Part
I. Item 1: Financial Statements
WHX
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Three
Months ended September 30,
|
|
|
Nine
Months ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands except per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
145,172
|
|
|
$
|
195,331
|
|
|
$
|
417,421
|
|
|
$
|
564,631
|
|
Cost
of goods sold
|
|
|
109,183
|
|
|
|
143,854
|
|
|
|
316,733
|
|
|
|
425,754
|
|
Gross
profit
|
|
|
35,989
|
|
|
|
51,477
|
|
|
|
100,688
|
|
|
|
138,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
24,469
|
|
|
|
34,690
|
|
|
|
81,801
|
|
|
|
104,882
|
|
Pension
expense (credit)
|
|
|
3,521
|
|
|
|
(2,185
|
)
|
|
|
10,436
|
|
|
|
(6,555
|
)
|
Asset
impairment charges
|
|
|
-
|
|
|
|
-
|
|
|
|
2,046
|
|
|
|
-
|
|
Goodwill
impairment charge
|
|
|
1,140
|
|
|
|
-
|
|
|
|
1,140
|
|
|
|
-
|
|
Proceeds
from insurance claims, net
|
|
|
(3,000
|
)
|
|
|
(757
|
)
|
|
|
(3,000
|
)
|
|
|
(3,447
|
)
|
Restructuring
charges
|
|
|
625
|
|
|
|
278
|
|
|
|
2,350
|
|
|
|
1,628
|
|
Other
operating expense (income)
|
|
|
(136
|
)
|
|
|
73
|
|
|
|
(239
|
)
|
|
|
245
|
|
Income
from continuing operations
|
|
|
9,370
|
|
|
|
19,378
|
|
|
|
6,154
|
|
|
|
42,124
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
6,693
|
|
|
|
8,981
|
|
|
|
18,768
|
|
|
|
30,211
|
|
Realized
and unrealized (gain) loss on derivatives
|
|
|
622
|
|
|
|
(400
|
)
|
|
|
316
|
|
|
|
925
|
|
Other
expense (income)
|
|
|
(53
|
)
|
|
|
637
|
|
|
|
(169
|
)
|
|
|
655
|
|
Income
(loss) from continuing operations before tax
|
|
|
2,108
|
|
|
|
10,160
|
|
|
|
(12,761
|
)
|
|
|
10,333
|
|
Tax
provision
|
|
|
261
|
|
|
|
841
|
|
|
|
427
|
|
|
|
2,311
|
|
Income
(loss) from continuing operations, net of tax
|
|
|
1,847
|
|
|
|
9,319
|
|
|
|
(13,188
|
)
|
|
|
8,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations, net of tax
|
|
|
(1,029
|
)
|
|
|
149
|
|
|
|
(2,938
|
)
|
|
|
567
|
|
Gain
on disposal, net of tax
|
|
|
182
|
|
|
|
-
|
|
|
|
1,671
|
|
|
|
-
|
|
Net
income (loss) from discontinued operations
|
|
|
(847
|
)
|
|
|
149
|
|
|
|
(1,267
|
)
|
|
|
567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,000
|
|
|
$
|
9,468
|
|
|
$
|
(14,455
|
)
|
|
$
|
8,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations, net of tax
|
|
$
|
0.15
|
|
|
$
|
5.39
|
|
|
$
|
(1.08
|
)
|
|
$
|
6.44
|
|
Discontinued
operations, net of tax
|
|
|
(0.07
|
)
|
|
|
0.09
|
|
|
|
(0.11
|
)
|
|
|
0.45
|
|
Net
income (loss)
|
|
$
|
0.08
|
|
|
$
|
5.48
|
|
|
$
|
(1.19
|
)
|
|
$
|
6.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
12,179
|
|
|
|
1,729
|
|
|
|
12,179
|
|
|
|
1,246
|
|
SEE NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
WHX
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars
and shares in thousands)
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
9,998
|
|
|
$
|
8,656
|
|
Trade
and other receivables - less allowance for doubtful
accounts
of $3,190 and $3,174 at 9/30/09 and 12/31/08,
respectively
|
|
|
82,260
|
|
|
|
79,696
|
|
Inventories
|
|
|
67,703
|
|
|
|
71,846
|
|
Deferred
income taxes
|
|
|
1,106
|
|
|
|
1,310
|
|
Other
current assets
|
|
|
9,159
|
|
|
|
10,285
|
|
Current
assets of discontinued operations
|
|
|
1,204
|
|
|
|
7,187
|
|
Total
current assets
|
|
|
171,430
|
|
|
|
178,980
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment at cost, less
accumulated
depreciation and amortization
|
|
|
90,802
|
|
|
|
98,423
|
|
Goodwill
|
|
|
63,949
|
|
|
|
65,070
|
|
Other
intangibles, net
|
|
|
34,758
|
|
|
|
36,965
|
|
Non-current
assets of discontinued operations
|
|
|
2,790
|
|
|
|
4,084
|
|
Other
non-current assets
|
|
|
15,361
|
|
|
|
18,718
|
|
|
|
$
|
379,090
|
|
|
$
|
402,240
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Trade
payables
|
|
$
|
44,019
|
|
|
$
|
35,965
|
|
Accrued
environmental liability
|
|
|
7,145
|
|
|
|
8,478
|
|
Accrued
liabilities
|
|
|
26,169
|
|
|
|
36,890
|
|
Current
portion of pension liability
|
|
|
9,200
|
|
|
|
1,800
|
|
Accrued
interest expense - related party
|
|
|
1,234
|
|
|
|
262
|
|
Current
portion of long-term debt
|
|
|
5,944
|
|
|
|
8,295
|
|
Short-term
debt
|
|
|
28,963
|
|
|
|
32,970
|
|
Deferred
income taxes
|
|
|
257
|
|
|
|
257
|
|
Current
liabilities of discontinued operations
|
|
|
326
|
|
|
|
5,787
|
|
Total
current liabilities
|
|
|
123,257
|
|
|
|
130,704
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
98,144
|
|
|
|
110,174
|
|
Long-term
debt - related party
|
|
|
54,098
|
|
|
|
54,098
|
|
Accrued
interest expense - related party
|
|
|
9,107
|
|
|
|
2,237
|
|
Accrued
pension liability
|
|
|
134,841
|
|
|
|
132,190
|
|
Other
employee benefit liabilities
|
|
|
3,741
|
|
|
|
4,233
|
|
Deferred
income taxes
|
|
|
5,009
|
|
|
|
5,307
|
|
Long-term
liabilities of discontinued operations
|
|
|
111
|
|
|
|
188
|
|
Other
liabilities
|
|
|
5,554
|
|
|
|
5,016
|
|
|
|
|
433,862
|
|
|
|
444,147
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
(Deficit) Equity:
|
|
|
|
|
|
|
|
|
Preferred
stock- $.01 par value; authorized 5,000
shares; issued and
outstanding -0- shares
|
|
|
-
|
|
|
|
-
|
|
Common
stock -$.01 par value; authorized 180,000 shares;
issued and
outstanding 12,179 shares
|
|
|
122
|
|
|
|
122
|
|
Accumulated
other comprehensive loss
|
|
|
(162,148
|
)
|
|
|
(163,502
|
)
|
Additional
paid-in capital
|
|
|
552,819
|
|
|
|
552,583
|
|
Accumulated
deficit
|
|
|
(445,565
|
)
|
|
|
(431,110
|
)
|
Total
stockholders' deficit
|
|
|
(54,772
|
)
|
|
|
(41,907
|
)
|
|
|
$
|
379,090
|
|
|
$
|
402,240
|
|
SEE NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
WHX
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(14,455
|
)
|
|
$
|
8,589
|
|
Adjustments
to reconcile net income (loss) to net cash provided by
(used in)
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
14,229
|
|
|
|
15,744
|
|
Non-cash
stock based compensation
|
|
|
173
|
|
|
|
378
|
|
Amortization
of debt related costs
|
|
|
1,329
|
|
|
|
1,441
|
|
Long-term
interest on related party debt
|
|
|
6,870
|
|
|
|
5,285
|
|
Deferred
income taxes
|
|
|
(141
|
)
|
|
|
(362
|
)
|
Loss
on asset dispositions
|
|
|
59
|
|
|
|
159
|
|
Asset
impairment charges
|
|
|
2,046
|
|
|
|
-
|
|
Goodwill
impairment charge
|
|
|
1,140
|
|
|
|
-
|
|
Unrealized
loss (gain) on derivatives
|
|
|
135
|
|
|
|
(249
|
)
|
Reclassification
of net cash settlements on derivative instruments
|
|
|
181
|
|
|
|
1,174
|
|
Net
cash provided by operating activities of discontinued
operations
|
|
|
4,075
|
|
|
|
1,561
|
|
Decrease
(increase) in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade
and other receivables
|
|
|
(2,247
|
)
|
|
|
(27,427
|
)
|
Inventories
|
|
|
4,390
|
|
|
|
4,774
|
|
Other
current assets
|
|
|
1,010
|
|
|
|
2,530
|
|
Accrued
interest expense-related party
|
|
|
972
|
|
|
|
(19,615
|
)
|
Other
current liabilities
|
|
|
5,010
|
|
|
|
1,258
|
|
Other
items-net
|
|
|
(174
|
)
|
|
|
259
|
|
Net
cash provided by (used in) operating activities
|
|
|
24,602
|
|
|
|
(4,501
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Plant
additions and improvements
|
|
|
(4,963
|
)
|
|
|
(9,926
|
)
|
Net
cash settlements on derivative instruments
|
|
|
(181
|
)
|
|
|
(1,174
|
)
|
Proceeds
from sales of assets
|
|
|
252
|
|
|
|
8,179
|
|
Proceeds
from sale of investment
|
|
|
3,113
|
|
|
|
-
|
|
Net
cash provided by sales of assets of discontinued
operations
|
|
|
2,640
|
|
|
|
-
|
|
Net
cash provided by (used in) investing activities
|
|
|
861
|
|
|
|
(2,921
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
of stock-rights offering
|
|
|
-
|
|
|
|
155,790
|
|
Proceeds
from term loans - domestic
|
|
|
9,328
|
|
|
|
4,000
|
|
Net
revolver repayments
|
|
|
(4,286
|
)
|
|
|
(13,127
|
)
|
Net
proceeds of term loans - foreign
|
|
|
249
|
|
|
|
-
|
|
Repayments
of term loans - domestic
|
|
|
(23,732
|
)
|
|
|
(16,394
|
)
|
Repayments
of term loans - related party
|
|
|
-
|
|
|
|
(111,188
|
)
|
Deferred
finance charges
|
|
|
(2,228
|
)
|
|
|
(1,534
|
)
|
Net
change in overdrafts
|
|
|
1,089
|
|
|
|
3,845
|
|
Net
cash used to repay debt of discontinued operations
|
|
|
(4,559
|
)
|
|
|
(371
|
)
|
Other
|
|
|
(208
|
)
|
|
|
-
|
|
Net
cash provided by (used in) financing activities
|
|
|
(24,347
|
)
|
|
|
21,021
|
|
Net
change for the period
|
|
|
1,116
|
|
|
|
13,599
|
|
Effect
of exchange rate changes on net cash
|
|
|
226
|
|
|
|
(3
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
8,656
|
|
|
|
6,090
|
|
Cash
and cash equivalents at end of period
|
|
$
|
9,998
|
|
|
$
|
19,686
|
|
SEE NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
WHX
CORPORATION
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES
IN
STOCKHOLDERS’ (DEFICIT) EQUITY
(Dollars
and shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Accumulated
Other Comprehensive
|
|
|
Accumulated
|
|
|
Additional
Paid-In
|
|
|
Total
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Loss
|
|
|
Deficit
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2008
|
|
|
12,179
|
|
|
$
|
122
|
|
|
$
|
(163,502
|
)
|
|
$
|
(431,110
|
)
|
|
$
|
552,583
|
|
|
$
|
(41,907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
period change
|
|
|
|
|
|
|
|
|
|
|
1,354
|
|
|
|
|
|
|
|
|
|
|
|
1,354
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,455
|
)
|
|
|
|
|
|
|
(14,455
|
)
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,101
|
)
|
Amortization
of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
236
|
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2009
|
|
|
12,179
|
|
|
$
|
122
|
|
|
$
|
(162,148
|
)
|
|
$
|
(445,565
|
)
|
|
$
|
552,819
|
|
|
$
|
(54,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
Comprehensive Income
(Loss)
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Net
income (loss)
|
|
$
|
(14,455
|
)
|
|
$
|
8,589
|
|
Foreign
currency translation adjustment
|
|
|
1,304
|
|
|
|
(353
|
)
|
Valuation
of marketable equity securities
|
|
|
50
|
|
|
|
-
|
|
|
|
$
|
(13,101
|
)
|
|
$
|
8,236
|
|
SEE NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - The Company and
Nature of Operations
WHX
Corporation, the parent company (“WHX”), manages a group of businesses on a
decentralized basis. WHX owns Handy & Harman (“H&H”), which
is a diversified holding company whose strategic business units encompass three
reportable segments: Precious Metal, Tubing, and Engineered
Materials. WHX also owns Bairnco Corporation (“Bairnco”), which has
business units in three reportable segments: Arlon Electronic Materials, Arlon
Coated Materials, and Kasco Replacement Products and Services. See Note 15
“Reportable Segments” for a description of the business and products of each of
the Company’s segments. The business units of H&H and Bairnco
principally operate in North America. WHX, together with all of its
subsidiaries, are referred to herein as the “Company.”
Note 2 – Liquidity and
Management’s Plans
The
Company’s third quarter net sales and profitability continue to reflect the
adverse effects of the world-wide economic recession which became evident in the
second half of 2008. Significant end market declines were experienced
by many of the Company’s served markets, especially general industrial,
residential and industrial construction, transportation, and appliance markets.
This had a material adverse effect on almost all of the Company’s businesses,
driving sales down by 26% in the three and nine months ended September 30, 2009
as compared to the same periods of 2008. Although the Arlon Coated
Materials segment reported higher segment operating income for the quarter ended
September 30, 2009, the Company’s other reportable segments experienced declines
in segment operating income for both the quarter and nine months ended September
30, 2009 compared to the same periods in 2008.
In late
2008, management prepared contingency plans to respond to the deteriorating
economic conditions which were aggressively implemented in
2009. Significant extraordinary cost containment actions were
initiated and are continuing across all of the business segments and the
corporate headquarters. These 2009 actions include a reduction in
compensation and benefits for salaried employees, layoffs in both the salaried
and hourly workforce, the temporary idling of certain of the Company’s
manufacturing facilities for various periods during 2009 to better match
production with customer demand, and certain restructuring activities. The
Company believes that the 2009 restructuring activities will strengthen its
competitive position over the long term.
Income
from continuing operations for the nine months ended September 30, 2009 declined
by $36.0 million from $42.1 million to $6.2 million, primarily as a result of
lower sales from all reportable segments, which was partially offset by lower
selling, general and administrative costs and a $3.0 million gain on proceeds
from an insurance claim. The 2009 income from continuing operations
included non-cash asset and goodwill impairment charges of $3.2 million and
non-cash pension expense of $10.4 million compared to pension-related income of
$6.6 million for the same period of the prior year. The 2009 non-cash pension
expense was principally a result of actuarial loss amortization. Such
actuarial loss occurred primarily because investment return on the assets of the
WHX Pension Plan during 2008 was significantly less than the assumed return of
8.5%, partially offset by an increase in discount rates. In addition, during the
nine months ended September 30, 2009, income from continuing operations included
a non-cash gain of $0.7 million from the liquidation of precious metal
inventories valued under the last-in-first-out inventory method (“LIFO”), as
compared to a non-cash LIFO liquidation gain of $2.5 million in the same period
of 2008. The 2009 period was also negatively impacted by a $1.9 million higher
operating loss at the Company’s Sumco operation (which is currently being wound
down and is anticipated to be classified as a discontinued operation by
year-end).
The
Company expects to continue its initiatives to improve its operating
efficiencies, working capital management and capital allocation, as well as its
extraordinary cost containment measures at least through the end of
2009. Management believes that these initiatives are positioning the
Company to realize enhanced performance as the global economy and the markets
the Company serves recover.
The
Company reduced its debt during the third quarter of 2009 through unscheduled
repayments of third-party long-term debt of approximately $8.6
million. On August 19, 2009, the proceeds of an insurance claim of
$3.2 million were used to repay $3.0 million of H&H’s Loan and Security
Agreement with Wachovia Bank, N.A. (“Wachovia”), as agent (the “Wachovia
Facilities”). In addition, on August 19, 2009, Bairnco repaid $3.0
million of its Credit Agreement with Ableco Finance LLC (“Ableco”), as
administrative agent thereunder (the “Ableco Facility”). H&H’s
subsidiary, Indiana Tube Denmark, which is classified as a discontinued
operation, repaid $2.6 million of its mortgage loan using proceeds from the sale
of equipment. In the second quarter, Indiana Tube Denmark repaid $2.1
million of debt.
Furthermore,
Bairnco’s availability for revolving credit under its Credit Agreement with
Wells Fargo Foothill, Inc. (“Wells Fargo”), as arranger and administrative agent
thereunder (the “Wells Fargo Facility”) was increased by eliminating a letter of
credit in the face amount of $2.2 million. The letter of credit had
been issued under the Wells Fargo Facility to support separate financing
arrangements in China for one of the Bairnco subsidiaries. These arrangements
were refinanced to eliminate the supporting letter of credit requirement and are
instead collateralized by existing unencumbered real estate owned by the
subsidiary in China. As a result of this refinancing, Bairnco’s total
outstanding letters of credit were reduced from $5.2 million to $3.0 million,
thereby increasing Bairnco’s availability under the Wells Fargo Facility by $2.2
million.
The
Company had $24.6 million of cash flow provided by operating activities for the
nine months ended September 30, 2009, as compared to using $4.5 million in the
same nine month period of 2008. Cash flow provided by operating activities for
2008 included the non-recurring payment of accrued interest of $31.3
million. As of September 30, 2009, H&H’s availability under its
credit facilities was $26.3 million, and Bairnco’s U.S. availability was $10.6
million.
In
2008, the Company reported net income of $3.0 million, but in years prior to
2008, the Company incurred significant losses and used significant amounts of
cash in operating activities. As of September 30, 2009, the Company
had an accumulated deficit of $445.6 million. As of September 30,
2009, the Company’s current assets totaled $171.4 million and its current
liabilities totaled $123.3 million; for net working capital of $48.1
million. The Company reduced its level of debt substantially in 2008,
from $359.4 million as of January 1, 2008 to $210.2 million as of December 31,
2008 and $187.1 million as of September 30, 2009, principally through a rights
offering completed by the Company on September 25, 2008 (the “Rights
Offering”). The Rights Offering generated $156.5 million of cash,
which was used by the Company to repay $142.5 million of indebtedness to Steel
Partners II, L.P. (“SP II”), the Company’s largest shareholder at that time, and
$13.2 million of additional debt.
WHX Corporation, the parent
company
WHX, the
parent company, has as its sole source of cash flow, distributions from its
principal subsidiaries, H&H and Bairnco, or other discrete
transactions. H&H’s credit facilities effectively do not permit
it to transfer any cash or other assets to WHX with the exception of (i) an
unsecured loan for required payments to the WHX Pension Plan, and (ii) an
unsecured loan for other uses in the aggregate principal amount not to exceed
$12.0 million, $9.5 million of which has been distributed. The
remaining $2.5 million is not permitted to be loaned to WHX before March 31,
2010. H&H’s credit facilities are collateralized by substantially
all of the assets of H&H and its subsidiaries. Bairnco’s credit
facilities and term loan do not permit it to make any distribution, pay any
dividend or transfer any cash or other assets to WHX other than common stock of
Bairnco and up to $0.6 million annually for services performed by WHX on behalf
of Bairnco, under certain circumstances. Bairnco’s credit facilities
are secured by a first priority lien on all of the assets of Bairnco and of its
U.S. subsidiaries.
WHX’s
ongoing operating cash flow requirements consist of arranging for the funding of
the minimum requirements of the WHX Pension Plan and paying WHX’s administrative
costs. The significant decline in 2008 of prices across a
cross-section of financial markets resulted in an accrued pension liability of
the WHX Pension Plan of $144.0 million as of September 30, 2009. The
Company expects to have required minimum contributions to the WHX Pension Plan
for 2009 and 2010 of $1.8 million (with $1.4 million remaining for 2009 as of
September 30, 2009) and $9.7 million, respectively. Such required
future contributions are determined based upon assumptions regarding such
matters as discount rates on future obligations, assumed rates of return on plan
assets and legislative changes. Actual future pension costs and
required funding obligations will be affected by changes in the factors and
assumptions described in the previous sentence, as well as other changes such as
a plan termination.
As of
September 30, 2009, WHX and its subsidiaries that are not restricted by loan
agreements or otherwise from transferring funds to WHX had cash of approximately
$3.6 million and current liabilities of approximately $0.9
million. On July 31, 2009, WHX CS Corp., one of these unrestricted
subsidiaries of WHX, sold its equity investment in CoSine Communications, Inc.
to SP II for $3.1 million. A subordinated secured loan of $3.0
million was made by WHX to Bairnco in connection with Bairnco’s partial
repayment of their Ableco Facility.
Management
expects that WHX will be able to fund its operations in the ordinary course of
business over at least the next twelve months.
Handy & Harman and
Bairnco
Widely-documented
commercial credit market disruptions have resulted in a tightening of credit
markets worldwide. Liquidity in the global credit market has been
severely contracted by these market disruptions, making it costly to obtain new
lines of credit or to refinance existing debt, when debt financing is available
at all. The effects of these disruptions are widespread and difficult
to quantify, and it is impossible to predict when the global credit market will
improve or when the credit contraction will significantly ease. As a
result of the ongoing credit market conditions, the Company may not be able to
obtain additional debt or equity financing if necessary or
desired. Furthermore, one or more of the financial institutions that
make available H&H and Bairnco’s revolving credit facilities may become
unable to fulfill their funding obligations, which could materially and
adversely affect liquidity.
On March
12, 2009, H&H and its subsidiaries amended each of the Wachovia Facilities,
and their Loan and Security Agreement with SP II (the “Term B Loan”) to, among
other things, (i) extend the term of the loans for two years until June 30,
2011, (ii) increase certain interest rates, (iii) reset the levels of certain
financial covenants, (iv) permit the disposition and/or cessation of operations
of certain of H&H’s direct and indirect subsidiaries (v) provide for an
increase in the aggregate amount of unsecured loans, distributions or other
advances from H&H to WHX for general business purposes from up to $7.0
million to up to $12.0 million, subject to a maximum additional amount of $2.5
million prior to March 31, 2010, and (vi) provide for an increase in the
existing limited guaranty by H&H of Bairnco’s obligations under the Ableco
Facility from up to $7.0 million to up to $12.0 million. In addition,
the Wachovia Facilities were also amended to, among other things, reduce the
amount of the credit facility from $125.3 million to $115.0 million including
decreasing the revolving credit facility from $83.0 million to $75.0
million.
On May 8,
2009, H&H and its subsidiaries further amended the Wachovia Facilities to
provide for, among other things, additional term loans to the borrowers
thereunder in the aggregate principal amount of approximately $5.3 million,
which were consolidated with the existing term loans under the Wachovia
Facilities for a combined aggregate principal amount of $15.0 million, and
additional guaranties by certain subsidiary trusts. Pursuant to this
amendment: (i) a portion of the obligations under the tranche B term loan under
the Wachovia Facilities was prepaid in an amount equal to $5.0 million; and (ii)
the remaining available proceeds of the term loans are to be used for operating
and working capital purposes. The Term B Loan was also amended on May 8,
2009 to provide for additional guaranties by certain subsidiary
trusts.
Effective
July 31, 2009, H&H and its subsidiaries amended each of the Wachovia
Facilities and the Term B Loan to, among other things, (i) reset certain
financial covenants, (ii) increase the existing limited H&H Guaranty of
Bairnco’s obligations under the Ableco Facility from up to $12 million to up to
$17 million, and (iii) provide for the repayment of a portion of the term loan
under the Wachovia Facilities in the amount of $3.0 million.
On March
12, 2009, Bairnco and certain of its subsidiaries amended the Ableco Facility
and the Wells Fargo Facility to, among other things, (i) increase the interest
rates and (ii) reset the levels of certain financial covenants. The
Ableco Facility was also amended to provide for, among other things, an increase
in the existing limited guaranty by H&H of Bairnco’s obligations under the
Ableco Facility from up to $7 million to up to $12 million, secured by a second
lien on all of the assets of H&H pursuant to the terms and conditions of
that certain Security Agreement by H&H in favor of Ableco (the “H&H
Security Agreement”) and that certain Limited Continuing Guaranty by H&H in
favor of Ableco (the “H&H Guaranty”). Bairnco’s Credit Agreement
with SP II (the “Subordinated Debt Credit Agreement”) was also amended to, among
other things, increase the interest rates.
Effective
August 18, 2009, Bairnco and certain of its subsidiaries also amended the Ableco
Facility to, among other things, (i) reset certain financial covenants, (ii)
increase the existing limited H&H Guaranty of Bairnco’s obligations under
the Ableco Facility from up to $12 million to up to $17 million and (iii)
provide for the repayment of a portion of the Ableco Facility in the amount of
$3.0 million. The Wells Fargo Facility and the Subordinated Debt Credit
Agreement were also amended effective August 18, 2009, to, among other things,
(i) reset certain financial covenants to levels consistent with the Ableco
Facility, as amended, and (ii) permit the repayment of a portion of the Ableco
Facility in the amount of $3.0 million.
The
ability of both H&H and Bairnco to draw on their respective revolving lines
of credit is limited by their respective borrowing base of accounts receivable
and inventory. As of September 30, 2009, H&H’s availability under
its credit facilities was $26.3 million, and Bairnco’s availability under its
U.S. credit facilities was $10.6 million.
There can
be no assurances that H&H and Bairnco will continue to have access to all or
any of their lines of credit if their respective operating and financial
performance does not satisfy the relevant borrowing base criteria and financial
covenants set forth in the applicable financing agreements. If either
H&H or Bairnco do not meet certain of their respective financial covenants
or satisfy the relevant borrowing base criteria, and if they are unable to
secure necessary waivers or other amendments from the respective lenders on
terms acceptable to management, their ability to access available lines of
credit could be limited, their debt obligations could be accelerated by their
respective lenders, and their liquidity could be adversely
affected.
Shelf Registration
Statement
Pursuant
to a shelf registration statement filed on Form S-3 with the Securities and
Exchange Commission (“SEC”) and declared effective on June 29, 2009, the Company
may, from time to time, issue up to $25 million of its common stock, preferred
stock, debt securities, warrants to purchase common stock, preferred stock, or
debt securities, or any combination of the above, separately or as units. The
terms of any offerings under the shelf registration statement will be determined
at the time of the offering. The Company does not presently have any
definitive plans or current commitments to sell securities that may be
registered under the shelf registration statement. However,
management believes that the shelf registration statement provides the Company
with the flexibility to quickly raise capital in the market as conditions become
favorable with a minimum of administrative preparation and
expense. The net proceeds of any such issuances under the shelf
registration statement are expected to be used for general corporate purposes,
which may include working capital and/or capital expenditures.
Summary
Management
believes that the Company has the ability to meet its capital requirements on a
continuing basis for at least the next twelve months. However, the ability of
the Company to meet its cash requirements for at least the next twelve months is
dependent, in part, on the Company’s continuing ability to meet its business
plans. The Company continues to examine all of its options and strategies,
including acquisitions, divestitures, and other corporate transactions, to
increase cash flow and stockholder value. If the Company’s planned cash flow
projections are not met, management could consider the additional reduction of
certain discretionary expenses and sale of certain assets. See Note 6
“Restructuring”.
Management
is utilizing the following strategies to enhance liquidity: (1) continuing to
implement improvements throughout all of the Company’s operations to increase
operating efficiencies, (2) supporting profitable sales growth both internally
and potentially through acquisitions, (3) evaluating strategic alternatives with
respect to all lines of business and/or assets and (4) seeking financing
alternatives that may lower its cost of capital and/or enhance current cash
flow. The Company also plans to continue, as appropriate, certain of
the extraordinary cost containment measures that it implemented at least through
the end of 2009.
However,
if the Company’s cash needs are greater than anticipated or the Company does not
materially meet its business plan, the Company may be required to seek
additional or alternative financing sources. There can be no
assurance that such financing will be available or available on terms acceptable
to the Company. There can be no assurance that the funds available
from operations and under the Company’s credit facilities will be sufficient to
fund its debt service costs, working capital demands, pension plan
contributions, and environmental remediation costs. The Company’s
inability to generate sufficient cash flows from its operations or through
financing could impair its liquidity, and would likely have a material adverse
effect on its businesses, financial condition and results of operations, and
could raise substantial doubt that the Company will be able to continue to
operate.
Note 3 - Basis of
Presentation
The
condensed consolidated balance sheet as of December 31, 2008, which has been
derived from audited financial statements, and the unaudited condensed
consolidated financial statements included herein have been prepared by the
Company in accordance with the rules and regulations of the SEC. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted in accordance with those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information not misleading. This quarterly report on Form 10-Q should
be read in conjunction with the Company's audited consolidated financial
statements contained in Form 10-K for the year ended December 31,
2008. Certain amounts for the prior year have been reclassified to
conform to the current year presentation.
In the
opinion of management, the interim financial statements reflect all normal and
recurring adjustments necessary to present fairly the consolidated financial
position and the results of operations and changes in cash flows for the interim
periods. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates. The results of operations for the three and nine months
ended September 30, 2009 are not necessarily indicative of the operating results
for the full year.
On
November 24, 2008, the Company consummated a 1-for-10 reverse stock split of its
outstanding common stock (the “Reverse Stock Split”). Pursuant to the
Reverse Stock Split, every ten (10) shares of common stock issued and
outstanding at the time the split was affected were changed and reclassified
into one (1) share of common stock immediately following the Reverse Stock
Split. To enhance comparability, unless otherwise noted, all
references herein to the Company’s common stock and per share amounts have been
adjusted on a retroactive basis as if the Reverse Stock Split had occurred on
January 1, 2008.
Note 4 – Recently Issued
Accounting Pronouncements
In July
2009, the Financial Accounting Standards Board (“FASB”) issued “The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles” (“the Codification” or “ASC”). The
Codification was effective for the Company’s third-quarter 2009 financial
statements. The Codification is the official single source of
authoritative U.S. generally accepted accounting principles (“GAAP”) and all
existing accounting standards have been superseded. All other accounting
guidance not included in the Codification are considered non-authoritative. The
Codification also includes all relevant SEC guidance organized using the same
topical structure in separate sections within the Codification. The Codification
did not change GAAP and all references to authoritative accounting literature
included herein have now been referenced in accordance with the
Codification.
In May
2009, the FASB issued ASC No. 855 “Subsequent Events” (“ASC
855”). ASC 855 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued. This statement sets forth the period
after the balance sheet date that management should evaluate events for
transactions that may occur for potential recognition or disclosure in the
financial statements. ASC 855 also sets forth the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements and the disclosures that an
entity should make about events or transactions that occurred after the balance
sheet date. ASC 855 was applicable to interim or annual financial
periods ending after June 15, 2009. The Company adopted ASC 855 in
the second quarter of 2009, and its adoption did not have a significant effect
on the Company’s consolidated financial position and results of
operations. The Company has evaluated subsequent events for potential
recognition and disclosure through the date of issuance of these financial
statements.
In April
2009, the FASB issued ASC No. 825, “Interim Disclosures about Fair Value of
Financial Instruments” (“ASC 825”), which increases the frequency of fair value
disclosures from an annual to a quarterly basis. ASC 825 was
effective for interim and annual periods ending after June 15, 2009, and
the Company adopted its provisions in the second quarter of 2009. The
adoption of ASC 825 did not impact the Company’s financial position or results
of operations. See Note 7 “Fair Value Measurements”.
In April
2009, the FASB issued ASC No. 820-10, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly” (“ASC 820-10”). It provides
guidance for estimating fair values when there is no active market or where the
price inputs being used represent distressed sales and identifying circumstances
that indicate a transaction is not orderly. ASC 820-10 was effective for interim
and annual reporting periods ending after June 15, 2009, and the Company
adopted it in the second quarter of 2009. Adoption of ASC 820-10 did
not have any effect on the Company’s financial position or results of
operations.
In
December 2008, the FASB issued ASC No. 715-20, “Employer’s Disclosures about
Postretirement Benefit Plan Assets” (“ASC 715-20”), to provide guidance on an
employer’s disclosures about plan assets of a defined benefit pension or other
postretirement plan. ASC 715-20 will become effective for financial
statements issued for fiscal years and interim periods ending after December 15,
2009. ASC 715-20 changes the disclosure requirements for benefit plan
assets, but does not change the accounting for such assets or plans, and
therefore, the Company believes that its adoption will not have an effect on its
consolidated financial position and results of operations.
In March
2008, the FASB issued ASC No. 815-10, “Disclosures about Derivative Instruments
and Hedging Activities” (“ASC 815-10”), which changed the disclosure
requirements for derivative instruments and hedging activities, but did not
change the accounting for such instruments. Therefore, the adoption
of ASC 815-10 did not have an effect on the Company’s consolidated financial
position and results of operations. ASC 815-10 became effective in
the first quarter of 2009. See Note 11 “Derivative
Instruments”.
In
September 2006, the FASB issued ASC No. 820, “Fair Value Measurements” (“ASC
820”) which defined fair value, established a framework for measuring fair value
in accordance with GAAP, and expanded disclosures about fair value
measurements. ASC 820 did not require any new fair value
measurements; rather, it applies under other accounting pronouncements that
require or permit fair value measurements. On January 1, 2009, the
Company adopted ASC 820 for all non-financial assets and liabilities measured at
fair value on a non-recurring basis. The application of ASC 820 did
not have an impact on the Company's financial position or results of operations
as it related only to disclosure. The Company's non-financial assets
measured at fair value on a non-recurring basis include goodwill and intangible
assets. In a business combination, the non-financial assets and
liabilities of the acquired company would be measured at fair value in
accordance with ASC 820. The requirements of ASC 820 include using an exit price
based on an orderly transaction between market participants at the measurement
date assuming the highest and best use of the asset by market participants. The
Company would use a market, income or cost approach valuation technique to
perform the valuations. The Company performs an annual impairment
analysis of goodwill and indefinite-lived intangible assets as of the fourth
quarter of each year, unless there has been an impairment trigger event relating
to goodwill or intangible assets during the interim period. See Note
7 “Fair Value Measurements”.
In
December 2007, the FASB issued ASC No. 810, “Non-controlling Interests in
Consolidated Financial Statements” (“ASC 810”), which established accounting and
reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. ASC 810 became effective for fiscal
years beginning after December 15, 2008. The Company adopted ASC 810
on January 1, 2009, and its adoption did not have a significant effect on the
Company’s consolidated financial position and results of
operations.
In
December 2007, the FASB also issued ASC No. 805, “Business Combinations” (“ASC
805”), which requires an entity to recognize assets acquired, liabilities
assumed, contractual contingencies and contingent consideration at their fair
value on the acquisition date. ASC 805 also requires that (1)
acquisition-related costs be expensed as incurred; (2) restructuring costs
generally be recognized as a post-acquisition expense; and (3) changes in
deferred tax asset valuation allowances and income tax uncertainties after the
measurement period impact income tax expense. The Company adopted ASC 805 on
January 1, 2009, and its adoption did not have a significant effect on the
Company’s consolidated financial position and results of
operations.
Note 5 – Discontinued
Operations
In 2008,
management decided to exit the welded specialty tubing market in Europe and
close its Indiana Tube Denmark subsidiary (“ITD”), sell ITD’s assets, pay off
ITD’s debt with cash generated by ITD, and repatriate the remaining cash. The
decision to exit this market was made after evaluating current economic
conditions and ITD’s capabilities, served markets, and
competitors. In conjunction with the decision to close ITD, the
Company reviewed the recoverability of ITD’s long-lived assets in accordance
with ASC No 360, “Accounting for Impairment or Disposal of Long-Lived
Assets.” A review of future cash flows, based on the expected closing
date, indicated that cash flows would be insufficient to support the carrying
value of certain machinery and equipment at ITD. As a result of the
Company’s review, a non-cash impairment loss of $0.5 million was recognized in
2008 to write down the individual components of long-lived assets to estimated
fair value.
During
the nine month period ended September 30, 2009, ITD ceased operations and sold
or disposed of its inventory and most of its equipment. A gain on the
sale of equipment of $1.7 million was recognized. ITD has been
collecting its receivables, and its facility has been offered for
sale. ITD repaid $4.6 million of its long-term debt during the nine
months ended September 30, 2009. The following assets and liabilities
of ITD have been segregated in the accompanying consolidated balance sheets as
of September 30, 2009 and December 31, 2008.
(in
thousands)
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
Current
Assets:
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
$
|
1,162
|
|
|
$
|
3,669
|
|
Inventory
|
|
|
-
|
|
|
|
3,423
|
|
Other
current assets
|
|
|
42
|
|
|
|
95
|
|
|
|
$
|
1,204
|
|
|
$
|
7,187
|
|
|
|
|
|
|
|
|
|
|
Long-term
Assets:
|
|
|
|
|
|
|
|
|
Property,
plant & equipment, net
|
|
$
|
2,790
|
|
|
$
|
4,084
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Note
payable to bank
|
|
$
|
-
|
|
|
$
|
4,661
|
|
Other
current liabilities
|
|
|
326
|
|
|
|
1,126
|
|
|
|
$
|
326
|
|
|
$
|
5,787
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
$
|
111
|
|
|
$
|
188
|
|
The
income (loss) from Discontinued Operations consists of the
following:
|
|
Three
Months ended September 30,
|
|
|
Nine
Months ended September 30,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
994
|
|
|
$
|
4,422
|
|
|
$
|
5,301
|
|
|
$
|
14,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
(776
|
)
|
|
|
318
|
|
|
|
(2,241
|
)
|
|
|
1,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest/other
expense
|
|
|
(253
|
)
|
|
|
(199
|
)
|
|
|
(697
|
)
|
|
|
(269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (expense)
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
(216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations, net
|
|
|
(1,029
|
)
|
|
|
149
|
|
|
|
(2,938
|
)
|
|
|
567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of assets, net of tax
|
|
|
182
|
|
|
|
-
|
|
|
|
1,671
|
|
|
|
-
|
|
Note 6 -
Restructuring
In 2008,
the Company evaluated the long-lived assets of its Sumco, Inc. (“Sumco”)
subsidiary in light of ongoing operating losses. Sumco provided
electroplating services primarily to the automotive market and is included in
the Precious Metal reportable segment. Sumco had declining cash flows
in 2008 and projected negative cash flows for 2009, principally caused by the
decline in U.S. economic activity and Sumco’s reliance on the automotive market
for over 90% of its sales. A review of future cash flows indicated
that such cash flows would be insufficient to support the carrying value of
certain of Sumco’s long-lived assets. As a result of the Company’s
evaluation, a non-cash impairment loss of $7.8 million was recognized in 2008 to
write down the individual components of long-lived assets to the lower of their
carrying value or estimated fair value. In June 2009, Sumco entered
into an agreement with the collective bargaining agent representing its
unionized workers which specified the conditions of termination of employment
for its unionized employees.
On June
12, 2009, Sumco entered into a Management Service Agreement (“MSA”) with a
company owned by two former employees (the “Management
Company”). Pursuant to the MSA, the Management Company agreed
to fulfill various remaining customer contracts of Sumco before December 31,
2009. In return, Sumco is paying the Management Company a
management service fee and leasing space to the Management Company for a nominal
rent. Sumco is responsible for all the working capital related to the
remaining customer contracts. The Management Company paid Sumco
$0.3 million for certain raw material inventory related to one contract that
Sumco assigned to the Management Company with the consent of the
customer. Sumco owns the building which is located in Indianapolis,
Indiana. As part of the transactions, Sumco incurred severance costs
of approximately $0.5 million.
Restructuring
costs of $0.6 million were recorded in the nine month period ended September 30,
2009 relating to the consolidation of the former Bairnco Corporate office into
the WHX Corporate office. The Bairnco corporate office consolidation has been
completed.
In April
2009, the Company announced the closure of a facility in New Hampshire which was
part of the Precious Metal segment and the relocation of the functions to its
facility in Milwaukee, Wisconsin. Such relocation has been completed
and the Company has offered the facility for sublease. Restructuring
costs of approximately $0.4 million were recorded in connection with this
relocation, including an estimate of future net lease costs for the
facility.
During
the second quarter of 2009, the Company closed a leased facility in Dallas,
Texas that was part of the Arlon Coated Materials segment, and will now service
that business from its facility in San Antonio, Texas. The Company
incurred severance and relocation costs of approximately $0.3 million in
connection with the shutdown of the Dallas facility.
EuroKasco
S.A (“EuroKasco”), which is part of the Kasco segment of Bairnco, is engaging in
restructuring activities principally due to weakness in its machinery sales
volume, and recorded $0.5 million of expense related mainly to workforce
reduction.
The
restructuring costs and activity in the restructuring reserve for the nine
months ended September 30, 2009 consisted of:
|
|
Reserve
Balance
|
|
|
|
|
|
|
|
|
Reserve
Balance
|
|
|
|
December
31, 2008
|
|
|
Expense
|
|
|
Payments
|
|
|
September
30, 2009
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
benefits
|
|
$
|
-
|
|
|
$
|
1,846
|
|
|
$
|
(1,687
|
)
|
|
$
|
159
|
|
Rent
expense
|
|
|
-
|
|
|
|
318
|
|
|
|
(146
|
)
|
|
|
172
|
|
Other
facility closure costs
|
|
|
-
|
|
|
|
186
|
|
|
|
(186
|
)
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
2,350
|
|
|
$
|
(2,019
|
)
|
|
$
|
331
|
|
The
restructuring charges for the three and nine month periods ended September 30,
2008 of $0.3 million and $1.6 million, respectively, represent move costs to
consolidate two plants in San Antonio, Texas into one. The costs were
incurred by the Arlon Coated Materials segment.
On June
30, 2008, Arlon Inc., a wholly-owned subsidiary of Bairnco, (i) sold land and a
building located in Rancho Cucamonga, California for $8.5 million and (ii)
leased back such property under a 15 year lease term with two 5 year renewal
options. Bairnco guaranteed the payment and performance under the
lease. The proceeds from the sale were applied to repay a portion of the term
loan under Bairnco’s Wells Fargo Facility. The gain on the sale of the property
of $1.8 million was deferred, and the gain is being recognized ratably over the
15 year lease term as a reduction of lease expense. Approximately
$1.6 million and $1.7 million of such deferred gain was included in “Other
Long-term Liabilities” on the consolidated balance sheets as of September 30,
2009 and December 31, 2008, respectively.
Note 7 – Fair Value
Measurements
The
Company adopted ASC No. 820, “Fair Value Measurements” effective January 1,
2009. Under this standard, fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability (
i.e.,
the “exit
price”) in an orderly transaction between market participants at the measurement
date.
In
determining fair value, the Company uses various valuation
approaches. The hierarchy of those valuation approaches is broken
down into three levels based on the reliability of inputs as
follows:
Level 1
inputs are quoted prices in active markets for identical assets or liabilities
that the Company has the ability to access at the measurement
date. An active market for the asset or liability is a market in
which transactions for the asset or liability occur with sufficient frequency
and volume to provide pricing information on an ongoing basis. The
valuation under this approach does not entail a significant degree of
judgment.
Level 2
inputs are inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or
indirectly. Level 2 inputs include: quoted prices for similar assets
or liabilities in active markets, inputs other than quoted prices that are
observable for the asset or liability, (
e.g.,
interest rates and
yield curves observable at commonly quoted intervals or current market) and
contractual prices for the underlying financial instrument, as well as other
relevant economic measures.
Level 3
inputs are unobservable inputs for the asset or
liability. Unobservable inputs are used to measure fair value to the
extent that observable inputs are not available, thereby allowing for situations
in which there is little, if any, market activity for the asset or liability at
the measurement date.
The fair
value of the Company’s financial instruments, such as cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities approximate
carrying value due to the short-term maturities of these assets and
liabilities. Fair value of the Company’s long term debt approximates
its carrying cost due to variable interest rates.
The
Company's non-financial assets measured at fair value on a non-recurring basis
include goodwill and intangible assets, any assets and liabilities acquired in a
business combination, or its long-lived assets written down to fair value. To
measure fair value for such assets, the Company uses techniques including
discounted expected future cash flows, or appraisals (Level 3
input).
The
Company reviews goodwill for impairment on an annual basis at the end of its
fiscal year, December 31. The Company uses judgment in assessing
whether assets may have become impaired between annual impairment
tests. The occurrence of a significant change in circumstances, such
as continuing adverse business conditions or other economic factors or other
triggering events, would determine the need for impairment testing between
annual impairment tests. Due to significant deterioration in the
general economic environment in recent periods, and its impact on the Company’s
sales and projected future cash flows, the Company performed interim impairment
tests during the second quarter of 2009, which compared the carrying value of
the Company’s reporting units to their fair market value. Based upon
those tests, the Company determined that it was probable that an impairment of
certain of its long lived assets such as goodwill had occurred, but could not
reasonably estimate the amount of any such impairment at that
time. During the third quarter of 2009, the Company conducted the
second step of the goodwill impairment test, which involved, among other things,
further assessing the fair value and intangible assets of one of its reporting
units, Silicone Technologies (
“
STD
”
). The fair value
of the reporting unit was determined principally based upon discounted expected
future cash flows. As a result of the fair value assessment, the
Company recorded a goodwill impairment charge of $1.1 million related to the STD
reporting unit.
The
changes in the carrying amount of goodwill by reportable segment for the nine
months ended September 30, 2009 were as follows:
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Arlon
|
|
|
|
|
|
|
Precious
|
|
|
|
|
|
Engineered
|
|
|
Electronic
|
|
|
|
|
|
|
Metal
|
|
|
Tubing
|
|
|
Materials
|
|
|
Materials
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill,
gross amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
$
|
1,506
|
|
|
$
|
1,895
|
|
|
$
|
51,232
|
|
|
$
|
10,437
|
|
|
$
|
65,070
|
|
Adjustments
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
Balance
at September 30, 2009
|
|
|
1,525
|
|
|
|
1,895
|
|
|
|
51,232
|
|
|
|
10,437
|
|
|
|
65,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
impairment losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Impairment
Charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,140
|
)
|
|
|
(1,140
|
)
|
Balance
at September 30, 2009
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,140
|
)
|
|
|
(1,140
|
)
|
Goodwill,
net at September 30, 2009
|
|
$
|
1,525
|
|
|
$
|
1,895
|
|
|
$
|
51,232
|
|
|
$
|
9,297
|
|
|
$
|
63,949
|
|
During
the second quarter of 2009, the Company recorded a $0.9 million non-cash
impairment charge related to certain manufacturing equipment located at one of
its Tubing segment facilities. The equipment had been utilized
exclusively in connection with a discontinued product line, and has no other
viable uses for the Company; nor is there believed to be a potential market to
sell the equipment.
The
Company measures fair value of its investments in equity securities on a
recurring basis and based on a quoted price in an active market for identical
securities (i.e. Level 1 input). The Company has an investment in
equity securities valued at fair value of $0.1 million as of September 30, 2009
and December 31, 2008. The investment is included in “Other
Non-current Assets” on the consolidated balance sheets.
In the
second quarter of 2009, the Company recorded a $1.2 million non-cash impairment
charge in connection with its investment in CoSine Communications Inc.
(“Cosine”), which had been accounted for under the equity method. The
amount of the impairment represented the difference between the carrying value
of the investment and its fair value. On July 31, 2009, WHX CS Corp.,
a subsidiary of WHX, sold its equity investment in CoSine to SP II for cash
proceeds of $3.1 million.
Note 8 – Income (Loss) Per
Share
The
computation of basic income (loss) per common share is calculated by dividing
the net income or loss by the weighted average number of shares of Common Stock
outstanding, as follows:
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands, except per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from
continuing
operations, net of tax
|
|
$
|
1,847
|
|
|
$
|
9,319
|
|
|
$
|
(13,188
|
)
|
|
$
|
8,022
|
|
Weighted
average number of common
shares outstanding
|
|
|
12,179
|
|
|
|
1,729
|
|
|
|
12,179
|
|
|
|
1,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations, net of tax
per common
share
|
|
$
|
0.15
|
|
|
$
|
5.39
|
|
|
$
|
(1.08
|
)
|
|
$
|
6.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
$
|
(847
|
)
|
|
$
|
149
|
|
|
$
|
(1,267
|
)
|
|
$
|
567
|
|
Weighted
average number of common
shares
outstanding
|
|
|
12,179
|
|
|
|
1,729
|
|
|
|
12,179
|
|
|
|
1,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations per common share
|
|
$
|
(0.07
|
)
|
|
$
|
0.09
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,000
|
|
|
$
|
9,468
|
|
|
$
|
(14,455
|
)
|
|
$
|
8,589
|
|
Weighted
average number of common
shares
outstanding
|
|
|
12,179
|
|
|
|
1,729
|
|
|
|
12,179
|
|
|
|
1,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share
|
|
$
|
0.08
|
|
|
$
|
5.48
|
|
|
$
|
(1.19
|
)
|
|
$
|
6.89
|
|
Diluted
earnings per share gives effect to dilutive potential common shares outstanding
during the period. The Company had potentially dilutive common share
equivalents including warrants and stock options and other stock-based incentive
compensation arrangements during the three and nine months ended September 30,
2009 and 2008. However, no common share equivalents were dilutive in
the nine month period ended September 30, 2009 because the Company reported a
net loss and therefore, any outstanding warrants and stock options would have
had an anti-dilutive effect. For the three month periods ended
September 30, 2009 and 2008, and the nine month period ended September 30, 2008,
no outstanding common share equivalents were dilutive because the exercise price
of such equivalents exceeded the fair market value of the Company’s common
stock. As of September 30, 2009, stock options for an aggregate of
60,500 shares are excluded from the calculation of net loss per
share.
The large
change in the number of shares outstanding is due to the additional shares
issued in the Rights Offering in September 2008. See Note 9
“Stockholders’ (Deficit) Equity”.
Note 9 – Stockholders’
(Deficit) Equity
Rights
Offering
On
September 25, 2008, the Company completed the Rights Offering to its existing
stockholders. The Company sold 11,178,459 shares of common stock to
existing stockholders through the exercise of rights, for an aggregate purchase
price of approximately $156.5 million. SP II, the Company’s largest
shareholder at that time, subscribed for shares with an aggregate purchase price
of approximately $120.8 million. The Company used the proceeds of the
Rights Offering to redeem preferred stock, accrued interest and other
indebtedness to SP II totaling $142.5 million. After such payments,
$14.0 million remained with the Company as cash, of which $13.2 million was used
to repay additional debt of the Company on October 29, 2008 pursuant to the
amendments to the Company’s credit agreements of that same date.
Accumulated
Other Comprehensive Loss
Accumulated
other comprehensive loss balances as of September 30, 2009 and December 31, 2008
were comprised of:
(in
thousands)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
actuarial losses and prior service costs
and
credits
|
|
$
|
(165,851
|
)
|
|
$
|
(165,851
|
)
|
Foreign
currency translation adjustment
|
|
|
3,817
|
|
|
|
2,513
|
|
Valuation
of marketable equity securities
|
|
|
(114
|
)
|
|
|
(164
|
)
|
|
|
$
|
(162,148
|
)
|
|
$
|
(163,502
|
)
|
Note 10 –
Inventories
Inventories
at September 30, 2009 and December 31, 2008 were comprised of:
(in
thousands)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Finished
products
|
|
$
|
21,622
|
|
|
$
|
34,452
|
|
In
- process
|
|
|
12,476
|
|
|
|
13,426
|
|
Raw
materials
|
|
|
26,153
|
|
|
|
22,844
|
|
Fine
and fabricated precious metal in various stages of
completion
|
|
|
8,889
|
|
|
|
2,247
|
|
|
|
|
69,140
|
|
|
|
72,969
|
|
LIFO
reserve
|
|
|
(1,437
|
)
|
|
|
(1,123
|
)
|
|
|
$
|
67,703
|
|
|
$
|
71,846
|
|
In order
to produce certain of its products, H&H purchases, maintains and utilizes
precious metal inventory. H&H records its precious metal
inventory at last-in, first-out (“LIFO”) cost, subject to lower of cost or
market with any adjustments recorded through cost of goods sold. The
market value of the precious metal inventory exceeded LIFO cost by $1.4 million
and $1.1 million as of September 30, 2009 and December 31, 2008,
respectively. In the nine month period ended September 30, 2009, the
Company experienced a liquidation of its inventory of gold which management
believes to be a permanent liquidation since the Company does not expect to
reinstate the inventory by year end. Operating income for the three
and nine months ended September 30, 2009 includes a $0.7 million credit to cost
of goods sold from the liquidation of the gold inventory valued at
LIFO.
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. To the extent H&H is able to utilize customer precious
metal in its production processes, such customer metal replaces the need for
H&H to purchase its own inventory. When the balance of customer metal
declines, H&H must purchase metal. During the third quarter of
2009, H&H’s balance of customer pooled silver was reduced by approximately
483,000 ounces attributable to one major customer. Therefore,
H&H’s silver inventory rose by a similar number of ounces, resulting in the
Company expending approximately $7.4 million to replace customer metal during
the quarter ended September 30, 2009. Furthermore, H&H
established a new LIFO layer of silver during the period, and its cost of sales
reflects recent market prices of silver. As of September 30, 2009,
H&H’s customer metal consisted of 235,764 ounces of silver, 1,377 ounces of
gold, and 1,391 ounces of palladium.
Supplemental
inventory information:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands, except per ounce)
|
|
|
|
|
|
|
|
|
Precious
metals stated at LIFO cost
|
|
$
|
7,452
|
|
|
$
|
1,124
|
|
|
|
|
|
|
|
|
|
|
Market
value per ounce:
|
|
|
|
|
|
|
|
|
Silver
|
|
$
|
16.21
|
|
|
$
|
11.30
|
|
Gold
|
|
$
|
1,003.48
|
|
|
$
|
883.00
|
|
Palladium
|
|
$
|
292.00
|
|
|
$
|
185.00
|
|
Note 11 – Derivative
Instruments
H&H
enters into commodity futures and forwards contracts on precious metal that are
subject to market fluctuations in order to economically hedge its precious metal
inventory against price fluctuations. As of September 30, 2009, the
Company had entered into forward and future contracts for gold with a total
value of $1.0 million and for silver with a total value of $7.0
million.
The
Company also economically hedges its exposure on variable interest rate debt
denominated in foreign currencies at one of its foreign
subsidiaries.
As these
derivatives are not designated as accounting hedges under ASC No. 815-10,
“Accounting for Derivative Instruments and Hedging Activities” (“ASC 815-10”),
they are accounted for as derivatives with no hedge designation. The
derivatives are marked to market and both realized and unrealized gains and
losses are recorded in current period earnings in the Company's consolidated
statement of operations. The Company’s hedging strategy is designed
to protect it against normal volatility. However, abnormal price
increases in these commodity or foreign exchange markets could negatively impact
H&H’s costs. The three month periods ended September 30, 2009 and
2008 include a net loss of $0.6 million and a net gain of $0.4 million,
respectively. The nine month periods ended September 30, 2009 and
2008 include net losses of $0.3 million and $0.9 million, respectively, on
derivative instruments.
As of
September 30, 2009, the Company had the following outstanding forward or future
contracts with settlement dates ranging from October 2009 to December
2009.
Commodity
|
|
Amount
|
|
|
|
|
Silver
|
|
425,000
|
ounces
|
Gold
|
|
800
|
ounces
|
ASC
815-10 requires companies to recognize all derivative instruments as either
assets or liabilities at fair value in the balance sheet.
Fair
Value of Derivative Instruments in the Condensed Consolidated Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
Derivative
|
|
Balance
Sheet Location
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Commodity
contracts
|
|
Other
current assets
|
|
$
|
221
|
|
|
$
|
355
|
|
Interest
rate swap
|
|
Accrued
liabilities
|
|
|
-
|
|
|
|
(199
|
)
|
Total
derivatives not designated as hedging instruments
|
|
|
221
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives
|
|
|
|
$
|
221
|
|
|
$
|
156
|
|
Effect
of Derivative Instruments on the Condensed Consolidated Statements of
Operations
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Derivative
|
|
Statement of
Operations Line
|
|
Gain
(Loss)
|
|
|
|
|
|
|
|
|
|
|
Commodity
contracts
|
|
Realized
and Unrealized Gain (loss) on Derivatives
|
|
$
|
(622
|
)
|
|
$
|
400
|
|
Interest
rate swap
|
|
Interest
income (expense)
|
|
|
-
|
|
|
|
(109
|
)
|
Total
derivatives not designated as hedging instruments
|
|
$
|
(622
|
)
|
|
$
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives
|
|
|
|
$
|
(622
|
)
|
|
$
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Derivative
|
|
Statement of
Operations Line
|
|
Gain
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
contracts
|
|
Realized
and Unrealized Gain (loss) on Derivatives
|
|
$
|
(316
|
)
|
|
$
|
(925
|
)
|
Interest
rate swap
|
|
Interest
income (expense)
|
|
|
(312
|
)
|
|
|
(1
|
)
|
Total
derivatives not designated as hedging instruments
|
|
$
|
(628
|
)
|
|
$
|
(926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives
|
|
|
|
$
|
(628
|
)
|
|
$
|
(926
|
)
|
Note 12 – 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 month periods ended
September 30, 2009 and 2008.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
80
|
|
|
$
|
93
|
|
|
$
|
240
|
|
|
$
|
279
|
|
Interest
cost
|
|
|
6,418
|
|
|
|
6,663
|
|
|
|
19,253
|
|
|
|
19,989
|
|
Expected
return on plan assets
|
|
|
(6,202
|
)
|
|
|
(8,966
|
)
|
|
|
(18,732
|
)
|
|
|
(26,898
|
)
|
Amortization
of prior service cost
|
|
|
15
|
|
|
|
25
|
|
|
|
45
|
|
|
|
75
|
|
Amortization
of actuarial loss
|
|
|
3,210
|
|
|
|
-
|
|
|
|
9,630
|
|
|
|
-
|
|
|
|
$
|
3,521
|
|
|
$
|
(2,185
|
)
|
|
$
|
10,436
|
|
|
$
|
(6,555
|
)
|
The
actuarial loss occurred principally because investment returns on the assets of
the WHX Pension Plan during 2008 were significantly less than the assumed return
of 8.5%. The 2008 column includes the pension credit of the Bairnco
qualified pension plans, substantially all of which were merged into the WHX
Pension Plan as of December 31, 2008.
In
addition to its pension plans which are included in the table above, the Company
also maintains several other postretirement benefit plans covering certain of
its employees. The approximate aggregate expense for these plans was
$0.1 million in both of the three month periods ended September 30, 2009 and
2008, and $0.3 million in both of the nine month periods ended September 30,
2009 and 2008. In addition, during the nine months ended September
30, 2009, the Company reduced its postretirement benefits expense by $0.9
million because of a reduction in certain postretirement benefits for former
employees.
Note 13 –
Debt
Long-term
debt consisted of the following:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
Debt to Non Related Party:
|
|
|
|
|
|
|
H&H
Wachovia Facility term loans
|
|
$
|
45,750
|
|
|
$
|
54,670
|
|
Other
H&H debt-domestic
|
|
|
7,475
|
|
|
|
7,580
|
|
Bairnco
Wells Fargo Facility term loan
|
|
|
4,090
|
|
|
|
6,466
|
|
Bairnco
Ableco Facility term loan
|
|
|
42,000
|
|
|
|
45,000
|
|
Bairnco
foreign loan facilities
|
|
|
4,773
|
|
|
|
4,753
|
|
Total
debt to non related party
|
|
|
104,088
|
|
|
|
118,469
|
|
Less
portion due within one year
|
|
|
5,944
|
|
|
|
8,295
|
|
Long-term
debt to non related party
|
|
|
98,144
|
|
|
|
110,174
|
|
|
|
|
|
|
|
|
|
|
Long-term
Debt to Related Party:
|
|
|
|
|
|
|
|
|
H&H
Term B Loan
|
|
|
44,098
|
|
|
|
44,098
|
|
Bairnco
Subordinated Debt Credit Agreement
|
|
|
10,000
|
|
|
|
10,000
|
|
Long-term
debt to related party
|
|
|
54,098
|
|
|
|
54,098
|
|
Total
long-term debt
|
|
$
|
152,242
|
|
|
$
|
164,272
|
|
In
addition to the Term B Loan with SP II, interest due to SP II under the Term B
Loan is not required to be paid in cash until the Wachovia Facilities have been
repaid and thus, such accrued interest has been classified as a long-term
liability in the consolidated balance sheets as of September 30, 2009 and
December 31, 2008. The interest accrued to SP II is subject to the
same collateral as the Term B Loan.
On March
12, 2009, H&H and certain of its subsidiaries amended each of the Wachovia
Facilities and the Term B Loan to, among other things, (i) extend the term of
the loans for two years until June 30, 2011, (ii) increase certain interest
rates, (iii) reset the levels of certain financial covenants, (iv) permit the
disposition and/or cessation of operations of certain of H&H’s direct and
indirect subsidiaries, (v) provide for an increase in the aggregate amount of
unsecured loans, distributions or other advances from H&H to WHX for general
business purposes from up to $7.0 million to up to $12.0 million, subject to a
maximum additional amount of $2.5 million prior to March 31, 2010, and (vi)
provide for an increase in the existing limited guaranty by H&H of Bairnco’s
obligations under the Ableco Facility from up to $7.0 million to up to $12.0
million. In addition, the Wachovia Facilities were also amended to,
among other things, reduce the amount of the credit facility from $125.3 million
to $115.0 million including decreasing the revolving credit facility from $83.0
million to $75.0 million.
On May 8,
2009, H&H and its subsidiaries further amended the Wachovia Facilities to
provide for, among other things, additional term loans to the borrowers
thereunder in the aggregate principal amount of approximately $5.3 million,
which were consolidated with the existing term loans under the Wachovia
Facilities for a combined aggregate principal amount of $15.0 million, and
additional guaranties by certain subsidiary trusts. Pursuant to this
amendment: (i) a portion of the obligations under the tranche B term loan under
the Wachovia Facilities was prepaid in an amount equal to $5.0 million; and (ii)
the remaining available proceeds of the term loans are to be used for operating
and working capital purposes. The Term B Loan was also amended
on May 8, 2009 to provide for additional guaranties by certain subsidiary
trusts.
Effective
July 31, 2009, H&H and its subsidiaries amended each of the Wachovia
Facilities and the Term B Loan to, among other things, (i) reset certain
financial covenants, (ii) increase the existing limited H&H Guaranty of
Bairnco’s obligations under the Ableco Facility from up to $12 million to up to
$17 million, and (iii) provide for the repayment of a portion of the term loan
under the Wachovia Facilities in the amount of $3.0 million.
On March
12, 2009, Bairnco and certain of its subsidiaries amended the Wells Fargo
Facility and the Ableco Facility to, among other things, (i) increase the
interest rates and (ii) reset the levels of certain financial
covenants. The Ableco Facility was also amended to provide for, among
other things, an increase in the existing limited guaranty by H&H of
Bairnco’s obligations under the Ableco Facility from up to $7 million to up to
$12 million, secured by a second lien on all of the assets of H&H pursuant
to the terms and conditions of the H&H Security Agreement and the H&H
Guaranty. The Subordinated Debt Credit Agreement with SP II was also
amended to, among other things, increase the interest rates.
Effective
August 18, 2009, Bairnco and certain of its subsidiaries also amended the Ableco
Facility to, among other things, (i) reset certain financial covenants, (ii)
increase the existing limited H&H Guaranty of Bairnco’s obligations under
the Ableco Facility from up to $12 million to up to $17 million and (iii)
provide for the repayment of a portion of the Ableco Facility in the amount of
$3.0 million. The Wells Fargo Facility and the Subordinated Debt Credit
Agreement were also amended effective August 18, 2009, to, among other things,
(i) reset certain financial covenants to levels consistent with the Ableco
Facility, as amended, and (ii) permit the repayment of a portion of the Ableco
Facility in the amount of $3.0 million. The $3.0 million repayment
was funded by a subordinated secured loan from WHX to Bairnco in the amount of
$3.0 million.
Note 14 - Income
Taxes
For the
three month periods ended September 30, 2009 and 2008, tax provisions from
continuing operations of $0.3 million and $0.8 million were recorded,
respectively. For the nine month periods ended September 30, 2009 and
2008, tax provisions from continuing operations of $0.4 million and $2.3 million
were recorded, respectively. The Company’s tax provisions are
principally for state and foreign income taxes because no federal income tax
benefit has been recognized in any of these periods due to the uncertainty of
realizing the benefit of the Company’s net operating loss carryforwards (“NOLs”)
in the future. The Company has recorded a deferred tax valuation
allowance to the extent that it believes that it is more likely than not that
the benefits of its deferred tax assets, including those relating to its NOLs,
will not be realized in future periods. The nine month period ended September
30, 2009 reflects a favorable impact of $0.5 million which resulted from a
change in the effective tax rate at which the deferred state income taxes of
certain subsidiaries are estimated to be realized.
Note 15 – Reportable
Segments
The
Company principally operates in North America, and has six reportable
segments
:
Precious Metal
Segment
H&H’s
Precious Metal segment fabricates precious metal and their alloys into brazing
alloys and utilizes precious metal in precision
electroplating. H&H’s brazing alloys are used to join most common
metals as well as specialty metals with strong, hermetic
joints. H&H offers a wide variety of these metal joining
products, including gold, silver, palladium, copper, nickel, and aluminum based
materials. These brazing alloys are fabricated into a variety of
engineered forms and are used in many industries including automotive, heating,
ventilation and air conditioning (“HVAC”), general industrial and other
metal-joining industries. H&H is also engaged in precision
electroplating (often using gold, silver, palladium and various base metals) of
electronic and electrical components primarily for use in the automotive
industry. H&H’s profits from precious metal products are
principally derived from the “value added” of processing and fabricating and not
from the purchase and resale of precious metal. In accordance with
general practice, prices to customers are principally a composite of two
factors: (1) the value of the precious metal content of the product and (2) the
“fabrication value,” which includes the cost of base metals, labor, overhead,
financing and profit.
Tubing
Segment
H&H
manufactures a wide variety of steel tubing products. The Stainless
Steel Tubing Group manufactures small-diameter precision-drawn seamless tubing
both in straight lengths and coils. The Stainless Steel Tubing
Group’s capabilities in long continuous drawing of seamless stainless steel
coils allow this Group to serve the petrochemical infrastructure and
shipbuilding markets. The Stainless Steel Tubing Group also
manufactures products for use in the medical, semiconductor fabrication,
aerospace and defense industries. The Specialty Tubing Group
manufactures welded carbon steel coated and uncoated tubing in straight lengths
and coils with a primary focus on products for the refrigeration, HVAC, and
automotive industries. In addition to producing bulk tubing, the
Specialty Tubing Group also produces value added products for the appliance and
HVAC industries by fabricating tubing into sealed system
components.
Engineered Materials
Segment
H&H’s
Engineered Materials Segment supplies products to the construction and building
industries. H&H manufactures fasteners and fastening systems for the U.S.
commercial flat roofing industry. Products are sold to building and
roofing material wholesalers. The products are also private labeled to roofing
system manufacturers. A line of specialty fasteners is produced for the building
products industry for fastening applications in log homes, landscaping, masonry,
and wood decks. H&H also manufactures plastic and steel fittings
and connectors for natural gas and water distribution service lines along with
exothermic welding products for electrical grounding, cathodic protection, and
lightning protection. In addition, H&H manufactures
electro-galvanized and painted cold rolled sheet steel products primarily for
the construction, entry door, container and appliance industries.
Arlon Electronic Materials
(“Arlon EM”) Segment
Arlon
EM’s principal products include high performance materials for the printed
circuit board (“PCB”) industry and silicone rubber-based insulation materials
used in a broad range of industrial, military/aerospace, consumer and commercial
markets.
Arlon EM
supplies high technology materials to the PCB industry. Arlon EM
products are marketed principally to OEMs and PCB manufacturers around the world
by a direct technical sales force in many cases in support of country and area
specific distributors and manufacturer’s representatives. Arlon EM’s
conventional laminates product line includes a wide variety of specialty
polyimide and epoxy laminates and bonding films, as well as other high
performance thermoset laminates. These materials are used in
demanding commercial and military market applications including high density
interconnect, surface mount technology, heat sink bonding, semiconductor
testing, wireless communications and microvia PCBs. The microwave and
radio frequency product area offers fluoropolymers (“PTFE”), ceramic-filled
fluoropolymers, and other non-PTFE laminates that deliver the electrical
performance needed in frequency-dependent circuit applications such as analog,
digital and personal communication systems, high-frequency military electronics,
microwave antennas and cellular base station electronics. These
products are supplied as copper-clad laminates with bonding plies or prepregs
for production of multi-layer printed circuits.
Arlon EM
also manufactures a line of silicone rubber materials used in a broad range of
military, consumer, industrial and commercial products. Typical
applications and products include: silicone bagging materials for producing
composite parts; silicone insulating tapes for electric traction motor coil
windings; insulation materials for industrial and commercial flexible heaters;
silicone materials for high temperature hose and duct markets; insulating tape
for medium and high voltage electrical splices and self-fusing tapes for a
variety of industrial and commercial applications; as well as compliant,
thermally or electrically conductive silicone film adhesives known as
Thermabond™ for heat sink-bonding to printed circuit boards.
Arlon Coated Materials
(“Arlon CM”) Segment
Arlon
CM’s principal products include adhesive coated cast and calendared vinyl films,
cast vinyl fabric, custom-engineered laminates, and coated and laminated films,
foils, foams and papers used in a broad range of industrial, consumer and
commercial products.
Arlon CM
specialty graphic films are marketed under the Arlon and Calon® brand names and
include cast and calendared vinyl films that are manufactured in a wide variety
of colors, face stocks and adhesive systems. These vinyl films are
used in commercial and electrical signage, point of purchase displays, highway
signage, fleet markings, and other commercial advertising
applications. Arlon CM also manufactures laminated vinyl fabrics for
corporate identity programs. These products are marketed under the
ArlonFlex® brand name and complement the Calon® specialty graphic
films.
Arlon CM
also manufactures and markets custom-engineered laminates and coated
products. Typical applications include insulating foam tapes for
thermopane windows, electrical insulation materials for motors and transformers,
thermal insulation panels for appliances and cars, durable printing stock,
coated foil tapes and transfer adhesives used in industrial assembly, and single
and double-coated foam and film tapes and other custom engineered laminates for
specific industrial applications.
Kasco Replacement Products
and Services Segment
Kasco
Replacement Products and Services (“Kasco”) is a provider of meat-room products
and maintenance services for the meat and deli departments of supermarkets; for
restaurants; for meat and fish processing plants; and for distributors of
electrical saws and cutting equipment throughout North America, Europe, Asia and
South America. These products and services include band saw blades
for cutting meat and fish, band saw blades for cutting wood and metal, grinder
plates and knives for grinding meat, repair and maintenance services for food
equipment in retail grocery and restaurant operations, electrical saws and
cutting machines, seasoning products, and other related butcher supply
products.
Kasco’s
products and services are sold under a number of brand names including Kasco
Corporation and Atlanta Sharptech in the United States and Canada, Atlantic
Service Co. in the United Kingdom and Canada, Bertram & Graf in Germany, and
Biro France and EuroKasco in France.
Management
has determined that certain operating companies should be aggregated and
presented within a single reportable segment on the basis that such operating
segments have similar economic characteristics and share other qualitative
characteristics. Management reviews sales, gross profit and operating
income to evaluate segment performance. Operating income for the reportable
segments excludes the costs of shared corporate headquarters functions such as
finance, auditing, treasury, legacy legal, benefits administration, and certain
executive functions, as well as other general corporate expenses. This is a
revision to the measurement of segment profit and loss that has been reported by
the Company in each of the quarters of 2008 and in the first quarter of 2009 in
which these shared corporate headquarters functions were allocated to the
reportable segments. Other shared functions that can be specifically identified
with each segment have been charged to those segments. The 2008 segment income
of each segment has been restated to be comparable with the revised
presentation. Other income and expense, interest expense, and income
taxes are not presented by segment since they are excluded from the measure of
segment profitability reviewed by the Company’s management.
The
following table presents information about reportable segments for the three and
nine month periods ended September 30, 2009 and 2008.
Statement
of operations data:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Precious
Metal
|
|
$
|
25,837
|
|
|
$
|
40,344
|
|
|
$
|
74,249
|
|
|
$
|
131,624
|
|
Tubing
|
|
|
18,782
|
|
|
|
27,564
|
|
|
|
56,371
|
|
|
|
78,408
|
|
Engineered
Materials
|
|
|
56,055
|
|
|
|
74,884
|
|
|
|
153,180
|
|
|
|
198,636
|
|
Arlon
Electronic Materials
|
|
|
13,154
|
|
|
|
16,777
|
|
|
|
44,034
|
|
|
|
48,409
|
|
Arlon
Coated Materials
|
|
|
16,762
|
|
|
|
19,103
|
|
|
|
43,921
|
|
|
|
56,763
|
|
Kasco
|
|
|
14,582
|
|
|
|
16,659
|
|
|
|
45,666
|
|
|
|
50,791
|
|
Total
net sales
|
|
$
|
145,172
|
|
|
$
|
195,331
|
|
|
$
|
417,421
|
|
|
$
|
564,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Precious
Metal (a)
|
|
$
|
3,263
|
|
|
$
|
6,759
|
|
|
$
|
2,514
|
|
|
$
|
14,120
|
|
Tubing
(b)
|
|
|
1,399
|
|
|
|
2,458
|
|
|
|
3,597
|
|
|
|
6,812
|
|
Engineered
Materials
|
|
|
7,037
|
|
|
|
9,238
|
|
|
|
14,288
|
|
|
|
20,458
|
|
Arlon
Electronic Materials ( c )
|
|
|
(501
|
)
|
|
|
1,849
|
|
|
|
2,305
|
|
|
|
4,232
|
|
Arlon
Coated Materials (d)
|
|
|
682
|
|
|
|
185
|
|
|
|
(433
|
)
|
|
|
(211
|
)
|
Kasco
(e)
|
|
|
494
|
|
|
|
625
|
|
|
|
2,264
|
|
|
|
2,703
|
|
Total
segment operating income
|
|
$
|
12,374
|
|
|
$
|
21,114
|
|
|
$
|
24,535
|
|
|
$
|
48,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated
corporate expenses & non operating units
|
|
|
2,542
|
|
|
|
4,665
|
|
|
|
9,110
|
|
|
|
15,833
|
|
Unallocated
pension expense (credit)
|
|
|
3,503
|
|
|
|
(2,185
|
)
|
|
|
10,418
|
|
|
|
(6,555
|
)
|
Proceeds
from insurance claims, net
|
|
|
(3,000
|
)
|
|
|
(757
|
)
|
|
|
(3,000
|
)
|
|
|
(3,447
|
)
|
Asset
impairment charge
|
|
|
-
|
|
|
|
-
|
|
|
|
1,158
|
|
|
|
-
|
|
Corporate
restructuring costs
|
|
|
(26
|
)
|
|
|
-
|
|
|
|
636
|
|
|
|
-
|
|
(Gain)
loss on disposal of assets
|
|
|
(15
|
)
|
|
|
13
|
|
|
|
59
|
|
|
|
159
|
|
Income
from continuing operations
|
|
|
9,370
|
|
|
|
19,378
|
|
|
|
6,154
|
|
|
|
42,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
6,693
|
|
|
|
8,981
|
|
|
|
18,768
|
|
|
|
30,211
|
|
Realized
and unrealized (gain) loss on derivatives
|
|
|
622
|
|
|
|
(400
|
)
|
|
|
316
|
|
|
|
925
|
|
Other
(income) expense
|
|
|
(53
|
)
|
|
|
637
|
|
|
|
(169
|
)
|
|
|
655
|
|
Income
(loss) from continuing operations before tax
|
|
$
|
2,108
|
|
|
$
|
10,160
|
|
|
$
|
(12,761
|
)
|
|
$
|
10,333
|
|
(a) Segment
operating income for the Precious Metal segment for the nine months ended
September 30, 2009 includes restructuring charges of $0.4 million relating to
the closure of a facility in New Hampshire, and $0.5 million relating to Sumco,
an operation currently being wound down and expected to be classified as a
discontinued operation by year-end. The results for the Precious Metal segment
for the three and nine month periods ended September 30, 2009 and 2008 also
include $0.7 million and $2.5 million of gain, respectively, resulting from the
liquidation of precious metal inventory valued at LIFO cost.
(b) Segment
operating income for the Tubing segment for the nine months ended September 30,
2009 includes non-cash asset impairment charges of $0.9 million to write-down to
fair value certain equipment formerly used in the manufacture of a discontinued
product line.
( c
) Segment operating results for the Arlon EM segment for the three
and nine months ended September 30, 2009 include a $1.1 million goodwill
impairment charge recorded to adjust the carrying value of one of the Arlon EM
segment’s reporting units to its estimated fair value.
(d) Segment
operating results for the Arlon CM segment for the three and nine months ended
September 30, 2009 include $0.1 million and $0.3 million of restructuring costs,
respectively, related to the closure and relocation of an operation in Dallas,
Texas. In the segment operating results for the three and nine month
periods ended September 30, 2008, $0.3 million and $1.6 million of move costs,
respectively, were incurred to consolidate two plants in San Antonio, Texas into
one. In addition to the direct move costs, the results of those
periods were negatively impacted by a plant shutdown and related operating
inefficiencies during the move.
(e) Segment
operating income for the Kasco segment for the three and nine months ended
September 30, 2009 includes $0.5 million of costs related to restructuring
activities at its EuroKasco operation.
Note 16 -
Contingencies
Legal Matters
:
Paul
E. Dixon & Dennis C. Kelly v. Handy & Harman
Paul
Dixon and Dennis Kelly, two former officers of H&H (the “Claimants”) filed a
Statement of Claim with the American Arbitration Association (the “Arbitration”)
on or about January 3, 2006. The Claimants were employees of H&H
until September 2005 when their employment was terminated by
H&H. Their arbitration claims included seeking payments allegedly
due under employment contracts and allegedly arising from their terminations,
and seeking recovery of benefits under what they allege was the H&H
Supplemental Executive Retirement Plan.
In the
Arbitration, Claimants sought an award in excess of $4.0 million each, plus
interest, costs and attorneys’ fees. The Claimants also sought
indemnification for certain matters and an injunction against H&H with
regard to life insurance policies. On February 15, 2006, H&H
brought a special proceeding in the Supreme Court of the State of New York,
County of Westchester (“Supreme Court, Westchester County”), for a judgment
staying the arbitration of three of the four claims. On March 10,
2006, all of the parties filed a stipulation with the court, discontinuing the
court proceeding and agreeing therein, among other things, that all claims
asserted by the Claimants in the Arbitration (which was also discontinued at
that time) would be asserted in Supreme Court,
Westchester County.
In April
2006, the Claimants served a request for benefits, severance and other amounts,
similar to those described above, on H&H and various plan administrators and
fiduciaries thereof. The request was reviewed in accordance with the
procedures of the benefit plans at issue and by letter dated September 27, 2006,
Claimants were notified that their request was largely denied.
In
January 2008, Mr. Kelly filed a lawsuit against WHX, H&H and various benefit
plans in the United States District Court for the Southern District of New
York. Mr. Dixon did not join in this lawsuit, and his counsel has not
indicated whether Mr. Dixon intends to file his own lawsuit. Mr.
Kelly’s claims in this lawsuit are essentially the same claims that he asserted
in the above-described arbitration and request for benefits. Mr.
Kelly’s complaint seeks approximately $4.0 million in money damages plus
unspecified punitive damages. The defendants are vigorously defending
this lawsuit, and believe that it is without merit. On April 22,
2009, the defendants filed a motion for summary judgment seeking dismissal of
the case. The motion for summary judgment was fully briefed on June 29, 2009 and
is now pending with the district court. There can be no assurance
that the defendants will be successful in defending against Mr. Kelly’s claims,
or that the defendants will not have any liability on account of Mr. Kelly’s
claims. Such liability, if any, cannot be reasonably estimated at
this time, and accordingly, there can be no assurance that the resolution of
this matter will not be material to the financial position, results of
operations and cash flow of the Company.
Arista
Development LLC v. Handy & Harman Electronic Materials Corporation
(“HHEM”)
In 2004,
HHEM, a subsidiary of H&H, entered into an agreement to sell a
commercial/industrial property in Massachusetts (the “MA
Property”). Disputes between the parties resulted in the purchaser
(plaintiff) initiating litigation in Bristol Superior Court in
Massachusetts. The plaintiff alleges that HHEM is liable for breach
of contract relating to HHEM’s alleged breach of the agreement, unfair and
deceptive acts and practices, and certain consequential and treble damages as a
result of HHEM’s termination of the agreement in 2005, although HHEM
subsequently revoked its notice of termination. HHEM has denied
liability and has been vigorously defending the case. The court
entered a preliminary injunction enjoining HHEM from conveying the property to
anyone other than the plaintiff during the pendency of the
case. Discovery on liability and damages has been stayed while the
parties are actively engaged in settlement discussions. Since discovery is not
completed, it cannot be known at this time whether it is foreseeable or probable
that plaintiff would prevail in the litigation or whether H&H would have any
liability to the plaintiff.
Electroplating
Technologies, Ltd. v. Sumco, Inc.
Electroplating
Technologies, Ltd. (“ETL”) filed a lawsuit against Sumco, a subsidiary of
H&H, in Lehigh, Pennsylvania County Court of Common Pleas. ETL
contended that Sumco misappropriated trade secrets and breached contractual
obligations with respect to certain allegedly proprietary and confidential ETL
information. ETL sought damages in excess of $4.55
million. In its pretrial filings, ETL also asserted a claim for $9.0
million in punitive damages. On May 8, 2009, after a ten day trial,
the jury found that Sumco had not misappropriated ETL’s trade
secrets. However, the jury found that Sumco had breached a
contractual obligation owed to ETL and as compensation for that breach of
contract, awarded ETL the sum of $250,000. Following the jury
verdict, the court denied ETL’s equitable requests for an injunction and for an
accounting. On May 18, 2009, Sumco filed a motion with the court for
judgment notwithstanding the verdict to set aside the damage
award. On May 28, 2009, ETL filed a motion with the court seeking
(i) a new trial and (ii) a modified verdict in the amount of
$2,250,000. Sumco vigorously opposed ETL’s two motions. In an order
docketed September 25, 2009, the court denied ETL’s motion for a new trial and
to increase the jury’s verdict. The court then granted Sumco’s motion for
a judgment notwithstanding the verdict and overturned the jury’s May 2009 award
of $250,000 against Sumco for breach of contract. ETL then filed a notice
of appeal of the court’s decision on October 16, 2009. Sumco intends
to vigorously litigate the appeal.
World
Properties, Inc. et. al. v. Arlon, Inc.
In
December 2008, World Properties, Inc. and Rogers Corporation (collectively,
“Rogers”) filed a lawsuit against Arlon, Inc. (“Arlon”), a subsidiary of
Bairnco, in the United States District Court for the District of
Connecticut. The lawsuit alleged that Rogers is the exclusive
licensee under U.S. Patent No. 5,552,210 (the “210 Patent”) and that Arlon’s
TC600 circuit board infringed that patent. In the complaint, Rogers
demanded that Arlon cease the manufacture, sale and distribution of its TC600
circuit board and that the district court award unspecified damages to
compensate Rogers for the alleged infringement. On January 14, 2009,
Arlon moved to dismiss the lawsuit, based upon a covenant not to sue contained
in an asset purchase agreement between Rogers and Arlon, dated January 30, 1996
(the “APA”), that Arlon contends covers the TC600 and the 210
Patent. Arlon also requested that the district court stay discovery
on Rogers’ patent infringement claim pending resolution of the motion to
dismiss. On February 13, 2009, the district court: (i) agreed to a
stay of discovery on the patent infringement claim; (ii) directed the parties to
conduct expedited discovery on the issue of the applicability of the covenant
not to sue in the APA to the TC600 and the 210 Patent; and (iii) denied the
motion to dismiss without prejudice. On June 24, 2009,
plaintiffs filed a motion to amend its complaint in order to assert that a
second Arlon product (AD 1000) infringed a second Rogers patent, U.S. Patent No.
5,384,181 (the “181 Patent”). Arlon subsequently filed its opposition to
plaintiffs’ motion to amend its complaint. On June 30, 2009, Arlon
filed a motion for summary judgment seeking to dismiss the lawsuit based upon
the APA. In an order issued October 9, 2009, the district court
granted Arlon’s motion for summary judgment and dismissed all of Rogers’
affirmative patent infringement claims. The parties are currently in
settlement discussions regarding the remaining claim in the case which is
Arlon’s affirmative claim for contractual indemnification for Rogers’ breach of
a covenant not to sue Arlon.
Environmental
Matters
H&H
has been working cooperatively with the Connecticut Department of Environmental
Protection (“CTDEP”) with respect to its obligations under a 1989 consent order
that applies to a property in Connecticut that H&H sold in 2003 (“Sold
Parcel”) and an adjacent parcel (“Adjacent Parcel”) that together with the Sold
Parcel comprises the site of a former H&H manufacturing
facility. Remediation of all soil conditions on the Sold Parcel was
completed on April 6, 2007, although H&H performed limited additional work
on that site, solely in furtherance of now concluded settlement discussions
between H&H and the purchaser of the Sold Parcel. Although no
groundwater remediation is required, there will be monitoring of the Sold Parcel
site for several years. On September 11, 2008, the CTDEP advised
H&H that it had approved H&H’s Soil Action Remediation Action Report,
dated December 28, 2007 as amended by an addendum letter dated July 15, 2008,
thereby concluding the active remediation of the Sold Parcel. Approximately
$29.0 million was expended through September 30, 2009, and the remaining
remediation and monitoring costs for the Sold Parcel are expected to approximate
$0.4 million. H&H received reimbursement of $2.0 million from an
insurance company under a cost-cap insurance policy and is pursuing its
potential entitlement to additional insurance coverage. H&H also
has been conducting an environmental investigation of the Adjacent Parcel, and
is continuing the process of evaluating various options for its remediation of
the Adjacent Parcel.
HHEM
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. HHEM and 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. HHEM is actively remediating the
property and continuing to investigate the most effective methods for achieving
compliance with the ACO. A remedial investigation report was filed
with the NJDEP in December 2007. By letter dated December 12, 2008,
NJDEP issued its approval with respect to additional investigation and
remediation activities discussed in the December 2007 remedial investigation
report. HHEM anticipates entering into discussions with NJDEP to
address that agency’s natural resource damage claims, the ultimate scope and
cost of which cannot be estimated at this time. Pursuant to a
settlement agreement with the former owner/operator of the site, the
responsibility for site investigation and remediation costs, as well as any
other costs, as defined in the settlement agreement, related to or arising from
environmental contamination on the property (collectively, “Costs”) are
contractually allocated 75% to the former owner/operator (with separate
guaranties by the two joint venture partners of the former owner/operator for
37.5% each) and 25% jointly to HHEM and H&H after the first $1.0
million. The $1.0 million was paid solely by the former
owner/operator. As of September 30, 2009, over and above the $1.0
million, total investigation and remediation costs of $1.2 million and $0.4
million have been expended by the former owner/operator and HHEM, respectively,
in accordance with the settlement agreement. Additionally, HHEM
indirectly is currently being reimbursed through insurance coverage for a
portion of the Costs for which HHEM is responsible. HHEM believes
that there is additional excess insurance coverage, which it intends to pursue
as necessary. HHEM anticipates that there will be additional remediation
expenses to be incurred once a remediation plan is agreed upon with NJDEP, and
there is no assurance that the former owner/operator or guarantors will continue
to timely reimburse HHEM for expenditures and/or will be financially capable of
fulfilling their obligations under the settlement agreement and the
guaranties. The additional Costs 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.
H&H
and Bairnco (and/or one or more of their respective subsidiaries) have also been
identified as potentially responsible parties (“PRPs”) under the Comprehensive
Environmental Response, Compensation and Liability Act (“CERCLA”) or similar
state statutes at several sites and are parties to administrative consent orders
in connection with certain other properties. H&H and Bairnco
(and/or one or more of their respective subsidiaries) may be subject to joint
and several liabilities imposed by CERCLA on PRPs. Due to the
technical and regulatory complexity of remedial activities and the difficulties
attendant in identifying PRPs and allocating or determining liability among
them, H&H and Bairnco are unable to reasonably estimate the ultimate cost of
compliance with such laws.
H&H
received a notice letter from the United States Environmental Protection Agency
(“EPA”) in August 2006 formally naming H&H as a PRP at a superfund site in
Massachusetts (the “Superfund site”). H&H then voluntarily joined
a group of ten (10) other PRPs (the “PRP Group”) which has since increased to
thirteen (13), to work cooperatively regarding remediation of the Superfund
site. Investigative work is ongoing to determine whether there are
other parties that sent hazardous substances to the Superfund site but that have
not received notice letters or been named as PRPs to date. The PRP
Group submitted its good faith offer to the EPA in late October
2006. The offer was contingent on the PRP Group arriving at an
acceptable allocation amongst themselves. The PRP Group agreed upon
allocations as to percentages of responsibility for investigation and
remediation costs at the Superfund site. There is a “shortfall” in
the overall allocation that is being shared, on a pro rata basis, among all of
the participating PRPs. The EPA has agreed to an orphan share equal
to the past costs incurred through April 1, 2008 and has also agreed to cap all
future EPA response and oversight costs at $2.9 million as further consideration
for the orphan share. H&H executed a participation agreement,
consent decree and settlement trust on June 13, 2008 and all of the other PRP’s
have signed as well. On December 9, 2008, the EPA lodged the consent
decree with the United States District Court for the District of
Massachusetts. After the thirty-day comment period (during which no
comments were received), the EPA filed a motion for the entry of the consent
decree, which was granted on January 27, 2009. With the entry and
filing of the consent decree, H&H was required to make two payments in
2009. On March 12, 2009, H&H made a payment of $182,053 relating
to the “true-up” of monies previously expended for remediation. On
March 27, 2009, H&H made a payment of $308,380 for H&H’s share of the
early action items for the remediation project. In addition, on March 11, 2009,
the Company executed a financial guaranty of H&H’s obligations in connection
with the Superfund site. There are some potentially responsible parties who have
not participated to date in the consent decree negotiations and allocation
process. Any such non-participating potentially responsible party may
be sued by the PRP Group under CERCLA. That is a decision that will
be made in the future by the participating PRPs. The remediation of
radiological contamination at the site is the responsibility of the Department
of Energy (“DOE”). The DOE radiological remediation is being
accomplished by the U.S. Army Corps of Engineers (the “ACOE”). The
DOE portion of the work has begun but is not expected to be completed until the
Spring of 2011 at the earliest and it may be delayed even further due to
inadequate funding in the federal program financing the DOE radiological
remediation work. Once the DOE portion of the work is completed, the
remaining remediation work relating to chemical contamination that is the
responsibility of the PRP Group will be more clearly
defined. Additional financial contributions will be required by the
PRP Group when it starts its work upon completion of the DOE’s radiological
remediation work. The PRP Group has both chemical and radiological
PRPs. H&H is a chemical PRP; not a radiological
PRP. The ACOE has informed one of the radiological PRPs in the PRP
Group that it may seek contribution from that PRP for the portion of the
remediation performed by the ACOE. That radiological PRP in turn has
indicated that it wishes to preserve its rights to sue the chemical PRPs in the
event any portion of the ACOE’s claim relates to chemical waste. The
PRPs investigated the nature of the ACOE’s potential claim and determined, based
on information currently available, that there is a minimal potential that the
ACOE’s claim can legally or factually result in a contribution claim against the
chemical PRPs. H&H has recorded a significant reserve in
connection with this matter.
HHEM is
continuing to comply with a 1987 consent order from the Massachusetts Department
of Environmental Protection (“MADEP”) to investigate and remediate the soil and
groundwater conditions at the MA Property that is the subject of the Arista
Development litigation discussed above. On January 20, 2009, HHEM
filed with MADEP a partial Class A-3 Response Action Outcome Statement (“RAO-P”)
and an Activity & Use Limitation (“AUL”) for the MA Property. By
letter dated March 24, 2009, MADEP advised HHEM that the RAO-P did not require a
comprehensive audit. By letter dated April 16, 2009, the MADEP
advised HHEM that a MADEP AUL Audit Inspection conducted on March 18, 2009 did
not identify any violations of the requirements applicable to the
AUL. Together, the March 24 and April 16 MADEP letters, combined with
HHEM’s Licensed Site Professional’s partial RAO opinion constitute confirmation
of the adequacy of HHEM’s investigation of the MA Property as well as its
remediation and post closure monitoring plans. HHEM is negotiating
with MADEP and the Massachusetts Attorney General a covenant not to sue (CNTS)
to cover the MA Property. Once the CNTS is executed, HHEM will file a
Remedy Operation Status and will then work towards filing a Class A-3 RAO to
close the site once groundwater monitoring demonstrates that the remediation has
controlled the conditions at the site. In addition, HHEM has
concluded settlement discussions with abutters of the MA Property and entered
into settlement agreements with each of them. Therefore, HHEM does
not expect that any claims from any additional abutters will be asserted, but
there can be no such assurances.
As
discussed above, H&H and Bairnco and/or their subsidiaries have existing and
contingent liabilities relating to environmental matters, including capital
expenditures, costs of remediation and potential fines and penalties relating to
possible violations of national and state environmental laws. H&H
and Bairnco and/or their subsidiaries have substantial remediation expenses on
an ongoing basis, although such costs are continually being readjusted based
upon the emergence of new techniques and alternative methods. In
addition, the Company has insurance coverage available for several of these
matters. The Company had approximately $7.1 million accrued related to
estimated environmental remediation costs as of September 30,
2009. Based upon information currently available, including
prior capital expenditures, anticipated capital expenditures, and information
available on pending judicial and administrative proceedings, H&H and
Bairnco and/or their subsidiaries do not expect their respective environmental
compliance costs, including the incurrence of additional fines and penalties, if
any, relating to the operation of their respective facilities to have a material
adverse effect on them, but there can be no such assurances that the resolution
of these matters will not have a material adverse effect on the financial
positions, results of operations and cash flows of H&H and Bairnco and/or
their subsidiaries. The Company anticipates that H&H and
Bairnco and/or their subsidiaries will pay such amounts out of their
respective working capital, although there is no assurance that H&H and
Bairnco and/or their subsidiaries will have sufficient funds to pay such
amounts. In the event that H&H and Bairnco and/or their
subsidiaries are unable to fund their liabilities, claims could be made against
their respective parent companies, including WHX, for payment of such
liabilities.
On July
31, 2009, H&H reached a settlement agreement with an insurer for
reimbursement of remediation and legal expense for five sites where H&H
and/or its subsidiaries had incurred environmental remediation
expenses. The insurer agreed to pay H&H $3,000,000 for past
indemnity expense and $150,000 for past defense costs. Such insurance
proceeds were received on August 10, 2009, and have been reflected as a gain in
the “Proceeds from insurance claims” line on the consolidated statement of
operations in the third quarter.
Other
Litigation
Certain
of the Company’s subsidiaries are defendants (“Subsidiary Defendants”) in
numerous cases pending in a variety of jurisdictions relating to welding
emissions. Generally, the factual underpinning of the plaintiffs’
claims is that the use of welding products for their ordinary and intended
purposes in the welding process causes emissions of fumes that contain
manganese, which is toxic to the human central nervous system. The
plaintiffs assert that they were over-exposed to welding fumes emitted by
welding products manufactured and supplied by the Subsidiary Defendants and
other co-defendants. The Subsidiary Defendants deny any liability and
are defending these actions. It is not possible to reasonably
estimate the Subsidiary Defendants’ exposure or share, if any, of the liability
at this time.
In
addition to the foregoing cases, there are a number of other product liability,
exposure, accident, casualty and other claims against WHX or certain of its
subsidiaries in connection with a variety of products sold by such subsidiaries
over several years, as well as litigation related to employment matters,
contract matters, sales and purchase transactions and general liability claims,
many of which arise in the ordinary course of business. There is also
one filed and served case in state court arising out of H&H’s sale of a used
piece of equipment which allegedly caused a fire resulting in property damage
and interruption of a third party’s business operations. It is not
possible to reasonably estimate the Company’s exposure or share, if any, of the
liability at this time in any of these matters.
There is
insurance coverage available for many of the foregoing actions, which are being
litigated in a variety of jurisdictions. To date, WHX and its
subsidiaries have not incurred and do not believe they will incur any
significant liability with respect to these claims, which they are contesting
vigorously in most cases. However, it is possible that the ultimate
resolution of such litigation and claims could have a material adverse effect on
the Company’s results of operations, financial position and cash flows when they
are resolved in future periods.
Pension
Plan Contingency Arising from the WPC Group Bankruptcy
On July
24, 2003, the Company entered into an agreement among the Pension Benefit
Guaranty Corporation (“PBGC”), certain of its former subsidiaries (“WPC” and
“WPSC”), and the United Steelworkers of America, AFL-CIO-CLC (“USWA”), in
settlement of matters relating to the Termination Litigation, in which the PBGC
was seeking to terminate the WHX Pension Plan. Under the settlement,
WHX agreed, among other things, (i) to certain administrative facts and legal
conclusions about the WHX Pension Plan, as well as certain ongoing agreements,
as set forth in the settlement agreement, and (ii) that WHX will not
contest a future action by the PBGC to terminate the WHX Pension Plan in
connection with a future WPC Group facility shutdown. The WPC Group
was a wholly-owned subsidiary of WHX until August 1, 2003. In the
event that such a plan termination occurs, the PBGC has agreed to release WHX
from any claims relating to the shutdown. However, there may be PBGC
claims related to unfunded liabilities that may exist as a result of a
termination of the WHX Pension Plan.
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of
Operations
Overview
WHX
Corporation, the parent company, manages a group of businesses on a
decentralized basis. WHX owns H&H, which is a diversified holding
company whose strategic business units encompass three reportable segments:
Precious Metal, Tubing, and Engineered Materials. WHX also owns
Bairnco, which has business units in three reportable segments: Arlon Electronic
Materials, Arlon Coated Materials, and Kasco Replacement Products and
Services. The business units of H&H and Bairnco principally
operate in North America.
WHX Business
System
The WHX
Business System is at the heart of the operational improvement methodologies for
all WHX operations and employees. Strategy Deployment forms the roof of the
business system and serves to convert strategic plans into tangible actions
ensuring alignment of goals throughout each of our businesses. The pillars of
the System are the key performance indicators used to monitor and drive
improvement. The steps of the System are the specific tool areas that
drive the key metrics and overall performance. WHX utilizes Lean
tools and philosophies to reduce and eliminate waste coupled with the Six Sigma
tools targeted at variation reduction. The System is a proven,
holistic approach to increasing shareholder value and achieving long term,
sustainable, and profitable growth.
H&H
Segments
|
·
|
H&H’s
Precious Metal segment fabricates precious metal and their alloys into
brazing alloys and utilizes precious metal in precision
electroplating.
|
|
·
|
H&H’s
Tubing segment manufactures a wide variety of steel tubing products.
Small-diameter precision-drawn tubing fabricated from stainless steel,
nickel alloy and carbon and alloy steel is produced in many sizes and
shapes to critical specifications for use in the appliance, refrigeration,
petrochemical, transportation, semiconductor, aircraft and instrumentation
industries. Additionally, tubular products are manufactured for the
medical industry for use in surgical devices and
instrumentation.
|
|
·
|
H&H’s
Engineered Materials segment manufactures fasteners, fastening systems,
plastic and steel connectors, exothermic welding materials, and electro
galvanized and painted sheet steel products for the roofing, construction,
appliance, do-it-yourself, electric, natural gas and water distribution
industries.
|
Bairnco
Segments
|
·
|
Arlon
EM manufactures high performance laminates & prepregs for circuit
boards and silicone rubber composites. These materials provide the
enabling platform for the electronic designs of the future, ranging across
military electronics, semiconductor, energy, medical devices, aerospace,
telecommunications and transportation
applications.
|
|
·
|
Arlon
CM’s principal products include adhesive coated cut graphics and digitally
printable cast and calendared vinyl films, cast vinyl fabric,
custom-engineered laminates, and coated and laminated films, foils, foams
and papers used in a broad range of industrial, consumer and commercial
products.
|
|
·
|
Kasco
is a provider of meat-room products and maintenance services for the meat
and deli departments of supermarkets; for restaurants; for meat and fish
processing plants; and for distributors of electrical saws and cutting
equipment throughout North America, Europe, Asia and South
America. These products and services include band saw blades
for cutting meat and fish, band saw blades for cutting wood and metal,
grinder plates and knives for grinding meat, repair and maintenance
services for food equipment in retail grocery and restaurant operations,
electrical saws and cutting machines, seasoning products, and other
related butcher supply products.
|
Cost Actions Taken During
the Nine Months Ended September 30, 2009
Overview
and Outlook
The
world-wide economic recession which became evident in the second half of 2008
continued to adversely impact net sales and profitability through the nine
months ended September 30, 2009. Significant end market declines were
experienced by many of the Company’s served markets, especially general
industrial, residential and industrial construction, transportation, and
appliance markets. This had a material adverse effect on almost all of the
Company’s businesses, driving sales down by over 26% during the nine months
ended September 30, 2009 as compared to the same period of 2008. All
of the Company’s reportable segments experienced declines in operating income
for the nine months ended September 30, 2009 compared to the same period in
2008.
In late
2008, management prepared contingency plans to respond to the deteriorating
economic conditions which were aggressively implemented in
2009. Significant extraordinary cost containment actions were
initiated and are continuing across all of the business segments and the
corporate headquarters. These 2009 actions include a reduction in
compensation and benefits for salaried employees, layoffs in both the salaried
and hourly workforce, the temporary idling of certain of the Company’s
manufacturing facilities for various periods during 2009 to better match
production with customer demand, and certain restructuring
activities. The Company believes that the 2009 restructuring
activities will strengthen its competitive position over the long
term.
Income
from continuing operations for the nine months ended September 30, 2009 declined
by $36.0 million from $42.1 million to $6.2 million, primarily as a result of
lower sales from all reportable segments, which was partially offset by lower
selling, general and administrative costs and a $3.0 million gain on proceeds
from an insurance claim. The 2009 income from continuing operations
included non-cash asset and goodwill impairment charges of $3.2 million, and
non-cash pension expense of $10.4 million compared to pension-related income of
$6.6 million for the same period of the prior year. The 2009 non-cash pension
expense was principally a result of actuarial loss amortization. Such
actuarial loss occurred primarily because investment return on the assets of the
WHX Pension Plan during 2008 was significantly less than the assumed return of
8.5%, partially offset by an increase in discount rates. In addition, during the
nine months ended September 30, 2009, income from continuing operations included
a non-cash gain of $0.7 million from the liquidation of precious metal
inventories valued at LIFO, as compared to a non-cash LIFO liquidation gain of
$2.5 million in the same period of 2008. The 2009 period was also negatively
impacted by a $1.9 million higher operating loss at the Company’s Sumco
operation (which is currently being wound down and is anticipated to be
classified as a discontinued operation by year-end).
The
Company expects to continue its initiatives to improve its operating
efficiencies, working capital management and capital allocation, as well as its
extraordinary cost containment measures at least through the end of 2009. The
implementation and utilization of the WHX Business System has been and will
continue to be the primary driver to achieving these goals, which management
believes are positioning the Company to realize enhanced performance as the
global economy and the markets the Company serves recover.
Comparison of Third Quarter
ended September 30, 2009 and 2008
The operating results for the three
months ended September 30, 2009 and 2008 (“third quarter”) are shown in the
following table (in thousands):
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Net
sales
|
|
$
|
145,172
|
|
|
$
|
195,331
|
|
Gross
profit
|
|
|
35,989
|
|
|
|
51,477
|
|
Income
from continuing operations
|
|
|
9,370
|
|
|
|
19,378
|
|
Income from
continuing operations before tax
|
|
|
2,108
|
|
|
|
10,160
|
|
Income
from continuing operations, net of tax
|
|
|
1,847
|
|
|
|
9,319
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operation:
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operation, net of tax
|
|
|
(1,029
|
)
|
|
|
149
|
|
Gain
on disposal of fixed assets, net of tax
|
|
|
182
|
|
|
|
-
|
|
Net
income (loss) from discontinued operation
|
|
|
(847
|
)
|
|
|
149
|
|
Net
income (loss)
|
|
$
|
1,000
|
|
|
$
|
9,468
|
|
Net sales
for the third quarter of 2009 decreased by $50.2 million, or 25.7%, to $145.2
million, as compared to $195.3 million for the third quarter of
2008. The lower sales volume across all the operating business
segments was primarily driven by lower demand as a result of the current
world-wide economic recession.
Gross
profit in the third quarter of 2009 declined to $36.0 million as compared to
$51.5 million in 2008. Gross profit margin for the quarter declined to 24.8% as
compared to 26.4% during the same period of 2008. The decline in gross profit
was primarily due to lower sales volume, reduced absorption of manufacturing
costs due to lower production levels, and unfavorable product mix. However,
improved price realization in 2009 more than offset the impact of higher raw
material costs. In addition, a non-cash LIFO liquidation gain of $0.7 million
related to precious metal inventory was recognized in the third quarter of 2009
as compared to a non-cash LIFO liquidation gain of $2.5 million during the same
period of 2008.
Selling,
general and administrative (“SG&A”) expenses in the third quarter of 2009
decreased $10.2 million to $24.5 million, or 16.9% of sales, from $34.7 million,
or 17.8% of sales, in the third quarter of 2008. SG&A costs
decreased in all segments, due to costs savings from headcount reduction and
incentive pay accruals, lower legal fees, partially offset by the severance
costs related to the workforce reduction efforts.
A
non-cash pension expense for the WHX Pension Plan of $3.5 million was recorded
in the third quarter of 2009. This non-cash pension expense primarily
represents actuarial loss amortization. Such actuarial loss occurred
principally because investment return on the assets of the WHX Pension Plan
during 2008 was significantly less than the assumed return of 8.5%, partially
offset by an increase in discount rates. In 2008 the Company recorded
a favorable non-cash pension credit of $2.2 million.
The
Company evaluated the goodwill of its Silicone Technology reporting unit (“STD”)
in light of deterioration of its profitability and forecasted future operating
income. STD sells flexible heaters, electronic materials for
appliance, automotive, and defense/aerospace markets and is included in the
Arlon EM segment. The decline in STD’s current and expected future
profitability was principally caused by the downturn in U.S. economic activity
accelerated by STD’s reliance on the appliance and automotive
markets. As a result of the Company’s evaluation, a non-cash
impairment charge of $1.1 million was recognized in the third quarter of 2009 to
write down the goodwill.
The
Company recorded a gain of $3.0 million from insurance proceeds during the three
months ended September 30, 2009 compared to a gain of $0.8 million for the same
period of 2008. On July 31, 2009, H&H reached a settlement
agreement with an insurer for reimbursement of certain remediation and legal
expenses for five sites where H&H and/or its subsidiaries had incurred
environmental remediation expenses.
Restructuring
costs of $0.6 million and $0.3 million were recorded in the third quarter of
2009 and 2008, respectively. EuroKasco (a division of Kasco) recorded
$0.5 million of restructuring expenses related to workforce
reduction.
Income
from continuing operations decreased $10.0 million to $9.4 million in the third
quarter of 2009 as compared to $19.4 million in the same period of 2008. The
lower income from continuing operations in the 2009 period was principally
driven by decreased sales and gross profit in all of the operating segments in
addition to a net increase in non-cash pension expense of $5.7 million and a
goodwill impairment charge of $1.1 million, partially offset by a $2.2 million
higher gain from insurance proceeds in 2009.
Interest
expense was $6.7 million in the third quarter of 2009, representing a 25.5%
decrease in comparison to $9.0 million in 2008, as total borrowings
decreased. In September of 2008, WHX completed the Rights Offering,
raising $156.5 million in equity and cash, of which approximately $13.2 million
was used to pay down senior debt and $142.5 million was used to pay down certain
related party long-term debt.
Realized
and unrealized losses on derivatives in the third quarter of 2009 were $0.6
million compared to a gain of $0.4 million for the same period of 2008. The
derivative financial instruments utilized by H&H are precious metal forward
and future contracts, which are used to economically hedge H&H’s precious
metal inventory against price fluctuations.
In the
third quarters of 2009 and 2008, tax expense of $0.3 million and $0.8 million,
respectively, were recorded, principally for state and foreign income
taxes. The Company has not recorded any federal income tax benefit in
either period due to the uncertainty of realizing the benefit of the Company’s
NOLs in the future. The Company has recorded a deferred tax valuation
allowance to the extent that it believes that it is more likely than not that
the benefits of its deferred tax assets, including those relating to its NOLs,
will not be realized in future periods.
The
discontinued operation segregated on the statement of operations is the
Company’s Indiana Tube Denmark (“ITD”) subsidiary. In 2008,
management decided to exit the welded specialty tubing market in Europe and
close ITD, sell its assets, pay off ITD’s debt with cash generated by ITD, and
repatriate the remaining cash. The decision to exit this market was made after
evaluating current economic conditions and ITD’s capabilities, served markets
and competitors. ITD ceased operations in the third quarter of
2009. The discontinued operation had an operating loss of $1.0
million and income of $0.1 million during the third quarter of 2009 and 2008,
respectively.
Net
income for the third quarter of 2009 was $1.0 million, or $0.08 per share on
12,179,000 shares outstanding, compared to net income of $9.5 million or $5.48
per share for the third quarter of 2008 on 1,729,000 shares
outstanding.
Segment
sales and operating income data for the three months ended September 30, 2009
and 2008 are shown in the following table (in thousands):
Statement
of operations data:
|
|
Three
Months Ended September 30,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
Inc(decr)
|
|
|
%
chg
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Precious
Metal
|
|
$
|
25,837
|
|
|
$
|
40,344
|
|
|
$
|
(14,507
|
)
|
|
|
-36.0
|
%
|
Tubing
|
|
|
18,782
|
|
|
|
27,564
|
|
|
|
(8,782
|
)
|
|
|
-31.9
|
%
|
Engineered
Materials
|
|
|
56,055
|
|
|
|
74,884
|
|
|
|
(18,829
|
)
|
|
|
-25.1
|
%
|
Arlon
Electronic Materials
|
|
|
13,154
|
|
|
|
16,777
|
|
|
|
(3,623
|
)
|
|
|
-21.6
|
%
|
Arlon
Coated Materials
|
|
|
16,762
|
|
|
|
19,103
|
|
|
|
(2,341
|
)
|
|
|
-12.3
|
%
|
Kasco
|
|
|
14,582
|
|
|
|
16,659
|
|
|
|
(2,077
|
)
|
|
|
-12.5
|
%
|
Total
net sales
|
|
$
|
145,172
|
|
|
$
|
195,331
|
|
|
$
|
(50,159
|
)
|
|
|
-25.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Precious
Metal
|
|
$
|
3,263
|
|
|
$
|
6,759
|
|
|
$
|
(3,496
|
)
|
|
|
-51.7
|
%
|
Tubing
|
|
|
1,399
|
|
|
|
2,458
|
|
|
|
(1,059
|
)
|
|
|
-43.1
|
%
|
Engineered
Materials
|
|
|
7,037
|
|
|
|
9,238
|
|
|
|
(2,201
|
)
|
|
|
-23.8
|
%
|
Arlon
Electronic Materials
|
|
|
(501
|
)
|
|
|
1,849
|
|
|
|
(2,350
|
)
|
|
|
-127.1
|
%
|
Arlon
Coated Materials
|
|
|
682
|
|
|
|
185
|
|
|
|
497
|
|
|
|
268.6
|
%
|
Kasco
|
|
|
494
|
|
|
|
625
|
|
|
|
(131
|
)
|
|
|
-21.0
|
%
|
Total
segment operating income
|
|
$
|
12,374
|
|
|
$
|
21,114
|
|
|
$
|
(8,740
|
)
|
|
|
-41.4
|
%
|
The
comments that follow compare revenues and operating income by segment for the
third quarter of 2009 and 2008.
Precious
Metal
The
Precious Metal segment net sales decreased by $14.5 million, or 36.0%, to $25.8
million. The decreased sales were primarily driven by lower volume in all of its
markets, particularly sales to the electronics, construction equipment, auto
industry and appliance markets in 2009 compared to the third quarter of
2008. The brazing alloys made by this segment are fabricated into a
variety of engineered forms and are used in many industries including
automotive, air conditioning, general industrial and other metal-joining
industries. The electro-galvanized electronic and electrical components sold by
this segment are primarily for use in the automotive
industry. Therefore, the broad-based recession significantly reduced
the sales of the Precious Metal segment.
Segment
operating income decreased by $3.5 million to $3.3 million in the third quarter
of 2009, compared to operating income of $6.8 million in the third quarter of
2008, primarily due to the decline in sales. During the third quarter
of 2009, gross profit included a non-cash gain of $0.7 million from the
liquidation of precious metal inventories valued at LIFO, as compared to a
non-cash LIFO liquidation gain of $2.5 million in the third quarter of
2008. The sales decline was partially offset by lower manufacturing
and selling, general, and administrative expenses as a result of cost saving
efforts.
Tubing
The
Tubing segment sales decreased by $8.8 million, or 31.9%, with lower sales to
the home appliance markets serviced by the Specialty Tubing Group. There was
also a reduction in sales to the petrochemical market serviced by the Stainless
Steel Tubing Group, which was partially offset by strength in sales to the
defense and aerospace markets.
Segment
operating income decreased by $1.1 million to $1.4 million in the third quarter
of 2009 compared to $2.5 million in the third quarter of 2008 primarily due to
the decline in sales and a reduction in gross profit
percentage. Third quarter gross profit percentage was 2.7% lower
compared to the same period of the prior year, primarily resulting from lower
selling prices due to softer demand and product mix changes in the Stainless
Steel Tubing Group.
The
discontinued operation, ITD, was previously part of the Tubing segment but has
now been excluded from the segment’s operating results in both periods
presented.
Engineered
Materials
The
Engineered Materials segment sales decreased by $18.8 million, or 25.1%, with
continued weakness experienced in the commercial flat roofing fasteners market,
natural gas and other utility connectors used in residential construction, as
well as a drop in electrical connector sales to its international
markets.
Segment
operating income decreased by $2.2 million to $7.0 million in the third quarter
of 2009 from $9.2 million in the same period of 2008, principally the result of
the lower sales volume. However, gross profit percentage improved
principally due to product mix, with a lesser decline in sales of the roofing
fastener business, partially offsetting a decline in the electrical and gas
connector business. In addition, the segment experienced lower
selling, general and administrative expenses due to lower sales and cost saving
initiatives.
Arlon EM
Arlon EM
segment sales declined by $3.6 million, or 21.6%, primarily due to slow
worldwide telecommunication material purchases, lower material demand from the
oil drilling industry and military programs.
Segment
operating loss was $0.5 million in the third quarter of 2009 compared to income
of $1.8 million during the same period of 2008 principally as a result of a $1.1
million goodwill impairment charge based on a recent valuation of its Silicone
Technology reporting unit. In addition, a shift from higher margin military
sales to lower margin PCB materials, particularly related to cellular
infrastructure in China and India, had a negative impact on gross profit margin.
This was partially offset by increased volume in the low-cost China
manufacturing facility as well as reduced staffing and expense reductions as
compared to the same quarter of the prior year.
Arlon CM
Arlon CM
segment sales declined by $2.3 million, or 12.3% compared to the same period of
2008. The world-wide economic recession has adversely affected demand
in the Asian shipping container market and the North American and European
graphics market for corporate imaging. Arlon CM sales were also
adversely impacted by lower demand from its automotive, appliance and
electronics customers.
Operating
income increased $0.5 million compared to the third quarter of 2008. Third
quarter gross profit percentage increased by 2.9% compared to the same period of
the prior year. This resulted from certain improvements from the
implementation of the WHX Business System, partially offset by unfavorable
overhead absorption.
Kasco
Kasco
segment sales declined by $2.1 million, or 12.5% compared to the same period of
2008. Sales to U.S. grocery stores and other route sales softened
along with weakness in distributor sales in North America, and in European
sales.
Operating
income from the Kasco segment was $0.5 million in the third quarter, which was
$0.1 million lower compared to the same period of 2008. Lower gross
profit margin from sales mix was offset by more efficient manufacturing
operations and better labor and spending control. During the third
quarter of 2009, EuroKasco recorded restructuring expenses of $0.5 million,
primarily severance payments, due to the weakness in its machinery sales
volume.
Comparison of Nine Months
ended September 30, 2009 and 2008
The
operating results for the nine months ended September 30, 2009 and 2008 are
shown in the following table (in thousands):
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Net
sales
|
|
$
|
417,421
|
|
|
$
|
564,631
|
|
Gross
profit
|
|
|
100,688
|
|
|
|
138,877
|
|
Income
from continuing operations
|
|
|
6,154
|
|
|
|
42,124
|
|
Income
(loss) from continuing operations before tax
|
|
|
(12,761
|
)
|
|
|
10,333
|
|
Income
(loss) from continuing operations, net of tax
|
|
|
(13,188
|
)
|
|
|
8,022
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operation:
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operation, net of tax
|
|
|
(2,938
|
)
|
|
|
567
|
|
Gain
on disposal of fixed assets, net of tax
|
|
|
1,671
|
|
|
|
-
|
|
Net
income (loss) from discontinued operation
|
|
|
(1,267
|
)
|
|
|
567
|
|
Net
income (loss)
|
|
$
|
(14,455
|
)
|
|
$
|
8,589
|
|
Net sales
for the nine months ended September 30, 2009 decreased by $147.2 million, or
26.1%, to $417.4 million, as compared to $564.6 million for the nine months
ended September 30, 2008. The lower sales volume across all the
operating business segments was primarily driven by lower demand as a result of
the current world-wide economic recession.
Gross
profit in the nine months ended September 30, 2009 declined to $100.7 million as
compared to $138.9 million in 2008. Gross profit margin for the nine months of
2009 declined to 24.1% as compared to 24.6% during the same period of 2008. The
decline in gross profit was primarily due to lower sales volume, reduced
absorption of certain manufacturing costs due to lower production
levels, and unfavorable product mix. However, improved price
realization in 2009 more than offset the impact of higher raw material costs. In
addition, during the nine months ended September 30, 2009, gross profit included
a non-cash gain of $0.7 million from the liquidation of precious metal
inventories valued at LIFO, as compared to a non-cash LIFO liquidation gain of
$2.5 million in the same period of 2008.
SG&A
expenses decreased $23.1 million to $81.8 million, or 19.6% of sales, in the
nine months ended September 30, 2009 from $104.9 million, or 18.6% of sales, in
the same period of 2008. SG&A costs decreased in all segments,
due to costs savings from headcount reduction and incentive pay accruals, lower
legal fees, reduction of certain non-qualified postretirement benefits for
former employees, partially offset by the severance costs related to the
workforce reduction efforts. Given the substantial drop in sales and
the fixed nature of certain SG&A costs, the positive result of the Company’s
efforts to reduce costs are reflected in the small increase in SG&A costs as
a percentage of sales.
A
non-cash pension expense for the WHX Pension Plan of $10.4 million was recorded
in the nine months ended September 30, 2009. This non-cash pension
expense primarily represents actuarial loss amortization. Such
actuarial loss occurred principally because investment return on the assets of
the WHX Pension Plan during 2008 was significantly less than the assumed return
of 8.5%, partially offset by an increase in discount rates. In 2008,
the Company recorded a favorable non-cash pension credit of $6.6
million.
The
Company evaluated the goodwill of its STD reporting unit in light of
ongoing deterioration of its profitability and forecasted future operating
income. STD sells flex heaters, electronic materials for appliance,
automotive, and defense/aerospace markets and is included in the Arlon EM
reportable segment. The decline in STD's current and expected future
profitability was principally caused by the downturn in U.S. economic activity
accelerated by STD’s reliance on the appliance and automotive
markets. As a result of the Company’s evaluation, a non-cash
impairment charge of $1.1 million was recognized in the third quarter of 2009 to
write down the goodwill.
The
Company recorded non-cash asset impairment charges totaling $2.0 million in the
nine months ended September 30, 2009. These charges included a $0.9
million non-cash impairment related to certain manufacturing equipment located
at one of the Company’s Tubing facilities, and a $1.1 million non-cash
impairment charge related to an investment accounted for under the equity
method. The equipment had been utilized exclusively in connection
with a discontinued product line, and has no other viable uses for the Company;
nor is there believed to be a potential market to sell the equipment. The equity
investment was sold by the Company during the third quarter for cash proceeds of
$3.1 million, and the amount of the impairment represents the difference between
the carrying value of the investment and the selling price.
Restructuring
costs of $2.4 million and $1.6 million were recorded for the nine months ended
September 30, 2009 and 2008, respectively. At its Sumco subsidiary,
which is part of the Precious Metal segment, the Company incurred severance
costs of approximately $0.5 million when it restructured its operations,
including entering into a Management Service Agreement with a company owned by
two former employees. In addition, restructuring costs of $0.6
million were recorded during the nine months ended September 30, 2009 relating
to the consolidation of the former Bairnco Corporate office into the WHX
Corporate office. In April 2009, the Company announced the closure of
a facility in New Hampshire which was part of the Precious Metal segment and the
relocation of the functions to its facility in Milwaukee,
Wisconsin. Such relocation has been completed and the Company has
offered the facility for sublease. Restructuring costs of
approximately $0.4 million were recorded in connection with this relocation,
including an estimate of future net lease costs for the facility. Also during
the nine months ended September 30, 2009, the Company closed a leased facility
in Dallas, Texas that was part of the Arlon CM segment, and will now service
that business from its facility in San Antonio, Texas. The Company
incurred severance and relocation costs of approximately $0.3 million in
connection with the shutdown of the Dallas facility. EuroKasco recorded
restructuring expenses of $0.5 million which related mainly to workforce
reduction. In the prior year, the restructuring charges for the nine months
ended September 30, 2008 of $1.6 million represented move costs to consolidate
two plants in San Antonio, Texas into one. The costs were incurred by
the Arlon CM segment.
Income
from continuing operations decreased $36.0 million to $6.2 million for the nine
months ended September 30, 2009 as compared to $42.1 million for the same period
of 2008. The lower income from continuing operations in the 2009 period was
principally driven by decreased sales and gross profit in all of the operating
segments in addition to a net increase in non-cash pension expense of $17.0
million, plus non-cash asset impairment charges of $2.0 million and a goodwill
impairment charge of $1.1 million in 2009. Furthermore, income from
continuing operations decreased in 2009 because of a $1.9 million higher
operating loss at the Company’s Sumco operation, which is currently being wound
down, and which is anticipated to be classified as a discontinued operation by
year-end.
Interest
expense was $18.8 million for the nine months ended September 30, 2009,
representing a 37.9% decrease in comparison to $30.2 million in 2008, as total
borrowings decreased. In September 2008, WHX completed the Rights
Offering, raising $156.5 million in equity and cash, of which approximately
$13.2 million was used to pay down senior debt and $142.5 million was used to
pay down certain related party long-term debt.
Realized
and unrealized losses on derivatives were $0.3 million and $0.9 million for the
nine months ended September 30, 2009 and 2008, respectively. The derivative
financial instruments utilized by H&H are precious metal forward and future
contracts, which are used to economically hedge H&H’s precious metal
inventory against price fluctuations.
For the
nine months ended September 30, 2009 and 2008, tax expense of $0.4 million and
$2.3 million were recorded, respectively, principally for state and foreign
income taxes. The Company has not recorded any federal income tax
benefit in either period due to the uncertainty of realizing the benefit of the
Company’s NOLs in the future. The Company has recorded a deferred tax
valuation allowance to the extent that it believes that it is more likely than
not that the benefits of its deferred tax assets, including those relating to
its NOLs, will not be realized in future periods. The nine month period ended
September 30, 2009 reflects a favorable impact of $0.5 million which resulted
from a change in the effective tax rate at which the deferred state income taxes
of certain subsidiaries are estimated to be realized.
The
discontinued operation segregated on the statement of operations is the
Company’s ITD subsidiary. In 2008, management decided to exit the
welded specialty tubing market in Europe and close ITD, sell its assets, pay off
ITD’s debt using cash generated by ITD, and repatriate the remaining cash. The
decision to exit this market was made after evaluating current economic
conditions and ITD’s capabilities, served markets, and
competitors. ITD ceased operations in the third quarter of
2009. The discontinued operation had an operating loss of $2.9
million and operating income of $0.6 million during the nine months ended
September 30, 2009 and 2008, respectively. In addition, ITD reported
a gain of $1.7 million in 2009 from the sale of certain machinery and
equipment.
Net loss
for the nine months ended September 30, 2009 was $14.5 million, or $1.19 loss
per share on 12,179,000 shares outstanding, compared to net income of $8.6
million or $6.89 earnings per share for the nine months ended September 30,
2008, on 1,245,700 shares outstanding.
Segment
sales and operating income data for the nine months ended September 30, 2009 and
2008 are shown in the following table (in thousands):
Statement
of operations data:
|
|
Nine
Months Ended September 30,
|
|
(in
thousands)
|
|
2009
|
|
|
2008
|
|
|
Inc(decr)
|
|
|
%
chg
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Precious
Metal
|
|
$
|
74,249
|
|
|
$
|
131,624
|
|
|
$
|
(57,375
|
)
|
|
|
-43.6
|
%
|
Tubing
|
|
|
56,371
|
|
|
|
78,408
|
|
|
|
(22,037
|
)
|
|
|
-28.1
|
%
|
Engineered
Materials
|
|
|
153,180
|
|
|
|
198,636
|
|
|
|
(45,456
|
)
|
|
|
-22.9
|
%
|
Arlon
Electronic Materials
|
|
|
44,034
|
|
|
|
48,409
|
|
|
|
(4,375
|
)
|
|
|
-9.0
|
%
|
Arlon
Coated Materials
|
|
|
43,921
|
|
|
|
56,763
|
|
|
|
(12,842
|
)
|
|
|
-22.6
|
%
|
Kasco
|
|
|
45,666
|
|
|
|
50,791
|
|
|
|
(5,125
|
)
|
|
|
-10.1
|
%
|
Total
net sales
|
|
$
|
417,421
|
|
|
$
|
564,631
|
|
|
$
|
(147,210
|
)
|
|
|
-26.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Precious
Metal
|
|
$
|
2,514
|
|
|
$
|
14,120
|
|
|
$
|
(11,606
|
)
|
|
|
-82.2
|
%
|
Tubing
|
|
|
3,597
|
|
|
|
6,812
|
|
|
|
(3,215
|
)
|
|
|
-47.2
|
%
|
Engineered
Materials
|
|
|
14,288
|
|
|
|
20,458
|
|
|
|
(6,170
|
)
|
|
|
-30.2
|
%
|
Arlon
Electronic Materials
|
|
|
2,305
|
|
|
|
4,232
|
|
|
|
(1,927
|
)
|
|
|
-45.5
|
%
|
Arlon
Coated Materials
|
|
|
(433
|
)
|
|
|
(211
|
)
|
|
|
(222
|
)
|
|
|
-105.2
|
%
|
Kasco
|
|
|
2,264
|
|
|
|
2,703
|
|
|
|
(439
|
)
|
|
|
-16.2
|
%
|
Total
segment operating income
|
|
$
|
24,535
|
|
|
$
|
48,114
|
|
|
$
|
(23,579
|
)
|
|
|
-49.0
|
%
|
The
comments that follow compare revenues and operating income by segment for the
nine months ended September 30, 2009 and 2008.
Precious
Metal
The
Precious Metal segment net sales decreased by $57.4 million, or 43.6%, to $74.2
million. The decreased sales were primarily driven by lower volume in
all of its markets, particularly sales to the electronics, construction
equipment, auto industry and appliance markets in 2009 compared to the nine
months ended September 30, 2008. The brazing alloys made by this
segment are fabricated into a variety of engineered forms and are used in many
industries including automotive, air conditioning, general industrial and other
metal-joining industries. The electro-galvanized electronic and electrical
components sold by this segment are primarily for use in the automotive
industry. Therefore, the broad-based recession significantly reduced
the sales of the Precious Metal segment.
Segment
operating income decreased by $11.6 million to $2.5 million for the nine months
ended September 30, 2009, compared to operating income of $14.1 million for the
nine months ended September 30, 2008. The decrease was driven by the
sales decline but also included a $1.9 million higher operating loss at the
segment’s Sumco operation (which is currently being wound down and is
anticipated to be classified as a discontinued operation by
year-end). The segment results also included $0.4 million of
restructuring charges related to the closure of a facility in New Hampshire and
the relocation of the functions to the segment’s facility in Milwaukee,
Wisconsin. In addition, during the nine months ended September 30,
2009, gross profit included a non-cash gain of $0.7 million from the liquidation
of precious metal inventories valued at LIFO, as compared to a non-cash LIFO
liquidation gain of $2.5 million in the same period of 2008.
Tubing
For the
nine months ended September 30, 2009, the Tubing segment sales decreased by
$22.0 million, or 28.1%, driven by lower sales to the home appliance markets
serviced by the Specialty Tubing Group. There was also a reduction in sales to
the petrochemical and shipbuilding markets serviced by the Stainless Steel
Tubing Group, which was partially offset by strength in sales to the defense,
aerospace and medical markets.
Segment
operating income decreased by $3.2 million to $3.6 million for the nine months
ended September 30, 2009 compared to operating income of $6.8 million for the
nine months ended September 30, 2008. The 2009 nine-month period included a
non-cash asset impairment charge of $0.9 million relating to equipment utilized
exclusively in connection with a discontinued product line, and has no other
viable uses for the Company; nor is there believed to be a potential market to
sell the equipment. Gross profit percentage declined because fixed
costs could not be reduced in the same proportion as the sales decline,
partially offset by manufacturing efficiency and cost saving
effort.
The
discontinued operation, ITD, was previously part of this Tubing segment but has
now been excluded from the segment’s operating results in both periods
presented.
Engineered
Materials
The
Engineered Materials segment sales decreased by $45.5 million, or 22.9%, with
continued weakness experienced in the commercial flat roofing fasteners market,
natural gas and other utility connectors used in residential construction, as
well as a drop in electrical connector sales to its international
markets.
Segment
operating income was $14.3 million for the nine months ended September 30, 2009,
compared to $20.5 million for the same period in 2008. The decline in
operating income was principally the result of the lower sales volume, partially
offset by pricing increases and cost saving efforts from manufacturing and
selling, general and administrative functions.
Arlon EM
Arlon EM
segment sales declined by $4.4 million, or 9.0%, primarily due to lower sales of
flexible heater and coil insulation products, which was partially offset by
improved sales related to military programs and increased sales of PCB
materials, particularly related to infrastructure in China and
India.
Segment
operating income decreased $1.9 million to $2.3 million for the nine months
ended September 30, 2009 principally as a result of lower sales volume which was
partially offset by favorable product mix and increased volume in the low-cost
China manufacturing facility, as well as reduced staffing expense compared to
the same period of the prior year. In addition, the segment recorded a non-cash
goodwill impairment charge of $1.1 million during the third quarter of 2009
based on a recent valuation of its STD reporting unit.
Arlon CM
Arlon CM
segment sales declined by $12.8 million, or 22.6% compared to the same period of
2008. The world-wide economic recession has adversely affected demand in the
Asian shipping container and the North American and European graphics market for
corporate imaging. Arlon CM sales were also adversely affected by
lower demand from its automotive, appliance and electronics
customers.
Operating
loss was $0.4 million and $0.2 million for the nine months ended September 30,
2009 and 2008, respectively. This was driven by lower sales volume which was
partially offset by the effect of certain efficiency improvements from
implementation of the WHX Business System, and lower raw material
cost. Restructuring charges were $0.3 million and $1.6 million in the
nine months ended September 30, 2009 and 2008, respectively, primarily related
to headcount reductions.
Kasco
Kasco
segment sales declined by $5.1 million, or 10.1% compared to the same period of
2008. Sales to U.S. grocery stores and other route sales softened
along with weakness in distributor sales in North America, and in
European sales. The decline in European sales was significantly
affected by the translation effect of a stronger U.S. dollar, but also reflected
global economic weakness.
Operating
income from the Kasco segment was $2.3 million for the nine months ended
September 30, 2009, which was $0.4 million lower compared to the same period of
2008. Lower gross profit margin from sales mix was partially offset
by more efficient manufacturing operations and better labor and spending
control. EuroKasco recorded restructuring charges of $0.5 million
during the third quarter of 2009 as a result of workforce reduction due to the
weakness in machinery sales volume.
Discussion of Consolidated
Statement of Cash Flows
Operating
Activities
For the
nine months ended September 30, 2009, $24.6 million was provided by operating
activities, $0.9 million was provided by investing activities, and $24.3 million
was used in financing activities. The following table provides
supplemental information regarding the Company’s cash flows from operating
activities for the nine month periods ended September 30, 2009 and
2008:
(in
thousands)
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
thousands)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(14,455
|
)
|
|
$
|
8,589
|
|
Adjustments
to reconcile net income (loss) to net cash
provided by (used in)
operating activities:
|
|
|
|
|
|
|
|
|
Non-cash
items:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
15,558
|
|
|
|
17,185
|
|
Asset
and goodwill impairments
|
|
|
3,186
|
|
|
|
-
|
|
Accrued
interest not paid in cash
|
|
|
7,842
|
|
|
|
16,979
|
|
Pension
expense (credit), net of payments
|
|
|
10,036
|
|
|
|
(6,555
|
)
|
Other
|
|
|
406
|
|
|
|
1,073
|
|
Net
income (loss) plus non-cash items
|
|
|
22,573
|
|
|
|
37,271
|
|
Discontinued
operations
|
|
|
4,075
|
|
|
|
1,561
|
|
Working
capital:
|
|
|
|
|
|
|
|
|
Trade
and other receivables
|
|
|
(2,247
|
)
|
|
|
(27,427
|
)
|
Precious
metal inventory
|
|
|
(6,328
|
)
|
|
|
3,238
|
|
Inventory
other than precious metal
|
|
|
10,718
|
|
|
|
1,536
|
|
Other
current assets
|
|
|
1,010
|
|
|
|
2,530
|
|
Other
current liabilities
|
|
|
(5,026
|
)
|
|
|
7,813
|
|
Total
working capital effect
|
|
|
(1,873
|
)
|
|
|
(12,310
|
)
|
Non-recurring
payment to SP II of accrued interest
|
|
|
-
|
|
|
|
(31,310
|
)
|
Other
items-net
|
|
|
(173
|
)
|
|
|
287
|
|
Net
cash provided by (used in) operating activities
|
|
$
|
24,602
|
|
|
$
|
(4,501
|
)
|
Although
the Company reported a net loss of $14.5 million for the nine months ended
September 30, 2009, non-cash income and expense items, including depreciation
and amortization of $15.6 million, non-cash asset and goodwill impairment
charges of $3.2 million, non-cash pension expense of $10.0 million, and
long-term interest expense not paid in cash of $7.8 million, resulted in the
positive cash flow from operations. Other working capital accounts
partially offset this by utilizing $1.9 million in the nine month
period. The Company’s discontinued operation, ITD, produced an
operating cash inflow of $4.1 million by liquidating working
capital.
Net
cash used in operating activities for the nine months ended September 30, 2008
totaled $4.5 million. Net income of $8.6 million was adjusted for
non-cash income and expense items totaling $28.7 million, but this was offset by
use of $31.3 million for accrued interest paid to SP II (with proceeds of the
Rights Offering), $12.3 million of cash for working capital, and the Company’s
discontinued operation provided $1.6 million of operating cash
flow.
Operating
cash flow of $24.6 million for the nine months ended September 30, 2009
favorably compares to a use of $4.5 million in the same period in
2008. Operating cash flow was negatively impacted by reduced profit,
but this was offset by reduced use of cash for working capital of $10.4 million
in 2009 and the non-recurring payment of accrued interest of $31.3 million in
the 2008 period.
Within
the elements of working capital, the largest change between the 2009 period and
the 2008 period was a reduction in the usage of cash for accounts receivable
growth. This was mostly offset by a related reduction in the amount
of cash utilized for accrued expenses. Both of these factors are
attributable to the lower sales and cost volume in the current
period. For example, accrued expenses for employee compensation
declined in the 2009 period due to less business activity and
profitability. With respect to other current assets, in the nine
months ended September 30, 2008, an income tax refund of $1.8 million was
collected, as compared to a refund for $0.6 million in the current nine month
period. The number of days’ sales outstanding in accounts receivable was
comparable between periods, as was the accounts receivable turnover
rate. The Company effectively managed its accounts receivable and its
costs despite the negative recessionary trends affecting many of the markets
that the Company’s subsidiaries operate in.
Inventory
was $67.7 million as of September 30, 2009 compared to $71.8 million as of
December 31, 2008, and $74.9 million as of September 30,
2008. Inventory provided $4.4 million in the nine months ended
September 30, 2009 as management adjusted inventories in response to continued
weakness in sales, as well as by improvements in inventory management using the
WHX Business System, which includes Lean manufacturing and other managerial
processes. These inventory reduction factors more than offset a
non-recurring cash expenditure of $7.4 million needed to acquire precious metal
inventory to replace customer-owned silver being used in H&H’s production
processes. For the 2008 period, $4.8 million of cash flow was
generated by changes in inventory. The Company continues to focus on
inventory management.
Total
accrued interest due to SP II, including both the current and long-term
portions, provided $7.8 million of interest accrued in the 2009 period, and used
a net amount of $14.3 million in the 2008 period. The 2008 net amount
reflects the payment of $31.3 million of accrued interest using the proceeds of
the Rights Offering, partially offset by $17.0 million of interest accrued
during the 2008 period. The reason for the decline in accrued
interest is that the Company has reduced its level of debt substantially since
2008, principally using the proceeds of the Rights Offering completed on
September 25, 2008.
Investing
Activities
Investing
activities provided $0.9 million in the nine months ended September 30, 2009 and
used $2.9 million in the nine months ended September 30,
2008. Capital spending in the 2009 period was $5.0 million, as
compared to $9.9 million spent in the 2008 period. The Company paid
net proceeds of $0.2 million related to its settlements of precious metal
derivative contracts in the period ended September 30, 2009, as compared to net
payments totaling $1.2 million in the period ended September 30,
2008. Also in the 2008 period, net proceeds from the sale of assets
totaled $8.2 million, principally from the sale of the Rancho Cucamonga,
California land and plant building utilized by Arlon, Inc., which it has leased
back from the buyer under a 15-year lease with two 5-year renewal
options. In the 2009 period, the Company’s discontinued operation,
ITD, sold certain equipment for proceeds of $2.6 million, and the Company also
sold its equity investment in CoSine Communications, Inc. for $3.1
million.
Financing
Activities
Financing
activities used a net amount of $24.3 million in the nine month period ended
September 30, 2009, principally due to the net repayment of $18.7 million under
its term loan agreements during the period. Such repayments included
both scheduled principal payments as well as unscheduled payments of
approximately $15.7 million, including $5.0 repaid on the Wachovia Facilities
pursuant to the May 9, 2009 amendment. Also, on August 19, 2009, the
proceeds of an insurance claim of $3.2 million was used to repay $3.0
million of the Wachovia Facilities. In addition, on August 19, 2009,
Bairnco repaid $3.0 million of the Ableco Facility. H&H’s
subsidiary, ITD, which is classified as a discontinued operation, repaid $4.7
million of debt using proceeds from the sale of equipment. The
Company’s indebtedness under its revolving credit facilities also declined (by
$4.3 million) in the 2009 period. The Company has focused on
effectively managing cash and working capital in the 2009 period despite the
decline in sales. The Company paid $2.2 million of financing fees during the
2009 period as compared to $1.5 million in the 2008 period, principally related
to extending and otherwise amending its credit facilities in both
periods.
For the
nine months ended September 30, 2008, financing activities generated a net
amount of $21.0 million. The completion of the Rights Offering
resulted in cash proceeds, net of expenses, of $155.8 million, $120.8 million of
which represented SP II’s participation. Of the total proceeds,
$111.2 million was used to repay debt to SP II, and $31.3 million was used to
pay SP II accrued interest, which was reflected in operating cash flows as
mentioned above. In addition to the debt repaid to SP II,
there were $12.8 million of net repayments of term loans in the first nine
months of 2008. In addition to the scheduled principal repayments,
Bairnco used the proceeds of its sale of the Rancho Cucamonga property described
above to repay $7.8 million of the term loan under the Wells Fargo
Facility. Bairnco also repaid $1.8 million of principal on its term
loan upon receipt of an income tax refund of the same amount during the 2008
period. H&H borrowed an additional $4.0 million under its
Wachovia Facility on February 14, 2008. There was a net repayment on the
Company’s revolving credit facilities of $13.1 million, and the payment of $1.5
million of financing fees during the 2008 period.
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
subsidiaries of H&H for return in fabricated form 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, 2009, H&H’s customer metal consisted
of 235,764 ounces of silver, 1,377 ounces of gold, and 1,391 ounces of
palladium.
Liquidity
The
Company continued to reduce its debt during the third quarter of 2009 through
unscheduled repayments of third-party long-term debt of approximately $8.6
million during the quarter, as discussed above.
Furthermore,
Bairnco’s availability for revolving credit under the Wells Fargo Facility was
increased by eliminating a letter of credit in the face amount of $2.2
million. The letter of credit had been issued under the Wells Fargo
Facility to support separate financing arrangements in China for one of the
Bairnco subsidiaries. These arrangements were refinanced to eliminate
the supporting letter of credit requirement and are instead collateralized by
existing unencumbered real estate owned by the subsidiary in China. As a result
of this refinancing, Bairnco’s total outstanding letters of credit were reduced
from $5.2 million to $3.0 million, thereby increasing Bairnco’s availability
under the Wells Fargo Facility by $2.2 million.
For the
nine months ended September 30, 2009, the Company incurred a net loss of $14.5
million, as compared to $8.6 million net income for the nine months ended
September 30, 2008. The Company had $24.6 million of cash flow
provided by operating activities for the nine months ended September 30, 2009,
as compared to using $4.5 million in the same nine month period in 2008. Cash
flow provided by operating activities for 2008 included the non-recurring
payment of accrued interest of $31.3 million. As of September 30,
2009, H&H’s availability under its credit facilities was $26.3 million, and
Bairnco’s U.S. availability was $10.6 million.
In
2008, the Company reported net income of $3.0 million, but in recent years prior
to 2008, the Company incurred significant losses and used significant amounts of
cash in operating activities. As of September 30, 2009, the Company
had an accumulated deficit of $445.6 million. As of September 30,
2009, the Company’s current assets totaled $171.4 million and its current
liabilities totaled $123.3 million; for net working capital of $48.1
million. The Company reduced its level of debt substantially in 2008,
from $359.4 million as of January 1, 2008 to $210.2 million as of December 31,
2008 and $187.1 million as of September 30, 2009, principally through the Rights
Offering completed on September 25, 2008. The Rights Offering
generated $156.5 million of cash, which was used by the Company to repay $142.5
million of indebtedness to SP II, the Company’s largest shareholder at that
time, and $13.2 million of additional debt.
WHX Corporation, the parent
company
WHX, the
parent company, has as its sole source of cash flow, distributions from its
principal subsidiaries, H&H and Bairnco, or other discrete
transactions. H&H’s credit facilities effectively do not permit
it to transfer any cash or other assets to WHX with the exception of (i) an
unsecured loan for required payments to the WHX Pension Plan, and (ii) an
unsecured loan for other uses in the aggregate principal amount not to exceed
$12.0 million, $9.5 million of which has been distributed. The
remaining $2.5 million is not permitted to be loaned to WHX before March 31,
2010. H&H’s credit facilities are collateralized by substantially
all of the assets of H&H and its subsidiaries. Bairnco’s credit
facilities and term loan do not permit it to make any distribution, pay any
dividend or transfer any cash or other assets to WHX other than common stock of
Bairnco and up to $0.6 million annually for services performed by WHX on behalf
of Bairnco, under certain circumstances. Bairnco’s credit facilities
are secured by a first priority lien on all of the assets of Bairnco and of its
U.S. subsidiaries.
WHX’s
ongoing operating cash flow requirements consist of arranging for the funding of
the minimum requirements of the WHX Pension Plan and paying WHX’s administrative
costs. The significant decline in 2008 of prices across a
cross-section of financial markets resulted in an accrued pension liability of
the WHX Pension Plan of $144.0 million as of September 30, 2009. The
Company expects to have required minimum contributions to the WHX Pension Plan
for 2009 and 2010 of $1.8 million (with $1.4 million remaining in 2009 as of
September 30, 2009) and $9.7 million, respectively. Such required
future contributions are determined based upon assumptions regarding such
matters as discount rates on future obligations, assumed rates of return on plan
assets and legislative changes. Actual future pension costs and
required funding obligations will be affected by changes in the factors and
assumptions described in the previous sentence, as well as other changes such as
a plan termination.
As of
September 30, 2009, WHX and its subsidiaries that are not restricted by loan
agreements or otherwise from transferring funds to WHX had cash of approximately
$3.6 million and current liabilities of approximately $0.9
million. On July 31, 2009, WHX CS Corp., one of these unrestricted
subsidiaries of WHX, sold its equity investment in CoSine Communications, Inc.
to SP II for $3.1 million. A subordinated secured loan of $3.0
million was made by WHX to Bairnco in connection with Bairnco’s partial
repayment of the Ableco Facility.
Management
expects that WHX will be able to fund its operations in the ordinary course of
business over at least the next twelve months.
Handy & Harman and
Bairnco
Widely-documented
commercial credit market disruptions have resulted in a tightening of credit
markets worldwide. Liquidity in the global credit market has been
severely contracted by these market disruptions, making it costly to obtain new
lines of credit or to refinance existing debt, when debt financing is available
at all. The effects of these disruptions are widespread and difficult
to quantify, and it is impossible to predict when the global credit market will
improve or when the credit contraction will significantly ease. As a
result of the ongoing credit market conditions, the Company may not be able to
obtain additional debt or equity financing if necessary or
desired. Furthermore, one or more of the financial institutions that
make available H&H and Bairnco’s revolving credit facilities may become
unable to fulfill their funding obligations, which could materially and
adversely affect liquidity.
On March
12, 2009, H&H and its subsidiaries amended each of the Wachovia Facilities,
and the Term B Loan to, among other things, (i) extend the term of the loans for
two years until June 30, 2011, (ii) increase certain interest rates, (iii) reset
the levels of certain financial covenants, (iv) permit the disposition and/or
cessation of operations of certain of H&H’s direct and indirect
subsidiaries, (v) provide for an increase in the aggregate amount of unsecured
loans, distributions or other advances from H&H to WHX for general business
purposes from up to $7.0 million to up to $12.0 million, subject to a maximum
additional amount of $2.5 million prior to March 31, 2010, and (vi) provide for
an increase in the existing limited guaranty by H&H of Bairnco’s obligations
under the Ableco Facility from up to $7.0 million to up to $12.0
million. In addition, the Wachovia Facilities were also amended to,
among other things; reduce the amount of the credit facility from $125.3 million
to $115.0 million including decreasing the revolving credit facility from $83.0
million to $75.0 million.
On May 8,
2009, H&H and its subsidiaries further amended the Wachovia Facilities to
provide for, among other things, additional term loans to the borrowers
thereunder in the aggregate principal amount of approximately $5.3 million,
which were consolidated with the existing term loans under the Wachovia
Facilities for a combined aggregate principal amount of $15.0 million, and
additional guaranties by certain subsidiary trusts. Pursuant to this
amendment: (i) a portion of the obligations under the tranche B term loan under
the Wachovia Facilities was prepaid in an amount equal to $5.0 million; and (ii)
the remaining available proceeds of the term loans are to be used for operating
and working capital purposes. The Term B Loan was also amended on May 8,
2009 to provide for additional guaranties by certain subsidiary
trusts.
Effective
July 31, 2009, H&H and its subsidiaries amended each of the Wachovia
Facilities and the Term B Loan to, among other things, (i) reset certain
financial covenants, (ii) increase the existing limited H&H Guaranty of
Bairnco’s obligations under the Ableco Facility from up to $12 million to up to
$17 million, and (iii) provide for the repayment of a portion of the term loan
under the Wachovia Facilities in the amount of $3.0 million.
On March
12, 2009, Bairnco and certain of its subsidiaries amended the Ableco Facility
and the Wells Fargo Facility to, among other things, (i) increase the interest
rates and (ii) reset the levels of certain financial covenants. The
Ableco Facility was also amended to provide for, among other things, an increase
in the existing limited guaranty by H&H of Bairnco’s obligations under the
Ableco Facility from up to $7 million to up to $12 million, secured by a second
lien on all of the assets of H&H pursuant to the terms and conditions of the
H&H Security Agreement and the H&H Guaranty. The Subordinated
Debt Credit Agreement was also amended to, among other things, increase the
interest rates.
Effective
August 18, 2009, Bairnco and certain of its subsidiaries also amended the Ableco
Facility to, among other things, (i) reset certain financial covenants, (ii)
increase the existing limited H&H Guaranty of Bairnco’s obligations under
the Ableco Facility from up to $12 million to up to $17 million and (iii)
provide for the repayment of a portion of the Ableco Facility in the amount of
$3.0 million. The Wells Fargo Facility and the Subordinated Debt Credit
Agreement were also amended effective August 18, 2009, to, among other things,
(i) reset certain financial covenants to levels consistent with the Ableco
Facility, as amended, and (ii) permit the repayment of a portion of the Ableco
Facility in the amount of $3.0 million.
The
ability of both H&H and Bairnco to draw on their respective revolving lines
of credit is limited by their respective borrowing base of accounts receivable
and inventory. As of September 30, 2009, H&H’s availability under
its credit facilities was $26.3 million, and Bairnco’s availability under its
credit facilities was $10.6 million.
There can
be no assurances that H&H and Bairnco will continue to have access to all or
any of their lines of credit if their respective operating and financial
performance does not satisfy the relevant borrowing base criteria and financial
covenants set forth in the applicable financing agreements. If either
H&H or Bairnco do not meet certain of their respective financial covenants
or satisfy the relevant borrowing base criteria, and if they are unable to
secure necessary waivers or other amendments from the respective lenders on
terms acceptable to management, their ability to access available lines of
credit could be limited, their debt obligations could be accelerated by their
respective lenders and their liquidity could be adversely affected.
Shelf Registration
Statement
Pursuant
to a shelf registration statement filed on Form S-3 with the SEC, and declared
effective on June 29, 2009, the Company may from time to time issue up to $25
million of its common stock, preferred stock, debt securities, warrants to
purchase common stock, preferred stock, or debt securities, or any combination
of the above, separately or as units. The terms of any offerings under the shelf
registration statement will be determined at the time of the
offering. The Company does not presently have any definitive plans or
current commitments to sell securities that may be registered under the shelf
registration statement. However, management believes that the shelf
registration statement provides the Company with the flexibility to quickly
raise capital in the market as conditions become favorable with a minimum of
administrative preparation and expense. The net proceeds of any such
issuances under the shelf registration statement are expected to be used for
general corporate purposes, which may include working capital and/or capital
expenditures.
Summary
Management
believes that the Company has the ability to meet its capital requirements on a
continuing basis for at least the next twelve months. However, the ability of
the Company to meet its cash requirements for at least the next twelve months is
dependent, in part, on the Company’s continuing ability to meet its business
plans. The Company continues to examine all of its options and strategies,
including acquisitions, divestitures, and other corporate transactions, to
increase cash flow and stockholder value. If the Company’s planned cash flow
projections are not met, management could consider the additional reduction of
certain discretionary expenses and sale of certain assets.
Management
is utilizing the following strategies to enhance liquidity: (1) continuing to
implement improvements throughout all of the Company’s operations using the WHX
Business System to enhance systems and processes to increase operating
efficiencies, (2) supporting profitable sales growth both internally and
potentially through acquisitions, (3) evaluating strategic alternatives with
respect to all lines of business and/or assets and (4) seeking financing
alternatives that may lower its cost of capital and/or enhance current cash
flow. The Company also plans to continue, as appropriate, certain of
the extraordinary cost containment measures that it implemented, at least for
the remainder of 2009.
However,
if the Company’s cash needs are greater than anticipated or the Company does not
materially meet its business plan, the Company may be required to seek
additional or alternative financing sources. There can be no
assurance that such financing will be available or available on terms acceptable
to the Company. There can be no assurance that the funds available from
operations and under the Company’s credit facilities will be sufficient to fund
its debt service costs, working capital demands, pension plan contributions, and
environmental remediation costs. The Company’s inability to generate
sufficient cash flows from its operations or through financing could impair its
liquidity, and would likely have a material adverse effect on its businesses,
financial condition and results of operations, and could raise substantial doubt
that the Company will be able to continue to operate.
*******
When used
in Management's Discussion and Analysis of Financial Condition and Results of
Operations, the words “anticipate”, “estimate” and similar expressions are
intended to identify forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), which are intended to be covered by the
safe harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, general economic conditions, the ability of the Company to develop
markets and sell its products, and the effects of competition and
pricing. Although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could be inaccurate, and therefore, there can be no assurance that the
forward-looking statements included herein will prove to be
accurate.
ITEM
4. Controls and Procedures
Disclosure Controls and
Procedures
As
required by Rule 13a-15(b) under the Exchange Act, the Company conducted an
evaluation under the supervision and with the participation of its management,
including the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the Company’s disclosure controls and procedures as of the end
of the period covered by this report. Based on that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that as of
September 30, 2009, the Company’s disclosure controls and procedures are
effective in ensuring that all information required to be disclosed in reports
that it files or submits 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 Company
management, including the Chief Executive Officer and Chief Financial Officer,
in a manner that allows timely decisions regarding required
disclosure.
Changes
in Internal Control over Financial Reporting
There
have not been any changes in the Company’s internal control over financial
reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act)
during the quarter ended September 30, 2009 to which this report relates that
have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
PART
II
OTHER
INFORMATION
ITEM
1. Legal Proceedings
Information
in this Item 1 is incorporated by reference to Part I, Notes to Condensed
Consolidated Financial Statements (unaudited), Note 16 “Contingencies-Legal
Matters”, of this report.
ITEM
6. Exhibits
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Exhibit
31.1 Certification of Principal Executive Officer pursuant to Rule
13a-15(f) or 15d-15(f) of the Securities Exchange Act of 1934, as amended,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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*
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Exhibit
31.2 Certification of Principal Financial Officer pursuant to Rule
13a-15(f) or 15d-15(f) of the Securities Exchange Act of 1934, as amended,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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*
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Exhibit
32 Certification of Principal Executive Officer and Principal
Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b) of the
Securities Exchange Act of 1934, as amended, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of Chapter
63 of Title 18 of United States
Code.
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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
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/s/
James F. McCabe, Jr.
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James
F. McCabe, Jr.
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Senior
Vice President and Chief Financial Officer
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November
16, 2009
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Exhibit
31.1 Certification of Principal Executive Officer pursuant to Rule
13a-15(f) or 15d-15(f) of the Securities Exchange Act of 1934, as amended,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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*
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Exhibit
31.2 Certification of Principal Financial Officer pursuant to Rule
13a-15(f) or 15d-15(f) of the Securities Exchange Act of 1934, as amended,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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*
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Exhibit
32 Certification of Principal Executive Officer and Principal
Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b) of the
Securities Exchange Act of 1934, as amended, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of Chapter
63 of Title 18 of United States
Code.
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*
Filed herewith