Horsehead Holding Corp - FORM 10-Q - August 7, 2015

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
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
 
x
  
Accelerated filer
 
¨
 
 
 
 
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 August 5, 2015 was 56,662,777.
 


TABLE OF CONTENTS
 
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Balance Sheets as of June 30, 2015 (Unaudited) and December 31, 2014
 
 
 
 
Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2015 and 2014
 
 
 
 
Consolidated Statements of Comprehensive Loss (Unaudited) for the three and six months ended June 30, 2015 and 2014
 
 
 
 
Consolidated Statement of Stockholders' Equity (Unaudited) for the six months ended June 30, 2015
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2015 and 2014
 
 
 
 
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: the cyclical nature of the metals industry; the state of the credit and financial markets; decreases in the prices of zinc, silver and nickel-based products; competition from global zinc and nickel manufacturers; our ability to implement our business strategy successfully; our ability to ramp-up production at our new zinc facility, and the timing and cost of the ramp-up; our ability to realize the projected benefits from the new zinc facility once fully operational; our ability to obtain silver and lead from the co-product recovery circuit; our ability to produce Special High Grade zinc; 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; 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, 2014, which was filed with the SEC on March 2, 2015, 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
June 30, 2015 (Unaudited) and December 31, 2014
(Amounts in thousands, except per share amounts)
 
June 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Current assets
 
 
 
       Cash and cash equivalents
$
51,045

 
$
30,714

Accounts receivable, net of allowance of $435 and $371, respectively
64,017

 
60,242

Inventories, net
58,404

 
55,008

Prepaid expenses and other current assets
12,572

 
3,755

Deferred income taxes
5,312

 
5,251

Total current assets
191,350

 
154,970

Property, plant and equipment, net
787,619

 
799,093

Other assets
 
 
 
Intangible assets, net
9,789

 
10,192

Deferred income taxes
5,845

 
—

Deferred finance costs and other
7,513

 
9,262

Total other assets
23,147

 
19,454

Total assets
$
1,002,116

 
$
973,517

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Current maturities of long-term debt
$
3,067

 
$
3,044

Accounts payable
60,660

 
67,734

Accrued expenses
25,911

 
35,645

Total current liabilities
89,638

 
106,423

Long-term debt, less current maturities
410,912

 
406,016

Other long-term liabilities
17,373

 
18,291

Deferred income taxes
—

 
8,602

Commitments and contingencies


 


Stockholders’ equity
 
 
 
Common stock, par value $0.01 per share; 100,000 shares authorized; 56,663 and 50,719 shares issued and outstanding in 2015 and 2014, respectively
567

 
507

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

 
—

Additional paid-in capital
385,992

 
313,815

Retained earnings
93,264

 
115,377

Accumulated other comprehensive income
531

 
534

Total stockholders’ equity before noncontrolling interest
480,354

 
430,233

Noncontrolling interest
3,839

 
3,952

Total stockholders’ equity
484,193

 
434,185

Total liabilities and stockholders’ equity
$
1,002,116

 
$
973,517

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 six months ended June 30, 2015 and 2014
(Unaudited)
(Amounts in thousands except per share amounts)
 
        
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Net sales of zinc material and other goods
$
99,239

 
$
102,508

 
$
181,907

 
$
190,320

Net sales of nickel-based material and other services
14,422

 
13,772

 
24,531

 
26,169

EAF dust service fees
9,137

 
9,985

 
18,504

 
19,840

Net sales
122,798

 
126,265

 
224,942

 
236,329

Cost of sales of zinc material and other goods
92,014

 
99,645

 
183,194

 
182,848

Cost of sales of nickel-based material and other services
8,621

 
8,270

 
16,242

 
17,041

Cost of EAF dust services
7,525

 
8,101

 
14,847

 
15,981

Restructuring expenses
—

 
59

 
—

 
205

Cost of sales (excluding depreciation and amortization)
108,160

 
116,075

 
214,283

 
216,075

Depreciation and amortization
15,149

 
8,115

 
26,990

 
12,968

Selling, general and administrative expenses
6,796

 
6,087

 
13,574

 
12,125

Total costs and expenses
130,105

 
130,277

 
254,847

 
241,168

Loss from operations
(7,307
)
 
(4,012
)
 
(29,905
)
 
(4,839
)
Other income (expense)
 
 
 
 
 
 
 
Interest expense
(9,114
)
 
(2,996
)
 
(18,228
)
 
(3,534
)
Interest and other income
12,255

 
279

 
12,585

 
2,767

Total other income (expense)
3,141

 
(2,717
)
 
(5,643
)
 
(767
)
Loss before income taxes
(4,166
)
 
(6,729
)
 
(35,548
)
 
(5,606
)
Income tax benefit
(547
)
 
(1,609
)
 
(13,435
)
 
(1,215
)
NET LOSS
$
(3,619
)
 
$
(5,120
)
 
$
(22,113
)
 
$
(4,391
)
Loss per common share:
 
 
 
 
 
 
 
Basic
$
(0.06
)
 
$
(0.10
)
 
$
(0.40
)
 
$
(0.09
)
Diluted
$
(0.06
)
 
$
(0.10
)
 
$
(0.40
)
 
$
(0.09
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
56,661

 
50,711

 
55,756

 
50,646

Diluted
56,661

 
50,711

 
55,756

 
50,646

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


2

Horsehead Holding Corp. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
For the three and six months ended June 30, 2015 and 2014
(Unaudited)
(Amounts in thousands except per share amounts)
 
        
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(3,619
)
 
$
(5,120
)
 
$
(22,113
)
 
$
(4,391
)
Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
Net pension liability adjustment
(1
)
 
(5
)
 
(3
)
 
(9
)
Comprehensive loss
$
(3,620
)
 
$
(5,125
)
 
$
(22,116
)
 
$
(4,400
)
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 six months ended June 30, 2015
(Unaudited)
(Amounts in thousands)
 
 
 
 
 
 
 
 
 
 
Accumulated
Other
Comprehensive
Income
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
 
Noncontrolling
interest
 
Total
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2014
50,719

 
$
507

 
$
313,815

 
$
115,377

 
$
534

 
$
3,952

 
$
434,185

Restricted stock vesting
191

 
2

 
(2
)
 
—

 
—

 
—

 
—

Stock compensation expense
—

 
—

 
2,747

 
—

 
—

 
—

 
2,747

Stock option exercise
3

 
—

 
33

 
—

 
—

 
—

 
33

Net tax benefit of equity award vesting
—

 
—

 
276

 
—

 
—

 
—

 
276

Distribution to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(113
)
 
(113
)
Net proceeds from equity offering
5,750

 
58

 
69,564

 
—

 
—

 
—

 
69,622

Restricted stock withheld for taxes
—

 
—

 
(441
)
 
—

 
—

 
—

 
(441
)
Comprehensive loss, net of tax
—

 
—

 
—

 
(22,113
)
 
(3
)
 
—

 
(22,116
)
Balance at June 30, 2015
56,663

 
$
567

 
$
385,992

 
$
93,264

 
$
531

 
$
3,839

 
$
484,193

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 six months ended June 30, 2015 and 2014
(Unaudited)
(Amounts in thousands)
 
2015
 
2014
Cash Flows from Operating Activities:
 
 
 
Net loss
$
(22,113
)
 
$
(4,391
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
26,990

 
12,968

Deferred income tax benefit
(14,508
)
 
(552
)
Accretion on debt
1,889

 
1,930

Accretion on ESOI liabilities
207

 
214

Amortization of deferred finance costs
1,570

 
1,237

(Gains) losses on writedown or disposal of assets
(11,873
)
 
665

(Gains) on derivative financial instruments
(9,766
)
 
(601
)
Lower of cost or market adjustment to inventories
3,627

 
1,145

Non-cash compensation expense
2,747

 
2,410

Capitalization of interest
(1,495
)
 
(13,552
)
Changes in operating assets and liabilities:
 
 
 
(Increase) in accounts receivable, net
(3,775
)
 
(1,568
)
(Increase) decrease in inventories, net
(7,023
)
 
28,338

Decrease (increase) in prepaid expenses and other current assets
1,045

 
(2,366
)
Decrease (increase) in deferred finance costs and other
179

 
(48
)
(Decrease) in accounts payable
(7,074
)
 
(28,976
)
(Decrease) increase in accrued expenses
(5,468
)
 
213

(Decrease) increase in other long-term liabilities
(1,125
)
 
391

Net cash used in operating activities
(45,966
)
 
(2,543
)
Cash Flows from Investing Activities:
 
 
 
Purchase of property, plant and equipment
(15,100
)
 
(82,918
)
Proceeds related to the sale of land
9,000

 
—

Net cash used in investing activities
(6,100
)
 
(82,918
)
Cash Flows from Financing Activities:
 
 
 
Net proceeds from the issuance of stock
69,622

 
—

Distributions to noncontrolling interest equity holders
(113
)
 
(113
)
Borrowings on the Credit Facilities
42,300

 
23,774

Repayments on the Credit Facilities
(38,130
)
 
(21,650
)
Debt issuance costs
(10
)
 
(162
)
Borrowings on the Credit Agreement
381

 
802

Repayments on the Credit Agreement
(1,521
)
 
(1,434
)
Proceeds from the exercise of stock options
33

 
910

Tax effect of share based compensation award exercise and vesting
276

 
784

Restricted stock withheld for taxes
(441
)
 
(683
)
Net cash provided by financing activities
72,397

 
2,228

Net increase (decrease) in cash and cash equivalents
20,331

 
(83,233
)
Cash and cash equivalents at beginning of period
30,714

 
136,327

Cash and cash equivalents at end of period
$
51,045

 
$
53,094


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 June 30, 2015 and for the three and six months ended June 30, 2015 and 2014 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 six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2015. 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, 2014.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") 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.

Recent Accounting Pronouncements

Adopted

In April 2014, the Financial Accounting Standards Board (“FASB”) 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 ("ASU 2014-08"). 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. ASU 2014-08 became effective for public companies for annual periods beginning on or after December 15, 2014 and interim periods within those years. 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. These changes also require expanded disclosures for all disposals of components of an entity, whether or not the threshold for reporting as a discontinued operation is met, related to profit or loss information and/or asset and liability information of the component. The adoption of this guidance had no impact on the Consolidated Financial Statements. This guidance will need to be considered in the event the Company initiates a disposal of a component.

Issued

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Topic 835) ("ASU 2015-03") which changes the presentation of debt issuance costs in financial statements to present such costs as a direct deduction from the related debt liability rather than as an asset. ASU 2015-03 will become effective for public companies during interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance on its financial position and results of operations.


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


In February 2015, The FASB issued ASU No. 2015-02, Consolidation (Topic 810) ("ASU 2015-02") which updates the considerations on whether an entity should consolidate certain legal entities. The update changes the way that entities evaluate limited partnerships and fees paid to service providers in the consolidation determination. ASU 2015-02 will become effective for public companies during interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. We do not expect the adoption of ASU 2015-02 to have a material impact on our consolidated financial statements.

In January 2015, The FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual Items (Topic 835) ("ASU 2015-01"), which eliminates the concept of extraordinary items. The update simplifies income statement presentation by altogether removing the concept of extraordinary items from consideration. ASU 2015-01 will become effective for all entities during interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We do not expect the adoption of ASU 2015-01 to have a material impact on our consolidated financial statements.

In May 2014, the FASB and the International Accounting Standards Board (“IASB”) jointly issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), 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. ASU 2014-09 was to be effective for public entities for annual and interim periods beginning after December 15, 2016; however, on July 9, 2015, the FASB decided to delay the effective date of the new revenue standard by one year. Reporting entities may choose to adopt the standard as of the original effective date. The Company is currently evaluating the impact of adopting this guidance on its financial position and results of operations.

There have been no other recently issued accounting updates that had or will have 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 former 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 its 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 acquisition resulted in a gain on bargain purchase.
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 first quarter of 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 ("Horsehead") to purchase the site of Horsehead’s facility located in Monaca, Pennsylvania, which also included the HZP facility site. The HZP production facility was subsequently demolished under the agreement with Shell. Sale of the site where the Monaca, Pennsylvania facility and HZP facility were located occurred in June 2015.

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., that a majority of its manufacturing operations at the plant located in Monaca, Pennsylvania would be permanently closed and shut down within several months from 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 activities were recognized by the Company when the formal plan for reorganization was 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 and an additional charge of $288 during 2014 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
288

Cash payments
(7,509
)
Accrual at December 31, 2014
461

Cash payments
(252
)
Accrual at March 31, 2015
209

Cash payments
$
(168
)
Remaining accrual at June 30, 2015
$
41


The remaining accrual of $41 related to the severance and other employee-related costs is expected to be paid by September 30, 2015.

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 incurred approximately $2.6 million during 2014 related to costs associated with exit and disposal activities and incurred an additional $0.6 million during the first six months of 2015. These costs are included in Cost of sales (excluding depreciation and amortization) in the Consolidated Statement of Operations. The Company does not expect to incur any additional costs during the remainder of 2015.
NOTE D—CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following at June 30, 2015 and December 31, 2014.
 
 
June 30,
2015
 
December 31,
2014
Cash in bank
$
50,828

 
$
30,497

Money market demand account
217

 
217

 
$
51,045

 
$
30,714

The Company’s cash balance was concentrated in three U.S. banks and one Canadian bank at both June 30, 2015 and December 31, 2014. The Company carries deposits in excess of federally insured amounts. At June 30, 2015, the Company had $16,162 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 0.15% at both June 30, 2015 and December 31, 2014. 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 June 30, 2015 and December 31, 2014.
 
June 30,
2015
 
December 31,
2014
Raw materials
$
16,447

 
$
17,493

Work-in-process
3,266

 
2,847

Finished goods
25,439

 
21,885

Supplies and spare parts
13,252

 
12,783

 
$
58,404

 
$
55,008

Inventories were net of reserves for slow moving inventory of $5,562 at both June 30, 2015 and December 31, 2014.
The Company recorded $1,267 and $189 in lower of cost or market ("LCM") adjustments to its finished goods inventories at June 30, 2015 and 2014, respectively, and recorded total LCM adjustments during the six months ended June 30, 2015 and 2014 of $3,627 and $1,145, respectively. The Company recorded total LCM adjustments to its finished goods inventories of $3,561 during 2014. These LCM adjustments were included in "Cost of sales (excluding depreciation and amortization)" in the Consolidated Statement of Operations. The 2015 and 2014 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 until it was permanently closed in April 2014 and the incurrence of higher than normal production costs in 2015 related to the new zinc facility in Mooresboro, North Carolina ("new zinc facility") which operated at inefficient levels during its continued ramp up.
NOTE F—PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at June 30, 2015 and December 31, 2014.

June 30,
2015

December 31,
2014
Land and land improvements
$
49,627


$
50,117

Buildings and building improvements
98,417


96,904

Machinery and equipment
740,100


736,815

Construction in progress
42,183


33,556


930,327


917,392

Less accumulated depreciation
(142,708
)

(118,299
)

$
787,619


$
799,093

The Company capitalized $747 and $1,495 of interest expense during the three and six months ended June 30, 2015, respectively, and capitalized $5,610 and $13,552 of interest expense during the three and six months ended June 30, 2014, respectively. The interest expense capitalized related to the construction of the new zinc facility in Mooresboro, North Carolina, which began operations in May 2014. Interest expensed capitalized subsequent to May 2014 relates to the lead/silver recovery unit at the new zinc facility which has not yet begun operations. Through June 30, 2015, the Company has capitalized a total of $56,889 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 Mooresboro, North Carolina.

During 2012, the Company recorded total impairment charges of $25,305 based on the entry and subsequent extension of an option agreement with Shell to purchase the Monaca, Pennsylvania site, its intent to close the zinc oxide refinery production facility at that site when the smelting operation was 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 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

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

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 Company permanently shut down all remaining operations at the Monaca, Pennsylvania facility in April 2014.

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 to purchase the Monaca, Pennsylvania site, under the Amended and Restated Option and Purchase Agreement. The only remaining asset of the Monaca facility was land which had a net book value of approximately $1.2 million. Sale of the site was completed in June 2015 and the Company recognized a gain of approximately $12.2 million, which was recorded in Interest and other income in the Consolidated Statement of Operations.
NOTE G— DEFERRED FINANCE COSTS AND OTHER
Deferred finance costs and other at June 30, 2015 and December 31, 2014 consisted of the following:

June 30,
2015

December 31,
2014
Deferred finance costs
$
6,481


$
8,042

Other
1,032


1,220


$
7,513


$
9,262

See Note H – Long Term Debt for additional information regarding deferred finance costs. 
NOTE H—LONG –TERM DEBT
Long-term debt consisted of the following at June 30, 2015 and December 31, 2014:

June 30,
2015

December 31,
2014
Loan Payable, related to New Market Tax Credit program
$
255


$
255

3.80% Convertible Senior Notes due July 2017, net of debt discount
91,384


89,448

10.50% Senior Secured Notes due June 2017, net of debt premium
205,122


205,169

9.00% Senior Unsecured Notes due July 2017
40,000

 
40,000

ABL Facility, interest payable at variable rates
20,800

 
14,830

Zochem Credit Facility, interest payable at variable rates
17,600

 
19,400

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

 
20,000

Credit Agreement, interest payable at variable rates
18,818


19,958


413,979


409,060

Less portion currently payable
3,067


3,044


$
410,912


$
406,016


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

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

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 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 $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 and $230 related to the amortization of debt issuance costs during both the three and six months ended June 30, 2015 and 2014, respectively. 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 six months ended June 30, 2015, the Company recognized $1,928 and $3,836, respectively, in interest expense related to the Convertible Notes. During the three and six months ended June 30, 2014, the Company recognized $1,848 and $3,678, respectively, 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 $91,384 with an unamortized discount of $8,616 at June 30, 2015. The carrying amount of the Convertible Notes was $89,448 with an unamortized discount of $10,552 at December 31, 2014. The carrying amount of the equity component was $4,879 and $6,052 at June 30, 2015 and December 31, 2014, respectively. The accumulated accretion related to the equity component was $8,142 and $6,969 at June 30, 2015 and December 31, 2014, respectively. The fair value of the Convertible Notes was estimated to be approximately $102,000 and $122,000 at June 30, 2015 and December 31, 2014, respectively, per quotes obtained from active markets.
ABL Facility
On September 28, 2011, the Company’s subsidiary Horsehead entered into an ABL Facility (the "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.
During the second quarter of 2015, the Company gave notice to PNC Bank of its intent to terminate the ABL Facility on or about June 30, 2015. Accordingly, the ABL Facility was terminated on July 6, 2015 when Horsehead, HMP and The International

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

Metals Reclamation Company, LLC (“INMETCO”) entered into a new $80,000 secured revolving credit facility with Macquarie Bank Limited, as administrative agent and sole arranger ("2015 Credit Facility"). The new revolving credit facility matures on May 15, 2017. The new revolving credit facility replaces the $20,000 INMETCO Facility (as defined below) and the $60,000 ABL Facility. The new revolving credit facility accommodates a broader borrowing base than the two previous credit facilities and adds approximately $30,000 of additional liquidity. See Footnote U - Subsequent Event for further information.
The ABL Facility provided 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 could 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 was available to Horsehead for the issuance of letters of credit, which reduced availability under the ABL Facility.
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, were 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 Horsehead Metal Products, LLC ("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.
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 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. On September 22, 2014, Horsehead entered into an additional 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, remained at $60,000.
At June 30, 2015, the Company had $7,562 in letters of credit outstanding under the ABL Facility. Horsehead’s obligations under the ABL Facility were 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 June 30, 2015, there were $20,800 in outstanding borrowings and no availability remaining under the ABL facility. The carrying amount of the debt approximated fair value at June 30, 2015.
Borrowings by Horsehead under the ABL Facility bore interest at a rate per annum which, at the option of Horsehead, could 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%) 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%) based on average undrawn availability. Horsehead would pay a letter of credit fee to the lenders under the ABL Facility (ranging from 1.75% to 2.50%) based on average undrawn availability, and a fronting fee to the issuing bank equal to 0.25% per annum on the average daily face amount of each outstanding letter of credit, as well as certain other related charges and expenses.
The ABL Facility contained 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 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 would become immediately due and payable.
 
Horsehead paid an unused line fee to the lenders under the ABL Facility (ranging from 0.25% to 0.375% 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 ABL Facility contained a minimum fixed charge coverage ratio of 1.15:1.00 in the event that undrawn availability was less than or equal to $10,000 on any business day or was less than or equal to $12,500 for any consecutive five business days. The ABL Facility also contained customary restrictive negative covenants as well as customary reporting and other affirmative covenants. The Company was in compliance with all covenants at June 30, 2015.

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

The Company incurred total issuance costs of $600 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 were amortized to interest expense over the term of the ABL Facility. Interest expense of $40 and $23 related to the amortization of deferred finance costs was recorded during the three months ended June 30, 2015 and 2014, respectively and $76 and $45 during the six months ended June 30, 2015 and 2014, respectively.
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 the Company's 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. 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%.

On July 29, 2014, the Company completed the sale of an additional $10,000 aggregate principal amount of the Company’s Secured Notes (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 in a private placement. The Company received net proceeds of $10,962 after deducting approximately $338 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 of 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 $5,359 and $5,196 for the three months ended June 30, 2015 and 2014, respectively and $10,716 and $10,390 during the six months ended June 30, 2015 and 2014, respectively.

At June 30, 2015, 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

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

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. As of July 6, 2015, the guarantors under the 2015 Credit Facility replaces the guarantors under the ABL Facility guarantors within the Senior Secured Notes indenture.
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 June 30, 2015.
The carrying amount of the Senior Secured Notes was $205,122 with a net unamortized premium of $122 at June 30, 2015. The carrying amount of the Senior Secured Notes was $205,169 with a net unamortized premium of $169 at December 31, 2014. The fair value of the Senior Secured Notes was estimated to be approximately $217,000 and $224,000 at June 30, 2015 and December 31, 2014, respectively, per quotes obtained from active markets.
Costs of $8,415 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 expense of $451 and $421 related to the amortization of debt issuance costs during the three months ended June 30, 2015 and 2014, respectively and $903 and $843 during the six months ended June 30, 2015 and 2014, respectively.
Credit Agreement
On August 28, 2012, Horsehead 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 August 2023, amortizing over that period, and bearing interest at a per annum rate equal to the London Interbank Offered Rate (“LIBOR”) plus 3.20%. Principal and interest payments are due quarterly. The Company will also semiannually pay a commitment fee of 0.50% calculated on the undrawn amount of the Credit Agreement. At June 30, 2015, the Company had outstanding borrowings of $18,818 under the Credit Agreement. At June 30, 2015, the current portion of amounts due under the Credit Agreement was $3,067. Availability under the Credit Agreement was approximately $900 at June 30, 2015 and draws may be made until December 2015. The carrying amount of the debt approximated fair value at June 30, 2015.
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 June 30, 2015.

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

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 are being amortized to interest expense over the term of the Credit Agreement. Interest expense of $35 and $71 related to the amortization of deferred finance costs was recorded during the three and six months ended June 30, 2015, respectively. Interest expense related to the amortization of deferred finance costs of $36 and $71 were recorded during the three and six months ended June 30, 2014, respectively.
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 reduces 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 June 30, 2015, the Company had $17,600 in outstanding borrowings under the 2014 Zochem Facility. There was $1,968 in undrawn availability at June 30, 2015. The carrying amount of the debt approximated fair value at June 30, 2015.
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.
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 exceeds 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 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. The 2014 Zochem Facility also 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 June 30, 2015.
The Company incurred total issuance costs of $201 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 $16 and $12 related to the amortization of deferred finance costs was recorded during the three months ended June 30, 2015 and 2014, respectively and $33 and $23 was recorded during the six months ended June 30, 2015 and 2014, respectively.

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

INMETCO Senior Secured Revolving Credit Agreement
On June 24, 2013, 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 ("Wells Fargo"). 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.
During the second quarter of 2015, the Company gave notice to Wells Fargo of its intent to terminate the INMETCO Facility on or about June 30, 2015. Accordingly, the INMETCO Facility was terminated on July 6, 2015 when Horsehead, HMP and INMETCO entered into the new $80,000 2015 Credit Facility. The new revolving credit facility matures on May 15, 2017. The new revolving credit facility replaces the $20,000 INMETCO Facility and the $60,000 ABL Facility. The new revolving credit facility accommodates a broader borrowing base than the two previous credit facilities and adds approximately $30,000 of additional liquidity. See Footnote U - Subsequent Event for further information.
The INMETCO Facility provided 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 were 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 June 30, 2015, 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 June 30, 2015.
 
Borrowings under the INMETCO facility bore interest at a rate per annum of LIBOR plus a margin of 2.0%. INMETCO paid 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 contained quarterly financial covenants, which included 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 First Amendment to the Credit Agreement amended the minimum net worth requirement for the March and June 2014 quarters. The INMETCO Facility also contained customary restrictive negative covenants as well as customary reporting and other affirmative covenants. The Company was in compliance with all covenants at June 30, 2015.
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 were amortized to interest expense over the term of the INMETCO Facility. Interest expense of $13 and $14 related to the amortization of deferred finance costs was recorded during the three months ended June 30, 2015 and 2014, respectively and $26 and $25 during the six months ended June 30, 2015 and 2014, 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 in a private placement. The Company received net proceeds of $38,686 after deducting approximately $1,314 in issuance costs in connection with the offering.
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 Company recorded interest expense of $900 and $1,800 for the three and six months ended June 30, 2015, respectively.
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

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

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. As of July 6, 2015, the guarantors under the 2015 Credit Facility replaces the guarantors under the ABL Facility and the INMETCO Facility within the Unsecured Notes Indenture.
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 June 30, 2015.

Costs of $1,314 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 $116 and $232 related to the amortization of debt issuance costs during the three and six months ended June 30, 2015, respectively.
The fair value of the Unsecured Notes was estimated to be approximately $40,000 at both June 30, 2015 and December 31, 2014 per quotes obtained from active markets.
Other
At June 30, 2015, the Company had a total of $7,902 in 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, 2014, the Company had a total of $7,926 in 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 June 30, 2015 and December 31, 2014.
NOTE I—ACCRUED EXPENSES
Accrued expenses at June 30, 2015 and December 31, 2014 consisted of the following.

June 30,
2015

December 31,
2014
Employee related costs
$
5,981


$
5,717

EAF dust processing reserve
5,326


3,684

Workers’ compensation insurance claim liabilities
1,500


1,500

Unearned tolling revenue
1,305


2,434

Accrued interest
4,374


4,473

Unearned contractual services
564

 
3,976

Restructuring accrual
41

 
461

Other
6,820


13,400


$
25,911


$
35,645


The decrease in other is due primarily to previously unearned income related to the sale of the Monaca site to Shell which occurred in June 2015. For further information related to the sale of land see Footnote F - Property, Plant and Equipment.


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

NOTE J—OTHER LONG-TERM LIABILITIES
Other long-term liabilities at June 30, 2015 and December 31, 2014 consisted of the following.

June 30,
2015

December 31,
2014
Environmental obligations
$
573


$
620

Insurance claim liabilities
6,774


7,753

Asset retirement obligations
4,949


4,775

Deferred purchase price obligation
3,977


3,769

Other
1,100


1,374


$
17,373


$
18,291

 
NOTE K — EMPLOYEE BENEFIT PLANS
As part of the acquisition of Zochem, on November 1, 2011, the Company assumed the pension assets and the pension liabilities 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 plans for the three months ended June 30, 2015 and 2014 were:

Three months ended June 30, 2015

Three months ended June 30, 2014
Components of net periodic benefit cost:



Service Cost
$
49


$
60

Interest Cost
53


56

Expected return on plan assets
(86
)

(79
)
Losses
(3
)

(6
)
Net periodic benefit cost
$
13


$
31

Net periodic benefit costs related to the plans for the six months ended June 30, 2015 and 2014 were:
 
Six months ended June 30, 2015
 
Six months ended June 30, 2014
Components of net periodic benefit cost:

 

Service Cost
$
97

 
$
120

Interest Cost
106

 
112

Expected return on plan assets
(172
)
 
(158
)
Losses
(5
)
 
(12
)
Net periodic benefit cost
$
26

 
$
62


During the three months ended June 30, 2015 and 2014, the Company made contributions in the amount of $37 and $92, respectively, to its defined benefit pension plans and $75 and $168 in contributions during the six months ended June 30, 2015 and 2014, respectively. The Company anticipates making $93 of additional contributions to fund its defined benefit pension plans during the remainder of 2015.
The Company’s hourly and salary pension plan assets of $5,196 at June 30, 2015 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.

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

NOTE L—INCOME TAXES
The Company’s effective tax rates were 13.1% and 23.9% for the three months ended June 30, 2015 and 2014, respectively, and 37.8% and 21.7% for the six months ended June 30, 2015 and 2014, 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 June 30, 2015 decreased when compared to the three months ended June 30, 2014 due to an increase in the valuation allowance related to state net operating losses.

The effective tax rate for the six months ended June 30, 2015 increased when compared to the six months ended June 30, 2014 due to higher than previously projected pretax losses coupled with lower foreign subsidiary statutory tax rates.
 
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 2014. 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.
NOTE M—ACCUMULATED OTHER COMPREHENSIVE INCOME
Components of accumulated other comprehensive income are as follows:

June 30, 2015

December 31, 2014
Cumulative translation adjustments
$
30


$
30

Net pension adjustment
501


504

Accumulated other comprehensive income
$
531


$
534

NOTE N—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 six months ended June 30, 2015, 3 stock options were exercised and the Company received proceeds of $33 from the exercise of these options. At June 30, 2015, there were 580 options still outstanding; all were fully vested and exercisable, each with an exercise price of $13.00 per share and 1.54 years of remaining contractual life. The options outstanding under the 2006 Plan had no intrinsic value at June 30, 2015. All compensation expense had been recognized as of March 31, 2012.

The Company had a total of 422 restricted stock units at a weighted average grant date fair value of $10.99 per unit outstanding under the 2006 Plan at December 31, 2014. During the six months ended June 30, 2015, 199 restricted stock units vested having an intrinsic value of $3,014. At June 30, 2015, there were 223 restricted stock units outstanding and the remaining contractual life ranged from 0.17 years to 2.25 years. The related compensation expense for the three months ended June 30, 2015 and 2014 was $254 and $338, respectively and the related compensation expense was $538 and $728 during the six months ended June 30, 2015 and 2014, respectively. These expenses are included in Selling, general and administrative expenses in the Consolidated Statement of Operations. Unrecognized compensation expense as of June 30, 2015 was $955.
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

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

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 Compensation 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 579 restricted stock units at a weighted average grant date fair value of $18.66 per unit outstanding under the 2012 Plan at December 31, 2014. During the six months ended June 30, 2015, the Company granted 124 service based restricted stock units with an average grant date fair value of $15.83 per unit. The restricted stock units vest over a one or five-year service period. During the six months ended June 30, 2015, 23 restricted stock units vested having an intrinsic value of $359.
During the six months ended June 30, 2015, the Company granted 103 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 $21.92 per unit, as estimated by a third party on the date of grant, 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 1.07%, 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 June 30, 2015 and 2014 was $1,106 and $839, respectively. The related compensation expense was $2,209 and $1,681 during the six months ended June 30, 2015 and 2014, respectively. These expenses are included in Selling, general and administrative expenses in the Consolidated Statement of Operations. The remaining contractual life ranged from 0.50 years to 4.50 years. Unrecognized compensation expense as of June 30, 2015 was $7,943.

NOTE O—ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company’s business consists principally of the sale of zinc and nickel-based products. As a result, its results of operations are subject to risk of fluctuations in the market prices of these metals. While the Company’s finished products are generally priced based on a spread to the price of zinc or nickel, as applicable, on the 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 June 30, 2015, the fixed portions of these contracts ranged from a monthly average of $0.93 to $1.05 per pound for zinc.
The Company has hedged approximately 9.3 tons of zinc with fixed-to-variable future swap contracts at June 30, 2015, all of which settle at various dates up to and including June 30, 2016.
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 of nickel. As of June 30, 2015, the Company had a small amount of nickel swap contracts in place. The fixed portions of these contracts were at a monthly average of $5.75 per pound for nickel and settle at various dates up to and including December 31, 2015.

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

The Company received cash of $12 and paid cash of $509 from the settlement of zinc and nickel swap contracts for the three and six months ended June 30, 2015, respectively, and paid cash of $535 and $567 for the three and six months ended June 30, 2014, respectively.

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 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. 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 total quantity covered under forward zinc fixed price swaps for the first quarter of 2014 was 26.6 tons and the total quantity covered under put options with a strike price of $0.85 per pound was approximately 11.6 tons of zinc production for the first quarter of 2014. No forward fixed price options nor put options were in place beyond the first quarter of 2014.

The 2014 put options settled monthly on an average LME pricing basis. The average LME monthly zinc prices for the first three months of 2014 were higher than the strike price for the contracts and the Company received no settlement payment during 2014.

During the first quarter of 2014, the Company added 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. 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.

During the three months ended March 31, 2015, the Company added zinc fixed price swaps for the month of February 2015 at an average price of approximately $0.97 per pound for a total quantity covered of approximately 3.3 tons. Additionally, the Company added zinc fixed price swaps for the months of April and May 2015 at an average price of approximately $0.94 per pound for a total quantity covered of approximately 6.6 tons per month.

During the second quarter of 2015, the Company added zinc fixed price swaps for the month of June 2015 at an average price of approximately $1.01 per pound for a total quantity covered of approximately 9.9 tons, fixed price swaps for the third quarter of 2015 at an average price of $1.07 per pound for a total quantity covered of approximately 18.2 tons and fixed price swaps for the fourth quarter of 2015 at an average price of $1.07 for a total quantity covered of approximately 16.9 tons.

The Company paid cash of $844 and $733 from the settlement of zinc fixed price swaps during the three and six months ended June 30, 2015, respectively, and paid cash of $7 and $1,047 during the three and six months ended June 30, 2014, respectively.


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

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 
 June 30, 2015

Three Months Ended June 30, 2014

Six Months Ended 
 June 30, 2015
 
Six Months Ended 
 June 30, 2014
Gains (losses) included in net sales:




 
 
 
Options
$
—


$
—


$
—

 
$
(3
)
Swaps
9,230


3,040


8,525

 
(1,010
)
Total gains (losses) resulting from hedging activities
$
9,230


$
3,040


$
8,525

 
$
(1,013
)

The fair value of the swap contracts as of June 30, 2015 and December 31, 2014 are listed in the table below.

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

June 30,
2015

December 31,
2014
Swaps included in Prepaid expenses and other current assets.
$
9,763


$
—

Swaps included in Accrued expenses
$
371


$
375


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 June 30, 2015 and December 31, 2014, 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 Company utilizes eight different brokers for their hedging program. The Company does not require collateral and does not enter into master netting arrangements.
NOTE P—CONTINGENCIES
The Company is subject to federal, state and local laws designed to protect the environment and believes that as a general matter, its policies, practices and procedures are properly designed to 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 Q—EARNINGS PER SHARE
Basic earnings (loss) per common share (“EPS”) is computed by dividing net income or loss by the weighted average number of common shares outstanding for the period. Diluted earnings per share 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.

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

The information used to compute basic and diluted earnings (loss) per share is as follows:
 
Three months ended June 30,
Six months ended June 30,
 
2015

2014
2015
 
2014
Basic loss per share:



 
 
 
Net loss
$
(3,619
)
 
$
(5,120
)
$
(22,113
)
 
$
(4,391
)
Weighted average shares outstanding – basic
56,661

 
50,711

55,756

 
50,646

Basic loss per share
$
(0.06
)
 
$
(0.10
)
$
(0.40
)
 
$
(0.09
)
Diluted loss per share:
 
 
 
 
 
 
Net loss
$
(3,619
)
 
$
(5,120
)
$
(22,113
)
 
$
(4,391
)
Weighted average shares outstanding – diluted
56,661

 
50,711

55,756

 
50,646

Diluted loss per share
$
(0.06
)
 
$
(0.10
)
$
(0.40
)
 
$
(0.09
)
Reconciliation of average shares outstanding – basic to average shares outstanding – diluted:
 
 
 
 
 
 
Weighted average shares outstanding – basic
56,661

 
50,711

55,756

 
50,646

Effect of dilutive securities:
 
 
 
 
 
 
Options
—

 
—

—

 
—

Convertible Notes
—

 
—

—

 
—

Restricted stock units
—

 
—

—

 
—

Weighted average shares outstanding – diluted
56,661

 
50,711

55,756

 
50,646

 
Exercise
Price

Three months ended June 30,
Six months ended June 30,
 
2015

2014
2015
 
2014
Anti-dilutive shares excluded from earnings per share calculation





 
 
 
Options
$
13.00


580


585

582

 
585

Convertible Notes
$
15.00

 
—

 
646

—

 
637

Restricted Stock Units


1,009


1,007

1,020

 
1,050

Total
 
 
1,589

 
2,238

1,602

 
2,272


 
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 six months ended June 30, 2015, the average share price for the quarter was lower than the exercise price for the Convertible Notes and therefore no conversion spread was realized and no dilution assumed.
NOTE R—SEGMENT INFORMATION
The Company 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.
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,

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

interest expense recorded on debt which is not allocated to its segments and selling, general and administrative expenses related to its corporate division.
The following table presents information regarding the Company’s segment presentation:
Three months ended June 30, 2015
Horsehead

Zochem

INMETCO
 
Corporate, eliminations
and other

Total
Net sales
$
76,259


$
33,228


$
14,422

 
$
(1,111
)

$
122,798

(Loss) income before income taxes
(2,352
)

2,465


3,964

 
(8,243
)

(4,166
)
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2014
Horsehead

Zochem

INMETCO
 
Corporate, eliminations
and other

Total
Net sales
$
75,831


$
37,082


$
13,786

 
$
(434
)

$
126,265

(Loss) income before income taxes
(11,412
)

3,321


3,666

 
(2,304
)

(6,729
)
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
Horsehead
 
Zochem
 
INMETCO
 
Corporate, eliminations and other
 
Total
Net sales
$
133,386

 
$
68,392

 
$
24,531

 
$
(1,367
)
 
$
224,942

(Loss) income before income taxes
(28,320
)
 
4,540

 
4,727

 
(16,495
)
 
(35,548
)
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2014
Horsehead
 
Zochem
 
INMETCO
 
Corporate, eliminations and other
 
Total
Net sales
$
138,090

 
$
72,829

 
$
26,206

 
$
(796
)
 
$
236,329

(Loss) income before income taxes
(15,367
)
 
6,796

 
5,361

 
(2,396
)
 
(5,606
)

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

NOTE S—EQUITY OFFERING

On January 28, 2015, the Company completed an underwritten public offering of 5,750 shares of its common stock, including 750 shares sold pursuant to the underwriters' exercise of their option to purchase additional shares. At the public offering price of $12.75 per share of common stock, the aggregate gross proceeds from the common stock sold by the Company were $73,313. The net proceeds realized by the Company from the offering, after $3,299 in underwriting discounts and commissions and $392 in expenses relating to the offering, were $69,622. The net proceeds are available for general corporate purposes, which may include capital expenditures, acquisitions, working capital and liquidity for operational contingencies.

The shares were offered under a shelf registration statement filed with the SEC on Form S-3, which was declared effective on October 3, 2013.

NOTE T—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 10.0% of total assets at June 30, 2015, accounted for 30.4% of its consolidated revenues and contributed $2.7 million of consolidated net income for the six months ended June 30, 2015. 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.
 



25
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
June 30, 2015
 
Issuer
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Total
Consolidated
ASSETS



 

 

 

Current assets



 

 

 

Cash and cash equivalents
$
13,055

 
$
21,828

 
$
16,162

 
$
—

 
$
51,045

Accounts receivable, net of allowance
—

 
44,217

 
20,018

 
(218
)
 
64,017

Inventories, net
—

 
42,046

 
16,358

 
—

 
58,404

Prepaid expenses and other current assets
1

 
19,507

 
37

 
(6,973
)
 
12,572

Deferred income taxes
—

 
5,288

 
24

 
—

 
5,312

Total current assets
13,056

 
132,886

 
52,599

 
(7,191
)
 
191,350

Property, plant and equipment, net
—

 
735,711

 
51,908

 
—

 
787,619

Other assets
 
 
 
 
 
 
 
 
 
Intangible assets
—

 
9,732

 
57

 
—

 
9,789

Deferred income taxes
—

 
—

 
—

 
5,845

 
5,845

Investment in and advances to subsidiaries
787,322

 
(656,521
)
 
(5,295
)
 
(125,506
)
 
—

Deferred finance costs and other
19,658

 
1,746

 
577

 
(14,468
)
 
7,513

Total other assets
806,980

 
(645,043
)
 
(4,661
)
 
(134,129
)
 
23,147

Total assets
$
820,036

 
$
223,554

 
$
99,846

 
$
(141,320
)
 
$
1,002,116

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

 
$
3,067

 
$
—

 
$
—

 
$
3,067

Accounts payable
—

 
47,052

 
13,826

 
(218
)
 
60,660

Accrued expenses
3,930

 
13,694

 
1,499

 
6,788

 
25,911

Total current liabilities
3,930

 
63,813

 
15,325

 
6,570

 
89,638

Long-term debt, less current maturities
336,506

 
56,551

 
32,297

 
(14,442
)
 
410,912

Other long-term liabilities
—

 
16,968

 
405

 
—

 
17,373

Deferred income taxes
—

 
5,905

 
1,958

 
(7,863
)
 
—

Commitments and contingencies


 


 


 


 


Stockholders’ equity
 
 
 
 
 
 
 
 
 
Common stock
567

 
—

 
—

 
—

 
567

Preferred stock
—

 
—

 
—

 
—

 
—

Additional paid-in capital
385,992

 
41,653

 
—

 
(41,653
)
 
385,992

Retained earnings
93,041

 
34,825

 
49,330

 
(83,932
)
 
93,264

Accumulated other comprehensive income
—

 
—

 
531

 
—

 
531

Total stockholders’ equity before noncontrolling interest
479,600

 
76,478

 
49,861

 
(125,585
)
 
480,354

Noncontrolling interest
—

 
3,839

 
—

 
—

 
3,839

Total stockholders’ equity
479,600

 
80,317

 
49,861

 
(125,585
)
 
484,193

Total liabilities and stockholders’ equity
$
820,036

 
$
223,554

 
$
99,846

 
$
(141,320
)
 
$
1,002,116


 

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
December 31, 2014
 
Issuer
 
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Total
Consolidated
ASSETS









Current assets









Cash and cash equivalents
$
3,166

 
$
15,354

 
$
12,194

 
$
—

 
$
30,714

Accounts receivable, net of allowance
—

 
40,656

 
19,740

 
(154
)
 
60,242

Inventories, net
—

 
43,085

 
11,923

 
—

 
55,008

Prepaid expenses and other current assets
1

 
10,672

 
55

 
(6,973
)
 
3,755

Deferred income taxes
—

 
5,227

 
24

 
—

 
5,251

Total current assets
3,167

 
114,994

 
43,936

 
(7,127
)
 
154,970

Property, plant and equipment, net
—

 
745,612

 
53,481

 
—

 
799,093

Other assets
 
 
 
 
 
 
 
 
 
Intangible assets
—

 
10,098

 
94

 
—

 
10,192

Investment in and advances to subsidiaries
743,463

 
(609,021
)
 
(1,083
)
 
(133,359
)
 
—

Deferred finance costs and other
21,457

 
2,140

 
611

 
(14,946
)
 
9,262

Total other assets
764,920

 
(596,783
)
 
(378
)
 
(148,305
)
 
19,454

Total assets
$
768,087

 
$
263,823

 
$
97,039

 
$
(155,432
)
 
$
973,517

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

 
$
3,044

 
$
—

 
$
—

 
$
3,044

Accounts payable
—

 
57,913

 
9,975

 
(154
)
 
67,734

Accrued expenses
3,994

 
35,702

 
2,816

 
(6,867
)
 
35,645

Total current liabilities
3,994

 
96,659

 
12,791

 
(7,021
)
 
106,423

Long-term debt, less current maturities
334,617

 
51,744

 
34,584

 
(14,929
)
 
406,016

Other long-term liabilities
—

 
17,883

 
408

 
—

 
18,291

Deferred income taxes
—

 
6,642

 
1,960

 
—

 
8,602

Commitments and contingencies


 


 


 


 


Stockholders’ equity
 
 
 
 
 
 
 
 
 
Common stock
507

 
—

 
—

 
—

 
507

Preferred stock
—

 
—

 
—

 
—

 
—

Additional paid-in capital
313,815

 
41,653

 
—

 
(41,653
)
 
313,815

Retained earnings
115,154

 
45,290

 
46,762

 
(91,829
)
 
115,377

Accumulated other comprehensive income
—

 
—

 
534

 
—

 
534

Total stockholders’ equity before noncontrolling interest
429,476

 
86,943

 
47,296

 
(133,482
)
 
430,233

Noncontrolling interest
—

 
3,952

 
—

 
—

 
3,952

Total stockholders’ equity
429,476

 
90,895

 
47,296

 
(133,482
)
 
434,185

Total liabilities and stockholders’ equity
$
768,087

 
$
263,823

 
$
97,039

 
$
(155,432
)
 
$
973,517



27
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 June 30, 2015

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

 
$
66,753

 
$
33,228

 
$
(742
)
 
$
99,239

Net sales of nickel-based material and other services
—

 
14,422

 
—

 
—

 
14,422

EAF dust service fees
—

 
9,137

 
—

 
—

 
9,137

Net sales
—


90,312


33,228


(742
)

122,798

Cost of sales of zinc material and other goods
—

 
63,307

 
29,449

 
(742
)
 
92,014

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

 
8,621

 
—

 
—

 
8,621

Cost of EAF dust services
—

 
7,525

 
—

 
—

 
7,525

Cost of sales (excluding depreciation and amortization)
—


79,453


29,449


(742
)

108,160

Depreciation and amortization
—

 
14,164

 
985

 
—

 
15,149

Selling, general and administrative expenses
368

 
5,855

 
573

 
—

 
6,796

Total costs and expenses
368


99,472


31,007


(742
)

130,105

(Loss) income from operations
(368
)

(9,160
)

2,221


—


(7,307
)
Equity in income (loss) of subsidiaries, net of taxes
4,646

 
—

 
—

 
(4,646
)
 
—

Other income (expense)
 
 
 
 
 
 
 
 
 
Interest expense
(8,120
)
 
(821
)
 
(412
)
 
239

 
(9,114
)
Interest and other income
223

 
11,949

 
300

 
(217
)
 
12,255

Total other income (expense)
(7,897
)

11,128


(112
)

22


3,141

(Loss) income before income taxes
(3,619
)

1,968


2,109


(4,624
)

(4,166
)
Income tax (benefit) expense
—

 
(1,151
)
 
604

 
—

 
(547
)
NET (LOSS) INCOME
$
(3,619
)

$
3,119


$
1,505


$
(4,624
)

$
(3,619
)
 

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 June 30, 2014
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net sales of zinc material and other goods
$
—

 
$
65,426

 
$
37,082

 
$
—

 
$
102,508

Net sales of nickel-based material and other services
—

 
13,772

 
—

 
—

 
13,772

EAF dust service fees
—

 
9,985

 
—

 
—

 
9,985

Net sales
—

 
89,183

 
37,082

 
—

 
126,265

Cost of sales of zinc material and other goods
—

 
66,953

 
32,692

 
—

 
99,645

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

 
8,270

 
—

 
—

 
8,270

Cost of EAF dust services
—

 
8,101

 
—

 
—

 
8,101

Restructuring expenses
—

 
59

 
—

 
—

 
59

Cost of sales (excluding depreciation and amortization)
—

 
83,383

 
32,692

 
—

 
116,075

Depreciation and amortization
—

 
7,410

 
705

 
—

 
8,115

Selling, general and administrative expenses
322

 
5,137

 
628

 
—

 
6,087

Total costs and expenses
322

 
95,930

 
34,025

 
—

 
130,277

(Loss) income from operations
(322
)
 
(6,747
)
 
3,057

 
—

 
(4,012
)
Equity in (loss) income of subsidiaries, net of taxes
(2,797
)
 
—

 
—

 
2,797

 
—

Other income (expense)
 
 
 
 
 
 
 
 
 
Interest expense
(2,237
)
 
(578
)
 
(419
)
 
238

 
(2,996
)
Interest and other income
236

 
(66
)
 
328

 
(219
)
 
279

Total other income (expense)
(2,001
)
 
(644
)
 
(91
)
 
19

 
(2,717
)
(Loss) income before income taxes
(5,120
)
 
(7,391
)
 
2,966

 
2,816

 
(6,729
)
Income tax (benefit) expense
—

 
(2,445
)
 
836

 
—

 
(1,609
)
NET (LOSS) INCOME
$
(5,120
)
 
$
(4,946
)
 
$
2,130

 
$
2,816

 
$
(5,120
)
 


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 six months ended June 30, 2015
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net sales of zinc material and other goods
$
—

 
$
114,257

 
$
68,392

 
$
(742
)
 
$
181,907

Net sales of nickel-based material and other services
—

 
24,531

 
—

 
—

 
24,531

EAF dust service fees
—

 
18,504

 
—

 
—

 
18,504

Net sales
—

 
157,292

 
68,392

 
(742
)
 
224,942

Cost of sales of zinc material and other goods
—

 
122,852

 
61,084

 
(742
)
 
183,194

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

 
16,242

 
—

 
—

 
16,242

Cost of EAF dust services
—

 
14,847

 
—

 
—

 
14,847

Restructuring Expenses
—

 
—

 
—

 
—

 
—

Cost of sales (excluding depreciation and amortization)
—

 
153,941

 
61,084

 
(742
)
 
214,283

Depreciation and amortization
—

 
25,006

 
1,984

 
—

 
26,990

Selling, general and administrative expenses
769

 
11,625

 
1,180

 
—

 
13,574

Total costs and expenses
769

 
190,572

 
64,248

 
(742
)
 
254,847

(Loss) income from operations
(769
)
 
(33,280
)
 
4,144

 
—

 
(29,905
)
Equity in (loss) income of subsidiaries, net of taxes
(5,575
)
 
—

 
—

 
5,575

 
—

Other income (expense)

 

 

 

 
 
Interest expense
(16,218
)
 
(1,685
)
 
(802
)
 
477

 
(18,228
)
Interest and other income
449

 
12,084

 
486

 
(434
)
 
12,585

Total other income (expense)
(15,769
)
 
10,399

 
(316
)
 
43

 
(5,643
)
(Loss) income before income taxes
(22,113
)
 
(22,881
)
 
3,828

 
5,618

 
(35,548
)
Income tax (benefit) expense
—

 
(14,581
)
 
1,146

 
—

 
(13,435
)
NET (LOSS) INCOME
$
(22,113
)
 
$
(8,300
)
 
$
2,682

 
$
5,618

 
$
(22,113
)





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 six months ended June 30, 2014

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

 
$
117,491

 
$
72,829

 
$
—

 
$
190,320

Net sales of nickel-based material and other services
—

 
26,169

 
—

 
—

 
26,169

EAF dust service fees
—

 
19,840

 
—

 
—

 
19,840

Net sales
—

 
163,500

 
72,829

 
—

 
236,329

Cost of sales of zinc material and other goods
—

 
118,658

 
64,190

 
—

 
182,848

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

 
17,041

 
—

 


 
17,041

Cost of EAF dust services
—

 
15,981

 
—

 
—

 
15,981

Restructuring Expenses
—

 
205

 
—

 
—

 
205

Cost of sales (excluding depreciation and amortization)
—

 
151,885

 
64,190

 
—

 
216,075

Depreciation and amortization
—

 
11,602

 
1,366

 
—

 
12,968

Selling, general and administrative expenses
685

 
10,173

 
1,267

 
—

 
12,125

Total costs and expenses
685

 
173,660

 
66,823

 
—

 
241,168

(Loss) income from operations
(685
)
 
(10,160
)
 
6,006

 
—

 
(4,839
)
Equity in (loss) income of subsidiaries, net of taxes
(1,954
)
 
—

 
—

 
1,954

 
—

Other income (expense)

 

 

 

 
 
Interest expense
(2,237
)
 
(1,085
)
 
(688
)
 
476

 
(3,534
)
Interest and other income
485

 
1,950

 
767

 
(435
)
 
2,767

Total other income (expense)
(1,752
)
 
865

 
79

 
41

 
(767
)
(Loss) income before income taxes
(4,391
)
 
(9,295
)
 
6,085

 
1,995

 
(5,606
)
Income tax (benefit) expense
—

 
(2,902
)
 
1,687

 
—

 
(1,215
)
NET (LOSS) INCOME
$
(4,391
)
 
$
(6,393
)
 
$
4,398

 
$
1,995

 
$
(4,391
)




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 Comprehensive Income (Loss)
For the three months ended June 30, 2015
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net (loss) income
$
(3,619
)
 
$
3,119

 
$
1,505

 
$
(4,624
)
 
$
(3,619
)
Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
 
 
Net pension liability adjustment
—

 
—

 
(1
)
 
—

 
(1
)
Comprehensive (loss) income
$
(3,619
)
 
$
3,119

 
$
1,504

 
$
(4,624
)
 
$
(3,620
)
Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the three months ended June 30, 2014
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net (loss) income
$
(5,120
)
 
$
(4,946
)
 
$
2,130

 
$
2,816

 
$
(5,120
)
Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
 
 
Net pension liability adjustment
—

 
—

 
(5
)
 
—

 
(5
)
Comprehensive (loss) income
$
(5,120
)
 
$
(4,946
)
 
$
2,125

 
$
2,816

 
$
(5,125
)


Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the six months ended June 30, 2015
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net (loss) income
$
(22,113
)
 
$
(8,300
)
 
$
2,682

 
$
5,618

 
$
(22,113
)
Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
 
 
Net pension liability adjustment
—

 
—

 
(3
)
 
—

 
(3
)
Comprehensive (loss) income
$
(22,113
)
 
$
(8,300
)
 
$
2,679

 
$
5,618

 
$
(22,116
)


Horsehead Holding Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the six months ended June 30, 2014
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Net (loss) income
$
(4,391
)
 
$
(6,393
)
 
$
4,398

 
$
1,995

 
$
(4,391
)
Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
 
 
Net pension liability adjustment
—

 
—

 
(9
)
 
—

 
(9
)
Comprehensive (loss) income
$
(4,391
)
 
$
(6,393
)
 
$
4,389

 
$
1,995

 
$
(4,400
)


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 Cash Flows
For the six months ended June 30, 2015
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(22,113
)
 
$
(8,300
)
 
$
2,682

 
$
5,618

 
$
(22,113
)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
—

 
25,006

 
1,984

 
—

 
26,990

Deferred income tax provision
—

 
(798
)
 
(2
)
 
(13,708
)
 
(14,508
)
Accretion on debt
1,889

 
—

 
—

 
—

 
1,889

Accretion on ESOI liabilities
—

 
207

 
—

 
—

 
207

Amortization of deferred finance costs
1,364

 
173

 
76

 
(43
)
 
1,570

(Gains) on write down or disposal of assets
—

 
(11,873
)
 
—

 
—

 
(11,873
)
(Gains) losses on derivative financial instruments
—

 
(9,875
)
 
109

 
—

 
(9,766
)
Lower of cost or market adjustment to inventories
—

 
3,627

 
—

 
—

 
3,627

Non-cash compensation expense
156

 
2,591

 
—

 
—

 
2,747

Capitalization of interest
(1,495
)
 
—

 
—

 
—

 
(1,495
)
Equity in loss (income) of subsidiaries, net of taxes
5,575

 
—

 
—

 
(5,575
)
 
—

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

 
(3,562
)
 
(277
)
 
64

 
(3,775
)
(Increase) in inventories
—

 
(2,588
)
 
(4,435
)
 
—

 
(7,023
)
Decrease in prepaid expenses and other current assets
—

 
1,027

 
18

 
—

 
1,045

Decrease (increase) in deferred finance costs and other
435

 
224

 
(45
)
 
(435
)
 
179

(Decrease) increase in accounts payable
—

 
(10,861
)
 
3,851

 
(64
)
 
(7,074
)
(Decrease) increase in accrued expenses
(64
)
 
(17,145
)
 
(1,914
)
 
13,655

 
(5,468
)
(Decrease) increase in long-term liabilities
—

 
(1,610
)
 
(3
)
 
488

 
(1,125
)
Net cash (used in) provided by operating activities
(14,253
)
 
(33,757
)
 
2,044

 
—

 
(45,966
)
Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
 
Purchase of property, plant and equipment
—

 
(14,726
)
 
(374
)
 
—

 
(15,100
)
Insurance proceeds related to fixed assets
—

 
9,000

 
—

 
—

 
9,000

Investment in and advance (to) from subsidiaries
(45,348
)
 
41,137

 
4,211

 
—

 
—

Net cash (used in) provided by investing activities.
(45,348
)
 
35,411

 
3,837

 
—

 
(6,100
)
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
 
Net proceeds from the issuance of stock
69,622

 
—

 
—

 
—

 
69,622

Distributions to noncontrolling interest equity holders
—

 
—

 
(113
)
 
—

 
(113
)
Borrowings on the Credit Facilities
—

 
35,100

 
7,200

 
—

 
42,300

Repayments on the Credit Facilities
—

 
(29,130
)
 
(9,000
)
 
—

 
(38,130
)
Debt issuance costs


 
(10
)
 
—

 
—

 
(10
)
Borrowings on the Credit Agreement
—

 
381

 
—

 
—

 
381

Repayments on the Credit Agreement
—

 
(1,521
)
 
—

 
—

 
(1,521
)
Proceeds from the exercise of stock options
33

 
—

 
—

 
—

 
33

Tax effect of share based compensation award exercise and vesting
276

 
—

 
—

 
—

 
276

Restricted stock withheld for taxes
(441
)
 
—

 
—

 
—

 
(441
)
Net cash provided by (used in) financing activities
69,490

 
4,820

 
(1,913
)
 
—

 
72,397

Net increase in cash and cash equivalents
9,889

 
6,474

 
3,968

 
—

 
20,331

Cash and cash equivalents at beginning of period
3,166

 
15,354

 
12,194

 
—

 
30,714

Cash and cash equivalents at end of period
$
13,055

 
$
21,828

 
$
16,162

 
$
—

 
$
51,045


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 six months ended June 30, 2014
 
Issuer
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Cash Flows from Operating Activities:
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(4,391
)
 
$
(6,393
)
 
$
4,398

 
$
1,995

 
$
(4,391
)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
 
Depreciation and amortization
—

 
11,602

 
1,366

 
—

 
12,968

Deferred income tax provision
—

 
(552
)
 
—

 


 
(552
)
Accretion on debt
1,930

 
—

 
—

 
—

 
1,930

Accretion on ESOI liabilities
—

 
214

 
—

 
—

 
214

Amortization of deferred finance costs
1,072

 
141

 
67

 
(43
)
 
1,237

(Gains) on derivative financial instruments
—

 
(553
)
 
(48
)
 
—

 
(601
)
Losses on write down or disposal of assets
—

 
665

 
—

 
—

 
665

Lower of cost or market adjustment to inventories
—

 
1,145

 
—

 
—

 
1,145

Non-cash compensation expense
186

 
2,224

 
—

 
—

 
2,410

Capitalization of interest
(12,903
)
 
(649
)
 
—

 
—

 
(13,552
)
Equity in loss (income) of subsidiaries, net of taxes
1,954

 
—

 
—

 
(1,954
)
 
—

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

 
8,353

 
(9,575
)
 
(346
)
 
(1,568
)
Decrease in inventories
—

 
26,936

 
1,402

 
—

 
28,338

Decrease (increase) in prepaid expenses and other current assets
7

 
(398
)
 
(41
)
 
(1,934
)
 
(2,366
)
Decrease (increase) in deferred finance costs and other
435

 
50

 
(102
)
 
(431
)
 
(48
)
(Decrease) increase in accounts payable
—

 
(28,989
)
 
(332
)
 
345

 
(28,976
)
Increase (decrease) in accrued expenses
1

 
131

 
(1,801
)
 
1,882

 
213

(Decrease) increase in long-term liabilities
—

 
(95
)
 
—

 
486

 
391

Net cash (used in) provided by operating activities
(11,709
)
 
13,832

 
(4,666
)
 
—

 
(2,543
)
Cash Flows from Investing Activities:
 
 
 
 
 
 
 
 
 
Purchase of property, plant and equipment
—

 
(76,333
)
 
(6,585
)
 
—

 
(82,918
)
Investment in and advance (to) from subsidiaries
(65,527
)
 
65,802

 
(275
)
 
—

 
—

Net cash used in investing activities.
(65,527
)
 
(10,531
)
 
(6,860
)
 
—

 
(82,918
)
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
 
Distributions to noncontrolling interest equity holders
—

 
—

 
(113
)
 
—

 
(113
)
Borrowings on the Credit Facilities
—

 
14,200

 
9,574

 
—

 
23,774

Repayments on the Credit Facilities
—

 
(21,550
)
 
(100
)
 
—

 
(21,650
)
Debt issuance costs
—

 
(125
)
 
(37
)
 
—

 
(162
)
Borrowings on Credit Agreement
—

 
802

 
—

 
—

 
802

Repayments on the Credit Agreement
—

 
(1,434
)
 
—

 
—

 
(1,434
)
Proceeds from the exercise of stock options
910

 
—

 
—

 
—

 
910

Tax effect of share based compensation award exercise and vesting
784

 
—

 
—

 
—

 
784

Restricted stock withheld for taxes
(683
)
 
—

 
—

 
—

 
(683
)
Net cash provided by (used in) financing activities
1,011

 
(8,107
)
 
9,324

 
—

 
2,228

Net decrease in cash and cash equivalents
(76,225
)
 
(4,806
)
 
(2,202
)
 
—

 
(83,233
)
Cash and cash equivalents at beginning of period
101,449

 
26,782

 
8,096

 
—

 
136,327

Cash and cash equivalents at end of period
$
25,224

 
$
21,976

 
$
5,894

 
$
—

 
$
53,094


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


NOTE U—SUBSEQUENT EVENT

During the second quarter of 2015, the Company gave notice to PNC Bank and Wells Fargo of its intent to terminate the $60,000 ABL Facility and $20,000 INMETCO Facility on or about June 30, 2015. Accordingly, both facilities were terminated on July 6, 2015 when Horsehead, HMP and INMETCO entered into a new $80,000 secured revolving credit facility with Macquarie Bank Limited, as administrative agent. The new revolving credit facility matures on May 15, 2017 and accommodates a broader borrowing base than the two previous credit facilities adding approximately $30,000 of additional liquidity.


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, 2014, which was filed with the SEC on March 2, 2015.
Overview

Our Business

We are a leading U.S. producer of zinc metal used in the galvanizing of steel products and in zinc die castings and zinc-bearing alloys. We believe we are the largest North American recycler of electric arc furnace ("EAF") dust, a hazardous waste produced by the carbon steel mini-mill manufacturing process. We also believe that, through our Zochem operations, we are the largest single site producer of zinc oxide in North America used in a wide variety of applications including in rubber tires, paint, chemicals and pharmaceuticals. Through our INMETCO operations, we believe we are 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. Our remelt alloy is used in the production of stainless steel. 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.

While we vary our raw material inputs, or feedstocks, based on cost and availability, our zinc products produced at our new zinc facility in Mooresboro, North Carolina, which began operations in May 2014, and nickel-based products produced at our INMETCO facility use 100% recycled materials, including in the case of our Mooresboro facility, 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 ("SHG") zinc metal as raw material feedstock. INMETCO provides recycling services, some of which are on a tolling basis, from a single production facility in Ellwood City, Pennsylvania.
Strategic Investments

In September of 2011, we began construction of a new, state-of-the-art zinc facility located in Mooresboro, North Carolina to replace our Monaca, Pennsylvania facility. We began production at our new zinc facility in May 2014. Our new facility provides us with the capability to produce SHG zinc, Continuous Galvanizing Grade ("CGG") zinc and High Grade zinc, in addition to the Prime Western ("PW") zinc that we produced at our former Monaca, Pennsylvania facility. The first month of operation of our new facility validated that the process as designed, is capable of producing SHG quality electrolyte from waelz oxide ("WOX") using the solvent extraction process. The new facility's design relies upon sustainable manufacturing practices to produce zinc solely from recycled materials and uses significantly less fossil fuel than our former Monaca, Pennsylvania facility, allowing us to significantly reduce emissions of greenhouse gases ("GHGs") and particulates into the atmosphere. The new facility began production in May 2014 and is in the process of being ramped up.

We believe that the new facility, once fully operational and efficiently operating, will provide us with a number of substantial benefits, including reduced manufacturing conversion costs due to the lower energy cost; higher labor productivity; reduced

35

maintenance costs; and lower operating costs in our EAF dust recycling plants resulting from the elimination of the need to calcine the majority of our WOX prior to its use. We believe that the new zinc facility's capability to convert WOX and other recycled materials into SHG zinc and other grades will allow us to expand into new markets, including selling to continuous galvanizers, which include some of our EAF dust customers, die casters and potentially LME warehouses, while continuing to serve customers in our existing markets. In addition, 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 zinc smelter in Monaca, Pennsylvania, which was permanently shut down in April 2014. The former Monaca smelter was over eighty years old and utilized a higher-cost pyrometallurgical process. Once fully operational, we expect the new zinc facility to be capable of producing over 155,000 tons of zinc metal per year with equipment capable of producing over 170,000 tons of zinc metal per year.

We also believe that additional benefits may be realized once the new facility is fully operational. These additional benefits include a reduction in the cost of hedging the price of zinc, which averaged $9.1 million per year for the period from 2008 to 2013 (the last full year of production at our Monaca, Pennsylvania facility), reduced maintenance capital spending, which averaged $7.8 million per year at our Monaca facility for the period from 2007 to 2012 (the last year significant capital expenditures were made at our Monaca facility) and reduced state income taxes as a result of certain tax incentives available as a result of the investment in the new zinc facility.

In connection with the start of operations at our new zinc facility, we permanently closed our Monaca, Pennsylvania facility in April 2014. Our Monaca, Pennsylvania site was sold to Shell in June 2015 pursuant to an option to purchase granted in March 2012 that was exercised on November 7, 2014. We retain ownership of a non-hazardous captive landfill located near that site. We have recorded an asset retirement obligation related to expected costs for the ultimate closure of this landfill and have a surety bond in place to collateralize our expected financial obligations. We are currently working with the Pennsylvania Department of Environmental Protection on a closure plan.

In December 2013, we 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 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 had contributed $0.8 million as of June 30, 2015

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 the Company’s 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, Pennsylvania facility. During the second quarter of 2014, we completed the expansion and put our seventh furnace into production. The expansion project increased the total zinc oxide production capacity at Zochem by approximately 20,000 tons to 72,000 tons per year.

Other

On July 26, 2012, we completed a private placement of $175.0 million principal amount of 10.50% Senior Secured Notes due 2017, 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.

On June 3, 2013, we completed the sale of an additional $20.0 million in aggregate principal amount of our Senior Secured Notes at an issue price of 106.5% of the principal amount. 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 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.


36

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 aggregate principal amount of our Senior Secured Notes due 2017, at an issue price of 113.00% of par. The 2014 Additional Notes were issued at an effective interest rate of 5.5%. Total net proceeds from the July 29, 2014 offerings were $49.6 million. At June 30, 2015, there was an aggregate of $205.0 million of Senior Secured Notes outstanding.

On January 28, 2015, we completed an underwritten public offering of 5.8 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 $12.75 per share. We received approximately $69.6 million in net proceeds from the offering, after deducting underwriting discounts and commissions and offering expenses.

On July 6, 2015, we entered into the new $80.0 million 2015 Credit Facility which matures on May 15, 2017. The new revolving credit facility replaces the $20.0 million INMETCO Facility and the $60.0 million ABL Facility. The new revolving credit facility accommodates a broader borrowing base than the two previous credit facilities and adds approximately $30 million of additional liquidity.

Recent Operating Updates and Outlook

The Year Ended December 31, 2014

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 months 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, with over 50% of the zinc units from our EAF dust recycling operations sold to third parties in 2014.

Our primary focus during the second half of 2014 was the ramp-up of the Mooresboro facility. The facility produced approximately 12,000 tons of zinc metal during the fourth quarter of 2014 compared to 4,300 tons in the third quarter of 2014. Production for the month of December was approximately 5,400 tons as improvements with equipment reliability and process debottlenecking helped to increase the ramp up rate during the quarter. For extended periods in December, the facility produced nearly 230 tons of zinc per day, which we estimate is the level of production necessary to generate cash flow sufficient to cover feedstock, conversion cost and cash interest expense at the LME zinc price in December 2014. Zinc metal sales during the fourth quarter of 2014 continued to be supplemented with the sale of approximately 23,500 tons of zinc calcine.

Our new zinc facility, currently in the ramp-up phase, has experienced operational difficulties that we believe are typical of a start-up of this size, which have resulted in production interruptions. Numerous improvements have been made to help remediate these issues. We have not identified any insurmountable technical or operational obstacles that materially challenge the value proposition of our new zinc facility. These issues, however, have slowed the ramp-up rate and delayed the realization of the benefits we believe we can obtain from full operation of our zinc facility.
First Quarter 2015

On April 1, 2015, we announced that our new zinc facility located in Mooresboro, North Carolina had produced approximately 10,000 tons of zinc during the first quarter of 2015. During January 2015, we produced approximately 4,600 tons of zinc metal. We reduced the plating rate for several days in January to perform some needed maintenance in the cell house. We also experienced intermittent equipment reliability issues, particularly with some key pumps, which were further exacerbated by extreme cold weather conditions. On February 20, 2015, we began a planned outage to address several of these issues. Production for the first quarter of 2015 was also affected by the outage taken in late February to install a bypass to resolve a problem with a clarifier in the leach feed circuit. After an extended period to completely drain the clarifier, the root cause of the issue was addressed and the clarifier was placed back into service.


37

Second Quarter 2015

During April 2015, our new zinc facility produced approximately 2,800 tons of zinc metal. Production was lower than expected primarily due to an extended period of exceptionally heavy rains which filled our containments and holding ponds, requiring us to process the excess water in the plant rather than produce zinc. This event highlighted a limitation in the capacity of our process and storm water utilization capability. As a result, we engaged Veolia, a third party water management company, to install a portable unit on-site to mitigate the excess water while we evaluate our options to expand the capacity of our own equipment. This unit is now operational and substantially mitigates the risk of a plant shut down caused by significant rainfall. In addition, in April, we engaged a team of engineers with hydrometallurgical plant experience from Hatch Associates to supplement our operations and engineering team and support the on-going ramp-up.
On June 1, 2015, we announced that our new zinc facility produced approximately 4,100 tons of zinc metal during May 2015. May's production was the highest monthly production since January of this year.
On July 2, 2015, we announced that our new zinc facility produced approximately 3,700 tons of zinc metal during June 2015. June's production was slowed initially while we implemented certain improvements but accelerated through the latter half of the month with 2,600 of the 3,700 tons processed after the 15th of June. Total production for the second quarter of 2015 was approximately 10,600 tons compared to approximately 10,000 tons for the first quarter of 2015. Although production improved, it was primarily paced by the capacity of our process for removing impurities from the system, the so-called bleed treatment system, and by intermittent equipment reliability issues.

Regarding the third quarter of 2015, we are encouraged by the improvements implemented in July. We better understand the bottleneck issues in bleed treatment and have successfully implemented measures which have allowed us to increase production. We took a short outage in early July to perform needed maintenance work, however, we have deferred the installation of the previously announced bypass around the first solvent extraction settler while we evaluate an alternate, lower-cost approach to control solids accumulation in the settler. We have developed a final solution to the design limitation in bleed treatment and will be installing a temporary pilot plant to test this concept before we engineer and install the permanent solution and expect this to be operational sometime in August. Upgrades made during the planned outage, along with the additional treatment capacity supplied by Veolia for processing rain water, have eased the bottleneck in our bleed treatment circuit. Several upgrades aimed at improving the reliability of pumps, piping and control systems are scheduled to be installed in the third quarter. We have decided to postpone any further ramp-up activity on the lead-silver recovery circuit until the arrival and installation of new pumps and other equipment that are properly designed to efficiently operate that facility. We expect this may take several months. During July, a month in which we took a planned outage, the facility produced approximately 4,000 tons of zinc metal. We expected better performance in July; however, we experienced unexpected production constraints due to reliability issues, caused mainly by design deficiencies, some of which we have remedied. We are encouraged that the operations in Mooresboro appear to have stabilized over the past quarter. We expect continued steady progress as we debottleneck the facility and systematically address equipment reliability issues. The timing of achieving specific milestones during the ramp-up or the completion of the ramp-up to full zinc production, however, cannot be predicted with certainty at this time.

Zinc metal shipments during the second quarter of 2015 continued to be supplemented with the sale of approximately 28,000 tons of zinc calcine. Based upon the expected rate of ramp up at Mooresboro, we expect to continue to produce zinc calcine from excess waelz oxide during the third quarter of 2015.
Oxide shipments at Zochem for the second quarter of 2015 were approximately 2% lower compared to shipments during the first quarter of 2015. Production increased approximately 3% for the second quarter of 2015 as compared to the first quarter of 2015.
EAF dust receipts for the second quarter of 2015 increased by approximately 3% compared with the first quarter of 2015. The increase over the previous quarter was primarily due to severe cold weather conditions which affected logistics and equipment reliability during the first quarter of 2015. The quantity of EAF dust processed during the second quarter of 2015 was approximately 2% lower than EAF dust processed for the first quarter of 2015 due primarily to maintenance outages taken on several kilns during the quarter. We have also used this lull in steel output to reduce system-wide inventory of recyclable zinc units and we expect to operate all of our kilns in the third quarter, although we plan to take extended maintenance outages on some of our kilns during the quarter.
Steel capacity utilization declined from the mid 70% range at December 2014 to the low 70% range during the first quarter and second quarters of 2015 and hit its lowest point for the year in April 2015.
INMETCO's annual maintenance outage took place during the month of January 2015 and affected first quarter 2015 results. Remelt alloy sales tons increased approximately 55% compared to the first quarter of 2015. Tolling receipts tons, however, were

38

down approximately 3% as compared with the first quarter of 2015. In March 2015, we announced plans to spend up to $10 million to expand capacity at INMETCO by 15%.
LME zinc prices were higher by approximately 5% and LME nickel prices were lower by approximately 9% during the second quarter of 2015 as compared to the first quarter of 2015.

During the second quarter of 2015, labor contracts covering hourly employees at our Palmerton, Pennsylvania facility and our Rockwood, Tennessee locations expired. The Palmerton labor contract, covering approximately 85 employees, was renegotiated and the new labor contract expires in April 2019. The Rockwood labor contract, covering approximately 50 employees, was renegotiated and the new labor contract expires in July 2019.

Factors Affecting Our Operating Results
    
Production Levels at our Mooresboro Facility. In May 2014, we began production of zinc metal at our new zinc facility in Mooresboro. Once fully operational, the facility will be capable of producing over 155,000 tons of zinc metal per year.  We have, however, experienced a number of operational issues associated with the ramp-up of this facility.   We have worked to address the operational issues we have faced at this facility and continue its ramp-up, but are currently unable to predict with any certainty when we will begin operating at full design capacity.  Lower than anticipated production levels at this new facility have negatively impacted our results of operations and have deferred realization of expected benefits. The new zinc facility produced approximately 12,000 tons of zinc metal during the fourth quarter of 2014, approximately 10,000 tons of zinc metal during the first quarter of 2015 and approximately 10,600 tons during the second quarter of 2015.
Market Price for Zinc and Nickel. We generate the substantial majority of our net sales from the sale of zinc-based products and to a much lesser extent from the sales of nickel-based products, our operating results therefore depend heavily on the prevailing market price for zinc and nickel. Our principal raw materials are zinc extracted from recycled EAF dust, for which we receive revenue from the carbon steel mini-mill companies, and other zinc-bearing secondary materials (“purchased feedstock”) that we purchase from third parties. Costs to acquire and recycle EAF dust are not impacted significantly by fluctuations in the market price of zinc on the LME. Our new zinc facility, which began production in May 2014, 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 SHG metal 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.
Average monthly, daily and yearly LME zinc prices for the years 2005 through 2014 and the six months ended June 30, 2015 were as follows:
LME Zinc Prices
2005
 
2006
 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
 
Six Months Ended 
 June 30, 2015
Monthly Average
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
High
$
0.83

 
$
2.00

 
$
1.74

 
$
1.14

 
$
1.08

 
$
1.10

 
$
1.12

 
$
0.93

 
$
0.97

 
$
1.06

 
$
1.04

Low
$
0.54

 
$
0.95

 
$
1.07

 
$
0.50

 
$
0.50

 
$
0.79

 
$
0.84

 
$
0.82

 
$
0.83

 
$
0.91

 
$
0.92

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Daily High
$
0.86

 
$
2.08

 
$
1.93

 
$
1.28

 
$
1.17

 
$
1.20

 
$
1.15

 
$
0.99

 
$
0.99

 
$
1.10

 
$
1.09

Daily Low
$
0.53

 
$
0.87

 
$
1.00

 
$
0.47

 
$
0.48

 
$
0.72

 
$
0.79

 
$
0.80

 
$
0.81

 
$
0.88

 
$
0.90

Average
$
0.63

 
$
1.48

 
$
1.47

 
$
0.85

 
$
0.75

 
$
0.98

 
$
0.99

 
$
0.88

 
$
0.87

 
$
0.98

 
$
0.97

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. We converted a portion of our put options into

39

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 total quantity covered under forward zinc fixed price swaps for the first quarter of 2014 was 26,600 tons and the total quantity covered under put options with a strike price of $0.85 per pound was approximately 11,600 tons of zinc production through the first quarter of 2014. No forward fixed price options nor put options were in place beyond the first quarter of 2014.
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. 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.
During the three months ended March 31, 2015, we added zinc fixed price swaps for the month of February 2015 at an average price of approximately $0.97 per pound for a total quantity covered of approximately 3,300 tons. Additionally, we added zinc fixed price swaps for the months of April and May 2015 at an average price of approximately $0.94 per pound for a total quantity covered of approximately 6,600 tons per month.

During the second quarter of 2015, we added zinc fixed price swaps for the month of June 2015 at an average price of approximately $1.01 per pound for a total quantity covered of approximately 9,900 tons, fixed price swaps for the third quarter of 2015 at an average price of $1.07 per pound for a total quantity covered of approximately 18,200 tons and fixed price swaps for the fourth quarter of 2015 at an average price of $1.07 for a total quantity covered of approximately 16,900 tons.

We paid cash of $0.8 million and $0.7 million from the settlement of zinc fixed price swaps during the three and six months ended June 30, 2015, respectively and paid cash of $0.01 million and $1.0 million during the three and six months ended June 30, 2014, respectively.
Daily high, low and yearly average LME nickel prices for the years 2010 through 2014 and the six months ended June 30, 2015 were as follows:
 
LME Nickel Prices
2010
 
2011
 
2012
 
2013
 
2014
 
Six Months Ended 
 June 30, 2015
Daily High
$
11.81

 
$
13.17

 
$
9.90

 
$
8.44

 
$
9.62

 
$
7.01

Daily Low
$
8.36

 
$
7.68

 
$
6.89

 
$
5.97

 
$
6.06

 
$
5.30

Average
$
9.89

 
$
10.36

 
$
7.97

 
$
6.81

 
$
7.65

 
$
6.21

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 at our Monaca facility. Production was reduced from five to four furnaces for the final months of operation until closure of the zinc smelter in Monaca, Pennsylvania, which occurred in late April 2014. Our new zinc facility in Mooresboro, North Carolina began production in May 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 2014, weekly steel industry capacity increased back to the mid to high 70% range. The weekly steel industry capacity decreased to the low 70% range during the first six months of 2015.

40

The table below illustrates historical sales volumes and revenues for zinc and nickel-based products and EAF dust:
 
Shipments/EAF Dust Receipts
 
Revenue/Ton
 
Six months ended June 30,
 
Year Ended December 31,
 
Six months ended June 30,
 
Year Ended December 31,
 
2015
 
2014
 
2014
 
2013
 
2015
 
2014
 
2014
 
2013
 
(Tons, in thousands)
 
(In U.S. dollars)
Product:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Zinc Products (1)
62

 
77

 
129

 
169

 
$
2,146

 
$
2,045

 
$
2,125

 
$
1,966

EAF Dust
261

 
286

 
580

 
607

 
$
71

 
$
69

 
$
70

 
$
72

Nickel-based products
14

 
15

 
29

 
28

 
$
1,540

 
$
1,691

 
$
1,677

 
$
1,568

(1)
Includes HZP from November 16, 2012 until production ceased during the first quarter of 2014.
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.
Raw material costs at our Zochem facility, which comprised approximately 88% 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 12% of our production costs for the six months ended June 30, 2015.
Certain components of our conversion costs do not change proportionally with changes in production volume. Consequently, as volume changes only 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 prices, LCM adjustments can occur when our inventory cost exceeds the market value of our finished goods. The Company recorded LCM adjustments of $3.6 million during the six months ended June 30, 2015 and $1.1 million during the six months ended June 30, 2014. Higher than normal LCM adjustments occurred in the first six months of 2015 due to lower production and higher than normal conversion costs. Total LCM adjustments were $3.6 million for the year ended December 31, 2014. 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, 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.
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;
•changes in cost of additives and process chemicals;
•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;

41

•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 primarily on electricity and natural gas to operate. Our freight operations depend heavily on diesel fuel. Energy prices have been volatile in recent years and currently exceed long-term historical averages. These fluctuations impact our manufacturing costs and contribute to earnings volatility.

Several additives and process chemicals, including but not limited to coke, limestone, sulfuric acid and manganese are used in our operations. Changes in price and availability have a direct impact on our manufacturing costs.
Our zinc based products compete with other materials in many of their applications. For example, PW 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. In addition, SHG zinc and CGG zinc are used by continuous galvanizers to produce galvanized flat-rolled sheet steel for the automotive market. There have been recent plans by some automotive companies to begin to use light weight aluminum sheet to replace galvanized steel. Any such shifts in industry uses could affect our sales.
Our nickel-based products are used in the stainless steel industry. Demand for our products and services may decline if demand for stainless steel lessens. Nickel-bearing stainless steel faces competition from stainless steel containing a lower level of nickel or no nickel.

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 and nickel 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, 2014, which were included in our Annual Report on Form 10-K filed with the SEC on March 2, 2015, 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 June 30, 2015 and for the six months ended June 30, 2015 and 2014. Certain of these accounting policies are described below.

Revenue Recognition

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

We recognize service fee revenue when persuasive evidence of a sales agreement exists which includes a fixed or determinable price, when 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.


42

Sales of zinc and nickel material goods include 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.

Inventories

Inventories, which consist primarily of zinc and nickel-bearing materials, chemical reagents 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.

Insurance Claim Liabilities

We accrue for costs associated with self-insured retention under certain insurance policies (primarily workers’ compensation) based on estimates of claims, including projected development, from information provided by the third party administrator and a third party actuarial firm. Accruals for estimated costs are undiscounted and are subject to change based on development of such claims. Changes in the estimates of the reserves are included in net income in the period determined. Amounts estimated to be paid within one year have been classified as current liabilities, with the remainder included in non-current liabilities in the Consolidated Balance Sheets.

Share-Based Compensation

We have a share-based compensation plan. Employee stock options granted on or after January 1, 2006 are expensed over the requisite service period, based on the estimated fair value of the award on the date of the grant using the Black-Scholes option-pricing model. Restricted stock unit service or performance related grants are expensed over the vesting period, with the expense based on the stock price on the grant-date multiplied by the number of restricted stock units granted. Restricted stock unit market based grants are expensed over the vesting period, with the expense determined 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 a basis for the Black Scholes and Monte Carlo valuations.

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 H - 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 O – 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 K – 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

43

is considered to be in Level 3 of the hierarchy (see Note H – Long-Term Debt in our Consolidated Financial Statements). The Secured Notes issued on July 26, 2012, June 3, 2013 and 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. These debt issuances are considered to be in Level 3 of the fair value hierarchy (see Note H – 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 market prices are not available.
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, with whom we have entered into substantially identical derivative contracts, to ensure that there is an acceptable level of consistency among them. The valuations utilize forward pricing and an implied volatility of the underlying commodity as well as interest rate forwards and are therefore subject to fluctuation based on the movements of the commodity markets. 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, at points in time, we utilize LME-registered contracts entered into with the London Clearing House for some of the contracts. Additionally, we are minimizing potential credit loss at June 30, 2015 by utilizing eight different brokers for our derivative contracts (see Note O – 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 or indefinite-lived intangible assets that require evaluation for impairment.

Acquisitions

We recognize the assets acquired and the liabilities assumed at their fair values as of the acquisition date. Contingent purchase consideration is recorded at fair value at the date of acquisition. Measuring assets and liabilities at fair value requires us to determine the price that would be paid by a third party market participant based on the highest and best use of the assets or interest acquired. The excess of the fair value of the net assets acquired over the purchase price is recorded as a bargain purchase gain. The excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. Acquisition costs are expensed as incurred. (See Note B - Acquisition of Business in our Consolidated Financial Statements).

Variable Interest Entities
Investments in other entities are accounted for using the consolidation, equity or cost basis method depending upon the level of ownership, 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.
HMP's joint venture, 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 using the equity method of accounting since they do not own over 50% and

44

they are not able to exercise significant influence over the joint venture. HMP recorded their cash contributions to ThirtyOx as an investment which is increased or decreased by their respective share of ThirtyOx pretax income or loss.
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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net sales
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales (excluding depreciation and amortization)
88.1
 %
 
91.9
 %
 
95.3
 %
 
91.4
 %
Depreciation and amortization
12.3
 %
 
6.4
 %
 
12.0
 %
 
5.5
 %
Selling, general and administrative expenses
5.5
 %
 
4.9
 %
 
6.0
 %
 
5.1
 %
Loss from operations
(5.9
)%
 
(3.2
)%
 
(13.3
)%
 
(2.0
)%
Interest expense
7.4
 %
 
2.4
 %
 
8.1
 %
 
1.5
 %
Interest and other income
10.0
 %
 
0.2
 %
 
5.6
 %
 
1.1
 %
Loss before income taxes
(3.3
)%
 
(5.4
)%
 
(15.8
)%
 
(2.4
)%
Income tax benefit
(0.4
)%
 
(1.3
)%
 
(6.0
)%
 
(0.5
)%
Net loss
(2.9
)%
 
(4.1
)%
 
(9.8
)%
 
(1.9
)%


The following table sets forth the activity and the fair values of our hedging instruments at the reporting dates.
 
 
Put Option Settlement Period
 
 
 
 
 
 
 
2014
 
 
Swaps
 
Total
Fair value December 31, 2013
 
$
38

 
 
$
(1,432
)
 
$
(1,394
)
Sales
 
(35
)
 
 
—

 
(35
)
Write-off of expired 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

Write-off of expired positions
 
—

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

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

 
 
(828
)
 
(828
)
Write-off of expired/sold positions
 
—

 
 
392

 
392

Mark to market adjustments on open positions
 
—

 
 
699

 
699

Fair value September 30, 2014
 
—

 
 
263

 
263

Write-off of expired/sold positions
 
—

 
 
(263
)
 
(263
)
Mark to market adjustments on open positions
 
—

 
 
(375
)
 
(375
)
Fair value December 31, 2014
 
—

 
 
(375
)
 
(375
)
Write-off of expired/sold positions
 
—

 
 
196

 
196

Mark to market adjustments on open positions
 
—

 
 
(491
)
 
(491
)
Fair value March 31, 2015
 
—

 
 
(670
)
 
(670
)
Write-off of expired/sold positions
 
—

 
 
229

 
229

Mark to market adjustments on open positions
 
—

 
 
9,833

 
9,833

Fair value June 30, 2015
 
$
—

 
 
$
9,392

 
$
9,392


45

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:
 
 
2013
 
2014
 
2015
Average LME zinc price
 
September 30
 
December 31
 
March 31
 
June 30
 
September 30
 
December 31
 
March 31
 
June 30
Quarter
 
$
0.84

 
$
0.86

 
$
0.92

 
$
0.94

 
$
1.05

 
$
1.01

 
$
0.94

 
$
0.99

Year-to-date
 
$
0.87

 
$
0.87

 
$
0.92

 
$
0.93

 
$
0.97

 
$
0.98

 
$
0.94

 
$
0.97


Segment Disclosure
We 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.
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 are not recorded within our three segments.
Three Months Ended June 30, 2015 Compared with Three Months Ended June 30, 2014
Consolidated net sales.
Consolidated net sales decreased $3.5 million, or 2.8%, to $122.8 million for the three months ended June 30, 2015, compared to $126.3 million for the three months ended June 30, 2014.
Change in consolidated net sales
 
(in millions)
Horsehead
 
$
(11.3
)
Zochem
 
(3.8
)
INMETCO
 
(0.3
)
Eliminations
 
(0.7
)
Unrealized non-cash hedge adjustments
 
12.6

Total change in consolidated net sales
 
$
(3.5
)
See separate segment discussion following.

Consolidated cost of sales (excluding depreciation and amortization).
Consolidated cost of sales decreased $7.9 million, or 6.8%, to $108.2 million for the three months ended June 30, 2015, compared to $116.1 million for the three months ended June 30, 2014.
Change in consolidated cost of sales (excluding depreciation and amortization)
 
(in millions)
Horsehead
 
$
(4.3
)
Zochem
 
(3.2
)
INMETCO
 
0.3

Eliminations
 
(0.7
)
Total change in consolidated cost of sales (excluding depreciation and amortization)
 
$
(7.9
)
See separate segment discussion following.
Consolidated depreciation and amortization.
Consolidated depreciation and amortization increased $7.0 million, or 86.4%, to $15.1 million for the three months ended June 30, 2015, compared to $8.1 million for the three months ended June 30, 2014.

46

Change in consolidated depreciation and amortization
 
(in millions)
Depreciation associated with the new zinc facility
 
6.9

Other
 
0.1

Total change in consolidated depreciation and amortization
 
$
7.0

•
The new zinc facility in Mooresboro, North Carolina began operations in May 2014.
Consolidated selling, general and administrative expenses.
Consolidated selling, general and administrative expenses increased $0.7 million, or 11.5%, to $6.8 million for the three months ended June 30, 2015, compared to $6.1 million for the three months ended June 30, 2014. The increase is a result of an overall increase in labor, non cash compensation and legal costs.
Consolidated other income (expense).
Net consolidated other income (expense) was $3.1 million for the three months ended June 30, 2015, compared to $(2.7) million for the three months ended June 30, 2014.
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
 
(4.7
)
Increase in interest and other income
 
11.9

Total change in consolidated other income (expense)
 
$
5.8

•
Increase in actual interest expense as a result of new debt issued on July 29, 2014 of $10 million in Senior Secured Notes and $40 million Unsecured Notes.
•
Decrease in capitalized interest due to the startup of the new zinc facility in May 2014.
•
Increase in interest and other income primarily as a result of an increase in income recorded under the Shell contract of $12.1 million during the three months ended June 30, 2015 as compared to the three months ended June 30, 2015. The sale of the Monaca site to Shell occurred in June 2015.
Consolidated income tax (benefit) expense.
 
 
Three Months Ended June 30, 2015
Three Months Ended June 30, 2014
Income tax benefit (in millions)
 
$
(0.5
)
$
(1.6
)
Effective tax rate
 
13.1
%
23.9
%
•
The effective tax rate for the three months ended June 30, 2015 decreased when compared to the three months ended June 30, 2014 due to an increase in the valuation allowance related to state net operating losses.
Consolidated net (loss) income.
Net loss for the three months ended June 30, 2015 was $(3.6) million compared to net loss of $(5.1) million for the three months ended June 30, 2014.
Business Segments
Horsehead
Net sales.
Net sales, excluding unrealized non-cash adjustments relating to our hedging activities, decreased $11.3 million, or 14.6%, to $66.1 million for the three months ended June 30, 2015 compared to $77.4 million for the three months ended June 30, 2014.

47

Change in Horsehead net sales
 
(in millions)
Volume decrease due to zinc finished products and services
 
(9.6
)
Price realization increase due to zinc finished products and services
 
2.7

WOX/zinc calcine sales decrease
 
(4.5
)
Miscellaneous and other sales increase
 
0.1

Total change in Horsehead net sales
 
$
(11.3
)
•
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 second quarter of 2015. 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 June 30, 2015 primarily related to zinc metal and resulted from a 5.6% higher average LME zinc price for the three months ended June 30, 2015 compared to the three months ended June 30, 2014.
•
Zinc calcine was sold to third parties during the three months ended June 30, 2015 and WOX and zinc calcine was sold to third parties during the three months ended June 30, 2014. Zinc calcine will continue to be sold until the new zinc facility is operating at close to capacity.
•
Net sales during the three months ended June 30, 2015 were increased by unrealized non-cash adjustments of $10.2 million relating to our hedging activities. Net sales during the three months ended June 30, 2014 were decreased by unrealized non-cash adjustments of $1.6 million relating to our hedging activities.
Horsehead zinc product shipments - in tons
 
Three Months Ended June 30, 2015
Three Months Ended June 30, 2014
Zinc finished product shipments
 
16,803

20,881

WOX/calcine shipments
 
27,886

29,225

Total zinc product shipments on a zinc contained basis
 
34,203

40,691

Average sales price realization on a zinc contained basis
 
$
0.80

$
0.81

Net sales of zinc metal decreased $4.3 million, or 10.8%, to $35.6 million for the three months ended June 30, 2015, compared to $39.9 million for the three months ended June 30, 2014.
Change in Horsehead zinc metal net sales
 
(in millions)
Decrease in volume
 
$
(6.7
)
Increase in price realization
 
2.4

Total change in Horsehead zinc metal net sales
 
$
(4.3
)
•
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 second quarter of 2015.
•
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 5.6% in the average LME zinc price.
Net sales of zinc-based powders decreased $1.8 million to $0.9 million for the three months ended June 30, 2015 compared to $2.7 million for the three months ended June 30, 2014. The decrease was primarily due to the idling of production at our HZP facility due to a lack of raw material supply during the first quarter of 2014.

48


Revenues from EAF dust recycling decreased $0.9 million, or 8.7%, to $9.5 million for the three months ended June 30, 2015, compared to $10.4 million for the three months ended June 30, 2014.
Change in Horsehead EAF Dust recycling net sales
 
(in millions)
Decrease in volume
 
$
(1.1
)
Increase in price realization
 
0.2

Total change in Horsehead EAF Dust recycling net sales
 
$
(0.9
)
•
EAF dust receipts for the three months ended June 30, 2015 were 134,511 tons compared to 150,576 tons for the three months ended June 30, 2014.
•
The decrease in volume was the result of a reduction in EAF dust receipts due to lower steel production output from our customers during the second quarter of 2015.
Cost of sales (excluding depreciation and amortization).

Cost of sales decreased $4.3 million, or 5.7%, to $70.8 million for the three months ended June 30, 2015, compared to $75.1 million for the three months ended June 30, 2014.
 
 
Three Months Ended 
 June 30, 2015
Three Months Ended 
 June 30, 2014
Cost of sales as a % of net sales, excluding non-cash losses related to hedging
 
107.1
%
97.0
%
Unrealized non-cash (gains) losses related to hedging
 
$
(10.2
)
$
1.6

The cost of zinc material and other products sold for the three months ended June 30, 2015, decreased $3.7 million, or 5.5%, to $63.3 million, compared to $67.0 million for the three months ended June 30, 2014.
Change in Horsehead cost of zinc material and other products sold
 
(in millions)
Decrease due to a reduction in the volume of zinc finished products shipped
 
(9.4
)
Increase in cost of zinc finished products shipped
 
6.0

Increase in recycling and other costs
 
0.5

Cost of sales relating to WOX and zinc calcine products produced
 
(0.8
)
Total change in Horsehead cost of zinc metal and other products sold
 
$
(3.7
)

•
Volume decrease due to the ramp-up of the new zinc facility which continued through the second quarter of 2015.

•
The cost of zinc material includes $1.3 million of LCM inventory adjustments during the three months ended June 30, 2015 and LCM adjustments of $0.2 million for the three months ended June 30, 2014. The 2015 and 2014 LCM adjustments were the result of higher than normal production costs at the new zinc facility which operated at inefficient levels during its continued ramp-up. The 2014 LCM adjustments were also the result of higher than normal production costs which occurred during the final months of shutdown at our Monaca facility. The Monaca facility was permanently closed in April 2014.
Conversion costs for the Mooresboro facility, which began operations in May 2014, were $20.1 million for the three months ended June 30, 2015 and $4.3 million for the three months ended June 30, 2014. Conversion costs at the Mooresboro facility 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 $7.5 million for the three months ended June 30, 2014.

Conversion costs for the recycling facilities that process EAF dust increased approximately $1.1 million to $23.2 million for the three months ended June 30, 2015 from $22.1 million for the three months ended June 30, 2014.

49

Change in Horsehead recycling conversion costs
 
(in millions)
Maintenance related costs
 
0.9

Services
 
0.4

Natural gas
 
(0.5
)
Other
 
0.3

Total change in Horsehead conversion costs
 
$
1.1

•
Production remained relatively the same for the second quarter of 2015 as compared to the second quarter of 2014.
•
Conversion cost per ton increased 5.4% for the second quarter of 2015 compared to the second quarter of 2014.

The cost of EAF dust services decreased $0.6 million, or 7.4% to $7.5 million for the three months ended June 30, 2015, compared to $8.1 million for the three months ended June 30, 2014.
Change in Horsehead cost of EAF dust services
 
(in millions)
Decrease in volume
 
$
(0.9
)
Increase in transportation costs
 
0.3

Total change in Horsehead cost of EAF dust services
 
$
(0.6
)

•
EAF tons processed remained approximately the same during the three months ended June 30, 2015 as compared to the three months ended June 30, 2014.
Loss before income taxes.
For the reasons stated above, our loss before income taxes was:
Horsehead loss before taxes (in millions)
 
Three Months Ended June 30, 2015
Three Months Ended June 30, 2014
Loss before taxes
 
$
(2.4
)
$
(11.4
)
Unrealized non-cash (gains) losses related to hedging
 
(10.2
)
1.6

Loss before taxes excluding unrealized non-cash adjustments related to hedging
 
$
(12.6
)
$
(9.8
)
Zochem
Net sales.
Net sales, excluding unrealized non-cash adjustments relating to our hedging activities, decreased $3.8 million, or 10.2%, to $33.3 million for the three months ended June 30, 2015, compared to $37.1 million for the three months ended June 30, 2014.
Change in Zochem net sales
 
(in millions)
Lower shipment volume
 
$
(4.6
)
Increase in price realization
 
0.8

Total change in Zochem net sales
 
$
(3.8
)
•
Lower shipment volume as a result of the closure of the Monaca zinc oxide refinery on December 23, 2013 and resulting transfer of the remaining Monaca zinc oxide inventory to Zochem during the first quarter of 2014.
•
Price realization per pound increased 2.9% partially as a result of an increase in the average LME zinc price of 5.6% for the three months ended June 30, 2015 compared to the three months ended June 30, 2014.
•
Non-cash adjustments related to hedging activities were not material for both the three months ended June 30, 2015 and the three months ended June 30, 2014.

50

Cost of sales (excluding depreciation and amortization).
Cost of sales decreased $3.2 million, or 9.8%, to $29.5 million for the three months ended June 30, 2015, compared to $32.7 million for the three months ended June 30, 2014.
Change in Zochem cost of sales (excluding depreciation and amortization)
 
(in millions)
Increase in cost of products shipped
 
$
0.8

Decrease due to lower shipment volume
 
(4.0
)
Total change in Zochem cost of sales (excluding depreciation and amortization)
 
$
(3.2
)
•
Lower shipment volume as a result of the closure of the Monaca zinc oxide refinery on December 23, 2013 and resulting transfer of the remaining Monaca zinc oxide inventory to Zochem during the first quarter of 2014.
Income before income taxes.
For the reasons stated above, income before income taxes was $2.5 million for the three months ended June 30, 2015, compared to $3.3 million for the three months ended June 30, 2014.
INMETCO
Net sales.
Net sales, excluding unrealized non-cash adjustments relating to our hedging activities, decreased $0.3 million, or 2.0%, to $14.4 million for the three months ended June 30, 2015, compared to $14.7 million for the three months ended June 30, 2014.
Change in INMETCO net sales
 
(in millions)
Decrease in price realization
 
$
(1.6
)
Increase in shipment volume
 
1.2

Increase in other and miscellaneous sales
 
0.1

Total change in INMETCO net sales
 
$
(0.3
)
•
Lower price realization due to customer mix on tolling return shipments and a 29.6% decrease in the average LME nickel price for the three months ended June 30, 2015 compared to the three months ended June 30, 2014.
•
Hedging activities related to nickel resulted in no non-cash adjustments for the three months ended June 30, 2015 compared with an unfavorable non-cash adjustment of $0.9 million for the three months ended June 30, 2014.
Cost of sales (excluding depreciation and amortization).
Cost of sales increased $0.3 million, or 3.4%, to $9.0 million for the three months ended June 30, 2015 compared to $8.7 million for the three months ended June 30, 2014.
Change in INMETCO cost of sales (excluding depreciation and amortization)
 
(in millions)
Higher shipment volume
 
$
1.0

Lower cost of product shipped
 
(0.7
)
Total change in INMETCO cost of sales (excluding depreciation and amortization)
 
$
0.3

•
Decrease in the cost of product shipped mainly due to lower raw material costs.
Income before income taxes.
For the reasons stated above, our income before income taxes was:
INMETCO income before taxes (in millions)
 
Three Months Ended June 30, 2015
Three Months Ended June 30, 2014
Income before taxes
 
$
4.0

$
3.7

Unrealized non-cash losses related to hedging
 
—

0.9

Income before taxes excluding unrealized non-cash adjustments related to hedging
 
4.0

4.6


51

Other
Corporate, eliminations and other

Net sales.
Eliminations of net sales were $1.1 million for the three months ended June 30, 2015 compared to $0.4 million for the three months ended June 30, 2014. Eliminations relate to the exclusion of revenue resulting from EAF dust service fees charged by our Horsehead segment to our INMETCO segment and the exclusion of metal sales charged from our Horsehead segment to our Zochem segment.

Loss before income taxes.
Loss before income taxes increased $5.9 million to $8.2 million for the three months ended June 30, 2015 compared to $2.3 million for the three months ended June 30, 2014. The increase in loss before income taxes was due to an increase in actual interest expense of $1.3 million due to an increase in debt recorded in our corporate division and a decrease in capitalized interest of $4.6 million due to the completion of the new zinc facility in May 2014
Six Months Ended June 30, 2015 Compared with Six Months Ended June 30, 2014
Consolidated net sales.
Consolidated net sales decreased $11.4 million, or 4.8%, to $224.9 million for the six months ended June 30, 2015, compared to $236.3 million for the six months ended June 30, 2014.
Change in consolidated net sales
 
(in millions)
Horsehead
 
$
(12.3
)
Zochem
 
(4.3
)
INMETCO
 
(3.4
)
Eliminations
 
(0.6
)
Unrealized non-cash hedge adjustments
 
9.2

Total change in consolidated net sales
 
$
(11.4
)
See separate segment discussion following.

Consolidated cost of sales (excluding depreciation and amortization).
Consolidated cost of sales decreased $1.8 million, or 0.8%, to $214.3 million for the six months ended June 30, 2015, compared to $216.1 million for the six months ended June 30, 2014.
Change in consolidated cost of sales (excluding depreciation and amortization)
 
(in millions)
Horsehead
 
$
2.8

Zochem
 
(3.1
)
INMETCO
 
(1.0
)
Eliminations
 
(0.5
)
Total change in consolidated cost of sales (excluding depreciation and amortization)
 
$
(1.8
)
See separate segment discussion following.
Consolidated depreciation and amortization.
Consolidated depreciation and amortization increased $13.9 million, or 106.9%, to $26.9 million for the six months ended June 30, 2015, compared to $13.0 million for the six months ended June 30, 2014.
Change in consolidated depreciation and amortization
 
(in millions)
Depreciation associated with the new zinc facility
 
14.0

Other
 
(0.1
)
Total change in consolidated depreciation and amortization
 
$
13.9


52

•
The new zinc facility in Mooresboro, North Carolina began operations in May 2014.
Consolidated selling, general and administrative expenses.
Consolidated selling, general and administrative expenses increased $1.5 million, or 12.4%, to $13.6 million for the six months ended June 30, 2015, compared to $12.1 million for the six months ended June 30, 2014. The increase is a result of an overall increase in labor, non cash compensation and legal costs.
Consolidated other income (expense).
Net consolidated other income (expense) was $(5.5) million for the six months ended June 30, 2015, compared to $(0.8) million for the six months ended June 30, 2014.
Change in consolidated other income (expense)
 
(in millions)
Increase in actual interest expense
 
$
(2.6
)
Decrease in capitalized interest related to construction of new zinc facility
 
(12.0
)
Increase in interest and other income
 
9.9

Total change in consolidated other income (expense)
 
$
(4.7
)
•
Increase in actual interest expense as a result of new debt issued on July 29, 2014 of $10 million in Senior Secured Notes and $40 million Unsecured Notes.
•
Decrease in capitalized interest due to the startup of the new zinc facility in May 2014.
•
Increase in interest and other income primarily as a result of an increase in income recorded under the Shell contract of $11.6 million partially offset by a decrease in scrap sales of $1.0 million during the six months ended June 30, 2015 as compared to the six months ended June 30, 2014. The sale of the Monaca site to Shell occurred in June 2015.
Consolidated income tax benefit.
 
 
Six Months Ended June 30, 2015
Six Months Ended June 30, 2014
Income tax benefit (in millions)
 
$
(13.4
)
$
(1.2
)
Effective tax rate
 
37.8
%
21.7
%
•
The effective tax rate for the six months ended June 30, 2015 increased when compared to the six months ended June 30, 2014 due to higher than previously projected pretax losses coupled with lower foreign subsidiary statutory tax rates.
Consolidated net loss.
Net loss for the six months ended June 30, 2015 was $(22.1) million compared to net loss of $(4.4) million for the six months ended June 30, 2014.
Business Segments
Horsehead
Net sales.
Net sales, excluding unrealized non-cash adjustments relating to our hedging activities, decreased $12.3 million, or 9.1%, to $123.5 million for the six months ended June 30, 2015 compared to $135.8 million for the six months ended June 30, 2014.
Change in Horsehead net sales
 
(in millions)
Volume decrease due to zinc finished products and services
 
(23.9
)
Price realization increase due to zinc finished products and services
 
4.2

WOX/zinc calcine sales increase
 
5.2

Miscellaneous and other sales increase
 
2.2

Total change in Horsehead net sales
 
$
(12.3
)
•
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 second quarter of 2015. During the first quarter of

53

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 six months ended June 30, 2015 primarily related to zinc metal and resulted from a 4.0% higher average LME zinc price for the six months ended June 30, 2015 compared to the six months ended June 30, 2014.
•
Zinc calcine was sold to third parties during the six months ended June 30, 2015 and both WOX and zinc calcine were sold to third parties during the six month ended June 30, 2014. Zinc calcine will continue to be sold until the new zinc facility is operating at close to capacity.
•
Net sales during the six months ended June 30, 2015 were increased by unrealized non-cash adjustments of $9.9 million relating to our hedging activities. Net sales during the six months ended June 30, 2014 were increased by unrealized non-cash adjustments of $2.3 million relating to our hedging activities.
Horsehead zinc product shipments - in tons
 
Six Months Ended June 30, 2015
Six Months Ended June 30, 2014
Zinc finished product shipments
 
31,088

41,759

WOX/calcine shipments
 
51,069

38,151

Total zinc product shipments on a zinc contained basis
 
63,265

67,360

Average sales price realization on a zinc contained basis
 
$
0.80

$
0.85

Net sales of zinc metal decreased $14.1 million, or 17.9%, to $64.7 million for the six months ended June 30, 2015, compared to $78.8 million for the six months ended June 30, 2014.
Change in Horsehead zinc metal net sales
 
(in millions)
Decrease in volume
 
$
(17.8
)
Increase in price realization
 
3.7

Total change in Horsehead zinc metal net sales
 
$
(14.1
)
•
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 six months ended June 2015.
•
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 4.0% in the average LME zinc price.
Net sales of zinc-based powders decreased $4.1 million to $1.6 million for the six months ended June 30, 2015 compared to $5.7 million for the six months ended June 30, 2014. The decrease was primarily due to the idling of production at our HZP facility due to a lack of raw material supply during the first quarter of 2014.

Revenues from EAF dust recycling decreased $1.5 million, or 7.3%, to $19.1 million for the six months ended June 30, 2015, compared to $20.6 million for the six months ended June 30, 2014.
Change in Horsehead EAF Dust recycling net sales
 
(in millions)
Decrease in volume
 
$
(1.8
)
Increase in price realization
 
0.3

Total change in Horsehead EAF Dust recycling net sales
 
$
(1.5
)
•
EAF dust receipts for the six months ended June 30, 2015 were 265,021 tons compared to 290,684 tons for the six months ended June 30, 2014.
•
The decrease in volume was the result of a reduction in EAF dust receipts due to lower steel production output from our customers during the six months ended June 30, 2015.
Cost of sales (excluding depreciation and amortization).

Cost of sales increased $2.8 million, or 2.1%, to $137.7 million for the six months ended June 30, 2015, compared to $134.9 million for the six months ended June 30, 2014.

54

 
 
Six Months Ended June 30, 2015
Six Months Ended June 30, 2014
Cost of sales as a % of net sales, excluding non-cash losses related to hedging
 
111.5
%
99.3
%
Unrealized non-cash losses (gains) related to hedging
 
$
(9.9
)
$
(2.3
)
The cost of zinc material and other products sold for the six months ended June 30, 2015, increased $4.0 million, or 3.4%, to $122.9 million, compared to $118.9 million for the six months ended June 30, 2014.
Change in Horsehead cost of zinc material and other products sold
 
(in millions)
Decrease due to a reduction in the volume of zinc finished products shipped
 
(24.5
)
Increase in cost of zinc finished products shipped
 
21.2

Cost of sales relating to WOX and zinc calcine products produced
 
6.6

Increase in recycling and other costs
 
0.7

Total change in Horsehead cost of zinc metal and other products sold
 
$
4.0


•
Volume decrease due to the ramp-up of the new zinc facility which continued through the second quarter of 2015.

•
The cost of zinc material includes $3.6 million of LCM inventory adjustments during the six months ended June 30, 2015 and LCM adjustments of $1.1 million for the six months ended June 30, 2014. The 2015 and 2014 LCM adjustments were the result of higher than normal production costs at the new zinc facility which operated at inefficient levels during its continued ramp-up. The 2014 LCM adjustments were also the result of higher than normal production costs which occurred during the final months of shutdown at our Monaca facility. The Monaca facility was permanently closed in April 2014.
Conversion costs for the Mooresboro facility, which began operations in May 2014, were $42.4 million for the six months ended June 30, 2015 and $4.3 million for the six months ended June 30, 2014. Conversion costs at the Mooresboro facility 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 $31.3 million for the six months ended June 30, 2014.

Conversion costs for the recycling facilities that process EAF dust increased approximately $3.0 million to $46.8 million for the six months ended June 30, 2015 from $43.8 million for the six months ended June 30, 2014.
Change in Horsehead recycling conversion costs
 
(in millions)
Labor
 
$
0.7

Coke
 
0.7

Maintenance related costs
 
1.9

Services
 
0.7

Natural gas
 
(1.3
)
Other
 
0.3

Total change in Horsehead conversion costs
 
$
3.0

•
Production increased 5.4% for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014.
•
Conversion cost per ton increased 1.4% for the six months ended June 30, 2015 compared to the six months ended June 30, 2014.

The cost of EAF dust services decreased $1.2 million, or 7.5% to $14.8 million for the six months ended June 30, 2015, compared to $16.0 million for the six months ended June 30, 2014.
Change in Horsehead cost of EAF dust services
 
(in millions)
Decrease in volume
 
$
(1.4
)
Increase in transportation costs
 
0.2

Total change in Horsehead cost of EAF dust services
 
$
(1.2
)


55

•
EAF tons processed increased 5.4% during the six months ended June 30, 2015 as compared to the six months ended June 30, 2014.
Loss before income taxes.
For the reasons stated above, our loss before income taxes was:
Horsehead loss before taxes (in millions)
 
Six Months Ended June 30, 2015
Six Months Ended June 30, 2014
Loss before taxes
 
$
(28.3
)
$
(15.4
)
Unrealized non-cash gains related to hedging
 
(9.9
)
(2.3
)
Loss before taxes excluding unrealized non-cash adjustments related to hedging
 
$
(38.2
)
$
(17.7
)
Zochem
Net sales.
Net sales, excluding unrealized non-cash adjustments relating to our hedging activities, decreased $4.3 million, or 5.9%, to $68.5 million for the six months ended June 30, 2015, compared to $72.8 million for the six months ended June 30, 2014.
Change in Zochem net sales
 
(in millions)
Lower shipment volume
 
$
(7.9
)
Increase in price realization
 
3.6

Total change in Zochem net sales
 
$
(4.3
)
•
Lower shipment volume as a result of the closure of the Monaca zinc oxide refinery on December 23, 2013 and resulting transfer of the remaining Monaca zinc oxide inventory to Zochem during the first quarter of 2014.
•
Price realization per pound increased 5.5% partially as a result of an increase in the average LME zinc price of 4.0% for the six months ended June 30, 2015 compared to the six months ended June 30, 2014.
•
Non-cash adjustments related to hedging activities were not material for both the six months ended June 30, 2015 and the six months ended June 30, 2014.
Cost of sales (excluding depreciation and amortization).
Cost of sales decreased $3.1 million, or 4.8%, to $61.1 million for the six months ended June 30, 2015, compared to $64.2 million for the six months ended June 30, 2014.
Change in Zochem cost of sales (excluding depreciation and amortization)
 
(in millions)
Increase in cost of products shipped
 
$
3.8

Decrease due to lower shipment volume
 
(6.9
)
Total change in Zochem cost of sales (excluding depreciation and amortization)
 
$
(3.1
)
•
Lower shipment volume as a result of the closure of the Monaca zinc oxide refinery on December 23, 2013 and resulting transfer of the remaining Monaca zinc oxide inventory to Zochem during the first quarter of 2014.
Income before income taxes.
For the reasons stated above, income before income taxes was $4.5 million for the six months ended June 30, 2015, compared to $6.8 million for the six months ended June 30, 2014.
INMETCO
Net sales.
Net sales, excluding unrealized non-cash adjustments relating to our hedging activities, decreased $3.4 million, or 12.2%, to $24.5 million for the six months ended June 30, 2015, compared to $27.9 million for the six months ended June 30, 2014.

56

Change in INMETCO net sales
 
(in millions)
Decrease in price realization
 
$
(1.7
)
Decrease in shipment volume
 
(1.5
)
Decrease in other and miscellaneous sales
 
(0.2
)
Total change in INMETCO net sales
 
$
(3.4
)
•
Decrease in price realization due to 17.2% decrease in average LME nickel price and the customer mix on tolling return shipments for the six months ended June 30, 2015 compared to the six months ended June 30, 2014.
•
Decrease in shipment volume as a result of the planned annual maintenance shutdown that occurred in January 2015.
•
Hedging activities related to nickel resulted in no non-cash adjustments for the three months ended June 30, 2015 compared with an unfavorable non-cash adjustment of $0.9 million for the three months ended June 30, 2014.
Cost of sales (excluding depreciation and amortization).
Cost of sales decreased $1.0 million, or 5.6%, to $16.8 million for the six months ended June 30, 2015 compared to $17.8 million for the six months ended June 30, 2014.
Change in INMETCO cost of sales (excluding depreciation and amortization)
 
(in millions)
Lower shipment volume
 
$
(1.3
)
Higher cost of product shipped
 
0.3

Total change in INMETCO cost of sales (excluding depreciation and amortization)
 
$
(1.0
)
•
Lower shipment volume and higher cost of product shipped resulted from the planned annual maintenance shutdown that occurred in January 2015.
Income before income taxes.
For the reasons stated above, our income before income taxes was:
INMETCO income before taxes (in millions)
 
Six Months Ended June 30, 2015
Six Months Ended June 30, 2014
Income before taxes
 
$
4.7

$
5.4

Unrealized non-cash losses related to hedging
 
—

1.7

Income before taxes excluding unrealized non-cash adjustments related to hedging
 
$
4.7

$
7.1

Other
Corporate, eliminations and other

Net sales.
Eliminations of net sales were $1.4 million for the six months ended June 30, 2015 compared to $0.8 million for the six months ended June 30, 2014. Eliminations relate to the exclusion of revenue resulting from EAF dust service fees charged by our Horsehead segment to our INMETCO segment and the exclusion of metal sales charged from our Horsehead segment to our Zochem segment.

Loss before income taxes.
Loss before income taxes increased $14.1 million to $16.5 million for the six months ended June 30, 2015 compared to $2.4 million for the six months ended June 30, 2014. The increase in loss before income taxes was due primarily to an increase in actual interest expense of $2.3 million due to an increase in debt recorded in our corporate division and a decrease in capitalized interest of $11.4 million due to the completion of the new zinc facility in May 2014.


57

Liquidity and Capital Resources

Liquidity

On July 26, 2012, we completed a private placement of $175.0 million principal amount of 10.50% Senior Secured Notes due 2017, 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 former 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 former ABL Facility. On June 30, 2014, we entered into an amendment which increased our advance rates on borrowings under the agreement. On September 22, 2014, we entered into an additional amendment which amended the definition of an eligible receivable with respect to a certain customer for a stated time period. We had $20,800 in outstanding borrowings on the former ABL Facility as of June 30, 2015. We had no availability remaining on this facility at June 30, 2015. The former ABL Facility was terminated on July 6, 2015, as described below.
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 June 30, 2015, we had $18.8 million in outstanding borrowings on this facility and $0.9 million in availability remaining on this agreement.
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 $17.6 million in outstanding borrowings on this facility as of June 30, 2015. We had $2.0 million of availability remaining at June 30, 2015 on this facility.
On June 3, 2013, we completed the private placement of an additional $20.0 million in aggregate principal amount of 2013 Additional Notes at an issue price of 106.5% of the principal amount. 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 June 30, 2015 and no remaining availability. The INMETCO Facility was terminated on July 6, 2015, as described below.
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% Unsecured Notes due 2017, at an issue price of 100.00% of par. The Unsecured Notes mature on June 1, 2017 and are a new issue of notes that pay interest semiannually at a rate of 9.00% per annum, beginning on December 1, 2014.

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

Total net proceeds from both July 29, 2014 offerings were $49.6 million.

At June 30, 2015, there was an aggregate of $205.0 million of Secured Notes outstanding.
On January 28, 2015, we completed an underwritten public offering of 5.8 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 $12.75 per share. We received approximately $69.6 million in net proceeds from the offering, after deducting underwriting discounts and commissions and offering expenses.


58

On July 6, 2015, we entered into a new $80.0 million secured revolving credit facility which matures on May 15, 2017. The new revolving credit facility replaces the $20.0 million INMETCO Facility and the $60.0 million ABL Facility. The new revolving credit facility accommodates a broader borrowing base than the two previous credit facilities and adds approximately $30.0 million of additional liquidity.

Outlook

Our new zinc facility currently in the ramp-up phase has experienced operational difficulties that we believe are typical of a start-up of this size which have resulted in production interruptions. Numerous improvements have been made to remediate these issues. We have not identified any insurmountable technical or operational obstacles that materially challenge the value proposition of our new zinc facility. These issues, however, have slowed the ramp-up rate and delayed the realization of the benefits we believe we can obtain from full operation of our zinc facility.

On April 1, 2015, we announced that the facility had produced approximately 10,000 tons of zinc during the first quarter of 2015. During January 2015, we produced approximately 4,600 tons of zinc metal. We reduced the plating rate for several days in January to perform some needed maintenance in the cell house. We also experienced intermittent equipment reliability issues, particularly with some key pumps, which were further exacerbated by extreme cold weather conditions. On February 20, 2015, we began a planned outage to address several of these issues. Production for the first quarter of 2015 was also affected by the outage during which we also installed a bypass to resolve a problem with a clarifier in the leach feed circuit. After an extended period to completely drain the clarifier, the root cause of the issue was addressed and the clarifier was placed back into service.

In April 2015, the facility produced approximately 2,800 tons of zinc metal. Production was lower than expected primarily due to an extended period of exceptionally heavy rains which filled our containments and holding ponds, requiring us to process the excess water in the plant rather than produce zinc. This event highlighted a limitation in the capacity of our process and storm water utilization capability. As a result, we engaged Veolia, a third party water management company, to install a portable unit on-site to mitigate the excess water while we evaluate our options to expand the capacity of our own equipment. This unit is now operational and substantially mitigates the risk of a plant shut down caused by significant rainfall. In addition, in April, we engaged a team of engineers with hydrometallurgical plant experience from Hatch Associates to supplement our operations and engineering team and support the on-going ramp-up.

On June 1, 2015, we announced that the facility produced approximately 4,100 tons of zinc metal during May 2015. May's production was the highest monthly production since January of this year.
On July 2, 2015, we announced that the facility produced approximately 3,700 tons of zinc metal during June 2015. June's production was slowed initially while implementing certain improvements but accelerated through the latter half of the month with 2,600 of the 3,700 tons processed after the 15th of June. Production for the second quarter of 2015 was approximately 10,600 tons compared to approximately 10,000 tons during the first quarter of 2015. Although production improved, it was primarily paced by the capacity of our process for removing impurities from the system, the so-called bleed treatment system, and by intermittent equipment reliability issues.

Regarding the third quarter of 2015, we are encouraged by the improvements implemented in July. We better understand the bottleneck issues in bleed treatment and have successfully implemented measures which have allowed us to increase production. We took a short outage in early July to perform needed maintenance work, however, we have deferred the installation of the previously announced bypass around the first solvent extraction settler while we evaluate an alternate, lower-cost approach to control solids accumulation in the settler. We have developed a final solution to the design limitation in bleed treatment and will be installing a temporary pilot plant to test this concept before we engineer and install the permanent solution and expect this to be operational sometime in August. Upgrades made during the planned outage, along with the additional treatment capacity supplied by Veolia for processing rain water, have eased the bottleneck in our bleed treatment circuit. Several upgrades aimed at improving the reliability of pumps, piping and control systems are scheduled to be installed in the third quarter. We have decided to postpone any further ramp-up activity on the lead-silver recovery circuit until the arrival and installation of new pumps and other equipment that are properly designed to efficiently operate that facility. We expect this may take several months. During July, a month in which we took a planned outage, the facility produced approximately 4,000 tons of zinc metal. We expected better performance in July; however, we experienced unexpected production constraints due to reliability issues, caused mainly by design deficiencies, some of which we have remedied. We are encouraged that the operations in Mooresboro appear to have stabilized over the past quarter. We expect continued steady progress as we debottleneck the facility and systematically address equipment reliability issues. We continue to believe that once we are operating efficiently at full capacity, we will realize significant benefits from our investment in this transformative project. Timing, however, for achieving specific milestones during the ramp-up or the completion of the ramp-up to full zinc production, however, cannot be predicted with certainty at this time. Once fully operational, we expect

59

the new zinc facility to be capable of producing over 155,000 tons of zinc metal per year with equipment capable of producing over 170,000 tons of zinc metal per year.

During 2014 and the first six months of 2015, we experienced a decline in our liquidity due to a reduction in the borrowing base of our $60.0 million ABL facility during the period between the end of production at the Monaca facility and the end of the first quarter of 2015 as we worked on ramping-up production at our new Mooresboro facility. On July 6, 2015, we entered into a new $80.0 million secured revolving credit facility. The new revolving credit facility replaces the $20.0 million INMETCO Facility and the $60.0 million ABL Facility. The new revolving credit facility accommodates a broader borrowing base than the two previous credit facilities and adds approximately $30.0 million of additional liquidity.
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 $51.0 million at June 30, 2015, which includes the remaining net proceeds from the stock offering on January 28, 2015 (ii) our availability under our 2014 Zochem Facility and Credit Agreement of $2.9 million (iii) the additional availability of approximately $30.0 million under our new credit facility entered into on July 6, 2015, (iv) our cost reduction initiatives and (v) our expected cash generated from operations will be sufficient to satisfy our liquidity and capital requirements, including capital requirements related to our capital needs based on the ramp-up to full production of the new zinc facility, for the next twelve months. Although we believe we could obtain additional credit and reduce our capital requirements if necessary, our ability to do so may be affected by industry factors, including LME zinc prices, 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, 2014.
Cash and Cash Equivalents
Our balance of cash and cash equivalents at June 30, 2015 was $51.0 million, an increase of $20.3 million from the December 31, 2014 balance of $30.7 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 $46.0 million of cash for the six months ended June 30, 2015. The cash flows used represent the operating loss for the six months ended June 30, 2015. Additionally, an increase in inventory, a decrease in accounts payable and a decrease in accrued expenses used $7.0 million, $7.1 million and $5.5 million, respectively, of cash during the first six months of 2015.
Our investment in working capital was $101.7 million at June 30, 2015 and $48.5 million at December 31, 2014. The increase in working capital was primarily due to an increase in current assets, primarily prepaid assets and a reduction in accounts payable and accrued expenses during the six months ended June 30, 2015.
Cash Flows from Investing Activities
Capital expenditures were $15.1 million for the six months ended June 30, 2015. Additionally, we received proceeds of $9.0 million related to the sale of the Monaca land to Shell which occurred in June 2015.
Cash Flows from Financing Activities
Cash provided by financing activities for the six months ended June 30, 2015 totaled $72.4 million. We received net proceeds of $69.6 million from the issuance of stock on January 28, 2015. Borrowings of $0.4 million on the Credit Agreement were offset by payments on the Credit Agreement of $1.5 million. We borrowed $42.3 million on our credit facilities and repaid $38.1 million.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements include operating leases, letters of credit and surety bonds. As of June 30, 2015, we had letters of credit outstanding in the amount of $7.9 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

60

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 in the past 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 to 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, at June 30, 2015, we currently utilize eight 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 (as amended), 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. Additionally, energy is one of our most significant costs. Our processes rely primarily on electricity and natural gas to operate. Our freight operations depend heavily on diesel fuel. Energy prices have been volatile in recent years and currently exceed long-term historical averages. These fluctuations impact our manufacturing costs and contribute to earnings volatility.

Several additives and process chemicals, including but not limited to coke, limestone, sulfuric acid and manganese are used in our operations. Changes in price and availability have a direct impact on our manufacturing costs.
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 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. 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, the total quantity covered under forward fixed price swaps was 26,600 tons and the total quantity covered under put options was approximately 11,600 tons at a strike price of $0.85 per pound. All quantities covered related to the first quarter of 2014 and no forward fixed price swaps nor put options were in place beyond the first quarter of 2014.
The 2014 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 we received no settlement payment during 2014.

61

During the first quarter of 2014, we added 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. 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.
During the three months ended March 31, 2015, we added zinc fixed price swaps for the month of February 2015 at an average price of approximately $0.97 per pound for a total quantity covered of approximately 3,300 tons. Additionally, we added zinc fixed price swaps for the months of April and May 2015 at an average price of approximately $0.94 per pound for a total quantity covered of approximately 6,600 tons per month.

During the second quarter of 2015, we added zinc fixed price swaps for the month of June 2015 at an average price of approximately $1.01 per pound for a total quantity covered of approximately 9,900 tons, fixed price swaps for the third quarter of 2015 at an average price of $1.07 per pound for a total quantity covered of approximately 18,200 tons and fixed price swaps for the fourth quarter of 2015 at an average price of $1.07 for a total quantity covered of approximately 16,900 tons.

We paid cash of $0.8 million and $0.7 million from the settlement of zinc fixed price swaps during the three and six months ended June 30, 2015, respectively and paid cash of $0.01 million and $1.0 million during the three and six months ended June 30, 2014, respectively.
The swaps and fixed rate swaps are included in “Prepaid expenses and other current assets” and "Accrued expenses" in our consolidated financial statements.
At December 31, 2014, we were party to raw material supply agreements through 2015. The agreements require us to purchase approximately 50,000 tons of SHG metal for 2015 at a variable price based on the monthly average LME zinc price plus a premium. Based on the December 2014 average LME zinc price, this purchase commitment was estimated to be approximately $107 million for 2015.
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 six months ended June 30, 2015.

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 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.

(b) Changes in internal control over financial reporting.

During the quarter ending June 30, 2015, 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.


62


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, 2014, which was filed with the SEC on March 2, 2015.

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, 2014, which was filed with the SEC on March 2, 2015.
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]

63

Item 6. Exhibits.
EXHIBIT INDEX
Exhibit No.
 
Description
 
 
 
 
10.1
 
Credit Agreement, dated as of June 30, 2015, by and among Horsehead Corporation, The International Metals Reclamation Company, LLC and Horsehead Metal Products, LLC as Borrowers, the lenders from time to time party hereto, as Lenders, and Macquarie Bank Limited, as Administrative Agent and Sole Arranger (incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed on July 7, 2015)
 
 
 
31.1
 
Certification by James M. Hensler, Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
 
Certification of Robert D. Scherich, Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
 
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS
 
Instance Document
 
 
101.SCH
 
Schema Document
 
 
101.CAL
 
Calculation Linkbase Document
 
 
101.LAB
 
Labels Linkbase Document
 
 
101.PRE
 
Presentation Linkbase Document
 
 
101.DEF
 
Definition Linkbase Document

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
HORSEHEAD HOLDING CORP.
 
 
 
/s/ James M. Hensler
 
By:
James M. Hensler
 
Its:
President and Chief Executive Officer
This report has been signed by the following persons in the capacities indicated on August 7, 2015.
 
 
 
 
 
 
SIGNATURE
  
TITLE
  
DATE
 
 
 
/s/ James M. Hensler
  
Principal Executive Officer
  
August 7, 2015
James M. Hensler
 
 
 
 
 
 
/s/ Robert D. Scherich
  
Principal Financial and
Accounting Officer
  
August 7, 2015
Robert D. Scherich
 
 
 

65

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