UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file Number 1-13645
HOWMET INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1946684
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
Address of Principal Executive Offices: 475 Steamboat Road, Greenwich, CT 06830
Registrant's telephone number, including area code: 203-661-4600
------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
-------------------
Common Stock, par value on which registered
-----------------------
$.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant:
$303,030,380 AS OF MARCH 16, 2000
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
COMMON STOCK, $0.01 PAR VALUE, AS OF MARCH 16, 2000: 100,033,307 SHARES
DOCUMENTS INCORPORATED BY REFERENCE
Exhibit Index appears on pages 27-31.
TABLE OF CONTENTS
Part I
Item 1 - BUSINESS....................................................... 1
- CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995........................................................ 6
Item 2 - PROPERTIES..................................................... 11
Item 3 - LEGAL PROCEEDINGS.............................................. 12
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 12
Part II
Item 5 - MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................ 12
Item 6 - SELECTED FINANCIAL DATA........................................ 13
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................... 13
Item 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...... 13
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 13
Item 9 - CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE....................................... 13
Part III
Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY................ 14
Item 11 - EXECUTIVE COMPENSATION......................................... 17
Item 12 - SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT............ 24
Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 25
Part IV
Item 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K........................................ 26
SIGNATURES.................................................................. 32
FINANCIAL INFORMATION....................................................... F-1
FINANCIAL STATEMENT SCHEDULES............................................... I-1
PART I
ITEM 1 -- BUSINESS
Howmet International Inc. is a Delaware corporation organized in 1995 (referred
to hereinafter together with its subsidiaries as the "Company" or "Howmet").
Through its principal operating subsidiary, Howmet Corporation, founded in 1926,
the Company is the largest manufacturer in the world of investment cast turbine
engine components for jet aircraft and industrial gas turbines ("IGT") as
original equipment and spare parts. The Company uses investment casting
techniques to produce high-performance, highly reliable superalloy and titanium
components to the exacting specifications of the major aerospace and IGT engine
manufacturers. Through Howmet Corporation's Aluminum Casting (formerly Cercast)
subsidiaries, the Company is also the world's largest producer of aluminum
investment castings, which it produces principally for the commercial aerospace
and defense electronics industries.
Howmet Corporation operates in one business segment, investment castings.
Financial information with respect to geographic regions is included in Note 15
of "Notes to Consolidated Financial Statements" on page F-21 - F-22 hereof.
The Company was formed in 1995 under the name Blade Acquisition Corp. ("Blade")
as a joint venture between Cordant Technologies Inc., then known as Thiokol
Corporation ("Cordant"), which at that time owned 49% of the Company's Common
Stock, and Carlyle-Blade Acquisition Partners, L.P. ("Carlyle-Blade Partners"),
which owned 51% of the Company's Common Stock. The Company was formed to
purchase Howmet Corporation and the Cercast companies ("Cercast") from a
subsidiary of Pechiney, S.A. The acquisition of Howmet Corporation and Cercast
was accomplished on December 13, 1995 through the purchase of the capital stock
of Pechiney Corporation, Howmet Corporation's parent holding company, and the
capital stock of Cercast (the "Acquisition"). The Cercast companies then became
subsidiaries of Howmet Corporation, and Pechiney Corporation's name was changed
to Howmet Holdings Corporation ("Holdings").
On December 2, 1997, Cordant acquired 13 million shares of the Company's Common
Stock from Carlyle-Blade Partners, increasing its ownership interest in the
Company to 62%. This was done concurrently with a public offering of stock of
the Company by Carlyle-Blade Partners, pursuant to which public stockholders
acquired a 15.35% interest in the Company and Carlyle-Blade Partners' interest
was reduced to 22.65%. On February 8, 1999, Cordant acquired all of Carlyle-
Blade Partners' remaining shares of the Company's Common Stock and now holds
84.6% of the currently outstanding Common Stock.
POSSIBLE OWNERSHIP CHANGES
On November 12, 1999, Cordant made a proposal to acquire all of the outstanding
shares of Common Stock of the Company not currently owned by Cordant for a price
of $17.00 per share in cash, and the proposal was referred to the Independent
Directors Committee of the Company's Board of Directors (the "Committee"). On
March 10, 2000, Cordant informed the Committee that it was willing to increase
its offer to $18.75 per share, but following further discussions no agreement
was reached. On March 14, 2000, Alcoa Inc. ("Alcoa") and Cordant announced an
agreement under which Alcoa agreed to acquire Cordant. Alcoa has advised the
Company that it intends to enter into discussions with the Committee to pursue
the acquisition of the outstanding publicly held shares of the Company's stock.
See "Control by and Relationship with Cordant" in "Cautionary Statement," page
8.
PRODUCTS
The Company uses the investment casting process to manufacture superalloy,
titanium and aluminum components for aerospace engine and airframe applications
and IGT applications for customers worldwide. Sales to the aerospace market were
$733.7 million, $802.5 million, and
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$739.9 million in 1999, 1998, and 1997 respectively. Sales to the IGT market
were $677.4 million, $476.1 million, and $402.5 million respectively in those
years. These products are manufactured to precise specifications provided by
customers.
HOWMET
PRODUCTS SUMMARY DESCRIPTION AND APPLICATION
- -------- -----------------------------------
Blades High temperature superalloy rotating turbine engine
components. Blades act as airfoils, which are driven by the
hot gas flow.
Vanes High temperature superalloy non-rotating turbine engine
components. Vanes are the fixed airfoils which direct the
gas flow.
IGT shroud blocks Vane holders that provide a seal to fix each vane in
position.
Turbine rotors Integrated cast rotating wheels of blades primarily for use
in smaller engines. Rotors incorporate numerous blades in a
single part.
Nozzle rings Integrated cast non-rotating rings of vanes primarily for
use in smaller engines. Nozzle rings are like vanes but are
manufactured as a single integral component.
Compressor stators Integrated cast non-rotating rings of compressor vanes for
use in small and large engines. Compressor stators
incorporate numerous vanes in a single part.
Frames Large diameter thin-wall cases used to support their
respective sections of turbine engines such as fans,
compressors and turbines.
Bearing housings Large diameter, heavy structural supports for bearings.
Airframe components Titanium and aluminum structures for commercial and
military aircraft, including door frames, flap tracks,
nacelles, longerons, wing tips, and nose and tail cones.
Electronics
packaging Aluminum boxes with card slots and cooling fins for
electronic avionics packages.
Electro-optical
system housings Heads-up display, gimbal and other housings.
Engine parts Gear boxes, front frames, and blocker doors for small
engines.
Other aircraft
parts Aircraft fuel pump, a/c blower, oil tank and surge tank
components.
JOINT VENTURES
Howmet Corporation currently is participating in two joint ventures, one in
Japan with Komatsu Ltd. and the other in the United States with a subsidiary of
United Technologies Corporation. The Japanese joint venture, Komatsu-Howmet Ltd.
("KHL"), was established in 1972 and manufactures investment cast components for
IGT and aerospace customers, primarily in Japan. Howmet Corporation currently
holds an 81% interest in KHL and has an option to purchase Komatsu's remaining
interest in this venture. On December 20, 1999 the Company announced that it
intends to acquire Komatsu's remaining interest, with the acquisition expected
to be completed in the second quarter of 2000. The joint venture with United
Technologies Corporation, Sprayform Technologies International, L.L.C.
("Sprayform"), was organized in 1997 to develop and commercialize the
Spraycast-X(R) technology. Through this technology atomized metal is sprayed
onto a rotating mandrel to form products such as cases and rings. Howmet
Corporation currently holds a 51% interest in Sprayform.
2
RAW MATERIALS
The Company's raw materials include a number of metals and minerals, including
titanium, hafnium, aluminum, nickel, cobalt, molybdenum and chromium, among
others. The Company has multiple sources of supply for most of these materials
and has not experienced any significant supply interruption in the past twenty
years. Prices of these materials, however, can be volatile, and the Company
engages in advance purchases of some of these materials under certain market
conditions, and passes certain price fluctuations through to customers pursuant
to its long-term agreements. The Company ordinarily does not otherwise attempt
to hedge the price risk of its raw materials. See "Availability and Cost of Raw
Materials" in "Cautionary Statement", page 8.
PATENTS
The Company has 75 outstanding United States patents, 8 of which will expire
within five years and 12 more of which will expire within ten years. The Company
has also obtained certain technical licenses and developed other proprietary
information. The Company believes that these proprietary rights, including
modifications and applications of the directional solidification and single
crystal casting processes, provide it with a competitive advantage. To protect
its proprietary information, the Company requires its employees to sign
confidentiality agreements, reminds employees of this confidentiality obligation
upon their departure from the Company, and builds much of its own specialized
equipment, such as casting furnaces, to prevent competitors from learning about
Howmet's newly developed processes.
Competitors in the Company's business also hold patents and other forms of
proprietary information, and there is active technical competition in that
business. No assurance can be given that one company or another will not obtain
a significant advantage from time to time in one aspect of the industry's
technology or another.
MAJOR CUSTOMERS
The Company is the leading supplier of precision investment cast components to
the producers of aircraft and industrial gas turbine engines. Most of the
turbine engine market is characterized by a limited number of large
manufacturers of engines. The Company's top ten customers represented
approximately 76% of the Company's net sales in 1999. The Company's principal
customers are The General Electric Company, principally through its aircraft
engine (GEAE) and power systems (GEPS) groups, ABB Power Generation Ltd., and
United Technologies Corporation, principally through its Pratt & Whitney
aircraft operations (Pratt & Whitney Division and Pratt & Whitney Canada). Sales
to these customers represented 24%, 13% and 10%, respectively, of the Company's
1999 net sales. The Company's other principal aerospace engine customers (none
of which represented more than 10% of 1999 net sales) include Honeywell
International Inc. (through its acquisition of AlliedSignal Inc.), FiatAvio,
S.p.A., Rolls-Royce PLC (and its Rolls-Royce Allison subsidiary), Walbar (a
division of Coltec Industries Inc.), and The Boeing Company. The Company's other
principal IGT customers (none of which represented more than 10% of 1998 net
sales) include Siemens Westinghouse Power Corporation, Mitsubishi Heavy
Industries Ltd., and Solar Turbines Incorporated.
Orders for components are primarily awarded through a competitive bidding
process. Contractual relationships with the Company's principal customers vary.
More than one-half of the Company's casting business is derived from multi-year
contracts, typically three years in length. Under these contracts, the Company's
customers agree to order from the Company, and the Company agrees to supply,
specified percentages of customer requirements for certain parts at specific
pricing over the life of the contracts. The customers are not required to order
fixed numbers of parts, although pricing may be subject to certain threshold
quantities. Some of these contracts include provisions requiring specified price
reductions over the term of the contract, based on lower production costs as
programs mature, shared benefits from other cost reductions resulting from joint
production decisions, and negotiated reductions. The Company typically
renegotiates these contracts during the
3
last year of the contract period, and during the process, customers frequently
solicit bids from the Company's competitors. See "Customer Base", "Competition"
and "Pricing Pressures" in "Cautionary Statement", pages 6-8.
BACKLOG
The Company's backlog of orders as of December 31, 1999 and December 31, 1998
was $765 million and $877 million, respectively. Because of the short lead and
delivery times often involved, backlog may not be a significant indicator of the
Company's future performance.
RESEARCH AND DEVELOPMENT
The Company has made a substantial investment in research and development to
establish technology leadership in the investment casting industry. The Company
believes it has significant opportunities for growth by developing new products
and new applications, which offer its customers improved quality, greater
performance and significant cost savings. These products include turbogenerator
components, airframe structural components manufactured using metal mold
processes, new thermal barrier coatings and titanium aluminide airframe
castings.
A portion of the Company's total research and development budget comes from the
Company's customers, which regularly retain the Company for specific projects.
The Company also provides research and development services by contract to
governmental agencies. Its research center staff includes 75 degreed engineers
and scientists. The Company's research and development expenses for the years
ended December 31, 1999, 1998 and 1997 were $19.9 million, $20.2 million and
$17.6 million, respectively. The amount spent during the same periods for
customer-sponsored research and development (including U.S. government funded)
was $12.9 million, $15.3 million and $15.8 million, respectively.
COMPETITION
The Company believes it has a majority market share in the overall worldwide
aerospace and IGT turbine engine airfoil investment casting market. Precision
Castparts Corp. ("PCC"), a publicly held company based in Portland, Oregon, is
the Company's primary competitor. The Company believes that the Company and PCC
account for most of the total aerospace turbine engine and IGT investment
casting production, except for captive foundries owned by three customers. The
Company competes with PCC and other smaller participants primarily on the basis
of technological sophistication, quality, price, service and delivery time for
orders from large, well-capitalized customers with significant market power.
Certain of the Company's customers, principally in Europe, have their own
investment casting foundries, which produce parts similar to those manufactured
by the Company. The Company knows of no plans by its major customers to
establish new captive facilities, nor any significant expansion plans by those
customers that have such foundries now. See "Competition" in "Cautionary
Statement," page 7.
The Company's aluminum casting operations compete with a large number of smaller
competitors, also on the basis of price, quality and service.
See "Major Customers", page 3, for discussion of competition in the contract
award process.
ENVIRONMENTAL MATTERS
The Company is subject to comprehensive and changing environmental laws, which
are discussed more fully in "Environmental Laws" in "Cautionary Statement", page
9.
In connection with the Acquisition, Pechiney, S.A. indemnified the Company for
environmental liabilities relating to Howmet Corporation 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
4
threshold has not yet been reached. 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 (the "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 the NJDEP on May 20, 1991 regarding clean-
up of the site. Various remedies are possible and could involve expenditures
ranging from $3 million to $22 million or more. The Company has recorded a $3
million long-term liability as of December 31, 1999 and $2 million as of
December 31, 1998 for this matter. The indemnification discussed above applies
to the costs associated with this matter.
Besides the above-mentioned remediation work required at the Company's Dover,
New Jersey plant, liabilities exist for clean-up costs associated with hazardous
materials at seven 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, 1999, $4 million of accrued environmental
liabilities are included in the consolidated balance sheet for these seven
sites. The December 31, 1998 consolidated balance sheet includes $4.2 million of
accrued liabilities for nine such sites. The indemnification discussed above
applies to these costs.
In addition to the above environmental matters, and unrelated to Howmet
Corporation, Howmet Holdings 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 1960's. These liabilities include
approximately $7 million in remaining 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 full.
In connection with these environmental matters, the Company recorded a $17
million liability and an equal $17 million receivable from Pechiney, S.A. as of
December 31, 1999 and $26 million for both the liability and receivable as of
December 31, 1998. Pechiney, S.A. is currently funding all amounts related to
these liabilities.
Estimated environmental costs are not expected to impact materially 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 costs which are not covered by the Pechiney, S.A.
indemnifications and which are in excess of amounts currently accrued will be
charged to operations in the periods in which they occur.
The Company believes that Pechiney, S.A. will honor its indemnification
obligations described in the preceding paragraphs. In the event that Pechiney,
S.A. does not honor its obligations, the Company would likely be responsible for
the foregoing environmental matters and the cost of addressing those matters
could be material.
EMPLOYEES
As of December 31, 1999, the Company had approximately 11,500 employees.
5
CAUTIONARY STATEMENT
FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
The Company wishes to inform its investors of the following important factors
that in some cases have affected, and in the future could affect, the Company's
results of operations, and that could cause the Company's future results of
operations, financial condition or liquidity to differ materially from those
expressed in any forward-looking statements made by or on behalf of the Company.
Such statements include those relating to pricing, competition effects, market
structure, contracting practices, developmental projects, and environmental
conditions, among others. The words "expect," "project," "estimate," "predict,"
"anticipate," "believes," "plans," "intends," and similar expressions are also
intended to identify forward-looking statements.
Disclosure of these factors is intended to permit the Company to take advantage
of the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995. Many of these factors have been discussed in prior SEC filings by the
Company or by Howmet Corporation.
Although the Company has attempted to list comprehensively these important
cautionary factors, the Company wishes to caution investors that other factors
may prove to be important in affecting the Company's results of operations,
financial condition and liquidity. The Company undertakes no obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
INDUSTRY ECONOMIC CONDITIONS AND CYCLICALITY
The Company currently derives approximately forty per cent of its revenue from
the commercial aerospace industry. This is a cyclical business. Although 1999
was a record year for aircraft deliveries, orders that year were substantially
below those in each of the prior three years. The Company's sales to commercial
original equipment manufacturers ("OEMs") lead the market by approximately nine
months. Hence, the Company's component sales have been adversely affected due to
decreased aircraft production rates for 2000. Any developments in the commercial
aerospace market resulting in a reduction in air travel, the rate of aircraft
engine deliveries, or customer or airline part inventory adjustments in the
future could materially adversely affect the Company's financial condition and
results of operations. Such developments could include cancellations or
deferrals of scheduled deliveries, substantial increases in aircraft fuel costs
or international political factors.
The Company's revenues from its industrial gas turbine ("IGT") castings are
subject to changes in global electric power demand and the availability and cost
of natural gas used to fuel these machines. Changing economic and political
conditions in the United States and in other countries could also delay delivery
of IGT engines, which could have a material adverse effect on the Company's
operations.
CUSTOMER BASE
A substantial portion of the Company's business is conducted with a small number
of large aerospace and industrial gas turbine customers, including The General
Electric Company through its aircraft engine and power systems groups, ABB Power
Generation Ltd., and United Technologies Corporation's Pratt & Whitney aircraft
operations. The Company's top ten customers in the aggregate accounted for
approximately 76% of 1999 net sales. More than one-half of the Company's
business is derived from multi-year contracts with its customers, which
typically last three years and generally give the Company the right and
obligation to fill a specified percentage of the customer's requirements but
generally do not provide the Company with any minimum order commitments. The
Company usually renegotiates these contracts during the last year of the
contract period, and, during
6
the renegotiation process, customers frequently solicit bids from the Company's
competitors. Some of the contracts require specified price reductions over the
term of the contract based on lower production costs as programs mature, shared
benefits from other cost reductions resulting from joint production decisions,
and negotiated reductions.
Military and defense contractor sales comprised approximately 14% of the
Company's 1999 sales. United States defense spending in markets served by the
Company has declined since the 1980's. If reductions in defense budgets or
military aircraft procurement continue, these reductions could adversely affect
the Company's results of operations. Furthermore, in the event of failure to
comply with the federal statutes and regulations relating to these sales, a
proceeding, including one relating to the matters described below, could result
in fines, penalties, compensatory and treble damages, the cancellation or
suspension of payments under one or more U.S. government contracts, debarment,
or ineligibility for future contracts or subcontracts funded in whole or in part
with federal funds.
Starting in late 1998, the Company discovered certain product testing and
specification non-compliance issues at the Montreal (Canada) and Bethlehem
(Pennsylvania) operations of its Howmet Aluminum Casting subsidiaries. In 1999,
the Company discovered several additional instances of other testing and
specification non-compliance at its Hillsboro (Texas) aluminum casting facility
and at the Montreal and Bethlehem operations. The Company has notified customers
and the appropriate government agencies and has substantially completed
correction of these issues. The Company knows of no in-service problems
associated with any of these issues. In addition, Howmet Aluminum Casting has
been, and expects to continue for some time to be, late in delivery of products
to certain customers, resulting in lower sales. However, delivery performance in
2000 is expected to improve significantly.
The Defense Criminal Investigative Service (the "DCIS"), in conjunction with
other agents from the Defense Department and NASA, has undertaken an
investigation with respect to certain of the foregoing matters at the Montreal
and Bethlehem facilities. The DCIS has informed the Company that the
investigation concerns possible violations of the False Claims Act and the False
Statements Act, as well as possible criminal penalties. The Company is unable to
determine definitively what, if any, civil or criminal penalties might be
imposed as a result of the investigation.
All customer claims relating to the foregoing matters either have been resolved
or, in the Company's judgment, will be resolved within existing reserves.
The Company believes that additional cost for the foregoing matters beyond
amounts accrued, 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 August 6, 1999, the Company entered into an Administrative Agreement with the
U.S. Air Force terminating Notices of Proposed Debarment issued on March 1, 1999
relating to certain of the foregoing matters. The Administrative Agreement
permitted the affected facilities to resume accepting new U.S. government
contracts and subcontracts.
COMPETITION
The Company competes against Precision Castparts Corp. ("PCC"), its principal
competitor, and other investment casting manufacturers. Competition in
investment casting is based primarily on technological sophistication, quality,
price, service and delivery for orders from large, well-capitalized customers
with significant market power. The Company believes that it and PCC account for
most of the total aerospace turbine engine and IGT component casting production,
except for captive foundries owned by three customers. Because competition is
based to a significant extent on technological capabilities and innovations,
there can be no assurance that PCC or any of the
7
Company's other competitors will not develop products and/or processes that
would give them a competitive advantage in the Company's markets.
PRICING PRESSURES
The Company has experienced pressure from all of its major customers for price
reductions. This pressure is the result of the competitive environment in which
the Company's OEM customers are operating in the selling of their engines in
the worldwide market. Because winning an initial order by an OEM generally
provides it with a long-term profitable market for sales of spare parts, fierce
competition exists for these orders and has resulted in reduced prices which
OEMs receive in the market. Pressure for reduced prices is then exerted by OEMs
on their suppliers. The future profitability of the Company will depend upon,
among other things, its ability to continue to reduce its per unit costs and
maintain a cost structure that will enable it to remain cost-competitive.
AVAILABILITY AND COST OF RAW MATERIALS
Raw materials used by the Company include a number of metals and minerals,
including titanium, hafnium, aluminum, nickel, cobalt, molybdenum and chromium,
among others. Prices of these materials can be volatile, and the Company engages
in advance purchases of some of these materials under certain market conditions,
and passes certain price fluctuations through to customers pursuant to its
long-term agreements. The Company ordinarily does not otherwise attempt to hedge
the price risk of its raw materials. For some of the supplies and raw materials
it purchases, including certain metals, the Company has no fixed price contracts
or arrangements. Commercial deposits of certain metals, such as cobalt, nickel,
titanium and molybdenum, which are required for the alloys used in the Company's
precision castings, are found in only a few parts of the world, and for certain
materials only single sources are readily available. The availability and prices
of these metals and other materials may be influenced by private or governmental
cartels, changes in world politics, unstable governments in exporting nations,
production interruptions, inflation and other factors. Although the Company has
not experienced significant shortages of its supplies and raw materials in the
past twenty years, there can be no assurance that such shortages will not occur
in the future. Any such shortages or price fluctuations could have a material
adverse effect on the Company.
CONTROL BY AND RELATIONSHIP WITH CORDANT
Cordant Technologies Inc. ("Cordant") beneficially owns 84.6% of the outstanding
Common Stock of the Company. Accordingly, subject to the Corporate Agreement
referred to below, Cordant is able to control the election of the Company's
Board of Directors and exercise a controlling influence over the business and
affairs of the Company (including any determinations with respect to mergers or
other business combinations involving the Company, the acquisition or
disposition of assets by the Company, the incurrence of indebtedness by the
Company, the issuance of any additional Common Stock or other equity securities
of the Company, the repurchase or redemption of Common Stock of the Company and
the payment of dividends with respect to the Common Stock), and will be able to
do so as long as it continues to own more than 50% of the voting power of the
Company's capital stock. Similarly, Cordant has the power to determine matters
submitted to a vote of the Company's stockholders without the consent of the
Company's other stockholders, has the power to prevent or cause a change in
control of the Company and could take other actions that might be favorable to
Cordant.
Cordant has entered into a Corporate Agreement with the Company relating to the
terms under which Cordant may acquire additional shares of the Company's Common
Stock. See "Arrangements Among the Company and Cordant - Corporate Agreement,"
page 23.
On November 12, 1999, Cordant made a proposal to acquire all of the outstanding
shares of Common Stock of the Company not currently owned by Cordant ( the
"Publicly Held Shares") for a price of $17.00 per share in cash, and the
proposal was referred to the Independent Directors
8
Committee of the Company's Board of Directors (the "Committee"). On March 10,
2000, Cordant informed the Committee that it was willing to increase its offer
to $18.75 per share, but following further discussions no agreement was reached.
On March 14, 2000, Alcoa Inc. ("Alcoa") and Cordant announced an agreement under
which Alcoa agreed to acquire Cordant. Alcoa has advised the Company that it
intends to enter into discussions with the Committee to pursue the acquisition
of the Publicly Held Shares of the Company. Such an acquisition would be subject
to the Corporate Agreement referred to above.
POTENTIAL CONFLICTS OF INTEREST ARISING FROM CORDANT RELATIONSHIP
As a result of Cordant's ownership of Common Stock of the Company and its
intercompany agreements with the Company or otherwise, various conflicts of
interest between the Company and Cordant could arise. The Company and Cordant
have entered into an intercompany services agreement with respect to services to
be provided by Cordant to the Company. Under the agreement, the Company
generally pays Cordant its cost plus a fee, as determined by Cordant from time
to time on a basis consistent with past practice. This arrangement is designed
to control administrative costs and avoid duplication of administrative
functions. The Company paid Cordant $1,875,000 to cover both its costs and fees
for the year ended December 31, 1999. Under the arrangement, Cordant also bills
the Company directly, with no "mark-up," for some services provided by third
parties.
Ownership interests of directors or officers of the Company in Common Stock of
Cordant, if any, or service as a director or officer of both the Company and
Cordant could create or appear to create potential conflicts of interest when
directors and officers are faced with decisions that could have different
implications for the Company and Cordant. The Restated Certificate of
Incorporation of the Company includes certain provisions relating to the
allocation of business opportunities that may be suitable for both the Company
and Cordant. In addition, under Delaware corporate law, officers, directors and
controlling stockholders of the Company have certain fiduciary duties to the
Company's stockholders.
ENVIRONMENTAL LAWS
The Company is subject to comprehensive and changing federal, state, local and
international laws, regulations and ordinances (together, "Environmental Laws")
governing activities or operations that may have adverse environmental effects,
such as discharges to air and water, as well as handling and disposal practices
for solid and hazardous wastes. Environmental Laws also impose liability for the
costs of cleaning up, and certain damages resulting from, sites of past spills,
disposals or other releases of hazardous substances and materials, including
liability under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA," the federal "Superfund" statute), and similar
state statutes for the investigation and remediation of environmental
contamination at properties owned and/or operated by the Company and at off-site
locations where it has arranged for the disposal of hazardous substances. The
Company is involved from time to time in legal proceedings involving remediation
of environmental contamination from past or present operations, as well as
compliance with environmental requirements applicable to ongoing operations.
There can be no assurance that material costs or liabilities will not be
incurred in connection with any such proceedings, claims or compliance
requirements or in connection with currently unknown environmental liabilities.
If it is determined that the Company is not in compliance with current
Environmental Laws, the Company could be subject to penalties. The amount of any
such penalties could be material. In addition, the Company uses solvents, waxes,
metals, caustics, acids, oils and other hazardous substances, and as is the case
with manufacturers in general, if a release of hazardous substances occurs on or
from the Company's properties or from an off-site disposal facility attributable
to the Company, the Company may be held liable and may be required to pay the
cost of remedying the condition. The amount of any such liability could be
material.
9
The Company's facilities have made, and will continue to make, expenditures to
comply with current and future Environmental Laws. The Company anticipates that
it could incur additional capital and operating costs in the future to comply
with existing Environmental Laws and new requirements arising from new or
amended statutes and regulations. In addition, because the applicable regulatory
agencies have not yet promulgated final standards for some existing
environmental programs, the Company cannot at this time reasonably estimate the
cost for compliance with these additional requirements. The amount of any such
compliance costs could be material.
Certain potential sources of liability under the Environmental Laws, as well as
other information relating to environmental matters, including rights of the
Company to indemnification for substantial portions of these potential
liabilities, are described under "Business - Environmental Matters", pages 4-5.
FOREIGN CURRENCY HEDGING
The Company maintains a policy of hedging foreign currency transactions and
economic exposures for foreign currency denominated obligations. The Company
does not hedge against net asset values for its foreign investments attributed
to its foreign subsidiaries valued in local currencies. To the extent the
Company's foreign revenue base grows and net asset base expands as a result of
increased foreign business activity, the Company's exposure to adverse foreign
currency rate movement increases. The Company's foreign currency risk exposure
is also subject to the stability of the foreign currency of the country where
the Company maintains foreign operations or does business. The Company seeks to
minimize the impact of adverse foreign currency rate movements through its
hedging policy. The success of the hedging policy in preventing an adverse
financial result on operations in any accounting period cannot be assured.
YEAR 2000 COMPLIANCE
The Company has not experienced any disruption in operations as a result of
computer software issues associated with the Year 2000. Only a few minor
problems have been discovered so far, and all of them have been addressed. There
can be no guarantee that the systems of other companies on which Howmet's
systems rely will continue to operate successfully. This could have an adverse
effect on the Howmet systems. However, at this point, the Company has not been
made aware of material problems. The Company has not experienced any failures
within its supply chain.
The estimated cost at completion for all phases of the Company's Year 2000
project is $16.2 million. An estimated $6.7 million (41%) 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 $6.9 million (43%) 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 $2.6
million (16%) is for infrastructure upgrades or replacement.
Approximately $15.9 million (98%) had been expended as of December 31, 1999; the
Company expects to spend $0.3 million (2%) in 2000.
EURO CONVERSION
The Company implemented a strategy during 1999, which would allow it to operate
in a Euro environment during the transition period, January 1, 1999 through
December 31, 2001, and after full Euro conversion, effective July 1, 2002. To
date the Company has not experienced and does not anticipate any material impact
from the Euro conversion on its operations, its competitive position or its
computer software plans. Also, the Company does not expect any significant
changes to its currency hedging program and does not expect any significant
increases in its foreign exchange exposure.
10
ITEM 2 -- PROPERTIES
The Company has twenty-one facilities in the United States, four in France, two
in the United Kingdom, two in Canada and one in Japan. The Company is carrying
out capacity expansions for airfoil production for aerospace and industrial gas
turbine products. Completed and planned facility expansion is considered
sufficient to meet the Company's operating needs. The facilities described below
are all owned by Howmet Corporation or its subsidiaries, except as otherwise
indicated. During 1999, additions to property, plant and equipment totaled
$112.9 million.
Location (No. of Facilities) Size (Sq. Ft.)
- ---------------------------- ---------------
UNITED STATES
Bethlehem, Pennsylvania 47,200 (leased)
Branford, Connecticut 138,420
City of Industry, California 50,000 (leased)
Cleveland, Ohio 100,000
Dover, New Jersey (2) 245,537
117,000
Hampton, Virginia (2) 253,157
117,069
15,700 (leased)
Hillsboro, Texas 68,000 (leased)
LaPorte, Indiana (2) 186,100
132,748 (a)
Morristown, Tennessee 111,435
Whitehall, Michigan (7) 469,254
108,897
114,740
86,722
58,926
61,015
23,700 (b)
Wichita Falls, Texas 255,466
Winsted, Connecticut 81,000
FOREIGN
Dives, France 255,858
Evron, France 86,000
Exeter, U.K. (2) 184,350
68,760
66,800 (leased)
Gennevilliers, France 47,361
Georgetown, Ontario 37,000 (leased)
Le Creusot, France 156,077
Laval, Quebec 189,860
Montreal, Quebec 11,200 (c)
99,900 (leased)(c)
Terai, Japan 53,000
- ----------
(a)Howmet Transport Services warehouse
(b)Facility owned by the Company and operated by and leased to its joint
venture company, Sprayform Technologies International, L.L.C.
(c)Howmet Aluminum's Montreal, Canada aluminum casting operation is in the
process of moving from the Montreal facility listed above to the newly
constructed 189,860 square foot plant in Laval, Quebec. Howmet Aluminum
expects to complete the move by the end of 2000 and vacate the Montreal
premises.
11
ITEM 3 -- LEGAL PROCEEDINGS
The Company is a party to certain pending proceedings regarding environmental
matters. See "Business - Environmental Matters", pages 4-5.
Starting in September 1998, the Company's senior management became aware of
possible violations of the U.S. Anti-Kickback Act of 1986 by several of Howmet
Aluminum's employees. This law prohibits receiving payments in return for
favorable treatment in connection with U.S. government contracts or
subcontracts. The Company promptly commenced an investigation and reported the
matter to, and is cooperating with, the U.S. Department of Defense and the
Quebec Provincial police.
Starting in late 1998, the Company also discovered certain testing and
specification non-compliance issues at three of its Howmet Aluminum casting
operations. See "Customer Base" in "Cautionary Statement", page 7.
On August 6, 1999, the Company entered into an Administrative Agreement with the
U.S. Air Force terminating Notices of Proposed Debarment issued on March 1, 1999
relating to certain of the foregoing matters. The Administrative Agreement
permitted the affected facilities to resume accepting new U.S. government
contracts and subcontracts.
Shortly after Cordant announced, on November 12, 1999, its proposal to acquire
all of the outstanding shares of Common Stock of the Company not currently owned
by Cordant (See "Business - Possible Ownership Changes," page 1), eight separate
but nearly identical lawsuits were filed in the Court of Chancery of Delaware
against the Company, Cordant and each member of the Company's Board of
Directors. The plaintiffs are shareholders of the Company who complain that
Cordant's offer for their shares in the Company is not for an adequate price.
The plaintiffs request the following relief: certification as a class action
with themselves designated as Class Representatives; an order enjoining Cordant,
the Company and its Board of Directors from proceeding with the transaction; and
money damages and the costs of bringing the lawsuit. On the motion of the
defendants, the Court has consolidated the cases under the style of "In re
Howmet International Shareholders Litigation" and directed that the plaintiffs
file an Amended Complaint reflecting the consolidation. The Company is defending
these actions and believes that any outcome will not result in a materially
adverse impact to the financial position of the Company.
The Company, in its ordinary course of business, is party to various other legal
actions, which management believes are routine in nature and incidental to its
operations. Management believes that the outcome of any of these proceedings
will not have a material adverse effect upon its results of operations,
financial condition or liquidity.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 1999.
PART II
ITEM 5 -- MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information.
The Company's Common Stock, $.01 par value, trades on the New York Stock
Exchange. The Transfer Agent and Registrar for the Company's stock is First
Chicago Trust Company of New York, One North State Street, 11th Floor, Chicago,
Illinois 60602. Other information required with respect
12
to this Item 5 (a) is included in the section "Recent Market Prices and
Dividends" on page F-38 hereof.
(b) Holders.
As of March 16, 2000 there were 399 stockholders of record of the Company's
Common Stock.
(c) Dividends.
During 1998 and 1999 the Company did not declare or pay any dividends. The
Company does not expect to pay cash dividends on its Common Stock for the
foreseeable future. Certain of the Company's debt instruments contain financial
covenants that could limit the payment of dividends by the Company to its
stockholders. Information with respect to restrictions on the payment of
dividends is incorporated by reference to information contained in the section
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" on pages F-34 to F-35 hereof.
ITEM 6 -- SELECTED FINANCIAL DATA
Information required with respect to this Item 6 is included in the section
"Selected Financial Data" on page F-39 hereof.
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information required with respect to this Item 7 is included in the section
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages F-29 to F-38 hereof.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information required with respect to this Item 7A is included in the section
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Market Risk" on pages F-35 to F-37 hereof.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required with respect to this Item 8 are contained in
the Consolidated Financial Statements of the Company included on pages F-1 to F-
28 hereof. See "Item 14 (a) Documents Filed as Part of this Report -- (1)
Financial Statements" on page 26.
The supplemental financial information required with respect to this Item 8 is
filed as "Financial Statement Schedules" pursuant to Item 14. See "Item 14 (a)
Documents Filed as Part of this Report -- (2) Financial Statement Schedules" on
page 26.
Information with respect to quarterly financial highlights is included in Note
24 of "Notes to Consolidated Financial Statements" on page F-27 hereof.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
13
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS
The Board of Directors is currently comprised of seven Directors. 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 Directors elected at the 1999 Annual Meeting are listed below.
Directors will serve until the Annual Meeting of Stockholders in 2000 and until
their successors have been elected and have qualified.
James R. Wilson, age 59, 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", 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 since October 1993. He
joined Cordant in 1989 as Vice President and Chief Financial Officer and became
Executive Vice President and Chief Financial Officer in 1992. Besides its
ownership of a controlling interest in the Company, Cordant's principal
businesses are the manufacture of solid rocket propellent and industrial and
aerospace fastener systems. 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 54, 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 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 64, 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, 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 69, 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.
D. Larry Moore, age 63, was elected a Director of the Company on December 15,
1997. He was the
14
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, 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 54, 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 68, was elected a Director of the Company on December 15,
1997. He is 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.
EXECUTIVE OFFICERS
David L. Squier, age 54, has been President and Chief Executive Officer of
Howmet Corporation since 1992 and has been President and Chief Executive Officer
of the Company since October 1997. He has been a Director of the Company since
consummation of the Acquisition. See further information concerning Mr. Squier
above under "Directors".
James R. Stanley, age 58, was elected Chief Operating Officer of the Company
effective April 1, 2000. He has been a Senior Vice President of Howmet
Corporation since 1992 and was Senior Vice President-United States/North
American Operations of the Company from October 1997 to the present. Previous to
his employment at Howmet, Mr. Stanley was the Vice President and General Manager
of Customer Support and Marketing at the Textron Turbine Engine Division of
Textron, Inc. from August 1990 to January 1992. He also held the position of
Vice President of Operations for Textron Lycoming and held numerous managerial
positions for nearly 20 years at General Electric-Aircraft Engines.
Marklin Lasker, age 62, has been a Senior Vice President of Howmet Corporation
since February 1992 and has been Senior Vice President-International Operations
of the Company since October 1997. Before joining Howmet, Mr. Lasker was Vice
President and General Manager for International Operations for the AlliedSignal
Turbocharger Division from April 1984 to September 1991. He also held other
managerial positions for AlliedSignal Aerospace Groups over a 20 year period.
John C. Ritter, age 52, has been Senior Vice President and Chief Financial
Officer of the Company since October 1997. From April 1996 until October 1997,
Mr. Ritter was Vice President-Finance and Chief Financial Officer of Howmet
Corporation. Prior to his employment at Howmet, he served as Vice President,
Finance and Contracts, for AlliedSignal Government Electronics from 1994 to
1996, and as Vice President, Finance and Administration of Norden Systems, a
subsidiary of United Technologies Corporation, from 1991 to 1994. He has also
held the positions of Vice President,
15
Finance and Administration, Chemical Systems Division, and Manager, Business
Analysis, Pratt & Whitney Aircraft- Government Products Division of United
Technologies Corporation.
Roland A. Paul, age 63, has been Vice President-General Counsel and Secretary of
Howmet Corporation since 1976 and has been Vice President-General Counsel and
Secretary of the Company since October 1997. Mr. Paul was previously in private
practice as an attorney at law firms in New York and Paris and served as Counsel
to the United States Senate Foreign Relations Subcommittee on United States
Security Commitments Abroad.
Nicholas J. Iuanow, age 41, has been Treasurer of the Company since May 1998. He
has been Treasurer of Cordant since 1994 and a Vice President since October
1997. He was Assistant Treasurer of Cordant from 1989 to 1993.
B. Dennis Albrechtsen, age 55, has been Vice President-Manufacturing of Howmet
Corporation since September 1997. Prior to that he held the position of General
Manager of the Howmet Whitehall Castings facility beginning in 1994. Prior to
this, he served Howmet Corporation as Vice President, Airfoil Operations
beginning in October 1988. He has also held managerial positions at Howmet
Corporation's Whitehall, Michigan; Dover, New Jersey; and Wichita Falls, Texas
casting plants.
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.
16
ITEM 11 -- EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Summary Compensation Table below sets forth the compensation for the three
fiscal years ended December 31, 1999, 1998 and 1997, both long-term and
short-term, for services in all capacities earned by those individuals who were
as of December 31, 1999, 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 1999 $410,000 $425,000 $48,780
President and 1998 390,000 375,000 44,844
Chief Executive Officer 1997 370,000 388,500 1,000,000 42,668
James R. Stanley 1999 266,019 184,000 21,301
Senior Vice President-- 1998 251,000 160,000 20,650
North American Operations 1997 231,333 162,000 375,000 20,166
John C. Ritter 1999 243,972 168,000 19,452
Senior Vice President and 1998 230,670 150,000 18,758
Chief Financial Officer 1997 206,250 144,500 250,000 16,373
Marklin Lasker 1999 227,873 130,000 20,787
Senior Vice President-- 1998 216,384 125,500 18,152
International Operations 1997 211,112 146,600 200,000 16,944
B. Dennis Albrechtsen. 1999 199,221 104,600 15,128
Vice President--
Manufacturing 1998 186,000 103,750 15,500
Howmet Corporation 1997 177,084 124,000 150,000 16,484
- ----------
(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 basic savings
plan. Matching contributions of $8,000 made for each of the named executives in
1999 are included in this column.
Prior to 1999 Howmet Corporation maintained excess non-qualified employee
benefit plans providing for payment of amounts in the form of taxable
compensation equal to the amounts that would have been otherwise paid to
employees under its basic savings plan absent the benefit limitations of the
Internal Revenue Code. Such payments were included in this column for 1997 and
1998. This excess plan was terminated on December 31, 1998. Final payments under
it in the following amounts made with respect to 1998 bonuses are included in
this column: John C. Ritter, $7,253; Marklin Lasker, $9,393; and B. Dennis
Albrechtsen, $2,380.
Beginning in January 1999 the Company established its new Executive Deferred
Savings Plan (a 401(k) Restoration Plan). Once pre-tax limits are reached under
the 401(k) feature of the basic savings plan, further pre-tax contributions and
company match are paid into the Executive Deferred Savings Plan for the benefit
of the executive if he elects to participate. Company matching payments made
into this plan for 1999 in the following amounts are included in this column:
David L. Squier, $31,329; James R. Stanley, $13,301; John C. Ritter, $4,199;
Marklin Lasker, $3,394; and B. Dennis Albrechtsen, $4,748.
Howmet Corporation permitted certain key employees to defer a portion of
their compensation earned in 1986-89 until retirement or termination; the
deferred compensation earned interest 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 1999 with respect to Mr. Squier's
deferred compensation was $9,451 and is included in this column.
17
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 "IPO"), 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 "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 $15 per share, a number of
shares of Common Stock equal to the number of shares with respect to which such
employee has SARs. The NQSOs vest and become exercisable in 25% increments on
January 1 of each year beginning in 1999, until fully vested, and will expire on
the eighth anniversary of their granting. The Stock Awards Plan provides that in
the event of a change of control or similar transaction, the plan committee,
comprised of independent directors, may in its discretion take certain actions
in order to prevent dilution or enlargement of the benefit or potential benefit
of the options. Such actions could include: adjusting the options, accelerating
their benefit, permitting them to be cashed out as if fully vested and
exercisable, or substituted for by equivalent options in a successor company's
stock. In addition, pursuant to the Amended SARs Program, the Company offered
holders of SARs the opportunity to cash out 20% of their SARs (which represented
the vested portion of the SARs) at the initial public offering price. Employees
making this election, including Mr. Lasker, received their cash payment in
January 1998, and received NQSOs representing 80% of the number of shares of
Common Stock with respect to which such employees had SARs immediately prior to
making such election.
18
STOCK OPTIONS EXERCISED DURING FISCAL YEAR 1999
The following table presents information regarding the exercise during 1999 of
SARs or options to purchase shares of the Company's or Cordant's Common Stock by
the Named Executive Officers and information regarding unexercised SARs and
options to purchase shares of the Company's and Cordant's Common Stock held by
the Named Executive Officers on December 31, 1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR1
AND FISCAL YEAR-END OPTION/SAR VALUES
Number of Securities Value Of Unexercised
Unexercised Underlying In-The-Money
Options/SARs Options/SARs
At Year-End (#)2 at Year-End ($)3
--------------------- --------------------
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- ---- -------------------- --------------------
David L. Squier. SARs 0/1,000,000 $0/$13,000,000
Company Options 250,000/750,000 765,625/2,296,875
Cordant Options 0/200,000 4 0/3,050,000
James R. Stanley SARs 0/375,000 0/4,875,000
Company Options 93,750/281,250 287,109/861,328
Cordant Options 0/50,000 4 0/762,500
John C. Ritter SARs 0/250,000 0/3,250,000
Company Options 62,500/187,500 191,406/574,219
Cordant Options 0/40,000 4 0/501,250
Marklin Lasker SARs 0/200,000 0/2,600,000
Company Options 50,000/150,000 153,125/459,375
Cordant Options 0/40,000 4 0/610,000
B. Dennis Albrechtsen SARs 0/150,000 0/1,950,000
Company Options 37,500/112,500 114,844/344,531
- ----------
1 None of the Named Executive Officers exercised any stock options or SARs
in 1999. 2 See "Stock Appreciation Rights; Stock Options" on page 18 for a
summary of the terms of the SARs and Company Options, including vesting and
exercise. See "Cordant Stock Options" on page 21 for a summary of the
terms of these options, including vesting and exercise, and the Revised
Plan of Cordant with respect to these options.
3 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, 1999 ($18.0625), 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 options is calculated based on the
closing New York Stock Exchange price of Cordant's Common Stock as of
December 31, 1999 ($33), 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 stock paid as a stock dividend on March 13, 1998. On March 14, 2000,
Alcoa Inc. ("Alcoa") and Cordant announced an agreement pursuant to which
Alcoa would acquire the outstanding Cordant shares at $57 per share in a
tender offer and second-step merger. All outstanding options to purchase
Cordant shares will become exercisable upon completion of Alcoa's tender
offer.
4 Adjusted for the two-for-one stock split in Cordant stock paid on March 13,
1998.
19
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, 1999, the Named Executive Officers had the following credited
service for determining pension benefits: David L. Squier, 28 years; James R.
Stanley, 7 years; John C. Ritter, 3 years; Marklin F. Lasker, 7 years; B. Dennis
Albrechtsen, 25 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
20
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.
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 STOCK OPTIONS
Since December 31, 1995, Cordant has granted to certain Howmet employees,
including certain of the Named Executive Officers, 460,000 contingent stock
options for Cordant Common Stock, of which 360,000 are still outstanding
(adjusted for the two-for-one stock split in Cordant stock on March 13, 1998)
(the "Cordant 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 stock on the date of the grant and adjusted to give
effect to the two-for-one stock split in Cordant stock. The options will vest
only if Cordant acquires 100% of the Company prior to December 13, 2001 unless
otherwise modified by the Compensation Committee of the Board of Directors of
Cordant. 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. The agreement by which Alcoa would acquire
Cordant provides for all Cordant stock options to become exercisable upon
completion of Alcoa's tender offer and to be either cashed out at the $57 tender
offer price less the option exercise price or, at the holder's election,
converted into Alcoa Common Stock options of equivalent value to the Cordant
options.
Cordant has informed holders of the Cordant Stock Options of its intention to
adopt a plan that would allow such holders to benefit from such options even if
Cordant does not acquire 100% of the Company prior to December 13, 2001 (the
"Revised Plan"). Under the Revised Plan, in the event that Cordant 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 Common Stock represented by such holder's
Cordant 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 stock over such
period or, at the participant's election, in part those of Cordant 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 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 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 1999, 1998 and
1997, $0.1 million, $0.6 million and $2.9 million of compensation expense was
charged against income.
21
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 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 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 36 months.
ARRANGEMENTS AMONG THE COMPANY AND CORDANT
(COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION)
SERVICES AGREEMENT
Upon consummation of the initial public offering of Company common stock in 1997
(the "IPO"), to control administrative costs and avoid duplication of
administrative functions, the Company and Cordant entered into an intercompany
services agreement (the "Services Agreement") with respect to the services to be
provided by Cordant to the Company. The Services Agreement provides that Cordant
will furnish to the Company administrative services for which the Company will
generally pay Cordant its costs plus a fee, both amounts to be determined by
Cordant from time to time on a basis consistent with its past practices. The
Company paid Cordant $1,875,000, to cover both its costs and fee, for the year
ended December 31, 1999.
The services provided by Cordant include but are not limited to tax; control and
audit; risk
22
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, Cordant bills such third party services directly to the Company with
no "mark up". However, the cost of Cordant's arranging for third parties'
services is billed to the Company along with a fee, as described above.
As set forth under Item 10 on pages 14-15, four Directors of the Company are
officers and/or directors of Cordant.
CORPORATE AGREEMENT
Upon consummation of the IPO, the Company and Cordant entered into a corporate
agreement (the "Corporate Agreement"). Under this 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, as amended on March 13, 2000,
Cordant agreed that without the prior consent of a majority (but not less than
two) of the non-employee Directors of the Company who are not Directors or
employees of Cordant ("Independent Directors"), neither Cordant nor any of its
affiliates may acquire outstanding shares of Common Stock of the Company not
then beneficially owned by Cordant (the "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 Publicly Held Shares that is conditioned on the
tender of a majority of the Publicly Held Shares (and this condition must be
satisfied for the exception to apply) and that provides a commitment for a
prompt "follow up" merger at the same price for untendered shares, or (y)
pursuant to a merger in which all holders of Publicly Held Shares are treated
the same and that is approved by the holders of a majority of the Publicly Held
Shares. The foregoing provision of the Corporate Agreement may not be amended or
waived by the Company without the consent of a majority (but not less than two)
of the Independent Directors. Alcoa has separately agreed with Howmet to be
bound by the same limitations as Cordant.
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, for an aggregate redemption price of $66,379,991.
CERTAIN CORDANT OFFICERS AND DIRECTORS
Cordant corporate officers may be elected by the Company's Board of Directors as
officers or assistant officers of the Company. Cordant 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,
and D. Larry Moore, a director of Cordant, serve on the Company's Compensation
Committee. The other members of the Compensation Committee are James R. Mellor
and James D. Woods.
23
DIRECTORS' COMPENSATION
Directors who are employees of the Company or its subsidiary Howmet Corporation
or of Cordant, receive no compensation for their service as Directors. James R.
Wilson and Richard L. Corbin are officers and employees of Cordant, and David L.
Squier is an officer and employee of the Company, serving as Directors. 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.
The Company maintains a Deferred Compensation Plan for Directors, under which
each Director who is entitled to a Director's fee from the Company 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 1,288 shares of restricted
stock in 1999, and 1,106 shares in 2000.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
PRINCIPAL HOLDERS
The following table sets forth information as of March 16, 2000, 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's investment in the Company is owned of record by Cordant's
wholly-owned subsidiary, Cordant Technologies Holding Company.
24
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table shows the Company's Common Stock beneficially owned as of
March 16, 2000, by each Director and each of the executive officers named in the
table on page 17, 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(4)
- ---- ------------
Richard L. Corbin(1)....................................... 3,000
Edsel D. Dunford(2)........................................ 13,733
James R. Mellor(2)......................................... 6,733
D. Larry Moore(2).......................................... 6,733
David L. Squier............................................ 160,000
James R. Wilson(1)......................................... 7,000
James D. Woods(2).......................................... 9,733
B. Dennis Albrechtsen...................................... 20,000
Marklin Lasker............................................. 0
John C. Ritter(3).......................................... 28,777
James R. Stanley........................................... 15,000
All Directors, nominees and executive officers as a group
(13 persons)............................................... 278,989
- ----------
(1) 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, the controlling stockholder of the Company.
(2 Includes 3,733 restricted shares of the Company's Common Stock for each
Director indicated. Each holds the voting power of these shares but may not
transfer them until termination of his service as a Director of the Company.
(3) Mr. Ritter disclaims beneficial ownership with respect to 777 of these
shares.
(4) 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 0.3 percent of the outstanding shares.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Arrangements Among The Company And Cordant (Compensation Committee
Interlocks And Insider Participation)", pages 22-24.
25
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) -- FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the Company and its
subsidiaries are included on pages F-1 to F-28 hereof.
Management's Report on Financial Statements F-2
Report of Ernst & Young LLP, Independent Auditors F-3
Consolidated Statements of Income -- Years Ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Balance Sheets -- December 31, 1999 and 1998 F-5
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Common Stockholders' Equity and
Redeemable Preferred Stock -- Years Ended December 31, 1999,
1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8 - F-28
(2) -- FINANCIAL STATEMENT SCHEDULES
The Financial Statement Schedules of the Company and its subsidiaries listed
below are filed as part of this Report on Form 10-K and should be read in
conjunction with the Consolidated Financial Statements of the Company:
Schedule I -- Condensed Financial Information of Howmet
International Inc. (Parent Company) I-1 to I-4
Schedule II -- Valuation and Qualifying Accounts and Reserves II - 1
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are otherwise inapplicable, and therefore have been
omitted.
26
(3) -- EXHIBITS
Regulation
S-K
Exhibit
No. Description
- --- -----------
3.1 Restated Certificate of Incorporation of the Company (incorporated herein
by reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1 filed October 9, 1997 (registration no. 333- 37573)).
3.2 Restated By-Laws of the Company (incorporated herein by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 filed March 26, 1998).
4.1 Specimen Certificate of Common Stock of the Company (incorporated herein
by reference to Exhibit 4.1 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 filed November 21, 1997 (registration
no. 333-37573)).
4.3 Corporate Agreement dated as of December 2, 1997 by and among the
Company, Thiokol Corporation and Thiokol Holding Corporation
(incorporated herein by reference to Exhibit 4.5 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 filed
March 26, 1998).
4.4 Credit Agreement dated as of December 16, 1997 among Howmet Corporation,
various institutions as Lenders, ABN AMRO Bank N.V. and Bankers Trust
Company as Co-Documentation Agents, and The First National Bank of
Chicago as Agent, together with certain collateral documents attached
thereto as exhibits, including the Pledge Agreements among Howmet Ltd.
and, Howmet S.A., Howmet Corporation, and the First National Bank of
Chicago. (incorporated herein by reference to Exhibit 4.11 to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997 filed March 26, 1998).
4.5 Blade Receivables Master Trust Amended and Restated Pooling and Servicing
Agreement dated April 18, 1996 among Blade Receivables Corporation as
Transferor, Howmet Corporation as Servicer and Manufacturers and Traders
Trust Company as Trustee together with certain collateral documents
attached thereto as exhibits, including the Amended and Restated
Receivables Purchase Agreement dated as of April 18, 1996 between Howmet
Corporation and certain subsidiaries of Howmet Corporation, as Settlors,
and Blade Receivables Corporation as Buyer (incorporated herein by
reference to Exhibit 4.7 to Howmet Corporation's Annual Report on Form
10-K for the fiscal year ended December 31, 1996 filed March 31, 1997).
4.6 Repurchase Agreement dated May 16, 1997 (under the Blade Receivables
Master Trust Amended and Restated Pooling and Servicing Agreement dated
April 16, 1996 (Exhibit 4.12)), among Howmet Corporation, Howmet Cercast
(U.S.A.), Inc., Howmet Refurbishment, Inc., Howmet-Tempcraft, Inc.,
Turbine Components Corporation, Blade Receivables Corporation, and
Manufacturers and Traders Trust Company, as Trustee (incorporated herein
by reference to Exhibit 4.14 to the Company's Registration Statement on
Form S-1 filed October 9, 1997 (registration no. 333-37573)).
4.7 Amending Agreement dated August 29, 1997 (amending the Blade Receivables
Master Trust Amended and Restated Pooling and Servicing Agreement dated
April 18, 1996 (Exhibit 4.12)) among Blade Receivables Corporation,
Howmet Corporation, Manufacturers and Traders Trust Company, as Trustee,
Falcon Asset Securitization Corporation, Alpine Securitization Corp.,
Credit Suisse First Boston, New York Branch, and The First National Bank
of Chicago, as Agent for Falcon Asset Securitization Corporation and
Alpine
27
Securitization Corp.(incorporated herein by reference to Exhibit
4.15 to the Company's Registration Statement on Form S-1 filed October 9,
1997 (registration no. 333-37573)).
4.8 Credit Agreement between Howmet Corporation and Bank One NA dated
February 9, 2000 (incorporated herein by reference to Exhibit 4.8 to the
Company's Report on Form 8-K, filed February 11, 2000).
4(iii) The Company agrees to provide the Securities and Exchange Commission,
upon request, with copies of instruments defining the rights of holders
of long-term debt of the Company and all of its subsidiaries for which
consolidated financial statements are required to be filed with the
Securities and Exchange Commission.
10.1* Howmet Corporation Annual Bonus Plan (incorporated herein by reference to
Exhibit 10.1 to Amendment No. 1 to Howmet Corporation's Registration
Statement on Form S-4 filed January 17, 1996(registration no.
333-00200)).
10.2* Howmet Restructuring Cash Incentive Plan (incorporated herein by
reference to Exhibit 10.2 to Amendment No. 1 to Howmet Corporation's
Registration Statement on Form S-4 filed January 17, 1996(registration
no. 333-00200)).
10.3* Howmet Corporation Excess Benefit Plan (incorporated herein by reference
to Exhibit 10.4 to Amendment No. 1 to Howmet Corporation's Registration
Statement on Form S-4 filed January 17, 1996(registration no.
333-00200)).
10.4* Howmet Corporation Transaction Incentive Payments Plan (incorporated
herein by reference to Exhibit 10.5 to Amendment No. 1 to Howmet
Corporation's Registration Statement on Form S-4 filed January 17,1996
(registration no. 333-00200)).
10.5* Howmet Corporation Enhanced Bonus Program for Employees Grade 22 and
Above (incorporated herein by reference to Exhibit 10.6 to Amendment No.
1 to Howmet Corporation's Registration Statement on Form S-4 filed
January 17, 1996 (registration no. 333-00200)).
10.6* 1986 Howmet Corporation Deferred Compensation Plan (incorporated herein
by reference to Exhibit 10.7 to Amendment No. 1 to Howmet Corporation's
Registration Statement on Form S-4 filed January 17,1996 (registration
no. 333-00200)).
10.7* Howmet Corporation 1995 Executive Deferred Compensation Plan
(incorporated herein by reference to Exhibit 10.8 to Amendment No. 1 to
Howmet Corporation's Registration Statement on Form S-4 filed January 17,
1996 (registration no.
333-00200)).
10.8* Employment Agreement dated October 4, 1995, between Howmet Corporation
and Mark Lasker (incorporated herein by reference to Exhibit 10.11 to
Howmet Corporation's Registration Statement on Form S-4 filed January 9,
1996 (registration no.
333-00200)).
10.9* Employment Agreement dated October 4, 1995, between Howmet Corporation
and James Stanley (incorporated herein by reference to Exhibit 10.13 to
Howmet Corporation's Registration Statement on Form S-4 filed January 9,
1996 (registration no. 333-00200)).
10.10* Employment Agreement dated October 4, 1995, between Howmet Corporation
and David Squier (incorporated herein by reference to Exhibit 10.17 to
Howmet Corporation's Registration Statement on Form S-4 filed January 9,
1996 (registration no. 333-00200)).
10.11* Employment Agreement dated July 1, 1984, between Howmet Turbine
Components Corporation and B. Dennis Albrechtsen (incorporated herein by
reference to Exhibit 10.18 to
28
Howmet Corporation's Registration Statement on Form S-4 filed January 9,
1996 (registration no. 333-00200)).
10.12* Letter Agreement regarding payment of life insurance between Howmet
Corporation and David L. Squier (incorporated herein by reference to
Exhibit 10.19 to Amendment No. 1 to Howmet Corporation's Registration
Statement on Form S-4 filed January 17, 1996 (registration no.
333-00200)).
10.13(a) Tax Sharing Agreement among Howmet Corporation, Howmet Management
Services, Inc., Howmet-Tempcraft, Inc., Howmet Thermatech Canada, Inc.,
Howmet Transport Services, Inc., Howmet Sales, Inc., Howmet
Refurbishment, Inc., Turbine Components Corporation, Blade Receivables
Corporation, a Nevada corporation, and Howmet Cercast (USA), Inc., dated
as of December 13, 1995 (incorporated herein by reference to Exhibit
10.20(a) to Howmet Corporation's Registration Statement on Form S-4 filed
January 9, 1996 (registration no. 333-00200)).
10.13(b) Tax Sharing Agreement among Blade Acquisition Corp., Pechiney
Corporation, Howmet Insurance Co., Inc., Howmet Corporation and all of
its directly and indirectly owned subsidiaries, dated as of December 13,
1995 (incorporated herein by reference to Exhibit 10.20(b) to Howmet
Corporation's Registration Statement on Form S-4 filed January 9, 1996
(registration no. 333-00200)).
10.14 Assignment and Assumption Agreement between Howmet Holdings Acquisition
Corp. and Howmet Acquisition Corp., dated as of December 6, 1995 and
Indemnification Provisions of the Stock Purchase Agreement among
Pechiney, Pechiney International S.A., Howmet Cercast S.A. and Blade
Acquisition Corp., dated as of October 12, 1995 (incorporated herein by
reference to Exhibit 10.23 to Amendment No. 1 to Howmet Corporation's
Registration Statement on Form S-4 filed January 17, 1996 (registration
no. 333-00200)).
10.15* Revised Employment Letter dated February 13, 1996, between Howmet
Corporation and John C. Ritter (incorporated herein by reference to
Exhibit 10.24 to Amendment No. 3 to Howmet Corporation's Registration
Statement on Form S-4 filed June 11, 1996 (registration no. 333-00200)).
10.16* Stock Appreciation Right Agreement between Howmet Corporation and David
L. Squier dated May 17, 1996 (incorporated herein by reference to Exhibit
10.24 to Howmet Corporation's Quarterly Report on Form 10-Q for the
quarter ended June 29, 1996, filed August 28, 1996).
10.17* Stock Appreciation Right Agreement between Howmet Corporation and James
Stanley dated May 17, 1996 (incorporated herein by reference to Exhibit
10.25 to Howmet Corporation's Quarterly Report on Form 10-Q for the
quarter ended June 29, 1996, filed August 28, 1996).
10.18* Stock Appreciation Right Agreement between Howmet Corporation and Marklin
Lasker dated May 17, 1996 (incorporated herein by reference to Exhibit
10.26 to Howmet Corporation's Quarterly Report on Form 10-Q for the
quarter ended June 29, 1996, filed August 28, 1996).
10.19* Stock Appreciation Right Agreement between Howmet Corporation and John C.
Ritter dated May 17, 1996 (incorporated herein by reference to Exhibit
10.27 to Howmet Corporation's Quarterly Report on Form 10-Q for the
quarter ended June 29, 1996, filed August 28, 1996).
10.20* Stock Appreciation Right Agreement between Howmet Corporation and B.
Dennis Albrechtsen dated May 17, 1996 (incorporated herein by reference
to Exhibit 10.29 to
29
Howmet Corporation's Quarterly Report on Form 10-Q for the quarter ended
June 29, 1996, filed August 28, 1996).
10.21* Employment Agreement dated October 4, 1995 between Howmet Corporation and
Roland Paul (incorporated herein by reference to Exhibit 10.16 to
Amendment No. 1 to Howmet Corporation's Registration Statement on Form
S-4 filed January 17, 1996 (registration no. 333-00200)).
10.22* The Howmet Corporation Nonqualified Deferred Compensation Trust dated
April 29, 1996 (incorporated herein by reference to Exhibit 10.31 to
Howmet Corporation's Quarterly Report on Form 10-Q for the quarter ended
June 29, 1996, filed August 28, 1996).
10.25 Intercompany Services Agreement between the Company and Thiokol
Corporation dated December 2, 1997 (incorporated herein by reference to
Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 filed March 26, 1998).
10.26* Agreement and Amendment to Stock Appreciation Right Agreement between
Howmet Corporation and David L. Squier dated November 1997(incorporated
herein by reference to Exhibit 10.26 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 filed March 26,
1998).
10.27* Agreement and Amendment to Stock Appreciation Right Agreement between
Howmet Corporation and Marklin Lasker dated November 10, 1997
(incorporated herein by reference to Exhibit 10.27 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997
filed March 26, 1998).
10.28* Agreement and Amendment to Stock Appreciation Right Agreement between
Howmet Corporation and James Stanley dated November 10, 1997
(incorporated herein by reference to Exhibit 10.28 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997
filed March 26, 1998).
10.29* Agreement and Amendment to Stock Appreciation Right Agreement between
Howmet Corporation and John C. Ritter dated November 1997 (incorporated
herein by reference to Exhibit 10.29 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 filed March 26,
1998).
10.30* Agreement and Amendment to Stock Appreciation Right Agreement between
Howmet Corporation and B. Dennis Albrechtsen dated November 8, 1997
(incorporated herein by reference to Exhibit 10.30 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997
filed March 26, 1998).
10.31* Howmet Corporation Second Amended and Restated Special Executive Deferred
Compensation Plan, dated November 24, 1997 (incorporated herein by
reference to Exhibit 10.31 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31,1998, filed May 12, 1998).
10.32* Howmet International Inc. Amended and Restated 1997 Stock Awards Plan
(incorporated herein by reference to Exhibit 10.32 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998,
filed August 10, 1998).
10.33* Form of Howmet International Inc. Nonqualified Stock Option Grant
Agreement (incorporated herein by reference to Exhibit 10.33 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 1998, filed August 10, 1998).
30
10.34* Form of Howmet International Inc. Director Restricted Stock Agreement
(incorporated herein by reference to Exhibit 10.34 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998,
filed August 10, 1998).
10.35 Administrative Agreement dated August 6, 1999 between Howmet Corporation
and the United States Department of the Air Force (incorporated herein by
reference to Exhibit 10.35 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1999, filed October 21, 1999).
10.36 Amendment, dated March 13, 2000, to the Corporate Agreement, dated as of
December 2, 1997 (Exhibit 4.3), by and among Cordant Technologies Inc.,
Cordant Technologies Holding Company, and the Company.
10.37 Letter Agreement, dated March 13, 2000, between Alcoa Inc. and the
Company.
10.38* 1989 Stock Awards Plan of Thiokol Corporation as amended by stockholder
approval October 15, 1993 (incorporated by reference to the definitive
Proxy Statement of Thiokol Corporation dated September 11, 1992).
10.39* Form of Thiokol Corporation Non-Qualified Stock Option Grant Agreement
11 Statement re computation of per share earnings
Statement re computation of per share earnings of the Company and
subsidiaries is contained in Note 2 of "Notes to Consolidated Financial
Statements" on page F-9 hereof.
21 List of Significant Subsidiaries
23 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule for the year ended December 31, 1999.
- ----------
* Management contract or compensatory arrangement
(b) REPORTS ON FORM 8-K
During the quarter ended December 31, 1999 the Company filed the following
Current Report on Form 8-K:
November 12, 1999.
- ------------------
Item 5 - Other events News Release relating to Independent Directors Committee
review of Cordant buyout proposal.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOWMET INTERNATIONAL INC.
Dated: March 20, 2000 By: /s/ John C. Ritter
John C. Ritter
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
- ---------------------- ------------------------------ -----------------
/s/ James R. Wilson Chairman of the Board February 22, 2000
-------------------
James R. Wilson and Director
/s/ David L. Squier Director, President and
-------------------
David L. Squier Chief Executive Officer February 22, 2000
(principal executive officer)
/s/ John C. Ritter Senior Vice President and
------------------
John C. Ritter Chief Financial Officer February 22, 2000
(principal financial officer)
/s/ George T. Milano Corporate Controller February 22, 2000
--------------------
George T. Milano (principal accounting officer)
/s/ Richard L. Corbin Director February 22, 2000
---------------------
Richard L. Corbin
/s/ Edsel D. Dunford Director February 22, 2000
--------------------
Edsel D. Dunford
/s/ James R. Mellor Director February 22, 2000
-------------------
James R. Mellor
/s/ D. Larry Moore Director March 6, 2000
------------------
D. Larry Moore
/s/ James D. Woods Director February 22, 2000
------------------
James D. Woods
32
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-29
Selected Financial Data F-39
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
Annual Report on Form 10-K. 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 Annual Report
on Form 10-K 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 and which 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, 1999 and 1998, 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, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Stamford, Connecticut
January 31, 2000, except for
the information regarding the
Company's New Credit Agreement
discussed in Note 7, as to which the
date is February 9, 2000
F-3
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
----------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998 1997
- -------------------------------------------------------------------------------
Net sales $1,459.7 $1,350.6 $1,258.2
Operating expenses:
Cost of sales 1,115.8 1,039.1 963.8
Selling, general and administrative 108.6 101.6 122.3
Research and development 19.9 20.2 17.6
- -------------------------------------------------------------------------------
Total operating expenses 1,244.3 1,160.9 1,103.7
Income from operations 215.4 189.7 154.5
Interest income 1.0 1.6 1.2
Interest expense (6.3) (12.7) (31.0)
Other, net (3.0) (3.4) (6.4)
- -------------------------------------------------------------------------------
Income before income taxes and
extraordinary item 207.1 175.2 118.3
Income taxes (70.4) (64.8) (46.3)
- -------------------------------------------------------------------------------
Income before extraordinary item 136.7 110.4 72.0
Extraordinary item - loss on early
retirement of debt, net of income
taxes of $7.9 - - (12.3)
- -------------------------------------------------------------------------------
Net income 136.7 110.4 59.7
Dividends on redeemable preferred stock (.8) (5.6) (5.1)
- -------------------------------------------------------------------------------
Net income applicable to common stock $ 135.9 $ 104.8 $ 54.6
================================================================================
Per common share amounts, basic and
diluted:
Income before extraordinary item $ 1.36 $ 1.05 $ .67
Extraordinary item - - (.12)
- -------------------------------------------------------------------------------
Net income $ 1.36 $ 1.05 $ .55
================================================================================
See notes to consolidated financial statements.
F-4
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
(IN MILLIONS, EXCEPT SHARE DATA) 1999 1998
- -----------------------------------------------------------------------------------
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 39.4 $ 37.6
Accounts receivable (less allowance of $3.7 and $5.2) 80.7 84.1
Inventories 165.3 161.9
Retained receivables 35.6 32.0
Deferred income taxes 14.3 16.2
Other current assets 3.7 3.0
Restricted Trust (a) - 716.4
- -----------------------------------------------------------------------------------
Total Current Assets 339.0 1,051.2
Property, plant and equipment, net 396.5 334.9
Goodwill, net 209.5 221.1
Patents and technology and other intangible assets, net 94.9 115.1
Deferred income taxes 11.9 -
Other noncurrent assets 68.3 78.3
- -----------------------------------------------------------------------------------
Total Assets $1,120.1 $1,800.6
===================================================================================
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY
- ---------------------------------------------------------
Current Liabilities:
Accounts payable $ 81.3 $ 101.5
Accrued compensation 59.8 45.0
Other accrued liabilities 98.0 108.7
Advance on accounts receivable 40.0 -
Income taxes payable 47.8 44.8
Short-term debt 45.7 28.0
Pechiney Notes (a) - 716.4
- -----------------------------------------------------------------------------------
Total Current Liabilities 372.6 1,044.4
Noncurrent Liabilities:
Accrued retiree benefits other than pensions 101.2 96.8
Accrued pension liability 35.9 49.0
Other noncurrent liabilities 59.9 64.9
SARs 49.8 43.5
Deferred income taxes - 2.1
Long-term debt - 63.0
- -----------------------------------------------------------------------------------
Total Noncurrent Liabilities 246.8 319.3
Commitments and contingencies
Redeemable preferred stock - 65.6
Stockholders' Equity:
Preferred stock, authorized - 10,000,000 shares, issued
and outstanding - 0 shares - -
Common stock, $.01 par value; authorized - 400,000,000
shares, issued and outstanding: 1999 - 100,028,883
shares; 1998 - 100,005,356 shares 1.0 1.0
Capital surplus 195.4 195.1
Retained earnings 316.0 180.1
Accumulated other comprehensive income (11.7) (4.9)
- -----------------------------------------------------------------------------------
Total Stockholders' Equity 500.7 371.3
- -----------------------------------------------------------------------------------
Total Liabilities, Redeemable Preferred Stock and
Stockholders' Equity $1,120.1 $1,800.6
===================================================================================
(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) 1999 1998 1997
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
- --------------------
Net income $ 136.7 $ 110.4 $ 59.7
Adjustments to reconcile net income to net cash
provided by operating
activities:
Depreciation and amortization 66.8 60.2 66.9
Equity in income of unconsolidated
affiliates - (.4) (1.5)
Extraordinary item - - 12.3
Changes in assets and liabilities:
Receivables (2.5) (3.5) 8.4
Inventories (4.6) 2.2 (17.9)
Accounts payable and accrued (12.6) 10.3 12.1
liabilities
Deferred income taxes (14.8) (2.1) (.3)
Income taxes payable 3.4 17.8 16.9
Long-term SARs accrual 6.3 5.5 31.4
Advance on accounts receivable 40.0 - -
Other, net 14.2 7.0 4.6
- --------------------------------------------------------------------------------
Net cash provided by operating activities 232.9 207.4 192.6
INVESTING ACTIVITIES
- --------------------
Purchases of property, plant and equipment (112.9) (83.0) (56.9)
Payments made for investments and other assets - (3.0) (1.8)
Proceeds from sale of refurbishment business,
net - - 44.9
- --------------------------------------------------------------------------------
Net cash used by investing activities (112.9) (86.0) (13.8)
FINANCING ACTIVITIES
- --------------------
Net change in short-term debt 14.6 15.1 -
Issuance of long-term debt 65.0 36.6 326.2
Repayment of long-term debt (128.0) (182.0) (467.6)
Redemption of preferred stock (66.4) - -
Premiums paid on early retirement of debt - - (13.7)
- --------------------------------------------------------------------------------
Net cash used by financing activities (114.8) (130.3) (155.1)
Foreign currency rate changes (3.4) 1.1 (1.7)
- --------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents 1.8 (7.8) 22.0
Cash and cash equivalents at beginning
of period 37.6 45.4 23.4
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 39.4 $ 37.6 $ 45.4
================================================================================
See notes to consolidated financial statements.
F-6
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
AND REDEEMABLE PREFERRED STOCK
ACCUMULATED TOTAL
OTHER COMMON REDEEMABLE
COMMON STOCK CAPITAL RETAINED COMPREHENSIVE STOCKHOLDERS' PREFERRED STOCK
---------------- ---------------
(IN MILLIONS, EXCEPT SHARE DATA) SHARES AMOUNT SURPLUS EARNINGS INCOME EQUITY SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 136.7 136.7
Other comprehensive income
Foreign exchange
translation adjustment (10.4) (10.4)
Minimum pension liability
adjustment 2.4 2.4
Unrealized gain on
securities 1.2 1.2
-----------
Total comprehensive income 129.9
-----------
Dividends - redeemable (.8) (.8) 78 .8
preferred stock
Redeemable preferred stock
redemption (6,638) (66.4)
Shares issued 23,527 .3 .3
- ---------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 100,028,883 $1.0 $195.4 $316.0 $(11.7) $500.7 - $ -
===============================================================================================================
See notes to consolidated financial statements.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. OWNERSHIP
THE 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 AND 1998 OWNERSHIP CHANGES: 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. In January 1998, Carlyle-Blade sold an
additional 350,000 common shares to the public.
1999 OWNERSHIP CHANGE: On February 8, 1999, Carlyle-Blade sold its remaining
22,650,000 shares of HII common shares to Cordant. At December 31, 1999, Cordant
held 84.6% and the public held 15.4% of outstanding HII common shares.
PROPOSED PURCHASE OF PUBLICLY HELD SHARES: On November 12, 1999, Cordant made a
proposal to the Company's board of directors to acquire all of the outstanding
shares of HII not currently owned by Cordant for a price of $17.00 per share in
cash. The Company's Independent Directors Committee of its Board of Directors is
reviewing the proposal and has retained independent financial and legal advisors
to assist in this matter. See Note 25 regarding an update on the proposed
purchase of the publicly held shares of the Company's common stock.
POSSIBLE CHANGE IN OWNERSHIP OF CORDANT: See Note 25.
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 accounting principles generally accepted in the United States
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.
F-8
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 (1999 - 100,022,361; 1998 - 100,002,678; 1997 -
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 (1999 - 100,255,305; 1998 -
100,079,344; 1997 - 100,008,832).
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 40 years and other assets'
lives vary between 4 and 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.
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 not 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 and included in
the equity section of 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.
F-9
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
fluctuations of anticipated foreign currency commitments. The Company also
enters into 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.
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 1999, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133". This statement delays the effective
date of Statement No. 133 to fiscal years beginning after June 15, 2000.
Statement No. 133 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 changes 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 Statement No. 133 will be on the earnings and financial position of
the Company. The Company expects to adopt this new statement on January 1, 2001.
NOTE 3. INVENTORIES
Inventories are summarized as follows:
DECEMBER 31,
-------------------------
(IN MILLIONS) 1999 1998
- -----------------------------------------------------------------------------
Raw materials and supplies $ 63.2 $ 56.7
Work in progress 75.0 78.8
Finished goods 31.5 29.7
- -----------------------------------------------------------------------------
FIFO inventory 169.7 165.2
LIFO valuation adjustment (4.4) (3.3)
- -----------------------------------------------------------------------------
$165.3 $161.9
=============================================================================
At December 31, 1999 and 1998, inventories include $110.4 million and $111.8
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) 1999 1998
- -----------------------------------------------------------------------------
Land $ 18.7 $ 18.8
Buildings 102.7 77.6
Machinery and equipment 440.0 363.4
- -----------------------------------------------------------------------------
561.4 459.8
Accumulated depreciation (164.9) (124.9)
- -----------------------------------------------------------------------------
$ 396.5 $ 334.9
=============================================================================
Depreciation expense was $48.6 million in 1999, $42 million in 1998, and $41.2
million in 1997.
NOTE 5. GOODWILL
Goodwill relates to the Acquisition (Note 1). Goodwill is net of accumulated
amortization of $27.3 million and $20.6 million at December 31, 1999 and 1998.
In 1999 goodwill was reduced by $5.0 million resulting from utilization of net
operating loss carryforwards which were acquired as part of the Acquisition.
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) 1999 1998
- ----------------------------------------------------------------------------------------------------
Patents and technology, net of accumulated amortization of $27.3 and $20.6 $40.1 $ 46.8
Non-compete agreement, net of accumulated amortization of $20.2 and $15.2 54.8 59.8
Pension intangible asset (Note 11) - 8.5
- ----------------------------------------------------------------------------------------------------
$94.9 $115.1
====================================================================================================
Other noncurrent assets includes the following:
DECEMBER 31,
-------------------------
(IN MILLIONS) 1999 1998
- -----------------------------------------------------------------------------
Indemnification receivables from Pechiney, S.A. for:
Environmental matters $ 20.8 $ 29.3
Insurance claims 5.2 6.0
Prepaid pension benefit costs 23.8 25.9
Other 18.5 17.1
- -----------------------------------------------------------------------------
$ 68.3 $ 78.3
=============================================================================
F-11
NOTE 7. FINANCING ARRANGEMENTS
At December 31, 1999 and 1998, the Company had $45.7 million and $28 million of
short-term borrowings principally at its foreign subsidiaries. Included in the
1999 amount was $22 million of the Canadian subsidiary's borrowings under two
credit facilities, which have a combined borrowing capacity of $25 million. At
December 31, 1998 the Canadian subsidiary had $8 million of outstanding
borrowings under a $10 million credit facility. Interest rates for these
facilities are based on LIBOR plus a spread (approximately 6.9% at December 31,
1999 and 5.8% at December 31, 1998). At December 31, 1999 and 1998, the
Company's Japanese subsidiary had short-term borrowings of $15 million and $17.9
million, respectively, bearing interest at a rate of approximately 1.1% and
1.4%, respectively, per annum.
At December 31, 1999, the Company had no long-term borrowings. The Company's
long-term debt at December 31, 1998, excluding Pechiney Notes (Note 8), was $63
million, including $60 million of borrowings under the Company's $300 Million
Revolving Credit Facility. The interest rate on this facility was based on LIBOR
plus a spread and was 5.8% at December 31, 1998. At December 31, 1999, $9.6
million of letters of credit were outstanding under separate credit arrangements
and $300 million borrowing capacity was available under the $300 Million
Revolving Credit Agreement.
On February 9, 2000, the Company elected to terminate its $300 Million Revolving
Credit Facility. On February 9, 2000, the Company (through its wholly-owned
operating subsidiary, Howmet Corporation) entered into a new $25 million credit
agreement with a major U.S. bank (the "New Credit Agreement"). The New Credit
Agreement provides a commitment from the bank for an unsecured revolving credit
line and letters of credit of up to a total of $25 million. The interest rate is
based on LIBOR plus a spread. The New Credit Agreement expires on May 9, 2000.
Terms of the New Credit Agreement 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.
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 New Credit Agreement (and previously the $300 Million
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, 1999 and
1998, the defined pool of outstanding accounts receivable amounted to $90.6
million and $87 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, 1999 and 1998 consolidated balance
sheets. Losses on the sale of receivables for the years ended December 31, 1999,
1998 and 1997 were $3.3 million, $3.8 million, and $3.8 million, respectively.
These losses are included in the line captioned "Other, net" in the statements
of income. At December 31, 1999 and 1998 the $35.6 million and $32 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.
F-12
NOTE 7. FINANCING ARRANGEMENTS (continued)
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. 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. In 1999, the Company redeemed the
remaining $3 million of its senior subordinated notes.
In 1999, 1998 and 1997, the Company paid interest of $6.2 million, $9.7 million
and $20.1 million, respectively.
NOTE 8. RESTRICTED TRUST AND RELATED PECHINEY NOTES PAYABLE
In 1988, Pechiney Corporation, which was then 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 and 1997 was equal to the interest expense and is
netted in the statements of income for these years.
Pechiney, S.A. paid the Pechiney Notes in full on January 4, 1999. As a result,
the Restricted Trust has been terminated. No Company funds were used in the
payment of the Pechiney Notes.
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, 1999 are as follows:
2000--$6.1 million, 2001--$4.0 million, 2002--$1.9 million, 2003--$1.2 million,
2004--$.5 million and thereafter $1.8 million.
Total rental expense for all operating leases was $8.6 million in 1999, $6.9
million in 1998 and $7.3 million in 1997.
As of December 31, 1999 the Company is committed to spend $11.4 million for 2000
capital expenditures.
NOTE 10. INCOME TAXES
In February 1999, Cordant increased its ownership of the Company's common stock
to 84.6 percent of the outstanding shares. As a result of the increase in
ownership, the Company and Cordant will file consolidated federal income tax
returns beginning in 1999. The consolidated tax liability of the affiliated
group, determined without taking credits into account, will be allocated based
on each company's contribution to consolidated federal taxable income. All tax
credits will be allocated on a pro rata basis equal to each company's
contribution to the consolidated tax credit determined to be available each
year.
F-13
NOTE 10. INCOME TAXES (continued)
Income taxes were provided in the following amounts:
YEAR ENDED DECEMBER 31,
-----------------------------------------
(IN MILLIONS) 1999 1998 1997
- ------------------------------------------------------------------------------------------
Current income taxes:
U.S. Federal $ 65.5 $51.7 $23.0
State 8.4 8.0 7.8
Foreign 11.3 7.2 7.9
- ------------------------------------------------------------------------------------------
85.2 66.9 38.7
Deferred income taxes:
U.S. Federal (12.6) (4.6) 2.1
State (2.2) (1.5) (3.8)
Foreign - 4.0 1.4
- ------------------------------------------------------------------------------------------
(14.8) (2.1) (.3)
- ------------------------------------------------------------------------------------------
$ 70.4 $64.8 $38.4
==========================================================================================
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,
----------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
Effect of:
State income taxes, net of federal benefit 1.9 2.0 3.1
Foreign tax differential (.4) (.4) .1
Goodwill amortization 1.1 1.3 2.3
Research and development credits (2.5) (2.4) (3.3)
Foreign sales corporation (1.3) (.6) -
Other .2 2.1 1.9
- ------------------------------------------------------------------------------------------
Effective rate 34.0% 37.0% 39.1%
==========================================================================================
Domestic and foreign components of pretax income, including the 1997 $20.2
million extraordinary loss from early retirement of debt, are as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
(IN MILLIONS) 1999 1998 1997
- ------------------------------------------------------------------------------------------
United States $152.7 $137.9 $71.8
Foreign 54.4 37.3 26.3
- ------------------------------------------------------------------------------------------
$207.1 $175.2 $98.1
==========================================================================================
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, 1999, these undistributed earnings amounted to
approximately $24 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) 1999 1998
- --------------------------------------------------------------------------------
State and foreign net operating losses $ 1.8 $ 7.5
Other foreign tax benefits - 2.5
Foreign tax credits 6.2 4.0
Accrued retiree benefits other than pensions 41.7 41.4
Vacation and deferred compensation accruals 31.9 28.8
Pension liability 15.1 21.0
Other accruals 28.3 20.0
- --------------------------------------------------------------------------------
Gross deferred tax asset 125.0 125.2
Valuation allowance (5.5) (7.5)
- --------------------------------------------------------------------------------
Total deferred tax asset 119.5 117.7
LIFO inventory (26.9) (25.6)
Pension prepaid assets (9.2) (13.8)
Property, plant and equipment (41.6) (44.9)
Patents and technology (15.6) (19.3)
- --------------------------------------------------------------------------------
Total deferred tax liability (93.3) (103.6)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 26.2 $ 14.1
- --------------------------------------------------------------------------------
Balance sheet classification:
Current assets $ 14.3 $ 16.2
Noncurrent assets (liabilities) 11.9 (2.1)
- --------------------------------------------------------------------------------
$ 26.2 $ 14.1
================================================================================
At December 31, 1999 and 1998, the Company had available approximately $4.7
million and $11.3 million, respectively, of foreign net operating loss
carryforwards which can only be used to offset foreign taxable income. These
carryforwards have no expiration date. At December 31, 1998, the Company also
had available $30.0 million of state net operating loss carryforwards. In 1999,
$11.9 million of the state net operating losses expired. In 1999, the Company
utilized $18.1 million of state net operating losses and $6.5 million of foreign
net operating losses, resulting in a $5.0 million reduction of goodwill.
Utilization of the $4.7 million remaining foreign net operating loss
carryforwards will result in an adjustment of goodwill. At December 31, 1998,
the Company also had other foreign tax benefits of $2.5 million which were
realized as 1999 cash receipts with no effect on income tax expense.
At December 31, 1998, the Company carried a valuation allowance equal to the
deferred tax asset associated with all state and foreign net operating loss
carryforwards. In 1999, the valuation allowance was reduced as a result of the
aforementioned net operating loss expiration and utilizations. At December 31,
1999 the Company carried a valuation allowance equal to the deferred tax asset
associated with $3.7 million of foreign tax credits generated in 1999 and $4.7
million of 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.
In 1999, 1998 and 1997, the Company paid income taxes, net of refunds, of $68.2
million, $49.3 million and $45.6 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) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------
Change in projected benefit obligations:
Projected benefit obligations at beginning
of year $(154.5) $(115.0) $(126.5) $(110.3)
Service cost (13.5) (11.5) (3.0) (2.5)
Interest cost (10.7) (9.2) (8.3) (8.2)
Plan amendments (1.5) (11.6) (.9) -
Actuarial gains (losses), net 20.2 (14.0) 7.1 (13.2)
Benefits paid 10.4 6.8 8.0 7.7
- --------------------------------------------------------------------------------------------
Ending projected benefit obligations $(149.6) $(154.5) $(123.6) $(126.5)
============================================================================================
Change in plan assets:
Fair value of plan assets at beginning
of year $ 146.7 $ 139.7 $ - $ -
Actual return on plan assets 20.5 6.9 - -
Company contributions 8.9 6.9 8.0 7.7
Benefits paid (10.4) (6.8) (8.0) (7.7)
- --------------------------------------------------------------------------------------------
Ending fair value of plan assets $ 165.7 $ 146.7 $ - $ -
============================================================================================
Reconciliation to balance sheet amounts:
Fair value of plan assets exceeds (less than)
projected benefit obligations $ 16.1 $ (7.8) $(123.6) $(126.5)
Unrecognized prior service (gain) loss cost (20.0) (23.5) 4.3 4.0
Unrecognized net actuarial (gain) loss (11.3) 16.6 11.9 19.7
- --------------------------------------------------------------------------------------------
Net liability recognized in balance sheet $ (15.2) $ (14.7) $(107.4) $(102.8)
============================================================================================
Amounts recognized in the balance sheet
consist of:
Prepaid benefit costs $ 23.8 $ 25.9 $ - $ -
Accrued benefit liabilities (39.0) (40.6) (107.4) (102.8)
Additional minimum liability - (12.5) - -
Intangible asset - 8.5 - -
Accumulated other comprehensive income, pretax - 4.0 - -
- --------------------------------------------------------------------------------------------
Net liability recognized in balance sheet $ (15.2) $ (14.7) $(107.4) $(102.8)
============================================================================================
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.
The change in projected benefit obligation included a realized actuarial gain in
1999 resulting from increasing the discount rate from 6.75 percent in 1998 to
7.5 percent in 1999. Benefits paid increased in 1999 primarily due to more lump
sum distributions to retirees.
F-16
NOTE 11. PENSIONS and OTHER POSTRETIREMENT BENEFITS (continued)
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) 1999 1998
- --------------------------------------------------------------------------------
Projected benefit obligations $(43.6) $(117.5)
Accumulated benefit obligations $(39.7) $(111.4)
Fair value of plan assets $ 29.5 $ 98.8
================================================================================
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) 1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------
Components of net periodic cost:
Service cost $13.5 $ 11.5 $ 10.1 $ 3.0 $ 2.5 $ 3.4
Interest cost 10.7 9.2 8.2 8.3 8.2 7.5
Expected return on assets (13.3) (12.1) (10.5) - - -
Recognized losses .4 .2 .2 .7 .2 .1
Recognized prior service (gain) cost (2.0) (2.3) (2.8) .6 .6 .3
- -------------------------------------------------------------------------------------
Net periodic cost $ 9.3 $ 6.5 $ 5.2 $12.6 $11.5 $11.3
=====================================================================================
Weighted-average assumptions used to determine pension costs and liabilities as
of December 31, are as follows:
1999 1998 1997
- --------------------------------------------------------------------------------
Discount rate 7.5% 6.75% 7.5%
Expected long-term return on assets 9.0% 9.0% 9.0%
Rate of compensation increase 4.75% 4.75% 5.0%
================================================================================
In calculating the Company's postretirement benefit obligation, the health care
cost trend rate assumption for below age 65 benefits was 8% in 1999 and 9% in
1998 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 6.6% in 1999 and 7.4% in 1998 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 effects:
1 PERCENTAGE 1 PERCENTAGE
(IN MILLIONS) POINT INCREASE POINT DECREASE
- --------------------------------------------------------------------------------
Effect on total service and interest cost
components $ .1 $ .1
Effect on postretirement benefit obligation $1.1 $1.1
================================================================================
In addition to the above, the net pension expense for the United Kingdom
operations was $1.8 million in 1999, $1.5 million in 1998 and $1.2 million in
1997.
F-17
NOTE 11. PENSIONS and OTHER POSTRETIREMENT BENEFITS (continued)
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 $7.3 million in 1999, $6.7 million in 1998 and
$6.8 million in 1997.
NOTE 12. PREFERRED STOCK
The Board of Directors is authorized to determine the terms of any series of
preferred stock. Of the 10,000,000 shares of authorized preferred stock, 15,000
shares were designated as 9% Series A Senior Cumulative Preferred Stock.
Dividends on this preferred stock were at 9% and were payable-in-kind. These
15,000 shares had a $.01 par value and $10,000 per share liquidation value.
At December 31, 1998, the Company had issued and outstanding 6,560 shares of the
9% Series A Senior Cumulative Preferred Stock. On February 17, 1999, the Company
redeemed and retired all these outstanding preferred shares at their $66.4
million book value. The Company borrowed under its revolving credit facility to
make the redemption. On February 17, 1999, and at all previous times, all
outstanding shares of this preferred stock were owned by Cordant Technologies
Inc.
At December 31, 1999, there were no preferred shares outstanding.
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, 1999 and 1998 there were approximately 4.3 million SARs
outstanding. Compensation costs of $6.3 million, $10.8 million and $31.4 million
were charged against income for the SARs plan in 1999, 1998 and 1997,
respectively. SARs expense is adjusted quarterly based on the market value of
the stock and vesting.
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 and 1999 changes follow:
F-18
NOTE 13. SARS AND STOCK OPTION PLANS (continued)
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 or lapsed (162,500) $15.00
Exercised - -
- --------------------------------------------------------------------------------
Options outstanding at December 31, 1998 (0 exercisable
shares) 4,313,000 $14.98
================================================================================
1999 activity:
Granted 82,500 $15.32
Forfeited or lapsed (75,875) $15.00
Exercised (18,375) $14.43
- --------------------------------------------------------------------------------
OPTIONS OUTSTANDING AT DECEMBER 31, 1999 (1,051,875
EXERCISABLE SHARES) 4,301,250 $15.00
================================================================================
Options granted in December 1997 vest and become exercisable in 25% increments
on January 1 of each year beginning in 1999. The options outstanding at December
31, 1999 have exercise prices ranging from $12.22 to $18.19 and a
weighted-average remaining contractual life of 6.1 years. Of the total options
outstanding at December 31, 1999, 4,124,500 will expire in December 2005, 94,250
in 2006 and 82,500 in 2007.
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 to
employees at market value. The fair values as estimated at the date of grant for
options granted in 1999, 1998 and 1997 are $7.97, $7.39 and $6.04 per share,
respectively. These estimated values were determined using a Black-Scholes
option pricing model with the following weighted average assumptions:
1999 1998 1997
- ----------------------------------------------------------------------------------
Expected life 6 years 6 years 6 years
Risk-free interest rate 6.39% 4.65% 5.71%
Volatility .44 .47 .29
================================================================================
If the Company had accounted for its stock option plan by recording compensation
expense based on the fair value at the grant date on a straight-line basis over
the vesting period, the pro forma amounts of the Company's net income and
earnings per share are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
(IN MILLIONS, EXCEPT FOR SHARE DATA) 1999 1998 1997
- --------------------------------------------------------------------------------
Net income - as reported $135.9 $104.8 $ 54.6
Net income - pro forma 132.0 100.9 54.2
Basic and diluted income per share - as reported 1.36 1.05 .55
Basic and diluted income per share - pro forma 1.32 1.01 .54
================================================================================
F-19
NOTE 13. SARS AND STOCK OPTION PLANS (continued)
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 13, 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 1999, 1998 and 1997, $.1 million, $.6 million and
$2.9 million, respectively, of compensation expense was charged against income.
See Note 1 and Note 25 regarding the proposed purchase of all the Company's
common stock not currently owned by Cordant. See Note 25 regarding changes to
the terms of the Cordant Options.
NOTE 14. SEGMENT INFORMATION
The Company's reportable segment manufactures investment cast components for the
commercial and defense aero and industrial gas turbine 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) 1999 1998 1997
- --------------------------------------------------------------------------------
Net sales to external customers:
Investment casting and consolidated $1,459.7 $1,350.6 $1,258.2
================================================================================
Income from operations:
Investment casting $ 241.1 $ 212.3 $ 197.6
Adjust to LIFO (1.8) .8 (1.7)
SARs expense (6.3) (10.8) (31.4)
Other unallocated corporate expense, net (17.6) (12.6) (10.0)
- --------------------------------------------------------------------------------
Consolidated $ 215.4 $ 189.7 $ 154.5
================================================================================
Total assets:
Investment casting $1,084.8 $1,037.2 $ 976.6
Adjust to LIFO (4.4) (2.6) (3.4)
Deferred tax asset 26.2 16.2 16.3
Restricted Trust (Note 8) - 716.4 716.4
Other corporate assets 13.5 33.4 31.1
- --------------------------------------------------------------------------------
Consolidated $1,120.1 $1,800.6 $1,737.0
================================================================================
F-20
NOTE 14. SEGMENT INFORMATION (continued)
YEAR ENDED DECEMBER 31,
--------------------------------------
(IN MILLIONS) 1999 1998 1997
- --------------------------------------------------------------------------------
Depreciation and amortization:
Investment casting $ 65.8 $59.2 $59.0
Corporate 1.0 1.0 7.9
- --------------------------------------------------------------------------------
Consolidated $ 66.8 $60.2 $66.9
================================================================================
Capital expenditures:
Investment casting $112.1 $82.3 $56.5
Corporate .8 .7 .4
- --------------------------------------------------------------------------------
Consolidated $112.9 $83.0 $56.9
================================================================================
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 related to the aircraft engine component refurbishment business which was
sold in 1997 (Note 20).
YEAR ENDED DECEMBER 31,
------------------------------------
(IN MILLIONS) 1999 1998 1997
- --------------------------------------------------------------------------------
Aero engine and airframe $ 733.7 $ 802.5 $ 739.9
Industrial gas turbine 677.4 476.1 402.5
Other 48.6 72.0 115.8
- --------------------------------------------------------------------------------
Total $1,459.7 $1,350.6 $1,258.2
================================================================================
Sales to three of the Company's customers exceed 10% of total consolidated sales
for 1999. Sales to these three customers were $357 million, $184 million and
$148 million in 1999. Receivables from these three customers were $20.9 million,
$26.3 million, and $12.1 million at December 31, 1999. Sales to two of the
Company's customers exceed 10% of total consolidated sales for 1998 and 1997.
Sales to these two customers were $251 million and $194 million in 1998 and $253
million and $185 million in 1997. Receivables from these two customers were $18
million and $11.3 million at December 31, 1998.
Net sales under U.S. government contracts and subcontracts were $199 million in
1999, $183 million in 1998 and $179 million in 1997. Included in the 1999 sales
amounts are $71 million of subcontract sales to the three largest customers.
Included in the 1998 and 1997 sales amounts are subcontract sales to the two
largest customers of $92 million and $85 million, respectively.
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.
F-21
NOTE 15. GEOGRAPHIC INFORMATION (continued)
Consolidated sales to external customers were shipped to the following
geographic regions:
YEAR ENDED DECEMBER 31,
---------------------------------
(IN MILLIONS) 1999 1998 1997
- --------------------------------------------------------------------------------
Sales to external customers
United States $ 845.3 $ 784.8 $ 783.4
Canada 69.2 76.8 71.0
Europe 459.0 431.8 358.3
Asia 86.2 57.2 45.5
- --------------------------------------------------------------------------------
Consolidated sales to external customers $1,459.7 $1,350.6 $1,258.2
================================================================================
Long-lived assets, excluding long-term deferred tax assets, were in the
following geographic regions:
DECEMBER 31,
---------------------------------
(IN MILLIONS) 1999 1998 1997
- --------------------------------------------------------------------------------
Long-lived assets
United States $638.5 $612.1 $590.2
Canada 26.2 31.6 22.6
Europe 86.4 90.3 87.8
Japan 18.1 15.4 -
- --------------------------------------------------------------------------------
Consolidated long-lived assets $769.2 $749.4 $700.6
================================================================================
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 December 1997, the
agreement with this Carlyle affiliate was amended to reduce the annual fee to
$.5 million, and on February 8, 1999 (the date it sold its ownership interest to
Cordant) the agreement with the Carlyle affiliate was terminated. In connection
with the 1997 ownership change, the Company and Cordant then entered into a new
service agreement whereby Cordant provides a wide range of administrative
services. For these services in 1999 and 1998, the Company paid Cordant $1.9
million and $1.5 million respectively, plus the cost of third party charges for
service without markup.
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 a majority (but not less than two) of the non-employee
directors of the Company who are not directors or employees of Cordant
("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 a majority
(but not less than two) of the Independent Directors. See Note 25 for amendments
to the Corporate Agreement.
F-22
NOTE 16. AFFILIATES INFORMATION (continued)
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 customers
whose sales exceed 10% of total consolidated sales.
Short-term and long-term debt: Because the $300 Million 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, 1999, the Company had contracts to buy and sell
various currencies with maturity dates ranging from January 2000 to December
2000. The total notional contract value of these transactions in U.S. dollars
was $51 million at December 31, 1999. The fair value of these contracts is the
$.2 million of unrecognized gain of such contracts as of December 31, 1999. The
fair value of these foreign currency contracts was estimated based on December
31, 1999 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.
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 the Montreal (Canada) and Bethlehem
(Pennsylvania) operations of its Howmet Aluminum Casting subsidiaries (formerly
called Cercast). In 1999, the Company discovered several additional instances of
other testing and specification non-compliance at its Hillsboro (Texas) aluminum
casting facility and at the Montreal and Bethlehem operations. The Company has
notified customers and the appropriate government agencies and has substantially
completed correction of these issues. The Company knows of no in-service
problems associated with any of these issues. In addition, Howmet Aluminum
Casting has been, and expects to continue for some time to be, late in delivery
of products to certain customers, resulting in lower sales. However, delivery
performance in 2000 is expected to improve significantly.
F-23
NOTE 18. CONTINGENT MATTERS (continued)
The Defense Criminal Investigative Service (the "DCIS"), in conjunction with
other agents from the Department of Defense and NASA, has undertaken an
investigation with respect to certain of the foregoing matters at the Montreal
and Bethlehem facilities. The DCIS has informed the Company that the
investigation concerns possible violations of the False Claims Act and the False
Statements Act, as well as possible criminal penalties. The Company is unable to
determine definitively what, if any, civil or criminal penalties might be
imposed as a result of the investigation.
All customer claims relating to the foregoing matters either have been resolved
or, in the Company's judgment, will be resolved within existing reserves.
The Company believes that additional cost for the foregoing matters beyond
amounts accrued, 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 August 6, 1999, the Company entered into an Administrative Agreement with the
U.S. Air Force terminating Notices of Proposed Debarment issued on March 1, 1999
relating to certain of the foregoing matters. The Administrative Agreement
permitted the affected facilities to resume accepting new U.S. government
contracts and subcontracts.
Shortly after Cordant announced, on November 12, 1999, its proposal to acquire
all of the outstanding shares of the Company not currently owned by Cordant
(Notes 1 and 25), eight separate but nearly identical lawsuits were filed in the
Court of Chancery of Delaware against the Company, Cordant and each member of
the Company's Board of Directors. The plaintiffs are shareholders of the Company
who complain that Cordant's offer for their shares in the Company is not for an
adequate price. The plaintiffs request the following relief: certification as a
class action with themselves designated as Class Representatives; an order
enjoining Cordant, the Company and its Board of Directors from proceeding with
the transaction; and money damages and the costs of bringing the lawsuit. On the
motion of the defendants, the Court has consolidated the cases under the style
of "In re Howmet International Shareholders Litigation" and directed that the
plaintiffs file an Amended Complaint reflecting the consolidation. The Company
is defending these actions and believes that any outcome will not result in a
materially adverse impact to the financial position of the Company.
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 that 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 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 threshold has not yet
been reached. 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.
F-24
NOTE 19. ENVIRONMENTAL MATTERS (continued)
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 (the "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 the NJDEP on May 20, 1991 regarding
clean-up of the site. Various remedies are possible and could involve
expenditures ranging from $3 million to $22 million or more. The Company has
recorded a $3 million long-term liability as of December 31, 1999 and $2 million
as of December 31, 1998 for this matter. The indemnification discussed above
applies to the costs associated with this matter.
Besides the above-mentioned remediation work required at the Company's Dover,
New Jersey plant, liabilities exist for clean-up costs associated with hazardous
materials at seven 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, 1999, $4 million of accrued environmental
liabilities are included in the consolidated balance sheet for these seven
sites. The December 31, 1998 consolidated balance sheet includes $4.2 million of
accrued liabilities for nine such sites. The indemnification discussed above
applies to these costs.
In addition to the above environmental matters, and unrelated to Howmet
Corporation, Howmet Holdings Corporation 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 1960's. These liabilities include
approximately $7 million in remaining 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 full.
In connection with these environmental matters, the Company recorded a $17
million liability and an equal $17 million receivable from Pechiney, S.A. as of
December 31, 1999 and $26 million for both the liability and receivable as of
December 31, 1998. Pechiney, S.A. is currently funding all amounts related to
these liabilities.
Estimated environmental costs are not expected to materially impact the
financial position or the results of the Company's operations in future periods.
However, environmental clean-ups are protracted in length and environmental
costs in future periods are subject to changes in environmental remediation
regulations. Any costs 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. Income from operations of this business were immaterial in 1997.
F-25
NOTE 21. OTHER COMPREHENSIVE INCOME
Items listed under the heading "Other comprehensive income" in the Consolidated
Statements of Common Stockholders' Equity and Redeemable Preferred Stock are
shown net of income taxes. Taxes related to the changes in accumulated other
comprehensive income were as follows:
(IN MILLIONS) 1999 1998 1997
- --------------------------------------------------------------------------------
Minimum pension liability $(1.6) $ 1.6 $ -
Unrealized gains on securities (.7) - -
Cumulative translation adjustment - (3.1) 3.1
- --------------------------------------------------------------------------------
Total tax benefit/(expense) $(2.3) $(1.5) $3.1
================================================================================
The accumulated balance, net of tax, for each item in other comprehensive income
is as follows:
(IN MILLIONS) 1999 1998 1997
- --------------------------------------------------------------------------------
Minimum pension liability $ - $(2.4) $ -
Unrealized gains on securities 1.2 - -
Cumulative translation adjustment (12.9) (2.5) (5.6)
- --------------------------------------------------------------------------------
Accumulated other comprehensive income $(11.7) $(4.9) $(5.6)
================================================================================
The increased loss in the cumulative translation adjustment resulted primarily
from a strengthening of the French Franc against the United States dollar.
NOTE 22. OTHER INVESTMENTS
The Company has investments in equities and fixed income securities for deferred
compensation plans. These assets are classified as "Other noncurrent assets" on
the balance sheet. Fair market value is determined by quoted market prices and
are carried on the balance sheet at market value. Information concerning these
investments at December 31, 1999 and 1998 was as follows:
(IN MILLIONS) 1999 1998
- --------------------------------------------------------------------------------
Fair market value $7.5 $4.6
Unrealized gains on securities 1.9 .1
Cost of equities 4.5 3.6
Cost of fixed income securities 1.1 .9
================================================================================
NOTE 23. OTHER INFORMATION
Other, net in the 1998 and 1997 consolidated statements of income includes
equity in income of unconsolidated affiliates of $.4 million and $1.5 million,
respectively. In 1999, all subsidiaries of the Company were consolidated. Other,
net also includes losses on sales of receivables in all three years (Note 7) and
$2.6 million of 1997 costs associated with the 1997 public offering of common
stock.
In 1999, the Company received a one-time customer advance on accounts receivable
of $40 million. This advance will be applied against accounts receivable
beginning in June 2001.
F-26
NOTE 24. QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
The table below presents the Company's quarterly financial highlights for 1999
and 1998. 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.
1999 QUARTER ENDED
-------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) DEC 31 SEP 30 JUN 30 MAR 31
- --------------------------------------------------------------------------------
Net sales $362.1 $355.2 $369.7 $372.7
Operating income 46.7 59.8 51.7 57.2
Net income (a) 32.8 37.8 31.3 34.8
Income per common share (basic and diluted) $ .33 $ .38 $ .31 $ .34
Market price
High $18.63 $20.63 $19.31 $16.94
Low $11.19 $13.75 $14.13 $13.75
================================================================================
1998 Quarter Ended
-------------------------------------
(in millions, except per share data) Dec 31 Sep 30 Jun 30 Mar 31
- --------------------------------------------------------------------------------
Net sales $354.9 $331.6 $335.7 $328.4
Operating income 32.5 62.6 49.8 44.8
Net income (b) 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
================================================================================
- ----------
(a)1999 includes pretax (expense) income related to the Company's SARs plan of
$1.0 million, $(4.2) million, $2.3 million and $(5.4) million in the first,
second, third and fourth quarters, respectively. The first quarter benefit
was reversed in the second quarter and the third quarter benefit was reversed
in the fourth quarter due to the Company's common stock price fluctuations.
The third quarter includes a $2.9 million benefit related to Cordant Options.
$.8 million of this benefit was reversed in the fourth quarter.
In the third quarter of 1999, the annual effective tax rate was reduced from
37% to 36%, and in the fourth quarter it was reduced from 36% to 34%. The
effect of applying the reductions retroactively, from the beginning of 1999
to the end of the quarter preceding the quarter of change, benefited the
third quarter by $1 million, after-tax, and benefited the fourth quarter by
$3.2 million, after-tax.
(b)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.
In the third quarter of 1998, the annual effective tax rate was reduced from
40% to 38%, and in the fourth quarter it was reduced from 38% to 37%. The
effect of applying the reductions retroactively, from the beginning of 1998
to the end of the quarter preceding the quarter of change, benefited the
third quarter by $1.7 million, after-tax, and benefited the fourth quarter by
$1.5 million, after-tax.
F-27
NOTE 25. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT AUDITORS
(UNAUDITED)
On March 10, 2000, Cordant informed the Independent Directors Committee of the
Company's Board of Directors that it was willing to increase its offer to
acquire all of the outstanding shares of the Company not currently owned by
Cordant to $18.75 per share, but following further discussions no agreement was
reached. (See Note 1.)
On March 14, 2000, Alcoa Inc. ("Alcoa") and Cordant announced an agreement under
which Alcoa agreed to acquire Cordant. Alcoa has advised the Company that it
intends to enter into discussions with the Independent Directors Committee to
pursue the acquisition of the outstanding publicly held shares of the Company's
stock.
On March 13, 2000, the Corporate Agreement (see Note 16) between the Company and
Cordant was amended with respect to the two ways in which Cordant, without the
prior consent of a majority (but not less than two) of the Company's Independent
Directors, may acquire the outstanding shares of common stock not beneficially
owned by Cordant (the "Publicly Held Shares") in an acquisition which would
reduce the number of Publicly Held Shares to less than 14% of the total number
of shares outstanding. The first alternative, which is a Cordant tender offer to
acquire all of the Publicly Held Shares, was amended to require that at least a
majority of the Publicly Held Shares are tendered and the tender offer is
followed by a prompt "follow up" merger at the same price for untendered shares.
The second alternative, which is a merger or other business combination in which
holders of the Publicly Held Shares are treated equally, was amended to require
that holders of at least a majority of the Publicly Held Shares approve the
merger. On March 14, 2000, Alcoa agreed to be bound by these same limitations in
the Corporate Agreement as Cordant is.
The agreement by which Alcoa would acquire Cordant provides for all Cordant
stock options to become exercisable upon completion of Alcoa's tender offer and
either cashed out at the $57 per share tender offer price less the option
exercise price or, at the holder's election, converted into Alcoa common stock
options of equivalent value to the Cordant Options.
F-28
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 ("IGT") 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. Sales of the Company's products
vary as a function of aircraft and IGT market demand.
Aircraft component sales represent approximately 50% of total 1999 sales,
including sales to military and defense contractors which comprise approximately
14% of total 1999 sales. The Company's sales to commercial original equipment
manufacturers ("OEMs") lead the market by approximately nine months. Hence,
while commercial aircraft deliveries were at an all time high in 1999, the
Company's component sales have been adversely affected, due to decreased
aircraft production rates for 2000. Aircraft production rates are expected to
decline through 2002. Despite the reduction in the new aircraft build rate for
aircraft with greater than 100 seats, 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. The aircraft from which the
Company derives its highest revenues is not expected to decline to the extent
projected for the overall aircraft build rate of the industry. Further, regional
jet and business aircraft markets where the Company has a dominant market
position, are expected to remain strong through 2002.
Recently, aviation fuel prices have increased significantly. Historically,
increased fuel prices for commercial aviation has had a negative impact on
airline profitability, resulting in a reduction of new aircraft orders and
engine overhaul rates.
Industrial gas turbine activity, which represented about 46% of the Company's
revenues in 1999, experienced a 42% increase over 1998. Industrial gas turbines,
especially in the larger (greater than 120 megawatts) size range, are primarily
used to generate electric power. These IGTs are in high demand at 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 fired steam turbines. 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 2000 and 2001 and are now accepting orders for 2002. 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 the
primary provider of the critical turbine airfoils. 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 the percentage growth of its IGT
business to be in the low teens in 2000 and to continue with positive growth in
F-29
the next few years thereafter.
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 adverse effect of price reductions is expected to be
offset to a large extent through Company and joint Company/customer cost
reduction programs. These cost reductions include significant efficiency and
yield improvements on new, technologically advanced parts, as they move through
the normal product life cycle.
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), 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. There can be no
assurance, however, that cost reductions can exceed price reductions and improve
margins.
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. Earnings from operations of this business were
immaterial in all periods.
Backlog: The Company's backlog of orders as of December 31, 1999 and 1998 were
- --------
$765 million and $877 million, respectively. Because of the short lead and
delivery times, backlog may not be a significant indicator of future performance
of the Company.
F-30
RESULTS OF OPERATIONS YEAR ENDED 1999 COMPARED TO YEAR ENDED 1998
Summary financial information for the years ended December 31 follows:
Better/
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1999 1998 (Worse) Percent
- --------------------------------------------------------------------------------
Net sales $1,459.7 $1,350.6 $109.1 8
Gross profit 343.9 311.5 32.4 10
Selling, general and administrative
expense 108.6 101.6 (7.0) (7)
Research and development expense 19.9 20.2 .3 1
- --------------------------------------------------------------------------------
Income from operations 215.4 189.7 25.7 14
Net interest expense (5.3) (11.1) 5.8 52
Other, net (3.0) (3.4) .4 12
Income taxes (70.4) (64.8) (5.6) (9)
- --------------------------------------------------------------------------------
Net income $ 136.7 $ 110.4 $ 26.3 24
- --------------------------------------------------------------------------------
Income per common share
(basic and diluted) $ 1.36 $ 1.05 $ .31 30
- --------------------------------------------------------------------------------
Net sales in 1999 were 8% higher than in 1998. The 1999 sales increase is due to
volume increases in the industrial gas turbine market. Sales to the aero market
were approximately 9% lower than 1998, including an approximate 2% price
decrease. The lower aero sales in 1999 were primarily attributable to decreased
commercial build rates and customer inventory corrections. Sales to the
industrial gas turbine market were approximately 42% higher than 1998, net of
price reductions of approximately 3%. The aforementioned price reductions were a
function of sharing cost savings with customers. The Company continues to
experience pressure from its major customers for price reductions and will
experience significant reductions again in 2000. The adverse effect of such
reductions is expected to be offset by the benefits of higher volume and the
effect of Company and joint Company/customer cost reduction programs. These cost
reductions include significant efficiency and yield improvements on new,
technologically advanced parts, as they move through the normal product life
cycle. While anticipated, the continuation of these cost reductions cannot be
assured.
Gross profit, as reported, was $32.4 million higher in 1999 than in 1998. The
principal reason for the 1999 improvement was increased volume. Cost control
enabled the Company to capitalize on such volume increases. Partially offsetting
the improvement was the adverse effect of continuing production problems at
certain aluminum casting plants. The 1999 gross margin percentage was 23.6%
compared with 23.1% for 1998. The Howmet Aluminum Casting problems discussed
below adversely affected the margins by approximately 1% in 1999 and 0.4% in
1998.
Selling, general and administrative expense was $7.0 million higher in 1999 than
in 1998. The increase is primarily related to general price increases, higher
costs to support higher volumes, and including a full year of SG&A expense for
the Company's Japanese subsidiary. Lower costs for SARs were offset by higher
performance related employee compensation costs and the cost of systems
upgrades. 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
F-31
stock fluctuates back up to $15 per share (the maximum per share price for SARs
compensation purposes) or higher.
Net interest expense was $5.8 million lower for 1999 compared with 1998. The
decrease was primarily due to lower debt levels and $0.8 million of capitalized
interest in 1999.
The effective tax rate for 1999 was 34% compared to 37% for 1998. The lower 1999
effective rate includes higher foreign sales corporation benefits.
Net income in 1999 increased by 24% when compared to 1998, and the resulting per
share amount increased 30% due to the factors discussed above.
Starting in late 1998, the Company discovered certain product testing and
specification non-compliance issues at the Montreal (Canada) and Bethlehem
(Pennsylvania) operations of its Howmet Aluminum Casting subsidiaries (formerly
called Cercast). In 1999, the Company discovered several additional instances of
other testing and specification non-compliance at its Hillsboro (Texas) aluminum
casting facility and at the Montreal and Bethlehem operations. The Company has
notified customers and the appropriate government agencies and has substantially
completed correction of these issues. The Company knows of no in-service
problems associated with any of these issues. In addition, Howmet Aluminum
Casting has been, and expects to continue for some time to be, late in delivery
of products to certain customers, resulting in lower sales. However, delivery
performance in 2000 is expected to improve significantly.
The Defense Criminal Investigative Service (the "DCIS"), in conjunction with
other agents from the Department of Defense and NASA, has undertaken an
investigation with respect to certain of the foregoing matters at the Montreal
and Bethlehem facilities. The DCIS has informed the Company that the
investigation concerns possible violations of the False Claims Act and the False
Statements Act, as well as possible criminal penalties. The Company is unable to
determine definitively what, if any, civil or criminal penalties might be
imposed as a result of the investigation.
All customer claims relating to the foregoing matters either have been resolved
or, in the Company's judgment, will be resolved within existing reserves.
The Company believes that additional cost for the foregoing matters beyond
amounts accrued, 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 August 6, 1999, the Company entered into an Administrative Agreement with the
U.S. Air Force terminating Notices of Proposed Debarment issued on March 1, 1999
relating to certain of the foregoing matters. The Administrative Agreement
permitted the affected facilities to resume accepting new U.S. government
contracts and subcontracts.
F-32
RESULTS OF OPERATIONS YEAR ENDED 1998 COMPARED TO YEAR ENDED 1997
Summary financial information for the years ended December 31 follows:
Better/
(in millions, except per share amounts) 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 administrative
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 extraordinary 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 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 were recorded, primarily in
the fourth quarters of both years. 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 improved in
1999 and are expected to improve more thereafter. The 1997 23.4% gross margin
percentage benefited by .8 of a percentage point from the aforementioned $9.7
million nonrecurring price adjustment.
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.
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
F-33
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flow from operations and
borrowings under its New Credit Agreement. 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 these purposes.
To date, cash available after satisfaction of these requirements has been used
to voluntarily repay debt prior to mandatory due dates.
Capital expenditures in 1999 were $112.9 million. Such expenditures include
significant amounts for previously announced plans to accelerate expansion of
IGT capacity at three plants and to build a new aero-airfoil plant. Capital
expenditures for 2000 are expected to be approximately $90 million.
In 1999, the Company received a one-time customer advance on accounts receivable
of $40 million. This advance will be applied against accounts receivable
beginning in June 2001.
On February 9, 2000, the Company elected to terminate its $300 Million Revolving
Credit Facility. On February 9, 2000, the Company (through its wholly-owned and
only operating subsidiaries, Howmet Corporation and its subsidiaries) entered
into a new $25 million credit agreement with a major U.S. bank. The New Credit
Agreement provides a commitment from the bank for an unsecured revolving credit
line of $25 million. The interest rate is based on LIBOR plus a spread. The New
Credit Agreement expires on May 9, 2000. The participating bank verbally stated
a willingness to enter into a short-term extension of the agreement, if the
Company deems necessary.
At December 31, 1999 there were $9.6 million of outstanding standby letters of
credit under separate credit arrangements. As of February 9, 2000, $25 million
of unused borrowing capacity was available under the Company's New Credit
Agreement.
At December 31, 1998, the Company's balance sheet included $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. 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 8% at December 31, 1999
compared to 30% at December 31, 1998. The current ratio (excluding short-term
debt and Pechiney Notes) was 1.0 at December 31, 1999 and 1.1 at December 31,
1998. Working capital (excluding short-term debt and Pechiney Notes) was $12.1
F-34
million and $34.8 million at December 31, 1999 and December 31, 1998,
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, 1999. The $35.6 million retained
receivables, shown in the December 31, 1999 balance sheet, represents the
receivables set aside to replace sold receivables in the event they are not
fully collected.
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 New Credit Agreement (and previously the terminated
$300 Million Revolving Credit Facility) could limit transfers of cash to the
Company from Howmet Corporation and 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, 1998, the cumulative translation adjustment, which is
included in stockholders' equity, changed by $10.4 million, resulting in a $12.9
million negative balance at December 31, 1999. The change is primarily due to
the strengthening of the U.S. dollar relative to the French franc.
CHANGES IN OWNERSHIP AND PREFERRED STOCK REDEMPTION
On February 8, 1999, Carlyle-Blade sold its remaining 22.7 million shares of
Howmet International Inc. common stock to Cordant. At December 31, 1999 Cordant
holds 84.6% and the public 15.4% of the outstanding Howmet International Inc.
common stock.
On February 17, 1999, the Company paid $66.4 million to redeem and retire all of
its outstanding 9% preferred stock. The payment was made to Cordant, the sole
preferred stockholder. The Company borrowed against its then existing revolving
credit agreement to make the redemption.
On November 12, 1999, Cordant made a proposal to acquire all of the outstanding
shares of Common Stock of the Company not currently owned by Cordant for a price
of $17.00 per share in cash, and the proposal was referred to the Independent
Directors Committee of the Company's Board of Directors (the "Committee"). On
March 10, 2000, Cordant informed the Committee that it was willing to increase
its offer to $18.75 per share, but following further discussions no agreement
was reached. On March 14, 2000, Alcoa Inc. ("Alcoa") and Cordant announced an
agreement under which Alcoa agreed to acquire Cordant. Alcoa has advised the
Company that it intends to enter into discussions with the Committee to pursue
the acquisition of the outstanding publicly held shares of the Company's stock.
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, 1999 and 1998, the interest rate on $100.7
million and $135 million (including $55 million from the receivables
securitization facility), respectively, 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 $.6 million and $.8 million in 1999 and 1998, respectively. This
hypothetical analysis does not take into consideration the effects of the
F-35
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, 1999 and 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, 1999, for hedging purposes, the Company had the following
forward exchange contracts outstanding:
(in millions) Contract & U.S. Local Unrealized
Currency Dollar Currency Gain Maturity
Local Currency Type Equivalent Equivalent (Loss) Dates
- ------------------------------------------------------------------------------------------------
United Kingdom sterling Buy U.S. dollars $13.6 8.4 $- Jan 2000 to Dec 2000
United States dollars Buy Can. dollars 9.7 9.7 .2 Jan 2000 to Dec 2000
French francs Buy U.K. sterling 8.8 54.2 .3 Jan 2000 to Dec 2000
French francs Sell U.S. dollars 10.2 65.8 - Mar 2000
Japanese Yen Buy U.S. dollars 2.6 271.6 (.1) Jan 2000 to Apr 2000
Japanese Yen Sell U.S. dollars .2 24.5 - May 2000 to Dec 2000
Japanese Yen Buy U.K. sterling 5.9 599.6 (.2) Jan 2000 to Dec 2000
- ------------------------------------------------------------------------------------------------
$51.0 $.2
- ------------------------------------------------------------------------------------------------
At December 31, 1998, for hedging purposes, the Company had the following
forward exchange contracts outstanding:
(in millions) Contract & U.S. Local Unrealized
Currency Dollar Currency Gain Maturity
Local Currency Type Equivalent Equivalent (Loss) Dates
- ------------------------------------------------------------------------------------------------
United Kingdom sterling Buy U.S. dollars $ 3.9 2.3 $- Jan 1999 to Dec 1999
United States dollars Buy Can. dollars 25.2 25.2 .1 Jan 1999 to Dec 1999
French francs Buy U.K. sterling 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
(loss), was estimated based on December 31, 1999 and 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 $1.5 million and $1.1 million in 1999 and
1998, respectively. These forward exchange contracts are hedges and,
consequently, any market value gains or losses related thereto would be 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 $141 million and $177
million at December 31, 1999 and December 31, 1998, respectively. 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 currency net asset
exposures. The Company also has some commodity price risk but does not currently
F-36
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.
YEAR 2000 COMPLIANCE
The Company has not experienced any disruption in operations as a result of
computer software issues associated with Year 2000. All internal systems have
been tested and validated. Formal communications have been initiated with its
critical suppliers, including raw materials and services suppliers to confirm
their successful transition through the Year 2000 rollover. At this point, the
Company has not been made aware of any material problems.
The estimated cost at completion for all phases of the Company's Year 2000
project is $16.2 million. An estimated $6.7 million (41%) 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 $6.9 million (43%) 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 $2.6
million (16%) is for infrastructure upgrades or replacement.
Approximately $15.9 million (98%) had been expended as of December 31, 1999. The
Company expects to spend $0.3 million (2%) in 2000.
EURO CONVERSION
The Company implemented a strategy during 1999, which would allow it to operate
in a Euro environment during the transition period, January 1, 1999 through
December 31, 2001, and after full Euro conversion, effective July 1, 2002. To
date the Company has not experienced and does not anticipate any material impact
from the Euro conversion on its operations, its competitive position or its
computer software plans. Also, the Company does not expect any significant
changes to its currency hedging program and does not expect any significant
increases in its foreign exchange exposure.
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.
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 that 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. See Note 18 of Notes to Consolidated Financial Statements.
F-37
RISK FACTORS
The Company sets forth at pages 6 to 10 hereof 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 elsewhere in this Annual Report on Form 10-K and in prior Company
filings with the Securities and Exchange Commission. The information in these
filings should be considered in assessing the various risks associated with the
Company's conduct of its business and financial condition. Certain risks may
impact the accuracy of the Company's forward-looking statements. Changing
economic and political conditions in the United States and in other countries
could delay the delivery of aero or industrial gas turbine engines. 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
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, and 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. The Company undertakes no obligation to publicly
upgrade or revise any forward looking statements to reflect future events or
developments.
NEW ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative
Instruments and hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133". This statement delays the effective date of Statement No.
133 to fiscal years beginning after June 15, 2000. Statement No. 133 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 changes in fair value of the hedged asset, 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 Statement No. 133 will be
on the earnings and financial position of the Company. The Company expects to
adopt this new statement on January 1, 2001.
RECENT MARKET PRICE AND DIVIDENDS
The market price of the Company's common stock ranged from a low of $11.19 to a
high of $20.63 per share for 1999 and a low of $9.75 to a high of $18.63 per
share for 1998.
The Company did not pay dividends in 1999 or 1998.
F-38
SELECTED FINANCIAL DATA
Howmet
Predecessor
Company
Howmet International Inc. Combined
Consolidated (a) (a)
------------------------------------------------ ----------
Period Period
from from
December 14, January 1,
1995 1995
to to
December December
Year Ended December 31, 31, 31,
------------------------------------------------ ----------
(dollars in millions) 1999 1998 1997 1996 1995 1995
------------------------------------------------ ----------
STATEMENT OF INCOME DATA (a)
Net sales $1,459.7 $1,350.6 $1,258.2 $1,106.8 $51.4 $894.1
Operating expenses:
Cost of sales 1,115.8 1,039.1 963.8 891.1 42.1 747.6
Selling, general and
administrative (b) 108.6 101.6 122.3 93.4 3.7 77.2
Research and development 19.9 20.2 17.6 20.3 1.0 19.2
Restructuring charges
(credit) - - - - - (1.6)
------------------------------------------------ ----------
Income from operations 215.4 189.7 154.5 102.0 4.6 51.7
Interest (expense)
income, net (5.3) (11.1) (29.8) (40.2) (3.1) 4.1
Other, net (3.0) (3.4) (6.4) (5.9) (1.0) (5.8)
Income taxes (70.4) (64.8) (46.3) (30.3) (.5) (23.7)
------------------------------------------------ ----------
Income before
extraordinary item (c) $ 136.7 $ 110.4 $ 72.0 $ 25.6 $ - $ 26.3
================================================ ==========
Net income (c) $ 136.7 $ 110.4 $ 59.7 $ 25.6 $ - $ 26.3
Dividends on redeemable
preferred stock (.8) (5.6) (5.1) (4.6) (.2) -
================================================ ==========
Net income applicable to
common stock $ 135.9 $ 104.8 $ 54.6 $ 21.0 $ (.2) $ 26.3
================================================ ==========
Per common share amounts (d):
Income before
extraordinary item $ 1.36 $ 1.05 $ .67 $ .21 $ - $ .26
================================================ ==========
Net income $ 1.36 $ 1.05 $ .55 $ .21 $ - $ .26
================================================ ==========
OTHER DATA (end of period,
where applicable) (a):
Total assets, excluding
Restricted Trust $1,120.1 $1,084.2 $1,020.6 $1,052.4 $1,127.8 $ -
Restricted Trust (e) - 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 -
Pechiney Notes (e) - 716.4 716.4 716.4 716.4 -
Redeemable preferred stock - 65.6 60.0 54.9 50.2 -
Stockholders' equity 500.7 371.3 265.7 218.8 196.9 -
Net cash provided (used)
by operating activities 232.9 207.4 192.6 184.5 (12.7) 35.2
Capital expenditures 112.9 83.0 56.9 33.7 1.6 41.2
Number of employees 11,500 11,500 10,400 10,000 9,600 -
========================================================================================
- ----------
(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 December 13, 1995
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
$6.3 million in 1999, $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 fully-diluted and were
calculated after retroactively restating all shares to reflect the October
1997 10,000-for-1 split.
(e) The Restricted Trust holds 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
Pechiney Notes in full on January 4, 1999, and the Restricted Trust was
terminated. No Company funds were used in the payment of the Pechiney
Notes.
F-39
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
HOWMET INTERNATIONAL INC. (PARENT COMPANY)
Condensed Balance Sheets
(Dollars in millions)
December 31,
1999 1998
------------ ------------
Assets
Current asset $ .5 $ .2
Investment in subsidiaries 500.7 437.3
============ ============
Total assets $501.2 $437.5
============ ============
Liabilities, redeemable preferred stock and
stockholders' equity
Current accrued liabilities $ .5 $ .6
Redeemable preferred stock - 65.6
Stockholders' equity 500.7 371.3
============ ============
Total liabilities, redeemable preferred stock
and stockholders' equity $501.2 $437.5
============ ============
See notes to the condensed financial statements.
I-1
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
HOWMET INTERNATIONAL INC. (PARENT COMPANY)
Condensed Statements of Operations
(Dollars in millions)
Year Ended December 31,
1999 1998 1997
---------- ---------- ---------
General and administrative expense $ (1.8) $ (2.0) $ -
Public stock offering costs - - (2.9)
Interest expense (.8) (.5) -
Income tax benefit .9 .9 1.0
Equity in earnings of subsidiaries
before extraordinary item 138.4 112.0 73.9
---------- ---------- ---------
Income before extraordinary item 136.7 110.4 72.0
Extraordinary item subsidiary's loss on
early retirement of debt, net of
income taxes of $7.9 - - (12.3)
---------- ---------- ---------
Net income 136.7 110.4 59.7
Payment-in-kind dividends on redeemable
preferred stock (.8) (5.6) (5.1)
---------- ---------- ---------
Net income applicable to common stock $135.9 $104.8 $ 54.6
========== ========== =========
Per common share amounts, basic and diluted:
Income before extraordinary item $ 1.36 $ 1.05 $ .67
Extraordinary item - - (.12)
========== ========== =========
Net income $ 1.36 $ 1.05 $ .55
========== ========== =========
See notes to the condensed financial statements
I-2
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
HOWMET INTERNATIONAL INC. (PARENT COMPANY)
Notes to Condensed Financial Statements
1. GENERAL
These parent company only financial statements should be read in conjunction
with the Howmet International Inc. ("HII") consolidated financial statements,
included herewith. Note 1 to such consolidated financial statements presents the
HII, Howmet Holdings Corporation and Howmet Corporation relationships.
In these parent company only financial statements, HII investments in its
wholly-owned subsidiaries are stated at cost plus the undistributed net income
and other comprehensive income of the subsidiaries, net of payables to
subsidiaries of $8.3 million and $6.9 million at December 31, 1999 and 1998,
respectively.
2. CASH FLOWS INFORMATION
HII had no cash flows for the years ended December 31, 1998 and 1997. In 1999
the only cash flows were receipt of a $66.4 million dividend from a subsidiary
and the redemption of all of the outstanding shares of redeemable preferred
stock at their $66.4 million book value.
3. ENVIRONMENTAL MATTERS
In connection with the Acquisition, Pechiney, S.A. indemnified HII for
environmental liabilities relating to Howmet Corporation 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 receivable from Pechiney, S.A. pursuant to this indemnification.
HII 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 (the "NJDEP"), and HII 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
Howmet Corporation and the NJDEP on May 20, 1991 regarding clean-up of the site.
Various remedies are possible and could involve expenditures ranging from $3
million to $22 million or more. HII has recorded a $3 million long-term
liability as of December 31, 1999 and $2 million as of December 31, 1998 for
this matter. The indemnification discussed above applies to the costs
associated with this matter.
Besides the above-mentioned remediation work required at HII's Dover, New Jersey
plant, liabilities exist for clean-up costs associated with hazardous types of
materials at seven other on-site and off-site locations. HII 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, 1999, $4 million of accrued environmental liabilities
are included in the consolidated balance sheet for these seven sites. The
December 31, 1998 balance sheet includes $4.2 million of accrued liabilities for
nine such sites. The indemnification discussed above applies to these costs.
In addition to the above environmental matters, and unrelated to Howmet
Corporation, Howmet Holdings Corporation 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 1960's. These liabilities include
approximately $7 million in remaining 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 full.
In connection with these environmental matters, the Company recorded a $17
million liability and an equal $17 million receivable from Pechiney, S.A. as of
December 31, 1999 and $26 million for both the liability and receivable as of
December 31, 1998. Pechiney, S.A. is currently funding all amounts related to
these liabilities.
I-3
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
HOWMET INTERNATIONAL INC. (PARENT COMPANY)
Notes to Condensed Financial Statements (Continued)
3. ENVIRONMENTAL MATTERS (continued)
Estimated environmental costs are not expected to materially impact the
financial position or the results of HII'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 costs 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.
4. CONTINGENT MATTERS
Starting in late 1998, HII discovered certain product testing and specification
non-compliance issues at the Montreal (Canada) and Bethlehem (Pennsylvania)
operations of its Howmet Aluminum Casting subsidiaries. In 1999, HII discovered
several additional instances of other testing and specification non-compliance
at its Hillsboro (Texas) aluminum casting facility and at the Montreal and
Bethlehem operations. HII has notified customers and the appropriate government
agencies and has substantially completed corrective action with respect to these
issues. HII knows of no in-service problems associated with any of these issues.
In addition, Howmet Aluminum Casting has been, and expects to continue for some
time to be, late in delivery of products to certain customers, resulting in
lower sales. However, delivery performance in 2000 is expected to improve
significantly.
The Defense Criminal Investigative Service (the "DCIS"), in conjunction with
other agents from the Defense Department and NASA, has undertaken an
investigation with respect to certain of the foregoing matters at the Montreal
and Bethlehem facilities. The DCIS has informed HII that the investigation
concerns possible violations of the False Claims Act and the False Statements
Act, as well as possible criminal penalties. HII is unable to determine
definitively what, if any, civil or criminal penalties might be imposed as a
result of the investigation.
All customer claims relating to the foregoing matters either have been resolved
or, in HII's judgment, will be resolved within existing reserves.
HII believes that additional cost for the foregoing matters beyond amounts
accrued, if any, would not have a material adverse effect on HII'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 August 6, 1999, HII entered into an Administrative Agreement with the U.S.
Air Force terminating Notices of Proposed Debarment issued on March 1, 1999
relating to certain of the foregoing matters. The Administrative Agreement
permitted the affected facilities to resume accepting new U.S. government
contracts and subcontracts.
Shortly after Cordant announced, on November 12, 1999, its proposal to acquire
all of the outstanding shares of HII not currently owned by Cordant (See
"Business - Possible Ownership Changes," page 1), eight separate but nearly
identical lawsuits were filed in the Court of Chancery of Delaware against HII,
Cordant and each member of the HII's Board of Directors. The plaintiffs are
shareholders of HII who complain that Cordant's offer for their shares in the
HII is not for an adequate price. The plaintiffs request the following relief:
certification as a class action with themselves designated as Class
Representatives; an order enjoining Cordant, HII and its Board of Directors from
proceeding with the transaction; and money damages and the costs of bringing the
lawsuit. On the motion of the defendants, the Court has consolidated the cases
under the style of "In re Howmet International Shareholders Litigation" and
directed that the plaintiffs file an Amended Complaint reflecting the
consolidation. HII is defending these actions and believes that any outcome will
not result in a materially adverse impact to the financial position of HII.
HII, in its ordinary course of business, is involved in other litigation,
administrative proceedings and investigations of various types in several
jurisdictions. HII believes that 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.
I-4
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
HOWMET INTERNATIONAL INC.
(Dollars in millions)
Balance at Charged to Charged to Deductions Balance at
beginning costs other from end of
Description of period and expenses accounts reserves period
----------- --------- ------------ -------- -------- ------
FOR THE YEAR ENDED
DECEMBER 31, 1999
Reserves:
Accounts $ 5.2 - - (1.5) $ 3.7
Receivable
Warranty Reserves $13.3 (.2) - (2.8) $10.3
FOR THE YEAR ENDED
DECEMBER 31, 1998
Reserves:
Accounts $ 4.4 .9 - (.1) $ 5.2
Receivable
Warranty Reserves $13.7 2.6 - (3.0) $13.3
FOR THE YEAR ENDED
DECEMBER 31, 1997
Reserves:
Accounts $ 5.6 6.0 (.7) (6.5) $ 4.4
Receivable
Warranty Reserves $ 8.1 6.5 - (.9) $13.7
- ----------
(a) 1997 Accounts Receivable amounts have been changed to conform to the 1998
presentation.
II-1