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EX-31.1 - EXHIBIT 31.1 - HANDY & HARMAN LTD.hnh3-31x2016ex311.htm
EX-31.2 - EXHIBIT 31.2 - HANDY & HARMAN LTD.hnh3-31x2016ex312.htm
EX-32 - EXHIBIT 32 - HANDY & HARMAN LTD.hnh3-31x2016ex32.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                 to                                

Commission File Number: 1-2394
HANDY & HARMAN LTD.
(Exact name of registrant as specified in its charter)
DELAWARE
13-3768097
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1133 Westchester Avenue, Suite N222
White Plains, New York
10604
(Address of principal executive offices)
(Zip Code)
914-461-1300
(Registrant's telephone number, including area code)
 
 
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ý  No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes ý     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer x
 
 
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Yes o    No ý

The number of shares of Common Stock outstanding as of April 27, 2016 was 12,263,792.




TABLE OF CONTENTS
HANDY & HARMAN LTD.

PART I - FINANCIAL INFORMATION
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 4.
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 





Part I - FINANCIAL INFORMATION
Item 1. - Financial Statements (unaudited)

HANDY & HARMAN LTD.
CONSOLIDATED BALANCE SHEETS
(Unaudited)

 
 
March 31,
 
December 31,
(in thousands, except par value)
 
2016
 
2015
ASSETS
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
21,311

 
$
23,728

Trade and other receivables - net of allowance for doubtful accounts of $1,535 and $1,451, respectively
 
92,015

 
74,375

Inventories, net
 
88,094

 
82,804

Prepaid and other current assets
 
5,851

 
9,295

Total current assets
 
207,271

 
190,202

Property, plant and equipment at cost, less accumulated depreciation
 
114,066

 
112,686

Goodwill
 
121,834

 
121,829

Other intangibles, net
 
42,050

 
43,117

Investment in associated company
 
13,583

 
20,923

Deferred income tax assets
 
120,007

 
120,149

Other non-current assets
 
15,453

 
15,767

Total assets
 
$
634,264

 
$
624,673

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current Liabilities:
 
 
 
 
Trade payables
 
$
46,688

 
$
34,466

Accrued liabilities
 
20,034

 
31,497

Accrued environmental liabilities
 
2,221

 
2,531

Short-term debt
 
774

 
742

Current portion of long-term debt
 
1,745

 
1,720

Total current liabilities
 
71,462

 
70,956

Long-term debt
 
105,932

 
97,106

Accrued pension liability
 
264,788

 
265,566

Other post-retirement benefit obligations
 
2,644

 
2,624

Deferred income tax liabilities
 
418

 
402

Other liabilities
 
3,618

 
3,479

Total liabilities
 
448,862

 
440,133

Commitments and Contingencies
 


 


Stockholders' Equity:
 
 
 
 
Common stock - $.01 par value; authorized 180,000 shares; issued 13,635 and 13,579 shares, respectively
 
136

 
136

Accumulated other comprehensive loss
 
(259,263
)
 
(259,392
)
Additional paid-in capital
 
586,970

 
586,693

Treasury stock, at cost - 1,371 shares
 
(34,454
)
 
(34,454
)
Accumulated deficit
 
(107,987
)
 
(108,443
)
Total stockholders' equity
 
185,402

 
184,540

Total liabilities and stockholders' equity
 
$
634,264

 
$
624,673


SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1



HANDY & HARMAN LTD.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)

 
 
Three Months Ended
 
 
March 31,
(in thousands, except per share)
 
2016
 
2015
Net sales
 
$
160,797

 
$
137,982

Cost of goods sold
 
117,080

 
99,603

Gross profit
 
43,717

 
38,379

Selling, general and administrative expenses
 
31,284

 
30,861

Pension expense
 
2,151

 
2,072

Operating income
 
10,282

 
5,446

Other:
 
 
 
 
Interest expense
 
1,070

 
1,167

Realized and unrealized loss on derivatives
 
123

 
207

Other expense
 
145

 
93

Income from continuing operations before tax and equity investment
 
8,944

 
3,979

Tax provision
 
3,860

 
1,643

Loss (gain) from associated company, net of tax
 
4,628

 
(922
)
Income from continuing operations, net of tax
 
456

 
3,258

Discontinued operations:
 
 
 
 
Income from discontinued operations, net of tax
 

 
565

Gain on disposal of assets, net of tax
 

 
89,521

Net income from discontinued operations
 

 
90,086

Net income
 
$
456

 
$
93,344

Basic and diluted income per share of common stock
 
 
 
 
Income from continuing operations, net of tax, per share
 
$
0.04

 
$
0.30

Discontinued operations, net of tax, per share
 

 
8.36

Net income per share
 
$
0.04

 
$
8.66

Weighted-average number of common shares outstanding
 
12,223

 
10,780


SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2



HANDY & HARMAN LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
 
Three Months Ended
 
 
March 31,
(in thousands)
 
2016
 
2015
Net income
 
$
456

 
$
93,344

 
 
 
 
 
Other comprehensive (loss) income, net of tax:
 
 
 
 
Changes in pension liability and other post-retirement benefit obligations
 
(94
)
 
2,022

Tax effect of changes in pension liability and other post-retirement benefit obligations
 

 
(395
)
Foreign currency translation adjustments
 
199

 
(1,397
)
Tax effect of changes in foreign currency translation adjustments
 
24

 

Other comprehensive income
 
129

 
230

 
 
 
 
 
Comprehensive income
 
$
585

 
$
93,574


SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3


HANDY & HARMAN LTD.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Accumulated Other Comprehensive
 
Additional Paid-In
 
Treasury Stock,
 
Accumulated
 
Total Stockholders'
(in thousands)
 
Shares
 
Amount
 
Loss
 
Capital
 
at Cost
 
Deficit
 
Equity
Balance, December 31, 2015
 
13,579

 
$
136

 
$
(259,392
)
 
$
586,693

 
$
(34,454
)
 
$
(108,443
)
 
$
184,540

Amortization, issuance and forfeitures of restricted stock grants
 
56

 

 

 
277

 

 

 
277

Changes in pension liability and post-retirement benefit obligations, net of tax
 

 

 
(94
)
 

 

 

 
(94
)
Foreign currency translation adjustments, net of tax
 

 

 
223

 

 

 

 
223

Net income
 

 

 

 

 

 
456

 
456

Balance, March 31, 2016
 
13,635

 
$
136

 
$
(259,263
)
 
$
586,970

 
$
(34,454
)
 
$
(107,987
)
 
$
185,402


SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4


HANDY & HARMAN LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
 
Three Months Ended
 
 
March 31,
(in thousands)
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net income
 
$
456

 
$
93,344

Net income from discontinued operations
 

 
(90,086
)
Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
5,686

 
3,250

Non-cash stock-based compensation
 
672

 
1,345

Non-cash loss (gain) from investment in associated company, net of tax
 
4,628

 
(922
)
Amortization of debt issuance costs
 
274

 
284

Deferred income taxes
 
2,870

 
1,166

Gain from asset dispositions
 
(164
)
 
(55
)
Non-cash (gain) loss from derivatives
 
(13
)
 
198

Reclassification of net cash settlements on precious metal contracts to investing activities
 
136

 
8

Change in operating assets and liabilities, net of acquisitions:
 
 
 
 
Trade and other receivables
 
(17,400
)
 
(21,908
)
Inventories
 
(5,206
)
 
(8,367
)
Prepaid and other current assets
 
(317
)
 
1,073

Other current liabilities
 
6,352

 
(1,914
)
Other items, net
 
(213
)
 
(295
)
Net cash used in continuing operations
 
(2,239
)
 
(22,879
)
Net cash used in discontinued operations
 

 
(2,264
)
Net cash used in operating activities
 
(2,239
)
 
(25,143
)
Cash flows from investing activities:
 
 
 
 
Additions to property, plant and equipment
 
(5,841
)
 
(3,775
)
Net cash settlements on precious metal contracts
 
(136
)
 
(8
)
Acquisitions, net of cash acquired
 

 
(27,000
)
Proceeds from sale of assets
 
423

 
79

Investments in associated company
 

 
(7,368
)
Proceeds from sale of discontinued operations
 

 
152,889

Net cash used in investing activities of discontinued operations
 

 
(75
)
Net cash (used in) provided by investing activities
 
(5,554
)
 
114,742


5


 
 
Three Months Ended
 
 
March 31,
(in thousands)
 
2016
 
2015
Cash flows from financing activities:
 
 
 
 
Net revolver borrowings (repayments)
 
8,932

 
(103,670
)
Net borrowings on loans - foreign
 
7

 
266

Repayments of term loans - domestic
 
(114
)
 
(88
)
Deferred finance charges
 
(82
)
 
(282
)
Net change in overdrafts
 
(3,369
)
 
1,555

Other financing activities
 
(3
)
 
(7
)
Net cash provided by (used in) financing activities
 
5,371

 
(102,226
)
Net change for the period
 
(2,422
)
 
(12,627
)
Effect of exchange rate changes on cash and cash equivalents
 
5

 
(161
)
Cash and cash equivalents at beginning of period
 
23,728

 
31,649

Cash and cash equivalents at end of period
 
$
21,311

 
$
18,861

 
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
880

 
$
1,011

Taxes
 
$
1,248

 
$
1,006


SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – The Company and Nature of Operations

Handy & Harman Ltd. ("HNH") is a diversified manufacturer of engineered niche industrial products. HNH's diverse product offerings are marketed throughout the United States and internationally. HNH owns Handy & Harman Group Ltd. ("H&H Group"), which owns Handy & Harman ("H&H") and Bairnco, LLC ("Bairnco"), formerly Bairnco Corporation. HNH manages its group of businesses on a decentralized basis with operations principally in North America. HNH's business units encompass the following segments: Joining Materials, Tubing, Building Materials, Performance Materials, and Kasco Blades and Route Repair Services ("Kasco"). All references herein to "we," "our" or the "Company" refer to HNH together with all of its subsidiaries.

Note 2 – Basis of Presentation

The consolidated balance sheet as of December 31, 2015, which has been derived from audited financial statements, and the unaudited consolidated financial statements included herein have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted in accordance with those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. This quarterly report on Form 10-Q should be read in conjunction with the Company's audited consolidated financial statements on Form 10-K for the year ended December 31, 2015.

In the opinion of management, the interim financial statements reflect all normal and recurring adjustments necessary to present fairly the consolidated financial position and the results of operations and changes in cash flows for the interim periods. The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Estimates are based on historical experience, expected future cash flows and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the operating results for the full year.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, and the guidance defines a five step process to achieve this core principle. In August 2015, the FASB issued ASU No. 2015-14, which deferred the effective date of ASU No. 2014-09 by one year. The ASU, as amended, is effective for the Company's 2018 fiscal year and may be applied either (i) retrospectively to each prior reporting period presented with an election for certain specified practical expedients, or (ii) retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application, with additional disclosure requirements. The Company is evaluating the potential impact of this new guidance, but does not currently anticipate that the application of ASU No. 2014-09 will have a significant effect on its financial condition, results of operations or its cash flows. We have not yet determined the method by which we will adopt the standard.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amendments do not apply to inventory that is measured using the last-in, first-out ("LIFO") cost method. The Company is currently evaluating the potential impact of this new guidance, which is effective for the Company's 2017 fiscal year.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments, which eliminates the requirement to restate prior-period financial statements for measurement-period adjustments following a business combination. The new guidance requires that the cumulative impact of a measurement-period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The prior-period impact of the adjustment should either be presented separately on the face of the income statement or disclosed in the notes. This new guidance is effective for the Company's 2016 fiscal year. The amendments in this ASU will be applied prospectively to adjustments to provisional amounts that occur in 2016 and thereafter.


7



In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability, measured on a discounted basis, on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. A modified retrospective transition approach is required for capital and operating leases existing at the date of adoption, with certain practical expedients available. The Company is currently evaluating the potential impact of this new guidance, which is effective for the Company's 2019 fiscal year.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This new standard simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows, among other things. The new standard is effective for the Company's 2017 fiscal year. The Company is currently evaluating the potential impact of this new guidance.

Note 3 – Acquisitions

ITW
On March 31, 2015, the Company, through its indirect subsidiary, OMG, Inc. ("OMG"), acquired certain assets and assumed certain liabilities of ITW Polymers Sealants North America Inc. ("ITW"), which are used in the business of manufacturing two-component polyurethane adhesive for the roofing industry, for a cash purchase price of $27.4 million, reflecting a final working capital adjustment of $0.4 million paid in June 2015. The assets acquired and liabilities assumed primarily included net working capital of inventories and accrued liabilities; property, plant and equipment; and intangible assets, primarily unpatented technology, valued at $1.7 million, $0.1 million and $4.4 million, respectively. ITW was the exclusive supplier of certain adhesive products to OMG, and this acquisition will provide OMG with greater control of its supply chain and allow OMG to expand its product development initiatives. The results of operations of the acquired business are reported within the Company's Building Materials segment. In connection with the ITW acquisition, the Company has recorded goodwill totaling approximately $21.3 million, which is expected to be deductible for income tax purposes.

JPS
Effective July 2, 2015, H&H Group completed the acquisition of JPS Industries, Inc. ("JPS") pursuant to an agreement and plan of merger, dated as of May 31, 2015, by and among the Company, H&H Group, HNH Group Acquisition LLC, a Delaware limited liability company and a subsidiary of H&H Group ("H&H Acquisition Sub"), HNH Group Acquisition Sub LLC, a Delaware limited liability company and a wholly owned subsidiary of H&H Acquisition Sub ("Sub"), and JPS. JPS is a manufacturer of mechanically formed glass and aramid substrate materials for specialty applications in a wide expanse of markets requiring highly engineered components. At the effective time of the Merger (as defined below), Sub was merged with and into JPS ("Merger"), with JPS being the surviving corporation in the Merger, and each outstanding share of JPS common stock (other than shares held by the Company and its affiliates, including SPH Group Holdings LLC ("SPH Group Holdings"), a subsidiary of Steel Partners Holdings L.P. ("SPLP"), the parent company of the Company, and a significant stockholder of JPS), was converted into the right to receive $11.00 in cash. The aggregate merger consideration of $70.3 million was funded primarily by H&H Group and also by SPH Group Holdings. H&H Group's funding of the aggregate merger consideration totaled approximately $65.7 million, which was financed through additional borrowings under the Company's senior secured revolving credit facility.

As a result of the closing of the Merger, JPS was indirectly owned by both H&H Group and SPH Group Holdings. Following the expiration of the 20-day period provided in Section 262(d)(2) of the Delaware General Corporation Law for JPS stockholders to exercise appraisal rights in connection with the Merger, and in accordance with an exchange agreement, dated as of May 31, 2015, by and between H&H Group and SPH Group Holdings, on July 31, 2015, the Company issued ("Issuance") to H&H Group 1,429,407 shares of the Company's common stock with a value of $48.7 million and, following the Issuance, H&H Group exchanged ("Exchange") those shares of Company common stock for all shares of JPS common stock held by SPH Group Holdings. As a result of the Exchange, H&H Group owned 100% of JPS and merged JPS with and into its wholly-owned subsidiary, HNH Acquisition LLC, a Delaware limited liability company, which was the surviving entity in the merger and was renamed JPS Industries Holdings LLC.

The following table summarizes the amounts of the assets acquired and liabilities assumed at the acquisition date on a preliminary basis (in thousands):

8



Cash and cash equivalents
$
22

Trade and other receivables
21,201

Inventories
27,126

Prepaid and other current assets
4,961

Property, plant and equipment
45,384

Goodwill
32,336

Other intangibles
9,120

Deferred income tax assets
19,286

Other non-current assets
3,280

Total assets acquired
162,716

Trade payables
(10,674
)
Accrued liabilities
(5,533
)
Long-term debt
(1,500
)
Accrued pension liability
(30,367
)
Other liabilities
(149
)
Net assets acquired
$
114,493


The preliminary purchase price allocation is subject to finalization of valuations of certain acquired assets and liabilities. The goodwill of $32.3 million arising from the acquisition consists largely of the synergies expected from combining the operations of HNH and JPS. All of the goodwill is assigned to the Company's Performance Materials segment and is not expected to be deductible for income tax purposes. Other intangibles consist primarily of acquired trade names of $4.3 million, customer relationships of $3.1 million and unpatented technology of $1.7 million. These intangible assets have been assigned useful lives ranging from 10 to 15 years based on the long operating history, broad market recognition and continued demand for the associated brands, and the limited turnover and long-standing relationships JPS has with its existing customer base. The valuations of acquired trade names and unpatented technology were performed utilizing a relief from royalty method, and significant assumptions used in the valuation included the royalty rate assumed and the expected level of future sales, as well as the rate of technical obsolescence for the unpatented technology. The acquired customer relationships were valued using an excess earnings approach, and significant assumptions used in the valuation included the customer attrition rate assumed and the expected level of future sales.

The amount of net sales and operating income of the acquired business included in the consolidated income statement for the three months ended March 31, 2016 were approximately $24.8 million and $0.4 million, respectively. The results of operations of the acquired business are reported within the Company's Performance Materials segment. Unaudited pro forma net sales and income from continuing operations, net of tax, of the combined entity had the acquisition date been January 1, 2014 are as follows:
 
 
Three Months Ended
 
 
March 31,
(in thousands, except per share)
 
2015
Net sales
 
$
181,823

Income from continuing operations, net of tax
 
$
4,086

Income from continuing operations, net of tax, per share
 
$
0.33

Weighted-average number of common shares outstanding
 
12,209


This unaudited pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or of the results that would have occurred had the acquisition taken place on January 1, 2014. The information for the three months ended March 31, 2015 is based on historical financial information with respect to the acquisition and does not include operational or other changes which might have been effected by the Company. The 2015 supplemental unaudited pro forma earnings were adjusted to reflect incremental depreciation and amortization expense based on the fair value adjustments for the acquired property, plant and equipment and intangible assets and exclude a total of $1.2 million of acquisition-related costs incurred by both the Company and JPS during the three months ended March 31, 2015.

Note 4 – Discontinued Operations

9




On December 18, 2014, H&H Group and Bairnco entered into a stock purchase agreement to sell all of the issued and outstanding equity interests of Arlon, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Bairnco, and its subsidiaries (other than Arlon India (Pvt) Limited) for $157.0 million in cash, less transaction fees, subject to a final working capital adjustment and certain potential reductions as provided in the stock purchase agreement. The closing of the sale occurred in January 2015. The operations of Arlon, LLC comprised substantially all of the Company's former Arlon Electronic Materials segment, which manufactured high performance materials for the printed circuit board industry and silicone rubber-based materials.

The net income from discontinued operations includes the following:
 
 
Three Months Ended
 
 
March 31,
(in thousands)
 
2015
Net sales
 
$
5,952

Operating income
 
920

Interest expense and other income
 
(10
)
Tax provision
 
365

Income from discontinued operations, net of tax
 
565

Gain on disposal of assets
 
93,455

Tax provision
 
3,934

Gain on disposal of assets, net of tax
 
89,521

Net income from discontinued operations
 
$
90,086


Based on a tax reorganization completed in anticipation of the sale of Arlon, LLC, as well as the release of Arlon, LLC's net deferred tax liabilities totaling $7.6 million, the effective tax rate on the gain on disposal of Arlon, LLC in 2015 was 4.2%.

Note 5 – Inventories

Inventories, net at March 31, 2016 and December 31, 2015 were comprised of:
 
 
March 31,
 
December 31,
(in thousands)
 
2016
 
2015
Finished products
 
$
31,680

 
$
31,355

In-process
 
20,885

 
19,873

Raw materials
 
19,128

 
18,451

Fine and fabricated precious metals in various stages of completion
 
16,986

 
13,155

 
 
88,679

 
82,834

LIFO reserve
 
(585
)
 
(30
)
Total
 
$
88,094

 
$
82,804


In order to produce certain of its products, H&H purchases, maintains and utilizes precious metal inventory. H&H records certain of its precious metal inventory at the lower of LIFO cost or market, with any adjustments recorded through cost of goods sold. Remaining precious metal inventory is accounted for primarily at fair value.

Certain customers and suppliers of H&H choose to do business on a "pool" basis and furnish precious metal to H&H for return in fabricated form or for purchase from or return to the supplier. When the customer metal is returned in fabricated form, the customer is charged a fabrication charge. The value of this customer metal is not included on the Company's consolidated balance sheet. To the extent H&H is able to utilize customer precious metal in its production processes, such customer metal replaces the need for H&H to purchase its own inventory. As of March 31, 2016, customer metal in H&H's custody consisted of 147,368 ounces of silver, 520 ounces of gold and 1,391 ounces of palladium.

10



Supplemental inventory information:
 
March 31,
 
December 31,
(in thousands, except per ounce)
 
2016
 
2015
Precious metals stated at LIFO cost
 
$
5,722

 
$
3,506

Precious metals stated under non-LIFO cost methods, primarily at fair value
 
$
10,679

 
$
9,619

Market value per ounce:
 
 
 
 
Silver
 
$
15.28

 
$
13.86

Gold
 
$
1,221.00

 
$
1,062.25

Palladium
 
$
577.00

 
$
547.00


Note 6 – Goodwill and Other Intangibles

The changes in the net carrying amount of goodwill by reportable segment for the three months ended March 31, 2016 were as follows (in thousands):
Segment
 
Balance at January 1, 2016
 
Foreign Currency Translation Adjustments
 
Additions
 
Adjustments
 
Balance at
March 31, 2016
 
Accumulated
Impairment Losses
Joining Materials
 
$
16,210

 
$
5

 
$

 
$

 
$
16,215

 
$

Tubing
 
1,895

 

 

 

 
1,895

 

Building Materials
 
71,388

 

 

 

 
71,388

 

Performance Materials
 
32,336

 

 

 

 
32,336

 

Total
 
$
121,829

 
$
5

 
$

 
$

 
$
121,834

 
$


Other intangible assets, net at March 31, 2016 and December 31, 2015 consisted of:
(in thousands)
March 31, 2016
 
December 31, 2015
 
Cost
Accumulated Amortization
Net
 
Cost
Accumulated Amortization
Net
Customer relationships
$
35,077

$
(11,291
)
$
23,786

 
$
35,077

$
(10,702
)
$
24,375

Trademarks, trade names and brand names
12,739

(2,878
)
9,861

 
12,739

(2,649
)
10,090

Patents and patent applications
5,635

(2,668
)
2,967

 
5,591

(2,591
)
3,000

Non-compete agreements
774

(725
)
49

 
774

(714
)
60

Other
7,341

(1,954
)
5,387

 
7,331

(1,739
)
5,592

Total
$
61,566

$
(19,516
)
$
42,050

 
$
61,512

$
(18,395
)
$
43,117


Other intangible assets at cost as of March 31, 2016 include $9.1 million in intangible assets, primarily trades names, customer relationships, and unpatented technology, associated with the JPS acquisition. These balances are subject to adjustment during the finalization of the purchase price allocation for the JPS acquisition.

Amortization expense totaled $1.1 million and $0.8 million for the three months ended March 31, 2016 and 2015, respectively. The increase in amortization expense during 2016 was principally due to the Company's ITW and JPS acquisitions.

Note 7 – Investments

The Company holds an investment in the common stock of a public company, ModusLink Global Solutions, Inc. ("ModusLink"), which is classified as an investment in associated company on the consolidated balance sheet. The Company carries its ModusLink investment on the consolidated balance sheet at fair value, calculated based on the closing market price for ModusLink common stock, with unrealized gains and losses on the investment reported in net income or loss. HNH owned 8,436,715 shares of the common stock of ModusLink at both March 31, 2016 and December 31, 2015, and the value of this investment decreased from $20.9 million at December 31, 2015 to $13.6 million at March 31, 2016 due entirely to a decrease in the share price of ModusLink's common stock.

11




As of March 31, 2016, SPLP and its associated companies, which include the Company, owned a combined total of 16,476,730 ModusLink common shares, which represented 31.3% of ModusLink's outstanding shares. SPLP is a majority shareholder of HNH, owning directly or indirectly through its subsidiaries in excess of 50% of HNH's common shares. The power to vote and dispose of the securities held by SPLP is controlled by Steel Partners Holdings GP Inc. ("SPH GP"). SPLP also holds warrants to purchase 2,000,000 additional shares of ModusLink common stock at an exercise price of $5.00 per share. These warrants will expire in March 2018.

ModusLink's fiscal year ends on July 31. Summarized unaudited information as to assets, liabilities and results of operations of ModusLink for the quarter ended January 31, 2016, its most recently completed fiscal quarter, and the comparable prior periods are as follows:
 
 
January 31,
 
July 31,
(in thousands)
 
2016
 
2015
Current assets
 
$
434,409

 
$
413,642

Non-current assets
 
$
30,949

 
$
32,860

Current liabilities
 
$
257,612

 
$
211,353

Non-current liabilities
 
$
92,887

 
$
90,548

Stockholders' equity
 
$
114,859

 
$
144,601

 
 
 
 
 
 
 
Three Months Ended
 
 
January 31,
(in thousands)
 
2016
 
2015
Net revenue
 
$
119,966

 
$
148,310

Gross profit
 
$
3,655

 
$
16,594

Loss from continuing operations
 
$
(13,948
)
 
$
(1,556
)
Net loss
 
$
(13,948
)
 
$
(1,566
)

Note 8 – Debt

Debt at March 31, 2016 and December 31, 2015 was as follows:
 
 
March 31,
 
December 31,
(in thousands)
 
2016
 
2015
Short-term debt
 
 
 
 
Foreign
 
$
774

 
$
742

Long-term debt
 
 
 
 
Revolving facilities
 
99,545

 
90,613

Other H&H debt - domestic
 
6,822

 
6,936

Foreign loan facilities
 
1,310

 
1,277

Sub total
 
107,677

 
98,826

Less portion due within one year
 
1,745

 
1,720

Total long-term debt
 
105,932

 
97,106

Total debt
 
$
108,451

 
$
99,568


Senior Credit Facilities

The Company's amended and restated senior credit agreement ("Senior Credit Facility") provided for an up to $365.0 million senior secured revolving credit facility, including a $20.0 million sublimit for the issuance of letters of credit and a $20.0 million sublimit for the issuance of swing loans. On March 23, 2016, the Company entered into an amendment to its Senior Credit Facility to increase the size of the credit facility by $35.0 million to an aggregate amount of $400.0 million. Borrowings under the Senior Credit Facility bear interest, at H&H Group's option, at either LIBOR or the Base Rate, as defined, plus an applicable

12



margin as set forth in the loan agreement (1.75% and 0.75%, respectively, for LIBOR and Base Rate borrowings at March 31, 2016), and the revolving facility provides for a commitment fee to be paid on unused borrowings. The weighted-average interest rate on the revolving facility was 2.22% at March 31, 2016. H&H Group's availability under the Senior Credit Facility was $174.7 million as of March 31, 2016.

The Senior Credit Facility will expire, with all amounts outstanding due and payable, on August 29, 2019. The Senior Credit Facility is guaranteed by substantially all existing and thereafter acquired or created domestic and Canadian wholly-owned subsidiaries of H&H Group, and obligations under the Senior Credit Facility are collateralized by first priority security interests in and liens upon all present and future assets of H&H Group and these subsidiaries. The Senior Credit Facility restricts H&H Group's ability to transfer cash or other assets to HNH, subject to certain exceptions, including required pension payments to the WHX Corporation Pension Plan ("WHX Pension Plan"). The Senior Credit Facility is subject to certain mandatory prepayment provisions and restrictive and financial covenants, which include a maximum ratio limit on Total Leverage and a minimum ratio limit on Fixed Charge Coverage, as defined, as well as a minimum liquidity level. The Company was in compliance with all debt covenants at March 31, 2016.

Interest Rate Swap Agreements

H&H Group entered into an interest rate swap agreement in February 2013 to reduce its exposure to interest rate fluctuations. Under the interest rate swap, the Company received one-month LIBOR in exchange for a fixed interest rate of 0.569% over the life of the agreement on an initial $56.4 million notional amount of debt, with the notional amount decreasing by $1.1 million, $1.8 million and $2.2 million per quarter in 2013, 2014 and 2015, respectively. The agreement expired in February 2016. H&H Group entered into a second interest rate swap agreement in June 2013, also to reduce its exposure to interest rate fluctuations. Under the interest rate swap, the Company received one-month LIBOR in exchange for a fixed interest rate of 0.598% over the life of the agreement on an initial $5.0 million notional amount of debt, with the notional amount decreasing by $0.1 million, $0.2 million and $0.2 million per quarter in 2013, 2014 and 2015, respectively. The agreement expired in February 2016.

Note 9 – Derivative Instruments

Precious Metal and Commodity Inventories

H&H's precious metal and commodity inventories are subject to market price fluctuations. H&H enters into commodity futures and forward contracts to mitigate the impact of price fluctuations on its precious and certain non-precious metal inventories that are not subject to fixed price contracts. The Company's hedging strategy is designed to protect it against normal volatility; therefore, abnormal price changes in these commodities or markets could negatively impact HNH's earnings. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes.

As of March 31, 2016, the Company had the following outstanding forward contracts with settlement dates through April 2016. There were no futures contracts outstanding at March 31, 2016.
 
 
 
 
Notional Value
Commodity
 
Amount
 
($ in millions)
Silver
 
762,562

 
ounces
 
$
11.7

Gold
 
1,000

 
ounces
 
$
1.2

Copper
 
200,000

 
pounds
 
$
0.4

Tin
 
55

 
metric tons
 
$
0.9


H&H accounts for these contracts as either fair value hedges or economic hedges under the guidance in Accounting Standards Codification 815, Derivatives and Hedging.

Fair Value Hedges. Of the total forward contracts outstanding, 587,562 ounces of silver and substantially all of the copper contracts are designated and accounted for as fair value hedges. The fair values of these derivatives are recognized as derivative assets and liabilities on the consolidated balance sheet. The net change in fair value of the derivative assets and liabilities, and the change in the fair value of the underlying hedged inventory, are recognized in the consolidated income statement, and such amounts principally offset each other due to the effectiveness of the hedges. The fair value hedges are associated primarily with the Company's precious metal inventory carried at fair value.


13



Economic Hedges. The remaining outstanding forward contracts for silver, and all of the contracts for gold and tin, are accounted for as economic hedges. As these derivatives are not designated as accounting hedges, they are accounted for as derivatives with no hedge designation. The derivatives are marked to market, and both realized and unrealized gains and losses are recorded in current period earnings in the consolidated income statement. The economic hedges are associated primarily with the Company's precious metal inventory valued using the LIFO method.

The forward contracts were made with a counter party rated A+ by Standard & Poors. Accordingly, the Company has determined that there is minimal credit risk of default. The Company estimates the fair value of its derivative contracts through the use of market quotes or with the assistance of brokers when market information is not available. The Company maintains collateral on account with the third-party broker. Such collateral consists of both cash that varies in amount depending on the value of open contracts, as well as ounces of precious metal held on account by the broker.

Debt Agreements

H&H Group entered into two interest rate swap agreements to reduce its exposure to interest rate fluctuations. See Note 8 - "Debt" for further discussion of the terms of these arrangements. These derivatives were not designated as accounting hedges under U.S. GAAP; they were accounted for as derivatives with no hedge designation. The Company recorded the gains or losses both from the mark-to-market adjustments and net settlements in interest expense in the consolidated income statement as the hedges were intended to offset interest rate movements. The agreements expired in February 2016.

Effect of Derivative Instruments in the Consolidated Income Statements - Income/(Expense)
(in thousands)
 
 
 
Three Months Ended
 
 
 
 
March 31,
Derivative
 
Income Statement Line
 
2016
 
2015
Commodity contracts
 
Cost of goods sold
 
$
(978
)
 
$
(914
)
 
 
Total derivatives designated as hedging instruments
 
(978
)
 
(914
)
Commodity contracts
 
Cost of goods sold
 
(24
)
 
147

Commodity contracts
 
Realized and unrealized loss on derivatives
 
(123
)
 
(207
)
Interest rate swap agreements
 
Interest expense
 

 
(45
)
 
 
Total derivatives not designated as hedging instruments
 
(147
)
 
(105
)
 
 
Total derivatives
 
$
(1,125
)
 
$
(1,019
)

Fair Value of Derivative Instruments on the Consolidated Balance Sheets - Asset/(Liability)
(in thousands)
 
 
 
March 31,
 
December 31,
Derivative
 
Balance Sheet Location
 
2016
 
2015
Commodity contracts
 
Prepaid and other current assets
 
$
58

 
$
197

 
 
Total derivatives designated as hedging instruments
 
58

 
197

Commodity contracts
 
(Accrued liabilities)/Prepaid and other current assets
 
(63
)
 
18

Interest rate swap agreements
 
Other liabilities
 

 
(30
)
 
 
Total derivatives not designated as hedging instruments
 
(63
)
 
(12
)
 
 
Total derivatives
 
$
(5
)
 
$
185


Note 10 – Pension and Other Post-Retirement Benefits

HNH sponsors a defined benefit pension plan, the WHX Pension Plan, covering many of H&H's employees and certain employees of H&H's former subsidiary, Wheeling-Pittsburgh Corporation. In addition, JPS sponsors a defined benefit pension plan, which was assumed in connection with the acquisition of JPS on July 2, 2015. The following table presents the components of net periodic pension expense for the Company's pension plans for the three months ended March 31, 2016 and 2015:

14



 
 
Three Months Ended
 
 
March 31,
(in thousands)
 
2016
 
2015
Service cost
 
$
14

 
$

Interest cost
 
4,788

 
4,760

Expected return on plan assets
 
(5,981
)
 
(5,518
)
Amortization of actuarial loss
 
3,330

 
2,830

Total
 
$
2,151

 
$
2,072


Beginning January 1, 2016, we changed the manner in which the interest cost component of net periodic pension expense is determined. Historically, we estimated the interest cost component using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. We have elected to use a full yield curve approach in the estimation of this component of benefit expense by applying the specific spot rates along the yield curve used in the determination of the benefit obligation that correlate to the relevant projected cash flows ("spot rate approach"). This change provides a more precise measurement of interest cost. The estimated impact of this change is to reduce forecast annual pension expense in 2016 by approximately $4.8 million.

The Company expects to have required minimum pension contributions of $13.5 million for the remainder of 2016, and $34.3 million, $42.0 million, $38.8 million, $35.3 million and $92.5 million in 2017, 2018, 2019, 2020, and for the five years thereafter, respectively. Required future pension contributions are estimated based upon assumptions such as discount rates on future obligations, assumed rates of return on plan assets and legislative changes. Actual future pension costs and required funding obligations will be affected by changes in the factors and assumptions described in the previous sentence, as well as other changes such as any plan termination or other acceleration events.

In addition to its pension plans included in the table above, the Company also maintains several other post-retirement benefit plans covering certain of its employees and retirees. The approximate aggregate expense for these plans was $0.6 million and $0.5 million for the three months ended March 31, 2016 and 2015, respectively.

Note 11 – Stockholders' Equity

Changes, net of tax, in accumulated other comprehensive loss and its components follow:
(in thousands)
 
Foreign Currency Translation Adjustments
 
Changes in Net Pension and Other Benefit Obligations
 
Total
Balance at December 31, 2015
 
$
(3,577
)
 
$
(255,815
)
 
$
(259,392
)
Current period income (loss)
 
223

 
(94
)
 
129

Balance at March 31, 2016
 
$
(3,354
)
 
$
(255,909
)
 
$
(259,263
)

Note 12 – Stock-Based Compensation

During the three months ended March 31, 2016, the Compensation Committee of the Company's Board of Directors approved the grant of an aggregate of 72,942 shares of restricted stock under the 2007 Incentive Stock Plan, as amended ("2007 Plan"), to certain employees, members of the Board of Directors and service providers. Restricted stock grants made to employees are in lieu of a long-term incentive plan component in the Company's bonus plan for those individuals who receive shares of restricted stock.

Compensation expense is measured based on the fair value of the stock-based awards on the grant date, as measured by the NASDAQ closing price for the Company's common stock. Compensation expense is recognized in the consolidated income statement on a straight-line basis over the requisite service period, which is the vesting period. The restricted stock grants made to employees and service providers in 2016 vest in approximately equal annual installments over a three year period from the grant date. The restricted stock grants to the Company's non-employee directors vest one year from the grant date.


15



The Company allows certain grantees to forego the issuance of shares to meet applicable income tax withholding due as a result of the vesting of restricted stock. Such shares are returned to the unissued shares of the Company's common stock.

Restricted stock activity under the 2007 Plan was as follows for the three months ended March 31, 2016:

 
 
Employees
 
 
 
 
 
 
and Service
 
 
 
 
(shares)
 
Providers
 
Directors
 
Total
Balance, January 1, 2016
 
575,131

 
825,275

 
1,400,406

Granted
 
60,670

 
12,272

 
72,942

Forfeited
 
(846
)
 

 
(846
)
Reduced for income tax obligations
 
(16,320
)
 

 
(16,320
)
Balance, March 31, 2016
 
618,635

 
837,547

 
1,456,182

 
 
 
 
 
 
 
Vested
 
533,874

 
825,275

 
1,359,149

Non-vested
 
84,761

 
12,272

 
97,033


The Company recognized compensation expense related to restricted shares of $0.7 million and $1.3 million for the three months ended March 31, 2016 and 2015, respectively. Unearned compensation expense related to restricted shares at March 31, 2016 is $2.0 million, which is net of an estimated 5% forfeiture rate for employees and service providers. This amount will be recognized over the remaining vesting period of the restricted shares.

As of December 31, 2015, 13,000 stock options to purchase HNH shares at an exercise price of $90.00 per share were outstanding under the 2007 Plan. During the three months ended March 31, 2016, all of these stock options expired unexercised.

Note 13 – Income Taxes

For the three months ended March 31, 2016 and 2015, tax provisions from continuing operations of $3.9 million and $1.6 million, respectively, were recorded. The effective tax rates in the three months ended March 31, 2016 and 2015 were 43.2% and 41.3%, respectively. The provision for income taxes is based on the current estimate of the annual effective tax rate, adjusted for discrete items that occurred within the respective periods. Changes in the effective tax rate arise principally from differences in the mix of income between taxable jurisdictions, including the impact of foreign sourced income, as well as changes in estimates associated with our projected annual state tax expense.

Note 14 – Earnings Per Share

The computation of basic earnings per share of common stock is calculated by dividing net income by the weighted-average number of shares of the Company's common stock outstanding, as follows:
 
 
Three Months Ended
 
 
March 31,
(in thousands, except per share)
 
2016
 
2015
Income from continuing operations, net of tax
 
$
456

 
$
3,258

Weighted-average number of common shares outstanding
 
12,223

 
10,780

Income from continuing operations, net of tax, per share
 
$
0.04

 
$
0.30

Net income from discontinued operations
 
$

 
$
90,086

Weighted-average number of common shares outstanding
 
12,223

 
10,780

Discontinued operations, net of tax, per share
 
$

 
$
8.36

Net income
 
$
456

 
$
93,344

Weighted-average number of common shares outstanding
 
12,223

 
10,780

Net income per share
 
$
0.04

 
$
8.66



16



Diluted earnings per share gives effect to dilutive potential common shares outstanding during the reporting period. The Company had potentially dilutive common share equivalents, in the form of outstanding stock options, during the three months ended March 31, 2016 and 2015, although none were dilutive because the exercise price of these equivalents exceeded the market value of the Company's common stock during those periods. As of March 31, 2016, no stock options remain outstanding.

Note 15 – Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the "exit price") in an orderly transaction between market participants at the measurement date. Fair value measurements are broken down into three levels based on the reliability of inputs as follows:

Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. The valuation under this approach does not entail a significant degree of judgment ("Level 1").

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the asset or liability (e.g. interest rates and yield curves observable at commonly quoted intervals or current market) and contractual prices for the underlying financial instrument, as well as other relevant economic measures ("Level 2").

Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date ("Level 3").

The fair value of the Company's financial instruments, such as cash and cash equivalents, trade and other receivables, and trade payables, approximate carrying value due to the short-term maturities of these assets and liabilities. Carrying cost approximates fair value for the Company's long-term debt which has variable interest rates.

The fair value of the Company's investment in associated company is a Level 1 measurement because the underlying security is listed on a national securities exchange.

The precious metal and commodity inventories associated with the Company's fair value hedges (see Note 9 - "Derivative Instruments") are reported at fair value. Fair values of these inventories are based on quoted market prices on commodity exchanges and are considered Level 1 measurements. The derivative instruments that the Company purchases in connection with its precious metal and commodity inventories, specifically commodity futures and forward contracts, are also valued at fair value. The futures contracts are Level 1 measurements since they are traded on a commodity exchange. The forward contracts are entered into with a counterparty and are considered Level 2 measurements.

The Company's interest rate swap agreements were considered Level 2 measurements as the inputs were observable at commonly quoted intervals. These agreements expired in February 2016.

The following tables summarize the Company's assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015:
 
 
Asset (Liability) as of March 31, 2016
(in thousands)
 
Total
 
Level 1
 
Level 2
 
Level 3
Investment in associated company
 
$
13,583

 
$
13,583

 
$

 
$

Precious metal and commodity inventories recorded at fair value
 
$
11,747

 
$
11,747

 
$

 
$

Commodity contracts on precious metal and commodity inventories
 
$
(5
)
 
$

 
$
(5
)
 
$



17



 
 
Asset (Liability) as of December 31, 2015
(in thousands)
 
Total
 
Level 1
 
Level 2
 
Level 3
Investment in associated company
 
$
20,923

 
$
20,923

 
$

 
$

Precious metal and commodity inventories recorded at fair value
 
$
10,380

 
$
10,380

 
$

 
$

Commodity contracts on precious metal and commodity inventories
 
$
215

 
$

 
$
215

 
$

Interest rate swap agreements
 
$
(30
)
 
$

 
$
(30
)
 
$


The Company's non-financial assets and liabilities measured at fair value on a non-recurring basis include goodwill and other intangible assets, any assets and liabilities acquired in a business combination, or its long-lived assets written down to fair value. To measure fair value for such assets and liabilities, the Company uses techniques including an income approach, a market approach and/or appraisals (Level 3 inputs). Long-lived assets consisting of land and buildings used in previously operating businesses and currently unused, which total $7.1 million as of March 31, 2016, are carried at the lower of cost or fair value less cost to sell and are included primarily in other non-current assets on the consolidated balance sheet. A reduction in the carrying value of such long-lived assets is recorded as an asset impairment charge in the consolidated income statement.

Note 16 – Commitments and Contingencies

Environmental Matters

Certain H&H Group subsidiaries have existing and contingent liabilities relating to environmental matters, including capital expenditures, costs of remediation, and potential fines and penalties relating to possible violations of national and state environmental laws. Those subsidiaries have remediation expenses on an ongoing basis, although such costs are continually being readjusted based upon the emergence of new techniques and alternative methods. The Company had approximately $2.2 million accrued related to estimated environmental remediation costs as of March 31, 2016. The Company also has insurance coverage available for several of these matters and believes that excess insurance coverage may be available as well. During the three months ended March 31, 2015, the Company recorded an insurance reimbursement of $1.2 million for previously incurred remediation costs. No similar reimbursements were recorded during the three months ended March 31, 2016.

In addition, certain H&H Group subsidiaries have been identified as potentially responsible parties ("PRPs") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or similar state statutes at sites and are parties to administrative consent orders in connection with certain properties. Those subsidiaries may be subject to joint and several liabilities imposed by CERCLA on PRPs. Due to the technical and regulatory complexity of remedial activities and the difficulties attendant in identifying PRPs and allocating or determining liability among them, the subsidiaries are unable to reasonably estimate the ultimate cost of compliance with such laws.

Based upon information currently available, however, the H&H Group subsidiaries do not expect that their respective environmental costs, including the incurrence of additional fines and penalties, if any, will have a material adverse effect on them or that the resolution of these environmental matters will have a material adverse effect on the financial position, results of operations or cash flows of such subsidiaries or the Company, but there can be no such assurances. The Company anticipates that the H&H Group subsidiaries will pay any such amounts out of their respective working capital, although there is no assurance that they will have sufficient funds to pay them. In the event that the H&H Group subsidiaries are unable to fund their liabilities, claims could be made against their respective parent companies, including H&H Group and/or HNH, for payment of such liabilities.

Among the sites where certain H&H Group subsidiaries may have more substantial environmental liabilities are the following:

H&H has been working with the Connecticut Department of Energy and Environmental Protection ("CTDEEP") with respect to its obligations under a 1989 consent order that applies to a property in Connecticut that H&H sold in 2003 ("Sold Parcel") and an adjacent parcel ("Adjacent Parcel") that together with the Sold Parcel comprises the site of a former H&H manufacturing facility. Remediation of all soil conditions on the Sold Parcel was completed on April 6, 2007. On September 11, 2008, the CTDEEP advised H&H that it had approved H&H's December 28, 2007 Soil Remediation Action Report, as amended, thereby concluding the active remediation of the Sold Parcel. The remaining remediation, monitoring and regulatory administrative costs for the Sold Parcel are expected to approximate $0.1 million. With respect to the Adjacent Parcel, an ecological risk assessment has been completed and the results, along with proposed clean up goals, will be submitted to the CTDEEP for their review and approval in the second quarter of 2016. The next phase of remedial investigation will be estimable once the CTDEEP reviews and approves the risk assessment and clean up goals. The total remediation costs for the Adjacent Parcel cannot be reasonably estimated at this

18



time. Accordingly, there can be no assurance that the resolution of this matter will not be material to the financial position, results of operations or cash flows of H&H or the Company.

In 1986, Handy & Harman Electronic Materials Corporation ("HHEM"), a subsidiary of H&H, entered into an administrative consent order ("ACO") with the New Jersey Department of Environmental Protection ("NJDEP") with regard to certain property that it purchased in 1984 in New Jersey. The ACO involves investigation and remediation activities to be performed with regard to soil and groundwater contamination. Thereafter, in 1998, HHEM and H&H settled a case brought by the local municipality in regard to this site and also settled with certain of its insurance carriers. HHEM is actively remediating the property and continuing to investigate effective methods for achieving compliance with the ACO. A remedial investigation report was filed with the NJDEP in December 2007. By letter dated December 12, 2008, the NJDEP issued its approval with respect to additional investigation and remediation activities discussed in the December 2007 remedial investigation report. HHEM anticipates entering into discussions with the NJDEP to address that agency's potential natural resource damage claims, the ultimate scope and cost of which cannot be estimated at this time. Pursuant to a settlement agreement with the former owner/operator of the site, the responsibility for site investigation and remediation costs, as well as any other costs, as defined in the settlement agreement, related to or arising from environmental contamination on the property (collectively, "Costs") are contractually allocated 75% to the former owner/operator (with separate guaranties by the two joint venture partners of the former owner/operator for 37.5% each) and 25% jointly to HHEM and H&H after the first $1.0 million. The $1.0 million was paid solely by the former owner/operator. As of March 31, 2016, over and above the $1.0 million, total investigation and remediation costs of approximately $5.1 million and $1.7 million have been expended by the former owner/operator and HHEM, respectively, in accordance with the settlement agreement. Additionally, HHEM is currently being reimbursed indirectly through insurance coverage for a portion of the Costs for which HHEM is responsible. HHEM believes that there is additional excess insurance coverage, which it intends to pursue as necessary. HHEM anticipates that there will be additional remediation expenses to be incurred once a final remediation plan is agreed upon. There is no assurance that the former owner/operator or guarantors will continue to timely reimburse HHEM for expenditures and/or will be financially capable of fulfilling their obligations under the settlement agreement and the guaranties. The final Costs cannot be reasonably estimated at this time, and accordingly, there can be no assurance that the resolution of this matter will not be material to the financial position, results of operations or cash flows of HHEM or the Company.

HHEM is continuing to comply with a 1987 consent order from the Massachusetts Department of Environmental Protection ("MADEP") to investigate and remediate the soil and groundwater conditions at a commercial/industrial property in Massachusetts. On June 30, 2010, HHEM filed a Response Action Outcome report to close the site since HHEM's licensed site professional concluded that groundwater monitoring demonstrated that the groundwater conditions have stabilized or continue to improve at the site. On June 20, 2013, HHEM received the MADEP's Notice of Audit Findings and Notice of Noncompliance ("Notice"). HHEM and its consultant held meetings with the MADEP to resolve differences identified in the Notice. As a result of those meetings and subsequent discussions, HHEM initiated additional sampling, testing and well installations. The additional work was completed in the third quarter of 2015, and we expect to submit a follow-up response report to the MADEP in the second quarter of 2016. The cost of the follow up response report and subsequent decommissioning is estimated at $0.1 million. Additional costs could result from the final review of the remediation plan by the MADEP, which cannot be reasonably estimated at this time.

Other Litigation

In the ordinary course of our business, we are subject to periodic lawsuits, investigations, claims and proceedings, including, but not limited to, contractual disputes, employment, environmental, health and safety matters, as well as claims associated with our historical acquisitions and divestitures. There is insurance coverage available for many of the foregoing actions. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations, claims and proceedings asserted against us, we do not believe any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, prospects, financial condition, cash flows, results of operations or liquidity.

Note 17 – Related Party Transactions

As of March 31, 2016, SPLP owned directly or indirectly through its subsidiaries 8,560,592 shares of the Company's common stock, representing approximately 69.8% of outstanding shares. The power to vote and dispose of the securities held by SPLP is controlled by SPH GP. Warren G. Lichtenstein, our Chairman of the Board of Directors, is also the Executive Chairman of SPH GP. Certain other affiliates of SPH GP hold positions with the Company, including Jack L. Howard, as Vice Chairman and Principal Executive Officer, John H. McNamara Jr., as Director, James F. McCabe, Jr., as Chief Financial Officer, Leonard J. McGill, as Chief Legal Officer, and Jeffrey A. Svoboda as President and Chief Executive Officer of H&H Group.

The Company entered into a management services agreement, as amended ("Management Services Agreement"), with SP Corporate Services LLC ("SP Corporate"). SP Corporate is an affiliate of SPLP. Pursuant to the Management Services Agreement, SP Corporate provided the Company with certain executive and corporate services, including, without limitation,

19



legal, tax, accounting, treasury, consulting, auditing, administrative, compliance, environmental health and safety, human resources, marketing, investor relations, and other similar services rendered for the Company or its subsidiaries. The Management Services Agreement further provided that the Company pay SP Corporate a fixed annual fee of approximately $8.9 million. On May 3, 2015, the Company and SP Corporate entered into an amendment to the Management Services Agreement to add operating group management services to the scope of services to be provided pursuant to the Management Services Agreement and to adjust the fee for services provided under the Management Services Agreement from $8.9 million to $10.6 million. In connection with the amendment, the Company also entered into a transfer agreement, dated May 3, 2015, with Steel Partners LLC ("Steel Partners"), pursuant to which three employees of the Company and its subsidiaries were transferred to Steel Partners, which will assume the cost of compensating those employees and providing applicable benefits.

Effective February 23, 2016, SP Corporate assigned its rights and responsibilities under the Management Services Agreement to its parent company, SPH Services, Inc. ("SPH Services"), and the Company and SPH Services entered into an Amended and Restated Management Services Agreement ("Amended and Restated Management Services Agreement") to have SPH Services furnish the services to be provided pursuant to the Management Services Agreement and to make certain other changes.

During the three months ended March 31, 2016 and 2015, the Company reimbursed SPH Services and its affiliates approximately $0.2 million and $0.1 million, respectively, for business expenses incurred on its behalf pursuant to the management services agreements.

The fees payable under the Amended and Restated Management Services Agreement are subject to review and such adjustments as may be agreed upon by SPH Services and the Company. The Amended and Restated Management Services Agreement has a term through December 31, 2016 and automatically renews for successive one-year periods unless and until terminated in accordance with the terms set forth therein. Upon any such termination, a reserve fund will be established by the Company for the payment of expenses incurred by or due to SPH Services that are attributable to the services provided to the Company.

Mutual Securities, Inc. is the custodian for the majority of the Company's holdings in ModusLink common stock. Jack L. Howard is a registered principal of Mutual Securities, Inc.

Note 18 – Reportable Segments

HNH is a diversified holding company whose strategic business units encompass the following segments: Joining Materials, Tubing, Building Materials, Performance Materials and Kasco. For a more complete description of the Company's segments, see "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - The Company."

Management has determined that certain operating companies should be aggregated and presented within a single segment on the basis that such segments have similar economic characteristics and share other qualitative characteristics. Management reviews net sales, gross profit and operating income to evaluate segment performance. Operating income for the segments generally includes costs directly attributable to the segment and excludes other unallocated general corporate expenses. Interest expense, other income and expense, and income taxes are not presented by segment since they are excluded from the measures of segment profitability reviewed by the Company's management.

The following table presents information about the Company's reportable segments for the three months ended March 31, 2016 and 2015:

20



Income Statement Data
 
Three Months Ended
(in thousands)
 
March 31,
 
 
2016
 
2015
Net sales:
 
 
 
 
Joining Materials
 
$
42,671

 
$
47,793

Tubing
 
20,270

 
21,080

Building Materials
 
58,302

 
54,989

Performance Materials
 
24,783

 

Kasco
 
14,771

 
14,120

Total net sales
 
$
160,797

 
$
137,982

Segment operating income:
 
 
 
 
Joining Materials
 
$
4,415

 
$
6,247

Tubing
 
4,211

 
3,080

Building Materials
 
7,353

 
3,233

Performance Materials
 
293

 

Kasco
 
980

 
863

Total segment operating income
 
17,252

 
13,423

Unallocated corporate expenses and non-operating units
 
(4,983
)
 
(5,960
)
Unallocated pension expense
 
(2,151
)
 
(2,072
)
Gain from asset dispositions
 
164

 
55

Operating income
 
10,282

 
5,446

Interest expense
 
(1,070
)
 
(1,167
)
Realized and unrealized loss on derivatives
 
(123
)
 
(207
)
Other expense
 
(145
)
 
(93
)
Income from continuing operations before tax and equity investment
 
$
8,944

 
$
3,979


Note 19 – Subsequent Events

SLI Acquisition

On April 6, 2016, the Company entered into a definitive merger agreement with SL Industries, Inc. ("SLI"), pursuant to which it commenced a cash tender offer to purchase all of the outstanding shares of SLI’s common stock, at a purchase price of $40.00 per share in cash, or approximately $164 million in total. SLI designs, manufactures and markets power electronics, motion control, power protection, power quality electromagnetic equipment, and custom gears and gearboxes that are used in a variety of medical, commercial and military aerospace, computer, datacom, industrial, architectural and entertainment lighting, and telecom applications. Consummation of the offer is subject to certain conditions, including the tender of a number of shares that constitutes at least (1) a majority of SLI’s outstanding shares and (2) 60% of SLI's outstanding shares not owned by HNH or any of its affiliates, as well as other customary conditions. SPLP beneficially owns approximately 25.1% of SLI’s outstanding shares. The transaction is not subject to any financing contingencies, and we expect to finance the acquisition with available funds under our Senior Credit Facility.

Common Stock Repurchase Program

On April 28, 2016, the Company's Board of Directors approved the repurchase of up to an aggregate of 500,000 shares of the Company's common stock. Any such repurchases will be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market, in compliance with applicable laws and regulations. The repurchase program is expected to continue unless and until revoked by the Board of Directors.


21



Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations

The Company

Handy & Harman Ltd. ("HNH") is a diversified manufacturer of engineered niche industrial products with leading market positions in many of the markets it serves. Through its wholly-owned operating subsidiaries, HNH focuses on high margin products and innovative technology and serves customers across a wide range of end markets. HNH's diverse product offerings are marketed throughout the United States and internationally. HNH owns Handy & Harman Group Ltd. ("H&H Group"), which owns Handy & Harman ("H&H") and Bairnco, LLC, formerly Bairnco Corporation. HNH manages its group of businesses on a decentralized basis with operations principally in North America. HNH's business units encompass the following segments: Joining Materials, Tubing, Building Materials, Performance Materials, and Kasco Blades and Route Repair Services ("Kasco"). All references herein to "we," "our" or the "Company" refer to HNH together with all of its subsidiaries.

Joining Materials segment primarily fabricates precious metals and their alloys into brazing alloys. Brazing alloys are used to join similar and dissimilar metals, as well as specialty metals and some ceramics, with strong, hermetic joints. Joining Materials segment offers these metal joining products in a wide variety of alloys, including gold, silver, palladium, copper, nickel, aluminum and tin. These brazing alloys are fabricated into a variety of engineered forms and are used in many industries, including electrical, appliance, transportation, construction and general industrial, where dissimilar material and metal joining applications are required. Operating income from precious metal products is principally derived from the "value added" of processing and fabricating and not from the direct purchase and resale of precious metals. Joining Materials segment enters into commodity futures and forward contracts to mitigate the impact of price fluctuations on its precious and certain non-precious metal inventories that are not subject to fixed price contracts. We believe that the business unit that comprises our Joining Materials segment is the North American market leader in many of the markets that it serves.

Tubing segment manufactures a wide variety of steel tubing products. We believe that the Tubing segment manufactures the world's longest continuous seamless stainless steel tubing coils, in excess of 5,000 feet, serving the petrochemical infrastructure and shipbuilding markets. In addition, we believe it is the number one supplier of small diameter (less than 3 mm) coil tubing to industry leading specifications serving the aerospace, defense and semiconductor fabrication markets. This segment also manufactures welded carbon steel tubing in coiled and straight lengths with a primary focus on products for the transportation, appliance and heating, and oil and gas industries. In addition to producing bulk tubing, it produces value added fabrications for several of these industries.

Building Materials segment manufactures and supplies products primarily to the commercial construction and building industries. It manufactures fasteners and fastening systems for the U.S. commercial low slope roofing industry, which are sold to building and roofing material wholesalers, roofing contractors and private label roofing system manufacturers, and a line of engineered specialty fasteners for the building products industry for fastening applications in the remodeling and construction of homes, decking and landscaping. We believe that our primary business unit in the Building Materials segment is the market leader in fasteners and accessories for commercial low-slope roofing applications and that the majority of the net sales for the segment are for the commercial construction repair and replacement market. The results of the Building Materials segment include the operations of ITW Polymers Sealants North America Inc. ("ITW") from its acquisition on March 31, 2015.

Performance Materials segment manufactures sheet and mechanically formed glass and aramid materials for specialty applications in a wide expanse of markets requiring highly engineered components. Its products are used in a wide range of advanced composite applications, such as civilian and military aerospace components, printed electronic circuit boards, filtration and insulation products, specialty commercial construction substrates, automotive and industrial components, and soft body armor for civilian and military applications. The Performance Materials segment is currently comprised solely of the operations of JPS Industries, Inc. ("JPS"), which was acquired on July 2, 2015.

Kasco provides meat-room blade products, repair services and resale products for the meat and deli departments of supermarkets, restaurants, meat and fish processing plants, and for distributors of electrical saws and cutting equipment, principally in North America and Europe. Kasco also provides wood cutting blade products for the pallet manufacturing, pallet recycler and portable saw mill industries in North America.

Management has determined that certain operating companies should be aggregated and presented within a single segment on the basis that such segments have similar economic characteristics and share other qualitative characteristics. Management reviews net sales, gross profit and operating income to evaluate segment performance. Operating income for the segments generally includes costs directly attributable to the segment and excludes other unallocated general corporate expenses. Interest expense, other income and expense, and income taxes are not presented by segment since they are excluded from the measures of segment profitability reviewed by the Company's management.

22




Discontinued Operations

The results of operations of Arlon, LLC have been reported as a discontinued operation in the Company's consolidated financial statements and are not reflected in the tables and discussion of the Company's continuing operations below.

Results of Operations

Comparison of the Three Months Ended March 31, 2016 and 2015

The Company's consolidated operating results for the three months ended March 31, 2016 and 2015 are summarized in the following table:
 
 
Three Months Ended
 
 
March 31,
(in thousands)
 
2016
 
2015
Net sales
 
$
160,797

 
$
137,982

Gross profit
 
43,717

 
38,379

Gross profit margin
 
27.2
%
 
27.8
%
Selling, general and administrative expenses
 
31,284

 
30,861

Pension expense
 
2,151

 
2,072

Operating income
 
10,282

 
5,446

Other:
 
 
 
 
Interest expense
 
1,070

 
1,167

Realized and unrealized loss on derivatives
 
123

 
207

Other expense
 
145

 
93

Income from continuing operations before tax and equity investment
 
8,944

 
3,979

Tax provision
 
3,860

 
1,643

Loss (gain) from associated company, net of tax
 
4,628

 
(922
)
Income from continuing operations, net of tax
 
$
456

 
$
3,258


Net Sales

Net sales for the three months ended March 31, 2016 increased by $22.8 million, or 16.5%, to $160.8 million, as compared to $138.0 million for the same period in 2015. The change in net sales reflects approximately $24.8 million in incremental sales associated with the JPS acquisition, which was partially offset by a reduction of approximately $2.1 million in net sales due to lower average silver prices. Excluding the impact of the JPS acquisition, our value added sales, defined as net sales less revenue from the direct purchase and resale of precious metals, increased by approximately $0.2 million on growth from the Building Materials segment, partially offset by lower volume from the Joining Materials segment. The average silver market price was approximately $14.92 per troy ounce in the first quarter of 2016, as compared to $16.74 per troy ounce in the same period in 2015.

Gross Profit

Gross profit for the three months ended March 31, 2016 increased to $43.7 million, as compared to $38.4 million for the same period in 2015, and as a percentage of net sales, decreased to 27.2%, as compared to 27.8% in the first quarter last year. The change in gross profit reflects approximately $2.2 million incremental gross profit associated with the JPS acquisition, as well as a net increase from core growth of approximately $3.5 million driven by higher gross profit margins from the Building Materials, Tubing, and Kasco segments, which were partially offset by lower gross profit from the Joining Materials segment as a result of lower sales volume and a reduction of approximately $0.3 million in gross profit due to lower average silver prices.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") for the three months ended March 31, 2016 were $31.3 million, as compared to $30.9 million for the same period a year ago. SG&A expenses from the Performance Materials segment were approximately $1.9 million for the first quarter of 2016. Excluding the impact of the JPS acquisition, the lower SG&A in the first

23



quarter of 2016 was primarily driven by lower benefit and stock-based compensation charges, partially offset by the recording of an insurance reimbursement of $1.2 million for previously incurred environmental remediation costs during the first quarter of 2015.

Pension Expense

Pension expense was $2.2 million for the three months ended March 31, 2016, which was $0.1 million higher than the three months ended March 31, 2015. We currently expect pension expense to be approximately $8.7 million in 2016, as compared to $7.5 million in 2015, due to the fact that the investment returns on the assets of the WHX Corporation Pension Plan ("WHX Pension Plan") were lower than actuarial assumptions during 2015, partially offset by $1.4 million of incremental income expected from JPS' pension plan. Forecast pension expense in 2016 is also favorably impacted by a change in the manner by which the interest cost component of net periodic pension expense is determined; specifically to utilize the "spot rate approach," which provides a more precise measurement of interest cost. The estimated impact of this change is to reduce forecast annual pension expense in 2016 by approximately $4.8 million.

Interest Expense

Interest expense for the three months ended March 31, 2016 was $1.1 million, as compared to $1.2 million for the three months ended March 31, 2015. The lower interest expense for the three months ended March 31, 2016 was primarily due to lower borrowing levels in the first quarter of 2016.

Realized and Unrealized Loss on Derivatives

H&H utilizes commodity forward and futures contracts to mitigate the impact of price fluctuations on its precious metal and certain non-precious metal inventories. The factors that affect the gain or loss on these derivative instruments are changes in the price of the associated metals and the amount of ounces hedged.

Tax Provision

For the three months ended March 31, 2016 and 2015, tax provisions from continuing operations of $3.9 million and $1.6 million, respectively, were recorded. The effective tax rates in the three months ended March 31, 2016 and 2015 were 43.2% and 41.3%, respectively. The provision for income taxes is based on the current estimate of the annual effective tax rate, adjusted for discrete items that occurred within the respective periods. Changes in the effective tax rate arise principally from differences in the mix of income between taxable jurisdictions, including the impact of foreign sourced income, as well as changes in estimates associated with our projected annual state tax expense.

Loss (Gain) from Associated Company

The Company carries its investment in ModusLink Global Solutions, Inc. ("ModusLink") at fair value, calculated based on the closing market price for ModusLink common stock, and the loss (gain) recorded during the three months ended March 31, 2016 and 2015 are due entirely to changes in the share price of ModusLink's common stock.

Segment Analysis

Segment net sales and operating income data for the three months ended March 31, 2016 and 2015 are shown in the following table:

24



 
 
Three Months Ended March 31,

 
 
 
%
(in thousands)
 
2016
 
2015
 
Change
Net sales:
 
 
 
 
 
 
Joining Materials
 
$
42,671

 
$
47,793

 
(10.7
)%
Tubing
 
20,270

 
21,080

 
(3.8
)%
Building Materials
 
58,302

 
54,989

 
6.0
 %
Performance Materials
 
24,783

 

 
N/A

Kasco
 
14,771

 
14,120

 
4.6
 %
Total net sales
 
$
160,797

 
$
137,982

 
16.5
 %
Segment operating income:
 
 
 
 
 
 
Joining Materials
 
$
4,415

 
$
6,247

 
(29.3
)%
Tubing
 
4,211

 
3,080

 
36.7
 %
Building Materials
 
7,353

 
3,233

 
127.4
 %
Performance Materials
 
293

 

 
N/A

Kasco
 
980

 
863

 
13.6
 %
Total segment operating income
 
$
17,252

 
$
13,423

 
28.5
 %

Joining Materials

For the three months ended March 31, 2016, the Joining Materials segment net sales decreased by $5.1 million, or 10.7%, to $42.7 million, as compared to net sales of $47.8 million for the same period in 2015. The change in net sales is due to both lower precious metal prices and volume, including a reduction of approximately $2.1 million in net sales due to a $1.82 per troy ounce decline in the average market price of silver, as well as lower value added sales volume in North America primarily due to reduced demand from the oil and gas markets.

Segment operating income for the first quarter of 2016 decreased by $1.8 million, or 29.3%, to $4.4 million, as compared to $6.2 million for the first quarter of 2015. The lower operating income was primarily driven by unfavorable product mix and lower sales volume, partially offset by lower labor and manufacturing overhead costs during the first quarter of 2016, as compared to the same period of 2015. The effect of lower average silver prices also reduced operating income by approximately $0.3 million on a quarter versus prior year's quarter basis.

Tubing

For the three months ended March 31, 2016, the Tubing segment net sales decreased by $0.8 million, or 3.8%, to $20.3 million, as compared to $21.1 million for the same period in 2015. The decrease was primarily driven by lower sales of our fabricated metal tubing in the medical segment and lower sales volume of our welded carbon steel tubing products due to lower oil prices. These declines were partially offset by higher sales volume to the energy markets in Asia.

Segment operating income for the first quarter of 2016 increased by $1.1 million, or 36.7%, to $4.2 million, as compared to $3.1 million for the first quarter of 2015. Higher operating income during the first quarter of 2016 was principally due to improved gross profit margin and lower SG&A as a result of lower personnel costs, as compared to the first quarter of 2015.

Building Materials

For the three months ended March 31, 2016, the Building Materials segment net sales increased by $3.3 million, or 6.0%, to $58.3 million, as compared to $55.0 million for the same period in 2015. Higher sales were driven by increased demand from home centers and lumberyards for our FastenMaster products, as well as increased demand from our company branded roofing products, as compared to the first quarter of 2015.

Segment operating income for the first quarter of 2016 increased by $4.1 million, or 127.4%, to $7.4 million, as compared to $3.2 million in the first quarter of 2015, reflecting higher sales volume. Gross profit margin for the three months ended March 31, 2016 was higher, as compared to the three months ended March 31, 2015, primarily due to lower manufacturing costs, reflecting the benefits of the ITW acquisition, as well as favorable overhead absorption.

25




Performance Materials

For the three months ended March 31, 2016, the Performance Materials segment net sales were $24.8 million, driven by fiberglass fabric sales serving the industrial fiberglass and commercial aerospace markets. Sales volume was affected by a reduction in U.S. military contracts for ballistic vests and an inventory correction throughout the aerospace supply chain. Lower global demand for electronic products is also negatively impacting revenue.

Segment operating income was $0.3 million for the first quarter of 2016, reflecting the reduced sales volume, which was partially offset by lower SG&A and manufacturing expenses resulting from cost reduction initiatives. Segment operating income also includes depreciation and amortization expense totaling $2.3 million, reflecting the fair value of acquired assets recognized at the acquisition date of JPS.

Kasco

For the three months ended March 31, 2016, the Kasco segment net sales increased by $0.7 million, or 4.6%, to $14.8 million, as compared to $14.1 million for the same period in 2015, primarily due to higher sales from its domestic route business, partially offset by the unfavorable impact of foreign currency exchange rates from its Canadian and European operations.

Segment operating income for the first quarter of 2016 increased by $0.1 million to $1.0 million, as compared to $0.9 million in the first quarter of 2015, reflecting improved gross profit margin as a result of the higher net sales and lower plant expenses, which were partially offset by increased personnel costs to support the higher sales.

Discussion of Consolidated Cash Flows

Comparison of the Three Months Ended March 31, 2016 and 2015

The following table provides a summary of the Company's consolidated cash flows for the three months ended March 31, 2016 and 2015:
 
 
Three Months Ended
 
 
March 31,
(in thousands)
 
2016
 
2015
Net cash used in operating activities
 
$
(2,239
)
 
$
(25,143
)
Net cash (used in) provided by investing activities
 
(5,554
)
 
114,742

Net cash provided by (used in) financing activities
 
5,371

 
(102,226
)
Net change for the period
 
$
(2,422
)
 
$
(12,627
)

Operating Activities

Operating cash flows for the three months ended March 31, 2016 were $22.9 million higher, as compared to the same period in 2015, reflecting higher operating income during the 2016 period. Inventories used $5.2 million during the three month period of 2016, as compared to $8.4 million for the same period in 2015. The lower inventory usage during the first quarter of 2016 was primarily driven by effective inventory management from the Building Materials segment, as compared to the same period of 2015. Trade and other receivables used $17.4 million, as compared to $21.9 million used during the same period of 2015. The change is primarily due to a $3.1 million receivable recorded in connection with the sale of Arlon, LLC during the 2015 period, which was subsequently collected during the second quarter of 2015. Other current liabilities provided $6.4 million during the three month period of 2016, as compared to a cash outflow of $1.9 million during the first quarter of 2015, primarily driven by payments made in the first quarter of 2015 in advance of the ITW acquisition. Discontinued operations used $2.3 million in the first quarter of 2015.

Investing Activities

Investing activities used $5.6 million of cash for the three months ended March 31, 2016 and provided $114.7 million during the same period of 2015. Capital spending was $5.8 million in the 2016 period, as compared to $3.8 million in the 2015 period, reflecting expenditures made on a steel heat treating facility in the Building Materials segment during 2016. Investing activities for the three months ended March 31, 2015 included net proceeds of $152.9 million from the sale of Arlon, LLC, partially

26



offset by acquisition costs of $27.0 million related to the ITW acquisition. The Company also invested approximately $7.4 million, including brokerage commissions, in the common stock of ModusLink during the first quarter of 2015.

Financing Activities

For the three months ended March 31, 2016, the Company's financing activities provided $5.4 million of cash. Borrowings under the Company's revolving credit facilities increased by $8.9 million during the three months ended March 31, 2016.

For the three months ended March 31, 2015, the Company's financing activities used $102.2 million of cash. Borrowings under the Company's revolving credit facilities decreased by $103.7 million during the three months ended March 31, 2015, driven by cash proceeds from the sale of Arlon, LLC.

Liquidity and Capital Resources

The Company's principal source of liquidity is its cash flows from operations. As of March 31, 2016, the Company's current assets totaled $207.3 million, its current liabilities totaled $71.5 million and its net working capital was $135.8 million, as compared to net working capital of $119.2 million as of December 31, 2015. The Company's debt is principally held by H&H Group, a wholly-owned subsidiary of HNH. HNH's subsidiaries borrow funds in order to finance capital expansion programs and for working capital needs. The terms of certain of those financing arrangements place restrictions on distributions of funds to HNH, the parent company, subject to certain exceptions including required pension payments to the WHX Pension Plan. The Company does not expect these restrictions to have an impact on its ability to meet its cash obligations. HNH's ongoing operating cash flow requirements consist primarily of arranging for the funding of the minimum requirements of the WHX Pension Plan and paying HNH's administrative costs. The Company expects to have required minimum contributions to the WHX Pension Plan of $13.1 million for the remainder of 2016, and $27.5 million, $32.9 million, $33.2 million, $32.0 million and $82.9 million in 2017, 2018, 2019, 2020, and for the five years thereafter, respectively. For JPS' pension plan, the Company expects to have required minimum contributions of $0.4 million for the remainder of 2016, and $6.8 million, $9.1 million, $5.6 million, $3.3 million and $9.6 million in 2017, 2018, 2019, 2020, and for the five years thereafter, respectively, which will be made by H&H Group. Required future pension contributions are estimated based upon assumptions such as discount rates on future obligations, assumed rates of return on plan assets and legislative changes. Actual future pension costs and required funding obligations will be affected by changes in the factors and assumptions described in the previous sentence, as well as other changes such as any plan termination or other acceleration events.

The Company believes it has access to adequate resources to meet its needs for normal operating costs, capital expenditures, mandatory debt redemptions and working capital for its existing business. These resources include cash and cash equivalents, cash provided by operating activities and unused lines of credit. The Company's senior credit agreement provided for an up to $365.0 million senior secured revolving credit facility. On March 23, 2016, the Company entered into an amendment to its senior credit agreement to increase the size of the credit facility by $35.0 million to an aggregate amount of $400.0 million. As of March 31, 2016, H&H Group's availability under its senior secured revolving credit facility was $174.7 million. The Company's ability to satisfy its debt service obligations, to fund planned capital expenditures and required pension payments, and to make acquisitions will depend upon its future operating performance, which will be affected by prevailing economic conditions in the markets in which it operates, as well as financial, business and other factors, some of which are beyond its control. In addition, the Company's senior secured revolving credit facility is subject to certain mandatory prepayment provisions and restrictive and financial covenants. There can be no assurances that H&H Group will continue to have access to its lines of credit if its financial performance does not satisfy the financial covenants set forth in the financing agreements. If H&H Group does not meet certain of its financial covenants, and if it is unable to secure necessary waivers or other amendments from the respective lenders on terms acceptable to management, its ability to access available lines of credit could be limited, its debt obligations could be accelerated by the respective lenders and liquidity could be adversely affected.

On April 6, 2016, the Company entered into a definitive merger agreement with SL Industries, Inc. ("SLI"), pursuant to which it commenced a cash tender offer to purchase all of the outstanding shares of SLI’s common stock, at a purchase price of $40.00 per share in cash, or approximately $164 million in total. SLI designs, manufactures and markets power electronics, motion control, power protection, power quality electromagnetic equipment, and custom gears and gearboxes that are used in a variety of medical, commercial and military aerospace, computer, datacom, industrial, architectural and entertainment lighting, and telecom applications. Consummation of the offer is subject to certain conditions, including the tender of a number of shares that constitutes at least (1) a majority of SLI’s outstanding shares and (2) 60% of SLI's outstanding shares not owned by HNH or any of its affiliates, as well as other customary conditions. HNH's affiliates beneficially own approximately 25.1% of SLI’s outstanding shares. The transaction is not subject to any financing contingencies, and we expect to finance the acquisition with available funds under our senior secured revolving credit facility.

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Management is utilizing the following strategies to continue to enhance liquidity: (1) continuing to implement improvements, using the Steel Business System, throughout all of the Company's operations to increase sales and operating efficiencies, (2) supporting profitable sales growth both internally and potentially through acquisitions and (3) evaluating from time to time and as appropriate, strategic alternatives with respect to its businesses and/or assets. The Company continues to examine all of its options and strategies, including acquisitions, divestitures and other corporate transactions, to increase cash flow and stockholder value.

Off-Balance Sheet Arrangements

It is not the Company's usual business practice to enter into off-balance sheet arrangements such as guarantees on loans and financial commitments, indemnification arrangements and retained interests in assets transferred to an unconsolidated entity for securitization purposes. Certain customers and suppliers of the Joining Materials segment choose to do business on a "pool" basis. Such customers or suppliers furnish precious metal to subsidiaries of H&H for return in fabricated form or for purchase from or return to the supplier. When the customer's precious metal is returned in fabricated form, the customer is charged a fabrication charge. The value of pooled precious metal is not included on the Company's consolidated balance sheet. As of March 31, 2016, customer metal in H&H's custody consisted of 147,368 ounces of silver, 520 ounces of gold and 1,391 ounces of palladium.

Cautionary Statement Regarding Forward-Looking Statements

When used in Management's Discussion and Analysis of Financial Condition and Results of Operations, the words "anticipate," "estimate" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation, general economic conditions, the ability of the Company to develop markets and sell its products and the effects of competition and pricing. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate.

Item 4. - Controls and Procedures

Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, the Company conducted an evaluation under the supervision and with the participation of its management, including the Principal Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Principal Executive Officer and Chief Financial Officer concluded that as of March 31, 2016, the Company's disclosure controls and procedures are effective in ensuring that all information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to company management, including the Principal Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.

The Company completed the acquisition of JPS on July 2, 2015. Our management excluded the operations of this business from our evaluation of, and conclusion on, the effectiveness of our internal control over financial reporting as of December 31, 2015. This business represents approximately 18.8% of our total assets as of March 31, 2016, and approximately 15.4% of net sales for the three months then ended. Our management will fully integrate the operations of this business into its assessment of the effectiveness of our internal control over financial reporting in 2016.

Changes in Internal Control over Financial Reporting

No change in internal control over financial reporting occurred during the quarter ended March 31, 2016 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.


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PART II - OTHER INFORMATION

Item 1. - Legal Proceedings

Information in this Item 1 is incorporated by reference to Part I, Notes to Consolidated Financial Statements (unaudited), Note 16 - "Commitments and Contingencies," of this report.

Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds

2(c) - Issuer Purchases of Equity Securities

During the three months ended March 31, 2016, 16,320 shares of common stock were foregone by certain employees and service providers, at their option, for income tax obligations attributable to the vesting of shares of restricted stock previously granted to such individuals.

The following table provides information on the shares foregone for income tax obligations attributable to the vesting of restricted stock during the three months ended March 31, 2016:

 
 
Total Number of Shares (or Units) Purchased
 
Average Price Paid per Share (or Unit)
 
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
Period
 
(a)
 
(b)
 
(c)
 
(d)
January 1, 2016 to January 31, 2016
 

 
N/A
 
 

 
N/A
February 1, 2016 to February 29, 2016
 

 
N/A
 
 

 
N/A
March 1, 2016 to March 31, 2016
 
16,320

 
$
24.22
 
 

 
N/A
 
 
16,320

 
 
 

 
N/A

Item 5. - Other Information

On April 28, 2016, the Company's Board of Directors approved the repurchase of up to an aggregate of 500,000 shares of the Company's common stock. Any such repurchases will be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market, in compliance with applicable laws and regulations. The repurchase program is expected to continue unless and until revoked by the Board of Directors.


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Item 6. - Exhibits
Exhibit 10.1 Amended and Restated Management Services Agreement, dated as of February 23, 2016, by and among SPH Services, Inc., Handy & Harman Ltd. and Handy & Harman Group Ltd. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed February 24, 2016)
 
 
Exhibit 10.2 Amended and Restated Management Services Agreement, dated as of February 23, 2016, by and among SPH Services, Inc., Handy & Harman Ltd. and Handy & Harman Group Ltd. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K/A filed February 25, 2016)
 
 
Exhibit 10.3 Third Amendment, dated as of March 23, 2016, to the Amended and Restated Credit Agreement, dated as of August 29, 2014, by and among Handy & Harman Group Ltd., certain of its subsidiaries as guarantors, PNC Bank, N.A., in its capacity as agent acting for the financial institutions party thereto as lenders, and the financial institutions party thereto as lenders. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed March 23, 2016)

 
 
Exhibit 31.1 Certification of Principal Executive Officer pursuant to Rule 13a-15(f) or 15d-15(f) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
 
 
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-15(f) or 15d-15(f) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
 
 
Exhibit 32 Certification of Principal Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of Chapter 63 of Title 18 of United States Code. (1)
 
 
Exhibit 101.INS XBRL Instance Document (1)
 
 
Exhibit 101.SCH XBRL Taxonomy Extension Schema (1)
 
 
Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase (1)
 
 
Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase (1)
 
 
Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase (1)
 
 
Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase (1)
 
 
 
 
(1)
Filed herewith.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
HANDY & HARMAN LTD.
 
 
 
/s/ James F. McCabe, Jr.
 
James F. McCabe, Jr.
Senior Vice President and Chief Financial Officer
(Principal Accounting Officer)

April 28, 2016


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