--------------------------------------
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 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.)
1133 WESTCHESTER AVENUE
WHITE PLAINS, NEW YORK 10604
---------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 914-461-1350
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 September 30,
2007 was 10,000,498.
1
PART I. ITEM 1: FINANCIAL STATEMENTS
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
--------------- -------------- ------------- ---------------
(in thousands - except per-share)
Net sales $ 182,400 $ 121,609 $ 477,091 $ 359,593
Cost of goods sold 147,796 97,711 382,837 290,767
--------- --------- --------- ---------
Gross profit 34,604 23,898 94,254 68,826
Selling, general and administrative expenses 33,627 15,574 83,145 46,588
Proceeds from insurance claims 0 (810) (5,689) (810)
Environmental remediation expense 2,527 -- 2,527 2,909
Loss (gain) on disposal of assets 153 (4) 288 83
Asset impairment charge -- -- -- 1,778
Restructuring charges -- 485 -- 2,416
--------- --------- --------- ---------
Income (loss) from operations (1,703) 8,653 13,983 15,862
--------- --------- --------- ---------
Other:
Interest expense 10,652 5,775 28,558 15,723
Realized and unrealized loss on derivatives 963 1,714 1,039 6,244
Other expense (income) 138 (175) 328 (41)
--------- --------- --------- ---------
Income (loss) from continuing operations before taxes (13,456) 1,339 (15,942) (6,064)
Tax provision (benefit) 213 (896) 2,230 339
--------- --------- --------- ---------
Income (loss) from continuing operations, net of tax (13,669) 2,235 (18,172) (6,403)
Discontinued operations:
Loss from discontinued operations -- -- -- (167)
Gain on disposal, net of tax -- 2,880 -- 2,880
--------- --------- --------- ---------
Net income-discontinued operations, net of tax of $1,639 -- 2,880 -- 2,713
--------- --------- --------- ---------
Net income (loss) $ (13,669) $ 5,115 $ (18,172) $ (3,690)
========= ========= ========= =========
BASIC AND DILUTED PER SHARE OF COMMON STOCK
Income (loss) from continuing operations, net of tax $ (1.37) $ 0.22 $ (1.82) $ (0.64)
Discontinued operations -- 0.29 -- 0.27
--------- --------- --------- ---------
Net income (loss) per share applicable to common stock $ (1.37) $ 0.51 $ (1.82) $ (0.37)
========= ========= ========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
WHX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2007 2006
------------- ------------
(Dollars and shares in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 8,942 $ 4,776
Trade receivables - net 108,184 58,697
Inventories 85,703 57,177
Deferred income taxes 899 339
Assets held for sale -- 3,967
Other current assets 12,236 5,611
--------- ---------
Total current assets 215,964 130,567
Property, plant and equipment at cost, less
accumulated depreciation and amortization 122,845 78,120
Goodwill and other intangibles, net 102,970 68,272
Other non-current assets 19,555 16,906
--------- ---------
$ 461,334 $ 293,865
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Trade payables $ 61,247 $ 39,194
Accrued environmental liability 6,680 9,421
Accrued liabilities 48,589 28,456
Accrued interest expense - related party 15,787 9,827
Current portion of long-term debt 61,240 4,778
Current portion of long-term debt - related party 103,316 --
Short-term debt 59,771 40,321
Deferred income taxes 123 123
--------- ---------
Total current liabilities 356,753 132,120
Long-term debt 89,473 70,901
Long-term debt - related party 48,910 89,627
Accrued pension liability 28,095 53,445
Other employee benefit liabilities 8,064 8,667
Deferred income taxes 5,306 2,868
Other liabilities 3,211 --
--------- ---------
539,812 357,628
--------- ---------
Stockholders' (Deficit) Equity:
Preferred stock- $.01 par value; authorized 5,000
shares; issued and outstanding -0- shares -- --
Common stock - $.01 par value; authorized 50,000 and 40,000
shares, respectively; issued and outstanding 10,000 shares 100 100
Warrants 1,287 1,287
Accumulated other comprehensive loss (43,961) (47,335)
Additional paid-in capital 395,618 394,308
Accumulated deficit (431,522) (412,123)
--------- ---------
Total stockholders' deficit (78,478) (63,763)
--------- ---------
$ 461,334 $ 293,865
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
2007 2006
---------- ----------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (18,172) $ (3,690)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 13,325 9,312
Non-cash stock based compensation 1,644 --
Acquired in-process research and development 1,520 --
Asset impairment charge -- 1,778
Amortization of debt related costs 1,421 1,684
Payment-in-kind interest on related party debt 3,018 --
Other postretirement benefits 488 (47)
Curtailment of employee benefit obligations 727 128
Loss on asset dispositions 288 106
Equity in after-tax income of affiliated companies (41) (134)
Gain on sale of investment in an affiliate -- (187)
Unrealized loss (gain) on derivatives 144 (963)
Reclassification of net cash settlements on derivative instruments 895 7,207
Discontinued operations -- (4,518)
Decrease (increase) in working capital elements,
net of effect of acquisitions:
Trade receivables (17,311) (9,743)
Inventories 11,497 (259)
Other current assets 1,363 963
Accrued interest expense-related party, net 5,633 3,640
Other current liabilities (19,100) (15,461)
Other items-net 173 (897)
Discontinued operations -- (401)
--------- ---------
Net cash used in operating activities (12,488) (11,482)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Bairnco, net of cash acquired (99,492) --
Plant additions and improvements (7,040) (6,837)
Net cash settlements on derivative instruments (895) (7,207)
Proceeds from sales of assets 4,323 139
Proceeds from sale of investment in an affiliate -- 616
Discontinued operations -- 7,216
--------- ---------
Net cash used in investing activities (103,104) (6,073)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from term loans - related party 115,080 19,000
Proceeds from term loans - Domestic 76,000 7,000
Proceeds from term loans - Foreign 93 --
Net increase in short term debt 7,878 702
Repayments of term loans - related party (55,499) --
Repayments of term loans - Foreign (365) (343)
Repayments of term loans - Domestic (20,694) (7,534)
Deferred finance charges (3,937) (216)
Net change in overdrafts 1,001 (404)
--------- ---------
Net cash provided by financing activities 119,557 18,205
--------- ---------
NET CHANGE FOR THE PERIOD 3,965 650
EFFECT OF EXCHANGE RATE CHANGES ON NET CASH 201 142
Cash and cash equivalents at beginning of period 4,776 4,076
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,942 $ 4,868
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' (DEFICIT) EQUITY
(Unaudited)
Nine Months Ended September 30, 2007
(dollars and shares in thousands)
Shares Common Stock, Accumulated Accumulated Total
of Warrants and Deficit Other Stockholders'
Common Additional Paid-in Comprehensive (Deficit) Equity
Stock Capital Loss
------------ ------------------ ---------------- ------------------ ----------------
Balance at December 31, 2006 10,000 $ 395,695 $(412,123) $ (47,335) $ (63,763)
Cumulative effect of adoption of
FIN 48 (Note 5) -- -- (1,227) -- (1,227)
--------- --------- --------- --------- ---------
Balance at January 1, 2007 10,000 $ 395,695 $(413,350) $ (47,335) $ (64,990)
Grant of stock options -- 1,310 -- -- 1,310
Net loss -- -- (18,172) -- (18,172)
Currency translation adjustments -- -- -- 2,028 2,028
Curtailment adjustment -- -- -- 1,346 1,346
---------
Comprehensive loss (14,798)
--------- --------- --------- --------- ---------
Balance at September 30, 2007 10,000 $ 397,005 $(431,522) $ (43,961) $ (78,478)
========= ========= ========= ========= =========
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. H&H's precious metal 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. The tubing 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. The
engineered materials segment manufactures a) specialty roofing and construction
fasteners, using steel and plastic, which are sold to the construction and do-it
yourself markets, b) plastic and steel fittings and connectors for natural gas
and water distribution, and non-ferrous thermite welding powders, which are sold
to the construction, electric, and natural gas and water distribution
industries, and c) electrogalvanized products used in the construction and
appliance industries. In April 2007, WHX acquired Bairnco Corporation
("Bairnco"). See Note 2-Acquisition of Bairnco. Bairnco's Arlon electronic
materials ("Arlon EM") 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 EM segment are
high technology materials for the printed circuit board industry and silicone
rubber products for insulating tapes and flexible heaters. Bairnco's Arlon
coated materials (`Arlon CM") 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 CM segment are vinyl films for graphics art applications, foam tapes
used in window glazing, and electrical and thermal insulation products.
Bairnco's Kasco replacement products and services ("Kasco") 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 $101.4
million. In connection with the closing of the Offer, initial financing was
provided by Steel through two credit facilities, one of which was refinanced on
July 18, 2007. These credit facilities are described in Note 10- Debt. The Offer
and the Merger are referred to as the "Bairnco Acquisition".
WHX believes that the Bairnco Acquisition 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 Bairnco Acquisition was accounted for under the purchase method of
accounting. As noted above, the operations of Bairnco comprise three new
reportable segments for WHX; Arlon EM, Arlon CM, and Kasco. Management of the
Company 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:
6
Current assets $ 80,222
Property, plant & equipment 49,124
Identifiable intangible assets 23,781
Other non-current assets 468
Goodwill 14,947
Current liabilities (29,845)
Debt (31,078)
Other long term liabilities (6,229)
---------
Purchase price $ 101,390
=========
The components of the $23.8 million of estimated acquired Identifiable
Intangible Assets, listed in the above table, are as follows:
Amount Amortization
------ Period
(in thousands) ------
Customer relationships $19,030 10 years
Trade names 2,003 10 years
Engineering drawings 246 10 years
Backlog 785
In-process research and development 1,520
Other 197 10 years
-------
Total Identifiable intangible assets $23,781
=======
Amortization expense on these intangible assets recorded from acquisition
through September 30, 2007 was approximately $1.0 million. The backlog and
in-process research and development intangible assets were fully expensed in the
third quarter ended September 30, 2007. 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 Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets".
Approximately $1.4 million of goodwill related to prior acquisitions made by
Bairnco is expected to be amortizable for income tax purposes.
Effective April 13, 2007, the consolidated financial statements of the
Company 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:
7
PRO FORMA COMBINED FINANCIAL INFORMATION
For the Three Months Ended September 30, For the Nine Months Ended September 30,
(in thousands) 2007 2006 2007 2006
------------------- -------------------- ------------------- -------------------
Net sales $ 182,400 $ 164,908 $ 531,860 $ 490,744
Loss from continuing operations before income taxes $ (5,102) $ (2,906) $ (18,507) $ (14,638)
Loss from continuing operations, net of tax $ (5,826) $ (1,841) $ (21,098) $ (14,731)
Discontinued operations, net of tax -- $ 2,880 -- $ 2,713
Net income (loss) $ (5,826) $ 1,039 $ (21,098) $ (12,018)
Loss from continuing operations per common share $ (0.58) $ (0.18) $ (2.11) $ (1.47)
Discontinued operations per common share -- $ 0.29 -- $ 0.27
Net income (loss) per common share $ (0.58) $ 0.10 $ (2.11) $ (1.20)
Included in the above pro forma results for the nine months ended
September 30, 2007 are non-recurring pre-tax charges of $5.7 million incurred
because of the change in control of Bairnco and costs of $1.4 million relating
to the tender offer for Bairnco shares. Other non-recurring charges totaling
$7.8 million that are included in the consolidated statement of operations of
WHX for the three and nine months ended September 30, 2007 have been excluded
from the above pro forma results of operations. Such charges consist of
approximately $5.5 million of acquired manufacturing profit in inventory that
was charged to cost of sales, approximately $1.5 million of acquired in-process
research and development costs, and $0.8 million of acquired backlog, and all
are related directly to the acquisition. Also included in the above pro forma
pretax results for the nine month period is pre-tax income of $5.7 million
resulting from WHX's settlement of a fire insurance claim from a prior year.
Pro forma adjustments to the historical results of operations for each of
the periods presented include additional interest expense on the
acquisition-related financing, additional depreciation and amortization expense
relating to the higher basis of fixed assets and acquired amortizable
intangibles, and the elimination of Federal income taxes on Bairnco's results of
operations. Since Bairnco will be included in the consolidated federal income
tax return of WHX, and due to the uncertainty of realizing the benefit of WHX's
net operating loss carryforwards ("NOLs") in the future, a deferred tax
valuation allowance has been established on a consolidated basis. Interest
expense reflects a refinancing of approximately $56 million of initial
acquisition financing three months after the acquisition date (specifically, on
April 1, 2006 in the pro forma results). Bairnco actually refinanced the initial
acquisition financing approximately three months (July 2007) after the actual
acquisition date.
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.
NOTE 3 - LIQUIDITY
The Company has incurred significant losses and negative cash flows from
operations in recent years, and as of September 30, 2007 had an accumulated
deficit of $431.5 million. As of September 30, 2007, the Company's current
assets totaled $216.0 million and its current liabilities totaled $356.8
million; a working capital deficit of $140.8 million. Included in the current
liabilities as of September 30, 2007 is a total of $124.2 million of loan
principal, interest, and manditorily redeemable preferred stock payable to
Steel, a related party. Such amounts are expected to be either partially or
totally repaid after the completion of a proposed rights offering. See Note 14 -
Subsequent Events. The Company's working capital deficit at December 31, 2006
was $1.6 million. As of September 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. If the
Company cannot refinance H&H's debt that is due on June 30, 2008, there can be
no assurance that H&H will be able to continue to operate its business or to
provide WHX with additional capital to fund its operations. Additionally, at
times over the past several years, H&H had not been in compliance with certain
of its bank covenants and obtained a number of waivers from its lenders related
to such covenants. As previously noted, Bairnco's bank debt was refinanced in
July 2007 with a new scheduled maturity of 2012.
8
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 credit facilities effectively do not permit it to
transfer any cash or other assets to WHX (with the exception of (i) an unsecured
loan for required payments to the defined benefit pension plan sponsored by WHX
(the "WHX Pension Plan"), (ii) an unsecured loan for other uses in the aggregate
principal amount not to exceed $3.5 million , of which approximately $3.4
million has already been distributed, (iii) the loan, distribution or other
advance of up to approximately $7.4 million, subject to certain limitations, to
the extent loaned by Steel to H&H, of which approximately $2.3 million has
already been distributed, and (iv) up to $13.1 million to be used by WHX solely
to make a contribution to the WHX Pension Plan, which contribution of $13.0
million was made on September 12, 2007). H&H's credit facilities are
collateralized by substantially all of H&H's assets. Similarly, Bairnco's credit
facilities do not permit it to make any distribution, pay any dividend or
transfer any cash or other assets to WHX other than common stock of Bairnco.
WHX's ongoing operating cash flow requirements consist of paying certain
administrative costs and funding the minimum requirements of the WHX Pension
Plan. On September 12, 2007, WHX made a payment to the WHX Pension Plan of $13.0
million, which exceeded the minimum required contribution under the Employee
Retirement, Income and Security Act of 1974, as amended ("ERISA"). As a result
of such accelerated contribution, the future required contributions to the WHX
Pension Plan are expected to decline, with no contribution required in 2008,
based on an estimate from our actuary. As of September 30, 2007, WHX and its
subsidiaries that are not restricted by loan agreements or otherwise from
transferring funds to WHX (collectively, its "Unrestricted Subsidiaries") had
cash of approximately $2.7 million and current liabilities of approximately $7.9
million, including $5.1 million of mandatorily redeemable preferred shares
payable to a related party.
H&H's availability under its credit facilities as of September 30, 2007,
was approximately $18.0 million.
On March 29, 2007, all such H&H credit 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 WHX
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 indirect subsidiary of H&H.
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 credit 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
"Fairfield Superior Court") on December 18, 2006 in connection with the
litigation known as HH East Parcel v. Handy & Harman currently pending in the
Fairfield 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 credit
facilities, 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 July 31, 2007, Steel loaned H&H $5,689,276.
On September 10, 2007, H&H and certain of its subsidiaries amended its
credit facilities, to, among other things, (i) provide for an additional term
loan by Steel of $8,000,000 to H&H and its subsidiaries, and (ii) permit a loan
by H&H to WHX of up to $13,100,000 to be used by WHX solely to make a
contribution to the WHX Pension Plan. On September 12, 2007, the Company made a
payment to the WHX Pension Plan of $13.0 million, which exceeded the minimum
required contribution under ERISA. As a result of such accelerated contribution,
the Company's required contributions to the WHX Pension Plan over the next five
years are expected to decline, and the Company believes that the full amount of
the Internal Revenue Service ("IRS") conditional waiver of the minimum funding
requirements for the WHX Pension Plan for the 2005 plan year ("IRS Waiver") has
been repaid. Subject to the Pension Benefit Guaranty Corporation's ("PBGC")
confirmation that the IRS Waiver amount has been paid in full, the subordinate
liens granted to the PBGC shall be terminated.
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 assets and inventory located in Malaysia
(collectively referred to as "HHEM") for net proceeds of approximately $3.8
million. Of the total net proceeds, $2.5 million was used to make an incremental
payment to the WHX Pension Plan, pursuant to the terms of a prior agreement with
the PBGC. 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.
9
Bairnco became a wholly-owned subsidiary of WHX in April 2007. Initial
financing to fund the tender offer to acquire Bairnco was provided by Steel
through two credit facilities, in the approximate aggregate amount of $101.4
million. The Bairnco senior secured credit facility dated as of November 9, 2006
with Bank of America, N.A. (the "Bairnco Senior Secured Credit Facility"),, as
well as a portion of the initial financing, were refinanced on July 18, 2007.
The availability under Bairnco's new revolving credit facility on September 30,
2007 was approximately $12.6 million. These credit facilities are described in
Note 10- Debt.
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
settlement agreement with the PBGC entered into December 28, 2006 (the "PBGC
Settlement Agreement"). As a result of the $13.0 million contribution to the WHX
Pension Plan in September 2007, however, the Company's required contributions to
the WHX Pension Plan over the next five years are expected to decline, and the
Company believes that the full amount of the IRS Waiver has been repaid. Subject
to the PBGC's confirmation that the IRS Waiver amount has been paid in full, the
subordinate liens granted to the PBGC shall be terminated. 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
the H&H 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. The Company's inability to
generate sufficient cash flows from its operations or to refinance the H&H debt
on commercially reasonable terms could impair the liquidity of H&H and WHX, and
will likely have a material adverse effect on H&H's business, financial
condition and results of operations, and could raise substantial doubt that H&H
and WHX will be able to continue to operate.
We do not anticipate that we will have any additional sources of cash flow
other than (i) as described above, (ii) from operations, (iii) from the sale of
non-core assets, (iv) from the refinancing of our debt and (v) from the proceeds
of a rights offering (described in Note 14 - Subsequent Events). In addition,
the proceeds of the rights offering are expected to be used to redeem preferred
stock and to retire indebtedness, and accordingly will not be available for
general corporate purposes. If we fail to refinance our debt and complete a
successful rights offering, we will likely face substantial liquidity problems
and our ability to operate could be adversely affected.
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 ("SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted in accordance with
those rules and regulations, although the Company believes that the disclosures
made are adequate to make the information not misleading. This quarterly report
on Form 10-Q should be read in conjunction with the Company's audited
consolidated financial statements contained in Form 10-K for the year ended
December 31, 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 nine months ended September 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.
10
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
September 30, 2007, the Company has $3.3 million of unrecognized tax benefits.
The increase in the amount of unrecognized tax benefits in the nine month period
ended September 30, 2007 related principally 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 September 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 tax benefits in these
periods since in the opinion of management; it is more likely than not that the
benefit of the Company's NOLs will not be realized in the future. The Company
records a valuation allowance against deferred tax assets resulting from NOL's.
In September 2006, the FASB issued SFAS 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 SFAS 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.
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 (10,000,498).
Diluted earnings per share gives effect to dilutive potential common shares
outstanding during the period. The Company has potentially dilutive common share
equivalents including warrants and stock options and other stock-based incentive
compensation arrangements (See Note 7-Stock-Based Compensation). No common share
equivalents were dilutive in any period presented. For the nine months ended
September 30, 2006 and for the three and nine months ended September 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
September 30, 2006, the Company's 753,155 warrants were anti-dilutive, and the
dilutive effect of the Company's phantom stock options (See Note 7-Stock-Based
Compensation) was not material.
NOTE 7 - STOCK-BASED COMPENSATION
Stock-based compensation expense is recorded based on the grant-date fair
value estimated in accordance with the provisions of Revised SFAS 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.
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
11
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.
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
620,000 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.
The Company satisfied the obligation for the phantom stock options by
granting actual stock options to various members of management on July 6, 2007.
The Company estimated the fair value of the 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.
Nine Months Ended
Assumptions September 30, 2007
- ----------------------- ------------------
Risk-free interest rate 5.08%
Expected dividend yield 0.00%
Expected life (in years) 4.5 years
Volatility 49.1%
The Company has recorded $0.4 million and $1.3 million of non-cash
stock-based compensation expense related to these stock options for the three
and nine month periods ended September 30, 2007, respectively.
Activity related to the Company's 2007 Plan was as follows:
Weighted-
Weighted- Average
Average Remaining Aggregate
Shares Exercise Contractual Intrinsic
Options (000's) Price Term Value (000)
- -------------------------------- ------- -------- ----------- -----------
Outstanding at January 1, 2007 --
Granted 620 $9.00 --
Exercised -- --
Forfeited or expired -- --
Outstanding at September 30, 2007 620 $9.00 7.77 --
Exercisable at September 30, 2007 310 $9.00 7.77 --
Nonvested Shares Shares (000's) Fair Value
- ------------------------------- -------------- ----------
Nonvested at January 1, 2007 --
Granted 620 $ 3.78
Vested 310 $ 3.78
Forfeited --
Nonvested at September 30, 2007 310 $ 3.78
12
As of September 30, 2007 there was $1.0 million of total unrecognized
compensation cost related to nonvested share based compensation arrangements
granted under the 2007 Plan. That cost is expected to be recognized over a
weighted-average period of 1.77 years. The total fair value of shares vested as
of September 30, 2007 was $1.2 million.
On July 6, 2007, the Compensation Committee of the Board of Directors of
the Company adopted incentive arrangements for two members of the Board of
Directors who are related parties to the Company. These arrangements provide,
among other things, for each to receive a bonus equal to 100,000 multiplied by
the difference of the fair market value of the Company's stock price and $9.00
per share. The bonus is payable upon the sending of a notice by either board
member, respectively. The notice can be sent with respect to one-half the bonus
immediately, with respect to one quarter, at any time after July 6, 2008 and
with respect to the remainder, at any time after July 6, 2009. The incentive
arrangements terminate July 6, 2015, to the extent not previously received.
Under SFAS 123(R), the Company is required to adjust its obligation for the fair
value of such incentive arrangements from the date of actual grant to the latest
balance sheet date and to record such incentive arrangements as liabilities in
the consolidated balance sheet. The Company has recorded $0.3 million of
non-cash compensation expense related to these incentive arrangements for the
three and nine month periods ended September 30, 2007.
NOTE 8 - INVENTORIES
Inventories at September 30, 2007 and December 31, 2006 are comprised as
follows:
(in thousands) September 30, December 31,
2007 2006
------------- ------------
Finished products $ 38,529 $ 16,162
In - process 14,483 5,743
Raw materials 27,400 25,423
Fine and fabricated precious metal in
various stages of completion 10,291 17,702
-------- --------
90,703 65,030
LIFO reserve (5,000) (7,853)
-------- --------
$ 85,703 $ 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 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 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 September 30, 2007 and 2006 include
losses of $1.0 million and $1.7 million, respectively, and the nine month
periods ended September 30, 2007 and 2006 include losses of $1.0 million and
$6.2 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 $5.0
million and $7.9 million at September 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 639,000 troy ounces as of September 30, 2007.
The Company deferred $3.6 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 September 30, 2007 balance sheet.
13
September 30, December 31,
2007 2006
---------- ------------
Silver ounces:
Customer metal 735,564 137,711
H&H owned metal 419,311 1,057,900
Gold ounces:
Customer metal 377 907
H&H owned metal 5,347 5,800
Palladium ounces:
Customer metal 1,340 1,338
H&H owned metal 1,535 1,535
Supplemental inventory information:
September 30, December 31,
2007 2006
---------- ------------
(in thousands, except per ounce)
Precious metal stated at LIFO cost $ 5,291 $ 9,849
Market value per ounce:
Silver $ 13.80 $ 12.85
Gold $ 743.56 $ 635.99
Palladium $ 343.75 $ 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
warehousing and procurement 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 September 30,
2007, $1.0 million is included in current liabilities and $2.1 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 nine months ended
September 30, 2007 and 2006. The pension cost (credit) of the Bairnco U.S.
pension plans is included in the three and nine month period of 2007 since April
13, 2007, the date of the Bairnco Acquisition.
(in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
-------- -------- -------- --------
Service cost $ 96 $ 41 $ 261 $ 182
Interest cost 6,671 5,844 19,017 17,210
Expected return on plan assets (8,499) (7,171) (24,285) (21,264)
Amortization of prior service cost 20 16 75 54
Recognized actuarial (gain)/loss 151 -- 675 303
Special termination benefit charge -- -- -- 128
-------- -------- -------- --------
$ (1,561) $ (1,270) $ (4,257) $ (3,387)
======== ======== ======== ========
In addition to the WHX Pension Plan, which is included in the table above,
the Company also maintains several other retirement and postretirement benefit
plans covering certain of its employees.. The approximate aggregate expense for
these plans was $0.1 million and $0.2 million for the three months ended
September 30, 2007 and 2006, respectively, and aggregate expense of $1.2 million
and $0.0 million for the nine months ended September 30, 2007 and 2006,
respectively. The increase in expense for the nine months ended September 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 minimal expense for these benefit plans in 2006 was that effective January
14
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.
NOTE 10 - DEBT
Long-term debt consists of the following:
(in thousands) September 30, December 31,
2007 2006
------------- ------------
H&H Term Loan - related party $103,316 $ 89,627
H&H Credit Facility - Term Loan A 10,146 14,453
H&H Term Loan 42,000 42,000
H&H Supplemental Term Loan 5,614 6,883
Other H&H debt-domestic 6,760 6,868
Other H&H debt-foreign 5,509 5,475
Bairnco Term Loan 75,767 --
Bairnco China foreign loan facility 4,917 --
Bairnco Bridge Loan-related party 32,785 --
WHX Subordinated Loan-related party 16,125 --
-------- --------
302,939 165,306
Less portion due within one year 164,556 4,778
-------- --------
Total long-term debt $138,383 $160,528
======== ========
As of September 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 H&H's 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 WHX 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 indirect subsidiary of H&H. 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 credit facilities granted a
waiver to the events of default arising as a result of the Order of Prejudgment
Attachment entered by the Fairfield Superior Court on December 18, 2006 in
connection with the litigation known as HH East Parcel v. Handy & Harman
currently pending in the Fairfield Superior Court in the amount of approximately
$3.5 million 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 approximately $3.5 million, and related matters (see Note 13-
Contingencies).
On July 27, 2007, H&H and certain of its subsidiaries amended its credit
facilities, 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 approximately $7.4 million, and (iii) permit the
loan, distribution or other advances by H&H to WHX of up to approximately $7.4
15
million, subject to certain limitations, to the extent loaned by Steel to H&H as
permitted by these amendments. On July 31, 2007, Steel loaned H&H approximately
$5.7 million.
On September 10, 2007, H&H and certain of its subsidiaries amended its
credit facilities, to, among other things, (i) provide for an additional term
loan by Steel of $8.0 million to H&H and its subsidiaries, and (ii) permit a
loan by H&H to WHX of up to $13.1 million to be used by WHX solely to make a
contribution to the WHX Pension Plan. On September 12, 2007, the Company made a
payment to the WHX Pension Plan of $13.0 million, which exceeded the minimum
required contribution under ERISA. As a result of such accelerated contribution,
the Company's required contributions to the WHX Pension Plan over the next five
years are expected to decline.
In connection with the of Bairnco Acquisition, 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.
On July 18, 2007, Bairnco, completed the refinancing of: (i) all existing
indebtedness of Bairnco and its subsidiaries under the Bairnco Senior Secured
Credit Facility and (ii) a portion of the existing indebtedness of Bairnco under
that certain Loan and Security Agreement, dated as of April 17, 2007 (the "Steel
Bridge Loan"), by and among BZA, Bairnco, and Steel, pursuant to which Steel
made up to a $90 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.
("Wells Fargo"), 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 ("Ableco"), 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 Steel Bridge Loan.
The First Lien Credit Agreement provides for a revolving credit facility
to the Borrowers in an aggregate principal amount not to exceed $30.0 million,
and a term loan facility to the Borrowers of $28.0 million. 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"),
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 secured 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 $48.0 million. 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 secured
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 approximately $56.7 million of the borrowings under the First
Lien Credit Agreement and Second Lien Credit Agreement to repay a portion of the
indebtedness outstanding under the Steel Bridge Loan, leaving a principal
balance of approximately $31.8 million (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 and all
fees payable under the Subordinated Debt Credit Agreement are due and payable,
in arrears on the scheduled maturity date of the indebtedness under the
Subordinated Debt Credit Agreement, January 17, 2013, except as otherwise
permitted by the terms of an intercreditor and subordination agreement by and
16
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 secured 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 Steel Bridge Loan.
Approximately $7.4 million of irrevocable standby letters of credit were
outstanding under the First Lien Credit Agreement, which are not reflected in
the accompanying consolidated financial statements. $2.0 million of the letters
of credit guarantee various insurance activities and $5.4 million represents
letters of credit securing borrowings of up to $5.2 million 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.
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 revolving credit facility under the First Lien Credit
Agreement. As of September 30, 2007, Bairnco had approximately $12.6 million of
unused borrowing availability under the First Lien Credit Agreement.
The China foreign loan facility reflects borrowing by Bairnco's Chinese
facilities through Bank of America, Shanghai, China, which is secured by four US
dollar denominated letters of credit totaling $5.4 million. Interest rates on
amounts borrowed under the China foreign loan facility averaged 6.0% at
September 30, 2007.
The First and Second Lien Credit Agreements contain financial covenants
which require Bairnco to meet EBITDA, capital expenditure, and fixed charge
coverage and leverage ratios. At September 30, 2007, Bairnco was in compliance
with all such covenants.
The annual maturities of long-term debt as of September 30, 2007 were as
follows:
(in thousands)
October 1 - December 31, 2008 $ 864
2009 19,577
2010 3,455
2011 9,606
2012 and beyond 104,881
--------
$138,383
========
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, (the "Norristown
facility") 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 facility's long-lived
assets in accordance with SFAS No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets" ("SFAS 144"). A review of future cash flows indicated that
cash flows would be insufficient to support the carrying value of certain
machinery and equipment at the Norristown facility. 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 facility's
long-lived assets, principally consisting of machinery and equipment, were
classified as current assets held for sale in the balance sheet as of September
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
17
resulting from a pension curtailment, and $0.3 million of other charges. The
activity in the restructuring reserve was as follows for the nine months ended
September 30, 2007:
Reserve Reserve
Balance Balance
December 31, September 30,
2006 Expense Paid 2007
------------ --------- --------- -------------
(in thousands)
Termination benefits $320 $-- $300 $ 20
==== = ==== ====
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. An additional expense of $0.1 million was recorded in the third quarter
of 2007 in connection with the estimated costs of environmental remediation
activities at the Norristown facility.
The Norristown facility operated through the third quarter of 2006. The
closing of the Norristown facility and the sale of certain of its assets were
completed by the end of 2006. The remaining machinery and equipment was sold in
2007 for proceeds of $0.9 million.
HHEM
On March 4, 2007, the Company sold certain assets, including the land and
building, certain machinery and equipment, and inventory of 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. 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 a) specialty roofing
and construction fasteners, using steel and plastic, which are sold
to the construction and do-it yourself markets, b) plastic and steel
fittings and connectors for natural gas and water distribution, and
non-ferrous thermite welding powders, which are sold to the
construction, electric, and natural gas and water distribution
industries, and c) electrogalvanized products used in the
construction and appliance industries;
(4) 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 EM segment are high technology materials for the printed
circuit board industry and silicone rubber products for insulating
tapes and flexible heaters.
(5) 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 CM 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 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
18
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.
The following table presents information about reportable segments for the
three and nine month periods ending September 30, 2007 and 2006. Information
about the Bairnco reportable segments includes the period April 13, 2007 through
September 30, 2007.
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
--------------- -------------- --------------- -------------
(in thousands)
Net sales
Precious Metal $ 36,994 $ 36,141 $ 114,202 $ 112,249
Tubing 30,801 30,526 91,051 93,235
Engineered Materials 64,670 54,942 178,820 154,109
Arlon Electronic Materials (a) 15,470 -- 29,487 --
Arlon Coated Materials (a) 18,213 -- 32,896 --
Kasco (a) 16,252 -- 30,635 --
--------- --------- --------- ---------
Net sales $ 182,400 $ 121,609 $ 477,091 $ 359,593
========= ========= ========= =========
Segment operating income (loss)
Precious Metal $ 1,515 $ 2,909 $ 3,003 $ 7,793
Tubing 343 (1,903) (138) (5,581)
Engineered Materials 6,859 6,489 14,430 14,993
Arlon Electronic Materials (a)(b) (3,614) -- (1,392) --
Arlon Coated Materials (a)(b) (2,521) -- (2,523) --
Kasco (a)(b) (834) -- (336) --
--------- --------- --------- ---------
1,748 7,495 13,044 17,205
--------- --------- --------- ---------
Unallocated corporate expenses 2,021 927 5,685 2,677
Pension income (1,250) (1,270) (3,750) (3,515)
Insurance proceeds -- (811) (5,689) (811)
Environmental remediation expense 2,527 -- 2,527 2,909
Loss (gain) on disposal of assets 153 (4) 288 83
--------- --------- --------- ---------
Income (loss) from operations (1,703) 8,653 13,983 15,862
--------- --------- --------- ---------
Interest expense 10,652 5,775 28,558 15,723
Realized and unrealized loss
on derivatives 963 1,714 1,039 6,244
Other expense (income) 138 (175) 328 (41)
--------- --------- --------- ---------
Income (loss) from continuing
operations before taxes $ (13,456) $ 1,339 $ (15,942) $ (6,064)
========= ========= ========= =========
(a) Bairnco segment information includes the period April 13, 2007 through September 30, 2007.
(b) The following non-recurring charges relating to the purchase accounting for the Bairnco Acquisition are
included in the three and nine months results above: Arlon EM -$3,956, Arlon CM -$2,425, and Kasco
-$1,465.
19
Nine Months Ended September 30, September 30, December 31,
2007 2006 2007 2006
------------ ------------ ------------ ------------
Capital Expenditures (in thousands) Total Assets (in thousands)
Precious Metal $1,901 $1,735 Precious Metal $ 57,430 $ 60,562
Tubing 1,015 3,588 Tubing 72,940 68,038
Engineered Materials 2,040 1,394 Engineered Materials 153,094 145,845
Arlon Electronic Materials 536 -- Arlon Electronic Materials 75,775 --
Arlon Coated Materials 318 -- Arlon Coated Materials 29,784 --
Kasco 1,132 -- Kasco 41,598 --
Corporate and other 98 120 Corporate and other 30,713 19,420
------ ------ -------- --------
Total $7,040 $6,837 Total $461,334 $293,865
====== ====== ======== ========
Geographic Information
Revenue Long-lived Assets
Three Months Ended September 30, Nine Months Ended September 30, September 30, December 31,
2007 2006 2007 2006 2007 2006
-------------- -------------- -------------- -------------- -------------- --------------
(in thousands) (in thousands) (in thousands)
United States $156,484 $111,755 $427,574 $330,171 $111,567 $ 76,686
Foreign 25,916 9,854 49,517 29,422 18,658 8,309
-------- -------- -------- -------- -------- --------
$182,400 $121,609 $477,091 $359,593 $130,225 $ 84,995
======== ======== ======== ======== ======== ========
NOTE 13 - 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 sought 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 had previously paid $5
million in claims. Sumco contended that its losses were in excess of the policy
limits, defendants acted in bad faith, and that it was entitled to the payment
of the remaining approximate $10 million in insurance coverage provided by the
defendants. 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. On August 29, 2007, Sumco
filed a Declaratory Judgment action in the Marion County Superior Court of
Indiana against Royal Indemnity Company and U.S. Fire Insurance Company,
requesting a declaration that Sumco is entitled to such funds. Steel will have a
first lien, and the PBGC 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 ("Fairfield East") 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
20
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 Fairfield
Superior Court to have the arbitration award enforced, 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 several other dates, HH East
re-served the Order against various 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 $28.5 million had been expended through September
30, 2007, and the remaining remediation costs are expected to approximate $0.2
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, although solely in furtherance of settlement discussions that had
been going on between the parties, H&H recently performed 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. No action is pending in any court, H&H does not
believe that it is liable to Claimants under the claims that have been asserted
to date, and it intends to defend itself vigorously against any claims that may
be asserted by Claimants. There can be no assurance that H&H will be successful
21
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. 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 Environmental Protection
Agency ("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 MATTERS
In connection with the sale of a portion of Fairfield East 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 September 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 $371,000. 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 $419,000 and $140,000 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 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,
22
against which the plaintiffs are pursuing their claims. Fact and expert
discovery has been concluded. H&H filed a motion for summary judgment in July
2007, seeking dismissal of plaintiffs' complaint, which Plaintiffs opposed and
as to which H&H has filed a motion for leave to file a reply brief. These
motions are pending. Plaintiffs recently filed a motion for leave to file an
amended complaint seeking to add a cost recovery claim in addition to its
contribution claim. This motion is pending as well. It is anticipated that the
court will rule on these motions in the Fall of 2007. 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 North Attleboro,
Massachusetts (the "Shpack site") 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. 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. Most of the PRPs have reached proposed allocations as to
percentages of responsibility for investigation and remediation costs at the
Shpack site. It is anticipated that there will be a "shortfall" in the overall
allocation that will then be shared, on a pro rata basis, among all of the
participating PRPs. The EPA has currently agreed to an orphan share for the past
response costs incurred through March 31, 2007 and the PRPs continue to
negotiate with the EPA to have all future response and oversight costs included
in the orphan share. The EPA seeks to have the Consent Decree lodged as soon as
practicable. The Consent Decree will then be subject to a public comment period
of no less than 30 days. After the expiration of the 30 days (or such other time
period), the court, in its discretion, can enter the Consent Decree. 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. There are some PRPs who have not
participated to date in the Consent Decree negotiations and allocation process.
Any non-participating PRPs may be sued later on under CERCLA. That is a decision
that will be made in the future by the participating PRPs. The Company has
recorded a reserve of $3.6 million 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
We or certain of our 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 us and other
co-defendants. We deny liability and are defending these actions. It is not
possible to reasonably estimate our 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 us or certain
of our subsidiaries in connection with a variety of products sold by our
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 our 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, we have not incurred and
do not believe we will incur any significant liability with respect to these
claims, which we contest vigorously in most cases. However, it is possible that
23
the ultimate resolution of such litigation and claims could have a material
adverse effect on quarterly or annual results of operations, financial position
and cash flows when they are resolved in future periods.
PENSION PLAN CONTINGENCY ARISING FROM THE WPC GROUP BANKRUPTCY:
Wheeling-Pittsburgh Corporation ("WPC") and six of its subsidiaries
(collectively referred to as the "WPC Group"), including Wheeling-Pittsburgh
Steel Corporation ("WPSC"), a vertically integrated manufacturer of value-added
and flat rolled steel products, was a wholly owned subsidiary of WHX. On
November 16, 2000, the WPC Group filed a petition seeking reorganization under
Chapter 11 of Title 11 of the United States Bankruptcy Code. A Chapter 11 Plan
of Reorganization for the WPC Group (the "WPC POR") was consummated on August 1,
2003, pursuant to which, among other things, the WPC Group ceased to be a
subsidiary of WHX effective August 1, 2003, and from that date forward has been
an independent company.
As part of the WPC POR, the Company agreed to make certain contributions
(the "WHX Contributions") to the reorganized company. Under the WHX
Contributions, the Company forgave the repayment of its claims against the WPC
Group of approximately $39.0 million and, additionally, contributed to the
reorganized company $20.0 million of cash, for which the Company received a note
in the amount of $10.0 million. The note was fully reserved upon receipt.
On March 6, 2003, the PBGC published its Notice of Determination
("Notice") and on March 7, 2003 filed a Summons and Complaint ("Complaint") in
United States District Court for the Southern District of New York seeking the
involuntary termination of the WHX Pension Plan, 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 Pension Plan. Under the settlement, among
other things, WHX agreed (a) that the WHX Pension Plan, as it is currently
constituted, is a single employer pension plan, (b) to contribute funds to the
WHX Pension Plan equal to moneys spent (if any) by WHX or its affiliates to
purchase WHX 10.5% Senior Notes (the "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 Pension
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 Pension 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 Pension 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 Pension Plan.
NOTE 14 - SUBSEQUENT EVENTS
On October 18, 2007, the Company filed a registration statement on Form
S-1 with the SEC for a rights offering to its existing stockholders. The rights
offering will be made through the distribution of non-transferable subscription
rights to purchase shares of the Company's common stock, par value $0.01 per
share, at a subscription price to be determined. Assuming the rights offering is
fully subscribed, the Company will receive gross proceeds of approximately $170
million, less expenses of the rights offering.
The rights offering includes an oversubscription privilege which permits
each rights holder, that exercises its rights in full, to purchase additional
shares of common stock that remain unsubscribed at the expiration of the
offering. This oversubscription privilege is subject to (i) the availability and
24
allocation of shares among persons exercising this oversubscription privilege
and (ii) a maximum number of shares for which stockholders can oversubscribe for
without endangering the availability of the Company's NOLs under Section 382 of
the Internal Revenue Code, in each case as further described in the rights
offering documents.
Steel has indicated that it intends to exercise all of its rights and to
oversubscribe for the maximum number of shares it can oversubscribe for without
(i) endangering the availability of the Company's NOLs or (ii) increasing its
ownership to in excess of 75% of the outstanding shares of the Company's common
stock.
A registration statement relating to these securities has been filed with
the SEC but has not yet become effective.
The purpose of this rights offering is to raise equity capital in a
cost-effective manner that gives all the Company's stockholders the opportunity
to participate. The net proceeds will be used to redeem preferred stock issued
by a subsidiary of WHX and held by Steel, to repay WHX indebtedness to Steel,
and to repay a portion of the indebtedness of certain wholly-owned subsidiaries
of WHX to Steel and to their other lenders.
On November 5, 2007, the Company completed the purchase of all of the
outstanding common stock of a manufacturer of flux cored brazing wire and metal
powders used for brazing and soldering pastes, and the financial results of this
company will be included in the consolidated financial statements in the fourth
quarter. It is not expected to have a material effect on the financial position,
results of operations, or cash flows of the Company.
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. H&H's precious metal 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 ("Precious Metal segment"). The tubing 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 ("Tubing segment"). The engineered materials segment
manufactures a) specialty roofing and construction fasteners, using steel and
plastic, which are sold to the construction and do-it yourself markets, b)
plastic and steel fittings and connectors for natural gas and water
distribution, and non-ferrous thermite welding powders, which are sold to the
construction, electric, and natural gas and water distribution industries, and
c) electrogalvanized products used in the construction and appliance industries
("Engineered Materials segment"). In April 2007, WHX acquired Bairnco
Corporation ("Bairnco"). Bairnco operates business units in three reportable
segments: Arlon electronic materials ("Arlon EM"), Arlon coated materials
("Arlon CM") and Kasco replacement products and services ("Kasco"). The Arlon EM
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 EM segment are high technology materials for the
printed circuit board industry and silicone rubber products for insulating tapes
and flexible heaters. The Arlon CM 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 CM segment are vinyl films for graphics art applications, foam tapes
used in window glazing, and electrical and thermal insulation products. The
Kasco 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".
RESULTS OF OPERATIONS
COMPARISON OF THE THIRD QUARTER OF 2007 WITH THE THIRD QUARTER OF 2006
Net sales for the third quarter of 2007 increased by $60.8 million, or
50%, to $182.4 million, as compared to $121.6 million in the third quarter of
2006. The Bairnco Acquisition contributed $49.9 million in net sales for the
third quarter of 2007. Net sales were flat at both the Precious Metal segment,
and at the Tubing segment and increased by $9.7 million at the Engineered
Materials segment., principally due to the net sales from the roofing fastener
business acquired by the Company in December 2006. There were also net sales
gains in our other businesses, but these were partially offset by a decrease in
net sales from businesses that had been sold or exited after the third 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 (the "Norristown facility") of the Handy & Harman Tube Co.
("HHT") within the Tubing segment.
25
Gross profit percentage was 19.0% in the third quarter of 2007 and 19.7%
in the third quarter of 2006. The gross profit percentage from the Precious
Metal, Tubing and Engineered Materials segments on a combined basis was
comparable to the third quarter of 2006. The decline in consolidated gross
profit percentage was attributable to the Bairnco segments, which had a combined
18.1% gross profit percentage for the 2007 quarter. Such gross profit had been
negatively impacted by approximately $5.5 million of manufacturing profit, or 3%
of consolidated sales, that was included in the acquisition value of the
inventory purchased by WHX and sold in the period. Another reason for the
decline in gross profit percentage in the 2007 quarter was a $2.3 million
favorable effect on gross profit in the 2006 quarter from the liquidation of
precious metal inventories valued at LIFO cost.
Selling, general and administrative ("SG&A") expenses increased $18.1
million to $33.6 million, or 18.4% of net sales, in the third quarter of 2007
from $15.6 million, or 12.8% of net sales, in the comparable 2006 period. The
2007 period includes $15.9 million of SG&A expenses of Bairnco which was
acquired in April 2007, and such SG&A expenses reflect $1.5 million of
non-recurring charges for acquired research and development and $0.8 million for
acquired backlog. It also includes amortization of $0.8 million due to the
intangibles acquired in the Bairnco Acquisition. Amortization of intangibles
also increased $0.5 million relating to intangibles from the roofing fastener
business acquired by the Company in December 2006. In addition, there were
increases in legal, auditing and consulting fees of $1.1 million and non-cash
stock-based compensation expense related to stock options and special incentive
arrangements of $0.7 million.
Restructuring charges relate to the closing of the Norristown facility. A
charge of $0.5 million was recorded in the third quarter 2006 statement of
operations. These charges were primarily for termination benefits for salaried
employees.
Environmental remediation expenses of $2.5 million were recorded in the
third quarter of 2007, principally related to the Company's estimated exposure
at the Shpack site. The Company increased its reserve related to the Shpack site
by $2.1 million based on the latest estimate of cleanup costs, together with
certain past oversight costs, and an expected increase in the Company's
allocation percentage among the PRP's. 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 were required,
which the Company accrued in 2006, and increased by an additional $0.1 million
in the third quarter of 2007.
Operating loss for the third quarter of 2007 was $1.7 million compared to
operating income of $8.7 million for the third quarter of 2006, and at the
segment level, was operating income of $1.7 million compared to $7.5 million in
2006. In addition to the factors discussed in the paragraphs above, the 2007
period includes operating losses of Bairnco totaling $6.9 million, which
reflected $7.8 million of non-recurring charges for acquired manufacturing
profit in inventory, acquired research and development costs, and acquired
backlog,. In the second quarter of 2007, pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 141 "Business Combinations" (SFAS No. 141),
the Company estimated the value of the assets and liabilities acquired from
Bairnco using information available at the time. The Company has retained
valuation consultants to assist it in determining the fair value of the assets
and liabilities acquired including inventory, fixed assets, pension assets and
liabilities, and identifiable intangibles. This valuation work has not yet been
completed. However, the preliminary valuation indicates that the fair value of
inventory acquired exceeded the Company's initial estimate by approximately $4.4
million, the fair value of fixed assets acquired exceeded the Company's initial
estimate by approximately $8.4 million, and the fair value of identifiable
intangibles acquired exceeded the Company's initial estimate by approximately
$14.1 million, with an offsetting reduction of goodwill. These changes in
estimates resulted in $8.7 million of charges in the third quarter, including
approximately $5.5 million to cost of sales, $0.1 million to depreciation
expense, and $3.1 million of charges relating to identifiable intangibles
(comprised of approximately $1.5 million of acquired in-process research and
development, $0.8 million of acquired backlog and $0.8 million of amortization
of other identifiable intangible assets over preliminary estimated useful lives
of ten years).
Interest expense for the third quarter of 2007 increased $4.9 million to
$10.7 million from $5.8 million in the third quarter of 2006. Bairnco interest
was $3.4 million of the increase, the remainder of the increase in interest
expense was principally due to additional borrowings after the third 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 Bank N.A. ("Wachovia"),
interest payable to Steel is accrued but not paid.
Realized and unrealized losses on derivatives were $1.0 million in the
third quarter of 2007, compared to $1.7 million the third 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. Increases
in silver market price occurred in both quarters, resulting in losses on
derivatives. The reason for the lower loss in the 2007 period is principally the
reduced quantity of precious metal under forward and future contracts.
26
In the third quarter of 2007 a tax provision of $0.2 million was recorded,
and in the third quarter of 2006 a tax benefit of $0.9 million was recorded. The
2006 tax benefit from continuing operations of $0.9 million includes a tax
benefit of $1.6 million related to discontinued operations. The Company's net
tax provision from both continuing and discontinued operations of $0.7 million
in 2006, and its tax provision of $0.2 million in 2007, are principally for
state and foreign taxes. The Company has not recorded a federal income tax
benefit 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 carry forward
("NOLs") will not be realized in the future. The Company records a valuation
allowance against deferred tax assets resulting from NOLs.
The net income from discontinued operations relates to the Company's wire
and cable business, which had been part of the Wire and Tubing segment. In the
second quarter of 2005, all operations of the wire and cable business were
concluded. Accordingly, these businesses are reported as discontinued operations
in 2006. A gain on the disposal of assets, net of tax, of $2.9 million in the
third quarter of 2006 reflects a gain on the sale of the land and building
formerly used in the wire and cable business.
Net loss for the third quarter of 2007 was $13.7 million, or ($1.37) per
share, compared to net income from continuing operations of $2.2 million or
$0.22 per share for the third quarter of 2006. Including discontinued
operations, net income was $5.1 million, or $.51 per share for the third quarter
of 2006.
The comments that follow compare revenues and operating income by segment
for the third quarter 2007 and 2006.
PRECIOUS METAL
Net sales for the Precious Metal segment for the third quarter of 2007
increased $0.9 million or 2.4% from $36.1 million in the third quarter 2006 to
$37 million. Within the precious metal segment, the sale of the HHEM business in
the first quarter of 2007 resulted in a $3.2 million reduction in net sales for
the third quarter of 2007 as compared to the same period of 2006. HHEM's net
sales reduction was partially offset by a transfer of a portion of its business
to another entity within the precious metal segment. Aside from the reduction
caused by the sale of the HHEM business, the segment experienced higher sales,
primarily from higher precious metal prices which are passed on to customers..
Operating income for the Precious Metal segment was $1.5 million in the
third quarter of 2007, compared to $2.9 million in the third quarter of 2006.
The 2006 quarter included a gain of $2.3 million from the liquidation of
precious metal inventories valued at LIFO cost. The sale of the HHEM business
resulted in operating income improvements of $0.9 million in the third quarter
of 2007 as compared to the same period of 2006.
TUBING
In the third quarter of 2007, net sales for the Tubing segment slightly
increased $0.3 million, or 0.9%, from $30.5 million in 2006 to $30.8 million in
the third quarter of 2007. The closure of the Norristown facility, which had
experienced strong demand in the third quarter of 2006 prior to its shutdown,
resulted in reduced sales of $3.1 million in 2007. The reduction in net sales in
the third quarter of 2007 from the closure of the Norristown facility was
partially offset by a transfer of the Norristown facility's small coil 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 and the transportation market.
Operating income increased by $2.2 million to income of $0.3 million in
the third quarter of 2007 as compared to an operating loss of $1.9 million in
the same period of 2006. The operating loss in the third quarter of 2006
included $0.5 million of restructuring charges related to the closing of the
Norristown facility of HHT. The remainder of the improvement in operating income
is due to the successful transfer of the small coil business from the Norristown
facility 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 $9.7 million from
$54.9 million in the third quarter of 2006 to $64.7 million in the third 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 continuing
slowdown.
Operating income increased by $0.4 million from $6.5 million in the third
quarter of 2006 to $6.9 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 increase in volume of lower margin private label products.
27
BAIRNCO SEGMENTS (REFERENCES TO THE BAIRNCO SEGMENTS' 2006 COMPARATIVE AMOUNTS
ARE PRE-ACQUISITION, AND SUCH AMOUNTS HAVE NOT BEEN INCLUDED IN THE COMPANY'S
RESULTS. THEY ARE STATED HERE FOR COMPARISON PURPOSES ONLY.)
Net sales for the Arlon EM, Arlon CM, and the Kasco segments (together,
the "Bairnco segments") on a combined basis for the quarter ended September 30,
2007 were $49.9 million. Arlon's EM sales of $15.5 million improved 3.8% over
prior year as both the electronics and industrial markets remained strong
through the third quarter. Arlon's CM sales of $18.2 million improved 4.7% from
2006 on increased sales to the domestic graphics market. Kasco's sales of $16.3
million were up significantly over prior year from the impact of the Atlanta
SharpTech acquisition and the impact of exchange rates of a weakened US dollar
on European sales.
Gross profit of the Bairnco segments for the quarter ended September 30,
2007 was $9.0 million, or 18.1% of net sales. Gross profit was negatively
impacted by a charge to cost of sales for $5.5 million of manufacturing profit
that was included in the acquisition value of the inventory purchased by WHX and
sold in the period. Arlon's EM gross profit margin was down slightly on
increased raw material costs, scrap and operating inefficiencies. Gross profit
margins at Arlon CM were negatively impacted by increased inefficiencies from
lower production volumes as sales to the Corporate re-imaging markets softened.
Kasco's gross profit margins improved from the prior year as certain sales and
cost efficiencies from the Atlanta SharpTech acquisition were implemented.
Selling and administrative expenses for the Bairnco segments for the
quarter ended September 30, 2007 of $15.9 million include $1.5 million of
non-recurring charges for acquired research and development and $0.8 million for
acquired backlog. It also includes amortization of $0.8 million due to the
valuation of intangibles acquired in the acquisition by WHX.
UNALLOCATED CORPORATE EXPENSES
Unallocated corporate expenses increased from $0.9 million in the third
quarter of 2006 to $2.0 million in the third quarter of 2007. There were
increases in the costs for audit and legal fees, and non-cash expenses
associated with stock-based compensation for certain executives.
COMPARISON OF THE FIRST NINE MONTHS OF 2007 WITH THE FIRST NINE MONTHS OF 2006
Net sales for the first nine months of 2007 increased by $117.5 million,
or 32.7%, to $477.1 million, as compared to $359.6 million in the first nine
months of 2006. The Bairnco Acquisition accounted for $93.0 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 24 weeks of
operations. Net sales increased by $1.9 million at the Precious Metal segment,
decreased by $2.2 million at the Tubing segment, and increased $24.7 million at
the Engineered Materials segment, principally due to sales from the roofing
fastener business acquired by the Company in December 2006. There were net sales
increases at the Precious Metal and Tubing segments, but they were offset by a
decrease in net sales from businesses that had been sold or exited after the
third quarter of 2006 (HHEM and HHT).
Gross profit percentage increased to 19.8% in the first nine months of
2007 from 19.1% in the first nine months of 2006. The 2007 period was positively
affected by the acquisition of Bairnco, which contributed $22.8 million to gross
profit and 1.1% higher gross profit percent on a consolidated basis than without
Bairnco. This was despite the fact that the Bairnco segments' gross profit had
been negatively impacted by approximately $5.5 million of manufacturing profit
that was included in the acquisition value of the inventory purchased by WHX and
sold in the period. The Tubing segment increased gross profit as compared to the
2006 period primarily from higher margin in the stainless steel tubing business.
Partially offsetting these gains, the 2007 period was negatively affected within
the Precious Metal segment by a $0.7 million loss principally 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, the 2006 period
included a $4.1 million favorable effect on gross profit from the liquidation of
precious metal inventories valued at LIFO cost.
SG&A expenses increased $36.6 million to $83.1 million, or 17.4% of net
sales, in the first nine months of 2007 from $46.6 million, or 13.0% of net
sales, in the comparable 2006 period. SG&A expenses of Bairnco, which was
acquired in April 2007, accounted for approximately $27.0 million of the
increase, and such SG&A expenses reflect $1.5 million of non-recurring charges
for acquired research and development and $0.8 million for acquired backlog.
They also include amortization of $0.8 million due to the intangibles acquired
in the Bairnco Acquisition. 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 Revised Statement of
Financial Accounting Standards No. 123(R), the Company is required to record its
obligation for stock options at the fair value
28
on the date of grant. The Company recorded $1.6 million of stock-based
compensation expense in 2007 related to stock options and other incentive
arrangements. 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.
The Company recorded a gain from insurance claims of $5.7 million in the
first nine months of 2007, and had recorded a similar gain of $0.8 million in
the first nine months of 2006. The insurance proceeds that the Company collected
related to claims from a fire at an H&H subsidiary plant in 2002.
Environmental remediation expenses of $2.5 million were recorded in the
first nine months of 2007 as compared to $2.9 million in the first nine months
of 2006. Expenses for both years relate principally to the Company's estimated
exposure at the Shpack site, and remediation liability in connection with the
Company's Norristown facility. The Company increased its reserve related to the
Shpack site by $2.1 million based on the latest estimate of cleanup costs,
together with certain past oversight costs, and an expected increase in the
Company's allocation percentage among the PRP's. 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 were
required, which the Company accrued as of the first nine months of 2006, and
increased by an additional $0.1 million in 2007.
The asset impairment charge of $1.8 million in the statement of operations
for the first nine months of 2006 relates to the closing of the Norristown
facility. Restructuring charges of $2.4 million also relate to the Norristown
facility closing. The restructuring charges included termination benefits of
$2.0 million and $0.1 million resulting from a pension plan curtailment and $0.3
million for other charges.
Operating income at the consolidated level for the first nine months of
2007 was $14.0 million, which was $1.9 million lower than the first nine months
of 2006. Bairnco operating loss was $4.3 million, and was negatively impacted by
non-recurring charges of $7.8 million for acquired manufacturing profit in
inventory, acquired research and development costs, and acquired backlog,. This
was partially offset by the gain on insurance proceeds, which provided operating
income of $5.7 million. Decreases to operating income in 2007 were also due to
higher SG&A expenses related to additional audit and other professional fees
and, expenses associated with share-based compensation for certain executives,
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 $4.2 million for asset impairment and restructuring costs related to
the closing of Norristown.
Interest expense for the first nine months of 2007 increased $12.8 million
to $28.6 million from $15.7 million in the first nine months of 2006 as
borrowings and the related interest rates both increased. Debt as of September
30, 2007 exceeded the September 30, 2006 balance by $193.8 million due mainly to
the financing of $101.4 million for the Bairnco Acquisition, plus additional
borrowings. $26.0 million of the proceeds from the additional borrowings was
used to fund the acquisition of OMG Midwest in December 2006, and the remainder
was used principally 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 $1.0 million in the
first nine months of 2007, compared to $6.2 million in the first nine 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 gold and
silver increased at a lower rate than in 2006, and in addition, hedged
quantities of silver declined substantially in 2007.
In the first nine months of 2007 a tax provision of $2.2 million was
recorded for state and foreign taxes. The 2006 net tax provision for continuing
operations of $0.3 million includes a tax benefit of $1.6 million related to
discontinued operations. The Company's net tax provision from both continuing
and discontinued operations was $1.9 million in the first nine months of 2006,
and was also principally 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.
The net income from discontinued operations relates to the Company's wire
and cable business, which had been part of the Wire and Tubing segment. In the
second quarter of 2005, all operations of the wire and cable business were
concluded. Accordingly, these businesses are reported as discontinued operations
in 2006. A gain on the disposal of assets, net of tax, of $2.9 million in the
first nine months of 2006 reflects a gain on the sale of the land and building
formerly used in the wire and cable business.
Net loss for the first nine months of 2007 was $18.2 million, or ($1.82)
per share, compared to a net loss from continuing operations of $6.4 million or
($0.64) per share for the first nine months of 2006. Including discontinued
operations, net loss was $3.7 million, or $(.37) per share for the nine months
ended September 30, 2006.
29
The comments that follow compare revenues and operating income by segment
for the first nine months of 2007 and 2006:
PRECIOUS METAL
Net sales for the Precious Metal segment increased $2.0 million, or 1.7%,
from $112.2 million in 2006 to $114.2 million in 2007. Within the precious metal
segment, the sale of the HHEM business resulted in a $13.4 million reduction in
net sales for the first nine months of 2007 compared to the same period of 2006,
partially offset by a transfer of a portion of HHEM's business to another entity
within the precious metal segment. 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 $4.8 million to
$3.0 million in 2007 from $7.8 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 nine months of 2006 had been
positively impacted by a gain of $4.1 million from the liquidation of precious
metal inventories valued at LIFO cost.
TUBING
In the first nine months of 2007, net sales for the Tubing segment
decreased $2.2 million, or 2.3%, from $93.2 million in 2006 to $91.1 million in
2007, principally due to the closure of the Norristown facility. The facility
continued to operate during the first nine months of 2006 and recorded sales of
$13.9 million, principally due to special non-recurring net sales and
accelerated shipment of product prior to shutdown. The reduction in net sales
from the closure of the Norristown facility was partially offset by a transfer
of the Norristown facility's small coil 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 $5.4 million to a loss of $0.1 million in the
first nine months of 2007 from an operating loss of $5.6 million in the same
period of 2006. The 2006 loss included a total of $4.2 million for restructuring
costs of $2.4 million and an asset impairment charge of $1.8 million recorded in
the second quarter of 2006; both of which relate to the closing of the
Norristown facility. In addition, cost inefficiencies at the Company's Mexican
tubing facility also contributed to the operating loss in both periods.
ENGINEERED MATERIALS
Net sales for the Engineered Materials segment increased $24.7 million, or
16.0%, from $154.1 million in the first nine months of 2006 to $178.8 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
continuing slowdown.
Operating income decreased in the first nine months of 2007 by $0.6
million from $15.0 million in 2006 to $14.4 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 (REFERENCES TO THE BAIRNCO SEGMENTS' 2006 COMPARATIVE AMOUNTS
ARE PRE-ACQUISITION, AND SUCH AMOUNTS HAVE NOT BEEN INCLUDED IN THE COMPANY'S
RESULTS. THEY ARE STATED HERE FOR COMPARISON PURPOSES ONLY.)
Net sales for the Bairnco segments on a combined basis for the period
April 13 through September 30, 2007 were $93.0 million. Arlon's EM sales of
$29.5 million improved over prior year on strong activity in both the
electronics and industrial markets. Arlon's CM sales of $32.9 million declined
from 2006 on slow sales to the domestic graphics and industrial markets. Kasco's
sales of $30.6 million were up significantly over prior year from the impact of
the Atlanta SharpTech acquisition and the impact of exchange rates of a weakened
US dollar on European sales.
30
Gross profit for the Bairnco segments on a combined basis for the period
April 13 through September 30, 2007 was $22.8 million or 24.6% of sales. Gross
profit was negatively impacted by a charge to cost of sales for $5.5 million of
manufacturing profit that was included in the acquisition value of the inventory
purchased by WHX and sold in the period. Arlon's EM gross profit margin was down
slightly on increased raw material costs, scrap and operating inefficiencies.
Gross profit margins at Arlon CM were negatively impacted by increased
inefficiencies from lower production volumes as sales to the corporate
re-imaging markets softened. Kasco's gross profit margins improved from the
prior year as certain sales and cost efficiencies from the Atlanta SharpTech
acquisition were implemented.
Selling and administrative expenses for the Bairnco segments on a combined
basis for the period April 13 through September 30, 2007 of $27.0 million
include $1.5 million of non-recurring charges for acquired research and
development and $0.8 million for acquired backlog. They also include
amortization of $0.8 million due to the valuation of intangibles acquired in the
acquisition by WHX.
UNALLOCATED CORPORATE EXPENSES
Unallocated corporate expenses increased from $2.7 million in the first
nine months of 2006 to $5.7 million in the first nine months of 2007. There were
increases in the costs for audit and legal fees, and non-cash expenses
associated with stock-based compensation for certain executives.
DISCUSSION OF CONSOLIDATED STATEMENT OF CASH FLOWS
Net cash used by operating activities for the nine months ended September
30, 2007 totaled $12.5 million. Net loss adjusted for non-cash income and
expense items provided approximately $5.3 million. Working capital accounts used
$17.7 million of cash, as follows: Accounts receivable used $17.3 million,
inventories provided $11.5 million, interest accrued but not paid to a related
party provided $5.6 million, and net other current assets and liabilities used
$17.6 million. Other non-working capital items included in operations provided
$0.1 million. Cash used by operating activities in the nine months ended
September 30, 2006 totaled $11.5 million, and principally was caused by the net
loss of the period, as well as a seasonal increase in accounts receivable and a
$11.8 million decrease in current liabilities, driven by environmental
remediation payments.
Cash flow provided by inventory, with precious metal inventory measured
using LIFO cost, totaled $11.5 million in the nine months ended September 30,
2007. Inventory used $0.3 million of cash flow in the nine months ended
September 30, 2006. 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 $3.6
million in profit arising from the temporary liquidation of the LIFO inventory,
which is included in accrued liabilities on the September 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 addition, as
the Company sold the inventory that it had acquired in the Bairnco Acquisition
in April 2007, it recovered the manufacturing profit of $5.5 million that was
paid for the inventory at that date. Throughout 2006, the Company's quantity of
precious metal in inventory also declined, 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 nine month periods
ended September 30, 2007 and 2006 ($17.3 million and $9.7 million, respectively)
was principally caused by a seasonal increase in accounts receivable which
resulted from higher sales levels for the third 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 third quarter of 2007 (excluding Bairnco) were
$132.5 million, as compared to $101.4 million in the fourth quarter of 2006, an
increase of $31.1 million. Net sales in the third quarter of 2006 were $121.6
million, as compared to $99.2 million in the fourth quarter of 2005; an increase
of $22.4 million.
Net other current assets and liabilities used $11.9 million of cash flow
in the nine months ended September 30, 2007 and $10.9 million in the same period
of 2006. The 2007 period use of cash was driven by $21 million of payments made
to fund the WHX Pension Plan, and approximately $4.9 million of payments for
environmental remediation costs, but was partially offset by the accrual of $5.7
million of interest payable to a related party (net of payments), a current
liability related to the deferral of the temporary LIFO gain of $3.6 million
discussed above, and additional environmental remediation accruals totaling $2.5
million. The use of cash of $10.9 million in the nine months ended September 30,
2006 was driven by cash used for the payment of $14.4 million of environmental
remediation costs and payments to fund the WHX Pension Plan totaling $4.9
million, partially offset by the recording of a $2.9 million environmental
remediation accrual and a restructuring reserve of $2.4 million. Other
non-working capital items included in operating activities provided $0.1 million
in the nine months ended September 30, 2007, as compared to a use of $0.9
million in the same period of 2006.
31
Investing activities used $103.1 million in the nine months ended
September 30, 2007, driven by the Bairnco Acquisition, which used $99.5 million,
net of cash acquired. See discussion below for additional detail on the Bairnco
Acquisition. This was partially offset by $4.3 million of proceeds from the sale
of assets, principally related to the sale of the HHEM and certain of the
Norristown facility assets. Investing activities used $6.1 million in the nine
month ended September 30, 2006, and included net cash paid out for precious
metal derivative contracts of $7.2 million, but was partially offset by $7.2
million from the sale of assets in 2006 related to a discontinued operation. In
addition, capital spending in the nine months ended September 30, 2007 was $7.0
million, as compared to $6.8 million spent on capital improvements in the same
period of 2006.
Financing activities provided $119.6 million in the nine months ended
September 30, 2007, $101.4 million of which was due to the financing of the
Bairnco Acquisition, which is discussed more fully below. In July 2007, Bairnco
completed a refinancing of its debt which resulted in new term loan borrowings
of $76.0 million and payments of approximately $55.5 million to Steel and $14.8
million of term loan payments to its former credit bank. H&H borrowed a total of
$13.7 million from Steel; $5.7 million in July and $8.0 million in September
2007. There were additional net drawdowns of $7.9 million on the revolving
credit facilities of both H&H and Bairnco (post-acquisition), partially offset
by $6.3 million of additional principal repaid on term loans and $3.9 million
related to financing fees principally in connection with the extension of the
maturity of the H&H credit facilities and the refinancing of Bairnco's debt.
Financing activities provided $18.2 million of net cash in the nine months ended
September 30, 2006, principally from new term loan borrowings, which totaled
$26.0 million during the period. The increase in debt between December 31, 2005
and September 30, 2006 consisted of the following: On December 29, 2005, H&H
entered into an amendment to its Term B Loan with Steel 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.
BAIRNCO ACQUISITION
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
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 $101.4
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.
32
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.
OFF-BALANCE SHEET ARRANGEMENTS
It is not the Company's usual business practice to enter into
off-balance sheet arrangements such as guarantees on loans and financial
commitments, indemnification arrangements, and retained interests in assets
transferred to an unconsolidated entity for securitization purposes. Certain
customers and suppliers of the Precious Metal segment choose to do business on a
"pool" basis. Such customers or suppliers furnish precious metal to H&H for
return in fabricated form ("customer metal") or for purchase from or return to
the supplier. When the customer's precious metal is returned in fabricated form,
the customer is charged a fabrication charge. The value of consigned precious
metal is not included in the Company's balance sheet. As of September 30, 2007,
the Company held customer metal comprised of 735,564 ounces of silver, 377
ounces of gold, and 1,340 ounces of palladium. The market value per ounce of
silver, gold, and palladium as of September 30, 2007 was $13.80, $743.56, and
$343.75, respectively.
LIQUIDITY
The Company has incurred significant losses and negative cash flows from
operations in recent years, and as of September 30, 2007 had an accumulated
deficit of $431.5 million. As of September 30, 2007, the Company's current
assets totaled $216.0 million and its current liabilities totaled $356.8
million; a working capital deficit of $140.8 million. Included in the current
liabilities as of September 30, 2007 is a total of $124.2 million of loan
principal, interest, and manditorily redeemable preferred stock payable to
Steel, a related party. Such amounts are expected to be either partially or
totally repaid after the completion of a proposed rights offering. See Note 14 -
Subsequent Events. The Company's working capital deficit at December 31, 2006
was $1.6 million. As of September 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. If the
Company cannot refinance H&H's debt that is due on June 30, 2008, there can be
no assurance that H&H will be able to continue to operate its business or to
provide WHX with additional capital to fund its operations. As previously noted,
Bairnco's bank debt was refinanced in July 2007 with a new scheduled maturity of
2012. Additionally, at times over the past several years, H&H has not been in
compliance with certain of its bank covenants and has obtained a number of
waivers from its lenders related to such covenants.
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 credit facilities effectively do not permit it to
transfer any cash or other assets to WHX (with the exception of (i) an unsecured
loan for required payments to the WHX Pension Plan, (ii) an unsecured loan for
other uses in the aggregate principal amount not to exceed $3.5 million, of
which approximately $3.4 million has already been distributed, (iii) the loan,
distribution or other advance of up to approximately $7.4 million, subject to
certain limitations, to the extent loaned by Steel to H&H, of which
approximately $2.3 million has already been distributed, and (iv) up to $13.1
million to be used by WHX solely to make a contribution to the WHX Pension Plan,
which contribution of $13.0 million was made on September 12, 2007). H&H's
credit facilities are collateralized by substantially all of H&H's assets.
Similarly, Bairnco's bank credit facilities and term loan do not permit it to
make any distribution, pay any dividend or transfer any cash or other assets to
WHX other than common stock of Bairnco.
WHX's ongoing operating cash flow requirements consist of paying certain
administrative costs and funding the minimum requirements of the WHX Pension
Plan. On September 12, 2007, WHX made a payment to the WHX Pension Plan of
33
$13.0 million, which exceeded the minimum required contribution under ERISA. As
a result of such accelerated contribution, the future required contributions to
the WHX Pension Plan are expected to decline, with no contribution required in
2008, based on an estimate from our actuary. As of September 30, 2007, WHX and
its subsidiaries that are not restricted by loan agreements or otherwise from
transferring funds to WHX (collectively, its "Unrestricted Subsidiaries") had
cash of approximately $2.7 million and current liabilities of approximately $7.9
million, including $5.1 million of mandatorily redeemable preferred shares
payable to a related party.
H&H's availability under its revolving credit facility as of September 30,
2007, was approximately $18.0 million. On March 29, 2007, all such H&H credit
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 WHX 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
indirect subsidiary of H&H. 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 "Fairfield Superior Court") on December 18,
2006 in connection with the litigation known as HH East Parcel v. Handy & Harman
currently pending in the Fairfield Superior Court in the amount of approximately
$3.5 million 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 $3.5 million, and related matters (see Note 13- Contingencies).
On July 27, 2007, H&H and certain of its subsidiaries amended its credit
facilities, 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 approximately $7.4 million, and (iii) permit the
loan, distribution or other advances by H&H to WHX of up to approximately $7.4
million, subject to certain limitations, to the extent loaned by Steel to H&H as
permitted by these amendments. On July 31, 2007, Steel loaned H&H approximately
$5.7 million.
On September 10, 2007, H&H and certain of its subsidiaries amended its
credit facilities, to, among other things, (i) provide for an additional term
loan by Steel of $8.0 million to H&H and its subsidiaries, and (ii) permit a
loan by H&H to WHX of up to $13.1 million to be used by WHX solely to make a
contribution to the WHX Pension Plan. On September 12, 2007, the Company made a
payment to the WHX Pension Plan of $13.0 million, which exceeded the minimum
required contribution under ERISA. As a result of such accelerated contribution,
the Company's required contributions to the WHX Pension Plan over the next five
years are expected to decline, and the Company believes that the full amount of
the Internal Revenue Service ("IRS") conditional waiver of the minimum funding
requirements for the WHX Pension Plan for the 2005 plan year ("IRS Waiver") has
been repaid. Subject to the Pension Benefit Guaranty Corporation's ("PBGC")
confirmation that the IRS Waiver amount has been paid in full, the subordinate
liens granted to the PBGC shall be terminated.
On March 4, 2007, the Company sold certain assets, including the land and
building, certain machinery and equipment, and inventory of HHEM for net
proceeds of approximately $3.8 million. Of the total net proceeds, $2.5 million
was used to make an incremental payment to the WHX Pension Plan, pursuant to the
terms of a prior agreement with the PBGC. 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 to acquire Bairnco was provided by Steel
through two credit facilities, the Bridge Loan Agreement and the Subordinated
Loan Agreement, in the approximate aggregate amount of $101.4 million. The
availability under the Bairnco revolving credit facility on September 30, 2007
was approximately $12.6 million. See previous section-" Bairnco Acquisition" for
a complete description of these facilities.
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.
("Wells Fargo"), 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
34
Finance LLC ("Ableco"), 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"),
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). As a result of the $13.0
million contribution to the WHX Pension Plan in September 2007, however, the
Company's required contributions to the WHX Pension Plan over the next five
years are expected to decline, and the Company believes that the full amount of
the IRS Waiver has been repaid. Subject to the PBGC's confirmation that the IRS
Waiver amount has been paid in full, the subordinate liens granted to the PBGC
shall be terminated. 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 the H&H 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. The Company's inability to generate sufficient cash
flows from its operations or to refinance the H&H debt on commercially
reasonable terms could impair the liquidity of H&H and WHX, and will likely have
a material adverse effect on H&H's business, financial condition and results of
operations, and could raise substantial doubt that H&H and WHX will be able to
continue to operate.
On October 18, 2007, the Company filed a registration statement on Form
S-1 with the Securities and Exchange Commission (the "SEC") for a rights
offering to its existing stockholders. The rights offering will be made through
the distribution of non-transferable subscription rights to purchase shares of
the Company's common stock, par value $0.01 per share, at a subscription price
to be determined. Assuming the rights offering is fully subscribed, the Company
will receive gross proceeds of approximately $170 million, less expenses of the
rights offering. The Company intends to use the proceeds of the rights offering
to redeem preferred stock issued by a wholly-owned subsidiary of the Company and
to reduce its debt.
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The rights offering includes an oversubscription privilege which permits
each rights holder, that exercises its rights in full, to purchase additional
shares of common stock that remain unsubscribed at the expiration of the
offering. This oversubscription privilege is subject to (i) the availability and
allocation of shares among persons exercising this oversubscription privilege
and (ii) a maximum number of shares for which stockholders can oversubscribe for
without endangering the availability of the Company's NOLs under Section 382 of
the Internal Revenue Code, in each case as further described in the rights
offering documents.
Steel has indicated that it intends to exercise all of its rights and to
oversubscribe for the maximum number of shares it can oversubscribe for without
(i) endangering the availability of the Company's NOLs or (ii) increasing its
ownership to in excess of 75% of the outstanding shares of the Company's common
stock.
A registration statement relating to these securities has been filed with
the SEC but has not yet become effective.
The purpose of the rights offering is to raise equity capital in a
cost-effective manner that gives all the Company's stockholders the opportunity
to participate. The net proceeds will be used to redeem preferred stock issued
by a subsidiary of WHX and held by Steel, to repay WHX indebtedness to Steel,
and to repay a portion of the indebtedness of certain wholly-owned subsidiaries
of WHX to Steel and to their other lenders.
We do not anticipate that we will have any additional sources of cash flow
other than (i) as described above, (ii) from operations, (iii) from the sale of
non-core assets, (iv) from the refinancing of our debt and (v) from the proceeds
of the stock rights offering. In addition, the proceeds of the stock rights
offering are expected to be used to redeem preferred stock and to retire
indebtedness, and accordingly will not be available for general corporate
purposes. If we fail to refinance our debt and have a successful rights
offering, we will likely face substantial liquidity problems and our ability to
operate could be adversely affected.
*******
When used in the Management's Discussion and Analysis, the words
"anticipate", "estimate" and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, which are intended to be covered by the
safe harbors created thereby. Investors are cautioned that all forward-looking
statements involve risks and uncertainty, including without limitation, general
economic conditions and, the ability of the Company to develop markets and sell
its products and the effects of competition and pricing. Although the Company
believes that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included herein will prove
to be accurate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
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.
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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.
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ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. As required by Rule
13a-15(b) under the Securities Exchange Act of 1934, as amended, (the "Exchange
Act") we conducted an evaluation under the supervision and with the
participation of our management, including the Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based on that
evaluation we identified certain material weaknesses in our disclosure controls
and procedures (discussed below), and the Chief Executive Officer and the Chief
Financial Officer concluded that as of September 30, 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 September 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 nine month periods
ended September 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 Bairnco Acquisition 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;
38
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 of 2002 ("SOX"); 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 SOX.
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
Information in this Item 1 is incorporated by reference to Part I, Notes
to Condensed Consolidated Financial Statements (unaudited), Note
13-Contingencies-Legal Proceedings, of this report.
ITEM 1A. RISK FACTORS
Please see "Risk Factors" from the WHX Registration Statement on Form S-1
filed on October 18, 2007, a copy of such Risk Factors attached hereto as
Exhibit 99.1.
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 and Section 1350 of Chapter 63 of
Title 18 of United States Code.
* Exhibit 99.1 Risk Factors contained in WHX Corporation's Registration
Statement on Form S-1 filed on October 18, 2007.
* Filed herewith
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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)
November 13, 2007
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