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, 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 October 20, 1999: 100,028,883 Shares
Howmet International Inc.
Quarterly Report on Form 10-Q
September 30, 1999
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1 -- Financial Statements
Consolidated Statements of Income - Three months ended and
Nine months ended September 30, 1999 and 1998 3
Consolidated Condensed Balance Sheets - September 30, 1999 and
December 31, 1998 4
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1999 and 1998 5
Consolidated Statements of Common Stockholders' Equity and
Redeemable Preferred Stock - Three months ended and
Nine months ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operation 12
Item 3 -- Quantitative and Qualitative Disclosure about Market Risk 17
Part II. OTHER INFORMATION
Item 1 -- Legal Proceedings 18
Item 5 -- Other Information 18
Item 6 -- Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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 Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------
Net sales $ 355.2 $ 331.6 $ 1,097.6 $ 995.7
Operating expenses:
Cost of sales 271.5 250.2 839.4 760.2
Selling, general and
administrative expense 19.4 14.2 75.2 64.2
Research and development expense 4.4 4.6 14.3 14.1
--------- --------- --------- ---------
295.3 269.0 928.9 838.5
--------- --------- --------- ---------
Income from operations 59.9 62.6 168.7 157.2
Interest income - .4 .5 1.2
Interest expense (1.3) (3.1) (5.3) (10.4)
Other, net (1.1) (1.2) (1.5) (2.8)
--------- --------- --------- ---------
Income before income taxes 57.5 58.7 162.4 145.2
Income taxes (19.7) (20.6) (58.5) (55.2)
--------- --------- --------- ---------
Net income 37.8 38.1 103.9 90.0
Dividends on redeemable preferred stock - (1.4) (.8) (4.1)
--------- --------- --------- ---------
Net income applicable to common stock $ 37.8 $ 36.7 $ 103.1 $ 85.9
========= ========= ========= =========
Net income per common share, basic
and diluted $ .38 $ .37 $ 1.03 $ .86
========= ========= ========= =========
<FN>
See notes to consolidated financial statements.
</FN>
3
Howmet International Inc.
Consolidated Condensed Balance Sheets
(in millions, except share data)
SEPTEMBER 30, December 31,
1999 1998
- -------------------------------------------------------------------------------------
(UNAUDITED)
Assets
Current assets:
Cash and cash equivalents $ 17.7 $ 37.6
Accounts receivable (less allowance of $5.4 and $5.2) 81.6 84.1
Inventories 165.9 161.9
Retained receivables 56.6 32.0
Deferred income taxes 12.5 16.2
Other current assets 4.9 3.0
Restricted Trust (a) - 716.4
----------- -----------
Total current assets 339.2 1,051.2
Property, plant and equipment, net 386.1 334.9
Goodwill, net 216.4 221.1
Patents and technology and other intangible assets, net 106.3 115.1
Other noncurrent assets 79.5 78.3
----------- -----------
Total assets $1,127.5 $1,800.6
=========== ===========
Liabilities, redeemable preferred stock and stockholders'
equity
Current liabilities:
Accounts payable $ 73.7 $ 101.5
Accrued compensation 48.0 45.0
Other accrued liabilities 116.0 108.7
Income taxes payable 61.5 44.8
Short-term debt 51.7 28.0
Pechiney Notes (a) - 716.4
----------- -----------
Total current liabilities 350.9 1,044.4
Accrued retiree benefits other than pensions 100.4 96.8
Accrued pension liability 49.5 49.0
Other noncurrent liabilities 105.0 108.4
Deferred income taxes - 2.1
Long-term debt 53.0 63.0
----------- -----------
Total noncurrent liabilities 307.9 319.3
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 - 100,028,883 shares;
1998 - 100,005,356 shares 1.0 1.0
Capital surplus 195.4 195.1
Retained earnings 283.2 180.1
Accumulated other comprehensive income (10.9) (4.9)
----------- -----------
Total stockholders' equity 468.7 371.3
=========== ===========
Total liabilities, redeemable preferred stock and
stockholders' equity $1,127.5 $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)
Nine Months Ended
September 30,
--------------------------
1999 1998
- --------------------------------------------------------------------------------
Operating activities
- --------------------
Net income $ 103.9 $ 90.0
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 48.8 44.1
Changes in assets and liabilities:
Receivables (22.9) (20.1)
Inventories (4.7) 4.1
Accounts payable and accrued liabilities (17.5) (22.9)
Deferred income taxes (2.9) -
Income taxes payable 16.9 18.9
Long-term SARs accrual .9 (8.1)
Other - net 2.0 4.4
---------- ----------
Net cash provided by operating activities 124.5 110.4
Investing activities
- --------------------
Purchases of property, plant and equipment (87.7) (54.7)
Investment in joint venture - (3.4)
---------- ----------
Net cash used by investing activities (87.7) (58.1)
Financing activities
- --------------------
Net change in short-term debt 21.6 16.7
Issuance of long-term debt 65.0 36.6
Repayment of long-term debt (75.0) (131.0)
Redemption of preferred stock (66.4) -
---------- ----------
Net cash used by financing activities (54.8) (77.7)
Foreign currency rate changes (1.9) 1.3
---------- ----------
Decrease in cash and cash equivalents (19.9) (24.1)
Cash and cash equivalents at beginning of period 37.6 45.4
========== ==========
Cash and cash equivalents at end of period $ 17.7 $ 21.3
========== ==========
<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
- ------------------
SEPTEMBER 30,
- -------------
Balance, June 30, 1998 100,000,000 $1.0 $195.0 $124.5 $ (5.9) $314.6 6,269 $62.7
----------
Comprehensive income
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
=====================================================================================================
Balance, June 30, 1999 100,024,883 $1.0 $195.4 $245.4 $(16.9) $424.9 - $ -
----------
Comprehensive income
Net income 37.8 37.8
Other comprehensive
income
Foreign exchange
translation adjustment 6.0 6.0
----------
Total comprehensive
income 43.8
----------
Shares issued 4,000 - -
- -----------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER
30, 1999 100,028,883 $1.0 $195.4 $283.2 $(10.9) $468.7 - $ -
=====================================================================================================
NINE MONTHS ENDED
- -----------------
SEPTEMBER 30,
- -------------
Balance, December 31, 100,000,000 $1.0 $195.0 $ 75.3 $ (5.6) $265.7 6,001 $60.0
1997 ----------
Comprehensive income
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
=====================================================================================================
Balance, December 31, 100,005,356 $1.0 $195.1 $180.1 $ (4.9) $371.3 6,560 $65.6
1998 ----------
Comprehensive income
Net income 103.9 103.9
Other comprehensive
income
Foreign exchange
translation adjustment (6.0) (6.0)
----------
Total comprehensive
income 97.9
----------
Dividends - redeemable
preferred stock (.8) (.8) 78 .8
Redeemable preferred
stock redemption (6,638) (66.4)
Shares issued 23,527 .3 .3
- -----------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER
30, 1999 100,028,883 $1.0 $195.4 $283.2 $(10.9) $468.7 - $ -
=====================================================================================================
<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 and nine months
ended September 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:
SEPTEMBER 30, December 31,
(in millions) 1999 1998
- ---------------------------------------------------------------------
Raw materials and supplies $ 62.1 $ 56.7
Work in progress 80.9 78.8
Finished goods 28.5 29.7
- ---------------------------------------------------------------------
FIFO inventory 171.5 165.2
LIFO valuation adjustment (5.6) (3.3)
- ---------------------------------------------------------------------
$165.9 $161.9
- ---------------------------------------------------------------------
At September 30, 1999 and December 31, 1998, inventories include $113.1 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 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 Nine Months Ended
September 30, September 30,
------------------ ------------------
(in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Net sales to external customers:
Investment casting and consolidated $355.2 $331.6 $1,097.6 $995.7
================================================================================
Income from operations:
Investment casting $ 60.3 $ 57.2 $ 184.1 $167.0
SARs benefit (expense) 2.3 8.1 (.9) 2.8
Cordant options 2.9 .2 .7 (1.4)
Adjust to LIFO (2.3) .1 (3.0) (.9)
Other unallocated corporate
expense, net (3.3) (3.0) (12.2) (10.3)
- --------------------------------------------------------------------------------
Consolidated $ 59.9 $ 62.6 $ 168.7 $157.2
================================================================================
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
(100,028,657 and 100,005,356 for the quarters ended September 30, 1999 and 1998,
and 100,020,615 and 100,001,785 for the nine months ended September 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 (100,495,143 and 100,005,356
for the quarters ended September 30, 1999 and 1998, and 100,332,273 and
100,104,007 for the nine months ended September 30, 1999 and 1998,
respectively).
8
Howmet International Inc.
Notes to Consolidated Financial Statements (Unaudited)
F. SARS AND CORDANT OPTIONS
For the quarters ended September 30, 1999 and 1998, selling, general and
administrative expense includes the following pre-tax benefits recorded in
connection with the Company's Stock Appreciation Rights ("SARs") plan and with
the Cordant Options (in millions):
Three Months Ended
September 30,
--------------------------------------
1999 1998
----------------- ------------------
SARs pre-tax benefit $2.3 $8.1
Cordant Options pre-tax
benefit $2.9 $0.2
SARs - SARs vest over a five-year period ending in 2001 based on the passage of
time and the operating performance of the Company. In addition to expense
recorded commensurate with additional vesting, SARs expense (or benefit from
reversal of previously recognized expense) is affected by fluctuations in the
market price of the Company's common stock below $15 (the upper limit for SARs
compensation purposes). Fluctuations below the $15 upper limit affect the per
share value of the outstanding SARs.
The September 30, 1999 and 1998 market prices of the Company's stock both
dropped below $15 causing distortive benefits in both quarters.
At September 30, 1999, the market price of the Company's common stock was $14
compared to a price that was above $15 at June 30, 1999. This reduction in stock
price below $15 resulted in a $2.3 million pre-tax 1999 third quarter benefit.
If the market price at September 30, 1999 were $15 or higher, the Company would
have recorded a $1.5 million pre-tax expense in the 1999 third quarter rather
than the $2.3 million pre-tax benefit. (If the December 31, 1999 market price of
the Company's stock is $15 or higher, the Company will record 1999 fourth
quarter SARs expense equal to (i) the reversal of the $2.3 million pre-tax third
quarter benefit plus (ii) the $1.5 million that would have been recorded in the
1999 third quarter had the market price been $15 plus (iii) the normal $1.5
million pre-tax 1999 fourth quarter expense.)
At September 30, 1998, the market price of the Company's common stock was
$11.625 compared to $15 at June 30, 1998. This reduction in stock price below
$15 resulted in an $8.1 million pre-tax 1998 third quarter benefit. If the
market price at September 30, 1998 were $15 or higher, the Company would have
recorded a $2.9 million pre-tax expense in the 1998 third quarter rather than
the $8.1 million pre-tax benefit. (At December 31, 1998 the market price of the
Company's stock was above $15. Consequently, in the 1998 fourth quarter, the
Company recorded SARs expense equal to (i) the reversal of the $8.1 million
pre-tax third quarter benefit plus (ii) the $2.9 million that would have been
recorded in the 1998 third quarter had the market price been $15 plus (iii) the
normal 1998 fourth quarter expense.)
Cordant Options - See the Company's 1998 Form 10K for a description of the
Cordant Options and the alternative plan related thereto. The Company is
recording compensation expense in accordance with the alternative plan. Expense
associated with Cordant Options is recorded over a six year vesting period
ending December 13, 2001. In addition to expense recorded commensurate with
additional vesting, Cordant Options expense is affected by fluctuations in the
market price of Cordant Stock. The higher or lower the Cordant common stock
price the higher or lower the value of the Cordant Options and, consequently,
the higher or lower the expense.
At September 30, 1999 the market price of Cordant's common stock declined to
$30.44. This reduction resulted in a $2.9 million pre-tax 1999 third quarter
benefit. (Each $1 increase or decrease in the market price of Cordant common
stock will result in a $.2 million 1999 fourth quarter pre-tax expense or
benefit.)
9
Howmet International Inc.
Notes to Consolidated Financial Statements (Unaudited)
F. SARS AND CORDANT OPTIONS (continued)
For the nine months ended September 30, 1999 and 1998, selling, general and
administrative expense included the following pre-tax amounts recorded in
connection with the SARs plan and with the Cordant Options (in millions):
Nine Months Ended
September 30,
--------------------------------------
1999 1998
------------------ -----------------
SARs pre-tax (expense) benefit $(0.9) $ 2.8
Cordant Options pre-tax benefit
(expense) $ 0.7 $(1.4)
G. INCOME TAXES
In the third quarter of 1999, the Company reduced its estimate of the effective
annual income tax rate from 37% to 36%. The reduction is due to higher benefits
related to the foreign sales corporation. Third quarter results benefitted from
a $1 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 36%.
The 1998 third quarter also included a benefit from the reversal of first half
income tax expense. The 1998 third quarter benefit was $1.7 million and was the
result of a change in the estimate of the 1998 annual effective income tax rate
from 40% to 38%.
The 1999 nine-month tax rate of 36% is 2% lower than 1998 due primarily to
higher estimates of research and development tax credits and higher benefits
related to the foreign sales corporation.
As of February 1999, the Company's taxable income will be included in Cordant's
consolidated Federal income tax return.
H. OTHER INFORMATION
On February 8, 1999, Cordant acquired the remaining 22.65 million shares of the
Company's common stock owned by Carlyle-Blade Acquisition Partners, L.P.
("Carlyle") for $385 million. The acquisition included a new Carlyle Standstill
Agreement and the extension of an existing covenant not to compete. With this
purchase of the Carlyle shares, Cordant's ownership of the Company's common
stock increased to approximately 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.
I. CERCAST CONTINGENT MATTERS
Starting in late 1998, the Company discovered certain product testing and
specification non-compliance issues at its Cercast-Montreal and
Cercast-Bethlehem (Pennsylvania) facilities. The Company notified customers, is
actively cooperating with them and government agencies in the investigation of
these matters, and is implementing remedial
10
Howmet International Inc.
Notes to Consolidated Financial Statements (Unaudited)
I. CERCAST CONTINGENT MATTERS (continued)
action. The Company knows of no in-service problems associated with any of these
issues. 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 the foregoing matters can be completed. Based on preliminary evaluation,
however, the Company recorded an estimated loss of $4 million in its
consolidated statement of income for the year ended December 31, 1998.
The Defense Criminal Investigative Service (the "DCIS") in conjunction with
agents from the military services and NASA, has undertaken an investigation with
respect to the foregoing matters at the Montreal and Bethlehem facilities. The
DCIS has informed the Company that the investigation concerns possible
violations of the False Claims Act and the False Statements Act, as well as
possible criminal penalties. The Company is unable to determine definitively
what, if any, civil or criminal penalties might be imposed as a result of the
investigation.
In July 1999, the Company received a customer claim related to certain of the
aforementioned issues, which was significantly higher than amounts accrued.
While final resolution of this claim is uncertain, the Company believes the
claim is excessive. In September 1999, the Company also discovered issues
related to product inspection procedures at its Cercast-Hillsboro (Texas)
facility and other testing and specification non-compliance at Cercast-Montreal
and Cercast-Bethlehem. The Company has substantially completed correction of
these procedures, has notified customers and government agencies, and has asked
the Department of Defense and Department of Justice to address these matters
under the U.S. government's voluntary disclosure program. The Company knows of
no in-service problems associated with these issues.
While there is uncertainty associated with all of the aforementioned matters,
the Company believes that additional cost for such matters beyond amounts
accrued, if any, would not have a material adverse effect on the Company's
financial position, cash flow, or annual operating results. However, additional
cost when and if accrued may have a material adverse impact on the quarter in
which it may be accrued.
Also, on March 1, 1999 the U.S. Air Force issued Notices of Proposed Debarment
relating to certain of the foregoing matters. On August 6, 1999, the Company
entered into an Administrative Agreement with the U.S. Air Force terminating
these Notices of Proposed Debarment. The Administrative Agreement permits the
affected facilities to resume accepting new U.S. government contracts and
subcontracts.
J. OTHER CONTINGENCIES
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 that these are routine in nature and
incidental to its operations, and that the outcome of any of these proceedings
will not have a material adverse effect upon its operations or financial
condition.
11
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Quarter Ended September 30, 1999 Compared to Quarter Ended September 30, 1998
Summary financial information for the quarters ended September 30 follows (in
millions, except per share data):
Better/
1999 1998 (Worse) Percent
-------------------------------------------------
Net Sales $355.2 $331.6 $23.6 7
- -----------------------------------------------------------------------------------------
Gross profit 83.7 81.4 2.3 3
Selling, general and administrative
expense 19.4 14.2 (5.2) (37)
Research and development expense 4.4 4.6 .2 4
- -----------------------------------------------------------------------------------------
Income from operations 59.9 62.6 (2.7) (4)
Net interest expense (1.3) (2.7) 1.4 52
Other, net (1.1) (1.2) .1 8
Income taxes (19.7) (20.6) .9 4
- -----------------------------------------------------------------------------------------
Net income $ 37.8 $ 38.1 $ (.3) (1)
=========================================================================================
Earnings per share (basic and diluted) $ .38 $ .37 $ .01 3
=========================================================================================
Net sales in the 1999 third quarter were 7% higher than in the 1998 third
quarter. The 1999 sales increase is due to volume increases in the industrial
gas turbine market. Sales to the aero market were approximately 10% lower than
1998, including an approximate 2% price decrease. Such price reductions, as well
as similar price reductions for the industrial gas turbine market, were a
function of sharing cost savings with customers. The Company continues to
experience pressure from its major customers for price reductions and expects
such reductions to continue in 2000. The adverse effect of such reductions is
expected to be offset to a large extent, if not all, through Company and joint
Company/customer cost reduction programs. These cost reductions include
significant efficiency and yield improvements on new, technologically advanced
parts, as they move through the normal product life cycle. While expected, these
cost reductions cannot yet be assured.
Gross profit was $2.3 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.
Partially offsetting the improvement was the adverse effect of continuing
production problems at certain aluminum casting plants.
Selling, general and administrative expense was $5.2 million higher in the 1999
third quarter than in the 1998 quarter. $3.1 million of the increase is due to
the effect of the Company's SARs plan and Cordant Options. See Note F of Notes
to Consolidated Financial Statements. The increase also includes general price
level increases and higher cost to support higher volumes.
Net interest expense was $1.4 million lower in the 1999 third quarter compared
with 1998. The decrease was primarily due to lower debt levels and $0.5 million
of capitalized interest in 1999.
Income tax expense decreased $.9 million due to lower pre-tax earnings and a 2%
lower rate in 1999. The quarter-to-quarter comparison is also affected by
changes in estimated tax rates in both the 1999 and 1998 third quarters. See
Note G of Notes to Consolidated Financial Statements.
12
Starting in late 1998, the Company discovered certain product testing and
specification non-compliance issues at its Cercast-Montreal and
Cercast-Bethlehem (Pennsylvania) facilities. The Company notified customers, is
actively cooperating with them and government agencies in the investigation of
these matters, and is implementing remedial action. The Company knows of no
in-service problems associated with any of these issues. 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 the foregoing
matters can be completed. Based on preliminary evaluation, however, the Company
recorded an estimated loss of $4 million in its consolidated statement of income
for the year ended December 31, 1998.
The Defense Criminal Investigative Service (the "DCIS") in conjunction with
agents from the military services and NASA, has undertaken an investigation with
respect to the foregoing matters at the Montreal and Bethlehem facilities. The
DCIS has informed the Company that the investigation concerns possible
violations of the False Claims Act and the False Statements Act, as well as
possible criminal penalties. The Company is unable to determine definitively
what, if any, civil or criminal penalties might be imposed as a result of the
investigation.
In July 1999, the Company received a customer claim related to certain of the
aforementioned issues, which was significantly higher than amounts accrued.
While final resolution of this claim is uncertain, the Company believes the
claim is excessive. In September 1999, the Company also discovered issues
related to product inspection procedures at its Cercast-Hillsboro (Texas)
facility and other testing and specification non-compliance at Cercast-Montreal
and Cercast-Bethlehem. The Company has substantially completed correction of
these procedures, has notified customers and government agencies, and has asked
the Department of Defense and Department of Justice to address these matters
under the U.S. government's voluntary disclosure program. The Company knows of
no in-service problems associated with these issues as well.
While there is uncertainty associated with all of the aforementioned matters,
the Company believes that additional cost for such matters beyond amounts
accrued, if any, would not have a material adverse effect on the Company's
financial position, cash flow, or annual operating results. However, additional
cost when and if accrued may have a material adverse impact on the quarter in
which it may be accrued.
Also, on March 1, 1999 the U.S. Air Force issued Notices of Proposed Debarment
relating to certain of the foregoing matters. On August 6, 1999, the Company
entered into an Administrative Agreement with the U.S. Air Force terminating
these Notices of Proposed Debarment. The Administrative Agreement permits the
affected facilities to resume accepting new U.S. government contracts and
subcontracts.
13
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
Summary financial information for the nine months ended September 30 follows (in
millions, except per share data):
Better/
1999 1998 (Worse) Percent
-------------------------------------------------
Net Sales $1,097.6 $995.7 $101.9 10
- -----------------------------------------------------------------------------------------
Gross profit 258.2 235.5 22.7 10
Selling, general and administrative
expense 75.2 64.2 (11.0) (17)
Research and development expense 14.3 14.1 (.2) (1)
- -----------------------------------------------------------------------------------------
Income from operations 168.7 157.2 11.5 7
Net interest expense (4.8) (9.2) 4.4 48
Other, net (1.5) (2.8) 1.3 46
Income taxes (58.5) (55.2) (3.3) (6)
- -----------------------------------------------------------------------------------------
Net income $ 103.9 $ 90.0 $ 13.9 15
=========================================================================================
Earnings per share (basic and diluted) $ 1.03 $ .86 $ .17 20
=========================================================================================
Net sales in the nine months ended September 30, 1999 were 10% higher than in
the 1998 nine-month period. The 1999 sales increase is due to volume increases
in the industrial gas turbine market. Sales to the aero market were
approximately 5% lower than 1998, including an approximate 2% price decrease.
Such price reductions, as well as similar price reductions for the industrial
gas turbine market, were a function of sharing cost savings with customers.
Gross profit was $22.7 million higher in 1999 than in the 1998 nine-month
period. The principal reason for the 1999 improvement was increased volume. Cost
control enabled the Company to capitalize on such volume increases. Partially
offsetting the improvement was the adverse effect of continuing production
problems at certain aluminum casting plants.
Selling, general and administrative expense was $11 million higher in 1999 than
in the 1998 nine-month period. $1.6 million of the increase is due to the effect
of the Company's SARs plan and Cordant Options. See Note F of Notes to
Consolidated Financial Statements. The increase also includes the cost of
systems upgrades, general price level increases and higher costs to support
higher volumes.
Net interest expense was $4.4 million lower in the 1999 nine months compared
with 1998. The decrease was primarily due to lower debt levels and $0.5 million
of capitalized interest in 1999.
Income tax expense increased $3.3 million due to higher pre-tax earnings,
partially offset by a 2% lower effective tax rate. The lower effective rate for
1999 was attributable primarily to higher estimates of research and development
tax credits and higher benefits related to the foreign sales corporation.
EARNINGS OUTLOOK
See Note F of Notes to Consolidated Financial Statements for a discussion of the
effects of SARs and Cordant Options on the third quarter results. In the 1999
third quarter the Company recorded a $2.9 million pre-tax benefit in connection
with the Cordant Options. The quarter also benefited from a SARs adjustment
resulting from the decline in the market price of Howmet common stock. If the
market price of Howmet common stock were $15 or higher at September 30, 1999,
the Company would have recorded $3.8 million less pre-tax profits in the 1999
third quarter.
14
Excluding the adverse effect of the possible reversal of some or all of the
aforementioned pre-tax benefits in the fourth quarter, the Company expects
fourth quarter earnings per share in the $.28 to $.31 range. Excluding any
portion of the aforementioned benefits remaining in 1999 results, the Company
expects full year 1999 earnings per share in the $1.27 to $1.30 range. For 2000,
the Company currently expects earnings per share percentage growth in the mid to
upper single digits.
THIS EARNINGS OUTLOOK CONSISTS OF "FORWARD-LOOKING STATEMENTS" AS DEFINED IN THE
"SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
(THE "ACT") INCLUDING STATEMENTS REGARDING EARNINGS PER SHARE AND EARNINGS PER
SHARE GROWTH. SUCH STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED THEREIN. THESE
RISKS AND UNCERTAINTIES SHOULD BE CONSIDERED IN ASSESSING THIS EARNINGS OUTLOOK;
THEY INCLUDE THOSE DESCRIBED IN ITEM 5 OF THIS REPORT AND IN OTHER REPORTS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flow from operations and
borrowings under its revolving credit facility. The Company's principal
requirements for cash are to provide working capital, service debt, finance
capital expenditures and fund research and development. Based upon the current
level of operations, management believes that cash from the aforementioned
sources will be adequate to meet the Company's anticipated requirements for
these purposes. To date, cash available after satisfaction of these requirements
has been used to voluntarily repay debt prior to mandatory due dates.
Capital expenditures in the 1999 nine months were $87.7 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 September 30, 1999, there were $50 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 September 30, 1999, $242.4 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 18%
at September 30, 1999 compared to 30% at December 31, 1998. The current ratio
(excluding short-term debt and Pechiney Notes) was 1.1 at September 30, 1999 and
at December 31, 1998. Working capital (excluding short-term debt and Pechiney
Notes) was $40 million and $34.8 million at September 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 September 30, 1999. The $56.6 million retained
receivables, shown in the September 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 $6 million, resulting in a $10.9
million negative balance at September 30, 1999. The change is due to the
strengthening of the U.S. dollar relative to the French franc.
15
FEBRUARY 1999 CHANGE IN OWNERSHIP AND PREFERRED STOCK REDEMPTION
On February 8, 1999, Cordant Technologies Inc. ("Cordant") acquired the
remaining 22.65 million shares of the Company's common stock owned by
Carlyle-Blade Acquisition Partners, L.P. ("Carlyle") for $385 million. The
acquisition included a new Carlyle Standstill Agreement and the extension of an
existing covenant not to compete. With this purchase of the Carlyle shares,
Cordant's ownership of the Company's common stock increased to approximately
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.
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, 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 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.
16
The Company has developed 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 were
completed during the third quarter of 1999 and 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 million (41%) of
this expense is for information systems labor and miscellaneous project costs;
these costs are being expensed as routine information systems maintenance as
incurred over the three-year duration of the project. Another $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 $15.1 million (93%) had been expended as of September 30, 1999;
the Company expects to spend $0.5 million (3%) during the remainder of 1999 and
$0.7 million (4%) in 2000.
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.
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.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
See Note I of Notes to Consolidated Financial Statements with respect to certain
product testing and specification non-compliance issues at certain of the
Company's aluminum casting facilities and a related claim and proceedings.
Item 5. Other Events
------------
CAUTIONARY STATEMENT
Certain statements in this quarterly report are "forward-looking statements" as
defined in the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. The matters discussed in these statements are subject to
risks and uncertainties which should be considered in assessing the Company's
conduct of its business. Such statements include those relating to sales and
earnings growth, the price of the Company's stock, the Cercast manufacturing
process issues, anticipated cost reductions, 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
--------
10.35 Administrative Agreement dated August 6, 1999 between Howmet
Corporation and the United States Department of the Air Force.
27.1 Financial Data Schedule
(b) -- Reports on Form 8-K
-------------------
During the quarter ended September 30, 1999, the Company filed the
following Current Reports on Form 8-K:
Report filed August 9, 1999. Item 5 - Other events - News Release
reporting that the Company entered into an Administrative Agreement with the
U.S. Air Force terminating the Air Force's proposed debarment against two
facilities.
Report filed September 23, 1999. Item 5 - Other events - News Release
announcing that fourth quarter earnings should be in the range of $.28 to $.31.
18
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 21, 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)
19