Horsehead Reports 2nd Quarter Earnings
08/12/2008 - Horsehead Holding reports consolidated net income of $13.9 million on net sales of $130.5 million for the second quarter of 2008.
Horsehead Holding Corp., the parent company of Horsehead Corp., reported consolidated net income of $13.9 million on net sales of $130.5 million for the second quarter of 2008.
Second Quarter Results—The $13.9 million consolidated net income ($0.39 per diluted share) compares to consolidated net income of $22.4 million ($0.75 per diluted share) for the second quarter of 2007. Net sales of $130.5 million compares to net sales of $144.6 million for the second quarter of 2007.
The company says the $14.1 million (9.7%) decline in net sales was primarily attributable to a 42% decrease in the price of zinc, a significant portion of which was offset by a 12% growth in zinc product shipments and the company's hedging program.
Compared to the year-ago second quarter, the company recorded a 25% increase in electric arc furnace ("EAF") dust receipts, and received $2.3 million for zinc put option settlements combined with $10.4 million, after taxes, of favorable mark-to-market effect for open hedge positions. The company said that it made continued progress with its growth strategies, including the successful start-up of 10,000 tons/year of zinc oxide production capacity and the start of construction on a new 160,000 tons/year EAF dust processing facility in Barnwell, S.C.
Management Comments—“We are pleased with the continued strong market demand for our products and services as we achieve higher production levels," said Jim Hensler, President and CEO. “Market demand for our recycling services was very good during the quarter as EAF dust receipts increased to a per-annum rate of 580,000 tons.”
“Recovery of zinc in the smelting operation improved to 95% from 90% in the prior year quarter and zinc production increased 12%,” added Hensler. “These improvements were over-shadowed by the decline in the price of zinc and higher costs associated with energy and maintenance in our operating facilities. Given the commodity price environment that we are facing, we have increased our focus on cost reduction activities.”
Financial Highlights—According to the company, the major factors affecting earnings and earnings per share (as compared to the year-ago second quarter) included increased product shipments, lower net sales, and relatively flat cost of sales.
Product shipments increased 4,687 tons (12%) to 43,114 tons, as compared to shipments of 38,427 tons in the year-ago quarter. However, the decline in the average LME price of zinc drove net sales to decrease $14.1 million (9.7%) to $130.5 million. Lower average price realization, net of $2.3 million received for settlement of put options, reduced sales $49.9 million, partially offset by $18.3 million attributable to higher volume. Sales for the quarter included unrealized gains of $16.7 million relating to the change in the market value of open hedge positions as of June 30, 2008 as the quarter closed with a LME zinc price of $0.85/lb.
The company’s cost of sales was flat with the year-ago quarter at $100.1 million. The favorable effect of improved smelter recovery and the effect of reduced LME zinc prices on purchased feeds was offset by lagging inventory costs, higher energy and maintenance costs, and by the volume effect of increased shipment levels. Inventories are carried at weighted-average actual costs. As a result, current quarter cost of sales flowing from inventory includes higher costs from zinc units purchased in prior months at higher LME prices having an estimated effect of $6.3 million. Energy costs for the second quarter were $3.0 million higher than the prior-year quarter.
Maintenance and supplies spending for the quarter was $1.6 million higher than the prior-year quarter due primarily to an increased frequency of furnace and column rebuilds, which the company expects to occur at a slower pace in the second half of the year.
In addition, there were 35,279,614 weighted average diluted shares outstanding for the current quarter compared to 29,937,823 for the prior year quarter.
On-going Cost Reduction and Growth Initiatives—"We are faced with lower zinc prices and rising energy costs,” said Hensler, “Therefore, our cost-reduction focus has accelerated as we have identified and are implementing $35 million in potential cost savings, which include a wide range of targeted opportunities throughout the business.
“In particular, we are focusing on reducing the price we pay for purchased feeds as a percentage of the LME zinc price,” added Hensler. “We also expect to continue to increase the proportion of EAF dust-based feed for our smelting operation.
“Our South Carolina expansion project is underway but we do not expect to realize the benefit of this increased EAF dust processing capacity until late next year. In addition, we believe that there is an opportunity to realize higher value from the iron units recovered from EAF dust. We currently recycle approximately 175,000 tons of iron into the aggregate market. We are targeting the higher value iron and steel markets which have been experiencing a significant increase in the price of pig iron, steel scrap and scrap substitutes," concluded Hensler.
Horsehead Holding Corp. is the parent company of Horsehead Corp., a leading U.S. producer of specialty zinc and zinc-based products. Headquartered in Pittsburgh, Pa., Horsehead employs over 1000 people and has six operating locations throughout the U.S.
