e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
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: 001-33658
Horsehead Holding Corp.
(Exact Name of Registrant as Specified in Its Charter)
|
|
|
Delaware
(State or other jurisdiction of
incorporation or organization)
|
|
20-0447377
(I.R.S. Employer
Identification No.) |
|
|
|
4955 Steubenville Pike, Suite 405
Pittsburgh, Pennsylvania 15205
(Address of Principal Executive Offices, including Zip Code)
|
|
(724) 774-1020
(Registrants Telephone Number, Including Area Code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
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 o 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 þ |
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 þ
The number of shares outstanding of the issuers common stock as of May 6, 2011 was 43,676,889
TABLE OF CONTENTS
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements within the meaning of the federal securities
laws. These statements relate to analyses and other information, which are based on forecasts of
future results and estimates of amounts not yet determinable. These statements also relate to our
future prospects, developments and business strategies.
These forward looking statements are identified by the use of terms and phrases such as
anticipate, believe, could, estimate, expect, intend, may, plan, predict,
project, and similar terms and phrases, including references to assumptions. However, these words
are not the exclusive means of identifying such statements. These statements are contained in many
sections of this report, including Part I, Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations. Although we believe that our plans, intentions and
expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot
assure you that we will achieve those plans, intentions or expectations. We believe that the
following factors, among others (including those described in Part II, Item 1A. Risk Factors),
could affect our future performance and the liquidity and value of our securities and cause our
actual results to differ materially from those expressed or implied by forward-looking statements
made by us or on our behalf: the cyclical nature of the metals industry; decreases in the prices of
zinc and nickel-based products; long-term declines in demand for zinc and nickel-based products due
to competing technologies or materials; competition from global zinc and nickel manufacturers; our
ability to implement our business strategy successfully; work stoppages and labor disputes;
material disruptions at any of our manufacturing facilities, including for equipment or power
failures or industrial accidents or explosions, including the explosion that occurred at our
Monaca, Pennsylvania facility in July 2010; the impact of the Monaca explosion on continuing
operations and the timing and costs of repairs resulting from the explosion: fluctuations in
i
the costs or availability of our energy supplies; decreases in order volume from major
customers; the costs of compliance with environmental, health and safety laws and responding to
potential liabilities and changes under these laws; failure of our hedging strategies, including
those relating to the prices of energy, raw materials and zinc products; our ability to attract and
retain key personnel; our ability to protect our intellectual property and know-how; our dependence
on third parties for transportation services; and risks associated with future acquisitions, joint
ventures or asset dispositions.
There may be other factors that may cause our actual results to differ materially from the
forward-looking statements. Our actual results, performance or achievements could differ materially
from those expressed in, or implied by, the forward-looking statements. We can give no assurances
that any of the events anticipated by the forward-looking statements will occur or, if any of them
does, what impact they will have on our results of operations and financial condition. You should
carefully read the factors described in the Risk Factors section of this report for a description
of certain risks that could, among other things, cause our actual results to differ from these
forward-looking statements.
All forward-looking statements are qualified in their entirety by this cautionary statement,
and we undertake no obligation to revise or update this Quarterly Report on Form 10-Q to reflect
events or circumstances after the date hereof.
ii
PART IFINANCIAL INFORMATION
|
|
|
Item 1. |
|
Financial Statements. |
Horsehead Holding Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
March 31, 2011 and December 31, 2010
(Amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
(Unaudited) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
112,925 |
|
|
$ |
109,557 |
|
Accounts receivable, net of allowance of $1,797 and $1,741, respectively |
|
|
71,289 |
|
|
|
53,075 |
|
Inventories, net |
|
|
57,546 |
|
|
|
50,855 |
|
Prepaid expenses and other current assets |
|
|
15,422 |
|
|
|
16,178 |
|
Deferred income taxes |
|
|
6,010 |
|
|
|
6,090 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
263,192 |
|
|
|
235,755 |
|
Property, plant and equipment, net |
|
|
218,580 |
|
|
|
218,652 |
|
Other assets |
|
|
|
|
|
|
|
|
Intangible assets |
|
|
12,843 |
|
|
|
13,026 |
|
Restricted cash |
|
|
23,879 |
|
|
|
26,399 |
|
Deferred income taxes |
|
|
1,984 |
|
|
|
1,984 |
|
Deposits and other |
|
|
323 |
|
|
|
320 |
|
|
|
|
|
|
|
|
Total other assets |
|
|
39,029 |
|
|
|
41,729 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
520,801 |
|
|
$ |
496,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
38,930 |
|
|
$ |
39,374 |
|
Accrued expenses |
|
|
32,972 |
|
|
|
26,261 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
71,902 |
|
|
|
65,635 |
|
Long-term debt, less current maturities |
|
|
255 |
|
|
|
255 |
|
Other long-term liabilities |
|
|
18,254 |
|
|
|
17,501 |
|
Deferred income taxes |
|
|
39,735 |
|
|
|
39,735 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share; 100,000 shares authorized; 43,653 and
43,468 shares issued and outstanding in 2011 and 2010, respectively |
|
|
436 |
|
|
|
434 |
|
Preferred stock, par value $0.01 per share; 10,000 shares authorized; no shares
issued or outstanding |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
217,398 |
|
|
|
214,406 |
|
Retained earnings |
|
|
168,529 |
|
|
|
153,765 |
|
|
|
|
|
|
|
|
Total stockholders equity before noncontrolling interest |
|
|
386,363 |
|
|
|
368,605 |
|
|
|
|
|
|
|
|
Noncontrolling interest |
|
|
4,292 |
|
|
|
4,405 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
390,655 |
|
|
|
373,010 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
520,801 |
|
|
$ |
496,136 |
|
|
|
|
|
|
|
|
The accompanying notes to financial statements are an integral part of these statements.
1
Horsehead Holding Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended March 31, 2011 and 2010
(Unaudited)
(Amounts in thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Net sales of zinc material and other goods |
|
$ |
84,481 |
|
|
$ |
73,057 |
|
Net sales of nickel-based material and other services |
|
|
15,535 |
|
|
|
14,447 |
|
EAF dust service fees |
|
|
9,198 |
|
|
|
9,472 |
|
|
|
|
|
|
|
|
Net sales |
|
|
109,214 |
|
|
|
96,976 |
|
Cost of sales of zinc material and other goods |
|
|
72,147 |
|
|
|
62,327 |
|
Cost of sales of nickel based material and other services |
|
|
8,822 |
|
|
|
8,954 |
|
Cost of EAF dust services |
|
|
6,058 |
|
|
|
5,851 |
|
Insurance claim income |
|
|
(10,347 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (excluding depreciation and amortization) |
|
|
76,680 |
|
|
|
77,132 |
|
Depreciation and amortization |
|
|
5,262 |
|
|
|
4,541 |
|
Selling, general and administrative expenses |
|
|
5,187 |
|
|
|
4,729 |
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
87,129 |
|
|
|
86,402 |
|
Income from operations |
|
|
22,085 |
|
|
|
10,574 |
|
Other income (expense) |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(302 |
) |
|
|
(309 |
) |
Interest and other income |
|
|
290 |
|
|
|
317 |
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
|
|
8 |
|
Income before income taxes |
|
|
22,073 |
|
|
|
10,582 |
|
Income tax provision |
|
|
7,309 |
|
|
|
3,800 |
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
14,764 |
|
|
$ |
6,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.34 |
|
|
$ |
0.16 |
|
Diluted |
|
$ |
0.33 |
|
|
$ |
0.16 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
43,530 |
|
|
|
43,334 |
|
Diluted |
|
|
44,181 |
|
|
|
43,602 |
|
The accompanying notes to financial statements are an integral part of these statements.
2
Horsehead Holding Corp. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
For the three months ended March 31, 2011
(Unaudited)
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Retained |
|
|
Noncontrolling |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Interest |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2011 |
|
|
43,468 |
|
|
$ |
434 |
|
|
$ |
214,406 |
|
|
$ |
153,765 |
|
|
$ |
4,405 |
|
|
$ |
373,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock vesting |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercise |
|
|
182 |
|
|
|
2 |
|
|
|
2,358 |
|
|
|
|
|
|
|
|
|
|
|
2,360 |
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
798 |
|
|
|
|
|
|
|
|
|
|
|
798 |
|
Reduction of tax benefit
of equity award exercise |
|
|
|
|
|
|
|
|
|
|
(164 |
) |
|
|
|
|
|
|
|
|
|
|
(164 |
) |
Distribution to
noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(113 |
) |
|
|
(113 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,764 |
|
|
|
|
|
|
|
14,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2011 |
|
|
43,653 |
|
|
$ |
436 |
|
|
$ |
217,398 |
|
|
$ |
168,529 |
|
|
$ |
4,292 |
|
|
$ |
390,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to financial statements are an integral part of these statements
3
Horsehead Holding Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2011 and 2010
(Unaudited)
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
14,764 |
|
|
$ |
6,782 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
5,262 |
|
|
|
4,541 |
|
Deferred income tax provision (benefit) |
|
|
80 |
|
|
|
(250 |
) |
Accretion on ESOI liabilities |
|
|
221 |
|
|
|
226 |
|
Losses on derivative financial instruments |
|
|
796 |
|
|
|
511 |
|
Non-cash compensation expense |
|
|
798 |
|
|
|
606 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
(Increase) in accounts receivable |
|
|
(18,214 |
) |
|
|
(10,447 |
) |
(Increase) in inventories |
|
|
(6,691 |
) |
|
|
(25 |
) |
Decrease in prepaid expenses and other current assets |
|
|
68 |
|
|
|
595 |
|
(Increase) in other assets |
|
|
(7 |
) |
|
|
(27 |
) |
(Decrease) increase in accounts payable |
|
|
(444 |
) |
|
|
5,481 |
|
Increase in accrued expenses |
|
|
6,603 |
|
|
|
5,918 |
|
Increase in other non-current liabilities |
|
|
532 |
|
|
|
319 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
3,768 |
|
|
|
14,230 |
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(5,003 |
) |
|
|
(11,846 |
) |
Purchase of INMETCO |
|
|
|
|
|
|
(4,567 |
) |
Decrease in restricted cash |
|
|
2,520 |
|
|
|
64 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(2,483 |
) |
|
|
(16,349 |
) |
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Distribution to noncontrolling interests |
|
|
(113 |
) |
|
|
(66 |
) |
Proceeds from exercise of options |
|
|
2,360 |
|
|
|
|
|
Tax effect of share based compensation award exercise |
|
|
(164 |
) |
|
|
|
|
Payments on notes payable and long-term debt |
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
2,083 |
|
|
|
(82 |
) |
|
|
|
|
|
|
|
Net Increase (Decrease) In Cash And Cash Equivalents |
|
|
3,368 |
|
|
|
(2,201 |
) |
Cash and cash equivalents at beginning of period |
|
|
109,557 |
|
|
|
95,480 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
112,925 |
|
|
$ |
93,279 |
|
|
|
|
|
|
|
|
The accompanying notes to financial statements are an integral part of these statements.
4
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
NOTE ABASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Horsehead Holding Corp. and
its subsidiaries as of March 31, 2011 and for the three months ended March 31, 2011 and March 31,
2010, have been prepared pursuant to the applicable rules and regulations of the Securities and
Exchange Commission (SEC). In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 2011 are not necessarily indicative of the results
that may be expected for the full year ending December 31, 2011. The accompanying financial
statements include the accounts of Horsehead Holding Corp. and all of its subsidiaries
(collectively referred to as the Company, we, us or our or similar terms). All intercompany
accounts and transactions have been eliminated. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 2010.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The more significant areas requiring the use of management
estimates and assumptions relate to inventory reserves, bad debt reserves, environmental and asset
retirement obligations, workers compensation liabilities, reserves for contingencies and
litigation and fair value of financial instruments and business acquisitions. Management bases its
estimates on the companys historical experience and its expectations of the future and on various
other assumptions that are believed to be reasonable under the circumstances. Actual results could
differ from those estimates.
NOTE B ACQUISITION OF BUSINESS
On December 31, 2009, the Company purchased all of the issued and outstanding capital stock of
INMETCO, from Vale Inco Americas Inc. The Company also assumed certain financial assurance
obligations associated with environmental regulatory requirements. The final purchase price, after
post-closing adjustments, was $38,567 and was settled in the first quarter of 2010.
NOTE CCASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following at March 31, 2011 and December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2011 |
|
2010 |
|
|
|
Cash in bank |
|
$ |
87,917 |
|
|
$ |
84,549 |
|
Money market demand account |
|
|
25,008 |
|
|
|
25,008 |
|
|
|
|
|
|
$ |
112,925 |
|
|
$ |
109,557 |
|
|
|
|
The Companys cash balance is concentrated in three U.S. banks. The money market demand account
carries an interest rate of 0.4% as of March 31, 2011 and December 31, 2010. The balances
approximate fair value.
NOTE DINVENTORIES
Inventories consisted of the following at March 31, 2011 and December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Raw materials |
|
$ |
15,410 |
|
|
$ |
13,202 |
|
Work-in-process |
|
|
5,894 |
|
|
|
7,289 |
|
Finished goods |
|
|
22,101 |
|
|
|
17,486 |
|
Supplies and spare parts |
|
|
14,141 |
|
|
|
12,878 |
|
|
|
|
|
|
|
|
|
|
$ |
57,546 |
|
|
$ |
50,855 |
|
|
|
|
|
|
|
|
5
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
Inventories are net of reserves for slow moving inventory of $2,631 and $2,546 at March
31, 2011 and December 31, 2010, respectively.
NOTE E PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consists of the following at March 31, 2011 and
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2011 |
|
2010 |
|
|
|
Refundable income taxes |
|
$ |
11,762 |
|
|
$ |
11,762 |
|
Prepaid hedge contracts |
|
|
296 |
|
|
|
984 |
|
Other |
|
|
3,364 |
|
|
|
3,432 |
|
|
|
|
|
|
$ |
15,422 |
|
|
$ |
16,178 |
|
|
|
|
NOTE FPROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at March 31, 2011 and December 31,
2010.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Land and land improvements |
|
$ |
18,788 |
|
|
$ |
18,412 |
|
Buildings and building improvements |
|
|
39,067 |
|
|
|
38,614 |
|
Machinery and equipment |
|
|
232,441 |
|
|
|
229,768 |
|
Construction in progress |
|
|
9,825 |
|
|
|
8,326 |
|
|
|
|
|
|
|
|
|
|
|
300,121 |
|
|
|
295,120 |
|
Less accumulated depreciation |
|
|
(81,541 |
) |
|
|
(76,468 |
) |
|
|
|
|
|
|
|
|
|
$ |
218,580 |
|
|
$ |
218,652 |
|
|
|
|
|
|
|
|
NOTE GRESTRICTED CASH
Restricted cash is related to the following at March 31, 2011 and December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2011 |
|
2010 |
|
|
|
Letters of credit |
|
$ |
21,379 |
|
|
$ |
21,379 |
|
ESOI deferred purchase price obligation |
|
|
2,500 |
|
|
|
3,997 |
|
New Market Tax Credit (NMTC) |
|
|
|
|
|
|
1,023 |
|
|
|
|
|
|
$ |
23,879 |
|
|
$ |
26,399 |
|
|
|
|
The restricted cash relating to our letters of credit and the ESOI deferred purchase price
obligation are held in third-party managed trust accounts and are invested in money market and
other liquid investment accounts. During the first quarter of 2011, the entire restricted cash
balance was released from escrow in accordance with the provisions of the New Markets Tax Credit
program related to the financing and development of the Barnwell site which began operations in
April 2010.
6
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
NOTE HNOTES PAYABLE AND DEBT
Debt at March 31, 2011 consisted of a $255 loan under the NMTC program. The loan under the
NMTC program is an interest only loan with the principal due at the end of its term.
At March 31, 2011 and at December 31, 2010, the Company had $20,360 of letters of credit
outstanding to collateralize self-insured claims for workers compensation and other general
insurance claims and closure bonds for the Companys three facilities in Pennsylvania.
NOTE IACCRUED EXPENSES
Accrued expenses at March 31, 2011 and December 31, 2010 consisted of the following.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Employee related costs |
|
$ |
8,331 |
|
|
$ |
8,877 |
|
EAF dust processing reserve |
|
|
4,621 |
|
|
|
4,826 |
|
Workers compensation insurance claim liabilities |
|
|
2,400 |
|
|
|
2,400 |
|
Unearned tolling revenue |
|
|
3,183 |
|
|
|
1,872 |
|
Income taxes payable |
|
|
9,467 |
|
|
|
1,461 |
|
Other |
|
|
4,970 |
|
|
|
6,825 |
|
|
|
|
|
|
|
|
|
|
$ |
32,972 |
|
|
$ |
26,261 |
|
|
|
|
|
|
|
|
NOTE J OTHER LONG-TERM LIABILITIES
Other long-term liabilities at March 31, 2011 and December 31, 2010 consisted of the
following.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2011 |
|
2010 |
|
|
|
Environmental obligations |
|
$ |
2,141 |
|
|
$ |
2,141 |
|
Insurance claim liabilities |
|
|
7,128 |
|
|
|
6,628 |
|
Asset retirement obligations |
|
|
2,910 |
|
|
|
2,861 |
|
Deferred purchase price obligation |
|
|
5,595 |
|
|
|
5,374 |
|
Other |
|
|
480 |
|
|
|
497 |
|
|
|
|
|
|
$ |
18,254 |
|
|
$ |
17,501 |
|
|
|
|
NOTE KINCOME TAXES
The Companys effective tax rates were 33.1% and 35.9% for the three months ended March 31,
2011 and 2010, respectively. The provision or benefit for income taxes differs from the tax
provision computed by applying the U.S. statutory federal income tax rate applied to net income
before income taxes due primarily to state income taxes.
The Company and its subsidiaries file income tax returns in the U.S. and various state
jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the
related tax laws and regulations and require significant judgment to apply. The tax years that
remain subject to examination generally range from 2007 through 2010.
7
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
NOTE LSTOCK-BASED COMPENSATION
The Company adopted a stock option plan in 2004 (as amended, the 2004 Plan) which was
amended and restated in December 2005 and November 2006. The 2004 Plan provides for the granting of
options to acquire shares of common stock of the Company to key employees of the Company and its
subsidiaries. A total of 1,685 shares are authorized and reserved for issuance under the 2004 Plan.
All options granted under the 2004 Plan to date are fully vested due to the change in ownership of
the Company in November 2006. The options may be exercised at any time prior to September 15,
2014. At March 31, 2011, there were 138 options outstanding, each with an average exercise price
of $1.01 per share and 3.40 years of remaining contractual life. The aggregate intrinsic value at
March 31, 2011 of the options outstanding under the 2004 Plan was $2,213.
In 2006, the Company adopted the Horsehead Holding Corp. 2006 Long-Term Equity Incentive
Plan, which was amended and restated on June 11, 2007 (the 2006 Plan) and which provides for
grants of stock options, stock appreciation rights, restricted stock, restricted stock units,
deferred stock units and other cash- or equity-based awards. Directors, officers and other
employees of the Company, as well as others performing services for the Company, are eligible for
grants under the 2006 Plan. The 2006 Plan is administered by the compensation committee of the
Companys Board of Directors (the Committee).
A total of 1,489 shares of the Companys common stock were initially authorized for
issuance under the 2006 Plan, which amount increases annually by an amount equal to 1% of the
number of shares on the Companys common stock outstanding or such lesser amount determined by the
Companys Board of Directors (the Board). The number of shares available for issuance under the
2006 Plan is subject to adjustment in the event of a reorganization, stock split, merger or similar
change in the corporate structure or the outstanding shares of common stock. In the event of any of
these occurrences, the Committee may make any adjustments considered appropriate to, among other
things, the number and kind of shares, options or other property available for issuance under the
2006 Plan or covered by grants previously made under the 2006 Plan. The shares available for
issuance under the 2006 Plan may be, in whole or in part, authorized and unissued or held as
treasury shares.
On January 16, 2007, the Board authorized the issuance of options to purchase 1,085
shares of the Companys common stock to certain officers and employees of the Company under the
2006 Plan. The exercise price is $13.00 per share. The options have a term of ten years and vest
ratably over a five-year period from date of grant. Generally, the vested options
may be exercised any time after November 30, 2007 and before the earlier of January 24, 2017 or the
date of the option holders employment termination.
At March 31, 2011, there were 658 options outstanding, each with an exercise price of $13.00
per share and 5.79 years of remaining contractual life. The related compensation expense for the
three months ended March 31, 2011 and 2010 was $306 and $332, respectively. Unrecognized
compensation expense as of March 31, 2011 was $968. As of March 31, 2011, 490 options were vested
and fully exercisable.
In the first quarter of 2011, the Company granted a total of 240 restricted stock units at an
average grant date fair value of $13.20 per unit. The units vest over a one or five year service
period. Upon vesting, the underlying stock will be issued for par value. In the first quarter of
2010, the Company granted a total of 189 restricted stock units at an average grant date fair value
of $9.95 per unit. The related compensation expense for the three months ended March 31, 2011 and
March 31, 2010 was $492 and $274, respectively. Unrecognized compensation expense as of March 31,
2011 was $5,545. As of March 31, 2011, there were 780 restricted stock units outstanding. The
remaining contractual life ranged from .08 years to 4.92 years at March 31, 2011.
NOTE MACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Companys business consists principally of the sale of zinc- and nickel-based products. As
a result, its results of operations are subject to risk of fluctuations in the market prices of
these metals. While the Companys finished products are generally priced based on a spread to the
price of zinc or nickel, as applicable, on the London
Metal Exchange (LME), its revenues are impacted significantly by changes in the market
prices of these metals. The Company pursues various hedging strategies as described below to
reduce its exposure to movements in the prices of zinc, copper, lead and nickel.
The Companys marketing strategy includes a metal hedging program that allows customers
to secure a firm price for future deliveries under a sales contract. Hedges are entered into based
on firm sales contracts to deliver specified quantities of product on a monthly basis for terms
generally not exceeding one year. The Companys raw material purchases related to
8
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
such firm price
contracts are at varying zinc and copper prices that are based on the LME. In order to protect its
cash flow related to firm price sales contracts, the Company enters into fixed-to-variable swap
contracts to convert the LME-based fixed sales price back to variable. Thus, if raw material costs
increase as a result of LME zinc or copper price increases, the related sales value and related
cash flows will also increase. As of March 31, 2011, the fixed portions of these contracts ranged
from a monthly average of $0.87 to $1.06 per pound for zinc and $4.19 to $4.23 per pound for
copper.
The Company entered into variable-to-fixed swap contracts as a financial hedge of a portion of
its exposure to the movements in the LME prices of lead and nickel. For instance, the Company
disposes of the lead co-product of its EAF dust recycling operation under a disposal agreement and
the disposal costs are similarly affected by the LME lead price fluctuations. As of March 31,
2011, the fixed portion of the lead swap contracts ranged from a monthly average of $1.16 to $1.18
per pound and nickel was $11.87 per pound.
The Company hedged approximately 1.4 tons of lead and nickel with variable-to-fixed future
swap contracts and approximately 1.0 tons of zinc and copper with fixed-to-variable future swap
contracts at December 31, 2010, all of which settle at various dates up to and including December
31, 2012. The Company received cash of $225 and $228 from the settlement of such contracts for the
three months ended March 31, 2011 and 2010, respectively.
In 2009, the Company purchased put options for approximately 100 tons of zinc for 2010. The
cost of the options was $5,276 and the strike price was $0.65 per pound. At the time of the
purchases, the options represented approximately 80% of the Companys anticipated sales volume for
2010. In 2010, the Company purchased put options for 2011 having a strike price of $0.65 per pound
for approximately 99 tons of zinc at a cost of $3,005. The Company also sold put options for 2011
having a strike price of $0.55 per pound for approximately 35 tons of zinc and received $230. The
options purchased provide that the Company will receive a minimum of $0.65 per pound for the
quantity hedged and the options sold provide that the buyer will receive a minimum of $0.55 per
pound for the quantity hedged. During the three months ended March 31, 2011, the Company did not
purchase or sell any put options. All of the options were purchased to act as a financial hedge
and to lend stability to the Companys revenue stream.
The options settle monthly on an average LME pricing basis. For the three months ended
March 31, 2011 and March 31, 2010, the average LME zinc prices were above the strike prices for the
contracts. Consequently, they expired with no settlement payment due the Company.
The gains and losses resulting from the Companys hedging activities are recorded in the
Consolidated Statements of Income as indicated in the table below.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
2011 |
|
2010 |
|
|
|
Losses included in net sales: |
|
|
|
|
|
|
|
|
Put options |
|
$ |
(428 |
) |
|
$ |
(368 |
) |
Swaps |
|
|
(17 |
) |
|
|
(177 |
) |
|
|
|
|
|
$ |
(445 |
) |
|
$ |
(545 |
) |
|
|
|
(Losses) gains included in cost of sales: |
|
|
|
|
|
|
|
|
Swaps |
|
|
(126 |
) |
|
|
262 |
|
|
|
|
Total losses resulting from hedging activities |
|
$ |
(571 |
) |
|
$ |
(283 |
) |
|
|
|
The fair value of the swap contracts and put options as of March 31, 2011 and December 31,
2010 are listed in the table below.
Fair Value Measurements Using Significant Other Observable Inputs (Level 2)
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
Put options and swaps included in Prepaid expenses and other
assets |
|
$ |
296 |
|
|
$ |
984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps included in Accrued expenses |
|
$ |
108 |
|
|
$ |
|
|
|
|
|
|
|
|
|
9
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
The fair values of derivative instruments are based upon a comparison of the Companys
internal valuations to the valuations provided by third party counter-parties with whom they have
entered into substantially identical derivative contracts. The Company also compares the
counter-parties valuations to ensure that there is an acceptable level of consistency among them.
The put option valuations utilize forward pricing and an implied volatility of the underlying
commodity as well as interest rate forwards and are therefore subject to fluctuation based on the
movements of the commodity markets. The swap valuations are based on the official LME closing
valuations at the end of the trading day on March 31, 2011 and December 31, 2010, using the
mid-point of the closing bid and ask prices on all open swap positions regardless of the
holder. The closing prices are supervised by the London Clearing House and are regulated
by the Financial Services Authority, the financial regulatory body in the United Kingdom.
The Company is exposed to credit loss in cases where counter-parties with which they have
entered into derivative transactions are unable to pay the Company when they owe the Company funds
as a result of agreements with them. To minimize the risk of such losses, the Company uses highly
rated financial institutions as counter-parties that meet certain requirements. The Company
currently does not anticipate that any of the counter-parties will default on their obligations.
The Company does not require collateral and does not enter into master netting arrangements.
NOTE NCONTINGENCIES
The Company is subject to federal, state and local laws designed to protect the environment
and believes that as a general matter, its policies, practices and procedures are properly designed
to reasonably prevent risk of environmental damage and financial liability to the company.
The Company is party to various litigation, claims and disputes, including labor
regulation claims and Occupational Safety and Health Act (OSHA) and environmental regulation
violations, some of which are for substantial amounts, arising in the ordinary course of business.
While the ultimate effect of such actions cannot be predicted with certainty, the Company expects
that the outcome of these matters will not result in a material adverse effect on its business,
financial condition or results of operations.
NOTE OEARNINGS PER SHARE
Basic earnings per common share (EPS) is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted earnings per share is
computed similarly to basic earnings per share except that the denominator is increased to include
the number of shares that would have been outstanding if the potentially dilutive common shares had
been issued. The Company uses the treasury stock method when calculating the dilutive effect in
basic EPS.
10
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
The information used to compute basic and diluted earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
14,764 |
|
|
$ |
6,782 |
|
Weighted average shares outstandingbasic |
|
|
43,530 |
|
|
|
43,334 |
|
Basic earnings per share |
|
$ |
0.34 |
|
|
$ |
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
14,764 |
|
|
$ |
6,782 |
|
Weighted average shares outstandingdiluted |
|
|
44,181 |
|
|
|
43,602 |
|
Diluted earnings per share |
|
$ |
0.33 |
|
|
$ |
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of average shares
outstanding basic to average shares
outstandingdiluted: |
|
|
|
|
|
|
|
|
Weighted average shares outstandingbasic |
|
|
43,530 |
|
|
|
43,334 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Options |
|
|
336 |
|
|
|
89 |
|
Restricted stock units |
|
|
315 |
|
|
|
179 |
|
|
|
|
|
|
|
|
Weighted average shares outstandingdiluted |
|
|
44,181 |
|
|
|
43,602 |
|
Anti-dilutive shares excluded from earnings per share calculation
for the three months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise price |
|
2011 |
|
2010 |
|
|
|
Options |
|
$ |
13.00 |
|
|
|
|
|
|
|
1,045 |
|
NOTE P SEGMENT INFORMATION
The following table presents information regarding the Companys segment information:
For the Three Months ended March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Horsehead |
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
|
INMETCO |
|
|
Other |
|
|
Total |
|
|
|
|
Net sales |
|
$ |
93,939 |
|
|
$ |
15,535 |
|
|
$ |
(260 |
) |
|
$ |
109,214 |
|
Income before income taxes |
|
|
17,014 |
|
|
|
5,059 |
|
|
|
|
|
|
|
22,073 |
|
For the Three Months ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Horsehead |
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
|
INMETCO |
|
|
Other |
|
|
Total |
|
|
|
|
Net sales |
|
$ |
82,746 |
|
|
$ |
14,447 |
|
|
$ |
(217 |
) |
|
$ |
96,976 |
|
Income before income taxes |
|
|
6,442 |
|
|
|
4,140 |
|
|
|
|
|
|
|
10,582 |
|
NOTE QMONACA, PENNSYLVANIA ACCIDENT INSURANCE RECOVERY
On July 22, 2010, an explosion occurred at the Companys Monaca, PA facility which resulted in
the complete shutdown of the plants refinery operations. Each of the 10 columns used to produce
zinc oxide and refined zinc metal in the refining facility has been rebuilt. Production
operations resumed late in 2010 as these repairs were completed. The Company pursued recovery of
the cost of repairs, lost profit and other losses from its zinc oxide and refined metal production
during the rebuilding period, subject to customary deductibles, under the Companys business
interruption and property insurance. As of March 31, 2011, the Company incurred $17,902 in
clean-up, repair and other costs associated with the explosion. The Company submitted a claim
totaling $33,831 and reached a final settlement in the amount of $29,614 in the first quarter of
2011.
The Company had recorded insurance recovery of $19,267 at December 31, 2010, of which $14,276
related to business interruption and $4,991 related to property damage. The estimated allocation
of the remaining settlement of $10,347 was $3,248 for business interruption and $7,099 for property
damage.
As of March 31, 2011, $20,500 of the recoveries were received in cash and $9,114 of the
recoveries were included in accounts receivable on the Companys Consolidated Balance Sheet.
The costs and insurance recoveries are summarized in the table below.
11
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
|
|
|
|
|
Total insurance recovery at December 31, 2010 |
|
$ |
(19,267 |
) |
Insurance recovery recognized during the three months ended March 31, 2011 |
|
|
(10,347 |
) |
|
|
|
|
|
Final insurance settlement |
|
|
(29,614 |
) |
|
|
|
|
|
|
|
Three Months ended |
|
|
|
March 31, 2011 |
|
|
|
|
|
|
Insurance recovery recognized during the three months ended March 31, 2011 |
|
|
(10,347 |
) |
Cost of clean-up and repairs included in cost of sales of zinc material
and other goods |
|
|
982 |
|
|
|
|
|
Income related to insurance recovery included in cost of sales (excluding
depreciation and amortization) |
|
|
(9,365 |
) |
|
|
|
|
|
Selling, general and administrative expenses |
|
|
69 |
|
|
|
|
|
Income related to insurance recovery |
|
$ |
(9,296 |
) |
|
|
|
|
|
|
|
|
|
Costs included in finished goods inventories |
|
|
170 |
|
Costs capitalized |
|
|
282 |
|
Insurance proceeds receivable included in accounts receivable |
|
$ |
9,114 |
|
12
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
General
This discussion should be read in conjunction with the Notes to Consolidated Financial
Statements included herein and the Notes to Consolidated Financial Statements and Managements
Discussion and Analysis of Financial Condition and Results of Operations included in the Companys
Annual Report on Form 10-K for the fiscal year ended December 31, 2010, which was filed with the
SEC on March 16, 2011.
Overview
Our History
We are a leading U.S. producer of zinc and nickel-based products. Our products are used in a
wide variety of applications, including in the galvanizing of fabricated steel products and as
components in rubber tires, alkaline batteries, paint, chemicals, pharmaceuticals and as a remelt
alloy in the production of stainless steel. We believe that we are the largest refiner of zinc
oxide and Prime Western zinc metal in North America. We believe we are also the largest North
American recycler of EAF dust, a hazardous waste produced by the carbon steel mini-mill
manufacturing process. Through our INMETCO operations, we believe we are also a leading recycler
of EAF dust and other nickel-bearing waste generated by specialty steel
producers and a leading recycler of nickel-cadmium (Ni-Cd) batteries in North America. We,
together with our predecessors, have been operating in the zinc industry for more than 150 years
and in the nickel-bearing waste industry for more than 30 years. We operate as two business
segments.
While we vary our raw material inputs, or feedstocks, based on cost and availability, we
generally produce our zinc and nickel-based products using nearly 100% recycled materials,
including metal recovered from our EAF dust and nickel-bearing waste recycling operations. We
believe that our ability to convert recycled zinc into finished products results in lower feed
costs than for smelters that rely primarily on zinc concentrates. Our EAF dust recycling facilities
also generate service fee revenue from steel mini-mills by providing a convenient and safe means
for recycling their EAF dust. In 2008, we began construction of a new EAF dust processing facility
located in South Carolina. We placed the first of the two kilns into production in April 2010 and
the second in September 2010. INMETCO provides recycling services, some of which is on a tolling
basis, from a single production facility in Ellwood City, Pennsylvania.
Strategic Investments
During the first quarter of 2011, we announced the completion of a preliminary feasibility
study to construct a 150,000 ton per year zinc plant based on state-of-the-art green technology.
The goals of the proposed plant would be to produce zinc at much lower costs, to significantly
reduce air emissions and to provide opportunities for us to serve the broader market for special
high grade zinc and the continuous galvanizing market, in addition to our traditional zinc markets.
If our Board of Directors approves this project and if we are able to secure financing for this
project, construction may start before the end of 2011.
Economic Conditions and Outlook
Our quarterly zinc product shipment levels through the first quarter of 2011 continued to
improve over the quarterly shipment levels for 2010 but continued to lag the quarterly shipment
levels for the first three quarters of 2008. The improvement reflects the continued strengthening
of the economy in general and the successful restart of our Monaca zinc oxide refinery late in the
fourth quarter of 2010. Our zinc smelting facility and our recycling plants operated at
near-capacity during the first quarter of 2011.
Factors Affecting Our Operating Results
Market Price for Zinc and Nickel. Since we generate the substantial majority of our net sales from
the sale of zinc and nickel-based products, our operating results depend greatly on the prevailing
market price for zinc and nickel. Our principal raw materials are zinc extracted from recycled EAF
dust, for which we receive revenue from the carbon steel mini-mill companies, and other
zinc-bearing secondary materials (purchased feedstock or purchased feed) that we purchase from
third parties. Costs to acquire and recycle EAF dust, which, during the first three months of 2011,
comprised approximately 71% of our raw materials, are not impacted significantly by fluctuations in
the market price of zinc on the LME. However, the cost for the remaining portion of our raw
materials is directly impacted by changes in the market price of zinc. The price
13
of our finished products is also impacted directly by changes in the market price of zinc and
nickel, which can result in rapid and significant changes in our monthly revenues. Zinc prices
experienced a period of general decline between 2000 and 2003, primarily due to increased exports
from China and declines in global zinc consumption. During 2004, however, zinc prices began to
recover, primarily due to increases in global zinc demand, including in China and to declines in
global production due to closed or permanently idled zinc mining and smelting capacity. Monthly
average zinc prices rose throughout 2005 and 2006, then began a steady decline through 2008, which
was particularly sharp in the fourth quarter of 2008. Monthly average zinc prices began to
gradually strengthen in 2009 and continued to strengthen throughout 2010 and the three months ended
March 31, 2011.
Average monthly, daily and yearly LME zinc prices for the years 2004 through 2010 and the
three months ended March 31, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
LME Zinc Prices |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
0.54 |
|
|
$ |
0.83 |
|
|
$ |
2.00 |
|
|
$ |
1.74 |
|
|
$ |
1.14 |
|
|
$ |
1.08 |
|
|
$ |
1.10 |
|
|
$ |
1.12 |
|
Low |
|
$ |
0.44 |
|
|
$ |
0.54 |
|
|
$ |
0.95 |
|
|
$ |
1.07 |
|
|
$ |
0.50 |
|
|
$ |
0.50 |
|
|
$ |
0.79 |
|
|
$ |
1.07 |
|
Daily High |
|
$ |
0.58 |
|
|
$ |
0.86 |
|
|
$ |
2.08 |
|
|
$ |
1.93 |
|
|
$ |
1.28 |
|
|
$ |
1.17 |
|
|
$ |
1.20 |
|
|
$ |
1.01 |
|
Daily Low |
|
$ |
0.43 |
|
|
$ |
0.53 |
|
|
$ |
0.87 |
|
|
$ |
1.00 |
|
|
$ |
0.47 |
|
|
$ |
0.48 |
|
|
$ |
0.72 |
|
|
$ |
1.15 |
|
Average per year |
|
$ |
0.48 |
|
|
$ |
0.63 |
|
|
$ |
1.48 |
|
|
$ |
1.47 |
|
|
$ |
0.85 |
|
|
$ |
0.75 |
|
|
$ |
0.98 |
|
|
$ |
1.09 |
|
For 2010, LME average nickel prices ranged from $8.36 per pound to $11.81 per pound and
averaged $9.89 per pound. For the three months ended March 31, 2010, LME nickel prices ranged from
$7.73 per pound to $11.32 per pound and averaged $9.11 per pound. For the three months ended March
31, 2011, LME average nickel prices ranged from $10.91 per pound to $13.17 per pound and averaged
$12.20 per pound.
In 2010, we purchased put options for 2011 to serve as a hedge and to mitigate the effects of
decreases in the LME average zinc price. Through the purchase of the options, we will receive a
minimum price per pound for the quantity hedged. We purchased put options for approximately 99,000
tons of zinc for 2011 having a strike price of $0.65 per pound. The purchases represent
approximately 70% of our expected zinc production in 2011. We also sold put options for
approximately 35,000 tons of zinc for the last six months of 2011 having a strike price of $0.55
per pound. The options we purchased provide that we will receive a minimum of $0.65 per pound for
the quantity hedged and the options we sold provide that the buyer will receive a minimum of $0.55
per pound for the quantity hedged. The cost of the options purchased was $3.0 million and the cost
of the options sold was $0.2 million.
Demand for Zinc and Nickel-Based Products. We generate revenue from the sale of zinc metal,
zinc oxide, zinc- and copper-based powders and nickel-based products, as well as from the
collection and recycling of EAF dust. Demand for our products increased from the fourth quarter of
2010 as our smelting facility and our recycling plants operated at near- capacity during the
quarter, partially reflecting the successful restart of our zinc oxide refinery and the
accompanying increase in zinc oxide shipments. Our production of zinc products for the first three
months of 2011 was increased to an annual rate of 140,000 tons from 124,000 tons for 2010.
Weekly steel production continued the general upward trend from 2010 through the first
quarter of 2011 thereby increasing the amount of EAF dust generated and the demand for our EAF dust
recycling services. We also began operations at our first kiln at our Barnwell, South Carolina
facility in April of 2010 and at the second kiln in September of 2010.
14
The table below illustrates historical production and sales volumes and revenues for zinc
products, EAF dust and nickel-based products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipments/EAF Dust Receipts |
|
Revenue/Ton |
|
|
Three Months Ended |
|
Year Ended |
|
Three Months Ended |
|
Year Ended |
|
|
March 31, |
|
December 31, |
|
March 31, |
|
December 31, |
|
|
2011 |
|
2010 |
|
2010 |
|
2009 |
|
2011 |
|
2010 |
|
2010 |
|
2009 |
|
|
(Tons, in thousands) |
|
(In U.S. dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zinc Products |
|
|
36 |
|
|
|
33 |
|
|
|
137 |
|
|
|
118 |
|
|
$ |
2,165 |
|
|
$ |
2,081 |
|
|
$ |
1,976 |
|
|
$ |
1,529 |
|
EAF Dust |
|
|
132 |
|
|
|
135 |
|
|
|
532 |
|
|
|
409 |
|
|
$ |
69 |
|
|
$ |
70 |
|
|
$ |
74 |
|
|
$ |
80 |
|
Nickel-based products |
|
|
7 |
|
|
|
7 |
|
|
|
27 |
|
|
|
25 |
|
|
$ |
1,970 |
|
|
$ |
1,789 |
|
|
$ |
1,768 |
|
|
$ |
1,453 |
|
Cost of Sales (excluding depreciation and amortization). Our cost of producing zinc products
consists principally of purchased feedstock, energy, maintenance and labor costs. In the first
three months of 2011, approximately 19% of our production costs were purchased-feedstock-related,
compared to 24% for the first three months of 2010. Purchased-feedstock-related costs are driven
by the percentage of purchased feed used in the feed mix, the average LME zinc price and the price
we pay for the purchased feed, which is expressed as a percentage of the LME average zinc price. We
purchase our purchased feedstock at a discount to the LME price of zinc. The decrease reflects our
efforts to increase the use of EAF dust-based feedstock. The remaining 81% of our production costs
in the first three months of 2011 were conversion-related. A portion of our conversion costs do
not change proportionally with changes in production volume. Other components of cost of sales
include transportation costs, as well as other manufacturing expenses. The main factors that
influence our cost of sales as a percentage of net sales are fluctuations in zinc prices,
production and shipment volumes, efficiencies, energy costs and our ability to implement cost
control measures aimed at improving productivity.
We value our inventories using the weighted average actual cost method. Under this method,
the cost of our purchased feedstock generally takes three to four months to flow through our cost
of sales. In an environment of declining LME average zinc prices, our inventory cost can exceed
the market value of our finished goods. Lower-of-cost-or-market (LCM) adjustments can result.
No LCM adjustment was recorded for the first quarter of 2010 or 2011.
Selling, General and Administrative Expenses. Our selling, general and administrative
expenses consist of all sales and marketing expenditures, as well as administrative overhead costs,
such as salary and benefit costs for sales personnel and administrative staff, expenses related to
the use and maintenance of administrative offices, costs associated with acquisitions, other
administrative expenses, including expenses relating to logistics and information systems and legal
and accounting expense, and other selling expenses, including travel costs. Salary and benefit
costs historically have comprised the largest single component of our selling, general and
administrative expenses. Selling, general and administrative expenses as a percent of net sales
historically have been impacted by changes in salary and benefit costs, as well as by changes in
selling prices.
Trends Affecting Our Business
Our operating results are and will be influenced by a variety of factors, including:
|
|
|
LME price of zinc and nickel; |
|
|
|
|
changes in cost of energy and fuels; |
|
|
|
|
gain and loss of customers; |
|
|
|
|
pricing pressures from competitors, including new entrants into the EAF dust or
nickel-bearing waste recycling markets; |
|
|
|
|
increases and decreases in the use of zinc and nickel-based products; |
|
|
|
|
expansions into new products and expansion of our capacity, which requires us to
incur costs prior to generating revenues; |
|
|
|
|
expenditures required to comply with environmental and other operational
regulations; |
|
|
|
|
access to credit by our customers; and |
|
|
|
|
our operational efficiency improvement programs. |
15
We have experienced fluctuations in our sales and operating profits in recent years due to
fluctuations in zinc prices. Historically, zinc prices have been extremely volatile, and we expect
that volatility to continue. Changes in zinc pricing have impacted our sales revenue
since the prices of the products we sell are based primarily on LME zinc prices, and they have
impacted our costs of production, since the prices of some of our feedstocks are based on LME zinc
prices. Therefore, since a large portion of our sales and a portion of our expenses are affected by
the LME zinc price, we expect that changing zinc prices will continue to impact our operations and
financial results in the future and any significant drop in zinc prices will negatively impact our
results of operations. We employ various hedging instruments in order to attempt to reduce the
impact of decreases in the selling prices of a portion of our expected production.
Energy is one of our most significant costs. Our processes rely on electricity, coke and
natural gas in order to operate. Our freight operations depend heavily on the availability of
diesel fuel, and our Monaca, Pennsylvania power plant uses coal to generate electricity for our
operations in that facility. Energy prices, particularly for electricity, natural gas, coal, coke
and diesel fuel, have been volatile in recent years and currently exceed long-term historical
averages. These fluctuations impact our manufacturing costs and contribute to earnings volatility.
The historically high zinc prices from 2006 into 2008 also made it attractive for new
competitors to enter the EAF dust recycling market to compete for dust generated by existing EAF
producers as well as anticipated new EAF capacity. The entry of new competitors could have an
adverse impact on our price realization and market share from EAF dust recycling. For example,
Steel Dust Recycling began operations at its Waelz kiln facility located in Alabama in 2008, and
The Heritage Group has built an EAF dust processing facility in Arkansas and began operations in
2009.
Our zinc products compete with other materials in many of their applications, and in some
cases our customers may shift to new processes or products. For example, our zinc is used by steel
fabricators in the hot dip galvanizing process, in which steel is coated with zinc in order to
protect it from corrosion. Demand for our zinc as a galvanizing material may shift depending on how
customers view the respective merits of hot dip galvanizing and paint. Our stainless steel
customers face competition from producers of material containing lower levels of nickel, which
could have an impact on the demand for our nickel-based products. Our ability to anticipate shifts
in product usage and to produce new products to meet our current and future customers needs will
significantly impact our operating results. We also face intense competition from regional,
national and global providers of zinc based products, and the growth of any of those competitors
could reduce our market share and negatively impact our operating results.
Finally, our business is subject to a wide variety of environmental and other regulations and
our operations expose us to a wide variety of potential liabilities. Our total cost of
environmental compliance at any time depends on a variety of regulatory, technical and factual
issues, some of which cannot be anticipated. Changes in regulations and/or our failure to comply
with existing regulations can result in significant capital expenditure requirements or penalties.
Summary of Critical Accounting Policies and Estimates
Our Consolidated Financial Statements and the notes thereto for the fiscal year
ended December 31, 2010 included in our Annual Report on Form 10-K which was filed with
the SEC on March 16, 2011, contain a summary of significant
accounting policies followed by us in the preparation of our consolidated financial statements. These policies were also
followed in preparing the consolidated financial statements as of March 31, 2011 and for the three
months ended March 31, 2011 and 2010. Certain of these accounting policies are described below.
Inventories
Inventories, which consist primarily of zinc and nickel-bearing materials and supplies and
spare parts, are valued at the lower of cost or market using a weighted average actual cost method.
Raw materials are purchased, as well as produced from the processing of EAF dust. Supplies and
spare parts inventory used in the production process are purchased. Work-in-process and finished
goods inventories are valued based on the costs of raw materials plus applicable conversion costs,
including depreciation and overhead costs relating to associated process facilities.
Zinc and nickel are traded as commodities on the LME, and, accordingly, product inventories
are subject to price fluctuations. When reviewing inventory for the lower of cost or market, we
consider the forward prices as quoted on the LME as of the reporting date in determining our
estimate of net realizable value to determine if an adjustment is required. Our product revenues
are based on the current or prior months LME average prices. The LME average prices upon which
our
product revenue is based has been reasonably correlated with the forward LME prices that we
use to make the lower of cost or market adjustments.
16
Financial Instruments
The following methods are used to estimate the fair value of our financial instruments.
|
|
|
Cash and cash equivalents, accounts receivable, notes payable due within one
year, accounts payable and accrued expenses approximate their fair value due to the
short-term nature of these instruments. |
|
|
|
|
Our financial swap and financial option instruments are carried at fair value.
We recognize changes in fair value within the consolidated statements of
income as they occur. |
We do not purchase, hold or sell derivative financial instruments unless we have an existing
asset or obligation or anticipate a future activity that is likely to occur and will result in
exposing us to market risk. We use various strategies to manage our market risk, including the use
of derivative instruments to limit, offset or reduce such risk. Derivative financial instruments
are used to manage well-defined commodity price risks from our primary business activity. The fair
values of derivative instruments are based upon a comparison of our internal valuations to the
valuations provided by third party counter-parties with whom we have entered into substantially
identical derivative contracts. We also compare their valuations to ensure that there is an
acceptable level of consistency among them. The valuations utilize forward pricing and an implied
volatility of the underlying commodity as well as interest rate forwards and are therefore subject
to fluctuation based on the movements of the commodity markets.
We are exposed to credit loss in cases where counter-parties with which we have entered into
derivative transactions become unable to satisfy their obligations in accordance with the
underlying agreements. To minimize this risk, we use highly rated counter-parties that meet
certain requirements. We currently do not anticipate that any of our counter-parties will default
on their obligations to us.
Impairment
We review the carrying value of our long-lived assets for impairment whenever events or
circumstances indicate that the carrying amounts may not be recoverable. We examined our assets
and found no events that would suggest a potential impairment. We have no goodwill. In the event
we would determine the carrying amounts would not be recovered, an impairment charge would be
recorded for the difference between the fair value and the carrying value.
Results of Operations
The following table sets forth the percentages of sales that certain items of operating data
constitute for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
2011 |
|
2010 |
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales (excluding depreciation and amortization) |
|
|
70.2 |
|
|
|
79.5 |
|
Depreciation and amortization |
|
|
4.8 |
|
|
|
4.7 |
|
Selling, general and administrative expenses |
|
|
4.8 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
20.2 |
|
|
|
10.9 |
|
Interest expense |
|
|
0.3 |
|
|
|
0.3 |
|
Interest and other income |
|
|
0.3 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
20.2 |
|
|
|
10.9 |
|
Income tax provision |
|
|
6.7 |
|
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
13.5 |
% |
|
|
7.0 |
% |
|
|
|
|
|
|
|
|
|
The following table sets forth the activity and the fair values of our hedging instruments at
the reporting dates.
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Put Options |
|
|
|
|
|
|
|
|
|
|
Settlement Periods |
|
|
|
|
|
|
|
|
|
|
2010 |
|
2011 |
|
Swaps |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Fair value December 31, 2009 |
|
$ |
737 |
|
|
$ |
|
|
|
$ |
1,157 |
|
|
$ |
1,894 |
|
|
|
|
|
Purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements of closed positions |
|
|
|
|
|
|
|
|
|
|
(228 |
) |
|
|
(228 |
) |
|
|
|
|
Gain (loss) on settlements of closed positions |
|
|
|
|
|
|
|
|
|
|
(34 |
) |
|
|
(34 |
) |
|
|
|
|
Mark to market adjustment on open positions |
|
|
(368 |
) |
|
|
|
|
|
|
119 |
|
|
|
(249 |
) |
|
|
|
|
|
|
|
|
|
|
|
Fair value March 31, 2010 |
|
|
369 |
|
|
|
|
|
|
|
1,014 |
|
|
|
1,383 |
|
|
|
|
|
Purchases |
|
|
|
|
|
|
882 |
|
|
|
|
|
|
|
882 |
|
|
|
|
|
Settlements of closed positions |
|
|
|
|
|
|
|
|
|
|
(74 |
) |
|
|
(74 |
) |
|
|
|
|
Gain (loss) on settlements of closed positions |
|
|
(1 |
) |
|
|
|
|
|
|
(209 |
) |
|
|
(210 |
) |
|
|
|
|
Mark to market adjustment on open positions |
|
|
813 |
|
|
|
1,441 |
|
|
|
(616 |
) |
|
|
1,638 |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value June 30, 2010 |
|
|
1,181 |
|
|
|
2,323 |
|
|
|
115 |
|
|
|
3,619 |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
|
|
|
|
|
1,307 |
|
|
|
|
|
|
|
1,307 |
|
|
|
|
|
Settlements of closed positions |
|
|
|
|
|
|
|
|
|
|
(439 |
) |
|
|
(439 |
) |
|
|
|
|
Gain (loss) on settlements of closed positions |
|
|
(214 |
) |
|
|
|
|
|
|
452 |
|
|
|
238 |
|
|
|
|
|
Mark to market adjustment on open positions |
|
|
(962 |
) |
|
|
(2,668 |
) |
|
|
461 |
|
|
|
(3,169 |
) |
|
|
|
|
|
|
|
|
|
|
|
Fair value September 30, 2010 |
|
|
5 |
|
|
|
962 |
|
|
|
589 |
|
|
|
1,556 |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases |
|
|
|
|
|
|
585 |
|
|
|
|
|
|
|
585 |
|
|
|
|
|
Settlements of closed positions |
|
|
|
|
|
|
|
|
|
|
233 |
|
|
|
233 |
|
|
|
|
|
Gain (loss) on settlements of closed positions |
|
|
(5 |
) |
|
|
|
|
|
|
(532 |
) |
|
|
(537 |
) |
|
|
|
|
Mark to market adjustment on open positions |
|
|
|
|
|
|
(968 |
) |
|
|
115 |
|
|
|
(853 |
) |
|
|
|
|
|
|
|
|
|
|
|
Fair value December 31, 2010 |
|
|
|
|
|
|
579 |
|
|
|
405 |
|
|
|
984 |
|
|
|
|
|
Purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements of closed positions |
|
|
|
|
|
|
|
|
|
|
(225 |
) |
|
|
(225 |
) |
|
|
|
|
Gain (loss) on settlements of closed positions |
|
|
|
|
|
|
(1 |
) |
|
|
(109 |
) |
|
|
(110 |
) |
|
|
|
|
Mark to market adjustment on open positions |
|
|
|
|
|
|
(427 |
) |
|
|
(34 |
) |
|
|
(461 |
) |
|
|
|
|
|
|
|
|
|
|
|
Fair value March 31, 2011 |
|
$ |
|
|
|
$ |
151 |
|
|
$ |
37 |
|
|
$ |
188 |
|
|
|
|
|
|
|
|
|
|
|
|
A significant portion of our zinc product shipments are priced based on prior months LME
average zinc price. Consequently, changes in the LME average zinc price are not fully realized
until subsequent periods. The LME average zinc prices are listed in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2010 |
|
2011 |
|
|
|
Average LME zinc price |
|
December 31 |
|
March 31 |
|
December 31 |
|
March 31 |
|
Quarter |
|
$ |
1.00 |
|
|
$ |
1.04 |
|
|
$ |
1.05 |
|
|
$ |
1.09 |
|
Year-to-date |
|
$ |
0.75 |
|
|
$ |
1.04 |
|
|
$ |
0.98 |
|
|
$ |
1.09 |
|
Three Months Ended March 31, 2011 Compared with Three Months Ended March 31, 2010
Consolidated net sales. Consolidated net sales increased $12.2 million, or 12.6%, to $109.2
million for the three months ended March 31, 2011 compared to $97.0 million for the three months
ended March 31, 2010. The increase includes an $11.1 million increase in net sales for Horsehead
Corporation (Horsehead) and a $1.1 million increase in net sales for INMETCO.
Consolidated cost of sales (excluding depreciation and amortization). Consolidated cost of
sales decreased $0.4 million, or 0.6%, to $76.7 million for the three months ended March 31, 2011
compared to $77.1 million for the three months ended March 31, 2010. Cost of sales for the three
months ended March 31, 2011 includes a benefit from business
18
interruption and property damage insurance recoveries totaling $10.3 million offset by
additional costs of repairs and clean-up totaling $1.0 million relating to the explosion at our
Monaca refinery in July 2010. Excluding the additional costs and insurance recoveries associated
with the explosion, consolidated cost of sales increased $8.9 million, or 11.5%, to $86.0 million.
The increase includes a $9.0 million increase in cost of sales for Horsehead offset by a $.1
million decrease in INMETCO. As a percentage of consolidated net sales, consolidated cost of sales
was 78.7% for the three months ended March 31, 2011 compared to 79.5% for the three months ended
March 31, 2010.
Consolidated depreciation and amortization. Consolidated depreciation and amortization
increased $0.8 million, or 15.9%, to $5.3 million for the three months ended March 31, 2011
compared to $4.5 million for the three months ended March 31, 2010. The
increase primarily reflects depreciation on the Barnwell facility, which began operations in April
2010.
Consolidated selling, general and administrative expenses. Consolidated selling, general and
administrative expenses increased $0.5 million, or 9.7%, to $5.2 million for the three months ended
March 31, 2011 compared to $4.7 million for the three months ended March 31, 2010. Horsehead
related costs increased $0.3 million, primarily reflecting increases in labor costs, bad debt
expense, and non-cash stock-based compensation expense offset by decreases in legal fees. INMETCO
selling, general and administrative costs increased $0.2 million.
Consolidated income tax provision. Our consolidated income tax provision was $7.3 million for
the three months ended March 31, 2011 compared to $3.8 million for the three months ended March 31,
2010. Our effective tax rates were 33.1% for the three months ended March 31, 2011 and 35.9% for
the three months ended March 31, 2010.
Consolidated net income. For the reasons stated above, our consolidated net income was $14.8
million for the three months ended March 31, 2011, which includes income of $6.2 million relating
to the insurance recovery from the explosion at our Monaca refinery in July 2010, compared to net
income of $6.8 million for the three months ended March 31, 2010. Excluding the benefit and related
costs from the insurance recovery, consolidated net income increased $1.8 million to $8.6 million.
Business Segments
Horsehead Corporation
Net sales. Net sales increased $11.1 million, or 13.5%, to $93.7 million for the three months
ended March 31, 2011 compared to $82.5 million for the three months ended March 31, 2010. The
increase was a result of a $7.0 million increase in sales volume primarily reflecting increases in
shipments of zinc metal partially offset by decreases in shipments of zinc oxide, a $3.2 million
increase in price realization due to a slightly higher average LME zinc price for the first quarter
of 2011 compared to the first quarter of 2010 and an increase of $0.9 million in our co-product and
miscellaneous sales. Net sales during the three months ended March 2011 and the three months ended
March 2010 were both decreased by unfavorable non-cash adjustments of $0.7 million relating to our
hedging activities.
Zinc product shipments were 36,461 tons for the three months ended March 31, 2011, or 33,555
tons on a zinc contained basis, compared to 33,408 tons, or 30,119 tons on a zinc contained basis,
for the three months ended March 31, 2010. The average sales price realization for zinc products on
a zinc contained basis, excluding the effects from the non-cash mark to market adjustments of our
open hedge positions, was $1.18 per pound for the three months ended March 31, 2011 compared to
$1.15 per pound for the three months ended March 31, 2010. The increase reflects a 5% increase in
the average LME zinc price for the three months ended March 31, 2011 compared to the three months
ended March 31, 2010.
Net sales of zinc metal increased $12.7 million, or 35.5%, to $48.5 million for the three
months ended March 31, 2011 compared to $35.8 million for the three months ended March 31, 2010.
The increase was primarily due to a $10.5 million increase in sales volume and a $2.2 million
increase in price realization. The increase in sales volume reflects the gradual improvement in
demand for our products that began in late 2009 and continued into 2011 and our continued efforts
to increase shipments of zinc metal beyond our traditional markets. The increase in price
realization was due to a slightly higher average LME zinc price for 2011 versus 2010, and an
increase in the average premium to the LME on zinc metal sold in 2011 compared to 2010.
Net sales of zinc oxide decreased $3.6 million, or 10.8%, to $29.7 million for the three
months ended March 31, 2011, compared to $33.3 million for the three months ended March 31, 2010.
The decrease was primarily due to a $3.9
19
million decrease in sales volume reflecting the ramp up of zinc oxide shipments following the
restart of the Monaca refinery in the fourth quarter of 2010. First quarter 2011 shipments were up
112% from the fourth quarter of 2010 as we restarted production and resumed commercial
relationships with our customers. The $0.3 million increase in price realization for the three
months ended March 31, 2011 compared to March 31, 2010 reflects the increase of the average LME
zinc prices, which was partially offset by the lag effect of pricing a majority of our zinc oxide
shipments on prior months average LME zinc prices.
Net sales of zinc and copper-based powders increased $1.2 million, or 36.4%, to $4.5 million
for the three months ended March 31, 2011 compared to $3.3 million for the three months ended March
31, 2010. The increase was attributable to both shipment volume and price, most notably in our
copper-based powders.
Revenues from EAF dust recycling remained relatively stable at $9.2 million for the three
months ended March 31, 2011 compared to $9.5 million for the three months ended March 31, 2010. EAF
dust receipts for the three months ended March 31, 2011 were 132,375 tons compared to 135,088 tons
for the three months ended March 31, 2010. EAF dust receipts increased approximately 5% for the
first three months of 2011 as compared to the three months ended December 31, 2010. According to
data from the American Iron and Steel Institute, reported steel production increased 7.2% for the
three months ended March 31, 2011 over the three months ended December 31, 2010.
Cost of sales (excluding depreciation and amortization). Cost of sales decreased $0.3 million
to $67.9 million for the three months ended March 31, 2011, compared to $68.2 million for the three
months ended March 31, 2010. Cost of sales for the three months ended March 31, 2011 includes a
benefit from business interruption and property damage insurance recoveries totaling $10.3 million
offset by additional costs of repairs and clean-up totaling $1.0 million relating to the explosion
at our Monaca refinery in July 2010. Excluding the additional costs and insurance recoveries, cost
of sales increased $9.0 million, or 13.3%, to $77.2 million for the three months ended March 31,
2011 compared to $68.2 million for the three months ended March 31, 2010. As a percentage of net
sales, cost of sales, excluding the additional insurance and explosion related items, was 82.4% and
82.6% for the three months ended March 31, 2011 and 2010, respectively.
The cost of zinc material and other products sold, excluding the insurance recoveries and
additional costs, increased $8.8 million, or 14.1%, to $71.1 million for the three months ended
March 31, 2011 compared to $62.3 million for the three months ended March 31, 2010. The increase
was primarily a result of a net $5.5 million increase in shipment volume, a $7.1 million increase
in the cost of products shipped, offset by a $3.8 million decrease in recycling and other costs.
Conversion costs for the first quarter of 2011 reflect the return to a six furnace operation in
2011 compared to a five furnace operation for the majority of the first quarter of 2010. The
increase also reflects a 14.4% increase in production levels. The improvement in production volume
was offset by an increase of $6.7 million in energy costs, the majority of which resulted from an
increase in the cost of coke and electricity, a $1.5 million increase in labor costs and a $1.7
million increase in other services. The conversion costs were partially offset by a decrease in
purchased feed costs of $1.5 million and a decrease in the cost of purchased feeds we pay expressed
as a percentage of the LME. The decrease in our purchased feed costs also reflects an 11.9%
decrease in the number of tons of purchased feed consumed. Changes in the average LME zinc price
effect only the purchased feed component of our cost of sales, therefore any changes in the average
LME zinc price have a smaller effect on our cost of sales than on our net sales.
The cost of EAF dust services increased $0.2 million, or 3.5%, to $6.1 million for the three
months ended March 31, 2011 from $5.9 million for the three months ended March 31, 2010. The
increased cost primarily reflects an increase in transportation costs.
Income before income taxes. For the reasons stated above, income before income taxes
increased $10.6 million to $17.0 million for the three months ended March 31, 2011, and includes a
benefit of $9.3 million related to insurance recoveries less additional costs associated with the
July 2010 explosion at our Monaca plant compared to operating income of $6.4 million for the three
months ended March 31, 2010. Excluding the additional costs and benefit received from insurance,
operating income was $7.7 million for the three months ended March 31, 2011, an increase of $1.3
million from the three months ended March 31, 2010.
INMETCO
Net sales. Net sales increased $1.1 million, or 7.5%, to $15.5 million for the three months
ended March 31, 2011 compared to $14.4 million for the three months ended March 31, 2010. The
increase was due primarily to a higher LME average nickel price for the three months ended March
31, 2011 compared to the three months ended March 31, 2010 which was partially offset by an
increase in percentage of shipments fulfilling tolling obligations.
20
Cost of sales (excluding depreciation and amortization) Cost of sales decreased $0.1
million, or 1.1%, to $8.8 million for the three months ended March 31, 2011 compared to $8.9
million for the three months ended March 31, 2010. The decrease was due to an increase in raw
material costs, reflecting primarily the effect of higher average LME nickel prices, offset by
lower conversion costs.
Income before income taxes. For the reasons stated above, income before income taxes
increased $0.9 million to $5.1 million for the three months ended March 31, 2011.
Liquidity and Capital Resources
We finance our operations, capital expenditures and debt service primarily with funds
generated by our operations. We believe the combination of our cash balance, our cost reduction
initiatives, our hedging positions and our cash generated from operations will be sufficient to
satisfy our liquidity and capital requirements for the next twelve months. Our cash is not
restricted with the exception of $23.9 million related to the following two items. The first is
the financial assurance associated with the ESOI customer contracts purchased by us in 2009, and
the second is the collateral for our letters of credit, all of which are described in our annual
report on Form 10-K for the fiscal year ended December 31, 2010, which we filed with the SEC on
March 16, 2011. We believe our cash balance is sufficient to satisfy our liquidity and
capital requirements for the next twelve months. We further believe we could obtain a new credit
facility and reduce our capital requirements, if necessary, to maintain liquidity. Our ability to
continue to fund these requirements may be affected by industry factors, including LME zinc prices,
and by general economic, financial, competitive, legislative, regulatory and other factors
discussed in this report, including the impact on our operating results of the explosion that
occurred in July 2010 at our Monaca facility, or in the materials incorporated herein by reference.
March 31, 2011
Our balance of cash and cash equivalents at March 31, 2011, excluding the $23.9 million of
restricted cash, was $112.9 million, a $3.3 million increase from the December 31, 2010 balance of
$109.6 million. It is concentrated in three U.S. banks.
Cash Flows from Operating Activities
Our operations provided a net $3.8 million in cash for the three months ended March 31, 2011,
reflecting the higher operating performance during the three months ended March 31, 2011,
insurance proceeds from the explosion at our Monaca facility in July 2010, the strengthening of the
LME average prices of zinc and nickel during the period as well as the general improvement in the
overall economy. These factors also contributed to the increase in accounts receivable and
inventory during the quarter.
Our investment in working capital was $191.3 million at March 31,
2011 and $170.1 million at December 31, 2010. The increase in our accounts receivable reflects
the resumption of shipments of zinc oxide during the first quarter of 2011, which was interrupted
in the second half of 2010. Investment in inventory increased 13.2% and zinc tons in inventory
increased 20.9% at March 31, 2011 compared to December 31, 2010. This increase is a result of an
18% increase in zinc tons produced during the three months ended March 31, 2011 compared to the
three months ended December 31, 2010.
During the three months ended March 31, 2011, we recorded an additional $10.3 million in
recoveries for business interruption and property damage insurance relating to the July 2010
explosion at our Monaca facility. This amount represents the final settlement of the claim. We
received cash payments of $9.5 million, of which $8.3 million was included in the accounts
receivable balance at December 31, 2010. The remaining $9.1 million to be received is recorded in
the accounts receivable balance at March 31, 2011.
Cash Flows from Investing Activities
Cash used in investing activities was $2.5 million for the three months ended March 31, 2011.
Capital expenditures were $5.0 million. We funded capital expenditures with cash on hand.
During the first quarter of 2011, restricted cash totaling $2.5 million was released from
escrow in accordance with the provisions of the New Markets Tax Credit program related to the
financing and development of the Barnwell site which began operations in April 2010.
21
Cash Flows from Financing Activities
Cash provided by investing activities included proceeds of $2.4 million from the exercise of
182 stock options during the three months ended March 31, 2011.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements include operating leases and letters of credit. As of March
31, 2011, we had letters of credit outstanding in the amount of $20.4 million to collateralize
self-insured claims for workers compensation and other general insurance claims and closure bonds
for our two facilities in Pennsylvania. These letters of credit are collateralized by $21.4 million
in restricted cash.
Available Information
Our internet website address is www.horsehead.net. Our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the
Exchange Act), will be available free of charge through our website as soon as reasonably
practicable after they are electronically filed with, or furnished to, the SEC. Our website and the
information contained or incorporated therein are not intended to be incorporated into this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In the ordinary course of our business, we are exposed to potential losses arising from
changes in the prices of zinc, copper, nickel, lead, natural gas and coal. We have historically
used derivative instruments, such as swaps, put options and forward purchase contracts to manage
the effect of these changes. When we use forward contract hedging instruments to reduce our
exposure to rising energy prices, we are limited in our ability to take advantage of future
reductions in energy prices, because the hedging instruments require us to exercise the hedging
instrument at the settlement date regardless of the market price at the time. We have also used put
options to reduce our exposure to future declines in zinc prices. We have entered into
arrangements hedging a portion of our exposure to future changes in the price of zinc, copper,
nickel and lead for 2011.
Our risk management policy seeks to meet our overall goal of managing our exposure to market
price risk, particularly risks related to changing zinc and nickel prices. All derivative contracts
are held for purposes other than trading and are used primarily to mitigate uncertainty and
volatility of expected cash flow and cover underlying exposures. We are exposed to losses in the
event of non-performance by the counter-parties to the derivative contracts discussed below, as
well as any similar contracts we may enter into in future periods. Counter-parties are evaluated
for creditworthiness and risk assessment both prior to our initiating contract activities and on an
ongoing basis.
Commodity Price Risk
Our business consists principally of the sale of zinc- and nickel-based products. As a result,
our results of operations are subject to risk of fluctuations in the market price of zinc and
nickel. While our finished products are generally priced based on a spread to the price of zinc or
nickel on the LME, our revenues are impacted significantly by changes in the market price of these
metals. Changes in zinc prices will also impact our ability to generate revenue from our EAF
recycling operations as well as our ability to procure raw materials. In addition, we consume
substantial amounts of energy in our zinc production and EAF dust recycling operations, and
therefore our cost of sales is vulnerable to changes in prevailing energy prices, particularly
natural gas, coke and coal.
In 2009, we purchased put options for approximately 100,000 tons of zinc for 2010. The cost
of the options was $5.3 million and they have a strike price of $0.65 per pound. At the time of
the purchases, the options represented approximately 80% of our anticipated sales volume for 2010.
In 2010, we purchased put options for approximately 99,000 tons of zinc for 2011 having a strike
price of $0.65 per pound. The purchases represent approximately 70% of our expected zinc production
in 2011. We also sold put options for approximately 35,000 tons of zinc for the last six months of
2011 having a strike price of $0.55 per pound. The options we purchased provide that we will
receive a minimum of $0.65 per pound for the quantity hedged and the options we sold provide that
the buyer will receive a minimum of $0.55 per pound for the quantity hedged. The cost of the
options purchased was $3.0 million and the cost of the options sold was $0.2 million. These
options are included in Prepaid expenses and other current assets in our consolidated financial
statements.
22
As of December 31, 2010, we were party to contracts for the purchase and delivery of the coal
requirements for our power plant in Monaca through 2011. We were party to a similar contract in
2010. Each year, we enter into contracts for the forward purchase of natural gas to cover the
majority of natural gas requirements in order to reduce our exposure to the volatility of natural
gas prices.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
Based on our managements evaluation (with the participation of our principal executive
officer and principal financial officer), as of the end of the period covered by this report, our
principal executive officer and principal financial officer have concluded that our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are
effective to ensure that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms and is accumulated and
communicated to our management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required disclosure. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and
operation of our disclosure controls and procedures were effective as of March 31, 2011.
(b) Changes in internal control over financial reporting.
During the quarter ending March 31, 2011, there was no change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that in
our managements judgment has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
23
PART IIOTHER INFORMATION
Item 1. Legal Proceedings.
We are party to various litigation, claims and disputes, including labor regulation claims and
OSHA and environmental regulation violations, some of which are for substantial amounts, arising in
the ordinary course of business. While the ultimate effect of such actions cannot be predicted
with certainty, we expect that the outcome of these matters will not result in a material adverse
effect on our business, financial condition or results of operations.
Item 1A. Risk Factors.
There have been no material changes in the risk factors as previously reported in the
Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2010, which we filed
with the SEC on March 16, 2011.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
[None]
Item 3. Defaults Upon Senior Securities.
[None]
Item 4. (Removed and Reserved)
Item 5. Other Information.
[None]
Item 6. Exhibits.
24
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Description |
10.1
|
|
Employment Agreement, dated as of January 3, 2011, by
and between Horsehead Corporation and James M. Hensler
III (incorporated by reference to Exhibit 10.1 of the
registrants Current Report on Form 8-K filed on January
4, 2011) |
10.2
|
|
Employment Agreement, dated as of January 3, 2011, by
and between Horsehead Corporation and Robert D. Scherich
(incorporated by reference to Exhibit 10.2 of the
registrants Current Report on Form 8-K filed on January
4, 2011) |
10.3
|
|
Employment Agreement, dated as of January 3, 2011, by
and between Horsehead Corporation and Ali Alavi
(incorporated by reference to Exhibit 10.3 of the
registrants Current Report on Form 8-K filed on January
4, 2011) |
31.1
|
|
Certification by James M. Hensler, Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
31.2
|
|
Certification of Robert D. Scherich, Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
32.1
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
HORSEHEAD HOLDING CORP. |
|
|
/s/ James M. Hensler |
|
|
By: James M. Hensler |
|
|
Its: President and Chief Executive Officer |
|
|
This report has been signed by the following persons in the capacities indicated on May
10, 2011.
|
|
|
|
|
SIGNATURE |
|
TITLE |
|
DATE |
|
|
|
|
|
/s/ James M. Hensler
James M. Hensler
|
|
Principal Executive Officer
|
|
May 10, 2011 |
|
|
|
|
|
/s/ Robert D. Scherich
Robert D. Scherich
|
|
Principal Financial and Accounting Officer |
|
May 10, 2011 |
26