Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

** **

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

** **

**For thequarterly period ended   June 30,2009**

** **

**or**

** **

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

** **

**For thetransition period from                         to**

 

**CommissionFile Number:    001-33288**

 

**HAYNESINTERNATIONAL, INC.**

(Exact name ofregistrant 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’stelephone 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 check markwhether the registrant has submitted electronically and posted on its corporatewebsite, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). Yes  o      No  o

 

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

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

 

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

 

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

 

Asof July 31, 2009, the registrant had 12,096,829 shares of Common Stock,$.001 par value, outstanding.

 

 

 

 

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

**TABLE OFCONTENTS**

** **
| ** **       | ** **                                                                                                                        | **Page**   |
|------------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|
| **PART I**  | **FINANCIAL INFORMATION**                                                                                                         | ** ** |
|             |                                                                                                                              |       |
| Item 1.          | Unaudited Condensed  Financial Statements                                                                                         |       |
|             |                                                                                                                              |       |
|             | Haynes  International, Inc. and Subsidiaries:                                                                                |       |
|             |                                                                                                                              |       |
|             | Unaudited  Consolidated Balance Sheets as of September 30, 2008 and June 30,  2009                                      | 1          |
|             |                                                                                                                              |       |
|             | Unaudited Consolidated Statements of Operations for  the Three and Nine Months Ended June 30, 2008 and 2009                  | 2          |
|             |                                                                                                                              |       |
|             | Unaudited Consolidated Statements of Comprehensive  Income (Loss) for the Three and Nine Months Ended June 30, 2008 and 2009 | 3          |
|             |                                                                                                                              |       |
|             | Unaudited Consolidated Statements of Cash Flows for  the Nine Months Ended June 30, 2008 and 2009                            | 4          |
|             |                                                                                                                              |       |
|             | Notes to Consolidated Financial Statements                                                                                        | 5          |
|             |                                                                                                                              |       |
| Item 2.          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                       | 15         |
|             |                                                                                                                              |       |
| Item 3.          | Quantitative  and Qualitative Disclosures About Market Risk                                                                       | 32         |
|             |                                                                                                                              |       |
| Item 4.          | Controls and  Procedures                                                                                                          | 32         |
|             |                                                                                                                              |       |
|             |                                                                                                                              |       |
| **PART II** | **OTHER INFORMATION**                                                                                                             | ** ** |
| ** **       | ** **                                                                                                                        | ** ** |
| Item 6.          | Exhibits                                                                                                                          | 33         |
|             |                                                                                                                              |       |
|             | Signatures                                                                                                                        | 34         |
|             |                                                                                                                              |       |
|             | Index to  Exhibits                                                                                                                | 35         |

 

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**PART 1         FINANCIAL INFORMATION**

 

Item 1.    Financial Statements

 

**HAYNESINTERNATIONAL, INC. and SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

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

 
| ** **                                                                                                                                                                      | ** ** | **September 30,********2008** | ** ** | **June 30,********2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|-------------------------------|------------|
| **ASSETS**                                                                                                                                                                      | ** ** | ** **                         | ** ** | ** **                    | ** ** |
| Current assets:                                                                                                                                                                 | ** ** | ** **                         |       |                          |       |
| Cash and cash equivalents                                                                                                                                                       |       | $                                  | 7,058      |                          | $          | 83,916 |   |
| Restricted cash — current portion                                                                                                                                          |       | 110                                |       | 110                           |       |
| Accounts receivable, less allowance for doubtfulaccounts of $1,354 and  $1,638, respectively                                                                                    |       | 99,295                             |       | 53,674                        |       |
| Inventories                                                                                                                                                                     |       | 304,915                            |       | 198,881                       |       |
| Income taxes receivable                                                                                                                                                         |       | —                             |       | 21,915                        |       |
| Deferred income taxes                                                                                                                                                           |       | 9,399                              |       | 8,492                         |       |
| Other current assets                                                                                                                                                            |       | 2,573                              |       | 1,255                         |       |
| Total current assets                                                                                                                                                            |       | 423,350                            |       | 368,243                       |       |
|                                                                                                                                                                            |       |                               |       |                          |       |
| Property, plant and equipment (at cost)                                                                                                                                         |       | 134,523                            |       | 141,554                       |       |
| Accumulated depreciation                                                                                                                                                        |       | (27,221                            | )          | (34,684                       | )          |
| Net property, plant and equipment                                                                                                                                               |       | 107,302                            |       | 106,870                       |       |
|                                                                                                                                                                            |       |                               |       |                          |       |
| Deferred income taxes — long term portion                                                                                                                                  |       | 32,310                             |       | 30,720                        |       |
| Prepayments and deferred charges                                                                                                                                                |       | 2,741                              |       | 2,675                         |       |
| Restricted cash — long term portion                                                                                                                                        |       | 220                                |       | 110                           |       |
| Goodwill                                                                                                                                                                        |       | 43,737                             |       | —                        |       |
| Other intangible assets, net                                                                                                                                                    |       | 7,907                              |       | 7,457                         |       |
| Total assets                                                                                                                                                                    |       | $                                  | 617,567    |                          | $          | 516,075 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                  |       |                               |       |                          |       |
| Current liabilities:                                                                                                                                                            |       |                               |       |                          |       |
| Accounts payable                                                                                                                                                                |       | $                                  | 41,939     |                          | $          | 26,347 |   |
| Accrued expenses                                                                                                                                                                |       | 12,729                             |       | 9,836                         |       |
| Income taxes payable                                                                                                                                                            |       | 7,482                              |       | —                        |       |
| Accrued pension and postretirement benefits                                                                                                                                     |       | 15,016                             |       | 14,675                        |       |
| 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                             |       | 53,468                        |       |
|                                                                                                                                                                            |       |                               |       |                          |       |
| Long-term obligations (less current portion)                                                                                                                                    |       | 1,582                              |       | 1,487                         |       |
| Deferred revenue (less current portion)                                                                                                                                         |       | 42,830                             |       | 40,954                        |       |
| Non-current income taxes payable                                                                                                                                                |       | 276                                |       | 276                           |       |
| Accrued pension and postretirement benefits                                                                                                                                     |       | 100,343                            |       | 89,026                        |       |
| Total liabilities                                                                                                                                                               |       | 238,024                            |       | 185,211                       |       |
| Commitments and contingencies (Note 6)                                                                                                                                          |       | —                             |       | —                        |       |
| Stockholders’ equity:                                                                                                                                                      |       |                               |       |                          |       |
| Common stock, $0.001 par value (40,000,000 sharesauthorized, 11,984,623 and  12,096,829 issued and outstandingat September 30, 2008 and June 30,  2009, respectively) |       | 12                                 |       | 12                            |       |
| Preferred stock, $0.001 par value (20,000,000  shares authorized, 0 shares issued and outstanding)                                                                              |       | —                             |       | —                        |       |
| Additional paid-in capital                                                                                                                                                      |       | 225,821                            |       | 227,654                       |       |
| Accumulated earnings                                                                                                                                                            |       | 155,831                            |       | 106,522                       |       |
| Accumulated other comprehensive loss                                                                                                                                            |       | (2,121                             | )          | (3,324                        | )          |
| Total stockholders’ equity                                                                                                                                                 |       | 379,543                            |       | 330,864                       |       |
| Total liabilities and stockholders’ equity                                                                                                                                 |       | $                                  | 617,567    |                          | $          | 516,075 |   |

 

The accompanyingnotes are 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** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **June 30,**      | ** ** | **June 30,**     | ** ** |
| ** **                                   | ** ** | **2008**               | ** ** | **2009**              | ** ** | **2008** | ** ** | **2009** | ** ** |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Net  revenues                                |       | $                      | 166,340    |                  | $          | 98,325 |   | $ | 476,188 |   | $ | 353,042 |   |
| Cost  of sales                               |       | 126,223                |       | 106,493               |       | 365,946 |   | 335,463 |   |
| Gross  profit (loss)                         |       | 40,117                 |       | (8,168                | )          | 110,242 |   | 17,579 |   |
| Selling,  general and administrative expense |       | 11,007                 |       | 8,837                 |       | 31,059 |   | 27,719 |   |
| Research  and technical expense              |       | 819                    |       | 757                   |       | 2,566 |   | 2,396 |   |
| Impairment  of goodwill                      |       | —                 |       | —                |       | — |   | 43,737 |   |
| Operating  income (loss)                     |       | 28,291                 |       | (17,762               | )          | 76,617 |   | (56,273 | ) |
| Interest  income                             |       | (92                    | )          | (42                   | )          | (149 | ) | (70 | ) |
| Interest  expense                            |       | 114                    |       | 87                    |       | 951 |   | 566 |   |
| Income  (loss) before income taxes           |       | 28,269                 |       | (17,807               | )          | 75,815 |   | (56,769 | ) |
| Provision  for (benefit from) income taxes   |       | 10,705                 |       | (6,863                | )          | 29,345 |   | (7,460 | ) |
| Net  income (loss)                           |       | $                      | 17,564     |                  | $          | (10,944 | ) | $ | 46,470 |   | $ | (49,309 | ) |
| Net  income (loss) per share:                |       |                   |       |                  |       |   |   |   |   |
| Basic                                        |       | $                      | 1.47       |                  | $          | (0.91 | ) | $ | 3.91 |   | $ | (4.11 | ) |
| Diluted                                      |       | $                      | 1.46       |                  | $          | (0.91 | ) | $ | 3.87 |   | $ | (4.11 | ) |
| Weighted  average shares outstanding:        |       |                   |       |                  |       |   |   |   |   |
| Basic                                        |       | 11,921,541             |       | 12,002,754            |       | 11,882,929 |   | 11,990,667 |   |
| Diluted                                      |       | 12,045,253             |       | 12,002,754            |       | 12,013,792 |   | 11,990,667 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

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**HAYNESINTERNATIONAL, INC. and SUBSIDIARIES**

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

**(Unaudited)**

**(inthousands)**

** **
| ** **                                      | ** ** | **Three Months Ended  June 30** | ** ** | **Nine Months Ended  June 30** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **2008**                             | ** ** | **2009**                            | ** ** | **2008** | ** ** | **2009** | ** ** |
| Net  income (loss)                              |       | $                                    | 17,564     |                                | $          | (10,944 | ) | $ | 46,470 |   | $ | (49,309 | ) |
| Other  comprehensive income (loss), net of tax: |       |                                 |       |                                |       |   |   |   |   |
| Pension  curtailment                            |       | —                               |       | —                              |       | 2,701 |   | — |   |
| Foreign  currency translation adjustment        |       | (207                                 | )          | 4,529                               |       | 2,069 |   | (1,203 | ) |
| Comprehensive  income (loss)                    |       | $                                    | 17,357     |                                | $          | (6,415 | ) | $ | 51,240 |   | $ | (50,512 | ) |

 

The accompanyingnotes are an integral part of these financial statements.

 

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**HAYNESINTERNATIONAL, INC. and SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(inthousands)**

 
| ** **                                                                                | ** **                              | **Nine Months Ended********June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|-----------------------------------------|--------------------------------------------|------------|
| ** **                                                                                | ** **                              | **2008**                                   | ** ** | **2009** | ** ** |
| **Cash flows from operating activities:**                                                 |                                    |                                       |       |   |   |
| Net  income (loss)                                                                        |                                    | $                                          | 46,470     |   | $ | (49,309 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |                                    |                                       |       |   |   |
| Depreciation                                                                              |                                    | 6,561                                      |       | 7,649 |   |
| Amortization                                                                              |                                    | 824                                        |       | 766 |   |
| Impairment  of goodwill                                                                   |                                    | —                                     |       | 43,737 |   |
| Stock  compensation expense                                                               |                                    | 1,216                                      |       | 994 |   |
| Excess  tax benefit from option exercises                                                 |                                    | (2,842                                     | )          | 9 |   |
| Deferred  revenue - portion recognized                                                    |                                    | (1,875                                     | )          | (1,876 | ) |
| Deferred  income taxes                                                                    |                                    | 1,767                                      |       | 2,858 |   |
| Loss  on disposal of property                                                             |                                    | 223                                        |       | 165 |   |
| Change  in assets and liabilities:                                                        |                                    |                                       |       |   |   |
| Accounts  receivable                                                                      |                                    | 11,587                                     |       | 44,591 |   |
| Inventories                                                                               |                                    | (33,595                                    | )          | 104,503 |   |
| Other  assets                                                                             |                                    | (934                                       | )          | 1,388 |   |
| Accounts  payable and accrued expenses                                                    |                                    | 8,953                                      |       | (17,418 | ) |
| Income  taxes                                                                             |                                    | 4,715                                      |       | (29,371 | ) |
| Accrued  pension and postretirement benefits                                              |                                    | (12,578                                    | )          | (11,658 | ) |
| Net  cash provided by operating activities                                                |                                    | 30,492                                     |       | 97,028 |   |
|                                                                                      |                                    |                                       |       |   |   |
| **Cash flows from investing activities:**                                                 |                                    |                                       |       |   |   |
| Additions  to property, plant and equipment                                               |                                    | (15,041                                    | )          | (7,463 | ) |
| Asia  distribution expansion and acquisition                                              |                                    | (3,000                                     | )          | — |   |
| Change  in restricted cash                                                                |                                    | 110                                        |       | 110 |   |
| Net  cash used in investing activities                                                    |                                    | (17,931                                    | )          | (7,353 | ) |
|                                                                                      |                                    |                                       |       |   |   |
| **Cash flows from financing activities:**                                                 |                                    |                                       |       |   |   |
| Net  decrease in revolving credit                                                         |                                    | (13,202                                    | )          | (11,812 | ) |
| Proceeds  from exercise of stock options                                                  |                                    | 1,939                                      |       | 848 |   |
| Excess  tax benefit from option exercises                                                 |                                    | 2,842                                      |       | (9 | ) |
| Payment  for debt issuance costs                                                          |                                    | —                                     |       | (316 | ) |
| Payments  on long-term obligations                                                        |                                    | (139                                       | )          | (1,449 | ) |
| Net  cash used in financing activities                                                    |                                    | (8,560                                     | )          | (12,738 | ) |
|                                                                                      |                                    |                                       |       |   |   |
| Effect  of exchange rates on cash                                                         |                                    | 139                                        |       | (79 | ) |
| Increase  in cash and cash equivalents                                                    |                                    | 4,140                                      |       | 76,858 |   |
|                                                                                      |                                    |                                       |       |   |   |
| Cash  and cash equivalents, beginning of period                                           |                                    | 5,717                                      |       | 7,058 |   |
| Cash  and cash equivalents, end of period                                                 |                                    | $                                          | 9,857      |   | $ | 83,916 |   |
|                                                                                      |                                    |                                       |       |   |   |
| Supplemental  disclosures of cash flow information:                                       |                                    |                                       |       |   |   |
| Cash  paid during period for:                                                             | Interest  (net of capitalized interest) |                                       | $          | 972 |   | $ | 512 |   |
|                                                                                      | Income  taxes                           |                                       | $          | 23,414 |   | $ | 20,365 |   |

 

The accompanyingnotes are 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)**

 

## **Note1.   Basis of Presentation**

## ** **

*Interim Financial Statements*

 

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

 

*Principles of Consolidation*

 

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

 

## **Note2.   New Accounting Pronouncements**

## ** **

In September 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Statement No. 157,*Fair Value Measurement* (“SFAS 157”).SFAS 157 addresses standardizing the measurement of fair value forcompanies who are required to use a fair value measure for recognition ordisclosure purposes. The FASB defines fair value as “the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction 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 April 2009,the FASB issued FASB Staff Position 157-4, *Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly*(“FSP 157-4”), which provides additional guidance for applying the provisionsof SFAS No. 157. SFAS No. 157 defines fair value as the price thatwould be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants under current marketconditions. This FSP requires an evaluation of whether there has been asignificant decrease in the volume and level of activity for the asset orliability in relation to normal market activity for the asset or liability. Ifthere has, transactions or quoted prices may not be indicative of fair valueand a significant adjustment may need to be made to those prices to estimatefair value. Additionally, an entity must consider whether the observedtransaction was orderly (that is, not distressed or forced). If the transactionwas orderly, the obtained price can be considered a relevant observable inputfor determining fair value. If the transaction is not orderly, other valuationtechniques must be used when estimating fair value. FSP 157-4 was appliedprospectively for interim periods ending after June 15, 2009, which didnot have a material impact on the Company’s financial position, results ofoperations or cash flows.**

 

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## **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* (“SFAS 141(R)”).  SFAS 141(R) requires that the fair valueof the purchase price of an acquisition including the issuance of equitysecurities be determined on the acquisition date; requires that all assets,liabilities, noncontrolling interests, contingent consideration, contingencies,and in-process research and development costs of an acquired business berecorded at fair value at the acquisition date; requires that acquisition costsgenerally be expensed as incurred; requires that restructuring costs generallybe expensed in periods subsequent to the acquisition date; and requires thatchanges in deferred tax asset valuation allowances and acquired income taxuncertainties after the measurement period impact income tax expense. SFAS 141(R) alsoexpands disclosures related to business combinations. SFAS 141(R) will beapplied prospectively to business combinations occurring after the beginning ofthe Company’s fiscal year 2010, except that business combinations consummatedprior to the effective date must apply SFAS 141(R) income tax requirementsimmediately upon adoption. The Company is currently evaluating the affect theadoption of SFAS 141(R) will have on its financial position, results ofoperations and cash flows.

 

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

 

**In March 2008, the FASB issuedFASB Statement No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities* (“SFAS 161”)—anamendment of SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities*. SFAS 161 is intended toimprove financial reporting transparency regarding derivative instruments andhedging activities by providing investors with a better understanding of theireffects on financial position, financial performance, and cash flows.SFAS 161 is effective for financial statements issued for fiscal years andinterim periods beginning after November 15, 2008. The Company has electedearly adoption of SFAS 161 and has included all applicable disclosures inits consolidated financial statements.**

** **

**In May 2008, the FASB issuedFASB Statement No. 162, *The Hierarchy of GenerallyAccepted Accounting Principles* (“SFAS 162”). SFAS 162 isintended to improve financial reporting by identifying a consistent framework,or hierarchy, for selecting accounting principles to be used in preparingfinancial statements that are presented in conformity with U.S. GAAP fornon-governmental entities. Any effect of applying the provisions ofSFAS 162 is to be reported as a change in accounting principle inaccordance with SFAS No. 154, *Accounting Changes andError Corrections*. The Company adopted SFAS 162, on November 15,2008, which had no impact on the Company’s financial position, results ofoperation or cash flows.**

** **

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

 

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

 

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

 

## **In May 2009,the FASB issued SFAS No. 165, *Subsequent Events*(“SFAS 165”), which establishes accounting standards for recognition anddisclosure of events that occur after the balance sheet date but beforefinancial statements are issued. These standards are essentially similar tocurrent accounting principles with few exceptions that do not result in achange in general practice. SFAS 165 is effective on a prospective basis forinterim or annual financial periods ending after June 15, 2009. TheCompany adopted this pronouncement effective June 30, 2009, and theadoption of this new standard did not have a material effect on the Company’sconsolidated financial position, results of operations or cash flows.Subsequent events were evaluated through August 6, 2009, the date theconsolidated financial statements were issued. See Note 12 for identifieditems.**

## ** **

In June 2009, theFASB issued FASB Statement No. 168, *The FASB AccountingStandards Codification and the Hierarchy of Generally Accepted AccountingPrinciples* (“SFAS 168”). The objective of this Statement is toreplace SFAS 162 and to establish the FASB Accounting Standards Codification asthe source of authoritative accounting principles recognized by the FASB to beapplied by entities in the preparation of financial statements in conformitywith GAAP. SFAS 168 will be effective for financial statements issued forinterim and annual periods ending after September 15, 2009. This Statementis not expected to have a significant impact on the Company’s financialstatements.

 

## **Note3.   Inventories**

## ** **

The following is asummary of the major classes of inventories:

 
| ** **      | ** ** | **September 30, 2008** | ** ** | **June 30, 2009** | ** ** |
|-----------------|------------|-----------------------------|------------|------------------------|------------|
| Raw Materials   |       | $                           | 20,343     |                   | $          | 16,680 |   |
| Work-in-process |       | 155,782                     |       | 84,391                 |       |
| Finished Goods  |       | 127,653                     |       | 96,842                 |       |
| Other           |       | 1,137                       |       | 968                    |       |
|            |       | $                           | 304,915    |                   | $          | 198,881 |   |

## ** **

## **Note4.   Income Taxes**

## ** **

Income tax expense forthe three and nine months ended June 30, 2008 and 2009, differed from theU.S. federal statutory rate of 35% partly due to state income taxes anddiffering tax rates on foreign earnings. The effective tax rate for the firstnine months of fiscal 2009 was a benefit of 13.1% compared to an expense of38.7% in the same period of fiscal 2008. The decrease in the effective tax rateis primarily attributable to the nondeductible goodwill impairment charge, achange in the reinvestment policy of a foreign entity and lower U.S. taxableincome.

 

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

 

Components of netperiodic pension and post-retirement benefit cost for the three and nine monthsended June 30, 2008 and 2009, are as follows:

 
| ** **                          | ** ** | **Three  Months Ended June 30,** | ** ** | **Nine  Months Ended June 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                          | ** ** | **Pension  Benefits**                 | ** ** | **Other  Benefits**                  | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** |
| ** **                          | ** ** | **2008**                              | ** ** | **2009**                             | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** |
| Service cost                        |       | $                                     | 708        |                                 | $          | 597 |   | $ | 361 |   | $ | 331 |   | $ | 2,123 |   | $ | 1,846 |   | $ | 1,083 |   | $ | 995 |   |
| Interest cost                       |       | 2,684                                 |       | 2,830                                |       | 1,115 |   | 1,232 |   | 8,056 |   | 8,734 |   | 3,345 |   | 3,694 |   |
| Expected return                     |       | (2,852                                | )          | (2,365                               | )          | — |   | — |   | (8,554 | ) | (7,279 | ) | — |   | — |   |
| Amortizations                       |       | 202                                   |       | 202                                  |       | (1,032 | ) | (1,327 | ) | 606 |   | 606 |   | (3,096 | ) | (3,980 | ) |
| Curtailment gain                    |       | —                                |       | —                               |       | — |   | — |   | (3,659 | ) | — |   | — |   | — |   |
| Net periodic benefit cost (benefit) |       | $                                     | 742        |                                 | $          | 1,264 |   | $ | 444 |   | $ | 236 |   | $ | (1,428 | ) | $ | 3,907 |   | $ | 1,332 |   | $ | 709 |   |

 

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The Company contributed$10,050 to the Company sponsored domestic pension plans, $3,706 to its otherpost-retirement benefit plans and $683 to the U.K. pension plan for the ninemonths ended June 30, 2009. The Company presently expects futurecontributions of $1,950 to its domestic pension plans, $494 to its otherpost-retirement benefit plans and $384 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.

 

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

 

**Note 6. Environmental and Legal**

 

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

 

The Company believes thatany and all claims arising out of conduct or activities that occurred prior toMarch 29, 2004 are subject to dismissal. On March 29, 2004, the Company andcertain of its subsidiaries and affiliates filed voluntary petitions for reliefunder Chapter 11 of Title 11 of the United States Bankruptcy Code in the UnitedStates Bankruptcy Court for the Southern District of Indiana (the “BankruptcyCourt”). On August 16, 2004, the Bankruptcy Court entered its Findings 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 and Debtors-in-Possessionas Further Modified (the “Confirmation Order”). The Confirmation Order andrelated Chapter 11 Plan, among other things, provide for the release anddischarge of prepetition claims and causes of action. The Confirmation Orderfurther provides for an injunction against the commencement of any actions withrespect to claims held prior to the Effective Date of the Plan. The EffectiveDate occurred on August 31, 2004. When appropriate, the Company pursues thedismissal of lawsuits premised upon claims or causes of action discharged inthe Confirmation Order and related Chapter 11 Plan. The success of thisstrategy is dependent upon a number of factors, including the respectivecourt’s interpretation of the Confirmation Order and the unique circumstancesof each case.

 

The Company is currently,and has in the past, been subject to claims involving personal injuriesallegedly relating to its products. For example, the Company is presentlyinvolved in two actions involving welding rod-related injuries, one filed inCalifornia state court against numerous manufacturers, including the Company,in February 2007, and a second case in U.S. Federal court filed in January2009, both alleging that the welding-related 

 

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products of the defendant manufacturers harmed the users of suchproducts through the inhalation of welding fumes containing manganese. TheCompany believes that it has defenses to these allegations and, that if theCompany were found liable, the cases would not have a material effect on itsfinancial position, results of operations or liquidity. In addition to thesecases, the Company has in the past been named a defendant in several otherlawsuits, including 53 filed in the state of California, alleging that itswelding-related products harmed the users of such products through theinhalation of welding fumes containing manganese. The Company has since beenvoluntarily dismissed from all of these lawsuits on the basis of the releaseand discharge of claims contained in the Confirmation Order. While the Companycontests such lawsuits vigorously, and may have applicable insurance, there areseveral risks and uncertainties that may affect its liability for claimsrelating to exposure to welding fumes and manganese. For instance, in recentcases, at least two courts (in cases not involving Haynes) have refused todismiss claims relating to inhalation of welding fumes containing manganesebased upon a bankruptcy discharge order. Although the Company believes thefacts of these cases are distinguishable from the facts of its cases, there canbe no assurance that any or all claims against the Company will be dismissedbased upon the Confirmation Order, particularly claims premised, in part or infull, upon actual or alleged exposure on or after the date of the 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 receivedpermits from the Indiana Department of Environmental Management, or IDEM, toclose and to provide post-closure monitoring and care for certain areas at theKokomo facility previously used for the storage and disposal of wastes, some ofwhich are classified as hazardous under applicable regulations. Closurecertification was received in fiscal 1988 for the South Landfill at the Kokomofacility and post-closure monitoring and care is ongoing there. Closurecertification was received in fiscal 1999 for the North Landfill at the Kokomofacility and post-closure monitoring and care are permitted and ongoingthere.  In fiscal 2007, IDEM issued asingle post-closure permit applicable to both the North and South Landfills,which contain 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 alsoreceived permits from the North Carolina Department of Environment and NaturalResources, or NCDENR, to close and provide post-closure monitoring and care forthe hazardous waste lagoon at its Mountain Home, North Carolina facility. Thelagoon area has been closed and is currently undergoing post-closure monitoringand care. The Company is required to monitor groundwater and to continuepost-closure maintenance of the former disposal areas at each site. As aresult, the Company is aware of elevated levels of certain contaminants in thegroundwater and additional corrective actions by the Company could be required.

 

Nitric acid leaks werediscovered at the Arcadia, Louisiana location in fiscal 2008.  Analytical results were received in March2008 and the site assessment was provided to the Louisiana Department ofEnvironmental Quality (“LDEQ”) in May. Remediation of the leaks, including the purchase of new equipment, wassubstantially complete in fiscal 2008.  Apreliminary assessment of the LDEQ authorized the Company’s proposed remedialactions. LDEQ approved the final remediation plan in February 2009. A summaryreport of remedial actions and testing results was submitted to LDEQ in July2009, and the Company is awaiting LDEQ’s response.

 

As of June 30, 2009 andSeptember 30, 2008, the Company has accrued $1,517 for post-closure monitoringand maintenance activities. In accordance with Statement of Position 96-1, *Environmental Remediation Liabilities*, accruals for thesecosts are calculated by estimating the cost to monitor and maintain each post-closuresite and multiplying that amount by the number of years remaining in the 30year post-closure monitoring period referred to above. At each fiscal year-end,or earlier if necessary, the Company evaluates the accuracy of the estimatesfor these monitoring and maintenance costs for the upcoming fiscal year. Theaccrual was based upon the undiscounted amount of the obligation of $2,231which was then discounted using an appropriate discount rate. The costassociated with closing the sites has been incurred in financial periods priorto those presented, with the remaining cost to be incurred in future periodsrelated solely to post-closure monitoring and maintenance. Based on historicalexperience, the Company estimates that the cost of post-closure monitoring andmaintenance will approximate $125 per year over the remaining obligationperiod.

 

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**Note 7.   Deferred Revenue**

 

On November 17,2006, the Company entered into a twenty-year agreement to provide conversionservices to Titanium Metals Corporation (“TIMET”) for up to ten million poundsof titanium metal annually. TIMET paid the Company a $50,000 up-front fee andwill also pay the Company for its processing services during the term of theagreement (20 years) at prices established by the terms of the agreement. TIMETmay exercise 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 rights ofaccess if the Company enters into bankruptcy or defaults on any financingarrangements.  The Company has agreed notto manufacture titanium products (other than cold reduced titaniumtubing).  The Company has also agreed notto provide titanium conversion services to any entity other than TIMET for theterm of the Conversion Services Agreement. The agreement contains certain default provisions which could result incontract termination and damages, including the Company being required toreturn the unearned portion of the upfront fee. The cash received of $50,000 is recognized in income on a straight-linebasis over the 20-year term of the agreement. The portion of the upfront feenot recognized in income is shown as deferred revenue on the consolidatedbalance sheet.  Taxes were paid on theup-front fee primarily in the first quarter of fiscal 2009.

 

**Note 8.   Intangible Assets andGoodwill**

 

Goodwill was created primarilyas a result of the Company’s reorganization pursuant to Chapter 11 of theU.S. Bankruptcy Code and fresh start accounting. The Company has adoptedFASB Statement 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 of goodwill exceeds its fair value,impairment of goodwill may exist resulting in a charge to earnings to theextent of goodwill impairment.  TheCompany estimated fair value using a combination of a market value approachusing quoted market prices and an income approach using discounted cash flowprojections.

 

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 ofthe impairment. The Company has non-compete agreements with lives of 2 to 7years. Amortization of the patents, non-competes and other intangibles was $824and $766 for the nine months ended June 30, 2008 and 2009, respectively.

 

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

 

During the second quarter offiscal 2009, the Company determined that the weakening of the U.S. economy andthe global credit crisis resulted in a reduction of the Company’s marketcapitalization below its total shareholder’s equity value for a sustainedperiod of time, which is an indication that goodwill may be impaired.  As a result, the Company performed an interimstep one goodwill impairment analysis as of February 28, 2009 whichindicated impairment.  With theassistance of a third-party valuation specialist, the Company first determinedthe fair value of its one reporting unit using two valuation methodologies: (a) theincome approach, which uses discounted cash flow projections, and (b) themarket  value approach, which uses quotedmarket prices.  The valuationmethodologies and the underlying financial information that are used todetermine fair value require significant judgments to be made bymanagement.  These judgments include, butare not limited to, long-term projections of future financial performance,terminal growth rate and the selection of an appropriate discount rate used tocalculate the present value of the estimated future cash flows of theCompany.  The long-term projections usedin the valuation were developed as a part of the Company’s annual budgeting andforecasting process.  The discount rateused in the valuation was selected based upon an analysis of comparable companiesand included adjustments made to account for specific attributes of the Companysuch as size and industry.

 

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As the second step of thegoodwill impairment test, the Company compared the implied fair value of thereporting unit goodwill to the carrying value of that goodwill and determinedthat the carrying value of the Company’s one reporting unit exceeded its fairvalue.  As a result, the Company recordeda non-cash charge of $43,737 for goodwill impairment in the second quarter offiscal 2009.

 

The Company reviewed trademarks for impairment as of August 31,2008, and concluded no impairment adjustment was necessary.Due to the present uncertaintysurrounding the global economy and stock price volatility generally, andvolatility in the Company’s stock price in particular, the Company concluded atriggering event had occurred indicating potential impairment and performed animpairment test as of December 31, 2008, February 28, 2009 and againat June 30, 2009 of trademarks. No impairment was recognized because thefair value exceeded the carrying values. Even though it was determined thatthere was no trademark impairment as of June 30, 2009, declines in salesbeyond current forecasts may result in a future impairment charge. Managementwill continue to evaluate trademarks for impairment on a quarterly basis if therecent decline in the Company’s sales continues.

 

The following table reflects thechange to the carrying amount of goodwill for the nine months ended June 30,2009:

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

 

The following represents asummary of intangible assets at September 30, 2008 and June 30, 2009:

 
| **September 30, 2008** | ** ** | **Gross Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Carrying  Amount** | ** ** |
|----------------------------------|------------|-----------------------|------------|-------------------------------|------------|----------------------|------------|
| Patents                          |       | $                     | 8,667      |                          | $          | (5,480               | )          | $ | 3,187 |   |
| Trademarks                       |       | 3,800                 |       | —                        |       | 3,800                |       |
| Non-compete                      |       | 1,340                 |       | (488                          | )          | 852                  |       |
| Other                            |       | 465                   |       | (397                          | )          | 68                   |       |
|                             |       | $                     | 14,272     |                          | $          | (6,365               | )          | $ | 7,907 |   |
|                             |       |                  |       |                          |       |                 |       |
| **June 30, 2009**           | ** ** | **Gross Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Carrying  Amount** | ** ** |
| Patents                          |       | $                     | 8,667      |                          | $          | (5,900               | )          | $ | 2,767 |   |
| Trademarks                       |       | 3,800                 |       | —                        |       | 3,800                |       |
| Non-compete                      |       | 1,340                 |       | (699                          | )          | 641                  |       |
| Other                            |       | 316                   |       | (67                           | )          | 249                  |       |
|                             |       | $                     | 14,123     |                          | $          | (6,666               | )          | $ | 7,457 |   |

 
| **Estimate of Aggregate Amortization Expense:** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|
| **Year Ended September 30,**                                   | ** ** | ** ** | ** ** |
| 2009  (remainder of fiscal year)                                    |       | $          | 235        |   |
| 2010                                                                |       | 554        |       |
| 2011                                                                |       | 540        |       |
| 2012                                                                |       | 359        |       |
| 2013                                                                |       | 350        |       |
|                                                                     |            |            |            |  |

 

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

 

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

 
| ** **                                                                           | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                           | ** ** | **June 30,**       | ** ** | **June 30,**           | ** ** |
| **(in thousands except share and  per share data)**         | ** ** | **2008**                | ** ** | **2009**                    | ** ** | **2008** | ** ** | **2009** | ** ** |
| Numerator:                                                                           |       |                    |       |                        |       |   |   |   |   |
| Net Income (loss)                                                                    |       | $                       | 17,564     |                        | $          | (10,944 | ) | $ | 46,470 |   | $ | (49,309 | ) |
| Denominator:                                                                         |       |                    |       |                        |       |   |   |   |   |
| Weighted average shares outstanding - Basic                                          |       | 11,921,541              |       | 12,002,754                  |       | 11,882,929 |   | 11,990,667 |   |
| Effect of dilutive stock options                                                     |       | 123,712                 |       | 52,223                      |       | 130, 863 |   | 53,303 |   |
| Adjustment for net loss                                                              |       | —                  |       | (52,223                     | )          | — |   | (53,303 | ) |
| Weighted average shares outstanding - Diluted                                        |       | 12,045,253              |       | 12,002,754                  |       | 12,013,792 |   | 11,990,667 |   |
|                                                                                 |       |                    |       |                        |       |   |   |   |   |
| Basic net income (loss) per share                                                    |       | $                       | 1.47       |                        | $          | (0.91 | ) | $ | 3.91 |   | $ | (4.11 | ) |
| Diluted net income (loss) per share                                                  |       | $                       | 1.46       |                        | $          | (0.91 | ) | $ | 3.87 |   | $ | (4.11 | ) |
|                                                                                 |       |                    |       |                        |       |   |   |   |   |
| Number of stock option shares excluded as theireffect would be  anti-dilutive        |       | 256,000                 |       | 300,565                     |       | 214,333 |   | 304,981 |   |
| Number of restricted stock shares excluded as their  performance goal is not yet met |       | —                  |       | 52,050                      |       | — |   | 52,050 |   |

 

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

 

## **Note10.  Stock-Based Compensation**

## ** **

**RestrictedStock Plan**

 

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

 

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

 

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

 

The followingtable summarizes the activity under the restricted stock plan for the ninemonths ended June 30, 2009:

 
| ** **                          | ** ** | **Number  of**

**Shares** | ** ** | **Aggregate**

**Intrinsic**

**Value** | ** ** | **Weighted**

**Average**

**Fair  Value** | ** ** |
|-------------------------------------|------------|----------------------------|------------|-----------------------------------------|------------|--------------------------------------------|------------|
| Unvested at September 30, 2008 |       | —                     |       |                                    |       |                                       |       |
| Granted                             |       | 53,800                     |       | $                                       | 959        |                                       | $          | 17.82 |   |
| Forfeited / Canceled                |       | (1,750                     | )          |                                    |       |                                       |       |
| Vested                              |       | —                     |       |                                    |       |                                       |       |
| Unvested at June 30, 2009      |       | 52,050                     |       | $                                       | 1,234      |                                       | $          | 17.82 |   |

 

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Compensationexpense related to restricted stock for the nine months ended June 30,2009 was $77. The remaining unrecognized compensation expense at June 30,2009 was $850 to be recognized over a weighted average period of 2.75 years.

 

**StockOption Plans**

 

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

 

In the first nine monthsof fiscal 2009, the Company granted 82,850 options to certain employees. On October 1,2008, the Company granted 20,000 options at an exercise price of $46.83, thefair market value of the Company’s common stock the day of the grant. Inaddition on March 31, 2009, the Company granted 62,850 options at anexercise price of $17.82, the fair market value of the Company’s common stockon the day of the grant.  During thefirst nine months of fiscal 2009, 60,156 options were exercised and 69,001options were forfeited/canceled.

 

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:

 
| **Grant Date**       | ** ** | **Fair**

**Value** | ** ** | **Dividend**

**Yield** | ** ** | **Risk-free**

**Interest**

**Rate** | ** ** | **Expected**

**Volatility** | ** ** | **Expected**

**Life** | ** ** |
|----------------------|------------|---------------------|------------|-------------------------|------------|---------------------------------------|------------|------------------------------|------------|------------------------|------------|
| October 1, 2008 |       | $                   | 15.89      |                    | 0          | %                                     | 2.12       | %                            | 47         | %                      | 3 years    |   |
| March 31, 2009  |       | $                   | 9.86       |                    | 0          | %                                     | 1.15       | %                            | 86         | %                      | 3 years    |   |

 

The stock-based employeecompensation expense from stock options for the three months ended June 30,2008 and 2009 was $515 and $330, respectively. The stock-based employeecompensation expense from stock options for the nine months ended June 30,2008 and 2009 was $1,216 and $917, respectively. The remaining unrecognizedcompensation expense at June 30, 2009 was $2,044 to be recognized over aweighted average period vesting of 0.99 years.

 

The followingtables summarize the activity under the stock option plans for the nine monthsended June 30, 2009:

 
| ** **                              | ** ** | **Number**

**of**

**Shares** | ** ** | **Weighted**

**Average**

**Exercise**

**Price** | ** ** | **Weighted**

**Average**

**Remaining**

**Contractual Life** | ** ** | **Aggregate**

**Intrinsic Value** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------|------------|
| Outstanding  at September 30, 2008 |       | 448,377                        |       | $                                                  | 43.24      |                                                           | 7.83 years |                               | $          | 5,862 |   |
| Granted                                 |       | 82,850                         |       | 24.82                                              |       |                                                           |       |                               |       |
| Exercised                               |       | (60,156                        | )          | 14.10                                              |       |                                                           |       |                               |       |
| Forfeited/cancelled                     |       | (69,001                        | )          |                                               |       |                                                           |       |                               |       |
| Outstanding  at June 30, 2009      |       | 402,070                        |       | $                                                  | 40.25      |                                                           | 7.67 Years |                               | $          | 1,335 |   |
| Vested  or expected to vest             |       | 395,785                        |       | $                                                  | 40.25      |                                                           | 7.67 Years |                               | $          | 1,335 |   |
| Exercisable  at June 30, 2009      |       | 230,208                        |       | $                                                  | 37.80      |                                                           | 6.67 Years |                               | $          | 1,335 |   |

 

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| **Grant Date**     | ** ** | **Exercise**

**Price Per**

**Share** | ** ** | **Remaining**

**Contractual**

**Life in Years** | ** ** | **Outstanding**

**Number of**

**Shares** | ** ** | **Exercisable**

**Number of**

**Shares** | ** ** |
|-------------------------|------------|----------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------|------------|
| August 31,  2004   |       | $                                      | 12.80      |                                                        | 5.17       |                                       | 86,886     |                                            | 86,886     |   |
| May 5, 2005        |       | 19.00                                  |       | 5.83                                                        |       | 8,334                                      |       | 8,334                                           |       |
| August 15,  2005   |       | 20.25                                  |       | 6.17                                                        |       | —                                     |       | —                                          |       |
| October 1,  2005   |       | 25.50                                  |       | 6.25                                                        |       | 5,000                                      |       | 5,000                                           |       |
| February 21,  2006 |       | 29.25                                  |       | 6.67                                                        |       | 25,001                                     |       | 25,001                                          |       |
| March 31,  2006    |       | 31.00                                  |       | 6.75                                                        |       | 10,000                                     |       | 10,000                                          |       |
| March 30,  2007    |       | 72.93                                  |       | 7.75                                                        |       | 83,166                                     |       | 57,328                                          |       |
| September 1,  2007 |       | 83.53                                  |       | 8.17                                                        |       | 1,667                                      |       | 1,667                                           |       |
| March 31,  2008    |       | 54.00                                  |       | 8.75                                                        |       | 102,666                                    |       | 35,992                                          |       |
| October 1,  2008   |       | 46.83                                  |       | 9.25                                                        |       | 20,000                                     |       | —                                          |       |
| March 31,  2009    |       | 17.82                                  |       | 9.75                                                        |       | 59,350                                     |       | —                                          |       |
|                    |       |                                   |       |                                                        |       | 402,070                                    |       | 230,208                                         |       |
|                         |            |                                        |            |                                                             |            |                                            |            |                                                 |            |  |

 

**Note 11. Commodity Contracts**

 

On June 11,2009, to mitigate the volatility of the natural gas markets, the Companyentered into a commodity swap-cash settlement agreement with JP Morgan ChaseBank. The Company has agreed to a fixed natural gas price on a total of 300,000MMBTU, at a settlement rate of 50,000 MMBTU per month for a period spanning October 2009to March 2010. The Company’s unrealized hedging loss was $84 at June 30,2009.

 
| ** **           | ** ** | **As of June 30, 2009**    | ** ** | **Gain or (Loss) Recognized in Income** | ** ** |
|----------------------|------------|---------------------------------|------------|-----------------------------------------|------------|
| ** **           | ** ** | **Balance Sheet**

**Location** | ** ** | **Fair   Value**                        | ** ** | **Statement of Operations**

**Location** | ** ** | **Nine Months Ended**

**June 30, 2009** | ** ** |
| Commodity  contracts |       | Accounts Payable                |       | $                                       | (84        | ) | Cost of Sales |   | $ | (84 | ) |
|                      |            |                                 |            |                                         |            |  |  |  |  |  |  |

 

**Note 12. Subsequent Event**

 

On August 6, 2009,the Company reduced its worldwide workforce by approximately 6%,  temporarily reduced salaries between 5% and15% for  salaried employees  and eliminated the cash bonus component ofthe fiscal 2009 management incentive plan. As a result of these personnelreductions, the annualized savings is expected to be approximately $4,100. Thesavings that will be reflected in the fourth quarter of fiscal 2009 will beapproximately $700 offset by approximately $1.0 million in severancecosts.  Subsequent events were evaluatedthrough August 6, 2009, the date the consolidated financial statementswere issued.

 

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

 

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

 

*This Quarterly Report on Form 10-Q containsstatements that constitute “forward-looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995, Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.All statements other than statements of historical fact, including statementsregarding industry prospects and future results of operations or financialposition, made in this Form 10-Q are forward-looking.    In many cases, you can identifyforward-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 comparableterminology. The forward-looking information may include, among otherinformation, statements concerning the Company’s outlook for fiscal year 2009and beyond, overall volume and pricing trends, cost reduction strategies andtheir anticipated results, and capital expenditures.  There may also be other statements ofexpectations, beliefs, future plans and strategies, anticipated events ortrends, and similar expressions concerning matters that are not historicalfacts.  Readers are cautioned that anysuch forward-looking statements are not guarantees of future performance andinvolve risks and uncertainties. Actual results may differ materially fromthose in the forward looking statements as a result of various factors, many ofwhich are beyond the Company’s control.*

* *

*The Company has based these forward-lookingstatements on its current expectations and projections about futureevents.  Although the Company believesthat the assumptions on which the forward-looking statements contained hereinare based are reasonable, any of those assumptions could prove to beinaccurate. As a result, the forward-looking statements based upon those assumptionsalso could be incorrect.  Risks anduncertainties, some of which are discussed in Item 1A. of Part 1 to theCompany’s Annual Report on Form 10-K for the fiscal year ended September 30,2008, may affect the accuracy of forward looking statements.*

* *

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

 

**BusinessOverview**

 

HaynesInternational, Inc. (“Haynes” or “the Company”) is one of the world’slargest producers of high-performance nickel- and cobalt-based alloys in sheet,coil and plate forms. The Company is focused on developing, manufacturing,marketing and distributing technologically advanced, high-performance alloys,which are used primarily in the aerospace, chemical processing and land-basedgas turbine industries. The global specialty alloy market consists of threeprimary sectors: stainless steel, general purpose nickel alloys andhigh-performance nickel- and cobalt-based alloys. The Company competesprimarily in the high-performance nickel- and cobalt-based alloy sector, whichincludes high temperature resistant alloys, or HTA products, and corrosionresistant alloys, or CRA products. The Company believes it is one of fourprincipal producers of high-performance alloys in sheet, coil and plate forms.The Company also produces its products as seamless and welded tubulars, and inbar, billet and wire forms.

 

The Company hasmanufacturing facilities in Kokomo, Indiana; Arcadia, Louisiana; and MountainHome, North Carolina. The Kokomo facility specializes in flat products, theArcadia facility specializes in tubular products and the Mountain Home facilityspecializes in high-performance alloy wire products. The Company sells itsproducts primarily through its direct sales organization, which includes 11service and/or sales centers in the United States, Europe, Asia and India. Allof these centers are company-operated.

 

**Quarterover Quarter Gross Profit Margin Trend**

 

Grossprofit margin has declined quarter over quarter since the 3rd quarter of fiscal2008. Gross profit margin in the third quarter of fiscal 2009 was a loss of$(8.2) million, compared to a profit of $7.0 million in the second quarter offiscal 2009. The gross profit margin percentage was negative 8.3% in the thirdquarter of fiscal 2009 compared to a profit of 5.8% in the second quarter offiscal 2009. The reduction in gross profit margin from 

 

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thesecond quarter of fiscal 2009 to the third quarter of fiscal 2009 was due toseveral factors. There was a reduction in revenue of $22.1 million betweenquarters, primarily as a result of a reduction in pounds shipped with theaverage selling price per pound declining slightly between quarters. Cost ofgoods sold per pound increased from the second quarter of fiscal 2009 to thethird quarter of fiscal 2009 due to (i) reduced absorption of fixedmanufacturing costs primarily due to lower production of sheet product, (ii) higherper pound manufacturing costs due to continued recognition of higher cost rawmaterial from inventory, and (iii) an increase in shipments of certainspecialty and proprietary alloys as a percent of total pounds shipped. Alsocompressing margins is the continued impact on average selling price of theweak economic environment.

 

Higherper pound manufacturing costs due to the recognition of higher raw materialcosts from inventory impacted the first, second and third quarters of fiscal2009. Gross profit margin in the fourth quarter is not expected to bematerially affected by this issue, provided that volume and prices remainstable.

 

**Outlook**

 

General

 

TheCompany expects a continued low level of revenue as a result of the creditcrisis and global recession for at least the reminder of fiscal 2009 and firstsix months of fiscal 2010. Management believes that the Company’s performancethrough the next three quarters will range from break-even to a small loss ineach quarter. It is expected that the weakest results in the next threequarters will occur in the first quarter of fiscal 2010, because typically thisquarter is impacted by fewer ship days and extended customer shutdowns.Management expects results in the fourth quarter of fiscal 2009 and first halfof fiscal 2010, to be negatively impacted by continued reduced absorption offixed manufacturing cost, which inflates cost of goods sold, and thecompetitive environment, which puts downward pressure on prices. However, aportion of this reduced absorption is expected to be offset by lower spendingfrom the cost saving initiatives undertaken in fiscal 2009 (discussed below infurther detail).

 

TheCompany continues to adjust production schedules, reduce costs and manage cashflow, while still moving forward with initiatives that are important to itslong-term success. The Company also reduced inventories substantially in thethird quarter and intends to reduce inventory levels further. As a result ofrecent equipment upgrades, service center value-added capabilities and itsfavorable liquidity position the Company believes it is well-positioned to dealwith the challenges of the downturn and ultimately manage the upturn moreeffectively than in prior periods.

 

Backlog

 

Areduction in economic activity and the increasingly competitive environmentmanifests itself, in part, as a reduction in the Company’s backlog.  Backlog dollars declined by approximately 26%from March 31, 2009 to June 30, 2009, and backlog pounds declined byapproximately 20% in that same period while the backlog average selling pricedropped by 8%.  Backlog dollars declinedby approximately 55% from June 30, 2008 to June 30, 2009 due to adecline in backlog pounds of approximately 46% and a reduction in backlogaverage selling price of approximately 16% in the period.

 

Themajor contributing factors to the decline in backlog for the periods noted werea reduction in pounds, resulting from decreased activity in the Company’s endmarkets and increased price competition (discussed below).  A reduction in backlog is indicative of areduction in revenue in the future. Management expects that backlog, andtherefore revenues, will continue to decline from last year and quarter over quarter,until stabilizing at some point in fiscal 2010. Based on order entry for thepast five months, including July 2009, it appears that the backlog maystabilize by the end of calendar 2009.

 

Competition

 

TheCompany continued to experience strong price competition from competitors whoproduce both stainless steel and high-performance alloys in the third fiscalquarter due primarily to weakness in the stainless market. 

 

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Increasedcompetition has required the Company to continue lowering prices, which hascontributed to the reduction in the Company’s gross profit margin and netincome.  There continues to besignificant uncertainty as to when the stainless market will improve; however,some financial analysts are writing that the market could begin to see someimprovement in the second half of calendar 2009. If that happens, pricingcompetition in the high-performance alloy industry should begin to ease. TheCompany continues to respond to the competition by increasing emphasis onservice centers, offering value-added services, improving its cost structure,and striving to improve delivery-times and reliability. However, continuedweakness in the economy continues to generate intense competitive pricingpressure.

 

Cost Reduction Measures

 

On August 6, 2009, the Company reduced its worldwide workforce by6%, temporarily reduced  salaries between5% and 15% for all salaried employees, and eliminated the cash bonus componentof the fiscal 2009 management incentive plan. These measures follow actions on January 16, 2009 which reduced theCompany’s workforce by 12% and froze salaries for all remaining employees.

 

The annualized savings of the personnel reductions announced today areexpected to be approximately $4.1 million, although these savings are notexpected to have a material impact on the results of the fourth fiscal quarter.  The severance expense of approximately $1.0million associated with the current personnel reduction will be paid in thefourth fiscal quarter.  Total personnelreductions in fiscal 2009 represent cost reductions of approximately $13.6million on an annualized basis, of which approximately $7.1 million will beincluded in the results of fiscal 2009.

 

Planned capital spending in fiscal 2009 is expected to be between $10.0to $12.0 million, compared to an original target of approximately $15.1million.  The Company evaluated plannedspending, postponing certain projects and spending until such time as financialconditions improve.  In light of thesignificant capital expenditures in recent years to upgrade operations,increase capacity and reduce unplanned downtime, management does not believethat the postponement of the current projects will have a material unfavorableimpact on operations in the short- or long-term.

 

In addition to the actions noted, the Company continues to adjust itsproduction schedules for all its manufacturing facilities, initiating plannedfurloughs and outages ranging from one day to one week in length in order tolimit further personnel reductions while continuing to meet customer deliveryrequirements at these lower sales volumes. Cost savings associated with these measures will be dependent upon thelevel of volume, as well as product mix, but are anticipated to beapproximately $6.0 million on an annualized basis.

 

**QuarterlyMarket Information**

 

Set forth below isselected data relating to the Company’s backlog, the 30-day average nickelprice per pound as reported by the London Metals Exchange, as well as abreakdown of net revenues, shipments and average selling prices to the marketsserved by the Company for the periods shown. These data should be read inconjunction with the consolidated financial statements and related notesthereto and the remainder of the “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” included in this Form 10-Q.

 
| ** **                      | ** ** | **Quarter Ended**          | ** ** |
|---------------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **December 31, 2007** | ** ** | **March  31, 2008** | ** ** | **June 30, 2008** | ** ** | **September 30, 2008** | ** ** | **December 31, 2008** | ** ** | **March 31, 2009** | ** ** | **June********30, 2009** | ** ** |
| **Backlog** (1)                 |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Dollars (in thousands)          |       | $                          | 247,775    |   | $ | 254,470 |   | $ | 252,598 |   | $ | 229,196 |   | $ | 199,667 |   | $ | 153,039 |   | $ | 113,420 |   |
| Pounds (in thousands)           |       | 8,274                      |       | 8,706 |   | 8,335 |   | 7,575 |   | 7,287 |   | 5,557 |   | 4,468 |   |
| Average selling price per pound |       | $                          | 29.95      |   | $ | 29.23 |   | $ | 30.30 |   | $ | 30.26 |   | $ | 27.38 |   | $ | 27.54 |   | $ | 25.39 |   |
|                            |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Average nickel price per pound  |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| London Metals Exchange (2)      |       | $                          | 12.11      |   | $ | 14.16 |   | $ | 10.23 |   | $ | 8.07 |   | $ | 4.39 |   | $ | 4.40 |   | $ | 6.79 |   |

----

(1)          The Company defines backlog to include firmcommitments from customers for delivery of product at established prices. Approximately30% of the orders in the backlog at any given time include prices that are subjectto adjustment based on changes in raw material costs. Historically, approximately75% of the backlog orders have shipped within six months and approximately 90% haveshipped within 12 months. The backlog figures do not reflect that portion of thebusiness conducted at service and sales centers on a spot or “just-in-time” basis.

 

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

 

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

 
| ** **                                                 | ** ** | **Quarter Ended**          | ** ** |
|------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                 | ** ** | **December 31, 2007** | ** ** | **March  31, 2008** | ** ** | **June 30, 2008** | ** ** | **September 30, 2008** | ** ** | **December 31, 2008** | ** ** | **March 31, 2009** | ** ** | **June 30, 2009** | ** ** |
| **Net revenues** (in  thousands)                           |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Aerospace                                                  |       | $                          | 59,442     |   | $ | 63,472 |   | $ | 62,857 |   | $ | 61,501 |   | $ | 49,721 |   | $ | 45,200 |   | $ | 34,959 |   |
| Chemical processing                                        |       | 40,805                     |       | 37,404 |   | 49,165 |   | 38,718 |   | 30,883 |   | 26,025 |   | 26,944 |   |
| Land-based gas turbines                                    |       | 25,505                     |       | 33,506 |   | 31,004 |   | 34,102 |   | 32,145 |   | 28,648 |   | 22,087 |   |
| Other markets                                              |       | 18,887                     |       | 26,085 |   | 18,811 |   | 22,809 |   | 19,166 |   | 17,562 |   | 11,529 |   |
| Total product revenue                                      |       | 144,639                    |       | 160,467 |   | 161,837 |   | 157,130 |   | 131,915 |   | 117,435 |   | 95,519 |   |
| Other revenue                                              |       | 1,438                      |       | 3,304 |   | 4,503 |   | 3,688 |   | 2,389 |   | 2,978 |   | 2,806 |   |
| **Net revenues**                                           |       | $                          | 146,077    |   | $ | 163,771 |   | $ | 166,340 |   | $ | 160,818 |   | $ | 134,304 |   | $ | 120,413 |   | $ | 98,325 |   |
|                                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Shipments by markets** (in thousands  of pounds)         |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Aerospace                                                  |       | 2,154                      |       | 2,190 |   | 2,319 |   | 2,188 |   | 1,653 |   | 1,648 |   | 1,387 |   |
| Chemical processing                                        |       | 1,312                      |       | 1,287 |   | 1,649 |   | 1,140 |   | 947 |   | 1,170 |   | 1,077 |   |
| Land-based gas turbines                                    |       | 1,060                      |       | 1,742 |   | 1,519 |   | 1,641 |   | 1,507 |   | 1,680 |   | 1,405 |   |
| Other markets                                              |       | 681                        |       | 861 |   | 732 |   | 800 |   | 691 |   | 871 |   | 511 |   |
| **Total shipments**                                        |       | 5,207                      |       | 6,080 |   | 6,219 |   | 5,769 |   | 4,798 |   | 5,369 |   | 4,380 |   |
|                                                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Average selling price per pound**                        |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Aerospace                                                  |       | $                          | 27.60      |   | $ | 28.98 |   | $ | 27.11 |   | $ | 28.11 |   | $ | 30.08 |   | $ | 27.43 |   | $ | 25.20 |   |
| Chemical processing                                        |       | 31.10                      |       | 29.06 |   | 29.82 |   | 33.96 |   | 32.61 |   | 22.24 |   | 25.02 |   |
| Land-based gas turbines                                    |       | 24.06                      |       | 19.23 |   | 20.41 |   | 20.78 |   | 21.33 |   | 17.05 |   | 15.72 |   |
| Other markets                                              |       | 27.73                      |       | 30.30 |   | 25.70 |   | 28.51 |   | 27.74 |   | 20.16 |   | 22.56 |   |
| **Total product** (excluding  other revenue)               |       | 27.78                      |       | 26.39 |   | 26.03 |   | 27.24 |   | 27.49 |   | 21.87 |   | 21.81 |   |
| **Total average selling price** (including  other revenue) |       | 28.05                      |       | 26.94 |   | 26.75 |   | 27.88 |   | 27.99 |   | 22.43 |   | 22.45 |   |

 

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**ThreeMonths Ended June 30, 2009 Compared to the Three Months Ended June 30,2008**

 

**Resultsof Operations**

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                  | ** ** | **June 30,**      | ** ** | **Change** | ** ** |
| **($ in thousands)**                   | ** ** | **2008**               | ** ** | **2009**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| Net revenues                                |       | $                      | 166,340    |       | 100.0      | % | $ | 98,325 |   | 100.0 | % | $ | (68,015 | ) | (40.9 | )% |
| Cost of sales                               |       | 126,223                |       | 75.9       | %          | 106,493 |   | 108.3 | % | (19,730 | ) | (15.6 | )% |
| Gross profit                                |       | 40,117                 |       | 24.1       | %          | (8,168 | ) | (8.3 | )% | (48,285 | ) | (120.4 | )% |
| Selling, general and administrative expense |       | 11,007                 |       | 6.6        | %          | 8,837 |   | 9.0 | % | (2,170 | ) | (19.7 | )% |
| Research and technical expense              |       | 819                    |       | 0.5        | %          | 757 |   | 0.8 | % | (62 | ) | (7.6 | )% |
| Operating income (loss)                     |       | 28,291                 |       | 17.0       | %          | (17,762 | ) | (18.1 | )% | (46,053 | ) | (162.8 | )% |
| Interest income                             |       | (92                    | )          | 0.0        | %          | (42 | ) | 0.0 | % | (50 | ) | (54.3 | )% |
| Interest expense                            |       | 114                    |       | 0.0        | %          | 87 |   | 0.0 | % | (27 | ) | (23.7 | )% |
| Income (loss) before income taxes           |       | 28,269                 |       | 17.0       | %          | (17,807 | ) | (18.1 | )% | (46,076 | ) | (163.0 | )% |
| Provision (benefit) for income taxes        |       | 10,705                 |       | 6.4        | %          | (6,863 | ) | (7.0 | )% | (17,568 | ) | (164.1 | )% |
| Net income (loss)                           |       | $                      | 17,564     |       | 10.6       | % | $ | (10,944 | ) | (11.1 | )% | $ | (28,508 | ) | (162.3 | )% |

 

**By market**

 
| ** **                                                | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|------------|------------|
| ** **                                                | ** ** | **June 30,**           | ** ** | **Change** | ** ** |
| ** **                                                | ** ** | **2008**                    | ** ** | **2009**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| **Net revenues** (in thousands)                           |       |                        |       |       |       |   |   |   |   |
| Aerospace                                                 |       | $                           | 62,857     |       | $          | 34,959 |   | $ | (27,898 | ) | (44.4 | )% |
| Chemical  processing                                      |       | 49,165                      |       | 26,944     |       | (22,221 | ) | (45.2 | )% |
| Land-based  gas turbines                                  |       | 31,004                      |       | 22,087     |       | (8,917 | ) | (28.8 | )% |
| Other  markets                                            |       | 18,811                      |       | 11,529     |       | (7,282 | ) | (38.7 | )% |
| **Total product revenue**                                 |       | 161,837                     |       | 95,519     |       | (66,318 | ) | (41.0 | )% |
| Other  revenue                                            |       | 4,503                       |       | 2,806      |       | (1,697 | ) | (37.7 | )% |
| **Net revenues**                                          |       | $                           | 166,340    |       | $          | 98,325 |   | $ | (68,015 | ) | (40.9 | )% |
|                                                      |       |                        |       |       |       |   |   |   |   |
| **Pounds by markets****(in thousands)                     |       |                        |       |       |       |   |   |   |   |
| Aerospace                                                 |       | 2,319                       |       | 1,387      |       | (932 | ) | (40.2 | )% |
| Chemical  processing                                      |       | 1,649                       |       | 1,077      |       | (572 | ) | (34.7 | )% |
| Land-based  gas turbines                                  |       | 1,519                       |       | 1,405      |       | (114 | ) | (7.5 | )% |
| Other  markets                                            |       | 732                         |       | 511        |       | (221 | ) | (30.2 | )% |
| **Total shipments**                                       |       | 6,219                       |       | 4,380      |       | (1,839 | ) | (29.6 | )% |
|                                                      |       |                        |       |       |       |   |   |   |   |
| **Average selling price per pound**                       |       |                        |       |       |       |   |   |   |   |
| Aerospace                                                 |       | $                           | 27.11      |       | $          | 25.20 |   | $ | (1.91 | ) | (7.0 | )% |
| Chemical  processing                                      |       | 29.82                       |       | 25.02      |       | (4.80 | ) | (16.1 | )% |
| Land-based  gas turbines                                  |       | 20.41                       |       | 15.72      |       | (4.69 | ) | (23.0 | )% |
| Other  markets                                            |       | 25.70                       |       | 22.56      |       | (3.14 | ) | (12.2 | )% |
| **Total product**(excluding other revenue)                |       | 26.03                       |       | 21.81      |       | (4.22 | ) | (16.2 | )% |
| **Total average selling price** (including other revenue) |       | 26.75                       |       | 22.45      |       | (4.30 | ) | (16.1 | )% |

 

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*NetRevenues*.  Net revenues were $98.3 million in the thirdquarter of fiscal 2009, a decrease of $68.0 million, or 40.9%, from $166.3million in the same period of fiscal 2008. Volume was 4.4 million pounds in the third quarter of fiscal 2009 adecrease of 6.2 million pounds in the same period of fiscal 2008.  Average selling price per pound was $22.45 inthe third quarter of fiscal 2009, a decrease of 16.1% from the selling priceper pound of $26.75  in the same periodof fiscal 2008.  Volume and averageselling price for the third quarter of fiscal 2008 were impacted by a 2.0million pound order for a single customer, which was not repeated in fiscal2009. In the third quarter of fiscal 2008 the volume associated with thisparticular order was approximately 0.7 million pounds with a selling priceapproximately half of the consolidated average selling price for all productssold in the quarter.  This volume was splitbetween the aerospace and chemical processing markets on a two thirds, onethird basis, respectively. As discussed above under “Overview”, increasedcompetition and the global economic recession unfavorably impacted both volumeand average selling price in the third quarter of fiscal 2009.  Average selling price also declined due tothe reduction in raw material costs. The Company’s consolidated backlogdecreased by $39.6 million, or 25.9%, to $113.4 million at June 30, 2009from $153.0 million at March 31, 2009 due to a slow down in order entryactivity.

 

Sales to the aerospacemarket was $35.0 million in the third quarter of fiscal 2009, a decrease of44.4% from $62.9 million in the same period of fiscal 2008, due to a 40.2%decrease in volume and a 7.0% decrease in the average selling price per pound.Volume decreased due to slowing market demand as reflected in the build ratefor new aircraft  caused by the globaleconomic recession and exacerbated by disruption to the aerospace supply chainfrom the fall 2008 work stoppage at Boeing.

 

Sales to thechemical processing market was $26.9 million in the third quarter of fiscal2009, a decrease of 45.2% from $49.2 million in the same period of fiscal 2008,due to a 34.7% decrease in volume, and a 16.1% decrease in the average sellingprice per pound.  Volume declined dueprimarily to the impact of the global economic recession on construction andmaintenance activity in the market and increased competition from stainlesssteel producers.

 

Sales to theland-based gas turbine market was $22.1 million for the third quarter of fiscal2009, a decrease of 28.8% from $31.0 million in the same period of fiscal 2008,due to a 7.5% decrease in volume, and a 23.0% decrease in the average sellingprice per pound.  The decrease in bothvolume and average selling price is due to the effect of the economic recessionresulting in increased competition.

 

Sales to othermarkets was $11.5 million in the third quarter of fiscal 2009, a decrease of38.7% from $18.8 million in the same period of fiscal 2008, due to a 30.2%decrease in volume, and a 12.2% decrease in the average selling price perpound.  The decline in average sellingprice reflects the continuing increase in market competition in many of thesemarkets.

 

*OtherRevenue. *Other revenue was $2.8 million in the third quarter offiscal 2009, a decrease of 37.7% from $4.5 million for the same period offiscal 2008 as conversion business has declined in line with lower levels ofbusiness from our customers.

 

*Costof Sales*.  Cost of sales decreased to $106.5 million inthe third quarter of fiscal 2009, compared to $126.2 million in the same periodof fiscal 2008.  Cost of sales was 108.3%of net revenues in the third quarter of fiscal 2009, compared to 75.9% in thesame period of fiscal 2008. Cost of sales in the third quarter of fiscal 2009decreased in dollars as compared to the same quarter of the prior year, due tothe lower volume between periods. However, cost of sales per pound increaseddue to the recognition of higher raw material cost from inventory, reducedabsorption of fixed manufacturing cost caused by lower production volumes inthe third quarter of fiscal 2009 compared to the same period in fiscal 2008 anda higher percentage of specialty products as a percent of the total mix. Thishigher per pound cost and increased competition combined with weaker demand(which lowered net revenue and average selling prices), resulted in cost ofsales being a higher percentage of net revenues as compared to the same periodin fiscal 2008.

 

*GrossProfit*. Grossprofit decreased to a loss of $(8.2) million, or (8.3)% of net revenues, in thethird quarter of fiscal 2009, compared to profit of $40.1 million, or 24.1% ofnet revenues, in the same period of fiscal 2008 as a result of the abovefactors.

 

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*Selling,General and Administrative Expenses*.  Selling,general and administrative expenses were $8.8 million in the third quarter offiscal 2009, a decrease of 19.7% from $11.0 million in the same period offiscal 2008 due to reductions in workforce and other spending reductions.Selling, general and administrative expenses increased to 9.0% of net revenuesin the third quarter of fiscal 2009 compared to 6.6% for the same period offiscal 2008 due primarily to a decreased level of revenues.

 

*Researchand Technical Expense*.  Research and technical expenseremained relatively flat at $0.8 million in the third quarter of fiscal 2009and $0.8 million in the same period of fiscal 2008.

 

*OperatingIncome (Loss)*.  As a result of the above factors, operatingloss in the third quarter of fiscal 2009 was $(17.8) million compared tooperating income of $28.3 million in the same period of fiscal 2008.

 

*InterestExpense*.  Interest expense decreased 23.7% to $0.09million in the third quarter of fiscal 2009 from $0.1 million in the sameperiod of fiscal 2008.  The decrease isattributable to a lower average debt balance during the third quarter of fiscal2009 (zero revolver at June 30, 2009).

 

*IncomeTaxes*.  Income tax expense decreased to a benefit of$(6.9) million in the third quarter of fiscal 2009 from an expense of $10.7million in the same period of fiscal 2008 primarily due to a pretax loss.  The effective tax rate for the third quarterof fiscal 2009 was 38.5% compared to 37.8% in the same period of fiscal 2008.

 

*NetIncome (Loss)*.  As a result of the above factors, net incomedecreased by $28.5 million to a net loss of $(10.9) million in the thirdquarter of fiscal 2009 from net income of $17.6 million in the same period offiscal 2008.

 

**NineMonths Ended June 30, 2009 Compared to Nine Months Ended June 30,2008**

 

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

 
| ** **                                   | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|------------|------------|
| ** **                                   | ** ** | **June 30,**     | ** ** | **Change** | ** ** |
| **($ in thousands)**                    | ** ** | **2008**              | ** ** | **2009**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| Net  revenues                                |       | $                     | 476,188    |       | 100.0      | % | $ | 353,042 |   | 100.0 | % | $ | (123,146 | ) | (25.9 | )% |
| Cost  of sales                               |       | 365,946               |       | 76.8       | %          | 335,463 |   | 95.0 | % | (30,483 | ) | (8.3 | )% |
| Gross  profit                                |       | 110,242               |       | 23.2       | %          | 17,579 |   | 5.0 | % | (92,663 | ) | (84.1 | )% |
| Selling,  general and administrative expense |       | 31,059                |       | 6.5        | %          | 27,719 |   | 7.9 | % | (3,340 | ) | (10.8 | )% |
| Research  and technical expense              |       | 2,566                 |       | 0.5        | %          | 2,396 |   | 0.7 | % | (170 | ) | (6.6 | )% |
| Impairment  of goodwill                      |       | —                |       | —     |       | 43,737 |   | 12.4 | % | 43,737 |   | NA |   |
| Operating  income (loss)                     |       | 76,617                |       | 16.1       | %          | (56,273 | ) | (15.9 | )% | (132,890 | ) | (173.4 | )% |
| Interest  income                             |       | (149                  | )          | 0.0        | %          | (70 | ) | 0.0 | % | (79 | ) | (53.0 | )% |
| Interest  expense                            |       | 951                   |       | 0.2        | %          | 566 |   | 0.2 | % | (385 | ) | (40.5 | )% |
| Income  (loss) before income taxes           |       | 75,815                |       | 15.9       | %          | (56,769 | ) | (16.1 | )% | (132,584 | ) | (174.9 | )% |
| Provision  (benefit) for income taxes        |       | 29,345                |       | 6.2        | %          | (7,460 | ) | (2.1 | )% | (36,805 | ) | (125.4 | )% |
| Net  income (loss)                           |       | $                     | 46,470     |       | 9.8        | % | $ | (49,309 | ) | (14.0 | )% | $ | (95,779 | ) | (206.1 | )% |

 

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

 

**By market**

 
| ** **                                                | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|----------------------------|------------|------------|------------|
| ** **                                                | ** ** | **June 30,**          | ** ** | **Change** | ** ** |
| ** **                                                | ** ** | **2008**                   | ** ** | **2009**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| ***Net revenues*** (in thousands)                         |       |                       |       |       |       |   |   |   |   |
| Aerospace                                                 |       | $                          | 185,771    |       | $          | 129,880 |   | $ | (55,891 | ) | (30.1 | )% |
| Chemical  processing                                      |       | 127,374                    |       | 83,852     |       | (43,522 | ) | (34.2 | )% |
| Land-based  gas turbines                                  |       | 90,015                     |       | 82,880     |       | (7,135 | ) | (7.9 | )% |
| Other  markets                                            |       | 63,783                     |       | 48,257     |       | (15,526 | ) | (24.3 | )% |
| **Total product revenue**                                 |       | 466,943                    |       | 344,869    |       | (122,074 | ) | (26.1 | )% |
| Other  revenue                                            |       | 9,245                      |       | 8,173      |       | (1,072 | ) | (11.6 | )% |
| **Net revenues**                                          |       | $                          | 476,188    |       | $          | 353,042 |   | $ | (123,146 | ) | (25.9 | )% |
|                                                      |       |                       |       |       |       |   |   |   |   |
| ***Pounds by markets***(in  thousands)                    |       |                       |       |       |       |   |   |   |   |
| Aerospace                                                 |       | 6,663                      |       | 4,688      |       | (1,975 | ) | (29.6 | )% |
| Chemical  processing                                      |       | 4,248                      |       | 3,194      |       | (1,054 | ) | (24.8 | )% |
| Land-based  gas turbines                                  |       | 4,321                      |       | 4,592      |       | 271 |   | 6.3 | % |
| Other  markets                                            |       | 2,274                      |       | 2,073      |       | (201 | ) | (8.8 | )% |
| **Total shipments**                                       |       | 17,506                     |       | 14,547     |       | (2,959 | ) | (16.9 | )% |
|                                                      |       |                       |       |       |       |   |   |   |   |
| ***Average selling price per pound***                     |       |                       |       |       |       |   |   |   |   |
| Aerospace                                                 |       | $                          | 27.88      |       | $          | 27.70 |   | $ | (0.18 | ) | (0.6 | )% |
| Chemical  processing                                      |       | 29.98                      |       | 26.25      |       | (3.73 | ) | (12.4 | )% |
| Land-based  gas turbines                                  |       | 20.83                      |       | 18.05      |       | (2.78 | ) | (13.3 | )% |
| Other  markets                                            |       | 28.05                      |       | 23.28      |       | (4.77 | ) | (17.0 | )% |
| **Total product**(excluding other revenue)                |       | 26.67                      |       | 23.71      |       | (2.96 | ) | (11.1 | )% |
| **Total average selling price** (including other revenue) |       | 27.20                      |       | 24.27      |       | (2.93 | ) | (10.8 | )% |

 

*NetRevenues*.  Net revenues were $353.0 million in the firstnine months of fiscal 2009, a decrease of $123.1 million, or 25.9%, from $476.2million in the same period of fiscal 2008. Volume for all products was 14.5 million pounds in the first nine monthsof fiscal 2009, a decrease of 16.9% from 17.5 million pounds in the same periodof fiscal 2008. The average selling price per pound was $24.27 per pound in thefirst nine months of fiscal 2009, a decrease of 10.8% from $27.20 per pound inthe same period of fiscal 2008.   Asdiscussed above under “Overview”, increased competition and the global economicrecession unfavorably impacted both average selling price and volume in thefirst nine months of fiscal 2009. Raw material costs have also declined due tothe weak economic environment, which has contributed to the reduction inaverage selling prices. The Company’s consolidated backlog decreased by $115.8million, or 50.5%, to $113.4 million at June 30, 2009 from $229.2 millionat September 30, 2008 due to a slow down in order entry and lower averageselling price.

 

Sales to the aerospacemarket was $129.9 million in the first nine months of fiscal 2009, a decreaseof 30.1% from $185.8 million in the same period of fiscal 2008, due to a 29.6%decrease in volume and a 0.6% decrease in average selling price.  Volume decreased due to slowing market demandas reflected in the build rate for new aircraft.

 

Sales to thechemical processing market was $83.9 million in the first nine months of fiscal2009, a decrease of 34.2%  from $127.4million in the same period of fiscal 2008, due to a 12.4% decrease in theaverage selling price per pound and a 24.8% decrease in volume.  Volume declined due to a number of factors,primarily the impact of the global economic recession on construction and maintenanceactivity in the market and increased competition from stainless steelproducers.

 

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Sales to theland-based gas turbine market was $82.9 million for the first nine months offiscal 2009, a decrease of 7.9% from $90.0 million in the same period of fiscal2008, due to an increase of 6.3% in volume, offset by a 13.3% decrease in theaverage selling price. The decrease in the average selling price and theincrease in volume is due to change in product mix to include a higherpercentage of billet product in the first nine months of fiscal 2009 comparedto the same period of fiscal 2008.

 

Sales to othermarkets was $48.3 million in the first nine months of fiscal 2009, a decreaseof 24.3% from $63.8 million in the same period of fiscal 2008, due to adecrease in volume of 8.8% and a 17.0% decrease in average selling price perpound.  The decrease in volume to othermarkets is primarily due to a decrease of 79.9% in volume of stainless steelwhile sales volume of high-performance alloys in the other markets categoryincreased 5.6% in the first nine months of fiscal 2009.  This is primarily due to the continuingeffort to increase sales into markets that fall into this category such as fluegas desulphurization and to expand the number of other markets.  The decrease in average selling price isprimarily due to the continued competition within this category.

 

*OtherRevenue. *Other revenue was $8.2 million in the first ninemonths of fiscal 2009, a decrease of 11.6% from $9.2 million for the sameperiod of fiscal 2008 as conversion business has declined in line with lowerlevels of business from our customers.

 

*Costof Sales*.  Cost of sales decreased to $335.5 million inthe first nine months of fiscal 2009, compared to $365.9 million in the sameperiod of fiscal 2008.  Cost of saleswere 95.0% of net revenues in the first nine months of fiscal 2009, compared to76.8% of net revenues in the same period of fiscal 2008. Cost of sales in thefirst nine months of fiscal 2009 decreased in dollars as compared to the sameperiod of the prior year, due to lower volume between periods. However, cost ofsales per pound  increased due to higherraw material cost from inventory, reduced absorption of fixed manufacturingcosts caused by lower production volumes and a higher percentage of specialtyproducts as a percent of total mix.  Inthe first nine months of fiscal 2008, cost of sales was partially offset by a$3.7 million (0.8% of net revenue) pension curtailment gain, which was recordeddue to an amendment to freeze future pension benefit accruals for non-unionemployees in the U.S.  The higher perpound cost and increased competition combined with weaker demand (which lowerednet revenue and average selling prices), resulted in cost of sales being ahigher percentage of net revenues as compared to the same period of fiscal2008.

 

*GrossProfit.* Grossprofit decreased to $17.6 million, or 5.0% of net revenues, for the first ninemonths of fiscal 2009, from $110.2 million, or 23.2% of net revenues, in thesame period of fiscal 2008 as a result of the above factors.

 

*Selling,General and Administrative Expenses*.  Selling,general and administrative expenses were $27.7 million in the first nine monthsof fiscal 2009, a decrease of $3.3 million from $31.1 million for the sameperiod of fiscal 2008 due to reductions in workforce and other spendingreductions. Selling, general and administrative expenses as a percentage of netrevenues increased to 7.9% in the first nine months of fiscal 2009 compared to6.5% for the same period of fiscal 2008 due primarily to decreased revenues.

 

*Researchand Technical Expense*.  Research and technical expensedecreased to $2.4 million in the first nine months of fiscal 2009 from $2.6million in the same period of fiscal 2008 due to the reduction in workforceduring the second quarter of fiscal 2009.

 

*Impairmentof Goodwill.*An impairment charge of $43.7 million was recordedin the second quarter of fiscal 2009 due to weakening of the U.S. economy andthe global credit crisis resulting in a reduction of the Company’s marketcapitalization below its total shareholder’s equity value for a sustainedperiod of time. Pleasesee Note 8 in the Notes to Consolidated Financial Statements containedelsewhere in the Form 10-Q for additional information.

 

*OperatingIncome (Loss)*.  As a result of the above factors, operatingloss in the first nine months of fiscal 2009 was $(56.3) million compared tooperating income of $76.6 million in the same period of fiscal 2008.

 

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*InterestExpense*.  Interest expense decreased to $0.6 million inthe first nine months of fiscal 2009 from $1.0 million for the same period offiscal 2008.  The decrease isattributable to a lower average debt balance during the third quarter of fiscal2009 (zero revolver at June 30, 2009).

 

*IncomeTaxes*.  Income tax expense decreased to a benefit of$(7.5) million in the first nine months of fiscal 2009 from an expense of $29.3million in the same period of fiscal 2008 due to a pretax loss. The effectivetax rate for the first nine months of fiscal 2009 was 13.1% compared to 38.7%in the same period of fiscal 2008. The decrease in the effective tax rate isprimarily attributable to the impairment of nondeductible goodwill, a change inthe reinvestment policy of a foreign entity and lower U.S. taxable income.

 

*Net Income(Loss)*.  As a result of the abovefactors, net income decreased by $95.8 million to a net loss of $(49.3) millionin the first nine months of fiscal 2009 from net income of $46.5 million in thesame period of fiscal 2008.

 

**Liquidity and Capital Resources**

 

*Comparative cash flow analysis*

 

During the first nine monthsof fiscal 2009, the Company’s primary sources of cash were cash from operationsand  borrowings under its U.S. revolvingcredit facility with a group of lenders led by Wachovia Capital FinanceCorporation (Central) (described below). At June 30, 2009, the Company had cash and cash equivalents of$83.9 million compared to cash and cash equivalents of $7.1 million at September 30,2008.

 

Net cash provided byoperating activities was $97.0 million in the first nine months of fiscal 2009compared to $30.5 million in the same period of fiscal 2008.  Several items contributed to this favorabledifference.  Cash generated from a decrease in accounts receivableof $44.6 million was $33.0 million higher than the same period of fiscal 2008.Cash generated from reduced inventory balances of $104.5 million was $138.1million higher than the same period of fiscal 2008, as a result of lower levelsof inventory required to support a lower sales level,  lower average inventory cost per pound ashigh cost inventory flows through cost of sales and positive results fromefforts to improve inventory management. Net loss of $(49.3) million was $95.8million lower than prior year net income of $46.5 million, partially offset bythe goodwill impairment charge of $43.7 million. Also offsetting the positiveitems were the use of cash from; (i) a combination of a reduction in taxespayable and an increase in taxes receivable of $29.4 million primarily causedby the tax payment of $15.0 million related to the upfront fee paid to theCompany pursuant to the conversion services agreement  with Titanium Metals Corporation and currentyear pretax losses which will be carried back to prior years, (ii) $17.4million use of cash from lower accounts payable caused by lower raw materialpurchases in both pounds and price, and (iii) $11.7 million use of cashfrom pension and postretirement benefits primarily caused by highercontributions to the pension plan. Net cash used in investing activities was$7.4 million in the first nine months of fiscal 2009 compared to $17.9 millionin the same period of fiscal 2008, primarily as a result of lower capitalexpenditures.  Net cash used in financingactivities included a repayment of borrowings on the revolving credit facilityof $11.8 million as a result of cash generated from operations, resulting in abalance on the revolver at June 30, 2009 of zero.

 

*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, all of which is available toborrow. At June 30, 2009, the Company had cash of approximately $83.9million, an outstanding balance of zero on the U.S. revolving credit facilityand access to approximately $120.0 million under the U.S. revolving creditfacility, subject to borrowing base and certain reserves. Management believesthat the resources described above will be sufficient to fund planned capitalexpenditures and working capital requirements over the next twelve months.

 

U.S. revolving credit facility:   The Company and Wachovia Capital FinanceCorporation (Central) (“Wachovia”) entered into a Second Amended and RestatedLoan and Security Agreement (the “Amended Agreement”) with an effective date ofNovember 18, 2008, which amended and restated the revolving creditfacility between Haynes 

 

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and Wachovia dated August 31, 2004. Among other items, the AmendedAgreement extended the maturity date of the U.S. revolving credit facility toSeptember 30, 2011, increased the margin included in the interest rate from1.5% per annum to 2.25% per annum for LIBOR borrowings, permitted the Companyto pay dividends and repurchase common stock if certain financial metrics aremet, and eliminated a covenant requiring the Company to maintain an EBITDAamount of $22.0 million when availability was less than $20.0 million. Themaximum revolving loan amount under the Amended Agreement is $120.0 million.Borrowings under the U.S. revolving credit facility bear interest at theCompany’s option at either Wachovia Bank, National Association’s “prime rate,”plus up to 2.25% per annum, or the adjusted Eurodollar rate used by the lender,plus up to 3.0% per annum.  As of June30, 2009, the U.S. revolving credit facility had an outstanding balance ofzero. During the nine month period ended June 30, 2009, it bore interest at aweighted average interest rate of 5.06%. In addition, the Company must pay monthly in arrears a commitment fee of0.375% per annum on the unused amount of the U.S. revolving credit facilitytotal commitment.  For letters of credit,the Company must pay 2.5% per annum on the daily outstanding balance of allissued letters of credit, plus customary fees for issuance, amendments, andprocessing. The Company is subject to certain covenants as to fixed chargecoverage ratios and other customary covenants, including covenants restrictingthe incurrence of indebtedness, the granting of liens, and the sale of assetsand permits the Company to pay dividends and repurchase common stock if certainmetrics are met.  As of June 30, 2009,the most recent required measurement date under the agreement documentation,the Company was in compliance with these covenants.  The U.S. revolving credit facility matures onSeptember 30, 2011. Borrowings under the U.S. revolving credit facility arecollateralized by a pledge of substantially all of the U.S. assets of theCompany, including equity interests in its U.S. subsidiaries, but excluding itsfour-high Steckel rolling mill and related assets, which are pledged to TIMET.The U.S. revolving credit facility is also secured by a pledge of 65% of theequity interests in each of the Company’s foreign subsidiaries.

 

*Future Uses of Liquidity*

 

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

 

·                  fundingoperations;

 

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

 

·                  pension planfunding.

 

Plannedcapital spending in fiscal 2009 will be between $10.0 to $12.0 million withapproximately $7.5 million spent in the first nine months of fiscal 2009.  The majority of the planned projects aremaintenance type projects. The Company continues to evaluate planned spendingand has postponed certain projects until fiscal 2010. Projects have beenevaluated to ensure that, if postponed, there will be no material unfavorableimpact to operations either in the short- or long-term. Keeping the facilitiesand equipment up to date continues to be an important focus for the Company.

 

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*Contractual Obligations*

 

The following table sets forth the Company’scontractual obligations for the periods indicated, as of June 30, 2009:

 

(inthousands)

 
| ** **                          | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations(1)** | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 years** | ** ** |
|                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating lease obligations         |       | $                                         | 12,054     |   | $ | 3,133 |   | $ | 3,433 |   | $ | 1,798 |   | $ | 3,690 |   |
| Capital lease obligations           |       | 305                                       |       | 33 |   | 66 |   | 66 |   | 140 |   |
| Raw material contracts              |       | 21,558                                    |       | 21,558 |   | —— |   | — |   | — |   |
| Natural gas hedge                   |       | 1,689                                     |       | 1,689 |   | — |   | — |   | — |   |
| Mill supplies contracts             |       | 52                                        |       | 52 |   | — |   | — |   | — |   |
| Capital projects                    |       | 2,360                                     |       | 2,360 |   | — |   | — |   | — |   |
| Pension plan(2)                     |       | 41,137                                    |       | 11,447 |   | 19,234 |   | 10,456 |   | — |   |
| Other postretirement benefits(3)    |       | 48,000                                    |       | 4,200 |   | 9,000 |   | 9,800 |   | 25,000 |   |
| Non-compete obligations(4)          |       | 220                                       |       | 110 |   | 110 |   | — |   | — |   |
| Total                               |       | $                                         | 127,375    |   | $ | 44,582 |   | $ | 31,843 |   | $ | 22,120 |   | $ | 28,830 |   |

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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 June 30, 2009, the non-current income taxes payable was$276. It is not possible to determine in which period the tax liability might bepaid 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 payments willbe tax deductible. All benefit payments under the domestic pension plan will comefrom 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)             Representsonly expected post-retirement benefits based upon anticipated timing of payments.

 

(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 as restrictedcash.

 

AtJune 30, 2009, 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, theFinancial Accounting Standards Board issued FASB Statement No. 157, *Fair Value Measurement* (“SFAS 157”). SFAS 157addresses standardizing the measurement of fair value for companies who arerequired to use a fair value measure for recognition or disclosure purposes.The FASB defines fair value as “the price that would be received to sell anasset or paid to transfer a liability in an orderly transaction between marketparticipants at the measure date.”  On February 12,2008, the FASB issued Staff Position 157-2 (“FSP 157-2”) which delays theeffective date of SFAS 157 for all nonfinancial assets and nonfinancialliabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis.  Therefore for financial assetsand liabilities the statement is effective for fiscal years beginning after November 15,2007 and for interim periods within those fiscal years. The Company wasrequired to adopt SFAS 157 (excluding nonfinancial assets and liabilities)beginning on October 1, 2008, which did not have a material impact on theCompany’s financial position, results of operations or cash flows.

 

## **In April 2009,the FASB issued FASB Staff Position 157-4, *Determining Fair ValueWhen the Volume and Level***

 

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## ***of Activityfor the Asset or Liability Have Significantly Decreased and IdentifyingTransactions That Are Not Orderly*** (“FSP 157-4”), which provides additional guidance for applying theprovisions of SFAS No. 157. SFAS No. 157 defines fair value as theprice that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants under current marketconditions. This FSP requires an evaluation of whether there has been asignificant decrease in the volume and level of activity for the asset orliability in relation to normal market activity for the asset or liability. Ifthere has, transactions or quoted prices may not be indicative of fair value anda significant adjustment may need to be made to those prices to estimate fairvalue. Additionally, an entity must consider whether the observed transactionwas orderly (that is, not distressed or forced). If the transaction wasorderly, the obtained price can be considered a relevant observable input fordetermining fair value. If the transaction is not orderly, other valuationtechniques must be used when estimating fair value. FSP 157-4 must be appliedprospectively for interim periods ending after June 15, 2009. The Companyis currently evaluating  the impact thatFSP 157-4 will have on the Company’s consolidated financial statements.

## ** **

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

 

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

 

**In March 2008, the FASB issuedFASB Statement No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities* (“SFAS 161”)—anamendment of SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities*. SFAS 161 is intended toimprove financial reporting transparency regarding derivative instruments andhedging activities by providing investors with a better understanding of theireffects on financial position, financial performance, and cash flows.SFAS 161 is effective for financial statements issued for fiscal years andinterim periods beginning after November 15, 2008. The Company has electedearly adoption of SFAS 161 and has included all applicable disclosures inits consolidated financial statements.**

** **

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

 

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In December 2008, the FASB issued FASB Staff Position No. 132(R)-1,*Employers’ Disclosures about PostretirementBenefit Plan Assets* (“FSP132(R)-1”)*.*The FSPrequires disclosures of the objectives of postretirement benefit plan assets,investment policies and strategies, categories of plan assets, fair valuemeasurements of plan assets, and significant concentrations of risk. FSP132(R)-1 is effective for fiscal years and interim periods beginning after December 15,2009. The adoption of FSP 132(R)-1 is expected to increase our disclosures, butit is not expected to have an impact on our consolidated financial statements.

 

## **In May 2009,the FASB issued SFAS No. 165, *Subsequent Events*(“SFAS 165”), which establishes accounting standards for recognition anddisclosure of events that occur after the balance sheet date but beforefinancial statements are issued. These standards are essentially similar tocurrent accounting principles with few exceptions that do not result in achange in general practice. SFAS 165 is effective on a prospective basis forinterim or annual financial periods ending after June 15, 2009. TheCompany adopted this pronouncement effective June 30, 2009, and theadoption of this new standard did not have a material effect on the Company’sconsolidated financial position, results of operations or cash flows.Subsequent events were evaluated through August 6, 2009, the date theconsolidated financial statements were issued. See Note 12 for identifieditems.**

## ** **

In June 2009, theFASB issued FASB Statement No. 168, *The FASB AccountingStandards Codification and the Hierarchy of Generally Accepted AccountingPrinciples* (“SFAS 168”). The objective of this Statement is toreplace SFAS 162 and to establish the FASB Accounting Standards Codification asthe source of authoritative accounting principles recognized by the FASB to beapplied by entities in the preparation of financial statements in conformitywith GAAP. SFAS 168 will be effective for financial statements issued forinterim and annual periods ending after September 15, 2009. This Statementis not expected to have a significant impact on the Company’s financialstatements.

 

**Critical AccountingPolicies and Estimates**

 

*Overview*

 

Management’s Discussionand Analysis of Financial Condition and Results of Operations discusses theCompany’s consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America.  The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and 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 is recognizedwhen title passes to the customer which is generally at the time of shipment(F.O.B. shipping point) or at a foreign port for certain export customers.Allowances for sales returns are recorded as a component of net revenues in theperiods in which the related sales are recognized. Management determines thisallowance based on historical experience and have not had any history ofreturns that have exceeded recorded allowances.

 

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*Pensionand Post-Retirement Benefits*

 

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

 

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

 

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

 

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

 

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

 

The Company reviewslong-lived assets for impairment whenever events or circumstances indicate thatthe carrying amount of an asset may not be recoverable. Recoverability oflong-lived assets to be held and used is measured by a comparison of thecarrying amount of the asset to the undiscounted future cash flows expected tobe generated by the asset. If the carrying amount of an asset exceeds itsestimated future cash flows, an impairment charge is recognized in the amountby which the carrying amount exceeds the fair value of the asset. Assumptionsand estimates with respect to estimated future cash flows used in theevaluation of long-lived assets impairment are subject to a high degree ofjudgment and complexity.

 

The Company reviewedgoodwill for impairment annually or more frequently if events or circumstancesindicate that the carrying amount of goodwill may be impaired. Recoverabilityof goodwill was measured by a comparison of the carrying value to the fairvalue. If the carrying amount exceeded its fair value, an impairment charge isrecognized to the extent that the implied fair value exceeds its carryingvalue. 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 estimated fair valueusing a combination of market value approach using quoted market prices and anincome approach using discounted cash flow projections.

 

The income approach useda projection of estimated operating results and cash flows that is discountedusing a weighted-average cost of capital that reflects current marketconditions. The projection used management’s best estimates of economic andmarket conditions over the projected period including growth rates in sales,costs, estimates of future expected changes in operating margins and cashexpenditures. Other significant estimates and assumptions included terminalvalue growth rates, future estimates of capital expenditures and changes in futureworking capital requirements. A significant amount of judgment is involved in 

 

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determining if anindicator of impairment has occurred. Such indicators may include, amongothers: a significant decline in our expected future cash flows; a sustained,significant decline in our stock price and market capitalization; a significantadverse change in the business climate; unanticipated competition; and slowergrowth rates. Any adverse change in these factors could have a significantimpact on the recoverability of these assets and could have a material impacton our consolidated financial statements. We also performed sensitivityanalyses on our estimated fair value using the income approach. A keyassumption in our fair value estimate was the weighted average cost of capitalutilized for discounting our cash flow estimates in our income approach.

 

During the second quarterof fiscal 2009, the Company determined that the weakening of the U.S. economyand the global credit crisis resulted in a reduction of the Company’s marketcapitalization below its total shareholder’s equity value for a sustainedperiod of time, which is an indication that goodwill may be impaired.  As a result, the Company performed an interimstep one goodwill impairment analysis as of February 28, 2009 whichindicated impairment.  With theassistance of a third-party valuation specialist, the Company determined thefair value of its reporting unit using the income and market comparablevaluation methodologies.  The valuationmethodologies and the underlying financial information that are used todetermine the fair value require significant judgments to be made bymanagement.  These judgments include, butare not limited to, long-term projections of future financial performance,terminal growth rate and the selection of an appropriate discount rate used tocalculate the present value of the estimated future cash flows of theCompany.  The long-term projections usedin the valuation are developed as a part of the Company’s annual budgeting andforecasting process.  The discount rateused to determine the fair value of the reporting unit was that of a hypotheticalmarket participant which is developed upon an analysis of comparable companiesand include adjustments made to account for any individual reporting unitspecific attributes such as size and industry.

 

The second step of thegoodwill impairment test compared the implied fair value of the reporting unitgoodwill to the carrying value of that goodwill.  The carrying value of the Company’s onereporting unit exceeded the fair value. The Company compared the implied fair value of the goodwill with the carryingvalue and a non-cash charge of $43,737 for goodwill impairment was recorded inthe second quarter of fiscal 2009.

 

The Company reviewstrademarks 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 Company reviewedtrademarks for impairment as of August 31, 2008, and concluded noimpairment adjustment was necessary.Due to the presentuncertainty surrounding the global economy and stock price volatilitygenerally, and volatility in our stock price in particular, we concluded atriggering event had occurred indicating potential impairment and performed animpairment test as of December 31, 2008, February 28, 2009 and againat June 30, 2009 of our trademarks. No impairment was recognized becausethe fair value exceeded the carrying values. Even though we determined thatthere was no trademark impairment as of June 30, 2009, declines in salesbeyond our current forecasts may result in a future impairment charge.Management will continue to evaluate trademarks for impairment on a quarterlybasis if the recent decline in the Company’s sales continues.

 

*Share-BasedCompensation*

 

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

 

Restricted stock grantsare subject to forfeiture if employment or service terminates prior to thevesting period or if the performance goal is not met.  The Company will access, on an ongoing basis,the probability of whether the performance criteria will be achieved. TheCompany will recognize compensation expense over the performance period if itis deemed probable that the goal will be achieved. The fair value of theCompany’s 

 

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restricted stock isdetermined based upon the closing price of the Company’s common stock on thegrant date. The plan provides for the adjustment of the number of sharescovered by an outstanding grant and the maximum number of shares for whichrestricted stock may be granted in the event of a stock split, extraordinarydividend or distribution or similar recapitalization event.

 

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

 

On October 1, 2007the 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.

 

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**Item 3.    Quantitative and Qualitative Disclosuresabout 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 in interest ratesaffect the Company’s interest expense on variable rate debt. The Company’soutstanding variable rate debt was zero at June 30, 2009. The Company hasnot entered into any derivative instruments to hedge the effects of changes ininterest rates.

 

The foreign currencyexchange risk exists primarily because the three foreign subsidiaries maintainreceivables and payables denominated in currencies other than their functionalcurrency. 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 June 30, 2009, the Company had no foreign currency exchangecontracts outstanding.

 

Fluctuations in the priceof nickel, our most significant raw material, subject the Company to commodityprice risk. The Company manages its exposure to this market risk throughinternally established policies and procedures, including negotiating rawmaterial escalators within product sales agreements, and continually monitoringand revising customer quote amounts to reflect the fluctuations in marketprices for nickel. The Company does not use derivative instruments to managethis market risk. The Company monitors its underlying market risk exposure froma rapid change in nickel prices on an ongoing basis and believes that it canmodify or adapt its strategies as necessary. The Company periodically purchasesraw material forward with certain suppliers. However, there is a risk that wemay not be able to successfully offset a rapid change in the cost of rawmaterial in the future.

 

On June 11, 2009, tomitigate the volatility of the natural gas markets, the Company entered into acommodity swap-cash settlement agreement with JP Morgan Chase Bank. The Companyhas agreed to a fixed natural gas price on a total of 300,000 MMBTU, at asettlement rate of 50,000 MMBTU per month for a period spanning October 2009to March 2010. The Company’s unrealized hedging loss was $84,000 at June 30,2009. On a hypothetical basis, a $1.00 per MMBTU decrease in the market priceof natural gas is estimated to have an unfavorable impact of $300,000 ofunrealized hedging loss for the period ended June 30, 2009 as a result ofthe commodity swap-cash settlement agreement.

 

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

#### ** **

The Company has performed, under the supervision andwith the participation of the Company’s management, including the Company’sChief Executive Officer and Chief Financial Officer, an evaluation of theeffectiveness and the design and operation of the Company’s disclosure controlsand procedures (as defined by Exchange Act rules 13a-15(e) and15d-15(e)) pursuant to Rule 13a-15(b) of the Exchange Act as of theend of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures were effective as of June 30, 2009 in providing reasonableassurance that information required to be disclosed by the Company in thereports that it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission, including to ensure thatinformation required to be disclosed by the Company in the reports that itfiles or submits under the Exchange Act is accumulated and communicated to theCompany’s management, including its principal executive and principal financialofficers, or persons performing similar functions, as appropriate to allowtimely decisions regarding required disclosure.

 

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

 

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**PART II  OTHER INFORMATION**

 

**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: August 6,  2009             |
|     |                                   |
|     |                                   |
| * * | */s/ Marcel Martin*                    |
|     | Marcel Martin                          |
|     | Vice President, Finance                |
|     | Chief Financial Officer                |
|     | Date: August 6, 2009              |

 

 

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**INDEX TO EXHIBITS**

 
| **Number**

**Assigned  In**

**Regulation  S-K**

**Item  601** | ** ** | ** ** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                    |
|------------------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3)                                                              |       | 3.01       |       | Restated  Certificate of Incorporation of Haynes International, Inc. (incorporated  by reference to Exhibit 3.1 to the Haynes International, Inc.  Registration Statement on Form S-1, Registration No. 333-140194). |
|                                                             |       | 3.02       |       | Amended  and Restated Bylaws of Haynes International, Inc. (incorporated by  reference to Exhibit 3.2 to the Haynes International, Inc.  Registration Statement on Form S-1, Registration No. 333-140194).           |
| (4)                                                              |       | 4.01       |       | Specimen  Common Stock Certificate (incorporated by reference to 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).          |
| (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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