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 March  31, 2020

 

or

 

 

 

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

 

For the transition period from              to              

 

Commission File Number:  001-33288

 

HAYNES INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

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

 

 

 

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

 

46904-9013
(Zip Code)

 

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

 

 

 

 

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

 

 

 

Tile of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $.001 per share

“HAYN”

NASDAQ Global Market

 

 

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

 

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

 

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

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

Non-accelerated filer ☐

 

Smaller reporting company☐

 

 

Emerging growth company  ☐

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

 

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

 

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

 

 

 

 

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 March  31, 2020 

3

 

 

 

 

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

4

 

 

 

 

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

5

 

 

 

 

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

6

 

 

 

 

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

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

 

 

 

Item 2. 

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

21

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

Item 4. 

Controls and Procedures

31

 

 

 

PART II 

OTHER INFORMATION

32

 

 

 

Item 1a.

Risk Factors COVID-19

32

 

 

 

Item 6. 

Exhibits

32

 

 

 

 

Index to Exhibits

33

 

 

 

 

Signatures

34

 

2

Table of Contents

PART 1     FINANCIAL INFORMATION

Item 1.        Unaudited Condensed Consolidated Financial Statements

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

    

September 30, 

    

March 31, 

 

 

 

2019

 

2020

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

31,038

 

$

52,406

 

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

 

 

76,979

 

 

65,970

 

Inventories

 

 

258,802

 

 

280,337

 

Income taxes receivable

 

 

1,757

 

 

377

 

Other current assets

 

 

3,297

 

 

4,440

 

Total current assets

 

 

371,873

 

 

403,530

 

Property, plant and equipment, net

 

 

169,966

 

 

164,720

 

Deferred income taxes

 

 

34,132

 

 

34,666

 

Other assets

 

 

7,756

 

 

9,895

 

Goodwill

 

 

4,789

 

 

4,789

 

Other intangible assets, net

 

 

5,284

 

 

5,184

 

Total assets

 

$

593,800

 

$

622,784

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

34,497

 

$

28,310

 

Accrued expenses

 

 

18,833

 

 

17,810

 

Income taxes payable

 

 

 —

 

 

70

 

Accrued pension and postretirement benefits

 

 

4,250

 

 

4,250

 

Revolving credit facilities

 

 

 —

 

 

30,000

 

Deferred revenue—current portion

 

 

2,500

 

 

2,500

 

Total current liabilities

 

 

60,080

 

 

82,940

 

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

 

 

8,609

 

 

8,598

 

Deferred revenue (less current portion)

 

 

15,329

 

 

14,079

 

Deferred income taxes

 

 

2,016

 

 

2,016

 

Operating lease liabilities

 

 

 —

 

 

2,306

 

Accrued pension benefits (less current portion)

 

 

101,812

 

 

98,523

 

Accrued postretirement benefits (less current portion)

 

 

109,679

 

 

110,710

 

Total liabilities

 

 

297,525

 

 

319,172

 

Commitments and contingencies (Note 7)

 

 

 —

 

 

 —

 

Stockholders’ equity:

 

 

 

 

 

 

 

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

 

 

13

 

 

13

 

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

 

 

 —

 

 

 —

 

Additional paid-in capital

 

 

253,843

 

 

255,896

 

Accumulated earnings

 

 

125,296

 

 

140,297

 

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

 

 

(2,239)

 

 

(2,437)

 

Accumulated other comprehensive loss

 

 

(80,638)

 

 

(90,157)

 

Total stockholders’ equity

 

 

296,275

 

 

303,612

 

Total liabilities and stockholders’ equity

 

$

593,800

 

$

622,784

 

 

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

 

3

Table of Contents

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

    

 

 

 

 

 

 

Three Months Ended March 31, 

 

Six Months Ended March 31, 

 

 

    

2019

    

2020

    

2019

    

2020

    

Net revenues

 

$

127,474

 

$

111,563

 

$

234,543

 

$

220,016

    

Cost of sales

 

 

112,791

 

 

92,267

 

 

208,525

 

 

181,977

 

Gross profit

 

 

14,683

 

 

19,296

 

 

26,018

 

 

38,039

 

Selling, general and administrative expense

 

 

10,663

 

 

10,785

 

 

21,791

 

 

22,292

 

Research and technical expense

 

 

859

 

 

1,028

 

 

1,693

 

 

1,910

 

Operating income

 

 

3,161

 

 

7,483

 

 

2,534

 

 

13,837

 

Nonoperating retirement benefit expense

 

 

856

 

 

1,700

 

 

1,712

 

 

3,400

 

Interest income

 

 

(18)

 

 

(10)

 

 

(38)

 

 

(24)

 

Interest expense

 

 

284

 

 

296

 

 

525

 

 

547

 

Income before income taxes

 

 

2,039

 

 

5,497

 

 

335

 

 

9,914

 

Provision for income taxes

 

 

530

 

 

1,429

 

 

429

 

 

2,578

 

Net income (loss)

 

$

1,509

 

$

4,068

 

$

(94)

 

$

7,336

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.12

 

$

0.32

 

$

(0.01)

 

$

0.58

 

Diluted

 

$

0.12

 

$

0.32

 

$

(0.01)

 

$

0.58

 

Weighted Average Common Shares Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

12,449

 

 

12,474

 

 

12,440

 

 

12,467

 

Diluted

 

 

12,600

 

 

12,504

 

 

12,440

 

 

12,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.22

 

$

0.22

 

$

0.44

 

$

0.44

 

 

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

4

Table of Contents

 

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

    

 

 

 

 

 

 

Three Months Ended March 31, 

 

Six Months Ended March 31, 

 

 

    

2019

    

2020

    

2019

    

2020

    

Net income (loss)

 

$

1,509

 

$

4,068

 

$

(94)

 

$

7,336

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement

 

 

579

 

 

1,720

 

 

1,159

 

 

3,439

 

Foreign currency translation adjustment

 

 

1,031

 

 

(3,918)

 

 

(140)

 

 

325

 

Other comprehensive income (loss)

 

 

1,610

 

 

(2,198)

 

 

1,019

 

 

3,764

 

Comprehensive income

 

$

3,119

 

$

1,870

 

$

925

 

$

11,100

 

 

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

 

 

 

 

 

5

Table of Contents

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Other

 

Total

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Treasury

 

Comprehensive

 

Stockholders’

 

    

Shares

    

Par

    

Capital

    

Earnings

    

Stock

    

Income (Loss)

    

Equity

Balance December 31, 2018

 

12,517,492

 

$

13

 

$

251,718

 

$

122,226

 

$

(2,177)

 

$

(43,156)

 

$

328,624

Net income (loss)

 

 

 

 

 

 

 

 

 

 

1,509

 

 

 

 

 

 

 

 

1,509

Dividends paid and accrued ($0.22 per share)

 

 

 

 

 

 

 

 

 

 

(2,758)

 

 

 

 

 

 

 

 

(2,758)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,610

 

 

1,610

Issue restricted stock (less forfeitures)

 

(2,012)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

Stock compensation

 

 

 

 

 

 

 

707

 

 

 

 

 

 

 

 

 

 

 

707

Balance March 31, 2019

 

12,515,480

 

$

13

 

$

252,425

 

$

120,977

 

$

(2,177)

 

$

(41,546)

 

$

329,692

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Other

 

Total

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Treasury

 

Comprehensive

 

Stockholders’

 

    

Shares

    

Par

    

Capital

    

Earnings

    

Stock

    

Income (Loss)

    

Equity

Balance December 31, 2019

 

12,556,255

 

$

13

 

$

254,999

 

$

139,010

 

$

(2,437)

 

$

(87,959)

 

$

303,626

Net income (loss)

 

 

 

 

 

 

 

 

 

 

4,068

 

 

 

 

 

 

 

 

4,068

Dividends paid and accrued ($0.22 per share)

 

 

 

 

 

 

 

 

 

 

(2,781)

 

 

 

 

 

 

 

 

(2,781)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,198)

 

 

(2,198)

Issue restricted stock (less forfeitures)

 

666

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

Stock compensation

 

 

 

 

 

 

 

897

 

 

 

 

 

 

 

 

 

 

 

897

Balance March 31, 2020

 

12,556,921

 

$

13

 

$

255,896

 

$

140,297

 

$

(2,437)

 

$

(90,157)

 

$

303,612

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Other

 

Total

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Treasury

 

Comprehensive

 

Stockholders’

 

    

Shares

    

Par

    

Capital

    

Earnings

    

Stock

    

Income (Loss)

    

Equity

Balance September 30, 2018

 

12,504,478

 

$

13

 

$

251,053

 

$

126,588

 

$

(1,869)

 

$

(42,565)

 

$

333,220

Net income (loss)

 

 

 

 

 

 

 

 

 

 

(94)

 

 

 

 

 

 

 

 

(94)

Dividends paid and accrued ($0.44 per share)

 

 

 

 

 

 

 

 

 

 

(5,517)

 

 

 

 

 

 

 

 

(5,517)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,019

 

 

1,019

Exercise of stock options

 

12,084

 

 

 

 

 

215

 

 

 

 

 

 

 

 

 

 

 

215

Issue restricted stock (less forfeitures)

 

8,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

Purchase of treasury stock

 

(9,226)

 

 

 

 

 

 

 

 

 

 

 

(308)

 

 

 

 

 

(308)

Stock compensation

 

 

 

 

 

 

 

1,157

 

 

 

 

 

 

 

 

 

 

 

1,157

Balance March 31, 2019

 

12,515,480

 

$

13

 

$

252,425

 

$

120,977

 

$

(2,177)

 

$

(41,546)

 

$

329,692

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Other

 

Total

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Treasury

 

Comprehensive

 

Stockholders’

 

    

Shares

    

Par

    

Capital

    

Earnings

    

Stock

    

Income (Loss)

    

Equity

Balance September 30, 2019

 

12,513,500

 

$

13

 

$

253,843

 

$

125,296

 

$

(2,239)

 

$

(80,638)

 

$

296,275

Net income (loss)

 

 

 

 

 

 

 

 

 

 

7,336

 

 

 

 

 

 

 

 

7,336

Dividends paid and accrued ($0.44 per share)

 

 

 

 

 

 

 

 

 

 

(5,618)

 

 

 

 

 

 

 

 

(5,618)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,764

 

 

3,764

Exercise of stock options

 

12,400

 

 

 

 

 

422

 

 

 

 

 

 

 

 

 

 

 

422

Reclass due to adoption of ASU 2018-02

 

 

 

 

 

 

 

 

 

 

13,283

 

 

 

 

 

(13,283)

 

 

 —

Issue restricted stock (less forfeitures)

 

36,461

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

Purchase of treasury stock

 

(5,440)

 

 

 

 

 

 

 

 

 

 

 

(198)

 

 

 

 

 

(198)

Stock compensation

 

 

 

 

 

 

 

1,631

 

 

 

 

 

 

 

 

 

 

 

1,631

Balance March 31, 2020

 

12,556,921

 

$

13

 

$

255,896

 

$

140,297

 

$

(2,437)

 

$

(90,157)

 

$

303,612

 

The accompanying notes are an integral part of these financial statements

6

Table of Contents

HAYNES INTERNATIONAL, INC. and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

Six Months Ended March 31, 

 

 

    

2019

    

2020

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

(94)

 

$

7,336

 

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

 

 

 

 

 

 

 

Depreciation

 

 

9,296

 

 

9,639

 

Amortization

 

 

155

 

 

100

 

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

 

 

4,487

 

 

6,897

 

Change in long-term obligations

 

 

 —

 

 

(24)

 

Stock compensation expense

 

 

1,157

 

 

1,631

 

Deferred revenue

 

 

(1,250)

 

 

(1,250)

 

Deferred income taxes

 

 

238

 

 

(1,782)

 

Loss on disposition of property

 

 

 5

 

 

 —

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(7,765)

 

 

11,122

 

Inventories

 

 

969

 

 

(21,192)

 

Other assets

 

 

(846)

 

 

(961)

 

Accounts payable and accrued expenses

 

 

4,124

 

 

(7,668)

 

Income taxes

 

 

4,788

 

 

1,447

 

Accrued pension and postretirement benefits

 

 

(3,207)

 

 

(4,488)

 

Net cash provided by (used in) operating activities

 

 

12,057

 

 

807

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(5,409)

 

 

(4,100)

 

Net cash provided by (used in) investing activities

 

 

(5,409)

 

 

(4,100)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Revolving credit facility borrowings

 

 

16,600

 

 

30,000

 

Revolving credit facility repayments

 

 

(16,600)

 

 

 —

 

Dividends paid

 

 

(5,505)

 

 

(5,523)

 

Proceeds from exercise of stock options

 

 

215

 

 

422

 

Payment for purchase of treasury stock

 

 

(308)

 

 

(198)

 

Payments on long-term obligation

 

 

(71)

 

 

(82)

 

Net cash provided by (used in) financing activities

 

 

(5,669)

 

 

24,619

 

Effect of exchange rates on cash

 

 

(1)

 

 

42

 

Increase (decrease) in cash and cash equivalents:

 

 

978

 

 

21,368

 

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

Beginning of period

 

 

9,802

 

 

31,038

 

End of period

 

$

10,780

 

$

52,406

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Interest (net of capitalized interest)

 

$

496

 

$

518

 

Income taxes paid (refunded), net

 

$

(4,636)

 

$

2,903

 

Capital expenditures incurred, but not yet paid

 

$

809

 

$

708

 

Dividends declared but not yet paid

 

$

12

 

$

95

 

 

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

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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 and six months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full fiscal year ending September 30, 2020 or any interim period.

 

Principles of Consolidation

 

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

 

COVID-19 Pandemic

 

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

 

Note 2.  Recently Issued Accounting Standards

 

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

 

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

 

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

 

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

 

 

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

   

 

Note 3.  Revenues from Contracts with Customers

 

Contract Balances

 

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

 

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

 

Disaggregation of Revenue

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

March 31, 

 

March 31, 

 

    

2019

    

2020

    

2019

    

2020

Net revenues (dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Aerospace

 

$

68,858

 

$

59,172

 

$

123,465

 

$

118,015

Chemical processing

 

 

21,761

 

 

15,832

 

 

40,681

 

 

32,544

Industrial gas turbine

 

 

13,685

 

 

16,701

 

 

27,768

 

 

30,464

Other markets

 

 

16,958

 

 

12,762

 

 

31,243

 

 

24,637

Total product revenue

 

 

121,262

 

 

104,467

 

 

223,157

 

 

205,660

Other revenue

 

 

6,212

 

 

7,096

 

 

11,386

 

 

14,356

Net revenues

 

$

127,474

 

$

111,563

 

$

234,543

 

$

220,016

 

 

 

 

 

 

 

 

 

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Note 4.  Inventories

 

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

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

March 31, 

 

 

 

    

2019

    

2020

    

 

Raw Materials

 

$

17,935

 

$

21,747

 

 

Work-in-process

 

 

138,859

 

 

142,879

 

 

Finished Goods

 

 

100,590

 

 

114,165

 

 

Other

 

 

1,418

 

 

1,546

 

 

 

 

$

258,802

 

$

280,337

 

 

 

 

 

 

 

Note 5.  Income Taxes

 

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

 

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

   

 

Note 6.  Pension and Post-retirement Benefits

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

Six Months Ended March 31, 

 

 

 

Pension Benefits

 

Other Benefits

 

Pension Benefits

 

Other Benefits

 

 

    

2019

    

2020

    

2019

    

2020

    

2019

    

2020

    

2019

    

2020

 

Service cost

 

$

1,310

 

$

1,387

 

$

79

 

$

354

 

$

2,620

 

$

2,773

 

$

158

 

$

708

 

Interest cost

 

 

2,567

 

 

2,148

 

 

1,088

 

 

873

 

 

5,133

 

 

4,296

 

 

2,176

 

 

1,746

 

Expected return