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, 1998
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, 1998
Common Stock, $1 Par Value 36,355,535
Page 1 of 29
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PART I.
ITEM 1. FINANCIAL STATEMENTS
WYMAN-GORDON COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
FEB. 28, FEB. 28, FEB. 28, FEB. 28,
1998 1997 1998 1997
(000's omitted, except per share data)
Revenue $181,764 $153,331 $551,142 $426,222
Less:
Cost of goods sold 159,229 124,716 463,415 362,540
Selling, general and
administrative expenses 12,958 10,342 39,529 31,444
Other charges(credits) - 2,434 (4,900) 18,213
172,187 137,492 498,044 412,197
Income from operations 9,577 15,839 53,098 14,025
Other deductions (income):
Interest expense 3,319 2,671 8,999 8,053
Miscellaneous, net 66 159 790 (4,306)
3,385 2,830 9,789 3,747
Income before income taxes 6,192 13,009 43,309 10,278
Provision (benefit) for
income taxes 2,229 - 14,151 (19,680)
Income before
extraordinary item 3,963 13,009 29,158 29,958
Extraordinary item -
net of income tax
benefit of $2,920,306 (5,192) - (5,192) -
Net income $ (1,229) $ 13,009 $ 23,966 $ 29,958
Basic net income per share:
Income before extra-
ordinary item $ .11 $ .36 $ .80 $ .84
Net income (.03) .36 .66 .84
Diluted net income per share:
Income before extra-
ordinary item $ .11 $ .35 $ .78 $ .81
Net income (.03) .35 .64 .81
The accompanying notes to the interim 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,
1998 1997
(Unaudited)
(000's omitted)
ASSETS
Cash and cash equivalents $ 59,261 $ 51,971
Accounts receivable 128,705 119,159
Inventories 140,341 92,332
Other current assets 7,303 7,789
Deferred income taxes - 6,500
Total current assets 335,610 277,751
Property, plant and equipment, net 168,714 153,737
Intangible assets 18,727 19,255
Other assets 5,686 3,628
$528,737 $454,371
LIABILITIES
Borrowings due within one year $ 477 $ 77
Accounts payable 55,516 62,092
Accrued liabilities and other 42,793 49,377
Total current liabilities 98,786 111,546
Restructuring, integration, disposal
and environmental 17,197 18,172
Long-term debt 161,029 96,154
Pension liability 1,107 1,102
Deferred income tax and other 11,406 15,861
Postretirement benefits 45,393 47,138
STOCKHOLDERS' EQUITY
Preferred stock - none issued - -
Common stock issued - 37,052,720 shares 37,053 37,053
Capital in excess of par value 28,443 27,608
Retained earnings 138,847 114,957
Equity adjustments 3,113 2,763
Less treasury stock at cost
February 28, 1998 - 697,185 shares
May 31, 1997 - 1,001,199 shares (13,637) (17,983)
193,819 164,398
$528,737 $454,371
The accompanying notes to the interim 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
(Unaudited)
NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1997
(000's omitted)
Operating activities:
Net income $ 23,966 $ 29,958
Adjustments to reconcile net income
to net cash provided by operating
activities:
Extraordinary loss on debt
retirement 5,192 -
Depreciation and amortization 17,172 15,676
Deferred taxes 6,500 -
Other charges - 13,045
Provision for equity investment - 2,734
Changes in assets and liabilities:
Accounts receivable (8,626) (11,961)
Inventories (48,009) (28,951)
Prepaid expenses and other assets (371) (134)
Accrued restructuring, disposal
and environmental (2,520) (2,545)
Income and other taxes (1,195) (4,650)
Accounts payable and accrued
liabilities (11,400) 9,092
Net cash provided (used) by
operating activities (19,291) 22,264
Investing activities:
Capital expenditures (32,755) (23,226)
Proceeds from sale of fixed assets 660 369
Other, net 752 (927)
Net cash provided (used) by
investing activities (31,343) (23,784)
Financing activities:
Payment to Cooper Industries, Inc. (2,300) -
Proceeds from Issuance of long-term
debt, net of fees 145,793 6,000
Repayment of long-term debt including
fees to retire debt (90,750) -
Net proceeds from issuance of
Common Stock 9,784 5,501
Repurchase of Common Stock (4,603) (2,857)
Net cash provided by
financing activities 57,924 8,644
Increase in cash 7,290 7,124
Cash, beginning of year 51,971 30,134
Cash, end of period $ 59,261 $ 37,258
The accompanying notes to the interim consolidated condensed
financial statements are an integral part of these financial
statements.
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
February 28, 1998
(Unaudited)
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, 1998 and its results of operations and cash flows
for the nine months ended February 28, 1998 and February 28,
1997. 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, 1997 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, 1997
and 1996 and its results of operations and cash flows for the
years ended May 31, 1997, 1996 and 1995, 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
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share"("SFAS 128"). SFAS 128 replaces the
previously reported primary and fully diluted earnings per share.
Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options. Diluted earnings per
share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all
periods have been presented, and where necessary, restated to
conform to the SFAS 128 requirements. There is no material
impact on earnings per share for the three or nine months ended
February 28, 1998 and 1997 calculated under SFAS 128.
In June 1997, the Financial Accounting Standards Board
issued Statement No. 130, "Reporting Comprehensive Income" ("SFAS
130") and Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). The
implementation of SFAS 130 will require that the components of
comprehensive income be reported in the financial statements.
The implementation of SFAS 131 will require the disclosure of
segment information utilizing the approach that the Company uses
to manage its internal organization. The Company is currently
assessing the impact that the new standards will have on its
financial statements. Implementation of both of these new
standards is required for the year ending May 31, 1999 ("fiscal
year 1999").
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
February 28, 1998
(Unaudited)
NOTE C - INVENTORIES
Inventories consisted of:
FEBRUARY 28, 1998 MAY 31, 1997
(000's omitted)
Raw material $ 62,158 $ 36,990
Work-in-process 88,203 61,741
Other 6,688 6,906
157,049 105,637
Less progress payments 16,708 13,305
$140,341 $ 92,332
If all inventories valued at LIFO cost had been valued at
the lower of first-in, first-out (FIFO) cost or market, which
approximates current replacement cost, inventories would have
been $18,262,000 higher than reported at February 28, 1998 and
May 31, 1997.
There were no LIFO inventory credits or charges to cost of
goods sold in the three and nine months ended February 28, 1998
or February 28, 1997.
NOTE D - LONG-TERM DEBT
On December 15, 1997, the Company issued $150,000,000 of 8%
Senior Notes due 2007 ("8% Senior Notes") under an indenture
between the Company and a bank as trustee. The 8% Senior Notes
were issued at a price of 99.323% of face value and pay interest
semi-annually in arrears on June 15 and December 15 of each year,
commencing June 15, 1998. The 8% Senior Notes are general
unsecured obligations of the Company, are non-callable for a five
year period, and are senior to any future subordinated
indebtedness of the Company. The Company used approximately
$90,750,000 of the net proceeds from the sale of the 8% Senior
Notes to repurchase $84,725,000 (94%) of its outstanding 10 3/4%
Senior Notes due 2003 ("10 3/4% Senior Notes"). The balance of
the proceeds will be used for additional working capital and
other general corporate purposes.
In conjunction with the extinguishment of the 10 3/4% Senior
Notes, the Company recorded an extraordinary after-tax loss of
$5,192,000 or $.14 per share. The extraordinary after-tax loss
relates to (i) the premium related to the retirement of the 10
3/4% Senior Notes, (ii) the write-off of certain deferred debt
issue expenses and (iii) fees and expenses payable by the Company
with respect to the tender offer for the 10 3/4% Senior Notes.
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
February 28, 1998
(Unaudited)
NOTE E - NET INCOME PER SHARE
There were no adjustments required to be made to Income
before Extraordinary item for purposes of computing basic and
diluted net income per share. A reconciliation of the average
number of common shares outstanding used in the calculation of
basic and diluted net income per share is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
FEB. 28, FEB. 28, FEB. 28, FEB. 28,
1998 1997 1998 1997
Shares used to compute
basic net income per
share 36,314,473 35,924,372 36,278,982 35,795,420
Dilutive effect of
stock options 789,599 1,201,750 993,502 1,169,534
Shares used to compute
diluted net income
per share 37,104,072 37,126,122 37,272,484 36,964,954
There were stock options outstanding that were not included
in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price
of the common shares and, therefore would be antidilutive. The
following table summarizes all options exceeding average market
price for the third quarter of fiscal year 1998 and 1997 and for
the first nine months of fiscal year 1998 and 1997:
THREE MONTHS ENDED NINE MONTHS ENDED
FEB. 28, FEB. 28, FEB. 28, FEB. 28,
1998 1997 1998 1997
Options exceeding
average market price 560,066 218,000 243,000 218,000
Exercise price range $19.88 - $21.50 - $25.50 $21.50 -
$25.50 $23.00 $23.00
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
February 28, 1998
(Unaudited)
NOTE F - COMMITMENTS AND CONTINGENCIES
At February 28, 1998, certain lawsuits arising in the normal
course of business were pending. In the opinion of management, the
outcome of these legal matters will not have a material adverse
effect on the Company's financial position and results of
operations.
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 $39,918,000 at February 28, 1998. These contracts
hedge certain normal operating purchase and sales transactions.
The foreign 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 Income for the three and nine months ended February
28, 1998 and February 28, 1997 were not material.
On December 22, 1996, a serious industrial accident occurred
at the Houston, Texas facility of Wyman-Gordon Forgings, Inc.
("WGFI"), a wholly-owned subsidiary of the Company, in which
eight employees were killed and two others were injured.
OSHA conducted an investigation of the accident. On June
18, 1997, WGFI reached an agreement with OSHA, settling citations
resulting from the accident.
The injured workers and the decedents' families have
asserted claims against the Company and WGFI. WGFI has also
received claims from several employees of a subcontractor
claiming to have been injured at the time of the accident as well
as from one current employee.
To date, the Company has settled all claims that could be
brought by three of the decedent's families on terms acceptable
to the Company and its insurance carriers. The Company has also
settled most of the claims of the subcontractor employees. The
Company thus far has been unable to achieve settlements with the
other claimants, and, on October 24, 1997, a lawsuit was filed in
the District Court of Harris County, Texas, on behalf of three of
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
February 28, 1998
(Unaudited)
NOTE F - COMMITMENTS AND CONTINGENCIES, Continued
the decedents' families against the Company, WGFI and Cooper-
Cameron Corporation. The family of another decedent and one of
the injured employees have subsequently filed motions to be
included in that lawsuit. Trial of the lawsuit is currently set
for October 1998.
In general under Texas statutory law, an employee's
exclusive remedy against an employer for an on-the-job injury is
the benefits of the Texas Workers Compensation Act. WGFI, the
employer of the deceased employees, has workers compensation
insurance coverage and the injured employees and beneficiaries of
the deceased employees are receiving workers compensation
payments. Under applicable law, however, statutory beneficiaries
of employees killed in the course and scope of their employment
may recover punitive (but not compensatory) damages in excess of
workers compensation benefits. However, to do so they must prove
that the employer was grossly negligent. The protection of the
workers compensation exclusive remedy provision may not extend to
the Company as parent corporation of WGFI. Therefore, with
regard to the October 24, 1997 lawsuit and any future lawsuits
brought on behalf of those killed or injured in the Houston
accident or their families against the Company, if (i) the court
finds that the Company had a legal duty to WGFI and its
employees, (ii) the evidence supports a finding that the Company
acted negligently in its duty to WGFI and its employees and (iii)
such negligence had a causal connection with the accident, the
plaintiffs might be able to recover compensatory damages against
the Company. If it is shown that the Company's conduct amounted
to gross neglect, and that conduct is found to be a cause of the
accident, the plaintiffs may be able to recover punitive damages
against the Company.
It is not possible at this time to determine the extent, if
any, to which WGFI or the Company could be held liable in
connection with the accident. The Company maintains general
liability and employer's liability insurance for itself and its
subsidiaries under various policies with aggregate coverage
limits of approximately $29 million, a portion of which has been
expended in the settlement to date. While WGFI has tendered the
defense of the various claims to the Company's insurance
carriers, there can be no assurance that the full insurance
coverage will be available. Based on the Company's experience in
the settlement negotiations to date, the Company believes that
there is a substantial risk that the pending and threatened
claims will not be settled for an aggregate amount within its
insurance coverage limits. The Company anticipates that, as with
currently pending lawsuit, any additional lawsuits will include
claims for alleged compensatory as well as punitive damages that
in the aggregate could substantially exceed the Company's
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
February 28, 1998
(Unaudited)
NOTE F - COMMITMENTS AND CONTINGENCIES, Continued
available insurance coverage. The Company intends to vigorously
defend all lawsuits that have been or may be filed relating to
the accident. However, if one or more such lawsuits were to be
prosecuted successfully by the plaintiffs and a judgment were to
be obtained by one or more plaintiffs in such lawsuits and
sustained on appeal, litigation costs, including the cost of
pursuing any appeals, and the cost of paying such a judgment, to
the extent not covered by insurance, could have a material
adverse effect on the Company's financial condition and the
results of operations, particularly if any such judgment includes
awards for punitive damages.
On September 25, 1997, the Company received a subpoena from
the United States Department of Justice informing it that the
United States Department of Defense and other federal agencies
had commenced an investigation with respect to the manufacture
and sale of investment castings at the Company's Tilton, New
Hampshire facility. The focus of the investigation is whether
the Company failed to comply with required quality control
procedures for cast aerospace parts and whether the Company
shipped cast components that did not meet applicable
specifications, which could be a violation of federal
requirements. The investigating agencies have directed the
Company to furnish various documents and information relating to
the subject of the investigation. The Company is cooperating
fully with the investigation and in addition has substantially
completed its own investigation, which was supervised by the
Company's outside attorneys and conducted by quality and process
auditors from another casting facility of the Company and by the
Company's internal attorneys. Such investigation has identified
certain departures from Company policies and procedures which
have been addressed. The federal investigation may result in
criminal or civil charges being brought against the Company,
which could result in civil damages and penalties and criminal
liability, if the Company were found to have violated federal
laws. Based on the Company's own investigation to date, the
Company does not believe that the federal investigation is likely
to result in a material adverse impact on the Company's financial
condition or results of operations, although no assurance as to
the outcome or impact of that investigation can be given.
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
February 28, 1998
(Unaudited)
NOTE G - OTHER CHARGES (CREDITS)
In the nine months ended February 28, 1998, the Company
recorded other credits of $4,900,000. Such other credits include
a credit of $1,900,000 resulting from the disposal of a building
held for sale, a credit of $4,000,000 for the recovery of cash
surrender value of certain company-owned life insurance policies
and a charge of $1,000,000 to provide for costs as a result of
the shutdown of the 29,000 ton press at the Company's Houston,
Texas forging facility. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Recent Developments.")
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, $2,484,000
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.
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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). The words "believe,"
"expect," "anticipate," "intend," "estimate", "assume" and other
similar expressions which are predictions of or indicate future
events and trends and which do not relate to historical matters
identify forward-looking statements. In addition, information
concerning raw material prices and availability, customer orders
and pricing, and industry cyclicality and their impact on gross
margins and business trends as well as liquidity and sales volume
are forward-looking statements. Reliance should not be placed on
forward-looking statements because they involve known and unknown
risks, uncertainties and other factors, which are in some cases
beyond the control of the Company and may cause the actual
results, performance or achievements of the Company to differ
materially from anticipated future results, performance or
achievements expressed or implied by such forward-looking
statements.
Certain factors that might cause such differences include,
but are not limited to, the following: The Company's ability to
successfully negotiate long-term contracts with customers and raw
materials suppliers at favorable prices and other terms
acceptable to the Company; the Company's ability to obtain
required raw materials and to supply its customers on a timely
basis; and the cyclicality of the aerospace industry.
For further 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, 1997 Part I, Item 1 -
"Business - The Company", "Customers", "Marketing and Sales",
"Backlog", "Raw Materials", "Energy Usage", "Employees",
"Competition", "Environmental Regulations", "Product Liability
Exposure" and "Legal Proceedings".
RECENT DEVELOPMENTS
On December 9, 1997, the Company announced that it had taken
the 29,000 ton press at its Houston, Texas facility out of
service to repair structural cracking and, while the press is out
of service, to install upgrades and process changes on that press
to improve reliability, cycle time and throughput capacity. The
Company had previously reinstalled a 20,000 ton press at the
Houston facility which has the capability of producing
approximately 80% of the parts previously produced on the 29,000
ton press. The Company has the capacity to produce the remaining
20% of the parts on its 35,000 ton press in Grafton,
Massachusetts and its 30,000 ton press in Livingston, Scotland.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RECENT DEVELOPMENTS, Continued
Production on alternate presses is now 100% of the steady-
state production level on the 29,000 ton press before the outage.
The 29,000 ton press in Houston produced approximately two-thirds
of the Company's aeroturbine forgings during fiscal year 1997.
The structural cracks were discovered in the four main columns as
a result of an ultrasonic inspection of the 29,000 ton press
conducted as part of a preventive maintenance program. At this
time, all four damaged columns have been removed from the 29,000
ton press. Based on the repair schedule critical path, the
Company expects production on the press to recommence in mid
June. Because of production delays and the cost of transferring
production to other presses, the Company expects that revenues
and net profits for the fourth quarter of fiscal year 1998 will
be adversely impacted.
On December 15, 1997, the Company issued $150.0 million of
8.0% Senior Notes due 2007 ("8% Senior Notes") under an indenture
between the Company and a bank as trustee. The 8% Senior Notes
were issued at a price of 99.323% of face value and pay interest
semi-annually in arrears on June 15 and December 15 of each year,
commencing June 15, 1998. The 8% Senior Notes are general
unsecured obligations of the Company, are non-callable for a five
year period, and are senior to any future subordinated
indebtedness of the Company. The Company used approximately
$90.7 million of the net proceeds from the sale of the 8% Senior
Notes to repurchase $84.7 million (94%) of its outstanding 10
3/4% Senior Notes due 2003 ("10 3/4% Senior Notes"). The balance
of the proceeds will be used for additional working capital and
other general corporate purposes.
In conjunction with the extinguishment of the 10 3/4% Senior
Notes, the Company recorded an extraordinary after-tax loss of
$5,192,000 or $.14 per share. The extraordinary after-tax loss
relates to (i) the premium related to the retirement of the 10
3/4% Senior Notes, (ii) the write-off of certain deferred debt
issue expenses and (iii) fees and expenses payable by the Company
with respect to the tender offer for the 10 3/4% Senior Notes.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
The principal markets served by the Company are aerospace
and energy. Revenue by market for the respective periods was as
follows:
THREE MONTHS ENDED
FEBRUARY 28, 1998 FEBRUARY 28, 1997
(000's omitted)
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
Aerospace $146,080 80% $124,618 81%
Energy 27,554 15% 20,185 13%
Other 8,130 5% 8,528 6%
$181,764 100% $153,331 100%
NINE MONTHS ENDED
FEBRUARY 28, 1998 FEBRUARY 28, 1997
(000's omitted)
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
Aerospace $445,132 81% $324,235 76%
Energy 82,823 15% 74,639 18%
Other 23,187 4% 27,348 6%
$551,142 100% $426,222 100%
RESULTS OF OPERATIONS THREE MONTHS ENDED FEBRUARY 28, 1998
("third quarter of fiscal year 1998") COMPARED TO THREE MONTHS
ENDED FEBRUARY 28, 1997 ("third quarter of fiscal year 1997")
The Company's revenue increased 18.5% to $181.8 million in
the third quarter of fiscal year 1998 from $153.3 million in the
third quarter of fiscal year 1997 as a result of higher sales
volume and higher sales prices at the Company's Forgings and
Castings Divisions. These revenue increases during the third
quarter of fiscal year 1998 as compared to the third quarter of
fiscal year 1997 are reflected by market as follows: a $21.5
million (17.2%) increase in aerospace, a $7.4 million (36.5%)
increase in energy and a $0.4 million (4.7%) decrease in other.
The reasons for the strength in the aerospace market were higher
airplane and engine build rates and higher demands for spares by
aerospace engine prime contractors. Although there were higher
shipments to aerospace customers during the third quarter of
fiscal year 1998 compared to the third quarter of fiscal year
1997, the shipments to aerospace customers were impacted by the
Company's 29,000 ton press being out of service for repairs. The
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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, 1998
("third quarter of fiscal year 1998") COMPARED TO THREE MONTHS
ENDED FEBRUARY 28, 1997 ("third quarter of fiscal year 1997")
(Continued)
Company expects production on the press to recommence in mid
June. The Company has provided alternative capacity to meet the
scheduled production levels of the 29,000 ton press. Production
on alternate presses, including the recently reinstalled 20,000
ton press, is now 100% of the steady-state production level on
the 29,000 ton press before the outage. Because of production
delays and the cost of transferring production to other presses,
the Company expects that revenues and net profits for the fourth
quarter of fiscal year 1998 will be adversely impacted. The
increase in energy revenue was a result of higher shipments of
extruded pipe and land-based gas turbine products during the
third quarter of fiscal year 1998 as compared to the third
quarter of fiscal year 1997. Revenues in the third quarter of
fiscal year 1997 were negatively impacted as a result of the
shutdown of the 35,000 ton vertical extrusion press in the
Company's Houston facility as a result of the industrial accident
explosion which occurred in December 1996. Production from the
press recommenced in March 1997.
The Company's backlog has increased to $1,013.2 million at
February 28, 1998 from $895.8 million at May 31, 1997 and from
$861.8 million at February 28, 1997. The increase from May 31,
1997 and from February 28, 1997 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, and
3. An increase in overdue orders to customer delivery
dates as a result of shipping delays at the Company due
to capacity constraints.
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, and that in-
process capacity enhancements at the Company will enable the
Company to meet its customer delivery requirements in a more
timely fashion.
The Company's gross margin was 12.4% in the third quarter of
fiscal year 1998 as compared to 18.7% in the third quarter of
fiscal year 1997. Gross margin in the third quarter of fiscal
year 1998 was negatively affected by the impact of the Company's
29,000 ton press being taken out of service for repairs at the
end of November 1997. In the third quarter of fiscal year 1998,
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16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS THREE MONTHS ENDED FEBRUARY 28, 1998
("third quarter of fiscal year 1998") COMPARED TO THREE MONTHS
ENDED FEBRUARY 28, 1997 ("third quarter of fiscal year 1997")
(Continued)
approximately 80% of the work scheduled on the 29,000 ton press
was performed on alternative presses at a significant cost.
Currently, production on these alternative presses is 100% of the
steady-state production level on the 29,000 ton press before the
outage. Although the Company has been able to meet the demand
rate that existed at the time the 29,000 ton press was taken out
of operation, the alternative production has not allowed the
Company to produce the mix of products required by its customers
at the dates they require nor has the Company been able to
increase its capacity to meet increased customer requirements as
shown by its growing overdues. The Company has estimated that
gross margin was negatively impacted by approximately 5.4% as a
result of underabsorption, inefficiencies and other items, all of
which include extra labor, higher overtime, tooling modifications
and higher scrap and rework costs. The Company believes
production on these alternative presses will continue to impact
gross margins in the fourth quarter of fiscal year 1998.
Selling, general and administrative expenses increased 25.9%
to $13.0 million during the third quarter of fiscal year 1998
from $10.3 million during the third quarter of fiscal year 1997.
Selling, general and administrative expenses as a percentage of
revenues increased to 7.2% in the third quarter of fiscal year
1998 from 6.7% in the third quarter of fiscal year 1997. The
increase as a percent of revenues was primarily the result of
costs associated with relocating employees and development costs
associated with the Company's composite operation.
During the third quarter of fiscal year 1998, the Company
recorded no other credits or charges, while during the same
period in fiscal year 1997, the Company recorded $2.4 million of
costs relating to the Houston accident.
Interest expense increased $0.6 million to $3.3 million in
the third quarter of fiscal year 1998 compared to $2.7 million in
the third quarter of fiscal year 1997. The increase results from
an increase of $150.0 million of 8% Senior Notes due 2003 offset
by repayment of $84.7 million 10 3/4% Senior Notes due 2007.
Miscellaneous, net was an expense of $0.1 million in the
third quarter of fiscal year 1998 as compared to an expense of
$0.2 million in the third quarter of fiscal year 1997.
The Company recorded a provision for income taxes of $2.2
million in the third quarter of fiscal year 1998 compared to no
provision or benefit for income taxes in the third quarter of
fiscal year 1997.
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17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS THREE MONTHS ENDED FEBRUARY 28, 1998
("third quarter of fiscal year 1998") COMPARED TO THREE MONTHS
ENDED FEBRUARY 28, 1997 ("third quarter of fiscal year 1997")
(Continued)
The Company expects that in fiscal year 1998, income tax
provisions will approximate statutory rates subject to
utilization of state net operating losses. The effective tax
rate in the third quarter of fiscal 1998 was 36%.
Net income before extraordinary item was $4.0 million, or
$.11 per share (diluted), and net loss, including extraordinary
item, was $1.2 million, or $.03 per share (diluted), in the third
quarter of fiscal year 1998. In the third quarter of fiscal year
1998, the Company recorded an extraordinary charge of $5.2
million, or $.14 per share (diluted), net of tax, in connection
with the extinguishment of $84.7 million of its 10 3/4% Senior
Notes due 2003. In the third quarter of fiscal year 1997, the
Company reported net income of $13.0 million, or $.35 per share
(diluted).
RESULTS OF OPERATIONS NINE MONTHS ENDED FEBRUARY 28, 1998 ("first
nine months of fiscal year 1998") COMPARED TO NINE MONTHS ENDED
FEBRUARY 28, 1997 ("first nine months of fiscal year 1997")
The Company's revenue increased 29.3% to $551.1 million in
the first nine months of fiscal year 1998 from $426.2 million in
the first nine months of fiscal year 1997 as a result of higher
sales volume and higher sales prices at the Company's Forgings
and Castings Divisions. These revenue increases during the first
nine months of fiscal year 1998 as compared to the first nine
months of fiscal year 1997 are reflected by market as follows: a
$120.9 million (37.3%) increase in aerospace, a $8.2 million
(11.0%) increase in energy and a $4.2 million (15.2%) decrease in
other. The reasons for the strength in the aerospace market were
higher airplane and engine build rates and higher demands for
spares by aerospace engine prime contractors. Although there
were higher shipments to aerospace customers during the first
nine months of fiscal year 1998 compared to the first nine months
of fiscal year 1997, the shipments to aerospace customers were
impacted by the Company's 29,000 ton press being out of service
for repairs. The Company expects production on the press to
recommence in mid June. The Company has provided alternative
capacity to meet the scheduled production levels of the 29,000
ton press. Production on alternate presses, including the
recently reinstalled 20,000 ton press, is now 100% of the steady-
state production level on the 29,000 ton press before the outage.
Because of production delays and the cost of transferring
production to other presses, the Company expects that revenues
and net profits for the fourth quarter of fiscal year 1998 will
be adversely impacted. The increase in energy revenue was a
result of higher shipments of land-based gas turbine products in
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18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS NINE MONTHS ENDED FEBRUARY 28, 1998 ("first
nine months of fiscal year 1998") COMPARED TO NINE MONTHS ENDED
FEBRUARY 28, 1997 ("first nine months of fiscal year 1997")
(Continued)
the first nine months of fiscal year 1998 compared to the first
nine months of fiscal year 1997. Revenues during the first nine
months of fiscal year 1997 were negatively impacted as a result
of the shutdown of the 35,000 ton vertical extrusion press in the
Company's Houston facility as a result of the industrial accident
explosion which occurred in December 1996. Production from the
press recommenced in March 1997. The cause of the decrease in
other markets is primarily due to the decline in the titanium
golf club head business because of oversupply and cost
disadvantages. Revenues 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.
Revenues in the first nine months of fiscal year 1998 were
limited due to lower than anticipated productivity of recent
equipment and personnel additions, unanticipated repairs of
equipment and inconsistencies in raw material deliveries
corresponding to customer requirements.
The Company's backlog has increased to $1,013.2 million at
February 28, 1998 from $895.8 million at May 31, 1997 and from
$861.8 million at February 28, 1997. The increase from May 31,
1997 and from February 28, 1997 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, and
3. An increase in overdue orders to customer delivery
dates as a result of shipping delays at the Company due
to capacity constraints and raw material unavail-
ability.
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, and that in-
process capacity enhancements at the Company will enable the
Company to meet its customer delivery requirements in a more
timely fashion.
The Company's gross margins were 15.9% in the first nine
months of fiscal year 1998 as compared to 14.9% in the first nine
months of fiscal year 1997. Gross margin in the first nine
months of fiscal year 1998 was negatively affected by the impact
of the Company's 29,000 ton press being taken out of service for
repairs at the end of November 1997. In the third quarter of
fiscal year 1998, approximately 80% of the work scheduled on the
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19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS NINE MONTHS ENDED FEBRUARY 28, 1998 ("first
nine months of fiscal year 1998") COMPARED TO NINE MONTHS ENDED
FEBRUARY 28, 1997 ("first nine months of fiscal year 1997")
(Continued)
29,000 ton press was performed on alternative presses at a
significant cost. The Company has estimated that gross margin in
the first nine months of fiscal year 1998 was negatively impacted
by approximately 1.9% as a result of underabsorption,
inefficiencies and other items, all of which include extra labor,
higher overtime, tooling modifications and higher scrap and
rework costs. The Company believes production on these
alternative presses will continue to impact gross margins in the
fourth quarter of fiscal year 1998. In addition, gross margin in
the first nine months of fiscal year 1998 was negatively affected
by other production inefficiency costs related to equipment
downtime in the Company's Forgings operations, recent personnel
additions and the reinstallation and start-up of two major forge
presses. The Company expects that the addition of these presses
and current repair and enhancement of the Company's 29,000 ton
press in Houston will improve predictability and the Company's
ability to meet its customer requirements. Gross margin in the
first nine months of fiscal year 1997 was negatively affected by
higher raw material costs which could not be passed on to
customers as a result of the then existing long-term agreements
with customers, and by price and demand declines within the
titanium golf club head business.
Selling, general and administrative expenses increased 25.7%
to $39.5 million during the first nine months of fiscal year 1998
from $31.4 million during the first nine months of fiscal year
1997. Selling, general and administrative expenses as a
percentage of revenues improved to 7.2% in the first nine months
of fiscal year 1998 from 7.4% in the first nine months of fiscal
year 1997. The improvement as a percent of revenues was
primarily the result of higher revenues. Selling, general and
administrative expense in the first nine months of fiscal year
1998 include higher costs associated with relocating employees
and development costs associated with the Company's composite
operations. Selling, general and administrative expenses
included approximately $3.0 million and $1.1 million of non-cash
compensation expense associated with the Company's performance
share program in the first nine months of fiscal year 1998 and
the first nine months of fiscal year 1997, respectively.
During the first nine months of fiscal year 1998, the
Company recorded net other credits of $4.9 million. Such other
credits include other credits of $1.9 million resulting from the
disposal of a building held for sale and $4.0 million for the
recovery of cash surrender value of certain company-owned life
insurance policies and other charges of $1.0 million to provide
for costs as a result of the shutdown of the 29,000 ton press at
the Company's Houston, Texas forging facility.
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20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS NINE MONTHS ENDED FEBRUARY 28, 1998 ("first
nine months of fiscal year 1998") COMPARED TO NINE MONTHS ENDED
FEBRUARY 28, 1997 ("first nine months of fiscal year 1997")
(Continued)
During the first nine months of fiscal year 1997, the
Company recorded other charges of $18.2 million. Such other
charges included $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.
Interest expense increased $0.9 million to $9.0 million in
the first nine months of fiscal year 1998 compared to $8.1
million in the first nine months of fiscal year 1997. The
increase results primarily from an issuance of $150.0 million of
8% Senior Notes offset by repayment of $84.7 million 10 3/4%
Senior Notes.
Miscellaneous, net was an expense of $0.8 million in the
first nine months of fiscal year 1998 as compared to income of
$4.3 million in the first nine months of fiscal year 1997.
Miscellaneous, net in the first nine months of fiscal year 1998
included a $0.6 million loss on the sale of fixed assets.
Miscellaneous, net in the first nine months of fiscal 1997
included interest income on a refund of prior years' income taxes
amounting to $3.5 million and a $1.7 million gain on the sale of
fixed assets.
The Company recorded a provision for income taxes of $14.2
million in the first nine months of fiscal year 1998.
The Company expects that in fiscal year 1998, income tax
provisions will approximate statutory rates subject to
utilization of state net operating losses. The effective tax
rate in the first nine months of fiscal 1998 was 36% on income
before income taxes excluding the $4.0 million recovery of the
cash surrender value of certain company-owned life insurance
policies.
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.
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21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS NINE MONTHS ENDED FEBRUARY 28, 1998 ("first
nine months of fiscal year 1998") COMPARED TO NINE MONTHS ENDED
FEBRUARY 28, 1997 ("first nine months of fiscal year 1997")
(Continued)
In the first nine months of fiscal year 1998, net income
before extraordinary item was $29.2 million, or $.78 per share
(diluted), and net income, including extraordinary item, was
$24.0 million, or $.64 per share (diluted). In the first nine
months of fiscal year 1998, the Company recorded an extraordinary
charge of $5.2 million, or $.14 per share (diluted), net of tax,
in connection with the extinguishment of $84.7 million of its 10
3/4% Senior Notes. For the same nine month period of the prior
fiscal year, the Company reported net income of $30.0 million, or
$.81 per share (diluted). The decrease resulted from the items
described above.
LIQUIDITY AND CAPITAL RESOURCES
The increase in the Company's cash of $7.3 million to $59.3
million at February 28, 1998 from $52.0 million at May 31, 1997
resulted primarily from cash used by operating activities of
$19.3 million, capital expenditures of $32.8 million, $2.3
million payment to Cooper Industries, Inc. ("Cooper"), $4.6
million repurchase of common stock and repayment of long-term
debt, including fees, of $90.7 million, offset by the net
proceeds from the issuance of long-term debt of $145.8 million,
issuance of common stock of $9.8 million in connection with
employee compensation and benefit plans and $1.4 million of
proceeds from the sale of fixed assets. The $2.3 million payment
to Cooper was made in accordance with the Company's $4.6 million
promissory note payable to Cooper under the terms of the Stock
Purchase Agreement with Cooper related to the acquisition of
Cameron Forged Products Company in May 1994. The remaining $2.3
million is payable on June 30, 1998, subject to certain
conditions.
The primary component impacting cash used by operating
activities was a $48.0 million increase in inventory over the
prior year-end. Inventory levels have increased for the
anticipated higher production levels from having the additional
capacity of the recently re-installed 20,000 ton press together
with the capacity of the 29,000 ton press. During this period of
ramping up for production demands, structural cracking was found
on the Company's 29,000 ton press causing redirection of 80% of
the 29,000 ton production to the 20,000 ton press rather than
providing additional capacity. The Company does not expect this
rate of increase to continue based on the Company's current
inventory reduction program, production on alternative presses
reaching 100% of the steady-state production level on the 29,000
ton press before the outage, and production on the 29,000 ton
press to recommence in mid June.
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22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES, Continued
The increase in the Company's working capital of $70.6
million to $236.8 million at February 28, 1998 from $166.2
million at May 31, 1997 resulted primarily from (in millions):
Net Income $ 24.0
Decrease in:
Long-term restructuring, integration
disposal and environmental (1.0)
Long-term benefit liabilities (1.8)
Deferred taxes and other (4.5)
Increase in:
Intangible and other assets (1.5)
Long-term debt 64.9
Property, plant and equipment, net (15.0)
Other changes in stockholders' equity 0.3
Issuance of common stock 5.2
Increase in working capital $ 70.6
Earnings before interest, taxes, depreciation, amortization,
other charges (credits)and extraordinary item ("EBITDA")
increased $12.4 million to $64.6 million in the first nine months
of fiscal year 1998 from $52.2 million in the first nine months
of fiscal year 1997. The EBITDA increases reflect higher
profitability as discussed above.
EBITDA should not be considered a substitute for net income
as an indicator of operating performance or as an alternative to
cash flow as a measure of liquidity, in each case determined in
accordance with generally accepted accounting principles.
Investors should be aware that EBITDA as shown above may not be
comparable to similarly titled measures presented by other
companies, and comparisons could be misleading unless all
companies and analysts calculate this measure in the same
fashion.
As of May 31, 1997, the Company estimated the remaining cash
requirements for the 1997 restructuring to be $5.5 million. Of
such amount, the Company expects to spend approximately $1.5
million during fiscal year 1998 and $4.0 million thereafter. In
the first nine months of fiscal year 1998, spending related to
the 1997 restructuring amounted to $1.3 million.
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23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES, Continued
As of May 31, 1997, the Company estimated the remaining cash
requirements for the integration of Cameron and direct costs
associated with the acquisition of Cameron to be $2.1 million, of
which the Company expects to spend approximately $0.7 million
during fiscal year 1998 and $1.4 million thereafter. In the
first nine months of fiscal year 1998, spending related to the
integration of Cameron and associated direct costs amounted to
$0.4 million.
The Company expects to spend $1.3 million in fiscal year
1998 and $14.9 million thereafter on non-capitalizable
environmental activities. In the first nine months of fiscal
year 1998, $1.1 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 1998, capital expenditures
amounted to $32.8 million and are expected to be approximately
$35.0 to $40.0 million in fiscal year 1998.
On December 15, 1997, the Company issued $150.0 million of
8% Senior Notes due 2007 under an indenture between the Company
and a bank as trustee. The 8% Senior Notes were issued at a
price of 99.323% of face value and pay interest semi-annually in
arrears on June 15 and December 15 of each year, commencing June
15, 1998. The 8% Senior Notes are general unsecured obligations
of the Company, are non-callable for a five year period, and are
senior to any future subordinated indebtedness of the Company.
The Company used approximately $90.7 million of the net proceeds
from the sale of the 8% Senior Notes to repurchase $84.7 million
(94%) of its outstanding 10 3/4% Senior Notes due 2003. The
balance of the net proceeds will be used for additional working
capital and other general corporate purposes.
The Company's revolving receivables-backed credit facility
(the "Receivables Financing Program") provides the Company with
an aggregate maximum borrowing capacity 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, 1998, the total
availability under the Receivables Financing Program was $62.1
million, there were no borrowings and letters of credit amounting
to $8.3 million were outstanding.
Wyman-Gordon Limited, the Company's subsidiary located in
Livingston, Scotland, has a credit agreement with a Scottish bank
("the U.K. Credit Agreement") with an effective date of June 27,
1997. The maximum borrowing capacity under the U.K. Credit
Agreement is 2.0 million pounds sterling (approximately $3.2
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24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES, Continued
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, 1998 and the Company had
issued 0.9 million pounds sterling (approximately $1.5 million)
of letters of credit or guarantees under the U.K. Credit
Agreement.
The primary sources of liquidity available to the Company to
fund operations and other future expenditures include available
cash ($59.3 million at February 28, 1998), 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 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 and, where
possible, negotiating price escalators into its customer
contracts to offset a portion of raw material cost increases.
ACCOUNTING AND TAX MATTERS
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"). SFAS 128 replaces the
previously reported primary and fully diluted earnings per share.
Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options. Diluted earnings per
share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all
periods have been presented, and where necessary, restated to
conform to the SFAS 128 requirements. There is no material
impact on earnings per share for the three or nine months ended
February 28, 1998 and 1997 calculated under SFAS 128.
In June 1997, the Financial Accounting Standards Board
issued Statement No. 130 "Reporting Comprehensive Income" ("SFAS
130")and Statement No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). The
implementation of SFAS 130 will require that the components of
comprehensive income be reported in the financial statements.
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25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
ACCOUNTING AND TAX MATTERS, Continued
The implementation of SFAS 131 will require the disclosure of
segment information utilizing the approach that the Company uses
to manage its internal organization. The Company is currently
assessing the impact that the new standards will have on its
financial statements. Implementation of both of these new
standards is required for the year ending May 31, 1999 ("fiscal
year 1999").
The Company is in the process of conducting a review of its
computer systems to identify areas that could be affected by the
"Year 2000" issue. An implementation plan will then be developed
to resolve the issues identified. The Year 2000 issue is the
result of computer programs being written using two digits
(rather than four) to define the applicable year. This could
result in computational errors as dates are compared across the
century boundary. The total cost of altering the applicable
program code is being determined as part of the Company's
implementation plan. The Company, based on a preliminary
evaluation, does not currently believe such costs will be
material.
OTHER MATTERS
On December 22, 1996, a serious industrial accident occurred
at the Houston, Texas facility of Wyman-Gordon Forgings, Inc.
("WGFI"), a wholly-owned subsidiary of the Company, in which
eight employees were killed and two others were injured.
OSHA conducted an investigation of the accident. On June
18, 1997, WGFI reached an agreement with OSHA, settling citations
resulting from the accident.
The injured workers and the decedents' families have
asserted claims against the Company and WGFI. WGFI has also
received claims from several employees of a subcontractor
claiming to have been injured at the time of the accident as well
as from one current employee.
To date, the Company has settled all claims that could be
brought by three of the decedent's families on terms acceptable
to the Company and its insurance carriers. The Company has also
settled most of the claims of the subcontractor employees. The
Company thus far has been unable to achieve settlements with the
other claimants, and, on October 24, 1997, a lawsuit was filed in
the District Court of Harris County, Texas, on behalf of three of
the decedents' families against the Company, WGFI and Cooper-
Cameron Corporation. The family of another decedent and one of
the injured employees have subsequently filed motions to be
included in that lawsuit. Trial of the lawsuit is currently set
for October 1998.
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26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
OTHER MATTERS, Continued
In general under Texas statutory law, an employee's
exclusive remedy against an employer for an on-the-job injury is
the benefits of the Texas Workers Compensation Act. WGFI, the
employer of the deceased employees, has workers compensation
insurance coverage and the injured employees and beneficiaries of
the deceased employees are receiving workers compensation
payments. Under applicable law, however, statutory beneficiaries
of employees killed in the course and scope of their employment
may recover punitive (but not compensatory) damages in excess of
workers compensation benefits. However, to do so they must prove
that the employer was grossly negligent. The protection of the
workers compensation exclusive remedy provision may not extend to
the Company as parent corporation of WGFI. Therefore, with
regard to the October 24, 1997 lawsuit and any future lawsuits
brought on behalf of those killed or injured in the Houston
accident or their families against the Company, if (i) the court
finds that the Company had a legal duty to WGFI and its
employees, (ii) the evidence supports a finding that the Company
acted negligently in its duty to WGFI and its employees and (iii)
such negligence had a causal connection with the accident, the
plaintiffs might be able to recover compensatory damages against
the Company. If it is shown that the Company's conduct amounted
to gross neglect, and that conduct is found to be a cause of the
accident, the plaintiffs may be able to recover punitive damages
against the Company.
It is not possible at this time to determine the extent, if
any, to which WGFI or the Company could be held liable in
connection with the accident. The Company maintains general
liability and employer's liability insurance for itself and its
subsidiaries under various policies with aggregate coverage
limits of approximately $29 million, a portion of which has been
expended in the settlement to date. While WGFI has tendered the
defense of the various claims to the Company's insurance
carriers, there can be no assurance that the full insurance
coverage will be available. Based on the Company's experience in
the settlement negotiations to date, the Company believes that
there is a substantial risk that the pending and threatened
claims will not be settled for an aggregate amount within its
insurance coverage limits. The Company anticipates that, as with
currently pending lawsuit, any additional lawsuits will include
claims for alleged compensatory as well as punitive damages that
in the aggregate could substantially exceed the Company's
available insurance coverage. The Company intends to vigorously
defend all lawsuits that have been or may be filed relating to
the accident. However, if one or more such lawsuits were to be
prosecuted successfully by the plaintiffs and a judgment were to
be obtained by one or more plaintiffs in such lawsuits and
sustained on appeal, litigation costs, including the cost of
pursuing any appeals, and the cost of paying such a judgment, to
the extent not covered by insurance, could have a material
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27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
OTHER MATTERS, Continued
adverse effect on the Company's financial condition and the
results of operations, particularly if any such judgment includes
awards for punitive damages.
On September 25, 1997, the Company received a subpoena from
the United States Department of Justice informing it that the
United States Department of Defense and other federal agencies
had commenced an investigation with respect to the manufacture
and sale of investment castings at the Company's Tilton, New
Hampshire facility. The focus of the investigation is whether
the Company failed to comply with required quality control
procedures for cast aerospace parts and whether the Company
shipped cast components that did not meet applicable
specifications, which could be a violation of federal
requirements. The investigating agencies have directed the
Company to furnish various documents and information relating to
the subject of the investigation. The Company is cooperating
fully with the investigation and in addition has substantially
completed its own investigation, which was supervised by the
Company's outside attorneys and conducted by quality and process
auditors from another casting facility of the Company and by the
Company's internal attorneys. Such investigation has identified
certain departures from Company policies and procedures which
have been addressed. The federal investigation may result in
criminal or civil charges being brought against the Company,
which could result in civil damages and penalties and criminal
liability, if the Company were found to have violated federal
laws. Based on the Company's own investigation to date, the
Company does not believe that the federal investigation is likely
to result in a material adverse impact on the Company's financial
condition or results of operations, although no assurance as to
the outcome or impact of that investigation can be given.
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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, 1998.
(b) On November 19, 1997, the Company filed a Form 8-K dated
November 14, 1997 with the Commission for the following
purposes: (1) to report that the Company has commenced a
cash tender offer for certain of its debt securities and is
soliciting to amend the related indenture; (2) to report
developments relating to the previously reported industrial
accident at the facility of Wyman-Gordon Forgings, Inc. in
Houston, Texas; and (3) to report the commencement of an
investigation by certain federal agencies involving alleged
irregularities at the Company's Tilton, New Hampshire
facility.
On December 9, 1997, the Company filed a Form 8-K with the
Commission to report that the Company had taken the 29,000
ton press at its Houston, Texas facility out of service for
repairs.
On February 9, 1998, the Company filed a Form 8-K with the
Commission to update the status of the 29,000 ton press and
to announce an extraordinary one time charge relating to the
refinancing of its 10 3/4% Senior Notes due 2003.
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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: 4/9/98 By: /S/ EDWARD J. DAVIS
Edward J. Davis
Vice President,
Chief Financial Officer
and Treasurer
Date: 4/9/98 By: /S/ JEFFREY B. LAVIN
Jeffrey B. Lavin
Corporate Controller
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