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 September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file Number 1-13645
HOWMET INTERNATIONAL INC.
Incorporated in the State of Delaware I.R.S. Employer Identification
No. 52-1946684
475 Steamboat Road, Greenwich, CT 06830
Telephone Number: (203) 661-4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock, $0.01 par value, as of October 20, 1998: 100,005,356 Shares
1
Howmet International Inc.
Quarterly Report on Form 10-Q
September 30, 1998
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1 -- Financial Statements
Consolidated Statements of Income - Three months ended
and Nine months ended September 30, 1998 and 1997 3
Consolidated Condensed Balance Sheets - September 30,
1998 and December 31, 1997 4
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1998 and 1997 5
Consolidated Statements of Common Stockholders' Equity
and Redeemable Preferred Stock - Three months ended
and Nine months ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II. OTHER INFORMATION
Item 5 -- Other Information 17
Item 6 -- Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Howmet International Inc.
Consolidated Statements of Income (Unaudited)
(Dollars in millions, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ----------------------------------
1998 1997 1998 1997
- ----------------------------------------------------- --------------------------------- ----------------------------------
Net sales $331.6 $309.0 $995.7 $952.0
Operating expenses:
Cost of sales 228.4 215.8 695.3 665.1
Selling, general and administrative expense 21.4 33.8 85.4 106.6
Depreciation and amortization expense 14.6 15.4 43.7 44.7
Research and development expense 4.6 4.0 14.1 12.6
----------------- --------------- --------------- -----------------
269.0 269.0 838.5 829.0
----------------- --------------- --------------- -----------------
Income from operations 62.6 40.0 157.2 123.0
Interest income (expense) from Restricted Trust and
Pechiney Notes, net (Note C) -- -- -- --
Interest income .4 -- 1.2 .8
Interest expense (3.1) (9.0) (10.4) (25.9)
Other, net (1.2) (.7) (2.8) (2.1)
----------------- --------------- --------------- -----------------
Income before income taxes 58.7 30.3 145.2 95.8
Income taxes 20.6 9.1 55.2 36.5
----------------- --------------- --------------- -----------------
Net income 38.1 21.2 90.0 59.3
Dividends on redeemable preferred stock (1.4) (1.3) (4.1) (3.8)
----------------- --------------- --------------- -----------------
Net income applicable to common stock $ 36.7 $ 19.9 $ 85.9 $ 55.5
================= =============== =============== =================
Net income per common share, basic and diluted $ .37 $ .20 $ .86 $ .56
================= =============== =============== =================
<FN>
See notes to consolidated financial statements.
</FN>
3
Howmet International Inc.
Consolidated Condensed Balance Sheets
(Dollars in millions, except share amounts)
September 30, December 31,
1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 21.3 $ 45.4
Accounts receivable (less allowance of $5.4 and $4.4) 89.7 78.7
Inventories 159.0 155.5
Retained receivables 41.7 20.2
Deferred income taxes 7.5 16.3
Other current assets 4.3 3.9
Restricted Trust (a) 726.9 --
----------------- -----------------
Total current assets 1,050.4 320.0
Property, plant and equipment, net 315.9 275.5
Goodwill, net 222.7 226.5
Patents and technology and other intangible assets, net 109.5 118.4
Other noncurrent assets 57.3 53.8
Deferred income taxes 2.4 --
Restricted Trust (a) -- 716.4
================= =================
Total assets $1,758.2 $1,710.6
================= =================
Liabilities, redeemable preferred stock and stockholders' equity
Current liabilities:
Accounts payable $ 70.3 $ 84.2
Accrued liabilities 150.2 145.1
Income taxes payable 45.4 28.2
Short-term debt 18.1 --
Pechiney Notes (a) 726.9 --
----------------- -----------------
Total current liabilities 1,010.9 257.5
Accrued retiree benefits other than pensions 95.8 93.1
Other noncurrent liabilities 110.2 106.1
Deferred income taxes -- 3.4
Long-term debt, excluding the Pechiney Notes 123.1 208.4
Pechiney Notes (a) -- 716.4
Commitments and contingencies (Note H)
Redeemable preferred stock, 9% payment-in-kind dividends, $.01 par value, liquidation
value - $10,000 per share, authorized - 15,000 shares, issued and outstanding:
September 30, 1998 - 6,415 shares, December 31, 1997 - 6,001 shares 64.1 60.0
Stockholders' equity:
Preferred stock, authorized - 9,985,000 shares, issued and outstanding - 0 shares -- --
Common stock, $.01 par value, authorized - 400,000,000 shares,
issued and outstanding - 100,005,356 shares 1.0 1.0
Capital surplus 195.1 195.0
Retained earnings 161.2 75.3
Accumulated other comprehensive income (Cumulative translation adjustment) (3.2) (5.6)
----------------- -----------------
Total stockholders' equity 354.1 265.7
================= =================
Total liabilities, redeemable preferred stock and stockholders' equity $1,758.2 $1,710.6
================= =================
<FN>
(a) The Restricted Trust holds a note receivable from Pechiney, S.A. and related letters of credit that secures Pechiney,
S.A.'s agreement to repay the Pechiney Notes due January 2, 1999. Management believes that it is extremely remote
that the Company will use any assets other than those in the Restricted Trust to satisfy any payments related to the
Pechiney Notes. See Note C
See notes to consolidated financial statements.
</FN>
4
Howmet International Inc.
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in millions)
Nine Months Ended
September 30,
--------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Operating activities
Net income $ 90.0 $ 59.3
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 44.1 51.4
Equity in income of unconsolidated affiliates (.4) (1.0)
Changes in assets and liabilities:
Receivables (20.1) (8.2)
Inventories 4.1 (4.9)
Accounts payable and accrued liabilities (22.9) (14.8)
Income taxes 18.9 18.6
Long-term SARs accrual (8.1) 21.0
Other - net 4.8 2.7
--------------------- ---------------------
Net cash provided by operating activities 110.4 124.1
Investing activities
Proceeds from sale of refurbishment business, net -- 57.5
Purchases of property, plant and equipment (54.7) (32.4)
Investment in joint venture (3.4) --
--------------------- ---------------------
Net cash (used) provided by investing activities (58.1) 25.1
Financing activities
Net change in short-term debt 16.7 --
Issuance of long-term debt 36.6 102.3
Repayment of long-term debt (131.0) (264.0)
--------------------- ---------------------
Net cash used by financing activities (77.7) (161.7)
--------------------- ---------------------
Foreign currency rate changes 1.3 (1.8)
--------------------- ---------------------
Decrease in cash and cash equivalents (24.1) (14.3)
Cash and cash equivalents at beginning of period 45.4 23.4
===================== =====================
Cash and cash equivalents at end of period $ 21.3 $ 9.1
===================== =====================
<FN>
See notes to consolidated financial statements.
</FN>
5
Howmet International Inc.
Consolidated Statements of Common Stockholders' Equity and Redeemable Preferred Stock
(Dollars in millions, except share amounts)
Accumulated Total
Other Common Redeemable
Common Stock Capital Retained Comprehensive Stockholders' Preferred Stock
Shares Amount Surplus Earnings Income (Note D) Equity Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended
September 30,
-------------
Balance, June 30, 1997 100,000,000 $1.0 $195.0 $56.3 $(6.1) $246.2 5,739 $57.4
------------
Comprehensive income (Note D):
Net income 21.2 21.2
Other comprehensive income
(Foreign exchange translation
adjustment) .2 .2
------------
Total comprehensive income 21.4
------------
Dividends - redeemable
preferred stock (1.3) (1.3) 132 1.3
- -----------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 100,000,000 $1.0 $195.0 $76.2 $(5.9) $266.3 5,871 $58.7
=============================================================================================================================
Balance, June 30, 1998 100,000,000 $1.0 $195.0 $124.5 $(5.9) $314.6 6,269 $62.7
------------
Comprehensive income (Note D):
Net income 38.1 38.1
Other comprehensive income
(Foreign exchange translation
adjustment) 2.7 2.7
------------
Total comprehensive income 40.8
------------
Dividends - redeemable
preferred stock (1.4) (1.4) 146 1.4
Shares issued 5,356 .1 .1
- -----------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 100,005,356 $1.0 $195.1 $161.2 $(3.2) $354.1 6,415 $64.1
=============================================================================================================================
Nine Months Ended
September 30,
-------------
Balance, December 31, 1996 100,000,000 $1.0 $195.0 $20.7 $2.1 $218.8 5,490 $54.9
------------
Comprehensive income (Note D):
Net income 59.3 59.3
Other comprehensive income
(Foreign exchange translation
adjustment) (8.0) (8.0)
------------
Total comprehensive income 51.3
------------
Dividends - redeemable
preferred stock (3.8) (3.8) 381 3.8
- -----------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 100,000,000 $1.0 $195.0 $76.2 $(5.9) $266.3 5,871 $58.7
=============================================================================================================================
Balance, December 31, 1997 100,000,000 $1.0 $195.0 $75.3 $(5.6) $265.7 6,001 $60.0
------------
Comprehensive income (Note D):
Net income 90.0 90.0
Other comprehensive income
(Foreign exchange translation
adjustment) 2.4 2.4
------------
Total comprehensive income 92.4
------------
Dividends - redeemable
preferred stock (4.1) (4.1) 414 4.1
Shares issued 5,356 .1 .1
- -----------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 100,005,356 $1.0 $195.1 $161.2 $(3.2) $354.1 6,415 $64.1
=============================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
6
Howmet International Inc.
Notes to Consolidated Financial Statements (Unaudited)
A. BASIS OF PRESENTATION
Cordant Technologies Inc. (name changed from Thiokol Corporation on May 5,
1998) owns 62% of the Company's common shares; Carlyle-Blade Acquisition
Partners, L.P., an affiliate of The Carlyle Group, owns 22.65% and the
public owns 15.35%. Cordant Technologies Inc. ("Cordant") also owns all of
the outstanding preferred stock of the Company.
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments necessary for a fair presentation have been included. The
consolidated condensed balance sheet at December 31, 1997 has been derived
from the Company's audited financial statements at that date. Operating
results for the nine months ended September 30, 1998 are not necessarily
indicative of the results to be expected for the year ending December 31,
1998. The financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Annual Report to Stockholders incorporated by reference in the
Annual Report on Form 10-K for the year ended December 31, 1997.
B. INVENTORIES
Inventories are summarized as follows (in millions):
September 30, December 31,
1998 1997
----------------- ----------------
Raw materials and supplies $ 63.9 $ 62.0
Work in progress 73.2 61.5
Finished goods 26.3 35.4
----------------- ----------------
FIFO inventory 163.4 158.9
LIFO valuation adjustment (4.4) (3.4)
================= ================
$159.0 $155.5
================= ================
At September 30, 1998 and December 31, 1997, inventories include $114.6
million and $122.7 million, respectively, that are valued using LIFO. This
valuation adjustment approximates the difference between the LIFO carrying
value and current replacement cost.
C. RESTRICTED TRUST AND RELATED PECHINEY NOTES PAYABLE
In 1988, Pechiney Corporation, as a wholly-owned subsidiary of Pechiney,
S.A., issued indebtedness maturing in 1999 (the "Pechiney Notes") to third
parties in connection with the purchase of American National Can Company.
As a result of the acquisition by the Company of Pechiney Corporation (now
named Howmet Holdings Corporation, "Holdings") and the Cercast Group of
companies, Holdings became a wholly-owned subsidiary of the Company. The
Pechiney Notes remained at Holdings, but Pechiney, S.A., which retained
American National Can Company, agreed with the Company to be responsible
for all payments due on or in connection with the Pechiney Notes.
Accordingly, Pechiney, S.A. issued its own note to Holdings in an amount
sufficient to satisfy all obligations under the Pechiney Notes. The
Pechiney, S.A. note was deposited in a trust for the benefit of Holdings
(the "Restricted Trust"). If Pechiney, S.A. fails to make any payments
required by its note, the trustee under the Restricted Trust (the
"Trustee") has irrevocable letters of credit in the aggregate amount of
$772 million issued to the Restricted Trust by Banque
7
Howmet International Inc.
Notes to Consolidated Financial Statements (Unaudited)
C. RESTRICTED TRUST AND RELATED PECHINEY NOTES PAYABLE (continued)
Nationale de Paris ("BNP"), a French bank, which has an A+ credit rating
from Standard & Poors Ratings Group ("S&P"), to draw upon to make such
payments. In the event that there is an impediment to a draw under the BNP
letters of credit held by the Trustee, the Trustee has substantially
identical "back-up" letters of credit in the aggregate amount of $772
million issued to the Restricted Trust by Caisse des Depots et
Consignations, a French bank, which has an AAA credit rating from S&P. In
addition, the holders of the Pechiney Notes have a third set of letters of
credit (also issued by BNP), which can be drawn upon by such holders in the
event that principal and/or interest payments on the Pechiney Notes are not
made. Pechiney, S.A. is solely responsible as reimbursement party for draws
under the various letters of credit referenced above, and by agreement with
the banks neither Holdings nor the Company has any responsibility therefor.
However, Holdings remains liable as the original issuer of the Pechiney
Notes in the event that Pechiney, S.A. and both banks fail to meet their
obligations under their respective letters of credit. Management believes
that it is extremely remote that the Company will be required to use any of
its assets other than those in the Restricted Trust to satisfy any payments
due on or in connection with the Pechiney Notes. Upon repayment of the
Pechiney Notes, the Restricted Trust terminates and any assets of the
Restricted Trust are to be returned to Pechiney, S.A..
The Pechiney Notes are due on January 2, 1999 and may not be prepaid prior
to that date. Interest is at three-month LIBOR plus 25 basis points (6.02%
for the quarter ended September 30, 1998). Interest is paid quarterly and
was paid shortly after the end of the 1998 and 1997 quarters. Interest
expense on these notes was $10.5 million and $10.7 million for the quarter
ended September 30, 1998 and 1997, respectively. Interest expense on these
notes was $32.4 million and $31.7 million for the nine months ended
September 30, 1998 and 1997, respectively. Interest income from the
Restricted Trust for the aforementioned periods was equal to the interest
expense and is netted in these financial statements.
D. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive
Income". SFAS No. 130 requires the Company to report comprehensive income,
which is net income plus other comprehensive income. For the Company, the
only item included in other comprehensive income is the change in foreign
currency translation adjustments. SFAS No. 130 also requires the Company to
report accumulated other comprehensive income in the stockholders' equity
section of the consolidated condensed balance sheet. The adoption of SFAS
No. 130 does not change the amount reported as net income nor the total
amount of stockholders' equity; however, it does change the presentation of
stockholders' equity. The amount previously presented as "cumulative
translation adjustment" in the stockholders' equity section of the
consolidated condensed balance sheets is now captioned "accumulated other
comprehensive income". Prior financial statements have been recaptioned to
conform to the requirement of SFAS No. 130.
Total comprehensive income, as disclosed in the Statements of Common
Stockholders' Equity and Redeemable Preferred Stock, amounted to $40.8
million and $21.4 million, for the third quarter of 1998 and 1997,
respectively and $92.4 million and $51.3 million, for the nine months of
1998 and 1997, respectively.
E. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income applicable to
common stock by the weighted average number of common shares outstanding
(100,005,356 and 100,001,785 for the quarter and nine months ended
September 30, 1998, respectively). Diluted earnings per share is calculated
by dividing net income applicable to common stock by the weighted average
8
Howmet International Inc.
Notes to Consolidated Financial Statements (Unaudited)
E. EARNINGS PER SHARE (continued)
number of common shares outstanding plus the common stock equivalent shares
of employee stock options, calculated using the treasury stock method (0
and 102,221 for the quarter and nine months ended September 30, 1998,
respectively).
All 1997 share and per share data have been retroactively restated to
reflect the October 1997, 10,000-to-1 stock split.
F. INCOME TAXES
In the third quarter of 1998, the Company reduced its estimate of the
effective annual income tax rate from 40% to 38%. The reduction is due to
higher estimates of research and development tax credits and foreign sales
corporate tax benefits and lower estimates of state taxes. Third quarter
results benefitted from a $1.7 million reversal of excess income taxes
provided in the first half of the year as the tax rate on first half
earnings was reduced to 38%.
The 1997 third quarter also included a benefit from the reversal of first
half income tax expense. The 1997 third quarter benefit was $2.4 million
and was the result of a change in the estimate of the 1997 annual effective
income tax rate. The 1998 and 1997 nine-month tax rates were both 38%.
G. OTHER INFORMATION
For the quarter ended September 30, 1998, selling, general and
administrative expense was reduced by an $8.1 million pre-tax reduction in
accrued expense recorded in connection with the Company's Stock
Appreciation Rights ("SARs") plan. The comparable 1997 quarter included
$5.1 million of expense related to the SARs plan. The 1998 third quarter
reduction of expense was caused by a reduction of the market price of the
Company's common stock. The per share value of the outstanding SARs
declines as the market price of the Company's common stock declines below
$15. At September 30, 1998, the market price of the Company's common stock
was $11.625 compared to $15 per share at June 30, 1998.
Nine month results for 1998 were also affected by the aforementioned SARs
accrual adjustment. A $2.8 million SARs benefit was included in the
reported selling, general and administrative expense for the 1998 period.
The comparable 1997 period included $21 million of expense related to the
SARs plan. Also affecting nine month comparability was a 1997 $9.7 million
benefit from finalization of a pricing adjustment with a customer that did
not occur in 1998 and is not expected to recur in the future.
The Company's research and development expense for the nine months ended
September 30, 1998 and 1997 was $14.1 million and $12.6 million,
respectively. In addition, the amount spent for customer-sponsored research
and development, which is recorded in cost of sales, was $12.2 million and
$10.1 million in the same two respective periods. Portions of previously
reported 1997 research and development amounts were reclassified to include
certain customer-sponsored research and development costs in cost of sales.
This is consistent with the 1998 cost of sales presentation.
9
Howmet International Inc.
Notes to Consolidated Financial Statements (Unaudited)
G. OTHER INFORMATION (continued)
At September 30, 1998, the Company had outstanding short-term borrowings of
$13.7 million under unsecured up to thirty day bank borrowing arrangements
and $3 million under a $7.5 million credit facility entered into in 1998 by
the Company's Canadian subsidiary. Interest rates on all such borrowings
are based on a bank's daily money market fund rate (approximately 5.7% at
September 30, 1998). The Company's Japanese subsidiary has short-term
borrowings of $1.4 million bearing interest at a rate of approximately 1.4%
per annum.
The Company paid interest of $9.2 million and $14 million, during the
respective 1998 and 1997 nine month periods.
The Company paid income taxes, net of refunds, of $35.4 million and $27.7
million, during the respective 1998 and 1997 nine month periods.
In the third quarter of 1998, the Company issued 1,339 shares of its Common
Stock to each of its four outside Directors as part of their annual
compensation.
H. CONTINGENCIES
The Company has received test results indicating levels of polychlorinated
biphenyls ("PCBs") at its Dover, New Jersey plant which will require
remediation. These levels have been reported to the New Jersey Department
of Environmental Protection ("NJDEP"), and the Company is preparing a work
plan to define the risk and to test possible clean-up options. The
statement of work must be approved by the NJDEP pursuant to an
Administrative Consent Order entered into between the Company and NJDEP on
May 20, 1991 regarding clean-up of the site. Various remedies are possible
and could involve expenditures ranging from $2 million to $22 million or
more. The Company has recorded a $2 million long-term liability as of
September 30, 1998 for this matter. Given the uncertainties, it is possible
that the estimated range of this cost and the amount accrued will change
within a year. The indemnification discussed below applies to the costs
associated with this matter.
Besides the above-mentioned remediation work required at the Company's
Dover, New Jersey plant, liabilities exist for clean-up costs associated
with hazardous types of materials at nine other on-site and off-site waste
disposal facilities. The Company has been or may be named a potentially
responsible party under the Comprehensive Environmental Response,
Compensation and Liability Act or similar state laws at these locations. At
September 30, 1998, $4 million of accrued environmental liabilities are
included in the consolidated condensed balance sheet for these nine sites.
In connection with the acquisition by the Company of Howmet Corporation's
parent holding company, Howmet Holdings Corporation and the Cercast Group
of companies ("the Acquisition"), Pechiney, S.A. indemnified the Company
for environmental liabilities relating to Howmet Corporation and stemming
from events occurring or conditions existing on or prior to the
Acquisition, to the extent that such liabilities exceed a cumulative $6
million. This indemnification applies to all of the aforementioned
environmental matters. It is highly probable that changes in any of the
aforementioned accrued liabilities will result in an equal change in the
amount receivable from Pechiney, S.A. pursuant to this indemnification.
In addition to the above environmental matters, and unrelated to Howmet
Corporation, Holdings and Pechiney, S.A. are jointly and severally liable
for environmental contamination and related costs associated with certain
discontinued mining operations owned and/or operated by a
predecessor-in-interest until the early 1960s. These liabilities include
10
Howmet International Inc.
Notes to Consolidated Financial Statements (Unaudited)
H. CONTINGENCIES (continued)
approximately $21.3 million in remediation and natural resource damage
liabilities at the Blackbird Mine site in Idaho and a minimum of $10
million in past governmental costs and future remediation costs at the
Holden Mine site in Washington. Pechiney, S.A. has agreed to indemnify the
Company for such liabilities. In connection with these environmental
matters, the Company recorded a $31.3 million liability and an equal $31.3
million receivable from Pechiney, S.A. at September 30, 1998. Pechiney,
S.A. is currently funding all amounts related to these liabilities.
Estimated environmental costs are not expected to materially impact the
financial position or the results of the Company's operations in future
periods. However, environmental clean-up periods are protracted in length,
and environmental costs in future periods are subject to changes in
environmental remediation regulations. Any losses which are not covered by
the Pechiney, S.A. indemnifications and which are in excess of amounts
currently accrued will be charged to operations in the periods in which
they occur.
The Company, in its ordinary course of business, is involved in other
litigation, administrative proceedings and investigations of various types
in several jurisdictions. The Company believes these are routine in nature
and incidental to its operations, and that the outcome of any proceedings
to which the Company currently is a party will not have a material adverse
effect upon its operations or financial condition.
11
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
RESULTS OF OPERATIONS
- ---------------------
Quarter Ended September 30, 1998 Compared to Quarter Ended September 30,
1997
Summary financial information for the quarters ended September 30 follows (in millions):
Better/
1998 1997 (Worse) Percent
--------------------------------------------------------------------
Net Sales $331.6 $309.0 $ 22.6 7
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit $103.2 $ 93.2 $ 10.0 11
Selling, general and administrative expense 21.4 33.8 12.4 37
Depreciation and amortization expense 14.6 15.4 .8 5
Research and development expense 4.6 4.0 (.6) (15)
- -----------------------------------------------------------------------------------------------------------------------------
Income from operations 62.6 40.0 22.6 57
Net interest expense (2.7) (9.0) 6.3 70
Other, net (1.2) (.7) (.5) (71)
Income taxes (20.6) (9.1) (11.5) (126)
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 38.1 $ 21.2 $ 16.9 80
=============================================================================================================================
Earnings per share (basic and diluted) $ .37 $ .20 $ .17 85
=============================================================================================================================
Net sales in the 1998 third quarter were 13% higher than in the 1997 third
quarter, after excluding from the 1997 quarter the sales of the Company's
refurbishment business, which was sold in September 1997. The 1998 sales
increase is due to volume increases in the aerospace and industrial gas
turbine markets.
Gross profit, as reported, was $10 million higher in the 1998 third quarter
than in the 1997 third quarter. However, on a comparable basis, 1998 gross
profit was $13.1 million higher than 1997, after reducing 1997 gross profit
to exclude the gross profit of the sold refurbishment business. Cost
control enabled the Company to capitalize on increased volume.
Selling, general and administrative expense was $12.4 million lower in the
1998 third quarter than in the 1997 third quarter. The decrease is due to a
$13.2 million change in the amounts recorded in connection with the
Company's Stock Appreciation Rights plan ("SARs"). In the 1998 quarter, an
$8.1 million reduction of SARs expense was recorded versus $5.1 million of
expense in the 1997 quarter. SARs compensation expense increases or
decreases as the market price of the Company's common stock fluctuates, and
also is determined based on employee SARs vesting to date. At September 30,
1998, the market price of the Company's common stock was $11.625 compared
to $15 per share at June 30, 1998, which resulted in the $8.1 million 1998
benefit. If the market price at September 30, 1998 were $15 per share or
higher, the Company would have recorded a $2.9 million expense for the 1998
quarter instead of the $8.1 million benefit (a combined $11 million pre-tax
benefit to the 1998 third quarter). SARS benefit or expense is recognized
each quarter based on the market value at the end of the quarter compared
to the market price at the previous quarter end except for fluctuations
above $15 per share (the upper limit for SARs compensation purposes).
Net interest expense was $6.3 million lower in the 1998 third quarter than
in the 1997 third quarter. The principal reason for the reduction was
significantly lower debt levels resulting from strong cash generation.
Another significant contributor to the lower interest expense is the
interest rate reductions achieved in the Company's 1997 fourth quarter debt
refinancing. Also contributing to the reduction was a $2.8 million charge
12
in the third quarter of 1997, which was not repeated in 1998, for
accelerated write-off of debt issuance cost associated with debt that was
repaid ahead of schedule.
Income tax expense increased $11.5 million due primarily to higher pre-tax
income. See Note F of Notes to Consolidated Financial Statements for the
effects of changes to estimated annual tax rates on the quarters.
The impact of the adverse Asian economic condition on the Company is
uncertain. To the extent the Asian economic conditions impact the
commercial aerospace and industrial gas turbine markets, such impact may
affect the Company.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Summary financial information for the nine months ended September 30 follows (in millions):
Better/
1998 1997 (Worse) Percent
--------------------------------------------------------------------
Net Sales $995.7 $952.0 $ 43.7 5
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit $300.4 $286.9 $ 13.5 5
Selling, general and administrative expense 85.4 106.6 21.2 20
Depreciation and amortization expense 43.7 44.7 1.0 2
Research and development expense 14.1 12.6 (1.5) (12)
- -----------------------------------------------------------------------------------------------------------------------------
Income from operations 157.2 123.0 34.2 28
Net interest expense (9.2) (25.1) 15.9 63
Other, net (2.8) (2.1) (.7) (33)
Income taxes (55.2) (36.5) (18.7) (51)
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 90.0 $ 59.3 $ 30.7 52
=============================================================================================================================
Earnings per share (basic and diluted) $ .86 $ .56 $ .30 54
=============================================================================================================================
Net sales in the 1998 nine month period were 11% higher than in the 1997
nine month period, after excluding from the 1997 nine month period the
sales of the Company's refurbishment business, which was sold in September
1997. The 1998 sales increase is due to volume increases in the aerospace
and industrial gas turbine markets. Also affecting nine month period
comparability is $9.7 million of additional revenue in 1997 from a pricing
adjustment with a customer that was not repeated in 1998 and is not
expected to recur in the future.
Gross profit, as reported, was $13.5 million higher in the 1998 nine month
period than in the 1997 nine month period. However, on a comparable basis,
1998 gross profit was $34.6 million higher than 1997, after reducing 1997
gross profit to exclude (i) the gross profit of the sold refurbishment
business and (ii) the aforementioned $9.7 million of additional 1997
revenue (which had no associated costs). Cost control enabled the Company
to capitalize on increased volume.
Selling, general and administrative expense was $21.2 million lower in the
1998 nine month period than in the 1997 period. The decrease is due to a
$23.8 million change in the amounts recorded in connection with the
Company's Stock Appreciation Rights plan ("SARs"). In the 1998 nine month
period, a $2.8 million reduction of SARs expense was recorded versus $21
million of expense in 1997. As discussed more fully in the third quarter
analysis, SARs compensation expense increases or decreases as the market
price of the Company's common stock fluctuates. At September 30, 1998, the
market price of the Company's common stock was $11.625 compared to $15 per
share at December 31, 1997. If the market price at September 30, 1998 were
$15 per share or higher, the Company would have recorded an $8.2 million
expense for the 1998 nine month period instead of the $2.8 million benefit
(a combined $11 million pre-tax benefit to the 1998 nine month period).
13
Net interest expense was $15.9 million lower in the 1998 nine month period.
The principal reason for the reduction was significantly lower debt levels
resulting from strong cash generation. Another significant contributor to
the lower interest expense is the interest rate reductions achieved in the
Company's 1997 fourth quarter debt refinancing. Also contributing to the
reduction was a $4.1 million charge in the nine month period of 1997, which
was not repeated in 1998, for accelerated write-off of debt issuance cost
associated with debt that was repaid ahead of schedule.
Income tax expense increased $18.7 million primarily due to higher pre-tax
income.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's principal sources of liquidity are cash flow from operations
and borrowings under its revolving credit facility. Based upon the current
level of operations, management believes that cash from the aforementioned
sources will be adequate to meet the Company's anticipated requirements for
working capital, interest payments, capital expenditures and research and
development, although there can be no assurance in this regard. To date,
cash available after satisfaction of these requirements has been used to
voluntarily repay debt prior to mandatory due dates.
At September 30, 1998, there were $7.6 million of standby letters of credit
outstanding and $105 million of outstanding borrowings under the $300
million revolving credit facility. At September 30, 1998, the Company also
had $18.1 million of outstanding short-term borrowings.
Capital expenditures in the 1998 nine month period were $54.7 million, and
are expected to be approximately $85 million for the current year. The 1998
capital expenditures are for capacity expansions needed to serve the core
business, as well as additional expenditures to support new products and
process enhancement activities. In August 1998, the Company announced plans
to accelerate expansion of IGT capacity at three plants and to build a new
aero-airfoil plant. Capital expenditures for 1999, including the
aforementioned capacity expansions, are expected to be approximately $115
million, although the actual amount of capital expenditure may vary.
In July 1998, the Company acquired an additional 31% of its Japanese
subsidiary for $3.4 million, increasing ownership to 81%. The initial July
1, 1998 consolidation of this subsidiary increased net working capital by
$6.5 million, property, plant and equipment by $12.1 million and combined
short- and long-term debt by $10.7 million.
Debt, excluding Pechiney Notes, plus redeemable preferred stock as a
percentage of total capitalization (debt, excluding Pechiney Notes, plus
redeemable preferred stock plus common stockholders' equity) is 37% at
September 30, 1998 compared to 50% at December 31, 1997. The current ratio
(excluding short-term debt and Pechiney Notes) was 1.2 at September 30,
1998 and at December 31, 1997. Working capital (excluding short-term debt
and Pechiney Notes) was $57.6 million and $62.5 million at September 30,
1998 and December 31, 1997, respectively.
At September 30, 1998 the Company's balance sheet includes $726.9 million
of Pechiney Notes and a related $726.9 million Restricted Trust asset. See
Note C of Notes to Consolidated Financial Statements.
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 at September 30, 1998. The $41.7 million retained
receivables, shown in the September 30, 1998 balance sheet, represents the
receivables set aside to replace sold receivables in the event they are not
fully collected.
YEAR 2000 COMPLIANCE
- --------------------
The Company does not anticipate a disruption in operations as a result of
computer software issues associated with the Year 2000. A dedicated team of
both Company and contract programmers are actively addressing the Company's
Year 2000 compliance issues. Management believes that all date logic
problems on the Company's central mainframe and distributed server
applications have been identified, and remedial action to correct or
14
replace problematic code is currently underway. Project work on this phase
of the effort started in late 1996 and is scheduled to be completed by June
30, 1999.
The Year 2000 compliance team is concurrently working with the various
plant facilities to identify and implement any needed changes to both local
business applications and shop floor control systems. The inventory and
assessment phase of this effort has been recently completed. Corrective
action projects are expected to be completed by June 30, 1999. To date no
material risk of non-compliance has been identified.
The Company has also initiated formal communications with all of its
significant suppliers, including raw materials, services, and computer
hardware/software suppliers, and large customers to determine the extent to
which Howmet's manufacturing processes and interface systems are vulnerable
to those third parties' failure to resolve their own Year 2000 issues.
There can be no guarantee that the systems of other companies on which
Howmet's systems rely will be timely converted and would not have an
adverse effect on the Howmet systems. However, responses to date have
indicated no significant problems.
In addition to the aforementioned efforts, the Company is installing
several commercial application software products, at both its central
facility and at certain plant sites, to further address its Year 2000
readiness. Through September 31, 1998, the Company has incurred $7.2
million of Year 2000 cost and expects to spend $2.3 million in the fourth
quarter of 1998, $4.3 million in 1999 and $.8 million in 2000.
During 1999, the Company will focus on further evaluation of customer and
supplier readiness, embedded processor systems, risk assessment, worst case
scenarios and contingency planning.
EURO DOLLAR COMPLIANCE
- ----------------------
The Company is assessing the impact of the Euro conversion on its business
operations and is currently implementing a strategy which will allow it to
operate in a Euro environment during the transition period, from January 1,
1999 to December 31, 2001, and after full Euro conversion, effective July
1, 2002. The Company does not expect the Euro conversion to materially
impact its competitive position, nor to significantly impact its computer
software plans. The impact of the Euro conversion on its foreign exchange
exposure position is being reviewed. The Company does not expect any
significant changes to its current hedging policy and does not expect any
significant increases in its foreign exchange exposure. Until the Company
completes its assessment of the Euro conversion impact, there can be no
assurance that the Euro conversion will not have a material impact on the
overall business operations of the Company.
ENVIRONMENTAL AND OTHER LEGAL MATTERS
- -------------------------------------
In view of the indemnification from the Company's previous owners granted
in connection with the acquisition described in Note H of Notes to
Consolidated Financial Statements, the Company does not expect resolution
of environmental matters to have a material effect on its liquidity or
results of operations. See Note H of Notes to Consolidated Financial
Statements in this Form 10-Q, and Exhibit 99.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, filed with the
Securities and Exchange Commission for discussion of environmental matters.
The Company, in its ordinary course of business, is involved in other
litigation, administrative proceedings and investigations of various types
in several jurisdictions. The Company believes these are routine in nature
and incidental to its operations, and that the outcome of any proceedings
to which the Company currently is a party will not have a material adverse
effect upon its operations or financial condition.
15
NEW ACCOUNTING STANDARDS
- ------------------------
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." This statement revises employers' disclosures about pensions and
other postretirement benefit plans. It does not change the measurement of
assets or recognition of liabilities under those plans. SFAS No. 132
requirements will be included in the Company's 1998 annual report.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted in years beginning after June 15, 1999. The Company
expects to adopt the new Statement effective January 1, 2000. The statement
will require the Company to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be
offset against the change in fair value of the hedged assets, liabilities,
or firm commitments through earnings or recognized in other comprehensive
income until the hedged item is recognized in earnings. The ineffective
portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company has not yet determined what the effect
of SFAS No. 133 will be on the earnings and financial position of the
Company.
16
PART II - OTHER INFORMATION
Item 5. Other Events
------------
CAUTIONARY STATEMENT
Certain statements in this quarterly report are "forward-looking
statements" as defined in the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. The matters discussed in these
statements are subject to risks and uncertainties which should be
considered in assessing the Company's conduct of its business. Such risks
include changing economic and political conditions in the United States and
in other countries, including those in Asia. Risks and uncertainties also
include but are not limited to changes in governmental laws and
regulations, the outcome of environmental matters, the availability and
cost of raw materials, potential effects of Year 2000 computer problems,
and the effects of: (i) aerospace and IGT industry economic conditions,
(ii) aerospace industry cyclicality, (iii) a concentrated customer base,
(iv) competition and (v) pricing pressures. These and other factors are
discussed in greater detail in Exhibit 99.1 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997 and in this Report on
Form 10-Q, filed with the Securities and Exchange Commission. All forecasts
and projections in this report are "forward-looking statements", and are
based on management's current expectations of the Company's results, based
on current information available pertaining to the Company and its products
including the aforementioned risk factors. Actual future results and trends
may differ materially from any "forward-looking statements" made herein.
The Company undertakes no obligation to update or revise any
forward-looking statements, 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 for the period ended September 30,
1998.
27.2 Amended Financial Data Schedule for the prior reporting period
of September 28, 1997.
(b) -- Reports on Form 8-K
-------------------
Report on Form 8-K filed August 27, 1998. Item 5 - Other Events -
News release reporting proposed expansion of its aerospace and
industrial gas turbine component manufacturing capacity.
17
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: October 20, 1998
HOWMET INTERNATIONAL INC.
/s/ John C. Ritter
------------------------------
John C. Ritter
Senior Vice President &
Chief Financial Officer
(Principal Financial Officer)
/s/ George T. Milano
------------------------------
George T. Milano
Corporate Controller
(Principal Accounting Officer)