1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
{ X } QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1997
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
COMMISSION FILE NUMBER 0-3085
WYMAN-GORDON COMPANY
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1992780
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
244 WORCESTER STREET, BOX 8001, NO. GRAFTON, MASSACHUSETTS 01536-8001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 508-839-4441
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
Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest
practicable date.
OUTSTANDING AT
CLASS FEBRUARY 28, 1997
Common Stock, $1 Par Value 35,936,802
Page 1 of 21
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PART I.
ITEM 1. FINANCIAL STATEMENTS
WYMAN-GORDON COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
FEB. 28, FEB. 28, FEB. 28, FEB. 28,
1997 1996 1997 1996
(000's omitted, except per share data)
Revenue $153,331 $121,517 $426,222 $353,674
Less:
Cost of goods sold 124,716 103,210 362,540 298,222
Selling, general and
administrative expenses 10,342 9,319 31,444 27,988
Other charges 2,434 110 18,213 1,010
137,492 112,639 412,197 327,220
Income from operations 15,839 8,878 14,025 26,454
Other deductions (income):
Interest expense 2,671 2,841 8,053 8,611
Miscellaneous, net 159 (40) (4,306) 615
2,830 2,801 3,747 9,226
Income before income taxes 13,009 6,077 10,278 17,228
Provision (credit) for
income tax - - (19,680) -
Net income $ 13,009 $ 6,077 $ 29,958 $ 17,228
Net income per share $ .35 $ .17 $ .81 $ .48
Shares used to compute net
income per share 37,127 36,269 36,954 36,061
The accompanying notes to the consolidated condensed
financial statements are an integral part of these financial
statements.
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
FEBRUARY 28, MAY 31,
1997 1996
(000's omitted)
ASSETS
Cash and cash equivalents $ 37,258 $ 30,134
Accounts receivable 106,689 94,928
Inventories 94,048 65,873
Prepaid expenses 12,328 14,338
Total current assets 250,323 205,273
Property, plant and equipment, net 149,698 140,408
Intangible assets 19,370 19,899
Other assets 6,976 10,310
$426,367 $375,890
LIABILITIES
Borrowings due within one year $ 77 $ 77
Accounts payable 53,386 40,484
Accrued liabilities and other 48,264 48,178
Total current liabilities 101,727 88,739
Restructuring, integration, disposal
and environmental 17,058 18,275
Long-term debt 96,231 90,231
Pension liability 5,513 1,698
Deferred income tax and other 14,339 17,717
Postretirement benefits 47,140 49,287
STOCKHOLDERS' EQUITY
Preferred stock - none issued - -
Common stock issued - 37,052,720 shares 37,053 37,053
Capital in excess of par value 29,788 33,291
Retained earnings 97,426 65,653
Less treasury stock at cost
February 28, 1997 - 1,115,918 shares
May 31, 1996 - 1,480,448 shares (19,908) (26,054)
144,359 109,943
$426,367 $375,890
The accompanying notes to the consolidated condensed
financial statements are an integral part of these financial
statements.
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1997 1996
(000's omitted)
Operating activities:
Net income $ 29,958 $17,228
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 15,676 12,785
Other charges 13,045 -
Provision for equity investment 2,734 1,010
Changes in assets and liabilities:
Accounts receivable (11,961) (9,310)
Inventories (28,951) (6,840)
Prepaid expenses and other assets (134) 2,270
Accrued restructuring, disposal
and environmental (2,545) (5,729)
Income and other taxes (4,650) 2,267
Accounts payable and accrued
liabilities 9,092 (5,942)
Net cash provided (used) by
operating activities 22,264 7,739
Investing activities:
Capital expenditures (23,226) (9,742)
Proceeds from sale of fixed assets 369 1,686
Other, net (927) (191)
Net cash provided (used) by
investing activities (23,784) (8,247)
Financing activities:
Issuance (payment) of debt 6,000 (1,852)
Net proceeds from issuance of
common stock 5,501 2,174
Repurchase of Common Stock (2,857) -
Net cash provided (used) by
financing activities 8,644 322
Increase (decrease) in cash 7,124 (186)
Cash, beginning of year 30,134 13,856
Cash, end of period $ 37,258 $13,670
The accompanying notes to the consolidated condensed
financial statements are an integral part of these financial
statements.
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
February 28, 1997
NOTE A - BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited
consolidated condensed financial statements contain all
adjustments necessary to present fairly its financial position at
February 28, 1997 and its results of operations and cash flows
for the three months and nine months ended February 28, 1997 and
February 28, 1996. All such adjustments are of a normal
recurring nature.
The accompanying unaudited consolidated condensed financial
statements have been prepared in accordance with Article 10 of
Securities and Exchange Commission Regulation S-X and, therefore,
do not include all information and footnotes necessary for a fair
presentation of the financial position, results of operations and
cash flows in conformity with generally accepted accounting
principles. In conjunction with its May 31, 1996 Annual Report
on Form 10-K, the Company filed audited consolidated financial
statements which included all information and footnotes necessary
for a fair presentation of its financial position at May 31, 1996
and 1995 and its results of operations and cash flows for the
years ended May 31, 1996 and 1995, the five months ended May 31,
1994 and the year ended December 31, 1993 in conformity with
generally accepted accounting principles. Where appropriate,
prior period amounts have been reclassified to permit comparison.
NOTE B - ADOPTION OF RECENT ACCOUNTING STANDARDS
Effective June 1, 1996, the Company adopted Statement of
Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" ("SFAS 121"). SFAS 121 prescribes the accounting
for the impairment of long-lived assets that are to be held and
used in the business and similar assets to be disposed of. The
adoption has not had a material effect on earnings or the
financial position of the Company.
Effective June 1, 1996, the Company adopted the Statement of
the Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). This standard prescribes
the accounting and disclosure of compensation related to all
stock-based awards to employees. The Company accounts for its
stock compensation arrangements under the provisions of APB 25,
"Accounting for Stock Issued to Employees," and will continue to
do so.
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
February 28, 1997
NOTE C - INVENTORIES
Inventories consisted of:
FEBRUARY 28, 1997 MAY 31, 1996
(000's omitted)
Raw material $ 48,237 $21,608
Work-in-process 50,287 51,125
Supplies 5,017 3,168
103,541 75,901
Less progress payments (9,493) (10,028)
$ 94,048 $65,873
If all inventories valued at LIFO cost had been valued at
first-in, first-out (FIFO) cost or market which approximates
current replacement cost, inventories would have been $16,662,000
higher than reported at February 28, 1997 and May 31, 1996.
There were no LIFO inventory credits or charges to cost of
goods sold in the nine months ended February 28, 1997 or February
28, 1996.
NOTE D - COMMITMENTS AND CONTINGENCIES
At February 28, 1997, certain lawsuits arising in the normal
course of business were pending. The Company denies all material
allegations of these complaints. In the opinion of management,
the outcome of legal matters will not have a material adverse
effect on the Company's financial position, results of operations
or liquidity.
The Company is subject to extensive, stringent and changing
federal, state and local environmental laws and regulations,
including those regulating the use, handling, storage, discharge
and disposal of hazardous substances and the remediation of
alleged environmental contamination. Accordingly, the Company is
involved from time to time in administrative and judicial
inquiries and proceedings regarding environmental matters.
Nevertheless, the Company believes that compliance with these
laws and regulations will not have a material adverse effect on
the Company's operations as a whole.
The Company had foreign exchange contracts totaling
approximately $22,017,000 at February 28, 1997. These contracts
hedge certain normal operating purchase and sales transactions.
The exchange contracts generally mature within six months and
require the Company to exchange U.K. pounds for non-U.K.
currencies or non-U.K. currencies for U.K. pounds. Transaction
gains and losses included in the Consolidated Condensed
Statements of Operations for the three and nine months ended
February 28, 1997 and February 28, 1996 were not material.
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
February 28, 1997
NOTE D - COMMITMENTS AND CONTINGENCIES (Continued)
On December 22, 1996, a serious industrial accident occurred
at the Houston, Texas facility of Wyman-Gordon Forgings, Inc., a
subsidiary of the Company ("WGFI"), in which eight employees of
WGFI, were killed and two were injured. The accident also caused
substantial damage to the Houston facility. The accident
occurred while a crew of ten men was performing maintenance on
the system that supplies hydraulic power to the Company's 35,000
ton vertical extrusion press. The Company has repaired damage to
the press and recommenced operations in the first week of March
1997. Although no lawsuits have yet been filed, each of the
decedents' families and one of the survivors have retained
attorneys to represent them in possible litigation against WGFI
and/or the Company. The Occupational Safety and Health
Administration ("OSHA") is conducting an investigation of the
accident. OSHA has six months from the date of the accident to
issue any citations, sanctions or fines, and WGFI may face
significant fines and sanctions for alleged violations of
applicable workplace safety requirements. WGFI has tendered the
defense of the various claims to the Company's insurance
carriers, but has not yet received formal responses from the
various carriers under the terms of the applicable policies. At
this time there can be no assurance that the full insurance
coverage will be available or that the Company's ultimate
liability resulting from the accident will not exceed available
insurance coverage by an amount which could be material to its
financial condition or results of operations.
NOTE E - INCOME TAX REFUND
In the nine months ended February 28, 1997, the Company
recognized the net benefit of a refund of prior years' income
taxes amounting to $19,680,000, plus interest of $3,484,000. The
refund relates to the carryback of tax net operating losses to
tax years 1981, 1984 and 1986 under applicable provisions of
Internal Revenue Code Section 172(f). The amount of net
operating losses carried back to such years was approximately
$48,500,000. At February 28, 1997, the Company had approximately
$38,000,000 of net operating loss carryforwards available to
offset taxable income in fiscal year 1997 and subsequent fiscal
years.
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
February 28, 1997
NOTE F - DEBT
In December 1996, the Company issued an Industrial Revenue
Bond (the "IRB") amounting to $6 million. The IRB bears an
interest rate approximating 3.75% fluctuating weekly. Principal
on the IRB is payable in annual installments of $400,000 in
December 1998 and $800,000 thereafter. The Company maintains a
letter of credit to collateralize the IRB. The proceeds of the
IRB are restricted for the construction of the Scaled Composites,
Inc. facility in Montrose, Colorado. As of February 28, 1997,
cash and cash equivalents includes $5,400,000 restricted for such
use.
NOTE G - OTHER CHARGES
In the nine months ended February 28, 1997, the Company
recorded other charges of $18,213,000. Such other charges
include $8,000,000 to provide for the costs of workforce
reductions at the Company's Grafton, Massachusetts facility and
the write-off and disposal of certain equipment. Other charges
also include $2,300,000 to reduce the carrying value of certain
assets of the Company's titanium castings operations, $2,485,000
to recognize the Company's 25.0% share of the net losses of its
Australian Joint Venture and to reduce the carrying value of such
joint venture, $250,000 relating to expenditures for an
investment in another joint venture, $2,745,000 to reduce the
carrying value of the cash surrender value of certain company-
owned life insurance policies and $2,434,000 of costs related to
the Houston accident.
In the nine months ended February 28, 1996, the Company
provided $1,010,000 in order to recognize its 25.0% share of the
net losses of its Australian Joint Venture and to reserve for
amounts loaned to such joint venture during the second quarter of
fiscal year 1996 and to provide for expenditures for an
investment in an additional joint venture.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
"FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY"
Certain statements in Management's Discussion and Analysis
of Financial Condition and Results of Operations contain
"forward-looking" information (as defined in the Private
Securities Litigation Reform Act of 1995) that involves risk and
uncertainty, including discussions of continuing raw material
prices and availability and their impact on gross margins and
business trends as well as liquidity and sales volume. Actual
future results and trends may differ materially depending on a
variety of factors, including the Company's successful
negotiation of long-term customer pricing contracts and raw
material prices and availability. For a discussion identifying
important factors that could cause actual results to differ
materially from those anticipated in forward-looking statements,
see the Company's SEC filings, in particular see the Company's
Annual Report on Form 10-K for the fiscal year ended May 31, 1996
Part I, Item 1 - "Markets and Products - Aerospace", "Customers",
"Marketing and Sales", "Raw Materials", "Employees",
"Competition", "Environmental Regulations" and "Product Liability
Exposure".
The principal markets served by the Company are aerospace
and power generation. Revenue by market for the respective
periods was as follows (000's omitted):
THREE MONTHS ENDED THREE MONTHS ENDED
FEBRUARY 28, 1997 FEBRUARY 28, 1996
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
Aerospace $124,618 81% $ 87,325 72%
Power generation 20,185 13% 23,783 20%
Other 8,528 6% 10,409 8%
$153,331 100% $121,517 100%
NINE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, 1997 FEBRUARY 28, 1996
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
Aerospace $324,235 76% $258,546 73%
Power generation 74,639 18% 68,615 19%
Other 27,348 6% 26,513 8%
$426,222 100% $353,674 100%
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS THREE MONTHS ENDED FEBRUARY 28, 1997
("third quarter of fiscal year 1997") COMPARED TO THREE MONTHS
ENDED FEBRUARY 28, 1996 ("third quarter of fiscal year 1996")
The Company's revenue increased 26.2% to $153.3 million in
the third quarter of fiscal year 1997 from $121.5 million in the
third quarter of fiscal year 1996 as a result of higher sales
volume at the Company's Forgings and Castings Divisions. These
sales volume increases during the third quarter of fiscal year
1997 as compared to the third quarter of fiscal year 1996 are
reflected by market as follows: a $37.3 million (42.7%) increase
in aerospace, a $(3.6) million (15.1%) decrease in power
generation and a $(1.9) million (18.1%) decrease in other. The
principal cause of the strength in the aerospace market was
higher engine build rates. The decrease in power generation and
other is as a result of the shutdown of the 35,000 ton vertical
extrusion press in the Company's Houston facility. The press was
incapacitated as a result of the industrial accident explosion in
the Company's Houston facility which occurred in December 1996.
While production on the press affected by the explosion was
recommenced in the first week of March 1997, the negative effects
of the shutdown on the production cycle for the affected product
lines are expected to continue until the end of March and
therefore may impact adversely the Company's results for the
quarter ending May 31, 1997. The principal product lines
affected by the press' incapacitation were extrusions, for both
pipe and powder metal processing, and large closed die forgings.
Revenues in the third quarter of fiscal year 1996 and, to a
lesser extent, in the third quarter of fiscal year 1997, were
limited by raw material shortages and production delays caused by
capacity constraints of the Company's suppliers. The Company
believes that the higher order activity reflects continued higher
spares demand and new business resulting from increasing
production rates on commercial aircraft by commercial airframe
primes.
The Company's backlog has increased to $861.8 million at
February 28, 1997 from $500.7 million at February 28, 1996 and
from $598.4 million at May 31, 1996. This increase resulted from
the following factors:
1. Higher build rates of the Company's engine and airframe
customers,
2. Higher prices for the Company's aerospace products,
particularly as reflected in the new long-term
agreement ("LTAs") which went into effect on January 1,
1997, and
3. An increase in orders overdue to customer delivery
dates as a result of the Company's inability to ship
because of capacity constraints and raw material
unavailability.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS THREE MONTHS ENDED FEBRUARY 28, 1997
("third quarter of fiscal year 1997") COMPARED TO THREE MONTHS
ENDED FEBRUARY 28, 1996 ("third quarter of fiscal year 1996")
(Continued)
The Company does not expect that this rate of increase in backlog
will continue since it expects that customer orders will not
increase at the same rates as in the recent past, that prices
will moderate and that capacity additions installed by the
Company and its suppliers will enable the Company to meet its
customer demands in a more timely fashion. Of the Company's
total current backlog, $666.1 million is shippable in the next
twelve months. Because of the additional production capacity
that the Company and its suppliers are installing, the Company
believes that it will be able to fulfill those twelve month
requirements.
The Company's gross margins were 18.7% in the third quarter
of fiscal year 1997 as compared to 15.0% in the third quarter of
fiscal year 1996. Higher production volumes, improved pricing
included in new LTAs, continued emphasis on cost reduction and
productivity gains resulting from the Company's continuing
efforts toward focusing forging production of rotating parts for
jet engines in its Houston, Texas facility and forging production
of airframe structures and large turbine parts in its Grafton,
Massachusetts facility favorably impacted gross margins in the
third quarter of fiscal year 1997.
There were no LIFO credits or charges recorded during the
third quarter of fiscal year 1997 or 1996. The Company currently
estimates that it will record a LIFO charge of approximately $2.0
million in the fourth quarter of fiscal year 1997.
Selling, general and administrative expenses increased 11.0%
to $10.3 million during the third quarter of fiscal year 1997
from $9.3 million during the third quarter of fiscal year 1996.
Selling, general and administrative expenses as a percentage of
revenues improved to 6.7% in the third quarter of fiscal year
1997 from 7.7% in the third quarter of fiscal year 1996. The
improvement as a percent of revenues is the result of higher
revenues.
Other charges was $2.4 million in the third quarter of
fiscal year 1997 and $0.1 million in the third quarter of fiscal
year 1996. Other charges in the third quarter of fiscal year
1997 result from costs related to the Houston accident.
Interest expense was $2.7 million in the third quarter of
fiscal year 1997 and $2.8 million in the third quarter of fiscal
year 1996. The decrease results from lower borrowings
outstanding under the credit agreement of Wyman-Gordon Limited,
the Company's subsidiary, in Livingston, Scotland (the "U.K.
Credit Agreement").
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS THREE MONTHS ENDED FEBRUARY 28, 1997
("third quarter of fiscal year 1997") COMPARED TO THREE MONTHS
ENDED FEBRUARY 28, 1996 ("third quarter of fiscal year 1996")
(Continued)
Miscellaneous, net was expense of $0.2 million in the third
quarter of fiscal year 1997 as compared to income of $0.1 million
in the third quarter of fiscal year 1996.
The Company recorded no provision or benefit for income
taxes in the third quarter of fiscal year 1997 or 1996. The
Company expects to utilize its NOLs and be a taxpayer in fiscal
year 1998.
Net income was $13.0 million, or $.35 per share, in the
third quarter of fiscal year 1997 and $6.1 million, or $.17 per
share in the third quarter of fiscal year 1996. The $6.9 million
improvement results from the items described above.
RESULTS OF OPERATIONS NINE MONTHS ENDED FEBRUARY 28, 1997 ("first
nine months of fiscal year 1997") COMPARED TO NINE MONTHS ENDED
FEBRUARY 28, 1996 ("first nine months of fiscal year 1996")
The Company's revenue increased 20.5% to $426.2 million in
the first nine months of fiscal year 1997 from $353.7 million in
the first nine months of fiscal year 1996 as a result higher
sales volume at the Company's Forgings and Castings Divisions.
These sales volume increases during the first nine months of
fiscal year 1997 as compared to the first nine months of fiscal
year 1996 are reflected by market as follows: a $65.7 million
(25.4%) increase in aerospace, a $6.0 million (8.8%) increase in
power generation and a $.8 million (3.1%) increase in other. The
causes of the strength in the aerospace market was higher engine
build rates and higher demands for spares by aerospace engine
prime contractors. Although there were higher extruded pipe
shipments to energy customers for the first nine months of fiscal
1997, the shipments to energy customers were impacted by the
shutdown of the 35,000 ton vertical extrusion press in Houston as
discussed above. Revenues in the first nine months of fiscal
year 1996 and, to a lesser extent, in the first nine months of
fiscal year 1997, were limited by raw material shortages and
production delays caused by capacity constraints of the Company's
suppliers. The Company believes that the higher order activity
reflects continued higher spares demand and new business
resulting from increasing production rates on commercial aircraft
by commercial airframe primes.
The Company's backlog has increased to $861.8 million at
February 28, 1997 from $500.7 million at February 28, 1996 and
from $598.4 million at May 31, 1996. This increase resulted from
the following factors:
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS NINE MONTHS ENDED FEBRUARY 28, 1997 ("first
nine months of fiscal year 1997") COMPARED TO NINE MONTHS ENDED
FEBRUARY 28, 1996 ("first nine months of fiscal year 1996")
(Continued)
1. Higher build rates of the Company's engine and airframe
customers,
2. Higher prices for the Company's aerospace products,
particularly as reflected in the new LTAs which went
into effect on January 1, 1997, and
3. An increase in orders overdue to customer delivery
dates as a result of the Company's inability to ship
because of capacity constraints and raw material
unavailability.
The Company does not expect that this rate of increase in backlog
will continue since it expects that customer orders will not
increase at the same rates as in the recent past, that prices
will moderate and that capacity additions installed by the
Company and its suppliers will enable the Company to meet its
customer demands in a more timely fashion. Of the Company's
total current backlog, $666.1 million is shippable in the next
twelve months. Because of the additional production capacity
that the Company and its suppliers are installing, the Company
believes that it will be able to fulfill those twelve month
requirements.
The Company's gross margins were 14.9% in the first nine
months of fiscal year 1997 as compared to 15.7% in the first nine
months of fiscal year 1996. The decline in gross margins was
caused by higher raw material costs which could not be passed on
to customers as a result of the then existing LTAs with its
customers. Such gross margin decline would have been greater if
not mitigated by higher production volumes, continued emphasis on
cost reductions, productivity gains resulting from the Company's
continuing efforts toward focusing forging production of rotating
parts for jet engines in its Houston, Texas facility and forging
production of airframe structures and large turbine parts in its
Grafton, Massachusetts facility and continuing realization of
cost reductions from synergies associated with the integration of
Cameron in the first nine months fiscal year 1997. Beginning in
the second half of fiscal year 1996, higher demand required the
Company to purchase certain raw materials under terms not covered
by LTAs with its vendors. The current rebound in demand for many
of these raw materials, especially nickel and titanium, resulted
in significant market price increases which negatively affected
the Company's gross margins. The Company began to see pricing
relief for its products in early calendar 1997 when the new LTAs
that the Company negotiated with its customers went into effect.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS NINE MONTHS ENDED FEBRUARY 28, 1997 ("first
nine months of fiscal year 1997") COMPARED TO NINE MONTHS ENDED
FEBRUARY 28, 1996 ("first nine months of fiscal year 1996")
(Continued)
Gross margins in the first nine months of fiscal year 1997
were also negatively impacted by price and demand declines within
the titanium golf club head business because of oversupply, cost
disadvantages and decreased demand.
There were no LIFO credits or charges recorded during the
first nine months of fiscal year 1997 or 1996. The Company
currently estimates that it will record a LIFO charge of
approximately $2.0 million in the fourth quarter of fiscal year
1997.
Selling, general and administrative expenses increased 12.3%
to $31.4 million during the first nine months of fiscal year 1997
from $28.0 million during the first nine months of fiscal year
1996. Selling, general and administrative expenses as a
percentage of revenues improved to 7.4% in the first nine months
of fiscal year 1997 from 7.9% in the first nine months of fiscal
year 1996. The improvement as a percent of revenues is the
result of higher revenues.
During the first nine months of fiscal year 1997, the
Company recorded other charges of $18.2 million. Such other
charges include $8.0 million to provide for the costs of
workforce reductions at the Company's Grafton, Massachusetts
facility and the write-off and disposal of certain equipment.
Other charges also include $2.3 million to reduce the carrying
value of certain assets of the Company's titanium castings
operations, $2.5 million to recognize the Company's 25.0% share
of the net losses of its Australian Joint Venture and to reduce
the carrying value of such joint venture, $0.3 million relating
to expenditures for an investment in another joint venture, $2.7
million to reduce the carrying value of the cash surrender value
of certain Company-owned life insurance policies and $2.4 million
of costs related to the Houston accident. As of February 28,
1997, the Company had fully written-off its investment in the
Australian Joint Venture. However, in the future, the Company
may make additional capital contributions to the Australian Joint
Venture to satisfy its cash or other requirements and may be
required to recognize its share of any additional losses or may
write-off such additional capital contributions.
During the first nine months of fiscal year 1996, the
Company provided $1.0 million in order to recognize its 25.0%
share of the net losses of its Australian Joint Venture and to
reserve for amounts loaned to the Australian Joint Venture during
the first nine months of fiscal year 1996 and to provide for
expenditures for an investment in an additional joint venture.
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15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS NINE MONTHS ENDED FEBRUARY 28, 1997 ("first
nine months of fiscal year 1997") COMPARED TO NINE MONTHS ENDED
FEBRUARY 28, 1996 ("first nine months of fiscal year 1996")
(Continued)
Interest expense was $8.1 million in the first nine months
of fiscal year 1997 and $8.6 million in the first nine months of
fiscal year 1996. The decrease results from lower borrowings
outstanding under the Company's U.K. Credit Agreement.
Miscellaneous, net was income of $4.3 million in the first
nine months of fiscal year 1997 as compared to an expense of $.6
million in the first nine months of fiscal year 1996.
Miscellaneous, net in the first nine months of fiscal year 1997
includes interest income on the refund of prior years' income
taxes amounting to $3.5 million and a $1.7 million gain on the
sale of fixed assets. Miscellaneous, net in the first nine
months of fiscal year 1996 includes a $0.2 million gain on the
sale of marketable securities.
In the first nine months of fiscal year 1997, the Company
recognized the net benefit of a refund of prior years' income
taxes amounting to $19.7 million. The refund relates to the
carryback of tax net operating losses. The Company recorded no
provision or benefit for income taxes in the first nine months of
fiscal year 1996. The Company expects to utilize its NOLs and be
a taxpayer in fiscal year 1998.
Net income was $30.0 million, or $.81 per share, in the
first nine months of fiscal year 1997 and $17.2 million, or $.48
per share in the first nine months of fiscal year 1996. The
$12.8 million improvement results from the items described above.
LIQUIDITY AND CAPITAL RESOURCES
The increase in the Company's cash of $7.1 million to $37.2
million at February 28, 1997 from $30.1 million at May 31, 1996
resulted primarily from cash provided by operating activities of
$22.3 million, issuance of common stock of $5.5 million, and
issuance of new debt of $6.0 million offset by capital
expenditures and other investing activities of $23.8 million and
the repurchase of common stock of $2.9 million.
The increase in the Company's working capital of $32.1
million to $148.6 million as of February 28, 1997 from $116.5
million as of May 31, 1996 resulted primarily from net income of
$30.0 million, a decrease in other assets of $3.3 million, a
decrease in intangible assets of $0.5 million, net proceeds from
the issuance of Common Stock of $5.5 million, other changes in
stockholders' equity of $1.8 million, an increase in long-term
debt of $6.0 million, and an increase in long-term benefit
liabilities of $1.7 million, offset by net increases in fixed
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16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
assets of $9.3 million, a decrease in deferred taxes and other of
$3.4 million, a decrease in long-term restructuring, integration,
disposal and environmental of $1.2 million, and the repurchase of
common stock of $2.9 million.
Earnings before interest, taxes, depreciation and
amortization ("EBITDA") decreased $4.0 million to $33.8 million
in the first nine months of fiscal year 1997 from $37.8 million
in the first nine months of fiscal year 1996. This decrease
reflects primarily the $18.2 million of other charges provided in
the first nine months of fiscal year 1997 offset against higher
profitability.
In the first nine months of fiscal year 1997, the Company
recorded other charges of $18.2 million, of which $10.1 million
was non-cash and $8.1 million requires the use of cash. Cash
spent for these activities through February 28, 1997 includes
$2.4 million related to the Houston accident and $0.2 million to
pay severance. Cash requirements during the remainder of fiscal
year 1997 and the fiscal year ending May 31, 1998 include $2.0
million to pay severance and other employee costs and $3.5
million to dispose of certain equipment.
As of May 31, 1996, the Company estimated the remaining cash
requirements for the integration of Cameron and direct costs
associated with the acquisition of Cameron to be $4.0 million.
Of such amount, the Company expects to spend approximately $2.5
million during its fiscal year ending May 31, 1997 ("fiscal year
1997") and $1.5 million thereafter. In the first nine months of
fiscal year 1997, spending related to the integration of Cameron
and associated direct costs amounted to $1.4 million.
The Company expects to spend $0.5 million in fiscal year
1997 and has a reserve with respect to environmental matters, the
balance of which is $16.2 million and which it expects to expend
in future periods on non-capitalizable environmental activities.
In the first nine months of fiscal year 1997, $0.4 million was
expended for non-capitalizable environmental projects.
The Company from time to time expends cash on capital
expenditures for more cost effective operations, environmental
projects and joint development programs with customers. In the
first nine months of fiscal year 1997, capital expenditures
amounted to $23.2 million and are expected to be in excess of
$30.0 million for fiscal year 1997 and approximately the same
level in fiscal year 1998.
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17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
The Company's revolving receivables-backed credit facility
(the "Receivables Financing Program") provides the Company with
an aggregate maximum borrowing capacity under the Receivables
Financing Program of $65.0 million (subject to a borrowing base),
with a letter of credit sub-limit of $35.0 million. The term of
the Receivables Financing Program is five years with a renewal
option. As of February 28, 1997, under the credit facility, the
total availability based on eligible receivables was $55.1
million, there were no borrowings and letters of credit amounting
to $6.5 million were outstanding.
Wyman-Gordon Limited, the Company's subsidiary located in
Livingston, Scotland, entered into a credit agreement with a
Scottish bank ("the U.K. Credit Agreement"). The maximum
borrowing capacity under the U.K. Credit Agreement is 2.0 million
pounds sterling (approximately $3.0 million) with a separate
letter of credit or guarantee limit of 2.0 million pounds
sterling. The term of the U.K. Credit Agreement is one year with
a renewal option. There were no borrowings outstanding at
February 28, 1997 and the Company had issued 0.4 million pounds
sterling (approximately $0.6 million) of letters of credit or
guarantees under the U.K. Credit Agreement.
In the first nine months of fiscal year 1997, the Company
recognized the net benefit of a refund of prior years' income
taxes amounting to $19.7 million, plus interest of $3.5 million.
In September of 1996, the Company received $20.3 million relating
to such refund. Previously, the Company had received $2.9
million related to certain refund claims filed. The refund
relates to the carryback of tax net operating losses to tax years
1981, 1984 and 1986 under applicable provisions of Internal
Revenue Code Section 172(f). The amount of net operating losses
carried back to such years was approximately $48.5 million. At
February 28, 1997, the Company had approximately $38.0 million of
net operating loss carryforwards available to offset taxable
income in fiscal year 1997 and subsequent fiscal years.
In December 1996, the Company issued an Industrial Revenue
Bond (the "IRB") amounting to $6 million. The IRB bears an
interest rate approximating 3.75% fluctuating weekly. Principal
on the IRB is payable in annual installments of $0.4 million in
December 1998 and $0.8 million thereafter. The Company maintains
a letter of credit to collateralize the IRB. The proceeds of the
IRB are restricted for the construction of the Scaled Composites,
Inc. facility in Montrose, Colorado. As of February 28, 1997,
cash and cash equivalents includes $5.4 million restricted for
such use.
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18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
The primary sources of liquidity available to the Company to
fund operations and other future expenditures include available
cash ($37.2 million at February 28, 1997), borrowing availability
under the Company's Receivables Financing Program, cash generated
by operations and reductions in working capital requirements
through planned inventory reductions and accounts receivable
management. The Company believes that it has adequate resources
to provide for its operations and the funding of restructuring,
integration, capital and environmental expenditures.
IMPACT OF INFLATION
The Company's earnings may be affected by changes in price
levels and in particular, changes in the price of basic metals.
The Company's contracts generally provide for fixed prices for
finished products with limited protection against cost increases.
The Company would therefore may be affected by changes in prices
of the raw materials during the term of any such contract. The
Company attempts to minimize this risk by entering into fixed
price arrangements with raw material suppliers.
ACCOUNTING AND TAX MATTERS
Effective June 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" ("SFAS 121"). SFAS 121 prescribes the accounting
for the impairment of long-lived assets that are to be held and
used in the business and similar assets to be disposed of. The
adoption has not had a material impact on the earnings or the
financial position of the Company.
Effective June 1, 1996, the Company adopted the Statement of
the Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). This standard prescribes
the accounting and disclosure of compensation related to all
stock-based awards to employees. The Company accounts for its
stock compensation arrangements under the provisions of APB 25,
"Accounting for Stock Issued to Employees," and will continue to
do so.
OTHER MATTERS
During the first nine months of fiscal 1997, the Company and
Weber Metals, Inc. entered into a strategic forging alliance
which will serve the Company's aluminum structural forgings
customers. Under the arrangement, the Company will provide
engineering, technical and marketing support to Weber and Weber
will manufacture aluminum structural products previously
manufactured in the Company's Grafton, Massachusetts facility.
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19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
OTHER MATTERS (Continued)
On December 22, 1996, a serious industrial accident occurred
at the Houston, Texas facility of WGFI, a subsidiary of the
Company, in which eight employees of WGFI, were killed and two
were injured. The accident also caused substantial damage to the
Houston facility. The accident occurred while a crew of ten men
was performing maintenance on the system that supplies hydraulic
power to the Company's 35,000 ton vertical extrusion press. The
Company has repaired damage to the press and recommenced
operations in the first week of March 1997. Although no lawsuits
have yet been filed, each of the decedents' families and one of
the survivors have retained attorneys to represent them in
possible litigation against WGFI and/or the Company. The
Occupational Safety and Health Administration ("OSHA") is
conducting an investigation of the accident. OSHA has six months
from the date of the accident to issue any citations, sanctions
or fines, and WGFI may face significant fines and sanctions for
alleged violations of applicable workplace safety requirements.
WGFI has tendered the defense of the various claims to the
Company's insurance carriers, but has not yet received formal
responses from the various carriers under the terms of the
applicable policies. At this time there can be no assurance that
the full insurance coverage will be available or that the
Company's ultimate liability resulting from the accident will not
exceed available insurance coverage by an amount which could be
material to its financial condition or results of operations.
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20
PART II.
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K
(a) Exhibits
The following exhibits are being filed as part of this Form
10-Q:
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule for the Nine Months
Ended February 28, 1997.
(b) On January 24, 1997, the Company filed a Form 8-K which
included an unaudited Statement of Operations for the twelve
months ended December 31, 1996 in accordance with Section
11(a) and Rule 158 of the Securities Act of 1933.
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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.
WYMAN-GORDON COMPANY
Date: 4/11/97 By: /S/ ANDREW C. GENOR
Andrew C. Genor
Vice President,
Chief Financial Officer
and Treasurer
Date: 4/11/97 By: /S/ JEFFREY B. LAVIN
Jeffrey B. Lavin
Corporate Controller
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