UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
COMMISSION FILE NUMBER 1-13645
HOWMET INTERNATIONAL INC.
INCORPORATED IN THE STATE OF DELAWARE I.R.S. EMPLOYER IDENTIFICATION
NO.52-1946684
475 STEAMBOAT ROAD, GREENWICH, CT 06830
TELEPHONE NUMBER: (203) 661-4600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 par value, as of April 28, 2000: 100,033,307 Shares
Howmet International Inc.
Quarterly Report on Form 10-Q
March 31, 2000
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1 -- Financial Statements
Consolidated Statements of Income - Three months ended
March 31, 2000 and 1999 3
Consolidated Condensed Balance Sheets - March 31, 2000 and
December 31, 1999 4
Consolidated Statements of Cash Flows - Three months ended
March 31, 2000 and 1999 5
Consolidated Statements of Common Stockholders' Equity and Redeemable
Preferred Stock - Three months ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operation 12
Item 3 -- Quantitative and Qualitative Disclosure about Market Risk 15
Part II. OTHER INFORMATION
Item 1 -- Legal Proceedings 16
Item 5 -- Other Information 16
Item 6 -- Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
HOWMET INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in millions, except per share data)
Three Months Ended
March 31,
------------------------
2000 1999
- ---------------------------------------------------------------------------
Net sales $381.6 $372.7
Operating expenses:
Cost of sales 296.8 284.6
Selling, general and administrative 34.4 26.0
Research and development 4.5 4.9
- ---------------------------------------------------------------------------
Total operating expenses 335.7 315.5
Income from operations 45.9 57.2
Interest income .4 .2
Interest expense (.7) (1.9)
Other, net (.7) (.3)
- ---------------------------------------------------------------------------
Income before income taxes 44.9 55.2
Income taxes (14.8) (20.4)
- ---------------------------------------------------------------------------
Net income 30.1 34.8
Dividends on redeemable preferred stock - (.8)
- ---------------------------------------------------------------------------
Net income applicable to common stock $ 30.1 $ 34.0
===========================================================================
Net income per common share, basic and diluted $ .30 $ .34
===========================================================================
See notes to consolidated financial statements.
3
HOWMET INTERNATIONAL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions, except share data)
March 31, December 31,
2000 1999
- -------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 23.2 $ 39.4
Accounts receivable (less allowance of $3.8 and $3.7) 96.1 80.7
Inventories 169.5 165.3
Retained receivables 49.3 35.6
Deferred income taxes 13.8 14.3
Other current assets 3.7 3.7
- -------------------------------------------------------------------------------------
Total current assets 355.6 339.0
Property, plant and equipment, net 394.1 396.5
Goodwill, net 207.9 209.5
Patents and technology and other intangible assets, net 91.9 94.9
Deferred income taxes 16.8 11.9
Other noncurrent assets 65.6 68.3
- -------------------------------------------------------------------------------------
Total assets $1,131.9 $1,120.1
=====================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 78.1 $ 81.3
Accrued compensation 38.7 59.8
Other accrued liabilities 94.5 98.0
Advance on accounts receivable 40.0 40.0
Income taxes payable 49.7 47.8
Short-term debt 50.4 45.7
- -------------------------------------------------------------------------------------
Total current liabilities 351.4 372.6
Noncurrent liabilities:
Accrued retiree benefits other than pensions 103.0 101.2
Accrued pension liability 36.1 35.9
Other noncurrent liabilities 62.9 59.9
SARs 50.6 49.8
- -------------------------------------------------------------------------------------
Total noncurrent liabilities 252.6 246.8
Commitments and contingencies
Stockholders' equity:
Preferred stock, authorized - 10,000,000 shares, no
shares issued and outstanding - -
Common stock, $.01 par value, authorized - 400,000,000
shares, issued and outstanding: 2000 - 100,033,307 shares;
1999 - 100,028,883 shares 1.0 1.0
Capital surplus 195.5 195.4
Retained earnings 346.1 316.0
Accumulated other comprehensive income (14.7) (11.7)
- -------------------------------------------------------------------------------------
Total stockholders' equity 527.9 500.7
- -------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,131.9 $1,120.1
=====================================================================================
See notes to consolidated financial statements.
4
HOWMET INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
Three Months Ended
March 31,
------------------------------
2000 1999
- ------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 30.1 $ 34.8
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 17.8 16.2
Changes in assets and liabilities:
Receivables (30.6) (28.3)
Inventories (5.9) (8.3)
Accounts payable and accrued liabilities (26.1) (25.9)
Deferred income taxes (4.4) (.7)
Income taxes payable 2.1 20.0
Long-term SARs and Cordant options accruals 7.0 (.3)
Other, net 2.0 2.3
- ------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (8.0) 9.8
INVESTING ACTIVITIES
Purchases of property, plant and equipment (12.3) (23.3)
- ------------------------------------------------------------------------------------
Net cash used by investing activities (12.3) (23.3)
FINANCING ACTIVITIES
Net change in short-term debt 4.7 32.7
Issuance of long-term debt - 65.0
Repayment of long-term debt - (35.0)
Redemption of preferred stock - (66.4)
- ------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 4.7 (3.7)
Foreign currency rate changes (.6) (2.3)
- ------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (16.2) (19.5)
Cash and cash equivalents at beginning of period 39.4 37.6
- ------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 23.2 $ 18.1
====================================================================================
See notes to consolidated financial statements.
5
HOWMET INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY AND REDEEMABLE
PREFERRED STOCK (UNAUDITED)
(in millions, except share data)
Accumulated Total
Other Common Redeemable
Common Stock Capital Retained Comprehensive Stockholders' Preferred Stock
------------------ -------------------
Shares Amount Surplus Earnings Income Equity Shares Amount
- ------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31, 1999
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 34.8 34.8
Other comprehensive income
Foreign exchange translation
adjustment (7.0) (7.0)
----------
Total comprehensive income 27.8
----------
Dividends - redeemable
preferred stock (.8) (.8) 78 .8
Redeemable preferred
stock redemption (6,638) (66.4)
Shares issued 8,902 .1 .1
- ------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 100,014,258 $1.0 $195.2 $214.1 $(11.9) $398.4 - $ -
========================================================================================================================
THREE MONTHS ENDED
MARCH 31, 2000
Balance, December 31, 1999 100,028,883 $1.0 $195.4 $316.0 $(11.7) $500.7
Comprehensive income
Net income 30.1 30.1
Other comprehensive income
Foreign exchange translation
adjustment (3.3) (3.3)
Unrealized gain on
securities .3 .3
----------
Total comprehensive income 27.1
----------
Shares issued 4,424 .1 .1
- ------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000 100,033,307 $1.0 $195.5 $346.1 $(14.7) $527.9
========================================================================================================================
See notes to consolidated financial statements.
6
HOWMET INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10-01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for the complete
financial statements. In the opinion of management, all adjustments necessary
for a fair presentation have been included. The consolidated condensed balance
sheet at December 31, 1999 has been derived from the Company's audited financial
statements at that date. Operating results for the three months ended March 31,
2000 are not necessarily indicative of the results to be expected for the year
ending December 31, 2000. The financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999 ("1999
Form 10-K").
B. POSSIBLE OWNERSHIP CHANGES
On March 14, 2000, Alcoa Inc. ("Alcoa") and Cordant Technologies Inc.
("Cordant") announced an agreement under which Alcoa agreed to acquire Cordant.
On April 18, 2000 Alcoa commenced a tender offer for the outstanding shares of
the Company's common stock at $20.00 per share in cash. This tender offer is
conditioned, among other things, on a majority of the publicly held shares being
tendered and not withdrawn. On May 1, the Company announced that its Independent
Directors Committee had unanimously determined that the tender offer by Alcoa
for shares of the Company's common stock was inadequate and not in the best
interests of the Company's public stockholders and recommended, on behalf of the
Company, that the Company's public stockholders reject Alcoa's offer. Cordant
had previously, on November 12, 1999, 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, later increased to $18.75 per share.
On March 13, 2000 the Company and Cordant amended their Corporate Agreement
originally entered into in December 1997. As so amended, this agreement provides
that without 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 the Company to be bound by the same limitations
as Cordant.
7
HOWMET INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
C. INVENTORIES
Inventories are summarized as follows:
MARCH 31, December 31,
(in millions) 2000 1999
- ---------------------------------------------------------------------------
Raw materials and supplies $ 64.5 $ 63.2
Work in progress 77.4 75.0
Finished goods 32.3 31.5
- ---------------------------------------------------------------------------
FIFO inventory 174.2 169.7
LIFO valuation adjustment (4.7) (4.4)
- ---------------------------------------------------------------------------
$169.5 $165.3
===========================================================================
At March 31, 2000 and December 31, 1999, inventories include $114.7 million and
$110.4 million, respectively, that are valued using LIFO. This valuation
adjustment approximates the difference between the LIFO carrying value and
current replacement cost.
D. 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.
Three Months Ended
March 31,
--------------------------
(in millions) 2000 1999
- ---------------------------------------------------------------------------
Net sales to external customers:
Investment casting and consolidated $381.6 $372.7
===========================================================================
Income from operations:
Investment casting $ 58.0 $ 62.1
SARs (expense) benefit (.8) 1.0
Cordant options (6.2) (.7)
Adjust to LIFO (.3) (.2)
Other unallocated corporate expense, net (4.8) (5.0)
- ---------------------------------------------------------------------------
Consolidated $ 45.9 $ 57.2
===========================================================================
8
HOWMET INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
E. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income applicable to
common stock by the weighted average number of common shares outstanding
(100,031,737 and 100,012,316 for the quarters ended March 31, 2000 and 1999,
respectively). Diluted earnings per share is calculated by dividing net income
applicable to common stock by the weighted average number of common shares
outstanding plus the common stock equivalent shares of employee stock options,
calculated using the treasury stock method (100,534,518 and 100,072,357 for the
quarters ended March 31, 2000 and 1999, respectively).
F. CORDANT OPTIONS AND SARS
For the quarters ended March 31, 2000 and 1999, selling, general and
administrative expense includes the following amounts recorded in connection
with the options to purchase Cordant common stock held by certain Company
executives (the "Cordant Options") and with the Company's Stock Appreciation
Rights ("SARs") plan (in millions):
Three Months Ended
March 31,
--------------------------------------
2000 1999
----------------- ------------------
Cordant Options pretax (expense) $(6.2) $(.7)
SARs pretax (expense) benefit $ (.8) $1.0
2000 Cordant Options Expense - See the Company's 1999 Report on Form 10-K for a
- -----------------------------
description of the Cordant Options and the alternative plan related thereto. The
Company is recording compensation expense in accordance with the alternative
plan. Expense associated with Cordant Options is recorded over a six year
vesting period ending December 13, 2001. In addition to expense recorded
commensurate with additional vesting, Cordant Options expense is affected by
fluctuations in the market price of shares of Cordant common stock. The higher
or lower the Cordant common stock price the higher or lower the value of the
Cordant Options and, consequently, the higher or lower the expense.
The 2000 quarter was adversely affected by a $6.2 million pretax charge related
to the Cordant Options, which was triggered by the proposed acquisition of
Cordant by Alcoa Inc. Following the announcement of the Alcoa Inc. proposed
acquisition of Cordant, the market price of Cordant common stock increased from
$29.56 to $56.56 per share resulting in the $6.2 million charge. (If the March
31, 2000 Cordant stock price were at the average for the 30 days prior to the
March 14, 2000 Alcoa Inc. acquisition announcement, the Company would have
recorded no expense related to these Cordant Options in the 2000 first quarter.)
1999 SARs Benefit - SARs vest over a five-year period ending in 2001 based on
- ------------------
the passage of time and the operating performance of the Company. In addition to
expense recorded commensurate with additional vesting, SARs expense (or benefit
from reversal of previously recognized expense) is affected by fluctuations in
the market price of the Company's common stock below $15 (the upper limit for
SARs compensation purposes). Fluctuations below the $15 upper limit affect the
per share value of the outstanding SARs.
The March 31, 1999 market prices of the Company's stock dropped below $15 to
$14.31 causing a $2.6 million pretax benefit in the 1999 quarter. The March 31,
1999 reduction in stock price to $14.31 resulted in a $1 million pretax 1999
first quarter benefit. If the market price at March 31, 1999 were $15 or higher,
the Company would have recorded a $1.6 million pretax expense in the 1999 first
quarter rather than the $1 million pretax benefit (a combined $2.6 million
benefit to the 1999 first quarter). This entire benefit reversed in the 1999
second quarter when the price of the Company's stock rose above $15.
9
HOWMET INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
F. CORDANT OPTIONS AND SARS (CONTINUED)
At March 31, 2000 and at December 31, 1999 the market price of the Company's
stock was higher than $15, consequently, there were no unusual entries in the
2000 first quarter relating to the SARs.
G. OTHER INFORMATION
Results for the 2000 first quarter include $2.3 million of pretax expenses
related to Cordant's proposed buyout of the Company's common stock not currently
owned by Cordant.
The effective tax rate for the 2000 first quarter was 33% compared to 37% for
the 1999 first quarter. The reduction is due primarily to realization of higher
research tax credits and higher benefits related to the foreign sales
corporation. The 1999 full year effective rate was 34%, and the 2000 full year
rate is estimated at 33%.
H. 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 to be, late in delivery of products to
certain customers, resulting in lower sales. However, delivery performance later
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.
10
HOWMET INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
H. CONTINGENT MATTERS (CONTINUED)
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,
eight separate but substantially similar 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 proposal to acquire their shares in the Company was 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 "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 is involved in certain environmentally related matters which are
discussed in its 1999 Form 10-K.
The Company, in its ordinary course of business, is also 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.
11
Item 2. Management's Discussion And Analysis Of Financial Condition And
-----------------------------------------------------------------------
Results Of Operations
---------------------
RESULTS OF OPERATIONS
Quarter Ended March 31, 2000 Compared to Quarter Ended March 31, 1999
Summary financial information for the quarters ended March 31 follows (in
millions, except per share data):
Better/
2000 1999 (Worse) Percent
-------------------------------------------------
Net Sales $381.6 $372.7 $ 8.9 2
- -----------------------------------------------------------------------------------------
Gross profit 84.8 88.1 (3.3) (3)
Selling, general and administrative
expense 34.4 26.0 (8.4) (32)
Research and development expense 4.5 4.9 .4 8
- -----------------------------------------------------------------------------------------
Income from operations 45.9 57.2 (11.3) (20)
Net interest expense (.3) (1.7) 1.4 82
Other, net (.7) (.3) (.4) (133)
Income taxes (14.8) (20.4) 5.6 27
- -----------------------------------------------------------------------------------------
Net income $ 30.1 $ 34.8 $ (4.7) (14)
=========================================================================================
Earnings per share (basic and diluted) $ .30 $ .34 $ (.04) (12)
=========================================================================================
Net sales in the 2000 first quarter were 2% higher than in 1999. The 2000 sales
increase is due to volume increases in the industrial gas turbine (IGT) market.
Sales to the aero market were approximately 7% lower than in 1999, including an
approximate 2% price decrease. Sales to the IGT market were approximately 18%
higher. Substantial volume increases in the IGT market were partly offset by an
approximate 6% price decrease. Such price reductions were primarily a function
of sharing cost savings with customers, as well as securing market share and,
consequently, anticipated higher volumes. The Company continues to experience
pressure from its major customers for price reductions and, based on current
long-term sales agreements, the Company expects additional price reductions in
2001. The adverse effect of such 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. While expected, these cost reductions cannot be assured.
Gross profit was $3.3 million lower in the 2000 quarter than in the 1999
quarter. The principal reasons for the lower gross profit in 2000 were the
adverse effect of continuing production problems at certain aluminum casting
plants, which are in the process of being corrected, and lower prices. Volume
increases and cost improvements enabled the Company to offset a large portion of
the price decreases. Further cost reductions are expected in 2000, however, they
cannot be assured.
Selling, general and administrative ("SG&A") expense was $8.4 million higher in
the 2000 first quarter than in the comparable 1999 quarter. See Note F of Notes
to Consolidated Financial Statements for a discussion of the first quarter 2000
charge of $6.2 million related to Cordant Options and the 1999 first quarter
benefit of $2.6 million related to the Company's SARs. Also, in the 2000 first
quarter the Company recorded $2.3 million of expenses related to Cordant's
proposed buyout of the Company's common stock not currently owned by Cordant.
Excluding these three items, 2000 SG&A is $2.7 million lower than SG&A in the
first quarter of 1999. If the market price of Cordant's common stock remains at
current levels, the Company expects significant future charges related to
Cordant Options as vesting continues. If the Alcoa acquisition of Cordant is
completed at the initial offer price, Cordant Options will become fully vested
and
12
the Company will record $4.2 million of additional expense in the period
beginning April 1, 2000 to the date the acquisition is completed.
Net interest expense was $1.4 million lower in the 2000 first quarter compared
with 1999. The decrease was due to lower debt levels in 2000.
Income tax expense decreased $5.6 million in the 2000 first quarter due to lower
pretax earnings and a lower effective tax rate. The lower effective rate is due
primarily to realization of higher research tax credits and higher benefits
related to the foreign sales corporation.
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 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flow from operations and
borrowings under its revolving credit facility. The Company's principal
requirements for cash are to provide working capital, service debt, finance
capital expenditures and fund research and development. Based upon the current
level of operations, management believes that cash from the aforementioned
sources will be adequate to meet the Company's anticipated requirements for
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 the 2000 first quarter were $12.3 million. Capital
expenditures for the 2000 year are expected to be approximately $90 million.
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
13
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 orally stated a
willingness to enter into a short-term extension of the agreement, if the
Company deems it necessary.
At March 31, 2000 there were $9.6 million of outstanding standby letters of
credit under separate credit arrangements. As of March 31, 2000, $25 million of
unused borrowing capacity was available under the Company's New Credit
Agreement.
Debt as a percentage of total capitalization (debt plus common stockholders'
equity) was 9% at March 31, 2000 compared to 8% at December 31, 1999. The
current ratio (excluding short-term debt) was 1.2 at March 31, 2000 and 1.0 at
December 31, 1999. Working capital (excluding short-term debt) was $54.6 million
and $12.1 million at March 31, 2000 and December 31, 1999, 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 March 31, 2000. The $49.3 million retained receivables
shown in the March 31, 2000 balance sheet represents the receivables set aside
to replace sold receivables in the event they are not fully collected.
From December 31, 1999 to March 31, 2000, the cumulative translation adjustment,
which is included in stockholders' equity, changed by $3.3 million, resulting in
a $16.2 million negative balance at March 31, 2000. The change is due to the
strengthening of the U.S. dollar relative to the French franc and the U.K.
sterling.
On April 10, 2000 the Company consummated its previously announced acquisition
of the remaining interest of Komatsu Ltd. in their Japanese joint venture
company, Komatsu-Howmet Ltd., and changed that company's name to Howmet Japan
Limited.
POSSIBLE OWNERSHIP CHANGES
On March 14, 2000, Alcoa Inc. ("Alcoa") and Cordant Technologies Inc.
("Cordant") announced an agreement under which Alcoa agreed to acquire Cordant.
On April 18, 2000 Alcoa commenced a tender offer for the outstanding shares of
the Company's common stock at $20.00 per share in cash. This tender offer is
conditioned, among other things, on a majority of the publicly held shares being
tendered and not withdrawn. On May 1, the Company announced that its Independent
Directors Committee had unanimously determined that the tender offer by Alcoa
for shares of the Company's common stock was inadequate and not in the best
interests of the Company's public stockholders and recommended, on behalf of the
Company, that the Company's public stockholders reject Alcoa's offer. Cordant
had previously, on November 12, 1999, 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, later increased to $18.75 per share.
On March 13, 2000 the Company and Cordant amended their Corporate Agreement
originally entered into in December 1997. As so amended, this agreement provides
that without 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
14
of a majority (but not less than two) of the Independent Directors. Alcoa has
separately agreed with the Company to be bound by the same limitations as
Cordant.
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.
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. For derivatives that are not designated as hedging
instruments the gain or loss resulting from adjustment to fair value is
recognized in earnings in the period of change. 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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
There have been no significant changes in market risk since the end of the
Company's December 31, 1999 year. For more information, please read the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
See Note H of Notes to Consolidated Financial Statements with respect to certain
claims and proceedings.
Item 5. Other Events
------------
CAUTIONARY STATEMENT
Certain statements in this quarterly report are "forward-looking statements" as
defined in the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. The matters discussed in these statements are subject to
risks and uncertainties which should be considered in assessing the Company's
conduct of its business. Such statements include those relating to sales and
earnings growth, price reductions, the price of Cordant's stock, the Howmet
Aluminum Casting manufacturing process issues and delivery performance,
anticipated cost reductions, cash flow adequacy, euro conversion, accounting
standard changes and others. All forecasts and projections in this report are
"forward-looking statements", and are based on management's current expectations
of the Company's results, based on current information available pertaining to
the Company and its products including the aforementioned risk factors. The
words "expect," "project," "estimate," "predict," "anticipate," "believes,"
"plans," "intends," and similar expressions are also intended to identify
forward-looking statements. Pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, the Company cautions readers
that such forward-looking statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
projected in those statements. These risks and uncertainties include, but are
not limited to, worldwide economic and political conditions, the effects of
aerospace industry economic conditions and cyclicality, the nature of the
Company's customer base, competition, pricing pressures, availability and cost
of raw materials and others detailed in the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 and other reports filed with the Securities
and Exchange Commission. The Company undertakes no obligation to update or
revise any forward-looking statement, whether as a result of new information,
future events or otherwise.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) -- Exhibits
--------
27.1 Financial Data Schedule
(b) -- Reports on Form 8-K
-------------------
During the quarter ended March 31, 2000, the Company filed the following
Current Reports on Form 8-K:
Report filed January 5, 2000. Item 5 - Other events - News release
announcing that the Independent Directors Committee has appointed its
financial advisor.
Report filed February 11, 2000. Item 5 - Other events - News release
announcing the Company's annual earnings for 1999.
Report filed March 15, 2000. Item 5 - Other events - News release
announcing Alcoa Inc.'s intention to acquire publicly held Company shares.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 3, 2000
HOWMET INTERNATIONAL INC.
/s/ John C. Ritter
------------------
John C. Ritter
Senior Vice President &
Chief Financial Officer
(Principal Financial Officer)
/s/ George T. Milano
--------------------
George T. Milano
Corporate Controller
(Principal Accounting Officer)
17