Summary of Significant Accounting Policies (Policies)

12 Months Ended

Sep. 30, 2019

Summary of Significant Accounting Policies

Principles of Consolidation and Nature of Operations

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 service centers in LaPorte, Indiana; LaMirada, California; Houston, Texas; Windsor, Connecticut; Openshaw, England; Lenzburg, Switzerland; Shanghai, China; and sales offices in Paris, France; Zurich, Switzerland; Singapore; Milan, Italy; and Tokyo, Japan.

Cash and Cash Equivalents

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.

Accounts Receivable

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.

Revenue Recognition

D.Revenue Recognition

The Company recognizes revenue when performance obligations under the terms of customer contracts are satisfied which occurs when control of the goods and services has been transferred to the customer.  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 16, Deferred Revenue for a description of accounting treatment relating to this up-front fee.

Inventories

E.Inventories

Inventories are stated at the lower of cost or net realizable value. 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.

Goodwill and Other Intangible Assets

F.Goodwill and Other Intangible Assets

The Company has goodwill, trademarks, customer relationships and other intangibles as of September 30, 2019. As the customer relationships have a definite life, they are amortized over fifteen years. The Company reviews customer relationships for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the assets is measured by a comparison of the carrying amount of the asset to the undiscounted 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.

Goodwill and trademarks (indefinite lived) are tested for impairment at least annually as of January 31 for goodwill and August 31 for trademarks (the annual impairment testing dates), or more frequently if impairment indicators exist. If the carrying value of the trademarks exceeds the fair value (determined using an income approach, based upon a discounted cash flow of an assumed royalty rate), impairment of the trademark may exist resulting in a charge to earnings to the extent of the impairment. The impairment test for goodwill is performed by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment loss in the event that the carrying amount is greater than the fair value.  Any goodwill impairment loss recognized would not exceed the total carrying amount of goodwill allocated to that reporting unit.  No impairment was recognized in the years ended September 30, 2017, 2018 or 2019 because the fair value exceeded the carrying values.

During fiscal 2017, 2018 and 2019, there were no changes in the carrying amount of goodwill.

Amortization of the patents, customer relationships and other intangibles was $496,  $527 and $255 for the years ended September 30, 2017, 2018 and 2019, respectively. The following represents a summary of intangible assets at September 30, 2018 and 2019:

	Gross		Accumulated		Carrying
September 30, 2018	Amount		Amortization		Amount
Patents	$	4,030	$	(3,977)	$	53
Trademarks		3,800		—		3,800
Customer relationships		2,100		(574)		1,526
Other		291		(131)		160
	$	10,221	$	(4,682)	$	5,539

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

Estimated future Aggregate Amortization Expense:
Year Ended September 30,
2020	$	198
2021		185
2022		133
2023		129
2024		126
Thereafter		713

Property, Plant and Equipment

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:

Buildings and improvements			40	years
Machinery and equipment	5	—	14	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.

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 the 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. No impairment was recognized during the years ended September 30, 2017, 2018 or 2019.

Environmental Remediation

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.

Pension and Postretirement Benefits

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.

Foreign Currency Exchange

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. 

Gains and losses arising from the impact of foreign currency exchange rate fluctuations on transactions in foreign currency are included in selling, general and administrative expense.  Beginning in the third quarter of fiscal 2018, the Company entered into foreign currency forward contracts (See Note 20, Foreign Currency Forward Contracts).  The purpose of these forward contracts is to reduce income statement volatility resulting from the transaction gains and losses. 

Research and Technical Costs

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, 2017, 2018 and 2019 were $3,855,  $3,785 and $3,592, respectively.

Income Taxes

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 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) for 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 (See Note 7, Income Taxes).

Stock-based Compensation

M.Stock-based Compensation

As described in Note 12, the Company has incentive compensation plans that provide for the issuance of restricted stock, restricted stock units, performance shares, stock options and stock appreciation rights to key employees and non-employee directors.  To date, the Company has only issued restricted stock, performance shares and stock options.  The Company recognizes compensation expense under the fair-value based method as a component of operating expenses. 

Financial Instruments and Concentrations of Risk

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, 2018 and 2019, the Company had no foreign currency exchange contracts outstanding.  To date, all foreign currency contracts have been settled prior to the end of the month in which they were initiated. 

Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. At September 30, 2019, 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 2017, 2018 and 2019, 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 amounted to $228,  $688 and $530 in fiscal 2017, 2018 and 2019, respectively,  and were within management’s expectations.  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.

Accounting Estimates

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 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.

Earnings Per Share

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.  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)	2017			2018			2019
Numerator: Basic and Diluted
Net income (loss)	$	(10,190)		$	(21,751)		$	9,745
Dividends		(11,009)			(11,027)			(11,037)
Undistributed income (loss)		(21,199)			(32,778)			(1,292)
Percentage allocated to common shares (a)		100.0	%		100.0	%		100.0	%
Undistributed income (loss) allocated to common shares		(21,199)			(32,778)			(1,292)
Dividends paid on common shares outstanding		10,905			10,933			10,987
Net income (loss) available to common shares		(10,294)			(21,845)			9,695
Denominator: Basic and Diluted
Weighted average common shares outstanding		12,397,099			12,419,564			12,445,212
Adjustment for dilutive potential common shares		—			—			35,696
Weighted average shares outstanding - Diluted		12,397,099			12,419,564			12,480,908
Basic net income (loss) per share	$	(0.83)		$	(1.75)		$	0.78
Diluted net income (loss) per share	$	(0.83)		$	(1.75)		$	0.78
Number of stock option shares excluded as their effect would be anti-dilutive		310,417			329,276			371,151
Number of restricted stock shares excluded as their effect would be anti-dilutive		107,854			91,008			—
(a) Percentage allocated to common shares - weighted average
Common shares outstanding		12,397,099			12,419,564			12,445,212
Unvested participating shares		—			—			—
		12,397,099			12,419,564			12,445,212

Recently Issued Accounting Pronouncements

Q.Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). The objective of the update is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  This update provides a five-step analysis of transactions to determine when and how revenue is recognized, along with expanded disclosure requirements.  An entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  In adopting this accounting standard update using the modified retrospective method, the Company had no cumulative effect to record on the Consolidated Statement of Stockholders’ Equity.   See Note 3 for further explanation, including all newly expanded disclosure requirements.   

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  This standard contains principles that will require an entity to recognize leases on the balance sheet by recording a right-of-use asset and a lease liability. The standard also contains other changes to the current lease guidance that may result in changes to how entities determine which contractual arrangements qualify as a lease, the accounting for executory costs, such as property taxes and insurance, as well as which lease origination costs will be capitalizable. This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption of this standard is permitted. The standard allows the use of the modified retrospective transition method, whereby the new guidance will be applied at the beginning of the earliest period presented in the financial statements of the period of adoption. The modified retrospective transition approach includes certain practical expedients that entities may elect to apply in transition. In July 2018, the FASB amended ASC 842 to provide another transition method, allowing a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption.  The Company will adopt this standard effective October 1, 2019 using the modified retrospective transition method which does not require adjustments to comparative periods or require modified disclosures for those periods. In addition, the Company anticipates electing certain practical expedients and transition reliefs, including the short-term lease recognition exemption, which excludes leases with a term of 12 months or less from recognition on the balance sheet, recognizing lease components and nonlease components together as a single lease component, and the transition relief package which, among other things, includes not reassessing the lease classification or whether a contract is or contains a lease.  The Company is continuing to finalize new processes and internal controls required to comply with the new lease standard. The adoption of ASC 842 will not have a material impact on the Statement of Operations or Statement of Cash Flows. The recording of right-of-use assets and lease liabilities is expected to not have a material impact on the Company’s Consolidated Balance Sheet. 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230).  This new guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents.  Therefore, amounts generally described as restricted cash and cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows.  This update is effective for fiscal years beginning after December 15, 2017.  The Company adopted this standard, effective October 1, 2018 and adjusted retrospectively. This application resulted in the addition of restricted cash of $5,446 to cash and cash equivalents for the beginning period of the year ended September 30, 2017 and reduced cash generated from restricted cash on the Consolidated Statement of Cash Flows.

In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715).  This new guidance requires entities to (1) disaggregate the service cost component from the other components of net benefit cost and present it with other current compensation costs for related employees in the income statement and (2) present the other components elsewhere in the income statement and outside of income from operations if that subtotal is presented.  In addition, the ASU requires entities to disclose the income statement lines that contain the other components if they are not presented on appropriately described separate lines.  The amendments in this ASU also only allow the service cost component to be eligible for capitalization.  This new guidance was effective for fiscal years beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted.  The Company adopted the standard on October 1, 2018.  The amendments are applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets.  As a result of the retrospective change in presentation, the Company reclassified $15,979 and $824 from cost of sales and selling, general and administrative expense, respectively, to nonoperating retirement benefit expense on the Consolidated Statements of Operations for the fiscal year ended September 30, 2017.  For the fiscal year ended September 30, 2018, the Company reclassified $8,157 and $81 from cost of sales and selling, general and administrative expense, respectively, to nonoperating retirement benefit expense on the Consolidated Statements of Operations The Company used the practical expedient allowed in the standard upon transition that permitted entities to use their previously disclosed service cost and other costs from the prior years’ pension and other postretirement benefit plan footnotes in the comparative periods as appropriate estimates when retrospectively changing the presentation of these costs in the income statement.

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income (loss) to accumulated earnings for standard tax effects resulting from the Tax Cuts and Jobs Act.  This update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted.  The Company will adopt this standard during the first quarter of fiscal 2020 and it is expected to have an impact of increasing accumulated other comprehensive loss and increasing retained earnings by approximately $13,300.  

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

In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20).  This new guidance removes and modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.  Some disclosure requirements that are removed include, among others, amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year and the effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits.  This update is effective for fiscal years beginning after December 15, 2020.  Early adoption is permitted.  The Company early adopted this standard, effective October 1, 2018.    

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