<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the thirteen week period ended March 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 1-6348
HOWMET CORPORATION
Incorporated in the State of Delaware I.R.S. Employer Identification
No. 13-2838093
475 Steamboat Road, Greenwich, CT 06836-1960
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 [ ] NO [X]
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
COMMON STOCK, $1.00 PAR VALUE, AS OF MAY 12, 1997 : 10 SHARES
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Howmet Corporation
Consolidated Condensed Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
March 30, December 31,
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 7,801 $ 23,398
Accounts receivable, less allowance of $5,814 and $5,623 78,932 76,870
Inventories 149,889 149,419
Retained receivables 62,805 46,132
Deferred income taxes 19,343 20,957
Other current assets 2,502 2,982
----------- -----------
Total current assets 321,272 319,758
Property, plant and equipment, net 286,416 291,086
Goodwill, net 251,734 253,377
Acquisition intangibles and other assets, net 153,024 159,672
----------- -----------
Total assets $ 1,012,446 $ 1,023,893
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 62,953 $ 76,840
Accrued liabilities 151,621 157,408
Income taxes payable 27,961 18,561
Long-term debt due within one year 47,076 56,106
----------- -----------
Total current liabilities 289,611 308,915
Accumulated postretirement benefit obligation 90,287 88,569
Other liabilities 44,155 37,245
Deferred income taxes 17,339 17,777
Long-term debt 257,921 266,870
----------- -----------
Total liabilities 699,313 719,376
Contingencies (Note D)
Stockholders' equity:
Common stock, $1 par value; 1,000 shares authorized;
10 shares issued and outstanding -- --
Capital surplus 275,000 275,000
Retained earnings 43,413 27,461
Cumulative translation adjustment (5,280) 2,056
----------- -----------
Total stockholders' equity 313,133 304,517
----------- -----------
Total liabilities and stockholders' equity $ 1,012,446 $ 1,023,893
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
2
<PAGE> 3
Howmet Corporation
Consolidated Condensed Income Statements (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Thirteen weeks ended
--------------------------
March 30, March 31,
1997 1996
--------------------------
<S> <C> <C>
Net sales $ 312,561 $ 261,448
Operating costs and expenses:
Cost of sales 220,021 189,978
Selling, general and administrative expense 36,474 29,546
Depreciation and amortization expense 14,422 15,119
Research and development expense 5,857 6,159
--------------------------
276,774 240,802
--------------------------
Earnings from operations 35,787 20,646
Interest income 411 269
Interest expense (7,347) (11,384)
Equity in income (loss) of unconsolidated
affiliates 186 (895)
Losses on sales of receivables (991) (883)
Other, net 188 (202)
--------------------------
Income before income taxes 28,234 7,551
Income taxes 12,282 5,286
--------------------------
Net income $ 15,952 $ 2,265
==========================
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
Howmet Corporation
Consolidated Condensed Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Thirteen weeks ended
----------------------------------------
March 30, 1997 March 31, 1996
---------------- ----------------
<S> <C> <C>
Operating activities
Net income $ 15,952 $ 2,265
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 15,300 15,939
Equity in (income) loss of unconsolidated affiliates (186) 895
Changes in assets and liabilities:
Accounts receivable (23,225) 2,792
Inventory (2,237) (1,308)
Deferred income taxes 979 (2,714)
Accounts payable (12,168) 5,318
Accrued liabilities 7,147 5,637
Income taxes payable 8,946 4,805
Other - net 1,057 (3,533)
---------------- ----------------
Net cash provided by operating activities 11,565 30,096
Investing activities
Payments made for capital expenditures (8,033) (5,167)
---------------- ----------------
Net cash used in investing activities (8,033) (5,167)
Financing activities
Issuance of debt 80,400 67,700
Repayment of debt (98,150) (85,082)
---------------- ----------------
Net cash used in financing activities (17,750) (17,382)
Effect of exchange rate changes on cash (1,379) (43)
---------------- ----------------
(Decrease) increase in cash (15,597) 7,504
Cash and cash equivalents at beginning of period 23,398 9,606
---------------- ----------------
Cash and cash equivalents at end of period $ 7,801 $ 17,110
================ ================
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
A. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. The consolidated condensed balance sheet at December 31,
1996 has been derived from audited financial statements at that date. In the
opinion of management all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation have been included. Operating results for the
thirteen weeks ended March 30, 1997 are not necessarily indicative of the
results to be expected for the year ending December 31, 1997. The financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Form 10-K for the year
ended December 31, 1996.
B. INVENTORIES
Inventories at March 30, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Raw materials and supplies ............ $ 56,225
Work in process and finished goods .... 96,017
---------
FIFO inventory ........................ 152,242
LIFO valuation adjustment ............. (2,353)
---------
$ 149,889
=========
</TABLE>
The Company increased the LIFO valuation adjustment and thereby increased cost
of sales by $0.6 million and $1.2 million in the 1997 and 1996 thirteen week
periods, respectively.
C. OTHER INFORMATION
Selling, general and administrative expense for the 1997 thirteen week period
included $7.9 million of expense recorded in connection with the Company's stock
appreciation rights plan. Partially offsetting this adverse effect on income
before income taxes in 1997 was a $3.4 million benefit from finalization of a
pricing adjustment with a customer. Results for the first thirteen weeks of 1996
did not include amounts for either of the aforementioned items.
In 1996 the effective tax rate was reduced from an estimated 70% for the first
thirteen week period to 53% for the full year. Had the 53% rate been applied to
income before income taxes in the 1996 thirteen week period, net income would
have been $1.3 million higher. The change in the income tax rate in 1996
resulted from actual annual income that was substantially higher than the
estimate of annual income contemplated in the 70% rate. The higher income
reduced the percentage effect of nondeductible costs and expenses.
5
<PAGE> 6
C. OTHER INFORMATION (Continued)
The Company paid interest of $2.8 million and $6.7 million , and paid income
taxes, net of refunds, of $2.0 million and $2.8 million, during the respective
1997 and 1996 thirteen week periods.
D. CONTINGENCIES
The Company has received recent test results indicating levels of
polychlorinated bi-phenyls ("PCBs") at its Dover, New Jersey facility which will
require remediation. These levels have been reported to the New Jersey
Department of Environmental Protection ("NJDEP"), and the Company is preparing a
work plan to define the risk and to test possible clean-up options. The
statement of work must be approved by the NJDEP pursuant to an Administrative
Consent Order entered into between the Company and NJDEP on May 20, 1991
regarding clean-up of the site. Various remedies are possible and could involve
expenditures ranging from $2 million to $22 million or more. The Company has
recorded a $2 million long-term liability as of March 30, 1997 for this matter.
Given the uncertainties, it is possible that the estimated range of this cost
and the amount accrued will change within a one to two year period. The
indemnification discussed below applies to the costs associated with this
matter.
In addition to the above, liabilities arising for clean-up costs associated with
hazardous types of materials in several waste disposal facilities exist. In
particular, the Company has been or may be named a potentially responsible party
under the Comprehensive Environmental Response, Compensation and Liability Act
or similar state laws at twelve on-site and off-site locations. At March 30,
1997, $4.3 million of accrued environmental liabilities are included in the
consolidated balance sheet for such matters.
In connection with the December 13, 1995 acquisition, Pechiney International and
Pechiney, S.A. indemnified the Company for environmental liabilities stemming
from events occurring or conditions existing on or prior to the December 13,
1995 acquisition date, to the extent that such liabilities exceed a cumulative
$6 million. This indemnification applies to all of the aforementioned
environmental matters. Pursuant to this indemnification, at March 30, 1997 the
Company has recorded a receivable from Pechiney International and Pechiney, S.A.
of $2 million. It is highly probable that changes in any of the aforementioned
accrued liabilities will result in an equal change in the amount receivable from
Pechiney International and Pechiney, S.A.
6
<PAGE> 7
D. CONTINGENCIES (Continued)
Estimated environmental costs are not expected to materially impact the
financial position or the results of the Company's operations in future periods.
However, environmental clean-up periods are protracted in length and
environmental costs in future periods are subject to changes in environmental
remediation regulations. Any losses which are not covered by the Pechiney
International and Pechiney, S.A. indemnifications and which are in excess of
amounts currently accrued will be charged to operations in the periods in which
they occur.
The Company, in its ordinary course of business, is involved in other
litigation, administrative proceedings and investigations of various types in
several jurisdictions. The Company believes these are routine in nature and
incidental to its operations, and that the outcome of any proceedings to which
the Company currently is a party will not have a material adverse effect upon
its operations or financial condition.
At March 30, 1997, the Company guaranteed certain indebtedness aggregating $10.9
million of its 50% owned entities.
E. SUBSEQUENT EVENT
On May 6, 1997 the Company entered into an agreement to sell certain assets of
its refurbishment business. The sale is subject to government antitrust review
under the Hart, Scott, Rodino Antitrust Improvements Act. Pursuant to the
agreement, the Company will no longer conduct refurbishment operations, except
for certain of its coating operations. The Company expects net cash proceeds of
approximately $40 million after tax payments and transaction related expenses.
Such proceeds will be used to reduce debt. The sale transaction is expected to
have an immaterial effect on net income. Net sales of the refurbishment business
to be sold were approximately $18 million in the 1997 thirteen week period and
approximately $17 million in the 1996 thirteen week period. Earnings from
operations of this business were immaterial in both periods.
7
<PAGE> 8
Item 2. Management's Discussion and Analysis Of Financial
Condition And Results Of Operations.
Results of Operations
Thirteen Weeks Ended March 30, 1997 Compared to Thirteen Weeks Ended March 31,
1996
Net sales increased by $51.1 million (20%) to $312.6 million for the thirteen
week period ended March 30, 1997 ("the 1997 thirteen week period") from $261.4
million for the thirteen week period ended March 31, 1996 ("the 1996 thirteen
week period"). The increase was primarily due to volume increases resulting from
increased demand for aerospace and industrial gas turbine airfoils.
Gross profit increased by $21.1 million (29%) to $92.5 million for the 1997
thirteen week period from $71.5 million for the 1996 thirteen week period. The
principal reason for the improvement was the effect of volume increases. The
1997 period also includes a $3.4 million benefit from the finalization of a
pricing adjustment with a customer.
Selling, general and administrative expense increased by $6.9 million (23%) to
$36.5 million for the 1997 thirteen week period. The increase was due to $7.9
million of 1997 expense recorded in connection with the Company's Stock
Appreciation Rights plan.
Net interest expense (expense less interest income) decreased $4.2 million for
the 1997 thirteen week period. The reduction was primarily due to lower debt
levels and, to a lesser extent, lower rates resulting from the December 1996
amendment to the Company's senior credit facilities.
Equity in income of unconsolidated affiliates of $0.2 million in the 1997
thirteen week period was a $1.1 million improvement over the $0.9 million equity
loss in the 1996 thirteen week period. The improvement reflects better results
for the Japanese joint venture.
Income taxes increased $7.0 million due to higher pre-tax income. The effective
income tax rate was 70% in the 1996 thirteen week period compared to 43.5% in
the 1997 thirteen week period. The higher 1996 effective rate is due principally
to a lower estimate of annual earnings in 1996 compared to 1997. As a result,
nondeductible costs and expenses represented a higher percentage of estimated
annual earnings in 1996 than in 1997. See Note D to the financial statements for
a discussion of changes in the estimated 1996 effective rate.
As a result of the foregoing, net income was $16.0 million for the 1997 thirteen
week period compared to $2.3 million for the 1996 thirteen week period.
8
<PAGE> 9
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 and finance
capital expenditures. Cash available after satisfaction of these requirements is
currently being used to voluntarily repay debt prior to mandatory due dates.
At March 30, 1997, borrowings under the $75 million revolving credit facility
were $10 million, and $9.6 million of standby letters of credit were
outstanding. In the 1997 thirteen week period, the Company repaid $17.8 million
of debt, including $7.0 million of voluntary repayments of borrowings under a
subsidiary's revolving credit line and a $2 million reduction in outstanding
borrowings under the Company's senior revolving credit facility.
In February 1997, interest rates on the senior term and senior revolving credit
facilities were reduced by 25 basis points based on achieving certain financial
milestones. An additional 25 basis point reduction occurred in May 1997 due to
further financial milestone achievements.
Capital expenditures in the 1997 first period were $8 million, and are
expected to be approximately $55 million for the full year.
A $7.3 million change in the cumulative translation adjustment included in
stockholders' equity resulted in a $5.3 million negative balance. The change is
primarily due to strengthening of the U.S. dollar relative to the French Franc.
See Note E of Notes to Consolidated Condensed Financial Statements for a
discussion of the agreement to sell the Company's refurbishment business. Apart
from the benefits of the approximate $40 million net cash proceeds of the sales
transaction and subsequent pay-down of debt, the impact of the sale
will not have a material effect on liquidity.
Based upon the current level of operations, management believes that cash flow
from operations, together with available borrowings under the revolving credit
facility, will be adequate to meet the Company's anticipated requirements for
working capital, capital expenditures, interest payments and scheduled principal
payments under the senior credit facilities prior to final maturity.
ENVIRONMENTAL MATTERS
See Note D of Notes to Consolidated Condensed Financial Statements, and Exhibit
99.1 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, filed with the Securities and Exchange Commission for
discussion of environmental matters.
* * * * * * * * * * *
9
<PAGE> 10
The statements made herein that are not historical facts may be forward looking
statements. The Company hereby cautions readers that the forward looking
statements are subject to certain risks and uncertainties, including without
limitation those identified in Exhibit 99.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996, filed with the Securities
and Exchange Commission, which could cause actual results to differ materially
from historical results or those anticipated, and urges readers to review these
materials carefully. Factors discussed in Exhibit 99.1 include, among others,
substantial leverage and debt service, the effects of aerospace industry
economic conditions and cyclicality, reduced government sales, concentrated
customer base, competition, concentration of ownership, and environmental
matters.
10
<PAGE> 11
PART II - OTHER INFORMATION
Item 5. Other Events
CAUTIONARY STATEMENT
The Company wishes to inform its investors of important factors that in some
cases have affected, and in the future could affect, the Company's results of
operations and that could cause such future results of operations to differ
materially from those expressed in any forward looking statements made by or on
behalf of the Company. These factors are discussed at length in Exhibit 99.1 of
the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31,
1996, filed with the Securities and Exchange Commission.
Although the Company has attempted to list in that exhibit the important
cautionary factors, the Company wishes to caution investors that other factors
may in the future prove to be important in affecting the Company's results of
operations. The Company undertakes no obligation to publicly update or revise
any forward looking statements, whether as a result of new information, future
events or otherwise.
Item 6. Exhibits and Reports on Form 8-K
(a) -- Exhibits
27.1 Financial Data Schedule
(b) -- Reports on Form 8-K
During the thirteen week period ended March 30, 1997, the
Company filed no Current Reports on Form 8-K.
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: May 13, 1997
HOWMET CORPORATION
By: /s/ John C. Ritter
--------------------------
Vice President Finance &
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE
THIRTEEN WEEK PERIOD ENDED MARCH 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-30-1997
<EXCHANGE-RATE> 1
<CASH> 7,801
<SECURITIES> 0
<RECEIVABLES> 147,551
<ALLOWANCES> 5,814
<INVENTORY> 149,889
<CURRENT-ASSETS> 321,272
<PP&E> 337,245
<DEPRECIATION> 50,829
<TOTAL-ASSETS> 1,012,446
<CURRENT-LIABILITIES> 289,611
<BONDS> 257,921
0
0
<COMMON> 0
<OTHER-SE> 313,133
<TOTAL-LIABILITY-AND-EQUITY> 1,012,446
<SALES> 312,561
<TOTAL-REVENUES> 312,561
<CGS> 220,021
<TOTAL-COSTS> 220,021
<OTHER-EXPENSES> 14,422
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,347
<INCOME-PRETAX> 28,048
<INCOME-TAX> 12,282
<INCOME-CONTINUING> 15,952
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,952
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
