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TABLE OF CONTENTS
Item 8. Financial Statements and Supplementary Data

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)    

ý

 

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

For the fiscal year ended September 30, 2013

or

o

 

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

For the transition period from                    to                  

Commission file number 001-33288

HAYNES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

Delaware
(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:

Title of each class   Name of each exchange on which registered
Common Stock, par value $.001 per share   NASDAQ Global Market

         Securities registered pursuant to section 12(g) of the Act: None.

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes        ý No

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes        ý No

         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 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. ý Yes        o No

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). ý Yes        o No

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act). (Check one):

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller Reporting Company o

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

         As of March 31, 2013, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $571,693,391 based on the closing sale price as reported on the NASDAQ Global Market. Shares of common stock held by each executive officer and director and by each person who owns 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

         12,332,592 shares of Haynes International, Inc. common stock were outstanding as of November 20, 2013.


DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the registrant's Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held February 24, 2014 have been incorporated by reference into Part III of this report.


Table of Contents


TABLE OF CONTENTS

 
   
  Page No.  

Part I

           


Item 1.


 


Business


 

 


3

 


Item 1A.


 


Risk Factors


 

 


17

 


Item 1B.


 


Unresolved Staff Comments


 

 


27

 


Item 2.


 


Properties


 

 


27

 


Item 3.


 


Legal Proceedings


 

 


28

 


Item 4.


 


Mine Safety Disclosures


 

 


29

 


Part II


 

 

 

 

 

 


Item 5.


 


Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities


 

 


30

 


Item 6.


 


Selected Financial Data


 

 


32

 


Item 7.


 


Management's Discussion and Analysis of Financial Condition and Results of Operations


 

 


34

 


Item 7A.


 


Quantitative and Qualitative Disclosures About Market Risk


 

 


52

 


Item 8.


 


Financial Statements and Supplementary Data


 

 


53

 


Item 9.


 


Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


 

 


92

 


Item 9A.


 


Controls and Procedures


 

 


92

 


Item 9B.


 


Other Information


 

 


93

 


Part III


 

 

 

 

 

 


Item 10.


 


Directors, Executive Officers and Corporate Governance


 

 


94

 


Item 11.


 


Executive Compensation


 

 


94

 


Item 12.


 


Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


 

 


94

 


Item 13.


 


Certain Relationships and Related Transactions, and Director Independence


 

 


94

 


Item 14.


 


Principal Accountant Fees and Services


 

 


95

 


Part IV


 

 

 

 

 

 


Item 15.


 


Exhibits, Financial Statement Schedules


 

 


96

 


Signatures


 

 


97

 


Index to Exhibits


 

 


99

 

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        This Annual Report on Form 10-K 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 Annual Report on Form 10-K 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 year 2014 and beyond, overall volume and pricing trends, cost reduction strategies and their anticipated results, market and industry trends, capital expenditures and dividends. 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, including, without limitation, those risk factors set forth in Item 1A of this Annual Report on Form 10-K. 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. 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.

        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.


Part I

Item 1.    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 land-based 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 for the aerospace market, gas turbine engines used for power generation and waste incineration, and industrial heating 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 61% of net product revenues in fiscal 2013. 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 13 service and/or sales centers in the United States, Europe and Asia. All of these centers are Company-operated. In fiscal 2013, approximately 77% of the Company's net revenue was generated by its direct sales organization, and the remaining 23% was generated by a network of independent distributors and sales agents who supplement its direct sales

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efforts primarily in the United States, Europe and Asia, some of whom have been associated with the Company for over 30 years.

Available Information

        The address of the Company's website is www.haynesintl.com. The Company provides a link to its reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 on its website as soon as reasonably practicable after filing with the U.S. Securities and Exchange Commission. The filings available on the Company's website date back to February 3, 2011. For all filings made prior to that date, the Company's website includes a link to the website of the U.S. Securities and Exchange Commission, where such filings are available. Information contained or referenced on the Company's website is not incorporated by reference and does not form a part of this Annual Report on Form 10-K. For a statement of the Company's profits and losses and total assets, please see the financial statements of the Company included in Item 8 of this Annual Report on Form 10-K.

Business Strategy

        The Company's goal is to grow its business and increase revenues and profitability while continuing to be its customers' provider of choice for high-performance alloys. The Company pursues this goal by taking advantage of its diverse product offerings and service capabilities to penetrate end markets, provide value-added services, deliver innovative products and applications and lowering costs through strategic investment in manufacturing facilities.

    Increase revenues by providing value-added processing services.  The Company believes that its network of service and sales centers throughout North America, Europe and Asia distinguishes it from its competitors, many of whom operate only mills. The Company's service and sales centers enable it to develop close customer relationships through direct interaction with customers and to respond to customer orders quickly, while providing value-added services such as laser, plasma and water jet processing. These services allow the Company's customers to minimize their processing costs and outsource non-core activities. In addition, the Company's rapid response time and enhanced processing services for products shipped from its service and sales centers often enable the Company to obtain a selling price advantage. The Company is planning to spend approximately $24 million over the course of fiscal 2014 and 2015 to enhance and restructure its service center operations.

    Increase revenue by developing new products and new applications for existing alloys and expanding into new markets.  The Company believes that it is the industry leader in developing new alloys designed to meet its customers' specialized and demanding requirements. The Company continues to work closely with customers and end users of its products to identify, develop, manufacture and test new high-performance alloys. Since fiscal 2000, the Company's technical programs have yielded eight new proprietary alloys; an accomplishment that the Company believes distinguishes it from its competitors. The Company expects continued emphasis on product innovation to yield similar future results.

      In recent years the Company's revenues have been derived primarily from the aerospace, chemical processing and land-based gas turbine industries. Through development of new alloys and new applications for existing alloys, the Company is looking to develop additional markets which will generate new revenue streams. The Company believes that the oil and gas, renewable energy (such as solar) flue-gas desulphurization, automotive, heat treatment and nuclear industries all present opportunities for its products.

    Continue to expand the maintenance, repair and overhaul business.  The Company believes that its maintenance, repair and overhaul, or MRO, business serves a growing market and represents both an expanding and recurring revenue stream. Products used in the Company's end markets require

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      periodic replacement due to the extreme environments in which they are used, which drives demand for recurring MRO work. The Company intends to continue to leverage the capabilities of its service and sales centers to respond quickly to its customers' time-sensitive MRO needs to develop new and retain existing business opportunities.

    Capitalize on strategic equipment investment.  The Company expects to continue to improve operations through ongoing capital investment in manufacturing facilities and equipment including information technology. Ongoing investment in equipment has significantly improved the Company's operations by increasing capacity, reducing unplanned downtime and manufacturing costs, and improving product quality and working capital management. Management believes that the Company's capital investments will enable it to continue to satisfy long-term customer demand for value-added products that meet increasingly precise specifications. For additional discussion of capital spending, see "Summary of Capital Spending" in Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations contained elsewhere in this Annual Report on Form 10-K.

    Expand product capability through strategic acquisitions and alliances.  The Company will continue to examine opportunities that enable it to offer customers an enhanced and more competitive product line to complement its core flat products. These opportunities may include product line enhancement and market expansion opportunities. The Company will also continue to evaluate strategic relationships with third parties in the industry in order to enhance its competitive position and relationships with customers.

Company History

        The Company began operations in 1912 as the Haynes Stellite Works, which was purchased by Union Carbide and Carbon Corporation in 1920. In 1972, the operations were sold to Cabot Corporation. In 1987, Haynes was incorporated as a stand-alone corporation in Delaware, and in 1989 Haynes was sold by Cabot Corporation to Morgan Lewis Githens & Ahn Inc., a private investment firm. The Blackstone Group, a private investment firm, purchased Haynes from Morgan Lewis Githens & Ahn Inc. in 1997. On March 29, 2004, Haynes and its U.S. subsidiaries and affiliates as of that date filed voluntary petitions for reorganization relief under Chapter 11 of the U.S. Bankruptcy Code. On August 31, 2004, Haynes emerged from bankruptcy pursuant to a court-approved plan of reorganization.

        In November 2005, Haynes acquired certain assets of the Branford Wire Company, including a facility that manufactured both stainless steel wire and high-performance alloy wire. The Company primarily produces high-performance alloy wire at the Haynes Wire Company, in Mountain Home, North Carolina.

        On March 23, 2007, the Company completed an equity offering, which resulted in the issuance of 1,200,000 shares of its common stock. Simultaneously the Company listed its common stock on the NASDAQ Global Market. The Company began paying a dividend in fiscal 2010.

Products

        The global specialty alloy market consists of three primary sectors: stainless steel, general purpose nickel alloys and high-performance nickel- and cobalt-based alloys. The Company believes that the high-performance alloy sector represents less than 10% of the total alloy market. The Company competes primarily in the high-performance nickel- and cobalt-based alloy sectors, which includes HTA products and CRA products. In fiscal 2011, 2012 and 2013, HTA products accounted for approximately 76%, 73% and 74% of the Company's net revenues, respectively; and sales of the Company's CRA products accounted for approximately 24%, 27% and 26% of the Company's net revenues, respectively. These percentages are based on data which include revenue associated with sales by the Company to its foreign subsidiaries, but exclude revenue associated with sales by foreign subsidiaries to their customers. Management believes,

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however, that the effect of including revenue data associated with sales by its foreign subsidiaries would not materially change the percentages presented in this section.

        High-temperature Resistant Alloys.    HTA products are used primarily in manufacturing components for the hot sections of gas turbine engines. Stringent safety and performance standards in the aerospace industry result in development lead times typically as long as eight to ten years in the introduction of new aerospace-related market applications for HTA products. However, once a particular new alloy is shown to possess the properties required for a specific application in the aerospace market, it tends to remain in use for extended periods. HTA products are also used in gas turbine engines produced for use in applications such as naval and commercial vessels, electric power generation, power sources for offshore drilling platforms, gas pipeline booster stations and emergency standby power generators. The following table sets forth information with respect to the Company's significant high-temperature resistant alloys, applications and features (new HTA development is discussed below under "Patents and Trademarks"):

Alloy and Year Introduced   End Markets and Applications(1)   Features
HAYNES® HR-160® alloy (1990)(2)   Waste incineration/CPI-boiler tube shields   Good resistance to sulfidation at high temperatures
HAYNES 242® alloy (1990)(2)   Aero-seal rings   High strength, low expansion and good fabricability
HAYNES HR-120® alloy (1990)(2)   LBGT-cooling shrouds   Good strength-to-cost ratio as compared to competing alloys
HAYNES 230® alloy (1984)(2)   Aero/LBGT-ducting, combustors   Excellent combination of strength, stability, oxidation resistance and fabricability
HAYNES 214® alloy (1981)(2)   Aero-honeycomb seals   Excellent combination of oxidation resistance and fabricating among nickel-based alloys
HAYNES 188 alloy (1968)(2)   Aero-burner cans, after-burner components   High strength, oxidation resistant cobalt-based alloy
HAYNES 625 alloy (1964)   Aero/CPI-ducting, tanks, vessels, weld overlays   Good fabricability and general corrosion resistance
HAYNES 617 alloy (1999)   Aero/LBGT—ducting, combustors   Good combination of strength, stability, oxidation resistance and fabricability
HAYNES 263 alloy (1960)   Aero/LBGT-components for gas turbine hot gas exhaust pan   Good ductility and high strength at temperatures up to 1600°F
HAYNES 718 alloy (1955)   Aero-ducting, vanes, nozzles   Weldable high strength alloy with good fabricability
HASTELLOY® X alloy (1954)   Aero/LBGT-burner cans, transition ducts   Good high temperature strength at relatively low cost
HAYNES 25 alloy (1950)(2)   Aero-gas turbine parts, bearings, and various industrial applications   Excellent strength, good oxidation, resistance to 1800°F
HAYNES 282® alloy (2004)(3)   Aero /LBGT components   Excellent high temperature strength, weldability, fabricability

(1)
"Aero" refers to the aerospace industry; "LBGT" refers to the land-based gas turbine industry; "CPI" refers to the chemical processing industry.

(2)
Represents a product which the Company believes has limited or no significant competition.

(3)
Patent filing date.

        Corrosion-resistant Alloys.    CRA products are used in a variety of applications, such as chemical processing, power plant emissions control, hazardous waste treatment, sour gas production and pharmaceutical vessels. Historically, the chemical processing market has represented the largest end-user

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sector for CRA products. Due to maintenance, safety and environmental considerations, the Company believes this market continues to represent an area of potential long-term growth. Unlike aerospace applications within the HTA product market, the development of new market applications for CRA products generally does not require long lead times. The following table sets forth information with respect to certain of the Company's significant corrosion-resistant alloys, applications and features (new CRA development is discussed below under "Patents and Trademarks"):

Alloy and Year Introduced   End Markets and Applications(1)   Features
HASTELLOY C-2000® alloy (1995)(2)   CPI-tanks, mixers, piping   Versatile alloy with good resistance to uniform corrosion
HASTELLOY B-3® alloy (1994)(2)   CPI-acetic acid plants   Better fabrication characteristics compared to other nickel-molybdenum alloys
HASTELLOY D-205® alloy (1993)(2)   CPI-plate heat exchangers   Corrosion resistance to hot sulfuric acid
ULTIMET® alloy (1990)(2)   CPI-pumps, valves   Wear and corrosion resistant nickel-based alloy
HASTELLOY C-22® alloy (1985)   CPI/FGD-tanks, mixers, piping   Resistance to localized corrosion and pitting
HASTELLOY G-30® alloy (1985)(2)   CPI-tanks, mixers, piping   Lower cost alloy with good corrosion resistance in phosphoric acid
HASTELLOY G-35® alloy (2004)(2)   CPI-tanks, heat exchangers, piping   Improved corrosion resistance to phosphoric acid with excellent resistance to corrosion in highly oxidizing media
HASTELLOY C-276 alloy (1968)   CPI/FGD/oil and gas tanks, mixers, piping   Broad resistance to many environments
HASTELLOY C-22HS® alloy (2003)(3)   Oil & Gas/Marine tubular, shafts, fasteners   Combines very high strength with excellent corrosion resistance and toughness

(1)
"CPI" refers to the chemical processing industry; "FGD" refers to the flue gas desulphurization industry.

(2)
Represents a patented product or a product which the Company believes has limited or no significant competition.

(3)
Patent filing date.

Patents and Trademarks

        The Company currently maintains a total of approximately 17 U.S. patents and applications and approximately 195 foreign counterpart patents and applications targeted at countries with significant or potential markets for the patented products and continues to develop, manufacture and test high-performance nickel- and cobalt-based alloys. Since fiscal 2000, the Company's technical programs have yielded eight new proprietary alloys, four of which are currently commercially available and four of which are being scaled-up to be brought to market. The alloys being commercialized saw significant further advancement in the process during fiscal 2013. HAYNES 282 alloy, which management believes will have significant commercial potential for the Company in the long term, is the subject of a U.S. patent issued in 2011. HAYNES 282 alloy has excellent formability, fabricability and forgeability. The commercial launch of HAYNES 282 alloy occurred in October 2005 and, since that time, there have been a significant number of customer tests and evaluations of this product for the hot sections of gas turbines in the aerospace and land-based gas turbine markets, as well as for automotive and other high-temperature applications. The alloy has also been specified into a major aerospace engine component. The Company will continue to actively promote HAYNES 282 alloy through customer engineering visits and technical presentations and papers.

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        For the chemical processing industry, HASTELLOY G-35 alloy has found extensive applications, particularly in wet phosphoric acid production. Management expects demand for this alloy will continue to grow. Commercialization of HASTELLOY C-22HS alloy also continued in fiscal 2013. The Company continues to provide customers with samples of this alloy and making technical presentations. Testing and evaluation of the alloy is ongoing with special emphasis on applications for the oil and gas market. Two major orders were received and shipped for HASTELLOY C-22HS alloy for oil and gas applications. One of those orders was shipped in fiscal 2011, and the second shipped in fiscal 2012. The Company believes that the alloys (particularly HAYNES 282 alloy) are being commercialized rapidly when compared to historical trends for other proprietary alloys introduced by the Company. In addition to HAYNES 282 alloy, HASTELLOY G-35 alloy and HASTELLOY C-22HS alloy, commercialization is also ongoing for HASTELLOY HYBRID-BC1® alloy. This alloy is a CRA product with potential applications in the chemical processing industry that has demonstrated resistance to hydrochloric and sulfuric acid.

        In addition to the commercialization of the above alloys, the Company continues to develop applications for new alloys not yet ready to begin the commercialization process. Two new high-temperature alloys, HAYNES NS-163 alloy (U.S. patent granted in 2011) and HAYNES HR-224® alloy (U.S. patent application filed in 2008 and granted in 2013), are in the scale-up phase. Both of these new materials are believed to have significant, medium to long-term commercial potential. HAYNES NS-163 alloy is a new alloy with extraordinary high-temperature strength in sheet form, which has applications in the aerospace, land-based gas turbine and automotive markets. Data generation and fabrication trials continued through 2013, with test marketing initiated in early 2009. HAYNES HR-224 alloy is an HTA product with superior resistance to oxidation. Scale up of this alloy is continuing and test marketing was initiated in fiscal 2010. A U.S. patent application was filed in fiscal 2012 and granted in 2013 for HAYNES 244 alloy. This alloy has potential in aerospace and land-based gas turbines. It combines high strength to 1400 degrees Fahrenheit with a low coefficient of thermal expansion. Scale-up of this alloy began in fiscal 2011 and is ongoing. Most recently, HAYNES HR-235TM was introduced in fiscal 2013. This alloy has excellent resistance to metal dusting in carbonaceous high temperature environments. Potential uses include applications in petrochemical production and syngas plants. Scale up of this alloy is well underway and material is currently being evaluated by certain key customers.

        Patents or other proprietary rights are an important element of the Company's business. The Company's strategy is to file patent applications in the U.S. and any other country that represents an important potential commercial market to the Company. In addition, the Company seeks to protect technology which is important to the development of the Company's business. The Company also relies upon trade secret rights to protect its technologies and its development of new applications and alloys. The Company protects its trade secrets in part through confidentiality and proprietary information agreements with its customers. Trademarks on the names of many of the Company's alloys have also been applied for or granted in the U.S. and certain foreign countries.

        While the Company believes its patents are important to its competitive position, significant barriers to entry continue to exist beyond the expiration of any patent period. These barriers to entry include the unique equipment required to produce this material and the exacting process required to achieve the desired metallurgical properties. These processing requirements include such items as specific annealing temperature, processing speeds and reduction per rolling pass. Management believes that the current alloy development program and these barriers to entry reduce the impact of patent expirations on the Company.

End Markets

        The global specialty alloy market consists of stainless steels, general purpose nickel alloys and high-performance nickel- and cobalt-based alloys. Of this total market, the Company competes in the high-performance nickel- and cobalt-based alloy sector. The high-performance alloy market demands diverse specialty alloys suitable for use in precision manufacturing. Given the technologically advanced nature of the products, strict requirements of the end users and higher-growth end markets, the Company

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believes the high-performance alloy sector provides greater growth potential, higher profit margins and greater opportunities for service, product and price differentiation than stainless steels and general purpose nickel alloys. While stainless steel and general purpose nickel alloy is generally sold in bulk through third-party distributors, the Company's products are sold in smaller-sized orders which are customized and typically handled on a direct-to-customer basis.

        Aerospace.    The Company has manufactured HTA products for the aerospace market since the late 1930s, and has developed numerous proprietary alloys for this market. Customers in the aerospace market tend to be the most demanding with respect to meeting specifications within very precise tolerances and achieving new product performance standards. Stringent safety standards and continuous efforts to reduce equipment weight and develop more fuel efficient designs require close coordination between the Company and its customers in the selection and development of HTA products. As a result, sales to aerospace customers tend to be made through the Company's direct sales force. Demand for the Company's products in the aerospace market is based on the new and replacement market for jet engines and the maintenance needs of operators of commercial and military aircraft. The Company specializes in the static parts included in the hot sections of the jet engine. The hot sections are subjected to substantial wear and tear and accordingly require periodic maintenance, repair and overhaul. The Company views the maintenance, repair and overhaul (MRO) business as an area of continuing long-term growth.

        Chemical Processing.    The chemical processing market represents a large base of customers with diverse CRA applications driven by demand for key end use markets such as automobiles, housing, health care, agriculture and metals production. CRA products supplied by the Company have been used in the chemical processing market since the early 1930s. Demand for the Company's products in this market is driven by the level of MRO and expansion requirements of existing chemical processing facilities, as well as the construction of new facilities. The North America expansion of manufacturing of natural gas liquids will be a driver of demand in this market. The Company believes the extensive worldwide network of Company-owned service and sales centers, as well as its network of independent distributors and sales agents who supplement the Company's direct sales efforts outside of the U.S., provide a competitive advantage in marketing its CRA products in the chemical processing market.

        Land-based Gas Turbines.    Demand for the Company's products in this market is driven by the construction of cogeneration facilities such as base load for electric utilities or as backup sources to fossil fuel-fired utilities during times of peak demand. Demand for the Company's alloys in the land-based gas turbine markets has also been driven by concerns regarding lowering emissions from generating facilities powered by fossil fuels. Land-based gas turbine generating facilities have gained acceptance as clean, low-cost alternatives to fossil fuel-fired electric generating facilities. Land-based gas turbines are also used in power barges with mobility and as temporary base-load-generating units for countries that have numerous islands and a large coastline. Demand is also generated by mechanical drive units used for oil and gas production and pipeline transportation, as well as microturbines that are used as back up sources of power generation for hospitals and shopping malls.

        Other Markets.    Other markets to which the Company sells its HTA products and CRA products include flue-gas desulphurization (FGD), oil and gas, waste incineration, industrial heat treating, automotive, instrumentation, biopharmaceuticals, solar and nuclear fuel. The FGD market has been driven by both legislated and self-imposed standards for lowering emissions from fossil fuel-fired electric generating facilities. This market is expected to soften if the trend to switch from coal to natural gas for power plants continues. The Company also sells its products for use in the oil and gas market, primarily in connection with sour gas production. In addition, incineration of municipal, biological, industrial and hazardous waste products typically produces very corrosive conditions that demand high-performance alloys. The Company continues to look for opportunities to introduce and expand the use of its alloys in emerging technologies such as solar and nuclear fuel applications. Markets capable of providing growth are

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being driven by increasing performance, reliability and service life requirements for products used in these markets which could provide further applications for the Company's products.

Sales and Marketing and Distribution

        The Company sells its products primarily through its direct sales organization, which operates from 16 total locations in the U.S., Europe and Asia, 13 of which are service and/or sales centers. All of the Company's service and/or sales centers are operated either directly by the Company or through its wholly-owned subsidiaries. Approximately 77% of the Company's net revenues in fiscal 2013 were generated by the Company's direct sales organization. The remaining 23% of the Company's fiscal 2013 net revenues was generated by a network of independent distributors and sales agents who supplement the Company's direct sales in the U.S., Europe and Asia, some of whom have been associated with the Company for over 30 years. Going forward, the Company expects its direct sales force to continue to generate approximately 80% of its total net revenues.

        Providing technical assistance to customers is an important part of the Company's marketing strategy. The Company provides performance analyses of its products and those of its competitors for its customers. These analyses enable the Company to evaluate the performance of its products and to make recommendations as to the use of those products in appropriate applications, enabling the products to be included as part of the technical specifications used in the production of customers' products. The Company's market development professionals are assisted by its engineering and technology staff in directing the sales force to new opportunities. Management believes the Company's combination of direct sales, technical marketing, engineering and customer support provides an advantage over other manufacturers in the high-performance alloy industry. This activity allows the Company to obtain direct insight into customers' alloy needs and to develop proprietary alloys that provide solutions to customers' problems.

        The Company continues to focus on growing its business in foreign markets. In recent years, the Company opened a service and sales center in China and sales centers in Singapore, India, Italy and Japan.

        While the Company is making concentrated efforts to expand foreign sales, the majority of its revenue continues to be provided by sales to U.S. customers. The Company's domestic expansion effort includes, but is not limited to, the continued expansion of ancillary product forms, the continued development of new high-performance alloys, the addition of equipment in U.S. service and sales centers to improve the Company's ability to provide a product closer to the form required by the customer and the continued effort through the technical expertise of the Company to find solutions to customer challenges.

        The following table sets forth the approximate percentage of the Company's fiscal 2013 net revenues generated through each of the Company's distribution channels.

 
  From
Domestic
Locations
  From
Foreign
Locations
  Total  

Company mill direct/service and sales centers

    55 %   22 %   77 %

Independent distributors/sales agents

    22 %   1 %   23 %
               

Total

    77 %   23 %   100 %
               

        The Company's top twenty customers accounted for approximately 38%, 36% and 34% of the Company's net revenues in fiscal 2011, 2012 and 2013, respectively. No customer or group of affiliated customers of the Company accounted for more than 10% of the Company's net revenues in fiscal 2011, 2012 or 2013.

        Net revenues and net income in fiscal 2011, 2012 and 2013 were generated primarily by the Company's U.S. operations. Sales to domestic customers comprised approximately 64%, 60% and 56% of

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the Company's net revenues in fiscal 2011, 2012 and 2013, respectively. In addition, the majority of the Company's operating costs are incurred in the U.S., as all of its manufacturing facilities are located in the U.S. It is expected that net revenues and net income will continue to be highly dependent on the Company's domestic sales and manufacturing facilities in the U.S.

        The Company's foreign and export sales were approximately $198.0 million, $233.0 million, and $214.7 million for fiscal 2011, 2012 and 2013, respectively. Additional information concerning foreign operations and export sales is set forth in Note 13 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

Manufacturing Process

        High-performance alloys require a lengthier, more complex production process and are more difficult to manufacture than lower-performance alloys, such as stainless steel. The alloying elements in high-performance alloys must be highly refined during melting, and the manufacturing process must be tightly controlled to produce precise chemical properties. The resulting alloyed material is more difficult to process because, by design, it is more resistant to deformation. Consequently, high-performance alloys require that a greater force be applied when hot or cold working and are less susceptible to reduction or thinning when rolling or forging. This results in more cycles of rolling, annealing and pickling compared to a lower-performance alloy to achieve proper dimensions. Certain alloys may undergo 40 or more distinct stages of melting, remelting, annealing, hot reduction, cold reduction, pickling and testing before they achieve the specifications required by a customer. This longer production cycle contributes to slower inventory turns. The Company manufactures its high-performance alloys in various forms, including sheet, plate, billet/ingot, tubular, wire and other forms. The Company also preforms value-added cutting services to supply certain customers with product cut to their specification.

        At the Kokomo, Indiana facility, the manufacturing process begins with raw materials being combined, melted and refined in a precise manner to produce the chemical composition specified for each high-performance alloy. The Company's primary melt facility utilizes two different melting processes. The argon oxygen decarburization process utilizes gas controls to remove carbon and other undesirable elements, thereby allowing more tightly-controlled chemistries, which in turn produce more consistent properties in the high-performance alloys. The other primary melt method utilizes vacuum induction melting which involves the melting of raw materials through electromagnetic induction while under vacuum conditions to produce the desired tightly-controlled chemistry. The control systems allow for statistical process control monitoring in real-time to improve product quality. For most high-performance alloys, this molten material is cast into electrodes and additionally refined through electroslag remelting. The resulting ingots are then forged or rolled to an intermediate shape and size depending upon the intended final product form. Intermediate shapes destined for flat products are then sent through a series of hot and cold rolling, annealing and pickling operations before being cut to final size.

        The Company has a four-high Steckel rolling mill for use in hot rolling high-performance alloys, created specifically for that purpose. The four-high Steckel rolling mill was installed in 1982 and is one of the most powerful four-high Steckel rolling mills in the world. The mill is capable of generating approximately 12.0 million pounds of separating force and rolling a plate up to 72 inches wide. The mill includes integrated computer controls (with automatic gauge control and programmed rolling schedules), two coiling Steckel furnaces and six heating furnaces. Computer-controlled rolling schedules for each of the hundreds of combinations of product shapes and sizes the Company produces allow the mill to roll numerous widths and gauges to exact specifications without stoppages or changeovers.

        The Company also operates a three-high hot rolling mill and a two-high hot rolling mill, each of which is capable of custom processing much smaller quantities of material than the four-high Steckel rolling mill. These mills provide the Company with significant flexibility in running smaller batches of varied products in response to customer requirements. The Company believes the flexibility provided by the three-high and

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two-high mills provides the Company with an advantage over its major competitors in obtaining smaller specialty orders.

        The Arcadia, Louisiana facility uses feedstock produced at the Kokomo facility to fabricate welded and seamless alloy pipe and tubing and purchases extruded tube hollows to produce seamless titanium tubing. The manufacturing processes at Arcadia require cold pilger mills, weld mills, draw benches, annealing furnaces and pickling facilities.

        The Mountain Home, North Carolina facility primarily manufactures finished high-performance alloy wire. Finished wire products are also warehoused at this facility.

Backlog

        The Company defines backlog to include firm commitments from customers for delivery of product at established prices. Approximately 30% of the orders in the backlog at any given time include prices that are subject to adjustment based on changes in raw material costs. Historically, approximately 75% of the Company's backlog orders have shipped within six months and approximately 90% have shipped within 12 months. The backlog figures do not typically reflect that portion of the Company's business conducted at its service and sales centers on a spot or "just-in-time" basis. For additional discussion of backlog, see Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations contained in this Annual Report on Form 10-K.


Consolidated Backlog at Fiscal Quarter End

 
  2009   2010   2011   2012   2013  
 
   
  (in millions)
 

1st quarter

  $ 199.7   $ 110.4   $ 167.0   $ 261.8   $ 211.7  

2nd quarter

    153.0     124.6     241.7     264.2     207.0  

3rd quarter

    113.4     130.9     288.6     241.2     189.6  

4th quarter

    106.7     148.0     273.4     222.9     166.6  

Raw Materials

        Raw materials represented 50% of cost of sales in fiscal 2013. Nickel, a major component of many of the Company's products, accounted for approximately 60% of raw material costs, or approximately 30% of total cost of sales in fiscal 2013. Other raw materials include cobalt, chromium, molybdenum and tungsten. Melt materials consist of virgin raw material, purchased scrap and internally produced scrap.

        The average nickel price per pound for cash buyers for the 30-day period ended on September 30, 2011, 2012 and 2013, as reported by the London Metals Exchange, was $9.25, $7.81 and $6.25, respectively. Prices for other raw materials which are significant in the manufacture of the Company's products, such as molybdenum, cobalt and chromium, were also lower in fiscal 2013 than in fiscal 2012.

        Although alternative sources of supply are available, the Company currently purchases nickel through an exclusive arrangement with a single supplier to ensure consistent quality and supply. The Company purchases raw materials through various arrangements including fixed-term contracts and spot purchases, which involve a variety of pricing mechanisms. In cases where the Company prices its products at the time of order placement, the Company attempts to establish selling prices with reference to known costs of materials, thereby reducing the risk associated with changes in the cost of raw materials. However, to the extent that the price of nickel fluctuates rapidly, there may be a favorable or unfavorable effect on the Company's gross profit margins. The Company periodically purchases material forward with certain suppliers. In the event the Company enters into a forward purchase which is not matched to one or more customer contracts with fixed raw material prices or if a customer fails to meet the expected volume levels

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or the consumption schedule deviates from the expected schedule, a rapid or prolonged decrease in the price of raw materials could adversely affect the Company's operating results.

        The Company values inventory utilizing the first-in, first-out ("FIFO") inventory costing methodology. Under the FIFO inventory costing method, the cost of materials included in cost of sales may be different than the current market price at the time of sale of finished product due to the length of time from the acquisition of the raw material to the sale of the finished product. In a period of decreasing raw material costs, the FIFO inventory valuation method normally results in higher costs of sales as compared to last-in, first out method. Conversely, in a period of rising raw material costs, the FIFO inventory valuation method normally results in lower costs of sales.

Research and Technical Support

        The Company's technology facilities are located at the Kokomo headquarters and consist of 19,000 square feet of offices and laboratories, as well as an additional 90,000 square feet of paved storage area. The Company has six fully equipped technology testing laboratories, including a mechanical test lab, a metallographic lab, an electron microscopy lab, a corrosion lab, a high temperature lab and a welding lab. These facilities also contain a reduced scale, fully equipped melt shop and process lab. As of September 30, 2013, the technology, engineering and technological testing staff consisted of 26 persons, 12 of whom have engineering or science degrees, including 6 with doctoral degrees, with the majority of degrees in the field of metallurgical engineering or materials science.

        Research and technical support costs primarily relate to efforts to develop new proprietary alloys and new applications for existing alloys. The Company spent approximately $3.3 million, $3.3 million and $3.5 million for research and technical support activities for fiscal 2011, 2012 and 2013, respectively.

        During fiscal 2013, research and development projects were focused on new alloy development, new product form development and new alloy concept validation, relating to products for the aerospace, land-based gas turbine, chemical processing and oil and gas industries. In addition, significant projects were conducted to generate technical data in support of major market application opportunities in areas such as renewable energy, fuel cell systems, biotechnology (including toxic waste incineration and pharmaceutical manufacturing), and power generation.

Competition

        The high-performance alloy market is a highly competitive market in which eight to ten major producers participate in various product forms. The Company's primary competitors in flat rolled products include Special Metals Corporation, a subsidiary of Precision Cast Parts, Allegheny Technologies, Inc. and Outokumpu-VDM. The Company faces strong competition from domestic and foreign manufacturers of both high-performance alloys (similar to those the Company produces) and other competing metals. The Company may face additional competition in the future to the extent new materials are developed, such as plastics or ceramics, that may be substituted for the Company's products. The Company also believes that it will face increased competition from non-U.S. entities in the next five to ten years, especially from competitors located in Eastern Europe and Asia. Additionally, in recent years the Company's domestic business has benefited from a weak U.S. dollar, which makes the goods of foreign competitors more expensive to import into the U.S. In the event that the U.S. dollar continues to strengthen, the Company may face increased competition in the U.S. from foreign competitors.

        During fiscal 2013, the Company experienced strong price competition from competitors who produce both stainless steel and high-performance alloys due primarily to weakness in both markets. Increased competition has required the Company to continually price its products competitively, which has contributed to the reduction in the Company's gross profit margin and net income. When demand begins to improve, price competition in the high-performance alloy industry should begin to ease. The Company

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continues to respond to this competition by increasing emphasis on service centers, offering value-added services, improving its cost structure and striving to improve delivery-times and reliability.

Employees

        As of September 30, 2013, the Company employed approximately 1,043 full-time employees worldwide. All eligible hourly employees at the Kokomo, Indiana and Arcadia, Louisiana plants, and the Lebanon, Indiana service center (approximately 593 in the aggregate) are covered by two collective bargaining agreements. Management believes that current relations with the union are satisfactory.

        On December 21, 2012, the Company entered into a new collective bargaining agreement with the United Steelworkers of America which covers eligible hourly employees at the Company's Arcadia, Louisiana plant. This agreement will expire in December 2015.

        On July 1, 2013, the Company entered into a new collective bargaining agreement with the United Steelworkers of America, which will expire in June 2018. The agreement covers eligible hourly employees at the Kokomo, Indiana plant and the Lebanon, Indiana service center.

Environmental Matters

        The Company's facilities and operations are subject to various foreign, federal, state and local laws and regulations relating to the protection of human health and the environment, including those governing the discharge of pollutants into the environment and the storage, handling, use, treatment and disposal of hazardous substances and wastes. In the U.S., such laws include the Occupational Safety and Health Act, the Clean Air Act, the Clean Water Act, the Toxic Substances Control Act and the Resource Conservation and Recovery Act. As environmental laws and regulations continue to evolve, it is likely the Company will be subject to increasingly stringent environmental standards in the future, particularly under air quality and water quality laws and standards related to climate change issues, such as a reporting of greenhouse gas emissions. Violations of these laws and regulations can result in the imposition of substantial penalties and can require facility improvements. Expenses related to environmental compliance were approximately $2.6 million for fiscal 2013 and are currently expected to be approximately $2.9 million for fiscal 2014. Although there can be no assurance, based upon current information available to the Company, the Company does not currently expect that costs of environmental contingencies, individually or in the aggregate, will have a material adverse effect on the Company's financial condition, results of operations or liquidity. The Company's facilities are subject to periodic inspection by various regulatory authorities, who from time to time have issued findings of violations of governing laws, regulations and permits. In the past five years, the Company has paid administrative fines, none of which have had a material effect on the Company's financial condition, for alleged violations relating to environmental matters, requirements relating to its Title V Air Permit and alleged violations of record keeping and notification requirements relating to industrial waste water discharge. Capital expenditures of approximately $0.5 million were made for pollution control improvements during fiscal 2013, with additional expenditures of approximately $1.0 million for similar improvements planned for fiscal 2014.

        The Company has received permits from the Indiana Department of Environmental Management, or IDEM, to close and to provide post-closure monitoring and care for certain areas at the Kokomo facility previously used for the storage and disposal of wastes, some of which are classified as hazardous under applicable regulations. Closure certification was received in fiscal 1988 for the South Landfill at the Kokomo facility and post-closure monitoring and care are permitted and ongoing there. Closure certification was received in fiscal 1999 for the North Landfill at the Kokomo facility, and post-closure monitoring and care are permitted and ongoing there. In fiscal 2007, IDEM issued a single post-closure permit applicable to both the North and South Landfills, which contains monitoring and post-closure care requirements and which was reviewed in fiscal 2012. In addition, IDEM required that a Resource Conservation and Recovery Act, or RCRA, Facility Investigation, or RFI, be conducted in order to further

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evaluate one area of concern and one solid waste management unit. The RFI commenced in fiscal 2008 and is ongoing. Based on preliminary results, the Company has determined that additional testing and further source remediation are necessary.

        The Company has also received permits from the North Carolina Department of Environment and Natural Resources, or NCDENR, to close and provide post-closure monitoring and care for the hazardous waste lagoon at its Mountain Home, North Carolina facility. The lagoon area has been closed and is currently undergoing post-closure monitoring and care.

        The Company is required to 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 corrective action by the Company could be required.

        The Company is unable to estimate the costs of any further corrective action at these sites, if required. 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. Additionally, it is possible that the Company could be required to undertake other corrective action commitments for any other solid waste management unit or other conditions existing or determined to exist at its facilities. As a condition of the post-closure permits, the Company must provide and maintain assurances to IDEM and NCDENR of the Company's capability to satisfy post-closure groundwater monitoring requirements, including possible future corrective action as necessary. The Company provides these required assurances through a statutory financial assurance test as provided by Indiana and North Carolina law.

        The Company may also incur liability for alleged environmental damages associated with the off-site transportation and disposal of hazardous substances. The Company's operations generate hazardous substances, and, while a large percentage of these substances are reclaimed or recycled, the Company also accumulates hazardous substances at each of its facilities for subsequent transportation and disposal off-site by third parties. Generators of hazardous substances which are transported to disposal sites where environmental problems are alleged to exist are subject to claims under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, and state counterparts. CERCLA imposes strict, joint and several liabilities for investigatory and cleanup costs upon hazardous substance generators, site owners and operators and other potentially responsible parties. The Company is currently named as a potentially responsible party at one site. The Company may have generated hazardous substances disposed of at other sites potentially subject to CERCLA or equivalent state law remedial action. Thus, there can be no assurance that the Company will not be named as a potentially responsible party at other sites in the future or that the costs associated with those sites would not have a material adverse effect on the Company's financial condition, results of operations or liquidity.

        On August 3, 2012, the Company received an information request from the United States Environmental Protection Agency, or EPA, relating to the Company's compliance with laws relating to air quality. The Company has responded to the request, and there has been no further action by the EPA.

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Executive Officers of the Company

        The following table sets forth certain information concerning the persons who served as executive officers as of September 30, 2013. Except as indicated in the following paragraphs, the principal occupations of these persons have not changed during the past five years.

Name
  Age   Position with Haynes International, Inc.
Mark M. Comerford     51   President and Chief Executive Officer; Director
Daniel W. Maudlin     47   Vice President—Finance, Treasurer and Chief Financial Officer
Venkat R. Ishwar     61   Vice President—Marketing & Technology
Marlin C. Losch     53   Vice President—Sales & Distribution
Jean C. Neel     54   Vice President—Corporate Affairs
Scott R. Pinkham     46   Vice President—Manufacturing
Gregory M. Spalding     57   Vice President—Tube & Wire Products
David S. Van Bibber     42   Controller and Chief Accounting Officer
Janice C. Wilken     41   Vice President—General Counsel & Corporate Secretary
Jeffrey L. Young     56   Vice President & Chief Information Officer

        Mr. Comerford was elected President and Chief Executive Officer and a director of the Company in October 2008. Before joining the Company, Mr. Comerford was President of Brush International, Inc. and Brush Engineered Materials Alloys Division, each affiliated with Materion Corporation, formerly known as Brush Engineered Material, Inc., a company that manufactures high performance materials, from 2004 to 2008.

        Mr. Maudlin has served as the Vice President-Finance and Chief Financial Officer of the Company since December 2012. Prior to that, he was Controller and Chief Accounting Officer of the Company from September 2004 to December 2012.

        Dr. Ishwar has served as Vice President—Marketing & Technology of the Company since January 2010. Dr. Ishwar was Senior Vice President of Forgital USA, a manufacturer of mechanical components, between July 2008 and December 2009. Prior to that, he was Director of Marketing and Business Development at the Company from 2005 to July 2008.

        Mr. Losch has served as Vice President—Sales & Distribution of the Company since January 2010. Prior to that, he served as Vice President—North American Sales of the Company beginning in February 2006. Mr. Losch was Midwest Regional Manager of the Company from 2001 to 2006.

        Ms. Neel has served as Vice President—Corporate Affairs of the Company since April 2000.

        Mr. Pinkham has served as Vice President—Manufacturing of the Company since March 2008. Prior to that, he served as Vice President—Manufacturing Planning of the Company from 2004 to 2008.

        Mr. Spalding has served as Vice President—Tube & Wire Products of the Company since May 2009. Prior to that, he served as Vice President, Haynes Wire & Chief Operating Officer from 2006 to May 2009, and Vice President—North American Sales since he joined the Company in July 1999.

        Mr. Van Bibber has served as Controller and Chief Accounting Officer of the Company since December 2012. Prior to joining the Company, Mr. Van Bibber was Director of Finance at Belden, Inc. from 2009 to 2012 and Director of Finance at Zimmer, Inc. from 2006 to 2009.

        Ms. Wilken has served as Vice President—General Counsel and Corporate Secretary since August 2011. Prior to joining the Company, Ms. Wilken was a partner at Ice Miller LLP from 2005 to 2011.

        Mr. Young has served as Vice President & Chief Information Officer since November 2005.

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Item 1A.    Risk Factors

Risks Related to Our Business

Our revenues may fluctuate widely based upon changes in demand for our customers' products.

        Demand for our products is dependent upon and derived from the level of demand for the machinery, parts and equipment produced by our customers, which are principally manufacturers and fabricators of machinery, parts and equipment for highly specialized applications. Historically, certain of the markets in which we compete have experienced unpredictable, wide demand fluctuations. Because of the comparatively high level of fixed costs associated with our manufacturing processes, significant declines in those markets have had a disproportionately adverse impact on our operating results.

        Since we became an independent company in 1987, we have, in several instances, experienced substantial year-to-year declines in net revenues, primarily as a result of decreases in demand in the industries to which our products are sold. In fiscal 2002, 2003, 2009, 2010 and 2013, our net revenues, when compared to the immediately preceding year, declined by approximately 10.3%, 21.2%, 31.1%, 13.0% and 16.7%, respectively. We may experience similar fluctuations in our net revenues in the future. Additionally, demand is likely to continue to be subject to substantial year-to-year fluctuations as a consequence of industry cyclicality, as well as other factors such as global economic uncertainty, and such fluctuations may have a material adverse effect on our financial condition or results of operations.

Profitability in the high-performance alloy industry is highly sensitive to changes in sales volumes.

        The high-performance alloy industry is characterized by high capital investment and high fixed costs. The cost of raw materials is the primary variable cost in the manufacture of our high-performance alloys and, in fiscal 2013, represented approximately 50.0% of our total cost of sales. Other manufacturing costs, such as labor, energy, maintenance and supplies, often thought of as variable, have a significant fixed element. Profitability is, therefore, very sensitive to changes in volume, and relatively small changes in volume can result in significant variations in earnings. Our ability to effectively utilize our manufacturing assets depends greatly upon continuing demand in our end-markets, successfully increasing our market share and continued acceptance of our new products into the marketplace. Any failure to effectively utilize our manufacturing assets may negatively impact our gross margin and net income.

We are subject to risks associated with global economic and political uncertainties.

        We are susceptible to macroeconomic downturns in the United States and abroad that may affect the general economic climate and our performance and the demand of our customers. The continuing turmoil in the global economy has had, and may continue to have, an adverse impact on our business and our financial condition. In addition to the impact that the global financial crisis has already had, we may face significant challenges if conditions in the global economy do not improve or worsen.

        In addition, we are subject to various domestic and international risks and uncertainties, including changing social conditions and uncertainties relating to the current and future political climate. Changes in governmental policies (particularly those that would limit or reduce defense spending) could have an adverse effect on our financial condition and results of operations and may reduce our customers' demand for our products and/or depress pricing of those products used in the defense industry or which have other military applications, resulting in a material adverse impact on our business, prospects, results of operations, revenues and cash flows. Furthermore, any actual armed hostilities, and any future terrorist attacks in the U.S. or abroad, could also have an adverse impact on the U.S. economy, global financial markets and our business. The effects may include, among other things, a decrease in demand in the aerospace industry due to reduced air travel, as well as reduced demand in the other industries we serve. Depending upon the severity, scope and duration of these effects, the impact on our financial position, results of operations and cash flows could be material.

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We operate in cyclical markets.

        A significant portion of our revenues are derived from the highly cyclical aerospace, power generation and chemical processing markets. Our sales to the aerospace industry constituted 40.8% of our total sales in fiscal 2013. Our land-based gas turbine and chemical processing sales constituted 21.2% and 25.7%, respectively, of our total sales in fiscal 2013.

        The commercial aerospace industry is historically driven by demand from commercial airlines for new aircraft. The U.S. and international commercial aviation industries continue to face challenges arising from the global economic climate, competitive pressures and fuel costs. Demand for commercial aircraft is influenced by industry profitability, trends in airline passenger traffic, the state of U.S. and world economies, the ability of aircraft purchasers to obtain required financing and numerous other factors, including the effects of terrorism and health and safety concerns. The military aerospace cycle is highly dependent on U.S. and foreign government funding; however, it is also driven by the effects of terrorism, a changing global political environment, U.S. foreign policy, the retirement of older aircraft and technological improvements to new engines that increase reliability. Accordingly, the timing, duration and severity of cyclical upturns and downturns cannot be forecast with certainty. Downturns or reductions in demand for our products sold into the aerospace market could have a material adverse effect on our business.

        The land-based gas turbine market is also cyclical in nature. Demand for power generation products is global and is affected by the state of the U.S. and world economies, the availability of financing to power generation project sponsors and the political environments of numerous countries. The availability of fuels and related prices also have a large impact on demand. Reductions in demand for our products sold into the land-based gas turbine industry may have a material adverse effect on our business.

        We also sell products into the chemical processing industry, which is also cyclical in nature. Customer demand for our products in this market may fluctuate widely depending on U.S. and world economic conditions, the availability of financing, and the general economic strength of the end use customers in this market. Cyclical declines or sustained weakness in this market could have a material adverse effect on our business.

Reductions in government expenditures or changes in spending priorities could adversely affect our military aerospace business.

        The budget for the U.S. Department of Defense may be reduced from current levels. In addition to debt reduction efforts already authorized, it is possible that the U.S. government could reduce or further delay its spending on, or reprioritize its spending away from, the military aerospace industry. On November 23, 2011, the Joint Select Committee on Deficit Reduction (commonly referred to as the "Super Committee" which was established as part of the Budget Control Act of 2011 (the "Budget Act")) failed to recommend legislation that would reduce net U.S. government spending by at least $1.2 trillion over the next 10 years, which failure to act triggered directed automatic across-the-board cuts, known as sequestrations, beginning on January 2, 2013. Then, on January 2, 2013, the American Taxpayer Relief Act of 2012 ("ATRA") was signed into law. ATRA delayed the sequestrations created by the Budget Act for two months, until March 1, 2013. On March 1, 2013, with no deal reached, President Obama signed an order putting the sequestrations into effect. The sequestrations are automatic reductions of discretionary appropriations for U.S. defense programs, which would make up the shortfall necessary to achieve the $1.2 trillion target. On October 1, 2013, as a result of Congress's inability to enact legislation appropriating funds for fiscal year 2014, the U.S. government entered a shutdown. Then, on October 16, 2013, Congress agreed on a proposal to fund the government through January 15, 2014 at sequestration levels and suspend the debt limit until February 7, 2014. Ultimately, the U.S. government may be unable to timely complete its budget process or fully agree upon spending priorities and the U.S. government may be forced to enter another shutdown or further extend the sequestrations. While we are unable to predict the outcome of the

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budget deliberations, actions of Congress or the impact of any resulting reductions in defense appropriations, reductions in U.S. defense spending or changes in spending priorities, particularly with respect to the military aerospace industry, could negatively affect our revenues, financial condition and results of operations.

Aerospace demand is primarily dependent on two manufacturers.

        A significant portion of our aerospace products are sold to fabricators and are ultimately used in the production of new commercial aircraft. There are only two primary manufacturers of large commercial aircraft in the world, The Boeing Company and Airbus. A significant portion of our aerospace sales are dependent on the number of new aircraft built by these two manufacturers, which is in turn dependent on a number of factors over which we have little or no control. Those factors include demand for new aircraft from around the globe, success of new commercial and military aircraft programs and factors that impact manufacturing capabilities, such as the availability of raw materials and manufactured components, U.S. and world economic conditions, changes in the regulatory environment and labor relations between the aircraft manufacturers and their work forces. A significant interruption or slow down in the number of new aircraft built by the aircraft manufacturers could have a material adverse effect on our business.

Our operations are dependent on production levels at our Kokomo facility.

        Our principal assets are located at our primary integrated production facility in Kokomo, Indiana and at our production facilities in Arcadia, Louisiana and in Mountain Home, North Carolina. The Arcadia and Mountain Home plants rely to a significant extent upon feedstock produced at the Kokomo facility. Any production failures, shutdowns or other significant problems at the Kokomo facility could have a material adverse effect on our financial condition and results of operations. We maintain property damage insurance to provide for reconstruction of damaged equipment, as well as business interruption insurance to mitigate losses resulting from any production shutdown caused by an insured loss. Although we believe that our insurance is adequate to cover any such losses, that may not be the case. One or more significant uninsured losses at our Kokomo facility may have a material adverse effect on our financial condition.

        In addition, from time to time we schedule planned outages on the equipment at our Kokomo facility for maintenance and upgrades. These projects are subject to a variety of risks and uncertainties, including a variety of market, operational and labor related factors, many of which may be beyond our control. Should a planned shut-down on a significant piece of equipment last substantially longer than originally planned, there could be a material adverse effect on our operating results.

A default under our agreements with Titanium Metals Corporation could require us to make significant payments and could disrupt our operations.

        We are party to a Conversion Services Agreement and an Access and Security Agreement with Titanium Metals Corporation (TIMET) that provide for the performance of certain titanium conversion services through November 2026. TIMET was acquired by Precision Castparts Corp. which owns Special Metals Corporation, a direct competitor of ours. Events of default under the Conversion Services Agreement include (a) a change in control in which the successor does not assume the agreement, (b) a violation by the Company of certain non-compete obligations relating to the manufacture and conversion of titanium and (c) failure to meet agreed-upon delivery and quality requirements. If an event of default under the Conversion Services Agreement occurs, TIMET could require us to repay the unearned portion of the $50.0 million fee paid to us by TIMET when the agreement was signed, plus liquidated damages of $25.0 million. Our obligations to pay these amounts to TIMET are secured by a security interest in our four-high Steckel rolling mill, through which we process a substantial amount of our products. In addition, the Access and Security Agreement with TIMET includes, among other terms, an access right that would allow TIMET to use certain of our operating assets, including the four-high mill, to perform titanium conversion services in the event of our bankruptcy or the acceleration of our indebtedness. Exercise by

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TIMET of its rights under its security interest following a default and non-payment of the amounts provided in the Conversion Services Agreement or exercise of the access rights under the Access and Security Agreement could cause significant disruption in our Kokomo operations which would have a material adverse effect on our financial condition and results of operations.

During periods of lower demand in other alloy markets, some of our competitors may use their available capacity to produce higher volumes of high-performance alloys, which leads to increased competition in the high-performance alloy market.

        We have experienced increased competition from competitors who produce both stainless steel and high-performance alloys. Due to continued under-utilization of capacity in the stainless steel market, we believe these competitors increased their production levels and sales activity in high-performance alloys to keep capacity in their mills as full as possible, while offering very competitive prices and delivery times. If the stainless market does not improve, continued competition from stainless steel producers could negatively impact our average selling price and reduce our gross profit margin.

        In addition, as a result of the competition in our markets, we have made significant price concessions to our customers from time to time, and we expect customer pressure for further price concessions to continue. Maintenance of our market share will depend, in part, on our ability to sustain a cost structure that enables us to be cost-competitive. If we are unable to adjust our costs relative to our pricing, our profitability will suffer. Our effectiveness in managing our cost structure will be a key determinant of future profitability and competitiveness.

Rapid fluctuations in the price of nickel may materially adversely affect our operating results.

        To the extent that we are unable to adjust to rapid fluctuations in the price of nickel, there may be a negative effect on our gross profit margins. In fiscal 2013, nickel, a major component of many of our products, accounted for approximately 60% of our raw material costs, or approximately 30% of our total costs of sales. We enter into several different types of sales contracts with our customers, some of which allow us to pass on increases in nickel prices to our customers. In other cases, we fix the nickel component of our prices for a period of time through the life of a long-term contract. In yet other cases, we price our products at the time of order, which allows us to establish prices with reference to known costs of our nickel inventory, but which does not allow us to offset an unexpected rise in the price of nickel. We may not be able to successfully offset rapid increases in the price of nickel or other raw materials in the future. In the event that raw material price increases occur that we are unable to pass on to our customers, our cash flows or results of operations could be materially adversely affected.

        Alternatively, our results of operations may also be negatively impacted if both customer demand and nickel prices rapidly fall at the same time. Because we value most of our inventory utilizing the first-in, first-out inventory costing methodology, a rapid decrease in raw material costs has a negative effect on our operating results. In those circumstances, we recognize higher material cost in cost of sales relative to lower raw material market prices that drive the sales price.

        In addition, we periodically enter into forward purchase agreements for our nickel supply. If we enter into a forward purchase agreement which is not matched to one or more customer contracts with fixed nickel prices, a rapid or prolonged decrease in the price of nickel could adversely impact our operating results.

Our business is dependent on a number of raw materials that are subject to volatility in price and availability.

        We use a number of raw materials in our products which are found in only a few parts of the world and are available from a limited number of suppliers. The availability and costs of these materials may be influenced by private or government cartels, changes in world politics, labor relations between the materials producers and their work force, unstable governments in exporting nations, inflation, general

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economic conditions and export quotas imposed by governments in nations with rare earth element supplies. The ability of key material suppliers to meet quality and delivery requirements or to provide materials on price and other terms acceptable to us can also impact our ability to meet commitments to customers. Future shortages or price fluctuations in raw materials could result in decreased sales as well as margins, or otherwise adversely affect our business. The enactment of new or increased import duties on raw materials imported by us could also increase the costs to us of obtaining the raw materials and might adversely affect our business.

        If suppliers increase the price of critical raw materials, we may not have alternative sources of supply. In some cases, we have entered into exclusive supply agreements with respect to raw materials, which could adversely affect our results of operations if the exclusive supplier cannot meet quality and delivery requirements to provide materials on price and other terms acceptable to us. In addition, to the extent that we have quoted prices to customers and accepted customer orders for products prior to purchasing necessary raw materials, or have existing fixed-price contracts, we may be unable to raise the price of products to cover all or part of the increased cost of the raw materials.

        The manufacture of some of our products is a complex process and requires long lead times. As a result, we may experience delays or shortages in the supply of raw materials. If unable to obtain adequate and timely deliveries of required raw materials, we may be unable to timely manufacture sufficient quantities of products. This could cause us to lose sales, incur additional costs, delay new product introductions or suffer harm to our reputation.

Failure to successfully develop, commercialize, market and sell new applications and new products could adversely affect our business.

        We believe that our proprietary alloys and metallurgical manufacturing expertise provide us with a competitive advantage over other high-performance alloy producers. Our ability to maintain this competitive advantage depends on our ability to continue to offer products that have equal or better performance characteristics than competing products at competitive prices. Our future growth will depend, in part, on our ability to address the increasingly demanding needs of our customers by enhancing the properties of our existing alloys, by timely developing new applications for our existing products, and by timely developing, commercializing, marketing and selling new products. If we are not successful in these efforts, or if our new products and product enhancements do not adequately meet the requirements of the marketplace and achieve market acceptance, our revenues, cash flows and results of operations could be negatively affected.

We are subject to risks relating to our cybersecurity measures.

        We have put in place a number of systems, processes and practices designed to protect against intentional or unintentional misappropriation or corruption of our systems and information or disruption of our operations. These include, for example, the appropriate encryption of information. Despite such efforts, we are subject to breaches of security systems which may result in unauthorized access, misappropriation, corruption or disruption of the information we are trying to protect, in which case we could suffer material harm. Access to our proprietary information regarding new alloy formulations would allow our competitors to use that information in the development of competing products. Current employees have, and former employees may have, access to a significant amount of information regarding our operations which could be disclosed to our competitors or otherwise used to harm us. In addition, our systems could be subject to sabotage by employees or third parties, which could slow or stop production or otherwise adversely affect our operations. Any misappropriation or corruption of our systems and information or disruption of our operations could have a material adverse effect on our business.

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An interruption in energy services may cause manufacturing curtailments or shutdowns.

        We rely upon third parties for our supply of energy resources consumed in the manufacture of our products. The prices for and availability of electricity, natural gas, oil and other energy resources are subject to volatile market conditions. These market conditions often are affected by political and economic factors beyond our control. Disruptions in the supply of energy resources could temporarily impair our ability to manufacture products for customers. Further, increases in energy costs, or changes in costs relative to energy costs paid by competitors, has and may continue to adversely affect our profitability. To the extent that these uncertainties cause suppliers and customers to be more cost sensitive, increased energy prices may have an adverse effect on our results of operations and financial condition.

We may be adversely affected by environmental, health and safety laws, regulations, costs and other liabilities.

        We are subject to various foreign, federal, state and local environmental, health and safety laws and regulations, including those governing the discharge of pollutants into the environment, the storage, handling, use, treatment and disposal of hazardous substances and wastes and the health and safety of our employees. Under these laws and regulations, we may be held liable for all costs arising out of any release of hazardous substances on, under or from any of our current or former properties or any off-site location to which we sent or arranged to be sent wastes for disposal or treatment, and such costs may be material. We could also be held liable for any and all consequences arising out of human exposure to such substances or other hazardous substances that may be attributable to our products or other environmental damage. In addition, some of these laws and regulations require our facilities to operate under permits that are subject to renewal or modification. These laws, regulations and permits can require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment. Violations of these laws, regulations or permits can also result in the imposition of substantial penalties, permit revocations and/or facility shutdowns.

        We have received permits from the environmental regulatory authorities in Indiana and North Carolina to close and to provide post-closure monitoring and care for certain areas of our Kokomo and Mountain Home facilities that were used for the storage and disposal of wastes, some of which are classified as hazardous under applicable regulations. We are required to monitor groundwater and to continue post-closure maintenance of the former disposal areas at each site. As a result, we are aware of elevated levels of certain contaminants in the groundwater and additional corrective action could be required. Additionally, it is possible that we could be required to undertake other corrective action for any other solid waste management unit or other conditions existing or determined to exist at our facilities. We are unable to estimate the costs of any further corrective action, if required. However, the costs of future corrective action at these or any other current or former sites could have a material adverse effect on our financial condition, results of operations or liquidity.

        We may also incur liability for alleged environmental damages associated with the off-site transportation and disposal of hazardous substances. Our operations generate hazardous substances, many of which we accumulate at our facilities for subsequent transportation and disposal off-site or recycling by third parties. Generators of hazardous substances which are transported to disposal sites where environmental problems are alleged to exist are subject to liability under CERCLA and state counterparts. In addition, we may have generated hazardous substances disposed of at sites which are subject to CERCLA or equivalent state law remedial action. We have been named as a potentially responsible party at two sites. CERCLA imposes strict, joint and several liabilities for investigatory and cleanup costs upon hazardous substance generators, site owners and operators and other potentially responsible parties regardless of fault. If we are named as a potentially responsible party at other sites in the future, the costs associated with those future sites could have a material adverse effect on our financial condition, results of operations or liquidity.

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        Environmental laws are complex, change frequently and have tended to become increasingly stringent over time. While we have budgeted for future capital and operating expenditures to comply with environmental laws, changes in any environmental law may increase our costs of compliance and liabilities arising from any past or future releases of, or exposure to, hazardous substances and may materially adversely affect our business, results of operations or financial condition. See "Business—Environmental Matters."

Pending legislation or regulation of greenhouse gases, if enacted or adopted in an onerous form, could have a material adverse impact on our results of operations, financial condition and cash flows.

        Political and scientific debates related to the impacts of emissions of greenhouse gases on the global climate are prevalent. Regulation or some form of legislation aimed at reducing greenhouse gas emissions is currently being considered in the United States as well as globally. As a high-performance alloy manufacturer, we will be affected, both directly and indirectly, if proposed climate change legislation, such as use of a "cap and trade" system, is enacted which could have a material adverse impact on our results of operations, financial condition and cash flows.

We are subject to increasing levels of federal regulation.

        In recent years, the United States Congress has adopted several significant pieces of legislation that affect our operations. We may be subject to significant fines and penalties if we fail to comply with these laws or their implementing regulations, and the increasingly stringent regulations could require us to make additional unforeseen expenditures. Any such fines, penalties or expenditures could have a material adverse effect on our financial condition and results of operations.

New regulations related to conflict minerals could adversely impact our business.

        The SEC has promulgated final rules mandated by the Dodd-Frank Act regarding disclosure of the use of tin, tantalum, tungsten and gold, known as conflict minerals, in products manufactured by public companies. These new rules require due diligence to determine whether such minerals originated from the Democratic Republic of Congo (the "DRC") or an adjoining country and whether such minerals helped finance the armed conflict in the DRC. The first conflict minerals report required by the new rules is due by May 31, 2014 and annually thereafter. There will be costs associated with complying with these disclosure requirements, including costs to determine the origin of conflict minerals used in our products. In addition, the implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our products. Also, we may face disqualification as a supplier for customers and reputational challenges if the due diligence procedures we implement do not enable us to verify the origins for all conflict minerals or to determine that such minerals are DRC conflict-free.

Our business is affected by federal rules, regulations and orders applicable to government contractors.

        A number of our products are manufactured and sold under U.S. government contracts or subcontracts. Consequently, we are directly and indirectly subject to various federal rules, regulations and orders applicable to government contractors. From time to time, we are also subject to government inquiries and investigations of our business practices due to our participation in government programs. These inquiries and investigations are costly and consuming of internal resources. Violations of applicable government rules and regulations could result in civil liability, in cancellation or suspension of existing contracts or in ineligibility for future contracts or subcontracts funded in whole or in part with federal funds, any of which could have a material adverse effect on our business.

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We could be required to make additional contributions to our defined benefit pension plans as a result of adverse changes in interest rates and the capital markets.

        Our estimates of liabilities and expenses for pension benefits incorporate significant assumptions, including the rate used to discount the future estimated liability, the long-term rate of return on plan assets and several assumptions relating to the employee workforce (salary increases, retirement age and mortality). We currently expect that we will be required to make future minimum contributions to our defined benefit pension plans. A decline in the value of plan investments in the future, an increase in costs or liabilities or unfavorable changes in laws or regulations that govern pension plan funding could materially change the timing and amount of required pension funding. A requirement to fund any deficit created in the future could have a material adverse effect on our operations and financial condition.

If we are unable to recruit, hire and retain skilled and experienced personnel, our ability to effectively manage and expand our business will be harmed.

        Our success largely depends on the skills, experience and efforts of our officers and other key employees who may terminate their employment at any time. The loss of any of our senior management team could harm our business. The announcement of the loss of one of our key employees could negatively affect our stock price. Our ability to retain our skilled workforce and our success in attracting and hiring new skilled employees will be a critical factor in determining whether we will be successful in the future. We face challenges in hiring, training, managing and retaining employees in certain areas including metallurgical researchers, equipment technicians, and sales and marketing staff. If we are unable to recruit, hire and retain skilled employees, our new product and alloy development and commercialization could be delayed and our marketing and sales efforts could be hindered, which would adversely impact our competitiveness and financial results.

The risks inherent in our international operations may adversely impact our revenues, results of operations and financial condition.

        We anticipate we will continue to derive a significant portion of our revenues from operations in international markets. As we continue to expand internationally, we will need to hire, train and retain qualified personnel for our direct sales efforts and retain distributors and train their personnel in countries where language, cultural or regulatory impediments may exist. Distributors, regulators or other government agencies may not continue to accept our products, services and business practices. In addition, we purchase raw materials on the international market. The sale and shipment of our products and services across international borders, as well as the purchase of raw materials from international sources, subject us to the trade regulations of various jurisdictions. Compliance with such regulations is costly. Any failure to comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments and restrictions on certain business activities. Failure to comply with applicable legal and regulatory obligations could result in the disruption of our shipping, sales and service activities. Our international sales operations expose us and our representatives, agents and distributors to risks inherent in operating in foreign jurisdictions any one or more of which may adversely affect our business and financial results, including:

    our ability to obtain, and the costs associated with obtaining, U.S. export licenses and other required export or import licenses or approvals;

    changes in duties and tariffs, taxes, trade restrictions, license obligations and other non-tariff barriers to trade;

    burdens of complying with the Foreign Corrupt Practices Act and a wide variety of foreign laws and regulations;

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    business practices or laws favoring local companies;

    fluctuations in foreign currencies;

    restrictive trade policies of foreign governments;

    longer payment cycles and difficulties collecting receivables through foreign legal systems;

    difficulties in enforcing or defending agreements and intellectual property rights; and

    foreign political or economic conditions.

        Any material decrease in our international revenues or inability to expand our international operations as a result of these or other factors would adversely impact our revenues, results of operations and financial condition.

Although a collective bargaining agreement is in place for certain employees, union or labor disputes could still disrupt the manufacturing process.

        Our operations rely heavily on our skilled employees. Any labor shortage, disruption or stoppage caused by any deterioration in employee relations or difficulties in the renegotiation of labor contracts could reduce our operating margins and income. Approximately 57% percent of our U.S. employees are affiliated with unions or covered by collective bargaining agreements. In fiscal 2013 the Company entered into new collective bargaining agreements with the United Steel Workers of America which covers eligible hourly employees at the Company's Arcadia, Louisiana, Kokomo, Indiana and Lebanon, Indiana facilities. Failure to negotiate new labor agreements when required could result in a work stoppage at one or more of our facilities. Although we believe that our labor relations have generally been satisfactory, it is possible that we could become subject to additional work rules imposed by agreements with labor unions, or that work stoppages or other labor disturbances could occur in the future, any of which could reduce our operating margins and income and place us at a disadvantage relative to non-union competitors.

Product liability and product warranty risks could adversely affect our operating results.

        We produce many critical products for commercial and military aircraft and for land-based gas turbines. Failure of our products could give rise to substantial product liability and other damage claims. We maintain insurance addressing this risk, but there can be no assurance that the insurance coverage will be adequate or will continue to be available on terms acceptable to us.

        Additionally, we manufacture our products to strict contractually-established specifications using complex manufacturing processes. If we fail to meet the contractual requirements for a part, we may be subject to warranty costs to repair or replace the product itself and additional costs related to the investigation and inspection of non-complying products. These costs are generally not insured.

Our business subjects us to risk of litigation claims, as a routine matter, and this risk increases the potential for a loss that might not be covered by insurance.

        Litigation claims may relate to the conduct of our business, including claims pertaining to product liability, commercial disputes, employment actions, employee benefits, compliance with domestic and federal laws and personal injury. Due to the uncertainties of litigation, we might not prevail on claims made against us in the lawsuits that we currently face and additional claims may be made against us in the future. The outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to us. The resolution in any reporting period of one or more of these matters could have a material adverse effect on our financial condition, liquidity or results of operations for that period.

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We depend on our Information Technology (IT) infrastructure to support the current and future information requirements of our operations.

        Management relies on IT infrastructure, including hardware, network, software, people and process, to provide useful information to support assessments and conclusions about operating performance. We are in the process of implementing an IT system change. If we do not successfully or timely implement the new system or it does not operate as envisioned, our business could be harmed. Our inability to produce relevant or reliable measures of operating performance in an efficient, cost-effective and well-controlled fashion may have significant negative impacts on our future operations.

Any significant delay or problems in the expansion of our operations could materially adversely affect our business, financial condition and results of operations.

        We are in the process of undertaking significant capital projects in order to enhance, expand and/or upgrade our facilities and operational capabilities. Our ability to achieve the anticipated increased revenues or otherwise realize acceptable returns on these investments or other strategic capital projects that we may undertake is subject to a number of risks, many of which are beyond our control, including the ability of management to ensure the necessary resources are in place to properly execute these projects on time and in accordance with planned costs, the ability of key suppliers to deliver the necessary equipment according to schedule and our ability to implement these project with minimal impacts to our existing operations. In addition, the cost to implement any given strategic capital project ultimately may prove to be greater than originally anticipated. If we are not able to achieve the anticipated results from the implementation of any of our strategic capital projects, or if we incur unanticipated implementation costs or delays, our results of operations and financial position may be materially adversely affected.

A global recession or disruption in global financial markets could adversely affect us.

        A global recession or disruption in the global financial markets presents risks and uncertainties that we cannot predict. During the recent recession, we saw a decline in demand for our products due to global economic conditions. During recessionary economic conditions or financial market disruptions, we face risks that may include:

    declines in revenues and profitability from reduced or delayed orders by our customers;

    supply problems associated with any financial constraints faced by our suppliers;

    restrictions on our access to credit sources;

    reductions to our banking group or to our committed credit availability due to combinations or failures of financial institutions; and

    increases in corporate tax rates to finance government spending programs.

Risks Related to Shares of Our Common Stock

Our stock price is subject to fluctuations as a result of being traded on a public exchange which may not be related to our performance.

        The stock market can be highly volatile. The market price of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease in the value of their stock, including decreases unrelated to our operating performance or prospects. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those listed elsewhere in this "Risk Factors" section and others such as:

    fluctuations in the market price of nickel, raw materials or energy;

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    market conditions in the end markets into which our customers sell their products, principally aerospace, power generation and chemical processing;

    announcements of technological innovations or new products and services by us or our competitors;

    the operating and stock price performance of other companies that investors may deem comparable to us;

    announcements by us of acquisitions, alliances, joint development efforts or corporate partnerships in the high-temperature resistant alloy and corrosion-resistant alloy markets;

    market conditions in the technology, manufacturing or other growth sectors; and

    rumors relating to us or our competitors.

Payment of dividends will depend on our future financial condition and performance.

        Although our Board of Directors currently intends to continue the payment of regular quarterly cash dividends on shares of our common stock, the timing and amount of future dividends will depend on the Board's assessment of our operations, financial condition, projected liabilities, our compliance with contractual restrictions in our credit agreement, restrictions imposed by applicable law and other factors. We cannot guarantee that we will continue to declare dividends at the same or similar rates.

Provisions of our certificate of incorporation and by-laws could discourage potential acquisition proposals and could deter or prevent a change in control.

        Some provisions in our certificate of incorporation and by-laws, as well as Delaware statutes, may have the effect of delaying, deterring or preventing a change in control. These provisions, including those regulating the nomination of directors, may make it more difficult for other persons, without the approval of our Board of Directors, to launch takeover attempts that a stockholder might consider to be in his or her best interest. These provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock.

Item 1B.    Unresolved Staff Comments

        There are no unresolved comments by the staff of the U.S. Securities and Exchange Commission.

Item 2.    Properties

        Manufacturing Facilities.    The Company owns manufacturing facilities in the following locations:

    Kokomo, Indiana—manufactures and sells all product forms, other than tubular and wire goods;

    Arcadia, Louisiana—manufactures and sells welded and seamless tubular goods; and

    Mountain Home, North Carolina—manufactures and sells high-performance alloy wire.

        The Kokomo plant, the Company's primary production facility, is located on approximately 180 acres of industrial property and includes over 1.0 million square feet of building space. There are three sites consisting of (1) a headquarters and research laboratory; (2) primary and secondary melting, annealing furnaces, forge press and several smaller hot mills; and (3) the Company's four-high Steckel rolling mill and sheet product cold working equipment, including two cold strip mills. All alloys and product forms other than tubular and wire goods are produced in Kokomo.

        The Arcadia plant is located on approximately 42 acres of land, and includes 202,500 square feet of buildings on a single site. Arcadia uses feedstock produced in Kokomo to fabricate welded and seamless alloy pipe and tubing and purchases extruded tube hollows to produce seamless titanium tubing.

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Manufacturing processes at Arcadia require cold pilger mills, weld mills, draw benches, annealing furnaces and pickling facilities.

        The Mountain Home plant is located on approximately 29 acres of land, and includes approximately 100,000 square feet of building space. The Mountain Home facility is primarily used to manufacture finished high-performance alloy wire. Finished wire products are also warehoused at this facility.

        The owned facilities located in the United States are subject to a mortgage which secures the Company's obligations under its U.S. revolving credit facility with a group of lenders led by Wells Fargo Capital Finance, LLC. For more information see Note 7 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

        Service and Sales Centers.    The service and sales centers, which stock and sell all product forms, contain equipment capable of precision laser and water jet processing services to cut and shape products to customers' precise specifications. The Company owns service and sales centers in the following locations:

    Openshaw, England

    Lenzburg, Switzerland

        The Openshaw plant, located near Manchester, England, consists of approximately 7 acres of land and over 200,000 square feet of buildings on a single site.

        In addition, the Company leases service and sales centers, which stock and sell all product forms, in the following locations:

    La Mirada, California

    Houston, Texas

    Lebanon, Indiana

    Shanghai, China

    Windsor, Connecticut

        Sales Centers.    The Company leases sales centers, which sell all product forms, in the following locations:

    Paris, France

    Zurich, Switzerland

    Singapore

    Milan, Italy

    Chennai, India

    Tokyo, Japan

        All owned and leased service and sales centers not described in detail above are single site locations and are less than 100,000 square feet. The Company is modifying its facilities to meet its current and future business needs. The Company plans to spend approximately $24 million over the course of fiscal 2014 and 2015 to restructure, consolidate and enhance capabilities at its service center operations.

Item 3.    Legal Proceedings

        The Company is subject to extensive federal, state and local laws and regulations. Future developments and increasingly stringent regulations could require the Company to make additional unforeseen expenditures for these matters. The Company is regularly involved in litigation, both as a

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plaintiff and as a defendant, relating to its business and operations. Such litigation includes federal and state EEOC administrative and judicial actions, litigation of commercial matters and litigation and administrative actions relating to environmental matters. For more information, see "Item 1. Business—Environmental Matters." Litigation and administrative actions may result in substantial costs and may divert management's attention and resources, and the level of future expenditures for legal matters cannot be determined with any degree of certainty. Nonetheless, based on the facts presently known, management does not expect expenditures for pending legal proceedings to have a material effect on the Company's financial position, results of operations or liquidity.

        The Company is currently, and has in the past, been subject to claims involving personal injuries allegedly relating to its products. For example, the Company is presently involved in two actions involving welding rod-related injuries, which were filed in California state court against numerous manufacturers, including the Company, in May 2006 and February 2007, respectively, alleging that the welding-related products of the defendant manufacturers harmed the users of such products through the inhalation of welding fumes containing manganese. The Company believes that it has defenses to these allegations and that, if the Company were found liable, the cases would not have a material effect on its financial position, results of operations or liquidity.

Item 4.    Mine Safety Disclosures

        Not Applicable.

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Part II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

        The Company's common stock is listed on the NASDAQ Global Market ("NASDAQ") and traded under the symbol "HAYN". The following table sets forth, for the periods indicated, the high and low closing prices for the Company's common stock as reported by NASDAQ.

Fiscal year ended September 30, 2013:
  High   Low   Dividend  

September 30, 2013

  $ 49.47   $ 44.23   $ 0.22  

June 30, 2013

  $ 54.95   $ 45.93   $ 0.22  

March 31, 2013

  $ 55.94   $ 50.00   $ 0.22  

December 31, 2012

  $ 54.13   $ 46.35   $ 0.22  

Fiscal year ended September 30, 2012:

                   

September 30, 2012

 
$

57.50
 
$

45.77
 
$

0.22
 

June 30, 2012

  $ 64.61   $ 46.00   $ 0.22  

March 31, 2012

  $ 65.47   $ 56.16   $ 0.22  

December 31, 2011

  $ 63.67   $ 39.90   $ 0.22  

        The range of the Company's closing common stock price on NASDAQ from October 1, 2012 to September 30, 2013 was $44.23 to $55.94. The closing price of the common stock was $45.25 on September 30, 2013.

        As of November 1, 2013, there were approximately 44 holders of record of the Company's common stock.

        Payment of dividends is permitted under the Company's existing financing agreement, although the U.S. revolving credit facility requires (i) prior notice to the agent, (ii) a fixed charge coverage ratio average for the previous twelve months which must be not less than 1.0 to 1.0, (applicable only for dividends greater than $20.0 million in any fiscal year) and (iii) that the Company have at least $18.0 million in availability, after payment, on the date the dividend payment is made. While it is the Company's intention to continue to pay quarterly cash dividends for fiscal 2014 and beyond, any decision to pay future cash dividends will be made by the Company's Board of Directors and will depend upon our earnings, financial condition and other factors.

Equity Compensation Plan Information

        The following table provides information as of September 30, 2013 regarding shares of the Company's common stock issuable pursuant to its stock option and restricted stock plans:

Plan Category
  Number of
securities to
be issued upon
exercise
of outstanding
options,
warrants and rights
  Weighted-average
exercise price of
outstanding
options,
warrants and rights
  Number of securities
remaining available
for future
issuance under
equity
compensation
plans (excluding
securities reflected
in the
second column)
 

Equity compensation plans approved by security holders(1)

    291,664   $ 45.36     481,228 (2)

(1)
For a description of the Company's equity compensation plans, see Note 11 to the Consolidated Financial Statements in Item 8.

(2)
Includes (i) options to purchase 237,478 shares of common stock and (ii) 243,750 shares of restricted stock.

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Cumulative Total Stockholder Return

        The graph below compares the cumulative total stockholder return on the Company's common stock to the cumulative total return of the Russell 2000 Index, S&P MidCap 400 Index, and Peer Group for each of the last five fiscal years ended September 30. The cumulative total return assumes an investment of $100 on September 30, 2008 and the reinvestment of any dividends during the period. The Russell 2000 is a broad-based index that includes smaller market capitalization stocks. The S&P MidCap 400 Index is the most widely used index for mid-sized companies. Management believes that the S&P MidCap 400 is representative of companies with similar market and economic characteristics to Haynes. Furthermore, we also believe the Russell 2000 Index is representative of the Company's current market capitalization status and this index is also provided on a comparable basis. The companies included in the Peer Group Index are: Allegheny Technologies, Inc., RTI International Metals, Inc., Universal Stainless & Alloy Products, Inc., A. M. Castle & Co. and Carpenter Technology Corp. Management believes that the companies included in the Peer Group, taken as a whole, provide a meaningful comparison in terms of competition, product offerings and other relevant factors. The total stockholder return for the peer group is weighted according to the respective issuer's stock market capitalization at the beginning of each period.


COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Haynes, The Russell 2000 Index, The S&P MidCap 400
Index and our Peer Group

GRAPHIC


 
  2008   2009   2010   2011   2012   2013  

Haynes International, Inc. 

    100.00     67.95     74.57     94.29     114.98     101.62  

Russell 2000

    100.00     88.92     100.81     97.24     128.25     166.77  

S&P MidCap 400

    100.00     95.01     111.91     110.48     141.99     181.29  

Peer Group

    100.00     95.41     129.27     118.42     118.72     128.02  

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Item 6.    Selected Financial Data

        This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.

        Amounts below are in thousands, except backlog, which is in millions, share and per share information and average nickel price.

 
  Year Ended September 30,  
 
  2009   2010   2011   2012   2013  

Statement of Operations Data:

                               

Net revenues

  $ 438,633   $ 381,543   $ 542,896   $ 579,561   $ 482,746  

Cost of sales

    416,150     327,712     449,116     458,721     409,120  

Selling, general and administrative expense

    36,207     35,470     41,215     40,661     38,165  

Research and technical expense

    3,120     2,828     3,259     3,285     3,505  

Impairment of goodwill(1)

    43,737                  

Operating income (loss)

    (60,581 )   15,533     49,306     76,894     31,956  

Interest expense (income), net

    509     (59 )   (92 )   (101 )   (42 )

Provision for (benefit from) income taxes

    (8,768 )   6,717     18,270     26,813     10,421  
                       

Net income (loss)

  $ (52,322 ) $ 8,875   $ 31,128   $ 50,182   $ 21,577  

Net income (loss) per share:

                               

Basic

  $ (4.36 ) $ 0.74   $ 2.55   $ 4.09   $ 1.75  

Diluted

  $ (4.36 ) $ 0.73   $ 2.54   $ 4.07   $ 1.74  

Dividends declared per common share

  $ 0.00   $ 0.80   $ 0.80   $ 0.88   $ 0.88  

Weighted average shares outstanding:

                               

Basic

    12,004,498     12,049,779     12,067,555     12,147,179     12,223,838  

Diluted

    12,004,498     12,159,529     12,149,866     12,216,031     12,265,630  

 

 
  September 30,  
 
  2009   2010   2011   2012   2013  

Balance Sheet Data:

                               

Working capital

  $ 307,091   $ 300,199   $ 318,761   $ 350,032   $ 347,210  

Property, plant and equipment, net

    105,820     107,043     110,678     124,652     152,764  

Total assets

    544,150     551,543     596,569     626,926     597,582  

Total debt

    1,592     1,433     1,348     980     767  

Long-term portion of debt

    1,482     1,324     1,348     980     767  

Accrued pension and postretirement benefits(2)

    181,077     193,560     215,432     236,552     167,177  

Stockholders' equity

    278,799     265,849     272,853     301,098     355,803  

Cash dividends paid

        9,707     9,758     10,803     10,849  

 

 
  2009   2010   2011   2012   2013  

Consolidated Backlog at Fiscal Quarter End(3):

                               

1st quarter

  $ 199.7   $ 110.4   $ 167.0   $ 261.8   $ 211.7  

2nd quarter

    153.0     124.6     241.7     264.2     207.0  

3rd quarter

    113.4     130.9     288.6     241.2     189.6  

4th quarter

    106.7     148.0     273.4     222.9     166.6  

 

 
  Year Ended September 30,  
 
  2009   2010   2011   2012   2013  

Average nickel price per pound(4)

  $ 7.93   $ 10.26   $ 9.25   $ 7.81   $ 6.25  

(1)
A non-cash goodwill impairment charge of $43.7 million was recorded during the second quarter of fiscal 2009.

(2)
Significant increases in the pension and postretirement benefits liability occurred in fiscal years 2009, 2010, 2011 and 2012 primarily due to reductions in the discount rate used to value the future liability. This has been reflected actuarially as an increase in the Pension and Postretirement Benefits Liability and an increase in the accumulated Other Comprehensive Loss account. In fiscal 2013, the discount rate increased, causing a reduction in the

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    liability. On a prospective basis, if interest rates were to continue to rise, this would cause a decrease in the liability and accumulated other comprehensive loss. Prior to fiscal 2009, many actions were taken to reduce this liability such as: i) effective second quarter of fiscal 2007, capping the Company's contributions to the retiree health care costs at $5,000 annually (resulting in a $46,300 liability reduction), ii) effective first quarter of fiscal 2008, freezing the pension benefit accruals for all non-union employees in the U.S. (resulting in an $8,191 liability reduction), and iii) closing the pension plans to new entrants for both non-union employees (effective 12/31/2005) and union employees (effective 6/30/2007).

(3)
The Company defines backlog to include firm commitments from customers for delivery of product at established prices. Approximately 30% of the orders in the backlog at any given time include prices that are subject to adjustment based on changes in raw material costs. Historically, approximately 75% of the backlog orders have shipped within six months and approximately 90% have shipped within 12 months. The backlog figures do not typically reflect that portion of the business conducted at service and sales centers on a spot or "just-in-time" basis.

(4)
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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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        Please refer to page 1 of this Annual Report on Form 10-K for a cautionary statement regarding forward-looking information.

Overview of Business

        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 used primarily in the aerospace, chemical processing and land-based gas turbine industries. The global specialty alloy market consists of three primary sectors: stainless steel, general purpose nickel alloys and high-performance nickel- and cobalt-based alloys. The Company competes primarily in the high-performance nickel- and cobalt-based alloy sector, which includes high-temperature resistant alloys, or HTA products, and corrosion-resistant alloys, or CRA products. The Company believes it is one of the principal producers of high-performance alloy flat products in sheet, coil and plate forms. The Company also produces its products as seamless and welded tubulars and in 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 high-performance wire products. The Company distributes its products primarily through its direct sales organization, which includes 13 service and/or sales centers in the United States, Europe and Asia. All of these centers are Company-operated.

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Overview of Markets

        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.

 
  Year Ended September 30,  
 
  2009   2010   2011   2012   2013  
 
  Amount   % of
Total
  Amount   % of
Total
  Amount   % of
Total
  Amount   % of
Total
  Amount   % of
Total
 

Net Revenues
(dollars in millions)

                                                             

Aerospace

  $ 160.0     36.5 % $ 138.4     36.3 % $ 203.5     37.5 % $ 229.9     39.7 % $ 197.1     40.8 %

Chemical processing

    109.7     25.0     87.7     23.0     150.0     27.6     134.6     23.2     124.1     25.7  

Land-based gas turbines

    97.7     22.3     74.2     19.4     98.2     18.1     119.2     20.5     102.0     21.2  

Other markets

    59.4     13.5     68.1     17.8     76.7     14.1     81.6     14.1     48.9     10.1  
                                           

Total product

    426.8     97.3     368.4     96.5     528.4     97.3     565.3     97.5     472.1     97.8  

Other revenue(1)

    11.8     2.7     13.1     3.5     14.5     2.7     14.3     2.5     10.6     2.2  
                                           

Net revenues

  $ 438.6     100.0 % $ 381.5     100.0 % $ 542.9     100.0 % $ 579.6     100.0 % $ 482.7     100.0 %
                                           

U.S. 

  $ 258.9     59.0 % $ 231.6     60.7 % $ 344.9     63.5 % $ 346.7     59.8 % $ 268.0     55.5 %

Foreign

  $ 179.7     41.0 % $ 149.9     39.3 % $ 198.0     36.5 % $ 232.9     40.2 % $ 214.7     44.5 %

Shipments by Market (millions of pounds)

                                                             

Aerospace

    5.9     32.2 %   6.0     33.7 %   8.1     34.3 %   8.9     38.1 %   8.1     38.5 %

Chemical processing

    4.5     24.5     4.2     23.6     7.0     29.7     5.3     22.6     5.2     24.8  

Land-based gas turbines

    5.5     29.6     4.6     25.8     5.5     23.3     6.5     27.8     6.1     29.1  

Other markets

    2.5     13.7     3.0     16.9     3.0     12.7     2.7     11.5     1.6     7.6  
                                           

Total Shipments

    18.5     100.0 %   17.8     100.0 %   23.6     100.0 %   23.4     100.0 %   21.0     100.0 %
                                           

Average Selling Price Per Pound

                                                             

Aerospace

  $ 26.90         $ 23.16         $ 25.07         $ 25.73         $ 24.31        

Chemical processing

    24.20           20.84           21.53           25.49           23.79        

Land-based gas turbines

    17.88           16.15           17.71           18.28           16.66        

Other markets

    23.39           22.37           25.56           30.78           30.69        

Total product(2)

    23.09           20.67           22.36           24.17           22.44        

Total average selling price

    23.73           21.41           22.97           24.78           22.94        

(1)
Other revenue consists of toll conversion, royalty income, scrap sales and revenue recognized from the TIMET agreement (see Note 15 in the Notes to the Consolidated Financial Statements).

(2)
Total product price per pound excludes "Other Revenue".

        Aerospace sales for fiscal 2013 decreased from fiscal 2012, which was the Company's best year for aerospace sales volume. Throughout fiscal 2013, aerospace demand was negatively impacted by customer destocking within the supply-chain and by falling raw material market prices which caused customers to delay ordering. This period of low demand is considered temporary, but is expected to persist through the early portion of fiscal 2014. Demand for aerospace products is expected to begin to increase commensurate with the forecasted increase in commercial aircraft builds. Both Boeing and Airbus have reported sizeable backlog increases along with forecasted increases in production schedules and continued emphasis on accelerating production. Demand for more fuel-efficient engines with fewer emissions is driving new engine builds. Management also anticipates that the maintenance, repair and overhaul business will continue at a steady to increasing pace due to required maintenance schedules for the rising number of engines in use year-over-year.

        Sales to the chemical processing industry decreased year-over-year. The project-oriented nature of this market can create inconsistent sales levels. Demand for large project based orders has been at relatively low levels during fiscal 2012 and 2013. The main driver of demand in this market is capital expenditure spending in the chemical processing sector driven by end user demand for housing, automotive and agricultural products. The chemical processing market is sensitive to fiscal policies as well as world economic conditions and GDP growth. Increased sales to the chemical processing industry in fiscal 2014 will be dependent on improvement in global spending in the chemical processing sector. An additional driver of demand in this market is the increase in North American production of natural gas liquids and the further downstream processing of those chemicals that may utilize equipment that requires high-performance alloys.

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        Sales to the land-based gas turbine market in fiscal 2013 decreased compared to fiscal 2012, which was the Company's best year for land-based gas turbine sales volume. Subject to global economic conditions, management believes that long-term demand in this market will improve due to higher activity in power generation, oil and gas production and alternative power systems. Land-based gas turbines are favored in electric generating facilities due to low capital cost at installation, fewer emissions than the traditional fossil fuel-fired facilities and favorable domestic natural gas prices provided by availability of unconventional (shale) gas supplies. As governmental policy shifts away from coal-fired facilities, demand for land-based gas turbines is expected to increase.

        Sales into the other markets category decreased in fiscal 2013 compared to fiscal 2012 partly due to a shipment of an oil and gas project order in fiscal 2012 which did not repeat in fiscal 2013. The industries in this category focus on upgrading overall quality, improving product performance through increased efficiency, prolonging product life and lowering long-term costs. Companies in these industries are looking to achieve these goals through the use of "advanced materials" which supports the increased use of high-performance alloys in an expanding number of applications. In addition to supporting and expanding the traditional businesses of oil and gas, flue-gas desulphurization, automotive and heat treating, the Company expects increased levels of activity overall in non-traditional markets such as fuel cells and silicon feed-stock production applications.

Summary of Capital Spending

        In fiscal 2012, the Company began to increase the amount of capital spending from historical levels in order to increase capacity commensurate with the anticipated expansion of the markets the Company services over the intermediate and long-term and also to improve customer service in the form of accelerated delivery times and expanded value-added products and services. Even though the markets in which the Company participates are currently experiencing a period of lower demand, management continues to believe in the long-term growth potential of the aerospace, land-based gas turbine and chemical processing markets. Therefore, the Company is continuing to implement its strategy regarding the previously announced capital investment projects in line with plans to meet the expected long-term growth requirements of those target markets.

        In fiscal 2012, the Company announced plans to invest approximately $61.0 million at two of its U.S. manufacturing facilities. This includes plans to invest approximately $37.0 million to expand by an estimated 60% the specialty titanium and high-performance nickel alloy tubular production capacity of its Arcadia, Louisiana facility. In addition, the Company plans to invest approximately $24.0 million to expand by an estimated 20% its capacity to produce specialty high-performance alloy flat products at the Company's Kokomo, Indiana facility. Both of these projects have commenced, and are expected to be completed by the end of fiscal 2014. These capital investments in Arcadia and Kokomo are expected to improve the Company's ability to service its customers' increasing demand for specialty products and also continue to improve product quality, improve operating efficiencies and enhance working capital management for all of the Company's products produced at these locations.

        The Company also previously announced plans to upgrade the Company's information systems so that all the Company's locations will be on a global centralized information technology system. To date, the Company has spent $8.0 million and expects to spend approximately $3.0 million in fiscal 2014 for a total project spend of approximately $11.0 million. The system is currently in use at the European service centers while the Company expects the domestic services centers to be completed during the second quarter of fiscal 2014. The systems upgrade for the manufacturing operating system is expected to be completed during the third quarter of fiscal 2014. In addition to enhanced analysis capability, the Company expects this system to lead to improvements in capacity planning, cost analysis and reduction, inventory management and customer service.

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        The Company's evaluation of its global service center and distribution function continues. The evaluation has included an analysis of the equipment required, the number and geographic locations of these service centers, the services provided and the cost structure, with the objective of enhancing the distribution organization. The Company is pursuing the purchase of coil processing capability with stretch leveling and cut-to-length capability. The enhanced capabilities are expected to result in increased revenue, enhancement of working capital management and a reduced cost structure, which is expected to improve return on assets at the service centers. Spending on the service and distribution center projects is estimated at approximately $24.0 million throughout fiscal 2014 and 2015 and includes additional cutting equipment such as laser and water jet cutting equipment.

        Capital spending in fiscal 2013 was $41.6 million. The forecast for capital spending in fiscal 2014 is approximately $57.0 million. The $57.0 million of planned capital spending includes $19.0 million for the tubular capacity expansion, $14.0 million for the processing and service center upgrades, $7.0 million for the Kokomo flat product project, $3.0 million for the information systems upgrade project and the remaining $14.0 million for additional enhancements and upgrades of the current facilities and equipment. The processing and service center project capital spend are expected to carry over into fiscal 2015 with approximately $10.0 million of spend in that year.

        The actual and planned capital investments of approximately $124.0 million over the three year-period of fiscal 2012 through 2014 are expected to allow the Company to increase capacity, enhance product quality, reduce costs and improve working capital management. These significant investments are necessitated by expected intermediate and long-term increasing customer demand for volume and quality improvements.

Dividends Declared

        On November 21, 2013, 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 December 16, 2013 to stockholders of record at the close of business on December 2, 2013. The aggregate cash payout based on current shares outstanding will be approximately $2.7 million, or approximately $10.8 million on an annualized basis.

Gross Profit Margin Trend Performance

        The following tables show net revenue, gross profit margin and gross profit margin percentage for fiscal 2012 and fiscal 2013.

 
  Trend of Gross Profit Margin and
Gross Profit Margin Percentage for Fiscal 2012
 
 
  Quarter Ended  
(dollars in thousands)
  December 31,
2011
  March 31,
2012
  June 30,
2012
  September 30,
2012
 

Net Revenues

  $ 128,851   $ 158,882   $ 141,574   $ 150,254  

Gross Profit Margin

  $ 23,491   $ 34,535   $ 32,389   $ 30,425  

Gross Profit Margin %

    18.2 %   21.7 %   22.9 %   20.2 %

 

 
  Trend of Gross Profit Margin and
Gross Profit Margin Percentage for Fiscal 2013
 
 
  Quarter Ended  
(dollars in thousands)
  December 31,
2012
  March 31,
2013
  June 30,
2013
  September 30,
2013
 

Net Revenues

  $ 114,300   $ 129,201   $ 123,587   $ 115,658  

Gross Profit Margin

  $ 18,774   $ 20,084   $ 18,605   $ 16,163  

Gross Profit Margin %

    16.4 %   15.5 %   15.1 %   14.0 %

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        The gross profit margin percentage decreased during each quarter of fiscal 2013. The quarter-to-quarter compression is primarily due to lower average selling prices resulting from price competition in the marketplace and the impact of declining raw material prices on demand as well as higher-cost inventory charged to cost of goods sold. Gross profit margin and gross profit margin percentage for fiscal 2013 were also impacted by the effect of a fixed pricing agreement with the Company's nickel supplier pursuant to which the Company agreed to purchase a portion of its nickel supply at a fixed price that has been and may continue to be greater than the market price of nickel. The impact of the contract on the Company's gross profit margin percentage for the fiscal year was 0.4 percentage points. While not material to the fiscal year results, the contract had a greater impact as the market price of nickel continued to drop through the second half of fiscal 2013. In the fourth quarter, the Company entered into an amendment with the supplier that allowed the Company to purchase lower volumes of the higher-priced nickel but extended the duration of the purchase commitment through fiscal 2015 in order to minimize the near term impact and provide a longer period in which the market price of nickel could increase. If the market price of nickel remains low and sales volumes do not increase, the impact on the Company's gross profit margin percentage is expected to be unfavorable in future periods as a result of the fixed price contract, which impact is estimated at approximately 1.0 percentage point, or higher, if the market price of nickel declines further.

Volumes, Competition and Pricing

        The Company continues to experience reduced demand, reduced selling price due to nickel market prices and increased price competition in the marketplace relative to fiscal 2012, particularly in commodity-type alloys in mill-direct project business. The intense competitive environment continues to require the Company to aggressively price orders across all markets, which has unfavorably impacted the Company's gross profit margin and net income. In addition, sales volumes below mill capacities in the industry have reduced mill-direct lead times for our products. The decline in mill-direct lead times has, in turn, resulted in downward pressure on prices for service center transactional business, which typically commands a higher price due to faster product availability.

        In addition to the negative effects of price competition, volumes in fiscal 2013 are lower than those in fiscal 2012. Management believes the reduction in volume in the aerospace and land-based gas turbine markets is attributable to destocking in the supply chain as customers consume excess inventory. Volume reductions in the chemical processing market are primarily attributable to lower large project releases. The year-to-year reduction in volume in the "other" markets is due to a large tubular oil and gas project produced and shipped in fiscal 2012 that did not repeat in fiscal 2013. Management believes the decline in the price of nickel and customer uncertainty regarding the strength of the economy have also been contributors to the decline in overall volumes.

        Declining nickel prices can cause customers to delay orders for the Company's products because the Company generally passes the cost of nickel on to customers in the price of its products. As nickel prices decline, customers may delay ordering in order to receive a lower price in the future. The reduced volumes processed through the mill have resulted in reduced absorption of fixed costs and additional margin compression. The Company has implemented cost reduction measures and continues to carefully review discretionary spending in order to mitigate the impact of these factors on gross margin.

        The Company values inventory utilizing the first-in, first-out ("FIFO") inventory costing methodology. Under the FIFO inventory costing method, the cost of materials included in cost of sales may be different than the current market price at the time of sale of finished product due to the length of time from the acquisition of the raw material to the sale of the finished product. In a period of decreasing raw material costs, the FIFO inventory valuation normally results in higher costs of sales as compared to the last-in, first out method. Conversely, in a period of rising raw material costs, the FIFO inventory valuation normally results in lower costs of sales.

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Working Capital

        Controllable working capital, which includes accounts receivable, inventory, accounts payable and accrued expenses, was $273.4 million at September 30, 2013, a decrease of $37.8 million or 12.1% from $311.2 million at September 30, 2012. This decrease of $37.8 million includes a reduction of inventory of $31.1 million due to careful attention to reducing melting and production schedules to match customer demand.

Guidance

        First quarter results are typically impacted by lower production days due to holidays and planned maintenance outages. Planned outages related to the capital expansion projects in both Kokomo and Arcadia as well as other extended maintenance-related projects are expected to impact first quarter results. In addition, the Company has continued to see order entry, pricing and backlog decline with lower demand, which resulted in managing inventories down. The Company remains committed to preparing for the anticipated long-term growth opportunities in its core markets. However, in the short term, management expects revenue for the first quarter of fiscal 2014 to be lower than revenue for the fourth quarter of fiscal 2013 and, the Company expects to incur a net loss in the first quarter of fiscal 2014.

Backlog

        Set forth below is selected data relating to the Company's backlog, the 30-day average nickel price per pound as reported by the London Metals Exchange, as well as a breakdown of net revenues, shipments and average selling prices to the markets served by the Company for the periods shown. These data should be read in conjunction with the consolidated financial statements and related notes thereto and the remainder of the "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Annual Report on Form 10-K.

 
  Quarter Ended   Quarter Ended  
 
  December 31,
2011
  March 31,
2012
  June 30,
2012
  September 30,
2012
  December 31,
2012
  March 31,
2013
  June 30,
2013
  September 30,
2013
 

Backlog

                                                 

Dollars (in thousands)

  $ 261,811   $ 264,245   $ 241,151   $ 222,870   $ 211,726   $ 206,994   $ 189,628   $ 166,589  

Pounds (in thousands)

    8,547     8,853     7,951     6,866     6,905     7,362     6,185     5,371  

Average selling price per pound

  $ 30.63   $ 29.85   $ 30.33   $ 32.46   $ 30.66   $ 28.12   $ 30.66   $ 31.02  

Average nickel price per pound

                                                 

London Metals Exchange(1)

  $ 8.23   $ 8.49   $ 7.50   $ 7.81   $ 7.90   $ 7.59   $ 6.47   $ 6.25  

(1)
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.

        Backlog was $166.6 million at September 30, 2013, a decrease of approximately $23.0 million, or 12.1%, from $189.6 million at June 30, 2013.

        On a year-to-date basis, the backlog has declined by $56.3 million or 25.3% primarily due to a 1.5 million pound reduction in backlog pounds. The reduction in the backlog during the fiscal year resulted from reduced order entry activity, as compared to sales, in each quarter of fiscal 2013. Backlog for aerospace, land-based gas turbine and other markets declined in fiscal 2013. Backlog for the chemical processing market remained flat at a low level.

        Management believes that destocking continues in the supply chain causing lower order entry volumes. Management also believes that customers continue to exercise caution in making purchases due to the decreasing cost of nickel. The effect of these factors was greater in the aerospace and land-based gas turbine markets than in its other markets in fiscal 2013. The Company's pounds shipped to the aerospace and land-based gas turbine markets in fiscal 2012 represented a record level of shipments.

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Quarterly Market Information

 
  Quarter Ended   Quarter Ended  
 
  December 31,
2011
  March 31,
2012
  June 30, 2012   September 30,
2012
  December 31,
2012
  March 31,
2013
  June 30,
2013
  September 30,
2013
 

Net revenues (in thousands)

                                                 

Aerospace

  $ 52,726   $ 61,901   $ 55,908   $ 59,378   $ 52,272   $ 49,319   $ 51,015   $ 44,498  

Chemical processing

    29,688     37,833     32,565     34,553     26,287     33,895     31,824     32,084  

Land-based gas turbines

    30,104     32,167     27,971     28,940     22,628     30,248     24,199     24,982  

Other markets

    12,721     23,082     21,280     24,477     10,618     12,034     14,677     11,591  
                                   

Total product revenue

    125,239     154,983     137,724     147,348     111,805     125,496     121,715     113,155  

Other revenue

    3,612     3,899     3,850     2,906     2,495     3,705     1,872     2,503  
                                   

Net revenues

  $ 128,851   $ 158,882   $ 141,574   $ 150,254   $ 114,300   $ 129,201   $ 123,587   $ 115,658  
                                   

Shipments by markets (in thousands of pounds)

                                                 

Aerospace

    1,970     2,421     2,175     2,368     2,116     1,981     2,077     1,933  

Chemical processing

    1,121     1,500     1,304     1,358     986     1,429     1,386     1,414  

Land-based gas turbines

    1,585     1,771     1,559     1,605     1,261     1,809     1,599     1,458  

Other markets

    456     782     673     739     322     362     478     432  
                                   

Total shipments

    5,132     6,474     5,711     6,070     4,685     5,581     5,540     5,237  
                                   

Average selling price per pound

                                                 

Aerospace

  $ 26.76   $ 25.57   $ 25.70   $ 25.08   $ 24.70   $ 24.90   $ 24,56   $ 23.02  

Chemical processing

    26.48     25.22     24.97     25.44     26.66     23.72     22.96     22.69  

Land-based gas turbines

    18.99     18.16     17.94     18.03     17.94     16.72     15.13     17.13  

Other markets

    27.90     29.52     31.62     33.12     32.98     33.24     30.71     26.83  

Total average selling price (product only; excluding other revenue)

    24.40     23.94     24.12     24.27     23.86     22.49     21.97     21.61  

Total average selling price (including other revenue)

    25.11     24.54     24.79     24.75     24.40     23.15     22.31     22.08  

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Results of Operations

Year Ended September 30, 2013 Compared to Year Ended September 30, 2012

($ in thousands)

 
  Year Ended September 30,   Change  
 
  2012   2013   Amount   %  

Net revenues

  $ 579,561     100.0 % $ 482,746     100.0 % $ (96,815 )   (16.7 )%

Cost of sales

    458,721     79.1 %   409,120     84.7 %   (49,601 )   (10.8 )%
                           

Gross profit

    120,840     20.9 %   73,626     15.3 %   (47,214 )   (39.1 )%

Selling, general and administrative expense

    40,661     7.0 %   38,165     7.9 %   (2,496 )   (6.1 )%

Research and technical expense

    3,285     0.6 %   3,505     0.7 %   220     6.7 %
                           

Operating income

    76,894     13.3 %   31,956     6.7 %   (44,938 )   (58.4 )%

Interest income

    (188 )   0.0 %   (114 )   0.0 %   74     (39.4 )%

Interest expense

    87     0.0 %   72     0.0 %   (15 )   (17.2 )%
                           

Income before income taxes

    76,995     13.3 %   31,998     6.7 %   (44,997 )   (58.4 )%

Provision for income taxes

    26,813     4.6 %   10,421     2.2 %   (16,392 )   (61.1 )%
                           

Net income

  $ 50,182     8.7 % $ 21,577     4.5 % $ (28,605 )   (57.0 )%
                           

Net income per share:

                                     

Basic

  $ 4.09         $ 1.75                    

Diluted

  $ 4.07         $ 1.74                    

Weighted average shares outstanding:

                                     

Basic

    12,147,179           12,223,838                    

Diluted

    12,216,031           12,265,630                    

        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.

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By market

 
  Year Ended September 30,   Change  
 
  2012   2013   Amount   %  

Net revenues (dollars in thousands)

                         

Aerospace

  $ 229,913   $ 197,104   $ (32,809 )   (14.3 )%

Chemical processing

    134,639     124,090     (10,549 )   (7.8 )%

Land-based gas turbines

    119,182     102,057     (17,125 )   (14.4 )%

Other markets

    81,560     48,920     (32,640 )   (40.0 )%
                   

Total product revenue

    565,294     472,171     (93,123 )   (16.5 )%

Other revenue

    14,267     10,575     (3,692 )   (25.9 )%
                   

Net revenues

  $ 579,561   $ 482,746   $ (96,815 )   (16.7 )%
                   

Pounds by market (in thousands)

                         

Aerospace

    8,934     8,107     (827 )   (9.3 )%

Chemical processing

    5,283     5,215     (68 )   (1.3 )%

Land-based gas turbines

    6,520     6,127     (393 )   (6.0 )%

Other markets

    2,650     1,594     (1,056 )   (39.8 )%
                   

Total shipments

    23,387     21,043     (2,344 )   (10.0 )%
                   

Average selling price per pound

                         

Aerospace

  $ 25.73   $ 24.31   $ (1.42 )   (5.5 )%

Chemical processing

    25.49     23.79     (1.70 )   (6.7 )%

Land-based gas turbines

    18.28     16.66     (1.62 )   (8.9 )%

Other markets

    30.78     30.69     (0.09 )   (0.3 )%

Total product (excluding other revenue)

    24.17     22.44     (1.73 )   (7.2 )%

Total average selling price (including other revenue)

  $ 24.78   $ 22.94   $ (1.84 )   (7.4 )%

        Net Revenues.    Net revenues were $482.7 million in fiscal 2013, a decrease of 16.7% from $579.6 million in fiscal 2012, due to a decrease in average selling price per pound combined with lower volume. The total average selling price was $22.94 per pound in fiscal 2013, a decrease of 7.4%, or $1.84, from $24.78 per pound in fiscal 2012. Volume was 21.0 million pounds in fiscal 2013, a decrease of 10.0% from 23.4 million pounds in fiscal 2012. Volume declined primarily due to destocking in the aerospace and land-based gas turbine markets, a decline in activity in the project-oriented other markets, uncertain economic conditions and declining raw material prices causing customers to delay ordering. Average selling price decreased due to lower raw material market prices, which represented approximately $1.01 per pound of the decrease; lower volume of conversion sales, which represented approximately $0.12 per pound of the decrease; a higher level of price competition and reduced customer demand due to supply chain destocking, declining nickel prices and uncertain economic conditions, which forced us to reduce prices in order to be competitive, representing approximately $0.71 per pound of the decrease.

        Sales to the aerospace market were $197.1 million in fiscal 2013, a decrease of 14.3% from $229.9 million in fiscal 2012, due to a 9.3% decrease in volume combined with a 5.5%, or $1.42, decrease in the average selling price per pound. The decrease in volume is due to destocking of inventory within the supply chain and customers delaying orders as the price of nickel declined and economic conditions remained uncertain. The average selling price per pound decline primarily reflects the decline in raw material market prices, which represented approximately $0.99 per pound of the decrease and continued price competition, which represented approximately $0.26 of the decrease.

        Sales to the chemical processing market were $124.1 million in fiscal 2013, a decrease of 7.8% from $134.6 million in fiscal 2012, due to a 1.3% decrease in volume combined with a 6.7%, or $1.70, decrease in the average selling price per pound. The decrease in the average selling price reflects continued price

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competition, which represented approximately $2.05 per pound of the decrease; lower raw material market prices, which represented approximately $1.09 of the decrease; partially offset by a higher value product mix resulting from shipping a higher percentage of sheet and plate products, which increased average selling price by approximately $1.44 per pound.

        Sales to the land-based gas turbine market were $102.1 million in fiscal 2013, a decrease of 14.4% from $119.2 million in fiscal 2012, due to a 6.0% decrease in volume combined with a decrease of 8.9%, or $1.62, in the average selling price per pound. The decrease in volume is due primarily to lower activity of new builds by original equipment manufacturers. The decrease in average selling price per pound reflected lower raw material market prices, which represented approximately $0.96 per pound of the decrease. The change in average selling price due to a change in product mix, which represented approximately $0.53 per pound of the decrease, resulted from the increase of sales of lower-value alloys and forms, predominately slab, as a percentage of pounds sold in this market.

        Sales to other markets were $48.9 million in fiscal 2013, a decrease of 40.0% from $81.6 million in fiscal 2012, due to a 0.3%, or $0.09, decrease in average selling price per pound combined with a 39.8% decrease in volume. The decrease in volume and average selling price is primarily attributable to one particular tubular oil & gas project from fiscal 2012, representing approximately 0.5 million pounds and $18.5 million of net revenues, which was not repeated in fiscal 2013. The other markets are project-oriented in general, and it is uncertain whether a similar project will repeat itself in the future.

        Other Revenue.    Other revenue was $10.6 million in fiscal 2013, a decrease of 25.9% from $14.3 million in fiscal 2012. The decrease in other revenue is primarily attributable to approximately $2.6 million of reduced conversion sales.

        Cost of Sales.    Cost of sales was $409.1 million, or 84.7% of net revenues, in fiscal 2013 compared to $458.7 million, or 79.1% of net revenues, in fiscal 2012. Cost of sales in fiscal 2013 decreased by $49.6 million as compared to fiscal 2012 primarily due to lower volume. When volume decreases, the cost of sales as percentage of net revenues increases due to reduced absorption of manufacturing costs.

        Gross Profit.    As a result of the above factors, gross margin was $73.6 million for fiscal 2013, a decrease of $47.2 million from $120.8 million in fiscal 2012. Gross margin as a percentage of net revenue decreased to 15.3% in fiscal 2013 as compared to 20.9% in fiscal 2012. Items impacting the gross margin percentage compression include pricing competition, which we estimate impacted gross profit margin percentage by 3.1 points. The remaining 2.5 percentage point compression is the result of other factors, including higher-cost inventory in cost of sales relative to lower raw material market prices that drive the sales price and unfavorable absorption of fixed costs.

        Selling, General and Administrative Expense.    Selling, general and administrative expense was $38.2 million for fiscal 2013, a decrease of $2.5 million, or 6.1%, from $40.7 million in fiscal 2012. Selling, general and administrative expense reductions were primarily due to reduced costs for incentive compensation programs. Selling, general and administrative expenses as a percentage of net revenues increased to 7.9% for fiscal 2013, compared to 7.0% for fiscal 2012 due to decreased revenues.

        Research and Technical Expense.    Research and technical expense was $3.5 million, or 0.7% of revenue, for fiscal 2013, an increase of $0.2 million, or 6.7%, from $3.3 million, or 0.6% of net revenues, in fiscal 2012.

        Operating Income.    As a result of the above factors, operating income in fiscal 2013 was $32.0 million, compared to operating income of $77.0 million in fiscal 2012.

        Income Taxes.    Income tax expense was $10.4 million in fiscal 2013, a decrease of $16.4 million from an expense of $26.8 million in fiscal 2012, due primarily to lower pretax income generated in fiscal 2013. The effective tax rate for fiscal 2013 was 32.6%, compared to 34.8% in fiscal 2012. During fiscal 2013, the Company's effective tax rate was lower, primarily due to increased proportion of taxable earnings in foreign jurisdictions with a lower tax rate and the reversal of certain tax reserves no longer required.

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        Net Income.    As a result of the above factors, net income in fiscal 2013, was $21.6 million, a decrease of $28.6 million from net income of $50.2 million in fiscal 2012.

Year Ended September 30, 2012 Compared to Year Ended September 30, 2011

($ in thousands)

 
  Year Ended September 30,   Change  
 
  2011   2012   Amount   %  

Net revenues

  $ 542,896     100.0 % $ 579,561     100.0 % $ 36,665     6.8 %

Cost of sales

    449,116     82.7 %   458,721     79.1 %   9,605     2.1 %
                           

Gross profit

    93,780     17.3 %   120,840     20.9 %   27,060     28.9 %

Selling, general and administrative expense

    41,215     7.6 %   40,661     7.0 %   (554 )   (1.3 )%

Research and technical expense

    3,259     0.6 %   3,285     0.6 %   26     0.8 %
                           

Operating income

    49,306     9.1 %   76,894     13.3 %   27,588     56.0 %

Interest income

    (248 )   0.0 %   (188 )   0.0 %   60     (24.2 )%

Interest expense

    156     0.0 %   87     0.0 %   (69 )   (44.2 )%
                           

Income before income taxes

    49,398     9.1 %   76,995     13.3 %   27,597     55.9 %

Provision for income taxes

    18,270     3.4 %   26,813     4.6 %   8,543     46.8 %
                           

Net income

  $ 31,128     5.7 % $ 50,182     8.7 % $ 19,054     61.2 %
                           

Net income per share:

                                     

Basic

  $ 2.55         $ 4.09                    

Diluted

  $ 2.54         $ 4.07                    

Weighted average shares outstanding:

                                     

Basic

    12,067,555           12,147,179                    

Diluted

    12,149,866           12,216,031                    

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

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By market

 
  Year Ended
September 30,
  Change  
 
  2011   2012   Amount   %  

Net revenues (dollars in thousands)

                         

Aerospace

  $ 203,561   $ 229,913   $ 26,352     12.9 %

Chemical processing

    149,973     134,639     (15,334 )   (10.2 )%

Land-based gas turbines

    98,224     119,182     20,958     21.3 %

Other markets

    76,667     81,560     4,893     6.4 %
                   

Total product revenue

    528,425     565,294     36,869     7.0 %

Other revenue

    14,471     14,267     (204 )   (1.4 )%
                   

Net revenues

  $ 542,896   $ 579,561   $ 36,665     6.8 %
                   

Pounds by market (in thousands)

                         

Aerospace

    8,120     8,934     814     10.0 %

Chemical processing

    6,965     5,283     (1,682 )   (24.1 )%

Land-based gas turbines

    5,546     6,520     974     17.6 %

Other markets

    2,999     2,650     (349 )   (11.6 )%
                   

Total shipments

    23,630     23,387     (243 )   (1.0 )%
                   

Average selling price per pound

                         

Aerospace

  $ 25.07   $ 25.73   $ 0.66     2.6 %

Chemical processing

    21.53     25.49     3.96     18.4 %

Land-based gas turbines

    17.71     18.28     0.57     3.2 %

Other markets

    25.56     30.78     5.22     20.4 %

Total product (excluding other revenue)

    22.36     24.17     1.81     8.1 %

Total average selling price (including other revenue)

  $ 22.97   $ 24.78     1.81     7.9 %

        Net Revenues.    Net revenues were $579.6 million in fiscal 2012, an increase of 6.8% from $542.9 million in fiscal 2011, due to increase in average selling price per pound partially offset by lower volume. The total average selling price was $24.78 per pound in fiscal 2012, an increase of 7.9% from $22.97 per pound in fiscal 2011. Volume was 23.4 million pounds in fiscal 2012, a decrease of 1.0% from 23.6 million pounds in fiscal 2011. Average selling price increased due to improved product mix supported by continued customer demand, while volume remained essentially unchanged year over year. The Company's consolidated backlog was $222.9 million at September 30, 2012, a decrease of 18.5% from $273.4 million at September 30, 2011. This decrease reflects a 24.0% decrease in backlog pounds partially offset by a 7.3% increase in backlog average selling price.

        Sales to the aerospace market were $229.9 million in fiscal 2012, an increase of 12.9% from $203.6 million in fiscal 2011, due to a 10.0% increase in volume combined with a 2.6% increase in the average selling price per pound. The increase in volume and average selling price per pound is due to increased customer demand in the aerospace market as evidenced by the production schedules for new commercial aircraft production. The requirement for more fuel-efficient engines in the commercial airline industry continues to drive demand in this market.

        Sales to the chemical processing market were $134.6 million in fiscal 2012, a decrease of 10.2% from $150.0 million in fiscal 2011, due to a 24.1% decrease in volume partially offset by an 18.4% increase in the average selling price per pound. The decrease in volume relates to a large project that shipped in fiscal 2011 that was not repeated in fiscal 2012, which represented approximately 1.9 million pounds and $29.4 million. The increase in the average selling price is attributable to a higher value product mix shipped into the chemical processing market, which represented approximately $3.13 of the increase.

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        Sales to the land-based gas turbine market were $119.2 million in fiscal 2012, an increase of 21.3% from $98.2 million in fiscal 2011, due to a 17.6% increase in volume combined with an increase of 3.2% in the average selling price per pound. The increases in both volume and average selling price are due to increased customer demand in the land-based gas turbine market, especially from the original equipment manufacturers.

        Sales to other markets were $81.6 million in fiscal 2012, an increase of 6.4% from $76.7 million in fiscal 2011, due to a 20.4% increase in average selling price per pound partially offset by an 11.6% decrease in volume. The decrease in volume is due to the project-oriented nature of these markets. The increase in average selling price reflects a change to a mix of higher value alloy and forms sold into the other market category, primarily from increased sales of tubular products.

        Other Revenue.    Other revenue was $14.3 million in fiscal 2012, a decrease of 1.4% from $14.5 million in fiscal 2011.

        Cost of Sales.    Cost of sales was $458.7 million, or 79.1% of net revenues, in fiscal 2012 compared to $449.1 million, or 82.7% of net revenues, in fiscal 2011. Cost of sales in fiscal 2012 increased by $9.6 million as compared to fiscal 2011 primarily due to a higher cost product mix.

        Gross Profit.    As a result of the above factors, gross margin was $120.8 million for fiscal 2012, an increase of $27.1 million from $93.8 in fiscal 2011. Gross margin as a percentage of net revenue increased to 20.9% in fiscal 2012 as compared to 17.3% in fiscal 2011. The improvement in gross margin percentage is due to a higher value product mix resulting in increased average selling prices, cost reduction projects and the benefits gained from completed capital expenditure projects.

        Selling, General and Administrative Expense.    Selling, general and administrative expense was $40.7 million for fiscal 2012, a decrease of $0.6 million, or 1.3%, from $41.2 million in fiscal 2011 due to reduced international sales expenses, primarily from transition of the French service center into a sales office. Selling, general and administrative expenses as a percentage of net revenues decreased to 7.0% for fiscal 2012, compared to 7.6% for fiscal 2011, due to increased revenues and decreased expenses.

        Research and Technical Expense.    Research and technical expense was $3.3 million, or 0.6% of revenue, for fiscal 2012, flat from the $3.3 million, or 0.6% of net revenues, in fiscal 2011.

        Operating Income.    As a result of the above factors, operating income in fiscal 2012 was $77.0 million compared to operating income of $49.3 million in fiscal 2011.

        Income Taxes.    Income tax expense was $26.8 million in fiscal 2012, an increase of $8.5 million from an expense of $18.3 million in fiscal 2011, due primarily to higher pretax income generated in fiscal 2012. The effective tax rate for fiscal 2012 was 34.8%, compared to 37.0% in fiscal 2011. The prior year effective tax rate was higher due to Indiana enacting a corporate income tax rate decrease from 8.5% to 6.5%, causing additional income tax expense of $0.7 million reflecting our estimate of the decrease in the deferred tax asset due to the lower tax rate.

        Net Income.    As a result of the above factors, net income in fiscal 2012, was $50.2 million, an increase of $19.1 million from net income of $31.1 million in fiscal 2011.

Liquidity and Capital Resources

    Comparative cash flow analysis

        During fiscal 2013, the Company's primary sources of cash were cash on-hand and cash from operations, as detailed below. At September 30, 2013, the Company had cash and cash equivalents of $68.3 million compared to cash and cash equivalents of $46.7 million at September 30, 2012.

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        As of September 30, 2013 the Company had cash and cash equivalents of $9.0 million that was held by foreign subsidiaries in various currencies. All of this amount is readily convertible to U.S. dollars and can be repatriated to the corporate parent as payment owed for product and/or services. The Company would not need to accrue or pay taxes if repatriated.

        Net cash provided by operating activities was $73.4 million in fiscal 2013 compared to $20.8 million in fiscal 2012. Net income of $21.6 million in fiscal 2013 was $28.6 million lower than the $50.2 million reported in fiscal 2012. Cash generated from lower inventories was $31.5 million as compared to fiscal 2012 cash used of $12.3 million, a change of $43.8 million. Additionally, cash generated from lower accounts receivable was $18.6 million compared to cash used by accounts receivable of $12.7 million in fiscal 2012, a change of $31.3 million. Cash used in accounts payable and accrued expenses of $12.2 million was $5.1 million lower than cash used in accounts payable and accrued expenses in fiscal 2012. Net cash used in investing activities was $41.6 million in fiscal 2013 compared to $25.9 million in fiscal 2012 as a result of higher capital expenditures. Net cash used in financing activities in fiscal 2013 of $10.4 million included $10.8 million of dividend payments partially offset by proceeds and excess tax deductions from exercises of stock options.

    Future sources of liquidity

        The Company's sources of liquidity for fiscal 2014 are expected to consist primarily of cash generated from operations, cash on-hand and, if needed, borrowings under the U.S. revolving credit facility. The U.S. revolving credit facility provides for borrowings in a maximum amount of $120.0 million, subject to a borrowing base formula and certain reserves. At September 30, 2013, the Company had cash of $68.3 million, an outstanding balance of zero on the U.S. revolving credit facility and access to a total of approximately $120.0 million under the U.S. revolving credit facility, subject to a borrowing base formula and certain reserves. Management believes that the resources described above will be sufficient to fund planned capital expenditures and working capital requirements over the next twelve months.

    U.S. revolving credit facility

        The Company and Wells Fargo Capital Finance, LLC ("Wells Fargo"), successor by merger to Wachovia Capital Finance Corporation (Central) ("Wachovia"), 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. 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 borrowers. Borrowings under the U.S. revolving credit facility bear interest at the Company's option at either Wells Fargo's "prime rate", plus up to 0.75% per annum, or the adjusted Eurodollar rate used by the lender, plus up to 2.0% per annum. As of September 30, 2013, the U.S. revolving credit facility had an outstanding balance of zero. In addition, the Company must pay monthly in arrears a commitment fee of 0.25% 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 Company is permitted to pay dividends and repurchase common stock if certain financial metrics are met (which do not apply in the case of 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 September 30, 2013, the most recent required measurement date under the Amended Agreement, the Company was in compliance with those covenants. The U.S. revolving credit facility matures on July 14, 2016. 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

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four-high Steckel rolling mill and related assets, which are pledged to Titanium Metals Corporation to secure the performance of the Company's obligations under a Conversion Services Agreement with TIMET (see discussion of TIMET at Note 15 in the Company's to Consolidated Financial Statements in this Annual Report on Form 10-K). 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 (detailed below); and

    Dividends to stockholders.

        Capital investment in fiscal 2013 was $41.6 million and the plan for capital spending in fiscal 2014 is $57.0 million. See "Summary of Capital Spending" in this Annual Report on Form 10-K for additional discussion of actual and planned capital spending.

    Contractual Obligations

        The following table sets forth the Company's contractual obligations for the periods indicated, as of September 30, 2013:

 
  Payments Due by Period  
Contractual Obligations
  Total   Less than
1 year
  1-3 Years   3-5 Years   More than
5 years
 
 
  (in thousands)
 

Credit facility fees(1)

  $ 947   $ 340   $ 607   $   $  

Operating lease obligations

    9,092     3,119     3,284     2,136     553  

Capital lease obligations

    192     33     66     66     27  

Raw material contracts (primarily nickel)

    50,566     31,031     19,535          

Mill supplies contracts

    717     717              

Capital projects

    36,713     36,713              

External product conversion source

    2,900     600     1,200     1,100      

Pension plan(2)

    64,214         16,340     16,208     31,666  

Non-qualified pension plans

    825     95     190     190     350  

Other postretirement benefits(3)

    49,823     4,823     10,000     10,000     25,000  

Environmental post-closure monitoring

    1,077     79     169     163     666  
                       

Total

  $ 217,066   $ 77,550   $ 51,391   $ 29,863   $ 58,262  
                       

(1)
As of September 30, 2013, the revolver balance was zero, therefore no interest is due. However, the Company is obligated to the Bank for unused line fees and quarterly management fees.

(2)
The Company has a funding obligation to contribute $64,214 to the domestic pension plan. These payments will be tax deductible. All benefit payments under the domestic pension plan will come from the plan and not the Company.

(3)
Represents expected other postretirement benefits based upon anticipated timing of payments.

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Inflation or Deflation

        While neither inflation nor deflation has had, nor does the Company expect them to have, a material impact on operating results, there can be no assurance that the Company's business will not be affected by inflation or deflation in the future. Historically, the Company has had the ability to pass on to customers both increases in consumable costs and material costs because of the value-added contribution the material makes to the final product. Raw material comprises the most significant portion of the product costs. Nickel, cobalt and molybdenum, the primary raw materials used to manufacture the Company's products, all have experienced significant fluctuations in price. In the future, the Company may not be able to successfully offset rapid increases in the price of nickel or other raw materials. In the event of raw material price declines the Company's customers may delay order patterns resulting in lower volumes. In the event that raw material price increases occur that the Company is unable to pass on to its customers, its cash flows or results of operations could be materially adversely affected.

Critical Accounting Policies and Estimates

    Overview

        Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, income taxes, asset impairments, retirement benefits, matters related to product liability lawsuits and environmental matters. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, pension asset mix and, in some cases, actuarial techniques, and various other factors that are believed to be reasonable under the circumstances. The results of this process form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company routinely reevaluates these significant factors and makes adjustments where facts and circumstances dictate. Actual results may differ from these estimates under different assumptions or conditions.

        The Company's accounting policies are more fully described in Note 2 in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. The Company has identified certain critical accounting policies, which are described below. The following listing of policies is not intended to be a comprehensive list of all of the Company's accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management's judgment in their application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result.

    Revenue Recognition

        Revenue is recognized when collectability is reasonably assured and when title passes to the customer which is generally at the time of shipment (F.O.B. shipping point or at a foreign port for certain export customers). Allowances for sales returns are recorded as a component of net revenues in the periods in which the related sales are recognized. Management determines this allowance based on historical experience. Should returns increase above historical experience, additional allowances may be required. Additionally, the Company recognizes revenue attributable to an up-front fee received from Titanium Metals Corporation ("TIMET") as a result of a twenty-year agreement, entered into on November, 17,

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2006 to provide conversion services to TIMET. See Note 15 Deferred Revenue for a description of accounting treatment relating to this up-front fee.

    Pension and Postretirement Benefits

        The Company has defined benefit pension and postretirement plans covering most of its current and former employees. Significant elements in determining the assets or liabilities and related income or expense for these plans are the expected return on plan assets (if any), the discount rate used to value future payment streams, expected trends in health care costs, and other actuarial assumptions. Annually, the Company evaluates the significant assumptions to be used to value its pension and postretirement plan assets and liabilities based on current market conditions and expectations of future costs. If actual results are less favorable than those projected by management, additional expense may be required in future periods.

        The selection of the Plan's assumption for the expected long-term rate of return on plan assets is based upon the Plan's target allocation of 60% equities and 40% bonds, and the expected rate of return for each equity/bond asset class. Based upon the target allocation and each asset class's expected return, the Plan's return on assets assumption of 7.50% is reasonable, and is unchanged from last year's assumption. The Company also realizes that historical performance is no guarantee of future performance.

        In the short term, substantial decreases in plan assets will result in higher plan funding contribution levels and higher pension expenses. A decrease of 25 basis points in the expected long-term rate of return on plan assets would result in an increase in annual pension expense of about $473,000. To the extent that the actual return on plan assets during the year exceeds or falls short of the assumed long-term rate of return, an asset gain or loss is created. Gains and losses are generally amortized over a 7-year period. As an example, each $1.0 million in asset loss created by unfavorable investment performance results in seven annual payments (contributions) of approximately $170,000 depending upon the precise effective interest rate in the valuation and the timing of the contribution.

        Decreases in discount rates used to value future payment streams will result in higher liabilities for pension and postretirement plans. A decrease of 25 basis points would result in $8.3 million higher liability for the U.S. pension plan and $3.8 million higher liability for the postretirement plan. This increase in liability would also increase the accumulated other comprehensive loss that would be amortized as higher pension and postretirement expense over an amortization period of approximately 8.5 and 10.5 years, respectively.

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

    Impairment of Long-lived Assets and Other Intangible Assets

        The Company reviews long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of the asset to the undiscounted future 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. The Company reviews for impairment annually or more frequently if events or circumstances indicated that the carrying amount may be impaired.

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    Share-Based Compensation

    Restricted Stock Plan

        On February 23, 2009, the Company adopted a restricted stock plan that reserved 400,000 shares of common stock for issuance. Grants of restricted stock are grants of shares of the Company's common stock subject to transfer restrictions, which vest in accordance with the terms and conditions established by the Compensation Committee. The Compensation Committee may set vesting requirements based on the achievement of specific performance goals or the passage of time.

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

    Stock Option Plans

        The Company has two stock option plans that authorize the granting of non-qualified stock options to certain key employees and non-employee directors for the purchase of a maximum of 1,500,000 shares of the Company's common stock. The original option plan was adopted in August 2004 pursuant to the plan of reorganization and provides for the grant of options to purchase up to 1,000,000 shares of the Company's common stock. In January 2007, the Company's Board of Directors adopted a second option plan that provides for options to purchase up to 500,000 shares of the Company's common stock. Each plan provides for the adjustment of the maximum number of shares for which options may be granted in the event of a stock split, extraordinary dividend or distribution or similar recapitalization event. Unless the Compensation Committee determines otherwise, options granted under the option plans are exercisable for a period of ten years from the date of grant and vest 331/3% per year over three years from the grant date. The amount of compensation cost recognized in the financial statements is measured based upon the grant date fair value. The fair value of the option grants is estimated on the date of grant using the Black-Scholes option pricing model with assumptions on dividend yield, risk-free interest rate, expected volatilities, expected forfeiture rate and expected lives of the options.

    Income Taxes

        The Company accounts for deferred tax assets and liabilities using enacted tax rates for the effect of temporary differences between book and tax basis of recorded assets and liabilities. A valuation allowance is required if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The determination of whether or not a valuation allowance is needed is based upon an evaluation of both positive and negative evidence. In its evaluation of the need for a valuation allowance, the Company assesses prudent and feasible tax planning strategies. The ultimate amount of deferred tax assets realized could be different from those recorded, as influenced by potential changes in enacted tax laws and the availability of future taxable income.

        On October 1, 2007, the Company adopted guidance prescribing a recognition threshold and measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in an income tax return. It also provides guidance related to reversal of tax positions, balance sheet classification, interest and penalties, interim period accounting, disclosure and transition.

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Recently Issued Accounting Pronouncements

        See Note 2.—Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements for information regarding New Accounting Standards.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

        Market risk is the potential loss arising from adverse changes in market rates and prices. The Company is exposed to various market risks, including changes in interest rates, foreign currency exchange rates and the price of raw material particularly nickel.

        Changes in interest rates affect the Company's interest expense on variable rate debt. All of the Company's revolver availability is at a variable rate at September 30, 2012 and 2013. The Company's outstanding variable rate debt was zero at September 30, 2012 and 2013. The Company has not entered into any derivative instruments to hedge the effects of changes in interest rates.

        The foreign currency exchange risk exists primarily because the foreign subsidiaries maintain receivables and payables denominated in currencies other than their functional currency. The foreign subsidiaries manage their own foreign currency exchange risk. The U.S. operations transact their foreign sales in U.S. dollars, thereby avoiding fluctuations in foreign exchange rates. Any exposure aggregating more than $500,000 requires approval from the Company's Vice President of Finance. The Company is not currently party to any currency contracts.

        Fluctuations in the price of nickel, the Company's most significant raw material, subject the Company to commodity price risk. The Company manages its exposure to this market risk through internally established policies and procedures, including negotiating raw material escalators within product sales agreements and continually monitoring and revising customer quote amounts to reflect the fluctuations in market prices for nickel. The Company does not presently use derivative instruments to manage this market risk but may in the future. The Company monitors its underlying market risk exposure from a rapid change in nickel prices on an ongoing basis and believes that it can modify or adapt its strategies as necessary. The Company periodically purchases raw material forward with certain suppliers. However, there is a risk that the Company may not be able to successfully offset a rapid increase or decrease in the cost of raw material in the future.

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Item 8.    Financial Statements and Supplementary Data

HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Audited Consolidated Financial Statements of Haynes International, Inc. and Subsidiaries as of September 30, 2013 and 2012 and for the years ended September 30, 2013, September 30, 2012 and September 30, 2011

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Haynes International, Inc.
Kokomo, IN

        We have audited the accompanying consolidated balance sheets of Haynes International, Inc. and subsidiaries (the "Company") as of September 30, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2013. We also have audited the Company's internal control over financial reporting as of September 30, 2013, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

        A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Haynes International, Inc. and subsidiaries as of September 30, 2013

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and 2012, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2013, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2013, based on the criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ DELOITTE & TOUCHE LLP

Indianapolis, IN
November 21, 2013

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 
  September 30,
2012
  September 30,
2013
 

ASSETS

             

Current assets:

             

Cash and cash equivalents

  $ 46,740   $ 68,326  

Accounts receivable, less allowance for doubtful accounts of $1,249 and $1,199 respectively

    100,631     82,562  

Inventories

    263,236     232,157  

Income taxes receivable

    4,153     4,433  

Deferred income taxes

    9,933     6,018  

Other current assets

    1,532     2,408  
           

Total current assets

    426,225     395,904  

Property, plant and equipment, net

    124,652     152,764  

Deferred income taxes—long term portion

    68,255     41,301  

Prepayments and deferred charges

    1,777     2,282  

Other intangible assets, net

    6,017     5,601  
           

Total assets

  $ 626,926   $ 597,852  
           

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Current liabilities:

             

Accounts payable

  $ 37,471   $ 27,600  

Accrued expenses

    15,157     13,676  

Revolving credit facility

         

Accrued pension and postretirement benefits

    21,065     4,918  

Deferred revenue—current portion

    2,500     2,500  
           

Total current liabilities

    76,193     48,694  

Long-term obligations (less current portion)

    980     767  

Deferred revenue (less current portion)

    32,829     30,329  

Non-current income taxes payable

    339      

Accrued pension and postretirement benefits

    215,487     162,259  
           

Total liabilities

    325,828     242,049  

Commitments and contingencies (Notes 9 and 10)

         

Stockholders' equity:

             

Common stock, $0.001 par value (40,000,000 shares authorized, 12,287,790 and 12,342,585 shares issued and 12,287,790 and 12,332,592 outstanding at September 30, 2012 and September 30, 2013, respectively)

    12     12  

Preferred stock, $0.001 par value (20,000,000 shares authorized, 0 shares issued and outstanding)

         

Additional paid-in capital

    236,751     238,941  

Accumulated earnings

    163,426     174,154  

Treasury stock, 0 shares at September 30, 2012 and 9,993 shares at September 30, 2013

        (505 )

Accumulated other comprehensive loss

    (99,091 )   (56,799 )
           

Total stockholders' equity

    301,098     355,803  
           

Total liabilities and stockholders' equity

  $ 626,926   $ 597,852  
           

   

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

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

 
  Year Ended
September 30,
2011
  Year Ended
September 30,
2012
  Year Ended
September 30,
2013
 

Net revenues

  $ 542,896   $ 579,561   $ 482,746  

Cost of sales

    449,116     458,721     409,120  
               

Gross profit

    93,780     120,840     73,626  

Selling, general and administrative expense

    41,215     40,661     38,165  

Research and technical expense

    3,259     3,285     3,505  
               

Operating income

    49,306     76,894     31,956  

Interest income

    (248 )   (188 )   (114 )

Interest expense

    156     87     72  
               

Income before income taxes

    49,398     76,995     31,998  

Provision for income taxes

    18,270     26,813     10,421  
               

Net income

  $ 31,128   $ 50,182   $ 21,577  
               

Net income per share:

                   

Basic

  $ 2.55   $ 4.09   $ 1.75  

Diluted

  $ 2.54   $ 4.07   $ 1.74  

Dividends declared per common share

  $ 0.80   $ 0.88   $ 0.88  

   

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

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

 
  Year Ended
September 30,
2011
  Year Ended
September 30,
2012
  Year Ended
September 30,
2013
 

Net income

  $ 31,128   $ 50,182   $ 21,577  

Other comprehensive income (loss), net of tax:

                   

Pension and postretirement

    (17,656 )   (16,741 )   41,280  

Foreign currency translation adjustment

    645     698     1,012  
               

Other comprehensive income (loss)

    (17,011 )   (16,043 )   42,292  
               

Comprehensive income

  $ 14,117   $ 34,139   $ 63,869  
               

   

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

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands, except share data)

 
  Common Stock    
   
   
  Accumulated
Other
Comprehensive
Income (Loss)
   
 
 
  Additional
Paid-in
Capital
  Accumulated
Earnings
  Treasury
Stock
  Total
Stockholders'
Equity
 
 
  Shares   Par  

Balance September 30, 2010

    12,144,079   $ 12   $ 229,197   $ 102,677   $   $ (66,037 ) $ 265,849  
                               

Net income

                      31,128                 31,128  

Dividends paid ($0.80 per share)

                      (9,758 )               (9,758 )

Other comprehensive loss

                                  (17,011 )   (17,011 )

Exercise of stock options

    28,400           872                       872  

Tax impact of forfeited vested options

                (10 )                     (10 )

Tax impact of dividends on restricted stock

                31                       31  

Issue restricted stock (less forfeitures)

    31,700                                      

Stock compensation

                1,752                       1,752  
                               

Balance September 30, 2011

    12,204,179   $ 12   $ 231,842   $ 124,047   $   $ (83,048 ) $ 272,853  
                               

Net income

                      50,182                 50,182  

Dividends paid ($0.88 per share)

                      (10,803 )               (10,803 )

Other comprehensive loss

                                  (16,043 )   (16,043 )

Exercise of stock options

    77,611           2,782                       2,782  

Tax impact of dividends on restricted stock

                48                       48  

Issue restricted stock (less forfeitures)

    6,000                                      

Stock compensation

                2,079                       2,079  
                               

Balance September 30, 2012

    12,287,790   $ 12   $ 236,751   $ 163,426   $   $ (99,091 ) $ 301,098  
                               

Net income

                      21,577                 21,577  

Dividends paid ($0.88 per share)

                      (10,849 )               (10,849 )

Other comprehensive income

                                  42,292     42,292  

Exercise of stock options

    30,545           1,092                       1,092  

Tax impact of forfeited vested options

                (185 )                     (185 )

Tax impact of dividends on restricted stock

                29                       29  

Issue restricted stock (less forfeitures)

    24,250                                    

Purchase of treasury stock

    (9,993 )                     (505 )         (505 )

Stock compensation

                1,254                       1,254  
                               

Balance September 30, 2013

    12,332,592   $ 12   $ 238,941   $ 174,154   $ (505 ) $ (56,799 ) $ 355,803  
                               

   

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

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 
  Year Ended
September 30,
2011
  Year Ended
September 30,
2012
  Year Ended
September 30,
2013
 

Cash flows from operating activities:

                   

Net income

  $ 31,128   $ 50,182   $ 21,577  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

                   

Depreciation

    11,528     12,520     13,744  

Amortization

    561     423     416  

Pension and post-retirement expense—U.S. and U.K.                

    11,936     15,590     16,173  

Change in long-term obligations

        (245 )   (153 )

Stock compensation expense

    1,752     2,079     1,254  

Excess tax benefit from option exercises

    (166 )   (1,147 )   (494 )

Deferred revenue

    (2,500 )   (2,500 )   (2,500 )

Deferred income taxes

    9,044     5,658     6,171  

Loss on disposition of property

    145     203     418  

Change in assets and liabilities:

                   

Accounts receivable

    (24,806 )   (12,700 )   18,630  

Inventories

    (17,859 )   (12,326 )   31,507  

Other assets

    805     1,309     (1,324 )

Accounts payable and accrued expenses

    17,966     (17,242 )   (12,165 )

Income taxes

    (1,540 )   (5 )   341  

Accrued pension and postretirement benefits

    (18,390 )   (21,018 )   (20,191 )
               

Net cash provided by operating activities

    19,604     20,781     73,404  
               

Cash flows from investing activities:

                   

Additions to property, plant and equipment

    (14,445 )   (25,937 )   (41,550 )

Change in restricted cash

    110          
               

Net cash used in investing activities

    (14,335 )   (25,937 )   (41,550 )
               

Cash flows from financing activities:

                   

Dividends paid

    (9,758 )   (10,803 )   (10,849 )

Proceeds from exercise of stock options

    706     1,635     598  

Payment for purchase of treasury stock

            (505 )

Excess tax benefit from option exercises

    166     1,147     494  

Payment for debt issuance cost

    (330 )        

Payments on long-term obligations

    (85 )   (123 )   (100 )
               

Net cash used in financing activities

    (9,301 )   (8,144 )   (10,362 )
               

Effect of exchange rates on cash

    126     (22 )   94  
               

Increase (decrease) in cash and cash equivalents:

    (3,906 )   (13,322 )   21,586  

Cash and cash equivalents:

                   

Beginning of period

    63,968     60,062     46,740  
               

End of period

  $ 60,062   $ 46,740   $ 68,326  
               

Supplemental disclosures of cash flow information:

                   

Cash paid during period for:

                   

Interest (net of capitalized interest)

  $ 33   $ 22   $ 7  
               

Income taxes paid, net

  $ 10,736   $ 21,341   $ 3,578  
               

Capital expenditures incurred but not yet paid

  $ 1,539   $ 2,360   $ 2,890  
               

   

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

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data and otherwise noted)

Note 1    Background and Organization

Description of Business

        Haynes International, Inc. and its subsidiaries (the "Company" or "Haynes") develops, manufactures, markets and distributes technologically advanced, high-performance alloys primarily for use in the aerospace, land-based gas turbine and chemical processing industries. The Company's products are high-temperature resistant alloys ("HTA") and corrosion-resistant alloys ("CRA"). The Company's HTA products are used by manufacturers of equipment that is subjected to extremely high temperatures, such as jet engines for the aerospace industry, gas turbine engines for power generation, waste incineration and industrial heating equipment. The Company's CRA products are used in applications that require resistance to extreme corrosion, such as chemical processing, power plant emissions control and hazardous waste treatment. The Company produces its high-performance alloys primarily in sheet, coil and plate forms. In addition, the Company produces its products as seamless and welded tubulars, and in slab, bar, billets and wire forms.

        High-performance alloys are characterized by highly engineered often proprietary, metallurgical formulations primarily of nickel, cobalt and other metals with complex physical properties. The complexity of the manufacturing process for high-performance alloys is reflected in the Company's relatively high average selling price per pound, compared to the average selling price of other metals, such as carbon steel sheet, stainless steel sheet and aluminum. The high-performance alloy industry has significant barriers to entry such as the combination of (i) demanding end-user specifications, (ii) a multi-stage manufacturing process and (iii) the technical sales, marketing and manufacturing expertise required to develop new applications.

Note 2    Summary of Significant Accounting Policies

A.    Principles of Consolidation and Nature of Operations

        The consolidated financial statements include the accounts of Haynes International, Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances are eliminated. The Company has manufacturing facilities in Kokomo, Indiana; Mountain Home, North Carolina; and Arcadia, Louisiana with distribution service centers in Lebanon, Indiana; LaMirada, California; Houston, Texas; Windsor, Connecticut; Openshaw, England; Lenzburg, Switzerland; Shanghai, China; and sales offices in Paris, France; Zurich, Switzerland; Singapore; Milan, Italy; Chennai, India; and Tokyo, Japan.

B.    Cash and Cash Equivalents

        The Company considers all highly liquid investment instruments, including investments with original maturities of three months or less at acquisition, to be cash equivalents, the carrying value of which approximates fair value due to the short maturity of these investments.

C.    Accounts Receivable

        The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company markets its products to a diverse customer base, both in the United States of America and overseas. Trade credit is extended based upon evaluation of each customer's ability to perform its obligation, which is updated periodically. The Company purchases credit insurance for certain foreign trade receivables.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data and otherwise noted)

Note 2    Summary of Significant Accounting Policies (Continued)

D.    Revenue Recognition

        The Company recognizes revenue when collectability is reasonably assured and when title passes to the customer, which is generally at the time of shipment with freight terms of FOB shipping point or at a foreign port for certain export customers. Allowances for sales returns are recorded as a component of net sales in the periods in which the related sales are recognized. The Company determines this allowance based on historical experience. Additionally, the Company recognizes revenue attributable to an up-front fee received from Titanium Metals Corporation ("TIMET") as a result of a twenty-year agreement, entered into on November, 17, 2006 to provide conversion services to TIMET. See Note 15 Deferred Revenue for a description of accounting treatment relating to this up-front fee.

E.    Inventories

        Inventories are stated at the lower of cost or market. The cost of inventories is determined using the first-in, first-out ("FIFO") method. The Company writes down its inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market or scrap value, if applicable, based upon assumptions about future demand and market conditions.

F.     Intangible Assets

        The Company has patents, trademarks and other intangibles. As the patents have a definite life, they are amortized over lives ranging from two to fourteen years. The Company reviews patents for impairment whenever events or circumstances indicate that the carrying amount of a patent may not be recoverable. Recoverability of the patent asset is measured by a comparison of the carrying amount of the asset to the undiscounted future 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.

        As the trademarks have an indefinite life, the Company tests them for impairment at least annually as of August 31 (the annual impairment testing date). If the carrying value exceeds the fair value (determined by calculating a fair value 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. No impairment was recognized in the years ended September 30, 2012 or 2013 because the fair value exceeded the carrying values. The Company has a non-compete agreement with a remaining life of 2 years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data and otherwise noted)

Note 2    Summary of Significant Accounting Policies (Continued)

        Amortization of the patents, non-competes and other intangibles was $561, $423 and $416 for the years ended September 30, 2011, 2012 and 2013, respectively. The following represents a summary of intangible assets at September 30, 2012 and 2013:

September 30, 2012
  Gross
Amount
  Accumulated
Amortization
  Carrying
Amount
 

Patents

  $ 8,667   $ (6,891 ) $ 1,776  

Trademarks

    3,800         3,800  

Non-compete

    1,090     (900 )   190  

Other

    330     (79 )   251  
               

  $ 13,887   $ (7,870 ) $ 6,017  
               

 

September 30, 2013
  Gross
Amount
  Accumulated
Amortization
  Carrying
Amount
 

Patents

  $ 4,030   $ (2,533 ) $ 1,497  

Trademarks

    3,800         3,800  

Non-compete

    500     (381 )   119  

Other

    330     (145 )   185  
               

  $ 8,660   $ (3,059 ) $ 5,601  
               

 

Estimate of Aggregate Amortization Expense:
Year Ended September 30,
   
 

2014

    416  

2015

    393  

2016

    332  

2017

    279  

2018

    279  

Thereafter

    102  

G.    Property, Plant and Equipment

        Additions to property, plant and equipment are recorded at cost with depreciation calculated primarily by using the straight-line method based on estimated economic useful lives which are generally as follows:

Building and improvements

  40 years

Machinery and equipment

  5-14 years

Office equipment and computer software

  3-10 years

Land improvements

  20 years

        Expenditures for maintenance and repairs and minor renewals are charged to expense; major renewals are capitalized. Upon retirement or sale of assets, the cost of the disposed assets and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to operations.

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data and otherwise noted)

Note 2    Summary of Significant Accounting Policies (Continued)

        The Company records capitalized interest for long-term construction projects to capture the cost of capital committed prior to the placed in service date as a part of the historical cost of acquiring the asset. Interest is not capitalized when balance on the revolver is zero.

        The Company reviews long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of the asset to the undiscounted future 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. There was no triggering event during the years ended September 30, 2012 or 2013 and thus no impairment was recognized.

H.    Environmental Remediation

        When it is probable that a liability has been incurred or an asset of the Company has been impaired, a loss is recognized assuming the amount of the loss can be reasonably estimated. The measurement of environmental liabilities by the Company is based on currently available facts, present laws and regulations and current technology. Such estimates take into consideration the expected costs of post-closure monitoring based on historical experience.

I.     Pension and Postretirement Benefits

        The Company has defined benefit pension and postretirement plans covering most of its current and former employees. Significant elements in determining the assets or liabilities and related income or expense for these plans are the expected return on plan assets, the discount rate used to value future payment streams, expected trends in health care costs, and other actuarial assumptions. Annually, the Company evaluates the significant assumptions to be used to value its pension and postretirement plan assets and liabilities based on current market conditions and expectations of future costs. If actual results are less favorable than those projected by management, additional expense may be required in future periods. Salaried employees hired after December 31, 2005 and hourly employees hired after June 30, 2007 are not covered by the pension plan; however, they are eligible for an enhanced matching program of the defined contribution plan (401(k)). Effective December 31, 2007, the U.S. pension plan was amended to freeze benefits for all non-union employees in the U.S. Effective September 30, 2009, the U.K. pension plan was amended to freeze benefits for employees in the plan. Effective January 1, 2007 a plan amendment of the postretirement medical plan caps the Company's liability related to retiree health care costs at $5,000 annually.

J.     Foreign Currency Exchange

        The Company's foreign operating entities' financial statements are denominated in the functional currencies of each respective country, which are the local currencies. All assets and liabilities are translated to U.S. dollars using exchange rates in effect at the end of the year, and revenues and expenses are translated at the weighted average rate for the year. Translation gains or losses are recorded as a separate component of comprehensive income (loss) and transaction gains and losses are reflected in the consolidated statements of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data and otherwise noted)

Note 2    Summary of Significant Accounting Policies (Continued)

K.    Research and Technical Costs

        Research and technical costs related to the development of new products and processes are expensed as incurred. Research and technical costs for the years ended September 30, 2011, 2012 and 2013 were $3,259, $3,285 and $3,505, respectively.

L.    Income Taxes

        The Company accounts for deferred tax assets and liabilities using enacted tax rates for the effect of temporary differences between book and tax basis of recorded assets and liabilities. A valuation allowance is required if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The determination of whether or not a valuation allowance is needed is based upon an evaluation of both positive and negative evidence. In its evaluation of the need for a valuation allowance, the Company utilizes prudent and feasible tax planning strategies. The ultimate amount of deferred tax assets realized could be different from those recorded, as influenced by potential changes in enacted tax laws and the availability of future taxable income. The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) it is determined whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

M.   Stock Based Compensation

Restricted Stock Plan

        On February 23, 2009, the Company adopted a restricted stock plan that reserved 400,000 shares of common stock for issuance. Grants of restricted stock are shares of the Company's common stock subject to transfer restrictions, which vest in accordance with the terms and conditions established by the Compensation Committee. The Compensation Committee may set restrictions on certain grants based on the achievement of specific performance goals and vesting of grants to participants will also be time-based.

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

Stock Option Plans

        The Company has two stock option plans that authorize the granting of non-qualified stock options to certain key employees and non-employee directors for the purchase of a maximum of 1,500,000 shares of the Company's common stock. The original option plan was adopted in August 2004 pursuant to the plan

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data and otherwise noted)

Note 2    Summary of Significant Accounting Policies (Continued)

of reorganization and provides for the grant of options to purchase up to 1,000,000 shares of the Company's common stock. In January 2007, the Company's Board of Directors adopted a second option plan that provides for options to purchase up to 500,000 shares of the Company's common stock. Each plan provides for the adjustment of the maximum number of shares for which options may be granted in the event of a stock split, extraordinary dividend or distribution or similar recapitalization event. Unless the Compensation Committee determines otherwise, options granted under the option plans are exercisable for a period of ten years from the date of grant and vest 331/3% per year over three years from the grant date. The amount of compensation cost recognized in the financial statement is measured based upon the grant date fair value. The fair value of the option grants is estimated on the date of grant using the Black-Scholes option pricing model with assumptions on dividend yield, risk-free interest rate, expected volatilities, expected forfeiture rate and expected lives of the options.

N.    Financial Instruments and Concentrations of Risk

        The Company may periodically enter into forward currency exchange contracts to minimize the variability in the Company's operating results arising from foreign exchange rate movements. The Company does not engage in foreign currency speculation. At September 30, 2012 and 2013, the Company had no foreign currency exchange contracts outstanding.

        Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. At September 30, 2013, and periodically throughout the year, the Company has maintained cash balances in excess of federally insured limits. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the relatively short maturity of these instruments.

        During 2011, 2012 and 2013, the Company did not have sales to any group of affiliated customers that were greater than 10% of net revenues. The Company generally does not require collateral with the exception of letters of credit with certain foreign sales. Credit losses have been within management's expectations. In addition, the Company purchases credit insurance for certain foreign trade receivables. The Company does not believe it is significantly vulnerable to the risk of near-term severe impact from business concentrations with respect to customers, suppliers, products, markets or geographic areas.

O.    Accounting Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, income taxes, asset impairment, retirement benefits, and environmental matters. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, pension asset mix and in some cases, actuarial techniques, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data and otherwise noted)

Note 2    Summary of Significant Accounting Policies (Continued)

routinely reevaluates these significant factors and makes adjustments where facts and circumstances dictate. Actual results may differ from these estimates under different assumptions or conditions.

P.     Earnings Per Share

        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. Per share amounts are computed by dividing net income attributable to common shareholders by the weighted average shares outstanding during each period. 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.

        Basic and diluted net income per share were computed as follows:

 
  Years ended September 30,  
(in thousands, except share and per share data)
  2011   2012   2013  

Numerator:

                   

Net income

  $ 31,128   $ 50,182   $ 21,577  

Less amount allocable to participating securities

    (320 )   (454 )   (186 )
               

Net income available for basic shareholders

    30,808     49,728     21,391  

Adjustment for dilutive potential common shares

    (2 )   2      
               

Net income available for diluted common shares

  $ 30,806   $ 49,730   $ 21,391  
               

Denominator:

                   

Weighted average shares—Basic

    12,067,555     12,147,179     12,223,838  

Adjustment for dilutive potential common shares          

    82,311     68,852     41,792  
               

Weighted average shares—Diluted

    12,149,866     12,216,031     12,265,630  
               

Basic net income per share

  $ 2.55   $ 4.09   $ 1.75  

Diluted net income per share

  $ 2.54   $ 4.07   $ 1.74  

Number of stock option shares excluded as their effect would be anti-dilutive

    130,195     98,630     170,623  

Q.    Recently Issued Accounting Pronouncements

        In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The standard revises the guidance for providing information about the amounts reclassified out of accumulated other comprehensive income. It became effective for fiscal years beginning after December 15, 2012. The Company adopted this accounting standard on January 1, 2013, and the impact to the consolidated financial statements was not material. See Note 17 for disclosure of amounts reclassified out of accumulated comprehensive income.

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HAYNES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data and otherwise noted)

Note 2    Summary of Significant Accounting Policies (Continued)

R.    Comprehensive Income (Loss)

        Comprehensive income (loss) includes changes in equity that result from transactions and economic events from non-owner sources. See Note 17 for a breakdown of Comprehensive Income (Loss) and changes in Accumulated Other Comprehensive Loss net of tax effects.

Note 3    Inventories

        Inventories are stated at the lower of cost or market. The cost of inventories is determined using the first-in, first-out ("FIFO") method. The following is a summary of the major classes of inventories:

 
  September 30,  
 
  2012   2013  

Raw materials

  $ 27,654   $ 25,647  

Work-in-process

    129,642     108,708  

Finished goods

    104,875     97,150  

Other

    1,065     652  
           

  $ 263,236   $ 232,157  
           

Note 4    Property, Plant and Equipment

        The following is a summary of the major classes of property, plant and equipment:

 
  September 30,  
 
  2012   2013  

Land and land improvements

  $ 6,415   $ 6,856  

Buildings

    17,178     19,034  

Machinery and equipment

    154,670     179,407  

Construction in process

    17,355     31,472  
           

    195,618     236,769  

Less accumulated depreciation

    (70,966 )   (84,005 )
           

  $ 124,652   $ 152,764  
           

        The Company has $903 of assets under a capital lease for equipment related to the service center operation in Shanghai, China.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data and otherwise noted)

Note 5    Accrued Expenses

        The following is a summary of the major classes of accrued expenses:

 
  September 30,  
 
  2012   2013  

Employee compensation

  $ 8,355   $ 6,415  

Advance payments from customers

    1,868     1,094  

Taxes, other than income taxes

    2,566     3,005  

Other

    2,368     3,162  
           

  $ 15,157   $ 13,676  
           

Note 6    Income Taxes

        The components of income before provision for income taxes are as follows:

 
  Year Ended September 30,  
 
  2011   2012   2013  

Income before income taxes:

                   

U.S. 

  $ 44,244   $ 67,968   $ 23,555  

Foreign

    5,154     9,027     8,443  
               

Total

  $ 49,398   $ 76,995   $ 31,998  
               

Provision for income taxes:

                   

Current:

                   

U.S. Federal

  $ 5,952   $ 15,836   $ 2,125  

Foreign

    2,145     1,712     1,419  

State

    825     2,079     85  
               

Total

    8,922     19,627     3,629  
               

Deferred:

                   

U.S. Federal

    7,411     6,314     5,907  

Foreign

    (685 )   585     623  

State

    2,308     601     262  

Valuation allowance

    314     (314 )   0  
               

Total

    9,348     7,186     6,792  
               

Total provision for income taxes

  $ 18,270   $ 26,813   $ 10,421  
               

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share data and otherwise noted)

Note 6    Income Taxes (Continued)

        The provision for income taxes applicable to results of operations differed from the U.S. federal statutory rate as follows:

 
  Year Ended September 30,  
 
  2011   2012   2013  

Statutory federal tax rate

    35 %   35 %   35 %

Tax provision for income taxes at the statutory rate

  $ 17,289   $ 26,949   $ 11,199  

Foreign tax rate differentials

    (342 )   (864 )   (913 )

Provision for state taxes, net of federal taxes

    1,289     1,578     473  

U.S. tax on distributed and undistributed earnings of foreign subsidiaries

        335     354  

Manufacturer's deduction

    (910 )   (1,715 )   (217 )

Tax credits

    (713 )       (78 )

State tax rate reduction impact on deferred tax asset

    1,228     89     (182 )

Change in Valuation Allowance

    314     (314 )