FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
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/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 1-2394
WHX CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3768097
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(State of Incorporation) (IRS Employer
Identification No.)
555 Theodore Fremd Avenue
Rye, New York 10580
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 914-925-4413
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
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Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer __ Accelerated filer __ Non-accelerated filer X
---
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
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Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No X
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The number of shares of Common Stock issued and outstanding as of March 26, 2007
was 10,000,498.
1
PART I. ITEM 1: FINANCIAL STATEMENTS
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
(in thousands - except per-share)
--------- --------- --------- ---------
Net sales $ 121,609 $ 103,142 359,593 $ 304,627
Cost of goods sold 97,711 84,090 290,767 246,771
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Gross profit 23,898 19,052 68,826 57,856
Selling, general and administrative expenses 14,764 21,418 45,778 52,083
Goodwill impairment charge -- -- -- --
Environmental remediation expense -- -- 2,909 --
Gain (loss) on disposal of assets 4 (5) (83) (4)
Asset impairment charge -- -- 1,778 --
Restructuring charges 485 -- 2,416 --
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Income (loss) from operations 8,653 (2,371) 15,862 5,769
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Other:
Interest expense 5,775 3,924 15,723 13,190
Chapter 11 and related reorganization expenses -- 4,856 -- 9,480
Realized and unrealized loss on derivatives (1,714) (986) (6,244) (1,439)
Other income 175 237 41 367
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Income (loss) from continuing operations before taxes 1,339 (11,900) (6,064) (17,973)
Tax provision (benefit) (896) 451 339 1,315
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Income (loss) from continuing operations, net of tax 2,235 (12,351) (6,403) (19,288)
Discontinued operations:
Loss from discontinued operations, net of tax -- (320) (167) (4,485)
Gain on disposal, net of tax 2,880 -- 2,880 681
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Net income (loss) on discontinued operations, net of tax 2,880 (320) 2,713 (3,804)
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Net income (loss) 5,115 (12,671) (3,690) (23,092)
Add: Extinguishment of preferred stock -- 257,782 -- 257,782
Less: Dividend requirement for preferred stock -- -- -- 3,561
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Net income (loss) applicable to common stock $ 5,115 $ 245,111 $ (3,690) $ 231,129
========= ========= ========= =========
BASIC AND DILUTED PER SHARE OF COMMON STOCK
Income (loss) from continuing operations
net of preferred dividends $ 0.22 $ 31.40 $ (0.64) $ 36.70
Discontinued operations 0.29 (0.04) 0.27 (0.60)
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Net income (loss) per share applicable to common shares $ 0.51 $ 31.36 $ (0.37) $ 36.10
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
WHX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2006 2005
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Dollars and Shares in Thousands
ASSETS
Current Assets:
Cash and cash equivalents $ 4,868 $ 4,076
Trade receivables - net 67,257 57,243
Inventories 58,249 60,978
Current assets of discontinued operations 94 181
Insurance receivable -- 2,000
Deferred income taxes 812 812
Assets held for sale 885 --
Other current assets 6,037 6,641
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Total current assets 138,202 131,931
Property , plant and equipment, at cost less
accumulated depreciation and amortization 86,900 91,150
Goodwill and other intangibles 50,021 50,048
Intangible pension asset 586 586
Long term assets of discontinued operations -- 2,794
Other non-current assets 14,643 19,704
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$ 290,352 $ 296,213
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LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Trade payables $ 45,337 $ 49,274
Accrued environmental liability 15,971 27,526
Accrued liabilities 34,067 31,064
Current portion of long-term debt 3,715 23,127
Current portion of long-term debt - related party -- 70,627
Short-term debt 51,781 51,080
Deferred income taxes 123 123
Current liabilities of discontinued operations -- 581
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Total current liabilities 150,994 253,402
Long-term debt 23,793 4,889
Long-term debt - related party 89,627 --
Accrued pension liability 7,913 16,216
Other employee benefit liabilities 7,907 8,761
Deferred income taxes 3,176 3,048
Additional minimum pension liability 65,601 65,601
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Total liabilities 349,011 351,917
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Stockholders' (deficit) equity:
Preferred stock - $.10 par value; authorized 5,000
shares; issued and outstanding: -0- shares -- --
Common stock - $.01 par value; authorized 40,000
shares; issued and outstanding: 10,000 shares 100 100
Warrants 1,287 1,287
Accumulated other comprehensive loss (56,691) (57,426)
Additional paid-in capital 394,308 394,308
Accumulated deficit (397,663) (393,973)
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Total stockholders' deficit (58,659) (55,704)
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$ 290,352 $ 296,213
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
2006 2005
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(in thousands)
Cash flows from operating activities:
Net loss $ (3,690) $(23,092)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Asset impairment charge 1,778 --
Depreciation and amortization 9,312 8,951
Amortization of debt related costs 1,684 1,152
Other postretirement benefits (47) 563
Pension curtailment 128 --
Chapter 11 and related reorganization expenses -- 9,480
Payments of Chapter 11 and related reorganization expenses -- (5,477)
Loss on asset dispositions 106 4
Equity in after-tax income of affiliated companies (134) (89)
Gain on sale of investment in an affiliate (187) --
Unrealized loss (gain) on derivatives (963) 853
Reclassification of net cash settlements on derivative instruments 7,207 587
Discontinued operations (4,518) (681)
Decrease (increase) in working capital elements, net of effect of acquisitions:
Trade receivables (9,743) (11,662)
Inventories (259) (4,703)
Other current assets 963 2,046
Other current liabilities (11,821) 6,588
Other items-net (971) (41)
Discontinued operations (401) 10,859
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Net cash used in operating activities (11,556) (4,662)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Plant additions and improvements (6,837) (16,692)
Net cash settlements on derivative instruments (7,207) (587)
Proceeds from sales of assets 139 45
Proceeds from sale of investment in an affiliate 616 --
Discontinued operations 7,216 1,666
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Net cash used in investing activities (6,073) (15,568)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of Term Loan B 19,000 6,139
Proceeds of term loans 7,000 2,330
Net revolver borrowings 298 4,229
Repayments of term loans - Foreign (343) (345)
Repayments of term loans - Domestic (7,534) (3,937)
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Net cash provided by financing activities 18,421 8,416
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NET CHANGE FOR THE PERIOD 792 (11,814)
Cash and cash equivalents at beginning of period 4,076 20,826
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,868 $ 9,012
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -THE COMPANY AND NATURE OF OPERATIONS
WHX Corporation, the parent company ("WHX") is a holding company that
invests in and manages a group of businesses that are managed on a decentralized
basis. WHX's primary business is Handy & Harman ("H&H"), a diversified
manufacturing company whose strategic business units encompass three reportable
segments: precious metals, wire and tubing, and engineered materials.. WHX,
together with all of its subsidiaries, shall be referred to herein as the
"Company."
NOTE 2 - RECENT DEVELOPMENTS AND LIQUIDITY
On December 27, 2006, WHX Corporation filed its Annual Report on Form 10-K
for the year ended December 31, 2005 (the "2005 10-K"). Since the filing of its
2005 10-K, the following significant events have occurred:
PENSION PLAN
On December 20, 2006, the Internal Revenue Service granted a conditional
waiver (the "IRS Waiver") of the minimum funding requirements for the WHX
Pension Plan for the 2005 plan year in accordance with section 412 (d) of the
Internal Revenue Code and section 303 of the Employee Retirement Income and
Security Act of 1974, as amended ("ERISA"), and on December 28, 2006, WHX, H&H,
and the Pension Benefit Guaranty Corporation (the "PBGC") entered into a
settlement agreement (the "PBGC Settlement Agreement") in connection with the
IRS Waiver and certain other matters. The IRS Waiver is subject to certain
conditions, including a requirement that the Company meet the minimum funding
requirements for the WHX Pension Plan for the plan years ending December 31,
2006 through 2010, without applying for a waiver of such requirements. The PBGC
Settlement Agreement and related agreements include the following: (i) the
amortization of the waived amount of $15.5 million (the "Waiver Amount") over a
period of five years, (ii) the PBGC's consent to increase borrowings under H&H's
senior credit facility to $125 million in connection with the closing of an
acquisition described below, (iii) the resolution of any potential issues under
Section 4062(e) of ERISA, in connection with the cessation of operations at
certain facilities owned by WHX, H&H or their subsidiaries, and (iv) the
granting to the PBGC of subordinate liens on the assets of H&H and its
subsidiaries, and specified assets of WHX, to collateralize WHX's obligation to
pay the Waiver Amount to the WHX Pension Plan and to make certain payments to
the WHX Pension Plan in the event of its termination. As a result of the PBGC
Settlement Agreement and the IRS Waiver, based on estimates from WHX's actuary,
the Company expects its minimum funding requirement for the specific plan year
and the amortization of the 2005 requirement to be $13.1 million (paid in full
in 2006), $10.8 million, $11.0 million, $8.9 million, $7.0 million and $2.3
million (which amounts reflect the recent passage of the Pension Protection Act
of 2006) in 2006, 2007, 2008, 2009, 2010 and 2011, respectively.
AMENDMENTS TO CREDIT AGREEMENTS
On December 27, 2006, Wachovia Bank, National Association ("Wachovia")
provided H&H with an additional $7.0 million loan. This was pursuant to an
amendment signed on October 30, 2006 which made the additional funds conditional
upon the filing of the Company's 2005 Annual Report on Form 10-K.
On December 28, 2006, H&H and certain of H&H's subsidiaries amended their
Loan and Security Agreement with Wachovia and their Loan and Security Agreement
with Steel Partners II, L.P. ("Steel") (the beneficial holder of 5,029,793
shares of the Company's common stock, representing approximately 50.3% of the
outstanding shares) to provide, in part, for: (i) the consummation of the
transactions contemplated by the PBGC Settlement Agreement and the waiver of
possible events of default that may have occurred relating to the matters
covered by the PBGC Settlement Agreement; and (ii) a $42 million term loan
funded by Ableco Finance LLC. A portion of the loan ($26 million) was used to
fund an acquisition by H&H, $3.2 million was paid as a contribution to the WHX
Pension Plan, and approximately $12 million of the loan was used to reduce H&H's
outstanding balance under its revolving credit facility.
On March 29, 2007, H&H and certain of H&H's subsidiaries amended the
respective Loan and Security Agreements with Wachovia and Steel to, among other
things, (i) amend the definition of EBITDA, (ii) reset the levels and amend
certain of the financial covenants, (iii) extend the termination date of the
credit facilities from March 31, 2007 to June 30, 2008, (iv) permit the
extension by H&H to WHX of an unsecured loan for required payments to the
pension plan, under certain conditions, and (v) permit the extension by H&H to
WHX of an unsecured loan for other uses in the aggregate principal amount not to
exceed $3.5 million under certain conditions. The amendments also provided for
the pledge of 65% of all outstanding securities of Indiana Tube Danmark A/S, a
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Danish corporation and a wholly-owned subsidiary of Handy & Harman
International, Ltd., and Protechno, S.A., a French corporation and a
wholly-owned subsidiary of Indiana Tube Danmark A/S. Finally, the amendments
also provided for waivers of certain events of default existing as of March 29,
2007.
ACQUISITIONS
Pursuant to an Asset Purchase Agreement (the "Asset Purchase Agreement")
dated as of December 28, 2006, a subsidiary of H&H acquired a mechanical roofing
fastener business. The purchase price was approximately $26 million, including a
working capital adjustment. The assets acquired included, among other things,
machinery, equipment, inventories of raw materials, work-in-process and finished
products, certain contracts, accounts receivable and intellectual property
rights, all as related to the acquired business and as provided in the Asset
Purchase Agreement. This acquired business develops and manufactures fastening
systems for the commercial roofing industry. WHX believes this acquisition
solidifies its position as a leading manufacturer and supplier of mechanical
fasteners, accessories and components, and building products for the North
American commercial and residential construction industry. Funds for payment of
the purchase price by H&H were obtained pursuant to the aforementioned term
loan.
On April 12, 2007, Steel Partners II, L.P. ("Steel"), a Delaware limited
partnership, and WHX entered into a Stock Purchase Agreement whereby WHX
acquired Steel's entire interest in BZ Acquisition Corp. ("BZA"), a Delaware
corporation and wholly owned subsidiary of Steel (the "BZA Transfer") for
$10.00. In addition, WHX agreed to reimburse all reasonable fees and expenses
incurred by Steel in connection with the Offer and the Merger (each as defined
below). BZA is the acquisition subsidiary in a tender offer to acquire up to all
of the outstanding stock of Bairnco Corporation, a Delaware corporation
("Bairnco") for $13.50 per share in cash. Steel beneficially owns approximately
50.3% of WHX's outstanding common stock.
Steel, BZA, and Bairnco entered into an Agreement and Plan of Merger dated
as of February 23, 2007 (the "Merger Agreement"), pursuant to which BZA amended
its tender offer to acquire all of the outstanding common shares of Bairnco at a
price of $13.50 per share in cash (the "Offer"). In addition, all Bairnco
shareholders of record on March 5, 2007 continued to be entitled to receive the
declared first quarter dividend of $0.10 per share, for total cash proceeds of
$13.60 per share. On April 13, 2007, upon the expiration of the Offer pursuant
to the Merger Agreement, BZA acquired approximately 88.9% of the outstanding
common stock of Bairnco.
Pursuant to the Merger Agreement, on April 24, 2007, BZA was merged with
and into Bairnco with Bairnco continuing as the surviving corporation as a
wholly owned subsidiary of WHX (the "Merger"). At the effective time of the
Merger, each Bairnco common share then outstanding (other than shares owned by
BZA or its direct parent entity, shares owned by Bairnco as treasury stock and
shares held by stockholders who properly exercise their appraisal rights) was
automatically converted into the right to receive $13.50 per share in cash
without interest and subject to applicable withholding taxes. Immediately prior
to the Merger, BZA held approximately 90.1% of the outstanding shares of
Bairnco. The proceeds required to fund the closing of the Offer and the
resulting Merger and to pay related fees and expenses were approximately $101.5
million.
In connection with the closing of the Offer, initial financing was
provided by Steel through two facilities. Steel extended to BZA bridge loans in
principal amount of approximately $75.1 million, $1.4 million, and $10.0 million
(and may extend additional loans of approximately $3.6 million, up to an
aggregate total amount of borrowings of $90.0 million) pursuant to a Loan and
Security Agreement (the "Bridge Loan Agreement"), between BZA and Bairnco, as
borrowers, and Steel, as lender. In addition, Steel extended to WHX a $15.0
million subordinated loan, which is unsecured at the WHX level, pursuant to a
Subordinated Loan and Security Agreement (the "Subordinated Loan Agreement" and,
together with the Bridge Loan Agreement, the "Loan Agreements"), between WHX, as
borrower, and Steel, as lender. WHX contributed the $15.0 million proceeds of
the subordinated loan to BZA as a capital contribution.
The Bridge Loan Agreement provides for bridge term loans of up to $90
million from Steel to BZA, which were assumed by Bairnco as a result of the
Merger. Borrowings under the Bridge Loan Agreement bear (i) cash interest at a
rate per annum equal to the prime rate of JP Morgan Chase plus 1.75% and (ii)
pay-in-kind interest at a rate per annum equal to 4.5% for the first 90 days the
initial loan is outstanding and 5% (instead of 4.5%) for the balance of the
term, each as adjusted from time to time. The minimum aggregate interest rate on
borrowings under the Bridge Loan Agreement is 14.5% per annum for the first 90
days the initial loan is outstanding, and 15% (instead of 14.5%) per annum for
the balance of the term, and the maximum aggregate interest rate on borrowings
under the Bridge Loan Agreement is 18% per annum. The cash interest rate and the
pay-in-kind interest rate may be adjusted from time to time, by agreement of
Steel and Bairnco, so long as the aggregate interest rate remains the same.
Interest is payable monthly in arrears. Obligations under the Bridge Loan
Agreement are guaranteed by certain of Bairnco's subsidiaries and secured by a
junior lien on the assets of Bairnco and certain of its subsidiaries and capital
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stock of certain of Bairnco's subsidiaries. Obligations under the Bridge Loan
Agreement are also guaranteed by the Company on an unsecured basis. The
scheduled maturity date of the indebtedness under the Bridge Loan Agreement is
the earlier to occur of (i) June 30, 2008 and (ii) such time as Bairnco obtains
any replacement financing. Indebtedness under the Bridge Loan Agreement may be
prepaid without penalty or premium.
The Subordinated Loan Agreement provides for a subordinated term loan of
$15 million from Steel to WHX, which is unsecured at the WHX level. Borrowings
under the Subordinated Loan Agreement bear pay-in-kind interest at a rate per
annum equal to the prime rate of JP Morgan Chase plus 7.75%, adjusted from time
to time, with a minimum interest rate of 16% per annum and a maximum interest
rate of 19% per annum. Interest is payable monthly in arrears. Obligations under
the Subordinated Loan Agreement are guaranteed by Bairnco and certain of its
subsidiaries and secured by a junior lien on the assets of Bairnco and certain
of its subsidiaries and capital stock of certain of Bairnco's subsidiaries. The
indebtedness under the Subordinated Loan Agreement will mature on the second
anniversary of the issuance of the subordinated loan and may be prepaid without
penalty or premium.
The Loan Agreements contain customary representations, warranties,
covenants, events of default and indemnification provisions. The indebtedness
under the Bridge Loan Agreement and the related security interests is
subordinated to the indebtedness and related security interests granted under
Bairnco's existing senior credit facility with Bank of America, N.A. The
guarantees of the indebtedness under the Subordinated Loan Agreement and the
related security interests is subordinated to all indebtedness and security
interests described in the preceding sentence.
Bairnco operates two core businesses - Arlon and Kasco. Arlon designs,
manufactures, and sells engineered materials and components for the electronic,
industrial and commercial markets. Kasco is a leading provider of meat-room
products and maintenance services for the meat and deli departments of
supermarkets; restaurants; meat, poultry and fish processing plants; and
manufacturers and distributors of electrical saws and cutting equipment
throughout North America, Europe, Asia and South America. WHX believes that the
acquisition of Bairnco will be beneficial because of Bairnco's strong positions
in niche engineered materials markets, and that it will improve Bairnco's plant
level operations, profit margins and working capital. The results of operations
and assets of Bairnco will be included in the financial statements of WHX
beginning in the second quarter of 2007.
SALE OF ASSETS
On March 4, 2007, the Company sold certain assets, including the land and
building, certain machinery and equipment, and inventory of its Handy & Harman
Electronic Materials Corporation subsidiary, located in East Providence, Rhode
Island, as well as certain of its assets and inventory located in Malaysia
(collectively referred to as "HHEM") for net proceeds of approximately $3.9
million. In December 2006, the Company recorded an asset impairment charge of
$3.4 million relating to the long-lived assets offered for sale, in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". The amount of the impairment loss was based upon the actual selling
price of the long-lived assets in March 2007. In the Company's balance sheet as
of December 31, 2006, the long-lived assets were classified as current assets
held for sale. Due to the charge for the long-lived asset impairment in 2006,
the Company recognized no gain or loss upon sale of the long-lived assets in
2007. However, upon sale, the Company recognized a loss of $0.9 million relating
to the sale of inventory. The Company has retained responsibility for any
environmental conditions requiring remediation at the HHEM site.
LIQUIDITY
On March 7, 2005, WHX filed a voluntary petition to reorganize under
Chapter 11 of the United States Bankruptcy Code. WHX continued to operate its
businesses and own and manage its properties as a debtor-in-possession under the
jurisdiction of the bankruptcy court until it emerged from protection under
Chapter 11 of the Bankruptcy Code on July 29, 2005. WHX's Bankruptcy Filing was
primarily intended to reduce WHX's debt, simplify its capital structure, reduce
its overall cost of capital and provide it with better access to capital
markets.
Throughout 2005 and 2006, the Company experienced liquidity issues, which
are more fully described in Notes 1a and 2 to the consolidated financial
statements included in the Annual Report on Form 10-K for the year ended
December 31, 2005. The Company incurred consolidated net losses of $34.7
million, $140.4 million and $159.9 million for the years ended December 31,
2005, 2004 and 2003, respectively, and had negative cash flows from operations
of $5.0 million and $39.6 million for the years ended December 31, 2005 and
2004, respectively. As of December 31, 2005, the Company had an accumulated
deficit of $394.0 million and a working capital deficit of $121.5 million.
Additionally, the Company has not been in compliance with certain of its bank
covenants. Note 1A to the consolidated financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 2005 describes a
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number of conditions concerning the Company's liquidity difficulties, and states
that these conditions raise substantial doubt about the Company's ability to
continue as a going concern.
WHX is a holding company and has as its sole source of cash flow
distributions from its operating subsidiaries, H&H and Bairnco, or other
discrete transactions. H&H's bank credit facilities and term loans effectively
do not permit it to transfer any cash or other assets to WHX (with the exception
of unsecured loans to be used to make required contributions to the pension
plan, and for other uses of an unsecured loan in the aggregate principal amount
not to exceed $3.5 million under certain conditions), and are collateralized by
substantially all of H&H's assets. Bairnco's revolving credit facility with Bank
of America, N.A permits distributions by Bairnco to WHX under certain
conditions. WHX has no bank credit facility of its own. WHX's ongoing operating
cash flow requirements consist of funding the minimum requirements for the WHX
Pension Plan and paying other administrative costs.
Since emerging from bankruptcy, due to covenant restrictions in H&H's
credit facilities, there have been no dividends from H&H to WHX and WHX's
sources of cash flow have consisted of:
o The issuance of $5.1 million in preferred stock by a newly created
subsidiary (WHX CS Corp.) in October 2005, which was invested in the
equity of a public company (Cosine Communications Inc.); and
o partial payment of the H&H subordinated debt to WHX of $9.0 million,
which required the approval of the banks participating in the H&H
bank facility. Subsequent to this transaction in 2006, the remaining
intercompany loan balance of the subordinated debt of $44.2 million
was converted to equity.
o As permitted by the March 29, 2007 Amendment and Waiver to the Loan
and Security Agreements, an unsecured loan from H&H for required
payments to the pension plan, and for other uses of an unsecured
loan in the aggregate principal amount not to exceed $3.5 million
under certain conditions.
o A $15.0 million subordinated loan from Steel pursuant to a
Subordinated Loan and Security Agreement between WHX, as borrower,
and Steel, as lender. WHX used the $15.0 million proceeds of the
subordinated loan as a capital contribution to acquire Bairnco.
As of December 31, 2006, WHX and its unrestricted subsidiaries had cash of
approximately $0.8 million and current liabilities of approximately $7.5
million, including $5.1 million of mandatorily redeemable preferred shares
payable to a related party. H&H's availability under its revolving credit
facility and other facilities as of December 31, 2006 was $19.1 million and as
of March 31, 2007, was approximately $15.5 million. All such facilities,
including the term loans, were set to expire on March 31, 2007 (although by
amendment signed on March 29, 2007, were extended until June 30, 2008).
In connection with the closing of the Bairnco Offer and the Merger on
April 24, 2007, Bairnco became a wholly-owned subsidiary of WHX. Initial
financing was provided by Steel through two facilities, as discussed above, in
the approximate aggregate amount of $101.5 million. In addition, the Bairnco
Revolving Credit Facility was amended to permit the closing of the Merger and
related financing transactions. The availability under the Bairnco Revolving
Credit Facility on March 31, 2007 was approximately $12.0 million. The Bairnco
Revolving Credit Facility permits distributions by Bairnco to WHX under certain
conditions, as described in Note 21 to the consolidated financial statements.
In addition to the obligations under the current credit facilities, the
Company also has significant cash flow obligations, including without limitation
the amounts due for the WHX Pension Plan (as amended by the PBGC Settlement
Agreement entered into December 28, 2006). There can be no assurance that the
funds available from operations and under its credit facilities will be
sufficient to fund pension funding requirements, debt service costs, working
capital demands and environmental remediation costs. Additionally, there can be
no assurances that the Company will be able to obtain replacement financing at
commercially reasonable terms upon the expiration of the H&H and Bairnco
credit facilities in June 2008.
Nevertheless, as discussed further below, the Company believes that recent
new and amended financing arrangements, acquisitions, the IRS Waiver and the
PBGC Settlement Agreement, the sale of a non-essential operating unit, as well
as recent improvements in its core operations, and the substantial completion of
a major remediation of property relating to certain environmental liabilities
should permit the Company to generate sufficient working capital to meet its
obligations as they mature over the next twelve months. The ability of the
8
Company to meet its cash requirements over this time period is dependent, in
part, on the Company's ability to meet its business plan. Management believes
that existing capital resources and sources of credit, including the H&H
facilities and the Bairnco facilities, are adequate to meet its current and
anticipated cash requirements. The Company also continues to examine all of its
options and strategies, including acquisitions, divestitures, and other
corporate transactions, to increase cash flow and stockholder value. 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.
As more fully described earlier in this "Recent Developments and
Liquidity" note to these financial statements, the Company has taken the
following actions which it believes will improve liquidity and help provide for
adequate liquidity to fund the Company's capital needs for the next twelve
months.
o On December 20, 2006, the IRS granted a conditional waiver of the $15.5
million minimum funding requirement for the WHX Pension Plan for the 2005
plan year and on December 28, 2006, WHX, H&H, and the PBGC entered into
the PBGC Settlement Agreement in connection with the IRS Waiver and
certain other matters. As a result of the PBGC Settlement Agreement and
the IRS Waiver, based on estimates from WHX's actuary, the Company expects
its minimum funding requirement for the specific plan year and the
amortization of the 2005 requirement to be $13.1 million (paid in full in
2006), $10.8 million, $11.0 million, $8.9 million, $7.0 million and $2.3
million (which amounts reflect the recent passage of the Pension
Protection Act of 2006) in 2006, 2007, 2008, 2009, 2010 and 2011,
respectively.
o Availability under H&H's Loan and Security Agreements' revolving credit
facility as of December 31, 2006 was $19.1 million, and as of March 31,
2007, was approximately $15.5 million. On March 29, 2007, all such
facilities, including the term loans, were amended to (i) redefine EBITDA,
(ii) reset the levels and amend certain of the financial covenants, (iii)
extend the termination date of the credit facilities from March 31, 2007
to June 30, 2008, (iv) permit the extension by H&H to WHX of an unsecured
loan for required payments to the pension plan, under certain conditions,
and (v) permit the extension by H&H to WHX of an unsecured loan for other
uses in the aggregate principal amount not to exceed $3.5 million under
certain conditions.
o Following the closing of the Bairnco Merger, upon the satisfaction of
certain conditions, Bairnco is permitted to make distributions to WHX. As
of March 31, 2007, availability under the Bairnco Revolving Credit
Facility was approximately $12.0 million, although there is no assurance
that such amount will be available in the future, or if available, that
Bairnco will satisfy the conditions for distributing this amount to WHX.
o The acquisition by a subsidiary of H&H of a mechanical roofing fastener
business for approximately $26 million, including a working capital
adjustment, on December 28, 2006, which we believe will prove to be a
valuable acquisition which will solidify H&H's position as a leading
manufacturer and supplier of mechanical fasteners, accessories and
components, and building products for the North American commercial and
residential construction industry.
o The sale in March 2007 of a non-core business which had generated
operating losses in the past year.
o The substantial completion of remediation of property relating to certain
environmental liabilities.
In view of the matters described in the preceding paragraphs, management
believes that the Company has the ability to meet its financing requirements on
a continuing basis. However, if the Company's fiscal 2007 planned cash flow
projections are not met, management could consider the reduction of certain
discretionary expenses and sale of certain assets. In the event that these plans
are not sufficient and the Company's credit facilities are not available, the
Company's ability to operate could be adversely affected.
NOTE 3 - BASIS OF PRESENTATION
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. 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
9
audited consolidated financial statements contained in Form 10-K for the year
ended December 31, 2005. Certain amounts for the prior year have been
reclassified to conform to the current year presentation.
During the three and nine month period ended September 30, 2005, WHX was
operating its businesses as a debtor-in-possession under the jurisdiction of the
bankruptcy court. Thus, the financial statements covering this period which are
included herein have been prepared in accordance with the American Institute of
Certified Public Accountants Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code." In
accordance with SOP 90-7, revenues, expenses, realized gains and losses, and
provisions for losses resulting from the reorganization are reported separately
as Chapter 11 and related reorganization expenses, net in the unaudited
condensed consolidated statements of operations. Cash used for Chapter 11 and
related reorganization expenses is disclosed separately in the unaudited
condensed consolidated statement of cash flows. The Company did not qualify for
fresh-start reporting under the guidance in SOP 90-7 upon its emergence from
bankruptcy.
In the opinion of management, the interim financial statements reflect all
normal and recurring adjustments (except for the accounting required under SOP
90-7 related to the Bankruptcy Filing) 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 nine months ended September 31, 2006 are not
necessarily indicative of the operating results for the full year.
During the period March 7, 2005 through July 28, 2005, while it was
reorganizing, WHX stopped recognizing interest on its 10-1/2% Senior Notes
(approximately $3.9 million of interest) and also stopped recognizing the
cumulative dividends on its preferred stock (approximately $7.8 million of
dividends would have accrued). As of the Effective Date, the Senior Notes and
Preferred Stock were deemed cancelled and annulled; consequently, no further
interest or dividends were recognized after March 7, 2005.
NOTE 4 -RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities" (SFAS No. 159). SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair value.
SFAS No. 159 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The Company is currently evaluating the
impact of adopting SFAS No. 159 on its consolidated financial position and
results of operations.
On September 29, 2006 , the FASB issued Statement of Financial Accounting
Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans" (SFAS No. 158) which amends SFAS No. 87 and SFAS No. 106
to require recognition of the overfunded or underfunded status of pension and
other postretirement benefit plans on the balance sheet. Under SFAS No. 158,
gains and losses, prior service costs and credits, and any remaining transition
amounts under SFAS No. 87 and SFAS No. 106 that have not yet been recognized
through net periodic benefit cost will be recognized in accumulated other
comprehensive income, net of tax effects, until they are amortized as a
component of net periodic cost. SFAS No. 158 is effective for publicly-held
companies for fiscal years ending after December 15, 2006. WHX Corporation
adopted the balance sheet recognition provisions of SFAS No. 158 at December 31,
2006. At that date, our balance sheet reflected a reduction in shareholder
equity of approximately $49.3 million due to our defined benefit pension and
other postretirement benefit plans. The new provisions of SFAS No. 158 resulted
in an additional $1.2 million reduction to WHX Corporation's shareholders'
equity at December 31, 2006. The Statement does not affect the results of
operations.
10
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB No. 108"). SAB No. 108
was issued in order to eliminate the diversity of practice surrounding how
public companies quantify financial statement misstatements. It requires
quantification of financial statement misstatements based on the effects of the
misstatements on each of the company's financial statements and related
financial statement disclosures. The provisions of SAB No. 108 must be applied
to annual financial statements no later than the fiscal year ending November 15,
2006. The Company has determined that SAB No. 108 does not have a material
impact on its financial statements.
In September 2006, the FASB issued Statement of Financial Standards No.
157, "Fair Value Measurements" (SFAS No. 157). SFAS No. 157 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. The provisions of SFAS No. 157
are effective for fiscal years beginning after November 15, 2007. The Company is
currently evaluating the impact of adopting SFAS # 157 on its consolidated
financial position and results of operations.
In June 2006, the FASB issued Financial Accounting Standards Board
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
Interpretation of SFAS Statement 109" (FIN No. 48), which clarifies the
accounting for uncertainty in tax positions. This Interpretation provides that
the tax effects from an uncertain tax position can be recognized in the
financial statements, only if the position is more likely than not of being
sustained on audit, based on the technical merits of the position. The
provisions of FIN No. 48 are effective as of the beginning of fiscal 2007, with
the cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. The Company does not expect the
adoption of FIN No. 48 to have a material impact on its consolidated financial
position or results of operations.
NOTE 5 - EARNINGS (LOSS) PER SHARE
The computation of basic loss per common share is based upon the weighted
average number of shares of Common Stock outstanding. Diluted earnings per share
gives effect to dilutive common stock equivalents outstanding during the period,
such as convertible preferred stock, and options to purchase common stock.
As a result of the Company's emergence from bankruptcy in 2005, there were
changes to the authorized and outstanding common stock of WHX. Prior to
emergence, the Company had 5,522,926 preferred and 5,485,856 common shares
outstanding. Upon emergence from bankruptcy, holders of the Company's 10 1/2%
Senior Notes received 9,200,000 shares of common stock in full and complete
satisfaction of all claims, in exchange for the extinguishment of this debt. The
preferred stock, with a carrying value of $267 million, was extinguished upon
emergence from bankruptcy in exchange for the residual shares of common stock
outstanding, (800,485 shares), plus warrants to purchase an additional 752,688
common shares. Holders of the pre-bankruptcy common stock received no
distribution under the Plan, and all stock option plans previously in effect
were cancelled and annulled. There are no dilutive common stock equivalents in
2006.
For purposes of calculating the 2005 Earnings Per Share, since the Company
did not qualify for fresh-start reporting under the guidance in SOP 90-7, the
pre-emergence common shares of 5,485,856 and post-bankruptcy shares of
10,000,485 are combined, on a weighted average basis, in the denominator used
for earnings per share calculations in 2005 on the basis that such common shares
are of the same class of stock. In addition, the Company has included the gain
on the extinguishment of the preferred stock of $258 million (representing the
difference between the fair value of the common stock and warrants issued upon
emergence from bankruptcy to the preferred stockholders and the carrying value
of the preferred stock) as an increase in net income available to common
shareholders in accordance with EITF Topic D-42, "The Effect on the Calculation
of Earnings per Share for the Redemption or Induced Conversion of Preferred
Stock". As to the weighted average number of common shares outstanding for 2005,
the Company has accounted for the common shares cancelled, in connection with
the emergence from Chapter 11 as a retirement, and the issuance of common shares
to the preferred stockholders and Senior Note holders as an issuance.
In 2005 prior to the emergence from bankruptcy, there were no dilutive
common stock equivalents. The conversion of preferred stock, the exercise of
options to purchase common stock, and the inclusion of non-vested restricted
common stock awards would have had an anti-dilutive effect.
A reconciliation of the income and shares used in the computation follows:
11
RECONCILIATION OF INCOME (LOSS) AND SHARES IN EPS CALCULATION
(in thousands except per share amounts) For the Three Months Ended September 30, 2006
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------- --------- ---------
Net income $ 5,115
Less: Preferred stock dividends --
---------
Basic and Diluted EPS
Income applicable to common stockholders $ 5,115 10,000 $ 0.51
For the Three Months Ended September 30, 2005
Income (loss) Shares Per-Share
(Numerator) (Denominator) Amount
--------- --------- ---------
Net loss $ (12,671)
Add: Gain on extinguishment of preferred stock 257,782
---------
Basic and Diluted EPS
Income applicable to common stockholders $ 245,111 7,816 $ 31.36
For the Nine Months Ended September 30, 2006
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------- --------- ---------
Net income $ (3,690)
Less: Preferred stock dividends --
---------
Basic and Diluted EPS
Income applicable to common stockholders $ (3,690) 10,000 $ (0.37)
For the Nine Months Ended September 30, 2005
Income (loss) Shares Per-Share
(Numerator) (Denominator) Amount
--------- --------- ---------
Net loss $ (23,092)
Add: Gain on extinguishment of preferred stock 257,782
Less: Preferred stock dividends 3,561
---------
Basic and Diluted EPS
Income applicable to common stockholders $ 231,129 6,402 $ 36.10
--------- --------- ---------
STOCK BASED COMPENSATION
The effect on net income (loss) and income (loss) per share if WHX had
applied the fair-value recognition provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", to stock-based compensation for the three and nine months ended
September 30, 2005 was not material.
Stock option plans were in effect until WHX emerged from bankruptcy in
July 2005. In accordance with the plan of reorganization all such stock option
plans were cancelled and annulled.
PREFERRED STOCK DIVIDENDS AND INTEREST
During the period March 7, 2005 through July 28, 2005, while it was
reorganizing, WHX stopped recognizing interest on its 10-1/2% Senior Notes
(approximately $3.9 million of interest) and also stopped recognizing the
12
cumulative dividends on its preferred stock (approximately $7.8 million of
dividends would have accrued). As of the Effective Date, the Senior Notes and
Preferred Stock were deemed cancelled and annulled; consequently, no further
interest or dividends were recognized after March 7, 2005.
NOTE 6 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three and nine-months ended September 30,
2006 and 2005 is as follows:
(in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
-------- --------- -------- ---------
Net income (loss) $ 5,115 $ (12,671) $ (3,690) $ (23,092)
Foreign currency translation adjustments 112 239 735 (928)
-------- --------- -------- ---------
Comprehensive income (loss) $ 5,227 $ (12,432) $ (2,955) $ (24,020)
======== ========= ======== =========
Accumulated other comprehensive income (loss) balances as of September 30, 2006
and December 31, 2005 were comprised as follows:
(in thousands)
September 30 December 31,
2006 2005
-------- --------
Minimum pension liability adjustment $(59,754) $(59,754)
Foreign currency translation adjustment 3,063 2,328
-------- --------
$(56,691) $(57,426)
======== ========
NOTE 7 - INVENTORIES
Inventories at September 30, 2006 and December 31, 2005 are comprised as
follows:
(in thousands) September 30, December 31,
2006 2005
-------- --------
Finished products $ 20,475 $ 17,804
In - process 6,894 4,851
Raw materials 18,928 19,226
Fine and fabricated precious metal in various states of completion 19,347 24,266
-------- --------
65,644 66,147
LIFO reserve (7,395) (5,169)
-------- --------
$ 58,249 $ 60,978
In order to produce certain of its products, the Company purchases,
maintains and utilizes precious metals inventory. H&H enters into commodity
futures and forwards contracts on precious metals that are subject to market
fluctuations in order to economically hedge its precious metals inventory
against price fluctuations. As these derivatives are not designated as
accounting hedges under Statement of Financial Accounting Standards ("SFAS") No.
133, they are accounted for as derivatives with no hedge designation.
Accordingly, the Company marks to market the derivative instruments related to
13
precious metals. Such mark to market adjustments are recorded in current period
earnings as other income or expense in the Company's consolidated statement of
operations. The quarter and nine month periods ended September 30, 2006 include
losses of $1.7 million and $6.2 million, respectively, relating to these
adjustments. The quarter and nine month periods ended September 30, 2005
included losses of $1.0 million and $1.4 million, respectively. In addition, the
Company records its precious metal inventory at LIFO cost, subject to lower of
cost or market with any adjustments recorded through cost of goods sold.
Operating income for the quarter and nine month periods ended September 30, 2006
include a credit to cost of goods sold of $2.3 million and $4.1 million,
respectively, resulting from the liquidation of precious metal inventories
valued at LIFO cost. The quarter and nine month periods ended September 30, 2005
include a non cash charge to cost of goods sold of $0.4 million and $0.3
million, respectively, resulting from the lower of cost or market adjustment to
precious metal inventories. The market value of the precious metal inventory
exceeded LIFO value cost by $7.4 million and $5.2 million at September 30, 2006
and December 31, 2005, 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's
precious metal is returned in fabricated form, the customer is charged a
fabrication charge. The value of this toll precious metal is not included in the
Company's balance sheet.
The following table summarizes customer-owned and H&H-owned precious metal
quantities:
September 30, 2006 December 31, 2005
Silver ounces: ------------------ ------------------
Customer metal 145,332 79,442
H&H owned metal 1,214,488 1,537,900
Gold ounces:
Customer metal 824 305
H&H owned metal 8,239 19,417
Palladium ounces:
Customer metal 1,338 1,060
H&H owned metal 2,161 2,161
Market value per ounce:
Silver $ 11.459 $ 8.910
Gold $ 599.28 $ 516.00
Palladium $ 315.00 $ 255.00
NOTE 8 - ASSET IMPAIRMENT, RESTRUCTURING CHARGES AND DISCONTINUED OPERATIONS
NORRISTOWN FACILITY
On May 9, 2006, the Company announced the closing of the Handy & Harman
Tube Co. ("HHT") located in Norristown, Pennsylvania., which is included in the
Company's Tubing segment. The decision to close the Norristown facility was
principally based on the economics of operating HHT's business at the facility.
HHT manufactured stainless steel tubing that was supplied in various lengths and
forms in both coil and straight lengths. HHT's coil business was relocated to
H&H's Camdel Metals Corporation ("Camdel") facility located in Camden, Delaware.
HHT's machinery and equipment and real property at the site are being offered
for sale.
In conjunction with the decision to close the Norristown facility, the
Company reviewed the recoverability of the Norristown long-lived assets in
accordance with SFAS 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 Norristown. As a result, the Company
recorded an asset impairment charge of $1.8 million in its statement of
operations for the second quarter of 2006. Certain of the Norristown long-lived
assets, principally consisting of machinery and equipment, have been
reclassified to current assets held for sale in the balance sheet as of
September 30, 2006. The real estate is included in non-current assets (other
14
assets) as it is not probable that it will be sold within one year. No
impairment loss was incurred on the real estate assets based on the Company's
analysis.
Restructuring charges related to the closing of the Norristown facility
totaling $2.4 million in 2006 ($1.9 million, and $0.5 million in the second, and
third quarters, respectively) were recorded in the statement of operations.
These charges included termination benefits of $2.0 million, $0.1 million
resulting from a pension curtailment, and $0.3 million of other charges.
The activity in the restructuring reserve was as follows for the nine
months ended September 30, 2006:
Reserve Reserve
Balance Balance
December 31, September 30,
2005 Expense Paid 2006
------- ------- ------- -------
(in thousands)
Termination benefits $ -- $ 2,161 $ (407) $ 1,754
Other facility closure costs -- 127 (127) --
Pension curtailment charge -- 128 (128) --
------- ------- ------- -------
$ -- $ 2,416 $ (662) $ 1,754
======= ======= ======= =======
The Norristown facility operated through the third quarter of 2006. The
closing of Norristown and the sale of certain of its assets was completed by the
end of 2006, and most of the remaining assets are expected to be sold in 2007.
The Company recently completed an environmental study at the Norristown
facility which indicated that environmental remediation activities with an
estimated cost of $0.8 million are required, which the Company accrued as of the
first quarter of 2006.
HANDY & HARMAN ELECTRONIC MATERIALS ("HHEM")
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long Lived Assets", the Company has evaluated fixed assets
associated with its HHEM facility in light of ongoing operating losses. This
evaluation resulted in the recording of accelerated depreciation of $0.2 million
in 2004, $0.8 million in 2005 and $0.6 million in 2006. This accelerated
depreciation is a charge to cost of goods sold in the applicable period. In the
fourth quarter of 2006, the Company again reviewed the recoverability of the
long-lived assets of the HHEM business for impairment when it was determined
that the assets should be classified as held for sale in accordance with SFAS
No.144, and as a result of such review in the fourth quarter of 2006, the
Company recorded an asset impairment charge of $3.4 million relating to the
long-lived assets of HHEM. The amount of the impairment loss was based upon the
actual selling price of the long-lived assets in March 2007. In the Company's
balance sheet as of December 31, 2006, the long-lived assets of $3.1 million
have been classified as current assets held for sale. HHEM is part of the
Company's Precious Metals segment. See Note 2 for discussion about a sale of the
HHEM assets in March 2007.
WIRE AND CABLE BUSINESS
In 2004 the Company evaluated the current operating plans and current and
forecasted operating results of its wire and cable business. In accordance with
SFAS No. 144, the Company determined that there were indicators of impairment as
of June 30, 2004 based on continued operating losses, deteriorating margins, and
rising raw material costs. An estimate of future cash flows indicated that as of
June 30, 2004 cash flows would be insufficient to support the carrying value of
the long-lived assets of the business. Accordingly, these assets were written
down to their estimated fair value by recording a non-cash asset impairment
charge of $3.9 million in the second quarter of 2004. In November 2004, the
15
Company announced that it had signed a non-binding letter of intent to sell its
wire business and that it was negotiating the sale of its steel cable business.
The decision to sell was based on the continued cash flow drain on the Company
caused by these businesses from further increases in operating losses,
deteriorating margins and rising raw material costs. Based on the proposed terms
of these transactions the Company recorded an additional asset impairment charge
of $4.3 million. At that time the Company stated that if it were unable to
complete these sales it would consider the closure of these operations. On
January 13, 2005, the Company determined that a sale of these operations could
not be completed on terms satisfactory to the Company. Accordingly, the Company
decided to permanently close the wire and cable businesses.
In the fourth quarter of 2004, H&H communicated to its 146 union employees
the plan to either sell or close the wire and cable business. Accordingly, H&H
recorded a restructuring charge of $1.2 million for termination benefits and
related costs. These termination benefits were paid in 2005. Additionally, $0.4
million was recorded as a restructuring charge for clean up costs related to the
Cockeysville, Maryland facility. The Company operated these facilities on a
limited basis in the first quarter of 2005 in order to fulfill customer
commitments. Operating losses and closure costs incurred in 2005 amounted to
$4.2 million including a $0.7 million gain on the sale of certain fixed assets
and $0.9 million in termination benefits. Accordingly, the total cost including
termination benefits, operating losses (excluding fixed asset gains) and closure
costs was approximately $6.5 million. These costs were funded from realization
of working capital and proceeds from the sale of fixed assets of these
businesses. In the second quarter of 2005 we concluded all operations of the
wire and cable business. Accordingly, these businesses are reported as
discontinued operations. In 2006 the Company sold land, buildings, and certain
machinery & equipment relating to this business for $7.3 million and recognized
a pretax gain on these sales of $4.5 million.
Net Income (loss) from discontinued operations were as follows:
(in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
---------------------------------------------
Net sales $ -- $ -- $ -- $ 10,672
Pretax gain on sale of assets 4,519 -- 4,519 681
Operating income (loss) 4,519 (283) 4,352 (3,699)
Interest/other income (expense) -- (37) -- (105)
Income tax provision (1,639) -- (1,639) --
Net income (loss) 2,880 (320) 2,713 (3,804)
NOTE 9 - PENSIONS, OTHER POSTRETIREMENT AND POST-EMPLOYMENT BENEFITS
The following table presents the components of net periodic pension cost
(credit) for the WHX Pension Plan for the three and nine months ended September
30, 2006 and 2005:
16
(in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005 (a)
---------------------- -----------------------
Service cost $ 41 $ 311 $ 182 $ 933
Interest cost 5,844 5,752 17,210 17,255
Expected return on plan assets (7,171) (6,944) (21,264) (20,830)
Amortization of prior service cost 16 39 54 116
Recognized actuarial (gain)/loss -- 317 303 951
Special termination benefit charge -- -- 128 --
$ (1,270) $ (525) $ (3,387) $ (1,575)
(a) A curtailment loss related to the shutdown of the wire and cable operations of $0.2
million is not included above. This curtailment loss is included in the net loss from
discontinued operations. As required by SFAS No. 88, the Company re-measured its pension
liability as of the date of the curtailment and as a result, reduced its year-to-date
pension credit by $0.5 million as of June 30, 2005.
The Company maintains several other retirement and postretirement benefit
plans covering substantially all of its employees. The approximate aggregate
expense for these plans is $0.2 million and $0.0 million (due to a favorable
adjustment in the quarter related to a legal settlement) for the three months
ended September 30, 2006 and 2005, respectively, and $0.0 million and $1.2
million for the nine months ended September 30, 2006 and 2005, respectively. The
reason for the lower expense for the nine months ended September 30, 2006 was
that effective January 1, 2006, the H&H non-qualified pension plan adopted an
amendment to freeze benefits for all participants. This resulted in a
curtailment credit of $0.5 million, which was recorded in the first quarter of
2006.
NOTE 10 - DEBT
Long-term debt consists of the following:
in thousands) September 30, December 31,
2006 2005
-------- --------
H&H Term Loan - related party $ 89,627 $ 70,627
H&H Credit Facility - Term Loan A 15,227 22,664
Sovereign - OMG 6,904 --
Other H&H debt 5,377 5,352
-------- --------
117,135 98,643
Less portion due within one year 3,715 93,754
-------- --------
Total long-term debt $113,420 $ 4,889
======== ========
As of December 31, 2005, due to default on certain financial covenants in
its various loan agreements, the Company classified much of its debt as
short-term due to the lenders' ability to demand immediate payment. As of
September 30, 2006, such debt has been classified as long-term since the Company
is no longer in default on the debt, and the debts' maturity date is June 30,
2008.
The increase in debt between December 31, 2005 and September 30, 2006
consisted principally of the following: On December 29, 2005, H&H entered into
an amendment to its Term B Loan with Steel. This amendment provided for, among
other things, an increase of the Term B Loan in January 2006 by $10 million. On
January 24, 2006, H&H's wholly-owned subsidiary, OMG, Inc. entered into a loan
agreement with Sovereign Bank for $8.0 million, collateralized by a mortgage on
OMG, Inc.'s real property. On March 31, 2006, H&H and Steel Partners, II L.P.
agreed to an increase in the Term B Loan in the amount of $9.0 million and the
prepayment in the same amount of a portion of H&H's subordinated intercompany
17
promissory note issued to WHX.. After the payment of $9.0 million by H&H, WHX
converted the remaining intercompany note balance to equity.
NOTE 11 - REPORTABLE SEGMENTS
The Company has three reportable segments: (1) Precious Metals. This
segment manufactures and sells precious metal products and electroplated
material, containing silver, gold, and palladium in combination with base metals
for use in a wide variety of industrial applications; (2) Tubing. This segment
manufactures and sells tubing products and fabrications primarily from stainless
steel, carbon steel and specialty alloys, for use in a wide variety of
industrial applications; and (3) Engineered Materials. This segment manufactures
specialty roofing and construction fasteners, products for gas, electricity and
water distribution using steel and plastic which are sold to the construction,
and natural gas and water distribution industries, and electrogalvanized
products used in the construction and appliance industries.
Management has determined that certain operating segments 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 gross profit and operating
income to evaluate segment performance. Operating income for the reportable
segments excludes 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 and nine month periods ended September 30, 2006 and 2005:
18
(in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
--------- --------- --------- ---------
Net Sales
Precious Metal $ 36,141 $ 28,071 $ 112,249 $ 87,656
Tubing 30,526 29,405 93,235 86,393
Engineered Materials 54,942 45,666 154,109 130,578
--------- --------- --------- ---------
Net sales $ 121,609 $ 103,142 $ 359,593 $ 304,627
========= ========= ========= =========
Segment operating income (loss)
Precious Metal $ 2,909 $ (1,015) $ 7,793 $ 410
Tubing (1,903) (9) (5,581) 1,674
Engineered Materials 6,489 4,360 14,993 11,602
--------- --------- --------- ---------
7,495 3,336 17,205 13,686
--------- --------- --------- ---------
Unallocated corporate expenses 927 6,227 2,677 9,488
Pension income (a) (1,270) (525) (3,515) (1,575)
Insurance proceeds (811) -- (811) --
Environmental remediation expense -- -- 2,909 --
(Gain) loss on disposal of assets (4) 5 83 4
--------- --------- --------- ---------
Income (loss) from operations 8,653 (2,371) 15,862 5,769
Interest expense 5,776 3,924 15,723 13,190
Chapter 11 and related reorganization expenses -- 4,856 -- 9,480
Realized and unrealized loss on derivatives 1,714 986 6,244 1,439
Other income (176) (237) (41) (367)
--------- --------- --------- ---------
Income (loss) from continuing operations before tax $ 1,339 $ (11,900) $ (6,064) $ (17,973)
========= ========= ========= =========
(a) Unallocated pension income does not include a curtailment charge of $128 related to the closure of the Norristown
location of HHT. This curtailment expense has been allocated to the Tubing segment, which includes HHT.
NOTE 12- COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS:
SUMCO INC. V. UNDERWRITERS AT LLOYD'S, LONDON, LEXINGTON INSURANCE COMPANY,
HARTFORD FIRE INSURANCE COMPANY, AND WURTTEMBERGISCHE VERSICHERUNG AG
On July 7, 2004, Sumco Inc. ("Sumco"), a wholly-owned subsidiary of H&H,
filed suit in the Marion County Superior Court of Indiana against certain
underwriters affiliated with Lloyd's, London, Lexington Insurance Company,
Hartford Fire Insurance Company, and Wurttembergische Versicherung AG (the
defendants). Sumco seeks to recover monies from these insurance carriers for
losses incurred as a result of a January 20, 2002 fire at its metal plating
19
facility in Indianapolis, Indiana. At the time of the fire, Sumco's parent
corporation, WHX, had in place layered fire insurance policies with combined
limits of $25 million and a deductible of $100,000. The defendants represent
carriers who provided $15 million in insurance coverage in excess of two
underlying policies of $5 million each. Defendants have previously paid $5
million in claims. Sumco contends that its losses are in excess of the policy
limits, defendants have acted in bad faith, and that it is entitled to the
payment of the remaining approximate $10 million in insurance coverage provided
by the defendants. In December 2006, the Court ruled on the Motion for Summary
Judgment. It denied the insurers' motion for summary judgment on the bad faith
claims and limited the compensatory damages that Sumco could recover. The
defendants have denied the allegations of the complaint and asserted certain
defenses. The parties settled their claims in May 2007 for an aggregate payment
to WHX of $5,689,276 from the defendants, and an assignment of their interest to
WHX in up to another $1.7 million in proceeds resulting from the settlement of
subrogation claims against various third parties (the recovery of which, in
whole or part, is not assured). Steel Partners has a first lien on these
proceeds and the Pension Benefit Guaranty Corporation has a second lien.
HANDY & HARMAN REFINING GROUP, INC., DEBTOR PLAINTIFFS V. HANDY & HARMAN,
DEFENDANT
H&H was a defendant in a lawsuit (the "Indemnity Action") filed by Handy &
Harman Refining Group, Inc. ("HHRG") (an unrelated party to H&H) seeking a money
judgment in the amount of $8.5 million, plus interest, which as of December 31,
2005 was alleged to be approximately $4.0 million, for an alleged breach of
contract in connection with H&H's sale of its Precious Metals Refining Division
to HHRG in 1996. HHRG subsequently filed for Chapter 11 and commenced the
Indemnity Action in the Bankruptcy Court on or about August 14, 2002. On or
about May 26, 2004, the Indemnity Action was transferred to the United States
District Court for the District of Connecticut. H&H filed a proof of claim in
the HHRG bankruptcy which had an outstanding amount of approximately $1.9
million and funds had been set aside in that amount by HHRG. The parties settled
this matter in June 2006 for the surrender of the full amount of H&H's proof of
claim of $1.9 million plus a payment of $438,000 to HHRG. The settlement was
approved by the Bankruptcy Court.
HH EAST PARCEL, LLC. V. HANDY & HARMAN
This action arises out of a purchase and sale agreement entered into in
2003 whereby H&H agreed to sell the eastern parcel of a commercial site in
Fairfield, Connecticut to HH East Parcel, LLC ("HH East"). On or about April 5,
2005, HH East filed a Demand for Arbitration with the American Arbitration
Association seeking legal and equitable relief including completion of the
remediation of environmental conditions at the site in accordance with the terms
of the agreement. An arbitration hearing was held in November 2005 in
Connecticut, pursuant to which HH East was awarded an amount equal to $5,000 per
day from January 1, 2005 through the date on which remediation is completed.
This award amounts to approximately $4.0 million through the completion date of
April 6, 2007. H&H applied to the Superior Court of Connecticut, Fairfield
County, to have the arbitration award vacated and a decision was issued on June
26, 2006, denying H&H's application. H&H is appealing this decision. 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 both the eastern and western parcels of the
property. H&H has been conducting an investigation of the western parcel, and is
continuing the process of evaluating various options for its remediation. The
sale of the eastern parcel that is the subject of this litigation triggered
statutory obligations under Connecticut law to investigate and remediate
pollution at or emanating from the eastern parcel. H&H completed the
investigation and has been actively conducting remediation of all soil
conditions on the eastern parcel for more than three years. Although no
groundwater remediation is required, there will be monitoring of same for
several years. Remediation of all soil conditions on site was completed on April
6, 2007. The total remediation is expected to exceed $28.0 million, of which
approximately $20.7 million had been expended through December 31, 2006. H&H
received reimbursement of $2.0 million of these costs from its carrier under a
cost-cap insurance policy and is pursuing its potential entitlement to
additional coverage.
PAUL E. DIXON & DENNIS C. KELLY V. HANDY & HARMAN
Two former officers of H&H filed a Statement of Claim with the American
Arbitration Association ("Arbitration") on or about January 3, 2006, alleging
four claims against H&H. The Claimants were employees of H&H until September
2005 when their employment was terminated by H&H. Their claims include seeking
payments allegedly due under employment contracts and allegedly arising from the
terminations, and seeking recovery of benefits under what they allege was the
Handy & Harman Supplemental Executive Retirement Plan.
The Statement of Claim recites that the employment agreements of each of
the Claimants provides that H&H may terminate their employment at any time,
without prior notice, for any of the following reasons: "(i) [the officer's]
engaging in conduct which is materially injurious to [H&H] or [WHX], their
subsidiaries or affiliates, or any of their respective customer or supplier
relationships, monetarily or otherwise; (ii) [the officer's] engaging in any act
of fraud, misappropriation or embezzlement or any act which would constitute a
20
felony (other than minor traffic violations); or (iii) [the officer's] material
breach of the agreement." The Statement of Claim further alleges, and H&H has
not disputed, that each Claimant's employment was terminated in September 2005
pursuant to a letter, which stated in part, that each Claimant had violated
provisions of such officer's employment agreement, contained in the previous
sentence, "by, INTER ALIA, attempting to amend and put in place various benefit
plans to personally benefit yourself, without notice to, or approval of the
Board of Directors; for further failing to disclose the existence of the
relevant plan documents and other information to the Board; for failing to
cooperate in the Company's investigation of these important issues; for material
losses to the Company in connection with these actions....".
In the Arbitration, Claimants sought an award in excess of $4 million
each, plus interest, costs and attorneys' fees. 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, 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 plans at issue and by letter dated September 27,
2006; Claimants were notified that their request was largely denied. They filed
an appeal on December 11, 2006 with the Plan Administrator, which appeal was
denied on February 9, 2007. While no action is pending in any court, H&H does
not believe that it is liable to Claimants under the claims that have been
asserted to date, and it intends to defend itself vigorously against any claims
that may be asserted by Claimants. There can be no assurance that H&H will be
successful in defending against any such claims, or that H&H will not have any
liability on account of claims that may be asserted by Claimants. 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
In 2004, a subsidiary of H&H entered into an agreement to sell a
commercial/industrial property in North Attleboro, Massachusetts. Disputes
between the parties led to suit being brought in Bristol Superior Court in
Massachusetts. The plaintiff alleges that H&H is liable for breach of contract
and certain consequential damages as a result of H&H's termination of the
agreement in 2005, although H&H subsequently revoked its notice of termination.
H&H has denied liability and has been vigorously defending the case. The court
entered a preliminary injunction enjoining H&H from conveying the property to
anyone other than the plaintiff during the pendency of the case. Discovery on
liability and damages has been stayed while the parties are actively engaged in
settlement discussions, on which they have reached agreement in principle,
subject to certain conditions. Concurrently with these settlement efforts, 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. H&H is in discussions with the EPA, the
MADEP and the plaintiff in connection with the remedial activities. 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.
ENVIRONMENTAL ACTIONS
In connection with the sale of its Fairfield, Connecticut facility in
2003, the Company was responsible for demolition and environmental remediation
of the site, the estimated cost of which was included in the loss on sale
recorded in 2003. H&H determined that an increase in the reserve for
environmental remediation was needed in the amount of $28.3 million, which was
recorded in the fourth quarter of 2004. This change in reserve was caused by the
discovery of underground debris and soil contaminants that had not been
anticipated. These additional costs are included in environmental remediation
expense. An additional $3.8 million was recorded in selling, general and
administrative expenses as a penalty related to Fairfield East. The Company
retains title to a parcel of land adjacent to the property sold in 2003. This
parcel is classified as other non-current assets, in the amount of $2.0 million,
on the consolidated balance sheets at September 30, 2006 and December 31, 2005.
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
remediation to be performed with regard to soil and groundwater contamination
allegedly from TCE. H&H settled a case brought by the local municipality in
21
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 May of 2006. Once the
investigation has been completed, it will be followed by a feasibility study and
a remedial action work plan that will be submitted to NJDEP. H&H anticipates
entering into discussions in the near future 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 $450,000 per year, plus anticipated additional costs in early
2007 of approximately $700,000. Pursuant to a settlement agreement with the
former operator of this facility, the responsibility for site investigation and
remediation costs have been allocated, 75% to the former operator and 25% to
H&H. To date, total investigation and remediation costs of $237,000 and $79,000
have been settled by the former operator and H&H, respectively, in accordance
with this agreement. Additionally, H&H is currently being reimbursed through
insurance coverage for a portion of those costs for which the company is
responsible. There is additional excess insurance coverage which H&H intends to
pursue as necessary.
H&H has been identified as a potentially responsible party ("PRP") under
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") or similar state statutes at several sites and is a party to ACO's in
connection with certain properties. H&H may be subject to joint and several
liability imposed by CERCLA on potentially responsible parties. Due to the
technical and regulatory complexity of remedial activities and the difficulties
attendant in identifying potentially responsible parties and allocating or
determining liability among them, H&H is unable to reasonably estimate the
ultimate cost of compliance with such laws.
In a case entitled AGERE SYSTEMS, INC., ET AL. V. ADVANCED ENVIRONMENTAL
TECHNOLOGY CORP., ET AL. (U.S. District Court, EDPA), five companies, all of
which are PRPs for the Boarhead Farm site in Bucks County, Pennsylvania, brought
CERCLA contribution and similar claims under Pennsylvania's environmental laws
against a number of companies in 2002, including a subsidiary of H&H, which the
plaintiffs claim contributed to the contamination of the Boarhead Farm site. A
number of the plaintiffs entered into settlements with several of the named
defendants and consent decrees with the Environmental Protection Agency ("EPA")
regarding the remediation of groundwater and soil contamination at the Boarhead
Farm site. There are currently nine non-settling defendants, including H&H,
against which the plaintiffs are pursuing their claims. Fact discovery has been
concluded and the parties are engaged in expert discovery. The plaintiffs have
already made substantial payments to the EPA in past response costs and have
themselves incurred costs for groundwater and soil remediation, which
remediation is continuing. Plaintiffs are seeking reimbursement of a portion of
amounts incurred and an allocation of future amounts from H&H and the other
non-settling defendants. H&H has been advised by counsel that its responsibility
for this site, if any, should be minimal and has demanded coverage from its
insurance carrier for any claims for which it could be held liable. It is not
possible to reasonably estimate the cost of remediation or H&H's share, if any,
of the liability at this time.
H&H received a notice letter from the EPA in August 2006 formally naming
H&H as a PRP at the Shpack landfill superfund site in Attleboro, Massachusetts.
H&H then voluntarily joined a group of ten (10) other PRPs (which group has
since increased to thirteen (13)) to work cooperatively regarding remediation of
this site. Investigative work is ongoing to determine whether there are other
parties that sent hazardous substances to the Shpack site but that have not
received notice letters nor been named as PRPs to date. No allocation as to
percentages of responsibility for any of the PRPs has been assigned or accepted;
proposed allocations are expected to be determined during the second quarter of
2007 (although that could be extended),, at which point H&H could still withdraw
from the group. The PRP group submitted its good faith offer to the EPA in late
October 2006. It is not anticipated that the EPA will accept or reject the PRP's
offer until some time in 2007. If accepted, it is not anticipated that PRP
remedial activities at the site will begin before 2008. The remediation of a
significant amount of the contamination at the site is the responsibility of the
U.S. Army Corps of Engineers. That portion of the work has begun but is not
expected to be completed before 2008, at which time the remaining work will be
more clearly defined. The Company has recorded a reserve of $1.5 million in the
first quarter of 2006 in connection with this matter.
As discussed above, H&H has 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 has 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. Based
upon information currently available, including H&H's prior capital
expenditures, anticipated capital expenditures, and information available to H&H
on pending judicial and administrative proceedings, H&H does not expect its
environmental compliance costs, including the incurrence of additional fines and
penalties, if any, relating to the operation of its facilities to have a
22
material adverse effect on the financial position, but there can be no such
assurances. Such costs could be material to H&H's results of operations and cash
flows. We anticipate that H&H will pay such amounts out of its working capital,
although there is no assurance that H&H will have sufficient funds to pay such
amounts. In the event that H&H is 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
H&H or its subsidiaries are a defendant 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 H&H and other
co-defendants. H&H denies liability and is defending these actions. It is not
possible to reasonably estimate H&H's 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 H&H or its
subsidiaries in connection with a variety of products sold by its 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. It is not possible to
reasonably estimate H&H's exposure or share, if any, of the liability at this
time.
There is insurance coverage available for many of these actions, which are
being litigated in a variety of jurisdictions. To date, H&H has not incurred and
does not believe it will incur any significant liability with respect to these
claims, which it contests vigorously in most cases. However, it is possible that
the ultimate resolution of such litigation and claims could have a material
adverse effect on quarterly or annual results of operations, financial position
and cash flows when they are resolved in future periods.
PENSION PLAN CONTINGENCY ARISING FROM THE WPC GROUP BANKRUPTCY
Wheeling-Pittsburgh Corporation ("WPC") and six of its subsidiaries
(collectively referred to as the "WPC Group"), including Wheeling-Pittsburgh
Steel Corporation ("WPSC"), a vertically integrated manufacturer of value-added
and flat rolled steel products, was a wholly owned subsidiary of WHX. On
November 16, 2000, the WPC Group filed a petition seeking reorganization under
Chapter 11 of Title 11 of the United States Bankruptcy Code. A Chapter 11 Plan
of Reorganization for the WPC Group (the "WPC POR") was consummated on August 1,
2003, pursuant to which, among other things, the WPC Group ceased to be a
subsidiary of WHX effective August 1, 2003, and from that date forward has been
an independent company.
As part of the WPC POR, the Company agreed to make certain contributions
(the "WHX Contributions") to the reorganized company. Under the WHX
Contributions, the Company forgave the repayment of its claims against the WPC
Group of approximately $39.0 million and, additionally, contributed to the
reorganized company $20.0 million of cash, for which the Company received a note
in the amount of $10.0 million. The note was fully reserved upon receipt.
On March 6, 2003, the PBGC published its Notice of Determination
("Notice") and on March 7, 2003 filed a Summons and Complaint ("Complaint") in
United States District Court for the Southern District of New York seeking the
involuntary termination of the WHX Pension Plan (the "WHX Plan"), a defined
benefit pension plan sponsored by the Company that provides pension benefits to
active and retired employees of WHX and H&H and certain benefits to active and
retired employees of members of the WPC Group. WHX filed an answer to this
complaint on March 27, 2003, contesting the PBGC's action. On July 24, 2003, the
Company entered into an agreement among the PBGC, WPC, WPSC, and the United
Steelworkers of America, AFL-CIO-CLC ("USWA") in settlement of matters relating
to the PBGC V. WHX CORPORATION, Civil Action No. 03-CV-1553, in the United
States District Court for the Southern District of New York ("Termination
Litigation"), in which the PBGC was seeking to terminate the WHX Plan. Under the
settlement, among other things, WHX agreed (a) that the WHX Plan, as it is
currently constituted, is a single employer pension plan, (b) to contribute
funds to the WHX Plan equal to moneys spent (if any) by WHX or its affiliates to
purchase WHX 10.5% Senior Notes ("Senior Notes") in future open market
transactions, and (c) to grant to the PBGC a pari passu security interest of up
to $50.0 million in the event WHX obtains any future financing on a secured
basis or provides any security or collateral for the Senior Notes.
Also under the settlement, all parties agreed that as of the effective
date of the WPC POR, (a) no shutdowns had occurred at any WPC Group facility,
(b) no member of the WPC Group is a participating employer under the WHX Plan,
(c) continuous service for WPC Group employees was broken, (d) no WPC Group
employees will become entitled to "Rule of 65" or "70/80" Retirement Benefits
23
(collectively, "Shutdown Benefits") by reason of events occurring after the
effective date of the WPC POR, and (e) the WHX Plan would provide for a limited
early retirement option to allow up to 650 WPSC USWA-represented employees the
right to receive retirement benefits based on the employee's years of service as
of July 31, 2003 with a monthly benefit equal to $40 multiplied by the
employee's years of service.
Finally, under the settlement, the PBGC agreed (a) that, after the
effective date of the WPC POR, if it terminates the WHX Plan at least one day
prior to a WPC Group facility shutdown, WHX shall be released from any
additional liability to PBGC resulting from the shutdown, (b) to withdraw its
claims in the WPC Bankruptcy Proceedings, and (c) to dismiss the Termination
Litigation.
The agreement with the PBGC also contains the provision that WHX will not
contest a future action by the PBGC to terminate the WHX Plan in connection with
a future WPC Group facility shutdown. 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 Plan.
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
WHX is a holding company that invests in and manages a diverse group of
businesses. WHX's primary business currently is Handy & Harman, a diversified
manufacturing company whose strategic business units encompass three segments:
precious metal, tubing, and engineered materials.
VOLUNTARY PETITION UNDER CHAPTER 11 OF U.S. BANKRUPTCY CODE
On March 7, 2005, WHX filed a voluntary petition to reorganize under
Chapter 11 of the United States Bankruptcy Code. WHX continued to operate its
businesses and own and manage its properties as a debtor-in-possession under the
jurisdiction of the bankruptcy court until it emerged from protection under
Chapter 11 of the Bankruptcy Code on July 29, 2005. WHX's Bankruptcy Filing was
primarily intended to reduce WHX's debt, simplify its capital structure, reduce
its overall cost of capital and provide it with better access to capital
markets.
RESULTS OF OPERATIONS
COMPARISON OF THE THIRD QUARTER OF 2006 WITH THE THIRD QUARTER OF 2005
Net sales for the third quarter of 2006 increased by $18.5 million, or
17.9%, to $121.6 million, as compared to $103.1 million in the third quarter of
2005. Sales increased by $8.1 million at the Precious Metals Segment, $1.1
million at the Tubing Segment and $9.3 million at the Engineered Materials
Segment. Approximately half of the rise in sales occurred because of price
increases, principally in the Precious Metals segment. The remainder of the
increase in sales was due to higher volume and increased market share across all
segments, principally in the Engineered Materials segment.
Gross profit percentage increased to 19.7% in the third quarter of 2006
from 18.5% in the third quarter of 2005. The major positive factor impacting
gross profit in the third quarter was a $2.3 million favorable effect from the
reduction in quantities of precious metal inventories valued at LIFO cost. In
addition, there was a shift in overall sales mix whereby sales in segments with
higher gross profit percentages accounted for more of the total sales in 2006
than in 2005. Partially offsetting this, negative factors affecting gross profit
in the third quarter of 2006 included inefficiencies at the Company's new
Mexican tubing facility, raw material price increases, and $0.5 million of costs
relating to the shutdown of the Norristown tubing facility which is more fully
described in the Tubing Segment discussion below.
Selling, general and administrative ("SG&A") expenses declined $6.6
million to $14.8 million in the third quarter of 2006 from $21.4 million in the
comparable 2005 period. The decrease in SG&A expenses was driven by the
Company's cost of its qualified pension plan, which was $0.7 million lower in
the third quarter of 2006 compared to the third quarter of 2005 principally
because pension benefits were frozen for substantially all non-union employees
at the end of 2005. In addition, the 2005 period included $3.9 million of
24
expenses related to change in control and termination of three WHX executives,
as well as higher insurance costs principally related to the change in control
of the Company. These factors were partially offset by higher costs for
additional sales staff and higher commissions in the 2006 period (in line with
sales increases) at certain of H&H's subsidiaries.
On May 9, 2006, the Company announced the closing of the Handy & Harman
Tube Co. ("HHT") Norristown, Pennsylvania facility. The decision to close the
Norristown facility was principally based on the economics of operating HHT's
business at the facility. HHT manufactured stainless steel tubing that is
supplied in various lengths and forms in both coil and straight lengths. HHT's
coil business was relocated to H&H's Camdel Metals Corporation ("Camdel")
facility located in Camden, Delaware. In conjunction with the decision to close
the Norristown facility, the Company reviewed the recoverability of the
Norristown long-lived assets in accordance with SFAS 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
Norristown. As a result, the Company recorded an asset impairment charge of $1.8
million in its statement of operations for the second quarter of 2006. No
impairment loss was incurred on the real estate assets based on the Company's
analysis.
Restructuring charges relate to the closing of the Norristown facility. A
charge of $0.5 million was recorded in the third quarter statement of
operations. These charges were primarily for termination benefits for salaried
employees.
Operating income for the third quarter of 2006 was $8.7 million, as
compared to an operating loss of $2.4 million for the third quarter of 2005. At
the segment level, operating income was $7.5 million compared to $3.3 million in
2005. The major factor causing the improvement in 2006 operating income is the
LIFO inventory liquidation adjustment of $2.3 million. In addition, the sales
increase generated additional gross margin dollars (although at a lower
percentage rate than in the third quarter of 2005), and lower SG&A expenses also
had a favorable impact on operating income in the third quarter of 2006.
Interest expense for the third quarter of 2006 rose $1.9 million to $5.8
million from $3.9 million in the third quarter of 2005. Approximately $0.8
million of the increase was due to additional debt that the Company entered into
during the first quarter of 2006. See discussion of cash flows from Financing
Activities that follows regarding the Company's new borrowings. In addition,
interest rates were higher in the third quarter of 2006 compared to the third
quarter of 2005.
In the third quarter of 2005, the Company recorded $4.9 million of costs
related to Chapter 11 filing and reorganization expenses, which represent
expenses incurred by WHX because of its reorganization under Chapter 11 of the
U.S. Bankruptcy Code. Such expenses principally consist of professional fees for
services provided by debtor and creditor professionals directly related to WHX's
reorganization proceedings.
Realized and unrealized losses on derivatives totaled $1.7 million in the
third quarter of 2006, and $1.0 million in the third quarter of 2005. The
derivative instruments utilized by the Company are precious metal forward
contracts. The increase in the loss resulted principally from a greater increase
in precious metal prices during the third quarter of 2006 compared to the third
quarter of 2005.
In the third quarter of 2006, a tax benefit of $0.9 million from
continuing operations was recorded, and in the third quarter of 2005, a tax
provision of $0.5 million was recorded. The 2006 tax benefit from continuing
operations of $0.9 million includes a tax benefit of $1.6 million related to
discontinued operations. The Company's total tax provision from both continuing
and discontinued operations of $0.7 million in 2006 and $0.5 million in 2005 is
principally for state and foreign taxes. The Company has recorded a valuation
allowance related to the tax benefits associated with its operating losses in
each period due to the uncertainty of realizing these benefits in the future.
The net income (loss) from discontinued operations relates to the
Company's wire and cable business, which had been part of the Wire and Tubing
segment. In 2004 the Company evaluated the current operating plans and current
and forecasted operating results of its wire and cable business. In accordance
with SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets",
the Company determined that there were indicators of impairment based upon
continued operating losses, deteriorating margins, and rising raw material
costs. An estimate of future cash flows indicated that cash flows would be
insufficient to support the carrying value of the long-term assets of the
business. Accordingly, these assets were written down to their estimated fair
value by recording non-cash asset impairment charges totaling $8.2 million in
2004. The decision to close these operations resulted in 2004 restructuring
charges of $1.2 million for termination benefits and related costs, and $0.4
million for clean up costs related to one of its facilities. On January 13,
2005, the Company decided to permanently close the wire and cable businesses.
The Company operated these facilities on a limited basis in the first quarter of
2005 in order to fulfill customer commitments. In the second quarter of 2005,
all operations of the wire and cable business were concluded. Accordingly, these
25
businesses are reported as discontinued operations. A gain on the disposal of
assets, net of tax,of $2.9 million in the third quarter of 2006 reflects a gain
on the sale of the land and building formerly used in the wire and cable
business. This compares to a loss of $0.3 million in the third quarter of 2005.
The comments that follow compare revenues and operating income by segment
for the third quarter of 2006 and 2005:
PRECIOUS METALS
Sales for the Precious Metals segment increased $8.1 million, or 28.7%,
from $28.1 million in 2005 to $36.1 million in 2006, driven mainly by precious
metal price increases. In addition, higher volume also occurred with increased
sales to existing customers as well as to new customers due to new distribution
and sales force initiatives. However, this was partially offset by reduced sales
at the HHEM operation.
Operating income for the Precious Metals segment increased $3.9 million to
operating income of $2.9 million in the third quarter of 2006 from an operating
loss of $1.0 million in 2005. The improvement in operating income was primarily
caused by a $2.3 million favorable effect on segment gross profit from the
liquidation of precious metal inventories valued at LIFO cost in the third
quarter of 2006. In addition, the increased sales as well as a more favorable
mix of fabrication (higher margin) versus plating (lower margin) revenues in the
third quarter of 2006 compared to 2005 also contributed to improved operating
income in 2006. This was partially offset by operating results for the HHEM
operation, which experienced excessive overhead costs per unit of production as
its volume declined.
TUBING
In the third quarter of 2006, sales for the Tubing Segment increased $1.1
million, or 3.8%, from $29.4 million in 2005 to $30.5 million in 2006,
principally due to higher volume and increased market share. On May 9, 2006, the
Company announced the closure of the Norristown, Pennsylvania facility of the
H&H Tube Co. The Norristown facility continued to operate during the third
quarter of 2006 with reduced sales as compared to the third quarter of 2005.
Norristown's small coil business was transferred to the Company's Camdel Metals
facility, which showed increased sales, partially offsetting the reduction at
H&H Tube Co. (Norristown).
Operating income decreased by $1.9 million despite the sales increase, to
a loss of $1.9 million in the third quarter of 2006 from a breakeven result in
the third quarter of 2005, including $0.5 million of costs relating to the
shutdown of the Norristown facility. In addition, cost inefficiencies at the
Company's new Mexican tubing facility also contributed to the operating loss in
the 2006 quarter.
ENGINEERED MATERIALS
Sales for the Engineered Materials Segment increased $9.3 million, or
20.3%, from $45.7 million in the third quarter of 2005 to $54.9 million in the
third quarter of 2006. This sales increase was primarily driven by market share
gains in the roofing sector and new product sales in the lumber yard and home
center markets. Additionally, sales in the electrical contracting, plumbing and
distribution markets experienced strong gains.
Operating income increased in the third quarter of 2006 by $2.1 million
from $4.4 million in 2005 to $6.5 million in 2006 primarily because of the
higher sales volume and improved operational efficiencies resulting from the
major capital investments in the Company's fastener division completed in late
2005. However, an increase in selling expenses and marketing personnel offset a
portion of this increase.
UNALLOCATED CORPORATE EXPENSES
Unallocated corporate expenses declined from $6.2 million in the third
quarter of 2005 to $0.9 million in the third quarter of 2006. The principal
reason for the decline was because the 2005 period included $3.9 million of
expenses related to change in control and termination of three WHX executives
plus higher costs for insurance principally related to the change in control of
the Company, than in the third quarter of 2006. The 2006 period includes $0.8
million of insurance proceeds received for losses incurred in a 2002 fire at
Sumco, which was not allocated to the Precious Metals segment. The Company's
pension credit rose by $0.7 million in the third quarter of 2006 compared to the
same period in
26
2005 principally because pension benefits were frozen for substantially all
non-union employees at the end of 2005.
COMPARISON OF THE FIRST NINE MONTHS OF 2006 WITH THE FIRST NINE MONTHS OF 2005
Net sales for the first nine months of 2006 increased by $55.0 million, or
18.0%, to $359.6 million, as compared to $304.6 million in the first nine months
of 2005. Sales increased by $24.6 million at the Precious Metals Segment, $6.9
million at the Tubing Segment and $23.5 million at the Engineered Materials
Segment. The higher sales occurred principally because of an increase in volume,
which rose across all segments, but particularly in the Engineered Materials
segment. The remainder of the sales increase, due to price increases, occurred
principally in the Precious Metals segment because of an increase in the market
price of precious metals.
Gross profit percentage increased slightly to 19.1% in the first nine
months of 2006 from 19.0% in the first nine months of 2005. The major positive
factor impacting gross profit in the first nine months of 2006 was a $4.1
million favorable effect from the reduction in quantities of precious metal
inventories valued at LIFO cost In addition, there was a shift in overall sales
mix whereby sales in segments with higher gross profit percentages accounted for
more of the total sales in 2006 than in 2005. Offsetting these, the major
factors that negatively impacted gross profit percentage in the 2006 period were
inefficiencies at the Company's new Mexican tubing facility and raw material
price increases, especially precious metals.
Selling, general and administrative ("SG&A") expenses declined by $6.3
million to $45.8 million in the first nine months of 2006 from $52.1 million in
the comparable 2005 period. One significant reason for the decrease in SG&A
expenses in 2006 was because the 2005 period included non-recurring expenses of
$4.1 million related to change in control and termination of three WHX
executives, as well as high insurance costs related principally to the change in
control of the Company. In addition, the Company's cost of its qualified pension
plan was $1.9 million lower in the first nine months of 2006 compared to the
first nine months of 2005 principally because pension benefits were frozen for
substantially all non-union employees at the end of 2005. These lower costs were
partially offset by higher costs for additional sales staff and higher
commissions (in line with sales increases) at certain of H&H's subsidiaries.
Environmental remediation expense of $2.9 million in the first nine months
of 2006 includes $1.5 million related to the Company's estimated exposure at the
Shpack landfill site, and $0.8 million in connection with the Company's
Norristown Pennsylvania facility. H&H received a notice letter from the
Environmental Protection Agency ("EPA") in August 2006 formally naming H&H as a
potentially responsible party ("PRP") at the Shpack landfill superfund site in
North Attleboro, Massachusetts. H&H then voluntarily joined a group of ten (10)
other PRPs (which group has since increased to thirteen (13)) to work
cooperatively regarding remediation of this site. Investigative work is ongoing
to determine whether there are other parties that sent hazardous substances to
the Shpack site but that have not received notice letters nor been named as PRPs
to date. No allocation as to percentages of responsibility for any of the PRPs
has been assigned or accepted; proposed allocations are expected to be
determined during the second quarter of 2007 (although that could be extended),
at which point H&H could still withdraw from the group. The PRP group submitted
its good faith offer to the EPA in late October 2006. It is not anticipated that
the EPA will accept or reject the PRPs' offer until some time in 2007. If
accepted, it is not anticipated that PRP remedial activities at the site will
begin before 2008. The remediation of a significant amount of the contamination
at the site is the responsibility of the U.S. Army Corps of Engineers. That
portion of the work has begun but is not expected to be completed before 2008,
at which time the remaining work will be more clearly defined. At the Company's
Norristown facility, the Company recently completed a study which indicated that
environmental remediation activities with an estimated cost of $0.8 million are
required, which the Company accrued as of the first quarter of 2006. There were
no environmental remediation expenses charged in the first nine months of 2005.
On May 9, 2006, the Company announced the closing of the Handy & Harman
Tube Co. ("HHT") Norristown, Pennsylvania facility. The decision to close the
Norristown facility was principally based on the economics of operating HHT's
business at the facility. HHT manufactured stainless steel tubing that is
supplied in various lengths and forms in both coil and straight lengths. HHT's
coil business was relocated to H&H's Camdel Metals Corporation ("Camdel")
facility located in Camden, Delaware. In conjunction with the decision to close
the Norristown facility, the Company reviewed the recoverability of the
Norristown long-lived assets in accordance with SFAS 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
Norristown. As a result, the Company recorded an asset impairment charge of $1.8
million in its statement of operations for the second quarter of 2006. No
impairment loss was incurred on the real estate assets based on the Company's
analysis.
27
Restructuring charges relating to the Norristown facility was $2.4 million
for the first nine months of 2006. These charges included termination benefits
of $2.0 million, $0.1 million resulting from a pension curtailment, and $0.3
million of other charges.
Operating income for the first nine months of 2006 was $15.9 million,
which was $10.1 million higher than the first nine months of 2005. At the
segment level, operating income was $17.2 million compared to $13.7 million in
the first nine months of 2005. The improvement in operating income was primarily
caused by a $4.1 million favorable effect on segment gross profit from the
liquidation of precious metal inventories valued at LIFO cost in the first nine
months of 2006. In addition, at both the consolidated and segment levels, the
sales increase generated additional gross margin dollars and there was
additional improvement from lower SG&A expenses. However, significant charges
for asset impairments and restructuring costs offset much of these improvements.
The improvement in operating income was lower at the segment level than at the
consolidated level in 2006 because neither the reduced cost of the pension plan
in the first nine months of 2006 nor the non-recurring charges for the
termination and change of control of WHX executives in 2005 is allocated to the
segments, but is included in "unallocated corporate expenses".
Interest expense for the first nine months of 2006 rose $2.5 million to
$15.7 million from $13.2 million in the first nine months of 2005. There was an
increase of approximately $1.9 million due to additional debt that the Company
entered into during the first nine months of 2006. See discussion of cash flows
from Financing Activities that follows regarding the Company's new borrowings.
In addition, interest rates were higher in the first nine months of 2006
compared to the first nine months of 2005. These increases were partially offset
because the Company's 10 1/2% Senior Notes, which accrued interest of
approximately $1.8 million in the first quarter of 2005, were cancelled and
annulled as part of the Company's Chapter 11 Plan of Reorganization, and thus,
no such interest expense was recorded in 2006.
In the first nine months of 2005, the Company recorded $9.5 million of
costs related to Chapter 11 filing and reorganization expenses, which represent
expenses incurred by WHX because of its reorganization under Chapter 11 of the
U.S. Bankruptcy Code. Such expenses principally consisted of professional fees
for services provided by debtor and creditor professionals directly related to
WHX's reorganization proceedings.
Realized and unrealized losses on derivatives totaled $6.2 million in the
first nine months of 2006, compared to $1.4 million in the first nine months of
2005. The derivative instruments utilized by the Company are precious metal
forward contracts. The increase in the loss resulted principally from a greater
increase in precious metal prices during the first nine months of 2006 compared
to the same period of 2005.
In the first nine months of 2006, a tax provision of $0.3 million from
continuing operations was recorded, and in the first nine months of 2005, a tax
provision of $1.3 million was recorded. The 2006 net tax provision for
continuing operations of $0.3 million includes a tax benefit of $1.6 million
related to discontinued operations. The Company's total tax provision from both
continuing and discontinued operations of $1.9 million in the first nine months
of 2006 and $1.3 million in 2005 is principally for state and foreign taxes. The
Company has recorded a valuation allowance related to the tax benefits
associated with its operating losses in each period due to the uncertainty of
realizing these benefits in the future.
The net income (loss) from discontinued operations relates to the
Company's wire and cable business, which had been part of the Wire and Tubing
segment. In 2004 the Company evaluated the current operating plans and current
and forecasted operating results of its wire & cable business. In accordance
with SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets",
the Company determined that there were indicators of impairment based upon
continued operating losses, deteriorating margins, and rising raw material
costs. An estimate of future cash flows indicated that cash flows would be
insufficient to support the carrying value of the long-term assets of the
business. Accordingly, these assets were written down to their estimated fair
value by recording non-cash asset impairment charges totaling $8.2 million in
2004. The decision to close these operations resulted in 2004 restructuring
charges of $1.2 million for termination benefits and related costs, and $0.4
million for clean up costs related to one of its facilities. On January 13,
2005, the Company decided to permanently close the wire and cable businesses.
The Company operated these facilities on a limited basis in the first quarter of
2005 in order to fulfill customer commitments. In the second quarter of 2005,
all operations of the wire and cable business were concluded. Accordingly, these
businesses are reported as discontinued operations. The income, net of tax, of
$2.7 million in the first nine months of 2006 reflects a loss of $0.2 million
offset by a gain of $2.9 million, net of tax, on the sale of the land and
building formerly used in the wire and cable business. This compares to a loss
of $3.8 million in the first nine months of 2005, which reflects an operating
loss of $4.5 million offset by a gain on the sale of fixed assets of $0.7
million.
28
The comments that follow compare revenues and operating income by segment
for the first nine months of 2006 and 2005:
PRECIOUS METAL
Sales for the Precious Metal segment increased $24.6 million, or 28.1%,
from $87.7 million in the first nine months of 2005 to $112.2 million in the
same period of 2006, driven mainly by precious metal price increases. In
addition, higher volume also occurred with increased sales to existing customers
as well as to new customers due to new distribution and sales initiatives.
Operating income for the Precious Metals segment increased $7.4 million to
$7.8 million in 2006 from $0.4 million in 2005. The improvement in operating
income was primarily caused by a $4.1 million favorable effect on segment gross
profit from the liquidation of precious metal inventories valued under LIFO in
the first nine months of 2006. In addition, the increased sales as well as a
more favorable mix of fabrication (higher margin) versus plating (lower margin)
revenues in the first nine months of 2006 compared to 2005, also contributed to
improved operating income in 2006.
TUBING
In the first nine months of 2006, sales for the Tubing Segment increased
$6.9 million, or 7.9%, from $86.4 million in 2005 to $93.2 million in 2006,
principally due to a volume increase. On May 9, 2006, the Company announced the
closure of the Norristown, Pennsylvania facility of the H&H Tube Co. The
Norristown facility continued to operate through the third quarter, during which
Norristown's small coil business was transferred to the Company's Camdel Metals
facility.
Operating income decreased by $7.3 million despite the sales increase, to
a loss of $5.6 million in the first nine months of 2006 from operating income of
$1.7 million in the same period of 2005. A total of $4.2 million of this loss
relates to restructuring costs of $2.4 million and an asset impairment charge of
$1.8 million recorded in the second quarter of 2006; both of which relate to the
closing of the Norristown facility. In addition, cost inefficiencies at the
Company's new Mexican tubing facility also contributed to the operating loss in
the nine month period ended September 30, 2006.
ENGINEERED MATERIALS
Sales for the Engineered Materials Segment increased $23.5 million from
$130.6 million in the first nine months of 2005 to $154.1 million in the same
period of 2006 due to increased volume in all product lines. Partially
offsetting these increases were selling price reductions at the segment's
electrogalvanized steel unit.
Operating income increased in the first nine months of 2006 by $3.4
million from $11.6 million in 2005 to $15.0 million in 2006 primarily because of
the higher sales volume. However, an increase in selling expenses and marketing
personnel offset part of this increase.
UNALLOCATED CORPORATE EXPENSES
Unallocated corporate expenses declined from $9.5 million in the first
nine months of 2005 to $2.7 million in the first nine months of 2006. One
significant reason for the decrease in SG&A expenses in 2006 was because the
2005 period included non-recurring expenses of $4.1 million related to change in
control and termination of three WHX executives, as well as high insurance costs
also related principally to the change in control of the Company. The 2006
period includes $0.8 million of insurance proceeds received for losses incurred
in a 2002 fire at Sumco, which was not allocated to the Precious Metals segment.
The Company's pension credit rose by $1.9 million in the first nine months of
2006 compared to the same period in 2005 principally because pension benefits
were frozen for substantially all non-union employees at the end of 2005.
DISCUSSION OF THE CONSOLIDATED STATEMENT OF CASH FLOWS
As of September 30, 2006, the Company's current assets totaled $138.2
million and its current liabilities totaled $151.6 million; a working capital
29
deficit of $13.4 million. The Company's working capital deficit at December 31,
2005 was $121.5 million. As of December 31, 2005, all debt other than $4.9
million of foreign debt was classified as current due to noncompliance with
certain debt covenants. As of September 30, 2006, such debt has been classified
as long-term since the Company is no longer in default on the debt as a result
of the March 29, 2007 Amendment and Waiver to the Loan and Security Agreements
(see discussion under liquidity).
Net cash used by operating activities for the nine months ended September
30, 2006 totaled $11.6 million. Income from operations adjusted for non-cash
income and expense items provided $10.7 million of cash. Working capital
accounts used $20.9 million of cash, as follows: Accounts receivable used $9.7
million, inventories used $0.3 million, and net other current assets and
liabilities used $10.9 million. Other non-working capital items included in
operations used $1.0 million. Cash used by operating activities in the first
nine months of 2005 totaled $4.7 million, and principally was caused by the net
loss of the period, as well as seasonal working capital needs for inventory and
accounts receivable, but was favorably impacted by $10.9 million from the
liquidation of the net current assets of the discontinued operation, the wire
and cable business.
In the nine month periods ended September 30, 2006 and 2005, inventory
(excluding the sale of the Singapore operation in 2006) used $0.3 million and
$4.7 million, respectively. Inventories totaled $58.2 million at September 30,
2006, a decrease of $2.7 million, or 4.5%, as compared to December 31, 2005.
During the first nine months of 2006, the Company reduced its quantities of
precious metals in inventory principally because of the wind-down of the HHEM
business and because of the sale of its interest in a Singapore operation.
The use of funds due to accounts receivable in both the first nine months
of 2006 and 2005 ($9.7 million and $11.7 million, respectively) was caused by an
increase in accounts receivable which resulted from higher sales levels for that
respective quarter compared to the fourth quarter of the prior year. Net sales
in the third quarter of 2006 were $121.6 million, as compared to $99.2 million
in the fourth quarter of 2005, an increase of $22.4 million. Net sales in the
third quarter of 2005 were $103.1 million, as compared to $84.2 million in the
fourth quarter of 2004; an increase of $18.9 million.
Net other current assets and liabilities used $10.9 million of cash flow
in the first nine months of 2006 and provided $8.6 million in the same period of
2005. The increase in funds used was partially driven by cash used for the
payment of $14.4 million of environmental remediation costs during the 2006
period, as compared to $3.3 million during the first nine months of 2005. In
addition, payments to fund the WHX Pension Plan totaling $4.9 million were made
in the first nine months of 2006. There was also a greater increase in trade
accounts payable in the nine months ending September 30, 2005 than during the
comparable period in 2006. This was partially offset by $5.5 million of Chapter
11-related expenses paid in the first nine months of 2005.
Other non-working capital items included in operating activities used $1.0
million in the first nine months of 2006, as compared to $41 thousand in the
first nine months of 2005.
Investing activities used net cash of $6.1 million in the first nine
months of 2006, compared to $15.6 million in the same period of 2005. The
decrease was driven by reduced capital spending in 2006. In the first nine
months of 2006, $6.8 million was spent on capital improvements, as compared to
$16.7 million in the first nine months of 2005. The higher capital spending in
2005 was principally related to a plant expansion at H&H's fastener facility in
Agawam, MA. In addition, in the first nine months of 2006, the Company sold the
remaining land and building from its discontinued wire and cable business for
net proceeds of $7.2 million, as compared to proceeds from sale of wire and
cable group assets of $1.7 million in the same period in 2005. Furthermore, the
Company sold its interest in a Singapore operation for $0.6 million during the
first nine months of 2006. This was partially offset by $7.2 million of net cash
paid out for precious metal derivative contracts in 2006, compared to $0.6
million in 2005.
Financing activities provided $18.4 million of net cash in the first nine
months of 2006, principally from new borrowings, which totaled $26.0 million
during the period. The increase in debt between December 31, 2005 and September
30, 2006 consisted of the following: On December 29, 2005, H&H entered into an
amendment to its Term B Loan with Steel. This amendment provided for, among
other things, an increase of the Term B Loan in January 2006 by $10 million. On
January 24, 2006, H&H's wholly-owned subsidiary, OMG, Inc. entered into a loan
agreement with Sovereign Bank for $8.0 million, collateralized by a mortgage on
OMG, Inc.'s real property. On March 31, 2006, H&H and Steel Partners, II L.P.
agreed to an increase in the Term B Loan in the amount of $9.0 million and the
prepayment in the same amount of a portion of H&H's subordinated intercompany
promissory note issued to WHX. Financing activities provided $8.4 million in the
first nine months of 2005 from additional term loans of $8.4 million as well as
net drawdowns on the revolving credit facility.
30
RECENT DEVELOPMENTS AND LIQUIDITY
Since the filing of its Annual Report on Form 10-K for the year ended December
31, 2005, the following significant events have occurred:
PENSION PLAN
On December 20, 2006, the Internal Revenue Service granted a conditional
waiver (the "IRS Waiver") of the minimum funding requirements for the WHX
Pension Plan for the 2005 plan year in accordance with section 412 (d) of the
Internal Revenue Code and section 303 of the Employee Retirement Income and
Security Act of 1974, as amended ("ERISA"), and on December 28, 2006, WHX, H&H,
and the Pension Benefit Guaranty Corporation (the "PBGC") entered into a
settlement agreement (the "PBGC Settlement Agreement") in connection with the
IRS Waiver and certain other matters. The IRS Waiver is subject to certain
conditions, including a requirement that the Company meet the minimum funding
requirements for the WHX Pension Plan for the plan years ending December 31,
2006 through 2010, without applying for a waiver of such requirements. The PBGC
Settlement Agreement and related agreements include the following: (i) the
amortization of the waived amount of $15.5 million (the "Waiver Amount") over a
period of five years, (ii) the PBGC's consent to increase borrowings under H&H's
senior credit facility to $125 million in connection with the closing of an
acquisition described below, (iii) the resolution of any potential issues under
Section 4062(e) of ERISA, in connection with the cessation of operations at
certain facilities owned by WHX, H&H or their subsidiaries, and (iv) the
granting to the PBGC of subordinate liens on the assets of H&H and its
subsidiaries, and specified assets of WHX, to collateralize WHX's obligation to
pay the Waiver Amount to the WHX Pension Plan and to make certain payments to
the WHX Pension Plan in the event of its termination. As a result of the PBGC
Settlement Agreement and the IRS Waiver, based on estimates from WHX's actuary,
the Company expects its minimum funding requirement for the specific plan year
and the amortization of the 2005 requirement to be $13.1 million (paid in full
in 2006), $10.8 million, $11.0 million, $8.9 million, $7.0 million and $2.3
million (which amounts reflect the recent passage of the Pension Protection Act
of 2006) in 2006, 2007, 2008, 2009, 2010 and 2011, respectively.
AMENDMENTS TO CREDIT AGREEMENTS
On December 27, 2006, Wachovia Bank, National Association ("Wachovia")
provided H&H with an additional $7.0 million loan. This was pursuant to an
amendment signed on October 30, 2006 which made the additional funds conditional
upon the filing of the Company's 2005 Annual Report on Form 10-K.
On December 28, 2006, H&H and certain of H&H's subsidiaries amended their
Loan and Security Agreement with Wachovia and their Loan and Security Agreement
with Steel Partners II, L.P. ("Steel") (the beneficial holder of 5,029,793
shares of the Company's common stock, representing approximately 50.3% of the
outstanding shares) to provide, in part, for: (i) the consummation of the
transactions contemplated by the PBGC Settlement Agreement and the waiver of
possible events of default that may have occurred relating to the matters
covered by the PBGC Settlement Agreement; and (ii) a $42 million term loan
funded by Ableco Finance LLC. A portion of the loan ($26 million) was used to
fund an acquisition by H&H, $3.2 million was paid as a contribution to the WHX
Pension Plan, and approximately $12 million of the loan was used to reduce H&H's
outstanding balance under its revolving credit facility.
On March 29, 2007, H&H and certain of H&H's subsidiaries amended the
respective Loan and Security Agreements with Wachovia and Steel to, among other
things, (i) amend the definition of EBITDA, (ii) reset the levels and amend
certain of the financial covenants, (iii) extend the termination date of the
credit facilities from March 31, 2007 to June 30, 2008, (iv) permit the
extension by H&H to WHX of an unsecured loan for required payments to the
pension plan, under certain conditions, and (v) permit the extension by H&H to
WHX of an unsecured loan for other uses in the aggregate principal amount not to
exceed $3.5 million under certain conditions. The amendments also provided for
the pledge of 65% of all outstanding securities of Indiana Tube Danmark A/S, a
Danish corporation and a wholly-owned subsidiary of Handy & Harman
International, Ltd., and Protechno, S.A., a French corporation and a
wholly-owned subsidiary of Indiana Tube Danmark A/S. Finally, the amendments
also provided for waivers of certain events of default existing as of March 29,
2007.
ACQUISITIONS
Pursuant to an Asset Purchase Agreement (the "Asset Purchase Agreement")
dated as of December 28, 2006, a subsidiary of H&H acquired a mechanical roofing
fastener business. The purchase price was approximately $26 million, including a
working capital adjustment. The assets acquired included, among other things,
machinery, equipment, inventories of raw materials, work-in-process and finished
products, certain contracts, accounts receivable and intellectual property
31
rights, all as related to the acquired business and as provided in the Asset
Purchase Agreement. This acquired business develops and manufactures fastening
systems for the commercial roofing industry. WHX believes this acquisition
solidifies its position as a leading manufacturer and supplier of mechanical
fasteners, accessories and components, and building products for the North
American commercial and residential construction industry. Funds for payment of
the purchase price by H&H were obtained pursuant to the aforementioned term
loan.
On April 12, 2007, Steel Partners II, L.P. ("Steel"), a Delaware limited
partnership, and WHX entered into a Stock Purchase Agreement whereby WHX
acquired Steel's entire interest in BZ Acquisition Corp. ("BZA"), a Delaware
corporation and wholly owned subsidiary of Steel (the "BZA Transfer") for
$10.00. In addition, WHX agreed to reimburse all reasonable fees and expenses
incurred by Steel in connection with the Offer and the Merger (each as defined
below). BZA is the acquisition subsidiary in a tender offer to acquire up to all
of the outstanding stock of Bairnco Corporation, a Delaware corporation
("Bairnco") for $13.50 per share in cash. Steel beneficially owns approximately
50.3% of WHX's outstanding common stock.
Steel, BZA, and Bairnco entered into an Agreement and Plan of Merger dated
as of February 23, 2007 (the "Merger Agreement"), pursuant to which BZA amended
its tender offer to acquire all of the outstanding common shares of Bairnco at a
price of $13.50 per share in cash (the "Offer"). In addition, all Bairnco
shareholders of record on March 5, 2007 continued to be entitled to receive the
declared first quarter dividend of $0.10 per share, for total cash proceeds of
$13.60 per share. On April 13, 2007, upon the expiration of the Offer pursuant
to the Merger Agreement, BZA acquired approximately 88.9% of the outstanding
common stock of Bairnco.
Pursuant to the Merger Agreement, on April 24, 2007, BZA was merged with
and into Bairnco with Bairnco continuing as the surviving corporation as a
wholly owned subsidiary of WHX (the "Merger"). At the effective time of the
Merger, each Bairnco common share then outstanding (other than shares owned by
BZA or its direct parent entity, shares owned by Bairnco as treasury stock and
shares held by stockholders who properly exercise their appraisal rights) was
automatically converted into the right to receive $13.50 per share in cash
without interest and subject to applicable withholding taxes. Immediately prior
to the Merger, BZA held approximately 90.1% of the outstanding shares of
Bairnco. The proceeds required to fund the closing of the Offer and the
resulting Merger and to pay related fees and expenses were approximately $101.5
million.
In connection with the closing of the Offer, initial financing was
provided by Steel through two facilities. Steel extended to BZA bridge loans in
principal amount of approximately $75.1 million, $1.4 million, and $10.0 million
(and may extend additional loans of approximately $3.6 million, up to an
aggregate total amount of borrowings of $90.0 million) pursuant to a Loan and
Security Agreement (the "Bridge Loan Agreement"), between BZA and Bairnco, as
borrowers, and Steel, as lender. In addition, Steel extended to WHX a $15.0
million subordinated loan, which is unsecured at the WHX level, pursuant to a
Subordinated Loan and Security Agreement (the "Subordinated Loan Agreement" and,
together with the Bridge Loan Agreement, the "Loan Agreements"), between WHX, as
borrower, and Steel, as lender. WHX contributed the $15.0 million proceeds of
the subordinated loan to BZA as a capital contribution.
The Bridge Loan Agreement provides for bridge term loans of up to $90
million from Steel to BZA, which were assumed by Bairnco as a result of the
Merger. Borrowings under the Bridge Loan Agreement bear (i) cash interest at a
rate per annum equal to the prime rate of JP Morgan Chase plus 1.75% and (ii)
pay-in-kind interest at a rate per annum equal to 4.5% for the first 90 days the
initial loan is outstanding and 5% (instead of 4.5%) for the balance of the
term, each as adjusted from time to time. The minimum aggregate interest rate on
borrowings under the Bridge Loan Agreement is 14.5% per annum for the first 90
days the initial loan is outstanding, and 15% (instead of 14.5%) per annum for
the balance of the term, and the maximum aggregate interest rate on borrowings
under the Bridge Loan Agreement is 18% per annum. The cash interest rate and the
pay-in-kind interest rate may be adjusted from time to time, by agreement of
Steel and Bairnco, so long as the aggregate interest rate remains the same.
Interest is payable monthly in arrears. Obligations under the Bridge Loan
Agreement are guaranteed by certain of Bairnco's subsidiaries and secured by a
junior lien on the assets of Bairnco and certain of its subsidiaries and capital
stock of certain of Bairnco's subsidiaries. Obligations under the Bridge Loan
Agreement are also guaranteed by the Company on an unsecured basis. The
scheduled maturity date of the indebtedness under the Bridge Loan Agreement is
the earlier to occur of (i) June 30, 2008 and (ii) such time as Bairnco obtains
any replacement financing. Indebtedness under the Bridge Loan Agreement may be
prepaid without penalty or premium.
The Subordinated Loan Agreement provides for a subordinated term loan of
$15 million from Steel to WHX, which is unsecured at the WHX level. Borrowings
under the Subordinated Loan Agreement bear pay-in-kind interest at a rate per
annum equal to the prime rate of JP Morgan Chase plus 7.75%, adjusted from time
to time, with a minimum interest rate of 16% per annum and a maximum interest
rate of 19% per annum. Interest is payable monthly in arrears. Obligations under
32
the Subordinated Loan Agreement are guaranteed by Bairnco and certain of its
subsidiaries and secured by a junior lien on the assets of Bairnco and certain
of its subsidiaries and capital stock of certain of Bairnco's subsidiaries. The
indebtedness under the Subordinated Loan Agreement will mature on the second
anniversary of the issuance of the subordinated loan and may be prepaid without
penalty or premium.
The Loan Agreements contain customary representations, warranties,
covenants, events of default and indemnification provisions. The indebtedness
under the Bridge Loan Agreement and the related security interests is
subordinated to the indebtedness and related security interests granted under
Bairnco's existing senior credit facility with Bank of America, N.A. The
guarantees of the indebtedness under the Subordinated Loan Agreement and the
related security interests is subordinated to all indebtedness and security
interests described in the preceding sentence.
Bairnco operates two core businesses - Arlon and Kasco. Arlon designs,
manufactures, and sells engineered materials and components for the electronic,
industrial and commercial markets. Kasco is a leading provider of meat-room
products and maintenance services for the meat and deli departments of
supermarkets; restaurants; meat, poultry and fish processing plants; and
manufacturers and distributors of electrical saws and cutting equipment
throughout North America, Europe, Asia and South America. WHX believes that the
acquisition of Bairnco will be beneficial because of Bairnco's strong positions
in niche engineered materials markets, and that it will improve Bairnco's plant
level operations, profit margins and working capital. The results of operations
and assets of Bairnco will be included in the financial statements of WHX
beginning in the second quarter of 2007.
SALE OF ASSETS
On March 4, 2007, the Company sold certain assets, including the land and
building, certain machinery and equipment, and inventory of its Handy & Harman
Electronic Materials Corporation subsidiary, located in East Providence, Rhode
Island, as well as certain of its assets and inventory located in Malaysia
(collectively referred to as "HHEM") for net proceeds of approximately $3.9
million. In December 2006, the Company recorded an asset impairment charge of
$3.4 million relating to the long-lived assets offered for sale, in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". The amount of the impairment loss was based upon the actual selling
price of the long-lived assets in March 2007. In the Company's balance sheet as
of December 31, 2006, the long-lived assets were classified as current assets
held for sale. Due to the charge for the long-lived asset impairment in 2006,
the Company recognized no gain or loss upon sale of the long-lived assets in
2007. However, upon sale, the Company recognized a loss of $0.9 million relating
to the sale of inventory. The Company has retained responsibility for any
environmental conditions requiring remediation at the HHEM site.
LIQUIDITY
Throughout 2005 and 2006, the Company experienced liquidity issues, which
are more fully described in Notes 1a and 2 to the consolidated financial
statements included in the Annual Report on Form 10-K for the year ended
December 31, 2005. The Company incurred consolidated net losses of $34.7
million, $140.4 million and $159.9 million for the years ended December 31,
2005, 2004 and 2003, respectively, and had negative cash flows from operations
of $5.0 million and $39.6 million for the years ended December 31, 2005 and
2004, respectively. As of December 31, 2005, the Company had an accumulated
deficit of $394.0 million and a working capital deficit of $121.5 million.
Additionally, the Company has not been in compliance with certain of its bank
covenants. Note 1A to the consolidated financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 2005 describes a
number of conditions concerning the Company's liquidity difficulties, and states
that these conditions raise substantial doubt about the Company's ability to
continue as a going concern.
WHX is a holding company and has as its sole source of cash flow
distributions from its operating subsidiaries, H&H and Bairnco, or other
discrete transactions. H&H's bank credit facilities and term loans effectively
do not permit it to transfer any cash or other assets to WHX (with the exception
of unsecured loans to be used to make required contributions to the pension
plan, and for other uses of an unsecured loan in the aggregate principal amount
not to exceed $3.5 million under certain conditions), and are collateralized by
substantially all of H&H's assets. . Bairnco's revolving credit facility with
Bank of America, N.A. permits distributions by Bairnco to WHX under certain
conditions. WHX has no bank credit facility of its own. WHX's ongoing operating
cash flow requirements consist of funding the minimum requirements for the WHX
Pension Plan and paying other administrative costs.
Since emerging from bankruptcy, due to covenant restrictions in H&H's
credit facilities, there have been no dividends from H&H to WHX and WHX's
sources of cash flow have consisted of:
o The issuance of $5.1 million in preferred stock by a newly created
subsidiary (WHX CS Corp.) in October 2005, which was invested in the
equity of a public company (Cosine Communications Inc.); and
33
o partial payment of the H&H subordinated debt to WHX of $9.0 million,
which required the approval of the banks participating in the H&H
bank facility. Subsequent to this transaction in 2006, the remaining
intercompany loan balance of the subordinated debt of $44.2 million
was converted to equity.
o As permitted by the March 29, 2007 Amendment and Waiver to the Loan
and Security Agreements, an unsecured loan from H&H for required
payments to the pension plan, and for other uses of an unsecured
loan in the aggregate principal amount not to exceed $3.5 million
under certain conditions.
o A $15.0 million subordinated loan from Steel pursuant to a
Subordinated Loan and Security Agreement between WHX, as borrower,
and Steel, as lender. WHX used the $15.0 million proceeds of the
subordinated loan as a capital contribution to acquire Bairnco.
As of December 31, 2006, WHX and its unrestricted subsidiaries had cash of
approximately $0.8 million and current liabilities of approximately $7.5
million, including $5.1 million of mandatorily redeemable preferred shares
payable to a related party. H&H's availability under its revolving credit
facility and other facilities as of December 31, 2006 was $19.1 million and as
of March 31, 2007 was approximately $15.5 million. All such facilities,
including the term loans, were set to expire in March 31, 2007 (although by
amendment signed on March 29, 2007, were extended until June 30, 2008).
In connection with the closing of the Bairnco Offer and the Merger on
April 24, 2007, Bairnco became a wholly-owned subsidiary of WHX. Initial
financing was provided by Steel through two facilities, as discussed above, in
the approximate aggregate amount of $101.5 million. In addition, the Bairnco
Revolving Credit Facility was amended to permit the closing of the Merger and
related financing transactions. The availability under the Bairnco Revolving
Credit Facility on March 31, 2007 was approximately $12.0 million. The Bairnco
Revolving Credit Facility permits distributions by Bairnco to WHX under certain
conditions, as described in Note 21 to the consolidated financial statements.
In addition to the obligations under the current credit facilities, the
Company also has significant cash flow obligations, including without limitation
the amounts due for the WHX Pension Plan (as amended by the PBGC Settlement
Agreement entered into December 28, 2006). There can be no assurance that the
funds available from operations and under its credit facilities will be
sufficient to fund pension funding requirements, debt service costs, working
capital demands and environmental remediation costs. Additionally, there can be
no assurances that the Company will be able to obtain replacement financing at
commercially reasonable terms upon the expiration of the H&H and Bairnco credit
facilities in June 2008.
Nevertheless, as discussed further below, the Company believes that recent
new and amended financing arrangements, acquisitions, the IRS Waiver and the
PBGC Settlement Agreement, the sale of a non-essential operating unit, as well
as recent improvements in its core operations, and the substantial completion of
a major remediation of property relating to certain environmental liabilities
should permit the Company to generate sufficient working capital to meet its
obligations as they mature over the next twelve months. The ability of the
Company to meet its cash requirements over this time period is dependent, in
part, on the Company's ability to meet its business plan. Management believes
that existing capital resources and sources of credit, including the H&H
facilities and the Bairnco facilities, are adequate to meet its current and
anticipated cash requirements. The Company also continues to examine all of its
options and strategies, including acquisitions, divestitures, and other
corporate transactions, to increase cash flow and stockholder value. 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.
As more fully described earlier in this Recent Developments section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the Company has taken the following actions which it believes will
improve liquidity and help provide for adequate liquidity to fund the Company's
capital needs for the next twelve months.
o On December 20, 2006, the IRS granted a conditional waiver of the $15.5
million minimum funding requirement for the WHX Pension Plan for the 2005
plan year and on December 28, 2006, WHX, H&H, and the PBGC entered into
the PBGC Settlement Agreement in connection with the IRS Waiver and
certain other matters. As a result of the PBGC Settlement Agreement and
the IRS Waiver, based on estimates from WHX's actuary, the Company expects
its minimum funding requirement for the specific plan year and the
amortization of the 2005 requirement to be $13.1 million (paid in full in
2006), $10.8 million, $11.0 million, $8.9 million, $7.0 million and $2.3
million (which amounts reflect the recent passage of the Pension
Protection Act of 2006) in 2006, 2007, 2008, 2009, 2010 and 2011,
respectively.
34
o Availability under H&H's Loan and Security Agreements' revolving credit
facility as of December 31, 2006 was $19.1 million, and as of March 31,
2007, was approximately $15.5 million. On March 29, 2007, all such
facilities, including the term loans, were amended to (i) redefine EBITDA,
(ii) reset the levels and amend certain of the financial covenants, (iii)
extend the termination date of the credit facilities from March 31, 2007
to June 30, 2008, (iv) permit the extension by H&H to WHX of an unsecured
loan for required payments to the pension plan, under certain conditions,
and (v) permit the extension by H&H to WHX of an unsecured loan for other
uses in the aggregate principal amount not to exceed $3.5 million under
certain conditions.
o Following the closing of the Bairnco Merger, upon the satisfaction of
certain conditions, Bairnco is permitted to make distributions to WHX. As
of March 31, 2007, availability under the Bairnco Revolving Credit
Facility was approximately $12.0 million, although there is no assurance
that such amount will be available in the future, or if available, that
Bairnco will satisfy the conditions for distributing this amount to WHX.
o The acquisition by a subsidiary of H&H of a mechanical roofing fastener
business for approximately $26 million, including a working capital
adjustment, on December 28, 2006, which we believe will prove to be a
valuable acquisition which will solidify H&H's position as a leading
manufacturer and supplier of mechanical fasteners, accessories and
components, and building products for the North American commercial and
residential construction industry.
o The sale in March 2007 of a non-core business which had generated
operating losses in the past year.
o The substantial completion of remediation of property relating to certain
environmental liabilities.
In view of the matters described in the preceding paragraphs, management
believes that the Company has the ability to meet its financing requirements on
a continuing basis. However, if the Company's fiscal 2007 planned cash flow
projections are not met, management could consider the reduction of certain
discretionary expenses and sale of certain assets. In the event that these plans
are not sufficient and the Company's credit facilities are not available, the
Company's ability to operate could be adversely affected.
*******
When used in the Management's Discussion and Analysis, 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 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 and, 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please see "Quantitative and Qualitative Disclosures About Market Risk"
from the Company's Annual Report on Form 10-K for the year ended December 31,
2005.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. As required by Rule
13a-15(b) under the Securities Exchange Act of 1934, as amended, (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 we identified certain material weaknesses in our disclosure controls
and procedures (discussed below), and the Chief Executive Officer and the Chief
Financial Officer concluded that as of September 30, 2006 and 2005, our
35
disclosure controls and procedures were not 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.
As more fully described in Management's Discussion and Analysis of Financial
Condition and Results of Operations and in Note 1b to the Consolidated Financial
Statements included in our 2005 Annual Report on Form 10-K, the Company
determined it was necessary to restate its 2003 and prior years' audited
consolidated financial statements, and its unaudited interim consolidated
financial statements for all quarters in 2004.
Notwithstanding the existence of the material weaknesses discussed below,
the Company's management has concluded that the condensed consolidated financial
statements included in this Form 10-Q fairly present, in all material respects,
the Company's financial position, results of operations and cash flows for the
interim and annual periods presented in conformity with generally accepted
accounting principles.
Although we are not currently required to assess and report on the
effectiveness of our internal control over financial reporting under Rules
13a-15 and 15d-15 of the Exchange Act, management is required to evaluate the
effectiveness of our disclosure controls and procedures under Rule 13a-15(b).
Because of its inherent limitations, internal controls over disclosure controls
and procedures may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that such
controls may become inadequate because of changes in conditions, or that the
degree of compliance with such disclosure controls and procedures may
deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. As of September 30, 2006, we have concluded that the Company did
not maintain effective disclosure controls and procedures due to the following
material weaknesses:
(a) We did not maintain active supervision over the accounting
functions at our operating subsidiaries.
(b) We did not maintain a sufficient number of personnel with an
appropriate level of knowledge, experience and training in the
application of generally accepted accounting principles commensurate
with the Company's global financial reporting requirements and the
complexity of our operations and transactions.
(c) We did not maintain appropriately designed and documented
company-wide policies and procedures.
(d) We did not maintain an effective anti-fraud program designed to
detect and prevent fraud, including (i) an effective whistle-blower
program, and (ii) an ongoing program to manage identified fraud
risks.
These material weaknesses contributed to the material weaknesses discussed
in items 1 to 6 below and the resulting restatement of our annual consolidated
financial statements for 2003, 2002 and prior years, restatement of the
unaudited consolidated quarterly financial statements for 2004 and 2003 as well
as audit adjustments to the 2005 and 2004 annual consolidated financial
statements and the 2005 unaudited consolidated quarterly financial statements.
Additionally, these control deficiencies could result in a material misstatement
in any of the Company's accounts or disclosures that would result in a material
misstatement of the annual or interim consolidated financial statements that
would not be prevented or detected. As of September 30, 2006, we did not
maintain effective controls over:
(1) the accuracy, valuation and disclosure of our goodwill and intangible
asset accounts and the related impairment expense accounts. Specifically,
effective controls were not designed and in place to ensure that an adequate
periodic impairment analysis was conducted, reviewed, and approved in order to
identify and accurately record impairments as required under generally accepted
accounting principles. This control deficiency resulted in the restatement of
our annual consolidated financial statements for 2003 and prior years, and the
unaudited quarterly consolidated financial statements for 2004 as well as audit
adjustments to the annual 2004 consolidated financial statements. Additionally,
this control deficiency could result in a material misstatement of goodwill,
intangible assets and related impairment expense accounts that would result in a
material misstatement of the annual or interim consolidated financial statements
that would not be prevented or detected. Accordingly, management has determined
that this control deficiency constitutes a material weakness.
(2) the accounting for income taxes, including the completeness and
accuracy of income taxes payable, deferred income tax assets, liabilities and
related valuation allowances and the income tax provision. Specifically, we did
36
not appropriately apply generally accepted accounting principles in the
estimation of tax reserves and the recording of valuation allowances against
deferred tax assets. Additionally, we did not have effective controls to monitor
the difference between the income tax basis and the financial reporting basis of
assets and liabilities and reconcile the difference to deferred income tax
assets and liabilities. This control deficiency resulted in the restatement of
the annual consolidated financial statements for 2003 and prior years and all
unaudited quarterly consolidated financial statements for 2004 and audit
adjustments to the annual consolidated financial statements for 2005 and 2004
and the 2005 unaudited consolidated quarterly financial statements.
Additionally, this control deficiency could result in a material misstatement of
income taxes payable, deferred income tax assets and liabilities, income tax
provision and other comprehensive income that would result in a material
misstatement of the annual or interim consolidated financial statements that
would not be prevented or detected. Accordingly, management has determined that
this control deficiency constitutes a material weakness.
(3) the completeness and accuracy of our environmental remediation
liability reserves. Specifically, we did not have effective controls to
accurately estimate or monitor for completeness our environmental remediation
liabilities arising from contractual obligations or regulatory requirements.
This control deficiency resulted in audit adjustments to the 2005 and 2004
annual consolidated financial statements and the 2005 unaudited quarterly
consolidated financial statements. Additionally, this control deficiency could
result in a material misstatement of environmental remediation liability
reserves and environmental remediation expenses that would result in a material
misstatement to annual or interim consolidated financial statements that would
not be prevented or detected. Accordingly, management has determined that this
control deficiency constitutes a material weakness.
(4) the valuation of long-lived assets for impairment purposes.
Specifically, we did not have effective controls to ensure the accuracy and
valuation of an impairment charge taken in the second quarter of 2004. This
control deficiency resulted in a restatement of our unaudited quarterly
condensed consolidated financial statements for the second and third quarters of
2004 and audit adjustments in the annual consolidated financial statements for
2004. Additionally, this control deficiency could result in a material
misstatement of property, plant and equipment and asset impairment charges that
would result in a material misstatement of the annual or interim consolidated
financial statements that would not be prevented or detected. Accordingly,
management has determined that this control deficiency constitutes a material
weakness.
(5) the accounting for derivative instruments and hedging activities
related to precious metal inventory. Specifically, effective controls were not
designed and in place to ensure the appropriate documentation had been completed
in order to qualify for hedge accounting treatment with respect to futures and
forward contracts specifically purchased to mitigate the Company's exposure to
changes in the value of precious metal inventory, including appropriate
identification of the instruments, assessment of effectiveness and maintenance
of contemporaneous documentation in accordance with generally accepted
accounting principles. This control deficiency resulted in the restatement of
the annual consolidated financial statements for the year ended December 31,
2003 and prior years, the 2004 unaudited quarterly consolidated financial
statements, as well as audit adjustments in the annual consolidated financial
statements for 2005 and 2004 and the 2005 unaudited quarterly consolidated
financial statements. Additionally, this control deficiency could result in a
material misstatement of inventory and cost of goods sold as well as other
current assets or accrued liabilities and other income (expense) that would
result in a material misstatement of the annual or interim consolidated
financial statements that would not be prevented or detected. Accordingly,
management has determined that this control deficiency constitutes a material
weakness.
(6) the preparation and review of the consolidated statement of cash
flows. Specifically, we did not maintain effective controls over the accuracy of
the classification of short-term borrowings used to fund purchases of short-term
investments as cash flows from financing activities, as required by generally
accepted accounting principles. This control deficiency resulted in the
restatement of the annual consolidated financial statements for the year ended
December 31, 2003 and prior years. Additionally, this control deficiency could
result in a material misstatement of operating and financing cash flows that
would result in a material misstatement of the annual or interim consolidated
financial statements that would not be prevented or detected. Accordingly,
management has determined that this control deficiency constitutes a material
weakness.
PLANS FOR REMEDIATION
The Company has taken the following actions to address the material weaknesses
noted above.
37
o Engaged an independent third-party valuation firm in the second quarter
of 2005 to assist management in evaluating the impairment of goodwill
and intangible asset accounts;
o Increased the Company's accounting and financial resources by hiring an
Assistant Controller and a Treasurer and retaining a regional
accounting firm of certified public accountants to assist financial
management in addressing various accounting matters;
o Increased the level of review and discussion on significant accounting
matters, including goodwill valuation, environmental issues, tax
matters, cash flow presentation and hedging and related supporting
documentation with senior finance management;
o Consolidated corporate office functions;
o Improved controls regarding timely communication of all significant
events to management and the Board of Directors; and
o Enhanced the monthly financial reporting to senior management and the
Board.
Additional actions planned by management include:
o Hiring additional experienced financial personnel;
o Updating the Company's accounting policies and procedures to ensure
such accounting policies and procedures are complete and current;
o Considering the engagement of an additional third party resource to
support the internal accounting and financial personnel; and
o Reviewing and modifying the nature and scope of internal audit
activities.
Management will consider the design and operating effectiveness of these
actions and will make additional changes it determines appropriate. We cannot
assure you that the measures we have taken, or will take, to remediate these
material weaknesses will be effective or that we will be successful in
implementing them before December 31, 2007 or December 31, 2008, the dates on
which the Company and its independent registered public accounting firm,
respectively, must first report on the effectiveness of our internal control
over financial reporting under the Section 404 provisions of the Sarbanes-Oxley
Act.
Internal control over disclosure controls and procedures, no matter how
well designed, has inherent limitations. Therefore, even those internal controls
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. We will continue to improve
the design and effectiveness of our disclosure controls and procedures to the
extent necessary in the future to provide our senior management with timely
access to such material information, and to correct any deficiencies that we may
discover in the future.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Please see "Legal Proceedings" from the Company's Annual Report on Form
10-K for the year ended December 31, 2005.
ITEM 1A. RISK FACTORS
Please see "Risk Factors" from the Company's Annual Report on Form 10-K
for the year ended December 31, 2005.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
On March 7, 2005, WHX filed a voluntary petition ("Bankruptcy Filing") to
reorganize under Chapter 11 of the United States Bankruptcy Code with the United
States Bankruptcy Court for the Southern District of New York. The Bankruptcy
Filing created an event of default under the Indenture governing WHX's 10 1/2%
Senior Notes (the "Senior Notes") due April 15, 2005. Under the terms of the
Senior Notes, as a result of the Bankruptcy Filing, the entire unpaid principal
38
and accrued interest (and any other additional amounts) became immediately due
and payable without any action on the part of the trustee or the note holders.
The principal amount outstanding under the Senior Notes at March 7, 2005 was
approximately $92.8 million. Accrued interest to March 7, 2005 was approximately
$3.8 million. As previously discussed, after emerging from bankruptcy, the
Company's 10 1/2% Senior Notes were deemed cancelled and annulled.
At March 7, 2005, the date of the Bankruptcy Filing, there were 2.6
million shares of Series A Convertible Preferred Stock and 2.9 million shares of
Series B Convertible Preferred Stock outstanding. Dividends on these shares are
cumulative and are payable quarterly in arrears, in an equal amount to $3.25 per
annum per share of Series A and $3.75 per annum per share of Series B. Pursuant
to the terms of the Supplemental Indenture to the Company's 10 1/2 % Senior
Notes, the Company was prohibited from paying dividends on this Preferred Stock
until after October 31, 2002, at the earliest and thereafter only in the event
that the Company satisfied certain conditions set forth in the Indenture. Such
conditions were not satisfied as of March 7, 2005. At March 7, 2005, dividends
in arrears amounted to $86.1 million. As previously described, after emerging
from bankruptcy, all shares of preferred stock and accrued dividends were deemed
cancelled and annulled.
ITEM 6. EXHIBITS
* Exhibit 31.1 Certification of Principal Executive Officer pursuant to
Rule 13a-14(a) or 15d-14(a) 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-14(a) or 15d-14(a) 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 Act of 1934, as amended, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
* Filed herewith
39
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
/s/ Robert K. Hynes
------------------------------
Robert K. Hynes
Chief Financial Officer
(Principal Accounting Officer)
May 18, 2007
40
