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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **x**                                                      | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**  |
|------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                       |                                                                                                     |
| **For the  quarterly period ended December 31, 2009** |
|                                                       |
| **or**                                                     |
|                                                       |                                                                                                     |
| **o**                                                      | **Transition  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |

 

**For the transition period from                    to                    **

 

**Commission File Number:  001-33288**

 

**HAYNES INTERNATIONAL, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

**(765) 456-6000**

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

Asof February 1, 2010, the registrant had 12,144,079 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 Consolidated  Financial Statements                                                                        |     |
|             |                                                                                                                          |     |
|             | Haynes  International, Inc. and Subsidiaries:                                                                            |     |
|             |                                                                                                                          |     |
|             | Unaudited  Consolidated Balance Sheets as of September 30, 2009 and  December 31, 2009                              | 1        |
|             |                                                                                                                          |     |
|             | Unaudited  Consolidated Statements of Operations for the Three Months Ended  December 31, 2008 and 2009                  | 2        |
|             |                                                                                                                          |     |
|             | Unaudited  Consolidated Statements of Comprehensive Income (Loss) for the Three Months  Ended December 31, 2008 and 2009 | 3        |
|             |                                                                                                                          |     |
|             | Unaudited  Consolidated Statements of Cash Flows for the Three Months Ended  December 31, 2008 and 2009                  | 4        |
|             |                                                                                                                          |     |
|             | Notes to Consolidated Financial Statements                                                                                    | 5        |
|             |                                                                                                                          |     |
| Item 2.          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                   | 15       |
|             |                                                                                                                          |     |
| Item 3.          | Quantitative  and Qualitative Disclosures About Market Risk                                                                   | 26       |
|             |                                                                                                                          |     |
| Item 4.          | Controls and  Procedures                                                                                                      | 27       |
|             |                                                                                                                          |     |
| **PART II** | **OTHER INFORMATION**                                                                                                         |     |
| ** **       | ** **                                                                                                                    |     |
| Item 6.          | Exhibits                                                                                                                      | 28       |
|             |                                                                                                                          |     |
|             | Signatures                                                                                                                    | 29       |
|             |                                                                                                                          |     |
|             | Index  to Exhibits                                                                                                            | 30       |

 

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

Item 1.     Financial Statements

 

**HAYNES INTERNATIONAL, INC. and SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

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

 
| ** **                                                                                                                                                                    | ** ** | **September 30,  2009** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                    |       |                         |       |                        |       |
| Current assets:                                                                                                                                                               |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                     |       | $                            | 105,095    |                        | $          | 97,510 |   |
| Restricted cash—current portion                                                                                                                                          |       | 110                          |       | 110                         |       |
| Accounts receivable, less allowance for doubtful  accounts of $1,310 and $1,316 respectively                                                                             |       | 47,473                       |       | 47,647                      |       |
| Inventories                                                                                                                                                                   |       | 182,771                      |       | 186,463                     |       |
| Income taxes receivable                                                                                                                                                       |       | 24,348                       |       | 17,416                      |       |
| Deferred income taxes                                                                                                                                                         |       | 9,035                        |       | 9,252                       |       |
| Other current assets                                                                                                                                                          |       | 645                          |       | 1,721                       |       |
| Total current assets                                                                                                                                                          |       | 369,477                      |       | 360,119                     |       |
| Property, plant and equipment, net                                                                                                                                            |       | 105,820                      |       | 107,767                     |       |
| Deferred income taxes—long term portion                                                                                                                                  |       | 58,843                       |       | 59,800                      |       |
| Prepayments and deferred charges                                                                                                                                              |       | 2,670                        |       | 2,815                       |       |
| Restricted cash—long term portion                                                                                                                                        |       | 110                          |       | —                      |       |
| Intangible assets, net                                                                                                                                                        |       | 7,230                        |       | 7,090                       |       |
| Total assets                                                                                                                                                                  |       | $                            | 544,150    |                        | $          | 537,591 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                 |       |                         |       |                        |       |
| Current liabilities:                                                                                                                                                          |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                              |       | $                            | 29,249     |                        | $          | 29,829 |   |
| Accrued expenses                                                                                                                                                              |       | 10,312                       |       | 9,363                       |       |
| Accrued pension and postretirement benefits                                                                                                                                   |       | 20,215                       |       | 19,305                      |       |
| Revolving credit facilities                                                                                                                                                   |       | —                       |       | —                      |       |
| Deferred revenue – current portion                                                                                                                                       |       | 2,500                        |       | 2,500                       |       |
| Current maturities of long-term obligations                                                                                                                                   |       | 110                          |       | 103                         |       |
| Total current liabilities                                                                                                                                                     |       | 62,386                       |       | 61,100                      |       |
| Long-term obligations (less current portion)                                                                                                                                  |       | 1,482                        |       | 1,382                       |       |
| Deferred revenue (less current portion)                                                                                                                                       |       | 40,329                       |       | 39,704                      |       |
| Non-current income taxes payable                                                                                                                                              |       | 292                          |       | 292                         |       |
| Accrued pension and postretirement benefits                                                                                                                                   |       | 160,862                      |       | 159,527                     |       |
| Total liabilities                                                                                                                                                             |       | 265,351                      |       | 262,005                     |       |
| Commitments and contingencies (Note 6)                                                                                                                                        |       | —                       |       | —                      |       |
| Stockholders’ equity:                                                                                                                                                    |       |                         |       |                        |       |
| Common stock, $0.001 par value (40,000,000 shares authorized, 12,101,829  shares issued and outstanding at September 30, 2009 and  December 31, 2009, respectively) |       | 12                           |       | 12                          |       |
| Preferred stock, $0.001 par value (20,000,000 shares authorized, 0  shares issued and outstanding)                                                                            |       | —                       |       | —                      |       |
| Additional paid-in capital                                                                                                                                                    |       | 227,734                      |       | 228,095                     |       |
| Accumulated earnings                                                                                                                                                          |       | 103,509                      |       | 99,803                      |       |
| Accumulated other comprehensive loss                                                                                                                                          |       | (52,456                      | )          | (52,324                     | )          |
| Total stockholders’ equity                                                                                                                                               |       | 278,799                      |       | 275,586                     |       |
| Total liabilities and stockholders’ equity                                                                                                                               |       | $                            | 544,150    |                        | $          | 537,591 |   |

 

The accompanying notesare an integral part of these financial statements.

 

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**HAYNESINTERNATIONAL, INC. and SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

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

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|
| ** **                                   | ** ** | **December 31,**  | ** ** |
| ** **                                   | ** ** | **2008**               | ** ** | **2009** | ** ** |
|                                         |       |                   |       |   |   |
| Net  revenues                                |       | $                      | 134,304    |   | $ | 81,008 |   |
| Cost  of sales                               |       | 115,554                |       | 74,163 |   |
| Gross  profit                                |       | 18,750                 |       | 6,845 |   |
| Selling,  general and administrative expense |       | 10,590                 |       | 8,186 |   |
| Research  and technical expense              |       | 825                    |       | 649 |   |
| Operating  income (loss)                     |       | 7,335                  |       | (1,990 | ) |
| Interest  income                             |       | (20                    | )          | (45 | ) |
| Interest  expense                            |       | 356                    |       | 48 |   |
| Income  (loss) before income taxes           |       | 6,999                  |       | (1,993 | ) |
| Provision  for (benefit from) income taxes   |       | 2,475                  |       | (707 | ) |
| Net  income (loss)                           |       | $                      | 4,524      |   | $ | (1,286 | ) |
| Net  income (loss) per share:                |       |                   |       |   |   |
| Basic                                        |       | $                      | 0.38       |   | $ | (0.11 | ) |
| Diluted                                      |       | $                      | 0.38       |   | $ | (0.11 | ) |
| Weighted  average shares outstanding:        |       |                   |       |   |   |
| Basic                                        |       | 11,984,623             |       | 12,049,779 |   |
| Diluted                                      |       | 12,044,999             |       | 12,049,779 |   |

 

The accompanying notesare an integral part of these financial statements.

 

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**HAYNESINTERNATIONAL, INC. and SUBSIDIARIES**

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

**(Unaudited)**

**(inthousands)**

** **
| ** **                                         | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|
| ** **                                         | ** ** | **December 31**   | ** ** |
| ** **                                         | ** ** | **2008**               | ** ** | **2009** | ** ** |
| Net  income (loss)                                 |       | $                      | 4,524      |   | $ | (1,286 | ) |
| **Other comprehensive income (loss), net of tax:** |       |                   |       |   |   |
| Foreign  currency translation adjustment           |       | (4,405                 | )          | 132 |   |
| Comprehensive  income (loss)                       |       | $                      | 119        |   | $ | (1,154 | ) |

 

The accompanying notesare an integral part of these financial statements.

 

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**HAYNESINTERNATIONAL, INC. and SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

**(inthousands)**

 
| ** **                                                                                    | ** ** | **Three Months Ended********December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2008**                                        | ** ** | **2009** | ** ** |
| **Cash flows from operating activities:**                                                     |       |                                            |       |   |   |
| Net  income (loss)                                                                            |       | $                                               | 4,524      |   | $ | (1,286 | ) |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |       |                                            |       |   |   |
| Depreciation                                                                                  |       | 2,454                                           |       | 2,645 |   |
| Amortization                                                                                  |       | 291                                             |       | 140 |   |
| Stock  compensation expense                                                                   |       | 454                                             |       | 361 |   |
| Deferred  revenue                                                                             |       | (625                                            | )          | (625 | ) |
| Deferred  income taxes                                                                        |       | 792                                             |       | (1,169 | ) |
| Loss  on disposal of property                                                                 |       | 29                                              |       | — |   |
| Change  in assets and liabilities:                                                            |       |                                            |       |   |   |
| Accounts  receivable                                                                          |       | 18,333                                          |       | (178 | ) |
| Inventories                                                                                   |       | 9,304                                           |       | (3,648 | ) |
| Other  assets                                                                                 |       | (916                                            | )          | (1,236 | ) |
| Accounts  payable and accrued expenses                                                        |       | (5,055                                          | )          | 238 |   |
| Income  taxes                                                                                 |       | (12,653                                         | )          | 6,899 |   |
| Accrued  pension and postretirement benefits                                                  |       | (3,005                                          | )          | (2,268 | ) |
| Net  cash provided by (used in) operating activities                                          |       | 13,927                                          |       | (127 | ) |
|                                                                                          |       |                                            |       |   |   |
| **Cash flows from investing activities:**                                                     |       |                                            |       |   |   |
| Additions  to property, plant and equipment                                                   |       | (2,796                                          | )          | (5,070 | ) |
| Change  in restricted cash                                                                    |       | 110                                             |       | 110 |   |
| Net  cash used in investing activities                                                        |       | (2,686                                          | )          | (4,960 | ) |
|                                                                                          |       |                                            |       |   |   |
| **Cash flows from financing activities:**                                                     |       |                                            |       |   |   |
| Dividends  paid                                                                               |       | —                                          |       | (2,420 | ) |
| Net  decrease in revolving credit facility                                                    |       | (11,812                                         | )          | — |   |
| Payment  for debt issuance costs                                                              |       | (306                                            | )          | — |   |
| Changes  in long-term obligations                                                             |       | (1,315                                          | )          | (107 | ) |
| Net  cash used in financing activities                                                        |       | (13,433                                         | )          | (2,527 | ) |
|                                                                                          |       |                                            |       |   |   |
| Effect  of exchange rates on cash                                                             |       | (13                                             | )          | 29 |   |
| Decrease  in cash and cash equivalents                                                        |       | (2,205                                          | )          | (7,585 | ) |
|                                                                                          |       |                                            |       |   |   |
| Cash  and cash equivalents, beginning of period                                               |       | 7,058                                           |       | 105,095 |   |
| Cash  and cash equivalents, end of period                                                     |       | $                                               | 4,853      |   | $ | 97,510 |   |
|                                                                                          |       |                                            |       |   |   |
| Supplemental  disclosures of cash flow information:                                           |       |                                            |       |   |   |
| Cash  paid during period for: Interest (net of capitalized interest)                          |       | $                                               | 304        |   | $ | 21 |   |
| Income taxes                                                                                  |       | $                                               | 15,787     |   | $ | 296 |   |

 

The accompanying notesare an integral part of these financial statements.

 

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**HAYNESINTERNATIONAL, INC. and SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

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

 

## **Note 1.  Basisof Presentation**

 

*Interim Financial Statements*

 

The accompanying unaudited condensed interimconsolidated financial statements are prepared in conformity with accountingprinciples generally accepted in the United States of America and suchprinciples are applied on a basis consistent with information reflected in our Form 10-Kfor the year ended September 30, 2009 filed with the Securities andExchange Commission (“SEC”). Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to the rules and regulationspromulgated by the SEC related to interim financial statements. In the opinionof management, the interim financial information includes all adjustments andaccruals, consisting only of normal recurring adjustments, which are necessaryfor a fair presentation of results for the respective interim periods. Theresults of operations for the three months ended December 31, 2009 are notnecessarily indicative of the results to be expected for the full fiscal yearending September 30, 2010 or any interim period.

 

For purposes of this interim financial information, February 8,2010 is the date through which subsequent events have been evaluated andrepresents the date the financial statements were issued.

 

*Principles of Consolidation*

 

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

 

## **Note 2.  NewAccounting Pronouncements**

 

In December 2007,the FASB issued FASB Statement No. 141 (revised 2007), BusinessCombinations (“SFAS 141(R)”) which was primarily codified into Topic 805 (*Business Combinations*) in the Accounting StandardsCodification, or ASC.  This guidancerequires that the fair value of the purchase price of an acquisition includingthe issuance of equity securities be determined on the acquisition date;requires that all assets, liabilities, noncontrolling interests, contingentconsideration, contingencies, and in-process research and development costs ofan acquired business be recorded at fair value at the acquisition date;requires that acquisition costs generally be expensed as incurred; requiresthat restructuring costs generally be expensed in periods subsequent to theacquisition date; and requires that changes in deferred tax asset valuationallowances and acquired income tax uncertainties after the measurement periodimpact income tax expense. This guidance also expands disclosures related tobusiness combinations and will be applied prospectively to businesscombinations occurring after the beginning of the Company’s fiscal year 2010,except that business combinations consummated prior to the effective date mustapply SFAS 141(R) income tax requirements immediately upon adoption. TheCompany is currently evaluating the impact of SFAS 141(R) related tofuture acquisitions, if any, on its financial position, results of operationsand 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”), which was primarily codified into Topic 810-10 (*Consolidations*) in the ASC. This guidance requires thatnoncontrolling interests be reported as a separate component of equity, thatnet income attributable to the parent and to the noncontrolling interest beseparately identified in the consolidated statement of operations, that changesin a parent’s ownership interest be accounted for as equity transactions, andthat, when a subsidiary is deconsolidated, any retained noncontrolling equityinvestment in the former subsidiary and the gain or loss on the deconsolidationof the subsidiary be measured at

 

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fair value. This guidancewill be applied prospectively, except for presentation and disclosurerequirements which were applied retroactively, as of the beginning of theCompany’s fiscal year 2010. The Company does not currently have noncontrollinginterests, and therefore the adoption of this guidance did not have an impacton the Company’s financial position, results of operations or cash flows.

 

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

 

In December 2008,the FASB issued FASB Staff Position No. 132(R)-1, *Employers’Disclosures about Postretirement Benefit Plan Assets*, which wasprimarily codified into Topic 715 (*Compensation RetirementBenefits*) in the ASC. The guidance requires disclosures of theobjectives of postretirement benefit plan assets, investment policies andstrategies, categories of plan assets, fair value measurements of plan assets,and significant concentrations of risk. This guidance is effective for fiscalyears and interim periods beginning after December 15, 2009. The adoptionof this guidance is expected to increase our disclosures, but it is notexpected to have an impact on our consolidated financial statements.

 

## **Note3.  Inventories**

 

The following is a summary of the major classes ofinventories:

 
| ** **      | ** ** | **September 30,  2009** | ** ** | **December 31,  2009** | ** ** |
|-----------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw Materials   |       | $                            | 13,321     |                        | $          | 16,968 |   |
| Work-in-process |       | 87,322                       |       | 88,268                      |       |
| Finished Goods  |       | 81,228                       |       | 80,079                      |       |
| Other           |       | 900                          |       | 1,148                       |       |
|            |       | $                            | 182,771    |                        | $          | 186,463 |   |

 

## **Note4.  Income Taxes**

 

## **Income tax expense for thethree months ended December 31, 2008 and 2009, differed from the U.S.federal statutory rate of 35% primarily due to state income taxes, differingtax rates on foreign earnings and the impact of permanent items with a pretaxloss. The effective tax rate for the first quarter of fiscal 2010 was 35.5%compared to 35.4% in the same period of fiscal 2009.**

 

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

 

## **Componentsof net periodic pension and post-retirement benefit cost for the three monthsended December 31, are as follows:**

 
| ** **                 | ** ** | **Three Months Ended December 31,** | ** ** |
|----------------------------|------------|------------------------------------------|------------|
| ** **                 | ** ** | **Pension Benefits**                     | ** ** | **Other Benefits** | ** ** |
| ** **                 | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** |
| Service  cost              |       | $                                        | 635        |   | $ | 899 |   | $ | 332 |   | $ | 52 |   |
| Interest  cost             |       | 2,999                                    |       | 2,864 |   | 1,231 |   | 1,205 |   |
| Expected  return           |       | (2,510                                   | )          | (2,619 | ) | — |   | — |   |
| Amortizations              |       | 201                                      |       | 1,446 |   | (1,327 | ) | (950 | ) |
| Net  periodic benefit cost |       | $                                        | 1,325      |   | $ | 2,590 |   | $ | 236 |   | $ | 307 |   |

 

TheCompany contributed $3,625 to Company sponsored domestic pension plans, $1,249to its other post-retirement benefit plans and $245 to the U.K. pension planfor the three months ended December 31, 2009.  The Company presently expects futurecontributions of $9,875 to its domestic pension plans, $3,551 to its otherpost-retirement benefit plans and $715 to the U.K. pension plan for theremainder of fiscal 2010. The Pension Protection Act of 2006 requires fundingover a seven-year period to achieve 100% funded status.

 

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

 

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 and dischargeof prepetition claims and causes of action. The Confirmation Order furtherprovides for an injunction against the commencement of any actions with respectto claims held prior to the Effective Date of the Plan. The Effective Dateoccurred 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, filed againstnumerous manufacturers, including the Company, in December 2008 in the FederalMDL Court in Ohio and in California State Court in February 2007, respectively,alleging that the welding-related products of the defendant manufacturersharmed the users of such products through the inhalation of welding fumescontaining manganese.  The Companybelieves that it has defenses to these allegations and, that if the Companywere found liable, the cases would not have a material effect on its financialposition, results of operations or liquidity. In addition to these cases, theCompany has in the past been named a defendant in several other lawsuits,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 been

 

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voluntarily dismissedfrom all of these lawsuits on the basis of the release and discharge of claimscontained in the Confirmation Order. While the Company contests such lawsuitsvigorously, there are several risks and uncertainties that may affect itsliability for claims relating to exposure to welding fumes and manganese. Forinstance, in recent cases, at least two courts (in cases not involving Haynes)have refused to dismiss claims relating to inhalation of welding fumescontaining manganese based upon a bankruptcy discharge order. Although theCompany believes the facts of these cases are distinguishable from the facts ofits cases, there can be no assurance that any or all claims against the Companywill be dismissed based upon the Confirmation Order, particularly claimspremised, in part or in full, upon actual or alleged exposure on or after thedate of the Confirmation Order. It is also possible that the Company will benamed in additional suits alleging welding-rod injuries. Should such litigationoccur, although the Company may have applicable insurance, it is possible thatthe aggregate claims for damages, if the Company is found liable, could have amaterial adverse effect on its financial condition, results of operations orliquidity.

 

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.

 

Historic nitric acidleaks were discovered at the Arcadia, Louisiana location in fiscal 2008.  Analytical results were received in March2008 and the site assessment was provided to the Louisiana Department of EnvironmentalQuality, or LDEQ in May.  Remediation ofthe spill, including the purchase of new equipment, was substantially completein fiscal 2008.  A preliminary assessmentof the LDEQ authorized the Company’s proposed remedial actions.  In fiscal 2009, the Company submittedresponses to further inquiries from LDEQ regarding remediation activities, andis awaiting response from LDEQ.

 

As of December 31, 2009and September 30, 2009, the Company has accrued $1,516 for post-closuremonitoring and maintenance activities. In accordance with Statement of Position96-1, *Environmental Remediation Liabilities*,which was primarily codified into Topic 410-30 (*AssetRetirement and Environmental Obligations*) in the ASC, accruals forthese costs are calculated by estimating the cost to monitor and maintain eachpost-closure site and multiplying that amount by the number of years remainingin the 30 year post-closure monitoring period referred to above. At each fiscalyear-end, or earlier if necessary, the Company evaluates the accuracy of theestimates for these monitoring and maintenance costs for the upcoming fiscalyear. The accrual was based upon the undiscounted amount of the obligation of$2,123 which was then discounted using an appropriate discount rate. The costassociated with closing the sites has been incurred in financial periods priorto those presented, with the remaining cost to be incurred in future periodsrelated solely to post-closure monitoring and maintenance. Based on historicalexperience, the Company estimates that the cost of post-closure monitoring andmaintenance will approximate $134 per year over the remaining obligationperiod.

 

All eligible hourly employees at the Kokomo plant andLebanon, Indiana service center (approximately 48.3% or 454 in aggregate as of September 30,2009), are covered by a collective bargaining agreement which will expire in June 2010.  The Company intends to renegotiate theagreement prior to its expiration.

 

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**Note 7.  Deferred Revenue**

 

On November 17, 2006, the Company entered into atwenty-year agreement to provide conversion services to Titanium MetalsCorporation (“TIMET”) for up to ten million pounds of titanium metal annually.TIMET paid the Company a $50,000 up-front fee and will also pay the Company forits processing services during the term of the agreement (20 years) at pricesestablished by the terms of the agreement. TIMET may exercise an option to have ten million additional pounds oftitanium converted annually, provided that it offers to loan up to $12,000 tothe Company for certain capital expenditures which may be required to expandcapacity.  In addition to the volumecommitment, the Company has granted TIMET a security interest on its four-highsteckel rolling mill, along with rights of access if the Company enters intobankruptcy or defaults on any financing arrangements.  The Company has agreed not to manufacturetitanium products (other than cold reduced titanium tubing).  The Company has also agreed not to providetitanium conversion services to any entity other than TIMET for the term of theConversion Services Agreement.  Theagreement contains certain default provisions which could result in contracttermination and damages, including the Company being required to return theunearned portion of the upfront fee.  Thecash received of $50,000 is recognized in income on a straight-line basis overthe 20-year term of the agreement. The portion of the upfront fee notrecognized in income is shown as deferred revenue on the consolidated balancesheet.  Taxes were paid on the up-frontfee primarily in the first quarter of fiscal 2009.

 

**Note 8.  Intangible Assets andGoodwill**

 

Goodwill was created primarily as a result of the Company’sreorganization pursuant to Chapter 11 of the U.S. Bankruptcy Code andfresh start accounting. The Company has adopted SFAS No. 142, *Goodwill and Other Intangible*Assets (“SFAS 142”) which wasprimarily codified into Topic 350 *(Intangibles - Goodwilland Other)* in the ASC. Pursuant to SFAS 142, goodwill is notamortized 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.

 

Due to uncertainty surrounding the global economy and volatility in theCompany’s stock price, the Company concluded a triggering event had occurredindicating potential impairment and performed an impairment test as of December 31,2008 of its goodwill. No impairment was recognized at December 31, 2008because the fair value exceeded the carrying values.

 

During the second quarter of fiscal 2009, the Company determined thatthe weakening of the U.S. economy and the global credit crisis resulted in areduction of the Company’s market capitalization below its total shareholder’sequity value for a sustained period of time, which is an indication thatgoodwill may be impaired.  As a result,the Company performed an interim step one goodwill impairment analysis as of February 28,2009 which indicated impairment.  Inconnection with the second step of the goodwill impairment test, the Companycompared the implied fair value of the reporting unit goodwill to the carryingvalue of that goodwill and determined that the carrying value of the Company’sone reporting unit exceeded its fair value. As a result, the Company recorded a non-cash charge of $43,737 forgoodwill impairment in the second quarter of fiscal 2009, which was primarilynon-deductible for tax purposes.

 

The Company also has patents, trademarks and other intangibles. As thepatents have a definite life, they are amortized over lives ranging from two tofourteen years. As the trademarks have an indefinite life, the Company teststhem for impairment at least annually. If the carrying value exceeds the fairvalue (determined by calculating a fair value based upon a discounted cash flowof an assumed royalty rate), impairment of the trademark may exist resulting ina charge to earnings to the extent of the impairment. The Company hasnon-compete agreements with lives of 5 to 7 years. Amortization of the patents,non-competes and other intangibles was $291 and $140 for the three months endedDecember 31, 2008 and 2009, respectively.

 

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

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

 
| **December 31,  2009** | ** ** | **Gross  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Carrying  Amount** | ** ** |
|-----------------------------|------------|-------------------|------------|-------------------------------|------------|----------------------|------------|
| Patents                     |       | $                 | 8,667      |                          | $          | (6,113               | )          | $ | 2,554 |   |
| Trademarks                  |       | 3,800             |       | —                        |       | 3,800                |       |
| Non-compete                 |       | 1,090             |       | (547                          | )          | 543                  |       |
| Other                       |       | 316               |       | (123                          | )          | 193                  |       |
| ** **                  |       | $                 | 13,873     |                          | $          | (6,783               | )          | $ | 7,090 |   |

 

**Estimate of Aggregate Amortization Expense:**

 
| **Year Ended September 30,** | ** ** |   |   |   |   |
|-----------------------------------|------------|--------|--------|--------|--------|
| 2010 (remainder of fiscal year)   |       | $      | 417    |   |   |   |
| 2011                              |       | 545    |   |   |   |
| 2012                              |       | 359    |   |   |   |
| 2013                              |       | 350    |   |   |   |
| 2014                              |       | 350    |   |   |   |
|                                   |            |        |        |        |        |  |

 

**Note9.  Net Income (Loss) Per Share**

 

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

 
| ** **                                                                           | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                           | ** ** | **December 31,**            | ** ** |
| **(in thousands except share  and per share data)**         | ** ** | **2008**                         | ** ** | **2009** | ** ** |
| Numerator:                                                                           |       |                             |       |   |   |
| Net income (loss)                                                                    |       | $                                | 4,524      |   | $ | (1,286 | ) |
| Denominator:                                                                         |       |                             |       |   |   |
| Weighted average shares  outstanding - Basic                                         |       | 11,984,623                       |       | 12,049,779 |   |
| Effect of dilutive  stock options                                                    |       | 60,376                           |       | 51,418 |   |
| Adjustment for net loss                                                              |       | —                           |       | (51,418 | ) |
| Weighted average shares  outstanding - Diluted                                       |       | 12,044,999                       |       | 12,049,779 |   |
|                                                                                 |       |                             |       |   |   |
| Basic net income (loss)  per share                                                   |       | $                                | 0.38       |   | $ | (0.11 | ) |
| Diluted net income  (loss) per share                                                 |       | $                                | 0.38       |   | $ | (0.11 | ) |
|                                                                                 |       |                             |       |   |   |
| Number of stock option  shares excluded as their effect would be anti-dilutive       |       | 280,334                          |       | 207,500 |   |
|                                                                                 |       |                             |       |   |   |
| Number of restricted  stock shares excluded as their performance goal is not yet met |       | —                           |       | 31,050 |   |
|                                                                                 |       |                             |       |   |   |
| Number of restricted  stock shares excluded because of the net loss                  |       | —                           |       | 21,000 |   |

 

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Anti-dilutiveshares with respect to outstanding stock options have been properly excludedfrom the computation of diluted net income (loss) per share.  Restricted stock issued to certain keyemployees is not included in the computation as the performance goal is deemednot yet achieved.  Restricted stockissued to non-employee directors would be included in the computation if theCompany had net income.

 

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

 

**RestrictedStock Plan**

 

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

 

Restricted stock grants are subject to forfeiture ifemployment or service terminates prior to the vesting period or if theperformance goal is not met, if applicable. The Company will assess, on an ongoing basis, the probability of whetherthe performance criteria will be achieved. The Company will recognizecompensation expense over the performance period if it is deemed probable thatthe goal will be achieved. The fair value of the Company’s restricted stock isdetermined based upon the closing price of the Company’s common stock on thegrant date. The plan provides for the adjustment of the number of 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.  Outstanding shares of restricted stock areentitled to receive dividends on shares of common stock.

 

On March 31, 2009, the Company granted 53,800shares of restricted stock to certain key employees and non-employee directors.The shares of restricted stock granted to employees will vest on the thirdanniversary of their grant date, provided that (a) the recipient is stillan employee with the Company and (b) the Company has met a three year netincome performance goal. The shares of restricted stock granted to directorswill vest on the earlier of (a) the third anniversary of the date of grantor (b) the failure of such non-employee director to be re-elected at anannual meeting of the stockholders of the Company as a result of suchnon-employee director being excluded from the nominations for any reason otherthan cause. The fair value of the grant was $17.82, the closing price of theCompany’s common stock on the day of the grant. On September 30, 2009 the probability of reaching the 3 yearperformance goal was evaluated and it was determined that it was not probablethat the performance goal would be achieved. Therefore the compensation expense recorded on the 31,050 shares grantedto employees was reversed and no future compensation expense will be recordedunless circumstances change making the achievement of the goal no longerimprobable.

 

The followingtable summarizes the activity under the restricted stock plan for the threemonths ended December 31, 2009:

 
| ** **                                     | ** ** | **Number of  Shares** | ** ** | **Weighted  Average Fair  Value At********Grant Date** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|--------------------------------------------------------|------------|
| Unvested at September 30, 2009            |       | 52,050                |       | $                                                      | 17.82      |   |
| Granted                                        |       | —                |       |                                                   |       |
| Forfeited / Canceled                           |       | —                |       |                                                   |       |
| Vested                                         |       | —                |       |                                                   |       |
| Unvested at December 31, 2009             |       | 52,050                |       | $                                                      | 17.82      |   |
| Expected to vest – December 31, 2009 |       | 21,000                |       | $                                                      | 17.82      |   |

 

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Compensation expense related to restricted stockgranted to non-employee directors for the three months ended December 31,2009 was $31. The remaining unrecognized compensation expense at December 31,2009 was $281 to be recognized over a weighted average period of 2.25 years.

 

**StockOption Plans**

 

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

 

The fair value of option grants was estimated as ofthe date of the grant pursuant to FASB No. 123(R), *Share-BasedPayment*, which was primarily codified into Topic 718 *(Compensation — Stock Compensation*) in the ASC*.* The Company has elected to use the Black-Scholes optionpricing model, which incorporates various assumptions including volatility,expected life, risk-free interest rates, expected forfeitures and dividendyields. The volatility is based on historical volatility of the Company’scommon stock over the most recent period commensurate with the estimatedexpected term of the stock option granted. The Company uses historicalvolatility because management believes such volatility is representative ofprospective trends. The expected term of an award is based on historicalexercise data. The risk-free interest rate assumption is based upon observedinterest rates appropriate for the expected term of the awards. The expectedforfeiture rate is based upon historical experience. The dividend yieldassumption is based on the Company’s history and expectation regarding dividendpayouts at the time of the grant. Valuation of future grants under the Black-Scholes model will include adividend yield.

 

The stock-based employee compensation expense forstock options for the three months ended December 31, 2008 and 2009 was$454 and $330, respectively.  Theremaining unrecognized compensation expense at December 31, 2009 was$1,385 to be recognized over a weighted average vesting period of 0.92 years.

 

Thefollowing table summarizes the activity under the stock option plans for thethree months ended December 31, 2009:

 
| ** **                              | ** ** | **Number of  Shares** | ** ** | **Aggregate  Intrinsic  Value********(000s)** | ** ** | **Weighted  Average  Exercise  Prices** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-----------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------------------|------------|
| Outstanding at  September 30, 2009 |       | 394,737               |       |                                          |       | $                                       | 40.20      |                                               |       |   |
| Granted                                 |       | —                |       |                                          |       |                                    |       |                                               |       |
| Exercised                               |       | —                |       |                                          |       |                                    |       |                                               |       |
| Canceled                                |       | (7,666                | )          |                                          |       |                                    |       |                                               |       |
| Outstanding at  December 31, 2009  |       | 387,071               |       | $                                             | 2,879      |                                    | $          | 39.68                                              |       | 7.18 yrs. |   |
| Vested or expected to  vest             |       | 380,786               |       | $                                             | 2,879      |                                    | $          | 39.68                                              |       | 7.18 yrs. |   |
| Exercisable at  December 31, 2009  |       | 221,875               |       | $                                             | 1,980      |                                    | $          | 36.92                                              |       | 6.19 yrs. |   |

 

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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      |                                                | 4.67       |                               | 86,886     |                                    | 86,886     |   |
| May 5, 2005       |       | 19.00                          |       | 5.33                                                |       | 8,334                              |       | 8,334                                   |       |
| August 15, 2005   |       | 20.25                          |       | 5.58                                                |       | —                             |       | —                                  |       |
| October 1, 2005   |       | 25.50                          |       | 5.75                                                |       | —                             |       | —                                  |       |
| February 21, 2006 |       | 29.25                          |       | 6.17                                                |       | 25,001                             |       | 25,001                                  |       |
| March 31, 2006    |       | 31.00                          |       | 6.25                                                |       | 10,000                             |       | 10,000                                  |       |
| March 30, 2007    |       | 72.93                          |       | 7.25                                                |       | 77,500                             |       | 51,662                                  |       |
| September 1, 2007 |       | 83.53                          |       | 7.67                                                |       | —                             |       | —                                  |       |
| March 31, 2008    |       | 54.00                          |       | 8.25                                                |       | 100,000                            |       | 33,326                                  |       |
| October 1, 2008   |       | 46.83                          |       | 8.75                                                |       | 20,000                             |       | 6,666                                   |       |
| March 31, 2009    |       | 17.82                          |       | 9.25                                                |       | 59,350                             |       | —                                  |       |
| ** **             |       |                           |       |                                                |       | 387,071                            |       | 221,875                                 |       |
|                        |            |                                |            |                                                     |            |                                    |            |                                         |            |  |

 

**Note 11.   Dividend**

 

In the first quarter offiscal 2010, the Company declared the first quarterly cash dividend in itshistory.  On November 23, 2009, theCompany announced that the Board of Directors had initiated a quarterly cashdividend of $0.20 per outstanding share of the Company’s common stock.  The dividend was paid December 15, 2009to stockholders of record at the close of business on December 3,2009.  The dividend cash pay-out was$2,420 for the quarter based on shares outstanding.

 

The Company announcedthat the Board of Directors declared a regular quarterly cash dividend of $0.20per outstanding share of the Company’s common stock.  The dividend is payable March 15, 2010to stockholders of record at the close of business on March 1, 2010.

 

**Note 12.  Commodity Contracts**

 

On June 11, 2009, tomitigate the volatility of the natural gas markets, the Company entered into acommodity swap-cash settlement agreement with JPMorgan Chase Bank.  The Company has agreed to a fixed natural gasprice on a total of 300,000 MMBTU, at a settlement rate of 50,000 MMBTU permonth for a period spanning October 2009 to March 2010.  As of December 31, 2009, 150,000 MMBTUhad been settled for a realized hedging loss of $219.  The Company’s unrealized hedging gain was $1at December 31, 2009.

 
| ** **          | ** ** | **Fair Value**     | ** ** | **Gain or  (loss) Recognized in Income (Loss)** | ** ** |
|---------------------|------------|--------------------|------------|-------------------------------------------------|------------|
| ** **          | ** ** | **Balance  Sheet** | ** ** | **September 30,**                          | ** ** | **December 31,** | ** ** | **Statement  of  Operations** | ** ** | **Three  Months Ended  December 31,** | ** ** |
| ** **          | ** ** | **Location**       | ** ** | **2009**                                        | ** ** | **2009** | ** ** | **Location** | ** ** | **2008** | ** ** | **2009** | ** ** |
| Commodity Contracts |       | Accts  Receivable  |       | $                                               | 51         |   | $ | 9 |   | Cost of Sales | ** ** | **—** |   | $ | 134 |   |
|                |       | Accounts  Payable  |       | $                                               | (134       | ) | $ | (8 | ) |   |   |   |   |   |   |
|                     |            |                    |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 13.  Fair Value Measurements**

 

On October 1,2008, the Company adopted the provisions of SFAS No. 157,*  Fair Value Measurements* , asamended by FSP FAS 157-3, for assets and liabilities measured at fair value ona recurring basis, which was primarily codified into FASB ASC 820-10 (*Fair Value Measurements and Disclosures)*in the ASC.  This standard does not applyto non-financial assets and non-financial liabilities, except those that arerecognized or disclosed in the financial statements at fair value at leastannually until October 1, 2009. FASB ASC 820-10 establishes a framework for measuring fair value,clarifies the definition of fair value within that framework and expandsdisclosures about the use of fair value measurements.  Fair value is defined as the price that wouldbe received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date. A fair valuemeasurement assumes that the transaction to sell the asset or transfer theliability 

 

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occurs in the principalmarket for the asset or liability or, in the absence of a principal market, themost advantageous market for the asset or liability.

 

FASB ASC 820-10specifies a hierarchy of valuation techniques based upon whether the inputs tothose valuation techniques reflect assumptions that other market participantswould use based upon market data obtained from independent sources (observableinputs) or reflect the Company’s own assumptions of market participantvaluation (unobservable inputs). Valuation techniques used to measure fairvalue under FASB ASC 820-10 must maximize the use of observable inputs andminimize the use of unobservable inputs. The fair value hierarchy thatprioritizes the use of inputs used in valuation techniques into the followingthree levels:

 
|   | · | Level 1 – Quoted prices in active markets that are  unadjusted and accessible at the measurement date for identical, unrestricted  assets or liabilities;                                                                                                                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | Level 2 – Quoted prices for identical assets and  liabilities in markets that are not active, quoted prices for similar assets  and liabilities in active markets or financial instruments for which  significant inputs are observable, either directly or indirectly; and |
|   | · | Level 3 – Prices or valuations that require inputs  that are both significant to the fair value measurement and unobservable.                                                                                                                                               |

 

When available,the Company uses unadjusted quoted market prices to measure fair value andclassifies such items within Level 1. If quoted market prices are notavailable, fair value is based upon internally-developed models that use, wherepossible, current market-based or independently-sourced market parameters suchas interest rates and currency rates. Items valued using internally-generatedmodels are classified according to the lowest level input or value driver thatis significant to the valuation. If quoted market prices are not available, thevaluation model used depends on the specific asset or liability being valued.

 

Pursuant to thisguidance*,* the Company measuresand reports the commodity swap-cash settlement agreement for natural gas (referto Note 12 for more information) at fair value.

 

The followingtable represents the Company’s fair value hierarchy for its financial assetsand liabilities (cash equivalents and commodity contracts) measured at fairvalue on a recurring basis as of September 30, 2009 and December 31,2009:

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

 
| ** **                                | ** ** | **Fair Value Measurements at Reporting Date Using:** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|
| **December  31, 2009**                    | ** ** | **Level 1**                                          | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| **Assets:**                               |       |                                                 |       |   |   |   |   |   |   |
| Cash and money market funds               |       | $                                                    | 97,510     |   | $ | — |   | $ | — |   | $ | 97,510 |   |
| Commodity contracts (accounts receivable) |       | —                                               |       | 9 |   | — |   | 9 |   |
| Total assets                              |       | $                                                    | 97,510     |   | $ | 9 |   | $ | — |   | $ | 97,519 |   |
| **Liabilities:**                          |       |                                                 |       |   |   |   |   |   |   |
| Commodity contracts (accounts payable)    |       | —                                               |       | 8 |   | — |   | 8 |   |
| Total liabilities                         |       | $                                                    | —     |   | $ | 8 |   | $ | — |   | $ | 8 |   |

 

The Company had no Level3 assets as of September 30, 2009 or December 31, 2009.

 

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**Item2.     Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

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

 

*ThisQuarterly Report on Form 10-Q (this “Form 10-Q”) contains statementsthat constitute “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995, Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934. Thosestatements appear in a number of places in this Form 10-Q and may include,but are not limited to, statements regarding the intent, belief or currentexpectations of the Company or its management with respect to strategic plans;revenues; financial results; backlog balance; trends in the industries thatconsume the Company’s products; global economic and political conditions;production levels at the Company’s Kokomo, Indiana facility; commercializationof the Company’s production capacity; and the Company’s ability to develop newproducts.  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.*

 

*TheCompany has based these forward-looking statements on its current expectationsand projections about future events.  Although the Company believes thatthe assumptions on which the forward-looking statements contained herein arebased are reasonable, any of those assumptions could prove to be inaccurate. Asa result, the forward-looking statements based upon those assumptions alsocould be incorrect.  Risks and uncertainties, some of which are discussedin Item 1A. of Part 1 to the Company’s Annual Report on Form 10-K forthe fiscal year ended September 30, 2009, may affect the accuracy offorward looking statements.*

 

*TheCompany undertakes no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.*

 

**Business Overview**

 

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 sold primarily in the aerospace, chemical processing and land-basedgas turbine industries. The Company’s products consist of high temperatureresistant alloys, or HTA products, and corrosion resistant alloys, or CRAproducts.  HTA products are used bymanufacturers of equipment that is subjected to extremely high temperatures,such as jet engines for the aerospace market, gas turbine engines used forpower generation and waste incineration, and industrial heating equipment.  CRA products are used in applications thatrequire resistance to very corrosive media found in chemical processing, powerplant emissions control and hazardous waste treatment.  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 inslab, bar, 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 wire products.  TheCompany markets its products primarily through its direct sales organization,which includes 12 service and/or sales centers in the United States, Europe,Asia and India. All of these centers are company-operated.

 

**Significant Events**

 

*Declarationof Dividend*

 

In the firstquarter of fiscal 2010, the Company declared the first quarterly cash dividendin its history.  On November 23,2009, the Company announced that the Board of Directors initiated a quarterlycash dividend of $0.20 per outstanding share of the Company’s commonstock.  The dividend was paidDecember 15, 2009 to 

 

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stockholders of record atthe close of business on December 3, 2009. The aggregate dividend cash pay-out was approximately $2.4 million forthe quarter based on shares outstanding, and equal to approximately $9.6 millionon an annualized basis.

 

The Company announcedthat the Board of Directors declared a regular quarterly cash dividend of $0.20per outstanding share of the Company’s common stock.  The dividend is payable March 15, 2010to stockholders of record at the close of business on March 1, 2010.

 

**Outlook**

 

*General*

 

It appears thatdemand has stabilized, but it continues to be at low levels and it does notappear demand will significantly improve in the next two quarters.  The Company expects that net revenues for thesecond and third quarters of fiscal 2010 will be similar to the amount recordedin the first quarter of fiscal 2010. Management believes that the Company’s net income will range frombreak-even to a small loss in the second quarter and from break-even to a smallprofit in the third quarter.  Results forfiscal 2010 will continue to be unfavorably impacted by both reduced absorptionof fixed manufacturing costs, which translates into increased cost of goodssold per pound, and by the competitive environment, which places downwardpressure on prices. A portion of this reduced absorption will continue to beoffset by lower spending from the cost saving initiatives undertaken in fiscal2009.

 

*Backlog*

 

Slightly improvingorder entry activity in the first quarter of fiscal 2010 contributed to a slightimprovement in backlog at December 31, 2009 as compared toSeptember 30, 2009.  Backlog dollars were $110.4 million atDecember 31, 2009, an increase of approximately 3.5% from $106.7 millionat September 30, 2009.  This increase is the result of an 8.2%increase in backlog pounds, which was partially offset by a 4.3% decline inbacklog average selling price.  Management expects the backlog to improvemodestly through the second and third quarters of fiscal 2010.  Theimprovement in backlog may begin to positively impact net revenues in thefourth quarter of fiscal 2010.

 

Backlog dollars atDecember 31, 2009 declined by approximately 45% from backlog dollars of$199.7 million at December 31, 2008.  Backlog pounds declined by approximately 33%and backlog average selling price declined by approximately 17% during the sameperiod, primarily due to decreased activity in the Company’s end markets andcontinued price competition.

 

*Competition*

 

In the firstquarter of fiscal 2010, the Company continued to experience price competitionfrom competitors who produce both stainless steel and high-performance alloysdue primarily to the continued weakness in both the high-performance alloymarket and in the stainless market.  Thiscompetition has required the Company to continue to aggressively price orders,which has continued to impact the Company’s gross profit margin and netincome.  However, there are indicationsthat both the stainless and high-performance alloy markets will begin toimprove in calendar 2010.  If thisimprovement materializes and continues, pricing competition in thehigh-performance alloy industry may begin to ease in future quarters.  The Company continues to respond to thecompetition by increasing emphasis on service centers, offering value-addedservices, improving its cost structure, and striving to improve delivery-timesand reliability.

 

InDecember 2009, the Company announced that it would be raising base pricesbetween 6% to 8% for all alloys, however, it is not yet known if these price increaseswill be accepted by the market due to the continuing uncertainty in the globaleconomy.  If the price increases areaccepted, it is likely that the Company will begin to see the effect beginningin the third quarter of fiscal 2010.

 

**Quarter over Quarter Gross ProfitMargin Trend**

 

Gross profit margin andgross profit margin percentage declined each quarter starting in the thirdquarter of fiscal 2008 through the third quarter of fiscal 2009.  In the fourth quarter of fiscal 2009 andfirst quarter of fiscal 2010, 

 

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however, both gross profit margin and gross profitmargin percentage have increased sequentially compared to the prior quarter.

 
| ** **             | ** ** | **Trend of Gross Profit Margin and********Gross Profit Margin Percentage for Fiscal 2009 and 2010** | ** ** |
|------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| ** **             | ** ** | **Quarter Ended**                                                                                   | ** ** |
| **(in  thousands)**    | ** ** | **December 31,  2008**                                                                         | ** ** | **March 31,********2009** | ** ** | **June 30,********2009** | ** ** | **September 30,  2009** | ** ** | **December 31,  2009** | ** ** |
| Net  Revenues          |       | $                                                                                                   | 134,304    |   | $ | 120,413 |   | $ | 98,325 |   | $ | 85,591 |   | $ | 81,008 |   |
| Gross  Profit Margin   |       | 18,750                                                                                              |       | 6,997 |   | (8,168 | ) | 4,904 |   | 6,848 |   |
| Gross  Profit Margin % |       | 13.9                                                                                                | %          | 5.8 | % | (8.3 | )% | 5.7 | % | 8.5 | % |
|                        |            |                                                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The sequentialimprovement in gross profit margin and gross profit margin percentageexperienced in the fourth quarter of fiscal 2009 and the first quarter offiscal 2010 were primarily due to a reduction in cost of goods sold perpound.  Cost of goods sold per pounddecreased as a result of reduced per pound manufacturing costs resultingprimarily from (i) a significant reduction in the amount of higher costraw material from inventory, which impacted costs of goods sold in the first,second and third quarters of fiscal 2009, (ii) manufacturing staffingreductions started in the second quarter of fiscal 2009 which continued throughthe fourth quarter of fiscal 2009, (iii) operating efficienciesattributable to equipment upgrades, particularly upgrades in the sheetfinishing operations and (iv) continued implementation of lean manufacturingtechniques.  The improvements in grossprofit margin were seen despite a reduction in net revenues of (i) $12.7million between the third and fourth quarters of fiscal 2009, and(ii) $4.6 million between the fourth quarter of fiscal 2009 and the firstquarter of fiscal 2010.

 

**Quarterly Market 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. This 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,  2008** | ** ** | **March 31,  2009** | ** ** | **June 30,  2009** | ** ** | **September 30,  2009** | ** ** | **December 31,  2009** | ** ** |
| **Backlog**(1)                     |       |                        |       |   |   |   |   |   |   |   |   |
| Dollars (in thousands)             |       | $                           | 199,667    |   | $ | 153,039 |   | $ | 113,420 |   | $ | 106,680 |   | $ | 110,406 |   |
| Pounds (in thousands)              |       | 7,287                       |       | 5,557 |   | 4,468 |   | 4,544 |   | 4,915 |   |
| Average selling price per pound    |       | $                           | 27.40      |   | $ | 27.54 |   | $ | 25.39 |   | $ | 23.48 |   | $ | 22.46 |   |
| ** **                         |       |                        |       |   |   |   |   |   |   |   |   |
| **Average nickel price per pound** |       |                        |       |   |   |   |   |   |   |   |   |
| London Metals Exchange(2)          |       | $                           | 4.39       |   | $ | 4.40 |   | $ | 6.79 |   | $ | 7.93 |   | $ | 7.75 |   |

 

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

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

 

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The Company’s financialperformance in the first quarter of fiscal 2010 is reflective of the continuedglobal economic slowdown and the corresponding caution being exhibited by theCompany’s customers.  Aggregate demand inthe Company’s markets declined through the course of fiscal 2009, as reflectedby decreases in net revenues, volume and pricing quarter-to-quarter in fiscal2009.  This decline in demand began withthe economic slowdown that started in calendar 2007 and was magnified by theglobal economic recession.  Competitioncontinued to increase through fiscal 2009, which correspondingly reducedearnings in fiscal 2009 as compared to fiscal 2008.  In the first quarter of fiscal 2010 netrevenues were lower than the fourth quarter of fiscal 2009 as a result of anaggregate lower average selling price due to the competitive environment, whilevolume between these two quarters was essentially flat. Management expects thatvolume and net revenues in the second and third quarters of fiscal 2010 willapproximate the levels of the first quarter of fiscal 2010.  Through the remainder of fiscal 2010, theoverall economic weakness, the competitive environment and the cautiousapproach of the Company’s customers to restocking will make improving netrevenues challenging.

 
| ** **                                                 | ** ** | **Quarter Ended**           | ** ** |
|------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                 | ** ** | **December 31,  2008** | ** ** | **March  31,  2009** | ** ** | **June  30,  2009** | ** ** | **September 30,  2009** | ** ** | **December 31,  2009** | ** ** |
| **Net revenues** (in  thousands)                           |       |                        |       |   |   |   |   |   |   |   |   |
| Aerospace                                                  |       | $                           | 49,721     |   | $ | 45,200 |   | $ | 34,959 |   | $ | 30,158 |   | $ | 28,375 |   |
| Chemical processing                                        |       | 30,883                      |       | 26,025 |   | 26,944 |   | 25,803 |   | 20,828 |   |
| Land-based gas turbines                                    |       | 32,145                      |       | 28,648 |   | 22,087 |   | 14,821 |   | 14,966 |   |
| Other markets                                              |       | 19,166                      |       | 17,562 |   | 11,529 |   | 11,152 |   | 13,080 |   |
| Total product revenue                                      |       | 131,915                     |       | 117,435 |   | 95,519 |   | 81,934 |   | 77,249 |   |
| Other revenue                                              |       | 2,389                       |       | 2,978 |   | 2,806 |   | 3,657 |   | 3,759 |   |
| **Net revenues**                                           |       | $                           | 134,304    |   | $ | 120,413 |   | $ | 98,325 |   | $ | 85,591 |   | $ | 81,008 |   |
|                                                       |       |                        |       |   |   |   |   |   |   |   |   |
| **Shipments by markets** (in thousands  of pounds)         |       |                        |       |   |   |   |   |   |   |   |   |
| Aerospace                                                  |       | 1,653                       |       | 1,648 |   | 1,387 |   | 1,261 |   | 1,221 |   |
| Chemical processing                                        |       | 947                         |       | 1,170 |   | 1,077 |   | 1,337 |   | 1,155 |   |
| Land-based gas turbines                                    |       | 1,507                       |       | 1,680 |   | 1,405 |   | 872 |   | 946 |   |
| Other markets                                              |       | 691                         |       | 871 |   | 511 |   | 467 |   | 605 |   |
| **Total shipments**                                        |       | 4,798                       |       | 5,369 |   | 4,380 |   | 3,937 |   | 3,927 |   |
|                                                       |       |                        |       |   |   |   |   |   |   |   |   |
| **Average selling price per pound**                        |       |                        |       |   |   |   |   |   |   |   |   |
| Aerospace                                                  |       | $                           | 30.08      |   | $ | 27.43 |   | $ | 25.20 |   | $ | 23.92 |   | $ | 23.24 |   |
| Chemical processing                                        |       | 32.61                       |       | 22.24 |   | 25.02 |   | 19.30 |   | 18.03 |   |
| Land-based gas turbines                                    |       | 21.33                       |       | 17.05 |   | 15.72 |   | 17.00 |   | 15.82 |   |
| Other markets                                              |       | 27.74                       |       | 20.16 |   | 22.56 |   | 23.88 |   | 21.62 |   |
| **Total product** (excluding  other revenue)               |       | 27.49                       |       | 21.87 |   | 21.81 |   | 20.81 |   | 19.67 |   |
| **Total  average selling price** (including other revenue) |       | 27.99                       |       | 22.43 |   | 22.45 |   | 21.74 |   | 20.63 |   |

 

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**Results of Operationsfor the Three Months Ended December 31, 2009 Compared to the Three MonthsEnded December 31, 2008**

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                                   | ** ** | **December 31,**            | ** ** | **Change** | ** ** |
| **($ in thousands)**               | ** ** | **2008**                         | ** ** | **2009**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| Net revenues                                 |       | $                                | 134,304    |       | 100.0      | %          | $          | 81,008 |   | 100.0 | % | (53,296 | ) | (39.7 | )% |
| Cost of sales                                |       | 115,554                          |       | 86.0       | %          | 74,163     |       | 91.6 | % | (41,391 | ) | (35.8 | )% |
| Gross profit                                 |       | 18,750                           |       | 14.0       | %          | 6,845      |       | 8.4 | % | (11,905 | ) | (63.5 | )% |
| Selling, general and  administrative expense |       | 10,590                           |       | 7.9        | %          | 8,186      |       | 10.1 | % | (2,404 | ) | (22.7 | )% |
| Research and technicalexpense                |       | 825                              |       | 0.6        | %          | 649        |       | 0.8 | % | (176 | ) | (21.3 | )% |
| Operating income (loss)                      |       | 7,335                            |       | 5.5        | %          | (1,990     | )          | (2.5 | )% | (9,325 | ) | (127.1 | )% |
| Interest income                              |       | (20                              | )          | 0.0        | %          | (45        | )          | 0.0 | % | (25 | ) | (125 | )% |
| Interest expense                             |       | 356                              |       | 0.3        | %          | 48         |       | 0.0 | % | (308 | ) | (86.5 | )% |
| Income (loss) before income taxes            |       | 6,999                            |       | 5.2        | %          | (1,993     | )          | (2.5 | )% | (8,992 | ) | (128.5 | )% |
| Provision for (benefit from) income taxes    |       | 2,475                            |       | 1.8        | %          | (707       | )          | (0.9 | )% | (3,182 | ) | (128.6 | )% |
| Net income (loss)                            |       | $                                | 4,524      |       | 3.4        | %          | $          | (1,286 | ) | (1.6 | )% | (5,810 | ) | (128.4 | )% |

 

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

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                                                 | ** ** | **December 31,**            | ** ** | **Change** | ** ** |
| **By market**                                         | ** ** | **2008**                         | ** ** | **2009**   | ** ** | **Amount** | ** ** | **%** | ** ** |
| **Net  revenues** (in thousands)                           |       |                             |       |       |       |       |       |   |   |
| Aerospace                                                  |       | $                                | 49,721     |       | $          | 28,375     |       | $ | (21,346 | ) | (42.9 | )% |
| Chemical processing                                        |       | 30,883                           |       | 20,828     |       | (10,055    | )          | (32.6 | )% |
| Land-based gas turbines                                    |       | 32,145                           |       | 14,966     |       | (17,179    | )          | (53.4 | )% |
| Other markets                                              |       | 19,166                           |       | 13,080     |       | (6,086     | )          | (31.8 | )% |
| **Total product revenue**                                  |       | 131,915                          |       | 77,249     |       | (54,666    | )          | (41.4 | )% |
| Other revenue                                              |       | 2,389                            |       | 3,759      |       | 1,370      |       | 57.3 | % |
| **Net revenues**                                           |       | $                                | 134,304    |       | $          | 81,008     |       | $ | (53,296 | ) | (39.7 | )% |
|                                                       |       |                             |       |       |       |       |       |   |   |
| **Pounds  by markets****(in thousands)                     |       |                             |       |       |       |       |       |   |   |
| Aerospace                                                  |       | 1,653                            |       | 1,221      |       | (432       | )          | (26.1 | )% |
| Chemical processing                                        |       | 947                              |       | 1,155      |       | 208        |       | 22.0 | % |
| Land-based gas turbines                                    |       | 1,507                            |       | 946        |       | (561       | )          | (37.2 | )% |
| Other markets                                              |       | 691                              |       | 605        |       | (86        | )          | (12.4 | )% |
| **Total shipments**                                        |       | 4,798                            |       | 3,927      |       | (871       | )          | (18.2 | )% |
|                                                       |       |                             |       |       |       |       |       |   |   |
| **Average  selling price per pound**                       |       |                             |       |       |       |       |       |   |   |
| Aerospace                                                  |       | $                                | 30.08      |       | $          | 23.24      |       | $ | (6.84 | ) | (22.7 | )% |
| Chemical processing                                        |       | 32.61                            |       | 18.03      |       | (14.58     | )          | (44.7 | )% |
| Land-based gas turbines                                    |       | 21.33                            |       | 15.82      |       | (5.51      | )          | (25.8 | )% |
| Other markets                                              |       | 27.74                            |       | 21.62      |       | (6.12      | )          | (22.1 | )% |
| **Total product**(excluding other revenue)                 |       | 27.49                            |       | 19.67      |       | (7.82      | )          | (28.4 | )% |
| **Total average selling price** (including  other revenue) |       | 27.99                            |       | 20.63      |       | (7.36      | )          | (26.3 | )% |

 

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*Net R*evenues.** Netrevenues were $81.0 million in the first quarter of fiscal 2010, a decrease39.7% from $134.3 million in the same period of fiscal 2009.   Volume was 3.9 million pounds in the firstquarter of fiscal 2010, a decrease of 18.2% from 4.8 million pounds in the sameperiod of fiscal 2009.  The aggregateaverage selling price was $20.63 per pound in the first quarter of fiscal 2010,a decrease of 26.3% from $27.99 per pound in the same period of fiscal2009.  As discussed above under “Outlook”,increased competition and the global economic recession continued tounfavorably impact both average selling price and volume in the first quarterof fiscal 2010 in most of the Company’s markets.  In addition, average selling price declineddue in part to continued weakness in customer demand, competition and areduction in raw material costs.  TheCompany’s consolidated backlog was $110.4 million at December 31, 2009, anincrease of 3.5% from $106.7 million at September 30, 2009.  This increase reflects the combination of an8.2% increase in backlog pounds partially offset by a 4.3% decrease in backlogaverage selling price.

 

Sales to the aerospacemarket were $28.4 million in the first quarter of fiscal 2010, a decrease of42.9% from $49.7 million in the same period of fiscal 2009, due to a 22.7%decrease in the average selling price per pound combined with a 26.1% decreasein volume. The volume decreased due to slowing market demand as reflected inthe reduction in air traffic and leaning out of the aero engine supply chain.

 

Sales to the chemicalprocessing market were $20.8 million in the first quarter of fiscal 2010, adecrease of 32.6% from $30.9 million in the same period of fiscal 2009, due toa 44.7% decrease in the average selling price per pound partially offset by a22.0% increase in volume.  Volume wasaffected by the project-oriented nature of the market where the comparisons ofvolume shipped between quarters can be affected by timing, quantity and ordersize of the project business which also impacts average selling price perpound.  In the first quarter of fiscal2010 there was an increased level of project business for commodity alloybillet versus the comparable quarter of fiscal 2009 which increased volume andlowered average selling price per pound. The decrease in average selling price also reflects a lower percentageof sales of specialty alloy product.

 

Sales to the land-basedgas turbine market were $15.0 million in the first quarter of fiscal 2010, adecrease of 53.4% from $32.1 million for the same period of fiscal 2009, due toa decrease of 25.8% in the average selling price per pound combined with a37.2% decrease in volume. The decrease in both volume and average selling priceis due to reduced original equipment manufacturer activity and increased pricecompetition.

 

Sales to other marketswere $13.1 million in the first quarter of fiscal 2010, a decrease of 31.8%from $19.2 million in the same period of fiscal 2009, due to a 22.1% decreasein average selling price per pound combined with a 12.4% decrease involume.  The decline in volume andaverage selling price reflects the economic slowdown and the continued increasein competition in many of these markets.

 

*Other Revenue.***Other revenue was $3.8 million in the first quarter offiscal 2010, an increase of 57.3% from $2.4 million in the same period offiscal 2009. The increase is due primarily to higher scrap and miscellaneoussales.

 

*Cost of Sales.* Cost ofsales was $74.2 million, or 91.6% of net revenues, in the first quarter offiscal 2010 compared to $115.6 million, or 86.0% of net revenues, in the sameperiod of fiscal 2009. Cost of sales in the first quarter of fiscal 2010decreased by $41.4 million as compared to the same period of fiscal 2009 due tolower volume, lower material costs, reduced spending and workforcereductions.  This decrease was partiallyoffset by reduced absorption of fixed manufacturing costs caused by lowerproduction volumes, particularly that of sheet product.  Cost of sales as a percentage of net revenuesincreased in the first quarter of fiscal 2010 as compared to the same period offiscal 2009 due to increased price competition and weaker demand, which reducednet revenues.

 

*Selling, General and Administrative Expense.* Selling,general and administrative expense was $8.2 million for the first quarter offiscal 2010, a decrease of $2.4 million, or 22.7%, from $10.6 million in thesame period of fiscal 2009 due primarily to: (i) lower business activitycausing commissions and sales expenses to decline, and (ii) significantworkforce reductions in the second and fourth quarters of fiscal 2009.  Selling, general and administrative expensesas a percentage of net revenues increased to 10.1% for the first quarter offiscal 2010 compared to 7.9% for the same period of fiscal 2009 due primarilyto reduced revenues.

 

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*Research and Technical Expense.* Researchand technical expense was $0.6 million, or 0.8% of revenue, for the firstquarter of fiscal 2010, a decrease of $0.2 million from $0.8 million, or0.6% of net revenues, in the same period of fiscal 2009, due to the reductionin workforce during the second and fourth quarters of fiscal 2009.

 

*Operating Income (Loss).* As a resultof the above factors, operating loss in the first quarter of fiscal 2010 was$(2.0) million compared to operating income of $7.3 million in the same periodof fiscal 2009.

 

*Income Taxes.* Incometaxes were a benefit of $0.7 million in the first quarter of fiscal 2010, adecrease of $3.2 million from an expense of $2.5 million in the same period offiscal 2009, due to a pretax loss.  The effectivetax rate for the first quarter of fiscal 2010 was 35.5%, compared to 35.4% inthe same period of fiscal 2009.

 

*Net Income (Loss).* As a result of the above factors, netloss in the first quarter of fiscal 2010 was $(1.3) million, a decrease of $5.8million from net income of $4.5 million in the same period of fiscal 2009.

 

**Liquidityand Capital Resources**

 

*Comparativecash flow analysis*

 

During the first quarter of fiscal 2010, theCompany’s primary sources of cash were cash from operations and cashon-hand.  At December 31, 2009, theCompany had cash and cash equivalents of approximately $97.5 million comparedto cash and cash equivalents of approximately $105.1 million at September 30,2009.

 

Net cash used in operating activities was$0.1 million in the first quarter of fiscal 2010 compared to net cash providedby operating activities of $13.9 million in the same period of fiscal2009.  Several items contributed to thedifference.  Cash used from increasedaccounts receivable of $0.2 million was $18.5 million higher than cash providedby accounts receivable in the same period of fiscal 2009.  Cash used from increased inventory balances(net of foreign currency fluctuation) of $3.6 million was $13.0 million higherthan cash provided by decreased inventory balances in the same period of fiscal2009.  Offsetting the above items, cashgenerated from income taxes of $6.9 million was $19.6 million higher than cashused by income taxes in the same period of fiscal 2009.  Net cash used in capital expenditures was$5.1 million in the first quarter of fiscal 2010 compared to $2.7 million inthe first quarter of fiscal 2009 primarily as a result of higher capitalexpenditures.  Net cash used in financingactivities in the first quarter of fiscal 2010 included a $2.4 million dividendpayment.

 

*Futuresources of liquidity*

 

The Company’s sources of cash for fiscal 2010 are expected to consistprimarily of cash generated from operations, cash on-hand, and borrowings underthe U.S. revolving credit facility.  TheU.S. revolving credit facility provides borrowings in a maximum amount of$120.0 million, subject to a borrowing base formula and certain reserves. At December 31,2009, the Company had cash of approximately $97.5 million, an outstandingbalance of zero on the U.S. revolving credit facility and access to a total ofapproximately $120.0 million under the U.S. revolving credit facility, subjectto borrowing base and certain reserves. Management believes that the resourcesdescribed above will be sufficient to fund planned capital expenditures andworking capital requirements over the next twelve months.

 

U.S. revolvingcredit facility:   Haynes and Wachovia Capital FinanceCorporation (Central) (“Wachovia”) entered into a Second Amended and RestatedLoan and Security Agreement (the “Amended Agreement”) with an effective date ofNovember 18, 2008, which amended and restated the revolving credit facilitybetween Haynes and Wachovia dated August 31, 2004. Among other items, theAmended Agreement extends the maturity date of the U.S. revolving creditfacility to September 30, 2011, increases the margin included in the interestrate from 1.5% per annum to 2.25% per annum for LIBOR borrowings, permits theCompany to pay dividends and repurchase common stock if certain financialmetrics are met, and eliminates the EBITDA covenant. The maximum revolving loanamount under the Amended Agreement continues to be $120.0 million. Borrowingsunder the U.S. revolving credit facility bear interest at the Company’s optionat 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 December 31, 2009, theU.S. revolving credit facility had an outstanding balance of zero. During thethree month period ended December 31, 2009 it bore interest at a weightedaverage interest rate of 5.00%.  Inaddition, the Company must pay monthly in arrears a commitment fee of 0.375%per annum on the unused amount of the U.S.

 

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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 December 31,2009, the most recent required measurement date under the Amended Agreement,the Company was in compliance with these covenants.  The U.S. revolving credit facility matures onSeptember 30, 2011. Borrowings under the U.S. revolving credit facility arecollateralized by a pledge of substantially all of the U.S. assets of the Company,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.

 

*FutureUses of Liquidity*

 

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

 

·      fundingoperations;

 

·      pension planfunding;

 

·      capitalspending; and

 

·      dividends tostockholders.

 

In fiscal 2010, capital spending is targeted atapproximately $15.0 million with approximately $5.1 million spent in the firstquarter of fiscal 2010.  The focus of thecapital spending is on recurring equipment requirements of approximately $9.0million and approximately $6.0 million on the upgrade of the four-high Steckelrolling mill.  The Company recentlyannounced plans to spend approximately $85.0 million over the next five yearson capital projects which focus on improving the capability of the Company’sproduction assets. Included in the $85.0 million total spending isapproximately $10.0 million to be spent over the course of fiscal 2010 and 2011to restructure, consolidate and enhance capabilities at its service centeroperations to improve the return on assets invested in the servicecenters.  Additionally, the Company plansto spend approximately $30.0 million (or $6.0 million per year) on upgrades toits four-high Steckel rolling mill and supporting equipment, and approximately$25.0 million (or $5.0 million per year) on other equipment purchases andupgrades.  These projects are expected toimprove quality, reduce operating costs, improve delivery performance anddecrease cycle time.  The Companyanticipates that it will continue to spend approximately $4.0 million per yearon routine capital maintenance projects over the same five-year period.  Management does not anticipate prolongedequipment outages as a result of upgrades in fiscal 2010.

 

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*ContractualObligations*

 

Thefollowing table sets forth the Company’s contractual obligations for theperiods indicated, as of December 31, 2009:

 

(in thousands)

 
| ** **                              | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations****(1)** | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 years** | ** ** |
|                                    | ** ** |                                      | ** ** |   | ** ** |   | ** ** |   |   |   |   |
| Debt obligations                        |       | $                                         | 893        |   | $ | 510 |   | $ | 383 |   | — |   | — |   |
| Operating lease obligations             |       | 13,144                                    |       | 3,321 |   | 3,870 |   | $ | 2,330 |   | $ | 3,623 |   |
| Capital lease obligations               |       | 321                                       |       | 33 |   | 66 |   | 66 |   | 156 |   |
| Raw material contracts                  |       | 33,906                                    |       | 28,341 |   | 5,565 |   | — |   | — |   |
| Natural gas hedge                       |       | 845                                       |       | 845 |   | — |   | — |   | — |   |
| Mill supplies contracts                 |       | 92                                        |       | 92 |   | — |   | — |   | — |   |
| Capital projects                        |       | 4,320                                     |       | 4,320 |   | — |   | — |   | — |   |
| Pension plan**(2)**                     |       | 81,835                                    |       | 14,410 |   | 28,000 |   | 26,350 |   | 13,075 |   |
| FAS 87 NQ pension plan                  |       | 869                                       |       | 95 |   | 190 |   | 190 |   | 394 |   |
| Other postretirement benefits**(3)**    |       | 49,800                                    |       | 4,800 |   | 10,000 |   | 10,000 |   | 25,000 |   |
| Non-compete obligations**(4)**          |       | 110                                       |       | 110 |   | — |   | — |   | — |   |
| Total                                   |       | $                                         | 186,136    |   | $ | 56,877 |   | $ | 48,074 |   | $ | 38,936 |   | $ | 42,249 |   |

 

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(1)    Taxes are notincluded in the table.  The Companyadopted the provisions of FIN No. 48, Accounting for Uncertainty in IncomeTaxes, on October 1, 2007.  As of December 31,2009, the non-current income taxes payable was $292.  It is not possible to determine in whichperiod the tax liability might be paid out.

(2)    The Company hasa funding obligation to contribute $80,875 to the domestic pension plan arisingfrom the Pension Protection Act of 2006. These payments will be tax deductible.All benefit payments under the domestic pension plan are provided by the planand not the Company. The Company expects its U.K. subsidiary to contribute $960in fiscal 2010 to the U.K. Pension Plan.

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

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

 

**New Accounting Pronouncements**

 

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

 

In December 2008,the FASB issued FASB Staff Position No. 132(R)-1, *Employers’Disclosures about Postretirement Benefit Plan Assets*which wasprimarily codified into Topic 715 *(Compensation RetirementBenefits)* in the ASC.  Theguidance requires disclosures of the objectives of postretirement benefit planassets, investment policies and strategies, categories of plan assets, fairvalue measurements of plan assets, and significant concentrations of risk.  This guidance is effective for fiscal yearsand interim periods beginning after December 15, 2009.  The adoption of this guidance is expected toincrease our disclosures, but it is not expected to have an impact on ourconsolidated financial statements.

 

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**Critical Accounting Policies and Estimates**

 

*Overview*

 

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

 

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, 2009, filed by the Company with theSecurities and Exchange Commission. The Company has identified certain criticalaccounting policies, which are described below. The following listing ofpolicies is not intended to be a comprehensive list of all of the Company’saccounting policies. In many cases, the accounting treatment of a particulartransaction is specifically dictated by generally accepted accountingprinciples, with no need for management’s judgment in their application. Thereare also areas in which management’s judgment in selecting any availablealternative would not produce a materially different result.

 

*RevenueRecognition*

* *

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

 

*Pensionand Postretirement Benefits*

* *

The Company has definedbenefit pension and postretirement 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 planassets (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 postretirement 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 be requiredin future periods.

 

The Company believes theexpected rate of return on plan assets of 8.5% is a reasonable assumption on along-term perspective based on its asset allocation of 58% equity, 41% fixedincome and 1% other. The Company’s assumption for expected rate of return forplan assets for equity, fixed income, and real estate/other are 10.25%, 5.5%and 8.5%, respectively. This position is supported through a review ofinvestment criteria, and consideration of historical returns over a several yearperiod.

 

In the short-term,substantial decreases in plan assets will result in higher plan fundingcontribution levels and higher pension expenses.  A decrease of 25 basis points in the expectedlong-term rate of return on plan assets would result in an increase in annualpension expense of about $260,000.  Tothe extent that the actual return on plan assets during the year exceeds orfalls short of the assumed long-term rate of return, an asset gain or loss iscreated.  Gains and losses are generallyamortized over a 7-year period.  As anexample, each $1.0 million in asset

 

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loss created byunfavorable investment performance results in seven annual payments(contributions) of approximately $180,000 depending upon the precise effectiveinterest rate in the valuation and the timing of the contribution.

 

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

 

*Impairmentof Long-lived Assets and Other Intangible Assets*

* *

The Company reviews long-lived assets for impairment whenever events orcircumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of long-lived assets to be held and used ismeasured by a comparison of the carrying amount of the asset to the undiscountedfuture cash flows expected to be generated by the asset. If the carrying amountof an asset exceeds its estimated future cash flows, an impairment charge isrecognized in the amount by which the carrying amount exceeds the fair value ofthe asset. Assumptions and estimates with respect to estimated future cashflows used in the evaluation are subject to a high degree of judgment andcomplexity.

 

*Share-Based Compensation*

* *

*RestrictedStock Plan*

 

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

 

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

 

*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.

 

On October 1,2005, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 123(R),*Share-Based Payment*, which was primarilycodified into Topic 718 *(Compensation — StockCompensation)* in the ASC. The statement requires compensation costsrelated to share-based payment transactions to be recognized in the financialstatements. This statement applies to all awards granted after the effectivedate and to modifications, repurchases or cancellations of existing awards.Additionally, under the modified prospective method of adoption, the Companyrecognizes compensation expense for the portion of outstanding awards on theadoption date for which the requisite service period has not yet been renderedbased on

 

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the grant-date fair valueof those awards. The amount of compensation cost is measured based upon thegrant date fair value. The fair value of the option grants is estimated on thedate of grant using the Black-Scholes option pricing model with assumptions ondividend yield, risk-free interest rate, expected volatilities, expectedforfeiture rate, and expected lives of the options.

 

*Income Taxes*

* *

The Company accounts forincome taxes in accordance with SFAS No. 109, *Accountingfor Income Taxes* (“SFAS No. 109”), which was primarily codifiedinto Topic 740 (*Income Taxes*) inthe ASC, which requires deferred tax assets and liabilities be recognized usingenacted tax rates for the effect of temporary differences between book and taxbasis of recorded assets and liabilities. This guidance also requires deferredtax assets be reduced by a valuation allowance if it is more likely than notthat some portion or all of the deferred tax assets will not be realized. Thedetermination of whether or not a valuation allowance is needed is based uponan evaluation of both positive and negative evidence. In its evaluation of theneed for a valuation allowance, the Company assesses prudent and feasible taxplanning strategies. The ultimate amount of deferred tax assets realized couldbe different from those recorded, as influenced by potential changes in enactedtax laws and the availability of future taxable income.

 

On October 1,2007, the Company adopted FASB Interpretation No. 48 (“FIN 48”) *Accounting for Uncertainty in Income Taxes*, aninterpretation of SFAS 109, *Accounting for IncomeTaxes* which was primarily codified into Topic 740-10 (*Income Taxes > Overall)* in the ASC.  Thisguidance prescribes a recognition threshold and measurement attribute forfinancial statement recognition and measurement of tax positions taken orexpected to be taken in an income tax return.  It also providesguidance related to reversal of tax positions, balance sheet classification,interest and penalties, interim period accounting, disclosure and transition.

 

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

 

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

 

Changes ininterest rates affect the Company’s interest expense on variable rate debt. Allof the Company’s outstanding debt was variable rate debt at December 31,2008 and 2009.  The Company’s outstandingvariable rate debt was zero at December 31, 2008 and 2009.  The Company has not entered into anyderivative instruments to hedge the effects of changes in interest rates.

 

The foreigncurrency exchange risk exists primarily because the foreign subsidiariesmaintain receivables and payables denominated in currencies other than theirfunctional currency or the U.S. dollar. The foreign subsidiaries manage theirown foreign currency exchange risk. The U.S. operations transact their foreignsales in U.S. dollars, thereby avoiding fluctuations in foreign exchange rates.Any currency exchange rate exposure aggregating more than $500,000 requiresapproval from the Company’s Chief Financial Officer. The Company is notcurrently party to any currency contracts.

 

Fluctuations inthe price of nickel, the Company’s most significant raw material, subject theCompany to commodity price risk. The Company manages its exposure to thismarket risk through internally established policies and procedures, includingnegotiating raw material escalators within product sales agreements, andcontinually monitoring and revising customer quote amounts to reflect thefluctuations in market prices for nickel. The Company does not presently usederivative instruments to manage this market risk, but may in the future. TheCompany monitors its underlying market risk exposure from a rapid change innickel prices on an ongoing basis and believes that it can modify or adapt itsstrategies as necessary. The Company periodically purchases raw materialforward with certain suppliers. However, there is a risk that the Company maynot be able to successfully offset a rapid increase in the cost of raw materialin the future as it has been able to in the past.

 

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 fixednatural gas price on a total of 300,000 MMBTU, at a settlement rate of 50,000MMBTU per month for a period spanning

 

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October 2009to March 2010.  As of December 31,2009, 150,000 MMBTU had been settled for a realized hedging loss of $219.  The Company’s unrealized hedging gain was $1at December 31, 2009.  On ahypothetical basis, a $1.00 per MMBTU decrease in the market price of naturalgas is estimated to have an unfavorable impact of $150 of unrealized hedgingloss for the period ended December 31, 2009 as a result of the commodityswap-cash settlement agreement.

 

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

 

The Company hasperformed, under the supervision and with the participation of the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, an evaluation of the effectiveness and the design and operation of theCompany’s disclosure controls and procedures (as defined by Exchange Act rules 13a-15(e) and15d-15(e)) pursuant to Rule 13a-15(b) of the Exchange Act as of theend of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures were effective as of December 31, 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 has materially affected, or is 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: February 8,  2010           |
|   |                                   |
|   |                                   |
|   | */s/ Marcel Martin*                    |
|   | Marcel Martin                          |
|   | Vice President, Finance                |
|   | Chief Financial Officer                |
|   | Date: February 8,  2010           |

 

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**INDEX TO EXHIBITS**

 
| **Number  Assigned In  Regulation  S-K****Item 601** | ** ** | ** ** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                    |
|------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                 |       |       |       |                                                                                                                                                                                                                                          |
| (3)                                                  |       | 3.01       |       | Restated Certificate of Incorporation of Haynes  International, Inc. (incorporated by reference to Exhibit 3.1 to  the Haynes International, Inc. Registration Statement on Form S-1,  Registration No. 333-140194). |
|                                                 |       | 3.02       |       | Amended and Restated Bylaws of Haynes International, Inc.  (incorporated by reference to Exhibit 3.2 to the Haynes  International, Inc. Registration Statement on Form S-1,  Registration No. 333-140194).           |
| (4)                                                  |       | 4.01*      |       | Specimen  Common Stock Certificate.                                                                                                                                                                                                           |
|                                                 |       | 4.02       |       | Restated  Certificate of Incorporation of Haynes International, Inc. (incorporated  by reference to Exhibit 2.1 to the Haynes International, Inc.  Registration Statement on Form S-1, Registration No. 333-140194). |
|                                                 |       | 4.03       |       | Amended and  Restated By-laws of Haynes International, Inc. (incorporated by  reference to Exhibit 2.2 to the Haynes International, Inc.  Registration Statement on Form S-1, Registration No. 333-140194).          |
| (10)                                                 |       | 10.01      |       | Summary of 2010  Management Incentive Plan (incorporated by reference to Item 5.02 of the  Haynes International, Inc. Form 8-K filed October 23, 2009).                                                                        |
| (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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