UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20152016
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-2394
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HANDY & HARMAN LTD. |
(Exact name of registrant as specified in its charter) |
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DELAWARE | 13-3768097 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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1133 Westchester Avenue, Suite N222 White Plains, New York | 10604 |
(Address of principal executive offices) | (Zip Code) |
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914-461-1300 |
(Registrant's telephone number, including area code) |
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(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o | Accelerated filer x |
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Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
The number of shares of Common Stock outstanding as of October 28, 2015July 29, 2016 was 12,208,560.12,242,507.
TABLE OF CONTENTS
HANDY & HARMAN LTD.
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PART I - FINANCIAL INFORMATION | Page |
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Item 1. | | |
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Item 2. | | |
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Item 4. | | |
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PART II - OTHER INFORMATION | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 6. | | |
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Part I - FINANCIAL INFORMATION
Item 1. - Financial Statements (unaudited)
HANDY & HARMAN LTD.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | September 30, | | December 31, | | June 30, | | December 31, |
(in thousands, except par value) | | 2015 | | 2014 | | 2016 | | 2015 |
ASSETS | | | | | | | | |
Current Assets: | | | | | | | | |
Cash and cash equivalents | | $ | 20,659 |
| | $ | 31,649 |
| | $ | 23,685 |
| | $ | 23,728 |
|
Trade and other receivables - net of allowance for doubtful accounts of $1,550 and $1,742, respectively | | 97,937 |
| | 59,463 |
| |
Trade and other receivables - net of allowance for doubtful accounts of $2,342 and $1,451, respectively | | | 136,586 |
| | 74,375 |
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Inventories, net | | 90,943 |
| | 63,929 |
| | 111,771 |
| | 82,804 |
|
Deferred income tax assets - current | | 20,287 |
| | 26,719 |
| |
Prepaid and other current assets | | 9,615 |
| | 7,111 |
| | 7,230 |
| | 9,295 |
|
Assets of discontinued operations | | — |
| | 69,673 |
| |
Total current assets | | 239,441 |
| | 258,544 |
| | 279,272 |
| | 190,202 |
|
Property, plant and equipment at cost, less accumulated depreciation | | 113,418 |
| | 67,621 |
| | 129,200 |
| | 112,686 |
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Goodwill | | 124,812 |
| | 68,253 |
| | 178,594 |
| | 121,829 |
|
Other intangibles, net | | 44,938 |
| | 33,338 |
| | 121,510 |
| | 43,117 |
|
Investment in associated company | | 22,948 |
| | 23,936 |
| | 10,040 |
| | 20,923 |
|
Deferred income tax assets | | 86,204 |
| | 71,710 |
| | 98,561 |
| | 120,149 |
|
Other non-current assets | | 17,901 |
| | 15,357 |
| | 14,460 |
| | 15,767 |
|
Total assets | | $ | 649,662 |
| | $ | 538,759 |
| | $ | 831,637 |
| | $ | 624,673 |
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LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
Current Liabilities: | | | | | | | | |
Trade payables | | $ | 42,999 |
| | $ | 30,805 |
| | $ | 67,542 |
| | $ | 34,466 |
|
Accrued liabilities | | 32,593 |
| | 23,368 |
| | 37,425 |
| | 31,497 |
|
Accrued environmental liabilities | | 1,773 |
| | 2,424 |
| | 5,951 |
| | 2,531 |
|
Short-term debt | | 606 |
| | 602 |
| | 617 |
| | 742 |
|
Current portion of long-term debt | | 1,181 |
| | 6,378 |
| | 1,677 |
| | 1,720 |
|
Deferred income tax liabilities - current | | 228 |
| | 186 |
| |
Liabilities of discontinued operations | | — |
| | 13,698 |
| |
Total current liabilities | | 79,380 |
| | 77,461 |
| | 113,212 |
| | 70,956 |
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Long-term debt | | 129,057 |
| | 196,423 |
| | 260,361 |
| | 97,106 |
|
Accrued pension liability | | 231,441 |
| | 208,388 |
| | 263,559 |
| | 265,566 |
|
Other post-retirement benefit obligations | | 2,701 |
| | 2,914 |
| | 3,826 |
| | 2,624 |
|
Deferred income tax liabilities | | | 379 |
| | 402 |
|
Other liabilities | | 2,745 |
| | 4,184 |
| | 5,555 |
| | 3,479 |
|
Total liabilities | | 445,324 |
| | 489,370 |
| | 646,892 |
| | 440,133 |
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Commitments and Contingencies | |
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Stockholders' Equity: | | | | | | | | |
Common stock - $.01 par value; authorized 180,000 shares; issued 13,579 and 13,580 shares, respectively | | 136 |
| | 136 |
| |
Common stock - $.01 par value; authorized 180,000 shares; issued 13,629 and 13,579 shares, respectively | | | 136 |
| | 136 |
|
Accumulated other comprehensive loss | | (235,448 | ) | | (235,822 | ) | | (259,342 | ) | | (259,392 | ) |
Additional paid-in capital | | 584,825 |
| | 570,256 |
| | 587,234 |
| | 586,693 |
|
Treasury stock, at cost - 1,371 and 2,800 shares, respectively | | (34,454 | ) | | (70,375 | ) | |
Treasury stock, at cost - 1,375 and 1,371 shares, respectively | | | (34,562 | ) | | (34,454 | ) |
Accumulated deficit | | (110,721 | ) | | (214,806 | ) | | (108,721 | ) | | (108,443 | ) |
Total stockholders' equity | | 204,338 |
| | 49,389 |
| | 184,745 |
| | 184,540 |
|
Total liabilities and stockholders' equity | | $ | 649,662 |
| | $ | 538,759 |
| | $ | 831,637 |
| | $ | 624,673 |
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HANDY & HARMAN LTD.
CONSOLIDATED INCOME STATEMENTS OF OPERATIONS
(Unaudited)
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | September 30, | | September 30, | | June 30, | | June 30, |
(in thousands, except per share) | | 2015 | | 2014 | | 2015 | | 2014 | | 2016 | | 2015 | | 2016 | | 2015 |
Net sales | | $ | 181,139 |
| | $ | 164,524 |
| | $ | 485,596 |
| | $ | 468,557 |
| | $ | 200,880 |
| | $ | 166,475 |
| | $ | 361,677 |
| | $ | 304,457 |
|
Cost of goods sold | | 134,034 |
| | 119,001 |
| | 351,937 |
| | 338,256 |
| | 148,918 |
| | 118,299 |
| | 265,998 |
| | 217,903 |
|
Gross profit | | 47,105 |
| | 45,523 |
| | 133,659 |
| | 130,301 |
| | 51,962 |
| | 48,176 |
| | 95,679 |
| | 86,554 |
|
Selling, general and administrative expenses | | 29,375 |
| | 26,288 |
| | 91,125 |
| | 85,917 |
| | 38,332 |
| | 30,892 |
| | 69,616 |
| | 61,751 |
|
Pension expense | | 1,761 |
| | 595 |
| | 5,906 |
| | 2,805 |
| | 2,132 |
| | 2,072 |
| | 4,283 |
| | 4,145 |
|
Asset impairment charges | | | 7,000 |
| | — |
| | 7,000 |
| | — |
|
Operating income | | 15,969 |
| | 18,640 |
| | 36,628 |
| | 41,579 |
| | 4,498 |
| | 15,212 |
| | 14,780 |
| | 20,658 |
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Other: | | | | | | | | | | | | | | | | |
Interest expense | | 1,208 |
| | 2,450 |
| | 3,483 |
| | 5,599 |
| | 1,345 |
| | 1,107 |
| | 2,415 |
| | 2,275 |
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Realized and unrealized gain on derivatives | | (168 | ) | | (1,320 | ) | | (273 | ) | | (854 | ) | |
Other expense (income) | | 113 |
| | (5 | ) | | 318 |
| | 141 |
| |
Realized and unrealized loss (gain) on derivatives | | | 416 |
| | (312 | ) | | 539 |
| | (105 | ) |
Other expense | | | 99 |
| | 113 |
| | 244 |
| | 204 |
|
Income from continuing operations before tax and equity investment | | 14,816 |
| | 17,515 |
| | 33,100 |
|
| 36,693 |
| | 2,638 |
| | 14,304 |
| | 11,582 |
|
| 18,284 |
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Tax provision | | 6,351 |
| | 6,703 |
| | 13,862 |
| | 15,158 |
| | 1,138 |
| | 5,867 |
| | 4,998 |
| | 7,511 |
|
Loss from associated company, net of tax | | 4,047 |
| | 1,242 |
| | 5,286 |
| | 7,783 |
| | 2,234 |
| | 2,161 |
| | 6,862 |
| | 1,239 |
|
Income from continuing operations, net of tax | | 4,418 |
| | 9,570 |
| | 13,952 |
| | 13,752 |
| |
(Loss) income from continuing operations, net of tax | | | (734 | ) | | 6,276 |
| | (278 | ) | | 9,534 |
|
Discontinued operations: | | | | | | | | | | | | | | | | |
Income from discontinued operations, net of tax | | — |
| | 2,290 |
| | 565 |
| | 8,772 |
| | — |
| | — |
| | — |
| | 565 |
|
Gain on disposal of assets, net of tax | | 195 |
| | — |
| | 89,568 |
| | 42 |
| |
Net income from discontinued operations | | 195 |
| | 2,290 |
| | 90,133 |
| | 8,814 |
| |
Net income | | $ | 4,613 |
| | $ | 11,860 |
| | $ | 104,085 |
| | $ | 22,566 |
| |
Basic and diluted income per share of common stock | | | | | | | | | |
Income from continuing operations, net of tax, per share | | $ | 0.37 |
| | $ | 0.77 |
| | $ | 1.26 |
| | $ | 1.07 |
| |
(Loss) gain on disposal of assets, net of tax | | | — |
| | (147 | ) | | — |
| | 89,373 |
|
Net (loss) income from discontinued operations | | | — |
| | (147 | ) | | — |
| | 89,938 |
|
Net (loss) income | | | $ | (734 | ) | | $ | 6,129 |
| | $ | (278 | ) | | $ | 99,472 |
|
Basic and diluted (loss) income per share of common stock | | | | | | | | | |
(Loss) income from continuing operations, net of tax, per share | | | $ | (0.06 | ) | | $ | 0.58 |
| | $ | (0.02 | ) | | $ | 0.88 |
|
Discontinued operations, net of tax, per share | | 0.02 |
| | 0.18 |
| | 8.12 |
| | 0.69 |
| | — |
| | (0.01 | ) | | — |
| | 8.35 |
|
Net income per share | | $ | 0.39 |
| | $ | 0.95 |
| | $ | 9.38 |
| | $ | 1.76 |
| |
Net (loss) income per share | | | $ | (0.06 | ) | | $ | 0.57 |
| | $ | (0.02 | ) | | $ | 9.23 |
|
Weighted-average number of common shares outstanding | | 11,729 |
| | 12,469 |
| | 11,101 |
| | 12,858 |
| | 12,260 |
| | 10,784 |
| | 12,242 |
| | 10,782 |
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HANDY & HARMAN LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | September 30, | | September 30, | | June 30, | | June 30, |
(in thousands) | | 2015 | | 2014 | | 2015 | | 2014 | | 2016 | | 2015 | | 2016 | | 2015 |
Net income | | $ | 4,613 |
| | $ | 11,860 |
| | $ | 104,085 |
| | $ | 22,566 |
| |
Net (loss) income | | | $ | (734 | ) | | $ | 6,129 |
| | $ | (278 | ) | | $ | 99,472 |
|
| | | | | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | |
Other comprehensive (loss) income, net of tax: | | | | | | | | | |
Changes in pension liability and other post-retirement benefit obligations | | — |
| | — |
| | 2,022 |
| | — |
| | — |
| | — |
| | (94 | ) | | 2,022 |
|
Tax effect of changes in pension liability and other post-retirement benefit obligations | | — |
| | — |
| | (395 | ) | | — |
| | — |
| | — |
| | — |
| | (395 | ) |
Foreign currency translation adjustments | | (421 | ) | | (980 | ) | | (1,472 | ) | | (1,099 | ) | | (515 | ) | | 347 |
| | (316 | ) | | (1,050 | ) |
Tax effect of changes in foreign currency translation adjustments | | 219 |
| | — |
| | 219 |
| | — |
| | 436 |
| | — |
| | 460 |
| | — |
|
Other comprehensive (loss) income | | (202 | ) | | (980 | ) | | 374 |
| | (1,099 | ) | | (79 | ) | | 347 |
| | 50 |
| | 577 |
|
| | | | | | | | | | | | | | | | |
Comprehensive income | | $ | 4,411 |
| | $ | 10,880 |
|
| $ | 104,459 |
|
| $ | 21,467 |
| |
Comprehensive (loss) income | | | $ | (813 | ) | | $ | 6,476 |
|
| $ | (228 | ) |
| $ | 100,049 |
|
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HANDY & HARMAN LTD.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Accumulated Other Comprehensive | | Additional Paid-In | | Treasury Stock, | | Accumulated | | Total Stockholders' | | Common Stock | | Accumulated Other Comprehensive | | Additional Paid-In | | Treasury Stock, | | Accumulated | | Total Stockholders' |
(in thousands) | | Shares | | Amount | | Loss | | Capital | | at Cost | | Deficit | | Equity | | Shares | | Amount | | Loss | | Capital | | at Cost | | Deficit | | Equity |
Balance, December 31, 2014 | | 13,580 |
| | $ | 136 |
| | $ | (235,822 | ) | | $ | 570,256 |
| | $ | (70,375 | ) | | $ | (214,806 | ) | | $ | 49,389 |
| |
Balance, December 31, 2015 | | | 13,579 |
| | $ | 136 |
| | $ | (259,392 | ) | | $ | 586,693 |
| | $ | (34,454 | ) | | $ | (108,443 | ) | | $ | 184,540 |
|
Amortization, issuance and forfeitures of restricted stock grants | | (1 | ) | | — |
| | — |
| | 1,742 |
| | — |
| | — |
| | 1,742 |
| | 50 |
| | — |
| | — |
| | 541 |
| | — |
| | — |
| | 541 |
|
Changes in pension liability and post-retirement benefit obligations, net of tax | | — |
| | — |
| | 1,627 |
| | — |
| | — |
| | — |
| | 1,627 |
| | — |
| | — |
| | (94 | ) | | — |
| | — |
| | — |
| | (94 | ) |
Foreign currency translation adjustments, net of tax | | — |
| | — |
| | (1,253 | ) | | — |
| | — |
| | — |
| | (1,253 | ) | | — |
| | — |
| | 144 |
| | — |
| | — |
| | — |
| | 144 |
|
Treasury shares issued in JPS acquisition | | — |
| | — |
| | — |
| | 12,827 |
| | 35,921 |
| | — |
| | 48,748 |
| |
Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 104,085 |
| | 104,085 |
| |
Balance, September 30, 2015 | | 13,579 |
| | $ | 136 |
| | $ | (235,448 | ) | | $ | 584,825 |
| | $ | (34,454 | ) | | $ | (110,721 | ) | | $ | 204,338 |
| |
Purchases of treasury stock | | | — |
| | — |
| | — |
| | — |
| | (108 | ) | | — |
| | (108 | ) |
Net loss | | | — |
| | — |
| | — |
| | — |
| | — |
| | (278 | ) | | (278 | ) |
Balance, June 30, 2016 | | | 13,629 |
| | $ | 136 |
| | $ | (259,342 | ) | | $ | 587,234 |
| | $ | (34,562 | ) | | $ | (108,721 | ) | | $ | 184,745 |
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HANDY & HARMAN LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | Nine Months Ended | | Six Months Ended |
| | September 30, | | June 30, |
(in thousands) | | 2015 | | 2014 | | 2016 | | 2015 |
Cash flows from operating activities: | | | | | | | | |
Net income | | $ | 104,085 |
| | $ | 22,566 |
| |
Net (loss) income | | | $ | (278 | ) | | $ | 99,472 |
|
Net income from discontinued operations | | (90,133 | ) | | (8,814 | ) | | — |
| | (89,938 | ) |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: | | | | | |
Depreciation and amortization | | 12,547 |
| | 9,724 |
| | 12,350 |
| | 6,650 |
|
Non-cash stock-based compensation | | 2,714 |
| | 3,773 |
| | 931 |
| | 2,051 |
|
Non-cash loss from investment in associated company, net of tax | | 5,286 |
| | 7,783 |
| | 6,862 |
| | 1,239 |
|
Amortization of debt issuance costs | | 820 |
| | 1,215 |
| | 550 |
| | 552 |
|
Deferred income taxes | | 10,924 |
| | 12,090 |
| | 3,623 |
| | 5,735 |
|
Gain from asset dispositions | | (309 | ) | | (87 | ) | | (337 | ) | | (140 | ) |
Asset impairment charges | | | 7,858 |
| | — |
|
Non-cash loss (gain) from derivatives | | 48 |
| | (674 | ) | | 133 |
| | (205 | ) |
Reclassification of net cash settlements on precious metal contracts to investing activities | | (322 | ) | | (180 | ) | | 406 |
| | 100 |
|
Change in operating assets and liabilities, net of acquisitions: | | | | | | | | |
Trade and other receivables | | (17,620 | ) | | (22,953 | ) | | (29,034 | ) | | (30,949 | ) |
Inventories | | 1,516 |
| | (9,322 | ) | | (3,572 | ) | | (6,324 | ) |
Prepaid and other current assets | | 1,842 |
| | 485 |
| | 2,728 |
| | 1,120 |
|
Other current liabilities | | (9,853 | ) | | (7,182 | ) | | 12,405 |
| | 1,520 |
|
Other items, net | | 270 |
| | 289 |
| | (364 | ) | | (137 | ) |
Net cash provided by continuing operations | | 21,815 |
| | 8,713 |
| |
Net cash (used in) provided by discontinued operations | | (2,266 | ) | | 14,439 |
| |
Net cash provided by operating activities | | 19,549 |
| | 23,152 |
| |
Net cash provided by (used in) continuing operations | | | 14,261 |
| | (9,254 | ) |
Net cash used in discontinued operations | | | — |
| | (2,266 | ) |
Net cash provided by (used in) operating activities | | | 14,261 |
| | (11,520 | ) |
Cash flows from investing activities: | | | | | | | | |
Additions to property, plant and equipment | | (10,871 | ) | | (7,727 | ) | | (9,673 | ) | | (6,979 | ) |
Net cash settlements on precious metal contracts | | 322 |
| | 180 |
| | (406 | ) | | (100 | ) |
Acquisitions, net of cash acquired | | (93,162 | ) | | — |
| | (157,000 | ) | | (27,440 | ) |
Proceeds from sale of assets | | 336 |
| | 183 |
| | 1,659 |
| | 181 |
|
Investments in associated company | | (7,607 | ) | | — |
| | — |
| | (7,607 | ) |
Proceeds from sale of discontinued operations | | 155,517 |
| | 3,732 |
| | — |
| | 152,889 |
|
Net cash used in investing activities of discontinued operations | | (75 | ) | | (2,046 | ) | | — |
| | (75 | ) |
Net cash provided by (used in) investing activities | | 44,460 |
| | (5,678 | ) | |
Net cash (used in) provided by investing activities | | | (165,420 | ) | | 110,869 |
|
| | | | Nine Months Ended | | Six Months Ended |
| | September 30, | | June 30, |
(in thousands) | | 2015 | | 2014 | | 2016 | | 2015 |
Cash flows from financing activities: | | | | | | | | |
Proceeds from term loans - domestic | | — |
| | 40,000 |
| |
Proceeds from WHX CS Loan | | — |
| | 12,600 |
| |
Repayment of WHX CS Loan | | — |
| | (12,600 | ) | |
Net revolver (repayments) borrowings | | (73,709 | ) | | 180,050 |
| |
Net borrowings on loans - foreign | | 79 |
| | 342 |
| |
Net revolver borrowings (repayments) | | | 153,967 |
| | (111,475 | ) |
Net (repayments) borrowings on loans - foreign | | | (161 | ) | | 268 |
|
Repayments of term loans - domestic | | (264 | ) | | (156,249 | ) | | (232 | ) | | (176 | ) |
Deferred finance charges | | (404 | ) | | (3,230 | ) | | (345 | ) | | (328 | ) |
Net change in overdrafts | | (486 | ) | | 2,546 |
| | (2,027 | ) | | (450 | ) |
Purchases of treasury stock | | — |
| | (60,502 | ) | | (108 | ) | | — |
|
Other financing activities | | 36 |
| | 54 |
| | 61 |
| | 9 |
|
Net cash (used in) provided by financing activities | | (74,748 | ) | | 3,011 |
| |
Net cash provided by (used in) financing activities | | | 151,155 |
| | (112,152 | ) |
Net change for the period | | (10,739 | ) | | 20,485 |
| | (4 | ) | | (12,803 | ) |
Effect of exchange rate changes on cash and cash equivalents | | (251 | ) | | (172 | ) | | (39 | ) | | (98 | ) |
Cash and cash equivalents at beginning of period | | 31,649 |
| | 10,300 |
| | 23,728 |
| | 31,649 |
|
Cash and cash equivalents at end of period | | $ | 20,659 |
| | $ | 30,613 |
| | $ | 23,685 |
| | $ | 18,748 |
|
| | | | | | | | |
Cash paid during the period for: | | | | | | | | |
Interest | | $ | 2,562 |
| | $ | 4,671 |
| | $ | 1,664 |
| | $ | 1,686 |
|
Taxes | | $ | 3,987 |
| | $ | 4,246 |
| | $ | 3,019 |
| | $ | 2,881 |
|
| | | | | |
Non-cash investing activities: | | | | | |
Exchange of treasury stock for shares of JPS Industries, Inc. | | $ | 48,748 |
| | $ | — |
| |
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 – The Company and Nature of Operations
Handy & Harman Ltd. ("HNH") is a diversified manufacturer of engineered niche industrial products. HNH's diverse product offerings are marketed throughout the United States and internationally. HNH owns Handy & Harman Group Ltd. ("H&H Group"), which owns Handy & Harman ("H&H") and Bairnco, LLC ("Bairnco"), formerly Bairnco Corporation. HNH manages its group of businesses on a decentralized basis with operations principally in North America. HNH's business units encompass the following segments: Joining Materials, Tubing, Building Materials, Performance Materials, Electrical Products, and Kasco Blades and Route Repair Services ("Kasco"). The Performance Materials segment is currently comprised solely of the operations of JPS Industries, Inc. ("JPS"), which was acquired on July 2, 2015 as discussed in Note 3 - "Acquisitions." All references herein to "we," "our" or the "Company" refer to HNH together with all of its subsidiaries.
Note 2 – Basis of Presentation
The consolidated balance sheet as of December 31, 2014,2015, which has been derived from audited financial statements, and the unaudited consolidated financial statements included herein have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") 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 on Form 10-K for the year ended December 31, 2014. Certain amounts for the prior year have been reclassified to conform to the current year presentation.2015.
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 consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Estimates are based on historical experience, expected future cash flows and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The results of operations for the three and ninesix months ended SeptemberJune 30, 20152016 are not necessarily indicative of the operating results for the full year.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, and the guidance defines a five step process to achieve this core principle. In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date of ASU No. 2014-09 by one year. The ASU, as amended, is effective for the Company's 2018 fiscal year and may be applied either (i) retrospectively to each prior reporting period presented with an election for certain specified practical expedients, or (ii) retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application, with additional disclosure requirements. The Company is evaluating the potential impact of this new guidance, but does not currently anticipate that the application of ASU No. 2014-09 will have a significant effect on its financial condition, results of operations or its cash flows. We have not yet determined the method by which we will adopt the standard.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amendments do not apply to inventory that is measured using the last-in, first-out ("LIFO") cost method. The Company is currently evaluating the potential impact of this new guidance, which is effective for the Company's 2017 fiscal year.
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement to restate prior-period financial statements for measurement-period adjustments following a business combination. The new guidance requires that the cumulative impact of a measurement-period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The prior-period impact of the adjustment should either be presented separately on the face of the income
statement of operations or disclosed in the notes. This new guidance is effective for the Company's 2016 fiscal year. The amendments in this ASU will be applied prospectively to adjustments to provisional amounts that occur afterin 2016 and thereafter.
In February 2016, the effectiveFASB issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability, measured on a discounted basis, on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations. A modified retrospective transition approach is required for capital and operating leases existing at the date of adoption, with certain practical expedients available. The Company is currently evaluating the potential impact of this new guidance, which is effective for the Company's 2019 fiscal year.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This new standard simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows, among other things. The new standard is effective for the Company's 2017 fiscal year. The Company is currently evaluating the potential impact of this new guidance.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments -Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments, including trade receivables, from an incurred loss model to an expected loss model and adds certain new required disclosures. Under the expected loss model, entities will recognize estimated credit losses to be incurred over the entire contractual term of the instrument rather than delaying recognition of credit losses until it is probable the loss has been incurred. The new standard is effective for the Company's 2020 fiscal year with earlier applicationearly adoption permitted for financial statements that have not been issued.all entities in fiscal years beginning after December 15, 2018. The Company is currently evaluating the potential impact of this new guidance.
Note 3 – Acquisitions
ITW
On March 31, 2015, the Company, through its indirect subsidiary, OMG, Inc. ("OMG"), acquired certain assets and assumed certain liabilities of ITW Polymers Sealants North America Inc. ("ITW"), which are used in the business of manufacturing two-component polyurethane adhesive for the roofing industry, for a cash purchase price of $27.4 million, reflecting a final working capital adjustment of $0.4 million. The assets acquired and liabilities assumed primarily includeincluded net working capital of inventories and accrued liabilities; property, plant and equipment; and intangible assets, primarily unpatented technology, valued at $1.7 million, $0.1 million and $4.4 million, respectively. ITW was the exclusive supplier of certain adhesive products to OMG, and this acquisition will provide OMG with greater control of its supply chain and allow OMG to expand its product development initiatives. The results of operations of the acquired business are reported within the Company's Building Materials segment. In connection with the ITW acquisition, the Company has recorded goodwill totaling approximately $21.3 million, which is expected to be deductible for income tax purposes.
JPS
Effective July 2, 2015, H&H Group completed the acquisition of JPS Industries, Inc. ("JPS") pursuant to an agreement and plan of merger, dated as of May 31, 2015, by and among the Company, H&H Group, HNH Group Acquisition LLC, a Delaware limited liability company and a subsidiary of H&H Group ("H&H Acquisition Sub"), HNH Group Acquisition Sub LLC, a Delaware limited liability company and a wholly owned subsidiary of H&H Acquisition Sub ("Sub"), and JPS. JPS is a major U.S. manufacturer of mechanically formed glass and aramid substrate materials for specialty applications in a wide expanse of markets requiring highly engineered components. At the effective time of the Merger (as defined below), Sub was merged with and into JPS ("Merger"), with JPS being the surviving corporation in the Merger, and each outstanding share of JPS common stock (other than shares held by the Company and its affiliates, including SPH Group Holdings LLC ("SPH Group Holdings"), a subsidiary of Steel Partners Holdings L.P. ("SPLP"), the parent company of the Company, and a significant stockholder of JPS), was converted into the right to receive $11.00 in cash. The aggregate merger consideration of $70.3 million was funded primarily by H&H Group and also by SPH Group Holdings. H&H Group's funding of the aggregate merger consideration totaled approximately $65.7 million, which was financed through additional borrowings under the Company's senior secured revolving credit facility.
As a result of the closing of the Merger, JPS was indirectly owned by both H&H Group and SPH Group Holdings. Following the expiration of the 20-day period provided in Section 262(d)(2) of the Delaware General Corporation Law for JPS stockholders to exercise appraisal rights in connection with the Merger, and in accordance with an exchange agreement, dated as of May 31, 2015, by and between H&H Group and SPH Group Holdings, on July 31, 2015, the Company issued ("Issuance") to H&H Group 1,429,407 shares of the Company's common stock with a value of $48.7 million and, following the Issuance, H&H Group exchanged ("Exchange") those shares of Company common stock for all shares of JPS common stock held by SPH Group Holdings. As a result of the Exchange, H&H Group owned 100% of JPS and merged JPS with and into its wholly-owned subsidiary,
HNH Acquisition LLC, a Delaware limited liability company, which was the surviving entity in the merger and was renamed JPS Industries Holdings LLC.
The following table summarizes the amounts of the assets acquired and liabilities assumed at the acquisition date on a preliminary basis (in thousands):
| | Cash and cash equivalents | $ | 22 |
| $ | 22 |
|
Trade and other receivables | 21,201 |
| 21,201 |
|
Inventories | 27,070 |
| 27,126 |
|
Prepaid and other current assets | 4,924 |
| 4,961 |
|
Property, plant and equipment | 45,181 |
| 45,384 |
|
Goodwill | 35,314 |
| 32,162 |
|
Other intangibles | 9,921 |
| 9,120 |
|
Deferred income tax assets | 17,605 |
| 19,788 |
|
Other non-current assets | 3,280 |
| 3,112 |
|
Total assets acquired | 164,518 |
| 162,876 |
|
Trade payables | (10,674 | ) | (10,674 | ) |
Accrued liabilities | (5,535 | ) | (5,838 | ) |
Long-term debt | (1,500 | ) | (1,500 | ) |
Accrued pension liability | (32,167 | ) | (30,367 | ) |
Other liabilities | (149 | ) | (4 | ) |
Net assets acquired | $ | 114,493 |
| $ | 114,493 |
|
The preliminary purchase price allocation is subject to finalization of valuations of certain acquired assets and liabilities. The goodwill of $35.3$32.2 million arising from the acquisition consists largely of the synergies expected from combining the operations of HNH and JPS. All of the goodwill is assigned to the Company's Performance Materials segment and is not expected to be deductible for income tax purposes. Other intangibles consist primarily of acquired trade names of $4.4$4.3 million, customer relationships of $3.7$3.1 million and patented and unpatented technology of $1.8$1.7 million. These intangible assets have been assigned useful lives ranging from 10 to 15 years based on the long operating history, broad market recognition and continued demand for the associated brands, and the limited turnover and long-standing relationships JPS has with its existing customer base. The valuations of acquired trade names and unpatented technology were performed utilizing a relief from royalty method, and significant assumptions used in the valuation included the royalty rate assumed and the expected level of future sales, as well as the rate of technical obsolescence for the unpatented technology. The acquired customer relationships were valued using an excess earnings approach, and significant assumptions used in the valuation included the customer attrition rate assumed and the expected level of future sales.
The amount of net sales and operating loss of the acquired business included in the consolidated statement of operations for the three months ended June 30, 2016 were approximately $26.2 million and $7.3 million, including $7.9 million of asset impairment charges, which are further discussed in Note 5 - "Asset Impairment Charges." The amount of net sales and operating loss of the acquired business included in the consolidated statement of operations for the six months ended June 30, 2016 were approximately $51.0 million and $6.9 million. The results of operations of the acquired business are reported within the Company's Performance Materials segment, which is currently comprised solely of the operations of JPS.
SLI Acquisition
On April 6, 2016, the Company entered into a definitive merger agreement with SL Industries, Inc. ("SLI"), pursuant to which it commenced a cash tender offer to purchase all of the outstanding shares of SLI's common stock, at a purchase price of $40.00 per share in cash ("Offer"). SLI designs, manufactures and markets power electronics, motion control, power protection, power quality electromagnetic equipment, and custom gears and gearboxes that are used in a variety of medical, commercial and military aerospace, computer, datacom, industrial, architectural and entertainment lighting, and telecom applications. Consummation of the Offer was subject to certain conditions, including the tender of a number of shares that constituted at least (1) a majority of SLI's outstanding shares and (2) 60% of SLI's outstanding shares not owned by HNH or any of its affiliates, as well as other customary conditions. SPLP beneficially owned approximately 25.1% of SLI's outstanding shares.
On June 1, 2016, the conditions noted above, as well as all other conditions to the Offer were satisfied, and the Company successfully completed its tender offer through a wholly owned subsidiary. Pursuant to the terms of the merger agreement, the wholly-owned subsidiary merged with and into SLI, with SLI being the surviving corporation ("SLI Merger"). Upon completion
of the SLI Merger, SLI became a wholly owned subsidiary of the Company.
The aggregate consideration paid by the Company in the Offer and SLI Merger was approximately $162.0 million, excluding related transaction fees and expenses. All of the funds necessary to consummate the Offer, the Merger and to pay related fees and expenses were financed with additional borrowings under the Company's senior secured revolving credit facility.
The following table summarizes the amounts of the assets acquired and liabilities assumed at the acquisition date on a preliminary basis (in thousands):
|
| | | |
Cash and cash equivalents | $ | 4,985 |
|
Trade and other receivables | 32,544 |
|
Inventories | 26,257 |
|
Prepaid and other current assets | 8,455 |
|
Property, plant and equipment | 23,120 |
|
Goodwill | 56,934 |
|
Other intangibles | 81,306 |
|
Other non-current assets | 825 |
|
Total assets acquired | 234,426 |
|
Trade payables | (18,440 | ) |
Accrued liabilities | (16,407 | ) |
Deferred income tax liabilities | (22,461 | ) |
Long-term debt | (9,500 | ) |
Other liabilities | (5,633 | ) |
Net assets acquired | $ | 161,985 |
|
The preliminary purchase price allocation is subject to finalization of valuations of certain acquired assets and liabilities. The goodwill of $56.9 million arising from the acquisition consists largely of the synergies expected from combining the operations of HNH and SLI. All of the goodwill is assigned to the Company's Electrical Products segment and is not expected to be deductible for income tax purposes. Other intangibles consist primarily of acquired trade names of $13.3 million, customer relationships of $58.7 million, and patented and unpatented technology of $9.2 million. These intangible assets have been assigned useful lives ranging from 10 to 15 years based on the long operating history, broad market recognition and continued demand for the associated brands, and the limited turnover and long-standing relationships SLI has with its existing customer base. The valuations of acquired trade names and patented and unpatented technology were performed utilizing a relief from royalty method, and significant assumptions used in the valuation included the royalty rate assumed and the expected level of future sales, as well as the rate of technical obsolescence for the patented and unpatented technology. The acquired customer relationships were valued using an excess earnings approach, and significant assumptions used in the valuation included the customer attrition rate assumed and the expected level of future sales.
The amount of net sales and operating loss of the acquired business included in the consolidated income statementstatements of operations for both the three and ninesix months ended SeptemberJune 30, 20152016 were approximately $28.1$11.8 million and $(2.3) million, respectively, which include $3.3 million. The operating loss includes $1.9 million of nonrecurring expense relatedexpenses associated with the acceleration of SLI's previously outstanding stock-based compensation awards, which became fully vested on the date of acquisition pursuant to the fair value adjustment to acquisition-date inventories.terms of the merger agreement, and which are included in selling, general and administrative expenses in the 2016 consolidated statements of operations. The results of operations of the acquired business are reported within the Company's Performance Materials segment. Electrical Products segment, which is currently comprised solely of the operations of SLI.
Pro Forma Disclosures
Unaudited pro forma net sales and income from continuing operations, net of tax, of the combined entityentities had the acquisition datedates for the JPS and SLI acquisitions been January 1, 2014 and January 1, 2015, respectively, are as follows:
| | | | Nine Months Ended | | | | | |
| | September 30, | | Six Months Ended June 30, |
(in thousands, except per share) | | 2015 | | 2014 | | 2016 | | 2015 |
Net sales | | $ | 568,695 |
| | $ | 594,163 |
| | $ | 445,298 |
| | $ | 484,959 |
|
Income from continuing operations, net of tax | | $ | 17,283 |
| | $ | 12,658 |
| | $ | 1,784 |
| | $ | 9,570 |
|
Income from continuing operations, net of tax, per share | | $ | 1.42 |
| | $ | 0.89 |
| | $ | 0.15 |
| | $ | 0.78 |
|
Weighted-average number of common shares outstanding | | 12,211 |
| | 14,287 |
| | 12,242 |
| | 12,211 |
|
This unaudited pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or of the results that would have occurred had the acquisitionJPS and SLI acquisitions taken place on January 1, 2014.2014 and January 1, 2015, respectively. The information for the ninesix months ended SeptemberJune 30, 20152016 and 20142015 is based on historical financial information with respect to the acquisition and does not include operational or other changes which might have been effected by the Company. Both the 2015 and 2014 periodsThe supplemental unaudited pro forma earnings were adjusted to reflect incremental depreciation and amortization expense based on the fair value adjustments for the acquired property, plant and equipment and intangibles assets. The 2015 supplemental unaudited pro forma earnings reflect adjustmentsintangible assets, as well as incremental interest expense on the borrowings made to finance the acquisitions, and to exclude a total of $7.4$4.1 million and $5.2 million of acquisition-related costs incurred by both the Company and JPS and SLI during the ninesix months ofended June 30, 2016 and 2015,
and $3.3 respectively. The 2016 supplemental unaudited pro forma earnings reflect adjustments to exclude $1.0 million of nonrecurring expense related to the amortization of the fair value adjustment to acquisition-date inventories.inventories, as well as $1.9 million in expense associated with the acceleration of SLI's previously outstanding stock-based compensation awards. The 20142015 supplemental unaudited pro forma earnings were adjusted to include both the fair value adjustment to acquisition-date inventories.inventories and the expense associated with the acceleration of SLI's previously outstanding stock-based compensation awards.
Note 4 – Discontinued Operations
On December 18, 2014, H&H Group and Bairnco entered into a stock purchase agreement to sell all of the issued and outstanding equity interests of Arlon, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Bairnco, and its subsidiaries (other than Arlon India (Pvt) Limited) for $157.0 million in cash, less transaction fees, subject to a final working capital adjustment and certain potential reductions as provided in the stock purchase agreement, which are reflected in proceeds from sale of discontinued operations in the consolidated statement of cash flows.agreement. The closing of the sale occurred in January 2015. The operations of Arlon, LLC comprised substantially all of the Company's former Arlon Electronic Materials segment, which manufactured high performance materials for the printed circuit board industry and silicone rubber-based materials.
The assets and liabilities of discontinued operations were segregated on the consolidated balance sheet as of December 31, 2014. No balances from discontinued operations remain at September 30, 2015.
|
| | | | |
| | December 31, |
(in thousands) | | 2014 |
Assets of Discontinued Operations: | | |
Trade and other receivables, net | | $ | 16,044 |
|
Inventories, net | | 8,294 |
|
Prepaid and other current assets | | 811 |
|
Property, plant and equipment, net | | 24,754 |
|
Goodwill | | 9,298 |
|
Other intangibles, net | | 10,472 |
|
Total assets of discontinued operations | | $ | 69,673 |
|
| | |
Liabilities of Discontinued Operations: | | |
Trade payables | | $ | 6,252 |
|
Accrued liabilities | | 3,986 |
|
Accrued pension liability | | 1,794 |
|
Other liabilities | | 1,666 |
|
Total liabilities of discontinued operations | | $ | 13,698 |
|
The net (loss) income from discontinued operations includes the following:
| | | | Three Months Ended | | Nine Months Ended | | | | | |
| | September 30, | | September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2015 |
Net sales | | $ | — |
| | $ | 24,177 |
| | $ | 5,952 |
| | $ | 77,483 |
| | $ | — |
| | $ | 5,952 |
|
Operating income | | — |
| | 3,553 |
| | 920 |
| | 13,561 |
| | — |
| | 920 |
|
Interest expense and other income | | — |
| | 13 |
| | (10 | ) | | 3 |
| |
Other income | | | — |
| | 10 |
|
Tax provision | | — |
| | 1,250 |
| | 365 |
| | 4,786 |
| | — |
| | 365 |
|
Income from discontinued operations, net of tax | | — |
| | 2,290 |
| | 565 |
| | 8,772 |
| | — |
| | 565 |
|
Gain on disposal of assets | | 316 |
| | — |
| | 93,732 |
| | 71 |
| |
(Loss) gain on disposal of assets | | | (38 | ) | | 93,416 |
|
Tax provision | | 121 |
| | — |
| | 4,164 |
| | 29 |
| | 109 |
| | 4,043 |
|
Gain on disposal of assets, net of tax | | 195 |
| | — |
| | 89,568 |
| | 42 |
| |
Net income from discontinued operations | | $ | 195 |
| | $ | 2,290 |
| | $ | 90,133 |
| | $ | 8,814 |
| |
(Loss) gain on disposal of assets, net of tax | | | (147 | ) | | 89,373 |
|
Net (loss) income from discontinued operations | | | $ | (147 | ) | | $ | 89,938 |
|
Based on a tax reorganization completed in anticipation of the sale of Arlon, LLC, as well as the release of Arlon, LLC's net deferred tax liabilities totaling $7.6 million, the effective tax rate on the gain on disposal of Arlon, LLC in 2015 was 4.4%4.3%.
Note 5 – Asset Impairment Charges
In connection with our continued integration of JPS, the Company approved the closure of JPS' Slater, South Carolina operating facility during the second quarter of 2016. The Company notified employees of such closure in July 2016 and currently expects that closure of the facility will be completed by December 31, 2016. For the three months ended June 30, 2016, the
Company recorded impairment charges totaling $7.9 million, including write-downs of $6.6 million to property, plant, and equipment and $0.4 million to intangible assets, as well as a $0.9 million inventory write-down, which was recorded in cost of goods sold in the consolidated statements of operations.
Note 6 – Inventories
Inventories, net at SeptemberJune 30, 20152016 and December 31, 20142015 were comprised of:
|
| | | | | | | | |
| | September 30, | | December 31, |
(in thousands) | | 2015 | | 2014 |
Finished products | | $ | 32,193 |
| | $ | 24,424 |
|
In-process | | 21,760 |
| | 10,310 |
|
Raw materials | | 20,436 |
| | 12,346 |
|
Fine and fabricated precious metals in various stages of completion | | 16,743 |
| | 17,094 |
|
| | 91,132 |
| | 64,174 |
|
LIFO reserve | | (189 | ) | | (245 | ) |
Total | | $ | 90,943 |
| | $ | 63,929 |
|
Inventories, net at September 30, 2015 include $27.5 million from the acquisition of JPS discussed in Note 3 - "Acquisitions." |
| | | | | | | | |
| | June 30, | | December 31, |
(in thousands) | | 2016 | | 2015 |
Finished products | | $ | 33,630 |
| | $ | 31,355 |
|
In-process | | 26,902 |
| | 19,873 |
|
Raw materials | | 33,731 |
| | 18,451 |
|
Fine and fabricated precious metals in various stages of completion | | 18,798 |
| | 13,155 |
|
| | 113,061 |
| | 82,834 |
|
LIFO reserve | | (1,290 | ) | | (30 | ) |
Total | | $ | 111,771 |
| | $ | 82,804 |
|
In order to produce certain of its products, H&H purchases, maintains and utilizes precious metal inventory. H&H records certain of its precious metal inventory at the lower of LIFO cost or market, with any adjustments recorded through cost of goods sold. Remaining precious metal inventory is accounted for primarily at fair value.
Certain customers and suppliers of H&H choose to do business on a "pool" basis and furnish precious metal to H&H for return in fabricated form 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 on the Company's consolidated 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. As of SeptemberJune 30, 2015,2016, customer metal in H&H's custody consisted of 160,520135,796 ounces of silver, 531 ounces of gold and 1,4621,391 ounces of palladium.
| | Supplemental inventory information: | | September 30, | | December 31, | | June 30, | | December 31, |
(in thousands, except per ounce) | | 2015 | | 2014 | | 2016 | | 2015 |
Precious metals stated at LIFO cost | | $ | 4,671 |
| | $ | 4,684 |
| | $ | 4,969 |
| | $ | 3,506 |
|
Precious metals stated under non-LIFO cost methods, primarily at fair value | | $ | 11,882 |
| | $ | 12,165 |
| | $ | 12,539 |
| | $ | 9,619 |
|
Market value per ounce: | | | | | | | | |
Silver | | $ | 15.13 |
| | $ | 15.75 |
| | $ | 17.82 |
| | $ | 13.86 |
|
Gold | | $ | 1,146.65 |
| | $ | 1,199.25 |
| | $ | 1,315.50 |
| | $ | 1,062.25 |
|
Palladium | | $ | 672.00 |
| | $ | 798.00 |
| | $ | 548.00 |
| | $ | 547.00 |
|
Note 67 – Goodwill and Other Intangibles
The changes in the net carrying amount of goodwill by reportable segment for the ninesix months ended SeptemberJune 30, 20152016 were as follows (in thousands):
| | Segment | | Balance at January 1, 2015 | | Foreign Currency Translation Adjustments | | Additions | | Adjustments | | Balance at September 30, 2015 | | Accumulated Impairment Losses | | Balance at January 1, 2016 | | Foreign Currency Translation Adjustments | | Additions | | Adjustments | | Balance at June 30, 2016 | | Accumulated Impairment Losses |
Joining Materials | | $ | 16,238 |
| | $ | (23 | ) | | $ | — |
| | $ | — |
| | $ | 16,215 |
| | $ | — |
| | $ | 16,210 |
| | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | 16,215 |
| | $ | — |
|
Tubing | | 1,895 |
| | — |
| | — |
| | — |
| | 1,895 |
| | — |
| | 1,895 |
| | — |
| | — |
| | — |
| | 1,895 |
| | — |
|
Building Materials | | 50,120 |
| | — |
| | 21,268 |
| | — |
| | 71,388 |
| | — |
| | 71,388 |
| | — |
| | — |
| | — |
| | 71,388 |
| |
|
|
Performance Materials | | — |
| | — |
| | 35,314 |
| | — |
| | 35,314 |
| | — |
| | 32,336 |
| | — |
| | — |
| | (174 | ) | | 32,162 |
| | — |
|
Electrical Products | | | — |
| | — |
| | 56,934 |
| | — |
| | 56,934 |
| | — |
|
Total | | $ | 68,253 |
| | $ | (23 | ) | | $ | 56,582 |
| | $ | — |
| | $ | 124,812 |
| | $ | — |
| | $ | 121,829 |
| | $ | 5 |
| | $ | 56,934 |
| | $ | (174 | ) | | $ | 178,594 |
| | $ | — |
|
Other intangible assets, as of Septembernet at June 30, 20152016 and December 31, 20142015 consisted of: |
| | | | | | | | | | | | | | | | | | | |
(in thousands) | September 30, 2015 | | December 31, 2014 |
| Cost | Accumulated Amortization | Net | | Cost | Accumulated Amortization | Net |
Customer relationships | $ | 35,677 |
| $ | (10,115 | ) | $ | 25,562 |
| | $ | 31,977 |
| $ | (8,524 | ) | $ | 23,453 |
|
Trademarks, trade names and brand names | 12,840 |
| (2,447 | ) | 10,393 |
| | 8,419 |
| (2,004 | ) | 6,415 |
|
Patents and patent applications | 5,522 |
| (2,519 | ) | 3,003 |
| | 5,354 |
| (2,229 | ) | 3,125 |
|
Non-compete agreements | 774 |
| (702 | ) | 72 |
| | 709 |
| (671 | ) | 38 |
|
Other | 7,448 |
| (1,540 | ) | 5,908 |
| | 1,358 |
| (1,051 | ) | 307 |
|
Total | $ | 62,261 |
| $ | (17,323 | ) | $ | 44,938 |
| | $ | 47,817 |
| $ | (14,479 | ) | $ | 33,338 |
|
The $21.3 million and $35.3 million additions to goodwill within the Building Materials and Performance Materials segments, respectively, during the nine months ended September 30, 2015 were due to the Company's ITW and JPS acquisitions discussed in Note 3 - "Acquisitions."
|
| | | | | | | | | | | | | | | | | | | |
(in thousands) | June 30, 2016 | | December 31, 2015 |
| Cost | Accumulated Amortization | Net | | Cost | Accumulated Amortization | Net |
Customer relationships | $ | 93,467 |
| $ | (12,179 | ) | $ | 81,288 |
| | $ | 35,077 |
| $ | (10,702 | ) | $ | 24,375 |
|
Trademarks, trade names and brand names | 25,999 |
| (3,197 | ) | 22,802 |
| | 12,739 |
| (2,649 | ) | 10,090 |
|
Patents and patent applications | 14,918 |
| (2,822 | ) | 12,096 |
| | 5,591 |
| (2,591 | ) | 3,000 |
|
Non-compete agreements | 774 |
| (729 | ) | 45 |
| | 774 |
| (714 | ) | 60 |
|
Other | 7,396 |
| (2,117 | ) | 5,279 |
| | 7,331 |
| (1,739 | ) | 5,592 |
|
Total | $ | 142,554 |
| $ | (21,044 | ) | $ | 121,510 |
| | $ | 61,512 |
| $ | (18,395 | ) | $ | 43,117 |
|
Other intangible assets at cost as of SeptemberJune 30, 20152016 include $4.4$81.3 million in intangible assets, primarily unpatented technology, associated with the ITW acquisition and $9.9 million in intangible assets, primarily tradestrade names, customer relationships, and patented and unpatented technology, associated with the JPSSLI acquisition. The goodwill and intangible assetThese balances associated with the JPS acquisition are subject to adjustment during the finalization of the purchase price allocation.allocation for the SLI acquisition.
Amortization expense totaled $1.2$1.6 million and $0.8$0.9 million for the three months ended SeptemberJune 30, 20152016 and 2014,2015, respectively, and $2.9$2.8 million and $2.4$1.7 million for the ninesix months ended SeptemberJune 30, 20152016 and 2014,2015, respectively. The increase in intangible assets and related amortization expense during 20152016 was principally due to the Company's ITWJPS and JPSSLI acquisitions. Future amortization expense of the intangible assets acquired in these acquisitionsthe SLI acquisition is expected to total $0.4$5.2 million for the remainder of 2015, $1.52016, $9.1 million, $1.4$8.0 million, $1.4$7.2 million, $1.3$6.5 million, $7.8and $44.7 million in 2016, 2017, 2018, 2019, 2020, and thereafter, respectively.
Note 78 – Investments
The Company holds an investment in the common stock of a public company, ModusLink Global Solutions, Inc. ("ModusLink"), which is classified as an investment in associated company on the consolidated balance sheet.sheets. The Company carries its ModusLink investment on the consolidated balance sheetsheets at fair value, calculated based on the closing market price for ModusLink common stock, with unrealized gains and losses on the investment reported in net income or loss. HNH owned 8,436,715 and 6,383,005 shares of the common stock of ModusLink at Septemberboth June 30, 20152016 and December 31, 2014, respectively,2015, and the value of this investment decreased from $23.9$20.9 million at December 31, 20142015 to $22.9$10.0 million at SeptemberJune 30, 20152016 due entirely to a decrease in the share price of ModusLink's common stock, partially offset by the additional shares of ModusLink common stock purchased by the Company during 2015.stock.
As of SeptemberJune 30, 2015,2016, SPLP and its associated companies, which include the Company, owned a combined total of 16,476,730 ModusLink common shares, which represented 31.5%approximately 31.3% of ModusLink's outstanding shares. SPLP is a majority shareholder of HNH, owning directly or indirectly through its subsidiaries in excess of 50% of HNH's common shares. The power to vote and dispose of the securities held by SPLP is controlled by Steel Partners Holdings GP Inc. ("SPH GP"). SPLP also holds warrants to purchase 2,000,000 additional shares of ModusLink common stock at an exercise price of $5.00$5.00 per share. These warrants will expire in March 2018.
ModusLink's fiscal year ends on July 31. Summarized unaudited information as to assets, liabilities and results of operations of ModusLink for the quarter ended July 31, 2015,April 30, 2016, its most recently completed fiscal quarter, and the comparable prior periods are as follows:
| | | | July 31, | | July 31, | | | | | | April 30, | | July 31, | | | | |
(in thousands) | | 2015 | | 2014 | | | | | | 2016 | | 2015 | | | | |
Current assets | | $ | 413,642 |
| | $ | 405,768 |
| | | | | | $ | 364,320 |
| | $ | 413,642 |
| | | | |
Non-current assets | | $ | 32,860 |
| | $ | 45,878 |
| | | | | | $ | 32,606 |
| | $ | 32,860 |
| | | | |
Current liabilities | | $ | 211,353 |
| | $ | 198,594 |
| | | | | | $ | 198,687 |
| | $ | 211,353 |
| | | | |
Non-current liabilities | | $ | 90,548 |
| | $ | 81,434 |
| | | | | | $ | 94,340 |
| | $ | 90,548 |
| | | | |
Stockholders' equity | | $ | 144,601 |
| | $ | 171,618 |
| | | | | | $ | 103,899 |
| | $ | 144,601 |
| | | | |
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | July 31, | | July 31, | | April 30, | | April 30, |
(in thousands) | | 2015 | | 2014 | | 2015 | | 2014 | | 2016 | | 2015 | | 2016 | | 2015 |
Net revenue | | $ | 119,685 |
| | $ | 164,700 |
| | $ | 374,229 |
| | $ | 531,985 |
| | $ | 96,460 |
| | $ | 106,234 |
| | $ | 216,426 |
| | $ | 254,544 |
|
Gross profit | | $ | 10,041 |
| | $ | 14,451 |
| | $ | 35,647 |
| | $ | 52,730 |
| | $ | 2,174 |
| | $ | 9,012 |
| | $ | 5,829 |
| | $ | 25,606 |
|
Loss from continuing operations | | $ | (4,989 | ) | | $ | (8,485 | ) | | $ | (18,651 | ) | | $ | (16,900 | ) | | $ | (12,849 | ) | | $ | (12,106 | ) | | $ | (26,797 | ) | | $ | (13,662 | ) |
Net loss | | $ | (4,989 | ) | | $ | (8,485 | ) | | $ | (18,651 | ) | | $ | (16,899 | ) | | $ | (12,849 | ) | | $ | (12,106 | ) | | $ | (26,797 | ) | | $ | (13,662 | ) |
Note 89 – Debt
Debt at SeptemberJune 30, 20152016 and December 31, 20142015 was as follows:
| | | | September 30, | | December 31, | | June 30, | | December 31, |
(in thousands) | | 2015 | | 2014 | | 2016 | | 2015 |
Short-term debt | | | | | | | | |
Foreign | | $ | 606 |
| | $ | 602 |
| | $ | 617 |
| | $ | 742 |
|
Long-term debt | | | | | | | | |
Revolving facilities | | 121,166 |
| | 193,375 |
| | 254,081 |
| | 90,613 |
|
Other H&H debt - domestic | | 7,750 |
| | 8,014 |
| | 6,707 |
| | 6,936 |
|
Foreign loan facilities | | 1,322 |
| | 1,412 |
| | 1,250 |
| | 1,277 |
|
Sub total | | 130,238 |
| | 202,801 |
| | 262,038 |
| | 98,826 |
|
Less portion due within one year | | 1,181 |
| | 6,378 |
| | 1,677 |
| | 1,720 |
|
Total long-term debt | | 129,057 |
| | 196,423 |
| | 260,361 |
| | 97,106 |
|
Total debt | | $ | 130,844 |
| | $ | 203,403 |
| | $ | 262,655 |
| | $ | 99,568 |
|
Senior Credit Facilities
On August 29, 2014, H&H Group entered into anThe Company's amended and restated senior credit agreement ("Senior Credit Facility"), which provides provided for an up to $365.0 million senior secured revolving credit facility, including a $20.0 million sublimit for the issuance of letters of credit and a $20.0 million sublimit for the issuance of swing loans. On March 23, 2016, the Company entered into an amendment to its Senior Credit Facility to increase the size of the credit facility by $35.0 million to an aggregate amount of $400.0 million. Borrowings under the Senior Credit Facility bear interest, at H&H Group's option, at either LIBOR or the Base Rate, as defined, plus an applicable margin as set forth in the loan agreement (1.75% and 0.75%, respectively, for LIBOR and Base Rate borrowings at SeptemberJune 30, 2015)2016), and the revolving facility provides for a commitment fee to be paid on unused borrowings. The weighted-average interest rate on the revolving facility was 1.99%2.24% at SeptemberJune 30, 2015.2016. H&H Group's availability under the Senior Credit Facility was $161.7$92.5 million as of SeptemberJune 30, 2015.2016.
On January 22, 2015, H&H Group, and certain subsidiaries of H&H Group, entered into an amendment to its Senior Credit Facility to, among other things, provide for the consent of the administrative agent and the lenders, subject to compliance with certain conditions, for the tender offer by HNH Group Acquisition LLC, a newly formed subsidiary of H&H Group, for the shares of JPS, including the use of up to $71.0 million under the Senior Credit Facility to purchase such shares, and certain transactions related thereto. In addition, HNH Group Acquisition LLC and HNH Acquisition LLC, another newly formed subsidiary of H&H Group, became guarantors under the Senior Credit Facility pursuant to the amendment. See further discussion regarding the JPS transaction in Note 3 - "Acquisitions."
The Senior Credit Facility will expire, with all amounts outstanding due and payable, on August 29, 2019. The Senior Credit Facility is guaranteed by substantially all existing and thereafter acquired or created domestic wholly-owned subsidiaries and Canadiancertain foreign wholly-owned subsidiaries of H&H Group, and obligations under the Senior Credit Facility are collateralized by first priority security interests in and liens upon all present and future assets of H&H Group and these subsidiaries. The Senior Credit Facility restricts H&H Group's ability to transfer cash or other assets to HNH, subject to certain exceptions, including required pension payments to the WHX Corporation Pension Plan ("WHX Pension Plan"). The Senior Credit Facility is subject to certain mandatory prepayment provisions and restrictive and financial covenants, which include a maximum ratio limit on Total
Leverage and a minimum ratio limit on Fixed Charge Coverage, as defined, as well as a minimum liquidity level. The Company was in compliance with all debt covenants at SeptemberJune 30, 2015.
The Company's prior senior credit facility, as amended, consisted of a revolving credit facility in an aggregate principal amount not to exceed $110.0 million and a senior term loan. On August 5, 2014, this agreement was further amended to, among other things, permit a new $40.0 million term loan and permit H&H Group to make a distribution to HNH of up to $80.0 million. The revolving facility provided for a commitment fee to be paid on unused borrowings. Borrowings under the prior senior credit facility bore interest, at H&H Group's option, at a rate based on LIBOR or the Base Rate, as defined, plus an applicable margin as set forth in the loan agreement. On August 29, 2014, all amounts outstanding under this agreement were repaid.2016.
Interest Rate Swap Agreements
H&H Group entered into an interest rate swap agreement in February 2013 to reduce its exposure to interest rate fluctuations. Under the interest rate swap, the Company receivesreceived one-month LIBOR in exchange for a fixed interest rate of 0.569% over the life of the agreement on an initial $56.4$56.4 million notional amount of debt, with the notional amount decreasing by $1.1$1.1 million,, $1.8 $1.8 million and $2.2$2.2 million per quarter in 2013, 2014 and 2015, respectively. The agreement expiresexpired in February 2016.2016. H&H Group entered into a second interest rate swap agreement in June 2013, also to reduce its exposure to interest rate fluctuations. Under the interest rate swap, the Company receivesreceived one-month LIBOR in exchange for a fixed interest rate of 0.598% over the life of the agreement on an initial $5.0$5.0 million notional amount of debt, with the notional amount decreasing by $0.1$0.1 million,, $0.2 $0.2 million and $0.2$0.2 million per quarter in 2013, 2014 and 2015, respectively. The agreement expiresexpired in February 2016.2016.
WHX CS Loan
On June 3, 2014, WHX CS Corp., a wholly-owned subsidiary of the Company, entered into a credit agreement ("WHX CS Loan"), which provided for a term loan facility with borrowing availability of up to a maximum aggregate principal amount of $15.0 million. The amounts outstanding under the WHX CS Loan bore interest at LIBOR plus 1.25%. On August 29, 2014, the WHX CS Loan was terminated and all outstanding amounts thereunder were repaid.
Other Debt
On October 5, 2015, a subsidiary of H&H refinanced an outstanding mortgage note, which had an original maturity in October 2015. Under the terms of the revised agreement, the subsidiary paid down $0.7 million of the original outstanding principal balance. The remaining outstanding principal balance of $5.4 million was refinanced and will be repaid in equal monthly installments totaling $0.4 million per year over the next five years, with a final principal payment of $3.6 million due at maturity of the loan in October 2020.
Note 910 – Derivative Instruments
Precious Metal and Commodity Inventories
H&H's precious metal and commodity inventories are subject to market price fluctuations. H&H enters into commodity futures and forward contracts to mitigate the impact of price fluctuations on its precious and certain non-precious metal inventories that are not subject to fixed price contracts. The Company's hedging strategy is designed to protect it against normal volatility; therefore, abnormal price changes in these commodities or markets could negatively impact HNH's earnings. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes.
As of SeptemberJune 30, 2015,2016, the Company had the following outstanding forward contracts with settlement dates through December 2015.July 2016. There were no futures contracts outstanding at SeptemberJune 30, 2015.2016.
| | | | | | Notional Value | | | | Notional Value |
Commodity | | Amount | | ($ in millions) | | Amount | | ($ in millions) |
Silver | | 740,000 |
| | ounces | | $ | 11.2 |
| | 727,562 |
| | ounces | | $ | 12.6 |
|
Gold | | 900 |
| | ounces | | $ | 1.0 |
| | 1,000 |
| | ounces | | $ | 1.3 |
|
Copper | | 300,000 |
| | pounds | | $ | 0.7 |
| | 325,000 |
| | pounds | | $ | 0.7 |
|
Tin | | 40 |
| | metric tons | | $ | 0.6 |
| | 30 |
| | metric tons | | $ | 0.5 |
|
H&H accounts for these contracts as either fair value hedges or economic hedges under the guidance in Accounting Standards Codification ("ASC") 815, Derivatives and Hedging.
Fair Value Hedges. Of the total forward contracts outstanding, 650,000587,562 ounces of silver and substantially all of the copper contracts are designated and accounted for as fair value hedges under ASC 815.hedges. The fair values of these derivatives are recognized as derivative assets and liabilities on the consolidated balance sheet.sheets. The net change in fair value of the derivative assets and liabilities, and the change in the fair value of the underlying hedged inventory, are recognized in the consolidated income statement,statements of operations, and such amounts principally offset each other due to the effectiveness of the hedges. The fair value hedges are associated primarily with the Company's precious metal inventory carried at fair value.
Economic Hedges. The remaining outstanding forward contracts for silver, and all of the contracts for gold and tin, are accounted for as economic hedges. As these derivatives are not designated as accounting hedges, under ASC 815, 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 consolidated income statement.statements of operations. The economic hedges are associated primarily with the Company's precious metal inventory valued using the LIFO method.
The forward contracts were made with a counter party rated A+ by Standard & Poors. Accordingly, the Company has determined that there is minimal credit risk of default. The Company estimates the fair value of its derivative contracts through the use of market quotes or with the assistance of brokers when market information is not available. The Company maintains collateral on account with the third-party broker. Such collateral consists of both cash that varies in amount depending on the value of open contracts, as well as ounces of precious metal held on account by the broker.
Debt Agreements
H&H Group has entered into two interest rate swap agreements to reduce its exposure to interest rate fluctuations. See Note 89 - "Debt" for further discussion of the terms of these arrangements. These derivatives arewere not designated as accounting hedges under U.S. GAAP; they arewere accounted for as derivatives with no hedge designation. The Company recordsrecorded the gains or losses both from the mark-to-market adjustments and net settlements in interest expense in the consolidated income statementstatements of operations as the hedges arewere intended to offset interest rate movements. The agreements expired in February 2016.
Effect of Derivative Instruments in the Consolidated Income Statements of Operations - Income/(Expense)
| | (in thousands) | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | September 30, | | September 30, | | June 30, | | June 30, |
Derivative | | Income Statement Line | | 2015 | | 2014 | | 2015 | | 2014 | | Statement of Operations Line | | 2016 | | 2015 | | 2016 | | 2015 |
Commodity contracts | | Cost of goods sold | | $ | 585 |
| | $ | 2,337 |
| | $ | 564 |
| | $ | 1,428 |
| | Cost of goods sold | | $ | (1,403 | ) | | $ | 893 |
| | $ | (2,381 | ) | | $ | (21 | ) |
| | Total derivatives designated as hedging instruments | | 585 |
| | 2,337 |
| | 564 |
| | 1,428 |
| | Total derivatives designated as hedging instruments | | (1,403 | ) | | 893 |
| | (2,381 | ) | | (21 | ) |
Commodity contracts | | Cost of goods sold | | (69 | ) | | 52 |
| | 209 |
| | 25 |
| | Cost of goods sold | | (70 | ) | | 131 |
| | (95 | ) | | 278 |
|
Commodity contracts | | Realized and unrealized gain on derivatives | | 168 |
| | 1,320 |
| | 273 |
| | 854 |
| | Realized and unrealized (loss) gain on derivatives | | (416 | ) | | 312 |
| | (539 | ) | | 105 |
|
Interest rate swap agreements | | Interest expense | | (16 | ) | | 9 |
| | (79 | ) | | (116 | ) | | Interest expense | | — |
| | (18 | ) | | — |
| | (63 | ) |
| | Total derivatives not designated as hedging instruments | | 83 |
| | 1,381 |
| | 403 |
| | 763 |
| | Total derivatives not designated as hedging instruments | | (486 | ) | | 425 |
| | (634 | ) | | 320 |
|
| | Total derivatives | | $ | 668 |
| | $ | 3,718 |
| | $ | 967 |
| | $ | 2,191 |
| | Total derivatives | | $ | (1,889 | ) | | $ | 1,318 |
| | $ | (3,015 | ) | | $ | 299 |
|
Fair Value of Derivative Instruments on the Consolidated Balance Sheets - Asset/(Liability)
| | (in thousands) | | September 30, | | December 31, | | June 30, | | December 31, |
Derivative | | Balance Sheet Location | | 2015 | | 2014 | | Balance Sheet Location | | 2016 | | 2015 |
Commodity contracts | | Prepaid and other current assets | | $ | 37 |
| | $ | 667 |
| | (Accrued liabilities)/Prepaid and other current assets | | $ | (222 | ) | | $ | 197 |
|
| | Total derivatives designated as hedging instruments | | 37 |
| | 667 |
| | Total derivatives designated as hedging instruments | | (222 | ) | | 197 |
|
Commodity contracts | | Prepaid and other current assets | | 23 |
| | 97 |
| | (Accrued liabilities)/Prepaid and other current assets | | (117 | ) | | 18 |
|
Interest rate swap agreements | | Other liabilities | | (72 | ) | | (138 | ) | | Other liabilities | | — |
| | (30 | ) |
| | Total derivatives not designated as hedging instruments | | (49 | ) | | (41 | ) | | Total derivatives not designated as hedging instruments | | (117 | ) | | (12 | ) |
| | Total derivatives | | $ | (12 | ) | | $ | 626 |
| | Total derivatives | | $ | (339 | ) | | $ | 185 |
|
Note 1011 – Pension and Other Post-Retirement Benefits
HNH sponsors a defined benefit pension plan, the WHX Pension Plan, covering many of H&H's employees and certain employees of H&H's former subsidiary, Wheeling-Pittsburgh Corporation. In addition, JPS sponsors a defined benefit pension plan, ("JPS Pension Plan"), which was assumed in connection with the acquisition of JPS on July 2, 2015. The following table presents the components of net periodic pension expense for the Company's pension plans for the three and ninesix months endedSeptember June 30, 20152016 and 2014:2015:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | September 30, | | September 30, | | June 30, | | June 30, |
(in thousands) | | 2015 | | 2014 | | 2015 | | 2014 | | 2016 | | 2015 | | 2016 | | 2015 |
Service cost | | $ | 9 |
| | $ | — |
| | $ | 9 |
| | $ | — |
| | $ | (14 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
Interest cost | | 5,057 |
| | 4,893 |
| | 14,577 |
| | 15,388 |
| | 4,585 |
| | 4,760 |
| | 9,373 |
| | 9,520 |
|
Expected return on plan assets | | (6,034 | ) | | (6,017 | ) | | (17,069 | ) | | (18,117 | ) | | (5,769 | ) | | (5,518 | ) | | (11,750 | ) | | (11,035 | ) |
Amortization of actuarial loss | | 2,729 |
| | 1,719 |
| | 8,389 |
| | 5,534 |
| | 3,330 |
| | 2,830 |
| | 6,660 |
| | 5,660 |
|
Total | | $ | 1,761 |
| | $ | 595 |
| | $ | 5,906 |
| | $ | 2,805 |
| | $ | 2,132 |
| | $ | 2,072 |
| | $ | 4,283 |
| | $ | 4,145 |
|
Under the JPS Pension Plan, substantially all of JPS's employees who were employed prior to April 1, 2005 have benefits. The defined benefit pension plan was frozen effective December 31, 2005. Employees no longer earned additional benefits after that date. Benefits earned prior to December 31, 2005 will be paid out to eligible participants following retirement. The defined benefit pension plan was "unfrozen" for employees who were active employees on or after June 1, 2012. This new benefit, calculated based on years of service and a capped average salary, will be added to the amount of any pre-2005 benefit. Assets of the JPS Pension Plan are invested in a bond portfolio covering specific liabilities and in common and preferred stocks, government and corporate bonds, and various short-term investments. The net unfunded pension liability of the JPS Pension Plan was $31.3 million as of September 30, 2015, and is included in accrued pension liability on the consolidated balance sheet.
The componentsBeginning January 1, 2016, we changed the manner in which the interest cost component of net periodic pension expense (benefit)is determined. Historically, we estimated the interest cost component using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the JPS Pension Plan since the date of acquisition are includedperiod. We have elected to use a full yield curve approach in the table above and are based on a preliminary actuarial report completed asestimation of this component of benefit expense by applying the July 2, 2015 acquisition date, which indicated a projected benefit obligation of $119.5 million, as compared to plan assets of $87.3 million. The Company expects a net pension benefit of $0.5 million fromspecific spot rates along the JPS Pension Plan from the acquisition date to December 31, 2015. Significant assumptionsyield curve used in the valuation included the discount rate (4.10%) and the expected return on plan assets (7.00%). The discount rate is the rate at which the plan's obligations could be effectively settled and is based on high quality bond yields asdetermination of the benefit obligation that correlate to the relevant projected cash flows ("spot rate approach"). This change provides a more precise measurement date. In determining the expected long-term rate of return on plan assets, the Company evaluated input from various investment professionals. In addition, the Company considered its historical compound returns, as well as the Company's forward-looking expectations.interest cost. The estimated impact of this change is to reduce forecast annual pension expense in 2016 by approximately $4.8 million.
The actuarial loss reflected in the table above occurred principally because the historical investment returns on the assets of the WHX Pension Plan have been lower than the actuarial assumptions. The actuarial losses are being amortized over the average future lifetime of the participants, which is expected to be approximately 20 years. The Company believes that use of the future lifetime of the participants is appropriate because the WHX Pension Plan is completely inactive.
The Company expects to have required minimum pension contributions to the WHX Pension Plan of $3.0$10.2 million for the remainder of 2015,2016, and $14.3$34.8 million,, $15.3 $41.6 million,, $17.0 $38.9 million,, $18.3 $35.4 million and $56.4$96.3 million in 2016, 2017, 2018, 2019, 2020, and for the five years thereafter, respectively. For the JPS Pension Plan, the Company expects to have no required minimum contributions for the remainder of 2015 or in 2016, and $5.6 million, $5.2 million and $3.7 million in 2017, 2018, and 2019, respectively.
Required future pension contributions are estimated 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 any plan termination or other acceleration events.
In addition to its pension plans which are included in the table above, the Company also maintains several other post-retirement benefit plans covering certain of its employees and retirees. The approximate aggregate expense for these plans was $0.4$0.5 million and $0.4 million for the three months ended SeptemberJune 30, 20152016 and 2014,2015, respectively, and $1.4$1.0 million and $1.3$0.9 million for the ninesix months ended SeptemberJune 30, 2016 and 2015, and 2014, respectively.
Note 1112 – Stockholders' Equity
Common Stock Repurchase Program
On April 28, 2016, the Company's Board of Directors approved the repurchase of up to an aggregate of 500,000 shares of the Company's common stock. Any such repurchases will be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market, in compliance with applicable laws and regulations. The repurchase program is expected to continue unless and until revoked by the Board of Directors. As of June 30, 2016, the Company has repurchased 4,086 shares for a total purchase price of approximately $0.1 million under the 2016 repurchase program.
Accumulated Other Comprehensive Loss
Changes, net of tax, in accumulated other comprehensive loss and its components follow:
|
| | | | | | | | | | | | |
(in thousands) | | Foreign Currency Translation Adjustments | | Changes in Net Pension and Other Benefit Obligations | | Total |
Balance at December 31, 2014 | | $ | (1,957 | ) | | $ | (233,865 | ) | | $ | (235,822 | ) |
Current period (loss) income | | (1,253 | ) | | 1,627 |
| | 374 |
|
Balance at September 30, 2015 | | $ | (3,210 | ) | | $ | (232,238 | ) | | $ | (235,448 | ) |
|
| | | | | | | | | | | | |
(in thousands) | | Foreign Currency Translation Adjustments | | Changes in Net Pension and Other Benefit Obligations | | Total |
Balance at December 31, 2015 | | $ | (3,577 | ) | | $ | (255,815 | ) | | $ | (259,392 | ) |
Current period income (loss) | | 144 |
| | (94 | ) | | 50 |
|
Balance at June 30, 2016 | | $ | (3,433 | ) | | $ | (255,909 | ) | | $ | (259,342 | ) |
The current period foreign currency translation adjustments include a $0.2 million increase in accumulated other comprehensive loss associated with the sale of Arlon, LLC. The changes in net pension and other benefit obligations of $1.6 million are also related to the sale of Arlon, LLC, which sponsored a defined benefit pension plan that had an accumulated other comprehensive loss. See Note 4 - "Discontinued Operations" for further discussion of the sale of Arlon, LLC.
Note 1213 – Stock-Based Compensation
During the ninesix months ended SeptemberJune 30, 2015,2016, the Compensation Committee of the Company's Board of Directors approved the grant of an aggregate of 52,71472,942 shares of restricted stock under the 2007 Incentive Stock Plan, as amended ("2007 Plan"), to certain employees, members of the Board of Directors and service providers. Restricted stock grants made to employees are in lieu of a long-term incentive plan component in the Company's bonus plan for those individuals who receive shares of restricted stock.
Compensation expense is measured based on the fair value of the stock-based awards on the grant date, as measured by the NASDAQ closing price for the Company's common stock. Compensation expense is recognized in the consolidated income statementstatements of operations on a straight-line basis over the requisite service period, which is the vesting period. The restricted stock grants made to employees and service providers in 20152016 vest in approximately equal annual installments over a three year period from the grant date. The restricted stock grants to the Company's non-employee directors vest one year from the grant date.
The Company allows certain grantees to forego the issuance of shares to meet applicable income tax withholding due as a result of the vesting of restricted stock. Such shares are returned to the unissued shares of the Company's common stock.
Restricted stock activity under the 2007 Plan was as follows for the ninesix months ended SeptemberJune 30, 2015:2016:
| | | | Employees | | | | | | Employees | | | | |
| | and Service | | | | | | and Service | | | | |
(shares) | | Providers | | Directors | | Total | | Providers | | Directors | | Total |
Balance, January 1, 2015 | | 616,248 |
| | 785,000 |
| | 1,401,248 |
| |
Balance, January 1, 2016 | | | 575,131 |
| | 825,275 |
| | 1,400,406 |
|
Granted | | 12,439 |
| | 40,275 |
| | 52,714 |
| | 60,670 |
| | 12,272 |
| | 72,942 |
|
Forfeited | | (8,466 | ) | | — |
| | (8,466 | ) | | (6,981 | ) | | — |
| | (6,981 | ) |
Reduced for income tax obligations | | (44,546 | ) | | — |
| | (44,546 | ) | | (16,320 | ) | | — |
| | (16,320 | ) |
Balance, September 30, 2015 | | 575,675 |
| | 825,275 |
| | 1,400,950 |
| |
Balance, June 30, 2016 | | | 612,500 |
| | 837,547 |
| | 1,450,047 |
|
| | | | | | | | | | | | |
Vested | | 497,987 |
| | 785,733 |
| | 1,283,720 |
| | 533,874 |
| | 825,275 |
| | 1,359,149 |
|
Non-vested | | 77,688 |
| | 39,542 |
| | 117,230 |
| | 78,626 |
| | 12,272 |
| | 90,898 |
|
The Company recognized compensation expense related to restricted shares of $0.7$0.3 million and $1.4$0.7 million for the three months ended SeptemberJune 30, 20152016 and 2014,2015, respectively, and $2.7$0.9 million and $3.8$2.1 million for the ninesix months ended SeptemberJune 30, 20152016 and 2014,2015, respectively. Unearned compensation expense related to restricted shares at SeptemberJune 30, 20152016 is $1.9$1.6 million, which is net of an estimated 5% forfeiture rate for employees and service providers. This amount will be recognized over the remaining vesting period of the restricted shares.
As of December 31, 2014, 38,1002015, 13,000 stock options to purchase HNH shares at an exercise price of $90.00 per share were outstanding under the 2007 Plan. During the ninesix months ended SeptemberJune 30, 2015, a total of 25,1002016, all of these stock options were forfeited or expired unexercised.
On May 26, 2016, the Company's stockholders approved the adoption of the Company's 2016 Equity Incentive Award Plan ("2016 Plan"). The 2016 Plan provides equity-based compensation through the grant of cash-based awards, nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other stock-based awards. The 2016 Plan replaces the 2007 Plan, and no further awards will be granted under the 2007 Plan. The 2016 Plan allows for issuance of up to 1,000,000 shares of common stock, plus the remaining 624,953 shares of HNH common stock previously available for issuance under the 2007 Plan. As of June 30, 2016, no awards had been granted under the 2016 Plan.
Note 1314 – Income Taxes
For the three months ended SeptemberJune 30, 20152016 and 2014,2015, tax provisions from continuing operations of $6.4$1.1 million and $6.7$5.9 million, respectively, were recorded. The effective tax rates in the three months ended SeptemberJune 30, 2016 and 2015 were 43.1% and 2014 were 42.9% and 38.3%41.0%, respectively. For the ninesix months ended SeptemberJune 30, 20152016 and 2014,2015, tax provisions from continuing operations of $13.9$5.0 million and $15.2$7.5 million, respectively, were recorded. The effective tax rates in the ninesix months ended SeptemberJune 30, 2016 and 2015 were 43.2% and 2014 were 41.9% and 41.3%41.1%, respectively. The provision for income taxes is based on the current estimate of the annual effective tax rate, adjusted for discrete items that occurred within the respective periods. Changes in the effective tax rate arise principally from differences in the mix of income between taxable jurisdictions, including the impact of foreign sourced income, as well as changes in estimates associated with our projected annual state tax expense.
As of December 31, 2015, the Company had U.S. federal income tax net operating loss carryforwards ("NOLs") of $71.3 million. Included in this amount are approximately $47.0 million of U.S. federal NOLs resulting from the JPS acquisition, which are subject to certain annual limitations under the ownership change rules of Section 382 of the Internal Revenue Code. The Company currently expects that its U.S. federal NOLs, excluding amounts attributable to the JPS acquisition, will become fully utilized by the end of 2016.
Note 1415 – Earnings Per Share
The computation of basic earnings per share of common stock is calculated by dividing net (loss) income by the weighted-average number of shares of the Company's common stock outstanding, as follows:
| | | | | | | | | | | | Three Months Ended | | Six Months Ended |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | June 30, | | June 30, |
(in thousands, except per share) | | 2015 | | 2014 | | 2015 | | 2014 | | 2016 | | 2015 | | 2016 | | 2015 |
Income from continuing operations, net of tax | | $ | 4,418 |
| | $ | 9,570 |
| | $ | 13,952 |
| | $ | 13,752 |
| |
(Loss) income from continuing operations, net of tax | | | $ | (734 | ) | | $ | 6,276 |
| | $ | (278 | ) | | $ | 9,534 |
|
Weighted-average number of common shares outstanding | | 11,729 |
| | 12,469 |
| | 11,101 |
| | 12,858 |
| | 12,260 |
| | 10,784 |
| | 12,242 |
| | 10,782 |
|
Income from continuing operations, net of tax, per share | | $ | 0.37 |
| | $ | 0.77 |
| | $ | 1.26 |
| | $ | 1.07 |
| |
Net income from discontinued operations | | $ | 195 |
| | $ | 2,290 |
| | $ | 90,133 |
| | $ | 8,814 |
| |
(Loss) income from continuing operations, net of tax, per share | | | $ | (0.06 | ) | | $ | 0.58 |
| | $ | (0.02 | ) | | $ | 0.88 |
|
Net (loss) income from discontinued operations | | | $ | — |
| | $ | (147 | ) | | $ | — |
| | $ | 89,938 |
|
Weighted-average number of common shares outstanding | | 11,729 |
| | 12,469 |
| | 11,101 |
| | 12,858 |
| | 12,260 |
| | 10,784 |
| | 12,242 |
| | 10,782 |
|
Discontinued operations, net of tax, per share | | $ | 0.02 |
| | $ | 0.18 |
| | $ | 8.12 |
| | $ | 0.69 |
| | $ | — |
| | $ | (0.01 | ) | | $ | — |
| | $ | 8.35 |
|
Net income | | $ | 4,613 |
| | $ | 11,860 |
| | $ | 104,085 |
| | $ | 22,566 |
| |
Net (loss) income | | | $ | (734 | ) | | $ | 6,129 |
| | $ | (278 | ) | | $ | 99,472 |
|
Weighted-average number of common shares outstanding | | 11,729 |
| | 12,469 |
| | 11,101 |
| | 12,858 |
| | 12,260 |
| | 10,784 |
| | 12,242 |
| | 10,782 |
|
Net income per share | | $ | 0.39 |
| | $ | 0.95 |
| | $ | 9.38 |
| | $ | 1.76 |
| |
Net (loss) income per share | | | $ | (0.06 | ) | | $ | 0.57 |
| | $ | (0.02 | ) | | $ | 9.23 |
|
Diluted earnings per share gives effect to dilutive potential common shares outstanding during the reporting period. The Company had potentially dilutive common share equivalents, in the form of outstanding stock options, during the three and nine
six months ended SeptemberJune 30, 20152016 and 2014,2015, although none were dilutive because the exercise price of these equivalents exceeded the market value of the Company's common stock during those periods. As of SeptemberJune 30, 2015,2016, no stock options for an aggregate of 13,000 shares are excluded from the calculations above.remain outstanding.
Note 1516 – Fair Value Measurements
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. Fair value measurements are 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 1").
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 2").
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 ("Level 3").
The fair value of the Company's financial instruments, such as cash and cash equivalents, trade and other receivables, and trade payables, approximate carrying value due to the short-term maturities of these assets and liabilities. Carrying cost approximates fair value for the Company's long-term debt which has variable interest rates.
The fair value of the Company's investment in associated company is a Level 1 measurement because the underlying security is listed on a national securities exchange.
The precious metal and commodity inventories associated with the Company's fair value hedges (see Note 910 - "Derivative Instruments") are reported at fair value. Fair values of these inventories are based on quoted market prices on commodity exchanges and are considered Level 1 measurements. The derivative instruments that the Company purchases in connection with its precious metal and commodity inventories, specifically commodity futures and forward contracts, are also valued at fair value. The futures contracts are Level 1 measurements since they are traded on a commodity exchange. The forward contracts are entered into with a counterparty and are considered Level 2 measurements.
The Company's interest rate swap agreements arewere considered Level 2 measurements as the inputs arewere observable at commonly quoted intervals. These agreements expired in February 2016.
The following table summarizestables summarize the Company's assets and liabilities that are measured at fair value on a recurring basis as of SeptemberJune 30, 20152016 and December 31, 2014:2015:
| | | | Asset (Liability) as of September 30, 2015 | | Asset (Liability) as of June 30, 2016 |
(in thousands) | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
Investment in associated company | | $ | 22,948 |
| | $ | 22,948 |
| | $ | — |
| | $ | — |
| | $ | 10,040 |
| | $ | 10,040 |
| | $ | — |
| | $ | — |
|
Precious metal and commodity inventories recorded at fair value | | $ | 12,642 |
| | $ | 12,642 |
| | $ | — |
| | $ | — |
| | $ | 12,875 |
| | $ | 12,875 |
| | $ | — |
| | $ | — |
|
Commodity contracts on precious metal and commodity inventories | | $ | 60 |
| | $ | — |
| | $ | 60 |
| | $ | — |
| | $ | (339 | ) | | $ | — |
| | $ | (339 | ) | | $ | — |
|
Interest rate swap agreements | | $ | (72 | ) | | $ | — |
| | $ | (72 | ) | | $ | — |
| |
| | | | Asset (Liability) as of December 31, 2014 | | Asset (Liability) as of December 31, 2015 |
(in thousands) | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
Investment in associated company | | $ | 23,936 |
| | $ | 23,936 |
| | $ | — |
| | $ | — |
| | $ | 20,923 |
| | $ | 20,923 |
| | $ | — |
| | $ | — |
|
Precious metal and commodity inventories recorded at fair value | | $ | 13,249 |
| | $ | 13,249 |
| | $ | — |
| | $ | — |
| | $ | 10,380 |
| | $ | 10,380 |
| | $ | — |
| | $ | — |
|
Commodity contracts on precious metal and commodity inventories | | $ | 764 |
| | $ | 764 |
| | $ | — |
| | $ | — |
| | $ | 215 |
| | $ | — |
| | $ | 215 |
| | $ | — |
|
Interest rate swap agreements | | $ | (138 | ) | | $ | — |
| | $ | (138 | ) | | $ | — |
| | $ | (30 | ) | | $ | — |
| | $ | (30 | ) | | $ | — |
|
The Company's non-financial assets and liabilities measured at fair value on a non-recurring basis include goodwill and other 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 and liabilities, the Company uses techniques including an income approach, a market approach and/or appraisals (Level 3 inputs). Long-lived assets consisting of land and buildings used in previously operating businesses and currently unused, which total $8.7$6.3 million as of SeptemberJune 30, 2015,2016, are carried at the lower of cost or fair value less cost to sell and are included primarily in other non-current assets on the consolidated balance sheet.sheets. A reduction in the carrying value of such long-lived assets is recorded as an asset impairment charge in the consolidated income statement.statements of operations.
Note 1617 – Commitments and Contingencies
Environmental Matters
Certain H&H Group subsidiaries, including its newly acquired subsidiary SLI, 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. Those subsidiaries have remediation expenses on an ongoing basis, although such costs are continually being readjusted based upon the emergence of new techniques and alternative methods. The Company hadrecorded current liabilities of approximately $1.8$6.0 million accruedand non-current liabilities of approximately $1.4 million related to estimated environmental remediation costs as of SeptemberJune 30, 2015.2016. The Company also has insurance coverage available for several of these matters and believes that excess insurance coverage may be available as well. ForDuring the ninesix months ended SeptemberJune 30, 2015, the Company recorded an insurance reimbursements totaling $2.8reimbursement of $1.2 million for previously incurred remediation costs. No similar reimbursements were recorded during the six months ended June 30, 2016.
In addition,Included among these liabilities, certain H&H Group subsidiaries have been identified as potentially responsible parties ("PRPs") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or similar state statutes at sites and are parties to administrative consent orders in connection with certain properties. Those 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, the subsidiaries are unable to reasonably estimate the ultimate cost of compliance with such laws.
Based upon information currently available, however, the H&H Group subsidiaries do not expect that their respective environmental costs, including the incurrence of additional fines and penalties, if any, will have a material adverse effect on them or that the resolution of these environmental matters will have a material adverse effect on the financial position, results of operations or cash flows of such subsidiaries or the Company, but there can be no such assurances. The Company anticipates that the H&H Group subsidiaries will pay any such amounts out of their respective working capital, although there is no assurance that they will have sufficient funds to pay them. In the event that the H&H Group subsidiaries are unable to fund their liabilities, claims could be made against their respective parent companies, including H&H Group and/or HNH, for payment of such liabilities.
Among theThe sites where certain H&H Group subsidiaries may have more substantial environmental liabilities areinclude the following:
H&H has been working with the Connecticut Department of Energy and Environmental Protection ("CTDEEP") 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 comprisescomprise the site of a former H&H manufacturing facility. Remediation of all soil conditions on the Sold Parcel was completed on April 6, 2007. On September 11, 2008, the CTDEEP advised H&H that it had approved H&H's December 28, 2007 Soil Remediation Action Report, as amended, thereby concluding the active remediation of the Sold Parcel. The remaining remediation, monitoring and regulatory administrative costs for the Sold Parcel are expected to approximate $0.1 million. With respect to the Adjacent Parcel, an ecological risk assessment has been completed and the results, along with proposed clean up goals, will bewere submitted in the second quarter of 2016 to the CTDEEP for their review and approval. The next phase will be a physical investigation of the upland portion of the parcel. A work plan will be submitted in the third quarter of 2016 to the CTDEEP for review and approval. That work is expected to start in in the fourth quarter of 2016 and is estimated to cost $0.2 million. Investigation of the wetlands portion is not expected to start until the later part of 2017, pending regulatory approvals and setting goals for the entire parcel. The total remediation costs for the Adjacent Parcel cannot be reasonably estimated at this time. Accordingly, there can be no assurance that the resolution of this matter will not be material to the financial position, results of operations or cash flows of H&H or the Company.
In 1986, Handy & Harman Electronic Materials Corporation ("HHEM"), a subsidiary of H&H, entered into an administrative consent order ("ACO") 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. Thereafter, in 1998, HHEM and H&H settled a case brought by the local municipality in regard to this site and also settled with certain of its insurance carriers. HHEM is actively remediating the property and continuing to investigate 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, the 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 the NJDEP to address that agency's potential 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, all after having the first $1.0 million. The $1.0 million was paid solely by the former owner/operator. As of SeptemberJune 30, 2015, over and above the $1.0 million,2016, total investigation and remediation costs of approximately $4.8$6.5 million and $1.6$1.8 million have been expended by the former owner/operator and HHEM, respectively, in accordance with the settlement agreement. Additionally, HHEM is currently being reimbursed indirectly 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 final remediation plan is agreed upon. 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 final 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 or cash flows of HHEM or the Company.
HHEM is continuing to complyhas been complying with a 1987 consent order from the Massachusetts Department of Environmental Protection ("MADEP") to investigate and remediate the soil and groundwater conditions at a commercial/industrial property in Massachusetts. On June 30, 2010, HHEM filed a Response Action Outcome report to close the site since HHEM's licensed site professional concluded that groundwater monitoring demonstrated that the groundwater conditions have stabilized or continue to improve at the site. On June 20, 2013, HHEM received the MADEP's Notice of Audit Findings and Notice of Noncompliance ("Notice"). HHEM and its consultant held meetings with the MADEP to resolve differences identified in the Notice. As a result of those meetings and subsequent discussions with the MADEP, HHEM initiated additional sampling, testing and well installations. Theconducted additional work that was completed in the secondthird quarter of 2015, and we expect2015. HHEM expects to submit a follow-up response report to the MADEP in the third quarter of 2016. The cost of the follow up response report and subsequent decommissioning, and any additional costs that could result from the final review of the closure report by the MADEP, are not anticipated to be material.
SLI may incur environmental costs in the future as a result of past activities of its former subsidiary, SurfTech, at sites located in Pennsauken, New Jersey ("Pennsauken Site") and in Camden, New Jersey ("Camden Site"). At the Pennsauken Site, SLI reached an agreement with both the United States Department of Justice and the Environmental Protection Agency ("EPA") related to its liability and entered into a Consent Decree which governs the agreement. The Company agreed to perform remediation, which is substantially complete, and also to pay a fixed sum for the EPA's past costs. The fixed sum was to be paid in installments, and the final payment of $2.1 million is due to be made in the second quarter of 2017. In December 2012, the Company received a demand letter from the office of the Deputy Attorney General of New Jersey ("NJ"). The demand is for $1.3 million for past and future cleanup costs and $0.5 million for natural resource damages for a total demand of $1.8 million. SLI has made a counter-offer to NJ in the amount of $0.3 million, which has been reserved for, and anticipates entering into discussions to address NJ's claims. The final scope and cost of those claims cannot be estimated at this time but is not expected to be outside a range of $0.3 million to $1.8 million.
With respect to the Camden Site, SLI has reported soil contamination and a groundwater contamination plume emanating from the site. A Remedial Action Workplan ("RAWP") for soils is being developed and is expected to be submitted to the NJDEP in the third quarter of 2016, by the Licensed Site Remediation Professional ("LSRP") for the site. The RAWP for treatment of unsaturated soils is scheduled to be implemented during the third quarter of 2016 with post-remediation rebound testing and slab
removal to be conducted in the second quarter of 2017. SLI's environmental consultants also implemented an interim remedial action pilot study to treat on-site contaminated groundwater, which consisted of injecting food-grade product, into the groundwater at the down gradient property boundary, to create a "bio-barrier." Post-injection groundwater monitoring to assess the bio-barrier's effectiveness was completed. Consistent decreases in target contaminants concentrations in groundwater were observed. In December 2014, a report was submitted to the NJDEP stating sufficient information was obtained from the pilot study to complete the full scale groundwater remedy design. A full scale groundwater bioremediation will be implemented during the fourth quarter of 2015. The cost2017 following the soil remediation mentioned above. A reserve of $1.4 million has been established for anticipated costs at this site, but there can be no assurance that there will not be potential additional work is estimated at $0.1 million. Additional costs could result from these testing activities and final acceptance ofassociated with the remediation plan by the MADEP,site which cannot be reasonably estimated at this time. Accordingly, there can be no assurance that the resolution of this matter will not be material to the financial position, results of operations or cash flows of SLI or the Company.
SLI is currently participating in environmental assessment and cleanup at a commercial facility located in Wayne, New Jersey. Contaminated soil and groundwater has undergone remediation with the NJDEP and LSRP oversight, but contaminants of concern ("COCs") in groundwater and surface water, which extend off-site, still remain above applicable NJDEP remediation standards. A soil remedial action plan has been developed to remove the new soil source contamination that continues to impact groundwater. SLI's LSRP completed a supplemental groundwater remedial action, pursuant to a RAWP filed with, and permit approved by, the NJDEP, and a report was filed with the NJDEP in March 2015. The Company's consultants have developed cost estimates for supplemental remedial injections, soil excavation and additional tests and remedial activities. The LSRP has initiated the preparation of a Remedial Investigation Report which was sent to the NJDEP in May 2016, and has negotiated off-site access to the adjacent property and installed monitoring wells. Results of the initial samples detected COC's above NJDEP standards. There can no assurance that there will not be potential additional costs associated with the site which cannot be reasonably estimated at this time. Accordingly, there can be no assurance that the resolution of this matter will not be material to the financial position, results of operations or cash flows of SLI or the Company.
Other Litigation
In the ordinary course of our business, we are subject to other periodic lawsuits, investigations, claims and proceedings, including, but not limited to, contractual disputes, employment, environmental, health and safety matters, as well as claims associated with our historical acquisitions and divestitures. There is insurance coverage available for many of the foregoing actions. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations, claims and proceedings asserted against us, we do not believe any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, prospects, financial condition, cash flows, results of operations or liquidity.
Note 1718 – Related Party Transactions
As of SeptemberJune 30, 2015,2016, SPLP owned directly or indirectly through its subsidiaries 8,560,592 shares of the Company's common stock, representing approximately 70.1%69.9% of outstanding shares. The power to vote and dispose of the securities held by SPLP is controlled by SPH GP. Warren G. Lichtenstein, our Chairman of the Board of Directors, is also the Executive Chairman of SPH GP. Certain other affiliates of SPH GP hold positions with the Company, including Jack L. Howard, as Vice Chairman and Principal Executive Officer, James F. McCabe,John H. McNamara Jr., as Director, Douglas B. Woodworth, as Chief Financial Officer, and Leonard J. McGill, as Chief Legal Officer.
In connection with its acquisitionOfficer, and William T. Fejes, Jr. and Jeffrey A. Svoboda as co-President and Chief Executive Officer of JPS, on July 31, 2015, HNH issued to H&H Group 1,429,407 shares of HNH common stock, and H&H Group then exchanged those shares of HNH common stock for all shares of JPS common stock held by SPH Group Holdings, a subsidiary of SPLP. See Note 3 - "Acquisitions."Group.
The Company has entered into a management services agreement, as amended ("Management Services Agreement"), with SP Corporate Services LLC ("SP Corporate"). SP Corporate is an affiliate of SPLP. Pursuant to the Management Services
Agreement, SP Corporate providesprovided the Company with certain executive and corporate services, including, without limitation, legal, tax, accounting, treasury, consulting, auditing, administrative, compliance, environmental health and safety, human resources, marketing, investor relations, and other similar services rendered for the Company or its subsidiaries. The Management Services Agreement further provided that the Company pay SP Corporate a fixed annual fee of approximately $8.89 million, consisting of (a) $1.74 million in consideration of the executive services provided by SP Corporate under the Management Services Agreement and (b) $7.15 million in consideration of the corporate services provided by SP Corporate under the Management Services Agreement.$8.9 million. On May 3, 2015, the Company and SP Corporate entered into an amendment to the Management Services Agreement to add operating group management services to the scope of corporate services to be provided pursuant to the Management Services Agreement and to adjust the fee for corporate services provided under the Management Services Agreement from $7.15$8.9 million to $8.81$10.6 million. In connection with the amendment, the Company also entered into a transfer agreement, dated May 3, 2015, with Steel Partners LLC ("Steel Partners"), pursuant to which three employees of the Company and its subsidiaries were transferred to Steel Partners, which will assume the cost of compensating those employees and providing applicable benefits.
Effective February 23, 2016, SP Corporate assigned its rights and responsibilities under the Management Services Agreement to its parent company, SPH Services, Inc. ("SPH Services"), and the Company and SPH Services entered into an Amended and Restated Management Services Agreement ("Amended and Restated Management Services Agreement") to have SPH Services furnish the services to be provided pursuant to the Management Services Agreement and to make certain other changes.
During the three months ended SeptemberJune 30, 20152016 and 2014,2015, the Company reimbursed SP CorporateSPH Services and its affiliates approximately $0.2$0.6 million and $0.1$0.2 million, respectively, for business expenses incurred on its behalf pursuant to the Management Services Agreement.management services agreements. Such reimbursements totaled approximately $0.4$0.8 million and $0.3$0.2 million, respectively, during the ninesix months ended SeptemberJune 30, 20152016 and 2014.2015.
The fees payable under the Amended and Restated Management Services Agreement are subject to an annual review and such adjustments as may be agreed upon by SP CorporateSPH Services and the Company. The Amended and Restated Management Services Agreement has a term of one yearthrough December 31, 2016 and automatically renews for successive one-year periods unless and until terminated in accordance with the terms set forth therein, which include, under certain circumstances, the paymenttherein. Upon any such termination, a reserve fund will be established by the Company for the payment of a termination feeexpenses incurred by or due to SP Corporate.SPH Services that are attributable to the services provided to the Company.
Mutual Securities, Inc. is the custodian for the majority of the Company's holdings in ModusLink common stock. Jack L. Howard is a registered principal of Mutual Securities, Inc.
Note 1819 – Reportable Segments
HNH is a diversified holding company whose strategic business units encompass the following segments: Joining Materials, Tubing, Building Materials, Performance Materials, Electrical Products and Kasco. For a more complete description of the Company's segments, see "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - The Company."
Management has determined that certain operating companies should be aggregated and presented within a single segment on the basis that such segments have similar economic characteristics and share other qualitative characteristics. Management reviews net sales, gross profit and operating income to evaluate segment performance. Operating income for the segments generally includes costs directly attributable to the segment and excludes other unallocated general corporate expenses. Interest expense, other income and expense, and income taxes are not presented by segment since they are excluded from the measures of segment profitability reviewed by the Company's management.
The following table presents information about the Company's reportable segments for the three and ninesix months ended SeptemberJune 30, 20152016 and 2014:2015:
| | Income Statement Data | | Three Months Ended | | Nine Months Ended | |
Statement of Operations Data | | | Three Months Ended | | Six Months Ended |
(in thousands) | | September 30, | | September 30, | | June 30, | | June 30, |
| | 2015 | | 2014 | | 2015 | | 2014 | | 2016 | | 2015 | | 2016 | | 2015 |
Net sales: | | | | | | | | | | | | | | | | |
Joining Materials | | $ | 45,360 |
| | $ | 54,621 |
| | $ | 144,094 |
| | $ | 162,796 |
| | $ | 46,323 |
| | $ | 50,941 |
| | $ | 88,994 |
| | $ | 98,735 |
|
Tubing | | 19,382 |
| | 19,768 |
| | 61,330 |
| | 61,834 |
| | 20,053 |
| | 20,870 |
| | 40,323 |
| | 41,949 |
|
Building Materials | | 73,475 |
| | 75,734 |
| | 207,841 |
| | 200,568 |
| | 81,434 |
| | 79,378 |
| | 139,736 |
| | 134,365 |
|
Performance Materials | | 28,065 |
| | — |
| | 28,065 |
| | — |
| | 26,200 |
| | — |
| | 50,983 |
| | — |
|
Electrical Products | | | 11,794 |
| | — |
| | 11,794 |
| | — |
|
Kasco | | 14,857 |
| | 14,401 |
| | 44,266 |
| | 43,359 |
| | 15,076 |
| | 15,286 |
| | 29,847 |
| | 29,408 |
|
Total net sales | | $ | 181,139 |
| | $ | 164,524 |
| | $ | 485,596 |
| | $ | 468,557 |
| | $ | 200,880 |
| | $ | 166,475 |
| | $ | 361,677 |
| | $ | 304,457 |
|
Segment operating income (loss): | | | | | | | | | | | | | | | | |
Joining Materials | | $ | 4,336 |
| | $ | 6,147 |
| | $ | 16,177 |
| | $ | 18,046 |
| | $ | 6,127 |
| | $ | 5,594 |
| | $ | 10,542 |
| | $ | 11,841 |
|
Tubing | | 3,799 |
| | 3,224 |
| | 10,226 |
| | 10,098 |
| | 3,558 |
| | 3,346 |
| | 7,769 |
| | 6,426 |
|
Building Materials | | 13,685 |
| | 10,998 |
| | 28,943 |
| | 25,924 |
| | 11,604 |
| | 12,025 |
| | 18,957 |
| | 15,258 |
|
Performance Materials | | (2,400 | ) | | — |
| | (2,400 | ) | | — |
| | (7,258 | ) | | — |
| | (6,965 | ) | | — |
|
Electrical Products | | | (3,263 | ) | | — |
| | (3,263 | ) | | — |
|
Kasco | | 1,364 |
| | 1,082 |
| | 3,062 |
| | 2,468 |
| | 565 |
| | 836 |
| | 1,545 |
| | 1,699 |
|
Total segment operating income | | 20,784 |
| | 21,451 |
| | 56,008 |
| | 56,536 |
| | 11,333 |
| | 21,801 |
| | 28,585 |
| | 35,224 |
|
Unallocated corporate expenses and non-operating units | | (3,222 | ) | | (2,254 | ) | | (13,783 | ) | | (12,239 | ) | | (4,876 | ) | | (4,602 | ) | | (9,859 | ) | | (10,561 | ) |
Unallocated pension expense | | (1,761 | ) | | (595 | ) | | (5,906 | ) | | (2,805 | ) | | (2,132 | ) | | (2,072 | ) | | (4,283 | ) | | (4,145 | ) |
Gain from asset dispositions | | 168 |
| | 38 |
| | 309 |
| | 87 |
| | 173 |
| | 85 |
| | 337 |
| | 140 |
|
Operating income | | 15,969 |
| | 18,640 |
| | 36,628 |
| | 41,579 |
| | 4,498 |
| | 15,212 |
| | 14,780 |
| | 20,658 |
|
Interest expense | | (1,208 | ) | | (2,450 | ) | | (3,483 | ) | | (5,599 | ) | | (1,345 | ) | | (1,107 | ) | | (2,415 | ) | | (2,275 | ) |
Realized and unrealized gain on derivatives | | 168 |
| | 1,320 |
| | 273 |
| | 854 |
| |
Other (expense) income | | (113 | ) | | 5 |
| | (318 | ) | | (141 | ) | |
Realized and unrealized (loss) gain on derivatives | | | (416 | ) | | 312 |
| | (539 | ) | | 105 |
|
Other expense | | | (99 | ) | | (113 | ) | | (244 | ) | | (204 | ) |
Income from continuing operations before tax and equity investment | | $ | 14,816 |
| | $ | 17,515 |
| | $ | 33,100 |
| | $ | 36,693 |
| | $ | 2,638 |
| | $ | 14,304 |
| | $ | 11,582 |
| | $ | 18,284 |
|
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations
The Company
Handy & Harman Ltd. ("HNH") is a diversified manufacturer of engineered niche industrial products with leading market positions in many of the markets it serves. Through its wholly-owned operating subsidiaries, HNH focuses on high margin products and innovative technology and serves customers across a wide range of end markets. HNH's diverse product offerings are marketed throughout the United States and internationally. HNH owns Handy & Harman Group Ltd. ("H&H Group"), which owns Handy & Harman ("H&H") and Bairnco, LLC, formerly Bairnco Corporation. HNH manages its group of businesses on a decentralized basis with operations principally in North America. HNH's business units encompass the following segments: Joining Materials, Tubing, Building Materials, Performance Materials, Electrical Products, and Kasco Blades and Route Repair Services ("Kasco"). All references herein to "we," "our" or the "Company" refer to HNH together with all of its subsidiaries.
The Joining Materials segment primarily fabricates precious metals and their alloys into brazing alloys. Brazing alloys are used to join similar and dissimilar metals, as well as specialty metals and some ceramics, with strong, hermetic joints. The Joining Materials segment offers these metal joining products in a wide variety of alloys, including gold, silver, palladium, copper, nickel, aluminum and tin. These brazing alloys are fabricated into a variety of engineered forms and are used in many industries, including electrical, appliance, transportation, construction and general industrial, where dissimilar material and metal joining applications are required. Operating income from precious metal products is principally derived from the "value added" of processing and fabricating and not from the direct purchase and resale of precious metals. The Joining Materials segment enters into commodity futures and forward contracts to mitigate the impact of price fluctuations on its precious and certain non-precious metal inventories that are not subject to fixed price contracts. We believe that the business unit that comprises our Joining Materials segment is the North American market leader in many of the markets that it serves.
The Tubing segment manufactures a wide variety of steel tubing products. We believe that the Tubing segment manufactures the world's longest continuous seamless stainless steel tubing coils, in excess of 5,000 feet, serving the petrochemical infrastructure and shipbuilding markets. In addition, we believe it is the number one supplier of small diameter (less than 3 mm) coil tubing to industry leading specifications serving the aerospace, defense and semiconductor fabrication markets. This segment also manufactures welded carbon steel tubing in coiled and straight lengths with a primary focus on products for the transportation, appliance and heating, and oil and gas industries. In addition to producing bulk tubing, it produces value added fabrications for several of these industries.
The Building Materials segment manufactures and supplies products primarily to the commercial construction and building industries. It manufactures fasteners and fastening systems for the U.S. commercial low slopelow-slope roofing industry, which are sold to building and roofing material wholesalers, roofing contractors and private label roofing system manufacturers, and a line of engineered specialty fasteners for the building products industry for fastening applications in the remodeling and construction of homes, decking and landscaping. We believe that our primary business unit in the Building Materials segment is the market leader in fasteners and accessories for commercial low-slope roofing applications and that the majority of the net sales for the segment are for the commercial construction repair and replacement market. On March 31, 2015, the Company acquired certain assets and assumed certain liabilities of ITW Polymers Sealants North America Inc. ("ITW"), which are used in the business of manufacturing two-component polyurethane adhesive for the roofing industry. ITW was the exclusive supplier of certain adhesive products to the Company. The results of the Building Materials segment include the operations of ITW Polymers Sealants North America Inc. ("ITW") from theits acquisition date.on March 31, 2015.
The Performance Materials segment manufactures sheet and mechanically formed glass and aramid materials for specialty applications in a wide expanse of markets requiring highly engineered components. Its products are used in a wide range of advanced composite applications, such as civilian and military aerospace components, printed electronic circuit boards, filtration and insulation products, specialty commercial construction substrates, automotive and industrial components, and soft body armor for civilian and military applications. The Performance Materials segment is currently comprised solely of the operations of JPS Industries, Inc. ("JPS"), which was acquired on July 2, 2015.
The Electrical Products segment designs, manufactures and markets power electronics, motion control, power protection, power quality electromagnetic equipment, and custom gears and gearboxes that are used in a variety of medical, commercial and military aerospace, computer, datacom, industrial, architectural and entertainment lighting, and telecom applications. Its products are generally incorporated into larger systems to improve operating performance, safety, reliability and efficiency. The Electrical Products segment is currently comprised solely of the operations of SL Industries, Inc. ("SLI"), which was acquired on June 1, 2016.
The Kasco segment provides meat-room blade products, repair services and resale products for the meat and deli departments of supermarkets, restaurants, meat and fish processing plants, and for distributors of electrical saws and cutting
equipment, principally in North America and Europe. Kasco also provides wood cutting blade products for the pallet manufacturing, pallet recycler and portable saw mill industries in North America.
Management has determined that certain operating companies should be aggregated and presented within a single segment on the basis that such segments have similar economic characteristics and share other qualitative characteristics. Management reviews net sales, gross profit and operating income to evaluate segment performance. Operating income for the segments generally includes costs directly attributable to the segment and excludes other unallocated general corporate expenses. Interest expense,
other income and expense, and income taxes are not presented by segment since they are excluded from the measures of segment profitability reviewed by the Company's management.
Discontinued Operations
The results of operations of Arlon, LLC have been reported as a discontinued operation in the Company's consolidated financial statements and are not reflected in the tables and discussion of the Company's continuing operations below.
Results of Operations
Comparison of the Three and NineSix Months Ended SeptemberJune 30, 20152016 and 20142015
The Company's consolidated operating results for the three and ninesix months ended SeptemberJune 30, 20152016 and 20142015 are summarized in the following table:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | September 30, | | September 30, | | June 30, | | June 30, |
(in thousands) | | 2015 | | 2014 | | 2015 | | 2014 | | 2016 | | 2015 | | 2016 | | 2015 |
Net sales | | $ | 181,139 |
| | $ | 164,524 |
| | $ | 485,596 |
| | $ | 468,557 |
| | $ | 200,880 |
| | $ | 166,475 |
| | $ | 361,677 |
| | $ | 304,457 |
|
Gross profit | | 47,105 |
| | 45,523 |
| | 133,659 |
| | 130,301 |
| | 51,962 |
| | 48,176 |
| | 95,679 |
| | 86,554 |
|
Gross profit margin | | 26.0 | % | | 27.7 | % | | 27.5 | % | | 27.8 | % | | 25.9 | % | | 28.9 | % | | 26.5 | % | | 28.4 | % |
Selling, general and administrative expenses | | 29,375 |
| | 26,288 |
| | 91,125 |
| | 85,917 |
| | 38,332 |
| | 30,892 |
| | 69,616 |
| | 61,751 |
|
Pension expense | | 1,761 |
| | 595 |
| | 5,906 |
| | 2,805 |
| | 2,132 |
| | 2,072 |
| | 4,283 |
| | 4,145 |
|
Asset impairment charges | | | 7,000 |
| | — |
| | 7,000 |
| | — |
|
Operating income | | 15,969 |
| | 18,640 |
| | 36,628 |
| | 41,579 |
| | 4,498 |
| | 15,212 |
| | 14,780 |
| | 20,658 |
|
Other: | | | | | | | | | | | | | | | | |
Interest expense | | 1,208 |
| | 2,450 |
| | 3,483 |
| | 5,599 |
| | 1,345 |
| | 1,107 |
| | 2,415 |
| | 2,275 |
|
Realized and unrealized gain on derivatives | | (168 | ) | | (1,320 | ) | | (273 | ) | | (854 | ) | |
Other expense (income) | | 113 |
| | (5 | ) | | 318 |
| | 141 |
| |
Realized and unrealized loss (gain) on derivatives | | | 416 |
| | (312 | ) | | 539 |
| | (105 | ) |
Other expense | | | 99 |
| | 113 |
| | 244 |
| | 204 |
|
Income from continuing operations before tax and equity investment | | 14,816 |
| | 17,515 |
| | 33,100 |
| | 36,693 |
| | 2,638 |
| | 14,304 |
| | 11,582 |
| | 18,284 |
|
Tax provision | | 6,351 |
| | 6,703 |
| | 13,862 |
| | 15,158 |
| | 1,138 |
| | 5,867 |
| | 4,998 |
| | 7,511 |
|
Loss from associated company, net of tax | | 4,047 |
| | 1,242 |
| | 5,286 |
| | 7,783 |
| | 2,234 |
| | 2,161 |
| | 6,862 |
| | 1,239 |
|
Income from continuing operations, net of tax | | $ | 4,418 |
| | $ | 9,570 |
| | $ | 13,952 |
| | $ | 13,752 |
| |
(Loss) income from continuing operations, net of tax | | | $ | (734 | ) | | $ | 6,276 |
| | $ | (278 | ) | | $ | 9,534 |
|
Net Sales
Net sales for the three months ended SeptemberJune 30, 20152016 increased by $16.634.4 million, or 10.1%20.7%, to $181.1200.9 million, as compared to $164.5$166.5 million for the same period in 2014.2015. The change in net sales reflects approximately $28.1$38.0 million in incremental sales associated with our recent acquisition ofthe JPS which was partially offset by a net decrease from our core business of approximately $5.2 million and a reduction of approximately $6.2 million in net sales due to lower average silver prices.SLI acquisitions. Excluding the impact of the JPS acquisition,these acquisitions, our value added sales, defined as net sales less revenue from the direct purchase and resale of precious metals, decreased by approximately $5.2$3.6 million ondue primarily to lower volume primarily from the Joining Materials andsegment, partially offset by growth from the Building Materials segments. The average silver market price was approximately $14.96 per troy ounce in the third quarter of 2015, as compared to $19.79 per troy ounce in the same period in 2014.segment.
Net sales for the ninesix months ended SeptemberJune 30, 20152016 increased by $17.0$57.2 million, or 3.6%18.8%, to $485.6$361.7 million, as compared to $468.6$304.5 million for the same period in 2014.2015. The change in net sales reflects approximately $28.1$62.8 million in incremental sales associated with our recent acquisition ofthe JPS and a net increase from core growth of approximately $4.3 million,SLI acquisitions, which was partially offset by a reduction of approximately $15.3$2.1 million in net sales due to lower average silver prices. Excluding the impact of the JPS acquisition,and SLI acquisitions, our value added sales increaseddecreased by approximately $4.3$3.5 million on higherdue primarily to lower volume primarily from the Joining Materials segment, partially offset by growth from
the Building Materials segment. The average silver market price was approximately $16.03$15.86 per troy ounce during the nine month periodfirst half of 2015,2016, as compared to $19.85$16.58 per troy ounce in the same period in 2014.2015.
Gross Profit
Gross profit for the three months ended SeptemberJune 30, 20152016 increased to $47.152.0 million, as compared to $45.548.2 million
for the same period in 20142015, and as a percentage of net sales, decreased to 26.0%25.9%, as compared to 27.7%28.9% in the thirdsecond quarter last year. The change in gross profit reflects a net increase from core growth of approximately $2.7 millionwas primarily driven by higherapproximately $3.9 million incremental gross profit marginsassociated with the JPS and SLI acquisitions. Lower gross profit as a percentage of net sales during the second quarter of 2016 was primarily due to higher duties on masonry anchors imported from Asia in the Building Material and Kasco segments, which were partially offset by lower gross profit from the Joining Materials segment as a result of lower sales volume and a reduction of approximately $0.8 million in gross profit due to lower average silver prices. Gross profit for the three months ended September 30, 2015 also reflects $3.3 million of nonrecurring expense associated with the amortization of the fair value adjustment to acquisition-date inventories associated with the JPS acquisition.SLI acquisition in the Electrical Products segment. Gross profit during the 2016 period was also unfavorably impacted by a $0.9 million inventory write-down related to the closure of JPS' Slater, South Carolina operating facility discussed further below.
Gross profit for the ninesix months ended SeptemberJune 30, 20152016 increased to $133.7$95.7 million, as compared to $130.3$86.6 million for the same period in 2014,2015, and as a percentage of net sales, decreased to 27.5%26.5%, as compared to 27.8% during28.4% in the same period of last year. The change in gross profit reflects approximately $6.1 million incremental gross profit associated with the JPS and SLI acquisitions, as well as a net increase from core growth of approximately $5.6$3.4 million which wasdriven by higher gross profit from the Building Materials segment due principally to the ITW acquisition. These increases were partially offset by a reduction of approximately $1.9$0.3 million in gross profit due to lower average silver prices. HigherLower gross profit as a percentage of net sales volumeduring the six month period of 2016 reflects JPS's current gross profit margin prior to its restructuring activities discussed below, higher duties on masonry anchors imported from Asia in the Building Materials segment, led to the increase in gross profit from our core business. Gross profit in the 2015 period also reflects $3.3 million of nonrecurring expense associated withas well as the amortization of the fair value adjustment to acquisition-date inventories associated with the JPS acquisition.SLI acquisition in the Electrical Products segment. Gross profit during the 2016 period was also unfavorably impacted by a $0.9 million inventory write-down related to the closure of JPS' Slater, South Carolina operating facility discussed further below.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") for the three months ended SeptemberJune 30, 20152016 were $29.4$38.3 million, as compared to $26.3$30.9 million for the same period a year ago. Higher SG&A in the second quarter of 2016 was primarily driven by the impact of the JPS and SLI acquisitions, as compared to the same period of 2015.
SG&A for the six months ended June 30, 2016 was $69.6 million, as compared to $61.8 million for the same period a year ago. SG&A expenses from the Performance Materials segmentJPS and SLI acquisitions were approximately $2.1$9.3 million duringfor the 2015 period.six months ended June 30, 2016. Excluding the impact of the JPS acquisition impact,and SLI acquisitions, the higherlower SG&A in the third quarter of 20152016 period was primarily driven by higherlower benefit costs and business development expenses, primarily associated with the acquisition of JPS, which werestock-based compensation charges, partially offset by lower stock-based compensation charges.
SG&Athe recording of an insurance reimbursement of $1.2 million for the nine months ended September 30, 2015 was $91.1 million, as compared to $85.9 millionpreviously incurred environmental remediation costs for the same period a year ago. SG&A expenses from the Performance Materials segment were approximately $2.1 million during the 2015 period. Excluding the JPS acquisition impact, the higher SG&A during the nine month period of 2015 was driven by higher personnel costs and higher business development expenses, primarily associated with the acquisition of JPS, which were partially offset by lower stock-based compensation charges.2015.
Pension Expense
Non-cash pension expenses were $1.8expense was $2.1 million and $5.9$4.3 million for the three and ninesix months ended SeptemberJune 30, 20152016, respectively, which were $1.2 million and $3.1$0.1 million higher than both the three and ninesix months ended SeptemberJune 30, 20142015, respectively.. We currently expect non-cash pension expense to be approximately $8.6 million in 2016, as compared to $7.5 million in 2015, as compared to $3.7 million in 20142015, due to a decline in discount rates based on changes in corporate bond yields, an increase in participant life expectancy reflected in revised mortality assumptions, and also due to the fact that the investment returns on the assets of the WHX Corporation Pension Plan ("WHX Pension Plan") were lower than actuarial assumptions during 2014, which are2015, partially offset by expectedincremental income of $0.5 millionexpected from JPS' pension plan fromplan. Forecast pension expense in 2016 is also favorably impacted by a change in the datemanner by which the interest cost component of acquisitionnet periodic pension expense is determined; specifically, to December 31, 2015.utilize the "spot rate approach," which provides a more precise measurement of interest cost. The estimated impact of this change is to reduce forecast annual pension expense in 2016 by approximately $4.8 million.
Asset Impairment Charges
In connection with our continued integration of JPS, the Company approved the closure of JPS' Slater, South Carolina operating facility during the second quarter of 2016. For the three months ended June 30, 2016, the Company recorded impairment charges totaling $7.9 million in the Performance Materials segment, including write-downs of $6.6 million to property, plant, and equipment and $0.4 million to intangible assets, as well as a $0.9 million inventory write-down, which was recorded in cost of goods sold in the consolidated statements of operations.
Interest Expense
Interest expense for the three and ninesix months ended SeptemberJune 30, 20152016 was $1.2$1.3 million and $3.5$2.4 million, respectively, as compared to $2.5$1.1 million and $5.6$2.3 million for the three and ninesix months ended SeptemberJune 30, 2014, respectively.2015. The lowerhigher interest expense for both the three and ninesix months ended SeptemberJune 30, 20152016 was primarily due to lowerhigher borrowing levels to finance the JPS and lower average interest rates in 2015.SLI acquisitions.
Realized and Unrealized GainLoss (Gain) on Derivatives
H&H utilizes commodity forward and futures contracts to mitigate the impact of price fluctuations on its precious metal and certain non-precious metal inventories. The factors that affect the gain or loss on these derivative instruments are changes in the price of the associated metals and the amountnumber of ounces hedged.
Tax Provision
For the three months ended SeptemberJune 30, 20152016 and 2014,2015, tax provisions from continuing operations of $6.4$1.1 million and $6.7$5.9 million, respectively, were recorded. The effective tax rates in the three months ended SeptemberJune 30, 2016 and 2015 were 43.1% and 2014 were 42.9% and 38.3%41.0%, respectively. For the ninesix months ended SeptemberJune 30, 20152016 and 2014,2015, tax provisions from continuing operations of $13.9$5.0 million and $15.2$7.5 million, respectively, were recorded. The effective tax rates in the ninesix months ended SeptemberJune 30, 2016 and 2015 were 43.2% and 2014 were 41.9% and 41.3%41.1%, respectively. The provision for income taxes is based on the current estimate of the annual
effective tax rate, adjusted for discrete items that occurred within the respective periods. Changes in the effective tax rate arise principally from differences in the mix of income between taxable jurisdictions, including the impact of foreign sourced income, as well as changes in estimates associated with our projected annual state tax expense.
Loss from Associated Company
The Company carries its investment in ModusLink Global Solutions, Inc. ("ModusLink") at fair value, calculated based on the closing market price for ModusLink common stock, and the losses recorded during the three and ninesix months ended SeptemberJune 30, 20152016 and 20142015 are due entirely to changes in the share price of ModusLink's common stock.
Segment Analysis
Segment net sales and operating income data for the three and ninesix months ended SeptemberJune 30, 20152016 and 20142015 are shown in the following table:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | | % | | | | % | | | | % | | | | % |
(in thousands) | | 2015 | | 2014 | | Change | | 2015 | | 2014 | | Change | | 2016 | | 2015 | | Change | | 2016 | | 2015 | | Change |
Net sales: | | | | | | | | | | | | | | | | | | | | | | | | |
Joining Materials | | $ | 45,360 |
| | $ | 54,621 |
| | (17.0 | )% | | $ | 144,094 |
| | $ | 162,796 |
| | (11.5 | )% | | $ | 46,323 |
| | $ | 50,941 |
| | (9.1 | )% | | $ | 88,994 |
| | $ | 98,735 |
| | (9.9 | )% |
Tubing | | 19,382 |
| | 19,768 |
| | (2.0 | )% | | 61,330 |
| | 61,834 |
| | (0.8 | )% | | 20,053 |
| | 20,870 |
| | (3.9 | )% | | 40,323 |
| | 41,949 |
| | (3.9 | )% |
Building Materials | | 73,475 |
| | 75,734 |
| | (3.0 | )% | | 207,841 |
| | 200,568 |
| | 3.6 | % | | 81,434 |
| | 79,378 |
| | 2.6 | % | | 139,736 |
| | 134,365 |
| | 4.0 | % |
Performance Materials | | 28,065 |
| | — |
| | N/A |
| | 28,065 |
| | — |
| | N/A |
| | 26,200 |
| | — |
| | N/A |
| | 50,983 |
| | — |
| | N/A |
|
Electrical Products | | | 11,794 |
| | — |
| | N/A |
| | 11,794 |
| | — |
| | N/A |
|
Kasco | | 14,857 |
| | 14,401 |
| | 3.2 | % | | 44,266 |
| | 43,359 |
| | 2.1 | % | | 15,076 |
| | 15,286 |
| | (1.4 | )% | | 29,847 |
| | 29,408 |
| | 1.5 | % |
Total net sales | | $ | 181,139 |
| | $ | 164,524 |
| | 10.1 | % | | $ | 485,596 |
| | $ | 468,557 |
| | 3.6 | % | | $ | 200,880 |
| | $ | 166,475 |
| | 20.7 | % | | $ | 361,677 |
| | $ | 304,457 |
| | 18.8 | % |
Segment operating income (loss): | | | | | | | | | | | | | | | | | | | | | | | | |
Joining Materials | | $ | 4,336 |
| | $ | 6,147 |
| | (29.5 | )% | | $ | 16,177 |
| | $ | 18,046 |
| | (10.4 | )% | | $ | 6,127 |
| | $ | 5,594 |
| | 9.5 | % | | $ | 10,542 |
| | $ | 11,841 |
| | (11.0 | )% |
Tubing | | 3,799 |
| | 3,224 |
| | 17.8 | % | | 10,226 |
| | 10,098 |
| | 1.3 | % | | 3,558 |
| | 3,346 |
| | 6.3 | % | | 7,769 |
| | 6,426 |
| | 20.9 | % |
Building Materials | | 13,685 |
| | 10,998 |
| | 24.4 | % | | 28,943 |
| | 25,924 |
| | 11.6 | % | | 11,604 |
| | 12,025 |
| | (3.5 | )% | | 18,957 |
| | 15,258 |
| | 24.2 | % |
Performance Materials | | (2,400 | ) | | — |
| | N/A |
| | (2,400 | ) | | — |
| | N/A |
| | (7,258 | ) | | — |
| | N/A |
| | (6,965 | ) | | — |
| | N/A |
|
Electrical Products | | | (3,263 | ) | | — |
| | N/A |
| | (3,263 | ) | | — |
| | N/A |
|
Kasco | | 1,364 |
| | 1,082 |
| | 26.1 | % | | 3,062 |
| | 2,468 |
| | 24.1 | % | | 565 |
| | 836 |
| | (32.4 | )% | | 1,545 |
| | 1,699 |
| | (9.1 | )% |
Total segment operating income | | $ | 20,784 |
| | $ | 21,451 |
| | (3.1 | )% | | $ | 56,008 |
| | $ | 56,536 |
| | (0.9 | )% | | $ | 11,333 |
| | $ | 21,801 |
| | (48.0 | )% | | $ | 28,585 |
| | $ | 35,224 |
| | (18.8 | )% |
Joining Materials
For the three months ended SeptemberJune 30, 2015,2016, the Joining Materials segment net sales decreased by $9.3$4.6 million,, or 17.0%9.1%, to $45.4$46.3 million,, as compared to net sales of $54.6$50.9 million for the same period in 2014.2015. The change in net sales was principally due to lower volume, primarily due to reduced demand from the electrical and oil and gas markets.
Segment operating income for the second quarter of 2016 increased by $0.5 million, or 9.5%, to $6.1 million, as compared to $5.6 million for the second quarter of 2015. The higher operating income was primarily driven by cost reduction initiatives, which reduced manufacturing overhead costs and SG&A, partially offset by the lower sales volume during the second quarter of 2016, as compared to the same period of 2015.
For the six months ended June 30, 2016, the Joining Materials segment net sales decreased by $9.7 million, or 9.9%, to $89.0 million, as compared to net sales of $98.7 million for the same period in 2015. The change in net sales is primarily due to both lower precious metal prices and volume, including a reduction of approximately $6.2$2.1 million in net sales due to a $4.83$0.72 per troy ounce decline in the average market price of silver, andas well as lower value added sales volume primarily in North America, primarily due to reduced demand from the oilelectrical and gas markets.
Segment operating income for the third quarter of 2015 decreased by $1.8 million, or 29.5%, to $4.3 million, as compared to $6.1 million for the same period in 2014. The effect of lower average silver prices reduced operating income by approximately $0.8 million on a quarter versus prior year's quarter basis. The lower operating income was also driven by unfavorable product mix and lower sales volume during the 2015 period, as compared to the same period of 2014.
For the nine months ended September 30, 2015, the Joining Materials segment net sales decreased by $18.7 million, or 11.5%, to $144.1 million, as compared to net sales of $162.8 million for the same period in 2014. The change in net sales reflects a reduction of approximately $15.3 million in net sales due to a $3.82 per troy ounce decline in the average market price of silver and lower value added sales volume primarily in North America due to reduced demand from the oil and gas markets.
Segment operating income for the ninesix months ended SeptemberJune 30, 20152016 decreased by $1.9$1.3 million or 10.4%, to $16.2$10.5 million, as compared to $18.0$11.8 million for the same period in 2014.of 2015. Lower gross profit inoperating income during the 20152016 period was due principally to reducedprimarily driven by lower sales volume, unfavorable product mix and lower silver prices, which were partially offset by favorable impact of cost reduction initiatives, which reduced manufacturing overhead costs, and lower SG&A due to higher
severance and recruitment costs incurred during the same period of 2014.&A. The effect of lower average silver prices also reduced operating income by approximately $1.9$0.3 million on a year to dateyear-to-date versus prior year's year to dateyear-to-date basis.
Tubing
For the three months ended SeptemberJune 30, 2015,2016, the Tubing segment net sales decreased by $0.4$0.8 million,, or 2.0%3.9%, to $19.4$20.1 million,, as compared to $19.8$20.9 million for the same period in 2015. The change in net sales was primarily due to lower sales of our fabricated metal tubing to the thirdmedical industry.
Segment operating income for the second quarter of 2014.2016 increased by $0.2 million, or 6.3%, to $3.6 million, as compared to $3.3 million for the second quarter of 2015. The decreaseincrease in operating income was primarily driven by improved gross profit margin as a result of favorable product mix and increased production efficiencies, as compared to the second quarter of 2015.
For the six months ended June 30, 2016, the Tubing segment net sales decreased by $1.6 million, or 3.9%, to $40.3 million, as compared to $41.9 million for the same period in 2015. The change in net sales was primarily due to lower sales of our fabricated metal tubing to the medical industry and lower sales volume of our seamless and welded carbon steel tubing products due to reduced demand in the transportation market and a decline in the appliance market, as several customers were realigning their inventories.lower oil prices. These declines were partially offset by higher sales of our fabricated metal tubing in the medical segment.
Segment operating income for the third quarter of 2015 increased by $0.6 million, or 17.8%, to $3.8 million, as compared to $3.2 million for the third quarter of 2014. Higher operating income during the third quarter of 2015 was principally the result of higher gross margin driven by favorable product mix and lower overhead costs, as comparedvolume to the third quarter of 2014.
For the nine months ended September 30, 2015, the Tubing segment net sales were $61.3 million, as compared to $61.8 millionenergy markets in the same period in 2014. The decrease was primarily driven by reduced demand for our welded carbon steel products, particularly in the transportation market, combined with a de-emphasis in the heat exchanger market, which were partially offset by improved demand for stainless steel and fabricated tubing during the nine months ended September 30, 2015, as compared to the same period of 2014.Asia.
Segment operating income for the ninesix months ended SeptemberJune 30, 20152016 increased by $0.1$1.3 million, or 1.3%20.9%, to $10.2$7.8 million, as compared to $10.1$6.4 million for the same period of 2014. Higher2015. The increase in operating income was primarilyprincipally due to higherimproved gross profit margin driven byas a result of favorable product mix and lower overhead costs, partially offset by higherincreased production efficiencies, as well as reduced SG&A as a result of higherlower personnel costs, as compared to the same period of 2014.2015.
Building Materials
For the three months ended SeptemberJune 30, 2015, the Building Materials segment net sales decreased by $2.3 million, or 3.0%, to $73.5 million, as compared to $75.7 million for the same period in 2014. Lower sales were driven by reduced demand from our private label roofing products, partially offset by increased demand from home centers for our FastenMaster products, as compared to the third quarter of 2014.
Segment operating income increased by $2.7 million, or 24.4%, to $13.7 million for the three months ended September 30, 2015, as compared to $11.0 million for the same period in 2014. Gross profit margin for the three months ended September 30, 2015 was higher, as compared to the three months ended September 30, 2014, primarily due to lower manufacturing costs as a result of the recent ITW acquisition, as well as favorable overhead absorption and lower freight costs.
For the nine months ended September 30, 2015,2016, the Building Materials segment net sales increased by $7.3$2.1 million, or 3.6%2.6%, to $207.8$81.4 million, as compared to $200.6$79.4 million for the same period in 2014. Salessecond quarter of both our roofing and FastenMaster products were higher, as compared to the nine months ended September 30, 2014, due to growth from our private label roofing products and strong2015, driven by increased demand from home centers and lumberyards for our FastenMaster products.products, as well as increased demand for our private label and roof edge roofing products, as compared to the second quarter of 2015.
Segment operating income increasedfor the second quarter of 2016 decreased by $3.0$0.4 million, or 11.6%3.5%, to $28.9$11.6 million, as compared to $12.0 million for the nine months ended September 30, 2015,second quarter of 2015. The decrease in operating income was primarily driven by lower gross profit due to higher duties on masonry anchors imported from Asia, partially offset by higher sales volume, as compared to $25.9the second quarter of 2015.
For the six months ended June 30, 2016, the Building Materials segment net sales increased by $5.4 million, or 4.0%, to $139.7 million, as compared to $134.4 million for the same period in 2014, reflecting higher sales volumeof 2015, driven by increased demand from home centers and lower manufacturing costs. Gross profit marginlumberyards for the nine months ended September 30, 2015 was higher,our FastenMaster products, as well as increased demand for our private label and roof edge roofing products, as compared to the ninesame period of 2015.
Segment operating income for the six months ended SeptemberJune 30, 2014,2016 increased by $3.7 million, or 24.2%, to $19.0 million, as compared to $15.3 million for the same period of 2015. The increase in operating income was primarily due to lower manufacturing costs, as a resultreflecting the benefits of the ITW acquisition, and favorable overhead absorption, partially offset by higher freight costs, in part dueduties on masonry anchors imported from Asia, as compared to the West Coast port slowdown, as well as costs associated with the consolidationsame period of our Midwest manufacturing and warehouse facilities into a single location. SG&A also increased, reflecting increased employee headcount, benefit costs and promotional expenses during the 2015 period.2015.
Performance Materials
For the three and six months ended SeptemberJune 30, 2015,2016, the Performance Materials segment net sales were $28.1$26.2 million and $51.0 million, respectively, driven by fiberglass fabric sales serving the industrial fiberglass, aerospace sector. The increaseand military markets. Sales volume was affected by a reduction in U.S. military contracts for ballistic vests and an inventory correction throughout the commercial aerospace supply chain. Lower global demand from aerospace applicationsfor electronic products is also negatively impacting revenue.
Segment operating loss was $7.3 million for the second quarter of 2016 and $7.0 million for the six months ended June 30, 2016, reflecting $7.9 million of non-cash asset impairment charges associated with the Company's continued integration of JPS. Operating income was also negatively impacted by reduced sales volume, which was partially offset by alower SG&A and manufacturing expenses resulting from cost reduction in demand from the U.S. military for ballistic vests and reduced demand for fiberglass fabrics used in a variety of electronic applications.initiatives during 2016.
Segment operating lossAs indicated above, the Electrical Products segment is currently comprised solely of the operations of SLI, which was $2.4 million, foracquired on June 1, 2016.
For the three months ended SeptemberJune 30, 2016, the Electrical Products segment net sales were $11.8 million, driven by medical, industrial, military and commercial aerospace product line sales. Overall demand has decreased in 2016, as compared to 2015, reflecting a decline in the oil and gas markets, partially offset by demand for our medical and industrial products.
Segment operating loss for the second quarter of 2016 was $3.3 million, primarily due to $3.3 million of nonrecurring expenseexpenses recorded during the quarter associated with the acceleration of SLI's previously outstanding stock-based compensation awards, which became fully vested on the date of acquisition pursuant to the terms of the merger agreement, as well as due to the amortization of the fair value adjustment to acquisition-date inventories.
Kasco
For the three months ended SeptemberJune 30, 2016, the Kasco segment net sales decreased by $0.2 million, or 1.4%, to $15.1 million, as compared to $15.3 million for the same period in 2015, primarily due to reduced international shipments as a result of the strength of the U.S. dollar against other currencies.
Segment operating income for the second quarter of 2016 decreased by $0.3 million to $0.6 million, as compared to $0.8 million in the second quarter of 2015, reflecting lower gross profit as a result of the lower net sales, and increased personnel and travel costs to support its domestic route business.
For the six months ended June 30, 2016, the Kasco segment net sales increased by $0.5$0.4 million, or 3.2%1.5%, to $14.9$29.8 million, as compared to $14.4$29.4 million for the same period in 2014,2015, primarily due to higher sales from its domestic route business and European operations, partially offset by the unfavorable impact of foreign currency exchange rates from its Canadian and European operations.
Segment operating income increased by $0.3 million to $1.4 million for the three months ended September 30, 2015, as compared to $1.1 million for the same period in 2014, reflecting improved gross profit margin as a result of the higher sales, and lower fuel costs, which were partially offset by increased personnel costs to support the higher sales.
For the nine months ended September 30, 2015, the Kasco segment net sales increased by $0.9 million, or 2.1%, to $44.3 million, as compared to $43.4 million for the same period in 2014, due to higher sales from its domestic route business, partially offset by lower sales from its European operations primarily due toreduced international shipments as a negative impact from changes in foreign currency exchange rates.result of the strength of the U.S. dollar against other currencies.
Segment operating income increasedfor the six months ended June 30, 2016 decreased by $0.6$0.2 million to $3.1$1.5 million, for the nine months ended September 30, 2015, as compared to $2.5$1.7 million for the same period in 2014. Gross profit increased for the nine months ended September 30, 2015, primarily due to the higher net sales, as well as lower fuel costs, as compared with the same period of the prior year. These improvements were partially offset by2015, reflecting increased personnel and travel costs to support the domestic route business, partially offset by the impact of higher sales.sales volume.
Discussion of Consolidated Cash Flows
Comparison of the NineSix Months Ended SeptemberJune 30, 20152016 and 20142015
The following table provides a summary of the Company's consolidated cash flows for the ninesix months ended SeptemberJune 30, 20152016 and 2014:2015:
|
| | | | | | | | |
| | Nine Months Ended |
| | September 30, |
(in thousands) | | 2015 | | 2014 |
Net cash provided by operating activities | | $ | 19,549 |
| | $ | 23,152 |
|
Net cash provided by (used in) investing activities | | 44,460 |
| | (5,678 | ) |
Net cash (used in) provided by financing activities | | (74,748 | ) | | 3,011 |
|
Net change for the period | | $ | (10,739 | ) | | $ | 20,485 |
|
|
| | | | | | | | |
| | Six Months Ended |
| | June 30, |
(in thousands) | | 2016 | | 2015 |
Net cash provided by (used in) operating activities | | $ | 14,261 |
| | $ | (11,520 | ) |
Net cash (used in) provided by investing activities | | (165,420 | ) | | 110,869 |
|
Net cash provided by (used in) financing activities | | 151,155 |
| | (112,152 | ) |
Net change for the period | | $ | (4 | ) | | $ | (12,803 | ) |
Operating Activities
Operating cash flows for the ninesix months ended SeptemberJune 30, 20152016 were $3.6$25.8 million lower,higher, as compared to the same period in 2014. Discontinued operations2015, reflecting higher operating income after excluding the non-cash impacts of increased depreciation and amortization of $5.7 million and asset impairment charges of $7.9 million recorded during the second quarter of 2016. Inventories used $2.3$3.6 million during 2015,the six month period of 2016, as compared to a cash inflow of $14.4 million in 2014. Inventories provided $1.5 million during the nine month period of 2015, as compared to cash usage of $9.3$6.3 million for the same period in 2014.2015. The lower inventory usage during the 2015 periodsix months ended June 30, 2016 was primarily driven by lower silver prices,higher sales volume from the Building Materials segment, which reduced inventory levels, as compared to the same period of 2014, and effective inventory control in our Tubing and Building Materials segments.2015. Trade and other receivables used $17.6$29.0 million, as compared to $23.0$30.9 million used during the same period of 2014, with2015. Other current liabilities provided $12.4 million during the changesix month period of 2016, as compared to $1.5 million during the same period of 2015, primarily driven by lower accounts receivable levelstiming of payments of trade payables. Discontinued operations used $2.3 million during the 2015six month period due to lower silver prices.of 2015.
Investing Activities
Investing activities provided $44.5used $165.4 million of cash for the ninesix months ended SeptemberJune 30, 20152016 and used $5.7provided $110.9 million during the same period of 2014.2015. Investing activities for the ninesix months ended SeptemberJune 30, 2016 included $157.0 million paid for the acquisition of SLI, net of cash acquired. Investing activities for the six months ended June 30, 2015 included net proceeds of $155.5$152.9 million from the sale of Arlon, LLC, partially offset by acquisition costs of $93.2$27.4 million related to the JPS and ITW acquisitions.acquisition. Capital spending was $10.9$9.7 million in the 2016 period, as compared to $7.0 million in the 2015 period, as compared with $7.7 millionreflecting expenditures made on a steel heat treating facility in the 2014 period.Building Materials segment during 2016. The Company also
invested approximately $7.6 million, including brokerage commissions, in the common stock of ModusLink during the ninesix month period of 2015. Discontinued operations used $0.1 million in the 2015 period, as compared to $2.0 million during the 2014 period.
Financing Activities
For the ninesix months ended SeptemberJune 30, 2016, the Company's financing activities provided $151.2 million of cash. Borrowings under the Company's revolving credit facilities increased by $154.0 million during the six months ended June 30, 2016, primarily to finance the SLI acquisition.
For the six months ended June 30, 2015, the Company's financing activities used $74.7$112.2 million of cash. Borrowings under the Company's revolving credit facility decreased by $73.7$111.5 million during the ninesix months ended SeptemberJune 30, 2015, primarily driven by cash proceeds from the sale of Arlon, LLC, partially offset by borrowings to fund the JPS and ITW acquisitions.LLC.
For the nine months ended September 30, 2014, the Company's financing activities provided $3.0 million of cash. Borrowings under the Company's revolving credit facilities increased by $180.1 million during the nine months ended September 30, 2014, due primarily to the repayment of $156.2 million in terms loans during this period, which included repayment of an additional $40.0 million term loan borrowing during the third quarter of 2014. The Company also initiated $12.6 million in borrowings on its WHX CS Loan facility during the nine months ended September 30, 2014, which were fully repaid during the third quarter of 2014. These changes in the Company's financing structure were primarily the result of the Company's entry into an amended and restated senior credit agreement on August 29, 2014. In addition, the Company used $60.5 million for the repurchase of its common stock during the nine months ended September 30, 2014.
Liquidity and Capital Resources
The Company's principal source of liquidity is its cash flows from operations. As of SeptemberJune 30, 20152016, the Company's current assets totaled $239.4$279.3 million, its current liabilities totaled $79.4$113.2 million and its net working capital was $160.1$166.1 million, as compared to net working capital of $181.1119.2 million as of December 31, 20142015. The Company's debt is principally held by H&H Group, a wholly-owned subsidiary of HNH. HNH's subsidiaries borrow funds in order to finance capital expansion programs and for working capital needs. The terms of certain of those financing arrangements place restrictions on distributions of funds to HNH, the parent company, subject to certain exceptions including required pension payments to the WHX Pension Plan. The Company does not expect these restrictions to have an impact on its ability to meet its cash obligations. HNH's ongoing operating cash flow requirements consist primarily of arranging for the funding of the minimum requirements of the WHX Pension Plan and paying HNH's administrative costs. The Company expects to have required minimum contributions to the WHX Pension Plan of $3.0$9.7 million for the remainder of 2015,2016, and $14.3$27.5 million,, $15.3 $32.9 million,, $17.0 $33.2 million,, $18.3 $32.0 million and $56.4$82.9 million in 2016, 2017, 2018, 2019, 2020, and for the five years thereafter, respectively. For JPS' pension plan, the Company expects to have no required minimum contributions of $0.5 million for the remainder of 2015 or in 2016, and $5.6$7.3 million, $5.2$8.7 million, $5.7 million, $3.4 million and $3.7$13.4 million in 2017, 2018, 2019, 2020, and 2019, respectively.for the five years thereafter, respectively, which will be made by H&H Group. Required future pension contributions are estimated 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 any plan termination or other acceleration events.
The Company believes it has access to adequate resources to meet its needs for normal operating costs, capital expenditures, mandatory debt redemptions and working capital for its existing business. These resources include cash and cash equivalents, cash provided by operating activities and unused lines of credit. On August 29, 2014, H&H Group entered into an amended and restatedThe Company's senior credit agreement which providesprovided for an up to $365.0 million senior secured revolving credit facility. On March 23, 2016, the Company entered into an amendment to its senior credit agreement to increase the size of the credit facility by $35.0 million to an aggregate amount of $400.0 million. As of SeptemberJune 30, 2015,2016, H&H Group's availability under its senior secured revolving credit facility was $161.7$92.5 million. On October 5, 2015, a subsidiary of H&H refinanced an outstanding mortgage note, which had an original maturity in October 2015. Under the terms of the revised agreement, the subsidiary paid down $0.7 million of the original outstanding principal balance. The remaining outstanding principal balance of $5.4 million was refinanced and will be repaid in equal monthly installments totaling $0.4 million per year over the next five years, with a final principal payment of $3.6 million due at maturity of the loan in October 2020. The Company's ability to satisfy its debt service obligations, to fund planned capital expenditures and required pension payments, and to make acquisitions will depend upon its future operating performance, which will be affected by prevailing economic conditions in the markets in which it operates, as well as financial, business and other factors, some of which are beyond its control. In addition, the Company's senior secured revolving credit facility is subject to certain mandatory prepayment provisions and restrictive and financial covenants. There can be no assurances that H&H Group will continue to have access to its lines of credit if its financial performance does not satisfy the financial covenants set forth in the financing agreements. If H&H Group does not meet certain of its financial covenants, and if it is unable to secure necessary waivers or other amendments from the respective lenders on terms acceptable to management, its ability to access available lines of credit could be limited, its debt obligations could be accelerated by the respective lenders and liquidity could be adversely affected.
As of December 31, 2015, the Company had U.S. federal income tax net operating loss carryforwards ("NOLs") of $71.3 million. Included in this amount are approximately $47.0 million of U.S. federal NOLs resulting from the JPS acquisition, which are subject to certain annual limitations under the ownership change rules of Section 382 of the Internal Revenue Code. The Company currently expects that its U.S. federal NOLs, excluding amounts attributable to the JPS acquisition, will become fully utilized by the end of 2016, thereby increasing its requirement to make future cash payments for federal income taxes.
Management is utilizing the following strategies to continue to enhance liquidity: (1) continuing to implement improvements, using the HNHSteel Business System, throughout all of the Company's operations to increase sales and operating
efficiencies, (2) supporting profitable sales growth both internally and potentially through acquisitions and (3) evaluating from time to time and as appropriate, strategic alternatives with respect to its businesses and/or assets. 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.
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 Joining Materials 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 pooled precious metal is not included on the Company's consolidated balance sheet. As of SeptemberJune 30, 2015,2016, customer metal in H&H's custody consisted of 160,520135,796 ounces of silver, 531 ounces of gold and 1,4621,391 ounces of palladium.
Cautionary Statement Regarding Forward-Looking Statements
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 Principal Executive Officer and 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 Principal Executive Officer and Chief Financial Officer concluded that as of SeptemberJune 30, 20152016, 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 Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to company management, including the Principal Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.
The Company completed the acquisitionacquisitions of JPS and SLI on July 2, 2015.2015 and June 1, 2016, respectively. Our management will excludeexcluded the operations of this businessJPS from our evaluation of, and conclusion on, the effectiveness of our internal control over financial reporting as of December 31, 2015. This business represents2015 and will exclude the operations of SLI from our evaluation of, and conclusion on, the effectiveness of our internal control over financial reporting as of December 31, 2016. JPS and SLI represent approximately 24.1%13.2% and 27.1%, respectively, of our total assets as of SeptemberJune 30, 2015,2016, and approximately 5.8%14.1% and 3.3%, respectively, of net sales for the ninesix months then ended. Our management plans towill fully integrate the operations of this businessJPS into its assessment of the effectiveness of our internal control over financial reporting in 2016.2016, and SLI will be integrated into such assessment in 2017.
Changes in Internal Control over Financial Reporting
No change in internal control over financial reporting occurred during the quarter ended SeptemberJune 30, 20152016 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting, except for the changes in internal control over financial reporting associated with integrating the acquisition of JPS,SLI, which was completed on July 2, 2015.June 1, 2016.
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
Information in this Item 1 is incorporated by reference to Part I, Notes to Consolidated Financial Statements (unaudited), Note 1617 - "Commitments and Contingencies," of this report.
Item 1A. - Risk Factors
In addition to the information set forth below and elsewhere in this Form 10-Q, you should carefully consider the factors discussed under "Cautionary Statement Regarding Forward-Looking Statements" above and under "Risk Factors" in our annual report on Form 10-K for the year ended December 31, 2014, and those risk factors set forth below. These risks could materially and adversely affect our business, financial condition and results of operations. These enumerated risks are not the only risks we face. Our operations could also be affected by additional factors that are not presently known to us or by factors that we currently consider immaterial to our business.
Transfer restrictions contained in our charter and other factors could hinder the development of an active market for our common stock.
There can be no assurance as to the volume of shares of our common stock or the degree of price volatility for our common stock traded on the NASDAQ Capital Market. There are transfer restrictions contained in our charter to help preserve our net operating tax loss carryforwards that will generally prevent any person from acquiring amounts of our common stock such that such person would hold 5% or more of our common stock, for up to three years after July 29, 2015, as specifically provided in our charter. The transfer restrictions could hinder development of an active market for our common stock.
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds
2(a) - Issuer Issuance of Equity Securities
On August 4, 2015, the Company filed a Current Report on Form 8-K reporting the issuance of 1,429,407 shares of the Company's common stock ("HNH Shares") to SPH Group Holdings LLC ("SPH Group Holdings") in exchange for SPH Group Holdings' shares of JPS. The HNH Shares were issued to SPH Group Holdings, an accredited investor, pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), provided by Section 4(2) under the Securities Act.
2(c) - Issuer Purchases of Equity Securities
DuringOn April 28, 2016, the three months ended September 30, 2015, 3,145Company's Board of Directors approved the repurchase of up to an aggregate of 500,000 shares of the Company's common stock were foregonestock. Any such repurchases will be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market, in compliance with applicable laws and regulations. The repurchase program is expected to continue unless and until revoked by certain employees and service providers, at their option, for income tax obligations attributable to the vestingBoard of shares of restricted stock previously granted to such individuals.Directors.
The following table provides information on the shares foregone for income tax obligations attributable topurchased under the vesting of restrictedCompany's common stock repurchase program during the three months ended SeptemberJune 30, 2015:
2016:
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| | | | | | | | | | | | | |
| | Total Number of Shares (or Units) Purchased | | Average Price Paid per Share (or Unit) | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
Period | | (a) | | (b) | | (c) | | (d) |
July 1, 2015 to July 31, 2015 | | — |
| | N/A | | | — |
| | N/A |
August 1, 2015 to August 31, 2015 | | 3,145 |
| | $ | 28.97 | | | — |
| | N/A |
September 1, 2015 to September 30, 2015 | | — |
| | N/A | | | — |
| | N/A |
| | 3,145 |
| | | | — |
| | N/A |
|
| | | | | | | | | | | | | | | |
| | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
Period | | (a) | | (b) | | (c) | | (d) |
April 1, 2016 to April 30, 2016 | | — |
| | N/A | | | — |
| | $ | 500,000 |
|
May 1, 2016 to May 31, 2016 | | — |
| | N/A | | | — |
| | $ | 500,000 |
|
June 1, 2016 to June 30, 2016 | | 4,086 |
| | $ | 26.36 | | | 4,086 |
| | $ | 495,914 |
|
| | 4,086 |
| | | | 4,086 |
| | $ | 495,914 |
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Item 6. - Exhibits
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Exhibit 3.1 Certificate2.1 Agreement and Plan of Amendment to the AmendedMerger, dated as of April 6, 2016, by and Restated Certificate of Incorporation ofamong Handy & Harman Ltd., as filed with Secretary of State of the State of Delaware on July 14, 2015Handy & Harman Group, Ltd., SLI Acquisition Co., and SL Industries, Inc. (incorporated by reference to Exhibit 3.12.1 to the Company's Current Report on Form 8-K filed July 16, 2015)April 7, 2016) |
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Exhibit 10.1 Tender Agreement, dated as of April 6, 2016, by and between Handy & Harman Ltd., Handy & Harman Group Ltd., SLI Acquisition Co., SL Industries, Inc., and DGT Holdings Corp. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed April 7, 2016) |
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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. (1) |
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Exhibit 31.2 Certification of Chief 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. (1) |
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Exhibit 32 Certification of Principal Executive Officer and Chief 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. (1) |
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Exhibit 101.INS XBRL Instance Document (1) |
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Exhibit 101.SCH XBRL Taxonomy Extension Schema (1) |
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Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase (1) |
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Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase (1) |
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Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase (1) |
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Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase (1) |
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(1) | Filed herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| HANDY & HARMAN LTD. |
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| /s/ James F. McCabe, Jr.Douglas B. Woodworth |
| James F. McCabe, Jr.Douglas B. Woodworth
Senior Vice President and Chief Financial Officer (Principal Accounting Officer) |
October 29, 2015August 1, 2016