PART
I. ITEM 1: Financial Statements
WHX
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three
Months ended
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
(in
thousands except per share)
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
132,679
|
|
|
$
|
177,277
|
|
Cost
of goods sold
|
|
|
103,323
|
|
|
|
136,473
|
|
Gross
profit
|
|
|
29,356
|
|
|
|
40,804
|
|
Selling,
general and administrative expenses
|
|
|
32,200
|
|
|
|
36,080
|
|
WHX
Pension Plan expense (credit)
|
|
|
3,458
|
|
|
|
(1,800
|
)
|
Restructuring
charges
|
|
|
533
|
|
|
|
-
|
|
Gain
on disposal of assets
|
|
|
(4
|
)
|
|
|
(22
|
)
|
Income
(loss) from operations
|
|
|
(6,831
|
)
|
|
|
6,546
|
|
Other:
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
5,224
|
|
|
|
10,371
|
|
Realized
and unrealized (gain) loss on derivatives
|
|
|
(281
|
)
|
|
|
1,627
|
|
Other
income
|
|
|
(161
|
)
|
|
|
(51
|
)
|
Loss
before income taxes
|
|
|
(11,613
|
)
|
|
|
(5,401
|
)
|
Tax
provision (benefit)
|
|
|
(245
|
)
|
|
|
811
|
|
Net
loss
|
|
$
|
(11,368
|
)
|
|
$
|
(6,212
|
)
|
|
|
|
|
|
|
|
|
|
Basic
and diluted per share of common stock
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(0.93
|
)
|
|
$
|
(6.21
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
12,179
|
|
|
|
1,000
|
|
SEE NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
WHX
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
March
31,
|
|
|
December
31,
|
|
(Dollars
and shares in thousands)
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
6,891
|
|
|
$
|
8,656
|
|
Trade
receivables - less allowance for doubtful accounts of $3,572 and $3,178 at
3/31/09 and 12/31/08, respectively
|
|
|
73,241
|
|
|
|
81,610
|
|
Inventories
|
|
|
77,177
|
|
|
|
75,270
|
|
Deferred
income taxes
|
|
|
1,108
|
|
|
|
1,310
|
|
Other
current assets
|
|
|
9,882
|
|
|
|
10,378
|
|
Total
current assets
|
|
|
168,299
|
|
|
|
177,224
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment at cost, less accumulated depreciation and
amortization
|
|
|
100,210
|
|
|
|
102,508
|
|
Goodwill
|
|
|
65,060
|
|
|
|
65,070
|
|
Other
intangibles, net
|
|
|
36,212
|
|
|
|
36,965
|
|
Other
non-current assets
|
|
|
18,148
|
|
|
|
17,717
|
|
|
|
$
|
387,929
|
|
|
$
|
399,484
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Trade
payables
|
|
$
|
37,174
|
|
|
$
|
36,599
|
|
Accrued
environmental liability
|
|
|
6,050
|
|
|
|
6,722
|
|
Accrued
liabilities
|
|
|
31,892
|
|
|
|
37,382
|
|
Accrued
interest expense - related party
|
|
|
554
|
|
|
|
262
|
|
Current
portion of long-term debt
|
|
|
11,343
|
|
|
|
12,956
|
|
Short-term
debt
|
|
|
39,739
|
|
|
|
32,970
|
|
Deferred
income taxes
|
|
|
248
|
|
|
|
257
|
|
Total
current liabilities
|
|
|
127,000
|
|
|
|
127,148
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
104,891
|
|
|
|
109,174
|
|
Long-term
debt - related party
|
|
|
54,098
|
|
|
|
54,098
|
|
Accrued
interest expense - related party
|
|
|
4,004
|
|
|
|
2,237
|
|
Accrued
pension liability
|
|
|
137,469
|
|
|
|
133,990
|
|
Other
employee benefit liabilities
|
|
|
5,087
|
|
|
|
4,936
|
|
Deferred
income taxes
|
|
|
4,753
|
|
|
|
5,413
|
|
Other
liabilities
|
|
|
4,326
|
|
|
|
4,395
|
|
|
|
|
441,628
|
|
|
|
441,391
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
(Deficit) Equity:
|
|
|
|
|
|
|
|
|
Preferred
stock- $.01 par value; authorized 5,000
shares; issued and
outstanding -0- shares
|
|
|
-
|
|
|
|
-
|
|
Common
stock -$.01 par value; authorized 180,000 shares;
issued and
outstanding 12,179 shares
|
|
|
122
|
|
|
|
122
|
|
Accumulated
other comprehensive loss
|
|
|
(164,033
|
)
|
|
|
(163,502
|
)
|
Additional
paid-in capital
|
|
|
552,690
|
|
|
|
552,583
|
|
Accumulated
deficit
|
|
|
(442,478
|
)
|
|
|
(431,110
|
)
|
Total
stockholders' deficit
|
|
|
(53,699
|
)
|
|
|
(41,907
|
)
|
|
|
$
|
387,929
|
|
|
$
|
399,484
|
|
SEE NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
WHX
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three
Months Ended
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(11,368
|
)
|
|
$
|
(6,212
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
4,925
|
|
|
|
5,348
|
|
Non-cash
stock based compensation
|
|
|
116
|
|
|
|
69
|
|
Amortization
of debt related costs
|
|
|
391
|
|
|
|
355
|
|
Long-term
interest on related party debt
|
|
|
1,767
|
|
|
|
1,775
|
|
Deferred
income taxes
|
|
|
(467
|
)
|
|
|
66
|
|
Gain
on asset dispositions
|
|
|
(4
|
)
|
|
|
(22
|
)
|
Unrealized
loss (gain) on derivatives
|
|
|
388
|
|
|
|
(162
|
)
|
Reclassification
of net cash settlements on derivative instruments
|
|
|
(669
|
)
|
|
|
1,789
|
|
Decrease
(increase) in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade
and other receivables
|
|
|
7,931
|
|
|
|
(19,890
|
)
|
Inventories
|
|
|
(2,197
|
)
|
|
|
(1,565
|
)
|
Other
current assets
|
|
|
135
|
|
|
|
583
|
|
Accrued
interest expense-related party
|
|
|
292
|
|
|
|
4,188
|
|
Other
current liabilities
|
|
|
(1,354
|
)
|
|
|
5,521
|
|
Other
items-net
|
|
|
64
|
|
|
|
85
|
|
Net
cash used in operating activities
|
|
|
(50
|
)
|
|
|
(8,072
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Plant
additions and improvements
|
|
|
(2,141
|
)
|
|
|
(3,523
|
)
|
Net
cash settlements on derivative instruments
|
|
|
669
|
|
|
|
(1,789
|
)
|
Proceeds
from sales of assets
|
|
|
58
|
|
|
|
78
|
|
Net
cash used in investing activities
|
|
|
(1,414
|
)
|
|
|
(5,234
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from term loans - domestic
|
|
|
-
|
|
|
|
4,000
|
|
Net
revolver borrowings
|
|
|
6,827
|
|
|
|
11,291
|
|
Repayments
of term loans - foreign
|
|
|
(122
|
)
|
|
|
(136
|
)
|
Repayments
of term loans - domestic
|
|
|
(5,641
|
)
|
|
|
(3,509
|
)
|
Deferred
finance charges
|
|
|
(880
|
)
|
|
|
(1,146
|
)
|
Net
change in overdrafts
|
|
|
(364
|
)
|
|
|
1,577
|
|
Other
|
|
|
(92
|
)
|
|
|
3
|
|
Net
cash provided by (used in) financing activities
|
|
|
(272
|
)
|
|
|
12,080
|
|
Net
change for the period
|
|
|
(1,736
|
)
|
|
|
(1,226
|
)
|
Effect
of exchange rate changes on net cash
|
|
|
(29
|
)
|
|
|
149
|
|
Cash
and cash equivalents at beginning of period
|
|
|
8,656
|
|
|
|
6,090
|
|
Cash
and cash equivalents at end of period
|
|
$
|
6,891
|
|
|
$
|
5,013
|
|
SEE NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
WHX
CORPORATION
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES
IN
STOCKHOLDERS’ (DEFICIT) EQUITY
(Dollars
and shares in thousands)
|
|
Common Stock
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Accumulated
|
|
|
Additional
Paid-In
|
|
|
Total
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Loss
|
|
|
Deficit
|
|
|
Capital
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2008
|
|
|
12,179
|
|
|
$
|
122
|
|
|
$
|
(163,502
|
)
|
|
$
|
(431,110
|
)
|
|
$
|
552,583
|
|
|
$
|
(41,907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
(531
|
)
|
|
|
|
|
|
|
|
|
|
|
(531
|
)
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,368
|
)
|
|
|
|
|
|
|
(11,368
|
)
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,899
|
)
|
Amortization
of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
March 31, 2009
|
|
|
12,179
|
|
|
$
|
122
|
|
|
$
|
(164,033
|
)
|
|
$
|
(442,478
|
)
|
|
$
|
552,690
|
|
|
$
|
(53,699
|
)
|
SEE NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - The Company and
Nature of Operations
WHX
Corporation, the parent company (“WHX”), manages a group of businesses on a
decentralized basis. WHX owns Handy & Harman (“H&H”), which
is a diversified holding company whose strategic business units encompass three
reportable segments: Precious Metal, Tubing, and Engineered
Materials. In April 2007, WHX acquired Bairnco Corporation
(“Bairnco”). Bairnco manages business units in three reportable
segments: Arlon Electronic Materials, Arlon Coated Materials, and Kasco
Replacement Products and Services. See Note 13 for a description of
the business and products of each of the Company’s segments. The
business units of H&H and Bairnco principally operate in North
America. WHX, together with all of its subsidiaries, are referred to
herein as the “Company.”
Note
2 - Management’s Plans and Liquidity
The
world-wide economic recession which became evident in the latter part of 2008
intensified to levels during the first quarter of 2009 not experienced in many
years. This had a material adverse effect on almost all of the Company’s
businesses during the first quarter of 2009, driving sales down by over 25% from
the first quarter of 2008. Significant end market declines and negative
inventory adjustments were experienced by many of the Company’s served markets,
especially general industrial, residential and industrial construction,
transportation and appliance markets.
In late
2008, management formulated contingency plans to respond to the deteriorating
economic conditions. Those plans and other cost containment actions
were aggressively implemented during the first quarter of 2009 with the goals of
maintaining adequate liquidity, preserving or increasing shares of key markets,
sustaining margins on sales and retaining key employees.
The plans
included a reduction in compensation and benefits for salaried employees, and
layoffs in both the salaried and hourly workforce. They further
included the temporary idling of certain of the Company’s manufacturing
facilities for various periods during the quarter to better match production
with customer demand. The Company made considerable progress during
the first quarter with respect to all of those efforts – reducing costs,
conserving cash, operating safely, and producing the highest quality products as
efficiently as possible under the current market
conditions. Notwithstanding the progress made during the quarter in
achieving its goals, the Company could not overcome the weakened global demand
for its products, and its shipments and revenues declined significantly compared
to the first quarter of 2008.
The
Company recorded a net loss of $11.4 million for the quarter ended March 31,
2009, following a profitable year in 2008, when the Company had net income of
$3.0 million and $10.1 million of cash flow provided by operating
activities. For the quarter ended March 31, 2009, cash flow used in
operating activities was $50,000, as compared to $8.1 million used in operating
activities in the same quarter of
2008.
In
recent years prior to 2008, the Company incurred significant losses and used
significant amounts of cash in operating activities, and as of March 31, 2009,
had an accumulated deficit of $442.5 million. As of March 31, 2009,
the Company’s current assets totaled $168.3 million and its current liabilities
totaled $127.0 million; for net working capital of $41.3 million. The
Company reduced its level of debt substantially in 2008, from $359.4 million as
of January 1, 2008 to $209.2 million as of December 31, 2008 and $210.1 million
as of March 31, 2009, principally through the Rights Offering completed on
September 25, 2008.
Rights
Offering
As a
result of a rights offering completed by the Company in September 2008 (“the
Rights Offering”), the Company sold 11,178,459 shares of common stock, to
existing stockholders through the exercise of rights at a subscription price of
$14.00 per share, for an aggregate purchase price of approximately $156.5
million. Steel Partners II, L.P., (“SPII”), the Company’s largest
shareholder, subscribed for 8,630,910 shares of the Company’s common stock, for
an aggregate purchase price of approximately $120.8 million, pursuant to its
basic and applicable oversubscription privileges. After giving effect
to the Rights Offering, SPII owns 75% of the outstanding shares of common stock
of the Company. The Company used the proceeds of the Rights Offering
to (i) redeem preferred stock issued by a wholly-owned subsidiary of the
Company, which was held by SPII, plus accumulated dividends, together totaling
approximately $6.0 million, (ii) repay Company indebtedness to SPII of
approximately $18.9 million, and (iii) repay $117.6 million of indebtedness and
accrued interest of certain wholly-owned subsidiaries of the Company to
SPII. After such payments, $14.0 million remained with the Company as
cash, of which $13.2 million was used to repay additional debt of the Company on
October 29, 2008 pursuant to the amendments to the Company’s credit agreements
of that same date.
WHX Corporation, the parent
company
WHX has
as its sole source of cash flow, distributions from its principal subsidiaries,
H&H and Bairnco, or other discrete transactions. H&H’s credit
facilities effectively do not permit it to transfer any cash or other assets to
WHX with the exception of (i) an unsecured loan for required payments to the WHX
Pension Plan, and (ii) an unsecured loan for other uses in the aggregate
principal amount not to exceed $12.0 million, $7.0 million of which has been
distributed. Of the remaining $5.0 million permitted to be loaned to
WHX, a maximum amount of $2.5 million may be loaned prior to March 31, 2010, and
the remainder may be loaned thereafter. H&H’s credit facilities
are collateralized by substantially all of the assets of H&H and its
subsidiaries. Similarly, Bairnco’s credit facilities and term loan do
not permit it to make any distribution, pay any dividend or transfer any cash or
other assets to WHX other than common stock of Bairnco and up to $0.6 million
annually for services performed by WHX on behalf of Bairnco, under certain
circumstances. Bairnco’s credit facilities are secured by a first
priority lien on all of the assets of Bairnco and of its U.S.
subsidiaries.
WHX’s
ongoing operating cash flow requirements consist of arranging for the funding of
the minimum requirements of the WHX Pension Plan and paying WHX’s administrative
costs. The recent decline of stock prices across a significant
cross-section of the United States stock market has resulted in an unfunded
pension liability of the WHX Pension Plan of $137.5 million as of March 31,
2009. The Company expects to have required minimum contributions for
2009 and 2010 of $1.2 million and $6.0 million, respectively. Such
required future contributions are determined based upon assumptions regarding
such matters as discount rates on future obligations, assumed rates of return on
plan assets and legislative changes. Actual future pension costs and
required funding obligations will be affected by changes in the factors and
assumptions described in the previous sentence, as well as other changes such as
a plan termination.
As of
March 31, 2009, WHX and its subsidiaries that are not restricted by loan
agreements or otherwise from transferring funds to WHX had cash of approximately
$2.4 million and current liabilities of approximately $1.4
million. Management expects that WHX will be able to fund its
operations in the ordinary course over at least the next twelve
months.
Handy & Harman and
Bairnco
Widely-documented
commercial credit market disruptions have resulted in a tightening of credit
markets worldwide. Liquidity in the global credit market has been
severely contracted by these market disruptions, making it costly to obtain new
lines of credit or to refinance existing debt, when debt financing is available
at all. The effects of these disruptions are widespread and difficult
to quantify, and it is impossible to predict when the global credit market will
improve or when the credit contraction will significantly ease. As a
result of the ongoing credit market turmoil, the Company may not be able to
obtain additional debt or equity financing if necessary or
desired. Furthermore, one or more of the financial institutions that
make available the Company’s revolving credit facilities may become unable to
fulfill their funding obligations, which could materially and adversely affect
liquidity.
On March
12, 2009, H&H and its subsidiaries amended each of their Loan and Security
Agreement with Wachovia Bank, National Association (“Wachovia”), as agent (the
“Wachovia Facilities”), and their Loan and Security Agreement with SPII (the
“Term B Loan”) to, among other things, (i) extend the term of the loans for two
years until June 30, 2011, (ii) increase certain interest rates, (iii) reset the
levels of certain financial covenants, (iv) permit the disposition and/or
cessation of operations of certain of H&H’s direct and indirect subsidiaries
(v) provide for an increase in the aggregate amount of unsecured loans,
distributions or other advances from H&H to WHX for general business
purposes from up to $7.0 million to up to $12.0 million, subject to a maximum
additional amount of $2.5 million prior to March 31, 2010, and (vi) provide for
an increase in the existing limited guaranty by H&H from up to $7.0 million
to up to $12.0 million. In addition, the Wachovia Facilities were
also amended to, among other things, reduce the amount of the credit facility
from $125.3 million to $115.0 million including decreasing the revolving credit
facility from $83.0 million to $75.0 million.
On May 8,
2009, H&H and its subsidiaries further amended the Wachovia Facilities to
provide for, among other things, additional term loans to the borrowers
thereunder in the aggregate principal amount of approximately $5.3 million,
which were consolidated with the existing term loans under the Wachovia
Facilities for a combined aggregate principal amount of $15.0 million, and
additional guaranties by certain subsidiary trusts. Pursuant to this
amendment: (a) a portion of the obligations under the tranche B term loan under
the Wachovia Facilities was prepaid in an amount equal to $5.0 million; and (b)
the remaining available proceeds of the term loans are to be used for operating
and working capital purposes. The Term B Loan was also amended on May 8,
2009 to provide for additional guaranties by certain subsidiary
trusts.
On March
12, 2009, Bairnco and certain of its subsidiaries amended their Credit Agreement
with Ableco Finance LLC (“Ableco”), as administrative agent thereunder (the
“Ableco Facility”), and their Credit Agreement with Wells Fargo Foothill, Inc.
(“Wells Fargo”), as arranger and administrative agent thereunder (the “Wells
Fargo Facility”), to, among other things, (i) increase the interest rates and
(ii) reset the levels of certain financial covenants. The Ableco
Facility was also amended to provide for, among other things, an increase in the
existing limited guaranty by H&H from up to $7 million to up to $12 million,
secured by a second lien on all of the assets of H&H pursuant to the terms
and conditions of the H&H Security Agreement and the H&H
Guaranty. The Subordinated Debt Credit Agreement with SPII was also
amended to, among other things, increase the interest rates.
The
ability of both H&H and Bairnco to draw on their respective revolving lines
of credit is limited by a borrowing base of accounts receivable and
inventory. As of March 31, 2009, H&H’s availability under its
credit facilities was $17.0 million, and Bairnco’s availability under its credit
facilities was $5.6 million. However, there can be no assurances that
they will continue to have access to all or any of the credit lines if their
operating and financial performance do not satisfy relevant borrowing base
criteria and financial covenants within the financing agreements. If
either H&H or Bairnco do not satisfy borrowing base criteria or financial
covenants, and if they are unable to secure necessary waivers or other
amendments from the lender, they will not have access to their credit
facilities, which could adversely affect the Company’s liquidity.
Shelf
Registration
Statement
On April 24, 2009, the
Company filed a shelf registration statement on Form S-3 with the SEC. If and
when the shelf registration statement is declared effective by the SEC, the
Company may from time to time issue up to $10 million of its common stock,
preferred stock, debt securities, warrants to purchase common stock, preferred
stock, or debt securities, or any combination of the above, separately or as
units. The terms of any offerings under the shelf registration statement will be
determined at the time of any offering. The Company does not presently have any
definitive plans or current commitments to sell securities that may be
registered under the shelf registration statement. The Company believes that,
once effective, the shelf registration statement will provide the Company with
the flexibility to quickly raise capital in the market as conditions become
favorable with a minimum of administrative preparation and expense. The net
proceeds of any such issuances under the shelf registration statement are
expected to be used for general corporate purposes, which may include working
capital and/or capital expenditures
.
The
Company
We do not
anticipate that the Company will have any additional sources of cash flow other
than (i) as described above, (ii) from operations, (iii) from the sale of assets
and/or businesses, and (iv) from other discrete transactions.
Management
believes that the Company has the ability to meet its capital requirements on a
continuing basis for at least the next twelve months. However, the ability of
the Company to meet its cash requirements for at least the next twelve months is
dependent, in part, on the Company’s continuing ability to meet its business
plans. The Company continues to examine all of its options and strategies,
including acquisitions, divestitures, and other corporate transactions, to
increase cash flow and stockholder value. If the Company’s planned cash flow
projections are not met, management could consider the additional reduction of
certain discretionary expenses and sale of certain assets. See Note
12.
Management
is utilizing the following strategies to enhance liquidity: (1) continuing to
implement improvements throughout all of the Company’s operations to enhance
systems and processes to increase operating efficiencies at Company facilities,
(2) supporting profitable sales growth both internally and through acquisition,
(3) evaluating strategic alternatives with respect to all lines of business
and/or assets and (4) seeking financing alternatives that may lower its cost of
capital and/or enhance current cash flow.
However,
if the Company’s cash needs are greater than anticipated or the Company does not
materially satisfy its business plan, the Company may be required to seek
additional or alternative financing sources. There can be no
assurance that such financing will be available or available on terms acceptable
to the Company. There can be no assurance that the funds available from
operations and under the Company’s credit facilities will be sufficient to fund
its debt service costs, working capital demands, pension plan contributions, and
environmental remediation costs. The Company’s inability to generate
sufficient cash flows from its operations or through financing could impair its
liquidity, and would likely have a material adverse effect on its businesses,
financial condition and results of operations, and could raise substantial doubt
that the Company will be able to continue to operate.
Note 3 - Basis of
Presentation
The
condensed consolidated balance sheet as of December 31, 2008, which has been
derived from audited financial statements, and the unaudited condensed
consolidated financial statements included herein have been prepared by the
Company in accordance with the rules and regulations of the Securities and
Exchange Commission (“SEC”). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted in accordance with
those rules and regulations, although the Company believes that the disclosures
made are adequate to make the information not misleading. This
quarterly report on Form 10-Q should be read in conjunction with the Company's
audited consolidated financial statements contained in Form 10-K for the year
ended December 31, 2008. Certain amounts for the prior year have been
reclassified to conform to the current year presentation.
In the
opinion of management, the interim financial statements reflect all normal and
recurring adjustments necessary to present fairly the consolidated financial
position and the results of operations and changes in cash flows for the interim
periods. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates. The results of operations for the three months ended March
31, 2009 are not necessarily indicative of the operating results for the full
year.
On
November 24, 2008, the Company consummated a 1-for-10 reverse stock split of its
outstanding common stock (the “Reverse Stock Split”). Pursuant to the
Reverse Stock Split, every ten (10) shares of common stock issued and
outstanding at the time the split was effected were changed and reclassified
into one (1) share of common stock immediately following the Reverse Stock
Split. To enhance comparability, unless otherwise noted, all
references herein to the Company’s common stock and per share amounts have been
adjusted on a retroactive basis as if the Reverse Stock Split had occurred on
January 1, 2008.
Note 4 – Recently Issued
Accounting Pronouncements
In
December 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position FAS 132R-1, “Employer’s Disclosures about Postretirement Benefit
Plan Assets” (“FSP FAS 132R-1”). The FSP amends FASB Statement No. 132 (Revised
2003) “Employers’ Disclosures about Pensions and Other Postretirement Benefits”
(“SFAS No. 132R”), to provide guidance on an employer’s disclosures about plan
assets of a defined benefit pension or other postretirement plan. FSP
FAS 132R-1 will become effective for financial statements issued for fiscal
years and interim periods ending after December 15, 2009. FSP FAS
132R-1 changes the disclosure requirements for benefit plan assets, but does not
change the accounting for such assets or plans, and therefore, the Company
believes that the adoption of FSP FAS 132R-1 will not have an effect on its
consolidated financial position and results of operations.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No.
161”). This Statement changes the disclosure requirements for
derivative instruments and hedging activities, but does not change the
accounting for such instruments, and therefore, the adoption of SFAS No. 161 did
not have an effect on the Company’s consolidated financial position and results
of operations. SFAS No. 161 became effective in the current
quarter. See Note 8.
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, “Fair Value Measurements” (“SFAS No. 157”) which defines fair value,
establishes a framework for measuring fair value in accordance with accounting
principles generally accepted in the United States, and expands disclosures
about fair value measurements. This statement does not require any
new fair value measurements; rather, it applies under other accounting
pronouncements that require or permit fair value measurements. On
January 1, 2009, the Company adopted SFAS No. 157 for all non-financial assets
and liabilities measured at fair value on a non-recurring basis in accordance
with FASB Staff Position FAS 157-2, “Effective Date of FAS 157” ("FSP FAS
157-2"), which postponed the effective date of SFAS No. 157 for those assets and
liabilities to fiscal years beginning after November 15, 2008, which for the
Company is January 1, 2009. The application of SFAS No. 157 did not have an
impact on the Company's financial position or results of operations. The
Company's non-financial assets measured at fair value on a non-recurring basis
include goodwill and intangible assets. In a business combination, the
non-financial assets and liabilities of the acquired company would be measured
at fair value in accordance with SFAS No. 157. The requirements of SFAS No. 157
include using an exit price based on an orderly transaction between market
participants at the measurement date assuming the highest and best use of the
asset by market participants. The Company would use a market, income or cost
approach valuation technique to perform the valuations. Since the Company
performs its annual impairment analyses of goodwill and indefinite-lived
intangible assets in the fourth quarter of each year and since no impairment
trigger event or business combination occurred during the first quarter of 2009,
the application of SFAS No. 157 for all non-financial assets and liabilities
measured at fair value on a non-recurring basis did not have an impact on the
Company's consolidated financial position or results of
operations. See Note 13.
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No.
160”). SFAS No. 160 amends Accounting Research Bulletin No. 51 to
establish accounting and reporting standards for the noncontrolling interest in
a subsidiary and for the deconsolidation of a subsidiary. SFAS No.
160 became effective for fiscal years beginning after December 15,
2008. The Company adopted SFAS 160 in the current quarter, and its
adoption did not have a significant effect on the Company’s consolidated
financial position and results of operations.
In
December 2007, the FASB also issued Statement of Financial Accounting Standards
No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R
requires an entity to recognize assets acquired, liabilities assumed,
contractual contingencies and contingent consideration at their fair value on
the acquisition date. SFAS No. 141R also requires that (1) acquisition-related
costs be expensed as incurred; (2) restructuring costs generally be recognized
as a post-acquisition expense; and (3) changes in deferred tax asset valuation
allowances and income tax uncertainties after the measurement period impact
income tax expense. The Company adopted SFAS No. 141R in the current quarter and
its adoption did not have a significant effect on the Company’s consolidated
financial position and results of operations.
Note 5 - Net Loss Per
Share
The
computation of basic loss per common share is calculated by dividing the net
loss by the weighted average number of shares of Common Stock outstanding, as
follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands, except per share)
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(11,368
|
)
|
|
$
|
(6,212
|
)
|
Weighted
average number of common shares outstanding
|
|
|
12,179
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share
|
|
$
|
(0.93
|
)
|
|
$
|
(6.21
|
)
|
Diluted
earnings per share gives effect to dilutive potential common shares outstanding
during the period. The Company had potentially dilutive common share
equivalents including warrants and stock options and other stock-based incentive
compensation arrangements during the quarters ended March 31, 2009 and
2008. However, no common share equivalents were dilutive in either
period presented because the Company reported a net loss and
therefore, any outstanding warrants and stock options would have had an
anti-dilutive effect. As of February 28, 2008, all of the Company’s
outstanding warrants expired. As of March 31, 2009, stock options for
an aggregate of 64,400 shares are excluded from the calculation of net loss per
share.
The large
difference in the number of shares outstanding is due to the additional shares
issued in the Rights Offering in September 2008. See Note 6.
Note 6 – Stockholders’
(Deficit) Equity
Rights
Offering
On
September 25, 2008, the Company completed the Rights Offering to its existing
stockholders. The Company sold 11,178,459 shares of common stock to
existing stockholders through the exercise of rights at a subscription price of
$14.00 per share, for an aggregate purchase price of approximately $156.5
million. SPII subscribed for 8,630,910 shares of the Company’s common
stock, for an aggregate purchase price of approximately $120.8 million, pursuant
to its basic and applicable oversubscription privileges. After giving
effect to the Rights Offering, SPII owns 75% of the outstanding shares of common
stock of the Company. The Company used the proceeds of the Rights
Offering to (i) redeem preferred stock issued by a wholly-owned subsidiary of
the Company, which was held by SPII, plus accumulated dividends, together
totaling $6.0 million, (ii) repay Company indebtedness to SPII of $18.9 million,
and (iii) repay $117.6 million of indebtedness and accrued interest of certain
wholly-owned subsidiaries of the Company to SPII. After such
payments, $14.0 million remained with the Company as cash, of which $13.2
million was used to repay additional debt of the Company on October 29,
2008.
Comprehensive
Income (Loss)
Comprehensive
loss for the three months ended March 31, 2009 and 2008 was comprised
of:
(in
thousands)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(11,368
|
)
|
|
$
|
(6,212
|
)
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(531
|
)
|
|
|
680
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$
|
(11,899
|
)
|
|
$
|
(5,532
|
)
|
Accumulated
Other Comprehensive Loss
Accumulated
other comprehensive loss balances as of March 31, 2009 and December 31, 2008
were comprised of:
(in
thousands)
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
actuarial losses and prior service costs
and
credits
|
|
$
|
(165,851
|
)
|
|
$
|
(165,851
|
)
|
Foreign
currency translation adjustment
|
|
|
1,982
|
|
|
|
2,513
|
|
Valuation
of marketable equity securities
|
|
|
(164
|
)
|
|
|
(164
|
)
|
|
|
$
|
(164,033
|
)
|
|
$
|
(163,502
|
)
|
Note 7 –
Inventories
Inventories
at March 31, 2009 and December 31, 2008 were comprised of:
(in
thousands)
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Finished
products
|
|
$
|
34,028
|
|
|
$
|
35,780
|
|
In
- process
|
|
|
14,691
|
|
|
|
13,426
|
|
Raw
materials
|
|
|
27,288
|
|
|
|
24,940
|
|
Fine
and fabricated precious metal in various stages of
completion
|
|
|
2,309
|
|
|
|
2,247
|
|
|
|
|
78,316
|
|
|
|
76,393
|
|
LIFO
reserve
|
|
|
(1,139
|
)
|
|
|
(1,123
|
)
|
|
|
$
|
77,177
|
|
|
$
|
75,270
|
|
In order
to produce certain of its products, H&H purchases, maintains and utilizes
precious metal inventory. H&H records its precious metal
inventory at last-in, first-out (“LIFO”) cost, subject to lower of cost or
market with any adjustments recorded through cost of goods sold. The
market value of the precious metal inventory exceeded LIFO cost by $1.1 million
as of both March 31, 2009 and December 31, 2008, respectively.
Certain
customers and suppliers of H&H choose to do business on a “toll” basis, and
furnish precious metal to H&H for return in fabricated form (customer metal)
or for purchase from or return to the supplier. When the customer metal is
returned in fabricated form, the customer is charged a fabrication charge. The
value of this customer metal is not included in the Company’s balance
sheet. As of March 31, 2009, H&H’s customer metal consisted of
731,717 ounces of silver, 1,461 ounces of gold, and 1,391 ounces of
palladium. As of December 31, 2008, the Company had a liability of
$1.1 million recorded with respect to its liability for customer metal subject
to pool account agreements, and none as of March 31, 2009.
Supplemental
inventory information:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands, except per ounce)
|
|
|
|
|
|
|
|
|
Precious
metals stated at LIFO cost
|
|
$
|
1,169
|
|
|
$
|
1,124
|
|
|
|
|
|
|
|
|
|
|
Market
value per ounce:
|
|
|
|
|
|
|
|
|
Silver
|
|
$
|
12.77
|
|
|
$
|
11.30
|
|
Gold
|
|
$
|
895.74
|
|
|
$
|
883.00
|
|
Palladium
|
|
$
|
221.00
|
|
|
$
|
185.00
|
|
Note 8 – Derivative
Instruments
H&H
enters into commodity futures and forwards contracts on precious metal that are
subject to market fluctuations in order to economically hedge its precious metal
inventory against price fluctuations. As of March 31, 2009, the
Company had entered into forward and future contracts for gold with a total
value of $2.3 million and for silver with a total value of $1.0
million.
The
Company also economically hedges its exposure on variable interest rate debt
denominated in foreign currencies at certain of its foreign
subsidiaries.
As these
derivatives are not designated as accounting hedges under Statement of Financial
Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS No. 133”), they are accounted for as derivatives with no
hedge designation. The derivatives are marked to market and both
realized and unrealized gains and losses are recorded in current period earnings
in the Company's consolidated statement of operations. Such gains and
losses are recorded on a separate line of the statement of operations in the
case of the precious metal contracts and in interest expense with
respect to the interest rate derivative. The Company’s hedging strategy is
designed to protect it against normal volatility. However, abnormal
price increases in these commodity or foreign exchange markets could negatively
impact H&H’s costs. The three month periods ended March 31, 2009
and 2008 include a net gain of $0.2 million and a loss of $1.7 million,
respectively, on derivative instruments.
As of
March 31, 2009, the Company had the following outstanding forward or future
contracts with settlement dates ranging from April 2009 to June
2009.
Commodity
|
|
Amount
|
|
|
|
|
Silver
|
|
75,000
|
ounces
|
Gold
|
|
2,500
|
ounces
|
SFAS No.
133 requires companies to recognize all derivative instruments as either assets
or liabilities at fair value in the statement of financial
position.
Fair
Value of Derivative Instruments in the Condensed Consolidated Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
(in
thousands)
|
Balance
Sheet Location
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Commodity
contracts
|
Other
current assets/(Accrued liabilities)
|
|
$
|
(33
|
)
|
|
$
|
355
|
|
Interest
rate swap
|
Accrued
liabilities
|
|
|
(241
|
)
|
|
|
(199
|
)
|
Total
derivatives not designated as hedging instruments
|
|
|
(274
|
)
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives
|
|
|
$
|
(274
|
)
|
|
$
|
156
|
|
Effect
of Derivative Instruments on the Condensed Consolidated Statements of
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Statement of
Operations Line
|
|
Gain
(Loss)
|
|
|
|
|
|
|
|
|
|
Commodity
contracts
|
Realized
and Unrealized Gain (loss) on Derivatives
|
|
$
|
281
|
|
|
$
|
(1,627
|
)
|
Interest
rate swap
|
Interest
expense
|
|
|
(92
|
)
|
|
|
(87
|
)
|
Total
derivatives not designated as hedging instruments
|
|
$
|
189
|
|
|
$
|
(1,714
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives
|
|
|
$
|
189
|
|
|
$
|
(1,714
|
)
|
Note 9 – Pensions, Other
Postretirement and Post-Employment Benefits
The
following table presents the components of net periodic pension cost (credit)
for the Company’s pension plans for the three month periods ended March 31, 2009
and 2008.
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Service
cost
|
|
$
|
80
|
|
|
$
|
87
|
|
Interest
cost
|
|
|
6,418
|
|
|
|
6,203
|
|
Expected
return on plan assets
|
|
|
(6,265
|
)
|
|
|
(8,336
|
)
|
Amortization
of prior service cost
|
|
|
15
|
|
|
|
23
|
|
Amortization
of actuarial loss
|
|
|
3,210
|
|
|
|
-
|
|
|
|
$
|
3,458
|
|
|
$
|
(2,023
|
)
|
The
actuarial loss occurred principally because investment returns on the assets of
the WHX Pension Plan during 2008 were significantly less than the assumed return
of 8.5%. The 2008 column includes the pension credit of the Bairnco
qualified pension plans, substantially all of which were merged into the WHX
Pension Plan as of December 31, 2008.
In
addition to its pension plans which are included in the table above, the Company
also maintains several other postretirement benefit plans covering certain of
its employees. The approximate aggregate expense for these plans was
$0.1 million for both of the three month periods ended March 31, 2009 and 2008,
respectively.
Note 10 –
Debt
Long-term
debt consisted of the following:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
Debt to Non Related Party:
|
|
|
|
|
|
|
H&H
Wachovia Facility term loans
|
|
$
|
49,997
|
|
|
$
|
54,670
|
|
Other
H&H debt-domestic
|
|
|
6,544
|
|
|
|
6,580
|
|
Other
H&H debt-foreign
|
|
|
4,381
|
|
|
|
4,661
|
|
Bairnco
Wells Fargo Facility term loan
|
|
|
5,534
|
|
|
|
6,466
|
|
Bairnco
Ableco Facility term loan
|
|
|
45,000
|
|
|
|
45,000
|
|
Bairnco
foreign loan facilities
|
|
|
4,778
|
|
|
|
4,753
|
|
|
|
|
|
|
|
|
|
|
Total
debt to non related party
|
|
|
116,234
|
|
|
|
122,130
|
|
Less
portion due within one year
|
|
|
11,343
|
|
|
|
12,956
|
|
Long-term
debt to non related party
|
|
|
104,891
|
|
|
|
109,174
|
|
|
|
|
|
|
|
|
|
|
Long-term
Debt to Related Party:
|
|
|
|
|
|
|
|
|
H&H
Term B Loan
|
|
|
44,098
|
|
|
|
44,098
|
|
Bairnco
Subordinated Debt Credit Agreement
|
|
|
10,000
|
|
|
|
10,000
|
|
Long-term
debt to related party
|
|
|
54,098
|
|
|
|
54,098
|
|
Total
long-term debt
|
|
$
|
158,989
|
|
|
$
|
163,272
|
|
In
addition to the Term B Loan with SPII, interest due to SPII under the Term B
Loan is not required to be paid in cash until the Wachovia Facilities have been
repaid and thus, such accrued interest has been classified as a long-term
liability in the consolidated balance sheets as of March 31, 2009 and December
31, 2008. The interest accrued to SPII is subject to the same
collateral as the Term B Loan.
On March
12, 2009, H&H and certain of its subsidiaries amended each of the Wachovia
Facilities and the Term B Loan to, among other things, (i) extend the term of
the loans for two years until June 30, 2011, (ii) increase certain interest
rates, (iii) reset the levels of certain financial covenants, (iv) permit the
disposition and/or cessation of operations of certain of H&H’s direct and
indirect subsidiaries (v) provide for an increase in the aggregate amount of
unsecured loans, distributions or other advances from H&H to WHX for general
business purposes from up to $7.0 million to up to $12.0 million, subject to a
maximum additional amount of $2.5 million prior to March 31, 2010, and (vi)
provide for an increase in the existing limited guaranty by H&H from up to
$7.0 million to up to $12.0 million. In addition, the Wachovia
Facilities were also amended to, among other things, reduce the amount of the
credit facility from $125.3 million to $115.0 million including decreasing the
revolving credit facility from $83.0 million to $75.0 million.
On May 8,
2009, H&H and its subsidiaries further amended the Wachovia Facilities to
provide for, among other things, additional term loans to the borrowers
thereunder in the aggregate principal amount of approximately $5.3 million,
which were consolidated with the existing term loans under the Wachovia
Facilities for a combined aggregate principal amount of $15.0 million, and
additional guaranties by certain subsidiary trusts. Pursuant to this
amendment: (a) a portion of the obligations under the tranche B term loan under
the Wachovia Facilities was prepaid in an amount equal to $5.0 million; and (b)
the remaining available proceeds of the term loans are to be used for operating
and working capital purposes. The Term B Loan was also amended
on May 8, 2009 to provide for additional guaranties by certain subsidiary
trusts.
On March
12, 2009, Bairnco and certain of its subsidiaries amended the Wells Fargo
Facility and the Ableco Facility to, among other things, (i) increase the
interest rates and (ii) reset the levels of certain financial
covenants. The Ableco Facility was also amended to provide for, among
other things, an increase in the existing limited guaranty by H&H from up to
$7 million to up to $12 million, secured by a second lien on all of the assets
of H&H pursuant to the terms and conditions of the H&H Security
Agreement and the H&H Guaranty. The Subordinated Debt Credit
Agreement with SPII was also amended to, among other things, increase the
interest rates.
Note 11 - Income
Taxes
For the
three month period ended March 31, 2009, a tax benefit of $0.2 million was
recorded, principally for state taxes. For the three months ended
March 31, 2008, a tax provision of $0.8 million was recorded, principally for
state and foreign income taxes. The Company has not recorded any
federal income tax benefit in either period due to the uncertainty of realizing
the benefit of the Company’s net operating loss carryforwards (“NOLs”) in the
future. The Company has recorded a deferred tax valuation allowance
to the extent that it believes that it is more likely than not that the benefits
of its deferred tax assets, including those relating to its NOLs, will not be
realized in future periods. The tax benefit for the three months ended March 31,
2009 reflects a favorable impact of $0.5 million. This favorable
adjustment resulted from a change in the state effective tax rate at which the
deferred state income taxes of certain subsidiaries are estimated to be
realized.
Note 12 -
Restructurings
In 2008,
management decided to exit the welded specialty tubing market in Europe and
close its Indiana Tube Denmark (“ITD”) subsidiary, sell ITD’s assets,
pay off ITD’s related debt and repatriate cash remaining post-closing. The
decision to exit this market was made after evaluating current economic
conditions and competition from lower cost manufacturers. In conjunction with
the decision to close ITD, the Company reviewed the recoverability of its
long-lived assets in accordance with Statement of Financial Accounting Standards
No. 144, “Accounting for Impairment or Disposal of Long-Lived
Assets.” A review of future cash flows, based on the expected closing
date, indicated that cash flows would be insufficient to support the carrying
value of certain machinery and equipment at ITD. As a result of the
Company’s review, an impairment loss of $0.5 million was recognized in 2008 to
write down the individual components of long-lived assets to estimated fair
value.
In 2008,
the Company evaluated the long-lived assets of its Sumco subsidiary in light of
ongoing operating losses. Sumco sells electroplating services
primarily to the automotive market and is included in the Precious Metal
reporting segment. It represented 17.5% of such segment’s sales in
2008. Sumco has had declining cash flows in 2008 and projected
negative cash flows for 2009, principally caused by the decline in U.S. economic
activity and Sumco’s reliance on the automotive market for over 90% of its
sales. A review of future cash flows indicated that such cash flows
would be insufficient to support the carrying value of certain of Sumco’s
long-lived assets. As a result of the Company’s evaluation, an
impairment loss of $7.8 million was recognized in 2008 to write down the
individual components of long-lived assets to the lower of their carrying value
or estimated fair value.
On March
12, 2009, Sumco issued a Worker Adjustment and Retraining Notice (WARN) to all
appropriate recipients including governmental officials and Sumco employees
relating to the proposed sale or closure of Sumco. The Board of Directors of
Sumco is exploring strategic options for the Sumco business.
Restructuring
costs of $0.5 million were recorded in the first quarter of 2009 relating to the
consolidation of the former Bairnco Corporate office into the WHX Corporate
office. The Bairnco corporate office restructuring activities are expected to be
completed by the third quarter of 2009. The restructuring costs and
activity in the restructuring reserve for the three months ended March 31, 2009
consisted of:
|
|
Reserve
Balance
|
|
|
Expense
|
|
|
Payments
|
|
|
Reserve
Balance
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
March
31, 2009
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
benefits
|
|
$
|
-
|
|
|
$
|
395
|
|
|
$
|
(95
|
)
|
|
$
|
300
|
|
Rent
expense
|
|
|
-
|
|
|
|
101
|
|
|
|
-
|
|
|
|
101
|
|
Other
facility closure costs
|
|
|
-
|
|
|
|
37
|
|
|
|
(3
|
)
|
|
|
34
|
|
|
|
$
|
-
|
|
|
$
|
533
|
|
|
$
|
(98
|
)
|
|
$
|
435
|
|
In
April, 2009, the Company announced the closure of a facility in New Hampshire
which is part of the Precious Metal segment and the relocation of the functions
to existing facilities in Milwaukee and in China.
Note 13 – Fair Value
Measurements
The
Company adopted Statement of Financial Accounting Standards No. 157, “Fair Value
Measurements” (“FAS 157”), effective January 1, 2009. Under this
standard, fair value is defined as the price that would be received to sell an
asset or paid to transfer a liability (
i.e.,
the “exit
price”) in an orderly transaction between market participants at the measurement
date.
The
Company's non-financial assets measured at fair value on a non-recurring basis
include goodwill and intangible assets, and would include any assets and
liabilities acquired in a business combination or any long-lived assets written
down to fair value.
In
determining fair value, the Company uses various valuation
approaches. The hierarchy of those valuation approaches is broken
down into three levels based on the reliability of inputs as
follows:
Level 1
inputs are quoted prices in active markets for identical assets or liabilities
that the reporting entity has the ability to access at the measurement
date. An active market for the asset or liability is a market in
which transactions for the asset or liability occur with sufficient frequency
and volume to provide pricing information on an ongoing basis. The
valuation under this approach does not entail a significant degree of
judgment.
Level 2
inputs are inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or
indirectly. Level 2 inputs include: quoted prices for similar assets
or liabilities in active markets, inputs other than quoted prices that are
observable for the asset or liability, (
e.g.,
interest
rates and yield curves observable at commonly quoted intervals or current
market) and contractual prices for the underlying financial instrument, as well
as other relevant economic measures.
Level 3
inputs are unobservable inputs for the asset or
liability. Unobservable inputs shall be used to measure fair value to
the extent that observable inputs are not available, thereby allowing for
situations in which there is little, if any, market activity for the asset or
liability at the measurement date.
Note 14 – Reportable
Segments
The
Company principally operates in North America, and has six reportable
segments
:
H&H’s Precious Metal
Segment
H&H’s
Precious Metal activities include the fabrication of precious metal and their
alloys into brazing alloys and the utilization of precious metal in precision
electroplating. H&H’s brazing alloys are used to join most common metals as
well as specialty metals with strong, hermetic joints. H&H offers
a wide variety of these metal joining products, including gold, silver,
palladium, copper, nickel, and aluminum based materials. These
brazing alloys are fabricated into a variety of engineered forms and are used in
many industries including automotive, heating, ventilation and air conditioning
(“HVAC”), general industrial and other metal-joining
industries. H&H is also engaged in precision electroplating
(often using gold, silver, palladium and various base metals) of electronic and
electrical components primarily for use in the automotive
industry. H&H’s profits from precious metal products are
principally derived from the “value added” of processing and fabricating and not
from the purchase and resale of precious metal. In accordance with
general practice, prices to customers are principally a composite of two
factors: (1) the value of the precious metal content of the product and (2) the
“fabrication value,” which includes the cost of base metals, labor, overhead,
financing and profit.
H&H Tubing
Segment
H&H
manufactures a wide variety of steel tubing products. The Stainless
Steel Seamless Tubing Group manufactures small-diameter precision-drawn seamless
tubing both in straight lengths and coils. The Stainless Steel Tubing
Group’s capabilities in long continuous drawing of seamless stainless steel
coils allow this Group to serve the petrochemical infrastructure and
shipbuilding markets. The Stainless Steel Tubing Group also
manufactures products for use in the medical, semiconductor fabrication,
aerospace and defense industries. The Specialty Tubing Group
manufactures welded carbon steel coated and uncoated tubing in straight lengths
and coils with a primary focus on products for the refrigeration, HVAC, and
automotive industries. In addition to producing bulk tubing, the
Specialty Tubing Group also produces value added products for the appliance and
HVAC industries by fabricating tubing into sealed system
components.
H&H Engineered Materials
Segment
The
H&H Engineered Materials Segment supplies products to the construction and
building industries. H&H manufactures fasteners and fastening systems for
the U.S. commercial flat roofing industry. Products are sold to
building and roofing material wholesalers. The products are also private labeled
to roofing system manufacturers. A line of specialty fasteners is produced for
the building products industry for fastening applications in log homes,
landscaping, masonry, and wood decks. H&H also manufactures
plastic and steel fittings and connectors for natural gas and water distribution
service lines along with exothermic welding products for electrical grounding,
cathodic protection, and lightning protection. In addition,
H&H manufactures electro-galvanized and painted cold rolled sheet steel
products primarily for the construction, entry door, container and appliance
industries.
Arlon Electronic Materials
(“EM”) Segment
Arlon
EM’s principal products include high performance materials for the printed
circuit board (“PCB”) industry and silicone rubber-based insulation materials
used in a broad range of industrial, military/aerospace, consumer and commercial
markets.
Arlon EM
supplies high technology materials to the PCB industry. Arlon EM
products are marketed principally to OEMs and PCB manufacturers around the world
by a direct technical sales force in many cases in support of country and area
specific distributors and manufacturer’s representatives. Arlon EM’s
conventional laminates product line includes a wide variety of specialty
polyimide and epoxy laminates and bonding films, as well as other high
performance thermoset laminates. These materials are used in
demanding commercial and military market applications including high density
interconnect, surface mount technology, heat sink bonding, semiconductor
testing, wireless communications and microvia PCBs. The microwave and
radio frequency product area offers fluoropolymers (PTFE), ceramic-filled
fluoropolymers, and other non-PTFE laminates that deliver the electrical
performance needed in frequency-dependent circuit applications such as analog,
digital and personal communication systems, high frequency military electronics,
microwave antennas and cellular base station electronics. These
products are supplied as copper-clad laminates with bonding plies or prepregs
for production of multi-layer printed circuits.
Arlon EM
also manufactures a line of silicone rubber materials used in a broad range of
military, consumer, industrial and commercial products. Typical
applications and products include: silicone bagging materials for producing
composite parts; silicone insulating tapes for electric traction motor coil
windings; insulation materials for industrial and commercial flexible heaters;
silicone materials for high temperature hose and duct markets; insulating tape
for medium and high voltage electrical splices and self-fusing tapes for a
variety of industrial and commercial applications; as well as compliant,
thermally or electrically conductive silicone film adhesives known as
Thermabond™ for heat sink-bonding to printed circuit boards.
Arlon Coated Materials
(“CM”) Segment
Arlon
CM’s principal products include adhesive coated cast and calendared vinyl films,
cast vinyl fabric, custom-engineered laminates, and coated and laminated films,
foils, foams and papers used in a broad range of industrial, consumer and
commercial products.
Arlon CM
specialty graphic films are marketed under the Arlon and Calon® brand names and
include cast and calendared vinyl films that are manufactured in a wide variety
of colors, face stocks and adhesive systems. These vinyl films are
used in commercial and electrical signage, point of purchase displays, highway
signage, fleet markings, and other commercial advertising
applications. Arlon CM also manufactures laminated vinyl fabrics for
corporate identity programs. These products are marketed under the
ArlonFlex® brand name and complement the Calon® specialty graphic
films.
Arlon CM
also manufactures and markets custom-engineered laminates and coated
products. Typical applications include insulating foam tapes for
thermopane windows, electrical insulation materials for motors and transformers,
thermal insulation panels for appliances and cars, durable printing stock,
coated foil tapes and transfer adhesives used in industrial assembly, and single
and double-coated foam and film tapes and other custom engineered laminates for
specific industrial applications.
Kasco Replacement Products
and Services Segment
Kasco
Replacement Products and Services (“Kasco”) is a provider of meat-room products
and maintenance services for the meat and deli departments of supermarkets; for
restaurants; for meat and fish processing plants; and for distributors of
electrical saws and cutting equipment throughout North America, Europe, Asia and
South America. These products and services include band saw blades
for cutting meat and fish, band saw blades for cutting wood and metal, grinder
plates and knives for grinding meat, repair and maintenance services for food
equipment in retail grocery and restaurant operations, electrical saws and
cutting machines, seasoning products, and other related butcher supply
products.
Kasco’s
products and services are sold under a number of brand names including Kasco
Corporation and Atlanta Sharptech in the United States and Canada, Atlantic
Service Co. in the United Kingdom and Canada, Bertram & Graf in Germany, and
Biro France and EuroKasco in France.
Management
has determined that certain operating companies should be aggregated and
presented within a single reporting segment on the basis that such operating
segments have similar economic characteristics and share other qualitative
characteristics. Management reviews sales, gross profit and operating income to
evaluate segment performance. Operating income for the reportable segments
includes the costs of shared corporate headquarters functions such as finance,
auditing, treasury, legal, benefits administration and certain executive
functions, but excludes other unallocated general corporate expenses. Other
income and expense, interest expense, and income taxes are not presented by
segment since they are excluded from the measure of segment profitability
reviewed by the Company’s management.
The
following table presents information about reportable segments for the three
month periods ended March 31, 2009 and 2008.
Statement
of operations data:
|
|
Three
Months Ended
|
|
(in
thousands)
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
Sales:
|
|
|
|
|
|
|
Precious
Metal
|
|
$
|
24,350
|
|
|
$
|
45,688
|
|
Tubing
|
|
|
21,150
|
|
|
|
29,626
|
|
Engineered
Materials
|
|
|
42,096
|
|
|
|
51,009
|
|
Arlon
Electronic Materials
|
|
|
17,031
|
|
|
|
16,404
|
|
Arlon
Coated Materials
|
|
|
12,340
|
|
|
|
17,675
|
|
Kasco
|
|
|
15,712
|
|
|
|
16,875
|
|
Total
net sales
|
|
$
|
132,679
|
|
|
$
|
177,277
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss) before corporate allocations:
|
|
|
|
|
|
|
|
|
Precious
Metal
|
|
|
(442
|
)
|
|
|
3,685
|
|
Tubing
|
|
|
131
|
|
|
|
2,480
|
|
Engineered
Materials
|
|
|
793
|
|
|
|
2,388
|
|
Arlon
Electronic Materials
|
|
|
1,748
|
|
|
|
1,619
|
|
Arlon
Coated Materials (a)
|
|
|
(1,068
|
)
|
|
|
(609
|
)
|
Kasco
|
|
|
920
|
|
|
|
1,309
|
|
Total
|
|
|
2,082
|
|
|
|
10,872
|
|
|
|
|
|
|
|
|
|
|
Corporate
expenses allocation:
|
|
|
|
|
|
|
|
|
Precious
Metal
|
|
|
1,005
|
|
|
|
1,288
|
|
Tubing
|
|
|
943
|
|
|
|
1,207
|
|
Engineered
Materials
|
|
|
879
|
|
|
|
1,124
|
|
Arlon
Electronic Materials
|
|
|
397
|
|
|
|
463
|
|
Arlon
Coated Materials
|
|
|
287
|
|
|
|
499
|
|
Kasco
|
|
|
366
|
|
|
|
476
|
|
Total
|
|
|
3,877
|
|
|
|
5,057
|
|
|
|
|
|
|
|
|
|
|
Segment
operating income (loss):
|
|
|
|
|
|
|
|
|
Precious
Metal
|
|
|
(1,447
|
)
|
|
|
2,397
|
|
Tubing
|
|
|
(812
|
)
|
|
|
1,273
|
|
Engineered
Materials
|
|
|
(86
|
)
|
|
|
1,264
|
|
Arlon
Electronic Materials
|
|
|
1,351
|
|
|
|
1,156
|
|
Arlon
Coated Materials (a)
|
|
|
(1,355
|
)
|
|
|
(1,108
|
)
|
Kasco
|
|
|
554
|
|
|
|
833
|
|
Segment
operating income (loss)
|
|
|
(1,795
|
)
|
|
|
5,815
|
|
Unallocated
corporate expenses & non operating units
|
|
|
1,049
|
|
|
|
1,091
|
|
Unallocated
pension expense (credit)
|
|
|
3,458
|
|
|
|
(1,800
|
)
|
Restructuring
costs
|
|
|
533
|
|
|
|
-
|
|
Gain
on disposal of assets
|
|
|
(4
|
)
|
|
|
(22
|
)
|
Income
(loss) from operations
|
|
|
(6,831
|
)
|
|
|
6,546
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
5,224
|
|
|
|
10,371
|
|
Realized
and unrealized (gain) loss on derivatives
|
|
|
(281
|
)
|
|
|
1,627
|
|
Other
income
|
|
|
(161
|
)
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
Loss
before taxes
|
|
$
|
(11,613
|
)
|
|
$
|
(5,401
|
)
|
(a) The
operating loss of the Arlon CM segment in 2008 included $0.6 million of move
costs to consolidate two plants in San Antonio, Texas into one. In
addition to the direct move costs, the results of the quarter were negatively
impacted by a plant shutdown and related operating inefficiencies during the
move.
Note 15 -
Contingencies
Legal Matters
:
Paul E. Dixon & Dennis
C. Kelly V. Handy & Harman
Paul
Dixon and Dennis Kelly, two former officers of H&H (the “Claimants”) filed a
Statement of Claim with the American Arbitration Association (the “Arbitration”)
on or about January 3, 2006. The Claimants were employees of H&H
until September 2005 when their employment was terminated by
H&H. Their claims included seeking payments allegedly due under
employment contracts and allegedly arising from their terminations, and seeking
recovery of benefits under what they allege was the H&H Supplemental
Executive Retirement Plan.
In the
Arbitration, Claimants sought an award in excess of $4.0 million each, plus
interest, costs and attorneys’ fees. The Claimants also sought
indemnification for certain matters and an injunction against H&H with
regard to life insurance policies. H&H brought a special
proceeding on February 15, 2006 in the Supreme Court of the State of New York,
County of Westchester, for a judgment staying the arbitration of three of the
four claims. On March 10, 2006, all of the parties filed a
stipulation with the court, discontinuing the court proceeding and agreeing
therein, among other things, that all claims asserted by the Claimants in the
Arbitration (which was also discontinued at that time) would be asserted in
Supreme Court, Westchester County.
In April
2006, the Claimants served a request for benefits, severance and other amounts,
similar to those described above, on H&H and various plan administrators and
fiduciaries thereof. The request was reviewed in accordance with the
procedures of the benefit plans at issue and by letter dated September 27, 2006,
claimants were notified that their request was largely denied.
In
January 2008, Mr. Kelly filed a lawsuit against WHX, H&H and various benefit
plans in the United States District Court for the Southern District of New
York. Mr. Dixon did not join in this lawsuit, and his counsel has not
indicated whether Mr. Dixon intends to file his own lawsuit. Mr.
Kelly’s claims in this lawsuit are essentially the same claims that he asserted
in the above-described arbitration and request for benefits. Mr.
Kelly’s complaint seeks approximately $4.0 million in money damages plus
unspecified punitive damages. The defendants are vigorously defending
this lawsuit, and believe that it is without merit. On April 22,
2009, the defendants filed a motion for summary judgment seeking dismissal of
the case. Nevertheless, there can be no assurance that the defendants will be
successful in defending against Mr. Kelly’s claims, or that the defendants will
not have any liability on account of Mr. Kelly’s claims. Such
liability, if any, cannot be reasonably estimated at this time, and accordingly,
there can be no assurance that the resolution of this matter will not be
material to the financial position, results of operations and cash flow of the
Company.
Arista Development LLC V.
Handy & Harman Electronic Materials Corporation (“HHEM”)
In 2004,
a subsidiary of H&H, HHEM, entered into an agreement to sell a
commercial/industrial property in Massachusetts (the “MA
Property”). Disputes between the parties led to suit being brought in
Bristol Superior Court in Massachusetts. The plaintiff alleges that
HHEM is liable for breach of contract relating to HHEM’s alleged breach of the
agreement, unfair and deceptive acts and practices, and certain consequential
and treble damages as a result of HHEM’s termination of the agreement in 2005,
although HHEM subsequently revoked its notice of termination. HHEM
has denied liability and has been vigorously defending the case. The
court entered a preliminary injunction enjoining HHEM from conveying the
property to anyone other than the plaintiff during the pendency of the
case. Discovery on liability and damages has been in abeyance while
the parties are actively engaged in settlement discussions. Since discovery is
not completed, it cannot be known at this time whether it is foreseeable or
probable that plaintiff would prevail in the litigation or whether H&H would
have any liability to the plaintiff.
Electroplating Technologies,
Ltd v. Sumco, Inc.
Electroplating
Technologies, Ltd. (“ETL”) filed a lawsuit against Sumco, a subsidiary of
H&H, in Lehigh, Pennsylvania County Court of Common Pleas. ETL
contends that Sumco misappropriated trade secrets and breached contractual
obligations with respect to certain allegedly proprietary and confidential
information of ETL. ETL is seeking damages in excess of $4.55
million. In its pretrial filings, ETL also asserted a claim for $9.0
million in punitive damages. On May 8, 2009, after a ten day trial,
the jury found that Sumco had not misappropriated ETL’s trade
secrets. However, the jury found that Sumco had breached a
contractual obligation owed to ETL and as compensation for that breach of
contract, awarded ETL the sum of $250,000. Following the jury
verdict, the Court denied ETL’s equitable requests for an injunction and for an
accounting. Sumco is reviewing its options with respect to filing
appropriate post trial motions.
World Properties, Inc. et.
al. v. Arlon, Inc.
In
December 2008, World Properties, Inc. and Rogers Corporation (collectively,
“Rogers”) filed a lawsuit against Arlon, Inc. (“Arlon”), a subsidiary of
Bairnco, in the United States District Court in Hartford, CT. The
lawsuit alleges that Rogers is the exclusive licensee under U.S. Patent No.
5,552,210 (the “210 Patent”) and that Arlon’s TC600 circuit board infringes that
patent. In the complaint, Rogers demanded that Arlon cease the
manufacture, sale and distribution of its TC600 circuit board and that the Court
award unspecified damages to compensate Rogers for the alleged
infringement. Arlon has moved to dismiss the lawsuit, based upon a
covenant not to sue contained in an asset purchase agreement between Rogers and
Arlon, dated January 30, 1996 (the “APA”), that Arlon contends covers the TC600
and the 210 Patent. Arlon has also requested that the Court stay
discovery on Rogers’ patent infringement claim pending resolution of the motion
to dismiss. The Court has agreed to a stay of discovery on the patent
infringement claim, but directed the parties to conduct expedited discovery on
the issue of the applicability of the covenant not to sue in the APA to the
TC600 and the 210 Patent. There can be no assurance that Arlon will be
successful in defending against Rogers’ claims. Arlon’s liability, if
any, cannot be reasonably estimated at this time, and accordingly, there can be
no assurance that the resolution of this matter will not be material to the
financial position, results of operations and cash flow of the
Company.
Environmental
Matters
H&H
has been working cooperatively with the Connecticut Department of Environmental
Protection (“CTDEP”) with respect to its obligations under a consent order
entered into in 1989 that applies to a property in Connecticut that H&H sold
in 2003 (“Sold Parcel”) and an adjacent parcel (“Adjacent Parcel”) that together
with the Sold Parcel comprises the site of a former H&H manufacturing
facility. Remediation of all soil conditions on the Sold Parcel was
completed on April 6, 2007, although H&H performed limited additional work
on that site, solely in furtherance of now concluded settlement discussions
between H&H and the purchaser of the Sold Parcel. Although no
groundwater remediation is required, there will be monitoring of the Sold Parcel
site for several years. On September 11, 2008, the CTDEP advised
H&H that it had approved H&H’s Soil Action Remediation Action Report,
dated December 28, 2007 as amended by an addendum letter dated July 15, 2008,
thereby concluding the active remediation of the Sold Parcel. Approximately
$29.0 million was expended through March 31, 2009, and the remaining remediation
and monitoring costs for the Sold Parcel are expected to approximate $0.3
million. H&H received reimbursement of $2.0 million from an
insurance company under a cost-cap insurance policy and is pursuing its
potential entitlement to additional insurance coverage. H&H also
has been conducting an investigation of the Adjacent Parcel, and is continuing
the process of evaluating various options for its remediation of the Adjacent
Parcel.
H&H
entered into an administrative consent order (the “ACO”) in 1986 with the New
Jersey Department of Environmental Protection (“NJDEP”) with regard to certain
property that it purchased in 1984 in New Jersey. The ACO involves
investigation and remediation activities to be performed with regard to soil and
groundwater contamination. H&H settled a case brought by the
local municipality in regard to this site in 1998 and also settled with certain
of its insurance carriers. H&H is actively remediating the
property and continuing to investigate the most effective methods for achieving
compliance with the ACO. A remedial investigation report was filed
with the NJDEP in December of 2007. By letter dated December 12,
2008, NJDEP issued its approval with respect to additional investigation and
remediation activities discussed in the December 2007 remedial investigation
report. H&H anticipates entering into discussions with NJDEP to
address that agency’s natural resource damage claims, the ultimate scope and
cost of which cannot be estimated at this time. The ongoing cost of
remediation is presently estimated at approximately $1.0
million. Pursuant to a settlement agreement with the former
owner/operator of the site, the responsibility for site investigation and
remediation costs are allocated 75% to the former owner/operator and 25% to
H&H after the first $1.0 million. The $1.0 million was paid
solely by the former owner/operator. As of March 31, 2009, over and
above the $1.0 million, total investigation and remediation costs of $1,052,479
and $351,161 have been expended by the former owner/operator and H&H,
respectively, in accordance with the settlement
agreement. Additionally, H&H is currently being reimbursed
through insurance coverage for a portion of the investigation and remediation
costs for which the Company is responsible. H&H believes that
there is additional excess insurance coverage, which it intends to pursue as
necessary.
H&H
and Bairnco (and/or one or more of their respective subsidiaries) have also been
identified as potentially responsible parties (“PRPs”) under the Comprehensive
Environmental Response, Compensation and Liability Act (“CERCLA”) or similar
state statutes at several sites and are parties to ACOs in connection with
certain other properties. H&H and Bairnco (and/or one or more of
their respective subsidiaries) may be subject to joint and several liabilities
imposed by CERCLA on PRPs. Due to the technical and regulatory
complexity of remedial activities and the difficulties attendant in identifying
PRPs and allocating or determining liability among them, H&H and Bairnco are
unable to reasonably estimate the ultimate cost of compliance with such
laws.
H&H
received a notice letter from the EPA in August 2006 formally naming H&H as
a PRP at a superfund site in Massachusetts (the “Superfund
site”). H&H then voluntarily joined a group of ten (10) other
PRPs (the “PRP Group”) which has since increased to thirteen (13), to work
cooperatively regarding remediation of the Superfund
site. Investigative work is ongoing to determine whether there are
other parties that sent hazardous substances to the Superfund site but that have
not received notice letters or been named as PRPs to date. The PRP
Group submitted its good faith offer to the EPA in late October
2006. The offer was contingent on the PRP Group arriving at an
acceptable allocation amongst themselves. The PRP Group agreed upon
allocations as to percentages of responsibility for investigation and
remediation costs at the Superfund site. There is a “shortfall” in
the overall allocation that is being shared, on a pro rata basis, among all of
the participating PRPs. The EPA has agreed to an orphan share equal
to the past costs incurred through April 1, 2008 and has also agreed to cap all
future EPA response and oversight costs at $2.9 million as further consideration
for the orphan share. H&H executed a participation agreement,
consent decree and settlement trust on June 13, 2008 and all of the other PRP’s
have signed as well. On December 9, 2008, the EPA lodged the consent
decree with the United States District Court for the District of
Massachusetts. After the thirty-day comment period (during which no
comments were received), the EPA filed a motion for the entry of the consent
decree, which was granted on January 27, 2009. With the entry and
filing of the consent decree, H&H was required to make two payments in
2009. On March 12, 2009, H&H made a payment of $182,053 relating
to the “true-up” of monies previously expended for remediation. On
March 27, 2009 H&H made a payment of $308,380 for H&H’s share of the
early action items for the remediation project. There are some potentially
responsible parties who have not participated to date in the consent decree
negotiations and allocation process. Any such non-participating
potentially responsible party may be sued by the PRP Group under
CERCLA. That is a decision that will be made in the future by the
participating PRPs. The remediation of radiological contamination at
the site is the responsibility of the Department of Energy
(“DOE”). The DOE radiological remediation is being accomplished by
the U.S. Army Corps of Engineers (the “ACOE”). The DOE portion of the
work has begun but is not expected to be completed until August 2010, at which
time the remaining remediation work relating to chemical contamination that is
the responsibility of the PRP Group will be more clearly defined. At
that time, additional financial contributions will be required by the PRP
Group. The PRP Group has both chemical and radiological
PRPs. H&H is a chemical PRP; not a radiological
PRP. The ACOE has informed one of the radiological PRPs in the PRP
Group that it may seek contribution from that PRP for the portion of the
remediation performed by the ACOE. The radiological PRP in turn
wishes to preserve its rights to sue the chemical PRPs in the event any portion
of the ACOE’s claim relates to chemical waste. The PRPs investigated
the nature of the ACOE’s potential claim and determined, based on information
currently available, that there is a minimal potential that the ACOE’s claim can
legally or factually result in a contribution claim against the chemical
PRPs. H&H has recorded a significant reserve in connection with
this matter. In addition, on March 11, 2009, the Company executed a
financial guaranty of H&H’s obligations in connection with the Superfund
site.
H&H
is continuing to comply with a 1987 consent order from the Massachusetts
Department of Environmental Protection (“MADEP”) to investigate and remediate
the soil and groundwater conditions at the MA Property that is the subject of
the Arista Development litigation discussed above. On January 20,
2009, H&H filed with MADEP a partial Class A-3 Response Action Outcome
Statement (RAO) and an Activity & Use Limitation (AUL) for the MA
Property. By letter dated March 24, 2009, MADEP advised H&H that
the RAO did not require a Comprehensive Audit. By letter dated April
16, 2009, the MADEP advised H&H that a MADEP AUL Audit Inspection conducted
on March 18, 2009 did not identify any violations of the requirements applicable
to the AUL. Together, the March 24 and April 16 MADEP letters
combined with H&H’s Licensed Site Professional’s opinion constitute
confirmation of the adequacy of H&H’s investigation of the MA Property as
well as its remediation and post closure monitoring plans. In
addition, H&H has concluded settlement discussions with abutters of the MA
Property and entered into settlement agreements with each of
them. Therefore, H&H does not expect that any claims from any
additional abutters will be asserted, but there can be no such
assurances.
As
discussed above, H&H and Bairnco have existing and contingent liabilities
relating to environmental matters, including capital expenditures, costs of
remediation and potential fines and penalties relating to possible violations of
national and state environmental laws. H&H and Bairnco have
substantial remediation expenses on an ongoing basis, although such costs are
continually being readjusted based upon the emergence of new techniques and
alternative methods. In addition, the Company has insurance coverage
available for several of these matters. The Company had $6.1 million
accrued related to estimated environmental remediation costs as of March 31,
2009. Based upon information currently available, including H&H
and Bairnco’s prior capital expenditures, anticipated capital expenditures, and
information available to H&H and Bairnco on pending judicial and
administrative proceedings, H&H and Bairnco do not expect their respective
environmental compliance costs, including the incurrence of additional fines and
penalties, if any, relating to the operation of their respective facilities to
have a material adverse effect on their financial position, but there can be no
such assurances. Such costs could be material to H&H and
Bairnco’s results of operations and cash flows. We anticipate that
H&H and Bairnco will pay such amounts out of their respective working
capital, although there is no assurance that H&H and Bairnco will have
sufficient funds to pay such amounts. In the event that H&H and
Bairnco are unable to fund these liabilities, claims could be made against WHX
for payment of such liabilities. As further information comes into
the Company’s possession, it will continue to reassess such
evaluations.
Other
Litigation
Certain
of the Company’s subsidiaries are defendants (“Subsidiary Defendants”) in
numerous cases pending in a variety of jurisdictions relating to welding
emissions. Generally, the factual underpinning of the plaintiffs’
claims is that the use of welding products for their ordinary and intended
purposes in the welding process causes emissions of fumes that contain
manganese, which is toxic to the human central nervous system. The
plaintiffs assert that they were over-exposed to welding fumes emitted by
welding products manufactured and supplied by the Subsidiary Defendants and
other co-defendants. The Subsidiary Defendants deny any liability and
are defending these actions. It is not possible to reasonably
estimate the Subsidiary Defendants’ exposure or share, if any, of the liability
at this time.
In
addition to the foregoing cases, there are a number of other product liability,
exposure, accident, casualty and other claims against WHX or certain of its
subsidiaries in connection with a variety of products sold by such subsidiaries
over several years, as well as litigation related to employment matters,
contract matters, sales and purchase transactions and general liability claims,
many of which arise in the ordinary course of business. There is also
one filed and served case in state court arising out of H&H’s sale of a used
piece of equipment which allegedly caused a fire resulting in property damage
and interruption of a third party’s business operations. It is not
possible to reasonably estimate the Company’s exposure or share, if any, of the
liability at this time in any of these matters.
There is
insurance coverage available for many of the foregoing actions, which are being
litigated in a variety of jurisdictions. To date, WHX and its
subsidiaries have not incurred and do not believe they will incur any
significant liability with respect to these claims, which they are contesting
vigorously in most cases. However, it is possible that the ultimate
resolution of such litigation and claims could have a material adverse effect on
the Company’s results of operations, financial position and cash flows when they
are resolved in future periods.
Pension
Plan Contingency Arising from the WPC Group Bankruptcy
On July
24, 2003, the Company entered into an agreement among the Pension Benefit
Guaranty Corporation (“PBGC”), certain of its former subsidiaries (“WPC” and
“WPSC”), and the United Steelworkers of America, AFL-CIO-CLC (“USWA”), in
settlement of matters relating to the Termination Litigation, in which the PBGC
was seeking to terminate the WHX Pension Plan. Under the settlement,
WHX agreed, among other things, (a) to certain administrative facts and legal
conclusions about the WHX Pension Plan, as well as certain ongoing agreements,
as set forth in the settlement agreement, and (b) that WHX will not
contest a future action by the PBGC to terminate the WHX Pension Plan in
connection with a future WPC Group facility shutdown. The WPC Group
was a wholly-owned subsidiary of WHX until August 1, 2003. In the
event that such a plan termination occurs, the PBGC has agreed to release WHX
from any claims relating to the shutdown. However, there may be PBGC claims
related to unfunded liabilities that may exist as a result of a termination of
the WHX Pension Plan.
ITEM
2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of
Operations
Overview
WHX, the
parent company, manages a group of businesses on a decentralized
basis. WHX owns H&H, a diversified holding company whose
strategic business units encompass three reportable segments: Precious Metal,
Tubing, and Engineered Materials. In April 2007, WHX acquired Bairnco. Bairnco
manages business units in three reportable segments: Arlon EM, Arlon
CM and Kasco. The business units of H&H and Bairnco principally
operate in North America with smaller operations in China and
Europe.
H&H’s
Segments
|
·
|
H&H’s
Precious Metal activities include the fabrication of precious metal and
their alloys into brazing alloys and the utilization of precious metal in
precision electroplating.
|
|
·
|
H&H
Tubing manufactures a wide variety of steel tubing products.
Small-diameter precision-drawn tubing fabricated from stainless steel,
nickel alloy and carbon and alloy steel is produced in many sizes and
shapes to critical specifications for use in the appliance, refrigeration,
petrochemical, transportation, semiconductor, aircraft and instrumentation
industries. Additionally, tubular products are manufactured for the
medical industry for use in surgical devices and
instrumentation.
|
|
·
|
H&H
Engineered Materials manufactures fasteners, fastening systems, plastic
and steel connectors, exothermic welding materials, and electrogalvanized
and painted sheet steel products for the roofing, construction, appliance,
do-it-yourself, electric, natural gas and water distribution
industries.
|
Bairnco
Segments
|
·
|
Arlon
EM manufactures high performance laminates & prepregs for circuit
boards and silicone rubber composites. These materials provide the
enabling platform for the electronic designs of the future, ranging across
military electronics, semiconductor, energy, medical devices, aerospace,
telecommunications and transportation
applications.
|
|
·
|
Arlon
CM’s principal products include adhesive coated cut graphics
and digitally printable cast and calendered vinyl films, cast vinyl
fabric, custom-engineered laminates, and coated and laminated films,
foils, foams and papers used in a broad range of industrial, consumer and
commercial products.
|
|
·
|
Kasco
is a provider of meat-room products and maintenance services for the meat
and deli departments of supermarkets; for restaurants; for meat and fish
processing plants; and for distributors of electrical saws and cutting
equipment throughout North America, Europe, Asia and South
America. These products and services include band saw blades
for cutting meat and fish, band saw blades for cutting wood and metal,
grinder plates and knives for grinding meat, repair and maintenance
services for food equipment in retail grocery and restaurant operations,
electrical saws and cutting machines, seasoning products, and other
related butcher supply products.
|
WHX Business
System
The WHX
Business System is at the heart of the operational improvement methodologies for
all WHX companies and employees. Strategy Deployment forms the roof of the
business system and serves to convert strategic plans into tangible actions
ensuring alignment of goals throughout each of our businesses. The pillars of
the System are the key performance indicators used to monitor and drive
improvement. The steps of the System are the specific tool areas that
drive the key metrics and overall performance. WHX utilizes lean
tools and philosophies to reduce and eliminate waste coupled with the Six Sigma
tools targeted at variation reduction. The System is a proven,
holistic approach to increasing shareholder value and achieving long term,
sustainable, and profitable growth.
First Quarter 2009 Cost
Actions and Outlook
The
world-wide economic recession which became evident in the latter part of 2008
intensified to levels during the first quarter of 2009 not experienced in many
years, and in particular its impact on U.S. based manufacturers. This had a
material adverse effect on almost all of our businesses during the first quarter
of 2009, driving our sales down by over 25% from the first quarter of 2008.
Significant end market declines and negative inventory adjustments were
experienced by many of our served markets, especially general industrial,
residential and industrial construction, transportation and appliance
markets.
In late
2008 we formulated contingency plans to respond to the deteriorating economic
conditions. Those plans and other cost containment actions were aggressively
implemented during the first quarter of 2009 with the goals of maintaining
adequate liquidity, preserving or increasing shares of key markets, sustaining
margins on sales and retaining key employees.
The
implementation and utilization of the WHX Business System has been and will
continue to be central to achieving these goals and positioning the Company to
realize enhanced performance as the global economies recover.
The
contingency plans included a reduction in compensation and benefits for salaried
employees, and layoffs in both the salaried and hourly
workforce. They further included the temporary idling of certain of
the Company’s manufacturing facilities for various periods during the quarter to
better match production with customer demand.
The
Company made considerable progress during the first quarter with respect to all
of those efforts – reducing costs, conserving cash, operating safely, and
producing the highest quality products as efficiently as possible under the
current market conditions. Notwithstanding the progress made during
the quarter in achieving its goals, the Company could not overcome the weakened
global demand for its products, and its shipments and revenues declined
significantly compared to the first quarter of 2008.
Comparison of the First
Quarter of 2009 with the First Quarter of 2008
Net sales
for the first quarter of 2009 decreased by $44.6 million, or 25.2%, to $132.7
million, as compared to $177.3 million in the first quarter of 2008. The
Precious Metal segment net sales decreased by $21.3 million, or 46.7%, to $24.4
million. The decreased sales were primarily driven by lower volume in almost all
of its markets, particularly sales to the electronics, construction equipment,
and appliance markets, but also by lower precious metal prices in 2009 compared
to the first quarter of 2008. The Tubing segment sales decreased by
$8.5 million, or 28.6%, driven by reduced sales to the home appliance markets
serviced by the Specialty Tubing Group. There was also a reduction in
sales to the petrochemical and shipbuilding markets serviced by the Stainless
Steel Tubing Group, which was partially offset by growth in sales to
the medical market. The Engineered Materials segment sales decreased by $8.9
million, or 17.5%, with continued weakness experienced in the commercial flat
roofing fasteners market, natural gas and other utility connectors used in
residential construction that it supplies, as well as a drop in sales to its
international markets. A reduction in steel prices has caused pricing
pressures on the selling prices for certain products that the Company
sells. Arlon EM segment sales were up $0.7 million, or 3.8% on a
mixed performance of its businesses. The Arlon EM segment saw
strength in its international sales, particularly related to infrastructure in
China and India, as well as higher sales to military markets, partially offset
by lower sales of silicone rubber materials used in a broad range of products
sold to the transportation, semi-conductor, and general industrial
markets. The Arlon CM segment sales declined by $5.3 million, or
30.2%. The broad based economic recession has affected demand in our Asian
shipping container market and in the North American graphics market for
corporate imaging, which was slightly offset by higher sales in the North
American digital print media market. The Kasco segment sales declined
by $1.2 million, or 6.9%. Sales to U.S. grocery stores and route
sales were stable, offsetting weakness in distributor sales, but pricing
pressures increased due to a reduction in steel prices.
Gross
profit in the first quarter of 2009 was $29.4 million as compared to $40.8
million in 2008. The $11.4 million decline in year over year gross profit is
primarily due to lower sales volume, which was partially offset by cost
reduction initiatives, contributions from price increases taken after the first
quarter of 2008, and lower steel costs in 2009. As a percentage of sales, gross
profit was 22.1% as compared to 23.0% in 2008.
Selling,
general and administrative (“SG&A”) expenses decreased $3.9 million to $32.2
million, or 24.3% of sales, in 2009 from $36.1 million, or 20.4% of sales, in
2008. On January 4, 2009, the Company implemented a 5% salary
reduction to annual salaries over $40,000 for all salaried employees, including
all of the Company’s executive officers, in furtherance of the Company’s ongoing
efforts to lower its operating costs. The Company also suspended its employer
contributions to 401(k) savings plans for all employees not covered by a
collective bargaining agreement. The Company developed contingency plans in late
2008 to further reduce fixed and variable expenses at its various locations if
sales and/or operating income fell below pre-determined levels. Many
of these plans were implemented in the first quarter of 2009. The Company
incurred severance costs of $0.6 million in addition to the restructuring costs
of $0.5 million discussed below, in the first quarter of 2009 in connection with
workforce reduction efforts.
Restructuring
costs of $0.5 million were recorded in the first quarter of 2009 relating to the
consolidation of the former Bairnco Corporate office into the WHX Corporate
office. Such costs consisted of $0.4 million of termination benefits
and $0.1 million of rent and other facility closure costs.
Pension
expense for the WHX Pension Plan of $3.5 million was recorded in the first
quarter of 2009. This non-cash pension expense included $3.2 million
of actuarial loss amortization. Such actuarial loss occurred
principally because investment return on the assets of the WHX Pension Plan
during 2008 was significantly less than the assumed return of 8.5%, partially
offset by an increase in discount rates. In 2008 the Company recorded
a pension credit of $2.0 million, including $1.8 million for the WHX Pension
Plan.
Income
from operations decreased $13.4 million to a $6.8 million loss in the first
quarter of 2009 as compared to income of $6.5 million in the same period of
2008. The operating loss in the 2009 period was principally driven by decreased
sales and gross profit in all of our operating segments in addition to a net
increase in pension expense of $5.3 million.
Interest
expense was $5.2 million in the first quarter of 2009, representing a 49.6%
decrease in comparison to $10.4 million in 2008, as total borrowings and the
related interest rates both decreased. In September of 2008, WHX
completed the Rights Offering, raising $156.5 million in equity and cash, of
which approximately $13.2 million was used to pay down its senior debt and
$142.5 million was used to pay down certain related party long-term debt of WHX,
H&H and Bairnco.
Realized
and unrealized gains on derivatives were $0.3 million in the first quarter of
2009, compared to a $1.6 million loss in the first quarter of 2008. The
derivative financial instruments utilized by H&H are precious metal forward
and future contracts, which are used to economically hedge H&H’s precious
metal inventory against price fluctuations. Generally, losses from
such derivatives are incurred as precious metal market prices increase over the
contract term, and gains are recognized as precious metal prices decrease over
the contract term. Although market prices increased during the first
quarter of 2009, the Company increased its precious metal inventory during most
of the quarter, causing it to sell into a rising market, yielding
gains. Whereas in 2008 the Company liquidated inventory, resulting in
purchases of contracts in a rising market, resulting in losses.
In the
first quarter of 2009, a tax benefit of $0.2 million was recorded, principally
for state taxes. For the first quarter of 2008, a tax provision of
$0.8 million was recorded, principally for state and foreign income
taxes. The Company has not recorded any federal income tax benefit in
either period due to the uncertainty of realizing the benefit of the Company’s
NOLs in the future. The Company has recorded a deferred tax valuation
allowance to the extent that it believes that it is more likely than not that
the benefits of its deferred tax assets, including those relating to its NOLs,
will not be realized in future periods. The tax benefit for the first quarter of
2009 reflects a favorable impact of $0.5 million. This favorable
adjustment resulted from a change in the state effective tax rate at which the
deferred state income taxes of certain subsidiaries are estimated to be
realized.
Net loss
for the first quarter of 2009 was $11.4 million, or $0.93 per share, on
12,179,000 shares outstanding. This compares to a net loss of $6.2
million or $6.21 per share for the first quarter of 2008, on 1,000,000 shares
outstanding. The large difference in the number of shares outstanding
is due to the additional shares issued in the Rights Offering in September
2008.
The
comments that follow compare revenues and operating income by segment for the
first quarter of 2009 and 2008.
Precious
Metal
Net sales
for the Precious Metal segment decreased $21.3 million or 46.7%, to $24.4
million in the first quarter of 2009 from $45.7 million in the first quarter of
2008. The decreased sales were primarily driven by lower volume in
almost all of its markets, particularly the sales to the electronics,
construction equipment, and appliance markets, but also by lower precious metal
prices in 2009 compared to the first quarter of 2008. The brazing alloys made by
this segment are fabricated into a variety of engineered forms and are used in
many industries including automotive, air conditioning, general industrial and
other metal-joining industries. The electro-galvanized electronic and electrical
components sold by this segment are primarily for use in the automotive
industry. Therefore, the broad-based recession significantly reduced
the sales of the Precious Metal segment.
Segment
operating income decreased by $3.8 million to a loss of $1.4 million in the
first quarter of 2009, compared to operating income of $2.4 million in the first
quarter of 2008. The decrease was driven by the sales decline, but
also by reduced gross profit margin, principally due to the mix of product
sold. Sales to the HVAC and welding distribution markets declined
less than to other markets, but yield a significantly lower gross profit margin
than do other sales. In April 2009, the Company announced the closure
of a facility in New Hampshire which is part of the Precious Metal segment and
the relocation of the functions to existing facilities in Milwaukee and in
China. The segment has also implemented other cost saving
measures.
In 2008,
the Company evaluated its Sumco subsidiary in light of ongoing operating
losses. Sumco sells electroplating services primarily to the
automotive market. Sumco has had declining cash flows in 2008 and
projected negative 2009 cash flows principally caused by the decline in U.S.
economic activity and by Sumco’s reliance on the automotive market for over 90%
of its sales.
On March
12, 2009, Sumco issued a Worker Adjustment and Retraining Notice (WARN) to all
appropriate recipients including governmental officials and Sumco employees
relating to the proposed sale or closure of Sumco. The Board of Directors of
Sumco is exploring strategic options for the Sumco business.
Tubing
In the
first quarter of 2009, net sales for the Tubing segment declined $8.5 million,
or 28.6%, to $21.2 million from $29.6 million in the first quarter of 2008,
driven by reduced sales to the home appliance markets serviced by the Specialty
Tubing Group. There was also a reduction in sales to the
petrochemical and shipbuilding markets serviced by the Stainless Steel Tubing
Group, which was partially offset by growth in sales to the medical
market.
Segment
operating income decreased by $2.1 million to an operating loss of $0.8 million
in the first quarter of 2009 as compared to operating income of $1.3 million in
the first quarter of 2008. Gross margin percentage declined because fixed costs
could not be reduced in the same proportion as the sales decline, partially
offset by reductions in raw material costs.
In
December 2008, WHX management decided to exit the welded specialty tubing market
in Europe and close ITD, sell ITD’s assets, pay off ITD’s related debt and
repatriate cash remaining post closing. The decision to exit this market was
made after evaluating current economic conditions and competition from lower
cost manufacturers. A non-cash impairment charge was recorded against
the machinery and equipment of this subsidiary for $0.5 million in the fourth
quarter of 2008.
Engineered
Materials
Net sales
for the Engineered Materials segment decreased $8.9 million, or 17.5%, to $42.1
million in the first quarter of 2009 from $51.0 million in the first quarter of
2008. There was continued weakness experienced in the commercial flat
roofing fasteners market as its customers utilized their existing inventories,
weakness in natural gas and other utility connectors used in residential
construction, as well as a drop in sales to its international
markets.
Segment
operating income decreased by $1.4 million from operating income of $1.3 million
in the first quarter of 2008 to an operating loss of $0.1 million in the first
quarter of 2009. The decline in operating income was principally the
result of the lower sales volume, partially offset by pricing
increases. Gross margin percentage for the segment remained
relatively stable. In view of the decline in sales, the segment has
implemented various cost saving measures.
Arlon EM
In the
first quarter of 2009 net sales for the Arlon EM segment increased by $0.6
million, or 3.8%, to $17.0 million, from $16.4 million in the prior year. Sales
of electronic high technology materials to the printed circuit board industry
rose by $2.2 million. PTFE laminate sales to commercial applications,
such as cellular antennas, were largely related to third generation (“3G”)
cellular technology upgrades in China and increased cellular infrastructure
activity in India. Reflecting the economic downturn, sales of
silicone rubber composites decreased by $1.5 million in the first quarter of
2009. These products are used for flexible heaters, traction motor insulation,
and hose and duct materials which are used in transportation, semiconductor, and
general industrial markets.
Segment
operating income increased $0.2 million to $1.4 million in the first quarter of
2009 principally as a result of higher sales and improved operating
efficiencies in the China manufacturing facility as well as reduced staffing and
expense reductions as compared to the same quarter of the prior
year.
Arlon CM
Arlon CM
sales decreased by $5.3 million, or 30.2%, from $17.7 million in the first
quarter of 2008 to $12.3 million in the first quarter of 2009. Sales
decreased on weakness in most product lines due to the world-wide economic
recession, with lower demand from the Asian shipping container market and the
North American graphics market for corporate imaging, slightly offset by higher
sales in the North American digital print media market. Also, this segment’s
materials sales decreased as a result of the general economic recession,
particularly affecting industrial electronics and automotive business as
manufacturers and distributors work through existing inventories.
Operating
losses increased from a $1.1 million loss in the first quarter of 2008 to $1.4
million loss in the same quarter of 2009. Gross profit decreased on lower sales
and from the associated impact on throughput, underutilized capacity, and plant
efficiencies. This was partially offset by the effect of certain
improvements from Lean Manufacturing techniques, along with an improved sales
mix, which increased gross profit slightly as a percent of sales in the first
quarter of 2009.
Kasco
Kasco
sales decreased by $1.2 million, or 6.9%, from $16.9 million in the first
quarter of 2008 to $15.7 million in the first quarter of 2009. Kasco
North America (“Kasco NA”), sales grew 3% due to strong U.S. and Canada route
sales but were partially offset by softer distributor sales. Price
reductions were made to retain market share; however product mix of higher
margin products offset lower selling prices. Sales for Kasco’s European
operations declined 24%, significantly affected by the stronger U.S. dollar, but
also reflecting global economic weakness. Operating income decreased
$0.3 million from $0.8 million in the first quarter of 2008 to $0.6 million in
the same quarter of 2009.
Discussion of Consolidated
Statement of Cash Flows
Operating
Activities
Net cash
used in operating activities for the three months ended March 31, 2009 totaled
$50,000. Net loss adjusted for non-cash income and expense items used
approximately $4.9 million of net cash. However, working capital accounts
provided $4.8 million of cash, as follows: accounts receivable provided $7.9
million, inventories used $2.2 million, accrued interest due to SPII provided
$0.3 million, and net other current assets and liabilities used $1.2
million.
Net cash
used in operating activities for the three months ended March 31, 2008 totaled
$8.1 million. Net loss adjusted for non-cash income and expense items
provided $3.1 million of cash. Working capital accounts used $11.1 million of
cash, as follows: accounts receivable used $19.9 million, inventories used $1.6
million, interest accrued but not paid to SPII provided $4.2 million, and net
other current assets and liabilities provided $6.0 million.
The major
reason for the change in operating cash flow in the 2009 quarter compared to the
2008 quarter was a reduction in accounts receivable. Due principally
to the sales decline in the 2009 quarter as compared to the 2008 quarter,
accounts receivable was $36.8 million lower ($73.2 million) as of March 31, 2009
as compared to March 31, 2008 ($110.0 million). The number of days’ sales
outstanding in accounts receivable was comparable between quarters, as was the
accounts receivable turnover rate. The Company effectively managed
its accounts receivable despite the negative recessionary trends affecting many
of the markets that the Company’s subsidiaries operate in.
Inventory
used $2.2 million in the quarter ended March 31, 2009 as compared to $1.6
million in the same quarter of 2008. Inventory was $77.2 million as
of March 31, 2009 compared to $85.5 million as of March 31, 2008, a decrease of
$8.3 million. The levels of inventory dropped consistently throughout
the quarters of 2008, largely driven by continual improvements in inventory
management using the WHX Business System, which includes Lean manufacturing and
other managerial processes and procedures, as well as a reduction in the
quantity of precious metal inventory owned throughout 2008. While the Company
continues to focus on inventory management, the rate of inventory management
improvements has slowed in 2009 as the most substantial improvements have
already been realized.
Total
accrued interest due to SPII, including both the current and long-term portions,
provided $2.1 million in the 2009 quarter compared to $6.0 million in the 2008
quarter. The reason for the decline in accrued interest is that the
Company has reduced its level of debt substantially since March 31, 2008, when
debt totaled $373 million, to total debt of $210 million as of March 31,
2009. The major repayment of debt was made using the proceeds of the
Rights Offering completed on September 25, 2008.
Net other
current assets and liabilities used $1.2 million in the quarter ended March 31,
2009, and provided $6.1 million in the quarter ended March 31, 2008. There is
normally a seasonal growth in trade accounts payable from a low point of
December 31 of the previous year, due to the Company’s business
cycle. However, in the 2009 quarter, due to the weaker sales, the
growth in trade accounts payable since year-end was lower by $2.8 million as
compared to the first quarter of 2008. Another significant change
related to the change in accrued expenses, including the effect of the WHX
Pension Plan. In the quarter ended March 31, 2009, the Company
recorded an additional pension plan accrual of $3.5 million, whereas in the
quarter ended March 31, 2008, the pension plan accrual declined by $2.2
million. Other accrued expenses such as for employee compensation
declined in the 2009 quarter as well, due to less business activity and
profitability.
Investing
Activities
Investing
activities used $1.4 million in the quarter ended March 31, 2009 and $5.2
million in the quarter ended March 31, 2008. Capital spending in the
2009 quarter was $2.1 million, as compared to $3.5 million spent in the 2008
quarter. The Company received net proceeds of $0.7 million related to
its settlements of precious metal derivative contracts in the quarter ended
March 31, 2009, as compared to net payments totaling $1.8 million in the quarter
ended March 31, 2008.
Financing
Activities
Financing
activities used a net amount of $0.3 million in the quarter ended March 31,
2009. The Company repaid $5.8 million of its term loans during the
quarter, and this was offset by a $6.8 million increase in its revolving credit
facilities, for a net increase in debt of $1.0 million. In the
quarter ended March 31, 2008, the Company increased its total borrowings by
$11.6 million, an increase of $10.6 million compared to the 2009 quarter,
principally to fund higher capital expenditures, greater derivative losses and
higher working capital needs in 2008. The Company has focused on
effectively managing cash and working capital in the 2009 quarter despite the
decline in sales. The Company paid $0.9 million of financing fees during the
2009 quarter as compared to $1.1 million in the 2008 quarter, principally
related to extending and otherwise amending its credit facilities in both
quarters.
Liquidity
The
Company recorded a net loss of $11.4 million for the quarter ended March 31,
2009, following a profitable year in 2008, when the Company had net income of
$3.0 million and $10.1 million of cash flow provided by operating
activities. For the quarter ended March 31, 2009, cash flow used in
operating activities was $50,000, as compared to $8.1 million used in operating
activities in the same quarter of 2008.
In recent
years prior to 2008, the Company incurred significant losses and used
significant amounts of cash in operating activities, and as of March 31, 2009,
had an accumulated deficit of $442.5 million. As of March 31, 2009,
the Company’s current assets totaled $168.3 million and its current liabilities
totaled $127.0 million; for net working capital of $41.3 million. The
Company reduced its level of debt substantially in 2008, from $359.4 million as
of January 1, 2008 to $209.2 million as of December 31, 2008 and $210.1 million
as of March 31, 2009, principally through the Rights Offering completed on
September 25, 2008.
Shelf
Registration Statement
On April
24, 2009, the Company filed a shelf registration statement on Form S-3 with the
SEC. If and when the shelf registration statement is declared
effective by the SEC, the Company may from time to time issue up to $10 million
of its common stock, preferred stock, debt securities, warrants to purchase
common stock, preferred stock, or debt securities, or any combination of the
above, separately or as units. The terms of any offerings under the shelf
registration statement will be determined at the time of any
offering. The Company does not presently have any definitive plans or
current commitments to sell securities that may be registered under the shelf
registration statement. The Company believes that, once effective,
the shelf registration statement will provide the Company with the flexibility
to quickly raise capital in the market as conditions become favorable with a
minimum of administrative preparation and expense. The net proceeds
of any such issuances under the shelf registration statement are expected to be
used for general corporate purposes, which may include working capital and/or
capital expenditures.
Rights
Offering
As a
result of the Rights Offering, the Company sold 11,178,459 shares of common
stock, to existing stockholders through the exercise of rights at a subscription
price of $14.00 per share, for an aggregate purchase price of approximately
$156.5 million. SPII subscribed for 8,630,910 shares of the Company’s
common stock, for an aggregate purchase price of approximately $120.8 million,
pursuant to its basic and applicable oversubscription
privileges. After giving effect to the Rights Offering, SPII owns 75%
of the outstanding shares of common stock of the Company. The Company
used the proceeds of the Rights Offering to (i) redeem preferred stock issued by
a wholly-owned subsidiary of the Company, which was held by SPII, plus
accumulated dividends, together totaling approximately $6.0 million, (ii) repay
Company indebtedness to SPII of approximately $18.9 million, and (iii) repay
$117.6 million of indebtedness and accrued interest of certain wholly-owned
subsidiaries of the Company to SPII. After such payments, $14.0
million remained with the Company as cash, of which $13.2 million was used to
repay additional debt of the Company on October 29, 2008 pursuant to the
amendments to the Company’s credit agreements of that same date.
WHX Corporation, the parent
company
WHX has
as its sole source of cash flow, distributions from its principal subsidiaries,
H&H and Bairnco, or other discrete transactions. H&H’s credit
facilities effectively do not permit it to transfer any cash or other assets to
WHX with the exception of (i) an unsecured loan for required payments to the WHX
Pension Plan, and (ii) an unsecured loan for other uses in the aggregate
principal amount not to exceed $12.0 million, $7.0 million of which has been
distributed. Of the remaining $5.0 million permitted to be loaned to
WHX, a maximum amount of $2.5 million may be loaned prior to March 31, 2010, and
the remainder may be loaned thereafter.. H&H’s credit facilities
are collateralized by substantially all of the assets of H&H and its
subsidiaries. Similarly, Bairnco’s credit facilities and term loan do
not permit it to make any distribution, pay any dividend or transfer any cash or
other assets to WHX other than common stock of Bairnco and up to $0.6 million
annually for services performed by WHX on behalf of Bairnco, under certain
circumstances. Bairnco’s credit facilities are secured by a first
priority lien on all of the assets of Bairnco and of its U.S.
subsidiaries.
WHX’s
ongoing operating cash flow requirements consist of arranging for the funding of
the minimum requirements of the WHX Pension Plan and paying WHX’s administrative
costs. The recent decline of stock prices across a significant
cross-section of the United States stock market has resulted in an unfunded
pension liability of the WHX Pension Plan of $137.5 million as of March 31,
2009. The Company expects to have required minimum contributions for
2009 and 2010 of $1.2 million and $6.0 million, respectively. Such
required future contributions are determined based upon assumptions regarding
such matters as discount rates on future obligations, assumed rates of return on
plan assets and legislative changes. Actual future pension costs and
required funding obligations will be affected by changes in the factors and
assumptions described in the previous sentence, as well as other changes such as
a plan termination.
As of
March 31, 2009, WHX and its subsidiaries that are not restricted by loan
agreements or otherwise from transferring funds to WHX had cash of approximately
$2.4 million and current liabilities of approximately $1.4
million. Management expects that WHX will be able to fund its
operations in the ordinary course over at least the next twelve
months.
Handy & Harman and
Bairnco
Widely-documented
commercial credit market disruptions have resulted in a tightening of credit
markets worldwide. Liquidity in the global credit market has been
severely contracted by these market disruptions, making it costly to obtain new
lines of credit or to refinance existing debt, when debt financing is available
at all. The effects of these disruptions are widespread and difficult
to quantify, and it is impossible to predict when the global credit market will
improve or when the credit contraction will significantly ease. As a
result of the ongoing credit market turmoil, the Company may not be able to
obtain additional debt or equity financing if necessary or
desired. Furthermore, one or more of the financial institutions that
make available the Company’s revolving credit facilities may become unable to
fulfill their funding obligations, which could materially and adversely affect
liquidity.
On March
12, 2009, H&H and its subsidiaries amended each of the Wachovia Facilities
and the Term B Loan to, among other things, (i) extend the term of the loans for
two years until June 30, 2011, (ii) increase certain interest rates, (iii) reset
the levels of certain financial covenants, (iv) permit the disposition and/or
cessation of operations of certain of H&H’s direct and indirect subsidiaries
(v) provide for an increase in the aggregate amount of unsecured loans,
distributions or other advances from H&H to WHX for general business
purposes from up to $7.0 million to up to $12.0 million, subject to a maximum
additional amount of $2.5 million prior to March 31, 2010, and (vi) provide for
an increase in the existing limited guaranty by H&H from up to $7.0 million
to up to $12.0 million. In addition, the Wachovia Facilities were
also amended to, among other things, reduce the amount of the credit facility
from $125.3 million to $115.0 million including decreasing the revolving credit
facility from $83.0 million to $75.0 million.
On May 8,
2009, H&H and its subsidiaries further amended their the Wachovia Facilities
to provide for, among other things, additional term loans to the borrowers
thereunder in the aggregate principal amount of approximately $5.3 million,
which were consolidated with the existing term loans under the Wachovia
Facilities for a combined aggregate principal amount of $15.0 million, and
additional guaranties by certain subsidiary trusts. Pursuant to this
amendment: (a) a portion of the obligations under the tranche B term loan under
the Wachovia Facilities was prepaid in an amount equal to $5.0 million; and (b)
the remaining available proceeds of the term loans are to be used for operating
and working capital purposes. The Term B Loan was also amended
on May 8, 2009 to provide for additional guaranties by certain subsidiary
trusts.
On March
12, 2009, Bairnco and certain of its subsidiaries amended the Wells Fargo
Facility and the Ableco Facility to, among other things, (i) increase the
interest rates and (ii) reset the levels of certain financial
covenants. The Ableco Facility was also amended to provide for, among
other things, an increase in the existing limited guaranty by H&H from up to
$7 million to up to $12 million, secured by a second lien on all of the assets
of H&H pursuant to the terms and conditions of the H&H Security
Agreement and the H&H Guaranty. The Subordinated Debt Credit
Agreement with SPII was also amended to, among other things, increase the
interest rates.
The
ability of both H&H and Bairnco to draw on their respective revolving lines
of credit is limited by a borrowing base of accounts receivable and
inventory. As of March 31, 2009, H&H’s availability under its
credit facilities was $17.0 million, and Bairnco’s availability under its credit
facilities was $5.6 million. However, there can be no assurances that
they will continue to have access to all or any of the credit lines if their
operating and financial performance do not satisfy relevant borrowing base
criteria and financial covenants within the financing agreements. If
either H&H or Bairnco do not satisfy borrowing base criteria or financial
covenants, and if they are unable to secure necessary waivers or other
amendments from the lender, they will not have access to their credit
facilities, which could adversely affect the Company’s liquidity.
The
Company
We do not
anticipate that the Company will have any additional sources of cash flow other
than (i) as described above, (ii) from operations, (iii) from the sale of assets
and/or businesses, and (iv) from other discrete transactions.
Management
believes that the Company has the ability to meet its capital requirements on a
continuing basis for at least the next twelve months. However, the ability of
the Company to meet its cash requirements for at least the next twelve months is
dependent, in part, on the Company’s continuing ability to meet its business
plans. The Company continues to examine all of its options and strategies,
including acquisitions, divestitures, and other corporate transactions, to
increase cash flow and stockholder value. If the Company’s planned cash flow
projections are not met, management could consider the additional reduction of
certain discretionary expenses and sale of certain assets.
In 2008,
management decided to exit the welded specialty tubing market in Europe and
close its ITD subsidiary, sell ITD’s assets, pay off ITD’s related debt and
repatriate cash remaining post-closing. The decision to exit this market was
made after evaluating current economic conditions and competition from lower
cost manufacturers. In 2008, the Company also evaluated its Sumco
subsidiary in light of ongoing operating losses. Sumco sells
electroplating services primarily to the automotive market. Sumco has
had declining cash flows in 2008 and projected negative 2009 cash flows
principally caused by the decline in U.S. economic activity and by Sumco’s
reliance on the automotive market for over 90% of its sales.
On March
12, 2009, Sumco issued a Worker Adjustment and Retraining Notice (WARN) to all
appropriate recipients including governmental officials and Sumco employees
relating to the proposed sale or closure of Sumco. The Board of Directors of
Sumco is exploring strategic options for the Sumco business.
In April,
2009, the Company announced the closure of a facility in New Hampshire which is
part of the Precious Metal segment and the relocation of the functions to
existing facilities in Milwaukee and in China.
Management
is utilizing the following strategies to enhance liquidity: (1) continuing to
implement the WHX Business System throughout all of the Company’s operations to
enhance systems and processes to increase operating efficiencies at Company
facilities, (2) supporting profitable sales growth both internally and through
acquisition, (3) evaluating strategic alternatives with respect to all lines of
business and/or assets and (4) seeking financing alternatives that may lower its
cost of capital and/or enhance current cash flow.
However,
if the Company’s cash needs are greater than anticipated or the Company does not
materially satisfy its business plan, the Company may be required to seek
additional or alternative financing sources. There can be no
assurance that such financing will be available or available on terms acceptable
to the Company. There can be no assurance that the funds available from
operations and under the Company’s credit facilities will be sufficient to fund
its debt service costs, working capital demands, pension plan contributions, and
environmental remediation costs. The Company’s inability to generate
sufficient cash flows from its operations or through financing could impair its
liquidity, and would likely have a material adverse effect on its businesses,
financial condition and results of operations, and could raise substantial doubt
that the Company will be able to continue to operate.
*******
When used
in Management's Discussion and Analysis of Financial Condition and Results of
Operations, the words “anticipate”, “estimate” and similar expressions are
intended to identify forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), which are intended to be covered by the
safe harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, general economic conditions, the ability of the Company to develop
markets and sell its products, and the effects of competition and
pricing. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could be inaccurate, and therefore, there can be no assurance that the
forward-looking statements included herein will prove to be
accurate.
ITEM
4. Controls and Procedures
Disclosure Controls and
Procedures
As
required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation
under the supervision and with the participation of our management, including
the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that as of March 31,
2009, our disclosure controls and procedures are effective in ensuring that all
information required to be disclosed in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC rules and forms and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, in a manner that allows timely decisions
regarding required disclosure.
Changes
in Internal Control Over Financial Reporting
There
have not been any changes in the Company’s internal control over financial
reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act)
during the quarter ended March 31, 2009 to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
PART
II
OTHER
INFORMATION
ITEM
1. Legal
Proceedings
Information
in this Item 1 is incorporated by reference to Part I, Notes to Condensed
Consolidated Financial Statements (unaudited), Note 15- Contingencies-Legal
Matters, of this report.
ITEM
1A. Risk
Factors
Please
see “Risk Factors” from the WHX Annual Report on Form 10-K for the year ended
December 31, 2008, filed on March 31, 2009. The following are the
material changes to the risk factors that were disclosed in Item 1A of the
Company’s Annual Report on Form 10-K for the year ended December 31,
2008.
Risks
related to the Current Contractions in the Global and Domestic
Economies.
Our
Annual Report on Form 10-K contains a number of risk factors relating to the
current global recession. Since the filing of the Form 10-K, the global economic
downturn deepened during the first quarter of 2009. The market for
our products, particularly in the
general
industrial, residential and industrial construction, transportation and
appliance markets
, have remained at depressed levels, as evidenced by a
25.2% decline in the Company’s sales in the first quarter of 2009 versus the
same period in the prior year. A significant portion of our revenues
are received from customers in automotive and construction related industries,
which have recently experienced significant financial
downturns. Recent developments concerning the automotive industry
that may negatively impact the Company include Chrysler LLC’s decision to file
for Chapter 11 bankruptcy protection and public statements by General Motors
Corporation that it intends to accelerate idling and closures of certain of its
plants as part of its viability plan. Additionally, construction
spending remained weak in much of the first quarter of 2009, and decreases in
mortgage lending, continued high levels of inventories of unsold new homes,
decreased consumer spending and increased vacancy rates at commercial properties
could cause further declines in demand for our products that are used in
residential and commercial construction. The continued weakness in
our principal markets and the deterioration of the broader global economy could
result in greater then expected decreases in demand for our products and the
products of our customers, which would materially and adversely affect our
revenues, profitability, operating results and cash flow.
*
|
Exhibit
4.55. Amendment No. 23 to the Loan and Security Agreement by
and among Handy & Harman and its subsidiaries, and Wachovia Bank,
National Association, as agent, dated May 8,
2009.
|
*
|
Exhibit
4.56. Amendment No. 18 to the Loan and Security Agreement by
and among Handy &
Harman
and its subsidiaries, and Steel Partners II, L.P., dated as of May 8,
2009.
|
*
|
Exhibit
31.1 Certification of Principal Executive Officer pursuant to
Rule 13a-15(f) or 15d-15(f) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
*
|
Exhibit
31.2 Certification of Principal Financial Officer pursuant to
Rule 13a-15(f) or 15d-15(f) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
*
|
Exhibit
32 Certification of Principal Executive Officer and Principal
Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b) of the
Securities Exchange Act of 1934, as amended, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of Chapter
63 of Title 18 of United States
Code.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
WHX
CORPORATION
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/s/ James F. McCabe,Jr.
James
F. McCabe, Jr.
Senior
Vice President and Chief Financial Officer
(Principal
Accounting Officer)
|
May 15,
2009
*
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Exhibit
4.55. Amendment No. 23 to the Loan and Security Agreement by
and among Handy & Harman and its subsidiaries, and Wachovia Bank,
National Association, as agent, dated May 8,
2009.
|
*
|
Exhibit
4.56. Amendment No. 18 to the Loan and Security Agreement by
and among Handy &
Harman
and its
subsidiaries, and Steel Partners II, L.P., dated as of May 8,
2009.
|
*
|
Exhibit
31.1 Certification of Principal Executive Officer pursuant to
Rule 13a-15(f) or 15d-15(f) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
*
|
Exhibit
31.2 Certification of Principal Financial Officer pursuant to
Rule 13a-15(f) or 15d-15(f) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
*
|
Exhibit
32 Certification of Principal Executive Officer and Principal
Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b) of the
Securities Exchange Act of 1934, as amended, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of Chapter
63 of Title 18 of United States
Code.
|
* Filed
herewith