|
|
 | | | |
- close
- close
- close
- close
| |||||||||
Horsehead Holding 10-K 2008 Documents found in this filing:
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
COMMISSION FILE NUMBER:
001-33658
Securities registered pursuant to Section 12(b) of the
Act:
Securities registered pursuant to Section 12(g) of the
Act:
None.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 it 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 if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the
Registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
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):
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 registrant consummated its initial public offering on
August 15, 2007. Accordingly, as of June 30, 2007, the
last day of the registrant’s most recently completed second
fiscal quarter, the registrant’s common stock was not
publicly traded. As of March 24, 2008, the aggregate market
value of the registrant’s common stock held by
non-affiliates of the registrant was approximately
$418 million (based upon the closing sale price of the
common stock on that date on The NASDAQ Global Select Market).
For this purpose, all shares held by directors, executive
officers and stockholders beneficially owning ten percent or
more of the registrant’s common stock have been treated as
held by affiliates.
The number of shares of the registrant’s common stock
outstanding as of as of March 24, 2008 was 34,913,317.
Portions of the registrant’s definitive proxy statement for
its 2008 annual meeting of stockholders, which is expected to be
filed with the Securities and Exchange Commission not later than
April 29, 2008 are incorporated by reference into
Part III of this report on Form
10-K. In the
event such proxy statement is not filed by April 29, 2008,
the required information will be filed as an amendment to this
report on
Form 10-K
no later than that date.
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 II, Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.” Although we believe that our
plans, intentions and expectations reflected in or suggested by
such forward-looking statements are reasonable, we cannot assure
you that we will achieve those plans, intentions or
expectations. We believe that the following factors, among
others (including those described in “Part I,
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 metal and zinc-related products;
long-term declines in demand for zinc products due to competing
technologies or materials; competition from global zinc
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; fluctuations in 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 Annual Report on
Form 10-K
to reflect events or circumstances after the date hereof.
We are a leading U.S. producer of zinc and zinc-based
products with production
and/or
recycling operations at six facilities in five states. We also
own and operate on our premises a 110 megawatt coal-fired power
plant that provides us with a cost-competitive source of
electricity and allows us to sell approximately one-fifth of its
capacity. 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 and pharmaceuticals. We believe that we are the
largest refiner of zinc oxide and Prime Western (“PW”)
zinc metal, a grade of zinc containing a minimum of 98.5% zinc,
in North America. We believe we are also the largest North
American recycler of electric arc furnace (“EAF”)
dust, a hazardous waste produced by the steel mini-mill
manufacturing process. We, together with our predecessors, have
been operating in the zinc industry for more than 150 years.
While we vary our raw material inputs, or feedstocks, based on
cost and availability, we generally produce our zinc products
using 100% recycled zinc, including zinc recovered from our four
EAF dust recycling operations located in four states. 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 four 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.
During 2007, we sold approximately 305.5 million pounds of
zinc products, generally priced at amounts based on premiums to
zinc prices on the London Metals Exchange (“LME”). For
the year ended December 31, 2007, we generated sales and
net income of $545.6 million and $90.7 million,
respectively.
We believe that we are the largest refiner of zinc oxide and PW
zinc metal in North America, based on volume. We also believe
that we are the largest North American recycler of EAF dust and
that we currently recycle more than half of all EAF dust
generated in the United States. In addition, our four
company-owned EAF dust recycling facilities are strategically
located near major EAF operators, reducing transportation costs
and enhancing our ability to compete effectively with other
means of EAF dust disposal. We believe that the location of our
facilities, together with our competitive cost position,
extensive zinc distribution network and proprietary market
knowledge, will enable us to maintain our leading market
positions and continue to capture market share in zinc products
and zinc recycling.
We believe that our product quality, reputation for on-time
delivery and competitive pricing enable us to maintain strong
relationships with a broad base of customers in each of our end
markets. For example, we are the leading supplier of zinc metal
to the after-fabrication hot-dip segment of the North American
galvanizing industry. We also sell zinc oxide to over 200
producers of tire and rubber products, chemicals, paints,
plastics and pharmaceuticals. We have supplied zinc oxide to
eight of our current ten largest zinc oxide customers for over
ten years, and we believe that we are the sole or primary
supplier of zinc to most of our customers. In addition, the
U.S. Environmental Protection Agency (“EPA”) has
designated our recycling process as a “Best Demonstrated
Available Technology” in the area of high-temperature
metals recovery related to the processing of EAF dust. We are
the largest recycler of EAF dust in the U.S., and we now recycle
EAF dust for seven of North America’s ten largest EAF
operators based on 2007 production volume. We are working to
expand our recycling capacity further in order to better service
these and other customers.
We believe that we are the only zinc smelter in North America
with the proven ability to refine zinc metal and zinc oxide
using 100% recycled zinc feedstocks. Our use of large amounts of
recycled feedstock reduces our exposure to increases in LME zinc
prices and increases our operating margins during periods of
high LME zinc
prices. In addition, our EAF dust recycling operations provide
us with a reliable, cost-effective source of recycled zinc
without relying on third-party sellers.
Since our recycling process converts EAF dust into saleable
products, our customers generally face less exposure to
environmental liabilities from EAF dust, which the EPA
classifies as a listed hazardous waste, than if they disposed of
their EAF dust in landfills. In addition, we believe our zinc
smelter and refinery in Monaca, Pennsylvania is unique in its
ability to refine zinc using almost any form of zinc-bearing
feedstock. This flexibility allows us to modify our feedstock
mix based on cost and availability, as well as to use 100%
recycled zinc feedstock, whether purchased from third parties at
a discount to the LME zinc price or generated by our EAF dust
recycling operations.
The LME price of zinc averaged $1.47 per pound in 2007 and $1.49
per pound in 2006 compared to $0.49 per pound for the
2003-2005
time period. The rising prices have been due primarily to strong
growth in demand, fueled by increased global steel consumption,
and declines in global production due to closed or permanently
idled zinc mining and smelting capacity. The growth in global
demand for zinc has also resulted in the depletion of LME zinc
inventory levels, from a recent high of approximately 790,000
tonnes in April 2004 to approximately 89,000 tonnes in December
2007. Current industry analysts forecast that global demand will
continue to grow. Historically low zinc inventories are expected
to increase moderately as zinc production is expected to
increase in 2008 and 2009. In addition, we believe that steel
mini-mill production, the principal source of EAF dust used in
our recycling operations, will continue to grow by approximately
2-3% per year through 2010, further increasing both the market
for our EAF dust recycling operations and our potential access
to low-cost zinc feedstock. For example, Nucor Corporation,
Severcorr Corporation and Steel Dynamics, Inc., three major
steel mini-mill operators, announced expected
future expansion in their EAF production capacity.
Our seven-member senior management team collectively has over
180 years of experience in zinc- and metal-related
industries. James M. Hensler, our Chief Executive Officer,
joined us in early 2004 and has since established a culture of
continuous improvement in safety and operational excellence,
which has led to significant cost reductions and productivity
improvements.
We have reduced our manufacturing costs by increasing our usage
of low-cost feedstock, streamlining our organizational structure
and implementing “Six Sigma” (a business process
improvement methodology) initiatives, and we intend to continue
to focus on these and similar initiatives in the future. As part
of our “Six Sigma” initiatives, we made a series of
operating improvements at certain facilities. For example, at
our Calumet plant we have reduced the amount of non-zinc
materials fed to our smelter, thereby reducing operating costs
by approximately $1.4 million on an annual basis without
significant capital expenditures. At our Monaca facility we
implemented the use of larger coke in our furnaces in 2007
resulting in savings in excess of $1.5 million. We also
improved the performance of the Monaca facility’s furnace
preheaters by increasing the preheat temperature of the charge
to our electrothermic furnaces resulting in savings in excess of
$0.5 million in 2007. In 2005, we converted our power plant
to the burning of Powder River Basin Coal (“PRB”)
coal, avoiding an increase in operating costs of approximately
$10 million per year with a one-time investment of
approximately $3.5 million. We have recently entered into a
PRB coal supply agreement through 2010.
We believe that there are significant opportunities for us to
recycle more EAF dust. We estimate that in 2007 approximately
one-third of the EAF dust generated per year was deposited in
landfills in the United States,
including by existing customers. In addition, several new EAF
steel plant projects are either under construction or were
recently announced, further increasing EAF dust generation in
the United States. Due to productivity, capital and operating
cost efficiencies relative to integrated steel mills, the
mini-mill share of the U.S. steel market has doubled in the
last ten years and is expected to account for over 70% of
U.S. steel produced by 2017, according to the Steel
Manufacturers Association. We estimate that EAF dust generated
by steel mini-mill producers will increase by approximately
2 — 3% annually through 2010, and we believe that
steel mini-mill operators increasingly will rely on recyclers
rather than landfills to manage this increased output. In order
to meet this expected growth, we placed a new kiln with an
annual EAF dust recycling capacity of 80,000 tons into
production in early January 2008. We are also planning to build
an additional kiln facility that would further increase our
recycling capacity near one of our current customer’s
facilities, a major U.S. steel mini-mill producer. In
addition to generating additional service fees, we expect that
our new kilns will provide us with additional low-cost recycled
zinc that we can use in our own smelting process or that we can
sell as feed to other zinc smelters.
We expect to increase our levels of zinc smelter production
output on an annual basis from approximately 140,000 tons in
2007 to 175,000 tons by the end of 2009 through a series of
operational enhancements that involve capital expenditures of
approximately $40 million in the aggregate. We also are
expanding our capacity to produce zinc oxide by converting
existing refining capacity at our Monaca facility. Our
additional production capacity will allow us to increase our
service to the zinc oxide market.
We sourced approximately 59% of our zinc feedstock in 2007 from
our EAF dust recycling operations, which feedstock is not
impacted by changes in LME zinc prices. We will continue to
evaluate our zinc price hedging alternatives considering the
costs and benefits in light of the commodity price environment,
hedging transaction costs and the extent to which we are able to
increase the percentage of zinc we acquire from our recycling
operations. We have hedged approximately 60% of our expected
production of zinc in 2008 through the purchase of put options
whereby we would receive a minimum of $1.00 per pound for the
quantity hedged. The remainder of our zinc feedstock costs are
derived primarily from zinc secondaries which use LME-based
pricing, and therefore are somewhat naturally hedged against
changes in the LME price. We have also entered into forward
contracts for the purchase of coal for a fixed price through
2010. We believe that locking in a price for coal, which
comprised approximately 27% of our energy costs in 2007, will
stabilize our production costs and reduce the risk of coal
supply interruptions.
We intend to continue to leverage our technical expertise,
culture of innovation and close customer relationships in order
to identify and pursue new markets and applications for our
products. For example, we are currently testing new,
higher-margin applications for iron-rich material, a co-product
of EAF dust recycling, such as its potential use as a passive
water-treatment medium at coal mining sites that have acidic
mine drainage and as a daily cover or base material for
municipal landfills to reduce ground water contamination. We are
also evaluating new markets for our zinc powder, and we expect
that our expanded EAF dust recycling capacity will allow us to
enter new markets for the sale of crude zinc oxide
(“CZO”) to other zinc smelters in the U.S. and
internationally. We also intend to continue to identify and
explore strategic acquisition opportunities.
We, together with the previous owners of our assets, have been
operating in the zinc industry for more than 150 years.
Horsehead Industries, Inc. (“HII”) was formed as a
result of several purchases of assets and entities that
substantially form our existing company. In 2002, record-low
zinc prices, production inefficiencies, high operational costs
and legacy environmental costs associated with prior
owners/operators of our facilities caused HII to file for
Chapter 11 bankruptcy protection. An affiliate of Sun
Capital Partners, Inc. (together with its affiliates, “Sun
Capital”) purchased substantially all of the operating
assets and assumed limited liabilities of HII in December 2003
pursuant to a sale order under Section 363 of the
U.S. Bankruptcy Code. Sun Capital assisted us in hiring our
current
chief executive officer and chief financial officer in 2004, and
since that time we have implemented significant operational
improvements as well as experienced significantly improved
industry conditions. In addition, since 2004 we have performed
maintenance at our production facilities that was deferred by
our predecessor due to its financial difficulties. We expect to
continue to perform additional maintenance at these facilities
for the foreseeable future. As a result of certain transactions
in 2007 Sun Capital and its affiliates no longer own any of our
outstanding common stock.
On November 30, 2006, we completed the private placement of
15,812,500 shares of our common stock at a price of $13.00
per share (less discounts and commissions of $0.91 per share)
through Friedman, Billings, Ramsey & Co., Inc.
(“FBR”) who served as the initial purchaser and
placement agent. On April 12, 2007, we completed the
private placement of 13,973,862 shares of our common stock
at a price of $13.50 per share (less discounts and commissions
of $0.95) through FBR who served as the initial purchaser and
placement agent. We used the net proceeds of the offerings
primarily to repurchase shares and redeem warrants held by our
pre-November 2006 stockholders (including Sun Capital). On
August 15, 2007, we completed the public offering of
5,597,050 shares of our common stock at a price of $18.00
per share (less discounts and commissions of $1.26) as part of
an underwritten public offering. We used a portion of the net
proceeds to retire substantially all debt and are using the net
proceeds of the public offering to fund capital expenditures and
for general corporate purposes.
On August 13, 2007, the SEC declared effective a
registration statement that registered for resale up to
29,860,436 shares of our common stock. There were resale
restrictions on these shares that lapsed on October 9, 2007.
Our recycling facilities recycle EAF dust into CZO, and zinc
calcine, which we then use as raw material feedstocks in the
production of zinc metal and value-added zinc products. Our
recycling and production operations form a complete zinc
recycling loop, from recycled zinc to finished zinc products. We
are the only zinc producer in the U.S. that uses recycled
materials for substantially all of its zinc feedstocks.
We operate four and have plans for a fifth hazardous waste
recycling facilities for the recovery of zinc from EAF dust. Our
recycling process has been designated by the EPA as a “Best
Demonstrated Available Technology” for the processing of
EAF dust. Our recycling facilities are strategically located
near sources of EAF dust production. These facilities recover
zinc from EAF dust generated primarily by steel mini-mill
manufacturers during the melting of steel scrap, as well as from
other waste material. We extract zinc from EAF dust, and recycle
the other components of EAF dust into non-hazardous materials,
using our proprietary “Waelz Kiln” process at our
Palmerton, Rockwood, and Calumet facilities, and our “Flame
Reactor” technology at our Beaumont facility.
Our Waelz Kiln recycling process blends, conditions and adds
carbon to EAF dust, feeding it then into the kiln itself, a
refractory-lined tube that is approximately 160 feet in
length and 12 feet in diameter. During the passage
through the kiln, the material is heated under reducing
conditions at temperatures exceeding 1,100 degrees Celsius,
thereby volatilizing the nonferrous metals, including zinc. The
resulting volatized gas stream is oxidized and collected as CZO,
which has a zinc content of between 50% and 55%. Our Flame
Reactor recycling process heats feedstock to a temperature high
enough (approximately 1,650 degrees Celsius) to convert
nonferrous metals into CZO. In addition, both processes produce
iron-rich material that we sell for use as an aggregate in
asphalt and as an iron source in cement.
The majority of the CZO generated by both processes is shipped
to our Palmerton facility, where it is further refined in a
process, called “calcining,” whereby we heat the
material to drive off impurities. Through this rotary kiln
process, which is fired with natural gas, the zinc content is
further upgraded to approximately 65% and collected as zinc
calcine in granular form for shipment to our Monaca facility or
sale to other zinc refineries around the world. The metal
concentrate product from the calcining process is shipped for
final metals recovery to our state-of-the-art hydrometallurgical
processing facility in Bartlesville. We have added technology at
our smelting facility to allow us to ship an increasing amount
of CZO directly as a feed to our Monaca, Pennsylvania, facility.
In 2004, we spent approximately $0.2 million to expand the
capacity of two of our Palmerton Waelz Kilns by approximately
8%-10%, or an additional 15,000 tons of annual capacity. We have
subsequently implemented similar projects in our Rockwood and
Calumet facilities, at an additional aggregate cost of
approximately $0.4 million. In addition, in
2003-2004 we
spent approximately $2.1 million to convert a calcining
kiln in Palmerton to a “swing kiln” capable of either
waelzing or calcining.
In order to further expand our EAF dust recycling capacity, we
brought an 80,000 ton per year kiln online at our Rockwood,
Tennessee facility in early January 2008 at a cost of
approximately $33 million. This new kiln will provide
approximately 14,500 tons of additional zinc that we will either
use directly in our own smelting process or sell as feed to
other zinc smelters. We are currently completing the
engineering, site selection and incentives negotiations for a
new kiln facility in the Carolinas.
Our 175,000
tons-per-year
capacity electrothermic zinc smelter and refinery in Monaca
produces zinc metal and value-added zinc products (e.g., zinc
oxide) using a wide range of feedstocks, including zinc
generated by our recycling operations, zinc secondary material
from galvanizers and other users of zinc. This uniquely flexible
electrothermic smelter and refinery in Monaca provides a
substantial competitive advantage both in raw material costs
(where it is able to use a wide range of zinc-bearing
feedstocks) and in finished products (where, together with our
refining operations, it can produce a wide range of zinc metal
and value-added zinc products).
Our Monaca smelter is the only smelter in North America that is
able to use this wide range of feedstocks, including 100%
recycled feedstocks, to produce our zinc products. Our unique
ability to vary our feedstock blend lowers our overall raw
materials costs without corresponding reductions in product
quality, as compared to other zinc smelters and refiners, which
generally can accept only a narrow slate of specific mined zinc
concentrates, together with only small amounts of recycled
materials. We also own and operate at our Monaca facility a
110 megawatt coal-fired power plant that provides us with a
cost-competitive source of electricity and allows us to sell
approximately one-fifth of its capacity.
The Monaca facility operates on a
24-hours-per-day,
365-days-per-year
basis to maximize efficiency and output. EAF-sourced calcine and
other purchased secondary zinc materials are processed through a
sintering operation (which is a method for making solid material
from particles by heating the particles to below their melting
point until they adhere to each other). The sintering process
converts this combined zinc feedstock into a uniform, hard,
porous material suitable for the electrothermic furnaces.
Monaca’s seven electrothermic furnaces are the key to
Monaca’s production flexibility. Sintered feedstock and
metallic zinc secondary materials are mixed with metallurgical
coke and fed directly into the top of the furnaces. Metallic
zinc vapor is drawn from the furnaces into a vacuum condenser,
which is then tapped to produce molten zinc metal. This metal is
then either cast as slab zinc metal, or conveyed directly to the
zinc refinery in liquid form. This integrated facility reduces
costs by eliminating the need to cast and then remelt the zinc
to refinery feed.
At the refinery, the molten zinc is directly fed through
distillation columns to produce an ultra-high-purity zinc vapor
that is condensed into “thermally refined” SSHG zinc
metal or processed through a combustion chamber into zinc oxide.
The condensed metal is either sold or sent for further
conversion into zinc powder.
We believe that our thermally produced SSHG zinc metal is among
the purest and highest quality SSHG zinc metal sold in North
America. Our zinc oxide is processed and separately refined
through the largest North American, and highly automated, zinc
oxide screening, coating and packing facility to create one of
our 50 grades of zinc oxide with ISO:9002 certification.
Our Product Development Lab, located at the Monaca site, is
designed for production of specially engineered zinc oxide
products for unique, “high tech” applications. One
such product is an extremely fine particle size (micronized)
zinc oxide that may be used in cosmetic and pharmaceutical
applications.
The Flow of Operations chart below describes our operations,
beginning with the input of raw materials, continuing through
the production processes and identifying finished products and
end uses for each such raw material.
We offer a wide variety of zinc products and services. In 2007,
we sold approximately 153,000 tons of zinc products. The
following are our primary zinc products:
Our primary zinc metal product is PW zinc metal, which we sell
to the hot-dip galvanizing and brass industries. We also produce
SSHG zinc metal, which is used as feed for the manufacture of
high-purity zinc powder and zinc alloys. SSHG zinc metal is an
ultra pure grade of zinc exceeding the American Society for
Testing and Materials standard for special high-grade zinc. Our
zinc metal is recognized within the galvanizing industry for its
consistent quality and appearance. We are the leading supplier
of zinc metal to the after-fabrication hot-dip segment of the
North American galvanizing industry (approximately 100
customers), who use our zinc metal to provide a protective
coating to a myriad of fabricated products, from pipe and guard
rails to, heat exchangers and telecommunications towers. We also
sell PW zinc metal for use in the production of brass, a
zinc/copper alloy. We believe that our operational standards and
proximity to customers allow us to deliver higher-quality metal
than many of our competitors, as lengthy transit times and poor
skimming techniques can often result in surface
oxidation. To accommodate various customer handling needs, our
zinc metal is sold in numerous forms, from
55-pound
slabs to 2,500-pound ingots.
We sell over 50 different grades of zinc oxide with differing
particle sizes, shapes, coatings and purity levels. Zinc oxide
is an important ingredient in the production of tire and rubber
products, chemicals, ceramics, plastics, paints, lubricating
oils and pharmaceuticals. The various end uses for zinc oxide
are:
We created the market for EAF dust recycling with the
development of our recycling technology in the early 1980s,
which has since been designated by the EPA as the “Best
Demonstrated Available Technology” for processing of EAF
dust, a hazardous waste generated by steel mini-mills. To date,
we have recycled over 7.0 million tons of EAF dust
(equivalent to 1.4 million tons of zinc), representing the
dust generated in the production of over 440 million tons
of steel. Since EAF dust is sold or converted into saleable
products, the steel mini-mills’ exposure to environmental
liabilities related to EAF dust is reduced.
In 2007, we recycled approximately 500,000 tons of EAF dust. The
installation of a new Waelz Kiln in Rockwood in early January
2008 increased our recycling capacity by 80,000 net tons,
or 15%. We currently are planning to construct a new kiln
facility in the Carolinas, adding additional EAF dust processing
capacity by the end of 2009.
Given the strong demand for zinc-bearing feed materials and
attractive pricing, we began selling CZO generated in our Waelz
Kilns to other zinc smelters in 2007. We plan to expand sales of
this product during periods of generation in excess of our
smelter requirements.
Our zinc powder is sold for use in a variety of chemical,
metallurgical and battery applications as well as for use in
corrosion-resistant coating applications. Zinc powder is
manufactured by the atomization of molten zinc, and is coarser
than zinc dust.
We manufacture three basic lines of powders:
Our sales and marketing staff consists of the following:
Our process engineering group provides additional technical help
to our EAF clients with monthly EAF analytical information and
assistance with any problems encountered on EAF dust chemistry,
transportation and environmental matters. In addition to our
sales and marketing organization, our quality assurance
department provides extensive laboratory services critical to
maintaining in-plant process control and to providing customer
support by certifying compliance to hundreds of unique product
specifications. We are ISO 9002 certified. Our laboratory also
offers sales and technical services support by assisting in new
product developments and troubleshooting various application and
processing issues both in-plant and with specific customers. We
also rely on a network of distributors with warehouses
throughout North America who assist us with supporting smaller
customers.
Most of the zinc metal we produce is purchased by galvanizers
and brass producers. We are the leading supplier of zinc metal
to the after-fabrication hot-dip segment of the North American
galvanizing industry. We sell zinc metal to a broad group of
approximately 100 hot-dip galvanizers. In many cases, these
customers are also suppliers of secondary materials (including
zinc remnants of steel galvanizing processes) to us. We also
sell a smaller portion of our metal product to brass
manufacturers.
We sell zinc oxide to over 200 different customers under
contract as well as on a spot basis, principally to
manufacturers of tire and rubber products, lubricating oils,
chemicals, paints, ceramics, plastics and pharmaceuticals.
Goodyear accounted for 10.4% of our total fiscal 2007 sales.
Our SSHG zinc metal product is used in the manufacturing of zinc
powder for the alkaline battery industry.
We typically enter into multi-year service contracts with steel
mini-mills to recycle their EAF dust. We provide our EAF dust
recycling services to over 45 steel producing facilities.
In 2007, approximately 59% of the raw material used in the
Monaca facility was sourced through our EAF dust recycling
operations. The remaining 41% of the raw material was comprised
of zinc secondaries, which are principally zinc-containing
remnants of steel galvanizing processes, including top drosses,
bottom drosses and skimmings that we purchase primarily from
several of our metal customers. The prices of zinc secondaries
vary according to the amount of recoverable zinc contained and
provide us with a diverse portfolio of low cost inputs from
which to choose. In addition to the dross and skims from the
galvanizing industry, we purchase other types of zinc-bearing
residues from the zinc, brass and alloying industries. Many of
these materials are acquired from our own customers. In
addition, we also have long standing relationships with zinc
scrap brokers in North America, Europe and South America. These
brokers in some cases act as an agent for us and are favorably
located to supply us with reliable and cost effective zinc scrap.
We rely on a combination of purchased and internally-generated
electricity for our operations. We generate substantially all of
our electricity requirements for Monaca at our
on-site
power plant, using PRB coal as our principal input. Sales of
excess power capacity from this power plant have also
historically provided a reliable source of revenue. In addition
to the electricity used by our Monaca facility, we use a
combination of coke and natural gas in our smelting and refining
processes. Our recycling facilities use a combination of coke,
electricity and natural gas. In 2007, we purchased the majority
of our energy under supply contracts, although we also engage in
spot purchases. We purchase all of our coal requirements
pursuant to a supply agreement that carries fixed prices through
2010.
We possess proprietary technical expertise and know-how related
to EAF dust recycling and zinc production, particularly zinc
production using recycled feedstocks. Our proprietary know-how
includes production methods for zinc oxide and micro-fine zinc
oxides and widely varying customer specifications. As a major
supplier of zinc metal and other zinc-based products to
industrial and commercial markets, we emphasize developing
intellectual property and protecting our rights in our
processes. However, the scope of protection afforded by
intellectual property rights, including ours, is often uncertain
and involves complex legal and factual issues. Also, there can
be no assurance that intellectual property rights will not be
infringed or designed around by others. In addition, we may not
elect to pursue an infringer due to the high costs and
uncertainties associated with litigation. Further, there can be
no assurance that courts will ultimately hold issued
intellectual property rights to be valid and enforceable.
We believe that we are a unique business, having no direct
competitor that recycles similar secondary materials into zinc
products in North America. Our primary competitors in the zinc
oxide segment include U.S. Zinc Corporation (“US
Zinc”), a wholly-owned subsidiary of Votorantim Metals,
Ltda, and Considar Metal Marketing Inc. (“Considar”),
a marketing and distribution joint venture between Hudbay
Minerals Inc. and Traxys, a trading company sold by Umicore
Group and Corus Steel to a private investment firm in 2005. US
Zinc, located in the middle-southern states of the U.S., is also
a zinc recycler. US Zinc is our primary competitor but lacks our
integrated processing and smelting capabilities. Considar’s
product is sourced through the Canadian operations of Hudson Bay
Mining and Smelting Co.
Approximately 75% of the zinc metal consumed in the U.S. is
imported. Therefore, we enjoy a domestic freight and reliability
advantage over foreign competitors with respect to
U.S. customers. Xstrata Plc (which acquired Falconbridge in
2006), Teck Cominco Limited and Penoles are the primary zinc
metal producers in the North American market. The vast majority
of the metal produced by these companies is used by continuous
galvanizers in the coating of steel sheet products. In addition,
these producers have mining and smelting operations while we
only engage in smelting. We primarily produce PW zinc metal for
use by hot-dip galvanizers.
We compete for EAF dust management contracts primarily with
companies that dispose of EAF dust in landfills (e.g.,
Envirosafe and American Ecology) as well as with a Mexico-based
recycler (Zinc Nacional). We are the only proven domestic
recycler of EAF dust. We expect to see new entrants to once
again explore opportunities in this area as long as zinc prices
remain attractive. Our proven reliability and customer service
have helped us maintain long-standing customer relationships.
Many of our EAF dust customers have been under contract with us
since our predecessor began recycling EAF dust in the 1980s.
ZincOx Resources plc recently acquired Big River Zinc
Corporation with the stated intention of producing zinc metal
from recycled EAF dust sourced from the U.S. (Envirosafe)
and Turkey, with initial estimated smelting output from EAF dust
of 90,000 tons in 2008. In addition, Steel Dust Recycling is
currently constructing a plant to recycle EAF dust in Alabama
and The Heritage Group has announced its intention to build an
EAF dust processing facility in Arkansas.
Our facilities and operations are subject to various federal,
state and local governmental laws and regulations with respect
to the protection of the environment, including regulations
relating to air and water quality, solid and hazardous waste
handling and disposal. These laws include the Comprehensive
Environmental Response, Compensation and Liability Act
(“CERCLA” or “Superfund”), RCRA, the Clean
Air Act, the Clean Water Act, and their state equivalents. We
are also subject to various other laws and regulations,
including those administered by the Department of Labor, the
FERC, the Surface Transportation Board, and the Department of
Transportation. We believe that we are in material compliance
with the applicable laws and regulations, including
environmental laws and regulations governing our ongoing
operations and that we have obtained or timely applied for all
material permits and approvals necessary for the operation of
our business.
HII’s process modifications resulted in operations fully
utilizing recycled feedstocks. The use of recycled zinc
feedstocks preserves natural resources, precluding the need for
mining and land reclamation, and thereby operating consistent
with the principles of sustainable development. Our recycling
services avoid the potential environmental impacts that are
associated with the landfilling of hazardous wastes. EAF dust
itself is a hazardous waste created during melting of steel
scrap in electric arc furnaces by the steel mini-mill industry.
Our recycling process has been designated by the EPA as
“Best Demonstrated Available Technology” for the
recycling of EAF dust.
We operate a hydrometallurgical metals recovery facility in
Bartlesville, processing a metal concentrate produced at our
Palmerton calcining operation. The concentrate is separated into
metal-bearing fractions at Bartlesville and sold to smelters.
The recovered zinc from this operation is returned to Monaca.
The cadmium-containing fraction is landfilled as a hazardous
waste. Brines containing chlorides, fluorides, sodium and
potassium are disposed in a fully permitted
on-site
underground injection system at Bartlesville.
We hold RCRA permits at our Palmerton, Rockwood and Bartlesville
locations. We have irrevocable letters of credit in place to
satisfy RCRA financial assurance requirements with respect to
closure and post-closure care at our Palmerton facility and
similar state level requirements for the landfill at our Monaca
facility. Similar financial assurance mechanisms are not
required with respect to our Rockwood location. Bartlesville was
formerly a primary zinc processing facility operated by us and
our predecessor. The former facilities were closed under a RCRA
agreement with the State of Oklahoma, which was completed in
2003. Those facilities are currently in post-closure care.
Financial assurance at Bartlesville is met by the three parties
responsible for post-closure care meeting the financial
assurance test in the Oklahoma regulations.
Our Palmerton property is part of a CERCLA site that was added
to the National Priorities List in 1983. When the Palmerton
assets were purchased out of bankruptcy in December 2003, we
acquired only those assets, including real property, needed to
support the ongoing recycling and powders businesses at that
location, resulting in our holding approximately 100 acres
of the approximately 1,600 acres owned by HII. The
successor in interest to previous owners has contractually
assumed responsibility for historic site contamination and
associated remediation, and has indemnified us against any
liabilities related to the property, including Natural Resource
Damage. Exceptions to this indemnity include our obligations
under the 1995 consent decree described below, non-Superfund
RCRA obligations and environmental liabilities resulting from
our ongoing operations.
We inherited certain of HII’s environmental liabilities
related to our Palmerton operations related to a 1995 Consent
Decree between HII, the EPA and the PADEP. Our obligations
pursuant to this consent decree include construction of a
storage building for calcine kiln feed materials and the removal
of lead concentrate from three buildings. These obligations are
currently being managed to the satisfaction of the regulatory
agencies and are reserved for on our balance sheet.
Approximately 50% of the lead concentrate was removed from the
facilities in 2007 and the remainder is expected to be removed
in 2008.
We have NPDES permits at our Palmerton, Monaca and Bartlesville
locations. We also may incur costs related to future compliance
with MACT air emission regulations relating to industrial
boilers as well as future MACT regulations relating to the
non-ferrous secondary metals production category. In addition,
Pennsylvania has adopted regulations with respect to mercury
emission regulations that are more stringent than federal MACT
regulations in this area, and such regulations may result in
additional ongoing compliance expenditures.
As of December 31, 2007, we employed 1,060 persons at
the following locations:
A two week strike at our Palmerton plant was settled on
May 15, 2007 with the finalization of a new collective
bargaining agreement. Four other collective bargaining
agreements were renegotiated in 2007.
The vast majority of our hourly personnel are unionized under
the United Steelworkers of America. Hourly workers receive
medical, dental and prescription drug benefits. We do not have a
defined benefit plan for hourly or salaried employees and no
company-paid medical plan for retirees. We have a 401(k) plan
for both our hourly and salaried employees. Our labor contracts
provide for a company contribution, and in most cases a company
match, which varies from contract to contract. We believe we
have satisfactory relations with our employees.
Set forth below is information concerning our executive officers.
James M. Hensler, Chairman of the Board of Directors,
President and Chief Executive Officer, joined us in April 2004.
He has over 28 years of experience working in the metals
industry. From 2003 to April 2004, Mr. Hensler was a
consultant to various companies in the metals industry. From
1999 to 2003, Mr. Hensler was Vice President of Global
Operations and Vice President and General Manager of the
Huntington Alloys Business Unit for Special Metals Corp., a
leading international manufacturer of high performance nickel
and cobalt alloys. Prior to that, Mr. Hensler was the
Executive Vice President for Austeel Lemont Co., General Manager
of Washington Steel Co. and Director of Business Planning for
Allegheny Teledyne Inc. He received a BS in Chemical Engineering
from the University of Notre Dame in 1977, an MSE in Chemical
Engineering from Princeton University in 1978 and an MBA from
the Katz Graduate School of Business at the University of
Pittsburgh in 1987.
Robert D. Scherich, Vice President and Chief Financial
Officer, joined us in July 2004. From 1996 to 2004,
Mr. Scherich was the Chief Financial Officer of Valley
National Gases, Inc. Prior to that, he was the Controller and
General Manager at Wheeling-Pittsburgh Steel Corp. and an
accountant at Ernst & Whinney. Mr. Scherich
received
a BS in Business Administration from The Pennsylvania State
University in 1982. He is a certified public accountant.
Robert Elwell, Vice President — Operations,
joined us in June 2006 with 31 years of industry
experience. For the previous eight years, he was the President
of Greenville Metals, a division of Precision Castparts
Corporation. Previous positions included Vice President of
Manufacturing for Cannon-Muskegon Corporation (also a Precision
Castparts Corporation), Vice President of Quality and Technology
for Freedom Forge Corporation, Manufacturing Manager for Haynes
International, Inc. and several operating and technical
positions at Lukens Steel Co. Mr. Elwell has a BS in
Metallurgical Engineering from Lafayette College in 1975 and an
MBA from Widener University in 1979.
James A. Totera, Vice President — Sales and
Marketing, joined us in 1997. Prior to that, he was the Vice
President of Sales for Steel Mill Products (EAF dust recycling)
and also spent over 15 years working in sales positions
(including as General Manager of Sales) at Insul Company.
Mr. Totera received a BA in Economics, Administrative
Management Science and Psychology from Carnegie Mellon
University in 1979.
Thomas E. Janeck, Vice President — Environment,
Health and Safety, has worked for us and our predecessors since
1964. Prior to his current position, Mr. Janeck served in a
number of capacities and was most recently Vice President of
Environmental Services and Director of Regulatory Affairs.
Mr. Janeck is a member of the Board of Directors of the
National Mining Association and serves as Chairman of its
Environment Committee. Mr. Janeck received a BS in Chemical
Engineering from the University of Pittsburgh in 1967.
Ali Alavi, Vice President — Corporate
Administration, General Counsel and Secretary, joined us in
1996. Mr. Alavi previously served as our
Director & Counsel of Environment, Health &
Safety and Director of Environmental Performance. Prior to
joining us, Mr. Alavi worked as Assistant General Counsel
of Clean Sites, Inc., Senior Regulatory Analyst of the American
Petroleum Institute and Project Manager/Engineer for the
U.S. Army Toxic & Hazardous Materials Agency.
Mr. Alavi received a BA in Geography/Environmental Studies
from the University of Pittsburgh in 1983, an MS in Petroleum
Engineering from the University of Pittsburgh School of
Engineering in 1985 and a JD from the University of Maryland Law
School in 1993.
Daryl K. Fox, Vice President-Human Resources, joined us
in October 2005. He has over 34 years of Human Resources
experience working in the metals and transportation industries.
Prior to joining us, from August 2004 to February 2005,
Mr. Fox served as a consultant to Allegheny Technologies
Incorporated. Previously, Mr. Fox served as Vice
President — Human Resources for J&L Specialty
Steel, LLC, a producer of stainless steel, from June 1993 until
it was acquired by Allegheny Technologies Incorporated in July
2004. Mr. Fox received a BA in Sociology from Duke
University in 1973.
Available
Information
We file annual, quarterly and current reports and other
information with the Securities and Exchange Commission
(“SEC”). These filings are available to the public at
the SEC’s web site at
http://www.sec.gov.
You may also read and copy any document we file at the
SEC’s public reference room located in Washington, DC
20549. Please call the SEC at
1-800-SEC-0330
for further information on the public reference room.
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 Exchange Act are available free
of charge through our website as soon as reasonably practicable
after they are electronically filed with, or furnished to, the
SEC. Additionally, our Code of Ethics may be accessed within the
Investor Relations section of our web site. Our website and the
information contained or incorporated therein are not intended
to be incorporated into this report.
In addition to the other information in this Annual Report on
Form 10-K,
the following risk factors should be read carefully in
connection with evaluating our business and the forward-looking
information contained in this Annual Report on
Form 10-K.
Any of the following risks could materially adversely affect our
business, operating results, financial condition and the actual
outcome of matters as to which we have made forward-looking
statements in this Annual Report on
Form 10-K.
There may be additional risks and uncertainties that are not
presently known or that we do not currently consider to be
significant that may adversely affect our business, performance
or financial condition in the future.
The metals industry is highly cyclical. The length and magnitude
of industry cycles have varied over time and by product, but
generally reflect changes in macroeconomic conditions, levels of
industry capacity and availability of usable raw materials. The
overall levels of demand for our zinc metal and zinc-based
products reflect fluctuations in levels of end-user demand,
which depend in large part on general macroeconomic conditions
in North America and regional economic conditions in our
markets. For example, many of the principal consumers of zinc
metal and zinc-related products operate in industries, such as
transportation, construction or general manufacturing, that
themselves are heavily dependent on general economic conditions,
including the availability of affordable energy sources,
employment levels, interest rates, consumer confidence and
housing demand. These cyclical shifts in our customers’
industries tend to result in significant fluctuations in demand
and pricing for our products and services. As a result, in
periods of recession or low economic growth, metals companies,
including ours, have generally tended to under-perform compared
to other industries. We generally have high fixed costs, so
changes in industry demand that impact our production volume
also can significantly impact our profit margins and our overall
financial condition. Economic downturns in the national and
international economies or a prolonged recession in our
principal industry segments have had a negative impact on our
operations and on those of our predecessor in the past, and
could have a negative impact on our future financial condition
or results of operations.
We derive most of our revenue from the sale of zinc and
zinc-based products. Changes in the market price of zinc impact
the selling prices of our products, and therefore our
profitability is significantly affected by decreased zinc
prices. Market prices of zinc are dependent upon supply and
demand and a variety of factors over which we have little or no
control, including:
Declines in the price of zinc have had a negative impact on our
operations in the past, and could have a negative impact on our
future financial condition or results of operations. In 2002,
record low zinc prices, together with high operational and
legacy environmental costs and inefficiencies, caused our
predecessor, HII, to file for Chapter 11 bankruptcy
protection. Market conditions beyond our control determine the
prices for our products, and the price for any one or more of
our products may fall below our production costs, requiring us
to either incur short-term losses
and/or idle
or permanently shut down production capacity. Market prices for
zinc may decrease substantially, and therefore our operating
results may be significantly harmed.
Our zinc products compete with other materials in many of their
applications. 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. Steel
fabricators also can use paint, which we do not sell, for
corrosion protection. Demand for our zinc as a galvanizing
material may shift depending on how customers view the
respective merits of hot dip galvanizing and paint. In addition,
some of our customers may reduce or eliminate their usage of PW
grade zinc metal because it contains a small amount of lead, and
may switch to other grades of zinc metal that we do not produce.
In addition, because zinc prices have recently been at
historical highs, consumers of zinc may have additional
incentives to invest in the development of technologically
viable substitutes for zinc and zinc-based products. Similarly,
customers may develop ways to manufacture their products by
using less zinc-based material than they do currently. If one or
more of our customers successfully identify alternative products
that can be substituted for our zinc products, or find ways to
reduce their zinc consumption, our sales to those and other
customers would likely decline.
Demand for our EAF dust recycling operations may decline to the
extent that steel mini-mill producers identify less expensive or
more convenient alternatives for the disposal of their EAF dust
or if the EPA were to no longer classify EAF dust as a listed
hazardous waste. We may in the future face increased competition
from other EAF dust recyclers, including new entrants in the EAF
dust recycling market, or from landfills implementing more
effective disposal techniques. Furthermore, our current
recycling customers may seek to capitalize on the value of the
EAF dust produced by their operations, and may seek to recycle
their dust themselves, or reduce the price they pay to us for
the dust they deliver to us. Any of these developments would
have an adverse effect on our financial results.
We face intense competition from regional, national and global
companies in each of the markets we serve, where we face also
the potential for future entrants and competitors. We compete on
the basis of product quality, on-time delivery performance and
price, with price representing a more important factor for our
larger customers and for sales of standard zinc products than
for smaller customers and customers to whom we sell value-added
zinc-based products. Our competitors include other independent
zinc producers as well as vertically integrated zinc companies
that mine and produce zinc. Some of our competitors have
substantially greater financial and other resources than we do.
In addition, we estimate that our products comprised only
approximately 11% of total zinc consumption in the U.S. in
2007, and several of our competitors have greater market share
than we do. Our competitors may also foresee the course of
market development more accurately than we do, sell products at
a lower cost than we can
and/or adapt
more quickly to new technologies or industry and customer
requirements. We operate in a global marketplace, and zinc metal
imports now represent approximately 75% of U.S. zinc metal
consumption.
In the future, foreign zinc metal producers may develop new ways
of packaging and transporting zinc metal that could mitigate the
freight cost and other shipping limitations that we believe
currently limit their ability to more fully penetrate the
U.S. zinc market. If our customers in any of the end-user
markets we serve were to shift their production outside the
U.S. and Canada, then those customers would likely source
zinc overseas, and, as a result, our net sales and results of
operations would be adversely affected. If we cannot compete
other than by reducing prices, we may lose market share and
suffer reduced profit margins. If our competitors lower their
prices, it could inhibit our ability to compete for customers
with higher value-added sales and could lead to a reduction in
our sales volumes and profit. If our product mix changed as a
result of competitive pricing, it could have an adverse impact
on our gross margins and profitability.
Our ability to achieve our business and financial objectives is
subject to a variety of factors, many of which are beyond our
control. For example, factors such as increased competition,
legal and regulatory developments, general
economic conditions or increased operating costs could prevent
us from increasing our capacity, implementing further
productivity improvements or continuing to enhance our business
and product mix.
An important part of our strategy is to grow our business by
expanding our capacity to produce zinc oxide and increase the
volume of EAF dust that we process. We currently are investing
in the conversion of an existing refining column at our Monaca
facility and have constructed and placed into service in early
January 2008, a new kiln at our Rockwood, Tennessee facility. We
have also initiated additional capacity expansion projects. We
may need additional financing to implement our expansion
strategy and we may not have access to the funding required for
the expansion on acceptable terms. Our construction costs may
also increase to levels that would make our facilities
unprofitable to operate. Our planned capacity expansions may
also suffer significant delays or cost overruns as a result of a
variety of factors, such as shortages of workers or materials,
transportation constraints, adverse weather, unforeseen
difficulties or labor issues, any of which could prevent us from
completing our expansion plans as currently expected. Our
expansion plans may also result in other unanticipated adverse
consequences, such as the diversion of management’s
attention from our existing operations. In addition, even if we
can implement our strategy, expansion in the zinc oxide market,
increased sales to various industries, including the alkaline
battery industry, and projected increases in EAF dust recycling
may not materialize to the extent we expect, or at all,
resulting in unutilized capacity. Any failure to successfully
implement our business strategy, including for any of the above
reasons, could materially and adversely affect our financial
condition and results of operations. We may, in addition, decide
to alter or discontinue certain aspects of our business strategy
at any time.
As of December 31, 2007, we had 1,060 employees, 835,
or 79%, of whom were covered by union contracts. Six of the
eight collective bargaining agreements to which we are a party
are scheduled to expire in 2011, five of which were renegotiated
in 2007. The remaining two agreements are scheduled to expire in
2009. We may be unable to resolve any of these contract
negotiations without work stoppages or significant increases in
costs, which could have a material adverse effect on our
financial condition, cash flows and operating results. We may be
unable to maintain satisfactory relationships with our employees
and their unions, and we may encounter strikes, further
unionization efforts or other types of conflicts with labor
unions or our employees which may interfere with our production
or increase our costs, either of which would negatively impact
our operating results. A collective bargaining agreement with
respect to workers at our Palmerton, Pennsylvania plant recently
expired, and we were not able to finalize a new agreement prior
to the date of expiration. Unionized workers voted to strike,
effective May 1, 2007. The strike ended on May 15,
2007 following the finalization of a new collective bargaining
agreement. A similar strike at another one of our facilities, or
a strike that was longer in duration, could have a material
adverse effect on our ability to produce our products and meet
customer demands, which would have an adverse impact on our
operating results.
An interruption in production or service capabilities at any of
our six production facilities as a result of equipment or power
failure or other reasons could limit our ability to deliver
products to our customers, reducing our net sales and net income
and potentially damaging relationships with our customers. Any
significant delay in deliveries to our customers could lead to
increased returns or cancellations, damage to our reputation
and/or
permanent loss of customers. Any such production stoppage or
delay could also require us to make unplanned capital
expenditures.
Furthermore, because many of our customers are, to varying
degrees, dependent on deliveries from our facilities, customers
that have to reschedule their own production due to our missed
deliveries could pursue financial claims against us. Our
facilities are also subject to the risk of catastrophic loss due
to unanticipated events such as fires, explosions, adverse
weather conditions or other events. We have experienced, and may
experience in the future, periods of reduced production as a
result of repairs that are necessary to our kiln, smelting and
refinery operations. If any of these events occur in the future,
they could have a material adverse effect on our business,
financial condition or results of operations. Our insurance
policies may not cover all of our losses and we could
incur uninsured losses and liabilities arising from, among other
things, physical damage, business interruptions and product
liability.
Energy is one of our most significant costs, comprising
approximately $67 million of our production costs in 2007.
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 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 historical averages. These
fluctuations impact our manufacturing costs and contribute to
earnings volatility. We estimate that a hypothetical 10%
increase in electricity, natural gas and coke costs would have
reduced our income from operations by approximately
$6 million for fiscal 2007. In addition, in the event of an
interruption in the supply of coal to our power plant at our
Monaca facility, that facility would be required to purchase
electricity, which may not be available, and would be subject to
the same risks related to an increase in electricity costs. In
addition, at most of our facilities we do not maintain sources
of secondary power, and therefore any prolonged interruptions in
the supply of energy to our facilities could result in lengthy
production shutdowns, increased costs associated with restarting
production and waste of production in progress. We have
experienced rolling power outages in the past, and any future
outages would reduce our production capacity, reducing our net
sales and potentially impacting our ability to deliver products
to our customers.
In 2007, our ten largest customers were responsible for 47% of
our consolidated sales. A loss of order volumes from, or a loss
of industry share by, any major customer could negatively affect
our financial condition and results of operations by lowering
sales volumes, increasing costs and lowering profitability. In
addition, several of our customers have become involved in
bankruptcy or insolvency proceedings and have defaulted on their
obligations to us in recent years. We may be required to record
significant additional reserves for accounts receivable from
customers which may have a material impact on our financial
condition, results of operations and cash flows.
In addition, approximately 20% by volume of our zinc product
shipments in 2007 were to customers who do not have long-term
contractual arrangements with us. These customers purchase
products and services from us on a spot basis and may choose not
to continue to purchase our products and services. The loss of
these customers or a significant reduction in their purchase
orders could have a negative impact on our sales volume and
business.
We are subject to the requirements of the OSHA, and comparable
state statutes that regulate the protection of the health and
safety of workers. In addition, the OSHA hazard communication
standard requires that information be maintained about hazardous
materials used or produced in operations and that this
information be provided to employees, state and local government
authorities and citizens. We are also subject to federal and
state laws regarding operational safety. Costs and liabilities
related to worker safety may be incurred and any violation of
health and safety laws or regulations could impose substantial
costs on us. Possible future developments, including stricter
safety laws for workers or others, regulations and enforcement
policies and claims for personal injury or property damages
resulting from our operations could result in substantial costs
and liabilities that could reduce the amount of cash that we
would otherwise have to distribute or use to service our
indebtedness or further enhance our business.
We may be involved in claims and litigation filed on behalf of
persons alleging injuries predominantly suffered because of or
occupational exposure to substances at our facilities. It is not
possible to predict the ultimate outcome
of these claims and lawsuits due to the unpredictable nature of
personal injury litigation. If these claims and lawsuits,
individually or in the aggregate, were finally resolved against
us, our results of operations and cash flows could be adversely
affected.
Our business is subject to a wide variety of environmental
regulations and our operations expose us to a wide variety of
potential environmental liabilities. For example, we recycle EAF
dust, which is listed and regulated as a hazardous waste under
the EPA’s solid waste Resource Conservation and Recovery
Act (“RCRA”). Our failure to properly process and
handle EAF dust could result in significant liability for us,
including, among other things, costs for health-related claims
or for removal or treatment of hazardous substances. In
addition, as part of the asset purchase out of bankruptcy, we
inherited several environmental issues of our predecessor at our
Palmerton facility cited in a 1995 EPA and Pennsylvania
Department of Environmental Protection (“PADEP”)
consent decree. We have established a reserve in the amount of
$3.8 million, as of December 31, 2007, to cover the
cost of removal of lead concentrate contained within three
buildings at our Palmerton facility, as well as the construction
of a storage building for calcine kiln feed materials at our
Palmerton facility and closures related to RCRA at our
Bartlesville, Oklahoma facility. We also may incur costs related
to future compliance with “Maximum Achievable Control
Technology” (“MACT”) air emission regulations
relating to industrial boilers as well as future MACT
regulations relating to the non-ferrous secondary metals
production category, and these costs may be material. In
addition, Pennsylvania has adopted regulations with respect to
mercury emission regulations that are more stringent than
federal MACT regulations in this area, and such regulations may
result in additional ongoing compliance expenditures. 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. Additional environmental issues
could arise, or laws and regulations could be passed and
promulgated, resulting in additional costs, which our reserves
may not cover and which could materially harm our operating
results.
We pursue various hedging strategies, including entering into
forward purchase contracts and put options, in order to reduce
our exposure to losses from adverse changes in the prices for
natural gas, coal and zinc. Our hedging activities vary in scope
based upon the level and volatility of natural gas, coal and
zinc prices and other changing market conditions. Our hedging
activity may fail to protect or could harm our operating results
because, among other things:
Our success will depend, in part, on the efforts of our
executive officers and other key employees, none of whom are
covered by key person insurance policies. These individuals
possess sales, marketing, engineering, manufacturing, financial
and administrative skills that are critical to the operation of
our business. If we lose or suffer an extended interruption in
the services of one or more of our executive officers or other
key employees, our business, results of operations and financial
condition may be negatively impacted. Moreover, the market for
qualified individuals may be highly competitive and we may not
be able to attract and retain qualified personnel to succeed
members of our management team or other key employees, should
the need arise.
We rely upon proprietary know-how and continuing technological
innovation and other trade secrets to develop and maintain our
competitive position. Our competitors could gain knowledge of
our know-how or trade secrets, either directly or through one or
more of our employees or other third parties. If one or more of
our competitors can use or independently develop such know-how
or trade secrets, our market share, sales volumes and profit
margins could be adversely affected.
We rely primarily on third parties for transportation of the
products we manufacture, as well as the delivery of EAF dust to
our recycling plants and other raw materials, including recycled
zinc, to our Monaca production facility. In particular, a
substantial portion of the raw materials we use is transported
by railroad, which is highly regulated. If any of our
third-party transportation providers were to fail to deliver our
products in a timely manner, we may be unable to sell those
products at full value, or at all. Similarly, if any of these
providers were to fail to deliver raw materials to us in a
timely manner, we may be unable to meet customer demand. In
addition, if any of these third parties were to cease operations
or cease doing business with us, we may be unable to replace
them at reasonable cost. Any failure of a third-party
transportation provider to deliver raw materials or finished
products in a timely manner could disrupt our operations, harm
our reputation and have a material adverse effect on our
financial condition and operating results.
The market for common stock has historically been subject to
disruptions that have caused substantial volatility in the
prices of these securities, which may not have corresponded to
the business or financial success of the particular company. We
cannot assure you that the market for the shares of our common
stock will be free from similar disruptions. Any such
disruptions could have an adverse effect on stockholders. In
addition, the price of the shares of our common stock could
decline significantly if our future operating results fail to
meet or exceed the expectations of market analysts and investors.
Some specific factors that may have a significant effect on the
market price of the shares of our common stock include:
As a result of these and other factors, you may be unable to
resell your shares of our common stock at or above the price you
paid for such shares.
We anticipate that we will retain all future earnings and other
cash resources for the future operation and development of our
business. Accordingly, we do not intend to declare or pay
regular cash dividends on our common stock in the near future.
Payment of any future dividends will be at the discretion of our
board of directors after taking into account many factors,
including our operating results, financial conditions, current
and anticipated cash needs and plans for expansion. The
declaration and payment of any dividends on our common stock is
also restricted by the terms of our credit facilities. As a
result, your only opportunity to achieve a return on your
investment in us will be if the price of our common stock
increases and if you are able to sell your shares at a profit.
You may not be able to sell shares of our common stock at a
price that exceeds the price that you pay.
Provisions
of our amended certificate of incorporation and by-laws could
delay or prevent a takeover of us by a third party and may
prevent attempts by stockholders to replace or remove our
current management.
Provisions in our amended certificate of incorporation and
by-laws and of Delaware corporate law may make it difficult and
expensive for a third party to pursue a tender offer, change in
control or takeover attempt that is opposed by our management
and board of directors. These anti-takeover provisions could
substantially impede the ability of public stockholders to
benefit from a change of control or change our management and
board of directors.
In addition, Section 203 of the Delaware General
Corporation Law may discourage, delay or prevent a change in
control by prohibiting us from engaging in a business
combination with an interested stockholder for a period of three
years after the person becomes an interested stockholder. These
provisions could limit the price that certain investors might be
willing to pay in the future for shares of our common stock and
limit the return, if any, you are able to achieve on your
investment in us.
None.
Our zinc production operations are located at Monaca,
Pennsylvania and Palmerton, Pennsylvania and our recycling
operations are located in Palmerton, Calumet, Illinois,
Rockwood, Tennessee and Beaumont, Texas. Our hydrometallurgical
processing facility is in Bartlesville, Oklahoma.
The chart below provides a brief description of each of our
production facilities:
We believe that our existing space is adequate for our current
operations. We believe that suitable replacement and additional
space will be available in the future on commercially reasonable
terms.
We are party to various litigation, claims and disputes,
including labor regulation claims and U.S. 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, 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.
We entered into a Consent Order and Agreement with the
Pennsylvania Department of Environmental Protection, dated
June 28, 2006, related to the resolution of fugitive
emission violations at our Monaca facility. Under the Consent
Order and Agreement, we are required to submit a written plan
for evaluating and implementing corrective action regarding
fugitive air emissions at our Monaca facility, and to implement
the required corrective action. We have delivered the
implementation plan and have begun corrective measures,
including enhancements to emission incident reporting and
follow-up;
maintenance and preventive maintenance on certain emission
control equipment such as ducts, capture hoods, fabric-filter
collectors and appurtenances; and development and implementation
of department-specific emission-control plans. Additionally, we
paid an initial civil penalty of $50,000 and are obligated to
pay an additional $2,500 per month for 24 months, subject
to extended or early termination.
No matters were submitted to a vote of the security holders in
the fourth quarter of 2007.
Our common stock has been listed on The NASDAQ Global Select
Market under the symbol “ZINC” since August 10,
2007. Prior to that time, there was no public market for our
common stock. The initial public offering price of our common
stock was $18.00 per share. From August 10, 2007 through
September 30, 2007, the highest and lowest sale prices of
our common stock were $26.14 to $17.50 per share, respectively.
From October 1, 2007 through December 31, 2007, the
highest and lowest sale prices of our common stock were $25.50
to $14.97 per share, respectively. As of March 24, 2008,
there were six holders of record of our common stock and
approximately 6,800 beneficial owners of such stock. The
transfer agent and registrar for our common stock is National
City Bank, N.A., National City Bank Shareholder Services, LOC
5352, P.O. Box 92301, Cleveland, Ohio 44135, Toll-free
telephone:
1-800-622-6757.
On April 12, 2007, we completed the private placement of
13,973,862 shares of our common stock (including
1,822,678 shares pursuant to the exercise of an
over-allotment option) at a price to investors of $13.50 per
share. The securities were sold to persons reasonably believed
to be “qualified institutional buyers” (as defined in
Rule 144A under the Securities Act) in reliance upon the
exemption from the registration requirements of the Securities
Act provided by Rule 144A
and/or to
non-U.S. persons
pursuant to offers and sales that occur outside of the
U.S. within the meaning of Regulation S under the
Securities Act. Friedman, Billings, Ramsey & Co., Inc.
(“FBR”) served as the initial purchaser and placement
agent and received discounts and commissions of $0.95 per share.
The aggregate net proceeds of the offering, after deducting
aggregate discounts and commissions of $13,205,300, were
$175,441,837. We used the net proceeds of the offering primarily
to repurchase an aggregate of 6,213,076 shares of our
common stock and to redeem outstanding warrants, all of which
were fully exercisable, for 5,938,108 shares of our common
stock, including warrants exercisable for fractional shares, in
each case held by our pre-November 2006 stockholders, at a price
equal to $12.55 per share, plus a portion of the interest that
accrued in an escrow account established to hold the offering
proceeds pending regulatory approval of the transaction, and
less, in the case of warrants, the applicable exercise price. We
refer to these transactions, collectively, as the “April
Transactions.”
We currently do not plan to pay dividends on our common stock.
We are currently restricted in our ability to pay dividends
under various covenants of our debt agreements, including our
senior secured credit facilities. We paid a special dividend in
October 2006 of approximately $1.45 per share, amounting to
$29.0 million, in connection with certain financing
transactions.
Any future determination to pay dividends will depend upon,
among other factors, our results of operations, financial
condition, capital requirements, debt covenants, any contractual
restrictions and any other considerations our board of directors
deems relevant.
Information regarding securities authorized for issuance under
the Company’s equity compensation plans may be found in our
Proxy Statement related to the 2008 Annual Meeting of
Stockholders and is incorporated herein by reference.
The following graph and table compares the Company’s four
month cumulative stockholder return on its common stock with the
return on the Russell 2000 Index and a Peer Group Index, from
August 31, 2007 through December 31, 2007, the end of
the Company’s fiscal year. The graph assumes investments of
$100 on August 10, 2007 in the Company’s common stock,
the Russell 2000 Index and the Peer Group Index and assumes the
reinvestment of all dividends. The Peer Group Index is composed
of Harsco Corp., Lundin Mining Corp., Metal Management Inc.,
Nyrstar, Schnitzer Steel Industries Inc., Teck Cominco Limited,
Umicore SA, Sims Group Limited, Hudbay Minerals Inc. and
Breakwater Resources Limited and is weighted by each of their
relative market capitalizations at the beginning of each month
for which returns are reported.
COMPARISON
OF 4 MONTH CUMULATIVE TOTAL RETURN*
Among Horsehead Holding Corp., The Russell 2000 Index And A Peer Group 
Fiscal year ending December 31.
On August 15, 2007, we completed an initial public offering
of shares of our common stock. The SEC declared the Registration
Statement for the initial public offering (File
No. 333-144295)
effective on August 9, 2007. Our net proceeds from the
offering, after accounting for approximately $5.8 million,
($1.26 per share), in underwriting discounts and commissions and
approximately $1.3 million of expenses relating to the
offering, were approximately $75.4 million. During the
period August 15, 2007 through December 31, 2007, we
used approximately $8.2 million of the net proceeds to
retire debt. We intend to use the remaining proceeds to fund
capital improvements and for general corporate purposes in 2008.
We also evaluate acquisition opportunities and engage in related
discussions with other companies from time to time. We could use
some or all of the remaining proceeds to fund such an
acquisition.
Issuer
Purchases of Equity Securities
We did not repurchase any of our common stock during the fourth
quarter of the fiscal year ended December 31, 2007 and we
do not have a formal or publicly announced stock repurchase
program.
On December 23, 2003, we acquired substantially all of the
assets of our business from HII in a sale under Section 363
of the U.S. Bankruptcy Code. See “Business —
Our History.” The financial statements of HII for 2003 were
not audited, and we have therefore derived the financial
information for the period from January 1, 2003 to
December 23, 2003 from HII’s unaudited consolidated
financial statements, which are not included in this Annual
Report on
Form 10-K.
The consolidated statements of HII as of and for the period
ended December 23, 2003, labeled as “Predecessor”
below, contain certain assets and liabilities that were not
acquired by us. These included, as of December 23, 2003,
restricted cash of $4.3 million, accrued expenses of
$4.9 million, notes payable of $1.6 million, long-term
defined benefit pension and other post-employment benefit
liabilities of $4.3 million and liabilities subject to
compromise of $184.7 million. Since we acquired
substantially all of the assets of our predecessor, there are no
separate results of operations associated with the assets and
liabilities not acquired. Because of the significant differences
in assets and liabilities included in our predecessor’s and
our financial statements, our predecessor’s financial
results as of and for the period ended December 23, 2003
are not directly comparable to ours and are not necessarily
indicative of or useful for the evaluation of our current or
future results.
We have derived the financial information as of
December 31, 2003 and 2004 from our audited consolidated
balance sheets for such dates, which are not included in this
Annual Report. We have derived the selected historical
consolidated financial information for the period from
December 24, 2003 to December 31, 2003 from our
unaudited consolidated financial statements for such period,
which are not included in this Annual Report. We have derived
the selected historical consolidated financial information as of
December 31, 2005 and 2004 and for the year ended
December 31, 2004 from our audited consolidated financial
statements, which are not included in this Annual Report. We
have derived the selected historical consolidated financial
information as of December 31, 2007 and 2006 and for the
years ended December 31, 2007, 2006 and 2005 from our
audited consolidated financial statements, which are included
elsewhere in this Annual Report.
The selected historical consolidated financial and other
information presented below is condensed and may not contain all
of the information that you should consider. You should read
this information in conjunction with the consolidated financial
statements of us and our predecessor, including, where
applicable, the related notes, and the “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” section included in this Annual Report on
Form 10-K.
You should read the following discussion and analysis in
conjunction with the other sections of this Annual Report on
Form 10-K, including “Business” and
“Selected Historical Consolidated Financial and Other
Information,” as well as our consolidated financial
statements, including the notes thereto. The statements in this
discussion and analysis regarding industry outlook, our
expectations regarding our future performance and our liquidity
and capital resources and other non-historical statements in
this discussion are forward-looking statements. See the
“Cautionary Statement Regarding Forward-Looking
Statements.” Our actual results may differ materially from
those contained in or implied in any forward-looking statements
due to numerous risks and uncertainties, including, but not
limited to, the risks and uncertainties described in “Risk
Factors.”
We are a leading U.S. producer of zinc and zinc-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 and pharmaceuticals. We believe that we are the
largest refiner of zinc oxide and PW zinc metal in North
America. We believe we are also the largest North American
recycler of EAF dust, a hazardous waste produced by the steel
mini-mill manufacturing process. We, together with our
predecessors, have been operating in the zinc industry for more
than 150 years.
While we vary our raw material inputs, or feedstocks, based on
cost and availability, we generally produce our zinc products
using nearly 100% recycled zinc, including zinc recovered from
our EAF dust 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 four 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.
Prior to December 24, 2003, HII operated our business. In
2002, record-low zinc prices, production inefficiencies, high
operational costs and legacy environmental costs associated with
prior owners/operators of our facilities caused HII to file for
Chapter 11 bankruptcy protection. We purchased
substantially all of the operating assets of HII in December
2003 pursuant to a Sale Order under Section 363 of the
U.S. Bankruptcy Code. For more information, see
“Business — Our History.”
Market Price for Zinc. Since we generate the
substantial majority of our net sales from the sale of zinc and
zinc-based products, our operating results depend greatly on the
prevailing market price for zinc. Our principal raw materials
are zinc extracted from recycled EAF dust and other zinc-bearing
secondary materials that we purchase from third parties. Costs
to acquire and recycle EAF dust, which, during 2007, comprised
approximately 59% of our raw materials, were not impacted
directly by fluctuations in the market price of zinc on the LME.
The price of our finished products is impacted directly by
changes in the market price of zinc, 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.
Zinc prices rose throughout 2005 and 2006 to a historical high
of $2.08 per pound on December 5, 2006 and have since
fallen to $1.04 per pound as of December 31, 2007.
Demand for Zinc-Based Products. We generate
revenue from the sale of zinc metal, zinc oxide, zinc- and
copper-based powders, as well as from the collection and
recycling of EAF dust. For the periods covered in this
discussion and analysis, North American consumption of PW zinc
metal (the grade of zinc metal in which we specialize) and zinc
oxide (the value-added zinc-based product from which we generate
the most net sales on an historical basis) has increased.
Because of the need to perform additional maintenance on key
equipment that was deferred due to our predecessor’s
financial difficulties, we have not been able to produce at
capacity to take full advantage of this consumption increase.
Production of zinc at our Monaca facility declined, primarily
due to this delayed maintenance on equipment, from approximately
170,000 tons in 2000 to approximately 139,000 tons per year in
2005, 2006 and approximately 140,000 in 2007. To meet demand we
purchased and resold metal to our customers. We began to reduce
these purchases in 2006 and further in 2007. We expect to
continue to perform additional maintenance to this equipment for
the foreseeable future. The table below illustrates historical
sales volumes and revenues for each of the zinc products and EAF
dust:
Cost of Sales (excluding depreciation). Our
cost of producing zinc products consists principally of
purchased feedstock, energy, maintenance and labor costs. In
2007, approximately 44% of our operating costs were
feedstock-related and approximately 56% were conversion-related.
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. A majority of
our purchased feedstock is priced at a discount to the LME.
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, 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, excluding management services fees paid
in fiscal 2006 to Sun Capital Partners Management III, LLC
pursuant to a Management Services Agreement, totaling
approximately 70% of such expenses in fiscal 2006. 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 sales volumes.
Our operating results are and will be influenced by a variety of
factors, including:
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. For example, the LME price
of zinc rose from $0.58 per pound on December 31, 2004 to
$2.08 per pound on December 5, 2006 and has since fallen to
$1.04 per pound as of December 31, 2007. Changes in zinc
pricing have impacted our revenues, 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
many 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 to hedge the selling prices of a
portion of our expected production.
Since 2004, our management has been focused on opportunities to
improve our results of operations by improving operational
efficiencies. We have reduced our manufacturing costs by
increasing our usage of low-cost feedstock, reducing our energy
consumption, streamlining our organizational structure and
implementing “Six Sigma” — based process
improvement initiatives, and we intend to continue to focus on
these and similar initiatives in the future. Our ability to
capitalize on these and other efficiency improvements will help
us to improve our margins. Our management is also focused on
increasing our EAF dust recycling capabilities, in order to
capture opportunities created by the expansion in the EAF dust
recycling market that we anticipate. We also currently expect to
begin additional capacity expansion projects in the near future,
including the addition of smelter capacity.
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 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.
Our discussion and analysis of our financial condition and
results of operations are based on our consolidated financial
statements, which have been prepared in conformity with
accounting principles generally accepted in the United States of
America. Note B to the audited consolidated financial
statements contained in this Annual Report on
Form 10-K
contains a summary of our significant accounting policies.
Certain of these accounting polices are described below.
Inventories, which consist primarily of zinc bearing materials,
zinc products and supplies and spare parts, are valued at the
lower of cost or market using a moving average 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 is traded as a commodity on the LME and, accordingly,
product inventories are subject to price fluctuations. When
reviewing inventory for the lower of cost or market, we consider
decreases in the LME zinc price subsequent to the end of the
year.
The following methods are used to estimate the fair value of our
financial instruments:
We enter into certain financial swap and financial option
instruments that are carried at fair value in accordance with
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (“SFAS 133”). We
recognize changes in fair value within the consolidated
statements of income as they occur (see Note N to our
audited consolidated financial statements).
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 on valuations provided by
third parties.
We are exposed to credit loss in cases where counter-parties
with which we have entered into derivative transactions are
unable to pay us when they owe us funds as a result of
agreements with them. To minimize the risk of such losses, 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.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (“SFAS 157”).
SFAS 157 defines “fair value”, establishes a
framework for measuring fair value and expands disclosures about
fair value measurements. This statement does not change existing
accounting rules governing what can or must be recognized and
reported at fair value in our financial statements, or disclosed
in the notes to our financial statements. SFAS 157 is
effective for fiscal years beginning after November 15,
2007. We do not believe the impact of our adoption of
SFAS 157 will be material.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(“SFAS 159”). SFAS 159 permits entities
to chose to measure many financial instruments and certain other
items at fair value that are not currently required to be
measured at fair value. This statement does not affect any
existing accounting literature that requires certain assets and
liabilities to be carried at fair value. SFAS 159 is
effective for fiscal years beginning after November 15,
2007. We do not believe the impact of our adoption of
SFAS 159 will be material.
Results
of Operations
The following table sets forth the percentages of sales that
certain items of operating data constitute for the periods
indicated.
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 for the most recent eight fiscal quarters and the average
LME zinc prices for the year to date as of the end of each
quarter are listed in the table below:
Net sales. Net sales increased
$49.2 million, or 9.9%, to $545.6 million for fiscal
2007 compared to $496.4 million for fiscal 2006. The net
increase was attributable to increases in price realization of
$57.3 million and co-product and miscellaneous sales of
$5.4 million partially offset by a sales volume decrease of
$21.5 million. The remaining $8.0 million increase
relates to the mark to market adjustments on various hedging
instruments we employed to hedge the selling prices of a portion
of our expected production. Net sales for fiscal 2007 and fiscal
2006 were reduced by mark to market adjustments of
$5.2 million and $13.2 million, respectively.
The average sales price realization for zinc products on a zinc
contained basis was $1.73 per pound for fiscal 2007 versus $1.52
per pound for fiscal 2006. The increase in price realization was
due to a higher premium to the LME on zinc products sold and the
lag effect of record high LME average zinc prices in the fourth
quarter of fiscal 2006 being partially realized in the first
quarter of fiscal 2007. Additionally, the year to date LME
average zinc prices for the first three quarters of fiscal 2007
were higher than full year fiscal 2006 as illustrated in the
table above. The LME average zinc price declined 19% in the
fourth quarter of fiscal 2007 to bring the year to date average
to $1.47 per pound versus $1.49 per pound for fiscal 2006.
Zinc product shipments decreased 4,926 tons, or 3.1%, to 152,745
tons, or 136,698 tons on a zinc contained basis, for fiscal 2007
compared to 157,671 tons, or 142,767 tons on a zinc contained
basis, for fiscal 2006. The decrease reflects primarily a
decrease in shipments of zinc metal partially offset by an
increase in shipments of zinc
oxide. The decrease in shipments of zinc metal reflects
decreases in both brokered metal and zinc metal produced of
5,171 tons and 5,123 tons, respectively.
Net sales of zinc metal decreased $15.7 million, or 6.5%,
to $226.3 million for fiscal 2007 compared to
$242.0 million for fiscal 2006. The decrease was primarily
attributable to a decrease in sales volume of $30.3 million
partially offset by an increase in price realization of
$14.6 million. The reduced sales volume primarily reflects
reduced shipment levels of brokered metal and an increase in the
quantity of produced metal further processed into zinc oxide.
The increase in price realization reflects the higher LME
average zinc price during most of fiscal 2007 as mentioned above
and a higher average premium to the LME on zinc products sold.
Net sales of zinc oxide increased $56.7 million, or 29.9%,
to $244.6 million for fiscal 2007 compared to
$187.9 million for fiscal 2006. The increase was
attributable to an increase in price realization of
$42.3 million and a shipment volume increase of
$14.4 million. The increase in price realization reflects
the lag effect of record high LME average zinc prices in the
fourth quarter of fiscal 2006 being partially realized in the
first quarter of fiscal 2007 as well as the year to date LME
average zinc prices for the first three quarters of fiscal 2007
exceeding the full year fiscal 2006 average. The increased
shipment volume reflects the settlement of a fourth quarter 2006
work stoppage at the operations of our largest oxide customer.
Consumption in 2007 has returned to pre-work stoppage levels.
Net sales of zinc and copper-based powder increased
$0.2 million, or 1.6%, to $12.9 million for fiscal
2007 compared to $12.7 million for fiscal 2006. The
increase was attributable to an increase in price realization of
$1.2 million partially offset by a decrease in sales volume
of $1.0 million.
Revenues from EAF dust recycling decreased $5.4 million, or
10.7%, to $45.2 million for fiscal 2007 compared to
$50.6 million for fiscal 2006. Decreased volume led to a
decrease in revenues of $4.6 million. The decreased volume
primarily reflects reduced steel production by our EAF
customers. EAF dust revenues for fiscal 2007 were based on
458,052 tons versus 503,985 tons for fiscal 2006. A 1.8%
decrease in price realization reduced revenues by
$0.8 million.
Cost of sales (excluding depreciation). Cost
of sales increased $13.2 million, or 3.6%, to
$373.4 million for fiscal 2007 compared to
$360.2 million for fiscal 2006. As a percentage of net
sales, cost of sales was 68.4% for fiscal 2007 versus 72.6% for
fiscal 2006. The increase was primarily attributable to a cost
increase of $29.2 million partially offset by a shipment
volume decrease of $16.0 million. The volume decrease was
caused by decreases of $15.8 million and $8.9 million
in brokered metal and produced metal shipments, respectively, a
decrease of $0.8 million in zinc and copper-based powder
shipments partially offset by a $9.5 million increase in
oxide shipments.
The cost increase of $29.2 million was primarily
attributable to a $19.9 million increase in conversion
costs and a $12.7 million increase in purchased feed costs
at our Monaca smelter partially offset by a $3.4 million
decrease in recycling and other costs. The largest components of
the conversion cost increase are a $10.9 million increase
in labor and maintenance costs, a $5.3 million increase in
utilities and a net $3.7 million increase in supplies,
fuels, additives and other costs. The increase in labor and
maintenance costs includes $5.4 million in signing bonuses
related to the collective bargaining unit agreements negotiated
in 2007 at our Palmerton, Calumet and Monaca facilities.
The purchased feed cost increase reflects the higher average LME
zinc price for the majority of 2007 as well as a 9.7% increase
in the percentage of the average LME zinc price we pay for our
purchased feeds. These increases were partially offset by a 9.0%
decrease in the quantity of purchased feeds used in fiscal 2007.
Depreciation. Depreciation expense increased
$1.7 million, or 18.9%, to $10.2 million for fiscal
2007 compared to $8.5 million for fiscal 2006. The increase
is attributable to an increase in property, plant and equipment
in fiscal 2007. Capital expenditures were $45.3 million in
fiscal 2007.
Selling, general and administrative
expenses. Selling, general and administrative
expenses decreased $15.6 million, or 48.9%, to
$15.7 million for fiscal 2007 compared to
$31.3 million for fiscal 2006. The decrease was primarily
attributable to the elimination of the management fees to Sun
Capital Partners Management III, LLC pursuant to our management
services agreement with them that was terminated in November
2006. The fees totaled $16.3 million in fiscal 2006.
Interest expense. Interest expense decreased
$1.9 million, or 21.8%, to $7.6 million for fiscal
2007 compared to $9.5 million for fiscal 2006. Lower
average debt levels in 2007 due to repayment of substantially
all debt more than offset the effects of higher average variable
interest rates associated with the debt. Interest expense for
fiscal 2007 included $2.5 million in amortization of
deferred finance charges, of which $1.6 million was related
to the early extinguishment of notes payable during the year.
Interest and other income increased to $3.0 million for
fiscal 2007 compared to $0.3 million for fiscal 2006. The
increase was primarily attributable to $1.7 million in
interest earned on excess cash during the year resulting
primarily from the second quarter private placement transaction,
the initial public offering of our common stock and strong cash
flows provided by operations during the year.
Income tax provision. Our income tax provision
was $51.1 million during fiscal 2007, compared to
$32.7 million for fiscal 2006. Our effective tax rate for
fiscal 2007 was 36.1%, compared to 37.5% for fiscal 2006.
Net income. For the reasons described above,
net income increased $36.2 million, or 66.5%, to
$90.7 million for fiscal 2007 compared to
$54.5 million for fiscal 2006.
Net sales. Net sales increased
$222.6 million, or 81%, to $496.4 million during
fiscal 2006, compared to $273.8 million during fiscal 2005.
The net increase was attributable to increased price realization
of $237.4 million due primarily to higher LME average zinc
prices in fiscal 2006 and a $6.8 million increase in
by-product and miscellaneous sales, partially offset by a sales
volume decrease of $8.4 million. Net sales were reduced by
a $13.2 million fair value adjustment to various hedging
instruments we employed to hedge the selling prices of a portion
of our expected zinc production. The LME average zinc price
increased 137% or $0.86 per pound, to $1.49 per pound in fiscal
2006 from $0.63 per pound in fiscal 2005. Under certain of our
contractual agreements, significant 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.
Net sales for zinc metal increased $135.2 million, or 126%,
to $242.0 million during fiscal 2006, compared to
$106.8 million during fiscal 2005. The increase was
attributable to a $137.2 million improvement in price
realization due primarily to the higher LME average zinc price,
partially offset by a $2.0 million decrease in tons
shipped. The improvement in price reflects 97%, or $0.83 per
pound, of the increase in the average LME zinc price from the
prior year.
Net sales for zinc oxide increased $84.8 million, or 82%,
to $187.9 million during fiscal 2006, compared to
$103.1 million during fiscal 2005. The increase is
primarily attributable to higher price realization during fiscal
2006, which accounted for $92.5 million of the difference.
The improvement in price realization reflects 72%, or $0.62 per
pound, of the increase in the average LME zinc price from the
prior year. A $7.7 million offset was caused by a 7%
decline in shipment volumes reflecting reduced consumption in
the rubber industry during the third and fourth quarters of
2006. The reduced consumption was caused primarily by high tire
inventories in the third quarter and a work stoppage during the
fourth quarter at the operations of our largest oxide customer.
Recently consumption has returned to levels consistent with the
prior year.
Net sales of zinc and copper-based powder increased
$5.1 million, or 67%, to $12.7 million during fiscal
2006, compared to $7.6 million during fiscal 2005.
Increases in prices accounted for $4.3 million of the
improvement. Volume increases accounted for $0.8 million,
as shipped tons increased by 10%.
Revenues from EAF dust increased $3.8 million, or 8%, to
$50.6 million during fiscal 2006, compared to
$46.8 million during fiscal 2005. Price increases caused
revenues to grow $3.2 million, and increased volume caused
revenues to grow by $0.6 million.
Cost of sales (excluding depreciation). Cost
of sales increased $116.8 million, or 48%, to
$360.2 million for fiscal 2006, compared to
$243.4 million for fiscal 2005. As a percentage of net
sales, cost of sales was 73% for fiscal 2006, compared to 89%
for fiscal 2005.
Feed costs increased $97.3 million in fiscal 2006
consisting largely of an $86.4 million increase in
purchased feed costs. The increase primarily reflects the
increase in the average LME zinc prices, an 8% increase in the
percentage of the average LME zinc price we pay on our purchased
feeds and a 14% increase in the quantity of purchased feed used
in fiscal 2006. Feed costs from recycled EAF dust rose
$10.9 million driven largely by increases in wages and
benefits of $1.8 million, maintenance of $2.7 million,
fuels and additives of $3.0 million, purchased services of
$1.3 million and transportation of $1.0 million. The
reduction in shipment volume resulted in a decrease in cost of
sales of $7.9 million. The cost of brokered metal sales
increased $11.6 million from 2005, primarily reflecting the
increase in the LME price of zinc.
Our cost of sales were also affected by a $5.7 million
increase in labor and maintenance costs at our Monaca facility
reflecting our initiatives to maintain and improve the
reliability of its operations, a $3.8 million increase in
freight costs, $2.8 million in charges relating to the
termination and settlement of a third-party operation and
maintenance agreement for our power plant in Monaca (see
Note Q to our consolidated audited financial statements), a
$1.6 million fuel surcharge related to coal purchased for
the power plant and $1.3 million related to a one-time sale
of zinc concentrates. The balance of the increase,
$0.6 million, was attributable largely to increases in
supplies and services.
Depreciation. Depreciation expense increased
by $1.3 million, or 18%, to $8.5 million during fiscal
2006, compared to $7.2 million in fiscal 2005. The increase
is attributable to an increase in property, plant and equipment
from fiscal 2005 due to capital expenditures of
$14.2 million in fiscal 2006.
Selling, general and administrative
expenses. Selling, general and administrative
expenses increased by $21.7 million, or 226%, to
$31.3 million during fiscal 2006, compared to
$9.6 million during fiscal 2005. Most of the increase is
attributable to a $15.0 million increase in the management
fee paid to Sun Capital Partners Management III, LLC pursuant to
our Management Services Agreement, which included an additional
one-time fee of $5.0 million and a $4.5 million
management services agreement termination fee. Additionally, we
incurred $3.0 million in management compensation related
principally to the November private placement in the fourth
quarter of 2006. The balance of the increase is attributable
primarily to increased wages, bonuses, benefits and professional
services.
Interest expense. Interest expense increased
$0.4 million, or 5%, to $9.5 million during fiscal
2006 compared to $9.1 million during fiscal 2005 primarily
reflecting increases in debt levels and the associated variable
rates.
Income tax provision. Our income tax provision
was $32.7 million during fiscal 2006, compared to
$2.0 million for fiscal 2005. Our effective tax rate for
fiscal 2006 was 37.5%, compared to 39.1% for fiscal 2005.
Net income. For the reasons described above,
net income increased $51.4 million, or 1,658%, to
$54.5 million for fiscal 2006, compared to
$3.1 million for fiscal 2005.
Liquidity
and Capital Resources
We finance our operations, capital expenditures and debt service
primarily with funds generated by our operations. We believe
that cash generated from operations, our initial public offering
and the borrowing availability under our credit facilities will
be sufficient to satisfy our liquidity and capital requirements
for the next twelve months. 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
herein.
Year
Ended December 31, 2007
Our operations generated a net $102.6 million in cash for
fiscal 2007. Net income and non-cash items totaled
$105.3 million. Although the LME average price of zinc
during fiscal 2007 has declined from December 31, 2006
levels, it remains at historically high levels and contributed
to our strong positive cash flow for the period.
Our working capital increased $91.1 million to
$150.0 million at December 31, 2007 from
$58.9 million at December 31, 2006. The largest
component was a $75.2 million increase in cash and cash
equivalents, reflecting primarily the cash raised through our
initial public offering as well as cash provided by our
operations. Accounts receivable decreased $20.0 million
during the period, reflecting the lower LME average zinc price
in relation to
December 31, 2006. Inventory increased $12.3 million
during the period, reflecting in part increases of 24.9% and
22.0% in raw material and work in process tons and finished
goods tons, respectively, and corresponding increases in cost of
4.4% and 47.3%, respectively. Prepaid expenses and other current
assets increased $4.8 million reflecting the purchase in
December 2007 of put options to be used as hedging instruments
for 2008 production. Other significant changes in working
capital include the $21.4 million reduction in current
maturities of debt related to the debt repayment described
below. The balance of cash and cash equivalents was
$76.2 million at December 31, 2007.
Cash used in investing activities was $45.3 million for
fiscal 2007. A majority of the expenditures, $27.1 million,
were for the kiln expansion project at our Rockwood, Tennessee
facility which was completed and placed into service in January
2008. Although our credit facility imposes certain limits on
capital spending, they did not preclude us from funding any of
our currently planned projects. We funded capital expenditures
with cash provided by operations.
Our financing activities for fiscal 2007 provided a net
$17.9 million. In the second quarter, we completed the
private placement of 13,973,862 shares of our common stock
at a price of $13.50 per share. The net proceeds were
$174.2 million, after deducting the initial purchaser
discount, placement fee and commissions of $13.2 million
and other costs of $1.2 million. The net proceeds were used
to repurchase the shares of our pre-November 2006 stockholders
and to redeem our outstanding warrants for $152.6 million,
to reduce debt and for general corporate purposes.
In the third quarter, we completed an initial public offering of
shares of our common stock. The SEC declared the Registration
Statement on
Form S-1
for our initial public offering effective on August 9,
2007. Pursuant to this Registration Statement, we registered a
total of 5,597,050 shares of common stock, of which we sold
4,580,957 shares and certain selling stockholders sold
1,016,093 shares. The 4,580,957 shares of common stock
we sold included 409,722 shares sold pursuant to the
underwriters’ over-allotment option. The
1,016,093 shares of common stock sold by the selling
stockholders included 320,328 shares sold pursuant to the
underwriters’ over-allotment option. At the public offering
price of $18.00 per share, the aggregate price of the shares of
common stock we sold was $82.5 million and the aggregate
price of the shares of common stock sold by the selling
stockholders was $18.3 million. We did not receive any
proceeds from the sale of common stock by the selling
stockholders. The net proceeds we realized from the offering,
after deducting approximately $5.8 million in underwriting
discounts and commissions and approximately $1.3 million of
expenses relating to the offering, were approximately
$75.4 million. We used a portion of the net proceeds to
retire substantially all of our debt and we expect to use the
remaining proceeds to fund capital improvements and for general
corporate purposes.
With the funds received from the private placement, our initial
public offering and cash generated from operations we retired
during fiscal 2007 the $57.0 million Contrarian note
payable, the $7.6 million in CIT notes payable and repaid
the $14.4 million outstanding balance of our revolving
credit facility.
We are subject to various financial covenants in our credit
facilities. Our consolidated senior leverage ratio must be not
higher than 5.50 to 1.00, and our consolidated fixed charge
coverage ratio must be not less than 1.00 to 1.00. Each fiscal
quarter, our EBITDA for the previous twelve months must be
higher than $13.4 million. Finally, our credit facility was
amended in December of 2007. Under the amendment, if the average
net availability for the calendar month of December of each
respective year is less than $30.0 million, then our
capital expenditures for fiscal 2007, 2008, 2009 and
2010 may not exceed $50.0 million,
$120.0 million, $70.0 million and $25.0 million,
respectively. At December 31, 2007, we were in compliance
with all covenants under the agreements governing the Credit
Facility and the Term Note and continue to be in compliance as
of March 31, 2008.
Year
Ended December 31, 2006
Our operations generated a net $15.6 million in cash for
fiscal 2006. Although the rising LME zinc price during the
period contributed to our strong performance, it negatively
impacted the cash flow from operations as reflected in our
higher working capital requirements. Net income and non-cash
items totaling $78.6 million were reduced by a
$70.7 million increase in accounts receivable and
inventory, partially offset by a net $15.5 million increase
in accounts payable and accrued expenses.
Net sales and accounts receivable increased during the period by
$218.8 million and $36.4 million, respectively. Both
were impacted by the 137% increase in the LME price of zinc.
Accounts receivable was further impacted by a 2.9 day
increase in days sales outstanding.
Higher LME zinc prices were also partially responsible for the
increase in inventory and accounts payable. Inventory tons of
purchased feed on hand increased 68%, while the associated costs
increased 334%. Tons of finished goods inventory on hand
increased 48%, while the associated costs increased 152% from
$8.3 million to $21.0 million.
Cash used in our investing activities totaled $14.2 million
for fiscal 2006. A majority of the capital invested was to
maintain existing operations. Our credit facilities impose
certain limits on capital spending, which are described below.
In 2006, we do not expect our credit facilities to preclude us
from funding any of our currently planned projects. We funded
capital expenditures with funds provided by operations.
Our financing activities used a net $1.0 million in cash
for fiscal 2006.
We received $188.2 million in net proceeds from the private
placement of our common stock in November 2006. We used
$166.2 million of the proceeds to repurchase shares of our
common stock from our pre-November 2006 stockholders and
$1.6 million, net of tax, to repurchase and cancel 20% of
the options, all of which were fully vested and exercisable,
held by members of our management. The remaining proceeds were
used to pay a $4.5 million termination fee relating to the
Management Services Agreement and bonus payments of
$2.5 million to certain members of management and to reduce
debt.
On July 15, 2005, Horsehead Corporation entered into a
first lien $72.0 million senior secured credit facility
(the “Credit Facility”) with CIT Group/Business
Credit, Inc. (“CIT”) and certain lenders and entered
into a $27.0 million second lien secured credit facility
with CMLI, LLC and Contrarian Financial Service Company, L.L.C.
as lenders. On October 25, 2006, the Credit Facility was
amended to provide for additional borrowing availability of
$30.0 million under our revolving credit facility
(“Revolver”) and our second lien facility was amended
to provide for additional borrowing availability of
$30.0 million. These amendments also increased our
flexibility to make capital expenditures. The transactions
relating to our October 2006 special dividend increased the
amounts outstanding under the Credit Facility by an aggregate of
$56.0 million. We used borrowings under these amended
facilities to repay $17.4 million, together with
$2.7 million in accrued interest, pursuant to loans entered
into with certain of our then existing stockholders and to pay
the October 2006 special dividend of approximately $1.45 per
share, amounting to $29.0 million. The Credit Facility
currently consists of a $75.0 million Revolver that
includes a letter of credit sub-line of $35.0 million, and
the second lien facility currently consists of a
$57.0 million term note (the “Term Note”).
We paid the special dividend to our stockholders in order to
share the benefits of our improved financial performance with
our stockholders. In connection with the dividend, we paid a
one-time $5.0 million fee and a $0.5 million
management fee to Sun Capital Partners Management III, LLC
pursuant to the Management Services Agreement. Under the terms
of this agreement, we received financial and management
services, including advice on financial reporting, accounting,
management information systems and staffing. Also, under the
terms of the Management Services Agreement, Sun Capital Partners
Management III, LLC, which is an affiliate of Sun Capital,
was entitled to receive a fee for services provided with respect
to certain corporate events, such as refinancings,
restructurings, equity and debt offerings, and mergers equal to
1% of the aggregate consideration resulting from the
transaction. We also made bonus payments of approximately
$0.5 million to certain members of our management.
We are subject to various financial covenants in our credit
facilities. Our consolidated senior leverage ratio must be not
higher than 5.50 to 1.00, and our consolidated fixed charge
coverage ratio must be not less than 1.00 to 1.00. Each fiscal
quarter, our EBITDA for the previous twelve months must be
higher than $13.4 million. Finally, our capital
expenditures for fiscal 2007, 2008 and each fiscal year
thereafter may not exceed $40.0 million, $15.0 million
and $11.0 million, respectively. At December 31, 2006,
we were in compliance with all covenants under the agreements
governing the Credit Facility and the Term Note.
In January 2006, Horsehead Corporation entered into a
$7.0 million term loan (“Special Accommodation
Advance”) with CIT. The proceeds of the loan were used to
repay a $7.29 million note to Sun Capital.
In April 2006, Horsehead Corporation entered into a
$5.0 million term loan with Sun Capital, with interest at
10% per annum. We used the proceeds of the loan to procure a put
option to serve as a financial hedge for the price of zinc in
2007. The entire principal and accrued interest balance was
repaid in April 2006 as described below.
In April 2006, Horsehead Corporation entered into a
$7.0 million term loan (“Tranche B Special
Accommodation Advance”) with CIT. We used a portion of the
proceeds of the loan to repay the $5.0 million Sun Capital
loan.
The following table summarizes our contractual obligations and
commitments as of December 31, 2007:
Our off-balance sheet arrangements include operating leases and
letters of credit. As of December 31, 2007, we had letters
of credit outstanding in the amount of $15.1 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 covered
by a $35.0 million letter of credit sub-line under the
terms of our Credit Facility as described in Note G to our
audited consolidated financial statements.
Inflation can affect us in two principal ways. First, a
significant portion of our debt is tied to prevailing short-term
interest rates that may change due to changes in inflation
rates, translating into changes in our interest expense. Second,
inflation can impact material purchases, energy, labor and other
costs. We do not believe that inflation has had a material
effect on our business, financial condition or results of
operations in recent years. However, if our costs were to become
subject to significant inflationary pressures, either as
described above or otherwise, we may not be ably to fully offset
such higher costs through price increases.
Due in large part to the diverse end-markets into which we sell
our products and services, our sales are generally not impacted
by seasonality with the exception of a slight reduction in
demand in the fourth quarter of the year as some customers
reduce production during the period.
In the ordinary course of our business, we are exposed to
potential losses arising from changes in interest rates and the
prices of zinc, 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 prices of zinc and lead for 2008 and 2009.
Our risk management policy seeks to meet our overall goal of
managing our exposure to market price risk, particularly risks
related to changing zinc 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.
We are subject to interest rate risk in connection with our
senior secured credit facilities, which provide for borrowings
of up to $75.0 million at December 31, 2007, all of
which bears interest at variable rates. Assuming that our senior
secured credit facilities are fully drawn and holding other
variables constant and excluding the impact of any hedging
arrangements, each one percentage point change in interest rates
would be expected to have an impact on pre-tax earnings and cash
flows for the next year of approximately $.8 million. We
may enter into interest rate swaps, involving the exchange of a
portion of our floating rate interest obligations for fixed rate
interest obligations, to reduce interest rate volatility.
However, we cannot assure you that any interest rate swaps we
implement will be effective.
Our business consists principally of the sale of zinc metal and
other zinc-based products. As a result, our results of
operations are subject to risk of fluctuations in the market
price of zinc. While our finished products are generally priced
based on a spread to the price of zinc on the LME, our revenues
are impacted significantly by changes in the market price of
zinc. 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 December 2007, we purchased put options for 2008 for a
financial hedge for approximately 90,000 tons of zinc, (7,500
tons monthly), or approximately 60% of our anticipated 2008
sales volume. The cost of these options was approximately
$13.3 million and is included in “Prepaid expenses and
other current assets” in our consolidated financial
statements for 2007. The options settle on a monthly basis, and
in each settlement we are entitled to receive the amount, if
any, by which the option strike price, set at $1.00 per pound
for the duration of 2008, exceeds the average LME price for zinc
during the preceding month. Similar put options for 45,000 tons,
(3,750 tons monthly) were purchased during the first quarter of
2008 for each of the 12 months of 2009 with a $0.90 per
pound strike price, for a cost of approximately
$7.0 million.
In December 2005, we purchased put options for 2006 for a
financial hedge for approximately 99,200 tons of zinc, or
approximately 65% of our then anticipated 2006 sales volume. The
cost of this option was approximately
$7.3 million and is included in “Prepaid expenses and
other current assets” in our consolidated financial
statements for 2005. The option settled on a monthly basis, and
in each settlement we were entitled to receive the amount, if
any, by which the option strike price, set at $0.748 per pound
for the duration of 2006, exceeded the average LME price for
zinc during the preceding month. The LME price for zinc in each
month of 2006 exceeded $0.748 per pound, so we did not receive
any payments under this arrangement during that period. Similar
put options were purchased during the second quarter of 2006 for
each of the 12 months of 2007 for the same quantity and at
the same strike price, at a cost of approximately
$6.9 million. In December 2006, we sold the 2007 put
options in order to realize an income tax benefit.
As of December 31, 2007 we were party to a contract for the
purchase and delivery of the coal requirements for the power
plant in Monaca through 2008 and have since extended our
contractual commitment to 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.
Our consolidated financial statements, together with the related
notes and the report of the independent registered public
accounting firm, are set forth on the pages indicated in
Item 15 in this Annual Report on
Form 10-K.
There were no changes in or disagreements with accountants on
accounting and financial disclosure.
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
reports pursuant to the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), is recorded, processed,
summarized and reported within the time periods specified in
Rule 13a-15
under the Exchange Act, and that such information is accumulated
and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure.
Management is responsible for establishing and maintaining
adequate internal control over financial reporting.
As required by
Rule 13a-15(b)
under the Exchange Act, we carried out an evaluation, under the
supervision and with the participation of our management,
including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on the foregoing, our
Chief Executive Officer and Chief Financial Officer determined
that disclosure controls and procedures were effective at a
reasonable assurance level as of the end of the period covered
by this report.
No change in our internal control over financial reporting
occurred during the quarter ended December 31, 2007 that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
None.
The information required by this item may be found in our Proxy
Statement related to the 2008 Annual Meeting of Stockholders and
is incorporated herein by reference and in “Executive
Officers of the Registrant” as set forth in
“Item 1. Business” in this report.
There have been no material changes to the procedures through
which stockholders may recommend nominees to our Board of
Directors since November 20, 2006. We have adopted a Code
of Ethics that applies to our principal executive officer,
principal financial officer and principal accounting officer.
The text of our Code of Ethics is posted on our website:
www.horsehead.net — click on “Investors”,
then click on “Corporate Governance” and then click on
“Code of Ethics for Senior Management.” Our Company
intends to disclose future amendments to, or waivers from,
certain provisions of the Code of Ethics on the website within
four business days following the date of such amendment or
waiver. Stockholders may request a free copy of the Code of
Ethics from: Horsehead Holding Corp., Attention: Corporate
Secretary, 300 Frankfort Road, Monaca, Pennsylvania 15061.
The information required by this item may be found in our Proxy
Statement related to the 2008 Annual Meeting of Stockholders and
is incorporated herein by reference.
The information required by this item may be found in our Proxy
Statement related to the 2008 Annual Meeting of Stockholders and
is incorporated herein by reference.
The information required by this item may be found in our Proxy
Statement related to the 2008 Annual Meeting of Stockholders and
is incorporated herein by reference.
The information required by this item may be found in our Proxy
Statement related to the 2008 Annual Meeting of Stockholders and
is incorporated herein by reference.
(a)(1) Financial Statements.
All remaining schedules have been omitted because they are
not required or applicable or the information is included in the
consolidated financial statements or notes thereto.
(a)(3) Exhibits. See Exhibit Index
appearing on
page E-1
for a list of exhibits filed with or incorporated by reference
as a part of this Annual Report on
Form 10-K.
Pursuant to the requirements of Section 13 or 15(d) 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 on March 31, 2008.
HORSEHEAD HOLDING CORP.
James M. Hensler
Its: Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints James M.
Hensler and Robert D. Scherich, jointly and severally, his
attorney-in-fact, each with the full power of substitution, for
such person, in any and all capacities, to sign any and all
amendments to this Annual Report on
Form 10-K,
and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every
act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he might do
or could do in person hereby ratifying and confirming all that
each of said attorneys-in-fact and agents, or his substitute,
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated and
on March 31, 2008.
To the Board of Directors
Horsehead Holding Corp.
We have audited the accompanying consolidated balance sheets of
Horsehead Holding Corp. (a Delaware corporation) and
subsidiaries (the “Company”) as of December 31,
2007 and 2006 and the related consolidated statements of income,
stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2007. Our audits of
the basic financial statements included the financial statement
schedule listed in the index appearing under Item 15(a)(2).
These consolidated financial statements and financial statement
schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Horsehead Holding Corp. and subsidiaries as of
December 31, 2007 and 2006 and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2007 in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ Grant
Thornton LLP
Cleveland, Ohio
March 28, 2008
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
December 31,
2007 and 2006
(Amounts in thousands, except per share amounts)
The accompanying notes to consolidated financial statements are
an integral part of these statements.
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
For the
Years Ended December 31, 2007, 2006 and 2005
(Amounts in thousands, except per share amounts)
The accompanying notes to consolidated financial statements are
an integral part of these statements.
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
For the
Years Ended December 31, 2007, 2006 and 2005
(Amounts in thousands)
The accompanying notes to consolidated financial statements are
an integral part of these statements.
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
For the
Years Ended December 31, 2007, 2006 and 2005
(Amounts in thousands)
The accompanying notes to consolidated financial statements are
an integral part of these statements.
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
December 31, 2007 and 2006
and for the Years Ended December 31, 2007, 2006 and
2005
(Amounts in thousands, except per share data)
Horsehead Holding Corp. (“HHC”, “Horsehead”
or the “company”) was incorporated in the state of
Delaware in May 2003. On December 23, 2003, the company
acquired substantially all of the operating assets and assumed
certain liabilities of Horsehead Industries, Inc. and its
wholly-owned subsidiaries. The company commenced operations on
December 24, 2003.
The company completed two private placement equity offerings,
the first in November 2006 and the second in April 2007. Both
offerings included common stock repurchases from the then
existing stockholders. Prior to the equity offerings the
principal stockholder of HHC was Sun Horsehead, LLC, (“Sun
Horsehead”) which owned 92% of the outstanding common stock
of HHC prior to the November 2006 offering and 26% of the
outstanding common stock of HHC prior to the April 2007
offering. Sun Horsehead’s ownership percentage was reduced
to 74 shares as a result of the equity offerings and
further reduced to zero with the completion of the
company’s initial public offering of its common stock in
August 2007 (see Note C).
The company is a producer of specialty zinc and zinc-based
products sold primarily to customers throughout the United
States of America and is also the largest recycler of electric
arc furnace dust in the United States. It also provides
short-line railroad service for the movement of materials for
both Horsehead Corporation and outside customers.
A summary of the significant accounting policies consistently
applied in the preparation of the accompanying consolidated
financial statements follows.
The consolidated financial statements include the accounts of
Horsehead and its wholly-owned subsidiaries, Horsehead
Intermediary Corp. (“HIC”), Horsehead Corporation (the
“Operating Company” or “HC”) and Chestnut
Ridge Railroad Corp. (“Chestnut Ridge”). Intercompany
accounts and transactions have been eliminated in consolidation.
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
items requiring the use of management estimates and assumptions
relate to inventory reserves, bad debt reserves, environmental
and asset retirement obligations, workers’ compensation
liabilities, reserves for contingencies and litigation and fair
value of financial instruments. Management bases its estimates
on the company’s historical experience and its expectations
of the future and on various other assumptions that are believed
to be reasonable under the circumstances. Actual results could
differ from those estimates.
The company recognizes revenues from the sale of finished goods
at the point of passage of title or risk of loss, which is
generally at the time of shipment. The company’s service
fee revenue is generally recognized at the time of receipt of
electric arc furnace (“EAF”) dust, which the company
collects from steel mini-mill operators.
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The components of net sales for the years ended
December 31, 2007, 2006 and 2005 are as follows:
Net sales from one customer represents $56,762 of the
company’s 2007 consolidated net sales. No other customer
exceeded 10% of consolidated net sales for 2007, 2006 and 2005.
The company classifies all amounts billed to a customer in a
sales transaction related to shipping and handling as revenue.
The company records shipping and handling costs incurred in cost
of sales.
The company considers all highly liquid investments with
maturities of less than 90 days when purchased to be cash
equivalents.
The majority of the company’s accounts receivable are due
from customers primarily in the steel, rubber and galvanizing
industries. Credit is extended based on an evaluation of a
customer’s financial condition. Generally collateral is not
required. Accounts receivable are stated at amounts due from
customers net of an allowance for doubtful accounts. Accounts
receivable outstanding longer than the contractual payment terms
are considered past due. The company determines its allowance by
considering a number of factors, including the length of time
trade accounts receivable are past due, the company’s
previous loss history, the customer’s current ability to
pay its obligation to the company, and the condition of the
general economy and industry as a whole. The company writes off
accounts receivable when they become uncollectible. Payments
subsequently received on such receivables are credited to the
allowance for doubtful accounts. The provision for bad debt
expense was $(433), $600 and $100 for 2007, 2006 and 2005,
respectively.
Inventories, which consist primarily of zinc bearing materials,
zinc products and supplies and spare parts, are valued at the
lower of cost or market using a moving average 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 is traded as a commodity on the London Metals Exchange
(“LME”) and, accordingly, product inventories are
subject to price fluctuations. When reviewing inventory for the
lower of cost or market the company uses the LME price as of the
balance sheet date. The company considers decreases in the LME
zinc price subsequent to the end of the year to determine if
disclosure of such decreases is warranted.
Prepaid expenses and other current assets at December 31,
2007 included approximately $9,872 related to put options
purchased for specified tons of zinc in 2008 (see Note N).
There were no put options outstanding at December 31, 2006.
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Property, plant and equipment are stated at cost. Depreciation
is provided using the straight-line method. Ordinary maintenance
and repairs are expensed as incurred; replacements and
betterments are capitalized if they extend the useful life of
the related asset. The estimated useful lives of property, plant
and equipment are as follows:
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the company reviews the
carrying value of its long-lived assets for impairment whenever
events or circumstances indicate that the carrying amounts may
not be recoverable. Fair value would be determined based upon a
discounted cash flow valuation. There were no impairment
write-downs charged to operations during 2007, 2006 and 2005.
The company accrues for costs associated with environmental
obligations when such costs are probable and reasonably
estimated. Accruals for estimated costs are generally
undiscounted and are adjusted as further information develops or
circumstances change.
The company accrues for costs associated with self-insured
retention under certain insurance policies (primarily
workers’ compensation) based on estimates of claims,
including projected development, from information provided by
the third party administrator and the insurance carrier.
Accruals for estimated costs are undiscounted and are subject to
change based on development of such claims.
In accordance with SFAS No. 143, Accounting for
Asset Retirement Obligations (“SFAS 143”),
and FASB Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations — an
Interpretation of FASB Statement No. 143
(“FIN 47”), the fair values of asset
retirement obligations are recognized in the period they are
incurred if a reasonable estimate of fair value can be made.
Asset retirement obligations primarily relate to environmental
remediation at two company locations. The liability is estimated
based upon cost studies prepared to estimate environmental
remediation upon closure and for purposes of obtaining state
permits to operate the facilities. The liability is discounted
using the company’s estimated credit-adjusted risk free
interest rate.
The company accounts for income taxes using the provisions of
SFAS No. 109, Accounting for Income Taxes and
FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes — an Interpretation of FASB Statement
No. 109 (“FIN 48”), which clarifies
SFAS No. 109. Deferred income taxes reflect the tax
consequences on future years of differences between the tax
bases of assets and liabilities and their respective financial
reporting amounts. As required by FIN 48, the Company
recognizes the financial statement benefit of a tax position
only after determining that the relevant tax authority would
more likely than not sustain the position following an audit.
For tax positions meeting the more-likely-than-not threshold,
the amount recognized in the financial statements is the largest
benefit that has a greater than 50 percent likelihood of
being realized upon ultimate settlement with the relevant tax
authority.
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The company has a stock-based compensation plan and an equity
incentive plan which are more fully described in Note M.
The company adopted SFAS No. 123R, “Accounting
for Stock-Based Compensation,” as revised
(“SFAS 123R”), as of January 1, 2006.
Accordingly, employee stock options granted on or after
January 1, 2006 are expensed by the company over the option
vesting period, based on the estimated fair value of the award
on the date of the grant using the Black-Scholes option-pricing
model. The company previously used the minimum value method as
permitted by SFAS No. 123, Accounting for
Stock-Based Compensation (“SFAS 123”) for pro
forma disclosure purposes and, therefore, as required has
applied the provisions of SFAS 123R on a prospective basis.
Prior to January 1, 2006, the company accounted for options
issued under the plan under the recognition and measurement
provisions of APB Opinion No. 25, Accounting for Stock
Issues to Employees. Under these provisions, stock-based
employee compensation was not reflected in net income in the
accompanying consolidated financial statements as all options
granted under the plan had an exercise price equal to or greater
than the market value of the underlying common stock on the
grant date.
The following methods are used to estimate the fair value of the
company’s 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.
Term loans and the Revolver approximate their fair value as they
bear interest at variable rates indexed to market rates of
interest.
The company enters into certain financial swap and financial
option instruments that are carried at fair value in accordance
with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities
(“SFAS 133”). The company recognizes changes
in fair value within the consolidated statements of income as
they occur (see Note N).
The company does not purchase, hold or sell derivative financial
instruments unless it has an existing asset or obligation or
anticipates a future activity that is likely to occur and will
result in exposing it to market risk. The company uses various
strategies to manage its 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 the company’s primary business
activity. The fair values of derivative instruments are based on
valuations provided by third parties.
The company is exposed to credit loss should counter-parties
with which it has entered into derivative transactions become
unable to satisfy their obligations in accordance with the
underlying agreements. To minimize this risk the company uses
highly rated counter-parties that meet certain requirements.
Cash paid for interest in 2007, 2006 and 2005 approximated
$5,045, $10,151 and $7,777, respectively. Cash paid for income
taxes in 2007, 2006 and 2005 approximated $51,194, $30,817 and
$2,420, respectively.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements
(“SFAS 157”). SFAS 157 defines “fair
value”, establishes a framework for measuring fair value
and expands disclosures about fair value measurements. This
statement does not change existing accounting rules governing
what can or what must be recognized and reported at fair value
in our financial statements, or disclosed in
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the notes to our financial statements. SFAS 157 is
effective for fiscal years beginning after November 15,
2007. The Company does not believe its adoption would have a
material impact on its financial statements.
In February 2007 the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities
(“SFAS 159”). SFAS 159 permits entities
to chose to measure many financial instruments and certain other
items at fair value that are not currently required to be
measured at fair value. This statement does not affect any
existing accounting literature that requires certain assets and
liabilities to be carried at fair value. SFAS 159 is
effective for fiscal years beginning after November 15,
2007. The Company does not believe its adoption would have a
material impact on its financial statements.
Reclassifications
Certain reclassifications have been made to the prior
years’ consolidated financial statements to conform to the
2007 presentation.
On November 30, 2006, the company sold 15,813 shares
of its common stock through a private placement to a combination
of qualified institutional buyers. The shares were sold at a
price of $13.00 per share, less a 7% initial purchaser’s
discount and placement fee. In connection with the private
placement, the company entered into a Securities Repurchase
Agreement with its then existing stockholders and repurchased
13,750 of their shares of common stock of the company on a
pro-rata basis at a price of $12.09 per share. The common stock
repurchase had the effect of reducing Sun Horsehead’s
interest in the company from 92% to 26%. The total expenses
incurred in connection with the transaction aggregated $4,847,
which included $2,056 of the initial purchaser’s discount
that was rebated to the company and subsequently paid to Sun
Horsehead as a transaction fee. Pursuant to a registration
rights agreement entered into in connection with the
aforementioned transaction, the company agreed to file a shelf
registration statement on
Form S-1
with the SEC no later than April 15, 2007 to register for
resale the shares of its common stock sold in the aforementioned
transaction.
In connection with the aforementioned equity offering and stock
repurchase, the following transactions also occurred:
On April 12, 2007, the Company completed the private
placement of 13,974 shares of its common stock at a price
of $13.50, less a 7% initial purchaser’s discount and
placement fee. The net proceeds for the total offering, after
deducting discounts and commissions of $13,205 and other costs
of $1,185, were equal to $174,258. The net proceeds of the
offering, were used to repurchase the 6,213 shares of its
common stock held by its pre-November 2006 stockholders and to
redeem all of the Company’s outstanding warrants.
On August 13, 2007, the SEC declared the Company’s
registration statement on
Form S-1
originally filed by the Company with the SEC on April 13,
2007 (File
No. 333-142113)
effective. The registration statement relates to the resale from
time to time of 29,860 of previously unregistered shares of the
Company’s common stock issued in its November 2006 and
April 2007 private placements. The Company did not receive any
proceeds from the registration of those shares.
On August 15, 2007, the Company completed an initial public
offering of shares of its common stock. The SEC declared the
Registration Statement for the initial public offering (File
No. 333-144295)
effective on August 9,
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
2007. Pursuant to this Registration Statement, the Company
registered a total of 5,597 shares of common stock, of
which it sold 4,581 shares and certain selling stockholders
sold 1,016 shares. The 4,581 shares of common stock
sold by the Company include 410 shares sold pursuant to the
underwriters’ over-allotment option. The 1,016 shares
of common stock sold by the selling stockholders include
320 shares sold pursuant to the underwriters’
over-allotment option. At the public offering price of $18.00
per share, the aggregate price of the shares of common stock
sold by the Company was $82,457 and the aggregate price of the
shares of common stock sold by the selling stockholders was
$18,290. The Company did not receive any proceeds from the sale
of common stock by the selling stockholders. The net proceeds
realized by the Company from the offering, after accounting for
approximately $5,772 in underwriting discounts and commissions
and approximately $1,314 of expenses relating to the offering,
were approximately $75,371. The Company used a portion of the
net proceeds to retire substantially all debt and is using the
remaining proceeds to fund capital improvements and for general
corporate purposes.
Inventories consisted of the following at December 31, 2007
and 2006:
Inventories are net of reserves for slow-moving inventory of
$2,154 and $1,562 at December 31, 2007 and 2006,
respectively. The provisions for slow-moving inventory were
$592, $283 and $0 in 2007, 2006 and 2005, respectively.
Property, plant and equipment consisted of the following at
December 31, 2007 and 2006:
Deferred financing costs of $1,911 and $3,517, were incurred in
2006 and 2005, respectively, in connection with the
company’s Credit Facility and term loans from CIT Group
Business Credit, Inc. as described in Note G. These costs
were being amortized over the terms of the related debt.
Amortization, which is included in interest expense in the
accompanying consolidated statements of income, was $2,506, $968
and $289 in 2007, 2006 and 2005 respectively. The significant
increase in 2007 reflects the write-off of unamortized costs
related to the repayment and cancellation of substantially all
of the outstanding debt as more fully described in Note G.
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Amortization of the costs associated with the remaining credit
facilities will approximate $666 in both 2008 and 2009 and $333
in 2010.
Notes payable, including the Revolver, and long-term debt
consisted of the following at December 31, 2007 and 2006:
On July 15, 2005, the Operating Company and HIC entered
into a $72,000 credit facility (“Credit Facility”)
with certain lenders. The Credit Facility was comprised of a
$45,000 revolving credit facility (“Revolver”)
including a letter of credit sub-line of $35,000 under the terms
of a Financing Agreement with CIT Group/Business Credit, Inc.
(“CIT”), and a $27,000 term note (“Term
Note”) under the terms of a Second Lien Financing Agreement
with Contrarian Service Company, L.L.C. (“Contrarian”).
On October 25, 2006 the Credit Facility was amended to
provide for an additional borrowing availability of $30,000
under the Revolver and for an addition to the Term Note with
Contrarian of $30,000. Borrowings made under this amendment were
used to pay a dividend of approximately $29,001, repay notes
payable to stockholders of $17,370 together with accrued
interest of $2,653, pay a one-time management fee and
re-financing fee totaling $5,500 to an affiliated company (see
Note L) and to make bonus payments of $477 to certain
members of company management. At December 31, 2007 the
Company’s amended Credit Facility consists only of the
$75,000 Revolver as a result of the debt repayments and
cancellations discussed below.
The Revolver requires a lock-box arrangement, which provides for
all receipts to be swept daily to reduce borrowings outstanding
under the credit facility and contains a subjective acceleration
clause in the revolving credit facility. Accordingly, any
outstanding borrowings under the Revolver are classified as a
current liability.
The outstanding borrowings on the Revolver, together with the
outstanding letters of credit, cannot exceed the company’s
borrowing base, which includes eligible receivables,
inventories, and certain other assets. The underlying Financing
Agreement, as amended, calls for interest payable monthly at
either prime (7.25% at December 31, 2007) plus .25% or
LIBOR (4.86% at December 31, 2007) plus 2.5% and
letter of credit fees of 2.5%. The Financing Agreement also
provides for certain covenants, the most restrictive of which
limit indebtedness, sales of assets, dividends, investments,
related party transactions and certain payment restrictions as
well as providing for the maintenance of certain financial
covenants. If an event of default were to occur, the rate on all
obligations owed under the Revolver and other borrowings from
CIT would be increased by 2% per annum. The Revolver expires in
2010. At December 31, 2007 and 2006, the company had
$15,073 and $15,549, respectively, of letters of credit
outstanding to collateralize self insured claims for
workers’ compensation and other general insurance claims
and closure bonds for the company’s two facilities in
Pennsylvania. Availability under the Revolver was $59,927 at
December 31, 2007.
The Financing Agreement was amended in December of 2007. The
amendment raised the limits on the company’s capital
expenditures for fiscal 2007 through 2010.
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Term Note payable to Contrarian provided for interest due
monthly at LIBOR (5.35% at December 31, 2006) plus an
applicable margin (6.875% at December 31, 2006) as
defined in the Second Lien Financing Agreement. In addition,
deferred interest accrued at 1% per annum and was due at
maturity along with the principal amount in October 2010. The
Term Note was repaid and cancelled in 2007.
The company was in compliance with all covenants under the
Financing Agreement at December 31, 2007.
In September 2005, the operating company entered into a $300
term loan with the Beaver County Corporation for Economic
Development. The proceeds of the loan were used to purchase
equipment for the Monaca, Pennsylvania location. The loan is a
five year note with principal and interest payments due monthly
through October 2010. Interest is charged at 3.125% per annum.
The loan requires the company to maintain a minimum number of
employees at the Monaca location.
In April 2006 and December 2005, the operating company entered
into a $5,000 term loan and a $7,290 term note, respectively,
with Sun Horsehead, the controlling stockholder of HHC. The
proceeds of the loans were used to procure put options to serve
as financial hedges for the price of zinc in 2007 and 2006,
respectively (see Note N). The loans bore interest at 10%
per annum. The entire principal and accrued interest balances
were repaid in April and January 2006.
In April and January 2006, the Operating Company entered into
two $7,000 term loans with CIT. The proceeds of the loans were
used to repay the April 2006 and December 2005 Sun Horsehead
notes. The notes bore interest at either prime plus .25% or
LIBOR plus 2.5%. The notes with CIT were repaid and cancelled in
August of 2007.
Substantially all of the company’s assets were pledged as
security under its Credit Facility at December 31, 2007 and
2006.
Aggregate future maturities of long-term debt are as follows:
Accrued expenses at December 31, 2007 and December 31,
2006 consisted of the following:
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The components of income tax provision (benefit) for the years
ended December 31, 2007, 2006 and 2005 are as follows:
The reconciliation between income tax expense and the amount
computed by applying the statutory federal income tax rate of
35% to income before income taxes is as follows:
The components of the company’s net deferred tax asset
(liability) at December 31, 2007 and 2006 are as follows:
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The above deferred tax assets and liabilities at
December 31, 2007 and 2006 have been included in the
company’s consolidated balance sheets as follows:
Refundable income taxes, included in prepaid expenses and other
current assets in the company’s consolidated balance sheets
amounted to $1,328 at December 31, 2006.
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 range from 2003 through 2007.
The company adopted FIN 48 on January 1, 2007. At the
adoption date, the company applied FIN 48 to all tax
positions for which the statute of limitations remained open.
Based on the company’s analysis it concluded that the
application of FIN 48 had no effect on the recorded tax
assets or liabilities of the company. Consequently no cumulative
effect adjustment was recorded as of January 1, 2007. The
company has no unrecognized tax benefits as of December 31,
2007.
Other long-term liabilities consisted of the following at
December 31, 2007 and 2006:
In connection with the acquisition (see Note A), the
company assumed certain liabilities related to environmental
issues cited in a 1995 Consent Decree (the “Consent
Decree”) between Horsehead Industries, Inc. and the United
States Environmental Protection Agency (“EPA”) and the
Pennsylvania Department of Environmental Protection. The Consent
Decree calls for, among other things, the removal of certain
materials containing lead from the company’s Palmerton,
Pennsylvania facility and the construction of a storage building
for calcine feed materials at the Palmerton facility. The
company has reviewed alternatives for meeting these requirements
and as a result, in 2007, it has refined its estimate of the
cost to remove the lead material, half of which was removed in
2007. These environmental obligations were recorded based on the
estimated undiscounted costs required to achieve compliance with
the Consent Decree and totaled $3,208 at December 31, 2007,
of which $1,538 is recorded as a current liability and $7,674 at
December 31, 2006.
Environmental obligations also include estimated post-closure
costs required by the EPA’s Resource Conservation and
Recovery Act (“RCRA”) related to a portion of the
property at the company’s Bartlesville, Oklahoma facility.
This liability was recorded based on the estimated costs
required to achieve compliance with the RCRA. In 2006, a
post-closure permit was issued by the Oklahoma Department of
Environmental Quality which triggered the
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
beginning of a 30 year period of post-closure care. Based
on the company’s annual review of the estimated annual
costs required for the care specified under the permit, the
liability was adjusted in 2007 and 2006 to reflect the
discounted net present value of these costs using an
undiscounted obligation of $1,480 in 2007 and $1,559 in 2006 and
a discount rate of 6%. The environmental obligations related to
Bartlesville totaled $635 at December 31, 2007, of which
$34 is recorded as a current liability and $650 at
December 31, 2006.
Insurance claim liabilities represent the non-current portion of
the company’s liabilities for self-insured retention under
certain insurance policies, primarily related to workers’
compensation. The Company estimates $2,800 of workers’
compensation claims will be paid in 2008 (see Note H).
The company currently recognizes a liability for the present
value of future asset retirement obligations if a reasonable
estimate of the fair value of that liability can be made. The
associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset.
The related depreciation expense for 2007, 2006 and 2005
associated with the capitalized costs was $35, $35 and $48,
respectively, and the related expense (which is included in
interest expense) associated with accreting the liability for
2007, 2006 and 2005 was $87, $81 and $75, respectively.
Employee
related costs
The company entered into a collective bargaining agreement with
the unionized workers at its Monaca, PA facility on
November 13, 2007. The agreement included a signing bonus
to be paid to eligible workers over a fourteen month period.
The company maintains two defined contribution 401(k) plans that
cover substantially all of its employees. Salaried employees are
eligible to enroll upon date of hire and hourly employees are
eligible to enroll one year after their date of hire. Employees
may make elective deferral contributions to the plans subject to
certain plan and statutory limitations.
Effective January 2007, the company modified the salaried
employees plan. In 2007 the company matched 100% of an
employee’s contribution to the plan up to a maximum of 3%
of the first $100 of base wages. The provision for matching
contributions to the plan for 2007 was approximately $258. In
2006, the company matched one-third of employees’
contributions to the plan. The maximum company contribution per
employee was 2% of annual wages up to a maximum wage of $80. The
provision for matching contributions for the salaried employees
plan for 2006 was approximately $132.
In April 2007 the hourly plan for the Palmerton employees was
merged into the plan covering the remaining hourly employees. In
2007 and 2006, the company made contributions to the hourly
employees’ plans in accordance with the provisions of the
various basic labor agreements. The provisions for contributions
for 2007 and 2006 were approximately $902 and $469 respectively.
There were no company contributions during the year ended
December 31, 2005 for any of the plans.
On December 23, 2003, the company entered into a ten year
management services agreement with an affiliated company, Sun
Capital Partners Management III, LLC (“SCPM”). Under
the terms of this agreement, financial and management services
were provided to the company including advice on financial
reporting, accounting,
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
management information systems and staffing. The annual fee for
these services was the greater of $600 or 6% of the
company’s EBITDA, (defined as the sum of net income,
interest expense, income taxes, depreciation and amortization)
with further adjustments for certain extraordinary, nonrecurring
and non-cash transactions as defined in the agreement. For 2006
and 2005, the provisions for such fees were $6,806 and $1,354.
Also, under the terms of the management services agreement, SCPM
was entitled to receive a fee for services provided with respect
to certain corporate events, such as refinancings,
restructurings, equity and debt offerings, and mergers equal to
1% of the aggregate consideration resulting from the
transaction. On July 15, 2005, the company paid $720 to
SCPM in conjunction with the establishment of the Credit
Facility and on October 25, 2006 paid $500 to SCPM in
connection with the amendment to the Credit Facility (see
Note G). Also on October 25, 2006 an additional
one-time fee of $5,000 was paid to SCPM.
On November 22, 2006 the management services agreement with
SCPM was terminated and in accordance with the termination
agreement, a fee of $4,500 was paid by the company to SCPM (see
Note C).
The total expenses included in selling, general and
administrative expenses in the accompanying consolidated
statements of income for the SCPM fees described above are
$16,306 and $1,354 for 2006 and 2005.
In connection with the company’s November 30, 2006
equity offering, a fee of $2,056 was paid to Sun Horsehead (See
Note C).
Sun Horsehead issued a $7,290 term loan to the company in
December 2005 and a $5,000 term loan in April 2006. (see
Note G). The principal and accrued interest balances for
these loans were repaid in 2006.
The company adopted a stock option plan in 2004 (the “2004
Plan”) with subsequent amendments 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. Options granted under the 2004 Plan are
non-qualified stock options within the meaning of
Section 409A of the Internal Revenue Code of 1986, as
amended. The 2004 Plan is administered by a committee designed
by the Board of Directors of the company which makes all
determinations relating to the 2004 Plan including, but not
limited to, those individuals who shall be granted options, the
date each option shall vest and become exercisable, the number
of shares to be subject to each option, and the option price.
All options granted under the 2004 Plan to date are fully vested
due to the change in ownership of the company resulting from the
equity offering and stock repurchase, as described in
Note C, and may be exercised at any time prior to
September 15, 2014. Compensation expense recognized in 2006
was $422.
During 2006 and 2005 options for 120 and 210 shares,
respectively, were granted with exercise prices of $7.39 and
$2.36, respectively. The fair value of each option granted under
SFAS 123R was estimated on the date of the grant using the
Black-Scholes option-pricing model. The Black-Scholes pricing
model was also used for the company’s proforma disclosure
information for periods prior to 2006. The significant
assumptions used in determining value were risk-free interest
rates of 5.11% and 4.17% in 2006 and 2005, respectively;
volatility of 40% for 2006 and 0% for 2005: expected lives of
6.25 years and no expected dividends for 2006 and 2005. In
May 2007 and August 2007, 74 and 320 options were exercised,
respectively. The aggregate intrinsic value at December 31,
2007 of the options outstanding under the 2004 Plan was $9,705.
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following summarizes the activity under the 2004 Plan:
In connection with the November 30, 2006 equity offering
(See Note C), the company entered into an agreement with
the option holders to cancel 20% of the options outstanding.
Under this agreement, the option holders were paid an amount
equal to $12.09 per share, less the applicable option exercise
price. These payments aggregated $2,657 and resulted in a
decrease in additional paid-in capital of $1,601, net of tax.
The following table summarizes the status of options outstanding
at December 31, 2007:
In 2006, the company adopted The Horsehead Holding Corp. 2006
Long-Term Equity Incentive Plan (“the 2006 Plan”)
which provides for grants of stock options, stock appreciation
rights, restricted stock, restricted stock units, deferred stock
units and other equity-based awards. Directors, officers and
other employees of the company, as well as others performing
services for the company, are eligible for grants under the 2006
Plan. The 2006 Plan is administered by the company’s Board
of Directors (“the Board”).
A total of 1,489 shares of the company’s common stock
is available for issuance under the 2006 Plan. 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 company 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.
The following is a summary of the material terms of the 2006
Plan.
Eligibility — Directors, officers and other
employees of the company, as well as other individuals
performing services for the company or to whom the company has
extended an offer of employment, are eligible to receive grants
under the 2006 Plan. However, only employees may receive grants
of incentive stock options.
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Stock Options — The Board may award grants,
subject to certain limitations, of incentive stock options
conforming to the provisions of Section 422 of the Internal
Revenue Code, and other non-qualified stock options.
The exercise price of an option granted under the 2006 Plan may
not be less than fair market value on the date of the grant.
The Board will determine the term of each option in its
discretion. However, no term may exceed ten years from the date
of grant, or, in the case of an incentive option granted to a
person who owns stock representing more than 10% of our voting
power, five years from the date of grant.
Stock Appreciation Rights (“SARs”) —
SARs entitle a participant to receive the amount by which the
fair market value of a share of the company’s common stock
on the date of exercise exceeds the grant price of the SAR. The
grant price and the term of a SAR will be determined by the
Board, except that the grant price of a SAR may not be less than
the fair market value of the shares of the company’s common
stock on the grant date.
Termination of Options and SARs — Options and
SARs under the 2006 Plan, whether or not then exercisable,
generally cease vesting when a grantee ceases to be a director,
officer or employee of, or to otherwise perform services for the
company.
Restricted Stock — The Board may award
restricted stock subject to the conditions and restrictions, and
for the duration, which will generally be at least six months,
that it determines in its discretion. Unless the Board
determines otherwise, all restrictions on a grantee’s
restricted stock will lapse when the grantee ceases to be a
director, officer or employee of, or to otherwise perform
services for the company.
Restricted Stock Units; Deferred Stock Units —
The Board may award restricted stock units subject to the
conditions and restrictions, and for the duration, which will
generally be at least six months, that it determines in its
discretion. Each restricted stock unit is equivalent in value to
one share of common stock and entitles the grantee to receive
one share of common stock for each restricted stock unit at the
end of the vesting period applicable to such restricted stock
unit. Unless the Board determines otherwise, all restrictions on
a grantee’s restricted stock units will lapse when the
grantee ceases to be a director, officer or employee of, or to
otherwise perform services for the company.
Performance Awards — The Board may grant
performance awards contingent upon achievement of specified
performance criteria. Performance awards may include specific
dollar-value target awards, such as performance units, the value
of which is established by the Board at the time of grant,
and/or
performance shares, the value of which is equal to the fair
market value of a share of common stock on the date of grant. A
performance award may be paid in cash
and/or
shares of the company’s common stock or other securities.
Vesting — The terms and conditions of each
award made under the equity incentive plan, including vesting
requirements, will be set forth consistent with the 2006 Plan in
a written agreement with the grantee. Except in limited
circumstances, no award under the 2006 Plan may vest and become
exercisable within six months of the date of grant, unless the
Board determines otherwise.
Amendment and Termination of the Equity Incentive
Plan — The Board may amend or terminate the 2006
Plan in its discretion, except that no amendment will become
effective without prior approval of the company’s
stockholders if such approval is necessary for continued
compliance with applicable stock exchange listing requirements.
Furthermore, any termination may not materially and adversely
affect any outstanding rights or obligations under the 2006 Plan
without the affected participant’s consent. If not
previously terminated by the Board, the 2006 Plan will terminate
on the tenth anniversary of its adoption.
On January 16, 2007, the Board authorized the issuance of
options to purchase 1,085 shares of the company’s
common stock to certain officers and employees of the company
under terms of the 2006 Plan. The exercise price is $13.00 per
share. The options have a term of ten years and vest ratably
over a 5 year period from date of grant.
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Generally, the vested options may be exercised any time after
November 30, 2007 and before the earliest of
January 24, 2017 or the date of the option holder’s
employment termination.
The fair value at the date of grant for these options was $6.28,
as estimated on the date of grant using the Black-Scholes option
pricing model. The significant assumptions used were a risk-free
interest rate of 5.15%, expected volatility of 40%, an expected
life of 6.25 years and no expected dividends. The related
compensation for the year ended December 31, 2007 was
$1,300. Unrecognized compensation expense as of
December 31, 2007 was $5,482. The aggregate intrinsic value
at December 31, 2007 of the options outstanding under the
2006 Plan was $4,288.
At December 31, 2007, there were 1,080 options outstanding,
each with an exercise price of $13.00 per share and
9.04 years of remaining contractual life. During the year 5
options were forfeited.
On June 11, 2007 the Company issued a total of
12 shares of restricted stock under the 2006 Plan to the
three non-employee directors on the board at the time. On
September 27, 2007 the Company issued 2 shares of
restricted stock to a newly appointed non-employee director
under the 2006 Plan. The shares may not be transferred until
they become fully vested on June 11, 2008 and
September 27, 2008, respectively.
The following is a description of the company’s hedging
programs:
The company’s marketing strategy includes a metal hedging
program that allows customers to secure a firm price for future
deliveries under a sales contract. Hedges are entered into based
on firm sales contracts to deliver specified quantities of
product on a monthly basis for terms generally not exceeding one
year. The company’s raw material purchases related to such
firm price contracts are at varying LME-based zinc prices. In
order to protect its cash flow related to firm price sales
contracts, the company enters into fixed-to-variable swap
contracts to convert the LME-based fixed sales price back to
variable. Thus, if raw material costs increase as a result of
LME zinc price increases, the related sales value and related
cash flows will also increase.
The company sells the lead co-product of its EAF dust recycling
operation at varying LME-based lead prices. In June 2007, in
order to offset the fluctuations in its cash flow related to
variable price lead sales contracts, the company entered into
variable-to-fixed swap contracts to convert the LME-based
variable sales price to fixed. Thus, the fluctuations in sales
as a result of LME lead price fluctuations will be offset by a
corresponding fluctuation in the value of the swap contract.
The company recognized expense of $1,298 during 2007 and income
of $2,064 during 2006 from the settlement of such contracts. The
income and expense recognized from the settlement of these
contracts is included as a component of net sales.
At December 31, 2007, approximately $9,359 of future
contracts were outstanding all of which settle at various dates
up to and including October 31, 2008. The fixed portions of
these contracts have settlements prices ranging from $1.05 to
$1.12 for the zinc contracts and $1.30 to $1.34 for the lead
contracts. The fair values at December 31, 2007 of the zinc
and lead contracts totaled approximately $(81) and $(676),
respectively and are included in “Accrued expenses” in
the consolidated balance sheets. Fair value adjustments of
$1,058 for zinc and $676 for lead are included as reductions of
net sales in the accompanying consolidated statements of income
for the year ended December 31, 2007.
At December 31, 2006, approximately $9,326 of future
contracts were outstanding, all of which settled in 2007. The
fixed portion of these contracts had settlement prices ranging
from $1.40 to $1.82 per pound. The fair value of these contracts
at December 31, 2006 totaled approximately $977 which is
included in “Prepaid expenses and other assets” in the
consolidated balance sheets and as a component of net sales in
the accompanying consolidated statements of income.
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The company entered into a contract for forward positions for
specified tons of zinc for each of the months in the fourth
quarter of 2005. The LME monthly settlement price for zinc was
above the forward price for each month, resulting in a payment
by the company of approximately $1,614 which was charged against
net sales during the quarter then ended.
In December 2007, April 2006 and December 2005 the company
purchased put options for specified tons of zinc in 2008, 2007
and 2006, respectively. The cost of the options was $13,290,
$6,932 and $7,290, respectively. They are recorded in
“Prepaid expenses and other assets” on the
consolidated balance sheets. The options settle monthly on an
average LME pricing basis. Through December 31, 2006 the
average LME zinc price exceeded the put option strike price each
month, thus the 2006 options expired with no further financial
requirements by the company. The carrying value of the options
expiring in 2007 was adjusted for the change in their fair
market value during 2006. The unexpired 2007 options were sold
in December, 2006 for their fair market value of $90. The
company recorded a charge to net sales of $3,418 in 2007 and
$14,132 in 2006 related to these options.
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 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.
The company entered into a Consent Order and Agreement with the
Pennsylvania Department of Environmental Protection, dated
June 28, 2006, related to the resolution of fugitive
emission violations at its Monaca facility. Pursuant to the
terms of the Consent Order and Agreement, the company is
obligated to undertake corrective action. Additionally, the
company paid an initial civil penalty of $50 and is obligated to
pay an additional $2.5 per month for 24 months, subject to
extended or early termination.
Basic earnings per common share (“EPS”) is computed by
dividing income available to common stockholders 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.
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The information used to compute basic and diluted earnings per
share follows:
Options to purchase 210 shares of common stock at a price
of $2.36 per share were outstanding at December 31, 2005,
but were not included in diluted earnings per share as their
effect would be anti-dilutive.
The company has operating leases for equipment and railroad cars
which expire at various dates through December 2016. Future
minimum lease payments under these noncancelable operating
leases as of December 31, 2007 are as follows:
Rent expense for all operating leases for 2007, 2006 and 2005
approximated $3,237, $2,760 and $2,013, respectively.
The company entered into an operation and maintenance agreement
with a third party service provider (“the Operator”)
in April 2004. The agreement provided for the Operator to
operate and maintain the company’s coal fired power station
located at the Monaca facility. The company was responsible for
capital expenditures at the
HORSEHEAD
HOLDING CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
facility. Power was provided to the company based on actual 2002
operating costs adjusted for inflation and other factors.
Billings to the company were monthly and were subject to annual
reconciliation by both parties. The gross margin on revenues
from excess power sales were shared by both parties. The
agreement was to expire in 2024.
In June 2006, the company and the Operator negotiated the
termination of the operation and maintenance agreement. As a
result, the agreement was terminated on August 31, 2006 and
the company assumed full control of the power station on
September 1, 2006. The settlement included a termination
payment of $2,000 due to the Operator which was paid in August
2006.
Amounts payable to the Operator related to this agreement
approximated $1,031 at December 31, 2006.
The company has coal supply agreements through 2010 for the coal
requirements of its power plant located in Monaca, Pennsylvania.
The agreement requires the company to purchase up to 420 tons of
coal per year for 2007 and 2008 and 400 tons per year for 2009
and 2010 resulting in purchase commitments of $16,943, $17,173,
$18,600 and $19,000 for 2007, 2008, 2009 and 2010, respectively.
These commitments are subject to adjustment in connection with
the fuel surcharge and other provisions of the agreement. In
2007 the company purchased 375 tons at a total cost, including
fees and fuel surcharges, of $18,107
Schedule I:
Condensed Financial Information of Registrant
HORSEHEAD HOLDING CORP.
CONDENSED BALANCE SHEETS — PARENT COMPANY ONLY
December 31,
2007 and 2006
(Amounts in thousands)
HORSEHEAD
HOLDING CORP.
CONDENSED
STATEMENTS OF OPERATIONS — PARENT COMPANY ONLY
FOR THE
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Amounts in thousands)
See notes to condensed financial statements of the registrant
HORSEHEAD
HOLDING CORP.
CONDENSED
STATEMENTS OF CASH FLOWS — PARENT COMPANY ONLY
FOR THE
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
(Amounts in thousands)
HORSEHEAD
HOLDING CORP.
NOTE 1. The condensed financial
information includes only the financial information for the
Registrant, Horsehead Holding Corp., excluding all of is
consolidated subsidiaries. The schedule is required based upon
the limitations on dividends and distributions that its
subsidiary, Horsehead Corporation (the Operating Company) can
make to the registrant under the terms of its credit facility as
described in Note G to the consolidated financial
statements.
NOTE 2. The registrant received a
dividend from Horsehead Corporation totaling $49.0 million
during fiscal 2006, which was funded with the proceeds of
borrowings on the credit facility described on Note 1 above.
NOTE 3. The registrant completed two
private placements of its common stock in November 2006 and
April 2007 as well as an initial public offering in August 2007.
These transactions are described in Note C to the
consolidated financial statements.
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||
