Horsehead Holding Corp - FORM 10-Q - November 10, 2014

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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, 2014
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 (Check one).
 
Large accelerated Filer
 
¨
  
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨
  
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, 2014 was 50,718,790.
 



TABLE OF CONTENTS
 
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013
 
 
 
 
Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2014 and 2013
 
 
 
 
Consolidated Statements of Comprehensive Loss (Unaudited) for the three and nine months ended September 30, 2014 and 2013
 
 
 
 
Consolidated Statement of Stockholders' Equity (Unaudited) for the nine months ended September 30, 2014
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2014 and 2013
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Item 1.
Item 1A. 
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 

i

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: our ability to complete the ramp up of our new zinc facility; our ability to realize the projected benefits from the new zinc facility once fully operational; our ability to implement our business strategy successfully; the cyclical nature of the metals industry; the state of the credit and financial markets; decreases in the prices of zinc and nickel-based products; competition from global zinc and nickel manufacturers; long term declines in demand of zinc and nickel products due to competing technologies or materials; our ability to meet our capital needs through cash flow generation and the availability of financing; our ability to service our debt; our ability to integrate acquired businesses; work stoppages and labor disputes; material disruptions at any of our manufacturing facilities, including for equipment, power failures or industrial accidents; fluctuations in the costs or availability of our energy or raw material 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; the effect of litigation related to worker safety or employment laws; failure of our hedging strategies, including those relating to the prices of energy, raw materials and zinc products; our ability to attract and retain key personnel; our ability to protect our intellectual property and know-how; our dependence on third parties for transportation services; and risks associated with our substantial indebtedness and limitations in our debt documents.
There may be other factors that may cause our actual results to differ materially from the forward-looking statements. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them does, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, which was filed with the SEC on March 13, 2014, for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.
All forward-looking statements are qualified in their entirety by this cautionary statement, and we undertake no obligation to revise or update this Quarterly Report on Form 10-Q to reflect events or circumstances after the date hereof.

ii

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Horsehead Holding Corp. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30, 2014 (Unaudited) and December 31, 2013
(Amounts in thousands, except per share amounts)
 
September 30,
2014
 
December 31,
2013
ASSETS
 
 
 
Current assets
 
 
 
       Cash and cash equivalents
$
72,167

 
$
136,327

Accounts receivable, net of allowance of $453 and $554, respectively
59,716

 
58,649

Inventories, net
46,189

 
69,576

Prepaid expenses and other current assets
13,038

 
5,264

Deferred income taxes
6,671

 
6,337

Total current assets
197,781

 
276,153

Property, plant and equipment, net
806,043

 
708,250

Other assets
 
 
 
Intangible assets, net
10,394

 
11,268

Deferred finance costs and other
10,121

 
9,641

Total other assets
20,515

 
20,909

Total assets
$
1,024,339

 
$
1,005,312

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Current maturities of long-term debt
$
2,998

 
$
2,870

Accounts payable
85,281

 
114,191

Accrued expenses
45,780

 
44,758

Total current liabilities
134,059

 
161,819

Long-term debt, less current maturities
408,337

 
354,768

Other long-term liabilities
18,913

 
17,787

Deferred income taxes
25,020

 
26,044

Commitments and contingencies


 


Stockholders’ equity
 
 
 
Common stock, par value $0.01 per share; 100,000 shares authorized; 50,719 and 50,437 shares issued and outstanding in 2014 and 2013, respectively
507

 
504

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

 
—

Additional paid-in capital
313,464

 
308,825

Retained earnings
119,432

 
130,833

Accumulated other comprehensive income
655

 
667

Total stockholders’ equity before noncontrolling interest
434,058

 
440,829

Noncontrolling interest
3,952

 
4,065

Total stockholders’ equity
438,010

 
444,894

Total liabilities and stockholders’ equity
$
1,024,339

 
$
1,005,312

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


1

Horsehead Holding Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2014 and 2013
(Unaudited)
(Amounts in thousands except per share amounts)
 
        
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Net sales of zinc material and other goods
$
85,474

 
$
86,021

 
$
275,794

 
$
263,814

Net sales of nickel-based material and other services
14,571

 
12,192

 
40,740

 
41,119

EAF dust service fees
10,933

 
11,378

 
30,773

 
33,376

Net sales
110,978

 
109,591

 
347,307

 
338,309

Cost of sales of zinc material and other goods
87,013

 
85,415

 
269,861

 
250,429

Cost of sales of nickel-based material and other services
7,807

 
8,782

 
24,848

 
27,661

Cost of EAF dust services
9,386

 
8,558

 
25,367

 
27,106

Restructuring expenses
—

 
—

 
205

 
—

Insurance claim income
—

 
—

 
—

 
(2,450
)
Cost of sales (excluding depreciation and amortization)
104,206

 
102,755

 
320,281

 
302,746

Depreciation and amortization
10,528

 
7,123

 
23,496

 
21,574

Selling, general and administrative expenses
5,665

 
5,343

 
17,790

 
16,879

Total costs and expenses
120,399

 
115,221

 
361,567

 
341,199

Loss from operations
(9,421
)
 
(5,630
)
 
(14,260
)
 
(2,890
)
Other income (expense)
 
 
 
 
 
 
 
Interest expense
(8,968
)
 
(487
)
 
(12,502
)
 
(2,007
)
Interest and other income
4,144

 
418

 
6,911

 
2,290

Total other income (expense)
(4,824
)
 
(69
)
 
(5,591
)
 
283

Loss before income taxes
(14,245
)
 
(5,699
)
 
(19,851
)
 
(2,607
)
Income tax benefit
(7,235
)
 
(2,184
)
 
(8,450
)
 
(1,092
)
NET LOSS
$
(7,010
)
 
$
(3,515
)
 
$
(11,401
)
 
$
(1,515
)
Loss per common share:
 
 
 
 
 
 
 
Basic
$
(0.14
)
 
$
(0.08
)
 
$
(0.23
)
 
$
(0.03
)
Diluted
$
(0.14
)
 
$
(0.08
)
 
$
(0.23
)
 
$
(0.03
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
50,715

 
44,109

 
50,670

 
44,077

Diluted
50,715

 
44,109

 
50,670

 
44,077

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


2

Horsehead Holding Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the three and nine months ended September 30, 2014 and 2013
(Unaudited)
(Amounts in thousands except per share amounts)
 
        
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net loss
$
(7,010
)
 
$
(3,515
)
 
$
(11,401
)
 
$
(1,515
)
Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
Net pension liability adjustment
(3
)
 
—

 
(12
)
 
—

Comprehensive loss
$
(7,013
)
 
$
(3,515
)
 
$
(11,413
)
 
$
(1,515
)
The accompanying notes to financial statements are an integral part of these statements.


3

Horsehead Holding Corp. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the nine months ended September 30, 2014
(Unaudited)
(Amounts in thousands)
 
 
 
 
 
 
 
 
 
 
Accumulated
Other
Comprehensive
(Loss) Income
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
 
Noncontrolling
interest
 
Total
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2013
50,437

 
$
504

 
$
308,825

 
$
130,833

 
$
667

 
$
4,065

 
$
444,894

Restricted stock vesting
209

 
2

 
(2
)
 
—

 
—

 
—

 
—

Stock compensation expense
—

 
—

 
3,584

 
—

 
—

 
—

 
3,584

Stock option exercise
73

 
1

 
940

 
—

 
—

 
—

 
941

Net tax benefit of equity award vesting
—

 
—

 
800

 
—

 
—

 
—

 
800

Distribution to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(113
)
 
(113
)
Restricted stock withheld for taxes
—

 
—

 
(683
)
 
—

 
—

 
—

 
(683
)
Comprehensive loss, net of tax
—

 
—

 
—

 
(11,401
)
 
(12
)
 
—

 
(11,413
)
Balance at September 30, 2014
50,719

 
$
507

 
$
313,464

 
$
119,432

 
$
655

 
$
3,952

 
$
438,010

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


4

Horsehead Holding Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2014 and 2013
(Unaudited)
(Amounts in thousands)
 
2014
 
2013
Cash Flows from Operating Activities:
 
 
 
Net loss
$
(11,401
)
 
$
(1,515
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
23,496

 
21,574

Gain on insurance recovery related to fixed assets
—

 
(1,791
)
Deferred income tax benefit
(1,358
)
 
(1,451
)
Accretion on debt
2,851

 
2,792

Accretion on ESOI liabilities
322

 
333

Amortization of deferred finance costs
1,963

 
1,780

Losses on writedown or disposal of assets
1,037

 
131

(Gains) losses on derivative financial instruments
(1,692
)
 
986

Lower of cost or market adjustment to inventories
1,590

 
2,893

Non-cash compensation expense
3,584

 
2,787

Capitalization of interest
(14,145
)
 
(21,533
)
Changes in operating assets and liabilities:
 
 
 
(Increase) in accounts receivable, net
(1,032
)
 
(6,691
)
Decrease (increase) in inventories, net
21,341

 
(4,752
)
(Increase) decrease in prepaid expenses and other current assets
(7,427
)
 
2,240

(Increase) in deferred finance costs and other
(693
)
 
(97
)
(Decrease) increase in accounts payable
(28,910
)
 
18,948

Increase in accrued expenses
2,332

 
5,402

Increase in other long-term liabilities
454

 
1,454

Net cash (used in) provided by operating activities
(7,688
)
 
23,490

Cash Flows from Investing Activities:
 
 
 
Purchase of property, plant and equipment
(106,488
)
 
(234,230
)
Insurance proceeds related to fixed assets
—

 
1,791

Net cash used in investing activities
(106,488
)
 
(232,439
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from the issuance of debt
51,300

 
21,300

Distributions to noncontrolling interest equity holders
(113
)
 
(114
)
Borrowings on the Credit Facilities
30,224

 
68,500

Repayments on the Credit Facilities
(29,724
)
 
(13,500
)
Debt issuance costs
(1,775
)
 
(524
)
Borrowings on the Credit Agreement
1,172

 
10,603

Repayments on the Credit Agreement
(2,126
)
 
(1,185
)
Proceeds from the exercise of stock options
941

 
—

Tax effect of share based compensation award exercise and vesting
800

 
185

Restricted stock withheld for taxes
(683
)
 
(411
)
Net cash provided by financing activities
50,016

 
84,854

Net decrease in cash and cash equivalents
(64,160
)
 
(124,095
)
Cash and cash equivalents at beginning of period
136,327

 
244,119

Cash and cash equivalents at end of period
$
72,167

 
$
120,024


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

5
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, 2014 and for the three and nine months ended September 30, 2014 and 2013 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, 2014 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2014. 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, 2013.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant items requiring the use of management estimates and assumptions relate to inventory reserves, bad debt reserves, environmental and asset retirement obligations, workers’ compensation liabilities, reserves for contingencies and litigation and fair value of financial instruments 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.
Certain reclassifications have been made to prior year amounts in Note S - Segment Information to conform with current year classifications.

On September 30, 2014, Horsehead Metal Products, Inc. was converted to a North Carolina limited liability company "Horsehead Metal Products, LLC", and The International Metals Reclamation Company, Inc. was converted to a Delaware limited liability company "The International Metals Reclamation Company, LLC".
Significant Accounting Policies - Update

Investment in Joint Venture
Investments in other entities are accounted for using the consolidation, equity method or cost basis depending upon the Company's level of ownership, ability to exercise significant influence over the operating and financial policies of the investee and whether the Company is determined to be the primary beneficiary of a variable interest in an entity.
In December 2013, Horsehead Metal Products ("HMP") entered into a joint venture known as ThirtyOx, LLC ("ThirtyOx") with Imperial Zinc Corp. for the acquisition and processing of zinc bearing secondary materials. The processing operation is located in North Carolina near the new zinc facility. The majority of the feedstock for the new zinc facility will be supplied by Horsehead's EAF dust recycling plants. ThirtyOx is expected to supply a portion of the incremental zinc feed required by the new zinc facility by recovering secondary zinc oxides from the residues generated by galvanizers, die casters and other users of zinc metal. The ThirtyOx facility became operational in August 2014. HMP's anticipated investment in ThirtyOx is expected to be less than $2.0 million.
ThirtyOx was determined to be a variable interest entity as their significant activities are directed by a management agreement and not the equity group. HMP has determined that they are not the primary beneficiary of the variable interest. HMP accounts for its investment in ThirtyOx utilizing the equity method of accounting as they do not own over 50% and are not able to exercise significant influence over the joint venture. HMP has recorded their cash contributions to ThirtyOx as an investment which is increased or decreased by their respective share of ThirtyOx pretax income or loss.
The Company has determined that HMP's interest in ThirtyOx is not individually significant to its consolidated balance sheet and income statement and therefore they are not required to provide additional disclosures regarding their involvement with this joint venture.


6
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“FASB”) issued issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)-Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Under the new guidance, discontinued operations reporting will be limited to disposal transactions that represent strategic shifts having a major effect on operations and financial results. The amended guidance also enhances disclosures and requires assets and liabilities of a discontinued operation to be classified as such for all periods presented in the financial statements. Public entities will apply the amended guidance prospectively to all disposals occurring within annual periods beginning on or after December 15, 2014 and interim periods within those years. Early adoption is permitted under generally accepted accounting principles ("GAAP"). Due to the change in requirements for reporting discontinued operations described above, presentation and disclosures of future disposal transactions after adoption may be different than under current standards. Currently, the adoption of this guidance does not have any impact on the Company's financial position and results of operations.

In May 2014, the FASB and the International Accounting Standards Board (“IASB”) jointly issued ASU No. 2014-9, Revenue from Contracts with Customers (Topic 606), which clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The ASU is effective for public entities for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted under GAAP and retrospective application is permitted, but not required. The Company is currently evaluating the impact of adopting this guidance on its financial position and results of operations.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires entities to evaluate their ability to continue as a going concern within one year after the date that the financial statements are issued. Disclosure is required if there is substantial doubt about an entity’s ability to continue as a going concern. The guidance in ASU No. 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter, with early application permitted. The Company does not expect that the adoption of this ASU will have a material impact on the consolidated financial statements.
There have been no other recently issued accounting updates that had a material impact on the Company’s Interim Financial Statements.

NOTE B—ACQUISITION OF BUSINESS
On November 16, 2012, the Company purchased the single membership interest in Mitsui Zinc Powder LLC (“MZP”), a manufacturer of zinc powders for the alkaline battery business, co-located on the Company’s Monaca facility site, from Oak-Mitsui, Inc. MZP was renamed Horsehead Zinc Powders, LLC. ("HZP"). The Company was MZP's long-term supplier of Special Special High Grade zinc metal used in their production process. The estimated purchase price was $1,101, which was comprised of $500 in cash at closing, a working capital adjustment and $1,270 in contingent consideration. The contingent consideration consisted of a per ton fee based on tons shipped for a period of time up to a maximum of $1,500.
The first two payments related to the contingent consideration were made in 2013. Based upon a decrease in expected production, however, the contingent consideration was reduced by $257 in 2013. During the first quarter of 2014, HZP production was idled due to a lack of raw material supply. Shipments, however, continued through the end of April 2014. As a result, the contingent consideration was reduced by an additional $88 during the nine months ended September 30, 2014. This adjustment was recorded in Interest and other income in the Consolidated Statements of Operations. The final payment under the contingent consideration was made in October 2014.
On November 7, 2014, the Company announced that Shell Chemical LP ("Shell") had exercised its option under the Amended and Restated Option and Purchase Agreement between Shell and Horsehead Corporation to purchase the site of Horsehead Corporation’s facility located in Monaca, PA. This purchase agreement also includes the HZP facility site. No closing date has been established. See Footnote V - Subsequent Event for additional information.

7
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)


NOTE C - RESTRUCTURING EXPENSES

On October 31, 2013, the Company notified various required parties, as required by the Worker Adjustment and Retraining Notification Act of 1988, 29 U.S.C. § 2101 et seq. (the "WARN Act"), that a majority of its manufacturing operations at the plant located in Monaca, Pennsylvania would be permanently closed and shut down within several months of the notification date. The Company ceased the zinc oxide and high purity zinc metal refinery operations at the Monaca facility on December 23, 2013, and ceased production at the zinc smelter at the end of April 2014. In connection with these actions, the Company permanently terminated the employment of five hundred ten salaried and hourly positions.

Costs and the related liabilities due to involuntary termination costs associated with one-time benefit arrangements provided as part of an exit or disposal activity are recognized by the Company when a formal plan for reorganization is approved at the appropriate level of management and communicated to the affected employees. The Company recorded a charge of $7,691 during the fourth quarter of 2013 for severance and other employee-related costs associated with the closing of the Monaca, Pennsylvania facility.
Accrual at October 31, 2013
$
7,517

Adjustments to previously recorded restructuring charges
174

Cash payments
(9
)
Accrual at December 31, 2013
7,682

Adjustments to previously recorded restructuring charges
146

Cash payments
(787
)
Accrual at March 31, 2014
7,041

Adjustments to previously recorded restructuring charges
59

Cash payments
(5,123
)
Accrual at June 30, 2014
1,977

Cash payments
(1,236
)
Accrual at September 30, 2014
$
741


The remaining cash expenditures of $741 related to the severance and other employee-related costs are expected to be paid by the end of 2014.

Costs associated with exit or disposal activities (e.g., costs to close facilities) are recognized and measured at their fair value in the period in which the liability is incurred. The Company expects to incur $1,700 during 2014 in exit and disposal costs related to the closing of the Monaca, Pennsylvania facility and incurred approximately $1,000 of these costs during the first nine months of 2014.
NOTE D—CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following at September 30, 2014 and December 31, 2013.
 
 
September 30,
2014
 
December 31,
2013
Cash in bank
$
71,950

 
$
136,110

Money market demand account
217

 
217

 
$
72,167

 
$
136,327

The Company’s cash balance was concentrated in three U.S. banks and one Canadian bank at both September 30, 2014 and December 31, 2013. The Company carries deposits in excess of federally insured amounts. At September 30, 2014, the Company had $9,607 in cash held at foreign institutions. The Company does not believe that it is exposed to significant concentration of credit risk.
The money market demand account carried an interest rate of 0.20% on September 30, 2014 and December 31, 2013. The balances approximate fair value.

8
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

NOTE E—INVENTORIES
Inventories consisted of the following at September 30, 2014 and December 31, 2013.
 
September 30,
2014
 
December 31,
2013
Raw materials
$
14,768

 
$
12,053

Work-in-process
3,213

 
5,120

Finished goods
15,472

 
40,468

Supplies and spare parts
12,736

 
11,935

 
$
46,189

 
$
69,576

Inventories were net of reserves for slow moving inventory of $5,572 and $6,164 at September 30, 2014 and December 31, 2013, respectively.
The Company recorded $445 and $1,590 in lower of cost or market ("LCM") adjustments to its finished goods inventories during the three and nine months ended September 30, 2014, respectively. The Company recorded LCM adjustments of $1,266 and $2,893 to its finished goods inventories during the three and nine months ended September 30, 2013, respectively, and recorded total LCM adjustments to its finished goods inventories of $3,739 during 2013. The 2014 and 2013 LCM adjustments were the result of the low London Metal Exchange (“LME”) zinc price, increased production costs in 2014 at the Monaca facility as the plant operated at inefficient levels during the final weeks of operation and the incurrence of higher than normal production costs in 2014 at the new zinc facility in Mooresboro, North Carolina ("new zinc facility") which operated at inefficient levels during startup.
NOTE F—PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following at September 30, 2014 and December 31, 2013.
 
September 30,
2014
 
December 31,
2013
Refundable income taxes
$
10,378


$
2,017

Prepaid hedge contracts
538


191

Other
2,122


3,056

 
$
13,038


$
5,264

See Note P – Accounting for Derivative Instruments and Hedging Activities for more information regarding Prepaid hedge contracts.
NOTE G—PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at September 30, 2014 and December 31, 2013.

September 30,
2014

December 31,
2013
Land and land improvements
$
46,510


$
21,879

Buildings and building improvements
69,688


27,758

Machinery and equipment
744,718


196,760

Construction in progress
52,358


546,519


913,274


792,916

Less accumulated depreciation
(107,231
)

(84,666
)

$
806,043


$
708,250

The Company capitalized $594 and $14,146 of interest expense during the three and nine months ended September 30, 2014, respectively, and capitalized $7,721 and $21,534 during the three and nine months ended September 30, 2013, respectively. The interest expense capitalized related to the construction of the new zinc facility in Mooresboro, North Carolina. The first phase of construction of the new zinc facility was completed during the second quarter of 2014 and reclassed out of construction in

9
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

progress and into the appropriate property, plant and equipment categories. Through September 30, 2014, the Company has capitalized a total of $54,645 of interest expense related to the new zinc facility.
 
During 2011, the Company recorded an initial impairment charge of $9,797 related to its Monaca, Pennsylvania facility, to adjust the net book value of the assets for the partial closure and/or disposition of the facility in connection with the expected future start-up of the new zinc plant in North Carolina.

During 2012, the Company recorded total impairment charges of $25,305 based on the entering into and subsequent extension of an option agreement with Shell to purchase its Monaca, Pennsylvania site, its intent to close the zinc oxide refinery production capacity at that site when the smelting operation is closed, the continuation of the construction of the new zinc facility and the determination that the power plant, which had been idled since September 2011, would not be restarted.

On June 28, 2013, Shell extended its option until January 2014. Based upon this extension, the Company evaluated the carrying values of these assets and no impairment charge was recorded. On October 31, 2013, the Company notified various related parties, as required by the WARN Act that a majority of Horsehead Corporation's manufacturing operations at its Monaca, Pennsylvania facility would be permanently closed and shut down within several months of the notification date. Based upon this notice, the Company recorded an impairment charge of $9,349 during the fourth quarter of 2013 related to its Monaca facility. The Company recorded total impairment charges of $44,451 related to the Monaca facility. The net book value of the remaining assets of the Monaca, Pennsylvania facility was approximately $5,000 at December 31, 2013 and no additional impairment will be recorded related to the Monaca facility.

The impairment charge calculations were performed using average expected future cash flows under various likelihoods of asset retirements or dispositions. The cash flows were then discounted and compared to the book value of the related assets resulting in the impairment charge.

On November 7, 2014, the Company announced that Shell had exercised its option under the Amended and Restated Option and Purchase Agreement. No closing date has been established. See Footnote V - Subsequent Event for additional information.

NOTE H— DEFERRED FINANCE COSTS AND OTHER
Deferred finance costs and other at September 30, 2014 and December 31, 2013 consisted of the following:

September 30,
2014

December 31,
2013
Deferred finance costs
$
8,715


$
8,903

Other
1,406


738


$
10,121


$
9,641

See Note I – Long Term Debt for additional information regarding deferred finance costs. 

10
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

NOTE I—LONG –TERM DEBT
Long-term debt consisted of the following at September 30, 2014 and December 31, 2013:

September 30,
2014

December 31,
2013
Loan Payable, related to New Market Tax Credit program
$
255


$
255

3.80% Convertible Senior Notes due July 2017, net of debt discount
88,511


85,814

10.50% Senior Secured Notes due June 2017, net of debt premium
205,194


193,734

9.00% Senior Unsecured Notes due July 2017
40,000

 
—

ABL Facility, interest payable at variable rates
17,600

 
31,500

Zochem Credit Facility, interest payable at variable rates
19,400

 
10,000

INMETCO Credit Facility, interest payable at variable rates
20,000

 
15,000

Credit Agreement, interest payable at variable rates
20,375


21,335


411,335


357,638

Less portion currently payable
2,998


2,870


$
408,337


$
354,768


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 used the proceeds from the offering for the initial stages of construction for the new zinc facility and for general corporate purposes, including working capital needs, investment in business initiatives, capital expenditures and acquisitions.
The Convertible Notes pay interest semi-annually in arrears on July 1 and January 1 of each year at a rate of 3.80% per annum and 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 0.0666667 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 of the Company and rank senior in right of payment to its future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment to its existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of its 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 its 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 Convertible 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 Convertible 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 at par 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 815-15 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 $78,174 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 $21,826 was 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

11
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

$8,805, 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 ASC 835-30 Imputation of Interest.
 
Costs of $3,481 associated with the issuance were allocated to the liability and equity components in proportion to the allocation of the fair value of the Convertible Notes. As such, $2,721 was accounted for as debt issuance costs attributable to the liability component of the Convertible Notes and were capitalized 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. The Company recognized interest expense of $115 related to the amortization of debt issuance costs during both the three months ended September 30, 2014 and 2013. The Company recognized interest expense of $345 during both the nine months ended September 30, 2014 and 2013. The remaining issuance costs of $760 were accounted for as equity issuance costs and were recorded in additional-paid in capital.
During the three and nine months ended September 30, 2014, the Company recognized $1,868 and $5,546, respectively, in interest expense related to the Convertible Notes. During the three and nine months ended September 30, 2013, the Company recognized $1,793 and $5,327 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 8.50%.
The carrying amount of the Convertible Notes was $88,511 with an unamortized discount of $11,489 at September 30, 2014. The carrying amount of the Convertible Notes was $85,814 with an unamortized discount of $14,186 at December 31, 2013. The carrying amount of the equity component was $6,322 and $8,028 at September 30, 2014 and December 31, 2013, respectively. The accumulated accretion related to the equity component was $6,699 and $4,993 at September 30, 2014 and December 31, 2013, respectively. The fair value of the Convertible Notes was estimated to be approximately $128,000 and $127,000 at September 30, 2014 and December 31, 2013, respectively, per quotes obtained from active markets.
Revolving Credit and Security Agreement (as amended, the “ABL Facility”)
On September 28, 2011, the Company’s subsidiary Horsehead Corporation (“Horsehead”) entered into an ABL Facility, as borrower, with PNC Bank, as agent and lender, to support liquidity needs for the Company’s new zinc facility and to allow for the availability of previously restricted cash. Horsehead Holding Corp. also entered into the ABL Facility, as guarantor of Horsehead’s obligations.
On July 26, 2012, the Company amended its ABL Facility to permit the offering of the Senior Secured Notes (as defined below) and the incurrence of liens on the collateral that secures the Senior Secured Notes and the ABL Facility. Pursuant to the ABL Facility, Horsehead’s existing and future domestic subsidiaries, other than certain excluded subsidiaries, are required to guarantee Horsehead’s obligations under the facility, jointly and severally, on a senior secured basis. On October 24, 2012, The Company amended its ABL Facility to add HMP as an additional guarantor and to transfer certain assets from Horsehead to HMP. On December 24, 2013, the Company entered into an amendment to add HZP as an additional borrower and convert HMP from a guarantor to a borrower.
The ABL Facility 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, or (b) the sum of certain portions 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 is available to Horsehead for the issuance of letters of credit, which reduces availability under the ABL Facility.
On June 30, 2014, the Company amended certain provisions of the ABL Facility including increasing the advance rates on receivables and inventory through April 1, 2015 (the"Availability Period") to provide up to a maximum additional available amount of $10,000. In addition, the interest spread on revolving advances, letters of credit and unused line fees were increased during the Availability Period as described below. On September 22, 2014, we entered into a further amendment, which amended the definition of an eligible receivable with respect to a certain customer for a stated time period. The total aggregate principal amount allowed under the ABL facility, however, remains at $60,000.
At September 30, 2014, the Company had $9,712 in letters of credit outstanding under the ABL Facility. Horsehead’s obligations under the ABL Facility are secured by a first priority lien (subject to certain permitted liens and exclusions) on substantially all of the tangible and intangible personal property assets of Horsehead. At September 30, 2014, there were $17,600

12
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

in outstanding borrowings and no availability remaining under the ABL facility. The carrying amount of the debt approximated fair value at September 30, 2014.
Borrowings by Horsehead under the ABL Facility 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 ABL Facility, plus an applicable margin (ranging from 0.25% to 1.00%, 1.50% during the Availability Period) based on average undrawn availability, or (b) a eurodollar rate equal to the “eurodollar rate,” as determined under the ABL Facility, plus an applicable margin (ranging from 1.75% to 2.50%, 3.00% during the Availability Period) based on average undrawn availability. Horsehead will pay a letter of credit fee to the lenders under the ABL Facility (ranging from 1.75% to 2.50%, 3.00% during the Availability Period) 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 ABL Facility 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 Corp. 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 ABL Facility will become immediately due and payable.
 
Horsehead pays an unused line fee to the lenders under the ABL Facility (ranging from 0.25% to 0.375% per annum, 0.75% during the Availability Period) 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 ABL Facility 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 ABL Facility 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, 2014.
The Company incurred total issuance costs of $590 in connection with the ABL Facility. 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 ABL Facility. Interest expense of $37 and $82 related to the amortization of deferred finance costs was recorded during the three and nine months ended September 30, 2014, respectively. Interest expense of $24 and $67 related to the amortization of deferred finance costs was recorded during the three and nine months ended September 30, 2013.
Senior Secured Notes
On July 26, 2012, the Company completed a private placement of $175,000 in aggregate principal amount of 10.50% Senior Secured Notes due 2017 (the “Secured Notes”), at an issue price of 98.188% of par. The Company received proceeds of $171,829 and recognized approximately $7,732 in issuance costs in connection with the offering. The total net proceeds from the offering were $164,097. The Company used the proceeds from the Secured Notes to pay for the completion of the construction of the Company’s new zinc facility and the remainder for general corporate purposes, including working capital needs, investment in other business initiatives and other capital expenditures. The Company recorded an initial debt carrying value of $171,829 (net of the debt discount of $3,171) and is accreting the long-term debt balance to par value over the term of the Secured Notes using the interest method as required by ASC 835-30 Imputation of Interest. Interest expense includes the contractual interest coupon of 10.50% and amortization of the debt discount to reflect an effective interest rate of 11.00%.

On June 3, 2013, the Company completed the sale to certain purchasers of an additional $20,000 in aggregate principal amount of its Secured Notes (the “2013 Additional Notes”) at an issue price of 106.5% of the principal amount of the 2013 Additional Notes plus accrued interest from June 1, 2013, in a private placement to qualified institutional buyers not registered under the Securities Act. The Company received net proceeds of $20,955 after deducting approximately $345 in issuance costs in connection with the offering. The Company recorded an initial debt carrying value of $21,300 (including the debt premium of $1,300) and is amortizing the long-term debt balance to par value over the remaining term of the Secured Notes using the interest method as required by ASC 835-30 Imputation of Interest. Interest expense includes the contractual interest coupon of 10.50% and amortization of the debt premium to reflect an effective interest rate of 8.6%.


13
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

On July 29, 2014, the Company completed the sale of an additional $10,000 aggregate principal amount of the Company’s 10.50% Senior Secured Notes due 2017 (the “2014 Additional Notes”), at an issue price of 113.00% of par. The 2014 Additional Notes and the related guarantees were offered to investors who were both qualified institutional buyers and accredited investors in a private placement not registered under the Securities Act. The Company received net proceeds of $10,976 after deducting approximately $324 in issuance costs in connection with the offering.The Company recorded an initial debt carrying value of $11,300 (including the debt premium of $1,300) and is amortizing the long-term debt balance to par value over the remaining term of the Secured Notes using the interest method as required by ASC 835-30 Imputation of Interest. Interest expense includes the contractual interest coupon of 10.50% and amortization of the debt premium to reflect an effective interest rate 5.5%.
The Secured Notes, 2013 Additional Notes and 2014 Additional Notes (collectively, the "Senior Secured Notes") pay interest at a rate of 10.50% per annum, payable in cash semi-annually, in arrears, on June 1 and December 1 of each year. The Senior Secured Notes mature on June 1, 2017. The Company recorded interest expense of $5,307 and $15,697 for the three and nine months ended September 30, 2014, respectively, and $5,189 and $14,784 for the three and nine months ended September 30, 2013, respectively.

At September 30, 2014, there was an aggregate of $205,000 of Senior Secured Notes outstanding.
The Senior Secured Notes are fully and unconditionally guaranteed, on a senior secured basis, by the Company’s existing and future domestic restricted subsidiaries, other than certain excluded subsidiaries (the “Guarantors”). The Senior Secured Notes and the related guarantees are secured by a first-priority lien on all of the Company’s and the Guarantors’ existing and future property and assets, whether real, personal or mixed (other than certain excluded assets), subject to certain permitted liens; provided that the lien on the accounts receivable, inventory, certain deposit accounts, cash and certain other assets and, in each case, the proceeds thereof, of Horsehead and the guarantors under the ABL Facility will be a second-priority lien. The Senior Secured Notes are the Company’s and the Guarantors’ senior secured obligations. The Senior Secured Notes and the guarantees rank equal in right of payment with any of the Company’s and the Guarantors’ senior indebtedness, including indebtedness under the ABL Facility and, in the case of the Company, the Company’s Convertible Notes. The Senior Secured Notes and the guarantees rank senior in right of payment to any of the Company’s and the Guarantors’ future indebtedness that is expressly subordinated to the Senior Secured Notes or guarantees. The Senior Secured Notes and the guarantees are effectively senior to any of the Company’s or the Guarantors’ unsecured indebtedness, including the Convertible Notes, to the extent of the value of the collateral securing the Senior Secured Notes, and the Senior Secured Notes are effectively senior to indebtedness of the Company that is not guaranteed by the Guarantors, including the Company’s Convertible Notes, to the extent of the value of the guarantees. With respect to the collateral securing the Senior Secured Notes, the Senior Secured Notes and the guarantees are effectively junior to the Company’s and the Guarantors’ obligations under the ABL Facility, to the extent of the value of the collateral securing the ABL Facility on a first-lien basis, and effectively senior to the Company’s and the Guarantors’ obligations under the ABL Facility, to the extent of the value of the collateral securing the ABL Facility on a second-lien basis.
The Company may redeem some or all of the Senior Secured Notes prior to June 1, 2016, by paying a make-whole premium, plus accrued and unpaid interest, if any, to the date of redemption or, on or after June 1, 2016, at a redemption price equal to 105.25%, plus accrued and unpaid interest, if any, to the date of redemption. Prior to June 1, 2015, the Company may redeem up to 35% of the aggregate principal amount of the Senior Secured Notes at a redemption price equal to 110.50%, plus accrued and unpaid interest, if any, to the date of redemption, with the net cash proceeds of certain equity offerings.
The Indenture contains covenants that limit the Company’s ability and the ability of its restricted subsidiaries to, among other things: (i) incur additional indebtedness and guarantee indebtedness; (ii) declare or pay dividends, redeem capital stock or make other distributions to stockholders; (iii) make investments and acquire assets; (iv) sell or transfer certain assets; (v) enter into transactions with affiliates; (vi) create liens or use assets as security in other transactions; (vii) enter into sale and leaseback transactions; (viii) merge or consolidate, or sell, transfer, lease or dispose of substantially all of its assets; and (ix) make certain payments on indebtedness. The Indenture also provides for customary events of default. On October 24, 2012, the Company entered into the First Supplemental Indenture to the Senior Secured Notes to add HMP as an additional subsidiary guarantor under the Indenture. The Company was in compliance with all covenants at September 30, 2014.
The carrying amount of the Senior Secured Notes was $205,194 with a net unamortized premium of $194 at September 30, 2014. The carrying amount of the Senior Secured Notes was $193,734 with a net unamortized discount of $1,266 at December 31, 2013. The fair value of the Senior Secured Notes was estimated to be approximately $234,000 and $214,000 at September 30, 2014 and December 31, 2013, respectively, per quotes obtained from active markets.
Costs of $8,401 associated with the issuance of the Senior Secured Notes were capitalized as a component of other assets. These costs are being amortized to interest expense over the term of the Senior Secured Notes. The Company recognized interest

14
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

expense of $442 and $1,285 related to the amortization of debt issuance costs during the three and nine months ended September 30, 2014, respectively, and $423 and $1,229 during the three and nine months ended September 30, 2013, respectively.
Credit Agreement
On August 28, 2012, Horsehead Corporation and Horsehead Holding Corp. entered into a Credit Agreement (the “Credit Agreement”) with Banco Bilbao Vizcaya Argentaria, S.A., a Spanish bank. The Credit Agreement provides for the financing of up to €18,583 (approximately $25,805 USD) for purchases under the contracts between Horsehead and Tecnicas Reunidas, S.A., a Spanish corporation providing equipment and related products and services for the new zinc facility and additional financing of $968 for the premium for the insurance on such loan which was issued by Compania Espanola de Seguros de Credito a la Exportacion (“CESCE”). The Company closed on the facility on November 14, 2012.
The obligations of Horsehead under the Credit Agreement are secured by an unconditional guarantee of the Company, but are not secured by security interest or mortgages on any real or personal property of Horsehead, the Company or any of the Company’s other direct or indirect subsidiaries.
The Credit Agreement provides for drawings thereunder to be repaid semiannually over a period ending on November 2022, amortizing over that period, and bearing interest at a per annum rate equal to the London Interbank Offered Rate (“LIBOR”) plus 3.20%. The Company will also semiannually pay a commitment fee of 0.50% calculated on the undrawn amount of the Credit Agreement. At September 30, 2014 and December 31, 2013, the Company had outstanding borrowings of $20,375 and $21,335, respectively, under the Credit Agreement. At September 30, 2014 and December 31, 2013, the current portion of amounts due under the Credit Agreement was $2,998 and $2,870, respectively.
Draws may be made under the Credit Agreement until March 2015. Principal and interest payments are due semiannually. The Credit Agreement contains customary events of default. In the event of a default, the Credit Agreement will be terminated and immediate repayment will be required for all amounts outstanding under the Credit Agreement including accrued interest.
The Credit Agreement contains a maximum Debt to Equity ratio of 1.2:1. The 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, 2014. Availability under the Credit Agreement was approximately $2,403 at September 30, 2014. The carrying amount of the debt approximated fair value at September 30, 2014.
The Company incurred issuance costs of $1,248 in connection with the 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 Credit Agreement. Interest expense of $35 related to the amortization of deferred finance costs was recorded during both the three months ended September 30, 2014 and 2013. Interest expense of $106 related to the amortization of deferred finance costs was recorded during both the nine months ended September 30, 2014 and 2013.
Zochem Revolving Credit and Security Agreement
On December 21, 2012, Zochem entered into a Revolving Credit and Security Agreement (the “Zochem Facility”), as borrower, with PNC Bank, Canada Branch, as agent and lender. The Company also entered into the Zochem Facility as a guarantor of Zochem’s obligations. Zochem entered into the Zochem Facility to support liquidity during the construction of its recently completed production capacity expansion in Brampton, Ontario. On April 29, 2014, Zochem terminated the $15,000 CAD Zochem Facility and entered into, as borrower, a new $20,000 revolving credit facility (the "2014 Zochem Facility") with PNC Bank, as agent and lender. The Company also entered into the 2014 Zochem Facility as a guarantor of Zochem's obligations. Terms under the 2014 Zochem Facility are essentially the same as the terms under the terminated Zochem Facility.
 
The 2014 Zochem Facility provides for a twenty-nine month senior secured revolving credit facility in an aggregate principal amount of up to $20,000. The aggregate amount of loans permitted to be made to Zochem under the 2014 Zochem Facility can not exceed a borrowing base consisting of the lesser of: (a) $20,000, 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 Zochem, minus the aggregate undrawn amount of outstanding letters of credit and certain availability reserves. Up to an aggregate of $5,000 is available to Zochem for the issuance of letters of credit, which reduce availability under the 2014 Zochem Facility. Zochem’s obligations under the 2014 Zochem Facility are secured by a first priority lien (subject to certain permitted liens) on substantially all of the tangible and intangible assets of Zochem. At September 30, 2014, the Company had $19,400 in outstanding borrowings under the 2014 Zochem Facility. There was no undrawn availability at September 30, 2014. The carrying amount of the debt approximated fair value at September 30, 2014.

15
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

Borrowings by Zochem under the 2014 Zochem Facility bear interest at a rate per annum which, at the option of Zochem, can be either: (a) a domestic rate equal to the “alternate base rate,” as determined under the 2014 Zochem Facility, plus an applicable margin of 1.00% based on average undrawn availability, or (b) a CDOR, LIBOR or eurodollar rate as applicable, plus a margin of 2.50% based on average undrawn availability. Zochem pays a letter of credit fee to the lenders under the Zochem Facility of 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 2014 Zochem Facility 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 would be equal to the otherwise applicable rate (including the highest applicable margin) plus 2.0% and any letter of credit fees would be increased by 2.0%. Upon (a) the occurrence of an event of default related to the bankruptcy of Zochem or the Company 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 2014 Zochem Facility will become immediately due and payable.
Zochem pays an unused line fee to the lenders of 0.75% per annum, based on average undrawn availability, times the amount by which the maximum revolving advance amount exceeded the average daily unpaid balance of revolver loans and undrawn amount of any outstanding letters of credit during any calendar quarter.
The 2014 Zochem Facility contains a minimum fixed charge coverage ratio of 1.15:1.00 which Zochem must comply with at the time of any advance request. The 2014 Zochem Facility 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, 2014.
The Company incurred total issuance costs of $175 in connection with the Zochem Facility and 2014 Zochem Facility. 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 remaining term of the 2014 Zochem Facility. Interest expense of $15 and $38 related to the amortization of deferred finance costs was recorded during the three and nine months ended September 30, 2014, respectively, and $8 and $23 during the three and nine months ended September 30, 2013, respectively.
INMETCO Senior Secured Revolving Credit Agreement
On June 24, 2013, The International Metals Reclamation Company, Inc. (“INMETCO”), a wholly owned subsidiary of the Company, entered into a Senior Secured Revolving Credit Agreement (the “INMETCO Facility”), as borrower, with Wells Fargo Bank, N.A., as lender. The Company entered into a guaranty of INMETCO’s obligations under the INMETCO Facility. The INMETCO Facility was entered into to support working capital requirements and for general corporate purposes. On March 31, 2014, the Company entered into the First Amendment to the Credit Agreement which amended certain provisions of the Credit Agreement including the increase of the maximum advances allowed from $15,000 to $20,000.
The INMETCO Facility provides for a three year secured line of credit with the aggregate amount of loans permitted to be made to INMETCO not to exceed $20,000. INMETCO’s obligations under the INMETCO facility are secured by a first priority lien (subject to certain permitted liens) on substantially all of the personal property of INMETCO, including accounts receivable, inventory, deposit accounts, equipment and general intangibles. At September 30, 2014, INMETCO had $20,000 in outstanding borrowings under the INMETCO Facility and no remaining availability. The carrying amount of the debt approximated fair value at September 30, 2014.
 
Borrowings under the INMETCO facility bear interest at a rate per annum of LIBOR plus a margin of 2.0%. INMETCO pays unused line fees of 0.375% per annum, based on the average daily unused amount of the INMETCO facility, and paid a one time fronting fee to the issuing bank equal to 0.50% of the maximum principal amount of the INMETCO Facility.
The INMETCO Facility contains quarterly financial covenants, which include a maximum cash flow leverage ratio of 2.00:1.00, a minimum tangible net worth requirement of $15,000 and a minimum net profit requirement of $100. The INMETCO Facility 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, 2014. The First Amendment to the Credit Agreement amended the minimum net worth requirement for the March and June 2014 quarters.
INMETCO incurred issuance costs of $151 in connection with the INMETCO Facility. 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 INMETCO Facility. Interest expense of $13 and $38 related to the amortization of deferred finance costs was

16
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

recorded during the three and nine months ended September 30, 2014, respectively. Interest expense of $10 related to the amortization of deferred finance costs was recorded during both the three and nine months ended September 30, 2013, respectively.
Senior Unsecured Notes

On July 29, 2014, the Company completed the sale of $40,000 aggregate principal amount of 9.00% Senior Notes due 2017 (the “Unsecured Notes”), at an issue price of 100.00% of par. The Unsecured Notes and the related guarantees were offered to investors who were both qualified institutional buyers and accredited investors in a private placement not registered under the Securities Act.
The Unsecured Notes were issued pursuant to an indenture, dated as of July 29, 2014 (the “Unsecured Notes Indenture”), among the Company, the Guarantors and U.S. Bank National Association, as trustee. The Unsecured Notes pay interest at a rate of 9.00% per annum, payable in cash semi-annually, in arrears, on June 1 and December 1 of each year, beginning on December 1, 2014. The Unsecured Notes mature on June 1, 2017.
The Unsecured Notes are fully and unconditionally guaranteed, on a senior unsecured basis (other than as described below), by the Company’s existing and future domestic restricted subsidiaries, other than certain excluded subsidiaries. The Unsecured Notes are the Company’s and the Guarantors’ senior unsecured obligations (other than as described below). The Unsecured Notes and the guarantees (i) rank equal in right of payment with the Company’s and the Guarantors’ senior indebtedness (other than as described below) (including indebtedness under the Company's Senior Secured Notes due 2017, the Convertible Notes due 2017, and the ABL facility, dated as of September 28, 2011, (as amended to the date hereof)); (ii) rank senior in right of payment with the Company’s and the Guarantors’ future indebtedness that is expressly subordinated to the Unsecured Notes, (iii) with respect to the guarantee by INMETCO, such guarantee ranks junior in right of payment to the obligations of INMETCO under the Company’s Senior Secured Notes and the INMETCO Facility; and (iv) is effectively junior to the Company’s and the Guarantors’ obligations under the Senior Secured Notes, the ABL Facility, and the INMETCO Facility, to the extent of the value of the collateral securing such indebtedness.
The Company may redeem some or all of the Unsecured Notes, on or after June 1, 2016 at a redemption price equal to 104.50%, plus accrued and unpaid interest, if any, to the date of redemption. Prior to June 1, 2015, the Company may redeem up to 35% of the aggregate principal amount of the Unsecured Notes at a redemption price equal to 109.00%, plus accrued and unpaid interest, if any, to the date of redemption, with the net cash proceeds of certain equity offerings. In addition, the Company may, at its option, redeem some or all of the Unsecured Notes prior to June 1, 2016, by paying a make-whole premium, plus accrued and unpaid interest, if any, to the date of redemption.
The Unsecured Notes Indenture contains covenants that limit the Company’s ability and the ability of its restricted subsidiaries to, among other things: (i) incur additional indebtedness and guarantee indebtedness; (ii) declare or pay dividends, redeem capital stock or make other distributions to stockholders; (iii) make investments and acquire assets; (iv) sell or transfer certain assets; (v) enter into transactions with affiliates; (vi) create liens or use assets as security in other transactions; (vii) enter into sale and leaseback transactions; (viii) merge or consolidate, or sell, transfer, lease or dispose of substantially all of its assets; and (ix) make certain payments on indebtedness. The Unsecured Notes Indenture also provides for customary events of default. The Company was in compliance with all debt covenants as of September 30, 2014.

Costs of $1,207 associated with the issuance of the Unsecured Notes were capitalized as a component of other assets. These costs are being amortized to interest expense over the term of the Unsecured Notes. The Company recognized interest expense of $71 related to the amortization of debt issuance costs during the three and nine months ended September 30, 2014.
The fair value of the Unsecured Notes was estimated to be approximately $39,200 at September 30, 2014 per quotes obtained from active markets.
Other
At September 30, 2014, the Company had $10,089 of letters of credit outstanding under the ABL Facility and 2014 Zochem Facility to collateralize self-insured claims for workers’ compensation and other general insurance claims. At December 31, 2013, the Company had $10,109 of letters of credit outstanding under the ABL Facility and Zochem Facility to collateralize self-insured claims for workers’ compensation and other general insurance claims. The Company also had three surety bonds outstanding in the amount of $11,213 to collateralize closure bonds for the three facilities located in Pennsylvania at both September 30, 2014 and December 31, 2013.

17
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

NOTE J—ACCRUED EXPENSES
Accrued expenses at September 30, 2014 and December 31, 2013 consisted of the following.

September 30,
2014

December 31,
2013
Employee related costs
$
5,524


$
9,165

EAF dust processing reserve
4,832


2,395

Workers’ compensation insurance claim liabilities
1,800


1,800

Unearned tolling revenue
2,939


2,616

Accrued electric
759


4,189

Accrued interest
9,063


4,136

Unearned contractual services
7,500

 
—

Restructuring accrual
741

 
7,682

Other
12,622


12,775


$
45,780


$
44,758


NOTE K—OTHER LONG-TERM LIABILITIES
Other long-term liabilities at September 30, 2014 and December 31, 2013 consisted of the following.

September 30,
2014

December 31,
2013
Environmental obligations
$
620


$
644

Insurance claim liabilities
7,876


7,195

Asset retirement obligations
4,691


4,452

Deferred purchase price obligation
4,312


3,988

Other
1,414


1,508


$
18,913


$
17,787

 
NOTE L — EMPLOYEE BENEFIT PLANS
As part of the acquisition of Zochem, on November 1, 2011, the Company assumed the pension assets and the pension liability for both the hourly and salary pension plans which were in effect at the time of the acquisition. These plans are maintained and contributions are made in accordance with the Pension Benefits Act of Ontario, which prescribes the minimum contributions that the Company must make to the Plans.
Net periodic benefit costs related to the plan for the three and nine months ended September 30, 2014, were $31 and $93, respectively. Net periodic benefit costs related to the plan for the three and nine months September 30, 2013, were $50 and $147, respectively.
Net periodic benefit costs for the three and nine months ended September 30, 2014 and 2013 were:

Three months ended September 30, 2014

Three months ended September 30, 2013
Components of net periodic benefit cost:



Service Cost
$
60


$
64

Interest Cost
56


54

Expected return on plan assets
(79
)

(69
)
Losses
(6
)

1

Net periodic benefit cost
$
31


$
50


18
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

 
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
Components of net periodic benefit cost:
 
 
 
Service Cost
$
180

 
$
191

Interest Cost
168

 
163

Expected return on plan assets
(237
)
 
(208
)
Losses
(18
)
 
1

Net periodic benefit cost
$
93

 
$
147


During the three and nine months ended September 30, 2014, the Company made contributions in the amount of $26 and $127, respectively, to its defined benefit pension plans. The Company anticipates making $46 of additional contributions to fund its defined benefit pension plans during the remainder of 2014. During the three and nine months ended September 30, 2013, the Company made contributions of $46 and $146, respectively, to its defined benefit pension plans.
The Company’s hourly and salary pension plan assets of $5,203 at September 30, 2014 are held in one fund which seeks to provide investors with a steady flow of monthly income and capital growth primarily through investments in Canadian fixed income and large cap securities. The pension plan assets are considered to be in level 2 of the fair value hierarchy.
NOTE M—INCOME TAXES
The Company’s effective tax rates were 50.8% and 42.6% for the three and nine months ended September 30, 2014, respectively. The Company's effective tax rates were 38.3% and 41.9% for the three and nine months ended September 30, 2013, respectively. Income tax expense (benefit) differs from the amount computed by applying the U.S. statutory federal income tax rate of 35% to income before income taxes, due to state income taxes, a lower income tax rate on Canadian income and the impact of permanent differences.

The effective tax rate for the three months ended September 30, 2014 increased when compared to the three months ended September 30, 2014 due to higher than previously projected pretax losses.

The effective tax rate for the nine months ended September 30, 2014 increased when compared to the nine months ended September 30, 2014 due to the utilization of state net operating losses and the absence of a 2014 research and development credit due to the expiration of the credit during 2013.

On September 13, 2013, the IRS released the final Regulations governing the application of Internal Revenue Code Sections 162(a) and 263(a) to amounts paid to acquire, produce, or improve tangible property. Management has concluded that the impact of these new regulations will not be material to the financial statements.

The Company and its subsidiaries file income tax returns in the U.S., Canada 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 are 2009 through 2013. U.S. income taxes and foreign withholding taxes are not provided on undistributed earnings of foreign subsidiaries because it is expected such earnings will be permanently reinvested in the operations of such subsidiaries. It is not practical to determine the amount of income tax liability that would result had such earnings been repatriated.

19
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

NOTE N—ACCUMULATED OTHER COMPREHENSIVE INCOME
Components of accumulated other comprehensive income are as follows:

September 30, 2014

December 31, 2013
Cumulative translation adjustments
$
30


$
30

Net pension adjustment
625


637

Accumulated other comprehensive income
$
655


$
667

NOTE O—SHARE-BASED COMPENSATION

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

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 terms of the 2006 Plan. The options have a term of ten years and vest ratably over a five-year period from date of grant. During the nine months ended September 30, 2014, 73 options were exercised and the Company received proceeds of $941 from the exercise of these options. At September 30, 2014, there were 583 options still outstanding; all were fully vested and exercisable, each with an exercise price of $13.00 per share and 2.3 years of remaining contractual life. The options outstanding under the 2006 Plan had $2,313 of intrinsic value at September 30, 2014. All compensation expense had been recognized as of March 31, 2012.

The Company had a total of 636 restricted stock units at a weighted average grant date fair value of $10.32 per unit outstanding under the 2006 Plan at December 31, 2013. During the nine months ended September 30, 2014, 214 restricted stock units vested having an intrinsic value of $3,553. At September 30, 2014, there were 422 restricted stock units outstanding and the remaining contractual life ranged from 0.33 years to 3.0 years. The related compensation expense for the three months ended September 30, 2014 and 2013 was $337 and $340, respectively. The related compensation expense for the nine months ended September 30, 2014 and 2013 was $1,065 and $1,356, respectively. Unrecognized compensation expense as of September 30, 2014 was $1,830.
On May 17, 2012, the Company adopted the Horsehead Holding Corp. 2012 Incentive Compensation Plan (“2012 Plan”), after it was approved by the Company’s stockholders at the 2012 Annual Meeting of Stockholders. The 2012 Plan replaced the 2006 Plan, and no further awards, stock options or other grants will be issued under the 2006 Plan. The 2012 Plan provides for grants of stock options, stock appreciation rights, restricted stock, restricted stock units and other cash or equity-based awards. Directors, officers and other employees of the Company, as well as others performing consulting or advisory services for the Company, are eligible for grants under the 2012 Plan. The 2012 Plan is administered by the Compensation Committee. A total of 2,700 shares of the Company’s common stock were initially authorized for issuance under the 2012 Plan. The number of shares available for issuance under the 2012 Plan is subject to adjustment in the event of a reorganization, stock split, merger or similar change in the corporate structure or the number of 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 2012 Plan or covered by grants previously made under the 2012 Plan. The shares available for issuance under the 2012 Plan may be, in whole or in part, authorized and unissued or held as treasury shares. If awards under the 2012 Plan are for any reason canceled, or expire or terminate unexercised, the shares covered by such awards may again be available for the grant of awards under the 2012 Plan.
The Company had a total of 376 restricted stock units at a weighted average grant date fair value of $15.10 per unit outstanding under the 2012 Plan at December 31, 2013. During the nine months ended September 30, 2014, the Company granted 130 service based restricted stock units with an average grant date fair value of $16.33 per unit. The restricted stock units vest over a one or five-year service period. During the nine months ended September 30, 2014, 36 restricted stock units vested having an intrinsic value of $605.
During the nine months ended September 30, 2014, the Company granted 107 restricted stock units to management based on the future achievement of a predefined level of total shareholder return compared to a group of global metals companies. The fair value at the date of grant for these restricted stock units was $31.15 per unit, as estimated by a third party on the date of grant,

20
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

using a valuation model based on commonly accepted economic theory which is used for all valuations of awards with market conditions. This economic theory is also used as the basis for the Black-Scholes and Monte Carlo valuations. The significant assumptions were a risk free rate of 0.76%, expected volatility of the Company and each comparator company, no expected dividends and a forfeiture rate of zero. A vesting percentage was then estimated based on the Company’s rank within the comparator group. Upon vesting and the achievement of the required shareholder return, these restricted stock units will be issued for par value.
The related compensation expense for all 2012 Plan restricted stock units for the three months ended September 30, 2014 and 2013 was $836 and $477, respectively. The related compensation expense for all 2012 Plan restricted stock units for the nine months ended September 30, 2014 and 2013 was $2,517 and $1,434, respectively. The remaining contractual life ranged from 0.25 years to 4.6 years. Unrecognized compensation expense as of September 30, 2014 was $6,712.

NOTE P—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 LME, its revenues are impacted significantly by changes in the market prices of these metals. The Company pursues various hedging strategies as described below to reduce its exposure to movements in the prices of zinc 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. A portion of the Company’s raw material purchases related to such firm price contracts are at varying zinc 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 price increases, the related sales value and related cash flows will also increase. As of September 30, 2014, the fixed portions of these contracts ranged from a monthly average of $0.89 to $1.06 per pound for zinc.
The Company has hedged approximately 2.4 tons of zinc with fixed-to-variable future swap contracts at September 30, 2014, all of which settle at various dates up to and including February 28, 2015.
The Company also enters into variable-to-fixed swap contracts as a financial hedge of a portion of its exposure to the movements in the LME prices nickel. As of September 30, 2014, the fixed portion of the nickel swap contracts ranged from a monthly average of $6.57 to $8.00 per pound.
The Company has hedged approximately 0.2 tons of nickel with variable-to-fixed future swap contracts at September 30, 2014, all of which settle at various dates up to and including December 31, 2014.
The Company paid cash of $109 and $676 from the settlement of zinc and nickel swap contracts for the three and nine months ended September 30, 2014, respectively. The Company received cash of $314 and $519 from the settlement of zinc and nickel swap contracts for the three and nine months ended September 30, 2013, respectively.
At December 31, 2012, the Company had zinc put options with an $0.85 per pound strike price outstanding, which covered approximately 106 tons of zinc production, representing 75% of the expected shipments for the period from January 2013 through December 2013. During 2012, the Company purchased the zinc put options, for the second half of 2013, at a cost of $4,945. These put options were put in place to provide protection to operating cash flow in the event that zinc prices decline below that level during the construction of the new zinc facility. The Company also had zinc call options with a $1.81 per pound strike price outstanding but their value was negligible at December 31, 2012. The remaining zinc call options expired during the six months ended June 30, 2013.
During the first quarter of 2013, the Company purchased put options, with an $0.85 per pound strike price, for the first quarter of 2014 that covered approximately 13.2 tons of production at a cost of $774. These put options were put in place to provide protection to operating cash flow in the event that zinc prices declined below that level during the construction and start up of the new zinc facility. During August 2013, the Company put in place equivalent $0.85 per pound strike price put options covering an additional 4.4 tons per month of zinc production for the period of January 2014 through March 2014 and converted $0.85 per pound strike price put options covering 5.0 tons per month of zinc production from October 2013 through March 2014 to zinc fixed price swap contracts for the same period at an average price of approximately $0.903 per pound. The sale of the put options resulted in a $1,295 cash benefit, and the Company was able to put the swaps in place without any additional payment. In December

21
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

2013, the Company entered into additional zinc fixed price swap contracts for the first quarter of 2014 at an average price of approximately $0.90 per pound. These zinc fixed price swaps were also transacted without any payment by the Company. At December 31, 2013, the total quantity covered under forward zinc fixed price swaps for the first quarter of 2014 was 26.6 tons. The Company converted a portion of its put options into swaps in order to reduce the effect of changes in the zinc price on cash flow during the period of planned transition of operations to the new zinc facility. At December 31, 2013, the Company had put options in place with a strike price of $0.85 per pound covering approximately 11.6 tons of zinc production for the first quarter of 2014.
The put options settled monthly on an average LME pricing basis. The average LME monthly zinc prices for first three months of 2014 were higher than the strike price for the contracts and the Company received no settlement payment during 2014. The average LME monthly zinc prices for five of the nine months in the period ended September 30, 2013 were lower than the strike price for the contracts and the Company received a total of $512 and $1,343 during the three and nine months ended September 30, 2013, respectively.
At September 30, 2014, the Company had no remaining put options in place.
During the first quarter of 2014, the Company added zinc fixed price swaps for the second quarter of 2014, at an average price of approximately $0.94 per pound for a total quantity covered of 26.5 tons for the quarter.
In late July and early August 2014, the Company added zinc fixed price swaps for the months of August and September 2014, at an average price of slightly over $1.07 per pound for a total quantity covered of 6.0 tons per month. These fixed rate swaps were put in place to reduce volatility during the continued ramp up of production at the new zinc facility.
The Company received cash of $535 but paid cash of $512 from the settlement of zinc fixed price swaps during the three and nine months ended September 30, 2014, respectively.
In October and early November 2014, the Company added zinc fixed price swaps for the months of November and December 2014, at an average price of slightly over $1.05 per pound for a total quantity covered of 6.6 tons per month. These fixed rate swaps were put in place to reduce volatility during the continued ramp up of production at the new zinc facility.

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, 2014

Three Months Ended September 30, 2013

Nine Months Ended 
 September 30, 2014

Nine Months Ended September 30, 2013
Gains (losses) included in net sales:







Options
$
—


$
(2,926
)

$
(3
)

$
(2,189
)
Swaps
1,517


2,054


507


2,551

Total gains (losses) resulting from hedging activities
$
1,517


$
(872
)

$
504


$
362

The fair value of the swap contracts and put options as of September 30, 2014 and December 31, 2013 are listed in the table below.
Fair Value Measurements Using Significant Other Observable Inputs (Level 2)

September 30,
2014

December 31,
2013
Options and swaps included in Prepaid expenses and other current assets.
$
538


$
191

Swaps included in Accrued expenses
$
275


$
1,585

The fair values of derivative instruments are based upon a comparison of third party counterparties valuations to ensure that there is an acceptable level of consistency among them. The swap valuations are based on the official LME closing valuations at the end of the trading day on September 30, 2014 and December 31, 2013, 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 counterparties with which they have entered into derivative transactions are unable to pay when they owe the Company funds as a result of agreements with them. To minimize the risk of such losses, the

22
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

Company utilizes six different brokers for their hedging program. The Company does not require collateral and does not enter into master netting arrangements.
On November 11, 2011, the Company received notification via email from MF Global UK Ltd. (in special administration) notifying it that all outstanding Over the Counter (“OTC”) hedge positions would be closed with an effective date of November 1, 2011. The net value of these outstanding OTC positions was $366 and their value was written off during the fourth quarter of 2011. During the first quarter of 2013, the Company sold its rights to any future bankruptcy settlement for these OTC positions to a third party and received $820.
NOTE Q—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 minimize 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 and environmental regulation violations, some of which are for substantial amounts, arising in the ordinary course of business. While the ultimate effect of such actions cannot be predicted with certainty, the Company expects that the outcome of these matters will not result in a material adverse effect on its business, financial condition or results of operations.
NOTE R—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 are computed similarly to basic earnings per share except that the denominator is increased to include the number of shares that would have been outstanding if the potentially dilutive common shares had been issued. The Company uses the treasury stock method when calculating the dilutive effect in basic EPS.
Diluted EPS for periods with a net loss is calculated by dividing the net loss by the weighted average number of basic shares outstanding.
The information used to compute basic and diluted loss per share is as follows:
 
Three months ended September 30,

Nine months ended September 30,
 
2014

2013

2014

2013
Basic loss per share:







Net loss
$
(7,010
)
 
$
(3,515
)
 
$
(11,401
)
 
$
(1,515
)
Weighted average shares outstanding – basic
50,715

 
44,109

 
50,670

 
44,077

Basic loss per share
$
(0.14
)
 
$
(0.08
)
 
$
(0.23
)
 
$
(0.03
)
Diluted loss per share:
 
 
 
 
 
 
 
Net loss
$
(7,010
)
 
$
(3,515
)
 
$
(11,401
)
 
$
(1,515
)
Weighted average shares outstanding – diluted
50,715

 
44,109

 
50,670

 
44,077

Diluted loss per share
$
(0.14
)
 
$
(0.08
)
 
$
(0.23
)
 
$
(0.03
)
Reconciliation of average shares outstanding – basic to average shares outstanding – diluted:
 
 
 
 
 
 
 
Weighted average shares outstanding – basic
50,715

 
44,109

 
50,670

 
44,077

Effect of dilutive securities:
 
 
 
 
 
 
 
Options
—

 
—

 
—

 
—

Convertible Notes
—

 
—

 
—

 
—

Restricted stock units
—

 
—

 
—

 
—

Weighted average shares outstanding – diluted
50,715

 
44,109

 
50,670

 
44,077


23
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

 
Exercise
Price

Three months ended September 30,

Nine months ended September 30,
 
2014

2013

2014

2013
Anti-dilutive shares excluded from earnings per share calculation









Options
$
13.00


584


655


584


655

Convertible Notes
$
15.00

 
1,406

 
—

 
896

 
—

Restricted Stock Units


1,001


1,090


1,033


1,137

Total
 
 
2,991

 
1,745

 
2,513

 
1,792


 
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 utilizes the modified treasury stock method and assumes dilution if the average stock price for the quarter exceeds the conversion price. The share dilution is calculated by dividing the conversion spread value by the average share price for the quarter. During the three and nine months ended September 30, 2014, the average share price was higher than the exercise price for the Convertible Notes, however, due to the net loss for the three and nine months ended September 30, 2014 no conversion spread was realized and no dilution assumed as the effect would have been antidilutive. During the three and nine months ended September 30, 2013, 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 S—SEGMENT INFORMATION
In anticipation of the April 2014 closure of the Monaca facility, the Company ceased production of zinc oxide at that facility on December 23, 2013. During 2014, the Company will only produce zinc oxide at the Zochem facility. Consequently, Horsehead Corporation and Zochem do not continue to meet the aggregation criteria as required by ASC 280 Segment Reporting and have not been combined into one reporting segment effective January 1, 2014.
The Company now reports three segments, Horsehead, Zochem and INMETCO. The Horsehead segment processes EAF dust and other zinc-bearing material to produce and sell zinc and other metals. The Zochem segment produces and sells zinc oxide. The INMETCO segment processes a variety of metal-bearing waste material generated primarily by the specialty steel industry, provides tolling services and produces and sells nickel-chromium-molybdenum-iron remelt alloy to the stainless and specialty steel industries. Accordingly, the prior year's segment information has been reclassified to conform to the new segment presentation.
The Company has recorded in the Corporate, eliminations and other column of the table below, eliminations related to the exclusion of revenue resulting primarily from EAF dust service fees charged by its Horsehead segment to its INMETCO segment, interest expense recorded on debt which is not allocated to its segments and selling, general and administrative expenses related to its corporate division.

24
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

The following table presents information regarding the Company’s new segment presentation:
Three months ended September 30, 2014
Horsehead

Zochem

INMETCO
 
Corporate, eliminations
and other

Total
Net sales
$
60,542


$
36,174


$
14,604

 
$
(342
)

$
110,978

(Loss) income before income taxes
(15,174
)

3,800


5,192

 
(8,063
)

(14,245
)
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2013
Horsehead

Zochem

INMETCO
 
Corporate, eliminations
and other

Total
Net sales
$
78,572


$
19,046


$
12,228

 
$
(255
)

$
109,591

(Loss) income before income taxes
(9,846
)

2,244


1,960

 
(57
)

(5,699
)
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2014
Horsehead
 
Zochem
 
INMETCO
 
Corporate, eliminations
and other
 
Total
Net sales
$
198,632

 
$
109,003

 
$
40,810

 
$
(1,138
)
 
$
347,307

(Loss) income before income taxes
(30,541
)
 
10,596

 
10,553

 
(10,459
)
 
(19,851
)
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2013
Horsehead
 
Zochem
 
INMETCO
 
Corporate, eliminations
and other
 
Total
Net sales
$
238,888

 
$
59,439

 
$
41,222

 
$
(1,240
)
 
$
338,309

(Loss) income before income taxes
(19,127
)
 
6,381

 
11,005

 
(866
)
 
(2,607
)

September 30, 2014
Horsehead
 
Zochem
 
INMETCO
 
Corporate, eliminations
and other
 
Total
Property, plant and equipment
$
747,042

 
$
26,783

 
$
32,218

 
$
—

 
$
806,043

Total assets
848,190

 
72,449

 
63,389

 
40,311

 
1,024,339

Capital expenditures for the nine months ended September 30, 2014
97,023

 
8,391

 
1,074

 
—

 
106,488

 
 
 
 
 
 
 
 
 
 
December 31, 2013
Horsehead
 
Zochem
 
INMETCO
 
Corporate, eliminations
and other
 
Total
Property, plant and equipment
$
655,475

 
$
19,429

 
$
33,346

 
$
—

 
$
708,250

Total assets
788,281

 
55,060

 
73,989

 
87,982

 
1,005,312

Capital expenditures for the year ended December 31, 2013
297,968

 
11,059

 
2,771

 
—

 
311,798


25
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)

NOTE T—INSURANCE RECOVERIES

On October 28, 2012, a fire occurred at the Company’s INMETCO facility. As INMETCO began its annual maintenance shutdown of the rotary hearth furnace and the submerged arc furnace, it experienced an unrelated fire in the material preparation and blending section of the plant, incurring damage to that portion of the building.

Through June 30, 2013, the Company incurred clean up, repair and other costs associated with the fire of $4,580 and a claim was submitted for property damage insurance recovery. The planned maintenance outage was only extended a day as a result of delays caused by the fire but the Company was not able to operate at full capacity until mid-December because power was not fully restored to some ancillary operations. All of the repairs associated with the fire were substantially complete by the end of the first quarter of 2013.

The damages from the fire exceeded our insurance deductible of $500 and we reached a final settlement in the amount of $3,950 during the second quarter of 2013. As of December 31, 2013, the entire insurance recovery of $3,950 had been received in cash.

The cost and insurance recoveries are summarized in the table below.
 
 
2013
 
2012
 
Total
Property damage insurance recovery
 
$
2,450

 
$
1,500

 
$
3,950

Cost of clean-up and repairs
 
129

 
148

 
277

Write off of fixed assets
 
—

 
236

 
236

Gain related to insurance recovery included in cost of sales
(excluding depreciation and amortization)
 
$
2,321

 
$
1,116

 
$
3,437

Insurance proceeds related to fixed assets
 
$
1,791

 
$
1,264

 
 
Costs capitalized
 
$
1,791

 
$
2,276

 
 

NOTE U—GUARANTOR FINANCIAL INFORMATION
The Senior Secured Notes were issued by Horsehead Holding Corp. and fully and unconditionally guarantee, on a senior secured basis, the Company’s existing and future domestic restricted subsidiaries other than certain excluded subsidiaries. The non-guarantor subsidiaries held approximately 9.4% of total assets at September 30, 2014, accounted for 31.4% of its consolidated revenues and $6,929 of consolidated net income for the nine months ended September 30, 2014. The Consolidated Financial Statements are presented net of intercompany activity. The following supplemental financial information sets forth on a consolidating basis, balance sheets, statements of operations, statements of comprehensive income (loss), and statements of cash flows for the Company, the subsidiary Guarantors, and the Company’s non-guarantor subsidiaries. The subsidiaries that serve as guarantors are 100% owned as defined in Rule 3-10(h) of Regulation S-X.
 



26
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)




Horsehead Holding Corp. and Subsidiaries
Consolidated Balance Sheets
September 30, 2014
 
Issuer
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Total
Consolidated
ASSETS



 

 

 

Current assets



 

 

 

Cash and cash equivalents
$
34,564

 
$
27,996

 
$
9,607

 
$
—

 
$
72,167

Accounts receivable, net of allowance
—

 
38,555

 
21,367

 
(206
)
 
59,716

Inventories, net
—

 
35,897

 
10,292

 
—

 
46,189

Prepaid expenses and other current assets
5

 
9,555

 
72

 
3,406

 
13,038

Deferred income taxes
—

 
6,648

 
18

 
5

 
6,671

Total current assets
34,569

 
118,651

 
41,356

 
3,205

 
197,781

Property, plant and equipment, net
—

 
751,695

 
54,348

 
—

 
806,043

Other assets
 
 
 
 
 
 
 
 
 
Intangible assets
—

 
10,281

 
113

 
—

 
10,394

Investment in and advances to subsidiaries
719,094

 
(584,488
)
 
(654
)
 
(133,952
)
 
—

Deferred finance costs and other
21,807

 
2,423

 
639

 
(14,748
)
 
10,121

Total other assets
740,901

 
(571,784
)
 
98

 
(148,700
)
 
20,515

Total assets
$
775,470

 
$
298,562

 
$
95,802

 
$
(145,495
)
 
$
1,024,339

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
$
—

 
$
2,998

 
$
—

 
$
—

 
$
2,998

Accounts payable
—

 
73,976

 
11,511

 
(206
)
 
85,281

Accrued expenses
8,586

 
30,731

 
2,973

 
3,490

 
45,780

Total current liabilities
8,586

 
107,705

 
14,484

 
3,284

 
134,059

Long-term debt, less current maturities
333,701

 
54,981

 
34,340

 
(14,685
)
 
408,337

Other long-term liabilities
—

 
18,553

 
360

 
—

 
18,913

Deferred income taxes
—

 
23,778

 
1,242

 
—

 
25,020

Commitments and contingencies


 


 


 


 


Stockholders’ equity
 
 
 
 
 
 
 
 
 
Common stock
507

 
—

 
—

 
—

 
507

Preferred stock
—

 
—

 
—

 
—

 
—

Additional paid-in capital
313,464

 
41,653

 
—

 
(41,653
)
 
313,464

Retained earnings
119,212

 
47,940

 
44,721

 
(92,441
)
 
119,432

Accumulated other comprehensive income
—

 
—

 
655

 
—

 
655

Total stockholders’ equity before noncontrolling interest
433,183

 
89,593

 
45,376

 
(134,094
)
 
434,058

Noncontrolling interest
—

 
3,952

 
—

 
—

 
3,952

Total stockholders’ equity
433,183

 
93,545

 
45,376

 
(134,094
)
 
438,010

Total liabilities and stockholders’ equity
$
775,470

 
$
298,562

 
$
95,802

 
$
(145,495
)
 
$
1,024,339


 

27
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)



Horsehead Holding Corp. and Subsidiaries
Consolidated Balance Sheets
December 31, 2013
 
Issuer
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Total
Consolidated
ASSETS









Current assets









Cash and cash equivalents
$
101,449

 
$
26,782

 
$
8,096

 
$
—

 
$
136,327

Accounts receivable, net of allowance
—

 
46,163

 
12,915

 
(429
)
 
58,649

Inventories, net
—

 
54,550

 
15,026

 
—

 
69,576

Prepaid expenses and other current assets
8

 
10,205

 
7

 
(4,956
)
 
5,264

Deferred income taxes
—

 
6,319

 
18

 
—

 
6,337

Total current assets
101,457

 
144,019

 
36,062

 
(5,385
)
 
276,153

Property, plant and equipment, net
—

 
660,161

 
48,089

 
—

 
708,250

Other assets
 
 
 
 
 
 
 
 
 
Intangible assets
—

 
11,100

 
168

 
—

 
11,268

Investment in and advances to subsidiaries
599,444

 
(435,470
)
 
(5,444
)
 
(158,530
)
 
—

Deferred finance costs and other
22,194

 
1,774

 
703

 
(15,030
)
 
9,641

Total other assets
621,638

 
(422,596
)
 
(4,573
)
 
(173,560
)
 
20,909

Total assets
$
723,095

 
$
381,584

 
$
79,578

 
$
(178,945
)
 
$
1,005,312

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Current maturities of long-term debt
$
—

 
$
2,870

 
$
—

 
$
—

 
$
2,870

Accounts payable
—

 
104,015

 
10,605

 
(429
)
 
114,191

Accrued expenses
3,606

 
42,386

 
3,617

 
(4,851
)
 
44,758

Total current liabilities
3,606

 
149,271

 
14,222

 
(5,280
)
 
161,819

Long-term debt, less current maturities
279,549

 
64,963

 
25,184

 
(14,928
)
 
354,768

Other long-term liabilities
—

 
17,427

 
360

 
—

 
17,787

Deferred income taxes
—

 
24,802

 
1,242

 
—

 
26,044

Commitments and contingencies


 


 


 


 


Stockholders’ equity
 
 
 
 
 
 
 
 
 
Common stock
504

 
—

 
—

 
—

 
504

Preferred stock
—

 
—

 
—

 
—

 
—

Additional paid-in capital
308,825

 
41,654

 
—

 
(41,654
)
 
308,825

Retained earnings
130,611

 
79,402

 
37,903

 
(117,083
)
 
130,833

Accumulated other comprehensive income
—

 
—

 
667

 
—

 
667

Total stockholders’ equity before noncontrolling interest
439,940

 
121,056

 
38,570

 
(158,737
)
 
440,829

Noncontrolling interest
—

 
4,065

 
—

 
—

 
4,065

Total stockholders’ equity
439,940

 
125,121

 
38,570

 
(158,737
)
 
444,894

Total liabilities and stockholders’ equity
$
723,095

 
$
381,584

 
$
79,578

 
$
(178,945
)
 
$
1,005,312



28
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)



Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Operations
For the three months ended September 30, 2014

Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net sales of zinc material and other goods
$
—

 
$
49,300

 
$
36,174

 
$
—

 
$
85,474

Net sales of nickel-based material and other services
—

 
14,641

 
—

 
(70
)
 
14,571

EAF dust service fees
—

 
12,001

 
—

 
(1,068
)
 
10,933

Net sales
—


75,942


36,174


(1,138
)

110,978

Cost of sales of zinc material and other goods
—

 
55,878

 
31,205

 
(70
)
 
87,013

Cost of sales of nickel-based material and other services
—

 
8,875

 
—

 
(1,068
)
 
7,807

Cost of EAF dust services
—

 
9,386

 
—

 
—

 
9,386

Cost of sales (excluding depreciation and amortization)
—


74,139


31,205


(1,138
)

104,206

Depreciation and amortization
—

 
9,707

 
821

 
—

 
10,528

Selling, general and administrative expenses
445

 
4,668

 
552

 
—

 
5,665

Total costs and expenses
445


88,514


32,578


(1,138
)

120,399

(Loss) income from operations
(445
)

(12,572
)

3,596


—


(9,421
)
Equity in income (loss) of subsidiaries, net of taxes
1,076

 
—

 
—

 
(1,076
)
 
—

Other income (expense)
 
 
 
 
 
 
 
 
 
Interest expense
(7,871
)
 
(913
)
 
(424
)
 
240

 
(8,968
)
Interest and other income
230

 
3,860

 
271

 
(217
)
 
4,144

Total other income (expense)
(7,641
)

2,947


(153
)

23


(4,824
)
(Loss) income before income taxes
(7,010
)

(9,625
)

3,443


(1,053
)

(14,245
)
Income tax (benefit) expense
—

 
(8,147
)
 
912

 
—

 
(7,235
)
NET (LOSS) INCOME
$
(7,010
)

$
(1,478
)

$
2,531


$
(1,053
)

$
(7,010
)
 

29
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)



Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Operations
For the three months ended September 30, 2013
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net sales of zinc material and other goods
$
—

 
$
66,975

 
$
19,046

 
$
—

 
$
86,021

Net sales of nickel-based material and other services
—

 
12,192

 
—

 
—

 
12,192

EAF dust service fees
—

 
11,378

 
—

 
—

 
11,378

Net sales
—

 
90,545

 
19,046

 
—

 
109,591

Cost of sales of zinc material and other goods
—

 
69,424

 
15,991

 
—

 
85,415

Cost of sales of nickel-based material and other services
—

 
8,782

 
—

 
—

 
8,782

Cost of EAF dust services
—

 
8,558

 
—

 
—

 
8,558

Cost of sales (excluding depreciation and amortization)
—

 
86,764

 
15,991

 
—

 
102,755

Depreciation and amortization
—

 
6,515

 
608

 
—

 
7,123

Selling, general and administrative expenses
306

 
4,399

 
638

 
—

 
5,343

Total costs and expenses
306

 
97,678

 
17,237

 
—

 
115,221

(Loss) income from operations
(306
)
 
(7,133
)
 
1,809

 
—

 
(5,630
)
Equity in (loss) income of subsidiaries, net of taxes
(3,436
)
 
—

 
—

 
3,436

 
—

Other income (expense)
 
 
 
 
 
 
 
 
 
Interest expense
(24
)
 
(428
)
 
(272
)
 
237

 
(487
)
Interest and other income
251

 
42

 
340

 
(215
)
 
418

Total other income (expense)
227

 
(386
)
 
68

 
22

 
(69
)
(Loss) income before income taxes
(3,515
)
 
(7,519
)
 
1,877

 
3,458

 
(5,699
)
Income tax (benefit) expense
—

 
(2,749
)
 
565

 
—

 
(2,184
)
NET (LOSS) INCOME
$
(3,515
)
 
$
(4,770
)
 
$
1,312

 
$
3,458

 
$
(3,515
)
 













30
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)



Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Operations
For the nine months ended September 30, 2014
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net sales of zinc material and other goods
$
—

 
$
166,791

 
$
109,003

 
$
—

 
$
275,794

Net sales of nickel-based material and other services
—

 
40,810

 
—

 
(70
)
 
40,740

EAF dust service fees
—

 
31,841

 
—

 
(1,068
)
 
30,773

Net sales
—

 
239,442

 
109,003

 
(1,138
)
 
347,307

Cost of sales of zinc material and other goods
—

 
174,536

 
95,395

 
(70
)
 
269,861

Cost of sales of nickel-based material and other services
—

 
25,916

 
—

 
(1,068
)
 
24,848

Cost of EAF dust services
—

 
25,367

 
—

 
—

 
25,367

Restructuring accrual
—

 
205

 
—

 
—

 
205

Cost of sales (excluding depreciation and amortization)
—

 
226,024

 
95,395

 
(1,138
)
 
320,281

Depreciation and amortization
—

 
21,309

 
2,187

 
—

 
23,496

Selling, general and administrative expenses
1,130

 
14,841

 
1,819

 
—

 
17,790

Total costs and expenses
1,130

 
262,174

 
99,401

 
(1,138
)
 
361,567

(Loss) income from operations
(1,130
)
 
(22,732
)
 
9,602

 
—

 
(14,260
)
Equity in (loss) income of subsidiaries, net of taxes
(878
)
 
—

 
—

 
878

 
—

Other income (expense)
 
 
 
 
 
 
 
 
 
Interest expense
(10,108
)
 
(1,998
)
 
(1,112
)
 
716

 
(12,502
)
Interest and other income
715

 
5,810

 
1,038

 
(652
)
 
6,911

Total other income (expense)
(9,393
)
 
3,812

 
(74
)
 
64

 
(5,591
)
(Loss) income before income taxes
(11,401
)
 
(18,920
)
 
9,528

 
942

 
(19,851
)
Income tax (benefit) provision
—

 
(11,049
)
 
2,599

 
—

 
(8,450
)
NET (LOSS) INCOME
$
(11,401
)
 
$
(7,871
)
 
$
6,929

 
$
942

 
$
(11,401
)

31
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)



Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Operations
For the nine months ended September 30, 2013
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net sales of zinc material and other goods
$
—

 
$
204,788

 
$
59,439

 
$
(413
)
 
$
263,814

Net sales of nickel-based material and other services
—

 
41,119

 
—

 
—

 
41,119

EAF dust service fees
—

 
33,376

 
—

 
—

 
33,376

Net sales
—

 
279,283

 
59,439

 
(413
)
 
338,309

Cost of sales of zinc material and other goods
—

 
199,900

 
50,942

 
(413
)
 
250,429

Cost of sales of nickel-based material and other services
—

 
27,661

 
—

 
—

 
27,661

Cost of EAF dust services
—

 
27,106

 
—

 
—

 
27,106

Insurance claim income
—

 
(2,450
)
 
—

 
—

 
(2,450
)
Cost of sales (excluding depreciation and amortization)
—

 
252,217

 
50,942

 
(413
)
 
302,746

Depreciation and amortization
—

 
19,847

 
1,727

 
—

 
21,574

Selling, general and administrative expenses
1,059

 
14,049

 
1,771

 
—

 
16,879

Total costs and expenses
1,059

 
286,113

 
54,440

 
(413
)
 
341,199

(Loss) income from operations
(1,059
)
 
(6,830
)
 
4,999

 
—

 
(2,890
)
Equity in (loss) income of subsidiaries, net of taxes
(584
)
 
—

 
—

 
584

 
—

Other income (expense)
 
 
 
 
 
 
 
 
 
Interest expense
(699
)
 
(1,207
)
 
(818
)
 
717

 
(2,007
)
Interest and other income
827

 
996

 
1,119

 
(652
)
 
2,290

Total other income (expense)
128

 
(211
)
 
301

 
65

 
283

(Loss) income before income taxes
(1,515
)
 
(7,041
)
 
5,300

 
649

 
(2,607
)
Income tax (benefit) provision
—

 
(2,716
)
 
1,624

 
—

 
(1,092
)
NET (LOSS) INCOME
$
(1,515
)
 
$
(4,325
)
 
$
3,676

 
$
649

 
$
(1,515
)

32
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)



Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the three months ended September 30, 2014
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net (loss) income
$
(7,010
)
 
$
(1,478
)
 
$
2,531

 
$
(1,053
)
 
$
(7,010
)
Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
 
 
Net pension liability adjustment
—

 
—

 
(3
)
 
—

 
(3
)
Comprehensive (loss) income
$
(7,010
)
 
$
(1,478
)
 
$
2,528

 
$
(1,053
)
 
$
(7,013
)
Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the three months ended September 30, 2013
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net (loss) income
$
(3,515
)
 
$
(4,770
)
 
$
1,312

 
$
3,458

 
$
(3,515
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
Net pension liability adjustment
—

 
—

 
—

 
—

 
—

Comprehensive (loss) income
$
(3,515
)
 
$
(4,770
)
 
$
1,312

 
$
3,458

 
$
(3,515
)


Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the nine months ended September 30, 2014
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net (loss) income
$
(11,401
)
 
$
(7,871
)
 
$
6,929

 
$
942

 
$
(11,401
)
Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
 
 
Net pension liability adjustment
—

 
—

 
(12
)
 
—

 
(12
)
Comprehensive (loss) income
$
(11,401
)
 
$
(7,871
)
 
$
6,917

 
$
942

 
$
(11,413
)


Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the nine months ended September 30, 2013
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net (loss) income
$
(1,515
)
 
$
(4,325
)
 
$
3,676

 
$
649

 
$
(1,515
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
Net pension liability adjustment
—

 
—

 
—

 
—

 
—

Comprehensive (loss) income
$
(1,515
)
 
$
(4,325
)
 
$
3,676

 
$
649

 
$
(1,515
)


33
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)



Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2014
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(11,401
)
 
$
(7,871
)
 
$
6,929

 
$
942

 
$
(11,401
)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
—

 
21,308

 
2,188

 
—

 
23,496

Deferred income tax provision
—

 
(1,358
)
 
—

 
—

 
(1,358
)
Accretion on debt
2,851

 
—

 
—

 
—

 
2,851

Accretion on ESOI liabilities
—

 
322

 
—

 
—

 
322

Amortization of deferred finance costs
1,700

 
225

 
102

 
(64
)
 
1,963

Losses on write down or disposal of assets
—

 
1,037

 
—

 
—

 
1,037

(Gains) on derivative financial instruments
—

 
(1,680
)
 
(12
)
 
—

 
(1,692
)
Lower of cost or market adjustment to inventories
—

 
1,590

 
—

 
—

 
1,590

Non-cash compensation expense
279

 
3,305

 
—

 
—

 
3,584

Capitalization of interest
(13,498
)
 
(647
)
 
—

 
—

 
(14,145
)
Equity (loss) in income of subsidiaries, net of taxes
878

 
—

 
—

 
(878
)
 
—

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Decrease (increase) in accounts receivable
—

 
7,643

 
(8,452
)
 
(223
)
 
(1,032
)
Decrease in inventories
—

 
16,607

 
4,734

 
—

 
21,341

Decrease (increase) in prepaid expenses and other current assets
3

 
985

 
(53
)
 
(8,362
)
 
(7,427
)
Decrease (increase) in deferred finance costs and other
218

 
(719
)
 
24

 
(216
)
 
(693
)
(Decrease) increase in accounts payable
—

 
(30,038
)
 
906

 
222

 
(28,910
)
Increase (decrease) in accrued expenses
4,980

 
(10,096
)
 
(888
)
 
8,336

 
2,332

Increase in long-term liabilities
—

 
211

 
—

 
243

 
454

Net cash (used in) provided by operating activities
(13,990
)
 
824

 
5,478

 
—

 
(7,688
)
Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
 
Purchase of property, plant and equipment
—

 
(98,097
)
 
(8,391
)
 
—

 
(106,488
)
Investment in and advance (to) from subsidiaries
(103,722
)
 
108,512

 
(4,790
)
 
—

 
—

Net cash (used in) provided by investing activities.
(103,722
)
 
10,415

 
(13,181
)
 
—

 
(106,488
)
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
 
Proceeds from the issuance of debt
51,300

 
—

 
—

 
—

 
51,300

Distributions to noncontrolling interest equity holders
—

 
—

 
(113
)
 
—

 
(113
)
Borrowings on the Credit Facilities
—

 
20,650

 
9,574

 
—

 
30,224

Repayments on the Credit Facilities
—

 
(29,550
)
 
(174
)
 
—

 
(29,724
)
Debt issuance costs
(1,531
)
 
(171
)
 
(73
)
 
—

 
(1,775
)
Borrowings on Credit Agreement
—

 
1,172

 
—

 
—

 
1,172

Repayments on the Credit Agreement
—

 
(2,126
)
 
—

 
—

 
(2,126
)
Proceeds from the exercise of stock options
941

 
—

 
—

 
—

 
941

Tax effect of share based compensation award exercise and vesting
800

 
—

 
—

 
—

 
800

Restricted stock withheld for taxes
(683
)
 
—

 
—

 
—

 
(683
)
Net cash provided by (used in) financing activities
50,827

 
(10,025
)
 
9,214

 
—

 
50,016

Net (decrease) increase in cash and cash equivalents
(66,885
)
 
1,214

 
1,511

 
—

 
(64,160
)
Cash and cash equivalents at beginning of period
101,449

 
26,782

 
8,096

 
—

 
136,327

Cash and cash equivalents at end of period
$
34,564

 
$
27,996

 
$
9,607

 
$
—

 
$
72,167



34
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)



Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2013
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(1,515
)
 
$
(4,325
)
 
$
3,676

 
$
649

 
$
(1,515
)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
—

 
19,847

 
1,727

 
—

 
21,574

Gain on insurance recovery related to assets
—

 
(1,791
)
 
—

 
—

 
(1,791
)
Deferred income tax provision
—

 
(1,423
)
 
(28
)
 


 
(1,451
)
Accretion on debt
2,792

 
—

 
—

 
—

 
2,792

Accretion on ESOI liabilities
—

 
333

 
—

 
—

 
333

Amortization of deferred finance costs
1,577

 
181

 
86

 
(64
)
 
1,780

Losses on write down or disposal of assets
—

 
131

 
—

 
—

 
131

Losses on derivative financial instruments
—

 
964

 
22

 
—

 
986

Lower of cost or market adjustment to inventories
—

 
2,893

 
—

 
—

 
2,893

Non-cash compensation expense
285

 
2,502

 
—

 
—

 
2,787

Capitalization of interest
(21,011
)
 
(522
)
 
—

 
—

 
(21,533
)
Equity (loss) in income of subsidiaries, net of taxes
584

 
—

 
—

 
(584
)
 
—

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
(Increase) in accounts receivable
—

 
(4,149
)
 
(2,462
)
 
(80
)
 
(6,691
)
(Increase) in inventories
—

 
(3,371
)
 
(1,381
)
 
—

 
(4,752
)
Decrease (increase) in prepaid expenses and other current assets
27

 
4,424

 
(16
)
 
(2,195
)
 
2,240

Decrease (increase) in deferred finance costs and other
217

 
(96
)
 
—

 
(218
)
 
(97
)
(Decrease) increase in accounts payable
(93
)
 
16,466

 
2,495

 
80

 
18,948

Increase (decrease) in accrued expenses
4,282

 
(2,393
)
 
1,101

 
2,412

 
5,402

Increase in long-term liabilities
—

 
1,422

 
32

 
—

 
1,454

Net cash (used in) provided by operating activities
(12,855
)
 
31,093

 
5,252

 
—

 
23,490

Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
 
Purchase of property, plant and equipment
—

 
(226,955
)
 
(7,275
)
 
—

 
(234,230
)
Insurance proceeds related to fixed assets
—

 
1,791

 
—

 
—

 
1,791

Investment in and advance (to) from subsidiaries
(172,528
)
 
172,922

 
(394
)
 
—

 
—

Net cash used in investing activities.
(172,528
)
 
(52,242
)
 
(7,669
)
 
—

 
(232,439
)
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
 
Proceeds from the issuance of debt
21,300

 
—

 
—

 
—

 
21,300

Distributions to noncontrolling interest equity holders
—

 
—

 
(114
)
 
—

 
(114
)
Borrowings on the Credit Facilities
—

 
45,000

 
23,500

 
—

 
68,500

Repayments on the Credit Facilities
—

 
—

 
(13,500
)
 
—

 
(13,500
)
Debt issuance costs
(358
)
 
(141
)
 
(25
)
 
—

 
(524
)
Borrowings on Credit Agreement
—

 
10,603

 
—

 
—

 
10,603

Repayments on the Credit Agreement
—

 
(1,185
)
 
—

 
—

 
(1,185
)
Proceeds from the exercise of stock options
—

 
—

 
—

 
—

 
—

Tax effect of share based compensation award exercise and vesting
185

 
—

 
—

 
—

 
185

Restricted stock withheld for taxes
(411
)
 
—

 
—

 
—

 
(411
)
Net cash provided by financing activities
20,716

 
54,277

 
9,861

 
—

 
84,854

Net (decrease) increase in cash and cash equivalents
(164,667
)
 
33,128

 
7,444

 
—

 
(124,095
)
Cash and cash equivalents at beginning of period
223,515

 
15,977

 
4,627

 
—

 
244,119

Cash and cash equivalents at end of period
$
58,848

 
$
49,105

 
$
12,071

 
$
—

 
$
120,024


35
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)


NOTE V—SUBSEQUENT EVENT

On November 7, 2014, the Company announced that Shell had exercised its option under the Amended and Restated Option and Purchase Agreement between Shell and Horsehead Corporation to purchase the site of Horsehead Corporation’s facility located in Monaca, PA. No closing date has been established.

36
HORSEHEAD HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
This discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included herein 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, 2013, which was filed with the SEC on March 13, 2014.
Overview

Our Business

We are a leading U.S. producer of zinc and zinc oxide, a leading recycler of electric arc furnace (“EAF”) dust and a leading recycler of nickel-bearing wastes and nickel-cadmium batteries in North America. 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 we are the largest producer of zinc oxide 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 and other types of 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.

In anticipation of the April 2014 closure of our Monaca facility, we ceased production of zinc oxide at that facility on December 23, 2013. During 2014, we will only produce zinc oxide at our Zochem facility. Consequently, Horsehead Corporation and Zochem do not continue to meet the aggregation criteria as required by ASC 280 Segment Reporting and have not been combined into one reporting segment effective January 1, 2014. The Company now reports three segments, Horsehead, Zochem and INMETCO.

While we vary our raw material inputs, or feedstocks, based on cost and availability, products produced at our recently completed new zinc facility in Mooresboro, North Carolina and nickel-based products produced at our INMETCO facility use nearly 100% recycled materials, including, in the case of our zinc products, zinc recovered from our four EAF dust recycling operations located in four states. Our four EAF dust recycling facilities generate service fee revenue from steel mini-mills by providing a convenient and safe means for recycling their EAF dust. 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.

We produce zinc oxide at our Brampton, Ontario, Canada facility and utilize special high grade zinc metal as raw material feedstock. INMETCO provides recycling services, some of which is on a tolling basis, from a single production facility in Ellwood City, Pennsylvania.
Strategic Investments
In September of 2011, we announced plans to construct a new zinc facility located in Mooresboro, North Carolina and first production at that facility began in May 2014. The new zinc facility will be capable of production in excess of 155,000 tons of zinc metal per year once fully operational, including Special High Grade (“SHG”) zinc and Continuous Galvanizing Grade zinc, in addition to the Prime Western ("PW") grade zinc that we produced at our Monaca facility until its permanent closure at the end of April 2014. The facility also enables us to potentially recover other marketable metals from waelz oxide (“WOX”) produced from EAF dust recycling. We believe the facility is capable of producing up to 175,000 tons of zinc metal per year without significant additional investment. The plant design relies upon sustainable manufacturing practices to produce zinc solely from recycled materials and use significantly less fossil fuel than our recently closed Monaca smelter.
The new zinc facility will convert WOX and other recycled materials into SHG zinc and other grades that sell at a premium to the PW grade that we currently offer. This allows us to expand into new markets, including selling to continuous galvanizers, which include some of our EAF dust customers, die casters and LME warehouses, while continuing to serve customers in our existing markets. In addition, we believe the new technology will also allow us to recover value from certain metals such as silver and lead from WOX produced from EAF dust recycling. The new zinc facility replaced our older smelter technology used at our Monaca facility and allows us to significantly reduce emissions of greenhouse gases and particulates into the atmosphere.


37

The new facility will significantly reduce our manufacturing conversion costs due to the lower energy cost, higher labor productivity, reduced operating maintenance costs and lower operating costs in our EAF dust recycling plants resulting from the elimination of the need to calcine a portion of our WOX before it is fed to the smelter.

On May 21, 2014, we reported that production of zinc metal at our new zinc facility had begun.   The cell house had been loaded with electrolyte, the rectifiers had been switched on and the plating of zinc metal was underway.  We harvested the initial cathode later that week and began melting and casting final product for shipment. On May 28, 2014, we announced that we had made our first shipments to customers.

On July 8, 2014, we reported that we had produced over 2,900 tons of zinc metal at the facility in June 2014, a rate of approximately 23% of design capacity, which was better than internal projections for the first month of an expected six-month ramp up.  We sold zinc feedstock produced from our recycling operations in excess of the requirement for the new zinc facility as either zinc calcine or waelz oxide. We further announced that the facility would be taking a temporary outage due to the need to repair, upgrade and replace some of the mixing components in a series of tanks.  We resumed zinc production in August. We also reported that the construction of the co-product recovery circuit designed to recover lead and silver was mechanically complete, commissioning had started and was expected to occur for the next few weeks before metal concentrate production began. 

The first month of operation validated that the process, as designed, is capable of producing special high grade quality electrolyte from waelz oxide using the solvent extraction process.

On October 1, 2014, we reported that the facility produced approximately 4,300 tons of zinc metal in the third quarter of 2014, compared to 3,400 tons in the second quarter, as a previously announced temporary outage at the beginning of the third quarter limited production during the first half of the quarter. While numerous improvements were made to several unit operations at the facility during the quarter which should help to accelerate the ramp-up rate going forward, production during the second half of the quarter was impeded mainly by operational issues associated with controlling the removal of solids in the clarifier unit downstream of the leaching process. These issues were diagnosed and solutions implemented. We also commissioned the casting line for SHG and CGG “jumbo” ingots. We continued to supplement zinc metal sales during the third quarter with the sale of zinc calcine to third parties.

Commissioning of the co-product recovery circuit was completed during the third quarter and we started to introduce feed, but we reallocated resources to focus on debottlenecking the zinc production plant in October which delayed the ramp-up of that circuit. We will restart the ramp-up of the co-product circuit in November. The ramp up period for the co-product recovery circuit is estimated to be approximately one year.

We enter the fourth quarter of 2014 with the expectation that we have resolved several issues that will improve the level of operation going forward. The primary bottleneck thus far has been with solids/liquid separation at the front end of the process. This is conventional technology used extensively in hydrometallurgical and mining applications, so we anticipate that this issue will be resolved. We have made progress through better control of the process and by minor equipment modifications. If additional equipment modifications or additions are required to fully resolve the issue we have identified, we do not believe the cost would be material. Several improvements have been implemented which have allowed us to continue ramping up production. Since the end of the third quarter of 2014, we have continued to increase the level of production of zinc. We have not identified any insurmountable technical or operational obstacles that materially challenge the value proposition of this project; however, issues such as the solids removal described above have slowed the rate of our ramp-up and delayed the realization of these benefits. During this ramp up we plan to continue to sell zinc calcine.

In December 2013, we entered into a joint venture known as ThirtyOx with Imperial Zinc Corp. for the acquisition and processing of zinc bearing secondary materials. The processing operation is located near our Mooresboro facility and the facility began production in August 2014. The majority of the feedstock for Mooresboro will be supplied by Horsehead's EAF dust recycling plants. ThirtyOx is expected to supply a portion of the incremental zinc feed required by Mooresboro by recovering secondary zinc oxides from the residues generated by galvanizers, die-casters and other users of zinc metal. Our anticipated total investment in ThirtyOx is expected to be less than $2.0 million and we have contributed $0.8 million as of September 30, 2014.

Acquisitions

On November 1, 2011, we acquired all of the outstanding shares of Zochem, a zinc oxide producer located in Brampton, Ontario Canada, from HudBay for a cash purchase price of $15.1 million. The acquisition broadened our geographic footprint, provided added operational flexibility and diversified our customers and markets for zinc oxide. In 2012, we announced our plans to expand capacity at the Zochem facility in anticipation of the closure of the zinc oxide refinery at our Monaca facility. During the second quarter of 2014, we put our seventh and final furnace into production. In July 2014, we took a planned outage on one

38

of the furnaces to replace worn refractories and install additional baghouse modules on several furnaces. This outage was completed in August. The expansion project increased our total zinc oxide production capacity at Zochem by approximately 20,000 tons to 72,000 tons per year.
On November 16, 2012, we acquired the single membership interest in MZP, a leading manufacturer of zinc powders for the alkaline battery business and subsequently renamed it HZP. We had been a long-term supplier of Special Special High Grade zinc metal to MZP which was co-located at the site of our Monaca zinc smelter. Our acquisition of HZP enabled us to increase our product margins by allowing us to convert our zinc metal into a higher margin zinc powder product for the battery market. During the first quarter of 2014, HZP production was idled due to a lack of raw material supply. Shipments, however, continued through the end of April 2014. On November 7, 2014, we announced that Shell had exercised its option under the Amended and Restated Option and Purchase Agreement between Shell and Horsehead Corporation to purchase the site of the Monaca facility. This purchase agreement also includes the HZP facility site. No closing date has been established.

Other

On March 15, 2012, we entered into an option agreement with Shell to purchase our Monaca site. At the end of December 2013, we entered into an Amended and Restated Option and Purchase Agreement with Shell that included extending the option period during which Shell may perform its evaluation. The amended agreement also provided for demolition activities to commence at Shell's expense. As of September 30, 2014, demolition of the majority of the structures had been completed and demolition of the remaining structures was underway. On November 7, 2014, we announced that Shell had exercised its option under the Amended and Restated Option and Purchase Agreement. No closing date has been established.

On September 27, 2012, we formed Horsehead Metal Products, Inc., a wholly owned subsidiary of Horsehead Corporation, which currently owns and operates our new Mooresboro, North Carolina facility.

On June 3, 2013, we issued an additional $20.0 million of Secured Notes. We received proceeds of $21.3 million and recognized $0.3 million in issuance costs in connection with the offering.

On October 30, 2013, we completed an underwritten public offering and received $72.0 million in net proceeds after deducting $3.9 million in expenses related to the offering.

On July 29, 2014, we completed the sale of $40.0 million aggregate principal amount of 9.00% Unsecured Notes due 2017, at an issue price of 100.00% of par and also completed the sale of an additional $10.0 million of our Secured Notes due 2017, at an issue price of 113.00% of par. We received net proceeds of $49.8 million from these two offerings after deducting $1.5 million in issuance costs in connection with the offering.

On September 30, 2014, Horsehead Metal Products, Inc. was converted to a North Carolina limited liability company "Horsehead Metal Products, LLC", and The International Metals Reclamation Company, Inc. was converted to a Delaware limited liability company "The International Metals Reclamation Company, LLC."
Economic Conditions and Outlook
During the first half of 2014, we sold the remaining zinc product inventory that we had built in 2013 in anticipation of the transition of metal production from Monaca to Mooresboro. We ceased operation of the Monaca smelter at the end of April 2014. The final month of operation experienced higher than normal unit operating costs as productivity suffered while we endeavored to keep four of the six furnaces operating in the final weeks before the facility was permanently shut down. As a result of the declining production of the smelter, we increased the sale of WOX and zinc calcine to third parties during the second and third quarters. In total, over two-thirds of the zinc units from our EAF dust recycling operations were sold to third parties during the second and third quarters of 2014. In addition, we have entered into agreements to sell additional zinc calcine, as needed, during the transition period while Mooresboro is ramping up.
Oxide shipments at Zochem for the third quarter of 2014 were 68% higher than the third quarter of 2013, reflecting the shift of our Monaca oxide business to Zochem as a result of the closure of the zinc oxide refinery on December 23, 2013 and Zochem's capacity expansion. During the second quarter of 2014, the seventh and final furnace was put into production. In July 2014, we took a planned outage on one of the furnaces to replace worn refractories and to install additional baghouse modules on several furnaces. By the end of August, Zochem had fully ramped up all seven furnaces to full production consistent with our zinc oxide consolidation strategy.
EAF dust receipts for the third quarter of 2014 improved by 4% compared with the second quarter of 2014. We processed a quantity of dust during the third quarter of 2014 which was 3% higher than our dust receipts for the quarter. Steel capacity

39

utilization remained in the high 70% range during the third quarter of 2014 and remains steady as we enter into the fourth quarter of 2014. We expect to operate all of our waelz kilns through the fourth quarter of 2014.
INMETCO's remelt alloy sales tons were down 13% during the third quarter of 2014 as compared with the second quarter of 2014 and tolling receipt tons were down 7% reflecting some softening in U.S. austenitic stainless steel production. INMETCO operated at full capacity during the third quarter of 2014. The annual outage originally planned for the fourth quarter of 2014 will be postponed to early 2015 as a result of an inspection of the furnace condition.
LME zinc prices were higher by 12% and LME nickel prices were higher by 1% during the third quarter of 2014 as compared to the second quarter of 2014.

Factors Affecting Our Operating Results
Market Price for Zinc and Nickel. We generate the substantial majority of our net sales from the sale of zinc and nickel-based products, our operating results however, depend heavily on the prevailing market price for zinc. 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”) that we purchase from third parties. Costs to acquire and recycle EAF dust, which, during 2014, comprised approximately 96% of our raw materials at our Monaca, Pennsylvania facility until it was permanently closed at the end of April 2014, were not impacted significantly by fluctuations in the market price of zinc on the LME. Our new zinc facility, which began production in May 2014, also utilizes zinc recycled from EAF dust for a substantial majority of their raw materials. The cost, however, for the remaining portion of our raw materials is directly impacted by changes in the market price of zinc. Our Zochem facility relies entirely on purchased feedstock that is dependent on the LME zinc price. The price of our finished products is impacted directly by changes in the market price of zinc and nickel, which can result in rapid and significant changes in our monthly revenues.
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 throughout 2010 and the first half of 2011. During the second half of 2011, however, the monthly average zinc prices began a steady decline that continued through the end of 2011 but then stabilized during 2012 through 2013. The monthly average zinc price has began a steady climb during the nine months ended September 30, 2014.
Average monthly, daily and yearly LME zinc prices for the years 2005 through 2013 and the nine months ended September 30, 2014 were as follows:
LME Zinc Prices
2005
 
2006
 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
 
2013
 
Nine Months Ended 
 September 30, 2014
Monthly Average
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
High
$
0.83

 
$
2.00

 
$
1.74

 
$
1.14

 
$
1.08

 
$
1.10

 
$
1.12

 
$
0.93

 
$
0.97

 
$
1.06

Low
$
0.54

 
$
0.95

 
$
1.07

 
$
0.50

 
$
0.50

 
$
0.79

 
$
0.84

 
$
0.82

 
$
0.83

 
$
0.91

Daily High
$
0.86

 
$
2.08

 
$
1.93

 
$
1.28

 
$
1.17

 
$
1.20

 
$
1.15

 
$
0.99

 
$
0.99

 
$
1.10

Daily Low
$
0.53

 
$
0.87

 
$
1.00

 
$
0.47

 
$
0.48

 
$
0.72

 
$
0.79

 
$
0.80

 
$
0.81

 
$
0.88

Average
$
0.63

 
$
1.48

 
$
1.47

 
$
0.85

 
$
0.75

 
$
0.98

 
$
0.99

 
$
0.88

 
$
0.87

 
$
0.97

At December 31, 2012, we had zinc put options with an $0.85 per pound strike price outstanding, which covered approximately 106,000 tons of zinc production, representing 75% of the expected shipments for the period from January 2013 through December 2013. These put options were put in place to provide protection to operating cash flow in the event that zinc prices decline below that level during the construction of the new zinc facility.
During the first quarter of 2013, we purchased put options, with an $0.85 per pound strike price, for the first quarter of 2014 that covered approximately 13,200 tons of production at a cost of $0.8 million. These put options were put in place to provide protection to operating cash flow in the event that zinc prices declined below that level during the construction and start up of the new zinc facility. During August 2013, we put in place equivalent $0.85 per pound strike price put options covering an additional 4,400 tons per month of zinc production for the period of January 2014 through March 2014 and converted $0.85 per pound strike price put options covering 4,950 tons per month of zinc production from October 2013 through March 2014 to fixed price swap contracts for the same period at an average price of approximately $0.903 per pound. The sale of the put options resulted in a $1.3 million cash benefit, and we were able to put the swaps in place without any additional payment. In December 2013, we entered into additional zinc fixed price swap contracts for the first quarter of 2014 at an average price of approximately $0.90 per pound. These fixed price swaps were also transacted without any payment by us. At December 31, 2013, the total quantity covered under forward zinc fixed price swaps for the first quarter of 2014 was 26,600 tons. We converted a portion of our put options into

40

swaps in order to reduce the effect of changes in the zinc price on cash flow during the period of planned transition of operations to the new zinc facility. At December 31, 2013, we had put options in place with a strike price of $0.85 per pound covering approximately 11,600 tons of zinc production through the first quarter of 2014.
The put options settled monthly on an average LME pricing basis. The average LME monthly zinc prices for first three months of 2014 were higher than the strike price for the contracts and the Company received no settlement payment during 2014. The average LME monthly zinc prices for five of the nine months in the period ended September 30, 2013 were lower than the strike price for the contracts and the Company received a total of $1.3 million during the nine months ended September 30, 2013.
At September 30, 2014, the Company did not have any remaining put options in place.
During the first quarter of 2014, we added zinc fixed price swaps for the second quarter of 2014, at an average price of approximately $0.94 per pound for a total quantity covered of 26,500 tons for the quarter.
In late July and early August 2014, we added zinc fixed price swaps for the months of August and September 2014, at an average price of slightly over $1.07 per pound for a total quantity covered of 6,000 tons per month. These fixed rate swaps were put in place to reduce volatility during the continued ramp up of production at the new zinc facility.
We paid cash of $0.5 million from the settlement of zinc fixed price swaps during the nine months ended September 30, 2014.
In October and early November 2014, we added zinc fixed price swaps for the months of November 2014 and December 2014, at an average price of slightly over $1.05 per pound for a total quantity covered of 6,600 tons per month. These fixed rate swaps were put in place to reduce volatility during the continued ramp up of production at the new zinc facility.
Daily high, low and yearly average LME nickel prices for the years 2010 through 2013 and the nine months ended September 30, 2014 were as follows:
 
LME Nickel Prices
2010
 
2011
 
2012
 
2013
 
Nine Months Ended 
 September 30, 2014
Daily High
$
11.81

 
$
13.17

 
$
9.90

 
$
8.44

 
$
9.62

Daily Low
$
8.36

 
$
7.68

 
$
6.89

 
$
5.97

 
$
6.06

Average
$
9.89

 
$
10.36

 
$
7.97

 
$
6.81

 
$
7.81


Demand for Zinc and Nickel-Based Products. We generate revenue from the sale of zinc metal, zinc oxide and nickel-based products and services, as well as from the collection and recycling of EAF dust. During the first six months of 2014, we shipped the remaining inventory that we had built in 2013. Production was reduced from five to four furnaces for the final weeks of operation until closure of the zinc smelter, which occurred in late April 2014.
Weekly steel industry capacity utilization continued the general upward trend from 2010 through the second quarter of 2012, remaining in the mid 70% range throughout that period, thereby increasing the amount of EAF dust generated and the demand for our EAF dust recycling services. During the third quarter of 2012, weekly steel industry capacity began to decline and dipped in the fourth quarter of 2012 to its lowest quarterly level since 2010. During 2013 and through the first nine months of 2014, weekly steel industry capacity increased back to the mid to high 70% range.
The table below illustrates historical sales volumes and revenues for zinc and nickel-based products and EAF dust:
 
Shipments/EAF Dust Receipts
 
Revenue/Ton
 
Nine months ended September 30,
 
Year Ended December 31,
 
Nine months ended September 30,
 
Year Ended December 31,
 
2014
 
2013
 
2013
 
2012
 
2014
 
2013
 
2013
 
2012
 
(Tons, in thousands)
 
(In U.S. dollars)
Product:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Zinc Products (1)
102

 
129

 
169

 
189

 
$
2,088

 
$
1,979

 
$
1,981

 
$
1,875

EAF Dust
440

 
465

 
607

 
618

 
$
70

 
$
72

 
$
72

 
$
69

Nickel-based products
22

 
21

 
28

 
28

 
$
1,738

 
$
1,583

 
$
1,568

 
$
1,717

 
(1)
Includes HZP from November 16, 2012 until production ceased during the first quarter of 2014.

41

Cost of Sales (excluding depreciation and amortization). Our cost of producing zinc and nickel products consists principally of purchased feedstock, energy, maintenance and labor costs. 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 paid for the purchased feed expressed as a percentage of the LME average zinc price. Purchased feedstock sells at a discount to the LME price of zinc.
Purchased feedstock costs at our Zochem facility, which comprised approximately 81% of production costs, consisted entirely of purchased SHG zinc metal. The price of these metal blocks is based on the LME zinc price. Conversion related costs represented 19% of our production costs for the nine months ended September 30, 2014.
Certain components of our conversion costs do not change proportionally with changes in production volume. Consequently, as volume changes a portion of our conversion cost per ton changes inversely. 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 and nickel prices, production and shipment volumes, efficiencies, energy costs and our ability to implement cost control measures aimed at improving productivity.
We value the majority of 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 and nickel prices, our inventory cost can exceed the market value of our finished goods. As a result, LCM adjustments can occur. The Company recorded LCM adjustments of $1.6 million during the nine months ended September 30, 2014. LCM adjustments of $2.9 million were recorded during the nine months ended September 30, 2013. Total LCM adjustments were $3.7 million for the year ended December 31, 2013. Zochem values its inventory using the first in-first out method and therefore the majority of the cost of their purchased feedstock generally flows through cost of sales during the same month it is purchased.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses consist of all sales and marketing expenditures, as well as administrative overhead costs, such as salary and benefit costs for sales personnel and administrative staff, expenses related to the use and maintenance of administrative offices, costs associated with acquisitions, other administrative expenses, including expenses relating to logistics and information systems and legal and accounting expense, and other selling expenses, including travel costs. Salary and benefit costs historically have comprised the largest single component of our selling, general and administrative expenses. Selling, general and administrative expenses as a percent of net sales historically have been impacted by changes in salary and benefit costs, as well as by changes in selling prices.
Fire at our INMETCO facility on October 28, 2012

On October 28, 2012, a fire occurred at the Company’s INMETCO facility. As INMETCO began its annual maintenance shutdown of the rotary hearth furnace and the submerged arc furnace, they experienced an unrelated fire in the material preparation and blending section of the plant, incurring damage to that portion of the building. The planned maintenance outage was only extended a day as a result of delays caused by the fire but we were not able to operate at full capacity until mid-December 2012 because power was not fully restored to some ancillary operations. All of the repairs associated with the fire were substantially complete by the end of the first quarter of 2013.

The damages from the fire exceeded our insurance deductible of $0.5 million and an estimated claim of $4.9 million was submitted for property damage insurance recovery. We reached a final settlement in the amount of $4.0 million during the second quarter of 2013. As of December 31, 2013, the entire insurance recovery of $4.0 million had been received in cash.

See Note T – Insurance Recoveries in our Consolidated Financial Statements for further information.
Trends Affecting Our Business

Our operating results are and will be influenced by a variety of factors, including:
•
production levels at our facilities;
•
the supply of EAF dust for our recycling operations;
•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 zinc product markets, or the EAF dust or nickel- bearing waste recycling markets;
•production levels in the domestic steel industry;
•increases and decreases in the use of zinc and nickel-based products;

42

•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, energy and fuel 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 purchase 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 costs are affected by the LME zinc price, we expect that changing zinc prices will continue to impact our operations and financial results in the future and any significant drop in zinc prices will negatively impact our results of operations.

Energy is one of our most significant costs. Our processes rely on electricity, coke and natural gas to operate. Our freight operations depend heavily on diesel fuel. Energy prices, particularly for coke and diesel fuel, have been volatile in recent years and currently exceed long-term historical averages. These fluctuations impact our manufacturing costs and contribute to earnings volatility.
The historically high zinc prices from 2006 to 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. There have been no new entries into the EAF dust recycling market, however, since 2008.
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. Longer-term, our steel customers may face pressure from increased use of aluminum. 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.
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, 2013 included in our Annual Report on Form 10-K which was filed with the SEC on March 13, 2014, 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, 2014 and for the nine months ended September 30, 2014 and 2013. Certain of these accounting policies are described below.

Revenue Recognition

The Company recognizes revenue from the sale of finished goods when a sales agreement includes a fixed or determinable price, passage of title or risk of loss has occurred (which is generally at the time of shipment) and collectability is reasonably assured.

The Company recognizes service fee revenue when a sales agreement includes a fixed or determinable price, passage of title or risk of loss has occurred (which is generally recognized at the time of receipt of EAF dust that the Company collects from steel mini-mill operators) and when collectability is reasonably assured.

Zinc and nickel material goods sales includes all zinc and nickel related products sold as a tangible good. Service fee revenue includes EAF service revenues and tolling and environmental services. Other revenues include miscellaneous and all other sales.

43


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. Zochem values its inventory using the first-in first-out 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 metal prices as quoted on the LME as of the reporting date in determining our estimate of net realizable value and to determine if an adjustment is required. Our product revenues are based on the current or prior months’ LME average prices. The LME average price 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.

Fair Value
Fair value is measured using inputs from the three levels of the fair value hierarchy. Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
The three levels are described as follows:
•Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities. Cash and cash equivalents including the money market demand account, accounts receivable, notes payable due within one year, accounts payable and accrued expenses are considered to be in Level 1 of the fair value hierarchy as they approximate their fair value due to the short-term nature of these instruments (see Note D – Cash and Cash Equivalents in our Consolidated Financial Statements). Borrowings under our credit facilities are considered to be in Level 1 of the fair value hierarchy (see Note I - Long Term Debt in our Consolidated Financial Statements).
•Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the determination of the fair value of the asset or liability, either directly or indirectly. The financial swap and financial option instruments are carried at fair value and are considered to be in Level 2 of the fair value hierarchy. These derivatives are not designated as cash flow hedges and we recognize changes in fair value within the consolidated statements of operations as they occur (see Note P – Accounting for Derivative Instruments and Hedging Activities in our Consolidated Financial Statements). The pension assets are considered to be in Level 2 of the fair value hierarchy (see Note L – Employee Benefit Plans in our Consolidated Financial Statements).
•Level 3 – Unobservable inputs that are significant to the determination of fair value of the asset or liability. The Convertible Notes, issued on July 27, 2011, were initially valued at fair value and subsequently are carried at amortized cost. The fair value is considered to be in Level 3 of the hierarchy (see Note I – Long-Term Debt in our Consolidated Financial Statements). The Secured Notes issued on July 26, 2012, 2013 Additional Notes issued on June 3, 2013 and 2014 Additional Notes issued on July 29, 2014 were initially valued at fair value and are subsequently carried at amortized cost. The Unsecured Notes issued on July 29, 2014 were issued and are valued at par value. The fair value of these debt issuances are considered to be in Level 3 of the fair value hierarchy (see Note I – Long-Term Debt in our Consolidated Financial Statements).
When developing the fair value measurements, we use quoted market prices whenever available or seek to maximize the use of observable inputs and minimize the use of unobservable inputs when quoted.
Derivatives
We do not enter into derivative financial instrument transactions unless we have an existing asset or obligation or anticipate a future activity that could 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.
We record derivative instruments in current assets or current liabilities in the Consolidated Balance Sheets at fair value. These derivatives are not designated as cash flow hedges and we recognize changes in fair value within the Consolidated Statements of Operations as they occur. The fair values of derivative instruments are based upon a comparison of third party counterparties valuations to ensure that there is an acceptable level of consistency among them. Cash flows from derivatives are recognized in the Consolidated Statements of Cash Flows in a manner consistent with the underlying transactions.
We are exposed to credit loss should counter-parties or clearing agents with which we have entered into derivative transactions become unable to satisfy their obligations in accordance with the underlying agreements. To reduce the risk of such losses, we

44

utilize six different brokers for our derivative contracts (see Note P – Accounting for Derivatives Instruments and Hedging Activities in our Consolidated Financial Statements).

Impairment
Long lived assets are reviewed for impairment when events and circumstances indicate that the carrying amount of an asset may not be recoverable. Our policy is to record an impairment loss when it is determined that the carrying amount of the asset exceeds the sum of the expected undiscounted future cash flows resulting from use of the asset, and its eventual disposition. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds its fair value, normally as determined in either open market transactions or through the use of a discounted cash flow model. Long lived assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.

We have no goodwill.

Investment in Joint Venture
Investments in other entities are accounted for using the consolidation, equity method or cost basis depending upon the level of ownership, our ability to exercise significant influence over the operating and financial policies of the investee and whether we are determined to be the primary beneficiary of a variable interest in an entity.
In December 2013, we entered into a joint venture known as ThirtyOx with Imperial Zinc Corp. for the acquisition and processing of zinc bearing secondary materials. The processing operation is located in North Carolina near the new zinc facility. The majority of the feedstock for the new zinc facility will be supplied by Horsehead's EAF dust recycling plants. ThirtyOx is expected to supply a portion of the incremental zinc feed required by the new zinc facility by recovering secondary zinc oxides from the residues generated by galvanizers, die casters and other users of zinc metal. The ThirtyOx facility became operational in August 2014. Our anticipated investment in ThirtyOx is expected to be less than $2.0 million.
ThirtyOx was determined to be a variable interest entity as their significant activities are directed by a management agreement and not the equity group. We have determined that we are not the primary beneficiary of the variable interest. We account for our investment in ThirtyOx using the equity method of accounting since we do not own over 50% and we are not able to exercise significant influence over the joint venture. We recorded our cash contributions to ThirtyOx as an investment which is increased or decreased by our respective share of ThirtyOx pretax income or loss.
We have determined that our interest in ThirtyOx is not individually significant to our consolidated balance sheet and income statement and therefore we are not required to provide additional disclosures regarding our involvement with this joint venture.
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,
 
2014
 
2013
2014
 
2013
Net sales
100.0
 %
 
100.0
 %
100.0
 %
 
100.0
 %
Cost of sales (excluding depreciation and amortization)
93.9
 %
 
93.8
 %
92.2
 %
 
89.5
 %
Depreciation and amortization
9.5
 %
 
6.5
 %
6.8
 %
 
6.4
 %
Selling, general and administrative expenses
5.1
 %
 
4.9
 %
5.1
 %
 
5.0
 %
Loss from operations
(8.5
)%
 
(5.2
)%
(4.1
)%
 
(0.9
)%
Interest expense
8.1
 %
 
0.4
 %
3.6
 %
 
0.6
 %
Interest and other income
3.7
 %
 
0.4
 %
2.0
 %
 
0.7
 %
Loss before income taxes
(12.9
)%
 
(5.2
)%
(5.7
)%
 
(0.8
)%
Income tax benefit
(6.6
)%
 
(2.0
)%
(2.4
)%
 
(0.3
)%
Net loss
(6.3
)%
 
(3.2
)%
(3.3
)%
 
(0.5
)%



45

The following table sets forth the activity and the fair values of our hedging instruments at the reporting dates.
 
 
Put and Call Option Settlement Period
 
 
 
 
 
 
2013
 
2014
 
Swaps
 
Total
Fair value December 31, 2012
 
$
4,402

 
$
—

 
$
358

 
$
4,760

Purchases
 
—

 
774

 
—

 
774

Write-off of expired positions
 
(172
)
 
—

 
(177
)
 
(349
)
Mark to market adjustments on open positions
 
901

 
535

 
(39
)
 
1,397

Fair value March 31, 2013
 
5,131

 
1,309

 
142

 
6,582

Purchases
 
—

 
—

 
—

 
—

Write-off of expired positions
 
(1,035
)
 
—

 
27

 
(1,008
)
Mark to market adjustments on open positions
 
(294
)
 
(29
)
 
481

 
158

Fair value June 30, 2013
 
3,802

 
1,280

 
650

 
5,732

Purchases/Sales
 
(540
)
 
(155
)
 
—

 
(695
)
Write-off of expired/sold positions
 
(2,304
)
 
(5
)
 
(274
)
 
(2,583
)
Mark to market adjustments on open positions
 
(625
)
 
(504
)
 
2,014

 
885

Fair value September 30, 2013
 
333

 
616

 
2,390

 
3,339

Purchases/Sales
 
—

 
—

 
—

 
—

Write-off of expired/sold positions
 
(333
)
 
—

 
(1,646
)
 
(1,979
)
Mark to market adjustments on open positions
 
—

 
(578
)
 
(2,176
)
 
(2,754
)
Fair value December 31, 2013
 
—

 
38

 
(1,432
)
 
(1,394
)
Purchases/Sales
 
—

 
(35
)
 
—

 
(35
)
Write-off of expired/sold positions
 
—

 
(3
)
 
1,534

 
1,531

Mark to market adjustments on open positions
 
—

 
—

 
1,569

 
1,569

Fair value March 31, 2014
 
—

 
—

 
1,671

 
1,671

Purchases/Sales
 
—

 
—

 
—

 
—

Write-off of expired/sold positions
 
—

 
—

 
(2,033
)
 
(2,033
)
Mark to market adjustments on open positions
 
—

 
—

 
(466
)
 
(466
)
Fair value June 30, 2014
 
—

 
—

 
(828
)
 
(828
)
Purchases/Sales
 
—

 
—

 
—

 
—

Write-off of expired/sold positions
 
—

 
—

 
392

 
392

Mark to market adjustments on open positions
 
—

 
—

 
699

 
699

Fair value September 30, 2014
 
$
—

 
$
—

 
$
263

 
$
263

A significant portion of our zinc oxide shipments are priced based on prior months’ LME average zinc price. Consequently, changes in the LME average zinc price are not fully realized until subsequent periods.
The LME average zinc prices for the most recent eight quarters and the average LME zinc prices for the year to date as of the end of each quarter are listed in the table below:
 
2012
 
2013
 
2014
Average LME zinc price
December 31
 
March 31
 
June 30
 
September 30
 
December 31
 
March 31
 
June 30
September 30
Quarter
$
0.88

 
$
0.92

 
$
0.83

 
$
0.84

 
$
0.86

 
$
0.92

 
$
0.93

$
1.05

Year-to-date
$
0.88

 
$
0.92

 
$
0.88

 
$
0.87

 
$
0.87

 
$
0.92

 
$
0.94

$
0.97


Segment Disclosure
In anticipation of the April 2014 closure of our Monaca facility, we ceased production of zinc oxide at that facility on December 23, 2013. During 2014, we will only produce zinc oxide at our Zochem facility. Consequently, Horsehead Corporation

46

and Zochem do not continue to meet the aggregation criteria as required by ASC 280 Segment Reporting and have not been combined into one reporting segment effective January 1, 2014.
We now report three segments, Horsehead, Zochem and INMETCO. The Horsehead segment processes EAF dust and other zinc-bearing material to produce and sell zinc and other metals. The Zochem segment produces and sells zinc oxide. The INMETCO segment processes a variety of metal-bearing waste material generated primarily by the specialty steel industry, provides tolling services and produces and sells nickel-chromium-molybdenum-iron to the stainless and specialty steel industries. Accordingly, the prior years segment information has been reclassified to conform to the new segment presentation.
We have not recorded within our three segments, eliminations related to the exclusion of revenue resulting primarily from EAF dust service fees charged by our Horsehead segment to our INMETCO segment, interest expense recorded on debt which is not allocated to our segments and selling, general and administrative expenses related to our corporate division.
Three Months Ended September 30, 2014 Compared with Three Months Ended September 30, 2013
Consolidated net sales.
Consolidated net sales increased $1.4 million, or 1.3%, to $111.0 million for the three months ended September 30, 2014, compared to $109.6 million for the three months ended September 30, 2013.
Change in consolidated net sales
 
(in millions)
Horsehead
 
$
(18.5
)
Zochem
 
17.2

INMETCO
 
0.5

Unrealized non-cash hedge adjustments
 
2.2

Total change in consolidated net sales
 
$
1.4

See separate segment discussion following.

Consolidated cost of sales (excluding depreciation and amortization).
Consolidated cost of sales increased $1.4 million, or 1.4%, to $104.2 million for the three months ended September 30, 2014, compared to $102.8 million for the three months ended September 30, 2013.
Change in consolidated cost of sales (excluding depreciation and amortization)
 
(in millions)
Horsehead
 
$
(12.8
)
Zochem
 
15.2

INMETCO
 
(1.0
)
Total change in consolidated cost of sales (excluding depreciation and amortization)
 
$
1.4

See separate segment discussion following.
Consolidated depreciation and amortization.
Consolidated depreciation and amortization increased $3.4 million, or 47.9%, to $10.5 million for the three months ended September 30, 2014, compared to $7.1 million for the three months ended September 30, 2013.
Change in consolidated depreciation and amortization
 
(in millions)
Decreased depreciation expense at the Monaca facility due to impairment of facility during 2013
 
$
(2.2
)
Depreciation associated with the new zinc facility
 
6.0

Other
 
(0.4
)
Total change in consolidated depreciation and amortization
 
$
3.4

Consolidated selling, general and administrative expenses.
Consolidated selling, general and administrative expenses increased $0.4 million, or 7.5%, to $5.7 million for the three months ended September 30, 2014, compared to $5.3 million for the three months ended September 30, 2013. The increase relates primarily to an increase in non-cash compensation.
Consolidated other income (expense).

47

Net consolidated other income (expense) was $(4.8) million for the three months ended September 30, 2014, compared to $(0.1) million for the three months ended September 30, 2013.
Change in consolidated other income (expense)
 
(in millions)
Increase in actual interest expense
 
$
(1.4
)
Decrease in capitalized interest related to construction of new zinc facility
 
(7.1
)
Increase in interest and other income
 
3.8

Total change in consolidated other income (expense)
 
$
(4.7
)
•
Increase in actual interest expense as a result of an increase in average borrowings under our credit facilities and issuance of the 2014 Senior Secured Notes and Unsecured Notes on July 29, 2014.
•
Decrease in capitalized interest due to the startup of the new zinc facility in May 2014.
•
Increase in interest and other income as a result of miscellaneous scrap sales and income recorded under the Shell contract in 2014.
Consolidated income tax benefit.
 
 
Three Months Ended September 30, 2014
Three Months Ended September 30, 2013
Income tax benefit (in millions)
 
$
(7.2
)
$
(2.2
)
Effective tax rate
 
50.8
%
38.3
%
•
The effective tax rate for the three months ended September 30, 2014 increased when compared to the three months ended September 30, 2013 due to higher than previously projected pretax losses.
Consolidated net loss.
Net loss for the three months ended September 30, 2014 was $(7.0) million, compared to net loss of $(3.5) million for the three months ended September 30, 2013.
Business Segments
Horsehead
Net sales.
Net sales, excluding unrealized non-cash adjustments relating to our hedging activities, decreased $18.5 million, or 23.3%, to $60.8 million for the three months ended September 30, 2014, compared to $79.3 million for the three months ended September 30, 2013.
Change in Horsehead net sales
 
(in millions)
Elimination of zinc oxide sales due to permanent shut down of zinc oxide refinery at Monaca facility
 
$
(18.4
)
Volume decrease due to zinc products (excluding zinc oxide)
 
(33.8
)
Price realization increase due to zinc products (excluding zinc oxide)
 
3.0

WOX/zinc calcine sales during three months ended September 30, 2014
 
29.6

Miscellaneous and other sales increase
 
1.1

Total change in Horsehead net sales
 
$
(18.5
)
•
The zinc oxide refinery at the Monaca facility was shut down permanently on December 23, 2013 and therefore no zinc oxide was produced by Horsehead during the three months ended September 30, 2014.
•
The zinc products volume reduction was primarily due the closure of the Monaca facility in April 2014 and the ramp up of production at the new zinc facility which continued during the third quarter of 2014. Our copper powders business was sold in December 2013. During the first quarter of 2014, HZP production was idled due to a lack of raw material supply. Shipments, however, continued through the end of April 2014.
•
The increase in price realization during the three months ended September 30, 2014 primarily related to zinc metal and resulted from a 24.3% higher average LME zinc price for the three months ended September 30, 2014 compared to the three months ended September 30, 2013.

48

•
WOX and zinc calcine were sold to third parties during the three months ended September 30, 2014 and will continue to be sold until the new zinc facility is operating at close to capacity.
•
Net sales during the three months ended September 30, 2014 were decreased by unrealized non-cash adjustments of $0.3 million relating to our hedging activities.
Horsehead zinc product shipments - in tons
 
Three Months Ended September 30, 2014
Three Months Ended September 30, 2013
Zinc product shipments
 
7,786

34,018

Zinc product shipments on a zinc contained basis
 
7,786

32,112

Average sales price realization
 
$
1.17

$
0.95


•
Horsehead zinc product shipment tons were the same as shipments on a zinc contained basis, as a result of no zinc oxide production in 2014 at the Monaca facility.
•
The increase in the average sales price realization reflects the 24.3% higher average LME zinc price during the three months ended September 30, 2014 compared to the three months ended September 30, 2013.
Net sales of zinc metal decreased $23.2 million, or 57.4%, to $17.2 million for the three months ended September 30, 2014, compared to $40.4 million for the three months ended September 30, 2013.
Change in Horsehead zinc metal net sales
 
(in millions)
Decrease in volume
 
$
(26.8
)
Increase in price realization
 
3.6

Total change in Horsehead zinc metal net sales
 
$
(23.2
)
•
The decrease in volume relates to a reduction in shipments due to the closure of the Monaca facility in April 2014 and the ramp up of production at the new zinc facility which continued during the third quarter of 2014.
•
The increase in price realization was a result of an increase in the average price per ton on zinc metal sold and an increase of 24.3% in the average LME zinc price.
Net sales of zinc oxide decreased $18.4 million as a result of the closure of the zinc oxide refinery on December 23, 2013.
Net sales of zinc and copper-based powders decreased $7.2 million to $1.0 million for the three months ended September 30, 2014, compared to $8.2 million for the three months ended September 30, 2013. The decrease was primarily due to the elimination of copper-based powder sales as this business line was sold in December 2013 and the idling of production at our HZP facility due to a lack of raw material supply.

Revenues from EAF dust recycling decreased $0.5 million, or 4.4%, to $10.9 million for the three months ended September 30, 2014, compared to $11.4 million for the three months ended September 30, 2013.
Change in Horsehead EAF Dust recycling net sales
 
(in millions)
Decrease in volume
 
$
(0.1
)
Decrease in price realization
 
(0.4
)
Total change in Horsehead EAF Dust recycling net sales
 
$
(0.5
)
•
EAF dust receipts for the three months ended September 30, 2014 were 154,658 tons compared to 155,753 tons for the three months ended September 30, 2013.
•
The decrease in price realization was a result of a decrease in the average price per ton received.
Cost of sales (excluding depreciation and amortization).

Cost of sales decreased $12.8 million, or 16.4%, to $65.2 million for the three months ended September 30, 2014, compared to $78.0 million for the three months ended September 30, 2013.

49

 
 
Three Months Ended 
 September 30, 2014
Three Months Ended 
 September 30, 2013
Cost of sales as a % of net sales, excluding non-cash losses related to hedging
 
107.2
%
98.4
%
Unrealized non-cash losses related to hedging
 
$
0.3

$
0.7

The cost of zinc material and other products sold for the three months ended September 30, 2014, decreased $13.6 million, or 19.6%, to $55.9 million, compared to $69.5 million for the three months ended September 30, 2013.
Change in Horsehead cost of zinc material and other products sold
 
(in millions)
Decrease related to elimination of zinc oxide sales due to permanent shut down of zinc oxide refinery at Monaca facility
 
$
(18.5
)
Volume decrease due to zinc products (excluding zinc oxide)
 
(34.6
)
Increase in cost of zinc products shipped (excluding zinc oxide)
 
16.6

Cost of sales relating to WOX and zinc calcine products produced
 
21.5

Increase in recycling and other costs
 
1.4

Total change in Horsehead cost of zinc metal and other products sold
 
$
(13.6
)
•
The cost of zinc material includes $0.4 million of LCM inventory adjustments for the three months ended September 30, 2014 and LCM adjustments of $1.3 million for the three months ended September 30, 2013. The 2013 LCM adjustments were the result of the low LME zinc price. The 2014 LCM adjustments were the result of higher than normal production costs at the new zinc facility which operated at inefficient levels during startup.
Conversion costs for the Mooresboro facility were $20.0 million for the three months ended September 30, 2014 and consisted primarily of labor, maintenance, services, utilities, supplies and chemical additives. Conversion costs for the Monaca facility, which was permanently closed at the end of April 2014, were $31.1 million for the three months ended September 30, 2013.
Conversion costs for the recycling facilities that process EAF dust were approximately the same at $23.5 million for the three months ended September 30, 2014 and the three months ended September 30, 2013. Production however increased 3.5% over the same periods.

The cost of EAF dust services increased $0.8 million, or 9.3% to $9.4 million for the three months ended September 30, 2014, compared to $8.6 million for the three months ended September 30, 2013.
Change in Horsehead cost of EAF dust services
 
(in millions)
Decrease in volume
 
$
(0.1
)
Increase in transportation costs
 
0.9

Total change in Horsehead cost of EAF dust services
 
$
0.8

•
EAF dust tons processed remained approximately the same for the three months ended September 30, 2014 compared to the three months ended September 30, 2013.
Loss before income taxes.
For the reasons stated above, our loss before income taxes was:
Horsehead loss before taxes (in millions)
 
Three Months Ended September 30, 2014
Three Months Ended September 30, 2013
Loss before taxes
 
$
(15.2
)
$
(9.8
)
Unrealized non-cash losses related to hedging
 
0.3

0.7

Loss before taxes excluding unrealized non-cash losses related to hedging
 
$
(14.9
)
$
(9.1
)
Zochem
Net sales.

50

Net sales, excluding unrealized non-cash adjustments relating to our hedging activities, increased $17.2 million, or 90.5%, to $36.2 million for the three months ended September 30, 2014, compared to $19.0 million for the three months ended September 30, 2013.
Change in Zochem net sales
 
(in millions)
Higher shipment volume
 
$
12.7

Increase in price realization
 
4.5

Total change in Zochem net sales
 
$
17.2

•
Higher shipment volume as a result of the capacity expansion, as the seventh and final furnace was put into production during the second quarter of 2014 and closure of the Monaca zinc oxide refinery on December 23, 2013 and resulting transition of customers to Zochem in 2014.
•
Price realization per pound increased 14.1% as a result of an increase in the average LME zinc price of 24.3% for the three months ended September 30, 2014 compared to the three months ended September 30, 2013.
•
Non-cash adjustments related to hedging activities were not material for both the three months ended September 30, 2014 and the three months ended September 30, 2013.
Cost of sales (excluding depreciation and amortization).
Cost of sales increased $15.2 million, or 95.0%, to $31.2 million for the three months ended September 30, 2014, compared to $16.0 million for the three months ended September 30, 2013. The increase resulted primarily from an increase in volume as shipments increased approximately 68% for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013.
Income before income taxes.
For the reasons stated above, income before income taxes was $3.8 million for the three months ended September 30, 2014, compared to $2.2 million for the three months ended September 30, 2013.
INMETCO
Net sales.
Net sales, excluding unrealized non-cash adjustments relating to our hedging activities, increased $0.5 million, or 3.9%, to $13.2 million for the three months ended September 30, 2014, compared to $12.7 million for the three months ended September 30, 2013.
Change in INMETCO net sales
 
(in millions)
Increase in price realization
 
$
1.1

Decrease in shipment volume
 
(0.4
)
Decrease in other and miscellaneous sales
 
(0.2
)
Total change in INMETCO net sales
 
$
0.5

•
Increase in price realization as a result of higher market prices and customer mix on tolling return shipments.
•
Miscellaneous and other sales decreased primarily due to a decrease in brokered battery sales.
•
Hedging activities related to nickel resulted in a favorable non-cash adjustment of $1.4 million for the three months ended September 30, 2014 compared with a unfavorable non-cash adjustment of $0.5 million for the three months ended September 30, 2013.
Cost of sales (excluding depreciation and amortization).
Cost of sales decreased $1.0 million, or 11.4%, to $7.8 million for the three months ended September 30, 2014 compared to $8.8 million for the three months ended September 30, 2013.
Change in INMETCO cost of sales (excluding depreciation and amortization)
 
(in millions)
Decrease in cost of products shipped
 
$
(0.6
)
Lower shipment volume
 
(0.4
)
Total change in INMETCO cost of sales (excluding depreciation and amortization)
 
$
(1.0
)

51

•
Cost reductions associated with the idling of the cadmium recovery facility in December 2013 was the primary reason for the reduction in the cost of products shipped.
Income before income taxes.
For the reasons stated above, our income before income taxes was:
INMETCO income before taxes (in millions)
 
Three Months Ended September 30, 2014
Three Months Ended September 30, 2013
Income before taxes
 
$
5.2

$
2.0

Unrealized non-cash (gains) losses related to hedging
 
(1.4
)
0.5

Income before taxes excluding unrealized non-cash adjustments related to hedging
 
3.8

2.5

Other
Corporate, eliminations and other

Net sales.
Eliminations of net sales remained relatively the same at $0.3 million for the three months ended September 30, 2014 compared to $0.2 million for the three months ended September 30, 2013. Eliminations relate to the exclusion of revenue resulting primarily from EAF dust service fees charged by our Horsehead segment to our INMETCO segment.

Loss before income taxes.
Loss before income taxes increased $8.0 million to $(8.1) million for the three months ended September 30, 2014 compared to $(0.1) million for the three months ended September 30, 2013. The increase in loss before income taxes was primarily attributable to an increase in actual interest expense of $0.7 million due to an increase in debt recorded in our corporate division and a decrease in capitalized interest of $7.1 million due to the completion of the new zinc facility.
Nine Months Ended September 30, 2014 Compared with Nine Months Ended September 30, 2013
Consolidated net sales.
Consolidated net sales increased $9.0 million, or 2.7%, to $347.3 million for the nine months ended September 30, 2014, compared to $338.3 million for the nine months ended September 30, 2013.
Change in consolidated net sales
 
(in millions)
Horsehead
 
$
(43.5
)
Zochem
 
49.6

INMETCO
 
0.2

Unrealized non-cash hedge adjustments
 
2.7

Total change in consolidated net sales
 
$
9.0

See separate segment discussion following.

Consolidated cost of sales (excluding depreciation and amortization).
Consolidated cost of sales increased $17.6 million, or 5.8%, to $320.3 million for the nine months ended September 30, 2014, compared to $302.7 million for the nine months ended September 30, 2013.
Change in consolidated cost of sales (excluding depreciation and amortization)
 
(in millions)
Horsehead
 
$
(27.0
)
Zochem
 
44.5

INMETCO
 
0.1

Total change in consolidated cost of sales (excluding depreciation and amortization)
 
$
17.6

See separate segment discussion following.
Consolidated depreciation and amortization.

52

Consolidated depreciation and amortization increased $1.9 million, or 8.8%, to $23.5 million for the nine months ended September 30, 2014, compared to $21.6 million for the nine months ended September 30, 2013.
Change in consolidated depreciation and amortization
 
(in millions)
Decreased depreciation expense at the Monaca facility due to impairment of facility during 2013
 
$
(7.1
)
Depreciation associated with the new zinc facility
 
9.4

Other
 
(0.4
)
Total change in consolidated depreciation and amortization
 
$
1.9

Consolidated selling, general and administrative expenses.
Consolidated selling, general and administrative expenses increased $0.9 million, or 5.3%, to $17.8 million for the nine months ended September 30, 2014, compared to $16.9 million for the nine months ended September 30, 2013. The increase relates primarily to an increase in non-cash compensation.
Consolidated other income (expense).
Net consolidated other income (expense) was $(5.6) million for the nine months ended September 30, 2014, compared to $0.3 million for the nine months ended September 30, 2013.
Change in consolidated other income (expense)
 
(in millions)
Increase in actual interest expense
 
$
(3.1
)
Decrease in capitalized interest related to construction of new zinc facility
 
(7.4
)
Increase in interest and other income
 
4.6

Total change in consolidated other income (expense)
 
$
(5.9
)
•
Increase in actual interest expense as a result of an increase in average borrowings under our credit facilities, issuance of 2013 Additional Notes on June 3, 2013 and issuance of the 2014 Senior Secured Notes and Unsecured Notes on July 29, 2014.
•
Decrease in capitalized interest due to completion and startup of the new zinc facility in May 2014.
•
Increase in interest and other income as a result of miscellaneous scrap sales and income recorded under the Shell contract in 2014.
Consolidated income tax benefit.
 
 
Nine months ended September 30, 2014
Nine months ended September 30, 2013
Income tax benefit (in millions)
 
$
(8.5
)
$
(1.1
)
Effective tax rate
 
42.6
%
41.9
%
•
The effective tax rate for the nine months ended September 30, 2014 increased compared to the nine months ended September 30, 2013 due to the utilization of state net operating losses and the absence of a 2014 research and development credit due to the expiration of the credit during 2013.
Consolidated net loss.
Net loss for the nine months ended September 30, 2014 was $(11.4) million, compared to net loss of $(1.5) million for the nine months ended September 30, 2013.
Business Segments
Horsehead
Net sales.
Net sales, excluding unrealized non-cash adjustments relating to our hedging activities, decreased $43.5 million, or 18.1%, to $196.6 million for the nine months ended September 30, 2014, compared to $240.1 million for the nine months ended September 30, 2013.

53

Change in Horsehead net sales
 
(in millions)
Elimination of zinc oxide sales due to permanent shut down of zinc oxide refinery at Monaca facility
 
$
(67.3
)
Volume decrease due to zinc products (excluding zinc oxide)
 
(42.7
)
Price realization increase due to zinc products (excluding zinc oxide)
 
7.7

WOX/zinc calcine sales during nine months ended September 30, 2014
 
59.0

Miscellaneous and other sales decrease
 
(0.2
)
Total change in Horsehead net sales
 
$
(43.5
)
•
The zinc oxide refinery at the Monaca facility was shut down permanently on December 23, 2013 and therefore no zinc oxide was produced by Horsehead during the nine months ended September 30, 2014.
•
Zinc products resulted in a reduction in volume primarily reflecting a decrease in zinc metal sales due to the closure of the Monaca facility in April 2014 and the ramp up of production at the new zinc facility which continued during the third quarter of 2014. Our copper powders business was sold in December 2013. During the first quarter of 2014, HZP production was idled due to a lack of raw material supply, shipments however, continued through the end of April 2014.
•
The increase in price realization during the nine months ended September 30, 2014 primarily related to zinc metal as the average LME zinc price was 12.1% higher for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013.
•
WOX and zinc calcine were sold to third parties during the nine months ended September 30, 2014 and will continue to be sold until the new zinc facility is operating at close to capacity.
•
Net sales during the nine months ended September 30, 2014 were increased by unrealized non-cash adjustments of $2.0 million relating to our hedging activities.
Horsehead zinc product shipments - in tons
 
Nine months ended September 30, 2014
Nine months ended September 30, 2013
Zinc product shipments
 
49,545

99,786

Zinc product shipments on a zinc contained basis
 
49,545

93,051

Average sales price realization
 
$
1.05

$
0.99


•
Horsehead zinc product shipment tons were the same as shipments on a zinc contained basis, as a result of no zinc oxide production in 2014 at the Monaca facility.
Net sales of zinc metal decreased $13.2 million, or 12.1%, to $96.0 million for the nine months ended September 30, 2014, compared to $109.2 million for the nine months ended September 30, 2013.
Change in Horsehead zinc metal net sales
 
(in millions)
Decrease in volume
 
$
(22.4
)
Increase in price realization
 
9.2

Total change in Horsehead zinc metal net sales
 
$
(13.2
)
•
The decrease in volume relates to a reduction in shipments due to the closure of the Monaca facility in April 2014 and the ramp up of production at the new zinc facility which continued during the third quarter of 2014.
•
The increase in price realization was a result of an increase in the average price per ton on zinc metal sold and an increase of 12.1% in the average LME zinc price.

Net sales of zinc oxide decreased $67.3 million as a result of the closure of the zinc oxide refinery on December 23, 2013.

Net sales of zinc and copper-based powders decreased $19.2 million to $6.7 million for the nine months ended September 30, 2014, compared to $25.9 million for the nine months ended September 30, 2013. The decrease was primarily due to the elimination of copper-based powders sales as this business line was sold in December 2013 and and the idling of production at our HZP facility due to a lack of raw material supply.


54

Revenues from EAF dust recycling decreased $2.6 million, or 7.8%, to $30.8 million for the nine months ended September 30, 2014, compared to $33.4 million for the nine months ended September 30, 2013.
Change in Horsehead EAF Dust recycling net sales
 
(in millions)
Decrease in volume
 
$
(1.7
)
Decrease in price realization
 
(0.9
)
Total change in Horsehead EAF Dust recycling net sales
 
$
(2.6
)
•
EAF dust receipts for the nine months ended September 30, 2014 were 440,470 tons compared to 464,832 tons for the nine months ended September 30, 2013.
Cost of sales (excluding depreciation and amortization).

Cost of sales decreased $27.0 million, or 11.9%, to $200.1 million for the nine months ended September 30, 2014, compared to $227.1 million for the nine months ended September 30, 2013.
 
 
Nine months ended September 30, 2014
Nine months ended September 30, 2013
Cost of sales as a % of net sales, excluding non-cash adjustments related to hedging
 
101.8
%
94.6
%
Unrealized non-cash (gains) losses related to hedging (in millions)
 
$
(2.0
)
$
1.2

The cost of zinc material and other products sold for the nine months ended September 30, 2014, decreased $25.3 million, or 12.7%, to $174.7 million, compared to $200.0 million for the nine months ended September 30, 2013.
Change in Horsehead cost of zinc material and other products sold
 
(in millions)
Decrease related to elimination of zinc oxide sales due to permanent shut down of zinc oxide refinery at Monaca facility
 
$
(61.2
)
Volume decrease due to zinc products (excluding zinc oxide)
 
(39.8
)
Increase in cost of zinc products shipped (excluding zinc oxide)
 
27.5

Cost of sales relating to WOX and zinc calcine products produced
 
45.9

Increase in recycling and other costs
 
2.3

Total change in Horsehead cost of zinc metal and other products sold
 
$
(25.3
)
•
The cost of zinc material includes LCM inventory adjustments of $1.6 million for the nine months ended September 30, 2014 and $2.9 million for the nine months ended September 30, 2013. The LCM adjustments were the result of the low LME zinc price, increased production costs in 2014 at the Monaca facility as the plant operated at inefficient levels during the final weeks of operation and the incurrence of higher than normal production costs in 2014 as the new zinc facility operated at inefficient levels during startup.
Conversion costs for the Mooresboro facility, which began production in May 2014, were $24.9 million for the nine months ended September 30, 2014 and consisted primarily of labor, maintenance, services, utilities, supplies and chemical additives. Conversion costs for the Monaca facility, which was closed the the end of April 2014, were $32.6 million for the nine months ended September 30, 2014. Conversion costs for the Monaca facility were $69.4 million for the nine months ended September 30, 2013.
Conversion costs for the recycling facilities that process EAF dust decreased $2.1 million, or 3.0%, to $67.3 million for the nine months ended September 30, 2014 compared to $69.4 million for the nine months ended September 30, 2013.
Change in Horsehead recycling conversion costs
 
(in millions)
Labor
 
$
(0.3
)
Coke
 
(1.7
)
Maintenance related costs
 
(1.9
)
Services
 
1.7

Utilities
 
0.3

Other
 
(0.2
)
Total change in Horsehead recycling conversion costs
 
$
(2.1
)

55

•
Conversion costs at the recycling facilities reflect 5.9% decrease in production levels. Production decreased due to the permanent closure of the Monaca smelter at the end of April 2014 and the ramp up of production at the new zinc facility which began production in May 2014.

The cost of EAF dust services decreased $1.7 million, or 6.3% to $25.4 million for the nine months ended September 30, 2014, compared to $27.1 million for the nine months ended September 30, 2013.
Change in Horsehead cost of EAF dust services
 
(in millions)
Decrease due to volume
 
$
(1.4
)
Decrease in transportation costs
 
(0.3
)
Total change in Horsehead cost of EAF dust services
 
$
(1.7
)

•
EAF dust tons processed decreased 7.6% for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013.
Loss before income taxes.
For the reasons stated above, our loss before income taxes was:
Horsehead loss before taxes (in millions)
 
Nine months ended September 30, 2014
Nine months ended September 30, 2013
Loss before taxes
 
$
(30.5
)
$
(19.1
)
Unrealized non-cash (gains) losses related to hedging
 
(2.0
)
1.2

Loss before taxes excluding unrealized non-cash (gains) losses related to hedging
 
$
(32.5
)
$
(17.9
)
Zochem
Net sales.
Net sales, excluding unrealized non-cash adjustments relating to our hedging activities, increased $49.6 million, or 83.5%, to $109.0 million for the nine months ended September 30, 2014, compared to $59.4 million for the nine months ended September 30, 2013.
Change in Zochem net sales
 
(in millions)
Higher shipment volume
 
$
44.8

Increase in price realization
 
4.8

Total change in Zochem net sales
 
$
49.6

•
Higher shipment volume as a result of the capacity expansion, as the seventh and final furnace was put into production during the second quarter of 2014 and closure of the Monaca zinc oxide refinery on December 23, 2013 and resulting transition of customers to Zochem in 2014.
•
Increase in price realization as the average LME zinc price was 12.1% higher for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013.
•
Non-cash adjustments related to hedging activities were not material for both the nine months ended September 30, 2014 and the nine months ended September 30, 2013.
Cost of sales (excluding depreciation and amortization).
Cost of sales increased $44.5 million, or 87.4%, to $95.4 million for the nine months ended September 30, 2014, compared to $50.9 million for the nine months ended September 30, 2013. The increase resulted primarily from volume as shipments increased approximately 75% for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013.
Income before income taxes.
For the reasons stated above, income before income taxes was $10.6 million for the nine months ended September 30, 2014, compared to $6.4 million for the nine months ended September 30, 2013.

56

INMETCO
Net sales.
Net sales, excluding unrealized non-cash adjustments relating to our hedging activities, increased $0.2 million, or 0.5%, to $41.1 million for the nine months ended September 30, 2014, compared to $40.9 million for the nine months ended September 30, 2013.
Change in INMETCO net sales
 
(in millions)
Increase in price realization
 
$
1.0

Increase in shipment volume
 
0.9

Sale of future bankruptcy claim rights received in 2013
 
(0.8
)
Other and miscellaneous sales
 
(0.9
)
Total change in INMETCO net sales
 
$
0.2

•
Increase in price realization as a result of higher market prices and customer mix on tolling return shipments.
•
Net sales for the nine months ended September 30, 2013 include $0.8 million received from the sale to a third party for any rights for future bankruptcy claims against MF Global.
•
Decrease in other and miscellaneous sales partially due to a decrease in scrap sales.
•
Hedging activities related to nickel resulted in unfavorable non-cash adjustments of $0.3 million for the nine months ended September 30, 2014, compared with favorable non-cash adjustments of $0.3 million for the nine months ended September 30, 2013.

Cost of sales (excluding depreciation and amortization).
Cost of sales decreased $0.4 million, or 1.6%, to $24.8 million for the nine months ended September 30, 2014, compared to $25.2 million for the nine months ended September 30, 2013.
Change in INMETCO cost of sales (excluding depreciation and amortization)
 
(in millions)
Decrease in cost of products shipped
 
$
(3.5
)
Higher shipment volume
 
0.8

Net insurance benefit recorded during the nine months ended September 30, 2013
 
2.3

Total change in INMETCO cost of sales (excluding depreciation and amortization)
 
$
(0.4
)
•
Lower maintenance costs, lower raw material costs and cost reductions associated with the idling of the cadmium recovery facility in December 2013 were the primary reasons for the reduction in the cost of product shipped.
•
Cost of sales for the nine months ended September 30, 2013 included a net insurance benefit related to the October 2012 fire at the INMETCO facility.
•
Cost of sales for the nine months ended September 30, 2013 included a non recurring insurance premium surcharge of $0.7 million related to the October 2012 fire.
Income before income taxes.
For the reasons stated above, our income before income taxes was:
INMETCO income (loss) before taxes (in millions)
 
Nine months ended September 30, 2014
Nine months ended September 30, 2013
Income before taxes
 
$
10.6

$
11.0

Unrealized non-cash losses (gains) related to hedging
 
0.3

(0.3
)
Net insurance benefit
 
—

(2.3
)
Income before taxes excluding unrealized non-cash losses (gains) related to hedging and net insurance benefit
 
$
10.9

$
8.4


57

Other
Corporate, eliminations and other

Net sales.
Eliminations of net sales remained relatively the same at $1.1 million for the nine months ended September 30, 2014 compared to $1.2 million for the nine months ended September 30, 2013. Eliminations relate to the exclusion of revenue resulting primarily from EAF dust service fees charged by our Horsehead segment to our INMETCO segment.

Loss before income taxes.
Loss before income taxes increased $9.6 million to $(10.5) million for the nine months ended September 30, 2014 compared to $(0.9) million for the nine months ended September 30, 2013. The increase in loss before income taxes was primarily attributable to an increase in actual interest expense of $1.9 million due to an increase in debt recorded in our corporate division and a decrease in capitalized interest of $7.5 million due to the completion of the new zinc facility.

Liquidity and Capital Resources

On July 26, 2012, we completed a private placement of $175.0 million principal amount of 10.50% Senior Secured Notes due 2017 (the "Secured Notes"), at an issue price of 98.188% of par with a yield to maturity of 11.00%. The net proceeds from the offering were approximately $164.1 million. In connection with the Secured Notes offering, we amended our Revolving Credit Facility (as amended, the "ABL Facility") to permit the offering of the Secured Notes and the incurrence of liens on the collateral that secures the Secured Notes and the ABL Facility. On June 30, 2014, we entered into the Fourth Amendment, which increased our advance rates on borrowings under the agreement. On September 22, 2014, we entered into the Fifth Amendment, which amended the definition of an eligible receivable with respect to a certain customer for a stated time period. We had $17.6 million in outstanding borrowings on the ABL Facility as of September 30, 2014. We had no availability remaining on this facility at September 30, 2014.
On August 28, 2012, we announced that we entered into a Credit Agreement with a Spanish bank to provide for the financing of up to €18.6 million (approximately $25.8 million USD) for purchases under certain contracts for equipment and related products and services for the new zinc facility and an additional $1.0 million for the insurance premium on this loan. As of September 30, 2014, we had $20.4 million in outstanding borrowings on this facility. We had $2.4 million in availability remaining on this agreement at September 30, 2014.
On December 21, 2012, Zochem entered into a $15.0 million CAD Zochem Facility. We also entered into this facility as a guarantor of Zochem’s obligations. Zochem entered into this agreement to support liquidity needs for its recently completed production capacity expansion. On April 29, 2014, we terminated the $15.0 million CAD Zochem Facility and entered into a new $20.0 million 2014 Zochem Facility. Terms under the 2014 Zochem Facility are essentially the same as the terms under the terminated Zochem Facility. We had $19.4 million in outstanding borrowings on this facility as of September 30, 2014. We had no availability remaining at September 30, 2014 on this facility.
On June 3, 2013, we completed the private placement of an additional $20.0 million in aggregate principal amount of our Secured Notes at an issue price of 106.5% of the principal amount (the "2013 Additional Notes"). The 2013 Additional Notes were issued at an effective interest rate of 8.6%. We received net proceeds from the offering of $21.0 million.
On June 24, 2013, INMETCO entered into the INMETCO Facility. We entered into a guaranty of INMETCO’s obligations under the INMETCO Facility. INMETCO entered into this facility to support working capital requirements and for general corporate purposes. On March 31, 2014, we entered into the First Amendment to the Credit Agreement, which amended certain provisions of the Credit Agreement, including the increase of the maximum advances allowed to $20.0 million. We had $20.0 million in outstanding borrowings on this facility as of September 30, 2014 and no availability.
On October 30, 2013, we completed an underwritten public offering of 6.3 million shares of common stock, including 0.8 million shares sold pursuant to the underwriters' exercise of their option to purchase additional shares, at a price to the public of $12.00 per share. We received approximately $72.0 million in net proceeds from the offering, after deducting underwriting discounts and commissions and offering expenses.

On July 29, 2014, we completed a private placement of $40.0 million aggregate principal amount of 9.00% Senior Notes due 2017 (the "Unsecured Notes"), at an issue price of 100.00% of par. The Unsecured Notes mature on June 1, 2017. The Unsecured Notes are a new issue of notes that pay interest semiannually at a rate of 9.00% per annum, beginning on December 1, 2014.

58


On July 29, 2014, we also completed the private placement of an additional $10.0 million aggregate principal amount of our Secured Notes, at an issue price of 113.00% of par (the "2014 Additional Notes"). The 2014 Additional Notes were issued as additional notes under the indenture dated July 26, 2012 and pay interest semiannually at a rate of 10.50% per annum. The 2014 Additional Notes were issued at an effective interest rate of 5.5%.

Total net proceeds from the July 29, 2014 offerings were $49.8 million.

At September 30, 2014, there was an aggregate of $205.0 million of Secured Notes outstanding.

The two financings completed on July 29, 2014 more than offset the reduction in availability under our $60.0 million ABL facility as the liquidation of inventory and receivables from the shutdown of the Monaca operation reduced our borrowing base. The borrowing base is expected to be restored once the Mooresboro facility is fully ramped up.

Construction of our new zinc production facility in Mooresboro has been completed.  We enter the fourth quarter of 2014 with the expectation that we have resolved several issues that will improve the level of operation going forward. We have made progress through better control of the process and by minor equipment modifications. If additional equipment modifications or additions are required to fully resolve the issue we have identified, we do not believe the cost would be material. Several improvements have been implemented which have allowed us to continue ramping up production. We have not identified any insurmountable technical or operational obstacles that materially challenge the value proposition of this project; however, issues such as the solids removal problem described above have delayed the timetable for our expected realization of these benefits.

Commissioning of the co-product recovery circuit was completed during the quarter and we started to introduce feed to the circuit, however, we reallocated resources to focus on debottlenecking the zinc production plant in October which delayed the ramp-up of that circuit. We will restart the ramp-up of the co-product circuit in November and the ramp up period is estimated to be approximately one year.
We typically finance our operations, maintenance capital expenditures and debt service primarily with funds generated by our operations. We believe the combination of (i) our cash balance of approximately $72.2 million at September 30, 2014, which includes the remaining proceeds from draw downs on our credit facilities and net proceeds of $49.8 million from the issuance of the Unsecured Notes and 2014 Additional Notes on July 29, 2014 (ii) our availability as of September 30, 2014 of $2.4 million under our credit agreement, (iii) our cost reduction initiatives and (iv) our expected cash generated from operations will be sufficient to satisfy our liquidity and capital requirements, including capital requirements related to the final construction of the new zinc facility and our capital needs based on the expected ramp up to full production, 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, by factors relating to the ramp up of our new zinc facility and by general economic, financial, competitive, legislative, regulatory and other factors discussed in this report and in our other filings with the SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
Cash and Cash Equivalents
Our balance of cash and cash equivalents at September 30, 2014 was $72.2 million, a decrease of $64.1 million from the December 31, 2013 balance of $136.3 million. Cash and cash equivalents are held in three US banks and one Canadian bank.
Cash Flows from Operating Activities
Our operations used a net $7.7 million in cash for the nine months ended September 30, 2014. A decrease in the total inventory balance was offset by a decrease in the total accounts payable balance.
Our investment in working capital was $63.7 million at September 30, 2014 and $114.3 million at December 31, 2013. The decrease in working capital was primarily due to a decrease in cash during the nine months ended September 30, 2014, related to capital expenditures for the new zinc facility.
Cash Flows from Investing Activities
Capital expenditures were $106.5 million for the nine months ended September 30, 2014, of which approximately $90 million related to the construction of the new zinc facility.
Cash Flows from Financing Activities

59

Cash provided by financing activities for the nine months ended September 30, 2014 totaled $50.0 million. We received proceeds of $51.3 million from the issuance of debt on July 29, 2014 and incurred $1.8 million in debt issuance costs. Borrowings of $1.2 million on the Credit Agreement were offset by payments on the Credit Agreement of $2.1 million. We borrowed $30.2 million on our credit facilities and repaid $29.7 million. Proceeds of $0.9 million from the exercise of stock options were received.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements include operating leases, letters of credit and surety bonds. As of September 30, 2014, we had letters of credit outstanding in the amount of $10.1 million to collateralize self-insured claims for workers’ compensation and other general insurance claims. We also have three surety bonds outstanding in the amount of $11.2 million to collateralize closure bonds for the Company’s three facilities 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, and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), will be available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Our website and the information contained or incorporated therein are not intended to be incorporated into this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.
In the ordinary course of our business, we are exposed to potential losses arising from changes in interest rates and the prices of zinc, nickel, lead and natural gas. 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.
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 or clearing agents 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 currently utilize six different brokers for our hedging program.

Interest Rate Risk
We are subject to interest rate risk in connection with our $60.0 million ABL Facility entered into on September 28, 2011(as amended), our $25.8 million Credit Agreement entered into on November 14, 2012, our $20.0 million 2014 Zochem Facility entered into on April 29, 2014 and our $20.0 million INMETCO Facility entered into on June 24, 2013 (as amended), all of which bear interest at variable rates. Assuming that the three credit facilities and the Credit Agreement are 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 $1.3 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 prices 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 currently consume substantial amounts of energy in our EAF dust recycling operations, and therefore our cost of sales is vulnerable to changes in prevailing energy prices, particularly natural gas and coke.
At December 31, 2012, we had zinc put options with an $0.85 per pound strike price outstanding, which covered approximately 106,000 tons of zinc production, representing 75% of the expected shipments for the period from January 2013 through December 2013. These put options were put in place to provide protection to operating cash flow in the event that zinc prices decline below that level during the construction of the new zinc facility.
During the first quarter of 2013, we purchased zinc put options with an $0.85 per pound strike price, for the first quarter of 2014, at a cost of $0.8 million. These put options covered approximately 13,200 tons of zinc production and were put in place to provide protection to operating cash flow in the event that zinc prices declined below that level during the construction and

60

start-up of the new zinc facility. During August 2013, we put in place equivalent $0.85 per pound strike price put options covering an additional 4,400 tons per month of zinc production for the period of January 2014 through March 2014 and converted $0.85 per pound strike price put options covering 4,950 tons per month of zinc production from October 2013 through March 2014 to zinc fixed price swap contracts for the same period at an average price of approximately $0.903 per pound. The sale of the put options resulted in a $1.3 million cash benefit, and we were able to put the swaps in place without any additional payment. In December 2013, we entered into additional zinc fixed price swap contracts for the first quarter of 2014 at an average price of approximately $0.90 per pound. These zinc fixed price swaps were also transacted without any payment by us. At December 31, 2013, the total quantity covered under forward zinc fixed price swaps for the first quarter of 2014 was 26,600 tons. We converted a portion of our put options into swaps in order to reduce the effect of changes in the zinc price on cash flow during the period of planned transition of operations to the new zinc facility. At December 31, 2013, we had put options in place with a strike price of $0.85 per pound covering approximately 11,600 tons of zinc production through the first quarter of 2014.
The put options settled monthly on an average LME pricing basis. The average LME monthly zinc prices for first three months of 2014 were higher than the strike price for the contracts and the Company received no settlement payment during 2014. The average LME monthly zinc prices for five of the nine months in the period ended September 30, 2013 were lower than the strike price for the contracts and the Company received a total of $1.3 million during the nine months ended September 30, 2013.
At September 30, 2014, the Company did not have any remaining put options in place.
During the first quarter of 2014, we added zinc fixed price swaps for the second quarter of 2014, at an average price of approximately $0.94 per pound for a total quantity covered of 26,500 tons for the quarter.
In late July and early August 2014, we added zinc fixed price swaps for the months of August and September 2014, at an average price of slightly over $1.07 per pound for a total quantity covered of 6,000 tons per month. These fixed rate swaps were put in place to reduce volatility during the continued ramp up of production at the new zinc facility.
We paid cash of $0.5 million from the settlement of zinc fixed price swaps during the nine months ended September 30, 2014.
In October and early November 2014, we added zinc fixed price swaps for the months of November and December 2014, at an average price of slightly over $1.05 per pound for a total quantity covered of 6,600 tons per month. These fixed rate swaps were put in place to reduce volatility during the continued ramp up of production at the new zinc facility.
The swaps are included in “Prepaid expenses and other current assets” and "Accrued expenses" in our consolidated financial statements.
At December 31, 2013, we were party to raw material supply agreements through 2014. The agreements require us to purchase 39,000 tons for 2014 at a variable price based on the monthly average LME zinc price plus a premium. Based on the December 2013 average LME zinc price, this purchase commitment was estimated to be approximately $77 million for 2014.
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.

Exchange Rate Sensitivity Analysis
Our exchange rate exposures result from our acquisition of Zochem on November 1, 2011. Effective August 1, 2012, we changed Zochem’s functional currency reporting basis from Canadian Dollar to U.S. Dollar. Zochem sales are predominately in U.S. Dollars, however a portion of their sales and certain other costs remain in the Canadian Dollar and are converted to US Dollars at month end. Holding other variables constant, a 10% reduction in all relevant exchange rates, would have had relatively no effect on our earnings for the nine months ended September 30, 2014.
Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

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 Securities Exchange Act of 1934, as amended (the "Exchange Act")), are effective to provide reasonable assurance that material information required to be disclosed by us in reports that we file or submit under the Exchange Act is appropriately recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

61


(b) Changes in internal control over financial reporting.

During the quarter ending September 30, 2014, there was no change in our internal control over financial reporting 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 U.S. Occupational Safety and Health Act 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.
For further information refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, which was filed with the SEC on March 13, 2014.

Item 1A. Risk Factors.
There have been no material changes in our Risk Factors from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the SEC on March 13, 2014.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
[None]
Item 3. Defaults Upon Senior Securities.
[None]
Item 4. Mine Safety Disclosures
[None]
Item 5. Other Information.
[None]

62

Item 6. Exhibits.
EXHIBIT INDEX
Exhibit No.
 
Description
 
 
 
 
10.1
 
Fifth Amendment to Revolving Credit and Security Agreement, dated as of September 22, 2014, by and among Horsehead Corporation, Horsehead Metal Products, Inc. and Horsehead Zinc Powders, LLC, as borrowers, Horsehead Holding Corp., as guarantor, Chestnut Ridge Railroad Corp., as guarantor, the financial institutions party thereto and PNC Bank, National Association, as agent for the lenders (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report filed on Form 8-K on September 22, 2014).
 
 
 
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

63

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 10, 2014.
 
 
 
 
 
 
SIGNATURE
  
TITLE
  
DATE
 
 
 
/s/ James M. Hensler
  
Principal Executive Officer
  
November 10, 2014
James M. Hensler
 
 
 
 
 
 
/s/ Robert D. Scherich
  
Principal Financial and
Accounting Officer
  
November 10, 2014
Robert D. Scherich
 
 
 

64

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