Table of Contents

 

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, 2019

 

or

 

 

 

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

 

For the transition period from              to              

 

Commission File Number:  001-33288

 

HAYNES INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

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

 

 

 

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

 

46904-9013
(Zip Code)

 

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

 

 

 

 

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

 

 

 

Tile of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $.001 per share

“HAYN”

NASDAQ Global Market

 

 

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

 

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

 

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

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

Non-accelerated filer ☐

 

Smaller reporting company☐

 

 

Emerging growth company  ☐

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

 

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

 

As of January 30, 2020, the registrant had 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, 2019 and December  31, 2019 

3

 

 

 

 

Consolidated Statements of Operations (Unaudited) for the Three Months Ended December  31, 2018 and 2019

4

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three Months Ended December  31, 2018 and 2019

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, 2018 and 2019

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

 

 

 

Item 2. 

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

20

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

27

 

 

 

Item 4. 

Controls and Procedures

27

 

 

 

PART II 

OTHER INFORMATION

28

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

28

 

 

 

Item 6. 

Exhibits

28

 

 

 

 

Index to Exhibits

29

 

 

 

 

Signatures

30

 

2

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PART 1     FINANCIAL INFORMATION

Item 1.        Unaudited Condensed Consolidated Financial Statements

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2019

 

2019

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

31,038

 

$

33,619

 

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

 

 

258,802

 

 

282,019

 

Income taxes receivable

 

 

1,757

 

 

457

 

Other current assets

 

 

3,297

 

 

3,668

 

Total current assets

 

 

371,873

 

 

385,797

 

Property, plant and equipment, net

 

 

169,966

 

 

167,400

 

Deferred income taxes

 

 

34,132

 

 

33,584

 

Other assets

 

 

7,756

 

 

10,164

 

Goodwill

 

 

4,789

 

 

4,789

 

Other intangible assets, net

 

 

5,284

 

 

5,233

 

Total assets

 

$

593,800

 

$

606,967

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

34,497

 

$

40,197

 

Accrued expenses

 

 

18,833

 

 

17,615

 

Income taxes payable

 

 

 —

 

 

481

 

Accrued pension and postretirement benefits

 

 

4,250

 

 

4,250

 

Deferred revenue—current portion

 

 

2,500

 

 

2,500

 

Total current liabilities

 

 

60,080

 

 

65,043

 

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

 

 

8,609

 

 

8,634

 

Deferred revenue (less current portion)

 

 

15,329

 

 

14,704

 

Deferred income taxes

 

 

2,016

 

 

2,016

 

Operating lease liabilities

 

 

 —

 

 

2,562

 

Accrued pension benefits (less current portion)

 

 

101,812

 

 

100,167

 

Accrued postretirement benefits (less current portion)

 

 

109,679

 

 

110,215

 

Total liabilities

 

 

297,525

 

 

303,341

 

Commitments and contingencies (Note 7)

 

 

 —

 

 

 —

 

Stockholders’ equity:

 

 

 

 

 

 

 

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

 

 

253,843

 

 

254,999

 

Accumulated earnings

 

 

125,296

 

 

139,010

 

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

 

 

(80,638)

 

 

(87,959)

 

Total stockholders’ equity

 

 

296,275

 

 

303,626

 

Total liabilities and stockholders’ equity

 

$

593,800

 

$

606,967

 

 

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

 

3

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HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

Three Months Ended December 31, 

 

 

    

2018

    

2019

    

Net revenues

 

$

107,069

 

$

108,453

    

Cost of sales

 

 

95,734

 

 

89,710

 

Gross profit

 

 

11,335

 

 

18,743

 

Selling, general and administrative expense

 

 

11,128

 

 

11,507

 

Research and technical expense

 

 

834

 

 

882

 

Operating income (loss)

 

 

(627)

 

 

6,354

 

Nonoperating retirement benefit expense

 

 

856

 

 

1,700

 

Interest income

 

 

(20)

 

 

(14)

 

Interest expense

 

 

241

 

 

251

 

Income (loss) before income taxes

 

 

(1,704)

 

 

4,417

 

Provision for (benefit from) income taxes

 

 

(101)

 

 

1,149

 

Net income (loss)

 

$

(1,603)

 

$

3,268

 

Net income (loss) per share:

 

 

 

 

 

 

 

Basic

 

$

(0.13)

 

$

0.26

 

Diluted

 

$

(0.13)

 

$

0.26

 

Weighted Average Common Shares Outstanding

 

 

 

 

 

 

 

Basic

 

 

12,431

 

 

12,460

 

Diluted

 

 

12,431

 

 

12,502

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.22

 

$

0.22

 

 

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

4

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HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

Three Months Ended December 31, 

 

 

    

2018

    

2019

    

Net income (loss)

 

$

(1,603)

 

$

3,268

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Pension and postretirement

 

 

580

 

 

1,719

 

Foreign currency translation adjustment

 

 

(1,171)

 

 

4,243

 

Other comprehensive income (loss)

 

 

(591)

 

 

5,962

 

Comprehensive income (loss)

 

$

(2,194)

 

$

9,230

 

 

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

 

 

 

 

 

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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.

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HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

Three Months Ended December 31, 

 

 

    

2018

    

2019

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

(1,603)

 

$

3,268

 

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

 

 

 

 

 

 

 

Depreciation

 

 

4,550

 

 

4,752

 

Amortization

 

 

105

 

 

51

 

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

 

 

2,245

 

 

3,437

 

Change in long-term obligations

 

 

(7)

 

 

(12)

 

Stock compensation expense

 

 

450

 

 

734

 

Deferred revenue

 

 

(625)

 

 

(625)

 

Deferred income taxes

 

 

289

 

 

(84)

 

Loss on disposition of property

 

 

 5

 

 

 —

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

8,106

 

 

11,941

 

Inventories

 

 

(8,815)

 

 

(19,983)

 

Other assets

 

 

(293)

 

 

(206)

 

Accounts payable and accrued expenses

 

 

(1,458)

 

 

4,207

 

Income taxes

 

 

5,081

 

 

1,761

 

Accrued pension and postretirement benefits

 

 

(934)

 

 

(2,213)

 

Net cash provided by (used in) operating activities

 

 

7,096

 

 

7,028

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(2,271)

 

 

(2,296)

 

Net cash provided by (used in) investing activities

 

 

(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)

 

 

(2,760)

 

Proceeds from exercise of stock options

 

 

215

 

 

422

 

Payment for purchase of treasury stock

 

 

(308)

 

 

(198)

 

Payments on long-term obligation

 

 

(34)

 

 

(40)

 

Net cash provided by (used in) financing activities

 

 

(2,879)

 

 

(2,576)

 

Effect of exchange rates on cash

 

 

(139)

 

 

425

 

Increase (decrease) in cash and cash equivalents:

 

 

1,807

 

 

2,581

 

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

Beginning of period

 

 

9,802

 

 

31,038

 

End of period

 

$

11,609

 

$

33,619

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Interest (net of capitalized interest)

 

$

226

 

$

236

 

Income taxes paid (refunded), net

 

$

(5,472)

 

$

(526)

 

Capital expenditures incurred, but not yet paid

 

$

952

 

$

106

 

Dividends declared but not yet paid

 

$

 7

 

$

117

 

 

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

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HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(in thousands, except share and per share data)

 

Note 1.  Basis of Presentation

 

Interim Financial Statements

 

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

 

Principles of Consolidation

 

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

 

Note 2.  Recently Issued Accounting Standards

 

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

 

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

 

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

 

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

 

 

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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, 

 

 

 

    

2019

    

2019

    

 

Raw Materials

 

$

17,935

 

$

23,013

 

 

Work-in-process

 

 

138,859

 

 

146,411

 

 

Finished Goods

 

 

100,590

 

 

111,197

 

 

Other

 

 

1,418

 

 

1,398

 

 

 

 

$

258,802

 

$

282,019

 

 

 

 

 

 

 

Note 5.  Income Taxes

 

Income tax expense for the three months ended December 31, 2018 and 2019 differed from the U.S. federal statutory rate of 21.0%, primarily due to state income taxes, differing tax rates on foreign earnings and discrete tax items that impacted income tax expense in these periods.  The effective tax rate for the three months ended December 31, 2018 was 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 first three months of fiscal 2019 was unfavorably impacted by the forfeiture of unexercised stock options, which resulted in approximately $300 of additional tax expense.

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Note 6.  Pension and Post-retirement Benefits

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 

 

 

 

Pension Benefits

 

Other Benefits

 

 

    

2018

    

2019

    

2018

    

2019

    

Service cost

 

$

1,310

 

$

1,386

 

$

79

 

$

354

 

Interest cost

 

 

2,566

 

 

2,148

 

 

1,088

 

 

873

 

Expected return

 

 

(3,572)

 

 

(3,645)

 

 

 —

 

 

 —

 

Amortizations

 

 

402

 

 

1,859

 

 

372

 

 

462

 

Net periodic benefit cost

 

$

706

 

$

1,748

 

$

1,539

 

$

1,689

 

 

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

 

 

Note 7.  Legal, Environmental and Other Contingencies

 

Legal

 

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

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

Environmental

 

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

The Company is required to, among other things, monitor groundwater and to continue post‑closure maintenance of the former disposal areas at each site. As a result, the Company is aware of elevated levels of certain contaminants in the groundwater, and additional testing and corrective action by the Company could be required.  The Company is unable to estimate the costs of any further corrective action at these sites, 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, 2019 and December 31, 2019, the Company has accrued $606 for post-closure monitoring and maintenance activities, of which $508 is included in long-term obligations as it is not due within one year.  Accruals for these costs are calculated by estimating the cost to monitor and maintain each post-closure site and multiplying that amount by the number of years remaining in the post-closure monitoring.

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

 

 

 

 

 

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

    

 

 

Year Ended September 30,

 

 

 

2021

$

74

 

2022

 

64

 

2023

 

81

 

2024

 

60

 

2025 and thereafter

 

229

 

 

$

508

 

 

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

 

 

Note 8.  Deferred Revenue

 

On November 17, 2006, the Company entered into a twenty-year agreement to provide conversion services to Titanium Metals Corporation (TIMET) for up to ten million pounds of titanium metal annually. TIMET paid the Company a $50,000 up-front fee and will also pay the Company for its processing services during the term of the agreement (20 years) at prices established by the terms of the agreement. TIMET may exercise an option to have ten million additional pounds of titanium converted annually, provided that it offers to loan up to $12,000 to the Company for certain capital expenditures which may be required to expand capacity. In addition to the volume commitment, the Company has granted TIMET a first priority security interest in its four-high Steckel rolling mill, along with rights of access if the Company enters into bankruptcy or defaults on any financing arrangements. The Company has agreed not to manufacture titanium products (other than cold reduced titanium tubing). The Company has also agreed not to provide titanium hot-rolling conversion services to any entity other than TIMET for the term of the Conversion Services Agreement. The agreement contains certain default provisions which could result in contract termination and damages, including liquidated damages of $25,000 and the Company being required to return the unearned portion of the up-front fee. The Company considered each provision and the likelihood of the occurrence of a default that would result in liquidated damages. Based on the nature of the events that could trigger the liquidated damages clause, and the availability of the cure periods set forth in the agreement, the Company determined and continues to believe that none of these circumstances are reasonably likely to occur. Therefore, events resulting in liquidated damages have not been factored in as a reduction to the amount of revenue recognized over the life of the contract. The cash received of $50,000 is recognized in income on a straight-line basis over the 20-year term of the agreement. If an event of default occurred and was not cured within any applicable grace period, the Company would recognize the impact of the liquidated damages in the period of default and re-evaluate revenue recognition under the contract for future periods. The portion of the up-front fee not recognized in income is shown as deferred revenue on the consolidated balance sheet.

 

Note 9.  Goodwill and Other Intangible Assets, Net

 

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

 

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

 

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Amortization of customer relationships and other intangibles was $105 and $51 for the three-month periods ended December  31, 2018 and 2019, respectively     The following represents a summary of intangible assets at September  30, 2019 and December  31, 2019.  

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross

    

Accumulated

    

Carrying

 

September 30, 2019

 

Amount

 

Amortization

 

Amount

 

Trademarks

 

 

3,800

 

 

 —

 

 

3,800

 

Customer relationships

 

 

2,100

 

 

(718)

 

 

1,382

 

Other

 

 

291

 

 

(189)

 

 

102

 

 

 

$

6,191

 

$

(907)

 

$

5,284

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross

    

Accumulated

    

Carrying

 

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

 

 

 

 

 

 

 

Estimated future Aggregate Amortization Expense:

    

 

 

Year Ended September 30, 

 

 

 

2020

$

147

 

2021

 

185

 

2022

 

133

 

2023

 

129

 

2024

 

126

 

Thereafter

 

713

 

 

 

 

 

 

Note 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.    Basic earnings per share is computed by dividing net income available to common stockholders for the period by the weighted average number of common shares outstanding for the period. The computation of diluted earnings per share is similar to basic earnings per share, except the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

December 31, 

 

(in thousands, except share and per share data)

    

2018

    

2019

 

Numerator: Basic and Diluted

 

 

 

 

 

 

 

Net income (loss)

 

$

(1,603)

 

$

3,268

 

Dividends paid and accrued

 

 

(2,759)

 

 

(2,837)

 

Undistributed income (loss)

 

 

(4,362)

 

 

431

 

Percentage allocated to common shares (a)

 

 

100.0

%

 

99.3

%

Undistributed income (loss) allocated to common shares

 

 

(4,362)

 

 

428

 

Dividends paid on common shares outstanding

 

 

2,737

 

 

2,818

 

Net income (loss) available to common shares

 

 

(1,625)

 

 

3,246

 

Denominator: Basic and Diluted

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

12,430,785

 

 

12,459,930

 

Adjustment for dilutive potential common shares

 

 

 —

 

 

41,582

 

Weighted average shares outstanding - Diluted

 

 

12,430,785

 

 

12,501,512

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share

 

$

(0.13)

 

$

0.26

 

Diluted net income (loss) per share

 

$

(0.13)

 

$

0.26

 

 

 

 

 

 

 

 

 

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

 

 

227,565

 

 

502,301

 

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

 

 

68,700

 

 

 —

 

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

 

 

29,050

 

 

 —

 

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

 

 

43,101

 

 

 —

 

 

 

 

 

 

 

 

 

(a) Percentage allocated to common shares - Weighted average

 

 

 

 

 

 

 

Common shares outstanding

 

 

12,430,785

 

 

12,459,930

 

Unvested participating shares

 

 

 —

 

 

83,283

 

 

 

 

12,430,785

 

 

12,543,213

 

 

 

Note 11.  Stock-Based Compensation

 

Restricted Stock

 

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, 2019:

 

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

 

 

Average Fair

 

 

 

Number of

 

Value At

 

 

 

Shares

 

Grant Date

 

Unvested at September 30, 2019

 

61,838

 

$

34.94

 

Granted

 

35,795

 

$

37.00

 

Vested

 

(14,350)

 

$

40.86

 

Unvested at December 31, 2019

 

83,283

 

$

34.81

 

Expected to vest

 

83,283

 

$

34.81

 

 

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

 

Deferred Restricted Stock

 

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

 

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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, 2018 and 2019 was $124 and $85, respectively. The remaining recognized compensation expense related to deferred restricted stock at December 31, 2019 was $156, to be recognized over a weighted average period of 0.92 years.

 

Performance Shares

 

The following table summarizes the activity under the 2016 Incentive Compensation Plan with respect to performance shares for the three months ended December 31, 2019. 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

 

 

Average Fair

 

 

 

Number of