Horsehead Holding Corp - FORM 10-Q - November 9, 2015

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-33658
 
 
Horsehead Holding Corp.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
20-0447377
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
4955 Steubenville Pike, Suite 405
Pittsburgh, Pennsylvania 15205
 
(724) 774-1020
(Address of Principal Executive Offices, including Zip Code)
 
(Registrant’s Telephone Number, Including Area Code)
 
 
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated Filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The number of shares outstanding of the issuer’s common stock as of November 6, 2015 was 57,938,598.
 


TABLE OF CONTENTS
 
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014
 
 
 
 
Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2015 and 2014
 
 
 
 
Consolidated Statements of Comprehensive Loss (Unaudited) for the three and nine months ended September 30, 2015 and 2014
 
 
 
 
Consolidated Statement of Stockholders' Equity (Unaudited) for the nine months ended September 30, 2015
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2015 and 2014
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Item 1.
Item 1A. 
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 

i

CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements within the meaning of the federal securities laws. These statements relate to analyses and other information, which are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies.
These forward looking statements are identified by the use of terms and phrases such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”, and similar terms and phrases, including references to assumptions. However, these words are not the exclusive means of identifying such statements. These statements are contained in many sections of this report (including “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”). Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that we will achieve those plans, intentions or expectations. We believe that the following factors, among others (including those described in “Part II, Item 1A. Risk Factors”), could affect our future performance and the liquidity and value of our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements made by us or on our behalf: our ability to resolve the operational issues that have delayed the ramp-up of production at our Mooresboro, North Carolina facility; the availability of funds to resolve the operational issues we have experienced at our Mooresboro, North Carolina facility, such as the remediation of equipment failures and the replacement or redesign of portions of the facility; our ability to realize the projected benefits from our Mooresboro, North Carolina facility; the impact on our liquidity of recent declines in the prices of zinc metal and nickel; fluctuations in the availability of zinc and nickel and in levels of customer demand; the effectiveness of our hedging strategies, including those relating to the prices of energy, raw materials and zinc products, and our ability to continue implementing these strategies in the future; our substantial level of indebtedness and our ability to service and refinance our debt, substantially all of which matures in 2017; current and future credit and financial market conditions; the effect of competing technologies, materials or imports on demand for our products and services; the effect of competition by other manufacturers of zinc and nickel products; material disruptions at any of our manufacturing facilities, including for equipment, power failures or industrial accidents; work stoppages and labor disputes; fluctuations in the costs or availability of our energy supplies; decreases in order volume from major customers; increasing costs of compliance with environmental, health and safety laws and responding to potential liabilities and changes under these laws; a failure to implement our business strategy; our ability to attract and retain key personnel and skilled operators; our ability to protect our intellectual property and know-how; our dependence on third parties for transportation services; and our ability to successfully manage the integration of businesses that we acquire.
There may be other factors that may cause our actual results to differ materially from the forward-looking statements. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them does, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which was filed with the SEC on March 2, 2015, for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.
All forward-looking statements are qualified in their entirety by this cautionary statement, and we undertake no obligation to revise or update this Quarterly Report on Form 10-Q to reflect events or circumstances after the date hereof.

ii

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Horsehead Holding Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30, 2015 (Unaudited) and December 31, 2014
(Amounts in thousands, except per share amounts)
 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Current assets
 
 
 
       Cash and cash equivalents
$
34,934

 
$
30,714

Accounts receivable, net of allowance of $493 and $371, respectively
63,753

 
60,242

Inventories, net
53,712

 
55,008

Prepaid expenses and other current assets
10,919

 
3,755

Deferred income taxes
5,843

 
5,251

Total current assets
169,161

 
154,970

Property, plant and equipment, net
786,024

 
799,093

Other assets
 
 
 
Intangible assets, net
9,626

 
10,192

Restricted cash
8,930

 
—

Deferred income taxes
21,060

 
—

Deferred finance costs and other
8,051

 
9,262

Total other assets
47,667

 
19,454

Total assets
$
1,002,852

 
$
973,517

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Current maturities of long-term debt
$
11,102

 
$
3,044

Accounts payable
65,480

 
67,734

Accrued expenses
38,707

 
35,645

Total current liabilities
115,289

 
106,423

Long-term debt, less current maturities
412,313

 
406,016

Other long-term liabilities
17,076

 
18,291

Deferred income taxes
—

 
8,602

Commitments and contingencies


 


Stockholders’ equity
 
 
 
Common stock, par value $0.01 per share; 100,000 shares authorized; 56,666 and 50,719 shares issued and outstanding in 2015 and 2014, respectively
567

 
507

Preferred stock, par value $0.01 per share; 10,000 shares authorized; no shares issued or outstanding
—

 
—

Additional paid-in capital
387,351

 
313,815

Retained earnings
65,888

 
115,377

Accumulated other comprehensive income
529

 
534

Total stockholders’ equity before noncontrolling interest
454,335

 
430,233

Noncontrolling interest
3,839

 
3,952

Total stockholders’ equity
458,174

 
434,185

Total liabilities and stockholders’ equity
$
1,002,852

 
$
973,517

The accompanying notes to financial statements are an integral part of these statements.

1

Horsehead Holding Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2015 and 2014
(Unaudited)
(Amounts in thousands except per share amounts)
 
        
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Net sales of zinc material and other goods
$
85,395

 
$
85,474

 
$
267,302

 
$
275,794

Net sales of nickel-based material and other services
12,472

 
14,571

 
37,003

 
40,740

EAF dust service fees
9,127

 
10,933

 
27,631

 
30,773

Net sales
106,994

 
110,978

 
331,936

 
347,307

Cost of sales of zinc material and other goods
105,737

 
87,013

 
288,931

 
269,861

Cost of sales of nickel-based material and other services
7,158

 
7,807

 
23,400

 
24,848

Cost of EAF dust services
7,561

 
9,386

 
22,408

 
25,367

Restructuring expenses
—

 
—

 
—

 
205

Cost of sales (excluding depreciation and amortization)
120,456

 
104,206

 
334,739

 
320,281

Depreciation and amortization
14,188

 
10,528

 
41,178

 
23,496

Selling, general and administrative expenses
5,912

 
5,665

 
19,486

 
17,790

Total costs and expenses
140,556

 
120,399

 
395,403

 
361,567

Loss from operations
(33,562
)
 
(9,421
)
 
(63,467
)
 
(14,260
)
Other income (expense)
 
 
 
 
 
 
 
Interest expense
(10,017
)
 
(8,968
)
 
(28,245
)
 
(12,502
)
Interest and other income
488

 
4,144

 
13,073

 
6,911

Total other income (expense)
(9,529
)
 
(4,824
)
 
(15,172
)
 
(5,591
)
Loss before income taxes
(43,091
)
 
(14,245
)
 
(78,639
)
 
(19,851
)
Income tax benefit
(15,715
)
 
(7,235
)
 
(29,150
)
 
(8,450
)
NET LOSS
$
(27,376
)
 
$
(7,010
)
 
$
(49,489
)
 
$
(11,401
)
Loss per common share:
 
 
 
 
 
 
 
Basic
$
(0.48
)
 
$
(0.14
)
 
$
(0.88
)
 
$
(0.23
)
Diluted
$
(0.48
)
 
$
(0.14
)
 
$
(0.88
)
 
$
(0.23
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
56,664

 
50,715

 
56,062

 
50,670

Diluted
56,664

 
50,715

 
56,062

 
50,670

The accompanying notes to financial statements are an integral part of these statements.


2

Horsehead Holding Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the three and nine months ended September 30, 2015 and 2014
(Unaudited)
(Amounts in thousands except per share amounts)
 
        
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(27,376
)
 
$
(7,010
)
 
$
(49,489
)
 
$
(11,401
)
Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
Net pension liability adjustment
(2
)
 
(3
)
 
(5
)
 
(12
)
Comprehensive loss
$
(27,378
)
 
$
(7,013
)
 
$
(49,494
)
 
$
(11,413
)
The accompanying notes to financial statements are an integral part of these statements.


3

Horsehead Holding Corp. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the nine months ended September 30, 2015
(Unaudited)
(Amounts in thousands)
 
 
 
 
 
 
 
 
 
 
Accumulated
Other
Comprehensive
Income
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
 
Noncontrolling
interest
 
Total
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2014
50,719

 
$
507

 
$
313,815

 
$
115,377

 
$
534

 
$
3,952

 
$
434,185

Restricted stock vesting
194

 
2

 
(2
)
 
—

 
—

 
—

 
—

Stock compensation expense
—

 
—

 
4,105

 
—

 
—

 
—

 
4,105

Stock option exercise
3

 
—

 
33

 
—

 
—

 
—

 
33

Net tax benefit of equity award vesting
—

 
—

 
277

 
—

 
—

 
—

 
277

Distribution to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(113
)
 
(113
)
Net proceeds from equity offering
5,750

 
58

 
69,564

 
—

 
—

 
—

 
69,622

Restricted stock withheld for taxes
—

 
—

 
(441
)
 
—

 
—

 
—

 
(441
)
Comprehensive loss, net of tax
—

 
—

 
—

 
(49,489
)
 
(5
)
 
—

 
(49,494
)
Balance at September 30, 2015
56,666

 
$
567

 
$
387,351

 
$
65,888

 
$
529

 
$
3,839

 
$
458,174

The accompanying notes to financial statements are an integral part of these statements


4

Horsehead Holding Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2015 and 2014
(Unaudited)
(Amounts in thousands)
 
2015
 
2014
Cash Flows from Operating Activities:
 
 
 
Net loss
$
(49,489
)
 
$
(11,401
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
41,178

 
23,496

Deferred income tax benefit
(30,254
)
 
(1,358
)
Accretion on debt
2,866

 
2,851

Accretion on ESOI liabilities
313

 
322

Amortization of deferred finance costs
2,777

 
1,963

(Gains) losses on writedown or disposal of assets
(11,866
)
 
1,037

(Gains) on derivative financial instruments
(6,805
)
 
(1,692
)
Lower of cost or market adjustment to inventories
3,627

 
1,590

Non-cash compensation expense
4,105

 
3,584

Capitalization of interest
(2,242
)
 
(14,145
)
Changes in operating assets and liabilities:
 
 
 
(Increase) in accounts receivable, net
(3,511
)
 
(1,032
)
(Increase) decrease in inventories, net
(2,331
)
 
21,341

Decrease (increase) in prepaid expenses and other current assets
1,080

 
(7,427
)
Decrease (increase) in deferred finance costs and other
60

 
(693
)
(Decrease) in accounts payable
(2,254
)
 
(28,910
)
Increase in accrued expenses
5,985

 
2,332

(Decrease) increase in other long-term liabilities
(1,528
)
 
454

Net cash used in operating activities
(48,289
)
 
(7,688
)
Cash Flows from Investing Activities:
 
 
 
Purchase of property, plant and equipment
(26,784
)
 
(106,488
)
Increase in restricted cash
(8,930
)
 
—

Proceeds related to the sale of land
9,000

 
—

Net cash used in investing activities
(26,714
)
 
(106,488
)
Cash Flows from Financing Activities:
 
 
 
Net proceeds from the issuance of stock
69,622

 
—

Proceeds from the issuance of debt
—

 
51,300

Distributions to noncontrolling interest equity holders
(113
)
 
(113
)
Borrowings on the Credit Facilities
65,951

 
30,224

Repayments on the Credit Facilities
(52,730
)
 
(29,724
)
Debt issuance costs
(1,644
)
 
(1,775
)
Borrowings on the Credit Agreement
496

 
1,172

Repayments on the Credit Agreement
(2,228
)
 
(2,126
)
Proceeds from the exercise of stock options
33

 
941

Tax effect of share based compensation award exercise and vesting
277

 
800

Restricted stock withheld for taxes
(441
)
 
(683
)
Net cash provided by financing activities
79,223

 
50,016

Net increase (decrease) in cash and cash equivalents
4,220

 
(64,160
)
Cash and cash equivalents at beginning of period
30,714

 
136,327

Cash and cash equivalents at end of period
$
34,934

 
$
72,167


The accompanying notes to financial statements are an integral part of these statements.

5
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)


NOTE A—BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Horsehead Holding Corp. and its subsidiaries as of September 30, 2015 and for the three and nine months ended September 30, 2015 and 2014 have been prepared pursuant to the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2015. The accompanying financial statements include the accounts of Horsehead Holding Corp. and all of its subsidiaries (collectively referred to as the “Company”, “we”, “us” or “our” or similar terms). All intercompany accounts and transactions have been eliminated. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") 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. The more significant items requiring the use of management estimates and assumptions relate to inventory reserves, bad debt reserves, environmental and asset retirement obligations, workers’ compensation liabilities, reserves for contingencies and litigation and fair value of financial instruments and business acquisitions. Management bases its estimates on the Company’s historical experience and its expectations of the future and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.

Recent Accounting Pronouncements

Adopted

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)-Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU 2014-08"). Under the new guidance, discontinued operations reporting will be limited to disposal transactions that represent strategic shifts having a major effect on operations and financial results. The amended guidance also enhances disclosures and requires assets and liabilities of a discontinued operation to be classified as such for all periods presented in the financial statements. ASU 2014-08 became effective for public companies for annual periods beginning on or after December 15, 2014 and interim periods within those years. Due to the change in requirements for reporting discontinued operations described above, presentation and disclosures of future disposal transactions after adoption may be different than under current standards. These changes also require expanded disclosures for all disposals of components of an entity, whether or not the threshold for reporting as a discontinued operation is met, related to profit or loss information and/or asset and liability information of the component. The adoption of this guidance had no impact on the Consolidated Financial Statements. This guidance will need to be considered in the event the Company initiates a disposal of a component.

Issued

In August 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Cost Associated with Line-of-Credit Arrangements (Topic 835) ("ASU 2015-15") as the guidance in ASU No. 2015-03, Interest - Imputation of Interest (Topic 835) ("ASU 2015-03") issued in April 2015 did not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. ASU 2015-15 allows entities to defer and present debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company currently presents debt issuance costs related to line-of-credit arrangements as an asset and therefore adoption of this guidance has no impact on its financial position nor results of operations.

In April 2015, the FASB issued ASU 2015-03, which changes the presentation of debt issuance costs in financial statements to present such costs as a direct deduction from the related debt liability rather than as an asset. ASU 2015-03 will become effective for public companies during interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance on its financial position and results of operations.


6
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)


In February 2015, The FASB issued ASU No. 2015-02, Consolidation (Topic 810) ("ASU 2015-02") which updates the considerations on whether an entity should consolidate certain legal entities. The update changes the way that entities evaluate limited partnerships and fees paid to service providers in the consolidation determination. ASU 2015-02 will become effective for public companies during interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. We do not expect the adoption of ASU 2015-02 to have a material impact on our Consolidated Financial Statements.

In January 2015, The FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual Items (Topic 835) ("ASU 2015-01"), which eliminates the concept of extraordinary items. The update simplifies income statement presentation by altogether removing the concept of extraordinary items from consideration. ASU 2015-01 will become effective for all entities during interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We do not expect the adoption of ASU 2015-01 to have a material impact on our Consolidated Financial Statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15), which requires entities to evaluate their ability to continue as a going concern within one year after the date that the financial statements are issued. Disclosure is required if there is substantial doubt about an entity’s ability to continue as a going concern. The guidance in ASU No. 2014-15 is effective for annual and interim periods ending after December 15, 2016 with early application permitted. The Company does not expect that the adoption of this ASU will have a material impact on our Consolidated Financial Statements.

In May 2014, the FASB and the International Accounting Standards Board (“IASB”) jointly issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU 2014-09 was to be effective for public entities for annual and interim periods beginning after December 15, 2016; however, in August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) and delayed the effective date of the new revenue standard by one year. Reporting entities may choose to adopt the standard as of the original effective date. The Company is currently evaluating the impact of adopting this guidance on its financial position and results of operations.

There have been no other recently issued accounting updates that had or will have a material impact on the Company’s Interim Financial Statements.
NOTE B—ACQUISITION OF BUSINESS
On November 16, 2012, the Company purchased the single membership interest in Mitsui Zinc Powder LLC (“MZP”), a manufacturer of zinc powders for the alkaline battery business, co-located on the Company’s former Monaca facility site, from Oak-Mitsui, Inc. MZP was renamed Horsehead Zinc Powders, LLC. ("HZP"). The Company was MZP's long-term supplier of Special Special High Grade zinc metal used in its production process. The estimated purchase price was $1,101, which was comprised of $500 in cash at closing, a working capital adjustment and $1,270 in contingent consideration. The contingent consideration consisted of a per ton fee based on tons shipped for a period of time up to a maximum of $1,500. The acquisition resulted in a gain on bargain purchase.
The first two payments related to the contingent consideration were made in 2013. Based upon a decrease in expected production, however, the contingent consideration was reduced by $257 in 2013. During the first quarter of 2014, HZP production was idled due to a lack of raw material supply. Shipments, however, continued through the end of April 2014. As a result, the contingent consideration was reduced by an additional $88 during the first quarter of 2014. This adjustment was recorded in Interest and other income in the Consolidated Statements of Operations. The final payment under the contingent consideration was made in October 2014.
On November 7, 2014, the Company announced that Shell Chemical LP ("Shell") had exercised its option under the Amended and Restated Option and Purchase Agreement between Shell and Horsehead Corporation ("Horsehead") to purchase the site of Horsehead’s facility located in Monaca, Pennsylvania, which also included the HZP facility site. The HZP production facility was subsequently demolished under the agreement with Shell. Sale of the site where the Monaca, Pennsylvania facility and HZP facility were located occurred in June 2015. HZP was dissolved on June 2, 2015.

7
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)



NOTE C - RESTRUCTURING EXPENSES

On October 31, 2013, the Company notified various required parties, as required by the Worker Adjustment and Retraining Notification Act of 1988, 29 U.S.C. § 2101 et seq., that a majority of its manufacturing operations at the plant located in Monaca, Pennsylvania would be permanently closed and shut down within several months from the notification date. The Company ceased the zinc oxide and high purity zinc metal refinery operations at the Monaca facility on December 23, 2013 and ceased production at the zinc smelter at the end of April 2014. In connection with these actions, the Company permanently terminated the employment of five hundred ten salaried and hourly positions.

Costs and the related liabilities due to involuntary termination costs associated with one-time benefit arrangements provided as part of an exit or disposal activities were recognized by the Company when the formal plan for reorganization was approved at the appropriate level of management and communicated to the affected employees. The Company recorded a charge of $7,691 during the fourth quarter of 2013 and an additional charge of $288 during 2014 for severance and other employee-related costs associated with the closing of the Monaca, Pennsylvania facility.
Accrual at October 31, 2013
$
7,517

Adjustments to previously recorded restructuring charges
$
174

Cash payments
$
(9
)
Accrual at December 31, 2013
$
7,682

Adjustments to previously recorded restructuring charges
$
288

Cash payments
$
(7,509
)
Accrual at December 31, 2014
$
461

Cash payments
$
(252
)
Accrual at March 31, 2015
$
209

Cash payments
$
(168
)
Remaining accrual at June 30, 2015
$
41

Cash payments
$
(41
)
Remaining accrual at September 30, 2015
$
—


Costs associated with exit or disposal activities (e.g., costs to close facilities) are recognized and measured at their fair value in the period in which the liability is incurred. The Company incurred approximately $2.6 million during 2014 related to costs associated with exit and disposal activities and incurred an additional $0.6 million during the first nine months of 2015 and does not expect to incur any additional costs during the remainder of 2015. These costs are included in Cost of sales (excluding depreciation and amortization) in the Consolidated Statement of Operations.
NOTE D—CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following at September 30, 2015 and December 31, 2014.
 
 
September 30,
2015
 
December 31,
2014
Cash in bank
$
34,716

 
$
30,497

Money market demand account
218

 
217

 
$
34,934

 
$
30,714

The Company’s cash balance was concentrated in three U.S. banks and one Canadian bank at both September 30, 2015 and December 31, 2014. The Company carries deposits in excess of federally insured amounts. At September 30, 2015, the Company had $7,246 in cash held at foreign institutions. The Company does not believe that it is exposed to significant concentration of credit risk.
The money market demand account carried an interest rate of 0.15% at both September 30, 2015 and December 31, 2014. The balances approximate fair value.

8
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

NOTE E—INVENTORIES
Inventories consisted of the following at September 30, 2015 and December 31, 2014.
 
September 30,
2015
 
December 31,
2014
Raw materials
$
15,626

 
$
17,493

Work-in-process
3,325

 
2,847

Finished goods
20,674

 
21,885

Supplies and spare parts
14,087

 
12,783

 
$
53,712

 
$
55,008

Inventories were net of reserves for slow moving inventory of $5,562 at both September 30, 2015 and December 31, 2014.
The Company did not record any lower of cost or market ("LCM") adjustments to its finished goods inventories at September 30, 2015 but recorded $445 in LCM adjustments at September 30, 2014 and recorded total LCM adjustments during the nine months ended September 30, 2015 and 2014 of $3,627 and $1,590, respectively. The Company recorded total LCM adjustments to its finished goods inventories of $3,561 during 2014. The LCM adjustments are included in "Cost of sales (excluding depreciation and amortization)" in the Consolidated Statement of Operations. The 2015 and 2014 LCM adjustments were the result of the low London Metal Exchange (“LME”) zinc price, increased production costs in 2014 at the Monaca facility as the plant operated at inefficient levels during the final weeks of operation until it was permanently closed in April 2014 and the incurrence of higher than normal production costs in 2014 and 2015 related to the new zinc facility in Mooresboro, North Carolina ("new zinc facility") which operated at inefficient levels during its continued ramp up.

NOTE F—PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following at September 30, 2015 and December 31, 2014.
 
September 30,
2015
 
December 31,
2014
Fair value hedge contracts
$
8,178

 
$
—

Other
2,741

 
3,755

 
$
10,919

 
$
3,755

See Note P – Accounting for Derivative Instruments and Hedging Activities for more information regarding Prepaid hedge contracts.

NOTE G—PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at September 30, 2015 and December 31, 2014.

September 30,
2015

December 31,
2014
Land and land improvements
$
49,627


$
50,117

Buildings and building improvements
98,694


96,904

Machinery and equipment
746,853


736,815

Construction in progress
45,092


33,556


940,266


917,392

Less accumulated depreciation
(154,242
)

(118,299
)

$
786,024


$
799,093

The Company capitalized $747 and $2,242 of interest expense during the three and nine months ended September 30, 2015, respectively, and capitalized $594 and $14,147 of interest expense during the three and nine months ended September 30, 2014, respectively. The interest expense capitalized related to the construction of the new zinc facility in Mooresboro, North Carolina,

9
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

which began operations in May 2014. Interest expense capitalized subsequent to May 2014 relates to the lead/silver recovery unit at the new zinc facility which has not yet begun operations. Through September 30, 2015, the Company has capitalized a total of $57,636 of interest expense related to the new zinc facility.

On November 7, 2014, the Company announced that Shell had exercised its option to purchase the Monaca, Pennsylvania site, under the Amended and Restated Option and Purchase Agreement. The operations at the former Monaca facility had been permanently shut down in April 2014 and subsequently demolished and the only remaining asset was land which had a net book value of approximately $1.2 million. Sale of the site was completed in June 2015 and the Company recognized a gain of approximately $12.2 million, which was recorded in Interest and other income in the Consolidated Statement of Operations.
NOTE H— DEFERRED FINANCE COSTS AND OTHER
Deferred finance costs and other at September 30, 2015 and December 31, 2014 consisted of the following:

September 30,
2015

December 31,
2014
Deferred finance costs
$
6,908


$
8,042

Other
1,143


1,220


$
8,051


$
9,262

See Note I – Long Term Debt for additional information regarding deferred finance costs. 
NOTE I—LONG –TERM DEBT
Long-term debt consisted of the following at September 30, 2015 and December 31, 2014:

September 30,
2015

December 31,
2014
Loan Payable, related to New Market Tax Credit program
$
255


$
255

3.80% Convertible Senior Notes due July 2017, net of debt discount
92,382


89,448

10.50% Senior Secured Notes due June 2017, net of debt premium
205,101


205,169

9.00% Senior Unsecured Notes due July 2017
40,000

 
40,000

ABL Facility, interest payable at variable rates
—

 
14,830

Macquarie Credit Facility, interest payable at variable rates
59,451

 
—

Zochem Credit Facility, interest payable at variable rates
8,000

 
19,400

INMETCO Credit Facility, interest payable at variable rates
—

 
20,000

Credit Agreement, interest payable at variable rates
18,226


19,958


423,415


409,060

Less portion currently payable
11,102


3,044


$
412,313


$
406,016


Convertible Senior Notes
On July 27, 2011, the Company issued $100,000 of 3.80% Convertible Senior Notes due 2017 (the “Convertible Notes”) in a private placement. The Company received proceeds of $100,000 and recognized $3,481 in issuance costs in connection with the offering. The Company used the proceeds from the offering for the initial stages of construction for the new zinc facility and for general corporate purposes, including working capital needs, investment in business initiatives, capital expenditures and acquisitions.
The Convertible Notes pay interest semi-annually in arrears on July 1 and January 1 of each year at a rate of 3.80% per annum and mature on July 1, 2017. The Convertible Notes are convertible into shares of the Company’s common stock, cash, or a combination of the Company’s common stock and cash, at the Company’s election, at an initial conversion rate of 0.0666667 shares of the Company’s common stock per $1 principal amount of the Convertible Notes (approximately 6,666.67 underlying shares), which is equivalent to an initial conversion price of approximately $15.00 per share of common stock, subject to adjustment

10
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

in certain circumstances, as defined in the indenture governing the Convertible Notes. The Company has stated that it intends to settle the par value in cash and the conversion spread in either cash, shares or a combination of both.
The Convertible Notes are senior unsecured obligations of the Company and rank senior in right of payment to its future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to its existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of its secured indebtedness, to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness and other liabilities (including trade payables) of its subsidiaries.
Holders of the Convertible Notes may convert their Convertible Notes at the applicable conversion rate at any time on or after April 1, 2017 until the close of business on the second business day immediately preceding the maturity date. The Convertible Notes may be converted prior to April 1, 2017 only under certain circumstances. If the Company undergoes a fundamental change, as defined in the indenture governing the Convertible Notes, holders may require the Company to repurchase for cash all or a portion of their notes at a price equal to 100% of the principal amount of the Convertible Notes to be repurchased plus any accrued and unpaid interest up to, but excluding the fundamental change repurchase date. The Company does not have the right to redeem the Convertible Notes prior to the stated maturity date of July 1, 2017 and no sinking fund is provided for the Convertible Notes.
In accordance with the guidance under Accounting Standards Codification ("ASC") 815-15 Embedded Derivatives and ASC 470-20 Debt with Conversion and other Options, the Company separately accounted for the liability and equity components of the Convertible Notes to reflect the Company’s nonconvertible borrowing rate when interest cost is recognized in subsequent periods. The fair value of the liability component of the Convertible Notes was calculated to be $78,174 and was determined by measuring the fair value of a similar liability that does not have an associated equity component. The nonconvertible rate was determined by the Company to be 8.5%. The carrying amount of the embedded conversion option (the debt discount) of $21,826 was determined by deducting the fair value of the liability component from the initial proceeds of the Convertible Notes and was recorded, net of deferred taxes of $8,805, as additional paid-in capital. The Company is accreting the long-term debt balance to par value over the term of the bonds using the interest method as required by ASC 835-30 Imputation of Interest.
The indenture governing the Convertible Notes contains customary reporting and other covenants. The Company was in compliance with all covenants at September 30, 2015.
 
Costs of $3,481 associated with the issuance were allocated to the liability and equity components in proportion to the allocation of the fair value of the Convertible Notes. As such, $2,721 was accounted for as debt issuance costs attributable to the liability component of the Convertible Notes and were capitalized as a component of other assets. These costs are being amortized to interest expense over the term of the Convertible Notes and are included as a component of interest expense. The Company recognized interest expense of $115 and $345 related to the amortization of debt issuance costs during both the three and nine months ended September 30, 2015 and 2014, respectively. The remaining issuance costs of $760 were accounted for as equity issuance costs and were recorded in additional-paid in capital.
During the three and nine months ended September 30, 2015, the Company recognized $1,948 and $5,784, respectively, in interest expense related to the Convertible Notes. During the three and nine months ended September 30, 2014, the Company recognized $1,868 and $5,546, respectively, in interest expense related to the Convertible Notes. Interest expense includes the contractual interest coupon of 3.80% and amortization of the discount on the liability component. This interest expense reflects an effective interest rate of 8.50%.
The carrying amount of the Convertible Notes was $92,382 with an unamortized discount of $7,618 at September 30, 2015. The carrying amount of the Convertible Notes was $89,448 with an unamortized discount of $10,552 at December 31, 2014. The carrying amount of the equity component was $4,206 and $6,052 at September 30, 2015 and December 31, 2014, respectively. The accumulated accretion related to the equity component was $8,815 and $6,969 at September 30, 2015 and December 31, 2014, respectively. The fair value of the Convertible Notes was estimated to be approximately $67,000 and $122,000 at September 30, 2015 and December 31, 2014, respectively, per pricing obtained from a pricing data service. The data service triangulates pricing based on market indications and their quotes do not represent actual trades only implied pricing based on the bid-ask in the market.
ABL Facility
On September 28, 2011, the Company’s subsidiary Horsehead entered into an ABL Facility (the "ABL Facility"), as borrower, with PNC Bank, as agent and lender, to support liquidity needs for the Company’s new zinc facility and to allow for the availability of previously restricted cash. Horsehead Holding Corp. also entered into the ABL Facility, as guarantor of Horsehead’s obligations.

11
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

The ABL Facility provided for a five-year senior secured revolving credit facility in an aggregate principal amount of up to $60,000. The aggregate amount of loans permitted to be made under the revolving credit facility could not exceed a borrowing base consisting of the lesser of: (a) $60,000, minus the aggregate undrawn amount of outstanding letters of credit, or (b) the sum of certain portions of eligible accounts receivable and eligible inventory of Horsehead, minus the aggregate undrawn amount of outstanding letters of credit and certain availability reserves. Up to an aggregate of $30,000 was available to Horsehead for the issuance of letters of credit, which reduced availability under the ABL Facility.
The ABL Facility was terminated on July 6, 2015 when a new $80,000 secured revolving credit facility became effective among Horsehead, HMP, The International Metals Reclamation Company, LLC (“INMETCO”) and Macquarie Bank Limited, as administrative agent and sole arranger (the "Macquarie Credit Facility"). The Macquarie Credit Facility replaces both the $20,000 INMETCO Facility (as defined below) and the $60,000 ABL Facility.
The Company incurred total issuance costs of $600 in connection with the ABL Facility. These costs were capitalized in the Company’s Consolidated Balance Sheet as a component of other assets. The issuance costs were being amortized to interest expense over the term of the ABL Facility. The remaining unamortized issuance costs of $201 related to the ABL Facility were written off to interest expense during the three months ended September 30, 2015. Interest expense of $201 and $37 related to the amortization of deferred finance costs was recorded during the three months ended September 30, 2015 and 2014, respectively and interest expense of $277 and $82 was recorded during the nine months ended September 30, 2015 and 2014, respectively.
Senior Secured Notes
On July 26, 2012, the Company completed a private placement of $175,000 in aggregate principal amount of 10.50% Senior Secured Notes due 2017 (the “Secured Notes”), at an issue price of 98.188% of par. The Company received proceeds of $171,829 and recognized approximately $7,732 in issuance costs in connection with the offering. The total net proceeds from the offering were $164,097. The Company used the proceeds from the Secured Notes to pay for the completion of the construction of the Company’s new zinc facility and the remainder for general corporate purposes, including working capital needs, investment in other business initiatives and other capital expenditures. The Company recorded an initial debt carrying value of $171,829 (net of the debt discount of $3,171) and is accreting the long-term debt balance to par value over the term of the Secured Notes using the interest method as required by ASC 835-30 Imputation of Interest. Interest expense includes the contractual interest coupon of 10.50% and amortization of the debt discount to reflect an effective interest rate of 11.00%.

On June 3, 2013, the Company completed the sale to certain purchasers of an additional $20,000 in aggregate principal amount of the Company's Secured Notes (the “2013 Additional Notes”) at an issue price of 106.5% of the principal amount of the 2013 Additional Notes plus accrued interest from June 1, 2013, in a private placement. The Company received net proceeds of $20,955 after deducting approximately $345 in issuance costs in connection with the offering. The Company recorded an initial debt carrying value of $21,300 (including the debt premium of $1,300) and is amortizing the long-term debt balance to par value over the remaining term of the Secured Notes using the interest method as required by ASC 835-30 Imputation of Interest. Interest expense includes the contractual interest coupon of 10.50% and amortization of the debt premium to reflect an effective interest rate of 8.6%.

On July 29, 2014, the Company completed the sale of an additional $10,000 aggregate principal amount of the Company’s Secured Notes (the “2014 Additional Notes”), at an issue price of 113.00% of par. The 2014 Additional Notes and the related guarantees were offered to investors in a private placement. The Company received net proceeds of $10,962 after deducting approximately $338 in issuance costs in connection with the offering.The Company recorded an initial debt carrying value of $11,300 (including the debt premium of $1,300) and is amortizing the long-term debt balance to par value over the remaining term of the Secured Notes using the interest method as required by ASC 835-30 Imputation of Interest. Interest expense includes the contractual interest coupon of 10.50% and amortization of the debt premium to reflect an effective interest rate of 5.5%.
The Secured Notes, 2013 Additional Notes and 2014 Additional Notes (collectively, the "Senior Secured Notes") pay interest at a rate of 10.50% per annum, payable in cash semi-annually, in arrears, on June 1 and December 1 of each year. The Senior Secured Notes mature on June 1, 2017. The Company recorded interest expense of $5,360 and $5,307 for the three months ended September 30, 2015 and 2014, respectively, and $16,076 and $15,697 during the nine months ended September 30, 2015 and 2014, respectively.

At September 30, 2015, there was an aggregate of $205,000 of Senior Secured Notes outstanding.

12
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

The Senior Secured Notes are fully and unconditionally guaranteed, on a senior secured basis, by the Company’s existing and future domestic restricted subsidiaries, other than certain excluded subsidiaries (the “Guarantors”). The Senior Secured Notes and the related guarantees are secured by a first-priority lien on all of the Company’s and the Guarantors’ existing and future property and assets, whether real, personal or mixed (other than certain excluded assets), subject to certain permitted liens; provided that the lien on the accounts receivable, inventory, certain deposit accounts, cash and certain other assets and, in each case, the proceeds thereof, of Horsehead and the guarantors under the Macquarie Credit Facility will be a second-priority lien. The Senior Secured Notes are the Company’s and the Guarantors’ senior secured obligations. The Senior Secured Notes and the guarantees rank equal in right of payment with any of the Company’s and the Guarantors’ senior indebtedness, including indebtedness under the Macquarie Credit Facility and, in the case of the Company, the Company’s Convertible Notes. The Senior Secured Notes and the guarantees rank senior in right of payment to any of the Company’s and the Guarantors’ future indebtedness that is expressly subordinated to the Senior Secured Notes or guarantees. The Senior Secured Notes and the guarantees are effectively senior to any of the Company’s or the Guarantors’ unsecured indebtedness, including the Convertible Notes, to the extent of the value of the collateral securing the Senior Secured Notes, and the Senior Secured Notes are effectively senior to indebtedness of the Company that is not guaranteed by the Guarantors, including the Company’s Convertible Notes, to the extent of the value of the guarantees. With respect to the collateral securing the Senior Secured Notes, the Senior Secured Notes and the guarantees are effectively junior to the Company’s and the Guarantors’ obligations under the Macquarie Credit Facility, to the extent of the value of the collateral securing the Macquarie Credit Facility on a first-lien basis, and effectively senior to the Company’s and the Guarantors’ obligations under the Macquarie Credit Facility, to the extent of the value of the collateral securing the Macquarie Credit Facility on a second-lien basis.
The Company may redeem some or all of the Senior Secured Notes prior to June 1, 2016, by paying a make-whole premium, plus accrued and unpaid interest, if any, to the date of redemption or, on or after June 1, 2016, at a redemption price equal to 105.25%, plus accrued and unpaid interest, if any, to the date of redemption.
The Indenture contains covenants that limit the Company’s ability and the ability of its restricted subsidiaries to, among other things: (i) incur additional indebtedness and guarantee indebtedness; (ii) declare or pay dividends, redeem capital stock or make other distributions to stockholders; (iii) make investments and acquire assets; (iv) sell or transfer certain assets; (v) enter into transactions with affiliates; (vi) create liens or use assets as security in other transactions; (vii) enter into sale and leaseback transactions; (viii) merge or consolidate, or sell, transfer, lease or dispose of substantially all of its assets; and (ix) make certain payments on indebtedness. The Indenture also provides for customary events of default. On October 24, 2012, the Company entered into the First Supplemental Indenture to the Senior Secured Notes to add HMP as an additional subsidiary guarantor under the Indenture. The Company was in compliance with all covenants at September 30, 2015.
The carrying amount of the Senior Secured Notes was $205,101 with a net unamortized premium of $101 at September 30, 2015. The carrying amount of the Senior Secured Notes was $205,169 with a net unamortized premium of $169 at December 31, 2014. The fair value of the Senior Secured Notes was estimated to be approximately $207,000 and $224,000 at September 30, 2015 and December 31, 2014, respectively, per pricing obtained from a pricing data service. The data service triangulates pricing based on market indications and their quotes do not represent actual trades only implied pricing based on the bid-ask in the market.
Costs of $8,415 associated with the issuance of the Senior Secured Notes were capitalized as a component of other assets. These costs are being amortized to interest expense over the term of the Senior Secured Notes. The Company recognized interest expense of $452 and $442 related to the amortization of debt issuance costs during the three months ended September 30, 2015 and 2014, respectively and $1,355 and $1,285 during the nine months ended September 30, 2015 and 2014, respectively.
Credit Agreement
On August 28, 2012, Horsehead and Horsehead Holding Corp. entered into a Credit Agreement (the “Credit Agreement”) with Banco Bilbao Vizcaya Argentaria, S.A., a Spanish bank. The Credit Agreement provides for the financing of up to €18,583 (approximately $25,805 USD) for purchases under the contracts between Horsehead and Tecnicas Reunidas, S.A., a Spanish corporation providing equipment and related products and services for the new zinc facility and additional financing of $968 for the premium for the insurance on such loan which was issued by Compania Espanola de Seguros de Credito a la Exportacion (“CESCE”). The Company closed on the facility on November 14, 2012.
The obligations of Horsehead under the Credit Agreement are secured by an unconditional guarantee of the Company, but are not secured by security interest or mortgages on any real or personal property of Horsehead, the Company or any of the Company’s other direct or indirect subsidiaries.

13
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

The Credit Agreement provides for drawings thereunder to be repaid semiannually over a period ending on August 2023, amortizing over that period, and bearing interest at a per annum rate equal to the London Interbank Offered Rate (“LIBOR”) plus 3.20%. Principal and interest payments are due quarterly. The Company will also semiannually pay a commitment fee of 0.50% calculated on the undrawn amount of the Credit Agreement. At September 30, 2015, the Company had outstanding borrowings of $18,226 under the Credit Agreement and the current portion of amounts due under the Credit was $3,102. Availability under the Credit Agreement was approximately $785 at September 30, 2015 and draws may be made until December 2015. The carrying amount of the debt approximated fair value at September 30, 2015.
The Credit Agreement contains customary events of default. In the event of a default, the Credit Agreement will be terminated and immediate repayment will be required for all amounts outstanding under the Credit Agreement including accrued interest. The Credit Agreement contains a maximum Debt to Equity ratio of 1.2:1. The Credit Agreement also contains customary restrictive negative covenants as well as customary reporting and other affirmative covenants. The Company was in compliance with all covenants at September 30, 2015.
The Company incurred issuance costs of $1,248 in connection with the Credit Agreement. These costs were capitalized in the Company’s Consolidated Balance Sheet as a component of other assets. The issuance costs are being amortized to interest expense over the term of the Credit Agreement. Interest expense of $35 and $106 related to the amortization of deferred finance costs was recorded during both the three and nine months ended September 30, 2015 and 2014, respectively.
Zochem Revolving Credit and Security Agreement
On April 29, 2014, Zochem entered into, as borrower, a new $20,000 revolving credit facility (the "2014 Zochem Facility") with PNC Bank, as agent and lender. The Company also entered into the 2014 Zochem Facility as a guarantor of Zochem's obligations.
 
The 2014 Zochem Facility provides for a twenty-nine month senior secured revolving credit facility in an aggregate principal amount of up to $20,000. The aggregate amount of loans permitted to be made to Zochem under the 2014 Zochem Facility can not exceed a borrowing base consisting of the lesser of: (a) $20,000, minus the aggregate undrawn amount of outstanding letters of credit, and (b) the sum of a certain portion of eligible accounts receivMacquariee and eligible inventory of Zochem, minus the aggregate undrawn amount of outstanding letters of credit and certain availability reserves. Up to an aggregate of $5,000 is available to Zochem for the issuance of letters of credit, which reduces availability under the 2014 Zochem Facility. Zochem’s obligations under the 2014 Zochem Facility are secured by a first priority lien (subject to certain permitted liens) on substantially all of the tangible and intangible assets of Zochem. At September 30, 2015, the Company had $8,000 in outstanding borrowings which are all classified as current due to the upcoming expiration of the facility in September 2016. There was $11,592 in undrawn availability at September 30, 2015. The carrying amount of the debt approximated fair value at September 30, 2015.
Borrowings by Zochem under the 2014 Zochem Facility bear interest at a rate per annum which, at the option of Zochem, can be either: (a) a domestic rate equal to the “alternate base rate,” as determined under the 2014 Zochem Facility, plus an applicable margin of 1.00% based on average undrawn availability, or (b) a CDOR, LIBOR or eurodollar rate as applicable, plus a margin of 2.50% based on average undrawn availability. Zochem pays a letter of credit fee to the lenders under the Zochem Facility of 2.50%, based on average undrawn availability, and a fronting fee to the issuing bank equal to 0.25% per annum on the average daily face amount of each outstanding letter of credit, as well as certain other related charges and expenses.
Zochem pays an unused line fee to the lenders of 0.75% per annum, based on average undrawn availability, times the amount by which the maximum revolving advance amount exceeds the average daily unpaid balance of revolver loans and undrawn amount of any outstanding letters of credit during any calendar quarter.
The 2014 Zochem Facility contains customary events of default. During an event of default, if the agent or lenders holding greater than 66 2/3% of the advances under the facility so elect, the interest rate applied to any outstanding obligations would be equal to the otherwise applicable rate (including the highest applicable margin) plus 2.0% and any letter of credit fees would be increased by 2.0%. Upon (a) the occurrence of an event of default related to the bankruptcy of Zochem or the Company or (b) at the option of lenders holding greater than 66 2/3% of the advances under the facility, the occurrence of any other event of default, all obligations under the 2014 Zochem Facility will become immediately due and payable. The 2014 Zochem Facility also contains a minimum fixed charge coverage ratio of 1.15:1.00 which Zochem must comply with at the time of any advance request. The 2014 Zochem Facility also contains customary restrictive negative covenants as well as customary reporting and other affirmative covenants. The Company was in compliance with all covenants at September 30, 2015.

14
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

The Company incurred total issuance costs of $201 in connection with the 2014 Zochem Facility. These costs were capitalized in the Company’s Consolidated Balance Sheet as a component of other assets. The issuance costs will be amortized to interest expense over the term of the facility. Interest expense of $17 and $15 related to the amortization of deferred finance costs was recorded during the three months ended September 30, 2015 and 2014, respectively and $50 and $38 was recorded during the nine months ended September 30, 2015 and 2014, respectively.
INMETCO Senior Secured Revolving Credit Agreement
On June 24, 2013, INMETCO, a wholly owned subsidiary of the Company, entered into a Senior Secured Revolving Credit Agreement (the “INMETCO Facility”), as borrower, with Wells Fargo Bank, N.A., as lender ("Wells Fargo"). The Company entered into a guaranty of INMETCO’s obligations under the INMETCO Facility. The INMETCO Facility was entered into to support working capital requirements and for general corporate purposes. On March 31, 2014, the Company entered into the First Amendment to the Credit Agreement which amended certain provisions of the Credit Agreement including the increase of the maximum advances allowed from $15,000 to $20,000.
The INMETCO Facility was terminated on July 6, 2015 when the new $80,000 secured revolving credit facility became effective among Horsehead, HMP and INMETCO and Macquarie Bank Limited, as administrative agent and sole arranger. The Macquarie Credit Facility replaces both the $20,000 INMETCO Facility and the $60,000 ABL Facility.
INMETCO incurred issuance costs of $151 in connection with the INMETCO Facility. These costs were capitalized in the Company’s Consolidated Balance Sheet as a component of other assets. The issuance costs were being amortized to interest expense over the term of the INMETCO Facility. The remaining unamortized issuance costs of $53 related to the INMETCO Facility were written off to interest expense during the three months ended September 30, 2015. Interest expense of $53 and $13 related to the amortization of deferred finance costs were recorded during the three months ended September 30, 2015 and 2014, respectively and $79 and $38 in interest expense were recorded during the nine months ended September 30, 2015 and 2014, respectively.
Senior Unsecured Notes

On July 29, 2014, the Company completed the sale of $40,000 aggregate principal amount of 9.00% Senior Notes due 2017 (the “Unsecured Notes”), at an issue price of 100.00% of par. The Unsecured Notes and the related guarantees were offered to investors in a private placement. The Company received net proceeds of $38,686 after deducting approximately $1,314 in issuance costs in connection with the offering.
The Unsecured Notes were issued pursuant to an indenture, dated as of July 29, 2014 (the “Unsecured Notes Indenture”), among the Company, the Guarantors and U.S. Bank National Association, as trustee. The Unsecured Notes pay interest at a rate of 9.00% per annum, payable in cash semi-annually, in arrears, on June 1 and December 1 of each year, beginning on December 1, 2014. The Unsecured Notes mature on June 1, 2017. The Company recorded interest expense of $900 and $2,700 for the three and nine months ended September 30, 2015, respectively. The Company recorded interest expense of $630 during both the three and nine months ended September 30, 2014, respectively.
The Unsecured Notes are fully and unconditionally guaranteed, on a senior unsecured basis (other than as described below), by the Company’s existing and future domestic restricted subsidiaries, other than certain excluded subsidiaries. The Unsecured Notes are the Company’s and the Guarantors’ senior unsecured obligations (other than as described below). The Unsecured Notes and the guarantees (i) rank equal in right of payment with the Company’s and the Guarantors’ senior indebtedness (other than as described below) (including indebtedness under the Company's Senior Secured Notes due 2017, the Convertible Notes due 2017, and the Macquarie Credit Facility, dated as of July 6, 2015); (ii) rank senior in right of payment with the Company’s and the Guarantors’ future indebtedness that is expressly subordinated to the Unsecured Notes and (iii) is effectively junior to the Company’s and the Guarantors’ obligations under the Senior Secured Notes and the Macquarie Credit Facility, to the extent of the value of the collateral securing such indebtedness.
The Company may redeem some or all of the Unsecured Notes, on or after June 1, 2016 at a redemption price equal to 104.50%, plus accrued and unpaid interest, if any, to the date of redemption. In addition, the Company may, at its option, redeem some or all of the Unsecured Notes prior to June 1, 2016, by paying a make-whole premium, plus accrued and unpaid interest, if any, to the date of redemption.
The indenture, governing the Unsecured Notes, contains covenants that limit the Company’s ability and the ability of its restricted subsidiaries to, among other things: (i) incur additional indebtedness and guarantee indebtedness; (ii) declare or pay dividends, redeem capital stock or make other distributions to stockholders; (iii) make investments and acquire assets; (iv) sell or

15
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

transfer certain assets; (v) enter into transactions with affiliates; (vi) create liens or use assets as security in other transactions; (vii) enter into sale and leaseback transactions; (viii) merge or consolidate, or sell, transfer, lease or dispose of substantially all of its assets; and (ix) make certain payments on indebtedness. The Unsecured Notes Indenture also provides for customary events of default. The Company was in compliance with all debt covenants as of September 30, 2015.

Costs of $1,314 associated with the issuance of the Unsecured Notes were capitalized as a component of other assets. These costs are being amortized to interest expense over the term of the Unsecured Notes. The Company recognized interest expense of $116 and $348 related to the amortization of debt issuance costs during the three and nine months ended September 30, 2015, respectively. The Company recognized interest expense of $71 during the three and nine months ended September 30, 2014.
The fair value of the Unsecured Notes was estimated to be approximately $38,000 at September 30, 2015 and $40,000 at December 31, 2014 per pricing obtained from a pricing data service. The data service triangulates pricing based on market indications and their quotes do not represent actual trades only implied pricing based on the bid-ask in the market.
Macquarie Revolving Credit Facility

On June 30, 2015, the Company's wholly owned direct and indirect subsidiaries, INMETCO, Horsehead Corporation and HMP, entered into the Macquarie Credit Facility with Macquarie Bank Limited, which became effective on July 6, 2015. The Macquarie Credit Facility matures on May 15, 2017. The new $80,000 facility replaces both the ABL Facility and the INMETCO Facility. The Macquarie Credit Facility is the same maximum principal amount, and is secured by the same collateral of such subsidiaries. However, the new credit facility accommodates a broader borrowing base than the two previous credit facilities. The Company had $59,451 in outstanding borrowings and $20,549 in undrawn availability at September 30, 2015. The carrying amount of the debt approximated fair value at September 30, 2015.
 
The aggregate amount of loans permitted to be made under the revolving credit facility may not exceed a borrowing base of $80,000. The available borrowing base consists of the sum of a portion of eligible cash on hand, accounts receivable, inventory and other eligible amounts as determined by the credit agreement governing the Macquarie Credit Facility. Borrowings under the Macquarie Credit Facility bear interest at a rate per annum, which is the sum of the designated LIBOR rate plus an applicable margin of 4.10%. The Company pays an unused line fee to the lenders of 1.5% per annum, based on average undrawn availability, times the amount by which the maximum revolving advance amount exceeds the average daily unpaid balance of revolver loans.

The Macquarie Credit Facility contains customary restrictive negative covenants as well as customary reporting and other affirmative covenants. Additionally, the Company must be in compliance at all times with certain financial covenants relating to tangible net worth, net working capital and adjusted EBITDA as defined in the credit agreement governing the Macquarie Credit Facility. The Company was in compliance with all covenants at September 30, 2015.

The Company's obligations under the Macquarie Credit Facility are secured by a first priority lien (subject to certain permitted liens) on substantially all of the personal property of INMETCO, Horsehead Corporation and HMP, including accounts receivable, inventory, deposit accounts, equipment and general intangibles.
The Company incurred total issuance costs of $1,635 in connection with the Macquarie Credit Facility. These costs were capitalized in the Company’s Consolidated Balance Sheet as a component of other assets and will be amortized to interest expense over the remaining term. Interest expense of $218 related to the amortization of deferred finance costs was recorded during the three and nine months ended September 30, 2015.
Other
At September 30, 2015, the Company had a total of $316 in letters of credit outstanding under the 2014 Zochem Facility and $7,562 in letters of credit that are cash collateralized and recorded in Restricted cash in the Company's Consolidated Balance Sheet at September 30, 2015. The letters of credit outstanding were entered into to collateralize self-insured claims for workers’ compensation and other general insurance claims. At December 31, 2014, the Company had a total of $7,926 in letters of credit outstanding under the former ABL Facility and Zochem Facility to collateralize self-insured claims for workers’ compensation and other general insurance claims. The Company also had three surety bonds outstanding in the amount of $11,213 to collateralize closure bonds for the three facilities located in Pennsylvania at both September 30, 2015 and December 31, 2014.

16
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

NOTE J—ACCRUED EXPENSES
Accrued expenses at September 30, 2015 and December 31, 2014 consisted of the following.

September 30,
2015

December 31,
2014
Employee related costs
$
6,188


$
5,717

EAF dust processing reserve
4,999


3,684

Workers’ compensation insurance claim liabilities
1,500


1,500

Unearned tolling revenue
1,192


2,434

Accrued interest
9,896


4,473

Unearned contractual services
—

 
3,976

Restructuring accrual
—

 
461

Other
14,932


13,400


$
38,707


$
35,645



NOTE K—OTHER LONG-TERM LIABILITIES
Other long-term liabilities at September 30, 2015 and December 31, 2014 consisted of the following.

September 30,
2015

December 31,
2014
Environmental obligations
$
567


$
620

Insurance claim liabilities
6,384


7,753

Asset retirement obligations
5,036


4,775

Deferred purchase price obligation
4,082


3,769

Other
1,007


1,374


$
17,076


$
18,291

 
NOTE L — EMPLOYEE BENEFIT PLANS
As part of the acquisition of Zochem, on November 1, 2011, the Company assumed the pension assets and the pension liabilities for both the hourly and salary pension plans which were in effect at the time of the acquisition. These plans are maintained and contributions are made in accordance with the Pension Benefits Act of Ontario, which prescribes the minimum contributions that the Company must make to the Plans.
Net periodic benefit costs related to the plans for the three months ended September 30, 2015 and 2014 were:

Three months ended September 30, 2015

Three months ended September 30, 2014
Components of net periodic benefit cost:



Service Cost
$
48


$
60

Interest Cost
53


56

Expected return on plan assets
(86
)

(79
)
Losses
(3
)

(6
)
Net periodic benefit cost
$
12


$
31


17
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

Net periodic benefit costs related to the plans for the nine months ended September 30, 2015 and 2014 were:
 
Nine months ended September 30, 2015
 
Nine months ended September 30, 2014
Components of net periodic benefit cost:

 

Service Cost
$
145

 
$
180

Interest Cost
159

 
168

Expected return on plan assets
(258
)
 
(237
)
Losses
(8
)
 
(18
)
Net periodic benefit cost
$
38

 
$
93


During the three months ended September 30, 2015 and 2014, the Company made contributions in the amount of $59 and $26, respectively, to its defined benefit pension plans and $134 and $127 in contributions during the nine months ended September 30, 2015 and 2014, respectively. The Company anticipates making $34 of additional contributions to fund its defined benefit pension plans during the remainder of 2015.
The Company’s hourly and salary pension plan assets of $5,341 at September 30, 2015 are held in one fund which seeks to provide investors with a steady flow of monthly income and capital growth primarily through investments in Canadian fixed income and large cap securities. The pension plan assets are considered to be in level 2 of the fair value hierarchy.
NOTE M—INCOME TAXES
The Company’s effective tax rates were 36.5% and 50.8% for the three months ended September 30, 2015 and 2014, respectively, and 37.1% and 42.6% for the nine months ended September 30, 2015 and 2014, respectively. Income tax expense (benefit) differs from the amount computed by applying the U.S. statutory federal income tax rate of 35% to income before income taxes, due to state income taxes, a lower income tax rate on Canadian income and the impact of permanent differences.

The effective tax rate for the nine months ended September 30, 2015 decreased when compared to the nine months ended September 30, 2014 due to higher than previously projected pretax losses during 2015 which increased the valuation allowance related to state net operating losses and also diluted the impact of lower foreign subsidiary statutory tax rates impact on the overall effective rate.

During the nine months ended September 30, 2015, pretax losses created future net operating loss deductions for both federal and state purposes resulting in a long term deferred tax asset of $21,060 at September 30, 2015. The long term deferred tax asset is recorded in the Company's Consolidated Balance Sheet.
 
The Company and its subsidiaries file income tax returns in the U.S., Canada and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The tax years that remain subject to examination are 2009 through 2014. U.S. income taxes and foreign withholding taxes are not provided on undistributed earnings of foreign subsidiaries because it is expected such earnings will be permanently reinvested in the operations of such subsidiaries. It is not practical to determine the amount of income tax liability that would result had such earnings been repatriated.
NOTE N—ACCUMULATED OTHER COMPREHENSIVE INCOME
Components of accumulated other comprehensive income are as follows

September 30, 2015

December 31, 2014
Cumulative translation adjustments
$
30


$
30

Net pension adjustment
499


504

Accumulated other comprehensive income
$
529


$
534


18
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

NOTE O—SHARE-BASED COMPENSATION

In 2006, the Company adopted the Horsehead Holding Corp. 2006 Long-Term Equity Incentive Plan (the “2006 Plan”), which was amended and restated on June 11, 2007, and provided for grants of stock options, stock appreciation rights, restricted stock, restricted stock units, deferred stock units and other equity-based awards. Directors, officers and other employees of the Company, as well as others performing services for the Company, were eligible for grants under the 2006 Plan. The 2006 Plan is administered by the compensation committee of the Company’s Board of Directors (the “Compensation Committee”).

On January 16, 2007, the Board authorized the issuance of options to purchase 1,085 shares of the Company’s common stock to certain officers and employees of the Company under the terms of the 2006 Plan. The options have a term of ten years and vest ratably over a five-year period from date of grant. During the nine months ended September 30, 2015, 3 stock options were exercised and the Company received proceeds of $33 from the exercise of these options. At September 30, 2015, there were 580 options still outstanding; all were fully vested and exercisable, each with an exercise price of $13.00 per share and 1.29 years of remaining contractual life. The options outstanding under the 2006 Plan had no intrinsic value at September 30, 2015. All compensation expense had been recognized as of March 31, 2012.

The Company had a total of 422 restricted stock units at a weighted average grant date fair value of $10.99 per unit outstanding under the 2006 Plan at December 31, 2014. During the nine months ended September 30, 2015, 203 restricted stock units vested having an intrinsic value of $3,039. At September 30, 2015, there were 219 restricted stock units outstanding and the remaining contractual life ranged from 0.25 years to 2.00 years. The related compensation expense for the three months ended September 30, 2015 and 2014 was $250 and $337, respectively and the related compensation expense was $788 and $1,065 during the nine months ended September 30, 2015 and 2014, respectively. These expenses are included in Selling, general and administrative expenses in the Consolidated Statement of Operations. Unrecognized compensation expense as of September 30, 2015 was $705.
On May 17, 2012, the Company adopted the Horsehead Holding Corp. 2012 Incentive Compensation Plan (“2012 Plan”), after it was approved by the Company’s stockholders at the 2012 Annual Meeting of Stockholders. The 2012 Plan replaced the 2006 Plan, and no further awards, stock options or other grants will be issued under the 2006 Plan. The 2012 Plan provides for grants of stock options, stock appreciation rights, restricted stock, restricted stock units and other cash or equity-based awards. Directors, officers and other employees of the Company, as well as others performing consulting or advisory services for the Company, are eligible for grants under the 2012 Plan. The 2012 Plan is administered by the Compensation Committee. A total of 2,700 shares of the Company’s common stock were initially authorized for issuance under the 2012 Plan. The number of shares available for issuance under the 2012 Plan is subject to adjustment in the event of a reorganization, stock split, merger or similar change in the corporate structure or the number of outstanding shares of common stock. In the event of any of these occurrences, the Compensation Committee may make any adjustments considered appropriate to, among other things, the number and kind of shares, options or other property available for issuance under the 2012 Plan or covered by grants previously made under the 2012 Plan. The shares available for issuance under the 2012 Plan may be, in whole or in part, authorized and unissued or held as treasury shares. If awards under the 2012 Plan are for any reason canceled, or expire or terminate unexercised, the shares covered by such awards may again be available for the grant of awards under the 2012 Plan.
The Company had a total of 579 restricted stock units at a weighted average grant date fair value of $18.66 per unit outstanding under the 2012 Plan at December 31, 2014. During the nine months ended September 30, 2015, the Company granted 126 service based restricted stock units with an average grant date fair value of $15.74 per unit. The restricted stock units vest over a one or five-year service period. During the nine months ended September 30, 2015, 23 restricted stock units vested having an intrinsic value of $359.
During the nine months ended September 30, 2015, the Company granted 105 restricted stock units to management based on the future achievement of a predefined level of total shareholder return compared to a group of global metals companies. The fair value at the date of grant for these restricted stock units was $21.92 per unit, as estimated by a third party on the date of grant, using a valuation model based on commonly accepted economic theory which is used for all valuations of awards with market conditions. This economic theory is also used as the basis for the Black-Scholes and Monte Carlo valuations. The significant assumptions were a risk free rate of 1.07%, expected volatility of the Company and each comparator company, no expected dividends and a forfeiture rate of zero. A vesting percentage was then estimated based on the Company’s rank within the comparator group. Upon vesting and the achievement of the required shareholder return, these restricted stock units will be issued for par value.
The related compensation expense for all 2012 Plan restricted stock units for the three months ended September 30, 2015 and 2014 was $1,108 and $836, respectively. The related compensation expense was $3,317 and $2,517 during the nine months

19
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

ended September 30, 2015 and 2014, respectively. These expenses are included in Selling, general and administrative expenses in the Consolidated Statement of Operations. The remaining contractual life ranged from 0.25 years to 4.75 years. Unrecognized compensation expense as of September 30, 2015 was $6,895.

NOTE P—ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company’s business consists principally of the sale of zinc and nickel-based products. As a result, its results of operations are subject to risk of fluctuations in the market prices of these metals. While the Company’s finished products are generally priced based on a spread to the price of zinc or nickel, as applicable, on the LME, its revenues are impacted significantly by changes in the market prices of these metals. The Company pursues various hedging strategies as described below to reduce its exposure to movements in the prices of zinc and nickel.
The Company’s marketing strategy includes a metal hedging program that allows customers to secure a firm price for future deliveries under a sales contract. Hedges are entered into based on firm sales contracts to deliver specified quantities of product on a monthly basis for terms generally not exceeding one year. A portion of the Company’s raw material purchases related to such firm price contracts are at varying zinc prices that are based on the LME. In order to protect its cash flow related to firm price sales contracts, the Company enters into fixed-to-variable swap contracts to convert the LME-based fixed sales price back to variable. Thus, if raw material costs increase as a result of LME zinc price increases, the related sales value and related cash flows will also increase. As of September 30, 2015, the fixed portions of these contracts ranged from a monthly average of $0.75 to $1.01 per pound for zinc.
The Company has hedged approximately 16.7 tons of zinc with fixed-to-variable future swap contracts at September 30, 2015, all of which settle at various dates up to and including December 31, 2016.
The Company also enters into variable-to-fixed swap contracts as a financial hedge of a portion of its exposure to the movements in the LME prices of nickel. As of September 30, 2015, the Company had a small amount of nickel swap contracts in place. The fixed portions of these contracts were at a monthly average of $4.42 per pound for nickel and settle at various dates up to and including December 31, 2016.
The Company paid cash of $2,306 and $2,815 from the settlement of zinc and nickel swap contracts for the three and nine months ended September 30, 2015, respectively, and paid cash of $109 and $676 for the three and nine months ended September 30, 2014, respectively.

In 2014, the Company entered into fixed rate swaps, which were put in place to reduce volatility during the completion of construction and ramp-up of production at the new zinc facility. During 2014, the Company added fixed price swaps for the second quarter of 2014, at an average price of approximately $0.94 per pound for a total quantity covered of 26.5 tons for the quarter, zinc fixed price swaps for the months of August and September 2014, at an average price of slightly over $1.07 per pound for a total quantity covered of 6.0 tons per month and zinc fixed price swaps for the months of November and December 2014, at an average price of slightly over $1.05 per pound for a total quantity covered of 6.6 tons per month.

During the first quarter of 2015, the Company added zinc fixed price swaps for the month of February 2015 at an average price of approximately $0.97 per pound for a total quantity covered of approximately 3.3 tons and zinc fixed price swaps for the months of April and May 2015 at an average price of approximately $0.94 per pound for a total quantity covered of approximately 6.6 tons per month.

During the second quarter of 2015, the Company added zinc fixed price swaps for the month of June 2015 at an average price of approximately $1.01 per pound for a total quantity covered of approximately 9.9 tons, fixed price swaps for the third quarter of 2015 at an average price of $1.07 per pound for a total quantity covered of approximately 18.2 tons and fixed price swaps for the fourth quarter of 2015 at an average price of $1.07 for a total quantity covered of approximately 16.9 tons.

The Company received cash of $8,255 and $7,522 from the settlement of zinc fixed price swaps during the three and nine months ended September 30, 2015, respectively, and received cash of $535 but paid cash of $512 during the three and nine months ended September 30, 2014, respectively.

In October 2015, the Company added zinc fixed price swaps for the first quarter of 2016 at an average price of approximately $0.83 per pound for a total quantity covered of approximately 5.0 tons.

20
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

The gains and losses resulting from the Company’s hedging activities are recorded in the Consolidated Statements of Operations as indicated in the table below.

Three Months Ended 
 September 30, 2015

Three Months Ended September 30, 2014

Nine Months Ended 
 September 30, 2015
 
Nine Months Ended 
 September 30, 2014
Gains (losses) included in net sales:




 
 
 
Options
$
—


$
—


$
—

 
$
(3
)
Swaps
3,754


1,517


12,279

 
507

 
3,754

 
1,517

 
12,279

 
504

Losses included in cost of sales (excluding depreciation and amortization)
 
 
 
 
 
 
 
       Swaps
(1,048
)
 
—

 
(1,048
)
 
—

Total gains resulting from hedging activities
$
2,706


$
1,517


$
11,231

 
$
504


The fair value of the swap contracts as of September 30, 2015 and December 31, 2014 are listed in the table below.

Fair Value Measurements Using Significant Other Observable Inputs (Level 2)

September 30,
2015

December 31,
2014
Swaps included in Prepaid expenses and other current assets.
$
8,178


$
—

Swaps included in Accrued expenses
$
1,748


$
375


The fair values of derivative instruments are based upon a comparison of third party counterparties valuations to ensure that there is an acceptable level of consistency among them. The swap valuations are based on the official LME closing valuations at the end of the trading day on September 30, 2015 and December 31, 2014, using the mid-point of the closing bid and ask prices on all open swap positions regardless of the holder. The closing prices are supervised by the London Clearing House and are regulated by the Financial Services Authority, the financial regulatory body in the United Kingdom.

The Company is exposed to credit loss in cases where counterparties with which they have entered into derivative transactions are unable to pay when they owe the Company funds as a result of agreements with them. To minimize the risk of such losses, the Company utilizes eight different brokers for their hedging program. The Company does not require collateral and does not enter into master netting arrangements.
NOTE Q—CONTINGENCIES
The Company is subject to federal, state and local laws designed to protect the environment and believes that as a general matter, its policies, practices and procedures are properly designed to minimize risk of environmental damage and financial liability to the Company.
The Company is party to various litigation, claims and disputes, including breach of contract claims, labor regulation claims and Occupational Safety and Health Act and environmental regulation violations, some of which are for substantial amounts, arising in the ordinary course of business. While the ultimate effect of such actions cannot be predicted with certainty, the Company expects that the outcome of these matters will not result in a material adverse effect on its business, financial condition or results of operations.
NOTE R—EARNINGS PER SHARE
Basic earnings (loss) per common share (“EPS”) is computed by dividing net income or loss by the weighted average number of common shares outstanding for the period. Diluted earnings per share are computed similarly to basic earnings per share except that the denominator is increased to include the number of shares that would have been outstanding if the potentially dilutive common shares had been issued. The Company uses the treasury stock method when calculating the dilutive effect in basic EPS.
Diluted EPS for periods with a net loss is calculated by dividing the net loss by the weighted average number of basic shares outstanding.

21
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

The information used to compute basic and diluted loss per share is as follows:
 
Three months ended September 30,
Nine months ended September 30,
 
2015

2014
2015
 
2014
Basic loss per share:



 
 
 
Net loss
$
(27,376
)
 
$
(7,010
)
$
(49,489
)
 
$
(11,401
)
Weighted average shares outstanding – basic
56,664

 
50,715

56,062

 
50,670

Basic loss per share
$
(0.48
)
 
$
(0.14
)
$
(0.88
)
 
$
(0.23
)
Diluted loss per share:
 
 
 
 
 
 
Net loss
$
(27,376
)
 
$
(7,010
)
$
(49,489
)
 
$
(11,401
)
Weighted average shares outstanding – diluted
56,664

 
50,715

56,062

 
50,670

Diluted loss per share
$
(0.48
)
 
$
(0.14
)
$
(0.88
)
 
$
(0.23
)
Reconciliation of average shares outstanding – basic to average shares outstanding – diluted:
 
 
 
 
 
 
Weighted average shares outstanding – basic
56,664

 
50,715

56,062

 
50,670

Effect of dilutive securities:
 
 
 
 
 
 
Options
—

 
—

—

 
—

Convertible Notes
—

 
—

—

 
—

Restricted stock units
—

 
—

—

 
—

Weighted average shares outstanding – diluted
56,664

 
50,715

56,062

 
50,670

 
Exercise
Price

Three months ended September 30,
Nine months ended September 30,
 
2015

2014
2015
 
2014
Anti-dilutive shares excluded from earnings per share calculation





 
 
 
Options
$
13.00


580


584

581

 
584

Convertible Notes
$
15.00

 
—

 
1,406

—

 
896

Restricted Stock Units


1,011


1,001

1,017

 
1,033

Total
 
 
1,591

 
2,991

1,598

 
2,513


 
On July 27, 2011, the Company issued $100,000 of Convertible Notes. The Convertible Notes are convertible at a conversion price of approximately $15.00 per share into cash, shares or a combination of both at the Company’s election. According to guidance under ASC 260 Earnings Per Share, if an entity issues a contract that may be settled in common stock or cash at the election of the entity or holder, then it is presumed that the contract will be settled in shares unless past experience or a stated policy provides a reasonable basis to believe that the contract will be paid partially or wholly in cash and the “if converted” method shall not be used. The Company has stated that it intends to settle the par value in cash and the conversion spread in either cash, shares or a combination of both. The Company utilizes the modified treasury stock method and assumes dilution if the average stock price for the quarter exceeds the conversion price. The share dilution is calculated by dividing the conversion spread value by the average share price for the quarter. During the three and nine months ended September 30, 2015, the average share price for the quarter was lower than the exercise price for the Convertible Notes and therefore no conversion spread was realized and no dilution assumed.
NOTE S—SEGMENT INFORMATION
The Company reports three segments, Horsehead, Zochem and INMETCO. The Horsehead segment processes EAF dust and other zinc-bearing material to produce and sell zinc and other metals. The Zochem segment produces and sells zinc oxide. The INMETCO segment processes a variety of metal-bearing waste material generated primarily by the specialty steel industry, provides tolling services and produces and sells nickel-chromium-molybdenum-iron remelt alloy to the stainless and specialty steel industries.

22
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

The Company has recorded in the Corporate, eliminations and other column of the table below, eliminations related to the exclusion of revenue resulting primarily from the sale of zinc metal from its Horsehead segment to its Zochem segment and EAF dust service fees charged by its Horsehead segment to its INMETCO segment, interest expense recorded on debt which is not allocated to its segments and selling, general and administrative expenses related to its corporate division.
The following table presents information regarding the Company’s segment presentation:
Three months ended September 30, 2015
Horsehead

Zochem

INMETCO
 
Corporate, eliminations
and other

Total
Net sales
$
65,424


$
33,283


$
12,472

 
$
(4,185
)

$
106,994

Depreciation and amortization
12,845

 
588

 
755

 
—

 
14,188

Selling, general and administrative expenses
4,267

 
536

 
725

 
384

 
5,912

Interest expense
1,857

 
111

 
179

 
7,870

 
10,017

(Loss) income before income taxes
(38,035
)

(104
)

3,301

 
(8,253
)

(43,091
)
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2014
Horsehead

Zochem

INMETCO
 
Corporate, eliminations
and other

Total
Net sales
$
60,542


$
36,174


$
14,604

 
$
(342
)

$
110,978

Depreciation and amortization
9,295

 
456

 
777

 
—

 
10,528

Selling, general and administrative expenses
3,987

 
552

 
681

 
445

 
5,665

Interest expense
1,009

 
159

 
169

 
7,631

 
8,968

(Loss) income before income taxes
(15,174
)

3,800


5,192

 
(8,063
)

(14,245
)
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
Horsehead
 
Zochem
 
INMETCO
 
Corporate, eliminations and other
 
Total
Net sales
$
198,810

 
$
101,675

 
$
37,003

 
$
(5,552
)
 
$
331,936

Depreciation and amortization
37,081

 
1,842

 
2,255

 
—

 
41,178

Selling, general and administrative expenses
14,637

 
1,716

 
1,980

 
1,153

 
19,486

Interest expense
3,714

 
383

 
537

 
23,611

 
28,245

(Loss) income before income taxes
(66,355
)
 
4,436

 
8,028

 
(24,748
)
 
(78,639
)
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
Horsehead
 
Zochem
 
INMETCO
 
Corporate, eliminations and other
 
Total
Net sales
$
198,632

 
$
109,003

 
$
40,810

 
$
(1,138
)
 
$
347,307

Depreciation and amortization
20,084

 
1,092

 
2,320

 
—

 
23,496

Selling, general and administrative expenses
12,851

 
1,819

 
1,990

 
1,130

 
17,790

Interest expense
2,314

 
318

 
478

 
9,392

 
12,502

(Loss) income before income taxes
(30,541
)
 
10,596

 
10,553

 
(10,459
)
 
(19,851
)

23
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

NOTE T—EQUITY OFFERING

On January 28, 2015, the Company completed an underwritten public offering of 5,750 shares of its common stock, including 750 shares sold pursuant to the underwriters' exercise of their option to purchase additional shares. At the public offering price of $12.75 per share of common stock, the aggregate gross proceeds from the common stock sold by the Company were $73,313. The net proceeds realized by the Company from the offering, after $3,299 in underwriting discounts and commissions and $392 in expenses relating to the offering, were $69,622. The net proceeds are available for general corporate purposes, which may include capital expenditures, acquisitions, working capital and liquidity for operational contingencies.

The shares were offered under a shelf registration statement filed with the SEC on Form S-3, which was declared effective on October 3, 2013.

NOTE U—GUARANTOR FINANCIAL INFORMATION
The Senior Secured Notes were issued by Horsehead Holding Corp. and are fully and unconditionally guaranteed, on a senior secured basis, by the Company’s existing and future domestic restricted subsidiaries other than certain excluded subsidiaries. The non-guarantor subsidiaries held approximately 8.9% of total assets at September 30, 2015, accounted for 30.6% of its consolidated revenues and contributed $2.2 million of consolidated net income for the nine months ended September 30, 2015. The Consolidated Financial Statements are presented net of intercompany activity.
The following supplemental financial information sets forth on a consolidating basis, balance sheets, statements of operations, statements of comprehensive income (loss), and statements of cash flows for the Company, the subsidiary Guarantors, and the Company’s non-guarantor subsidiaries. The subsidiaries that serve as guarantors are 100% owned as defined in Rule 3-10(h) of Regulation S-X.
 



24
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)




Horsehead Holding Corp. and Subsidiaries
Consolidated Balance Sheets
September 30, 2015
 
Issuer
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Total
Consolidated
ASSETS



 

 

 

Current assets



 

 

 

Cash and cash equivalents
$
232

 
$
27,456

 
$
7,246

 
$
—

 
$
34,934

Accounts receivable, net of allowance
105

 
44,592

 
19,377

 
(321
)
 
63,753

Inventories, net
—

 
37,673

 
16,039

 
—

 
53,712

Prepaid expenses and other current assets
—

 
17,843

 
49

 
(6,973
)
 
10,919

Deferred income taxes
—

 
5,819

 
24

 
—

 
5,843

Total current assets
337

 
133,383

 
42,735

 
(7,294
)
 
169,161

Property, plant and equipment, net
—

 
734,866

 
51,158

 
—

 
786,024

Other assets
 
 
 
 
 
 
 
 
 
Intangible assets
—

 
9,588

 
38

 
—

 
9,626

Restricted cash
—

 
8,930

 
—

 
—

 
8,930

Deferred income taxes
—

 
—

 
—

 
21,060

 
21,060

Investment in and advances to subsidiaries
779,805

 
(648,045
)
 
(5,556
)
 
(126,204
)
 
—

Deferred finance costs and other
20,183

 
1,987

 
583

 
(14,702
)
 
8,051

Total other assets
799,988

 
(627,540
)
 
(4,935
)
 
(119,846
)
 
47,667

Total assets
$
800,325

 
$
240,709

 
$
88,958

 
$
(127,140
)
 
$
1,002,852

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
$
—

 
$
3,102

 
$
8,000

 
$
—

 
$
11,102

Accounts payable
—

 
53,613

 
12,083

 
(216
)
 
65,480

Accrued expenses
9,262

 
5,532

 
2,207

 
21,706

 
38,707

Total current liabilities
9,262

 
62,247

 
22,290

 
21,490

 
115,289

Long-term debt, less current maturities
337,483

 
94,575

 
14,940

 
(34,685
)
 
412,313

Other long-term liabilities
—

 
16,693

 
383

 
—

 
17,076

Deferred income taxes
—

 
5,526

 
1,958

 
(7,484
)
 
—

Commitments and contingencies


 


 


 


 


Stockholders’ equity
 
 
 
 
 
 
 
 
 
Common stock
567

 
—

 
—

 
—

 
567

Preferred stock
—

 
—

 
—

 
—

 
—

Additional paid-in capital
387,348

 
41,656

 
—

 
(41,653
)
 
387,351

Retained earnings
65,665

 
16,173

 
48,858

 
(64,808
)
 
65,888

Accumulated other comprehensive income
—

 
—

 
529

 
—

 
529

Total stockholders’ equity before noncontrolling interest
453,580

 
57,829

 
49,387

 
(106,461
)
 
454,335

Noncontrolling interest
—

 
3,839

 
—

 
—

 
3,839

Total stockholders’ equity
453,580

 
61,668

 
49,387

 
(106,461
)
 
458,174

Total liabilities and stockholders’ equity
$
800,325

 
$
240,709

 
$
88,958

 
$
(127,140
)
 
$
1,002,852


 

25
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)



Horsehead Holding Corp. and Subsidiaries
Consolidated Balance Sheets
December 31, 2014
 
Issuer
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Total
Consolidated
ASSETS









Current assets









Cash and cash equivalents
$
3,166

 
$
15,354

 
$
12,194

 
$
—

 
$
30,714

Accounts receivable, net of allowance
—

 
40,656

 
19,740

 
(154
)
 
60,242

Inventories, net
—

 
43,085

 
11,923

 
—

 
55,008

Prepaid expenses and other current assets
1

 
10,672

 
55

 
(6,973
)
 
3,755

Deferred income taxes
—

 
5,227

 
24

 
—

 
5,251

Total current assets
3,167

 
114,994

 
43,936

 
(7,127
)
 
154,970

Property, plant and equipment, net
—

 
745,612

 
53,481

 
—

 
799,093

Other assets
 
 
 
 
 
 
 
 
 
Intangible assets
—

 
10,098

 
94

 
—

 
10,192

Investment in and advances to subsidiaries
743,463

 
(609,021
)
 
(1,083
)
 
(133,359
)
 
—

Deferred finance costs and other
21,457

 
2,140

 
611

 
(14,946
)
 
9,262

Total other assets
764,920

 
(596,783
)
 
(378
)
 
(148,305
)
 
19,454

Total assets
$
768,087

 
$
263,823

 
$
97,039

 
$
(155,432
)
 
$
973,517

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
$
—

 
$
3,044

 
$
—

 
$
—

 
$
3,044

Accounts payable
—

 
57,913

 
9,975

 
(154
)
 
67,734

Accrued expenses
3,994

 
35,702

 
2,816

 
(6,867
)
 
35,645

Total current liabilities
3,994

 
96,659

 
12,791

 
(7,021
)
 
106,423

Long-term debt, less current maturities
334,617

 
51,744

 
34,584

 
(14,929
)
 
406,016

Other long-term liabilities
—

 
17,883

 
408

 
—

 
18,291

Deferred income taxes
—

 
6,642

 
1,960

 
—

 
8,602

Commitments and contingencies


 


 


 


 


Stockholders’ equity
 
 
 
 
 
 
 
 
 
Common stock
507

 
—

 
—

 
—

 
507

Preferred stock
—

 
—

 
—

 
—

 
—

Additional paid-in capital
313,815

 
41,653

 
—

 
(41,653
)
 
313,815

Retained earnings
115,154

 
45,290

 
46,762

 
(91,829
)
 
115,377

Accumulated other comprehensive income
—

 
—

 
534

 
—

 
534

Total stockholders’ equity before noncontrolling interest
429,476

 
86,943

 
47,296

 
(133,482
)
 
430,233

Noncontrolling interest
—

 
3,952

 
—

 
—

 
3,952

Total stockholders’ equity
429,476

 
90,895

 
47,296

 
(133,482
)
 
434,185

Total liabilities and stockholders’ equity
$
768,087

 
$
263,823

 
$
97,039

 
$
(155,432
)
 
$
973,517



26
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)



Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Operations
For the three months ended September 30, 2015

Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net sales of zinc material and other goods
$
—

 
$
55,925

 
$
33,283

 
$
(3,813
)
 
$
85,395

Net sales of nickel-based material and other services
—

 
12,472

 
—

 
—

 
12,472

EAF dust service fees
—

 
10,124

 
—

 
(997
)
 
9,127

Net sales
—


78,521


33,283


(4,810
)

106,994

Cost of sales of zinc material and other goods
—

 
77,509

 
32,041

 
(3,813
)
 
105,737

Cost of sales of nickel-based material and other services
—

 
8,155

 
—

 
(997
)
 
7,158

Cost of EAF dust services
—

 
7,561

 
—

 
—

 
7,561

Cost of sales (excluding depreciation and amortization)
—


93,225


32,041


(4,810
)

120,456

Depreciation and amortization
—

 
13,235

 
953

 
—

 
14,188

Selling, general and administrative expenses
384

 
4,992

 
536

 
—

 
5,912

Total costs and expenses
384


111,452


33,530


(4,810
)

140,556

Loss from operations
(384
)

(32,931
)

(247
)

—


(33,562
)
Equity in (loss) income of subsidiaries, net of taxes
(19,142
)
 
—

 
—

 
19,142

 
—

Other income (expense)
 
 
 
 
 
 
 
 
 
Interest expense
(8,173
)
 
(1,772
)
 
(375
)
 
303

 
(10,017
)
Interest and other income
323

 
325

 
162

 
(322
)
 
488

Total other income (expense)
(7,850
)

(1,447
)

(213
)

(19
)

(9,529
)
(Loss) income before income taxes
(27,376
)

(34,378
)

(460
)

19,123


(43,091
)
Income tax (benefit) expense
—

 
(15,727
)
 
12

 
—

 
(15,715
)
NET (LOSS) INCOME
$
(27,376
)

$
(18,651
)

$
(472
)

$
19,123


$
(27,376
)
 

27
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)



Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Operations
For the three months ended September 30, 2014
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net sales of zinc material and other goods
$
—

 
$
49,300

 
$
36,174

 
$
—

 
$
85,474

Net sales of nickel-based material and other services
—

 
14,641

 
—

 
(70
)
 
14,571

EAF dust service fees
—

 
12,001

 
—

 
(1,068
)
 
10,933

Net sales
—

 
75,942

 
36,174

 
(1,138
)
 
110,978

Cost of sales of zinc material and other goods
—

 
55,878

 
31,205

 
(70
)
 
87,013

Cost of sales of nickel-based material and other services
—

 
8,875

 
—

 
(1,068
)
 
7,807

Cost of EAF dust services
—

 
9,386

 
—

 
—

 
9,386

Restructuring expenses
—

 
—

 
—

 
—

 
—

Cost of sales (excluding depreciation and amortization)
—

 
74,139

 
31,205

 
(1,138
)
 
104,206

Depreciation and amortization
—

 
9,707

 
821

 
—

 
10,528

Selling, general and administrative expenses
445

 
4,668

 
552

 
—

 
5,665

Total costs and expenses
445

 
88,514

 
32,578

 
(1,138
)
 
120,399

(Loss) income from operations
(445
)
 
(12,572
)
 
3,596

 
—

 
(9,421
)
Equity in income (loss) of subsidiaries, net of taxes
1,076

 
—

 
—

 
(1,076
)
 
—

Other income (expense)
 
 
 
 
 
 
 
 
 
Interest expense
(7,871
)
 
(913
)
 
(424
)
 
240

 
(8,968
)
Interest and other income
230

 
3,860

 
271

 
(217
)
 
4,144

Total other income (expense)
(7,641
)
 
2,947

 
(153
)
 
23

 
(4,824
)
(Loss) income before income taxes
(7,010
)
 
(9,625
)
 
3,443

 
(1,053
)
 
(14,245
)
Income tax (benefit) expense
—

 
(8,147
)
 
912

 
—

 
(7,235
)
NET (LOSS) INCOME
$
(7,010
)
 
$
(1,478
)
 
$
2,531

 
$
(1,053
)
 
$
(7,010
)
 


28
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)



Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Operations
For the nine months ended September 30, 2015
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net sales of zinc material and other goods
$
—

 
$
170,182

 
$
101,675

 
$
(4,555
)
 
$
267,302

Net sales of nickel-based material and other services
—

 
37,003

 
—

 
—

 
37,003

EAF dust service fees
—

 
28,628

 
—

 
(997
)
 
27,631

Net sales
—

 
235,813

 
101,675

 
(5,552
)
 
331,936

Cost of sales of zinc material and other goods
—

 
200,361

 
93,125

 
(4,555
)
 
288,931

Cost of sales of nickel-based material and other services
—

 
24,397

 
—

 
(997
)
 
23,400

Cost of EAF dust services
—

 
22,408

 
—

 
—

 
22,408

Restructuring Expenses
—

 
—

 
—

 
—

 
—

Cost of sales (excluding depreciation and amortization)
—

 
247,166

 
93,125

 
(5,552
)
 
334,739

Depreciation and amortization
—

 
38,241

 
2,937

 
—

 
41,178

Selling, general and administrative expenses
1,153

 
16,617

 
1,716

 
—

 
19,486

Total costs and expenses
1,153

 
302,024

 
97,778

 
(5,552
)
 
395,403

(Loss) income from operations
(1,153
)
 
(66,211
)
 
3,897

 
—

 
(63,467
)
Equity in (loss) income of subsidiaries, net of taxes
(24,717
)
 
—

 
—

 
24,717

 
—

Other income (expense)

 

 

 

 
 
Interest expense
(24,391
)
 
(3,457
)
 
(1,177
)
 
780

 
(28,245
)
Interest and other income
772

 
12,409

 
648

 
(756
)
 
13,073

Total other income (expense)
(23,619
)
 
8,952

 
(529
)
 
24

 
(15,172
)
(Loss) income before income taxes
(49,489
)
 
(57,259
)
 
3,368

 
24,741

 
(78,639
)
Income tax (benefit) expense
—

 
(30,308
)
 
1,158

 
—

 
(29,150
)
NET (LOSS) INCOME
$
(49,489
)
 
$
(26,951
)
 
$
2,210

 
$
24,741

 
$
(49,489
)





29
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)


Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Operations
For the nine months ended September 30, 2014

 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net sales of zinc material and other goods
$
—

 
$
166,791

 
$
109,003

 
$
—

 
$
275,794

Net sales of nickel-based material and other services
—

 
40,810

 
—

 
(70
)
 
40,740

EAF dust service fees
—

 
31,841

 
—

 
(1,068
)
 
30,773

Net sales
—

 
239,442

 
109,003

 
(1,138
)
 
347,307

Cost of sales of zinc material and other goods
—

 
174,536

 
95,395

 
(70
)
 
269,861

Cost of sales of nickel-based material and other services
—

 
25,916

 
—

 
(1,068
)
 
24,848

Cost of EAF dust services
—

 
25,367

 
—

 
—

 
25,367

Restructuring Expenses
—

 
205

 
—

 
—

 
205

Cost of sales (excluding depreciation and amortization)
—

 
226,024

 
95,395

 
(1,138
)
 
320,281

Depreciation and amortization
—

 
21,309

 
2,187

 
—

 
23,496

Selling, general and administrative expenses
1,130

 
14,841

 
1,819

 
—

 
17,790

Total costs and expenses
1,130

 
262,174

 
99,401

 
(1,138
)
 
361,567

(Loss) income from operations
(1,130
)
 
(22,732
)
 
9,602

 
—

 
(14,260
)
Equity in (loss) income of subsidiaries, net of taxes
(878
)
 
—

 
—

 
878

 
—

Other income (expense)

 

 

 

 
 
Interest expense
(10,108
)
 
(1,998
)
 
(1,112
)
 
716

 
(12,502
)
Interest and other income
715

 
5,810

 
1,038

 
(652
)
 
6,911

Total other income (expense)
(9,393
)
 
3,812

 
(74
)
 
64

 
(5,591
)
(Loss) income before income taxes
(11,401
)
 
(18,920
)
 
9,528

 
942

 
(19,851
)
Income tax (benefit) expense
—

 
(11,049
)
 
2,599

 
—

 
(8,450
)
NET (LOSS) INCOME
$
(11,401
)
 
$
(7,871
)
 
$
6,929

 
$
942

 
$
(11,401
)




30
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)



Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the three months ended September 30, 2015
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net (loss) income
$
(27,376
)
 
$
(18,651
)
 
$
(472
)
 
$
19,123

 
$
(27,376
)
Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
 
 
Net pension liability adjustment
—

 
—

 
(2
)
 
—

 
(2
)
Comprehensive (loss) income
$
(27,376
)
 
$
(18,651
)
 
$
(474
)
 
$
19,123

 
$
(27,378
)
Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the three months ended September 30, 2014
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net (loss) income
$
(7,010
)
 
$
(1,478
)
 
$
2,531

 
$
(1,053
)
 
$
(7,010
)
Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
 
 
Net pension liability adjustment
—

 
—

 
(3
)
 
—

 
(3
)
Comprehensive (loss) income
$
(7,010
)
 
$
(1,478
)
 
$
2,528

 
$
(1,053
)
 
$
(7,013
)


Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the nine months ended September 30, 2015
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net (loss) income
$
(49,489
)
 
$
(26,951
)
 
$
2,210

 
$
24,741

 
$
(49,489
)
Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
 
 
Net pension liability adjustment
—

 
—

 
(5
)
 
—

 
(5
)
Comprehensive (loss) income
$
(49,489
)
 
$
(26,951
)
 
$
2,205

 
$
24,741

 
$
(49,494
)


Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the nine months ended September 30, 2014
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net (loss) income
$
(11,401
)
 
$
(7,871
)
 
$
6,929

 
$
942

 
$
(11,401
)
Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
 
 
Net pension liability adjustment
—

 
—

 
(12
)
 
—

 
(12
)
Comprehensive (loss) income
$
(11,401
)
 
$
(7,871
)
 
$
6,917

 
$
942

 
$
(11,413
)


31
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)



Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2015
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(49,489
)
 
$
(26,951
)
 
$
2,210

 
$
24,741

 
$
(49,489
)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
—

 
38,241

 
2,937

 
—

 
41,178

Deferred income tax provision
—

 
(1,708
)
 
(2
)
 
(28,544
)
 
(30,254
)
Accretion on debt
2,866

 
—

 
—

 
—

 
2,866

Accretion on ESOI liabilities
—

 
313

 
—

 
—

 
313

Amortization of deferred finance costs
2,046

 
683

 
112

 
(64
)
 
2,777

(Gains) on write down or disposal of assets
—

 
(11,866
)
 
—

 
—

 
(11,866
)
(Gains) losses on derivative financial instruments
—

 
(7,769
)
 
964

 
—

 
(6,805
)
Lower of cost or market adjustment to inventories
—

 
3,627

 
—

 
—

 
3,627

Non-cash compensation expense
242

 
3,863

 
—

 
—

 
4,105

Capitalization of interest
(2,242
)
 
—

 
—

 
—

 
(2,242
)
Equity in loss (income) of subsidiaries, net of taxes
24,717

 
—

 
—

 
(24,717
)
 
—

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
(Increase) decrease in accounts receivable
(105
)
 
(3,936
)
 
363

 
167

 
(3,511
)
Decrease (increase) in inventories
—

 
1,785

 
(4,116
)
 
—

 
(2,331
)
Decrease in prepaid expenses and other current assets
1

 
1,073

 
6

 
—

 
1,080

(Increase) decrease in deferred finance costs and other
(772
)
 
1,101

 
(89
)
 
(180
)
 
60

(Decrease) increase in accounts payable
—

 
(4,300
)
 
2,108

 
(62
)
 
(2,254
)
Increase (decrease) increase in accrued expenses
5,268

 
(26,039
)
 
(1,817
)
 
28,573

 
5,985

(Decrease) increase in long-term liabilities
—

 
(1,747
)
 
(25
)
 
244

 
(1,528
)
Net cash (used in) provided by operating activities
(17,468
)
 
(33,630
)
 
2,651

 
158

 
(48,289
)
Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
 
Purchase of property, plant and equipment
—

 
(26,226
)
 
(558
)
 
—

 
(26,784
)
Increase in restricted cash
—

 
(8,930
)
 
—

 
—

 
(8,930
)
Proceeds related to the sale of land
—

 
9,000

 
—

 
—

 
9,000

Investment in and advance (to) from subsidiaries
(54,957
)
 
30,643

 
4,472

 
19,842

 
—

Net cash (used in) provided by investing activities.
(54,957
)
 
4,487

 
3,914

 
19,842

 
(26,714
)
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
 
Net proceeds from the issuance of stock
69,622

 
—

 
—

 
—

 
69,622

Distributions to noncontrolling interest equity holders
—

 
—

 
(113
)
 
—

 
(113
)
Borrowings on the Credit Facilities
—

 
58,751

 
7,200

 
—

 
65,951

Repayments on the Credit Facilities
—

 
(14,130
)
 
(18,600
)
 
(20,000
)
 
(52,730
)
Debt issuance costs


 
(1,644
)
 
—

 
—

 
(1,644
)
Borrowings on the Credit Agreement
—

 
496

 
—

 
—

 
496

Repayments on the Credit Agreement
—

 
(2,228
)
 
—

 
—

 
(2,228
)
Proceeds from the exercise of stock options
33

 
—

 
—

 
—

 
33

Tax effect of share based compensation award exercise and vesting
277

 
—

 
—

 
—

 
277

Restricted stock withheld for taxes
(441
)
 
—

 
—

 
—

 
(441
)
Net cash provided by (used in) financing activities
69,491

 
41,245

 
(11,513
)
 
(20,000
)
 
79,223

Net (decrease) increase in cash and cash equivalents
(2,934
)
 
12,102

 
(4,948
)
 
—

 
4,220

Cash and cash equivalents at beginning of period
3,166

 
15,354

 
12,194

 
—

 
30,714

Cash and cash equivalents at end of period
$
232

 
$
27,456

 
$
7,246

 
$
—

 
$
34,934


32
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)


Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2014
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(11,401
)
 
$
(7,871
)
 
$
6,929

 
$
942

 
$
(11,401
)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
—

 
21,309

 
2,187

 
—

 
23,496

Deferred income tax provision
—

 
(1,358
)
 
—

 


 
(1,358
)
Accretion on debt
2,851

 
—

 
—

 
—

 
2,851

Accretion on ESOI liabilities
—

 
322

 
—

 
—

 
322

Amortization of deferred finance costs
1,700

 
225

 
102

 
(64
)
 
1,963

(Gains) on derivative financial instruments
—

 
(1,680
)
 
(12
)
 
—

 
(1,692
)
Losses on write down or disposal of assets
—

 
1,037

 
—

 
—

 
1,037

Lower of cost or market adjustment to inventories
—

 
1,590

 
—

 
—

 
1,590

Non-cash compensation expense
279

 
3,305

 
—

 
—

 
3,584

Capitalization of interest
(13,498
)
 
(647
)
 
—

 
—

 
(14,145
)
Equity in loss (income) of subsidiaries, net of taxes
878

 
—

 
—

 
(878
)
 
—

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Decrease (increase) in accounts receivable
—

 
7,643

 
(8,452
)
 
(223
)
 
(1,032
)
Decrease in inventories
—

 
16,607

 
4,734

 
—

 
21,341

Decrease (increase) in prepaid expenses and other current assets
3

 
985

 
(53
)
 
(8,362
)
 
(7,427
)
Decrease (increase) in deferred finance costs and other
218

 
(719
)
 
24

 
(216
)
 
(693
)
(Decrease) increase in accounts payable
—

 
(30,038
)
 
906

 
222

 
(28,910
)
Increase (decrease) in accrued expenses
4,980

 
(10,097
)
 
(887
)
 
8,336

 
2,332

Increase in long-term liabilities
—

 
211

 
—

 
243

 
454

Net cash (used in) provided by operating activities
(13,990
)
 
824

 
5,478

 
—

 
(7,688
)
Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
 
Purchase of property, plant and equipment
—

 
(98,097
)
 
(8,391
)
 
—

 
(106,488
)
Investment in and advance (to) from subsidiaries
(103,722
)
 
108,512

 
(4,790
)
 
—

 
—

Net cash (used in) provided by investing activities.
(103,722
)
 
10,415

 
(13,181
)
 
—

 
(106,488
)
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
 
Proceeds from the issuance of debt
51,300

 
—

 
—

 
—

 
51,300

Distributions to noncontrolling interest equity holders
—

 
—

 
(113
)
 
—

 
(113
)
Borrowings on the Credit Facilities
—

 
20,650

 
9,574

 
—

 
30,224

Repayments on the Credit Facilities
—

 
(29,550
)
 
(174
)
 
—

 
(29,724
)
Debt issuance costs
(1,531
)
 
(171
)
 
(73
)
 
—

 
(1,775
)
Borrowings on Credit Agreement
—

 
1,172

 
—

 
—

 
1,172

Repayments on the Credit Agreement
—

 
(2,126
)
 
—

 
—

 
(2,126
)
Proceeds from the exercise of stock options
941

 
—

 
—

 
—

 
941

Tax effect of share based compensation award exercise and vesting
800

 
—

 
—

 
—

 
800

Restricted stock withheld for taxes
(683
)
 
—

 
—

 
—

 
(683
)
Net cash provided by (used in) financing activities
50,827

 
(10,025
)
 
9,214

 
—

 
50,016

Net (decrease) increase in cash and cash equivalents
(66,885
)
 
1,214

 
1,511

 
—

 
(64,160
)
Cash and cash equivalents at beginning of period
101,449

 
26,782

 
8,096

 
—

 
136,327

Cash and cash equivalents at end of period
$
34,564

 
$
27,996

 
$
9,607

 
$
—

 
$
72,167


33
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)


NOTE V—SUBSEQUENT EVENT

On October 23, 2015, the Company entered into an At-The-Market Equity Offering sales agreement pursuant to which the Company may offer and sell, from time to time, shares of its common stock having an aggregate offering price of up to $50,000, through the sales agent. Subject to the terms and conditions of the sales agreement, the sales agent will use its commercially reasonable efforts to sell shares of the Company’s common stock in such number, at such times and at such prices as the Company shall determine. However, the Company is not required to sell any shares of its common stock at any time. Sales of the shares of the Company’s common stock, if made, may be made by any method deemed to be an “at-the-market offering” as defined in Rule 415 under the Securities Act of 1933, as amended, including, sales made directly on or through the NASDAQ Global Select Market, the existing trading market for the Company’s common stock or sales made to or through a market maker other than on an exchange, in negotiated transactions at market prices prevailing at the time of sale or at prices related to such prevailing market prices. The offering is being made under the Company’s registration statement on Form S-3 which became effective October 3, 2013. The sales agreement will terminate on the earlier of (i) the sale of all of the common stock subject to the sales agreement or (ii) termination of the sales agreement in accordance with its terms. The Company intends to use the net proceeds from the sale of the shares of its common stock, if any, for general corporate purposes, which may include liquidity for operational contingencies, working capital and capital expenditures.

In October 2015, the Company received a tax certification notice from the state of North Carolina that it had qualified for and been approved for a tax credit on the eligible assets related to its recycling equipment at its facility located in Mooresboro, North Carolina. The Company is eligible to a receive a tax credit not to exceed 50% of its verified equipment which exceeded $500 million in total cost. During the fourth quarter of 2015, the Company will record the related tax benefit less any required valuation allowance.

On November 8, 2015, a fire damaged a battery storage building at our INMETCO facility located in Ellwood City, Pennsylvania.  The fire did not affect the facility’s primary operations, however, the cause of the fire and the full extent of the damage are not known at the time of this filing.  The Company maintains property and business interruption insurance coverage.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
This discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included herein and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which was filed with the SEC on March 2, 2015.
Overview

Our Business

Through the operations of our subsidiary, Horsehead Corporation, we are a leading U.S. producer of zinc metal used in the galvanizing of steel products and in zinc die castings and zinc-bearing alloys and we believe, the largest North American recycler of electric arc furnace ("EAF") dust, a hazardous waste produced by the carbon steel mini-mill manufacturing process. We also believe that, through the operations of our subsidiary, Zochem, we are the largest single site producer of zinc oxide in North America. Through the operations of our subsidiary, INMETCO, we believe we are a leading recycler of EAF dust and other nickel-bearing waste generated by the stainless and specialty steel producers and a leading recycler of nickel-cadmium batteries and other types of batteries in North America. We currently have production and/or recycling operations at six facilities located in five states in the United States and one facility located in Canada.

While we vary our raw material inputs, or feedstocks, based on cost and availability, our zinc products produced at our new zinc facility in Mooresboro, North Carolina, which began operations in May 2014, and our nickel-based products produced at our INMETCO facility use 100% recycled materials, including, in the case of our Mooresboro facility, zinc recovered from our four EAF dust recycling operations located in four states. Our four EAF dust recycling facilities generate service fee revenue from steel mini-mills by providing a convenient and safe means for recycling their EAF dust. We believe that our ability to convert recycled zinc into finished products results in lower feed costs than for smelters that rely primarily on zinc concentrates. We produce zinc oxide at our Brampton, Ontario, Canada facility and utilize Special High Grade ("SHG") zinc metal as raw material

34

feedstock. INMETCO provides recycling services, some of which are on a tolling basis, from a single production facility in Ellwood City, Pennsylvania.

We, together with our predecessors, have been operating in the zinc industry for more than 150 years and in the nickel-bearing waste industry for more than 30 years. We operate as three business segments, Horsehead, Zochem and INMETCO.
Strategic Investments

In September of 2011, we began construction of a new, state-of-the-art zinc facility located in Mooresboro, North Carolina to replace our Monaca, Pennsylvania facility. We began production at our new zinc facility in May 2014. Our new facility provides us with the capability to produce SHG zinc, Continuous Galvanizing Grade ("CGG") zinc and High Grade zinc, in addition to the Prime Western ("PW") zinc that we produced at our former Monaca, Pennsylvania facility. The first month of operation of our new facility validated that the process, as designed, is capable of producing SHG quality electrolyte from waelz oxide ("WOX") using the solvent extraction process. The new facility's design relies upon sustainable manufacturing practices to produce zinc solely from recycled materials and uses significantly less fossil fuel than our former Monaca, Pennsylvania facility, allowing us to significantly reduce emissions of greenhouse gases ("GHGs") and particulates into the atmosphere. The new facility continues to be in the process of being ramped up.

We believe that the new facility, once fully operational and efficiently operating, will provide us with a number of substantial benefits, including reduced manufacturing conversion costs due to the lower energy cost; higher labor productivity; reduced operating maintenance costs; and lower operating costs in our EAF dust recycling plants resulting from the elimination of the need to calcine the majority of our WOX prior to its use. We believe that once the new facility is operating at capacity, its capability to convert WOX and other recycled materials into SHG zinc and other grades will allow us to expand into new markets, including selling to continuous galvanizers, which include some of our EAF dust customers, die casters and potentially LME warehouses, while continuing to serve customers in our existing markets. In addition, we believe that once the new facility is operating at full capacity, the new technology will also allow us to recover value from certain metals such as silver and lead from WOX produced from EAF dust recycling. Once the new facility is operating at full capacity and at full efficiency, we believe it will be capable of producing over 155,000 tons of zinc metal per year and with certain modifications, capable of producing over 170,000 tons of zinc metal per year.

We also believe that additional benefits may be realized once the new facility is operating at full capacity. These additional benefits include a reduction in the cost of hedging the price of zinc, which averaged $9.1 million per year for the period from 2008 to 2013 (the last full year of production at our Monaca, Pennsylvania facility), reduced maintenance capital spending, which averaged $7.8 million per year at our Monaca facility for the period from 2007 to 2012 (the last year significant capital expenditures were made at our Monaca facility) and reduced state income taxes as a result of certain tax incentives available as a result of the investment in the new zinc facility.

In connection with the start of operations at our new zinc facility, we permanently closed our Monaca, Pennsylvania facility in April 2014. The former Monaca smelter was over eighty years old and utilized a higher-cost pyrometallurgical process. Our Monaca, Pennsylvania site was sold to Shell in June 2015. We retain ownership of a non-hazardous captive landfill located near that site. We have recorded an asset retirement obligation related to expected costs for the ultimate closure of this landfill and have a surety bond in place to collateralize our expected financial obligations. We are currently working with the Pennsylvania Department of Environmental Protection on a closure plan.

In December 2013, we entered into a joint venture known as ThirtyOx, LLC ("ThirtyOx") with Imperial Zinc Corp. for the acquisition and processing of zinc bearing secondary materials. The processing operation is located near our Mooresboro facility and the facility began production in August 2014. The majority of the feedstock for Mooresboro will be supplied by Horsehead's EAF dust recycling plants. ThirtyOx is expected to supply a portion of the incremental zinc feed required by Mooresboro by recovering secondary zinc oxides from the residues generated by galvanizers, die-casters and other users of zinc metal. Our anticipated total investment in ThirtyOx is expected to be less than $2.0 million and we had contributed $0.8 million as of September 30, 2015

Acquisitions

On November 1, 2011, we acquired all of the outstanding shares of Zochem, a zinc oxide producer located in Brampton, Ontario Canada from Hudbay for a cash purchase price of $15.1 million. The acquisition broadened the Company’s geographic footprint, provided added operational flexibility and diversified our customers and markets for zinc oxide. In 2012, we announced our plans to expand capacity at the Zochem facility in anticipation of the closure of the zinc oxide refinery at our Monaca,

35

Pennsylvania facility. During the second quarter of 2014, we completed the expansion and put our seventh furnace into production. The expansion project increased the total zinc oxide production capacity at Zochem by approximately 20,000 tons to 72,000 tons per year.

Other

On July 26, 2012, we completed a private placement of $175.0 million principal amount of 10.50% Senior Secured Notes due 2017, at an issue price of 98.188% of par with a yield to maturity of 11.00%. The net proceeds from the offering were approximately $164.1 million.

On June 3, 2013, we completed the sale of an additional $20.0 million in aggregate principal amount of our Senior Secured Notes at an issue price of 106.5% of the principal amount. The 2013 Additional Notes were issued at an effective interest rate of 8.6%. We received net proceeds from the offering of $21.0 million.

On October 30, 2013, we completed an underwritten public offering of 6.3 million shares of common stock, including 0.8 million shares sold pursuant to the underwriters' exercise of their option to purchase additional shares, at a price to the public of $12.00 per share. We received approximately $72.0 million in net proceeds from the offering, after deducting underwriting discounts and commissions and offering expenses.

On July 29, 2014, we completed the sale of $40.0 million aggregate principal amount of 9.00% Unsecured Notes due 2017, at an issue price of 100.00% of par and also completed the sale of an additional $10.0 million aggregate principal amount of our Senior Secured Notes due 2017, at an issue price of 113.00% of par. The 2014 Additional Notes were issued at an effective interest rate of 5.5%. Total net proceeds from the July 29, 2014 offerings were $49.6 million. At September 30, 2015, there was an aggregate of $205.0 million of Senior Secured Notes outstanding.

On January 28, 2015, we completed an underwritten public offering of 5.8 million shares of common stock, including 0.8 million shares sold pursuant to the underwriters' exercise of their option to purchase additional shares, at a price to the public of $12.75 per share. We received approximately $69.6 million in net proceeds from the offering, after deducting underwriting discounts and commissions and offering expenses.

On July 6, 2015, we entered into the new $80.0 million Macquarie Credit Facility which matures on May 15, 2017. The Macquarie Credit Facility replaces the $20.0 million INMETCO Facility and the $60.0 million ABL Facility. The new revolving credit facility accommodates a broader borrowing base than the two previous credit facilities. We had $59.5 million in outstanding borrowings on this facility as of September 30, 2015 and availability of $20.5 million.

On October 23, 2015, the Company entered into an At-The-Market Equity Offering sales agreement pursuant to which the Company may offer and sell, from time to time, shares of its common stock having an aggregate offering price of up to $50 million, through the sales agent. Subject to the terms and conditions of the sales agreement, the sales agent will use its commercially reasonable efforts to sell shares of the Company’s common stock in such number, at such times and at such prices as the Company shall determine. However, the Company is not required to sell any shares of its common stock at any time. The sales agreement will terminate on the earlier of (i) the sale of all of the common stock subject to the sales agreement or (ii) termination of the sales agreement in accordance with its terms. The Company intends to use the net proceeds from the sale of the shares of its common stock, if any, for general corporate purposes, which may include liquidity for operational contingencies, working capital and capital expenditures.

Recent Operating Updates and Outlook

The Year Ended December 31, 2014

During the first half of 2014, we sold the remaining zinc product inventory that we had built in 2013 in anticipation of the transition of metal production from Monaca to Mooresboro. We ceased operation of the Monaca smelter at the end of April 2014. The final months of operation experienced higher than normal unit operating costs as productivity suffered while we endeavored to keep four of the six furnaces operating in the final weeks before the facility was permanently shut down. As a result of the declining production of the smelter, we increased the sale of WOX and zinc calcine to third parties, with over 50% of the zinc units from our EAF dust recycling operations sold to third parties in 2014.

Our primary focus during the second half of 2014 was the ramp-up of the Mooresboro facility. The facility produced approximately 12,000 tons of zinc metal during the fourth quarter of 2014 compared to 4,300 tons in the third quarter of 2014.

36

Production for the month of December was approximately 5,400 tons as improvements with equipment reliability and process debottlenecking helped to increase the ramp up rate during the quarter. For extended periods in December, the facility produced nearly 230 tons of zinc per day, which we estimate is the level of production necessary to generate cash flow sufficient to cover feedstock, conversion cost and cash interest expense at the average LME zinc price for December 2014 of $0.99. Zinc metal sales during the fourth quarter of 2014 continued to be supplemented with the sale of approximately 23,500 tons of zinc calcine.

First Quarter 2015

During January 2015, we reduced the plating rate for several days to perform some needed maintenance in the cell house. We also experienced intermittent equipment reliability issues, particularly with some key pumps, which were further exacerbated by extreme cold weather conditions. On February 20, 2015, we began a planned outage to address several of these issues. Production for the first quarter of 2015 was also affected by the outage taken in late February to install a bypass to resolve a problem with a clarifier in the leach feed circuit. After an extended period to completely drain the clarifier, the root cause of the issue was addressed and the clarifier was placed back into service.

On April 1, 2015, we announced that our new zinc facility located in Mooresboro, North Carolina had produced approximately 10,000 tons of zinc during the first quarter of 2015.

Second Quarter 2015

During April 2015, our new zinc facility produced approximately 2,800 tons of zinc metal. Production was lower than expected primarily due to an extended period of exceptionally heavy rains which filled our containments and holding ponds, requiring us to process the excess water in the plant rather than produce zinc. This event highlighted a limitation in the capacity of our process and storm water utilization capability. As a result, we engaged a third party water management company, to install a portable unit on-site to mitigate the excess water while we evaluate our options to expand the capacity of our own equipment. This unit is now operational and substantially mitigates the risk of a plant shut down caused by significant rainfall. In addition, in April, we engaged a team of engineers with hydrometallurgical plant experience from Hatch Associates to supplement our operations and engineering team and support the on-going ramp-up.
The new zinc facility produced approximately 4,100 tons of zinc metal during May 2015 and produced approximately 3,700 tons of zinc metal during June 2015. June's production was slowed initially while we implemented certain improvements but accelerated through the latter half of the month with 2,600 of the 3,700 tons processed after June 15, 2015. 
Total production for the second quarter of 2015 was approximately 10,600 tons. Although production improved compared to the first quarter of 2015, it was primarily paced by the capacity of our process for removing impurities from the system, the so-called bleed treatment system, and by intermittent equipment reliability issues.

Third Quarter 2015

Our primary focus during the quarter was to address production and equipment-related issues at the Mooresboro facility. The facility produced approximately 9,700 tons of zinc metal during the quarter, more than double the volume during the prior year's quarter.
During the third quarter and in October 2015, we made several equipment upgrades and improvements at the Mooresboro facility, some of which required planned outages, all of which are expected to help move the facility toward full capacity. We took a 10 day outage in October, resuming operations on October 21, 2015, and experienced an immediate improvement in the zinc production rate and quality upon start-up. In addition to several equipment upgrades and repairs, the outage allowed us to remove production constraints and process inefficiencies. The outage also allowed us to do a thorough inspection of electrodes in the cellhouse which confirmed the need to replace several of them. The bleed treatment pilot plant, which successfully started in September, has added incremental processing capacity, and we continue to work on development of a full-scale solution. However, we are not able to predict the impact of these improvements on the rate of production going forward, and expect to have intermittent disruptions to the production rate as we continue to implement solutions.

During the past few months of 2015 we have significantly enhanced our organization at the Mooresboro facility, and we have recently expanded the use of external engineering resources assigned to the Mooresboro projects to accelerate the rate that changes are implemented. These resources, which include engineering, technical support and operations management, have validated the feasibility of the technology and developed potential solutions to many of the known issues. We are focused on implementing these improvements, a number of which were achieved during the recent outage.


37

We are currently unable to predict with any certainty when we will begin operating at full design capacity, and we cannot guarantee that our efforts to remediate known issues will be sufficient or that we will not encounter additional issues that may result in further delays. We are also unable to foresee the severity of any such issues. In addition, we are also unable to predict with any degree of certainty the expected costs to remediate any issues which prevent us from operating at full design capacity.

Due to the issues described above and the planned outage we took to address them, we plated only approximately 2,000 tons of zinc in the cell house during October 2015.

Zinc metal shipments during the third quarter of 2015 continued to be supplemented with the sale of approximately 27,500 tons of zinc calcine. Based upon the expected rate of ramp up at Mooresboro, we expect to continue to produce zinc calcine from excess waelz oxide during the fourth quarter of 2015.
Oxide shipments at Zochem for the third quarter of 2015 were approximately 3% higher compared to shipments during the second quarter of 2015. Production increased approximately 3% for the third quarter of 2015 as compared to the second quarter of 2015.
EAF dust receipts for the third quarter of 2015 decreased by approximately 4% compared with the second quarter of 2015. The quantity of EAF dust processed during the third quarter of 2015 was approximately 3% lower than EAF dust processed for the second quarter of 2015 due primarily to maintenance outages taken on several kilns during the quarter. We have also used this lull in steel output to reduce system-wide inventory of recyclable zinc units and we expect to operate all of our kilns in the fourth quarter, although we plan to take extended maintenance outages on some of our kilns during the quarter.
Steel capacity utilization declined from the mid 70% range at December 2014 to the low 70% range during the first nine months of 2015 and hit its lowest point for the year in April 2015.
INMETCO's annual maintenance outage took place during the month of January 2015 and affected first quarter 2015 results. Remelt alloy sales tons decreased approximately 2% compared to the second quarter of 2015. Tolling receipts tons, however, were approximately the same as compared with the second quarter of 2015. In March 2015, we announced plans to spend up to $10 million to expand capacity at INMETCO by 15%.
LME zinc and nickel prices were both lower by approximately 17% during the third quarter of 2015 as compared to the second quarter of 2015.

During the second quarter of 2015, labor contracts covering hourly employees at our Palmerton, Pennsylvania facility and our Rockwood, Tennessee locations expired. The Palmerton labor contract, covering approximately 85 employees, was renegotiated and the new labor contract expires in April 2019. The Rockwood labor contract, covering approximately 50 employees, was renegotiated and the new labor contract expires in July 2019.

Factors Affecting Our Operating Results
    
Production Levels at our Mooresboro Facility. In May 2014, we began production of zinc metal at our new zinc facility in Mooresboro. Once operating at full capacity and at full efficiency, we believe the facility will be capable of producing over 155,000 tons of zinc metal per year.  We have, however, experienced a number of significant operational issues associated with the ramp-up of this facility.   We have worked to address the significant operational issues we have faced at this facility and continue its ramp-up, but are currently unable to predict with any certainty when we will begin operating at full design capacity.  Lower than anticipated production levels at this new facility have negatively impacted our cash flows, liquidity and results of operations and have deferred realization of expected benefits. The new zinc facility produced approximately 12,000 tons of zinc metal during the fourth quarter of 2014, 10,000 tons of zinc metal during the first quarter of 2015, 10,600 tons during the second quarter of 2015 and 9,700 tons during the third quarter of 2015.
Market Price for Zinc and Nickel. We generate the substantial majority of our net sales from the sale of zinc-based products and to a much lesser extent from the sales of nickel-based products, our operating results therefore depend heavily on the prevailing market price for zinc and nickel. Our principal raw materials are zinc extracted from recycled EAF dust, for which we receive revenue from the carbon steel mini-mill companies, and other zinc-bearing secondary materials (“purchased feedstock”) that we purchase from third parties. Costs to acquire and recycle EAF dust are not impacted significantly by fluctuations in the market price of zinc on the LME. Our new zinc facility, which began production in May 2014, utilizes zinc recycled from EAF dust for a substantial majority of their raw materials. The cost, however, for the remaining portion of our raw materials is directly impacted by changes in the market price of zinc. Our Zochem facility relies entirely on SHG metal that is dependent on the LME zinc price. The price of our finished products is impacted directly by changes in the market price of zinc and nickel, which can result in rapid and significant changes in our monthly revenues.

38

Average monthly, daily and yearly LME zinc prices for the years 2005 through 2014 and the nine months ended September 30, 2015 were as follows:
LME Zinc Prices
2005
 
2006
 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
 
Nine Months Ended 
 September 30, 2015
Monthly Average
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
High
$
0.83

 
$
2.00

 
$
1.74

 
$
1.14

 
$
1.08

 
$
1.10

 
$
1.12

 
$
0.93

 
$
0.97

 
$
1.06

 
$
1.04

Low
$
0.54

 
$
0.95

 
$
1.07

 
$
0.50

 
$
0.50

 
$
0.79

 
$
0.84

 
$
0.82

 
$
0.83

 
$
0.91

 
$
0.78

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Daily High
$
0.86

 
$
2.08

 
$
1.93

 
$
1.28

 
$
1.17

 
$
1.20

 
$
1.15

 
$
0.99

 
$
0.99

 
$
1.10

 
$
1.09

Daily Low
$
0.53

 
$
0.87

 
$
1.00

 
$
0.47

 
$
0.48

 
$
0.72

 
$
0.79

 
$
0.80

 
$
0.81

 
$
0.88

 
$
0.72

Average
$
0.63

 
$
1.48

 
$
1.47

 
$
0.85

 
$
0.75

 
$
0.98

 
$
0.99

 
$
0.88

 
$
0.87

 
$
0.98

 
$
0.92

The Company entered into fixed rate swaps which were put in place to reduce volatility during the completion of construction and ramp-up of production at the new zinc facility. During the first quarter of 2014, we added zinc fixed price swaps for the second quarter of 2014, at an average price of approximately $0.94 per pound for a total quantity covered of 26,500 tons for the quarter, zinc fixed price swaps for the months of August and September 2014, at an average price of slightly over $1.07 per pound for a total quantity covered of 6,000 tons per month, zinc fixed price swaps for the months of November 2014 and December 2014, at an average price of slightly over $1.05 per pound for a total quantity covered of 6,600 tons per month.
During the three months ended March 31, 2015, we added zinc fixed price swaps for the month of February 2015 at an average price of approximately $0.97 per pound for a total quantity covered of approximately 3,300 tons and zinc fixed price swaps for the months of April and May 2015 at an average price of approximately $0.94 per pound for a total quantity covered of approximately 6,600 tons per month.

During the second quarter of 2015, we added zinc fixed price swaps for the month of June 2015 at an average price of approximately $1.01 per pound for a total quantity covered of approximately 9,900 tons, fixed price swaps for the third quarter of 2015 at an average price of $1.07 per pound for a total quantity covered of approximately 18,200 tons and fixed price swaps for the fourth quarter of 2015 at an average price of $1.07 for a total quantity covered of approximately 16,900 tons.

We received cash of $8.3 million and $7.5 million from the settlement of zinc fixed price swaps during the three and nine months ended September 30, 2015, respectively and received cash of $0.54 million but paid cash of $0.51 million during the three and nine months ended September 30, 2014, respectively.

In October 2015, the Company added zinc fixed price swaps for the first quarter of 2016 at an average price of approximately $0.83 per pound for a total quantity covered of approximately 5,000 tons.
Daily high, low and yearly average LME nickel prices for the years 2010 through 2014 and the nine months ended September 30, 2015 were as follows:
 
LME Nickel Prices
2010
 
2011
 
2012
 
2013
 
2014
 
Nine Months Ended 
 September 30, 2015
Daily High
$
11.81

 
$
13.17

 
$
9.90

 
$
8.44

 
$
9.62

 
$
7.01

Daily Low
$
8.36

 
$
7.68

 
$
6.89

 
$
5.97

 
$
6.06

 
$
4.22

Average
$
9.89

 
$
10.36

 
$
7.97

 
$
6.81

 
$
7.65

 
$
5.72

Demand for Zinc and Nickel-Based Products. We generate revenue from the sale of zinc metal, zinc oxide and nickel-based products and services, as well as from the collection and recycling of EAF dust. During the first six months of 2014, we shipped the remaining inventory that we had built in 2013 at our Monaca facility. Production was reduced from five to four furnaces for the final months of operation until closure of the zinc smelter in Monaca, Pennsylvania, which occurred in late April 2014.
Weekly steel industry capacity utilization continued the general upward trend from 2010 through the second quarter of 2012, remaining in the mid 70% range throughout that period, thereby increasing the amount of EAF dust generated and the demand for our EAF dust recycling services. During the third quarter of 2012, weekly steel industry capacity began to decline and dipped in the fourth quarter of 2012 to its lowest quarterly level since 2010. During 2013 and 2014, weekly steel industry

39

capacity increased back to the mid to high 70% range. The weekly steel industry capacity decreased to the low 70% range during the first nine months of 2015.
The table below illustrates historical sales volumes and revenues for zinc and nickel-based products and EAF dust:
 
Shipments/EAF Dust Receipts
 
Revenue/Ton
 
Nine months ended September 30,
 
Year Ended December 31,
 
Nine months ended September 30,
 
Year Ended December 31,
 
2015
 
2014
 
2014
 
2013
 
2015
 
2014
 
2014
 
2013
 
(Tons, in thousands)
 
(In U.S. dollars)
Product:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Zinc Products (1)
95

 
101

 
129

 
169

 
$
2,087

 
$
2,097

 
$
2,125

 
$
1,966

EAF Dust
388

 
440

 
580

 
607

 
$
71

 
$
70

 
$
70

 
$
72

Nickel-based products
22

 
22

 
29

 
28

 
$
1,447

 
$
1,738

 
$
1,677

 
$
1,568

(1)
Includes HZP from November 16, 2012 until production ceased during the first quarter of 2014.
Cost of Sales (excluding depreciation and amortization). Our cost of producing zinc and nickel products consists principally of purchased feedstock, energy, maintenance and labor costs. Purchased feedstock related costs are driven by the percentage of purchased feed used in the feed mix, the average LME zinc price and the price paid for the purchased feed expressed as a percentage of the LME average zinc price. Purchased feedstock sells at a discount to the LME price of zinc.
Raw material costs at our Zochem facility, which comprised approximately 86% of production costs, consisted entirely of purchased SHG zinc metal. The price of these metal blocks is based on the LME zinc price. Conversion related costs represented 14% of our production costs for the nine months ended September 30, 2015.
Certain components of our conversion costs do not change proportionally with changes in production volume. Consequently, as volume changes only a portion of our conversion cost per ton changes inversely. Other components of cost of sales include transportation costs, as well as other manufacturing expenses. The main factors that influence our cost of sales as a percentage of net sales are fluctuations in zinc and nickel prices, production and shipment volumes, efficiencies, energy costs and our ability to implement cost control measures aimed at improving productivity.
We value the majority of our inventories using the weighted average actual cost method. Under this method, the cost of our purchased feedstock generally takes three to four months to flow through our cost of sales. In an environment of declining LME average zinc prices, LCM adjustments can occur when our inventory cost exceeds the market value of our finished goods. The Company recorded LCM adjustments of $3.6 million and $1.6 million during the nine months ended September 30, 2015 and 2014, respectively. Higher than normal LCM adjustments occurred in the first nine months of 2015 and 2014 due to lower production and higher than normal conversion costs at the new zinc facility and additionally during 2014 increased production costs occurred at the Monaca facility as the plant operated at inefficient levels during the final weeks of operation until it was permanently closed in April 2014. Total LCM adjustments were $3.6 million for the year ended December 31, 2014. Zochem values its inventory using the first in-first out method and therefore the majority of the cost of their purchased feedstock generally flows through cost of sales during the same month it is purchased.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses consist of all sales and marketing expenditures, as well as administrative overhead costs, such as salary and benefit costs for sales personnel and administrative staff, expenses related to the use and maintenance of administrative offices, costs associated with acquisitions, other administrative expenses, including expenses relating to logistics and information systems, legal and accounting expense and other selling expenses, including travel costs. Salary and benefit costs historically have comprised the largest single component of our selling, general and administrative expenses. Selling, general and administrative expenses as a percent of net sales historically have been impacted by changes in salary and benefit costs, as well as by changes in selling prices.
Trends Affecting Our Business

Our operating results are and will be influenced by a variety of factors, including:
•
production levels at our facilities;
•
the supply of EAF dust for our recycling operations;
•LME price of zinc and nickel;
•changes in cost of energy and fuels;
•changes in cost of additives and process chemicals;
•gain and loss of customers;

40

•
pricing pressures from competitors, including new entrants into the zinc product markets, or the EAF dust or nickel- bearing waste recycling markets;
•production levels in the domestic steel industry;
•increases and decreases in the use of zinc and nickel-based products;
•expansions into new products and expansion of our capacity, which requires us to incur costs prior to generating revenues;
•expenditures required to comply with environmental and other operational regulations;
•access to credit by our customers; and
•our operational efficiency improvement programs.
We have experienced fluctuations in our sales and operating profits in recent years due to fluctuations in zinc, energy and fuel prices. Historically, zinc prices have been extremely volatile, and we expect that volatility to continue. Since May 2015, the price of zinc has fallen approximately 34% reaching a five-year low in September of 2015. Additionally, the price of nickel has fallen approximately 50% from May 2014 to September 2015. Changes in zinc pricing have impacted our sales revenue since the prices of the products we sell are based primarily on LME zinc prices, and they have impacted our costs of production, since the purchase prices of some of our feedstocks are based on LME zinc prices. Therefore, since a large portion of our sales and a portion of our costs are affected by the LME zinc price, we expect that changing zinc prices will continue to impact our operations and financial results in the future and any significant drop in zinc prices will negatively impact our results of operations.

Energy is one of our most significant costs. Our processes rely primarily on electricity and natural gas to operate. Our freight operations depend heavily on diesel fuel. Energy prices have been volatile in recent years and currently exceed long-term historical averages. These fluctuations impact our manufacturing costs and contribute to earnings volatility.

Several additives and process chemicals, including but not limited to coke, limestone, sulfuric acid and manganese are used in our operations. Changes in price and availability have a direct impact on our manufacturing costs.
Our zinc based products compete with other materials in many of their applications. For example, PW zinc is used by steel fabricators in the hot dip galvanizing process, in which steel is coated with zinc in order to protect it from corrosion. Demand for our zinc as a galvanizing material may shift depending on how customers view the respective merits of hot dip galvanizing and paint. In addition, SHG zinc and CGG zinc are used by continuous galvanizers to produce galvanized flat-rolled sheet steel for the automotive market. There have been recent plans by some automotive companies to begin to use light weight aluminum sheet to replace galvanized steel. Any such shifts in industry uses could affect our sales.
Our nickel-based products are used in the stainless steel industry. Demand for our products and services may decline if demand for stainless steel lessens. Nickel-bearing stainless steel faces competition from stainless steel containing a lower level of nickel or no nickel.

Our ability to anticipate shifts in product usage and to produce new products to meet our current and future customers’ needs will significantly impact our operating results. We also face intense competition from regional, national and global providers of zinc and nickel based products, and the growth of any of those competitors could reduce our market share and negatively impact our operating results.
Our business is subject to a wide variety of environmental and other regulations and our operations expose us to a wide variety of potential liabilities. Our total cost of environmental compliance at any time depends on a variety of regulatory, technical and factual issues, some of which cannot be anticipated. Changes in regulations and/or our failure to comply with existing regulations can result in significant capital expenditure requirements or penalties.
Summary of Critical Accounting Policies and Estimates

Our Consolidated Financial Statements and the notes thereto for the fiscal year ended December 31, 2014, which were included in our Annual Report on Form 10-K filed with the SEC on March 2, 2015, contain a summary of significant accounting policies followed by us in the preparation of our consolidated financial statements. These policies were also followed in preparing the consolidated financial statements as of September 30, 2015 and for the nine months ended September 30, 2015 and 2014. Certain of these accounting policies are described below.

Revenue Recognition

We recognize revenue from the sale of finished goods when persuasive evidence of a sales agreement exists which includes a fixed or determinable price, when passage of title or risk of loss has occurred (which is generally at the time of shipment) and when collectability is reasonably assured.

41


We recognize service fee revenue when persuasive evidence of a sales agreement exists which includes a fixed or determinable price, when passage of title or risk of loss has occurred (which is generally recognized at the time of receipt of EAF dust that the Company collects from steel mini-mill operators) and when collectability is reasonably assured.

Sales of zinc and nickel material goods include all zinc and nickel related products sold as a tangible good. Service fee revenue includes EAF service revenues and tolling and environmental services. Other revenues include miscellaneous and all other sales.

Inventories

Inventories, which consist primarily of zinc and nickel-bearing materials, chemical reagents and supplies and spare parts are valued at the lower of cost or market using a weighted average actual cost method. Zochem values its inventory using the first-in first-out method. Raw materials are purchased, as well as produced, from the processing of EAF dust. Supplies and spare parts inventory used in the production process are purchased. Work-in-process and finished goods inventories are valued based on the costs of raw materials plus applicable conversion costs, including depreciation and overhead costs relating to associated process facilities.
Zinc and nickel are traded as commodities on the LME, and accordingly, product inventories are subject to price fluctuations. When reviewing inventory for the lower of cost or market, we consider the forward metal prices as quoted on the LME as of the reporting date in determining our estimate of net realizable value and to determine if an adjustment is required. Our product revenues are based on the current or prior months’ LME average prices. The LME average price upon which our product revenue is based has been reasonably correlated with the forward LME prices that we use to make the lower of cost or market adjustments.

Insurance Claim Liabilities

We accrue for costs associated with self-insured retention under certain insurance policies (primarily workers’ compensation) based on estimates of claims, including projected development, from information provided by the third party administrator and a third party actuarial firm. Accruals for estimated costs are undiscounted and are subject to change based on development of such claims. Changes in the estimates of the reserves are included in net income in the period determined. Amounts estimated to be paid within one year have been classified as current liabilities, with the remainder included in non-current liabilities in the Consolidated Balance Sheets.

Share-Based Compensation

We have a share-based compensation plan. Employee stock options granted on or after January 1, 2006 are expensed over the requisite service period, based on the estimated fair value of the award on the date of the grant using the Black-Scholes option-pricing model. Restricted stock unit service or performance related grants are expensed over the vesting period, with the expense based on the stock price on the grant-date multiplied by the number of restricted stock units granted. Restricted stock unit market based grants are expensed over the vesting period, with the expense determined using a valuation model based on commonly accepted economic theory which is used for all valuations of awards with market conditions. This economic theory is also used as a basis for the Black Scholes and Monte Carlo valuations.

Fair Value

Fair value is measured using inputs from the three levels of the fair value hierarchy. Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
The three levels are described as follows:
•Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities. Cash and cash equivalents including the money market demand account, accounts receivable, notes payable due within one year, accounts payable and accrued expenses are considered to be in Level 1 of the fair value hierarchy as they approximate their fair value due to the short-term nature of these instruments (see Note D – Cash and Cash Equivalents in our Consolidated Financial Statements). Borrowings under our credit facilities are considered to be in Level 1 of the fair value hierarchy (see Note I - Long Term Debt in our Consolidated Financial Statements).
•Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the determination of the fair value of the asset or liability, either directly or indirectly. The financial swap and financial option instruments are carried at fair value and are considered to be in Level 2 of the fair value hierarchy. These derivatives are not designated as cash flow hedges and we

42

recognize changes in fair value within the consolidated statements of operations as they occur (see Note P – Accounting for Derivative Instruments and Hedging Activities in our Consolidated Financial Statements). The pension assets are considered to be in Level 2 of the fair value hierarchy (see Note L – Employee Benefit Plans in our Consolidated Financial Statements).
•Level 3 – Unobservable inputs that are significant to the determination of fair value of the asset or liability. The Convertible Notes, issued on July 27, 2011, were initially valued at fair value and subsequently are carried at amortized cost. The fair value is considered to be in Level 3 of the hierarchy (see Note I – Long-Term Debt in our Consolidated Financial Statements). The Secured Notes issued on July 26, 2012, June 3, 2013 and July 29, 2014 were initially valued at fair value and are subsequently carried at amortized cost. The Unsecured Notes issued on July 29, 2014 were issued and are valued at par value. These debt issuances are considered to be in Level 3 of the fair value hierarchy (see Note I – Long-Term Debt in our Consolidated Financial Statements).
When developing the fair value measurements, we use quoted market prices whenever available or seek to maximize the use of observable inputs and minimize the use of unobservable inputs when quoted market prices are not available.
Derivatives
We do not enter into derivative financial instrument transactions unless we have an existing asset or obligation or anticipate a future activity that could result in exposing us to market risk. We use various strategies to manage our market risk, including the use of derivative instruments to limit, offset or reduce such risk. Derivative financial instruments are used to manage well-defined commodity price risks from our primary business activity.
We record derivative instruments in current assets or current liabilities in the Consolidated Balance Sheets at fair value. These derivatives are not designated as cash flow hedges and we recognize changes in fair value within the Consolidated Statements of Operations as they occur. The fair values of derivative instruments are based upon a comparison of third party counterparties valuations, with whom we have entered into substantially identical derivative contracts, to ensure that there is an acceptable level of consistency among them. The valuations utilize forward pricing and an implied volatility of the underlying commodity as well as interest rate forwards and are therefore subject to fluctuation based on the movements of the commodity markets. Cash flows from derivatives are recognized in the Consolidated Statements of Cash Flows in a manner consistent with the underlying transactions.
We are exposed to credit loss should counter-parties or clearing agents with which we have entered into derivative transactions become unable to satisfy their obligations in accordance with the underlying agreements. To reduce the risk of such losses, at points in time, we utilize LME-registered contracts entered into with the London Clearing House for some of the contracts. Additionally, we are minimizing potential credit loss at September 30, 2015 by utilizing eight different brokers for our derivative contracts (see Note P – Accounting for Derivatives Instruments and Hedging Activities in our Consolidated Financial Statements).

Impairment

Long lived assets are reviewed for impairment when events and circumstances indicate that the carrying amount of an asset may not be recoverable. On a quarterly bases, we assess, among other things, adverse changes in asset use or business climate; current period cash flows; expectations that assets may be sold and projections of future cash flows, any of which may indicate a triggering event indicating potential impairment. Our policy is to record an impairment loss when it is determined that the carrying amount of the asset exceeds the sum of the expected undiscounted future cash flows resulting from use of the asset, and its eventual disposition. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds its fair value, normally as determined in either open market transactions or through the use of a discounted cash flow model. Long lived assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.

We have no goodwill or indefinite-lived intangible assets that require evaluation for impairment.

Acquisitions

We recognize the assets acquired and the liabilities assumed at their fair values as of the acquisition date. Contingent purchase consideration is recorded at fair value at the date of acquisition. Measuring assets and liabilities at fair value requires us to determine the price that would be paid by a third party market participant based on the highest and best use of the assets or interest acquired. The excess of the fair value of the net assets acquired over the purchase price is recorded as a bargain purchase gain. The excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. Acquisition costs are expensed as incurred. (See Note B - Acquisition of Business in our Consolidated Financial Statements).

Variable Interest Entities

43

Investments in other entities are accounted for using the consolidation, equity or cost basis method depending upon the level of ownership, ability to exercise significant influence over the operating and financial policies of the investee and whether we are determined to be the primary beneficiary of a variable interest in an entity.
HMP's joint venture, ThirtyOx, was determined to be a variable interest entity as their significant activities are directed by a management agreement and not the equity group. HMP has determined that they are not the primary beneficiary of the variable interest. HMP accounts for its investment in ThirtyOx using the equity method of accounting since they do not own over 50% and they are not able to exercise significant influence over the joint venture. HMP recorded their cash contributions to ThirtyOx as an investment which is increased or decreased by their respective share of ThirtyOx pretax income or loss.
Results of Operations
The following table sets forth the percentages of sales that certain items of operating data constitute for the periods indicated.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net sales
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales (excluding depreciation and amortization)
112.6
 %
 
93.9
 %
 
100.8
 %
 
92.2
 %
Depreciation and amortization
13.3
 %
 
9.5
 %
 
12.4
 %
 
6.8
 %
Selling, general and administrative expenses
5.5
 %
 
5.1
 %
 
5.9
 %
 
5.1
 %
Loss from operations
(31.4
)%
 
(8.5
)%
 
(19.1
)%
 
(4.1
)%
Interest expense
9.4
 %
 
8.1
 %
 
8.5
 %
 
3.6
 %
Interest and other income
0.5
 %
 
3.7
 %
 
3.9
 %
 
2.0
 %
Loss before income taxes
(40.3
)%
 
(12.9
)%
 
(23.7
)%
 
(5.7
)%
Income tax benefit
(14.7
)%
 
(6.6
)%
 
(8.8
)%
 
(2.4
)%
Net loss
(25.6
)%
 
(6.3
)%
 
(14.9
)%
 
(3.3
)%



44

The following table sets forth the activity and the fair values of our hedging instruments at the reporting dates.
 
 
Put Option Settlement Period
 
 
 
 
 
 
 
2014
 
 
Swaps
 
Total
Fair value December 31, 2013
 
$
38

 
 
$
(1,432
)
 
$
(1,394
)
Sales
 
(35
)
 
 
—

 
(35
)
Write-off of expired positions
 
(3
)
 
 
1,534

 
1,531

Mark to market adjustments on open positions
 
—

 
 
1,569

 
1,569

Fair value March 31, 2014
 
—

 
 
1,671

 
1,671

Write-off of expired positions
 
—

 
 
(2,033
)
 
(2,033
)
Mark to market adjustments on open positions
 
—

 
 
(466
)
 
(466
)
Fair value June 30, 2014
 
—

 
 
(828
)
 
(828
)
Write-off of expired/sold positions
 
—

 
 
392

 
392

Mark to market adjustments on open positions
 
—

 
 
699

 
699

Fair value September 30, 2014
 
—

 
 
263

 
263

Write-off of expired/sold positions
 
—

 
 
(263
)
 
(263
)
Mark to market adjustments on open positions
 
—

 
 
(375
)
 
(375
)
Fair value December 31, 2014
 
—

 
 
(375
)
 
(375
)
Write-off of expired/sold positions
 
—

 
 
196

 
196

Mark to market adjustments on open positions
 
—

 
 
(491
)
 
(491
)
Fair value March 31, 2015
 
—

 
 
(670
)
 
(670
)
Write-off of expired/sold positions
 
—

 
 
229

 
229

Mark to market adjustments on open positions
 
—

 
 
9,833

 
9,833

Fair value June 30, 2015
 
—

 
 
$
9,392

 
9,392

Write-off of expired/sold positions
 
—

 
 
(4,874
)
 
(4,874
)
Mark to market adjustments on open positions
 
—

 
 
1,912

 
1,912

Fair value September 30, 2015
 
$
—

 
 
$
6,430

 
$
6,430

A significant portion of our zinc oxide shipments are priced based on prior months’ LME average zinc price. Consequently, changes in the LME average zinc price are not fully realized until subsequent periods.
The LME average zinc prices for the most recent eight quarters and the average LME zinc prices for the year to date as of the end of each quarter are listed in the table below:
 
 
2013
 
2014
 
2015
Average LME zinc price
 
December 31
 
March 31
 
June 30
 
September 30
 
December 31
 
March 31
 
June 30
 
September 30
Quarter
 
$
0.86

 
$
0.92

 
$
0.94

 
$
1.05

 
$
1.01

 
$
0.94

 
$
0.99

 
$
0.84

Year-to-date
 
$
0.87

 
$
0.92

 
$
0.93

 
$
0.97

 
$
0.98

 
$
0.94

 
$
0.97

 
$
0.92


Segment Disclosure
We report three segments, Horsehead, Zochem and INMETCO. The Horsehead segment processes EAF dust and other zinc-bearing material to produce and sell zinc and other metals. The Zochem segment produces and sells zinc oxide. The INMETCO segment processes a variety of metal-bearing waste material generated primarily by the specialty steel industry, provides tolling services and produces and sells nickel-chromium-molybdenum-iron to the stainless and specialty steel industries.
Eliminations relate to the exclusion of revenue resulting primarily from the sale of zinc metal from our Horsehead segment to our Zochem segment and EAF dust service fees charged by our Horsehead segment to our INMETCO segment, interest expense recorded on debt which is not allocated to our segments and selling, general and administrative expenses related to our corporate division are not recorded within our three segments.

45

Three Months Ended September 30, 2015 Compared with Three Months Ended September 30, 2014
Consolidated net sales.
Consolidated net sales decreased $4.0 million, or 3.6%, to $107.0 million for the three months ended September 30, 2015, compared to $111.0 million for the three months ended September 30, 2014.
Change in consolidated net sales
 
(in millions)
Horsehead
 
$
6.7

Zochem
 
(2.8
)
INMETCO
 
(0.7
)
Eliminations
 
(3.9
)
Unrealized non-cash hedge adjustments
 
(3.3
)
Total change in consolidated net sales
 
$
(4.0
)
See separate segment discussion following.

Consolidated cost of sales (excluding depreciation and amortization).
Consolidated cost of sales increased $16.3 million, or 15.6%, to $120.5 million for the three months ended September 30, 2015, compared to $104.2 million for the three months ended September 30, 2014.
Change in consolidated cost of sales (excluding depreciation and amortization)
 
(in millions)
Horsehead
 
$
19.9

Zochem
 
—

INMETCO
 
(0.6
)
Eliminations
 
(3.8
)
Unrealized non-cash hedge adjustments
 
$
0.8

Total change in consolidated cost of sales (excluding depreciation and amortization)
 
$
16.3

See separate segment discussion following.
Consolidated depreciation and amortization.
Consolidated depreciation and amortization increased $3.7 million, or 35.2%, to $14.2 million for the three months ended September 30, 2015, compared to $10.5 million for the three months ended September 30, 2014.
Change in consolidated depreciation and amortization
 
(in millions)
Depreciation associated with the new zinc facility
 
3.4

Other
 
0.3

Total change in consolidated depreciation and amortization
 
$
3.7

•
The increase in depreciation associated with the new zinc facility in Mooresboro, North Carolina relates to capital expenditures subsequent to the start of operations in May 2014.
•
Depreciation during the three months ended September 30, 2015 includes additional depreciation of $1.8 million relating to the write off of electrodes scrapped at the Mooresboro facility during the quarter.
Consolidated selling, general and administrative expenses.
Consolidated selling, general and administrative expenses increased $0.2 million, or 3.5%, to $5.9 million for the three months ended September 30, 2015, compared to $5.7 million for the three months ended September 30, 2014. The increase was due to an overall increase in labor.
Consolidated other income (expense).
Net consolidated other income (expense) was $(9.5) million for the three months ended September 30, 2015, compared to $(4.8) million for the three months ended September 30, 2014.

46

Change in consolidated other income (expense)
 
(in millions)
Increase in interest expense
 
$
(1.0
)
Decrease in interest and other income
 
(3.7
)
Total change in consolidated other income (expense)
 
$
(4.7
)
•
Increase in interest expense as a result of new debt issued on July 29, 2014 of $10 million in Senior Secured Notes and $40 million Unsecured Notes and increase in average borrowings outstanding under revolvers during the three months ended September 30, 2015 as compared to the three months ended September 30, 2014.
•
Decrease in interest and other income primarily as a result of a decrease in income recorded under the Shell contract during the three months ended September 30, 2015 as compared to the three months ended September 30, 2014. The sale of the Monaca site to Shell occurred in June 2015. Additionally, the three months ended September 30, 2014 included scrap sales.
Consolidated income tax benefit.
 
 
Three Months Ended September 30, 2015
Three Months Ended September 30, 2014
Income tax benefit (in millions)
 
$
(15.7
)
$
(7.2
)
Effective tax rate
 
36.5
%
50.8
%
Consolidated net loss.
Net loss for the three months ended September 30, 2015 was $(27.4) million compared to net loss of $(7.0) million for the three months ended September 30, 2014.
Business Segments
Horsehead
Net sales.
Net sales, excluding unrealized non-cash adjustments relating to our hedging activities and intercompany transactions relating to the sale of zinc metal, increased $2.9 million, or 4.8%, to $63.7 million for the three months ended September 30, 2015 compared to $60.8 million for the three months ended September 30, 2014.
Change in Horsehead net sales
 
(in millions)
Volume increase due to zinc finished products and services
 
17.5

Price realization decrease due to zinc finished products and services
 
(6.6
)
WOX/zinc calcine sales decrease
 
(17.1
)
Miscellaneous and other sales increase
 
9.1

Total change in Horsehead net sales
 
$
2.9

•
The zinc finished products volume increase is due to the continued ramp-up of production at the new zinc facility which began operations in May 2014.
•
The decrease in price realization during the three months ended September 30, 2015 primarily related to zinc metal and resulted from a 20.1% lower average LME zinc price for the three months ended September 30, 2015 compared to the three months ended September 30, 2014.
•
Zinc calcine was sold to third parties during the three months ended September 30, 2015 and three months ended September 30, 2014. Zinc calcine will continue to be sold until the new zinc facility is operating at close to capacity. The decrease was due to a volume decrease of 23.2% and a decrease in price realization due to a reduction in the LME zinc price for the quarter as compared to the previous year's quarter.
•
The increase in miscellaneous and other sales is due to the sale of zinc cathodes from the Mooresboro facility and the settlement of fixed rate swaps.
•
Net sales during the three months ended September 30, 2015 were decreased by unrealized non-cash adjustments of $2.1 million relating to our hedging activities. Net sales during the three months ended September 30, 2014 were decreased by unrealized non-cash adjustments of $0.3 million relating to our hedging activities.

47

Horsehead zinc product shipments - in tons
 
Three Months Ended September 30, 2015
Three Months Ended September 30, 2014
Zinc finished product shipments
 
16,324

7,786

Calcine shipments
 
27,467

35,782

Total zinc product shipments on a zinc contained basis
 
33,464

30,801

Average sales price realization on a zinc contained basis
 
$
0.65

$
0.78

Net sales of zinc metal, excluding intercompany transactions, increased $12.6 million, or 73.3%, to $29.8 million for the three months ended September 30, 2015, compared to $17.2 million for the three months ended September 30, 2014.
Change in Horsehead zinc metal net sales
 
(in millions)
Increase in volume
 
$
19.3

Decrease in price realization
 
(6.7
)
Total change in Horsehead zinc metal net sales
 
$
12.6

•
The volume increase is due to the continued ramp-up of production at the new zinc facility which began operations in May 2014. The increase also relates to an increase in the sale of purchased metal.
•
The decrease in price realization was a result of an decrease in the average price per ton on zinc metal sold and a decrease of 20.1% in the average LME zinc price.
Net sales of zinc-based powders remained approximately the same at $1.1 million for the three months ended September 30, 2015 compared to $1.0 million for the three months ended September 30, 2014.

Revenues from EAF dust recycling decreased $1.7 million, or 15.2%, to $9.5 million for the three months ended September 30, 2015, compared to $11.2 million for the three months ended September 30, 2014.
Change in Horsehead EAF Dust recycling net sales
 
(in millions)
Decrease in volume
 
$
(2.0
)
Increase in price realization
 
0.3

Total change in Horsehead EAF Dust recycling net sales
 
$
(1.7
)
•
EAF dust receipts for the three months ended September 30, 2015 were 129,152 tons compared to 156,605 tons for the three months ended September 30, 2014.
•
The decrease in volume was the result of a reduction in EAF dust receipts due to lower steel production output from our customers during the third quarter of 2015.
Cost of sales (excluding depreciation and amortization).

Cost of sales, excluding intercompany transactions relating to the sale of zinc metal, increased $16.1 million, or 24.7%, to $81.3 million for the three months ended September 30, 2015, compared to $65.2 million for the three months ended September 30, 2014.
The cost of zinc material and other products sold, excluding intercompany transactions relating to the sale of zinc metal, increased $17.8 million, or 31.8%, to $73.7 million for the three months ended September 30, 2015, compared to $55.9 million for the three months ended September 30, 2014.
Change in Horsehead cost of zinc material and other products sold
 
(in millions)
Increase in the volume of zinc finished products shipped
 
35.3

Decrease in cost of zinc finished products shipped
 
(14.3
)
Decrease in recycling and other costs
 
(0.3
)
Cost of sales relating to WOX and zinc calcine products produced
 
(2.9
)
Total change in Horsehead cost of zinc metal and other products sold
 
$
17.8



48

•
The increase in volume relates to a sales increase due to the continued ramp-up of production at the new zinc facility during the third quarter of 2015 compared to the third quarter of 2014. The increase in volume also relates to an increase in the sale of purchased metal.
Conversion costs for the Mooresboro facility, which began operations in May 2014, were $24.0 million for the three months ended September 30, 2015 compared to $20.0 million for the three months ended September 30, 2014. Conversion costs at the Mooresboro facility consisted primarily of labor, maintenance, services, utilities, supplies and chemical additives.

Conversion costs for the recycling facilities that process EAF dust increased approximately $0.9 million to $24.4 million for the three months ended September 30, 2015 from $23.5 million for the three months ended September 30, 2014.
Change in Horsehead recycling conversion costs
 
(in millions)
Maintenance related costs
 
1.2

Natural gas
 
(0.5
)
Other
 
0.2

Total change in Horsehead conversion costs
 
$
0.9

•
Production decreased 15.6% for the third quarter of 2015 as compared to the third quarter of 2014.
•
Conversion cost per ton increased approximately 23% for the third quarter of 2015 compared to the third quarter of 2014.

The cost of EAF dust services decreased $1.8 million, or 19.1% to $7.6 million for the three months ended September 30, 2015, compared to $9.4 million for the three months ended September 30, 2014.
Change in Horsehead cost of EAF dust services
 
(in millions)
Decrease in volume
 
$
(1.6
)
Decrease in transportation costs
 
(0.2
)
Total change in Horsehead cost of EAF dust services
 
$
(1.8
)

•
EAF tons processed remained decreased 13.7% during the three months ended September 30, 2015 as compared to the three months ended September 30, 2014.
Loss before income taxes.
For the reasons stated above, our loss before income taxes was:
Horsehead loss before taxes (in millions)
 
Three Months Ended September 30, 2015
Three Months Ended September 30, 2014
Loss before taxes
 
$
(38.0
)
$
(15.2
)
Unrealized non-cash losses related to hedging
 
2.1

0.3

Loss before taxes excluding unrealized non-cash adjustments related to hedging
 
$
(35.9
)
$
(14.9
)
Zochem
Net sales.
Net sales, excluding unrealized non-cash adjustments relating to our hedging activities, decreased $2.8 million, or 7.7%, to $33.4 million for the three months ended September 30, 2015, compared to $36.2 million for the three months ended September 30, 2014.
Change in Zochem net sales
 
(in millions)
Lower shipment volume
 
$
(0.1
)
Decrease in price realization
 
(2.7
)
Total change in Zochem net sales
 
$
(2.8
)
•
Price realization per pound decreased 7.6% partially as a result of a decrease in the average LME zinc price of 20.1% for the three months ended September 30, 2015 compared to the three months ended September 30, 2014.

49

•
Non-cash adjustments related to hedging activities were not material for both the three months ended September 30, 2015 and the three months ended September 30, 2014.
Cost of sales (excluding depreciation and amortization).
Cost of sales remained approximately the same at $31.2 million for the three months ended September 30, 2015, compared to the three months ended September 30, 2014, after excluding unrealized non-cash losses related to hedging of approximately $0.8 million during the three months ended September 30, 2015. Shipment volume remained approximately the same during the three months ended September 30, 2015 compared to the three months ended September 30, 2014.

(Loss) income before income taxes.
For the reasons stated above, loss before income taxes was $(0.1) million for the three months ended September 30, 2015, compared to income before income taxes of $3.8 million for the three months ended September 30, 2014.
INMETCO
Net sales.
Net sales, excluding unrealized non-cash adjustments relating to our hedging activities, decreased $0.7 million, or 5.3%, to $12.5 million for the three months ended September 30, 2015, compared to $13.2 million for the three months ended September 30, 2014.
Change in INMETCO net sales
 
(in millions)
Decrease in price realization
 
$
(4.0
)
Increase in shipment volume
 
3.0

Increase in other and miscellaneous sales
 
0.3

Total change in INMETCO net sales
 
$
(0.7
)
•
Lower price realization due to customer mix on tolling return shipments and a 43.1% decrease in the average LME nickel price for the three months ended September 30, 2015 compared to the three months ended September 30, 2014.
•
Hedging activities related to nickel resulted in no non-cash adjustments for the three months ended September 30, 2015 compared with an favorable non-cash adjustment of $1.4 million for the three months ended September 30, 2014.
Cost of sales (excluding depreciation and amortization).
Cost of sales decreased $0.6 million, or 7.4%, to $7.5 million for the three months ended September 30, 2015 compared to $8.1 million for the three months ended September 30, 2014.
Change in INMETCO cost of sales (excluding depreciation and amortization)
 
(in millions)
Decrease in cost of product shipped
 
$
(2.1
)
Higher shipment volume
 
2.0

Other
 
$
(0.5
)
Total change in INMETCO cost of sales (excluding depreciation and amortization)
 
$
(0.6
)
•
Decrease in the cost per ton shipped was due to a 29% increase in tons produced and lower raw material costs.
•
Decrease in other relates to credit for participation in energy program.
Income before income taxes.
For the reasons stated above, our income before income taxes was:
INMETCO income before taxes (in millions)
 
Three Months Ended September 30, 2015
Three Months Ended September 30, 2014
Income before taxes
 
$
3.3

$
5.2

Unrealized non-cash losses related to hedging
 
—

(1.4
)
Income before taxes excluding unrealized non-cash adjustments related to hedging
 
3.3

3.8


50

Other
Corporate, eliminations and other

Net sales.
Eliminations of net sales were $4.2 million for the three months ended September 30, 2015 compared to $0.3 million for the three months ended September 30, 2014. Eliminations relate to the exclusion of revenue resulting primarily from the sale of zinc metal from our Horsehead segment to our Zochem segment and EAF dust service fees charged by our Horsehead segment to our INMETCO segment.

Loss before income taxes.
Loss before income taxes increased $0.2 million to $8.3 million for the three months ended September 30, 2015 compared to $8.1 million for the three months ended September 30, 2014. The increase in loss before income taxes was primarily due to an increase in interest expense of $0.4 million due to an increase in debt recorded in our corporate division.
Nine Months Ended September 30, 2015 Compared with Nine Months Ended September 30, 2014
Consolidated net sales.
Consolidated net sales decreased $15.4 million, or 4.4%, to $331.9 million for the nine months ended September 30, 2015, compared to $347.3 million for the nine months ended September 30, 2014.
Change in consolidated net sales
 
(in millions)
Horsehead
 
$
(5.6
)
Zochem
 
(7.0
)
INMETCO
 
(4.1
)
Eliminations
 
(4.5
)
Unrealized non-cash hedge adjustments
 
5.8

Total change in consolidated net sales
 
$
(15.4
)
See separate segment discussion following.

Consolidated cost of sales (excluding depreciation and amortization).
Consolidated cost of sales increased $14.4 million, or 4.5%, to $334.7 million for the nine months ended September 30, 2015, compared to $320.3 million for the nine months ended September 30, 2014.
Change in consolidated cost of sales (excluding depreciation and amortization)
 
(in millions)
Horsehead
 
$
22.7

Zochem
 
(3.0
)
INMETCO
 
(1.5
)
Eliminations
 
(4.5
)
Unrealized non-cash hedge adjustments
 
0.7

Total change in consolidated cost of sales (excluding depreciation and amortization)
 
$
14.4

See separate segment discussion following.
Consolidated depreciation and amortization.
Consolidated depreciation and amortization increased $17.7 million, or 75.3%, to $41.2 million for the nine months ended September 30, 2015, compared to $23.5 million for the nine months ended September 30, 2014.
Change in consolidated depreciation and amortization
 
(in millions)
Depreciation associated with the new zinc facility
 
17.4

Other
 
0.3

Total change in consolidated depreciation and amortization
 
$
17.7


51

•
The new zinc facility in Mooresboro, North Carolina began operations in May 2014.
•
Depreciation during the nine months ended September 30, 2015 includes additional depreciation of $3.9 million relating to the write off of electrodes scrapped at the Mooresboro facility.
Consolidated selling, general and administrative expenses.
Consolidated selling, general and administrative expenses increased $1.7 million, or 9.6%, to $19.5 million for the nine months ended September 30, 2015, compared to $17.8 million for the nine months ended September 30, 2014. The increase is a result of an overall increase in labor and service related costs.
Consolidated other income (expense).
Net consolidated other income (expense) was $(15.2) million for the nine months ended September 30, 2015, compared to $(5.6) million for the nine months ended September 30, 2014.
Change in consolidated other income (expense)
 
(in millions)
Increase in interest expense
 
$
(3.8
)
Decrease in capitalized interest related to construction of new zinc facility
 
(11.9
)
Increase in interest and other income
 
6.1

Total change in consolidated other income (expense)
 
$
(9.6
)
•
Increase in interest expense as a result of new debt issued on July 29, 2014 of $10 million in Senior Secured Notes and $40 million Unsecured Notes and increase in average borrowings outstanding under revolvers during the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014.
•
Decrease in capitalized interest due to the startup of the new zinc facility in May 2014.
•
Increase in interest and other income primarily as a result of an increase in income recorded under the Shell contract of $8.6 million partially offset by a decrease in scrap sales of $1.4 million during the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014. The sale of the Monaca site to Shell occurred in June 2015.
Consolidated income tax benefit.
 
 
Nine Months Ended September 30, 2015
Nine Months Ended September 30, 2014
Income tax benefit (in millions)
 
$
(29.2
)
$
(8.5
)
Effective tax rate
 
37.1
%
42.6
%
•
The effective tax rate for the nine months ended September 30, 2015 decreased when compared to the nine months ended September 30, 2014 due to higher than previously projected pretax losses during 2015 which increased the valuation allowance related to state net operating losses and also diluted the impact of lower foreign subsidiary statutory tax rates impact on the overall effective rate.
Consolidated net loss.
Net loss for the nine months ended September 30, 2015 was $(49.5) million compared to net loss of $(11.4) million for the nine months ended September 30, 2014.
Business Segments
Horsehead
Net sales.
Net sales, excluding unrealized non-cash adjustments relating to our hedging activities and intercompany transactions relating to the sale of zinc metal, decreased $10.2 million, or 5.2%, to $186.4 million for the nine months ended September 30, 2015 compared to $196.6 million for the nine months ended September 30, 2014.

52

Change in Horsehead net sales
 
(in millions)
Volume decrease due to zinc finished products and services
 
(9.6
)
Price realization increase due to zinc finished products and services
 
0.1

WOX/zinc calcine sales decrease
 
(11.9
)
Miscellaneous and other sales increase
 
11.2

Total change in Horsehead net sales
 
$
(10.2
)
•
The zinc products volume reduction was primarily due the closure of the Monaca facility in April 2014 and the continued ramp-up of production at the new zinc facility. During the first quarter of 2014, HZP production was idled due to a lack of raw material supply. Shipments, however, continued through the end of April 2014.
•
Zinc calcine was sold to third parties during the nine months ended September 30, 2015 and both WOX and zinc calcine were sold to third parties during the nine months ended September 30, 2014. Zinc calcine will continue to be sold until the new zinc facility is operating at close to capacity. The decrease was due to a reduction in price realization due to a decrease in the LME zinc price for the nine motnhs as compared to the previous year's nine months.
•
Net sales during the nine months ended September 30, 2015 were increased by unrealized non-cash adjustments of $7.8 million relating to our hedging activities. Net sales during the nine months ended September 30, 2014 were increased by unrealized non-cash adjustments of $2.0 million relating to our hedging activities.
•
The increase in miscellaneous and other sales is primarily due to the sale of zinc cathodes from the Mooresboro facility and the settlement of fixed rate swaps.
Horsehead zinc product shipments - in tons
 
Nine Months Ended September 30, 2015
Nine Months Ended September 30, 2014
Zinc finished product shipments
 
47,047

49,545

WOX/calcine shipments
 
78,536

73,933

Total zinc product shipments on a zinc contained basis
 
96,363

98,161

Average sales price realization on a zinc contained basis
 
$
0.75

$
0.83

Net sales of zinc metal, excluding intercompany transactions, decreased $2.2 million, or 2.3%, to $93.8 million for the nine months ended September 30, 2015, compared to $96.0 million for the nine months ended September 30, 2014.
Change in Horsehead zinc metal net sales
 
(in millions)
Decrease in volume
 
$
(1.7
)
Decrease in price realization
 
(0.5
)
Total change in Horsehead zinc metal net sales
 
$
(2.2
)
•
The decrease in volume relates to a reduction in shipments due to the closure of the Monaca facility in April 2014 and the continued ramp-up of production at the new zinc facility.
•
The decrease in price realization was a result of a decrease of 4.9% in the average LME zinc price.
Net sales of zinc-based powders decreased $4.1 million to $2.6 million for the nine months ended September 30, 2015 compared to $6.7 million for the nine months ended September 30, 2014. The decrease was primarily due to the idling of production at our HZP facility due to a lack of raw material supply during the first quarter of 2014.

Revenues from EAF dust recycling decreased $3.2 million, or 10.1%, to $28.6 million for the nine months ended September 30, 2015, compared to $31.8 million for the nine months ended September 30, 2014.
Change in Horsehead EAF Dust recycling net sales
 
(in millions)
Decrease in volume
 
$
(3.8
)
Increase in price realization
 
0.6

Total change in Horsehead EAF Dust recycling net sales
 
$
(3.2
)
•
EAF dust receipts for the nine months ended September 30, 2015 were 394,173 tons compared to 447,289 tons for the nine months ended September 30, 2014.

53

•
The decrease in volume was the result of a reduction in EAF dust receipts due to lower steel production output from our customers during the nine months ended September 30, 2015.
Cost of sales (excluding depreciation and amortization).

Cost of sales, excluding intercompany transactions relating to the sale of zinc metal, increased $18.1 million, or 9.0%, to $218.2 million for the nine months ended September 30, 2015, compared to $200.1 million for the nine months ended September 30, 2014.
The cost of zinc material and other products sold, excluding intercompany transactions relating to the sale of zinc metal, for the nine months ended September 30, 2015, increased $21.1 million, or 12.1%, to $195.8 million, compared to $174.7 million for the nine months ended September 30, 2014.
Change in Horsehead cost of zinc material and other products sold
 
(in millions)
Decrease due to a reduction in the volume of zinc finished products shipped
 
(6.3
)
Increase in cost of zinc finished products shipped
 
23.3

Cost of sales relating to WOX and zinc calcine products produced
 
3.7

Increase in recycling and other costs
 
0.4

Total change in Horsehead cost of zinc metal and other products sold
 
$
21.1


•
Volume decrease due to the continued ramp-up of the new zinc facility.

•
The cost of zinc material includes $3.6 million of LCM inventory adjustments during the nine months ended September 30, 2015 and LCM adjustments of $1.6 million for the nine months ended September 30, 2014. The 2015 and 2014 LCM adjustments were the result of higher than normal production costs at the new zinc facility which operated at inefficient levels during its continued ramp-up. The 2014 LCM adjustments were also the result of higher than normal production costs which occurred during the final months of shutdown at our Monaca facility. The Monaca facility was permanently closed in April 2014.
Conversion costs for the Mooresboro facility, which began operations in May 2014, were $66.4 million for the nine months ended September 30, 2015 and $24.9 million for the nine months ended September 30, 2014. Conversion costs at the Mooresboro facility consisted primarily of labor, maintenance, services, utilities, supplies and chemical additives. Conversion costs for the Monaca facility, which was permanently closed at the end of April 2014, were $32.6 million for the nine months ended September 30, 2014.

Conversion costs for the recycling facilities that process EAF dust increased approximately $4.0 million to $71.3 million for the nine months ended September 30, 2015 from $67.3 million for the nine months ended September 30, 2014.
Change in Horsehead recycling conversion costs
 
(in millions)
Labor
 
$
0.6

Coke
 
0.7

Maintenance related costs
 
3.2

Services
 
1.2

Natural gas
 
(1.7
)
Total change in Horsehead conversion costs
 
$
4.0

•
Production decreased 2.3% for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014
•
Conversion cost per ton increased 8.4% for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

The cost of EAF dust services decreased $3.0 million, or 11.8% to $22.4 million for the nine months ended September 30, 2015, compared to $25.4 million for the nine months ended September 30, 2014.

54

Change in Horsehead cost of EAF dust services
 
(in millions)
Decrease in volume
 
$
(3.1
)
Increase in transportation costs
 
0.1

Total change in Horsehead cost of EAF dust services
 
$
(3.0
)

•
EAF tons processed decreased 1.4% during the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014.
Loss before income taxes.
For the reasons stated above, our loss before income taxes was:
Horsehead loss before taxes (in millions)
 
Nine Months Ended September 30, 2015
Nine Months Ended September 30, 2014
Loss before taxes
 
$
(66.4
)
$
(30.5
)
Unrealized non-cash gains related to hedging
 
(7.8
)
(2.0
)
Loss before taxes excluding unrealized non-cash adjustments related to hedging
 
$
(74.2
)
$
(32.5
)
Zochem
Net sales.
Net sales, excluding unrealized non-cash adjustments relating to our hedging activities, decreased $7.0 million, or 6.4%, to $102.0 million for the nine months ended September 30, 2015, compared to $109.0 million for the nine months ended September 30, 2014.
Change in Zochem net sales
 
(in millions)
Lower shipment volume
 
$
(8.2
)
Increase in price realization
 
1.2

Total change in Zochem net sales
 
$
(7.0
)
•
Lower shipment volume as a result of the closure of the Monaca zinc oxide refinery on December 23, 2013 and resulting transfer of the remaining Monaca zinc oxide inventory to Zochem during the first quarter of 2014.
•
Price realization per pound increased 1.1% after being offset by a decrease in the average LME zinc price of 4.9% for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.
•
Non-cash adjustments related to hedging activities were $0.3 million for the nine months ended September 30, 2015 but were not material for the nine months ended September 30, 2014.
Cost of sales (excluding depreciation and amortization).
Cost of sales, after excluding unrealized non-cash adjustments related to hedging, decreased $3.0 million, or 3.1%, to $92.4 million for the nine months ended September 30, 2015, compared to $95.4 million for the nine months ended September 30, 2014.
Change in Zochem cost of sales (excluding depreciation and amortization)
 
(in millions)
Increase in cost of products shipped
 
$
4.1

Decrease due to lower shipment volume
 
(7.1
)
Total change in Zochem cost of sales (excluding depreciation and amortization)
 
$
(3.0
)
•
Lower shipment volume as a result of the closure of the Monaca zinc oxide refinery on December 23, 2013 and resulting transfer of the remaining Monaca zinc oxide inventory to Zochem during the first quarter of 2014.
•
Non-cash adjustments related to hedging totaled $0.7 million for the nine months ended September 30, 2015. No non-cash adjustments related to hedging were recorded during the nine months ended September 30, 2014.
Income before income taxes.
For the reasons stated above, income before income taxes was $4.4 million for the nine months ended September 30, 2015, compared to $10.6 million for the nine months ended September 30, 2014.

55

INMETCO
Net sales.
Net sales, excluding unrealized non-cash adjustments relating to our hedging activities, decreased $4.1 million, or 10.0%, to $37.0 million for the nine months ended September 30, 2015, compared to $41.1 million for the nine months ended September 30, 2014.
Change in INMETCO net sales
 
(in millions)
Decrease in price realization
 
$
(5.2
)
Increase in shipment volume
 
1.0

Increase in other and miscellaneous sales
 
0.1

Total change in INMETCO net sales
 
$
(4.1
)
•
Decrease in price realization due to 26.8% decrease in average LME nickel price and the customer mix on tolling return shipments for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.
•
Hedging activities related to nickel resulted in no non-cash adjustments for the nine months ended September 30, 2015 compared with an unfavorable non-cash adjustment of $0.3 million for the nine months ended September 30, 2014.
Cost of sales (excluding depreciation and amortization).
Cost of sales decreased $1.5 million, or 5.8%, to $24.4 million for the nine months ended September 30, 2015 compared to $25.9 million for the nine months ended September 30, 2014.
Change in INMETCO cost of sales (excluding depreciation and amortization)
 
(in millions)
Lower cost of product shipped
 
$
(1.8
)
Higher shipment volume
 
0.8

Other
 
$
(0.5
)
Total change in INMETCO cost of sales (excluding depreciation and amortization)
 
$
(1.5
)
•
Lower cost of product shipped mainly related to lower purchased raw material costs.
•
Decrease in other relates to credit for participation in energy program.

Income before income taxes.
For the reasons stated above, our income before income taxes was:
INMETCO income before taxes (in millions)
 
Nine Months Ended September 30, 2015
Nine Months Ended September 30, 2014
Income before taxes
 
$
8.0

$
10.6

Unrealized non-cash losses related to hedging
 
—

0.3

Income before taxes excluding unrealized non-cash adjustments related to hedging
 
$
8.0

$
10.9

Other
Corporate, eliminations and other

Net sales.
Eliminations of net sales were $5.6 million for the nine months ended September 30, 2015 compared to $1.1 million for the nine months ended September 30, 2014. Eliminations relate to the exclusion of revenue resulting primarily from the sale of zinc metal from our Horsehead segment to our Zochem segment and EAF dust service fees charged by our Horsehead segment to our INMETCO segment.

Loss before income taxes.
Loss before income taxes increased $14.3 million to $24.7 million for the nine months ended September 30, 2015 compared to $10.5 million for the nine months ended September 30, 2014. The increase in loss before income taxes was due primarily to

56

an increase in actual interest expense of $2.7 million due to an increase in debt recorded in our corporate division and a decrease in capitalized interest of $11.3 million due to the completion of the new zinc facility in May 2014.

Liquidity and Capital Resources

Liquidity

On July 26, 2012, we completed a private placement of $175.0 million principal amount of 10.50% Senior Secured Notes due 2017, at an issue price of 98.188% of par with a yield to maturity of 11.00%. The net proceeds from the offering were approximately $164.1 million.
On August 28, 2012, we announced that we entered into a Credit Agreement with a Spanish bank to provide for the financing of up to €18.6 million (approximately $25.8 million USD) for purchases under certain contracts for equipment and related products and services for the new zinc facility and an additional $1.0 million for the insurance premium on this loan. As of September 30, 2015, we had $18.2 million in outstanding borrowings on this facility and $0.8 million in availability remaining on this agreement.
On April 29, 2014, we entered into a $20.0 million 2014 Zochem Facility. As of September 30, 2015, we had $8.0 million in outstanding borrowings on this facility, which is classified as current in the Consolidated Balance Sheets due to the expiration of the facility in September 2016. We had $11.6 million of availability remaining at September 30, 2015.
On June 3, 2013, we completed the private placement of an additional $20.0 million in aggregate principal amount of 2013 Additional Notes at an issue price of 106.5% of the principal amount. The 2013 Additional Notes were issued at an effective interest rate of 8.6%. We received net proceeds from the offering of $21.0 million.
On June 24, 2013, INMETCO entered into the INMETCO Facility. INMETCO entered into this facility to support working capital requirements and for general corporate purposes. The INMETCO Facility was terminated on July 6, 2015, as described below.
On October 30, 2013, we completed an underwritten public offering of 6.3 million shares of common stock, including 0.8 million shares sold pursuant to the underwriters' exercise of their option to purchase additional shares, at a price to the public of $12.00 per share. We received approximately $72.0 million in net proceeds from the offering, after deducting underwriting discounts and commissions and offering expenses.

On July 29, 2014, we completed a private placement of $40.0 million aggregate principal amount of 9.00% Unsecured Notes due 2017, at an issue price of 100.00% of par. The Unsecured Notes mature on June 1, 2017 and are a new issue of notes.

On July 29, 2014, we also completed the private placement of an additional $10.0 million aggregate principal amount of 2014 Additional Notes, at an issue price of 113.00% of par. The 2014 Additional Notes were issued as additional notes under the indenture dated July 26, 2012, pay interest semiannually at a rate of 10.50% per annum and were issued at an effective interest rate of 5.5%.

Total net proceeds from the July 29, 2014 offerings were $49.6 million.

At September 30, 2015, there was an aggregate of $205.0 million of Secured Notes outstanding.
On January 28, 2015, we completed an underwritten public offering of 5.8 million shares of common stock, including 0.8 million shares sold pursuant to the underwriters' exercise of their option to purchase additional shares, at a price to the public of $12.75 per share. We received approximately $69.6 million in net proceeds from the offering, after deducting underwriting discounts and commissions and offering expenses.

On June 30, 2015, we entered into the new $80.0 million Macquarie Credit Facility, which became effective on July 6, 2015. The Macquarie Credit Facility matures on May 15, 2017. The new revolving credit facility replaces both the $20.0 million INMETCO Facility and the $60.0 million ABL Facility. The Macquarie Credit Facility accommodates a broader borrowing base than the two previous credit facilities and adds additional liquidity. We had $59.5 million in outstanding borrowings on this facility as of September 30, 2015 and $20.5 million of availability.

On October 23, 2015, the Company entered into an At-The-Market Equity Offering sales agreement pursuant to which the Company may offer and sell, from time to time, shares of its common stock having an aggregate offering price of up to $50 million, through the sales agent. Subject to the terms and conditions of the sales agreement, the sales agent will use its commercially

57

reasonable efforts to sell shares of the Company’s common stock in such number, at such times and at such prices as the Company shall determine. However, the Company is not required to sell any shares of its common stock at any time. The sales agreement will terminate on the earlier of (i) the sale of all of the common stock subject to the sales agreement or (ii) termination of the sales agreement in accordance with its terms. The Company intends to use the net proceeds from the sale of the shares of its common stock, if any, for general corporate purposes, which may include liquidity for operational contingencies, working capital and capital expenditures.

Outlook
Our new zinc facility continues to be in the ramp-up stage, and since start-up, has experienced significant operational difficulties that have resulted in low production and several interruptions. The operational issues we have experienced have significantly slowed the ramp-up rate, negatively impacted our cash flows and results of operations, and delayed the realization of the benefits we believe we can obtain from full operation of our zinc facility. We have not identified any insurmountable technical or operational obstacles that materially challenge the value proposition of our new zinc facility. However, the timing and the cost to achieve and sustain full capacity are currently uncertain.

During the past few months of 2015 we have significantly enhanced our organization at the Mooresboro facility, and we have recently expanded the use of external engineering resources assigned to the Mooresboro projects to accelerate the rate that changes are implemented. These resources, which include engineering, technical support and operations management, have validated the feasibility of the technology and developed potential solutions to many of the known issues. We are focused on implementing these improvements, a number of which were achieved during the recent outage.

We are currently unable to predict with any certainty when we will begin operating at full design capacity, and we cannot guarantee that our efforts to remediate known issues will be sufficient or that we will not encounter additional issues that may result in further delays. We are also unable to foresee the severity of any such issues. In addition, we are unable to predict with any degree of certainty the expected costs to remediate any issues which prevent us from operating at full design capacity.

We continue to believe that once we are operating efficiently at full capacity, we will realize significant benefits from our investment in this transformative project. Timing, however, for achieving specific milestones during the ramp-up or the completion of the ramp-up to full zinc production, however, cannot be predicted with certainty at this time. Once the new facility is operating at full capacity and at full efficiency, we believe it will be capable of producing over 155,000 tons of zinc metal per year and with certain modifications, capable of producing over 170,000 tons of zinc metal per year.
We have historically financed our operations, maintenance capital expenditures and debt service primarily with funds generated by our operations, supplemented by additional debt or equity capital as needed. We believe the combination of (i) our cash balance of approximately $34.9 million at September 30, 2015, (ii) our availability under the Macquarie Credit Facility, 2014 Zochem Facility and Credit Agreement of approximately $33 million as of September 30, 2015, (iii) our cost reduction initiatives, (iv) our expected cash generated from operations and (v) our potential to raise additional debt or equity capital will be sufficient to satisfy our liquidity and capital requirements for the next twelve months. Significant assumptions underlie this belief, including, among other things, that we will be able to resolve the operational issues that have delayed ramp-up of production at our new zinc facility and that new unforeseen issues do not develop, that the prices of zinc and nickel do not continue to decrease or remain at current low levels, that we are able to implement our business strategy, that there will be no other material adverse developments in our business, liquidity or capital requirements and, if needed, that we will be able to raise additional debt or equity capital or consummate other liquidity-generating transactions in a timely manner and on terms acceptable to us. Although we believe we could obtain additional capital and/or reduce our capital requirements if necessary, our ability to do so may be affected by industry factors, including LME zinc prices, by factors relating to the ramp up of our new zinc facility and by general economic, financial, competitive, legislative, regulatory and other factors discussed in this report and in our other filings with the SEC, including our Annual Report on Form 10-K, for the fiscal year ended December 31, 2014.
If our future cash flows from operations and existing financing sources and other liquidity-generating transactions are insufficient to pay our debt obligations as they mature or to fund our liquidity needs, we may be forced to reduce or delay our business activities and capital expenditures, seek additional capital or refinance our debt.  In addition, if we are unable to refinance our indebtedness, we may be required to pursue one or more strategic alternatives, such as a merger, recapitalization, reorganization, going private transaction, divestiture or sale of all or substantially all of our assets. We cannot assure you that we would be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all. If our indebtedness is accelerated and we are unable to refinance that indebtedness, we may be forced into bankruptcy or liquidation.

58

Cash and Cash Equivalents
Our balance of cash and cash equivalents at September 30, 2015 was $34.9 million, an increase of $4.2 million from the December 31, 2014 balance of $30.7 million. Cash and cash equivalents are held in three US banks and one Canadian bank.
Cash Flows from Operating Activities
Our operations used a net $48.3 million of cash for the nine months ended September 30, 2015. The cash flows used represent the operating loss for the nine months ended September 30, 2015. Additionally, an increase in accounts receivable and inventory and a decrease in accounts payable used $3.5 million, $2.3 million and $2.3 million, respectively, of cash during the first nine months of 2015. This was somewhat offset by an increase in accrued expenses of $6.0 million.
Our investment in working capital was $53.9 million at September 30, 2015 and $48.5 million at December 31, 2014. The increase in working capital was primarily due to an increase in current assets, primarily prepaid assets, this however, was partially offset due to the reclass of the outstanding amounts due under the 2014 Zochem Facility to current maturities of long-term debt at September 30, 2015.
Cash Flows from Investing Activities
Capital expenditures were $26.8 million for the nine months ended September 30, 2015. Additionally, we received proceeds of $9.0 million related to the sale of the Monaca land to Shell which occurred in June 2015. We used cash of $8.9 million due primarily to the cash collateralization of letters of credit which had been outstanding under our previous ABL Facility.
Cash Flows from Financing Activities
Cash provided by financing activities for the nine months ended September 30, 2015 totaled $79.2 million. We received net proceeds of $69.6 million from the issuance of stock on January 28, 2015. Additionally, we borrowed $66.0 million on our credit facilities and repaid $52.7 million.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements include operating leases, letters of credit and surety bonds. At September 30, 2015, the Company had a total of $0.3 million in letters of credit outstanding under the 2014 Zochem Facility and $7.6 million in letters of credit that are cash collateralized and recorded in Restricted cash in the Company's Consolidated Balance Sheet at September 30, 2015. The letters of credit outstanding were entered into to collateralize self-insured claims for workers’ compensation and other general insurance claims. We also have three surety bonds outstanding in the amount of $11.2 million to collateralize closure bonds for the Company’s three facilities located in Pennsylvania.
Available Information
Our internet website address is www.horsehead.net. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), will be available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Our website and the information contained or incorporated therein are not intended to be incorporated into this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In the ordinary course of our business, we are exposed to potential losses arising from changes in interest rates and the prices of zinc, nickel, lead and natural gas. We have historically used derivative instruments, such as swaps, put options and forward purchase contracts to manage the effect of these changes. When we use forward contract hedging instruments to reduce our exposure to rising energy prices, we are limited in our ability to take advantage of future reductions in energy prices, because we are required to exercise the hedging instrument at the settlement date regardless of the market price at the time. We have also used put options in the past to reduce our exposure to future declines in zinc prices.
Our risk management policy seeks to meet our overall goal of managing our exposure to market price risk, particularly risks related to changing zinc and nickel prices. All derivative contracts are held for purposes other than trading and are used primarily to mitigate uncertainty and volatility of expected cash flow and to cover underlying exposures. We are exposed to credit loss in cases where counter-parties or clearing agents with which we have entered into derivative transactions become unable to satisfy their obligations in accordance with the underlying agreements. To minimize the risk of such losses, at September 30, 2015, we currently utilize eight different brokers for our hedging program.


59

Interest Rate Risk
We are subject to interest rate risk in connection with our $80.0 million Macquarie Credit Facility entered into on July 6, 2015, our $25.8 million Credit Agreement entered into on November 14, 2012 (as amended) and our $20.0 million 2014 Zochem Facility entered into on April 29, 2014, all of which bear interest at variable rates. Assuming that the two credit facilities and the Credit Agreement are fully drawn and holding other variables constant, each one percentage point change in interest rates would be expected to have an impact on pre-tax earnings and cash flows for the next year of approximately $1.3 million.

Commodity Price Risk
Our business consists principally of the sale of zinc and nickel-based products. As a result, our results of operations are subject to risk of fluctuations in the market prices of zinc and nickel. While our finished products are generally priced based on a spread to the price of zinc or nickel on the LME, our revenues are impacted significantly by changes in the market price of these metals. Changes in zinc prices will also impact our ability to generate revenue from our EAF recycling operations as well as our ability to procure raw materials. Additionally, energy is one of our most significant costs. Our processes rely primarily on electricity and natural gas to operate. Our freight operations depend heavily on diesel fuel. Energy prices have been volatile in recent years and currently exceed long-term historical averages. These fluctuations impact our manufacturing costs and contribute to earnings volatility.

Several additives and process chemicals, including but not limited to coke, limestone, sulfuric acid and manganese are used in our operations. Changes in price and availability have a direct impact on our manufacturing costs.
The Company entered into fixed rate swaps which were put in place to reduce volatility during the completion of construction and ramp-up of production at the new zinc facility. During the first quarter of 2014, we added fixed price swaps for the second quarter of 2014, at an average price of approximately $0.94 per pound for a total quantity covered of 26,500 tons for the quarter, zinc fixed price swaps for the months of August and September 2014, at an average price of slightly over $1.07 per pound for a total quantity covered of 6,000 tons per month, zinc fixed price swaps for the months of November and December 2014, at an average price of slightly over $1.05 per pound for a total quantity covered of 6,600 tons per month.
During the three months ended March 31, 2015, we added zinc fixed price swaps for the month of February 2015 at an average price of approximately $0.97 per pound for a total quantity covered of approximately 3,300 tons and zinc fixed price swaps for the months of April and May 2015 at an average price of approximately $0.94 per pound for a total quantity covered of approximately 6,600 tons per month.

During the second quarter of 2015, we added zinc fixed price swaps for the month of June 2015 at an average price of approximately $1.01 per pound for a total quantity covered of approximately 9,900 tons, fixed price swaps for the third quarter of 2015 at an average price of $1.07 per pound for a total quantity covered of approximately 18,200 tons and fixed price swaps for the fourth quarter of 2015 at an average price of $1.07 for a total quantity covered of approximately 16,900 tons.

We received cash of $8.3 million and $7.5 million from the settlement of zinc fixed price swaps during the three and nine months ended September 30, 2015, respectively and received cash of $0.54 million but paid cash of $0.51 million during the three and nine months ended September 30, 2014, respectively.

In October 2015, the Company added zinc fixed price swaps for the first quarter of 2016 at an average price of approximately $0.83 per pound for a total quantity covered of approximately 5,000.0 tons.
The swaps and fixed rate swaps are included in “Prepaid expenses and other current assets” and "Accrued expenses" in our consolidated financial statements.
At December 31, 2014, we were party to raw material supply agreements through 2015. The agreements require us to purchase approximately 50,000 tons of SHG metal for 2015 at a variable price based on the monthly average LME zinc price plus a premium. Based on the December 2014 average LME zinc price, this purchase commitment was estimated to be approximately $107 million for 2015.
Each year, we enter into contracts for the forward purchase of natural gas to cover the majority of natural gas requirements in order to reduce our exposure to the volatility of natural gas prices.


60

Exchange Rate Sensitivity Analysis
Our exchange rate exposures result from our acquisition of Zochem on November 1, 2011. Effective August 1, 2012, we changed Zochem’s functional currency reporting basis from Canadian Dollar to U.S. Dollar. Zochem sales are predominately in U.S. Dollars, however a portion of their sales and certain other costs remain in the Canadian Dollar and are converted to US Dollars at month end. Holding other variables constant, a 10% reduction in all relevant exchange rates, would have had relatively no effect on our earnings for the nine months ended September 30, 2015.

Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

Our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, are effective to provide reasonable assurance that material information required to be disclosed by us in reports that we file or submit under the Exchange Act is appropriately recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting.

During the quarter ending September 30, 2015, there was no change in our internal control over financial reporting that in our management’s judgment has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


61


PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
We are party to various litigation, claims and disputes, including, breach of contract claims, labor regulation claims and U.S. Occupational Safety and Health Act and environmental regulation violations, some of which are for substantial amounts, arising in the ordinary course of business. While the ultimate effect of such actions cannot be predicted with certainty, we expect that the outcome of these matters will not result in a material adverse effect on our business, financial condition or results of operations.
For further information refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which was filed with the SEC on March 2, 2015.

Item 1A. Risk Factors.
There have been no material changes in our Risk Factors from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on March 2, 2015.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
[None]
Item 3. Defaults Upon Senior Securities.
[None]
Item 4. Mine Safety Disclosures
[None]
Item 5. Other Information.

On November 6, 2015, we entered into a Severance Agreement (the "Severance Agreement") with Gary R. Whitaker, our Vice President, General Counsel and Secretary.

The initial term of the Severance Agreement is two years and provides for the payment of an amount equal to eighteen months base salary rate (currently $338,000) in the event of a change of control of the Company, as long as certain conditions are met, including the signing of a general release.

The foregoing description of the Severance Agreement is not intended to be complete and is qualified it its entirety by the complete text of the Severance Agreement, which is attached as Exhibit 10.1 to this Current Report on Form 10-Q and is incorporated herein by reference.


62

Item 6. Exhibits.
EXHIBIT INDEX
Exhibit No.
 
Description
 
 
 
 
10.1
 
Severance Agreement, dated as of November 6, 2015 by and between Horsehead Holding Corp. and Gary W. Whitaker.
10.2
 
At-The-Market Equity Offering Sales Agreement, dated October 23, 2015, between Horsehead Holding Corp. and Stifel, Nicolaus & Company, Incorporated, as sales agent (incorporated by reference to Exhibit 1.1 of the Registrant’s Current Report on Form 8-K filed on October 23, 2015).
 
 
 
31.1
 
Certification by James M. Hensler, Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
 
Certification of Robert D. Scherich, Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
 
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS
 
Instance Document
 
 
101.SCH
 
Schema Document
 
 
101.CAL
 
Calculation Linkbase Document
 
 
101.LAB
 
Labels Linkbase Document
 
 
101.PRE
 
Presentation Linkbase Document
 
 
101.DEF
 
Definition Linkbase Document

63

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.
 
 
HORSEHEAD HOLDING CORP.
 
 
 
/s/ James M. Hensler
 
By:
James M. Hensler
 
Its:
President and Chief Executive Officer
This report has been signed by the following persons in the capacities indicated on November 9, 2015.
 
 
 
 
 
 
SIGNATURE
  
TITLE
  
DATE
 
 
 
/s/ James M. Hensler
  
Principal Executive Officer
  
November 9, 2015
James M. Hensler
 
 
 
 
 
 
/s/ Robert D. Scherich
  
Principal Financial and
Accounting Officer
  
November 9, 2015
Robert D. Scherich
 
 
 

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