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HNH > SEC Filings for HNH > Form 10-Q on 2-May-2013All Recent SEC Filings

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Form 10-Q for HANDY & HARMAN LTD.


2-May-2013

Quarterly Report


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 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 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, Engineered Materials, Arlon Electronic Materials ("Arlon") 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 purchase and resale of precious metal. Joining Materials segment has limited exposure to the prices of precious metals due to the Company's hedging and pricing models. 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 our Stainless Steel Tubing Group manufactures the world's longest continuous seamless stainless steel tubing coils, in excess of 5,000 feet, serving the petrochemical infrastructure and shipbuilding markets. We also believe it is the number one supplier of small diameter (<3mm) coil tubing to industry leading specifications serving the aerospace, defense and semiconductor fabrication markets. Our Specialty Tubing unit manufactures welded carbon steel tubing in coiled and straight lengths with a primary focus on products for the commercial refrigeration, automotive, heating, ventilation and cooling (HVAC), industrial heat exchanger, and oil and gas industries. In addition to producing bulk tubing, it produces value added fabrications for several of these industries.

Engineered 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; a line of engineered specialty fasteners for the building products industry for fastening applications in the remodeling and construction of homes, decking and landscaping; and electro-galvanized and painted cold rolled sheet steel products primarily for the construction, entry door, container and appliance industries. We believe that our primary business unit in the Engineered 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. In January 2013, we divested substantially all of the assets and existing operations of our Continental Industries business unit, which manufactured plastic and steel fittings and connectors for natural gas, propane and water distribution service lines, along with exothermic welding products for electrical grounding, cathodic protection and lightning protection. The results of this business unit have been classified as discontinued operations in the Company's consolidated financial statements for 2013, as well as all historical periods, and are not reflected in the tables and discussion of the Company's continuing operations below.

Arlon provides high performance materials for the printed circuit board ("PCB") industry and silicone rubber-based insulation materials used in a broad range of industrial, military/aerospace, consumer and commercial markets. It also supplies high technology circuit substrate laminate materials to the PCB industry. Products are marketed principally to original equipment manufacturers, distributors and PCB manufacturers globally. Arlon also manufactures a line of market leading silicone rubber materials used in a broad range of military, consumer, industrial and commercial products.

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. Other income and expense, interest expense and income taxes are not presented by segment since they are excluded from the measure of segment profitability reviewed by the Company's management.

Results of Operations

Comparison of the Three Months Ended March 31, 2013 and 2012

The operating results for the three months ended March 31, 2013 and 2012 are
summarized in the following table:
                                                               Three Months Ended
                                                                    March 31,
(in thousands)                                                2013             2012

Net sales                                                $    158,888     $    156,713
Gross profit                                                   44,963           41,569
Gross profit margin                                              28.3 %           26.5 %
Selling, general and administrative expenses                   32,349           30,113
Pension expense                                                 1,274              612
Operating income                                               11,340           10,844
Other:
Interest expense                                                8,446            3,848
Realized and unrealized loss (gain) on derivatives                439             (898 )
Other expense                                                     145               45
Income from continuing operations before tax and
equity investment                                               2,310            7,849
Tax provision                                                     916            3,129
Loss from associated company, net of tax                        2,837                -
(Loss) income from continuing operations, net of tax     $     (1,443 )   $      4,720

Net Sales

Net sales for the three months ended March 31, 2013 increased by $2.2 million, or 1.4%, to $158.9 million, as compared to $156.7 million for the same period in 2012. Value added sales increased by $4.3 million on higher volume, primarily from the Engineering segment, and were partially offset by the impact of lower average precious metal prices of $2.1 million, principally due to silver. The average silver market price was approximately $30.01 per troy ounce in the first quarter of 2013, as compared to $32.85 per troy ounce during the same period of 2012.

Gross Profit

Gross profit for the three months ended March 31, 2013 increased to $45.0 million, as compared to $41.6 million for the same quarter of 2012, and as a percentage of net sales, increased to 28.3%, as compared to 26.5% in the first quarter last year. The gross margin improvement of 1.8% was principally due to favorable product mix, effective cost control and improved operating efficiency at our manufacturing plants across all segments. In addition, lower average precious metal prices, principally silver, also contributed to the increase in gross margin by 0.4% in the three months ended March 31, 2013. Since the Company's precious metal inventory is hedged and the cost of silver is passed through to customers principally at market, lower silver prices generally result in increases in the Joining Materials segment's gross profit margin.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") for the three months ended March 31, 2013 were $32.3 million, or 20.4% of net sales, as compared to $30.1 million, or 19.2% of net sales, for the same period a year ago. The increase in SG&A as a percentage of net sales was primarily due to higher non-cash stock-based compensation expense and the Company's business development activities associated with our planned acquisition of Wolverine Joining Technologies, LLC. Also, the lower average precious metal prices had a negative impact on SG&A as a percentage of net sales, as compared to the prior year.


Pension Expense

Non-cash pension expense was $1.3 million for the three months ended March 31, 2013, which was $0.7 million higher than the three months ended March 31, 2012. The increase in non-cash pension expense was primarily due to the fact that investment returns on the assets of the WHX Corporation Pension Plan ("WHX Pension Plan") have been lower than actuarial assumptions. We currently expect non-cash pension expense to be approximately $5.1 million in 2013, as compared to $3.3 million in 2012.

Interest Expense

Interest expense for the three months ended March 31, 2013 was $8.4 million, as compared to $3.8 million for the same period of 2012. On March 26, 2013, H&H Group instructed Wells Fargo Bank, National Association ("Wells Fargo"), as trustee and collateral agent, to deliver an irrevocable notice of H&H Group's election to redeem all of its outstanding 10% subordinated secured notes due 2017 ("Subordinated Notes") and irrevocably deposited with Wells Fargo funds totaling $36.9 million for such redemption and interest payment in order to satisfy and discharge its obligations under the indenture. Interest expense for the three months ended March 31, 2013 included a $5.7 million loss associated with the redemption of the Subordinated Notes, including the redemption premium and the write-off of remaining deferred finance costs and unamortized debt discounts. This loss was partially offset by a lower average interest rate in the three months ended March 31, 2013, principally due to the Company's debt refinancing in the fourth quarter of 2012.

Realized and Unrealized (Loss) Gain on Derivatives

Realized and unrealized (loss) gain on derivatives for the three months ended
March 31, 2013 and 2012 were as follows:
(in thousands)                                                Three Months Ended
                                                                  March 31,
                       Derivative                              2013          2012
Commodity contracts                                        $      354       $  257
Derivative features of Subordinated Notes                        (793 )        641
Total realized and unrealized (loss) gain on derivatives   $     (439 )     $  898

H&H utilizes precious metal forward and future contracts to economically hedge its precious metal inventory against price fluctuations. The factors that affect the gain or loss on these derivative instruments are changes in the price of precious metals and the amount of ounces hedged. In addition, the Company's Subordinated Notes had embedded call premiums as well as Warrants associated with them. The Company treated the fair value of these features together as both a discount on the debt and a derivative liability at inception of the loan agreement. For the three months ended March 31, 2013, a mark-to-market loss of $0.8 million was recognized in realized and unrealized loss (gain) on derivatives, principally due to the redemption of the Subordinated Notes and Warrants.

Loss from Associated Company

As described in Note 7 - "Investments" to its consolidated financial statements, the Company concluded that it gained significant influence over the operating and financial policies of ModusLink Global Solutions, Inc. ("ModusLink") during the three months ended March 31, 2013. The $2.8 million loss from associated company, net of tax, for the three months ended March 31, 2013 is primarily the result of the reclassification of its historical unrealized loss associated with this investment from accumulated other comprehensive loss to earnings.

Income Taxes

For the three months ended March 31, 2013 and 2012, tax provisions from continuing operations of $0.9 million and $3.1 million were recorded, respectively. The effective tax rates in the three month ended March 31, 2013 and 2012 were 39.7% and 39.9%, 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.

Segment Analysis


                                       27
--------------------------------------------------------------------------------


Segment sales and operating income data for the three months ended March 31,
2013 and 2012 are shown in the following table:
                                       Three Months Ended March 31,
(in thousands)                                                       %
                                       2013             2012      Change
Net sales:
Joining Materials                $     44,530        $  47,839    (6.9 )%
Tubing                                 24,893           25,791    (3.5 )%
Engineered Materials                   53,692           49,690     8.1  %
Arlon                                  21,304           20,005     6.5  %
Kasco                                  14,469           13,388     8.1  %
Total net sales                  $    158,888        $ 156,713     1.4  %
Segment operating income:
Joining Materials                       5,747            5,614     2.4  %
Tubing                                  3,810            3,545     7.5  %
Engineered Materials                    4,150            3,898     6.5  %
Arlon                                   3,091            2,529    22.2  %
Kasco                                   1,291            1,157    11.6  %
Total segment operating income   $     18,089        $  16,743     8.0  %

Joining Materials

For the three months ended March 31, 2013, the Joining Materials segment net sales decreased by $3.3 million, or 6.9%, to $44.5 million, as compared to net sales of $47.8 million for the same period of 2012. The decrease in net sales was driven by lower sales volume and a decrease of approximately $2.84 per troy ounce in the average market price of silver during the first quarter of 2013, as compared to the same period of 2012. The effect of lower average precious metal prices reduced net sales by $2.1 million on a quarter versus prior year's quarter basis. Lower organic sales volume was primarily driven by lower demand from the mining and exploration industries as a result of slow growth of the global economy.

Segment operating income for the first quarter of 2013 increased by $0.1 million to $5.7 million, as compared to $5.6 million during the first quarter of 2012. During the first quarter of 2013, higher gross profit margin as a result of product mix and lower silver prices was partially offset by lower sales volume, as compared to the same quarter of 2012. The Joining Segment's operating income was also unfavorably impacted by higher SG&A associated with business development activities related to our planned acquisition of Wolverine Joining Technologies, LLC.

Tubing

For the three months ended March 31, 2013, the Tubing segment net sales decreased by $0.9 million, or 3.5%, to $24.9 million, as compared to $25.8 million in the first quarter of 2012. The decrease was principally from the home refrigeration market served by the Specialty Tubing Group, partially offset by higher sales volume from the energy and defense sectors served by the Stainless Steel Tubing Group.

Segment operating income for the first quarter of 2013 increased by $0.3 million, or 7.5%, to $3.8 million, as compared to $3.5 million in the first quarter of 2012. Gross profit margin improvement driven by favorable product mix was partially offset by reduced sales volume.

Engineered Materials

For the three months ended March 31, 2013, the Engineered Materials segment net sales increased by $4.0 million, or 8.1%, to $53.7 million, as compared to $49.7 million for the same period of 2012. The increase in net sales was primarily the result of higher sales of FastenMaster products for the home center segment, as well as $2.9 million of incremental sales associated with the acquisition of the operations of W.P. Hickman Company in December 2012.


Segment operating income increased by $0.3 million to $4.2 million for the three months ended March 31, 2013, as compared to $3.9 million for the same period of 2012. Gross profit margin for the three months ended March 31, 2013 was higher compared to the three months ended March 31, 2012 primarily due to increased sales of high margin branded fasteners in the first quarter of 2013, as compared to the first quarter of 2012.

Arlon

For the three months ended March 31, 2013, the Arlon segment net sales increased by $1.3 million, or 6.5%, to $21.3 million, as compared to $20.0 million for the first quarter of 2012. The increased sales were driven by higher demand for printed circuit board materials related to the telecommunications infrastructure in China.

Segment operating income increased by $0.6 million to $3.1 million for the three months ended March 31, 2013, as compared to $2.5 million for the same period of 2012. Gross margin was higher during the first quarter of 2013, as compared to the first quarter of 2012 primarily due to favorable product mix and effective cost control.

Kasco

For the three months ended March 31, 2013, the Kasco segment net sales increased 8.1%, to $14.5 million, as compared to $13.4 million for the first quarter of 2012. The sales improvements were principally from its route business and equipment sales in North America.

Segment operating income increased by $0.1 million to $1.3 million for the three months ended March 31, 2013, as compared to $1.2 million for the same period of 2012. Improvements in gross margin resulted from increased route business.

Discussion of Consolidated Statement of Cash Flows

Comparison of the Three Months Ended March 31, 2013 and 2012

Operating Activities

For the three months ended March 31, 2013, $19.0 million was used in operating activities, $30.3 million was provided by investing activities and $15.0 million was used in financing activities. The following table provides supplemental information regarding the Company's cash flows from operating activities for the three months ended March 31, 2013 and 2012:


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