UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 1-13645
HOWMET INTERNATIONAL INC.
INCORPORATED IN THE STATE OF DELAWARE I.R.S. EMPLOYER IDENTIFICATION
NO. 52-1946684
475 STEAMBOAT ROAD, GREENWICH, CT 06830
TELEPHONE NUMBER: (203) 661-4600
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 registrant's classes
of common stock, as of the latest practicable date.
Common Stock, $0.01 par value, as of August 5, 1998 : 100,005,356 Shares
Howmet International Inc.
Quarterly Report on Form 10-Q
June 30, 1998
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1 -- Financial Statements
Consolidated Statements of Income - Three months ended and Six
months ended June 30, 1998 and 1997 3
Consolidated Condensed Balance Sheets - June 30,
1998 and December 31, 1997 4
Consolidated Statements of Cash Flows - Six
months ended June 30, 1998 and 1997 5
Consolidated Statements of Common Stockholders'
Equity and Redeemable Preferred Stock - Three months
ended and Six months ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. OTHER INFORMATION
Item 4 -- Submission of Matters to a Vote of Security Holders 15
Item 5 -- Other Information 15
Item 6 -- Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Howmet International Inc.
Consolidated Statements of Income (Unaudited)
(Dollars in millions, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ---------------------------
1998 1997 1998 1997
- -------------------------------------------------- ----------------------------- ---------------------------
Net sales $335.7 $330.4 $664.1 $643.0
Operating expenses:
Cost of sales 235.4 228.0 466.8 449.2
Selling, general and administrative expense 31.4 36.3 64.1 72.8
Depreciation and amortization expense 14.7 14.9 29.1 29.3
Research and development expense 4.4 4.0 9.5 8.7
------------ ----------- ----------- -----------
285.9 283.2 569.5 560.0
------------ ----------- ----------- -----------
Income from operations 49.8 47.2 94.6 83.0
Interest income (expense) from Restricted Trust
and Pechiney Notes, net (Note C)
Interest income .3 .3 .8 .7
Interest expense (3.5) (8.8) (7.3) (16.8)
Other, net (.9) (.7) (1.6) (1.4)
------------ ----------- ----------- -----------
Income before income taxes 45.7 38.0 86.5 65.5
Income taxes 18.3 15.4 34.6 27.4
------------ ----------- ----------- -----------
Net income 27.4 22.6 51.9 38.1
Dividends on redeemable preferred stock (1.4) (1.3) (2.7) (2.5)
------------ ----------- ----------- -----------
Net income applicable to common stock $ 26.0 $ 21.3 49.2 35.6
============ =========== =========== ===========
Net income per common share, basic and diluted $ .26 $ .21 $ .49 $ .36
============ =========== =========== ===========
See notes to consolidated financial statements.
3
Howmet International Inc.
Consolidated Condensed Balance Sheets
(Dollars in millions, except share amounts)
June 30, December 31,
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 10.1 $ 45.4
Accounts receivable (less allowance of $5.2 and $4.4) 91.2 78.7
Inventories 161.8 155.5
Retained receivables 42.6 20.2
Deferred income taxes 9.0 16.3
Other current assets 2.7 3.9
Restricted Trust (a) 726.9 --
------------ -----------
Total current assets 1,044.3 320.0
Property, plant and equipment, net 293.9 275.5
Goodwill, net 223.5 226.5
Patents and technology and other intangible assets, net 112.5 118.4
Other noncurrent assets 56.5 53.8
Deferred income taxes 8.1 --
Restricted Trust (a) -- 716.4
------------ -----------
Total assets $1,738.8 $1,710.6
============ ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 61.7 $ 84.2
Accrued liabilities 142.8 145.1
Income taxes payable 45.2 28.2
Short-term debt 18.9 --
Pechiney Notes (a) 726.9 --
------------ -----------
Total current liabilities 995.5 257.5
Accrued retiree benefits other than pensions 95.4 93.1
Other noncurrent liabilities 116.6 106.1
Deferred income taxes -- 3.4
Long-term debt, excluding the Pechiney Notes 154.0 208.4
Pechiney Notes (a) -- 716.4
Commitments and contingencies (Note G).
Redeemable preferred stock, 9% payment-in-kind dividends, $.01 par value,
liquidation value - $10,000 per share, authorized - 15,000 shares,
issued and outstanding: June 30, 1998 - 6,269 shares, December 31, 1997 - 6,001 shares 62.7 60.0
Stockholders' equity:
Preferred stock, authorized - 9,985,000 shares, issued and outstanding - 0 shares -- --
Common stock, $.01 par value, authorized - 400,000,000 shares,
issued and outstanding - 100,000,000 shares 1.0 1.0
Capital surplus 195.0 195.0
Retained earnings 124.5 75.3
Accumulated other comprehensive income (Cumulative translation adjustment) (5.9) (5.6)
------------ -----------
Total stockholders' equity 314.6 265.7
------------ -----------
Total liabilities, redeemable preferred stock and stockholders' equity $1,738.8 $1,710.6
============ ===========
(a) The Restricted Trust holds a note receivable from Pechiney, S.A. and related
letters of credit that secures Pechiney, S.A.'s agreement to repay the
Pechiney Notes due January 2, 1999. Management believes that it is
extremely remote that the Company will use any assets other than those in
the Restricted Trust to satisfy any payments related to the Pechiney Notes.
See Note C.
See notes to consolidated financial statements.
4
Howmet International Inc.
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in millions)
Six Months Ended
June 30,
--------------------
1998 1997
- -------------------------------------------------------------------------------------------------------
Operating activities
- --------------------
Net income $ 51.9 $ 38.1
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 29.3 32.3
Equity in income of unconsolidated affiliates (.3) (.6)
Changes in assets and liabilities:
Receivables (34.6) (18.0)
Inventories (6.0) (3.9)
Accounts payable and accrued liabilities (26.4) (9.2)
Deferred income taxes (4.2) (6.2)
Income taxes payable 18.4 12.5
Long-term SARs accrual .2 15.9
Other--net 7.7 3.6
--------------------
Net cash provided by operating activities 36.0 64.5
Investing activities
- --------------------
Purchases of property, plant and equipment (35.8) (20.3)
--------------------
Net cash used by investing activities (35.8) (20.3)
Financing activities
- --------------------
Net change in short-term debt 18.9 --
Issuance of long-term debt 36.6 89.4
Repayment of long-term debt (91.0) (152.6)
Foreign currency rate changes -- (1.4)
--------------------
Net cash used by financing activities (35.5) (64.6)
--------------------
Decrease in cash and cash equivalents (35.3) (20.4)
Cash and cash equivalents at beginning of period 45.4 23.4
--------------------
Cash and cash equivalents at end of period $ 10.1 $ 3.0
====================
See notes to consolidated financial statements.
5
Howmet International Inc.
Consolidated Statements of Common Stockholders' Equity and Redeemable Preferred
Stock
(Dollars in millions, except share amounts)
Accumulated Total Redeemable
Common Stock Other Common Preferred Stock
------------------- Capital Retained Comprehensive Stockholders' ---------------
Shares Amount Surplus Earnings Income (Note D) Equity Shares Amount
----------- ------ ------- --------- --------------- -------------- ------- ------
THREE MONTHS ENDED JUNE 30,
- ---------------------------
Balance, March 31, 1997 100,000,000 $1.0 $195.0 $ 35.0 $(5.3) $225.7 5,614 $56.1
-------------
Comprehensive income (Note D):
Net income 22.6 22.6
Other comprehensive income
(Foreign exchange translation
adjustment) (.8) (.8)
-------------
Total comprehensive income 21.8
-------------
Dividends - redeemable
preferred stock (1.3) (1.3) 125 1.3
- --------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 100,000,000 $1.0 $195.0 $ 56.3 $(6.1) $246.2 5,739 $57.4
================================================================================================================================
Balance, March 31, 1998 100,000,000 $1.0 $195.0 $ 98.5 $(5.7) $288.8 6,134 $61.3
-------------
Comprehensive income (Note D):
Net income 27.4 27.4
Other comprehensive income
(Foreign exchange translation
adjustment) (.2) (.2)
-------------
Total comprehensive income 27.2
-------------
Dividends - redeemable
preferred stock (1.4) (1.4) 135 1.4
- --------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 100,000,000 $1.0 $195.0 $124.5 $(5.9) $314.6 6,269 $62.7
================================================================================================================================
SIX MONTHS ENDED JUNE 30,
- -------------------------
Balance, December 31, 1996 100,000,000 $1.0 $195.0 $ 20.7 $ 2.1 $218.8 5,490 $54.9
------------
Comprehensive income (Note D):
Net income 38.1 38.1
Other comprehensive income
(Foreign exchange translation
adjustment) (8.2) (8.2)
------------
Total comprehensive income 29.9
------------
Dividends - redeemable
preferred stock (2.5) (2.5) 249 2.5
- --------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 100,000,000 $1.0 $195.0 $ 56.3 $(6.1) $246.2 5,739 $57.4
================================================================================================================================
Balance, December 31, 1997 100,000,000 $1.0 $195.0 $ 75.3 $(5.6) $265.7 6,001 $60.0
------------
Comprehensive income (Note D):
Net income 51.9 51.9
Other comprehensive income
(Foreign exchange translation
adjustment) (.3) (.3)
------------
Total comprehensive income 51.6
------------
Dividends - redeemable
preferred stock (2.7) (2.7) 268 2.7
- --------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 100,000,000 $1.0 $195.0 $124.5 $(5.9) $314.6 6,269 $62.7
================================================================================================================================
See notes to consolidated financial statements.
6
Howmet International Inc.
Notes to Consolidated Financial Statements (Unaudited)
A. BASIS OF PRESENTATION
Cordant Technologies Inc. (name changed from Thiokol Corporation on May 5, 1998)
owns 62% of the Company's common shares; Carlyle-Blade Acquisition Partners,
L.P., an affiliate of The Carlyle Group, owns 22.65% and the public owns 15.35%.
Cordant Technologies Inc. ("Cordant") also owns all of the outstanding preferred
stock of the Company.
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10-01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for the complete
financial statements. In the opinion of management, all adjustments necessary
for a fair presentation have been included. The consolidated condensed balance
sheet at December 31, 1997 has been derived from the Company's audited financial
statements at that date. Operating results for the six months ended June 30,
1998 are not necessarily indicative of the results to be expected for the year
ending December 31, 1998. The financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report to Stockholders incorporated by
reference in the Annual Report on Form 10-K for the year ended December 31,
1997.
B. INVENTORIES
Inventories are summarized as follows (in millions):
June 30, December 31,
1998 1997
------------------ ------------------
Raw materials and supplies $ 62.5 $ 62.0
Work in progress 73.4 61.5
Finished goods 30.4 35.4
------------------ ------------------
FIFO inventory 166.3 158.9
LIFO valuation adjustment (4.5) (3.4)
------------------ ------------------
$161.8 $155.5
================== ==================
At June 30, 1998 and December 31, 1997, inventories include $121.9 million and
$122.7 million, respectively, that are valued using LIFO. This valuation
adjustment approximates the difference between the LIFO carrying value and
current replacement cost.
C. RESTRICTED TRUST AND RELATED PECHINEY NOTES PAYABLE
In 1988, Pechiney Corporation, as a wholly-owned subsidiary of Pechiney, S.A.,
issued indebtedness maturing in 1999 (the "Pechiney Notes") to third parties in
connection with the purchase of American National Can Company. As a result of
the acquisition by the Company of Pechiney Corporation (now named Howmet
Holdings Corporation, "Holdings") and the Cercast Group of companies, Holdings
became a wholly-owned subsidiary of the Company. The Pechiney Notes remained at
Holdings, but Pechiney, S.A., which retained American National Can Company,
agreed with the Company to be responsible for all payments due on or in
connection with the Pechiney Notes. Accordingly, Pechiney, S.A. issued its own
note to Holdings in an amount sufficient to satisfy all obligations under the
Pechiney Notes. The Pechiney, S.A. note was deposited in a trust for the
benefit of Holdings (the "Restricted Trust"). If Pechiney, S.A. fails to make
any payments required by its note, the trustee under the Restricted Trust (the
"Trustee")
7
Howmet International Inc.
Notes to Consolidated Financial Statements (Unaudited)
C. RESTRICTED TRUST AND RELATED PECHINEY NOTES PAYABLE (CONTINUED)
has irrevocable letters of credit in the aggregate amount of $772 million issued
to the Restricted Trust by Banque Nationale de Paris ("BNP"), a French bank,
which has an A+ credit rating from Standard & Poors Ratings Group ("S&P"), to
draw upon to make such payments. In the event that there is an impediment to a
draw under the BNP letters of credit held by the Trustee, the Trustee has
substantially identical "back-up" letters of credit in the aggregate amount of
$772 million issued to the Restricted Trust by Caisse des Depots et
Consignations, a French bank, which has an AAA credit rating from S&P. In
addition, the holders of the Pechiney Notes have a third set of letters of
credit (also issued by BNP), which can be drawn upon by such holders in the
event that principal and/or interest payments on the Pechiney Notes are not
made. Pechiney, S.A. is solely responsible as reimbursement party for draws
under the various letters of credit referenced above, and by agreement with the
banks neither Holdings nor the Company has any responsibility therefor.
However, Holdings remains liable as the original issuer of the Pechiney Notes in
the event that Pechiney, S.A. and both banks fail to meet their obligations
under their respective letters of credit. Management believes that it is
extremely remote that the Company will be required to use any of its assets
other than those in the Restricted Trust to satisfy any payments due on or in
connection with the Pechiney Notes. Upon repayment of the Pechiney Notes, the
Restricted Trust terminates and any assets of the Restricted Trust are to be
returned to Pechiney, S.A..
The Pechiney Notes are due on January 2, 1999 and may not be prepaid prior to
that date. Interest is at three-month LIBOR plus 25 basis points (5.98% for the
quarter ended June 30, 1998). Interest is paid quarterly and was paid shortly
after the end of the 1998 and 1997 quarters. Interest expense on these notes
was $10.5 million and $10.6 million for the quarter ended June 30, 1998 and
1997, respectively. Interest expense on these notes was $21.5 million and $21
million for the six months ended June 30, 1998 and 1997, respectively. Interest
income from the Restricted Trust for the aforementioned periods was equal to the
interest expense and is netted in these financial statements.
D. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income". SFAS No.
130 requires the Company to report comprehensive income, which is net income
plus other comprehensive income. For the Company, the only item included in
other comprehensive income is the change in foreign currency translation
adjustments. SFAS No. 130 also requires the Company to report accumulated other
comprehensive income in the stockholders' equity section of the consolidated
condensed balance sheet. The adoption of SFAS No. 130 does not change the
amount reported as net income nor the total amount of stockholders' equity;
however, it does change the presentation of stockholders' equity. The amount
previously presented as "cumulative translation adjustment" in the stockholders'
equity section of the consolidated condensed balance sheets is now captioned
"accumulated other comprehensive income". Prior financial statements have been
recaptioned to conform to the requirement of SFAS No. 130.
Total comprehensive income, as disclosed in the Statements of Common
Stockholders' Equity and Redeemable Preferred Stock, amounted to $27.2 million
and $21.8 million, for the second quarter of 1998 and 1997, respectively and
$51.6 million and $29.9 million, for the six months of 1998 and 1997,
respectively.
E. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income applicable to
common stock by the weighted average number of common shares outstanding
(100,000,000). Diluted earnings per share is calculated by dividing net income
applicable to common stock by the weighted average number of common shares
outstanding plus the common stock equivalent shares of employee stock options,
calculated using the treasury stock method (117,415 and 152,713 for the quarter
and six months ended June 30, 1998, respectively).
8
Howmet International Inc.
Notes to Consolidated Financial Statements (Unaudited)
E. EARNINGS PER SHARE (CONTINUED)
All 1997 share and per share data have been retroactively restated to reflect
the October 1997, 10,000-to-1 stock split.
F. OTHER INFORMATION
For the quarter ended June 30, 1998, selling, general and administrative expense
included $2.6 million of pre-tax expense recorded in connection with the
Company's Stock Appreciation Rights ("SARs") plan and $.2 million of pre-tax
expense recorded in connection with the Cordant Options. The comparable 1997
quarter included $8 million of expense related to the SARs plan and no
expense for the Cordant Options. Partially offsetting the aforementioned 1997
adverse effect on income before income taxes was a $6.3 million benefit from
finalization of a pricing adjustment with a customer that did not occur in 1998
and is not expected to recur in the future.
For the six months ended June 30, 1998, selling, general and administrative
expense included $5.3 million of pre-tax expense recorded in connection with the
Company's Stock Appreciation Rights ("SARs") plan and $1.6 million of pre-tax
expense recorded in connection with the Cordant Options. The comparable 1997
period included $15.9 million of expense related to the SARs plan and no expense
for the Cordant Options. Partially offsetting the aforementioned 1997 adverse
effect on income before income taxes was a $9.7 million benefit from
finalization of a pricing adjustment with a customer that did not occur in 1998
and is not expected to recur in the future.
The Company's research and development expense for the six months ended June 30,
1998 and 1997 was $9.5 million and $8.7 million, respectively. In addition, the
amount spent for customer-sponsored research and development, which is recorded
in cost of sales, was $7.8 million and $6.8 million in the same two respective
periods. Portions of previously reported 1997 research and development amounts
were reclassified to include certain customer-sponsored research and development
costs in cost of sales. This is consistent with the 1998 cost of sales
presentation.
At June 30, 1998, the Company had outstanding short-term borrowings of $15.9
million under unsecured up to thirty day bank borrowing arrangements and $3
million under a $7.5 million credit facility entered into in 1998 by the
Company's Canadian subsidiary. Interest rate on all such borrowings is based on
a bank's daily money market fund rate (approximately 5.9% at June 30, 1998).
The Company paid interest of $6.9 million and $12.1 million, during the
respective 1998 and 1997 six month periods.
The Company paid income taxes, net of refunds, of $20.9 million and $23.3
million, during the respective 1998 and 1997 six month periods.
9
Howmet International Inc.
Notes to Consolidated Financial Statements (Unaudited)
G. CONTINGENCIES
The Company has received test results indicating levels of polychlorinated
biphenyls ("PCBs") at its Dover, New Jersey plant which will require
remediation. These levels have been reported to the New Jersey Department of
Environmental Protection ("NJDEP"), and the Company is preparing a work plan to
define the risk and to test possible clean-up options. The statement of work
must be approved by the NJDEP pursuant to an Administrative Consent Order
entered into between the Company and NJDEP on May 20, 1991 regarding clean-up of
the site. Various remedies are possible and could involve expenditures ranging
from $2 million to $22 million or more. The Company has recorded a $2 million
long-term liability as of June 30, 1998 for this matter. Given the
uncertainties, it is possible that the estimated range of this cost and the
amount accrued will change within a year. The indemnification discussed below
applies to the costs associated with this matter.
Besides the above-mentioned remediation work required at the Company's Dover,
New Jersey plant, liabilities exist for clean-up costs associated with hazardous
types of materials at eight other on-site and off-site waste disposal
facilities. The Company has been or may be named a potentially responsible
party under the Comprehensive Environmental Response, Compensation and Liability
Act or similar state laws at these locations. At June 30, 1998 $4.1 million of
accrued environmental liabilities are included in the consolidated condensed
balance sheet for these eight sites.
In connection with the acquisition by the Company of Howmet Corporation's parent
holding company, Howmet Holdings Corporation and the Cercast Group of companies
("the Acquisition"), Pechiney, S.A. indemnified the Company for environmental
liabilities relating to Howmet Corporation and stemming from events occurring or
conditions existing on or prior to the Acquisition, to the extent that such
liabilities exceed a cumulative $6 million. This indemnification applies to all
of the aforementioned environmental matters. It is highly probable that changes
in any of the aforementioned accrued liabilities will result in an equal change
in the amount receivable from Pechiney, S.A. pursuant to this indemnification.
In addition to the above environmental matters, and unrelated to Howmet
Corporation, Holdings and Pechiney, S.A. are jointly and severally liable for
environmental contamination and related costs associated with certain
discontinued mining operations owned and/or operated by a predecessor-in-
interest until the early 1960s. These liabilities include approximately $21.3
million in remediation and natural resource damage liabilities at the Blackbird
Mine site in Idaho and a minimum of $10 million in past costs and investigation
and future remediation costs at the Holden Mine site in Washington. Pechiney,
S.A. has agreed to indemnify the Company for such liabilities. In connection
with these environmental matters, the Company recorded a $31.3 million liability
and an equal $31.3 million receivable from Pechiney, S.A. at June 30, 1998.
Pechiney, S.A. is currently funding all amounts related to these liabilities.
Estimated environmental costs are not expected to materially impact the
financial position or the results of the Company's operations in future periods.
However, environmental clean-up periods are protracted in length, and
environmental costs in future periods are subject to changes in environmental
remediation regulations. Any losses which are not covered by the Pechiney, S.A.
indemnifications and which are in excess of amounts currently accrued will be
charged to operations in the periods in which they occur.
The Company, in its ordinary course of business, is involved in other
litigation, administrative proceedings and investigations of various types in
several jurisdictions. The Company believes these are routine in nature and
incidental to its operations, and that the outcome of any proceedings to which
the Company currently is a party will not have a material adverse effect upon
its operations or financial condition.
10
Item 2. Management's Discussion And Analysis Of Financial Condition
------------------------------------------------------------
And Results Of Operations
-------------------------
RESULTS OF OPERATIONS
- ---------------------
Quarter Ended June 30, 1998 Compared to Quarter Ended June 30, 1997
Summary financial information for the quarters ended June 30 follows (in
millions):
Better/
1998 1997 (Worse) Percent
---------------------------------------------
Net Sales $335.7 $330.4 $ 5.3 2
- ------------------------------------------------------------------------------------------------------
Gross profit $100.3 $102.4 $(2.1) (2)
Selling, general and administrative expense 31.4 36.3 4.9 14
Depreciation and amortization expense 14.7 14.9 .2 1
Research and development expense 4.4 4.0 (.4) (10)
- ------------------------------------------------------------------------------------------------------
Income from operations 49.8 47.2 2.6 6
Net interest expense (3.2) (8.5) 5.3 62
Other, net (.9) (.7) (.2) (29)
Income taxes 18.3 15.4 (2.9) (19)
- ------------------------------------------------------------------------------------------------------
Net income $ 27.4 $ 22.6 $ 4.8 21
======================================================================================================
Earnings per share (basic and diluted) $ .26 $ .21 $ .05 24
======================================================================================================
Net sales in the 1998 second quarter were 8% higher than in the 1997 second
quarter, after excluding from the 1997 quarter, the sales of the Company's
refurbishment business, which was sold in September 1997. The 1998 sales
increase is due to volume increases in the aerospace and industrial gas turbine
markets. Also affecting second quarter comparability is $6.3 million of
additional revenue in 1997 from a pricing adjustment with a customer that was
not repeated in 1998 and is not expected to recur in the future.
Gross profit, as reported, was $2.1 million lower in the 1998 second quarter
than in the 1997 second quarter. However, on a comparable basis, 1998 gross
profit was $9.2 million higher than 1997, after reducing 1997 gross profit to
exclude (i) the gross profit of the sold refurbishment business and (ii) the
aforementioned $6.3 million of additional 1997 revenue (which had no associated
costs). Cost control enabled the Company to capitalize on increased volume.
Selling, general and administrative expense was $4.9 million lower in the 1998
second quarter than in the 1997 second quarter. The decrease was primarily due
to lower expense recorded in connection with the Company's Stock Appreciation
Rights plan ("SARs"). Expense for SARs in 1998 will continue to be less than in
1997.
Net interest expense was $5.3 million lower in the 1998 second quarter than in
the 1997 second quarter. The principal reason for the reduction was
significantly lower debt levels resulting from strong cash generation in the
last three quarters of 1997. Another significant contributor to the lower
interest expense is the interest rate reductions achieved in the Company's 1997
fourth quarter debt refinancing. Also contributing to the reduction was a $1.3
million charge in the second quarter of 1997, which was not repeated in 1998,
for accelerated write-off of debt issuance cost associated with debt that was
repaid ahead of schedule.
Income tax expense increased $2.9 million due to higher pre-tax income.
11
The impact of the adverse Asian economic condition on the Company is uncertain.
To the extent the Asian economic conditions impact the commercial aerospace and
industrial gas turbine markets, such impact may affect the Company.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Summary financial information for the six months ended June 30 follows (in
millions):
Better/
1998 1997 (Worse) Percent
--------------------------------------------
Net Sales $664.1 $643.0 $21.1 3
- -----------------------------------------------------------------------------------------------------
Gross profit $197.3 $193.8 $ 3.5 2
Selling, general and administrative expense 64.1 72.8 8.7 12
Depreciation and amortization expense 29.1 29.3 .2 1
Research and development expense 9.5 8.7 (.8) 9
- -----------------------------------------------------------------------------------------------------
Income from operations 94.6 83.0 11.6 14
Net interest expense (6.5) (16.1) 9.6 60
Other, net (1.6) (1.4) (.2) (14)
Income taxes 34.6 27.4 (7.2) (26)
- -----------------------------------------------------------------------------------------------------
Net income $ 51.9 $ 38.1 $13.8 36
=====================================================================================================
Earnings per share (basic and diluted) $ .49 $ .36 $ .13 36
=====================================================================================================
Net sales in the 1998 six month period were 10% higher than in the 1997 six
month period, after excluding from the 1997 six month period, the sales of the
Company's refurbishment business, which was sold in September 1997. The 1998
sales increase is due to volume increases in the aerospace and industrial gas
turbine markets. Also affecting six month period comparability is $9.7 million
of additional revenue in 1997 from a pricing adjustment with a customer that was
not repeated in 1998 and is not expected to recur in the future.
Gross profit, as reported, was $3.5 million higher in the 1998 six month period
than in the 1997 six month period. However, on a comparable basis, 1998 gross
profit was $21.5 million higher than 1997, after reducing 1997 gross profit to
exclude (i) the gross profit of the sold refurbishment business and (ii) the
aforementioned $9.7 million of additional 1997 revenue (which had no associated
costs). Cost control enabled the Company to capitalize on increased volume.
Selling, general and administrative expense was $8.7 million lower in the 1998
six month period than in the 1997 six month period. The decrease was primarily
due to lower expense recorded in connection with the Company's Stock
Appreciation Rights plan ("SARs").
Net interest expense was $9.6 million lower in the 1998 six month period. The
principal reason for the reduction was significantly lower debt levels resulting
from strong cash generation in the last three quarters of 1997. Another
significant contributor to the lower interest expense is the interest rate
reductions achieved in the Company's 1997 fourth quarter debt refinancing. Also
contributing to the reduction was a $1.3 million charge in the second quarter of
1997, which was not repeated in 1998, for accelerated write-off of debt
issuance cost associated with debt that was repaid ahead of schedule.
Income tax expense increased $7.2 million primarily due to higher pre-tax
income.
12
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's principal sources of liquidity are cash flow from operations and
borrowings under its revolving credit facility. Based upon the current level of
operations, management believes that cash from the aforementioned sources will
be adequate to meet the Company's anticipated requirements for working capital,
interest payments, capital expenditures and research and development, although
there can be no assurance in this regard. To date, cash available after
satisfaction of these requirements has been used to voluntarily repay debt prior
to mandatory due dates.
At June 30, 1998, there were $7.6 million of standby letters of credit
outstanding and $145 million of outstanding borrowings under the $300 million
revolving credit facility. At June 30, 1998, the Company also had $18.9 million
of outstanding short-term borrowings.
Capital expenditures in the 1998 six month period were $35.8 million, and are
expected to be approximately $80 million for the current year. The 1998 capital
expenditures are for completion of capacity expansions needed to serve the core
business, as well as additional expenditures to support new products and process
enhancement activities. The Company expects capital expenditures to be at a
high level again in 1999.
Debt, excluding Pechiney Notes, plus redeemable preferred stock as a percentage
of total capitalization (debt, excluding Pechiney Notes, plus redeemable
preferred stock plus common stockholders' equity) is 43% at June 30, 1998
compared to 50% at December 31, 1997. The current ratio (excluding short-term
debt and Pechiney Notes) at June 30, 1998 was 1.3 and was 1.2 at December 31,
1997. Working capital (excluding short-term debt and Pechiney Notes) was $67.7
million and $62.5 million at June 30, 1998 and December 31, 1997, respectively.
At June 30, 1998 the Company's balance sheet includes $726.9 million of Pechiney
Notes and a $726.9 million Restricted Trust asset. See Note C of Notes to
Consolidated Financial Statements.
YEAR 2000 COMPLIANCE
- --------------------
The Company does not anticipate a disruption in operations as a result of
computer software issues associated with the Year 2000. A dedicated team of
both Company and contract programmers are actively addressing the Company's Year
2000 compliance issues. Management believes that all date logic problems on the
Company's central mainframe and distributed server applications have been
identified, and remedial action to correct or replace problematic code is
currently underway. Project work on this phase of the effort started in late
1996 and is scheduled to be completed by June 30, 1999.
The Year 2000 compliance team is concurrently working with the various plant
facilities to identify and implement any needed changes to both local business
applications and shop floor control systems. The inventory and assessment phase
of this effort is well underway and will be completed in the third quarter of
1998. Corrective action projects are expected to be completed by June 30, 1999.
To date no material risk of non-compliance has been identified.
The Company has also initiated formal communications with all of its significant
suppliers, including raw materials, services, and computer hardware/software
suppliers, and large customers to determine the extent to which Howmet's
manufacturing processes and interface systems are vulnerable to those third
parties' failure to resolve their own Year 2000 issues. There can be no
guarantee that the systems of other companies on which Howmet's systems rely
will be timely converted and would not have an adverse effect on the Howmet
systems. However, at this point, no material problems are anticipated.
The Company expects to incur incremental costs for such efforts of $2.5 million,
$2.5 million and $.5 million, respectively, for the full years 1998, 1999 and
2000. The Company has also diverted internal resources with an additional
annual cost of approximately $.6 million for each of the 1998 and 1999 years.
13
ENVIRONMENTAL AND OTHER LEGAL MATTERS
- -------------------------------------
In view of the indemnification from the Company's previous owners granted in
connection with the acquisition described in Note G of Notes to Consolidated
Financial Statements, the Company does not expect resolution of environmental
matters to have a material effect on its liquidity or results of operations.
See Note G of Notes to Consolidated Financial Statements in this Form 10-Q, and
Exhibit 99.1 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, filed with the Securities and Exchange Commission for
discussion of environmental matters.
The Company, in its ordinary course of business, is involved in other
litigation, administrative proceedings and investigations of various types in
several jurisdictions. The Company believes these are routine in nature and
incidental to its operations, and that the outcome of any proceedings to which
the Company currently is a party will not have a material adverse effect upon
its operations or financial condition.
NEW ACCOUNTING STANDARD
- -----------------------
In February 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." This
statement revises employers' disclosures about pensions and other postretirement
benefit plans. It does not change the measurement of assets or recognition of
liabilities under those plans. SFAS No. 132 requirements will be included in
the Company's 1998 annual report.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted in years beginning after June 15, 1999. The Company
expects to adopt the new Statement effective January 1, 2000. The statement
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company has not
yet determined what the effect of SFAS No. 133 will be on the earnings and
financial position of the Company.
14
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Annual Meeting of Stockholders of the Company for 1998 was held on
May 12, 1998.
(b) At the meeting the eight individuals nominated for directors by the
management of the Company were elected; the Amended and Restated 1997 Stock
Awards Plan, under which key employees and directors may be awarded stock
options, stock appreciation rights or restricted stock grants, was approved; and
the appointment of Ernst & Young, LLP as the independent auditors of the Company
for 1998 was ratified. The votes for and against and abstentions with respect
to each nominee for election as a director and each of these other two matters
were as set forth below. According to a schedule provided by the Company's
transfer agent, there were no broker non-votes.
For Against Abstain
----------------- ----------------- -----------------
Director Nominees:
Richard L. Corbin 97,675,350 182,465 -
William E. Conway 97,675,350 182,465 -
Edsel D. Dunford 97,827,950 29,865 -
James R. Mellor 97,827,950 29,865 -
D. Larry Moore 97,827,950 29,865 -
David L. Squier 97,675,050 182,765 -
James R. Wilson 97,657,350 182,465 -
James D. Woods 97,827,950 29,865 -
Amended and Restated 1997
Stock Awards Plan 96,422,119 1,393,207 42,489
Ernst & Young, LLP as
independent auditors 97,824,240 12,939 20,636
Item 5. Other Events
------------
CAUTIONARY STATEMENT
Certain statements in this quarterly report are "forward-looking statements" as
defined in the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. The matters discussed in these statements are subject to
risks and uncertainties which should be considered in assessing the Company's
conduct of its business. Such risks include changing economic and political
conditions in the United States and in other countries, including those in Asia.
Risks and uncertainties also include but are not limited to changes in
governmental laws and regulations, the outcome of environmental matters, the
availability and cost of raw materials, and the effects of: (i) aerospace and
IGT industry economic conditions, (ii) aerospace industry cyclicality, (iii) a
concentrated customer base, (iv) competition and (v) pricing pressures. These
and other factors are discussed in greater detail in Exhibit 99.1 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, filed
with the Securities and Exchange Commission. All forecasts and projections in
this report are "forward-looking statements", and are based on management's
current expectations of the Company's results, based on current information
available pertaining to the Company and its products including the
aforementioned risk factors. Actual future results and trends may differ
materially from any "forward-looking statements" made herein. The Company
undertakes no obligations to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
15
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) -- Exhibits
--------
10.32 Howmet International Inc. Amended and Restated 1997 Stock Awards
Plan adopted November 20, 1997, amended February 9, 1998, approved
by stockholders May 12, 1998.
10.33 Form of Howmet International Inc. Nonqualified Stock Option
Grant Agreement.
10.34 Form of Howmet International Inc. Director Restricted Stock
Agreement.
27.1 Financial Data Schedule for the quarter ended June 30, 1998.
27.2 Restated Financial Data Schedule including columns for the prior
reporting periods of June 29, 1997 and September 28, 1997 and
prior two fiscal years ended December 31, 1997 and December 31,
1996.
(b) -- Reports on Form 8-K
-------------------
During the quarter ended June 30, 1998, the Company did not file any
Current Reports on Form 8-K.
16
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.
Dated: August 10, 1998
HOWMET INTERNATIONAL INC.
/s/ John C. Ritter
------------------
John C. Ritter
Senior Vice President &
Chief Financial Officer
(Principal Financial Officer)
/s/ George T. Milano
---------------------
George T. Milano
Corporate Controller
(Principal Accounting Officer)
17