UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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.
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 July 26, 1999: 100,024,883 Shares
Howmet International Inc.
Quarterly Report on Form 10-Q
June 30, 1999
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1 -- Financial Statements
Consolidated Statements of Income - Three months ended and
Six months ended June 30, 1999 and 1998 3
Consolidated Condensed Balance Sheets - June 30, 1999 and
December 31, 1998 4
Consolidated Statements of Cash Flows - Six months ended
June 30, 1999 and 1998 5
Consolidated Statements of Common Stockholders' Equity and
Redeemable Preferred Stock - Three months ended and
Six months ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3 -- Quantitative and Qualitative Disclosure about Market Risk 16
Part II. OTHER INFORMATION
Item 1 -- Legal Proceedings 16
Item 4 -- Submission of Matters to a Vote of Security Holders 16
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)
(in millions, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------
Net sales $369.7 $335.7 $742.4 $664.1
Operating expenses:
Cost of sales 283.3 257.4 567.9 510.1
Selling, general and
administrative expense 29.7 24.1 55.7 49.9
Research and development expense 5.0 4.4 9.9 9.5
----------- ---------- ----------- -----------
318.0 285.9 633.5 569.5
----------- ---------- ----------- -----------
Income from operations 51.7 49.8 108.9 94.6
Interest income .2 .3 .4 .8
Interest expense (2.0) (3.5) (4.0) (7.3)
Other, net (.2) (.9) (.4) (1.6)
----------- ---------- ----------- -----------
Income before income taxes 49.7 45.7 104.9 86.5
Income taxes (18.4) (18.3) (38.8) (34.6)
----------- ---------- ----------- -----------
Net income 31.3 27.4 66.1 51.9
Dividends on redeemable preferred
stock - (1.4) (.8) (2.7)
----------- ---------- ----------- -----------
Net income applicable to common
stock $ 31.3 $ 26.0 $ 65.3 $ 49.2
=========== ========== =========== ===========
Net income per common share, basic
and diluted $ .31 $ .26 $ .65 $ .49
=========== ========== =========== ===========
<FN>
See notes to consolidated financial statements.
</FN>
3
Howmet International Inc.
Consolidated Condensed Balance Sheets
(in millions, except share data)
JUNE 30, December 31,
1999 1998
- -------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 9.6 $ 37.6
Accounts receivable (less allowance of $5.1 and $5.2) 91.4 84.1
Inventories 166.5 161.9
Retained receivables 53.0 32.0
Deferred income taxes 14.5 16.2
Other current assets 5.4 3.0
Restricted Trust (a) - 716.4
---------- ----------
Total current assets 340.4 1,051.2
Property, plant and equipment, net 364.5 334.9
Goodwill, net 217.7 221.1
Patents and technology and other intangible assets, net 109.3 115.1
Other noncurrent assets 76.2 78.3
---------- ----------
Total assets $1,108.1 $1,800.6
========== ==========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 83.8 $ 101.5
Accrued compensation 40.4 45.0
Other accrued liabilities 113.6 108.7
Income taxes payable 55.1 44.8
Short-term debt 58.4 28.0
Pechiney Notes (a) - 716.4
--------- ---------
Total current liabilities 351.3 1,044.4
Accrued retiree benefits other than pensions 99.3 96.8
Accrued pension liability 49.4 49.0
Other noncurrent liabilities 110.2 108.4
Deferred income taxes - 2.1
Long-term debt 73.0 63.0
--------- ---------
Total noncurrent liabilities 331.9 319.3
Commitments and contingencies
Redeemable preferred stock - 65.6
Stockholders' equity:
Preferred stock, authorized - 9,993,470 shares, issued
and outstanding - 0 shares - -
Common stock, $.01 par value, authorized - 400,000,000
shares, issued and outstanding: 1999 - 100,024,883
shares; 1998 - 100,005,356 shares 1.0 1.0
Capital surplus 195.4 195.1
Retained earnings 245.4 180.1
Accumulated other comprehensive income (16.9) (4.9)
--------- ---------
Total stockholders' equity 424.9 371.3
--------- ---------
Total liabilities, redeemable preferred stock and
stockholders' equity $1,108.1 $1,800.6
========= =========
<FN>
(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. No Company funds were
used in the payment of the Notes.
See notes to consolidated financial statements.
</FN>
4
Howmet International Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in millions)
Six Months Ended
June 30,
--------------------------
1999 1998
- --------------------------------------------------------------------------------
Operating activities
- --------------------
Net income $ 66.1 $ 51.9
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 32.6 29.3
Changes in assets and liabilities:
Receivables (33.2) (34.6)
Inventories (7.5) (6.0)
Accounts payable and accrued liabilities (13.9) (26.4)
Deferred income taxes (1.8) (4.2)
Income taxes payable 10.9 18.4
Long-term SARs accrual 3.2 .2
Other - net 2.7 7.4
----------- ----------
Net cash provided by operating activities 59.1 36.0
Investing activities
- --------------------
Purchases of property, plant and equipment (57.3) (35.8)
----------- ----------
Net cash used by investing activities (57.3) (35.8)
Financing activities
- --------------------
Net change in short-term debt 30.4 18.9
Issuance of long-term debt 65.0 36.6
Repayment of long-term debt (55.0) (91.0)
Redemption of preferred stock (66.4) -
----------- ----------
Net cash used by financing activities (26.0) (35.5)
Foreign currency rate changes (3.8) -
----------- ----------
Decrease in cash and cash equivalents (28.0) (35.3)
Cash and cash equivalents at beginning of period 37.6 45.4
----------- ----------
Cash and cash equivalents at end of period $ 9.6 $ 10.1
=========== ==========
<FN>
See notes to consolidated financial statements.
</FN>
5
Howmet International Inc.
Consolidated Statements of Common Stockholders' Equity and Redeemable Preferred Stock
(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 JUNE 30,
- ---------------------------
Balance, March 31,
1998 100,000,000 $1.0 $195.0 $ 98.5 $(5.7) $288.8 6,134 $61.3
-------
Comprehensive income
Net income 27.4 27.4
Other comprehensive
income
Foreign exchange
translation adjustment (.2) (.2)
-------
Total comprehensive
income 27.2
-------
Dividends - redeemable
preferred stock (1.4) (1.4) 135 1.4
- ------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 100,000,000 $1.0 $195.0 $124.5 $(5.9) $314.6 6,269 $62.7
======================================================================================================
Balance, March 31,
1999 100,014,258 $1.0 $195.2 $214.1 $(11.9) $398.4 - $ -
-------
Comprehensive income
Net income 31.3 31.3
Other comprehensive
income
Foreign exchange
translation adjustment (5.0) (5.0)
-------
Total comprehensive
income 26.3
-------
Shares issued 10,625 .2 .2
- -----------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1999 100,024,883 $1.0 $195.4 $245.4 $(16.9) $424.9 - $ -
=====================================================================================================
SIX MONTHS ENDED JUNE 30,
- -------------------------
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 51.9 51.9
Other comprehensive
income
Foreign exchange
translation adjustment (.3) (.3)
-------
Total comprehensive
income 51.6
-------
Dividends - redeemable
preferred stock (2.7) (2.7) 268 2.7
- -----------------------------------------------------------------------------------------------------
Balance, June 30, 1998 100,000,000 $1.0 $195.0 $124.5 $(5.9) $314.6 6,269 $62.7
=====================================================================================================
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 66.1 66.1
Other comprehensive
income
Foreign exchange
translation adjustment (12.0) (12.0)
-------
Total comprehensive
income 54.1
-------
Dividends - redeemable
preferred stock (.8) (.8) 78 .8
Redeemable preferred
stock redemption (6,638) (66.4)
Shares issued 19,527 .3 .3
- -----------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1999 100,024,883 $1.0 $195.4 $245.4 $(16.9) $424.9 - $ -
=====================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
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, 1998 has been derived from the Company's audited financial
statements at that date. Operating results for the three months ended June 30,
1999 are not necessarily indicative of the results to be expected for the year
ending December 31, 1999. The financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Notice of 1999 Annual Meeting and Proxy Statement, Exhibit A,
incorporated by reference in the Annual Report on Form 10-K for the year ended
December 31, 1998 ("1998 Form 10-K").
Certain reclassifications were made to the 1998 financial statements to conform
to the 1999 presentation.
B. INVENTORIES
Inventories are summarized as follows:
JUNE 30, December 31,
(in millions) 1999 1998
- --------------------------------------------------------------------
Raw materials and supplies $ 59.7 $ 56.7
Work in progress 78.9 78.8
Finished goods 31.2 29.7
- --------------------------------------------------------------------
FIFO inventory 169.8 165.2
LIFO valuation adjustment (3.3) (3.3)
- --------------------------------------------------------------------
$166.5 $161.9
====================================================================
At June 30, 1999 and December 31, 1998, inventories include $115.7 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.
C. SEGMENT INFORMATION
The Company's reportable segment manufactures investment cast components for the
commercial and defense aero and industrial gas turbine ("IGT") industries. The
Company conducts this business at many operating units which are similar in
terms of product, production process, customer and distribution systems and have
similar economic characteristics. These similar operating units have been
aggregated for presentation purposes below.
7
Howmet International Inc.
Notes to Consolidated Financial Statements (Unaudited)
C. SEGMENT INFORMATION (continued)
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 Six Months Ended
June 30, June 30,
----------------- ----------------
(in millions) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------
Net sales to external customers:
Investment casting and consolidated $369.7 $335.7 $742.4 $664.1
===========================================================================================
Income from operations:
Investment casting $ 60.0 $ 55.9 $122.3 $108.8
SARs expense (4.2) (2.6) (3.2) (5.3)
Adjust to LIFO (.5) (.6) (.7) (1.0)
Other unallocated corporate expense, net (3.6) (2.9) (9.5) (7.9)
- -------------------------------------------------------------------------------------------
Consolidated $ 51.7 $ 49.8 $108.9 $ 94.6
===========================================================================================
D. PREFERRED STOCK REDEMPTION
At December 31, 1998, the Company had issued and outstanding 6,560 shares of the
authorized 15,000 shares, $.01 par value and $10,000 per share liquidation
value, of 9% Series A Senior Cumulative Preferred Stock. Dividends on this
preferred stock was at 9% payable-in-kind.
On February 17, 1999, the Company redeemed and retired all of the outstanding
preferred stock at its $66.4 million book value. The Company borrowed under its
revolving credit facility to make this redemption. On February 17, 1999, and at
all previous times, all outstanding shares of this preferred stock were owned by
Cordant Technologies Inc. ("Cordant").
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
(100,019,457 and 100,000,000 for the quarters ended June 30, 1999 and 1998, and
100,015,907 and 100,000,000 for the six months ended June 30, 1999 and 1998,
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 (100,303,952 and 100,117,415 for the
quarters ended June 30, 1999 and 1998, and 100,195,915 and 100,152,713 for the
six months ended June 30, 1999 and 1998, respectively).
8
Howmet International Inc.
Notes to Consolidated Financial Statements (Unaudited)
F. OTHER INFORMATION
On February 8, 1999, Cordant Technologies Inc. ("Cordant") acquired for $385
million the remaining 22.65 million shares of the Company's common stock owned
by Carlyle-Blade Acquisition Partners, L.P. ("Carlyle"), entered into a new
Standstill Agreement and extended an existing covenant not to compete. With this
purchase of the Carlyle shares, Cordant's ownership of the Company's common
stock increases to 84.6 million shares representing 84.6% of the Company's
outstanding voting common stock. The remaining 15.4% of the Company's common
stock is publicly owned.
The quarter ended June 30, 1999 includes an adverse $2.6 million pre-tax
reversal of a first quarter benefit associated with the Company's Stock
Appreciation Rights ("SARs") plan. In addition to this adverse adjustment, the
1999 second quarter selling, general and administrative expense includes $1.6
million of pre-tax SARs expense and $1.5 million of pre-tax expense recorded in
connection with the Cordant Options. The comparable 1998 quarter included $2.7
million of pre-tax expense related to the SARs plan and $0.2 million of pre-tax
expense recorded in connection with the Cordant Options. The 1999 adverse $2.6
million pre-tax reversal of the first quarter benefit was caused by an increase
of the market price of the Company's common stock. The per share value of the
outstanding SARs increases or decreases as the market price of the Company's
common stock fluctuates above or below $15 (the upper limit for SARs
compensation purposes). At June 30, 1999, the market price of the Company's
common stock was above $15 compared to a March 31, 1999 price that was lower
than $15 per share.
For the six months ended June 30, 1999, selling, general and administrative
expense includes $3.2 million of pre-tax expense recorded in connection with the
SARs plan and $2.2 million of pre-tax expense recorded in connection with the
Cordant Options. The comparable 1998 six month period included $5.3 million of
pre-tax expense related to the SARs plan and $1.6 million of pre-tax expense
recorded in connection with the Cordant Options.
G. CONTINGENT MATTERS
Starting in late 1998, the Company discovered certain product testing and
specification non-compliance issues at two of Cercast's facilities. The Company
notified customers, is actively cooperating with them and government agencies in
the investigation of these matters, and is implementing remedial action. In
addition, Cercast has been, and expects to continue for some time to be, late in
delivery of products to certain customers. Data collection and analysis must be
completed before a definitive estimate of the Company's cost to resolve these
matters can be completed. The Company knows of no in-service problems associated
with these issues. Based on preliminary evaluation, however, the Company has
recorded an estimated loss of $4 million in its consolidated statement of income
for the year ended December 31, 1998. On July 23, 1999, the Company received a
customer claim, which was significantly higher than, and which could possibly be
resolved for an amount in excess of, amounts accrued. The Company is in the very
early stages of evaluating this claim but believes it is excessive. Based on
currently known facts, the Company believes that additional cost 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.
There are outstanding Notices of Proposed Debarment from the U.S. Air Force
directed at the Company's Cercast-Montreal and Cercast-Bethlehem, Pennsylvania
facilities. These notices preclude these plants from accepting new U.S.
government contracts or subcontracts. The notices were issued based upon certain
product testing and specification non-compliance issues at these two facilities,
and improper vendor payments that took place at the Cercast-Montreal operation.
Debarment does not affect existing contracts, other than extensions. The Company
is negotiating an Administrative Agreement with the Air Force under which the
Notices of Proposed Debarment would be terminated. The Company believes it will
be successful in this effort. In the unlikely event a debarment were imposed for
an extended period of time, such action would negatively impact sales and
profits in future periods. However, the Company believes that such impact would
be immaterial to results of operations.
9
The Company is involved in certain environmentally related matters which are
discussed in its 1998 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 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.
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Quarter Ended June 30, 1999 Compared to Quarter Ended June 30, 1998
Summary financial information for the quarters ended June 30 follows
(in millions, except per share data):
Better/
1999 1998 (Worse) Percent
-------------------------------------------------
Net Sales $369.7 $335.7 $34.0 10
- -----------------------------------------------------------------------------------------
Gross profit 86.4 78.3 8.1 10
Selling, general and administrative
expense 29.7 24.1 (5.6) (23)
Research and development expense 5.0 4.4 (.6) (14)
- -----------------------------------------------------------------------------------------
Income from operations 51.7 49.8 1.9 4
Net interest expense (1.8) (3.2) 1.4 44
Other, net (.2) (.9) .7 78
Income taxes (18.4) (18.3) (.1) (1)
- -----------------------------------------------------------------------------------------
Net income $ 31.3 $ 27.4 $ 3.9 14
=========================================================================================
Earnings per share (basic and diluted) $ .31 $ .26 $ .05 19
=========================================================================================
Net sales in the 1999 second quarter were 10% higher than in the 1998 second
quarter. The 1999 sales increase is due to volume increases in the industrial
gas turbine market. Sales to the aero market were approximately 6% lower than
1998, with approximately one third of the decrease due to price reductions. Such
price reductions, as well as similar reductions for the industrial gas turbine
market, were a function of sharing cost savings with customers.
Gross profit was $8.1 million higher in the 1999 quarter than in the 1998
quarter. The principal reason for the 1999 improvement was increased volume.
Cost control enabled the Company to capitalize on such volume increases.
Selling, general and administrative expense was $5.6 million higher in the 1999
second quarter than in the 1998 quarter. The increase includes general price
level increases, and higher costs to support the higher volume levels, and $2.8
million of higher costs related to the Company's Stock Appreciation Rights plan
("SARs") and the Cordant Options discussed in Note F to the Consolidated
Financial Statements. The higher second quarter costs include an adverse $2.6
million reversal of a first quarter benefit related to SARs. This adverse
reversal was anticipated by the Company in its first quarter Form 10-Q, where it
described the first quarter benefit as one which would reverse and adversely
affect future results when the market price of the Company's common stock
increased to $15 or higher. SARs benefit or expense is recognized each quarter
based on employee vesting to date and also on the market price of the Company's
common stock at the end of each quarter compared to the market price at the
previous quarter end, except for the fluctuations above $15 per share (the upper
limit for SARs compensation period). In the first quarter of 1999, the Company's
stock price dropped to less than $15 per share resulting in the $2.6 million
benefit. In the 1999
10
second quarter, the stock price rose to over $15 per share resulting in the
reversal of the $2.6 million first quarter benefit. For comparability purposes
management believes that the $2.6 million benefit and its reversal should be
excluded from the 1999 first and second quarter results.
Net interest expense was $1.4 million lower in the 1999 second quarter compared
with 1998. The decrease was primarily due to lower debt levels.
Income tax expense increased $0.1 million due to higher pre-tax income. The
Company had an effective tax rate of 37% in 1999 compared with 40% for the same
three-month period in 1998. The lower effective rate for 1999 was attributable
primarily to higher estimates of research and development tax credits and a
lower state rate. Beginning in February 1999, the Company's taxable income will
be included in Cordant's consolidated Federal income tax return.
Starting in late 1998, the Company discovered certain product testing and
specification non-compliance issues at two of Cercast's facilities. The Company
notified customers, is actively cooperating with them and government agencies in
the investigation of these matters, and is implementing remedial action. In
addition, Cercast has been, and expects to continue for some time to be, late in
delivery of products to certain customers. Data collection and analysis must be
completed before a definitive estimate of the Company's cost to resolve these
matters can be completed. The Company knows of no in-service problems associated
with these issues. Based on preliminary evaluation, however, the Company has
recorded an estimated loss of $4 million in its consolidated statement of income
for the year ended December 31, 1998. On July 23, 1999, the Company received a
customer claim, which was significantly higher than, and which could possibly be
resolved for an amount in excess of, amounts accrued. The Company is in the very
early stages of evaluating this claim but believes it is excessive. Based on
currently known facts, the Company believes that additional cost 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.
There are outstanding Notices of Proposed Debarment from the U.S. Air Force
directed at the Company's Cercast-Montreal and Cercast-Bethlehem, Pennsylvania
facilities. These notices preclude these plants from accepting new U.S.
government contracts or subcontracts. The notices were issued based upon certain
product testing and specification non-compliance issues at these two facilities,
and improper vendor payments that took place at the Cercast-Montreal operation.
Debarment does not affect existing contracts, other than extensions. The Company
is negotiating an Administrative Agreement with the Air Force under which the
Notices of Proposed Debarment would be terminated. The Company believes it will
be successful in this effort. In the unlikely event a debarment were imposed for
an extended period of time, such action would negatively impact sales and
profits in future periods. However, the Company believes that such impact would
be immaterial to results of operations.
11
RESULTS OF OPERATIONS
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Summary financial information for the six months ended June 30 follows
(in millions, except per share data):
Better/
1999 1998 (Worse) Percent
-------------------------------------------------
Net Sales $742.4 $664.1 $78.3 12
- -----------------------------------------------------------------------------------------
Gross profit 174.5 154.0 20.5 13
Selling, general and administrative
expense 55.7 49.9 (5.8) (12)
Research and development expense 9.9 9.5 (.4) (4)
- -----------------------------------------------------------------------------------------
Income from operations 108.9 94.6 14.3 15
Net interest expense (3.6) (6.5) 2.9 45
Other, net (.4) (1.6) 1.2 75
Income taxes (38.8) (34.6) (4.2) (12)
- -----------------------------------------------------------------------------------------
Net income $ 66.1 $ 51.9 $14.2 27
=========================================================================================
Earnings per share (basic and diluted) $ .65 $ .49 $ .16 33
=========================================================================================
Net sales in the six months ended June 30, 1999 were 12% higher than in the 1998
six month period. The 1999 sales increase is due to volume increases in the
industrial gas turbine market. Sales to the aero market were approximately 3%
lower than 1998, with approximately one third of the decrease due to price
reductions. Such price reductions, as well as similar reductions for the
industrial gas turbine market, were a function of sharing cost savings with
customers.
Gross profit was $20.5 million higher in 1999 than in the 1998 six month period.
The principal reason for the 1999 improvement was increased volume. Cost control
enabled the Company to capitalize on such volume increases.
Selling, general and administrative expense was $5.8 million higher in 1999 than
in the 1998 six month period. The increase includes general price level
increases and higher costs to support the higher volume levels. These increases
were partially offset by a $1.5 million net decrease in expenses recorded in
connection with the Company's SARs and the Cordant Options.
Net interest expense was $2.9 million lower in the 1999 six months compared with
1998. The decrease was primarily due to lower debt levels.
Income tax expense increased $4.2 million due to higher pre-tax income. The
Company had an effective tax rate of 37% in 1999 compared with 40% for the same
six month period in 1998. The lower effective rate for 1999 was attributable
primarily to higher estimates of research and development tax credits and a
lower state rate.
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.
12
Capital expenditures in the 1999 six months were $57.3 million. Capital
expenditures for the full year are expected to be approximately $120 million.
Such expenditures include amounts for previously announced plans to accelerate
expansion of IGT capacity at three plants and to build a new aero-airfoil plant.
At June 30, 1999, there were $70 million of outstanding borrowings and $7.6
million of outstanding standby letters of credit under the $300 million
revolving credit facility. An additional $2 million of standby letters of credit
were outstanding under another facility. At June 30, 1999, $222.4 million of
unused borrowing capacity was available under the Company's revolving credit
facility.
At December 31, 1998, the Company's balance sheet includes $716.4 million of
Pechiney Notes and a related $716.4 million Restricted Trust asset. On January
4, 1999 Pechiney, S.A. (the Company's previous owner) repaid the Pechiney Notes
in full. As a result, the Restricted Trust, which secured Pechiney, S.A.'s
agreement to repay the notes, was terminated. No Company funds were used in the
payment of the notes.
Debt, excluding Pechiney Notes, plus redeemable preferred stock as a percentage
of total capitalization (these items plus common stockholders' equity) was 24%
at June 30, 1999 compared to 30% at December 31, 1998. The current ratio
(excluding short-term debt and Pechiney Notes) was 1.2 at June 30, 1999 and 1.1
at December 31, 1998. Working capital (excluding short-term debt and Pechiney
Notes) was $47.5 million and $34.8 million at June 30, 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 June 30, 1999. The $53 million retained receivables,
shown in the June 30, 1999 balance sheet represents the receivables set aside to
replace sold receivables in the event they are not fully collected.
Since December 31, 1998, the cumulative translation adjustment, which is
included in stockholders' equity, changed by $12 million, resulting in a $16.9
million negative balance at June 30, 1999. The change is due to the
strengthening of the U.S. dollar relative to the French franc and the United
Kingdom pound.
FEBRUARY 1999 CHANGE IN OWNERSHIP AND PREFERRED STOCK REDEMPTION
On February 8, 1999, Cordant Technologies Inc. ("Cordant") acquired for $385
million the remaining 22.65 million shares of the Company's common stock owned
by Carlyle-Blade Acquisition Partners, L.P. ("Carlyle"), entered into a new
Standstill Agreement and extended an existing covenant not to compete. With this
purchase of the Carlyle shares, Cordant's ownership of the Company's common
stock increases to 84.6 million shares representing 84.6% of the Company's
outstanding voting common stock. The remaining 15.4% of the Company's common
stock is publicly owned.
On February 17, 1999, the Company exercised its option to redeem all of its
outstanding 9% redeemable preferred stock. The payment was made to Cordant, the
sole preferred stockholder. The Company borrowed under its existing revolving
credit facility to make this payment.
YEAR 2000 COMPLIANCE
The Company does not anticipate a disruption in operations as a result of
computer hardware and software issues associated with the Year 2000. A team of
both Company personnel and contract consultants is specifically assigned to
actively identify, evaluate and address the Company's Year 2000 compliance
issues. Overall, the Company has completed virtually all of the Year 2000
testing and associated corrective actions for its critical systems and devices.
Remaining systems and devices are being closely monitored by the central Year
2000 project team with completion planned by the third quarter of 1999.
Business Information Systems Remediation: Management believes that virtually all
- -----------------------------------------
date logic problems on the Company's central mainframe and distributed server
applications have been identified, and remedial action to correct or replace
problematic code is currently underway. Project work on this phase of the effort
started in late 1996 and, with minor exceptions, has been completed. All central
systems have been placed under restrictive change control procedures to ensure
that corrected systems are not inadvertently impacted by further changes.
System-wide testing
13
activity will be conducted periodically throughout 1999. In addition to the
aforementioned efforts, the Company is installing several commercial application
software products, at both its central facility and at certain plant sites, to
further address its Year 2000 readiness.
The Year 2000 compliance team is concurrently working with the various plant
facilities to identify and implement any needed changes to local business
applications. The inventory and assessment phase of this effort at each plant
has been completed. Corrective action projects have been completed for virtually
all of the critical systems at all plants. To date no material risk of
non-compliance has been identified. No major information systems initiatives
have been materially adversely affected due to staffing constraints or
expenditures needed to remedy Year 2000 issues.
Embedded Processor Systems Remediation: The Year 2000 team has provided each
- ------------------------------------------
plant facility with guidance and support for embedded processor identification,
evaluation, testing and remediation, where required. The plant facility teams
have, with minor exceptions, tested and/or corrected all of the critical
embedded systems.
Customer and Supplier Readiness: The Company has also initiated formal
- -----------------------------------
communications with all of its significant suppliers, including raw materials,
services, and computer hardware/software suppliers, and large customers to
determine the extent to which the Company's manufacturing processes and
interface systems are vulnerable to those third parties' failure to resolve
their own Year 2000 issues. These communications have included written inquiries
or questionnaires and, in some instances, on-site meetings. Over 880 suppliers
have responded to the Company's survey, and a plan has been established to
validate important suppliers' Year 2000 preparations. Electronic interfaces with
individual business associates are being addressed on a case by case basis.
There can be no assurance that the systems of other companies on which Howmet's
systems rely will be timely converted and would not have an adverse effect on
the Howmet systems. However, responses to date have indicated no significant
problems.
Risk Assessment, Worst Case Scenarios and Contingency Planning: Management
- --------------------------------------------------------------------
believes that the most likely worst case Year 2000 scenario for the Company
would be a shut down of individual pieces of critical equipment or computer
systems at one or two of its manufacturing facilities for one or two weeks
disrupting but not totally eliminating production at those plants. Work-around
procedures would probably be established by the end of that period. Total
remediation of the underlying problem may stretch over a six-month period or
longer. Management further believes that this is more likely to occur at its
foreign facilities than its U.S. plants. Even in this eventuality, management
believes any loss of revenue during the period involved will be substantially
recovered in later periods as a result of deferral rather than cancellation of
orders or deliveries. But no assurance can be given in this regard.
The Company is currently developing Year 2000 contingency plans in three areas:
1) business systems processing at the Company's primary data center, 2)
procurement activities for critical raw materials and services including
transportation, and 3) local manufacturing processes and systems at each
facility. These plans are expected to be complete during the third quarter of
1999 and will employ methods such as alternate manual processes for critical
applications, installation of a generator at the Company's primary data center,
the establishment of a corporate command post, full staffing of information
technology and plant maintenance personnel during the year-end weekend,
extensive future date testing, methods to assure adequate inventory of
materials, if any, identified as susceptible to supply interruption, extra
product quality testing in 2000, validation of customer and supplier electronic
data interchanges, critical equipment shut-downs on December 31, 1999 and active
monitoring, measuring and auditing plant compliance. While diligent efforts have
been made to anticipate and mitigate risks, it is possible that the inability of
the Company or its suppliers or customers to effectuate solutions to their
respective Year 2000 issues on a timely and cost effective basis could have a
material adverse effect on the Company.
Cost Information: The estimated cost at completion for all phases of the
- ------------------
Company's Year 2000 project is $16.3 million. An estimated $6.7 (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 $7.0 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 $13.9 million (86%) had been expended as of June 30, 1999; the
Company expects to spend $1.7 million (10%) during the remainder of 1999 and
$0.7 million (4%) in 2000.
14
EURO CONVERSION
The Company continues to assess the impact of the Euro conversion on its
business operations and is currently implementing a strategy which will allow it
to operate in a Euro environment during the transition period, from January 1,
1999 to December 31, 2001, and after full Euro conversion, effective July 1,
2002. The Company does not expect the Euro conversion to materially impact its
competitive position, nor to significantly impact its computer software plans.
The Company does not expect any significant changes to its current hedging
policy and does not expect any significant increases in its foreign exchange
exposure.
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.
15
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, 1998 year. For more information, please read the
consolidated financial statements and notes thereto included in the Company's
Notice of Annual Meeting and Proxy Statement, Exhibit A, incorporated by
reference in the Annual Report on Form 10-K for the year ended December 31,
1998.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
See Note G of Notes to Consolidated Financial Statements (Unaudited) for
information relating to the proposed debarment proceedings pending against the
Montreal, Quebec facility of Howmet Cercast (Canada), Inc. and the Bethlehem,
Pennsylvania facility of Howmet Cercast (U.S.A.), Inc., which note is
incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
----------------------------------------------------
(a) The Annual Meeting of Stockholders of the Company for 1999 was held on
May 7, 1999.
(b) At the meeting the seven individuals nominated for directors by the
management of the Company were elected; and the appointment of Ernst & Young
LLP as the independent auditors of the Company for 1999 was ratified. The votes
for and against and abstentions with respect to each nominee for election as a
director and the other matter were as set forth below. According to a schedule
provided by the Company's transfer agent, there were no broker non-votes.
For Against Abstain
--- ------- -------
Director Nominees:
Richard L. Corbin 99,545,242 22,775 -
Edsel D. Dunford 99,547,542 20,475 -
James R. Mellor 99,543,542 24,475 -
D. Larry Moore 99,547,542 20,475 -
David L. Squier 99,545,742 22,275 -
James R. Wilson 99,544,392 23,625 -
James D. Woods 99,542,042 22,975 -
Ernst & Young LLP as
independent auditors 99,548,320 10,675 9,022
16
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 the Cercast
manufacturing process issues, cash flow adequacy, year 2000 compliance, 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, 1998 and
other reports filed with the Securities and Exchange Commission.
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 June 30, 1999, the Company did not file any
Current Reports on Form 8-K.
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: July 26, 1999
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)
18