Haynes International (HAYN) 10-Q 2020 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March  31, 2020

or

☐ 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 (State or other jurisdiction of incorporation or organization)	06-1185400 (I.R.S. Employer Identification No.)
1020 West Park Avenue, Kokomo, Indiana (Address of principal executive offices)	46904-9013 (Zip Code)

Registrant’s telephone number, including area code (765) 456-6000

Securities registered pursuant to Section 12(b) of the Act:
Tile of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $.001 per share	“HAYN”	NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐

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

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company☐
	Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of April 30, 2020, the registrant had 12,556,921 shares of Common Stock, $.001 par value, outstanding.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements of Haynes International, Inc. and Subsidiaries	3
	Consolidated Balance Sheets (Unaudited) as of September 30, 2019 and March  31, 2020	3
	Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended March  31, 2019 and 2020	4
	Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Six Months Ended March  31, 2019 and 2020	5
	Consolidated Statement of Stockholders Equity (Unaudited) for the Three and Six Months Ended March  31, 2019 and 2020	6
	Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended March 31, 2019 and 2020	7
	Notes to Condensed Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
PART II	OTHER INFORMATION	32
Item 1a.	Risk Factors COVID-19	32
Item 6.	Exhibits	32
	Index to Exhibits	33
	Signatures	34

2

PART 1     FINANCIAL INFORMATION

Item 1.        Unaudited Condensed Consolidated Financial Statements

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share data)

	September 30,		March 31,
	2019		2020
ASSETS
Current assets:
Cash and cash equivalents	$	31,038	$	52,406
Accounts receivable, less allowance for doubtful accounts of $441 and $697 at September 30, 2019 and March 31, 2020, respectively		76,979		65,970
Inventories		258,802		280,337
Income taxes receivable		1,757		377
Other current assets		3,297		4,440
Total current assets		371,873		403,530
Property, plant and equipment, net		169,966		164,720
Deferred income taxes		34,132		34,666
Other assets		7,756		9,895
Goodwill		4,789		4,789
Other intangible assets, net		5,284		5,184
Total assets	$	593,800	$	622,784
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	34,497	$	28,310
Accrued expenses		18,833		17,810
Income taxes payable		—		70
Accrued pension and postretirement benefits		4,250		4,250
Revolving credit facilities		—		30,000
Deferred revenue—current portion		2,500		2,500
Total current liabilities		60,080		82,940
Long-term obligations (less current portion) (Note 15)		8,609		8,598
Deferred revenue (less current portion)		15,329		14,079
Deferred income taxes		2,016		2,016
Operating lease liabilities		—		2,306
Accrued pension benefits (less current portion)		101,812		98,523
Accrued postretirement benefits (less current portion)		109,679		110,710
Total liabilities		297,525		319,172
Commitments and contingencies (Note 7)		—		—
Stockholders’ equity:
Common stock, $0.001 par value (40,000,000 shares authorized, 12,566,969 and 12,615,830 shares issued and 12,513,500 and 12,556,921 shares outstanding at September 30, 2019 and March 31, 2020, respectively)		13		13
Preferred stock, $0.001 par value (20,000,000 shares authorized, 0 shares issued and outstanding)		—		—
Additional paid-in capital		253,843		255,896
Accumulated earnings		125,296		140,297
Treasury stock, 53,469 shares at September 30, 2019 and 58,909 shares at March 31, 2020		(2,239)		(2,437)
Accumulated other comprehensive loss		(80,638)		(90,157)
Total stockholders’ equity		296,275		303,612
Total liabilities and stockholders’ equity	$	593,800	$	622,784

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

3

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

	Three Months Ended March 31,				Six Months Ended March 31,
	2019		2020		2019		2020
Net revenues	$	127,474	$	111,563	$	234,543	$	220,016
Cost of sales		112,791		92,267		208,525		181,977
Gross profit		14,683		19,296		26,018		38,039
Selling, general and administrative expense		10,663		10,785		21,791		22,292
Research and technical expense		859		1,028		1,693		1,910
Operating income		3,161		7,483		2,534		13,837
Nonoperating retirement benefit expense		856		1,700		1,712		3,400
Interest income		(18)		(10)		(38)		(24)
Interest expense		284		296		525		547
Income before income taxes		2,039		5,497		335		9,914
Provision for income taxes		530		1,429		429		2,578
Net income (loss)	$	1,509	$	4,068	$	(94)	$	7,336
Net income (loss) per share:
Basic	$	0.12	$	0.32	$	(0.01)	$	0.58
Diluted	$	0.12	$	0.32	$	(0.01)	$	0.58
Weighted Average Common Shares Outstanding
Basic		12,449		12,474		12,440		12,467
Diluted		12,600		12,504		12,440		12,497
Dividends declared per common share	$	0.22	$	0.22	$	0.44	$	0.44

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

4

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

	Three Months Ended March 31,				Six Months Ended March 31,
	2019		2020		2019		2020
Net income (loss)	$	1,509	$	4,068	$	(94)	$	7,336
Other comprehensive income (loss), net of tax:
Pension and postretirement		579		1,720		1,159		3,439
Foreign currency translation adjustment		1,031		(3,918)		(140)		325
Other comprehensive income (loss)		1,610		(2,198)		1,019		3,764
Comprehensive income	$	3,119	$	1,870	$	925	$	11,100

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

5

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(in thousands, except share data)

	Three Months Ended March 31, 2019
										Accumulated
				Additional						Other		Total
	Common Stock			Paid-in		Accumulated		Treasury		Comprehensive		Stockholders’
	Shares	Par		Capital		Earnings		Stock		Income (Loss)		Equity
Balance December 31, 2018	12,517,492	$	13	$	251,718	$	122,226	$	(2,177)	$	(43,156)	$	328,624
Net income (loss)							1,509						1,509
Dividends paid and accrued ($0.22 per share)							(2,758)						(2,758)
Other comprehensive income (loss)											1,610		1,610
Issue restricted stock (less forfeitures)	(2,012)												—
Stock compensation					707								707
Balance March 31, 2019	12,515,480	$	13	$	252,425	$	120,977	$	(2,177)	$	(41,546)	$	329,692
	Three Months Ended March 31, 2020
										Accumulated
				Additional						Other		Total
	Common Stock			Paid-in		Accumulated		Treasury		Comprehensive		Stockholders’
	Shares	Par		Capital		Earnings		Stock		Income (Loss)		Equity
Balance December 31, 2019	12,556,255	$	13	$	254,999	$	139,010	$	(2,437)	$	(87,959)	$	303,626
Net income (loss)							4,068						4,068
Dividends paid and accrued ($0.22 per share)							(2,781)						(2,781)
Other comprehensive income (loss)											(2,198)		(2,198)
Issue restricted stock (less forfeitures)	666												—
Stock compensation					897								897
Balance March 31, 2020	12,556,921	$	13	$	255,896	$	140,297	$	(2,437)	$	(90,157)	$	303,612
	Six Months Ended March 31, 2019
										Accumulated
				Additional						Other		Total
	Common Stock			Paid-in		Accumulated		Treasury		Comprehensive		Stockholders’
	Shares	Par		Capital		Earnings		Stock		Income (Loss)		Equity
Balance September 30, 2018	12,504,478	$	13	$	251,053	$	126,588	$	(1,869)	$	(42,565)	$	333,220
Net income (loss)							(94)						(94)
Dividends paid and accrued ($0.44 per share)							(5,517)						(5,517)
Other comprehensive income (loss)											1,019		1,019
Exercise of stock options	12,084				215								215
Issue restricted stock (less forfeitures)	8,144												—
Purchase of treasury stock	(9,226)								(308)				(308)
Stock compensation					1,157								1,157
Balance March 31, 2019	12,515,480	$	13	$	252,425	$	120,977	$	(2,177)	$	(41,546)	$	329,692
	Six Months Ended March 31, 2020
										Accumulated
				Additional						Other		Total
	Common Stock			Paid-in		Accumulated		Treasury		Comprehensive		Stockholders’
	Shares	Par		Capital		Earnings		Stock		Income (Loss)		Equity
Balance September 30, 2019	12,513,500	$	13	$	253,843	$	125,296	$	(2,239)	$	(80,638)	$	296,275
Net income (loss)							7,336						7,336
Dividends paid and accrued ($0.44 per share)							(5,618)						(5,618)
Other comprehensive income (loss)											3,764		3,764
Exercise of stock options	12,400				422								422
Reclass due to adoption of ASU 2018-02							13,283				(13,283)		—
Issue restricted stock (less forfeitures)	36,461												—
Purchase of treasury stock	(5,440)								(198)				(198)
Stock compensation					1,631								1,631
Balance March 31, 2020	12,556,921	$	13	$	255,896	$	140,297	$	(2,437)	$	(90,157)	$	303,612

The accompanying notes are an integral part of these financial statements

6

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Six Months Ended March 31,
	2019		2020
Cash flows from operating activities:
Net income (loss)	$	(94)	$	7,336
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		9,296		9,639
Amortization		155		100
Pension and post-retirement expense - U.S. and U.K.		4,487		6,897
Change in long-term obligations		—		(24)
Stock compensation expense		1,157		1,631
Deferred revenue		(1,250)		(1,250)
Deferred income taxes		238		(1,782)
Loss on disposition of property		5		—
Change in assets and liabilities:
Accounts receivable		(7,765)		11,122
Inventories		969		(21,192)
Other assets		(846)		(961)
Accounts payable and accrued expenses		4,124		(7,668)
Income taxes		4,788		1,447
Accrued pension and postretirement benefits		(3,207)		(4,488)
Net cash provided by (used in) operating activities		12,057		807
Cash flows from investing activities:
Additions to property, plant and equipment		(5,409)		(4,100)
Net cash provided by (used in) investing activities		(5,409)		(4,100)
Cash flows from financing activities:
Revolving credit facility borrowings		16,600		30,000
Revolving credit facility repayments		(16,600)		—
Dividends paid		(5,505)		(5,523)
Proceeds from exercise of stock options		215		422
Payment for purchase of treasury stock		(308)		(198)
Payments on long-term obligation		(71)		(82)
Net cash provided by (used in) financing activities		(5,669)		24,619
Effect of exchange rates on cash		(1)		42
Increase (decrease) in cash and cash equivalents:		978		21,368
Cash, cash equivalents and restricted cash:
Beginning of period		9,802		31,038
End of period	$	10,780	$	52,406
Supplemental disclosures of cash flow information:
Interest (net of capitalized interest)	$	496	$	518
Income taxes paid (refunded), net	$	(4,636)	$	2,903
Capital expenditures incurred, but not yet paid	$	809	$	708
Dividends declared but not yet paid	$	12	$	95

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

7

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(in thousands, except share and per share data)

Note 1.  Basis of Presentation

Interim Financial Statements

The accompanying unaudited condensed interim consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), and such principles are applied on a basis consistent with information reflected in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019 filed with the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations promulgated by the SEC related to interim financial statements. In the opinion of management, the interim financial information includes all adjustments and accruals which are necessary for a fair presentation of results for the respective interim periods. The results of operations for the three and six months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full fiscal year ending September 30, 2020 or any interim period.

Principles of Consolidation

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

COVID-19 Pandemic

In March 2020, the World Health Organization characterized the coronavirus (“COVID-19”) a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency.  The rapid spread of the pandemic and the continuously evolving responses to combat it have had an increasingly negative impact on the global economy and our business.  Due to the widespread impact of the COVID-19 pandemic, the Company implemented a temporary shut-down of most of the Company’s production operations beginning the week of March 23, 2020, which impacted the last week of the second quarter.  The shut-down continued into the third quarter with operations resuming in mid-April in certain areas on a voluntary basis.  In view of the rapidly changing business environment, unprecedented market volatility and heightened degree of uncertainty resulting form COVID-19, we cannot reasonably estimate the length or severity of the pandemic or its impact on the Company’s liquidity, results of operations, and financial condition, which could have a material adverse effect.     

Note 2.  Recently Issued Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  This new guidance requires that a lessee recognize assets and liabilities on the balance sheet for all leases with a lease term of more than twelve months, with the result being the recognition of a right of use asset and a lease liability.  The new lease accounting requirements are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The Company adopted the provisions of ASU 2016-02 in the first quarter of fiscal year 2020 using the modified retrospective transition method, which did not require the Company to adjust comparative periods.  The Company’s right-of-use assets (“ROU”) and lease liabilities are recognized on the lease commencement date in an amount that represents the present value of future lease payments.  ROU assets are included in Other assets, and the related lease obligation is included in Operating lease liabilities on the consolidated balance sheets.  The adoption of the standard had no material impact on the Consolidated Financial Statements. 

The Company elected the package of practical expedients included in this guidance which allowed it to not reassess: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and, (iii) the initial direct costs for existing leases.  The Company has elected the practical expedient to not separate lease components from non-lease components for all asset classes.  The Company will recognize lease expense for operating leases in the consolidated statements of operations on a straight-line basis over the lease term.  The Company also made a policy election to not recognize ROU asset and lease liabilities for short-term leases with an initial term of 12 months or less for all asset classes.  Leases with the option to extend their term are reflected in the lease term when it is reasonably certain that the Company will exercise such options.  The Company has expanded the disclosure of operating leases included in Note 16.

8

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income (loss) to accumulated earnings for standard tax effects resulting from the Tax Cuts and Jobs Act.  This update is effective for fiscal years beginning after December 15, 2018.  The Company adopted the provisions of this standard in the first quarter of fiscal year 2020 which had an impact of increasing accumulated other comprehensive loss and increasing accumulated earnings by $13,283.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820).  This new guidance removes and modifies disclosure requirements on fair value statements.  This update is effective for fiscal years beginning after December 15, 2019.  The Company is currently evaluating the impact, if any, on its disclosures in the Notes to Consolidated Financial Statements.

In June 2016, the FASB issued ASU 2016-05, Financial Instruments – Credit Losses (Topic 326) which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology.  The new current expected credit loss (CECL) methodology does not have a minimum threshold for recognition of impairment losses, and entities will need to measure expected credit losses on assets that have a low risk of loss.  This update is effective for fiscal years beginning after December 15, 2019.  The Company is currently evaluating the impact, if any, on the Company’s Consolidated Financial Statements.

Note 3.  Revenues from Contracts with Customers

Contract Balances

As of September 30, 2019 and March 31, 2020, accounts receivable with customers were $77,420 and $66,667, respectively.  Allowance for doubtful accounts as of September 30, 2019 and March 31, 2020 were $441 and $697, respectively, and are presented within accounts receivable, less allowance for doubtful accounts on the consolidated balance sheet.   

Contract liabilities are recognized when the Company has received consideration from a customer to transfer goods or services at a future point in time when the Company performs under the purchase order or contract.  As of September 30, 2019 and March 31, 2020, no contract liabilities have been recorded except for $17,829 and $16,579, respectively, for the Titanium Metals Corporation agreement, as described in Note 8 to the Condensed Consolidated Financial Statements. 

Disaggregation of Revenue

Revenue is disaggregated by end-use markets.  The following table includes a breakdown of net revenues to the markets served by the Company for the three and six months ended March 31, 2019 and 2020.  

	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2019		2020		2019		2020
Net revenues (dollars in thousands)
Aerospace	$	68,858	$	59,172	$	123,465	$	118,015
Chemical processing		21,761		15,832		40,681		32,544
Industrial gas turbine		13,685		16,701		27,768		30,464
Other markets		16,958		12,762		31,243		24,637
Total product revenue		121,262		104,467		223,157		205,660
Other revenue		6,212		7,096		11,386		14,356
Net revenues	$	127,474	$	111,563	$	234,543	$	220,016

9

Note 4.  Inventories

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

	September 30,		March 31,
	2019		2020
Raw Materials	$	17,935	$	21,747
Work-in-process		138,859		142,879
Finished Goods		100,590		114,165
Other		1,418		1,546
	$	258,802	$	280,337

Note 5.  Income Taxes

Income tax expense for the three and six months ended March 31, 2019 and 2020 differed from the U.S. federal statutory rate of 21.0%, primarily due to state income taxes,differing tax rates on foreign earnings and discrete tax items that impacted income tax expense in these periods.  The effective tax rate for the three months ended March 31, 2020 was 26.0% on $5,497 of income before income taxes compared to 26.0% on income before income taxes of $2,039 for the three months ended March 31, 2019.  The effective tax rate for the six months ended March 31, 2020 was 26.0% on $9,914 of income before income taxes compared to 128.1% on income before income taxes of $335 for the six months ended March 31, 2019.  Income tax expense in the first six months of fiscal 2019 was unfavorably impacted by the forfeiture of unexercised stock options, which resulted in approximately $300 of additional tax expense.

On Friday March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law.  The CARES Act contains significant business tax provisions, including modifications to the rules limiting the deductibility of net operating losses (NOLs), expensing of qualified improvement property (OIP) and business interest in IRC Sections 172(a) and 163(j), respectively.  The effects of the new legislation are recognized upon enactment, which (for U.S. federal legislation) is the date the President signs a bill into law.  There was not significant impact to income tax expense for the three and six months ended March 31, 2020 relating to the CARES Act.   

Note 6.  Pension and Post-retirement Benefits

Components of net periodic pension and post-retirement benefit cost for the three and six months ended March 31, 2019 and 2020 were as follows:

	Three Months Ended March 31,								Six Months Ended March 31,
	Pension Benefits				Other Benefits				Pension Benefits				Other Benefits
	2019		2020		2019		2020		2019		2020		2019		2020
Service cost	$	1,310	$	1,387	$	79	$	354	$	2,620	$	2,773	$	158	$	708
Interest cost		2,567		2,148		1,088		873		5,133		4,296		2,176		1,746
Expected return		(3,575)		(3,623)		—		—		(7,147)		(7,268)		—		—
Amortizations		401		1,859		372		462		803		3,718		744		924
Net periodic benefit cost	$	703	$	1,771	$	1,539	$	1,689	$	1,409	$	3,519	$	3,078	$	3,378

The Company contributed $3,000 to Company-sponsored domestic pension plans, $1,424 to its other post-retirement benefit plans and $370 to the U.K. pension plan for the six months ended March 31, 2020. The Company expects to make contributions of $3,000 to its U.S. pension plan, $2,730 to its other post-retirement benefit plan and $368 to the U.K. pension plan for the remainder of fiscal 2020.

Note 7.  Legal, Environmental and Other Contingencies

Legal

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

10

In January 2017, a customer based in the United Kingdom wrote to the Company making a claim in relation to certain product sold to that customer by the Company.  This writing was followed up by claim correspondence from 2018 through early 2020.  The Company has engaged its legal advisors in the United Kingdom to respond to the claim, and correspondence between the parties’ respective counsel remains ongoing.  To date, the insurers have not accepted coverage responsibility for the claim but have agreed to fund expenses of legal counsel selected by the Company through the date of the determination regarding coverage. The Company intends to pursue such coverage as and if necessary while vigorously defending against the customer claim. Liability for the claim is disputed, and the amount of the claim, if any, remains unclear.  Based on the facts presently known, management does not believe that the claim will have a material effect on the Company’s financial position, results of operations or cash flows.

Environmental

The Company has received permits from the Indiana Department of Environmental Management and the North Carolina Department of Environment and Natural Resources to close and provide post‑closure environmental monitoring and care for certain areas of its Kokomo, Indiana and Mountain Home, North Carolina facilities, respectively. 

The Company is required to, among other things, monitor groundwater and to continue post‑closure maintenance of the former disposal areas at each site. As a result, the Company is aware of elevated levels of certain contaminants in the groundwater, and additional testing and corrective action by the Company could be required.  The Company is unable to estimate the costs of any further corrective action at these sites, or other sites, if required.  In addition, the Company occasionally has regulatory violations that may be required to be reported at the state or federal level.  Accordingly, the Company cannot assure that the costs of any future corrective action at these or any other current or former sites would not have a material effect on the Company’s financial condition, results of operations or liquidity.

As of September 30, 2019 and March 31, 2020, the Company has accrued $606 for post-closure monitoring and maintenance activities, of which $508 is included in long-term obligations as it is not due within one year.  Accruals for these costs are calculated by estimating the cost to monitor and maintain each post-closure site and multiplying that amount by the number of years remaining in the post-closure monitoring.

Expected maturities of post-closure monitoring and maintenance activities (discounted) included in long-term obligations are as follows at March 31, 2020. 

Expected maturities of post-closure monitoring and maintenance activities (discounted)
Year Ended September 30,
2021	$	74
2022		64
2023		81
2024		60
2025 and thereafter		229
	$	508

On February 11, 2016, the Company voluntarily reported to the Louisiana Department of Environmental Quality a leak that it discovered in one of its chemical cleaning operations at its Arcadia, Louisiana facility.  As a result of the discovery, the Company is working with that department to determine the extent of the issue and appropriate remediation.  Management does not currently expect that any remediation costs related to this matter will have a material adverse effect on the Company’s results of operations.

Note 8.  Deferred Revenue

On November 17, 2006, the Company entered into a twenty-year agreement to provide conversion services to Titanium Metals Corporation (TIMET) for up to ten million pounds of titanium metal annually. TIMET paid the Company a $50,000 up-front fee and will also pay the Company for its processing services during the term of the agreement (20 years) at prices established by the terms of the agreement. TIMET may exercise an option to have ten million additional pounds of titanium converted annually, provided that it offers to loan up to $12,000 to the Company for certain capital expenditures which may be required to expand capacity. In addition to the volume commitment, the Company has granted TIMET a first priority security interest in its four-high Steckel rolling mill, along with rights of access if the Company enters into bankruptcy or defaults on any financing arrangements. The Company has agreed not to manufacture titanium products (other than cold reduced titanium tubing). The Company has also agreed not to provide titanium hot-rolling conversion services to any entity other than TIMET for the term of the Conversion Services Agreement. The agreement contains certain default provisions which could result in contract termination and damages, including liquidated damages of $25,000 and the Company being required to return the unearned portion of the up-front fee. The Company considered each provision and the likelihood

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of the occurrence of a default that would result in liquidated damages. Based on the nature of the events that could trigger the liquidated damages clause, and the availability of the cure periods set forth in the agreement, the Company determined and continues to believe that none of these circumstances are reasonably likely to occur. Therefore, events resulting in liquidated damages have not been factored in as a reduction to the amount of revenue recognized over the life of the contract. The cash received of $50,000 is recognized in income on a straight-line basis over the 20-year term of the agreement. If an event of default occurred and was not cured within any applicable grace period, the Company would recognize the impact of the liquidated damages in the period of default and re-evaluate revenue recognition under the contract for future periods. The portion of the up-front fee not recognized in income is shown as deferred revenue on the consolidated balance sheet.

Note 9.  Goodwill and Other Intangible Assets, Net

The Company has goodwill, trademarks, customer relationships and other intangibles.  As the customer relationships have a definite life, they are amortized over a  life of sixteen years.  The Company reviews customer relationships for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the assets is measured by a comparison of the carrying amount of the asset to the undiscounted cash flows expected to be generated by the asset.   If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount exceeds the fair value of the asset. 

Goodwill and trademarks (indefinite lived) are tested for impairment at least annually as of January 31 for goodwill and August 31 for trademarks (the annual impairment testing dates), or more frequently if impairment indicators exist.  If the carrying value of a trademark exceeds its fair value (determined using an income approach, based upon a discounted cash flow of an assumed royalty rate), impairment of the trademark may exist resulting in a charge to earnings to the extent of the impairment.  The impairment test for goodwill is performed by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment loss in the event that the carrying amount is greater than the fair value.  Any goodwill impairment loss recognized would not exceed the total carrying amount of goodwill allocated to that reporting unit.  No impairment has been recognized as of March 31, 2020. 

During the first six months of fiscal 2020, there were no changes in the carrying amount of goodwill. 

Amortization of customer relationships and other intangibles was $50 and $49 for the three-month periods ended March 31, 2019 and 2020, respectively and $155 and $100 for the six-month periods ended March 31, 2019 and 2020, respectively.  The following represents a summary of intangible assets at September 30, 2019 and March 31, 2020.  

	Gross		Accumulated		Carrying
September 30, 2019	Amount		Amortization		Amount
Trademarks		3,800		—		3,800
Customer relationships		2,100		(718)		1,382
Other		291		(189)		102
	$	6,191	$	(907)	$	5,284

	Gross		Accumulated		Carrying
March 31, 2020	Amount		Amortization		Amount
Trademarks	$	3,800	$	—	$	3,800
Customer relationships		2,100		(789)		1,311
Other		291		(218)		73
	$	6,191	$	(1,007)	$	5,184

Estimated future Aggregate Amortization Expense:
Year Ended September 30,
2020	$	98
2021		185
2022		133
2023		129
2024		126
Thereafter		713

Note 10.  Net Income (Loss) Per Share

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The Company accounts for earnings per share using the two-class method. The two-class method is an earnings allocation that determines net income per share for each class of common stock and participating securities according to participation rights in undistributed earnings. Non-vested restricted stock awards that include non-forfeitable rights to dividends are considered participating securities.    Basic earnings per share is computed by dividing net income available to common stockholders for the period by the weighted average number of common shares outstanding for the period. The computation of diluted earnings per share is similar to basic earnings per share, except the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.

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The following table sets forth the computation of basic and diluted earnings (losses) per share for the periods indicated:

	Three Months Ended						Six Months Ended
	March 31,						March 31,
(in thousands, except share and per share data)	2019			2020			2019			2020
Numerator: Basic and Diluted
Net income (loss)	$	1,509		$	4,068		$	(94)		$	7,336
Dividends paid and accrued		(2,758)			(2,781)			(5,517)			(5,618)
Undistributed income (loss)		(1,249)			1,287			(5,611)			1,718
Percentage allocated to common shares (a)		100.0	%		99.3	%		100.0	%		99.3	%
Undistributed income (loss) allocated to common shares		(1,249)			1,279			(5,611)			1,707
Dividends paid on common shares outstanding		2,738			2,763			5,475			5,581
Net income (loss) available to common shares		1,489			4,042			(136)			7,288
Denominator: Basic and Diluted
Weighted average common shares outstanding		12,448,792			12,473,881			12,439,689			12,466,867
Adjustment for dilutive potential common shares		151,500			30,182			—			30,082
Weighted average shares outstanding - Diluted		12,600,292			12,504,063			12,439,689			12,496,949
Basic net income (loss) per share	$	0.12		$	0.32		$	(0.01)		$	0.58
Diluted net income (loss) per share	$	0.12		$	0.32		$	(0.01)		$	0.58
Number of stock option shares excluded as their effect would be anti-dilutive		313,028			561,457			313,787			561,457
Number of restricted stock shares excluded as their effect would be anti-dilutive		66,688			—			67,694			—
Number of deferred restricted stock shares excluded as their effect would be anti-dilutive		29,050			—			29,050			—
Number of performance share awards excluded as their effect would be anti-dilutive		55,762			—			49,432			—
(a) Percentage allocated to common shares - Weighted average
Common shares outstanding		12,448,792			12,473,881			12,439,689			12,466,867
Unvested participating shares		—			81,652			—			82,468
		12,448,792			12,555,533			12,439,689			12,549,335

Note 11.  Stock-Based Compensation

Restricted Stock

The following table summarizes the activity under the 2009 restricted stock plan and the 2016 and 2020 Incentive Compensation Plans with respect to restricted stock for the six months ended March 31, 2020:

		Weighted
		Average Fair
	Number of	Value At
	Shares	Grant Date
Unvested at September 30, 2019	61,838	$	34.94
Granted	37,011	$	36.67
Forfeited / Canceled	(550)	$	34.00
Vested	(16,647)	$	40.33
Unvested at March 31, 2020	81,652	$	34.62
Expected to vest	81,652	$	34.62

Compensation expense related to restricted stock for the three months ended March 31, 2019 and 2020 was $219 and $340, respectively, and for the six months ended March 31, 2019 and 2020 was $272 and $556, respectively. The remaining unrecognized compensation expense related to restricted stock at March 31, 2020 was $1,759, to be recognized over a weighted average period of 1.62 years.  During the first six months of fiscal 2020, the Company repurchased 5,440 shares of stock from employees at an average purchase price of $36.38 to satisfy required withholding taxes upon vesting of restricted stock-based compensation.

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Deferred Restricted Stock

The following table summarizes the activity under the 2016 and 2020 Incentive Compensation Plans with respect to deferred restricted stock for the six months ended March 31, 2020. 

		Weighted
		Average Fair
	Number of	Value At
	Shares	Grant Date
Unvested and deferred at September 30, 2019	12,500	$	33.98
Granted	7,449	$	33.39
Vested and deferred	(12,500)		33.98
Unvested and deferred at March 31, 2020	7,449	$	33.39
Vested and deferred at March 31, 2020	29,050	$	32.72

Compensation expense related to deferred restricted stock for the three months ended March 31, 2019 and 2020 was $106 and $58, respectively, and for the six months ended March 31, 2019 and 2020 was $229 and $143, respectively. The remaining recognized compensation expense related to deferred restricted stock at March 31, 2020 was $176, to be recognized over a weighted average period of 0.67 years.

Performance Shares

The following table summarizes the activity under the 2016 and 2020 Incentive Compensation Plans with respect to performance shares for the six months ended March 31, 2020. 

		Weighted
		Average Fair
	Number of	Value At
	Shares	Grant Date
Unvested at September 30, 2019	38,553	$	42.52
Granted	23,880	$	44.13
Unvested at March 31, 2020	62,433	$	43.14

Compensation expense related to the performance shares for the three months ended March 31, 2019 and 2020 was $204 and $238, respectively, and for the six months ended March 31, 2019 and 2020 was $325 and $414, respectively.  The remaining unrecognized compensation expense related to performance shares at March 31, 2020 was $1,606, to be recognized over a weighted average period of 1.69 years.

Stock Options

The Company has elected to use the Black-Scholes option pricing model to estimate fair value, which incorporates various assumptions including volatility, expected life, risk-free interest rates and dividend yields. The volatility is based on historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected term of the stock option granted. The Company uses historical volatility because management believes such volatility is representative of prospective trends. The expected term of an award is based on historical exercise data. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of the awards.  The dividend yield assumption is based on the Company’s history and expectations regarding dividend payouts at the time of the grant.   The following assumptions were used for grants during fiscal year 2020:

	Fair		Dividend		Risk-free		Expected		Expected
Grant Date	Value		Yield		Interest Rate		Volatility		Life
November 19, 2019	$	9.66	2.38	%	1.65	%	35	%	5	years

The stock-based employee compensation expense for stock options for the three months ended March 31, 2019 and 2020 was $178 and $261, respectively, and for the six months ended March 31, 2019 and 2020 was $331 and $518, respectively. The remaining unrecognized compensation expense at March 31, 2020 was $2,100, to be recognized over a weighted average vesting period of 2.00 years.

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The following table summarizes the activity under the stock option plans and the 2016 and 2020 Incentive Compensation Plans with respect to stock options for the six months ended March 31, 2020 and provides information regarding outstanding stock options:

						Weighted
		Aggregate		Weighted		Average
		Intrinsic		Average		Remaining
	Number of	Value		Exercise		Contractual
	Shares	(000s)		Prices		Life
Outstanding at September 30, 2019	482,391			$	38.05
Granted	91,466			$	37.00
Exercised	(12,400)			$	34.00
Outstanding at March 31, 2020	561,457	$	—	$	37.97	7.57	yrs.
Vested or expected to vest	519,065	$	—	$	37.90	7.64	yrs.
Exercisable at March 31, 2020	245,517	$	—	$	42.17	5.51	yrs.

Note 12.  Dividend

In the first and second quarters of fiscal 2020, the Company declared and paid quarterly cash dividends of $0.22 per outstanding share of the Company’s common stock.  The first quarter dividend was paid on December 16, 2019 to stockholders of record at the close of business on December 2, 2019 and the second quarter dividend was paid on March 16, 2020 to stockholders of record at the close of business on March 2, 2020.  The dividend cash pay-outs were $2,760 and $2,763 for the first and second quarters of fiscal 2020, respectively, and $77 and $18 of dividends were recorded as deferred in the first and second quarters, respectively.

On April 30, 2020, the Company announced that the Board of Directors declared a regular quarterly cash dividend of $0.22 per outstanding share of the Company’s common stock.  The dividend is payable June  15, 2020 to stockholders of record at the close of business on June 1, 2020.

Note 13.  Fair Value Measurements

The fair value hierarchy has three levels based on the inputs used to determine fair value.

Level 1 — Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 — Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly; and

Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

When available, the Company uses unadjusted quoted market prices to measure fair value and classifies such items within Level 1. If quoted market prices are not available, fair value is based upon internally-developed models that use, where possible, current market-based or independently-sourced market parameters such as interest rates and currency rates. Items valued using internally-generated models are classified according to the lowest level input or value driver that is significant to the valuation. If quoted market prices are not available, the valuation model used depends on the specific asset or liability being valued. The fair value of cash and cash equivalents is determined using Level 1 information.  The Company had no Level 2 or Level 3 assets or liabilities as of September 30, 2019 or March  31, 2020.    

U.S. and international equities, fixed income and other investments held in the Company’s pension plan are held in mutual funds and common / collective funds which are valued using net asset value (NAV) provided by the administrator of the fund.  The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding.  These investments are not classified in the fair value hierarchy in accordance with guidance included in ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).

Note 14.  Changes in Accumulated Other Comprehensive Income (Loss) by Component

Comprehensive income (loss) includes changes in equity that result from transactions and economic events from non-owner sources. Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss) items, including pension, post-retirement and foreign currency translation adjustments, primarily caused by the strengthening or weakening of the U.S. dollar against the British pound sterling, net of tax when applicable.

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Accumulated Other Comprehensive Income (Loss)

	Three Months Ended March 31, 2019
	Pension		Postretirement		Foreign
	Plan		Plan		Exchange		Total
Accumulated other comprehensive income (loss) as of December 31, 2018	$	(21,166)	$	(10,928)	$	(11,062)	$	(43,156)
Other comprehensive income (loss) before reclassifications		—		—		1,031		1,031
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of Pension and Postretirement Plan items (1)		52		—		—		52
Actuarial losses (1)		363		371		—		734
Tax benefit		(109)		(98)		—		(207)
Net current-period other comprehensive income (loss)		306		273		1,031		1,610
Accumulated other comprehensive income (loss) as of March 31, 2019	$	(20,860)	$	(10,655)	$	(10,031)	$	(41,546)
	Three Months Ended March 31, 2020
	Pension		Postretirement		Foreign
	Plan		Plan		Exchange		Total
Accumulated other comprehensive income (loss) as of December 31, 2019	$	(60,942)	$	(17,749)	$	(9,268)	$	(87,959)
Other comprehensive income (loss) before reclassifications		—		—		(3,918)		(3,918)
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of Pension and Postretirement Plan items (1)		52		—		—		52
Actuarial losses (1)		1,822		463		—		2,285
Tax benefit		(494)		(123)		—		(617)
Net current-period other comprehensive income (loss)		1,380		340		(3,918)		(2,198)
Accumulated other comprehensive income (loss) as of March 31, 2020	$	(59,562)	$	(17,409)	$	(13,186)	$	(90,157)
	Six Months Ended March 31, 2019
	Pension		Postretirement		Foreign
	Plan		Plan		Exchange		Total
Accumulated other comprehensive income (loss) as of September 30, 2018	$	(21,473)	$	(11,201)	$	(9,891)	$	(42,565)
Other comprehensive income (loss) before reclassifications		—		—		(140)		(140)
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of Pension and Postretirement Plan items (1)		103		—		—		103
Actuarial losses (1)		727		743		—		1,470
Tax benefit		(217)		(197)		—		(414)
Net current-period other comprehensive income (loss)		613		546		(140)		1,019
Accumulated other comprehensive loss as of March 31, 2019	$	(20,860)	$	(10,655)	$	(10,031)	$	(41,546)
	Six Months Ended March 31, 2020
	Pension		Postretirement		Foreign
	Plan		Plan		Exchange		Total
Accumulated other comprehensive income (loss) as of September 30, 2019	$	(53,811)	$	(13,316)	$	(13,511)	$	(80,638)
Other comprehensive income (loss) before reclassifications		—		—		325		325
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of Pension and Postretirement Plan items (1)		103		—		—		103
Actuarial losses (1)		3,642		925		—		4,567
Tax benefit		(987)		(244)		—		(1,231)
Net current-period other comprehensive income (loss)		2,758		681		325		3,764
Reclass due to adoption of ASU 2018-02		(8,509)		(4,774)		—		(13,283)
Accumulated other comprehensive loss as of March 31, 2020	$	(59,562)	$	(17,409)	$	(13,186)	$	(90,157)

(1) These accumulated other comprehensive income components are included in the computation of net periodic pension cost.

Note 15.  Long-term Obligations

The following table sets for the components of the Company’s Long-term obligations. 

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	September 30,		March 31,
	2019		2020
Finance lease obligations	$	7,979	$	7,896
Environmental post-closure monitoring and maintenance activities		606		606
Long-term disability		251		261
Deferred dividends		40		135
Less amounts due within one year		(267)		(300)
Long-term obligations (less current portion)	$	8,609	$	8,598

Note 16.  Leases

Nature of the Leases

The Company has operating and financing leases for buildings, equipment (e.g. trucks and forklifts), vehicles, and computer equipment. Leasing arrangements require fixed payments and also include an amount that is probable will be owed under residual value guarantees, if applicable. Some lease payments also include payments related to purchase or termination options when the lessee is reasonably certain to exercise the option or is not reasonably certain not to exercise the option, respectively.  The leases have remaining terms of one to 17 years.

For all leases with an initial expected term of more than 12 months, the Company recorded, at the adoption date of ASC 842 or lease commencement date for leases entered into after the adoption date, a lease liability, which is the lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or to control the use of, a specified asset for the lease term. The Company utilizes its collateralized incremental borrowing rate commensurate to the lease term as the discount rate for its leases, unless the Company can specifically determine the lessor’s implicit rate.

Significant Judgments and Assumptions

Determination of Whether a Contract Contains a Lease

The Company determines whether a contract is or contains a lease at the inception of the contract. The contract is or contains a lease if the contract conveys the right to control the use of identified assets for a period of time in exchange for consideration. The Company generally must also have the right to obtain substantially all of the economic benefits from use of the property, plant, and equipment and have the right to direct its use.

Practical Expedients (Policy Elections)

The Company elected certain practical expedients and transition relief, including the short-term lease recognition exemption, which excludes leases with a term of 12 months or less from recognition on the balance sheet, recognizing lease components and non-lease components together as a single lease component, and the transition relief package which, among other things, includes not reassessing the lease classification or whether a contract is or contains a lease. 

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The following table sets forth the components of the Company’s lease cost for the three and six months ended March 31, 2020.

		Three Months Ended March 31,	Six Months Ended March 31,
	2020		2020
Finance lease cost:
Amortization of right of use asset	$	107	$	215
Interest on lease liabilities		207		415
Total finance lease cost	$	314	$	630
Operating lease cost	$	375	$	730
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases		207		415
Operating cash flows from operating leases		375		730
Financing cash flows from finance leases		42		82
Total cash paid for amounts included in measurement of lease liabilities	$	624	$	1,227

Lease costs associated with short term leases are not material.

The following table sets forth the Company’s right of use assets and lease liabilities as of March 31, 2020.

	March 31,
	2020
Finance lease assets (included in Property, plant and equipment, net)		6,719
Operating right of use lease assets (included in Other assets)		2,306
Total lease assets	$	9,025
Finance lease liabilities
Accrued expenses		182
Long-term obligations (less current portion)		7,714
Total Finance lease liabilities	$	7,896
Operating lease liabilities	$	2,306

	March 31,
	2020
Weighted average lease term (Years)
Finance leases		15.6
Operating leases		3.2
Weighted average discount rate
Finance leases		10.33	%
Operating leases		5.25	%

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The following is a table of future minimum lease payments during each fiscal year under operating and finance leases and the present value of the net minimum lease payments as of March 31, 2020.

	Finance		Operating
Future minimum lease payments	Leases		Leases
2020	$	498	$	683
2021		1,001		839
2022		1,012		426
2023		1,024		293
2024		1,031		281
Thereafter		11,540		71
Total minimum lease payments		16,106		2,593
Less: amount representing interest		(8,210)		(287)
Present value of net minimum lease payments	$	7,896	$	2,306

The following is a table of future minimum lease payments as of September 30, 2019.

	Finance		Operating
Contractual Obligations as of September 30, 2019	Leases		Leases
2020	$	993	$	2,542
2021		1,000		1,254
2022		1,013		460
2023		1,024		277
2024		1,032		259
Thereafter		11,623		60
Total minimum lease payments		16,685		4,852
Less: amount representing interest		(8,706)		—
Present value of net minimum lease payments	$	7,979	$	4,852

Note 17.  Foreign Currency Forward Contracts

The Company enters into foreign currency forward contracts to reduce income statement volatility resulting from foreign currency denominated transactions. The Company has not designated the contracts as hedges, therefore, changes in fair value are recognized in earnings.  All of these contracts are designed to be settled within the same fiscal quarter they are entered into and, accordingly, as of March 31, 2020, there were no contracts that remain unsettled.  As a result, there was no impact to the balance sheet from those contracts as of September 30, 2019 or March 31, 2020.  Foreign exchange hedging gains and losses are recorded within selling, general and administrative expenses on the Consolidated Statements of Operations along with foreign currency transactional gains and losses as follows.

	Three Months Ended March 31,				Six Months Ended March 31,
	2019		2020		2019		2020
Foreign currency transactional gain (loss)	$	(93)	$	724	$	247	$	(347)
Foreign exchange forward contract gain (loss)	$	198	$	(501)	$	(299)	$	(22)
Net gain (loss) included in selling, general and administrative expense	$	105	$	223	$	(52)	$	(369)

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

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

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, each as amended. All statements other than statements of historical fact, including statements regarding market and industry prospects and future results of operations or financial position, made in this Form 10-Q are forward-looking.    In many cases, you can identify forward-looking statements by terminology, such as “may”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of such terms and other comparable terminology. The forward-looking information may include, among other information, statements concerning the Company’s outlook for fiscal 2020 and beyond, overall volume and pricing trends, cost reduction strategies and their anticipated results, capital expenditures, dividends and the impact of COVID-19 on the economy, demand for our products and our operations, including the measures taken by governmental authorities to address it, which may precipitate or exacerbate other risks and/or uncertainties.  There may also be other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.  Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of various factors, many of which are beyond the Company’s control.

The Company has based these forward-looking statements on its current expectations and projections about future events, including our expectations of the impact of the recent COVID-19 pandemic.  Although the Company believes that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate. As a result, the forward-looking statements based upon those assumptions also could be incorrect.  Risks and uncertainties may affect the accuracy of forward-looking statements. Some, but not all, of these risks are described in Item 1A of Part II of this Quarterly Report and Item 1A. of Part 1 of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019.    

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

Business Overview

Haynes International, Inc. (“Haynes” or “the Company”) is one of the world’s largest producers of high-performance nickel and cobalt based alloys in sheet, coil and plate forms. The Company is focused on developing, manufacturing, marketing and distributing technologically advanced, high-performance alloys, which are sold primarily in the aerospace, chemical processing and industrial gas turbine industries. The Company’s products consist of high-temperature resistant alloys, or HTA products, and corrosion-resistant alloys, or CRA products. HTA products are used by manufacturers of equipment that is subjected to extremely high temperatures, such as jet engines, gas turbine engines, and industrial heating and heat treatment equipment. CRA products are used in applications that require resistance to very corrosive media found in chemical processing, power plant emissions control and hazardous waste treatment. Management believes Haynes is one of the principal producers of high-performance alloy flat products in sheet, coil and plate forms, and sales of these forms, in the aggregate, represented approximately 58% of net product revenues in fiscal 2019. The Company also produces its products as seamless and welded tubulars, and in slab, bar, billet and wire forms.

The Company has manufacturing facilities in Kokomo, Indiana; Arcadia, Louisiana; and Mountain Home, North Carolina. The Kokomo facility specializes in flat products, the Arcadia facility specializes in tubular products, and the Mountain Home facility specializes in wire products. The Company’s products are sold primarily through its direct sales organization, which includes 12 service and/or sales centers in the United States, Europe and Asia. All of these centers are Company operated.

COVID-19 Pandemic

In March 2020, the World Health Organization characterized the coronavirus (“COVID-19”) as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency.  The rapid spread of the pandemic, and the continuously evolving responses to combat it, have had an increasingly negative impact on the global economy and our business.  Due to the widespread impact of the COVID-19 pandemic, the Company implemented a temporary shut-down of most of the Company’s production operations beginning the week of March 23, 2020, which impacted the last week of the second quarter.  The shut-down continued into the third quarter with operations resuming in mid-April in certain areas on a voluntary basis. 

Due to the current unprecedented market and economic conditions in the U.S. and internationally, the expected impact of the COVID-19 pandemic on the Company’s operations cannot be reasonably estimated.  However, we expect our results from operations and cash flows for the remainder of fiscal 2020 to be adversely impacted by the pandemic.  See Item 1A. Risk Factors in Part II. Other

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Information for further information regarding the risks associated with the COVID-19 pandemic.  Also, see Liquidity and Capital Resources below for certain actions taken by the Company in response to the COVID-19 pandemic. 

Dividends Paid and Declared

In the first and second quarters of fiscal 2020, the Company declared and paid a regular quarterly cash dividend of $0.22 per outstanding share of the Company’s common stock. The first quarter dividend was paid on December 16, 2019 to stockholders of record at the close of business on December 2, 2018 and the second quarter dividend was paid on March 16, 2020 to stockholders of record at the close of business on March 2, 2020.  The dividend cash pay-outs in each of the first and second quarters were approximately $2.8 million based on the number of shares outstanding and equal to approximately $11.0 million on an annualized basis.

On April 30, 2020, the Company announced that the Board of Directors declared a regular quarterly cash dividend of $0.22 per outstanding share of the Company’s common stock.  The dividend is payable June 15, 2020 to stockholders of record at the close of business on June 1, 2020.

Capital Spending

During the first six months of fiscal 2020, capital investment was $4.1 million, and total planned capital expenditures for fiscal 2020 are expected to be between $10.0 and $12.0 million.  

Volumes, Competition and Pricing

Due to the widespread impact of the COVID-19 pandemic, the Company implemented a temporary shut-down of most of the Company’s production operations beginning the week of March 23, 2020, which impacted the last week of the second quarter.  The shut-down continued into the third quarter with operations resuming in mid-April in certain areas on a voluntary basis.  Volume shipped in the second quarter of fiscal 2020 was 4.3 million pounds, which was 0.1 million pounds higher sequentially than the first quarter of fiscal 2020, which was impacted by seasonality, and 0.9 million pounds, or 16.2%, lower than last year’s second quarter. 

Volume shipped into the aerospace market in the second quarter of fiscal 2020 was slightly lower sequentially compared to the first quarter of fiscal 2020 and 0.6 million pounds lower than last year’s second quarter.  Volumes going forward in aerospace are expected to significantly decline due to both Boeing’s continuing issues with the 737 MAX and the demand reductions stemming from the COVID-19 pandemic. The pandemic has had effects across the aerospace industry with announced industry-wide shutdowns and reduced production levels. 

Volume shipped into the chemical processing market in the second quarter of fiscal 2020 was lower sequentially by 0.1 million pounds compared to the first quarter of fiscal 2020 and lower than the second quarter of fiscal year 2019 by 0.3 million pounds, driven by lower base-business volumes, which the Company attributes to global economic uncertainty resulting from COVID-19, continued trade tariffs and the chemical industry’s reaction to the significant drop in the market price of oil. 

Volume shipped in the second quarter of fiscal 2020 into the industrial gas turbine market was 0.2 million pounds higher sequentially compared to the first quarter of fiscal 2020 and 0.2 million pounds higher than last year’s second quarter.  This was attributable to an easing of the inventory destocking in this market along with the initial impact of the Company’s share gain initiative. 

Volume shipped into the other markets category in the second quarter of fiscal 2020 was higher sequentially by 0.1 million pounds compared to the first quarter of fiscal 2020 and lower by 0.2 million pounds compared to last year’s second quarter, the latter fluctuation driven by a reduction in flue gas desulfurization shipments.

The product average selling price per pound in the second quarter of fiscal 2020 was $24.15, which is higher sequentially compared to the first quarter of fiscal 2020 and higher than last year’s second quarter.  The increase is primarily driven by favorable product mix and the impact of price increases.  The Company continues to emphasize price increases in our high-value differentiated products.

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

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Net Revenue and Gross Profit Margin Performance:

	Comparison by Quarter of Net Revenues, Gross Profit Margin and
	Gross Profit Margin Percentage for Fiscal 2019 and 2020
				Quarter Ended
	December 31,			March 31,			June 30,			September 30,			December 31,			March 31,
(dollars in thousands)	2018			2019			2019			2019			2019			2020
Net Revenues	$	107,069		$	127,474		$	126,032		$	129,640		$	108,453		$	111,563
Gross Profit Margin	$	11,335		$	14,683		$	18,175		$	21,310		$	18,743		$	19,296
Gross Profit Margin %		10.6	%		11.5	%		14.4	%		16.4	%		17.3	%		17.3	%

The temporary shut-down of most of the Company’s production operations beginning the week of March 23, 2020 impacted the last week of the second quarter.  Margins in January and February averaged over 18% with a drop in margins in March.  Unfavorable fixed cost absorption compressed March margins due to the shutdown and lower volumes.  Overall for the second quarter, gross profit margin percentage was 17.3%, even with gross profit margin percentage for the first quarter of fiscal 2020.    Gross margin exceeded gross margin in last year’s second quarter by $4.6 million, or 580 basis points in spite of lower revenue of $15.9 million.  The Company’s continued initiatives to improve pricing, improve yields and reduce costs have lowered its volume breakeven point and have been favorable for gross margins. 

Backlog

	Quarter Ended
	December 31,		March 31,		June 30,		September 30,		December 31,		March 31,
	2018		2019		2019		2019		2019		2020
Backlog(1)
Dollars (in thousands)	$	237,802	$	253,003	$	254,947	$	235,204	$	237,620	$	204,709
Pounds (in thousands)		8,392		8,855		9,072		8,064		8,231		6,930
Average selling price per pound	$	28.34	$	28.57	$	28.10	$	29.17	$	28.87	$	29.54
Average nickel price per pound
London Metals Exchange(2)	$	4.92	$	5.93	$	5.43	$	8.02	$	6.26	$	5.39

(1)The Company defines backlog to include firm commitments from customers for delivery of product at established prices. There are orders in the backlog at any given time which include prices that are subject to adjustment based on changes in raw material costs, which can vary from approximately 30% - 50% of the orders.  Historically, approximately 75% of the backlog orders have shipped within nine months and approximately 90% have shipped within 12 months. The backlog figures do not reflect that portion of the business conducted at service and sales centers on a spot or “just-in-time” basis.

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

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The Company has experienced lower order entry levels attributable to the grounding of the Boeing 737 MAX and the uncertainty from the global COVID-19 pandemic and its unprecedented impact on the economy, significant supply chain inventory reductions, continued trade tariffs and the significant drop in the oil prices.  Backlog was $204.7 million at March 31, 2020, a decrease of $32.9 million, or 13.9%, from $237.6 million at December 31, 2019.  Backlog pounds at March 31, 2020 decreased sequentially during the second quarter of fiscal 2020 by 15.8% as compared to December 31, 2019.  The average selling price of products in the Company’s backlog increased to $29.54 per pound at March 31, 2020 from $28.87 per pound at December 31, 2019, reflecting a favorable change in product mix.  Visibility with respect to the remainder of fiscal 2020 and beyond, is limited due to the uncertainty surrounding the ultimate impact of COVID-19 and the mitigation measures that are being pursued by governmental authorities. 

Quarterly Market Information

	Quarter Ended
	December 31,		March 31,		June 30,		September 30,		December 31,		March 31,
	2018		2019		2019		2019		2019		2020
Net revenues (in thousands)
Aerospace	$	54,607	$	68,858	$	66,321	$	68,318	$	58,843	$	59,172
Chemical processing		18,920		21,761		21,197		27,773		16,712		15,832
Industrial gas turbines		14,083		13,685		15,870		15,792		13,763		16,701
Other markets		14,285		16,958		15,666		11,037		11,875		12,762
Total product revenue		101,895		121,262		119,054		122,920		101,193		104,467
Other revenue		5,174		6,212		6,978		6,720		7,260		7,096
Net revenues	$	107,069	$	127,474	$	126,032	$	129,640	$	108,453	$	111,563
Shipments by markets (in thousands of pounds)
Aerospace		2,112		2,857		2,579		2,731		2,303		2,261
Chemical processing		898		971		1,126		1,315		788		689
Industrial gas turbines		811		757		893		946		825		990
Other markets		509		580		523		432		306		386
Total shipments		4,330		5,165		5,121		5,424		4,222		4,326
Average selling price per pound
Aerospace	$	25.86	$	24.10	$	25.72	$	25.02	$	25.55	$	26.17
Chemical processing		21.07		22.41		18.83		21.12		21.21		22.98
Industrial gas turbines		17.36		18.08		17.77		16.69		16.68		16.87
Other markets		28.06		29.24		29.95		25.55		38.81		33.06
Total product (product only; excluding other revenue)		23.53		23.48		23.25		22.66		23.97		24.15
Total average selling price (including other revenue)	$	24.73	$	24.68	$	24.61	$	23.90	$	25.69	$	25.79

Results of Operations for the Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019

	Three Months Ended March 31,								Change
	2019				2020				Amount		%
Net revenues	$	127,474	100.0	%	$	111,563	100.0	%	$	(15,911)	(12.5)	%
Cost of sales		112,791	88.5	%		92,267	82.7	%		(20,524)	(18.2)	%
Gross profit		14,683	11.5	%		19,296	17.3	%		4,613	31.4	%
Selling, general and administrative expense		10,663	8.4	%		10,785	9.7	%		122	1.1	%
Research and technical expense		859	0.7	%		1,028	0.9	%		169	19.7	%
Operating income (loss)		3,161	2.5	%		7,483	6.7	%		4,322	136.7	%
Nonoperating retirement benefit expense		856	0.7	%		1,700	1.5	%		844	98.6	%
Interest income		(18)	(0.0)	%		(10)	(0.0)	%		8	(44.4)	%
Interest expense		284	0.2	%		296	0.3	%		12	4.2	%
Income (loss) before income taxes		2,039	1.6	%		5,497	4.9	%		3,458	169.6	%
Provision for (benefit from) income taxes		530	0.4	%		1,429	1.3	%		899	169.6	%
Net income (loss)	$	1,509	1.2	%	$	4,068	3.6	%	$	2,559	169.6	%

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

	Three Months Ended
	March 31,				Change
By market	2019		2020		Amount		%
Net revenues (dollars in thousands)
Aerospace	$	68,858	$	59,172	$	(9,686)	(14.1)	%
Chemical processing		21,761		15,832		(5,929)	(27.2)	%
Industrial gas turbine		13,685		16,701		3,016	22.0	%
Other markets		16,958		12,762		(4,196)	(24.7)	%
Total product revenue		121,262		104,467		(16,795)	(13.9)	%
Other revenue		6,212		7,096		884	14.2	%
Net revenues	$	127,474	$	111,563	$	(15,911)	(12.5)	%
Pounds by market (in thousands)
Aerospace		2,857		2,261		(596)	(20.9)	%
Chemical processing		971		689		(282)	(29.0)	%
Industrial gas turbine		757		990		233	30.8	%
Other markets		580		386		(194)	(33.4)	%
Total shipments		5,165		4,326		(839)	(16.2)	%
Average selling price per pound
Aerospace	$	24.10	$	26.17	$	2.07	8.6	%
Chemical processing		22.41		22.98		0.57	2.5	%
Industrial gas turbine		18.08		16.87		(1.21)	(6.7)	%
Other markets		29.24		33.06		3.82	13.1	%
Total product (excluding other revenue)		23.48		24.15		0.67	2.9	%
Total average selling price (including other revenue)	$	24.68	$	25.79	$	1.11	4.5	%

Net Revenues.  Net revenues were $111.6 million in the second quarter of fiscal 2020, a decrease of 12.5% from $127.5 million in the same period of fiscal 2019.   Volume was 4.3 million pounds in the second quarter of fiscal 2020, a decrease of 16.2% from 5.2 million pounds in the same period of fiscal 2019.  The decrease in volume is primarily attributable to COVID-19 and impacts on the aerospace supply chain due to the 737 MAX.  The product average selling price was $24.15 per pound in the second quarter of fiscal 2020, an increase of 2.9% from $23.48 per pound in the same period of fiscal 2019.  The increase in average selling price per pound largely reflects improved pricing combined with a higher value product mix most notably in aerospace and other markets as compared to the same period of last year, both of which increased average selling price per pound by approximately $0.79.  These increases were partially offset by lower market prices of raw materials which decreased average selling price per pound by approximately $0.12. 

Sales to the aerospace market were $59.2 million in the second quarter of fiscal 2020, a decrease of 14.1% from $68.9 million in the same period of fiscal 2019, due to a 20.9% decrease in volume, partially offset by an 8.6% increase in average selling price per pound.  Demand in the aerospace market declined due to issues in the supply chain due to the 737 MAX and COVID-19.  The increase in average selling price per pound largely reflects a higher value product mix, combined with pricing increases taken over the past year, which increased average selling price per pound by approximately $2.17, partially offset by lower market prices of raw materials, which decreased average selling price per pound by approximately $0.10 per pound.  

Sales to the chemical processing market were $15.8 million in the second quarter of fiscal 2020, a decrease of 27.2% from $21.8 million in the same period of fiscal 2019, due to a 29.0% decrease in volume, partially offset by a 2.5% increase in average selling price per pound. Volume was lower primarily due to decreased demand caused by COVID-19. This was partially offset by increased special project shipments.  The increase in average selling price per pound reflects higher pricing, which increased average selling price per pound by approximately $0.77, partially offset by a lower value product mix and lower market prices of raw materials, which decreased average selling price per pound by approximately $0.20.

Sales to the industrial gas turbine market were $16.7 million in the second quarter of fiscal 2020, an increase of 22.0% from $13.7 million for the same period of fiscal 2019, due to an increase in volume of 30.8%, partially offset by a decrease in average selling price per pound of 6.7%.  The increase in volume is primarily attributable an easing of inventory destocking in the industry, the initial impact of our share gain initiative and a slight improvement in demand for large-frame turbines, while small/medium frame engine builds have slowed down.   The decrease in average selling price per pound reflects a lower value product mix, which decreased average selling

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price per pound by approximately $1.12, combined with lower market prices of raw materials, which decreased average selling price per pound by approximately $0.09.

Sales to other markets were $12.8 million in the second quarter of fiscal 2020, a decrease of 24.7% from $17.0 million in the same period of fiscal 2019, due to a decrease in volume of 33.4%, partially offset by a 13.1% increase in average selling price per pound.  The decrease in volume was primarily due to decreases in sales to the flue-gas desulfurization market. The average selling price per pound increase reflects a higher-value product mix, which increased average selling price per pound by approximately $4.38, partially offset by increased pricing competition and lower market prices of raw materials, which decreased average selling price per pound by approximately $0.56. 

Other Revenue.  Other revenue was $7.1 million in the second quarter of fiscal 2020, an increase of 14.2% from $6.2 million in the same period of fiscal 2019. The increase was due primarily to increased toll conversion.

Cost of Sales. Cost of sales was $92.3 million, or 82.7% of net revenues, in the second quarter of fiscal 2020 compared to $112.8 million, or 88.5% of net revenues, in the same period of fiscal 2019. The decrease was primarily due to lower volumes, combined with the Company’s cost reduction initiatives and lower raw material prices. 

Gross Profit.  As a result of the above factors, gross profit was $19.3 million for the second quarter of fiscal 2020, an increase of $4.6 million from the same period of fiscal 2019. Gross margin as a percentage of net revenue increased to 17.3% in the second quarter of fiscal 2020 as compared to 11.5% in the same period of fiscal 2019, primarily attributable to improved pricing, higher value product mix and cost savings initiatives.  Margins increased despite challenges from plant shutdowns in March for safety measures to reduce the risk of spread of COVID-19.   

Selling, General and Administrative Expense.    Selling, general and administrative expense was $10.8 million for the second quarter of fiscal 2020.  Selling, general and administrative expense as a percentage of net revenues increased to 9.7% for the second quarter of fiscal 2020 compared to 8.4% for the same period of fiscal 2019.

Research and Technical Expense.  Research and technical expense was $1.0 million, or 0.9% of net revenue, for the second quarter of fiscal 2020, compared to $0.9 million, or 0.7% of net revenue, in the same period of fiscal 2019.  The increase was primarily due to increased employment levels because of our ongoing investment in this core competency. 

Operating Income/(Loss).  As a result of the above factors, operating income in the second quarter of fiscal 2020 was $7.5 million compared to operating income of $3.2 million in the same period of fiscal 2019.

Nonoperating retirement benefit expense.  Nonoperating retirement benefit expense was $1.7 million in the second quarter of fiscal 2020 compared to $0.9 million in the same period of fiscal 2019.  The increase in expense was primarily driven by lower discount rates in the September 30, 2019 valuation which resulted in higher retirement liabilities and ultimately higher expense for the second quarter of fiscal 2020.  

Income Taxes.    Income tax expense was $1.4 million in the second quarter of fiscal 2020, a difference of $0.9 million from expense of $0.5 million in the second quarter of fiscal 2019, driven by higher income before income taxes. 

Net Income/(Loss).  As a result of the above factors, net income in the second quarter of fiscal 2020 was $4.1 million, compared to $1.5 million in the same period of fiscal 2019.

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Results of Operations for the Six Months Ended March 31, 2020 Compared to the Six Months Ended March 31, 2019

	Six Months Ended March 31,								Change
($ in thousands)	2019				2020				Amount		%
Net revenues	$	234,543	100.0	%	$	220,016	100.0	%	$	(14,527)	(6.2)	%
Cost of sales		208,525	88.9	%		181,977	82.7	%		(26,548)	(12.7)	%
Gross profit		26,018	11.1	%		38,039	17.3	%		12,021	46.2	%
Selling, general and administrative expense		21,791	9.3	%		22,292	10.1	%		501	2.3	%
Research and technical expense		1,693	0.7	%		1,910	0.9	%		217	12.8	%
Operating income (loss)		2,534	1.1	%		13,837	6.3	%		11,303	446.1	%
Nonoperating retirement benefit expense		1,712	0.7	%		3,400	1.5	%		1,688	98.6	%
Interest income		(38)	(0.0)	%		(24)	(0.0)	%		14	(36.8)	%
Interest expense		525	0.2	%		547	0.2	%		22	4.2	%
Income (loss) before income taxes		335	0.1	%		9,914	4.5	%		9,579	2,859.4	%
Provision for (benefit from) income taxes		429	0.2	%		2,578	1.2	%		2,149	500.9	%
Net income (loss)	$	(94)	(0.0)	%	$	7,336	3.3	%	$	7,430	(7,904.3)	%

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

	Six Months Ended
	March 31,				Change
	2019		2020		Amount		%
Net revenues (dollars in thousands)
Aerospace	$	123,465	$	118,015	$	(5,450)	(4.4)	%
Chemical processing		40,681		32,544		(8,137)	(20.0)	%
Industrial gas turbine		27,768		30,464		2,696	9.7	%
Other markets		31,243		24,637		(6,606)	(21.1)	%
Total product revenue		223,157		205,660		(17,497)	(7.8)	%
Other revenue		11,386		14,356		2,970	26.1	%
Net revenues	$	234,543	$	220,016	$	(14,527)	(6.2)	%
Pounds by market (in thousands)
Aerospace		4,969		4,564		(405)	(8.2)	%
Chemical processing		1,869		1,477		(392)	(21.0)	%
Industrial gas turbine		1,568		1,815		247	15.8	%
Other markets		1,089		692		(397)	(36.5)	%
Total shipments		9,495		8,548		(947)	(10.0)	%
Average selling price per pound
Aerospace	$	24.85	$	25.86	$	1.01	4.1	%
Chemical processing		21.77		22.03		0.26	1.2	%
Industrial gas turbine		17.71		16.78		(0.93)	(5.3)	%
Other markets		28.69		35.60		6.91	24.1	%
Total product (excluding other revenue)		23.50		24.06		0.56	2.4	%
Total average selling price (including other revenue)	$	24.70	$	25.74	$	1.04	4.2	%

Net Revenues.   Net revenues were $220.0 million in the first six months of fiscal 2020, a decrease of 6.2% from $234.5 million in the same period of fiscal 2019.   Volume was 8.5 million pounds in the first six months of fiscal 2020, a decrease of 10.0% from 9.5 million pounds in the same period of fiscal 2019.  The decrease in volume was primarily caused by COVID-19 and issues in the aerospace supply chain due to the 737 MAX, partially offset by increased volumes in the industrial gas turbine market.  The product average selling price was $24.06 per pound in the first six months of fiscal 2020, an increase of 2.4% from $23.50 per pound in the same period of fiscal 2019.  The average selling price increased as a result of improved pricing and a higher value mix as compared to the same period of fiscal 2019, in the amount of approximately $0.65 per pound, partially offset by lower raw material market prices, which decreased average selling price per pound by approximately $0.09. 

Sales to the aerospace market were $118.0 million in the first six months of fiscal 2020, a decrease of 4.4% from $123.5 million in the same period of fiscal 2019, due to an 8.2%, or 0.4 million pound, decrease in volume, partially offset by a 4.1%, or $1.01, increase in average selling price per pound.  The decrease in volume is due to COVID-19 and the reduced demand in the supply chain for the

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Boeing 737 MAX.  The average selling price per pound increase reflects a higher value product mix and improved pricing, which increased average selling price per pound by approximately $1.03, partially offset by lower raw material market prices, which decreased average selling price per pound by approximately $0.02.

Sales to the chemical processing market were $32.5 million in the first six months of fiscal 2020, a decrease of 20.0% from $40.7 million in the same period of fiscal 2019, due to a 21.0% decrease in volume, partially offset by a 1.2%, or $0.26, increase in average selling price per pound.  Base-business volumes decreased in the first six months of fiscal 2020 from the same period of fiscal 2019, primarily due to COVID-19.   However, partially offsetting base-business decline was an increase in specialty application project revenue in the first six months of fiscal 2020 compared to the same period last year.   The average selling price per pound reflects improved pricing and an increase in raw material market prices, which increased average selling price per pound by approximately $0.53, partially offset by a lower-value product mix, which decreased average selling price per pound by approximately $0.27.

Sales to the industrial gas turbine market were $30.5 million in the first six months of fiscal 2020, an increase of 9.7% from $27.8 million for the same period of fiscal 2019, due to an increase in volume of 15.8%, partially offset by a decrease in average selling price per pound of 5.3%, or $0.93.  The increase in volume is primarily attributable an easing of inventory destocking in the industry, the initial impact of our share gain initiative and a slight improvement in demand for large-frame turbines, while small/medium frame engine builds have slowed down. The decrease in average selling price per pound primarily reflects declined pricing due to competition and other factors combined with lower market prices for raw materials, which decreased average selling price per pound by approximately $1.12, partially offset by a higher-value product mix, which increased the average selling price per pound by approximately $0.19.

Sales to other markets were $24.6 million in the first six months of fiscal 2020, a decrease of 21.1% from $31.2 million in the same period of fiscal 2019, due to a 36.5% decrease in volume, partially offset by a 24.1% increase in average selling price per pound.  The decrease in volume was primarily due to a decline in sales to the flue-gas desulfurization market. The increase in average selling price reflects a higher-value product mix, which increased average selling price per pound by approximately $7.99, partially offset by lower raw material market prices and increased competition and other factors, which decreased average selling price per pound by approximately $1.08.

Other Revenue.   Other revenue was $14.4 million in the first six months of fiscal 2020, an increase of 26.1% from $11.4 million in the same period of fiscal 2019. The increase was due primarily to increased toll conversion. 

Cost of Sales.  Cost of sales was $182.0 million, or 82.7% of net revenues, in the first six months of fiscal 2020 compared to $208.5 million, or 88.9% of net revenues, in the same period of fiscal 2019.  This decrease was primarily due to lower volumes sold combined with continued traction in the Company’s cost reduction initiatives and lower raw material prices. 

Gross Profit.   As a result of the above factors, gross profit was $38.0 million for the first six months of fiscal 2020, an increase of $12.0 million from the same period of fiscal 2019. Gross profit as a percentage of net revenue increased to 17.3% in the first six months of fiscal 2020 as compared to 11.1% in the same period of fiscal 2019.  The improvement in gross profit was primarily attributable to improved pricing and cost saving initiatives.  Fiscal 2019 was impacted by the temporary inefficiencies caused by the delayed start-up of cold-finish operations after the planned equipment upgrade in the first three months of fiscal 2019.

Selling, General and Administrative Expense.  Selling, general and administrative expense was $22.3 million for the first six months of fiscal 2020, an increase of $0.5 million from the same period of fiscal 2019.  This increase is primarily attributable to higher expense due to foreign exchange losses.  Selling, general and administrative expense as a percentage of net revenues increased to 10.1% for the first six months of fiscal 2020 compared to 9.3% for the same period of fiscal 2019.

Research and Technical Expense.  Research and technical expense was $1.9 million, or 0.9% of net revenue, for the first six months of fiscal 2020, compared to $1.7 million, or 0.7% of net revenue, in the same period of fiscal 2019.  The increase was primarily due to higher salary expenses. 

Operating Income/(Loss).  As a result of the above factors, operating income in the first six months of fiscal 2020 was $13.8 million compared to an operating income of $2.5 million in the same period of fiscal 2019.

Nonoperating retirement benefit expense.  Nonoperating retirement benefit expense was $3.4 million in the first six months of fiscal 2020 compared to $1.7 million in the same period of fiscal 2019.  The increase in expense was primarily driven by lower discount rates in the September 30, 2019 valuation which resulted in higher retirement liabilities and ultimately higher expense for the first six months of fiscal 2020.  

Income Taxes.  Income tax expense was $2.6 million in the first six months of fiscal 2020, an increase of $2.1 million from expense of $0.4 million in the same period of fiscal 2019.  The effective tax rate (ETR) in the first six months of fiscal 2020 of 26.0% was lower

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than the ETR during the same period of fiscal 2019 due to the prior year forfeiture of stock options which had an adverse impact of $0.3 million during the first six months of fiscal 2019. 

Net Income/(Loss).  As a result of the above factors, net income for the first six months of fiscal 2020 was $7.3 million, a difference of $7.4 million from a net loss of $(0.1) million in the same period of fiscal 2019.

Working Capital

Controllable working capital, which includes accounts receivable, inventory, accounts payable and accrued expenses, was $300.2 million at March 31, 2020, an increase of $17.7 million, or 6.3%, from $282.5 million at September 30, 2019. This increase resulted primarily from inventory increasing $21.5 million and accounts payable and accrued expenses decreasing by $7.2 million, partially offset by accounts receivable decreasing by $11.0 million during the first six months of fiscal 2020.    

Liquidity and Capital Resources

Comparative cash flow analysis

The Company had cash and cash equivalents of $52.4 million at March 31, 2020, inclusive of $8.1 million that was held by foreign subsidiaries in various currencies, compared to $31.0 million at September 30, 2019.  Additionally, the Company has borrowings against its line of credit outstanding of $30.0 million as of March 31, 2020 compared to zero borrowed as of September 30, 2019.  

Net cash provided by operating activities in the first six months of fiscal 2020 was $0.8 million compared to net cash provided by operating activities of $12.1 million in the first six months of fiscal 2019, a decrease of $11.3 million.  Cash flow from operating activities in the first six months of fiscal 2020 was adversely impacted by higher tax payments as compared to the same period of fiscal 2019, an increase in inventory as compared to a decrease in the same period of fiscal 2019 and a decrease in accounts payable and accrued expenses as compared to an increase in the same period of fiscal 2019.  These impacts were partially offset by higher net income in the first six months of fiscal 2020 as compared to the same period of fiscal 2019 and a decrease in accounts receivable in the first six months of fiscal 2020 as compared to an increase in the same period of fiscal 2019.   

Net cash used in investing activities was $4.1 million in the first six months of fiscal 2020 which was lower than cash used in investing activities during the same period of fiscal 2019 due to lower additions to property, plant and equipment.

Net cash provided by financing activities was $24.6 million in the first six months of fiscal 2020, primarily driven by the borrowing of $30.0 million against the revolving line of credit.  This source of cash was partially offset by cash used in financing activities of $(5.4) million primarily attributable to dividends paid, which amount was comparable to the same period of fiscal 2019. 

Future sources of liquidity

The Company’s sources of liquidity for fiscal 2020 are expected to consist primarily of cash generated from operations, cash on hand and, if needed, additional borrowings under the U.S. revolving credit facility. At March 31, 2020, the Company had cash of $52.4 million and an outstanding balance of $30 million under its $120.0 million U.S. revolving credit facility with access to an additional $90.0 million, subject to a borrowing base formula and certain reserves.  Management believes that the resources described above will be sufficient to fund planned capital expenditures, regular quarterly dividends and working capital requirements over the next twelve months.

During the second quarter of fiscal 2020 the Company undertook measures to further secure its liquidity position and to provide financial flexibility given uncertain market conditions as a result of the COVID-19 outbreak, including drawing $30.0 million available under the line of credit.  In addition, the Company temporarily reduced the base salaries of the President and Chief Executive Officer, the Vice-Presidents and other members of the executive team by 10%, and the members of the Board of Directors also temporarily reduced their total cash compensation by 10%. 

U.S. revolving credit facility

The Company and Wells Fargo Capital Finance, LLC (“Wells Fargo”) entered into a Third Amended and Restated Loan and Security Agreement (the “Amended Agreement”) with certain other lenders with an effective date of July 14, 2011. On July 7, 2016, the Company amended the agreement to, among other things, extend the term through July 7, 2021 and reduce unused line fees and certain administrative fees. The maximum revolving loan amount under the Amended Agreement is $120.0 million, subject to a borrowing base formula and certain reserves. The Amended Agreement permits an increase in the maximum revolving loan amount from $120.0 million up to an aggregate amount of $170.0 million at the request of the borrower. Borrowings under the U.S. revolving credit facility bear interest, at the Company’s option, at either Wells Fargo’s “prime rate”, plus 0.00% to 0.75% per annum, or the

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adjusted Eurodollar rate used by the lender, plus 1.5% to 2.0% per annum (depending on the amount borrowed).  The Company is currently borrowing in the lowest point in the range.  As of March 31, 2020, the U.S. revolving credit facility had a balance of $30.0 million.

The Company must pay monthly, in arrears, a commitment fee of 0.20% per annum on the unused amount of the U.S. revolving credit facility total commitment. For letters of credit, the Company must pay 1.5% per annum on the daily outstanding balance of all issued letters of credit, plus customary fees for issuance, amendments and processing.

The Company is subject to certain covenants as to fixed charge coverage ratios and other customary covenants, including covenants restricting the incurrence of indebtedness, the granting of liens and the sale of assets. The covenant pertaining to fixed charge coverage ratios is only effective in the event the amount of excess availability under the revolver is less than 10.0% of the maximum credit revolving loan amount. The Company is permitted to pay dividends and repurchase common stock if certain financial metrics are met (most of which do not apply in the case of regular quarterly dividends less than $20.0 million in the aggregate in a year and repurchases in connection with the vesting of shares of restricted stock). As of March 31, 2020, the most recent required measurement date under the Amended Agreement, management believes the Company was in compliance with all applicable financial covenants under the Amended Agreement. Borrowings under the U.S. revolving credit facility are collateralized by a pledge of substantially all of the U.S. assets of the Company, including the equity interests in its U.S. subsidiaries, but excluding the four-high Steckel rolling mill and related assets, which are pledged to Titanium Metals Corporation (“TIMET”) to secure the performance of the Company’s obligations under a Conversion Services Agreement with TIMET (see discussion of TIMET at Note 8 in the Notes to Condensed Consolidated Financial Statements in this report). The U.S. revolving credit facility is also secured by a pledge of a 65% equity interest in each of the Company’s direct foreign subsidiaries.

Future uses of liquidity

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

Funding operations;

Capital spending;

Dividends to stockholders; and

Pension and postretirement plan contributions.

Capital investment in the first six months of fiscal 2020 was $4.1 million, and the forecast for capital spending in fiscal 2020 is between $10.0 and $12.0 million. 

Contractual Obligations

The following table sets forth the Company’s contractual obligations for the periods indicated, as of March 31, 2020:

	Payments Due by Period
			Less than						More than
Contractual Obligations	Total		1 year		1-3 Years		3-5 Years		5 years
	(in thousands)
Credit facility fees(1)	$	30,526	$	30,436	$	90	$	—	$	—
Operating lease obligations		3,954		2,097		1,310		547		—
Finance lease obligations		16,190		998		2,024		2,063		11,105
Raw material contracts (primarily nickel)		16,767		16,767		—		—		—
Capital projects and other commitments		2,902		2,902		—		—		—
Pension plan(2)		98,523		6,000		12,000		9,000		71,523
Non-qualified pension plans		671		95		190		190		196
Other postretirement benefits(3)		47,234		4,155		9,281		9,859		23,939
Environmental post-closure monitoring		606		97		144		151		214
Total	$	217,373	$	63,547	$	25,039	$	21,810	$	106,977

(1)As of March 31, 2020, the revolver balance was $30,000 with interest due along with unused line fees and quarterly management fees.

(2)The Company has a funding obligation to contribute $98,523 to the domestic pension plan. These payments will be tax deductible. All benefit payments under the domestic pension plan are provided by the plan and not the Company.

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

New Accounting Pronouncements

See Note 2. New Accounting Pronouncements in the Notes to Consolidated Financial Statements.

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Assumptions and estimates were based on the facts and circumstances known at March 31, 2020 However, future events rarely develop exactly as forecasted and the best estimates routinely require adjustment. The accounting policies discussed in Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019 are considered by management to be the most important to an understanding of the financial statements because their application places the most significant demands on management’s judgment and estimates about the effect of matters that are inherently uncertain. These policies are also discussed in Note 2 of the consolidated financial statements included in Item 8 of that report. For the quarter ended March 31, 2020 included herein, there have been no material changes to the critical accounting policies and estimates. 

Item 3.Quantitative and Qualitative Disclosures about Market Risk

As of March  31, 2020, there were no material changes in the market risks described in “Quantitative and Qualitative Disclosures about Market Risk” in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019.

Item 4.Controls and Procedures

The Company has performed, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness and the design and operation of the Company’s disclosure controls and procedures (as defined by Exchange Act rules 13a-15(e) and 15d-15(e)) pursuant to Rule 13a-15(b) of the Exchange Act as of the end of the period covered by this report.  Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March  31, 2020.

There were no changes in the Company’s internal control over financial reporting during the quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II OTHER INFORMATION

Item 1a. Risk Factors

In addition to the risk factors previously disclosed in Part I Item IA of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, we are exposed to certain additional risks and uncertainties which could have a material adverse impact on our business, financial condition and operating results as a result of the recent outbreak of COVID-19.

The risks described herein and in our Annual Report on Form 10-K are not the only risks we face.  New risk factors or risks that we currently deem immaterial emerge from time to time and it is not possible for us to predict all such risk factors, nor to assess the impact such risk factors might have on our business, financial condition and operating results, or the extent to which any such risk factor or combination of risk factors may impact our business, financial condition and operating results. 

Our results of operations, financial condition, cash flows have and may continue to be adversely affected by pandemics, epidemics or other public health emergencies, such as the recent outbreak of COVID-19. 

Our business, results of operations, financial condition, cash flows and stock price have and may continue to be adversely affected by pandemics, epidemics or other public health emergencies, such as the recent outbreak of COVID-19 which has spread from China to many other countries, including the United States. In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The outbreak has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19.

The outbreak of COVID-19 and preventive or protective actions taken by governmental authorities may continue to have a material adverse effect on our operations, supply chain, customers and transportation networks, including business shutdowns or disruptions. The extent to which COVID-19 may continue to adversely impact our business depends on future developments, which are highly uncertain and unpredictable, depending upon the severity and duration of the outbreak and the effectiveness of actions taken globally to contain or mitigate its effects. Future financial impact cannot be estimated reasonably at this time, but may materially adversely affect our business, results of operations, financial condition and cash flows. The aerospace market, our largest market, has been particularly hit hard by the addition of COVID-19 issues to the pre-existing issues with the Boeing 737MAX, and we cannot determine what further effect that exacerbating factor will have on the aerospace market.  Even after the COVID-19 pandemic has subsided, we may experience materially adverse impacts to our business due to any resulting economic recession or depression. Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets which has and may continue to adversely impact our stock price and our ability to access capital markets. Our indebtedness may increase due to our need to increase borrowing to fund operations during a period of reduced revenue.  To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in our Annual Report on Form 10-K.    

Item 6.Exhibits

Exhibits.  See Index to Exhibits.

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INDEX TO EXHIBITS

Exhibit Number	Description
3.1	Second 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).
3.2**	Amended and Restated By-Laws of Haynes International, Inc., as amended through February 28, 2018.
4.1	Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.01 to the Haynes International, Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2009).
10.1	Haynes International, Inc. 2020 Incentive Compensation Plan (incorporated by reference to Exhibit 99.1 to the for 8-K filed by the Company on February 27, 2020).
31.1**	Rule 13a-14(a)/15d-4(a) Certification of Chief Executive Officer
31.2**	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1*	Section 1350 Certifications
101	The following materials from the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2019 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Income (Loss); (iv) the Consolidated Statements of Stockholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) related notes.

*Furnished not filed.

** Filed herewith.

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SIGNATURES

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

HAYNES INTERNATIONAL, INC.

/s/ Michael Shor

Michael Shor

President and Chief Executive Officer

Date: April 30, 2020

/s/ Daniel Maudlin

Daniel Maudlin

Vice President — Finance and Chief Financial Officer

Date:  April 30, 2020

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