Back to GetFilings.com
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, 2003
Commission File No. 333-46607-12
WERNER HOLDING CO. (PA), INC.
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 25-0906895
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
93 WERNER RD. 16125
GREENVILLE, PENNSYLVANIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(724) 588-2550
(CO-REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
Commission File No. 333-46607
WERNER HOLDING CO. (DE), INC.
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 25-1581345
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1105 NORTH MARKET ST., 19899
SUITE 1300 (ZIP CODE)
WILMINGTON, DELAWARE
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(302) 478-5723
(CO-REGISTRANT'S TELEPHONE 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. [X] Yes [ ] No
Indicate by check mark whether each of the Co-registrants is an accelerated
filer (as defined in Rule 12b-2 of the Act). [ ] Yes [X] No
Indicate the number of shares outstanding of each of the Co-registrants'
classes of common stock, as of September 30, 2003:
Werner Holding Co. (PA), Inc. 1,134.0315 shares of Class A Common Stock
13,137.9952 shares of Class B Common Stock
3,315.9002 shares of Class C Common Stock
603.3543 shares of Class D Common Stock
27,150.9299 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, 2003
PART I FINANCIAL INFORMATION
Item 1. Financial Statements of Werner Holding Co. (PA), Inc. and Subsidiaries (Unaudited)
Condensed Consolidated Balance Sheets -- September 30, 2003 and
December 31, 2002.................................................................... 1
Condensed Consolidated Statements of Income -- Three and Nine Months Ended
September 30, 2003 and 2002.......................................................... 2
Condensed Consolidated Statements of Changes in Shareholders'
Equity (Deficit) -- Nine Months Ended September 30, 2003 and 2002.................... 3
Condensed Consolidated Statements of Cash Flows -- Nine Months Ended
September 30, 2003 and 2002.......................................................... 5
Notes to Condensed Consolidated Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................... 30
Item 4. Controls and Procedures.................................................................. 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 31
Item 6. Exhibits and Reports on Form 8-K......................................................... 31
SIGNATURES ......................................................................................... 33
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
2003 2002
-------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 15,170 $ 43,161
Accounts receivable 59,871 54,219
Allowance for doubtful accounts (1,772) (1,800)
Prepaid income taxes -- 1,748
Inventories 60,604 52,530
Deferred income taxes 487 1,062
Other 2,498 1,598
--------- ---------
Total current assets 136,858 152,518
Property, plant and equipment, net 109,779 112,416
Other assets:
Deferred income taxes 19,261 18,521
Deferred financing fees, net 11,658 4,078
Other 17,359 10,710
--------- ---------
48,278 33,309
--------- ---------
TOTAL ASSETS $ 294,915 $ 298,243
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 17,413 $ 16,173
Accrued liabilities 41,125 33,655
Income taxes payable 2,543 --
Current maturities of long-term debt 15,607 27,622
--------- ---------
Total current liabilities 76,688 77,450
Long-term obligations:
Long-term debt 304,054 233,954
Reserve for product liability and workers' compensation claims 49,534 48,205
Other long-term obligations 41,382 40,959
--------- ---------
Total liabilities 471,658 400,568
Convertible preferred stock 61,240 --
Shareholders' deficit:
Common stock 1 1
Additional paid-in-capital 203,771 200,872
Accumulated deficit (280,329) (287,078)
Treasury stock, at cost (146,983) --
Accumulated other non-owner changes in equity (13,144) (13,694)
Notes receivable arising from stock loan plan (1,299) (2,426)
--------- ---------
Total shareholders' deficit (237,983) (102,325)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 294,915 $ 298,243
========= =========
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
---------------------------- ----------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ 136,779 $ 134,635 $ 372,570 $ 382,198
Cost of sales 84,598 86,738 239,378 256,953
--------- --------- --------- ---------
Gross profit 52,181 47,897 133,192 125,245
General and administrative expenses 8,506 7,012 21,800 21,383
Selling and distribution expenses 23,977 21,498 66,419 59,621
Recapitalization expense 81 -- 10,198 --
Manufacturing and distribution
optimization costs 1,127 -- 2,102 --
--------- --------- --------- ---------
Operating profit 18,490 19,387 32,673 44,241
Other income (expense), net 127 173 410 (188)
--------- --------- --------- ---------
Income before interest and taxes 18,617 19,560 33,083 44,053
Interest expense 6,068 5,278 18,645 16,282
--------- --------- --------- ---------
Income before income taxes 12,549 14,282 14,438 27,771
Income tax 4,777 5,503 5,414 10,431
--------- --------- --------- ---------
NET INCOME 7,772 8,779 9,024 17,340
Convertible preferred stock dividends
and accretion 3,017 -- 3,081 --
--------- --------- --------- ---------
NET INCOME ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ 4,755 $ 8,779 $ 5,943 $ 17,340
========= ========= ========= =========
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
OTHER TOTAL
ADDITIONAL NON-OWNER SHAREHOLDERS'
COMMON PAID-IN ACCUMULATED TREASURY EQUITY EQUITY
STOCK CAPITAL DEFICIT STOCK CHANGES OTHER (DEFICIT)
--------- --------- --------- --------- --------- --------- ---------
Balance at January 1, 2003 $ 1 $ 200,872 $(287,078) $ -- $ (13,694) $ (2,426) $(102,325)
Non-owner equity changes:
Net income 2,391 2,391
Derivative instruments-amounts
reclassified to income (net
of deferred tax of $89) (152) (152)
Change in fair value of
derivative commodity
instruments (net of deferred
tax of $4) 8 8
---------
Total non-owner equity
changes 2,247
Reduction in notes receivable
arising from stock loan plan 247 247
--------- --------- --------- --------- --------- --------- ---------
BALANCE AT MARCH 31, 2003 $ 1 $ 200,872 $(284,687) $ -- $ (13,838) $ (2,179) $ (99,831)
========= ========= ========= ========= ========= ========= =========
Non-owner equity changes:
Net loss (1,139) (1,139)
Derivative instruments-amounts
reclassified to income (net
of deferred tax of $108) (184) (184)
Change in fair value of
derivative commodity
instruments (net of deferred
tax of $258) 440 440
---------
Total non-owner equity
changes (883)
Redemption of common stock on
Recapitalization date (146,983) (146,983)
Costs related to redemption of
common stock (825) (825)
Repurchase of common stock (60) (60)
Accretion of convertible
preferred stock (64) (64)
Noncash compensation associated
with Recapitalization 4,590 4,590
Reduction in notes receivable
arising from stock loan plan 880 880
--------- --------- --------- --------- --------- --------- ---------
BALANCE AT JUNE 30, 2003 $ 1 $ 204,513 $(285,826) $(146,983) $ (13,582) $ (1,299) $(243,176)
========= ========= ========= ========= ========= ========= =========
Non-owner equity changes:
Net income 7,772 7,772
Derivative instruments-amounts
reclassified to income (net
of deferred tax of $82) 140 140
Change in fair value of
derivative commodity
instruments (net of
deferred tax of $175) 298 298
---------
Total non-owner equity
changes 8,210
Convertible preferred stock
dividends (2,275) (2,275)
Accretion of convertible
preferred stock (742) (742)
--------- --------- --------- --------- --------- --------- ---------
BALANCE AT SEPTEMBER 30, 2003 $ 1 $ 203,771 $(280,329) $(146,983) $ (13,144) $ (1,299) $(237,983)
========= ========= ========= ========= ========= ========= =========
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
OTHER TOTAL
ADDITIONAL NON-OWNER SHAREHOLDERS'
COMMON PAID-IN ACCUMULATED EQUITY EQUITY
STOCK CAPITAL DEFICIT CHANGES OTHER (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)
========= ========= ========= ========= ========= =========
Non-owner equity changes:
Net income 10,088 10,088
Derivative instruments-amounts reclassified
to income (net of deferred tax of $143) 243 243
Change in fair value of derivative commodity
instruments (net of deferred tax of $311) 529 529
Adjustment to minimum pension liability
(net of deferred tax of $3,930) (6,693) (6,693)
---------
Total non-owner equity changes 4,167
Notes receivable arising from stock loan
plan (112) (112)
Issuance of common stock 150 150
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 2002 $ 1 $ 200,872 $(287,078) $ (13,694) $ (2,426) $(102,325)
========= ========= ========= ========= ========= =========
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
----------------------------------
2003 2002
--------- ---------
OPERATING ACTIVITIES
Net income $ 9,024 $ 17,340
Reconciliation of net income to net cash provided by operating activities:
Noncash stock compensation charge associated with Recapitalization 4,590 --
Other Recapitalization expenses 5,607 --
Depreciation 9,566 8,763
Amortization of deferred financing fees and original issue discount 4,165 2,203
Amortization of deferred costs 3,521 2,771
Provision for losses on accounts receivable (24) 450
Provision for product liability and workers' compensation claims 9,513 10,826
Payment of product liability and workers' compensation claims (8,184) (5,871)
Deferred income taxes (487) (3,031)
Loss on disposition of property, plant and equipment 343 310
Changes in operating assets and liabilities:
Accounts receivable (5,652) (907)
Prepaid income taxes 1,748 1,501
Inventories (8,074) (5,805)
Accounts payable 1,240 (1,949)
Income taxes payable 2,543 1,533
Other assets and liabilities, net (2,352) (3,844)
--------- ---------
Net cash provided by operating activities 27,087 24,290
INVESTING ACTIVITIES
Capital expenditures (6,879) (9,090)
Proceeds from liquidation of investments 43 183
--------- ---------
Net cash used by investing activities (6,836) (8,907)
FINANCING ACTIVITIES
Issuance of convertible preferred stock 65,000 --
Costs related to issuance of convertible preferred stock (6,841) --
Issuance of long-term debt at Recapitalization 180,000 --
Payment of deferred financing fees (11,441) --
Redemption of common stock at Recapitalization (146,983) --
Costs related to redemption of common stock (825) --
Repayments of long-term debt at Recapitalization (115,421) --
Payment of other Recapitalization expenses (5,607) --
Issuance of common stock -- 157
Repurchase of common stock (60) (453)
Repayments of long-term debt prior to Recapitalization (6,992) (16,403)
Repayments of long-term debt after Recapitalization (199) --
Repayment of notes receivable arising from stock loan plan 1,127 140
--------- ---------
Net cash used by financing activities (48,242) (16,559)
--------- ---------
Net decrease in cash and cash equivalents (27,991) (1,176)
Cash and cash equivalents at beginning of period 43,161 30,473
--------- ---------
Cash and cash equivalents at end of period $ 15,170 $ 29,297
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Capital lease obligations incurred $ 394 $ 937
Issuance of common stock in exchange for notes receivable arising
from stock loan plan $ -- $ 473
Cancellation of notes receivable arising from stock loan plan in connection
with repurchase of common stock $ (15) $ (402)
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 EXCEPT PER SHARE AMOUNTS)
A. BASIS OF PRESENTATION AND RECENTLY ISSUED ACCOUNTING STANDARDS
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, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. 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.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 143, Accounting for Asset Retirement Obligations, which 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 effective as of January 1, 2003 did not have a material impact
on 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. The
adoption of Statement No. 145 effective as of January 1, 2003 did not have a
material impact on the Company's 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 applies to all exit or disposal activities initiated on or
after January 1, 2003. The adoption of Statement No. 146 impacted the timing of
liability recognition associated with such activities (see Note L).
6
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The interpretation elaborates on the
disclosures to be made in interim and annual financial statements about
obligations under certain guarantees. It also requires the recognition of a
liability at the inception of a guarantee equal to the fair value of the
obligation undertaken in issuing the guarantee. The disclosure requirements are
effective for financial statements of interim and annual periods ending after
December 15, 2002 (see Note H). The initial measurement and recognition
provisions are required to be applied on a prospective basis to guarantees
issued or modified effective as of January 1, 2003. The adoption of the
requirements of the interpretation did not have a material impact on the
Company's results of operations, financial position or cash flows.
In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, which amended Statement
No. 123, Accounting for Stock-Based Compensation. The new standard provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. Additionally, the
statement amends the disclosure requirements of Statement No. 123 to require
prominent disclosures in the annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. This statement is effective for financial
statements for fiscal years ending after December 15, 2002. In compliance with
Statement No. 148, the Company elected to continue to apply the intrinsic value
method in accounting for its stock-based employee compensation arrangement as
defined by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employee, and has provided the applicable disclosures in Note K.
In April 2003, the FASB issued Statement No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement No. 133. This Statement is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. The adoption of Statement No. 149 did not have a material impact on
the Company's results of operations, financial position or cash flows.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. The
Statement changes the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. The new Statement
requires that those instruments be classified as liabilities in statements of
financial position. Most of the guidance in Statement 150 is effective for all
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. Effective during the quarter ended June 30, 2003, the Company
classified its newly issued Convertible Preferred Stock (see Note C) consistent
with the provisions of Statement No. 150.
B. RECAPITALIZATION
On June 11, 2003, the previously announced recapitalization of the Company
(the "Recapitalization") was completed. On May 7, 2003, The Company entered into
a Recapitalization and Stock Purchase Agreement (the "Recapitalization
Agreement") with Green Equity Investors III, L.P. ("GEI"), an affiliate of
Leonard Green & Partners L.P. ("Leonard Green"), and certain shareholders of the
Company. Pursuant to the Recapitalization Agreement (i) GEI invested $65,000 in
the Company in exchange for 65,000 shares of Series A Preferred Stock (see Note
C), (ii) the Company redeemed 39.66% of its outstanding shares of capital stock
for payments totaling $146,983 and (iii) the Company made certain other payments
including $3,017 to the holders of options to purchase the Company's Class C
Common Stock in consideration for the cancellation of certain of their vested
options (collectively, the "Recapitalization"). The Series A Preferred Stock
represents approximately 22% of the outstanding voting shares of capital stock
as of the date of the Recapitalization. The Recapitalization was accounted for
as a leveraged recapitalization at historical cost principally due to the fact
that less than 80% of the voting securities were acquired.
7
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
As part of the Recapitalization, the Company entered into a new $230,000
credit facility (see Note E) with a syndicate of banks consisting of a $180,000
Term Loan and a $50,000 Revolving Credit Facility. The Revolving Credit facility
was not utilized on the date of the Recapitalization. The Company used $115,421
to repay in full its existing senior credit facility which was terminated as of
the date of the Recapitalization.
Additional sources of cash to complete the Recapitalization included the
Company's Receivables Purchase Agreement, existing cash on-hand and employee
stock loan repayments related to the capital stock redeemed. The following is a
summary of the sources and uses of cash resulting from, and in connection with,
the Recapitalization:
SOURCES OF CASH:
Term Loan proceeds $180,000
Issuance of convertible preferred stock 65,000
Additional borrowings under Receivables Purchase Agreement 20,000
Existing cash 20,916
Employee repayment of stock loans 1,202
--------
TOTAL $287,118
========
USES OF CASH:
Redemption of common stock $146,983
Repay existing term loans 115,421
Payments in connection with stock option cancellations 3,017
Costs associated with Recapitalization 21,697
--------
TOTAL $287,118
========
Costs associated with the Recapitalization include $4,050 to obtain the
consent of holders of the Company's 10% Notes (see Note E), a one-time Leonard
Green equity commitment fee of $2,500, transaction bonuses of $1,725 paid to
certain officers and employees of the Company, a $1,000 credit refinance
advisory services fee paid to INVESTCORP S.A. ("Investcorp") and other fees
primarily related to investment banking, legal and accounting services and other
associated costs totaling $12,422.
Recapitalization expense reflected on the income statement totals $10,198
and includes a noncash compensation charge of $4,590 associated with the
accelerated vesting of stock options (see Note K), payments totaling $3,017 in
connection with stock option cancellations, transaction bonus payments totaling
$1,725 and other miscellaneous costs totaling $866.
C. CONVERTIBLE PREFERRED STOCK
Ranking and Liquidation Preference
The $65,000 of Series A Preferred Stock issued in connection with the
Recapitalization ranks senior to all outstanding classes of common stock of the
Company with respect to dividends and as to distributions upon the liquidation,
winding-up and dissolution of the Company. Each share will have an initial
liquidation preference of $1,000 and the holders thereof will be entitled to
receive dividends thereon at an annual rate equal to 14%, payable quarterly,
from the date the Series A Preferred Stock is first issued until December 31,
2008. The dividends may be paid in cash or, at the election of the Company, in
lieu of cash by increasing the liquidation preference by the amount of unpaid
dividends. The Company's debt covenants prohibit the payment of cash dividends
(see Note E).
8
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Preferred Dividends
On September 30, 2003, a quarterly preferred dividend in the amount of
$2,275 was paid and, in lieu of a cash dividend payment, the liquidation
preference of the Series A Preferred Stock was increased by the amount of the
dividend. The dividend was recorded by reducing retained earnings and increasing
the balance of convertible preferred stock. The dividend, which increased the
liquidation preference of preferred stock to $67,275, is presented as an
adjustment to arrive at net income attributable to common shareholders in the
consolidated statements of income.
Conversion into Common Stock
Holders of the Series A Preferred Stock will be able to convert all or any
of the shares of the Series A Preferred Stock into shares of Class F Common
Stock of the Company, at any time or from time to time, at a conversion rate
equal to the liquidation preference divided by $4,929.66 (such multiple, the
"Conversion Rate"). If dividends are unpaid at the election of the Company, the
Conversion Rate will increase by 14% per year, compounded quarterly from the
date of issue through the third anniversary. Therefore, over time (but in any
event not beyond the third anniversary of the date issued), each share of Series
A Preferred Stock will be convertible into a greater number of shares of Class F
Common Stock. If all of the Series A Preferred shares had been converted as of
September 30, 2003, 13,647 shares of Class F Common Stock would have been
issued.
Redemption
Each holder of Series A Preferred Stock will have the right to require the
Company to redeem, in whole or in part, such holder's shares if certain events
occur (the "Put Events"). Put Events include a change of control, the sale of
all or substantially all the assets of the Company, or an initial public
offering (each as specifically defined by the Recapitalization Agreement). On or
after January 1, 2007 and prior to December 31, 2008, any or all holders of
Series A Preferred Stock may elect to have their shares redeemed, in whole or in
part, (the "Elective Put"). The redemption pricing for the Put Events and the
Elective Put will be 130.8% of the liquidation preference if the event giving
rise to the redemption right occurs prior to the first anniversary of the date
issued or, if the event giving rise to the redemption right occurs on or after
the first anniversary of the date issued, at a redemption price equal to 112% in
2004, 110% in 2005, 108% in 2006 and, 106% in 2007 and thereafter.
Preferred Stock Accretion
As a result of the Elective Put discussed above, the Series A Preferred
Stock will have a redemption value equal to 106% of the liquidation preference
effective on January 1, 2007. At the date of issuance, the preferred stock was
recorded net of associated issuance costs of $6,841. The recorded value of the
preferred stock will be accreted to its fair value through December 31, 2006
using the effective interest method. The accretion of preferred stock is
subtracted from net income in calculating net income attributable to common
shareholders for purposes of presenting the consolidated statements of income.
Voting Rights
The holders of Series A Preferred Stock will be entitled to vote on all
matters which the holders of common stock of the Company are entitled to vote,
and will be accorded such number of votes per share of Series A Preferred Stock
as the number of common shares then issuable upon such share's conversion.
As long as any shares of Series A Preferred Stock remain outstanding, the
Company will not amend its charter so as to affect adversely the special rights,
powers, preferences, privileges or voting rights of the Series A Preferred Stock
without the consent of the holders of at least a majority of the then
outstanding shares of Series A Preferred Stock.
9
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
D. SHAREHOLDERS' EQUITY
Shareholder Agreement
At closing of the Recapitalization, the Company, Investcorp and certain
affiliates (the "Investcorp Investors"), GEI (with its affiliates, the "GEI
Investors"), and certain members of the Werner and Solot families (the "Family
Shareholders") entered into an amended and restated shareholder agreement (the
"Shareholder Agreement") to provide, among other things, that the Board of
Directors of the Company will consist of nine members initially, consisting of
not less than four designated by the Investcorp Investors, two designated by the
Family Shareholders and two designated by the GEI Investors, with the ninth
director being the Company's Chief Executive Officer. On June 11, 2006, the GEI
Investors will have the right to designate a third member to the Board of
Directors, bringing the total at such time to ten directors. The right of the
Investcorp Investors, the Family Shareholders or the GEI Investors to appoint
directors under the Shareholder Agreement will terminate as to any such group if
it ceases to own at least 50% of the aggregate equity position that it owned
immediately after the closing of the Recapitalization.
Other Agreements
In connection with the Recapitalization, the Company's agreement for
management and consulting services with Investcorp International, Inc. ("III")
was amended to provide consulting services through November 24, 2007. The
amended agreement provides for the Company to pay III an annual fee of $1,500
for the annual period ending November 24, 2003 and $1,000 for each annual period
thereafter. The agreement will terminate on the earlier of November 24, 2007,
the date on which III ceases to own at least 50% of the aggregate equity of the
Company or on the date of an initial public offering, as defined.
The Company entered into a management and consulting agreement with
Leonard Green in connection with the Recapitalization. The agreement provides
for the Company to pay Leonard Green $455 for services for the period through
November 23, 2003 and $1,000 for each annual period thereafter through November
25, 2008. The agreement will terminate on the earlier of November 25, 2008, the
date on which Leonard Green ceases to own at least 50% of the Company's Series A
Preferred Stock (including any shares of common stock issued upon conversion) or
on the date of an initial public offering, as defined.
10
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
E. DEBT
As part of the Recapitalization (see Note B), the Company entered into a
new $230,000 senior credit facility with a syndicate of banks consisting of a
$180,000 Term Loan and a $50,000 Revolving Credit Facility. The new Senior
Credit Facility will mature in May 2007 in the event the Company's existing 10%
Senior Subordinated Notes maturing November 15, 2007 (the "Notes") are not
refinanced or extended by May 2007. Otherwise, if the Notes are refinanced or
extended by May 2007, the maturity date of the Senior Credit Facility will be
the earlier of (i) six months prior to the new maturity date of the Notes and
(ii) (A) for the Revolving Credit Facility, June 11, 2008 and (B) for the Term
Loan, December 31, 2009. A summary of debt outstanding is as follows:
SEPTEMBER 30 DECEMBER 31
2003 2002
-------- --------
Senior Credit Term Loans repaid on June 11, 2003 $122,197
Senior Credit Term Loan issued June 11, 2003 $180,000
Senior Subordinated Notes, due 2007, net of unamortized
original issue discount of $1,702 in 2003 and $2,007 in 2002 133,298 132,993
Variable Rate Demand Industrial Building Revenue Bonds,
due 2015 5,000 5,000
Capital lease obligations 1,363 1,386
-------- --------
Total debt 319,661 261,576
Less current maturities 15,607 27,622
-------- --------
DEBT CLASSIFIED AS LONG-TERM $304,054 $233,954
======== ========
Senior Credit Facility
Subject to refinancing or extension of the Notes as discussed above, the
$180,000 Term Loan is payable in aggregate principal amounts of $7,500 in 2003,
$17,500 in 2004, $22,500 in 2005, $27,500 in 2006, $32,500 in 2007, $45,000 in
2008 and $27,500 in 2009. Borrowings under the Senior Credit Facility bear
interest at alternative floating rate structures at management's option (3.87%
at September 30, 2003) and are collateralized by the capital stock of each of
the Company's subsidiaries and substantially all the assets of the Company and
its subsidiaries, except for Werner Funding Corporation.
The Company is entitled to draw amounts under the Revolving Credit
Facility for general corporate purposes and working capital requirements. The
availability under the $50,000 Revolving Credit Facility, under which no amount
was outstanding as of September 30, 2003, is reduced by amounts issued under a
letter of credit subfacility which totals $22,851 at September 30, 2003. An
annual commitment fee of 0.50% is paid on the average daily unused amount of the
Revolving Credit Facility.
Deferred financing fees totaling $7,165 were incurred in connection with
obtaining the new Senior Credit Facility. These costs will be deferred and
amortized over the life of the facility using the effective interest method. The
remaining unamortized deferred financing fees totaling $2,356 associated with
the credit facility terminated on the date of the Recapitalization were expensed
in June 2003.
The Notes
In connection with the Recapitalization, consent fees totaling $4,050 were
paid to the holders of the Notes and certain other costs totaling $226 were
incurred in connection with the modification of the Indenture to permit the
redemption of common stock on the date of the Recapitalization. These fees and
costs have been deferred and will be amortized over the remaining life of the
Notes using the effective interest method.
11
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Covenants
The Senior Credit Facility 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
cash dividends. The financial covenants of the Senior Credit Facility require
the Company to meet specific interest coverage, maximum leverage, and capital
expenditure requirements.
F. SHIPPING AND HANDLING FEES AND EXPENSES
Pursuant to the FASB'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 statement of
income. Shipping and handling costs represent costs associated with shipping
products to customers and handling finished goods. Shipping and handling costs
of $14,439 and $12,510 are included in the caption entitled, "Selling and
distribution expenses" in the condensed consolidated statements of income for
the three months ended September 30, 2003 and 2002, respectively, and $40,940
and $34,985 are included for the nine months ended September 30, 2003 and 2002,
respectively.
G. INVENTORIES
Components of inventories are as follows:
SEPTEMBER 30 DECEMBER 31
2003 2002
------- -------
Finished goods $36,193 $33,525
Work-in-process 13,668 11,770
Raw materials and supplies 20,539 17,085
------- -------
70,400 62,380
Less excess of cost over LIFO stated values 9,796 9,850
------- -------
NET INVENTORIES $60,604 $52,530
======= =======
12
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
H. 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.
Letters of credit are issued to guarantee the Company's performance under
certain contractual obligations. A letter of credit in the amount of $17,492 has
been issued to an insurance company to guarantee the payment of certain claims
under the Company's product liability and workers' compensation programs.
Repayment of principal plus certain accrued interest of the Company's
outstanding Variable Rate Demand Industrial Building Revenue Bonds is guaranteed
by a letter of credit in the amount of $5,109. Other letters of credit have been
issued totaling $250. Letters of credit, which have a term of one year or less,
total $22,851 at September 30, 2003. Management believes the likelihood of
demand for payment under these instruments is minimal and expects no material
cash outlays to occur in connection with these instruments.
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 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. On November 10, 2003, the Company and the
individual defendants entered into a settlement agreement with the plaintiffs in
this action. In exchange for the dismissal with prejudice of the lawsuit and the
full release of claims, the plaintiffs will receive 100 shares of Class B common
stock to be issued by the Company and 100 shares of Class B common stock to be
transferred to the plaintiffs by the individual defendants. The Company has
received a waiver of certain provisions of the Shareholder Agreement which is
necessary in order to issue the shares of stock to the plaintiffs.
13
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
I. 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, 2003 and 2002 are as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------------- ----------------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
NET SALES
Climbing Products $ 119,766 $ 115,531 $ 320,485 $ 323,691
Extruded Products 17,013 19,104 52,085 58,507
--------- --------- --------- ---------
$ 136,779 $ 134,635 $ 372,570 $ 382,198
========= ========= ========= =========
OPERATING PROFIT (LOSS)
Climbing Products $ 18,689 $ 18,950 $ 43,755 $ 45,175
Extruded Products 982 688 1,770 204
Corporate and Other (1,181) (251) (12,852) (1,138)
--------- --------- --------- ---------
$ 18,490 $ 19,387 $ 32,673 $ 44,241
========= ========= ========= =========
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 Corporate and Other for the three and nine months ended September 30, 2003
includes Recapitalization expenses of $81 and $10,198, respectively (see Note
B).
Operating profit (loss) for the three and nine months ended September 30,
2003 for the Climbing Products segment includes $910 and $1,885, respectively,
of costs related to manufacturing and distribution optimization and $934 and
$1,729, respectively, of associated startup and realignment costs. For the
Extruded Products segment, operating profit (loss) for both the three and nine
months ended September 30, 2003 includes $217 of costs related to manufacturing
and distribution optimization and $236 of associated startup and realignment
costs (see Note L).
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.
14
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
J. 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, 2003 and December 31, 2002, the
Company had sold, on a recurring basis, $88,181 and $78,765 of accounts
receivable in exchange for $25,000 and $20,000 in cash and an undivided interest
in accounts receivable of $63,102 and $58,704, 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."
K. STOCK-BASED COMPENSATION
The Company measures stock-based compensation costs associated with its
Stock Option Plan using the intrinsic value method of accounting pursuant to
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations. Had compensation costs for stock options
been determined using the fair market value method of FASB Statement No. 123,
Accounting for Stock-Based Compensation, the effect on net income would have
been as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
2003 2002 2003 2002
------- ------- ------- -------
Net income, as reported $ 7,772 $ 8,779 $ 9,024 $17,340
Less total stock-based employee
compensation costs determined
using fair value method, net of
related tax effects -- 100 103 293
------- ------- ------- -------
PRO FORMA NET INCOME $ 7,772 $ 8,679 $ 8,921 $17,047
======= ======= ======= =======
In connection with the Recapitalization (see Note B) the Company
accelerated the vesting of 2,368 options, paid option holders $3,017 in
consideration for the cancellation of 1,235 vested options and cancelled the
remaining 3,007 issued and outstanding unvested options. A noncash compensation
charge totaling $4,590 associated with the accelerated vesting was recorded
effective on the date of the Recapitalization. The charge was determined based
on the excess of the fair value of the Company's common stock on the date of the
Recapitalization compared to the exercise price of the options. Pro forma
compensation costs are zero for periods subsequent to March 31, 2003 because all
such costs have been recorded as expense in the consolidated statement of income
as a result of recording the noncash compensation charge of $4,590. At September
30, 2003, options outstanding total 1,863 all of which are vested.
15
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
L. MANUFACTURING AND DISTRIBUTION OPTIMIZATION COSTS
The Company's strategic plan includes several initiatives intended to
optimize its manufacturing and distribution operations to improve productivity
and reduce costs. During the second quarter of 2003, the Company commenced the
first phase of the optimization plan and transferred all ladder fabrication and
assembly operations in Greenville, Pennsylvania to other lower cost Company
facilities. The Company also began an initiative during the second quarter to
focus the Greenville facility on the Extruded Products segment of the Company's
business. During the third quarter of 2003, the Company began manufacturing
ladder components and accessories at a leased facility in Mexico. In addition,
the Company announced on October 23, 2003 that it will close its manufacturing
facility located in Carrollton, Kentucky. Additional Phase One initiatives have
not yet been implemented. The Company currently anticipates that the total
expense associated with Phase One of the optimization plan will approximate
$8,000 and is expected to be completed in 2004.
The costs incurred during the three and nine months ended September 30,
2003 relating to the optimization plan consist of the following:
Costs Incurred During
---------------------------------------------
Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003
------------------ ------------------
Facility and other exit costs $ 332 $ 960
Employee severance and termination benefits 597 833
Other associated costs 198 309
------ ------
Recorded as Manufacturing and distribution optimization costs 1,127 2,102
Startup and realignment costs included in:
Cost of sales 1,132 1,852
Selling and distribution expenses 38 113
------ ------
Total costs relating to optimization of manufacturing
and distribution $2,297 $4,067
====== ======
A reconciliation of the beginning and ending liability balances showing
the manufacturing and distribution optimization costs incurred and charged to
expense, and related amounts paid or otherwise settled during the three and nine
months ended September 30, 2003 is as follows:
Liability Liability
Balance at Costs Costs Balance at
June 30, 2003 Incurred Settled September 30, 2003
------------- -------- ------- ------------------
Facility and other exit costs $ -- $ 332 $ 332 $ --
Employee severance and
termination benefits 122 597 719 --
Other associated costs 10 198 198 10
------ ------ ------ ------
$ 132 $1,127 $1,249 $ 10
====== ====== ====== ======
Liability Liability
Balance at Costs Costs Balance at
March 31, 2003 Incurred Settled September 30, 2003
-------------- -------- ------- ------------------
Facility and other exit costs $ -- $ 960 $ 960 $ --
Employee severance and
termination benefits -- 833 833 --
Other associated costs -- 309 299 10
------ ------ ------ ------
$ -- $2,102 $2,092 $ 10
====== ====== ====== ======
16
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
M. 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.
17
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(DOLLARS IN THOUSANDS)
M. SUPPLEMENTAL GUARANTOR INFORMATION--CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
-------------------------------------------------------------------------------------
COMBINED NON-
PARENT GUARANTOR GUARANTOR
COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ---------- ------------ ------------
SEPTEMBER 30, 2003
ASSETS
Current assets:
Accounts receivable $ -- $ -- $ -- $ 59,871 $ -- $ 59,871
Inventories, net -- -- 60,604 -- -- 60,604
Other current assets 59 151 16,005 168 -- 16,383
--------- --------- --------- --------- --------- ---------
Total current assets 59 151 76,609 60,039 -- 136,858
Property, plant and equipment, net -- 1 109,778 -- -- 109,779
Investment in subsidiaries (191,167) (113,985) 7,672 -- 297,480 --
Other assets -- 10,745 37,529 4 -- 48,278
--------- --------- --------- --------- --------- ---------
TOTAL ASSETS $(191,108) $(103,088) $ 231,588 $ 60,043 $ 297,480 $ 294,915
========= ========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Other current liabilities $ (807) $ 23,639 $ 53,971 $ (115) $ -- $ 76,688
Intercompany payable (receivable) (13,558) (233,858) 194,930 52,486 -- --
--------- --------- --------- --------- --------- ---------
Total current liabilities (14,365) (210,219) 248,901 52,371 -- 76,688
Long-term debt -- 298,298 5,756 -- -- 304,054
Other long-term liabilities -- -- 90,916 -- -- 90,916
Convertible preferred stock 61,240 -- -- -- -- 61,240
Total equity (deficit) (237,983) (191,167) (113,985) 7,672 297,480 (237,983)
--------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES AND EQUITY
(DEFICIT) $(191,108) $(103,088) $ 231,588 $ 60,043 $ 297,480 $ 294,915
========= ========= ========= ========= ========= =========
DECEMBER 31, 2002
ASSETS
Current assets:
Accounts receivable $ -- $ -- $ -- $ 54,219 $ -- $ 54,219
Inventories, net -- -- 52,530 -- -- 52,530
Other current assets 127 280 45,356 6 -- 45,769
--------- --------- --------- --------- --------- ---------
Total current assets 127 280 97,886 54,225 -- 152,518
Property, plant and equipment, net -- 1 112,415 -- -- 112,416
Investment in subsidiaries (114,826) (87,728) 7,656 -- 194,898 --
Other assets -- 5 33,294 10 -- 33,309
--------- --------- --------- --------- --------- ---------
TOTAL ASSETS $(114,699) $ (87,442) $ 251,251 $ 54,235 $ 194,898 $ 298,243
========= ========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Other current liabilities $ (899) $ 32,344 $ 46,186 $ (181) $ -- $ 77,450
Intercompany payable (receivable) (11,475) (233,049) 197,764 46,760 -- --
--------- --------- --------- --------- --------- ---------
Total current liabilities (12,374) (200,705) 243,950 46,579 -- 77,450
Long-term debt -- 228,089 5,865 -- -- 233,954
Other long-term liabilities -- -- 89,164 -- -- 89,164
Total equity (deficit) (102,325) (114,826) (87,728) 7,656 194,898 (102,325)
--------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES AND EQUITY
(DEFICIT) $(114,699) $ (87,442) $ 251,251 $ 54,235 $ 194,898 $ 298,243
========= ========= ========= ========= ========= =========
18
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(DOLLARS IN THOUSANDS)
M. 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, 2003
Net sales $ -- $ -- $ 372,570 $ -- $ -- $ 372,570
Cost of sales -- -- 239,378 -- -- 239,378
--------- --------- --------- --------- --------- ---------
Gross profit -- -- 133,192 -- -- 133,192
Selling, general and administrative
expenses -- 11 88,208 -- -- 88,219
Recapitalization expense -- -- 10,198 -- -- 10,198
Manufacturing and distribution
optimization costs -- -- 2,102 -- -- 2,102
--------- --------- --------- --------- --------- ---------
Operating (loss) profit -- (11) 32,684 -- -- 32,673
Other income (expense), net 8,675 10,825 (1,279) 1,965 (19,776) 410
Interest income (expense) 655 (3,609) (13,750) (1,941) -- (18,645)
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes
(benefit) 9,330 7,205 17,655 24 (19,776) 14,438
Income taxes (benefit) 306 (1,387) 6,487 8 -- 5,414
--------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 9,024 $ 8,592 $ 11,168 $ 16 $ (19,776) $ 9,024
========= ========= ========= ========= ========= =========
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2003
Net sales $ -- $ -- $ 136,779 $ -- $ -- $ 136,779
Cost of sales -- -- 84,598 -- -- 84,598
--------- --------- --------- --------- --------- ---------
Gross profit -- -- 52,181 -- -- 52,181
Selling, general and administrative
expenses -- 4 32,479 -- -- 32,483
Recapitalization expense -- -- 81 -- -- 81
Manufacturing and distribution
optimization costs -- -- 1,127 -- -- 1,127
--------- --------- --------- --------- --------- ---------
Operating (loss) profit -- (4) 18,494 -- -- 18,490
Other income (expense), net 7,640 8,927 (405) 716 (16,751) 127
Interest income (expense) 239 (2,073) (3,640) (594) -- (6,068)
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes
(benefit) 7,879 6,850 14,449 122 (16,751) 12,549
Income taxes (benefit) 107 (770) 5,398 42 -- 4,777
--------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 7,772 $ 7,620 $ 9,051 $ 80 $ (16,751) $ 7,772
========= ========= ========= ========= ========= =========
19
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(DOLLARS IN THOUSANDS)
M. 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
========= ========= ========= ========= ========= =========
20
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(DOLLARS IN THOUSANDS)
M. 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, 2003
Net cash from operating activities $ 5,182 $ 560 $ 21,346 $ (1) $ 27,087
Net cash from investing activities (2,083) (766) (3,987) -- (6,836)
Net cash from financing activities (3,099) 206 (45,349) -- (48,242)
-------- -------- -------- -------- --------
Net increase (decrease) in cash
and cash equivalents -- -- (27,990) (1) (27,991)
Cash and cash equivalents at
beginning of period -- 1 43,158 2 43,161
-------- -------- -------- -------- --------
Cash and cash equivalents at
end of period $ -- $ 1 $ 15,168 $ 1 $ 15,170
======== ======== ======== ======== ========
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
======== ======== ======== ======== ========
21
WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--CONTINUED
(DOLLARS IN THOUSANDS)
N. SUBSEQUENT EVENT
As previously reported, the Company has been informed by its largest
customer, Home Depot, that it will no longer purchase aluminum and fiberglass
stepladders from the Company. Home Depot has opted to purchase these products
directly from China. Stepladder sales to Home Depot in year 2002 and the first
nine months of 2003 represented 16% and 12%, respectively, of the Company's
total net sales. The Company is also participating in an extension ladder
supplier line review with Home Depot that has not yet been completed. This line
review process has several potential outcomes, which include losing or gaining
additional business. Management is unable to make any forward-looking statements
or estimates as to potential outcomes of the line review at this time.
22
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.
RECENT DEVELOPMENTS
Update of Customer Status. As previously reported, the Company has been
informed by its largest customer, Home Depot, that it will no longer purchase
aluminum and fiberglass stepladders from the Company effective during the fourth
quarter of 2003. Home Depot has opted to purchase these products directly from
China. Stepladder sales to Home Depot in the year 2002 and the first nine months
of 2003 represented 16% and 12%, respectively, of the Company's total net sales.
The Company is also included in an extension ladder line review with Home Depot
that began in late October. This line review process has several potential
outcomes, which include losing or gaining additional business. The Company has
not yet been informed by Home Depot about the outcome of the line review
process. Management is currently evaluating other initiatives to increase sales,
restructure operations and re-engineer its selling, general and administrative
functions to offset the effects of the lost sales volume at Home Depot. Such
initiatives may include accelerating implementation of Phase Two of the
Company's strategic plans to optimize manufacturing and distribution operations
to reduce costs.
The Recapitalization. On June 11, 2003, the previously announced
Recapitalization of the Company was completed. On May 7, 2003, the Company
entered into a Recapitalization Agreement with Green Equity Investors III, L.P.
("GEI"), an affiliate of Leonard Green & Partners L.P. ("Leonard Green"), and
certain shareholders of the Company. Pursuant to the Recapitalization Agreement
(i) GEI invested $65.0 million in the Company in exchange for 65,000 shares of
newly issued convertible preferred stock, (ii) the Company redeemed 39.66% of
its outstanding shares of capital stock for payments totaling $147.0 million and
(iii) the Company made certain other payments including $3.0 million to the
holders of options to purchase the Company's capital stock in consideration for
the cancellation of certain of their vested options (collectively, the
"Recapitalization"). The convertible preferred shares represent approximately
22% of the outstanding voting shares of capital stock as of the date of the
Recapitalization.
As part of the Recapitalization, the Company entered into a new $230
million senior credit facility with a syndicate of banks consisting of a $180
million Term Loan and a $50 million Revolving Credit Facility. The Revolving
Credit facility was not utilized on the date of the Recapitalization. The
Company paid $115.4 million to repay in full its existing senior credit facility
which was terminated as of the date of the Recapitalization.
The Recapitalization was accounted for as a leveraged recapitalization at
historical cost principally due to the fact that less than 80% of the voting
securities were acquired.
Strategic Initiatives. As previously disclosed, the Company transferred
all ladder fabrication and assembly operations in Greenville, Pennsylvania to
other lower cost Company facilities beginning in the second quarter of 2003. The
Company also began an initiative to focus the Greenville facility on the
Extruded Products segment of the Company's business.
During the third quarter of 2003, the Company began manufacturing ladder
components and accessories at a leased facility located in Mexico and expects to
further expand its manufacturing activities in Mexico in the future.
On October 23, 2003, the Company announced that it will close its
manufacturing facility located in Carrollton, Kentucky where it manufactures
wood stepladders and attic ladders, due to the declining demand for
23
wood stepladders. Wood stepladder sales were approximately 1% of the Company's
net sales for the nine months ended September 30, 2003. Production at the
facility is expected to cease by mid-2004. The Company will continue to serve
its wood stepladder customers by outsourcing production to a third party. Wood
attic ladders will continue to be manufactured by the Company at one of its
other manufacturing facilities.
RESULTS OF OPERATIONS
Regulation G, "Conditions for Use of Non-GAAP Financial Measures", and
other provisions of the Securities Exchange Act of 1934, as amended, define and
prescribe the conditions for use of certain financial information that is not in
accordance with generally accepted accounting principles ("GAAP"). EBITDA and
Adjusted EBITDA presented below are financial measures which are neither
calculated nor presented in accordance with GAAP. EBITDA represents earnings
before interest, income taxes, depreciation and amortization. Adjusted EBITDA
represents EBITDA adjusted to exclude certain costs or transactions considered
by management not to be indicative of the on-going operating performance of the
Company. EBITDA and Adjusted EBITDA are presented below because they are
measures commonly used by some investors to analyze a company's performance and
to determine a company's ability to service and/or incur debt. These non-GAAP
financial measures should be considered in addition to, not as a substitute for,
the Company's net income or cash flows as well as other measures of financial
performance in accordance with accounting principles generally accepted in the
United States.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
2003 2002 2003 2002
----- ----- ----- -----
(DOLLARS IN MILLIONS)
NET INCOME $ 7.7 $ 8.7 $ 9.0 $17.3
Interest expense 6.0 5.3 18.6 16.3
Income tax expense 4.8 5.5 5.4 10.4
Depreciation and amortization expense 4.8 4.2 13.1 11.5
Accounts receivable securitization expense 0.1 0.2 0.5 0.5
----- ----- ----- -----
EBITDA 23.4 23.9 46.6 56.0
Recapitalization expense 0.1 -- 10.2 --
Manufacturing and distribution
optimization costs 1.1 -- 2.1 --
Startup and realignment costs included in:
Cost of sales 1.2 -- 1.9 --
Selling and distribution expenses -- -- 0.1 --
Severance cost associated with separation
of a former executive officer -- -- -- 1.6
----- ----- ----- -----
ADJUSTED EBITDA $25.8 $23.9 $60.9 $57.6
===== ===== ===== =====
QUARTER ENDED SEPTEMBER 30, 2003 AS COMPARED TO QUARTER ENDED SEPTEMBER
30, 2002
Net Sales. Net sales increased by $2.2 million, or 1.6%, to $136.8 million
for the quarter ended September 30, 2003 from $134.6 million for the quarter
ended September 30, 2002. Net sales of climbing products increased by $4.3
million, or 3.7%, to $119.8 million for the quarter ended September 30, 2003
from $115.5 million for the quarter ended September 30, 2002. The sales increase
primarily reflects an improvement in product mix mostly due to higher unit sales
of fiberglass ladders and aluminum extension ladders which more than offset the
impact of lower unit sales of aluminum stepladders at the Company's largest
customer. Net sales of extruded products of $17.0 million for the quarter ended
September 30, 2003 declined by $2.1 million, or 10.9%, compared to the quarter
ended September 30, 2002 primarily reflecting lower unit sales volumes due to
the continued softness in the markets served by this segment of the Company's
business.
24
Gross Profit. Gross profit improved by $4.3 million, or 8.9%, to $52.2
million for the quarter ended September 30, 2003 from $47.9 million for the
quarter ended September 30, 2002. Gross profit as a percentage of net sales in
the quarter ended September 30, 2003 improved to 38.1% from 35.6% for the
quarter ended September 30, 2002. The higher gross profit margin is due to the
realignment of ladder fabrication and assembly operations in Greenville,
Pennsylvania to lower cost facilities and improvements in the mix of products
sold as well as on-going manufacturing productivity improvements and other
manufacturing cost reduction initiatives. Cost of sales for the current quarter
also includes costs of $1.1 million primarily related to manufacturing
inefficiencies associated with the start-up and realignment of ladder
fabrication and assembly operations that was initiated in the second quarter of
2003.
General and Administrative Expenses. General and administrative expenses
were $8.5 million for the quarter ended September 30, 2003 compared to $7.0
million for the quarter ended September 30, 2002, an increase of $1.5 million.
The increase is primarily due to increases in legal, professional, management
advisory and consulting expenses (related, in part, to new product development),
pension expense and depreciation related to capitalized computer hardware and
software costs. Pension expense increased in the current quarter due to lower
than expected returns on plan investments and a decrease in the discount rate
used to value pension liabilities.
Selling and Distribution Expenses. Selling and distribution expenses
increased by $2.5 million to $24.0 million for the quarter ended September 30,
2003 compared to $21.5 million for the quarter ended September 30, 2002
primarily reflecting higher shipping and handling expenses to support supply
chain initiatives to continue reducing cycle times and improving order fill
rates.
Manufacturing and Distribution Optimization Costs. Beginning in the second
quarter of 2003, the Company transferred all ladder fabrication and assembly
operations in Greenville, Pennsylvania to other lower cost Company facilities.
The Company also began an initiative to focus the Greenville facility on the
Extruded Products segment of the Company's business. During the third quarter,
the Company began manufacturing component parts and accessories at a leased
facility in Mexico. The total costs incurred during the third quarter relating
to the optimization of the Company's manufacturing and distribution operations
were $2.3 million which includes $1.1 million recorded in Cost of sales and $0.1
million in Selling and distribution expenses.
Operating Profit. Operating profit declined by $0.9 million to $18.5
million for the quarter ended September 30, 2003 from $19.4 million for the
quarter ended September 30, 2002 primarily due to the recognition of $2.3
million of costs relating to the Company's plan to optimize its manufacturing
and distribution operations. If the impact of optimization costs is removed,
operating profit would have been $20.8 million in the quarter which is $1.4
million, or 7.2%, more than operating profit for the quarter ended September 30,
2002.
Operating profit of the Climbing Products segment declined $0.3 million to
$18.7 million for the quarter ended September 30, 2003. If the impact of
optimization costs totaling $1.8 million is removed, operating profit would have
been $20.5 million which is $1.5 million, or 8.4%, more than operating profit
for the third quarter of the prior year. The increase primarily reflects the
improvement in gross profit partially offset by higher selling and distribution
expenses.
Operating profit of the Extruded Products segment improved by $0.3 million
to $1.0 million for the quarter ended September 30, 2003. If the impact of
optimization costs totaling $0.5 million is removed, operating profit would have
been $1.5 million which is $0.8 million more than operating profit for the third
quarter of the prior year. The improvement in operating profit of $0.8 million
is primarily due to improvements in the profitability of the segment's sales mix
which more than offset the effects of lower aluminum extrusion production
volumes.
Corporate and Other expenses increased by $0.9 million for the quarter
ended September 30, 2003 compared to the quarter ended September 30, 2002
primarily due to higher legal and professional expenses and higher management
advisory and consulting fees.
Other Income (Expense), Net. Other income (expense) was net income of $0.1
million for the quarter ended September 30, 2003, a decrease in income of $0.1
million compared to the third quarter of 2002.
25
Interest Expense. Interest expense increased by $0.8 million to $6.1
million for the quarter ended September 30, 2003 from $5.3 million for the
quarter ended September 30, 2002. The increase is primarily due to higher debt
levels in the current quarter.
Income Tax (Benefit). In accordance with APB Opinion 28, at the end of
each interim period the Company makes its best estimate of the annual effective
tax rate expected to be applicable for the full fiscal year. The rate so
determined is used in providing for income taxes on a current year-to-date
basis. The effective tax rate includes 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. The effective tax rate for the quarter ended September 30, 2003 is
approximately 38% compared to 39% for the third quarter of the prior year. The
difference between the statutory and effective tax rates at both September 30,
2003 and 2002 was primarily due to state taxes (net of federal benefit).
Net Income. Net income was $7.8 million for the quarter ended September
30, 2003 which is $1.0 million less than net income of $8.8 million for the
quarter ended September 30, 2002 as a result of all the above factors.
NINE MONTHS ENDED SEPTEMBER 30, 2003 AS COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2002
Net Sales. Net sales were down $9.6 million, or 2.5%, to $372.6 million
for the nine months ended September 30, 2003 from $382.2 million for the nine
months ended September 30, 2002. Net sales of climbing products decreased by
$3.2 million, or 1.0%, to $320.5 million for the nine months ended September 30,
2003 from $323.7 million for the first nine months of the prior year. The sales
decline primarily reflects lower unit sales volumes of aluminum and wood
stepladders offset, for the most part, by higher sales of fiberglass ladders.
Net sales of extruded products of $52.1 million for the nine months ended
September 30, 2003 declined by $6.4 million, or 11.0%, compared to the nine
months ended September 30, 2002 primarily reflecting lower unit sales volumes
due to the continued softness in the markets served by this segment of the
Company's business.
Gross Profit. Despite lower sales, gross profit improved by $8.0 million,
or 6.3%, to $133.2 million for the nine months ended September 30, 2003 from
$125.2 million for the nine months ended September 30, 2002. Gross profit as a
percentage of net sales in the nine months ended September 30, 2003 improved to
35.7% from 32.8% for the first nine months of 2002. The higher gross profit
margin is largely due to the realignment of ladder fabrication and assembly
operations in Greenville, Pennsylvania to lower cost facilities as well as
on-going manufacturing productivity improvements and other manufacturing cost
reduction initiatives. An improvement in the profitability of the product mix
also contributed to the higher gross profit margin. These improvements more than
offset the effects of lower aluminum extrusion production volumes. Cost of sales
for the current period includes costs of $1.9 million primarily related to
manufacturing inefficiencies associated with the start-up and realignment of
ladder fabrication and assembly operations that was initiated in the second
quarter of 2003.
General and Administrative Expenses. General and administrative expenses
were $21.8 million for the nine months ended September 30, 2003 compared to
$21.4 million for the nine months ended September 30, 2002, an increase of $0.4
million or 2.0%. Expenses of the first nine months of the prior year include
severance cost of $1.6 million associated with the separation of a former
executive officer. Excluding this one-time severance cost, general and
administrative expenses were $2.0 million higher in the current period than the
prior year period due to higher pension expense, higher management advisory and
consulting fees, higher legal and professional expenses (related, in part, to
new product development) and higher depreciation related to capitalized computer
hardware and software costs. Pension expense increased in the current period due
to lower than expected returns on plan investments and a decrease in the
discount rate used to value pension liabilities. These increases in expense in
the current period were partially offset by a lower provision for performance
based incentive compensation.
Selling and Distribution Expenses. Selling and distribution expenses
increased by $6.8 million, or 11.4%, to $66.4 million for the nine months ended
September 30, 2003 compared to $59.6 million for the nine months ended September
30, 2002 primarily reflecting higher shipping and handling expenses to support
supply chain initiatives to continue reducing cycle times and improving order
fill rates. These cost increases more than offset the impact of lower unit sales
volumes.
26
Recapitalization Expense. Recapitalization expense for the nine months
ended September 30, 2003 totals $10.2 million and includes a noncash
compensation charge of $4.6 million associated with the accelerated vesting of
stock options in connection with the Recapitalization. Recapitalization expense
also includes a compensation charge of $3.0 million related to cancellation
payments for certain vested options, transaction bonus payments totaling $1.7
million paid to certain officers and employees of the Company and, other
professional fees and miscellaneous expenses totaling $0.9 million.
Manufacturing and Distribution Optimization Costs. Beginning in the second
quarter of 2003, the Company transferred all ladder fabrication and assembly
operations in Greenville, Pennsylvania to other lower cost Company facilities.
The Company also began an initiative to focus the Greenville facility on the
Extruded Products segment of the Company's business. During the third quarter,
the Company began manufacturing component parts and accessories at a leased
facility in Mexico. The total costs incurred during the first nine months of
2003 relating to the optimization of the Company's manufacturing and
distribution operations were $4.1 million which includes $1.9 million recorded
in Cost of sales and $0.1 million in Selling and distribution expenses.
Operating Profit. Operating profit declined by $11.5 million to $32.7
million for the nine months ended September 30, 2003 from $44.2 million for the
nine months ended September 30, 2002 primarily due to the recognition of $10.2
million of Recapitalization expense and $4.1 million of costs related to the
Company's plan to optimize its manufacturing and distribution operations. If the
impact of the Recapitalization expense and optimization costs is removed, in
addition to removal of the prior year impact of the one-time severance cost of
$1.6 million associated with the separation of a former executive officer,
operating profit would have been $47.0 million in the current period which is
$1.2 million, or 2.4%, more than the prior year period.
Operating profit of the Climbing Products segment decreased $1.4 million
to $43.7 million in the first nine months of 2003. If the impact of optimization
costs totaling $3.6 million is removed, in addition to removal of the prior year
impact of a one-time severance cost allocation of $1.3 million, operating profit
of the Climbing Products segment would have increased by $0.9 million, or 1.9%,
to $47.3 million in the current period compared to the first nine months of
2002. The increase primarily reflects the improvement in gross profit which more
than offset the negative impact of higher selling and distribution expenses.
Operating profit of the Extruded Products segment was $1.8 million for the
nine months ended September 30, 2003 compared to $0.2 million for the nine
months ended September 30, 2002. If the impact of optimization costs totaling
$0.5 million is removed, operating profit would have been $2.3 million which is
$2.1 million more than operating profit for the prior year period. The
improvement in operating profit of $2.1 million is primarily due to improvements
in the profitability of the segment's sales mix and lower allocated severance
costs more than offsetting the effects of lower aluminum extrusion production
volumes.
Corporate and Other expenses increased by $11.7 million for the nine
months ended September 30, 2003 compared to the nine months ended September 30,
2002 primarily due to Recapitalization expense of $10.2 million recorded in the
current period in addition to higher legal and professional expenses, and higher
management advisory and consulting fees.
Other Income (Expense), Net. Other income (expense) was net income of $0.4
million for the nine months ended September 30, 2003, an increase in income of
$0.6 million compared to the first nine months 2002. The expense last year
included a charge recorded in the first quarter of 2002 relating to the loss on
disposal of an asset of $0.3 million.
Interest Expense. Interest expense increased by $2.3 million to $18.6
million for the nine months ended September 30, 2003 from $16.3 million for the
nine months ended September 30, 2002. The increase is primarily due to the
recognition of $2.4 million of unamortized deferred financing fees in the
current period which was associated with the senior credit facility that was
repaid and terminated effective on the date of the Recapitalization. In
addition, the first quarter of 2002 included a charge of $0.4 million related to
the accelerated amortization of deferred financing fees as a result of a
voluntary repayment of debt that occurred in March 2002. After removing the
impact of accelerating the recognition of unamortized deferred financing fees,
interest expense is $0.3 million greater in the current period primarily due to
the higher average debt levels in the current period resulting from the
Recapitalization.
27
Income Tax (Benefit). In accordance with APB Opinion 28, at
the end of each interim period the Company makes its best estimate of the annual
effective tax rate expected to be applicable for the full fiscal year. The rate
so determined is used in providing for income taxes on a current year-to-date
basis. The effective tax rate includes 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. The effective tax rate for the nine months ended September 30, 2003 is
approximately 37% compared to 38% for the prior year period. The lower effective
tax rate in the current period is primarily due to lower state taxes. The
difference between the statutory and effective tax rates at both September 30,
2003 and 2002 was primarily due to state taxes (net of federal benefit).
Net Income. Net income declined by $8.3 million to $9.0 million for the
nine months ended September 30, 2003 from net income of $17.3 million for the
nine months ended September 30, 2002 as a result of all the above factors.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources were significantly impacted
as a result of the Recapitalization that occurred on June 11, 2003. Total
long-term debt and related current maturities increased by $58.1 million to
$319.7 million as of September 30, 2003 compared to the amounts at December 31,
2002. Other significant changes in capital resources and liquidity in connection
with the Recapitalization are summarized in the following sources and uses of
cash (in millions of dollars):
SOURCES OF CASH:
Term Loan proceeds $180.0
Issuance of convertible preferred stock 65.0
Additional borrowings under Receivables Purchase Agreement 20.0
Existing cash 20.9
Employee repayment of stock loans 1.2
------
TOTAL $287.1
======
USES OF CASH:
Redemption of common stock $147.0
Repay existing term loans 115.4
Payments in connection with stock option cancellations 3.0
Costs associated with Recapitalization 21.7
------
TOTAL $287.1
======
The balance of long-term debt and current maturities which totals $319.7
million at September 30, 2003 includes $133.3 million of Senior Subordinated
Notes reflected net of unamortized original issue discount; $180.0 million
related to a Term Loan issued on the date of the Recapitalization under the new
Senior Credit Facility; and $6.4 million of other debt. The new Senior Credit
Facility provides for the Term Loan and a $50 million Revolving Facility of
which $27.1 million was available for borrowing at September 30, 2003. The
available borrowings under the Revolving Facility are reduced by amounts issued
under a letter of credit subfacility which totals $22.9 million at September 30,
2003.
The Company maintains a Receivables Purchase Agreement with a financial
institution and its affiliate which originally was to expire in May 2003.
Effective in May 2003, the Company and the financial institution agreed to
extend the Receivables Purchase Agreement for a period of three years, subject
to the approval of annual renewals by both the Company and the financial
institution. 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, 2003, the Company sold $88.2 million
of accounts receivable in exchange for $25.0 million in cash and an undivided
interest in the accounts receivable of $63.1 million. An additional $25.0
million of financing was available under the Receivables Purchase Agreement at
September 30, 2003. In October 2003, the
28
Company reduced the utilization of the facility to $20.0 million which increased
the availability under the facility to $30.0 million.
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 Senior Credit Facility 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
cash dividends. The financial covenants of the Senior Credit Facility require
the Company to meet specific interest coverage, maximum leverage, and capital
expenditure requirements. The Company is in compliance with all of its debt
covenants as of September 30, 2003. The previously-described loss of the
stepladder business at the Company's largest customer will adversely impact
future sales and earnings. The outcome of the extension ladder line review
process currently in progress at Home Depot could also impact future sales and
earnings. The Company anticipates that it will continue to comply with its debt
covenants for the next twelve months; 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 provided by operating activities was $27.1 million for the nine
months ended September 30, 2003 compared to $24.3 million for the nine months
ended September 30, 2002. The increase is primarily due to net proceeds of $5.0
million from the sale of accounts receivable under the Receivables Purchase
Agreement during the current period and reductions in cash used for accounts
payable, deferred income taxes and other assets and liabilities. However, more
cash was used in the current period to increase year-over-year accounts
receivable and inventories. In addition, $3.6 million less cash was generated in
the current period due to lower product liability and workers' compensation
noncash expense provisions and higher claims payments in the current period
compared to the prior year period. Net cash used for investing activities was
$6.8 million for the nine months ended September 30, 2003 compared to $8.9
million for the prior year period which primarily reflects lower capital
expenditures during the current period. Net cash used for financing activities
was $48.2 million for the nine months ended September 30, 2003 compared to net
cash used of $16.6 million for the prior year period. As previously described,
financing activities for the first nine months of 2003 reflects transactions
that occurred on the date of the Recapitalization including proceeds from
issuance of convertible preferred stock of $65.0 million, Term Loan proceeds of
$180.0 million, payments of $147.0 million to redeem common stock, repayment of
debt totaling $115.4 million and other payments totaling $24.7 million which
includes payments of $3.0 million in connection with stock option cancellations.
Debt repayments for the first nine months of the prior year include a
voluntarily repayment of $15 million.
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.
29
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.
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 operations in foreign countries subject to
material foreign currency exchange risk. International sales were not material
to the Company's operations for the nine months ended September 30, 2003. 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 because its foreign currency exchange risk is minimal.
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.
30
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.
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 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. On November 10, 2003, the Company and the
individual defendants entered into a settlement agreement with the plaintiffs in
this action. In exchange for the dismissal with prejudice of the lawsuit and the
full release of claims, the plaintiffs will receive 100 shares of Class B common
stock to be issued by the Company and 100 shares of Class B common stock to be
transferred to the plaintiffs by the individual defendants. The Company has
received a waiver of certain provisions of the Shareholder Agreement which is
necessary in order to issue the shares of stock to the plaintiffs.
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 Articles of Amendment of the Amended and Restated Articles of
Incorporation 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, 2003 and incorporated herein by reference).
3.5 Werner Holding Co. (PA), Inc. Statement With Respect to the Powers,
Preferences and Relative, Optional and Other Special Rights of
Series A Participating Convertible Preferred Stock and
Qualifications, Limitations and Restrictions Thereof (filed as
Exhibit 3.5 to Issuer's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003 and incorporated herein by reference).
3.6 Amended and Restated By-laws of Werner Holding Co. (PA), Inc. (filed
as Exhibit 3.6 to Issuer's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003 and incorporated herein by reference).
32.1 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.
32.2 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.
31
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8K dated October 17, 2003
reporting the current status of the Company's business relationship with
its largest customer, Home Depot, under Item 12. Results of Operations and
Financial Condition.
32
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 12, 2003 /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 12, 2003 /s/ LARRY V. FRIEND
-----------------------------------------
Larry V. Friend
Vice President, Chief Financial Officer
and Treasurer (Principal Financial
Officer and Principal Accounting Officer)
33