UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2009
or
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o |
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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)
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Delaware |
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06-1185400 |
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(State or other jurisdiction of |
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(IRS Employer Identification No.) |
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incorporation or organization) |
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1020 West Park Avenue, Kokomo, Indiana |
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46904-9013 |
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(Address of principal executive offices) |
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(Zip Code) |
(765) 456-6000
(Registrant’s telephone number, including area code)
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 x No o
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 file 405 of Regulation ST (§ 232.405 of the chapter) during the preceding 12 months (or for such stated period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filler”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o |
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Accelerated filer x |
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Non-accelerated filer o |
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No o
As of May 1, 2009, the registrant had 12,038,423 shares of Common Stock, $.001 par value, outstanding.
HAYNES INTERNATIONAL, INC. and SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q
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Page |
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PART I |
FINANCIAL INFORMATION |
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Item 1. |
Unaudited Condensed Financial Statements |
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Haynes International, Inc. and Subsidiaries: |
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Unaudited Consolidated Balance Sheets as of September 30, 2008 and March 31, 2009 |
1 |
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Unaudited Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2008 and 2009 |
2 |
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Unaudited Consolidated Statements of Comprehensive Income for the Three and Six Months Ended March 31, 2008 and 2009 |
3 |
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Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2008 and 2009 |
4 |
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Notes to Consolidated Financial Statements |
5 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
15 |
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
32 |
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Item 4. |
Controls and Procedures |
32 |
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PART II |
OTHER INFORMATION |
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Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
33 |
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Item 4. |
Submissions of Matters to a Vote of Security Holders |
33 |
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Item 6. |
Exhibits |
33 |
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Signatures |
34 |
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Index to Exhibits |
35 |
HAYNES INTERNATIONAL, INC. and SUBSIDIARIES
(Unaudited)
(in thousands, except share and per share data)
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September 30, |
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March 31, |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
7,058 |
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$ |
30,376 |
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Restricted cash — current portion |
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110 |
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110 |
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Accounts receivable, less allowance for doubtful accounts of $1,354 and $1,330, respectively |
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99,295 |
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75,035 |
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Inventories |
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304,915 |
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243,320 |
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Income taxes receivable |
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— |
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12,493 |
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Deferred income taxes |
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9,399 |
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8,891 |
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Other current assets |
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2,573 |
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1,887 |
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Total current assets |
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423,350 |
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372,112 |
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Property, plant and equipment (at cost) |
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134,523 |
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139,247 |
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Accumulated depreciation |
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(27,221 |
) |
(31,614 |
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Net property, plant and equipment |
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107,302 |
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107,633 |
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Deferred income taxes — long term portion |
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32,310 |
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32,594 |
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Prepayments and deferred charges |
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2,741 |
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2,779 |
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Restricted cash — long term portion |
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220 |
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110 |
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Goodwill |
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43,737 |
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— |
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Other intangible assets, net |
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7,907 |
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7,695 |
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Total assets |
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$ |
617,567 |
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$ |
522,923 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
41,939 |
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$ |
22,940 |
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Accrued expenses |
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12,729 |
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10,234 |
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Income taxes payable |
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7,482 |
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— |
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Accrued pension and postretirement benefits |
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15,016 |
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15,972 |
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Revolving credit facilities |
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11,812 |
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— |
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Deferred revenue — current portion |
|
2,500 |
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2,500 |
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Current maturities of long-term obligations |
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1,515 |
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110 |
| ||
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Total current liabilities |
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92,993 |
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51,756 |
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Long-term obligations (less current portion) |
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1,582 |
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1,482 |
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Deferred revenue (less current portion) |
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42,830 |
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41,579 |
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Non-current income taxes payable |
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276 |
|
276 |
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Accrued pension and postretirement benefits |
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100,343 |
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91,796 |
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Total liabilities |
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238,024 |
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186,889 |
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Commitments and contingencies (Note 6) |
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— |
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— |
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Stockholders’ equity: |
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Common stock, $0.001 par value (40,000,000 shares authorized, 11,984,623 and 12,038,423 issued and outstanding at September 30, 2008 and March 31, 2009, respectively) |
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12 |
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12 |
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Preferred stock, $0.001 par value (20,000,000 shares authorized, 0 shares issued and outstanding) |
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— |
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— |
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Additional paid-in capital |
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225,821 |
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226,409 |
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Accumulated earnings |
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155,831 |
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117,466 |
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Accumulated other comprehensive loss |
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(2,121 |
) |
(7,853 |
) | ||
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Total stockholders’ equity |
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379,543 |
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336,034 |
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Total liabilities and stockholders’ equity |
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$ |
617,567 |
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$ |
522,923 |
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The accompanying notes are an integral part of these financial statements.
1
HAYNES INTERNATIONAL, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share and per share data)
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Three Months Ended |
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Six Months Ended |
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March 31, |
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March 31, |
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2008 |
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2009 |
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2008 |
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2009 |
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Net revenues |
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$ |
163,771 |
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$ |
120,413 |
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$ |
309,848 |
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$ |
254,717 |
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Cost of sales |
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127,851 |
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113,416 |
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239,723 |
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228,970 |
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Gross profit |
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35,920 |
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6,997 |
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70,125 |
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25,747 |
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Selling, general and administrative expense |
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10,062 |
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8,292 |
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20,052 |
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18,882 |
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Research and technical expense |
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839 |
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814 |
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1,747 |
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1,639 |
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Impairment of goodwill |
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— |
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43,737 |
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— |
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43,737 |
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Operating income (loss) |
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25,019 |
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(45,846 |
) |
48,326 |
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(38,511 |
) | ||||
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Interest income |
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(26 |
) |
(8 |
) |
(57 |
) |
(28 |
) | ||||
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Interest expense |
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343 |
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123 |
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837 |
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479 |
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Income (loss) before income taxes |
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24,702 |
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(45,961 |
) |
47,546 |
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(38,962 |
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Provision for (benefit from) income taxes |
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9,639 |
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(3,072 |
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18,640 |
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(597 |
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Net income (loss) |
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$ |
15,063 |
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$ |
(42,889 |
) |
$ |
28,906 |
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$ |
(38,365 |
) |
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Net income (loss) per share: |
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Basic |
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$ |
1.27 |
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$ |
(3.58 |
) |
$ |
2.44 |
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$ |
(3.20 |
) |
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Diluted |
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$ |
1.25 |
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$ |
(3.58 |
) |
$ |
2.41 |
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$ |
(3.20 |
) |
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Weighted average shares outstanding: |
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Basic |
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11,906,076 |
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11,984,623 |
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11,863,729 |
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11,984,623 |
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Diluted |
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12,030,895 |
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11,984,623 |
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11,998,167 |
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11,984,623 |
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The accompanying notes are an integral part of these financial statements.
2
HAYNES INTERNATIONAL, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands)
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Three Months Ended |
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Six Months Ended |
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2008 |
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2009 |
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2008 |
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2009 |
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Net income (loss) |
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$ |
15,063 |
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$ |
(42,889 |
) |
$ |
28,906 |
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$ |
(38,365 |
) |
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Other comprehensive income (loss), net of tax: |
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Pension curtailment |
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— |
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— |
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2,701 |
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— |
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Foreign currency translation adjustment |
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2,475 |
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(1,326 |
) |
2,276 |
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(5,732 |
) | ||||
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Comprehensive income (loss) |
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$ |
17,538 |
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$ |
(44,215 |
) |
$ |
33,883 |
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$ |
(44,097 |
) |
The accompanying notes are an integral part of these financial statements.
3
HAYNES INTERNATIONAL, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
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Six Months Ended |
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2008 |
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2009 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
28,906 |
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$ |
(38,365 |
) | |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation |
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4,415 |
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4,964 |
| |||
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Amortization |
|
542 |
|
528 |
| |||
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Impairment of goodwill |
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— |
|
43,737 |
| |||
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Stock compensation expense |
|
700 |
|
588 |
| |||
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Excess tax benefit from option exercises |
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(2,077 |
) |
— |
| |||
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Deferred revenue - portion recognized |
|
(1,250 |
) |
(1,251 |
) | |||
|
Deferred income taxes |
|
(5,498 |
) |
590 |
| |||
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Loss on disposal of property |
|
230 |
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29 |
| |||
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Change in assets and liabilities: |
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|
|
|
| |||
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Accounts receivable |
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4,336 |
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20,863 |
| |||
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Inventories |
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(15,535 |
) |
55,866 |
| |||
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Other assets |
|
(495 |
) |
589 |
| |||
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Accounts payable and accrued expenses |
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(1,515 |
) |
(17,573 |
) | |||
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Income taxes |
|
7,806 |
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(19,804 |
) | |||
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Accrued pension and postretirement benefits |
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(8,454 |
) |
(7,591 |
) | |||
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Net cash provided by operating activities |
|
12,111 |
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43,170 |
| |||
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Cash flows from investing activities: |
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|
|
|
| |||
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Additions to property, plant and equipment |
|
(9,356 |
) |
(6,118 |
) | |||
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Change in restricted cash |
|
110 |
|
110 |
| |||
|
Net cash used in investing activities |
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(9,246 |
) |
(6,008 |
) | |||
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|
|
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|
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Cash flows from financing activities: |
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|
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Net decrease in revolving credit |
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(573 |
) |
(11,812 |
) | |||
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Proceeds from exercise of stock options |
|
1,308 |
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— |
| |||
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Excess tax benefit from option exercises |
|
2,077 |
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— |
| |||
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Payment for debt issuance costs |
|
— |
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(316 |
) | |||
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Changes in long-term obligations |
|
(148 |
) |
(1,335 |
) | |||
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Net cash provided by (used in) financing activities |
|
2,664 |
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(13,463 |
) | |||
|
|
|
|
|
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| |||
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Effect of exchange rates on cash |
|
251 |
|
(381 |
) | |||
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Increase in cash and cash equivalents |
|
5,780 |
|
23,318 |
| |||
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|
|
|
|
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Cash and cash equivalents, beginning of period |
|
5,717 |
|
7,058 |
| |||
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Cash and cash equivalents, end of period |
|
$ |
11,497 |
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$ |
30,376 |
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Supplemental disclosures of cash flow information: |
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Cash paid during period for: |
Interest (net of capitalized interest) |
|
$ |
784 |
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$ |
453 |
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|
|
Income taxes |
|
$ |
16,370 |
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$ |
19,945 |
|
The accompanying notes are an integral part of these financial statements.
4
HAYNES INTERNATIONAL, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands, except share and per share data)
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 and such principles are applied on a basis consistent with information reflected in our Form 10-K for the year ended September 30, 2008 filed with the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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, consisting only of normal recurring adjustments, 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, 2009 are not necessarily indicative of the results to be expected for the full fiscal year ending September 30, 2009 or any interim period.
Principles of Consolidation
The consolidated financial statements include the accounts of Haynes International, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). All significant intercompany transactions and balances are eliminated.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 157, Fair Value Measurement (“SFAS 157”). SFAS 157 addresses standardizing the measurement of fair value for companies who are required to use a fair value measure for recognition or disclosure purposes. The FASB defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measure date.” On February 12, 2008, the FASB issued Staff Position 157-2 (“FSP 157-2”) which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. Therefore for financial assets and liabilities the statement is effective for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years. The Company was required to adopt SFAS 157 (excluding nonfinancial assets and liabilities) beginning on October 1, 2008, which did not have a material impact on the Company’s financial position, results of operations or cash flows.
5
In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), Business Combinations (“SFAS 141(R)”). SFAS 141(R) requires that the fair value of the purchase price of an acquisition including the issuance of equity securities be determined on the acquisition date; requires that all assets, liabilities, noncontrolling interests, contingent consideration, contingencies, and in-process research and development costs of an acquired business be recorded at fair value at the acquisition date; requires that acquisition costs generally be expensed as incurred; requires that restructuring costs generally be expensed in periods subsequent to the acquisition date; and requires that changes in deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. SFAS 141(R) also expands disclosures related to business combinations. SFAS 141(R) will be applied prospectively to business combinations occurring after the beginning of the Company’s fiscal year 2010, except that business combinations consummated prior to the effective date must apply SFAS 141(R) income tax requirements immediately upon adoption. The Company is currently evaluating the affect the adoption of SFAS 141(R) will have on its financial position, results of operations and cash flows.
In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 requires that noncontrolling interests be reported as a separate component of equity, that net income attributable to the parent and to the noncontrolling interest be separately identified in the consolidated statement of operations, that changes in a parent’s ownership interest be accounted for as equity transactions, and that, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. SFAS 160 will be applied prospectively, except for presentation and disclosure requirements which will be applied retrospectively, as of the beginning of the Company’s fiscal year 2010. The Company does not currently have noncontrolling interests, and therefore the adoption of SFAS 160 is not expected to have an impact on the Company’s financial position, results of operations or cash flows.
In March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”)—an amendment of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 161 is intended to improve financial reporting transparency regarding derivative instruments and hedging activities by providing investors with a better understanding of their effects on financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company will adopt SFAS 161 on October 1, 2009 and is currently evaluating the effect the adoption will have on its consolidated financial statements.
In May 2008, the FASB issued FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for non-governmental entities. Any effect of applying the provisions of SFAS 162 is to be reported as a change in accounting principle in accordance with SFAS No. 154, Accounting Changes and Error Corrections. The Company adopted SFAS 162, on November 15, 2008, which had no impact on the Company’s financial position, results of operation or cash flows.
In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and
6
the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, and other U.S. GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and early adoption is prohibited. Accordingly, this FSP is effective for the Company on October 1, 2009. The Company is currently evaluating the effect the adoption will have on its consolidated financial statements.
In December 2008, the FASB issued FASB Staff Position No. 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (“FSP 132(R)-1”). The FSP requires disclosures of the objectives of postretirement benefit plan assets, investment policies and strategies, categories of plan assets, fair value measurements of plan assets, and significant concentrations of risk. FSP 132(R)-1 is effective for fiscal years and interim periods beginning after December 15, 2009. The adoption of FSP 132(R)-1 is expected to increase our disclosures, but it is not expected to have an impact on our consolidated financial statements.
The following is a summary of the major classes of inventories:
|
|
|
September 30, 2008 |
|
March 31, 2009 |
| ||
|
Raw Materials |
|
$ |
20,343 |
|
$ |
21,820 |
|
|
Work-in-process |
|
155,782 |
|
108,989 |
| ||
|
Finished Goods |
|
127,653 |
|
111,515 |
| ||
|
Other |
|
1,137 |
|
996 |
| ||
|
|
|
$ |
304,915 |
|
$ |
243,320 |
|
Income tax expense for the three and six months ended March 31, 2008 and 2009, differed from the U.S. federal statutory rate of 35% partly due to state income taxes and differing tax rates on foreign earnings. The effective tax rate for the first six months of fiscal 2009 was a benefit of 1.5% compared to an expense of 39.2% in the same period of fiscal 2008. The decrease in the effective tax rate is primarily attributable to the goodwill impairment charge, a change in the reinvestment policy of a foreign entity and lower U.S. taxable income.
Note 5. Pension and Post-retirement Benefits
Components of net periodic pension and post-retirement benefit cost for the three and six months ended March 31, 2008 and 2009 are as follows:
|
|
|
Three Months Ended March 31, |
|
Six Months Ended March 31, |
| ||||||||||||||||||||
|
|
|
Pension Benefits |
|
Other Benefits |
|
Pension Benefits |
|
Other Benefits |
| ||||||||||||||||
|
|
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2009 |
| ||||||||
|
Service cost |
|
$ |
709 |
|
$ |
614 |
|
$ |
361 |
|
$ |
332 |
|
$ |
1,415 |
|
$ |
1,249 |
|
$ |
722 |
|
$ |
664 |
|
|
Interest cost |
|
2,684 |
|
2,905 |
|
1,115 |
|
1,231 |
|
5,372 |
|
5,904 |
|
2,230 |
|
2,462 |
| ||||||||
|
Expected return |
|
(2,851 |
) |
(2,404 |
) |
— |
|
— |
|
(5,702 |
) |
(4,914 |
) |
— |
|
— |
| ||||||||
|
Amortizations |
|
203 |
|
203 |
|
(1,032 |
) |
(1,326 |
) |
404 |
|
404 |
|
(2,064 |
) |
(2,653 |
) | ||||||||
|
Curtailment gain |
|
— |
|
— |
|
— |
|
— |
|
(3,659 |
) |
— |
|
— |
|
— |
| ||||||||
|
Net periodic benefit cost (benefit) |
|
$ |
745 |
|
$ |
1,318 |
|
$ |
444 |
|
$ |
237 |
|
$ |
(2,170 |
) |
$ |
2,643 |
|
$ |
888 |
|
$ |
473 |
|
The Company contributed $7,216 to the Company sponsored domestic pension plans, $2,446 to its other post-retirement benefit plans and $446 to the U.K. pension plan for the six months ended March 31, 2009. The Company presently expects future contributions of $4,784 to its domestic pension plans, $1,754 to its other post-retirement benefit plans and $621 to the U.K. pension plan for the remainder of fiscal 2009. The Pension Protection Act of 2006 requires funding over a seven year period to achieve 100% funded status.
7
On October 2, 2007, the U.S. pension plan was amended effective December 31, 2007 to freeze benefit accruals for all non-union employees in the U.S. and, effective January 1, 2008, the pension multiplier used to calculate the employee’s monthly benefit was increased from 1.4% to 1.6%. In addition, the Company began making enhanced matching contributions to its 401K plan equal to 60% of the non-union and union plan participant’s salary deferrals, up to 6% of compensation. The Company estimates the redesign of the pension plan, including previous actions to close the plan to new non-union and union employees and the adjustment of the multiplier for non-union and union plan participants, will reduce funding requirements by $23,000 over fiscal years 2008 through 2013. The offsetting estimated incremental cost of the enhanced 401K match is $2,300 over the same six year period. As a result of freezing the benefit accruals for all non-union employees in the U.S. in the first quarter of fiscal 2008, we recognized a reduction of the projected benefit obligation of $8,191, an increase to other comprehensive income (before tax) of $4,532 and a curtailment gain (before tax) of $3,659. The impact of the multiplier increase will be charged to pension expense over the estimated remaining lives of the participants.
On January 16, 2009, the Company announced that it was taking actions to reduce costs by reducing its worldwide workforce by 12%, and implementing a salary freeze for salaried employees, both of which have been achieved. As a result of these personnel reductions, the annualized savings to cost of sales is expected to be approximately $8,400, with an impact in fiscal 2009 of approximately $5,300, net of severance expense. The annualized savings to selling, general and administrative expense is expected to be approximately $1,100, with an impact in fiscal 2009 of approximately $700, net of severance expense. The full benefit of these cost reduction efforts will begin to be reflected in the third quarter of fiscal 2009.
Note 6. Environmental and Legal
The Company is regularly involved in litigation, both as a plaintiff and as a defendant, relating to its business and operations, including environmental and intellectual property matters. Future expenditures for environmental, 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.
The Company believes that any and all claims arising out of conduct or activities that occurred prior to March 29, 2004 are subject to dismissal. On March 29, 2004, the Company and certain of its subsidiaries and affiliates filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Indiana (the “Bankruptcy Court”). On August 16, 2004, the Bankruptcy Court entered its Findings of Fact, Conclusions of Law, and Order Under 11 U.S.C. 1129(a) and (b) and Fed. R. Bankr. P. 3020 Confirming the First Amended Joint Plan of Reorganization of Haynes International, Inc. and its Affiliated Debtors and Debtors-in-Possession as Further Modified (the “Confirmation Order”). The Confirmation Order and related Chapter 11 Plan, among other things, provide for the release and discharge of prepetition claims and causes of action. The Confirmation Order further provides for an injunction against the commencement of any actions with respect to claims held prior to the Effective Date of the Plan. The Effective Date occurred on August 31, 2004. When appropriate, the Company pursues the dismissal of lawsuits premised upon claims or causes of action discharged in the Confirmation Order and related Chapter 11 Plan. The success of this strategy is dependent upon a number of factors, including the respective court’s interpretation of the Confirmation Order and the unique circumstances of each case.
The Company is currently, and has in the past, been subject to claims involving personal injuries allegedly relating to its products. For example, the Company is presently involved in two actions involving welding rod-related injuries, one filed in California state court against numerous manufacturers, including the Company, in February 2007, and a second case in U.S. Federal court filed in January 2009, both alleging 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 believes that it has defenses to these allegations and, that if the Company were found liable, the cases would not have a material effect on its financial position, results of operations or liquidity. In addition to these cases, the Company has in the past been named a defendant in several other lawsuits, including 53 filed in the state of California, alleging that its welding-related products harmed the users of such products through the inhalation of welding fumes containing manganese. The Company
8
has since been voluntarily dismissed from all of these lawsuits on the basis of the release and discharge of claims contained in the Confirmation Order. While the Company contests such lawsuits vigorously, and may have applicable insurance, there are several risks and uncertainties that may affect its liability for claims relating to exposure to welding fumes and manganese. For instance, in recent cases, at least two courts (in cases not involving Haynes) have refused to dismiss claims relating to inhalation of welding fumes containing manganese based upon a bankruptcy discharge order. Although the Company believes the facts of these cases are distinguishable from the facts of its cases, there can be no assurance that any or all claims against the Company will be dismissed based upon the Confirmation Order, particularly claims premised, in part or in full, upon actual or alleged exposure on or after the date of the Confirmation Order. It is also possible that the Company will be named in additional suits alleging welding-rod injuries. Should such litigation occur, it is possible that the aggregate claims for damages, if the Company is found liable, could have a material adverse effect on its financial condition, results of operations or liquidity.
The Company has received permits from the Indiana Department of Environmental Management, or IDEM, to close and to provide post-closure monitoring and care for certain areas at the Kokomo facility previously used for the storage and disposal of wastes, some of which are classified as hazardous under applicable regulations. Closure certification was received in fiscal 1988 for the South Landfill at the Kokomo facility and post-closure monitoring and care is ongoing there. Closure certification was received in fiscal 1999 for the North Landfill at the Kokomo facility and post-closure monitoring and care are permitted and ongoing there. In fiscal 2007, IDEM issued a single post-closure permit applicable to both the North and South Landfills, which contain monitoring and post-closure care requirements. In addition, IDEM required that a Resource Conservation and Recovery Act, or RCRA, Facility Investigation, or RFI, be conducted in order to further evaluate one area of concern and one solid waste management unit. The RFI commenced in fiscal 2008 and is ongoing.
The Company has also received permits from the North Carolina Department of Environment and Natural Resources, or NCDENR, to close and provide post-closure monitoring and care for the hazardous waste lagoon at its Mountain Home, North Carolina facility. The lagoon area has been closed and is currently undergoing post-closure monitoring and care. The Company is required to 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 corrective actions by the Company could be required.
Historic nitric acid spills were discovered at the Arcadia, Louisiana location in fiscal 2008. Analytical results were received in March 2008 and the site assessment was provided to the Louisiana Department of Environmental Quality (“LDEQ”) in May. Remediation of the spill, including the purchase of new equipment, was substantially complete in fiscal 2008. A preliminary assessment of the LDEQ authorized the Company’s proposed remedial actions. LDEQ approved the final remediation plan in February 2009.
As of March 31, 2009 and September 30, 2008, the Company has accrued $1,517 for post-closure monitoring and maintenance activities. In accordance with Statement of Position 96-1, Environmental Remediation Liabilities, 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 30 year post-closure monitoring period referred to above. At each fiscal year-end, or earlier if necessary, the Company evaluates the accuracy of the estimates for these monitoring and maintenance costs for the upcoming fiscal year. The accrual was based upon the undiscounted amount of the obligation of $2,231 which was then discounted using an appropriate discount rate. The cost associated with closing the sites has been incurred in financial periods prior to those presented, with the remaining cost to be incurred in future periods related solely to post-closure monitoring and maintenance. Based on historical experience, the Company estimates that the cost of post-closure monitoring and maintenance will approximate $125 per year over the remaining obligation period.
Note 7. 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
9
commitment, the Company has granted TIMET a security interest on 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 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 the Company being required to return the unearned portion of the upfront fee. The cash received of $50,000 is recognized in income on a straight-line basis over the 20-year term of the agreement. The portion of the upfront fee not recognized in income is shown as deferred revenue on the consolidated balance sheet. Taxes were paid on the up-front fee primarily in the first quarter of fiscal 2009.
Note 8. Intangible Assets and Goodwill
Goodwill was created primarily as a result of the Company’s reorganization pursuant to Chapter 11 of the U.S. Bankruptcy Code and fresh start accounting. The Company has adopted FASB Statement No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). Pursuant to SFAS 142, goodwill is not amortized and the value of goodwill is reviewed at least annually for impairment. If the carrying value of goodwill exceeds its fair value, impairment of goodwill may exist resulting in a charge to earnings to the extent of goodwill impairment. The Company estimates fair value using a combination of a market value approach using quoted market prices and an income approach using discounted cash flow projections.
The Company also has patents, trademarks and other intangibles. As the patents have a definite life, they are amortized over lives ranging from two to fourteen years. As the trademarks have an indefinite life, the Company tests them for impairment at least annually. If the carrying value exceeds the fair value (determined by calculating a fair value 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 Company has non-compete agreements with lives of 2 to 7 years. Amortization of the patents, non-competes and other intangibles was $542 and $528 for the six months ended March 31, 2008 and 2009, respectively.
Goodwill and trademarks were tested for impairment on August 31, 2008 with no impairment recognized. Due to uncertainty surrounding the global economy and volatility in the Company’s stock price, the Company concluded a triggering event had occurred indicating potential impairment and performed an impairment test as of December 31, 2008 of its goodwill and trademarks. No impairment was recognized at December 31, 2008 because the fair value exceeded the carrying values.
During the second quarter of fiscal 2009, the Company determined that the weakening of the U.S. economy and the global credit crisis resulted in a reduction of the Company’s market capitalization below its total shareholder’s equity value for a sustained period of time, which is an indication that goodwill may be impaired. As a result, the Company performed an interim step one goodwill impairment analysis as of February 28, 2009 which indicated impairment. With the assistance of a third-party valuation specialist, the Company first determined the fair value of its one reporting unit using two valuation methodologies: (a) the income approach, which uses discounted cash flow projections, and (b) the market value approach, which uses quoted market prices. The valuation methodologies and the underlying financial information that are used to determine fair value require significant judgments to be made by management. These judgments include, but are not limited to, long-term projections of future financial performance, terminal growth rate and the selection of an appropriate discount rate used to calculate the present value of the estimated future cash flows of the Company. The long-term projections used in the valuation were developed as a part of the Company’s annual budgeting and forecasting process. The discount rate used in the valuation was selected based upon an analysis of comparable companies and included adjustments made to account for specific attributes of the Company such as size and industry.
As the second step of the goodwill impairment test, the Company compared the implied fair value of the reporting unit goodwill to the carrying value of that goodwill and determined that the carrying value of the Company’s one reporting unit exceeded its fair value. As a result, the Company recorded a non-cash charge of $43,737 for goodwill impairment in the second quarter of fiscal 2009.
The following table reflects the change to the carrying amount of goodwill for the six months ended March 31, 2009:
10
|
Goodwill balance at September 30, 2008 |
|
$ |
43,737 |
|
|
Impairment charge |
|
(43,737 |
) | |
|
Goodwill balance at March 31, 2009 |
|
$ |
0 |
|
The following represents a summary of intangible assets at September 30, 2008 and March 31, 2009:
|
September 30, 2008 |
|
Gross Amount |
|
Accumulated |
|
Carrying |
| |||
|
Patents |
|
$ |
8,667 |
|
$ |
(5,480 |
) |
$ |
3,187 |
|
|
Trademarks |
|
3,800 |
|
— |
|
3,800 |
| |||
|
Non-compete |
|
1,340 |
|
(488 |
) |
852 |
| |||
|
Other |
|
465 |
|
(397 |
) |
68 |
| |||
|
|
|
$ |
14,272 |
|
$ |
(6,365 |
) |
$ |
7,907 |
|
|
March 31, 2009 |
|
Gross Amount |
|
Accumulated |
|
Carrying |
| |||
|
Patents |
|
$ |
8,667 |
|
$ |
(5,760 |
) |
$ |
2,907 |
|
|
Trademarks |
|
3,800 |
|
— |
|
3,800 |
| |||
|
Non-compete |
|
1,340 |
|
(628 |
) |
712 |
| |||
|
Other |
|
316 |
|
(40 |
) |
276 |
| |||
|
|
|
|||||||||