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, 1998
-------------------------------------------------
/ / 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, 1998 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 July 31, 1998
was 18,778,726 which includes redeemable common shares.
WHX CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
(in thousands except per share)
NET SALES $464,455 $128,472 $768,533 $242,105
- ---------
OPERATING COSTS
Cost of goods sold 375,932 145,515 645,590 286,668
Depreciation and amortization 25,629 11,445 46,133 22,782
Selling, administrative and general expense 33,316 17,584 51,591 33,902
-------- -------- -------- --------
434,877 174,544 743,314 343,352
------- -------- ------- --------
OPERATING INCOME (LOSS) 29,578 (46,072) 25,219 (101,247)
- -----------------------
Interest expense on debt 21,480 6,974 31,327 13,431
Other income 13,595 5,188 29,378 4,168
-------- ---------- -------- ---------
INCOME (LOSS) BEFORE TAXES 21,693 (47,858) 23,270 (110,510)
- --------------------------
Tax provision (benefit) 7,626 (16,751) 8,115 (38,679)
--------- ---------- --------- ----------
NET INCOME (LOSS) 14,067 (31,107) 15,155 (71,831)
- -----------------
Dividend requirement for Preferred Stock 5,152 5,152 10,304 10,353
-------- ---------- ------- ---------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCK $ 8,915 $(36,259) $ 4,851 $(82,184)
- ------------------------------------------- ======= ========= ======= =========
Income (loss) per share of common stock:
Basic income (loss) per share of $.48 $(1.58) $.26 $(3.51)
Common Stock ==== ======= ==== =======
Income (loss) per share of $.39 $(1.58) $.26 $(3.51)
Common Stock-assuming dilution ==== ======= ==== =======
See notes to consolidated financial statements.
WHX CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
JUNE 30, DECEMBER 31,
1998 1997
---- ----
(Dollars and shares in thousands)
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 1,747 $ 1,002
Short term investments 464,869 581,550
Trade receivables - net 134,871 44,993
Inventories:
Finished and semi-finished products 372,968 178,450
Raw materials 94,997 103,735
Other materials and supplies 17,850 19,811
Excess of LIFO over current cost (21,485) (17,239)
----------- ----------
464,330 284,757
Other current assets 26,960 26,581
---------- ----------
Total current assets 1,092,777 938,883
Property, plant and equipment at cost, less
accumulated depreciation and amortization 812,756 738,660
Deferred income taxes 140,924 196,966
Prepaid pension cost 46,258 76,714
Intangibles, net of amortization 305,979 --
Other non-current assets 147,908 119,180
----------- -----------
$2,546,602 $2,070,403
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $172,784 $ 123,872
Short-term borrowings 306,628 366,418
Deferred income taxes - current 72,856 32,196
Other current liabilities 131,440 86,559
Long-term debt due in one year 619 466
------------- -------------
Total current liabilities 684,327 609,511
Long-term debt 931,988 350,453
Pension liability -- 166,652
Other employee benefit liabilities 428,852 427,124
Other liabilities 56,155 49,979
----------- ------------
2,101,322 1,603,719
----------- ------------
Redeemable Common Stock - 310 shares
and 360 shares 3,857 4,808
----------- ------------
Stockholders' Equity:
Preferred Stock $.10 par value -
5,883 shares 588 589
Common Stock - $.01 par value - 18,478
shares and 19,074 shares 185 193
Accumulated other
comprehensive income 7,065 24,237
Additional paid-in capital 592,316 602,657
Accumulated (deficit) earnings (158,731) (163,582)
------------ -----------
441,423 464,094
Less treasury stock - 0 shares and 205 shares -- (2,218)
------------ -----------
Total stockholders' equity 441,423 461,876
------------ -----------
$2,546,602 $2,070,403
========== ==========
See notes to consolidated financial statements.
WHX CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
---- ----
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 15,155 $(71,831)
Non cash expenses:
Depreciation and amortization 46,637 22,947
Other postemployment benefits (2,150) (1,200)
Income taxes 3,710 (38,679)
Equity income in affiliated companies (3,136) 1,371
Pension expense 7,277 --
Decrease (increase) in working capital elements,
net of effect of acquisition
Trade receivables (43,806) 8,474
Trade receivables sold 25,000 --
Inventories (2,021) (44,329)
Other current assets 22,558 (1,604)
Trade payables 296 24,775
Other current liabilities 13,209 9,664
Short term investments(trading) 73,490 61,878
Trading account borrowings (23,557) 31,262
Other items - net (163) (4,789)
----------- ---------
Net cash provided by (used in) operating activities 132,499 (2,061)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Short term investments-available for sale (22,418) (26,290)
Plant additions and improvements (22,779) (4,683)
Investment in affiliates (8,335) (3,450)
Acquisition of Handy & Harman, net of cash (366,147) --
Dividends from affiliates 5,000 2,500
Proceeds from sale of property 148 797
-------- ----------
Net cash used in investing activities (414,531) (31,126)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long term debt proceeds, net of issuance cost 340,375 --
Payments on long-term borrowings (2,232) (2,077)
Minority interest (103) --
Short term borrowings (payments) (36,233) 42,517
Preferred stock purchased -- (9,839)
Common stock purchased (10,050) (15,656)
Letter of credit collateralization 820 3,199
Preferred stock dividends paid (10,304) (10,353)
Redemption of common stock 504 (219)
--------- -----------
Net cash provided by financing activities 282,777 7,572
-------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 745 (25,615)
Cash and cash equivalents
at beginning of period 1,002 35,020
-------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 1,747 $ 9,405
======= ========
See notes to consolidated financial statements.
WHX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
GENERAL
The consolidated balance sheet as of June 30, 1998, the
consolidated statement of operations for the three and six month periods
ended June 30, 1998 and 1997 and the consolidated statement of cash flows
for the six month periods ended June 30, 1998 and 1997, have been prepared
by the Company without audit. In the opinion of management, all normal and
recurring adjustments necessary to present fairly the consolidated
financial position at June 30, 1998 and the results of operations and
changes in cash flows for the periods presented have been made.
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 and
that of its recently acquired subsidiary Handy & Harman's audited
consolidated financial statements for the year ended December 31, 1997.
The results of operations for the period ended June 30, 1998 are not
necessarily indicative of the operating results for the full year.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affected 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.
NOTE 1 - HANDY & HARMAN ACQUISITION
On April 13, 1998, the Company completed the acquisition of Handy &
Harman and merged it with a wholly-owned subsidiary of the Company (the
"Merger"). The acquisition has been accounted for as a purchase business
combination in accordance with APB 16. Accordingly, the assets and
liabilities of Handy & Harman have been adjusted to reflect their relative
fair values at the date of acquisition. The transaction has a total value
of approximately $651.4 million, including the assumption of approximately
$229.6 million in debt. The excess of the purchase price over the fair
value of the net assets acquired is approximately $307.6 million and is
being amortized over a period of 40 years. The Company financed the
transaction through cash on hand and a private placement of debt
securities of the Company.
The following pro forma disclosure is presented as if the Handy &
Harman acquisition had occurred on January 1 of the respective periods.
SIX MONTHS ENDED JUNE 30,
1998 1997
---- ----
(in thousands, except per share)
Revenue $888,865 $463,008
Net income (loss) 12,261 (78,828)
Basic and diluted income (loss) per share: .11 (3.80)
The results of Handy & Harman included in the pro forma have been
adjusted to exclude merger related transaction costs.
NOTE 2 - 10 1/2% SENIOR NOTES
On April 7, 1998, the Company closed a definitive purchase
agreement for the sale of $350.0 million principal amount of 10 1/2%
Senior Notes due 2005 in a Rule 144A Private Placement to qualified
institutional buyers. The net proceeds of $340.4 million from the offering
were used to finance a portion of the acquisition of Handy & Harman and
related transaction expenses. The 10 1/2% Senior Notes were exchanged for
identical notes which were issued pursuant to an exchange offer registered
under the Securities Act of 1933, as amended.
NOTE 3 - 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 second quarter of 1997 and the
six month periods for 1997 and 1998, the conversion of preferred shares
and redeemable common stock and exercise of options and warrants would
have had an anti-dilutive effect. Previously reported second quarter 1997
EPS has been restated. A reconciliation of the income and shares used in
the computation follows:
RECONCILIATION OF INCOME AND SHARES IN EPS CALCULATION
FOR THE QUARTER ENDED JUNE 30, 1998 FOR THE SIX MONTHS ENDED JUNE 30, 1998
----------------------------------- --------------------------------------
Income Shares Per-Share Income Shares Per-share
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
Income before extraordinary item $14,067 $15,155
Less: Preferred stock dividends 5,152 10,304
------ ------
BASIC EPS
Income available to
common stockholders 8,915 18,452 $0.48 4,851 18,502 $0.26
EFFECT OF DILUTIVE SECURITIES
OPTIONS 875
Convertible preferred stock 5,152 16,506
Redeemable common stock 310
DILUTED EPS
Income available to common
stockholders+ assumed conversions $14,067 36,143 $0.39 $4,851 18,502 $0.26
======= ====== ===== ====== ====== =====
FOR THE QUARTER ENDED JUNE 30, 1997 FOR THE SIX MONTHS ENDED JUNE 30, 1997
----------------------------------- --------------------------------------
Income Shares Per-Share Income Shares Per-share
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
Income before extraordinary item $(31,107) $(71,831)
Less: Preferred stock dividends 5,152 10,353
BASIC AND DILUTED EPS
Income available to
common stockholders $(36,259) 23,003 $(1.58) $(82,184) 23,445 $(3.51)
========= ====== ======= ========= ====== =======
The assumed conversion of stock options, preferred stock and redeemable common
stock would have an anti-dilutive effect on earnings per share in the six month
period of 1998 and the second quarter and the six month period of 1997.
Outstanding stock options granted to officers, directors and key
employees totaled 4.6 million shares of common stock at June 30, 1998.
REDEEMABLE COMMON STOCK
Certain present and former employees of the Company 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%
-2-
of the number of shares publicly traded during the previous day. As of
June 30, 1998 redeemable common stock outstanding totaled 310,083 shares.
NOTE 4 - COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS No. 130), effective
January 1, 1998. This Statement establishes standards for reporting and
display of comprehensive income and its components in the financial
statements. The Company's second quarter 1998 comprehensive gain on income
of $5.7 million consists of net income of $14.1 million and other
comprehensive loss of $8.4 million, net of tax related to an unrealized
loss on available-for-sale securities and foreign exchange translation
loss. The comprehensive loss for the comparable period in 1997 of $27.7
million consists of net loss of $31.1 million and other comprehensive
income of $3.4 million, net of tax related to an unrealized gain on
available-for-sale securities.
NOTE 5 - SHORT TERM INVESTMENTS
Net unrealized holding gains or losses on trading securities
included in net income for the second quarter of 1998 and 1997 were gains
of $13.8 million and $9.0 million, respectively.
NOTE 6 - SALES OF RECEIVABLES
Accounts receivable at June 30, 1998 and 1997 exclude $94.0
million and $45.0 million, respectively, representing uncollected accounts
receivable sold with recourse limited to the extent of uncollectible
balances. Fees paid by the Company under such agreement range from 6.1375%
to 8.5% of the outstanding amount of receivables sold. Based on the
Company's collection history, the Company believes that the credit risk
associated with the above arrangement is immaterial.
NOTE 7 - REVOLVING CREDIT FACILITY
On December 28, 1995, Wheeling-Pittsburgh Steel Corporation
("WPSC") entered into a Second Amended and Restated Revolving Credit
Facility ("WPSC Revolving Credit Facility") with Citibank, N.A. as agent.
The "WPSC Revolving Credit Facility", as amended, provides for borrowings
for general corporate purposes up to $150 million and a $35 million
sub-limit for Letters of Credit. Borrowings outstanding against the "WPSC
Revolving Credit Facility" at June 30, 1998 totaled $54.7 million. Letters
of credit outstanding under the "WPSC Revolving Credit Facility" were
$10.6 million at June 30, 1998.
In August 1994 WPSC entered into a separate facility for letters
of credit up to $50 million. At June 30, 1998 letters of credit totaling
$8.5 million were outstanding under this facility. The letters of credit
are collateralized at 105% with U.S. Government securities owned by the
Company, and are subject to an administrative charge of .4% per annum on
the amount of outstanding letters of credit.
H & H had outstanding borrowings under its $200 million dollar
unsecured revolving credit facility of $95,000 at June 30, 1998. See Note
8 below regarding refinancing of H & H long term debt.
NOTE 8 - HANDY & HARMAN REFINANCING
On July 30, 1998 Handy & Harman entered into a $300 million Senior
Secured Credit facility (the "Facilities") with Citibank, N.A. as agent.
The Facilities are comprised of (i) a $100 million 6-year Revolving Credit
Facility, (ii) a $25 million 6-year Delayed Draw Term Loan Facility, (iii)
a $50 million 6-year Term Loan A Facility, and (iv) a $125 million 8-year
Term Loan B Facility. Interest under the Facilities is calculated at a
rate determined either using (i) the Citibank prime rate
-3-
or (ii) the Libor Rate, plus the Applicable Margin in effect from time to
time. Applicable Margin means a percentage per annum determined by
reference to the Total Leverage Ratio of Handy & Harman. The rates in
effect until December 31, 1998 are (a) in the case of the Term A Facility,
the Delayed Draw Facility and the Revolving Credit Facility calculated at
Libor + 1.75% and (b) in the case of the Term B facility at Libor + 2.50%.
Borrowings under the Facilities are secured by the pledge of 100% of the
capital stock of all Handy & Harman's active U.S. subsidiaries and 65% of
the stock of Handy & Harman's non-U.S. subsidiaries. In addition Handy &
Harman has provided a perfected first priority lien on and security
interest in substantially all the assets of Handy & Harman and its active
subsidiaries. The facilities have certain financial covenants restricting
indebtedness, liens and distributions.
The Facilities replaced Handy & Harman's $125 million Senior Notes
due 2004 and its $200 million unsecured revolving credit facility.
NOTE 9 - MERGER OF PENSION PLANS
In May, 1998 WHX completed the merger of its pension plan with the
pension plans of its wholly owned Handy & Harman subsidiary. Under the
terms of the merged WHX Pension Plan there will be a series of benefit
structures, which will essentially continue the various pension plans for
employees of the Wheeling-Pittsburgh Steel Corporation and Handy & Harman
pension plans as they existed before the mergers.
At the time of the merger of the pension plans, the assets in the
Handy & Harman pension plans exceeded the plans' liabilities by
approximately $155 million. At that time, the liabilities of the WHX
pension plans exceeded their assets by approximately $150 million. The
pension plan merger thus eliminates both the underfunding in the WHX
Pension Plan and WHX's balance sheet liability and will materially reduce
WHX's net periodic pension expense in future periods. Furthermore, based
on WHX's current actuarial assumptions, the merged pension plan is
expected to be fully funded for several years according to the Internal
Revenue Code. The merger therefore substantially reduces future cash
funding obligations of WHX estimated to be approximately $135 million over
the next four years.
NOTE 10 - CONTINGENCIES
ENVIRONMENTAL MATTERS
The Wheeling-Pittsburgh Steel Corporation has been identified as a
potentially responsible party under the Comprehensive Environmental
Response, Compensation and Liability Act ("Superfund") or similar state
statutes at several waste sites. The Company 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, the Company is unable
to reasonably estimate the ultimate cost of compliance with Superfund
laws. The Company believes, based upon information currently available,
that the Company's liability for clean up and remediation costs in
connection with the Buckeye reclamation will be between $3.0 million and
$4.0 million. At six other sites (MIDC Glassport, United Scrap Lead,
Tex-Tin, Breslube Penn, Four County Landfill and Beazor) the Company
estimates costs to aggregate up to $700,000. The Company is currently
funding its share of remediation costs.
The Company, 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, the Company has incurred capital expenditures for environmental
control projects aggregating $6.8 million, $12.4 million and $5.0 million
for 1996, 1997 and the six months ended June 30, 1998, respectively. The
Company anticipates spending approximately $41.3 million in the aggregate
on major environmental compliance projects through the year 2000,
estimated to be spent as follows: $13.4 million in 1998, $15.9 million in
1999 and $12.0 million
-4-
in 2000. Due to the possibility of unanticipated factual or regulatory
developments, the amount of future expenditures may vary substantially
from such estimates.
Non-current accrued environmental liabilities totaled $10.6
million at December 31, 1997 and $11.1 million at June 30, 1998. 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 the Company has adequately provided for remediation
costs that might be incurred or penalties that might be imposed under
present environmental laws and regulations.
Based upon information currently available, including the
Company's prior capital expenditures, anticipated capital expenditures,
consent agreements negotiated with Federal and state agencies and
information available to the Company on pending judicial and
administrative proceedings, the Company does not expect its environmental
compliance and liability 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 financial condition or results of
operations of the Company. However, as further information comes into the
Company's possession, it will continue to reassess such evaluations.
-5-
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
On March 31, 1998, the Company announced that it had entered into
a definitive purchase agreement for the sale of $350.0 million principal amount
of 10 1/2% Senior Notes due 2005 in a Rule 144A Private Placement to qualified
institutional buyers. The closing on the private placement of 10 1/2% Senior
Notes occurred April 7, 1998. The net proceeds of $340.4 million from the
offering were used to finance a portion of the acquisition of Handy & Harman and
related transaction expenses. The 10 1/2% Senior Notes were exchanged for
identical notes which were issued pursuant to an exchange offer registered under
the Securities Act of 1933, as amended.
On April 13, 1998 the Company completed the acquisition of Handy & Harman
("H&H") and merged it with a wholly-owned subsidiary of the Company. The
transaction has a total value of approximately $651.4 million, including the
assumption of approximately $229.6 million in debt. The Company financed the
transaction through cash on hand and the private placement of $350 million of 10
1/2% Senior Notes of the Company.
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.
RESULTS OF OPERATIONS
Net sales for the second quarter of 1998 were $464.5 million - up 261%
from $128.5 million in the second quarter of 1997. Sales growth was increased
primarily due to (i) the return to near pre- strike levels of sales for
Wheeling-Pittsburgh Steel Corporation's ("WPSC") operations compared to the
second quarter 1997, which reflects the effect of the strike by the United Steel
Workers of America and (ii) the acquisition of H&H.
Second quarter 1998 operating costs increased to $434.8 million from
$174.5 million in 1997 second quarter. The increase in operating costs reflects
the increased volume of raw steel production at the WPSC's operations, which
were idled throughout much of 1997 due to the strike, and the inclusion of H&H
operations in the second quarter. Also, WPSC received approximately $9.8 million
of net insurance recoveries related to various environmental obligations and
experienced lower pension expense due to the merger of the H&H and WPSC pension
plans.
Depreciation and amortization expense increased $14.2 million to $25.6
million in the second quarter of 1998 from $11.4 million in the comparable
period in 1997, due to the effects of the strike on production in the second
quarter of 1997. Amortization increased $1.7 reflecting the goodwill acquired in
the H&H acquisition. There was no amortization of goodwill in the second quarter
of 1997.
Selling, administrative and general expense for the second quarter of 1998
increased $15.8 million to $33.3 million from $17.6 million in the comparable
period in 1997 due primarily to the acquisition of H&H in the second quarter
1998.
Interest expense for the second quarter 1998 increased $14.5 million to
$21.5 million from the comparable period in 1997 reflecting the acquisition debt
issued in connection with the purchase of H&H as well as the assumption of H&H
outstanding indebtedness.
Other income increased $8.4 million to $13.6 million in the second quarter
of 1998, compared to $5.2 million in the 1997 second quarter. The increase is
due to unrealized gains on short-term
-6-
investments, partially offset by realized losses on short-term investments and
increased equity income on joint venture operations.
Net income for the 1998 second quarter totaled $14.1 million, or $.48 per
share of common stock after preferred stock dividends. The 1997 second quarter
net loss totaled $31.1 million, or a loss of $1.58 per share of common stock
after preferred stock dividends.
Net sales for the first half of 1998 totaled $768.5 million a 217%
increase over first half 1997 sales of $242.1 million. The increase is due to
the H&H acquisition and the strike related impact on the first half 1997 sales
of the Wheeling-Pittsburgh Steel Corporation.
Operating costs for the first six months of 1998 increased to $743.3
million from $343.4 million in 1997 first six months. The increase in operating
costs reflects the increased volume of raw steel production at WPSC's
operations, which were idled throughout much of 1997 due to the strike, and the
inclusion of H&H operations in the second quarter. Also, WPSC received
approximately $9.8 million of net insurance recoveries related to various
environmental obligations and experienced lower pension expense due to the
merger of the H&H and WPSC pension plans.
Depreciation and amortization expense increased $23.3 million to $46.1
million in the first six months of 1998 from $22.8 million in the comparable
period in 1997 due to the effects of the strike on production in the first six
months of 1997. Amortization increased $1.7 million reflecting the goodwill
acquired in the second quarter acquisition of H&H.
Selling, administrative and general expense for the first six months of
1998 increased $17.7 million to $51.6 million from $33.9 million in the
comparable period in 1997 due primarily to the acquisition of H&H in the second
quarter 1998.
Interest expense for the first six months of 1998 increased $17.9 million
to $31.3 million from the comparable period in 1997 reflecting the acquisition
debt issued for the purchase of H&H as well as the assumption of H&H outstanding
indebtedness.
Other income increased $25.2 million to $29.4 million in the first six
months of 1998, compared to income of $4.2 million in the 1997 first six months.
The increase is due to unrealized gains on short-term investments, partially
offset by realized losses on short-term investments and increased equity income
on joint venture operations.
The 1998 six month tax provision reflects an estimated annual effective
tax rate of 35% reflecting no change compared to 1997.
Net income for the 1998 first half totaled $15.2 million, or $0.26 per
share of common stock after preferred stock dividends. The 1997 six month net
loss totaled $71.8 million, or a loss of $3.51 per share of common stock after
preferred stock dividends.
FINANCIAL POSITION
Net cash flow provided by operating activities for the first half of 1998
totaled $132.5 million. Short term trading investments and related short-term
borrowings are reported as cash flow from operating activities and provided a
net $50.0 million of funds in the 1998 first half. Working capital accounts
(excluding cash, short term investments, short-term borrowings and current
maturities of long term debt) provided $15.1 million of funds. Accounts
receivable increased by $44.3 million (excluding a $25.6 million sale of trade
receivables under the WPC Receivables Facility), and other current liabilities
increased $13.2 million. Inventories, valued principally by the LIFO method for
financial reporting purposes, totaled $464.3 million at June 30, 1998, a
increase of $179.6 million from December 31, 1997 reflecting the acquisition of
H&H. The increase in accounts receivable is due to increased shipments and the
inclusion of H&H.
-7-
In the first half of 1998, $22.8 million was spent on capital improvements
including $5.0 million on environmental control projects. Continuous and
substantial capital and maintenance expenditures will be required to maintain
and where necessary, upgrade operating facilities to remain competitive, and to
comply with environmental control requirements. It is anticipated that necessary
capital expenditures including required environmental expenditures in future
years will approximate depreciation expense and represent a material use of
operating funds.
On July 30, 1998 Handy & Harman entered into a $300 million Senior Secured
Credit facility (the "Facilities") with Citibank, N.A. as agent. The Facilities
are comprised of (i) a $100 million 6-year Revolving Credit Facility, (ii) a $25
million 6-year Delayed Draw Term Loan Facility, (iii) a $50 million 6-year Term
Loan A Facility, and (iv) a $125 million 8-year Term Loan B Facility. Interest
under the Facilities is calculated at a rate determined either using (i) the
Citibank prime rate or (ii) the Libor, plus the Applicable Margin in effect from
time to time. Applicable Margin means a percentage per annum determined by
reference to the Total Leverage Ratio of Handy & Harman. The rates in effect
until December 31, 1998 are (a) in the case of the Term A Facility, the Delayed
Draw Facility and the Revolving Credit Facility calculated at Libor + 1.75% and
(b) in the case of the Term B facility at Libor + 2.50%. Borrowings under the
Facilities are secured by the pledge of 100% of the capital stock of all H&H's
active U.S. subsidiaries and 65% of the stock of H&H's non-U.S. subsidiaries. In
addition Handy & Harman provided a perfected first priority lien on and security
interest in substantially all the assets of H&H and its subsidiaries. The
facilities have certain financial covenants restricting indebtedness, liens and
distributions. The Facilities replaced H&H's $125 million Senior Notes due 2004
and its unsecured Revolving Credit Facility.
On April 7, 1998, the Company closed a definitive purchase agreement for
the sale of $350.0 million principal amount of 10 1/2% Senior Notes due 2005 in
a Rule 144A Private Placement to qualified institutional buyers. The net
proceeds of $340.4 million from the offering were used to finance a portion of
the acquisition of H&H and related transaction expenses. The 10 1/2% Senior
Notes were exchanged for identical notes which were issued pursuant to an
exchange offer registered under the Securities Act of 1933, as amended.
In November 1997, Wheeling-Pittsburgh Corporation, a wholly owned
subsidiary of the Company, ("WPC") issued $275.0 million principal amount of 9
1/4% Senior Unsecured Notes to qualified institutional buyers pursuant to Rule
144A under The Securities Act of 1933. The 9 1/4% notes were exchanged for
identical notes which were issued pursuant to an exchange offer registered under
the Securities Act of 1933, as amended.
In November 1997 WPC also entered into a Term Loan Agreement with DLJ
Capital Funding, Inc., as syndication agent, pursuant to which the Company
borrowed $75 million. The Term Loan Agreement matures on November 15, 2006.
Amounts outstanding under the Term Loan Agreement bear interest at either (i)
the Alternate Base Rate (as defined therein) plus 2.25% or (ii) the LIBOR (as
defined therein) plus 3.25%, determined at the Company's option. WPC's
obligations under the Term Loan Agreement will be guaranteed by WPC's then
outstanding present and future operating subsidiaries.
The proceeds from the 9 1/4% Senior Notes and the Term Loan Agreement were
used to defease $266.2 million of 93/8% Senior Secured Notes due 2003 and to pay
down borrowings under the WPSC Revolving Credit Facility. Borrowings outstanding
against the WPSC Revolving Credit Facility at June 30, 1998 totaled $54.7
million. Letters of credit outstanding under the WPSC Revolving Credit Facility
were $10.6 million at June 30, 1998.
In August 1994 WPSC entered into a separate facility for letters of credit
up to $50 million. At June 30, 1998 letters of credit totaling $8.5 million were
outstanding under this facility. The letters of credit are collateralized at
105% with U.S. Government securities owned by the Company, and are subject to an
administrative charge of .4% per annum on the amount of outstanding letters of
credit.
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In May, 1998 WHX completed the merger of its Pension Plan with the pension
plan of its wholly owned H&H subsidiary. Under the terms of the merged WHX
Pension Plan, there will be a series of benefit structures, which will
essentially continue the various pension plans for employees of the
Wheeling-Pittsburgh Steel Corporation and H&H plans as they existed before the
merger.
At the time of the merger of the pension plans, the assets in the Handy &
Harman pension plans exceeded the plans' liabilities by approximately $155
million. At that time, the liabilities of the WHX pension plan exceeded their
assets by approximately $150 million. The pension plan merger thus eliminates
both the underfunding in the WHX Pension Plan and WHX's balance sheet liability
and will materially reduce WHX's net periodic pension expense in future periods.
Furthermore, based on WHX's current actuarial assumptions, the merged pension
plan is expected to be fully funded for several years according to the Internal
Revenue Code. The merger therefore substantially reduces future cash funding
obligations of WHX estimated to be approximately $135 million over the next four
years.
As of June 30, 1998, the Company had repurchased on the open market and
retired 11.3 million shares of its Common Stock and .6 million shares of
Preferred Stock since the repurchase program was initiated in October 1994 for
an aggregate purchase price of approximately $140.6 million. In the first six
months of 1998 the Company repurchased 795,607 shares of Common Stock for $10.1
million. The Company may, from time to time, continue to purchase additional
shares of Common Stock and Preferred Stock.
LIQUIDITY
As of June 30, 1998, the Company had cash and short-term investments, net
of related investment borrowings of $214.7 million.
Short-term liquidity is dependent, in large part, on cash on hand,
investments, general economic conditions and their effect on steel demand and
prices. Long-term liquidity is dependent upon the Company's ability to sustain
profitable operations and control costs during periods of low demand or pricing
in order to sustain positive cash flow. The Company satisfies its working
capital requirements through cash on hand, investments, the Receivables
Facility, borrowing availability under the Revolving Credit Facility, the
facilities at H & H and funds generated from operations. The Company believes
that such sources will provide the Company for the next twelve months with the
funds required to satisfy working capital and capital expenditure requirements.
External factors, such a worldwide steel production and demand and currency
exchange rates, could materially affect the Company's results of operations and
financial condition.
The Company began a Year 2000 compliance project in July 1995. This
project encompasses business systems, mainframe processor systems, plant
operating systems, end-user computing systems, wide-area and voice networks, and
building and plant environmental systems. Included in the project plan is a
review and Year 2000 compliance assurance program with customers, suppliers, and
other constituents. System inventories through out the Company were reviewed and
work is in progress to ensure that such systems are Year 2000 compliant.
Management believes, based on a current review and the ongoing effort, that all
relevant computer systems will be Year 2000 compliant by the second quarter of
1999. Management believes that the cost of this project will not be material to
the Company's financial condition or results of operation.
NEW ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
addresses costs incurred in connection with the implementation of internal-use
software, and specifies the circumstances under which such costs should be
capitalized or expensed. The Company will be required to adopt SOP 98-1 in the
first quarter of 1999. At this time, management has not determined the impact of
adoption of SOP 98-1 on the Company's results of operation or financial
position.
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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 a an element of comprehensive income. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. The Company has not
engaged in significant activity with respect to derivative instruments or
hedging activities in the past. Management of the company has not yet determined
the impact, if any, of the adoption of SFAS 133 on the Company's financial
position or results of operation.
*******
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 market and sell its products, the effects of
competition and pricing, the impact of the acquisition of Handy & Harman and
Company and industry shipment levels. 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.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 25, 1998, the Securities and Exchange Commission ("SEC")
instituted an administrative proceeding against the Company alleging that
it had violated certain SEC rules in connection with the tender offer for
Dynamics Corporation of America ("DCA") commenced on March 31, 1997
through the Company's wholly-owned subsidiary, SB Acquisition Corp. (the
"Offer"). The Company previously disclosed that the SEC intended to
institute this proceeding. Specifically, the Order Instituting Proceedings
(the "Order") alleges that, in its initial form, the Offer violated the
"All Holders Rule," Rule 14d-10(a)(1) under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), based on the Company's inclusion of
a "record holder condition" in the Offer. No shareholder had tendered any
shares at the time the condition was removed. The Order further alleges
that the Company violated Rules 14d-4(c) and 14d-6(d) under the Exchange
Act upon expiration of the Offer, by allegedly waiving material conditions
to the Offer without prior notice to shareholders and purchasing the
approximately 10.6% of DCA's outstanding shares tendered pursuant to the
Offer. The SEC does not claim that the Offer was intended to or in fact
defrauded any investor.
The Order institutes proceedings to determine whether the SEC
should enter an order requiring the Company (a) to cease and desist from
committing or causing any future violation of the rules alleged to have
been violated and (b) to pay approximately $1.3 million in disgorgement of
profits. The Company has filed an Answer denying any violations and
seeking dismissal of the proceeding. Although there can be no assurance
that an adverse decision will not be rendered, the Company intends to
vigorously defend against the SEC's charges.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 1998 annual meeting of stockholders was held on June 29, 1998.
(b) All of the Company's nominees, as set forth below, were elected.
There was no solicitation in opposition to the Company's
nominees. The other members of the Company's Board of Directors
are Neil D. Arnold, William Goldsmith, Robert A. Davidow and
Ronald LaBow.
(c) Matters voted on at the meeting and the number of votes cast.
Votes
Voted Against or Broker
(1) Directors For Withheld Abstentions Non-Votes
--------- ----- -------- ----------- ---------
Paul W. Bucha 15,806,511 207,264 -- --
Marvin L. Olshan 15,641,134 373,341 -- --
Raymond S. Troubh 15,783,050 231,425 -- --
(2) Approval of an 10,949,728 1,241,442 99,352 3,727,954
Amendment to the
1991 Incentive and
Nonqualified Stock
Option Plan
(3) Ratification of Price 15,871,349 63,368 71,858 7,900
Waterhouse LLP as
the Company's
Independent Public
Accountants for the
fiscal year ending
December 31, 1998
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Item 6.(a) EXHIBITS
27 Financial Data Schedule
6.(b) REPORT ON FORM 8-K
Form 8-K dated June 17, 1998 announcing the merger of the
Defined Benefit Pension Plan of wheeling-Pittsburgh Steel
Corporation with the pension plans of Handy & Harman.
Form 8-K dated June 22, 1998 submitting the pro forma financial
information related to the acquisition of Handy & Harman by WHX
Corporation.
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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/ Arnold Nance
------------------------------
Arnold Nance
Vice President-Finance
(Principal Accounting Officer)
August 7, 1998
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