UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 April 26, 1999: 100,016,758 shares
<PAGE>
Howmet International Inc.
Quarterly Report on Form 10-Q
March 31, 1999
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1 -- Financial Statements
Consolidated Statements of Income - Three months ended
March 31, 1999 and 1998 3
Consolidated Condensed Balance Sheets - March 31, 1999
and December 31, 1998 4
Consolidated Statements of Cash Flows - Three months ended
March 31, 1999 and 1998 5
Consolidated Statements of Common Stockholders' Equity
and Redeemable Preferred Stock - Three months ended
March 31, 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 14
Part II. OTHER INFORMATION
Item 5 -- Other Information 15
Item 6 -- Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Howmet International Inc.
Consolidated Statements of Income (Unaudited)
(in millions, except per share data)
Three Months Ended
March 31,
-------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $372.7 $328.4
Operating expenses:
Cost of sales 284.6 252.7
Selling, general and administrative expense 26.0 25.8
Research and development expense 4.9 5.1
--------------- --------------
315.5 283.6
--------------- --------------
Income from operations 57.2 44.8
Interest income .2 .4
Interest expense (1.9) (3.8)
Other, net (.3) (.6)
--------------- --------------
Income before income taxes 55.2 40.8
Income taxes (20.4) (16.3)
--------------- --------------
Net income 34.8 24.5
Dividends on redeemable preferred stock (.8) (1.4)
--------------- --------------
Net income applicable to common stock $ 34.0 $ 23.1
=============== ==============
Net income per common share, basic and diluted $ .34 $ .23
=============== ==============
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Howmet International Inc.
Consolidated Condensed Balance Sheets
(in millions, except share data)
March 31, December 31,
1999 1998
- ----------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 18.1 $ 37.6
Accounts receivable (less allowance of $5.1 and $5.2) 85.7 84.1
Inventories 168.5 161.9
Retained receivables 54.6 32.0
Deferred income taxes 16.2 16.2
Other current assets 5.4 3.0
Restricted Trust (a) - 716.4
------------- -------------
Total current assets 348.5 1,051.2
Property, plant and equipment, net 343.2 334.9
Goodwill, net 219.4 221.1
Patents and technology and other intangible assets, net 112.2 115.1
Other noncurrent assets 74.5 78.3
------------- -------------
Total assets $1,097.8 $1,800.6
============= =============
Liabilities, redeemable preferred stock and stockholders' equity Current
liabilities:
Accounts payable $ 81.7 $ 101.5
Accrued compensation 36.1 45.0
Other accrued liabilities 108.3 108.7
Income taxes payable 64.4 44.8
Short term debt 61.0 28.0
Pechiney Notes (a) - 716.4
------------- -------------
Total current liabilities 351.5 1,044.4
Accrued retiree benefits other than pensions 98.3 96.8
Accrued pension liability 49.8 49.0
Other noncurrent liabilities 105.1 108.4
Deferred income taxes 1.7 2.1
Long-term debt 93.0 63.0
------------- -------------
Total noncurrent liabilities 347.9 319.3
Commitments and contingencies
Redeemable preferred stock - 65.6
Stockholders' equity:
Preferred stock, authorized - 10,000,000 shares, issued and - -
outstanding - 0 shares
Common stock, $.01 par value, authorized - 400,000,000 shares,
issued and outstanding: 1999 - 100,014,258 shares; 1998 - 1.0 1.0
100,005,356 shares
Capital surplus 195.2 195.1
Retained earnings 214.1 180.1
Accumulated other comprehensive income (11.9) (4.9)
------------- -------------
Total stockholders' equity 398.4 371.3
------------- -------------
Total liabilities, redeemable preferred stock and stockholders' equity $1,097.8 $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>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Howmet International Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in millions)
Three Months Ended
March 31,
------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities
Net income $ 34.8 $ 24.5
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 16.2 14.5
Changes in assets and liabilities:
Receivables (28.3) (37.8)
Inventories (8.3) .1
Accounts payable and accrued liabilities (25.9) (25.1)
Deferred income taxes (.7) (1.7)
Income taxes payable 20.0 16.0
Long-term SARs accrual (1.0) (2.4)
Other, net 3.0 6.5
----------------- -----------------
Net cash provided (used) by operating activities 9.8 (5.4)
Investing activities
Purchases of property, plant and equipment (23.3) (16.6)
----------------- -----------------
Net cash used by investing activities (23.3) (16.6)
Financing activities
Net change in short-term debt 32.7 -
Issuance of long-term debt 65.0 33.6
Repayment of long-term debt (35.0) (35.2)
Redemption of preferred stock (66.4) -
----------------- -----------------
Net cash used by financing activities (3.7) (1.6)
Foreign currency rate changes (2.3) .1
----------------- -----------------
Decrease in cash and cash equivalents (19.5) (23.5)
----------------- -----------------
Cash and cash equivalents at beginning of period 37.6 45.4
----------------- -----------------
Cash and cash equivalents at end of period $ 18.1 $ 21.9
================= =================
<FN>
See notes to consolidated financial statements
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Howmet International Inc.
Consolidated Statements of Common Stockholders' Equity and Redeemable Preferred Stock (Unaudited)
(in millions, except share data)
Accumulated Total
Other Common Redeemable
Common Stock Capital Retained Comprehensive Stockholders' Preferred Stock
Shares Amount Surplus Earnings Income Equity Shares Amount
- --------------------------- --------- -------- -------- --------- ------------ ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 24.5 24.5
Other comprehensive
income -
-------
Total comprehensive
income 24.5
-------
Dividends - redeemable
preferred stock (1.4) (1.4) 135 1.4
- --------------------------- ----------- ----- ------- --------- --------- --------- ------- -------
Balance, March 31, 1998 100,000,000 $1.0 $195.0 $ 98.4 $(5.6) $288.8 6,136 $61.4
=========================== =========== ===== ======= ========= ========= ========= ======= =======
Balance, December 31, 1998 100,005,356 $1.0 $195.1 $180.1 $(4.9) $371.3 6,560 $65.6
-------
Comprehensive income:
Net income 34.8 34.8
Other comprehensive
income
Foreign exchange
translation adjustment (7.0) (7.0)
-------
Total comprehensive
income 27.8
-------
Dividends - redeemable
preferred stock (.8) (.8) 78 .8
Redeemable preferred
stock redemption (6,638) (66.4)
Shares issued 8,902 .1 .1
- --------------------------- ----------- ----- ------- --------- --------- --------- ------- -------
Balance, March 31, 1999 100,014,258 $1.0 $195.2 $214.1 $(11.9) $398.4 - -
=========================== =========== ===== ======= ========= ========= ========= ======= =======
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
6
<PAGE>
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 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 March 31,
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.
Certain reclassifications were made to the 1998 financial statements to conform
to the 1999 presentation.
B. INVENTORIES
Inventories are summarized as follows (in millions):
<TABLE>
March 31, December 31,
1999 1998
-------------- ---------------
<S> <C> <C>
Raw materials and supplies $ 56.3 $ 56.7
Work in progress 80.7 78.8
Finished goods 34.3 29.7
-------------- ---------------
FIFO inventory 171.3 165.2
LIFO valuation adjustment (2.8) (3.3)
-------------- ---------------
$168.5 $161.9
============== ===============
</TABLE>
At March 31, 1999 and December 31, 1998, inventories include $114.9 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.
7
<PAGE>
Howmet International Inc.
Notes to Consolidated Financial Statements (Unaudited)
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.
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.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
(in millions) 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales to external customers:
Investment casting and consolidated $372.7 $328.4
- -------------------------------------------------------------------------------------------------
Income from operations:
Investment casting $ 62.1 $ 52.4
SARs expense 1.0 (2.7)
Other unallocated corporate expense, net (5.9) (4.9)
- -------------------------------------------------------------------------------------------------
Consolidated $ 57.2 $ 44.8
- -------------------------------------------------------------------------------------------------
</TABLE>
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 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
(100,012,316 and 100,000,000 for the quarters ended March 31, 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 (100,072,357 and 100,189,249 for the
quarters ended March 31, 1999 and 1998, respectively).
8
<PAGE>
Howmet International Inc.
Notes to Consolidated Financial Statements (Unaudited)
F. OTHER INFORMATION
On February 8, 1999, Carlyle-Blade Acquisition Partners, L.P. sold its remaining
22,650,000 shares of the Company's common shares to Cordant. At March 31, 1999,
Cordant holds 84.6% and the public holds 15.4% of the Company's outstanding
common shares.
For the quarter ended March 31, 1999, selling, general and administrative
expense was reduced by a $1 million pre-tax reduction in accrued expense
recorded in connection with the Company's Stock Appreciation Rights ("SARs")
plan. The comparable 1998 quarter included $2.7 million of expense related to
the SARs plan. The 1999 first quarter reduction of expense was caused by a
reduction of the market price of the Company's common stock. The per share value
of the outstanding SARs declines as the market price of the Company's common
stock declines below $15. At March 31, 1999, the market price of the Company's
common stock was $14.31 compared to a December 31, 1998 price that was higher
than $15 per share (the upper limit for SARs compensation purposes).
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. Based on currently known facts, the
Company believes that additional cost beyond $4 million, if any, would not have
a material adverse effect on the Company's financial position, cash flow, or
annual operating results. However, additional cost when and if accrued may have
a material adverse impact on the quarter in which it may be accrued.
On March 3, 1999, the Company received from the U.S. Air Force a Notice of
Proposed Debarment from future government contracts and subcontracts directed at
Howmet Corporation and its Cercast Canadian subsidiary. The Air Force terminated
the proposed debarment with respect to Howmet Corporation by letter to it on
March 10, 1999, thus permitting Howmet Corporation to resume accepting U.S.
government contracts and subcontracts. The continuing proposed debarment with
respect to the Company's Cercast Canadian subsidiary is based on certain product
testing and specification non-compliance issues, and improper vendor payments
that took place at the Cercast Montreal operations. Debarment does not affect
existing Cercast contracts, other than extensions. The Company is negotiating an
Administrative Agreement with the Air Force under which the Notice of Proposed
Debarment would be terminated. 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.
The Company, in its ordinary course of business, is involved in other
litigation, administrative proceedings and investigations of various types in
several jurisdictions. The Company believes these are routine in nature and
incidental to its operations, and that the outcome of any of these proceedings
will not have a material adverse effect on its operations or financial
condition.
9
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
RESULTS OF OPERATIONS
- ---------------------
Quarter Ended March 31, 1999 Compared to Quarter Ended March 31, 1998
<TABLE>
<CAPTION>
Summary financial information for the quarters ended March 31 follows (in
millions):
Better/
1999 1998 (Worse) Percent
----------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $372.7 $328.4 $44.3 13
- ----------------------------------------------------------------------------------------------------------
Gross profit 88.1 75.7 12.4 16
Selling, general and administrative expense 26.0 25.8 (.2) (1)
Research and development expense 4.9 5.1 .2 4
- ----------------------------------------------------------------------------------------------------------
Income from operations 57.2 44.8 12.4 28
Net interest expense (1.7) (3.4) 1.7 50
Other, net (.3) (.6) .3 50
Income taxes (20.4) (16.3) (4.1) (25)
- ----------------------------------------------------------------------------------------------------------
Net income $ 34.8 $ 24.5 $10.3 42
==========================================================================================================
Earnings per share (basic and diluted) $ .34 $ .23 $ .11 48
==========================================================================================================
</TABLE>
Net sales in the 1999 first quarter were 13% higher than in the 1998 first
quarter. The 1999 sales increase is due primarily to volume increases in the
industrial gas turbine market.
Gross profit was $12.4 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 $.2 million higher in the 1999
first quarter than in the 1998 quarter. The increase includes higher costs to
support the higher volume levels and price level increases, offset by a decrease
in expense due to a $3.7 million change in the amounts recorded in connection
with the Company's Stock Appreciation Rights plan ("SARs"). In the 1999 quarter,
a $1 million reduction of SARs expense was recorded versus $2.7 million of
expense in the 1998 quarter. SARs benefit or expense is recognized each quarter
based on employee vesting to date and also on the market price of the Company's
stock at the end of the quarter compared to the market price at the previous
quarter end, except for fluctuations above $15 per share (the upper limit for
SARs compensation purposes). At March 31, 1999, the market price of the
Company's common stock was $14.31 compared to $16.13 per share at December 31,
1998, which resulted in the $1 million 1999 benefit. If the market price at
March 31, 1999 were $15 per share or higher, the Company would have recorded a
$1.6 million expense for the 1999 quarter instead of the $1 million benefit (a
combined $2.6 million pre-tax benefit to the 1999 first quarter). This benefit
will reverse and adversely affect future results when the market price of the
Company common stock increases to $15 or higher.
Net interest expense was $1.7 million lower in the 1999 first quarter compared
with 1998. The reason for the decrease was lower debt levels and lower interest
rates in the first quarter of 1999.
10
<PAGE>
Income tax expense increased $4.1 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. Based on currently known facts, the
Company believes that additional cost beyond $4 million, if any, would not have
a material adverse effect on the Company's financial position, cash flow, or
annual operating results. However, additional cost when and if accrued may have
a material adverse impact on the quarter in which it may be accrued.
On March 3, 1999, the Company received from the U.S. Air Force a Notice of
Proposed Debarment from future government contracts and subcontracts directed at
Howmet Corporation and its Cercast Canadian subsidiary. The Air Force terminated
the proposed debarment with respect to Howmet Corporation by letter to it on
March 10, 1999, thus permitting Howmet Corporation to resume accepting U.S.
government contracts and subcontracts. The continuing proposed debarment with
respect to the Company's Cercast Canadian subsidiary is based on certain product
testing and specification non-compliance issues and improper vendor payments
that took place at the Cercast Montreal operations. Debarment does not affect
existing Cercast contracts, other than extensions. The Company is negotiating an
Administrative Agreement with the Air Force under which the Notice of Proposed
Debarment would be terminated. 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.
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
working capital, debt service, capital expenditures and research and
development. 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 first quarter were $23.3 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 March 31, 1999, there were $90 million of outstanding borrowings and $7.6
million of outstanding standby letter of credit under the $300 million revolving
credit facility. An additional $2 million of standby letters of credit were
outstanding under another facility. At March 31, 1999 $202.4 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.
11
<PAGE>
Debt, excluding Pechiney Notes, plus redeemable preferred stock as a percentage
of total capitalization (debt, excluding Pechiney Notes, plus redeemable
preferred stock plus common stockholders' equity) was 28% at March 31, 1999
compared to 30% at December 31, 1998. The current ratio (excluding short-term
debt and Pechiney Notes) was 1.2 at March 31, 1999 and 1.1 at December 31, 1998.
Working capital (excluding short-term debt and Pechiney Notes) was $58 million
and $34.8 million at March 31, 1999 and December 31, 1998, respectively.
The Company has an agreement to sell, on a revolving basis, an undivided
interest in a defined pool of accounts receivable. The Company has received $55
million from the sale of such receivables and has deducted this amount from
accounts receivable as of March 31, 1999. The $54.6 million retained
receivables, shown in the March 31, 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 $7 million, resulting in a $11.9
million negative balance at March 31, 1999. The change is primarily due to the
strengthening of the U.S. dollar relative to the French franc.
FEBRUARY 1999 CHANGE IN OWNERSHIP AND PREFERRED STOCK REDEMPTION
On February 8, 1999, Carlyle-Blade Acquisition Partners, L.P. sold its
remaining 22.65 million shares of Howmet International Inc. common stock to
Cordant. At March 31, 1999, Cordant holds 84.6% and the public holds 15.4% of
the outstanding Howmet International Inc. common stock.
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.
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 is scheduled, with minor exceptions, to be completed by
June 30, 1999. All central systems will be 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 or is near completion. The Company expects corrective action
projects to be completed by June 30, 1999. 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. All plant
facility teams are scheduled to complete this project by June of 1999.
12
<PAGE>
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 Howmet Corporation'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 800 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.
During 1999 the Company will focus on further evaluation of customer and
supplier readiness, testing systems with embedded processors and business
systems, risk assessment, and contingency planning.
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 $16.6 million. An estimated $6.1 million (37%) 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 $7.6 million (46%)
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 $2.9 million (17%) is for infrastructure upgrades or replacement.
Approximately $11.9 million (72%) had been expended as of March 31, 1999; the
Company expects to spend $4.7 million (28%) during the remainder of 1999.
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.
13
<PAGE>
NEW ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued. This statement 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 SFAS No. 133 will be on the earnings and financial position of the
Company. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. The Company expects to adopt this new statement on January 1, 2000.
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.
14
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Events
CAUTIONARY STATEMENT
Certain statements in this quarterly report are "forward-looking statements" as
defined in the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. The matters discussed in these statements are subject to
risks and uncertainties which should be considered in assessing the Company's
conduct of its business. Such statements include those relating to pricing,
competitive effects, market structure, contracting practices, and developmental
projects. 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,
changing economic and political conditions in the United States and in other
countries including those in Asia, 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 March 31, 1999, the Company filed the following
Current Reports on Form 8-K:
Report filed February 9, 1999. Item 5 - Other events -- News
release reporting the Company's annual earnings for 1998.
Report filed February 16, 1999. Item 5 - Other events - News release
reporting decision to exercise the Company's option to redeem all of its then
outstanding shares of 9% Series A Senior Cumulative Preferred Stock on February
17, 1999.
Report filed March 5, 1999. Item 5 - Other events - News release
reporting receipt by Howmet Corporation of a notice from the United States Air
Force of proposed debarment of Howmet Corporation and Howmet Cercast (Canada),
Inc.
Report filed March 12, 1999. Item 5 - Other events - News release
reporting that the notice of proposed debarment was withdrawn with respect to
Howmet Corporation.
15
<PAGE>
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: April 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)
16
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HOWMET
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