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 June 30, 2007
-------------------------------------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------------- -----------
COMMISSION FILE NUMBER 1-2394
WHX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3768097
------------------------ -------------------
(State of Incorporation) (IRS Employer
Identification No.)
555 Theodore Fremd Avenue
Rye, New York 10580
------------- -----
(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 X No
--- ---
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
--- ---
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 X No
--- ---
The number of shares of Common Stock issued and outstanding as of June 30, 2007
was 10,000,498.
1
PART I. ITEM 1: FINANCIAL STATEMENTS
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2007 2006 2007 2006
---------------- --------------- -------------- --------------
(in thousands - except per-share)
Net sales $ 176,854 $ 125,223 $ 294,691 $ 237,984
Cost of goods sold 136,686 101,704 235,041 193,056
--------- --------- --------- ---------
Gross profit 40,168 23,519 59,650 44,928
Selling, general and administrative expenses 30,743 16,031 49,518 31,013
Proceeds from insurance claims (5,689) -- (5,689) --
Environmental remediation expense -- -- -- 2,909
Loss on disposal of assets 5 43 135 87
Asset impairment charge -- 1,778 -- 1,778
Restructuring charges -- 1,931 -- 1,931
--------- --------- --------- ---------
Income from operations 15,109 3,736 15,686 7,210
--------- --------- --------- ---------
Other:
Interest expense 10,336 5,365 17,906 9,948
Realized and unrealized (gain) loss on derivatives (615) (936) 76 4,530
Other expense 50 183 190 134
--------- --------- --------- ---------
Income (loss) from continuing operations
before taxes 5,338 (876) (2,486) (7,402)
Tax provision 1,308 696 2,017 1,234
--------- --------- --------- ---------
Income (loss) from continuing operations,net of tax 4,030 (1,572) (4,503) (8,636)
Discontinued operations:
Loss from discontinued operations, net of tax -- 167 -- 167
--------- --------- --------- ---------
Net income (loss) $ 4,030 $ (1,739) $ (4,503) $ (8,803)
========= ========= ========= =========
BASIC AND DILUTED PER SHARE OF COMMON STOCK
Income (loss) from continuing operations per share $ 0.40 $ (0.16) $ (0.45) $ (0.86)
Discontinued operations -- (0.02) -- (0.02)
--------- --------- --------- ---------
Net income (loss) per share
applicable to common stock $ 0.40 $ (0.17) $ (0.45) $ (0.88)
========= ========= ========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
WHX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2007 2006
----------------- -----------------
(Dollars and Shares in Thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 5,427 $ 4,776
Trade receivables - net 114,106 58,697
Inventories 89,309 57,177
Deferred income taxes 888 339
Assets held for sale -- 3,967
Other current assets 11,400 5,611
--------- ---------
Total current assets 221,130 130,567
Property, plant and equipment at cost, less
accumulated depreciation and amortization 115,815 78,120
Goodwill and other intangibles, net 114,817 68,272
Other non-current assets 20,453 16,906
--------- ---------
$ 472,215 $ 293,865
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Trade payables $ 58,284 $ 39,194
Accrued environmental liability 4,562 9,421
Accrued liabilities 48,411 28,456
Accrued interest expense - related party 12,588 9,827
Current portion of long-term debt 60,803 4,778
Current portion of long-term debt - related party 89,627 --
Short-term debt 71,716 40,321
Deferred income taxes 123 123
--------- ---------
Total current liabilities 346,113 132,120
Long-term debt 29,783 70,901
Long-term debt - related party 102,680 89,627
Accrued pension liability 45,145 53,445
Other employee benefit liabilities 8,083 8,667
Deferred income taxes 3,904 2,868
Other liabilities 3,616 --
--------- ---------
539,324 357,628
--------- ---------
Stockholders' (Deficit) Equity:
Preferred stock- $.10 par value; authorized 5,000
shares; issued and outstanding -0- shares -- --
Common stock - $.01 par value; authorized 50,000 and 40,000
shares; issued and outstanding 10,000 shares 100 100
Warrants 1,287 1,287
Accumulated other comprehensive loss (44,950) (47,335)
Additional paid-in capital 394,308 394,308
Accumulated deficit (417,854) (412,123)
--------- ---------
Total stockholders' deficit (67,109) (63,763)
--------- ---------
$ 472,215 $ 293,865
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2007 2006
----------------- -----------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,503) $ (8,803)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 7,813 6,559
Stock based compensation 910 --
Asset impairment charge -- 1,778
Amortization of debt related costs 1,248 1,081
Other postretirement benefits 351 (218)
Curtailment of employee benefit obligations 727 128
Loss on asset dispositions 135 87
Equity in after-tax income of affiliated companies (18) (134)
Unrealized gain on derivatives (35) (252)
Reclassification of net cash settlements on derivative instruments 111 4,782
Decrease (increase) in working capital elements,
net of effect of acquisitions:
Trade receivables (23,828) (12,275)
Inventories 3,621 1,358
Other current assets 787 1,970
Accrued interest expense-related party 2,761 --
Other current liabilities (5,421) (7,519)
Other items-net (1,079) (380)
Discontinued operations -- (300)
--------- ---------
Net cash used in operating activities (16,420) (12,138)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Bairnco, net of cash acquired (99,555) --
Plant additions and improvements (3,638) (4,826)
Net cash settlements on derivative instruments (111) (4,782)
Proceeds from sales of assets 3,795 139
Discontinued operations -- 1,400
--------- ---------
Net cash used in investing activities (99,509) (8,069)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from term loans - related party 101,391 19,000
Proceeds from term loans - Domestic 32 7,000
Net increase (decrease) in short term debt 19,944 (127)
Repayments of term loans - Foreign (246) (226)
Repayments of term loans - Domestic (4,667) (3,688)
Deferred financing charges (1,046) (156)
Payment in kind interest on related party debt 1,289 --
Net change in overdrafts (236) (841)
--------- ---------
Net cash provided by financing activities 116,461 20,962
--------- ---------
NET CHANGE FOR THE PERIOD 532 755
EFFECT OF EXCHANGE RATE CHANGES ON NET CASH 119 140
Cash and cash equivalents at beginning of period 4,776 4,076
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,427 $ 4,971
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' (DEFICIT) EQUITY
(Unaudited)
Six Months Ended June 30, 2007
(in thousands)
Common Stock,
Shares Warrants and Accumulated
of Additional Other Total
Common Paid-in Accumulated Comprehensive Stockholders'
Stock Capital Deficit Loss (Deficit) Equity
------------- ------------- ------------- ------------- ----------------
Balance at December 31, 2006 10,000 $ 395,695 $(412,123) $ (47,335) $ (63,763)
Cumulative effect of adoption of
FIN 48 (Note 5) -- -- (1,228) -- (1,228)
--------- --------- --------- --------- ---------
Balance at January 1, 2007 10,000 $ 395,695 $(413,351) $ (47,335) $ (64,991)
Net loss -- -- (4,503) -- (4,503)
Currency translation adjustments -- -- -- 1,039 1,039
Curtailment adjustment -- -- -- 1,346 1,346
---------
Comprehensive loss -- -- -- -- (2,118)
--------- --------- --------- --------- ---------
Balance at June 30, 2007 10,000 $ 395,695 $(417,854) $ (44,950) $ (67,109)
========= ========= ========= ========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
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 on a decentralized basis. WHX owns
Handy & Harman ("H&H"), which is a diversified manufacturing company whose
strategic business units encompass three reportable segments: precious metal,
tubing, and engineered materials. In April 2007, WHX acquired Bairnco
Corporation ("Bairnco"). See Note 2. Bairnco operates business units in three
reportable segments: Arlon electronic materials, Arlon coated materials and
Kasco replacement products and services. The Arlon electronic materials segment
designs, manufactures, markets and sells high performance laminate materials and
bonding films utilized in the military/aerospace, wireless communications,
automotive, oil drilling, and semiconductor markets. Among the products included
in the Arlon electronic materials segment are high technology materials for the
printed circuit board industry and silicone rubber products for insulating tapes
and flexible heaters. The Arlon coated materials segment designs, manufactures,
markets and sells laminated and coated products to the electronic, industrial
and commercial markets under the Arlon and Calon brand names. Among the products
included in the Arlon coated materials segment are vinyl films for graphics art
applications, foam tapes used in window glazing, and electrical and thermal
insulation products. The Kasco replacement products and services segment is a
leading provider of meat-room products (principally replacement band saw blades)
and on site maintenance services principally to retail food stores, meat and
deli operations, and meat, poultry and fish processing plants throughout the
United States, Canada and Europe. In Canada and France, in addition to providing
its replacement products, Kasco also sells equipment to the supermarket and food
processing industries. The results of operations of Bairnco are included in the
financial results of WHX beginning April 13, 2007. WHX, together with all of its
subsidiaries, are referred to herein as the "Company."
NOTE 2 - ACQUISITION OF BAIRNCO
On April 12, 2007, WHX and Steel Partners II, L.P. ("Steel") entered into
a Stock Purchase Agreement whereby WHX acquired Steel's entire interest in BZ
Acquisition Corp. ("BZA"), a wholly owned subsidiary of Steel (the "BZA
Transfer") for $10.00. BZA was the acquisition subsidiary in a tender offer to
acquire up to all of the outstanding stock of Bairnco for $13.50 per share in
cash. Steel also beneficially owns approximately 50.3% of WHX's outstanding
common stock. WHX also agreed to reimburse all reasonable fees and expenses
incurred by Steel in connection with the Offer and the Merger (each as defined
below).
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 exercised 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 credit facilities, which are described in Note 10-
Debt. One of the initial financing facilities was refinanced on July 18, 2007,
and such credit facility is described in Note 14-Subsequent Events.
WHX believes that the acquisition of Bairnco will be beneficial because of
Bairnco's strong positions in its three business segments, and that Bairnco's
plant level operations, profit margins and working capital can be improved.
The acquisition was accounted for under the purchase method of accounting.
The operations of Bairnco comprise three new reportable segments for WHX; Arlon
Coated Materials, Arlon Electronic Materials, and Kasco Replacement Products and
Services. Management is responsible for valuing the assets and liabilities
acquired, and such valuation has not yet been completed. The preliminary
purchase price allocation, subject to change pending completion of the final
valuation and analysis, is as follows:
Amount
--------------
(In Thousands)
Net tangible assets $ 54,276
Identifiable intangible assets 9,732
Goodwill 37,445
--------
Purchase price $101,453
========
6
The components of the $9.7 million of estimated acquired Identifiable
Intangible Assets, listed in the above table, are as follows:
Amortization
Amount Period
-------------- ------------
(In Thousands)
Customer relationships $6,921 10-20 years
Trademarks/Brand names 2,208 5-10 years
Non-compete agreement 446 5 years
Engineering drawings 157 7 years
------
Total Identifiable Intangible Assets $9,732
======
Amortization expense on these intangible assets recorded from acquisition
through June 30, 2007 was $0.1 million. The Goodwill has an indefinite life and,
accordingly, will not be amortized, but will be subject to periodic impairment
testing at future periods in accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets". Approximately $1.4 million of the acquired goodwill is
expected to be amortizable for income tax purposes.
Effective April 13, 2007, the consolidated financial statements of WHX
include the actual results of operations of Bairnco. The following table
summarizes unaudited pro forma financial data for the combined companies as
though the Company had acquired Bairnco as of January 1, 2006:
COMBINED WHX AND BAIRNCO
For the Three Months Ended June 30, For the Six Months Ended June 30,
(in thousands) 2007 2006 2007 2006
------------- ------------- ------------- -------------
Net sales $ 182,896 $ 170,217 $ 349,460 $ 325,836
Loss from continuing
operations before income taxes $ (2,411) $ (2,740) $ (13,633) $ (11,605)
Net loss $ (3,679) $ (3,866) $ (15,774) $ (13,610)
Net loss per common share $ (0.37) $ (0.39) $ (1.58) $ (1.36)
Included in the above pro forma pretax results for Bairnco for the six
months ended June 30, 2007 are non-recurring charges of $5.7 million relating to
amounts owed due to the change in control of Bairnco and costs of $1.4 million
relating to the tender offer that were not included in the purchase price of the
company. Included in the above pro forma pretax results for WHX for the three
and six months ended June 30, 2007 is income of $5.7 million relating to the
settlement of a fire insurance claim from a prior year. The pro forma
information noted above should be read in conjunction with the related
historical information and is not necessarily indicative of the results that
would have been attained had the transaction actually taken place as of January
1, 2006; nor is it indicative of any future operating results of the combined
entities.
7
NOTE 3 - LIQUIDITY
The Company has incurred significant losses and negative cash flows from
operations in recent years, and as of June 30, 2007 had an accumulated deficit
of $417.9 million. As of June 30, 2007, the Company's current assets totaled
$221.1 million and its current liabilities totaled $346.1 million; a working
capital deficit of $125.0 million. The Company's working capital deficit at
December 31, 2006 was $1.6 million. As of June 30, 2007, the majority of the
Company's debt has been classified as short-term since its maturity date is
within twelve months (June 30, 2008); whereas as of December 31, 2006, such debt
was classified as long-term since its maturity date exceeded one year. The
Company intends to refinance its debt, but there can be no assurance that such
financing will be available or available on terms acceptable to the Company.
As of June 30, 2007, WHX and its unrestricted subsidiaries had cash of
approximately $0.1 million and current liabilities of approximately $8.7
million, including $5.1 million of mandatorily redeemable preferred shares
payable to a related party. 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 loan
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. WHX has no bank credit
facility of its own. WHX's ongoing operating cash flow requirements consist of
funding the minimum requirements of the WHX Pension Plan and paying other
administrative costs.
H&H's availability under its revolving credit facility and other
facilities as of June 30, 2007, was approximately $10.1 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. 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 indirect subsidiary of H&H, 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.
On June 15, 2007, the lenders under H&H's revolving credit facility and
other facilities granted a waiver to the events of default arising as a result
of the Order of Prejudgment Attachment entered by the Superior Court of
Fairfield County, Connecticut (the "Superior Court") on December 18, 2006 in
connection with the litigation known as HH East Parcel v. Handy & Harman
currently pending in the Superior Court in the amount of $3,520,200 and the
Notice of Bank Attachment/Garnishment dated May 21, 2007 by the State Marshal of
Fairfield County, Connecticut to JPMorgan Chase Bank in the amount of
$3,520,200, and related matters (see Note 13- Contingencies).
On July 20, 2007, H&H and its lenders under its revolving credit facility
and other facilities amended such facilities to permit additional loans by Steel
to H&H in an aggregate amount not to exceed $7,389,276, and permit the loan,
distribution or other advances by H&H to WHX of up to $7,389,276, subject to
certain limitations, to the extent loaned by Steel to H&H as permitted by these
amendments. See Note 14- Subsequent Events.
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 $3.8
million. Under the terms of the sale agreement, the Company has retained
responsibility for any pre-existing environmental conditions requiring
remediation at the Rhode Island site.
Bairnco became a wholly-owned subsidiary of WHX in April 2007. Initial
financing to fund the tender offer was provided by Steel through two credit
facilities, in the approximate aggregate amount of $101.5 million. The
availability under the Bairnco Revolving Credit Facility on June 30, 2007 was
approximately $5.9 million. The Bairnco Revolving Credit Facility, as well as a
portion of the initial financing, were refinanced on July 18, 2007. See Note 14-
Subsequent Events.
In addition to the obligations under the current credit facilities, the
Company also has significant cash flow obligations, including without limitation
the amounts due to the WHX Pension Plan (as amended by the IRS Waiver and PBGC
Settlement Agreement entered into December 28, 2006). The Company continues to
examine all of its options and strategies, including acquisitions, divestitures,
and other corporate transactions, to increase cash flow and stockholder value,
as well as considering the reduction of certain discretionary expenses and sale
of certain non-core assets. The Company intends to refinance its debt prior to
maturity. There can be no assurance that the funds available from operations and
under the Company's credit facilities will be sufficient to fund debt service
costs, working capital demands, pension plan contributions, and environmental
remediation costs, or that the Company will be able to obtain replacement
financing at commercially reasonable terms upon the expiration of the H&H credit
facilities in June 2008.
8
NOTE 4 - BASIS OF PRESENTATION
The condensed consolidated balance sheet as of December 31, 2006, which
has been derived from audited financial statements, and the unaudited condensed
consolidated financial statements included herein have been prepared by the
Company in accordance with the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in accordance with those
rules and regulations, although the Company believes that the disclosures made
are adequate to make the information not misleading. This quarterly report on
Form 10-Q should be read in conjunction with the Company's audited consolidated
financial statements contained in Form 10-K for the year ended December 31,
2006. Certain amounts for the prior year period have been reclassified to
conform to the current year presentation.
In the opinion of management, the interim financial statements reflect all
normal and recurring adjustments necessary to present fairly the consolidated
financial position and the results of operations and changes in cash flows for
the interim periods. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The results
of operations for the six months ended June 30, 2007 are not necessarily
indicative of the operating results for the full year.
NOTE 5 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
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 adopted the provisions of FIN No. 48 on January 1, 2007. As a
result of the implementation of FIN No. 48, an increase in the liability for
unrecognized income tax benefits of $1.2 million was recognized, and
accordingly, an adjustment to opening retained earnings was recorded. At the
adoption date of January 1, 2007, the Company had $2.7 million of unrecognized
tax benefits, all of which would affect its effective tax rate if recognized. At
June 30, 2007, the Company has $3.1 million of unrecognized tax benefits. The
increase in the amount of unrecognized tax benefits in the six month period
ended June 30, 2007 related to interest and to the acquisition of Bairnco.
The Company recognizes interest and penalties related to uncertain tax
positions in income tax expense. As of June 30, 2007, approximately $0.6 million
of interest related to uncertain tax positions is accrued. It is reasonably
possible that the total amount of unrecognized tax benefits will decrease by as
much as $0.4 million during the next twelve months as a result of the lapse of
the applicable statutes of limitations in certain taxing jurisdictions. The tax
years 2003-2006 remain open to examination by the major taxing jurisdictions to
which the Company is subject.
The Company's tax provisions included in the Condensed Consolidated
Statements of Operations for all periods presented are comprised of state and
foreign taxes. The Company has not recorded federal income taxes in these
periods since in the opinion of management, it is more likely than not that the
benefit of the Company's net operating loss carryforward will not be realized in
the future. The Company records a valuation allowance against deferred tax
assets resulting from net operating loss carryforwards.
In September 2006, the FASB issued Statement of Financial Accounting
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 No. 157 on its consolidated financial position and results of operations.
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.
9
NOTE 6 - NET INCOME (LOSS) PER SHARE
The computation of basic earnings or 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 potential common shares outstanding
during the period. No common share equivalents were dilutive in any period
presented. For the three and six months ended June 30, 2006 and for the six
months ended June 30, 2007, the Company reported a net loss and therefore, any
outstanding warrants and stock options would have had an anti-dilutive effect.
For the three months ended June 30, 2007, the Company's 752,688 warrants were
anti-dilutive, and the dilutive effect of the Company's 420,000 phantom stock
options (See Note 7) was not material.
10
RECONCILIATION OF INCOME (LOSS) AND SHARES IN EPS CALCULATION
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
For the Three Months Ended June 30, 2007
Loss Shares Per-Share
(Numerator) (Denominator) Amount
---------------- -------------------- ------------------
Net income $ 4,030
Less: Preferred stock dividends --
-------
BASIC AND DILUTED EPS
Net income applicable to common stockholders $ 4,030 10,000 $ 0.40
======= ====== ========
For the Three Months Ended June 30, 2006
Loss Shares Per-Share
(Numerator) (Denominator) Amount
---------------- -------------------- ------------------
Net loss $(1,739)
Less: Preferred stock dividends --
-------
BASIC AND DILUTED EPS
Loss applicable to common stockholders $(1,739) 10,000 $ (0.17)
======= ====== ========
For the Six Months Ended June 30, 2007
Loss Shares Per-Share
(Numerator) (Denominator) Amount
---------------- -------------------- ------------------
Net loss $(4,503)
Less: Preferred stock dividends --
-------
BASIC AND DILUTED EPS
Loss applicable to common stockholders $(4,503) 10,000 $ (0.45)
======= ====== ========
For the Six Months Ended June 30, 2006
Loss Shares Per-Share
(Numerator) (Denominator) Amount
---------------- -------------------- ------------------
Net loss $(8,803)
Less: Preferred stock dividends --
-------
BASIC AND DILUTED EPS
Loss applicable to common stockholders $(8,803) 10,000 $ (0.88)
======= ====== ========
NOTE 7 - STOCK-BASED COMPENSATION
Stock-based compensation expense is recorded based on the grant-date fair
value estimated in accordance with the revisions of Revised Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123(R)"). The Company measures stock-based compensation
cost at the grant date, based on the fair value of the award, and recognizes the
expense on a straight-line basis over the employee's requisite service (vesting)
period.
11
The Company had agreed to grant stock options upon adoption of a stock
option plan by the Board of Directors and registration thereof with the SEC, or
in lieu thereof, phantom stock options or equivalent other consideration (at the
sole discretion of the Company), to various officers and employees of the
Company, on or as of the following effective dates (in the case of December 31,
2006, on or before) and in the following respective amounts, with strike prices
or equivalent values as if granted on the dates set forth:
June 30, 2006 25,000 shares
September 30, 2006 130,000 shares
December 31, 2006 205,000 shares
September 30, 2007 60,000 shares
The trading price per share of the Company's common stock as of June 30,
2006 and September 30, 2006 was $9.20 and $9.00, respectively and as of December
31, 2006 the trading price was $8.45 per share.
The Company estimated the fair value of the phantom stock options in
accordance with SFAS No.123(R) using a Black-Scholes option-pricing model. The
expected average risk-free rate is based on U.S. treasury yield curve. The
expected average life represents the period of time that options granted are
expected to be outstanding. Expected volatility is based on historical
volatilities of WHX's post-bankruptcy common stock. The expected dividend yield
is based on historical information and management's plan.
Six Months Ended
Assumptions June 30, 2007
- ----------------------- ----------------
Risk-free interest rate 4.92%
Vesting period 3 years
Expected dividend yield 0.00%
Expected life (in years) 4.5 years
Volatility 58.7%
Under SFAS 123R, the Company is required to adjust its obligation to the
fair value of such phantom stock options from the effective date of grant up to
the date of actual grant. The Company has recorded $0.7 million and $0.9 million
of stock-based compensation expense related to these phantom stock options for
the three and six month periods ended June 30, 2007, respectively. Effective
July 6, 2007, the Company cancelled the phantom stock options and granted stock
options to these employees on similar terms. See Note 14- Subsequent Events.
NOTE 8 - INVENTORIES
Inventories at June 30, 2007 and December 31, 2006 are comprised as
follows:
(in thousands) June 30, December 31,
2007 2006
------------ ------------
Finished products $ 41,348 $ 16,162
In - process 15,563 5,743
Raw materials 26,692 25,423
Fine and fabricated precious metal in
various stages of completion 9,845 17,702
-------- --------
93,448 65,030
LIFO reserve (4,139) (7,853)
-------- --------
$ 89,309 $ 57,177
======== ========
In order to produce certain of its products, the Company purchases,
maintains and utilizes precious metal inventory. H&H enters into commodity
futures and forwards contracts on precious metal that are subject to market
fluctuations in order to economically hedge its precious metal inventory against
price fluctuations. As 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
recognizes realized and unrealized gains and losses on the derivative
instruments related to precious metal. Such realized and unrealized gains and
12
losses are recorded in current period earnings as other income or expense in the
Company's consolidated statement of operations. The three month periods ended
June 30, 2007 and 2006 include gains of $0.6 million and $0.9 million,
respectively, and the six month periods ended June 30, 2007 and 2006 include
losses of $0.1million and $4.5 million, respectively, relating to these
adjustments. 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. The market value of the precious metal inventory
exceeded LIFO value cost by $4.1 million and $7.9 million at June 30, 2007 and
December 31, 2006, respectively.
Certain customers and suppliers of H&H choose to do business on a "toll"
basis, and furnish precious metal to H&H for return in fabricated form (customer
metal) or for purchase from or return to the supplier. When the customer metal
is returned in fabricated form, the customer is charged a fabrication charge.
The value of this customer metal is not included in the Company's balance sheet.
In the first quarter of 2007, the Company received 400,000 troy ounces of silver
from a customer under an unallocated pool account agreement. Such agreement is
cancelable by the customer upon six months notice. Because of a reduction in its
operating needs as well as a result of this agreement, the quantity of silver
owned by the Company declined by 622,000 troy ounces as of June 30, 2007. The
Company deferred $4.2 million of profit arising from this liquidation of LIFO
inventory, which is currently being treated as temporary, and such deferral is
included in accrued liabilities on the June 30, 2007 balance sheet.
June 30, December 31,
2007 2006
-------------- --------------
Silver ounces:
Customer metal 706,093 137,711
H&H owned metal 435,741 1,057,900
Gold ounces:
Customer metal 464 907
H&H owned metal 6,177 5,800
Palladium ounces:
Customer metal 1,338 1,338
H&H owned metal 1,067 1,535
Supplemental inventory information:
June 30, December 31,
2007 2006
-------------- --------------
(in thousands, except per ounce)
Precious metal stated at LIFO cost $ 5,706 $ 9,849
Market value per ounce:
Silver $ 12.40 $ 12.85
Gold $ 649.51 $ 635.99
Palladium $ 365.00 $ 323.50
One of Bairnco's suppliers informed Bairnco that it will be discontinuing
production of a particular raw material. Certain customers have paid Bairnco
deposits and warehousing fees to secure inventory levels of the raw material.
The fees paid by the customers are deferred on Bairnco's balance sheet, and are
being amortized over periods ranging from 12 to 72 months. As of June 30, 2007,
$1.0 million is included in current liabilities and $2.3 million is included in
long-term liabilities on the consolidated balance sheet in connection with these
customer agreements.
NOTE 9 - PENSIONS, OTHER POSTRETIREMENT AND POST-EMPLOYMENT BENEFITS
The following table presents the components of net periodic pension cost
(credit) for the Company's pension plans for the three and six months ended June
30, 2007 and 2006. The pension cost (credit) of the Bairnco U.S. pension plans
is included in the three and six month period of 2007 since the acquisition date
of April 13, 2007:
13
(In Thousands) Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
-------------------------- --------------------------
Service cost $ 90 $ 57 $ 165 $ 141
Interest cost 6,428 5,762 12,353 11,366
Expected return on plan assets (8,286) (7,109) (15,786) (14,092)
Amortization of prior service cost 30 17 55 38
Recognized actuarial (gain)/loss 299 75 524 303
Special termination benefit charge -- 128 -- 128
-------- -------- -------- --------
$ (1,439) $ (1,070) $ (2,689) $ (2,116)
======== ======== ======== ========
In addition to the WHX Pension Plan which is included in the table above,
WHX also maintains several other retirement and postretirement benefit plans
covering substantially all of the employees of WHX and H&H. The approximate
aggregate expense for these plans was $0.9 million and $0.2 million for the
three months ended June 30, 2007 and 2006, respectively, and aggregate expense
of $1.1 million and aggregate income of $0.2 million for the six months ended
June 30, 2007 and 2006, respectively. The increase in expense for the three and
six months ended June 30, 2007 was the result of a one time curtailment charge
of $0.7 million to redesign the postretirement benefit plan of one of the
subsidiaries of H&H. The reason for the aggregate income for these benefit plans
in 2006 was that effective January 1, 2006, the H&H non-qualified pension plan
adopted an amendment under the plan 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.
Bairnco maintains a 401(k) plan to provide retirement benefits to its
employees in the United States. A base contribution of 1% of pay is made to each
participant's account, plus Bairnco matches 50% of up to 4% of pay contributed
by the employee. Bairnco has a pension plan at one of its United States
subsidiaries, which is included in the 2007 table above. The benefits paid under
this plan are based on employees' years of service and compensation during the
last years of employment. In addition to the U.S. pension plan, Bairnco's
Canadian subsidiary provides retirement benefits for its employees through a
defined contribution plan, and Bairnco's European subsidiaries provide
retirement benefits for employees consistent with local practices. The foreign
plans are not significant in the aggregate.
14
NOTE 10 - DEBT
Long-term debt consists of the following:
June 30, December 31,
2007 2006
(in thousands) ------------ ------------
H&H Term Loan - related party $ 89,627 $ 89,627
H&H Credit Facility - Term Loan A 11,078 14,453
H&H Term Loan 42,000 42,000
H&H Supplemental Term Loan 5,951 6,883
Other H&H debt-domestic 6,792 6,868
Other H&H debt-foreign 5,365 5,475
Bairnco Term Loan 14,347 --
Bairnco Credit Facility 141 --
Bairnco China foreign loan facility 4,912 --
Bairnco Bridge Loan-related party 87,188 --
WHX Subordinated Loan-related party 15,492 --
-------- --------
282,893 165,306
Less portion due within one year 150,430 4,778
-------- --------
Total long-term debt $132,463 $160,528
======== ========
As of June 30, 2007, the majority of the Company's debt has been
classified as short-term since its maturity date is within twelve months (June
30, 2008); whereas as of December 31, 2006, such debt was classified as
long-term since its maturity date exceeded one year. The Company intends to
refinance its debt but there can be no assurance that such financing will be
available or available on terms acceptable to the Company.
On March 29, 2007, H&H and certain of H&H's subsidiaries amended the
respective Loan and Security Agreements' revolving credit facilities with
Wachovia Bank, N.A. ("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 indirect subsidiary of H&H, 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.
On June 15, 2007, the lenders under H&H's revolving credit facility and
other facilities granted a waiver to the events of default arising as a result
of the Order of Prejudgment Attachment entered by the Superior Court of
Fairfield County, Connecticut (the "Superior Court") on December 18, 2006 in
connection with the litigation known as HH East Parcel v. Handy & Harman
currently pending in the Superior Court in the amount of $3,520,200 and the
Notice of Bank Attachment/Garnishment dated May 21, 2007 by the State Marshal of
Fairfield County, Connecticut to JPMorgan Chase Bank in the amount of
$3,520,200, and related matters (see Note 13- Contingencies).
On July 20, 2007, H&H and its lenders under its revolving credit facility
and other facilities amended such facilities. See Note 14- Subsequent Events.
On November 9, 2006, Bairnco entered into a five year, $42.0 million
Secured Credit Facility. The $42.0 million facility is apportioned as follows: a
five-year $15.0 million Term Loan and up to a $27.0 million Revolving Credit
Facility, including a $13.0 million sub-limit for letters of credit and a $3.0
million sub-limit for foreign currency loans. The Bairnco Revolving Credit
Facility is collateralized by a first lien on substantially all of the domestic
assets of Bairnco, the capital stock of domestic subsidiaries and 65% of the
capital stock of foreign subsidiaries. The Bairnco Revolving Credit Facility
matures on November 8, 2011. This Bairnco Revolving Credit Facility was amended
on March 23, 2007 to permit the change of control in connection with the closing
of the Offer, among other things, and was further amended on April 24, 2007 in
connection with the acquisition of Bairnco to amend certain covenants and to
permit the financing under the Bridge Loan and Subordinated Loan Agreements,
among other things. Bairnco's Secured Credit Facility was refinanced effective
July 18, 2007.
15
Approximately $7.1 million of irrevocable standby letters of credit were
outstanding under the Secured Credit Facility, which are not reflected in the
accompanying consolidated financial statements, and also which reduce the unused
borrowing availability under the Secured Credit Facility. $1.9 million of the
letters of credit guarantee various insurance activities and $5.2 million
represent letters of credit securing borrowing for the China foreign loan
facility. These letters of credit mature at various dates and have automatic
renewal provisions subject to prior notice of cancellation.
The Term Loan under the Bairnco Revolving Credit Facility has scheduled
principal payments of $0.6 million in 2007, and $1.1 million in 2008, 2009 and
2010, and $1.0 million in 2011, with the balance due at maturity. Interest rates
vary on the Term Loan and are set from time to time in relationship to one of
several reference rates, as selected by Bairnco. The revolving credit notes
under the Secured Credit Facility relate to foreign borrowings denominated in
Canadian Dollars. Interest rates vary on the revolving credit notes and are set
at the time of borrowing in relationship to one of several reference rates as
selected by Bairnco. A commitment fee is paid on the unused portion of the total
credit facility. The amount Bairnco can borrow at any given time is based upon a
formula that takes into account, among other things, eligible inventory and
accounts receivable, which can result in borrowing availability of less than the
full amount of the Bairnco Revolving Credit Facility. The availability under the
Bairnco Revolving Credit Facility on June 30, 2007 was approximately $5.9
million.
The Bairnco Revolving Credit Facility contains customary representations,
warranties, covenants, events of default, and indemnification provisions. The
Bairnco Revolving Credit Facility also contains a financial covenant which
requires Bairnco to meet a minimum fixed charge coverage ratio.
In addition, Bairnco has a China foreign loan facility that reflects
borrowing by its Chinese facilities, which is collateralized by four U.S. dollar
denominated letters of credit totaling $5.2 million issued under the Secured
Credit Facility.
In connection with the acquisition of Bairnco, initial financing was
provided by Steel through two credit facilities. Steel extended to BZA bridge
loans in the principal amount of approximately $75.1 million, $1.4 million, and
$10.0 million pursuant to a loan and security agreement (the "Bridge Loan
Agreement"), between BZA and Bairnco, as borrowers, and Steel, as lender.
Approximately $56.7 million of the indebtedness under the Bridge Loan Agreement
was repaid in July 2007, leaving a principal balance of approximately $31.8
million. 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"), 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.
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 collateralized
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.
On July 18, 2007, Bairnco completed the refinancing of: (i) all existing
indebtedness of Bairnco and its subsidiaries under its Senior Secured Credit
Facility dated as of November 9, 2006, and (ii) a portion of the existing
indebtedness under the Bridge Loan Agreement with Steel. See Note 14- Subsequent
Events. Accordingly, the Bridge Loan Agreement has been classified as long-term
debt in the consolidated balance sheet as of June 30, 2007.
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 collateralized 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.
16
The Bridge Loan Agreement and the Subordinated Loan Agreement contain
customary representations, warranties, covenants, events of default and
indemnification provisions.
The annual maturities of long-term debt as of June 30, 2007 were as
follows:
(in thousands)
July 1 - December 31, 2008 $ 887
2009 104,451
2010 1,774
2011 22,283
2012 3,067
--------
$132,462
========
NOTE 11 -FACILITY CLOSURES AND ASSET SALES
NORRISTOWN FACILITY
On May 9, 2006, the Company announced the closing of the Handy & Harman
Tube Co. ("HHT") facility 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 short 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 Statement of Financial Accounting Standards No. 144, "Accounting
for Impairment or Disposal of Long-Lived Assets". A review of future cash flows
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, were reclassified to current
assets held for sale in the balance sheet as of June 30, 2006. The real estate
is included in non-current assets (other assets). 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 six months ended
June 30, 2007:
Reserve Reserve
Balance Balance
December 31, June 30,
2006 Expense Paid 2007
------------ ------- ---- ---------
(in thousands)
Termination benefits $320 $-- $274 $ 46
==== ==== ==== ====
The Company 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.
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 machinery and equipment were sold in the
first quarter of 2007 for proceeds of $0.7 million.
17
HANDY & HARMAN ELECTRONIC MATERIALS ("HHEM")
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 $3.8
million. HHEM was part of the Company's Precious Metal segment. 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. Upon
sale, the Company recognized a loss of $0.4 million relating to the sale of
inventory. Under the terms of the sale agreement, the Company has retained
responsibility for any pre-existing environmental conditions requiring
remediation at the Rhode Island site.
NOTE 12 - REPORTABLE SEGMENTS
The Company has six reportable segments:
(1) Precious Metal. 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;
(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;
(4) Arlon Electronic Materials ("Arlon EM"). This segment designs,
manufactures, markets and sells high performance laminate materials
and bonding films utilized in the military/aerospace, wireless
communications, automotive, oil drilling, and semiconductor markets.
Among the products included in the Arlon Electronic Materials
segment are high technology materials for the printed circuit board
industry and silicone rubber products for insulating tapes and
flexible heaters.
(5) Arlon Coated Materials ("Arlon CM"). This segment designs,
manufactures, markets and sells laminated and coated products to the
electronic, industrial and commercial markets under the Arlon and
Calon brand names. Among the products included in the Arlon Coated
Materials segment are vinyl films for graphics art applications,
foam tapes used in window glazing, and electrical and thermal
insulation products.
(6) Kasco Replacement Products and Services ("Kasco"). Replacement
products and services are manufactured and distributed under the
Kasco name principally to retail food stores, meat and deli
operations, and meat, poultry and fish processing plants throughout
the United States, Canada and Europe. The principal products include
replacement band saw blades for cutting meat, fish, wood and metal,
and on site maintenance services primarily in the meat and deli
departments. In Canada and France, in addition to providing its
replacement products, Kasco also sells equipment to the supermarket
and food processing industries. These products are sold under a
number of brand names including Kasco in the United States and
Canada, Atlantic Service in the United Kingdom, and Bertram & Graf
and Biro in Continental Europe.
Management has determined that certain reporting units 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.
18
The following table presents information about reportable segments for the
three and six month periods ending June 30, 2007 and 2006. Information about the
Bairnco reportable segments includes the period April 13, 2007 through June 30,
2007.
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
----------- ------------- ----------- -------------
(in thousands) (in thousands)
Net sales
Precious Metal $ 39,446 $ 39,396 $ 77,208 $ 76,108
Tubing 30,913 32,308 60,250 62,709
Engineered Materials 63,412 53,519 114,150 99,167
Arlon Electronic Materials (a) 14,017 -- 14,017 --
Arlon Coated Materials (a) 14,683 -- 14,683 --
Kasco (a) 14,383 -- 14,383 --
--------- --------- --------- ---------
Net sales $ 176,854 $ 125,223 $ 294,691 $ 237,984
========= ========= ========= =========
Segment operating income
Precious Metal $ 1,759 $ 2,470 $ 1,488 $ 4,884
Tubing 419 (4,111) (481) (3,678)
Engineered Materials 5,498 5,093 7,571 8,504
Arlon Electronic Materials (a) 2,222 -- 2,222 --
Arlon Coated Materials (a) (2) -- (2) --
Kasco (a) 498 -- 498 --
--------- --------- --------- ---------
10,394 3,452 11,296 9,710
--------- --------- --------- ---------
Unallocated corporate expenses 2,219 871 3,664 1,748
Pension income (1,250) (1,198) (2,500) (2,244)
Insurance proceeds (5,689) -- (5,689) --
Environmental remediation expense -- -- -- 2,909
Loss on disposal of assets 5 43 135 87
--------- --------- --------- ---------
Income from operations $ 15,109 $ 3,736 $ 15,686 $ 7,210
========= ========= ========= =========
(a) Bairnco segment information includes the period April 13, 2007 through
June 30, 2007.
19
Six Months Ended June 30,
2007 2006
---------- ----------
CAPITAL EXPENDITURES (in thousands)
Precious Metal $ 890 $1,089
Tubing 569 2,600
Engineered Materials 1,127 1,058
ARLON EM 282 --
ARLON CM 218 --
KASCO 485 --
Corporate and other 67 79
------ ------
Total $3,638 $4,826
====== ======
GEOGRAPHIC INFORMATION
Revenue Long-lived Assets
Three Months Ended June 30, Six Months Ended June 30, June 30, December 31,
2007 2006 2007 2006 2007 2006
------------ ------------ ------------ ------------ ------------ ------------
(in thousands) (in thousands) (in thousands)
United States $157,527 $114,152 $264,260 $218,416 $111,404 $ 76,686
Foreign 19,327 11,071 30,431 19,568 11,285 8,309
-------- -------- -------- -------- -------- --------
Total $176,854 $125,223 $294,691 $237,984 $122,689 $ 84,995
======== ======== ======== ======== ======== ========
NOTE 13 - 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
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 (which proceeds were paid to Steel in
partial satisfaction of its loan), 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 will have a first lien, and the Pension
Benefit Guaranty Corporation a second lien, on any additional proceeds
recovered.
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 October 2005 in
Connecticut, pursuant to which HH East was awarded, among other things, an
amount equal to $5,000 per day from January 1, 2005 through the date on which
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remediation is completed. This award amounts to approximately $4.0 million
through the completion date of April 6, 2007. HH East moved in the Superior
Court of Connecticut, Fairfield County, to have the arbitration award and H&H
moved to have it vacated. The court issued a decision on June 26, 2006, denying
H&H's application. H&H is appealing this decision.
On May 22, 2007, HH East served an Order for a Prejudgment Attachment in
the amount of $3,520,200, issued by the Superior Court, Stamford, Connecticut in
December 2006, against certain Connecticut property of H&H and against certain
bank accounts maintained by H&H at banks in New York. H&H has brought
proceedings in the Superior Court, Stamford, Connecticut, and in the Supreme
Court, State of New York, to oppose the attachment of such bank accounts and to
have it lifted. The New York proceeding has been discontinued and the
Connecticut proceeding is pending but adjourned. The parties have engaged from
time to time in settlement discussions to resolve the open issues and
proceedings between them. On June 14, 2007, HH East temporarily withdrew its
attachment/garnishment against certain bank accounts of H&H after the posting of
other satisfactory collateral by H&H and while settlement discussions are
continuing. On June 29, 2007, and again on July 23, 2007, HH East re-served the
Order against certain bank accounts of H&H.
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. Approximately $28.4 million had been expended through June 30,
2007, and the remaining remediation costs are expected to approximate $0.3
million. H&H received reimbursement of $2.0 million from its carrier under a
cost-cap insurance policy and is pursuing its potential entitlement to
additional coverage. Remediation of all soil conditions on site was completed on
April 6, 2007. HH East informed H&H in June that it believes that additional
work remains to be done by H&H on the site. The parties have been in discussion
about this matter and in furtherance of settlement discussions, H&H is
considering performing limited additional work on site.
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
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
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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 $4.0 million has been 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 June 30, 2007 and December 31, 2006.
H&H entered into an administrative consent order (the "ACO") in 1986 with
the New Jersey Department of Environmental Protection ("NJDEP") with regard to
certain property that it purchased in 1984 in New Jersey. The ACO involves
investigation and remediation activities to be performed with regard to soil and
groundwater contamination. H&H settled a case brought by the local municipality
in regard to this site in 1998 and also settled with certain of its insurance
carriers. H&H is actively remediating the property and continuing to investigate
the most effective methods for achieving compliance with the ACO. A remedial
investigation report was filed with the NJDEP in 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 2007 of
approximately $250,000. Pursuant to a settlement agreement with the former
owner/operator of the Site, the responsibility for site investigation and
remediation costs are allocated, 75% to the former owner/operator and 25% to H&H
after the first $1 million. The $1 million was paid solely by the former
owner/operator. To date, over and above the $1 million, total investigation and
remediation costs of $237,000 and $79,000 have been expended by the former
owner/operator and H&H, respectively, in accordance with the settlement
agreement. Additionally, H&H is currently being reimbursed through insurance
coverage for a portion of the investigation and remediation costs for which the
company is responsible. 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
liabilities 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. A subsidiary of H&H is one of the
defendants that the plaintiffs claim contributed to the contamination of the
Boarhead Farm site. A number of the plaintiffs have entered into consent decrees
with the Environmental Protection Agency ("EPA") regarding the remediation of
groundwater and soil contamination at the Boarhead Farm site. In addition,
plaintiffs have settled with a number of the defendants. There are currently six
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non-settling defendants, including H&H, against which the plaintiffs are
pursuing their claims. Fact and expert discovery has been concluded. The
plaintiffs have already made substantial payments to the EPA in past response
costs and have themselves incurred costs for groundwater and soil remediation.
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 third 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. The offer is contingent on the group arriving at an acceptable
allocation amongst the PRPs. It is anticipated that the EPA will accept or
reject the PRP's offer shortly after the allocation process is concluded
(assuming an acceptable allocation is reached). It is anticipated that PRP
remedial activities at the site will not begin until 2009. The remediation of a
significant amount of the contamination at the site is the responsibility of the
U.S. Department of Energy ("DOE"). That remediation is being accomplished by the
U.S. Army Corps of Engineers. The DOE portion of the work has begun but is not
expected to be completed until 2009, 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
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.
23
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
(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.
NOTE 14 - SUBSEQUENT EVENTS
On July 18, 2007, Bairnco completed the refinancing of: (i) all existing
indebtedness of Bairnco and its subsidiaries under its Senior Secured Credit
Facility dated as of November 9, 2006 with Bank of America, N.A., and (ii) a
portion of the existing indebtedness under the Bridge Loan Agreement pursuant to
which Steel made an $87.2 million term loan to Bairnco.
Under the refinancing, Bairnco entered into (i) a Credit Agreement, dated
as of July 17, 2007 (the "First Lien Credit Agreement"), by and among Bairnco,
Arlon, Inc. ("Arlon"), Arlon Viscor Ltd. ("Arlon Viscor"), Arlon Signtech, Ltd.
("Arlon Signtech"), Kasco Corporation ("Kasco"), and Southern Saw Acquisition
Corporation ("Southern Saw," and together with each of Arlon, Arlon Viscor,
Arlon Signtech and Kasco, the "Borrowers") and Wells Fargo Foothill, Inc., as
the arranger and administrative agent for the lenders thereunder, (ii) a Credit
Agreement, dated as of July 17, 2007 (the "Second Lien Credit Agreement"), by
and among Bairnco, each of the Borrowers, and Ableco Finance LLC, as
administrative agent for the lenders thereunder, and (iii) an Amended and
Restated Credit Agreement, dated as of July 17, 2007 (the "Subordinated Debt
Credit Agreement"), by and among Bairnco, each of the Borrowers and Steel as
lender. The Subordinated Debt Credit Agreement amends and restates the Bridge
Loan Agreement.
The First Lien Credit Agreement provides for a revolving credit facility
to the Borrowers in an aggregate principal amount not to exceed $30,000,000, and
a term loan facility to the Borrowers of $28,000,000. Borrowings under the First
Lien Credit Agreement, bear interest, (A) in the case of base rate loans, at
0.25 percentage points above the Wells Fargo prime rate, (B) in the case of
LIBOR rate loans, at rates of 2.00 percentage points or 2.50 percentage points,
as applicable, above the LIBOR rate, and (C) otherwise, at a rate equal to the
Wells Fargo prime rate minus 0.25 percentage points. Obligations under the First
Lien Credit Agreement are guaranteed by Arlon Partners, Inc. ("Arlon Partners"),
24
Arlon MED International LLC ("Arlon MED International"), Arlon Adhesives &
Films, Inc. ("Arlon Adhesives") and Kasco Mexico LLC ("Kasco Mexico," and
together with Bairnco, Arlon Partners, Arlon MED International and Arlon
Adhesives, the "Guarantors"), and collateralized by a first priority lien on all
assets of Bairnco, the Borrowers, the Guarantors and Bairnco's Ontario
subsidiary, Atlantic Service Company, Limited ("Atlantic Service," and together
with Bairnco, the Borrowers and the Guarantors, the "Loan Parties"). The
scheduled maturity date of the indebtedness under the First Lien Credit
Agreement is July 17, 2012.
The Second Lien Credit Agreement provides for a term loan facility to the
Borrowers of $48,000,000. Borrowings under the Second Lien Credit Agreement bear
interest, in the case of base rate loans, at 3.50 percentage points above the
rate of interest publicly announced by JPMorgan Chase Bank in New York, New York
as its reference rate, base rate or prime rate, and, in the case of LIBOR rate
loans, at 6.00 percentage points above the LIBOR rate. Obligations under the
Second Lien Credit Agreement are guaranteed by the Loan Parties, and
collateralized by a second priority lien on all assets of the Loan Parties. The
scheduled maturity date of the indebtedness under the Second Lien Credit
Agreement is July 17, 2012.
Bairnco used $56,659,776 of the borrowings under the First Lien Credit
Agreement and Second Lien Credit Agreement to repay a portion of the
indebtedness outstanding under the Bridge Loan Agreement, leaving a principal
balance of $31,814,320 (the "Subordinated Debt Principal"). The Subordinated
Debt Credit Agreement provides for a term loan facility to the Borrowers in the
amount of the Subordinated Debt Principal. All borrowings under the Subordinated
Debt Credit Agreement bear interest at 6.75 percentage points above the rate of
interest publicly announced by JPMorgan Chase Bank in New York, New York as its
reference rate, base rate or prime rate. Interest is payable under the
Subordinated Debt Credit Agreement and as permitted by the terms of an
intercreditor and subordination agreement by and among Wells Fargo Foothill,
Inc., as agent under the First Lien Credit Agreement, Ableco Finance LLC, as
agent under the Second Lien Credit Agreement, and Steel. Obligations under the
Subordinated Debt Credit Agreement are guaranteed by the Loan Parties, and
collateralized by a subordinated priority lien on the assets of the Loan
Parties. In connection with the Subordinated Debt Credit Agreement, Steel
released certain foreign subsidiaries of Bairnco from their joint and several
guarantee of the obligations of Bairnco and its subsidiaries under the Bridge
Loan Agreement.
On July 27, 2007, H&H and certain of its subsidiaries amended its
revolving credit agreement and its other credit agreements, effective as of July
20, 2007 to, among other things, (i) change the definition of EBITDA, (ii)
permit additional loans by Steel to H&H in an aggregate amount not to exceed
$7,389,276, and (iii) permit the loan, distribution or other advances by H&H to
WHX of up to $7,389,276, subject to certain limitations, to the extent loaned by
Steel to H&H as permitted by these amendments.
At the Company's Annual Meeting of Shareholders on June 21, 2007, the
Company's shareholders approved a proposal to adopt WHX Corporation's 2007
Incentive Stock Plan (the "2007 Plan"), and reserved 800,000 shares of common
stock under the 2007 Plan. On July 6, 2007, stock options for an aggregate of
662,000 shares of common stock were granted under the 2007 Plan to employees and
to two outside directors of the Company, at an exercise price of $9.00 per
share. The options are exercisable in installments as follows: half of the
options granted were exercisable immediately, one-quarter of the options granted
become exercisable on July 6, 2008 and the balance become exercisable on July 6,
2009. The options will expire on July 6, 2015.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
WHX Corporation, the parent company ("WHX") is a holding company that
invests in and manages a group of businesses on a decentralized basis. WHX owns
Handy & Harman ("H&H"), which is a diversified manufacturing company whose
strategic business units encompass three reportable segments: precious metal,
tubing, and engineered materials. In April 2007, WHX acquired Bairnco
Corporation ("Bairnco"). Bairnco operates business units in three reportable
segments: Arlon electronic materials, Arlon coated materials and Kasco
replacement products and services. The Arlon electronic materials segment
designs, manufactures, markets and sells high performance laminate materials and
bonding films utilized in the military/aerospace, wireless communications,
automotive, oil drilling, and semiconductor markets. Among the products included
in the Arlon electronic materials segment are high technology materials for the
printed circuit board industry and silicone rubber products for insulating tapes
and flexible heaters. The Arlon coated materials segment designs, manufactures,
markets and sells laminated and coated products to the electronic, industrial
and commercial markets under the Arlon and Calon brand names. Among the products
included in the Arlon coated materials segment are vinyl films for graphics art
applications, foam tapes used in window glazing, and electrical and thermal
insulation products. The Kasco replacement products and services segment is a
leading provider of meat-room products (principally replacement band saw blades)
and on site maintenance services principally to retail food stores, meat and
deli operations, and meat, poultry and fish processing plants throughout the
United States, Canada and Europe. In Canada and France, in addition to providing
its replacement products, Kasco also sells equipment to the supermarket and food
processing industries. WHX, together with all of its subsidiaries, are referred
to herein as the "Company".
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RESULTS OF OPERATIONS
COMPARISON OF THE SECOND QUARTER OF 2007 WITH THE SECOND QUARTER OF 2006
Net sales for the second quarter of 2007 increased by $51.6 million, or
41.2%, to $176.9 million, as compared to $125.2 million in the second quarter of
2006. The acquisition of Bairnco contributed $43.1 million in net sales for the
second quarter of 2007. The results of operations of Bairnco are included in the
financial results of WHX beginning April 13, 2007, and comprise approximately 11
weeks of financial activity. Net sales were flat at the Precious Metal Segment,
declined by $1.4 million at the Tubing Segment and increased by $9.9 million at
the Engineered Materials Segment. Net sales in ongoing businesses increased by
$62.2 million, including $43 million from the Bairnco acquisition and
approximately $8.7 million of net sales from the roofing fastener business
acquired by the Company in December 2006, but was offset by $10.6 million from a
decrease in net sales from businesses that had been sold or exited after the
second quarter of 2006. These businesses consisted of the Handy & Harman
Electronic Materials Corp. ("HHEM") business within the Precious Metal segment
and the Norristown Pennsylvania location of the Handy & Harman Tube Co. ("H&H
Tube") within the Tubing segment. In the ongoing businesses, there was an
increase in volume across all H&H's segments. Market share gains in the Precious
Metal and Engineered Materials segments also contributed to the increased net
sales.
Gross profit percentage was 22.7% in the second quarter of 2007 and 18.8%
in the second quarter of 2006. The 2007 period was positively affected by the
acquisition of Bairnco, contributing $13.8 million to gross profit, and 3%
higher gross profit percent on a consolidated basis than without Bairnco. In
addition, the successful transfer of the small coil business from Norristown to
another tubing facility was a principal contributer to the overall increase of
the gross profit percentage. The 2006 period includes a $1.0 million favorable
effect on gross profit from the liquidation of precious metal inventories valued
at LIFO cost.
Selling, general and administrative ("SG&A") expenses increased $14.7
million to $30.7 million in the second quarter of 2007 from $16.0 million in the
comparable 2006 period. The 2007 period includes $11.1 million of SG&A expenses
of Bairnco which was acquired in April 2007, and increases in legal and auditing
expense of $0.9 million. Additionally there was a $0.7 million postretirement
welfare plan curtailment non-cash charge resulting from the redesign of the
postretirement welfare plan of one of the subsidiaries of H&H. The changes to
this plan resulted in reduced future cash cost but required the immediate
recognition of unrecognized prior service cost. In addition, under SFAS 123R,
the Company is required to adjust its obligation for phantom stock options to
the fair value from the effective date of grant up to the date of actual grant.
The Company recorded $0.7 million of non-cash stock-based compensation expense
related to these phantom stock options in the second quarter of 2007.
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
small 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 $1.9 million was recorded in the second quarter 2006 statement of
operations. These charges included termination benefits of $1.8 million and $0.1
million resulting from a pension plan curtailment.
Operating income for the second quarter of 2007 was $15.1 million compared
to $3.7 million for the second quarter of 2006, and at the segment level, was
$10.4 million compared to $3.5 million in 2006. The 2007 period includes $2.7
million of operating income from the Bairnco acquisition in addition to a gain
of $5.7 million from an insurance settlement on the Sumco fire claim. The 2006
period had asset impairment and restructuring charges of $3.7 million relating
to the shutdown of H&H Tube, partially offset by a gain of $1.0 million from the
liquidation of precious metal inventories valued at LIFO cost. Operating income
for the 2007 period at the segment level was lower than at the 2007 consolidated
level principally because the insurance gain of $5.7 million was not allocated
to the segments.
Interest expense for the second quarter of 2007 increased $5.0 million to
$10.3 million from $5.4 million in the second quarter of 2006. Bairnco interest
was $3.0 million of the increase, and consisted principally of related-party
interest expense to Steel on the Bridge Loan Agreement. The remainder of the
increase in interest expense was principally due to additional borrowings after
the second quarter of 2006. Proceeds from the additional borrowings were used
principally to fund the acquisition of OMG Midwest in December 2006, and to fund
environmental remediation costs and required pension plan contributions. In
addition, WHX borrowed $15.0 million in April 2007 in connection with the
Bairnco acquisition. There was also an increase in interest expense attributable
to higher interest rates in 2007 compared to the same period of 2006. Pursuant
to the terms of a Subordination Agreement between Steel and Wachovia, interest
payable to Steel is accrued but not paid.
26
Realized and unrealized gains on derivatives were $0.6 million in the
second quarter of 2007, compared to $0.9 million the second quarter of 2006. The
derivative financial instruments utilized by the Company are precious metal
forward and future contracts, which are used to economically hedge the Company's
precious metal inventory against price fluctuations. Losses are incurred as
precious metal market prices increase over the contract term, and gains are
recognized as precious metal prices decrease over the contract term. Decreases
in silver market price occurred in both quarters, resulting in gain on
derivatives. The reason for the lower gain in the 2007 period is principally the
reduced quantity of precious metal under forward and future contracts.
In the second quarter of 2007 and 2006, tax provisions of $1.3 million and
$0.7 million, respectively, were recorded for state and foreign taxes. The
Company has not recorded federal income taxes in either quarter since in the
opinion of management; it is more likely than not that the benefit of the
Company's net operating loss carryforward will not be realized in the future.
The Company records a valuation allowance against deferred tax assets resulting
from net operating loss carryforwards.
Net income for the second quarter of 2007 was $4.0 million, or $0.40 per
share, compared to a net loss of $1.7 million or ($0.17) per share for the
second quarter of 2006.
The comments that follow compare revenues and operating income by segment
for the second quarter 2007 and 2006.
PRECIOUS METAL
Net sales for the Precious Metal segment for the second quarter of 2007
remained flat with the same period in 2006. Within the precious metal plating
group, the sale of the HHEM business resulted in a $4.9 million reduction in net
sales for the second quarter of 2007 compared to the same period of 2006,
partially offset by a transfer of business to another entity within the precious
metal plating group. Aside from the reduction caused by the sale of the HHEM
business, the segment experienced higher net sales from both increased volume
with existing customers and market share gains.
Operating income for the Precious Metal segment was $1.8 million in the
second quarter of 2007, compared to $2.5 million in the second quarter of 2006.
The 2006 quarter included a gain of $1.0 million from the liquidation of
precious metal inventories valued at LIFO cost.
TUBING
In the second quarter of 2007, net sales for the Tubing segment decreased
$1.4 million, or 4.3%, from $32.3 million in 2006 to $30.9 million in the second
quarter of 2007. The decrease in net sales was principally caused by the closure
of the Norristown Pennsylvania facility, which had experienced strong demand in
the second quarter of 2006, prior to its shutdown. The reduction in sales from
the closure of the Norristown facility was partially offset by a transfer of a
portion of Norristown's business and strong demand at the other stainless steel
tubing facilities, principally from the petrochemical markets. The refrigeration
tubing group experienced reduced sales volume resulting from weak demand from
the North American refrigeration market, partially offset by an increase in
sales from the European refrigeration market.
Operating income increased by $4.5 million to income of $0.4 million in
the second quarter of 2007 as compared to an operating loss of $4.1 million in
the same period of 2006. The operating loss in the second quarter of 2006
included $3.7 million of restructuring and impairment charges related to the
closing of the Norristown facility of H&H Tube. The remainder of the improvement
in operating income is due to the successful transfer of the small coil business
from Norristown to another stainless steel tubing facility, partially offset by
continued inefficiencies at the North American refrigeration tubing facilities.
ENGINEERED MATERIALS
Net sales for the Engineered Materials segment increased $9.9 million from
$53.5 million in the second quarter of 2006 to $63.4 million in the second
quarter of 2007 due to increased volume in the commercial roofing fastener
business (principally due to the net sales of OMG Midwest, which was acquired in
late December 2006). This increase was partially offset by weaker sales of
products used in the domestic housing market, which is experiencing a continued
slowdown.
Operating income increased by $0.4 million from $5.1 million in the second
quarter of 2006 to $5.5 million in the same period of 2007. Factors resulting in
higher operating income included profit from higher sales mostly due to the OMG
Midwest acquisition, partially offset by softness in the domestic housing market
and the postretirement welfare plan curtailment charge of $0.7 million at one of
the H&H subsidiaries included in this segment.
27
BAIRNCO SEGMENTS
The results of operations of Bairnco are included in the financial results
of WHX beginning April 13, 2007. The following discussion is for the approximate
eleven-week period from April 13 through June 30, 2007.
Arlon's Electronic Materials net sales of $14.0 million improved over
prior year on strong activity in both the electronics and industrial markets.
Arlon's Coated Materials net sales of $14.7 million declined from 2006 on slow
sales to the domestic graphics and industrial markets. Kasco's net sales of
$14.4 million were up significantly over prior year from the impact of the
Atlanta SharpTech acquisition made by Bairnco in the second half of 2006, and
the impact of exchange rates of a weakened US dollar on European sales.
Arlon's Electronic Materials gross profit margin was down slightly on
increased raw material costs. Gross profit margins at Arlon Coated Materials
were negatively impacted by operating at less than full capacity due to reduced
sales, which resulted in expensing excess production costs in the current
period. Kasco's gross profit margins improved from the prior year as certain
sales and cost efficiencies from the Atlanta SharpTech acquisition were
implemented. However, Kasco's results were negatively impacted by certain
ongoing relocation costs of approximately $0.2 million associated with the
acquisition.
UNALLOCATED CORPORATE EXPENSES
Unallocated corporate expenses increased from $0.9 million in the second
quarter of 2006 to $2.2 million in the second quarter of 2007. There were
increases in the costs for audit and legal fees, and expenses associated with
stock-based compensation for certain executives, partially offset by reduced
costs of insurance.
COMPARISON OF THE FIRST SIX MONTHS OF 2007 WITH THE FIRST SIX MONTHS OF 2006
Net sales for the first six months of 2007 increased by $56.7 million, or
23.8%, to $294.7 million, as compared to $238.0 million in the first six months
of 2006. The Bairnco acquisition accounted for $43.1 million of the increase.
The results of operations of Bairnco are included in the financial results of
WHX beginning April 13, 2007, and comprise approximately 11 weeks of financial
activity. Net sales increased by $1.1 million at the Precious Metal Segment,
decreased by $2.5 million at the Tubing Segment and increased $15.0 million at
the Engineered Materials Segment. Net sales in ongoing businesses increased by
$77.5 million, including $43 million from the Bairnco acquisition and
approximately $15 million of net sales from the roofing fastener business
acquired by the Company in December 2006, but was offset by $20.8 million from a
decrease in net sales from businesses that had been sold or exited after the
second quarter of 2006 (HHEM and H&H Tube). In the ongoing H&H businesses, there
was an increase in net sales across all segments, with particular strength in
the Precious Metal fabrication group.
Gross profit percentage increased to 20.2% in the first six months of 2007
from 18.9% in the first six months of 2006. The 2007 period was positively
affected by the acquisition of Bairnco, which contributed $13.8 million to gross
profit and 2% higher gross profit percent on a consolidated basis than without
Bairnco. The 2007 period was negatively affected by a $0.4 million loss on the
sale of the HHEM inventory (related to the sale of the business) as compared to
positive gross profit for this business in the 2006 period. In addition, there
was a reduction of $1.9 million in gross profit at the Company's refrigeration
tubing facility in the 2007 period, principally due to continued production
inefficiencies at its Mexican and domestic facilities. The 2006 period included
a $1.7 million favorable effect on gross profit from the liquidation of precious
metal inventories valued at LIFO cost.
Selling, general and administrative ("SG&A") expenses increased $18.5
million to $49.5 million in the first six months of 2007 from $31.0 million in
the comparable 2006 period. SG&A expenses of Bairnco, which was acquired in
April 2007, accounted for $11.1 million of the increase. In addition, there was
also an increase in 2007 from the acquisition of OMG Midwest, a roofing fastener
business acquired by the Company in late 2006. Its costs include operating costs
as well as amortization of certain acquired intangible assets. Furthermore,
under SFAS 123R, the Company is required to adjust its obligation for phantom
stock options to the fair value the effective date of grant up to the date of
actual grant. The Company recorded $0.9 million of stock-based compensation
expense related to these phantom stock options in 2007. In addition, costs also
rose in the 2007 period due to additional audit and other professional fees,
partially offset by reduced costs resulting from the closure of the HHEM and
Norristown facilities.
There were no environmental remediation expenses recognized in the first
six months of 2007,as compared to environmental remediation expenses of $2.9
million recognized in the first six months of 2006. These expenses included $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 former Norristown facility.
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
28
allocations are expected to be determined during the third 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. The offer is contingent on the group arriving at an acceptable
allocation amongst the PRPs. It is anticipated that the EPA will accept or
reject the PRP's offer shortly after the allocation process is concluded
(assuming an acceptable allocation is reached). It is anticipated that PRP
remedial activities at the site will not begin until 2009. The remediation of a
significant amount of the contamination at the site is the responsibility of the
U.S. Department of Energy ("DOE"). That remediation is being accomplished by the
U.S. Army Corps of Engineers. The DOE portion of the work has begun but is not
expected to be completed until 2009, at which time the remaining work will be
more clearly defined. At the Company's former Norristown facility, the Company
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 six months of 2006.
The asset impairment charge of $1.8 million in the statement of operations
for the first six months of 2006 relates to the closing of the Norristown
facility. Restructuring charges of $1.9 million also relate to the facility
closing. These charges included termination benefits of $1.8 million and $0.1
million resulting from a pension plan curtailment.
Operating income at the consolidated level for the first six months of
2007 was $15.7 million, which was $8.5 million higher than the first six months
of 2006. Bairnco provided operating income of $2.7 million, the gain on the
insurance proceeds provided operating income of $5.7 million. Decreases to
operating income in 2007 were higher SG&A expenses related to additional audit
and other professional fees, partially offset by reduced SG&A costs resulting
from the closure of the HHEM and Norristown facilities. Operating income for the
comparable period in 2006 included $2.9 million of environmental remediation
expense, and $3.7 million for asset impairment and restructuring costs related
to the closing of Norristown.
Interest expense for the first six months of 2007 increased $8.0 million
to $17.9 million from $9.9 million in the first six months of 2006 as borrowings
and the related interest rates both increased. Debt as of June 30, 2007 exceeded
the June 30, 2006 balance by $182.5 million due mainly to the financing of
$101.4 million for the Bairnco acquisition, plus additional borrowings. Proceeds
from the additional borrowings were used principally to fund the acquisition of
OMG Midwest in December 2006, and to fund environmental remediation costs and
required pension plan contributions, There was also an increase in interest
expense attributable to higher interest rates in 2007 compared to the same
period of 2006 and higher amortization of deferred financing costs in 2007
compared to the same period of 2006. Pursuant to the terms of a Subordination
Agreement between Steel and Wachovia, interest payable to Steel is accrued but
not paid.
Realized and unrealized losses on derivatives totaled $0.1 million in the
first six months of 2007, compared to $4.5 million in the first six months of
2006. The derivative instruments utilized by the Company are precious metal
forward and future contracts. In the 2007 period, the market price of silver
decreased 4% while in the 2006 period, the market price of silver increased 23%.
In addition, hedged quantities of silver have declined substantially in 2007.
In the first six months of 2007 and 2006, a tax provision of $2.0 million
and $1.2 million, respectively, was recorded for state and foreign taxes. The
Company 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.
Net loss for the first six months of 2007 was $4.5 million, or ($0.45) per
share, compared to a net loss of $8.8 million or ($0.88) per share for the first
six months of 2006.
The comments that follow compare revenues and operating income by segment
for the first six months of 2007 and 2006:
PRECIOUS METAL
Net sales for the Precious Metal segment increased $1.1 million, or 1.4%,
from $76.1 million in 2006 to $77.2 million in 2007. Within the precious metal
plating group, the sale of the HHEM business resulted in a $11.2 million
reduction in net sales for the first half of 2007 compared to the same period of
2006, partially offset by a transfer of business to another entity within the
precious metal plating group. Aside from the reduction caused by the sale of the
HHEM business, the segment, particularly the precious metal fabrication group,
experienced higher net sales from both increased volume and market share with
increased sales to existing customers as well as to new customers because of new
distribution and sales force initiatives.
Operating income for the Precious Metal segment decreased $3.4 million to
$1.5 million in 2007 from $4.9 million in 2006. Operating income in the 2007
period was negatively affected by continued weakness in the automotive market, a
less profitable mix of industrial products sold, and higher base metal costs. In
addition, operating income was reduced by a $0.4 million loss upon sale of
certain inventory and by $0.2 million of employee-related termination costs when
the HHEM business was sold in March 2007. The first six months of 2006 had been
positively impacted by a gain of $1.7 million from the liquidation of precious
metal inventories valued at LIFO cost.
29
TUBING
In the first six months of 2007, net sales for the Tubing Segment
decreased $2.5 million, or 3.9%, from $62.7 million in 2006 to $60.2 million in
2007, principally due to the closure of the Norristown, Pennsylvania facility.
The facility continued to operate during the first half of 2006 and recorded
sales of $11.7 million, principally due to special non-recurring sales and
accelerated shipment of product prior to shutdown. The reduction in sales from
the closure of the Norristown facility was partially offset by a transfer of a
portion of Norristown's business and strong demand at the other stainless steel
tubing facilities, principally from the petrochemical markets. The refrigeration
tubing group experienced reduced sales volume resulting from weak demand from
the North American refrigeration market, partially offset by an increase in
sales from the European refrigeration market.
Operating loss decreased by $3.2 million to a loss of $0.5 million in the
first six months of 2007 from operating loss of $3.7 million in the same period
of 2006. Volume reduction due to weakness in the refrigeration market and cost
inefficiencies at the Company's North American refrigeration tubing facility
were the primary contributors to the operating loss in the 2007 period. Included
in the 2006 loss was $1.9 million in restructuring costs and a $1.8 million
asset impairment charge both relating to the closing of the Norristown facility.
ENGINEERED MATERIALS
Net sales for the Engineered Materials Segment increased $15.0 million, or
15.1%, from $99.2 million in the first six months of 2006 to $114.2 million in
the same period of 2007 due to increased volume in the commercial roofing
fastener business (principally due to the net sales of OMG Midwest, which was
acquired in late December 2006). This increase was partially offset by weaker
sales of products used in the domestic housing market, which is experiencing a
continued slowdown.
Operating income decreased in the first six months of 2007 by $0.9 million
from $8.5 million in 2006 to $7.6 million in 2007. Factors resulting in lower
operating income included soft demand from the housing construction market,
reduced gross margin from a mix of lower margin products as well as higher SG&A
expenses including amortization of certain intangibles acquired in December 2006
and the postretirement welfare plan curtailment charge of $0.7 million at one of
the H&H subsidiaries included in this segment. This was partially offset by
improved sales in the commercial roofing market.
BAIRNCO SEGMENTS
The results of operations of Bairnco are included in the financial results of
WHX as of April 13, 2007. See the discussion within the "Comparison of the
Second Quarter of 2007 with the Second Quarter of 2006" in the preceding
section.
UNALLOCATED CORPORATE EXPENSES
Unallocated corporate expenses increased from $1.7 million in the first
six months of 2006 to $3.7 million in the first six months of 2007. There were
increases in the costs for audit and legal fees, and expenses associated with
share-based compensation for certain executives, partially offset by reduced
costs of insurance. The Company's pension credit rose by $0.2 million in the
first half of 2007 compared to the same period in 2006.
DISCUSSION OF CONSOLIDATED STATEMENT OF CASH FLOWS
As of June 30, 2007, the Company's current assets totaled $221.1 million
and its current liabilities totaled $346.1 million; a working capital deficit of
$125.0 million. The Company's working capital deficit at December 31, 2006 was
$1.6 million. As of June 30, 2007, the majority of the Company's debt has been
classified as short-term since its maturity date is within twelve months (June
30, 2008); whereas as of December 31, 2006, such debt was classified as
long-term since its maturity date exceeded one year. The Company intends to
refinance its debt.
Net cash used by operating activities for the six months ended June 30,
2007 totaled $16.4 million. Net loss adjusted for non-cash income and expense
items provided $6.7 million of cash. Working capital accounts used $22.0 million
of cash, as follows: Accounts receivable used $23.8 million, inventories
provided $3.6 million, interest accrued but not paid to a related party provided
$2.8 million, and net other current assets and liabilities used $4.6 million.
Other non-working capital items included in operations used $1.1 million. Cash
used by operating activities in the first half of 2006 totaled $12.1 million,
and principally was caused by the net loss of the period, as well as a seasonal
increase in accounts receivable and a $7.5 million decrease in current
liabilities, driven by environmental remediation payments.
30
Cash flow provided by inventory, with precious metal inventory measured
using LIFO cost, totaled $0.8 million in the six months ended June 30, 2007. In
the normal course of business, H&H accepts precious metal from suppliers and
customers, which quantities are returnable in fabricated or commercial bar form
under agreed-upon terms. To the extent such metals are used by the Company to
meet its operating requirements, the amount of inventory which H&H must own is
reduced. In the first quarter of 2007, the Company received 400,000 ounces of
silver from a customer under an unallocated pool agreement. As a result of this
agreement, along with a reduction in operating needs, the Company was able to
reduce its owned quantity of silver by over 400,000 troy ounces, providing over
$5.0 million in cash. The Company has deferred $4.2 million in profit arising
from the temporary liquidation of the LIFO inventory, which is included in
accrued liabilities on the June 30, 2007 balance sheet. The deferred gain
reflects the excess of the current market value of the precious metal over the
LIFO value of the inventory decrement. In the comparable six month period of the
prior year, inventory provided $1.4 million of cash flow, primarily due to a
decrease in its quantities of precious metal in inventory. Such precious metal
inventory was reduced in 2006 principally because of the wind-down of the HHEM
business and because of the sale of the Company's interest in a Singapore
operation.
The use of funds due to accounts receivable in both the first half of 2007
and 2006 ($23.8 million and $12.3 million, respectively) was principally caused
by a seasonal increase in accounts receivable which resulted from higher sales
levels for the second quarter of each period (and particularly the last month of
the quarter) compared to the fourth quarter of the prior year. Net sales in the
second quarter of 2007 (excluding Bairnco) were $133.8 million, as compared to
$101.4 million in the fourth quarter of 2006, an increase of $32.4 million. Net
sales in the second quarter of 2006 were $125.2 million, as compared to $99.2
million in the fourth quarter of 2005; an increase of $26.0 million.
Net other current assets and liabilities used $1.9 million of cash flow in
the first half of 2007 and $5.5 million in the first half of 2006. The 2007
period included the accrual of $2.8 million of interest payable to a related
party (net of payments), and a current liability related to the deferral of the
temporary LIFO gain of $4.2 million discussed above, plus a seasonal increase in
trade accounts payable, but was reduced by $4.9 million of payments for
environmental remediation costs and $5.8 million paid to the WHX Pension Plan.
The use of cash of $5.5 million in the first half of 2006 was driven by cash
used for the payment of $8.0 million of environmental remediation costs and
payments to fund the WHX Pension Plan totaling $4.1 million, partially offset by
the recording of a $2.9 million environmental remediation accrual and a
restructuring reserve of $1.9 million ($1.7 million net of payments). Other
non-working capital items included in operating activities used $1.1 million in
the first half of 2007, as compared to $0.4 million in the first half of 2006.
Investing activities used $99.5 million in the first half of 2007, driven
by the Bairnco acquisition, which used $99.6 million, net of cash acquired. See
discussion below for additional detail on the Bairnco acquisition. This was
partially offset by $3.8 million received principally from the sale of the HHEM
and certain Norristown assets. Investing activities used $8.1 million in the
first half of 2006, and included net cash paid out for precious metal derivative
contracts of $4.8 million, compared to $0.1 million in 2007, but was partially
offset by $1.4 million from the sale of assets in 2006 related to a discontinued
operation. In addition, capital spending in the first six months of 2007 was
$3.6 million, as compared to $4.8 million spent on capital improvements in the
same period of 2006.
Financing activities provided $116.5 million in the first half of 2007,
$101.5 million of which was due to the financing of the Bairnco acquisition,
which is discussed more fully below. There were additional net drawdowns of
$19.9 million on the revolving credit facilities of both H&H and Bairnco
(post-acquisition), partially offset by $4.9 million of principal repaid on term
loans and $1.0 million related to financing fees principally in connection with
the extension of the maturity of the Company's credit facilities. Financing
activities provided $21.0 million of net cash in the first half of 2006,
principally from new term loan borrowings, which totaled $26.0 million during
the period. The increase in debt between December 31, 2005 and June 30, 2006
consisted of the following: On December 29, 2005, H&H entered into an amendment
to its Term B Loan with Steel which provided for, among other things, a $10
million increase in such loan in January 2006. 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 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.
ACQUISITION OF BAIRNCO CORPORATION
On April 12, 2007, Steel 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 was the acquisition subsidiary in a tender offer to acquire
up to all of the outstanding stock of Bairnco for $13.50 per share in cash.
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
31
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 credit facilities. Steel extended to BZA bridge
loans in the 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. Approximately $56.7 million of the
indebtedness under the Bridge Loan Agreement was repaid in July 2007, leaving a
principal balance of approximately $31.8 million. See "Liquidity". 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 collateralized
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
the Subordinated Loan Agreement are guaranteed by Bairnco and certain of its
subsidiaries and collateralized 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. 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.
LIQUIDITY
The Company has incurred significant losses and negative cash flows from
operations in recent years, and as of June 30, 2007 had an accumulated deficit
of $417.9 million. As of June 30, 2007, the Company's current assets totaled
$221.1 million and its current liabilities totaled $346.1million; a working
capital deficit of $125.0 million. The Company's working capital deficit at
December 31, 2006 was $1.6 million. As of June 30, 2007, the majority of the
Company's debt has been classified as short-term since its maturity date is
within twelve months (June 30, 2008); whereas as of December 31, 2006, such debt
was classified as long-term since its maturity date exceeded one year. The
Company intends to refinance its debt, but there can be no assurance that such
financing will be available or available on terms acceptable to the Company.
32
As of June 30, 2007, WHX and its unrestricted subsidiaries had cash of
approximately $0.1 million and current liabilities of approximately $ 8.7
million, including $5.1 million of mandatorily redeemable preferred shares
payable to a related party. 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 loan
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. WHX has no bank credit
facility of its own. WHX's ongoing operating cash flow requirements consist of
funding the minimum requirements of the WHX Pension Plan and paying other
administrative costs.
H&H's availability under its revolving credit facility and other
facilities as of June 30, 2007, was approximately 10.1 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. 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 indirect subsidiary of H&H., 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.
On June 15, 2007, the lenders under H&H's revolving credit facility and
other facilities granted a waiver to the events of default arising as a result
of the Order of Prejudgment Attachment entered by the Superior Court of
Fairfield County, Connecticut (the "Superior Court") on December 18, 2006 in
connection with the litigation known as HH East Parcel v. Handy & Harman
currently pending in the Superior Court in the amount of $3,520,200 and the
Notice of Bank Attachment/Garnishment dated May 21, 2007 by the State Marshal of
Fairfield County, Connecticut to JPMorgan Chase Bank in the amount of
$3,520,200, and related matters (see Note 13- Contingencies).
On July 27, 2007, H&H and certain of its subsidiaries amended its
revolving credit agreement and its other credit agreements, effective as of July
20, 2007 to, among other things, (i) change the definition of EBITDA, (ii)
permit additional loans by Steel to H&H in an aggregate amount not to exceed
$7,389,276, and (iii) permit the loan, distribution or other advances by H&H to
WHX of up to $7,389,276, subject to certain limitations, to the extent loaned by
Steel to H&H as permitted by these amendments.
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 $3.8
million. Under the terms of the sale agreement, the Company has retained
responsibility for any pre-existing environmental conditions requiring
remediation at the Rhode Island site.
Bairnco became a wholly-owned subsidiary of WHX in April 2007. The
availability under the Bairnco Revolving Credit Facility (part of its Senior
Secured Credit Facility) on June 30, 2007 was approximately $5.9 million.
Initial financing to fund the tender offer to acquire Bairnco was provided by
Steel through two credit facilities, in the approximate aggregate amount of
$101.5 million.
On July 18, 2007, Bairnco completed the refinancing of: (i) all existing
indebtedness of Bairnco and its subsidiaries under its Senior Secured Credit
Facility dated as of November 9, 2006 with Bank of America, N.A., and (ii) a
portion of the existing indebtedness under the Bridge Loan Agreement pursuant to
which Steel made an $86.5 million term loan to Bairnco.
Under the refinancing, Bairnco entered into (i) a Credit Agreement, dated
as of July 17, 2007 (the "First Lien Credit Agreement"), by and among Bairnco,
Arlon, Inc. ("Arlon"), Arlon Viscor Ltd. ("Arlon Viscor"), Arlon Signtech, Ltd.
("Arlon Signtech"), Kasco Corporation ("Kasco"), and Southern Saw Acquisition
Corporation ("Southern Saw," and together with each of Arlon, Arlon Viscor,
Arlon Signtech and Kasco, the "Borrowers") and Wells Fargo Foothill, Inc., as
the arranger and administrative agent for the lenders thereunder, (ii) a Credit
Agreement, dated as of July 17, 2007 (the "Second Lien Credit Agreement"), by
and among Bairnco, each of the Borrowers, and Ableco Finance LLC, as
administrative agent for the lenders thereunder, and (iii) an Amended and
Restated Credit Agreement, dated as of July 17, 2007 (the "Subordinated Debt
Credit Agreement"), by and among Bairnco, each of the Borrowers and Steel as
lender. The Subordinated Debt Credit Agreement amends and restates the Bridge
Loan Agreement.
The First Lien Credit Agreement provides for a revolving credit facility
to the Borrowers in an aggregate principal amount not to exceed $30,000,000, and
a term loan facility to the Borrowers of $28,000,000. Borrowings under the First
Lien Credit Agreement, bear interest, (A) in the case of base rate loans, at
33
0.25 percentage points above the Wells Fargo prime rate, (B) in the case of
LIBOR rate loans, at rates of 2.00 percentage points or 2.50 percentage points,
as applicable, above the LIBOR rate, and (C) otherwise, at a rate equal to the
Wells Fargo prime rate minus 0.25 percentage points. Obligations under the First
Lien Credit Agreement are guaranteed by Arlon Partners, Inc. ("Arlon Partners"),
Arlon MED International LLC ("Arlon MED International"), Arlon Adhesives &
Films, Inc. ("Arlon Adhesives") and Kasco Mexico LLC ("Kasco Mexico," and
together with Bairnco, Arlon Partners, Arlon MED International and Arlon
Adhesives, the "Guarantors"), and collateralized by a first priority lien on all
assets of Bairnco, the Borrowers, the Guarantors and Bairnco's Ontario
subsidiary, Atlantic Service Company, Limited ("Atlantic Service," and together
with Bairnco, the Borrowers and the Guarantors, the "Loan Parties"). The
scheduled maturity date of the indebtedness under the First Lien Credit
Agreement is July 17, 2012.
The Second Lien Credit Agreement provides for a term loan facility to the
Borrowers of $48,000,000. Borrowings under the Second Lien Credit Agreement bear
interest, in the case of base rate loans, at 3.50 percentage points above the
rate of interest publicly announced by JPMorgan Chase Bank in New York, New York
as its reference rate, base rate or prime rate, and, in the case of LIBOR rate
loans, at 6.00 percentage points above the LIBOR rate. Obligations under the
Second Lien Credit Agreement are guaranteed by the Loan Parties, and
collateralized by a second priority lien on all assets of the Loan Parties. The
scheduled maturity date of the indebtedness under the Second Lien Credit
Agreement is July 17, 2012.
Bairnco used $56,659,776 of the borrowings under the First Lien Credit
Agreement and Second Lien Credit Agreement to repay a portion of the
indebtedness outstanding under the Bridge Loan Agreement, leaving a principal
balance of $31,814,320 (the "Subordinated Debt Principal"). The Subordinated
Debt Credit Agreement provides for a term loan facility to the Borrowers in the
amount of the Subordinated Debt Principal. All borrowings under the Subordinated
Debt Credit Agreement bear interest at 6.75 percentage points above the rate of
interest publicly announced by JPMorgan Chase Bank in New York, New York as its
reference rate, base rate or prime rate. Interest is payable under the
Subordinated Debt Credit Agreement and as permitted by the terms of an
intercreditor and subordination agreement by and among Wells Fargo Foothill,
Inc., as agent under the First Lien Credit Agreement, Ableco Finance LLC, as
agent under the Second Lien Credit Agreement, and Steel. Obligations under the
Subordinated Debt Credit Agreement are guaranteed by the Loan Parties, and
collateralized by a subordinated priority lien on the assets of the Loan
Parties. In connection with the Subordinated Debt Credit Agreement, Steel
released certain foreign subsidiaries of Bairnco from their joint and several
guarantee of the obligations of Bairnco and its subsidiaries under the Bridge
Loan Agreement.
In addition to the obligations under the current credit facilities, the
Company also has significant cash flow obligations, including without limitation
the amounts due to the WHX Pension Plan (as amended by the IRS Waiver and PBGC
Settlement Agreement entered into December 28, 2006). The Company continues to
examine all of its options and strategies, including acquisitions, divestitures,
and other corporate transactions, to increase cash flow and stockholder value,
as well as considering the reduction of certain discretionary expenses and sale
of certain non-core assets. The Company intends to refinance its debt prior to
maturity. There can be no assurance that the funds available from operations and
under the Company's credit facilities will be sufficient to fund debt service
costs, working capital demands, pension plan contributions, and environmental
remediation costs, or that the Company will be able to obtain replacement
financing at commercially reasonable terms upon the expiration of the H&H credit
facilities in June 2008.
*******
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
COMMODITY PRICE RISK AND RELATED RISKS
In the normal course of business, H&H is exposed to market risk or price
fluctuation related to the purchase of natural gas, electricity, precious metal,
steel products and certain non-ferrous metal used as raw material. H&H is also
exposed to the effects of price fluctuations on the value of its commodity
inventories, specifically, H&H's precious metal inventories.
34
H&H's market risk strategy has generally been to obtain competitive prices
for its products and services and allow operating results to reflect market
price movements dictated by supply and demand.
H&H enters into commodity futures and forwards contracts on precious metal
that are subject to market fluctuations in order to economically hedge its
precious metal inventory against price fluctuations. Future and forward
contracts to sell or buy precious metal are the derivatives used for this
objective. As these derivatives are not designated as accounting hedges under
SFAS No. 133, they are accounted for as derivatives with no hedge designation.
These derivatives are marked to market and both realized and unrealized gains
and losses on these derivatives are recorded in current period earnings as other
income (loss). The unrealized gain or loss (open trade equity) on the
derivatives is included in other current assets or other current liabilities.
General inflation has impacted Bairnco's operating results in recent
years. During late 2005 and 2006 Bairnco saw percentage cost increases from
suppliers that were greater than the percentage price increases it passed on to
its customers. Sales prices and volumes have also continued to be strongly
influenced by specific market supply and demand and by foreign currency exchange
rate fluctuations.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company is subject to the risk of price fluctuations related to
anticipated revenues and operating costs, firm commitments for capital
expenditures and existing assets or liabilities denominated in currencies other
than U.S. dollars. The Company has not generally used derivative instruments to
manage this risk.
INTEREST RATE RISK
Fair value of cash and cash equivalents, receivables, short-term
borrowings, accounts payable, accrued interest and variable-rate long-term debt
approximate their carrying values and are relatively insensitive to changes in
interest rates due to the short-term maturity of the instruments or the variable
nature of underlying interest rates.
At December 31, 2006 and 2005, the Company's portfolio of debt was
comprised of primarily variable rate instruments. Accordingly, the fair value of
such instruments may be relatively sensitive to effects of interest rate
fluctuations. In addition, the fair value of such instruments is also affected
by investors' assessments of the risks associated with industries in which the
Company operates as well as the Company's overall creditworthiness and ability
to satisfy such obligations upon their maturity. The Company economically hedges
its exposure on variable interest rate debt at one of its foreign subsidiaries.
A reduction in long-term interest rates could materially increase the
Company's cash funding obligations to the WHX Pension Plan.
SAFE HARBOR
The Company's quantitative and qualitative disclosures about market risk
include forward-looking statements with respect to management's opinion about
the risk associated with the Company's financial instruments. These statements
are based on certain assumptions with respect to market prices, interest rates
and other industry-specific risk factors. To the extent these assumptions prove
to be inaccurate, future outcomes may differ materially from those discussed
above.
35
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 June 30, 2007, our 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.
Notwithstanding the existence of the material weaknesses discussed below,
the Company's management has concluded that the 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 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 June 30, 2007 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 certain of 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.
These weaknesses could result in conditions that would cause material
adjustments to the financial statements for the three and six month periods
ended June 30, 2007 including: the application of SFAS No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets", the completeness of the
Company's environmental remediation reserves, treatment of the Rabbi trust,
capitalization of leases, revenue recognition, and differences between foreign
and US GAAP as it applies to certain international subsidiaries.
As disclosed herein, the acquisition of Bairnco was completed in April
2007 when Bairnco became a wholly-owned subsidiary of WHX. The Company is in the
process of evaluating its disclosure controls and procedures with respect to
Bairnco and its subsidiaries. In light of Bairnco's recent acquisition, at the
present time the Company is not able to reach a conclusion as to the
effectiveness of its disclosure controls and procedures with respect to Bairnco
and its subsidiaries, and the Company's evaluation described above excluded
Bairnco's business units' assessment of the effectiveness of the internal
controls over financial reporting..
PLANS FOR REMEDIATION
The Company has taken the following actions to address the material weaknesses
noted above:
o Increased the Company's accounting and financial resources by hiring a
Senior Vice President, an Assistant Controller, a Treasurer, and a
Director of Budgeting and Financial Analysis, 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 complex and judgmental
accounting matters;
36
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 Initiating processes and procedures to better document employee
responsibilities including transaction review and monitoring activities;
o The engagement of a third party resource to support our review,
documentation and testing of the effectiveness of our internal control
over financial reporting under the Section 404 provisions of the
Sarbanes-Oxley Act ; 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
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 October 2005 in
Connecticut, pursuant to which HH East was awarded, among other things, 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. HH East moved in the Superior
Court of Connecticut, Fairfield County, to have the arbitration award and H&H
moved to have it vacated. The court issued a decision on June 26, 2006, denying
H&H's application. H&H is appealing this decision.
On May 22, 2007, HH East served an Order for a Prejudgment Attachment in
the amount of $3,520,200, issued by the Superior Court, Stamford, Connecticut in
December 2006, against certain Connecticut property of H&H and against certain
bank accounts maintained by H&H at banks in New York. H&H has brought
proceedings in the Superior Court, Stamford, Connecticut, and in the Supreme
Court, State of New York, to oppose the attachment of such bank accounts and to
have it lifted. The New York proceeding has been discontinued and the
Connecticut proceeding is pending but adjourned. The parties have engaged from
time to time in settlement discussions to resolve the open issues and
proceedings between them. On June 14, 2007, HH East temporarily withdrew its
attachment/garnishment against certain bank accounts of H&H after the posting of
other satisfactory collateral by H&H and while settlement discussions are
continuing. On June 29, 2007, and again on July 23, 2007, HH East re-served the
Order against certain bank accounts of H&H.
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. Approximately $28.4 million had been expended through June 30,
2007, and the remaining remediation costs are expected to approximate $0.3
million. H&H received reimbursement of $2.0 million from its carrier under a
cost-cap insurance policy and is pursuing its potential entitlement to
additional coverage. Remediation of all soil conditions on site was completed on
April 6, 2007. HH East informed H&H in June that it believes that additional
37
work remains to be done by H&H on the site. The parties have been in discussion
about this matter and in furtherance of settlement discussions, H&H is
considering performing limited additional work on site.
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 $4.0 million has been 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 June 30, 2007 and December 31, 2006.
H&H entered into an administrative consent order (the "ACO") in 1986 with
the New Jersey Department of Environmental Protection ("NJDEP") with regard to
certain property that it purchased in 1984 in New Jersey. The ACO involves
investigation and remediation activities to be performed with regard to soil and
groundwater contamination. H&H settled a case brought by the local municipality
in regard to this site in 1998 and also settled with certain of its insurance
carriers. H&H is actively remediating the property and continuing to investigate
the most effective methods for achieving compliance with the ACO. A remedial
investigation report was filed with the NJDEP in 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 2007 of
approximately $250,000. Pursuant to a settlement agreement with the former
owner/operator of the Site, the responsibility for site investigation and
remediation costs are allocated, 75% to the former owner/operator and 25% to H&H
after the first $1 million. The $1 million was paid solely by the former
owner/operator. To date, over and above the $1 million, total investigation and
remediation costs of $237,000 and $79,000 have been expended by the former
owner/operator and H&H, respectively, in accordance with the settlement
agreement. Additionally, H&H is currently being reimbursed through insurance
coverage for a portion of the investigation and remediation costs for which the
company is responsible. 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
liabilities 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. A subsidiary of H&H is one of the
defendants that the plaintiffs claim contributed to the contamination of the
Boarhead Farm site. A number of the plaintiffs have entered into consent decrees
with the Environmental Protection Agency ("EPA") regarding the remediation of
groundwater and soil contamination at the Boarhead Farm site. In addition,
plaintiffs have settled with a number of the defendants. There are currently six
non-settling defendants, including H&H, against which the plaintiffs are
pursuing their claims. Fact and expert discovery has been concluded. The
plaintiffs have already made substantial payments to the EPA in past response
costs and have themselves incurred costs for groundwater and soil remediation.
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 third 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. The offer is contingent on the group arriving at an acceptable
allocation amongst the PRPs. It is anticipated that the EPA will accept or
reject the PRP's offer shortly after the allocation process is concluded
38
(assuming an acceptable allocation is reached). It is anticipated that PRP
remedial activities at the site will not begin until 2009. The remediation of a
significant amount of the contamination at the site is the responsibility of the
U.S. Department of Energy ("DOE"). That remediation is being accomplished by the
U.S. Army Corps of Engineers. The DOE portion of the work has begun but is not
expected to be completed until 2009, 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.
Please see "Legal Proceedings" from the WHX Annual Report on Form 10-K for
the year ended December 31, 2006, and Note 13 to this Quarterly Report on Form
10-Q.
ITEM 1A. RISK FACTORS
Please see "Risk Factors" from the WHX Annual Report on Form 10-K for the
year ended December 31, 2006. In addition, in light of the acquisition of
Bairnco by the Company in April 2007, please see "Risk Factors" from the Bairnco
Corporation Annual Report on Form 10-K for the year ended December 31, 2006, a
copy of such Risk Factors attached hereto as Exhibit 99.1.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders on June 21, 2007, the
Company's shareholders re-elected the eight incumbent members (Warren G.
Lichtenstein, Jack L. Howard, Glen M. Kassan, Louis Klein, Jr., Daniel P.
Murphy, Jr., John J. Quicke, Joshua E. Schechter and Garen W. Smith) to the
Company's Board of Directors. The votes cast for and withheld from each nominee
were as follows:
Withhold
Nominees For Authority
- ---------------------- --------- ---------
Warren G. Lichtenstein 7,756,622 512,877
Jack L. Howard 7,756,579 512,920
Glen M. Kassan 7,756,551 512,948
Louis Klein, Jr 8,261,209 8,290
Daniel P. Murphy, Jr 7,756,551 512,948
John J. Quicke 7,756,520 512,979
Joshua E. Schechter 7,756,475 513,024
Garen W. Smith 8,260,904 8,595
A proposal to amend WHX Corporation's amended and restated certificate of
incorporation to increase WHX Corporation's authorized capital stock from
45,000,000 shares, consisting of 40,000,000 shares of common stock, par value
$0.01 per share, and 5,000,000 shares of preferred stock, par value $0.01 per
share, to a total of 55,000,000 shares, consisting of 50,000,000 shares of
common stock and 5,000,000 shares of preferred stock was approved, and the
number of votes cast for, against or to abstain were as follows:
For Against Abstain
- --------- ------- -------
8,245,532 22,885 1,082
A proposal to adopt WHX Corporation's 2007 Incentive Stock Plan was
approved, and the number of votes cast for, against or to abstain were as
follows:
For Against Abstain
- --------- ------- -------
5,954,341 702,064 2,269
A proposal to ratify of the appointment of Grant Thornton LLP as the
Company's independent auditors for the fiscal year ending December 31, 2006 was
approved, and the number of votes cast for, against or to abstain were as
follows:
39
For Against Abstain
- --------- ------- -------
8,262,500 5,500 1,499
ITEM 5. OTHER INFORMATION
On June 15, 2007, the lenders under H&H's revolving credit facility and
other facilities granted a waiver to the events of default arising as a result
of the Order of Prejudgment Attachment entered by the Superior Court of
Fairfield County, Connecticut (the "Superior Court") on December 18, 2006 in
connection with the litigation known as HH East Parcel v. Handy & Harman
currently pending in the Superior Court in the amount of $3,520,200 and the
Notice of Bank Attachment/Garnishment dated May 21, 2007 by the State Marshal of
Fairfield County, Connecticut to JPMorgan Chase Bank in the amount of
$3,520,200, and related matters (see Note 13- Contingencies).
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.
* Exhibit 99.1 Risk Factors contained in Bairnco Corporation's Annual
Report on Form 10-K for the twelve months ended December 31, 2006.
* Filed herewith
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)
August 14, 2007
