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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED JUNE 30, 2002
Commission File No. 333-46607-12 Commission File No. 333-46607
WERNER HOLDING CO. (PA), INC. WERNER HOLDING CO. (DE), INC.
(Exact name of co-registrant as (Exact name of co-registrant as
specified in its charter) specified in its charter)
PENNSYLVANIA 25-0906895 DELAWARE 25-1581345
(State or other (IRS Employer (State or other (IRS Employer
jurisdiction of identification No.) jurisdiction of Identification No.)
incorporation or incorporation or
organization) organization)
93 WERNER RD. 16125 1105 NORTH MARKET ST., 19899
GREENVILLE, PENNSYLVANIA (Zip Code) SUITE 1300 (Zip Code)
(Address of principal WILMINGTON, DELAWARE
executive offices) (Address of principal
executive offices)
(724) 588-2550 (302) 478-5723
(Co-registrant's telephone (Co-registrant's telephone
number including area code) number including area code)
Indicate by check mark whether each of the Co-registrants (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 each of the Co-registrants was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the
Co-registrants' classes of common stock, as of June 30, 2002:
Werner Holding Co. (PA), Inc. 1,879.5454 shares of Class A Common
Stock
21,774.9346 shares of Class B Common
Stock
5,265.7790 shares of Class C Common
Stock
1,000 shares of Class D Common Stock
45,000 shares of Class E Common Stock
Werner Holding Co. (DE), Inc. 1,000 shares of Common Stock
INDEX
WERNER HOLDING CO. (PA), INC.
WERNER HOLDING CO. (DE), INC.
FORM 10-Q
PERIOD ENDED JUNE 30, 2002
PART I FINANCIAL INFORMATION
Item 1. Financial Statements of Werner Holding Co. (PA), Inc. and Subsidiaries (Unaudited)
Condensed Consolidated Balance Sheets--June 30, 2002 and
December 31, 2001.................................................................... 1
Condensed Consolidated Statements of Income--Three and Six Months Ended
June 30, 2002 and 2001............................................................... 2
Condensed Consolidated Statements of Changes in Shareholders'
Equity (Deficit)--Three and Six Months Ended June 30, 2002 and 2001.................. 3
Condensed Consolidated Statements of Cash Flows--Six Months Ended
June 30, 2002 and 2001............................................................... 5
Notes to Condensed Consolidated Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations of Werner Holding Co. (PA), Inc. and
Subsidiaries........................................................................... 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................... 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 21
Item 4. Submission of Matters to a Vote of Security Holders...................................... 21
Item 6. Exhibits and Reports on Form 8-K......................................................... 21
SIGNATURES ......................................................................................... 22
The financial statements included herein are that of Werner Holding Co. (PA),
Inc. ("Holding (PA)"). The Co-registrants are Holding (PA) and Werner Holding
Co. (DE), Inc. (the "Issuer"), which is a wholly-owned subsidiary of Holding
(PA). Holding (PA) has no substantial operations or assets other than its
investment in the Issuer. The consolidated financial condition and results of
operations of Holding (PA) are substantially the same as those of the Issuer. As
used herein and except as the context otherwise may require, the "Company" or
"Werner" means, collectively, Holding (PA), the Issuer and all of their
consolidated subsidiaries.
PART I - FINANCIAL INFORMATION
ITEM 1.
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
JUNE 30 DECEMBER 31
2002 2001
-------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 7,316 $ 30,473
Accounts receivable 65,330 54,250
Allowance for doubtful accounts (1,446) (1,835)
Refundable income taxes - 1,501
Inventories 56,030 52,916
Deferred income taxes 696 338
Other 1,376 1,803
- ------------------------------------------------------------------------------------------------
Total current assets 129,302 139,446
Property, plant and equipment, net 113,076 111,929
Other assets:
Deferred income taxes 16,033 14,970
Deferred financing fees, net 5,060 6,469
Other 11,215 12,195
- ------------------------------------------------------------------------------------------------
32,308 33,634
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 274,686 $ 285,009
================================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 20,939 $ 21,014
Accrued liabilities 24,478 36,037
Income taxes payable 1,999 -
Current maturities of long-term debt 14,749 16,907
- ------------------------------------------------------------------------------------------------
Total current liabilities 62,165 73,958
Long-term obligations:
Long-term debt 247,575 260,457
Reserve for product liability and workers' compensation claims 48,520 44,069
Other long-term obligations 30,919 30,348
- ------------------------------------------------------------------------------------------------
Total liabilities 389,179 408,832
Shareholders' deficit:
Common stock 1 1
Additional paid-in-capital 200,122 200,947
Accumulated deficit (305,945) (314,506)
Accumulated other non-owner changes in equity (6,807) (7,882)
Notes receivable arising from stock loan plan (1,864) (2,383)
- ------------------------------------------------------------------------------------------------
Total shareholders' deficit (114,493) (123,823)
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 274,686 $ 285,009
================================================================================================
See notes to unaudited condensed consolidated financial statements.
1
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in Thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------------------------------------------
2002 2001 2002 2001
--------------------------------------------------------------
Net sales $ 136,922 $ 143,927 $ 247,563 $ 268,504
Cost of sales 92,938 103,576 170,215 192,928
- ------------------------------------------------------------------------------------------------
Gross profit 43,984 40,351 77,348 75,576
General and administrative expenses 6,879 4,977 14,371 11,153
Selling and distribution expenses 20,270 22,207 38,123 42,778
- ------------------------------------------------------------------------------------------------
Operating profit 16,835 13,167 24,854 21,645
Other income (expense), net (17) (850) (361) (868)
- ------------------------------------------------------------------------------------------------
Income before interest and taxes 16,818 12,317 24,493 20,777
Interest expense 5,228 6,626 11,004 13,369
- ------------------------------------------------------------------------------------------------
Income before income taxes 11,590 5,691 13,489 7,408
Income taxes 4,257 2,279 4,928 2,965
- ------------------------------------------------------------------------------------------------
NET INCOME $ 7,333 $ 3,412 $ 8,561 $ 4,443
================================================================================================
See notes to unaudited condensed consolidated financial statements.
2
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (DEFICIT) (Unaudited)
(Dollars in Thousands)
ACCUMULATED
ADDITIONAL OTHER NON- TOTAL
COMMON PAID-IN ACCUMULATED OWNER EQUITY SHAREHOLDERS'
STOCK CAPITAL DEFICIT CHANGES OTHER EQUITY (DEFICIT)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2002 $ 1 $ 200,947 $ (314,506) $ (7,882) $ (2,383) $ (123,823)
Non-owner equity changes:
Net income 1,228 1,228
Derivative instruments-amounts reclassified
to income (net of deferred tax of $251) 428 428
Change in fair value of derivative commodity
instruments (net of deferred tax of $182) 311 311
----------------
Total non-owner equity changes 1,967
Reduction in notes receivable arising from
stock loan plan 140 140
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2002 $ 1 $ 200,947 $ (313,278) $ (7,143) $ (2,243) $ (121,716)
==============================================================================================================================
Non-owner equity changes:
Net income 7,333 7,333
Derivative instruments-amounts reclassified
to income (net of deferred tax of $201) 342 342
Change in fair value of derivative commodity
instruments (net of deferred tax of $4) (6) (6)
----------------
Total non-owner equity changes 7,669
Notes receivable arising from stock loan plan (23) (23)
Issuance of common stock 30 30
Repurchase of common stock (855) (855)
Reduction in notes receivable arising from
stock loan plan 402 402
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2002 $ 1 $ 200,122 $ (305,945) $ (6,807) $ (1,864) $ (114,493)
==============================================================================================================================
See notes to unaudited condensed consolidated financial statements.
3
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (DEFICIT) (Unaudited)
(Dollars in Thousands)
ACCUMULATED
ADDITIONAL OTHER NON- TOTAL
COMMON PAID-IN ACCUMULATED OWNER EQUITY SHAREHOLDERS'
STOCK CAPITAL DEFICIT CHANGES OTHER EQUITY (DEFICIT)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2001 $ 1 $ 201,272 $ (330,061) $ - $ (2,468) $ (131,256)
Non-owner equity changes:
Net income 1,031 1,031
Cumulative effect of accounting change
for derivatives (net of deferred tax
of $69) (118) (118)
Derivative instruments-amounts reclassified
to income (net of deferred tax of $84) 142 142
Change in fair value of derivative commodity
instruments (net of deferred tax of $375) (639) (639)
----------------
Total non-owner equity changes 416
Repurchase of common stock (61) (61)
Reduction in notes receivable arising from
stock loan plan 15 15
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2001 $ 1 $ 201,211 $ (329,030) $ (615) $ (2,453) $ (130,886)
===============================================================================================================================
Non-owner equity changes:
Net income 3,412 3,412
Derivative instruments-amounts reclassified
to income (net of deferred tax of $68) 114 114
Change in fair value of derivative commodity
instruments (net of deferred tax of $89) (148) (148)
----------------
Total non-owner equity changes 3,378
Notes receivable arising from stock loan plan (18) (18)
Issuance of common stock 24 24
Repurchase of common stock (98) (98)
Reduction in notes receivable arising from
stock loan plan 18 18
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2001 $ 1 $ 201,137 $ (325,618) $ (649) $ (2,453) $ (127,582)
===============================================================================================================================
Non-owner equity changes:
Net income 5,992 5,992
Derivative instruments-amounts reclassified
to income (net of deferred tax of $359) 612 612
Change in fair value of derivative commodity
instruments (net of deferred tax of $1,032) (1,759) (1,759)
----------------
Total non-owner equity changes 4,845
Notes receivable arising from stock loan plan (92) (92)
Issuance of common stock 122 122
Repurchase of common stock (264) (264)
Reduction in notes receivable arising from
stock loan plan 149 149
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2001 $ 1 $ 200,995 $ (319,626) $ (1,796) $ (2,396) $ (122,822)
===============================================================================================================================
Non-owner equity changes:
Net income 5,120 5,120
Derivative instruments-amounts reclassified
to income (net of deferred tax of $526) 897 897
Change in fair value of derivative commodity
instruments (net of deferred tax of $139) (238) (238)
Adjustment to minimum pension liability
(net of deferred tax of $3,962) (6,745) (6,745)
----------------
Total non-owner equity changes (966)
Repurchase of common stock (48) (48)
Reduction in notes receivable arising from
stock loan plan 13 13
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 $ 1 $ 200,947 $ (314,506) $ (7,882) $ (2,383) $ (123,823)
===============================================================================================================================
See notes to unaudited condensed consolidated financial statements.
4
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
SIX MONTHS ENDED
JUNE 30
-----------------------------------
2002 2001
-----------------------------------
OPERATING ACTIVITIES
Net income $ 8,561 $ 4,443
Reconciliation of net income to net cash provided by operating activities:
Depreciation 5,615 4,724
Amortization of deferred financing fees and original issue discount 1,611 1,356
Amortization of deferred costs 1,696 1,599
Provision for losses on accounts receivable 300 300
Provision for product liability and workers' compensation claims 8,332 7,920
Payment of product liability and workers' compensation claims (3,881) (2,873)
Deferred income taxes (1,626) (1,422)
Loss on disposition of property, plant and equipment 310 -
Impairment of investments - 303
Changes in operating assets and liabilities:
Accounts receivable (11,080) (6,951)
Refundable income taxes 1,501 2,033
Inventories (3,114) (6,063)
Accounts payable (75) 3,967
Income taxes payable 1,999 715
Other assets and liabilities, net (10,868) (8,607)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (719) 1,444
INVESTING ACTIVITIES
Capital expenditures (6,356) (10,411)
Proceeds from liquidation of investments 183 457
Proceeds from sale of investment - 2,096
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (6,173) (7,858)
FINANCING ACTIVITIES
Repayment of notes receivable arising from stock loan plan 140 -
Issuance of common stock 7 7
Repurchase of common stock (453) (127)
Increase in cash overdrafts - 2,981
Repayments of long-term debt (15,959) (1,781)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (16,265) 1,080
- ---------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (23,157) (5,334)
Cash and cash equivalents at beginning of period 30,473 5,518
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 7,316 $ 184
===========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Capital lease obligations incurred $ 717 $ -
Issuance of common stock in exchange for notes receivable arising
from stock loan plan $ 23 $ 18
Cancellation of notes receivable arising from stock loan plan in connection
with repurchase of common stock $ (402) $ (33)
See notes to unaudited condensed consolidated financial statements.
5
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in Thousands)
A. GENERAL
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of Werner Holding Co. (PA), Inc., ("Holding (PA)") include its accounts and the
accounts of its wholly-owned subsidiary, Werner Holding Co. (DE), Inc.
("Issuer") and the Issuer's wholly-owned subsidiaries (collectively the
"Company"). Holding (PA) has no substantial operations or assets, other than its
investment in the Issuer. The consolidated financial condition and results of
operations of Holding (PA) are substantially the same as those of the Issuer.
Intercompany accounts and transactions have been eliminated. The unaudited
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair financial presentation have been included.
Operating results for the three and six months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's most recent Annual Report
on Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in certain circumstances that affect amounts reported in the
consolidated financial statements and notes. Actual results could differ from
those estimates.
Certain amounts for 2001 have been reclassified to conform to the 2002
interim period presentation.
Derivative Commodity Instruments
As more fully described in Note B to the consolidated financial
statements included in the Company's most recent Annual Report on Form 10-K, the
Company holds derivatives as part of a formal risk management policy. The
Company's derivatives consist of aluminum futures and options contracts that are
designated either as fair value or cash flow hedges. The Company utilizes
derivatives to hedge the market risk of changing prices associated with customer
firm order commitments and a certain percentage of its forecasted sales.
Generally, these contracts cover exposures of one year or less. The Company's
risk management policy with respect to the percentage of forecasted sales being
hedged is currently being reviewed by management and may be revised.
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement No. 142, Goodwill and Other Intangible Assets. Statement No.
142 requires that goodwill no longer be amortized to earnings, but instead be
reviewed for impairment. The amortization of goodwill ceases effective January
1, 2002. The adoption of Statement No. 142 did not impact the Company's results
of operations, financial position or cash flows.
In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations, effective for fiscal years beginning after June 15,
2002. The Statement provides accounting requirements for retirement obligations
associated with tangible long-lived assets. The obligations affected are those
for which there is a legal obligation to settle as a result of existing or
enacted law. The adoption of Statement No. 143 will not have a significant
impact on the Company's results of operations, financial position or cash flows.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, effective for fiscal years
beginning after December 15, 2001. The new rules on asset impairment supersede
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, and provide a single accounting model
for long-lived assets to be disposed of. The adoption of Statement No. 144 did
not impact the Company's results of operations, financial position or cash
flows.
6
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--Continued
(Dollars in Thousands)
A. GENERAL--CONTINUED
In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Statement No. 145 rescinds previous accounting guidance which
required all gains and losses from extinguishment of debt to be classified as an
extraordinary item in the income statement. As a result, the criteria contained
in Accounting Principles Board Opinion No. 30 will be used to classify those
gains and losses. This statement also amends other existing authoritative
pronouncements to make various technical corrections, eliminate inconsistencies,
clarify meanings, or describe their applicability under changed conditions.
Statement No. 145 is effective for fiscal years beginning after May 15, 2002.
The Company does not expect Statement No. 145 to have a material impact on its
results of operations, financial position or cash flows.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Statement No. 146 will apply to all exit or disposal activities initiated after
December 31, 2002. The Company has not yet completed its evaluation of the
impact of adopting Statement No. 146.
B. SHIPPING AND HANDLING FEES AND EXPENSES
Pursuant to the Financial Accounting Standards Board's Emerging Issues
Task Force ("EITF") Issue 00-10, Accounting for Shipping and Handling Fees and
Costs, all shipping and handling fees billed to customers are classified as
revenues and all shipping and handling costs are removed from revenues when
presenting the income statement. Shipping and handling costs represent costs
associated with shipping products to customers and handling finished goods.
Shipping and handling costs of $11,812 and $13,642 are included in the caption
entitled, "Selling and distribution expenses" in the condensed consolidated
statements of income for the three months ended June 30, 2002 and 2001,
respectively, and $22,475 and $26,204 are included for the six months ended June
30, 2002 and 2001, respectively.
C. INVENTORIES
Components of inventories are as follows:
JUNE 30 DECEMBER 31
2002 2001
---------------------------
Finished goods $32,776 $32,595
Work-in-process 14,364 11,436
Raw materials and supplies 18,485 17,564
- -----------------------------------------------------------------------------
65,625 61,595
Less excess of cost over LIFO stated values 9,595 8,679
- -----------------------------------------------------------------------------
NET INVENTORIES $56,030 $52,916
=============================================================================
7
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--Continued
(Dollars in Thousands)
D. COMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in various legal proceedings
and claims incident to the normal conduct of its business. Although it is
impossible to predict the outcome of any pending legal proceeding, the Company
believes that such legal proceedings and claims individually and in the
aggregate are either without merit, covered by insurance or adequately reserved
for, and will not have a material adverse effect on its results of operations,
financial position or cash flows.
In March 1998, an action was filed in the United States District Court
for the Western District of Pennsylvania entitled Elizabeth Werner, et al v.
Eric J. Werner, et al (Civil Action No. 98-503). The action purports, in part,
to be brought derivatively on behalf of Holding (PA) and, in part, to be brought
on behalf of plaintiffs individually against the Company and certain current and
former officers and directors of the Company. The aspect of the case purportedly
brought on behalf of Holding (PA) alleges breaches of fiduciary duty by various
members of the Company's management arising out of, among other things, the
issuance of restricted stock to management of the Company in 1992 and 1993.
Holding (PA)'s Board of Directors referred the matter to a special committee of
disinterested directors to investigate the merits of the claim and to take
appropriate actions on behalf of Holding (PA). After a detailed investigation,
the special committee recommended that the derivative claims not be pursued by
or on behalf of Holding (PA). Accordingly, all the defendants made motions to
dismiss the derivative claims. Pursuant to an amendment to the complaint filed
by plaintiffs on March 29, 1999, the only remaining corporate defendant in this
action is Holding (PA). Pursuant to the same amendment, the only remaining
derivative claim asserted by the plaintiffs is a claim for excessive
compensation, not relating to the restricted stock issuances. The aspect of the
case purportedly brought on behalf of plaintiffs individually against the
Company appears to arise out of the 1992 and 1993 restricted stock issuances as
well as certain alleged misrepresentations by representatives of the Company.
The plaintiffs seek monetary damages in an unspecified amount. In May 1999, the
magistrate judge issued a report and recommendation ruling that all of the
plaintiffs' claims be dismissed. The District Court issued a Memorandum Order on
August 4, 1999 granting the motion to dismiss all remaining claims against all
defendants without prejudice and adopted the magistrate judge's report as the
opinion of the District Court. The plaintiffs filed an appeal on September 2,
1999. On September 27, 2001, the Court of Appeals for the Third Circuit affirmed
the dismissal of all claims except for a claim relating to the Company's
redemption of stock from the Elizabeth Werner trust and the Anne Werner estate.
The Court of Appeals has remanded the claim relating to the stock redemption to
the District Court with directions to allow the plaintiffs to file a second
amended complaint with respect to that claim only. On December 18, 2001, the
Estate and the Trust filed an amended complaint. Count I of the complaint
alleges that Holding (PA) made material misrepresentations in connection with
the redemption of shares of stock held by the Trust and the Estate. On February
8, 2002, Holding (PA) and the management defendants filed motions to dismiss the
Amended Complaint. Those motions are currently pending. Management believes that
the ultimate resolution of this lawsuit will not have a material adverse effect
on the Company's results of operations, financial position or cash flows.
8
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--Continued
(Dollars in Thousands)
E. SEGMENT INFORMATION
The Company classifies its business in two segments: Climbing Products,
which includes aluminum, fiberglass and wood ladders, scaffolding, stages and
planks; and Extruded Products, which includes aluminum extrusions and fabricated
components. The Company's reportable segments are based on the characteristics
of the product and the markets and distribution channels through which the
products are sold. The composition of segments and measure of segment
profitability are consistent with that used by the Company's management. The
Company evaluates segment performance based on operating profit. There has not
been a change in the basis of segmentation or the basis of measurement of
segment profit or loss from that disclosed in the Company's most recent Annual
Report on Form 10-K. Net sales and operating profit (loss) of the Company's
segments for the three and six months ended June 30, 2002 and 2001 are as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------------------------------------------------------
2002 2001 2002 2001
--------------------------------------------------------------------------
NET SALES
Climbing Products $ 116,285 $ 123,452 $ 208,160 $ 225,927
Extruded Products 20,637 20,475 39,403 42,577
- ----------------------------------------------------------------------------------------------------------------
$ 136,922 $ 143,927 $ 247,563 $ 268,504
================================================================================================================
OPERATING PROFIT (LOSS)
Climbing Products $ 17,274 $ 14,737 $ 26,225 $ 23,280
Extruded Products 123 (311) (484) 718
Corporate and Other (562) (1,259) (887) (2,353)
- ----------------------------------------------------------------------------------------------------------------
$ 16,835 $ 13,167 $ 24,854 $ 21,645
================================================================================================================
Operating profit (loss) for Corporate and Other includes "Other income
(expense), net" reflected in the condensed consolidated statements of income,
various corporate expenses not allocated to the reportable segments and
eliminations. Operating profit (loss) for the six months ended June 30, 2002 for
the Climbing Products and Extruded Products segments includes the impact of
severance costs of approximately $1,300 and $300, respectively, associated with
the separation of a former executive officer.
F. SALES OF ACCOUNTS RECEIVABLE
The Company maintains a Receivables Purchase Agreement with a financial
institution and its affiliate to provide additional financing capacity with a
maximum availability of $50,000 depending upon the level of accounts receivable
and certain other factors. As of June 30, 2002 and December 31, 2001, the
Company had sold, on a recurring basis, $90,321 and $76,469 of accounts
receivable in exchange for $20,000 in cash and an undivided interest in accounts
receivable of $70,250 and $56,382, respectively. The ongoing cost associated
with the Receivables Purchase Agreement, which represents a return to investors
in the purchased interests, as well as the cost of implementation and the loss
on the sale of accounts receivable, is reported in the accompanying condensed
consolidated statements of income in "Other income (expense), net."
9
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--Continued
(Dollars in Thousands)
G. DEBT
In March 2002 the Company voluntarily repaid $15,000 of term loans,
without premium or penalty, as permitted by the Senior Credit Agreement.
Additional interest expense of $394 was recorded in the quarter ended March 31,
2002 due to the accelerated amortization of the deferred financing fees
associated with the term loans voluntarily repaid. The Senior Credit Facility
provides for the adjustment of future principal installments when voluntary
payments are made. Effective June 30, 2002, Tranche B term loans are due in
aggregate principal amounts of $400 for the remainder of 2002, $26,612 in 2003,
and $49,233 in 2004, and Tranche C term loans are due in aggregate principal
amounts of $244 for the remainder of 2002, $488 in 2003, $488 in 2004, and
$45,374 in 2005.
H. SUPPLEMENTAL GUARANTOR INFORMATION
The Company's debt includes borrowings under the Senior Credit Facility
and 10% Senior Subordinated Notes maturing November 15, 2007 (the "Notes"). The
issuer of this debt is Werner Holding Co. (DE), Inc. (the "Issuer"). Werner
Holding Co. (PA), Inc. (the "Parent Company") has provided a full,
unconditional, joint and several guaranty of the Issuer's obligations under the
Senior Credit Facility and the Notes. In addition, the Issuer's wholly-owned
subsidiaries, except for Werner Funding Corporation, (collectively, the
"Guarantor Subsidiaries") have provided full, unconditional, joint and several
guarantees of the Senior Credit Facility and the Notes.
Following is condensed consolidated information for the Parent Company,
the Issuer, the Guarantor Subsidiaries, and Werner Funding Corporation (the
"Non-Guarantor Subsidiary"). Separate financial statements of the Guarantor
Subsidiaries are not presented because management has determined that they would
not provide additional information that is material to investors. Therefore,
each of the Guarantor Subsidiaries is combined in the presentation below.
Further, separate financial statements of the Issuer have not been provided as
management has determined that they would not provide information that is
material to investors, as the Issuer has no substantial operations or assets,
other than its investment in its subsidiaries.
Investments in subsidiaries are accounted for on the equity method of
accounting. Earnings of subsidiaries are, therefore, reflected in the respective
investment accounts of the Parent Company and the Issuer. The investments in
subsidiaries and intercompany balances and transactions have been eliminated.
Income taxes are allocated generally on a separate return basis with
reimbursement for losses utilized on a consolidated basis in accordance with a
tax sharing agreement between the Company and each of its subsidiaries.
10
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--Continued
(Dollars in Thousands)
H. SUPPLEMENTAL GUARANTOR INFORMATION--CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
------------------------------------------------------------------------------------
COMBINED NON-
PARENT GUARANTOR GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------------------------
JUNE 30, 2002 ASSETS CURRENT
ASSETS:
Accounts receivable $ - $ - $ - $ 65,330 $ - $ 65,330
Inventories, net - - 56,030 - - 56,030
Other current assets 54 69 7,808 11 - 7,942
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 54 69 63,838 65,341 - 129,302
Property, plant and equipment, net - 1 113,075 - - 113,076
Investment in subsidiaries (126,528) (100,520) 7,603 - 219,445 -
Other assets - 126 32,161 21 - 32,308
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $(126,474) $(100,324) $ 216,677 $ 65,362 $ 219,445 $ 274,686
===========================================================================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Other current liabilities $ (832) $ 19,685 $ 43,661 $ (349) $ - $ 62,165
Intercompany payable (receivable) (11,149) (234,919) 187,960 58,108 - -
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities (11,981) (215,234) 231,621 57,759 - 62,165
Long-term debt - 241,437 6,138 - - 247,575
Other long-term liabilities - - 79,439 - - 79,439
Total equity (deficit) (114,493) (126,527) (100,521) 7,603 219,445 (114,493)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY
(DEFICIT) $(126,474) $(100,324) $ 216,677 $ 65,362 $ 219,445 $ 274,686
===========================================================================================================================
DECEMBER 31, 2001
ASSETS
Current assets:
Accounts receivable $ - $ - $ - $ 54,250 $ - $ 54,250
Inventories, net - - 52,916 - - 52,916
Other current assets 344 188 31,739 9 - 32,280
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 344 188 84,655 54,259 - 139,446
Property, plant and equipment, net - 2 111,927 - - 111,929
Investment in subsidiaries (135,881) (110,862) 7,576 - 239,167 -
Other assets 5 1,503 32,026 100 - 33,634
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets $(135,532) $(109,169) $ 236,184 $ 54,359 $ 239,167 $ 285,009
===========================================================================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Other current liabilities $ (791) $ 23,419 $ 51,438 $ (108) $ - $ 73,958
Intercompany payable (receivable) (10,918) (251,375) 215,401 46,892 - -
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities (11,709) (227,956) 266,839 46,784 - 73,958
Long-term debt - 254,668 5,789 - - 260,457
Other long-term liabilities - - 74,417 - - 74,417
Total equity (deficit) (123,823) (135,881) (110,861) 7,575 239,167 (123,823)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY
(DEFICIT) $(135,532) $(109,169) $ 236,184 $ 54,359 $ 239,167 $ 285,009
===========================================================================================================================
11
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--Continued
(Dollars in Thousands)
H. SUPPLEMENTAL GUARANTOR INFORMATION--CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF INCOME
--------------------------------------------------------------------------------------------
COMBINED NON-
PARENT GUARANTOR GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30, 2002
Net sales $ - $ - $ 247,563 $ - $ - $ 247,563
Cost of sales - - 170,215 - - 170,215
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit - - 77,348 - - 77,348
Selling, general and administrative
expenses 1 2 52,491 - - 52,494
- ----------------------------------------------------------------------------------------------------------------------------------
Operating (loss) profit (1) (2) 24,857 - - 24,854
Other income (expense), net 8,327 9,020 (1,640) 1,538 (17,606) (361)
Interest income (expense) 424 (1,255) (8,678) (1,495) - (11,004)
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
(benefit) 8,750 7,763 14,539 43 (17,606) 13,489
Income taxes (benefit) 189 (532) 5,256 15 - 4,928
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 8,561 $ 8,295 $ 9,283 $ 28 $ (17,606) $ 8,561
==================================================================================================================================
FOR THE THREE MONTHS ENDED
JUNE 30, 2002
Net sales $ - $ - $ 136,922 $ - $ - $ 136,922
Cost of sales - - 92,938 - - 92,938
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit - - 43,984 - - 43,984
Selling, general and administrative
expenses 1 1 27,147 - - 27,149
- ----------------------------------------------------------------------------------------------------------------------------------
Operating (loss) profit (1) (1) 16,837 - - 16,835
Other income (expense), net 7,218 7,528 (669) 804 (14,898) (17)
Interest income (expense) 214 (589) (4,097) (756) - (5,228)
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
(benefit) 7,431 6,938 12,071 48 (14,898) 11,590
Income taxes (benefit) 98 (257) 4,399 17 - 4,257
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 7,333 $ 7,195 $ 7,672 $ 31 $ (14,898) $ 7,333
==================================================================================================================================
12
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--Continued
(Dollars in Thousands)
H. SUPPLEMENTAL GUARANTOR INFORMATION--CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF INCOME
----------------------------------------------------------------------------------------
COMBINED NON-
PARENT GUARANTOR GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30, 2001
Net sales $ - $ - $ 268,504 $ - $ - $ 268,504
Cost of sales - - 192,928 - - 192,928
- -------------------------------------------------------------------------------------------------------------------------------
Gross profit - - 75,576 - - 75,576
Selling, general and administrative
expenses 2 37 53,892 - - 53,931
- -------------------------------------------------------------------------------------------------------------------------------
Operating (loss) profit (2) (37) 21,684 - - 21,645
Other income (expense), net 4,177 4,770 (2,663) 2,354 (9,506) (868)
Interest income (expense) 532 (1,287) (10,577) (2,037) - (13,369)
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
(benefit) 4,707 3,446 8,444 317 (9,506) 7,408
Income taxes (benefit) 264 (625) 3,215 111 - 2,965
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 4,443 $ 4,071 $ 5,229 $ 206 $ (9,506) $ 4,443
===============================================================================================================================
FOR THE THREE MONTHS ENDED
JUNE 30, 2001
Net sales $ - $ - $ 143,927 $ - $ - $ 143,927
Cost of sales - - 103,576 - - 103,576
- -------------------------------------------------------------------------------------------------------------------------------
Gross profit - - 40,351 - - 40,351
Selling, general and administrative
expenses 2 13 27,169 - - 27,184
- -------------------------------------------------------------------------------------------------------------------------------
Operating (loss) profit (2) (13) 13,182 - - 13,167
Other income (expense), net 3,280 3,473 (1,427) 1,166 (7,342) (850)
Interest income (expense) 266 (654) (5,245) (993) - (6,626)
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
(benefit) 3,544 2,806 6,510 173 (7,342) 5,691
Income taxes (benefit) 132 (420) 2,506 61 - 2,279
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 3,412 $ 3,226 $ 4,004 $ 112 $ (7,342) $ 3,412
===============================================================================================================================
13
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)--Continued
(Dollars in Thousands)
H. SUPPLEMENTAL GUARANTOR INFORMATION--CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
------------------------------------------------------------------
COMBINED NON-
PARENT GUARANTOR GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY CONSOLIDATED
------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30, 2002
Net cash from operating activities $ 537 $ (932) $ (322) $ (2) $ (719)
Net cash from investing activities (231) 16,639 (22,581) - (6,173)
Net cash from financing activities (306) (15,684) (275) - (16,265)
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents - 23 (23,178) (2) (23,157)
Cash and cash equivalents at
beginning of period - 4 30,465 4 30,473
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at
end of period $ - $ 27 $ 7,287 $ 2 $ 7,316
=============================================================================================================
FOR THE SIX MONTHS ENDED
JUNE 30, 2001
Net cash from operating activities $ 289 $ (247) $ 1,401 $ 1 $ 1,444
Net cash from investing activities (168) 1,639 (9,329) - (7,858)
Net cash from financing activities (121) (1,407) 2,608 - 1,080
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents - (15) (5,320) 1 (5,334)
Cash and cash equivalents at
beginning of period - 22 5,495 1 5,518
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at
end of period $ - $ 7 $ 175 $ 2 $ 184
=============================================================================================================
14
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Unaudited Condensed Consolidated Financial Statements of the Company and the
Notes thereto included elsewhere in this document and the Company's most recent
Annual Report on Form 10-K as filed with the Securities and Exchange Commission.
This document contains, in addition to historical information, forward-looking
statements that are subject to risks and other uncertainties. The Company's
actual results may differ materially from those anticipated in these
forward-looking statements. In the text below, financial statement amounts have
been rounded and the percentage changes are based on the financial statements.
RESULTS OF OPERATIONS--QUARTER ENDED JUNE 30, 2002 AS COMPARED TO QUARTER ENDED
JUNE 30, 2001
Net Sales. Net sales were down $7.0 million, or 4.9%, to $136.9 million
for the quarter ended June 30, 2002 from $143.9 million for the quarter ended
June 30, 2001. Net sales of climbing products decreased by $7.2 million, or
5.8%, to $116.3 million for the quarter ended June 30, 2002 from $123.5 million
for the quarter ended June 30, 2001. The sales decline reflects lower unit sales
volumes related primarily to soft economic conditions. Net sales of extruded
products of $20.6 million for the quarter ended June 30, 2002 increased by $0.2
million, or 0.8%, compared to the quarter ended June 30, 2001 which primarily
reflects a modest improvement in unit sales volumes.
Gross Profit. Gross profit improved by $3.6 million, or 9.0%, to $44.0
million for the quarter ended June 30, 2002 from $40.4 million for the quarter
ended June 30, 2001 despite lower net sales. Gross profit as a percentage of net
sales in the quarter ended June 30, 2002 improved to 32.1% from 28.0% for the
quarter ended June 30, 2001. The negative effect of the lower production levels
on the Company's gross profit percentage as a result of the lower unit sales
volumes was more than offset by product mix improvements, manufacturing
productivity improvements and lower aluminum and other material costs.
General and Administrative Expenses. General and administrative
expenses were $6.9 million for the quarter ended June 30, 2002 compared to $5.0
million for the quarter ended June 30, 2001, an increase of $1.9 million or
38.2%. The increase is primarily due to higher compensation and related expense
accruals associated with improved profitability and higher depreciation related
to capitalized computer hardware and software costs which more than offset the
absence of severance and related expenses associated with the reduction in
salaried employees that occurred during the second quarter of the prior year.
Selling and Distribution Expenses. Selling and distribution expenses
declined by $1.9 million, or 8.7%, to $20.3 million for the quarter ended June
30, 2002 compared to $22.2 million for the quarter ended June 30, 2001 primarily
reflecting the impact of lower unit sales volumes, changes in customer mix,
lower freight rates and more productive warehousing and distribution primarily
related to the operation of the west coast manufacturing facility.
Operating Profit. Despite a decline of $7.0 million in net sales,
operating profit improved by $3.6 million, or 27.9%, to $16.8 million for the
quarter ended June 30, 2002 from $13.2 million for the quarter ended June 30,
2001. Operating profit of the Climbing Products segment increased $2.5 million,
or 17.2%, to $17.3 million in the second quarter of 2002. The improvement in the
profitability of climbing products reflects product mix improvements, lower
material costs, manufacturing and distribution productivity improvements and
cost reduction initiatives partially offset by higher general and administrative
expenses. The Extruded Products segment reported an operating profit of $0.1
million for the quarter ended June 30, 2002 compared to an operating loss of
$0.3 million for the quarter ended June 30, 2001. The improvement in operating
profit of $0.4 million is primarily due to improved manufacturing performance
stemming from the Company's Six Sigma initiatives partially offset by higher
general and administrative expenses. Corporate and Other expenses declined by
$0.7 million for the quarter ended June 30, 2002 compared to the quarter ended
June 30, 2001 primarily due to reduced manufacturing consulting expenses.
Other Income (Expense), Net. Net expense for the quarter ended June 30,
2002 was $0.8 million less than the same quarter of the prior year primarily due
to lower costs associated with the receivables purchase
15
agreement resulting from lower utilization and lower interest rates during the
current quarter and the absence of a charge of $0.3 million recorded in the
quarter ended June 30, 2001 related to the impairment of an investment formerly
held by MIICA, the Company's captive insurance subsidiary that was dissolved in
1998.
Interest Expense. Interest expense declined by $1.4 million to $5.2
million for the quarter ended June 30, 2002 from $6.6 million for the quarter
ended June 30, 2001. The decline in expense is due to lower interest rates and
lower levels of debt in the current quarter.
Income Taxes. In accordance with APB Opinion 28, at the end of each
interim period the Company shall make its best estimate of the annual effective
tax rate expected to be applicable for the full fiscal year. The rate so
determined shall be used in providing for income taxes on a current year-to-date
basis. The effective tax rate shall include the effect of any valuation
allowance expected to be necessary at the end of the year for deferred tax
assets related to originating deductible temporary differences and loss
carryforwards during the year. Accordingly, the Company has estimated its annual
effective tax rates as of June 30, 2002 and 2001, and appropriately provided for
income taxes for the quarterly periods then ended. The effective tax rate for
the quarter ended June 30, 2002 is approximately 37% compared to 40% for the
same quarter of the prior year. The decrease in the effective tax rate is due to
lower estimated income tax accruals.
The difference between the statutory and effective tax rates at both
June 30, 2002 and 2001 was primarily due to state taxes (net of federal benefit)
and estimated income tax accruals.
Net Income. Net income improved by $3.9 million to $7.3 million for the
quarter ended June 30, 2002 from net income of $3.4 million for the quarter
ended June 30, 2001 as a result of all of the above factors.
RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 2002 AS COMPARED TO SIX MONTHS
ENDED JUNE 30, 2001
Net Sales. Net sales were down $20.9 million, or 7.8%, to $247.6
million for the six months ended June 30, 2002 from $268.5 million for the six
months ended June 30, 2001. Net sales of climbing products decreased by $17.7
million, or 7.9%, to $208.2 million for the six months ended June 30, 2002 from
$225.9 million for the six months ended June 30, 2001. The sales decline
reflects lower unit sales volumes related primarily to soft economic conditions
and a major customer lowering its inventory levels mostly during the first
quarter. Net sales of extruded products of $39.4 million for the six months
ended June 30, 2002 declined by $3.2 million, or 7.5%, compared to the six
months ended June 30, 2001. The markets served by this segment of the Company's
business remained soft during the current period.
Gross Profit. Gross profit improved by $1.7 million, or 2.3%, to $77.3
million for the six months ended June 30, 2002 from $75.6 million for the six
months ended June 30, 2001 despite lower net sales. Gross profit as a percentage
of net sales in the six months ended June 30, 2002 improved to 31.2% from 28.1%
for the six months ended June 30, 2001. The negative effect of the lower
production levels on the Company's gross profit percentage as a result of the
lower unit sales volumes was more than offset by product mix improvements,
manufacturing productivity improvements and lower aluminum and other material
costs.
General and Administrative Expenses. General and administrative
expenses were $14.4 million for the six months ended June 30, 2002 compared to
$11.2 million for the six months ended June 30, 2001, an increase of $3.2
million or 28.9%. The increase is due, in part, to severance cost of $1.6
million recognized in the current period associated with the separation of a
former executive officer. Excluding this one-time severance cost, general and
administrative expenses increased by $1.6 million in the current period
reflecting higher compensation and related expense accruals associated with
improved profitability and higher depreciation related to capitalized computer
hardware and software costs which more than offset the absence of severance and
related expenses associated with the reduction in salaried employees that
occurred during the second quarter of the prior year.
Selling and Distribution Expenses. Selling and distribution expenses
declined by $4.7 million, or 10.9%, to $38.1 million for the six months ended
June 30, 2002 compared to $42.8 million for the six months ended June 30, 2001
primarily reflecting the impact of lower unit sales volumes, changes in customer
mix and lower freight rates.
Operating Profit. Despite a decline in net sales, operating profit
improved by $3.3 million, or 14.8%, to $24.9 million for the six months ended
June 30, 2002 from $21.6 million for the six months ended June 30, 2001.
Operating profit of the Climbing Products segment increased $2.9 million, or
12.7%, to $26.2 million in the first six
16
months of 2002 despite a charge of $1.3 million for an allocated portion of
severance costs related to the separation of a former executive officer.
Excluding the one-time severance cost allocation, operating profit of the
Climbing Products segment in the current period would have increased by $4.2
million, or 18.0%, from $23.3 million in the first six months of 2001. The
improvement in the profitability of climbing products reflects product mix
improvements, lower material costs, manufacturing and distribution productivity
improvements and cost reduction initiatives. The Extruded Products segment
incurred an operating loss of $0.5 million for the six months ended June 30,
2002 compared to an operating profit of $0.7 million for the six months ended
June 30, 2001. The decline in operating profit of $1.2 million is primarily due
to the decline in unit sales volumes and resulting lower absorption of fixed
manufacturing costs and increased general and administrative expenses. Corporate
and Other expenses declined by $1.5 million for the six months ended June 30,
2002 compared to the six months ended June 30, 2001 primarily due to reduced
manufacturing consulting expenses.
Other Income (Expense), Net. Net expense of $0.4 million for the six
months ended June 30, 2002 was $0.5 million less than net expense for the first
six months of 2001. The decrease in expense is primarily due to lower costs
associated with the receivables purchase agreement resulting from lower
utilization and lower interest rates during the current period and the absence
of a charge of $0.3 million recorded in the quarter ended June 30, 2001 related
to the impairment of an investment formerly held by MIICA, the Company's captive
insurance subsidiary that was dissolved in 1998. The decrease in expense during
the current period was partially offset by a loss on the disposal of an asset
recorded in the quarter ended March 31, 2002.
Interest Expense. Interest expense declined by $2.4 million to $11.0
million for the six months ended June 30, 2002 from $13.4 million for the six
months ended June 30, 2001. The favorable impact of lower interest rates and
lower levels of debt in the current period was partially offset by the
accelerated amortization of deferred financing fees of $0.4 million as a result
of a $15 million voluntary repayment of term loans under the Senior Credit
Facility made by the Company in March 2002.
Income Taxes. In accordance with APB Opinion 28, at the end of each
interim period the Company shall make its best estimate of the annual effective
tax rate expected to be applicable for the full fiscal year. The rate so
determined shall be used in providing for income taxes on a current year-to-date
basis. The effective tax rate shall include the effect of any valuation
allowance expected to be necessary at the end of the year for deferred tax
assets related to originating deductible temporary differences and loss
carryforwards during the year. Accordingly, the Company has estimated its annual
effective tax rates as of June 30, 2002 and 2001, and appropriately provided for
income taxes for the six months then ended. The effective tax rate for the six
months ended June 30, 2002 is approximately 37% compared to 40% for the first
six months of the prior year. The decrease in the effective tax rate is due to
lower estimated income tax accruals.
The difference between the statutory and effective tax rates at both
June 30, 2002 and 2001 was primarily due to state taxes (net of federal benefit)
and estimated income tax accruals.
Net Income. Net income improved by $4.2 million to $8.6 million for the
six months ended June 30, 2002 from net income of $4.4 million for the six
months ended June 30, 2001 as a result of all of the above factors.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company had $262.3 million of consolidated
indebtedness that includes $132.8 million of indebtedness (net of unamortized
original issue discount) pursuant to the $135 million principal of 10% Senior
Subordinated Notes due 2007 (the "Notes"); $122.8 million of Term Loans under
the Senior Credit Facility; and $6.7 million of other debt. The Senior Credit
Facility provides for Term Loans and a $70 million Revolving Facility of which
$44.9 million was available for borrowing at June 30, 2002. The available
borrowings under the Revolving Facility, which expires on November 30, 2003, are
reduced by amounts issued under a letter of credit subfacility which totaled
$25.1 million at June 30, 2002.
The Company maintains a Receivables Purchase Agreement with a financial
institution and its affiliate which expires in May 2003. The agreement provides
additional financing capacity with a maximum availability of $50 million
depending upon the level of accounts receivable and certain other factors. As of
June 30, 2002, the Company sold $90.3 million of accounts receivable in exchange
for $20.0 million in cash and an undivided interest in the accounts receivable
of $70.3 million. An additional $30 million of financing was available under the
Receivables Purchase Agreement at June 30, 2002.
17
The Company satisfies its working capital needs and capital expenditure
requirements primarily through a combination of operating cash flow, borrowings
under the Senior Credit Facility and sales of accounts receivable under the
Receivables Purchase Agreement. The Company believes it has sufficient funds
available in the next twelve months to support debt service requirements,
projected capital expenditures and working capital needs based on projected
results of operations and availability under both the Senior Credit Facility and
the Receivables Purchase Agreement. The Receivables Purchase Agreement and the
$70 million Revolving Facility expire in May 2003 and November 2003,
respectively. The Company may need to renew or replace one or both of these to
satisfy its future working capital needs. There can be no assurance that the
Company will be able to effect a renewal or a replacement on commercially
reasonable terms, or at all.
The Senior Credit Facility, as amended effective June 30, 2001, and the
Notes contain various restrictive covenants including restrictions on additional
indebtedness, mergers, asset dispositions, restricted payments, prepayment and
amendments of subordinated indebtedness. These covenants also prohibit, among
other things, the payment of dividends. The financial covenants of the Senior
Credit Facility require the Company to meet specific interest coverage, maximum
leverage, minimum EBITDA, and capital expenditure requirements. The Company is
in compliance with all its debt covenants effective June 30, 2002. The Company
anticipates that it will continue to comply with its debt covenants in 2002,
however, continued compliance is primarily based on its future financial and
operating performance, which to a certain extent is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond its control.
Net cash flows used by operating activities were $0.7 million for the
six months ended June 30, 2002 compared to $1.4 million provided by operating
activities for the six months ended June 30, 2001. Cash flows from operating
activities were $2.1 million less than the prior year period largely due to
lower sales of accounts receivable in 2002 under the Receivables Purchase
Agreement partially offset by cash generated from reducing year-over-year
inventory levels. Net cash used for investing activities was $6.2 million for
the six months ended June 30, 2002 compared to $7.9 million for the six months
ended June 30, 2001 primarily reflecting lower capital expenditures during the
current period partially offset by lower proceeds received on the disposal of
investments formerly held by MIICA. Net cash used for financing activities was
$16.3 million for the six months ended June 30, 2002 compared to net cash
provided of $1.1 million for the six months ended June 30, 2001 which primarily
reflects increased repayments of debt in the current period. The Senior Credit
Facility allows the Company to voluntarily repay the principal amount of Term
Loans from time to time, in whole or in part, without premium or penalty. In
March 2002 the Company voluntarily repaid $15 million of Term Loans. The $1.1
million of net cash provided by financing activities in the first six months of
2001 was due to book overdrafts partially offset by repayments of long-term
debt.
The Company's ability to make scheduled payments of principal on
existing indebtedness or to refinance its indebtedness (including the Notes), or
to fund planned capital expenditures or to finance acquisitions (although the
Company has not entered into any pending agreements for acquisitions), will
depend on its future financial and operating performance, which to a certain
extent is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond its control. Based on the current
and anticipated level of operations, management believes that cash flow from
operations and available cash, together with available borrowings under the
Senior Credit Facility and sales of accounts receivable under the Receivables
Purchase Agreement, will be adequate to meet the Company's anticipated future
requirements for working capital, budgeted capital expenditures, and scheduled
payments of principal and interest on its indebtedness, including the Notes, for
the next twelve months. The Company, however, may need to refinance all or a
portion of the principal of the Notes on or prior to maturity. There can be no
assurance that the Company's business will generate sufficient cash flows from
operations or that future borrowings will be available under the Senior Credit
Facility and the Receivables Purchase Agreement in an amount sufficient to
enable the Company to service its indebtedness, including the Notes, or make
anticipated capital expenditures and fund potential future acquisitions, if any.
In addition, there can be no assurance that the Company will be able to effect
any refinancing on commercially reasonable terms, or at all.
18
SEASONALITY, WORKING CAPITAL AND CYCLICALITY
Sales of certain products of the Company are subject to seasonal
variation. Demand for the Company's climbing products is affected by residential
housing starts and existing home sales, commercial construction activity and
overall home improvement expenditures. The residential and commercial
construction markets are sensitive to cyclical changes in the economy. Due to
seasonal factors associated with the construction industry, sales of climbing
products and working capital requirements are typically higher during the second
and third quarters than at other times of the year. The Company expects to use
the Senior Credit Facility and the Receivables Purchase Agreement to meet any
seasonal variations in its working capital requirements.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement No. 142, Goodwill and Other Intangible Assets. Statement No.
142 requires that goodwill no longer be amortized to earnings, but instead be
reviewed for impairment. The amortization of goodwill ceases effective January
1, 2002. The adoption of Statement No. 142 did not impact the Company's results
of operations, financial position or cash flows.
In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations, effective for fiscal years beginning after June 15,
2002. The Statement provides accounting requirements for retirement obligations
associated with tangible long-lived assets. The obligations affected are those
for which there is a legal obligation to settle as a result of existing or
enacted law. The adoption of Statement No. 143 will not have a significant
impact on the Company's results of operations, financial position or cash flows.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, effective for fiscal years
beginning after December 15, 2001. The new rules on asset impairment supersede
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, and provide a single accounting model
for long-lived assets to be disposed of. The adoption of Statement No. 144 did
not impact the Company's results of operations, financial position or cash
flows.
In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Statement No. 145 rescinds previous accounting guidance which
required all gains and losses from extinguishment of debt to be classified as an
extraordinary item in the income statement. As a result, the criteria contained
in Accounting Principles Board Opinion No. 30 will be used to classify those
gains and losses. This statement also amends other existing authoritative
pronouncements to make various technical corrections, eliminate inconsistencies,
clarify meanings, or describe their applicability under changed conditions.
Statement No. 145 is effective for fiscal years beginning after May 15, 2002.
The Company does not expect Statement No. 145 to have a material impact on its
results of operations, financial position or cash flows.
In June 2002, the FASB issued Statement No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. This statement requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. Examples of costs covered by the standard include lease termination costs
and certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Statement No. 146 will apply to all exit or disposal activities initiated after
December 31, 2002. The Company has not yet completed its evaluation of the
impact of adopting Statement No. 146.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed to
market risk related to changes in interest rates, foreign currency exchange
rates and commodity prices. The Company does not use derivative financial
instruments for speculative or trading purposes.
The Company is exposed to market risk from changes in interest rates on
long-term debt obligations. The Company manages such risk through the use of a
combination of fixed and variable rate debt. Currently, the Company does not use
derivative financial instruments to manage its interest rate risk. There have
been no material changes in market risk from changes in interest rates from that
disclosed in the Company's most recent Annual Report on Form 10-K.
The Company does not have material operations in foreign countries.
International sales were not material to the Company's operations for the six
months ended June 30, 2002. Accordingly, the Company is not subject to material
foreign currency exchange risk. To date, the Company has not entered into any
foreign currency forward exchange contracts or other derivative financial
instruments relative to foreign currency exchange rates.
The Company is also exposed to market risk from changes in the price of
aluminum. The Company manages such risk through the use of aluminum futures and
options contracts. There have been no material changes in market risk from
changes in the price of aluminum from that disclosed in the Company's most
recent Annual Report on Form 10-K.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved from time to time in various legal proceedings
and claims incident to the normal conduct of its business. In the opinion of
management, the amount of any ultimate liability with respect to these
proceedings and claims will not have a material adverse effect on its results of
operations, financial position or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on April 3, 2002.
The size of the Board of Directors of Holding (PA) was set at eleven (11)
persons and the following eleven (11) persons were elected as directors: Mamoun
Askari, James O. Egan, James F. Hardymon, Dennis G. Heiner, Charles K. Marquis,
Howard L. Solot, Christopher J. Stadler, Thomas J. Sullivan, Stephen J. Tempini,
Donald M. Werner and Michael E. Werner. Of the total shares of stock voted, all
were cast for these eleven (11) persons with the exception that 1,451.9552
shares of voting stock were withheld for all directors. In addition, at the
meeting, PricewaterhouseCoopers LLP was approved as the Company's independent
auditors for the upcoming year. Of the total shares of stock voted, 71,287.3736
were cast for, 0 were cast against and 1,451.9552 shares were withheld, with
respect to the selection of PricewaterhouseCoopers LLP as the Company's
independent auditors.
A special meeting of shareholders of the Company was held on May 9,
2002. The By-laws of the Company were amended and restated in the form
distributed to Shareholders with the Notice and Proxy for the meeting. The
By-laws of the Company were amended to increase the maximum number of directors
permitted on the Board from eleven to twelve. Of the total shares of stock
voted, 69,894.0291 were cast for, 1,077.2704 were cast against and 822.4352 were
withheld, with respect to amending and restating the Bylaws of the Company. In
addition, at the meeting, the size of the Board of Directors of Holding (PA) was
increased from eleven (11) Directors to twelve (12) Directors and Dana R. Snyder
was elected to fill the vacancy created thereby. Of the total shares of stock
voted to increase the size of the Board and to elect Dana R. Snyder, all were
cast for, with the exception that 822.4352 were withheld.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Certificate of Incorporation of Werner Holding Co. (DE), Inc.
(filed as Exhibit 3.1 to Issuer's Form S-4 Registration
Statement No. 333-46607 and incorporated herein by reference).
3.2 By-laws of Werner Holding Co. (DE), Inc. (filed as Exhibit
3.2 to Issuer's Form S-4 Registration Statement No. 333-46607
and incorporated herein by reference).
3.3 Amended and Restated Articles of Incorporation of Werner
Holding Co. (PA), Inc. (filed as Exhibit 3.3 to Issuer's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000 and incorporated herein by reference).
3.4 Amended and Restated By-laws of Werner Holding Co. (PA), Inc.
10.1 Employment Agreement between Werner Co. and Peter R. O'Coin.
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Co-registrants have duly caused this report to be signed on their behalf by
the undersigned thereunto duly authorized.
WERNER HOLDING CO. (PA), INC.
Date: August 13, 2002 /s/ LARRY V. FRIEND
---------------------------------------------------
Larry V. Friend
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal Accounting
Officer)
WERNER HOLDING CO. (DE), INC.
Date: August 13, 2002 /s/ LARRY V. FRIEND
---------------------------------------------------
Larry V. Friend
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal Accounting
Officer)
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