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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2011

OR

 

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

For the transition period from                     to                     

Commission File Number: 001-33658

 

 

Horsehead Holding Corp.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   20-0447377

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

4955 Steubenville Pike, Suite 405

Pittsburgh, Pennsylvania 15205

  (724) 774-1020
(Address of Principal Executive Offices, including Zip Code)   (Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   x     No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   x     No  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

The number of shares outstanding of the issuer’s common stock as of November 7, 2011 was 43,696,461.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I – Financial Information       
Item 1.   Financial Statements   
  Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010      1   
  Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2011 and 2010      2   
  Consolidated Statement of Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2011      3   
  Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2011 and September 30, 2010      4   
  Notes to Consolidated Financial Statements (Unaudited)      5   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      18   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      33   
Item 4.   Controls and Procedures      34   
PART II – Other Information   
Item 1.   Legal Proceedings      35   
Item 1A   Risk Factors      35   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      35   
Item 3   Defaults Upon Senior Securities      35   
Item 4   (Removed and Reserved)      35   
Item 5.   Other Information      35   
Item 6.   Exhibits      35   

CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report contains forward-looking statements within the meaning of the federal securities laws. These statements relate to analyses and other information, which are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies.

These forward looking statements are identified by the use of terms and phrases such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”, and similar terms and phrases, including references to assumptions. However, these words are not the exclusive means of identifying such statements. These statements are contained in many sections of this report, including “Part I, Item 2. 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 II, Item 1A. Risk Factors”), could affect our future performance and the liquidity and value of our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements made by us or on our behalf: the cyclical nature of the metals industry; decreases in the prices of zinc and nickel-based products; long-term declines in demand for zinc and nickel-based products due to competing technologies or materials; competition from global zinc and nickel manufacturers; our ability to implement our business strategy successfully; our ability to obtain sufficient funds to construct the new zinc facility, including accessing capital markets; our ability to service our debt; our ability to construct and operate the new zinc facility; our ability to realize the projected benefits from the new zinc facility if constructed; work stoppages and labor disputes; material disruptions at any of our manufacturing facilities, including for equipment, power failures or industrial accidents or explosions, including the explosion that occurred at our Monaca, Pennsylvania facility in July 2010; the impact of the Monaca explosion on continuing operations; 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

 

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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 our recent acquisition of Zochem on November 1, 2011 and 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 referenced in the “Risk Factors” section of this report for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.

All forward-looking statements are qualified in their entirety by this cautionary statement, and we undertake no obligation to revise or update this Quarterly Report on Form 10-Q to reflect events or circumstances after the date hereof.

 

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Horsehead Holding Corp. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

September 30, 2011 and December 31, 2010

(Amounts in thousands, except per share amounts)

 

     September 30,
2011
     December 31,
2010
 
     (Unaudited)         
ASSETS      

Current assets

     

Cash and cash equivalents

   $ 250,138       $ 109,557   

Accounts receivable, net of allowance of $1,846 and $1,741, respectively

     56,744         53,075   

Inventories, net

     51,320         50,855   

Prepaid expenses and other current assets

     23,484         16,178   

Deferred income taxes

     6,399         6,090   
  

 

 

    

 

 

 

Total current assets

     388,085         235,755   

Property, plant and equipment, net

     229,201         218,652   

Other assets

     

Intangible assets

     12,477         13,026   

Restricted cash

     2,500         26,399   

Deferred income taxes

     1,984         1,984   

Deferred financing costs, net of accumulated amortization of $77

     3,036         —     

Deposits and other

     12,910         320   
  

 

 

    

 

 

 

Total other assets

     32,907         41,729   
  

 

 

    

 

 

 

Total assets

   $ 650,193       $ 496,136   
  

 

 

    

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY      

Current liabilities

     

Accounts payable

   $ 42,953       $ 39,374   

Accrued expenses

     38,320         26,261   
  

 

 

    

 

 

 

Total current liabilities

     81,273         65,635   

Long-term debt, less current maturities

     78,936         255   

Other long-term liabilities

     17,825         17,501   

Deferred income taxes

     48,262         39,735   

Commitments and contingencies

     

Stockholders’ equity

     

Common stock, par value $0.01 per share; 100,000 shares authorized; 43,696 and 43,468 shares issued and outstanding in 2011 and 2010, respectively

     436         434   

Preferred stock, par value $0.01 per share; 10,000 shares authorized; no shares issued or outstanding

     —           —     

Additional paid-in capital

     231,246         214,406   

Retained earnings

     187,923         153,765   
  

 

 

    

 

 

 

Total stockholders’ equity before noncontrolling interest

     419,605         368,605   

Noncontrolling interest

     4,292         4,405   
  

 

 

    

 

 

 

Total stockholders’ equity

     423,897         373,010   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 650,193       $ 496,136   
  

 

 

    

 

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

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Horsehead Holding Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and nine months ended September 30, 2011 and 2010

(Unaudited)

(Amounts in thousands except per share amounts)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2011     2010     2011     2010  

Net sales of zinc material and other goods

   $ 119,649      $ 67,092      $ 274,598      $ 217,201   

Net sales of nickel-based material and other services

     17,328        13,092        48,886        38,870   

EAF dust service fees

     8,863        10,365        27,361        29,992   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net sales

     145,840        90,549        350,845        286,063   

Cost of sales of zinc material and other goods

     80,623        71,803        229,009        199,816   

Cost of sales of nickel-based material and other services

     9,503        7,799        27,012        24,402   

Cost of EAF dust services

     5,958        5,922        18,210        18,286   

Insurance claim income

     —          —          (10,347     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of sales (excluding depreciation and amortization)

     96,084        85,524        263,884        242,504   

Depreciation and amortization

     5,289        4,430        15,890        13,212   

Selling, general and administrative expenses

     5,734        4,616        15,795        14,306   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     107,107        94,570        295,569        270,022   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     38,733        (4,021     55,276        16,041   

Other income (expense)

        

Interest expense

     (1,751     (308     (2,354     (920

Interest and other income

     914        113        1,434        673   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (837     (195     (920     (247
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     37,896        (4,216     54,356        15,794   

Income tax provision (benefit)

     14,842        (1,863     20,198        5,657   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

   $ 23,054      $ (2,353     34,158      $ 10,137   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share:

        

Basic

   $ 0.53      $ (0.05   $ 0.78      $ 0.23   

Diluted

   $ 0.52      $ (0.05   $ 0.77      $ 0.23   

Weighted average shares outstanding:

        

Basic

     43,696        43,358        43,637        43,346   

Diluted

     44,049        43,358        44,194        43,637   

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

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Horsehead Holding Corp. and Subsidiaries

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the nine months ended September 30, 2011

(Unaudited)

(Amounts in thousands)

 

                   Additional                     
     Common Stock      Paid-In     Retained      Noncontrolling        
     Shares      Amount      Capital     Earnings      Interest     Total  

Balance at December 31, 2010

     43,468       $ 434       $ 214,406      $ 153,765       $ 4,405      $ 373,010   

Restricted stock vesting

     46         —           —          —           —          —     

Stock option exercise

     182         2         2,358        —           —          2,360   

Stock compensation expense.

     —           —           2,280        —           —          2,280   

Net tax benefit of equity award exercise

     —           —           (139     —           —          (139

Distribution to noncontrolling interests

     —           —           —          —           (113     (113

Issuance of Convertible Notes

     —           —           13,101        —           —          13,101   

Equity issuance costs related to issuance of Convertible Notes

     —           —           (760     —           —          (760

Net income

     —           —           —          34,158         —          34,158   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Balance at September 30, 2011

     43,696       $ 436       $ 231,246      $ 187,923       $ 4,292      $ 423,897   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements

 

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Horsehead Holding Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended September 30, 2011 and 2010

(Unaudited)

(Amounts in thousands)

 

     2011     2010  

Cash Flows from Operating Activities:

    

Net income

   $ 34,158      $ 10,137   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     15,890        13,212   

Accretion on ESOI liabilities

     663        680   

Accretion on convertible debt

     516        —     

Amortization of deferred financing costs

     77        —     

Deferred income tax benefit

     (516     (641

(Gains) losses on derivative financial instruments

     (23,217     2,527   

Non-cash compensation expense

     2,280        1,751   

Lower of cost or market adjustment to inventories

     786        —     

Changes in operating assets and liabilities:

    

(Increase) in accounts receivable

     (3,669     (15,057

(Increase) in inventories

     (1,251     (4,603

Decrease in prepaid expenses and other current assets

     5,414        15,359   

Decrease (increase) in other assets

     36        (79

Increase in accounts payable

     3,579        6,187   

Increase in accrued expenses

     9,917        5,846   

(Decrease) increase in other long-term liabilities

     (339     207   
  

 

 

   

 

 

 

Net cash provided by operating activities

     44,324        35,526   

Cash Flows from Investing Activities:

    

Purchase of property, plant and equipment

     (25,877     (31,369

Purchase of INMETCO

     —          (4,567

Decrease in restricted cash

     23,899        214   
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,978     (35,722

Cash Flows from Financing Activities:

    

Payments on notes payable and long-term debt

     —          (48

Proceeds from the issuance of Convertible Notes

     100,000        —     

Debt issuance costs

     (3,113     —     

Equity issuance costs related to issuance of Convertible Notes

     (760     —     

Distribution to noncontrolling interests

     (113     (66

Tax effect of share based compensation award exercise

     (139     (20

Proceeds from exercise of options

     2,360        —     
  

 

 

   

 

 

 

Net cash provided by (used in) by financing activities

     98,235        (134
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     140,581        (330

Cash and cash equivalents at beginning of period

     109,557        95,480   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 250,138      $ 95,150   
  

 

 

   

 

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

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HORSEHEAD HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)

NOTE A—BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Horsehead Holding Corp. and its subsidiaries as of September 30, 2011 and for the three and nine months ended September 30, 2011 and September 30, 2010, have been prepared pursuant to the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2011. The accompanying financial statements include the accounts of Horsehead Holding Corp. and all of its subsidiaries (collectively referred to as “the Company”, “we”, “us” or “our” or similar terms). All intercompany accounts and transactions have been eliminated. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions relate to inventory reserves, bad debt reserves, environmental and asset retirement obligations, workers’ compensation liabilities, reserves for contingencies and litigation and fair value of financial instruments and business acquisitions. Management bases its estimates on the 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.

NOTE B—RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2011, the FASB issued guidance clarifying how to measure and disclose fair value. This guidance amends the application of the “highest and best use” concept to be used only in the measurement of fair value of nonfinancial assets, clarifies that the measurement of the fair value of equity-classified financial instruments should be performed from the perspective of a market participant who holds the instrument as an asset, clarifies that an entity that manages a group of financial assets and liabilities on the basis of its net risk exposure can measure those financial instruments on the basis of its net exposure to those risks, and clarifies when premiums and discounts should be taken into account when measuring fair value. The fair value disclosure requirements also were amended. The Company does not believe that the adoption of the amended guidance will have significant effect on its consolidated financial statements. The amended guidance is effective prospectively for interim and annual periods beginning after December 15, 2011.

In June 2011, the FASB issued guidance eliminating the option to present components of other comprehensive income (“OCI”) in the statement of stockholders’ equity. The new guidance now requires entities to present all nonowner changes in stockholders’ equity either as a continuous statement of comprehensive income or as two separate but consecutive statements. The components of OCI have not changed, nor have the guidance on when OCI items are reclassified to net income; however, the amendments require entities to present all reclassification adjustments from OCI to net income on the face of the statement of comprehensive income. The Company does not believe that the adoption of the amended guidance will have a significant effect on its consolidated financial statements. The amended guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 31, 2011. The amended guidance must be applied retrospectively and early adoption is permitted.

NOTE C—ACQUISITION OF BUSINESS

On December 31, 2009, the Company purchased all of the issued and outstanding capital stock of INMETCO, from Vale Inco Americas Inc. The Company also assumed certain financial assurance obligations associated with environmental regulatory requirements. The final purchase price, after post-closing adjustments, was $38,567 and was settled in the first quarter of 2010.

 

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HORSEHEAD HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)

 

NOTE D—CASH AND CASH EQUIVALENTS

Cash and cash equivalents consisted of the following at September 30, 2011 and December 31, 2010.

 

     September 30,
2011
     December 31,
2010
 

Cash in bank

   $ 225,055       $ 84,549   

Money market demand account

     25,083         25,008   
  

 

 

    

 

 

 
   $ 250,138       $ 109,557   
  

 

 

    

 

 

 

The Company’s cash balance is concentrated in three U.S. banks. The money market demand account carried an interest rate of 0.4% as of September 30, 2011 and December 31, 2010. The balances approximate fair value.

See Footnote H Restricted Cash and Footnote J Long-Term Debt for additional information regarding increases in the Company’s cash in bank balance at September 30, 2011.

NOTE E—INVENTORIES

Inventories consisted of the following at September 30, 2011 and December 31, 2010.

 

     September 30,
2011
     December 31,
2010
 

Raw materials

   $ 15,057       $ 13,202   

Work-in-process

     4,893         7,289   

Finished goods

     17,246         17,486   

Supplies and spare parts

     14,124         12,878   
  

 

 

    

 

 

 
   $ 51,320       $ 50,855   
  

 

 

    

 

 

 

Inventories are net of reserves for slow moving inventory of $3,078 and $2,546 at September 30, 2011 and December 31, 2010, respectively. The significant decline in the average LME price of zinc in the third quarter of 2011 resulted in the Company recording lower of cost or market (“LCM”) adjustments of $786 to its finished goods inventories. No LCM adjustment was recorded during the first nine months of 2010.

NOTE F—PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following at September 30, 2011 and December 31, 2010.

 

     September 30,
2011
     December 31,
2010
 

Refundable income taxes

   $ 7,762       $ 11,762   

Prepaid hedge contracts

     13,705         984   

Other

     2,017         3,432   
  

 

 

    

 

 

 
   $ 23,484       $ 16,178   
  

 

 

    

 

 

 

See Footnote O for additional information regarding prepaid hedge contracts.

NOTE G—PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following at September 30, 2011 and December 31, 2010.

 

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HORSEHEAD HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)

 

     September 30,
2011
    December 31,
2010
 

Land and land improvements

   $ 19,069      $ 18,412   

Buildings and building improvements

     41,017        38,614   

Machinery and equipment

     242,024        229,768   

Construction in progress

     18,902        8,326   
  

 

 

   

 

 

 
     321,012        295,120   

Less accumulated depreciation

     (91,811     (76,468
  

 

 

   

 

 

 
   $ 229,201      $ 218,652   
  

 

 

   

 

 

 

NOTE H—RESTRICTED CASH

Restricted cash is related to the following at September 30, 2011 and December 31, 2010.

 

     September 30,
2011
     December 31,
2010
 

ESOI deferred purchase price obligation

   $ 2,500       $ 3,997   

Letters of credit

     —           21,379   

New Market Tax Credit (“NMTC”)

     —           1,023   
  

 

 

    

 

 

 
   $ 2,500       $ 26,399   
  

 

 

    

 

 

 

The restricted cash relating to the ESOI deferred purchase price obligation is held in third-party managed trust accounts and is invested in money market and other liquid investment accounts.

During the first quarter of 2011, $2,520 was released from restricted cash and transferred to operating cash. This previously restricted cash represented the remaining restricted balance of $1,023, related to the financing and development of the Barnwell, South Carolina site which began operations in April 2010, in accordance with the provisions of the New Markets Tax Credit program and $1,497 related to reduced collateral requirements under the ESOI purchase agreement.

During the third quarter of 2011, $21,379 was released from restricted cash and transferred to operating cash. Restricted cash totaling $2,708 relating to environmental obligations at our Palmerton location was released and replaced by a surety bond. The additional $18,671 in restricted cash was released and replaced with letters of credit under our new $60,000 Revolving Credit and Security Agreement (the “Revolving Credit Agreement”) which was entered into on September 28, 2011. See footnote J for additional information regarding our new Revolving Credit Agreement.

NOTE I— DEPOSITS AND OTHER

Deposits and other at September 30, 2011 and December 31, 2010 consisted of the following:

 

     September 30,
2011
     December 31,
2010
 

Noncurrent hedge contracts

   $ 12,639       $ —     

Other

     271         320   
  

 

 

    

 

 

 
   $ 12,910       $ 320   
  

 

 

    

 

 

 

See Footnote O for additional information regarding noncurrent hedge contracts.

 

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HORSEHEAD HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)

 

NOTE J— LONG-TERM DEBT

Debt at September 30, 2011 and December 31, 2010 consisted of the following:

 

     September 30,
2011
     December 31,
2010
 

Loan payable

   $ 255       $ 255   

$100.0 million 3.80% Convertible Notes due July 2017, net of debt discount

     78,681         —     
  

 

 

    

 

 

 
   $ 78,936       $ 255   
  

 

 

    

 

 

 

The loan payable consists of a $255 loan under the NMTC program. The loan under the NMTC program is an interest-only loan with the principal due at the end of the original seven year term ending June 2016.

Convertible Senior Notes

On July 27, 2011, the Company issued $100,000 of 3.80% Convertible Senior Notes due 2017 (the “Convertible Notes”) in a private placement. The Company received proceeds of $100,000 and recognized $3,481 in issuance costs in connection with the offering. The Company intends to use the proceeds from the offering for the initial stages of construction of the new state-of-the-art zinc and diversified metal production facility under construction in Rutherford County, North Carolina and for general corporate purposes, including working capital needs, investment in business initiatives, capital expenditures and acquisitions.

The Convertible Notes will pay interest semiannually in arrears on July 1 and January 1 of each year, beginning on January 1, 2012, at a rate of 3.80% per annum and will mature on July 1, 2017. The Convertible Notes are convertible into shares of the Company’s common stock, cash, or a combination of the Company’s common stock and cash, at the Company’s election, at an initial conversion rate of .0666667 shares of the Company’s common stock per $1 principal amount of the Convertible Notes (approximately 6,666.67 underlying shares), which is equivalent to an initial conversion price of approximately $15.00 per share of common stock, subject to adjustment in certain circumstances, as defined in the indenture governing the Convertible Notes. The Company has stated that it intends to settle the par value in cash and the conversion spread in either cash, shares or a combination of both.

The Convertible Notes are senior unsecured obligations and will rank senior in right of payment to our future indebtedness that is expressly subordinated in right of payment to the notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness, to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness and other liabilities (including trade payables) of our subsidiaries.

Holders of the Convertible Notes may convert their Convertible Notes at the applicable conversion rate at any time on or after April 1, 2017 until the close of business on the second business day immediately preceding the maturity date. The Notes may be converted prior to April 1, 2017 only under certain circumstances. If the Company undergoes a fundamental change, as defined in the indenture governing the Convertible Notes, holders may require the Company to repurchase for cash all or a portion of their notes at a price equal to 100% of the principal amount of the notes to be repurchased plus any accrued and unpaid interest up to, but excluding the fundamental change repurchase date. The Company does not have the right to redeem the Convertible Notes prior to the stated maturity date of July 1, 2017 and no sinking fund is provided for the Convertible Notes.

In accordance with the guidance under ASC 815-015 Embedded Derivatives and ASC 470-20 Debt with Conversion and other Options, the Company separately accounted for the liability and equity components of the Convertible Notes to reflect the Company’s nonconvertible borrowing rate when interest cost is recognized in subsequent periods. The fair value of the liability component of the Convertible Notes was calculated to be $78,166 and was determined by measuring the fair value of a similar liability that does not have an associated equity component. The nonconvertible rate was determined by the Company to be 8.5%. The carrying amount of the embedded conversion option (the debt discount) of $21,834 was

 

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HORSEHEAD HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)

 

determined by deducting the fair value of the liability component from the initial proceeds of the Convertible Notes and was recorded, net of deferred taxes of $8,733, as additional paid-in capital. The Company is accreting the long-term debt balance to par value over the term of the bonds using the interest method as required by APB Opinion No. 21.

Costs of $3,481 associated with the issuance were allocated to the liability and equity components in proportion to the allocation of the proceeds of the Convertible Notes. As such, $2,721 were accounted for as debt issuance costs attributable to the liability component of the Convertible Notes and were capitalized in the Company’s Consolidated Balance Sheet as a component of other assets. These costs are being amortized to interest expense over the term of the Convertible Notes and are included as a component of interest expense in the Company’s Consolidated Statement of Operations. The Company recognized interest expense of $77 related to the amortization of debt issuance costs for the three and nine months ended September 30, 2011. The remaining issuance costs of $760 were accounted for as equity issuance costs and recorded in additional-paid in capital.

During the three and nine months ended September 30, 2011, the Company recognized $1,202 in interest expense related to the Convertible Notes. Interest expense includes the contractual interest coupon of 3.80% and amortization of the discount on the liability component. This interest expense reflects an effective interest rate of 8.5%.

The carrying amount of the Convertible Notes was $78,681 with an unamortized discount of $21,319 at September 30, 2011. The carrying amount of the equity component was $12,791 at September 30, 2011.

Revolving Credit and Security Agreement

On September 28, 2011, the Company’s subsidiary Horsehead Corporation (“Horsehead”) entered into a Revolving Credit Agreement, as borrower, to support liquidity needs for the Company’s new zinc facility currently under construction in Rutherford County, North Carolina and to allow for the availability of previously restricted cash. Horsehead Holding Corporation also entered into the Revolving Credit Agreement, as guarantor of Horsehead’s obligations.

The Revolving Credit Agreement provides for a five-year senior secured revolving credit facility in an aggregate principal amount of up to $60,000. The aggregate amount of loans permitted to be made under the revolving credit facility may not exceed a borrowing base consisting of the lesser of: (a) $60,000, minus the aggregate undrawn amount of outstanding letters of credit, and (b) the sum of a certain portion of eligible accounts receivable and eligible inventory of Horsehead, minus the aggregate undrawn amount of outstanding letters of credit and certain availability reserves. Up to an aggregate of $30,000 will be available to Horsehead for the issuance of letters of credit, which reduces availability under the revolving credit facility. At September 30, 2011, the Company had $17,781 in letters of credit outstanding under the Revolving Credit Agreement. Horsehead’s obligations under the Revolving Credit Agreement are secured by a first priority lien (subject to certain permitted liens) on substantially all of the tangible and intangible assets of Horsehead. At September 30, 2011, there were no outstanding borrowings under the Revolving Credit Agreement. Undrawn availability under the Revolving Credit Agreement was $36,707 at September 30, 2011.

Borrowings by Horsehead under the Revolving Credit Agreement will bear interest at a rate per annum which, at the option of Horsehead, can be either: (a) a domestic rate equal to the “alternate base rate,” as determined under the Revolving Credit Agreement, plus an applicable margin (ranging from 0.25% to 1.00%) based on average undrawn availability, or (b) a eurodollar rate equal to the “eurodollar rate,” as determined under the Revolving Credit Agreement, plus an applicable margin (ranging from 1.75% to 2.50%) based on average undrawn availability. Horsehead will pay a letter of credit fee to the lenders under the Revolving Credit Agreement ranging from 1.75% to 2.50%, based on average undrawn availability, and a fronting fee to the issuing bank equal to 0.25% per annum on the average daily face amount of each outstanding letter of credit, as well as certain other related charges and expenses.

The Revolving Credit Agreement contains customary events of default. During an event of default, if the agent or lenders holding greater than 66 2/3% of the advances under the facility so elect, the interest rate applied to any outstanding obligations will be equal to the otherwise applicable rate (including the highest applicable margin) plus 2.0% and any letter of credit fees will be increased by 2.0%. Upon (a) the occurrence of an event of default related to the bankruptcy of Horsehead or Horsehead Holding Corporation or (b) at the option of lenders holding greater than 66 2/3% of the advances under the facility, the occurrence of any other event of default, all obligations under the Revolving Credit Agreement will become immediately due and payable.

 

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HORSEHEAD HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)

 

Horsehead will pay an unused line fee to the lenders under the Revolving Credit Agreement ranging from 0.25% to 0.375% per annum, based on average undrawn availability, times the amount by which the maximum revolving advance amount exceeds the average daily unpaid balance of revolver loans and undrawn amount of any outstanding letters of credit during any calendar quarter.

The Revolving Credit Agreement contains a minimum fixed charge coverage ratio of 1.15:1.00 which Horsehead must comply with in the event that undrawn availability is less than or equal to $10,000 on any business day or is less than or equal to $12,500 for any consecutive five business days. The Revolving Credit Agreement also contains customary restrictive negative covenants as well as customary reporting and other affirmative covenants. The Company was in compliance with all covenants at September 30, 2011.

The Company incurred issuance costs of $392 in connection with the Revolving Credit Agreement. These costs were capitalized in the Company’s Consolidated Balance Sheet as a component of other assets. The issuance costs will be amortized to interest expense over the term of the Revolving Credit Agreement. No interest expense was recorded related to the amortization of deferred finance costs for the three or nine months ended September 30, 2011.

Other

At September 30, 2011, the Company had $17,781 of letters of credit outstanding under the new $60,000 Revolving Credit Agreement to collateralize self-insured claims for workers’ compensation and other general insurance claims and to collateralize closure bonds for two of the Company’s three facilities located in Pennsylvania. The Company also has a surety bond outstanding in the amount of $2,579 to collateralize a closure bond for the Company’s third facility located in Pennsylvania. At December 31, 2010, the Company had $20,360 of letters of credit outstanding relating to these obligations which was collateralized by restricted cash of $21,379.

NOTE K—ACCRUED EXPENSES

Accrued expenses at September 30, 2011 and December 31, 2010 consisted of the following.

 

     September 30,
2011
     December 31,
2010
 

Employee related costs

   $ 8,152       $ 8,877   

EAF dust processing reserve

     4,143         4,826   

Workers’ compensation insurance claim liabilities

     2,400         2,400   

Unearned tolling revenue

     1,598         1,872   

Income taxes payable

     14,980         1,461   

Accrued hedge contracts

     2,143         —     

Other

     4,904         6,825   
  

 

 

    

 

 

 
   $ 38,320       $ 26,261   
  

 

 

    

 

 

 

NOTE L—OTHER LONG-TERM LIABILITIES

Other long-term liabilities at September 30, 2011 and December 31, 2010 consisted of the following.

 

     September 30,
2011
     December 31,
2010
 

Environmental obligations

   $ 641       $ 2,141   

Insurance claim liabilities

     7,691         6,628   

Asset retirement obligations

     3,008         2,861   

Deferred asset purchase price obligations

     6,037         5,374   

Other

     448         497   
  

 

 

    

 

 

 
   $ 17,825       $ 17,501   
  

 

 

    

 

 

 

 

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HORSEHEAD HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)

 

Environmental obligations

We assumed certain of HII’s environmental liabilities related to our Palmerton, Pennsylvania operations pursuant to a 1995 Consent Decree between HII, the EPA and PADEP. Our obligations pursuant to this consent decree include construction of a storage building for calcine kiln feed materials and the removal of historic accumulations of lead concentrate from three buildings. Removal of historic accumulations of lead concentrate was completed in 2008. We believe our obligations under the consent decree are currently being managed in accordance with the requirements of the regulatory agencies and were reserved for on our balance sheet in the amount of approximately $1.5 million at December 31, 2010. The PADEP recently concurred with our assessment that construction of the storage building for calcine feed was not necessary in light of the material management practices employed at the Palmerton, Pennsylvania facility which comply with applicable environmental regulations for the facility. The reserve for $1.5 million formerly established on our balance sheet was removed during the second quarter of 2011.

NOTE M—INCOME TAXES

The Company’s effective tax rates were 39.2% and 37.2% for the three and nine months ended September 30, 2011, respectively and 44.2% and 35.8% for the three and nine months ended September 30, 2010, respectively. The provision or benefit for income taxes differs from the tax provision or benefit computed by applying the U.S. statutory federal income tax rate applied to net income before income taxes due primarily to state income taxes.

The Company and its subsidiaries file income tax returns in the U.S. and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The tax years that remain subject to examination range from 2007 through 2010.

NOTE N—STOCK-BASED COMPENSATION

The Company adopted a stock option plan in 2004 (as amended, the “2004 Plan”) which was amended and restated in December 2005 and November 2006. The 2004 Plan provides for the granting of options to acquire shares of common stock of the Company to key employees of the Company and its subsidiaries. A total of 1,685 shares are authorized and reserved for issuance under the 2004 Plan. All options granted under the 2004 Plan to date are fully vested due to the change in ownership of the Company in November 2006. The options may be exercised at any time prior to September 15, 2014. In the first nine months of 2011, no options were forfeited. At September 30, 2011, there were 138 options outstanding, with an average exercise price of $1.01 per share and 2.90 years of remaining contractual life. The aggregate intrinsic value at September 30, 2011 of the options outstanding under the 2004 Plan was $885.

In 2006, the Company adopted the Horsehead Holding Corp. 2006 Long-Term Equity Incentive Plan, which was amended and restated on June 11, 2007 (the “2006 Plan”) and which provides for grants of stock options, stock appreciation rights, restricted stock, restricted stock units, deferred stock units and other cash- or equity-based awards. Directors, officers and other employees of the Company, as well as others performing services for the Company, are eligible for grants under the 2006 Plan. The 2006 Plan is administered by the compensation committee of the Company’s Board of Directors (the “Committee”).

 

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HORSEHEAD HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)

 

A total of 1,489 shares of the Company’s common stock were initially authorized for issuance under the 2006 Plan, which amount increases annually by an amount equal to 1% of the number of shares on the Company’s common stock outstanding or such lesser amount determined by the Company’s Board of Directors (the “Board”). The number of shares available for issuance under the 2006 Plan is subject to adjustment in the event of a reorganization, stock split, merger or similar change in the corporate structure or the outstanding shares of common stock. In the event of any of these occurrences, the Committee may make any adjustments considered appropriate to, among other things, the number and kind of shares, options or other property available for issuance under the 2006 Plan or covered by grants previously made under the 2006 Plan. The shares available for issuance under the 2006 Plan may be, in whole or in part, authorized and unissued or held as treasury shares.

On January 16, 2007, the Board authorized the issuance of options to purchase 1,085 shares of the Company’s common stock to certain officers and employees of the Company under the 2006 Plan. The exercise price is $13.00 per share. The options have a term of ten years and vest ratably over a five-year period from date of grant. Generally, the vested options may be exercised any time after November 30, 2007 and before the earlier of January 24, 2017 or the date of the option holder’s employment termination.

At September 30, 2011, there were 658 options outstanding, each with an exercise price of $13.00 per share and 5.29 years of remaining contractual life. The related compensation expense for the three and nine months ended September 30, 2011 was $306 and $918, respectively. For the three and nine months ended September 30, 2010, the compensation expense was $238 and $893, respectively. Unrecognized compensation expense as of September 30, 2011 was $357. As of September 30, 2011, 490 options were vested and fully exercisable. In the first nine months of 2011, no options were forfeited. The options had no intrinsic value at September 30, 2011 since the exercise price was lower than the stock price.

In the first nine months of 2011, the Company granted a total of 240 restricted stock units at an average grant date fair value of $13.20 per unit. The units vest over a one or five year service period. Upon vesting, the underlying stock will be issued for par value. The related compensation expense for the three and nine months ended September 30, 2011 was $412 and $1,363, respectively. For the three and nine months ended September 30, 2010, the compensation expense was $321 and $858, respectively. Unrecognized compensation expense as of September 30, 2011 was $4,624. As of September 30, 2011, there were 732 restricted stock units outstanding. The remaining contractual life ranged from 0.25 years to 4.42 years at September 30, 2011. The aggregate intrinsic value at September 30, 2011 of the outstanding restricted stock units was $5,429.

NOTE O—ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company’s business consists principally of the sale of zinc and nickel-based products. As a result, its results of operations are subject to risk of fluctuations in the market prices of these metals. While the Company’s finished products are generally priced based on a spread to the price of zinc or nickel, as applicable, on the London Metal Exchange (“LME”), its revenues are impacted significantly by changes in the market prices of these metals. The Company pursues various hedging strategies as described below to reduce its exposure to movements in the price of zinc, copper, lead and nickel.

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 zinc and copper prices that are based on the LME. In order to protect its cash flow related to firm price sales contracts, the Company enters into fixed-to-variable swap contracts to convert the LME-based fixed sales price back to variable. Thus, if raw material costs increase as a result of LME zinc or copper price increases, the related sales value and related cash flows will also increase. As of September 30, 2011, the fixed portions of these contracts ranged from a monthly average of $0.90 per pound to $0.97 per pound for zinc and $3.91 to $4.10 per pound for copper.

The Company entered into variable-to-fixed swap contracts as a financial hedge of a portion of its exposure to the movements in the LME prices of lead and nickel. For instance, under an agreement, the Company manages the lead co-product of its EAF dust recycling operation by providing it to a lead smelter as a feedstock for the production of lead. The related costs under this agreement are similarly affected by the LME lead price fluctuations. As of September 30, 2011, the fixed portion of the swap contracts ranged from a monthly average of $1.16 per pound to $1.22 per pound for lead and $11.23 to $11.83 per pound for nickel.

 

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HORSEHEAD HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)

 

The Company hedged approximately 1.5 tons of lead and nickel with variable-to-fixed future swap contracts and approximately 10.3 tons of zinc and copper with fixed-to-variable future swap contracts at September 30, 2011, all of which settle at various dates up to and including March 31, 2013. The Company received cash of $358 and $719, respectively, from the settlement of such contracts for the three and nine months ended September 30, 2011. The Company received cash of $439 and $741, respectively, from the settlement of such contracts for the three and nine months ended September 30, 2010.

In 2009, the Company purchased options for approximately 100 tons of zinc for 2010. The cost of the options was $5,276 and the strike price was $0.65 per pound. At the time of the purchases, the options represented approximately 80% of the Company’s anticipated sales volume for 2010. In 2010, the Company purchased put options for 2011 having a strike price of $0.65 per pound for approximately 99 tons of zinc at a cost of $3,005. The Company also sold put options for 2011 having a strike price of $0.55 per pound for approximately 35 tons of zinc and received $230. The options purchased provide that the Company will receive a minimum of $0.65 per pound for the quantity hedged and the options sold provide that the buyer will receive a minimum of $0.55 per pound for the quantity hedged. The options settle monthly on an average LME pricing basis. For the three and nine months ended September 30, 2011 and 2010, the average LME zinc prices were above the strike prices for the contracts. Consequently, they expired with no settlement payment due the Company. All of the options were purchased to act as a financial hedge and to lend stability to the Company’s revenue stream.

In June 2011, the Company entered into call and put option hedging arrangements for zero net premiums paid that will provide it with minimum, maximum and capped zinc prices per pound of $0.85, $1.20, and $1.81, respectively, The hedges reduced its exposure to future declines in zinc prices below the minimum price. We will not be able to participate in increases in zinc prices beyond the maximum price until the capped zinc price is reached. The hedges cover approximately 160 tons of zinc production, which represents approximately 75% of the expected shipments for the period from January 2012 through June 2013. The Company put these hedges in place to help support its liquidity needs during the construction of the new zinc facility and to help support its growth initiatives.

The gains and losses resulting from the Company’s hedging activities are recorded in the Consolidated Statements of Operations as indicated in the table below.

 

     Three months ended September 30,     Nine months ended September 30,  
     2011     2010     2011     2010  

Gains (losses) included in net sales:

        

Options

   $ 39,020      $ (3,844   $ 23,256      $ (1,959

Swaps

     (1,008     1,097        (46     (130
  

 

 

   

 

 

   

 

 

   

 

 

 
     38,012        (2,747   $ 23,210        (2,089
  

 

 

   

 

 

   

 

 

   

 

 

 

Gains (losses) included in cost of sales:

        

Swaps

     799        (184     727        303   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gains (losses) resulting from hedging activities

   $ 38,811      $ (2,931   $ 23,937      $ (1,786
  

 

 

   

 

 

   

 

 

   

 

 

 

The fair value of the swap contracts and put options as of September 30, 2011 and December 31, 2010 are listed in the table below.

Fair Value Measurements Using Significant Other Observable Inputs (Level 2)

 

     September 30,
2011
     December 31,
2010
 

Options and swaps included in Prepaid expenses and other assets

   $ 13,705       $ 984   
  

 

 

    

 

 

 

Options and swaps included in Deposits and other

   $ 12,639       $ —     
  

 

 

    

 

 

 

Swaps included in Accrued expenses

   $ 2,143       $ —     
  

 

 

    

 

 

 

The fair values of derivative instruments are based upon a comparison of the Company’s internal valuations to the valuations provided by third parties with which they have entered into substantially identical derivative contracts. The Company also compares the valuations to ensure that there is an acceptable level of consistency among them. The put option valuations utilize forward pricing and an implied volatility of the underlying commodity as well as interest rate forwards and are therefore subject to fluctuation based on the movements of the commodity markets. The swap valuations are based on the

 

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HORSEHEAD HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)

 

official LME closing valuations at the end of the trading day on September 30, 2011 and December 31, 2010, using the mid-point of the closing bid and ask prices on all open swap positions regardless of the holder. The closing prices are supervised by the London Clearing House and are regulated by the Financial Services Authority, the financial regulatory body in the United Kingdom.

The Company is exposed to credit loss in cases where counter-parties with which they have entered into derivative transactions are unable to pay the Company when they owe the Company funds as a result of agreements with them. To minimize the risk of such losses, the Company utilizes LME-registered contracts entered into with the London Clearing House for a majority of their contracts. The Company does not require collateral and does not enter into master netting arrangements The clearing agent for the majority of the Company’s hedges has been MF Global UK Ltd, a U.K. affiliate of MF Global. As has been widely reported, MF Global Holdings Ltd. and MF Global Finance USA filed for U.S. bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code last week, and a special administration order was issued in the United Kingdom in respect of MF Global UK Limited, appointing partners of KPMG LLP as joint administrators responsible for managing its business. While there are many uncertainties surrounding the impact of last week’s bankruptcy filing on the Company, the Company currently believes that their LME-registered hedging contracts, which includes all of their put and call options for 2012 and 2013, can be transferred to alternate clearing members of the London Clearing House without any loss to the Company. The Company is actively pursuing the transfer of these contracts and is closely monitoring this situation.

NOTE P—CONTINGENCIES

The Company is subject to federal, state and local laws designed to protect the environment and believes that as a general matter, its policies, practices and procedures are properly designed to reasonably prevent risk of environmental damage and financial liability to the Company.

The Company is party to various litigation, claims and disputes, including labor regulation claims and Occupational Safety and Health Act (“OSHA”) and environmental regulation violations, some of which may be for substantial amounts, arising in the ordinary course of business. While the ultimate effect of such actions cannot be predicted with certainty, the Company expects that the outcome of these matters will not result in a material adverse effect on its business, financial condition or results of operations.

NOTE Q—EARNINGS PER SHARE

Basic earnings (loss) per common share (“EPS”) is computed by dividing net income or loss 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 potentially dilutive common shares had been issued. The Company uses the treasury stock method when calculating the dilutive effect in basic EPS.

Diluted EPS for periods with a net loss is calculated by dividing the net loss by the weighted average number of basic shares outstanding.

 

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HORSEHEAD HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)

 

The information used to compute basic and diluted earnings (loss) per share is as follows:

 

     Three months ended September 30,     Nine months ended September 30,  
     2011      2010     2011      2010  

Basic earnings (loss) per share:

          

Net income (loss)

   $ 23,054       $ (2,353   $ 34,158       $ 10,137   

Weighted average shares outstanding – basic

     43,696         43,358        43,637         43,346   

Basic earnings (loss) per share

   $ 0.53       $ (0.05   $ 0.78       $ 0.23   
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted earnings (loss) per share:

          

Net income (loss)

   $ 23,054       $ (2,353   $ 34,158       $ 10,137   

Weighted average shares outstanding – diluted

     44,049         43,358        44,194         43,637   

Diluted earnings (loss) per share

   $ 0.52       $ (0.05   $ 0.77       $ 0.23   
  

 

 

    

 

 

   

 

 

    

 

 

 

Reconciliation of average shares outstanding – basic to average shares outstanding – diluted:

          

Weighted average shares outstanding – basic

          

Effect of dilutive securities:

     43,696         43,358        43,637         43,346   

Options

     81         —          257         88   

Restricted stock units

     272         —          300         203   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average shares outstanding – diluted

     44,049         43,358        44,194         43,637   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     Exercise      Three months ended September 30,      Nine months ended September 30,  
     Price      2011      2010      2011      2010  

Anti-dilutive shares excluded from earnings per share calculation

              

Options

   $ 13.00         658         1,020         658         1,020   

Options

   $ 1.01         —           151         —           —     

Restricted Stock Units

        —           614         —           —     
     

 

 

    

 

 

    

 

 

    

 

 

 

Total

        658         1,785         658         1,020   
     

 

 

    

 

 

    

 

 

    

 

 

 

On July 27, 2011, the Company issued $100,000 of Convertible Notes. The Convertible Notes are convertible at a conversion price of approximately $15.00 per share into cash, shares or a combination of both at the Company’s election. According to guidance under ASC 260 Earnings Per Share, if an entity issues a contract that may be settled in common stock or cash at the election of the entity or holder, then it is presumed that the contract will be settled in shares unless past experience or a stated policy provides a reasonable basis to believe that the contract will be paid partially or wholly in cash and the if converted method shall not be used. The Company has stated that it intends to settle the par value in cash and the conversion spread in either cash, shares or a combination of both. The Company will utilize the modified treasury stock method and assume dilution if the average stock price for the quarter exceeds the conversion price. The share dilution will be calculated by dividing the conversion spread value by the average share price for the quarter. During the third quarter of 2011, the average stock price was lower than the exercise price for the Convertible Notes and therefore no conversion spread was recognized and no dilution assumed.

NOTE R—SEGMENT INFORMATION

The following table presents information regarding the Company’s segment information:

 

     Three months ended September 30, 2011      Three months ended September 30, 2010  
     Horsehead
Corporation
     INMETCO      Other     Total      Horsehead
Corporation
    INMETCO      Other     Total  

Net sales

     128,758         17,328         (246     145,840         77,727        13,092         (270     90,549   

Income (loss) before income taxes

     31,305         6,591         —          37,896         (7,836     3,620         —          (4,216

 

     Nine Months ended September 30, 2011      Nine Months ended September 30, 2010  
     Horsehead
Corporation
     INMETCO      Other     Total      Horsehead
Corporation
     INMETCO      Other     Total  

Net sales

     302,699         48,886         (740     350,845         247,894         38,870         (701     286,063   

Income before income taxes

     36,940         17,416         —          54,356         5,865         9,929         —          15,794   

 

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HORSEHEAD HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)

 

NOTE S—MONACA, PENNSYLVANIA ACCIDENT INSURANCE RECOVERY

On July 22, 2010, an explosion occurred at the Company’s Monaca, PA facility which resulted in the complete shutdown of the plant’s refinery operations. Each of the 10 columns used to produce zinc oxide and refined zinc metal in the refining facility was rebuilt. Production operations resumed late in 2010 as these repairs were completed. The Company pursued recovery of the cost of repairs, lost profit and other losses from its zinc oxide and refined metal production during the rebuilding period, subject to customary deductibles, under the Company’s business interruption and property insurance. As of March 31, 2011, the Company incurred $17,902 in clean-up, repair and other costs associated with the explosion. The Company submitted a claim totaling $33,831 and reached a final settlement in the amount of $29,614 in the first quarter of 2011.

The Company had recorded insurance recovery of $19,267 at December 31, 2010, of which $14,276 related to business interruption and $4,991 related to property damage. The estimated allocation of the remaining settlement of $10,347 was $3,248 for business interruption and $7,099 for property damage.

As of September 30, 2011, the entire insurance recoveries of $29,614 were received in cash.

The costs and insurance recoveries are summarized in the table below.

 

Total insurance recovery at December 31, 2010

   $
 
 
(19,267)
  
  

Insurance recovery recognized during the three months ended March 31, 2011

     (10,347)   
  

 

 

 

Final insurance settlement

     (29,614)   
     Three Months ended
March 31, 2011
 

Insurance recovery recognized during the three months ended March 31, 2011

     (10,347)   

Cost of clean-up and repairs included in cost of sales of zinc material and other goods

     982   
  

 

 

 

Income related to insurance recovery included in cost of sales (excluding depreciation and amortization)

     (9,365)   

Selling, general and administrative expenses

     69   
  

 

 

 

Income related to insurance recovery

   $ (9,296)   
  

 

 

 

Costs included in finished goods inventories

   $ 170   

Costs capitalized

   $ 282   

 

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HORSEHEAD HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands except per share amounts)

 

NOTE T—SUBSEQUENT EVENT

On November 1, 2011, a newly formed Canadian subsidiary of the Company acquired all of the outstanding shares of Zochem Inc, a zinc oxide producer located in Brampton, Ontario, for a cash purchase price of $15,000. This acquisition will broaden the Company’s geographic reach, provide added flexibility, and allow the Company to diversify the technologies used to produce zinc oxide for customers. The Company plans to continue to operate its current zinc oxide production facilities.

 

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

General

This discussion should be read in conjunction with the Notes to Consolidated Financial Statements included herein and the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, which was filed with the SEC on March 16, 2011.

Overview

Our History

We are a leading U.S. producer of zinc and nickel-based products. Our products are used in a wide variety of applications, including in the galvanizing of fabricated steel products and as components in rubber tires, alkaline batteries, paint, chemicals, pharmaceuticals and as a remelt alloy in the production of stainless steel. We believe that we are the largest refiner of zinc oxide and Prime Western zinc metal in North America. We believe we are also the largest North American recycler of EAF dust, a hazardous waste produced by the carbon steel mini-mill manufacturing process. Through our INMETCO operations, we believe we are also a leading recycler of EAF dust and other nickel-bearing waste generated by specialty steel producers and a leading recycler of nickel-cadmium batteries in North America. We, together with our predecessors, have been operating in the zinc industry for more than 150 years and in the nickel-bearing waste industry for more than 30 years. We operate as two business segments.

While we vary our raw material inputs, or feedstocks, based on cost and availability, we generally produce our zinc and nickel-based products using nearly 100% recycled materials, including metal recovered from our EAF dust and nickel-bearing waste recycling operations. We believe that our ability to convert recycled zinc into finished products results in lower feed costs than for smelters that rely primarily on zinc concentrates. Our EAF dust recycling facilities also generate service fee revenue from steel mini-mills by providing a convenient and safe means for recycling their EAF dust. We began production at our new EAF dust processing facility located in South Carolina in 2010. INMETCO provides recycling services, some of which is on a tolling basis, from a single production facility in Ellwood City, Pennsylvania.

Strategic Investments

During the first quarter of 2011, we announced the completion of a preliminary feasibility study to construct a new zinc plant capable of producing in excess of 150,000 tons per year based on state-of-the-art “green” technology. We believe the new plant, once operational, will enable us to produce zinc at much lower costs, to significantly reduce air emissions and to provide opportunities for us to serve the broader market for special high grade zinc and the continuous galvanizing market, in addition to our traditional zinc markets. Total capital expenditures for the construction of the new zinc facility are currently estimated to range from $350 million to $375 million. During the third quarter of 2011, we announced that the new zinc plant will be constructed in Rutherford County, North Carolina. Site preparation work has begun along with preliminary permitting activities as engineering is underway. We continue to target startup of the new plant by the third quarter of 2013.

Recent Developments

On July 27, 2011, we issued $100.0 million of 3.80% Convertible Senior Notes due 2017 (the “Convertible Notes”) in a private placement. We received proceeds of $100.0 million and recognized approximately $3.5 million in issuance costs in connection with the offering. On September 28, 2011, we entered into a $60.0 million Revolving Credit Agreement to support our liquidity needs during construction and to allow for the availability of previously restricted cash. We were able to release $18.7 million of restricted cash which was replaced with $17.8 million in letters of credit under the Revolving Credit Agreement. We intend to use the proceeds from the offering and availability under the credit facility, together with cash on hand, for the initial stages of construction of the new zinc facility in North Carolina and general corporate purposes, including working capital needs, investment in business initiatives, capital expenditures and acquisitions.

We disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, which was filed with the SEC on March 16, 2011, that six of our seven union labor contracts were set to expire during 2011. During 2011, we negotiated new multi year contracts with four of the six unions. During the nine months ended September 30, 2011, we recorded in cost of sales a one time charge of approximately $2.3 million relating to signing bonuses for three of these contract renewals. In mid September 2011, we temporarily idled the Monaca, Pennsylvania power plant. We had extended that labor contract through mid September 2011. The remaining labor contract expires in December of 2011 and covers three employees.

 

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Economic Conditions and Outlook

Our quarterly zinc product shipment levels for the three months ended September 30, 2011 decreased from the quarterly shipment levels for the first two quarters of 2011. The decrease reflects production difficulties at the Monaca smelter which reduced metal production. These production issues were resolved by the end of the third quarter. Our zinc smelting facility operated at near-capacity during the first nine months of 2011. During the three months ended September 30, 2011, we began a series of planned major maintenance outages at our recycling facilities to assure the long term reliability of those units. We took the equivalent of 92 kiln days of outages during the third quarter. We expect economic growth will remain sluggish in the near future.

Factors Affecting Our Operating Results

Market Price for Zinc and Nickel. Since we generate the substantial majority of our net sales from the sale of zinc and nickel-based products, our operating results depend greatly on the prevailing market price for zinc and nickel. Our principal raw materials are zinc extracted from recycled EAF dust, for which we receive revenue from the carbon steel mini-mill companies, and other zinc-bearing secondary materials (“purchased feedstock” or “purchased feed”) that we purchase from third parties. Costs to acquire and recycle EAF dust, which, during the first nine months of 2011, represented approximately 73% of our raw materials, are not impacted significantly by fluctuations in the market price of zinc on the LME. However, the cost for the remaining portion of our raw materials is directly impacted by changes in the market price of zinc. The price of our finished products is also impacted directly by changes in the market price of zinc and nickel, which can result in rapid and significant changes in our monthly revenues. Zinc prices experienced a period of general decline between 2000 and 2003, primarily due to increased exports from China and declines in global zinc consumption. During 2004, however, zinc prices began to recover, primarily due to increases in global zinc demand, including in China, and to declines in global production due to closed or permanently idled zinc mining and smelting capacity. Monthly average zinc prices rose throughout 2005 and 2006 and then began a steady decline through 2008, which was particularly sharp in the fourth quarter of 2008. Monthly average zinc prices began to gradually strengthen in 2009 and continued to strengthen through the first quarter of 2011. The monthly average zinc prices began a steady decline during the second and third quarter of 2011, reaching its lowest level during the month of September.

Average monthly, daily and yearly LME zinc prices for the years 2004 through 2010 and the nine months ended September 30, 2011 were as follows:

 

LME Zinc Prices    2004      2005      2006      2007      2008      2009      2010      Nine months ended
September 30,
2011
 

Monthly Average

                       

High

   $ 0.54       $ 0.83       $ 2.00       $ 1.74       $ 1.14       $ 1.08       $ 1.10       $ 1.12   

Low

   $ 0.44       $ 0.54       $ 0.95       $ 1.07       $ 0.50       $ 0.50       $ 0.79       $ 0.94   

Daily High

   $ 0.58       $ 0.86       $ 2.08       $ 1.93       $ 1.28       $ 1.17       $ 1.20       $ 1.15   

Daily Low

   $ 0.43       $ 0.53       $ 0.87       $ 1.00       $ 0.47       $ 0.48       $ 0.72       $ 0.84   

Average per year

   $ 0.48       $ 0.63       $ 1.48       $ 1.47       $ 0.85       $ 0.75       $ 0.98       $ 1.04   

For 2010, LME average nickel prices ranged from $8.36 per pound to $11.81 per pound and averaged $9.89 per pound. For the nine months ended September 30, 2010, LME nickel prices ranged from $8.36 per pound to $11.81 per pound and averaged $9.62 per pound. For the nine months ended September 30, 2011, LME average nickel prices ranged from $8.13 per pound to $13.17 per pound and averaged $11.04 per pound. Nickel prices began a steady decline in the third quarter reaching its lowest price of 2011 during the final weeks of September.

In 2010, we purchased put options for 2011 to serve as a hedge and to mitigate the effects of decreases in the LME average zinc price. Through the purchase of the options, we will receive a minimum price per pound for the quantity hedged. We purchased put options for approximately 99,000 tons of zinc for 2011 having a strike price of $0.65 per pound. The purchases represent approximately 70% of our expected zinc production in 2011. We also sold put options for approximately 35,000 tons of zinc for the last six months of 2011 having a strike price of $0.55 per pound. The options we purchased provide that we will receive a minimum of $0.65 per pound for the quantity hedged and the options we sold provide that the buyer will receive a minimum of $0.55 per pound for the quantity hedged. The cost of the options purchased was $3.0 million and the cost of the options sold was $0.2 million.

 

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In June 2011, we entered into call and put option hedging arrangements for zero net premiums paid, that will provide us with minimum, maximum and capped zinc prices per pound of $0.85, $1.20, and $1.81, respectively. The hedges reduced our exposure to future declines in zinc prices below the minimum price. We will not be able to participate in increases in zinc prices beyond the maximum price until the capped zinc price is reached. The hedges cover approximately 160,000 tons of zinc production, which represents approximately 75% of the expected shipments for the period from January 2012 through June 2013. We put these hedges in place to help support our liquidity needs during the construction of the new zinc facility and to help support our growth initiatives.

Demand for Zinc and Nickel-Based Products. We generate revenue from the sale of zinc metal, zinc oxide, zinc- and copper-based powders and nickel-based products, as well as from the collection and recycling of EAF dust. Demand for our products increased during the first nine months of 2011 compared to the same period in 2010, as our smelting facility and INMETCO operated at near-capacity during the nine months ended September 30, 2011, partially reflecting our efforts to expand our zinc products beyond our traditional markets. During the third quarter of 2011, production of our zinc products decreased 6.7% from the second quarter of 2011 due in part to production difficulties arising from raw material quality, in particular coke, and a lost transformer at the Monaca smelter facility. During the third quarter of 2011, we reduced zinc tons in inventory by approximately 31% from the second quarter as we shipped more tons than we produced. Our production of zinc products, however, for the first nine months of 2011 still increased to an annual rate of 135,000 tons from 124,000 tons for 2010. As a result of planned major maintenance outages at our recycling facilities of approximately 92 kiln days, EAF dust tons processed during the third quarter of 2011 decreased 3.7% from the second quarter of 2011.

Weekly steel production continued the gradual upward trend from 2010 through the first nine months of 2011 thereby increasing the amount of EAF dust generated. We also began operations of our first kiln at our Barnwell, South Carolina facility in April of 2010 and the second kiln in September of 2010 which allowed us to increase the quantity of EAF dust processed. EAF dust processed increased 6.6% for the first nine months of 2011 as compared to the first nine months of 2010.

The table below illustrates historical production and sales volumes and revenues for zinc products and EAF dust:

 

     Shipments/EAF Dust Receipts      Revenue/Ton  
     Nine Months Ended      Year Ended      Nine Months Ended      Year Ended  
     September 30,      December 31,      September 30,      December31,  
     2011      2010      2010      2009      2011      2010      2010      2009  
     (Tons, in thousands)      (In U.S. dollars)  

Product:

                       

Zinc Products

     110         105         137         118       $ 2,105       $ 1,960       $ 1,976       $ 1,529   

EAF Dust

     401         405         532         409       $ 68       $ 74       $ 74       $ 80   

Nickel-based products

     21         20         27         25       $ 1,945       $ 1,751       $ 1,768       $ 1,453   

Cost of Sales (excluding depreciation and amortization). Our cost of producing zinc products consists principally of purchased feedstock, energy, maintenance and labor costs. In the first nine months of 2011, approximately 19% of our production costs were purchased-feedstock-related, compared to 21% for the first nine months of 2010. Purchased-feedstock-related costs are driven by the percentage of purchased feed used in the feed mix, the average LME zinc price and the price we pay for the purchased feed, which is expressed as a percentage of the LME average zinc price. We purchase our purchased feedstock at a discount to the LME price of zinc. The decrease reflects our efforts to increase the use of EAF dust-based feedstock. The remaining 81% of our production costs in the first nine months of 2011 were conversion-related. A portion of our conversion costs do not change proportionally with changes in production volume. Other components of cost of sales include transportation costs, as well as other manufacturing expenses. The main factors that influence our cost of sales as a percentage of net sales are fluctuations in zinc prices, production and shipment volumes, efficiencies, energy costs and our ability to implement cost control measures aimed at improving productivity.

We value our inventories using the weighted average actual cost method. Under this method, the cost of our purchased feedstock generally takes three to four months to flow through our cost of sales. In an environment of declining LME average zinc prices, our inventory cost can exceed the market value of our finished goods. Lower-of-cost-or-market (“LCM”) adjustments can result. An LCM adjustment of approximately $0.8 million was recorded during the three and nine months ended September 30, 2011. No LCM adjustment was recorded during the first nine months of 2010.

 

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Selling, General and Administrative Expenses. Our selling, general and administrative expenses consist of all sales and marketing expenditures, as well as administrative overhead costs, such as salary and benefit costs for sales personnel and administrative staff, expenses related to the use and maintenance of administrative offices, costs associated with acquisitions, other administrative expenses, including expenses relating to logistics and information systems, legal and accounting expense, and other selling expenses, including travel costs. Salary and benefit costs historically have comprised the largest single component of our selling, general and administrative expenses. Selling, general and administrative expenses as a percent of net sales historically have been impacted by changes in salary and benefit costs, as well as by changes in selling prices.

Explosion at our Monaca, Pennsylvania facility on July 22, 2010

On July 22, 2010, an explosion occurred at our Monaca, PA zinc oxide refining facility. The zinc refinery was shut down for repairs and an investigation and assessment of the damage. Each of the ten columns used to produce zinc oxide and refined zinc metal in the refining facility was redesigned and rebuilt. Production resumed in the fourth quarter of 2010.

The smelting facility at the Monaca plant was returned to full capacity late in the fourth quarter of 2010. Although it operated at a reduced rate during the third quarter, we were able to offset a portion of the lost revenue from zinc oxide with additional zinc metal sales beyond our traditional markets.

We pursued recovery of the cost of repairs, lost profit and other losses from our zinc oxide and refined metal, subject to customary deductibles, under our business interruption and property insurance. During the third quarter of 2010, we received a $4,500 advance from our property carriers and applied $2,200 in clean-up and repairs costs against it.

We submitted a claim totaling $33,831 and reached a final settlement in the amount of $29,614 in the first quarter of 2011. As of September 30, 2011, the entire insurance recoveries of $29,614 had been received in cash.

Trends Affecting Our Business

Our operating results are and will be influenced by a variety of factors, including:

 

   

LME price of zinc and nickel;

 

   

changes in cost of energy and fuels;

 

   

gain and loss of customers;

 

   

pricing pressures from competitors, including new entrants into the EAF dust or nickel-bearing waste recycling market;

 

   

increases and decreases in the use of zinc and nickel-based products;

 

   

expansions into new products and expansion of our capacity, which requires us to incur costs prior to generating revenues;

 

   

expenditures required to comply with environmental and other operational regulations;

 

   

access to credit by our customers; and

 

   

our operational efficiency improvement programs.

We have experienced fluctuations in our sales and operating profits in recent years due to fluctuations in zinc prices. Historically, zinc prices have been extremely volatile, and we expect that volatility to continue. Changes in zinc pricing have impacted our sales revenue since the prices of the products we sell are based primarily on LME zinc prices, and they have impacted our costs of production, since the prices of some of our feedstocks are based on LME zinc prices. Therefore, since a large portion of our sales and a portion of our expenses are affected by the LME zinc price, we expect that changing zinc

 

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prices will continue to impact our operations and financial results in the future and any significant drop in zinc prices will negatively impact our results of operations. We employ various hedging instruments in order to attempt to reduce the impact of decreases in the selling prices of a portion of our expected production.

Energy is one of our most significant costs. Our processes rely on electricity, coke and natural gas in order to operate. Our freight operations depend heavily on the availability of diesel fuel, and our Monaca, Pennsylvania power plant, which was temporarily idled in September 2011, used coal to generate electricity for our operations in that facility. Energy prices, particularly for electricity, natural gas, coal, coke and diesel fuel, have been volatile in recent years and currently exceed long-term historical averages. These fluctuations impact our manufacturing costs and contribute to earnings volatility. In June 2011, we entered into a new power purchase agreement to supply our electrical power needs at our Monaca, Pennsylvania facility at rates lower than the cost at which we are currently able to produce power on-site, which led to our decision to idle our Monaca, Pennsylvania power plant in September 2011. The power plant was idled in such a manner so that if market conditions are strong after the power purchase agreement expires, we could restart and operate the power plant again.

The historically high zinc prices from 2006 into 2008 also made it attractive for new competitors to enter the EAF dust recycling market to compete for dust generated by existing EAF producers as well as new EAF capacity. The entry of new competitors could have an adverse impact on our price realization and market share from EAF dust recycling. For example, Steel Dust Recycling began operations at its Waelz kiln facility located in Alabama in 2008, and The Heritage Group built an EAF dust processing facility in Arkansas and began operations in 2009.

Our zinc products compete with other materials in many of their applications, and in some cases our customers may shift to new processes or products. For example, our zinc is used by steel fabricators in the hot dip galvanizing process, in which steel is coated with zinc in order to protect it from corrosion. Demand for our zinc as a galvanizing material may shift depending on how customers view the respective merits of hot dip galvanizing and paint. Our stainless steel customers face competition from producers of material containing lower levels of nickel, which could have an impact on the demand for our nickel-based products. Our ability to anticipate shifts in product usage and to produce new products to meet our current and future customers’ needs will significantly impact our operating results. We also face intense competition from regional, national and global providers of zinc based products, and the growth of any of those competitors could reduce our market share and negatively impact our operating results.

Finally, our business is subject to a wide variety of environmental and other regulations and our operations expose us to a wide variety of potential liabilities. Our total cost of environmental compliance at any time depends on a variety of regulatory, technical and factual issues, some of which cannot be anticipated. Changes in regulations and/or our failure to comply with existing regulations can result in significant capital expenditure requirements or penalties.

Summary of Critical Accounting Policies and Estimates

Our Consolidated Financial Statements and the notes thereto for the fiscal year ended December 31, 2010 included in our Annual Report on Form 10-K, which was filed with the SEC on March 16, 2011, contain a summary of significant accounting policies followed by us in the preparation of our consolidated financial statements. These policies were also followed in preparing the consolidated financial statements as of September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010. Certain of these accounting policies are described below.

Inventories

Inventories, which consist primarily of zinc and nickel-bearing materials and supplies and spare parts, are valued at the lower of cost or market using a weighted average actual cost method. Raw materials are purchased, as well as produced from the processing of EAF dust. Supplies and spare parts inventory used in the production process are purchased. Work-in-process and finished goods inventories are valued based on the costs of raw materials plus applicable conversion costs, including depreciation and overhead costs relating to associated process facilities.

Zinc and nickel are traded as commodities on the LME, and, accordingly, product inventories are subject to price fluctuations. When reviewing inventory for the lower of cost or market, we consider the forward prices as quoted on the LME as of the reporting date in determining our estimate of net realizable value to determine if an adjustment is required. Our product revenues are based on the current or prior months’ LME average prices. The LME average prices upon which our product revenue is based has been reasonably correlated with the forward LME prices that we use to make the lower of cost or market adjustments.

 

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Financial Instruments

The following methods are used to estimate the fair value of our financial instruments.

 

   

Cash and cash equivalents, accounts receivable, notes payable due within one year, accounts payable and accrued expenses approximate their fair value due to the short-term nature of these instruments.

 

   

Our financial swap and financial option instruments are carried at fair value. We recognize changes in fair value within the consolidated statements of operations as they occur.

We do not purchase, hold or sell derivative financial instruments unless we have an existing asset or obligation or anticipate a future activity that is likely to occur and will result in exposing us to market risk. We use various strategies to manage our market risk, including the use of derivative instruments to limit, offset or reduce such risk. Derivative financial instruments are used to manage well-defined commodity price risks from our primary business activity. The fair values of derivative instruments are based upon a comparison of our internal valuations to the valuations provided by third-parties with whom we have entered into substantially identical derivative contracts. We also compare these valuations to ensure that there is an acceptable level of consistency among them. The valuations utilize forward pricing and an implied volatility of the underlying commodity as well as interest rate forwards and are therefore subject to fluctuation based on the movements of the commodity markets.

We are exposed to credit loss in cases where counter-parties with which we have entered into derivative transactions become unable to satisfy their obligations in accordance with the underlying agreements. To minimize the risk of such losses, we utilize LME-registered contracts entered into with the London Clearing House for a majority of our contracts. The clearing agent for the majority of our hedges has been MF Global UK Ltd, a U.K. affiliate of MF Global. As has been widely reported, MF Global Holdings Ltd. and MF Global Finance USA filed for U.S. bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code last week, and a special administration order was issued in the United Kingdom in respect of MF Global UK Limited, appointing partners of KPMG LLP as joint administrators responsible for managing its business. While there are many uncertainties surrounding the impact of last week’s bankruptcy filing on us, we currently believe that our LME-registered hedging contracts, which includes all of our put and call options for 2012 and 2013, can be transferred to alternate clearing members of the London Clearing House without any loss to us. We are actively pursuing the transfer of these contracts and we are closely monitoring this situation.

Recent Accounting Pronouncements

In May 2011, the FASB issued guidance clarifying how to measure and disclose fair value. This guidance amends the application of the “highest and best use” concept to be used only in the measurement of fair value of nonfinancial assets, clarifies that the measurement of the fair value of equity-classified financial instruments should be performed from the perspective of a market participant who holds the instrument as an asset, clarifies that an entity that manages a group of financial assets and liabilities on the basis of its net risk exposure can measure those financial instruments on the basis of its net exposure to those risks, and clarifies when premiums and discounts should be taken into account when measuring fair value. The fair value disclosure requirements also were amended. We do not believe that the adoption of the amended guidance will have significant effect on our consolidated financial statements.

In June 2011, the FASB issued guidance eliminating the option to present components of other comprehensive income (“OCI”) in the statement of stockholders’ equity. The new guidance now requires entities to present all nonowner changes in stockholders’ equity either as a continuous statement of comprehensive income or as two separate but consecutive statements. The components of OCI have not changed, nor have the guidance on when OCI items are reclassified to net income; however, the amendments require entities to present all reclassification adjustments from OCI to net income on the face of the statement of comprehensive income. We do not believe that the adoption of the amended guidance will have a significant effect on our consolidated financial statements.

Impairment

We review the carrying value of our long-lived assets for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. We examined our assets as of September 30, 2011 and found no events that would suggest a potential impairment. We have no goodwill. In the event we would determine the carrying amounts would not be recovered, an impairment charge would be recorded for the difference between the fair value and the carrying value.

 

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Results of Operations

The following table sets forth the percentages of sales that certain items of operating data constitute for the periods indicated.

 

     Three months ended September 30,     Nine months ended September 30,  
     2011     2010     2011     2010  

Net sales

     100.0     100.0     100.0     100.0

Cost of sales (excluding depreciation and amortization)

     65.9        94.4        75.2        84.8   

Depreciation and amortization

     3.6        4.9        4.5        4.6   

Selling, general and administrative expenses

     3.9        5.1        4.5        5.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     26.6        (4.4     15.8        5.6   

Interest expense

     1.2        0.3        0.7        0.3   

Interest and other income

     0.6        0.1        0.4        0.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     26.0        (4.6     15.5        5.5   

Income tax provision (benefit)

     10.2        (2.0     5.8        2.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     15.8     (2.6 )%      9.7     3.5
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table sets forth the activity and the fair values of our hedging instruments at the reporting dates.

 

 

     Put and Call Options Settlement Periods        
     2010     2011     2012     2013     Swaps     Total  

Fair Value December 31, 2009

   $ 737      $ —        $ —        $ —        $ 1,157      $ 1,894   

Purchases

     —          —          —          —          —          —     

Settlements of closed positions

     —          —          —          —          (228     (228

Gain (loss) on settlements of closed positions

     —          —          —          —          (34     (34

Mark to market adjustment on open positions

     (368     —          —          —          119        (249
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value March 31, 2010

     369        —          —          —          1,014        1,383   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchases

     —          882        —          —          —          882   

Settlements of closed positions

     —          —          —          —          (74     (74

Gain (loss) on settlements of closed positions

     (1     —          —          —          (209     (210

Mark to market adjustment on open positions

     813        1,441        —          —          (616     1,638   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value June 30, 2010

     1,181        2,323        —          —          115        3,619   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchases

     —          1,307        —          —          —          1,307   

Settlements of closed positions

     —          —          —          —          (439     (439

Gain (loss) on settlements of closed positions

     (214     —          —          —          452        238   

Mark to market adjustment on open positions

     (962     (2,668     —          —          461        (3,169
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value September 30, 2010

     5        962        —          —          589        1,556   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchases

     —          585        —          —          —          585   

Settlements of closed positions

     —          —          —          —          233        233   

Gain (loss) on settlements of closed positions

     (5     —          —          —          (532     (537

Mark to market adjustment on open positions

     —          (968     —          —          115        (853
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value December 31, 2010

     —          579        —          —          405        984   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchases

     —          —          —          —          —          —     

Settlements of closed positions

     —          —          —          —          (225     (225

Gain (loss) on settlements of closed positions

     —          (1     —          —          (109     (110

Mark to market adjustment on open positions

     —          (427     —          —          (34     (461
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value March 31, 2011

     —          151        —          —          37        188   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchases

     —          —          —          —          —          —     

Settlements of closed positions

     —          —          —          —          (135     (135

Gain (loss) on settlements of closed positions

     —          —          —          —          69        69   

Mark to market adjustment on open positions

     —          (117     (10,288     (4,931     963        (14,373
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value June 30, 2011

     —          34        (10,288     (4,931     934        (14,251
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchases

     —          —          —          —          —          —     

Settlements of closed positions

     —          —          —          —          (360     (360

Gain (loss) on settlements of closed positions

     —          —          —          —          (196     (196

Mark to market adjustment on open positions

     —          38        25,834        13,148        (12     39,008   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value September 30, 2011

     —        $ 72      $ 15,546      $ 8,217      $ 366      $ 24,201   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 periods indicated are listed in the table below.

 

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Table of Contents
     2009      2010      2011  
    

Fiscal quarter

ended

     Fiscal quarter ended      Fiscal quarter ended  
Average LME                 

zinc price

   December 31      March 31      June 30      September 30      December 31      March 31      June 30      September 30  

Quarter

   $  1.00       $  1.04       $  0.92       $  0.91       $  1.05       $  1.09       $  1.02       $  1.01   

Year-to-date

   $ 0.75       $ 1.04       $ 0.98       $ 0.96       $ 0.98       $ 1.09       $ 1.05       $ 1.04   

Three Months Ended September 30, 2011 Compared with Three Months Ended September 30, 2010

Consolidated net sales. Consolidated net sales increased $55.3 million, or 61.1%, to $145.8 million for the three months ended September 30, 2011 compared to $90.5 million for the three months ended September 30, 2010. Net sales for the three months ended September 30, 2011 includes favorable non-cash mark-to market adjustments of $39.0 million related to the hedging transactions for 2012 and 2013 completed in June 2011 (“June 2011 hedges”). Excluding the adjustments related to the June 2011 hedges, consolidated net sales increased $16.3 million, or 18.0%, to $106.8 million. The increase includes a $12.1 million increase in net sales for Horsehead and a $4.2 million increase in net sales for INMETCO.

Consolidated cost of sales (excluding depreciation and amortization). Consolidated cost of sales increased $10.6 million, or 12.3%, to $96.1 million for the three months ended September 30, 2011 compared to $85.5 million for the three months ended September 30, 2010. The increase includes an $8.9 million increase in cost of sales for Horsehead and a $1.7 million increase for INMETCO. As a percentage of consolidated net sales, consolidated cost of sales was 65.9% for the three months ended September 30, 2011. Excluding the adjustments related to the June 2011 hedges, included in net sales, consolidated cost of sales was 89.9% of net sales compared to 94.4% for the three months ended September 30, 2010.

Consolidated depreciation and amortization. Consolidated depreciation and amortization increased $0.9 million, or 19.4%, to $5.3 million for the three months ended September 30, 2011 compared to $4.4 million for the three months ended September 30, 2010. The increase reflects depreciation on the entire Barnwell facility, which began operations at a second kiln in September 2010 and an overall increase in total property as compared to September 30, 2010.

Consolidated selling, general and administrative expenses. Consolidated selling, general and administrative expenses increased $1.1 million, or 24.2%, to $5.7 million for the three months ended September 30, 2011 compared to $4.6 million for the three months ended September 30, 2010. Horsehead related costs increased $1.2 million over 2010, primarily reflecting increases in labor costs, bad debt expense, and non-cash stock-based compensation expense. INMETCO selling, general and administrative costs decreased $0.1 million from 2010.

Consolidated other income (expense). Consolidated other income (expense) decreased $0.6 million to $(0.8) million for the three months ended September 30, 2011 compared to $(0.2) million for the three months ended September 30, 2010. Interest expense related to the Convertible Debt issued on July 27, 2011 accounted for $1.3 million of additional interest expense which was offset by an increase in interest and other income of $0.7 million.

Consolidated income tax provision (benefit). Our consolidated income tax provision was $14.8 million for the three months ended September 30, 2011 compared to an income tax benefit of $(1.9) million for the three months ended September 30, 2010. Our estimated annual effective tax rate for 2011 changed from 32.5% as of June 30, 2011 to 37.2% as of September 30, 2011. The change in the annual rate primarily reflects the combined effect of a decrease in our projected pre-tax income for 2011 and the related impact of permanent differences. The change in the annual rate was reflected in our effective rate for the three months ended September 30, 2011. Out effective tax rates were 39.2% for the three months ended September 30, 2011 compared to an effective benefit rate of (44.2%) for the three months ended September 30, 2010.

Consolidated net income (loss). For the reasons stated above, our consolidated net income was $23.1 million for the three months ended September 30, 2011, which includes income from favorable non-cash mark-to market adjustments of $23.7 million related to the June 2011 hedges. Excluding the adjustments related to the June 2011 hedges, a consolidated net loss of $(0.6) million was recorded which improved $1.8 million over the consolidated net loss for the three months ended September 30, 2010 of $(2.4) million.

Business Segments

Horsehead Corporation

 

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Table of Contents

Net sales. Net sales increased $51.1 million, or 65.7%, to $128.8 million for the three months ended September 30, 2011 compared to $77.7 million for the three months ended September 30, 2010. Net sales for the three months ended September 30, 2011 includes favorable non-cash mark-to market adjustments of $39.0 million related to the June 2011 hedges. Excluding the adjustments related to the June 2011 hedges, net sales increased $12.1 million, or 15.5%, to $89.8 million. The increase was a result of a $0.1 million increase in sales volume primarily reflecting increases in shipments of zinc oxide offset by decreases in shipments of zinc metal, a $7.1 million increase in price realization due to a higher average LME zinc price for the third quarter of 2011 compared to the third quarter of 2010 and an increase of $4.6 million in our zinc co-product and other miscellaneous sales. Miscellaneous sales include $4.2 million related to the resale of excess coal arising from the idling of our power plant in September 2011. Net sales during the three months ended September 2011 was decreased by non-cash mark-to market charges relating to our hedging activities of $2.6 million, which excludes the adjustments related to the June 2011 hedges. Net sales during the three months ended September 30, 2010 included $2.9 million of non-cash mark-to market charges relating to our hedging activities.

Net sales for the three months ended September 30, 2010 were affected by the explosion which occurred at our Monaca facility on July 22, 2010. Each of the ten columns used to produce zinc oxide and refined zinc metal in the refining facility was redesigned and rebuilt. Production resumed in the fourth quarter of 2010. The smelting facility at the Monaca plant operated at a reduced rate during the third quarter, however, we were able to offset a portion of the lost revenue from zinc oxide with additional zinc metal sales beyond our traditional markets. The smelting facility returned to full capacity late in the fourth quarter of 2010.

Zinc product shipments were 35,651 tons for the three months ended September 30, 2011, or 32,770 tons on a zinc contained basis, compared to 34,703 tons, or 33,080 tons on a zinc contained basis, for the three months ended September 30, 2010. The average sales price realization for zinc products on a zinc contained basis, excluding the effects from the non-cash mark to market adjustments of our open hedge positions, was $1.12 per pound for the three months ended September 30, 2011 compared to $0.98 per pound for the three months ended September 30, 2010. The increase reflects a 10.5% increase in the average LME zinc price for the three months ended September 30, 2011 compared to the three months ended September 30, 2010.

Net sales of zinc metal decreased $6.3 million, or 12.5%, to $43.9 million for the three months ended September 30, 2011 compared to $50.2 million for the three months ended September 30, 2010. The decrease was primarily due to a $10.3 million decrease in sales volume offset by a $4.0 million increase in price realization. The increase in price realization was due to a higher average LME zinc price for 2011 versus 2010. Zinc metal shipments were approximately 8.7% lower than second quarter 2011 shipments due to production difficulties at the Monaca smelter during the third quarter which were resolved by the end of the quarter.

Net sales of zinc oxide increased $14.9 million, or 108.8%, to $28.6 million for the three months ended September 30, 2011, compared to $13.7 million for the three months ended September 30, 2010. The increase was primarily due to a $10.7 million increase in sales volume and a $4.2 million increase in price realization due to a higher average LME zinc price for the three months ended September 30, 2011 compared to the same period in 2010. Third quarter 2011 shipments remained relatively flat compared to the first and second quarter of 2011. Although we resumed commercial relationships with many of our customers following the restart of the Monaca, Pennsylvania refinery in the fourth quarter of 2010, this increase was partially offset by customer outages which reduced shipments in the third quarter of 2011. The increase in price realization for the three months ended September 30, 2011 compared to September 30, 2010 reflects the increase of the average LME zinc prices and the lag effect of pricing a majority of our zinc oxide shipments on prior months’ average LME zinc prices which were significantly higher than the current months.

Net sales of zinc and copper-based powders increased slightly $0.1 million, to $3.9 million for the three months ended September 30, 2011 compared to $3.8 million for the three months ended September 30, 2010. The slight increase was attributable to price, which increased $0.3 million, most notably in our copper-based powders, offset by a decrease in volume of $0.2 million.

Revenues from EAF dust recycling decreased $1.5 million, or 14.4%, to $8.9 million for the three months ended September 30, 2011 compared to $10.4 million for the three months ended September 30, 2010. The decrease was primarily attributable to a decrease of $1.4 million in price realization. Our price realization per ton decreased 14.0% for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010. EAF dust receipts for the three months ended September 30, 2011 were 131,980 tons compared to 132,755 tons for the three months ended September 30, 2010. EAF dust receipts decreased approximately 3.2% for the three months ended September 30, 2011 as compared to the three months ended June 30, 2011. According to data from the American Iron and Steel Institute, reported steel production increased slightly to 76% for the three months ended September 30, 2011 compared to 75% for the three months ended June 30, 2011.

 

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Table of Contents

Cost of sales (excluding depreciation and amortization). Cost of sales increased $8.9 million to $86.6 million for the three months ended September 30, 2011, compared to $77.7 million for the three months ended September 30, 2010. As a percentage of net sales, excluding the adjustments related to the June 2011 hedges which are included in net sales, cost of sales, as a percentage of net sales, was 96.4% and 100.4% for the three months ended September 30, 2011 and 2010, respectively.

The cost of zinc material and other zinc related products sold increased $8.8 million, or 12.3%, to $80.6 million for the three months ended September 30, 2011 compared to $71.8 million for the three months ended September 30, 2010. The increase was primarily a result of a net $2.0 million increase in shipment volume, a $0.9 million increase in the cost of products shipped and a $0.8 million increase in other costs. Cost of sales also includes $5.1 million related to the resale of excess coal due to the idling of the power plant in September 2011. Conversion costs reflect an increase in production levels of 13.6% for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. This increase was due in part to the explosion at our Monaca facility in July 2010, which reduced production during the three months ended September 30, 2010. In addition to the increase in production volume, energy costs increased by $4.2 million, the majority of which resulted from an increase in the cost of coke. Labor costs increased by $3.0 million, which was primarily due to the increase in production. The increase in conversion costs was compounded by an increase in purchased feed costs of $7.2 million and an increase in the cost of purchased feeds we pay expressed as a percentage of the LME. The increase in our purchased feed costs also reflects a 13.4% increase in the number of tons of purchased feed consumed. Changes in the average LME zinc price effect only the purchased feed component of our cost of sales, therefore any changes in the average LME zinc price have a smaller effect on our cost of sales than on our net sales.

The cost of EAF dust services remained relatively flat at approximately $6.0 million for both the three months ended September 30, 2011 and 2010. EAF dust processed increased 2.4% to 139,324 tons for the three months ended September 30, 2011 from 136,116 tons for the three months ended September 30, 2010.

Income (loss) before income taxes. For the reasons stated above, income before income taxes, including the effect of the adjustments related to the June 2011 hedges, was $31.3 million for the three months ended September 30, 2011. Excluding the adjustments related to the June 2011 hedges, operating loss before income taxes was $(7.7) million compared to operating loss of $(7.8) million for the three months ended September 30, 2010.

INMETCO

Net sales. Net sales increased $4.2 million, or 32.4%, to $17.3 million for the three months ended September 30, 2011 compared to $13.1 million for the three months ended September 30, 2010. The increase was due primarily to a higher LME average nickel price for the three months ended September 30, 2011 compared to the three months ended September 30, 2010, higher shipment volume of 10.0% and favorable non-cash mark-to market adjustments of $1.3 million.

Cost of sales (excluding depreciation and amortization) Cost of sales increased $1.7 million, or 21.8%, to $9.5 million for the three months ended September 30, 2011 compared to $7.8 million for the three months ended September 30, 2010. The increase was due to an increase in shipment volume of 10.0% as compared to the third quarter of 2010.

Income before income taxes. For the reasons stated above, income before income taxes increased $3.0 million to $6.6 million for the three months ended September 30, 2011.

Nine Months Ended September 30, 2011 Compared with Nine Months Ended September 30, 2010

Consolidated net sales. Consolidated net sales increased $64.8 million, or 22.6%, to $350.8 million for the nine months ended September 30, 2011 compared to $ 286.1 million for the nine months ended September 30, 2010. Net sales for the nine months ended September 30, 2011 includes net favorable non-cash mark-to market adjustments of $23.7 million related to the June 2011 hedges. Excluding the net adjustments related to the June 2011 hedges, consolidated net sales increased $41.0 million, or 14.3%, to $327.1 million. The increase includes a $31.0 million increase in net sales for Horsehead and a $10.0 million increase in net sales for INMETCO.

 

28


Table of Contents

Consolidated cost of sales (excluding depreciation and amortization). Consolidated cost of sales increased $21.4 million, or 8.8%, to $263.9 million for the nine months ended September 30, 2011 compared to $242.5 million for the nine months ended September 30, 2010. Cost of sales for the nine months ended September 30, 2011 includes a benefit from business interruption and property damage insurance recoveries totaling $10.3 million offset by additional costs of repairs and clean-up totaling $1.0 million relating to the explosion at our Monaca refinery in July 2010. Excluding the additional costs and insurance recoveries associated with the explosion, consolidated cost of sales increased $30.7 million, or 12.7%, to $273.2 million. The increase includes a $28.1 million increase in cost of sales for Horsehead and a $2.6 million increase for INMETCO. As a percentage of consolidated net sales, excluding the net adjustments related to the June 2011 hedges which are included in consolidated net sales and excluding the additional costs and insurance recoveries associated with the explosion included in cost of sales, both adjustments relating to the nine months ended September 30, 2011, consolidated cost of sales was 83.5% for the nine months ended September 30, 2011 compared to 84.8% for the nine months ended September 30, 2010.

Consolidated depreciation and amortization. Consolidated depreciation and amortization increased $2.7 million, or 20.3%, to $15.9 million for the nine months ended September 30, 2011 compared to $13.2 million for the nine months ended September 30, 2010. The increase primarily reflects depreciation on the Barnwell facility, which began operations in April 2010.

Consolidated selling, general and administrative expenses. Consolidated selling, general and administrative expenses increased $1.5 million, or 10.4%, to $15.8 million for the nine months ended September 30, 2011 compared to $14.3 million for the nine months ended September 30, 2010. Horsehead related costs increased $1.5 million, primarily reflecting increases in labor costs, bad debt expense, and non-cash stock-based compensation expense. INMETCO selling, general and administrative costs remained flat compared to the nine months ended September 30, 2010.

Consolidated other income (expense) Consolidated other income (expense) decreased $0.7 million to $(0.9) million for the nine months ended September 30, 2011 compared to $(0.2) million for the nine months ended September 30, 2010. Interest expense related to the Convertible Debt issued on July 27, 2011 accounted for $1.3 million in additional interest expense which was offset by an increase in interest and other income of $0.6 million.

Consolidated income tax provision. Our consolidated income tax provision was $20.2 million for the nine months ended September 30, 2011 compared to $5.7 million for the nine months ended September 30, 2010. Our estimated annual effective tax rate for 2011 changed from 32.5% as of June 30, 2011 to 37.2% as of September 30, 2011. The change in the annual rate primarily reflects the combined effect of a reduction in our projected pre-tax income for 2011 and the related impact of permanent differences. Our effective tax rate was 35.8% for the nine months ended September 30, 2010.

Consolidated net income. For the reasons stated above, our consolidated net income was $34.2 million for the nine months ended September 30, 2011, which includes income of $5.9 million relating to the insurance recovery from the explosion at our Monaca refinery in July 2010 and net adjustments related to the June 2011 hedges of $14.9 million compared to net income of $10.1 million for the nine months ended September 30, 2010. Excluding the benefit and related costs from the insurance recovery and net adjustments of the June 2011 hedges, consolidated net income increased $3.3 million to $13.4 million.

Business Segments

Horsehead Corporation

Net sales. Net sales increased $54.7 million, or 22.1%, to $302.7 million for the nine months ended September 30, 2011 compared to $247.9 million for the nine months ended September 30, 2010. Net sales for the nine months ended September 30, 2011 include net favorable non-cash mark-to market adjustments of $23.7 million related to the June 2011 hedges. Excluding the net adjustments related to the June 2011 hedges, net sales increased $31.0 million, or 12.5%, to $278.9 million. The increase was a result of a $9.7 million increase in sales volume primarily reflecting increases in shipments of zinc metal and of zinc oxide, a $15.1 million increase in price realization due to a higher average LME zinc price for the first nine months of 2011 compared to the first nine months of 2010 and an increase of $6.9 million in our zinc co-product and other miscellaneous sales. Miscellaneous sales include $4.2 million related to the resale of excess coal arising from the idling of our power plant in September 2011. Net sales during the nine months ended September 2011 was decreased by non-cash charges relating to our hedging activities of $3.1 million, excluding the net adjustments related to the June 2011 hedges, compared to a non-cash charge of $2.4 million for the nine months ended September 30, 2010.

 

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Table of Contents

Net sales for the nine months ended September 30, 2010 were affected by the explosion which occurred at our Monaca facility on July 22, 2010 Production resumed in the fourth quarter of 2010. The smelting facility at the Monaca plant operated at a reduced rate during the third quarter of 2010, however, we were able to offset a portion of the lost revenue from zinc oxide with additional zinc metal sales beyond our traditional markets. The smelting facility returned to full capacity late in the fourth quarter of 2010.

Zinc product shipments were 109,800 tons for the nine months ended September 30, 2011, or 101,113 tons on a zinc contained basis, compared to 104,970 tons, or 96,397 tons on a zinc contained basis, for the nine months ended September 30, 2010. The average sales price realization for zinc products on a zinc contained basis, excluding the effects from the non-cash mark-to market adjustments of our open hedge positions, was $1.14 per pound for the nine months ended September 30, 2011 compared to $1.07 per pound for the nine months ended September 30, 2010. The increase reflects an 8.7% increase in the average LME zinc price for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.

Net sales of zinc metal increased $19.8 million, or 16.4%, to $140.7 million for the nine months ended September 30, 2011 compared to $120.9 million for the nine months ended September 30, 2010. The increase was primarily due to an $8.1 million increase in sales volume and a $11.7 million increase in price realization. The increase in sales volume reflects the gradual improvement in demand for our products that began in late 2009 and continued into the first nine months of 2011. The increase in zinc metal sales was partially offset by reduced shipments in the third quarter of 2011 due to production difficulties at the Monaca smelter which were resolved by the end of the quarter. The increase in price realization was due to a higher average LME zinc price for 2011 versus 2010, and an increase in the average premium to the LME on zinc metal sold in 2011 compared to 2010.

Net sales of zinc oxide increased $5.0 million, or 6.0%, to $87.9 million for the nine months ended September 30, 2011, compared to $82.9 million for the nine months ended September 30, 2010. The increase was primarily due to a $1.1 million increase in sales volume and a $3.9 million increase in price realization which reflects the increase of the average LME zinc prices and the lag effect of pricing a majority of our zinc oxide shipments on prior months’ average LME zinc prices which were significantly higher than the more current months. We have resumed commercial relationships with our customers following the restart of the Monaca, Pennsylvania refinery in the fourth quarter of 2010 but this increase was partially offset by customer outages which reduced shipments in the third quarter of 2011.

Net sales of zinc and copper-based powders increased $2.7 million, or 25.5%, to $13.3 million for the nine months ended September 30, 2011 compared to $10.6 million for the nine months ended September 30, 2010. The increase was attributable to both shipment volume and price, most notably in our copper-based powders.

Revenues from EAF dust recycling decreased $2.6 million, or 8.7%, to $27.4 million for the nine months ended September 30, 2011 compared to $30.0 million for the nine months ended September 30, 2010. The decrease was primarily attributable to a $2.3 million decrease in price realization as our price realization per ton decreased 7.7% for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010. EAF dust receipts for the nine months ended September 30, 2011 were 400,707 tons compared to 405,420 tons for the nine months ended September 30, 2010. According to data from the American Iron and Steel Institute, reported steel production increased approximately 6.1% for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.

Cost of sales (excluding depreciation and amortization). Cost of sales increased $18.8 million to $236.9 million for the nine months ended September 30, 2011, compared to $218.1 million for the nine months ended September 30, 2010. As a percentage of net sales, excluding the net adjustments related to the June 2011 hedges which are included in net sales and excluding the benefit from additional costs and insurance recoveries from the explosion at our Monaca refinery of $9.3 million included in cost of sales, both adjustments for the nine months ended September 30, 2011, cost of sales was 88.3% and 88.2% for the nine months ended September 30, 2011 and 2010, respectively.

The cost of zinc material and other zinc related products sold, excluding the insurance recoveries and additional costs of $9.3 million included in cost of sales for the nine months ended September 30, 2011, increased $28.2 million, or 14.1%, to $228.0 million for the nine months ended September 30, 2011 compared to $199.8 million for the nine months ended September 30, 2010. The increase was primarily a result of a net $8.4 million increase in shipment volume, an $11.6 million increase in the cost of products shipped and a $3.1 million increase in other costs. Cost of sales also includes $5.1 million related to the resale of excess coal due to the idling of the power plant in September 2011. Conversion costs for the nine months ended September 30, 2011 reflect an increase in production levels for the first nine months of 2011 of 8.3% compared to first nine months of 2010. In addition to the increase in production volume, energy costs increased by $14.8 million , the majority of which resulted from an increase in the cost of coke. Labor costs increased $7.1 million, which reflects the increase in production and includes a one time charge of approximately $2.3 million related to signing bonuses

 

30


Table of Contents

for several union contract renewals which occurred during the nine months ended September 30, 2011. Additionally maintenance costs increased $1.0 million and services increased $2.7 million. The conversion costs increases were compounded by an increase in purchased feed costs of $2.1 million. The cost of purchased feeds we pay expressed as a percentage of the LME remained relatively the same for both the nine months ended September 30, 2011 and 2010. Changes in the average LME zinc price effect only the purchased feed component of our cost of sales, therefore any changes in the average LME zinc price have a smaller effect on our cost of sales than on our net sales.

The cost of EAF dust services decreased $0.1 million, or 0.5%, to $18.2 million for the nine months ended September 30, 2011 from $18.3 million for the nine months ended September 30, 2010. The decrease primarily reflects a $0.2 million decrease in volume offset by a $0.1 million increase in transportation costs. Cost per ton remained relatively flat for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010.

Income before income taxes. For the reasons stated above, income before income taxes, which includes a net benefit of $9.3 million related to insurance recoveries less additional costs associated with the explosion at our Monaca plant and includes net adjustments of $23.8 million related to the June 2011 hedges, increased $31.0 million to $36.9 million for the nine months ended September 30, 2011, compared to operating income of $5.9 million for the nine months ended September 30, 2010. Excluding the additional costs and benefit received from insurance and the net adjustments related to the June 2011 hedges, operating income was $3.9 million for the nine months ended September 30, 2011, a decrease of $2.0 million, from the nine months ended September 30, 2010.

INMETCO

Net sales. Net sales increased $10.0 million, or 25.8%, to $48.9 million for the nine months ended September 30, 2011 compared to $38.9 million for the nine months ended September 30, 2010. The increase was due primarily to a higher LME average nickel price for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010, higher shipment volume of 6.9% and favorable non-cash mark-to market adjustments of $1.8 million. Shipment volume increased over the prior year partially due to the planned maintenance during May 2010 which reduced shipments during the nine months ended September 2010.

Cost of sales (excluding depreciation and amortization) Cost of sales increased $2.6 million, or 10.7%, to $27.0 million for the nine months ended September 30, 2011 compared to $24.4 million for the nine months ended September 30, 2010. The increase was due to an increase in shipment volume of 6.9% as compared to the nine months ended September 30, 2010 and an increase in raw material costs.

Income before income taxes. For the reasons stated above, income before income taxes increased $7.5 million to $17.4 million for the nine months ended September 30, 2011 compared to $9.9 million for the nine months ended September 30, 2010.

Liquidity and Capital Resources

We finance our operations, capital expenditures and debt service primarily with funds generated by our operations. We believe the combination of our cash balance, which includes proceeds from the issuance of the Convertible Notes, availability under the Revolving Credit Agreement, our cost reduction initiatives, our hedging positions, and our cash generated from operations will be sufficient to satisfy our liquidity and capital requirements, including capital requirements related to the construction of the new zinc facility, for the next twelve months. Although we believe we could obtain additional credit and reduce our capital requirements if necessary, our ability to do so may be affected by industry factors, including LME zinc prices, and by general economic, financial, competitive, legislative, regulatory and other factors discussed in this report, or in the materials incorporated herein by reference.

Total capital expenditures for the construction of the new zinc facility are currently estimated to range from $350 million to $375 million. During the third quarter of 2011, we announced the new zinc plant will be constructed in Rutherford County, North Carolina. Site preparation work continues along with preliminary permitting activities as engineering is underway. We continue to target startup of the new plant by the third quarter of 2013.

Our cash is not restricted with the exception of $2.5 million related to the financial assurance associated with the ESOI customer contracts purchased by us in 2009, which are described in our annual report on Form 10-K for the fiscal year ended December 31, 2010, filed with the SEC on March 16, 2011.

 

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In June 2011, we entered into call and put option hedging arrangements for zero net premiums paid, that will provide us with minimum, maximum and capped zinc prices per pound. The hedges reduced our exposure to future declines in zinc prices below the minimum price. We will not be able to participate in increases in zinc prices beyond the maximum price until the capped zinc price is reached. These hedges cover approximately 75% of our expected shipments for the period from January 2012 through June 2013. As a result of these hedges, we could be subject to potential margin calls if the forward zinc prices increase prior to settlement. In the event of a margin call, unsecured credit provided by our clearing agent would apply first. After the use of the credit that they provide, we would be required to put cash on deposit with the clearing agent as security for eventual settlement of the hedge positions. This deposit would be classified as a restricted asset. At September 30, 2011, we were not required to put any cash on deposit with the clearing agent. The clearing agent for the majority of our hedges has been MF Global UK Ltd, a U.K. affiliate of MF Global. As has been widely reported, MF Global Holdings Ltd. and MF Global Finance USA filed for U.S. bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code last week, and a special administration order was issued in the United Kingdom in respect of MF Global UK Limited, appointing partners of KPMG LLP as joint administrators responsible for managing its business. While there are many uncertainties surrounding the impact of last week’s bankruptcy filing on us, we currently believe that our LME-registered hedging contracts, which includes all of our put and call options for 2012 and 2013, can be transferred to alternate clearing members of the London Clearing House without any loss to us. We are actively pursuing the transfer of these contracts and we are closely monitoring this situation. We may not, however, be able to replace the unsecured credit that was provided by MF Global UK Ltd. with an alternate clearing member of the London Clearing House.

On July 27, 2011, we issued $100.0 million of 3.80% Convertible Notes in a private placement. We received proceeds of $100.0 million and recognized approximately $3.5 million in issuance costs in connection with the offering. On September 28, 2011, we entered into a $60.0 million Revolving Credit Agreement to support liquidity needs during construction of the new zinc plant and to allow for the availability of previously restricted cash. At September 30, 2011, the Company had $17.8 million in letters of credit outstanding under the Revolving Credit Agreement which had previously been collateralized with restricted cash. At September 30, 2011, there were no outstanding borrowings under the Revolving Credit Agreement and undrawn availability was $36.7 million at September 30, 2011. We recognized $.4 million in issuance costs in connection with the Revolving Credit Agreement. We intend to use the proceeds from the offering, borrowing under the Revolving Credit Agreement and cash on hand, for the initial stages of construction of the new zinc facility and general corporate purposes, including working capital needs, investment in business initiatives, capital expenditures and acquisitions.

September 30, 2011

Our balance of cash and cash equivalents at September 30, 2011, excluding $2.5 million of restricted cash, was $250.1 million, a $140.6 million increase from the December 31, 2010 balance of $109.6 million. It is concentrated in three U.S. banks.

Cash Flows from Operating Activities

Our operations provided a net $44.3 million in cash for the nine months ended September 30, 2011. The cash flows generated reflect the operating performance during the nine months ended September 30, 2011, insurance proceeds from the explosion at our Monaca facility in July 2010 and a $4 million income tax refund for the 2010 tax year.

Our investment in working capital was $306.8 million at September 30, 2011 and $170.1 million at December 31, 2010. The increase in working capital is primarily a result of a $140.6 million increase in cash, primarily due to the $100.0 million Convertible Notes offering, $23.9 million release of previously restricted cash to operating cash, operating performance for the nine months ended September 30, 2011 and an increase of $10.6 million in prepaid hedge contracts. Investment in working capital was reduced by a $13.5 million increase in income taxes payable.

During the nine months ended September 30, 2011, we recorded an additional $10.3 million in recoveries for business interruption and property damage insurance relating to the July 2010 explosion at our Monaca facility. This amount represents the final settlement of the claim. We received cash payments of $18.6 million during the nine months ended September 30, 2011 for the settlement of the claim.

Cash Flows from Investing Activities

Cash used in investing activities was $2.0 million for the nine months ended September 30, 2011. Capital expenditures were $25.9 million. We funded capital expenditures with cash on hand.

 

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During the first quarter of 2011, restricted cash totaling $2.5 million was released from escrow, $1.5 million was related to reduced collateral requirements under the ESOI purchase agreement and $1.0 million was the final amount to be received under the provisions of the New Markets Tax Credit program related to the financing and development of the Barnwell site. During the third quarter of 2011, restricted cash totaling $21.4 million was released from escrow, $2.7 million of which related to collateralization for a letter of credit required for a closure bond for one of our Pennsylvania facilities which was replaced with a surety bond, the remaining $18.7 million related to letters of credit collateralized by restricted cash which are now outstanding under the Revolving Credit Agreement.

Cash Flows from Financing Activities

Cash provided by financing activities was $98.2 million for the nine months ended September 30, 2011 and consisted primarily of proceeds of $100.0 million from the issuance of the Convertible Notes and $2.4 million from the exercise of 0.2 million stock options. Cash used in financing activities of $3.9 million related to issuance costs for the Convertible Notes and Revolving Credit Agreement.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements include operating leases and letters of credit. As of September 30, 2011, we had letters of credit outstanding under the new $60.0 million Revolving Credit Agreement in the amount of $17.8 million to collateralize self-insured claims for workers’ compensation and other general insurance claims and closure bonds for our two facilities in Pennsylvania. We also have a surety bond outstanding in the amount of $2.6 million to collateralize a closure bond for the Company’s third facility located in Pennsylvania.

Available Information

Our internet website address is www.horsehead.net. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act will be available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Our website and the information contained or incorporated therein are not intended to be incorporated into this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

In the ordinary course of our business, we are exposed to potential losses arising from changes in interest rates and the prices of zinc, copper, nickel, lead, natural gas and coal. We have historically used derivative instruments, such as swaps, put options and forward purchase contracts to manage the effect of these changes. When we use forward contract hedging instruments to reduce our exposure to rising energy prices, we are limited in our ability to take advantage of future reductions in energy prices, because we are required to exercise the hedging instrument at the settlement date regardless of the market price at the time. We have also used put options to reduce our exposure to future declines in zinc prices. We have entered into arrangements hedging a portion of our exposure to future changes in the price of zinc, copper, nickel and lead through 2011, 2012 and 2013. In June 2011, we entered into call and put option hedging arrangements for 2012 and 2013 for zero net premiums paid, that will provide us with minimum, maximum and capped zinc prices per pound. The hedges reduced our exposure to future declines in zinc prices below the minimum price. We will not be able to participate in increases in zinc prices beyond the maximum price until the capped zinc price is reached. As a result of these hedges, we could be subject to potential margin calls if the forward zinc prices increase prior to settlement. We put these hedges in place to help support our liquidity needs during the construction of the new zinc facility and to help support our growth initiatives.

Our risk management policy seeks to meet our overall goal of managing our exposure to market price risk, particularly risks related to changing zinc and nickel prices. All derivative contracts are held for purposes other than trading and are used primarily to mitigate uncertainty and volatility of expected cash flow and cover underlying exposures. We are exposed to credit loss in cases where counter-parties with which we have entered into derivative transactions become unable to satisfy their obligations in accordance with the underlying agreements. To minimize the risk of such losses, we utilize LME-registered contracts entered into with the London Clearing House for a majority of our contracts. The clearing agent for the majority of our hedges has been MF Global UK Ltd, a U.K. affiliate of MF Global. As has been widely reported, MF Global Holdings Ltd. And MF Global Finance USA filed for U.S. bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code last week, and a special administration order was issued in the United Kingdom in respect of MF Global UK Limited, appointing partners of KPMG LLP as joint administrators responsible for managing its business. While there are many uncertainties surrounding the impact of last week’s bankruptcy filing on us, we currently believe that our LME-registered hedging contracts, which includes all of our put and call options for 2012 and 2013, can be transferred to alternate clearing members of the London Clearing House without any loss to us. We are actively pursuing the transfer of these contracts and we are closely monitoring this situation.

 

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Interest Rate Risk

We are subject to interest rate risk in connection with our $60.0 million Revolving Credit Agreement entered into on September 28, 2011 which bears interest at variable rates. Assuming that our Revolving Credit Agreement is fully drawn and holding other variables constant, 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 $0.6 million.

Commodity Price Risk

Our business consists principally of the sale of zinc and nickel-based products. As a result, our results of operations are subject to risk of fluctuations in the market price of zinc and nickel. While our finished products are generally priced based on a spread to the price of zinc or nickel on the LME, our revenues are impacted significantly by changes in the market price of these metals. Changes in zinc prices will also impact our ability to generate revenue from our EAF recycling operations as well as our ability to procure raw materials. In addition, we consume substantial amounts of energy in our zinc production and EAF dust recycling operations, and therefore our cost of sales is vulnerable to changes in prevailing energy prices, particularly natural gas, coke and coal.

In 2009, we purchased put options for approximately 100,000 tons of zinc for 2010. The cost of the options was $5.3 million and they have a strike price of $0.65 per pound. At the time of the purchases, the options represented approximately 80% of our anticipated sales volume for 2010. In 2010, we purchased put options for approximately 99,000 tons of zinc for 2011 having a strike price of $0.65 per pound. The purchases represent approximately 70% of our expected zinc production in 2011. We also sold put options for approximately 35,000 tons of zinc for the last six months of 2011 having a strike price of $0.55 per pound. The options we purchased provide that we will receive a minimum of $0.65 per pound for the quantity hedged and the options we sold provide that the buyer will receive a minimum of $0.55 per pound for the quantity hedged. The cost of the options purchased was $3.0 million and the cost of the options sold was $0.2 million. These options are included in “Prepaid hedge contracts” in our consolidated financial statements.

As of December 31, 2010, we were party to contracts for the purchase and delivery of the coal requirements for our power plant in Monaca through 2011. We were party to a similar contract in 2010. In June 2011, we entered into a new power purchase agreement to supply our electrical power needs at our Monaca, Pennsylvania facility this fall. In September 2011, we idled the Monaca power plant. During the third quarter of 2011, we began to sell our remaining coal obligations under this contract to third parties and expect to sell all remaining requirements by the end of 2011. 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.

In June 2011, we entered into call and put option hedging arrangements for zero net premiums paid, that will provide us with minimum, maximum and capped zinc prices per pound of $0.85, $1.20, and $1.81, respectively. The hedges reduced our exposure to future declines in zinc prices below the minimum price. We will not be able to participate in increases in zinc prices beyond the maximum price until the capped zinc price is reached. The hedges cover approximately 160,000 tons of zinc production, which represents approximately 75% of the expected shipments for the period from January 2012 through June 2013. We put these hedges in place to help support our liquidity needs during the construction of the new zinc facility and to help support our growth initiatives. These options are included in “Prepaid hedge contracts” and “ Noncurrent hedge contracts” in our consolidated financial statements.

Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and

 

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Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures were effective as of September 30, 2011.

(b) Changes in internal control over financial reporting

During the quarter ending September 30, 2011, there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that in our management’s judgment has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are party to various litigation, claims and disputes, including labor regulation claims and OSHA and environmental regulation violations, some of which are for substantial amounts, arising in the ordinary course of business. While the ultimate effect of such actions cannot be predicted with certainty, we expect that the outcome of these matters will not result in a material adverse effect on our business, financial condition or results of operations.

Item 1A. Risk Factors.

Our Risk Factors are discussed in our Annual Report on Form 10-K for the year ended December 31, 2010, which was filed with the SEC on March 16, 2011, and our Quarterly Report on Form 10Q for the quarter ended June 30, 2011 which was filed on August 9, 2011.

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

The information otherwise required to be disclosed under this Part II Item 2 related to the Convertible Notes was previously disclosed in Current Reports on Form 8-K filed on July 21, 2011, July 22, 2011 and July 27, 2011 and therefore is not required to be furnished herein.

Item 3. Defaults Upon Senior Securities.

[None]

Item 4. (Removed and Reserved)

Item 5. Other Information.

[None]

Item 6. Exhibits.

 

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EXHIBIT INDEX

 

Exhibit No.

  

Description

4.1    Indenture, dated as of July 27, 2011, between Horsehead Holding Corp. and U.S. Bank National Association, as trustee. (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed on July 27, 2011)
4.2    Form of 3.80% Convertible Senior Notes due 2017 (incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K filed on July 27, 2011 (included as Exhibit A to Exhibit 4.1))
10.1    Revolving Credit and Security Agreement, dated as of September 28, 2011, by and among Horsehead Corporation, as borrower, Horsehead Holding Corp., as guarantor, and PNC Bank, National Association, as agent and lender. (incorporated by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K filed on September 30, 2011)
31.1    Certification by James M. Hensler, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Robert D. Scherich, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    Instance Document
101.SCH    Schema Document
101.CAL    Calculation Linkbase Document
101.LAB    Labels Linkbase Document
101.PRE    Presentation Linkbase Document
101.DEF    Definition Linkbase Document

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

HORSEHEAD HOLDING CORP.
/s/ James M. Hensler        

By: James M. Hensler

Its: President and Chief Executive Officer

This report has been signed by the following persons in the capacities indicated on November 9, 2011.

 

SIGNATURE

  

TITLE

  

DATE

/s/ James M. Hensler

   Principal Executive Officer    November 9, 2011

James M. Hensler

     

/s/ Robert D. Scherich

   Principal Financial and Accounting    November 9, 2011

Robert D. Scherich

   Officer   

 

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