FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2001
------------------------------------------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------------------------------------
FOR QUARTER ENDED JUNE 30, 2001 COMMISSION FILE NUMBER 1-2394
WHX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3768097
(State of Incorporation) (I.R.S. Employer
Identification No.)
110 EAST 59TH STREET
NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 212-355-5200
Indicate by check mark whether the registrant (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 the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
The number of shares of Common Stock issued and outstanding as of August 8, 2001
was 15,369,953 which includes redeemable common shares.
WHX CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Net Sales $ 162,789 $ 486,779 $ 318,860 $ 954,522
Operating Costs
Cost of goods sold 130,409 404,924 259,726 791,678
Depreciation and amortization 7,489 28,721 14,869 55,987
Selling, administrative and general expenses 23,349 35,671 42,167 74,531
--------- --------- --------- ---------
161,247 469,316 316,762 922,196
--------- --------- --------- ---------
Operating Income 1,542 17,463 2,098 32,326
Interest expense 12,711 21,754 26,220 44,200
Other income (expense) 7,230 (1,054) 3,800 (7,721)
--------- --------- --------- ---------
Income (loss) before Taxes and Extraordinary Item (3,939) (5,345) (20,322) (19,595)
Tax provision (benefit) 635 (41,607) (5,554) (49,159)
--------- --------- --------- ---------
Income (loss) before Extraordinary Item (4,574) 36,262 (14,768) 29,564
Extraordinary item-net of tax 12,357 -- 12,357 --
--------- --------- --------- ---------
Net Income (loss) 7,783 36,262 (2,411) 29,564
Dividend requirement for Preferred Stock 5,110 5,151 10,262 10,303
--------- --------- --------- ---------
Net Income (loss) applicable to Common Stock $ 2,673 $ 31,111 $ (12,673) $ 19,261
========= ========= ========= =========
BASIC AND DILUTED INCOME (LOSS) PER SHARE OF
COMMON STOCK
Income (loss) before extraordinary item ($ 0.65) $ 2.19 ($ 1.70) $ 1.35
Extraordinary item-net of tax 0.83 -- 0.83 --
--------- --------- --------- ---------
Net (loss) per share $ 0.18 $ 2.19 ($ 0.87) $ 1.35
========= ========= ========= =========
Income (loss) per share of Common Stock-assuming
dilution
Income (loss) before extraordinary item ($ 0.65) $ 1.17 ($ 1.70) $ 0.95
Extraordinary item-net of tax 0.83 -- 0.83 --
--------- --------- --------- ---------
Net income (loss) per share - assuming dilution $ 0.18 $ 1.17 ($ 0.87) $ 0.95
========= ========= ========= =========
See notes to consolidated financial statements
2
WHX CORPORATION
CONSOLIDATED BALANCE SHEET
JUNE 30, DECEMBER 31,
2001 2000
- -----------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands)
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 25,703 $ 4,837
Short term investments 20,399 69,319
Trade receivables - net 92,507 83,929
Inventories 120,377 150,269
Due from WPC -- 20,878
Other current assets 9,668 11,472
--------- ---------
Total current assets 268,654 340,704
Note Receivable - WPC 30,529 --
Restricted cash 5,000 33,000
Property, plant and equipment at cost, less
accumulated depreciation and amortization 173,986 173,790
Prepaid pension 35,002 37,755
Intangibles, net of amortization 278,559 282,821
Other non-current assets 39,744 45,446
--------- ---------
$ 831,474 $ 913,516
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 53,316 $ 46,477
Deferred income taxes - current 18,562 18,562
Other current liabilities 42,708 46,086
Due to WPC -- 31,952
Long-term debt due in one year 2,150 929
--------- ---------
Total current liabilities 116,736 144,006
Long-term debt 470,937 504,983
Loss in excess of investment - WPC 37,584 39,783
Deferred income taxes - non-current 20,939 21,289
Other liabilities 24,081 25,813
--------- ---------
670,277 735,874
--------- ---------
Redeemable Common Stock - 245 shares -- 2,646
--------- ---------
Stockholders' Equity:
Preferred Stock $.10 par value -
5,866 shares and 5,883 587 589
Common Stock - $.01 par value -
15,095 shares and 14,590 shares 151 146
Accumulated other
Comprehensive income (loss) (2,922) (1,501)
Additional paid-in capital 555,771 555,479
Accumulated earnings (deficit) (392,390) (379,717)
--------- ---------
Total stockholders' equity 161,197 174,996
--------- ---------
$ 831,474 $ 913,516
========= =========
See notes to consolidated financial statements.
3
WHX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30
(in thousands) 2001 2000
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,411) $ 29,564
Non cash income and expenses:
Depreciation and amortization 14,869 55,987
Extraordinary income (19,012)
Other post employment benefits 110 (3,969)
Deferred income taxes (17) (49,159)
(Gain) loss on sale of assets 92 (1,847)
Equity income in affiliated companies (1,226) (1,692)
Pension expense 2,753 1,305
Amortization of deferred financing fees 2,034 1,833
Minority interest -- 964
Decrease (increase) in working capital elements,
Trade receivables (5,867) (23,359)
Trade receivables sold -- 14,150
Inventories 31,236 (28,138)
Other current assets 1,804 2,031
Trade payables 6,677 30,830
Other current liabilities (6,471) 1,348
Short-term investments - net 48,920 414,596
Trading account borrowings -- (367,696)
Other items-net 779 (8,386)
--------- ---------
Net cash provided by operating activities 74,270 68,362
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Release of restricted cash 33,000 --
Note receivable-WPC (30,453) --
Settlement Agreement-WPC (32,000) --
Restricted cash (5,000) --
Short term investments available-for-sale -- (11,649)
Property additions and improvements (8,787) (61,040)
Investment in affiliates -- 131
Dividends from affiliates -- 3,750
Proceeds from sale of property 167 4,742
--------- ---------
Net cash used in investing activities (43,073) (64,066)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Early retirement of long-term debt (15,906) --
Net borrowings on long-term debt 3,606 8,748
Minority interest dividends -- (703)
Short term borrowings 2,000 12,951
Preferred stock dividends paid -- (10,304)
Redemption of equity issues (18) (193)
--------- ---------
Net cash (used) provided by financing activities (10,318) 10,499
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON NET CASH (13) --
INCREASE IN CASH AND CASH EQUIVALENTS 20,866 14,795
Cash and cash equivalents
at beginning of period 4,837 10,775
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 25,703 $ 25,570
========= =========
See notes to consolidated financial statements
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
GENERAL
The unaudited consolidated financial statements included herein
have been prepared by the Company. In the opinion of management, the
interim financial statements reflect all normal and recurring
adjustments necessary to present fairly the consolidated financial
position and the results of operations and changes in cash flows for the
interim periods.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. This quarterly
report on Form 10-Q should be read in conjunction with the Company's
audited consolidated financial statements contained in Form 10K for the
year ended December 31, 2000. The results of operations for the quarter
and six months ended June 30, 2001 are not necessarily indicative of the
operating results for the full year.
The consolidated financial statements include the accounts of
all subsidiary companies except for Wheeling-Pittsburgh Corporation and
its subsidiaries. On November 16, 2000, Wheeling-Pittsburgh Corporation
("WPC"), a wholly owned subsidiary of WHX Corporation ("WHX"), and six
of its subsidiaries ("the WPC Group") filed a petition seeking
reorganization under Chapter 11 of Title 11 of the United States
Bankruptcy Code. See Note 1. As a result of the Bankruptcy Filing the
Company has, as of November 16, 2000, deconsolidated the balance sheet
of its wholly owned subsidiary WPC. Accordingly, the accompanying
consolidated balance sheets at June 30, 2001 and December 31, 2000 do
not include any of the assets or liabilities of WPC, and the
accompanying consolidated statement of operations and the consolidated
statement of cash flows for the quarter and six months ended June 30,
2001 exclude the operating results of WPC.
NATURE OF OPERATIONS
WHX Corporation ("WHX") is a holding company that has been
structured to invest in and/or acquire a diverse group of businesses on
a decentralized basis. WHX's primary businesses currently are: Handy
& Harman ("H&H"), a diversified manufacturing company whose
strategic business units encompass three segments; precious metal, wire
& tubing, and engineered materials; Unimast Incorporated
("Unimast"), a leading manufacturer of steel framing and other products
for commercial and residential construction; and WHX Entertainment
Corp., a co-owner of a racetrack and video lottery facility located in
Wheeling, West Virginia. WHX's other business consists of
Wheeling-Pittsburgh Corporation ("WPC") and its subsidiaries including
Wheeling-Pittsburgh Steel Corporation ("WPSC" and together with WPC and
its other subsidiaries, the "WPC Group"), a vertically integrated
manufacturer of value-added and flat rolled steel products (see Note 1).
WHX, together with all of its subsidiaries shall be referred to herein
as the "Company," and the Company and its subsidiaries other than the
WPC Group shall be referred to herein as the "WHX Group."
NOTE 1 - WPC GROUP BANKRUPTCY
On November 16, 2000, the WPC Group filed petitions for relief
under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy
Court for the Northern District of Ohio. As a result, subsequent to the
commencement of the Bankruptcy Filing, the WPC Group sought and obtained
several orders from the Bankruptcy Court that were intended to enable
the WPC Group to continue business operations as debtors-in-possession.
Since the Petition Date, the WPC Group's management has been in the
process of stabilizing their businesses
5
and evaluating their operations, while continuing to provide
uninterrupted services to its customers.
The Bankruptcy Court granted the WPC Group's motion to approve
a new $290 million Debtor in Possession Credit Agreement ("DIP Credit
Agreement") provided by Citibank, N.A., as initial issuing bank,
Citicorp U.S.A., Inc., as administrative agent, and the DIP Lenders.
Pursuant to the DIP Credit Agreement, Citibank, N.A. made term loan
advances to the WPC Group up to a maximum aggregate principal amount of
$35 million. In addition, the DIP Lenders agreed, subject to certain
conditions, to provide the WPC Group with revolving loans, swing loans
and letter of credit accommodations in an aggregate amount of up to $255
million. In connection with the Bankruptcy Filing, WHX had guaranteed
$30 million of the term loan portion of the DIP Credit Agreement (the
"Term Loan") and deposited in a pledged asset account $33 million of
funds in support of such guaranty. Effective as of June 1, 2001, WHX
purchased a participation interest comprising an undivided interest in
the Term Loan in the amount of $30 million, plus interest accrued but
not paid on such amount of the Term Loan through June 1, 2001.
Concurrently with such transaction, WHX's guaranty of $30 million of the
Term Loan described above was terminated and the $33 million of funds
previously deposited in a pledged asset account in support of such
guaranty were released to WHX. WHX paid to Citibank $30.5 million of
such deposited funds to purchase WHX's participation interest in the
Term Loan. WPC borrowings outstanding under the DIP Credit Agreement at
June 30, 2001 included the $35 million Term Loan, $ 127.7 million in
revolving credit borrowings and approximately $2.5 million of letters of
credit.
Although the WPC Group expects to file a Plan of Reorganization
at an appropriate time in the future, there can be no assurance at this
time that a Plan of Reorganization will be proposed by the WPC Group,
approved or confirmed by the Bankruptcy Court, or that such plan will be
consummated. The WPC Group has the exclusive right to file a Plan of
Reorganization at any time during the 120-day period following November
16, 2000. The exclusive filing period has been extended until August 24,
2001 by the Bankruptcy Court at the WPC Group's request, and while the
WPC Group intends to request extensions of the exclusivity period if
necessary, there can be no assurance that the Bankruptcy Court will
grant future extensions. If the exclusivity period were to expire or be
terminated, other interested parties, such as creditors of the WPC
Group, would have the right to propose alternative plans of
reorganization.
During the period January 1, 2001 through June 30, 2001, the
WPC Group incurred a net loss of $98.7 million which is not reflected in
the Company's June 30, 2001 consolidated results of operations.
At January 1, 2000, $136.8 million of the Company's net equity
represented its investment in WPC. In addition to this investment, WHX,
on November 16, 2000, guaranteed $30 million of the WPC Group's
debtor-in-possession term loan. Such guaranty was terminated effective
as of June 1, 2001 concurrently with WHX's purchase of a participation
interest in the Term Loan as discussed above. The recognition of the WPC
Group's net loss of $176.6, in the year 2000, has eliminated the
investment's carrying value of $136.8 million. In November of 2000, WHX
recorded a liability of $39.8 million representing the excess of the WPC
Group's loss over the carrying amount of the investment.
A Settlement and Release Agreement (the "Settlement Agreement")
by and among WPSC, WPC, WHX, and certain affiliates of WPSC, WPC and WHX
, received approval of the United States Bankruptcy Court for the
Northern District of Ohio on May 24, 2001, was entered into on May 25,
2001, and became effective on May 29, 2001. Pursuant to the Settlement
Agreement certain outstanding claims among the parties thereto were
resolved, including without limitation, all inter-company receivables
and payables between the WHX Group and the WPC Group.
The Settlement Agreement provided, in part, that the Settlement
Agreement shall be effective upon the occurrence of each of the
following transactions, (i) the payment by WHX to WPC of $17 million;
(ii) the exchange of releases between the WPC Group and the WHX Group;
(iii) WHX or its designee would enter into a binding agreement to
purchase certain assets of Pittsburgh-Canfield Corporation ("PCC") for
$15 million, plus the assumption of certain trade payables, subject to
bidding procedures as may be established by the bankruptcy court, and
certain other terms and conditions; (iv) the termination of the Tax
6
Sharing Agreements between WHX and WPC; (v) WHX would deliver an
agreement to the WPC Group whereby it agreed not to charge or allocate
any pension obligations, expenses or charges to the WPC Group with
respect to the WHX Pension Plan, subject to certain limitations as
provided therein, through and including the earlier of the effective
date of a plan or plans of reorganization and December 31, 2002; (vi)
the DIP Credit Agreement shall have been amended as provided in the
Settlement Agreement; (vii) WPC Land Corporation shall execute such
instruments as may be necessary to effect the transfer of title, to
WPSC, of certain properties specified in the Settlement Agreement; and
(viii) the lenders party to the DIP Credit Agreement shall have
consented to the transaction described in the Settlement Agreement. Such
transactions, other than the acquisition of certain assets of
Pittsburgh-Canfield Corporation, all occurred effective May 29, 2001.
The sale of certain assets of Pittsburgh-Canfield Corporation closed on
June 29, 2001. The PCC agreement includes a one year repurchase option
for the seller. The repurchase price is $15 million plus the sum of
environmental expenditures and capital expenditures made by the Company.
In addition, the repurchase price will be adjusted for any changes in
working capital.
As a result of the total cash payments of $32 million to the
WPC Group by WHX all intercompany receivables and liabilities (except
for commercial trade transactions), including the liability for
redeemable common stock were settled. In addition, WHX recorded the fair
value of the net assets of PCC of $5.4 million.
The Company has no current intention to provide the WPC Group
with additional cash funding. However, the Company may elect to provide
additional financing to the WPC Group should the need arise and if it is
in the best interest of the Company.
Management of the Company cannot determine with certainty the
ultimate outcome of the Chapter 11 proceedings; however it is reasonably
possible that the following outcomes could result:
o The WPC Group could reorganize, and their creditors could
receive all or a portion of their claims.
o The WPC Group could be sold in its entirety or segments
could be sold, and the proceeds from such sale(s) would be
utilized to satisfy creditor claims.
o The creditors could assume ownership of the WPC Group and
continue to operate the WPC Group businesses.
In each of the above possible outcomes, the WHX Group would
have little or no future ownership in or involvement with the WPC Group,
and the WHX Group future cash obligations to or on behalf of the WPC
Group would be minimal to none. It is also reasonably possible that none
of the above outcomes would occur and the WPC Group may shut down a
number of their operations. According to the Company's preliminary
evaluation of potential pension obligations, if a partial shutdown of
the WPC Group's operations were to occur in the immediate future WHX's
liability for early retirement pension benefits could range from
approximately $80 million to $100 million. It is also possible that the
WPC Group could cease operations in their entirety and this liability
would then be significantly greater. However, management does not
believe this occurrence is likely. Under current pension law and
regulations based on the Company's analysis of the current funded status
of the pension plan, if a partial shutdown were to occur at the present
time, the cash funding obligations would likely not begin until 2003 and
would extend over several years. Such cash funding obligations would
have a material adverse impact on the liquidity, financial position and
capital resources of the Company. The Company's funding obligation and
the impact on the Company's liquidity, financial position and capital
resources could be substantially reduced or eliminated if (1) a partial
shutdown, if it occurs, were to occur at such a time that the fair
market value of the assets of the plan approximates or exceeds the
plan's liabilities (including the early retirement benefits), (2) a
shutdown were to occur gradually over several years or (3) the number of
the WPC Group's operations shut down were less than those assumed in
estimating the above-mentioned amounts.
7
NOTE 2 - EARNINGS PER SHARE
The computation of basic earnings per common share is based
upon the average shares of Common Stock outstanding. In the computation
of diluted earnings per common share in the three and six month periods
ended June 30, 2001, the conversion of preferred stock and redeemable
common stock and exercise of options would have had an anti-dilutive
effect. A reconciliation of the income and shares used in the
computation follows:
RECONCILIATION OF INCOME AND SHARES IN EPS CALCULATION
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
For Three Months Ended June 30, 2001 For Six Months Ended June 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------------------------------------------------------------------------------------
Income (loss)before extraordinary item ($4,574) ($14,768)
Less: Preferred stock dividends 5,110 10,262
------------ ----------
Basic and Diluted EPS
Income (loss) before extraordinary item
available to common stockholders ($9,684) 14,804 ($0.65) ($25,030) 14,723 ($1.70)
======================================================================================
For Three Months Ended June 30, 2001 For Six Months Ended June 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Income before extraordinary item $36,262 $29,564
Less: Preferred stock dividends 5,151 10,303
------------- --------------
Basic EPS
Income available to common
stockholders 31,111 14,228 $2.19 19,261 14,283 $1.35
Effect of Dilutive Securities
Options 1 9
Convertible preferred stock 5,151 16,506 10,303 16,506
Redeemable common stock 270 270
Diluted EPS
Income available to common
-------------------------------- -------------------------------
stockholders plus assumed conversion $36,262 31,005 $1.17 $29,564 31,068 $0.95
======================================================================================
Outstanding stock options granted to officers, directors, key
employees and others totaled 5,365,366 million shares of Common Stock at June
30, 2001.
PREFERRED STOCK
The Company has accrued $15.4 million representing dividends in
arrears at June 30, 2001 for preferred shares Series A and Series B.
REDEEMABLE COMMON STOCK
Certain present and former employees of the WPC Group have the right
to sell their redeemable common stock to the Company at prices of $15 or
$20 per share depending on years of service, age and retirement date.
Holders can sell any or all of their redeemable common stock into the
public market, provided, however, that stock sales on any day cannot be
more than 20% of the number of shares publicly traded during the previous
day. As a result of the Settlement Agreement, the liability for redeemable
common shares remained with WPC.
NOTE 3 - COMPREHENSIVE INCOME
Comprehensive income for the three month and six month periods ended June
30, 2001 and 2000 was as follows:
8
Three Months Ended Six Months Ended
June 30 June 30
------- -------
(in thousands)-
2001 2000 2001 2000
---- ---- ---- ----
Net Income (loss) $ 7,783 $ 36,262 $ (2,411) $ 29,564
Other comprehensive income (loss):
Foreign currency translation adjustments (152) (350) (802) (586)
Unrealized holding (losses) on available-for-sale securities
arising during the period, net of tax (4,529) (7,572)
Cumulative effect on Equity of SFAS No. 133 adoption, net
of tax $227 -- -- (423) --
Interest Rate Swap, net of tax of $123 and ($106) 228 -- (196) --
-------- -------- -------- --------
Comprehensive income (loss) $ 7,859 $ 31,383 ($ 3,832) $ 21,406
======== ========
Accumulated other comprehensive income balances as of June 30, 2001 and December
31, 2000 were as follows:
(in thousands) Foreign currency Accumulated other
Cash Flow Unrealized gain translation comprehensive
Hedge loss) on securities adjustments income (loss)
June 30, 2001
Balance on January 1, 2001 $ -- $ -- $(1,501) $(1,501)
Period change (619) -- (802) (1,421)
------- ------- ------- -------
Balance on June 30, 2001 $ (619) $ -- $(2,303) $(2,922)
======= ======= ======= =======
December 31, 2000
Balance on January 1, 2000 $ -- $ 1,450 $ (505) $ 945
Period change -- (1,450) (996) (2,446)
------- ------- ------- -------
Balance on December 31, 2000 $ -- $ -- $(1,501) $(1,501)
======= ======= ======= =======
NOTE 4 - SHORT TERM INVESTMENTS
Net unrealized holding losses on trading securities held at
period end and included in other income for the second quarter of 2001
and 2000 were a loss of $.2 million and $6.3 million, respectively. Net
unrealized holding losses on trading securities held at period end and
included in other income for the six months ended June 30, 2001 and 2000
were a loss of $10.3 million and $17.5 million, respectively.
NOTE 5 - INVENTORY
Inventories at June 30, 2001 and December 31, 2000 are comprised as
follows (in thousands):
June 30,2001 December 31,2000
------------ ----------------
Finished and semi-finished products $ 48,163 $ 53,821
Raw materials 33,222 36,453
Precious metals 39,462 61,671
LIFO Reserve (470) (1,676)
-------- --------
$120,377 $150,269
======== ========
The operating income for the six months ended June 30, 2001
includes a charge resulting from lower of cost or market adjustment to
precious metal inventory. The effect of this adjustment decreased
operating income by $3.3 million for the six months ended June 30, 2001.
As a result of reduction in quantities of precious metals
inventories valued under the LIFO method of accounting, income for the
quarter and six months ended June 30, 2001 decreased by $.5 million.
9
NOTE 6 - LONG-TERM DEBT
The Company's long-term debt consists of the following debt
instruments:
June 30, December 31,
2001 2000
---- ----
(dollars in thousands)
WHX Senior Unsecured Notes due 2005, 10-1/2% $245,059 $281,490
Handy & Harman Senior Secured Credit Facility 187,328 192,793
Handy & Harman Industrial Revenue Bonds, due 2004 7,500 7,500
Unimast Revolving Credit Agreement, due 2003 33,000 21,000
Unimast Industrial Development Bond, due 2030 6,050 6,050
Other 2,150 3,079
-------- --------
481,087 511,912
Less portion due within one year (a) 10,150 6,929
-------- --------
Total Long-Term Debt $470,937 $504,983
======== ========
(a) $8 million and $6 million of the Unimast Revolving Credit Agreement,
due in 2003, is included in other current liabilities.
Unimast, in connection with the Settlement Agreement discussed
in Note 1, borrowed $15 million under its Revolving Credit Agreement for
the settlement payment made to WPC Group. In addition, WHX deposited $5
million in an escrow account as additional collateral for this loan.
In the quarter ended June 30, 2001 the Company purchased and
retired $36.4 million aggregate principal amount of 10 1/2 % Senior
Notes in the open market for $15.9 million. After the write off of $1.5
million of deferred debt related costs, the Company recognized an
extraordinary gain of $19.0 million ($12.4 million after tax).
NOTE 7 - CONTINGENCIES
Legal & Environmental Matters
Legal Matters
WPC Group
The WPC Group is a party to various litigation matters
including general liability claims covered by insurance. Claims that are
"pre-petition" claims for Chapter 11 purposes will ultimately be handled
in accordance with the terms of a confirmed Plan of Reorganization in
Chapter 11 cases. In the opinion of management, litigation claims are
not expected to have a material adverse effect on the WPC Group's
results of operations or its ability to reorganize.
Handy & Harman
On or about April 3, 2000 a civil action was commenced under
Title 3 of the United States Code ss.3729 ET SEQ. (False Claims Act)
entitled United States of America, EX REL. Patricia Keehle v. Handy
& Harman, Inc. (sic) and Strandflex, a Division of Maryland
Specialty Wire, Inc. ("Strandflex") (Civil Action No. 5:99-CV-103). The
substantive allegations in the complaint related to the alleged improper
testing and certification of certain wire rope manufactured at the
Strandflex plant during the period 1992-1999 and sold as MIL-SPEC wire.
A companion criminal investigation of Strandflex was initiated by the
United States Attorney for the Northern District of New York under Title
18 of the United States Code ss.287(Submitting False Claims). On March
7, 2000, Handy & Harman was informed by the U.S. Attorney for the
Northern District of New York that absent a negotiated settlement, the
government would seek a criminal indictment and unspecified civil
damages against Handy & Harman based on the then-alleged 161 sales
of wire rope by Strandflex during the period June, 1995 to July 1998.
Handy & Harman entered into discussion with the United States
Attorney to seek
10
a negotiated settlement of all criminal and civil claims. Those
discussions resulted in a settlement agreement dated May 24, 2001,
pursuant to which all civil and criminal claims were resolved as
follows:
Maryland Specialty Wire, Inc., Strandflex Division, made a
total civil payment of $1 million which amount represented civil damages
as payment for remediation and compensation and included $100,000 as
restitution pursuant to the Plea Agreement which related to 35 wire rope
sales which took place between 1994 and 1998;
Maryland Specialty Wire, Inc., Strandflex Division, paid a
criminal fine of $500,000 and $100,000 as restitution pursuant to the
Plea Agreement.
There are no known incidents of any Strandflex wire rope
failing and causing personal or property damage in any application.
Summary
The Company is a party to various litigation matters including
general liability claims covered by insurance. In the opinion of
management, the ultimate outcome of such litigation matters and claims
is not expected to have a material adverse effect on the financial
condition or results of operations of the Company. However, it is
possible that the ultimate resolution of such litigation matters and
claims could have a material effect on quarterly or annual operating
results when they are resolved in future periods.
Environmental Matters
WPC Group
WPC has been identified as a potentially responsible party
under the Comprehensive Environmental Response, Compensation and
Liability Act ("Superfund") and/or similar state statutes at several
waste sites. WPC is subject to joint and several liability imposed by
Superfund on potentially responsible parties. Due to the technical and
regulatory complexity of remedial activities and the difficulties
attendant to identifying potentially responsible parties and allocating
or determining liability among them, WPC is unable to reasonably
estimate the ultimate cost of compliance with Superfund laws. WPC
believes, based upon information currently available, that its liability
for clean up and remediation costs in connection with the Buckeye
Reclamation Landfill will be between $1.5 and $2.0 million. At WPC's
other sites the Company estimates costs of an aggregate less than $.5
million.
WPC, as are other industrial manufacturers, is subject to
increasingly stringent standards relating to the protection of the
environment. In order to facilitate compliance with these environmental
standards, WPC has incurred capital expenditures for environmental
control projects aggregating $7.7 million, $3.4 million and $.9 million
for 1999, 2000 and the six months ended June 30, 2001, respectively. WPC
anticipates spending approximately $23.1 million in the aggregate on
major environmental compliance projects through the year 2003, estimated
to be spent as follows: $4.1 million in 2001, $15.0 million in 2002, and
$4.0 million in 2003. Due to the possibility of unanticipated factual or
regulatory developments, the amount of future expenditures may vary
substantially from such estimates.
WPC's non-current accrued environmental liabilities totaled
$18.6 million at June 30, 2001. These accruals were initially determined
by WPC, based on all available information. As new information becomes
available, including information provided by third parties, and changing
laws and regulation the liabilities are reviewed and the accruals
adjusted quarterly. Management believes, based on its best estimate,
that WPC has adequately provided for remediation costs that might be
incurred or penalties that might be imposed under present environmental
laws and regulations.
11
The Bankruptcy Code may distinguish between environmental
liabilities that represent pre-petition liabilities and those that
represent ongoing post-petition liabilities. Based on information
currently available, including the WPC Group's prior capital
expenditures, anticipated capital expenditures, consent agreements
negotiated with Federal and state agencies and information available to
the WPC Group on pending judicial and administrative proceedings, the
WPC Group does not expect its environmental compliance costs, including
the incurrence of additional fines and penalties, if any, relating to
the operation of its facilities, to have a material adverse effect on
the results of operations of the WPC Group or on the WPC Group's ability
to reorganize. However, it is possible that litigation and environmental
contingencies could have a material effect on quarterly or annual
operating results when they are resolved in future periods. As further
information comes into the WPC Group's possession, it will continue to
reassess such evaluations.
In the event the WPC Group is unable to fund these liabilities,
claims may be made against the WHX Group for payment of such
liabilities.
NOTE 8 - REPORTED SEGMENTS
In the second quarter of 2001 the Company increased its number
of reportable segments by dividing Handy & Harman into three
segments. As a result of the bankruptcy filing and deconsolidation of
the WPC Group, as discussed in Note 1, the H&H business segments
have become more significant to the operations of the Company. The
Company now has four reportable segments: (1) H&H Precious Metal.
This segment manufactures and sells precious metal products and
electroplated material, containing silver, gold, and palladium in
combination with base metals for use in a wide variety of industrial
applications; (2) H&H Wire & Tubing. This segment manufactures
and sells metal wire, cable and tubing products and fabrications
primarily from stainless steel, carbon steel and specialty alloys, for
use in a wide variety of industrial applications; (3) H&H Engineered
Materials. This segment manufactures specialty roofing and construction
fasteners and products for gas, electricity and water distribution using
steel and plastic which are sold to the construction, and natural gas
and water distribution industries; (4) Unimast, a manufacturer of steel
framing and other products for commercial and residential construction.
The results of operations of Pittsburgh-Canfield will be included in the
Unimast segment beginning July 1, 2001. Operating results for the WPC
Group are included in the year 2000 figures for the periods before
deconsolidation effective November 16, 2000. The WPC Group is a
vertically integrated manufacturer of value-added and flat rolled steel
products.
Management reviews operating income to evaluate segment
performance. Operating income for the reportable segments excludes
unallocated general corporate expenses (including pension expense in the
2001 periods) and goodwill amortization. Other income and expense,
interest expense, and income taxes are not presented by segment since
they are excluded from the measure of segment profitability reviewed by
the Company's management.
For the periods presented, intersegment sales and transfers
were conducted at arm's length. Goodwill amortization is primarily
related to the H&H segments.
The following table presents information about reported
segments for the three and six month periods ending June 30, 2001 and
2000:
12
Three Months Ended Six Months Ended
(in thousands) June 30 June 30
2001 2000 2001 2000
- -------------------------------------------------------------------------------------
Segment revenue
H&H Precious Metal $ 45,758 $ 62,564 $ 92,746 $ 124,981
H&H Wire & Tubing 34,130 40,990 71,375 82,666
H&H Engineered Materials 21,153 19,546 36,574 36,769
Unimast 61,748 61,461 118,165 122,628
--------- --------- --------- ---------
Sub total 162,789 184,561 318,860 367,044
WPC Group -- 304,796 -- 594,998
--------- --------- --------- ---------
Total segment revenue 162,789 489,357 318,860 962,042
Intersegment revenue -- (2,578) -- (7,520)
--------- --------- --------- ---------
Consolidated revenue $ 162,789 $ 486,779 $ 318,860 $ 954,522
--------- --------- --------- ---------
Segment operating income
H&H Precious Metal $ 3,055 $ 6,738 $ 4,047 $ 12,219
H&H Wire & Tubing 1,077 5,026 3,016 9,594
H&H Engineered Materials 2,480 2,693 2,691 4,038
Unimast 4,183 4,026 6,682 9,466
--------- --------- --------- ---------
Sub total 10,795 18,483 16,436 35,317
WPC Group -- 1,802 -- 2,649
--------- --------- --------- ---------
10,795 20,285 16,436 37,966
Unallocated corporate expenses 7,176 614 10,012 1,214
Goodwill amortization 2,077 2,208 4,326 4,426
--------- --------- --------- ---------
Operating income 1,542 17,463 2,098 32,326
Interest expense 12,711 21,754 26,220 44,200
Other income (expense) 7,230 (1,054) 3,800 (7,721)
--------- --------- --------- ---------
Income (loss) before taxes and
extraordinary items (3,939) (5,345) (20,322) (19,595)
Income tax expense (benefit) 635 (41,607) (5,554) (49,159)
--------- --------- --------- ---------
Income (loss) before
extraordinary item (4,574) 36,262 (14,768) 29,564
Extraordinary item-net of tax 12,357 -- 12,357 --
--------- --------- --------- ---------
Net income (loss) $ 7,783 $ 36,262 ($ 2,411) $ 29,564
========= ========= ========= =========
13
Note 9 - New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS133). This
pronouncement requires all derivative instruments to be reported at fair
value on the balance sheet; depending on the nature of the derivative
instrument, changes in fair value will be recognized either in net
income or as an element of comprehensive income. SFAS 133 is effective
for fiscal years beginning after June 15, 2000. The Company has not
engaged in significant activity with respect to derivative instruments
or hedging activities in the past.
A reconciliation of current period charges, net of applicable
income taxes, included in the comprehensive income component of
stockholders' equity is as follows:
(Dollars in thousands)
Cumulative Effect on Equity of SFAS No. 133 adoption $(423)
Current period change in fair value of interest swap
- net of tax (196)
-------
Balance at June 30, 2001 $(619)
======
The above amount is recorded in equity, net of a tax benefit of
$333, at June 30, 2001. This amount is expected to be
reclassified to earnings over the three month period ending
September 30, 2001.
During the third quarter 2000, the EITF issued EITF Consensus
No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an
Agent", which addresses whether certain cost items should be reported as
a reduction of revenue or as a component of cost of sales and EITF
Consensus No. 00-10, "Accounting for Shipping and Handling Fees and
Costs" ("EITF 00-10"), which addresses the classification of cost
incurred for shipping goods to customers. As a result of adopting EITF
00-10, the Company has reclassified amounts in the Consolidated
Statements of Operations for the three and six month periods ended June
30, 2000 as follows:
Three months ended Six months ended
June 30,2000 June 30, 2000
------------ -------------
(dollars in thousands)
Increased Sales $14,467 $28,440
Increased Cost of Sales 15,412 30,284
Decreased SG&A 945 1,844
In July 2001, the FASB issued SFAS 141 and 142, "Business
Combinations"("SFAS 141") and "Goodwill and Other Intangible Assets"
("SFAS 142"), respectively. SFAS 141 supercedes Accounting Principles
Board Opinion No. 16 (APB 16), BUSINESS COMBINATIONS. The most
significant changes made by SFAS 141 are: (1) requiring that the
purchase method of accounting be used for all business combinations
initiated after June 30, 2001, (2) establishing specific criteria for
the recognition of intangible assets separately from goodwill, and (3)
requiring unallocated negative goodwill to be written off immediately as
an extraordinary gain (instead of being deferred and amortized).
SFAS 142 supercedes APB 17, INTANGIBLE ASSETS. SFAS 142
primarily addresses the accounting for goodwill and intangible assets
subsequent to their acquisition (i.e., the post-acquisition accounting).
The provisions of SFAS 142 will be effective for fiscal years beginning
after December 15, 2001. However, early adoption of SFAS 142 will be
permitted for companies with a fiscal year beginning after March 15,
2001, provided their first quarter financial statements have not been
previously issued. In all cases, SFAS 142 must be adopted at the
beginning of a fiscal year. the most significant changes made by SFAS
142 are: (1) goodwill and indefinite lived intangible assets will no
longer be amortized, (2) goodwill will be tested for impairment at least
annually at the reporting unit level, (3) intangible assets deemed to
have an indefinite life will be tested for impairment at least annually,
and (4) the amortization period of intangible assets with finite lives
will no longer be limited to forty years.
14
The Company will adopt the provisions of SFAS 142 effective
January 1, 2002. As a result of the adoption of SFAS 142, the Company
will not record amortization expense of approximately $8.7 million for
existing goodwill for the year ending December 31, 2002. The Company
will record amortization expense on this goodwill through December 31,
2001. However, any intangible assets acquired or goodwill arising from
transactions after June 30, 2001 will be subject to the amortization and
nonamortization provisions of SFAS 141 and SFAS 142. As of January 1,
2002, the Company will evaluate their goodwill and other intangible
assets for impairment under the criteria set forth in SFAS 142.
15
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
The Company continues to pursue strategic alternatives to
maximize the value of its portfolio of businesses. Some of these
alternatives have included, and will continue to include selective
acquisitions, divestitures and sales of certain assets. The Company has
provided, and may from time to time in the future, provide information
to interested parties regarding portions of its businesses for such
purposes.
SETTLEMENT AGREEMENT
A Settlement and Release Agreement (the "Settlement Agreement")
by and among Wheeling-Pittsburgh Steel Corporation ("WPSC"),
Wheeling-Pittsburgh Corporation (WPC), WHX Corporation ("WHX"), and
certain affiliates of WPSC, WPC and WHX as specified on the signature
pages thereto, received approval of the United States Bankruptcy Court
for the Northern District of Ohio on May 24, 2001, was entered into on
May 25, 2001, and became effective on May 29, 2001. Pursuant to the
Settlement Agreement certain outstanding claims among the parties
thereto were resolved, including without limitation, all inter-company
receivables and payables between the WHX Group and the WPC Group.
The Settlement Agreement provided, in part, that the Settlement
Agreement shall be effective upon the occurrence of each of the
following transactions, (i) the payment by WHX to WPC of $17 million;
(ii) the exchange of releases between the WPC Group and the WHX Group;
(iii) WHX or its designee would enter into a binding agreement to
purchase certain assets of Pittsburgh-Canfield Corporation ("PCC") for
$15 million, plus the assumption of certain trade payables, subject to
bidding procedures as may be established by the bankruptcy court, and
certain other terms and conditions; (iv) the termination of the Tax
Sharing Agreements between WHX and WPC; (v) WHX would deliver an
agreement to the WPC Group whereby it agreed not to charge or allocate
any pension obligations, expenses or charges to the WPC Group with
respect to the WHX Pension Plan, subject to certain limitations as
provided therein, through and including the earlier of the effective
date of a plan or plans of reorganization and December 31, 2002; (vi)
the DIP Credit Agreement shall have been amended as provided in the
Settlement Agreement; (vii) WPC Land Corporation shall execute such
instruments as may be necessary to effect the transfer of title, to
WPSC, of certain properties specified in the Settlement Agreement; and
(viii) the lenders party to the DIP Credit Agreement shall have
consented to the transaction described in the Settlement Agreement. Such
transactions, other than the acquisition of certain assets of
Pittsburgh-Canfield Corporation, all occurred effective May 29, 2001.
The sale of certain assets of Pittsburgh-Canfield Corporation closed on
June 29, 2001. The PCC agreement includes a one year repurchase option
for the seller. The repurchase price is $15 million plus the sum of
environmental expenditures and capital expenditures made by the Company.
In addition, the repurchase price will be adjusted for any changes in
working capital
RESULTS OF OPERATIONS
The Bankruptcy Filing and resultant deconsolidation of WPC as
of November 16, 2000 have affected comparisons between the 2001 and 2000
periods.
16
COMPARISON OF THE SECOND QUARTER OF 2001 WITH THE SECOND QUARTER OF 2000
Net sales for the second quarter of 2001 were $162.8 million as
compared to $486.8 million in the second quarter of 2000, a decrease of
$324.0 million. WPC Group sales included in the second quarter of 2000
were $302.2 million. Sales decreased by $16.8 million at the H&H
Precious Metal Segment and $6.9 million at the H&H Wire & Tubing
Segment. Sales from the H&H Engineered Materials Segment increased
by $1.6 million. Sales from the Unimast segment were flat from the year
ago quarter.
Operating income for the second quarter of 2001 decreased to
$1.5 million from $17.5 million in the comparable 2000 period. WPC Group
operating income in the second quarter of 2000 amounted to $1.8 million.
Operating income at the H&H Segments declined from $14.5 million in
2000 to $6.6 in 2001. Unimast operating income increased $.2 million
from the year ago quarter. Unallocated Corporate expenses increased from
$.6 million to $7.2 million. This increase is primarily related to legal
and professional fees related to the WPC bankruptcy, and to costs and
expenses no longer allocated to the WPC segment including pension
expense of $2.8 million.
Interest expense for the second quarter 2001 decreased $9.1
million to $12.7 million from $21.8 million in the comparable period in
2000. After excluding WPC Group interest of $9.5 million in the second
quarter 2000, interest expense increased by $ .4 million. This was the
result of higher effective interest rates and increased amortization of
consent fees, partially offset by lower borrowings.
Other income was $7.2 million for the second quarter 2001
compared to $1.1 million of expense in the second quarter of 2000. The
income in 2001 was primarily related to a favorable settlement of an
H&H lawsuit of $3.2 million, income from WHX Entertainment of $4.0
million, net investment income of $.5 million, and other expenses of $.5
million. The 2000 period loss included net investment activity losses of
$2.0 million, minority interest expense of $.5 million, and income from
WHX Entertainment of $1.8 million.
The second quarter 2001 tax provision is based on a Federal
benefit of 35%, offset by permanent differences and state and foreign
tax expense. The 2000 second quarter tax benefit includes a non-cash
benefit of approximately $38 million relating to the reversal of prior
year provisions for taxes no longer required.
The extraordinary income of $19.0 million ($12.4 million after
tax) in the second quarter of 2001 reflects the gain on the early
retirement of $36.4 million of 10 1/2 Senior Notes.
The comments that follow compare revenues and operating income
by operating segment for the second quarter of 2001 and 2000:
Handy & Harman Precious Metal
Sales for the Precious Metal Segment decreased $16.8 million to
$45.8 million. Approximately 21% of the decrease was attributable to the
decline in the market price of silver period to period, 29% was due to
the dissolution of a fully consolidated joint venture, as of December
31, 2000, which had $4.8 million in sales in the comparative period, and
the balance of the decrease was primarily due to the economic slowdown
experienced by automotive and electronic equipment manufacturers, two
primary markets this segment serves. Operating income decreased $3.7
million to $3.0 million, inclusive of a $.5 million LIFO loss in the
sale of precious metal. Excluding the LIFO loss, operating income
decreased $3.2 million due to the shortfall in revenue.
17
Handy & Harman Wire & Tubing
Sales for the Wire & Tubing Segment decreased $6.9 million
to $34.1 million and operating income, inclusive of a $ .5 million
additional inventory reserve, decreased $3.9 million to $1.1 million due
to the continued weakness, which began in the fourth quarter of 2000, in
the automotive and telecommunications markets. Tubing sales, although
strong in the first quarter, declined in the semi-conductor fabrication
industry in the second quarter.
Handy & Harman Engineered Materials
Sales for the Engineered Materials Segment increased $1.6
million to $21.2 million primarily due to increases in its customer
base. Operating income decreased by $.2 million to $2.5 million
primarily due to additional initial selling costs associated with this
sales growth.
Unimast
Sales for the second quarter 2001 increased slightly to $61.7
million from $61.5 in the same period 2000. This reflects growth in
sales volume offset by a significant reduction in selling prices.
Despite lower selling prices, the segment was able to increase operating
income by 3.9% to $4.2 million compared to $4.0 million in the same
period of 2000. This resulted from increased volume, manufacturing
efficiencies and raw material cost reductions, offset by an increase in
allowance for bad debts relating to the Chapter 11 bankruptcy filing of
a major customer.
18
COMPARISON OF THE FIRST SIX MONTHS OF 2001 WITH THE FIRST SIX MONTHS OF 2000
Net sales for the first six months of 2001 were $318.9 million
as compared to $954.5 million in the first six months of 2000, a
decrease of $635.6 million. WPC Group sales included in the first six
months of 2000 were $587.5 million. All four of the Company's reportable
segments reported decreased sales for the six month period ended June
30, 2001.
Operating income for the first six months of 2001 was $2.1
million compared to $32.3 million in the comparable 2000 period. WPC
Group operating income in the first six months of 2000 amounted to $2.6
million. Operating income at the remaining four reportable segments
declined from $35.3 million in 2000 to $16.4 in 2001. Unallocated
Corporate expenses increased from $1.2 million to $10.0 million. This
increase is primarily related to legal and professional fees related to
the WPC bankruptcy, and to costs and expenses no longer allocated to the
WPC segment including pension expense of $2.8 million.
Interest expense for the first six months 2001 decreased by
$18.0 million to $26.2 million from $44.2 million in the comparable
period in 2000. After excluding WPC Group interest of $19.3 million in
the 2000 period, interest expense increased by $1.3 million. This was
the result of higher effective interest rates and increased amortization
of consent fees, partially offset by lower borrowings.
Other income was $3.8 million for the six month period ended
June 30, 2001 compared to $7.7 million of expense in the second quarter
of 2000. The income in 2001 was primarily related to a favorable
settlement of an H&H lawsuit of $3.2 million, income from WHX
Entertainment of $7.24 million, net investment loss of $6.3 (including
unrealized losses of $10.3 million), and other expenses of $.3 million.
The 2000 period loss included net investment losses of $9.6 million,
minority interest expense of $1.0 million, and income from WHX
Entertainment of $3.5 million.
The tax provision reflects an effective rate of 27% based on a
Federal benefit of 35%, offset by permanent differences and state and
foreign tax expense. The 2000 six month tax benefit includes a non-cash
benefit of approximately $38 million relating to the reversal of prior
year provisions for taxes no longer required.
The extraordinary item of $19.0 million ($12.4 million after
tax) in the six month period of 2001 reflects the gain on the early
retirement of $36.4 million of 10 1/2 Senior Notes.
The comments that follow compare revenues and operating income
by operating segment for the first six months of 2001 and 2000:
Handy & Harman Precious Metal
Sales for the Precious Metal Segment decreased $32.2 million to
$92.7 million. Approximately 23% of the sale decrease was attributable
to the decline in the market price of silver period to period, 30% was
due to the dissolution of a fully consolidated joint venture, as of
December 31, 2000, which had $9.6 million in sales in the comparative
period and the balance of the decrease was primarily due to the slowdown
in the economy. Operating income decreased $8.2 million to $4.0 million.
Included in the 2001 period was a $3.3 million precious metal lower of
cost or market reserve established in the first quarter and a $.5
million LIFO loss on the sale of silver in the second quarter, partially
offset by a favorable precious metal gain of $.8 million. The 2000
period includes a bad debt reserve of $1.0 million and $1.0 million
lower of cost or market reserve on precious metal inventory. Excluding
these charges and LIFO loss, operating income decreased $7.1 million due
to the shortfall in revenue.
Handy & Harman Wire & Tubing
Sales for the Wire & Tubing Segment decreased $11.3 million
to $71.4 million and operating income, inclusive of a $ .8 million
additional inventory reserve, decreased $6.6 million to $3.0 million for
reasons outlined in the previously discussed second quarter analysis.
19
Handy & Harman Engineered Materials
Sales for the Engineered Materials Segment decreased $.2
million to $36.6 million and operating income decreased $1.3 million to
$2.7 million due to lower sales in the first quarter of approximately
$1.8 million, obsolete and slow moving inventory charges, and additional
selling and administrative costs associated with sales gains in the
second quarter.
Unimast
Sales for the six months ended June 30, 2001 decreased by $4.5
million to $118.2 million, reflecting steady demand offset by a
significant reduction in selling prices. Operating income decreased $2.8
million as a result of pricing pressures and a $.5 million increase in
allowance for bad debts. The segment's second quarter performance was
much stronger than the first quarter.
FINANCIAL POSITION
Net cash flow provided by operating activities for the six
months ended June 30, 2001 totaled $74.3 million. Short term trading
investments are reported as cash flow from operating activities and
provided a net $48.9 million of funds in the first six months of 2001.
Working capital accounts provided $27.4 million of funds. Accounts
receivable decreased by $5.9 million, trade payables increased $6.7
million, and other current liabilities decreased $6.5 million.
Inventories, valued principally by the LIFO method for financial
reporting purposes, totaled $120.4 million at June 30, 2001, a decrease
of $29.9 million from December 31, 2000.
In the first six months of 2001, $8.8 million was spent on
capital improvements.
The Company's two major subsidiaries, H&H and Unimast each
maintain separate and distinct credit facilities with various financial
institutions.
Borrowings outstanding against the H&H Senior Secured
Credit Facility at June 30, 2001 totaled $187.3 million. Letters of
credit outstanding under the H&H Revolving Credit Facility were
$14.6 million at June 30, 2001.
Borrowings outstanding against the Unimast Revolving Credit
Facility at June 30, 2001 totaled $33.0 million. $15.0 million of this
outstanding balance was used to fund a portion of the Settlement
Agreement payment. As additional security for this borrowing WHX placed
$5.0 million in escrow in the second quarter. Letters of credit
outstanding under the Unimast Revolving Credit facility were $6.1
million at June 30, 2001.
H&H has entered into an interest rate swap for certain of
its variable-rate debt. The swap agreement covers a notional amount of
$125 million and converts $125 million of its variable-rate debt to a
fixed rate with Citibank, N.A., New York. The fixed rate is 6.75%,
effective September 22, 2000 with a termination date of September 30,
2001.
Unimast has also entered into an interest rate swap for certain
of its variable-rate debt. The swap agreement covers a notional amount
of $10 million and converts $10 million of its variable-rate debt to a
fixed rate with Bank One, N.A., Chicago, IL. The fixed rate is 4.99%,
effective March 27, 2001 with a termination date of November 23, 2003.
In connection with the Bankruptcy Filing of the WPC Group, WHX
had guaranteed $30 million of the term loan portion of the DIP Credit
Agreement (the "Term Loan") and deposited in a pledged asset account $33
million of funds in support of such guaranty. Effective as of June 1,
2001, WHX purchased a participation interest comprising an undivided
interest in the Term Loan in the amount of $30 million, plus interest
accrued but not paid on such amount of the Term Loan through June 1,
2001. WHX paid to Citibank $30.5 of such deposited funds to purchase
WHX's participation interest in the Term Loan. Concurrently with such
transaction, WHX's guaranty of $30 million of the Term Loan described
above was terminated and the $33 million of fund previously deposited in
a pledged asset account in support of such guaranty was released to WHX.
20
LIQUIDITY
As of June 30, 2001, the WHX Group had cash and short-term
investments, of $46.1 million. In addition, H&H and Unimast had a
total of $44.4 million of funds available under bank credit
arrangements.
The WHX Group has a significant amount of outstanding
indebtedness, and their ability to access capital markets in the future
may be limited. However, management believes that cash on hand and
future operating cash flow will enable the WHX Group to meet its cash
needs for the foreseeable future. The respective credit agreements of
H&H and Unimast have certain financial covenants that limit the
amount of cash distributions that can be paid to WHX.
Short-term liquidity is dependent, in large part, on cash on
hand, investments, precious metal values, and general economic
conditions and their effect on marketing demand. Long-term liquidity is
dependent upon the WHX Group's ability to sustain profitable operations
and control costs during periods of low demand or pricing in order to
sustain positive cash flow. The WHX Group satisfies its working capital
requirements through cash on hand, investments, borrowing availability
under the Revolving Credit Facilities and funds generated from
operations. The WHX Group believes that such sources will provide the
WHX Group for the next twelve months with the funds required to satisfy
working capital and capital expenditure requirements. External factors,
such as world economic conditions, could materially affect the WHX
Group's results of operations and financial condition.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS133). This
pronouncement requires all derivative instruments to be reported at fair
value on the balance sheet; depending on the nature of the derivative
instrument, changes in fair value will be recognized either in net
income or as an element of comprehensive income. SFAS 133 is effective
for fiscal years beginning after June 15, 2000. The Company has not
engaged in significant activity with respect to derivative instruments
or hedging activities in the past.
A reconciliation of current period charges, net of applicable
income taxes, included in the comprehensive income component of
stockholders' equity is as follows:
(Dollars in thousands)
Cumulative Effect on Equity of SFAS No. 133 adoption $(423)
Current period declines in fair value of interest rate swap
- net of tax (196)
-----
Balance at June 30, 2001 $(619)
======
The above amount is recorded in equity, net of a tax benefit of
$333, at June 30, 2001. This amount is expected to be
reclassified to earnings over the three month period ending
September 30, 2001.
During the third quarter 2000, the EITF issued EITF Consensus
No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an
Agent", which addresses whether certain cost items should be reported as
a reduction of revenue or as a component of cost of sales and EITF
Consensus No. 00-10, "Accounting for Shipping and Handling Fees and
Costs" ("EITF 00-10"), which addresses the classification of cost
incurred for shipping goods to customers. As a result of adopting EITF
00-10, the Company has reclassified amounts in the Consolidated
Statements of Operations for the three and six month periods ended June
30, 2001 as follows:
Three months ended Six months ended
June 30,2000 June 30, 2000
------------ -------------
(dollars in thousands)
Increased Sales $14,467 $28,440
Increased Cost of Sales 15,412 30,284
Decreased SG&A 945 1,844
21
In July 2001, the FASB issued SFAS 141 and 142, "Business
Combinations"("SFAS 141") and "Goodwill and Other Intangible Assets"
("SFAS 142"), respectively. SFAS 141 supercedes Accounting Principles
Board Opinion No. 16 (APB 16), BUSINESS COMBINATIONS. The most
significant changes made by SFAS 141 are: (1) requiring that the
purchase method of accounting be used for all business combinations
initiated after June 30, 2001, (2) establishing specific criteria for
the recognition of intangible assets separately from goodwill, and (3)
requiring unallocated negative goodwill to be written off immediately as
an extraordinary gain (instead of being deferred and amortized).
SFAS 142 supercedes APB 17, INTANGIBLE ASSETS. SFAS 142
primarily addresses the accounting for goodwill and intangible assets
subsequent to their acquisition (i.e., the post-acquisition accounting).
The provisions of SFAS 142 will be effective for fiscal years beginning
after December 15, 2001. However, early adoption of SFAS 142 will be
permitted for companies with a fiscal year beginning after March 15,
2001, provided their first quarter financial statements have not been
previously issued. In all cases, SFAS 142 must be adopted at the
beginning of a fiscal year. the most significant changes made by SFAS
142 are: (1) goodwill and indefinite lived intangible assets will no
longer be amortized, (2) goodwill will be tested for impairment at least
annually at the reporting unit level, (3)intangible assets deemed to
have an indefinite life will be tested for impairment at least annually,
and (4)the amortization period of intangible assets with finite lives
will no longer be limited to forty years.
The Company will adopt the provisions of SFAS 142 effective
January 1, 2002. As a result of the adoption of SFAS 142, the Company
will not record amortization expense of approximately $8.7 million for
existing goodwill for the year ending December 31, 2002. The Company
will record amortization expense on this goodwill through December 31,
2001. However, any intangible assets acquired or goodwill arising from
transactions after June 30, 2001 will be subject to the amortization and
nonamortization provisions of SFAS 141 and SFAS 142. As of January 1,
2002, the Company will evaluate their goodwill and other intangible
assets for impairment under the criteria set forth in SFAS 142.
*******
When used in the Management's Discussion and Analysis, the
words "anticipate", "estimate" and similar expressions are intended to
identify forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act, which are
intended to be covered by the safe harbors created thereby. Investors
are cautioned that all forward-looking statements involve risks and
uncertainty, including without limitation, the ability of the Company to
develop markets and sell its products and the effects of competition and
pricing. Although the Company believes that the assumptions underlying
the forward-looking statements are reasonable, any of the assumptions
could be inaccurate, and therefore, there can be no assurance that the
forward-looking statements included herein will prove to be accurate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no changes in financial market risk as originally discussed in
the Company's Annual Report on Form 10-K for the year ended December 31, 2000.
22
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Legal Matters
WPC Group
On November 16, 2000, the WPC Group filed petitions for relief
under Chapter 11 of the Bankruptcy Code. The Bankruptcy Filing was made
in the United States Bankruptcy Court for the Northern District of Ohio.
As a result, subsequent to the commencement of the Bankruptcy Filing,
the WPC Group sought and obtained several orders from the Bankruptcy
Court that were intended to enable the WPC Group to continue business
operations as debtors-in-possession. Since the Petition Date, the WPC
Group's management has been in the process of stabilizing their
businesses and evaluating their operations, while continuing to provide
uninterrupted services to its customers. Reference is made to Note 1 of
the Consolidated Financial Statements included herewith and to the
Company's Annual Report Form 10-K for a more detailed description of the
matters referred to in this paragraph.
The WPC Group is a party to various litigation matters
including general liability claims covered by insurance. Claims that are
"pre-petition" claims for Chapter 11 purposes will ultimately be handled
in accordance with the terms of a confirmed Plan of Reorganization in
Chapter 11 cases. In the opinion of management, litigation claims are
not expected to have a material adverse effect on the WPC Group's
results of operations or its ability to reorganize.
Handy & Harman
On or about April 3, 2000 a civil action was commenced under
Title 3 of the United States Code ss.3729 ET SEQ. (False Claims Act)
entitled United States of America, EX REL. Patricia Keehle v. Handy
& Harman, Inc. (sic) and Strandflex, a Division of Maryland
Specialty Wire, Inc. ("Strandflex") (Civil Action No. 5:99-CV-103). The
substantive allegations in the complaint related to the alleged improper
testing and certification of certain wire rope manufactured at the
Strandflex plant during the period 1992-1999 and sold as MIL-SPEC wire.
A companion criminal investigation of Strandflex was initiated by the
United States Attorney for the Northern District of New York under Title
18 of the United States Code ss.287(Submitting False Claims). On March
7, 2000, Handy & Harman was informed by the U.S. Attorney for the
Northern District of New York that absent a negotiated settlement, the
government would seek a criminal indictment and unspecified civil
damages against Handy & Harman based on the then-alleged 161 sales
of wire rope by Strandflex during the period June, 1995 to July 1998.
Handy & Harman entered into discussion with the United States
Attorney to seek a negotiated settlement of all criminal and civil
claims. Those discussions resulted in a settlement agreement dated May
24, 2001, pursuant to which all civil and criminal claims were resolved
as follows:
Maryland Specialty Wire, Inc., Strandflex Division, made a
total civil payment of $1 million which amount represented civil damages
as payment for remediation and compensation and included $100,000 as
restitution pursuant to the Plea Agreement which related to 35 wire rope
sales which took place between 1994 and 1998;
Maryland Specialty Wire, Inc., Strandflex Division, paid a
criminal fine of $500,000 and $100,000 as restitution pursuant to the
Plea Agreement.
There are no known incidents of any Strandflex wire rope
failing and causing personal or property damage in any application.
Summary
The Company is a party to various litigation matters including
general liability claims covered by insurance. In the opinion of
management, the ultimate outcome of such litigation matters and claims
is not expected to have a material adverse effect on the financial
condition or results of operations of the Company. However, it is
possible that the ultimate resolution of such litigation matters and
claims could have a material effect on quarterly or annual operating
results when they are resolved in future periods.
23
Environmental Matters
WPC Group
WPC has been identified as a potentially responsible party
under the Comprehensive Environmental Response, Compensation and
Liability Act ("Superfund") and/or similar state statutes at several
waste sites. WPC is subject to joint and several liability imposed by
Superfund on potentially responsible parties. Due to the technical and
regulatory complexity of remedial activities and the difficulties
attendant to identifying potentially responsible parties and allocating
or determining liability among them, WPC is unable to reasonably
estimate the ultimate cost of compliance with Superfund laws. WPC
believes, based upon information currently available, that its liability
for clean up and remediation costs in connection with the Buckeye
Reclamation Landfill will be between $1.5 and $2.0 million. At WPC's
other sites the Company estimates costs of an aggregate less than $.5
million.
WPC, as are other industrial manufacturers, is subject to
increasingly stringent standards relating to the protection of the
environment. In order to facilitate compliance with these environmental
standards, WPC has incurred capital expenditures for environmental
control projects aggregating $7.7 million, $3.4 million and $.9 million
for 1999, 2000 and the six months ended June 30, 2001, respectively. WPC
anticipates spending approximately $23.1 million in the aggregate on
major environmental compliance projects through the year 2003, estimated
to be spent as follows: $4.1 million in 2001, $15.0 million in 2002, and
$4.0 million in 2003. Due to the possibility of unanticipated factual or
regulatory developments, the amount of future expenditures may vary
substantially from such estimates.
WPC's non-current accrued environmental liabilities totaled
$18.6 million at June 30, 2001. These accruals were initially determined
by WPC, based on all available information. As new information becomes
available, including information provided by third parties, and changing
laws and regulation the liabilities are reviewed and the accruals
adjusted quarterly. Management believes, based on its best estimate,
that WPC has adequately provided for remediation costs that might be
incurred or penalties that might be imposed under present environmental
laws and regulations.
The Bankruptcy Code may distinguish between environmental
liabilities that represent pre-petition liabilities and those that
represent ongoing post-petition liabilities. Based on information
currently available, including the WPC Group's prior capital
expenditures, anticipated capital expenditures, consent agreements
negotiated with Federal and state agencies and information available to
the WPC Group on pending judicial and administrative proceedings, the
WPC Group does not expect its environmental compliance costs, including
the incurrence of additional fines and penalties, if any, relating to
the operation of its facilities, to have a material adverse effect on
the results of operations of the WPC Group or on the WPC Group's ability
to reorganize. However, it is possible that litigation and environmental
contingencies could have a material effect on quarterly or annual
operating results when they are resolved in future periods. As further
information comes into the WPC Group's possession, it will continue to
reassess such evaluations.
In the event the WPC Group is unable to fund these liabilities,
claims may be made against the WHX Group for payment of such
liabilities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8-K Filed on April 18, 2001
Form 8-K Filed on May 30, 2001
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WHX CORPORATION
/s/ Robert K. Hynes
-------------------
Robert K. Hynes
Vice President-Finance
(Principal Accounting Officer)
August 10, 2001
25
