SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_]Preliminary Proxy Statement [_]Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X]Definitive Proxy Statement
[_]Definitive Additional Materials
[_]Soliciting Material Pursuant to Rule14a-11(c) or Rule14a-12
HOWMET INTERNATIONAL INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X]No fee required
[_]Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_]Fee paid previously with preliminary materials:
[_]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
(HOWMET LOGO APPEARS HERE)
475 Steamboat Road
Greenwich, CT 06830
MARCH 24, 1999
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
Howmet International Inc., which will be held at 11:00 a.m. local time on
Friday, May 7, 1999 at the New York Palace Hotel, 455 Madison Avenue, New York,
New York. Information about the matters to be voted upon at the meeting is in
the enclosed formal Notice of Meeting and Proxy Statement.
It is important that your shares be represented at this meeting whether or
not you personally plan to attend. Please sign, date, and return your Proxy
promptly in the enclosed envelope. This will not limit your right to vote in
person or attend the meeting.
The Company's audited financial statements for the fiscal year ended December
31, 1998, the reports on those statements, management's discussion and analysis
of the Company's financial condition and results of operations, and other
related information are included in Exhibit A to this Notice of Annual Meeting
and Proxy Statement.
The Company's Summary Annual Report to Stockholders is also enclosed.
/s/ David L. Squier /s/ James R. Wilson
David L. Squier James R. Wilson
President and Chief Executive Officer Chairman of the Board
NOTICE OF
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON
FRIDAY, MAY 7, 1999
To the Stockholders:
The Annual Meeting of Stockholders of Howmet International Inc. (the
"Company") will be held on Friday, May 7, 1999, at the New York Palace Hotel,
455 Madison Avenue, New York, New York, at 11:00 a.m. local time, to consider
and vote upon:
1. Election of seven Directors to serve until the Annual Meeting of
Stockholders in the year 2000 (see page 2);
2. Ratification of appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31, 1999 (see
page 19); and
3. Any other business that may properly come before the meeting.
The close of business on March 16, 1999, has been fixed as the record date
for the meeting. All stockholders of record at that time are entitled to be
present and vote at the meeting.
Attendance at the Annual Meeting will be limited to stockholders of record,
beneficial owners of Company Common Stock entitled to vote at the meeting
having evidence of ownership, authorized representatives (one per stockholder
only) of absent stockholders, and invited guests of management. Any person
claiming to be an authorized representative of a stockholder must, upon
request, produce written evidence of such authorization.
The meeting will be conducted pursuant to the Company's By-Laws and rules of
order prescribed by the chairman of the meeting.
For a ten day period prior to the date of the 1999 Annual Meeting, a list of
stockholders entitled to vote will be open for examination during normal
business hours at the offices of Latham & Watkins, counsel to the Company, 855
Third Avenue, Third Floor, New York City, and may be examined by any
stockholder for any purpose germane to the meeting.
March 24, 1999
By Order of the Board of Directors,
Roland A. Paul
Vice President and Secretary
TABLE OF CONTENTS
SOLICITATION OF PROXIES..................................................... 1
ELECTION OF DIRECTORS....................................................... 2
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF............................ 5
EXECUTIVE COMPENSATION..................................................... 7
ARRANGEMENTS AMONG THE COMPANY, CARLYLE AND CORDANT TECHNOLOGIES........... 12
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION.............. 15
PERFORMANCE GRAPH........................................................... 18
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS......................... 19
DISCRETIONARY VOTING OF PROXIES ON OTHER MATTERS............................ 19
STOCKHOLDER PROPOSALS FOR ANNUAL MEETING IN YEAR 2000....................... 19
1998 ANNUAL REPORT ON FORM 10-K AVAILABLE................................... 20
EXHIBIT A: FINANCIAL INFORMATION............................................ F-1
HOWMET INTERNATIONAL INC.
475 STEAMBOAT ROAD
GREENWICH, CONNECTICUT 06830
PROXY STATEMENT
MARCH 24, 1999
SOLICITATION OF PROXIES
This Proxy Statement is furnished in connection with the solicitation by the
Board of Directors of Howmet International Inc. (the "Company") of proxies for
use at its Annual Meeting of Stockholders to be held on Friday, May 7, 1999,
and at any adjournment thereof (the "1999 Annual Meeting").
Shares represented in person or by properly executed and unrevoked proxies
received in proper form in time for the 1999 Annual Meeting will be voted.
Shares will be voted in accordance with stockholders' instructions on the
accompanying Proxy. If any such Proxy contains no instructions, the shares
will be voted in accordance with the Directors' recommendations, which are
noted herein. Any Proxy may be revoked at any time before it is exercised by
filing with the Secretary of the Company an instrument revoking it or by
submitting prior to the time of the 1999 Annual Meeting a duly executed Proxy
bearing a later date.
On March 16, 1999, the record date for the 1999 Annual Meeting, there were
100,014,258 shares of Common Stock, $.01 par value, outstanding, each entitled
to one vote, and there is no cumulative voting. The Company has no other class
of equity securities outstanding.
One Judge of Election and one alternate judge have been elected by the Board
of Directors to serve at the 1999 Annual Meeting. In the event the judge and
the alternate judge so elected shall not be present at the meeting, a judge
shall be appointed by the Board of Directors in advance of the meeting or by
the chairman of the meeting in advance of any voting at such meeting. The
presence, in person or by proxy, of the owners of a majority of the
outstanding shares entitled to vote is required for a quorum for the
transaction of business at the 1999 Annual Meeting. Under Delaware corporation
law abstentions, withheld votes and broker no votes (i.e., shares held by a
broker or nominee which are represented at the meeting, but with respect to
which such broker or nominee is not empowered to vote on a particular proposal
or proposals) will be considered part of the quorum. Under the Company's By-
laws, Directors will be elected and all other proposals, including the
ratification of the appointment of Ernst & Young LLP as the Company's
independent auditors, will be determined by a plurality of the votes cast at
the 1999 Annual Meeting. This means that abstentions, withheld votes, and
broker no votes will not affect the outcome. The approximate mailing date of
the Proxy Statement and Proxy to stockholders is March 24, 1999.
The Company will bear the cost of the solicitation. In addition to
solicitation by mail, the Company will request banks, brokers, and other
custodian nominees and fiduciaries to supply proxy material to the beneficial
owners of the Company's Common Stock of whom they have knowledge, and will
reimburse them for their expenses in so doing. Certain Directors, officers,
and other employees of the Company, not specifically employed for the purpose,
may solicit proxies, without additional remuneration, by personal interview,
mail, telephone, or telecopier. In addition, the Company has retained D. F.
King & Co., Inc. to assist in the solicitation for a fee of $2,000 plus
expenses.
1
1. ELECTION OF DIRECTORS
The Board of Directors is currently comprised of eight Directors. However,
the Board of Directors at its meeting on February 12, 1999, reduced the number
of directors to seven effective from and after the date of the 1999 Annual
Meeting. The Company's Amended and Restated Certificate of Incorporation and
By-Laws provide for all members of the Board of Directors to be elected
annually.
The seven nominees for election as Directors at the 1999 Annual Meeting are
listed below. If any nominee should become unavailable, an event the Board of
Directors does not anticipate, it is intended that such shares will be voted
for such substitute nominee as may be selected by the Board of Directors, or
the Board may reduce the number of Directors. All nominees are currently
serving as Directors and have consented to being named herein and to serve if
elected. Nominees elected as Directors will serve until the Annual Meeting of
Stockholders in 2000 and until their successors have been elected and have
qualified.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THESE SEVEN
NOMINEES FOR DIRECTORS.
NOMINEES FOR DIRECTORS
JAMES R. WILSON, age 58, has served as a Director of the Company since
October 1995; he was elected Chairman of the Board of Directors on October 13,
1997. He served as a Vice President of the Company from October 1995 to
October 1997. He has served as Chairman of the Board, President and Chief
Executive Officer of Cordant Technologies Inc. ("Cordant Technologies,"
formerly Thiokol Corporation) since October 1995 and President and Chief
Executive Officer from October 1993 to October 1995. He has served as a
Director of Cordant Technologies since October 1993. He joined Cordant
Technologies in 1989 as Vice President and Chief Financial Officer and became
Executive Vice President and Chief Financial Officer in 1992. Mr. Wilson is a
Director of Cooper Industries Inc., The BF Goodrich Co. and First Security
Corporation, and is a member of the Board of Trustees of the College of
Wooster. He holds a Bachelors degree from the College of Wooster and a Masters
of Business Administration from Harvard University.
RICHARD L. CORBIN, age 53, was elected a Director of the Company in October
1995. He served as Vice President and Treasurer of the Company from October
1995 to October 1997. Mr. Corbin has been Executive Vice President and Chief
Financial Officer of Cordant Technologies since November 1998, and Senior Vice
President and Chief Financial Officer of that company before that since May
1994. From 1991 to 1994 Mr. Corbin served as Chief Financial Officer and Vice
President of Administration of the Space Systems Division of General Dynamics
Corporation, a diversified defense contractor, which he joined in 1974. Mr.
Corbin is a director of OEA, Inc.
EDSEL D. DUNFORD, age 63, was elected a Director of the Company in January
1996. He served as President and Chief Operating Officer of TRW, Inc., a
manufacturer of automotive parts, spacecraft and information systems, from
1991 until his retirement in December 1994. He served as Executive Vice
President and General Manager of TRW Space and Defense Business from 1987 to
1991. Mr. Dunford is a Director of Cordant Technologies, Cooper Tire & Rubber
Company and National Steel Corporation and is a trustee at the University of
California at Los Angeles. Mr. Dunford holds a Bachelor of Science degree from
the University of Washington and a Masters of Engineering degree from the
University of California at Los Angeles.
JAMES R. MELLOR, age 68, was elected a Director of the Company on December
15, 1997. Mr. Mellor was Chairman of the Board of Directors and Chief
Executive Officer of General Dynamics Corporation from 1993 until June 1997,
when he retired. Mr. Mellor joined General Dynamics in 1981 as Executive Vice
President, Commercial Systems and Corporate Planning, became Executive Vice
President, Marine, Land Systems and International in 1986 and became President
and Chief Operating Officer in 1990. He was President of AM International from
1977 to 1981 and worked from 1958 to 1977 at Litton Industries in various
senior management positions, ultimately as Executive Vice President. He is a
Director of General Dynamics Corporation, Bergen Brunswig Corporation,
Computer Sciences Corporation, Pinkerton's Inc., and USEC Inc.
2
D. LARRY MOORE, age 62, was elected a Director of the Company on December
15, 1997. He was the President and Chief Operating Officer of Honeywell, Inc.,
an electronic automation and controls systems manufacturer, from April 1993
until his retirement in June 1997. Joining Honeywell in 1986, he served in
various executive positions including Executive Vice President and Chief
Operating Officer from 1990 to 1993. Dr. Moore is a Director of Cordant
Technologies, Geon Company, and Reynolds Metals Company. Dr. Moore holds a
Ph.D. in Economics from Arizona State University and a Bachelor of Science
degree and Masters in Business Administration from the University of Arizona.
DAVID L. SQUIER, age 53, has served as a Director of the Company since
December 1995. He was elected President and Chief Executive Officer of the
Company on October 13, 1997. He has been President and Chief Executive Officer
of Howmet Corporation, which manufactures investment castings primarily for
gas turbine engines, since 1992. Mr. Squier began his association with Howmet
Corporation, when he joined the Corporate Planning department of its
predecessor in December 1971. He was involved in manufacturing management from
1976 to 1978, became General Manager of Howmet Corporation's Wichita Falls
Casting facility in 1979, and was promoted to Vice President of Operations in
1983. He was elected a Director of Howmet Corporation in 1987.
JAMES D. WOODS, age 67, was elected a Director of the Company on December
15, 1997. He is Chairman of the Board of CONEMSCO, Inc. and Chairman Emeritus
of Baker Hughes Incorporated, a provider of products and services for the oil,
gas, wastewater and base metals industries. He was Chairman of the Board,
President and Chief Executive Officer of Baker Hughes Incorporated from 1989
to January 1997. He has worked his entire career at Baker Hughes Incorporated
and its affiliated and predecessor companies, including holding the position
of Corporate Vice President--Finance from 1972 to 1975, Executive Vice
President and Director from 1977 to 1985, President, Chief Operating Officer
and Director from 1985 to 1986 and President, Chief Executive Officer and
Director from 1987 to 1997 at Baker International and Baker Hughes
Incorporated. He is a Director of The Kroger Company, Varco International,
Inc. and Wynn's International, Inc.
See "Voting Securities and Principal Holders Thereof--Principal Holders" on
page 5 with respect to the ownership of shares of stock of the Company by
Cordant Technologies. Besides its ownership of a controlling interest in the
Company, Cordant Technologies' principal businesses are the manufacture of
solid rocket propellant and industrial and aerospace fastener systems.
On February 8, 1999, Cordant Technologies purchased all of the remaining
shares of the Company's Common Stock held by Carlyle-Blade Acquisition
Partners, L.P. ("Carlyle-Blade Partners"), an affiliate of The Carlyle Group.
Accordingly, William E. Conway, Jr., a present director of the Company serving
as the representative of Carlyle-Blade Partners, will not be standing for
reelection at the 1999 Annual Meeting.
BOARD MEETING ATTENDANCE AND COMPENSATION OF DIRECTORS
The Company's Board of Directors met four times during fiscal year 1998. All
incumbent Directors were present for 75 percent or more of these meetings.
Directors who are employees of the Company or its subsidiary Howmet
Corporation or of Cordant Technologies, the controlling stockholder of the
Company, receive no compensation for their service as Directors. James R.
Wilson and Richard L. Corbin are officers and employees of Cordant
Technologies, and David L. Squier is an officer and employee of Howmet
Corporation. William E. Conway, Jr., also receives no compensation for his
services as a Director of the Company because of his position as a Managing
Director of The Carlyle Group. Other Directors are paid an annual retainer of
$40,000, plus out-of-pocket expenses. James R. Mellor and James D. Woods serve
as independent Directors of the Company on committees of the Board of
Directors, and accordingly each receives an additional annual retainer of
$5,000. D. Larry Moore and Edsel D. Dunford also serve as Directors of Cordant
Technologies.
Prior to February 8, 1999, the Company had a management agreement with TCG
Holdings, L.L.C. ("TCG Holdings"), an affiliate of The Carlyle Group, pursuant
to which, since December 2, 1997, the Company paid
3
TCG Holdings $500,000 per year for certain management and financial advisory
services. This agreement was terminated on February 8, 1999 in connection with
the purchase by Cordant Technologies of the shares of the Company held by
Carlyle-Blade Partners (see "Arrangements Among the Company, Carlyle and
Cordant Technologies--TCG Management Agreement" on page 12).
The Company maintains a Deferred Compensation Plan for Directors, under
which each Director who is entitled to a Director's fee from the Company,
Messrs. Dunford, Mellor, Moore and Woods, may elect to have payment of part or
all of his Director's compensation deferred until such time as he ceases to be
a Director. With respect to all but $20,000 of each Director's compensation,
the Plan permits each Director to elect to defer his Director's fees into a
cash or phantom stock credit account. Amounts credited to the cash account are
credited with increments equivalent to interest at the prime rate, and amounts
credited to the phantom stock account are credited or debited with amounts
reflecting the change in the price of the Company's Common Stock and payment
of dividends, if any. All distributions of a Director's cash or phantom stock
account are made only in cash.
Also under the Company's Amended and Restated 1997 Stock Awards Plan, each
such Director receives the number of shares of restricted stock of the Company
as of each January 1, beginning January 1, 1998, which $20,000 would purchase
at the average of the high and low trading prices for the Company's Common
Stock on the New York Stock Exchange on the last trading day of the previous
year. The Director may not sell this stock until his service as a Director
terminates. Dividends, if any, on such stock are credited to the Director in
the form of phantom stock. The Board of Directors may from time to time change
the amount or proportion of his compensation that will thereafter be
distributed in the form of stock awards. Each of these Directors received
1,339 shares of restricted stock in 1998, and 1,288 shares in 1999.
COMMITTEES OF THE BOARD
There are four standing committees of the Company's Board of Directors:
Audit, Compensation, Independent Directors, and Executive. There is no
standing Nominating Committee.
The Audit Committee recommends to the Board the independent auditors to be
selected to audit the Company's annual financial statements and reviews the
fees charged for such audits and for any special assignments given the
auditors. The Audit Committee also reviews the annual audit and its scope,
including the independent auditors' comment letter and management's responses;
possible violations of the Company's business ethics and conflict of interest
policies; any major accounting changes made or contemplated; and the
effectiveness and efficiency of the Company's internal audit program. In
addition, the Audit Committee confirms that no restrictions have been imposed
by Company personnel on the independent auditors and that there were no
substantive differences with the Company's management. The present members of
the Audit Committee are Messrs. Mellor (Chairman) and Woods. The Audit
Committee met three times in 1998. Mr. Mellor attended all of the meetings;
Mr. Woods attended all but one of the meetings.
The Compensation Committee annually reviews and reports to the Board on the
investment performance of the fund managers of the Company's retirement plans
and the appointment of investment managers, trustees, actuaries, auditors and
other fiduciaries with respect to such plans and changes in their investment
guidelines or actuarial assumptions. It also approves and makes
recommendations to the Board with respect to the creation, termination and
amendment of retirement, executive compensation, and other benefit plans of
the Company and its subsidiaries. A subcommittee of the Compensation Committee
comprised of the two independent Directors (Messrs. Mellor and Woods)
administers the Company's stock option and awards plans. The Compensation
Committee, and that subcommittee as well, review and approve compensation
actions with respect to the Chief Executive Officer, other executive officers
and other key employees and administer the executive bonus programs. Members
of the Compensation Committee are D. Larry Moore (Chairman), James R. Mellor,
James R. Wilson, and James D. Woods. The Compensation Committee met three
times in 1998. All the members were in attendance at all meetings except Mr.
Woods, who attended two of the meetings. The Compensation Committee's Report
on Executive Compensation is set forth below, beginning on page 15.
4
The Committee of Independent Directors consists of two or more independent
Directors. The Committee reviews the performance of the Company and Cordant
Technologies under the Intercompany Services Agreement between them, the
charges made to the Company by Cordant Technologies pursuant to that
agreement, and any material amendments to that agreement, and reviews and
approves any other material agreements and transactions between the Company
and Cordant Technologies. Members of the Committee are James D. Woods
(Chairman) and James R. Mellor. The Committee met once in 1998, and both
members were in attendance.
The Executive Committee may exercise all of the powers and authority of the
Company's Board of Directors, except as follows: the Committee does not have
the power to amend the Company's By-Laws or Certificate of Incorporation;
authorize the issuance of stock; declare dividends; adopt an agreement of
merger or consolidation; adopt a certificate of ownership and merger under
Delaware law; or recommend to the Company's stockholders the sale, lease, or
exchange of all or substantially all of the property and assets of the
Company, a dissolution of the Company or a revocation of a dissolution; nor
does it have the power to act in lieu of the independent Directors in their
capacity as such on the foregoing committees. Members of this Committee are
James R. Wilson (Chairman), William E. Conway, Edsel D. Dunford, and David L.
Squier. The Committee did not meet in 1998.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
PRINCIPAL HOLDERS
The following table sets forth information as of March 16, 1999, with
respect to the shares of the Company's Common Stock, par value $.01, which are
held by persons known to the Company to be beneficial owners of more than five
percent of such stock.
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNERS OWNERSHIP(1) OF CLASS
- ------------------------------------- ------------ --------
Cordant Technologies Inc.(2).............................. 84,650,000 84.6
15 W. South Temple
Salt Lake City, Utah 84101-1532
- --------
(1) As provided by the stockholder.
(2) Cordant Technologies' investment in the Company is owned of record by
Cordant Technologies' wholly-owned subsidiary, Cordant Technologies
Holding Company.
5
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table shows the Company's Common Stock beneficially owned as
of March 16, 1999, by each Director and nominee for Director and each of the
executive officers named in the table on page 7, and the aggregate number of
such shares beneficially owned by all Directors and executive officers of the
Company as a group. Each named person and member of the group has sole voting
and investment power with respect to the shares shown, except for the
restricted shares held by four Directors as indicated below.
SHARES
BENEFICIALLY
NAME OWNED(5)
- ---- ------------
William E. Conway, Jr.(1).......................................... 105,000
Richard L. Corbin(2)............................................... 3,000
Edsel D. Dunford(3)................................................ 12,627
James R. Mellor(3)................................................. 5,627
D. Larry Moore(3).................................................. 5,627
David L. Squier.................................................... 160,000
James R. Wilson(2)................................................. 7,000
James D. Woods(3).................................................. 8,627
B. Dennis Albrechtsen.............................................. 20,000
Marklin Lasker..................................................... 0
John C. Ritter((4)................................................. 28,777
James R. Stanley................................................... 15,000
All Directors, nominees and executive officers as a group
(14 persons, including those named)............................... 379,565
- --------
(1) Mr. Conway disclaims beneficial ownership with respect to 5,000 of these
shares.
(2) Mr. Wilson is the Chairman of the Board, President and Chief Executive
Officer and Mr. Corbin is Executive Vice President and Chief Financial
Officer of Cordant Technologies, the controlling stockholder of the
Company.
(3) Includes 2,627 restricted shares of the Company's Common Stock for each
such Director (see "Election of Directors--Board Meeting Attendance and
Compensation of Directors" on page 3). Each holds the voting power of
these shares but may not transfer them until termination of his service as
a Director of the Company.
(4) Mr. Ritter disclaims beneficial ownership with respect to 777 of these
shares.
(5) None of the beneficial holdings of any individual in the table totals more
than one percent of the outstanding shares; the holdings of the group
represent less than 0.4 percent of the outstanding shares.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To the Company's knowledge based on review of copies of such reports
furnished to the Company and written representations, all Forms 3, 4, and 5
required by Section 16(a) of the Securities Exchange Act of 1934, as amended,
have been timely filed with respect to the most recently concluded fiscal
year, except for one late filing of a Form 4 by Mr. Albrechtsen in connection
with the purchase of 100 shares of Common Stock by his wife's account.
6
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Summary Compensation Table below sets forth the compensation for the
three fiscal years ended December 31, 1998, 1997 and 1996, both long-term and
short-term, for services in all capacities earned by those individuals who
were as of December 31, 1998, either (i) the Chief Executive Officer or (ii)
one of the other four most highly compensated executive officers of the
Company and its subsidiaries (the "Named Executive Officers"). All of these
officers are employees of the Company's subsidiary, Howmet Corporation, which
pays all of their compensation.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
---------------------- ---------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(2) OPTIONS/SARS(#) COMPENSATION(3)
- --------------------------- ---- -------- -------- --------------- ---------------
David L. Squier......... 1998 $390,000 $375,000 $44,844
President and 1997 370,000 388,500 1,000,000 42,668
Chief Executive Officer 1996 350,000 400,000 1,000,000(4) 34,621
200,000(5)
James R. Stanley........ 1998 251,000 160,000 20,650
Senior Vice President-- 1997 231,333 162,000 375,000 20,166
United States Opera-
tions 1996 215,000 172,000 375,000(4) 16,644
50,000(5)
John C. Ritter.......... 1998 230,670 150,000 18,758
Senior Vice President
and 1997 206,250 144,500 250,000 16,373
Chief Financial Officer 1996 157,603 126,082 250,000(4) 7,880
40,000(5)
Marklin Lasker.......... 1998 216,384 125,500 18,152
Senior Vice President-- 1997 211,112 146,600 200,000 16,944
International Opera-
tions 1996 200,004 132,603 250,000(4) 54,899
40,000(5)
B. Dennis Albrechtsen... 1998 186,000 103,750 15,500
Vice President--Manu-
facturing 1997 177,084 124,000 150,000 16,484
Howmet Corporation 1996 174,390 152,593 150,000(4) 13,267
- --------
(1) The column headed "Other Annual Compensation" is omitted because such
compensation included only perquisites in amounts not exceeding the
threshold for disclosure required by Regulation S-K under the federal
securities laws.
(2) Amounts are reported in the year during which they were accrued, although
they were paid in the following year.
(3) Howmet Corporation makes matching contributions for the first five percent
of each salaried employee's compensation paid into its savings plan.
Matching contributions made in the following amounts in 1998 are included
in this column: David L. Squier, $8,000; James R. Stanley, $7,143; John C.
Ritter, $7,799; Marklin Lasker, $7,143; and B. Dennis Albrechtsen, $8,000.
Howmet Corporation also maintains excess non-qualified employee benefit
plans that provide for payment of amounts in the form of taxable
compensation equal to the amounts that would have been otherwise paid to
employees under its savings plan absent the benefit limitations of the
Internal Revenue Code. Such payments made in the following amounts in 1998
are included in this column: David L. Squier, $30,325 James R. Stanley,
$13,507; John C. Ritter, $10,959; Marklin Lasker, $11,009; and B. Dennis
Albrechtsen, $7,500.
7
Certain key employees of Howmet Corporation were permitted to defer a
portion of their compensation earned in 1986-89 until retirement or
termination, with interest to be earned on such deferred compensation
generally at the seasoned corporate bond yield published by Moody's
Investors Service plus 3 percentage points. The above-market portion of this
interest in 1998 with respect to Mr. Squier's deferred compensation was
$6,519.
(4) 1996 SAR grants. Pursuant to the Amended SARs Program described below, the
maximum net per share value of the outstanding 1996 SAR grants was limited
in the case of these officers to $13.
(5) 1996 grants of options to purchase Cordant Technologies' Common Stock (see
"Cordant Technologies Stock Options" on page 11), adjusted for a two-for-
one split in Cordant Technologies stock paid as a stock dividend on March
13, 1998.
STOCK APPRECIATION RIGHTS; STOCK OPTIONS
In May 1996, the Company introduced a Stock Appreciation Rights ("SARs")
plan for key employees. Under the plan, SARs representing approximately 5
percent of the Company's equity value were issued to certain members of the
Company's management. The SARs, similar to phantom stock options, are
generally payable on the earliest to occur of the following: (i) March 31,
2001; (ii) a merger, sale of substantially all of the assets, or liquidation
of the Company or Howmet Corporation, the Company's wholly owned operating
subsidiary; (iii) the acquisition by an unaffiliated entity of more than 50%
of the Company's or Howmet Corporation's Common Stock; or (iv) a public
offering of more than 50% of the Company's or Howmet Corporation's Common
Stock. The SARs are valued based on appreciation in value of the Company's
Common Stock, as defined in the plan, from the date of adoption of the plan to
the earliest of the foregoing dates. The SARs vest in equal annual
installments over a five-year period, ending March 31, 2001, based upon the
passage of time and the operating performance of Howmet Corporation, with
acceleration in the event of one of the earlier triggering events referred to
above.
On December 2, 1997, in connection with the public offering of the Company's
Common Stock (the "Offering"), the Company amended its SARs plan (the "Amended
SARs Program") and granted stock options to participants in the plan,
including the Company's executive officers, pursuant to a newly adopted stock-
based awards plan (the "1997 Stock Awards Plan"). Pursuant to the Amended SARs
Program, the maximum per share value of the outstanding SARs has been limited
to the difference between the initial public offering price and the base price
per share (generally $2) of the SARs and, in exchange for accepting such
limitation, each holder of SARs was granted a non-qualified stock option (an
"NQSO") to purchase, at the initial public offering price of $15 per share, a
number of shares of Common Stock equal to the number of shares with respect to
which such employee has SARs. The NQSOs vest and become exercisable in 25%
increments on January 1 of each year beginning in 1999, until fully vested,
and will expire on the eighth anniversary of their granting. In addition,
pursuant to the Amended SARs Program, the Company offered holders of SARs the
opportunity to cash out 20% of their SARs (which represented the vested
portion of the SARs) at the initial public offering price. Employees making
this election, including Mr. Lasker, received their cash payment in January
1998, and received NQSOs representing 80% of the number of shares of Common
Stock with respect to which such employees had SARs immediately prior to
making such election.
8
STOCK OPTIONS EXERCISED DURING FISCAL YEAR 1998
The following table presents information regarding the exercise during 1998
of SARs or options to purchase shares of the Company's or Cordant
Technologies' Common Stock by the Named Executive Officers and information
regarding unexercised SARs and options to purchase shares of the Company's and
Cordant Technologies' Common Stock held by the Named Executive Officers on
December 31, 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR(1) AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT YEAR- AT YEAR-
END (#) END ($)(2)
------------- --------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
- ---- ------------- --------------
David L. Squier............... SARs 0/1,000,000 $0/$13,000,000
Company Options 0/1,000,000 0/1,125,000
Cordant Options 0/200,000(3) 0/3,950,000(4)
James R. Stanley.............. SARs 0/375,000 0/4,875,000
Company Options 0/375,000 0/421,875
Cordant Options 0/50,000(3) 0/987,500(4)
John C. Ritter................ SARs 0/250,000 0/3,250,000
Company Options 0/250,000 0/281,250
Cordant Options 0/40,000(3) 0/681,250(4)
Marklin Lasker................ SARs 0/200,000 0/2,600,000
Company Options 0/200,000 0/225,000
Cordant Options 0/40,000(3) 0/790,000(4)
B. Dennis Albrechtsen......... SARs 0/150,000 0/1,950,000
Company Options 0/150,000 0/168,750
- --------
(1) None of the Named Executive Officers exercised any stock options or SARs
in 1998.
(2) Values of Company stock options and SARs are calculated based on the
closing New York Stock Exchange price of the Company's Common Stock as of
December 31, 1998 ($16.125), minus the option exercise price ($15.00) or
the SAR base price ($2.00 for the Named Executive Officers), subject to a
maximum value for the SARs of $15 per share minus the base price. The
Company stock options vest and become exercisable in 25% increments on
January 1 of each year beginning in 1999. Value of Cordant Technologies'
options is calculated based on the closing New York Stock Exchange price
of Cordant Technologies' Common Stock as of December 31, 1998 ($37.50),
minus the option exercise price ($17.75 except for John Ritter
($20.46875)), after giving effect to a two-for-one stock split in Cordant
Technologies stock paid as a stock dividend on March 13, 1998. For
information regarding vesting and exercise of the Cordant Technologies
options, see "Cordant Technologies Stock Options" on page 11.
(3) Adjusted for the two-for-one stock split in Cordant Technologies stock
paid on March 13, 1998.
(4) See "Cordant Technologies Stock Options" on page 11 for a summary of the
terms of these options and the Revised Plan of Cordant Technologies with
respect to these options.
9
RETIREMENT PLANS
Howmet Corporation, the Company's wholly owned operating subsidiary,
maintains defined benefit pension plans for substantially all of its
employees. Effective January 2, 1996, Howmet adopted the Howmet Salaried
Employees Pension Plan (the "SEPP"), a defined benefit plan that covers most
salaried employees, and provides for continuing benefits that had been
provided under another defined benefit plan (the "Pechiney Plan") prior to the
acquisition of Howmet's parent company, Pechiney Corporation (now Howmet
Holdings Corporation) by Blade Acquisition Corp. (now the Company) from
Pechiney International, a French company, on December 13, 1995 (the
"Acquisition"). The following table shows the estimated annual pension
benefits for salaried employees, including the Named Executive Officers,
payable upon retirement (including amounts attributable to the SEPP, the
Excess Benefit Plans and the Supplemental Executive Retirement Plans, as
described below, and including any benefit payable under the Pechiney Plan)
for the specified compensation and years of service.
PENSION PLAN TABLE
YEARS OF SERVICE
-----------------------------------------------------
REMUNERATION 15 20 25 30 35 40
- ------------ -------- -------- -------- -------- -------- --------
$ 200,000................ $ 43,164 $ 57,552 $ 71,940 $ 86,328 $100,716 $111,716
400,000................ 88,164 117,552 146,940 176,328 205,716 227,716
600,000................ 133,164 177,552 221,940 266,328 310,716 343,716
800,000................ 178,164 237,552 296,940 356,328 415,715 459,716
1,000,000................ 223,164 297,552 371,940 446,328 520,716 595,104
As of December 31, 1998, the Named Executive Officers had the following
credited service for determining pension benefits: David L. Squier, 27 years;
James R. Stanley, 6 years; John C. Ritter, 2 years; Marklin F. Lasker, 6
years; B. Dennis Albrechtsen, 24 years.
All the Named Executive Officers participate in the SEPP. For employees who
retired before 1997, pension benefits were based on the average earnings for
the highest five consecutive years of their final ten years of service.
Compensation included in the final average earnings for the pension benefit
computation included base annual salary and annual bonuses but excluded
payments for all other compensation. The plan in effect prior to 1997 provided
an increased benefit for employees with final average pay above one-half of
the social security wage base. The SEPP benefit prior to 1997 took into
account the service and compensation earned prior to the Acquisition and was
reduced by any benefit payable under the Pechiney Plan.
Effective January 1, 1997, the SEPP's design was changed to that of a cash
balance plan. The cash balance plan maintains hypothetical individual accounts
for participants. The annual amount credited to a participant's account
consists of the sum of age-based compensation credits (7 percent for employees
age 50 or older) and interest credits, with an additional age-based annual
credit for the years 1997-2006 for employees age 45 years and older on January
1, 1997 (being an additional 7 percent for employees age 50 or older on that
date). The interest credit rate, set once annually, is equal to the one year
U.S. Treasury constant maturities rate plus one percent. Benefits earned
before 1997 under the final average earnings formula mentioned above have been
converted to opening account balances.
SEPP benefits are payable at retirement or termination, at the participant's
election. Benefits may be payable as a single life annuity, a joint and
survivor annuity, a ten year certain option, or a lump sum.
Because the SEPP is subject to the benefit and compensation limits under the
Internal Revenue Code (the "Code"), the Company has established two unfunded
Excess Benefit Plans that provide for payment of amounts that would have been
paid to employees under the pension formula absent the benefit and
compensation limits of the Code.
10
The Company also maintains several Supplemental Executive Retirement Plans
("SERPs") designed to provide unfunded supplemental retirement benefits to
certain employees of the Company. The first is designed to provide the
selected employees a benefit at retirement equal to that which they would have
earned under the SEPP and the Excess Benefit Plans, had the SEPP not been
converted to a cash balance plan. Benefits under this SERP are offset by
benefits received under the SEPP and the Excess Benefit Plans. Currently,
Messrs. Squier, Stanley, Lasker, and Albrechtsen participate in this SERP.
The second SERP is designed to provide each selected employee a benefit at
retirement equal to the excess of 50% of the participant's average base pay
during his final three years of employment over amounts the participant
receives from certain other plans and social security. Currently, Mr. Squier
is the only employee participating in this SERP (see "Employment Agreements"
below).
CORDANT TECHNOLOGIES STOCK OPTIONS
Since December 31, 1995, Cordant Technologies has granted to certain Howmet
employees, including certain of the Named Executive Officers, 460,000
contingent stock options for Cordant Technologies Common Stock, of which
360,000 are still outstanding (adjusted for the two-for-one stock split in
Cordant Technologies stock on March 13, 1998) (the "Cordant Technologies Stock
Options"). The options granted to the Named Executive Officers have exercise
prices of either $17.75 or $20.46875 per option, the market price of Cordant
Technologies' stock on the date of the grant and adjusted to give effect to
the two-for-one stock split in Cordant Technologies stock. The options will
vest only if Cordant Technologies acquires 100% of the Company prior to
December 13, 2001 unless otherwise modified by the Compensation Committee of
the Board of Directors of Cordant Technologies. The options vest, and are
exercisable, 50% on the date of such acquisition and 25% each year thereafter.
The options expire not later than ten years after the date of the grant.
Cordant Technologies has informed holders of the Cordant Technologies Stock
Options of its intention to adopt a plan that would allow such holders to
benefit from such options even if Cordant Technologies does not acquire 100%
of the Company prior to December 13, 2001 (the "Revised Plan"). Under the
Revised Plan, in the event that Cordant Technologies does not acquire 100% of
the Company prior to December 13, 2001, then, with respect to each holder, the
difference as of December 13, 2001 between the aggregate market value of all
of the shares of Cordant Technologies Common Stock represented by such
holder's Cordant Technologies Stock Options and the aggregate exercise price
of all such options shall become vested and contributed to a deferred payment
plan, pursuant to which 25% of the vested amount would be paid out
immediately, if the participant so elected prior to vesting, and the balance
of which would be paid out over a period (not less than five years) elected by
the participant. Deferred balances would accrue investment earnings equal to
those of Cordant Technologies' stock over such period or, at the participant's
election, in part those of Cordant Technologies' stock over such period and in
part the interest on five year U.S. Treasury notes. Pursuant to the Revised
Plan, a holder of Cordant Technologies Stock Options who retires before
December 13, 2001 would receive a pro rata portion of the benefits described
in the foregoing sentences based on the portion of time during the period from
December 13, 1995 to December 13, 2001 in which such holder was employed by
the Company.
Whether the executives vest in the Cordant Technologies Stock Options or
vest in the Revised Plan, the Company would record compensation expense for
one but not both plans. Accordingly, the Company is recording compensation
expense over the six year vesting period of the Revised Plan ending December
13, 2001. In 1998 and 1997, $6.6 million and $2.9 million of compensation
expense was charged against income. There was no comparable expense recorded
prior to 1997.
EMPLOYMENT AGREEMENTS
In October 1995 Howmet Corporation entered into employment agreements (the
"Employment Agreements") with thirteen management employees, including Messrs.
Squier, Stanley and Lasker. The Employment Agreements set base salary levels
and provide a specified percentage (generally from 30-60%) of base salary as a
target annual bonus amount. The Employment Agreements also generally provide
each such Named Executive Officer (the "Executive") with the use of a Howmet-
owned automobile and participation in
11
benefit plans and programs available to Howmet management employees generally.
In the event of the Executive's death or disability, the Employment Agreements
generally provide for the payment of prorated annual bonus and long-term
incentive plan awards, but not other severance amounts.
Mr. Squier's Employment Agreement also provides that in the event his
employment is terminated by Howmet other than for "cause" or by him with "good
reason" (each as defined therein) prior to his 62nd birthday, he will be
entitled to (i) the amount of his base pay and target bonus for 36 months,
(ii) a prorated portion of the annual bonus and any long-term incentive awards
that would have been payable in the year of termination, (iii) company-paid
outplacement services, (iv) transfer to him of the company-owned car he was
using, (v) accelerated vesting under certain of Howmet's retirement plans, and
(vi) the right to continue to participate in Howmet's medical benefits plan
for up to two years at the rates in effect for active employees, and the right
to be treated as a retiree for purposes of continued coverage thereafter.
These severance benefits are conditioned on his agreement not to compete with
Howmet for a period of twelve months following his termination of employment.
Mr. Squier's agreement also provides that he is entitled to a supplemental
annual pension payment equal to the excess of 50% of his average base pay
during his final three years of employment over the amounts provided to him
under certain of Howmet's retirement plans and under social security.
In February 1996 Howmet Corporation entered into an employment agreement
with Mr. Ritter that sets a base salary and an annual bonus targeted at 40% of
that amount. Half of the bonus is based on achievement of personal objectives
and half is based on Howmet Corporation's performance. The agreement also
provides for Mr. Ritter to receive stock appreciation rights from the Company,
stock options in Cordant Technologies stock and the opportunity to purchase an
interest in Howmet. Mr. Ritter is also entitled to use of a company car.
Mr. Albrechtsen has an employment agreement that sets a base salary and 35%
of that amount as an annual bonus target. It is generally effective until his
62nd birthday (in 2008). In the event that Mr. Albrechtsen's employment is
terminated by Howmet Corporation without "cause" or by Mr. Albrechtsen with
"good reason" (each as defined therein), Mr. Albrechtsen is generally entitled
to the amount of his base salary and annual bonus for a period of 24 months;
and if such termination occurs after his 55th birthday, he is entitled to such
amounts for a period of 36 months.
ARRANGEMENTS AMONG THE COMPANY, CARLYLE AND CORDANT TECHNOLOGIES
(COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION)
TCG MANAGEMENT AGREEMENT
Prior to February 8, 1999, Howmet was a party to a management agreement with
TCG Holdings, L.L.C. ("TCG Holdings"), an affiliate of The Carlyle Group, for
the provision of certain management and financial advisory services to be
provided to the Company and its subsidiaries. Pursuant to this management
agreement, TCG Holdings received an annual management fee of $500,000. On
February 8, 1999 this agreement was terminated in connection with the purchase
by Cordant Technologies of Carlyle-Blade Partners' remaining shares in the
Company. William E. Conway, Jr., a Director of the Company, who is not
standing for re-election, is a Managing Director of The Carlyle Group.
SERVICES AGREEMENT
To control administrative costs and avoid duplication of administrative
functions, the Company and Cordant Technologies, upon consummation of the
public offering of the Company's stock on December 2, 1997 (the "Offering"),
entered into an intercompany services agreement (the "Services Agreement")
with respect to the services to be provided by Cordant Technologies to the
Company. The Services Agreement provides that Cordant Technologies will
furnish to the Company administrative services for which the Company will
generally pay Cordant Technologies its costs plus a fee, both amounts to be
determined by Cordant Technologies from time to time on a basis consistent
with its past practices. These intercompany services will be phased in over
time, and their cost to the Company will increase as more services are
provided. These costs, when combined with the
12
elimination of certain management fees previously incurred and anticipated
cost savings, are not expected to result in material incremental costs to the
Company. The Company paid Cordant Technologies $1.5 million, to cover both its
costs and fee, for the twelve month period beginning December 2, 1997.
The services provided by Cordant Technologies include but are not limited to
tax; control and audit; risk management and insurance advice and purchasing;
health, safety and environmental; treasury and cash management; human
resources and employee relations; employee benefit plans; in-house legal;
investor relations and public affairs; and executive department services.
The services also include or involve some services provided by third
parties, such as insurance brokers and carriers, actuaries and financial
printers. Generally, such third party services will be billed directly to the
Company with no "mark up" by Cordant Technologies. However, the cost of
Cordant Technologies' arranging for third parties' services will be billed to
the Company along with a fee, as described above.
As set forth under "Election of Directors--Nominees for Directors," on pages
2-3, four Directors of the Company are officers and/or directors of Cordant
Technologies.
SHAREHOLDERS AGREEMENT
Upon consummation of the Offering, the Company, Cordant Technologies and
Carlyle-Blade Acquisition Partners, L.P. ("Carlyle-Blade Partners") entered
into a shareholders agreement providing for Carlyle-Blade Partners'
representation on the Company's Board of Directors and rights in favor of
Cordant Technologies to acquire Carlyle-Blade Partners' remaining shares in
the Company. This agreement was terminated on February 8, 1999 in connection
with the purchase by Cordant Technologies of Carlyle-Blade Partners' remaining
shares in the Company.
CORPORATE AGREEMENT
Upon consummation of the Offering, the Company and Cordant Technologies
entered into a corporate agreement (the "Corporate Agreement"). Under the
Corporate Agreement, the Company granted preemptive rights to Cordant
Technologies, which give Cordant Technologies the right, upon any issuance or
sale by the Company of its shares of capital stock, to acquire a number of
such shares sufficient to maintain Cordant Technologies' percentage ownership
of the Company's outstanding voting power and equity immediately prior to such
issuance or sale. The purchase of shares of Common Stock pursuant to the
exercise of a preemptive right will be at market price, or, in the case of a
public offering by the Company for cash, at a price per share equal to the net
proceeds per share to the Company in such offering. The preemptive rights
expire in the event Cordant Technologies reduces its ownership interest to
less than 20%.
In addition, under the Corporate Agreement, Cordant Technologies agreed that
without the prior consent of the Carlyle-Blade Partners representative on the
Company's Board of Directors and a majority (but not less than two) of the
non-employee Directors of the Company who are not Directors or employees of
Cordant Technologies or The Carlyle Group ("Independent Directors"), neither
Cordant Technologies nor any of its affiliates may acquire publicly held
shares if such acquisition would reduce the number of publicly held shares to
less than 14% of the total number of shares outstanding, other than (x)
pursuant to a tender offer to acquire all of the outstanding shares of Common
Stock of the Company not then beneficially owned by Cordant Technologies or
(y) pursuant to a merger or other business combination in which holders of all
outstanding publicly held shares are treated equally. The foregoing provision
of the Corporate Agreement may not be amended or waived by the Company without
the consent of the Carlyle-Blade Partners representative on the Company's
Board of Directors and a majority (but not less than two) of the Independent
Directors. Following the 1999 Annual Meeting, however, Carlyle-Blade Partners
will no longer have a representative on the Company's Board of Directors.
13
REGISTRATION RIGHTS AGREEMENT
Upon the closing of the Offering, the Company and Carlyle-Blade Partners
also entered into a Registration Rights Agreement pursuant to which the
Company granted certain rights to Carlyle-Blade Partners with respect to the
registration under the Securities Act of 1933, as amended ("Securities Act"),
of the shares of Common Stock of the Company owned by Carlyle-Blade Partners
after the closing of the Offering. This agreement was likewise terminated on
February 8, 1999 in connection with the purchase by Cordant Technologies of
Carlyle-Blade Partners' remaining shares in the Company.
PREFERRED STOCK REDEMPTION
On February 17, 1999, the Company redeemed all of the outstanding shares of
its 9.0% Series A Senior Cumulative Preferred Stock, all of which was held by
Cordant Technologies, for an aggregate redemption price of $66,379,991.
CERTAIN CORDANT OFFICERS AND DIRECTORS
Cordant Technologies corporate officers may be elected by the Company's
Board of Directors as officers or assistant officers of the Company. Cordant
Technologies corporate officers may also serve as officers or assistant
officers of the Company's operating subsidiary Howmet Corporation and other
wholly-owned subsidiaries.
James R. Wilson, the Chairman, President and Chief Executive Officer of
Cordant Technologies, and D. Larry Moore, a director of Cordant Technologies,
serve on the Company's Compensation Committee.
14
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
COMPENSATION POLICY
The Compensation Policy adopted by the Compensation Committee of the Board
of Directors (the "Committee") is designed to provide a competitive
compensation program to attract, retain, motivate, and reward talented
individuals as executive officers and as key employees of the Company. The
Committee's policies are implemented by the compensation and benefits staff
under the direction of the Vice President--Human Resources. The components of
the program include base annual salary, short-term cash incentives and long-
term stock based incentives, employee benefits, and perquisites. Compensation
grades, ranges, and midpoints adopted by the Committee are set based upon
nationally recognized compensation surveys; namely, (i) the Hewitt Management
Compensation Survey 777, consisting of 316 companies, and (ii) Towers Perrin
Compensation Data Bank, consisting of 639 companies, including several
aerospace companies. The Committee also considers the compensation paid by
other major industrial companies. Short and long-term incentives are designed
to provide above or below average total compensation, depending on whether
performance of the Company or an operating unit exceeds, or falls below,
targets set by the Committee. Annual incentives are related to the Company and
operating unit performance and individual achievement of qualitative
individual and strategic goals. Long-term incentives are designed to balance
management focus between short and long-term goals and to provide capital
accumulation linked to corporate performance. Stock based incentives are
designed to align with the results achieved for stockholders in share price
performance. The total compensation program is designed to reflect the overall
level of the Company's or the operating unit's financial performance,
achievement of strategic goals, and the Company's stock performance. Total
compensation will vary from year to year, depending on the actual performance
achieved against the predetermined goals and the Company's share price
reflected in stock based compensation awards.
The principal elements of the compensation program for the executive
officers, including the Chief Executive Officer, and other key employees are
as follows:
BASE ANNUAL SALARY
The base salaries of the executive officers and other key employees are
determined in the same manner as the salaries of all exempt salaried
employees. Howmet's goal is that executive officers, and employees in general,
be paid salaries which are commensurate with their qualifications, duties and
responsibilities and which are competitive with like positions of comparable
companies.
ANNUAL INCENTIVE COMPENSATION PLAN
The Annual Incentive Compensation Plan provides annual cash incentive
opportunities to all exempt employees, including executive officers. The
overall bonus pool for 1998 was set by the Board of Directors early in the
fiscal year in terms of corporate-wide cash flow and earnings per share
targets. Actual results for 1998 exceeded these targets. Each bonus award was
then based upon the Company's or the respective operating unit's achieving
predetermined cash flow, earnings and/or operating performance goals and the
attainment of individual qualitative strategic objectives relative to the
participant's position and responsibilities with the Company. For 1998 the
Chief Executive Officer set the cash flow, earnings and strategic goals for
the corporate staff and operating unit participants effective as of the
beginning of the fiscal year. The Annual Incentive Compensation Plan is
designed to provide above average total compensation when performance of the
Company or an operating unit exceeds the pre-determined targets, or below
average when these targets are missed. The Plan permits discretion in
adjusting incentives for Plan participants.
All executive officers, including the Chief Executive Officer, earned
bonuses from the Plan for 1998.
The Plan also permits employees, including the executive officers, to
receive discretionary bonus payments made in recognition of outstanding
achievements or accomplishments.
15
LONG-TERM INCENTIVE PLANS
The Company's present long-term incentive plans are its stock appreciation
rights ("SARs") program (the "SARs Program") for key employees and stock
options awarded under its Amended and Restated 1997 Stock Awards Plan. The
Committee believes that providing stock based compensation awards to executive
officers and other key employees who are in a position to impact the future
performance of the Company is an integral part of the compensation package.
Effective with the Offering, the SARs Program was amended to include a maximum
limit to the per share value of the outstanding SARs, which is the difference
between the Offering price ($15) and the base price per share of the SARs
(generally $2). In exchange for accepting such limitation, each holder of SARs
was granted a non-qualified stock option to purchase, at the Offering price, a
number of shares of Common Stock equal to the number of shares with respect to
which such employee has SARs. The Amended and Restated 1997 Stock Awards Plan
provides for the grant of stock options, SARs and restricted stock. No further
awards are expected to be made under the amended SARs Program. The
stockholders approved the Amended and Restated 1997 Stock Awards Plan at the
1998 Annual Meeting of Stockholders held on May 12, 1998.
PERQUISITES
The Committee reviews annually the perquisites available to the executive
officers, including the Chief Executive Officer, to determine if they are
competitive and reflect the usual and customary industry practices based on
compensation survey data.
DETERMINATION OF THE CHIEF EXECUTIVE OFFICER'S COMPENSATION
The 1998 compensation for David L. Squier, President and Chief Executive
Officer, consisted of a base annual salary, an annual bonus, employee benefits
provided to salaried employees as a group, and perquisites that are usual and
customary for the position. He previously received SARs and stock options to
purchase Common Stock of the Company and Cordant Technologies.
For 1998 the Company's stockholders, before the Offering, determined Mr.
Squier's salary grade, salary range, and midpoint based on his position as
President and Chief Executive Officer, using the salary data described above.
The size of the Company and the markets the Company serves were considered by
those stockholders in setting Mr. Squier's salary level. Mr. Squier's base
annual salary was correspondingly increased from $370,000 to $390,000
effective January 1, 1998, as a result of that review.
For 1998 Mr. Squier received an annual bonus award of $375,000 as approved
by the Compensation Committee. The payment reflects cash flow and earnings per
share results exceeding their targets.
Mr. Squier's compensation and the compensation of the other Named Executive
Officers in the Summary Compensation Table reflect the financial performance
of the Company and its operating units. In 1998 the Company's sales increased
12 percent, from $1,205 million, after adjustment for the sale of the
Company's refurbishment business, to $1,351million; and net income applicable
to common stock increased 57 percent, from $66.9 million, before extraordinary
item, to $104.8 million.
1993 TAX ACT COMPENSATION LIMITS
Section 162(m) of the Internal Revenue Code, adopted under the 1993 tax law
changes, restricts the tax deductibility for executive compensation exceeding
$1 million which is not based on the attainment of predetermined performance
goals. The Company's stock appreciation rights and stock options granted under
the Company's Amended and Restated 1997 Stock Awards Plan have been designed,
approved and disclosed in a manner such that the Company believes that there
will be no such non-deductible compensation with respect to 1998 or 1999.
16
In general, the Compensation Committee intends to design the Company's
compensation programs to conform with Section 162(m) so that the total
compensation paid to any employee will not exceed $1 million in any one year,
except for compensation payments in excess of $1 million which qualify as
performance based or which are exempt for other reasons. However, the
Committee may approve payment of compensation in excess of $1 million that is
not tax deductible if it believes sound management of the Company so requires.
COMPENSATION COMMITTEE
D. Larry Moore, Chairman
James R. Mellor
James R. Wilson
James D. Woods
The report of the Compensation Committee and the following stock performance
graph are not deemed to be "soliciting material" or to be "filed" with the
Securities and Exchange Commission or subject to Regulation 14A or 14C or to
the liabilities of Section 18 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), except to the extent the Company specifically
requests that such information be treated as soliciting material or
specifically incorporates it by reference into any filing under the Securities
Act or the Exchange Act.
17
PERFORMANCE GRAPH
The Company's Common Stock began public trading on November 26, 1997.
Therefore, it is not possible to provide performance information for the last
five years. The following graph presents a comparison of the cumulative
stockholder return on the Common Stock of the Company for the period beginning
November 26, 1997 and ending December 31, 1998 as measured against (i) the
Standard & Poor's 500 Stock Index, and (ii) the Standard & Poor's 500
Aerospace and Defense Index.
The returns shown assume that $100 was invested at the closing price on
November 26, 1997 in the Company's Common Stock and the stocks in the two
indices. Although the returns shown are calculated in a manner that assumes in
each case that all dividends paid during the period shown in the graph were
reinvested, no dividends were paid on the Company's Common Stock. Stockholders
are cautioned against drawing conclusions from the data contained in this
graph, as past performance is no guarantee of future results.
COMPARISON OF THE CUMULATIVE TOTAL RETURN
[The following Table is also represented by a Graph]
11/26/97 12/31/97 12/31/98
-------- -------- --------
Howmet International................................. 100.00 99.59 107.05
Standard & Poor's 500 Index.......................... 100.00 102.09 131.44
Standard & Poor's 500 Aerospace/Defense Index........ 100.00 97.47 74.72
18
2. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
Upon recommendation by the Audit Committee, the Board of Directors has
appointed Ernst & Young LLP ("Ernst & Young") as its independent auditors for
the fiscal year ending December 31, 1999. At the Board's direction, the
appointment of Ernst & Young is being presented to the stockholders for
ratification at the 1999 Annual Meeting. While ratification is not required by
law or the Company's Certificate of Incorporation or By-Laws, the Board
believes that such ratification is desirable. In the event this appointment is
not ratified by the stockholders, the Board will consider that fact when it
appoints independent auditors for the next fiscal year.
Ernst & Young was the Company's independent auditors for fiscal year 1998
and for all prior years since fiscal year 1995. Audit services provided to the
Company by Ernst & Young during fiscal year 1998 consisted of examination of
the financial statements of the Company and its subsidiaries for that year and
the preparation of various related reports, as well as services relating to
filings with the Securities and Exchange Commission; pension, savings, and
welfare plan audits; and various tax services.
Representatives of Ernst & Young are expected to be present at the 1999
Annual Meeting with the opportunity to make a statement if they so desire and
to be available to respond to appropriate questions relating to that firm's
examination of the Company's financial statements for fiscal year 1998.
Ernst & Young is also the independent auditors of Cordant Technologies, the
controlling stockholder of the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO RATIFY THE
APPOINTMENT OF ERNST & YOUNG LLP.
DISCRETIONARY VOTING OF PROXIES ON OTHER MATTERS
Management does not now intend to bring before the 1999 Annual Meeting any
matters other than those disclosed in the notice of the meeting. Should any
other matter requiring a vote of stockholders be properly brought before the
meeting, the Proxies in the enclosed form confer upon the person or persons
entitled to vote the shares represented by such Proxies discretionary
authority to vote such shares in respect of any such matter in accordance with
their best judgment.
STOCKHOLDER PROPOSALS FOR ANNUAL MEETING IN YEAR 2000
Stockholder proposals intended for inclusion in the Company's Proxy
Statement for the Annual Meeting of Stockholders in the year 2000 must be
received by the Secretary of the Company at its principal executive office set
forth below no later than November 24, 1999.
The Company's By-laws provide that stockholders desiring to nominate a
director or bring any other business before the stockholders at an annual
meeting must notify the Secretary of the Company thereof in writing during the
period 90 to 60 days before the first anniversary of the date of the preceding
year's annual meeting (or, if the date of the annual meeting is more than 30
days before or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered during the period 90 to 60 days
before such annual meeting or 10 days following the day on which public
announcement of the date of such meeting is first made by the Company). In the
event that the number of directors to be elected is increased and there is no
public announcement by the Company naming all of the nominees for director or
specifying the size of the increased Board of Directors at least 70 days
before the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by the Company's By-laws will be timely, but
only with respect to the nominees for any new positions created by such
increase, if such notice is delivered to the Secretary of the Company no later
than 10 days following the day on which such public announcement is first made
by the Company. These stockholder notices must set forth certain information
specified in the Company's By-laws.
19
1998 ANNUAL REPORT ON FORM 10-K AVAILABLE
A COPY OF THE COMPANY'S 1998 SUMMARY ANNUAL REPORT TO STOCKHOLDERS IS
ENCLOSED WITH THIS PROXY STATEMENT. THE COMPANY'S AUDITED FINANCIAL STATEMENTS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 AND RELATED INFORMATION ARE SET
FORTH IN EXHIBIT A TO THIS PROXY STATEMENT. THE COMPANY WILL PROVIDE, WITHOUT
CHARGE, UPON WRITTEN REQUEST FROM ANY PERSON SOLICITED HEREBY, A COPY OF THE
HOWMET INTERNATIONAL INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR 1998
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. REQUESTS SHOULD BE DIRECTED
TO THE VICE PRESIDENT--GENERAL COUNSEL, HOWMET INTERNATIONAL INC.,
475 STEAMBOAT ROAD, GREENWICH, CONNECTICUT 06830.
By Order of the Board of Directors,
Roland A. Paul
Vice President and Secretary
Greenwich, Connecticut
March 24, 1999
20
EXHIBIT A
FINANCIAL INFORMATION
Management's Report on Financial Statements F-2
Report of Ernst & Young LLP, Independent Auditors F-3
Consolidated Statements of Income F-4
Consolidated Balance Sheets F-5
Consolidated Statements of Cash Flows F-6
Consolidated Statements of Stockholders' Equity and Redeemable Preferred
Stock F-7
Notes to Consolidated Financial Statements F-8
Management's Discussion and Analysis of Financial Condition and Results
of Operations F-27
Selected Financial Data F-36
F-1
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
Management has prepared, and is responsible for, the consolidated financial
statements and all related financial information contained in this report to
stockholders and Board of Directors included in the Howmet International Inc.
1999 Notice of Annual Meeting and Proxy Statement. The consolidated financial
statements, which include amounts based on estimates and judgments, were
prepared in accordance with generally accepted accounting principles
appropriate in the circumstances and applied on a consistent basis. Other
financial information in this proxy statement is consistent with that in the
consolidated financial statements.
Management maintains an accounting system and related internal controls which
it believes provide reasonable assurance, at appropriate cost, that
transactions are properly executed and recorded, that assets are safeguarded,
and that accountability for assets is maintained. An environment that provides
an appropriate level of control is maintained and monitored and includes
examinations by an internal audit staff.
Management recognizes its responsibilities for conducting the Company's
affairs in an ethical and socially responsible manner. The Company has written
standards of business conduct, including its business code of ethics which
emphasize the importance of personal and corporate conduct, that demand
compliance with federal and state laws governing the Company. The importance
of ethical behavior is communicated to all employees.
The Audit Committee of the Board of Directors is composed of two outside
directors. This Committee meets periodically and also meets separately with
representatives of the independent auditors, Company officers, and the
internal auditors to review their activities.
The consolidated financial statements have been audited by Ernst & Young LLP,
independent auditors, whose report follows.
/s/ John C. Ritter
John C. Ritter
Senior Vice President and
Chief Financial Officer
F-2
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and
Stockholders
Howmet International Inc.
We have audited the accompanying consolidated balance sheets of Howmet
International Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of income, common stockholders' equity and redeemable
preferred stock, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Howmet
International Inc. as of December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Stamford, Connecticut
January 27, 1999, except for
Notes 1 and 12, as to which the
date is February 17, 1999
F-3
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
----------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 1998 1997 1996
- --------------------------------------------------------------------------------
Net sales $1,350.6 $1,258.2 $1,106.8
Operating expenses:
Cost of sales 1,039.1 963.8 891.1
Selling, general and administrative expense 101.6 122.3 93.4
Research and development expense 20.2 17.6 20.3
- --------------------------------------------------------------------------------
Total operating expenses 1,160.9 1,103.7 1,004.8
Income from operations 189.7 154.5 102.0
Interest income (expense) from Restricted Trust
and Pechiney Notes, net (Note 8) - - -
Interest income 1.6 1.2 1.7
Interest expense (12.7) (31.0) (41.9)
Other, net (3.4) (6.4) (5.9)
- --------------------------------------------------------------------------------
Income before income taxes and extraordinary item 175.2 118.3 55.9
Income taxes (64.8) (46.3) (30.3)
- --------------------------------------------------------------------------------
Income before extraordinary item 110.4 72.0 25.6
Extraordinary item-loss on early retirement of
debt, net of income taxes of $7.9 - (12.3) -
- --------------------------------------------------------------------------------
Net income 110.4 59.7 25.6
Dividends on redeemable preferred stock (5.6) (5.1) (4.6)
- --------------------------------------------------------------------------------
Net income applicable to common stock $ 104.8 $ 54.6 $ 21.0
================================================================================
Per common share amounts, basic and diluted:
Income before extraordinary item $ 1.05 $ .67 $ .21
Extraordinary item - (.12) -
- --------------------------------------------------------------------------------
Net income $ 1.05 $ .55 $ .21
================================================================================
See notes to consolidated financial statements.
F-4
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------
(IN MILLIONS, EXCEPT SHARE DATA) 1998 1997
- -------------------------------------------------------------------------------
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 37.6 $ 45.4
Accounts receivable (less allowance of $5.2 and $4.4) 84.1 78.7
Inventories 161.9 155.5
Retained receivables 32.0 20.2
Deferred income taxes 16.2 16.3
Other current assets 3.0 3.9
Restricted Trust (a) 716.4 -
- -------------------------------------------------------------------------------
Total Current Assets 1,051.2 320.0
Property, plant and equipment, net 334.9 275.5
Goodwill, net 221.1 226.5
Patents and technology and other intangible assets, net 115.1 118.4
Other noncurrent assets 78.3 80.2
Restricted Trust (a) - 716.4
- -------------------------------------------------------------------------------
Total Assets $1,800.6 $1,737.0
===============================================================================
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY
- ---------------------------------------------------------
Current Liabilities:
Accounts payable $ 101.5 $ 84.2
Accrued compensation 45.0 37.8
Other accrued liabilities 108.7 107.3
Income taxes payable 44.8 28.2
Short-term debt 28.0 -
Pechiney Notes (a) 716.4 -
- -------------------------------------------------------------------------------
Total Current Liabilities 1,044.4 257.5
Noncurrent Liabilities:
Accrued retiree benefits other than pensions 96.8 93.1
Accrued pension liability 49.0 37.8
Other noncurrent liabilities 108.4 94.7
Deferred income taxes 2.1 3.4
Long-term debt, excluding the Pechiney Notes 63.0 208.4
Pechiney Notes (a) - 716.4
- -------------------------------------------------------------------------------
Total Noncurrent Liabilities 319.3 1,153.8
Commitments and contingencies
Redeemable preferred stock, 9% payment-in-kind dividends,
$.01 par value; liquidation value $10,000 per share;
authorized - 15,000 shares; issued and outstanding: 1998 -
6,560 shares; 1997 - 6,001 shares 65.6 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: 1998 - 100,005,356
shares; 1997 - 100,000,000 shares 1.0 1.0
Capital surplus 195.1 195.0
Retained earnings 180.1 75.3
Accumulated other comprehensive income (4.9) (5.6)
- -------------------------------------------------------------------------------
Total Stockholders' Equity 371.3 265.7
- -------------------------------------------------------------------------------
Total Liabilities, Redeemable Preferred Stock and
Stockholders' Equity $1,800.6 $1,737.0
===============================================================================
(a) The Restricted Trust held a note receivable from Pechiney, S.A. and related
letters of credit that secured Pechiney, S.A.'s agreement to repay the
Pechiney Notes. Pechiney, S.A. (the Company's previous owner) paid the
Notes in full on January 4, 1999, and the Restricted Trust was terminated.
(See Note 8.)
See notes to consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------
(IN MILLIONS) 1998 1997 1996
- ---------------------------------------------------------------------------
OPERATING ACTIVITIES
- --------------------
Net income $ 110.4 $ 59.7 $ 25.6
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 60.2 66.9 63.3
Equity in (income) loss of unconsolidated
affiliates (.4) (1.5) 1.4
Extraordinary item - 12.3 -
Changes in assets and liabilities:
Receivables (3.5) 8.4 29.9
Inventories 2.2 (17.9) 17.2
Accounts payable and accrued liabilities 10.3 12.1 39.1
Deferred income taxes (2.1) (.3) (3.2)
Income taxes payable 17.8 16.9 6.1
Long-term SARs accrual 5.5 31.4 6.6
Other, net 7.0 4.6 (1.5)
- ---------------------------------------------------------------------------
Net cash provided by operating activities 207.4 192.6 184.5
INVESTING ACTIVITIES
- --------------------
Proceeds from disposal of fixed assets .4 .2 .3
Purchases of property, plant and equipment (83.0) (56.9) (33.7)
Payments made for investments and other assets (3.4) (2.0) -
Proceeds from sale of refurbishment business,
net - 44.9 -
Other - - 3.6
- ---------------------------------------------------------------------------
Net cash used by investing activities (86.0) (13.8) (29.8)
FINANCING ACTIVITIES
- --------------------
Net change in short-term debt 15.1 - -
Issuance of long-term debt 36.6 326.2 147.2
Repayment of long-term debt (182.0) (467.6) (288.1)
Premiums paid on early retirement of debt - (13.7) -
- ---------------------------------------------------------------------------
Net cash used by financing activities (130.3) (155.1) (140.9)
Foreign currency rate changes 1.1 (1.7) -
- ---------------------------------------------------------------------------
(Decrease) increase in cash and cash
equivalents (7.8) 22.0 13.8
Cash and cash equivalents at beginning of
period 45.4 23.4 9.6
- ---------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 37.6 $ 45.4 $ 23.4
===========================================================================
See notes to consolidated financial statements.
F-6
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED
STOCK
ACCUMULATED TOTAL REDEEMABLE
COMMON STOCK RETAINED OTHER COMMON PREFERRED STOCK
------------------ CAPITAL EARNINGS COMPREHENSIVE STOCKHOLDERS' ----------------
(IN MILLIONS, EXCEPT SHARE DATA) SHARES AMOUNT SURPLUS (DEFICIT) INCOME EQUITY SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 100,000,000 $1.0 $195.0 $ (.2) $ 1.1 $196.9 5,024 $ 50.2
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 25.6 25.6
Other comprehensive income
Foreign exchange
translation adjustment 1.0 1.0
--------
Total comprehensive income 26.6
--------
Dividends - redeemable
preferred stock (4.7) (4.7) 466 4.7
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 100,000,000 $1.0 $195.0 $ 20.7 $ 2.1 $218.8 5,490 $ 54.9
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 59.7 59.7
Other comprehensive income
Foreign exchange
translation adjustment (7.7) (7.7)
--------
Total comprehensive income 52.0
--------
Dividends - redeemable
preferred stock (5.1) (5.1) 511 5.1
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 100,000,000 $1.0 $195.0 $ 75.3 $(5.6) $265.7 6,001 $ 60.0
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 110.4 110.4
Other comprehensive income
Foreign exchange
translation adjustment 3.1 3.1
Minimum pension liability
adjustment (2.4) (2.4)
--------
Total comprehensive income 111.1
--------
Dividends - redeemable
preferred stock (5.6) (5.6) 559 5.6
Shares issued 5,356 .1 .1
- -------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 100,005,356 $1.0 $195.1 $180.1 $(4.9) $371.3 6,560 $ 65.6
- -------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE ACQUISITION
1995 ACQUISITION: Howmet International Inc. ("HII" or "the Company") was
formed on October 11, 1995. On December 13, 1995, HII acquired all of its
existing operations from Pechiney, S.A. (the "Acquisition"). Carlyle-Blade
Acquisition Partners, L.P. ("Carlyle-Blade"), an affiliate of The Carlyle
Group, and Cordant Technologies Holding Company, a wholly-owned subsidiary of
Cordant Technologies Inc. ("Cordant") owned 51% and 49%, respectively, of
HII's common stock from December 13, 1995 until the 1997 ownership change.
That subsidiary of Cordant also owned 100% of HII's 9% Series A Senior
Cumulative payment-in-kind preferred stock, which was redeemed on February 17,
1999 (see Note 12).
The Acquisition was effected through a series of transactions, mergers and
name changes resulting in HII owning Howmet Holdings Corporation ("Holdings").
Holdings owns Howmet Corporation. Howmet Corporation and its subsidiaries are
the only operating subsidiaries of Holdings and HII. In connection with the
Acquisition HII received indemnities from Pechiney, S.A. for certain pre-
closing tax, environmental, and product liability matters and the Pechiney
Notes (see Note 8). The acquisition was accounted for in accordance with the
purchase method of accounting, and accordingly, the consolidated financial
statements reflect the allocation of the purchase price and related
acquisition costs to the assets acquired and liabilities assumed based on
their fair values on the date of acquisition.
1997 OWNERSHIP CHANGE: In December 1997, Carlyle-Blade sold 15 million of its
HII common shares to the public, and sold 13 million of its HII common shares
to Cordant Technologies Inc.
1998 AND 1999 OWNERSHIP CHANGES: In January 1998, Carlyle-Blade sold an
additional 350,000 common shares to the public. On February 8, 1999, Carlyle-
Blade sold its remaining 22,650,000 shares of HII common shares to Cordant.
After these sales, Cordant holds 84.65% and the public holds 15.35% of
outstanding HII common shares.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION: The accompanying consolidated financial statements
include all subsidiary companies. All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES: The consolidated financial statements are prepared in
conformity with generally accepted accounting principles which requires
management to make estimates and assumptions. Estimates of the carrying
amounts of assets and liabilities and the reported amounts of revenues and
expenses are utilized in the earnings recognition process that affects
reported amounts in the consolidated financial statements and accompanying
notes. Amounts affected include, but are not limited to, allowances for
doubtful accounts, reserves for contract losses and other accruals. Actual
results could differ from those estimates.
REVENUE RECOGNITION: The Company recognizes revenue from the sale of its
products upon shipment. Provision for estimated losses on sales commitments
are recorded when identified.
EARNINGS PER SHARE: Basic earnings per share is calculated by dividing net
income applicable to common stockholders by the weighted average number of
common shares outstanding (1998 - 100,002,678; 1997 and 1996 - 100,000,000).
Diluted earnings per share is calculated by dividing net income applicable to
common stockholders 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 (1998 - 100,079,344; 1997 -
100,008,832; 1996 - 100,000,000).
All share and per share data have been retroactively restated to reflect the
October 1997 10,000-to-1 stock split.
F-8
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS: Highly liquid investments with a maturity of three
months or less when acquired are considered cash equivalents.
INVENTORIES: Inventories are stated at cost, which approximates or is less
than replacement value. A substantial portion of inventories is valued on the
last-in, first-out ("LIFO") method, and the remainder is on the first-in,
first-out method.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are carried at
cost and are depreciated over the assets' estimated useful lives on the
straight-line method. Buildings' useful lives vary between 19 and 30 years and
other assets' lives vary between 4 to 8 years.
INTANGIBLES: Goodwill relates to the Acquisition (Note 1) and is the excess of
the purchase price over the fair value of tangible and identifiable intangible
net assets acquired. It is amortized on a straight-line basis over 40 years.
Other intangible assets include the fair value, at the Acquisition date, of
patents, technology and a non-compete agreement. They are being amortized on a
straight-line basis over 10 to 15 years. Other intangible assets also include
an intangible pension asset, which is amortized over the remaining service
lives of the relevant pension plan participants.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company records impairment losses on
goodwill and on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than net book
value. The Company also evaluates the amortization periods of assets,
including goodwill and other intangible assets, to determine whether events or
circumstances warrant revised estimates of useful lives.
CONTINGENT MATTERS: The Company accrues costs for contingent matters when it
is probable that a liability has been incurred and the amount can be
reasonably determined. At the time a liability is recognized, a receivable is
recorded for the estimated future recovery from third parties including
Pechiney, S.A. or insurance carriers. Costs allocated to commercial business
or not otherwise recoverable from third parties are expensed when the
liability is recorded. Except for current amounts receivable and payable,
contingent amounts are included in "other noncurrent assets" and in "other
noncurrent liabilities".
FOREIGN CURRENCY TRANSLATION: Except for the Company's Canadian subsidiaries,
all assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at period-end exchange rates. Revenues and
expenses are translated into U.S. dollars at average rates of exchange
prevailing during the period. Unrealized currency translation adjustments are
deferred in the consolidated balance sheet, whereas transaction gains and
losses are recognized in the consolidated statements of income when incurred.
The Canadian operation's functional currency is the U.S. dollar. Therefore,
Canadian monetary assets and liabilities are translated at period-end exchange
rates, and inventories and other nonmonetary assets and liabilities are
translated at historical rates. Adjustments resulting from translation of
Canadian monetary assets and liabilities at period-end exchange rates are
included in the consolidated statements of income.
DERIVATIVE FINANCIAL INSTRUMENTS: Derivative financial instruments are
utilized by the Company to reduce foreign currency risks in accordance with
policy approved by the Board of Directors. The Company does not hold or issue
derivative financial instruments for trading purposes. The Company enters into
foreign exchange contracts to minimize fluctuations in the value of payments
due international vendors and the value of foreign denominated receipts.
Forward foreign exchange contracts obligate the Company to exchange
predetermined amounts of specified foreign currencies at specified exchange
rates on specified dates or to make an equivalent U.S. dollar payment equal to
the value of such exchange. The Company enters into economic hedges to
mitigate
F-9
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
fluctuations of anticipated foreign currency commitments. The Company also
enters into the forward foreign exchange contracts which are directly related
to assets, liabilities, or transactions for which a commitment is in place.
In accordance with hedge accounting, gains and losses for specifically
identified assets, liabilities and firmly committed transactions are
recognized in income and offset the foreign exchange gains and losses when the
underlying transaction is settled. Unrealized changes in fair value of
contracts no longer effective as hedges for such firm items are recognized in
income at such time and marked to market until their expiration. In cases
where the hedge is for anticipated items, forward foreign exchange contracts
are marked to market. The impact on the financial position and results of
operations from likely changes in foreign exchange rates is mitigated by
minimizing risk through hedging transactions related to commitments.
INCOME TAXES: The provision for income taxes includes, in the current period,
the cumulative effect of any changes in tax rates from those used previously
in determining deferred tax assets and liabilities. Deferred taxes are
provided to recognize the income tax effects of amounts which are included in
different reporting periods for financial statement and tax purposes.
NEW ACCOUNTING STANDARDS: In June 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", was issued. This statement
establishes accounting standards for derivative instruments and for hedging
activities. 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. SFAS No. 133 is effective for fiscal years beginning after June
15, 1999. The Company will adopt this new statement on January 1, 2000.
RECLASSIFICATIONS: Certain 1997 and 1996 amounts have been reclassified to be
consistent with the 1998 presentation. These include reclassifications to cost
of sales from depreciation and amortization, selling, general and
administrative expense and research and development expense.
NOTE 3. INVENTORIES
Inventories are summarized as follows:
DECEMBER 31,
--------------
(IN MILLIONS) 1998 1997
- -------------------------------------------
Raw materials and supplies $ 56.7 $ 62.0
Work in progress 78.8 61.5
Finished goods 29.7 35.4
- -------------------------------------------
FIFO inventory 165.2 158.9
LIFO valuation adjustment (3.3) (3.4)
- -------------------------------------------
$161.9 $155.5
- -------------------------------------------
At December 31, 1998 and 1997, inventories include $111.8 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.
F-10
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment includes the following:
DECEMBER 31,
---------------
(IN MILLIONS) 1998 1997
- ------------------------------------------
Land $ 18.8 $ 12.8
Buildings 77.6 60.2
Machinery and equipment 363.4 267.7
- ------------------------------------------
459.8 340.7
Accumulated depreciation (124.9) (65.2)
- ------------------------------------------
$ 334.9 $275.5
- ------------------------------------------
Depreciation expense was $42 million in 1998, $41.2 million in 1997, and $39.6
million in 1996.
NOTE 5. GOODWILL
Goodwill relates to the Acquisition (Note 1). Accumulated amortization was
$20.6 million and $14.6 million at December 31, 1998 and 1997. The $22.5
million 1997 reduction in goodwill was due to (i) $6.5 million of
amortization, (ii) the recognition of $6.1 million of preacquisition U.S.
alternative minimum tax credits that were not estimable at the Acquisition
date, (iii) $9.4 million of goodwill associated with the Company's
refurbishment business which was sold in 1997 (Note 20), and (iv) the effects
of foreign exchange translation.
NOTE 6. PATENTS AND TECHNOLOGY AND OTHER INTANGIBLE ASSETS, NET AND OTHER
NONCURRENT ASSETS
Patents and technology and other intangible assets, net includes the
following:
DECEMBER 31,
-------------
(IN MILLIONS) 1998 1997
- -------------------------------------------------------------------------------
Patents and technology, net of accumulated amortization of $20.6
and $13.8 $ 46.8 $ 53.6
Non-compete agreement, net of accumulated amortization of $15.2
and $10.2 59.8 64.8
Pension intangible asset (Note 11) 8.5 -
- -------------------------------------------------------------------------------
$115.1 $118.4
- -------------------------------------------------------------------------------
Other noncurrent assets includes the following:
DECEMBER 31,
-------------
(IN MILLIONS) 1998 1997
- -------------------------------------------------------------------
Indemnification receivables from Pechiney, S.A. for:
Environmental matters $ 29.3 $ 32.4
Insurance claims 6.0 7.2
Prepaid pension benefit costs 25.9 26.4
Other 17.1 14.2
- -------------------------------------------------------------------
$ 78.3 $ 80.2
- -------------------------------------------------------------------
NOTE 7. FINANCING ARRANGEMENTS
At December 31, 1998, the Company had $28 million of short-term borrowings
principally at its Canadian and Japanese subsidiaries. Included in this amount
was $8 million outstanding under a $10 million credit facility entered into in
1998 by the Company's Canadian subsidiary. Interest rates for this facility
F-11
NOTE 7. FINANCING ARRANGEMENTS (CONTINUED)
are based on a bank's daily money market fund rate (approximately 5.8% at
December 31, 1998). The Company's Japanese subsidiary has short-term
borrowings of $17.9 million bearing interest at a rate of approximately 1.4%
per annum.
Long-term debt, excluding Pechiney Notes (Note 8), includes the following:
DECEMBER 31,
------------
(IN MILLIONS) 1998 1997
- ---------------------------------------
Revolving credit facility $60.0 $198.0
Other 3.0 10.4
- ---------------------------------------
$63.0 $208.4
- ---------------------------------------
Principal maturities for the succeeding five years ended December 31 are as
follows: $60 million in 2002 and $3 million in 2003. At December 31, 1998,
$9.6 million of letters of credit were outstanding and $232.4 million of
borrowing capacity was available under the Revolving Credit Facility.
The Company (through its wholly-owned and only operating subsidiaries, Howmet
Corporation and its subsidiaries) has credit commitments from a group of banks
under a revolving credit agreement (the "Revolving Credit Facility"). The
facility expires in December 2002 and provides for an unsecured revolving
credit line and letters of credit of up to $300 million in the aggregate.
Interest rate on the facility is based on LIBOR plus a spread and was 5.8% and
6.2% at December 31, 1998 and 1997, respectively.
Terms of the Revolving Credit Facility require Howmet Corporation to meet
certain interest coverage and leverage ratios and maintain certain minimum net
worth amounts. In addition, there are restrictions customarily found in such
agreements, such as limits on indebtedness and payments for acquisitions or
investments. The agreement contains events of default including a change of
control (as defined) of the Company and its subsidiaries, and cross defaults
with respect to other debt and the receivables facility.
In 1997 the Company terminated its then existing senior credit facilities and
repaid all outstanding borrowings thereunder, and the Company tendered for and
repaid all but $3 million of its $125 million senior subordinated notes. As a
result of these transactions, the Company recorded an extraordinary loss from
the early retirement of debt of $12.3 million, after tax. The loss includes
the write-offs of unamortized debt issuance costs, a tender premium for the
senior subordinated notes and transaction costs. The debt repayments were
funded with borrowings under the Revolving Credit Facility. Also in 1997 the
Company elected to repay all but $6 million of its 10% payment-in-kind junior
subordinated notes and in 1998 repaid the remaining $6 million. These payments
were funded with borrowings under the $300 million Revolving Credit Facility.
The Company is a holding company, which conducts its only operations through
Howmet Corporation and its subsidiaries and, accordingly, is dependent on the
receipt of cash from these subsidiaries to meet its expenses and other
obligations. Terms of the Revolving Credit Facility which limit transfers of
cash to the Company from Howmet Corporation, affect the Company's ability to
obtain funds for any purposes, including dividends, stock redemption, debt
service and normal business activities. Based on current and anticipated
activities, this limitation is not expected to have an effect on the Company's
ability to conduct its normal activities.
The Company has an agreement to sell, on a revolving basis, an undivided
interest in a defined pool of accounts receivable. At December 31, 1998 and
1997, the defined pool of outstanding accounts receivable amounted to $87
million and $75.2 million, respectively. The Company received $55 million from
the sale of such eligible receivables to a master trust and has deducted this
amount from accounts receivable in the December 31, 1998 and 1997 consolidated
balance sheets. Losses on the sale of receivables for the years ended December
31, 1998, 1997 and 1996 were $3.8 million, $3.8 million, and $4.5 million,
respectively. These losses are included in the line captioned "Other, net" in
the consolidated statements of income. At
F-12
NOTE 7. FINANCING ARRANGEMENTS (CONTINUED)
December 31, 1998 and 1997 the $32 million and $20.2 million differences,
between the total eligible pool and the $55 million sold, represent retainage
on the sale in the event the receivables are not fully collected. The Company
has retained the responsibility for servicing and collecting the accounts
receivable sold or held in the master trust. Any incremental additional costs
related to such servicing and collection efforts are not significant.
In 1998, 1997 and 1996, the Company paid interest of $9.7 million, $20.1
million and $36.2 million, respectively.
NOTE 8. RESTRICTED TRUST AND RELATED PECHINEY NOTES PAYABLE
In 1988, Pechiney Corporation, which 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, Pechiney Corporation (now named Howmet Holdings
Corporation, "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").
Interest income from the Restricted Trust for 1998, 1997 and 1996 was equal to
the interest expense and is netted in the consolidated statements of income
for these years.
Pechiney, S.A. paid the Notes in full on January 4, 1999. No Company funds
were used in the payment of the Notes. As a result, the Restricted Trust has
been terminated and like the Pechiney Notes, subsequent to December 31, 1998,
will not be included on the Company's consolidated balance sheet.
NOTE 9. COMMITMENTS
The Company has noncancelable operating leases relating principally to
manufacturing and office facilities and certain equipment. Future minimum
payments under noncancelable leases as of December 31, 1998 are as follows:
1999 - $5.7 million, 2000 - $4.4 million, 2001 - $2.6 million, 2002 - $1.1
million, 2003 - $.9 million and thereafter $2.2 million.
Total rental expense for all operating leases was $6.9 million in 1998, $7.3
million in 1997 and $8 million in 1996.
As of December 31, 1998, the Company is committed to spend $24.8 million for
1999 capital expenditures.
NOTE 10. INCOME TAXES
Income taxes were provided in the following amounts:
YEAR ENDED DECEMBER 31,
-----------------------
(IN MILLIONS) 1998 1997 1996
- ---------------------------------------------
Current income taxes:
U.S. Federal $51.7 $23.0 $15.5
State 8.0 7.8 11.7
Foreign 7.2 7.9 6.3
- --------------------------------------------
66.9 38.7 33.5
Deferred income taxes:
U.S. Federal (4.6) 2.1 (1.8)
State (1.5) (3.8) (3.0)
Foreign 4.0 1.4 1.6
- --------------------------------------------
(2.1) (.3) (3.2)
- --------------------------------------------
$64.8 $38.4 $30.3
- --------------------------------------------
F-13
NOTE 10. INCOME TAXES (CONTINUED)
The 1997 tax expense includes $46.3 million of expense related to income
before the extraordinary loss, and a $7.9 million benefit related to the
extraordinary loss from early retirement of debt.
A reconciliation of the United States statutory rate to the effective income
tax rate follows:
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
- --------------------------------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
Effect of:
State income taxes, net of federal benefit 2.0 3.1 10.1
Foreign tax differential (1.0) .1 .3
Goodwill amortization 1.3 2.3 4.8
Research & development credits (2.4) (3.3) (.4)
Other 2.1 1.9 4.4
- --------------------------------------------------------------------------
Effective rate 37.0% 39.1% 54.2%
- --------------------------------------------------------------------------
Domestic and foreign components of pre tax income, including the 1997 $20.2
million extraordinary loss from early retirement of debt, are as follows:
YEAR ENDED DECEMBER 31,
------------------------
(IN MILLIONS) 1998 1997 1996
- ---------------------------------------
United States $137.9 $71.8 $37.0
Foreign 37.3 26.3 18.9
- ---------------------------------------
$175.2 $98.1 $55.9
- ---------------------------------------
Deferred income taxes arise from differences in the timing of income, expense,
and tax credit recognition for financial reporting and income tax purposes.
Deferred income taxes are not provided on the undistributed earnings of
international subsidiaries as the earnings are considered to be indefinitely
reinvested. At December 31, 1998, these undistributed earnings amounted to
approximately $29 million. Upon distribution of such earnings in the form of
dividends or otherwise, the Company would be subject to both U.S. income taxes
and withholding taxes payable to the various foreign countries. After taking
into account available foreign tax credits the amount of such taxes is
immaterial.
F-14
NOTE 10. INCOME TAXES (CONTINUED)
The components of the net deferred income tax asset (liability) are as
follows:
DECEMBER 31,
--------------
(IN MILLIONS) 1998 1997
- -------------------------------------------------------------
State and foreign net operating losses $ 7.5 $ 18.0
Other foreign tax benefits 2.5 6.7
Foreign tax credits 4.0 -
U.S. alternative minimum tax credits - 7.9
Accrued retiree benefits other than pensions 41.4 39.8
Vacation and deferred compensation accruals 28.8 24.2
Pension liability 21.0 17.2
Other accruals 20.0 23.1
- -------------------------------------------------------------
Gross deferred tax asset 125.2 136.9
Valuation allowance (7.5) (18.0)
- -------------------------------------------------------------
Total deferred tax asset 117.7 118.9
LIFO inventory (25.6) (27.0)
Pension prepaid assets (13.8) (10.6)
Property, plant and equipment (44.9) (46.9)
Patents and technology (19.3) (21.5)
- -------------------------------------------------------------
Total deferred tax liability (103.6) (106.0)
- -------------------------------------------------------------
Net deferred tax asset $ 14.1 $ 12.9
- -------------------------------------------------------------
Balance sheet classification:
Current assets $ 16.2 $ 16.3
Noncurrent liabilities (2.1) (3.4)
- -------------------------------------------------------------
$ 14.1 $ 12.9
- -------------------------------------------------------------
At December 31, 1998 and 1997, the Company had available $30 million and $131
million, respectively, of state net operating loss carryforwards. All of the
1998 amount will expire in 1999. At December 31, 1998 and 1997, the Company
had available approximately $11.3 million and $10.5 million, respectively, of
foreign net operating loss carryforwards which can only be used to offset
foreign taxable income. A majority of these carryforwards have no expiration
date. Utilization of any state net operating loss and $10.3 million of foreign
net operating loss carryforwards will result in an adjustment of goodwill. At
December 31, 1998 and 1997, the Company also had foreign tax benefits of $2.5
million and $6.7 million, respectively, which will be realized over the next
two years.
At December 31, 1998 and 1997, the Company carried a valuation allowance equal
to the deferred tax asset associated with all state and foreign net operating
loss carryforwards. The Company has no other valuation allowance because
management believes it is more likely than not that future operations will
generate sufficient taxable income to realize the other deferred tax assets. A
continuation of the 1998 level of earnings will provide ample taxable income
for such realizations. The deferred tax valuation allowance related to net
operating losses decreased in 1998, primarily due to the expiration of state
net operating losses.
In 1998, 1997 and 1996, the Company paid income taxes, net of refunds, of
$49.3 million, $45.6 million and $28.4 million, respectively.
During 1998, the Internal Revenue Service completed its audit of the Company's
federal income tax return for the year ended December 31, 1995, with no
material findings.
F-15
NOTE 11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The Company has noncontributing defined benefit plans covering certain of its
employees. The Company also has an unfunded postretirement plan that provides
certain nonvested health care and life insurance benefits to certain of its
employees. Data for the pension plans and the other benefit plan are
summarized as follows:
PENSION BENEFITS OTHER BENEFITS
DECEMBER 31, DECEMBER 31,
------------------ ----------------
(IN MILLIONS) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Change in projected benefit obligations:
Projected benefit obligations at be-
ginning of year $ (115.0) $ (98.4) $(110.3) $ (96.0)
Service cost (11.5) (10.1) (2.5) (3.4)
Interest cost (9.2) (8.2) (8.2) (7.5)
Plan amendments (11.6) (.7) - (4.4)
Actuarial losses, net (14.0) (2.5) (13.2) (5.8)
Benefits paid 6.8 4.9 7.7 6.8
- -------------------------------------------------------------------------------
Ending projected benefit obligations $ (154.5) $ (115.0) $(126.5) $(110.3)
- -------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning
of year $ 139.7 $ 114.5 $ - $ -
Actual return on plan assets 6.9 17.6 - -
Company contributions 6.9 12.5 7.7 6.8
Benefits paid (6.8) (4.9) (7.7) (6.8)
- -------------------------------------------------------------------------------
Ending fair value of plan assets $ 146.7 $ 139.7 $ - $ -
- -------------------------------------------------------------------------------
Reconciliation to balance sheet amounts:
Fair value of plan assets
(less than) exceeds projected benefit
obligations $ (7.8) $ 24.7 $(126.5) $(110.3)
Unrecognized prior service (gain) cost (23.5) (37.3) 4.0 4.5
Unrecognized net actuarial loss (gain) 16.6 (2.4) 19.7 6.7
- -------------------------------------------------------------------------------
Net liability recognized in balance
sheet $ (14.7) $ (15.0) $(102.8) $ (99.1)
- -------------------------------------------------------------------------------
Amounts recognized in the balance sheet
consist of:
Prepaid benefit costs $ 25.9 $ 26.4 $ - $ -
Accrued benefit liabilities (40.6) (41.4) (102.8) (99.1)
Additional minimum liability (12.5) - - -
Intangible asset 8.5 - - -
Accumulated other comprehensive in-
come, pretax 4.0 - - -
- -------------------------------------------------------------------------------
Net liability recognized in balance
sheet $ (14.7) $ (15.0) $(102.8) $ (99.1)
- -------------------------------------------------------------------------------
Assets of the pension plans are invested primarily in equities and bonds. The
other benefits plan is not funded, therefore, the Company pays benefits as
claims are made.
Included in the aggregated pension data in the above tables are amounts
applicable to plans with projected benefit obligations or accumulated benefit
obligations in excess of plan assets. Amounts related to such plans are as
follows:
DECEMBER 31,
---------------
(IN MILLIONS) 1998 1997
- -------------------------------------------------
Projected benefit obligations $(117.5) $(22.6)
Accumulated benefit obligations $(111.4) $(17.4)
Fair value of plan assets $ 98.8 $ 14.3
- -------------------------------------------------
F-16
NOTE 11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
Effective January 1, 1997, Howmet Corporation amended the salaried pension
plan to change the formula from "final pay" to "cash balance". This change
resulted in a 1997 unrecognized prior service cost reduction of $37.9 million,
and 1997 expense of $2.6 million less than it would have been using the prior
plan formula.
Components of net periodic cost are as follows:
PENSION BENEFITS OTHER BENEFITS
------------------ ----------------
(IN MILLIONS) 1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------
Service cost $11.5 $10.1 $8.6 $ 2.5 $ 3.4 $2.9
Interest cost 9.2 8.2 9.7 8.2 7.5 6.6
Expected return on assets (12.1) (10.5) (9.9) - - -
Recognized losses .2 .2 - .2 .1 -
Recognized prior service (gain) cost (2.3) (2.8) - .6 .3 -
- --------------------------------------------------------------------------
Net periodic cost $ 6.5 $ 5.2 $8.4 $11.5 $11.3 $9.5
- --------------------------------------------------------------------------
Weighted-average assumptions as of December 31, are as follows:
1998 1997 1996
- ----------------------------------------------------
Discount rate 6.75% 7.5% 7.5%
Expected long-term return on assets 9.00% 9.0% 9.0%
Rate of compensation increase 4.75% 5.0% 5.0%
- ----------------------------------------------------
In calculating the Company's postretirement benefit obligation, the health
care cost trend rate assumption for below age 65 benefits was 9% in 1998 and
10% in 1997 and is assumed to decline 1% annually to 6% in the year 2001 and
remain constant thereafter. The health care cost trend rate for above age 65
benefits was 7.4% in 1998 and 8.2% in 1997 and is assumed to decline gradually
to 5% in the year 2001 and remain constant thereafter.
A one-percentage point change in assumed health care cost trend rates would
have the following affects:
1 PERCENTAGE 1 PERCENTAGE
(IN MILLIONS) POINT INCREASE POINT DECREASE
- -------------------------------------------------------------------------------
Effect on total service and interest cost compo-
nents $ .1 $ .2
Effect on postretirement benefit obligation $1.4 $1.8
- -------------------------------------------------------------------------------
In addition to the above, the net pension expense for the United Kingdom
operations was $1.5 million in 1998, $1.2 million in 1997 and $1.1 million in
1996.
The Company sponsors matching 401(k) savings plans for eligible employees. The
Company matches up to 5% of salaried employee contributions, up to 6% of the
contribution of all full time non-union hourly employees and up to $50 per
month of union hourly employee contributions. Company contributions to the
matching savings plans were approximately $6.7 million in 1998, $6.8 million
in 1997 and $4 million in 1996.
F-17
NOTE 12. COMMON AND PREFERRED STOCK
On October 8, 1997, the Board of Directors approved a 10,000-to-1 stock split
in the form of a stock dividend, which increased outstanding common stock from
10,000 to 100,000,000 shares. All share and per share data in the accompanying
consolidated financial statements have been retroactively adjusted to reflect
the aforementioned changes.
The Board of Directors is authorized to determine the terms of any new series
of preferred stock. Of the 10,000,000 shares of authorized preferred stock,
15,000 shares are designated as 9% Series A Senior Cumulative Preferred Stock.
Dividends on this preferred stock are at 9% and are payable-in-kind. At
December 31, 1998 and at all previous times, all outstanding shares of this
preferred stock were owned by Cordant. On February 17, 1999 the Company
redeemed all of the outstanding preferred stock at its book carrying value.
The Company borrowed under its revolving credit facility to make this
redemption.
NOTE 13. SARS AND STOCK OPTION PLANS
STOCK APPRECIATION RIGHTS ("SARS"): In early 1996, the Company adopted a SARs
plan. Under the plan, SARs representing up to 5% of the Company's equity value
were authorized to be issued to executive officers of the Company. The SARs
are similar to phantom stock options and are valued based on appreciation of
the value of the Company's common stock above the base per share of the SARs.
The maximum per share value of the outstanding SARs is limited to the
difference between $15 and the base price per share of the SARs (generally
$2). The SARs vest over a five-year period ending in 2001 based upon passage
of time and the operating performance of the Company. Vesting accelerates if
there is a sale of substantially all assets, or a liquidation of the Company,
or a sale of more than a 50% interest in the Company.
At December 31, 1998 and 1997 there were approximately 4.3 million SARs
outstanding. Compensation costs of $10.8 million, $31.4 million and $6.6
million were charged against income for the SARs plan in 1998, 1997 and 1996,
respectively. SARs expense is adjusted quarterly based on the market value of
the stock and vesting. At December 31, 1998 and 1997, $43.5 million and $38
million, respectively, was included in the amount captioned "Other noncurrent
liabilities" in the consolidated balance sheet.
HOWMET OPTIONS: The Amended and Restated 1997 Stock Awards Plan (the "Plan")
provides for grants of stock options, shares of restricted stock and SARs to
key Company employees. The Plan provides for grants involving up to an
aggregate 5 million shares of the Company's common stock, and the Company has
reserved 5 million common shares for such grants. In December 1997, 4,377,500
options were granted; 1998 changes follow:
WEIGHTED
AVERAGE
SHARES PER SHARE
- -------------------------------------------------------------------------------------
Options outstanding at December 31, 1997 (0 exercisable shares) 4,377,500 $15.00
- -------------------------------------------------------------------------------------
1998 activity:
Granted 98,000 $14.42
Forfeited (162,500) $15.00
Lapsed or exercised - -
- -------------------------------------------------------------------------------------
OPTIONS OUTSTANDING AT DECEMBER 31, 1998 (0 EXERCISABLE SHARES) 4,313,000 $14.98
- -------------------------------------------------------------------------------------
Options granted in December 1997 will vest and become exercisable in 25%
increments on January 1 of each year beginning in 1999. The options
outstanding at December 31, 1998 have exercise prices ranging from $12.22 to
$15.66 and a weighted average remaining contractual life of seven years.
Options outstanding at December 31, 1998 expire in December 2005.
F-18
NOTE 13. SARS AND STOCK OPTION PLANS (CONTINUED)
In accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company has elected to continue to account for stock-based
compensation using the intrinsic value method under APB Opinion No. 25 and,
accordingly, does not recognize compensation cost for options issued at the
market price at date of grant. If the Company recognized compensation cost
based on the fair value of the options granted at grant date as prescribed by
SFAS No. 123, both net income applicable to common stock and earnings per
common share, on a pro forma basis would have been reduced by approximately 4%
in 1998. In 1997 they would have been reduced by .7% and 1.8%, respectively.
The fair value of the Howmet options was estimated using the Black-Scholes
option pricing model with the following weighted-average assumptions: risk-
free interest rate of 4.65%; in 1998 and 5.71% in 1997; volatility of the
expected market price of the Company's common stock of .470 in 1998 and .288
in 1997 and a weighted-average option life of 6 years in both 1998 and 1997.
CORDANT OPTIONS: Certain key executives of the Company hold 360,000 contingent
stock options for Cordant common stock (the "Cordant Options"). The exercise
price of the options is the market price of Cordant common stock on the date
of the grant ($17.75-$20.47). The options will vest only if Cordant acquires
100% of the Company prior to December 13, 2001. The options vest, and are
exercisable, 50% on the date of such acquisition and 25% each year thereafter.
They expire not later than ten years after the date of the grant.
Subsequent to the initial grant of the Cordant Options, the participants were
granted rights under an alternative plan whereby if Cordant does not acquire
100 percent of the Company by December 31, 2001, each participant will vest in
an amount equal to the gain in such Cordant options on such date.
Whether the executives vest in the Cordant Options or vest in the alternative
plan, the Company will record compensation expense for one but not both plans.
Because vesting is assured under the alternative plan, the Company is
recording compensation expense related to that plan over the six year vesting
period ending December 13, 2001. In 1998, $.6 million and in 1997 $2.9 million
of compensation expense was charged against income. There was no comparable
expense recorded prior to 1997.
F-19
NOTE 14. SEGMENT INFORMATION
The Company's reportable segment manufactures investment cast components for
the commercial and defense aero and industrial gas turbine ("IGT") industries.
The Company conducts this business at many operating units which are similar
in terms of product, production process, customer and distribution systems and
have similar economic characteristics. These similar operating units have been
aggregated for presentation purposes below.
Data for the investment casting segment and a reconciliation to consolidated
amounts are presented in the tables below. Amounts below the "Income from
operations" line in the consolidated statements of income are not allocated to
the investment casting segment and, therefore, are not presented below.
YEAR ENDED DECEMBER 31,
----------------------------
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------------------
Net sales to external customers:
Investment casting and consolidated $1,350.6 $1,258.2 $1,106.8
- ------------------------------------------------------------------------
Income from operations:
Investment casting $ 212.3 $ 197.6 $ 116.7
Adjust to LIFO .8 (1.7) (1.7)
SARs expense (10.8) (31.4) (2.6)
Other unallocated corporate expense, net (12.6) (10.0) (10.4)
- ------------------------------------------------------------------------
Consolidated $ 189.7 $ 154.5 $ 102.0
- ------------------------------------------------------------------------
Total assets:
Investment casting $1,037.2 $ 976.6 $1,008.7
Adjust to LIFO (2.6) (3.4) (1.7)
Deferred tax asset 16.2 16.3 21.0
Restricted Trust (Note 8) 716.4 716.4 716.4
Other corporate assets 33.4 31.1 24.4
- ------------------------------------------------------------------------
Consolidated $1,800.6 $1,737.0 $1,768.8
- ------------------------------------------------------------------------
Depreciation and amortization:
Investment casting $ 59.2 $ 59.0 $ 58.9
Corporate 1.0 7.9 4.4
- ------------------------------------------------------------------------
Consolidated $ 60.2 $ 66.9 $ 63.3
- ------------------------------------------------------------------------
Capital expenditures:
Investment casting $ 82.3 $ 56.5 $ 33.3
Corporate .7 .4 .4
- ------------------------------------------------------------------------
Consolidated $ 83.0 $ 56.9 $ 33.7
- ------------------------------------------------------------------------
Sales are from cast products manufactured to the specifications of customers
in the markets presented below. Other in the table includes sales of $53
million in 1997 and $69 million in 1996 related to the aircraft engine
component refurbishment business which was sold in 1997 (Note 20).
YEAR ENDED DECEMBER 31,
--------------------------
(IN MILLIONS) 1998 1997 1996
- ----------------------------------------------------
Aero engine and airframe $ 802.5 $ 739.9 $ 586.9
Industrial gas turbine 476.1 402.5 388.7
Other 72.0 115.8 131.2
- ----------------------------------------------------
Total $1,350.6 $1,258.2 $1,106.8
- ----------------------------------------------------
F-20
NOTE 14. SEGMENT INFORMATION (CONTINUED)
Sales to two of the Company's customers exceed 10% of total consolidated
sales. Sales to these two customers were $251 million and $194 million in
1998, $253 million and $185 million in 1997, and $206 million and $159 million
in 1996. Receivables from these customers were $18 million and $11.3 million
at December 31, 1998 and $12.4 million and $17 million at December 31, 1997.
Net sales under U.S. government contracts and subcontracts were $183 million
in 1998, $179 million in 1997 and $154 million in 1996. Included in these
sales amounts are subcontract sales to the two aforementioned customers of $92
million in 1998, $85 million in 1997 and $68 million in 1996.
NOTE 15. GEOGRAPHIC INFORMATION
The Company is a multinational entity with operating subsidiaries in four
geographic regions: United States, Canada, Europe (France and the United
Kingdom), and Japan. Intercompany transfers between geographic regions are not
significant. Allocated long-lived assets in the following table exclude the
$716.4 million Restricted Trust (see Note 8). Sales are attributed to
countries based on where the product is shipped.
Consolidated sales to external customers were shipped to the following
geographic regions:
YEAR ENDED DECEMBER 31,
--------------------------
(IN MILLIONS) 1998 1997 1996
- -----------------------------------------------------------------------
Sales to external customers
United States $ 784.8 $ 783.4 $ 635.1
Canada 76.8 71.0 74.8
Europe 425.1 348.3 358.0
Asia 57.2 45.5 32.4
Other 6.7 10.0 6.5
- -----------------------------------------------------------------------
Consolidated sales to external customers $1,350.6 $1,258.2 $1,106.8
- -----------------------------------------------------------------------
Long-lived assets were in the following geographic regions:
DECEMBER 31,
--------------------
(IN MILLIONS) 1998 1997 1996
- -------------------------------------------------------
Long-lived Assets
United States $612.1 $590.2 $616.9
Canada 31.6 22.6 22.4
Europe 90.3 87.8 93.3
Japan 15.4 - -
- -------------------------------------------------------
Consolidated long-lived assets $749.4 $700.6 $732.6
- -------------------------------------------------------
NOTE 16. AFFILIATES INFORMATION
Prior to the 1997 ownership change (Note 1), the Company had management
agreements with a member of The Carlyle Group and with Cordant for certain
management and financial advisory services. Each agreement provided for the
payment of an annual management fee of $1 million. In November 1997, the
agreement with this Carlyle affiliate was amended to reduce the annual fee to
$.5 million and the agreement with Cordant was terminated. The Company and
Cordant then entered into a new service agreement whereby Cordant provides a
wide range of administrative services. For these services, for the twelve
month period beginning December 2, 1997, the Company paid Cordant $1.5 million
plus the cost of third party charges for service without markup.
F-21
NOTE 16. AFFILIATES INFORMATION (CONTINUED)
Upon consummation of the 1997 ownership change (Note 1), the Company and
Cordant entered into a corporate agreement (the "Corporate Agreement"). Under
the Corporate Agreement, the Company granted preemptive rights to Cordant
which give Cordant the right, upon any issuance or sale by the Company of its
shares of capital stock, to acquire a number of such shares sufficient to
maintain Cordant's percentage ownership of the Company's outstanding voting
power and equity immediately prior to such issuance or sale. The purchase of
shares of common stock pursuant to the exercise of a preemptive right will be
at market price, or, in the case of a public offering by the Company for cash,
at a price per share equal to the net proceeds per share to the Company in
such offering. The preemptive rights expire in the event Cordant reduces its
ownership interest to less than 20%.
In addition under the Corporate Agreement, Cordant has agreed, that without
the prior consent of the Carlyle-Blade representative on the Company's Board
of Directors and a majority (but not less than two) of the non-employee
directors of the Company who are not directors or employees of Cordant or The
Carlyle Group ("Independent Directors"), neither Cordant nor any of its
affiliates may acquire publicly held shares if such acquisition would reduce
the number of publicly held shares to less than 14% of the total number of
shares outstanding, other than (x) pursuant to a tender offer to acquire all
of the outstanding shares of common stock not beneficially owned by Cordant or
(y) pursuant to a merger or other business combination in which holders of all
outstanding publicly held shares are treated equally. The foregoing provision
of the Corporate Agreement may not be amended or waived by the Company without
the consent of the Carlyle-Blade representative on the Company's Board of
Directors and a majority (but not less than two) of the Independent Directors.
Following the 1999 Annual Meeting of the Company's stockholders, Carlyle-Blade
will no longer have a representative on the Company's Board of Directors.
In December 1995, certain executives of the Company and Howmet Corporation
invested $4.7 million in Carlyle-Blade. Upon the 1997 and 1999 sales of
Carlyle-Blade's interest in the Company, the executives received cash
distributions from Carlyle-Blade, pro rata to their investment in Carlyle-
Blade.
NOTE 17. FINANCIAL INSTRUMENTS
The following methods and assumptions were used in estimating fair values:
Cash and cash equivalents: The carrying amount of cash and cash equivalents
approximates fair value.
Receivables and payables: The fair values of trade receivables and payables
approximate their carrying amounts. Financial instruments which potentially
subject the Company to credit risk consist principally of trade receivables.
The Company does not require collateral and maintains reserves for potential
credit losses related to trade accounts receivable. The Company's accounts
receivable are principally due from companies in the aerospace and industrial
gas turbine engine industries. See Note 14 for receivables from the Company's
two largest customers.
Short-term and long-term debt: Because the Revolving Credit Facility
borrowings and other borrowings are generally at variable interest rates,
their carrying value approximates their fair value.
Off-balance sheet instruments: The Company enters into forward exchange
contracts as a hedge against currency fluctuations of certain foreign currency
transactions. At December 31, 1998, the Company had contracts to buy and sell
various currencies with maturity dates ranging from January 1999 to December
1999. The total notional contract value of these transactions in U.S. dollars
was $50.1 million at December 31, 1998. The fair value of these contracts is
the $.3 million of unrecognized gain of such contracts as of December 31,
1998. The fair value of these foreign currency contracts was estimated based
on December 31, 1998 foreign currency rates obtained from dealers. Gains or
losses arising from foreign exchange contracts offset foreign exchange gains
or losses on the underlying hedged commitments, assets or liabilities. The
impact on financial position and results of operations from likely changes in
foreign exchange rates is mitigated by minimizing risk through hedging
transactions related to commitments.
F-22
NOTE 17. FINANCIAL INSTRUMENTS (CONTINUED)
The Company enters into forward exchange contracts with major dealers and does
not require collateral. If a counterparty was not able to completely fulfill
its contract obligations, the Company would incur a loss equal to the amount
of any gain on the contract.
NOTE 18. CONTINGENT MATTERS
Starting in late 1998, the Company discovered certain product testing and
specification non-compliance issues at two of its Cercast aluminum casting
operations. The Company notified customers, is actively cooperating with them
and government agencies in the investigation of these matters, and is
implementing remedial action. Data collection and analysis must be completed
before a definitive estimate of the cost to resolve these matters can be
completed. Customers have asserted no formal claims, and the Company knows of
no in-service problems associated with these issues. Based on preliminary
evaluation, however, the Company has recorded an estimated loss of $4 million
in its consolidated statement of income for the year ended December 31, 1998.
Based on currently known facts, the Company believes that additional costs
beyond $4 million, if any, would not have a material adverse effect on the
Company's financial position, cash flow, or annual operating results. However,
additional cost when and if accrued may have a material adverse impact on the
quarter in which it may be accrued.
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 of these proceedings
will not have a material adverse effect upon its operations or financial
condition.
NOTE 19. ENVIRONMENTAL MATTERS
In connection with 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 environmental matters discussed in the
next two paragraphs. It is probable that changes in any of the accrued
liabilities discussed in the next two paragraphs will result in an equal
change in the amount of the receivable from Pechiney, S.A. pursuant to this
indemnification.
The Company has received test results indicating levels of polychlorinated
biphenyls ("PCBs") at its Dover, New Jersey facility, 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 December 31, 1998 and 1997 for this matter.
The indemnification discussed above applies to the costs associated with this
matter.
In addition to the above-mentioned remediation work required at the Company's
Dover, New Jersey plant, liabilities exist for clean-up costs associated with
hazardous materials at nine other on-site and off-site locations. 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 December 31, 1998, $4.2 million of
accrued environmental liabilities are included in the consolidated balance
sheet for these nine sites. The December 31, 1997 consolidated balance sheet
includes $4.4 million of accrued liabilities for eight such sites. The
indemnification discussed above applies to these locations.
F-23
NOTE 19. ENVIRONMENTAL MATTERS (CONTINUED)
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 $16
million in remediation and natural resource damage liabilities at the
Blackbird Mine site in Idaho and a minimum of $10 million in investigation and
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 $26 million liability and an
equal $26 million receivable from Pechiney, S.A. as of December 31, 1998 and
$29.3 million for both the liability and receivable as of December 31, 1997.
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-ups 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.
NOTE 20. SALE OF REFURBISHMENT BUSINESS
In September 1997, the Company sold its aircraft engine component
refurbishment business (other than its coating operations). The Company
received net cash proceeds of approximately $44.9 million after tax and
related expenses. The sales transaction had an immaterial effect on net
income. Net sales of such business were approximately $53 million in 1997 for
the period prior to the September sale and approximately $69 million for the
full year 1996. Income from operations of this business were immaterial in all
periods.
NOTE 21. OTHER INFORMATION
Other, net in the 1998, 1997, and 1996 consolidated statements of income
includes equity in income (loss) of unconsolidated affiliates of $.4 million,
$1.5 million and $(1.4) million, respectively. It also includes losses on
sales of receivables (Note 7) and $2.6 million of 1997 costs associated with
the 1997 public offering of common stock.
Taxes related to the changes in accumulated other comprehensive income were a
$1.6 million benefit associated with the 1998 minimum pension liability
adjustment and a 1998 $3.1 million expense and a 1997 $3.1 million benefit
associated with the foreign exchange adjustments.
In connection with the Acquisition, management determined that certain
manufacturing capabilities would be eliminated. Accordingly, a reserve of $1.9
million, principally for severance costs, was recorded as part of the
allocation of the purchase price. Expenditures in 1996 for this restructuring
effort were $1 million, principally for termination costs for 45 permanent and
temporary employees. The remaining $.9 million was spent in 1997, principally
for termination costs related to 15 employees.
F-24
NOTE 22. QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
The table below presents the Company's quarterly financial highlights for 1998
and 1997. The Company's business is generally not seasonal. However, the
timing of customer inventory needs in relation to engine production and
delivery schedules can cause quarterly fluctuations in the Company's operating
performance that are not necessarily related to underlying business
conditions.
1998 QUARTER ENDED
----------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) DEC. 31 SEPT. 30 JUNE 30 MARCH 31
- -------------------------------------------------------------------------------
Net sales $354.9 $331.6 $335.7 $328.4
Operating income 32.5 62.6 49.8 44.8
Net income (a) 20.4 38.1 27.4 24.5
Income per common share (basic and diluted) .19 .37 .26 .23
Market price
High 17.63 15.38 18.25 18.63
Low 10.63 9.75 13.56 13.63
- -------------------------------------------------------------------------------
1997 QUARTER ENDED
----------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) DEC. 31 SEPT. 30 JUNE 30 MARCH 31
- -------------------------------------------------------------------------------
Net sales (b) $306.2 $309.0 $330.4 $312.6
Operating income 31.5 40.0 47.2 35.8
Income before extraordinary item (a)(c)(d) 12.7 21.2 22.6 15.5
Extraordinary item-loss on early retirement
of debt (12.3) - - -
Net income .4 21.2 22.6 15.5
Income per common share before
extraordinary item (basic and diluted) .11 .20 .21 .14
Market price
High 16.00 - - -
Low 14.69 - - -
- -------------------------------------------------------------------------------
(a) 1998 includes pretax expense (income) related to the Company's SARs plan
of $2.7 million, $2.6 million, $(8.1) million and $13.6 million in the
first, second, third and fourth quarters, respectively. The third quarter
benefit was reversed in the fourth quarter due to the Company's common
stock price fluctuations. 1997 includes pretax expense related to the
Company's SARs plan of $7.9 million, $8 million, $5.1 million and $10.4
million in the first, second, third and fourth quarters of 1997,
respectively.
(b) Includes $3.4 million and $6.3 million of additional revenue (with no
associated costs) in the first and second quarters of 1997, respectively,
from a pricing adjustment with a customer that is not expected to recur in
future periods.
(c) Includes pretax expense of $1.3 million and $2.8 million in the second and
third quarters of 1997, respectively, for the accelerated write-off of
debt issuance costs associated with debt that was repaid ahead of
schedule.
(d) Includes $.6 million and $2 million in the third and fourth quarters of
1997, for costs associated with the Company's November 1997 public
offering of common stock.
F-25
NOTE 23. EVENT SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT AUDITORS
(UNAUDITED)
On March 3, 1999, the Company received from the U.S. Air Force a Notice of
Proposed Debarment from future government contracts and subcontracts directed
at Howmet Corporation and its Cercast Canadian subsidiary. The Air Force
unilaterally terminated the proposed debarment with respect to Howmet
Corporation by letter to Howmet on March 10, 1999, thus permitting Howmet
Corporation to resume accepting U.S. government contracts and subcontracts.
The continuing proposed debarment with respect to the Company's Cercast
Canadian subsidiary is based on certain of the testing issues discussed in
Note 18 and improper vendor payments that took place at the Cercast Canadian
operations. Debarment does not affect existing contracts, other than
extensions. The Company is taking steps to have the proposed Cercast debarment
withdrawn. In the unlikely event a debarment were imposed for an extended
period of time, such action would negatively impact sales and profits in
future periods. However, the Company believes that such impact would be
immaterial to results of operations.
F-26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's operating performance is affected by general economic trends and
by the following key factors.
INDUSTRY TRENDS: The Company manufactures cast components for the aircraft
- -------- ------
engine, airframe and industrial gas turbine markets through operating
companies located in the United States, France, the United Kingdom, Canada and
Japan. (See Notes 14 and 15 of Notes to Consolidated Financial Statements.)
Such castings are made from nickel and cobalt based superalloys, as well as
titanium and aluminum. In the two aircraft related markets, the Company
supplies parts to both the military and the commercial sectors. Demand for the
Company's products varies as a function of the strength of the aircraft and
the industrial gas turbine markets.
In the commercial aircraft market, from which the majority of the Company's
revenues are currently derived, production rates are at an all time high.
However, 1999 is thought to be the peak production year in the current cycle,
with production rates expected to decline through 2002. Despite the reduction
in the new aircraft build rate over this period, the Company believes that
aviation derived revenues and earnings will grow. This projection is due to
(i) increased aftermarket sales supporting the installed fleet of nearly
13,000 aircraft, (ii) increased use of technologically advanced, higher
revenue components, and (iii) market share increases with certain key
customers. An important consideration in forecasting aero revenue and earnings
growth is the fact that the mix of aircraft the Company expects to be built
over the next several years is such that those aircraft from which the Company
derives its highest revenues is not expected to decline as much as the overall
decline in aircraft builds. A further consideration is the comparative
strength of the regional jet and business aircraft market where the Company
has a dominant market position.
Military and defense contractor sales comprised approximately 14% of the
Company's total 1998 sales. Future sales to the U.S. Government could be
negatively impacted, depending on the outcome of the debarment matter
discussed below in "Results of Operations Year Ended 1998 Compared to Year
Ended 1997".
Industrial gas turbine ("IGT") activity, which represented about 35% of the
Company's revenues in 1998, is now experiencing a sharp increase. Industrial
gas turbines, especially in the larger (greater than 120 MW) size range, are
primarily used to generate electric power. These IGT's are in demand as power
plants because natural gas is available in large supplies, burns cleanly, and
is comparatively inexpensive. Also, IGTs, especially those incorporating aero
technologies, operate at much higher efficiencies compared to alternatives
such as coal and oil. Further increasing the demand is a recently heightened
awareness in the U.S. of insufficient reserve power generating capacity. IGT
power generation installations can be installed and made operational more
quickly than the alternatives. As a result, most of the major IGT OEMs have
significantly increased production rates. Several have sold all their capacity
for 1999 and 2000 and are now accepting orders for 2001. The Company is the
majority supplier of turbine airfoils at each of the major OEM producers, a
position that is enhanced by the fact that all such OEMs are introducing
advanced new higher technology engines for which the Company is for all
practical purposes, the sole provider of the critical turbine blades. As a
result of the heightened OEM demand and expected growth in aftermarket
component sales from an expanding installed base of engines, the Company
expects its IGT business to increase for the next several years.
PRICING: The Company has experienced pressure from all of its major customers
- -------
for price reductions. This pressure is the result of the competitive
environment which the Company's OEM customers are facing in the selling of
their products in the worldwide market. The Company's strategy to provide
added value and service to its customers has been successful to date in
offsetting much of the pricing pressures.
F-27
COST REDUCTION AND PRODUCTIVITY PROGRAMS: Since 1992 the Company has
- ---- --------- --- ------------ --------
significantly reduced costs and improved productivity, delivery and cycle
times. As a result of these improvements, the Company has enhanced its
financial performance, and management believes further improvements can be
achieved. The Company employs specific programs designed to achieve these
improvements. These programs include synchronous manufacturing, kaizen events
(in which solutions to specific operational problems are achieved by teams of
workers in concentrated time periods), quick shop intelligence (daily meetings
of plant staff in which product-specific manufacturing issues are reviewed and
solved), and standardization of manufacturing and business processes
throughout the Company's facilities worldwide, specialization by plants in the
production of certain families of castings and inter-facility manufacturing
and technical support, including the sharing of best practices, under a "One
Howmet" concept.
SALE OF REFURBISHMENT BUSINESS: In September 1997, the Company sold its
- ---- -- ------------- --------
aircraft engine component refurbishment business (other than its coating
operations). The Company received net cash proceeds of approximately $44.9
million after tax payments and related expenses. The sale had an immaterial
effect on net income. Net sales of this business were approximately $53
million in 1997 for the period prior to the September sale and approximately
$69 million for the full year 1996. Earnings from operations of this business
were immaterial in all periods.
BACKLOG: The Company's backlog of orders as of December 31, 1998 and 1997 were
- -------
$877 million and $793 million, respectively. Because of the short lead and
delivery times, backlog may not be a significant indicator of future
performance of the Company.
RECLASSIFICATION: Certain 1997 and 1996 amounts, which are presented below,
- ----------------
have been reclassified to be consistent with the 1998 presentation. These
include reclassifications to cost of sales from depreciation and amortization,
selling, general and administrative expense and research and development
expense.
RESULTS OF OPERATIONS YEAR ENDED 1998 COMPARED TO YEAR ENDED 1997
(in millions, except per Better/
share data) 1998 1997 (Worse) Percent
- -------------------------------------------------------------
Net Sales $1,350.6 $1,258.2 $92.4 7
Gross profit 311.5 294.4 17.1 6
Selling, general and ad-
ministrative expense 101.6 122.3 20.7 17
Research and development
expense 20.2 17.6 (2.6) (15)
- -------------------------------------------------------------
Income from operations 189.7 154.5 35.2 23
Net interest expense (11.1) (29.8) 18.7 63
Other, net (3.4) (6.4) 3.0 47
Income taxes (64.8) (46.3) (18.5) (40)
- -------------------------------------------------------------
Income before extraordi-
nary item 110.4 72.0 38.4 53
Extraordinary item - (12.3) 12.3 -
- -------------------------------------------------------------
Net income $ 110.4 $ 59.7 $50.7 85
- -------------------------------------------------------------
Income per common share
before
extraordinary item
(basic and diluted) $ 1.05 $ .67 $ .38 57
- -------------------------------------------------------------
Net sales in 1998 were 12% higher than in 1997, after excluding from 1997 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 aero and
industrial gas turbine markets. Also affecting comparability is $9.7 million
of
F-28
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 $17.1 million higher in 1998 than in 1997.
However, on a comparable basis, 1998 gross profit was $35.3 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). Provisions for
warranty and other large claims of approximately $6.5 million, including the
$4 million provision discussed in the next paragraph, were recorded in both
years, primarily in the fourth quarters. Cost control enabled the Company to
capitalize on increased volume. The 1998 gross margin percentage of 23.1% was
adversely affected by results of new product offerings. Such results are
expected to improve and contribute to future earnings growth. The 1997 23.4%
gross margin percentage benefited by .8 of a percentage point from the
aforementioned $9.7 million nonrecurring price adjustment.
Starting in late 1998, the Company discovered certain product testing and
specification non-compliance issues at two of its Cercast aluminum casting
operations. The Company notified customers, is actively cooperating with them
and government agencies in the investigation of these matters, and is
implementing remedial action. Data collection and analysis must be completed
before a definitive estimate of the cost to resolve these matters can be
completed. Customers have asserted no formal claims, and the Company knows of
no in-service problems associated with these issues. Based on preliminary
evaluation, however, the Company has recorded an estimated loss of $4 million
in its consolidated statement of income for the year ended December 31, 1998.
Based on currently known facts, the Company believes that additional costs
beyond $4 million, if any, would not have a material adverse effect on the
Company's financial position, cash flow, or annual operating results. However,
additional cost when and if accrued may have a material adverse impact on the
quarter in which it may be accrued.
On March 3, 1999, the Company received from the U.S. Air Force a Notice of
Proposed Debarment from future government contracts and subcontracts directed
at Howmet Corporation and its Cercast Canadian subsidiary. The Air Force
unilaterally terminated the proposed debarment with respect to Howmet
Corporation by letter to it on March 10, 1999, thus permitting Howmet
Corporation to resume accepting U.S. government contracts and subcontracts.
The continuing proposed debarment with respect to the Company's Cercast
Canadian subsidiary is based on certain of the above testing issues and
improper vendor payments that took place at the Cercast Canadian operations.
Debarment does not affect existing Cercast contracts, other than extensions.
The Company is taking steps to have the proposed Cercast debarment withdrawn.
In the unlikely event a debarment were imposed for an extended period of time,
such action would negatively impact sales and profits in future periods.
However, the Company believes that such impact would be immaterial to results
of operations.
Selling, general and administrative expense was $20.7 million lower in 1998
than in 1997. The decrease is primarily due to a $20.6 million change in the
amounts recorded in connection with the Company's Stock Appreciation Rights
plan ("SARs"). In 1998, $10.8 million of SARs expense was recorded versus
$31.4 million of expense in 1997. SARs expense will continue to decline in
future years. However, if the market price of the Company's common stock
fluctuates below $15 per share, the amount of expense will fluctuate and could
result in the Company recording profits from the reversal of previously
recorded SARs expense. Such profits would be reversed in subsequent periods
when the market price of the Company's stock fluctuates back up to $15 per
share (the maximum per share price for SARs compensation purposes) or higher.
Net interest expense was $18.7 million lower for 1998 compared to 1997. The
principal reason for the reduction was significantly lower debt levels
resulting from strong cash generation. Another significant contributor to the
lower interest expense was the interest rate reductions achieved in the
Company's 1997 fourth quarter debt refinancing. Also contributing to the
reduction was a $4.1 million charge in 1997, which was not repeated in 1998,
for accelerated write-off of debt issuance cost associated with debt that was
repaid ahead of schedule.
F-29
The effective tax rate for 1998 was 37% compared to 39.1% for 1997. The lower
effective rate for 1998 was attributable primarily to a lower state tax rate
and the diminished impact of non-deductible goodwill in relation to higher
1998 income.
Income before extraordinary item in 1998 increased by 53% when compared with
1997, and the resulting per share amount increased by 57%, due to the factors
outlined above.
RESULTS OF OPERATIONS YEAR ENDED 1997 COMPARED TO YEAR ENDED 1996
Better/
(in millions, except per share data) 1997 1996 (Worse) Percent
- -----------------------------------------------------------------------------
Net Sales $1,258.2 $1,106.8 $151.4 14
Gross profit 294.4 215.7 78.7 36
Selling, general and administrative
expense 122.3 93.4 (28.9) (31)
Research and development expense 17.6 20.3 2.7 13
- -----------------------------------------------------------------------------
Income from operations 154.5 102.0 52.5 51
Net interest expense (29.8) (40.2) 10.4 26
Other, net (6.4) (5.9) (0.5) (8)
Income taxes (46.3) (30.3) (16.0) (53)
- -----------------------------------------------------------------------------
Income before extraordinary item 72.0 25.6 46.4 181
Extraordinary item (12.3) - (12.3) -
- -----------------------------------------------------------------------------
Net income $ 59.7 $ 25.6 $ 34.1 133
- -----------------------------------------------------------------------------
Income per common share before
extraordinary item (basic and diluted) $ .67 $ .21 $ .46 219
- -----------------------------------------------------------------------------
Net sales increased significantly in 1997 due primarily to volume increases,
principally in the aero market. The favorable effects of higher volume were
partially offset by lower prices. Such price reductions were a function of
competitive factors and sharing cost reductions with customers. In 1997, the
Company received $9.7 million of additional revenue from a pricing adjustment
with a customer that is not expected to recur in future periods.
Gross profit increased by $78.7 million in 1997 primarily from leveraging the
higher sales volume and improved operating performance. Cost reductions and
productivity improvements were partially offset by the aforementioned price
reductions. A $6.5 million warranty expense charge in 1997 and the $9.7
million additional revenue (which had no associated costs) also affect
comparability. All of these factors resulted in a 1997 gross margin percentage
of 23.4% compared to 19.5% in 1996.
Selling, general and administrative expense increased by $28.9 million in
1997. The increase was primarily due to $24.8 million of higher 1997 SARs
expense.
Net interest expense decreased $10.4 million in 1997. Interest expense was
reduced by $14.5 million due to lower debt levels and, to a lesser extent,
lower rates resulting from achievements of financial targets. Partially
offsetting this reduction was a $4.1 million accelerated write-off of debt
issuance costs associated with debt that was repaid ahead of schedule in the
second and third quarters.
F-30
The effective tax rate for 1997 was 39.1% compared to 54.2% for 1996. The
lower effective rate for 1997 was attributable primarily to the diminished
impact of non-deductible goodwill amortization in relation to higher 1997
income, higher 1997 research and development credits, and a lower state tax
rate.
Income before extraordinary item increased by 181%, and the resulting per
share amount increased by 219%, due to the factors outlined above, including
the favorable impact of the lower effective tax rate.
In 1997, the Company recorded a $12.3 million extraordinary loss from early
debt retirement.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flow from operations and
borrowings under its revolving credit facility. The Company's principal
requirements for cash are to provide working capital, service debt, finance
capital expenditures and fund research and development. 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, debt service, capital expenditures and research and
development for the next year. To date, cash available after satisfaction of
these requirements has been used to voluntarily repay debt prior to mandatory
due dates.
Capital expenditures in 1998 were $83 million. The 1998 capital expenditures
were for capacity expansions needed to serve the core business, as well as
additional expenditures to support new products and process enhancement
activities. In 1998, the Company announced plans to accelerate expansion of
IGT capacity at three plants and to build a new aero-airfoil plant. Capital
expenditures for 1999, including the aforementioned capacity expansions, are
expected to be approximately $120 million.
In July 1998, the Company acquired an additional 31% of its Japanese
subsidiary for $3.4 million, increasing ownership to 81%. The initial July 1,
1998 consolidation of this subsidiary increased net working capital by $6.5
million, property, plant and equipment by $12.1 million and debt by $10.7
million.
At December 31, 1998, $232.4 million of unused borrowing capacity was
available under the Company's revolving credit facility.
On February 17, 1999, the Company exercised its option to redeem all of its
redeemable preferred stock. The $66.4 million disbursement, equal to the
carrying value, was funded with borrowings under the revolving credit
agreement.
At December 31, 1998, the Company's balance sheet includes $716.4 million of
Pechiney Notes and a related $716.4 million Restricted Trust asset. On January
4, 1999 Pechiney, S.A. (the Company's previous owner) repaid the Pechiney
Notes in full. As a result, the Restricted Trust, which secured Pechiney,
S.A.'s agreement to repay the notes, was terminated. No Company funds were
used in the payment of the notes. The Restricted Trust and the Pechiney Notes
will not be included on the Company's balance sheet after December 31, 1998.
See Note 8 of Notes to Consolidated Financial Statements.
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) was 30% at
December 31, 1998 compared to 50% at December 31, 1997. The current ratio
(excluding short-term debt and Pechiney Notes) was 1.1 at December 31, 1998
and 1.2 at December 31, 1997. Working capital (excluding short-term debt and
Pechiney Notes) was $34.8 million and $62.5 million at December 31, 1998 and
December 31, 1997, respectively.
The Company has an agreement to sell, on a revolving basis, an undivided
interest in a defined pool of accounts receivable. The Company has received
$55 million from the sale of such receivables and has deducted this amount
from accounts receivable as of December 31, 1998. The $32 million retained
receivables, shown in the December 31, 1998 balance sheet, represents the
receivables set aside to replace sold receivables in the event they are not
fully collected.
F-31
The Company is a holding company, which conducts its only operations through
Howmet Corporation and its subsidiaries and, accordingly, is dependent on the
receipt of cash from these subsidiaries to meet its expenses and other
obligations. Terms of the Revolving Credit Facility which limit transfers of
cash to the Company from Howmet Corporation, affect the Company's ability to
obtain funds for any purposes, including dividends, stock redemption, debt
service and normal business activities. Based on current and anticipated
activities, this limitation is not expected to have an effect on the Company's
ability to conduct its normal activities.
Since December 31, 1997, the cumulative translation adjustment, which is
included in stockholders' equity, changed by $3.1 million, resulting in a $2.5
million negative balance at December 31, 1998. The change is primarily due to
the strengthening of the French franc relative to the U.S. dollar.
MARKET RISK
The Company's long and short-term debt portfolio consists primarily of
variable-rate instruments. The Company currently does not utilize interest
rate derivative contracts. At December 31, 1998, the interest rate on $135
million (including $55 million from the receivables securitization facility)
of the Company's debt varies with changes in prevailing market rates. If the
interest rate on this variable-rate debt were to change by 1 percent, net
income would hypothetically increase or decrease by $.8 million. This
hypothetical analysis does not take into consideration the effects of the
economic conditions that would give rise to such an interest rate change or
the Company's response to such hypothetical conditions, nor does it take into
effect changes from the December 31, 1998 debt amounts.
The Company enters into forward exchange contracts to manage certain foreign
currency exposures. These forward exchange contracts are hedges for risk
management and are not used for trading or speculative purposes. Such hedges
comply with Company policies approved by the Board of Directors. To mitigate
the effects of changes in currency exchange rates on that portion of the
foreign operations business conducted in foreign currencies, the Company
regularly hedges by entering into foreign exchange forward contracts to cover
near-term exposures. At December 31, 1998, for hedging purposes, the Company
had the following forward exchange contracts outstanding:
(IN MILLIONS)
CONTRACT & U.S. LOCAL
CURRENCY DOLLAR CURRENCY UNREALIZED MATURITY
LOCAL CURRENCY TYPE EQUIVALENT EQUIVALENT GAIN DATES
- ----------------------------------------------------------------------------------------------
United Kingdom pounds Buy U.S. dollars $ 3.9 2.3 $ - Jan 1999 to Feb 1999
United States dollars Buy Can. dollars 25.2 25.2 .1 Jan 1999 to Dec 1999
French francs Buy U.K. pounds 11.9 66.3 - Jan 1999 to Dec 1999
French francs Sell U.S. dollars 9.1 52.0 .2 Mar 1999
- ----------------------------------------------------------------------------------------------
$50.1 $.3
- ----------------------------------------------------------------------------------------------
The fair value of these foreign exchange contracts, which is the unrealized
gain, was estimated based on December 31, 1998, foreign exchange rates
obtained from dealers. If the U.S. dollar were to strengthen or weaken against
these currencies by 10 percent, the hypothetical value of the contracts would
increase or decrease by approximately $1.1 million. However, these forward
exchange contracts are offset by foreign exchange losses or gains on the
underlying commitments. Calculations of the above effects assume that each
rate changed in the same direction at the same time relative to the U.S.
dollar. The calculations reflect only those differences resulting from
mechanically replacing one exchange rate with another. They do not factor in
any potential effects that changes in currency exchange rates may have on
income statement translation, sales volume and prices, and on local currency
costs of production.
The Company's international operations' net assets totaled $177 million at
December 31, 1998. The effect of any change in foreign exchange rates on the
translation of such net assets is reflected in the translation adjustment
recorded in the equity section of the balance sheet. The Company does not
hedge its foreign
F-32
currency net asset exposures. The Company also has some commodity price risk
but does not currently hedge commodity-related transactions. For additional
information on policies and discussion of the Company's foreign exchange and
financial instruments, see Notes 2 and 17 of the notes to the consolidated
financial statements.
FEBRUARY 1999 CHANGE IN OWNERSHIP AND PREFERRED STOCK REDEMPTION
On February 8, 1999, Carlyle-Blade sold its remaining 22.65 million shares of
Howmet International Inc. common stock to Cordant. After the sale Cordant
holds 84.65% and the public holds 15.35% of the outstanding Howmet
International Inc. common stock.
On February 17, 1999, the Company paid $66.4 million to redeem all of its
outstanding 9% preferred stock. The payment was made to Cordant, the sole
preferred stockholder. The Company borrowed under its existing revolving
credit facility to make this payment.
YEAR 2000 COMPLIANCE
The Company does not anticipate a disruption in operations as a result of
computer hardware and software issues associated with the Year 2000. A team of
both Company personnel and contract consultants is specifically assigned to
actively identify, evaluate and address the Company's Year 2000 compliance
issues.
Business Information Systems Remediation: Management believes that virtually
- -------- ----------- ------- -----------
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, with minor exceptions, to be
completed by June 30, 1999. All central systems will be placed under
restrictive change control procedures to ensure that corrected systems are not
inadvertently impacted by further changes. System-wide testing activity will
be conducted periodically throughout 1999. In addition to the aforementioned
efforts, the Company is installing several commercial application software
products, at both its central facility and at certain plant sites, to further
address its Year 2000 readiness.
The Year 2000 compliance team is concurrently working with the various plant
facilities to identify and implement any needed changes to local business
applications. The inventory and assessment phase of this effort at each plant
has been completed or is near completion. The Company expects corrective
action projects to be completed by June 30, 1999. To date no material risk of
non-compliance has been identified. No major information systems initiatives
have been materially adversely affected due to staffing constraints or
expenditures needed to remedy Year 2000 issues.
Embedded Processor Systems Remediation: The Year 2000 team has provided each
- -------- --------- ------- -----------
plant facility with guidance and support for embedded processor
identification, evaluation, testing and remediation, where required. All plant
facility teams are scehduled to complete this project by June of 1999.
Customer and Supplier Readiness: 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 Corporation's manufacturing processes and
interface systems are vulnerable to those third parties' failure to resolve
their own Year 2000 issues. These communications have included written
inquiries or questionnaires and, in some instances, on-site meetings. Over 800
suppliers have responded to the Company's survey, and a plan has been
established to validate important suppliers' Year 2000 preparations.
Electronic interfaces with individual business associates are being addressed
on a case by case basis. There can be no assurance 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, responses to date
have indicated no significant problems.
Risk Assessment, Worst Case Scenarios and Contingency Planning: Management
- ---- ---------- ----- ---- --------- --- ----------- --------
believes that the most likely worst case Year 2000 scenario for the Company
would be a shut down of individual pieces of critical
F-33
equipment or computer systems at one or two of its manufacturing facilities
for one or two weeks disrupting but not totally eliminating production at
those plants. Work-around procedures would probably be established by the end
of that period. Total remediation of the underlying problem may stretch over a
six-month period or longer. Management further believes that this is more
likely to occur at its foreign facilities than its U.S. plants. Even in this
eventuality, management believes any loss of revenue during the period
involved will be substantially recovered in later periods as a result of
deferral rather than cancellation of orders or deliveries. But no assurance
can be given in this regard.
During 1999 the Company will focus on further evaluation of customer and
supplier readiness, testing systems with embedded processors and business
systems, risk assessment, and contingency planning.
The Company is currently developing Year 2000 contingency plans in three
areas; 1) business systems processing at the Company's primary data center, 2)
procurement activities for critical raw materials and services including
transportation, and 3) local manufacturing processes and systems at each
facility. These plans are expected to be complete during the third quarter of
1999 and will employ methods such as alternate manual processes for critical
applications, installation of a generator at the Company's primary data
center, the establishment of a corporate command post, full staffing of
information technology and plant maintenance personnel during the year-end
weekend, extensive future date testing, methods to assure adequate inventory
of materials, if any, identified as susceptible to supply interruption, extra
product quality testing in 2000, validation of customer and supplier
electronic data interchanges, critical equipment shut-downs on December 31,
1999 and active monitoring, measuring and auditing plant compliance. While
diligent efforts have been made to anticipate and mitigate risks, it is
possible that the inability of the Company or its suppliers or customers to
effectuate solutions to their respective Year 2000 issues on a timely and cost
effective basis could have a material adverse effect on the Company.
Cost Information: The estimated cost at completion for all phases of the
- ---- -----------
Company's Year 2000 project is $16.5 million. An estimated $6.5 (39%) of this
expense is for information systems labor and miscellaneous project costs;
these costs are being expensed as routine information systems maintenance as
incurred over the three-year duration of the project. Another $7.5 million
(46%) is for software purchase and implementation costs for applications that
were installed as scheduled, or on an expedited basis, for Year 2000 purposes.
An additional $2.5 million (15%) is for infrastructure upgrades or
replacement.
Approximately $9.3 million (56%) had been expended as of December 31, 1998;
the Company expects to spend $7.2 million (44%) in 1999.
EURO CONVERSION
The Company continues to assess the impact of the Euro conversion on its
business operations and is currently implementing a strategy which will allow
it to operate in a Euro environment during the transition period, from January
1, 1999 to December 31, 2001, and after full Euro conversion, effective July
1, 2002. The Company does not expect the Euro conversion to materially impact
its competitive position, nor to significantly impact its computer software
plans. The Company does not expect any significant changes to its current
hedging policy and does not expect any significant increases in its foreign
exchange exposure. Until the Company completes its assessment of the Euro
conversion impact, there can be no assurance that the Euro conversion will not
have a material impact on the overall business operations of the Company.
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 1 of Notes to 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 19
of Notes to Consolidated Financial Statements.
F-34
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 of these proceedings
will not have a material adverse effect upon its operations or financial
condition.
RISK FACTORS
The Company sets forth in its Form 10-K for 1998, incorporated by reference
herein, a "Cautionary Statement" with respect to certain statements herein
that the Company believes are "forward-looking statements" under the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Many of the factors described therein are discussed in both current and prior
Company Securities and Exchange Commission filings and to the extent not
otherwise discussed in forward-looking statements should be considered in
assessing the various risks associated with the Company's conduct of its
business and financial condition. Certain risks which may impact the accuracy
of the Company's forward-looking statements include, but are not necessarily
limited to: changing economic and political conditions in the United States
and in other countries, including those in Asia, where economic disruption
could delay the delivery of aero or industrial gas turbine engines. The impact
of such delay in delivery of new engines would be offset in part by higher
spare parts sales to these customers. 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) the nature of the Company's customer base, (iv)
competition and (v) pricing pressures. 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
projections made herein as a result of the factors set forth above and other
factors.
NEW ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued. This statement establishes accounting standards for
derivative instruments and for hedging activities. 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. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. The Company expects to adopt this new statement
on January 1, 2000.
RECENT MARKET PRICE AND DIVIDENDS
The market price of the Company's common stock ranged from a low of $9.75 to a
high of $18.63 per share for 1998. From the November 1997 initial public
offering to December 31, 1997 the range was from a low of $14.69 to a high of
$16.00 per share.
The Company did not pay dividends in 1998 or 1997.
F-35
SELECTED FINANCIAL DATA
Howmet Predecessor
Howmet International Inc. Consolidated (a) Company Combined (a)
---------------------------------------------------------------------------
Period from Period from
December 14, January 1,
1995 to 1995 to Year Ended
Year Ended December 31, December 31, December 13, December 31,
---------------------------------- -------------------------- ------------
(in millions, except per share data) 1998 1997 1996 1995 1995 1994
- -----------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME
DATA (A)
Net sales $ 1,350.6 $ 1,258.2 $ 1,106.8 $ 51.4 $894.1 $858.3
Operating expenses:
Cost of sales 1,039.1 963.8 891.1 42.1 747.6 711.5
Selling, general and
administrative (b) 101.6 122.3 93.4 3.7 77.2 64.3
Research and
development 20.2 17.6 20.3 1.0 19.2 14.7
Restructuring charges
(credit) - - - - (1.6) 2.5
Goodwill write-off - - - - - 47.4
- -----------------------------------------------------------------------------------------------------------------
Income from operations 189.7 154.5 102.0 4.6 51.7 17.9
Interest (expense)
income, net (11.1) (29.8) (40.2) (3.1) 4.1 5.2
Other, net (3.4) (6.4) (5.9) (1.0) (5.8) (0.1)
Income taxes (64.8) (46.3) (30.3) (.5) (23.7) (46.0)
- -----------------------------------------------------------------------------------------------------------------
Income (loss) before
extraordinary item (c) $ 110.4 $ 72.0 $ 25.6 $ - $ 26.3 $(23.0)
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) (c) $ 110.4 $ 59.7 $ 25.6 $ - $ 26.3 $(23.0)
Dividends on redeemable
preferred stock (5.6) (5.1) (4.6) (.2) - -
- -----------------------------------------------------------------------------------------------------------------
Net income(loss)
applicable to common
stock $ 104.8 $ 54.6 $ 21.0 $ (.2) $ 26.3 $(23.0)
- -----------------------------------------------------------------------------------------------------------------
Per common share
amounts (d):
Income (loss) before
extraordinary item $ 1.05 $ .67 $ .21 $ - $ .26 $ (.23)
Net income (loss) $ 1.05 $ .55 $ .21 $ - $ .26 $ (.23)
- -----------------------------------------------------------------------------------------------------------------
OTHER DATA (END OF PERIOD, WHERE
APPLICABLE) (A)(E):
Total assets, excluding
Restricted Trust $ 1,084.2 $ 1,020.6 $ 1,052.4 $ 1,127.8 $ - $509.9
Restricted Trust (f) 716.4 716.4 716.4 716.4 - -
Long-term debt,
including current
maturities, excluding
Pechiney Notes 63.0 208.4 350.7 488.6 - 42.1
Pechiney Notes (f) 716.4 716.4 716.4 716.4 - -
Redeemable preferred
stock 65.6 60.0 54.9 50.2 - -
Stockholders' equity 371.3 265.7 218.8 196.9 - 166.3
Net cash provided
(used) by operating
activities 207.4 192.6 184.5 (12.7) 35.2 91.4
Capital expenditures 83.0 56.9 33.7 1.6 41.2 38.0
Approximate number of
employees 11,500 10,400 10,000 9,600 - 8,700
- -----------------------------------------------------------------------------------------------------------------
(a) In 1995 Howmet International Inc. was formed to acquire its only
operations, which are those of the entities that comprise Howmet
Predecessor Company Combined. Data for periods after the December 13, 1995
acquisition date reflect the allocation of the acquisition purchase price
to asset and liabilities of the Company, the financing of the acquisition,
and the subsequent amortization, depreciation, interest expense and other
effects related thereto.
(b) Includes charges related to the Company's stock appreciation rights plan
of $10.8 million in 1998, $31.4 million in 1997 and $6.6 million in 1996.
(c) In 1997 the Company recorded a $12.3 million after-tax extraordinary loss
on early retirement of debt.
(d) All per common share amounts are both basic and diluted and were
calculated assuming that the 100 million common shares outstanding at
December 31, 1998 and 1997 were outstanding for all periods.
(e) Excludes 1994 related party advances to Pechiney Corporation of $238.7
million and excludes 1994 related party payables of $20 million.
(f) The Restricted Trust held a note receivable from Pechiney, S.A. and
related letters of credit that secured Pechiney, S.A.'s agreement to repay
the Pechiney Notes. Subsequent to December 31, 1998, Pechiney, S.A. (the
Company's previous owner) paid the Pechiney Notes in full on January 4,
1999. No Company funds were used in the payment of the Notes. As a result,
the Restricted Trust has been terminated and like the Pechiney Notes,
subsequent to December 31, 1998, will not be included on the Company's
balance sheet.
F-36
- --------------------------------------------------------------------------------
Please mark your [ [ 2575
[X] votes as in this
example.
This proxy when properly executed will be voted in the manner directed herein
by the undersigned stockholder(s). If no direction is made, this proxy will be
voted FOR proposals 1 and 2.
- -----------------------------------------------------------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR proposals 1 and 2
- -----------------------------------------------------------------------------------------------------------------------------------
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of 2. Appointment of Ernst & Young LLP
Directors (See [_] [_] as independent auditors for fiscal [_] [_] [_]
Reverse) year 1999
To withhold authority to vote for any nominee(s), mark
the "FOR" box and write the name of each such nominee
below
- -----------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Note: Please sign exactly as name appears on this form. Joint owners
should each sign personally. Corporation proxies should be signed
by an authorized officer. Executors, administrators, trustees, etc.
should so indicate when signing.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SIGNATURE(S) DATE
- ------------------------------------------------------------------------------------------------------------------------------------
[ARROW UP] FOLD AND DETACH HERE [ARROW DOWN]
HOWMET INTERNATIONAL INC. PROXY/VOTING INSTRUCTION CARD
Greenwich, Connecticut
- --------------------------------------------------------------------------------
This proxy is solicited on behalf of the Board of Directors for the Annual
Meeting on May 7, 1999.
The undersigned hereby appoints James R. Wilson, David L. Squier and Roland A.
Paul, or any of them, each with power of substitution, as proxies to vote as
specified on this card all shares of common stock of Howmet International Inc.
(the "Company") owned of record by the undersigned on March 16, 1999, at the
Company's Annual Meeting of Stockholders on May 7, 1999, and at any adjournment
thereof. Said proxies are authorized to vote in their discretion as to any other
business which may properly come before the meeting. If a vote is not specified,
said proxies will vote FOR proposals 1 and 2.
Receipt of the Notice and Proxy Statement for the above Annual Meeting and the
Company's Annual Report to Stockholders for the fiscal year ended December
31, 1998, is acknowledged.
Nominees for Election as Directors: James R. Wilson, Richard L. Corbin, Edsel D.
Dunford, James R. Mellor, D. Larry Moore, David L. Squier, and James D. Woods
You are encouraged to specify your choices by marking the appropriate boxes (SEE
REVERSE SIDE), but you need not mark any boxes if you wish to vote in accordance
with the Board of Directors' recommendations. The proxies cannot vote your
shares unless you sign and return this card.
FOLD AND DETACH HERE