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 September 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 September 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 T No
The number of shares of Common Stock issued and outstanding as of October 30,
1998 was 17,796,230 which includes redeemable common shares.
WHX CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Quarter Ended Sept. 30, Nine Months Ended Sept. 30,
----------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
(in thousands, except per share)
Net Sales $ 459,563 $ 144,612 $ 1,228,096 $ 386,717
- --------- ----------- ----------- ----------- -----------
Operating Costs
- ---------------
Cost of goods sold 380,250 172,926 1,025,839 459,594
Depreciation and amortization 26,008 9,570 72,645 32,352
Selling, administrative and general expense 34,820 16,664 85,908 50,566
Special charge -- 88,910 -- 88,910
----------- ----------- ----------- -----------
441,078 288,070 1,184,392 631,422
----------- ----------- ----------- -----------
Operating Income (Loss) 18,485 (143,458) 43,704 (244,705)
- -----------------------
Interest expense on debt 23,415 7,594 54,742 21,025
Other income 42,492 10,457 71,870 14,625
----------- ----------- ----------- -----------
Income (Loss) Before Taxes And Extraordinary Item 37,562 (140,595) 60,832 (251,105)
- -------------------------------------------------
Tax provision (benefit) 15,779 (49,208) 23,895 (87,887)
----------- ----------- ----------- -----------
Income (Loss) Before Extraordinary Item 21,783 (91,387) 36,937 (163,218)
- ---------------------------------------
Extraordinary income-net of tax 2,240 -- 2,240 --
----------- ----------- ----------- -----------
Net Income (Loss) 24,023 (91,387) 39,177 (163,218)
- -----------------
Dividend requirement for Preferred Stock 5,152 5,152 15,456 15,505
----------- ----------- ----------- -----------
Net Income (Loss) Available To Common Stock $ 18,871 $ (96,539) $ 23,721 $ (178,723)
- ------------------------------------------- =========== =========== =========== ===========
Basic Income (Loss) Per Share Of
Common Stock
Income (loss) before extraordinary item $ .91 $ (4.49) $ 1.17 $ (7.84)
Extraordinary item - net of tax .12 -- .12 --
----------- ----------- ----------- -----------
Net income (loss) per share $ 1.03 $ (4.49) $ 1.29 $ (7.84)
=========== =========== =========== ===========
Income (Loss) Per Share Of
Common Stock-Assuming Dilution
Income (loss) before extraordinary item $ .61 $ (4.49) $ 1.03 $ (7.84)
Extraordinary item - net of tax .07 -- .06 --
----------- ----------- ----------- -----------
Net income (loss) per share - $ .68 $ (4.49) $ 1.09 $ (7.84)
assuming dilution =========== =========== =========== ===========
See notes to consolidated financial statements.
WHX CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
Sept. 30, December 31,
1998 1997
--------- ------------
(Dollars and shares in thousands)
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 10,565 $ 1,002
Short term investments 484,368 581,550
Trade receivables - net 130,291 44,993
Inventories:
Finished and semi-finished products 399,048 178,450
Raw materials 86,123 103,735
Other materials and supplies 26,290 19,811
Excess of LIFO over current cost (18,985) (17,239)
----------- ------------
492,476 284,757
Other current assets 20,140 26,581
----------- ------------
Total current assets 1,137,840 938,883
Property, plant and equipment at cost, less
accumulated depreciation and amortization 827,670 738,660
Deferred income taxes 113,808 196,966
Prepaid pension cost 45,378 76,714
Intangibles, net of amortization 288,884 --
Other non-current assets 151,283 119,180
----------- ------------
$ 2,564,863 $ 2,070,403
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade payables $ 163,963 $ 123,872
Short-term borrowings 352,779 366,418
Deferred income taxes - current 72,856 32,196
Other current liabilities 142,269 86,559
Long-term debt due in one year 616 466
----------- ------------
Total current liabilities 732,483 609,511
Long-term debt 896,783 350,453
Pension liability -- 166,652
Other employee benefit liabilities 424,218 427,124
Other liabilities 53,876 49,979
----------- ------------
2,107,360 1,603,719
----------- ------------
Redeemable Common Stock - 302 shares
and 360 shares 3,704 4,808
----------- ------------
Stockholders' Equity:
Preferred Stock $.10 par value -
5,883 shares 589 589
Common Stock - $.01 par value -
17,782 shares and 19,074 shares 178 193
Accumulated other
comprehensive income 8,013 24,237
Additional paid-in capital 585,413 602,657
Accumulated (deficit) earnings (139,861) (163,582)
----------- ------------
454,332 464,094
Less treasury stock - 42 shares and 205 shares (533) (2,218)
----------- ------------
Total stockholders' equity 453,799 461,876
----------- ------------
$ 2,564,863 $ 2,070,403
=========== ============
See notes to consolidated financial statements
WHX CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended Sept. 30,
---------------------------
1998 1997
---- ----
(Dollars in thousands)
Cash flows from operating activities:
Net income (loss) $ 39,177 $(163,218)
Non cash income and expenses:
Depreciation and amortization 72,645 32,599
Other postemployment benefits (4,575) (1,390)
Income taxes 16,957 (88,246)
Gain on sale of assets -- 835
Equity income in affiliated companies (5,238) 1,191
Pension expense 8,157 3,655
Special charges, net of current portion -- 57,459
Minority interest 730 --
Gain on early debt retirement (2,240) --
Decrease (increase) in working capital elements,
net of effect of acquisition
Trade receivables (40,226) (2,842)
Trade receivables sold 26,000 3,500
Inventories (30,167) (68,667)
Other current assets 29,378 2,204
Trade payables (8,524) 42,623
Other current liabilities 24,038 29,863
Short term investments(trading) 66,160 (54,878)
Trading account borrowings 9,555 190,279
Other items - net (3,634) (3,660)
--------- ---------
Net cash provided by (used in) operating activities 198,193 (18,693)
--------- ---------
Cash flows from investing activities:
Short term investments-available for sale (34,132) (32,430)
Plant additions and improvements (32,520) (19,323)
Investment in affiliates (8,335) (5,450)
Acquisition of Handy & Harman, net of cash (366,147) --
Dividends from affiliates 5,000 2,500
Proceeds from sale of property 163 1,217
--------- ---------
Net cash used in investing activities (435,971) (53,486)
--------- ---------
Cash flows from financing activities:
Long term debt proceeds, net of issuance cost 561,968 --
Gain on early debt retirement 4,779 --
Payments on long-term borrowings (263,890) (2,199)
Minority interest (675) --
Short term borrowings (payments) (23,194) 95,618
Preferred stock retirement -- (9,839)
Common stock purchased (17,765) (38,876)
Letter of credit collateralization 1,220 8,999
Preferred stock dividends paid (15,456) (15,505)
All other 354 722
--------- ---------
Net cash provided by financing activities 247,341 38,920
--------- ---------
Increase (decrease) in cash and
cash equivalents 9,563 (33,259)
Cash and cash equivalents
at beginning of period 1,002 35,020
--------- ---------
Cash and cash equivalents
at end of period $ 10,565 $ 1,761
========= =========
See notes to consolidated financial statements.
WHX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
GENERAL
The consolidated balance sheet as of September 30, 1998, the
consolidated statement of operations for the three and nine month
periods ended September 30, 1998 and 1997, and the consolidated
statement of cash flows for the nine month periods ended September 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 September 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 September 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 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.
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 was 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 excess of the
purchase price over the fair value of the net assets acquired 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.
Nine Months Ended Sept. 30,
---------------------------
1998 1997
---- ----
(in thousands, except per share)
Revenue $1,348,428 $722,735
Net income (loss) 36,283 (176,549)
Basic income (loss) per share: 1.13 (8.43)
Diluted income (loss) per share: 1.01 (8.43)
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
-2-
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. During the third quarter of 1998,
the Company purchased and retired $48 million aggregate principal amount
of 10 1/2% Senior Notes in the open market resulting in a $2.4 million
gain, net of tax.
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 third quarter of 1997 and
the nine month period of 1997, the conversion of preferred stock and
redeemable common stock and exercise of options and warrants 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 The Quarter Ended Sept. 30, 1998 For The Nine Months Ended Sept. 30, 1998
------------------------------------ ----------------------------------------
Income Shares Per-Share Income Shares Per-share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------------------------------------------------------------------------------
Income before extraordinary item $21,783 $36,937
Less: Preferred stock dividends 5,152 15,456
------ ------
BASIC EPS
Income available to
common stockholders 16,631 18,236 $0.91 21,481 18,413 $1.17
EFFECT OF DILUTIVE SECURITIES
OPTIONS 453 559
Convertible preferred stock 5,152 16,506 15,456 16,506
Redeemable common stock 302 302
DILUTED EPS
Income available to common
stockholders + assumed conversions ------- ------ ----- ------- ------ -----
$21,783 35,497 $0.61 $36,937 35,780 $1.03
======= ====== ===== ======= ====== =====
For The Quarter Ended Sept. 30, 1997 For The Nine Months Ended Sept. 30, 1997
------------------------------------ ----------------------------------------
Income Shares Per-Share Income Shares Per-share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------------------------------------------------------------------------------
Income before extraordinary item $(91,387) $(163,218)
Less: Preferred stock dividends 5,152 15,505
BASIC AND DILUTED EPS
Income available to
common stockholders --------- ------ ------- ---------- ------ -------
$(96,539) 21,513 $(4.49) $(178,723) 22,792 $(7.84)
========= ====== ======= ========== ====== =======
Outstanding stock options granted to officers, directors, key
employees and others totaled 4.6 million shares of Common Stock at
September 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% of the number of shares publicly traded during the
previous day. As of September 30, 1998 redeemable common stock
outstanding totaled 301,799 shares.
-3-
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 third quarter 1998 comprehensive
income of $24.6 million consists of net income of $24.0 million and
other comprehensive income of $.6 million, net of tax related to an
unrealized gain on available-for-sale securities and foreign exchange
translation adjustment. The comprehensive loss for the comparable period
in 1997 of $83.9 million consists of net loss of $91.4 million and other
comprehensive income of $7.5 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 third quarter of 1998 and 1997 were a
loss of $7.2 million and a gain of $4.7 million, respectively.
NOTE 6 - SALES OF RECEIVABLES
Accounts receivable at September 30, 1998 and 1997 exclude
$95.0 million and $48.5 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
In December 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, and expires May 3, 1999.
Borrowings outstanding against the WPSC Revolving Credit Facility at
September 30, 1998 totaled $67.2 million. Letters of credit outstanding
under the WPSC Revolving Credit Facility were $8.7 million at September
30, 1998.
In August 1994 WPSC entered into a separate facility for
letters of credit up to $50 million. At September 30, 1998 letters of
credit totaling $8.1 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.
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 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, calculated at LIBOR + 2.50%. Borrowings
-4-
under the Facilities are secured by the pledge of 100% of the capital
stock of all of 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 Company has
entered into a cancelable interest-rate swap to convert $125 million of
its variable-rate debt to a fixed rate with Citibank, N.A. New York. The
fixed rate is 4.53 percent, effective January 4, 1999, with a
termination date of January 5, 2004; PROVIDED, HOWEVER, Citibank may
designate July 5, 2000 as the termination date. Borrowings outstanding
under the Facilities at September 30, 1998 totaled $240.5 million.
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 is a series of benefit
structures, which essentially continue the various pension plans for
employees of the WPSC and H&H 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 eliminates
approximately $135 million of future cash funding obligations of WHX
over the next four years.
NOTE 10 - CONTINGENCIES
ENVIRONMENTAL MATTERS
WPSC 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 $6.5 million for 1996, 1997 and the nine months ended September 30,
1998, respectively. The Company anticipates spending approximately $27.6
million in the aggregate on major environmental compliance projects
through the year 2000, estimated to be spent as follows: $10.5 million
in 1998, $13.2 million in 1999 and $3.9 million in 2000. Due to the
possibility of unanticipated factual or regulatory developments, the
amount of future expenditures may vary substantially from such
estimates.
-5-
Non-current accrued environmental liabilities totaled $10.6
million at December 31, 1997 and $12.7 million at September 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.
-6-
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
("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 (the "Securities Act").
On April 13, 1998 the Company completed the acquisition of 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 $350.0 million of 10 1/2%
Senior Notes of the Company.
WPSC announced on September 30, 1998 that it is actively supporting
the "Stand Up for Steel" Campaign initiated by the United Steel Workers of
America and other steel producers. The campaign is aimed at creating
governmental action against dumping foreign steel at prices below the cost of
production.
On October 27, 1998 WPSC also filed suit against 15 Japanese and
Russian steel producers and trading companies, alleging that they are selling
hot-rolled steel to WPSC's customers in Ohio below the cost of production and
are causing the Company irreparable harm. The suit seeks to have the defendant
companies immediately enjoined from selling or otherwise providing hot-rolled
steel manufactured in Russia or Japan below its cost of production and delivery
to the Ohio market. It asked for accelerated handling of the complaint by the
Belmont County Common Pleas Court. The defendant companies have filed a Notice
of Removal removing the action from the Common Pleas Court to the United States
District Court for the Southern District of Ohio. WPSC has filed a motion to
remand the action to the Common Pleas Court. The notion is currently pending.
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 third quarter of 1998 were $459.6 million as
compared to $144.6 million in the third quarter of 1997. Sales increased
primarily due to (i) the return to pre-strike levels of sales for WPSC's
operations compared to the third quarter of 1997, which earlier period reflects
the effect of the strike by the United Steel Workers of America and (ii) the
acquisition of H&H.
Operating costs for the third quarter of 1998 increased to $441.1
million from $199.2 million, excluding the special charge, in the 1997 third
quarter. 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 third quarter.
Third quarter costs include $4.5 million related principally to physical
inventory adjustments. Also, WPSC experienced lower pension expense in the third
quarter of 1998 as a result of the merger of the H&H and WPSC pension plans.
-7-
Depreciation and amortization expense increased $16.4 million to
$26.0 million in the third quarter of 1998 from $9.6 million in the comparable
period in 1997, due to the effects of the strike on production in the third
quarter of 1997 and the inclusion of H&H. Amortization increased $2.0 reflecting
the goodwill acquired in the H&H acquisition. There was no amortization of
goodwill for H&H in the third quarter of 1997.
Selling, administrative and general expense for the third quarter of
1998 increased $18.1 million to $34.8 million from $16.7 million in the
comparable period in 1997 due primarily to the acquisition of H&H in the second
quarter 1998.
In the third quarter of 1997 the Company recorded a special charge
of $88.9 million related to the new labor agreement. The special charge included
$66.7 million for enhanced retirement benefits, $15.5 million for signing and
retention bonuses and special assistance payments and other employee benefits
totaling $6.7 million.
Interest expense for the third quarter 1998 increased $15.8 million
to $23.4 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 and
refinancing of H&H outstanding indebtedness.
Other income increased $32.0 million to $42.5 million in the third
quarter of 1998, compared to $10.5 million in the 1997 third quarter. The
increase is due primarily to realized gains on short-term investments as well as
increased equity income on joint venture operations. WPN Corp. was granted a
bonus of $3.75 million for its performance related to its management of the
Company's short-term investments.
Income before extraordinary items for the 1998 third quarter totaled
$21.8 million, or $0.91 per share of common stock after preferred stock
dividends. The extraordinary income of $3.4 million ($2.2 million, net of tax)
or $0.12 per share of common stock reflects the gain on early debt retirement of
$48 million of 10 1/2% Senior Notes. The 1997 third quarter net loss totaled
$91.4 million, or a loss of $4.49 per share of common stock after preferred
stock dividends.
Net sales for the first nine months of 1998 totaled $1.2 billion
compared to the first nine months 1997 net sales of $386.7 million. The increase
is due to the H&H acquisition and the strike related impact on the nine month
1997 sales of WPSC.
Operating costs for the first nine months of 1998 increased to $1.2
billion from $542.5 million in 1997's first nine 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 third quarter. Also, WPSC experienced lower
pension expense due to the merger of the H&H and WPSC pension plans.
Depreciation and amortization expense increased $40.2 million to
$72.6 million in the first nine months of 1998 from $32.4 million in the
comparable period of 1997 due to the effects of the strike on production in the
first nine months of 1997 and the inclusion of H&H. Amortization increased $3.7
million reflecting the goodwill acquired in the second quarter acquisition of
H&H.
Selling, administrative and general expense for the first nine
months of 1998 increased $35.3 million to $85.9 million from $50.6 million in
the comparable period of 1997 due primarily to the acquisition of H&H in the
second quarter 1998. WPN's annual management fee was increased by $750,000 as a
result of the H&H acquisition.
In the third quarter of 1997 the Company recorded a special charge
of $88.9 million related to the new labor agreement for WPSC. The special charge
included $66.7 million for enhanced retirement benefits, $15.5 million for
signing and retention bonuses, and special assistance payments and other
employee benefits totaling $6.7 million.
-8-
Interest expense for the first nine months of 1998 increased $33.7
million to $54.7 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 $57.3 million to $71.9 million in the first
nine months of 1998, compared to income of $14.6 million in the first nine
months of 1997. The increase is primarily due to realized gains on short-term
investments, and includes increased equity income on joint venture operations.
The 1998 first nine month tax provision reflects an estimated annual
effective tax rate of 39%, as compared to 35% in 1997.
Income before extraordinary items in the first nine months of 1998
totaled $36.9 million, or $1.17 per share of common stock after preferred stock
dividends. The extraordinary income of $3.4 million ($2.2 million net of tax)
reflects the gain on early debt retirement of $48 million of the 10 1/2% Senior
Notes. The 1997 first nine month net loss totaled $163.2 million, or a loss of
$7.84 per share of common stock after preferred stock dividends.
FINANCIAL POSITION
Net cash flow provided by operating activities for the first nine
months of 1998 totaled $198.2 million. Short term trading investments and
related short-term borrowings are reported as cash flow from operating
activities and provided a net $75.7 million of funds in the 1998 first nine
months. Working capital accounts (excluding cash, short term investments,
short-term borrowings and current maturities of long term debt) provided $.5
million of funds. Accounts receivable increased by $40.2 million (excluding a
$26.0 million sale of trade receivables under the WPSC Receivables Facility),
and other current liabilities increased $24.0 million. Inventories, valued
principally by the LIFO method for financial reporting purposes, totaled $492.5
million at September 30, 1998, an increase of $207.7 million from December 31,
1997 reflecting the acquisition of H&H. The increase in accounts receivable is
due to increased shipments at WPSC and the inclusion of H&H.
In the first nine month period of 1998, $32.5 million was spent on
capital improvements including $6.5 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) 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,
calculated 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.
In addition, the Facilities required H&H to procure an interest rate hedge
agreement covering a notional amount of not less than $125 million for a period
of no less than three years. H&H has entered into a cancelable interest-rate
swap to convert $125 million of its variable-rate debt to a fixed rate with
Citibank, N.A. New York. The fixed rate is 4.53 percent, effective January 4,
1999, with a termination date of January 5, 2004; provided
-9-
however Citibank may designate July 5, 2000 as the termination date. 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. During the third quarter of
1998, the Company purchased $48.0 million aggregate principal amount of 10 1/2%
Senior Notes in the open market for $43.2 million.
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 Notes to qualified institutional buyers pursuant to Rule 144A under
the Securities Act. The 9 1/4% Senior Notes were exchanged for identical notes
which were issued pursuant to an exchange offer registered under the Securities
Act.
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 $75.0 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 9d% 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 September
30, 1998 totaled $67.2 million. Letters of credit outstanding under the WPSC
Revolving Credit Facility were $8.7 million at September 30, 1998.
In August 1994 WPSC entered into a separate facility for letters of
credit up to $50 million. At September 30, 1998 letters of credit totaling $8.1
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.
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 are a series of benefit structures, which essentially
continue the various pension plans for employees of the WPSC 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 the Company's
balance sheet liability and will materially reduce the Company's net periodic
pension expense in future periods. Furthermore, based on the Company'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
eliminates approximately $135 million of future cash funding obligations of the
Company over the next four years.
In the first nine months of 1998 the Company repurchased 1.5 million
shares of Common Stock for $17.8 million. The Company may, from time to time,
continue to purchase additional shares of Common Stock and Preferred Stock.
-10-
LIQUIDITY
As of September 30, 1998, the Company had cash and short-term
investments, net of related investment borrowings, of $209.9 million. During the
third quarter of 1998, the Company purchased $48.0 million aggregate principal
amount of its 10 1/2% Senior Notes due 2005 in the open market.
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 as worldwide steel production and demand and currency
exchange rates, could materially affect the Company's results of operations and
financial condition.
The Company announced on October 5, 1998 that it had purchased
approximately 2.2 million shares of stock, a 9.9 percent stake, in Global
Industrial Technologies Inc. ("Global") for $14.9 million. Global is a
Dallas-based industrial tool and special equipment products company.
YEAR 2000 PROJECT
WHX's company wide Year 2000 Project is proceeding on schedule. The
project addresses all aspects of computing in the company including mainframe
systems, external data interfaces to customers, suppliers, banks and government,
mainframe controlling software, voice and data systems, internal networks and
personal computers, plant process control systems, building controls, and in
addition surveying major suppliers and customers to assure their readiness.
Mainframe business systems are anticipated to be Year 2000 compliant
by the end of 1998; external data interfaces, mainframe software, voice and data
systems and internal networks and personal computers are anticipated to be Year
2000 compliant by the end of the first quarter of 1999; process control systems
are anticipated to be compliant by the end of the second quarter of 1999.
Building controls are Year 2000 compliant at this time. Supplier and customer
survey's are 25% complete at this time and completion is expected by the end of
the second quarter of 1999.
The total costs associated with the required modifications to become
Year 2000 compliant is not expected to be material to the Company's financial
condition or results of operations. The estimated total cost of the Year 2000
Project is $3.0 million. The total amount expended on the project through
October 1998 is $2.3 million. Funds are being provided to the project through
departmental expenses budgeted for at the beginning of this project.
Failure to correct a Year 2000 problem could result in an
interruption of certain normal business activities or operations. The Year 2000
project is expected to eliminate any issues that would cause such an
interruption. The Company believes that the implementation of the Year 2000
project changes will minimize any interruptions. The Company is currently in the
process of developing contingency plans regarding component failure of any Year
2000 non-compliant segment of the business.
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
-11-
time, management has not determined the impact of adoption of SOP 98-1 on the
Company's results of operations or financial position.
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, 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 operations.
*******
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.
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.
-12-
Item 6.(a) EXHIBITS
27 Financial Data Schedule
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)
November 13, 1998