<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
{ X } QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1997
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 0-3085
WYMAN-GORDON COMPANY
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1992780
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
244 WORCESTER STREET, BOX 8001, NO. GRAFTON, MASSACHUSETTS 01536-8001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 508-839-4441
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 issuer's classes of common stock, as of the latest
practicable date.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS NOVEMBER 30, 1997
<S> <C>
Common Stock, $1 Par Value 36,270,902
</TABLE>
Page 1 of 27<PAGE>
<PAGE> 2
PART I.
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
WYMAN-GORDON COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOV. 30, NOV. 30, NOV. 30, NOV. 30,
1997 1996 1997 1996
(000's omitted, except per share data)
<S> <C> <C> <C> <C>
Revenue $189,370 $138,655 $369,378 $272,890
Less:
Cost of goods sold 157,422 115,079 304,185 237,823
Selling, general and
administrative expenses 13,177 11,049 26,572 21,102
Other charges(credits) (3,000) - (4,900) 15,779
167,599 126,128 325,857 274,704
Income (loss) from
operations 21,771 12,527 43,521 (1,814)
Other deductions (income):
Interest expense 2,791 2,659 5,682 5,382
Miscellaneous, net 392 735 722 (4,464)
3,183 3,394 6,404 918
Income (loss) before
income taxes 18,588 9,133 37,117 (2,732)
Provision (benefit) for
income taxes 5,252 - 11,922 (19,680)
Net income $ 13,336 $ 9,133 $ 25,195 $ 16,948
Net income per share $ .36 $ .25 $ .67 $ .46
Shares used to compute net
income per share 37,517 37,124 37,446 36,896
</TABLE>
The accompanying notes to the interim consolidated condensed
financial statements are an integral part of these financial
statements.
-2-<PAGE>
<PAGE> 3
<TABLE>
WYMAN-GORDON COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<CAPTION>
NOVEMBER 30, MAY 31,
1997 1997
(Unaudited)
(000's omitted)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 26,247 $ 51,971
Accounts receivable 125,819 119,159
Inventories 116,667 92,332
Other current assets 11,171 7,789
Deferred income taxes - 6,500
Total current assets 279,904 277,751
Property, plant and equipment, net 165,133 153,737
Intangible assets 18,903 19,255
Other assets 3,261 3,628
$467,201 $454,371
LIABILITIES
Borrowings due within one year $ 77 $ 77
Accounts payable 55,155 62,092
Accrued liabilities and other 44,496 49,377
Total current liabilities 99,728 111,546
Restructuring, integration, disposal
and environmental 18,361 18,172
Long-term debt 96,154 96,154
Pension liability 1,122 1,102
Deferred income tax and other 11,393 15,861
Postretirement benefits 45,609 47,138
STOCKHOLDERS' EQUITY
Preferred stock - none issued - -
Common stock issued - 37,052,720 shares 37,053 37,053
Capital in excess of par value 28,997 27,608
Retained earnings 140,076 114,957
Equity adjustments 4,000 2,763
Less treasury stock at cost
November 30, 1997 - 781,818 shares
May 31, 1997 - 1,001,199 shares (15,292) (17,983)
194,834 164,398
$467,201 $454,371
</TABLE>
The accompanying notes to the interim consolidated condensed
financial statements are an integral part of these financial
statements.
-3-<PAGE>
<PAGE> 4
<TABLE>
WYMAN-GORDON COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1997 1996
(000's omitted)
<S> <C> <C>
Operating activities:
Net income $ 25,195 $16,948
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 11,185 10,099
Deferred taxes 6,500 -
Other charges - 13,045
Provision for equity investment - 2,734
Changes in assets and liabilities:
Accounts receivable (5,741) (3,663)
Inventories (24,335) (19,052)
Prepaid expenses and other assets (3,935) (584)
Accrued restructuring, disposal
and environmental (1,758) (1,600)
Income and other taxes 279 (4,452)
Accounts payable and accrued
liabilities (13,846) 3,223
Net cash provided (used) by
operating activities (6,456) 16,698
Investing activities:
Capital expenditures (22,688) (14,303)
Proceeds from sale of fixed assets 471 -
Other, net 1,169 491
Net cash provided (used) by
investing activities (21,048) (13,812)
Financing activities:
Payment to Cooper Industries, Inc. (2,300) -
Net proceeds from issuance of
common stock 8,683 3,257
Repurchase of Common Stock (4,603) -
Net cash provided by
financing activities 1,780 3,257
Increase (decrease) in cash (25,724) 6,143
Cash, beginning of year 51,971 30,134
Cash, end of period $ 26,247 $36,277
</TABLE>
The accompanying notes to the interim consolidated condensed
financial statements are an integral part of these financial
statements.
-4-<PAGE>
<PAGE> 5
WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
November 30, 1997
(Unaudited)
NOTE A - BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited
consolidated condensed financial statements contain all
adjustments necessary to present fairly its financial position at
November 30, 1997 and its results of operations and cash flows
for the six months ended November 30, 1997 and November 30, 1996.
All such adjustments are of a normal recurring nature.
The accompanying unaudited consolidated condensed financial
statements have been prepared in accordance with Article 10 of
Securities and Exchange Commission Regulation S-X and, therefore,
do not include all information and footnotes necessary for a fair
presentation of the financial position, results of operations and
cash flows in conformity with generally accepted accounting
principles. In conjunction with its May 31, 1997 Annual Report
on Form 10-K, the Company filed audited consolidated financial
statements which included all information and footnotes necessary
for a fair presentation of its financial position at May 31, 1997
and 1996 and its results of operations and cash flows for the
years ended May 31, 1997, 1996 and 1995, in conformity with
generally accepted accounting principles. Where appropriate,
prior period amounts have been reclassified to permit comparison.
NOTE B - ADOPTION OF RECENT ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board
issued Statement No. 130, "Reporting Comprehensive Income" ("SFAS
130") and Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). The
implementation of SFAS 130 will require that the components of
comprehensive income be reported in the financial statements.
The implementation of SFAS 131 will require the disclosure of
segment information utilizing the approach that the Company uses
to manage its internal organization. The Company is currently
assessing the impact that the new standards will have on its
financial statements. Implementation of both of these new
standards is required for the year ending May 31, 1999 ("fiscal
year 1999").
In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings Per Share" ("SFAS 128"),
which is required to be adopted for both interim and annual
periods ending after December 15, 1997. In the third quarter of
fiscal year 1998, the Company will be required to change the
method currently used to compute earnings per share and to
restate all prior periods. Under SFAS 128, the dilutive effect
of common stock equivalents will be excluded in calculating basic
earnings per share. All dilutive securities will be considered
in the presentation of diluted earnings per share under SFAS 128.
There is no material impact on earnings per share for the three
or six months ended November 30, 1997 and 1996 calculated under
SFAS 128.
-5-<PAGE>
<PAGE> 6
WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
November 30, 1997
(Unaudited)
NOTE C - INVENTORIES
Inventories consisted of:
<TABLE>
<CAPTION>
NOVEMBER 30, 1997 MAY 31, 1997
(000's omitted)
<S> <C> <C>
Raw material $ 51,283 $ 36,990
Work-in-process 77,893 61,741
Other 6,691 6,906
135,867 105,637
Less progress payments 19,200 13,305
$116,667 $ 92,332
</TABLE>
If all inventories valued at LIFO cost had been valued at
the lower of first-in, first-out (FIFO) cost or market, which
approximates current replacement cost, inventories would have
been $18,262,000 higher than reported at November 30, 1997 and
May 31, 1997.
There were no LIFO inventory credits or charges to cost of
goods sold in the three and six months ended November 30, 1997 or
November 30, 1996.
NOTE D - COMMITMENTS AND CONTINGENCIES
At November 30, 1997, certain lawsuits arising in the normal
course of business were pending. In the opinion of management,
the outcome of these legal matters will not have a material
adverse effect on the Company's financial position and results of
operations.
The Company is subject to extensive, stringent and changing
federal, state and local environmental laws and regulations,
including those regulating the use, handling, storage, discharge
and disposal of hazardous substances and the remediation of
alleged environmental contamination. Accordingly, the Company is
involved from time to time in administrative and judicial
inquiries and proceedings regarding environmental matters.
Nevertheless, the Company believes that compliance with these
laws and regulations will not have a material adverse effect on
the Company's operations as a whole.
The Company had foreign exchange contracts totaling
approximately $42,200,000 at November 30, 1997. These contracts
hedge certain normal operating purchase and sales transactions.
The exchange contracts generally mature within six months and
require the Company to exchange U.K. pounds for non-U.K.
currencies or non-U.K. currencies for U.K. pounds. Transaction
gains and losses included in the Consolidated Condensed
Statements of Income for the three and six months ended November
30, 1997 and November 30, 1996 were not material.
-6-<PAGE>
<PAGE> 7
WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
November 30, 1997
(Unaudited)
NOTE D - COMMITMENTS AND CONTINGENCIES, Continued
On December 22, 1996, a serious industrial accident occurred
at the Houston, Texas facility of Wyman-Gordon Forgings, Inc.
("WGFI"), a wholly-owned subsidiary of the Company. The accident
occurred while a crew of ten men was performing maintenance on
the accumulator system that supplies hydraulic power for WGFI's
35,000 ton press. The maintenance required that the system be
completely depressurized which the crew believed to be the case.
However, subsequent examination has shown that a valve on one of
the pressure vessels was closed thereby containing pressure in
that vessel. The crew was in the process of removing the bolts
on the vessel when the few remaining bolts could no longer hold
the pressure and the lid was blown off, killing eight crew
members and injuring two others.
OSHA conducted an investigation of the accident. On June
18, 1997, WGFI reached an agreement with OSHA, settling citations
resulting from the accident.
The injured workers and the decedents' families have all
retained attorneys who notified the Company that they intend to
assert claims against the Company on behalf of their clients.
WGFI has also received claims from several employees of a
subcontractor claiming to have been injured at the time of the
accident as well as from one current employee. The Company has
cooperated with attorneys for the decedents' families by
providing them information and allowing them and their experts
access to Company facilities.
To date, the Company has settled all claims that could be
brought by two of the decedent's families on terms acceptable to
the Company and its insurance carriers and has agreed in
principle to settle with the family of a third decedent. The
Company thus far has been unable to achieve settlements with the
other claimants, and, on October 24, 1997, a lawsuit was filed in
the District Court of Harris County, Texas, on behalf of three of
the decedents' families against the Company, WGFI and Cooper-
Cameron Corporation, as successor in interest to the manufacturer
of the valve. One of the injured employees has subsequently
filed a motion to be included in that lawsuit.
In general under Texas statutory law, an employee's
exclusive remedy against an employer for an on-the-job injury is
the benefits of the Texas Workers Compensation Act. WGFI, the
employer of the deceased employees, has workers compensation
insurance coverage and the injured employees and beneficiaries of
the deceased employees are receiving workers compensation
payments. Under applicable law, however, statutory beneficiaries
of employees killed in the course and scope of their employment
may recover punitive (but not compensatory) damages in excess of
-7-<PAGE>
<PAGE> 8
WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
November 30, 1997
(Unaudited)
NOTE D - COMMITMENTS AND CONTINGENCIES, Continued
workers compensation benefits. However, to do so they must prove
that the employer was grossly negligent. The protection of the
workers compensation exclusive remedy provision may not extend to
the Company as parent corporation of WGFI. Therefore, with
regard to the October 24, 1997 lawsuit and any future lawsuits
brought on behalf of those killed or injured in the Houston
accident or their families against the Company, if (i) the court
finds that the Company had a legal duty to WGFI and its
employees, (ii) the evidence supports a finding that the Company
acted negligently in its duty to WGFI and its employees and (iii)
such negligence had a causal connection with the accident, the
plaintiffs might be able to recover compensatory damages against
the Company. If it is shown that the Company's conduct amounted
to gross neglect, and that conduct is found to be a cause of the
accident, the plaintiffs may be able to recover punitive damages
against the Company.
It is not possible at this time to determine the extent, if
any, to which WGFI or the Company could be held liable in
connection with the accident. The Company maintains general
liability and employer's liability insurance for itself and its
subsidiaries under various policies with aggregate coverage
limits of approximately $29 million. While WGFI has tendered the
defense of the various claims to the Company's insurance
carriers, there can be no assurance that the full insurance
coverage will be available. Counsel for the Company has been
engaged for several months in settlement discussions with
attorneys representing the decedents' families. At this time,
however, only three of the decedents' families (and none of the
other claimants or potential claimants) have agreed to settle any
claims against the Company and/or WGFI relating to the accident.
If the Company is not successful in settling the remaining claims
on terms acceptable to the Company, the Company anticipates that
more lawsuits relating to the accident will be filed against it
and WGFI. Based on the Company's experience in the settlement
negotiations to date, the Company believes that there is a
substantial risk that the pending and threatened claims will not
be settled for an aggregate amount within its insurance coverage
limits. The Company anticipates that, like the currently pending
lawsuit, any additional lawsuits will include claims for alleged
compensatory as well as punitive damages that in the aggregate
could substantially exceed the Company's available insurance
coverage. The Company intends to vigorously defend all lawsuits
that have been or may be filed relating to the accident.
However, if one or more such lawsuits were to be prosecuted
successfully by the plaintiffs and a judgment were to be obtained
by one or more plaintiffs in such lawsuits and sustained on
appeal, litigation costs, including the cost of pursuing any
appeals, and the cost of paying such a judgment, to the extent
-8-<PAGE>
<PAGE> 9
WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
November 30, 1997
(Unaudited)
NOTE D - COMMITMENTS AND CONTINGENCIES, Continued
not covered by insurance, could have a material adverse effect on
the Company's financial condition and the results of operations,
particularly if any such judgment includes awards for punitive
damages.
On September 25, 1997, the Company received a subpoena from
the United States Department of Justice informing it that the
United States Department of Defense and other federal agencies
had commenced an investigation with respect to the manufacture
and sale of investment castings at the Company's Tilton, New
Hampshire facility. The focus of the investigation is whether
the Company failed to comply with required inspection procedures
for cast aerospace parts and whether the Company shipped cast
components that did not meet applicable specifications, which
could be a violation of federal requirements. The investigating
agencies have directed the Company to furnish various documents
and information relating to the subject of the investigation.
The Company is cooperating fully with the investigation and in
addition has substantially completed its own investigation, which
was supervised by the Company's outside attorneys and conducted
by quality and process auditors from another casting facility of
the Company and by the Company's internal attorneys. Such
investigation has identified certain departures from Company
policies and procedures which have been addressed. The federal
investigation may result in criminal or civil charges being
brought against the Company, which could result in civil damages
and penalties and criminal liability, if the Company were found
to have violated federal laws. Based on the Company's own
investigation to date (which is substantially completed), the
Company does not believe that the federal investigation is likely
to result in a material adverse impact on the Company's financial
condition or results of operations, although no assurance as to
the outcome or impact of that investigation can be given.
NOTE E - OTHER CHARGES (CREDITS)
In the six months ended November 30, 1997, the Company
recorded other credits of $4,900,000. Such other credits include
a credit of $1,900,000 resulting from the disposal of a building
held for sale, a credit of $4,000,000 for the recovery of cash
surrender value of certain company-owned life insurance policies
and a charge of $1,000,000 to provide for costs as a result of
the shutdown of the 29,000 ton press at the Company's Houston,
Texas forging facility. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Recent Developments.")
-9-<PAGE>
<PAGE> 10
WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
November 30, 1997
(Unaudited)
NOTE E - OTHER CHARGES (CREDITS), Continued
In the six months ended November 30, 1996, the Company
recorded other charges of $15,779,000. Such other charges
include $4,600,000 to provide for the costs of workforce
reductions at the Company's Grafton, Massachusetts Forging
facility and $3,400,000 to write-off and dispose of certain
Forging equipment. Other charges also include $2,300,000 to
reduce the carrying value of certain assets of the Company's
titanium castings operations, $2,485,000 to recognize the
Company's 25.0% share of the net losses of its Australian joint
venture and to reduce the carrying value of such joint venture,
$250,000 relating to expenditures for an investment in another
joint venture and $2,745,000 to reduce the carrying value of the
cash surrender value of certain company-owned life insurance
policies.
NOTE F - SUBSEQUENT EVENT
On December 15, 1997, the Company issued $150,000,000 of
Senior Notes due 2007 ("Senior Notes") under an indenture between
the Company and a bank as trustee. The Senior Notes were issued
at a price of 99.323% of face value and pay interest semi-
annually in arrears on June 15 and December 15 of each year,
commencing June 15, 1998. The Senior Notes are general unsecured
obligations of the Company, are non-callable for a five year
period, and are senior to any future subordinated indebtedness of
the Company. The Company used approximately $92,000,000 of the
net proceeds from the sale of the Senior Notes to repurchase
$84,725,000 (94%) of its outstanding 10 3/4% Senior Notes due
1998. The balance of the proceeds will be used for additional
working capital and other general corporate purposes.
-10-<PAGE>
<PAGE> 11
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
"FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY"
Certain statements in Management's Discussion and Analysis
of Financial Condition and Results of Operations contain
"forward-looking" information (as defined in the Private
Securities Litigation Reform Act of 1995). The words "believe,"
"expect," "anticipate," "intend," "estimate", "assume" and other
similar expressions which are predictions of or indicate future
events and trends and which do not relate to historical matters
identify forward-looking statements. In addition, information
concerning raw material prices and availability, customer orders
and pricing, and industry cyclicality and their impact on gross
margins and business trends as well as liquidity and sales volume
are forward-looking statements. Reliance should not be placed on
forward-looking statements because they involve known and unknown
risks, uncertainties and other factors, which are in some cases
beyond the control of the Company and may cause the actual
results, performance or achievements of the Company to differ
materially from anticipated future results, performance or
achievements expressed or implied by such forward-looking
statements.
Certain factors that might cause such differences include,
but are not limited to, the following: The Company's ability to
successfully negotiate long-term contracts with customers and raw
materials suppliers at favorable prices; the Company's ability to
obtain required raw materials and to supply its customers on a
timely basis; and the cyclicality of the aerospace industry.
For further discussion identifying important factors that
could cause actual results to differ materially from those
anticipated in forward-looking statements, see the Company's SEC
filings, in particular see the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 1997 Part I, Item 1 -
"Business - The Company", "Customers", "Marketing and Sales",
"Backlog", "Raw Materials", "Energy Usage", "Employees",
"Competition", "Environmental Regulations", "Product Liability
Exposure" and "Legal Proceedings".
RECENT DEVELOPMENTS
On December 9, 1997, the Company announced that it had taken
the 29,000 ton press at its Houston, Texas facility out of
service to repair structural cracking and, while the press is out
of service, to install upgrades and process changes on that press
to improve reliability, cycle time and throughput capacity. The
Company has recently reinstalled a 20,000 ton press at the
Houston facility which has the capability of producing
approximately 80% of the parts previously produced on the 29,000
ton press. The Company believes it has the capacity to produce
the remaining 20% of the parts on its 35,000 ton press in
Grafton, Massachusetts and its 30,000 ton press in Livingston,
-11-<PAGE>
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RECENT DEVELOPMENTS, Continued
Scotland. The transfer of production to the 20,000, 30,000 and
35,000 ton presses will in most cases require customer approval.
The Company has requested that customers expedite their approval
process. Once the transfers are complete, the Company expects
that it will have productive capacity sufficient to meet customer
requirements at current levels, although no assurances can be
given in that regard. The 29,000 ton press in Houston produced
approximately two-thirds of the Company's aeroturbine forgings
during fiscal year 1997. The cracks were discovered as a result
of an ultrasonic inspection of the 29,000 ton press conducted as
part of a preventive maintenance program. Current estimates
indicate that repairs may require three to six months depending
on the extent of the modifications. Because of production delays
and the cost of transferring production to other presses, the
Company expects that revenues and net profits for the third and
fourth quarters of fiscal year 1998 will be impacted. The
Company does not believe that the impact will be significant,
although no assurances can be given in that regard.
On December 15, 1997, the Company issued $150.0 million of
8.0% Senior Notes due 2007 (the "Senior Notes") under an
indenture between the Company and a bank as trustee. The Senior
Notes were issued at a price of 99.323% of face value and pay
interest semi-annually in arrears on June 15 and December 15 of
each year, commencing June 15, 1998. The Senior Notes are
general unsecured obligations of the Company, are non-callable
for a five year period, and are senior to any future subordinated
indebtedness of the Company. The Company used approximately
$92.0 million of the net proceeds from the sale of the Senior
Notes to repurchase $84.7 million (94%) of its outstanding 10
3/4% Senior Notes due 2003. The balance of the proceeds will be
used for additional working capital and other general corporate
purposes.
As a result of the repurchase of the 10 3/4% Senior Notes,
the Company will record an extraordinary after-tax loss of
approximately $5.0 million during the quarter ending February 28,
1998. The extraordinary after-tax loss relates to (i) the
premium related to the retirement of the 10 3/4% Senior Notes,
(ii) the write-off of certain deferred debt issue expenses and
(iii) fees and expenses payable by the Company with respect to
the tender offer for the 10 3/4% Senior Notes.
-12-<PAGE>
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
The principal markets served by the Company are aerospace
and energy. Revenue by market for the respective periods was as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 30, 1997 NOVEMBER 30, 1996
(000's omitted)
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
<S> <C> <C> <C> <C>
Aerospace $153,305 81% $106,556 77%
Energy 28,602 15% 23,818 17%
Other 7,463 4% 8,281 6%
$189,370 100% $138,655 100%
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30, 1997 NOVEMBER 30, 1996
(000's omitted)
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
<S> <C> <C> <C> <C>
Aerospace $299,052 81% $199,617 73%
Energy 55,269 15% 54,454 20%
Other 15,057 4% 18,819 7%
$369,378 100% $272,890 100%
</TABLE>
RESULTS OF OPERATIONS THREE MONTHS ENDED NOVEMBER 30, 1997
("second quarter of fiscal year 1998") COMPARED TO THREE MONTHS
ENDED NOVEMBER 30, 1996 ("second quarter of fiscal year 1997")
The Company's revenue increased 36.6% to $189.4 million in
the second quarter of fiscal year 1998 from $138.7 million in the
second quarter of fiscal year 1997 as a result of higher sales
volume and higher sales prices at the Company's Forgings and
Castings Divisions. These revenue increases during the second
quarter of fiscal year 1998 as compared to the second quarter of
fiscal year 1997 are reflected by market as follows: a $46.7
million (43.9%) increase in aerospace, a $4.8 million (20.1%)
increase in energy and a $0.8 million (9.9%) decrease in other.
The reasons for the strength in the aerospace market were higher
airplane and engine build rates and higher demands for spares by
aerospace engine prime contractors. The increase in energy
revenue was a result of higher land-based gas turbine shipments
during the second quarter of fiscal year 1998 as compared to the
second quarter of fiscal year 1997. Revenues in the second
-13-<PAGE>
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS THREE MONTHS ENDED NOVEMBER 30, 1997
("second quarter of fiscal year 1998") COMPARED TO THREE MONTHS
ENDED NOVEMBER 30, 1996 ("second quarter of fiscal year 1997")
(Continued)
quarter of fiscal year 1997 were limited by raw material
shortages and production delays caused by capacity constraints of
the Company's suppliers. Revenues in the second quarter of
fiscal year 1998 were limited due to lower than anticipated
productivity of recent equipment and personnel additions and
inconsistencies in raw material deliveries corresponding to
customer requirements.
The Company's backlog has increased to $973.4 million at
November 30, 1997 from $895.8 million at May 31, 1997 and from
$809.1 million at November 30, 1996. The increase from May 31,
1997 resulted primarily from bookings of aerospace turbine and
structural parts. The increase from November 30, 1996 resulted
from the following factors:
1. Higher build rates of the Company's engine and airframe
customers,
2. Higher prices for the Company's aerospace products,
particularly as reflected in new long-term agreements
("LTAs") which went into effect on January 1, 1997, and
3. An increase in overdue orders to customer delivery
dates as a result of shipping delays at the Company due
to capacity constraints and raw material unavail-
ability.
The Company does not expect that this rate of increase in backlog
will continue since it expects that customer orders will not
increase at the same rates as in the recent past, that prices
will moderate and that recent capacity additions at the Company
and its suppliers will enable the Company to meet its customer
delivery requirements in a more timely fashion.
The Company's gross margin was 16.9% in the second quarter
of fiscal year 1998 as compared to 17.0% in the second quarter of
fiscal year 1997. Gross margin in the second quarter of fiscal
year 1998 was negatively affected by production inefficiency
costs related to equipment downtime in the Company's Forgings
operations, recent personnel additions and the reinstallation and
start-up of two major forge presses. The Company expects that
the addition of these presses will increase the Company's ability
to meet its customer requirements.
Selling, general and administrative expenses increased 19.3%
to $13.2 million during the second quarter of fiscal year 1998
from $11.0 million during the second quarter of fiscal year 1997.
Selling, general and administrative expenses as a percentage of
revenues improved to 6.9% in the second quarter of fiscal year
-14-<PAGE>
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS THREE MONTHS ENDED NOVEMBER 30, 1997
("second quarter of fiscal year 1998") COMPARED TO THREE MONTHS
ENDED NOVEMBER 30, 1996 ("second quarter of fiscal year 1997")
(Continued)
1998 from 7.9% in the second quarter of fiscal year 1997. The
improvement as a percent of revenues was primarily the result of
higher revenues. Selling, general and administrative expenses
included approximately $1.2 million and $1.1 million of non-cash
compensation expense associated with the Company's performance
share program in the second quarter of fiscal year 1998 and the
second quarter of fiscal year 1997, respectively.
During the second quarter of fiscal year 1998, the Company
recorded net other credits of $3.0 million which included other
credits of $4.0 million for the recovery of cash surrender value
of certain company-owned life insurance policies and other
charges of $1.0 million to provide for costs as a result of the
shutdown of the 29,000 ton press at the Company's Houston, Texas
forging facility.
Interest expense increased $0.1 million to $2.8 million in
the second quarter of fiscal year 1998 compared to $2.7 million
in the second quarter of fiscal year 1997.
Miscellaneous, net was an expense of $0.4 million in the
second quarter of fiscal year 1998 as compared to an expense of
$0.7 million in the second quarter of fiscal year 1997.
The Company recorded a provision for income taxes of $5.3
million in the second quarter of fiscal year 1998 compared to no
provision or benefit for income taxes in the second quarter of
fiscal year 1997.
The Company expects that in fiscal year 1998, income tax
provisions will approximate statutory rates subject to
utilization of state net operating losses. The effective tax
rate in the second quarter of fiscal 1998 was 36% on income
before income taxes excluding the $4.0 million recovery of the
cash surrender value of certain company-owned life insurance
policies.
Net income was $13.3 million, or $.36 per share, in the
second quarter of fiscal year 1998 and $9.1 million, or $.25 per
share in the second quarter of fiscal year 1997. The $4.2
million improvement resulted from the items described above.
-15-<PAGE>
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS SIX MONTHS ENDED NOVEMBER 30, 1997 ("first
six months of fiscal year 1998") COMPARED TO SIX MONTHS ENDED
NOVEMBER 30, 1996 ("first six months of fiscal year 1997")
The Company's revenue increased 35.4% to $369.4 million in
the first six months of fiscal year 1998 from $272.9 million in
the first six months of fiscal year 1997 as a result of higher
sales volume and higher sales prices at the Company's Forgings
and Castings Divisions. These revenue increases during the first
six months of fiscal year 1998 as compared to the first six
months of fiscal year 1997 are reflected by market as follows: a
$99.4 million (49.8%) increase in aerospace, a $0.8 million
(1.5%) increase in energy and a $3.8 million (20.0%) decrease in
other. The reasons for the strength in the aerospace market were
higher airplane and engine build rates and higher demands for
spares by aerospace engine prime contractors. The cause of the
decrease in other markets is primarily due to the decline in the
titanium golf club head business because of oversupply and cost
disadvantages. Revenues in the first six months of fiscal year
1997 were limited by raw material shortages and production delays
caused by capacity constraints of the Company's suppliers.
Revenues in the first six months of fiscal year 1998 were limited
due to lower than anticipated productivity of recent equipment
and personnel additions and inconsistencies in raw material
deliveries corresponding to customer requirements.
The Company's backlog has increased to $973.4 million at
November 30, 1997 from $895.8 million at May 31, 1997 and from
$809.1 million at November 30, 1996. The increase from May 31,
1997 resulted primarily from bookings of aerospace turbine and
structural parts. The increase from November 30, 1996 resulted
from the following factors:
1. Higher build rates of the Company's engine and airframe
customers,
2. Higher prices for the Company's aerospace products,
particularly as reflected in new long-term agreements
("LTAs") which went into effect on January 1, 1997, and
3. An increase in overdue orders to customer delivery
dates as a result of shipping delays at the Company due
to capacity constraints and raw material unavail-
ability.
The Company does not expect that this rate of increase in backlog
will continue since it expects that customer orders will not
increase at the same rates as in the recent past, that prices
will moderate and that recent capacity additions and enhancements
at the Company and its suppliers will enable the Company to meet
its customer delivery requirements in a more timely fashion.
-16-<PAGE>
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS SIX MONTHS ENDED NOVEMBER 30, 1997 ("first
six months of fiscal year 1998") COMPARED TO SIX MONTHS ENDED
NOVEMBER 30, 1996 ("first six months of fiscal year 1997")
(Continued)
The Company's gross margins were 17.7% in the first six
months of fiscal year 1998 as compared to 12.9% in the first six
months of fiscal year 1997. The improvement in gross margin
resulted from higher production volumes, improved pricing and
continued emphasis on controlling costs. This improvement was
offset by production inefficiency costs related to equipment
downtime in the Company's Forgings operations, recent personnel
additions and the reinstallation and start-up of two major forge
presses. The Company expects that the addition of these presses
will increase the Company's ability to meet its customer
requirements. Gross margin in the first six months of fiscal
year 1997 was negatively affected by provisions for losses on
long-term, fixed price contracts for the production of certain
aerospace structural products, by higher raw material costs which
could not be passed on to customers as a result of the then
existing long-term agreements with customers, and by price and
demand declines within the titanium golf club head business.
Selling, general and administrative expenses increased 25.9%
to $26.6 million during the first six months of fiscal year 1998
from $21.1 million during the first six months of fiscal year
1997. Selling, general and administrative expenses as a
percentage of revenues improved to 7.2% in the first six months
of fiscal year 1998 from 7.7% in the first six months of fiscal
year 1997. The improvement as a percent of revenues was
primarily the result of higher revenues. Selling, general and
administrative expenses included approximately $3.0 million and
$1.1 million of non-cash compensation expense associated with the
Company's performance share program in the first six months of
fiscal year 1998 and the first six months of fiscal year 1997,
respectively.
During the first six months of fiscal year 1998, the Company
recorded net other credits of $4.9 million. Such other credits
include other credits of $1.9 million resulting from the disposal
of a building held for sale and $4.0 million for the recovery of
cash surrender value of certain company-owned life insurance
policies and other charges of $1.0 million to provide for costs
as a result of the shutdown of the 29,000 ton press at the
Company's Houston, Texas forging facility.
-17-<PAGE>
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS SIX MONTHS ENDED NOVEMBER 30, 1997 ("first
six months of fiscal year 1998") COMPARED TO SIX MONTHS ENDED
NOVEMBER 30, 1996 ("first six months of fiscal year 1997")
(Continued)
During the first six months of fiscal year 1997, the Company
recorded other charges of $15.8 million. Such other charges
included $4.6 million to provide for the costs of workforce
reductions at the Company's Grafton, Massachusetts Forging
facility and $3.4 million to write-off and dispose of certain
Forging equipment. Other charges also include $2.3 million to
reduce the carrying value of certain assets of the Company's
titanium castings operations, $2.5 million to recognize the
Company's 25.0% share of the net losses of its Australian Joint
Venture and to reduce the carrying value of such joint venture,
$0.3 million relating to expenditures for an investment in
another joint venture and $2.7 million to reduce the carrying
value of the cash surrender value of certain company-owned life
insurance policies.
Interest expense increased $0.3 million to $5.7 million in
the first six months of fiscal year 1998 compared to $5.4 million
in the first six months of fiscal year 1997.
Miscellaneous, net was an expense of $0.7 million in the
first six months of fiscal year 1998 as compared to income of
$4.5 million in the first six months of fiscal year 1997.
Miscellaneous, net in the first six months of fiscal 1998
included a $0.5 million gain on the sale of fixed assets.
Miscellaneous, net in the first six months of fiscal 1997
included interest income on a refund of prior years' income taxes
amounting to $3.5 million and a $1.7 million gain on the sale of
fixed assets.
The Company recorded a provision for income taxes of $11.9
million in the first six months of fiscal year 1998.
The Company expects that in fiscal year 1998, income tax
provisions will approximate statutory rates subject to
utilization of state net operating losses. The effective tax
rate in the first six months of fiscal 1998 was 36% on income
before income taxes excluding the $4.0 million recovery of the
cash surrender value of certain company-owned life insurance
policies.
In the first six months of fiscal year 1997, the Company
recognized the net benefit of a refund of prior years' income
taxes amounting to $19.7 million. The refund relates to the
carryback of tax net operating losses.
Net income was $25.2 million, or $.67 per share, in the
first six months of fiscal year 1998 and $16.9 million, or $.46
per share in the first six months of fiscal year 1997. The $8.3
million improvement resulted from the items described above.
-18-<PAGE>
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
The decrease in the Company's cash of $25.8 million to $26.2
million at November 30, 1997 from $52.0 million at May 31, 1997
resulted primarily from cash used by operating activities of $6.5
million, capital expenditures of $22.7 million, $2.3 million
payment to Cooper Industries, Inc. ("Cooper") and $4.6 million
repurchase of common stock offset by the issuance of common stock
of $8.7 million in connection with employee compensation and
benefit plans and $1.6 million of proceeds from the sale of fixed
assets. The $2.3 million payment to Cooper was made in
accordance with the Company's $4.6 million promissory note
payable to Cooper under the terms of the Stock Purchase Agreement
with Cooper related to the acquisition of Cameron Forged Products
Company in May 1994. The remaining $2.3 million is payable on
June 30, 1998, subject to certain conditions.
The increase in the Company's working capital of $14.0
million to $180.2 million at November 30, 1997 from $166.2
million at May 31, 1997 resulted primarily from (in millions):
<TABLE>
<CAPTION>
<S> <C>
Net Income $25.2
Decrease in:
Intangible and other assets .7
Long-term benefit liabilities (1.5)
Deferred taxes and other (4.5)
Increase in:
Long-term restructuring, integration
disposal and environmental .2
Property, plant and equipment, net (11.4)
Other changes in stockholders' equity 1.2
Issuance of common stock 4.1
Increase in working capital $14.0
</TABLE>
Earnings before interest, taxes, depreciation, amortization,
other charges (credits) ("EBITDA") increased $20.6 million to
$49.1 million in the first six months of fiscal year 1998 from
$28.5 million in the first six months of fiscal year 1997. The
EBITDA increases reflect higher profitability as discussed above.
EBITDA should not be considered a substitute for net income
as an indicator of operating performance or as an alternative to
cash flow as a measure of liquidity, in each case determined in
accordance with generally accepted accounting principles.
Investors should be aware that EBITDA as shown above may not be
comparable to similarly titled measures presented by other
companies, and comparisons could be misleading unless all
companies and analysts calculate this measure in the same
fashion.
-19-<PAGE>
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES, Continued
As of May 31, 1997, the Company estimated the remaining cash
requirements for the restructuring in 1997 to be $5.5 million.
Of such amount, the Company expects to spend approximately $5.2
million during fiscal year 1998 and $0.3 million thereafter. In
the first six months of fiscal year 1998, spending related to the
1997 restructuring amounted to $0.6 million.
As of May 31, 1997, the Company estimated the remaining cash
requirements for the integration of Cameron and direct costs
associated with the acquisition of Cameron to be $2.1 million, of
which the Company expects to spend approximately $0.7 million
during fiscal year 1998 and $1.4 million thereafter. In the
first six months of fiscal year 1998, spending related to the
integration of Cameron and associated direct costs amounted to
$0.3 million.
The Company expects to spend $1.2 million in fiscal year
1998 and $15.0 million thereafter on non-capitalizable
environmental activities. In the first six months of fiscal year
1998, $0.8 million was expended for non-capitalizable
environmental projects.
The Company from time to time expends cash on capital
expenditures for more cost effective operations, environmental
projects and joint development programs with customers. In the
first six months of fiscal year 1998, capital expenditures
amounted to $22.7 million and are expected to be approximately
$30.0 to $35.0 million in fiscal year 1998.
On December 15, 1997, the Company issued $150.0 million of
Senior Notes due 2007 under an indenture between the Company and
a bank as trustee. The Senior Notes were issued at a price of
99.323% of face value and pay interest semi-annually in arrears
on June 15 and December 15 of each year, commencing June 15,
1998. The Senior Notes are general unsecured obligations of the
Company, are non-callable for a five year period, and are senior
to any future subordinated indebtedness of the Company. The
Company used approximately $92.0 million of the net proceeds from
the sale of the Senior Notes to repurchase $84.7 million (94%) of
its outstanding 10 3/4% Senior Notes due March 2003. The balance
of the net proceeds (approximately $47.0 million) will be used
for additional working capital and other general corporate
purposes.
The Company's revolving receivables-backed credit facility
(the "Receivables Financing Program") provides the Company with
an aggregate maximum borrowing capacity of $65.0 million (subject
to a borrowing base), with a letter of credit sub-limit of $35.0
million. The term of the Receivables Financing Program is five
years with a renewal option. As of November 30, 1997, the total
availability under the Receivables Financing Program was $53.6
million, there were no borrowings and letters of credit amounting
to $6.8 million were outstanding.
-20-<PAGE>
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES, Continued
Wyman-Gordon Limited, the Company's subsidiary located in
Livingston, Scotland, has a credit agreement with a Scottish bank
("the U.K. Credit Agreement") with an effective date of June 27,
1997. The maximum borrowing capacity under the U.K. Credit
Agreement is 2.0 million pounds sterling (approximately $3.2
million) with a separate letter of credit or guarantee limit of
2.0 million pounds sterling. The term of the U.K. Credit
Agreement is one year with a renewal option. There were no
borrowings outstanding at November 30, 1997 and the Company had
issued 0.9 million pounds sterling (approximately $1.5 million)
of letters of credit or guarantees under the U.K. Credit
Agreement.
The primary sources of liquidity available to the Company to
fund operations and other future expenditures include available
cash ($26.2 million at November 30, 1997, which does not include
approximately $47.0 million representing the balance of the
proceeds of the Senior Notes issuance discussed above), borrowing
availability under the Company's Receivables Financing Program,
cash generated by operations and reductions in working capital
requirements through planned inventory reductions and accounts
receivable management. The Company believes that it has adequate
resources to provide for its operations and the funding of
restructuring, integration, capital and environmental
expenditures.
IMPACT OF INFLATION
The Company's earnings may be affected by changes in price
levels and in particular, changes in the price of basic metals.
The Company's contracts generally provide for fixed prices for
finished products with limited protection against cost increases.
The Company would therefore be affected by changes in prices of
the raw materials during the term of any such contract. The
Company attempts to minimize this risk by entering into fixed
price arrangements with raw material suppliers and, where
possible, negotiating price escalators into its customer
contracts to offset a portion of raw material cost increases.
ACCOUNTING AND TAX MATTERS
In June 1997, the Financial Accounting Standards Board
issued Statement No. 130 "Reporting Comprehensive Income" ("SFAS
130")and Statement No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). The
implementation of SFAS 130 will require that the components of
comprehensive income be reported in the financial statements.
The implementation of SFAS 131 will require the disclosure of
segment information utilizing the approach that the Company uses
to manage its internal organization. The Company is currently
-21-<PAGE>
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
ACCOUNTING AND TAX MATTERS, Continued
assessing the impact that the new standards will have on its
financial statements. Implementation of both of these new
standards is required for the year ending May 31, 1999 ("fiscal
year 1999").
In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings Per Share" ("SFAS 128"),
which is required to be adopted for both interim and annual
periods ending after December 15, 1997. In the third quarter of
fiscal year 1998, the Company will be required to change the
method currently used to compute earnings per share and to
restate all prior periods. Under SFAS 128, the dilutive effect
of common stock equivalents will be excluded in calculating basic
earnings per share. All dilutive securities will be considered
in the presentation of diluted earnings per share under SFAS 128.
There is no material impact on earnings per share for the quarter
ended November 30, 1997 and 1996 calculated under SFAS 128.
The Company is in the process of conducting a review of its
computer systems to identify areas that could be affected by the
"Year 2000" issue. An implementation plan will then be developed
to resolve the issues identified. The Year 2000 issue is the
result of computer programs being written using two digits
(rather than four) to define the applicable year. This could
result in computational errors as dates are compared across the
century boundary. The total cost of altering the applicable
program code is being determined as part of the Company's
implementation plan.
OTHER MATTERS
On December 22, 1996, a serious industrial accident occurred
at the Houston, Texas facility of Wyman-Gordon Forgings, Inc.
("WGFI"), a wholly-owned subsidiary of the Company. The accident
occurred while a crew of ten men was performing maintenance on
the accumulator system that supplies hydraulic power for WGFI's
35,000 ton press. The maintenance required that the system be
completely depressurized which the crew believed to be the case.
However, subsequent examination has shown that a valve on one of
the pressure vessels was closed thereby containing pressure in
that vessel. The crew was in the process of removing the bolts
on the vessel when the few remaining bolts could no longer hold
the pressure and the lid was blown off, killing eight crew
members and injuring two others.
OSHA conducted an investigation of the accident. On June
18, 1997, WGFI reached an agreement with OSHA, settling citations
resulting from the accident.
-22-<PAGE>
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
OTHER MATTERS, Continued
The injured workers and the decedents' families have all
retained attorneys who notified the Company that they intend to
assert claims against the Company on behalf of their clients.
WGFI has also received claims from several employees of a
subcontractor claiming to have been injured at the time of the
accident as well as from one current employee. The Company has
cooperated with attorneys for the decedents' families by
providing them information and allowing them and their experts
access to Company facilities.
To date, the Company has settled all claims that could be
brought by two of the decedent's families on terms acceptable to
the Company and its insurance carriers and has agreed in
principle to settle with the family of a third decedent. The
Company thus far has been unable to achieve settlements with the
other claimants, and, on October 24, 1997, a lawsuit was filed in
the District Court of Harris County, Texas, on behalf of three of
the decedents' families against the Company, WGFI and Cooper-
Cameron Corporation, as successor in interest to the manufacturer
of the valve. One of the injured employees has subsequently
filed a motion to be included in that lawsuit.
In general under Texas statutory law, an employee's
exclusive remedy against an employer for an on-the-job injury is
the benefits of the Texas Workers Compensation Act. WGFI, the
employer of the deceased employees, has workers compensation
insurance coverage and the injured employees and beneficiaries of
the deceased employees are receiving workers compensation
payments. Under applicable law, however, statutory beneficiaries
of employees killed in the course and scope of their employment
may recover punitive (but not compensatory) damages in excess of
workers compensation benefits. However, to do so they must prove
that the employer was grossly negligent. The protection of the
workers compensation exclusive remedy provision may not extend to
the Company as parent corporation of WGFI. Therefore, with
regard to the October 24, 1997 lawsuit and any future lawsuits
brought on behalf of those killed or injured in the Houston
accident or their families against the Company, if (i) the court
finds that the Company had a legal duty to WGFI and its
employees, (ii) the evidence supports a finding that the Company
acted negligently in its duty to WGFI and its employees and (iii)
such negligence had a causal connection with the accident, the
plaintiffs might be able to recover compensatory damages against
the Company. If it is shown that the Company's conduct amounted
to gross neglect, and that conduct is found to be a cause of the
accident, the plaintiffs may be able to recover punitive damages
against the Company.
-23-<PAGE>
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
OTHER MATTERS, Continued
It is not possible at this time to determine the extent, if
any, to which WGFI or the Company could be held liable in
connection with the accident. The Company maintains general
liability and employer's liability insurance for itself and its
subsidiaries under various policies with aggregate coverage
limits of approximately $29 million. While WGFI has tendered the
defense of the various claims to the Company's insurance
carriers, there can be no assurance that the full insurance
coverage will be available. Counsel for the Company has been
engaged for several months in settlement discussions with
attorneys representing the decedents' families. At this time,
however, only three of the decedents' families (and none of the
other claimants or potential claimants) have agreed to settle any
claims against the Company and/or WGFI relating to the accident.
If the Company is not successful in settling the remaining claims
on terms acceptable to the Company, the Company anticipates that
more lawsuits relating to the accident will be filed against it
and WGFI. Based on the Company's experience in the settlement
negotiations to date, the Company believes that there is a
substantial risk that the pending and threatened claims will not
be settled for an aggregate amount within its insurance coverage
limits. The Company anticipates that, like the currently pending
lawsuit, any additional lawsuits will include claims for alleged
compensatory as well as punitive damages that in the aggregate
could substantially exceed the Company's available insurance
coverage. The Company intends to vigorously defend all lawsuits
that have been or may be filed relating to the accident.
However, if one or more such lawsuits were to be prosecuted
successfully by the plaintiffs and a judgment were to be obtained
by one or more plaintiffs in such lawsuits and sustained on
appeal, litigation costs, including the cost of pursuing any
appeals, and the cost of paying such a judgment, to the extent
not covered by insurance, could have a material adverse effect on
the Company's financial condition and the results of operations,
particularly if any such judgment includes awards for punitive
damages.
On September 25, 1997, the Company received a subpoena from
the United States Department of Justice informing it that the
United States Department of Defense and other federal agencies
had commenced an investigation with respect to the manufacture
and sale of investment castings at the Company's Tilton, New
Hampshire facility. The focus of the investigation is whether
the Company failed to comply with required inspection procedures
for cast aerospace parts and whether the Company shipped cast
components that did not meet applicable specifications, which
could be a violation of federal requirements. The investigating
agencies have directed the Company to furnish various documents
and information relating to the subject of the investigation.
-24-<PAGE>
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
OTHER MATTERS, Continued
The Company is cooperating fully with the investigation and in
addition has substantially completed its own investigation, which
was supervised by the Company's outside attorneys and conducted
by quality and process auditors from another casting facility of
the Company and by the Company's internal attorneys. Such
investigation has identified certain departures from Company
policies and procedures which have been addressed. The federal
investigation may result in criminal or civil charges being
brought against the Company, which could result in civil damages
and penalties and criminal liability, if the Company were found
to have violated federal laws. Based on the Company's own
investigation to date (which is substantially completed), the
Company does not believe that the federal investigation is likely
to result in a material adverse impact on the Company's financial
condition or results of operations, although no assurance as to
the outcome or impact of that investigation can be given.
-25-<PAGE>
<PAGE> 26
PART II.
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K
(a) Exhibits
The following exhibits are being filed as part of this Form
10-Q:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
27 Financial Data Schedule for the Six Months Ended
November 30, 1997.
</TABLE>
(b) On November 19, 1997, the Company filed a Form 8-K dated
November 14, 1997 with the Commission for the following
purposes: (1) to report that the Company has commenced a
cash tender offer for certain of its debt securities and is
soliciting to amend the related indenture; (2) to report
developments relating to the previously reported industrial
accident at the facility of Wyman-Gordon Forgings, Inc. in
Houston, Texas; and (3) to report the commencement of an
investigation by certain federal agencies involving alleged
irregularities at the Company's Tilton, New Hampshire
facility.
On December 9, 1997, the Company filed a Form 8-K with the
Commission to report that the Company had taken the 29,000
ton press at its Houston, Texas facility out of service for
repairs.
-26-<PAGE>
<PAGE> 27
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.
WYMAN-GORDON COMPANY
Date: 1/9/98 By: /S/ ANDREW C. GENOR
Andrew C. Genor
Vice President,
Chief Financial Officer
and Treasurer
Date: 1/9/98 By: /S/ JEFFREY B. LAVIN
Jeffrey B. Lavin
Corporate Controller
-27-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 26,247
<SECURITIES> 7
<RECEIVABLES> 125,581
<ALLOWANCES> 0
<INVENTORY> 116,667
<CURRENT-ASSETS> 279,904
<PP&E> 447,781
<DEPRECIATION> 282,648
<TOTAL-ASSETS> 467,201
<CURRENT-LIABILITIES> 99,728
<BONDS> 96,154
0
0
<COMMON> 37,053
<OTHER-SE> 157,781
<TOTAL-LIABILITY-AND-EQUITY> 467,201
<SALES> 366,621
<TOTAL-REVENUES> 369,378
<CGS> 304,185
<TOTAL-COSTS> 304,185
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,682
<INCOME-PRETAX> 37,117
<INCOME-TAX> 11,922
<INCOME-CONTINUING> 25,195
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,195
<EPS-PRIMARY> 0.67
<EPS-DILUTED> 0.67
</TABLE>
