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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 SEPTEMBER 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 JURISDICTION OF (IRS EMPLOYER (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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
NUMBER INCLUDING AREA CODE) 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 September 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
5,465.7790 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 SEPTEMBER 30, 2002
PART I FINANCIAL INFORMATION
Item 1. Financial Statements of Werner Holding Co. (PA), Inc. and Subsidiaries (Unaudited)
Condensed Consolidated Balance Sheets--September 30, 2002 and
December 31, 2001.................................................................... 1
Condensed Consolidated Statements of Income--Three and Nine Months Ended
September 30, 2002 and 2001.......................................................... 2
Condensed Consolidated Statements of Changes in Shareholders'
Equity (Deficit)--Three and Nine Months Ended September 30, 2002 and 2001............. 3
Condensed Consolidated Statements of Cash Flows--Nine Months Ended
September 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
Item 4. Controls and Procedures.................................................................. 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 21
Item 6. Exhibits and Reports on Form 8-K......................................................... 21
SIGNATURES ......................................................................................... 22
CERTIFICATIONS ......................................................................................... 23
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)
SEPTEMBER 30 DECEMBER 31
2002 2001
-----------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 29,297 $ 30,473
Accounts receivable 55,157 54,250
Allowance for doubtful accounts (1,500) (1,835)
Refundable income taxes -- 1,501
Inventories 58,721 52,916
Deferred income taxes 1,369 338
Other 2,199 1,803
- --------------------------------------------------------------------------------------------------
Total current assets 145,243 139,446
Property, plant and equipment, net 112,883 111,929
Other assets:
Deferred income taxes 16,906 14,970
Deferred financing fees, net 4,569 6,469
Other 10,159 12,195
- --------------------------------------------------------------------------------------------------
31,634 33,634
- --------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 289,760 $ 285,009
==================================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 19,065 $ 21,014
Accrued liabilities 33,409 36,037
Income taxes payable 1,533 --
Current maturities of long-term debt 21,221 16,907
- --------------------------------------------------------------------------------------------------
Total current liabilities 75,228 73,958
Long-term obligations:
Long-term debt 240,980 260,457
Reserve for product liability and workers' compensation claims 49,024 44,069
Other long-term obligations 31,058 30,348
- --------------------------------------------------------------------------------------------------
Total liabilities 396,290 408,832
Shareholders' deficit:
Common stock 1 1
Additional paid-in-capital 200,722 200,947
Accumulated deficit (297,166) (314,506)
Accumulated other non-owner changes in equity (7,773) (7,882)
Notes receivable arising from stock loan plan (2,314) (2,383)
- --------------------------------------------------------------------------------------------------
Total shareholders' deficit (106,530) (123,823)
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 289,760 $ 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------------------------------------------------------
2002 2001 2002 2001
---------------------------------------------------------------------------
Net sales $ 134,635 $ 133,035 $ 382,198 $ 401,539
Cost of sales 86,738 90,141 256,953 283,069
- --------------------------------------------------------------------------------------------------------------------------------
Gross profit 47,897 42,894 125,245 118,470
General and administrative expenses 7,012 6,440 21,383 17,593
Selling and distribution expenses 21,498 20,332 59,621 63,110
- --------------------------------------------------------------------------------------------------------------------------------
Operating profit 19,387 16,122 44,241 37,767
Other income (expense), net 173 656 (188) (212)
- --------------------------------------------------------------------------------------------------------------------------------
Income before interest and taxes 19,560 16,778 44,053 37,555
Interest expense 5,278 6,803 16,282 20,172
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 14,282 9,975 27,771 17,383
Income taxes 5,503 3,983 10,431 6,948
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $ 8,779 $ 5,992 $ 17,340 $ 10,435
================================================================================================================================
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)
- -------------------------------------------------------------------------------------------------------------------------------
Non-owner equity changes:
Net income 8,779 8,779
Derivative instruments-amounts
reclassified to income (net of
deferred tax of $212) 360 360
Change in fair value of derivative
commodity instruments (net of
deferred tax of $778) (1,326) (1,326)
-------------
Total non-owner equity changes 7,813
Notes receivable arising from stock loan
plan (450) (450)
Issuance of common stock 600 600
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2002 $ 1 $ 200,722 $ (297,166) $ (7,773) $ (2,314) $ (106,530)
===============================================================================================================================
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)
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
2002 2001
-----------------------------
OPERATING ACTIVITIES
Net income $ 17,340 $ 10,435
Reconciliation of net income to net cash provided by operating activities:
Depreciation 8,763 7,071
Amortization of deferred financing fees and original issue discount 2,203 2,691
Amortization of deferred costs 2,771 2,720
Provision for losses on accounts receivable 450 450
Provision for product liability and workers' compensation claims 10,826 10,707
Payment of product liability and workers' compensation claims (5,871) (4,349)
Deferred income taxes (3,031) 1,261
Loss on disposition of property, plant and equipment 310 --
Impairment of investments -- 303
Changes in operating assets and liabilities:
Accounts receivable (907) (5,822)
Refundable income taxes 1,501 2,033
Inventories (5,805) (13,732)
Accounts payable (1,949) 2,911
Income taxes payable 1,533 1,315
Other assets and liabilities, net (3,844) (8,365)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 24,290 9,629
INVESTING ACTIVITIES
Capital expenditures (9,090) (15,063)
Proceeds from liquidation of investments 183 753
Proceeds from sale of investment -- 2,096
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,907) (12,214)
FINANCING ACTIVITIES
Repayment of notes receivable arising from stock loan plan 140 --
Issuance of common stock 157 36
Repurchase of common stock (453) (241)
Repayments of long-term debt (16,403) (2,239)
Payment of deferred financing fees -- (192)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (16,559) (2,636)
- ---------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,176) (5,221)
Cash and cash equivalents at beginning of period 30,473 5,518
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 29,297 $ 297
===========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Capital lease obligations incurred $ 937 $ 270
Issuance of common stock in exchange for notes receivable arising
from stock loan plan $ 473 $ 110
Cancellation of notes receivable arising from stock loan plan in connection
with repurchase of common stock $ (402) $ (118)
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 nine months ended September 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. Effective during
the third quarter of 2002, the Company has determined that it will not purchase
option contracts to hedge a portion of forecasted sales pending revision of its
risk management policy. The revision of the Company's risk management policy is
expected to be finalized by December 31, 2002.
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 ceased 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.
6
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(DOLLARS IN THOUSANDS)
A. GENERAL--CONTINUED
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.
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 $12,510 and $12,371 are included in the caption
entitled, "Selling and distribution expenses" in the condensed consolidated
statements of income for the three months ended September 30, 2002 and 2001,
respectively, and $34,985 and $38,575 are included for the nine months ended
September 30, 2002 and 2001, respectively.
C. INVENTORIES
Components of inventories are as follows:
SEPTEMBER 30 DECEMBER 31
2002 2001
------------------------------
Finished goods $ 35,832 $ 32,595
Work-in-process 13,264 11,436
Raw materials and supplies 19,221 17,564
- -----------------------------------------------------------------------------
68,317 61,595
Less excess of cost over LIFO stated values 9,596 8,679
- -----------------------------------------------------------------------------
NET INVENTORIES $ 58,721 $ 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 nine months ended September 30, 2002 and 2001 are as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------------------------------------------------------------
2002 2001 2002 2001
--------------------------------------------------------------------------------
NET SALES
Climbing Products $ 115,531 $ 113,519 $ 323,691 $ 339,446
Extruded Products 19,104 19,516 58,507 62,093
- ------------------------------------------------------------------------------------------------------------------------------
$ 134,635 $ 133,035 $ 382,198 $ 401,539
==============================================================================================================================
OPERATING PROFIT (LOSS)
Climbing Products $ 18,950 $ 16,119 $ 45,175 $ 39,399
Extruded Products 688 684 204 1,402
Corporate and Other (251) (681) (1,138) (3,034)
- ------------------------------------------------------------------------------------------------------------------------------
$ 19,387 $ 16,122 $ 44,241 $ 37,767
==============================================================================================================================
Operating profit (loss) for Corporate and Other includes various
corporate expenses not allocated to the reportable segments and eliminations.
"Other income (expense), net" reflected in the condensed consolidated statements
of income is also not allocated to the reportable segments. Operating profit
(loss) for the nine months ended September 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 September 30, 2002 and December 31, 2001, the
Company had sold, on a recurring basis, $78,619 and $76,469 of accounts
receivable in exchange for $20,000 in cash and an undivided interest in accounts
receivable of $58,548 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 September 30, 2002, Tranche B term loans are due in
aggregate principal amounts of $200 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 $122 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
--------------------------------------------------------------------------------------------
SEPTEMBER 30, 2002
ASSETS
Current assets:
Accounts receivable $ -- $ -- $ -- $ 55,157 $ -- $ 55,157
Inventories, net -- -- 58,721 -- -- 58,721
Other current assets 90 19 31,247 9 -- 31,365
- ---------------------------------------------------------------------------------------------------------------------------------
Total current assets 90 19 89,968 55,166 -- 145,243
Property, plant and equipment, net -- 1 112,882 -- -- 112,883
Investment in subsidiaries (118,851) (92,199) 7,631 -- 203,419 --
Other assets -- 92 31,526 16 -- 31,634
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $(118,761) $ (92,087) $ 242,007 $ 55,182 $ 203,419 $ 289,760
=================================================================================================================================
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Other current liabilities $ (875) $ 29,632 $ 46,741 $ (270) $ -- $ 75,228
Intercompany payable (receivable) (11,356) (237,631) 201,166 47,821 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total current liabilities (12,231) (207,999) 247,907 47,551 -- 75,228
Long-term debt -- 234,763 6,217 -- -- 240,980
Other long-term liabilities -- -- 80,082 -- -- 80,082
Total equity (deficit) (106,530) (118,851) (92,199) 7,631 203,419 (106,530)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY
(DEFICIT) $(118,761) $ (92,087) $ 242,007 $ 55,182 $ 203,419 $ 289,760
=================================================================================================================================
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 NINE MONTHS ENDED
SEPTEMBER 30, 2002
Net sales $ -- $ -- $ 382,198 $ -- $ -- $ 382,198
Cost of sales -- -- 256,953 -- -- 256,953
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit -- -- 125,245 -- -- 125,245
Selling, general and administrative
expenses 4 4 80,996 -- -- 81,004
- ----------------------------------------------------------------------------------------------------------------------------------
Operating (loss) profit (4) (4) 44,249 -- -- 44,241
Other income (expense), net 17,003 18,133 (2,136) 2,341 (35,529) (188)
Interest income (expense) 627 (2,055) (12,599) (2,255) -- (16,282)
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
(benefit) 17,626 16,074 29,514 86 (35,529) 27,771
Income taxes (benefit) 286 (862) 10,977 30 -- 10,431
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 17,340 $ 16,936 $ 18,537 $ 56 $ (35,529) $ 17,340
==================================================================================================================================
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
Net sales $ -- $ -- $ 134,635 $ -- $ -- $ 134,635
Cost of sales -- -- 86,738 -- -- 86,738
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit -- -- 47,897 -- -- 47,897
Selling, general and administrative
expenses 3 2 28,505 -- -- 28,510
- ----------------------------------------------------------------------------------------------------------------------------------
Operating (loss) profit (3) (2) 19,392 -- -- 19,387
Other income (expense), net 8,676 9,113 (496) 803 (17,923) 173
Interest income (expense) 203 (800) (3,921) (760) -- (5,278)
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
(benefit) 8,876 8,311 14,975 43 (17,923) 14,282
Income taxes (benefit) 97 (330) 5,721 15 -- 5,503
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 8,779 $ 8,641 $ 9,254 $ 28 $ (17,923) $ 8,779
==================================================================================================================================
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 NINE MONTHS ENDED
SEPTEMBER 30, 2001
Net sales $ -- $ -- $ 401,539 $ -- $ -- $ 401,539
Cost of sales -- -- 283,069 -- -- 283,069
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit -- -- 118,470 -- -- 118,470
Selling, general and administrative
expenses 3 47 80,653 -- -- 80,703
- ----------------------------------------------------------------------------------------------------------------------------------
Operating (loss) profit (3) (47) 37,817 -- -- 37,767
Other income (expense), net 10,036 10,781 (3,061) 3,595 (21,563) (212)
Interest income (expense) 790 (1,612) (16,310) (3,040) -- (20,172)
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
(benefit) 10,823 9,122 18,446 555 (21,563) 17,383
Income taxes (benefit) 388 (767) 7,133 194 -- 6,948
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 10,435 $ 9,889 $ 11,313 $ 361 $ (21,563) $ 10,435
==================================================================================================================================
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2001
Net sales $ -- $ -- $ 133,035 $ -- $ -- $ 133,035
Cost of sales -- -- 90,141 -- -- 90,141
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit -- -- 42,894 -- -- 42,894
Selling, general and administrative
expenses 1 10 26,761 -- -- 26,772
- ----------------------------------------------------------------------------------------------------------------------------------
Operating (loss) profit (1) (10) 16,133 -- -- 16,122
Other income (expense), net 5,859 6,011 (398) 1,241 (12,057) 656
Interest income (expense) 258 (325) (5,733) (1,003) -- (6,803)
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
(benefit) 6,116 5,676 10,002 238 (12,057) 9,975
Income taxes (benefit) 124 (142) 3,918 83 -- 3,983
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 5,992 $ 5,818 $ 6,084 $ 155 $ (12,057) $ 5,992
==================================================================================================================================
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 NINE MONTHS ENDED
SEPTEMBER 30, 2002
Net cash from operating activities $ 595 $ 2,258 $ 21,439 $ (2) $ 24,290
Net cash from investing activities (439) 13,744 (22,212) -- (8,907)
Net cash from financing activities (156) (16,004) (399) -- (16,559)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents -- (2) (1,172) (2) (1,176)
Cash and cash equivalents at
beginning of period -- 4 30,465 4 30,473
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at
end of period $ -- $ 2 $ 29,293 $ 2 $ 29,297
====================================================================================================================
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
Net cash from operating activities $ 352 $ 2,062 $ 7,206 $ 9 $ 9,629
Net cash from investing activities (147) (315) (11,752) -- (12,214)
Net cash from financing activities (205) (1,767) (664) -- (2,636)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents -- (20) (5,210) 9 (5,221)
Cash and cash equivalents at
beginning of period -- 22 5,495 1 5,518
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at
end of period $ -- $ 2 $ 285 $ 10 $ 297
====================================================================================================================
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 SEPTEMBER 30, 2002 AS COMPARED TO QUARTER
ENDED SEPTEMBER 30, 2001
Net Sales. Net sales were up $1.6 million, or 1.2%, to $134.6 million
for the quarter ended September 30, 2002 from $133.0 million for the quarter
ended September 30, 2001. Net sales of climbing products increased by $2.0
million, or 1.8%, to $115.5 million for the quarter ended September 30, 2002
from $113.5 million for the quarter ended September 30, 2001 which primarily
reflects modestly higher unit sales volumes. Net sales of extruded products of
$19.1 million for the quarter ended September 30, 2002 declined by $0.4 million,
or 2.1%, compared to the quarter ended September 30, 2001 which primarily
reflects continued softness of the markets served by this segment of the
Company's business.
Gross Profit. Gross profit improved by $5.0 million, or 11.7%, to $47.9
million for the quarter ended September 30, 2002 from $42.9 million for the
quarter ended September 30, 2001. Gross profit as a percentage of net sales in
the quarter ended September 30, 2002 improved to 35.6% from 32.2% for the
quarter ended September 30, 2001. The improved gross profit percentage primarily
reflects the impact of manufacturing productivity improvements and lower
aluminum and other material costs.
General and Administrative Expenses. General and administrative
expenses were $7.0 million for the quarter ended September 30, 2002 compared to
$6.4 million for the quarter ended September 30, 2001, an increase of $0.6
million or 8.9%. The increase is primarily due to higher depreciation related to
capitalized computer hardware and software.
Selling and Distribution Expenses. Selling and distribution expenses
increased by $1.2 million, or 5.7%, to $21.5 million for the quarter ended
September 30, 2002 compared to $20.3 million for the quarter ended September 30,
2001 primarily due to the impact of higher warehousing and distribution costs.
Operating Profit. Despite a modest improvement of $1.6 million in net
sales, operating profit improved by $3.3 million, or 20.3%, to $19.4 million for
the quarter ended September 30, 2002 from $16.1 million for the quarter ended
September 30, 2001. Operating profit of the Climbing Products segment increased
$2.8 million, or 17.6%, to $19.0 million in the third quarter of 2002. The
improvement in the profitability of climbing products reflects lower material
costs, manufacturing productivity improvements and other cost reduction
initiatives partially offset by higher general and administrative expenses and
higher selling and distribution expenses. The Extruded Products segment reported
an operating profit of $0.7 million for the quarter ended September 30, 2002
which was equal to operating profit of the third quarter of the prior year.
Operating profit was flat despite lower sales which reflects the impact of
improved manufacturing performance. Corporate and Other expenses declined by
$0.4 million for the quarter ended September 30, 2002 compared to the quarter
ended September 30, 2001 primarily due to reduced manufacturing consulting
expenses.
Other Income (Expense), Net. Other income for the quarter ended
September 30, 2002 was $0.5 million less than the same quarter of the prior
year. The decline in income is primarily due to the absence of interest that was
received in the third quarter of the prior year related to an overpayment of
income tax liabilities partially offset by lower costs associated with the
receivables purchase agreement resulting from lower utilization and lower
interest rates during the current quarter.
15
Interest Expense. Interest expense declined by $1.5 million to $5.3
million for the quarter ended September 30, 2002 from $6.8 million for the
quarter ended September 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 September 30, 2002 and 2001, and appropriately
provided for income taxes for the quarterly periods then ended. The effective
tax rate for the quarter ended September 30, 2002 is approximately 39% 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
September 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 $2.8 million to $8.8 million for the
quarter ended September 30, 2002 from net income of $6.0 million for the quarter
ended September 30, 2001 as a result of the factors described above.
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 2002 AS COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2001
Net Sales. Net sales were down $19.3 million, or 4.8%, to $382.2
million for the nine months ended September 30, 2002 from $401.5 million for the
nine months ended September 30, 2001. Net sales of climbing products decreased
by $15.7 million, or 4.6%, to $323.7 million for the nine months ended September
30, 2002 from $339.4 million for the nine months ended September 30, 2001. The
sales decline reflects lower unit sales volumes related primarily to a major
customer lowering its inventory levels primarily during the first quarter. Net
sales of extruded products of $58.5 million for the nine months ended September
30, 2002 declined by $3.6 million, or 5.8%, compared to the nine months ended
September 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 $6.7 million, or 5.7%, to $125.2
million for the nine months ended September 30, 2002 from $118.5 million for the
nine months ended September 30, 2001 despite lower net sales. Gross profit as a
percentage of net sales in the nine months ended September 30, 2002 improved to
32.8% from 29.5% for the nine months ended September 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 $21.4 million for the nine months ended September 30, 2002
compared to $17.6 million for the nine months ended September 30, 2001, an
increase of $3.8 million or 21.5%. 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 $2.2 million, or 12.4%,
in the current period. The increase reflects higher performance based
compensation and related expense accruals associated with improved profitability
and higher depreciation related to capitalized computer hardware and software
costs. These increases 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 $3.5 million, or 5.5%, to $59.6 million for the nine months ended
September 30, 2002 compared to $63.1 million for the nine months ended September
30, 2001 primarily reflecting the impact of lower unit sales volumes, changes in
customer mix and lower freight rates.
Operating Profit. Operating profit improved by $6.4 million, or 17.1%,
to $44.2 million for the nine months ended September 30, 2002 from $37.8 million
for the nine months ended September 30, 2001. Operating profit of the Climbing
Products segment increased $5.8 million, or 14.7%, to $45.2 million in the first
nine months of 2002
16
including 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 $7.1 million, or 18.0%, from $39.4
million in the first nine months of 2001. The improvement in the profitability
of climbing products reflects product mix improvements, lower material costs,
manufacturing productivity improvements and other cost reduction initiatives.
Operating income of the Extruded Products segment was $0.2 million for the nine
months ended September 30, 2002 compared to an operating profit of $1.4 million
for the nine months ended September 30, 2001. The decline in operating profit of
$1.2 million is primarily due to the decline in unit sales volumes and the
resulting lower absorption of fixed manufacturing costs in addition to increased
general and administrative expenses. Corporate and Other expenses declined by
$1.9 million for the nine months ended September 30, 2002 compared to the nine
months ended September 30, 2001 primarily due to reduced manufacturing
consulting expenses.
Other Income (Expense), Net. Net expense of $0.2 million for the nine
months ended September 30, 2002 was equal to net expense for the first nine
months of 2001. Expense declined in the current period 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 decline in expense in the
current period was offset by a loss on the disposal of an asset recorded in the
quarter ended March 31, 2002 and the absence of interest received in the third
quarter of the prior year related to an overpayment of income tax liabilities.
Interest Expense. Interest expense declined by $3.9 million to $16.3
million for the nine months ended September 30, 2002 from $20.2 million for the
nine months ended September 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 September 30, 2002 and 2001, and appropriately
provided for income taxes for the nine months then ended. The effective tax rate
for the nine months ended September 30, 2002 is approximately 38% compared to
40% for the first nine 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
September 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 $6.9 million to $17.3 million for
the nine months ended September 30, 2002 from net income of $10.4 million for
the nine months ended September 30, 2001 as a result of the factors described
above.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, the Company had $262.2 million of consolidated
indebtedness that includes $132.9 million of indebtedness (net of unamortized
original issue discount) pursuant to the $135 million principal of 10% Senior
Subordinated Notes due 2007 (the "Notes"); $122.5 million of Term Loans under
the Senior Credit Facility; and $6.8 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 September 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 September 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
September 30, 2002, the Company sold $78.6 million of accounts receivable in
exchange for $20.0 million in cash and an undivided
17
interest in the accounts receivable of $58.5 million. An additional $21.0
million of financing was available under the Receivables Purchase Agreement at
September 30, 2002.
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. The Company currently anticipates that
it will be able to extend or replace both of these facilities if it elects to do
so; however, 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 September 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 provided by operating activities were $24.3 million for
the nine months ended September 30, 2002 compared to $9.6 million provided by
operating activities for the nine months ended September 30, 2001. Cash flows
from operating activities were $14.7 million greater in the current period
largely due to reducing year-over-year inventory levels and reductions in cash
used for accounts receivable and other assets and liabilities. The increase in
cash flows from operating activities during the period was partially offset by
an increase in cash used for accounts payable and income taxes. Net cash used
for investing activities was $8.9 million for the nine months ended September
30, 2002 compared to $12.2 million for the nine months ended September 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 $16.6 million
for the nine months ended September 30, 2002 compared to $2.6 million for the
nine months ended September 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 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.
Recent declines in equity markets have had a negative impact on the
fair value of the Company's pension plan assets. In addition, interest rate
declines that have occurred during the year will result in an increased
valuation of pension liabilities as of December 31, 2002. As a result of
declining equity markets and interest rates,
18
the excess of the accumulated pension benefit obligation over the fair value of
plan assets for the Company's defined benefit pension plans is expected to
increase as of December 31, 2002 compared to the excess that existed at December
31, 2001. As required by Financial Accounting Standards Board (the "FASB")
Statement No. 87, Employers' Accounting for Pensions, additional pension
liabilities equal to the amount of the increase will be recorded as of December
31, 2002 and an offsetting reduction of shareholders' equity will be reflected
net of applicable income taxes. The amount of the adjustment to be recorded as
of December 31, 2002 will not impact the Company's results of operations or cash
flows for year ended December 31, 2002. Based on the current fair value of plan
assets and current interest rates, the anticipated charge to shareholders'
equity is expected to range from $6 million to $10 million. The reduction in
shareholders' equity to be recorded at December 31, 2002 is subject to changes
in market conditions during the remainder of the year and completion of an
actuarial valuation by the Company's independent actuaries.
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 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 ceased 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.
19
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 nine
months ended September 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.
ITEM 4. CONTROLS AND PROCEDURES
Within ninety days prior to the filing of this quarterly report, an
evaluation was performed under the supervision and with the participation of the
Company's management, including the President and Chief Executive Officer (the
"CEO") and the Vice President, Chief Financial Officer and Treasurer (the
"CFO"), of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were effective. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to the evaluation.
20
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 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.
(filed as Exhibit 3.4 to Issuer's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002 and incorporated
herein by reference).
(b) Reports on Form 8-K:
None.
21
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: November 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: November 13, 2002 /s/ LARRY V. FRIEND
--------------------------------------------
Larry V. Friend
Vice President, Chief Financial Officer and
Treasurer (Principal Financial Officer and
Principal Accounting Officer)
22
CERTIFICATIONS
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Dennis G. Heiner, the Chief Executive Officer of Werner Holding Co. (PA),
Inc. and Werner Holding Co. (DE), Inc. (the "Co-registrants"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the
Co-registrants;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Co-registrants as of, and for, the periods presented in this quarterly report;
4. The Co-registrants' other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Co-registrants and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Co-registrants, including
their consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the Co-registrants' disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Co-registrants' other certifying officer and I have disclosed, based
on our most recent evaluation, to the Co-registrants' auditors and the audit
committee of Co-registrants' board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Co-registrants'
ability to record, process, summarize, and report financial data
and have identified for the Co-registrants' auditors any material
weaknesses in internal controls;
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Co-registrants'
internal controls; and
6. The Co-registrants' other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
WERNER HOLDING CO. (PA), INC.
Date: November 13, 2002 /s/ DENNIS G. HEINER
------------------------------------------
Chief Executive Officer
WERNER HOLDING CO. (DE), INC.
Date: November 13, 2002 /s/ DENNIS G. HEINER
------------------------------------------
Chief Executive Officer
23
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Larry V. Friend, the Chief Financial Officer of Werner Holding Co. (PA), Inc.
and Werner Holding Co. (DE), Inc. (the "Co-registrants"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the
Co-registrants;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Co-registrants as of, and for, the periods presented in this quarterly report;
4. The Co-registrants' other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Co-registrants and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Co-registrants, including
their consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the Co-registrants' disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Co-registrants' other certifying officer and I have disclosed, based
on our most recent evaluation, to the Co-registrants' auditors and the audit
committee of Co-registrants' board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Co-registrants'
ability to record, process, summarize, and report financial data
and have identified for the Co-registrants' auditors any material
weaknesses in internal controls;
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Co-registrants'
internal controls; and
6. The Co-registrants' other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
WERNER HOLDING CO. (PA), INC.
Date: November 13, 2002 /s/ LARRY V. FRIEND
--------------------------------------
Chief Financial Officer
WERNER HOLDING CO. (DE), INC.
Date: November 13, 2002 /s/ LARRY V. FRIEND
--------------------------------------
Chief Financial Officer
24