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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 SEPTEMBER 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 September 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 November 8,
2004 was 5,485,856.
1
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------
(in thousands - except per-share)
Net sales $ 111,483 $ 83,269 $ 316,817 $ 247,788
Cost of goods sold 91,882 66,440 258,856 200,520
--------- --------- --------- ---------
Gross profit 19,601 16,829 57,961 47,268
Selling, general and administrative expenses 14,439 12,788 41,810 55,630
Pension - curtailment and special termination benefits -- 48,102 -- 48,102
Asset impairment charge -- 89,000 9,000 89,000
Gain (loss) on disposal of fixed assets (43) 368 1,622 452
--------- --------- --------- ---------
Income (loss) from operations 5,119 (132,693) 8,773 (145,012)
--------- --------- --------- ---------
Other:
Interest expense 6,901 4,537 17,717 14,457
Gain on disposition of WPC -- 534 -- 534
(Loss) gain on early retirement of debt -- -- (1,161) 2,999
Other income 93 842 6,364 1,030
--------- --------- --------- ---------
Loss before taxes (1,689) (135,854) (3,741) (154,906)
Tax expense 384 6,711 1,271 565
--------- --------- --------- ---------
Net loss $ (2,073) $(142,565) $ (5,012) $(155,471)
========= ========= ========= =========
Dividend requirement for preferred stock $ 4,856 $ 4,856 $ 14,568 $ 14,568
========= ========= ========= =========
Net loss applicable to common stock $ (6,929) $(147,421) $ (19,580) $(170,039)
========= ========= ========= =========
BASIC AND DILUTED PER SHARE OF COMMON STOCK
Loss per share $ (1.28) $ (27.38) $ (3.61) $ (31.75)
========= ========= ========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
WHX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2004 2003
- --------------------------------------------------------------------------------
(Dollars and shares in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 25,484 $ 41,990
Trade receivables - net 62,920 42,054
Inventories 71,682 41,782
Other current assets 10,234 30,174
--------- ---------
Total current assets 170,320 156,000
Property, plant and equipment at cost 142,081 146,459
Less accumulated depreciation and amortization (55,964) (42,236)
--------- ---------
86,117 104,223
Goodwill and other intangibles 125,797 126,089
Intangibles - pension asset 758 758
Assets held for sale 2,000 2,000
Other non-current assets 21,883 17,076
--------- ---------
$ 406,875 $ 406,146
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 39,271 $ 27,300
Accrued liabilities 27,334 29,395
Current portion of long-term debt 96,877 40,056
Short-term debt 42,710 --
--------- ---------
Total current liabilities 206,192 96,751
Long-term debt 93,397 189,344
Accrued pension liability 19,638 27,367
Other employee benefit liabilities 7,407 7,840
Additional minimum pension liability 24,912 24,912
Other liabilities 1,306 1,047
--------- ---------
Total liabilities 352,852 347,261
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 (21,541) (21,642)
Additional paid-in capital 556,206 556,206
Unearned compensation - restricted stock awards (50) (99)
Accumulated deficit (481,199) (476,187)
--------- ---------
Total stockholders' equity 54,023 58,885
--------- ---------
$ 406,875 $ 406,146
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
2004 2003
- -----------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,012) $(155,471)
Items not affecting cash from operating activities:
Depreciation and amortization 10,620 11,110
Amortization of debt related costs 1,816 1,362
Asset impairment charge 9,000 89,000
Other postretirement benefits 338 175
Loss (gain) on early retirement of debt 1,161 (2,999)
Gain on WPSC note recovery (5,596) --
Deferred income taxes -- (832)
Gain on asset dispositions (1,622) (452)
Pension expense (credit) (1,918) 6,586
Pension - Curtailment and special benefits -- 48,102
Gain on disposition of WPC -- (534)
Equity gain in affiliated companies (112) --
Other -- 232
Decrease (increase) in working capital elements:
Trade receivables (20,866) (4,562)
Inventories (29,900) 25,265
Short term investments-trading -- 205,275
Investment account borrowings -- (107,857)
Other current assets 640 296
Other current liabilities 10,311 (28,618)
Pension contribution (5,810) --
Other items-net (3,478) 2,245
--------- ---------
Net cash (used in) provided by operating activities (40,428) 88,323
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net payment to WPC -- (19,500)
Sale / (Purchase) of aircraft 19,301 (19,171)
Dividends from affiliates 77 58
Cash received on WPSC Note sale 5,596 --
Plant additions and improvements (6,975) (10,189)
Receipt of escrow deposit 1,250 --
Proceeds from sales of assets 7,057 3,709
--------- ---------
Net cash provided by (used in) investing activities 26,306 (45,093)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash proceeds from Handy & Harman term loans 99,250 --
Repayment of Handy & Harman term loans (1,796)
Net borrowings from revolving credit facilities 42,710 --
Repayment of H&H Senior Secured Credit Facility (149,684) --
Net borrowings from H&H Senior Secured Credit Facility 20,604 402
Repayment of H&H Industrial Revenue Bonds (7,500) --
Debt issuance fees (5,968) --
Cash paid on early extinguishment of debt -- (14,302)
Due from Unimast -- 3,204
--------- ---------
Net cash used in financing activities (2,384) (10,696)
--------- ---------
NET CASH (USED IN) PROVIDED BY OPERATIONS (16,506) 32,534
Cash and cash equivalents at beginning of period 41,990 18,396
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,484 $ 50,930
========= =========
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 nine months ended September 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 nine-months
ended September 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. 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.
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
5
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."
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:
NINE MONTHS ENDED SEPT 30,
2004 2003
--------- ---------
(in thousands - except per share)
Net loss as reported applicable to common stockholders $ (19,580) $(170,039)
Add: compensation expense included in net loss (net of tax) 49 83
Deduct: total stock-based compensation expense determined under
fair-value based method for all awards (net of tax) (310) (429)
--------- ---------
Pro forma basic and diluted loss per share $ (19,841) $(170,385)
========= =========
Loss per share:
Basic and diluted - as reported $ (3.61) $ (31.75)
Basic and diluted - pro forma $ (3.66) $ (31.82)
THREE MONTHS ENDED SEPT 30,
2004 2003
--------- ---------
(in thousands - except per share)
Net loss as reported applicable to common stockholders $ (6,929) $(147,421)
Add: compensation expense included in net loss (net of tax) 16 17
Deduct: total stock-based compensation expense determined under
fair-value based method for all awards (net of tax) (84) (43)
--------- ---------
Pro forma basic and diluted loss per share $ (6,997) $(147,447)
========= =========
Loss per share:
Basic and diluted - as reported $ (1.28) $ (27.38)
Basic and diluted - pro forma $ (1.29) $ (27.38)
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.
6
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 adoption of FSP 106-2 on July 1, 2004
did not have a material impact on the Company's financial statements.
NOTE 2 - LOSS 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 nine and three-month periods ended September 30, 2004
and 2003, the conversion of preferred stock and the exercise of options would
have had an anti-dilutive effect. At September 30, 2004 and 2003 the assumed
conversion of preferred stock would increase outstanding shares of common stock
by 5,127,914 shares. At September 30, 2004 the assumed conversion of non-vested
restricted stock awards would increase outstanding shares by 26,667. At
September 30, 2004 and 2003 the exercise of stock options would increase
outstanding shares of common stock by 31,834 and 11,548 shares, respectively. 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 September 30, 2004
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------------- --------------------- ---------------------
Net loss $ (2,073)
Less: Preferred stock dividends 4,856
-------------------
BASIC AND DILUTED EPS
Loss applicable to common stockholders $ (6,929) 5,426 $ (1.28)
=================== ===================== =====================
For the Three Months Ended September 30, 2003
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------------- --------------------- ---------------------
Net loss $ (142,565)
Less: Preferred stock dividends 4,856
-------------------
BASIC AND DILUTED EPS
Loss applicable to common stockholders $ (147,421) 5,385 $ (27.38)
=================== ===================== =====================
For the Nine Months Ended September 30, 2004
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------------- --------------------- ---------------------
Net loss $ (5,012)
Less: Preferred stock dividends 14,568
-------------------
BASIC AND DILUTED EPS
Loss applicable to common stockholders $ (19,580) 5,426 $ (3.61)
=================== ===================== =====================
For the Nine Months Ended September 30, 2003
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------------- --------------------- ---------------------
Net loss $ (155,471)
Less: Preferred stock dividends 14,568
-------------------
BASIC AND DILUTED EPS
Loss applicable to common stockholders $ (170,039) 5,355 $ (31.75)
=================== ===================== =====================
7
Outstanding stock options for common stock granted to officers, directors,
and key employees totaled 1.4 million at September 30, 2004.
PREFERRED STOCK DIVIDENDS
At September 30, 2004, dividends in arrears to Series A and Series B
Convertible Preferred Shareholders were $33.5 million and $44.2 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 nine-months ended September 30,
2004 and 2003 is as follows:
(in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Net loss $ (2,073) $(142,565) $ (5,012) $(155,471)
Other comprehensive income (loss):
Minimum pension liability adjustment -- 38,422 -- 38,422
Deferred taxes relating to minimum pension liability -- (18,710) -- (18,710)
Write off of deferred foreign currency translation losses -- -- -- 1,142
Foreign currency translation adjustments 340 20 101 1,050
--------- --------- --------- ---------
Comprehensive loss $ (1,733) $(122,833) $ (4,911) $(133,567)
========= ========= ========= =========
Accumulated other comprehensive income (loss) balances as of September 30, 2004
and December 31, 2003 were comprised as follows:
(in thousands)
SEPTEMBER 30, DECEMBER 31,
2004 2003
-------- --------
Minimum pension liability adjustment $(23,996) $(23,996)
Foreign currency translation adjustment 2,455 2,354
-------- --------
(21,541) (21,642)
======== ========
NOTE 4 - SHORT TERM INVESTMENTS
Net realized and unrealized gains on trading securities included in other
income for the nine-months ended September 30, 2004 and 2003 were income of $0.3
million and $3.2 million, respectively.
Net realized and unrealized gains on trading securities included in other
income for the third quarter 2004 and 2003 was income of $0 and $1.4 million,
respectively.
8
NOTE 5 - INVENTORIES
Inventories at September 30, 2004 and December 31, 2003 are
comprised as follows:
(in thousands) SEPTEMBER 30, DECEMBER 31,
2004 2003
-------- --------
Finished products $ 16,595 $ 14,938
In - process 11,202 7,992
Raw materials 23,106 17,290
Precious metal - hedged 19,217 --
Fine and fabricated precious metal in various stages of completion - at market 1,812 1,575
-------- --------
71,932 41,795
LIFO reserve (250) (13)
-------- --------
$ 71,682 $ 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.
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 accrued
expenses 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 $0.3 million and $0.0 million at September 30, 2004 and December
31, 2003, respectively. The operating loss for the nine-months ended September
30, 2003, includes a first quarter non-cash charge resulting from the lower of
cost or market adjustment on precious metal inventories in the amount of $1.3
million. Included in operating income for the nine-months and three-months ended
September 30, 2003 is a pre-tax gain on the liquidation of certain precious
metal of $3.0 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
9
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 a non-cash asset impairment charge of
$9.0 million in the second quarter.
In November 2004 Handy & Harman signed a non-binding letter of intent to
sell its wire business. Concurrently, the Company is negotiating the sale of its
steel cable business. The Company expects to close on the sale of these
businesses at or near year-end. If the Company is unable to complete these sales
it will consider the closure of these operations. In connection with the
disposal of these businesses the Company expects to incur a loss of between $5.0
million and $7.0 million. Such loss will be recognized upon disposal. There is
no assurance that the Company will be able to close the swale of the wire
business or sell its steel cable business. The following is a summary of the
carrying amounts of the major classes of assets and liabilities of the wire
business at September 30, 2004 (in thousands):
Current assets $16,122
Property, plant and equipment 2,477
Total assets 18,599
Total liabilities 3,579
Net assets 15,020
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 nine months ended September 30, 2004 and 2003:
(in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
----------------------- ----------------------
Service cost $ 244 $ (34) $ 733 $ 4,217
Interest cost 6,082 4,864 18,245 17,264
Expected return on plan assets (6,987) (6,120) (20,960) (18,470)
Amortization of prior service cost 21 246 64 3,146
Recognized actuarial (gain)/loss -- (430) -- 430
----------------------- ----------------------
(640) (1,474) (1,918) 6,587
----------------------- ----------------------
Curtailment loss -- 36,629 -- 36,629
Special termination benefit charge -- 11,472 -- 11,472
----------------------- ----------------------
$ (640) $ 46,627 $ (1,918) $ 54,688
======================= ======================
10
The following table presents the components of other postretirement benefit
costs for the three and nine months ended September 30, 2004 and 2003:
(in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
----- ----- ----- -----
Service cost $ 33 $ 16 $ 96 $ 50
Interest cost 115 51 345 179
Amortization of prior service cost 7 3 22 11
Amortization of net (gain)/loss (42) (20) (125) (65)
----- ----- ----- -----
$ 113 $ 50 $ 338 $ 175
================ ================
NOTE 8 - GOODWILL AND OTHER INTANGIBLES
The changes in the carrying amount of goodwill by segment for the
nine-months ended September 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 -- (270) -- (270)
--------- --------- --------- ---------
Balance at September 30, 2004 $ 56,471 $ 21,481 $ 47,150 $ 125,102
========= ========= ========= =========
At December 31, 2003 and September 30, 2004 there was no goodwill related
to the Wire Group.
As of December 31, 2003 and September 30, 2004, the Company has
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.
The changes in the carrying amount of goodwill for the nine-months ended
September 30, 2003 were as follows:
(in thousands)
Precious Wire & Engineered
Metals Tubing Materials Total
--------- --------- --------- ---------
Balance as of January 1, 2003 $ 106,971 $ 60,464 $ 47,150 $ 214,585
Goodwill impairment (50,500) (38,500) -- (89,000)
Pre acquisition foreign NOL utilized -- (100) -- (100)
--------- --------- --------- ---------
Balance at September 30, 2003 $ 56,471 $ 21,864 $ 47,150 $ 125,485
========= ========= ========= =========
Operating results for the nine months ended September 30, 2003 were
significantly lower than expected. This was due to several factors including a
slower than expected recovery in the US manufacturing sector. As a result, the
Company obtained current short term and longer-term forecasts from its operating
units and revised its expectations concerning future earnings and cash flow for
certain of its reporting units. As a result of the evaluation, in the third
quarter of 2003 the Company recorded a goodwill impairment charge of $89.0
million as follows: Precious Metal Plating Group $47.0 million, Specialty Tubing
Group $38.5 million, Precious Metal Fabrication Group $3.5 million.
11
The expected rate of growth in sales and profitability for the Precious
Metal Plating Group was lowered as the result of several factors. The business
had not returned to the level of profitability it experienced prior to the 2002
fire at its Indianapolis, IN facility. Partial resumption of operations occurred
soon after the fire and repairs to the building, its infrastructure and
replacement of machinery and equipment were completed in early 2003. However, as
a result of the fire, the Company lost market share to competitors and
experienced erosion in selling prices. In the third quarter of 2003, the Company
lowered its expectations as to the timing of a return to pre fire levels of
revenue and profitability. In addition, the expected start dates of new programs
(new products) were extended.
The estimated rate of growth for the Specialty Tubing Group was lowered, as
the growth in medical, appliance and semi-conductor markets, was slower than
anticipated, and the development of new products was not as strong as originally
forecast. In addition, profit forecasts were lowered due to lower sales prices
in the appliance market and greater than expected increases in raw material
costs (steel).
The estimated rate of growth for the Precious Metal Fabrication Group was
lowered for the slower than expected growth in sales for new products.
Concurrently, the Company began preliminary discussions with various
financial institutions concerning the refinancing of the Handy & Harman credit
facility (the revolving credit portion of which was scheduled to mature in
2004). From these discussions the Company determined that the deterioration in
earnings at H&H would result in higher than anticipated long-term interest rates
when H&H refinanced its credit facility. The combination of lower than expected
future earnings and an expected increase in the weighted average cost of capital
triggered the Company's evaluation of goodwill for impairment in the third
quarter of 2003.
The results of the Company's annual impairment review, which is performed
in the fourth quarter, are highly dependent on management's projection of future
results. The use of different estimates and assumptions employed in the
discounted cash flow model that measures the fair value of the Company's
reporting units could result in an impairment of goodwill.
NOTE 9 - DEBT
The Company's long-term debt consists of the following debt instruments:
(in thousands) SEPTEMBER 30, DECEMBER 31,
2004 2003
-------- --------
Senior Notes due 2005, 10 1/2% $ 92,820 $ 92,820
Handy & Harman Credit Facility - Congress 20,354 --
Handy & Harman Credit Facility - Ableco 71,000 --
Handy & Harman Senior Secured Credit Facility -- 129,080
Other 6,100 7,500
-------- --------
190,274 229,400
Less portion due within one year 96,877 40,056
-------- --------
Total long-term debt $ 93,397 $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. As of September
30, 2004 $1.1 million of the collateral was returned to WHX.
The new revolving credit facility provided for up to $62.9 million of
borrowings dependent on the levels of and collateralized by eligible accounts
receivable and inventory. The revolving credit facility was amended on August
31, 2004 to reduce the maximum amount of the loan from $70.0 million to $62.9
million. The new revolving credit facility provides for interest at LIBOR plus
12
2.75% or the U.S. Base rate plus 1.00%. Borrowings under the new revolving
credit facility amounted to $42.7 million at September 30, 2004. The Congress
Facilities mature on March 31, 2007. On September 30, 2004 H&H had approximately
$11.5 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 September 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 September 30, 2004.
At March 31, 2004, Indiana Tube Danmark, 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 (Nordea) and include a revolving credit facility and term loans. The
term loans consist of a 20-year mortgage (collateralized by Indiana Tube
Danmark's building) and a 10 year serial loan (collateralized by Machinery and
Equipment of Indiana Tube Danmark). Interest is variable, based on LIBOR, and is
fixed yearly on the mortgage and quarterly on the serial loan. At September 30,
2004 there was approximately $6.1 million outstanding under the term loans.
Principal payments on the term loans are approximately $480,000 per year. The
revolving credit facility is collateralized by accounts receivable and inventory
of Indiana Tube Danmark. Interest is variable and based on Nordea's daily rate.
At September 30, 2004 there were no borrowings under the revolving credit
facility.
As described above the H&H loan agreements contain provisions restricting
payments to WHX. At September 30, 2004 the net assets of H&H amounted to $109.5
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
nine months ended September 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.
See Note 14 - Subsequent Event
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
13
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
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.
14
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 nine month periods ending September 30, 2004 and 2003:
(in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Revenue
Precious Metal $ 25,568 $ 19,547 $ 82,146 $ 63,266
Wire & Tubing 37,452 29,371 107,682 92,278
Engineered Materials 48,463 34,351 126,989 92,244
--------- --------- --------- ---------
Consolidated revenue $ 111,483 $ 83,269 $ 316,817 $ 247,788
========= ========= ========= =========
Segment operating income
Precious Metal $ 592 $ (46,503) $ 4,288 $ (47,879)
Wire & Tubing (531) (40,823) (9,736) (41,389)
Engineered Materials 6,173 3,967 15,335 7,488
--------- --------- --------- ---------
6,234 (83,359) 9,887 (81,780)
--------- --------- --------- ---------
Gain/(loss) on disposal of fixed assets (43) 368 1,622 452
Pension - curtailment & special termination benefits -- 48,102 -- 48,102
Unallocated corporate expenses 1,072 1,600 2,736 15,582
--------- --------- --------- ---------
Operating Income/(loss) 5,119 (132,693) 8,773 (145,012)
Interest expense 6,901 4,537 17,717 14,457
Equity in Gain on WPC -- 534 -- 534
Gain (loss) on early retirement of debt -- -- (1,161) 2,999
Other income 93 842 6,364 1,030
--------- --------- --------- ---------
Loss before taxes (1,689) (135,854) (3,741) (154,906)
Income tax expense 384 6,711 1,271 565
--------- --------- --------- ---------
Net loss $ (2,073) $(142,565) $ (5,012) $(155,471)
========= ========= ========= =========
15
NOTE 12 - SUPPLEMENTAL WPC GROUP INCOME STATEMENT DATA
During the nine months ended September 30, 2003 the WPC Group incurred a
net loss of $77.2 million. These results are not reflected in WHX's September
30, 2003 consolidated results of operations. The WPC Group's summarized income
statement data for the three and nine months ended September 30, 2003 is as
follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003(1) 2003(1)
Net sales $ 81,298 $ 570,439
Cost of goods sold, excluding depreciation 77,629 564,584
Depreciation 6,095 39,889
Selling, general and administrative expenses 4,648 29,906
Reorganization expenses 1,995 8,140
--------- ---------
Operating loss (9,069) (72,080)
Interest expense 1,462 9,185
Reorganization income -- 160
Other income 382 3,228
--------- ---------
Pre-tax loss (10,149) (77,877)
Tax provision (12) (641)
--------- ---------
Net loss $ (10,137) $ (77,236)
========= =========
(1) Contains results through July 31, 2003 (the date of reorganization)
NOTE 13 - WPC SUBORDINATED NOTE
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.
NOTE 14 - SUBSEQUENT EVENT
On October 29, 2004, Handy & Harman completed the assignment of its
$71.0 million Tranche B term loan from Ableco, as agent, and the existing
lenders thereto, to Canpartners Investments IV, LLC ("Canpartners"), an entity
affiliated with Canyon Capital Advisors LLC, as agent and lender. Substantially
all of the terms and conditions of the term loan continue without amendment,
with the principal exception that the interest rate for the loan has been
reduced by 4.0% per annum, effective October 29, 2004. In addition, of the $5.0
million cash balance which WHX had deposited with Ableco at the time of the
original loan as collateral for the Handy & Harman obligation, approximately
$3.9 million, the remaining outstanding amount, has been returned to WHX as it
is no longer required (approximately $1.1 million had been returned during the
third quarter of 2004).
16
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 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,
17
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 THIRD QUARTER OF 2004 WITH THE THIRD QUARTER OF 2003
Net sales for the third quarter of 2004 were $111.5 million compared
to $83.3 million in the third quarter of 2003. Sales increased by $6.0 million
at the Precious Metal Segment, $8.1 million at the Wire & Tubing Segment ($1.1
million increase for Wire and $7.0 million increase for Tubing) and $14.1
million at the Engineered Materials Segment. Gross profit percentage decreased
in the third quarter of 2004 to 17.6% from 20.2% in the third quarter of 2003.
This decrease resulted primarily from a gain on the liquidation of certain
precious metals inventory of $3.0 million recorded in the 2003 period. Gross
profit in the 2004 period was negatively impacted by lower margins in the wire
and cable business. Gross profit improved in the tubing businesses and the
engineered materials segment due to increased sales volume and selling prices,
partially offset by increased raw material costs.
Selling, general and administrative expenses increased $1.6 million
to $14.4 million in the third quarter of 2004 from $12.8 million in the
comparable 2003 period. The 2004 period includes a decrease in net pension
credit of $0.8 and increased selling expenses associated with the increased
sales levels discussed above. The 2004 period also reflects the benefit from the
termination of the WPN management agreement. The 2003 period includes a $3.0
million gain on insurance proceeds and a $2.2 million write-down of the
Fairfield, CT facility.
Operating income for the third quarter of 2004 was $5.1 million
compared to a loss of $132.7 million for the third quarter of 2003. The 2003
period results include a $48.1 million non-cash pension curtailment and special
termination benefit charge related to the consummation of the WPC Group Plan of
Reorganization and a non-cash goodwill impairment charge of $89.0 million.
Operating income at the segment level was $6.2 million compared to an operating
loss of $83.4 million in 2003. The 2003 operating loss at the segment level
includes the aforementioned non-cash goodwill impairment charge of $89.0 million
relating to the Company's specialty tubing and precious metal operations, a $3.0
million gain on insurance proceeds, a $3.0 million gain on the liquidation of
certain precious metal inventory, and a $2.2 million write-down of the
Fairfield, CT property.
Interest expense for the third quarter of 2004 increased $2.4
million to $6.9 million from $4.5 million in the third quarter of 2003. This
increase was due to higher interest rates.
Other income was $0.1 million in the third quarter of 2004 compared
to $0.8 million in the third quarter of 2003.
In the third 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
third quarter tax provision is based on a Federal rate 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 by
segment for the third quarter 2004 and 2003:
18
PRECIOUS METAL
Sales for the Precious Metal Segment increased $6.0 million from
$19.5 million in 2003 to $25.6 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 $47.1 million to $0.6 million in 2004
from a loss of $46.5 million in 2003. The 2003 period includes a $50.5 million
non-cash charge for goodwill impairment, a $3.0 million gain on the liquidation
of certain precious metal inventories, a $3.0 million gain on insurance proceeds
and a $2.2 million write-down of the Fairfield, CT property. Improvements in
operating income in 2004 resulting from the aforementioned sales growth were
partially offset by higher raw material costs.
WIRE & TUBING
Sales for the Wire & Tubing Segment increased $8.1 million ($1.1
million increase for Wire and $7.0 million increase for Tubing) from $29.4
million in 2003 ($8.8 million for Wire and $20.6 million for Tubing) to $37.5
million ($9.9 million for Wire and $27.6 million for Tubing) in 2004. This
increase is primarily related to market share gains, new products, and stronger
demand in appliance, medical, and semi conductor markets as they relate to the
Company's tubing businesses.
Operating loss decreased by $40.3 million ($0.3 million increase in
operating loss for Wire and $40.6 million increase in operating income for
Tubing) from a loss of $40.8 million ($2.1 million for Wire and $38.7 million
for Tubing) in 2003 to a loss of $0.5 million (operating loss of $2.4 million
for Wire and operating income of $1.9 million for Tubing) in 2004. The 2003
period included a $38.5 million non-cash charge for goodwill impairment related
to the Tubing business. Improvement in operating income for the Tubing business
is due to the increased sales level discussed above. Partially offsetting the
improvement in the Tubing businesses is the continuing poor performance of the
wire and cable business.
ENGINEERED MATERIALS
Sales for the Engineered Materials Segment increased $14.1 million
from $34.4 million in 2003 to $48.5 million in 2004 due to a strong commercial
construction market, market share gains, and increased sales prices.
Operating income increased by $2.2 million from $4.0 million in 2003
to $6.2 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 $1.6 million in 2003 to
$1.1 million in 2004. This is primarily due to the termination of the WPN
management agreement partially offset by a reduced pension credit of $0.8
million and increased salaries.
GOODWILL IMPAIRMENT
Operating results for the nine months ended September 30, 2003 were
significantly lower than expected. This was due to several factors including a
slower than expected recovery in the US manufacturing sector. As a result, the
Company obtained current short term and longer-term forecasts from its operating
units and revised its expectations concerning future earnings and cash flow for
certain of its reporting units. As a result of the evaluation, in the third
quarter of 2003 the Company recorded a goodwill impairment charge of $89.0
million as follows: Precious Metal Plating Group $47.0 million, Specialty Tubing
Group $38.5 million, Precious Metal Fabrication Group $3.5 million.
The expected rate of growth in sales and profitability for the
Precious Metal Plating Group was lowered as the result of several factors. The
business had not returned to the level of profitability it experienced prior to
the 2002 fire at its Indianapolis, IN facility. Partial resumption of operations
occurred soon after the fire and repairs to the building, its infrastructure and
replacement of machinery and equipment were completed in early 2003. However, as
a result of the fire, the Company lost market share to competitors and
19
experienced erosion in selling prices. In the third quarter of 2003, the Company
lowered its expectations as to the timing of a return to pre fire levels of
revenue and profitability. In addition, the expected start dates of new programs
(new products) were extended.
The estimated rate of growth for the Specialty Tubing Group was
lowered, as the growth in medical, appliance and semi-conductor markets, was
slower than anticipated, and the development of new products was not as strong
as originally forecast. In addition, profit forecasts were lowered due to lower
sales prices in the appliance market and greater than expected increases in raw
material costs (steel).
The estimated rate of growth for the Precious Metal Fabrication
Group was lowered for the slower than expected growth in sales for new products.
Concurrently, the Company began preliminary discussions with
various financial institutions concerning the refinancing of the Handy & Harman
credit facility (the revolving credit portion of which was scheduled to mature
in 2004). From these discussions the Company determined that the deterioration
in earnings at H&H would result in higher than anticipated long-term interest
rates when H&H refinanced its credit facility. The combination of lower than
expected future earnings and an expected increase in the weighted average cost
of capital triggered the Company's evaluation of goodwill for impairment in the
third quarter of 2003.
The results of the Company's annual impairment review, which is
performed in the fourth quarter, are highly dependent on management's projection
of future results. The use of different estimates and assumptions employed in
the discounted cash flow model that measures the fair value of the Company's
reporting units could result in an impairment of goodwill.
COMPARISON OF THE FIRST NINE MONTHS OF 2004 WITH THE FIRST NINE MONTHS OF 2003
Net sales for the first nine months of 2004 were $316.8 million
compared to $247.8 million in the first nine months of 2003. Sales increased by
$18.9 million at the Precious Metal Segment, by $15.4 million at the Wire &
Tubing Segment ($0.9 million for Wire and $14.5 million for Tubing), and by
$34.7 million at the Engineered Materials Segment. Gross profit percentage
decreased in the nine month period of 2004 to 18.3% from 19.1% in the comparable
2003 period primarily due to a gain on the liquidation of certain precious
metals inventory of $3.0 million recorded in 2003 partially offset by a $1.3
million lower of cost or market adjustment for precious metal inventory recorded
in the 2003 period. Gross profit in the 2004 period was negatively impacted by
lower margins in the wire and cable business. Gross profit improved in the
tubing businesses and the engineered materials segment due to increased sales
volume and selling prices, partially offset by increased raw material costs.
Selling, general and administrative expenses decreased $13.8 million
to $41.8 million in the first nine months of 2004 from $55.6 million in the
comparable 2003 period. This resulted from decreased pension expense of $8.5
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 nine 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. The 2003 period also includes a $3.0 million gain
on insurance proceeds and a $2.2 million write-down of the Fairfield, CT
facility. The balance of the fluctuation in selling, general and administrative
expenses is increased selling expenses associated with the increased sales
levels discussed above.
Gain on disposal of fixed assets for the nine months ended September
30, 2004 amounted to $1.6 million. This gain was primarily from the sale of an
aircraft.
Operating income for the first nine months of 2004 was $8.8 million
compared to a $145.0 million operating loss for the first nine months of 2003.
Operating income at the segment level was $9.9 million compared to an operating
loss of $81.8 million in 2003. The 2004 operating results at the segment level
include a $9.0 million asset impairment charge recorded in the second quarter of
2004 relating to the wire and cable business. The 2003 period results include a
non-cash goodwill impairment charge of $89.0 million. The 2003 operating loss at
the segment level also includes a $3.0 million gain on insurance proceeds, a
$3.0 million gain on the liquidation of certain precious metal inventory, a
non-cash lower of cost or market charge of $1.3 million related to precious
metal inventory and a $2.2 million write-down of the Fairfield, CT property. The
2003 period also includes a $3.5 million charge related to a reduction in
executive, administrative and information technology personnel at H&H and
20
approximately $2.6 million associated with the shut down of certain H&H
operations. The balance of the increase in operating income is due to the
above-mentioned increased sales levels.
Interest expense for the first nine months of 2004 increased $3.3
million to $17.7 million from $14.4 million in the first nine months of 2003.
This increase was due to increased interest rates partially offset by lower
borrowings.
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
nine months ended September 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.
Other income was $6.4 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 second quarter.
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 $1.3 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 nine - month periods 2004 and 2003:
PRECIOUS METAL
Sales for the Precious Metal Segment increased $18.9 million from
$63.2 million in 2003 to $82.1 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 $4.3 million in 2004 compared to an operating
loss of $47.9 million in 2003. The 2003 period includes a $50.5 million non-cash
charge for goodwill impairment, a $3.0 million gain on the liquidation of
certain precious metal inventories, and a $3.0 million gain on insurance
proceeds and a $2.2 million write-down of the Fairfield, CT property. Also
included in 2003 is a non cash lower of cost or market charge of $1.3 million
related to precious metal inventory and $1.1 million of severance related
expenses allocated to this segment from the reduction in salaried staff at H&H.
The balance of the improvement in operating income in 2004 is related to the
above-mentioned increase in sales partially offset by higher raw material costs.
WIRE & TUBING
Sales for the Wire & Tubing Segment increased $15.4 million ($0.9
million for Wire and $14.5 million for Tubing) from $92.3 million ($28.1 million
for Wire and $64.2 million for Tubing) in 2003 to $107.7 million ($29.0 million
for Wire and $78.7 million for Tubing) in 2004. This increase is primarily
related to market share gains, new products, and stronger demand in appliance,
medical, and semi-conductor markets as they relate to the Company's tubing
businesses.
Operating loss decreased by $31.7 million ($9.6 million increase in
operating loss for Wire and $41.3 million decrease in operating loss for Tubing)
from an operating loss of $41.4 million ($4.5 million for Wire and $36.9 million
for Tubing) in 2003 to a loss of $9.7 million ($14.1 million operating loss for
Wire and $4.4 million operating income for Tubing) in 2004. The 2004 period
includes a $9.0 million asset impairment charge recorded in the second quarter
of 2004 relating to the wire and cable business. The 2003 period included a
$38.5 million non-cash charge for Specialty Tubing goodwill impairment. The 2003
period also includes costs related to the closure of certain wire facilities and
$1.5 million ($0.3 million for Wire and $1.2 million for Tubing) of severance
related expenses allocated to this segment from the reduction in salaried staff
at H&H. 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
21
facilities. These improvements are directly related to the sales improvements
discussed above.
ENGINEERED MATERIALS
Sales for the Engineered Materials Segment increased $34.7 million
from $92.2 in 2003 to $127.0 million in 2004 primarily due to due to a stronger
commercial construction market, market share gains, and increased sales prices.
Operating income increased $7.8 million from $7.5 million in 2003 to
$15.3 million in 2004. This increase in operating income is primarily due to the
increase in sales noted above, partially offset by increased steel costs.
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 $15.6 million in 2003
to $2.7 million in 2004. This decrease is primarily related to decreased pension
expense of $8.5 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 $2.5 million in 2004.
Accordingly, a pension credit of $1.9 million was recognized through September
30, 2004.
GOODWILL IMPAIRMENT
See discussion of goodwill impairment in the comparison of third
quarter 2004 to third quarter of 2003 section of Management's Discussion and
Analysis of Financial Position and Results of Operations.
FINANCIAL POSITION
Net cash used by operating activities for the nine months ended
September 30, 2004 totaled $40.4 million. Income from operations adjusted for
non-cash income and expense items provided $8.7 million of cash. Working capital
accounts used $39.8 million of funds, as follows: accounts receivable used $20.9
million, trade payables provided $12.0 million. Inventories totaled $71.7
million at September 30, 2004, and used $29.9 million. Net other current items
used $1.0 million.
At September 30, 2004 accounts receivable totaled $62.9 million
compared to $42.1 million at December 31, 2003, an increase of $20.9 million.
The increase in accounts receivable reflects the strong sales levels for the
three-month period ended September 30, 2004 when compared to the fourth quarter
of 2003. Accounts receivable at year-end are normally at their lowest level of
the year as a result of the normal slow down in manufacturing activity in the
later part of the fourth quarter. This is the result of scheduled plant shut
downs and holidays in November and December and the slow down in construction
markets in December.
At September 30, 2004 inventory totaled $71.7 million compared to
$41.8 million at December 31, 2003, an increase of $29.9 million. The increase
in inventory is primarily related to the termination of the Company's precious
metal consignment facility on March 30, 2004 coincident with H&H entering into
new financing agreements to replace existing Senior Secured Credit facilities,
including the revolving credit 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 purchased precious
metals amounted to $19.2 million at September 30, 2004 and are included in
inventory. The remaining increase of $10.7 million is primarily related to
higher steel costs.
A pension contribution of $5.8 million was made in 2004.The Company
estimates that it will make a pension contribution of approximately 1.2 million
in 2005.
Other non-working capital items included in operating activities
used $3.5 million. 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. In the third quarter of
2004 $1.1 million of these funds were returned to WHX.
22
In the first nine months of 2004, $7.0 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 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 second quarter of 2004.
In the third quarter of 2003 the Company received $1.3 million of an
escrow deposit related to the sale of a former subsidiary.
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.
Borrowings outstanding under Handy & Harman's credit facilities at
September 30, 2004 amounted to $134.1 million. In addition there was
approximately $6.1 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
satisfies its working capital requirements through cash on hand, investments,
borrowing availability under the H&H Facilities and funds generated from
operations. At September 30, 2004, WHX Corporation, the parent company, had
$20.6 million in cash that was unrestricted and available to the parent company.
Such funds are adequate to satisfy WHX Corporation's obligations prior to the
April 15, 2005 date of maturity of its 10-1/2% Senior Notes. At September 30,
2004 H&H had $11.5 million of funds available under its new revolving credit
facility (see below). 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
23
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. As of September 30,2004
$1.1 million of such funds were returned to WHX. On October 29, 2004, in
connection with the assignment of the Term B Note, approximately $3.9 million,
the remaining outstanding amount, was returned to WHX (see below).
The new revolving credit facility provided for up to $70.0 million
of borrowings dependent on the levels of and collateralized by eligible accounts
receivable and inventory. The revolving credit facility was amended on August
31, 2004 to reduce the maximum amount of the loan from $70 million to $62.9
million. 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 $42.7 million at September 30, 2004. The Congress
facilities mature on March 31, 2007. On September 30, 2004 H&H had approximately
$11.5million 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 September 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 September 30, 2004.
On October 29, 2004, Handy & Harman completed the assignment of its
$71.0 Tranche B term loan from Ableco to Canpartners Investments IV, LLC
("Canpartners"), an entity affiliated with Canyon Capital Advisors LLC, as agent
and lender. Substantially all of the terms and conditions of the term loan
continue without amendment, with the principal exception that the interest rate
for the loan has been reduced by 4.0% per annum, effective October 29, 2004. In
addition, of the $5 million cash collateral which WHX had deposited with Ableco
at the time of the original loan as collateral for the Handy & Harman
obligation, approximately $3.9 million, the remaining outstanding amount, has
been returned to WHX (approximately $1.1 million had been returned during the
third quarter of 2004).
At March 31, 2004, Indiana Tube Danmark, 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 (Nordea) and include a revolving credit facility and term loans. The
term loans consist of a 20-year mortgage (collateralized by Indiana Tube
Danmark's building) and a 10 year serial loan (collateralized by Machinery and
Equipment of Indiana Tube Danmark). Interest is variable, based on LIBOR, and is
fixed yearly on the mortgage and quarterly on the serial loan. At September 30,
2004 there was approximately $6.1 million outstanding under the term loans.
Principal payments on the term loans are approximately $480,000 per year. The
revolving credit facility is collateralized by accounts receivable and inventory
of Indiana Tube Danmark. Interest is variable and based on Nordea's daily rate.
At September 30, 2004 there were no borrowings under the revolving credit
facility.
As described above the H&H loan agreements contain provisions
restricting payments to WHX. At September 30, 2004 the net assets of H&H
amounted to $109.5 million, all of which was restricted as to the payment of
dividends to WHX.
As of September 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 $232,983 $ 43,677 $ 96,877 $ 4,059 $ 83,815 $ 4,555
Operating Leases $ 4,320 $ 421 $ 1,660 $ 1,326 $ 913 $ 7
24
At September 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 September 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 September 30, 2004,
preferred dividends in arrears totaled $77.7 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 adoption of FSP 106-2 on July 1, 2004 did not have a material
impact on the Company's financial statements.
*******
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.
25
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 September 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 September 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
significant changes in internal controls over financial reporting during the
three months ended September 30, 2004 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
26
PART II OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At September 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 September 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 September 30, 2004 dividends in arrears amounted to $77.7
million.
ITEM 5. OTHER MATTERS
In October 2004, the Company was notified by the New York Stock
Exchange ("NYSE") that its share price had fallen below the NYSE's continued
listing criteria relating to minimum share price. The NYSE requires that a
company's common stock trade at a minimum average share price of $1.00 during a
30-day trading period. Following such notification by the NYSE, the Company has
up to six months by which time its share price and average share price over a
consecutive 30 trading-day period may not be less than $1.00, subject to certain
NYSE conditions. In the event these requirements are not met by the end of such
period, the Company would be subject to NYSE trading suspension and delisting
and, in such event, management believes that an alternative trading venue would
be available. Management is currently considering various alternatives to cure
the price condition within the designated time frame.
The Company may not be able to resolve the problem in a timely
fashion or at all, which could cause its common stock to be delisted. Even if
the Company were able to find an alternative trading market for its shares,
delisting from the NYSE could adversely effect the liquidity of the Company's
common stock, negatively impact the Company's ability to raise future capital
through a sale of the Company's common stock and make it more difficult for
investors to obtain quotations or trade the Company's common stock.
ITEM 6. EXHIBITS
* Exhibit 4.1 Consent and Amendment No. 1 to Loan and Security
Agreement dated as of August 31, 2004 by and among Handy & Harman,
certain of its affiliates and Congress Financial Corporation.
* Exhibit 4.2 Amendment No. 2 to Loan and Security Agreement dated as
of October 29, 2004 by and among Handy & Harman, certain of its
affiliates and Congress Financial Corporation.
* Exhibit 4.3 Loan and Security Agreement dated as of October 29, 2004
by and among Handy & Harman, certain of its affiliates and
Canpartners Investments IV, LLC.
* 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 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.
* Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHX CORPORATION
/s/ Robert K. Hynes
-------------------
Robert K. Hynes
Chief Financial Officer
(Principal Accounting Officer)
November 12, 2004
28