10-Q 1 hayn-20200331x10q.htm 10-Q hayn_Current Folio_10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

 

 

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

 

For the quarterly period ended March  31, 2020

 

or

 

 

 

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

 

For the transition period from              to              

 

Commission File Number:  001-33288

 

HAYNES INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

06-1185400
(I.R.S. Employer Identification No.)

 

 

 

1020 West Park Avenue, Kokomo, Indiana
(Address of principal executive offices)

 

46904-9013
(Zip Code)

 

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

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Tile of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $.001 per share

“HAYN”

NASDAQ Global Market

 

 

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

 

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

 

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

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

Non-accelerated filer ☐

 

Smaller reporting company☐

 

 

Emerging growth company  ☐

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

 

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

 

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

 

 

 

 

 

 

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

 

 

Page

PART I 

FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Unaudited Condensed Consolidated Financial Statements of Haynes International, Inc. and Subsidiaries

3

 

 

 

 

Consolidated Balance Sheets (Unaudited) as of September 30, 2019 and March  31, 2020 

3

 

 

 

 

Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended March  31, 2019 and 2020

4

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Six Months Ended March  31, 2019 and 2020

5

 

 

 

 

Consolidated Statement of Stockholders Equity (Unaudited) for the Three and Six Months Ended March  31, 2019 and 2020

6

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended March 31, 2019 and 2020

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

 

 

 

Item 2. 

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

21

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

Item 4. 

Controls and Procedures

31

 

 

 

PART II 

OTHER INFORMATION

32

 

 

 

Item 1a.

Risk Factors COVID-19

32

 

 

 

Item 6. 

Exhibits

32

 

 

 

 

Index to Exhibits

33

 

 

 

 

Signatures

34

 

2

PART 1     FINANCIAL INFORMATION

Item 1.        Unaudited Condensed Consolidated Financial Statements

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

    

September 30, 

    

March 31, 

 

 

 

2019

 

2020

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

31,038

 

$

52,406

 

Accounts receivable, less allowance for doubtful accounts of $441 and $697 at September 30, 2019 and March 31, 2020, respectively

 

 

76,979

 

 

65,970

 

Inventories

 

 

258,802

 

 

280,337

 

Income taxes receivable

 

 

1,757

 

 

377

 

Other current assets

 

 

3,297

 

 

4,440

 

Total current assets

 

 

371,873

 

 

403,530

 

Property, plant and equipment, net

 

 

169,966

 

 

164,720

 

Deferred income taxes

 

 

34,132

 

 

34,666

 

Other assets

 

 

7,756

 

 

9,895

 

Goodwill

 

 

4,789

 

 

4,789

 

Other intangible assets, net

 

 

5,284

 

 

5,184

 

Total assets

 

$

593,800

 

$

622,784

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

34,497

 

$

28,310

 

Accrued expenses

 

 

18,833

 

 

17,810

 

Income taxes payable

 

 

 —

 

 

70

 

Accrued pension and postretirement benefits

 

 

4,250

 

 

4,250

 

Revolving credit facilities

 

 

 —

 

 

30,000

 

Deferred revenue—current portion

 

 

2,500

 

 

2,500

 

Total current liabilities

 

 

60,080

 

 

82,940

 

Long-term obligations (less current portion) (Note 15)

 

 

8,609

 

 

8,598

 

Deferred revenue (less current portion)

 

 

15,329

 

 

14,079

 

Deferred income taxes

 

 

2,016

 

 

2,016

 

Operating lease liabilities

 

 

 —

 

 

2,306

 

Accrued pension benefits (less current portion)

 

 

101,812

 

 

98,523

 

Accrued postretirement benefits (less current portion)

 

 

109,679

 

 

110,710

 

Total liabilities

 

 

297,525

 

 

319,172

 

Commitments and contingencies (Note 7)

 

 

 —

 

 

 —

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.001 par value (40,000,000 shares authorized, 12,566,969 and 12,615,830 shares issued and 12,513,500 and 12,556,921 shares outstanding at September 30, 2019 and March 31, 2020, respectively)

 

 

13

 

 

13

 

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

 

 

 —

 

 

 —

 

Additional paid-in capital

 

 

253,843

 

 

255,896

 

Accumulated earnings

 

 

125,296

 

 

140,297

 

Treasury stock, 53,469 shares at September 30, 2019 and 58,909 shares at March 31, 2020

 

 

(2,239)

 

 

(2,437)

 

Accumulated other comprehensive loss

 

 

(80,638)

 

 

(90,157)

 

Total stockholders’ equity

 

 

296,275

 

 

303,612

 

Total liabilities and stockholders’ equity

 

$

593,800

 

$

622,784

 

 

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

 

3

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

    

 

 

 

 

 

 

Three Months Ended March 31, 

 

Six Months Ended March 31, 

 

 

    

2019

    

2020

    

2019

    

2020

    

Net revenues

 

$

127,474

 

$

111,563

 

$

234,543

 

$

220,016

    

Cost of sales

 

 

112,791

 

 

92,267

 

 

208,525

 

 

181,977

 

Gross profit

 

 

14,683

 

 

19,296

 

 

26,018

 

 

38,039

 

Selling, general and administrative expense

 

 

10,663

 

 

10,785

 

 

21,791

 

 

22,292

 

Research and technical expense

 

 

859

 

 

1,028

 

 

1,693

 

 

1,910

 

Operating income

 

 

3,161

 

 

7,483

 

 

2,534

 

 

13,837

 

Nonoperating retirement benefit expense

 

 

856

 

 

1,700

 

 

1,712

 

 

3,400

 

Interest income

 

 

(18)

 

 

(10)

 

 

(38)

 

 

(24)

 

Interest expense

 

 

284

 

 

296

 

 

525

 

 

547

 

Income before income taxes

 

 

2,039

 

 

5,497

 

 

335

 

 

9,914

 

Provision for income taxes

 

 

530

 

 

1,429

 

 

429

 

 

2,578

 

Net income (loss)

 

$

1,509

 

$

4,068

 

$

(94)

 

$

7,336

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.12

 

$

0.32

 

$

(0.01)

 

$

0.58

 

Diluted

 

$

0.12

 

$

0.32

 

$

(0.01)

 

$

0.58

 

Weighted Average Common Shares Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

12,449

 

 

12,474

 

 

12,440

 

 

12,467

 

Diluted

 

 

12,600

 

 

12,504

 

 

12,440

 

 

12,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.22

 

$

0.22

 

$

0.44

 

$

0.44

 

 

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

4

 

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

    

 

 

 

 

 

 

Three Months Ended March 31, 

 

Six Months Ended March 31, 

 

 

    

2019

    

2020

    

2019

    

2020

    

Net income (loss)

 

$

1,509

 

$

4,068

 

$

(94)

 

$

7,336

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement

 

 

579

 

 

1,720

 

 

1,159

 

 

3,439

 

Foreign currency translation adjustment

 

 

1,031

 

 

(3,918)

 

 

(140)

 

 

325

 

Other comprehensive income (loss)

 

 

1,610

 

 

(2,198)

 

 

1,019

 

 

3,764

 

Comprehensive income

 

$

3,119

 

$

1,870

 

$

925

 

$

11,100

 

 

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

 

 

 

 

 

5

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Other

 

Total

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Treasury

 

Comprehensive

 

Stockholders’

 

    

Shares

    

Par

    

Capital

    

Earnings

    

Stock

    

Income (Loss)

    

Equity

Balance December 31, 2018

 

12,517,492

 

$

13

 

$

251,718

 

$

122,226

 

$

(2,177)

 

$

(43,156)

 

$

328,624

Net income (loss)

 

 

 

 

 

 

 

 

 

 

1,509

 

 

 

 

 

 

 

 

1,509

Dividends paid and accrued ($0.22 per share)

 

 

 

 

 

 

 

 

 

 

(2,758)

 

 

 

 

 

 

 

 

(2,758)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,610

 

 

1,610

Issue restricted stock (less forfeitures)

 

(2,012)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

Stock compensation

 

 

 

 

 

 

 

707

 

 

 

 

 

 

 

 

 

 

 

707

Balance March 31, 2019

 

12,515,480

 

$

13

 

$

252,425

 

$

120,977

 

$

(2,177)

 

$

(41,546)

 

$

329,692

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Other

 

Total

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Treasury

 

Comprehensive

 

Stockholders’

 

    

Shares

    

Par

    

Capital

    

Earnings

    

Stock

    

Income (Loss)

    

Equity

Balance December 31, 2019

 

12,556,255

 

$

13

 

$

254,999

 

$

139,010

 

$

(2,437)

 

$

(87,959)

 

$

303,626

Net income (loss)

 

 

 

 

 

 

 

 

 

 

4,068

 

 

 

 

 

 

 

 

4,068

Dividends paid and accrued ($0.22 per share)

 

 

 

 

 

 

 

 

 

 

(2,781)

 

 

 

 

 

 

 

 

(2,781)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,198)

 

 

(2,198)

Issue restricted stock (less forfeitures)

 

666

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

Stock compensation

 

 

 

 

 

 

 

897

 

 

 

 

 

 

 

 

 

 

 

897

Balance March 31, 2020

 

12,556,921

 

$

13

 

$

255,896

 

$

140,297

 

$

(2,437)

 

$

(90,157)

 

$

303,612

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Other

 

Total

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Treasury

 

Comprehensive

 

Stockholders’

 

    

Shares

    

Par

    

Capital

    

Earnings

    

Stock

    

Income (Loss)

    

Equity

Balance September 30, 2018

 

12,504,478

 

$

13

 

$

251,053

 

$

126,588

 

$

(1,869)

 

$

(42,565)

 

$

333,220

Net income (loss)

 

 

 

 

 

 

 

 

 

 

(94)

 

 

 

 

 

 

 

 

(94)

Dividends paid and accrued ($0.44 per share)

 

 

 

 

 

 

 

 

 

 

(5,517)

 

 

 

 

 

 

 

 

(5,517)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,019

 

 

1,019

Exercise of stock options

 

12,084

 

 

 

 

 

215

 

 

 

 

 

 

 

 

 

 

 

215

Issue restricted stock (less forfeitures)

 

8,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

Purchase of treasury stock

 

(9,226)

 

 

 

 

 

 

 

 

 

 

 

(308)

 

 

 

 

 

(308)

Stock compensation

 

 

 

 

 

 

 

1,157

 

 

 

 

 

 

 

 

 

 

 

1,157

Balance March 31, 2019

 

12,515,480

 

$

13

 

$

252,425

 

$

120,977

 

$

(2,177)

 

$

(41,546)

 

$

329,692

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Other

 

Total

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Treasury

 

Comprehensive

 

Stockholders’

 

    

Shares

    

Par

    

Capital

    

Earnings

    

Stock

    

Income (Loss)

    

Equity

Balance September 30, 2019

 

12,513,500

 

$

13

 

$

253,843

 

$

125,296

 

$

(2,239)

 

$

(80,638)

 

$

296,275

Net income (loss)

 

 

 

 

 

 

 

 

 

 

7,336

 

 

 

 

 

 

 

 

7,336

Dividends paid and accrued ($0.44 per share)

 

 

 

 

 

 

 

 

 

 

(5,618)

 

 

 

 

 

 

 

 

(5,618)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,764

 

 

3,764

Exercise of stock options

 

12,400

 

 

 

 

 

422

 

 

 

 

 

 

 

 

 

 

 

422

Reclass due to adoption of ASU 2018-02

 

 

 

 

 

 

 

 

 

 

13,283

 

 

 

 

 

(13,283)

 

 

 —

Issue restricted stock (less forfeitures)

 

36,461

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

Purchase of treasury stock

 

(5,440)

 

 

 

 

 

 

 

 

 

 

 

(198)

 

 

 

 

 

(198)

Stock compensation

 

 

 

 

 

 

 

1,631

 

 

 

 

 

 

 

 

 

 

 

1,631

Balance March 31, 2020

 

12,556,921

 

$

13

 

$

255,896

 

$

140,297

 

$

(2,437)

 

$

(90,157)

 

$

303,612

 

The accompanying notes are an integral part of these financial statements

6

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

Six Months Ended March 31, 

 

 

    

2019

    

2020

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

(94)

 

$

7,336

 

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

 

 

 

 

 

 

 

Depreciation

 

 

9,296

 

 

9,639

 

Amortization

 

 

155

 

 

100

 

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

 

 

4,487

 

 

6,897

 

Change in long-term obligations

 

 

 —

 

 

(24)

 

Stock compensation expense

 

 

1,157

 

 

1,631

 

Deferred revenue

 

 

(1,250)

 

 

(1,250)

 

Deferred income taxes

 

 

238

 

 

(1,782)

 

Loss on disposition of property

 

 

 5

 

 

 —

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(7,765)

 

 

11,122

 

Inventories

 

 

969

 

 

(21,192)

 

Other assets

 

 

(846)

 

 

(961)

 

Accounts payable and accrued expenses

 

 

4,124

 

 

(7,668)

 

Income taxes

 

 

4,788

 

 

1,447

 

Accrued pension and postretirement benefits

 

 

(3,207)

 

 

(4,488)

 

Net cash provided by (used in) operating activities

 

 

12,057

 

 

807

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(5,409)

 

 

(4,100)

 

Net cash provided by (used in) investing activities

 

 

(5,409)

 

 

(4,100)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Revolving credit facility borrowings

 

 

16,600

 

 

30,000

 

Revolving credit facility repayments

 

 

(16,600)

 

 

 —

 

Dividends paid

 

 

(5,505)

 

 

(5,523)

 

Proceeds from exercise of stock options

 

 

215

 

 

422

 

Payment for purchase of treasury stock

 

 

(308)

 

 

(198)

 

Payments on long-term obligation

 

 

(71)

 

 

(82)

 

Net cash provided by (used in) financing activities

 

 

(5,669)

 

 

24,619

 

Effect of exchange rates on cash

 

 

(1)

 

 

42

 

Increase (decrease) in cash and cash equivalents:

 

 

978

 

 

21,368

 

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

Beginning of period

 

 

9,802

 

 

31,038

 

End of period

 

$

10,780

 

$

52,406

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Interest (net of capitalized interest)

 

$

496

 

$

518

 

Income taxes paid (refunded), net

 

$

(4,636)

 

$

2,903

 

Capital expenditures incurred, but not yet paid

 

$

809

 

$

708

 

Dividends declared but not yet paid

 

$

12

 

$

95

 

 

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

7

 

 

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(in thousands, except share and per share data)

 

Note 1.  Basis of Presentation

 

Interim Financial Statements

 

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

 

Principles of Consolidation

 

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

 

COVID-19 Pandemic

 

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

 

Note 2.  Recently Issued Accounting Standards

 

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

 

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

 

8

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

 

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

 

 

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

   

 

Note 3.  Revenues from Contracts with Customers

 

Contract Balances

 

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

 

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

 

Disaggregation of Revenue

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

March 31, 

 

March 31, 

 

    

2019

    

2020

    

2019

    

2020

Net revenues (dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

68,858

 

$

59,172

 

$

123,465

 

$

118,015

Chemical processing

 

 

21,761

 

 

15,832

 

 

40,681

 

 

32,544

Industrial gas turbine

 

 

13,685

 

 

16,701

 

 

27,768

 

 

30,464

Other markets

 

 

16,958

 

 

12,762

 

 

31,243

 

 

24,637

Total product revenue

 

 

121,262

 

 

104,467

 

 

223,157

 

 

205,660

Other revenue

 

 

6,212

 

 

7,096

 

 

11,386

 

 

14,356

Net revenues

 

$

127,474

 

$

111,563

 

$

234,543

 

$

220,016

 

 

 

 

 

 

 

 

 

9

Note 4.  Inventories

 

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

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

March 31, 

 

 

 

    

2019

    

2020

    

 

Raw Materials

 

$

17,935

 

$

21,747

 

 

Work-in-process

 

 

138,859

 

 

142,879

 

 

Finished Goods

 

 

100,590

 

 

114,165

 

 

Other

 

 

1,418

 

 

1,546

 

 

 

 

$

258,802

 

$

280,337

 

 

 

 

 

 

 

Note 5.  Income Taxes

 

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

 

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

   

 

Note 6.  Pension and Post-retirement Benefits

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

Six Months Ended March 31, 

 

 

 

Pension Benefits

 

Other Benefits

 

Pension Benefits

 

Other Benefits

 

 

    

2019

    

2020

    

2019

    

2020

    

2019

    

2020

    

2019

    

2020

 

Service cost

 

$

1,310

 

$

1,387

 

$

79

 

$

354

 

$

2,620

 

$

2,773

 

$

158

 

$

708

 

Interest cost

 

 

2,567

 

 

2,148

 

 

1,088

 

 

873

 

 

5,133

 

 

4,296

 

 

2,176

 

 

1,746

 

Expected return

 

 

(3,575)

 

 

(3,623)

 

 

 —

 

 

 —

 

 

(7,147)

 

 

(7,268)

 

 

 —

 

 

 —

 

Amortizations

 

 

401

 

 

1,859

 

 

372

 

 

462

 

 

803

 

 

3,718

 

 

744

 

 

924

 

Net periodic benefit cost

 

$

703

 

$

1,771

 

$

1,539

 

$

1,689

 

$

1,409

 

$

3,519

 

$

3,078

 

$

3,378

 

 

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

 

 

Note 7.  Legal, Environmental and Other Contingencies

 

Legal

 

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

10

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

Environmental

 

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

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

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

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

 

 

 

 

 

Expected maturities of post-closure monitoring and maintenance activities (discounted)

    

 

 

Year Ended September 30,

 

 

 

2021

$

74

 

2022

 

64

 

2023

 

81

 

2024

 

60

 

2025 and thereafter

 

229

 

 

$

508

 

 

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

 

 

Note 8.  Deferred Revenue

 

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

11

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

 

Note 9.  Goodwill and Other Intangible Assets, Net

 

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

 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross

    

Accumulated

    

Carrying

 

September 30, 2019

 

Amount

 

Amortization

 

Amount

 

Trademarks

 

 

3,800

 

 

 —

 

 

3,800

 

Customer relationships

 

 

2,100

 

 

(718)

 

 

1,382

 

Other

 

 

291

 

 

(189)

 

 

102

 

 

 

$

6,191

 

$

(907)

 

$

5,284

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross

    

Accumulated

    

Carrying

 

March 31, 2020

 

Amount

 

Amortization

 

Amount

 

Trademarks

 

$

3,800

 

$

 —

 

$

3,800

 

Customer relationships

 

 

2,100

 

 

(789)

 

 

1,311

 

Other

 

 

291

 

 

(218)

 

 

73

 

 

 

$

6,191

 

$

(1,007)

 

$

5,184

 

 

 

 

 

 

 

Estimated future Aggregate Amortization Expense:

    

 

 

Year Ended September 30, 

 

 

 

2020

$

98

 

2021

 

185

 

2022

 

133

 

2023

 

129

 

2024

 

126

 

Thereafter

 

713

 

 

 

 

 

 

Note 10.  Net Income (Loss) Per Share

 

12

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.

 

13

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

March 31, 

 

March 31, 

 

(in thousands, except share and per share data)

    

2019

    

2020

    

2019

    

2020

 

Numerator: Basic and Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,509

 

$

4,068

 

$

(94)

 

$

7,336

 

Dividends paid and accrued

 

 

(2,758)

 

 

(2,781)

 

 

(5,517)

 

 

(5,618)

 

Undistributed income (loss)

 

 

(1,249)

 

 

1,287

 

 

(5,611)

 

 

1,718

 

Percentage allocated to common shares (a)

 

 

100.0

%

 

99.3

%

 

100.0

%

 

99.3

%

Undistributed income (loss) allocated to common shares

 

 

(1,249)

 

 

1,279

 

 

(5,611)

 

 

1,707

 

Dividends paid on common shares outstanding

 

 

2,738

 

 

2,763

 

 

5,475

 

 

5,581

 

Net income (loss) available to common shares

 

 

1,489

 

 

4,042

 

 

(136)

 

 

7,288

 

Denominator: Basic and Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

12,448,792

 

 

12,473,881

 

 

12,439,689

 

 

12,466,867

 

Adjustment for dilutive potential common shares

 

 

151,500

 

 

30,182

 

 

 —

 

 

30,082

 

Weighted average shares outstanding - Diluted

 

 

12,600,292

 

 

12,504,063

 

 

12,439,689

 

 

12,496,949

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share

 

$

0.12

 

$

0.32

 

$

(0.01)

 

$

0.58

 

Diluted net income (loss) per share

 

$

0.12

 

$

0.32

 

$

(0.01)

 

$

0.58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

313,028

 

 

561,457

 

 

313,787

 

 

561,457

 

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

 

 

66,688

 

 

 —

 

 

67,694

 

 

 —

 

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

 

 

29,050

 

 

 —

 

 

29,050

 

 

 —

 

Number of performance share awards excluded as their effect would be anti-dilutive

 

 

55,762

 

 

 —

 

 

49,432

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) Percentage allocated to common shares - Weighted average

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares outstanding

 

 

12,448,792

 

 

12,473,881

 

 

12,439,689

 

 

12,466,867

 

Unvested participating shares

 

 

 —

 

 

81,652

 

 

 —

 

 

82,468

 

 

 

 

12,448,792

 

 

12,555,533

 

 

12,439,689

 

 

12,549,335

 

 

 

Note 11.  Stock-Based Compensation

 

Restricted Stock

 

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

 

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

 

 

Average Fair

 

 

 

Number of

 

Value At

 

 

 

Shares

 

Grant Date

 

Unvested at September 30, 2019

 

61,838

 

$

34.94

 

Granted

 

37,011

 

$

36.67

 

Forfeited / Canceled

 

(550)

 

$

34.00

 

Vested

 

(16,647)

 

$

40.33

 

Unvested at March 31, 2020

 

81,652

 

$

34.62

 

Expected to vest

 

81,652

 

$

34.62

 

 

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

 

14

Deferred Restricted Stock

 

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

 

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

 

 

Average Fair

 

 

 

Number of

 

Value At

 

 

 

Shares

 

Grant Date

 

Unvested and deferred at September 30, 2019

 

12,500

 

$

33.98

 

Granted

 

7,449

 

$

33.39

 

Vested and deferred

 

(12,500)

 

 

33.98

 

Unvested and deferred at March 31, 2020

 

7,449

 

$

33.39

 

Vested and deferred at March 31, 2020

 

29,050

 

$

32.72

 

 

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

 

Performance Shares

 

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

 

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

 

 

Average Fair

 

 

 

Number of

 

Value At

 

 

 

Shares

 

Grant Date

 

Unvested at September 30, 2019

 

38,553

 

$

42.52

 

Granted

 

23,880

 

$

44.13

 

Unvested at March 31, 2020

 

62,433

 

$

43.14

 

 

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

 

Stock Options

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Fair

    

Dividend

    

Risk-free

    

Expected

    

Expected

 

Grant Date

 

Value

 

Yield

 

Interest Rate

 

Volatility

 

Life

 

November 19, 2019

 

$

9.66

 

2.38

%  

1.65

%  

35

%  

 5

years

 

 

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

 

15

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

 

    

Weighted

 

 

 

 

 

Aggregate

 

Weighted

 

Average

 

 

 

 

 

Intrinsic

 

Average

 

Remaining

 

 

 

Number of

 

Value

 

Exercise

 

Contractual

 

 

 

Shares

 

(000s)

 

Prices

 

Life

 

Outstanding at September 30, 2019

 

482,391

 

 

 

 

$

38.05

 

 

 

 

Granted

 

91,466

 

 

 

 

$

37.00

 

 

 

 

Exercised

 

(12,400)

 

 

 

 

$

34.00

 

 

 

 

Outstanding at March 31, 2020

 

561,457

 

$

 —

 

$

37.97

 

7.57

yrs.

 

Vested or expected to vest

 

519,065

 

$

 —

 

$

37.90

 

7.64

yrs.

 

Exercisable at March 31, 2020

 

245,517

 

$

 —

 

$

42.17

 

5.51

yrs.

 

 

 

Note 12.  Dividend

 

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

 

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

 

Note 13.  Fair Value Measurements

 

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

 

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

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

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

 

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

 

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

 

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

 

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

 

16

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

    

Pension

    

Postretirement

    

Foreign

    

 

 

 

 

Plan

 

Plan

 

Exchange

 

Total

Accumulated other comprehensive income (loss) as of December 31, 2018

 

$

(21,166)

 

$

(10,928)

 

$

(11,062)

 

$

(43,156)

Other comprehensive income (loss) before reclassifications

 

 

 —

 

 

 —

 

 

1,031

 

 

1,031

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of Pension and Postretirement Plan items (1)

 

 

52

 

 

 —

 

 

 —

 

 

52

Actuarial losses (1)

 

 

363

 

 

371

 

 

 —

 

 

734

Tax benefit

 

 

(109)

 

 

(98)

 

 

 —

 

 

(207)

Net current-period other comprehensive income (loss)

 

 

306

 

 

273

 

 

1,031

 

 

1,610

Accumulated other comprehensive income (loss) as of March 31, 2019

 

$

(20,860)

 

$

(10,655)

 

$

(10,031)

 

$

(41,546)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2020

 

    

Pension

    

Postretirement

    

Foreign

    

 

 

 

 

Plan

 

Plan

 

Exchange

 

Total

Accumulated other comprehensive income (loss) as of December 31, 2019

 

$

(60,942)

 

$

(17,749)

 

$

(9,268)

 

$

(87,959)

Other comprehensive income (loss) before reclassifications

 

 

 —

 

 

 —

 

 

(3,918)

 

 

(3,918)

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of Pension and Postretirement Plan items (1)

 

 

52

 

 

 —

 

 

 —

 

 

52

Actuarial losses (1)

 

 

1,822

 

 

463

 

 

 —

 

 

2,285

Tax benefit

 

 

(494)

 

 

(123)

 

 

 —

 

 

(617)

Net current-period other comprehensive income (loss)

 

 

1,380

 

 

340

 

 

(3,918)

 

 

(2,198)

Accumulated other comprehensive income (loss) as of March 31, 2020

 

$

(59,562)

 

$

(17,409)

 

$

(13,186)

 

$

(90,157)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended March 31, 2019

 

    

Pension

    

Postretirement

    

Foreign

    

 

 

 

 

Plan

 

Plan

 

Exchange

 

Total

Accumulated other comprehensive income (loss) as of September 30, 2018

 

$

(21,473)

 

$

(11,201)

 

$

(9,891)

 

$

(42,565)

Other comprehensive income (loss) before reclassifications

 

 

 —

 

 

 —

 

 

(140)

 

 

(140)

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of Pension and Postretirement Plan items (1)

 

 

103

 

 

 —

 

 

 —

 

 

103

Actuarial losses (1)

 

 

727

 

 

743

 

 

 —

 

 

1,470

Tax benefit

 

 

(217)

 

 

(197)

 

 

 —

 

 

(414)

Net current-period other comprehensive income (loss)

 

 

613

 

 

546

 

 

(140)

 

 

1,019

Accumulated other comprehensive loss as of March 31, 2019

 

$

(20,860)

 

$

(10,655)

 

$

(10,031)

 

$

(41,546)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended March 31, 2020

 

    

Pension

    

Postretirement

    

Foreign

    

 

 

 

 

Plan

 

Plan

 

Exchange

 

Total

Accumulated other comprehensive income (loss) as of September 30, 2019

 

$

(53,811)

 

$

(13,316)

 

$

(13,511)

 

$

(80,638)

Other comprehensive income (loss) before reclassifications

 

 

 —

 

 

 —

 

 

325

 

 

325

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of Pension and Postretirement Plan items (1)

 

 

103

 

 

 —

 

 

 —

 

 

103

Actuarial losses (1)

 

 

3,642

 

 

925

 

 

 —

 

 

4,567

Tax benefit

 

 

(987)

 

 

(244)

 

 

 —

 

 

(1,231)

Net current-period other comprehensive income (loss)

 

 

2,758

 

 

681

 

 

325

 

 

3,764

Reclass due to adoption of ASU 2018-02

 

 

(8,509)

 

 

(4,774)

 

 

 —

 

 

(13,283)

Accumulated other comprehensive loss as of March 31, 2020

 

$

(59,562)

 

$

(17,409)

 

$

(13,186)

 

$

(90,157)

 

 


(1)

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

 

Note 15.  Long-term Obligations

 

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

 

17

 

 

 

 

 

 

 

 

 

 

September 30, 

 

March 31, 

 

 

    

2019

    

2020

    

Finance lease obligations

 

$

7,979

 

$

7,896

 

Environmental post-closure monitoring and maintenance activities

 

 

606

 

 

606

 

Long-term disability

 

 

251

 

 

261

 

Deferred dividends

 

 

40

 

 

135

 

Less amounts due within one year

 

 

(267)

 

 

(300)

 

Long-term obligations (less current portion)

 

$

8,609

 

$

8,598

 

 

 

Note 16.  Leases

 

Nature of the Leases

 

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

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

 

 

Significant Judgments and Assumptions

 

Determination of Whether a Contract Contains a Lease

 

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

 

Practical Expedients (Policy Elections)

 

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

 

18

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

Six Months Ended March 31, 

 

 

    

2020

    

2020

    

Finance lease cost:

 

 

 

 

 

 

 

Amortization of right of use asset

 

$

107

 

$

215

 

Interest on lease liabilities

 

 

207

 

 

415

 

Total finance lease cost

 

$

314

 

$

630

 

 

 

 

 

 

 

 

 

Operating lease cost

 

$

375

 

$

730

 

 

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

 

Operating cash flows from finance leases

 

 

207

 

 

415

 

Operating cash flows from operating leases

 

 

375

 

 

730

 

Financing cash flows from finance leases

 

 

42

 

 

82

 

Total cash paid for amounts included in measurement of lease liabilities

 

$

624

 

$

1,227

 

 

Lease costs associated with short term leases are not material.

 

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

 

 

 

 

 

 

 

 

March 31, 

 

 

    

2020

    

Finance lease assets (included in Property, plant and equipment, net)

 

 

6,719

 

Operating right of use lease assets (included in Other assets)

 

 

2,306

 

Total lease assets

 

$

9,025

 

 

 

 

 

 

Finance lease liabilities

 

 

 

 

Accrued expenses

 

 

182

 

Long-term obligations (less current portion)

 

 

7,714

 

Total Finance lease liabilities

 

$

7,896

 

Operating lease liabilities

 

$

2,306

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

    

2020

    

Weighted average lease term (Years)

 

 

 

 

Finance leases

 

 

15.6

 

Operating leases

 

 

3.2

 

Weighted average discount rate

 

 

 

 

Finance leases

 

 

10.33

%

Operating leases

 

 

5.25

%

 

 

19

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

 

 

 

 

 

 

 

 

 

Finance

 

Operating

 

Future minimum lease payments

Leases

 

Leases

 

2020

$

498

 

$

683

 

2021

 

1,001

 

 

839

 

2022

 

1,012

 

 

426

 

2023

 

1,024

 

 

293

 

2024

 

1,031

 

 

281

 

Thereafter

 

11,540

 

 

71

 

Total minimum lease payments

 

16,106

 

 

2,593

 

Less: amount representing interest

 

(8,210)

 

 

(287)

 

Present value of net minimum lease payments

$

7,896

 

$

2,306

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Finance

 

Operating

 

Contractual Obligations as of September 30, 2019

Leases

 

Leases

 

2020

$

993

 

$

2,542

 

2021

 

1,000

 

 

1,254

 

2022

 

1,013

 

 

460

 

2023

 

1,024

 

 

277

 

2024

 

1,032

 

 

259

 

Thereafter

 

11,623

 

 

60

 

Total minimum lease payments

 

16,685

 

 

4,852

 

Less: amount representing interest

 

(8,706)

 

 

 —

 

Present value of net minimum lease payments

$

7,979

 

$

4,852

 

 

 

 

 

 

 

 

 

 

 

 

Note 17.  Foreign Currency Forward Contracts

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

    

 

 

 

 

 

 

Three Months Ended March 31, 

 

Six Months Ended March 31, 

 

 

    

2019

    

2020

    

2019

    

2020

    

Foreign currency transactional gain (loss)

 

$

(93)

 

$

724

 

$

247

 

$

(347)

    

Foreign exchange forward contract gain (loss)

 

$

198

 

$

(501)

 

$

(299)

 

$

(22)

    

Net gain (loss) included in selling, general and administrative expense

 

$

105

 

$

223

 

$

(52)

 

$

(369)

 

 

 

 

 

 

 

 

 

 

 

20

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

 

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

 

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

 

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

 

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

 

Business Overview

 

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

 

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

 

COVID-19 Pandemic

 

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

 

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

21

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

 

Dividends Paid and Declared

 

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

 

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

 

Capital Spending

 

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

   

Volumes, Competition and Pricing

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

22

Net Revenue and Gross Profit Margin Performance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comparison by Quarter of Net Revenues, Gross Profit Margin and

 

 

 

Gross Profit Margin Percentage for Fiscal 2019 and 2020

 

 

 

 

 

 

Quarter Ended

 

 

 

December 31, 

 

March 31, 

 

June 30, 

 

September 30, 

 

December 31, 

 

March 31, 

 

(dollars in thousands)

 

2018

 

2019

 

2019

 

2019

 

2019

 

2020

 

Net Revenues

    

$

107,069

 

$

127,474

    

$

126,032

    

$

129,640

    

$

108,453

 

$

111,563

 

Gross Profit Margin

 

$

11,335

 

$

14,683

 

$

18,175

 

$

21,310

 

$

18,743

 

$

19,296

 

Gross Profit Margin %

  

 

10.6

%  

 

11.5

%  

 

14.4

%  

 

16.4

%  

 

17.3

%  

 

17.3

%

 

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

 

Backlog

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

December 31, 

 

March 31, 

 

June 30, 

 

September 30, 

 

December 31, 

 

March 31, 

 

 

    

2018

    

2019

    

2019

    

2019

    

2019

    

2020

 

Backlog(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Dollars (in thousands)

 

$

237,802

 

$

253,003

 

$

254,947

 

$

235,204

 

$

237,620

 

$

204,709

 

Pounds (in thousands)

 

 

8,392

 

 

8,855

 

 

9,072

 

 

8,064

 

 

8,231

 

 

6,930

 

Average selling price per pound

 

$

28.34

 

$

28.57

 

$

28.10

 

$

29.17

 

$

28.87

 

$

29.54

 

Average nickel price per pound

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

London Metals Exchange(2)

 

$

4.92

 

$

5.93

 

$

5.43

 

$

8.02

 

$

6.26

 

$

5.39

 


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

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

 

23

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

 

Quarterly Market Information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

December 31, 

 

March 31, 

 

June 30, 

 

September 30, 

 

December 31, 

 

March 31, 

 

 

 

2018

 

2019

 

2019

    

2019

    

2019

    

2020

 

Net revenues (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

54,607

 

$

68,858

 

$

66,321

 

$

68,318

 

$

58,843

 

$

59,172

 

Chemical processing

 

 

18,920

 

 

21,761

 

 

21,197

 

 

27,773

 

 

16,712

 

 

15,832

 

Industrial gas turbines

 

 

14,083

 

 

13,685

 

 

15,870

 

 

15,792

 

 

13,763

 

 

16,701

 

Other markets

 

 

14,285

 

 

16,958

 

 

15,666

 

 

11,037

 

 

11,875

 

 

12,762

 

Total product revenue

 

 

101,895

 

 

121,262

 

 

119,054

 

 

122,920

 

 

101,193

 

 

104,467

 

Other revenue

 

 

5,174

 

 

6,212

 

 

6,978

 

 

6,720

 

 

7,260

 

 

7,096

 

Net revenues

 

$

107,069

 

$

127,474

 

$

126,032

 

$

129,640

 

$

108,453

 

$

111,563

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shipments by markets (in thousands of pounds)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

 

2,112

 

 

2,857

 

 

2,579

 

 

2,731

 

 

2,303

 

 

2,261

 

Chemical processing

 

 

898

 

 

971

 

 

1,126

 

 

1,315

 

 

788

 

 

689

 

Industrial gas turbines

 

 

811

 

 

757

 

 

893

 

 

946

 

 

825

 

 

990

 

Other markets

 

 

509

 

 

580

 

 

523

 

 

432

 

 

306

 

 

386

 

Total shipments

 

 

4,330

 

 

5,165

 

 

5,121

 

 

5,424

 

 

4,222

 

 

4,326

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average selling price per pound

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

25.86

 

$

24.10

 

$

25.72

 

$

25.02

 

$

25.55

 

$

26.17

 

Chemical processing

 

 

21.07

 

 

22.41

 

 

18.83

 

 

21.12

 

 

21.21

 

 

22.98

 

Industrial gas turbines

 

 

17.36

 

 

18.08

 

 

17.77

 

 

16.69

 

 

16.68

 

 

16.87

 

Other markets

 

 

28.06

 

 

29.24

 

 

29.95

 

 

25.55

 

 

38.81

 

 

33.06

 

Total product (product only; excluding other revenue)

 

 

23.53

 

 

23.48

 

 

23.25

 

 

22.66

 

 

23.97

 

 

24.15

 

Total average selling price (including other revenue)

 

$

24.73

 

$

24.68

 

$

24.61

 

$

23.90

 

$

25.69

 

$

25.79

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

Change

 

 

 

2019

    

2020

    

Amount

    

%

 

Net revenues

    

$

127,474

    

100.0

%  

$

111,563

    

100.0

%  

$

(15,911)

    

(12.5)

%

Cost of sales

 

 

112,791

 

88.5

%  

 

92,267

 

82.7

%  

 

(20,524)

    

(18.2)

%

Gross profit

 

 

14,683

 

11.5

%  

 

19,296

 

17.3

%  

 

4,613

    

31.4

%

Selling, general and administrative expense

 

 

10,663

 

8.4

%  

 

10,785

 

9.7

%  

 

122

    

1.1

%

Research and technical expense

 

 

859

 

0.7

%  

 

1,028

 

0.9

%  

 

169

    

19.7

%

Operating income (loss)

 

 

3,161

 

2.5

%  

 

7,483

 

6.7

%  

 

4,322

    

136.7

%

Nonoperating retirement benefit expense

 

 

856

 

0.7

%  

 

1,700

 

1.5

%  

 

844

    

98.6

%

Interest income

 

 

(18)

 

(0.0)

%  

 

(10)

 

(0.0)

%  

 

 8

    

(44.4)

%

Interest expense

 

 

284

 

0.2

%  

 

296

 

0.3

%  

 

12

    

4.2

%

Income (loss) before income taxes

 

 

2,039

 

1.6

%  

 

5,497

 

4.9

%  

 

3,458

    

169.6

%

Provision for (benefit from) income taxes

 

 

530

 

0.4

%  

 

1,429

 

1.3

%  

 

899

    

169.6

%

Net income (loss)

 

$

1,509

 

1.2

%  

$

4,068

 

3.6

%  

$

2,559

    

169.6

%

 

24

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

March 31, 

 

Change

 

By market 

    

2019

    

2020

    

Amount

    

%

 

Net revenues (dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

68,858

 

$

59,172

 

$

(9,686)

 

(14.1)

%

Chemical processing

 

 

21,761

 

 

15,832

 

 

(5,929)

 

(27.2)

%

Industrial gas turbine

 

 

13,685

 

 

16,701

 

 

3,016

 

22.0

%

Other markets

 

 

16,958

 

 

12,762

 

 

(4,196)

 

(24.7)

%

Total product revenue

 

 

121,262

 

 

104,467

 

 

(16,795)

 

(13.9)

%

Other revenue

 

 

6,212

 

 

7,096

 

 

884

 

14.2

%

Net revenues

 

$

127,474

 

$

111,563

 

$

(15,911)

 

(12.5)

%

Pounds by market (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

 

2,857

 

 

2,261

 

 

(596)

 

(20.9)

%

Chemical processing

 

 

971

 

 

689

 

 

(282)

 

(29.0)

%

Industrial gas turbine

 

 

757

 

 

990

 

 

233

 

30.8

%

Other markets

 

 

580

 

 

386

 

 

(194)

 

(33.4)

%

Total shipments

 

 

5,165

 

 

4,326

 

 

(839)

 

(16.2)

%

Average selling price per pound

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

24.10

 

$

26.17

 

$

2.07

 

8.6

%

Chemical processing

 

 

22.41

 

 

22.98

 

 

0.57

 

2.5

%

Industrial gas turbine

 

 

18.08

 

 

16.87

 

 

(1.21)

 

(6.7)

%

Other markets

 

 

29.24

 

 

33.06

 

 

3.82

 

13.1

%

Total product (excluding other revenue)

 

 

23.48

 

 

24.15

 

 

0.67

 

2.9

%

Total average selling price (including other revenue)

 

$

24.68

 

$

25.79

 

$

1.11

 

4.5

%

 

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

 

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

   

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

 

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

25

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

   

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

26

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended March 31, 

 

Change

 

($ in thousands)

 

2019

 

2020

 

Amount

 

%  

 

Net revenues

    

$

234,543

    

100.0

%  

$

220,016

    

100.0

%  

$

(14,527)

    

(6.2)

%

Cost of sales

 

 

208,525

 

88.9

%  

 

181,977

 

82.7

%  

 

(26,548)

 

(12.7)

%

Gross profit

 

 

26,018

 

11.1

%  

 

38,039

 

17.3

%  

 

12,021

 

46.2

%

Selling, general and administrative expense

 

 

21,791

 

9.3

%  

 

22,292

 

10.1

%  

 

501

 

2.3

%

Research and technical expense

 

 

1,693

 

0.7

%  

 

1,910

 

0.9

%  

 

217

 

12.8

%

Operating income (loss)

 

 

2,534

 

1.1

%

 

13,837

 

6.3

%  

 

11,303

 

446.1

%

Nonoperating retirement benefit expense

 

 

1,712

 

0.7

%

 

3,400

 

1.5

%  

 

1,688

 

98.6

%

Interest income

 

 

(38)

 

(0.0)

%

 

(24)

 

(0.0)

%  

 

14

 

(36.8)

%

Interest expense

 

 

525

 

0.2

%  

 

547

 

0.2

%  

 

22

 

4.2

%

Income (loss) before income taxes

 

 

335

 

0.1

%

 

9,914

 

4.5

%  

 

9,579

 

2,859.4

%

Provision for (benefit from) income taxes

 

 

429

 

0.2

%

 

2,578

 

1.2

%  

 

2,149

 

500.9

%

Net income (loss)

 

$

(94)

 

(0.0)

%

$

7,336

 

3.3

%  

$

7,430

 

(7,904.3)

%

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

March 31, 

 

Change

 

 

    

2019

    

2020

    

Amount

    

%

 

Net revenues (dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

123,465

 

$

118,015

 

$

(5,450)

 

(4.4)

%

Chemical processing

 

 

40,681

 

 

32,544

 

 

(8,137)

 

(20.0)

%

Industrial gas turbine

 

 

27,768

 

 

30,464

 

 

2,696

 

9.7

%

Other markets

 

 

31,243

 

 

24,637

 

 

(6,606)

 

(21.1)

%

Total product revenue

 

 

223,157

 

 

205,660

 

 

(17,497)

 

(7.8)

%

Other revenue

 

 

11,386

 

 

14,356

 

 

2,970

 

26.1

%

Net revenues

 

$

234,543

 

$

220,016

 

$

(14,527)

 

(6.2)

%

Pounds by market (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

 

4,969

 

 

4,564

 

 

(405)

 

(8.2)

%

Chemical processing

 

 

1,869

 

 

1,477

 

 

(392)

 

(21.0)

%

Industrial gas turbine

 

 

1,568

 

 

1,815

 

 

247

 

15.8

%

Other markets

 

 

1,089

 

 

692

 

 

(397)

 

(36.5)

%

Total shipments

 

 

9,495

 

 

8,548

 

 

(947)

 

(10.0)

%

Average selling price per pound

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

24.85

 

$

25.86

 

$

1.01

 

4.1

%

Chemical processing

 

 

21.77

 

 

22.03

 

 

0.26

 

1.2

%

Industrial gas turbine

 

 

17.71

 

 

16.78

 

 

(0.93)

 

(5.3)

%

Other markets

 

 

28.69

 

 

35.60

 

 

6.91

 

24.1

%

Total product (excluding other revenue)

 

 

23.50

 

 

24.06

 

 

0.56

 

2.4

%

Total average selling price (including other revenue)

 

$

24.70

 

$

25.74

 

$

1.04

 

4.2

%

 

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

   

 

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

27

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

28

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

 

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

 

Working Capital

 

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

 

Liquidity and Capital Resources

 

Comparative cash flow analysis

 

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

 

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

 

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

 

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

 

Future sources of liquidity

 

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

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

U.S. revolving credit facility

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

29

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

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

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

 

Future uses of liquidity

 

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

 

Funding operations;

 

Capital spending;

 

Dividends to stockholders; and

 

Pension and postretirement plan contributions.

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

 

 

Contractual Obligations

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments Due by Period

 

 

 

 

 

 

Less than

 

 

 

 

 

 

 

More than

 

Contractual Obligations

 

Total

 

1 year

 

1-3 Years

 

3-5 Years

 

5 years

 

 

 

(in thousands)

 

Credit facility fees(1)

    

$

30,526

    

$

30,436

    

$

90

    

$

 —

    

$

 —

 

Operating lease obligations

 

 

3,954

 

 

2,097

 

 

1,310

 

 

547

 

 

 —

 

Finance lease obligations

 

 

16,190

 

 

998

 

 

2,024

 

 

2,063

 

 

11,105

 

Raw material contracts (primarily nickel)

 

 

16,767

 

 

16,767

 

 

 —

 

 

 —

 

 

 —

 

Capital projects and other commitments

 

 

2,902

 

 

2,902

 

 

 —

 

 

 —

 

 

 —

 

Pension plan(2)

 

 

98,523

 

 

6,000

 

 

12,000

 

 

9,000

 

 

71,523

 

Non-qualified pension plans

 

 

671

 

 

95

 

 

190

 

 

190

 

 

196

 

Other postretirement benefits(3)

 

 

47,234

 

 

4,155

 

 

9,281

 

 

9,859

 

 

23,939

 

Environmental post-closure monitoring

 

 

606

 

 

97

 

 

144

 

 

151

 

 

214

 

Total

 

$

217,373

 

$

63,547

 

$

25,039

 

$

21,810

 

$

106,977

 

 


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

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

30

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

 

New Accounting Pronouncements

 

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

 

Critical Accounting Policies and Estimates

 

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

 

 

Item 3.Quantitative and Qualitative Disclosures about Market Risk

 

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

 

Item 4.Controls and Procedures

 

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

 

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

 

 

 

31

 

 

PART II OTHER INFORMATION

 

 

 

Item 1a. Risk Factors

 

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

 

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

 

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

 

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

 

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

 

 

 

 

 

 

Item 6.Exhibits

 

Exhibits.  See Index to Exhibits.

 

32

 

INDEX TO EXHIBITS

 

 

 

 

Exhibit
Number

 

Description

3.1

 

Second Restated Certificate of Incorporation of Haynes International, Inc. (incorporated by reference to Exhibit 3.1 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).

3.2**

 

Amended and Restated By-Laws of Haynes International, Inc., as amended through February 28, 2018.

4.1

 

Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.01 to the Haynes International, Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2009).

10.1

 

Haynes International, Inc. 2020 Incentive Compensation Plan (incorporated by reference to Exhibit 99.1 to the for 8-K filed by the Company on February 27, 2020).

31.1**

 

Rule 13a-14(a)/15d-4(a) Certification of Chief Executive Officer

31.2**

 

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.1*

 

Section 1350 Certifications

101

 

The following materials from the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2019 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Income (Loss); (iv) the Consolidated Statements of Stockholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) related notes.


*Furnished not filed.

** Filed herewith.

 

33

SIGNATURES

 

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

 

 

 

 

 

HAYNES INTERNATIONAL, INC.

 

 

 

 

 

/s/ Michael Shor

 

Michael Shor

 

President and Chief Executive Officer

 

Date: April 30, 2020

 

 

 

 

 

/s/ Daniel Maudlin

 

Daniel Maudlin

 

Vice President — Finance and Chief Financial Officer

 

Date:  April 30, 2020

 

34