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 December 31, ~~2017~~2019


☐	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 ~~and posted on its corporate Website, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). 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 ~~(Do not check if a smaller reporting company)~~ ☐		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 ~~February 1, 2018,~~January 30, 2020, the registrant had ~~12,520,320~~12,556,255 shares of Common Stock, $.001 par value, outstanding.

Table of Contents

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, ~~2017~~2019 and December 31, ~~201~~2019 7	3

	Consolidated Statements of Operations (Unaudited) for the Three Months Ended December 31, ~~2016~~2018 and ~~201~~72019	4

	Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three Months Ended December 31, ~~2016~~2018 and ~~201~~72019	5

	Consolidated Statement of Stockholders Equity (Unaudited) for the Three Months Ended December 31, 2018 and 2019	6

	Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended December 31, ~~2016~~2018 and ~~201~~72019	67

	Notes to Condensed Consolidated Financial Statements (Unaudited)	78

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1820

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2527

Item 4.	Controls and Procedures	2527

PART II	OTHER INFORMATION	2628

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 6.	Exhibits	2628

	Index to Exhibits	2729

	Signatures	2830

Table of Contents

PART 1FINANCIAL 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,		December 31,		September 30,		December 31,
	2017		2017		2019		2019
ASSETS
Current assets:
Cash and cash equivalents	$	46,328	$	33,966	$	31,038	$	33,619
Accounts receivable, less allowance for doubtful accounts of $620 and $624 at September 30, 2017 and December 31, 2017, respectively		61,602		54,823
Accounts receivable, less allowance for doubtful accounts of $441 and $464 at September 30, 2019 and December 31, 2019, respectively						76,979		66,034
Inventories		244,457		267,228		258,802		282,019
Income taxes receivable		—		10,104		1,757		457
Other current assets		2,781		3,587		3,297		3,668
Total current assets		355,168		369,708		371,873		385,797
Property, plant and equipment, net		192,556		188,999		169,966		167,400
Deferred income taxes		58,133		29,889		34,132		33,584
Other assets		5,107		5,297		7,756		10,164
Goodwill		4,789		4,789		4,789		4,789
Other intangible assets, net		6,066		5,933		5,284		5,233
Total assets	$	621,819	$	604,615	$	593,800	$	606,967
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	32,802	$	40,737	$	34,497	$	40,197
Accrued expenses		14,108		13,054		18,833		17,615
Income taxes payable		195		—		—		481
Accrued pension and postretirement benefits		5,095		5,095		4,250		4,250
Deferred revenue—current portion		2,500		2,500		2,500		2,500
Total current liabilities		54,700		61,386		60,080		65,043
Long-term obligations (less current portion) (Note 14)		7,896		8,626
Long-term obligations (less current portion) (Note 15)						8,609		8,634
Deferred revenue (less current portion)		20,329		19,704		15,329		14,704
Deferred income taxes		1,741		1,741		2,016		2,016
Operating lease liabilities						—		2,562
Accrued pension benefits (less current portion)		90,957		89,764		101,812		100,167
Accrued postretirement benefits (less current portion)		112,424		112,707		109,679		110,215
Total liabilities		288,047		293,928		297,525		303,341
Commitments and contingencies (Note 6)		—		—
Commitments and contingencies (Note 7)						—		—
Stockholders’ equity:
Common stock, $0.001 par value (40,000,000 shares authorized, 12,544,933 and 12,562,433 shares issued and 12,509,757 and 12,520,320 outstanding at September 30, 2017 and December 31, 2017, respectively)		13		13
Common stock, $0.001 par value (40,000,000 shares authorized, 12,566,969 and 12,615,164 shares issued and 12,513,500 and 12,556,255 shares outstanding at September 30, 2019 and December 31, 2019, respectively)						13		13
Preferred stock, $0.001 par value (20,000,000 shares authorized, 0 shares issued and outstanding)		—		—		—		—
Additional paid-in capital		248,733		249,339		253,843		254,999
Accumulated earnings		159,366		134,082		125,296		139,010
Treasury stock, 35,176 shares at September 30, 2017 and 42,113 shares at December 31, 2017		(1,646)		(1,876)
Treasury stock, 53,469 shares at September 30, 2019 and 58,909 shares at December 31, 2019						(2,239)		(2,437)
Accumulated other comprehensive loss		(72,694)		(70,871)		(80,638)		(87,959)
Total stockholders’ equity		333,772		310,687		296,275		303,626
Total liabilities and stockholders’ equity	$	621,819	$	604,615	$	593,800	$	606,967

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

Table of Contents

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)



	Three Months Ended December 31,				Three Months Ended December 31,
	2016		2017		2018		2019
Net revenues	$	93,355	$	89,693	$	107,069	$	108,453
Cost of sales		82,868		82,683		95,734		89,710
Gross profit		10,487		7,010		11,335		18,743
Selling, general and administrative expense		10,312		10,770		11,128		11,507
Research and technical expense		943		888		834		882
Operating income (loss)		(768)		(4,648)		(627)		6,354
Nonoperating retirement benefit expense						856		1,700
Interest income		(57)		(18)		(20)		(14)
Interest expense		169		230		241		251
Income (loss) before income taxes		(880)		(4,860)		(1,704)		4,417
Provision for (benefit from) income taxes		(208)		17,666		(101)		1,149
Net income (loss)	$	(672)	$	(22,526)	$	(1,603)	$	3,268
Net income (loss) per share:
Basic	$	(0.06)	$	(1.82)	$	(0.13)	$	0.26
Diluted	$	(0.06)	$	(1.82)	$	(0.13)	$	0.26
Weighted Average Common Shares Outstanding
Basic		12,382		12,411		12,431		12,460
Diluted		12,382		12,411		12,431		12,502

Dividends declared per common share	$	0.22	$	0.22	$	0.22	$	0.22

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

Table of Contents

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)



	Three Months Ended December 31,				Three Months Ended December 31,
	2016		2017		2018		2019
Net income (loss)	$	(672)	$	(22,526)	$	(1,603)	$	3,268
Other comprehensive income (loss), net of tax:
Pension and postretirement		2,580		1,306		580		1,719
Foreign currency translation adjustment		(3,026)		517		(1,171)		4,243
Other comprehensive income (loss)		(446)		1,823		(591)		5,962
Comprehensive income (loss)	$	(1,118)	$	(20,703)	$	(2,194)	$	9,230

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

Table of Contents

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(in thousands, except share data)


	Three Months Ended December 31, 2018
										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)							(1,603)						(1,603)
Dividends paid and accrued ($0.22 per share)							(2,759)						(2,759)
Other comprehensive income (loss)											(591)		(591)
Exercise of stock options	12,084				215								215
Issue restricted stock (less forfeitures)	10,156												—
Purchase of treasury stock	(9,226)								(308)				(308)
Stock compensation					450								450
Balance December 31, 2018	12,517,492	$	13	$	251,718	$	122,226	$	(2,177)	$	(43,156)	$	328,624


	Three Months Ended December 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, 2019	12,513,500	$	13	$	253,843	$	125,296	$	(2,239)	$	(80,638)	$	296,275
Net income (loss)							3,268						3,268
Dividends paid and accrued ($0.22 per share)							(2,837)						(2,837)
Other comprehensive income (loss)											5,962		5,962
Exercise of stock options	12,400				422								422
Tax impact of forfeited vested options													—
Tax impact of dividends on restricted stock													—
Reclass due to adoption of ASU 2018-02							13,283				(13,283)		—
Issue restricted stock (less forfeitures)	35,795												—
Purchase of treasury stock	(5,440)								(198)				(198)
Stock compensation					734								734
Balance December 31, 2019	12,556,255	$	13	$	254,999	$	139,010	$	(2,437)	$	(87,959)	$	303,626

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

Table of Contents

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)



	Three Months Ended December 31,				Three Months Ended December 31,
	2016		2017		2018		2019
Cash flows from operating activities:
Net income (loss)	$	(672)	$	(22,526)	$	(1,603)	$	3,268
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		5,262		5,744		4,550		4,752
Amortization		123		133		105		51
Pension and post-retirement expense - U.S. and U.K.		5,859		3,556		2,245		3,437
Change in long-term obligations						(7)		(12)
Stock compensation expense		558		606		450		734
Deferred revenue		(5,205)		(625)		(625)		(625)
Deferred income taxes		729		27,488		289		(84)
Loss on disposition of property		254		—		5		—
Change in assets and liabilities:
Restricted cash		3,523		—
Accounts receivable		7,648		6,979		8,106		11,941
Inventories		(6,973)		(22,502)		(8,815)		(19,983)
Other assets		(1,041)		(989)		(293)		(206)
Accounts payable and accrued expenses		8,938		8,583		(1,458)		4,207
Income taxes		(2,705)		(10,300)		5,081		1,761
Accrued pension and postretirement benefits		(2,829)		(2,400)		(934)		(2,213)
Net cash provided by (used in) operating activities		13,469		(6,253)		7,096		7,028
Cash flows from investing activities:
Additions to property, plant and equipment		(5,893)		(3,183)		(2,271)		(2,296)
Net cash provided by (used in) investing activities		(5,893)		(3,183)		(2,271)		(2,296)
Cash flows from financing activities:
Revolving credit facility borrowings						2,000		—
Revolving credit facility repayments						(2,000)		—
Dividends paid		(2,752)		(2,754)		(2,752)		(2,760)
Proceeds from exercise of stock options						215		422
Payment for purchase of treasury stock		(266)		(230)		(308)		(198)
Payments on long-term obligation		(55)		(67)		(34)		(40)
Net cash provided by (used in) financing activities		(3,073)		(3,051)		(2,879)		(2,576)
Effect of exchange rates on cash		(839)		125		(139)		425
Increase (decrease) in cash and cash equivalents:		3,664		(12,362)		1,807		2,581
Cash and cash equivalents:
Cash, cash equivalents and restricted cash:
Beginning of period		59,297		46,328		9,802		31,038
End of period	$	62,961	$	33,966	$	11,609	$	33,619
Supplemental disclosures of cash flow information:
Interest (net of capitalized interest)	$	155	$	215	$	226	$	236
Income taxes paid (refunded), net	$	1,836	$	464	$	(5,472)	$	(526)
Capital expenditures incurred, but not yet paid	$	991	$	896	$	952	$	106
Dividends declared but not yet paid					$	7	$	117

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

Table of Contents

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, ~~2017~~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 months ended December 31, ~~2017~~2019 are not necessarily indicative of the results to be expected for the full fiscal year ending September 30, ~~2018~~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.

Note 2.Recently Issued Accounting Standards

~~In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ASU 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606)~~. The objective of the update is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2015-14 deferred the effective date of the update to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the methods of adoption allowed by the new standard and the effect on its consolidated financial statements.

~~In July 2015, the FASB issued ASU 2015-11,~~ ~~Inventory (Topic 330)~~. The objective of this update is to simplify the measurement of inventory valuation at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. It is effective for annual reporting periods beginning after December 15, 2016 and interim periods within fiscal years beginning after December 15, 2017. The Company adopted these changes in the first quarter of fiscal 2018, which did not result in a material impact to the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This new guidance ~~will require~~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. ~~Early adoption is permitted.~~ 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 ~~currently evaluating~~included in Operating lease liabilities on the ~~impact~~consolidated balance sheets. The adoption of the ~~new~~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 in the consolidated statements of operations on ~~its consolidated financial statements.~~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.

In ~~March 2017,~~February 2018, the FASB issued ASU ~~2017-07,~~2018-02, ~~Compensation~~Income Statement – ~~Retirement Benefits~~Reporting Comprehensive Income (Topic ~~715)~~220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income~~. This new guidance requires entities~~, which allows a reclassification from accumulated other comprehensive income (loss) to ~~(1) disaggregate the service cost component~~accumulated earnings for standard tax effects resulting from the ~~other components of net benefit cost~~Tax Cuts and present it with other current compensation costs for related employees in the income statement and (2) present the other components elsewhere in the income statement and outside of income from operations if that subtotal is presented. In addition, the ASU requires entities to disclose the income statement lines that contain the other components if they are not presented on appropriately described separate lines.Jobs Act. This ~~new guidance~~update is effective for fiscal years beginning after December 15, ~~2017, including interim periods within those annual periods, with early adoption permitted.~~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, ~~of the new guidance~~if any, on its ~~consolidated financial statements.~~disclosures in the Notes to Consolidated Financial Statements.

Table of Contents

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 December 31, 2019, accounts receivable with customers were $77,420 and $66,498, respectively. Allowance for doubtful accounts as of September 30, 2019 and December 31, 2019 were $441 and $464, 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 December 31, 2019, no contract liabilities have been recorded except for $17,829 and $17,204, 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 months ended December 31, 2018 and 2019.


	Three Months Ended
	December 31,
	2018		2019
Net revenues (dollars in thousands)
Aerospace	$	54,607	$	58,843
Chemical processing		18,920		16,712
Industrial gas turbine		14,083		13,763
Other markets		14,285		11,875
Total product revenue		101,895		101,193
Other revenue		5,174		7,260
Net revenues	$	107,069	$	108,453

Note 4. Inventories

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


	September 30,		December 31,		September 30,		December 31,
	2017		2017		2019		2019
Raw Materials	$	18,731	$	21,949	$	17,935	$	23,013
Work-in-process		130,019		148,341		138,859		146,411
Finished Goods		94,331		95,351		100,590		111,197
Other		1,376		1,587		1,418		1,398
	$	244,457	$	267,228	$	258,802	$	282,019

Note 4.5. Income Taxes

On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (“the Act”), which made significant changes to U.S. federal income tax law including, among other things, lowering corporate income tax rates, permitting bonus depreciation that will allow for full expensing of qualified property and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. Beginning October 1, 2017 and continuing through September 30, 2018, the Company’s U.S. income will be taxed at a 24.5% federal tax rate after which time the federal tax rate applicable to the Company will be lowered to 21.0%. Deferred tax assets as of December 31, 2017 were revalued to the lower statutory rates of 24.5% or 21.0%, depending upon the projected timing of the reversal of these assets. The estimated impact of the revaluation of the deferred tax assets has resulted in increased tax expense in the first quarter of fiscal 2018 of $17,868. This amount was recorded as a discrete accounting adjustment and will be adjusted throughout the remainder of fiscal 2018 as the timing of the reversal of deferred tax assets becomes known. Other components of the Act, such as the transition tax applied on accumulated earnings and profits of controlled foreign corporations, have not been included in income tax expense as the impact, if any, cannot reasonably be determined at this time. An analysis of accumulated earnings and foreign tax credit pools must be completed before this amount can be determined.

Income tax expense for the three months ended December 31, ~~2016~~2018 and ~~2017~~2019 differed from the U.S. federal statutory ~~rates~~rate of ~~35% and 24.5%~~21.0%, ~~respectively,~~ primarily due to state income taxes, differing tax rates on foreign earnings and discrete tax items that impacted income tax expense in these periods. In addition to the deferred tax revaluation adjustment of $17,868, current period tax expense was adversely impacted due to a lower rate applied against a pretax loss of $(4,860). Additionally, the low effective tax rate in the first quarter of fiscal 2018 was due to the Company’s pre-tax loss in the United States and pre-tax income in the United Kingdom, which has a lower effective tax rate than the statutory rate. When incurring a pre-tax loss, the effective tax rate of the Company will be lower than the statutory rate if the estimated full-year pre-tax loss in the United States is a partial offset to estimated full year pre-tax income incurred in other jurisdictions. The effective tax rate for the three months ended December 31, ~~2017~~2018 was ~~(363.5)% compared to 23.6%~~5.9% on ($1,704) of loss before income taxes and 26.0% on income before income taxes of $4,417 for the three months ended December 31, 2019. Income tax expense in the ~~same period~~first three months of fiscal ~~2017.~~ 2019 was unfavorably impacted by the forfeiture of unexercised stock options, which resulted in approximately $300 of additional tax expense.

Table of Contents

Note 5.6. Pension and Post-retirement Benefits

Components of net periodic pension and post-retirement benefit cost for the three months ended December 31, ~~2016~~2018 and ~~2017~~2019 were as follows:


	Three Months Ended December 31,								Three Months Ended December 31,
	Pension Benefits				Other Benefits				Pension Benefits				Other Benefits
	2016		2017		2016		2017		2018		2019		2018		2019
Service cost	$	1,571	$	1,384	$	87	$	84	$	1,310	$	1,386	$	79	$	354
Interest cost		2,549		2,606		1,073		1,078		2,566		2,148		1,088		873
Expected return		(3,472)		(3,634)		—		—		(3,572)		(3,645)		—		—
Amortizations		2,981		1,289		1,070		749		402		1,859		372		462
Net periodic benefit cost	$	3,629	$	1,645	$	2,230	$	1,911	$	706	$	1,748	$	1,539	$	1,689

The Company contributed $1,500 to Company-sponsored domestic pension plans, ~~$879~~$691 to its other post-retirement benefit plans and ~~$203~~$198 to the U.K. pension plan for the three months ended December 31, ~~2017.~~2019. The Company expects to make ~~future~~ contributions of $4,500 to its U.S. pension plan, ~~$4,121~~$3,463 to its other post-retirement benefit plan and ~~$504~~$540 to the U.K. pension plan for the remainder of fiscal ~~2018.~~2020.

~~Table of Contents~~

Note ~~6.Legal,~~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.

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 in 2018 and 2019. The Company ~~is currently, and~~ has engaged its legal advisors in the ~~past been, subject~~United Kingdom to ~~claims involving personal injuries allegedly relating~~respond to ~~its products~~the claim, and ~~processes. For example,~~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 involved in two actions involving welding rod-related injuries, which were filed in California state court against numerous manufacturers, including the Company, in May 2006 and February 2007, respectively, allegingknown, management does not believe that the welding-related products of the defendant manufacturers harmed the users of such products through the inhalation of welding fumes containing manganese. The Company (together with a number of other manufacturer defendants) is also involved in one action alleging that asbestos in its facilities harmed the plaintiff. The Company believes that it has defenses to these allegations and that, if the Company were to be found liable, the cases would notclaim will have a material effect on ~~its~~the Company’s financial position, results of operations or ~~liquidity.~~

The Company expects to amend its Amended and Restated By-Laws effective upon receipt of the affirmative vote of a majority of its stockholders at the Company’s 2018 Annual Meeting of Stockholders. The proposed amendment would remove the requirement that stockholders electing to remove a director must show cause in order to do so. This proposed amendment is in response to a recent decision by the Delaware Court of Chancery.

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~~ 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~~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, if required. Accordingly, the Company cannot assure that the costs of any future corrective action at these or any other current or former sites would not have a material effect on the Company’s financial condition, results of operations or liquidity.

As of September 30, ~~2017~~2019 and December 31, ~~2017,~~2019, the Company has accrued ~~$633~~$606 for post-closure monitoring and maintenance activities, of which ~~$531 was~~$508 is included in long-term obligations as it is not due within one year. Accruals for these costs are calculated by estimating the ~~annual~~ cost to monitor and maintain each post-closure site and multiplying that amount by the number of years remaining in the post-closure ~~monitoring period.~~monitoring.

Table of Contents

Expected ~~expenditures for~~maturities of post-closure monitoring and maintenance activities (discounted) ~~were~~included in long-term obligations are as follows at December 31, ~~2017.~~2019.

2019
$
54

2020

52

2021

60

2022

50

2023 and thereafter

315

$
531


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.

~~Table~~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 ~~Contents~~operations.

Note ~~7.Deferred~~8. Deferred Revenue

On November 17, 2006, the Company entered into a twenty-year agreement to provide conversion services ~~(“Conversion Services Agreement”)~~ to Titanium Metals Corporation ~~(“TIMET”)~~(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 ~~$25.0 million~~$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 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 ~~8.Goodwill~~9. Goodwill and Other Intangible Assets, Net

The Company has goodwill, ~~patents,~~ trademarks, customer relationships and other intangibles. As the ~~patents and~~ customer relationships have a definite life, they are amortized over lives ranging from ~~two to sixteen~~fifteen years. The Company reviews ~~patents and~~ 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 ~~discounted~~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 December 31, ~~2017.~~2019.

During the first three months of fiscal ~~2018,~~2020, there were no changes in the carrying amount of goodwill.

1011

Table of Contents

Amortization of customer relationships ~~patents, non-competes~~ and other intangibles was ~~$123~~$105 and ~~$133~~$51 for the three-month periods ended December 31, ~~2016~~2018 and ~~2017, respectively.~~2019, respectively The following represents a summary of intangible assets at September 30, ~~2017~~2019 and December 31, ~~2017:~~2019.


	Gross		Accumulated		Carrying		Gross		Accumulated		Carrying
September 30, 2017	Amount		Amortization		Amount
Patents	$	4,030	$	(3,656)	$	374
September 30, 2019							Amount		Amortization		Amount
Trademarks		3,800		—		3,800		3,800		—		3,800
Customer relationships		2,100		(426)		1,674		2,100		(718)		1,382
Other		291		(73)		218		291		(189)		102
	$	10,221	$	(4,155)	$	6,066	$	6,191	$	(907)	$	5,284


	Gross		Accumulated		Carrying
December 31, 2019	Amount		Amortization		Amount
Trademarks	$	3,800	$	—	$	3,800
Customer relationships		2,100		(754)		1,346
Other		291		(204)		87
	$	6,191	$	(958)	$	5,233

Gross

Accumulated

Carrying

December 31, 2017

Amount

Amortization

Amount

Patents

$
4,030

$
(3,737)

$
293

Trademarks

3,800

—

3,800

Customer relationships

2,100

(464)

1,636

Other

291

(87)

204

$
10,221

$
(4,288)

$
5,933


Estimated future Aggregate Amortization Expense:
Year Ended September 30,
2018	$	394
2019		256
2020		198	$	147
2021		180		185
2022		133		133
2023				129
2024				126
Thereafter		972		713

Note ~~9.Net~~10. Net Income (Loss) Per Share

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

1112

Table of Contents

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


	Three Months Ended						Three Months Ended
	December 31,						December 31,
(in thousands, except share and per share data)	2016			2017			2018			2019
Numerator: Basic and Diluted
Net income (loss)	$	(672)		$	(22,526)		$	(1,603)		$	3,268
Dividends paid		(2,752)			(2,758)
Dividends paid and accrued								(2,759)			(2,837)
Undistributed income (loss)		(3,424)			(25,284)			(4,362)			431
Percentage allocated to common shares (a)		100.0	%		100.0	%		100.0	%		99.3	%
Undistributed income (loss) allocated to common shares		(3,424)			(25,284)			(4,362)			428
Dividends paid on common shares outstanding		2,724			2,737			2,737			2,818
Net income (loss) available to common shares		(700)			(22,547)			(1,625)			3,246
Denominator: Basic and Diluted
Weighted average common shares outstanding		12,382,207			12,410,896			12,430,785			12,459,930
Adjustment for dilutive potential common shares		—			—			—			41,582
Weighted average shares outstanding - Diluted		12,382,207			12,410,896			12,430,785			12,501,512

Basic net income (loss) per share	$	(0.06)		$	(1.82)		$	(0.13)		$	0.26
Diluted net income (loss) per share	$	(0.06)		$	(1.82)		$	(0.13)		$	0.26

Number of stock option shares excluded as their effect would be anti-dilutive		345,167			366,776			227,565			502,301
Number of restricted stock shares excluded as their effect would be anti-dilutive		109,785			97,835			68,700			—
Number of deferred restricted stock shares excluded as their effect would be anti-dilutive		—			16,550			29,050			—
Number of performance share awards excluded as their effect would be anti-dilutive		19,000			43,800			43,101			—

(a) Percentage allocated to common shares - Weighted average
(a) Percentage allocated to common shares - Weighted average
Common shares outstanding		12,382,207			12,410,896			12,430,785			12,459,930
Unvested participating shares		—			—			—			83,283
		12,382,207			12,410,896			12,430,785			12,543,213

Note ~~10.~~11. Stock-Based Compensation

Restricted Stock

On February 23, 2009, the Company adopted a restricted stock plan that reserved 400,000 shares of common stock for issuance. Additionally, on March 1, 2016, the Company adopted the 2016 Incentive Compensation Plan which provides for grants of restricted stock, restricted stock units and performance shares, among other awards. Up to 275,000 shares of restricted stock, restricted stock units and performance shares may be granted in the aggregate under this plan. Following the adoption of the 2016 Incentive Compensation Plan, the Company ceased granting awards from the 2009 restricted stock plan, although awards remain outstanding thereunder.

Grants of restricted stock are comprised of shares of the Company’s common stock subject to transfer restrictions, which vest in accordance with the terms and conditions established by the Compensation Committee. The Compensation Committee may set vesting requirements based on the achievement of specific performance goals or the passage of time.

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

The shares of time-based restricted stock granted to employees vest on the third anniversary of their grant date if the recipient is still an employee of the Company on such date. The shares of restricted stock granted to non-employee directors will vest on the earlier of (a) the first anniversary of the date of grant or (b) the failure of such non-employee director to be re-elected at an annual meeting of the stockholders of the Company as a result of such non-employee director being excluded from the nominations for any reason other than cause.

~~Table of Contents~~

The following table summarizes the activity under the 2009 restricted stock plan and the 2016 Incentive Compensation Plan with respect to restricted stock for the three months ended December 31, ~~2017:~~2019:


		Weighted			Weighted
		Average Fair			Average Fair
	Number of	Value At		Number of	Value At
	Shares	Grant Date		Shares	Grant Date
Unvested at September 30, 2017	107,210	$	41.36
Unvested at September 30, 2019				61,838	$	34.94
Granted	31,750	$	31.76	35,795	$	37.00
Forfeited / Canceled	(14,250)	$	46.72
Vested	(26,875)	$	44.51	(14,350)	$	40.86
Unvested at December 31, 2017	97,835	$	36.60
Unvested at December 31, 2019				83,283	$	34.81
Expected to vest	85,168	$	36.43	83,283	$	34.81

Compensation expense related to restricted stock for the three months ended December 31, ~~2016~~2018 and ~~2017~~2019 was ~~$416~~$53 and ~~$315,~~$215, respectively. The remaining unrecognized compensation expense related to restricted stock at December 31, ~~2017~~2019 was ~~$1,960,~~$2,085, to be recognized over a weighted average period of ~~1.36~~1.81 years. During the first ~~quarter~~three months of fiscal ~~2018,~~2020, the Company repurchased ~~6,937~~5,440 shares of stock from employees at an average purchase price of ~~$32.23~~$36.38 to satisfy required withholding taxes upon vesting of restricted stock-based compensation.

Deferred Restricted Stock

On November 20, 2017, the Company adopted a deferred compensation plan that allows directors and officers the option to defer receipt of cash and stock compensation. On November 21, 2017, the Company granted shares of restricted stock out of the restricted stock plan in which elections were made by certain individuals to defer receipt to a future period. Those shares will vest in accordance with the parameters of the restricted stock plan, however, receipt of the shares and any corresponding dividends are deferred until the end of the deferral period. In the event the deferred shares are forfeited prior to the vesting date, deferred dividends pertaining to those shares are also forfeited. During the deferral period, the participants who elected to defer shares will not have voting rights with respect to those shares during the period of deferral.

The following table ~~summarized~~summarizes the activity under the 2016 Incentive Compensation Plan with respect to deferred restricted stock for the three months ended December 31, ~~2017.~~2019.

Weighted

Average Fair

Number of

Value At

Shares

Grant Date

Unvested at September 30, 2017

—

$
—

Granted

16,550

$
31.76

Unvested at December 31, 2017

16,550

$
31.76

Expected to vest

16,550

$
31.76

Table of Contents


		Weighted
		Average Fair
	Number of	Value At
	Shares	Grant Date
Unvested and deferred at September 30, 2019	12,500	$	33.98
Granted	4,594	$	37.00
Vested and deferred	(12,500)		33.98
Unvested and deferred at December 31, 2019	4,594	$	37.00
Vested and deferred at December 31, 2019	29,050	$	32.72

Compensation expense related to deferred restricted stock for the three months ended December 31, ~~2016~~2018 and ~~2017~~2019 was $0$124 and ~~$44,~~$85, respectively. The remaining ~~unrecognized~~recognized compensation expense related to deferred restricted stock at December 31, ~~2017~~2019 was ~~$482,~~$156, to be recognized over a weighted average period of 0.92 years.

Performance Shares

~~On November 22,~~The following table summarizes the activity under the 2016 ~~and November 21, 2017, the Company granted a target of 19,000 and 24,800, respectively, performance share awards~~Incentive Compensation Plan with respect to ~~certain key employees. The number of~~ performance shares ~~that will ultimately be earned, as well as~~for the number of shares that will be distributed in settling those earned performance shares, if any, will not be determined until the end of the performance period. Performance shares earned will depend on the calculated total shareholder return of the Company at the end of the three-year period ending September 30, 2019 and September 30, 2020, respectively, as compared to the total shareholder return of the Company’s peer group, as defined by the Compensation Committee. The fair value of the performance shares granted on November 22, 2016 and November 21, 2017 is $60.09 and $38.43, per share, respectively, which is estimated as of the date of the grant using a Monte Carlo simulation model. three months ended December 31, 2019.


		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 December 31, 2019	62,433	$	43.14

Compensation expense related to the performance shares for the three months ended December 31, ~~2016~~2018 and ~~2017~~2019 was ~~$23~~$121 and ~~$128,~~$176, respectively. The remaining unrecognized compensation expense related to performance shares at December 31, ~~2017~~2019 was ~~$1,630,~~$1,844, to be recognized over a weighted average period of ~~2.20~~1.94 years.

~~Table of Contents~~

Stock Options

The Company’s 2016 Incentive Compensation Plan and its two previous stock option plans authorize, or formerly authorized, the granting of non-qualified stock options to certain key employees and non-employee directors for the purchase of a maximum of 1,925,000 shares of the Company’s common stock. The first option plan was adopted in August 2004 and provided for the grant of options to purchase up to 1,000,000 shares of the Company’s common stock. In January 2007, the Company’s Board of Directors adopted a second option plan that provides for the grant of options to purchase up to 500,000 shares of the Company’s common stock. Following the adoption of the 2016 Incentive Compensation Plan, the Company ceased granting awards from these plans, although awards remain outstanding thereunder. On March 1, 2016, the Company adopted the 2016 Incentive Compensation Plan which provides for grants of up to 425,000 stock options and stock appreciation rights. Each plan provides for the adjustment of the maximum number of shares for which options may be granted in the event of a stock split, extraordinary dividend or distribution or similar recapitalization event. Unless the Compensation Committee determines otherwise, options are exercisable for a period of ten years from the date of grant and vest 331/3~~% per year over three years from the grant date. The amount of compensation cost recognized in the financial statements is measured based upon the grant date fair value.~~

~~The fair value of option grants is estimated as of the date of the grant~~.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 years ~~2017~~2019 and ~~2018:~~2020:

Fair

Dividend

Risk-free

Expected

Expected

Grant Date

Value

Yield

Interest Rate

Volatility

Life

November 21, 2017

$
9.74

2.77
%
2.06
%
42
%
5
years

November 22, 2016

$
11.50

2.15
%
1.79
%
37
%
5
years


	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 December 31, ~~2016~~2018 and ~~2017~~2019 was ~~$120~~$152 and ~~$118,~~$258, respectively. The remaining unrecognized compensation expense at December 31, ~~2017~~2019 was ~~$1,242,~~$2,360, to be recognized over a weighted average vesting period of ~~1.65~~2.25 years.

Table of Contents

The following table summarizes the activity under the stock option plans and the 2016 Incentive Compensation Plan with respect to stock options for the ~~three~~nine months ended December 31, ~~2017~~2019 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, 2017

425,326

$
44.93

Granted

57,550

$
31.76

Exercised

—

$
0.00

Canceled

—

$
0.00

Outstanding at December 31, 2017

482,876

$
189

$
44.56

5.89
yrs.

Vested or expected to vest

446,141

$
188

$
43.33

4.60
yrs.

Exercisable at December 31, 2017

366,776

$
172

$
45.80

4.85
yrs.


						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 September 30, 2019	561,457	$	646	$	37.97	7.82	yrs.
Vested or expected to vest	519,065	$	595	$	37.90	7.89	yrs.
Exercisable at September 30, 2019	245,517	$	145	$	42.17	5.76	yrs.

Note ~~11.~~12. Dividend

In the first quarter of fiscal ~~2018,~~2020, the Company declared and paid a quarterly cash dividend. The dividend of $0.22 per outstanding share of the Company’s common stock was paid December ~~15, 2017~~16, 2019 to stockholders of record at the close of business on December ~~1, 2017.~~2, 2019. The dividend cash pay-out was ~~$2,754~~$2,760 for the quarter based on the number of shares outstanding and $4$77 of dividends were recorded as ~~deferred in accordance with the Deferred Compensation Plan.~~deferred.

~~Table of Contents~~

On ~~February 1, 2018,~~January 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 March ~~15, 2018~~16, 2020 to stockholders of record at the close of business on March ~~1, 2018.~~2, 2020.

Note ~~12.~~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.

~~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, ~~2017~~2019 or December 31, ~~2017.~~2019.

~~U.S~~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 ~~13.~~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 of the USU.S. dollar against the British pound sterling, net of tax when applicable.

Table of Contents

Accumulated Other Comprehensive Income (Loss)


	Three Months Ended December 31, 2016								Three Months Ended December 31, 2018
	Pension		Postretirement		Foreign				Pension		Postretirement		Foreign
	Plan		Plan		Exchange		Total		Plan		Plan		Exchange		Total
Accumulated other comprehensive income (loss) as of September 30, 2016	$	(74,742)	$	(29,585)	$	(10,196)	$	(114,523)
Accumulated other comprehensive income (loss) as of September 30, 2018									$	(21,473)	$	(11,201)	$	(9,891)	$	(42,565)
Other comprehensive income (loss) before reclassifications		—		—		(3,026)		(3,026)		—		—		(1,171)		(1,171)
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of Pension and Postretirement Plan items ~~(a)~~(1)		202		—		—		202		51		—		—		51
Actuarial losses ~~(a)~~(1)		2,810		1,070		—		3,880		364		372		—		736
Tax benefit		(1,108)		(394)		—		(1,502)		(108)		(99)		—		(207)
Net current-period other comprehensive income (loss)		1,904		676		(3,026)		(446)		307		273		(1,171)		(591)
Accumulated other comprehensive income (loss) as of December 31, 2016	$	(72,838)	$	(28,909)	$	(13,222)	$	(114,969)
Accumulated other comprehensive income (loss) as of December 31, 2018									$	(21,166)	$	(10,928)	$	(11,062)	$	(43,156)


	Three Months Ended December 31, 2017								Three Months Ended December 31, 2019
	Pension		Postretirement		Foreign				Pension		Postretirement		Foreign
	Plan		Plan		Exchange		Total		Plan		Plan		Exchange		Total
Accumulated other comprehensive income (loss) as of September 30, 2017	$	(43,012)	$	(21,691)	$	(7,991)	$	(72,694)
Accumulated other comprehensive income (loss) as of September 30, 2019									$	(53,811)	$	(13,316)	$	(13,511)	$	(80,638)
Other comprehensive income (loss) before reclassifications		—		—		517		517		—		—		4,243		4,243
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of Pension and Postretirement Plan items ~~(a)~~(1)		93		—		—		93		51		—		—		51
Actuarial losses ~~(a)~~(1)		1,223		750		—		1,973		1,820		462		—		2,282
Tax benefit		(484)		(276)		—		(760)		(493)		(121)		—		(614)
Net current-period other comprehensive income (loss)		832		474		517		1,823		1,378		341		4,243		5,962
Accumulated other comprehensive loss as of December 31, 2017	$	(42,180)	$	(21,217)	$	(7,474)	$	(70,871)
Reclass due to adoption of ASU 2018-02										(8,509)		(4,774)		—		(13,283)
Accumulated other comprehensive loss as of December 31, 2019									$	(60,942)	$	(17,749)	$	(9,268)	$	(87,959)

^(a)

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.


	September 30,		December 31,
	2019		2019
Finance lease obligations	$	7,979	$	7,938
Environmental post-closure monitoring and maintenance activities		606		606
Long-term disability		251		266
Deferred dividends		40		117
Less amounts due within one year		(267)		(293)
Long-term obligations (less current portion)	$	8,609	$	8,634

Note ~~14. Long-term Obligations~~16. Leases

On January 1, 2015, the Company entered into a capital lease agreement for the building that houses the assets and operations of LaPorte Custom Metal Processing (LCMP). The capital asset and obligation are recorded at the present valueNature of the minimum lease payments. The asset is included in Property, plant and equipment, net on the Consolidated Balance Sheet and is depreciated over the 20-year lease term. The long-term component of the capital lease obligation is included in Long-term obligations. 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 ~~twenty-year “build-to-suit”~~ 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 ~~a building that houses~~ the assets and operations of the service center located in LaPorte, Indiana that was relocated from Lebanon, Indiana. During the first quarter of fiscal 2017, the Company took occupancy of the building. The Company retained substantially all of the construction risk and was deemed to be the owner of the facility for accounting purposes, even though it is not the legal owner. Construction costs incurred relative to the buildout of the facility of approximately $4,100 are included in Property, plant and equipment, net on the Consolidated Balance Sheet and are depreciated over the 20-year lease term. The Company ~~accounts for the related build-to-suit liability as a financing obligation.~~

~~As of December 31, 2017, future minimum lease rental payments during each fiscal year applicable~~utilizes its collateralized incremental borrowing rate commensurate to the lease ~~obligations were~~term as ~~follows.~~

2018

$
656

2019

989

2020

994

2021

1,001

2022

1,012

Thereafter

13,678

Total minimum lease payments

18,330

Less amounts representing interest

(10,106)

Present value of net minimum lease payments

8,224

Less current obligation

(132)

Total long-term lease obligation

$
8,092

the discount rate for its leases, unless the Company can specifically determine the lessor’s implicit rate.

Table of Contents

Significant Judgments and Assumptions

Determination of Whether a Contract Contains a Lease

The Company determines whether a contract is or contains a lease ~~obligations are included~~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 ~~Long-term obligations (less current portion)~~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 ~~Consolidated Balance Sheet.~~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.

The following table sets forth the components of the Company’s lease cost for the three months ended December 31, 2019.

September 30,

December 31,


2017

2017

Capital lease rental payments

$
4,275

$
4,259

Finance lease rental payments

4,017

3,965

Environmental post-closure monitoring and maintenance activities

633

633

Less amounts due within one year

(1,029)

(231)

Long-term obligations (less current portion)

$
7,896

$
8,626


	Three Months Ended December 31,
	2019
Finance lease cost:
Amortization of right of use asset	$	108
Interest on lease liabilities		208
Total finance lease cost	$	316

Operating lease cost	$	355

Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases		208
Operating cash flows from operating leases		355
Financing cash flows from finance leases		40
Total cash paid for amounts included in measurement of lease liabilities	$	603

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 December 31, 2019.


	December 31,
	2019
Finance lease assets (included in Property, plant and equipment, net)		6,826
Operating right of use lease assets (included in Other assets)		2,562
Total lease assets	$	9,388

Finance lease liabilities
Accrued expenses		176
Long-term obligations (less current portion)		7,763
Total Finance lease liabilities	$	7,939
Operating lease liabilities	$	2,562

Table of Contents


	December 31,
	2019
Weighted average lease term (Years)
Finance leases		15.9
Operating leases		3.3
Weighted average discount rate
Finance leases		10.33	%
Operating leases		5.25	%

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 December 31, 2019.


	Finance		Operating
Future minimum lease payments	Leases		Leases
2020	$	747	$	1,015
2021		1,001		769
2022		1,012		387
2023		1,024		289
2024		1,031		264
Thereafter		11,540		70
Total minimum lease payments		16,355		2,794
Less: amount representing interest		(8,416)		(232)
Present value of net minimum lease payments	$	7,939	$	2,562

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

1718

Table of Contents

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 December 31, 2019, 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 December 31, 2019. 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 December 31,
	2018		2019
Foreign currency transactional gain (loss)	$	340	$	(1,071)
Foreign exchange forward contract gain (loss)	$	(497)	$	479
Net gain (loss) included in selling, general and administrative expense	$	(157)	$	(592)

Table of Contents

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 ~~2018~~2020 and beyond, overall volume and pricing trends, cost reduction strategies and their anticipated results, capital expenditures and dividends. There may also be other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of various factors, many of which are beyond the Company’s control.

The Company has based these forward-looking statements on its current expectations and projections about future events. Although the Company believes that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate. As a result, the forward-looking statements based upon those assumptions also could be incorrect. Risks and uncertainties may affect the accuracy of forward-looking statements. Some, but not all, of these risks are ~~listed~~described in Item 1A. of Part 1 of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, ~~2017.~~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 ~~59%~~58% of net product revenues in fiscal ~~2017.~~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 1312 service and/or sales centers in the United States, Europe and Asia. All of these centers are Company operated.

Dividends Paid and Declared

In the first quarter of fiscal ~~2018,~~2020, the Company declared and paid a regular quarterly cash dividend of $0.22 per outstanding share of the Company’s common stock. The dividend was paid on December ~~15, 2017~~16, 2019 to stockholders of record at the close of business on December ~~1, 2017.~~2, 2019. The dividend cash pay-out in the first quarter was approximately $2.8 million based on the number of shares outstanding and equal to approximately $11.0 million on an annualized basis.

Capital Spending

During the first ~~quarter~~three months of fiscal ~~2018,~~2020, capital investment was ~~$3.2~~$2.3 million, and total planned capital expenditures for fiscal ~~2018~~2020 are expected to be ~~$16.0 million, similar to fiscal 2017.~~approximately $12.0 million.

1820

Table of Contents

~~Impact of the Tax Cuts~~Volumes, Competition and ~~Jobs Act on Deferred Tax Assets~~ Pricing

~~On December 22, 2017,~~Overall shipments during the Tax Cuts and Jobs Act (the "Act") was signed into law. Among other changes is a permanent reduction in the federal corporate income tax rate from 35% to 21%, which the Company expects will positively impact the Company’s future effective tax rate and after-tax earnings in the United States. As a result of the Act, the Company’s blended rate for fiscal 2018 is 24.5%. The Company may also be affected by certain other aspects of the Act, including, without limitation, provisions regarding repatriation of accumulated foreign earnings and deductibility of capital expenditures. The Company is in the process of determining what, if any, effect those provisions will have on the Company’s financial results, and there can be no assurance of whether such additional effects will be positive or negative.

As a result of the reduction in the corporate income tax rate, the Company is required to revalue its net deferred tax asset to account for the future impact of lower corporate tax rates on this deferred amount and record any change in the value of such asset as a one-time non-cash charge on its income statement. The Company has performed an analysis of its first quarter of fiscal ~~2018 tax provision based on~~2020 declined from the ~~new tax rate as compared to the previous effective tax rate of 40% (which includes state~~prior quarter and ~~foreign taxes), and determined the amount of such expense to be $19.6 million, which reduced the Company’s~~prior year’s first quarter ~~fiscal 2018 results.~~

~~Expansion~~due to a number of ~~LaPorte, Indiana Operations~~

The Company announced on May 2, 2016 its decision to expand and streamline its distribution footprint by investing in new plant and equipment at its processing facility located in LaPorte, Indiana. In connection with the expansion, the Company has relocated its service center operations in Lebanon, Indiana to LaPorte. The project beganfactors. Volume shipped in the first quarter of fiscal ~~2016 and~~2020 was substantially completed by the end of the first quarter of fiscal 2018. During the first three months of fiscal 2018, the Company expensed $0.8 million for costs related to the relocation, including but not limited to, physical relocation costs, employee retention costs, and duplicate lease costs.

~~Volumes, Competition and Pricing~~

Consistent with previous fiscal years, the Company’s first quarter ending December 31 was impacted by holidays, planned maintenance outages and customers managing their calendar year-end balance sheets. Volume in the first quarter of fiscal 2018 was 3.94.2 million pounds, which ~~is 1.5% lower than last year’s first quarter, and 16.9%~~was 1.2 million pounds lower sequentially than the fourth quarter of fiscal ~~2017. While~~2019 and 0.1 million pounds lower than last year’s first quarter, ~~sales continued to be~~which was impacted by ~~weak volume demand driven by lower transactional business, challenging pricing and low levels of high-value specialty application projects,~~a planned equipment outage. Volume shipped into the ~~Company has identified positive signs of the beginning of a~~aerospace market ~~recovery. Backlog has increased to $205.7 million at December 31, 2017 which reflects a 25.1% increase in backlog pounds from September 30, 2017. Overall, order entry rates~~ in the first quarter of fiscal ~~2018 were 34%~~2020 was 0.4 million pounds lower sequentially compared to the fourth quarter of fiscal 2019 but higher than ~~sales levels, creating~~last year’s first quarter by 0.2 million pounds. Uncertainty is elevated in the aerospace market with the Boeing announcement that it has temporarily suspended production of the grounded 737 MAX and the corresponding impact in the aerospace supply chain. The Company has also seen adjustments in the ordering patterns for supply chains other than the Boeing 737 MAX. These headwinds are detrimental to current and near-term shipments into the aerospace market. The Company believes the demand drivers in the aerospace market are favorable long-term. Volume shipped into the chemical processing market in the first quarter of fiscal 2020 was lower sequentially by 0.5 million pounds compared to the fourth quarter of fiscal 2019 and lower than the first quarter of fiscal year 2019 by 0.1 million pounds driven by lower base-business volumes which the Company attributes to trade tariffs and global economic uncertainty. However, the lower base-business was slightly offset by higher specialty application projects. Pounds shipped in the first quarter of fiscal 2020 into the industrial gas turbine market were 0.1 million pounds lower sequentially compared to the fourth quarter of fiscal 2019 but slightly higher than last year’s first quarter. The primary industrial gas turbine market activity was attributable to a ~~solid book-to-bill-ratio.~~ slight improvement in demand for large-frame turbines, while small/medium frame engine builds have slowed down primarily due to the oil and gas market. Volume shipped into the other markets category in the first quarter of fiscal 2020 was lower sequentially by 0.1 million pounds compared to the fourth quarter of fiscal 2019 and lower by 0.2 million pounds compared to last year’s first quarter, driven by a reduction in flue gas desulfurization shipments.

The product average selling price per pound in the first quarter of fiscal ~~2018~~2020 was ~~$21.15~~$23.97, which is higher sequentially compared to ~~$19.80 in~~ the fourth quarter of ~~2017. In addition, the~~fiscal 2019 and higher than last year’s first quarter. The increase is primarily driven by favorable product mix and price increases. The Company ~~is expecting some additional pricing strength moving forward as pricing under many of the Company’s long-term agreements with customers increased according~~continues to ~~annual escalating clauses relating to the market~~emphasize price ~~of certain raw materials beginning~~increases in ~~January.~~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.

Net Revenue and Gross Profit Margin Performance:


	Comparison by Quarter of Net Revenues, Gross Profit Margin and
	Gross Profit Margin Percentage for Fiscal 2017 and 2018
	Quarter Ended															Quarter Ended
	December 31,			March 31,			June 30,			September 30,			December 31,			December 31,			March 31,			June 30,			September 30,			December 31,
(dollars in thousands)	2016			2017			2017			2017			2017			2018			2019			2019			2019			2019
Net Revenues	$	93,355		$	103,112		$	97,977		$	100,765		$	89,693		$	107,069		$	127,474		$	126,032		$	129,640		$	108,453
Gross Profit Margin	$	10,487		$	9,788		$	3,662		$	5,773		$	7,010		$	11,335		$	14,683		$	18,175		$	21,310		$	18,743
Gross Profit Margin %		11.2	%		9.5	%		3.7	%		5.7	%		7.8	%		10.6	%		11.5	%		14.4	%		16.4	%		17.3	%

~~Compared to the first quarter of fiscal 2017,~~The gross profit margin ~~and gross profit margin~~ percentage improved in the first quarter of fiscal 2018 were lower because lower levels of specialty application projects negatively impacted gross margins. However sequential improvements in gross profit margin and gross profit margin percentage occurred2020 to 17.3% as compared to 16.4% in the ~~first~~fourth quarter of fiscal ~~2018, compared to~~2019, even on lower topline net revenues, and continued the ~~third and fourth quarters~~sequential improvement in each quarter since the beginning of fiscal ~~2017, even~~2019 with ~~lower sales~~the progression being 10.6%, 11.5%, 14.4%, 16.4% and ~~volume levels. Gross profit margin percentage was 7.8% in~~17.3%. Continued traction of the ~~first~~Company’s improvement initiatives related to price increases and cost reductions continue to favorably impact gross margins.

1921

Table of Contents

quarter of fiscal 2018 compared to 3.7% and 5.7% in the third and fourth quarters of fiscal 2017. Improvement was largely attributable to better product-mix and higher pricing levels driven by raw material increases.

Backlog


	Quarter Ended										Quarter Ended
	December 31,		March 31,		June 30,		September 30,		December 31,		December 31,		March 31,		June 30,		September 30,		December 31,
	2016		2017		2017		2017		2017		2018		2019		2019		2019		2019
Backlog(1)
Dollars (in thousands)	$	167,286	$	170,848	$	180,922	$	177,300	$	205,718	$	237,802	$	253,003	$	254,947	$	235,204	$	237,620
Pounds (in thousands)		6,795		6,960		7,496		6,453		8,073		8,392		8,855		9,072		8,064		8,231
Average selling price per pound	$	24.62	$	24.55	$	24.14	$	27.48	$	25.48	$	28.34	$	28.57	$	28.10	$	29.17	$	28.87
Average nickel price per pound
London Metals Exchange(2)	$	5.00	$	4.64	$	4.05	$	5.10	$	5.18	$	4.92	$	5.93	$	5.43	$	8.02	$	6.26

(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.

⁽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.~~

Backlog was ~~$205.7~~$237.6 million at December 31, ~~2017,~~2019, an increase of ~~$28.4~~$2.4 million, or ~~16.0%~~1.0%, from ~~$177.3~~$235.2 million at September 30, ~~2017.~~2019. Backlog pounds at December 31, 2019 increased sequentially during the first quarter of fiscal ~~2018~~2020 by ~~25.1%. Aerospace and other markets had higher order entries and improving backlog levels,~~2.1% as compared to ~~the prior quarter.~~September 30, 2019. The average selling price of products in the Company’s backlog decreased to $28.87 per pound at December 31, 2019 from $29.17 per pound at September 31, 2019, reflecting a change in product mix and lower market ~~price~~prices for ~~nickel increased during the first quarter by 1.6%.~~raw materials.

Quarterly Market Information


	Quarter Ended										Quarter Ended
	December 31,		March 31,		June 30,		September 30,		December 31,		December 31,		March 31,		June 30,		September 30,		December 31,
	2016		2017		2017		2017		2017		2018		2019		2019		2019		2019
Net revenues (in thousands)
Aerospace	$	45,784	$	49,536	$	46,895	$	50,300	$	46,839	$	54,607	$	68,858	$	66,321	$	68,318	$	58,843
Chemical processing		19,128		18,081		15,017		18,241		13,356		18,920		21,761		21,197		27,773		16,712
Industrial gas turbines		14,593		17,827		14,731		14,372		13,421		14,083		13,685		15,870		15,792		13,763
Other markets		8,429		9,923		14,379		10,472		9,238		14,285		16,958		15,666		11,037		11,875
Total product revenue		87,934		95,367		91,022		93,385		82,854		101,895		121,262		119,054		122,920		101,193
Other revenue		5,421		7,745		6,955		7,380		6,839		5,174		6,212		6,978		6,720		7,260
Net revenues	$	93,355	$	103,112	$	97,977	$	100,765	$	89,693	$	107,069	$	127,474	$	126,032	$	129,640	$	108,453

Shipments by markets (in thousands of pounds)
Aerospace		2,017		2,322		2,207		2,301		2,023		2,112		2,857		2,579		2,731		2,303
Chemical processing		605		771		858		929		687		898		971		1,126		1,315		788
Industrial gas turbines		1,039		1,403		1,011		1,015		876		811		757		893		946		825
Other markets		316		350		501		472		332		509		580		523		432		306
Total shipments		3,977		4,846		4,577		4,717		3,918		4,330		5,165		5,121		5,424		4,222

Average selling price per pound
Aerospace	$	22.70	$	21.33	$	21.25	$	21.86	$	23.15	$	25.86	$	24.10	$	25.72	$	25.02	$	25.55
Chemical processing		31.62		23.45		17.50		19.64		19.44		21.07		22.41		18.83		21.12		21.21
Industrial gas turbines		14.05		12.71		14.57		14.16		15.32		17.36		18.08		17.77		16.69		16.68
Other markets		26.67		28.35		28.70		22.19		27.83		28.06		29.24		29.95		25.55		38.81
Total product (product only; excluding other revenue)		22.11		19.68		19.89		19.80		21.15		23.53		23.48		23.25		22.66		23.97
Total average selling price (including other revenue)		23.47		21.28		21.41		21.36		22.89	$	24.73	$	24.68	$	24.61	$	23.90	$	25.69

2022

Table of Contents

Results of Operations for the Three Months Ended December 31, ~~2016~~2019 Compared to the Three Months Ended December 31, ~~2017~~

~~The following table sets forth certain financial information as a percentage of net revenues for the periods indicated and compares such information between periods.~~2018


	Three Months Ended December 31,								Change				Three Months Ended December 31,								Change
	2016				2017				Amount		%
($ in thousands)													2018				2019				Amount		%
Net revenues	$	93,355	100.0	%	$	89,693	100.0	%	$	(3,662)	(3.9)	%	$	107,069	100.0	%	$	108,453	100.0	%	$	1,384	1.3	%
Cost of sales		82,868	88.8	%		82,683	92.2	%		(185)	(0.2)	%		95,734	89.4	%		89,710	82.7	%		(6,024)	(6.3)	%
Gross profit		10,487	11.2	%		7,010	7.8	%		(3,477)	(33.2)	%		11,335	10.6	%		18,743	17.3	%		7,408	65.4	%
Selling, general and administrative expense		10,312	11.0	%		10,770	12.0	%		458	4.4	%		11,128	10.4	%		11,507	10.6	%		379	3.4	%
Research and technical expense		943	1.0	%		888	1.0	%		(55)	(5.8)	%		834	0.8	%		882	0.8	%		48	5.8	%
Operating income (loss)		(768)	(0.8)	%		(4,648)	(5.2)	%		(3,880)	505.2	%		(627)	(0.6)	%		6,354	5.9	%		6,981	(1,113.4)	%
Nonoperating retirement benefit expense														856	0.8	%		1,700	1.6	%		844	98.6	%
Interest income		(57)	(0.1)	%		(18)	(0.0)	%		39	(68.4)	%		(20)	(0.0)	%		(14)	(0.0)	%		6	(30.0)	%
Interest expense		169	0.2	%		230	0.3	%		61	36.1	%		241	0.2	%		251	0.2	%		10	4.1	%
Income (loss) before income taxes		(880)	(0.9)	%		(4,860)	(5.4)	%		(3,980)	452.3	%		(1,704)	(1.6)	%		4,417	4.1	%		6,121	(359.2)	%
Provision for (benefit from) income taxes		(208)	(0.2)	%		17,666	19.7	%		17,874	(8,593.3)	%		(101)	(0.1)	%		1,149	1.1	%		1,250	(1,237.6)	%
Net income (loss)	$	(672)	(0.7)	%	$	(22,526)	(25.1)	%	$	(21,854)	3,252.1	%	$	(1,603)	(1.5)	%	$	3,268	3.0	%	$	4,871	(303.9)	%

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.


	Three Months Ended								Three Months Ended
	December 31,				Change				December 31,				Change
By market	2016		2017		Amount		%
Net revenues (in thousands)
									2018		2019		Amount		%
Net revenues (dollars in thousands)
Aerospace	$	45,784	$	46,839	$	1,055	2.3	%	$	54,607	$	58,843	$	4,236	7.8	%
Chemical processing		19,128		13,356		(5,772)	(30.2)	%		18,920		16,712		(2,208)	(11.7)	%
Industrial gas turbine		14,593		13,421		(1,172)	(8.0)	%		14,083		13,763		(320)	(2.3)	%
Other markets		8,429		9,238		809	9.6	%		14,285		11,875		(2,410)	(16.9)	%
Total product revenue		87,934		82,854		(5,080)	(5.8)	%		101,895		101,193		(702)	(0.7)	%
Other revenue		5,421		6,839		1,418	26.2	%		5,174		7,260		2,086	40.3	%
Net revenues	$	93,355	$	89,693	$	(3,662)	(3.9)	%	$	107,069	$	108,453	$	1,384	1.3	%

Pounds by market (in thousands)
Aerospace		2,017		2,023		6	0.3	%		2,112		2,303		191	9.0	%
Chemical processing		605		687		82	13.6	%		898		788		(110)	(12.2)	%
Industrial gas turbine		1,039		876		(163)	(15.7)	%		811		825		14	1.7	%
Other markets		316		332		16	5.1	%		509		306		(203)	(39.9)	%
Total shipments		3,977		3,918		(59)	(1.5)	%		4,330		4,222		(108)	(2.5)	%

Average selling price per pound
Aerospace	$	22.70	$	23.15	$	0.45	2.0	%	$	25.86	$	25.55	$	(0.31)	(1.2)	%
Chemical processing		31.62		19.44		(12.18)	(38.5)	%		21.07		21.21		0.14	0.7	%
Industrial gas turbine		14.05		15.32		1.27	9.0	%		17.36		16.68		(0.68)	(3.9)	%
Other markets		26.67		27.83		1.16	4.3	%		28.06		38.81		10.75	38.3	%
Total product (excluding other revenue)		22.11		21.15		(0.96)	(4.3)	%		23.53		23.97		0.44	1.9	%
Total average selling price (including other revenue)	$	23.47	$	22.89	$	(0.58)	(2.5)	%	$	24.73	$	25.69	$	0.96	3.9	%

Net Revenues. Net revenues were ~~$89.7~~$108.5 million in the first ~~quarter~~three months of fiscal ~~2018, a decrease~~2020, an increase of ~~3.9%~~1.3% from ~~$93.3~~$107.1 million in the same period of fiscal ~~2017.~~2019. Volume was ~~3.9~~4.2 million pounds in the first ~~quarter~~three months of fiscal ~~2018,~~2020, a decrease of ~~1.5%~~2.5% from ~~4.0~~4.3 million pounds in the same period of fiscal ~~2017.~~2019. The decrease in volume was primarily due to ~~a decline in shipments into the industrial gas turbine market during the first quarter of fiscal 2018~~declining chemical processing sales (partly due to ~~continued weak demand.~~retaliatory tariffs in China) as well as declining volume in flue-gas desulfurization (included within other markets), partially offset by an increase in aerospace volume. The product-sales average selling price was ~~$21.15~~$23.97 per pound in the first ~~quarter~~three months of fiscal ~~2018, a decrease~~2020, an increase of ~~4.3%~~1.9% from ~~$22.11~~$23.53 per pound in the same period of fiscal ~~2017.~~2019. The average selling price ~~decreased due to~~ increased as a result of improved pricing ~~competition~~ and a higher value mix within the industrial gas turbine and other markets as compared to the same period of fiscal 2019, in the amount of approximately $0.45 per pound, partially offset by lower ~~value product mix,~~raw material market prices, which decreased average selling price per pound by approximately ~~$1.14 and $0.82, respectively, partially offset by higher raw material market prices, primarily cobalt, which increased average selling prices per pound by approximately $1.00.~~$0.01.

2123

Table of Contents

Sales to the aerospace market were ~~$46.8~~$58.8 million in the first ~~quarter~~three months of fiscal ~~2018,~~2020, an increase of ~~2.3%~~7.8% from ~~$45.8~~$54.6 million in the same period of fiscal ~~2017,~~2019, due to a ~~2.0%~~9.0%, or 0.2 million pound, increase in volume, partially offset by a 1.2%, or $0.31, decrease in average selling price per ~~pound, combined with a 0.3%~~pound. The increase in ~~volume.~~volume is due to the planned equipment that was undertaken in the first three months of fiscal 2019. Partially offsetting this were lower shipments as the supply chain began to be impacted by the grounding, production slow-down and eventually temporary suspension of production of the Boeing 737 MAX. The average selling price per pound ~~increase~~decrease reflects a lower value product mix, which decreased average selling price per pound by approximately $0.76, partially offset by improved pricing of $0.38 and an increase in raw material market prices, ~~of raw materials, primarily cobalt, and a higher-value product mix,~~ which increased average selling price per pound by approximately ~~$1.00~~$0.07.

Sales to the chemical processing market were $16.7 million in the first three months of fiscal 2020, a decrease of 11.7% from $18.9 million in the same period of fiscal 2019, due to a 12.2% decrease in volume. Base-business volumes have decreased in the first three months of fiscal 2020 from the same period of fiscal 2019. However, partially offsetting base-business decline was an increase in specialty application project revenue in the first three months of fiscal 2020 compared to the same period last year. The average selling price per pound reflects improved pricing and ~~$0.78,~~an increase in raw material market prices, which increased average selling price per pound by approximately $0.48 and $0.39, respectively, partially offset by ~~other pricing and~~a lower-value product mix, ~~factors,~~ which decreased average selling price per pound by approximately ~~$1.33.~~ $0.73.

Sales to the ~~chemical processing~~industrial gas turbine market were ~~$13.4~~$13.8 million in the first ~~quarter~~three months of fiscal ~~2018,~~2020, a decrease of ~~30.2%~~2.3% from ~~$19.1~~$14.1 million infor the same period of fiscal ~~2017,~~2019, due to a ~~38.5%~~ decrease of 3.9%, or $0.68, in average selling price per pound, partially offset by a ~~13.6%~~1.7%, increase in volume. The increase in volume ~~reflects~~is primarily attributable to a ~~moderate strengthening of base~~slight improvement in demand ~~but from very low volume levels.~~for large-frame turbines, while small/medium frame engine builds have slowed down primarily due to the oil and gas market. The decrease in average selling price per pound ~~decrease~~primarily reflects ~~a lower-value product mix~~declined pricing due to ~~a proprietary alloy project shipment sold in the first quarter of fiscal 2017 which was not repeated in the first quarter of fiscal 2018, and increased pricing~~ competition and other factors, which decreased average selling price per pound by approximately ~~$10.56 and $2.19, respectively,~~$1.23, partially offset by a ~~change~~higher-value product mix, which increased the average selling price per pound by approximately $0.55.

Sales to other markets were $11.9 million in ~~market prices~~the first three months of ~~certain raw materials,~~fiscal 2020, a decrease of 16.9% from $14.3 million in the same period of fiscal 2019, due to a 39.9% decrease in volume, partially offset by a 38.3% 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 and improved pricing, which increased average selling price per pound by approximately ~~$0.57.~~

Sales to the industrial gas turbine market were $13.4 million in the first quarter of fiscal 2018, a decrease of 8.0% from $14.6 million for the same period of fiscal 2017, due to a decrease of 15.7% in volume,$12.47, partially offset by an increase in average selling price per pound of 9.0%. The decrease in volume is primarily due to a decreased level of transactional business in this market. The increase in average selling price per pound primarily reflects a change inlower raw material market prices, of raw materials, primarily cobalt, and a higher-value product form mix due to less ingot product shipped, which increased average selling price per pound by approximately $0.95 and $0.49, respectively, partially offset by increased pricing competition and other factors, which decreased average selling price per pound by approximately ~~$0.17.~~

Sales to other markets were $9.2 million in the first quarter of fiscal 2018, an increase of 9.6% from $8.4 million in the same period of fiscal 2017, due to a 5.1% increase in volume, combined with a 4.3% increase in average selling price per pound. The increase in volume was primarily due to strength in the oil and gas and flue-gas desulfurization markets. The increase in average selling price reflects higher raw material market prices, primarily cobalt, which increased average selling price per pound by approximately $2.04, partially offset by a lower-value product mix and increased pricing competition and other factors, which decreased average selling price per pound by approximately $0.52 and $0.36, respectively.$1.72.

Other Revenue. Other revenue was ~~$6.8~~$7.3 million in the first ~~quarter~~three months of fiscal ~~2018,~~2020, an increase of ~~26.2%~~40.3% from ~~$5.4~~$5.2 million in the same period of fiscal ~~2017.~~2019. The increase iswas due primarily to increased toll conversion ~~and miscellaneous sales.~~particularly in titanium.

Cost of Sales. Cost of sales was ~~$82.7~~$89.7 million, or ~~92.2%~~82.7% of net revenues, in the first ~~quarter~~three months of fiscal ~~2018~~2020 compared to ~~$82.9~~$95.7 million, or ~~88.8%~~89.4% of net revenues, in the same period of fiscal ~~2017. Cost of sales in the first quarter of fiscal 2018 decreased by $0.2 million as compared to the same period of fiscal 2017~~2019. This decrease was primarily due to lower volumes sold combined with continued traction in the Company’s cost reduction initiatives and ~~the reduction of inventory reserves, partially offset by costs associated with relocating the Lebanon service center to LaPorte as previously announced.~~lower raw material prices.

Gross Profit. As a result of the above factors, gross profit was ~~$7.0~~$18.7 million for the first ~~quarter~~three months of fiscal ~~2018, a decrease~~2020, an increase of ~~$3.5~~$7.4 million from the same period of fiscal ~~2017.~~2019. Gross ~~margin~~profit as a percentage of net revenue ~~decreased~~increased to ~~7.8%~~17.3% in the first ~~quarter~~three months of fiscal ~~2018~~2020 as compared to ~~11.2%~~10.6% in the same period of fiscal ~~2017.~~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 ~~$10.8~~$11.5 million for the first ~~quarter~~three months of fiscal ~~2018,~~2020, an increase of ~~$0.5~~$0.4 million from the same period of fiscal ~~2017.~~2019. This increase is primarily attributable to higher expense due to foreign exchange ~~fluctuations.~~losses. Selling, general and administrative expense as a percentage of net revenues increased to ~~12.0%~~10.6% for the first ~~quarter~~three months of fiscal ~~2018~~2020 compared to ~~11.0%~~10.4% for the same period of fiscal ~~2017.~~2019.

Research and Technical Expense. Research and technical expense was $0.9 million, or ~~1.0%~~0.8% of net revenue, for the first ~~quarter~~three months of fiscal ~~2018, similar~~2020, compared to ~~the expense~~$0.8 million, or 0.8% of net revenue, in the same period of fiscal ~~2017.~~ 2019.

Operating Income/(Loss). As a result of the above factors, operating ~~loss~~income in the first ~~quarter~~three months of fiscal ~~2018~~2020 was ~~$(4.6)~~$6.4 million compared to an operating loss of ~~$(0.8)~~$(0.6) million in the same period of fiscal ~~2017.~~2019.

Nonoperating retirement benefit expense. Nonoperating retirement benefit expense was $1.7 million 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 first quarter of fiscal 2020.

Table of Contents

Income Taxes. Income tax expense was ~~$17.7~~$1.1 million in the first three months of fiscal 2020, an increase of $1.2 million from a benefit of $0.1 million in the same period of fiscal 2019. The effective tax rate (ETR) in the first quarter of fiscal ~~2018, a difference~~2020 of ~~$17.9~~26.0% was higher 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 ~~from a benefit of $0.2 million in~~during the first quarter of fiscal ~~2017. The effective tax rate for~~2019. This adverse impact lowered the ~~first quarter of fiscal 2018 was (363.5)%, compared to 23.6%~~ETR in ~~the same~~a period of fiscal 2017. The change in effective tax rate for the first quarter of fiscal 2018 as compared to the same period of fiscal 2017 is primarily attributable to the passage of the Tax Reform and Jobs Act during the quarter, which ~~required~~ the Company revalue its deferred tax assets based on the lowering of the statutory tax rate of 35% to 21% (24.5% in fiscal 2018). See “Impact of the Tax Cuts and Jobs Act on Deferred Tax Assets” and Note 4 to the condensed consolidated financial statements in this Form 10-Q for additional discussion of the expected impact of the Tax Cuts and Jobs Act. had pre-tax losses.

~~Table of Contents~~

Net Income/(Loss). As a result of the above factors, net ~~loss in~~income for the first ~~quarter~~three months of fiscal ~~2018~~2020 was ~~$(22.5)~~$3.3 million, a difference of ~~$21.9~~$4.9 million from a net loss of ~~$(0.7)~~$(1.6) million in the same period of fiscal ~~2017.~~2019.

Working Capital

Controllable working capital, which includes accounts receivable, inventory, accounts payable and accrued expenses, was ~~$268.3~~$290.2 million at December 31, ~~2017,~~2019, an increase of ~~$9.1~~$7.8 million, or ~~3.5%~~2.8%, from ~~$259.1~~$282.5 million at September 30, ~~2017.~~2019. This increase resulted primarily from inventory increasing ~~$22.8~~$23.2 million, partially offset by accounts receivable decreasing by $10.9 million during the first quarter of fiscal 2020 and accounts payable and accrued expenses increasing by ~~$6.9 million and accounts receivable decreasing by $6.8~~$4.5 million during the first ~~three months~~quarter of fiscal ~~2018.~~ 2020.

Liquidity and Capital Resources

Comparative cash flow analysis

During the first three months of fiscal 2018, the Company’s primary sources of cash was cash on-hand. At December 31, 2017, the Company had unrestricted cash and cash equivalents of $34.0 million compared to $46.3 million at September 30, 2017. As of December 31, 2017, theThe Company had cash and cash equivalents of ~~$14.9~~$33.6 million, inclusive of $9.9 million that was held by foreign subsidiaries in various ~~currencies.~~currencies, compared to $31.0 million at September 30, 2019. Additionally, there were zero borrowings against the line of credit outstanding as of December 31, 2019.

Net cash ~~used in~~provided by operating activities in the first three months of fiscal ~~2018~~2020 was ~~$(6.3)~~$7.0 million compared to net cash provided by operating activities of ~~$13.5~~$7.1 million in the first three months of fiscal ~~2017. The lower cash provided~~2019, a decrease of $0.1 million. Cash flow from operating activities in the first three months of fiscal ~~2018~~2020 was ~~largely driven~~adversely impacted by greater increases in inventory and lower income tax refunds as compared to the same period of ~~$22.5 million~~fiscal 2019, partially offset by higher net income and greater decreases in accounts receivable in the first three months of fiscal ~~2018~~2020 as compared to ~~increases in inventory of $7.0 million during~~ the same period of fiscal 2017, as well as losses before income taxes of $($4.9) million during the first three months of fiscal 2018 compared to losses before income taxes of $(0.9) million during the same period of fiscal 2017. These factors were partially offset by lower cash payments of $0.5 million during the first three months of fiscal 2018 compared to $1.8 million during the same period of fiscal 2017.2019.

Net cash used in investing activities was ~~$3.2~~$2.3 million in the first three months of fiscal ~~2018~~2020 which was ~~lower than cash used in investing activities during~~comparable to the same period of fiscal ~~2017 of $5.9 million as a result of lower additions to property, plant and equipment, as the Company completed its capacity expansion in sheet manufacturing.~~2019.

Net cash used in financing activities was $2.6 million in the first three months of fiscal 2020, which was lower than cash used in financing activities during the same period of fiscal 2018 of ~~$3.1~~$2.9 million, ~~included $2.8 million~~primarily as a result of, ~~dividend payments and approximately $0.2 million~~among other factors, proceeds received from the exercise of stock ~~re-purchases made to satisfy taxes in relation~~options during the three months of fiscal 2020 as compared to the ~~vesting~~same period of ~~restricted stock, which is comparable~~fiscal 2019. Stock options were exercised by certain members of management just prior to ~~the prior year.~~their 10 year expiration dates.

Future sources of liquidity

The Company’s sources of liquidity for ~~the remainder of~~ fiscal ~~2018~~2020 are expected to consist primarily of cash generated from operations, cash ~~on-hand~~on hand and, if needed, borrowings under the U.S. revolving credit facility. At December 31, ~~2017,~~2019, the Company had cash of ~~$34.0~~$33.6 million, an outstanding balance of zero on the U.S. revolving credit facility and access to a total of approximately $120.0 million under the U.S. revolving credit facility, subject to a borrowing base formula and certain reserves. Management believes that the resources described above will be sufficient to fund planned capital expenditures, regular quarterly dividends and working capital requirements over the next twelve months.

U.S. ~~Revolving Credit Facility~~

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 ~~borrowers.~~borrower. Borrowings under the U.S. revolving credit facility bear interest, at the Company’s option, at either Wells Fargo’s “prime rate”, plus up to 0.75% per annum, or the adjusted Eurodollar rate used by the lender, plus up to 2.0% per annum. As of December 31, ~~2017,~~2019, the U.S. revolving credit facility had a zero balance.

2325

Table of Contents

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 December 31, ~~2017,~~2019, 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 78 in the ~~Company’s~~ Notes to Condensed Consolidated Financial Statements in this ~~Quarterly Report on Form 10-Q)~~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;

~~Funding operations;~~

Capital spending;

~~Capital spending;~~

Dividends to stockholders; and

~~Dividends to stockholders; and~~

Pension and postretirement plan contributions.

~~Pension and postretirement plan contributions.~~

Capital investment in the first three months of fiscal ~~2018~~2020 was ~~$3.2~~$2.3 million, and the forecast for capital spending in fiscal ~~2018~~2020 is ~~$16.0~~approximately $12.0 million. ~~See “Capital Spending” in this Form 10-Q for additional discussion of actual and planned capital spending.~~

Contractual Obligations

The following table sets forth the Company’s contractual obligations for the periods indicated, as of December 31, ~~2017:~~2019:


	Payments Due by Period										Payments Due by Period
			Less than						More than				Less than						More than
Contractual Obligations	Total		1 year		1-3 Years		3-5 Years		5 years		Total		1 year		1-3 Years		3-5 Years		5 years
	(in thousands)										(in thousands)
Credit facility fees(1)	$	1,000	$	280	$	560	$	160	$	—	$	440	$	280	$	160	$	—	$	—
Operating lease obligations		5,970		2,979		2,737		254		—		4,474		2,486		1,454		534		—
Capital and finance lease obligations		18,458		1,017		1,999		2,018		13,424
Finance lease obligations												16,438		996		2,018		2,060		11,364
Raw material contracts (primarily nickel)		25,129		25,129		—		—		—		24,671		24,671		—		—		—
Capital projects and other commitments		10,907		10,907		—		—		—		1,987		1,987		—		—		—
Pension plan(2)		90,422		6,000		18,375		25,531		40,516		100,167		6,000		12,000		10,500		71,667
Non-qualified pension plans		753		95		190		190		278		695		95		190		190		220
Other postretirement benefits(3)		50,000		5,000		10,000		10,000		25,000		47,234		4,155		9,281		9,859		23,939
Environmental post-closure monitoring		633		104		112		121		296		606		97		144		151		214
Total	$	203,272	$	51,511	$	33,973	$	38,274	$	79,514	$	196,712	$	40,767	$	25,247	$	23,294	$	107,404

(1)As of December 31, 2019, the revolver balance was zero, therefore no interest is due. However, the Company is obligated to the Bank for unused line fees and quarterly management fees.

(2)The Company has a funding obligation to contribute $100,167 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.

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

⁽¹⁾

~~As of December 31, 2017, the revolver balance was zero, therefore no interest is due. However, the Company is obligated to the Bank for unused line fees and quarterly management fees.~~

⁽²⁾

The Company has a funding obligation to contribute $90,422 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.

⁽³⁾

~~Represents expected post-retirement benefits only based upon anticipated timing of payments.~~

2426

Table of Contents

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 December 31, ~~2017.~~2019. 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, ~~2017~~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. ~~There~~For the quarter ended December 31, 2019 included herein, there have been no material changes to ~~that information since~~ the ~~end of fiscal 2017.~~critical accounting policies and estimates.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

As of December 31, ~~2017,~~2019, 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, ~~2017.~~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 December 31, ~~2017.~~2019.

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.

2527

Table of Contents

PART II OTHER INFORMATION

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Set forth below is information regarding the Company’s stock repurchases during the period covered by this report, comprising shares repurchased by the Company from employees ~~and directors~~ to satisfy share-based compensation.

Period

Total Number of Shares (or Units) Purchased

Average Price Paid per Share (or Unit

Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans of Programs

Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs

October 1-31, 2017

—

—

—

—

November 1-30, 2017

6,937

32.23

—

—

December 1-31, 2017

—

—

—

—

Total

6,937

32.23

—

—


Period	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Unit		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
October 1-31, 2019	—	$	—	—	—
November 1-30, 2019	5,440		36.38	—	—
December 1-31, 2019	—		—	—	—
Total	5,440	$	36.38	—	—

Item 6.Exhibits

Exhibits. See Index to Exhibits.

2628

Table of Contents

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~~3.2**		Amended and Restated ~~By-laws~~By-Laws of Haynes International, Inc. ~~(incorporated by reference to Exhibit 3.2 to the Haynes International, Inc. Registration Statement on Form S-1, Registration No. 333-140194).~~, 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).
~~4.2~~		~~Second Restated Certificate of Incorporation of Haynes International, Inc. (incorporated by reference to Exhibit 3.1 hereof).~~
~~4.3~~		~~Amended and Restated By-laws of Haynes International, Inc. (incorporated by reference to Exhibit 3.2 hereof).~~
~~10.1~~		~~Haynes International, Inc. Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to the Haynes International, Inc. Form 8-K, filed November 27, 2017).~~
10.2**		~~Revised form of Restricted Stock Award Agreement for non-employee directors.~~
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, ~~2016~~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 ~~(v)~~(vi) related notes.

*Furnished not filed.

** Filed herewith.

2729

Table of Contents

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/ ~~Mark Comerford~~Michael Shor
	~~Mark Comerford~~Michael Shor
	President and Chief Executive Officer
	Date: ~~February 1, 2018~~January 30, 2020


	/s/ Daniel Maudlin
	Daniel Maudlin
	Vice President — Finance and Chief Financial Officer
	Date: ~~February 1, 2018~~January 30, 2020

2830