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

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Form 10-Q for HANDY & HARMAN LTD.


2-Aug-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 wholly-owned operating subsidiaries, HNH focuses on high margin products and innovative technology and serves customers across a wide range of end markets. HNH's diverse product offerings are marketed throughout the United States and internationally. HNH owns Handy & Harman Group Ltd. ("H&H Group"), which owns Handy & Harman ("H&H") and Bairnco Corporation. HNH manages its group of businesses on a decentralized basis with operations principally in North America. HNH's business units encompass the following segments: Joining Materials, Tubing, Building Materials, Arlon Electronic Materials ("Arlon") and Kasco Blades and Route Repair Services ("Kasco"). The Building Materials segment was formerly known as the Engineered Materials segment. 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. The results of the Joining Materials segment include the operations of Wolverine Joining Technologies, LLC ("Wolverine Joining") from its acquisition on April 26, 2013.

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 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.

Building Materials segment manufactures and supplies products primarily to the commercial construction and building industries. It manufactures fasteners and fastening systems for the U.S. commercial low slope roofing industry, which are sold to building and roofing material wholesalers, roofing contractors and private label roofing system manufacturers, and a line of engineered specialty fasteners for the building products industry for fastening applications in the remodeling and construction of homes, decking and landscaping. We believe that our primary business unit in the Building Materials segment is the market leader in fasteners and accessories for commercial low-slope roofing applications and that the majority of the net sales for the segment are for the commercial construction repair and replacement market.

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.


Discontinued Operations

In January 2013, the Company divested substantially all of the assets and existing operations of its 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. It was part of the Company's Building Materials reporting segment. In June 2013, the Company divested substantially all of the assets and existing operations of its Canfield Metal Coating Corporation business unit, which manufactured electro-galvanized and painted cold rolled sheet steel products primarily for the construction, entry door, container and appliance industries. It was also part of the Company's Building Materials reporting segment. In July 2013, the Company divested substantially all of the equipment owned or utilized by Indiana Tube de México, S. De R.L. de C.V. ("ITM") for the manufacture of refrigeration condensers. ITM's operations were part of the Company's Tubing reporting segment. The results of these business units 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.

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2013 and 2012

The operating results for the three and six months ended June 30, 2013 and 2012
are summarized in the following table:
                                                  Three Months Ended           Six Months Ended
                                                       June 30,                    June 30,
(in thousands)                                    2013          2012          2013          2012
Net sales                                      $ 182,084     $ 164,430     $ 331,041     $ 308,816
Gross profit                                      51,665        49,676        95,637        89,818
Gross profit margin                                 28.4 %        30.2 %        28.9 %        29.1 %
Selling, general and administrative expenses      32,307        29,627        63,804        58,675
Pension expense                                    1,394           652         2,668         1,264
Operating income                                  17,964        19,397        29,165        29,879
Other:
Interest expense                                   1,641         4,350        10,087         8,199
Realized and unrealized gain on derivatives       (1,492 )      (1,612 )      (1,053 )      (2,510 )
Other expense                                        128           113           264           125
Income from continuing operations before tax
and equity investment                             17,687        16,546        19,867        24,065
Tax provision                                      7,038         6,824         7,905         9,832
Loss from associated company, net of tax             438             -         3,275             -
Income from continuing operations, net of
tax                                            $  10,211     $   9,722     $   8,687     $  14,233

Net Sales

Net sales for the three months ended June 30, 2013 increased by $17.7 million, or 10.7%, to $182.1 million, as compared to $164.4 million for the same period in 2012. Value added sales increased by $22.3 million on higher volume, primarily from the Joining Materials segment, including the acquisition of Wolverine Joining, and the Building Materials segment, and were partially offset by the impact of lower average precious metal prices of $4.6 million, principally due to silver. The average silver market price was approximately $22.90 per troy ounce in the second quarter of 2013, as compared to $29.40 per troy ounce during the same period of 2012. The acquisition of Wolverine Joining during the second quarter of 2013 provided incremental net sales of $15.2 million within the Joining Materials segment during the period.

Net sales for the six months ended June 30, 2013 increased by $22.2 million, or 7.2%, to $331.0 million, as compared to $308.8 million for the same period in 2012. Value added sales increased by $28.9 million on higher volume, primarily from the Joining Materials segment, including the acquisition of Wolverine Joining, and the Building Materials segment, and were partially offset by the impact of lower average precious metal prices of $6.7 million, principally due to silver. The average silver market price was approximately $26.46 per troy ounce during the first half of 2013, as compared to $31.12 per troy ounce during the


same period of 2012. The acquisition of Wolverine Joining during the second quarter of 2013 provided incremental net sales of $15.2 million within the Joining Materials segment during the period.

Gross Profit

Gross profit for the three months ended June 30, 2013 increased to $51.7 million, as compared to $49.7 million for the same period of 2012, and as a percentage of net sales, decreased to 28.4%, as compared to 30.2% in the second quarter last year. The gross profit margin decrease of 1.8% was principally due to unfavorable product mix in the Joining Materials segment and unfavorable production variances in the Arlon segment. Lower average precious metal prices, principally silver, favorably impacted gross profit margin by 0.7% in the three months ended June 30, 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. The acquisition of Wolverine Joining during the second quarter of 2013 provided incremental gross profit of $0.8 million within the Joining Materials segment during the period.

Gross profit for the six months ended June 30, 2013 increased to $95.6 million, as compared to $89.8 million for the same period of 2012. Gross profit as a percentage of net sales was relatively flat comparing the six months ended June 30, 2013 to the same period of 2012, with the slight decline due to unfavorable product mix from the Joining Materials segment and unfavorable production variances in the Arlon segment. Lower average precious metal prices, principally silver, favorably impacted gross profit margin by 0.6% in the six months ended June 30, 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. The acquisition of Wolverine Joining during the second quarter of 2013 provided incremental gross profit of $0.8 million within the Joining Materials segment during the period.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") for the three months ended June 30, 2013 were $32.3 million, or 17.7% of net sales, as compared to $29.6 million, or 18.0% of net sales, for the same period a year ago. The lower SG&A as a percentage of sales during the second quarter of 2013, as compared to the same period of 2012 was primarily due to effective cost control and higher sales volume, offsetting the impact of lower average precious metal prices, which had a negative impact on SG&A as a percentage of net sales, as compared to the prior year.

SG&A for the six months ended June 30, 2013 were $63.8 million, or 19.3% of net sales, as compared to $58.7 million, or 19.0% of net sales, for the same period a year ago. Lower average precious metal prices and increased business development costs, including acquisition fees and integration costs related to our acquisition of Wolverine Joining, 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 $1.4 million and $2.7 million for the three and six months ended June 30, 2013, respectively, which was $0.7 million higher than the three months ended June 30, 2012 and $1.4 million higher than the six months ended June 30, 2012, respectively. 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 $5.3 million in 2013, as compared to $3.3 million in 2012.

Interest Expense

Interest expense for the three and six months ended June 30, 2013 was $1.6 million and $10.1 million, respectively, as compared to $4.4 million and $8.2 million for the same periods of 2012, respectively. 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 and six months ended June 30, 2013, principally due to the Company's debt refinancing in the fourth quarter of 2012 and the redemption of the Subordinated Notes.

Realized and Unrealized Gain on Derivatives


                                       29
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Realized and unrealized gains (losses) on derivatives for the three and six
months ended June 30, 2013 and 2012 were as follows:
(in thousands)                                           Three Months Ended             Six Months Ended
                                                              June 30,                      June 30,
                   Derivative                             2013            2012         2013          2012
Commodity contracts (economic hedges)               $    1,492         $    495     $   1,846     $    752
Derivative features of Subordinated Notes                    -            1,117          (793 )      1,758
Total realized and unrealized gain on derivatives   $    1,492         $  1,612     $   1,053     $  2,510

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 prior to the redemption of the Subordinated Notes and Warrants in the first quarter of 2013.

Tax Provision

For the three months ended June 30, 2013 and 2012, tax provisions from continuing operations of $7.0 million and $6.8 million were recorded, respectively. The effective tax rates in the three months ended June 30, 2013 and 2012 were 39.8% and 41.2%, respectively. For the six months ended June 30, 2013 and 2012, tax provisions from continuing operations of $7.9 million and $9.8 million were recorded, respectively. The effective tax rates in the six months ended June 30, 2013 and 2012 were 39.8% and 40.9%, 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. Lower effective rates for the three and six months ended June 30, 2013, as compared to the same periods of 2012 were principally due to differences in the mix of income between taxable jurisdictions.

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 first quarter of 2013. The $3.3 million loss from associated company, net of tax, for the six months ended June 30, 2013 is primarily the result of the reclassification of the Company's historical unrealized loss associated with this investment from accumulated other comprehensive loss to earnings.

Segment Analysis

Segment net sales and operating income data for the three and six months ended
June 30, 2013 and 2012 are shown in the following table:

                                       30
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                                       Three Months Ended June 30,                Six Months Ended June 30,
                                                                   %                                        %
(in thousands)                       2013           2012         Change        2013          2012         Change
Net sales:
Joining Materials                $    56,902     $  49,576        14.8  %   $ 101,432     $  97,414         4.1  %
Tubing                                23,366        21,811         7.1  %      45,380        42,875         5.8  %
Building Materials                    66,733        58,325        14.4  %     113,372       100,417        12.9  %
Arlon                                 21,109        21,703        (2.7 )%      42,414        41,708         1.7  %
Kasco                                 13,974        13,015         7.4  %      28,443        26,402         7.7  %
Total net sales                  $   182,084     $ 164,430        10.7  %   $ 331,041     $ 308,816         7.2  %
Segment operating income:
Joining Materials                $     5,989     $   7,803       (23.2 )%   $  11,736     $  13,417       (12.5 )%
Tubing                                 4,736         4,388         7.9  %       8,488         7,716        10.0  %
Building Materials                     9,871         8,532        15.7  %      13,939        12,286        13.5  %
Arlon                                  2,867         3,970       (27.8 )%       5,958         6,497        (8.3 )%
Kasco                                    838           852        (1.6 )%       2,129         2,009         6.0  %
Total segment operating income   $    24,301     $  25,545        (4.9 )%   $  42,250     $  41,925         0.8  %

Joining Materials

For the three months ended June 30, 2013, the Joining Materials segment net sales increased by $7.3 million, or 14.8%, to $56.9 million, as compared to net sales of $49.6 million for the same period of 2012. The increase in net sales was driven by higher sales volume, including the acquisition of Wolverine Joining, partially offset by a decrease of approximately $6.50 per troy ounce in the average market price of silver during the second quarter of 2013, as compared to the same period of 2012, as well as lower demand from the mining and exploration sectors. The effect of lower average precious metal prices reduced net sales by $4.6 million on a quarter versus prior year's quarter basis. The acquisition of Wolverine Joining during the second quarter of 2013 provided incremental net sales of $15.2 million within the Joining Materials segment during the period.

Segment operating income for the second quarter of 2013 decreased by $1.8 million, or 23.2%, to $6.0 million, as compared to $7.8 million during the second quarter of 2012. During the second quarter of 2013, lower gross profit margin resulted from unfavorable product mix, 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, including acquisition fees and integration costs related to our acquisition of Wolverine Joining.

For the six months ended June 30, 2013, the Joining Materials segment net sales increased by $4.0 million, or 4.1%, to $101.4 million, as compared to net sales of $97.4 million for the same period of 2012. The increase in net sales was driven by higher sales volume, including the acquisition of Wolverine Joining, partially offset by a decrease of approximately $4.66 per troy ounce in the average market price of silver during the first half of 2013, as compared to the same period of 2012, as well as lower demand from the mining and exploration sectors. The effect of lower average precious metal prices reduced net sales by $6.7 million on a year-to-date basis versus the same period of 2012. The acquisition of Wolverine Joining during the second quarter of 2013 provided incremental net sales of $15.2 million within the Joining Materials segment during the period.

Segment operating income for the first half of 2013 decreased by $1.7 million, or 12.5%, to $11.7 million, as compared to $13.4 million during the first half of 2012. During the first half of 2013, lower gross profit margin resulted from unfavorable product mix, as compared to the same period of 2012. The Joining Segment's operating income was also unfavorably impacted by higher SG&A associated with business development activities, including acquisition fees and integration costs related to our acquisition of Wolverine Joining.

Tubing

For the three months ended June 30, 2013, the Tubing segment net sales increased by $1.6 million, or 7.1%, to $23.4 million, as compared to $21.8 million in the second quarter of 2012. The increase was primarily driven by higher sales volume from the oil and gas and chemical processing sectors served by the Stainless Steel Tubing Group.


Segment operating income for the second quarter of 2013 increased by $0.3 million, or 7.9%, to $4.7 million, as compared to $4.4 million in the second quarter of 2012. Gross profit margin was comparable with prior year, and the increase in operating income was driven primarily by the higher sales level in the quarter, as compared to the second quarter of 2012.

For the six months ended June 30, 2013, the Tubing segment net sales increased by $2.5 million, or 5.8%, to $45.4 million, as compared to $42.9 million in the first half of 2012. The increase was primarily driven by higher sales volume from the oil and gas and chemical processing sectors served by the Stainless Steel Tubing Group.

Segment operating income for the first half of 2013 increased by $0.8 million, or 10.0%, to $8.5 million, as compared to $7.7 million in the first six months of 2012. The increase in segment operating income was driven by gross profit margin improvement resulting from effective cost control on higher sales volume.

Building Materials

For the three months ended June 30, 2013, the Building Materials segment net sales increased by $8.4 million, or 14.4%, to $66.7 million, as compared to $58.3 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 and higher roofing sales during the quarter, as well as $3.3 million of incremental sales associated with the acquisition of the operations of W.P. Hickman Company in December 2012.

Segment operating income increased by $1.3 million, or 15.7%, to $9.9 million for the three months ended June 30, 2013, as compared to $8.5 million for the same period of 2012. Gross profit margin for the three months ended June 30, 2013 was slightly higher compared to the three months ended June 30, 2012 primarily due to increased sales of high margin branded fasteners in the second quarter of 2013, as compared to the second quarter of 2012. The remaining increase in operating income was primarily due to the higher sales level in the quarter, as compared to the second quarter of 2012.

For the six months ended June 30, 2013, the Building Materials segment net sales increased by $13.0 million, or 12.9%, to $113.4 million, as compared to $100.4 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 $6.3 million of incremental sales associated with the acquisition of the operations of W.P. Hickman Company in December 2012.

Segment operating income increased by $1.7 million, or 13.5%, to $13.9 million for the six months ended June 30, 2013, as compared to $12.3 million for the same period of 2012. Gross profit margin for the six months ended June 30, 2013 was slightly higher, as compared to the six months ended June 30, 2012 primarily due to increased sales of high margin branded fasteners in the first half of 2013. The remaining increase in operating income was primarily due to the higher sales level in the first half of 2013, as compared to the same period of the prior year.

Arlon

For the three months ended June 30, 2013, the Arlon segment net sales decreased by $0.6 million, or 2.7%, to $21.1 million, as compared to $21.7 million for the second quarter of 2012. The decreased net sales were resulted from lower demand for printed circuit board materials for use in the telecommunications infrastructure in China, which was partially offset by higher sales of extruded silicone products.

Segment operating income decreased by $1.1 million, or 27.8%, to $2.9 million for the three months ended June 30, 2013, as compared to $4.0 million for the same period of 2012. Gross margin was lower during the second quarter of 2013, as compared to the second quarter of 2012 primarily due to unfavorable production variances, partially as a result of lower demand.

For the six months ended June 30, 2013, the Arlon segment net sales increased by $0.7 million, or 1.7%, to $42.4 million, as compared to $41.7 million for the first half of 2012. The increased net sales were driven by higher demand for extruded silicone products.

Segment operating income decreased by $0.5 million, or 8.3%, to $6.0 million for . . .

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