UNITED STATES
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 quarterly period ended March 31, 1996
----------------------------------------------
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 1-6179
THIOKOL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-26787
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2475 Washington Blvd., Ogden, Utah 84401-2398
---------------------------------------------
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code.............(801) 629-2091
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.
Class Outstanding at April 30, 1996
- ----------------------------- -----------------------------
Common Stock, $1.00 par value 18,205,734
<PAGE>
THIOKOL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Consolidated Statements of Operations - Three months ended
and nine months ended March 31, 1996 and 1995 3
Consolidated Balance Sheets - March 31, 1996 and
June 30, 1995 4
Consolidated Statements of Cash Flows - Nine months
ended March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
<PAGE>
<TABLE>
<CAPTION>
Part I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
THIOKOL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
March 31 March 31
---------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ......................................................... $ 228,937 $ 232,642 $ 661,777 $ 689,430
Operating expenses:
Cost of sales ................................................. 192,213 184,464 548,413 553,325
General and administrative .................................... 20,317 18,851 54,694 53,653
Research and development ...................................... 3,159 4,298 9,428 11,239
Restructuring and impairment .................................. 61,398 5,906 61,398
--------- -------- --------- ---------
215,689 269,011 618,441 679,615
Income (loss) from operations ..................................... 13,248 (36,369) 43,336 9,815
Equity income, Howmet ............................................. 1,696 1,696
Interest income ................................................... 464 1,083 30,089 2,621
Interest expense .................................................. (1,562) (2,751) (3,077) (8,188)
--------- -------- ---------- ---------
Income (loss) before income taxes
and extraordinary item ........................................ 13,846 (38,037) 72,044 4,248
Income taxes (benefit) ............................................ 4,317 (2,932) 27,036 13,771
--------- -------- --------- ---------
Income (loss) before extraordinary item ........................... 9,529 (35,105) 45,008 (9,523)
Extraordinary item - loss on early
retirement of debt ............................................ (4,786) (4,786)
--------- --------- --------- ---------
Net income (loss) ................................................. $ 9,529 $ (39,891) $ 45,008 $ (14,309)
========= ========= ========= =========
Net income (loss) per share:
Income (loss) before extraordinary item ....................... $ .52 $ (1 .87) $ 2 .43 $ (.51)
Extraordinary item ............................................ (.25) (.25)
--------- --------- --------- ---------
Net income (loss) per share ....................................... $ .52 $ (2.12) $ 2.43 $ (.76)
========= ========= ========= =========
Average number of common and common
equivalent share outstanding .................................. 18,551 18,795 18,554 18,826
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
THIOKOL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 31 June 30
1996 1995
---------- ----------
ASSETS (Unaudited)
- ------
Current assets
<S> <C> <C>
Cash and cash equivalents ...................................... $ 11,084 $ 13,216
Receivables .................................................... 150,705 268,070
Inventories .................................................... 109,210 134,984
Deferred tax assets ............................................ 8,713
Prepaid expenses ............................................... 4,288 4,191
--------- --------
Total current assets ........................................ 284,000 420,461
Property, plant and equipment, at cost
less allowances for depreciation ............................... 287,608 297,551
Other assets
Equity investment in Howmet .................................... 147,696
Costs in excess of net assets of businesses
acquired, less amortization ................................. 27,965 28,748
Patents and other intangible assets ............................ 17,027 19,004
Other non-current assets ....................................... 35,545 44,921
--------- ---------
$ 799,841 $ 810,685
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Short-term debt ................................................ $ 79,967 $ 62,819
Accounts payable ............................................... 22,080 38,530
Accrued compensation ........................................... 40,712 43,424
Other accrued expenses ......................................... 49,213 52,903
Current portion of deferred income taxes ....................... 5,026
--------- ---------
Total current liabilities ................................... 191,972 202,702
Long-term debt ..................................................... 2,238 2,521
Accrued retiree benefits ........................................... 71,358 72,762
Deferred income taxes .............................................. 23,982 26,763
Accrued interest and other non-current liabilities ................. 73,100 102,206
Stockholders' equity
Common stock (par value $1.00 per share)
Authorized - 200,000 shares
Issued - 20,455 shares including shares in treasury ......... 20,538 20,538
Additional paid-in capital ..................................... 44,237 44,536
Retained earnings .............................................. 434,771 399,084
--------- ---------
499,546 464,158
Less cost of common stock in treasury
2,333 shares, March 31, 1996 and
2,229 shares, June 30, 1995 ................................. (62,355) (60,427)
--------- ----------
Total stockholders' equity ................................ 437,191 403,731
--------- ---------
$ 799,841 $ 810,685
========= =========
</TABLE>
See notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
THIOKOL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
March 31
-------------------------------
1996 1995
------------ -------------
Operating Activities
<S> <C>
Net income $45,008 $ (14,309)
Adjustments to reconcile net income to net cash
provided by operating activities:
Restructuring and impairment 5,906 61,398
Extraordinary item 4,786
Depreciation and amortization 27,255 29,731
Equity income (1,696)
Changes in operating assets and liabilities:
Receivables 110,102 32,640
Inventories and prepaid expenses 23,526 (16,891)
Accounts payable and accrued expenses (24,635) (16,563)
Income taxes (11,916) (18,143)
Other (22,250) (3,956)
-------- -------
Net cash provided by operating activities 151,300 58,693
Investing Activities
Investment in Howmet (146,000)
Acquisitions, net of acquired cash (8,941)
Purchases of property, plant and equipment (21,258) (33,338)
Proceeds from disposal of assets 6,161 385
-------- --------
Net cash used for investing activities (161,097) (41,894)
Financing Activities
Net change in short-term debt 19,391 48,912
Repayment of long-term debt (176) (85,579)
Dividends paid (9,323) (9,499)
Premiums paid on early retirement of debt (4,786)
Purchase of common stock for treasury (4,321) (8,273)
Stock option transactions 2,094 2,297
-------- --------
Net cash provided by (used for) financing activities 7,665 (56,928)
Decrease in cash and cash equivalents (2,132) (40,129)
Cash and cash equivalents at beginning of year 13,216 40,129
-------- --------
Cash and cash equivalents at end of period $11,084 $
======== ========
</TABLE>
See notes to consolidated financial statements
<PAGE>
THIOKOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
Basis of Presentation
- ---------------------
The accompanying interim consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. The balance sheet at June 30, 1995, reflects the Company's
audited consolidated financial statements at that date. In the opinion of
management all adjustments considered necessary for a fair presentation have
been included. Operating results for the nine months ended March 31, 1996,
are not necessarily indicative of the results to be expected for the fiscal
year ending June 30, 1996. The financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report to Stockholders and Annual Report on
Form 10-K for the fiscal year ended June 30, 1995.
Restructuring and Impairment
- ----------------------------
As a result of a comprehensive review of the Company's poor operating
performance in Europe, a pre-tax restructuring charge of $5.9 million was
recognized in the second quarter of 1996 relating to the anticipated shutdown
of the fastening system's German operations. Approximately $2 million of
additional period costs will be incurred over the next 12 months relating to
the transfer of production equipment for continuing product lines to be
manufactured at the Company's plant in France. During the current quarter the
Company notified the 82 affected employees of the German plant shutdown. The
charge includes $3.6 million of employee severance expense, a $1.7 million
write down of long-lived assets, and $.6 million write down of discontinued
inventory.
The severance benefits are included under "accrued compensation" in the
consolidated balance sheet and relate to the 82 employees classified as
follows:
<TABLE>
<CAPTION>
Identified Remaining
Terminations Terminations
December 31, 1995 March 31, 1996
----------------- --------------
<S> <C> <C>
Production staff 57 57
Administration and finance staff 18 18
Sales staff 7 7
-- --
82 82
== ==
</TABLE>
During the 1993-1994 defense industry down turn, pricing pressures required
the Company to review operations and reduce operating costs to remain
competitive. During the third quarter of 1995, the Board determined a
consolidation of the Company's manufacturing facilities and associated write
down of assets was required. The Company recorded a $61.4 million pre- tax
defense systems restructuring and related impairment charge including a $20
million write down for impaired long-lived assets and a $23.6 million write
down of goodwill. Fair value of goodwill and fixed asset write downs was
determined by estimating discounted cash flows from future defense and
non-shuttle vehicle operations. Also included was an estimated restructuring
loss of $10.5 million on the disposition of fixed assets from two
manufacturing facilities, and a $7.3 million cash restructuring charge for
costs related to the facility closures including $2.3 million of employee
severance costs. The restructuring included 360 employee terminations. Fair
value of the Huntsville and Omneco assets was based on estimated cash
proceeds from asset sales net of the costs of disposal. The closure of the
Omneco facility is completed, except for the sale of the land and building.
The closure of the Huntsville facility is expected to be completed in the
second quarter of fiscal year 1997. Obligations totaling $5 million related
to facility closure issues are included in "other non-current liabilities".
<PAGE>
THIOKOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
The severance benefits are included under "accrued compensation" in the
consolidated balance sheet and relate to the 360 employees classified as
follows:
<TABLE>
<CAPTION>
Identified Remaining
Terminations Terminations
March 31, 1995 March 31, 1996
-------------- --------------
<S> <C> <C>
Production staff 267 119
Administration and finance staff 93 51
--- --
360 170
=== ===
</TABLE>
A summary of restructuring reserve activity by program follows:
<TABLE>
<CAPTION>
U.S Germany
Plants Plant
Shutdown Shutdown Total
-------- -------- --------
<S> <C> <C> <C> <C>
Reserve Balance at March 31, 1995 ..... $ 17,780 $ 17,780
Reductions (noncash) .................. (555) (555)
Payments made ......................... (284) (284)
-------- --------
Balance at June 30, 1995 .............. 16,941 16,941
Reductions (noncash) .................. (1,628) (1,628)
Fastening Systems restructuring ....... $ 3,597 3,597
Payments made ......................... (666) (666)
-------- -------- --------
Balance at March 31, 1996 ............. $ 14,647 $ 3,597 $ 18,244
========= ======== ========
</TABLE>
Cash related restructuring charges of $4.9 million are expected to be paid
over the next three quarters. A remaining $5 million of cash expenses are
expected to be paid over future periods. The Company is negotiating with the
U.S. Government (government) for recovery of certain of these costs. The
Company estimates a savings of approximately $2.3 million in amortization and
depreciation and approximately $7 million in overhead reduction for the
current year.
Receivables
The components of receivables are as follows:
<TABLE>
<CAPTION>
March 31 June 30
1996 1995
-------- --------
Receivables under U.S. Government contracts
<S> <C> <C>
and subcontracts .............................. $ 92,742 $128,409
Income tax receivable ........................... 5,731 85,351
Accounts receivable ............................. 48,474 50,517
Other current receivables ....................... 3,758 3,793
-------- --------
$150,705 $268,070
</TABLE>
Receivables under government contracts and subcontracts include unbilled
costs and accrued profits primarily consisting of revenues recognized on
contracts that have not been billed. Such amounts are billed based on
contract terms and delivery schedules.
Cost and incentive-type contracts and subcontracts are subject to government
audit and review. Adjustments, if any, are not anticipated to have a material
effect on the Company's results of operations or financial condition. Cost
management award fees of $ 51.6 million have been recognized on the Space
Shuttle Reusable Solid Rocket Motor (RSRM) contract. Realization of such
fees, although not guaranteed, is reasonably assured based on actual and
anticipated future contract cost performance.
<PAGE>
THIOKOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
All cost management award fees, however, remain at risk until completion of
the contract and final NASA review. The RSRM contract is expected to be
completed not earlier than fiscal year 2000. Unanticipated contract problems
eroding cost management performance could cause a reversal of some or all of
the award fees recognized in prior periods and would be offset against NASA
receivable amounts or be directly reimbursed by the Company. Circumstances
which could erode cost management performance include a failure of a Company
supplied component, performance problems with the RSRM leading to a major
redesign and/or requalification effort, manufacturing problems including
supplier problems which result in RSRM production interruptions or delays,
and major industrial safety incidents.
Inventories
- -----------
Inventories are stated at the lower of cost or market. Space systems and
defense systems inventories represent estimated recoverable costs related to
long-term fixed price contracts and include direct production costs and
allocable indirect costs, net of related progress payments received. In
accordance with industry practice, such costs include amounts not expected to
be realized within one year. Under the provisions of certain contracts, the
government acquires title to, or a security interest in, certain inventories
as a result of progress payments made on contracts and programs. Inventories
for the fastening systems segment are determined by the first in, first out
(FIFO) method.
Inventories are summarized as follows:
<TABLE>
<CAPTION>
March 31 June 30
1996 1995
--------- --------
<S> <C> <C>
Finished goods ............................ $ 49,681 $61,461
Raw materials and work-in-progress ........ 47,487 52,893
Inventoried costs related to U.S.
Government and other long-term
contracts .............................. 22,685 27,768
Progress payments received on
long-term contracts...................... (10,643) (7,138)
-------- --------
$ 109,210 $134,984
========= ========
</TABLE>
Equity Investment in Howmet
- ---------------------------
During the second quarter of 1996, the Company and the Carlyle Group
(Carlyle) formed a jointly owned company, Blade Acquisition Corp. (Blade), to
acquire Howmet Corporation and the Cercast Group of companies, referred to
collectively in the financial statements as Howmet. Carlyle owns 51% and
Thiokol owns 49% of the Blade voting common stock. In addition to the
Company's $98 million equity investment in Blade voting common stock, the
Company also invested $50 million in Blade for 9% paid-in-kind non-voting
preferred stock. The Company accounts for its 49 percent minority investment
in Blade using the equity method.
On December 13, 1995, Blade completed the acquisition of Howmet Corporation,
the world's largest manufacturer of investment casting components for
aircraft and industrial gas turbine engines for $750 million plus an
additional $27.1 million of related fees and expenses. The acquisition
includes the Cercast Group, a major producer of high-quality aluminum alloy
investment castings. The acquisition is
<PAGE>
THIOKOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
accounted for by the purchase method. The acquisition was financed by a $250
million equity investment from Blade, $475.7 million of Howmet nonrecourse
debt, and a $51.4 million receivable facility. The Company has a three year
option to acquire Carlyle's interest in Blade beginning after December 13,
1998 at fair value. Subject to favorable Howmet financial and operating
performance and favorable conditions in the financial markets, the Company
expects to exercise its option. The Company expects the Howmet investment to
provide minimal earnings in fiscal year 1996. Howmet earnings are expected to
improve as debt and related interest expense are reduced from internal cash
flows and anticipated market improvements occur in the commercial aircraft
industry.
The Company's $148 million investment was reduced by a $2 million transaction
fee paid by Howmet to the Company for services provided in connection with
the acquisition. The Company and Carlyle each receive annually from Howmet a
$1 million management fee. As part of the purchase, Blade received
indemnifications from the seller, secured by bank letters of credit, for
liabilities over amounts reserved relating to environmental and certain other
obligations existing at the purchase date.
A summary of Howmet financial information is as follows:
<TABLE>
At March 31, 1996
<S> <C>
Current assets $ 310,407
Noncurrent assets 796,638
----------
Total assets $1,107,045
==========
Current liabilities $ 284,375
Noncurrent liabilities 570,593
----------
Total liabilities 854,968
Preferred stock 51,363
Common stockholder's equity 200,714
----------
Total liabilities and equity $1,107,045
==========
</TABLE>
For the Period of December 14, 1995 to March 31, 1996:
<TABLE>
<S> <C>
Net Sales $312,995
Cost of goods sold $229,867
Gross profit $ 83,128
Operating income $ 22,362
Net income $ 2,056
</TABLE>
A reconciliation of Howmet's net income to the Company's equity income
follows:
<TABLE>
<CAPTION>
December 14, 1995
to
March 31, 1996
----------------------
<S> <C>
Howmet net income $2,056
Less preferred paidd dividend (1,350)
Net income available to common ------
shareholders 706
------
Company's 49% interest in Howmet 346
Add preferred paid-in-kind dividend 1,350
------
Equity income $1,696
======
</TABLE>
<PAGE>
THIOKOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
The unaudited consolidated pro forma results of operations for the nine
months ended March 31, 1996 and 1995, assuming the formation of Blade and
Blade's acquisition of Howmet as of July 1, 1994, are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
March 31
1996 1995
------------------
<S> <C> <C>
Net income (loss) $35,698 $(23,546)
Net income (loss) per share $ 1.92 $ (1.25)
</TABLE>
The unaudited pro forma financial information is not necessarily indicative
of the results that would have occurred had the acquisition of Howmet taken
place for the periods presented nor are future results of operations assured.
Operations by Industry Segment
- ------------------------------
The Company and its subsidiaries design, develop, manufacture, and sell
products classified in three industry segments:
(i) Space systems consisting of solid rocket propulsion for NASA, the
Department of Defense and various commercial customers for space
applications,
(ii) Defense systems consisting of solid rocket propulsion, gas
generator and ordnance products, metal and composite components,
and services to such systems, principally under contracts and
subcontracts with the Department of Defense and aerospace prime
contractors, for use primarily in defense applications, and
(iii) Fastening systems consisting of specialty fasteners and tooling
for a broad range of aerospace and industrial applications
worldwide.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
1996 1995 1996 1995
---------------------- ----------------------
Net Sales
<S> <C> <C> <C> <C>
Space Systems ................................. $ 101,883 $ 114,953 $ 300,651 $ 337,405
Defense Systems ............................... 65,006 57,441 185,853 188,671
Fastening Systems ............................. 62,048 60,248 175,273 163,354
--------- --------- --------- ---------
Consolidated net sales ........................... $ 228,937 $ 232,642 $ 661,777 $ 689,430
========= ========= ========= =========
Net Profit
Space Systems ................................ $ 13,357 $ 15,940 $ 40,447 $ 41,977
Defense Systems .............................. 5,483 (55,983) 18,011 (41,865)
Fastening Systems ............................ (3,971) 5,023 (10,259) 13,753
--------- --------- --------- --------
Operating profit (loss) ................... 14,869 (35,020) 48,199 13,865
Interest and other income .................... 2,160 1,083 31,785 2,621
Interest expense ............................. (1,562) (2,751) (3,077) (8,188)
Unallocated corporate expense ................ (1,621) (1,349) (4,863) (4,050)
--------- --------- --------- --------
Consolidated income (loss) before income
taxes and extraordinary item .................. $ 13,846 $ (38,037) $ 72,044 $ 4,248
========= ========= ========= ========
</TABLE>
<PAGE>
THIOKOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
Environmental Matters
- ---------------------
The Company is involved with two Environmental Protection Agency (EPA)
superfund sites and other various sites involving environmental issues.
(Please see Note L in the Company's consolidated financial statements
included in its Annual Report to Stockholders.) The Company has recorded to
date an estimated total liability of $21 million for all of its environmental
remediation obligations. The Company believes that any liability beyond the
amount recorded above will not have a material adverse effect on the
Company's future results of operations or financial position. The Company has
collected $8.1 million during fiscal year 1996 from insurance carriers. A
$2.9 million receivable remains to be collected from insurance, third parties
and the government. The Company has expended approximately $1 million on
environmental obligations during fiscal year 1996.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
- ---------------------
Income for the Third Quarter
Net income for the third quarter ended March 31, 1996, was $9.5 million or
$.52 per share, a 33 percent decrease, compared to $14.1 million or $.75 per
share before last year's defense systems restructuring and early debt
retirement. Last year's quarterly results including the charges was a $39.9
million loss or $2.12 per share. Sales for the quarter of $228.9 million
decreased 2 percent compared to $232.6 million last year.
Income for the quarter decreased due primarily to a loss from the fastening
systems $5 million write-off of inventory and lower operating margins. The
quarter was also negatively impacted by Castor IV program requalification
costs and facility closure expenses. The prior year's quarterly results were
favorably impacted by the recognition of a $3 million pre-tax reduction in
accrued health care costs from personnel reductions. The quarter was
favorably affected by an increase in the recognition of RSRM cost management
fees, recognition of equity income from the Howmet investment, reduced
interest expense, and a lower effective tax rate.
Income for the Nine Months
Net income for the nine months ended March 31, 1996, was $45 million or $2.43
per share, a 13 percent increase over last year's $39.7 million or $2.11 per
share, before recognition of restructuring and debt retirement charges. Year
to date net- income for 1996 would have been $38.1 million or $2.06 per share
excluding the $21.3 million or $1.15 per share after-tax interest income from
income taxes and research tax credit, and the $14.4 million or $.78 per share
after-tax fastening systems charges recognized in the second and third
quarters. Last year's net loss for the nine month period including the
charges was $14.3 million or $.76 per share. Sales of $661.8 million for the
nine month period decreased 4 percent from $689.4 million last year.
Business Segment Sales and Income for the Third Quarter
Space systems sales for the quarter of $101.9 million decreased 11 percent or
$13.1 million compared to 1995, while related operating income of $13.4
million declined 16 percent or $2.6 million. The sales decrease was due to
completion of the RSRM processing contract during the first quarter and a
decline in Castor and STAR motor deliveries. The decline in income for the
quarter resulted from lower space systems sales and Castor IV requalification
costs of $1.5 million. Prior year's margins benefited from a $1.9 million
reduction in accrued health care costs. Income for the quarter was favorably
impacted by continuing effective cost management performance on the RSRM
program resulting in the recognition of $2.8 million of additional cost
management incentive fee (CMF) recognized over last year. Approximately $1.8
million of the CMF related to fee earned on prior years' costs. The Company
continuously evaluates actual and forecasted RSRM cost performance and
anticipates further CMF increases during fiscal year 1996 assuming continuing
favorable RSRM program performance.
Defense systems sales increased 13 percent to $65 million while operating
income of $5.5 million was unchanged from 1995. The increase in sales
resulted from a significant rise in demilitarization activity and an increase
in flare deliveries and Trident production. Income resulting from higher
sales was offset by $1 million of facility closure costs. Prior year's
margins were increased by a $1.1 million reduction in accrued health care
costs.
<PAGE>
Fastening systems sales for the quarter were $62 million, a 3 percent
increase over 1995. The current quarter operating loss of $4 million,
resulting from a $5 million inventory charge, compares to income of $5
million for the prior year quarter. This loss follows a $7.2 million
inventory charge and a $5.9 million restructuring charge taken in the second
quarter. Operating margins for the quarter excluding the charge would have
been 1.7% compared to 8.3% last year. The sales increase resulting from
improving domestic aerospace sales was partially offset by a decline in
domestic industrial sales, particularly in the transportation markets. The
decrease in income, other than from the inventory write-off, results
primarily from a decline in domestic industrial sales and margins, lower
domestic aerospace margins including continued high production costs at the
Lakewood, California facility and nonrecurring restructuring costs. Efforts
to reduce inventory levels have resulted in higher period costs due to lower
production levels.
Business Segment Sales and Income for the Nine Months
For the nine month period, RSRM contract sales and profit accounted for
approximately 44 percent of consolidated net sales and 64 percent of
consolidated operating income before the $18.1 million before tax fastening
systems charge. The current contract with NASA extends the Space Shuttle
solid rocket motor production through fiscal year 2000. At the present time,
current long-term NASA planning includes a follow-on RSRM contract on which
the Company anticipates it will bid. Last year NASA reduced the shuttle
launch rate from 8 to 7 flights per year. The reduction in future revenues
and profits from the reduced annual launch rate is not expected to be
material. The Company's contract to perform RSRM processing work at the
Kennedy Space Center (KSC) has not been renewed and work was completed during
the first quarter. Projected lost revenues and profits from the KSC
processing contract in 1996 are $21.7 and $1.6 million, respectively. NASA's
continued emphasis on cost containment to control its budget combined with
the Company's emphasis on cost reductions should produce lower RSRM sales for
the remainder of fiscal year. However, contract incentives to reduce costs
over the life of the contract should result in the award of higher incentive
fees in the future based on actual and anticipated contract cost performance.
Cost management award fees of $ 51.6 million have been recognized on the RSRM
contract. Realization of such fees is reasonably assured based on actual and
anticipated favorable contract cost performance. All of the cost management
award fees, however, remain at risk until completion of the contract and
final NASA review. Unanticipated contract problems eroding cost management
performance could cause a reversal of some or all of the fee awards
recognized in prior periods and would be offset against NASA receivable
amounts or be directly reimbursed by the Company. Circumstances which could
erode cost management performance include a failure of a Company supplied
component, performance problems with the RSRM leading to a major redesign
and/or requalification effort, manufacturing problems including supplier
problems which result in RSRM production interruptions or delays, and major
industrial safety incidents. The 1995 restructuring will negatively impact
space systems income in 1996 by approximately $3 million of operating costs
relating to the relocation of equipment from the Huntsville, Alabama plant
and by the requalification of the Castor IV program at the Company's Northern
Utah facility. During the first nine months, $2.6 million of these costs were
incurred.
Due to reductions in government defense spending, the Company expects future
declines in defense systems sales and income during fiscal year 1996 and 1997
as government defense spending reductions continue. Trident sales and profits
will decline from 1995 levels due to reduced production. Standard Missile,
Patriot, Sidewinder and Hellfire motor production will be substantially
completed during 1996. Reduced defense spending has created a highly
competitive pricing environment for tactical programs and has significantly
limited new program opportunities. The propulsion industry continues to be
characterized by overcapacity. As a result of the 1995 restructuring, defense
systems will be negatively impacted in 1996 by approximately $5 million of
relocation and operating costs at the Huntsville,
<PAGE>
Alabama and Omneco Inc. manufacturing facilities. During the first nine months,
$3.6 million of these costs were incurred.
At the GOCO's all U.S. Army directed production was completed in 1995 with
sales and profits declining significantly in 1996. Both GOCO plants are being
maintained under a facilities contract.
The Company has submitted a request for equitable adjustment to the
government for recovery of approximately $38 million of projected post
retirement medical, disability, and workers compensation benefit costs
resulting from the Company's past performance on various contracts to operate
the GOCO's.
Assuming a continuing improvement in the aircraft market, fastening systems
sales are anticipated to increase slightly over 1995. Income, excluding the
year to date $18.1 million inventory and restructuring charges, will
decrease. Sales and income from domestic industrial fasteners (excluding the
acquisition of Automatic Fastener Corporation which achieved record levels in
1995), decreased 16 and 37 percent respectively, for the first nine months
compared to 1995 and are projected to decline further for the year on the
expected continuing slowdown in the transportation markets. Domestic
aerospace fastener revenues and operating margins (excluding the Lakewood,
California facility) should improve over 1995 as commercial aircraft build
rates are anticipated to stabilize after several years of decline. Losses at
the Lakewood facility, purchased in 1994, result from higher than anticipated
production costs due to changing customer specifications and manufacturing
inefficiencies. Losses are anticipated to continue at the Lakewood facility
into the first quarter of fiscal year 1997. International operating margins
have been negatively impacted by the mix of low margin product sales and new
product marketing costs.
Other Activities
For the quarter, the Company recognized income of $1.7 million on its Howmet
investment. Howmet sales of $261 million for the quarter increased by $26
million or 11 percent, over the prior year's quarter. Income from operations
excluding amortization of acquisition related assets and acquisition
financing costs, was $27 million, a 56 percent increase over last year's
quarter.
The effective income tax rate of 31.2% for the quarter compared to 39.5% last
year (excluding the tax impact of the restructuring charges) resulted from
the recognition of credits for prior year research expense and a lower
effective rate on Howmet equity income.
General and administrative expenses for the quarter of $20.3 million
increased 8 percent compared to the prior year. The $1.2 million decrease in
interest expense for the quarter resulted from the reduction in long-term
debt.
During the quarter, the Company announced the fastening systems segment's
receipt of a three-year $16 million order to manufacture proprietary blind
bolt construction fasteners for Japan's Daiwa House Industry Co. Ltd. The
fasteners will be manufactured at the Waco, Texas plant. The ULTRA-TWIST(TM)
blind fastener system was jointly developed by the Company and Daiwa House
over a five-year period.
The Company announced the headquarters of Huck International Inc. (fastening
systems operations) will relocate from Irvine, California to Tucson, Arizona
by July 31, 1996.
On February 19, 1996, the Company announced the signing of an agreement with
Morton International's Automotive Safety Product group (Morton) for the
development of new gas generates and inflator technology. The companies
anticipate co-developing a series of advanced non-azide automobile airbag
inflators.
<PAGE>
Howmet Acquisition
- ------------------
During the second quarter of 1996, the Company and the Carlyle Group
(Carlyle) formed a jointly owned company, Blade Acquisition Corp. (Blade), to
acquire Howmet Corporation and the Cercast Group of companies, referred to
collectively in the financial statements as Howmet. Carlyle owns 51% and
Thiokol owns 49% of the Blade voting common stock. In addition to the
Company's $98 million equity investment in Blade voting common stock, the
Company also invested $50 million in Blade for 9% paid-in-kind non-voting
preferred stock. The Company accounts for its 49 percent minority investment
in Blade using the equity method.
On December 13, 1995, Blade completed the acquisition of Howmet Corporation,
the world's largest manufacturer of investment casting components for
aircraft and industrial gas turbine engines for $750 million plus an
additional $27.1 million of related fees and expenses. The acquisition
includes the Cercast Group, a major producer of high-quality aluminum alloy
investment castings. The acquisition is accounted for by the purchase method.
The acquisition was financed by a $250 million equity investment from Blade,
$475.7 million of Howmet nonrecourse debt, and a $51.4 million receivable
facility. The Company has a three year option to acquire the Carlyle's Blade
equity beginning after December 13, 1998 at fair value. Subject to favorable
Howmet financial and operating performance and favorable conditions in the
financial markets, the Company expects to exercise its option. The Company
expects the Howmet investment to provide minimal earnings in fiscal year
1996. Howmet earnings are expected to improve as debt and related interest
expense are reduced from internal cash flows and expected improvements occur
in the commercial aircraft industry.
The Company's $148 million investment was reduced by a $2 million transaction
fee paid by Howmet to the Company for services provided in connection with
the acquisition. The Company and Carlyle each receive annually from Howmet a
$1 million management fee. As part of the purchase, Blade received
indemnifications from the seller, secured by bank letters of credit, for
liabilities over amounts reserved relating to environmental and certain other
liabilities existing at the purchase date.
Restructuring and Impairment
- ----------------------------
As a result of a comprehensive review of the Company's poor operating
performance in Europe, a pre-tax restructuring charge of $5.9 million was
recognized in the second quarter of 1996 relating to the anticipated shutdown
of the fastening system's German operations. Approximately $2 million of
additional period costs will be incurred over the next 12 months relating to
the transfer of production equipment for continuing product lines to be
manufactured at the Company's plant in France. During the current quarter the
Company notified the 82 affected employees of the German plant shutdown. The
charge includes $3.6 million of employee severance expense, a $1.7 million
write down of long-lived assets, and $.6 million write down of discontinued
inventory.
The severance benefits are included under "accrued compensation" in the
consolidated balance sheet and relate to the 82 employees classified as
follows:
<TABLE>
<CAPTION>
Identified Remaining
Terminations Terminations
December 31, 1995 March 31, 1996
----------------- --------------
<S> <C> <C>
Production staff 57 57
Administration and finance staff 18 18
Sales staff 7 7
-- --
82 82
== ==
</TABLE>
<PAGE>
During the 1993-1994 defense industry down turn, pricing pressures required
the Company to review operations and reduce operating costs to remain
competitive. During the third quarter of 1995, the Board determined a
consolidation of the Company's manufacturing facilities and associated write
down of assets was required to satisfy the requirements of SFAS 121. The
Company recorded a $61.4 million pre- tax defense systems restructuring and
related impairment charge including a $20 million write down for impaired
long-lived assets and a $23.6 million write down of goodwill. Fair value of
goodwill and fixed asset write downs was determined by estimating discounted
cash flows from future defense and non-shuttle vehicle operations. Also
included was an estimated restructuring loss of $10.5 million on the
disposition of fixed assets from two manufacturing facilities, and a $7.3
million cash restructuring charge for costs related to the facility closures
including $2.3 million of employee severance costs. The restructuring
included 360 employee terminations. Fair value of the Huntsville and Omneco
assets was based on estimated cash proceeds from asset sales net of the costs
of disposal. The closure of the Omneco facility is completed, except for the
sale of the land and building. The closure of the Huntsville facility is
expected to be completed in the second quarter of fiscal year 1997.
Obligations totaling $5 million related to facility closure issues are
included in "other non-current liabilities".
The severance benefits are included under "accrued compensation" in the
consolidated balance sheet and relate to the 360 employees classified as
follows:
<TABLE>
<CAPTION>
Identified Remaining
Terminations Terminations
March 31, 1995 March 31, 1996
-------------- --------------
<S> <C> <C>
Production staff 267 119
Administration and finance staff 93 51
--- ---
360 170
=== ===
</TABLE>
A summary of restructuring reserve activity by program follows:
<TABLE>
<CAPTION>
U.S Germany
Plant Plant
Shutdown Shutdown Total
-------- -------- --------
<S> <C> <C> <C> <C>
Reserve Balance at March 31, 1995 ........ $ 17,780 $ 17,780
Reductions (noncash) ..................... (555) (555)
Payments made ............................ (284) (284)
-------- --------
Balance at June 30, 1995 ................. 16,941 16,941
Reductions (noncash) ..................... (1,628) (1,628)
Fastening Systems restructuring .......... $ 3,597 3,597
Payments made ............................ (666) (666)
-------- -------- --------
Balance at March 31, 1996 ................ $ 14,647 $ 3,597 $ 18,244
======== ======== ========
</TABLE>
Cash related restructuring charges of $4.9 million are expected to be paid
over the next three quarters. A remaining $5 million of cash expenses are
expected to be paid over future periods. The Company is negotiating with the
government for recovery of certain of these costs. The Company estimates a
savings of approximately $2.3 million in amortization and depreciation and
approximately $7 million in overhead reduction for the current year.
Liquidity and Capital Resources
- -------------------------------
For the nine months ended March 31,1996, net cash flow from operations was
$151.3 million compared to $58.7 million in 1995. Cash flow increased as the
result of a reduction in receivables ($77.5 million) and a $23.5 million
decrease in inventories and prepaid expenses compared to a $16.9 million
increase in 1995. The majority of the receivable reduction results from the
collection of $79.6 million of income tax refunds. Neither the $27.5 million
of interest income related to income taxes nor the $18.1 million fastening
systems charge affected cash flow.
<PAGE>
Major 1996 investing activities include the $146 million Howmet investment
and $21.3 million investment for purchases of property, plant and equipment,
compared to the $33.0 million investment in 1995. During the second quarter,
the Company completed the $6.5 million purchase of Air Force Plant 78 in
Northern Utah from the government. Capital expenditures, excluding the
purchase of Howmet and Plant 78, decreased significantly in 1996 from 1995.
The majority of the decrease is attributed to capital spending of $15 million
last year at the Yellow Creek nozzle facility compared to $5.0 million
received in capital reimbursements this year relating to prior year's
spending. NASA terminated the construction of the Yellow Creek facility
during the fourth quarter of last year. Fastening systems capital
expenditures also declined in 1996 from the prior year.
Cash flow provided by financing activities of $7.7 million compares to $56.9
million in cash used last year. Last year's cash flow was negatively impacted
by the early retirement of $85.6 million of long-term debt. Cash flow
provided by financing activities in 1996 resulted from an increase in
short-term borrowing of approximately $19.4 million to finance the investment
in Howmet. Year to date, 124,600 shares of common stock have been repurchased
for $4.3 million with approximately 625,000 shares remaining from the
original 1.5 million share authorization to be continued when conditions are
deemed appropriate by the Company.
At March 31, 1996 the Company's current ratio of 1.5 decreased from 2.1 at
June 30, 1995, and at March 31, 1996, working capital of $92 million
decreased $133.1 million since June 30, 1995. The declines in the current
ratio and working capital are primarily the result of cash and short-term
borrowing used to finance the $146 million net investment in Howmet. At March
31, 1996, the Company's debt to equity ratio was 18.8 percent compared to
16.2 percent at June 30, 1995. The Company may incur significant additional
debt if it exercises the three year option to acquire the Carlyle's equity
interest in Howmet. The consolidated debt of the two combined companies would
significantly increase the Company's debt to equity ratio.
The Company has outstanding authorizations for capital expenditures of
approximately $36 million.
Future estimated cash flow from operations, current financial resources, and
available credit facilities are expected to be adequate to fund the Company's
anticipated working capital requirements, capital expenditures, dividend
payments, and stock repurchase program for the remainder of the fiscal year.
The Company has filed a shelf registration statement with the Securities and
Exchange Commission for the issuance long-term financing in amounts, type,
and timing as considered appropriate.
As of March 31, 1996, the Company had available revolving credit and other
committed facilities of $140 million, of which $96 million remained unused.
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
McDonnell Douglas v. Thiokol Corporation
- ----------------------------------------
In July 1992, McDonnell Douglas filed a claim for damages of $17 million for
breach of warranty and tort damages, plus about $19 million in prejudgment
interest based upon the failure in 1984 of two STAR 48 motors (manufactured
to plaintiff's specifications by the Company's Elkton Division) to lift
telecommunication satellites into geosynchronous orbits. Trial on the merits
of the Plantiff's claim before the United States District Court, Central
District of California, was completed during the second fiscal quarter. The
Court ruled for the Company on all counts of the Plaintiff's complaint. The
plaintiff has since filed an appeal with the Ninth Circuit Court of Appeals.
Based on the District Court's findings of fact and conclusions of law, the
Company anticipates, at this time, a favorable decision by the Court of
Appeals. The Company's costs of defending the suit are being reimbursed by
its insurance carrier subject to reservation of rights.
Item 5. OTHER INFORMATION
During the quarter, the board of directors of the Company was increased to
ten members with the appointment of Admiral William O. Studeman, U.S. Navy
retired, and former Deputy Director of Central Intelligence.
Bruce M. Zorich has been named president of Huck International, the Company's
Fastening Systems business segment, effective April 15, 1996.
Pursuant to the "Safe Harbor" provisions of the Private Securities
Legislation Reform Act of 1995, the Company filed a Form 8-K report on May
14, 1996, providing cautionary statements identifying factors that may cause
actual results to differ from those results projected in forward looking
statements made by the Company.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The Company filed a Form 8-KA report on February 8, 1996, as an
amendment to the 8-K filed on December 21, 1995; financial statements
were filed therewith. The 8-KA report was related to the Company's
minority investment in Blade Acquisition Corp. and the acquisition of
Howmet by Blade.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THIOKOL CORPORATION
(Registrant)
Date: May 15, 1996 /s/ Richard L. Corbin
------------- --------------------------------
Richard L. Corbin, Senior
Vice President and Chief
Financial Officer
/s/ Michael R. Ayers
--------------------------------
Michael R. Ayers, Vice President
and Controller
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Thiokol Corporation financial statements incorporated by reference as Exhibit
13 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 11,084
<SECURITIES> 0
<RECEIVABLES> 152,002
<ALLOWANCES> 1,297
<INVENTORY> 109,210
<CURRENT-ASSETS> 284,000
<PP&E> 605,116
<DEPRECIATION> 317,508
<TOTAL-ASSETS> 799,841
<CURRENT-LIABILITIES> 191,972
<BONDS> 2,238
<COMMON> 20,538
0
0
<OTHER-SE> 416,653
<TOTAL-LIABILITY-AND-EQUITY> 799,841
<SALES> 661,777
<TOTAL-REVENUES> 695,347
<CGS> 548,413
<TOTAL-COSTS> 565,483
<OTHER-EXPENSES> 52,958
<LOSS-PROVISION> 406
<INTEREST-EXPENSE> 3,077
<INCOME-PRETAX> 72,044
<INCOME-TAX> 27,036
<INCOME-CONTINUING> 45,008
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,008
<EPS-PRIMARY> 2.43
<EPS-DILUTED> 2.43
</TABLE>
