10-Q 1 l89651ae10-q.txt WERNER HOLDINGS CO\PA-DE 10-Q/QTR END 6-30-01 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTERLY PERIOD ENDED JUNE 30, 2001 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. Yes |X| No |_| Indicate the number of shares outstanding of each of the Co-registrants' classes of common stock, as of June 30, 2001: Werner Holding Co. (PA), Inc. 1,879.5454 shares of Class A Common Stock 21,774.9346 shares of Class B Common Stock 5,618.7790 shares of Class C Common Stock 1,000 shares of Class D Common Stock 45,000 shares of Class E Common Stock Werner Holding Co. (DE), Inc. 1,000 shares of Common Stock 2 INDEX WERNER HOLDING CO. (PA), INC. WERNER HOLDING CO. (DE), INC. FORM 10-Q PERIOD ENDED JUNE 30, 2001 PART I FINANCIAL INFORMATION Item 1. Financial Statements of Werner Holding Co. (PA), Inc. and Subsidiaries (Unaudited) Condensed Consolidated Balance Sheets--June 30, 2001 and December 31, 2000.................................................................... 1 Condensed Consolidated Statements of Income--Three and Six Months Ended June 30, 2001 and 2000............................................................... 2 Condensed Consolidated Statements of Changes in Shareholders' Equity (Deficit)--Three and Six Months Ended June 30, 2001 and 2000................... 3 Condensed Consolidated Statements of Cash Flows--Six Months Ended June 2001 and 2000................................................................... 5 Notes to Condensed Consolidated Financial Statements................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of Werner Holding Co. (PA), Inc. and Subsidiaries.......................................................................... 15 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................... 20 PART II OTHER INFORMATION Item 1. Legal Proceedings........................................................................ 21 Item 4. Submission of Matters to a Vote of Security Holders...................................... 21 Item 6. Exhibits and Reports on Form 8-K......................................................... 21 SIGNATURES ......................................................................................... 22
The financial statements included herein are that of Werner Holding Co. (PA), Inc. ("Holding (PA)"). The Co-registrants are Holding (PA) and Werner Holding Co. (DE), Inc. (the "Issuer"), which is a wholly-owned subsidiary of Holding (PA). Holding (PA) has no substantial operations or assets other than its investment in the Issuer. The consolidated financial condition and results of operations of Holding (PA) are substantially the same as those of the Issuer. As used herein and except as the context otherwise may require, the "Company" or "Werner" means, collectively, Holding (PA), the Issuer and all of their consolidated subsidiaries. 3 PART I - FINANCIAL INFORMATION ITEM 1. WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
JUNE 30 DECEMBER 31 2001 2000 ----------------------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 184 $ 5,518 Undivided interest in accounts receivable 65,283 58,332 Allowance for doubtful accounts (1,879) (1,816) Refundable income taxes - 2,033 Inventories 66,682 60,619 Deferred income taxes 1,332 1,583 Other 1,630 1,349 ----------------------------------------------------------------------------------------------- Total current assets 133,232 127,618 Property, plant and equipment, net 108,833 102,904 Other assets: Deferred income taxes 13,785 12,112 Deferred financing fees, net 8,031 9,185 Other 14,078 18,055 ----------------------------------------------------------------------------------------------- 35,894 39,352 ----------------------------------------------------------------------------------------------- TOTAL ASSETS $ 277,959 $ 269,874 =============================================================================================== LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accounts payable $ 30,250 $ 23,302 Accrued liabilities 33,923 40,973 Income taxes payable 715 - Current maturities of long-term debt 1,844 2,123 ----------------------------------------------------------------------------------------------- Total current liabilities 66,732 66,398 Long-term obligations: Long-term debt 276,044 277,344 Reserve for product liability and workers' compensation claims 43,042 37,995 Other long-term obligations 19,723 19,393 ----------------------------------------------------------------------------------------------- Total liabilities 405,541 401,130 Shareholders' deficit: Common stock 1 1 Additional paid-in-capital 201,137 201,272 Accumulated deficit (325,618) (330,061) Accumulated other non-owner changes in equity (649) - Notes receivable arising from stock loan plan (2,453) (2,468) ----------------------------------------------------------------------------------------------- Total shareholders' deficit (127,582) (131,256) ----------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 277,959 $ 269,874 ===============================================================================================
See notes to unaudited condensed consolidated financial statements. 1 4 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 -------------------------------------------------------- 2001 2000 2001 2000 -------------------------------------------------------- Net sales $ 143,927 $ 146,876 $ 268,504 $ 281,833 Cost of sales 103,576 103,251 192,928 200,092 ----------------------------------------------------------------------------------------------- Gross profit 40,351 43,625 75,576 81,741 General and administrative expenses 4,977 7,032 11,153 14,724 Selling and distribution expenses 22,207 22,128 42,778 43,139 Plant shutdown costs - 1,400 - 1,400 ------------------------------------------------------------------------------------------------ Operating profit 13,167 13,065 21,645 22,478 Other income (expense), net (850) (238) (868) 52 ------------------------------------------------------------------------------------------------ Income before interest and taxes 12,317 12,827 20,777 22,530 Interest expense 6,626 6,934 13,369 13,879 ------------------------------------------------------------------------------------------------ Income before income taxes 5,691 5,893 7,408 8,651 Income taxes 2,279 2,270 2,965 3,383 ------------------------------------------------------------------------------------------------ NET INCOME $ 3,412 $ 3,623 $ 4,443 $ 5,268 ================================================================================================
See notes to unaudited condensed consolidated financial statements. 2 5 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED) (DOLLARS IN THOUSANDS)
ACCUMULATED TOTAL ADDITIONAL OTHER NON- SHAREHOLDERS' COMMON PAID-IN ACCUMULATED OWNER EQUITY EQUITY STOCK CAPITAL DEFICIT CHANGES OTHER (DEFICIT) -------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 2001 $ 1 $ 201,272 $ (330,061) $ - $(2,468) $ (131,256) Non-owner equity changes: Net income 1,031 1,031 Cumulative effect of accounting change for derivatives (net of deferred tax of $69) (118) (118) Change in fair value of derivative commodity instruments (net of deferred tax of $291) (497) (497) ---------------- Total non-owner equity changes 416 Repurchase of common stock (61) (61) Reduction in notes receivable arising from stock loan plan 15 15 ------------------------------------------------------------------------------------------------------------------------ BALANCE AT MARCH 31, 2001 $ 1 $ 201,211 $ (329,030) $ (615) $(2,453) $ (130,886) ========================================================================================================================= Non-owner equity changes: Net income 3,412 3,412 Change in fair value of derivative commodity instruments (net of deferred tax of $21) (34) (34) ---------------- Total non-owner equity changes 3,378 Notes receivable arising from stock loan plan (18) (18) Repurchase of common stock (74) (74) Reduction in notes receivable arising from stock loan plan 18 18 ------------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 2001 $ 1 $ 201,137 $ (325,618) $ (649) $(2,453) $ (127,582) =========================================================================================================================
See notes to unaudited condensed consolidated financial statements. 3 6 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED) (DOLLARS IN THOUSANDS)
ACCUMULATED ADDITIONAL OTHER NON- TOTAL COMMON PAID-IN ACCUMULATED OWNER EQUITY SHAREHOLDERS' STOCK CAPITAL DEFICIT CHANGES OTHER EQUITY (DEFICIT) --------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 2000 $ 1 $ 198,786 $ (341,718) $ (260) $ (685) $ (143,876) Non-owner equity changes: Net income 1,645 1,645 ---------------- Total non-owner equity changes 1,645 Notes receivable arising from stock loan plan, net (1,624) (1,624) Repurchase of common stock (611) (611) Issuance of common stock 2,172 2,172 -------------------------------------------------------------------------------------------------------------------------- BALANCE AT MARCH 31, 2000 $ 1 $ 200,958 $ (340,684) $ (260) $(2,309) $ (142,294) ========================================================================================================================= Non-owner equity changes: Net income 3,623 3,623 ---------------- Total non-owner equity changes 3,623 Notes receivable arising from stock loan plan (635) (635) Issuance of common stock 847 847 -------------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 2000 $ 1 $ 201,805 $ (337,061) $ (260) $(2,944) $ (138,459) ========================================================================================================================= Non-owner equity changes: Net income 3,622 3,622 ---------------- Total non-owner equity changes 3,622 Reduction in notes receivable arising from stock loan plan 477 477 Repurchase of common stock (533) (533) -------------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 2000 $ 1 $ 201,272 $ (333,439) $ (260) $(2,467) $ (134,893) ========================================================================================================================= Non-owner equity changes: Net income 3,378 3,378 Adjustment to minimum pension liability (net of deferred tax of $152) 260 260 ---------------- Total non-owner equity changes 3,638 Notes receivable arising from stock loan plan (1) (1) -------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2000 $ 1 $ 201,272 $ (330,061) $ - $(2,468) $ (131,256) =========================================================================================================================
See notes to unaudited condensed consolidated financial statements. 4 7 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30 ---------------------------- 2001 2000 ---------------------------- OPERATING ACTIVITIES Net income $ 4,443 $ 5,268 Reconciliation of net income to net cash provided by operating activities: Depreciation 4,724 4,239 Amortization of deferred financing fees and original issue discount 1,356 1,345 Amortization of deferred costs 1,599 1,769 Provision for plant shutdown costs - 1,400 Provision for losses on accounts receivable 300 400 Provision for product liability and workers' compensation claims 7,920 7,424 Payment of product liability and workers' compensation claims (2,873) (1,656) Deferred income taxes (1,422) (1,432) Impairment of investments 303 - Changes in operating assets and liabilities: Undivided interest in accounts receivable (6,951) 5,530 Refundable income taxes 2,033 697 Inventories (6,063) (2,262) Accounts payable 3,967 (2,828) Income taxes payable 715 2,101 Other assets and liabilities, net (8,607) (4,111) --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,444 17,884 INVESTING ACTIVITIES Capital expenditures (10,411) (16,073) Proceeds from sale of investment 2,096 - Other, net 457 97 --------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (7,858) (15,976) FINANCING ACTIVITIES Repayment of notes receivable arising from stock loan plan - 56 Issuance of common stock 7 704 Repurchase of common stock (127) (611) Increase (decrease) in cash overdrafts 2,981 (903) Repayments of long-term debt (1,781) (725) --------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 1,080 (1,479) --------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (5,334) 429 Cash and cash equivalents at beginning of period 5,518 866 --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 184 $ 1,295 =============================================================================================================== SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: Issuance of common stock in exchange for notes receivable arising from stock loan plan $ 18 $ 2,315 =============================================================================================================== Cancellation of notes receivable arising from stock loan plan in connection with repurchase of common stock $ (33) $ - ===============================================================================================================
See notes to unaudited condensed consolidated financial statements. 5 8 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS) 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 six months ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. For further information, refer to the consolidated financial statements and notes thereto included in the Company's most recent Annual Report on Form 10-K. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the consolidated financial statements and notes. Actual results could differ from those estimates. Certain amounts for 2000 have been reclassified to conform to the 2001 interim period presentation. Recently Issued Accounting Standards Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 (SFAS No. 133), Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and No. 138. The fair value of all outstanding derivatives is now recorded on the balance sheet. The adoption of SFAS No. 133 resulted in a net of tax transition loss of $118 recorded by the Company effective on January 1, 2001 as a cumulative-effect adjustment to accumulated other comprehensive income to recognize the fair value of all derivatives. Derivatives are held as part of a formal risk management policy and are held for purposes other than trading. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis. The ineffective portions, which were not material in the six months ended June 30, 2001, are included in the Company's results of operations in the period in which the ineffectiveness occurs. If the hedging relationship ceases to be highly effective or it becomes probable that an expected transaction will no longer occur, gains or losses on the derivative are included in the Company's results of operations. The amount of such gains or losses was immaterial in the six months ended June 30, 2001. The Company's derivatives consist of aluminum futures and options contracts that are designated either as fair value or cash flow hedges. The Company utilizes aluminum commodity futures and option contracts to hedge the market risk of changing prices associated with customer firm order commitments and a certain percentage of its forecasted sales. Generally, these contracts cover exposures of one year or less. Futures contracts obligate the Company to make or receive a payment equal to the net change in value of the contract at its maturity. In the case of option contracts, the Company creates a price risk tolerance range (referred to as a "collar") by purchasing call option contracts and selling put option contracts with a minimal net initial investment. Price movement inside the collar is not protected by the derivatives, whereas, price movement outside the collar or strike price provides either a financial gain or loss (depending upon price movement) if the option is exercised. 6 9 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED (DOLLARS IN THOUSANDS) A. BASIS OF PRESENTATION AND RECENTLY ISSUED ACCOUNTING STANDARDS - CONTINUED Such contracts are designated as hedges, correspond to the commitment or forecasted sales period, and are effective in hedging the Company's exposure to changes in aluminum prices during that cycle. Changes in the fair value of derivatives are recorded in results of operations or in other comprehensive income, depending on whether a derivative is designated as a fair value or cash flow hedge. For cash flow hedges, the effective portion of the change in fair value is recorded in other comprehensive income and is reclassified to the results of operations in the period in which earnings are impacted by the hedged item or in the period that the transaction no longer qualifies as a cash flow hedge. No derivative initially designated as a cash flow hedge ceased to qualify as a cash flow hedge during the six months ended June 30, 2001. As of June 30, 2001, all of the $649 net of tax loss recognized in other comprehensive income is expected to be recognized in the Company's results of operations over the next twelve months. In September 2000, the Financial Accounting Standards Board (the "FASB") issued Statement No. 140, a replacement of Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Statement No. 140, which is effective for transactions occurring after March 31, 2001, did not have a significant impact on the Company's results of operations, financial position or cash flows. In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires that all business combinations be accounted for under the purchase method. Use of the pooling-of-interests method is no longer permitted. Statement No. 141 requires that the purchase method be used for business combinations initiated after June 30, 2001. Statement No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases effective January 1, 2002. The adoption of Statements No. 141 and 142 will not have a significant impact on the Company's results of operations, financial position or cash flows. B. SHIPPING AND HANDLING FEES AND EXPENSES The FASB's Emerging Issues Task Force ("EITF") Issue 00-10, Accounting for Shipping and Handling Fees and Costs, requires all shipping and handling fees billed to customers to be classified as revenues and all shipping and handling costs be removed from revenues when presenting the income statement. Shipping and handling costs represent costs associated with shipping products to customers and handling finished goods. Prior to December 31, 2000, the Company netted both shipping revenues and shipping costs in net sales. The Company applied Issue 00-10 as of December 31, 2000 and reclassified prior periods which resulted in increased net sales and increased selling and distribution expenses of $6,365 and $12,300 in the three and six months ended June 30, 2000, respectively. The reclassification had no effect on net income. Shipping and handling costs of $13,642 and $13,696 are included in the caption entitled "Selling and distribution expenses" in the condensed consolidated statements of income for the three months ended June 30, 2001 and 2000, respectively, and $26,204 and $26,199 are included for the six months ended June 30, 2001 and 2000, respectively. 7 10 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED (DOLLARS IN THOUSANDS) C. INVENTORIES Components of inventories are as follows: JUNE 30 DECEMBER 31 2001 2000 -------------------------- Finished goods $37,548 $37,198 Work-in-process 17,839 11,810 Raw materials and supplies 21,045 21,185 ------------------------------------------------------------------------- 76,432 70,193 Less excess of cost over LIFO stated values 9,750 9,574 ------------------------------------------------------------------------- NET INVENTORIES $66,682 $60,619 ========================================================================= D. COMMITMENTS AND CONTINGENCIES The Company is involved from time to time in various legal proceedings and claims incident to the normal conduct of its business. Although it is impossible to predict the outcome of any pending legal proceeding, the Company believes that such legal proceedings and claims individually and in the aggregate are either without merit, covered by insurance or adequately reserved for, and will not have a material adverse effect on its results of operations, financial position or cash flows. In March 1998, an action was filed in the United States District Court for the Western District of Pennsylvania entitled Elizabeth Werner, et al v. Eric J. Werner, et al (Civil Action No. 98-503). The action purports, in part, to be brought derivatively on behalf of Holding (PA) and, in part, to be brought on behalf of plaintiffs individually against the Company and certain current and former officers and directors of the Company. The aspect of the case purportedly brought on behalf of Holding (PA) alleges breaches of fiduciary duty by various members of the Company's management arising out of, among other things, the issuance of restricted stock to management of the Company in 1992 and 1993. Holding (PA)'s Board of Directors referred the matter to a special committee of disinterested directors to investigate the merits of the claim and to take appropriate actions on behalf of Holding (PA). After a detailed investigation, the special committee recommended that the derivative claims not be pursued by or on behalf of Holding (PA). Accordingly, all the defendants made motions to dismiss the derivative claims. Pursuant to an amendment to the complaint filed by plaintiffs on March 29, 1999, the only remaining corporate defendant in this action is Holding (PA). Pursuant to the same amendment, the only remaining derivative claim asserted by the plaintiffs is a claim for excessive compensation, not relating to the restricted stock issuances. The aspect of the case purportedly brought on behalf of plaintiffs individually against the Company appears to arise out of the 1992 and 1993 restricted stock issuances as well as certain alleged misrepresentations by representatives of the Company. The plaintiffs seek monetary damages in an unspecified amount. In May 1999, the magistrate judge issued a report and recommendation ruling that all of the Plaintiffs' claims be dismissed. The District Court issued a Memorandum Order on August 4, 1999 granting the motion to dismiss all remaining claims against all defendants without prejudice and adopted the magistrate judge's report as the opinion of the District Court. The plaintiffs filed an appeal on September 2, 1999, which continues to be pending before the Court of Appeals for the Third Circuit. Management believes that the ultimate resolution of this lawsuit will not have a material adverse effect on the Company's results of operations, financial position or cash flows. 8 11 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED (DOLLARS IN THOUSANDS) E. SEGMENT INFORMATION The Company classifies its business in two segments: Climbing Products, which includes aluminum, fiberglass and wood ladders, scaffolding, stages and planks; and Extruded Products, which includes aluminum extrusions and fabricated components. The Company's reportable segments are based on the characteristics of the product and the markets and distribution channels through which the products are sold. The composition of segments and measure of segment profitability are consistent with that used by the Company's management. The Company evaluates segment performance based on operating profit. There has not been a material change in total assets, the basis of segmentation or the basis of measurement of segment profit or loss from that disclosed in the Company's most recent Annual Report on Form 10-K. Net sales and operating profit (loss) of the Company's segments for the three and six months ended June 30, 2001 and 2000 are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ----------------------------------------------------------- 2001 2000 2001 2000 ----------------------------------------------------------- NET SALES Climbing Products $ 123,452 $ 118,222 $ 225,927 $ 226,877 Extruded Products 20,475 28,654 42,577 54,956 --------------------------------------------------------------------------------------- $ 143,927 $ 146,876 $ 268,504 $ 281,833 ======================================================================================= OPERATING PROFIT (LOSS) Climbing Products $ 14,737 $ 11,504 $ 23,280 $ 20,753 Extruded Products (311) 2,182 718 2,885 Corporate and Other (1,259) (621) (2,353) (1,160) --------------------------------------------------------------------------------------- $ 13,167 $ 13,065 $ 21,645 $ 22,478 =======================================================================================
Corporate and Other includes various corporate expenses and eliminations. Operating profit for the Climbing Products segment for the three and six month periods ended June 30, 2000 includes the impact of a $1,400 charge related to plant shutdown costs - see Note G. F. SALES OF ACCOUNTS RECEIVABLE The undivided interest in accounts receivable is the net residual interest associated with accounts receivable sold under a $50,000 receivables purchase agreement with a financial institution and its affiliate (the "Receivables Purchase Agreement"). As of June 30, 2001 and December 31, 2000, the Company had sold, on a recurring basis, $93,283 and $78,332 of accounts receivable, net of the loss on sale, in exchange for $28,000 and $20,000 in cash and an undivided interest in the accounts receivable of $65,283 and $58,332, respectively. The ongoing cost associated with the Receivables Purchase Agreement, which represents a return to investors in the purchased interests, is reported in the accompanying condensed consolidated statements of operations in "Other income (expense), net." G. PLANT SHUTDOWN COSTS During the quarter ended June 30, 2000, the Company recorded plant shutdown costs of $1,400 associated with a plan to improve efficiency and reduce overall manufacturing and distribution costs by closing its Goshen, Indiana and Swainsboro, Georgia facilities. During the quarter ended December 31, 2000, the charge was reduced by $307 to $1,093 due to reopening a portion of the Swainsboro, Georgia facility. The plan reflected the 9 12 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED (DOLLARS IN THOUSANDS) G. PLANT SHUTDOWN COSTS - CONTINUED elimination of approximately 240 jobs primarily in manufacturing functions. The affected employees were paid severance, vacation and other benefits totaling approximately $372. Plant shutdown costs also include other estimated exit costs of $721, including continuing lease payments, security and other costs applicable to the leased facilities through the end of the respective non-cancelable lease periods. Other exit costs of $359 were paid as of June 30, 2001. The payment of the remaining costs is expected to extend through December 31, 2001. H. DEBT The Company's senior credit facility, which consists of term loan facilities and a revolving credit facility (the "Senior Credit Facility") was amended on July 24, 2001 to provide for certain changes effective as of June 30, 2001. The amount available under the revolving credit facility, which matures on November 30, 2003, was reduced from $100,000 to $70,000. No amounts were borrowed under the revolving credit facility at June 30, 2001, or December 31, 2000. Available borrowings under this arrangement continue to be reduced by amounts issued under a letter of credit subfacility which totaled $9,859 and $6,471 at June 30, 2001 and December 31, 2000, respectively. The financial covenants of the Senior Credit Facility were amended to reduce the minimum EBITDA requirement and to make the maximum leverage and interest coverage covenants more restrictive. The effect on deferred financing fees, if any, and related amortization calculated using the effective interest method will be evaluated in the quarter ending September 30, 2001. A provision of the Senior Credit Facility requires that net proceeds from certain asset sales be used to reduce debt when the aggregate of such net proceeds since inception of the facility exceeds $2,000. Pursuant to this provision, $683 was used to reduce term loans during the quarter ended June 30, 2001, as a result of the sale of an investment formerly held by Manufacturers Indemnity and Insurance Company of America, the Company's captive insurance subsidiary which was dissolved in 1998. Effective June 30, 2001, installments of the Tranche B term loans are due in aggregate principal amounts of $896 per annum through 2002, $29,854 in 2003, and $55,230 in 2004. Installments of the Tranche C term loans are due in aggregate principal amounts of $547 per annum through 2004 and $50,901 in 2005. I. SUPPLEMENTAL GUARANTOR INFORMATION The Company's debt includes borrowings under the Senior Credit Facility and 10% Senior Subordinated Notes maturing November 15, 2007 (the "Notes"). The issuer of this debt is Werner Holding Co. (DE), Inc. (the "Issuer"). Werner Holding Co. (PA), Inc. (the "Parent Company") has provided a full, unconditional, joint and several guaranty of the Issuer's obligations under the Senior Credit Facility and the Notes. In addition, the Issuer's wholly-owned subsidiaries, except for Werner Funding Corporation, (collectively, the "Guarantor Subsidiaries") have provided full, unconditional, joint and several guarantees of the Senior Credit Facility and the Notes. Following is condensed consolidated information for the Parent Company, the Issuer, the Guarantor Subsidiaries, and Werner Funding Corporation (the "Non-Guarantor Subsidiary"). Separate financial statements of the Guarantor Subsidiaries are not presented because management has determined that they would not provide additional information that is material to investors. Therefore, each of the Guarantor Subsidiaries is combined in the presentation below. Further, separate financial statements of the Issuer have not been provided as management has determined that they would not provide information that is material to investors, as the Issuer has no substantial operations or assets, other than its investment in its subsidiaries. Investments in subsidiaries are accounted for on the equity method of accounting. Earnings of subsidiaries are, therefore, reflected in the respective investment accounts of the Parent Company and the Issuer. The investments in subsidiaries and intercompany balances and transactions have been eliminated. Income taxes are allocated generally on a separate return basis with reimbursement for losses utilized on a consolidated basis in accordance with a tax sharing agreement between the Company and each of its subsidiaries. 10 13 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED (DOLLARS IN THOUSANDS) I. SUPPLEMENTAL GUARANTOR INFORMATION - CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS ------------------------------------------------------------------------------- COMBINED NON- PARENT GUARANTOR GUARANTOR COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED ------------------------------------------------------------------------------- JUNE 30, 2001 ASSETS Current assets: Undivided interest in accounts receivable $ - $ - $ - $ 65,283 $ - $ 65,283 Inventories, net - - 66,682 - - 66,682 Other current assets 285 13 966 3 - 1,267 --------------------------------------------------------------------------------------------------------------------------- Total current assets 285 13 67,648 65,286 - 133,232 Property, plant and equipment, net - 2 108,831 - - 108,833 Investment in subsidiaries (139,424) (114,615) 7,321 - 246,718 - Other assets 5 2,179 33,610 100 - 35,894 --------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $(139,134) $(112,421) $ 217,410 $ 65,386 $ 246,718 $ 277,959 =========================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Other current liabilities $ (553) $ 10,204 $ 57,146 $ (65) $ - $ 66,732 Intercompany payable (receivable) (10,999) (253,389) 206,258 58,130 - - --------------------------------------------------------------------------------------------------------------------------- Total current liabilities (11,552) (243,185) 263,404 58,065 - 66,732 Long-term debt - 270,188 5,856 - - 276,044 Other long-term liabilities - - 62,765 - - 62,765 Total equity (deficit) (127,582) (139,424) (114,615) 7,321 246,718 (127,582) --------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY (DEFICIT) $(139,134) $(112,421) $ 217,410 $ 65,386 $ 246,718 $ 277,959 =========================================================================================================================== DECEMBER 31, 2000 ASSETS Current assets: Undivided interest in accounts receivable $ - $ - $ - $ 58,332 $ - $ 58,332 Inventories, net - - 60,619 - - 60,619 Other current assets 184 (16) 8,494 5 - 8,667 --------------------------------------------------------------------------------------------------------------------------- Total current assets 184 (16) 69,113 58,337 - 127,618 Property, plant and equipment, net - 2 102,902 - - 102,904 Investment in subsidiaries (142,847) (119,198) 7,115 - 254,930 - Other assets 5 5,176 34,071 100 - 39,352 --------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $(142,658) $(114,036) $ 213,201 $ 58,437 $ 254,930 $ 269,874 =========================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Other current liabilities $ (571) $ 9,901 $ 56,857 $ 211 $ - $ 66,398 Intercompany payable (receivable) (10,831) (252,476) 212,196 51,111 - - --------------------------------------------------------------------------------------------------------------------------- Total current liabilities (11,402) (242,575) 269,053 51,322 - 66,398 Long-term debt - 271,386 5,958 - - 277,344 Other long-term liabilities - - 57,388 - - 57,388 Total equity (deficit) (131,256) (142,847) (119,198) 7,115 254,930 (131,256) --------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY (DEFICIT) $(142,658) $(114,036) $ 213,201 $ 58,437 $ 254,930 $ 269,874 ===========================================================================================================================
11 14 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED (DOLLARS IN THOUSANDS) I. SUPPLEMENTAL GUARANTOR INFORMATION - CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF INCOME --------------------------------------------------------------------------------- COMBINED NON- PARENT GUARANTOR GUARANTOR COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED --------------------------------------------------------------------------------- FOR THE SIX MONTHS ENDED JUNE 30, 2001 Net sales $ - $ - $ 268,504 $ - $ - $ 268,504 Cost of sales - - 192,928 - - 192,928 -------------------------------------------------------------------------------------------------------------------------- Gross profit - - 75,576 - - 75,576 Selling, general and administrative expenses 2 37 53,892 - - 53,931 -------------------------------------------------------------------------------------------------------------------------- Operating (loss) profit (2) (37) 21,684 - - 21,645 Other income (expense), net 4,177 4,770 (2,663) 2,354 (9,506) (868) Interest income (expense) 532 (1,287) (10,577) (2,037) (13,369) -------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (benefit) 4,707 3,446 8,444 317 (9,506) 7,408 Income taxes (benefit) 264 (625) 3,215 111 - 2,965 -------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 4,443 $ 4,071 $ 5,229 $ 206 $ (9,506) $ 4,443 ========================================================================================================================== FOR THE THREE MONTHS ENDED JUNE 30, 2001 Net sales $ - $ - $ 143,927 $ - $ - $ 143,927 Cost of sales - - 103,576 - - 103,576 -------------------------------------------------------------------------------------------------------------------------- Gross profit - - 40,351 - - 40,351 Selling, general and administrative expenses 2 13 27,169 - - 27,184 -------------------------------------------------------------------------------------------------------------------------- Operating (loss) profit (2) (13) 13,182 - - 13,167 Other income (expense), net 3,280 3,473 (1,427) 1,166 (7,342) (850) Interest income (expense) 265 (654) (5,244) (993) - (6,626) -------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (benefit) 3,543 2,806 6,511 173 (7,342) 5,691 Income taxes (benefit) 132 (420) 2,506 61 - 2,279 -------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 3,411 $ 3,226 $ 4,005 $ 112 $ (7,342) $ 3,412 ===========================================================================================================================
12 15 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED (DOLLARS IN THOUSANDS) I. SUPPLEMENTAL GUARANTOR INFORMATION - CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF INCOME -------------------------------------------------------------------------------- COMBINED NON- PARENT GUARANTOR GUARANTOR COMPANY ISSUER SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED -------------------------------------------------------------------------------- FOR THE SIX MONTHS ENDED JUNE 30, 2000 Net sales $ - $ - $ 281,833 $ - $ - $ 281,833 Cost of sales - - 200,092 - - 200,092 -------------------------------------------------------------------------------------------------------------------------- Gross profit - - 81,741 - - 81,741 Selling, general and administrative expenses 11 14 57,838 - - 57,863 Plant shutdown costs - - 1,400 - - 1,400 -------------------------------------------------------------------------------------------------------------------------- Operating (loss) profit (11) (14) 22,503 - - 22,478 Other income (expense), net 5,072 5,759 (2,339) 3,145 (11,585) 52 Interest income (expense) 506 (1,837) (10,385) (2,163) (13,879) -------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (benefit) 5,567 3,908 9,779 982 (11,585) 8,651 Income taxes (benefit) 299 (850) 3,571 363 3,383 -------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 5,268 $ 4,758 $ 6,208 $ 619 $ (11,585) $ 5,268 =========================================================================================================================== FOR THE THREE MONTHS ENDED JUNE 30, 2000 Net sales $ - $ - $ 146,876 $ - $ - $ 146,876 Cost of sales - - 103,251 - - 103,251 -------------------------------------------------------------------------------------------------------------------------- Gross profit - - 43,625 - - 43,625 Selling, general and administrative expenses - 9 29,151 - - 29,160 Plant shutdown costs - - 1,400 - - 1,400 -------------------------------------------------------------------------------------------------------------------------- Operating (loss) profit - (9) 13,074 - - 13,065 Other income (expense), net 3,570 3,745 (1,741) 1,649 (7,461) (238) Interest income (expense) 251 (1,069) (4,492) (1,624) - (6,934) -------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (benefit) 3,821 2,667 6,841 25 (7,461) 5,893 Income taxes (benefit) 198 (617) 2,680 9 - 2,270 -------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 3,623 $ 3,284 $ 4,161 $ 16 $ (7,461) $ 3,623 ===========================================================================================================================
13 16 WERNER HOLDING CO. (PA), INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED (DOLLARS IN THOUSANDS) I. SUPPLEMENTAL GUARANTOR INFORMATION - CONTINUED
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS ------------------------------------------------------------------ COMBINED NON- PARENT GUARANTOR GUARANTOR COMPANY ISSUER SUBSIDIARIES SUBSIDIARY CONSOLIDATED ------------------------------------------------------------------ FOR THE SIX MONTHS ENDED JUNE 30, 2001 Net cash from operating activities $ 289 $ (247) $ 1,401 $ 1 $ 1,444 Net cash from investing activities (168) 1,639 (9,329) - (7,858) Net cash from financing activities (121) (1,407) 2,608 - 1,080 ------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents - (15) (5,320) 1 (5,334) Cash and cash equivalents at beginning of period (1,919) 22 7,414 1 5,518 ------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ (1,919) $ 7 $ 2,094 $ 2 $ 184 ====================================================================================================== FOR THE SIX MONTHS ENDED JUNE 30, 2000 Net cash from operating activities $ (444) $ (4,728) $ 23,059 $ (3) $ 17,884 Net cash from investing activities 295 5,456 (21,727) - (15,976) Net cash from financing activities 149 (725) (903) - (1,479) ------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents - 3 429 (3) 429 Cash and cash equivalents at beginning of period - 417 442 7 866 ------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ - $ 420 $ 871 $ 4 $ 1,295 ======================================================================================================
14 17 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. GENERAL Reclassifications. As a result of the adoption of EITF 00-10, Accounting for Shipping and Handling Fees and Costs, the Company has reclassified certain amounts among net sales and selling and distribution expenses in accordance with this pronouncement for the three and six months ended June 30, 2000 presented in Management's Discussion and Analysis of Financial Condition and Results of Operations, contained herein, and in the Company's Condensed Consolidated Financial Statements included elsewhere herein (see Note B of the Notes to Condensed Consolidated Financial Statements). The reclassifications did not have any effect on operating profit or net income. The discussions below reflect the impact of the reclassifications. Cost Reduction Initiatives. During the quarter ended June 30, 2001, the Company implemented several cost reduction initiatives as a result of the slowdown in the U.S. economy. These initiatives include reductions in discretionary spending and the reduction of approximately 6% in April, and an additional reduction of approximately 4% in June, of the Company's salaried employees. The pre-tax charge to provide severance and other benefits to the affected salaried employees of $0.9 million was recorded in the quarter ended June 30, 2001. RESULTS OF OPERATIONS--QUARTER ENDED JUNE 30, 2001 AS COMPARED TO QUARTER ENDED JUNE 30, 2000 Net Sales. Net sales decreased $3.0 million or 2.0% to $143.9 million for the quarter ended June 30, 2001 from $146.9 million for the quarter ended June 30, 2000 which primarily reflects the impact of lower unit sales volumes for extruded products due to the impact of the slowing economy on the markets served. Net sales of climbing products increased $5.3 million or 4.4% to $123.5 million for the quarter ended June 30, 2001 from $118.2 million for the quarter ended June 30, 2000 primarily due to improving product mix and higher unit sales volumes driven by national sales promotions. Net sales of extruded products of $20.5 million for the quarter ended June 30, 2001 declined by $8.2 million or 28.5% compared to the quarter ended June 30, 2000 due primarily to lower unit sales volumes. Gross Profit. Gross profit decreased by $3.2 million or 7.5% to $40.4 million for the quarter ended June 30, 2001 from $43.6 million for the quarter ended June 30, 2000 primarily reflecting the impact of lower unit sales volumes for extruded products partially offset by the impact of higher sales of climbing products. Gross profit as a percentage of net sales in the quarter ended June 30, 2001 decreased to 28.0% from 29.7% for the quarter ended June 30, 2000. The decrease in the gross profit margin percentage principally resulted from the decline in unit sales volumes for extruded products. General and Administrative Expenses. General and administrative expenses were $5.0 million for the quarter ended June 30, 2001 compared to $7.0 million for the quarter ended June 30, 2000, a decline of $2.0 million or 29.2%. The decline is primarily due to reduced compensation and related expenses partially offset by the severance and related expenses associated with the reduction in salaried employees that occurred during the quarter ended June 30, 2001. 15 18 Selling and Distribution Expenses. Selling and distribution expenses increased $0.1 million to $22.2 million for the quarter ended June 30, 2001 compared to $22.1 million for the quarter ended June 30, 2000 which primarily reflects the impact of increased advertising and freight expenses partially offset by lower sales commissions. Operating Profit. Operating profit increased $0.1 million to $13.2 million for the quarter ended June 30, 2001 from $13.1 million for the quarter ended June 30, 2000. Operating profit of the Climbing Products segment increased $3.2 million to $14.7 million in the second quarter of 2001 from $11.5 million in the second quarter of 2000. The higher operating profit of the Climbing Products segment primarily reflects the impact of price increases implemented in the second half of 2000, improvements in product mix, higher unit sales volumes, lower general and administrative expenses and the absence of a $1.4 million charge related to plant shutdown costs that was recorded in the quarter ended June 30, 2000. Operating profit of the Climbing Products segment also improved due to utilizing internal aluminum extrusion capacity to produce more extrusions for ladders rather than purchase them from outside suppliers at a premium over the Company's manufacturing costs. Operating loss of the Extruded Products segment of $0.3 million for the quarter ended June 30, 2001 declined by $2.5 million compared to operating profit of $2.2 million for the quarter ended June 30, 2000. The decline is primarily due to the decline in unit sales volumes partially offset by lower general and administrative expenses. Corporate and Other expenses increased $0.6 million for the quarter ended June 30, 2001 compared to the quarter ended June 30, 2000 primarily due to consulting expenses associated with implementing manufacturing productivity improvement initiatives. Other Income (Expense), Net. Other (expense), net was ($0.9) million for the quarter ended June 30, 2001 compared to other (expense), net of ($0.2) million recorded in the quarter ended June 30, 2000. The increase in expense was primarily attributable to the recognition of non-cash (expense) of ($0.3) million related to the impairment of an investment formerly held by Manufacturers Indemnity and Insurance Company of America ("MIICA"), the Company's captive insurance subsidiary that was dissolved in 1998. In addition, royalty and other income declined during the current quarter. The increase in expense for the quarter ended June 30, 2001 was partially offset by lower costs associated with the receivables purchase agreement due to lower utilization and lower interest rates during the current quarter. Interest Expense. Interest expense declined $0.3 million to $6.6 million for the quarter ended June 30, 2001 from $6.9 million for the quarter ended June 30, 2000 primarily due to lower interest rates. Income Taxes. In accordance with APB Opinion 28, at the end of each interim period the Company shall make its best estimate of the annual effective tax rate expected to be applicable for the full fiscal year. The rate so determined shall be used in providing for income taxes on a current year-to-date basis. The effective tax rate shall include the effect of any valuation allowance expected to be necessary at the end of the year for deferred tax assets related to originating deductible temporary differences and loss carryforwards during the year. Accordingly, the Company has estimated its annual effective tax rates as of June 30, 2001 and 2000, and appropriately provided for income taxes for the quarterly periods then ended. The effective tax rate for the quarter ended June 30, 2001 approximates the effective tax rate of the same quarter last year. The difference between the statutory and effective tax rates at both June 30, 2001 and 2000 was primarily due to state taxes (net of federal benefit) and estimated income tax accruals. Net Income. Net income declined by $0.2 million to $3.4 million for the quarter ended June 30, 2001 from net income of $3.6 million for the quarter ended June 30, 2000 as a result of all of the above factors. RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 2001 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 Net Sales. Net sales decreased $13.3 million or 4.7% to $268.5 million for the six months ended June 30, 2001 from $281.8 million for the six months ended June 30, 2000 which primarily reflects the impact of a slowing economy. Net sales of climbing products decreased $1.0 million or 0.4% to $225.9 million for the six months ended June 30, 2001 from $226.9 million for the six months ended June 30, 2000 primarily due to lower unit sales volumes partially offset by the impact of improving product mix. Net sales of extruded products of $42.6 million for the six months ended June 30, 2001 declined by $12.4 million or 22.5% compared to the quarter ended June 30, 2000 due primarily to lower unit sales volumes. 16 19 Gross Profit. Gross profit decreased by $6.1 million or 7.5% to $75.6 million for the six months ended June 30, 2001 from $81.7 million for the six months ended June 30, 2000 primarily reflecting the impact of lower unit sales volumes. Gross profit as a percentage of net sales in the six months ended June 30, 2001 decreased to 28.1% from 29.0% for the six months ended June 30, 2000. The decrease in the gross profit margin percentage principally resulted from lower unit sales volumes. General and Administrative Expenses. General and administrative expenses were $11.2 million for the six months ended June 30, 2001 compared to $14.7 million for the six months ended June 30, 2000, a decline of $3.5 million or 24.3%. The decline is primarily due to reduced compensation and related expenses and lower legal and professional expenses partially offset by the severance and related expenses associated with the reduction in salaried employees that occurred during the quarter ended June 30, 2001. Selling and Distribution Expenses. Selling and distribution expenses decreased $0.3 million to $42.8 million for the six months ended June 30, 2001 compared to $43.1 million for the six months ended June 30, 2000 which primarily reflects the impact of lower sales commissions partially offset by increased advertising and freight expenses. Operating Profit. Operating profit declined $0.9 million to $21.6 million for the six months ended June 30, 2001 from $22.5 million for the six months ended June 30, 2000. Operating profit of the Climbing Products segment increased $2.5 million to $23.3 million in the first six months of 2001 from $20.8 million in the first six months of 2000. The higher operating profit of the Climbing Products segment primarily reflects the impact of price increases implemented in the second half of 2000, improvements in product mix, the absence of a $1.4 million charge related to plant shutdown costs that was recorded in the quarter ended June 30, 2000, and lower general and administrative expenses all of which more than offset the impact of a decline in unit sales volumes. Operating profit of the Extruded Products segment of $0.7 million for the six months ended June 30, 2001 declined by $2.2 million from operating profit of $2.9 million for the six months ended June 30, 2000. The decline is primarily due to the decline in unit sales volumes partially offset by lower general and administrative expenses. Corporate and Other expenses increased $1.2 million for the six months ended June 30, 2001 compared to the quarter ended June 30, 2000 primarily due to consulting expenses associated with implementing manufacturing productivity improvement initiatives. Other Income (Expense), Net. Other (expense), net was ($0.9) million for the six months ended June 30, 2001 compared to other income, net of $0.1 million recorded in the six months ended June 30, 2000. The increase in expense was partially attributable to the recognition of non-cash (expense) of ($0.3) million related to the impairment of an investment formerly held by MIICA. In addition, royalty and other income declined during the current period. Interest Expense. Interest expense declined $0.5 million to $13.4 million for the six months ended June 30, 2001 from $13.9 million for the six months ended June 30, 2000 primarily due to lower interest rates. Income Taxes. In accordance with APB Opinion 28, at the end of each interim period the Company shall make its best estimate of the annual effective tax rate expected to be applicable for the full fiscal year. The rate so determined shall be used in providing for income taxes on a current year-to-date basis. The effective tax rate shall include the effect of any valuation allowance expected to be necessary at the end of the year for deferred tax assets related to originating deductible temporary differences and loss carryforwards during the year. Accordingly, the Company has estimated its annual effective tax rates for the six months ended June 30, 2001 and 2000. The effective tax rate for the six months ended June 30, 2001 approximates the effective tax rate of the same period last year. The difference between the statutory and effective tax rates at both June 30, 2001 and 2000 was primarily due to state taxes (net of federal benefit) and estimated income tax accruals. Net Income. Net income declined by $0.9 million to $4.4 million for the six months ended June 30, 2001 from net income of $5.3 million for the six months ended June 30, 2000 as a result of all of the above factors. 17 20 LIQUIDITY AND CAPITAL RESOURCES 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. The Company believes it has sufficient funds available in the upcoming year 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, as amended effective June 30, 2001, and the Receivables Purchase Agreement. On July 24, 2001, the Senior Credit Facility, which consists of term loan facilities and a revolving credit facility, was amended effective June 30, 2001 to reduce the amount available under the revolving credit facility from $100 million to $70 million. No amounts were borrowed under the revolving credit facility at June 30, 2001, or December 31, 2000, except for a reduction in availability of $9.9 million and $6.5 million, respectively, resulting from letters of credit issued under a letter of credit subfacility. 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 dividends. The financial covenants of the Senior Credit Facility require the Company to meet specific interest coverage, maximum leverage, minimum EBITDA, and capital expenditure requirements. On July 24, 2001, the financial covenants of the Senior Credit Facility were amended effective as of June 30, 2001 in anticipation of the Company not complying with its increasing minimum EBITDA covenant due to changing business conditions. The amendment reduced the minimum EBITDA requirement through June 30, 2004 and amended the financial covenants requiring the Company to meet specific minimum interest coverage and maximum leverage requirements to be more restrictive. The Company is in compliance with all its debt covenants, as amended, effective June 30, 2001. The Company anticipates that it will continue to comply with its debt covenants in 2001, however, continued compliance is primarily based on its future financial and operating performance, which to a certain extent is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. Net cash flows provided by operating activities were $1.4 million for the six months ended June 30, 2001 compared to $17.9 million for the six months ended June 30, 2000. The decline is primarily attributable to increases in cash used for accounts receivable, accrued liabilities and inventories partially offset by decreased cash used for accounts payable. Net cash used in investing activities was $7.9 million for the six months ended June 30, 2001 compared to net cash used of $16.0 million for the six months ended June 30, 2000. The decrease is primarily due to a decline in capital expenditures and the $2.1 million of cash received during the quarter ended June 30, 2001 upon the sale of an investment formerly held by MIICA. Net cash flows provided by financing activities were $1.1 million for the six months ended June 30, 2001 compared to net cash used for financing activities of $1.5 million for the six months ended June 30, 2000 reflecting an increase in book overdrafts in the current period partially offset by an increase in repayments of long-term debt. As required by the Company's Senior Credit Facility, unscheduled debt payments of $0.7 million were made in the current period from the net proceeds received from the sale of the investment formerly held by MIICA. 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, 18 21 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. SEASONALITY, WORKING CAPITAL AND CYCLICALITY Sales of certain products of the Company are subject to seasonal variation. Demand for the Company's climbing products is affected by residential housing starts and existing home sales, commercial construction activity and overall home improvement expenditures. The residential and commercial construction markets are sensitive to cyclical changes in the economy. Due to seasonal factors associated with the construction industry, sales of climbing products and working capital requirements are typically higher during the second and third quarters than at other times of the year. The Company expects to use the Senior Credit Facility and the Receivables Purchase Agreement to meet any seasonal variations in its working capital requirements. RECENTLY ISSUED ACCOUNTING STANDARDS In September 2000, the FASB issued Statement No. 140, a replacement of Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Statement No. 140, which is effective for transactions occurring after March 31, 2001, did not have a significant impact on the Company's results of operations, financial position, or cash flows. In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires that all business combinations be accounted for under the purchase method. Use of the pooling-of-interests method is no longer permitted. Statement No. 141 requires that the purchase method be used for business combinations initiated after June 30, 2001. Statement No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases effective January 1, 2002. The adoption of Statements No. 141 and 142 will not have a significant impact on the Company's results of operations, financial position or cash flows. 19 22 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion about the Company's market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates, foreign currency exchange rates and commodity prices. The Company does not use derivative financial instruments for speculative or trading purposes. The Company is exposed to market risk from changes in interest rates on long-term debt obligations. The Company manages such risk through the use of a combination of fixed and variable rate debt. Currently, the Company does not use derivative financial instruments to manage its interest rate risk. There have been no material changes in market risk from changes in interest rates from that disclosed in the Company's most recent Annual Report on Form 10-K. The Company does not have material operations in foreign countries. International sales were not material to the Company's operations for the six months ended June 30, 2001. Accordingly, the Company is not subject to material foreign currency exchange risk. To date, the Company has not entered into any foreign currency forward exchange contracts or other derivative financial instruments relative to foreign currency exchange rates. The Company is also exposed to market risk from changes in the price of aluminum. The Company manages such risk through the use of aluminum futures and options contracts. There have been no material changes in market risk from changes in the price of aluminum from that disclosed in the Company's most recent Annual Report on Form 10-K. 20 23 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved from time to time in various legal proceedings and claims incident to the normal conduct of its business. In the opinion of management, the amount of any ultimate liability with respect to these proceedings and claims will not have a material adverse effect on its results of operations, financial position or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting of shareholders was held on May 15, 2001. The size of the Board of Directors of Holding (PA) was increased to eleven (11) persons and the following eleven (11) persons were elected as directors: Mamoun Askari, James O. Egan, Charles L. Griffith, James F. Hardymon, Dennis G. Heiner, Charles K. Marquis, Howard L. Solot, Christopher J. Stadler, Thomas J. Sullivan, Donald M. Werner and Michael E. Werner. Of the total shares of stock voted, all were cast for these eleven (11) persons with the exception that 1,046.5856 shares of voting stock were withheld for all directors. In addition, at the meeting, PricewaterhouseCoopers LLP was approved as the Company's independent auditors for the upcoming year. Of the total shares of stock voted, 71,085.5144 were cast for, 0 were cast against and 1,112.6336 shares were withheld, with respect to the selection of PricewaterhouseCoopers LLP as the Company's independent auditors. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 3.1 Certificate of Incorporation of Werner Holding Co. (DE), Inc. (filed as Exhibit 3.1 to Issuer's Form S-4 Registration Statement No. 333-46607 and incorporated herein by reference). 3.2 By-laws of Werner Holding Co. (DE), Inc. (filed as Exhibit 3.2 to Issuer's Form S-4 Registration Statement No. 333-46607 and incorporated herein by reference). 3.3 Amended and Restated Articles of Incorporation of Werner Holding Co. (PA), Inc. (filed as Exhibit 3.3 to Issuer's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference). 3.4 Amended and Restated By-laws of Werner Holding Co. (PA), Inc. (filed as Exhibit 3.1 to Issuer's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and incorporated herein by reference). (b) Reports on Form 8-K: None. 21 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Co-registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. WERNER HOLDING CO. (PA), INC. Date: August 14, 2001 /s/ LARRY V. FRIEND --------------------------------------------- Larry V. Friend Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) WERNER HOLDING CO. (DE), INC. Date: August 14, 2001 /s/ LARRY V. FRIEND --------------------------------------------- Larry V. Friend Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) 22