  Due to 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 of our goodwill and trademarks. No impairment wasrecognized at December 31, 2008 because the fair value exceeded thecarrying values. Management will continue to evaluate goodwill and trademarksfor impairment on a quarterly basis if the recent decline in the Company’sstock price continues.

 

The following represents asummary of intangible assets and goodwill at September 30, 2008 and December 31,2008:

 
| **September 30, 2008** | ** ** | **Gross Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Carrying  Amount** | ** ** |
|----------------------------------|------------|-----------------------|------------|-------------------------------|------------|----------------------|------------|
| ** **                       | ** ** | ** **            | ** ** | ** **                    | ** ** | ** **           | ** ** |
| Goodwill                         |       | $                     | 43,737     |                          | $          | —               |       | $ | 43,737 |   |
| 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 |   |

 
| **December 31, 2008** | ** ** | **Gross Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Carrying  Amount** | ** ** |
|---------------------------------|------------|-----------------------|------------|-------------------------------|------------|----------------------|------------|
| ** **                      | ** ** | ** **            | ** ** | ** **                    | ** ** | ** **           | ** ** |
| Goodwill                        |       | $                     | 43,737     |                          | $          | —               |       | $ | 43,737 |   |
| Patents                         |       | 8,667                 |       | (5,620                        | )          | 3,047                |       |
| Trademarks                      |       | 3,800                 |       | —                        |       | 3,800                |       |
| Non-compete                     |       | 1,340                 |       | (558                          | )          | 782                  |       |
| Other                           |       | 306                   |       | (13                           | )          | 293                  |       |
|                            |       | $                     | 14,113     |                          | $          | (6,191               | )          | $ | 7,922 |   |

 

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| **Estimate of Aggregate Amortization Expense:** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|
| **Year Ended September 30,**                         | ** ** | ** ** | ** ** |
| 2009 (remainder  of fiscal year)                                    |       | $          | 699        |   |
| 2010                                                                |       | 554        |       |
| 2011                                                                |       | 540        |       |
| 2012                                                                |       | 359        |       |
| 2013                                                                |       | 350        |       |
|                                                                     |            |            |            |  |

 

**Note 9.   Net Income Per Share**

 

Basic and diluted net incomeper share were computed as follows:

 
| ** **                                                                            | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                            | ** ** | **December 31,**            | ** ** |
| **(in thousands except share and per share data)** | ** ** | **2007**                         | ** ** | **2008** | ** ** |
| Numerator:                                                                            |       |                             |       |   |   |
| Net Income                                                                            |       | $                                | 13,843     |   | $ | 4,524 |   |
| Denominator:                                                                          |       |                             |       |   |   |
| Weighted average  shares outstanding - Basic                                          |       | 11,821,842                       |       | 11,984,623 |   |
| Effect of  dilutive stock options                                                     |       | 144,058                          |       | 60,376 |   |
| Weighted average  shares outstanding - Diluted                                        |       | 11,965,900                       |       | 12,044,999 |   |
|                                                                                  |       |                             |       |   |   |
| Basic net income  per share                                                           |       | $                                | 1.17       |   | $ | 0.38 |   |
| Diluted net  income per share                                                         |       | $                                | 1.16       |   | $ | 0.38 |   |
|                                                                                  |       |                             |       |   |   |
| Number of shares excluded as their effect would be anti-dilutive                      |       | 131,000                          |       | 280,334 |   |

 

Anti-dilutive shares withrespect to outstanding stock options have been excluded from the computation ofdiluted net income per share.

 

## **Note 10. Stock-BasedCompensation**

## ** **

The Company has two stock option plans thatauthorize the granting of non-qualified stock options to certain key employeesand non-employee directors for the purchase of a maximum of 1,500,000 shares ofthe Company’s common stock. The original option plan was adopted in August 2004pursuant to the plan of reorganization and provides for the grant of options topurchase up to 1,000,000 shares of the Company’s common stock. In January 2007,the Company’s Board of Directors adopted a second option plan that provides foroptions to purchase up to 500,000 shares of the Company’s common stock. Each planprovides for the adjustment of the maximum number of shares for which optionsmay be granted in the event of a stock split, extraordinary dividend ordistribution or similar recapitalization event. Unless the CompensationCommittee determines otherwise, options granted under the option plans areexercisable for a period of ten years from the date of grant and vest 33 1/3%per year over three years from the grant date.

 

On October 1, 2008,the Company granted 20,000 options at an exercise price of $46.83, the fairmarket value of the Company’s common stock on the day prior to the day of thegrant.  During the first quarter offiscal 2008 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:

 

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

 

The stock-based employeecompensation expense for the three months ended December 31, 2007 and 2008was  $350 ($209 net of tax or $0.02 perfully diluted share) and $454 ($279 net of tax or $0.02 per fully dilutedshare), respectively. The remaining unrecognized compensation expense at December 31,2008 was $2,960 to be recognized over a weighted average period vesting of 1.33years.

 

The following tables summarize the activity under thestock option plans for the three months ended December 31, 2008:

 
| ** **                              | ** ** | **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                                 |       | 20,000                 |       | 46.83                                  |       |                                                    |       |                                |       |
| Exercised                               |       | —                 |       |                                   |       |                                                    |       |                                |       |
| Forfeited                               |       | (32,667                | )          |                                   |       |                                                    |       |                                |       |
| Outstanding at  December 31, 2008  |       | 435,710                |       | $                                      | 41.61      |                                                    | 7.60 Years |                                | $          | 1,707 |   |
| Vested or  expected to vest             |       | 435,710                |       | $                                      | 41.61      |                                                    | 7.60 Years |                                | $          | 1,707 |   |
| Exercisable at  December 31, 2008  |       | 215,700                |       | $                                      | 26.54      |                                                    | 6.36 Years |                                | $          | 1,707 |   |

 
| **Grant Date**     | ** ** | **Exercise  Price Per  Share** | ** ** | **Remaining  Contractual  Life in Years** | ** ** | **Outstanding  Number of  Shares** | ** ** | **Exercisable  Number of  Shares** | ** ** |
|-------------------------|------------|-------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| August 31, 2004    |       | $                                   | 12.80      |                                                | 5.67       |                                    | 136,565    |                                    | 136,565    |   |
| May 5, 2005        |       | 19.00                               |       | 6.33                                                |       | 8,334                                   |       | 8,334                                   |       |
| August 15,  2005   |       | 20.25                               |       | 6.58                                                |       | 10,477                                  |       | 10,477                                  |       |
| October 1,  2005   |       | 25.50                               |       | 6.75                                                |       | 5,000                                   |       | 5,000                                   |       |
| February 21,  2006 |       | 29.25                               |       | 7.17                                                |       | 25,001                                  |       | 8,333                                   |       |
| March 31,  2006    |       | 31.00                               |       | 7.25                                                |       | 10,000                                  |       | 5,000                                   |       |
| March 30,  2007    |       | 72.93                               |       | 8.25                                                |       | 98,333                                  |       | 40,324                                  |       |
| September 1,  2007 |       | 83.53                               |       | 8.67                                                |       | 5,000                                   |       | 1,667                                   |       |
| March 31,  2008    |       | 54.00                               |       | 9.25                                                |       | 117,000                                 |       | —                                  |       |
| October 1,  2008   |       | 46.83                               |       | 9.75                                                |       | 20,000                                  |       | —                                  |       |
|                    |       |                                |       |                                                |       | 435,710                                 |       | 215,700                                 |       |
|                         |            |                                     |            |                                                     |            |                                         |            |                                         |            |  |

 

**Note 11.  SubsequentEvent**

 

OnJanuary 16, 2009, the Company announced that it was taking actions toreduce costs by cutting its worldwide workforce by 12% and implementing asalary freeze for salaried employees.  Asa result of these personnel reductions, the annualized savings to cost of goodssold is expected to be approximately $8,400, with an impact in fiscal 2009 ofapproximately $5,300, net of severance expense. In, addition, the annualizedsavings to selling, general and administrative expense is expected to beapproximately $1,100, with an impact in fiscal 2009 of approximately $700, netof severance expense.

 

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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*.*

 

*ThisQuarterly Report on Form 10-Q (this “Form 10-Q”) contains statements thatconstitute “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995, Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934. All statementsother than statements of historical fact, including statements regardingindustry prospects and future results of operations or financial position, madein this Form 10-Q are forward-looking.    In many cases, you canidentify forward-looking statements by terminology, such as “may”, “should”, “expects”,“intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”or “continue” or the negative of such terms and other comparable terminology.The forward-looking information may include, among other information,statements concerning the Company’s outlook for fiscal year 2009 and beyond,overall volume and pricing trends, cost reduction strategies and theiranticipated results, and capital expenditures.  There may also beother statements of expectations, beliefs, future plans and strategies,anticipated events or trends, and similar expressions concerning matters thatare not historical facts.  Readers are cautioned that any suchforward-looking statements are not guarantees of future performance and involverisks and uncertainties. Actual results may differ materially from those in theforward looking statements as a result of various factors, many of which arebeyond the Company's control.*

* *

*TheCompany has based these forward-looking statements on its current expectationsand projections about future events.  Although the Company believes thatthe assumptions on which the forward-looking statements contained herein arebased are reasonable, any of those assumptions could prove to be inaccurate. Asa result, the forward-looking statements based upon those assumptions alsocould be incorrect.  Risks and uncertainties, some of which are discussedin Item 1A. of Part 1 to the Company’s Annual Report on Form 10-K for thefiscal year ended September 30, 2008, may affect the accuracy of forwardlooking statements.*

* *

*TheCompany undertakes no obligation to publicly update or revise any forward-lookingstatements, whether as 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.

 

 

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**Significant Events**

 

*CEO Transition*

 

The Company announced on April 4, 2008 thatFrancis Petro had informed the Board of his intention to retire as theCompany’s President and Chief Executive Officer at the end of his existingemployment agreement on September 30, 2008.

 

On September 9, 2008, the Company announced thatMark Comerford was appointed as the new President and Chief Executive Officerof the Company reporting directly to the Board of Directors. Mr. Comerfordassumed his new position effective upon Mr. Petro’s retirement from theCompany.

 

Before joining the Company, Mr. Comerford wasPresident of Alloy Products at Brush Wellman Inc. Since 1998, Mr. Comerfordserved in various positions for Brush Wellman Inc. both in the U.S. and Asia.In addition to his considerable experience at Brush Wellman Inc., Mr. Comerfordwas previously employed at Carpenter Technology and American Brass in variousmetallurgical engineering, international and commercial management positions.

 

*Extensionof U.S. Revolving Credit Facility*

 

Haynes and WachoviaCapital Finance Corporation (Central) (“Wachovia”) entered into a SecondAmended and Restated Loan and Security Agreement (the “Amended Agreement”) withan effective date of November 18, 2008, which amended and restated therevolving credit facility between Haynes and Wachovia dated August 31,2004. Among other items, the Amended Agreement extends the maturity date of theU.S. revolving credit facility to September 30, 2011, increases the marginincluded in the interest rate from 1.5% per annum to 2.25% per annum, permitsthe Company to pay dividends and repurchase common stock if certain financialmetrics are met, and eliminates the EBITDA covenant. The maximum revolving loanamount under the Amended Agreement continues to be $120.0 million.

 

**FirstQuarter of Fiscal 2009 Gross Profit Margin and Outlook for Remainder of FiscalYear**

 

*FirstQuarter of Fiscal 2009 Gross Profit Margin*

 

TheCompany experienced further gross profit margin compression in the firstquarter of fiscal 2009. Gross profit margin in the first quarter of fiscal 2009declined $15.6 million to $18.8 million from $34.4 million in the fourthquarter of fiscal 2008. The gross profit margin percent was 14.0% in the firstquarter of fiscal 2009 compared to 21.4% in the fourth quarter of fiscal 2008.The reduction in gross profit margin of $15.6 million from the fourth quarterof fiscal 2008 to the first quarter of fiscal 2009 was due to (i) lowervolume due primarily to decreased demand in the Company’s end markets, (ii) alower average selling price on a certain portion of the Company’s products, (iii) higherper pound manufacturing costs due to the recognition of higher raw materialcost from inventory, (iv) a higher percentage of specialty products as apercent of the total mix and (v) reduced absorption of fixed costs due tolower volume.

 

Dueto the increasingly challenging economic environment, the volume between the fourthquarter of fiscal 2008 and the first quarter of fiscal 2009 declined byapproximately 1.0 million pounds, or approximately 17%.  The product mix in the quarters also changedsignificantly.  Products shipped in thefirst quarter of fiscal 2009 included a higher percentage of specialty alloys,which are comprised of higher cost material and require a greater amount ofprocessing compared to commodity alloys. In addition, in the first quarter offiscal 2009, prices on specialty alloys declined. Gross profit margin in thefirst quarter was also negatively impacted by higher per pound manufacturingcosts due to the recognition of higher raw material cost from inventory. TheCompany anticipates that the results for the second and third quarters offiscal 2009 will continue to be unfavorably impacted by the recognition ofhigher cost material flowing through cost of goods sold, possibly to an evengreater degree than in the first quarter of fiscal 2009. Following the thirdquarter, it is expected that gross profit margin will not be materiallyaffected by this issue, provided that volume and prices stabilize.

 

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*Outlookfor the Remainder of Fiscal 2009*

 

General

 

Forthe remainder of fiscal 2009, the Company expects a slow-down in shipments asthe credit crisis and global recession continue. While management believes theCompany can maintain profitability for the fiscal year, it is expected thatresults will be significantly below those seen in recent years, and there willbe continued weakness in order entry and pounds shipped over the balance of theyear. In particular, continued declines in volume and pricing, combined withthe continued impact of high cost inventories, could have a substantial impacton the Company’s profitability in the second quarter.

 

TheCompany continues to adjust production schedules, reduce costs and manage cashflow while still moving forward with initiatives that are important to ourlong-term success. The Company intends to reduce inventory levels and tore-evaluate its capital spending.

 

Asa result of the strategies implemented over the last five years, the Companybelieves it is well-positioned to deal with the challenges of the down turn.The equipment upgrades, the value-added capabilities and its favorableliquidity position gives the Company an advantage it has not had in pasteconomic down turns.

 

Competition

 

TheCompany has experienced increasing competition since the third quarter offiscal 2007 from competitors who produce both stainless steel andhigh-performance alloys.  Due tocontinued slowness in the stainless steel market, management believes thesecompetitors increased their production levels and sales activity inhigh-performance alloys to keep capacity in their mills as full as possible,while offering very competitive prices and delivery times.  While competition should soften as the stainlessmarket improves, based on the current economic environment there is significantuncertainty as to when that may occur and the possibility exists that thestainless market may continue to deteriorate. Although the Company continues to respond to the competition byincreasing emphasis on service centers, offering value-added services,improving cost structure, and striving to improve delivery-times andreliability, 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.

 

Backlog and Strength of Markets

 

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 13%from September 30, 2008 to December 31, 2008, and backlog poundsdeclined by approximately 4% in that same period.  Backlog dollars declined by approximately 20%from June 30, 2008 to December 31, 2008, and backlog pounds declinedby approximately 13% in that same period.

 

Thefollowing table shows the progressive decline in backlog dollars by market fromSeptember 30, 2008 to December 31, 2008 and from June 30, 2008to December 31, 2008.

 
| ** **               | ** ** | **Percent Decline  9/30/08 – 12/31/08** | ** ** | **Percent Decline  6/30/08 – 12/31/08** | ** ** |
|--------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| Aerospace                |       | 19                                                          | %          | 26                                                          | %          |
| Chemical  processing     |       | 10                                                          | %          | 29                                                          | %          |
| Land-based gas  turbines |       | 14                                                          | %          | 21                                                          | %          |
| Other markets            |       | 17                                                          | %          | 12                                                          | %          |

 

Themajor contributing factors to the decline in backlog in both periods weredeclining raw material costs, increased competition and decreasing activity inthe Company’s end markets, as discussed above. A reduction in backlog ultimately results in a reduction in revenue.Management expects that backlog, and therefore revenues, will continueto decline from last year and quarterover quarter for at least several morequarters.

 

Cost Reduction Measures

 

OnJanuary 16, 2009, the Company announced that it was taking actions toreduce costs by reducing its

 

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worldwideworkforce by 12% and implementing a salary freeze for salaried employees.  As a result of these personnel reductions,the annualized savings to cost of sales is expected to be approximately $8.4million, with an impact in fiscal 2009 of approximately $5.3 million, net ofseverance expense. 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.

 

Plannedcapital spending in fiscal 2009 was originally targeted at approximately $15.1million. However, the Company is evaluating this planned spending and maypostpone certain projects to the latter part of fiscal 2009 or possibly fiscal2010. Projects are being evaluated to ensure that, if postponed, there will beno material unfavorable impact to operations either in the short- or long-term.

 

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.

 

**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. This 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** | ** ** |
| **Backlog**  (1)                 |       |                        |       |   |   |   |   |   |   |   |   |
| Dollars (in  thousands)          |       | $                           | 247,775    |   | $ | 254,470 |   | $ | 252,598 |   | $ | 229,196 |   | $ | 199,667 |   |
| Pounds (in  thousands)           |       | 8,274                       |       | 8,706 |   | 8,335 |   | 7,575 |   | 7,287 |   |
| Average selling  price per pound |       | $                           | 29.95      |   | $ | 29.23 |   | $ | 30.30 |   | $ | 30.26 |   | $ | 27.38 |   |
|                             |       |                        |       |   |   |   |   |   |   |   |   |
| Average nickel  price per pound  |       |                        |       |   |   |   |   |   |   |   |   |
| London Metals  Exchange (2)      |       | $                           | 12.11      |   | $ | 14.16 |   | $ | 10.23 |   | $ | 8.07 |   | $ | 4.39 |   |

 

----

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

 

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

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

 

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**Results of Operations for the Three Months EndedDecember 31, 2008 Compared to the Three Months Ended December 31,2007**

** **

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

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                                   | ** ** | **December 31,**            | ** ** | **Change** | ** ** |
| **($ in thousands)**               | ** ** | **2007**                         | ** ** | **2008**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| Net revenues                                 |       | $                                | 146,077    |       | 100.0      | %          | $          | 134,304 |   | 100.0 | % | $ | (11,773 | ) | (8.1 | )% |
| Cost of sales                                |       | 111,872                          |       | 76.6       | %          | 115,554    |       | 86.0 | % | 3,682 |   | 3.3 | % |
| Gross profit                                 |       | 34,205                           |       | 23.4       | %          | 18,750     |       | 14.0 | % | (15,455 | ) | (45.2 | )% |
| Selling, general  and administrative expense |       | 9,990                            |       | 6.8        | %          | 10,590     |       | 7.9 | % | 600 |   | 6.0 | % |
| Research and  technical expense              |       | 908                              |       | 0.6        | %          | 825        |       | 0.6 | % | (83 | ) | (9.1 | )% |
| Operating income                             |       | 23,307                           |       | 16.0       | %          | 7,335      |       | 5.5 | % | (15,972 | ) | (68.5 | )% |
| Interest income                              |       | (31                              | )          | 0.0        | %          | (20        | )          | 0.0 | % | 11 |   | (35.5 | )% |
| Interest expense                             |       | 494                              |       | 0.3        | %          | 356        |       | 0.3 | % | (138 | ) | (27.9 | )% |
| Income before  income taxes                  |       | 22,844                           |       | 15.6       | %          | 6,999      |       | 5.2 | % | (15,845 | ) | (69.4 | )% |
| Provision for  income taxes                  |       | 9,001                            |       | 6.2        | %          | 2,475      |       | 1.8 | % | (6,526 | ) | (72.5 | )% |
| Net income                                   |       | $                                | 13,843     |       | 9.5        | %          | $          | 4,524 |   | 3.4 | % | $ | (9,319 | ) | (67.3 | )% |

*** ***
| ** **                                                | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                                                | ** ** | **December 31,**            | ** ** | **Change** | ** ** |
| **By market**                                        | ** ** | **2007**                         | ** ** | **2008**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| **Net revenues******(in thousands)                        |       |                             |       |       |       |       |       |   |   |
| Aerospace                                                 |       | $                                | 59,442     |       | $          | 49,721     |       | $ | (9,721 | ) | (16.4 | )% |
| Chemical  processing                                      |       | 40,805                           |       | 30,883     |       | (9,922     | )          | (24.3 | )% |
| Land-based gas  turbines                                  |       | 25,505                           |       | 32,145     |       | 6,640      |       | 26.0 | % |
| Other markets                                             |       | 18,887                           |       | 19,166     |       | 279        |       | 1.5 | % |
| **Total  product revenue**                                |       | 144,639                          |       | 131,915    |       | (12,724    | )          | (8.8 | )% |
| Other revenue                                             |       | 1,438                            |       | 2,389      |       | 951        |       | 66.1 | % |
| **Net  revenues**                                         |       | $                                | 146,077    |       | $          | 134,304    |       | $ | (11,773 | ) | (8.1 | )% |
|                                                      |       |                             |       |       |       |       |       |   |   |
| **Pounds  by markets**(in thousands)                      |       |                             |       |       |       |       |       |   |   |
| Aerospace                                                 |       | 2,154                            |       | 1,653      |       | (501       | )          | (23.3 | )% |
| Chemical  processing                                      |       | 1,312                            |       | 947        |       | (365       | )          | (27.8 | )% |
| Land-based gas  turbines                                  |       | 1,060                            |       | 1,507      |       | 447        |       | 42.2 | % |
| Other markets                                             |       | 681                              |       | 691        |       | 10         |       | 1.5 | % |
| **Total  shipments**                                      |       | 5,207                            |       | 4,798      |       | (409       | )          | (7.9 | )% |
|                                                      |       |                             |       |       |       |       |       |   |   |
| **Average  selling price per pound**                      |       |                             |       |       |       |       |       |   |   |
| Aerospace                                                 |       | $                                | 27.60      |       | $          | 30.08      |       | $ | 2.48 |   | 9.0 | % |
| Chemical processing                                       |       | 31.10                            |       | 32.61      |       | 1.51       |       | 4.9 | % |
| Land-based gas  turbines                                  |       | 24.06                            |       | 21.33      |       | (2.73      | )          | (11.3 | )% |
| Other markets                                             |       | 27.73                            |       | 27.74      |       | 0.01       |       | 0.0 | % |
| **Total  product**(excluding other revenue)               |       | 27.78                            |       | 27.49      |       | (0.29      | )          | (1.0 | )% |
| **Total  average selling price**(including other revenue) |       | 28.05                            |       | 27.99      |       | (0.06      | )          | (0.2 | )% |

 

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*Net Revenues*.  Net revenues decreased by $11.8 million, or8.1%, to $134.3 million in the first quarter of fiscal 2009 from $146.1 millionin the same period of fiscal 2008. Volume decreased by 7.9% to 4.8 million pounds in the first quarter offiscal 2009 from 5.2 million pounds in the same period of fiscal 2008.  The average selling price per pound decreasedby 0.2% to $27.99 per pound in the first quarter of fiscal 2009 from $28.05 perpound in the same period of fiscal 2008. Volume and average selling pricefor  fiscal 2008, including the firstquarter, were impacted by a 2.0 million pound order for a single customer whichis not being repeated in fiscal 2009. In the first quarter of fiscal 2008 thevolume associated with this particular order was approximately 0.4 millionpounds with a selling price approximately half of the consolidated averageselling 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 first quarter of fiscal 2009. As discussed above, the Company’sconsolidated backlog decreased by $29.5 million, or 12.9%, to $199.7 million atDecember 31, 2008 from $229.2 million at September 30, 2008.

 

Sales to the aerospace market decreased by 16.4% to $49.7 million inthe first quarter of fiscal 2009 from $59.4 million in the same period offiscal 2008, due to a 23.3% decrease in volume partially offset with a 9.0%increase in the average selling price per pound. Volume declined due to slowingdemand which is impacted by the global economic recession exacerbated bydisruption to the aerospace supply chain from the fall 2008 work stoppage atBoeing. The increase in the average selling price per pound is due to changesin product mix.  Product mix in the firstquarter of fiscal 2009 reflects a higher percentage of specialty alloy productsand forms with a higher average selling price when compared to the product mixsold in the same period of fiscal 2008.

 

Sales to thechemical processing market decreased by 24.3% to $30.9 million in the firstquarter of fiscal 2009 from $40.8 million in the same period of fiscal 2008,due to an 27.8% decrease in volume, partially offset by a 4.9% increase in theaverage selling price per pound.  Theincrease in the average selling price reflects a higher percentage of sales ofspecialty alloy product.  Volume hasdeclined due to a number of factors, the primary reason being the globaleconomic recession. In addition, volume was affected by the project orientednature of the market where the comparisons of volume shipped between quarterscan be affected by timing, quantity and order size of the project business whichalso impacts average selling price per pound.

 

Sales to the land-based gas turbine market increasedby 26.0% to $32.1 million for the first quarter of fiscal 2009 from $25.5million in the same period of fiscal 2008, due to a 42.2% increase in volume,partially offset by a 11.3% decrease in the average selling price perpound.  The decrease in the averageselling price is due to the effect of a change in product mix (both form andalloy) and increased competition. The increase in volume reflects lower billetsales in the first quarter of fiscal 2008 due to timing of project business.

 

Sales to other markets increased by 1.5% to $19.2million in the first quarter of fiscal 2009 from $18.9 million in the sameperiod of fiscal 2008, due to a 1.5% increase in volume.  Volume of stainless steel wire decreased by79.1% as a result of the Company’s strategy to reduce production of stainlesssteel wire and focus on the production and sale of high-performance alloy wire,while volume of all forms of high-performance alloy sold to other marketsincreased 33.6% in the first quarter of fiscal 2009 compared to the same periodof fiscal 2008.  The increased volume ofhigh-performance alloy in the “other markets” category is primarily due to theCompany’s continuing effort to increase sales into markets such as flue gasdesulphurization (“FGD”) market, which fall into this category and to expandthe number of other markets.

 

*Other Revenue. *Other revenue increased by 66.1% to $2.4 million inthe first quarter of fiscal 2009 from $1.4 million for the same period offiscal 2008.  The increase is due tohigher activity in toll conversion and miscellaneous sales.

 

*Cost of Sales*.  Cost of sales increased to $115.6 million,and 86.0% of net revenues, in the first quarter of fiscal 2009, compared to$111.9 million, and 76.6% of net revenues, in the same period of fiscal2008.  Cost of sales in the first quarterof fiscal 2009 increased, as compared to the same quarter of the prior year, asa result of higher per pound manufacturing costs due to the recognition ofhigher raw material cost from inventory and a higher

 

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percentage of specialty products as percent of the total mix.  In addition, labor costs increased in thefirst quarter of fiscal 2009 compared to the same period in fiscal 2008 due toincreased wage rates for union employees and increased fringe benefitcosts.  In the first quarter of fiscal2008 cost of sales was reduced by a $3.7 million (2.5% 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 increase in cost of sales as a percentageof net revenues (and the corresponding decline in gross profit) can beattributed to the increased cost of sales, and increased competition combinedwith weaker demand (which lowered net revenue).

 

*Selling, General and AdministrativeExpenses*.  Selling,general and administrative expenses increased 6.0% to $10.6 million in thefirst quarter of fiscal 2009 from $10.0 million in the same period of fiscal2008 due to increased headcount and inflationary rate increases. Selling,general and administrative expenses increased to 7.9% of net revenues in thefirst quarter of fiscal 2009 compared to 6.8% for the same period of fiscal2008 due primarily to a decreased level of revenues.

 

*Research and Technical Expense*.  Research and technical expense decreased 9.1%to $0.8 million in the first quarter of fiscal 2009 from $0.9 million in thesame period of fiscal 2008.

 

*Operating Income*.  As a result of the above factors, operatingincome in the first quarter of fiscal 2009 was $7.3 million compared to $23.3million in the same period of fiscal 2008.

 

*Interest Expense*.  Interest expense decreased 27.9% to $0.4million in the first quarter of fiscal 2009 from $0.5 million in the sameperiod of fiscal 2008.  The decrease isattributable to a lower average debt balance during the first quarter of fiscal2009 (zero debt at December 31, 2008).

 

*Income Taxes*.  Income tax expense decreased to $2.5 millionin the first quarter of fiscal 2009 from $9.0 million in the same period offiscal 2008 primarily due to lower pretax income. The effective tax rate forthe first quarter of fiscal 2009 was 35.4% compared to 39.4% in the same periodof fiscal 2008. The decrease in the effective tax rate is primarilyattributable to favorable adjustments on an amended state tax return filed inthe three months ended December 31, 2008 combined with the prior yearimpact of FIN 48 during the three months ended December 31, 2007 which didnot occur this fiscal year.

 

*Net Income*.  As a result of the above factors, net incomedecreased by $9.3 million to $4.5 million in the first quarter of fiscal 2009from $13.8 million in the same period of fiscal 2008.

 

**Liquidityand Capital Resources**

 

*Comparative cashflow analysis*

 

During the first quarter 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 December 31,2008, Haynes had cash and cash equivalents of approximately $4.9 millioncompared to cash and cash equivalents of approximately $7.1 million at September 30,2008.

 

Net cash provided by operating activities was$13.9 million in the first quarter of fiscal 2009 compared to $11.5 million inthe same period of fiscal 2008.  Severalitems contributed to the difference.  Cashgenerated from a decrease in accounts receivable of $18.3 million was $5.9million higher than the same period of fiscal 2008. Cash generated from reducedinventory balances (net of foreign currency adjustments) of $9.3 million was$27.0 million higher than the same period of fiscal 2008, as a result of bothlower levels of inventory required to support a lower sales level and loweraverage inventory cost per pound. Offsetting the positive items were a lowernet income of $9.3 million and the use of cash from higher income tax paymentsof $12.7 million primarily caused by the tax payment of $15.0 million relatedto the upfront fee on the TIMET agreement. Net cash used in investing activitieswas $2.7 million in the first quarter of fiscal 2009 compared to $4.6 millionin the first quarter of fiscal 2008, primarily as a result of lower capitalexpenditures.  Net cash used in financingactivities included a reduction in borrowings on the revolving credit facilityof $11.8 million as a result of cash generated from operations resulting in abalance on the revolver at December 31, 2008 of zero.

 

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*Future sources of liquidity*

 

The Company’s sources of cash for fiscal 2009 areexpected to consist primarily of cash generated from operations, cash on hand,and borrowings under the U.S. revolving credit facility.  The U.S. revolving credit facility providesborrowings in a maximum amount of $120.0 million, subject to a borrowing baseformula and certain reserves. At December 31, 2008, the Company had cashof approximately $4.9 million, an outstanding balance of zero on the U.S.revolving credit facility and access to a total of approximately $120.0 millionunder the U.S. revolving credit facility, subject to borrowing base and certainreserves. Management believes that the resources described above will be sufficientto fund planned capital expenditures and working capital requirements over thenext twelve months.

 

U.S. revolving credit facility:   Haynes and Wachovia CapitalFinance Corporation (Central) (“Wachovia”) entered into a Second Amended andRestated Loan and Security Agreement (the “Amended Agreement”) with aneffective date of November 18, 2008, which amended and restated therevolving credit facility between Haynes and Wachovia dated August 31,2004. Among other items, the Amended Agreement extends the maturity date of theU.S. revolving credit facility to September 30, 2011, increases the marginincluded in the interest rate from 1.5% per annum to 2.25% per annum for LIBORborrowings, permits the Company to pay dividends and repurchase common stock ifcertain financial metrics are met, and eliminates the EBITDA covenant. Themaximum revolving loan amount under the Amended Agreement continues to be$120.0 million. Borrowings under the U.S. revolving credit facility bearinterest at the Company’s option at either Wachovia Bank, National Association’s“prime rate,” plus up to 2.25% per annum, or the adjusted Eurodollar rate usedby the lender, plus up to 3.0% per annum. As of December 31, 2008, the U.S. revolving credit facility had anoutstanding balance of zero. During the three month period ended December 31,2008 it bore interest at a weighted average interest rate of 5.18%.  In addition, the Company must pay monthly inarrears a commitment fee of 0.375% per annum on the unused amount of the U.S.revolving credit facility total commitment. For letters of credit, the Company must pay 2.5% per annum on the dailyoutstanding balance of all issued letters of credit, plus customary fees forissuance, amendments, and processing. The Company is subject to certaincovenants as to fixed charge coverage ratios and other customary covenants,including covenants restricting the incurrence of indebtedness, the granting ofliens, and the sale of assets and permits the Company to pay dividends andrepurchase common stock if certain metrics are met.  As of December 31, 2008, the most recentrequired measurement date under the agreement documentation, the Company was incompliance with these covenants.  TheU.S. revolving credit facility matures on September 30, 2011. Borrowingsunder the U.S. revolving credit facility are collateralized by a pledge ofsubstantially all of the U.S. assets of the Company, including equity interestsin its U.S. subsidiaries, but excluding its four-high Steckel rolling mill andrelated assets, which are pledged to TIMET. The U.S. revolving credit facilityis also secured by a pledge of 65% of the equity interests in each of theCompany’s foreign subsidiaries.

 

*FutureUses of Liquidity*

 

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

 

·                  fundingoperations;

 

·                  income taxpayments;

 

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

 

·                  pension planfunding;

 

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Planned capital spending in fiscal 2009 was originally targeted atapproximately $15.1 million, and approximately $2.8 million was spent in thefirst quarter of fiscal 2009.  Themajority of the planned projects are maintenance capital type projects;however, the Company is evaluating this planned spending and may postponecertain projects to the latter part of fiscal 2009 or possibly fiscal 2010.Projects are being evaluated to ensure that, if postponed, there will be nomaterial unfavorable impact to operations either in the short- or long-term.

 

*Contractual Obligations*

 

The following table setsforth the Company’s contractual obligations for the periods indicated, as of December 31,2008:

 

(in thousands)

 
| ** **                          | ** ** | **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        |       | $                                         | 13,453     |   | $ | 3,459 |   | $ | 3,973 |   | $ | 1,875 |   | $ | 4,146 |   |
| Capital lease  obligations          |       | 354                                       |       | 33 |   | 66 |   | 66 |   | 189 |   |
| Raw material  contracts             |       | 33,474                                    |       | 23,950 |   | 9,524 |   | — |   | — |   |
| Mill supplies  contracts            |       | 156                                       |       | 156 |   | — |   | — |   | — |   |
| Capital projects                    |       | 2,037                                     |       | 2,037 |   | — |   | — |   | — |   |
| Pension plan(2)                     |       | 41,137                                    |       | 11,637 |   | 10,140 |   | 19,360 |   | — |   |
| Other  postretirement benefits(3)   |       | 48,000                                    |       | 4,200 |   | 9,000 |   | 9,800 |   | 25,000 |   |
| Non-compete  obligations(4)         |       | 220                                       |       | 110 |   | 110 |   | — |   | — |   |
| Total                               |       | $                                         | 138,831    |   | $ | 45,582 |   | $ | 32,813 |   | $ | 31,101 |   | $ | 29,335 |   |

 

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(1)             Taxesare not included in the table. The Company adopted the provisions of FIN No. 48,*Accounting for Uncertainty in Income Taxes*,on October 1, 2007. As of December 31, 2008, the non-current income taxes payablewas $276. It is not possible to determine in which period the tax liability mightbe paid out.

 

(2)             TheCompany has a funding obligation to contribute an additional $40,070 to the domesticpension plan arising from the Pension Protection Act of 2006. These paymentswill be tax deductible. All benefit payments under the domestic pension planwill come from the plan and not the Company. The Company expects its U.K.subsidiary to contribute $1,067 in fiscal 2009 to the U.K. Pension Plan.

 

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

 

(4)             Pursuantto an escrow agreement, as of April 11, 2005, the Company established an escrowaccount to satisfy its obligation to make payments under a non-compete agreemententered into as part of the Branford Acquisition. This amount is reported asrestricted cash.

 

AtDecember 31, 2008, the Company also had $0.03 million outstanding under aletter of credit. The letter of credit is outstanding in connection with abuilding lease obligation.

 

**New Accounting Pronouncements**

 

In September 2006, theFASB issued FASB Statement No. 157, *Fair Value Measurement*(“SFAS 157”). SFAS 157 addresses standardizing the measurement offair value for companies who are required to use a fair value measure forrecognition or disclosure purposes. The FASB defines fair value as “the pricethat would be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measure date.”  On February 12, 2008, the FASB issuedStaff Position 157-2 (“FSP 157-2”) which delays the effective date of SFAS 157for all nonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis.  Therefore for financial assets and liabilities thestatement is effective for fiscal years beginning after November 15, 2007and for

 

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interim periods within those fiscal years. The Companywas required to adopt SFAS 157 (excluding nonfinancial assets andliabilities) beginning on October 1, 2008, which did not have a materialimpact on the Company’s financial position, results of operations or cashflows.

 

In December 2007,the FASB issued FASB Statement No. 141 (revised 2007), *Business Combinations* (“FAS 141(R)”).  FAS 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. FAS 141(R) alsoexpands disclosures related to business combinations. FAS 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 FAS 141(R) income tax requirementsimmediately upon adoption. The Company is currently evaluating the impact ofFAS 141(R) on its financial position, results of operations, and cashflows.

 

In December 2007,the FASB issued FASB Statement No. 160, *NoncontrollingInterests in Consolidated Financial Statements, an Amendment of ARB No. 51*(“FAS 160”). FAS 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. FAS 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 FAS 160is not expected to have an impact on the Company’s financial position, resultsof operations, or cash flows.

 

**In March 2008, the FASB issued SFAS No. 161, *Disclosures about Derivative Instruments and Hedging Activities*(“SFAS 161”)—an amendment of SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*. SFAS 161 isintended to improve financial reporting transparency regarding derivativeinstruments and hedging activities by providing investors with a betterunderstanding of their effects on financial position, financial performance,and cash flows. SFAS 161 is effective for financial statements issued forfiscal years and interim periods beginning after November 15, 2008. TheCompany will adopt SFAS 161 on October 1, 2009 and is currentlyevaluating the effect the adoption will have on its consolidated financialstatements.**

** **

In April 2008, theFASB issued FASB Staff Position (“FSP”) 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.

 

**Critical Accounting Policies and Estimates**

 

*Overview*

 

Management’s Discussion andAnalysis of Financial 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

 

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liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  On an on-going basis, management evaluatesits estimates and judgments, including those related to bad debts, inventories,income taxes, retirement benefits and environmental matters.  The process of determining significant estimatesis fact specific and takes into account factors such as historical experience,current and expected economic conditions, product mix and in some cases,actuarial techniques, and various other factors that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. The Company constantly reevaluates these significant factors and makesadjustments where facts and circumstances dictate.  Actual results may differ from theseestimates 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 netrevenues in the periods in which the related sales are recognized. Managementdetermines this allowance based on historical experience and have not had anyhistory of returns 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. As a result of the 2004 Chapter 11 reorganizationthere were no changes to terms of these benefits.

 

*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

 

 

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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 performed sensitivity analyses on our estimated fair value using theincome approach. A key assumption in our fair value estimate is the weightedaverage cost of capital utilized for discounting our cash flow estimates in ourincome approach. The Company can provide no assurance that a materialimpairment charge will not occur in future periods as a result of theseanalyses.

 

The Companyreviews the 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 goodwill and trademarks for impairment as of August 31, 2008, andconcluded no impairment adjustment was necessary.Due tothe present uncertainty surrounding the global economy and stock pricevolatility generally, and volatility in our stock price in particular, weconcluded a triggering event had occurred indicating potential impairment andperformed an impairment test as of December 31, 2008 of our goodwill andtrademarks. No impairment was recognized at December 31, 2008 because thefair value exceeded the carrying values. Even though we determined that therewas no goodwill or trademark impairment as of December 31, 2008, continueddeclines in the value of our stock price as well as values of others in ourindustry, declines in sales beyond our current forecasts, and significantadverse changes in the operating environment for the industry may result in afuture impairment charge. Management will continue to evaluate goodwill and trademarksfor impairment on a quarterly basis if the recent decline in the Company’sstock price continues.

 

*Share-BasedCompensation*

 

The Company hastwo stock option plans that authorize the granting of non-qualified stockoptions to certain key employees and non-employee directors for the purchase ofa maximum of 1,500,000 shares of the Company’s common stock. The originaloption plan was adopted in 2004 pursuant to the plan of reorganization andprovides the grant of options to purchase up to 1,000,000 shares of the Company’scommon stock. In January 2007, the Company’s Board of Directors adopted anew option plan that provides for options to purchase up to 500,000 shares ofthe Company’s common stock. Unless the Compensation Committee determinesotherwise, options granted under the option plans are exercisable for a periodof ten years for the date of grant and vest 33 1/3% per year over three yearsfrom 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 paymenttransactions to be recognized in the financial statements. This statementapplies to all awards granted after the effective date and to modifications,repurchases or cancellations of existing awards. Additionally, under themodified prospective method of adoption, the Company recognizes compensationexpense for the portion of outstanding awards on the adoption date for whichthe requisite service period has not yet been rendered based on the grant-datefair value of those awards calculated under SFAS No. 123 and 148 for proforma disclosures. The amount of compensation cost will be measured based uponthe grant date fair value. The fair value of the option grants is estimated onthe date of grant using the Black-Scholes option pricing model with assumptionson dividend yield, risk-free interest rate, expected volatilities, and expectedlives of the options.

 

*IncomeTaxes*

 

The Companyaccounts for income taxes in accordance with FASB Statement No. 109, *Accounting for Income*

 

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*Taxes*(“SFAS No. 109”), which requires deferred tax assets and liabilities berecognized using enacted tax rates for the effect of temporary differencesbetween book and tax basis of recorded assets and liabilities. SFAS No. 109also requires deferred tax assets be reduced by a valuation allowance if it ismore likely than not that some portion or all of the deferred tax assets willnot be realized. The determination of whether or not a valuation allowance isneeded is based upon an evaluation of both positive and negative evidence. Inits evaluation of the need for a valuation allowance, the Company assessesprudent and feasible tax planning strategies. The ultimate amount of deferredtax assets realized could be different from those recorded, as influenced bypotential changes in enacted tax laws and the availability of future taxableincome.

 

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,accounting in interim periods, disclosure, and transition.

 

**Item 3.****           Quantitative andQualitative 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 December 31,2007. A hypothetical 10% increase in the interest rate on variable rate debtwould have resulted in additional interest expense of approximately $200,000for the three months ended December 31, 2007.  The Company’s outstanding variable rate debtwas zero at December 31, 2008. The Company has not entered into anyderivative instruments to hedge the effects 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 currency exchangerisk. The Company’s U.S. operations transact their foreign sales in U.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 December 31, 2008, 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 as we have been able to in the past.

 

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#### **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 andprocedures were effective as of December 31, 2008 in providing reasonableassurance that information required to be disclosed by the Company in thereports that it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission.

 

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

 

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**PART II  OTHER INFORMATION**

 

**Item1.   Legal Proceedings**

 

In the fourth quarter of fiscal 2008, one of two currently pendingcases involving welding rod-related injuries was dismissed.  Both of these cases were filed in Californiastate court against numerous manufacturers, including the Company, allegingthat the welding-related products of the defendant manufacturers harmed theusers of such products through the inhalation of welding fumes containingmanganese.  The plaintiff voluntarilydismissed the Company from this lawsuit.

 

**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: February 9,  2009           |
|   | * *                               |
|   | * *                               |
|   | *  /s/ Marcel Martin*        |
|   | Marcel Martin                          |
|   | Vice President, Finance                |
|   | Chief Financial Officer                |
|   | Date: February 9,  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      |       | Nonqualified  Stock Option Agreement by and between Haynes International, Inc. and  Mark Comerford, dated October 1, 2008 (incorporated by reference to  Exhibit 10.2 of the Haynes International, Inc. Form 8-K filed  October 7, 2008).                                                                                                                                                                                                                             |
|                                                  |       | 10.02      |       | Second Amended and  Restated Loan and Security Agreement by and among Haynes  International, Inc., Haynes Wire Company, Wachovia Capital Finance  Corporation (Central), as agent, JP Morgan Chase Bank, N.A., as documentation  agent and the lenders from time to time party thereto, dated  November 18, 2008 (incorporated by reference to Exhibit 10.10 to  the Haynes International, Inc. annual Report on form 10-K for the fiscal  year ended September 30, 2008). |
| (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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