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 August 31, 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 AUGUST 31, 1998
Common Stock, $1 Par Value 36,560,847
Page 1 of 23
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PART I.
ITEM 1. FINANCIAL STATEMENTS
WYMAN-GORDON COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED
AUGUST 31, AUGUST 31,
1998 1997
(000's omitted, except per share data)
Revenue $189,664 $180,009
Less:
Cost of goods sold 161,067 146,764
Selling, general and
administrative expenses 13,480 13,395
Other charges(credits) (5,000) (1,900)
169,547 158,259
Income from operations 20,117 21,750
Other deductions:
Interest expense 3,529 2,890
Miscellaneous, net 256 331
3,785 3,221
Income before income taxes 16,332 18,529
Provision for income taxes 4,480 6,670
Net income $ 11,852 $ 11,859
Net income per share:
Basic $ .32 $ .33
Diluted $ .32 $ .32
Shares used to compute net income
per share:
Basic 36,542 36,156
Diluted 37,207 37,510
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
AUGUST 31, MAY 31,
1998 1998
(Unaudited)
(000's omitted)
ASSETS
Cash and cash equivalents $ 66,331 $ 64,561
Accounts receivable 126,049 124,658
Inventories 145,995 133,134
Prepaid expenses 7,317 6,710
Total current assets 345,692 329,063
Property, plant and equipment, net 203,704 197,363
Intangible and other assets 27,043 25,184
$576,439 $551,610
LIABILITIES
Borrowings due within one year $ 559 $ 3,017
Accounts payable 62,646 51,590
Accrued liabilities and other 52,092 50,692
Total current liabilities 115,297 105,299
Restructuring, integration, disposal
and environmental 17,123 17,314
Long-term debt 165,283 162,573
Pension liability 2,923 2,908
Deferred income tax and other 13,985 14,066
Postretirement benefits 44,018 44,630
STOCKHOLDERS' EQUITY
Preferred stock - none issued - -
Common stock issued - 37,052,720 shares 37,053 37,053
Capital in excess of par value 27,331 28,037
Retained earnings 160,699 148,847
Accumulated other comprehensive income 2,344 1,465
Less treasury stock at cost
August 31, 1998 - 491,873 shares
May 31, 1998 - 543,077 shares (9,617) (10,582)
217,810 204,820
$576,439 $551,610
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)
THREE MONTHS ENDED
AUGUST 31, AUGUST 31,
1998 1997
(000's omitted)
OPERATING ACTIVITIES:
Net income $ 11,852 $ 11,859
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 6,799 5,435
Deferred income taxes - 4,000
Gain on sale of operating assets (5,000) -
Changes in assets and liabilities:
Accounts receivable (471) (6,272)
Inventories (12,861) (20,912)
Prepaid expenses and other assets (3,561) (2,359)
Accrued restructuring, integration
disposal and environmental 37 (392)
Income and other taxes payable 3,542 1,943
Accounts payable and accrued
and other liabilities 10,292 (7,164)
Net cash provided (used) by
operating activities 10,629 (13,862)
INVESTING ACTIVITIES:
Capital expenditures (12,573) (13,673)
Proceeds from sale of fixed assets 5,283 222
Other, net (215) (716)
Net cash provided (used) by
investing activities (7,505) (14,167)
FINANCING ACTIVITIES:
Payment to Cooper Industries, Inc. (2,300) (2,300)
Net proceeds from issuance of
common stock 946 4,942
Net cash provided (used) by
financing activities (1,354) 2,642
Increase (decrease) in cash 1,770 (25,387)
Cash, beginning of year 64,561 51,971
Cash, end of period $ 66,331 $ 26,584
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
August 31, 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
August 31, 1998 and its results of operations and cash flows for
the three months ended August 31, 1998 and August 31, 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, 1998 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, 1998
and 1997 and its results of operations and cash flows for the
years ended May 31, 1998, 1997, and 1996, 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 February 28, 1998, the Company adopted 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 months ended August 31, 1998 and 1997 calculated
under SFAS 128.
Effective June 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes new rules for reporting and disclosure of
comprehensive income, which is composed of net earnings and
certain items of other comprehensive income as defined in the
Statement, for all periods presented; however, the adoption of
SFAS 130 had no impact on the Company's net income or
stockholders' equity. The components of other comprehensive
income, both individually and in the aggregate, were not material
for the three month periods ended August 31, 1998 and 1997.
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
August 31, 1998
(Unaudited)
NOTE B - ADOPTION OF RECENT ACCOUNTING STANDARDS, Continued
In June 1997, the Financial Accounting Standards Board
issued Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). 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 standard will have on its
financial statements. Implementation of this Standard is
required for the year ending May 31, 1999.
In February 1998, the Financial Accounting Standards Board
issued Statement No. 132, "Employers' Disclosures about Pensions
and Other Post Retirement Benefits" ("SFAS 132"). SFAS 132
standardizes disclosure requirements of Statement Nos. 87,
"Employers' Accounting for Pensions", and 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions". The
Company is currently assessing the impact that the new standard
will have on its financial statements. Implementation of this
Standard is required for the year ending May 31, 1999.
NOTE C - INVENTORIES
Inventories consisted of:
AUGUST 31, 1998 MAY 31, 1998
(000's omitted)
Raw material $ 50,055 $ 50,050
Work-in-process 100,907 92,136
Other 4,457 4,221
155,419 146,407
Less progress payments (9,424) (13,273)
$145,995 $133,134
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 August 31, 1998 and May
31, 1998.
There were no LIFO inventory credits or charges to cost of
goods sold in the three months ended August 31, 1998 or August
31, 1997.
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
August 31, 1998
(Unaudited)
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").
NOTE E - NET INCOME PER SHARE
There were no adjustments required to be made to net income
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
AUGUST 31, AUGUST 31,
1998 1997
Shares used to compute
basic net income per
share 36,542,318 36,156,042
Dilutive effect of
stock options 664,735 1,354,087
Shares used to compute
diluted net income
per share 37,207,053 37,510,129
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 first quarter of fiscal year 1999 and 1998:
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
August 31, 1998
(Unaudited)
NOTE E - NET INCOME PER SHARE, Continued
THREE MONTHS ENDED
AUGUST 31, AUGUST 31,
1998 1997
Options exceeding
average market price 555,570 -
Exercise price range $19.00- N/A
$25.00
NOTE F - COMMITMENTS AND CONTINGENCIES
At August 31, 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 $42,029,000 at August 31, 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 months ended August 31, 1998
and August 31, 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.
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
August 31, 1998
(Unaudited)
NOTE F - COMMITMENTS AND CONTINGENCIES, Continued
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 two current employees.
To date, the Company has settled all claims that could be
brought by four 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. Two employees have subsequently filed a
motion to be included in the lawsuit. Trial of the lawsuit is
currently set for January, 1999.
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.
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
August 31, 1998
(Unaudited)
NOTE F - COMMITMENTS AND CONTINGENCIES, Continued
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 substantial portion of
which has been expended in the settlements 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 the 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 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
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. The
Company is cooperating fully with the investigation, and in
addition, has substantially completed its own investigation,
which 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. Based on the Company's own investigation, 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)
August 31, 1998
(Unaudited)
NOTE G - OTHER CHARGES (CREDITS)
In the three months ended August 31, 1998, the Company
recorded other credits of $5,000,000 resulting from the sale of
the operating assets of the Company's Millbury, Massachusetts
vacuum remelting facility which produced titanium ingots for
further processing into finished forgings to Titanium Metals
Corporation "TIMET".
In the three months ended August 31, 1997, the Company
recorded other credits of $1,900,000 resulting from the disposal
of a building held for sale.
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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, 1998 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
In the first quarter of fiscal year 1999, the Company's
Scaled Composites subsidiary launched the first flight of its
experimental plane called the Proteus. With the successful first
flight of this new aircraft, the Company has begun to capitalize
all costs associated with the further advancement of the
aircraft.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RECENT DEVELOPMENTS, Continued
The Company has reduced its workforce in the Grafton,
Massachusetts plant by approximately 100 people, or 15%. The
Company seeks to return the Grafton operations to profitability
and has transferred the aerospace turbine work, which was moved
to Grafton during the refurbishment of the 29,000 ton press, back
to Houston.
The Company successfully negotiated a new contract with the
bargaining unit representing 616 Houston hourly employees. The
contract covers a three-year term expiring August 2001 and
provides for a general wage increase of 3% per year.
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
AUGUST 31, 1998 AUGUST 31, 1997
(000's omitted)
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
Aerospace $150,509 80% $145,747 81%
Energy 30,900 16% 26,667 15%
Other 8,255 4% 7,595 4%
$189,664 100% $180,009 100%
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS THREE MONTHS ENDED AUGUST 31, 1998 ("first
quarter of fiscal year 1999") COMPARED TO THREE MONTHS ENDED
AUGUST 31, 1997 ("first quarter of fiscal year 1998")
The Company's revenue increased 5.4% to $189.7 million in
the first quarter of fiscal year 1999 from $180.0 million in the
first quarter of fiscal year 1998 as a result of additional
revenues generated from the acquisition of International Extruded
Products ("IXP") in April, 1998 and entering into the Castings
joint venture with TIMET in July, 1998. These revenue increases
during the first quarter of fiscal year 1999 as compared to the
first quarter of fiscal year 1998 are reflected by market as
follows: a $4.8 million (3.3%) increase in aerospace, a $4.2
million (15.9%) increase in energy and a $0.7 million (8.7%)
increase in other. The increase in aerospace market revenues
were the result of an increase in aerospace structural sales
volume which includes additional revenues generated from entering
into the Castings joint venture with TIMET, as noted above.
Although aerospace revenues were higher during the first quarter
of fiscal year 1999 compared to the first quarter of fiscal year
1998, aerospace revenues were negatively impacted by the overhang
of production inefficiencies relating to the recent re-
commissioning of the Company's 29,000 ton press. The increase in
energy revenue was a result of higher shipments of extruded pipe,
produced by IXP, during the first quarter of fiscal year 1999 as
compared to the first quarter of fiscal year 1998. Revenues in
the first quarter 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 continues to be strong with $1,000.9
million at August 31, 1998 compared to $1,030.1 million at May
31, 1998 and $935.3 million at August 31, 1997. The Company
attributes the decrease from May 31, 1998 to August 31, 1998 to a
reduction in lead times in the supply chain and initiatives by
customers to reduce inventory levels. The Company anticipates a
leveling off or possible decline in backlog since it does not
expect to receive customer orders at the same rates as in the
recent past. Additionally, the Company believes that capacity
enhancements, equipment refurbishments and additions installed by
the Company will enable the Company to meet its customer demands
more timely. Of the Company's total current backlog, $767.3
million is shippable in the next twelve months. Because of the
additional production capacity generated from equipment
enhancements, refurbishments and additions, the Company believes
that it will be able to fulfill those twelve-month requirements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS THREE MONTHS ENDED AUGUST 31, 1998 ("first
quarter of fiscal year 1999") COMPARED TO THREE MONTHS ENDED
AUGUST 31, 1997 ("first quarter of fiscal year 1998")
(Continued)
The Company's gross margin was 15.1% in the first quarter of
fiscal year 1999 as compared to 18.5% in the first quarter of
fiscal year 1998. The Company has estimated that gross margin in
the first quarter of fiscal year 1999 was negatively affected by
approximately 1.6% as a result of production inefficiencies
resulting from the recent re-commissioning of the Company's
29,000 ton press. Additionally, gross margins were negatively
impacted by production inefficiencies at the Company's Groton,
Connecticut casting plant and lower margins generated in the
Livingston, Scotland forging plant. Gross margin in the first
quarter of fiscal year 1998 was negatively affected by production
inefficiency costs related to personnel additions and the re-
installation and start-up of two major forge presses.
Selling, general and administrative expenses increased 0.6%
to $13.5 million during the first quarter of fiscal year 1999
from $13.4 million during the first quarter of fiscal year 1998.
Selling, general and administrative expenses as a percentage of
revenues improved to 7.1% in the first quarter of fiscal year
1999 from 7.4% in the first quarter of fiscal year 1998. The
first quarter of fiscal year 1998 included $1.9 million of non-
cash compensation expense associated with the Company's
performance share program. Selling, general and administrative
expenses for the first quarter of fiscal year 1999 were in line
with the Company's expectation of higher revenues.
During the first quarter of fiscal year 1999, the Company
recorded other credits of $5.0 million resulting from the sale of
the operating assets of the Company's Millbury, Massachusetts
facility to TIMET. In the first quarter of fiscal year 1998, the
Company recorded other credits of $1.9 million resulting from the
disposal of a building held for sale.
Interest expense increased $0.6 million to $3.9 million in
the first quarter of fiscal year 1999 compared to $2.9 million in
the first quarter of fiscal year 1998. The increase results
primarily from an issuance of $150.0 million of 8% Senior Notes
offset by repayment of $84.7 million of 10 3/4% Senior Notes.
The Company recorded a provision for income taxes of $4.5
million in the first quarter of fiscal year 1999. The provision
was recorded net of a $1.4 million tax benefit related to
reduction in the tax asset reserve for the capital loss related
to the Company's investment in an Australian joint venture. The
Company recorded a provision for income taxes of $6.7 million in
the first quarter of fiscal year 1998.
Net income was $11.9 million, or $.32 per share (diluted),
in the first quarters of fiscal year 1999 and 1998.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
The increase in the Company's cash of $1.7 million to $66.3
million at August 31, 1998 from $64.6 million at May 31, 1998
resulted primarily from cash provided by operating activities of
$10.6 million, issuance of common stock of $0.9 million in
connection with employee compensation and benefit plans and $5.3
million of proceeds from the sale of fixed assets, offset by
capital expenditures of $12.6 million, use of $0.2 million in
other, net investing activities and $2.3 million payment to
Cooper Industries, Inc. ("Cooper"). The $2.3 million payment to
Cooper was the final payment made in accordance with the
Company's 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 increase in the Company's working capital of $6.6
million to $230.4 million at August 31, 1998 from $223.8 million
at May 31, 1998 resulted primarily from (in millions):
Net Income $11.9
Decrease in:
Long-term restructuring, integration
disposal and environmental (0.2)
Long-term benefit liabilities (0.6)
Deferred taxes and other (0.1)
Increase in:
Intangible and other assets (1.9)
Long-term debt 2.6
Property, plant and equipment, net (6.3)
Other changes in stockholders' equity 0.9
Issuance of common stock 0.3
Increase in working capital $ 6.6
Earnings before interest, taxes, depreciation, amortization
and other charges (credits) ("EBITDA") decreased $3.3 million to
$21.7 million in the first quarter of fiscal year 1999 from $25.0
million in the first quarter of fiscal year 1998. The decrease in
EBITDA reflects the impact of production inefficiencies relating
to the re-commissioning of the Company's 29,000 ton press.
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.
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17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES, Continued
As of May 31, 1998, the Company estimated the remaining cash
requirements for the 1997 restructuring to be $3.7 million. Of
such amount, the Company expects to spend approximately $2.5
million during fiscal year 1999 and $1.2 million thereafter. In
the first quarter of fiscal year 1999, spending related to the
1997 restructuring amounted to $0.7 million.
The Company expects to spend $2.0 million in fiscal year
1999 and $14.5 million thereafter on non-capitalizable
environmental activities. In the first quarter of fiscal year
1999, $0.1 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 quarter of fiscal year 1999, capital expenditures amounted
to $12.6 million and are expected to be approximately $40.0 to
$45.0 million in fiscal year 1999.
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 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 August 31, 1998, the total
availability under the Receivables Financing Program was $62.2
million, there were no borrowings and letters of credit amounting
to $8.4 million were outstanding.
Wyman-Gordon Limited, the Company's subsidiary located in
Livingston, Scotland, entered into a credit agreement ("the U.K.
Credit Agreement") with Clydesdale Bank PLC ("Clydesdale")
effective June 22, 1998. The maximum borrowing capacity under
the U.K. Credit Agreement is 2.0 million pounds sterling
(approximately $3.2 million) with a separate letter of credit and
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18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES, Continued
guarantee limits of 1.0 million pounds sterling (approximately
$1.6 million) each. The term of the U.K. Credit Agreement is one
year with a renewal option. There were no borrowings outstanding
at August 31, 1998, Wyman-Gordon Limited had outstanding 1.0
million pounds sterling (approximately $1.6 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 ($66.3 million at August 31, 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
Effective February 28, 1998, the Company adopted 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 months ended August 31, 1998 and 1997 calculated
under SFAS 128.
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19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
ACCOUNTING AND TAX MATTERS, Continued
Effective June 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes new rules for reporting and disclosure of
comprehensive income, which is composed of net earnings and
certain items of other comprehensive income as defined in the
Statement, for all periods presented; however, the adoption of
SFAS 130 had no impact on the Company's net income or
stockholders' equity. The components of other comprehensive
income, both individually and in the aggregate, were not material
for the three month periods ended August 31, 1998 and 1997.
In June 1997, the Financial Accounting Standards Board
issued Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). 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 standard will have on its
financial statements. Implementation of this Standard is
required for the year ending May 31, 1999.
In February 1998, the Financial Accounting Standards Board
issued Statement No. 132, "Employers' Disclosures about Pensions
and Other Post Retirement Benefits" ("SFAS 132"). SFAS 132
standardizes disclosure requirements of Statement Nos. 87,
"Employers' Accounting for Pensions", and 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions". The
Company is currently assessing the impact that the new standard
will have on its financial statements. Implementation of this
Standard is required for the year ending May 31, 1999.
YEAR 2000
The Year 2000 computer issue is the result of computer
programs being written using two digits rather than four to
define the applicable year. Any of the computer programs in the
Company's computer systems and plant equipment systems that have
time-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a
system failure or miscalculation causing disruptions of
operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar
normal business activities.
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20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
YEAR 2000, Continued
The Company's overall Year 2000 project approach and status
is as follows:
ESTIMATED
DESCRIPTION STAGE OF TIMETABLE FOR
OF APPROACH COMPLETION COMPLETION
Computer Systems:
Assess systems for possible
Year 2000 impact 100% Completed
Modify or replace non-compliant
systems 50% May 31, 1999
Test systems with system clocks
set at current date 50% May 31, 1999
Test systems off-line with
system clocks set at various
Year 2000 related critical
dates 10% May 31, 1999
Plant Equipment:
Computer-dependent plant
equipment assessment and
compliance procedures
performed 20% May 31, 1999
The Company has completed a comprehensive inventory of
substantially all computer systems and programs. All hardware
required for stand alone testing of systems has been installed in
order to perform off-line testing for Year 2000 program
compliance. The Company has identified all software supplied by
outside vendors that are not Year 2000 compliant. With respect
to approximately 95% of such non-compliant software the Company
has acquired the most recent release and is currently testing
such versions for Year 2000 compliance. All software developed
in-house has been reviewed and necessary modifications have been
completed and are in the final stages of testing.
In addition to assessing the Company's Year 2000 readiness,
the Company has contacted and sent questionnaires regarding Year
2000 readiness to most of its suppliers. Over 70% have responded
thus far and the majority of the Company's top suppliers believe
they will be Year 2000 compliant prior to December 31, 1999.
Detailed audits of the Company's key suppliers are currently
being coordinated in order to assess their Year 2000 systems
readiness.
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21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
YEAR 2000, Continued
The Company is using both internal and external resources to
reprogram, or replace, and test software for Year 2000
modifications. The Year 2000 project is 50% complete and the
Company anticipates completing the project by mid-1999.
Maintenance or modification costs will be expensed as incurred,
while the costs of new information technology will be capitalized
and amortized in accordance with Company policy. The Company is
uncertain of the cost of making its computer-dependent plant
equipment Year 2000 compliant due to the early stages of this
part of the Year 2000 computer project. The estimated cost of
the Year 2000 computer project, including software modifications,
consultants, replacement costs for non-compliant systems and
internal personnel costs, based on presently available
information, is not material to the financial operations of the
Company and is estimated at approximately $0.8 million. However,
if such modifications and conversions are not made, or are not
completed in time, the Year 2000 computer issue could have a
material impact on the operations of the Company.
The Company is currently making Year 2000 contingency plans.
The Company has multiple business systems at different locations.
In case of the failure of a system at one location, the Company's
contingency plan is to evaluate the use of an alternate compliant
business system at another location. The Company will continue
to assess possible contingency plan solutions.
The forecast costs and the date on which the Company
believes it will complete its Year 2000 computer modifications
are based on its best estimates, which, in turn, were based on
numerous assumptions of future events, including third-party
modification plans, continued availability of resources and other
factors. The Company cannot be sure that these estimates will be
achieved and actual results could differ materially from those
anticipated.
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 two current employees. See Note F on page 8 for further
discussion.
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22
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 Three Months
Ended August 31, 1998.
(b) On August 11, 1998, the Company filed a Form 8-K with the
Commission to report that it and Titanium Metals Corporation
completed a transaction in which the parties have combined
their respective titanium castings businesses into a
jointly-owned venture.
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23
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: 10/9/98 By: /S/ EDWARD J. DAVIS
Edward J. Davis
Vice President,
Chief Financial Officer
and Treasurer
Date: 10/9/98 By: /S/ JEFFREY B. LAVIN
Jeffrey B. Lavin
Corporate Controller
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