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, 1999
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 OCTOBER 2, 1999
Common Stock, $1 Par Value 36,103,428
Page 1 of 21
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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,
1999 1998
(000's omitted, except per share data)
Revenue $176,495 $189,664
Less:
Cost of goods sold 147,767 161,067
Selling, general and
administrative expenses 11,976 13,480
Other charges(credits) (1,200) (5,000)
158,543 169,547
Income from operations 17,952 20,117
Other deductions:
Interest expense 3,599 3,529
Miscellaneous, net 305 256
3,904 3,785
Income before income taxes 14,048 16,332
Provision for income taxes 5,057 4,480
Net income $ 8,991 $ 11,852
Net income per share:
Basic $ .25 $ .32
Diluted $ .25 $ .32
Shares used to compute
net income per share:
Basic 35,911 36,542
Diluted 36,557 37,207
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,
1999 1999
(Unaudited)
(000's omitted)
ASSETS
Cash and cash equivalents $ 74,855 $ 73,867
Accounts receivable 156,112 156,042
Inventories 95,118 97,603
Prepaid expenses 4,386 6,768
Deferred income taxes 6,400 6,400
Total current assets 336,871 340,680
Property, plant and equipment, net 213,629 214,604
Intangible and other assets 30,521 26,426
Total assets $581,021 $581,710
LIABILITIES
Borrowings due within one year $ 968 $ 965
Accounts payable 46,904 52,561
Accrued liabilities and other 51,338 57,127
Total current liabilities 99,210 110,653
Restructuring, integration, disposal
and environmental 15,279 15,444
Long-term debt 164,315 164,338
Pension liability 1,605 1,771
Deferred income tax and other 13,890 13,857
Postretirement benefits 41,352 41,885
Total liabilities 335,651 347,948
STOCKHOLDERS' EQUITY
Preferred stock - none issued - -
Common stock issued - 37,052,720 shares 37,053 37,053
Capital in excess of par value 26,467 27,360
Retained earnings 194,866 185,875
Accumulated other comprehensive income 1,264 1,267
Less treasury stock at cost
August 31, 1999 - 950,292 shares
May 31, 1999 - 1,417,737 shares (14,280) (17,793)
Total stockholders' equity 245,370 233,762
Total liabilities and stockholders'
equity $581,021 $581,710
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,
1999 1998
(000's omitted)
OPERATING ACTIVITIES:
Net income $ 8,991 $ 11,852
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 7,353 6,799
Gain on sale of operating assets - (5,000)
Changes in assets and liabilities:
Accounts receivable (70) (471)
Inventories 2,485 (12,861)
Prepaid expenses and other assets (1,892) (3,561)
Accrued restructuring, integration
disposal and environmental (4,050) 37
Income and other taxes payable 5,194 3,542
Accounts payable and accrued
other liabilities (13,254) 10,292
Net cash provided (used) by
operating activities 4,757 10,629
INVESTING ACTIVITIES:
Capital expenditures (6,403) (12,573)
Proceeds from sale of fixed assets 159 5,283
Other, net (124) (215)
Net cash provided (used) by
investing activities (6,368) (7,505)
FINANCING ACTIVITIES:
Payment to Cooper Industries, Inc. - (2,300)
Repayments of debt (21) -
Net proceeds from issuance of
common stock 2,620 946
Net cash provided (used) by
financing activities 2,599 (1,354)
Increase (decrease) in cash 988 1,770
Cash, beginning of year 73,867 64,561
Cash, end of period $ 74,855 $ 66,331
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, 1999
(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, 1999 and its results of operations and cash flows for
the three months ended August 31, 1999 and August 31, 1998. 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, 1999 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, 1999
and 1998 and its results of operations and cash flows for the
years ended May 31, 1999, 1998, and 1997, in conformity with
generally accepted accounting principles. Where appropriate,
prior period amounts have been reclassified to permit comparison.
NOTE B - RECENTLY ISSUED ACCOUNTING STANDARDS
In June, 1998, the Financial Accounting Standards Board
issued Statement No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This Statement requires
companies to record derivatives on the balance sheet as assets
and liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would
be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS 133 is not
expected to have material impact on the Company's consolidated
financial statements. This Statement is effective for fiscal
years beginning after June 15, 2000. The Company will adopt this
accounting standard as required in fiscal 2002.
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
August 31, 1999
(Unaudited)
NOTE C - INVENTORIES
Inventories consisted of:
AUGUST 31, 1999 MAY 31, 1999
(000's omitted)
Raw material $ 35,897 $ 36,849
Work-in-process 62,084 65,654
Other 3,970 3,204
101,951 105,707
Less progress payments 6,833 8,104
$ 95,118 $ 97,603
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 $16,446,000 higher than reported at August 31, 1999 and May
31, 1999.
There were no LIFO inventory credits or charges to cost of
goods sold in the three months ended August 31, 1999 or August
31, 1998.
NOTE D - NET INCOME PER SHARE
There were no adjustments required to be made to net income
(loss) 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,
1999 1998
Shares used to compute
basic net income per
share 35,911,474 36,542,318
Dilutive effect of
stock options 645,507 664,735
Shares used to compute
diluted net income
per share 36,556,981 37,207,053
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
August 31, 1999
(Unaudited)
NOTE E - SEGMENT INFORMATION
The following table summarizes segment information by
markets served:
THREE MONTHS ENDED
AUGUST 31, AUGUST 31,
1999 1998
Net sales
Aerospace products $145,645 $152,951
Energy products 25,735 29,574
Other products 5,115 7,139
Consolidated net sales $176,495 $189,664
EBITDA(1)
Aerospace products $ 23,016 $ 19,200
Energy products 2,237 3,066
Other products 491 1,261
Corporate (1,944) (1,867)
Total EBITDA 23,800 21,660
Depreciation and Amortization 7,353 6,799
Other charges (credit) (1,200) (5,000)
Interest expense 3,599 3,529
Income before income taxes $ 14,048 $ 16,332
[FN]
(1) Earnings before interest, taxes, depreciation, amortization,
extraordinary items and other charges (credits).
</FN>
The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting
policies. Expenses that are not directly identifiable to a
business market are allocated. Common administrative expenses
are allocated based on revenue, common period costs are allocated
based on value added.
The Company's management uses Revenues and EBITDA by
business market as its primary information for decision-making
purposes. The Company's revenues are predominantly generated in
the Aerospace market segment. All plants with the exception of
the Buffalo, New York facility, which has approximately
$23,000,000 of total assets and generates most of its revenues
from the Energy market segment, generate the majority of their
revenues from the Aerospace market. Certain plants manufacture
products for all segments; however, due to the significance of
the Aerospace market segment (82% of revenues), assets of the
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WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
August 31, 1999
(Unaudited)
NOTE E - SEGMENT INFORMATION, Continued
Company are not managed by business markets but are managed on a
plant-by-plant basis. Because the Company does not prepare and
management does not use asset information by the segments
identified, assets by segments are not presented in these
financial statements.
NOTE F - COMMITMENTS AND CONTINGENCIES
At August 31, 1999, 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 $12,541,000 at August 31, 1999. 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, 1999
and August 31, 1998 were not material.
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 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 INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
August 31, 1999
(Unaudited)
NOTE G - OTHER CHARGES (CREDITS)
In the three months ended August 31, 1999, the Company
recorded other credits of $1,200,000 for the recovery of costs
associated with the Houston industrial accident.
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".
NOTE H - PENDING MERGER
On May 17, 1999, Precision Castparts, Corp. ("PCC") and the
Company announced that PCC has agreed to acquire 100 percent of
the Company's common stock in a cash tender offer of $20 per
share, valued at approximately $825,000,000, including the
assumption of $104,000,000 of net debt. Upon completion of the
tender offer and subsequent merger, Wyman-Gordon will become a
wholly-owned subsidiary of PCC. The completion of the tender
offer is conditioned upon the tender of at least two-thirds of
the outstanding shares of Wyman-Gordon and certain other
conditions, including compliance with the requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. PCC,
headquartered in Portland, Oregon, is a worldwide manufacturer of
complex metal components and products.
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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 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, 1999 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".
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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
AUGUST 31, 1999 AUGUST 31, 1998
(000's omitted)
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
Aerospace $145,645 82% $152,951 81%
Energy 25,735 15% 29,574 15%
Other 5,115 3% 7,139 4%
$176,495 100% $189,664 100%
RESULTS OF OPERATIONS THREE MONTHS ENDED AUGUST 31, 1999 ("first
quarter of fiscal year 2000") COMPARED TO THREE MONTHS ENDED
AUGUST 31, 1998 ("first quarter of fiscal year 1999")
CONSOLIDATED RESULTS OF OPERATIONS
Total revenues in the first quarter of fiscal year 2000
decreased by $13.2 million, or 6.9%, to $176.5 million compared
to $189.7 million in the first quarter of fiscal year 1999.
EBITDA improved to $23.8 million, or 13.5% of revenues compared
to $21.7 million, or 11.4% of revenues in the first quarter of
fiscal year 1999. The decline in revenues while maintaining
EBITDA and gross margins consistent with those of fiscal year
1999 is in line with the Company's previous announcements.
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 reported within 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.
Net income was $9.0 million, or $.25 per share (diluted),
for the quarter, compared to $11.9 million, or $.32 per share
(diluted) for the first quarter of fiscal year 1999. During the
first quarter of fiscal year 2000, the Company recorded other
credits of $1.2 million for the recovery of costs associated with
the Houston industrial accident. During the first quarter of
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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, 1999 ("first
quarter of fiscal year 2000") COMPARED TO THREE MONTHS ENDED
AUGUST 31, 1998 ("first quarter of fiscal year 1999"), Continued
CONSOLIDATED RESULTS OF OPERATIONS, Continued
fiscal year 1999, the Company recorded a $5.0 million credit
associated with the sale of operating assets from its Millbury,
Massachusetts facility to TIMET and a $1.4 million tax benefit
related to expected realization of certain tax assets.
Notwithstanding these items, net income for the first quarter of
fiscal year 2000 and the first quarter of fiscal year 1999 would
have been $8.2 million, or $.23 per share (diluted) and $7.3
million, or $.20 per share (diluted), respectively.
Selling, general and administrative expenses decreased 11.2%
to $12.0 million during the first quarter of fiscal year 2000
from $13.5 million during the first quarter of fiscal year 1999.
Selling, general and administrative expenses as a percentage of
revenues improved to 6.8% in first quarter of fiscal year 2000
from 7.1% in the first quarter of fiscal year 1999. Selling,
general and administrative expenses benefited from a $2.4 million
credit associated with the demutualization of one of the
Company's insurance carriers in which the Company holds certain
life insurance policies. This benefit was offset by a charge of
$1.2 million relating to the maturation of restricted stock and
$1.4 million associated with incentive accruals. Excluding these
items noted above, selling, general and administrative expenses
would have been $11.8 million, or 6.7% of revenues.
During the first quarter of fiscal year 2000, the Company
provided $5.1 million, representing a 36% effective tax rate, for
income taxes. 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's backlog decreased to $644.3 million as of the
end of the first quarter of fiscal year 2000 from $1,000.9
million as of the end of the first quarter of fiscal year 1999
and $734.8 million at May 31, 1999. This decrease resulted from
the following factors:
1. Reduction in build rates of the Company's engine and
airframe customers due to a downturn in the commercial
aircraft cycle,
2. Inventory reduction programs initiated by certain major
customers, and
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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, 1999 ("first
quarter of fiscal year 2000") COMPARED TO THREE MONTHS ENDED
AUGUST 31, 1998 ("first quarter of fiscal year 1999"), Continued
CONSOLIDATED RESULTS OF OPERATIONS, Continued
3. A decrease in overdue orders to customer delivery dates
as a result of increased capacity from recommissioning
of major presses coupled with reduced bookings.
Of the Company's total current backlog, $492.6 million is
shippable in the next twelve months. The Company believes that it
will be able to fulfill those twelve-month requirements.
FINANCIAL RESULTS BY SEGMENT
AEROSPACE MARKET
The Aerospace Market segment produces components utilizing
all of the Company's manufacturing disciplines: forging,
investment casting and composites. The parts produced in this
segment are used extensively by the major jet engine
manufacturers and airframe builders within the commercial and
military aircraft industry. A variety of engine parts produced
by the Company include fan discs, compressor discs, turbine
discs, seals, shafts, hubs, reversers and valves. Aerospace
airframe components include landing gear, bulkheads, wing spars,
engine mounts, struts, wing and tail flaps and bulkheads. The
Company produces these components from titanium, nickel, steel,
aluminum and composite materials.
The Aerospace Market segment reported first quarter fiscal
year 2000 revenues of $145.6 million and EBITDA of $23.0 million.
Revenues for the first quarter of fiscal year 2000 decreased by
4.8% compared to first quarter of fiscal year 1999 revenues of
$153.0 million, however, EBITDA as a percentage of revenues
improved to 19.9% in first quarter of fiscal year 2000 from 12.6%
in the first quarter of fiscal year 1999. The decrease in
aerospace market revenues is a result of the downturn in the
commercial aircraft cycle. The significant improvement in EBITDA
is a result of continuous cost reduction initiatives and shipment
of a more favorable product mix compared to the first quarter of
fiscal year 1999. Also, the first quarter of fiscal year 1999
EBITDA was negatively impacted by inefficiencies associated with
bringing the 29,000 ton press back on-line in the Company's
Houston, TX facility.
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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, 1999 ("first
quarter of fiscal year 2000") COMPARED TO THREE MONTHS ENDED
AUGUST 31, 1998 ("first quarter of fiscal year 1999"), Continued
ENERGY MARKET
The Company is a major supplier of products used in nuclear
and fossil-fueled commercial power plants, co-generation projects
and retrofit and life extension applications as well as in the
oil and gas industry. Products produced within the energy
product segment include extruded seamless thick wall pipe,
connectors and valves. The Company produces rotating components,
such as discs and spacers, and valve components for land-based
steam turbine and gas turbine generators.
Revenues for the Energy Market segment totaled $25.7 million
for the first quarter of fiscal year 2000, as compared to $29.6
million in the first quarter of fiscal year 1999, a decrease of
$3.8 million, or 13.0%. The segment's EBITDA saw some
deterioration, falling to $2.2 million, or 8.7% of revenues for
the first quarter of fiscal year 2000 from $3.1 million, or 10.4%
of revenues in the first quarter of fiscal year 1999. The Energy
Market segment continues to experience the lack of demand for oil
exploration worldwide, which has dramatically affected sales of
oil and gas products both domestically and internationally.
OTHER MARKET
The Company manufactures a variety of products for defense
related applications. Some of the products produced within this
segment include steel casings for bombs and rockets, components
for propulsion systems for nuclear submarines and aircraft
carriers as well as pump, valve, structural and non-nuclear
propulsion forgings. The Company also manufactures products for
commercial applications such as food processing, semiconductor
manufacturing, diesel turbochargers and sporting equipment.
The Other Market segment revenues decreased to $5.1 million
in the first quarter of fiscal year 2000 compared to $7.1 million
in first quarter of fiscal year 1999, a decrease of $2.0 million,
or 28.4%. EBITDA dropped to $0.5 million, or 9.8% of revenues
compared to $1.3 million, or 17.7% of revenues. The decrease in
revenues and EBITDA was largely due to reduced sales of ordnance
products and associated margins.
LIQUIDITY AND CAPITAL RESOURCES
The $1.0 million increase in the Company's cash to $74.9
million at August 31, 1999 from $73.9 million at May 31, 1999
resulted primarily from cash provided by operating activities of
$4.8 million, issuance of common stock of $2.6 million in
connection with employee compensation and benefit plans and $0.2
million of proceeds from the sale of fixed assets, offset by
capital expenditures of $6.4 million and $0.2 million used for
other, net investing and financing activities.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, Continued
LIQUIDITY AND CAPITAL RESOURCES, Continued
The $7.7 million increase in the Company's working capital
to $237.7 million at August 31, 1999 from $230.0 million at May
31, 1999 resulted primarily from (in millions):
Increase in:
Cash and cash equivalents $ 1.0
Accounts receivable 0.1
Decrease in:
Inventories (2.5)
Prepaid expenses (2.4)
Accounts payable 5.7
Accrued liabilities and other 5.8
Increase in working capital $ 7.7
Earnings before interest, taxes, depreciation, amortization
and other charges (credits) ("EBITDA") increased $2.1 million to
$23.8 million in the first three months of fiscal year 2000 from
$21.7 million in the first three months of fiscal year 1999. The
increase in EBITDA reflects the favorable impact from cost
reduction initiatives and a more favorable mix of products
shipped, primarily within the Company's aerospace market product
lines.
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, which, in each case is
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, 1999, the Company estimated the remaining cash
requirements for the 1997 restructuring to be $2.5 million. Of
such amount, the Company expects to spend approximately $2.2
million during fiscal year 2000 and $0.3 million thereafter. In
the first three months of fiscal year 2000, spending related to
the 1997 restructuring amounted to $1.2 million.
The Company expects to spend $1.3 million in fiscal year
2000 and $14.2 million thereafter on non-capitalizable
environmental activities. In the first three months of fiscal
year 2000, $0.2 million was expended for non-capitalizable
environmental projects.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES, Continued
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 three months of fiscal year 2000, capital expenditures
amounted to $6.4 million and are expected to be approximately
$25.0 million in fiscal year 2000.
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 pay interest semi-
annually in arrears on June 15 and December 15 of each year. 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'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, 1999, the total
availability under the Receivables Financing Program was $65.0
million, there were no borrowings and letters of credit amounting
to $9.8 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 May 24, 1999. 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
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, 1999. Wyman-Gordon Limited had outstanding 1.1
million pounds sterling (approximately $1.7 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 ($74.9 million at August 31, 1999), borrowing availability
under the Company's Receivables Financing Program, cash generated
by operations and reductions in working capital requirements
through planned accounts receivable management. The Company
believes that it has adequate resources to provide for its
operations and the funding of restructuring, capital and
environmental expenditures.
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17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 June, 1998, the Financial Accounting Standards Board
issued Statement No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This Statement requires
companies to record derivatives on the balance sheet as assets
and liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would
be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS 133 is not
expected to have material impact on the Company's consolidated
financial statements. This Statement is effective for fiscal
years beginning after June 15, 2000. The Company will adopt this
accounting standard as required in fiscal 2002.
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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18
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
STATE OF TIMETABLE
DESCRIPTION OF APPROACH COMPLETION FOR COMPLETION
Computer Systems:
Assess systems for possible
Year 2000 impact 100% Completed
Modify or replace non-compliant
systems 99% October 31, 1999
Test systems with system clocks
set at current date 99% October 31, 1999
Test systems off-line with
system clocks set at various
Year 2000 related critical
dates 99% October 31,1999
Plant Equipment:
Computer-dependent plant
equipment assessment and
compliance procedures
performed 99% October 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 is not Year 2000 compliant. With respect to
all such non-compliant software the Company has acquired the most
recent release and has completed testing such versions for Year
2000 compliance. All software developed in-house has been
reviewed and necessary modifications have been completed.
In addition to assessing the Company's Year 2000 readiness,
the Company has also undertaken an action plan to assess and
monitor the progress of third-party vendors in resolving Year
2000 issues. To date, the Company has generated correspondence
to each of its third-party vendors to assure their Year 2000
readiness. At this time, correspondence received and
communication with the Company's major suppliers indicates Year
2000 readiness plans are currently being developed and monitored.
The Company used both internal and external resources to
reprogram, or replace, and test software for Year 2000
modifications. The Year 2000 project is 99% complete and the
Company anticipates completing the project by October 31, 1999.
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19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
YEAR 2000, Continued
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
estimates it will cost approximately $1.2 million to make its
computer-dependent plant equipment Year 2000 compliant. The total
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 $2.0
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 assessing Year 2000 contingency
plans. A contingency planning guideline has been established to
address departmental requirements to develop plans for responding
to the loss or degradation of system or services due to Year 2000
issues. The contingency planning involves the preparation and
implementation of alternate work process (such as manual process
and/or the use of an alternate compliant business system at
another location) in the event of system failure due to Year 2000
noncompliance.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company uses derivative financial instruments to limit
exposure to changes in foreign currency exchange rates and
interest rates.
FOREIGN CURRENCY RISK
The Company's subsidiary in Livingston, Scotland enters into
foreign exchange contracts to manage risk on transactions
conducted in foreign currencies. As discussed in the "Commitments
and Contingencies" footnote, the Company had several foreign
currency hedges in place at August 31, 1999 to reduce such
exposure. The potential loss in fair value on such financial
instruments from a hypothetical 10 percent adverse change in
quoted foreign currency exchange rates would not have been
material to the financial position of the Company as of the three
months ended August 31, 1999 or August 31, 1998.
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20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK, Continued
INTEREST RATE RISK
There were no borrowings under the Company's WGRC Revolving
Credit Facility or the U.K. Credit Agreement during the three
months ended August 31, 1999 or August 31, 1998. As such, if
market rates would have averaged 10 percent higher than actual
levels during these periods, there would have been no impact to
interest expense or net income as reported.
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, 1999
(b) Reports on Form 8-K
NONE
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21
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: 10/15/99 By: /S/ WALLACE F. WHITNEY, JR
Wallace F. Whitney, Jr.
Vice President,
General Counsel and Clerk
Date: 10/15/99 By: /S/ DAVID J. SULZBACH
David J. Sulzbach
Vice President,
Finance, Corporate Controller
and Principal Accounting Officer
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