Handy & Harman Ltd. 10% Owner Holdings LLC SPH Group bought 148200 shares on 08-23-2011 at $ 12.66
Precious Metal Segment
Precious Metal segment fabricates precious metal and their alloys into brazing alloys. Brazing alloys are used to join similar and dissimilar metals as well as specialty metals and some ceramics with strong, hermetic joints. We offer these metal joining products in a wide variety of alloys including gold, silver, palladium, copper, nickel, aluminum, and tin. These brazing alloys are fabricated into a variety of engineered forms and are used in many industries including electrical, appliance, transportation, construction, and general industrial, where dissimilar material and metal-joining applications are required. Operating income from precious metal products is principally derived from the â€śvalue addedâ€ť of processing and fabricating and not from the purchase and resale of precious metal. In accordance with general practice, prices to customers are principally a composite of two factors: (1) the value of the precious metal content of the product and (2) the â€śfabrication value,â€ť which includes the cost of base metals, labor, overhead, financing and profit.
The Tubing segment manufactures a wide variety of steel tubing products. The Stainless Steel Seamless Tubing Group manufactures small-diameter precision-drawn seamless tubing both in straight lengths and coils. The Stainless Steel Tubing Groupâ€™s capabilities in long continuous drawing of seamless stainless steel coils allow this Group to serve the petrochemical infrastructure and shipbuilding markets. The Stainless Steel Tubing Group also manufactures products for use in the medical, semiconductor fabrication, aerospace and defense industries. The Specialty Tubing Group manufactures welded carbon steel tubing in coiled and straight lengths with a primary focus on products for the consumer and commercial refrigeration, automotive, and heating, ventilation and cooling (HVAC), structural, and oil and gas industries. In addition to producing bulk tubing, the Specialty Tubing Group also produces value added products and assemblies for these industries.
Engineered Materials Segment
The Engineered Materials Segment manufactures and supplies products to the construction and building industries. Fasteners and fastening systems for the U.S. commercial flat roofing industry are manufactured and sold to building and roofing material wholesalers. The products are also private labeled to roofing system manufacturers. A line of specialty fasteners is produced for the building products industry for fastening applications in the construction and remodeling of homes, decking and landscaping. We also manufacture plastic and steel fittings and connectors for natural gas, propane and water distribution service lines along with exothermic welding products for electrical grounding, cathodic protection, and lightning protection. In addition, we manufacture electro-galvanized and painted cold rolled sheet steel products primarily for the construction, entry door, container and appliance industries.
Arlon Electronic Materials Segment
Arlon Electronic Materialsâ€™ (â€śArlon EMâ€ť) principal products include high performance materials for the printed circuit board (â€śPCBâ€ť) industry and silicone rubber-based insulation materials used in a broad range of industrial, military/aerospace, consumer and commercial markets.
Arlon EM supplies high technology circuit materials to the PCB industry. Arlon EM products are marketed principally to original equipment manufacturers (â€śOEMsâ€ť) and PCB manufacturers around the world by a direct technical sales force in many cases in support of country and area specific distributors and manufacturerâ€™s representatives. Arlon EMâ€™s conventional laminates product line includes a wide variety of specialty polyimide and epoxy laminates and bonding films, as well as other high performance thermoset laminates. These materials are used in demanding commercial and military market applications including high density interconnect, surface mount technology, heat sink bonding, semiconductor testing, thermal management, wireless communications and microwave PCBs. The microwave and radio frequency product line offers fluoropolymers (i.e. polytetrafluorethylene (â€śPTFEâ€ť)), ceramic-filled fluoropolymers, and other non-PTFE laminates that deliver the electrical performance needed in frequency-dependent circuit applications such as analog, digital and personal communication systems, high frequency military electronics, microwave antennas and cellular base station electronics. These circuit materials are supplied as copper-clad laminates with bonding plies or prepregs for production of multi-layer printed circuits.
Arlon EM also manufactures a line of silicone rubber materials used in a broad range of military, consumer, industrial and commercial products. Typical applications and products include: silicone bagging materials for producing composite parts; silicone insulating tapes for electric traction motor coil windings; insulation materials for industrial and commercial flexible heaters; silicone materials for high temperature hose and duct markets; insulating tape for medium and high voltage electrical splices and self-fusing tapes for a variety of industrial and commercial applications; as well as compliant, thermally or electrically conductive silicone film adhesives known as Thermabondâ„˘ for heat sink-bonding to printed circuit boards and other thermal management applications.
Arlon Coated Materials Segment
Arlon Coated Materials (â€śArlon CMâ€ť) consists of three separate business units, Arlon Adhesive & Film Division located in California (â€śArlon CM Californiaâ€ť), Arlon Engineered Coated Products (â€śECPâ€ť) and Arlon Signtech located in Texas (together, â€śArlon CM Texasâ€ť).
Arlon CM California manufactures specialty graphic films marketed under the Arlon and CalonÂ® brand names and include cast and calendared vinyl films that are provided in a wide variety of colors, face stocks and adhesive systems. These vinyl films are used in commercial and electrical signage, point of purchase displays, highway signage, fleet markings, and other commercial advertising applications.
Arlon CM Texas, through ECP, manufactures and markets custom-engineered laminates and coated products. Typical applications include insulating foam tapes for thermopane windows, electrical insulation materials for motors and transformers, thermal insulation panels for appliances and cars, durable printing stock, coated foil tapes and transfer adhesives used in industrial assembly, and single and double-coated foam and film tapes and other custom engineered laminates for specific industrial applications. In addition, Arlon SignTech manufactures laminated vinyl fabrics for corporate identity programs. These products are marketed under the ArlonFlex brand name and complement the CalonÂ® specialty graphic films.
The Arlon CM Segment businesses have been classified as discontinued operations in the accompanying financial statements. See â€śItem 7 - Managementâ€™s Discussion and Analysis of Financial Condition and Results of Operationsâ€ť.
Kasco Blades and Route Repair Services Segment
Kasco Blades and Route Repair Services (â€śKascoâ€ť) is a provider of meat-room blade products, repair services, and resale products for the meat and deli departments of supermarkets; for restaurants; for meat and fish processing plants; and for distributors of electrical saws and cutting equipment throughout North America, Europe, Asia and South America. Kasco is also a provider of wood cutting blade products for the pallet manufacturing, pallet recycler, and portable saw mill industries in North America. These products and services include band saw blades for cutting meat and fish, band saw blades for cutting wood and metal, grinder plates and knives for grinding and cutting meat, repair and maintenance services for food equipment in retail grocery and restaurant operations, electrical saws and cutting machines, seasoning products, and other related butcher supply products.
Kascoâ€™s products and services are sold under a number of company names including Kasco Corporation and Atlanta Sharptech in the United States and Canada, Atlantic Service Company in the United Kingdom and Canada, Bertram & Graf in Germany, and Biro France and EuroKasco in France.
Our business strategy is to enhance the growth and profitability of the businesses of HNH and to build upon their strengths through internal growth and strategic acquisitions. We expect HNH to continue to focus on high margin products and innovative technology, while limiting its exposure to low margin, capital-intensive businesses.
We also will continue to evaluate, from time to time, the sale of certain businesses and assets, as well as strategic and opportunistic acquisitions. HNH has provided, and may provide from time to time in the future, information to interested parties regarding certain of its assets and businesses for such purposes.
The HNH Business System is at the heart of the operational improvement methodologies for all HNH companies and employees. Strategy Deployment forms the roof of the HNH Business System and serves to convert strategic plans into tangible actions ensuring alignment of goals throughout each of our businesses. The pillars of the HNH Business System are the key performance indicators used to monitor and drive improvement. The steps of the HNH Business System are the specific tool areas that drive the key performance indicators and overall performance. HNH utilizes lean tools and philosophies in operations and commercialization activities to improve business processes and reduce and eliminate waste coupled with the Six Sigma tools targeted at variation reduction. The HNH Business System is a proven, holistic approach to increasing shareholder value and achieving long term, sustainable, and profitable growth.
Besides precious metals, the raw materials used in the operations of the Precious Metal, Tubing, and Engineered Materials segments consist principally of stainless, galvanized, and carbon steel, nickel alloys, a variety of high-performance alloys, and various plastic compositions. HNH purchases all such raw materials at open market prices from domestic and foreign suppliers. HNH has not experienced any significant problem in obtaining the necessary quantities of raw materials. Prices and availability, particularly of raw materials purchased from foreign suppliers, are affected by world market conditions and government policies. The raw materials used by HNH in its non-precious metal segments are generally readily available from more than one source.
The essential raw materials used in the Arlon EM segment are silicone rubber, fiberglass cloths, non-woven glass mats, pigments, copper foils, various plastic films, special release liners, various solvents, Teflonâ„˘ or PTFE dispersion, skive PTFE film, polyimide resin, epoxy resins, other thermoset resins, ceramic fillers, as well as various chemicals. Generally, these materials are each available from several qualified suppliers. There are, however, several raw materials used in products that are purchased from chemical companies that are proprietary in nature. Other raw materials are purchased from a single approved vendor on a â€śsole sourceâ€ť basis, although alternative sources could be developed in the future if necessary. However, the qualification procedure for new suppliers can take several months or longer and could therefore interrupt production if the primary raw material source became unexpectedly unavailable. Current suppliers are located in the United States, Asia, and Europe.
Regarding the Kasco segment, high quality carbon steel and stainless steel are the principal raw materials used in the manufacture of band saw blades; they are purchased from multiple domestic and international suppliers. Tool steel is utilized in manufacturing meat grinder plates and knives and is purchased from qualified suppliers located in the United States, Europe and Japan. Equipment, replacement parts, and supplies are purchased from a number of manufacturers and distributors in Asia, the United States, and Europe. In France and Canada, certain specialty equipment and other items used in the supermarket industry and in the food processing industry are purchased and resold under exclusive distributorship agreements with the equipment manufacturers. All of the raw materials and purchased products utilized by this segment have been readily available throughout this last year.
The Company believes that in order to be and remain competitive, its businesses must continuously strive to improve productivity and product quality, and control and/or reduce manufacturing costs. Accordingly, HNHâ€™s segments expect to continue to incur capital investments that reduce overall manufacturing costs, improve the quality of products produced, and broaden the array of products offered to the industries HNH serves, as well as replace equipment as necessary to maintain compliance with environmental, health and safety laws and regulations. HNHâ€™s capital expenditures for 2010 and 2009 for continuing operations were $10.6 million and $7.2 million, respectively. HNH anticipates funding its capital expenditures in 2011 from funds generated by operations and borrowed funds. HNH anticipates its capital expenditures will approximate depreciation, on average, and may approximate $15 to $22 million per year for the next several years.
HNH requires significant amounts of electricity and natural gas to operate its facilities and is subject to price changes in these commodities. A shortage of electricity or natural gas, or a government allocation of supplies resulting in a general reduction in supplies, could increase costs of production and could cause some curtailment of production.
As of December 31, 2010, the Company employed 1,884 employees worldwide. Of these employees, 363 were sales employees, 468 were office employees, 250 were covered by collective bargaining agreements, and 803 were non-union operating employees.
There are many companies, both domestic and foreign, which manufacture products of the type the Company manufactures. Some of these competitors are larger than the Company and have financial resources greater than it does. Some of these competitors enjoy certain other competitive advantages, including greater name recognition, greater financial, technical, marketing and other resources, a larger installed base of customers, and well-established relationships with current and potential customers. Competition is based on quality, technology, service, and price and in some industries, new product introduction, each of which is of equal importance. The Company may not be able to compete successfully and competition may have a negative impact on its business, operating results or financial condition by reducing volume of products sold and/or selling prices, and accordingly reducing revenues and profits.
Warren G. Lichtenstein . Chairman of the Board.
Warren G. Lichtenstein, age 45, has served as Chairman of the Board of the Company since July 2005. Mr. Lichtenstein is the Chairman and Chief Executive Officer of Steel Partners LLC (â€śSteel Partnersâ€ť), a global management firm. Steel Partners is the manager of Steel Partners Holdings L.P. (â€śSPHâ€ť). Mr. Lichtenstein has been associated with Steel Partners and its affiliates since 1990. Mr. Lichtenstein has been the Chairman of the Board and Chief Executive Officer of SPH, a global diversified holding company that engages or has interests in a variety of operating businesses through its subsidiary companies, since July 2009. He is a Co-Founder of Steel Partners Japan Strategic Fund (Offshore), L.P., a private investment partnership investing in Japan, and Steel Partners China Access I LP, a private equity partnership investing in China. He also co-founded Steel Partners II, L.P. (â€śSPIIâ€ť), a private investment partnership that is now a wholly-owned subsidiary of SPH, in 1993. Mr. Lichtenstein has served as a director of GenCorp Inc., a manufacturer of aerospace and defense products and systems with a real estate business segment, since March 2008. Mr. Lichtenstein also served as the Chairman of the Board, President and Chief Executive Officer of SP Acquisition Holdings, Inc. (â€śSPAHâ€ť), a company formed for the purpose of acquiring one or more businesses or assets, from February 2007 until October 2009. He has served as a director of SL Industries, Inc. (â€śSL Industriesâ€ť), a designer and manufacturer of power electronics, power motion equipment, power protection equipment, and teleprotection and specialized communication equipment, since March 30, 2010. He previously served as a director (formerly Chairman of the Board) of SL Industries from January 2002 to May 2008 and served as Chief Executive Officer from February 2002 to August 2005. He served as a director of the predecessor entity of SPH, from 1996 to June 2005, as Chairman and Chief Executive Officer from December 1997 to June 2005 and as President from December 1997 to December 2003. Mr. Lichtenstein served as a director (formerly Chairman of the Board) of United Industrial Corporation (â€śUnited Industrialâ€ť), a company principally focused on the design, production and support of defense systems, which was acquired by Textron Inc., from May 2001 to November 2007. He served as a director of KT&G Corporation, South Koreaâ€™s largest tobacco company, from March 2006 to March 2008. Mr. Lichtenstein served as a director of Layne Christensen Company (â€śLayne Christensenâ€ť), a provider of products and services for the water, mineral, construction and energy markets, from January 2004 to October 2006. He served as a director of BKF Capital Group, Inc., the parent company of John A. Levin & Co., an investment management firm, from 2005 to 2006. As a result of these and other professional experiences, we believe Mr. Lichtenstein is qualified to serve as Chairman of the Board due to his expertise in corporate finance, record of success in managing private investment funds and his related service as a director of, and advisor to, a diverse group of public companies, including other companies having attributes similar to our Company.
Glen M. Kassan . Vice Chairman of the Board and Chief Executive Officer.
Glen M. Kassan, age 67, has served as a director of the Company since July 2005 and as the Companyâ€™s Vice Chairman of the Board and Chief Executive Officer since October 2005. He is a Managing Director and operating partner of Steel Partners and has been associated with Steel Partners and its affiliates since August 1999. He served as the Vice President, Chief Financial Officer and Secretary of a predecessor entity of SPH from June 2000 to April 2007. He has served as a director of SL Industries since January 2002, its Chairman of the Board since May 2008, its Vice Chairman of the Board from August 2005 to May 2008 and its President from February 2002 to August 2005. He was a director of United Industrial from October 2002 to November 2007. As a result of these and other professional experiences, we believe Mr. Kassan is qualified to serve as Vice Chairman of the Board due to his years of experience and record of success in leadership positions in other manufacturing, industrial and other public companies having attributes similar to our Company as well as the expertise he possesses in capital markets and corporate finance.
Robert Frankfurt . Director.
Robert Frankfurt, age 45, has been a director of the Company since November 2008. Mr. Frankfurt is the founder of Myca Partners, Inc., an investment advisory services firm, and has served as its President since November 2006. From February 2005 through December 2005, Mr. Frankfurt served as the Vice President of Sandell Asset Management Corp., a privately owned hedge fund. From October 2002 through January 2005, Mr. Frankfurt was a private investor. Mr. Frankfurt graduated from the Wharton School of Business at the University of Pennsylvania with a B.S. in Economics and received an M.B.A. from the Anderson Graduate School of Management at UCLA. As a result of these and other professional experiences, we believe Mr. Frankfurt is qualified to serve as a member of the Board due to his years of experience with private investing and investment advising and his post-graduate education, which provide him with comprehensive financial and accounting expertise.
Jack L. Howard . Director.
Jack L. Howard, age 49, has been a director of the Company since July 2005. Mr. Howard has served as President of SPH since July 15, 2009. He has been a registered principal of Mutual Securities, Inc., a FINRA registered broker-dealer, since 1989. Mr. Howard is the President of Steel Partners and has been associated with Steel Partners and its affiliates since 1993. Mr. Howard co-founded SPII in 1993. Mr. Howard has served as a director of NOVT Corporation (â€śNOVTâ€ť), a former developer of advanced medical treatments for coronary and vascular disease, since April 2006. Since July 2005, he has been a director of CoSine Communications, Inc., a holding company. He has been a director (currently Chairman) of ADPT Corporation, a storage solutions provider, since December 2007. Mr. Howard served as Chairman of the Board of a predecessor entity of SPH from June 2005 to December 2008, as a director from 1996 to December 2008 and its Vice President from 1997 to December 2008. From 1997 to May 2000, he also served as Secretary, Treasurer and Chief Financial Officer of SPHâ€™s predecessor entity. He has served as Chairman of the Board of Directors of Ore Pharmaceutical Inc., a pharmaceutical asset management company, since October 2010. He serves as Chairman of the Board of Gateway Industries, Inc., a former provider of database development and web site design and development services, and served as Chief Executive Officer from February 2004 to April 2007 and as Vice President from December 2001 to April 2007. Mr. Howard served as a director of SPAH from February 2007 until June 2007, and was Vice-Chairman from February 2007 until August 2007. He also served as Chief Operating Officer and Secretary of SPAH from June 2007 and February 2007, respectively, until October 2009. Mr. Howard has previously served as a director of BNS Holdings, Inc., a holding company, a manufacturer of school buses, ambulances and terminal trucks. He currently holds the securities licenses of Series 7, Series 24, Series 55 and Series 63. As a result of these and other professional experiences, we believe Mr. Howard is qualified to serve as a member of the Board due to his financial expertise and record of success as a director, chairman and top-level executive officer of numerous public companies.
Louis Klein, Jr . Director.
Louis Klein, Jr., age 75, has served as a director of the Company since 2002. He has served as trustee of Manville Personal Injury Settlement Trust from 1991 through 2007, trustee of WT Mutual Fund and WT Investment Trust I (Wilmington Trust) since 1998 and trustee of the CRM Mutual Fund since 2005. He has also served as a director of Bulwark Corporation, a private company engaged in real estate investment, from 1998 through June 2008. As a result of these and other professional experiences, we believe Mr. Klein is qualified to serve as a member of the Board due to his financial and accounting expertise.
John H. McNamara, Jr . Director.
John H. McNamara, Jr., age 46, has served as a director of the Company since February 2008. He is a Managing Director and investment professional of Steel Partners and has been associated with Steel Partners and its affiliates since May 2006. He has served as a director of SL Industries since May 2008. He has also served as a director of Fox & Hound Restaurant Group, an owner and operator of entertainment restaurants, since April 2008. Mr. McNamara has served as Chairman of the Board of Directors of WebBank, a Utah-chartered industrial bank that is a wholly owned-subsidiary of SPH, since May 2009. Mr. McNamara also served as a director of a predecessor entity of SPH from April 2008 to December 2008, and was its Chief Executive Officer from June 2008 to December 2008. Prior to working at Steel Partners, Mr. McNamara was a Managing Director and Partner at Imperial Capital LLC, an investment banking firm, which he joined in 1995. As a member of its Corporate Finance Group he provided advisory services for middle market companies in the areas of mergers and acquisitions, restructurings and financings. Mr. McNamara began his career at Bay Banks, Inc., a commercial bank, where he served in lending and work-out capacities As a result of these and other professional experiences, we believe Mr. McNamara is qualified to serve as a member of the Board due to his record of success in leadership positions in other public companies and extensive expertise in corporate finance, particularly in the areas of mergers and acquisitions, restructuring and refinancing.
Garen W. Smith . Director.
Garen W. Smith, age 67, has served as a director of the Company since 2002. Mr. Smith serves on the Audit, Compensation and Nomination Committees of the Board. In addition, Mr. Smith is on the Board of Directors of Handy & Harman (â€śH&Hâ€ť) and Bairnco Corporation (â€śBairncoâ€ť), both subsidiaries of the Company. Mr. Smith is Vice President, Secretary and Treasurer of New Abundance Corp., a business consulting company. He was Chairman of the Board of H&H from 2003 through September 2005. Mr. Smith was Vice President, Secretary and Treasurer of Abundance Corp., a consulting company that provided services to the Company, from 2002 to February 2005. In addition, he was President and Chief Executive Officer of Unimast Incorporated from 1991 to 2002. Mr. Smith has served as a director of Phillips Manufacturing Company since November 2006. Mr. Smith also serves on the advisory board of Steel Warehouse Company, Inc. Mr. Smith is also currently the President of Grove Park Associates, a small, regional residential developer. Mr. Smith received his Bachelor of Science degree in Civil Engineering from Penn State University in 1964 and his Masters of Engineering degree (Civil Engineering) from Penn State University in 1966. As a result of these and other professional experiences, we believe Mr. Smith is qualified to serve as a member of the Board due to his years of experience and record of success in leadership positions in other manufacturing and industrial companies having attributes similar to our Company.
MANAGEMENT DISCUSSION FROM LATEST 10K
Precious Metal segment fabricates precious metal and their alloys into brazing alloys which are used to join similar and dissimilar metals, as well as specialty metals and some ceramics, with strong, hermetic joints. H&H offers these metal joining products in a wide variety of alloys. These brazing alloys are fabricated into a variety of engineered forms and are used in many industries including electrical, appliance, transportation, construction, and general industrial, where dissimilar material and metal-joining applications are required.
Tubing segment manufactures a wide variety of steel tubing products. Small-diameter tubing fabricated from stainless steel, nickel alloy and carbon and alloy steel is produced in many sizes and shapes to critical specifications for use in the appliance, refrigeration, petrochemical, transportation, semiconductor, aircraft and instrumentation industries. Additionally, tubular products are manufactured for the medical industry for use in surgical devices and instrumentation.
Engineered Materials segment manufactures and supplies products to the construction and building industries. Engineered Materials segment also manufactures fasteners and fastening systems for the U.S. commercial flat roofing industry. Products are sold to building and roofing material wholesalers and are also private labeled to roofing system manufacturers. A line of specialty fasteners is produced for the building products industry for fastening applications in the construction and remodeling of homes, decking and landscaping. Engineered Materials segment also manufactures plastic and steel fittings and connectors for natural gas and water distribution service lines along with exothermic welding products for electrical grounding, cathodic protection, and lightning protection. In addition, Engineered Materials segment also manufactures electro-galvanized and painted cold rolled sheet steel products primarily for the construction, entry door, container and appliance industries.
Arlon EM segment designs, manufactures, markets and sells high performance laminate materials and silicone rubber products utilized in the military/aerospace, wireless communications, transportation, energy generation, oil drilling, general industrial, electricity generation, lighting, and semiconductor markets. Among the products included in the Arlon EM segment are high technology laminates and bonding materials used in the manufacture of printed circuit boards and silicone rubber products such as electrically insulating tapes and thermally conductive materials.
Kasco segment is a provider of meat-room blade products, repair services, and resale products for the meat and deli departments of supermarkets; for restaurants; for meat and fish processing plants; and for distributors of electrical saws and cutting equipment throughout North America, Europe, Asia and South America. Kasco is also a provider of wood cutting blade products for the pallet manufacturing, pallet recycler, and portable saw mill industries in North America. These products and services include band saw blades for cutting meat and fish, band saw blades for cutting wood and metal, grinder plates and knives for grinding and cutting meat, repair and maintenance services for food equipment in retail grocery and restaurant operations, electrical saws and cutting machines, seasoning products, and other related butcher supply products.
Demand for the Companyâ€™s products and services increased in 2010 as compared to 2009 resulting in 22.7% year-over-year net sales growth. The growth in net sales was due in part to strengthening in the markets served by the Company that began in the fourth quarter of 2009. All of the Companyâ€™s segments experienced improvements in income from continuing operations, which for 2010 was $58.9 million compared to $34.3 million for 2009. Improved income from continuing operations was primarily a result of $107.4 million higher sales from all segments. Gross margin percentage improved by 1.9% from 24.9% to 26.8% and selling, general and administrative (â€śSG&Aâ€ť) costs as a percentage of sales were 18.9% of net sales compared to 19.7% last year. The 2010 income from continuing operations before tax included non-cash pension expense of $4.3 million, compared to non-cash pension expense of $14.1 million for 2009. Other factors affecting comparability between the periods were the following: during 2010, the Company recorded a non-cash asset impairment charge of $1.6 million based on a valuation of land, building and houses owned by its Kasco segment located in Atlanta, Georgia, as compared to non-cash asset impairment charges totaling $3.0 million for 2009; restructuring charges were $0.5 million during 2010, compared to $1.6 million for the same period of 2009; the Company recorded a non-cash goodwill impairment charge of $1.1 million related to its Silicone Technology Division (STD) in 2009; realized and unrealized losses on derivatives were $6.0 million in 2010 compared to $0.8 million in 2009; and finally, the Company recorded a gain of $1.3 million related to insurance claim proceeds in 2010 compared to a gain of $4.0 million related to insurance claim proceeds in 2009.
We continue to seek opportunities to gain market share in markets we currently serve, expand into new markets and develop new products in order to increase demand as well as broaden our sales base. We expect that the continuing application of the HNH Business System and other cost containment measures will result in a more efficient infrastructure that will continue to positively impact our productivity and profitability.
Gross profit for the twelve months ended December 31, 2010 increased to $155.6 million as compared to $118.2 million for the same period of 2009. Gross profit margin for the twelve months ended December 31, 2010 improved to 26.8% as compared to 24.9% during the same period of 2009, with improvement in all segments. Greater absorption of fixed manufacturing costs due to a higher volume of production, more profitable product mix, and greater manufacturing efficiencies were the primary drivers that contributed to improved gross profit margin.
SG&A expenses were $16.6 million higher for the twelve months ended December 31, 2010 compared to the same period of 2009, reflecting higher variable costs plus the reinstatement of certain employee compensation costs. The 2009 period reflected the suspension of these programs as well as a reduction in accruals related to incentive pay. The Company recorded $0.6 million of environmental remediation expense in 2010 compared to $0.1 million in 2009. SG&A as a percentage of net sales was 18.9% for the twelve months ended December 31, 2010 as compared to 19.7% for the same period of 2009.
A non-cash pension expense of $4.3 million was recorded for the twelve months ended December 31, 2010, compared to $14.1 million of non-cash pension expense for the same period of 2009. The non-cash pension expense in 2010 and 2009 primarily represented actuarial loss amortization. Such actuarial loss occurred principally because investment return on the assets of the WHX Pension Plan during 2008 was significantly less than the assumed return of 8.5%. However, investment returns on the plan assets exceeded the assumed return in 2009, thereby reducing the amount of the actuarial loss and its amortization in 2010 as compared to 2009. The amortization period applied to the unrecognized actuarial gains or losses of the WHX Pension Plan is the average future service years of active participants, approximately 10 years. We currently expect pension expense to be approximately $4.5 million in 2011.
Actuarial gains and losses affect plan assets and liabilities, and therefore, the unfunded pension liability that is recorded on the Companyâ€™s balance sheet at year-end. Such actuarial gains and losses affect both current year income, as described above, and other comprehensive income for the year. During 2010, the Company recorded a net other comprehensive loss of $16.2 million which was comprised of a $25.2 million actuarial loss that occurred in 2010 partially offset by $9.0 million of amortization of prior year accumulated actuarial losses that were expensed through the 2010 income statement. In 2009, the Company recorded $44.0 million of net comprehensive income, which was comprised of a $30.7 million actuarial gain that occurred in 2009 and $13.3 million amortization of accumulated actuarial losses that were expensed through the 2009 income statement. The remaining pre-tax amount that is recorded on the balance sheet in accumulated comprehensive loss as of December 31, 2010 is an accumulated loss of $143.1 million which will be amortized over approximately 10 years through the income statement. Actuarial gains experienced in future years will help reduce the effect of the actuarial loss amortization. The Company expects that $9.5 million of such accumulated actuarial loss will be recognized in the income statement in 2011, but the amount of any actuarial gain or loss arising in 2011 is not known at this time but will affect the comprehensive income or loss recorded in 2011.
A non-cash asset impairment charge of $1.6 million was recorded for the twelve months ended December 31, 2010. During 2010, Kasco completed a restructuring plan to move its Atlanta, Georgia operation to an existing facility in Mexico. As a result, the Company performed a valuation of its land, building and houses located in Atlanta. The impairment represents the difference between the assetsâ€™ book value and fair market value as a result of the declining real estate market in the area where the properties are located. The Company recorded non-cash asset impairment charges totaling $3.0 million for the twelve months ended December 31, 2009. These charges included a $0.9 million non-cash impairment related to certain manufacturing equipment located at one of the Companyâ€™s Tubing facilities; a non-cash impairment charge of $1.1 million related to an investment accounted for under the equity method; and a $1.0 million impairment charge related principally to property located in North Attleboro, Massachusetts which resulted from the deterioration of the real estate market. For the twelve months ended December 31, 2009, the Company evaluated the goodwill of its Silicone Technology reporting unit (STD) in light of deterioration of its profitability and forecasted future operating income. As a result of the Companyâ€™s evaluation, a non-cash impairment charge of $1.1 million was recognized in 2009 to write down the goodwill.
Restructuring expenses of $0.5 million related to Kascoâ€™s restructuring project as mentioned above were recorded for the twelve months ended December 31, 2010. The restructuring costs incurred were primarily related to severance and moving costs. Restructuring costs of $1.6 million were recorded for the twelve months ended December 31, 2009 primarily related to consolidation of corporate offices and manufacturing facilities along with workforce reduction at EuroKasco in France.
For the twelve months ended December 31, 2010, the Company recorded a gain of $1.3 million from insurance proceeds related to a loss from a fire that occurred at its Indiana Tube Mexico location. In 2009, the Company recorded income totaling $4.0 million from the settlement of insurance claims. In one matter, H&H reached a settlement agreement with an insurer for reimbursement of $3.0 million in connection with five sites where H&H and/or its subsidiaries had incurred environmental remediation expenses. In another matter, H&H accrued a settlement reached with an insurance company related to an environmental site, and in January 2010, H&H received $1.0 million as the final settlement.
Income from continuing operations was $40.3 million for the twelve months ended December 31, 2010 as compared to $8.9 million for the same period of 2009. The higher income from continuing operations in the 2010 period was principally driven by increased sales and gross profit in all of the Companyâ€™s segments along with the lower non-cash pension expense of $9.7 million, $1.1 million lower restructuring costs, and $2.5 million lower impairment charges comparing the twelve months ended December 31, 2010 with the same period of 2009. Partially offsetting these items, there was a $2.7 million lower gain from insurance proceeds in the 2010 period as compared to the same period of 2009.
Interest expense was $26.3 million for the twelve months ended December 31, 2010, compared to $25.8 million in the same period of 2009. The increase was primarily due to interest compounding on related-party debt for which the interest was not paid in cash, which was partially offset by lower interest rates during the fourth quarter of 2010 as a result of the Companyâ€™s debt refinancing. A loss on debt extinguishment of $1.2 million was recognized in the fourth quarter of 2010 in connection with the October 15, 2010 refinancing of the Companyâ€™s credit agreements. The loss on debt extinguishment consists of financing fees paid by the Company in connection with amendments to the extinguished debt.
Realized and unrealized losses on derivatives were $6.0 million for the twelve months ended December 31, 2010 compared to $0.8 million in the same period of 2009. The higher loss was primarily driven by much higher silver prices during 2010 as compared to the same period of the prior year. The derivative financial instruments utilized by H&H are precious metal forward and future contracts which are used to economically hedge H&Hâ€™s precious metal inventory against price fluctuations. The trend in the market price of silver could significantly affect the income from continuing operations of the Company. If there is a material increase in silver prices, it could reasonably be expected to cause a loss on H&Hâ€™s open silver derivatives contracts. Based on the average daily amount of ounces of silver that H&H hedged in 2010, a change of $1.00 per troy ounce of silver would increase or decrease the derivative loss by $0.4 million. The market price of silver on December 31, 2010 was $30.92. In addition, as described below (see â€śDebtâ€ť), the Companyâ€™s Subordinated Notes have embedded call premiums and warrants associated with them. The Company has treated the fair value of these features together as both a discount on the debt and a derivative liability at inception of the loan agreement, valued at $4.7 million. The discount is being amortized over the 7-year life of the notes as an adjustment to interest expense, and the derivative liability is marked to market at each balance sheet date. The market price of HNHâ€™s stock is a significant factor that influences the valuation of the derivative liability. As of December 31, 2010, a mark to market adjustment of $0.4 million was charged to unrealized losses on derivatives, increasing the fair value of the derivative liability to $5.1 million.
For the twelve months ended December 31, 2010, a tax expense of $3.3 million was recorded, principally for state and foreign income taxes compared to $0.5 million tax benefit for the same period of 2009. No significant federal income tax provision or benefit has been recognized in either period due to the effect of the Companyâ€™s deferred tax valuation allowance, which reflects the uncertainty of realizing the benefit of the Companyâ€™s NOLs in the future. The Company has recorded a deferred tax valuation allowance to the extent that it believes that it is more likely than not that the benefits of its deferred tax assets, including those relating to its net operating loss carryforwards (â€śNOLsâ€ť), will not be fully realized in future periods. The twelve months ended December 31, 2009 reflects a favorable impact of $0.5 million which resulted from a change in the effective tax rate at which the deferred state income taxes of certain subsidiaries are estimated to be realized.
On February 4, 2011, Arlon LLC (â€śArlonâ€ť), an indirect wholly-owned subsidiary of HNH, sold substantially all of its assets and existing operations located primarily in the State of California related to its Adhesive Film Division for an aggregate sale price of $27.0 million. Net proceeds of approximately $24.2 million from this sale were used to repay indebtedness under the Companyâ€™s credit facilities. A gain on the sale of these assets of approximately $12.0 million will be recorded in the first quarter of 2011.
On February 4, 2011, Arlon and its subsidiaries sold an option for the sale of all of their assets and existing operations located primarily in the State of Texas related to Arlonâ€™s Engineered Coated Products Division and SignTech subsidiary for an aggregate sale price of $2.5 million (including the option price). Upon closing of the potential transaction, the Company expects to record a loss of approximately $4.0 million on the sale of these assets in the first quarter of 2011. In addition, Arlon granted an option for the sale of a coater machine to the same purchaser for a price of $0.5 million. The parties subsequently agreed to extend the exercise date of the two options and they are now each exercisable between March 14, 2011 and March 18, 2011. The net proceeds from any such sales are expected to be used to repay indebtedness under the Companyâ€™s credit facilities.
The businesses described in the previous two paragraphs formerly comprised the Arlon CM segment. Their results for 2010 and 2009, along with the Indiana Tube Denmark (â€śITDâ€ť) and Sumco subsidiaries in 2009, are classified as discontinued operations on the consolidated income statements. Discontinued operations generated aggregate net income of $0.6 million during the twelve months ended December 31, 2010. For 2009, the discontinued operations had aggregate losses from their operations of $6.0 million, partially offset by a gain of $1.8 million on asset sales of ITD.
The Precious Metal segment net sales increased by $42.4 million, or 49.3%, to $128.4 million for the twelve months ended December 31, 2010, as compared to $86.0 million in 2009. The increased sales were primarily driven by higher volume in all of its markets, particularly sales to the commercial construction and electrical markets in 2010 compared to 2009. Higher sales were also driven by the impact of a 37.0% increase in the average market price of silver in 2010 ($20.16 per troy oz.) as compared to 2009 ($14.72 per troy oz).
Segment operating income increased by $9.0 million from $5.5 million in 2009 to $14.5 million in 2010. The increase was primarily driven by higher sales volume. The Precious Metal segment gross profit margin improved in 2010 as compared to the same period of 2009 primarily due to favorable manufacturing overhead absorption. The Precious Metal segment recorded a favorable non-cash LIFO liquidation gain of $0.2 million in 2010 compared to a gain of $0.6 million in the same period of 2009. In 2009, the Precious Metal segment recorded restructuring charges of $0.4 million related to closure of a facility in New Hampshire and the relocation of the functions to its facility in Milwaukee.
For the twelve months ended December 31, 2010, the Tubing segment sales increased by $19.4 million, or 25.7%, to $94.6 million, as compared to $75.2 million in 2009, resulting primarily from higher sales to refrigeration, automotive, and HVAC markets serviced by the Specialty Tubing Group along with strong sales from petrochemical and precision material markets serviced by the Stainless Steel Tubing Group, which was partially offset by weakness in sales to medical markets within that group.
Segment operating income increased by $8.6 million on the higher sales, to $13.4 million for the twelve months ended December 31, 2010, as compared to $4.8 million for 2009, positively impacted by higher gross profit from the higher sales volume, favorable manufacturing overhead absorption, and product mix. The Tubing segment also recorded a gain of $1.3 million from insurance proceeds related to a loss from a fire that occurred at its Indiana Tube Mexico location. In addition, the Tubing segment recorded a non-cash asset impairment charge of $0.9 million in 2009 related to certain manufacturing equipment located at one of its facilities.
The Engineered Materials segment sales for the twelve months ended December 31, 2010 increased by $29.4 million, or 15.3%, to $221.1 million, as compared to $191.7 million in 2009. The incremental sales were primarily driven by higher volume of commercial roofing and branded fasteners. Sales of electro-galvanized rolled sheet steel, electrical and gas connector products also improved in 2010.
Segment operating income increased by $4.0 million to $20.9 million for the twelve months ended December 31, 2010, as compared to $16.9 million for 2009. The increase in operating income was principally the result of the higher sales volume, better product mix, along with improved gross margin percentage from efficiencies in manufacturing.
Arlon EM segment sales increased by $15.3 million, or 25.4%, to $75.4 million, for the twelve months ended December 31, 2010, as compared to $60.1 million in 2009. The sales increase was primarily due to increased sales of flex heater and coil insulation products for the general industrial market as a result of the economic rebound and increased sales of printed circuit board materials related to the telecommunications infrastructure in China.
Segment operating income increased by $4.5 million to $8.8 million for the twelve months ended December 31, 2010, as compared to $4.3 million in 2009, principally due to higher sales volume, along with manufacturing efficiencies. Gross margin improved due to favorable manufacturing overhead absorption. In addition, the Arlon EM segment recorded a goodwill impairment charge of $1.1 million during 2009 related to its Silicone Technology Division (STD).
Kasco segment sales of $62.1 million for the twelve months ended December 31, 2010 were $1.1 million, or 1.7% higher, as compared to $61.1 million in 2009, primarily from its route business in North America.
Operating income for the Kasco segment was $1.4 million for 2010, as compared to $2.8 million for 2009, due primarily to a non-cash asset impairment charge of $1.6 million. During 2010, Kasco completed restructuring activities to move its Atlanta, Georgia operation to an existing facility in Mexico. In connection with this restructuring project, costs of $0.5 million were incurred in 2010, principally for employee compensation and moving costs. Also as a result of the restructuring project, the Company performed a valuation of its land, building and houses located in Atlanta, Georgia, and recorded an asset impairment charge of $1.6 million. The Company had previously recorded an asset impairment charge of $0.2 million related to this property in 2009. The impairments represent the difference between the assetsâ€™ book value and fair market value as a result of the declining real estate market in the area where the properties are located. In 2009, EuroKasco recorded restructuring expenses of $0.5 million, primarily for workforce reduction, due to the weakness in its machinery sales volume.
Liquidity and Capital Resources
The Company recorded net income of $5.1 million in 2010, and generated $44.8 million of positive cash flow from operating activities. This compares with a net loss of $21.2 million and $39.5 million provided by cash flows from operating activities in 2009. As of December 31, 2010, the Company had an accumulated deficit of $447.3 million.
On March 7, 2005, the Company filed a voluntary petition to reorganize under Chapter 11 of the Bankruptcy Code. The Company continued to operate its business and own and manage its assets as a debtor in possession until it emerged from protection under Chapter 11 of the Bankruptcy Code on July 29, 2005.
As of December 31, 2010, the Companyâ€™s current assets totaled $163.0 million and its current liabilities totaled $147.7 million, resulting in working capital of $15.3 million, as compared to working capital of $49.4 million as of December 31, 2009.
See the discussions below regarding the separate liquidity of HNH the parent company, and H&H Group.
HNH, the parent company
On October 15, 2010, the Company refinanced substantially all of its indebtedness principally with its existing lenders or their affiliates. The refinancing was effected through a newly formed, wholly-owned subsidiary of the Company, H&H Group, which is the direct parent of H&H and Bairnco.
HNH, the parent companyâ€™s, sources of cash flow consist of its cash on-hand, distributions from its principal subsidiary, H&H Group, and other discrete transactions. H&H Groupâ€™s credit facilities effectively do not permit it to transfer any cash or other assets to HNH with the exception of (i) an unsecured loan for required payments to the WHX Pension Plan, and (ii) an unsecured loan for other uses in the aggregate principal amount not to exceed $3.5 million in any fiscal year. H&H Groupâ€™s credit facilities are collateralized by priority liens on all of the assets of its subsidiaries.
HNHâ€™s ongoing operating cash flow requirements consist of arranging for the funding of the minimum requirements of the WHX Pension Plan and paying HNHâ€™s administrative costs. The significant decline in market value of stocks and other investments starting in 2008 across a cross-section of financial markets contributed to an unfunded pension liability of the WHX Pension Plan which totaled $112.1 million as of December 31, 2010 and $101.1 million as of December 31, 2009. The Company expects to have required minimum contributions to the WHX Pension Plan for 2011 and 2012 of $14.9 million and $15.6 million, respectively. Such required future contributions are determined based upon assumptions regarding such matters as discount rates on future obligations, assumed rates of return on plan assets and legislative changes. Actual future pension costs and required funding obligations will be affected by changes in the factors and assumptions described in the previous sentence, as well as other changes such as any plan termination.
As of December 31, 2010, HNH and its subsidiaries that are not restricted by loan agreements or otherwise from transferring funds to HNH had cash of approximately $3.0 million and current liabilities of approximately $18.0 million. Such current liabilities include $14.9 million of estimated required contributions to the WHX Pension Plan, which HNH is permitted to borrow from H&H Group pursuant to its credit agreements, in addition to an unsecured loan of up to $3.5 million in any fiscal year for other purposes.
Management expects that HNH will be able to fund its operations in the ordinary course of business over at least the next twelve months.
Shelf Registration Statement
Pursuant to a shelf registration statement filed on Form S-3 with the SEC and declared effective on June 29, 2009, the Company may, from time to time, issue up to $25 million of its common stock, preferred stock, debt securities, warrants to purchase common stock, preferred stock, or debt securities, or any combination of the above, separately or as units. The terms of any offerings under the shelf registration statement will be determined at the time of the offering. The Company does not presently have any definitive plans or current commitments to sell securities that may be registered under the shelf registration statement. While management believes that the shelf registration statement provides the Company with the flexibility to quickly raise capital in the market as conditions permit with a minimum of administrative preparation and expense, there can be no assurance that the Company will sell securities under the shelf registration on terms favorable to the Company, if at all.
Handy & Harman Group Ltd.
The ability of H&H Group to draw on its revolving line of credit is limited by its borrowing base of accounts receivable and inventory. As of December 31, 2010, H&H Groupâ€™s availability under its U.S. revolving credit facilities was $24.2 million, and as of January 31, 2011, availability was $18.3 million.
There can be no assurances that H&H Group will continue to have access to its lines of credit if financial performance of its subsidiaries do not satisfy the relevant borrowing base criteria and financial covenants set forth in the applicable financing agreements. If H&H Group does not meet certain of its financial covenants or satisfy its borrowing base criteria, and if it is unable to secure necessary waivers or other amendments from the respective lenders on terms acceptable to management, its ability to access available lines of credit could be limited, its debt obligations could be accelerated by the respective lenders, and liquidity could be adversely affected.
Management is utilizing the following strategies to continue to enhance liquidity: (1) continuing to implement improvements, using the HNH Business System, throughout all of the Companyâ€™s operations to increase operating efficiencies, (2) supporting profitable sales growth both internally and potentially through acquisitions, (3) evaluating from time to time and as appropriate, strategic alternatives with respect to its businesses and/or assets and (4) seeking financing alternatives that may lower its cost of capital and/or enhance current cash flow. The Company continues to examine all of its options and strategies, including acquisitions, divestitures, and other corporate transactions, to increase cash flow and stockholder value.
Management believes that the Company will be able to meet its cash requirements on a continuing basis for at least the next twelve months. However, that ability is dependent, in part, on the Companyâ€™s continuing ability to meet its business plans. There can be no assurance that the funds available from operations and under the Companyâ€™s credit facilities will be sufficient to fund its debt service costs, working capital demands, pension plan contributions, and environmental remediation costs. If the Companyâ€™s planned cash flow projections are not met, management could consider the additional reduction of certain discretionary expenses and the sale of certain assets and/or businesses.
Furthermore, if the Companyâ€™s cash needs are significantly greater than anticipated or the Company does not materially meet its business plan, the Company may be required to seek additional or alternative financing sources. There can be no assurance that such financing will be available or available on terms acceptable to the Company, if at all. The Companyâ€™s inability to generate sufficient cash flows from its operations or through financing could impair its liquidity, and would likely have a material adverse effect on its businesses, financial condition and results of operations, and could raise substantial doubt that the Company will be able to continue to operate.