<PAGE> 1
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 thirteen week period ended June 29, 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 AUGUST 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>
June 29, December 31,
1997 1996
----------- ----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,020 $ 23,398
Accounts receivable, less allowance of $5,531 and $5,623 88,450 76,870
Inventories 151,405 149,419
Retained receivables 47,414 46,132
Deferred income taxes 23,854 20,957
Other current assets 2,506 2,982
----------- ----------
Total current assets 316,649 319,758
Property, plant and equipment, net 286,874 291,086
Goodwill, net 250,132 253,377
Acquisition intangibles and other assets, net 151,033 159,672
----------- ----------
Total assets $ 1,004,688 $1,023,893
=========== ==========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 63,361 $ 76,840
Accrued liabilities 157,782 157,408
Income taxes payable 30,999 18,561
Current portion of long-term debt 50,200 56,106
----------- ----------
Total current liabilities 302,342 308,915
Accumulated postretirement benefit obligation 91,370 88,569
Other liabilities 50,498 37,245
Deferred income taxes 16,068 17,777
Long-term debt 209,057 266,870
----------- ----------
Total liabilities 669,335 719,376
Contingencies (Note E)
Stockholders' equity:
Common stock, $1 par value; 1,000 shares authorized;
10 shares issued and outstanding -- --
Capital surplus 275,000 275,000
Retained earnings 66,462 27,461
Cumulative translation adjustment (6,109) 2,056
----------- ----------
Total stockholders' equity 335,353 304,517
----------- ----------
Total liabilities and stockholders' equity $ 1,004,688 $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 Twenty-Six Weeks Ended
-------------------------- --------------------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 330,424 $ 283,366 $ 642,985 $ 544,814
Operating costs and expenses:
Cost of sales 226,821 208,772 446,842 398,750
Selling, general and administrative expense 36,319 27,455 72,793 57,001
Depreciation and amortization expense 14,850 15,161 29,272 30,280
Research and development expense 5,217 6,007 11,074 12,166
--------- --------- --------- ---------
283,207 257,395 559,981 498,197
--------- --------- --------- ---------
Earnings from operations 47,217 25,971 83,004 46,617
Interest income 355 692 749 961
Interest expense (8,134) (10,880) (15,464) (22,265)
Equity in income (loss) of unconsolidated affiliates 414 (1,183) 600 (2,078)
Losses on sales of receivables (966) (1,529) (1,957) (2,412)
Other, net (223) (122) (35) (323)
--------- --------- --------- ---------
Income before income taxes 38,663 12,949 66,897 20,500
Income taxes 15,614 7,774 27,896 13,060
--------- --------- --------- ---------
Net income $ 23,049 $ 5,175 $ 39,001 $ 7,440
========= ========= ========= =========
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
HOWMET CORPORATION
Consolidated Condensed Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
----------------------
June 29, 1997 June 30, 1996
--------- ---------
<S> <C> <C>
Operating activities
Net income $ 39,001 $ 7,440
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 32,313 31,713
Equity in (income) loss of unconsolidated affiliates (600) 2,078
Changes in assets and liabilities:
Accounts receivable (18,031) 4,595
Inventory (3,903) 4,980
Deferred income taxes (5,729) (1,739)
Accounts payable (11,669) 6,541
Accrued liabilities 20,891 15,554
Income taxes payable 12,497 3,081
Other, net (262) (1,819)
--------- ---------
Net cash provided by operating activities 64,508 72,424
Investing activities
Payments made for capital expenditures (18,793) (10,876)
Investment in joint venture (1,450) --
Settlement of December 13,1995 acquisition -- 3,634
--------- ---------
Net cash used in investing activities (20,243) (7,242)
Financing activities
Borrowings 89,400 95,500
Repayment of debt (152,600) (141,069)
--------- ---------
Net cash used in financing activities (63,200) (45,569)
Effect of exchange rate changes on cash (1,443) 101
--------- ---------
(Decrease) increase in cash (20,378) 19,714
Cash and cash equivalents at beginning of period 23,398 9,606
--------- ---------
Cash and cash equivalents at end of period $ 3,020 $ 29,320
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
HOWMET CORPORATION
Notes to Consolidated Condensed Financial Statements
(Unaudited)
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
twenty-six weeks ended June 29, 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 June 29, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Raw materials and supplies................... $ 62,297
Work in process and finished goods........... 93,584
-----------
FIFO inventory........................ 155,881
LIFO valuation adjustment.................... (4,476)
-----------
$ 151,405
===========
</TABLE>
The Company increased the LIFO valuation adjustment and thereby increased cost
of sales by $2.7 million and $1.3 million in the 1997 and 1996 twenty-six week
periods, respectively.
C. PENDING SALE OF REFURBISHMENT BUSINESS
On May 6, 1997 the Company entered into an agreement to sell certain assets of
its refurbishment business. The sale is subject to a second request by the
government antitrust authorities for further documents and information 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 and fund capital expenditures. The sale transaction
is expected to have an immaterial effect on net income. Net sales of the
refurbishment business to be sold were approximately $20 million and $38 million
in the 1997 thirteen and twenty-six week periods, and approximately $18 million
and $35 million in the 1996 thirteen and twenty-six week periods. Earnings from
operations of this business were immaterial in both periods.
5
<PAGE> 6
HOWMET CORPORATION
Notes to Consolidated Condensed Financial Statements
(Unaudited)
D. OTHER INFORMATION
Selling, general and administrative expense for the thirteen and twenty-six
weeks ended June 29, 1997 included $8 million and $15.9 million of pre-tax
expense, respectively, recorded in connection with the Company's Stock
Appreciation Rights ("SARs") plan. The 1996 thirteen week and twenty-six weeks
ended June 30, 1996 include $0.9 million of expense related to the SARs plan. In
the 1997 thirteen and twenty-six weeks ended June 29, 1997, the Company realized
a $6.3 million and a $9.7 million pre-tax benefit, respectively, from
finalization of a pricing adjustment with a customer. Results for the thirteen
and twenty-six week periods of 1996 did not include amounts for the
aforementioned item.
In 1996 the effective tax rate was reduced from an estimated 64% for the first
twenty-six week period to 53% for the full year. Had the 53% rate been applied
to income before income taxes in the 1996 twenty-six week period, net income
would have been $2.2 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 64% rate. The higher income
reduced the percentage effect of nondeductible costs and expenses.
The Company paid interest of $12.1 million and $18.4 million, and paid income
taxes, net of refunds, of $23.3 million and $11.4 million, during the
respective 1997 and 1996 twenty-six week periods.
E. 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 June 29, 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 fourteen on-site and off-site locations. At June 29,
1997, $4.6 million of accrued environmental liabilities are included in the
consolidated condensed 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. 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. pursuant to this
indemnification.
6
<PAGE> 7
HOWMET CORPORATION
Notes to Consolidated Condensed Financial Statements
(Unaudited)
E. 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 June 29, 1997, the Company guaranteed certain indebtedness aggregating $10.7
million of its 50% owned entities.
7
<PAGE> 8
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
RESULTS OF OPERATIONS
Thirteen Weeks Ended June 29, 1997 Compared to Thirteen Weeks Ended June 30,
1996
Net sales increased by $47.0 million (17%) to $330.4 million for the thirteen
week period ended June 29, 1997 ("the 1997 thirteen week period") from $283.4
million for the thirteen week period ended June 30, 1996 ("the 1996 thirteen
week period"). The increase was primarily due to volume increases resulting from
increased demand in the commercial aerospace market and continued strength in
the industrial gas turbine airfoils market. 1997 sales reflect continued pricing
pressures, offset by $6.3 million of additional revenue from the finalization of
a pricing adjustment with a customer.
Gross profit increased by $29.0 million (39%) to $103.6 million for the 1997
thirteen week period from $74.6 million for the 1996 thirteen week period. The
principal reason for the improvement was the effect of volume increases.
Continued pricing pressures, the aforementioned $6.3 million of additional
revenue with no associated costs, fixed cost containment, variable cost
reductions and other operational improvements were also significant factors in
the 1997 versus 1996 comparison.
Selling, general and administrative expense increased by $8.9 million (32%) to
$36.3 million for the 1997 thirteen week period. The increase was primarily due
to $7.2 million of higher 1997 expense recorded in connection with the Company's
Stock Appreciation Rights plan.
Net interest expense decreased $2.4 million for the 1997 thirteen week period.
Interest expense was reduced by $3.7 million due to lower debt levels and, to a
lesser extent, lower rates resulting from achievements of financial milestones.
Partially offsetting this reduction is a $1.3 million accelerated write-off of
debt issuance cost associated with debt that was repaid ahead of schedule.
Equity in income of unconsolidated affiliates of $0.4 million in the 1997
thirteen week period was a $1.6 million improvement over the $1.2 million equity
loss in the 1996 thirteen week period. The improvement reflects better results
for the Japanese joint venture.
Income taxes increased $7.8 million due to higher pre-tax income. The effective
income tax rate was 40.4% in the 1997 thirteen week period compared to 60% in
the 1996 thirteen week period. The lower 1997 effective rate is due principally
to a higher estimate of annual earnings in 1997 compared to 1996. As a result,
nondeductible costs and expenses represented a lower percentage of estimated
annual earnings in 1997 than in 1996. See Note D of Notes to Consolidated
Condensed Financial Statements for a discussion of changes in the estimated
1996 effective rate.
As a result of the foregoing, net income was $23.0 million for the 1997 thirteen
week period compared to $5.2 million for the 1996 thirteen week period.
Twenty-Six Weeks Ended June 29, 1997 Compared to Twenty-Six Weeks Ended June 30,
1996
Net sales increased by $98.2 million (18%) to $643.0 million for the twenty-six
week period ended June 29, 1997 ("the 1997 twenty-six week period") from $544.8
million for the twenty-six week period ended June 30, 1996 ("the 1996 twenty-six
week period"). The increase was primarily due to volume increases resulting from
increased demand for aerospace and continued strength in the industrial gas
turbine airfoils market. 1997 sales reflect continued pricing pressures, offset
by $9.7 million of additional revenue from the finalization of a pricing
adjustment with a customer.
8
<PAGE> 9
Gross profit increased by $50.1 million (34%) to $196.1 million for the 1997
twenty-six week period from $146.0 million for the 1996 twenty-six week period.
The principal reason for the improvement was the effect of volume increases.
Continued pricing pressures, the aforementioned $9.7 million of additional
revenue with no associated cost, fixed cost containment, variable cost
reductions and other operational improvements were also significant factors in
the 1997 versus 1996 comparison.
Selling, general and administrative expense increased by $15.8 million (28%) to
$72.8 million for the 1997 twenty-six week period. The increase was primarily
due to $15 million of higher 1997 expense recorded in connection with the
Company's Stock Appreciation Rights plan.
Net interest expense decreased $6.6 million for the 1997 twenty-six week period.
Interest expense was reduced by $7.9 million due to lower debt levels and, to a
lesser extent, lower rates resulting from achievements of financial milestones.
Partially offsetting this reduction is a $1.3 million accelerated write-off of
debt issuance cost associated with debt that was repaid ahead of schedule.
Equity in income of unconsolidated affiliates of $0.6 million in the 1997
twenty-six week period was a $2.7 million improvement over the $2.1 million
equity loss in the 1996 twenty-six week period. The improvement reflects better
results for the Japanese joint venture.
Income taxes increased $14.8 million due to higher pre-tax income. The effective
income tax rate was 41.7% in the 1997 twenty-six week period compared to 63.7%
in the 1996 twenty-six week period. The lower 1997 effective rate is due
principally to a higher estimate of annual earnings in 1997 compared to 1996. As
a result, nondeductible costs and expenses represented a lower percentage of
estimated annual earnings in 1997 than in 1996. See Note D of Notes to
Consolidated Condensed Financial Statements for a discussion of changes in the
estimated 1996 effective rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash flow from operations and
borrowings under its revolving credit facility. The Company's principal
requirements for cash are to provide working capital, service debt 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 June 29, 1997, there were $9.6 million of standby letters of credit
outstanding and no outstanding borrowings under the $75 million revolving credit
facility. In the 1997 twenty-six week period, the Company reduced its debt
outstanding by $63.2 million, including (i) repayment of $8.7 million of
borrowings under a subsidiary's revolving credit line, (ii) repayment of $12
million of the Company's revolving credit facility borrowings, and (iii) $17.5
million of mandatory scheduled repayments and $25.0 million of voluntary
repayments of senior term facility borrowings.
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 twenty-six week period were $18.8 million, and
are expected to be approximately $60 million for the full year.
An $8.2 million change in the cumulative translation adjustment included in
stockholders' equity resulted in a $6.1 million negative balance. The change is
primarily due to strengthening of the U.S. dollar relative to the French Franc.
9
<PAGE> 10
See Note C 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 any 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 facility.
ENVIRONMENTAL MATTERS
See Note E 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.
* * * * * * * * * * *
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 June 29, 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: August 12, 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 JUNE 29, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-29-1997
<EXCHANGE-RATE> 1
<CASH> 3,020
<SECURITIES> 0
<RECEIVABLES> 141,395
<ALLOWANCES> 5,531
<INVENTORY> 151,405
<CURRENT-ASSETS> 316,649
<PP&E> 347,987
<DEPRECIATION> 61,113
<TOTAL-ASSETS> 1,004,688
<CURRENT-LIABILITIES> 302,342
<BONDS> 209,057
0
0
<COMMON> 0
<OTHER-SE> 335,353
<TOTAL-LIABILITY-AND-EQUITY> 1,004,688
<SALES> 642,985
<TOTAL-REVENUES> 642,985
<CGS> 446,842
<TOTAL-COSTS> 446,842
<OTHER-EXPENSES> 29,272
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,464
<INCOME-PRETAX> 66,297
<INCOME-TAX> 27,896
<INCOME-CONTINUING> 39,001
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,001
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
