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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2004
-------------------------------------------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
FOR QUARTER ENDED JUNE 30, 2004 COMMISSION FILE NUMBER 1-2394
WHX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3768097
(State of Incorporation) (IRS Employer
Identification No.)
110 EAST 59TH STREET
NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 212-355-5200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes / / No /X/
The number of shares of Common Stock issued and outstanding as of August 2, 2004
was 5,485,856.
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------------
(in thousands - except per-share)
Net sales $ 107,840 $ 83,519 $ 205,334 $ 164,519
Cost of goods sold 87,511 67,131 166,974 134,080
--------- --------- --------- ---------
Gross profit 20,329 16,388 38,360 30,439
Selling, general and administrative expenses (see note 10) 13,524 20,759 27,371 42,842
Asset impairment charge 9,000 -- 9,000 --
Gain (loss) on disposal of fixed assets 1,707 (13) 1,665 84
--------- --------- --------- ---------
Income (loss) from operations (488) (4,384) 3,654 (12,319)
--------- --------- --------- ---------
Other:
Interest expense 6,107 4,903 10,816 9,920
(Loss) gain on early retirement of debt -- 1,966 (1,161) 2,999
Other income (expense) 6,016 1,696 6,271 188
--------- --------- --------- ---------
Loss before taxes (579) (5,625) (2,052) (19,052)
Tax expense (benefit) 375 (1,567) 887 (6,146)
--------- --------- --------- ---------
Net loss $ (954) $ (4,058) $ (2,939) $ (12,906)
========= ========= ========= =========
Dividend requirement for preferred stock $ 4,856 $ 4,856 $ 9,712 $ 9,712
========= ========= ========= =========
Net loss applicable to common stock $ (5,810) $ (8,914) $ (12,651) $ (22,618)
========= ========= ========= =========
BASIC AND DILUTED PER SHARE OF COMMON STOCK
Loss per share $ (1.07) $ (1.67) $ (2.33) $ (4.24)
========= ========= ========= =========
SEE NOTES TO CONDENSED CONSOLIDATED STATEMENTS
2
WHX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, DECEMBER 31,
2004 2003
- -------------------------------------------------------------------------------------------
(Dollars and shares in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 26,295 $ 41,990
Trade receivables - net 63,999 42,054
Inventories 59,547 41,782
Other current assets 14,048 30,174
--------- ---------
Total current assets 163,889 156,000
Property, plant and equipment at cost 139,768 146,459
Less accumulated depreciation and amortization (53,072) (42,236)
--------- ---------
86,696 104,223
Goodwill and other intangibles 125,874 126,089
Intangibles - pension asset 758 758
Assets held for sale 2,000 2,000
Other non-current assets 23,809 17,076
--------- ---------
$ 403,026 $ 406,146
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 37,235 $ 27,300
Accrued liabilities 21,454 29,395
Current portion of long-term debt 96,874 40,056
Short-term debt 37,840 --
--------- ---------
Total current liabilities 193,403 96,751
Long-term debt 94,370 189,344
Accrued pension liability 25,864 27,367
Other employee benefit liabilities 7,532 7,840
Additional minimum pension liability 24,912 24,912
Other liabilities 1,205 1,047
--------- ---------
Total liabilities 347,286 347,261
Stockholders' Equity:
Preferred stock - $.10 par value; authorized 10,000
shares; issued and outstanding: 5,523 shares 552 552
Common stock - $.01 par value; authorized 60,000
shares; issued and outstanding: 5,486 shares 55 55
Accumulated other comprehensive loss (21,881) (21,642)
Additional paid-in capital 556,206 556,206
Unearned compensation - restricted stock awards (66) (99)
Accumulated deficit (479,126) (476,187)
--------- ---------
Total stockholders' equity 55,740 58,885
--------- ---------
$ 403,026 $ 406,146
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
2004 2003
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,939) $ (12,906)
Items not affecting cash from operating activities:
Depreciation and amortization 7,368 7,485
Amortization of debt related costs 1,131 829
Asset impairment charge 9,000 --
Other postretirement benefits 225 125
Loss (gain) on early retirement of debt 1,161 (2,999)
WPSC note recovery (5,596)
Deferred income taxes -- (7,208)
(Gain) on asset dispositions (1,665) (490)
Pension expense (credit) (1,278) 8,060
Equity loss in affiliated companies 2 31
Other 34 --
Decrease (increase) in working capital elements,
net of effect of acquisitions:
Trade receivables (21,945) (5,199)
Inventories (17,765) (317)
Short term investments-trading -- 199,005
Investment account borrowings -- (107,857)
Other current assets 2,422 3,298
Other current liabilities 2,324 (4,487)
Pension contribution (226) --
Other items-net (4,789) (468)
--------- ---------
Net cash (used in) provided by operating activities (32,536) 76,902
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Receipts from WPC -- 500
Purchase of aircraft -- (19,171)
Proceeds from sale of aircraft 19,301 --
Plant additions and improvements (4,357) (5,939)
Proceeds from sales of assets 7,049 3,704
--------- ---------
Net cash provided by (used in) investing activities 21,993 (20,906)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash proceeds from Handy & Harman term loans 99,329 --
Net borrowings from revolving credit facilities 36,936 --
Repayment of H&H Senior Secured Credit Facility (149,684) --
Net borrowings from H&H Senior Secured Credit Facility 20,604 22,425
Repayment of H&H Industrial Revenue Bonds (7,500) --
Debt issuance fees (4,837) --
Cash paid on early extinguishment of debt -- (14,302)
Due from Unimast -- 3,204
--------- ---------
Net cash (used in)provided by financing activities (5,152) 11,327
--------- ---------
NET CASH (USED IN) PROVIDED BY OPERATIONS (15,695) 67,323
Cash and cash equivalents at beginning of period 41,990 18,396
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,295 $ 85,719
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
GENERAL
The unaudited condensed consolidated financial statements included
herein have been prepared by the Company. In the opinion of management, the
interim financial statements reflect all normal and recurring adjustments
necessary to present fairly the consolidated financial position and the results
of operations and changes in cash flows for the interim periods.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. This quarterly report on Form 10-Q
should be read in conjunction with the Company's audited consolidated financial
statements contained in Form 10-K for the year ended December 31, 2003. The
results of operations for the three and six months ended June 30, 2004 are not
necessarily indicative of the operating results for the full year.
The unaudited condensed consolidated financial statements include
the accounts of all subsidiary companies. Wheeling-Pittsburgh Corporation
("WPC") and its subsidiaries, which had been subsidiaries of the Company, ceased
to be subsidiaries on August 1, 2003. On November 16, 2000, WPC, a wholly-owned
subsidiary of WHX Corporation ("WHX"), and six of its subsidiaries including
Wheeling-Pittsburgh Steel Corporation ("WPSC" and together with WPC and its
other subsidiaries, the "WPC Group") filed a petition seeking reorganization
under Chapter 11 of Title 11 of the United States Bankruptcy Code ("Bankruptcy
Filing"). As a result of the Bankruptcy Filing, the Company had, as of November
16, 2000, deconsolidated the balance sheet of its wholly-owned subsidiary WPC.
Accordingly, the accompanying condensed consolidated statements of operations
and the condensed consolidated statements of cash flows for the six-months ended
June 30, 2003 exclude WPC. A Chapter 11 Plan of Reorganization (the "POR") for
the WPC Group was consummated on August 1, 2003. Among other things, as a result
of the consummation of the POR, each member of the WPC Group is no longer a
subsidiary of WHX Corporation.
The accompanying unaudited condensed consolidated financial
statements have been prepared assuming the Company will continue as a going
concern, which indicates that the Company will be able to realize its assets and
satisfy its liabilities in the normal course of business. The WHX 10 1/2% Senior
Notes in the amount of $92.8 million are due on April 15, 2005. It is the
Company's intention to refinance this obligation prior to its scheduled
maturity; however there can be no assurance that such refinancing will be
obtained. The Company's access to capital markets in the future to refinance
such indebtedness may be limited. If the Company were unable to refinance this
obligation, it would have a material adverse impact on the liquidity, financial
position and capital resources of WHX and would impact the Company's ability to
continue as a going concern. The unaudited condensed consolidated financial
statements do not include any adjustments that might result from the occurrence
of this contingency.
The new H&H financing agreements (see note 9) restrict cash payments
to WHX. The ability of WHX to liquidate liabilities arising in the ordinary
course of business prior to the maturity of the 10 1/2% Senior Notes on April
15, 2005 is dependent on cash on hand.
NATURE OF OPERATIONS
WHX is a holding company that has been structured to invest in and
manage a diverse group of businesses. WHX's primary business is H&H, a
diversified manufacturing company whose strategic business units encompass three
segments: precious metal, wire & tubing, and engineered materials. WHX's other
business (up through August 1, 2003) consisted of WPC and six of its
subsidiaries, including WPSC; a vertically integrated manufacturer of
value-added and flat rolled steel products. WPSC, together with WPC and its
other subsidiaries, shall be referred to herein as the "WPC Group." WHX,
together with all of its subsidiaries, shall be referred to herein as the
"Company," and the Company and its subsidiaries other than the WPC Group shall
be referred to herein as the "WHX Group."
5
STOCK BASED COMPENSATION
The following table illustrates the effect on net loss and loss per
share if WHX had applied the fair- value recognition provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation, ("SFAS123"), to stock-based compensation:
SIX MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2003
------------- -------------
(IN THOUSANDS - EXCEPT PER SHARE)
Net loss as reported applicable to common stockholders $(12,651) $(22,618)
Add: compensation expense included in net loss 33 66
Deduct: total stock-based compensation expense determined under
fair-value based method for all awards (226) (386)
-------- --------
Pro forma basic and diluted loss per share $(12,844) $(22,938)
======== ========
Loss per share:
Basic and diluted - as reported $ (2.33) $ (4.24)
Basic and diluted - pro forma $ (2.37) $ (4.30)
THREE MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2003
------------- -------------
(IN THOUSANDS - EXCEPT PER SHARE)
Net loss as reported applicable to common stockholders $ (5,810) $ (8,914)
Add: compensation expense included in net loss 17 66
Deduct: total stock-based compensation expense determined under
fair-value based method for all awards (113) (259)
-------- --------
Pro forma basic and diluted loss per share $ (5,906) $ (9,107)
======== ========
Loss per share:
Basic and diluted - as reported $ (1.07) $ (1.67)
Basic and diluted - pro forma $ (1.09) $ (1.71)
NOTE 1 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities," which addresses consolidation by
a business of variable interest entities in which it is the primary beneficiary.
In December 2003, the FASB issued a revised Interpretation, FIN 46R, which
addresses a partial deferral of and certain proposed modifications to FIN 46, to
address certain implementation issues. The adoption of FIN 46R on January 1,
2004 did not have a material impact on the Company's financial statements.
In January 2004, the FASB issued FASB Staff Position No. FAS 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" (FSP 106-1). The FSP permits
employers that sponsor postretirement benefit plans (plan sponsors) that provide
prescription drug benefits to retirees to make a one-time election to defer
accounting for any effects of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (the "Act"). Without the FSP, plan sponsors would be
required under Statement of Financial Accounting Standards No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions (FAS 106), to account
for the effects of the Act in the fiscal period that includes December 8, 2003,
the date the President signed the Act into law.
FASB Staff Position No. 106-2 (FSP 106-2) includes guidance on
recognizing the effects of the new legislation under various conditions
surrounding the assessment of "actuarial equivalence" of subsidies under the
Act. FSP 106-2 is effective for the first interim or annual period beginning
after June 15, 2004 with earlier application permitted. The Company is currently
evaluating the impact of this Statement.
NOTE 2 - EARNINGS PER SHARE
The computation of basic loss per common share is based upon the
average number of shares of Common Stock outstanding. In the computation of
diluted loss per common share in the six and three-month periods ended June 30,
2004 and 2003, the conversion of preferred stock and the exercise of options
6
would have had an anti-dilutive effect. At June 30, 2004 and 2003 the assumed
conversion of preferred stock and non-vested restricted stock awards would
increase outstanding shares of common stock by 5,127,914 shares. At June 30,
2004 the exercise of stock options would increase outstanding shares of common
stock by 47,308 shares. At June 30, 2004 there were 26,667 shares of non-vested
common stock associated with restricted stock awards. A reconciliation of the
income and shares used in the computation follows:
RECONCILIATION OF INCOME AND SHARES IN EPS CALCULATION
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
For the Three Months Ended June 30, 2004
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net loss $ (954)
Less: Preferred stock dividends 4,856
--------
BASIC AND DILUTED EPS
Loss applicable to common stockholders $ (5,810) 5,426 $ (1.07)
======== =========== =========
For the Three Months Ended June 30, 2003
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net loss $ (4,058)
Less: Preferred stock dividends 4,856
--------
BASIC AND DILUTED EPS
Loss applicable to common stockholders $ (8,914) 5,340 $ (1.67)
======== =========== =========
For the Six Months Ended June 30, 2004
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net loss $ (2,939)
Less: Preferred stock dividends 9,712
--------
BASIC AND DILUTED EPS
Loss applicable to common stockholders $(12,651) 5,426 $ (2.33)
======== ========== =========
For the Six Months Ended June 30, 2003
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net loss $(12,906)
Less: Preferred stock dividends 9,712
---------
BASIC AND DILUTED EPS
Loss applicable to common stockholders $(22,618) 5,339 $ (4.24)
======== =========== =========
Outstanding stock options for common stock granted to officers,
directors, and key employees totaled 1.4 million at June 30, 2004.
PREFERRED STOCK DIVIDENDS
At June 30, 2004, dividends in arrears to Series A and Series B
Convertible Preferred Shareholders were $31.4 million and $41.5 million,
respectively. Presently management believes that it is not likely that the
Company will be able to pay these dividends in the foreseeable future.
NOTE 3 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three and six-months ended June 30, 2004 and
2003 is as follows:
7
(IN THOUSANDS) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Net loss $ (954) $ (4,058) $ (2,939) $(12,906)
Other comprehensive income (loss):
Write off of deferred foreign currency translation losses 1,142 1,142
Foreign currency translation adjustments (95) 269 (239) 1,030
-------- -------- -------- --------
Comprehensive loss $ (1,049) $ (2,647) $ (3,178) $(10,734)
======== ======== ======== ========
Accumulated other comprehensive income (loss) balances as of June 30, 2004 and
December 31, 2003 were comprised as follows:
(in thousands)
JUNE 30, DECEMBER 31,
2004 2003
---------- -----------
Minimum pension liability adjustment $(23,996) $(23,996)
Foreign currency translation adjustment 2,115 2,354
-------- --------
(21,881) (21,642)
======== ========
NOTE 4 - SHORT TERM INVESTMENTS
Net realized and unrealized gains on trading securities included in
other income (expense) for the six-months ended June 30, 2004 and 2003 were
income of $0.3 million and $1.6 million, respectively.
Net realized and unrealized losses on trading securities included in
other income (expense) for the second quarter of 2004 and 2003 were income of
$0.0 million and $2.6 million, respectively.
NOTE 5 - INVENTORIES
Inventories at June 30, 2004 and December 31, 2003 are comprised as
follows:
(IN THOUSANDS) JUNE 30, DECEMBER 31,
2004 2003
---------- -----------
Finished products $ 13,946 $ 14,938
In-process 10,308 7,992
Raw materials 21,036 17,290
Precious metal - hedged 12,695 --
Fine and fabricated precious metal in various stages of completion - at market 1,714 1,575
-------- --------
59,699 41,795
LIFO reserve (152) (13)
-------- --------
$ 59,547 $ 41,782
======== ========
The Company holds unhedged precious metal positions that are subject
to market fluctuations. The portion of the precious metal inventory that has not
been hedged and, therefore, is subject to price risk is included in inventory
using the last-in, first-out (LIFO) method of inventory valuation.
Hedged precious metal reflects the fair value of precious metal
purchased (other than LIFO inventory) and held by the Company plus the fair
value of contracts that are in a gain position undertaken to economically hedge
price exposures. The price exposure is hedged through a forward or future sale.
8
To the extent metal prices increase subsequent to a spot purchase
that has been hedged, the Company will recognize a gain as a result of marking
the spot metal to market while at the same time recognizing a loss related to
the fair value of the derivative instrument (forwards and futures). The
aggregate fair value of derivatives in a loss position is classified as part of
hedged metal obligations at the balance sheet date because the Company has
incurred a liability to a third party. Should the reverse occur and metal prices
decrease, the resultant gain on the derivative will be offset against the loss
within the hedged metal position.
Both hedged precious metal and derivative instruments used in
hedging are stated at fair value. Any change in value, whether realized or
unrealized, is recognized as an adjustment to cost of sales in the period of the
change.
The market value of the unhedged precious metal inventory exceeded
LIFO value cost by $0.2 million and $0 million at June 30, 2004 and December 31,
2003, respectively. The operating loss for the six-months ended June 30, 2003,
includes a non-cash charge resulting from the lower of cost or market adjustment
on precious metal inventories in the amount of $1.3 million.
In the normal course of business, certain customers and suppliers
deposit quantities of precious metals with the Company under a variety of
arrangements. Equivalent quantities of precious metals are returnable as product
or in other forms. Metals held for the accounts of customers and suppliers are
not reflected in the Company's financial statements.
At December 31, 2003, 1,605,000 ounces of silver and 14,617 ounces
of gold were leased to the Company under a consignment facility. This
consignment facility was terminated on March 30, 2004 and H&H purchased precious
metal with a then market value of approximately $15.0 million. The price
exposure on this metal purchase was hedged through a forward sale.
NOTE 6 - ASSET IMPAIRMENT CHARGE
On June 30, 2004 the Company evaluated the current operating plans
and current and forecasted operating results of its wire & cable business. In
accordance with Statement of Financial Accounting Standards Number 144,
"Accounting for Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), the
Company determined that there were indicators of impairment as of June 30, 2004
based on continued operating losses, deteriorating margins, and rising raw
material costs. An estimate of future cash flows indicated that as of June 30,
2004 cash flows would be insufficient to support the carrying value of the
long-term assets of the business. Accordingly, these assets were written down to
their estimated fair value by recording an asset impairment charge of $9.0
million in the second quarter. The Company continues to evaluate this business
and future plans could include, among other things, continued operation of the
business or the sale or closure of all or parts of this business.
NOTE 7 - PENSIONS, OTHER POSTRETIREMENT AND POST-EMPLOYMENT BENEFITS
The Company maintains several qualified and non-qualified pension
plans and other postretirement benefit plans covering substantially all of its
employees.
The following table presents the components of net periodic pension cost
(credit) for the three and six months ended June 30, 2004 and 2003:
Domestic Plan Domestic Plan
------------------------- -----------------------
(in thousands) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
------------------------ -----------------------
Service cost $ 114 $ 2,125 $ 489 $ 4,250
Interest cost 6,363 6,200 12,163 12,400
Expected return on plan assets (7,098) (6,175) (13,973) (12,350)
Amortization of prior service cost 18 1,450 43 2,900
Recognized actuarial (gain)/loss -- 430 -- 860
-------- -------- -------- --------
$ (603) $ 4,030 $ (1,278) $ 8,060
======== ======== ======== ========
9
NOTE 8 - GOODWILL AND OTHER INTANGIBLES
The components of goodwill by segment at December 31, 2003 and June
30, 2004 were as follows:
(in thousands)
Precious Wire & Engineered
Metals Tubing Materials Total
---------- ---------- ----------- ----------
Balance as of December 31, 2003 $ 56,471 $ 21,751 $ 47,150 $ 125,372
Pre acquistion foreign NOL utilized -- (199) -- (199)
--------- --------- --------- ---------
Balance at June 30, 2004 $ 56,471 $ 21,552 $ 47,150 $ 125,173
========= ========= ========= =========
At December 31, 2003 and June 30, 2004 there was no goodwill related
to the Wire Group.
As of December 31, 2003 and June 30, 2004, the Company had
approximately $0.6 million of other intangible assets, which will continue to be
amortized over their remaining useful lives ranging from 3 to 17 years.
NOTE 9 - DEBT
The Company's long-term debt consists of the following debt
instruments:
(IN THOUSANDS) JUNE 30, DECEMBER 31,
2004 2003
---------- ------------
Senior Notes due 2005, 10 1/2% $ 92,820 $ 92,820
Handy & Harman Credit Facility - Congress 21,252 --
Handy & Harman Credit Facility - Ableco 71,000 --
Handy & Harman Senior Secured Credit Facility -- 129,080
Other 6,172 7,500
-------- --------
191,244 229,400
Less portion due within one year 96,874 40,056
-------- --------
Total long-term debt $ 94,370 $189,344
======== ========
On March 31, 2004, H&H obtained new financing agreements to replace
its existing Senior Secured Credit Facilities, including the revolving credit
facility. The new financing agreements include a revolving credit facility and a
$22.2 million Term A Loan with Congress Financial Corporation ("Congress
Facilities") and a $71.0 million Term B Loan with Ableco Finance LLP ("Ableco").
Concurrently with the new financing agreements, WHX loaned $43.5 million to H&H
to repay, in part, the Senior Secured Credit Facilities. Such loan is
subordinated to the loans from Congress and Ableco. In addition, WHX deposited
$5.0 million of cash with Ableco as collateral for the H&H obligation. Portions
of the cash collateral may be returned to WHX prior to maturity of the Term B
Loan if H&H meets and maintains certain defined leverage ratios.
The new revolving credit facility provides for up to $70.0 million
of borrowings dependent on the levels of and collateralized by eligible accounts
receivable and inventory. The new revolving credit facility provides for
interest at LIBOR plus 2.75% or the U.S. Base rate plus 1.00%. Borrowings under
the new revolving credit facility amounted to $37.8 million at June 30, 2004.
The Congress Facilities mature on March 31, 2007. On June 30, 2004 H&H had
approximately $14.0 million of funds available under the new revolving credit
facility after deducting $5.0 million excess availability requirement. The Term
Loan A is collateralized by eligible equipment and real estate, and provides for
interest at LIBOR plus 3.25% or U.S. Base rate plus 1.5%. Borrowings under the
Congress Facilities are collateralized by all present and future stock and
assets of H&H and its subsidiaries including all contract rights, deposit
accounts, investment property, inventory, equipment, real property, and all
products and proceeds thereof. The principal of the Term Loan A is payable in
monthly installments of $299,000. The Congress Facilities contain affirmative,
negative, and financial covenants (including minimum EBITDA, maximum leverage,
and fixed charge coverage), and restrictions on cash distributions that can be
made to WHX. The Company was in compliance with all covenants at June 30, 2004.
The Ableco $71.0 million Term B Loan matures on March 31, 2007 and
provides for annual payments based on 40% of excess cash flow as defined in the
10
agreement. Interest is payable monthly at the Prime Rate plus 8%. At no time
shall the Prime Rate of interest be below 4%. The Term B Facility is
collateralized by all assets of H&H, subject only to the prior lien of the
Congress Facilities. The Term B facility contains affirmative, negative, and
financial covenants (including minimum EBITDA, maximum leverage, and fixed
charge coverage), and restrictions on cash distributions that can be made to
WHX. The Company was in compliance with all covenants at June 30, 2004.
In March 2004, H&H's wholly owned Danish subsidiary obtained new
financing agreements to replace and repay its existing debt which had been
issued under a multi-currency facility within the existing H&H Senior Secured
Credit Facilities. The new Danish facilities are with a Danish Bank and include
a revolving credit facility and term loans. At June 30, 2004 there was
approximately $6.2 million outstanding under the term loans.
As described above the H&H loan agreements contain provisions
restricting payments to WHX. At June 30, 2004 the net assets of H&H amounted to
$108.1 million, all of which was restricted as to the payment of dividends to
WHX.
In connection with the refinancing of the H&H Senior Secured Credit
Facility in March 2004, the Company wrote off deferred financing fees of $1.2
million. This charge is classified as loss on early retirement of debt. In the
six months ended June 30, 2003, the Company purchased and retired $17.7 million
aggregate principal amount of 10 1/2% Senior Notes in the open market for $14.3
million. After the write off of $0.4 million of deferred debt related costs, the
Company recognized a pre-tax gain of $3.0 million.
NOTE 10- CONTINGENCIES
SEC ENFORCEMENT ACTION
On June 25, 1998, the Securities and Exchange Commission ("SEC")
instituted an administrative proceeding against the Company alleging that it had
violated certain SEC rules in connection with the tender offer for Dynamics
Corporation of America ("DCA") commenced on March 31, 1997 through the Company's
wholly-owned subsidiary, SB Acquisition Corp. ("Offer"). Specifically, the Order
Instituting Proceedings ("Order") alleges that, in its initial form, the Offer
violated the "All Holders Rule," Rule 14d-10(a)(1) under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and that the Company violated Rules
14d-4(c) and 14d-6(d) under the Exchange Act upon expiration of the Offer. The
SEC does not claim that the Offer was intended to or in fact defrauded any
investor. On October 6, 2000, the initial decision of the Administrative Law
Judge who heard the case dismissed all charges against the Company, with the
finding that the Company had not violated the law.
The Division of Enforcement filed a petition and brief for the SEC
to review the decision, but only as to the All Holders Rule Claim. On June 4,
2003, the SEC issued an Opinion of the Commission that found that the Company
had violated the "All Holders Rule" and ordered that the Company cease and
desist from further violations of Section 14(d)(4) of the Exchange Act or the
"All Holders Rule." The Company filed a petition for review of the SEC's
decision with the United States Court of Appeals for the District of Columbia.
On April 9, 2004, the Court of Appeals vacated the SEC's cease and desist order
and the portion of the SEC's Opinion that found the order justified, on the
grounds that both were arbitrary and capricious. The Court's Opinion also
expressly explained that the Court did not need to reach (and did not reach) the
Company's other claims, which, among other things, challenged the merits of the
SEC's finding that the Company violated the "All Holders Rule." All times for
the SEC to seek rehearing or to file a petition for certiorari have expired and
the mandate has issued. Accordingly, this matter is now final. As a result, in
the second quarter of 2004 the Company reversed a $1.3 million reserve that was
previously recorded for the estimated liability related to this proceeding. This
reversal was credited to selling, general, and administrative expense in the
accompanying Condensed Consolidated Statement of Operations.
PBGC ACTION
On March 6, 2003, the Pension Benefit Guaranty Corporation ("PBGC")
published its Notice of Determination ("Notice") and on March 7, 2003 filed a
Summons and Complaint ("Complaint") in United States District Court for the
Southern District of New York seeking the involuntary termination of the WHX
Plan. WHX filed an answer to this complaint on March 27, 2003, contesting the
PBGC's action. On July 24, 2003, the Company entered into an agreement among the
PBGC, Wheeling-Pittsburgh Corporation ("WPC"), Wheeling-Pittsburgh Steel
Corporation ("WPSC"), and the United Steelworkers of America, AFL-CIO-CLC
("USWA") in settlement of matters relating to the PBGC V. WHX CORPORATION, Civil
Action No. 03-CV-1553, in the United States District Court for the Southern
District of New York ("Termination Litigation"), in which the PBGC was seeking
11
to terminate the WHX Plan. Under the settlement, among other things, WHX agreed
(a) that the WHX Plan, as it is currently constituted, is a single employer
pension plan, (b) to contribute funds to the WHX Plan equal to moneys spent (if
any) by WHX or its affiliates to purchase WHX 10.5% Senior Notes ("Senior
Notes") in future open market transactions, and (c) to grant to the PBGC a pari
passu security interest of up to $50.0 million in the event WHX obtains any
future financing on a secured basis or provides any security or collateral for
the Senior Notes. Also, under the settlement, the PBGC agreed (a) that, after
the effective date of the POR, if it terminates the WHX Plan at least one day
prior to a Steel facility shutdown, WHX shall be released from any additional
liability to PBGC resulting from the shutdown, (b) to withdraw its claims in the
WPC Bankruptcy Proceedings; and (c) to dismiss the Termination Litigation.
THE WHX GROUP GENERAL LITIGATION
The WHX Group is a party to various litigation matters including
general liability claims covered by insurance. In the opinion of management,
such claims are not expected to have a material adverse effect on the financial
condition or results of operations of the Company. However, it is possible that
the ultimate resolution of such litigation matters and claims could have a
material adverse effect on quarterly or annual operating results when they are
resolved in future periods.
ENVIRONMENTAL MATTERS
Prior to the consummation of the POR, WHX was the sole stockholder
of WPC, the parent company of the WPC Group. The WPC Group has been identified
as a potentially responsible party under the Comprehensive Environmental
Response, Compensation and Liability Act ("Superfund") or similar state statutes
at several waste sites. The WPC Group is subject to joint and several liability
imposed by Superfund on potentially responsible parties. The WPC Group entered
into a Settlement Agreement with the US EPA that resolves all of the US EPA's
pre-petition unsecured claims under the Superfund law and releases the WPC Group
from any future liability for such claims. The Bankruptcy Court approved the
Settlement Agreement by order entered June 13, 2003.
In the event the WPC Group is responsible for any environmental
liabilities relating to the period prior to the consummation of the POR, and is
unable to fund these liabilities, claims may be made against WHX for payment of
such liabilities.
NOTE 11 - REPORTED SEGMENTS
The Company has three reportable segments: (1) Precious Metal. This
segment manufactures and sells precious metal products and electroplated
material, containing silver, gold, and palladium in combination with base metals
for use in a wide variety of industrial applications; (2) Wire & Tubing. This
segment manufactures and sells metal wire, cable and tubing products and
fabrications primarily from stainless steel, carbon steel and specialty alloys,
for use in a wide variety of industrial applications; (3) Engineered Materials.
This segment manufactures specialty roofing and construction fasteners, products
for gas, electricity and water distribution using steel and plastic which are
sold to the construction, and natural gas and water distribution industries, and
electrogalvinized products used in the construction and appliance industries.
Management reviews operating income to evaluate segment performance.
Operating income for the reportable segments excludes unallocated general
corporate expenses. Other income and expense, interest expense, and income taxes
are not presented by segment since they are excluded from the measure of segment
profitability reviewed by the Company's management.
The following table presents information about reported segments for
the three and six-month periods ending June 30, 2004 and 2003:
12
(in thousands) Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---------- --------- --------- ---------
Revenue
Precious Metal $ 27,956 $ 21,365 $ 56,578 $ 43,719
Wire & Tubing 35,668 30,759 70,230 62,907
Engineered Materials 44,216 31,395 78,526 57,893
--------- --------- --------- ---------
Consolidated revenue $ 107,840 $ 83,519 $ 205,334 $ 164,519
========= ========= ========= =========
Segment operating income
Precious Metal $ 1,220 $ (177) $ 3,696 $ (1,376)
Wire & Tubing (9,002) 159 (9,205) (566)
Engineered Materials 6,011 2,906 9,162 3,521
--------- --------- --------- ---------
(1,771) 2,888 3,653 1,579
--------- --------- --------- ---------
Gain/(loss) on disposal of fixed assets 1,707 (13) 1,665 84
Unallocated corporate expenses 424 7,259 1,664 13,982
--------- --------- --------- ---------
Operating Income/(loss) (488) (4,384) 3,654 (12,319)
Interest expense 6,107 4,903 10,816 9,920
Gain (loss) on early retirement of debt -- 1,966 (1,161) 2,999
Other income (expense) 6,016 1,696 6,271 188
--------- --------- --------- ---------
Loss before taxes (579) (5,625) (2,052) (19,052)
Income tax expense (benefit) 375 (1,567) 887 (6,146)
--------- --------- --------- ---------
Net loss $ (954) $ (4,058) $ (2,939) $ (12,906)
========= ========= ========= =========
NOTE 12 - SUPPLEMENTAL WPC GROUP INCOME STATEMENT DATA
During the six-months ended June 30, 2003 the WPC Group incurred a
net loss of $67.1 million. These results are not reflected in WHX's June 30,
2003 consolidated results of operations. The WPC Group's summarized income
statement data for the three and six- months ended June 30, 2003 is as follows
(in thousands):
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2003 JUNE 30, 2003
------------- -------------
Net sales $ 250,469 $ 489,141
Cost of goods sold, excluding depreciation 239,702 486,955
Depreciation 16,349 33,794
Selling, general and administrative expenses 11,394 25,258
Reorganization expenses 2,845 6,145
--------- ---------
Operating loss (19,821) (63,011)
Interest expense 4,072 7,723
Reorganization income 169 160
Other income 1,612 2,846
--------- ---------
Pre-tax loss (22,112) (67,728)
Tax provision (638) (629)
--------- ---------
Net loss $ (21,474) $ (67,099)
========= =========
13
NOTE 13 - SUBSEQUENT EVENT
In 2003, as part of the WPC Group Plan of Reorganization WHX forgave
its claims against the WPC Group and, additionally, contributed to the
reorganized company $20.0 million in cash, for which WHX received a $10.0
million subordinated note. This Note was fully reserved upon receipt. In July
2004 the Company realized $5.6 million upon the sale of the note to a third
party and, accordingly, the reserve was reversed and $5.6 million was recorded
in other income in the second quarter of 2004.
14
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Risk Factors and Cautionary Statements
This Report includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Exchange Act, including, in particular, forward-looking
statements under the headings "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 8. Financial Statements
and Supplementary Data." These statements appear in a number of places in this
Report and include statements regarding WHX's intent, belief or current
expectations with respect to (i) its financing plans, (ii) trends affecting its
financial condition or results of operations, and (iii) the impact of
competition. The words "expect," "anticipate," "intend," "plan," "believe,"
"seek," "estimate," and similar expressions are intended to identify such
forward-looking statements; however, this Report also contains other
forward-looking statements in addition to historical information.
Any forward-looking statements made by WHX are not guarantees of
future performance and there are various important factors that could cause
actual results to differ materially from those indicated in the forward-looking
statements. This means that indicated results may not be realized.
Factors that could cause the actual results of the WHX Group in
future periods to differ materially include, but are not limited to, the
following:
o The WHX 10 1/2% Senior Notes in the amount of $92.8 million are
due on April 15, 2005. It is the Company's intention to
refinance this obligation prior to its scheduled maturity;
however there can be no assurance that such refinancing will be
obtained. The Company's access to capital markets in the future
to refinance such indebtedness may be limited. If the Company
were unable to refinance this obligation, it would have a
material adverse impact on the liquidity, financial position
and capital resources of WHX and would impact the Company's
ability to continue as a going concern. The financial
statements do not reflect any adjustments related to this
matter. In June 2004 WHX announced that it had retained
Jefferies & Company, Inc. to assist it in developing
recapitalization alternatives. A committee of preferred
shareholders has been formed and has retained legal and
financial advisors;
o The new H&H financing agreements discussed below restrict cash
payments to WHX. The ability of WHX to liquidate liabilities
arising in the ordinary course of business through December 31,
2004 is dependent upon cash on hand;
o The WHX Group's businesses operate in highly competitive
markets and are subject to significant competition from other
businesses;
o A decline in the general economic and business conditions and
industry trends and the other factors detailed from time to
time in the Company's filings with the SEC could continue to
adversely affect the Company's results of operations;
o The WPC Group has a large net operating tax loss carryforward.
WPC was part of the Company's consolidated tax group. In
accordance with federal tax laws and regulations, WPC's tax
attributes have been utilized by the Company's consolidated
group to reduce its consolidated federal tax obligations. The
WPC Group's tax attributes were available to the WHX Group
through December 31, 2003, and are no longer available; and
o Prior to the consummation of the POR, WHX was the sole
stockholder of WPC, the parent company of the WPC Group. The
WPC Group has been identified as a potentially responsible
party under the Superfund law or similar state statutes at
several waste sites. The WPC Group is subject to joint and
15
several liability imposed by Superfund on potentially
responsible parties. The WPC Group entered into a Settlement
Agreement with the US EPA that resolves all of the US EPA's
pre-petition unsecured claims under the Superfund law and
releases the WPC Group from any future liability for such
claims. The Bankruptcy Court approved the Settlement Agreement
by order entered June 13, 2003. In the event the WPC Group is
responsible for any environmental liabilities relating to the
period prior to the consummation of the POR, and is unable to
fund these liabilities, claims may be made against WHX for
payment of such liabilities.
OVERVIEW
WHX is a holding company that has been structured to invest in and
manage a diverse group of businesses. WHX's primary business currently is Handy
& Harman, a diversified manufacturing company whose strategic business units
encompass three segments: precious metal plating and fabrication, specialty wire
and tubing, and engineered materials.
WHX continues to pursue strategic alternatives to maximize the
value of its portfolio of businesses. Some of these alternatives have included,
and will continue to include, selective acquisitions, divestitures and sales of
certain assets. WHX has provided, and may from time to time in the future,
provide information to interested parties regarding portions of its businesses
for such purposes.
RESULTS OF OPERATIONS
COMPARISON OF THE SECOND QUARTER OF 2004 WITH THE SECOND QUARTER OF 2003
Net sales for the second quarter of 2004 were $107.8 million
compared to $83.5 million in the second quarter of 2003. Sales increased by $6.6
million at the Precious Metal Segment, $4.9 million at the Wire & Tubing Segment
and $12.8 million at the Engineered Materials Segment. Gross profit percentage
decreased in the second quarter of 2004 to 18.9% from 19.6% in the second
quarter of 2003. This decrease resulted primarily from lower margins in the wire
and cable business and increased precious metal prices.
Selling, general and administrative expenses decreased $7.3 million
to $13.5 million in the second quarter of 2004 from $20.8 million in the
comparable 2003 period. This resulted primarily from a decrease in net pension
expense of $4.6 million, lower professional fees, the termination of the WPN
management agreement in January 2004, and the reversal of a $1.3 million reserve
for a legal proceeding that was resolved in the Company's favor.
Operating loss for the second quarter of 2004 was $0.5 million
compared to $4.4 million for the second quarter of 2003. Operating loss at the
segment level was $1.8 million compared to operating income of $2.9 million in
2003. This decrease in operating loss is due to a $9.0 million asset impairment
charge recorded in the second quarter of 2004 relating to the wire and cable
business. Partially offsetting this charge are improvements related to an
increase in sales at all business segments and the reduction in SG&A expenses
previously discussed.
Gain on disposal of fixed assets for the second quarter of 2004
amounted to $1.7 million, which resulted from the sale of an aircraft.
Interest expense for the second quarter of 2004 increased $1.2
million to $6.1 million from $4.9 million in the second quarter of 2003. This
increase was due to increased interest rates.
Other income was $6.0 million in the second quarter of 2004. The
Company had received a $10.0 million subordinated note from WPSC upon
consummation of the POR, which had been fully reserved. In July 2004 the Company
realized $5.6 million upon the sale of the note to a third party and,
accordingly, the reserve was reversed and $5.6 million was recorded in other
income.
In the three-months ended June 30, 2003, the Company purchased and
retired $12.0 million aggregate principal amount of 10 1/2% Senior Notes in the
open market for $9.8 million. After the write off of $0.2 million of deferred
debt related costs, the Company recognized a pre-tax gain of $2.0 million. No
10-1/2% Senior Notes were repurchased by the Company in the three-months ended
June 30, 2004.
In the second quarter of 2004 a tax provision of $0.4 million was
recorded for foreign and state taxes. The Company has recorded a valuation
allowance related to the Federal tax benefit associated with the current period
loss due to the uncertainty of realizing these benefits in the future. The 2003
second quarter tax benefit is based on a Federal benefit of 35%, offset by
permanent differences and state and foreign tax expense. At December 31, 2003
the Company had Federal net operating loss carry forwards of $90.6 million for
which no benefit has been recognized.
16
The comments that follow compare revenues and operating income by
segment for the second quarter 2004 and 2003:
PRECIOUS METAL
Sales for the Precious Metal Segment increased $6.6 million from
$21.4 million in 2003 to $28.0 million in 2004 primarily due to market share
gains, stronger demand in the electrical and telecommunications markets, and
increased precious metal prices.
Operating income increased $1.4 million to $1.2 million in 2004 from
a loss of $0.2 million in 2003. The 2003 period included $1.4 million of costs
related to the closure of facilities. Improvements in operating income in 2004
resulting from the aforementioned sales growth were offset by higher raw
material costs and start up costs related to a new facility in Malaysia.
WIRE & TUBING
Sales for the Wire & Tubing Segment increased $4.9 million from
$30.8 million in 2003 to $35.7 million in 2004. This increase is primarily
related to market share gains and stronger demand in refrigeration, medical, and
semi conductor markets as they relate to the Company's tubing businesses.
Operating income decreased by $9.2 million from a loss of $0.2
million in 2003 to a loss of $9.0 million in 2004. The 2004 period includes a
$9.0 million asset impairment charge relative to the wire and cable business. An
estimate of future cash flows indicated that as of June 30, 2004 cash flows
would be insufficient to support the carrying value of the long-term assets of
the business. Accordingly, these assets were written down to their estimated
fair value by recording an asset impairment charge of $9.0 million. The
operating results of this segment were negatively impacted by the poor
performance of the wire and cable business and by production inefficiencies
related to new products at a stainless tubing group facility. These declines
were offset by the improved operating performance at the Company's other tubing
facilities. These improvements are directly related to the sales improvements
discussed above. The 2003 period included $1.2 million of costs related to the
closure of certain specialty wire facilities.
ENGINEERED MATERIALS
Sales for the Engineered Materials Segment increased $12.8 million
(41%) from $31.4 million in 2003 to $44.2 million in 2004 due to a strong
commercial construction market and increased sales prices.
Operating income increased by $3.1 million from $2.9 million in 2003
to $6.0 million in 2004. The operating income increase is due to the sales gains
discussed above, partially offset by increased steel costs.
UNALLOCATED CORPORATE EXPENSES
Unallocated corporate expenses declined from $7.3 million in 2003 to
$.4 million in 2004. This improvement is related to a decrease in pension
expense of $4.6 million, lower professional fees, the termination of the WPN
management agreement in January of 2004, and the reversal of a $1.3 million
reserve for a legal proceeding. These improvements were partially offset by an
increase in salary expense and insurance costs. Full year pension expense under
SFAS 87 accounting is estimated to be a credit of $2.6 million in 2004.
Accordingly, a pension credit of $0.6 million was recognized in the second
quarter of 2004.
COMPARISON OF THE FIRST SIX MONTHS OF 2004 WITH THE FIRST SIX MONTHS OF 2003
Net sales for the first six months of 2004 were $205.3 million
compared to $164.5 million in the first six months of 2003. Sales increased by
$12.9 million at the Precious Metal Segment, by $7.3 million at the Wire &
Tubing Segment, and by $20.6 million at the Engineered Materials Segment. Gross
profit percentage increased in the six month period of 2004 to 18.7% from 18.5%
in the comparable 2003 period primarily due to a $1.3 million lower of cost or
market adjustment for precious metal inventory in the first quarter of 2003, and
higher precious metal prices and lower margins at the wire group in 2004..
Selling, general and administrative expenses decreased $15.4 million
to $27.4 million in the first six months of 2004 from $42.8 million in the
17
comparable 2003 period. This resulted from decreased pension expense of $9.3
million, lower professional fees, and the termination of the WPN management
agreement. Also included in the 2004 period is the reversal of a $1.3 million
reserve for a legal proceeding that was settled in the Company's favor. Included
in the 2003 six month results is approximately $2.6 million associated with the
shut down of certain H&H operations, and a $3.5 million charge for employee
separation and related expenses in the first quarter of 2003. This $3.5 million
charge related to a reduction in executive, administrative and information
technology personnel at H&H.
Gain on disposal of fixed assets for the six months ended June 30,
2004 amounted to $1.7 million. This gain was primarily from the sale of an
aircraft.
Operating income for the first six months of 2004 was $3.7 million
compared to a $12.3 million operating loss for the first six months of 2003.
Operating income at the segment level was $3.7 million compared to operating
income of $1.6 million in 2003. The 2004 operating results include a $9.0
million asset impairment charge recorded in the second quarter of 2004 relating
to the wire and cable business. Partially offsetting this charge are
improvements related to the increase in sales at all business segments and the
reduction in SG&A expenses previously discussed. The 2003 operating results at
the segment level include the $3.5 million charge for employee separation and
related expenses, and incremental costs (primarily employee related) of $2.2
million associated with the shut down of certain H&H operations discussed above.
Interest expense for the first six months of 2004 increased $0.9
million to $10.8 million from $9.9 million in the first six months of 2003. This
increase was due to increased interest rates.
Other income was $6.3 million in 2004. The Company had received a
$10.0 million subordinated note from WPSC upon consummation of the POR, which
had been fully reserved. In July 2004 the Company realized $5.6 million upon the
sale of the note to a third party and, accordingly, the reserve was reversed and
$5.6 million was recorded in other income.
In the six months ended June 30, 2003, the Company purchased and
retired $17.7 million aggregate principal amount of 10 1/2% Senior Notes in the
open market for $14.3 million. After the write-off of $0.4 million of deferred
debt related costs, the Company recognized a gain of $3.0 million.
The Company has recorded a valuation allowance related to the
Federal tax benefit associated with the current period loss due to the
uncertainty of realizing these benefits in the future. In 2004 a tax provision
of $ 0.9 million was recorded for foreign and state taxes. The 2003 period tax
provision is based on a federal benefit of 35%, offset by permanent differences
and state and foreign tax expense. At December 31, 2003 the Company had Federal
net operating loss carry forwards of $90.6 million for which no benefit has been
recognized.
The comments that follow compare revenues and operating income from
continuing operations by segment for the six-month periods 2004 and 2003:
PRECIOUS METAL
Sales for the Precious Metal Segment increased $12.9 million from
$43.7 million in 2003 to $56.6 million in 2004. This increase in sales is
primarily due to market share gains, stronger demand in the electrical and
telecommunications markets, and increased precious metal prices.
Operating income was $3.7 million in 2004 compared to an operating
loss of $1.4 million in 2003. Included in 2003 is a non cash lower of cost or
market charge of $1.3 million related to precious metal inventory, $1.1 million
of severance related expenses allocated to this segment from the reduction in
salaried staff at H&H, and costs associated with the closure of facilities. The
balance of the improvement in operating income in 2004 is related to the
abovementioned increase in sales.
WIRE & TUBING
Sales for the Wire & Tubing Segment increased $7.3 million from
$62.9 million in 2003 to $70.2 million in 2004. This increase is primarily
related to market share gains and stronger demand in refrigeration, medical, and
semi-conductor markets as they relate to the Company's tubing businesses.
Operating loss increased by $8.6 million from an operating loss of
$0.6 million in 2003 to a loss of $9.2 million in 2004. This increase in
18
operating loss is due to a $9.0 million asset impairment charge recorded in the
second quarter of 2004 relating to the wire and cable business. The operating
results of this segment were negatively impacted by the poor performance of the
wire and cable business and by production inefficiencies related to new products
at a stainless tubing group facility. These declines were offset by the improved
operating performance at the Company's other tubing facilities. These
improvements are directly related to the sales improvements discussed above. The
2003 period included $1.2 million of costs related to the closure of certain
wire facilities and $1.5 million of severance related expenses allocated to this
segment from the reduction in salaried staff at H&H.
ENGINEERED MATERIALS
Sales for the Engineered Materials Segment increased $20.6 million
from $57.9 in 2003 to $78.5 million in 2004 primarily due to due to a stronger
commercial construction market, market share gains, and increased sales prices.
Operating income increased $5.7 million from $3.5 million in 2003 to
$9.2 million in 2004. This increase in operating income is primarily due to the
increase in sales noted above. Included in 2003 is $0.9 million of severance
related expenses allocated to this segment from the reduction in salaried staff
at H&H.
UNALLOCATED CORPORATE EXPENSES
Unallocated corporate expenses decreased from $14.0 million to $1.7
million. This decrease is primarily related to decreased pension expense of $9.3
million, lower professional fees, the termination of the WPN management
agreement in January of 2004, and the reversal of $1.3 million reserve for a
legal proceeding. These improvements were partially offset by an increase in
salary expense and insurance costs. Full year pension expense under SFAS 87
accounting is estimated to be a credit of $2.6 million in 2004. Accordingly, a
pension credit of $1.3 million was recognized in the first half of 2004.
FINANCIAL POSITION
Net cash used by operating activities for the six months ended June
30, 2004 totaled $32.5 million. Income from operations adjusted for non-cash
income and expense items provided $7.4 million of cash. Working capital accounts
used $35.0 million of funds, as follows: accounts receivable used $21.9 million,
trade payables provided $9.9 million. Inventories totaled $59.5 million at June
30, 2004, and used $17.8 million. Net other current items used $10.7 million.
The increase in accounts receivable, which was partially offset by an increase
in trade payables, reflects the strong sales levels for the six month period
ended June 30, 2004. The increase in inventory is related to the termination of
the Company's precious metal consignment facility. At December 31, 2003,
1,605,000 ounces of silver and 14,617 ounces of gold were leased to the Company
under the consignment facility. Upon termination of this facility on March 30,
2004, H&H purchased approximately $15.0 million of precious metal. The price
exposure on this metal purchase was hedged through a forward sale.
A pension contribution of $0.2 million was made in the second
quarter of 2004.
In connection with the H&H refinancing, WHX deposited $5.0 million
of cash with H&H's lender as collateral for the H&H obligation. Portions of the
cash collateral may be returned to WHX prior to maturity of the loan if H&H
meets and maintains certain defined leverage ratios. Other non-working capital
items included in operating activities provided $0.2 million.
In the first six months of 2004, $4.4 million was spent on capital
improvements.
In 2003 the Company purchased an aircraft, which it sold in the
first quarter of 2004 for $19.3 million. The sale resulted in a gain of $30,000.
The aircraft was included in other current assets on the Company's consolidated
balance sheet at December 31, 2003. Additionally, the Company sold an aircraft
in second quarter of 2004. The sale of this aircraft provided $7.0 million and
resulted in a pre-tax gain of $1.7 million.
The Company's major subsidiary, H&H, maintains separate and distinct
credit facilities with various financial institutions. These facilities contain
affirmative, negative, and financial covenants (including minimum EBITDA,
maximum leverage, and fixed charge coverage), and restrictions on cash
distributions that can be made to WHX.
19
Borrowings outstanding under Handy & Harman's credit facilities at
June 30, 2004 amounted to $130.1 million. In addition there was approximately
$6.2 million of borrowings outstanding under H&H's wholly owned Danish
subsidiary's term loans.
LIQUIDITY
As previously discussed, the WHX 10 1/2% Senior Notes in the amount
of $92.8 million are due on April 15, 2005. It is the Company's intention to
refinance this obligation prior to its scheduled maturity; however there can be
no assurance that such refinancing will be obtained. The Company's access to
capital markets in the future to refinance such indebtedness may be limited. If
the Company were unable to refinance this obligation, it would have a material
adverse impact on the liquidity, financial position and capital resources of WHX
and would impact the Company's ability to continue as a going concern. The
financial statements do not reflect any adjustments related to this matter.
WHX's liquidity is dependent on its ability to refinance the 10 1/2%
Senior Notes, cash on hand, investments, and general economic conditions and
their effect on market demand. In addition, it is dependent upon the WHX Group's
ability to sustain profitable operations and control costs during periods of low
demand or pricing in order to sustain positive cash flow. The WHX Group
satisfied its working capital requirements through cash on hand, investments,
borrowing availability under the H&H Facilities and funds generated from
operations. The WHX Group believes that, cash on hand, investments, sales of
selected assets, and funds available under the new H&H credit facilities, will
provide the WHX Group with the funds required to satisfy working capital and
capital expenditure requirements. However, factors, such as economic conditions,
could materially affect the WHX Group's results of operations, financial
condition and liquidity.
The new H&H financing agreements (see below) restrict cash payments
to WHX. The ability of WHX to liquidate liabilities arising in the ordinary
course of business prior to the maturity of the 10 1/2% Senior Notes on April
15, 2005 is dependent on cash on hand.
H&H's revolving credit facility existing at December 31, 2003 was
scheduled to mature on July 31, 2004. On March 31, 2004, H&H obtained new
financing agreements to replace and repay its existing Senior Secured Credit
Facilities, including the revolving credit facility. The new financing
agreements include a $70.0 million revolving credit facility and a $22.2 million
Term A Loan with Congress Financial Corporation ("Congress Facilities") and a
$71.0 million Term B Loan with Ableco Finance LLP ("Ableco"). Concurrently with
the new financing agreements, WHX loaned $43.5 million to H&H to repay, in part,
the Senior Secured Credit Facilities. Such loan is subordinated to the loans
from Congress and Ableco. In addition, WHX deposited $5.0 million of cash with
Ableco as collateral security for the H&H obligation. Portions of the cash
collateral may be returned to WHX prior to maturity of the Term B Loan if H&H
meets and maintains certain defined leverage ratios.
The new revolving credit facility provides for up to $70.0 million
of borrowings dependent on the levels of and collateralized by eligible accounts
receivable and inventory. The new revolving credit facility provides for
interest at LIBOR plus 2.75% or the U.S. Base rate plus 1.00%. Borrowings under
the new revolving credit facility amounted to $37.8 million at June 30, 2004.
The Congress facilities mature on March 31, 2007. On June 30, 2004 H&H had
approximately $14.0 million of funds available under the new revolving credit
facility after deducting $5.0 million of excess availability requirement. The
Term Loan A is collateralized by eligible equipment and real estate, and
provides for interest at LIBOR plus 3.25% or the prime rate plus 1.5%.
Borrowings under the Congress Facilities are collateralized by all present and
future stock and assets of H&H and its subsidiaries including all contract
rights, deposit accounts, investment property, inventory, equipment, real
property, and all products and proceeds thereof. The principal of the Term Loan
A is payable in monthly installments of $299,000. The Congress Facilities
contain affirmative, negative, and financial covenants (including minimum
EBITDA, maximum leverage, and fixed charge coverage), and restrictions on cash
distributions that can be made to WHX. The Company was in compliance with all
covenants at June 30, 2004.
The Ableco $71.0 million Term B Loan matures on March 31, 2007 and
provides for annual payments based on 40% of excess cash flow as defined in the
agreement. Interest is payable monthly at the Prime Rate plus 8%. At no time
shall the Prime Rate of interest be below 4%. The Term B Facility is
collateralized by all assets of H&H, subject only to the prior lien of the
Congress Facilities. The Term B facility contains affirmative, negative, and
financial covenants (including minimum EBITDA, maximum leverage, and fixed
charge coverage), and restrictions on cash distributions that can be made to
WHX. The Company was in compliance with all covenants at June 30, 2004.
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In March 2004, H&H's wholly owned Danish subsidiary obtained new
financing agreements to replace and repay its existing debt which had been
issued under a multi-currency facility within the existing H&H Senior Secured
Credit Facilities. The new Danish facilities are with a Danish Bank and include
a revolving credit facility and term loans. At June 30, 2004 there was
approximately $6.2 million outstanding under the term loans.
As described above the H&H loan agreements contain provisions
restricting payments to WHX. At June 30, 2004 the net assets of H&H amounted to
$108.1 million, all of which was restricted as to the payment of dividends to
WHX.
As of June 30, 2004, the total of the WHX Group's future contractual
commitments, including the repayment of debt obligations is summarized as
follows:
Payments Due by Period
----------------------------------------------------------------------------
Contractual
Obligations Total 2004 2005 2006 2007 thereafter
- --------------------------------------------------------------------------------------------------
Debt $229,083 $ 39,795 $ 96,877 $ 4,059 $ 83,815 $ 4,537
Operating Leases $ 4,741 $ 842 $ 1,660 $ 1,326 $ 913 $ 7
At June 30, 2004 there were 2.6 million shares of Series A
Convertible Preferred Stock and 2.9 million shares of Series B Convertible
Preferred Stock outstanding. Dividends on these shares are cumulative and are
payable quarterly in arrears, in an amount equal to $3.25 per annum per share of
Series A and $3.75 per annum per share of Series B. Pursuant to the terms of the
Supplemental Indenture to the Company's 10 1/2% Senior Notes, the Company was
prohibited from paying dividends on this Preferred Stock until after October 31,
2002, at the earliest and thereafter only in the event that the Company
satisfies certain conditions set forth in the Indenture. Such conditions were
not satisfied at June 30, 2004. Presently, management believes that it is not
likely that the Company will be able to pay these dividends in the foreseeable
future. The holders of the Preferred Stock are eligible to elect two directors
to the Company's Board of Directors upon the Company's failure to pay six
quarterly dividend payments, whether or not consecutive. Dividends on the
Preferred Stock have not been paid since the dividend payment of October 31,
2000. Accordingly, the holders of the Preferred Stock have the right to elect
two directors to the Company's Board of Directors. To date, the holders of the
Preferred Stock have not elected such directors. At June 30, 2004, preferred
dividends in arrears totaled $72.9 million. The Company has retained Jefferies &
Company to assist in the evaluation of possible recapitalization options. A
committee of preferred shareholders has been formed and has retained legal and
financial advisors.
NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities," which addresses consolidation by
a business of variable interest entities in which it is the primary beneficiary.
In December 2003, the FASB issued a revised Interpretation, FIN 46R, which
addresses a partial deferral of and certain proposed modifications to FIN 46, to
address certain implementation issues. The adoption of FIN 46R on January 1,
2004 did not have a material impact on the Company's financial statements.
In January 2004, the FASB issued FASB Staff Position No. FAS 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" (FSP 106-1). The FSP permits
employers that sponsor postretirement benefit plans (plan sponsors) that provide
prescription drug benefits to retirees to make a one-time election to defer
accounting for any effects of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (the "Act"). Without the FSP, plan sponsors would be
required under Statement of Financial Accounting Standards No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions (FAS 106), to account
for the effects of the Act in the fiscal period that includes December 8, 2003,
the date the President signed the Act into law.
Proposed FASB Staff Position No. 106b (FSP 106-b) includes guidance
on recognizing the effects of the new legislation under various conditions
surrounding the assessment of "actuarial equivalence" of subsidies under the
Act. The proposed FSP 106-b, if passed would be effective for the first interim
or annual period beginning after June 15, 2004 with earlier application
permitted. The Company is currently evaluating the impact of this Statement.
*******
21
When used in the Management's Discussion and Analysis, the words
"anticipate", "estimate" and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, which are intended to be covered by the
safe harbors created thereby. Investors are cautioned that all forward-looking
statements involve risks and uncertainty, including without limitation, general
economic conditions and, the ability of the Company to develop markets and sell
its products and the effects of competition and pricing. Although the Company
believes that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included herein will prove
to be accurate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY PRICE RISK AND RELATED RISKS
In the normal course of business, the Company is exposed to market
risk or price fluctuation related to the purchase of natural gas, electricity,
precious metals, steel products and certain non-ferrous metals used as raw
material. The Company is also exposed to the effects of price fluctuations on
the value of its commodity inventories, specifically, H&H's precious metals
inventories.
The Company's market risk strategy has generally been to obtain
competitive prices for its products and services and allow operating results to
reflect market price movements dictated by supply and demand.
The Company holds unhedged precious metal positions that are subject
to market fluctuations. The portion of the precious metal inventory that has not
been hedged and, therefore, is subject to price risk is included in inventory
using the last-in, first-out (LIFO) method of inventory valuation. To the extent
that additional precious metal inventory is required to support operations,
precious metals are purchased and immediately sold using forward or future
contracts, to eliminate the economic risk of price fluctuations. To minimize the
risk of counter party non-performance, such contracts are made only through
major financial institutions. From time to time, senior management reviews the
appropriate precious metal inventory levels and may elect to make adjustments.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company is subject to the risk of price fluctuations related to
anticipated revenues and operating costs, firm commitments for capital
expenditures and existing assets or liabilities denominated in currencies other
than U.S. dollars. The Company has not generally used derivative instruments to
manage this risk.
INTEREST RATE RISK
Fair value of cash and cash equivalents, receivables, short-term
borrowings, accounts payable, accrued interest and variable-rate long-term debt
approximate their carrying values and are relatively insensitive to changes in
interest rates due to the short-term maturity of the instruments or the variable
nature of underlying interest rates.
The Company attempts to maintain a reasonable balance between fixed
and floating-rate debt in an attempt to keep financing costs as low as possible.
At June 30, 2004, the Company's portfolio of long-term debt included fixed-rate
instruments. Accordingly, the fair value of such instruments may be relatively
sensitive to effects of interest rate fluctuations. In addition, the fair value
of such instruments is also affected by investors' assessments of the risks
associated with industries in which the Company operates as well as the
Company's overall creditworthiness and ability to satisfy such obligations upon
their maturity. However, the Company's sensitivity to interest rate declines and
other market risks that might result in a corresponding increase in the fair
value of its fixed-rate debt portfolio would only have an unfavorable effect on
the Company's result of operations and cash flows to the extent that the Company
elected to repurchase or retire all or a portion of its fixed-rate debt
portfolio at an amount in excess of the corresponding carrying value.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation, as of June 30, 2004, the Company's
Principal Executive Officer and Principal Financial Officer have concluded the
Company's disclosure controls and procedures (as defined in Rule 13a-15 under
the Securities Exchange Act of 1934) are effective. There have been no
22
significant changes in internal controls over financial reporting subsequent to
March 31, 2004 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 25, 1998, the Securities and Exchange Commission ("SEC")
instituted an administrative proceeding against the Company alleging that it had
violated certain SEC rules in connection with the tender offer for Dynamics
Corporation of America ("DCA") commenced on March 31, 1997 through the Company's
wholly-owned subsidiary, SB Acquisition Corp. ("Offer"). Specifically, the Order
Instituting Proceedings ("Order") alleges that, in its initial form, the Offer
violated the "All Holders Rule," Rule 14d-10(a)(1) under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and that the Company violated Rules
14d-4(c) and 14d-6(d) under the Exchange Act upon expiration of the Offer. The
SEC does not claim that the Offer was intended to or in fact defrauded any
investor. On October 6, 2000, the initial decision of the Administrative Law
Judge who heard the case dismissed all charges against the Company, with the
finding that the Company had not violated the law.
The Division of Enforcement filed a petition and brief for the SEC
to review the decision, but only as to the All Holders Rule Claim. On June 4,
2003, the SEC issued an Opinion of the Commission that found that the Company
had violated the "All Holders Rule" and ordered that the Company cease and
desist from further violations of Section 14(d)(4) of the Exchange Act or the
"All Holders Rule." The Company filed a petition for review of the SEC's
decision with the United States Court of Appeals for the District of Columbia.
On April 9, 2004, the Court of Appeals vacated the SEC's cease and desist order
and the portion of the SEC's Opinion that found the order justified, on the
grounds that both were arbitrary and capricious. The Court's Opinion also
expressly explained that the Court did not need to reach (and did not reach) the
Company's other claims, which, among other things, challenged the merits of the
SEC's finding that the Company violated the "All Holders Rule." All times for
the SEC to seek rehearing or to file a petition for certiorari have expired and
the mandate has issued. Accordingly, this matter is now final.
See Note 10 to the Condensed Consolidated Financial Statements and
the Company's Annual Report on Form 10-K for the year ended December 31, 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
2004 ANNUAL MEETING OF STOCKHOLDERS
The 2004 Annual Meeting of Stockholders was held on June 2, 2004.
All of the Company's nominees as Class II directors, as set forth
below, were elected. There was no solicitation in opposition to the Company's
nominees. The other members of the Company's Board of Directors as of the date
of the Company's annual meeting of stockholders were Neil D. Arnold, Robert A.
Davidow, William Goldsmith, Louis Klein, Jr., Howard Mileaf, Neale X. Trangucci
and Stewart E. Tabin.
Matters voted on at the meeting and the number of votes cast:
VOTED FOR WITHHELD
(1) Election of Directors
Marvin L. Olshan 3,737,812 562,869
Garen W. Smith 3,737,245 563,436
Raymond S. Troubh 3,722,525 578,156
AGAINST BROKER
VOTED FOR VOTED ABSTENTIONS NON-VOTES
--------- ----- ----------- ---------
(2) Ratification of Pricewaterhouse
Coopers LLP as the Company's
Independent Registered Public
Accounting Firm for the fiscal
year ending December 31, 2004 4,179,163 110,958 10,560 0
23
In addition to the matters voted upon at the Annual Meeting as
described above, holders of the Company's Series A Convertible Preferred Stock
and Series B Convertible Preferred Stock, voting together as a class, had the
right to elect up to two directors to the Board of Directors of the Company. Two
preferred stockholders had solicited proxies in support of their election as
directors, but no action was taken on this matter because a quorum of preferred
stockholders was not present at the Annual Meeting.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At June 30, 2004, there were 2.6 million shares of Series A
Convertible Preferred Stock and 2.9 million shares of Series B Convertible
Preferred Stock outstanding. Dividends on these shares are cumulative and are
payable quarterly in arrears, in an equal amount to $3.25 per annum per share of
Series A and $3.75 per annum per share of Series B. Pursuant to the terms of the
Supplemental Indenture to the Company's 10 1/2 % Senior Notes, the Company was
prohibited from paying dividends on this Preferred Stock until after October 31,
2002, at the earliest and thereafter only in the event that the Company
satisfies certain conditions set forth in the Indenture. Such conditions were
not satisfied as of June 30, 2004. Presently, management believes that it is not
likely that the Company will be able to pay these dividends in the foreseeable
future. At June 30, 2004 dividends in arrears amounted to $72.9 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
* Exhibit 10.1 Agreement dated February 11, 2004 by and between the
Company and Daniel P. Murphy, Jr.
* Exhibit 31.1 Certification of Principal Executive Officer pursuant to
Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
* Exhibit 31.2 Certification of Principal Financial Officer pursuant to
Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
* Exhibit 32.1 Certification of Principal Executive Officer and Principal
Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b) of the
Securities Act of 1934, as amended, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Form 8-K filed on April 2, 2004
Form 8-K filed on April 13, 2004
Form 8-K filed on May 6, 2004
Form 8-K filed on June 7, 2004
Form 8-K filed on June 21, 2004
* Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHX CORPORATION
/s/ Robert K. Hynes
-------------------
Robert K. Hynes
Chief Financial Officer
(Principal Accounting Officer)
August 12, 2004
25