UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1998
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
CORDANT TECHNOLOGIES INC.
Incorporated in the State of Delaware IRS Employer Identification
No. 36-2678716
15 West S. Temple Suite 1600, Salt Lake City, Utah 84101-1532
Telephone Number: (801) 933-4000
The report on this Form 10-Q covers the transition from the former fiscal
year-ended June 30, 1998 to the new fiscal year ended December 31, 1998
effective the quarter ended September 30, 1998.
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.
Common Stock, $1.00 par value, outstanding at September 30, 1998:
36,501,498
1
<PAGE>
CORDANT TECHNOLOGIES INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 1998
INDEX
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Income -- Three months
ended and Nine months ended September 30, 1998 and 1997 3
Consolidated Balance Sheets --
September 30, 1998 and December 31, 1997 4-5
Consolidated Statements of Cash Flows -- Nine
months ended September 30, 1998 and 1997 6
Consolidated Statements of Common Stockholders' Equity --
Three months ended and Nine months ended
September 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8-16
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-32
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 32
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 32
ITEM 5. Other Information 33-36
ITEM 6. Exhibits and Reports on Form 8-K 37
SIGNATURES 37
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
CORDANT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $595.0 $237.7 $1,786.4 $719.9
Operating expenses:
Cost of sales 451.4 190.5 1,359.5 588.8
Selling, general and administrative 46.8 19.0 160.1 54.9
Research and development 6.0 2.4 22.5 9.4
- --------------------------------------------------------------------------------------------------
Total operating expenses 504.2 211.9 1,542.1 653.1
Income from operations 90.8 25.8 244.3 66.8
Equity income of affiliates .1 11.0 .4 31.0
Interest income 4.3 1.7 10.9 5.1
Interest expense (8.2) (.3) (21.0) (.8)
Other, net (1.6) (.2) (3.3) (1.0)
- --------------------------------------------------------------------------------------------------
Income before income taxes and
minority interest 85.4 38.0 231.3 101.1
Income taxes 32.9 9.4 86.3 28.0
- --------------------------------------------------------------------------------------------------
Income before minority interest 52.5 28.6 145.0 73.1
Minority interest (14.0) -- (32.6) --
- --------------------------------------------------------------------------------------------------
Net income $ 38.5 $ 28.6 $ 112.4 $ 73.1
==================================================================================================
Net Income per share:
Basic $ 1.05 $ .78 $ 3.08 $ 2.00
Diluted $ 1.03 $ .76 $ 2.99 $ 1.95
==================================================================================================
Dividends per share $ .10 $ .085 $ .30 $ .285
==================================================================================================
<FN>
In 1998, Cordant Technologies Inc. consolidated the financial statements of its 62 percent
ownership in Howmet International Inc. Prior to December 1997, Cordant Technolgies Inc.'s then 49
percent ownership interest in Howmet International Inc. was accounted for under the equity method.
See notes to consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CORDANT TECHNOLOGIES INC
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS)
September 30 December 31
1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 29.0 $ 45.6
Receivables 291.1 235.7
Inventories 252.3 240.2
Deferred income taxes and prepaid expenses 56.7 50.5
Restricted trust (a) 726.9 --
- --------------------------------------------------------------------------------------------
Total current assets 1,356.0 572.0
Property, plant and equipment, at cost
less allowances for depreciation 655.7 550.4
Other assets
Restricted trust (a) -- 716.4
Costs in excess of net assets of businesses
acquired, net 565.6 400.3
Patents and other intangible assets, net 123.3 131.6
Other noncurrent assets 111.5 102.7
- --------------------------------------------------------------------------------------------
Total other assets 800.4 1,351.0
- --------------------------------------------------------------------------------------------
Total assets $2,812.1 $2,473.4
============================================================================================
<FN>
(a) The Restricted Trust holds a note receivable from Pechiney S.A. and related letters of
credit that secure Pechiney S.A.'s agreement to repay the Pechiney Notes due January 2,
1999. Management believes that it is extremely remote that the Company will use any
assets other than those in the Restricted Trust to satisfy any payments related to the
Pechiney Notes (See footnote entitled "Restricted Trust and Related Pechiney Notes
Payable.")
See notes to consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
CORDANT TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS)
September 30 December 31
1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities
Short-term debt $ 72.3 $ 8.2
Accounts payable 115.2 121.8
Accrued compensation 82.2 79.5
Other accrued expenses 215.1 174.5
Pechiney notes (a) 726.9 --
- ----------------------------------------------------------------------------------------------
Total current liabilities 1,211.7 384.0
Noncurrent liabilities
Accrued retiree benefits 167.6 163.9
Deferred income taxes 47.4 44.8
Accrued interest and other noncurrent liabilities 190.4 186.9
Long-term debt 415.0 325.9
Pechiney notes (a) -- 716.4
- ----------------------------------------------------------------------------------------------
Total noncurrent liabilities 820.4 1,437.9
Minority interest 134.5 101.0
Stockholders' equity
Common stock (par value $1.00 per share)
Authorized - 200 shares
Issued - 41.1 shares at September 30, and 20.5 41.1 20.5
shares at December 31, (includes treasury shares)
Additional paid-in capital 47.4 46.0
Retained earnings 632.8 552.0
Accumulated other comprehensive income (1.7) (3.5)
- ----------------------------------------------------------------------------------------------
719.6 615.0
Less common stock in treasury, at cost
4.6 shares, September 30, 1998 and
2.2 shares, December 31, 1997 (74.1) (64.5)
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 645.5 550.5
- ----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,812.1 $ 2,473.4
==============================================================================================
<FN>
(a) The Restricted Trust holds a note receivable from Pechiney S.A. and related letters of
credit that secure Pechiney S.A.'s agreement to repay the Pechiney Notes due January 2,
1999. Management believes that it is extremely remote that the Company will use any assets
other than those in the Restricted Trust to satisfy any payments related to the Pechiney
Notes (See footnote entitled "Restricted Trust and Related Pechiney Notes Payable.")
See notes to consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
CORDANT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
Nine Months Ended
September 30
--------------------------
1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 112.4 $ 73.1
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest 32.6 --
Depreciation 52.6 22.9
Amortization 22.6 8.0
Equity income (.4) (31.0)
Changes in operating assets and liabilities:
Receivables (25.0) (31.0)
Inventories 12.9 6.6
Accounts payable and accrued expenses (23.3) 2.5
Income taxes 30.8 (1.0)
Other (8.6) (8.1)
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 206.6 42.0
Investing Activities
Acquisitions (277.0) -
Purchases of property, plant and equipment (77.9) (16.8)
Proceeds from disposal of assets 4.7 1.7
- -----------------------------------------------------------------------------------------------
Net cash used for investing activities (350.2) (15.1)
Financing Activities
Net change in short-term debt 62.9 (6.8)
Issuance of long-term debt 336.6 8.0
Repayment of long-term debt (254.2) (.1)
Dividends paid (11.0) (10.5)
Purchase of common stock for treasury (12.9) (7.9)
Stock option transactions 4.7 5.9
- -----------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 126.1 (11.4)
Foreign currency rate changes .9 -
- -----------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (16.6) 15.5
Cash and cash equivalents at beginning of year 45.6 32.7
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 29.0 $ 48.2
===============================================================================================
<FN>
In 1998, Cordant Technologies Inc. consolidated the financial statements of its 62 percent
ownership interest in Howmet International Inc. Prior to December 1997, Cordant Technologies
Inc.'s then 49 percent ownership interest in Howmet International Inc. was accounted for under
the equity method.
See notes to consolidated financial statements.
</FN>
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
CORDANT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(IN MILLIONS)
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Comprehensive Stockholders'
Stock Capital Earnings Stock Income Equity
- --------------------------------------------------------------------------------------------------------------------------
Three months ended September 30
- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 $20.5 $44.7 $514.3 $(58.4) $521.1
Comprehensive income
Net income 28.6 28.6
-----------
Total comprehensive income 28.6
===========
Dividends paid (3.7) (3.7)
Treasury stock purchases (.2 shares) (7.9) (7.9)
Stock options exercised and related
income tax benefits (.1 shares) 1.3 1.6 2.9
- --------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 $20.5 $46.0 $539.2 $(64.7) $541.0
==========================================================================================================================
Balance, June 30, 1998 $41.1 $46.8 $598.0 $(72.5) $(3.9) $609.5
Comprehensive income
Net income 38.5 38.5
Other comprehensive income
Cumulative translation adjustment 2.2 2.2
-----------
Total comprehensive income 40.7
===========
Dividends paid (3.7) (3.7)
Treasury stock purchases (.1 shares) (2.1) (2.1)
Stock options exercised and related
income tax benefits (.1 shares) .6 .5 1.1
- --------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 $41.1 $47.4 $632.8 $(74.1) $(1.7) $645.5
==========================================================================================================================
Nine months ended September 30
- ------------------------------
Balance, December 31, 1996 $20.5 $44.3 $476.6 $(61.0) $480.4
Comprehensive income
Net income 73.1 73.1
-----------
Total comprehensive income 73.1
===========
Dividends paid (10.5) (10.5)
Treasury stock purchases (.2 shares) (7.9) (7.9)
Stock options exercised and related
income tax benefits (.2 shares) 1.7 4.2 5.9
- --------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 $20.5 $46.0 $539.2 $(64.7) $541.0
==========================================================================================================================
Balance, December 31, 1997 $20.5 $46.0 $552.0 $(64.5) $(3.5) $550.5
Comprehensive income
Net income 112.4 112.4
Other comprehensive income
Cumulative translation adjustment 1.8 1.8
-----------
Total comprehensive income 114.2
===========
Dividends paid (11.0) (11.0)
Stock Split (2.2 treasury shares and
20.6 common shares) 20.6 (20.6)
Treasury stock purchases (.3 shares) (12.9) (12.9)
Stock options exercised and related
income tax benefits (.1 shares) 1.4 3.3 4.7
- --------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 $41.1 $47.4 $632.8 $(74.1) $(1.7) $645.5
==========================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Basis of Presentation
- ---------------------
On May 5, 1998, Thiokol Corporation changed its corporate name to Cordant
Technologies Inc. (the Company). Two of the Company's three business
segments have retained their names (Huck International, Inc., and Howmet
International Inc.), the Propulsion Group is now called Thiokol Propulsion
and operates as a division of the Company, and all are referred to as a
part of Cordant Technologies.
The Company's Board of Directors amended the bylaws of the Company and
changed the fiscal year-end from June 30 to a calendar year. This change is
being made effective with this report which will cover the three-month and
nine-month periods ending September 30. All historical information in this
report has been prepared to conform to a calendar year presentation. The
change by the Company was made to coordinate Cordant and Howmet
International Inc. (Howmet) reporting periods and to reduce the confusion
that accompanies a fiscal year versus a calendar year. Howmet reports
separately on a calendar year basis.
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 December 31, 1997
reflects the Company's unaudited consolidated balance sheet at that date.
The Company increased its ownership in Howmet International Inc. (Howmet)
from 49 percent to 62 percent on December 2, 1997. Accordingly, Howmet's
earnings, cash flows, and balance sheet at September 30, 1998, have been
consolidated with the Company's. As a result, operating results for the
current year include Howmet earnings reported on a consolidated basis,
while the prior year results include Howmet earnings on an equity basis
through November 1997. Minority interest in income and equity is also
reported in the current year for the 38 percent of Howmet the Company does
not own. Due to the consolidation of Howmet in the Company's financial
statements, comparison of financial information for the respective periods
is difficult and may not be relevant. In the opinion of management, all
adjustments considered necessary for a fair presentation have been
included. Operating results for the nine-months ended September 30, 1998,
are not necessarily indicative of the results to be expected for the year
ending December 31, 1998. The financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Notice of Annual Meeting and Proxy Statement,
Exhibit B, incorporated by reference in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1998.
Certain reclassifications were made to the 1997 financial statements to
conform with the 1998 presentation.
8
<PAGE>
Receivables
- -----------
The components of receivables are as follows:
<TABLE>
<CAPTION>
September 30 December 31
(in millions) 1998 1997
- ------------------------------------------------------------------------------------------
Trade Receivables:
<S> <C> <C>
Trade accounts receivable $169.5 $147.2
Retained receivables 41.7 20.2
Allowance for doubtful accounts (7.5) (6.3)
- ------------------------------------------------------------------------------------------
Total Trade Receivables 203.7 161.1
Receivables under U.S. Government contracts
and subcontracts 87.4 74.6
- ------------------------------------------------------------------------------------------
$291.1 $235.7
==========================================================================================
</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. It is anticipated that adjustments, if any,
will not have a material effect on the Company's results of operations or
financial condition.
Cost management award fees totaling $115.8 million, at September 30, 1998,
have been recognized on the current Space Shuttle Reusable Solid Rocket
Motor (RSRM) contract. Realization of such fees is reasonably assured based
on actual and anticipated contract cost performance. However, all cost
management award fees remain at risk until contract completion and final
NASA review. The current RSRM contract is expected to be completed during
2001. Unanticipated program problems which erode cost management
performance could cause some or all of the recognized cost management award
fees to be reversed and would be offset against receivable amounts from the
government or may be directly reimbursed. Circumstances which could erode
cost management performance, and materially impact Company profitability
and cash flow, include 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 safety incidents.
Trade accounts receivable primarily relate to sales to well established
corporations and bad debt expense has historically been minor.
Howmet has an agreement to sell, on a revolving basis, an undivided
interest in a defined pool of accounts receivable. The $41.7 million
retained receivables represents the receivables set aside to replace sold
receivables in the event they are not fully collected.
9
<PAGE>
Inventories
- -----------
Inventories are stated at the lower of cost or market. Inventories for the
fastening systems segment are determined by the first-in, first-out (FIFO)
method. Inventories for the investment castings segment are determined by
both the FIFO and last-in, first-out (LIFO) method.
Propulsion Systems inventories include estimated recoverable costs related
to long-term fixed price contracts including direct production costs and
allocable indirect costs, less related progress payments received. In
accordance with industry practice, such costs include amounts that are not
expected to be realized within one year. The government may acquire title
to, or a security interest in, certain inventories as a result of progress
payments made on contracts and programs.
The components of inventories are as follows:
<TABLE>
<CAPTION>
September 30 December 31
(in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials and work-in-process $194.5 $168.2
Finished Goods 58.5 72.6
Inventoried costs related to U.S. Government
and other long-term contracts 25.2 27.3
Progress payments received on long-term
contracts (21.5) (24.5)
LIFO valuation adjustment (4.4) (3.4)
- --------------------------------------------------------------------------------
$252.3 $240.2
================================================================================
</TABLE>
At September 30, 1998 and December 31, 1997, inventories include $114.6 and
$122.7 million, respectively, that are valued using LIFO. The LIFO
valuation adjustment approximates the difference between the LIFO carrying
value and current replacement cost.
Jacobson Manufacturing Purchase
- -------------------------------
On June 11, 1998, the Company completed the purchase of all of the common
stock of Jacobson Manufacturing Company Inc. (Jacobson) for $273.6 million
and assumed $7.3 million in liabilities. Jacobson manufactures
high-quality, custom-designed metal parts and fasteners and
precision-engineered plastic products. The acquisition of Jacobson was
accounted for under the purchase accounting method. The goodwill associated
with the purchase is being amortized over 40 years using the straight-line
method. Jacobson's results of operations are included in the consolidated
results of the Company with the fastening systems segment.
10
<PAGE>
Purchase of Howmet International Inc.
- -------------------------------------
On December 13, 1995, the Company and The Carlyle Group (Carlyle), a
private merchant bank, formed a jointly owned company, Howmet International
Inc., to acquire Howmet Corporation and the Cercast Group of companies,
referred to collectively in the financial statements as Howmet. Carlyle
owned 51 percent and Cordant Technologies owned 49 percent of the Howmet
common stock. The Company's initial equity investment in Howmet consisted
of $96 million in Howmet voting common stock, and $50 million in Howmet 9
percent paid-in-kind, non-voting, preferred stock. The Company accounted
for its 49 percent minority voting common stock investment in Howmet using
the equity method.
On December 2, 1997, the Company increased its ownership in Howmet to 62
percent by acquiring an additional 13 million shares of Howmet common stock
for approximately $183.8 million, which included the exercise of an option
for 2 million shares of common stock. Simultaneously with this transaction,
Carlyle sold 15.35 million shares of Howmet common stock in an initial
public offering (IPO). After the transactions, the Company, Carlyle, and
the public owned approximately 62, 22.65 and 15.35 percent, respectively,
of Howmet common stock. Beginning with December 1997, Howmet's results have
been consolidated with Cordant Technologies'. Operating results for the
current year include Howmet's earnings on a consolidated basis, while
Howmet's results through November 1997 are reported under the equity
method. Additional detailed financial information on Howmet is available in
Howmet's Annual Report to Stockholders incorporated by reference in the
Howmet's Annual Report on Form 10-K for the year ended December 31, 1997.
The following pro forma information is not necessarily indicative of the
results which would have resulted had the purchase occurred at the
beginning of each period presented, nor is it necessarily indicative of
future results. The unaudited consolidated pro forma results of operations
assuming consummation of the purchase of an additional 13 percent of Howmet
common stock as of the beginning of each period are as follows:
<TABLE>
<CAPTION>
Pro Forma
---------------------------------------------------------
Three-Months Ended Nine-Months Ended
September 30 September 30
(In millions, except per ---------------------------------------------------------
share data) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $595.0 $546.6 $1,786.4 $1,668.0
Net income $ 38.5 $ 27.8 $ 112.4 $ 68.5
Net income per diluted share $ 1.03 $ .73 $ 2.99 $ 1.81
</TABLE>
11
<PAGE>
Restricted Trust and Related Pechiney Notes Payable
- ---------------------------------------------------
In 1988, Pechiney Corporation, then a wholly-owned subsidiary of Pechiney,
S.A., issued indebtedness maturing in 1999 (Pechiney Notes) to third
parties in connection with the purchase of American National Can Company.
As a result of the acquisition, Pechiney Corporation (now named Howmet
Holdings Corporation or Holdings), became a wholly-owned subsidiary of
Howmet. The Pechiney Notes remained at Holdings, but Pechiney, S.A., which
retained American National Can Company, agreed with Howmet to be
responsible for all payments due on or in connection with the Pechiney
Notes. Accordingly, Pechiney, S.A. issued its own note to Holdings in an
amount sufficient to satisfy all obligations under the Pechiney Notes. The
Pechiney, S.A. note was deposited in a trust (Restricted Trust) for the
benefit of Holdings. If Pechiney, S.A. fails to make any payments required
by its note, the trustee under the Restricted Trust (Trustee) has
irrevocable letters of credit in the aggregate amount of $772 million
issued to the Restricted Trust by Banque Nationale de Paris (BNP), a French
bank which has an A+ credit rating from Standard and Poor's Ratings Group
(S&P), to draw upon to make such payments. In the event there is an
impediment to a draw under the BNP letters of credit held by the Trustee,
the Trustee has substantially identical "back-up" letters of credit in the
aggregate amount of $772 million issued to the Restricted Trust by Caisse
Des Depots et Consignations, a French bank which has an AAA credit rating
from S&P. In addition, the holders of the Pechiney Notes have a third set
of letters of credit (also issued by BNP), which can be drawn upon by such
holders in the event that principal and/or interest payments on the
Pechiney Notes are not made. Pechiney S.A. is solely responsible as
reimbursement party for draws under the various letters of credit
referenced above, and by agreement with the banks, neither Holdings nor
Howmet has any responsibility therefor. However, Holdings remains liable as
the original issuer of the Pechiney Notes in the event that Pechiney, S.A.
and both banks fail to meet their obligations under their respective
letters of credit. Management believes that it is extremely remote that
Howmet will be required to use any of its assets other than those in the
Restricted Trust to satisfy any payments due on or in connection with the
Pechiney Notes. Upon repayment of the Pechiney Notes, the Restricted Trust
terminates and any assets of the Restricted Trust are to be returned to
Pechiney, S.A.
The Pechiney Notes are due on January 2, 1999, and may not be prepaid prior
to that date. Interest is at three-month London Interbank Offered Rates
(LIBOR), plus 25 basis points (6.02 percent for the quarter ended September
30, 1998). Interest is paid quarterly and was paid shortly after the end of
the quarter. Interest expense on these notes was $32.4 million for the
nine-months ended September 30, 1998. Interest income from the Restricted
Trust for that period was equal to the interest expense, and is netted in
the financial statements.
12
<PAGE>
Earnings per share
- ------------------
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share."
SFAS No. 128 replaced the previously reported "primary and fully diluted
earnings per share" with "basic and diluted earnings per share." Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants, and convertible securities. However, due to
the limited dilutive impact, diluted earnings per share approximate the
Company's previously reported primary earnings per share. All earnings per
share amounts for all periods are presented to conform to the SFAS No. 128
requirements. All earnings per share discussions are based on a "diluted"
earnings per share basis.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three-Months Ended Nine-Months Ended
September 30 September 30
-----------------------------------------
(In millions, except per share data) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------
Numerator
- ---------
<S> <C> <C> <C> <C>
Income before minority interest and
extraordinary item $52.5 $28.6 $145.0 $73.1
Minority interest (14.0) -- (32.6) --
- -----------------------------------------------------------------------------------------
Numerator for basic and diluted
earnings per share $38.5 $28.6 $112.4 $73.1
=========================================================================================
Denominator
- -----------
Denominator for basic earnings per
share -- weighted-average shares 36.5 36.6 36.5 36.6
Effect of dilutive securities
Employee stock options 1.0 1.1 1.0 1.0
- -----------------------------------------------------------------------------------------
Denominator for diluted earnings per
share -- weighted-average shares
and assumed exercises 37.5 37.7 37.5 37.6
- -----------------------------------------------------------------------------------------
Net income per share:
Basic $1.05 $ .78 $3.08 $2.00
Diluted $1.03 $ .76 $2.99 $1.95
=========================================================================================
</TABLE>
13
<PAGE>
Environmental Matters
- ---------------------
The Company's Propulsion and Fastening Systems segments' estimated
liability for all environmental remediation is $21 million. This amount is
classified in "other accrued expenses" and "accrued interest and other
noncurrent liabilities."
The Company continues to be involved with two Environmental Protection
Agency (EPA) superfund sites designated under the Comprehensive
Environmental Response, Compensation and Liability Act in Morris County,
New Jersey. These sites were operated about thirty years ago by the Company
for government contract work. The Company has negotiated a consent decree
with the EPA concerning the Rockaway Borough Well Field Site. At this site,
the Company's estimated cost for response costs, site remediation, and
future operation and maintenance costs is $4.8 million, of which
approximately $1.4 million is estimated to be spent during 1999. In 1996,
the Company negotiated a consent decree with the State of New Jersey for
the Rockaway Township Well Field Site. At this site, the Company's
estimated cost for response costs, site remediation, and future operations
and maintenance costs is $4.6 million, of which approximately $1.2 million
is estimated to be spent during fiscal year 1999. Jacobson, acquired by
Huck in June 1998, is involved in a superfund site at Tempe, Arizona.
Pursuant to the terms of a five-year environmental indemnity contained in
the Stock Purchase Agreement between Huck and Seller, Huck is responsible
for the first $2 million in environmental liabilities, the Seller is
responsible for environmental liabilities from $2 to $6 million; Huck and
Seller share the expense of environmental liabilities 50-50 in excess of $6
million but less than $10 million.
Howmet has received test results indicating levels of polychlorinated
biphenyls ("PCBs") at its Dover, N.J. plant which will require remediation.
Various remedies are possible and could involve expenditures ranging from
$2 million to $22 million or more. Howmet has recorded a $2 million
long-term liability for this plant. Besides the above-mentioned remediation
work required at Howmet's Dover, N.J. plant, liabilities exist for clean-up
costs associated with hazardous types of materials at nine other on-site
and off-site waste disposal facilities. Howmet has been, or may be, named a
potentially responsible party under the Comprehensive Environmental
Response, Compensation and Liability Act, or similar state laws at these
locations. At September 30, 1998, $4 million of accrued environmental
liabilities are included in the consolidated balance sheet for these nine
sites. The indemnification discussed below applies to the costs associated
with the Dover, N.J. and the nine other locations.
In connection with the Howmet acquisition, Pechiney, S.A. (Howmet's
previous owner) indemnified Howmet for environmental liabilities relating
to Howmet and stemming from events occurring or conditions existing on or
prior to the acquisition, to the extent that such liabilities exceed a
cumulative $6 million. Once the above described liabilities exceed $6
million, it is highly probable that Pechiney, S.A. will be responsible for
reimbursing Howmet for those costs, pursuant to this indemnification. The
Company believes that any liability exceeding amounts recorded will not
have a material adverse effect on the Company's future results of
operations or financial position.
14
<PAGE>
In addition to the above environmental matters, and unrelated to Howmet
operations, Howmet and Pechiney, S.A. are jointly and severally liable for
environmental contamination and related costs associated with certain
discontinued mining operations owned and/or operated by a
predecessor-in-interest until the early 1960s. These liabilities include
approximately $21.3 million in remediation and natural resource damage
liabilities at the Blackbird Mine site in Idaho and a minimum of $10
million in past governmental costs and future remediation costs at the
Holden Mine site in Washington. Pechiney, S.A. has agreed to indemnify
Howmet for such liabilities. In connection with these environmental
matters, Howmet has recorded a $31.3 million liability which is classified
in "accrued interest and other noncurrent liabilities," and an equal $31.3
million receivable from Pechiney, S.A. which is classified in "other
noncurrent assets." Pechiney, S.A. is currently funding such amounts
related to these liabilities.
Accounting Standards
- --------------------
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income." The Company has adopted this new standard effective with this
report. SFAS No. 130 requires the Company to report comprehensive income,
which is net income plus other comprehensive income. The Company's only
item included in other comprehensive income is its changes in foreign
currency translation adjustments. SFAS No. 130 also requires the Company to
report accumulated other comprehensive income in the stockholders' equity
section of the consolidated balance sheet. The adoption of SFAS No. 130
does not change the amount reported as net income nor the total amount of
stockholders' equity; however, it does change the presentation of
stockholders' equity. The amount previously presented as "cumulative
translation adjustment" in the stockholders' equity section of the
consolidated balance sheets is now captioned "accumulated other
comprehensive income". Prior financial statements have been changed to
conform to the requirement of SFAS No. 130.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information." The Company will adopt this
statement in its report on 10K for the period ended December 31, 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement revises
employers' disclosures about pensions and other postretirement benefit
plans. It does not change the measurement or recognition of those plans.
This statement is effective for fiscal years beginning after December 15,
1997, and will be adopted by the Company in its annual report for its newly
adopted calendar year 1998. Adoption of SFAS No. 131 and SFAS No. 132 is
not expected to have a significant impact on the Company's financial
statements.
15
<PAGE>
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting
and reporting standards for derivative instruments and for hedging
activities. This statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is
a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. The Company has not
yet determined what the effect of SFAS No. 133 will be on the earnings and
financial position of the Company. This statement is effective for fiscal
years beginning after June 15, 1999. The Company expects to adopt the new
statement beginning on January 1, 2000.
Stock Split
- -----------
On January 22, 1998, the Company's Board of Directors declared a
two-for-one stock split in the form of a stock dividend payable March 13,
1998, for each stockholder of record on February 27, 1998. A regular
quarterly dividend of $.10 per common share, reflecting the split, was also
declared payable March 13, 1998, for each stockholder of record on February
27, 1998. All earnings per share amounts for all periods presented reflect
the stock split. The stock split affected the stockholders' equity section
of the balance sheet in the current year due to reclassifying the par value
amount of the common shares issued from retained earnings to common stock.
Branford Closure and Relocation
- -------------------------------
The Company announced the closing and relocation of assets at its Branford,
Connecticut industrial fastener plant to the Company's Waco, Texas plant.
The Branford closure will result in reduced fixed costs and allow
utilization of available capacity in Waco. The Company's third quarter
results include a $3 million pre-tax charge for the plant closing. Future
periods are expected to include $1.5 million in relocation expenses. A
small number of key employees will be relocated to Waco. The relocation is
expected to be completed by March 31, 1999.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (UNAUDITED)
The Company's Board of Directors amended the bylaws of the Company and
changed the fiscal year-end from June 30 to a calendar year. This change is
being made effective with this report which will cover the three-month and
nine-month periods ending September 30. All historical information in this
report has been prepared to conform to a calendar year presentation. The
change by the Company was made to coordinate Cordant and Howmet
International Inc. (Howmet) reporting periods and to reduce the confusion
that accompanies a fiscal year versus a calendar year. Howmet reports
separately on a calendar year basis.
On May 5, 1998, Thiokol Corporation changed its corporate name to Cordant
Technologies Inc. (the Company). Two of the Company's three business
segments have retained their names (Huck International, Inc., and Howmet),
the Propulsion Group is now called Thiokol Propulsion and operates as a
division of the Company, and all are referred to as a part of Cordant
Technologies.
Results of Operations
- ---------------------
The Company increased its ownership in Howmet from 49 percent to 62 percent
on December 2, 1997. Accordingly, beginning in December, Howmet's earnings,
cash flows, and the balance sheet for Howmet have been consolidated with
the Company's. As a result, operating results for the current year include
Howmet earnings reported on a consolidated basis while the prior year
includes Howmet earnings on an equity basis through November 1997. Minority
interest in income and equity is also reported, in the current year, for
the 38 percent of Howmet the Company does not own. Due to the consolidation
of Howmet in the Company's financial statements, comparison of financial
information for the respective periods is difficult and may not be
relevant. In order to facilitate an understanding of the Company's data,
separate Howmet comparative data and analysis have been included below for
the respective periods being reported.
The Company has adopted Statement of Financial Accounting Standard No. 128
"Earnings per Share," discussed in the notes to the financial statements
above. All of the following discussion reflects diluted earnings per share,
which approximates the primary earnings per share method previously
reported by the Company. All earnings per share amounts have been adjusted
for the two-for-one stock dividend on March 13, 1998.
Income for the Third Quarter
Net income for the third quarter ended September 30, 1998, was $38.5
million, or $1.03 per share, an increase of 35 percent, compared to the
prior year's quarter net income of $28.6 million or $.76 per share. The
current quarter's net income included a Stock Appreciation Rights (SAR)
benefit at Howmet of $2.9 million or $.08 per share, resulting from recent
Howmet stock price declines, and tax interest income of $1.8 million, or
$.05 per share. Net income also included a two-percent retroactive tax rate
reduction at Howmet for the current calendar year primarily for research
17
<PAGE>
and development credits of $1.6 million, or $.05 per share, and an
after-tax charge of $1.8 million, or $.05 per share in the fastener segment
for closing and relocating the Branford facility's assets. The prior year
net income included Howmet SAR expense of $1.4 million or $.04 per share.
Excluding the unusual items listed above, and SAR benefit and expense for
both periods, net income increased 13 percent over the prior year quarter.
The SAR benefit was caused by a decline in Howmet's common stock price.
Compensation expense increases or decreases (benefit) as the market value
of the stock fluctuates, and also is determined based on employee SAR
vesting to date. At September 30, 1998, Howmet's common stock price was
$11.625 compared to $15 per share at June 30, 1998, which resulted in the
$2.9 million, or $.08 per share benefit to the Company. SAR benefit or
expense is recognized each quarter based on the market value at the end of
the quarter compared to the market price at the previous quarter end except
for fluctuations above $15 per share (the ceiling limit).
Summary unaudited financial information for the three-months ended
September 30 follows:
<TABLE>
<CAPTION>
Dollar Percent
(in millions, except per share data) 1998 1997 Change Change
- -------------------------------------------------------------------------------------------
Sales:
<S> <C> <C> <C> <C>
Propulsion systems $147.0 $159.3 $(12.3) (8)
Fastening systems 116.4 78.4 38.0 48
Investment castings 331.6 -- 331.6 --
------------------------------------------------------------------------------------------
Total sales $595.0 $237.7 $357.3 150
===========================================================================================
Operating income:
Propulsion systems $ 19.4 $ 18.7 $ .7 4
Fastening systems 14.8 9.0 5.8 64
Investment castings 61.6 -- 61.6 --
Unallocated corporate expense (5.0) (1.9) (3.1) (163)
- -------------------------------------------------------------------------------------------
Total operating income 90.8 25.8 65.0 252
Equity income of affiliates .1 11.0 (10.9) (99)
Interest income 4.3 1.7 2.6 153
Interest expense (8.2) (.3) (7.9) (2,633)
Other, net (1.6) (.2) (1.4) (700)
Income taxes (32.9) (9.4) (23.5) (250)
- -------------------------------------------------------------------------------------------
Income before minority interest 52.5 28.6 23.9 84
Minority interest (14.0) -- (14.0) --
- -------------------------------------------------------------------------------------------
Net income $ 38.5 $ 28.6 $ 9.9 35
===========================================================================================
Net income per share:
Basic $ 1.05 $ .78 $ .27 35
Diluted $ 1.03 $ .76 $ .27 36
</TABLE>
18
<PAGE>
Selected Unaudited Financial Data
For the Quarter Ended 9/30/98
<TABLE>
<CAPTION>
1998 1997 (a)
---------------------------------- ----------
(in millions) Cordant Howmet Consolidated Cordant
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities $ (.1) $74.3 $74.2 $7.2
Capital expenditures (8.9) (18.9) (27.8) (3.1)
Dividends (3.7) -- (3.7) (3.7)
- -------------------------------------------------------------------------------------------
Free Cash flow $(12.7) $55.4 $42.7 $ .4
===========================================================================================
<FN>
(a) Howmet results were consolidated starting in December 1997.
</FN>
</TABLE>
BUSINESS SEGMENT SALES AND INCOME FOR THE QUARTER
Propulsion Systems
Propulsion Systems sales for the quarter decreased 8 percent compared to
the prior year, primarily as a result of reduced activity in the commercial
launch motor programs and cost containment initiatives on the cost plus
contract of the Space Shuttle Reusable Solid Rocket Motor (RSRM) program.
Propulsion Systems' operating income increased 4 percent from the prior
year's quarter due to a retroactive rate increase in the cost management
incentive fee in the RSRM program, and higher Missile Defense program sales
and margins. Operating margins increased to 13.2 percent in the current
quarter from 11.7 percent last year.
During the quarter, the RSRM contract accounted for approximately 16
percent of consolidated net sales and 15 percent of consolidated operating
income. Current year RSRM sales are expected to approximate the prior
year's sales. The current NASA cost-plus-award-fee contract provides for
Company production of the Space Shuttle solid rocket motors through 2001.
The Company is negotiating a follow-on contract which would extend the
program into 2005.
Fastening Systems
Fastening Systems sales for the quarter increased $38 million or 48 percent
over the same period last year. Sales increased 5 percent over the prior
year's quarter, excluding the additional sales provided by Jacobson
Manufacturing Company Inc., (Jacobson) which was acquired in June 1998.
Aerospace sales increased $2.8 million over the prior year. Industrial
sales increased $35.2 million over the prior year primarily due to the
additional sales provided by Jacobson. Industrial sales increased 3 percent
excluding the additional sales provided by Jacobson.
19
<PAGE>
Operating income for the current quarter increased $8.8 million over the
prior year's quarter, excluding a $3 million pre-tax Branford plant closing
and relocation charge. Operating income increased 40 percent over the prior
year's quarter excluding both the Branford relocation charge and the
increased income provided by Jacobson. Industrial income increased $5.8
million, while aerospace income increased $3 million over the prior year.
Fastening Systems margins increased to 12.7 percent (15.3 percent excluding
the Branford charge) compared to 11.5 percent last year. Operating margins
continue to benefit from continuing cost control initiatives, and lean
manufacturing practices.
The Company announced the closing and relocation of assets at its Branford,
Connecticut industrial fastener plant to the Company's Waco, Texas plant.
The Branford closure will result in reduced fixed costs and allow
utilization of available capacity in Waco. The Company's third quarter
results include a $3 million pre-tax charge for the plant closing. Future
periods are expected to include $1.5 million in relocation expenses. A
small number of key employees will be relocated to Waco. The relocation is
expected to be completed by March 31, 1999.
Fastening Systems book-to-bill ratios, which are orders divided by
shipments, for the quarter ended September 30, were as follows:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Aerospace .70 1.29
Industrial .91 .99
Total .83 1.15
</TABLE>
The above ratios indicate a softening in the aerospace market which may
impact the future sales of Huck aerospace products.
Investment Castings
On December 2, 1997, the Company purchased an additional 13 percent of
Howmet common stock, increasing the Company's ownership percentage to 62
percent. The current quarter includes consolidated Howmet results, while
the prior year through November 1997, includes Howmet results using the
equity method. The following unaudited information summarizes Howmet's
results, including the 38 percent minority share, before consolidation for
the three-months ended September 30:
<TABLE>
<CAPTION>
(in millions) 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Net sales $331.6 $309.0
Cost of goods sold 239.7 228.4
Gross profit 91.9 80.6
Operating income 62.6 40.0
Net income $ 38.1 $ 21.2
===========================================================================
</TABLE>
20
<PAGE>
Following is a reconciliation of Howmet's contribution to the Company's
income for the three-months ended September 30:
<TABLE>
<CAPTION>
(in millions) 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Howmet net income $38.1 $21.2
Less preferred paid-in-kind dividend (1.4) (1.3)
- -----------------------------------------------------------------------------------------------
Income available to common shareholders 36.7 19.9
- -----------------------------------------------------------------------------------------------
Company's interest in Howmet income 22.8 9.7
Add preferred paid-in-kind dividend 1.4 1.3
- -----------------------------------------------------------------------------------------------
Howmet's contribution to the Company's
income $24.2 $11.0
- -----------------------------------------------------------------------------------------------
</TABLE>
Howmet's sales increased 13 percent on a comparable basis with the prior
year, adjusting for the sale of its refurbishment business, which was
completed in September 1997. The sales increase came from both the
commercial aircraft engine and industrial gas turbine (IGT) markets.
Howmet's earnings were $38.1 million for the quarter, an 80 percent
increase from $21.2 million in the prior year's quarter. Income benefited
from higher sales and a $3.7 million after-tax reduction of interest
expense. The current quarter includes a $5 million after-tax SAR benefit
that may reverse in future periods, as well as a two-percent retroactive
tax rate reduction at Howmet for the current calendar year of $2.9 million.
The prior year net income included SAR expense of $3.1 million, and a
retroactive income tax rate reduction of $3.5 million. Excluding the SAR
benefit and expense and retroactive income tax rate reductions for both
quarters, net income increased 48 percent over the prior year.
21
<PAGE>
Income Year-To-Date
Net Income for the nine-months ended September 30, 1998, was $112.4 million
or $2.99 per share, a 54 percent increase compared to $73.1 million or
$1.95 per share last year. Net income for the nine-month period included
federal income tax and interest refunds of $5.3 million or $.14 per share,
and a $1.8 million or $.05 per share charge in the fastener segment for
closing and relocating the Branford facility's assets. Net income for the
nine-month period also included a SAR benefit at Howmet of $1 million or
$.03 per share. As previously discussed, this SAR benefit may reverse in
the future. The prior year's net income included tax interest income of
$1.1 million or $.02 per share and $5.9 million or $.16 per share of Howmet
SAR expense. Excluding the unusual items and SAR benefit and expense listed
above, net income increased 39 percent over the prior year period.
Summary unaudited financial information for the nine-months ended September
30 follows:
<TABLE>
<CAPTION>
Dollar Percent
(in millions, except per share data) 1998 1997 Change Change
- ----------------------------------------------------------------------------------------------------
Sales:
<S> <C> <C> <C> <C>
Propulsion systems $ 483.4 $485.3 $ (1.9) --
Fastening systems 307.3 234.6 72.7 31
Investment castings 995.7 -- 995.7 --
- ----------------------------------------------------------------------------------------------------
Total sales $1,786.4 $719.9 $1,066.5 148
====================================================================================================
Operating income:
Propulsion systems $ 60.7 $ 45.3 $ 15.4 34
Fastening systems 44.8 28.0 16.8 60
Investment castings 154.3 -- 154.3 --
Unallocated corporate expense (15.5) (6.5) (9.0) (138)
- ----------------------------------------------------------------------------------------------------
Total operating income 244.3 66.8 177.5 266
Equity income of affiliates .4 31.0 (30.6) (99)
Interest income 10.9 5.1 5.8 114
Interest expense (21.0) (.8) (20.2) (2,525)
Other, net (3.3) (1.0) (2.3) (230)
Income taxes (86.3) (28.0) (58.3) (208)
- ----------------------------------------------------------------------------------------------------
Income before minority interest 145.0 73.1 71.9 98
Minority interest (32.6) -- (32.6) --
- ----------------------------------------------------------------------------------------------------
Net income $ 112.4 $ 73.1 $ 39.3 54
====================================================================================================
Net income per share:
Basic $ 3.08 $ 2.00 $ 1.08 54
Diluted $ 2.99 $ 1.95 $ 1.04 53
</TABLE>
22
<PAGE>
Selected Unaudited Financial Data
For the Nine-Months Ended 9/30/98
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------- ------------
(in millions) Cordant Howmet (b) Consolidated Cordant
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities $ 96.2 $110.4 $206.6 $ 42.0
Capital expenditures (23.2) (54.7) (77.9) (16.8)
Dividends (11.0) -- (11.0) (10.5)
- -------------------------------------------------------------------------------------------------------
Free Cash flow 62.0 $ 55.7 $117.7 $ 14.7
- -------------------------------------------------------------------------------------------------------
Total Debt (a) $348.9 $141.2 $490.1 $ 25.7
Less cash & cash equivalents 7.7 21.3 29.0 48.2
- -------------------------------------------------------------------------------------------------------
Net Debt (Cash) Position $341.2 $119.9 $461.1 $(22.5)
- -------------------------------------------------------------------------------------------------------
<FN>
(a) Excludes Pechiney note payable.
(b) Howmet results were consolidated starting in December 1997.
See Liquidity and Capital Resources.
</FN>
</TABLE>
Propulsion Systems
Propulsion Systems sales were flat for the nine-month period while income
increased $15.4 million or 34%. Higher Missile Defense and Trident program
sales were offset by lower sales from other programs. The higher income
resulted from a retroactive rate increase in the cost management incentive
fee on the RSRM contract, increased Commercial Launch Motor margins, and
reduced corporate overhead allocations due to increased ownership in
Howmet.
Fastening Systems
Fastening Systems sales for the nine-month period increased $72.7 million
or 31 percent over last year. Sales increased 14 percent over the prior
year excluding the sales provided by the Jacobson acquisition in June.
Aerospace sales increased $24.2 million and industrial sales increased
$48.5 million over the prior year. Industrial sales increased 7 percent
excluding the additional sales provided by Jacobson. The growth reflected
continued strong worldwide commercial aircraft and domestic industrial
markets. Management expects future industrial sales to increase due to the
access and new product lines of the Jacobson acquisition and overall growth
in the industrial market, although such increases may not occur. Management
believes such sales increases will more than offset an anticipated decline
in aerospace sales.
23
<PAGE>
Operating income for the nine-month period was $19.8 million or 71 percent
higher than the prior year, excluding the $3 million Branford relocation
charge in the current year. Operating income increased 48 percent excluding
both the Branford relocation charge and the additional income provided by
the Jacobson acquisition. Aerospace and industrial income increased $7.8
million and $12 million respectively over the prior year. Industrial income
increased 57 percent excluding the additional income provided by Jacobson.
Continued strong domestic aerospace and industrial markets provided the
improvement. Fastening Systems margins increased to 14.6 percent (15.5
percent excluding the Branford charge) from 11.9 percent last year. The
increased margins were primarily the result of volume increases, continuing
cost control initiatives, and lean manufacturing practices.
Fastening Systems book-to-bill ratios, which are orders divided by
shipments, for the nine-months ended September 30, were as follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Aerospace .88 1.30
Industrial .97 1.04
Total .93 1.18
</TABLE>
The above ratios indicate a softening in the aerospace market which may
impact the future sales of Huck aerospace products.
Investment Castings
- -------------------
On December 2, 1997, the Company purchased an additional 13 percent of
Howmet common stock, increasing the Company's ownership percentage to 62
percent. The current nine-month period includes consolidated Howmet results
while the prior year through November 1997, includes Howmet results on an
equity basis. The following unaudited information summarizes Howmet's
results, including the 38 percent minority share, before consolidation:
<TABLE>
<CAPTION>
Nine-Months Ended
September 30
-----------------------------------------------
(in millions) 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $995.7 $952.0
Cost of goods sold 730.2 701.2
Gross profit 265.5 250.8
Operating income 157.2 123.0
Net income $ 90.0 $ 59.3
- -------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
Following is a reconciliation of Howmet's contribution to the Company's
income for the nine-months ended September 30:
<TABLE>
<CAPTION>
(in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Howmet net income $90.0 $59.3
Less preferred paid-in-kind dividend (4.1) (3.8)
- --------------------------------------------------------------------------------
Income available to common shareholders 85.9 55.5
- --------------------------------------------------------------------------------
Company's interest in Howmet income 53.3 27.2
Add preferred paid-in-kind dividend 4.1 3.8
- --------------------------------------------------------------------------------
Howmet's contribution to the Company's income
before extraordinary item $57.4 $31.0
- --------------------------------------------------------------------------------
</TABLE>
Howmet's sales for the nine-month period increased 11 percent on a
comparable basis with the prior year period, adjusting for the sale of its
refurbishment business, which was sold in September 1997. The sales
increase came from both the commercial aircraft engines and IGT markets.
Also affecting nine-month period comparability is $9.7 million of
additional revenue in 1997 from a pricing adjustment with a customer that
was not repeated in 1998 and is not expected to recur in the future.
Howmet's net income for the nine-month period was $90 million, a 52 percent
increase from $59.3 million last year. Net Income benefited from increased
sales, operating performance, and a $9.6 million after-tax reduction of
interest expense. The current period also includes a $1.7 million after-tax
SAR benefit that is expected to reverse in future periods. SAR expense for
the prior year was $13 million after tax. The prior year period included a
$6 million after-tax benefit from a pricing settlement with a customer,
which is not expected to recur.
25
<PAGE>
Income Taxes
- ------------
The Company had an effective income tax rate of 37 percent, compared with
28 percent for the same nine-month period in the prior year. The current
year higher rate is due primarily to consolidating Howmet, whose effective
tax rate has been 38 percent. In addition, Cordant must continue to accrue
tax at a 7 percent rate on its share of Howmet net income. The Company's
effective income tax rate would have been higher if not for a reduced rate
during the first six months of this calendar year resulting from a United
States tax benefit related to a reorganization of investments in certain
overseas operations, from the recognition of certain tax refunds, and from
the return to tax profitability of European operations enabling the use of
tax loss carry-forward amounts.
Other Activities
- ----------------
Selling, general and administrative
- -----------------------------------
For the quarter and nine-months ended September 30, 1998, selling, general
and administrative expenses increased $27.8 million and $105.2 million,
respectively, compared to the prior year. Howmet's general and
administrative expenses were $24.7 million and $94.7 million for the
quarter and nine-month period, respectively and accounted for most of the
increase over 1997. Goodwill amortization increased $2 and $4 million for
the quarter and nine-month periods, respectively, due to the purchase of an
additional 13 percent of Howmet in December, and the purchase of Jacobson
in June. Fastening systems administrative expenses for the nine-month
period increased due to the Branford closure and relocation charge.
Interest expense increased primarily due to the consolidation of Howmet and
increased borrowings related to the 13 percent purchase of Howmet and the
Jacobson acquisition.
Unallocated corporate expense increased primarily due to the consolidation
of Howmet and the allocation of corporate overhead related to Howmet
operations.
Asian Economic Conditions
- --------------------------
The adverse Asian economic conditions caused no material impact to the
Company's sales or earnings during the quarter and nine-month periods.
Propulsion systems sales in Asia are minimal. The future impact to
Investment castings and Fastening systems is uncertain. To the extent the
Asian economic conditions impact the commercial aerospace, heavy-duty
truck/trailer and IGT markets, such impact may affect the Company in the
future.
RSRM Buy IV
- -----------
The Company's proposal for the RSRM Buy IV contract was submitted to NASA
in April 1998. The Buy IV Request for Proposal baseline requests 35 flight
sets, or 70 motors, and three flight support motors with projected contract
completion during 2005. Motor deliveries and periods of performance may
change in negotiations. Currently, the Company anticipates follow-on
contracts for RSRM motors through the life of the Space Shuttle Program.
26
<PAGE>
The contract type is anticipated to be a cost-plus-incentive/award-fee,
similar to the current Buy III structure. The Company believes the margins
on the follow-on contract will be similar to those of the current contract,
but there can be no assurance that such margins will be realized. NASA has
provided the Company with long lead material procurement authorization to
support a Buy IV production start in October 1998. The contract is subject
to annual Congressional funding.
Stock Split
- -----------
On January 22, 1998, the Company's Board of Directors declared a
two-for-one stock split in the form of a stock dividend payable March 13,
1998, for each stockholder of record on February 27, 1998. A regular
quarterly dividend of $.10 per common share, reflecting the split, was also
declared payable March 13, 1998, for each stockholder of record on February
27, 1998. All earnings per share amounts for all periods presented reflect
the stock split. The stock split affected the stockholders' equity section
of the balance sheet in the current year due to reclassifying the par value
amount of the common shares issued from retained earnings to common stock.
Year 2000 Compliance
- --------------------
The Company has a decentralized Information Systems (I.S.) function, in
which each of its three major business segments operate autonomously with
its own I.S. organization. The Thiokol Propulsion I.S. organization is
moving toward completing a scheduled three-year Year 2000 date readiness
project that addresses all major production applications supported by the
propulsion systems segment. The project's objective is to identify all
date-related program logic, to correct, replace or eliminate all date
processing problems, and to test and implement into production the
corrected application software. The project is on schedule. The project is
expected to be completed by December 31, 1998, with system-wide testing
activity occurring after that date. The estimated cost for the project and
related purchased software is $7.5 million, of which $6.4 million has been
expensed. The Thiokol Propulsion I.S. organization has requested its
vendors of application or operating system software products to provide a
status and commitment regarding the readiness of their respective products
for the Year 2000. Most responses indicate that vendors have solutions
either in place or have scheduled future versions to correct this problem.
The propulsion systems procurement organization is conducting similar
inquiries with major material and services suppliers regarding their
respective Year 2000 initiatives.
Huck (fastening systems) uses primarily standard commercial,
vendor-supported application software products. These systems can be made
Year 2000 compliant by upgrading to current versions of the vendors'
software products. Huck recently purchased a new Enterprise Requirements
Planning (ERP) software product that is Year 2000 and Euro compliant and
will be implemented at all Huck sites over the next three years. During the
next nine months, approximately one-half of Huck's facilities will be
27
<PAGE>
converted to the new software, thereby avoiding the need to upgrade the old
systems at those sites to achieve Year 2000 readiness. All remaining sites,
meanwhile, will be made compliant by upgrading to current versions of the
existing software products as described above. This dual approach will
address all Year 2000 readiness requirements by June 30, 1999. Those costs
associated with Year 2000 readiness and related software purchases are
estimated at $8.6 million, of which $3 million has been expensed.
Howmet (investment castings) I.S. is actively completing its Year 2000
readiness program. All date logic problems on its central mainframe
applications and distributed server applications have been identified and
remedial action to correct or replace any problematic code is currently
under way. Howmet is currently reviewing its various remote plant
facilities to identify and begin implementing any needed changes to both
local business applications and shop floor control systems. All corrective
action projects are expected to be completed by June 30, 1999. To date, no
material risk of non-compliance has been identified. Howmet has also
initiated formal communications with all of its significant suppliers,
including raw materials, services, and computer hardware/software
suppliers, and large customers to determine the extent to which Howmet's
manufacturing processes and interface systems are vulnerable to those third
parties' failure to resolve their own Year 2000 issues. Responses to date
have indicated no significant problems.
Additionally, Howmet is installing several commercial application software
products, at both their central facility and at certain plant sites, to
further address their Year 2000 readiness. Howmet's total estimated Year
2000 cost is $14.6 million, of which $7.2 million has been expensed.
During 1999, all three business segments will focus on further evaluation
of customer and supplier readiness, embedded processor systems, risk
assessment, worst case scenarios and contingency planning. There can be no
guarantee that the systems of other companies on which the Company's
systems rely will be timely converted and would not have an adverse effect
on the Company's systems.
Euro Conversion
- ---------------
The Company is assessing the impact of the Euro conversion on its business
operations and is currently implementing a strategy which will allow it to
operate in a Euro environment during the transition period, January 1, 1999
- - December 31, 2001, and after full Euro conversion post July 1, 2002. The
Company does not anticipate any material impact from the Euro conversion on
its computer software plans. Computer software changes necessary to comply
with the Year 2000 issue are generally compliant with the Euro conversion
issue. Enterprise Resource Planning (ERP) software being implemented at
Huck as a part of Year 2000 readiness will be Euro compliant. No additional
costs related to Euro compliance are expected for the ERP software. Some
expense is anticipated for minor system modifications, but is not expected
28
<PAGE>
to be material. The Company's payroll system has not yet been examined and
will require modifications to be Euro compliant. The costs of payroll
systems modifications are also undetermined. The Company expects no Euro
conversion impact to its Thiokol Propulsion business segment. The Company
does not expect any material impact to its contracting policies or
competitive position on its three business segments as a result of the Euro
conversion. The Company is reviewing the impact of the Euro conversion on
its foreign exchange exposure position. The Company does not expect any
significant changes to its current hedging policy and does not expect any
significant increases in its foreign exchange exposure. Until the Company
completes its assessment of the Euro conversion impact, there can be no
assurance that the Euro impact will not have a material impact on the
overall business operations of the Company.
Liquidity and Capital Resources
- -------------------------------
As previously discussed, the increase in the Company's Howmet ownership to
62 percent and subsequent consolidation in December 1997 has resulted in
consolidating Howmet's cash flows with that of the Company in the current
nine-month period. Howmet's results for the same nine-month period in 1997
were reported under the equity method. As a result comparison of the
current year to the prior years' cash flows is difficult. As a result of
Howmet's financing agreements, Howmet is limited as to the amount of
dividends it can declare, which limits Cordant Technologies' access to
Howmet's cash flows and resources. Separate cash flow information for
Howmet has been included below for the respective periods being reported.
For the current nine-month period, net cash flows from operating activities
were $206.6 million compared to $42 million for the prior year. The major
source of this increase was Howmet, which had $110.4 million in net cash
flows from operating activities. The current period also benefited from
increased net income. The increase in depreciation and amortization over
the prior year period was due primarily to the addition of Howmet. The
increase in receivables was primarily due to the addition of Howmet, and to
increased receivables in the Propulsion segment due to timing differences
in cash receipts. Howmet's increase in receivables was due to higher sales
volume, and timing differences in shipments and collections. The decrease
in accounts payable and accrued expenses was also due primarily to the
addition of Howmet. Howmet's decreases in accounts payable and accrued
expenses resulted principally due to payment timing differences. The
decrease in taxes payable was primarily due to the addition of Howmet.
Acquisition activity included $273.6 million for the purchase of Jacobson
manufacturing in June, and Howmet's $3.4 million increased investment in
the joint venture company, Komatsu-Howmet, Ltd. Capital spending on
property, plant and equipment used $77.9 million in the current period
compared to $16.8 million in the prior year. Howmet used $54.7 million in
capital expenditures, mainly for capacity expansions to serve the core
business as well as additional expenditures to support new products and
process enhancement activities.
Financing activities for the nine-month period provided $126.1 million of
cash compared to $11.4 million of cash used in the prior year period. On
29
<PAGE>
March 3, 1998, the Company completed a public offering of $150 million of 6
5/8 percent senior notes due March 1, 2008. The notes were priced at 99.423
percent to yield 6.705 percent. The notes were offered pursuant to a
prospectus supplement dated February 26, 1998, under the Company's $300
million shelf registration statement that has been effective since October
1996. The net proceeds from the sale of the notes were used to pay down
bank debt the Company incurred in December 1997, in connection with the
purchase of an additional 13 percent of Howmet International Inc. common
stock and for general corporate purposes. In June, the Company borrowed
$180 million to finance the purchase of Jacobson Manufacturing.
During the nine-month period, the Company repurchased 319,400 shares
(adjusted for the stock split) of the Company's common stock for $12.9
million. In the prior year period, the Company repurchased 215,800 shares
(adjusted for the stock split) of the Company's common stock for $7.9
million. There are approximately 2.5 million shares available for
repurchase under the Company's current share repurchase authorization. The
Company will repurchase shares when, and in amounts as the Company deems
appropriate.
On September 30, 1998, the Company's current ratio was 1.3 excluding the
Restricted Trust and the Pechiney Notes payable. The debt-to-equity ratio
was 75.9 percent, excluding the Pechiney Notes payable. The
debt-to-total-capital ratio was 46 percent and includes the $55 million
receivables facility at Howmet. Working capital was $144.3 million, a $43.7
million decrease from December 31, 1997. The decrease in working capital
primarily relates to the use of cash and increase in short term debt
related to the Howmet and Jacobson acquisitions.
Estimated future cash flows 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 foreseeable future.
At September 30, 1998, Cordant had $200 million in revolving credit
facilities with $65 million unused. In addition, on September 30, 1998,
Howmet had a $300 million revolving credit facility with $187.4 million
available for additional borrowing and/or letters of credit.
30
<PAGE>
A comparative cash flow statement for Howmet for the nine-month period
ending September 30 follows:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------------------------
Operating activities
<S> <C> <C>
Net income $90.0 $59.3
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 44.1 51.4
Equity income of affiliates (.4) (1.0)
Changes in operating assets and liabilities:
Receivables (20.1) (8.2)
Inventories 4.1 (4.9)
Accounts payable and accrued expenses (22.9) (14.8)
Income taxes 18.9 18.6
Long-term SAR accrual (8.1) 21.0
Other -- net 4.8 2.7
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 110.4 124.1
Investing activities
Purchases of property, plant and equipment, net (54.7) (32.4)
Investment in joint venture (3.4) -
Proceeds from sale of refurbishment business - net of tax - 57.5
- ------------------------------------------------------------------------------------------------------
Net cash (used for) provided by investing activities (58.1) 25.1
Financing activities
Net change in short-term debt 16.7 -
Issuance of long-term debt 36.6 102.3
Repayment of long-term debt (131.0) (264.0)
- ------------------------------------------------------------------------------------------------------
Net cash used for financing activities (77.7) (161.7)
- ------------------------------------------------------------------------------------------------------
Foreign currency rate changes 1.3 (1.8)
- ------------------------------------------------------------------------------------------------------
(Decrease) in cash and cash equivalents (24.1) (14.3)
Cash and cash equivalents at beginning of period 45.4 23.4
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $21.3 $9.1
======================================================================================================
</TABLE>
31
<PAGE>
Howmet Cash Flow
- ----------------
Howmet net cash flows provided from operations for the nine-month period
were $110.4 million compared to $124.1 million in the prior year period.
Higher increases of receivables in 1998 was due to higher volume increases
and timing of shipments and collections. Alloy inventory reductions in 1998
were partially offset by the effect of the higher volume level. Higher pay
down of accounts payable in 1998 compared to 1997 is due to payment timing
differences.
Capital expenditures in the 1998 nine-month period were $54.7 million, and
are expected to be approximately $85 million for the current year. The 1998
capital expenditures are for capacity expansions needed to serve the core
business, as well as additional expenditures to support new products and
process enhancement activities. In August 1998, the Company announced plans
to accelerate expansion of IGT capacity at three plants and to build a new
aero-airfoil plant. Capital expenditures for 1999, including these capacity
expansions, are expected to be approximately $115 million, although the
actual amount of capital expenditures may vary.
Estimated future cash flows from operations, current financial resources
and available credit facilities are expected to be adequate to fund
Howmet's anticipated working capital requirements and capital expenditures
for the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no significant changes in market risks since the end of the
Company's June 30, 1998 fiscal year. For more information, please read the
consolidated financial statements and notes thereto included in the
Company's Notice of Annual Meeting and Proxy Statement, Exhibit B,
incorporated by reference in the Annual Report on Form 10-K for the fiscal
year ended June 30, 1998.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in a number of other pending legal and
administrative proceedings which are not expected individually or in the
aggregate to have a material adverse effect upon the Company's financial
condition. Depending on the amount and the timing of an unfavorable
resolution of these matters, it is possible that the Company's future
results of operations or cash flows could be materially affected in a
particular period.
32
<PAGE>
ITEM 5. OTHER INFORMATION
The Company's Board of Directors approved the change in the name of the
Corporation from Thiokol Corporation to Cordant Technologies Inc. The name
change was effected under Delaware corporation law through a short form
merger effective May 5, 1998.
The Company's Board of Directors also amended the corporation's by-laws
effective April 23, 1998, dealing with changing the fiscal year-end;
scheduling and postponement of stockholder' meeting, advance notice of
stockholder business and nominations; inspections and polls; and board
meeting notice.
The Board of Directors of the Company amended the by-laws setting the
number of directors at eleven effective August 20, 1998. This action
increased the board membership from nine to eleven directors. Steven G.
Lamb and David J. Lesar were elected by the Board to fill the vacancies
created by the board's expansion to terms of office expiring at the 2000
annual meeting. Steven G. Lamb is President and Chief Operating Officer of
Case Corporation, a manufacturer of farm and light to medium construction
equipment. David J. Lesar is the president and Chief Operating Officer of
Halliburton Company, a global engineering and services company.
The Company sets forth below "Cautionary Statements" for the purpose of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Many of the factors described below are discussed in both current and
prior Company Securities and Exchange Commission filings and to the extent
not otherwise discussed in forward-looking statements should be considered
in assessing the various risks associated with the Company's conduct of its
business and financial condition. Risks which may impact the accuracy of
the Company's forward-looking statements include, but are not necessarily
limited to, the following:
(i) The Company's RSRM contract for NASA's space shuttle program is
subject to substantial performance and financial risks. Without cause,
the contract may be terminated for the convenience of the U.S.
Government ("government"). Deliveries under the contract may be
delayed or extended at the election of the government. Future space
shuttle launches are highly dependent upon the construction and
operation of the international space station. Delays in space station
components may delay launches and affect the RSRM production rates.
Congress may change the funding available to the contract. Actions by
the government or the Company may make the amount of the contract fee
already booked inappropriate, thus causing a retroactive award fee
adjustment including possible reimbursement to the government of fees
the government has paid to the Company. The current "Buy III" contract
is expected to continue until fiscal year 2001. Deliveries are
33
<PAGE>
expected to be completed by 1999. The Company is negotiating the Buy
IV contract with expected production of thirty-five flight sets
through 2005. The terms of the Company's Buy IV award fee have not
been finalized, but are expected to be similar to the structure of the
Buy III award fee. The profitability and cash flow of the Buy IV
contract, however, may not be at current levels. NASA's privatization
of the Space Shuttle Program through United Space Alliance could
adversely impact the Company's RSRM contract in the out-years. NASA
has also shown initial interest in developing a Liquid Fly Back
Booster (LFBB) as an alternative propulsion source or as a replacement
for the Company's RSRM motors.
(ii) The Company's maintenance of non-RSRM space and defense contracts
including the Minuteman regrain and commercial launch vehicle programs
(collectively "programs") and the availability and award of future
programs with the government and prime contractors are subject to the
risk of termination or renegotiation by the government or failure of
such programs to be funded. The level of Minuteman production may be
impacted by international treaty negotiations limiting the deployment
of ICBM's. The Company's ability to successfully compete for and win
new programs or retain current programs is also dependent on the
availability of program funding; competition by others with the
Company for such programs on price, quality, technology, facilities,
delivery, and product performance; changes in Congressional funding
objectives; and federal agency demand and program management,
including but not limited to, program termination, consolidation, or
privatization. Other risks include the Company's ability to
successfully manage current programs, obtaining or retaining new and
existing programs, and the profitability of such programs with
satisfactory return on investment on lower prices, costs, and unit
volumes in a shrinking and competitive government procurement
environment. Competitive propulsion systems and technologies, as well
as ballistic missile surplus propulsion inventory (both domestic and
foreign), can adversely impact the success of the Company's commercial
launch programs and its ability to compete successfully for government
strategic and tactical propulsion programs.
(iii)The products and services sold by the Company to domestic and
international commercial aerospace markets are subject to the risks of
the cyclical nature of the aircraft market and the phase of such cycle
at any point in time. Delay or changes in aircraft and component
orders and build schedules may impact the future demand for Company
products, delivery, and profitability. The Company's major aerospace
customers are large and may exercise their market power among a number
of vendors, including the Company, competing for their business by
exerting pricing pressure, delivery, inventory, and unit volume
requirements. Risks to the Company include management's ability to
maintain both product and manufacturing qualifications, meet the needs
of its major customers and regulatory agencies and maintain or improve
margins and return on investment in light of competitive pricing
pressures, unit demand, product qualification, and product
substitutions by major customers. The Company's potential inability to
maintain product pricing, as well as availability, delivery, and
service are important risk factors.
34
<PAGE>
(iv) The products and services sold by the Company for domestic and
international, and industrial commercial markets, primarily through
the Fastening Systems business segment and the Investment Castings
segment represented by the Company's 62 percent equity investment in
Howmet, are subject to the risks of the level of general economic
activity and industry capacity in mature industrial markets, product
applications, and technology associated primarily with aircraft,
automotive, transportation, power generation, construction, and other
industrial applications. The Fastening Systems segment is subject to
the cyclical and economic nature of the automotive industry and the
market power of large automotive original equipment manufacturers as
to competition among vendors for pricing, delivery, inventory and unit
volumes. The Company's business can also be affected by factors such
as management's ability to successfully expand new and existing
product lines, including the successful integration of the Jacobson
Manufacturing operations, to improve margins and returns on investment
by successfully implementing asset management, pricing and cost
reduction strategies. The Company's ability to maintain competitive
products, pricing, availability, delivery, and service are important
factors in maintaining customer relationships and effectively
competing with other manufacturers.
(v) Additional future increases in ownership percentage of Howmet will, in
part, be dependent on the favorable operational and financial
performance, favorable economic conditions, price of Howmet common
stock, and the availability of financing at reasonable costs and on
reasonable terms from the capital markets at the time the Company
exercises its option to acquire the balance of the equity ownership of
Howmet from Carlyle. Significant intangible values comprise Howmet
asset values, which may not be realized by stockholders, including the
Company, if Howmet were sold or liquidated. Howmet remains liable as
the original issuer of the Pechiney Notes, as defined in the Notes to
the Company's financial statements, due to be paid in January of 1999,
held in a Restricted Trust secured by Pechiney International, a French
Company secured by $772 million in letters of credit issued by Banque
Nationale de Paris, a French bank with a Standard & Poor's rating of
A+ secured by substantially identical "back-up" letters of credit
issued by Caisse des Depots et Consignations, a French bank with a
Standard & Poor's AAA credit rating. In the event that Pechiney fails
to meet its obligations under the Restricted Trust and both banks fail
to meet their obligations under their respective letters of credit,
such events, which management believes are remote, would have a
material effect on Howmet's financial condition and value of the
Company's 62 percent equity ownership of Howmet.
(vi) Supplier and customer product qualifications are important to the
Company as a purchaser and as a supplier. As a supplier, loss or
failure to maintain product or manufacturing qualifications from major
customers including the government and major commercial aerospace and
aircraft manufacturers and automotive original equipment manufacturers
may result in loss of business for the Company. Qualified vendors,
component parts, and raw materials qualifications are important to the
Company in the manufacture of its products including major propulsion
systems such as the RSRM. Vendors, component parts and raw materials
may be limited, and the loss of a major vendor as a supplier has the
potential to cause a major and material delay in production or program
performance.
35
<PAGE>
(vii)Raw materials used by the Company's Investment Castings and Fastening
Systems segments include a number of metals and minerals, including
titanium, hafnium, aluminum, nickel, cobalt, molybdenum and chromium,
among others. Prices of these materials can be volatile, and the
Company engages in advanced purchases of some of these materials under
certain market conditions, and passes certain price fluctuations
through to customers pursuant to its long-term agreements. The Company
ordinarily does not otherwise attempt to hedge the price risk of its
raw materials. For some of the supplies and raw materials it
purchases, including certain metals, the Company has no fixed price
contracts or arrangements. Commercial deposits of certain metals, such
as cobalt, nickel, titanium, and molybdenum, that are required for the
alloys used in precision castings and aircraft fasteners, are found in
only a few parts of the world, and for certain materials only single
sources are readily available. The availability and prices of these
metals and other materials may be influenced by private or
governmental cartels, changes in world politics, unstable governments
in exporting nations, production interruptions, inflation and other
factors. Although the Company has not experienced significant
shortages of its supplies and raw materials, there can be no assurance
that such shortages will not occur in the future. Any such shortages
or prices fluctuations could have a material adverse effect on the
Company.
(viii) The Company maintains a policy of hedging foreign currency
transactions and economic exposures for foreign currency denominated
obligations. The Company does not hedge against net asset values for
its foreign investments attributed to its foreign subsidiaries valued
in local currencies. To the extent the Company's foreign revenue base
grows and net asset base expands, as the result of the Company's
increased foreign business activity, the Company's exposure to adverse
foreign currency rate movement increases. The Company's foreign
currency risk exposure is also subject to the stability of the foreign
currency of the country where the Company maintains foreign operations
or does business. The Company seeks to minimize the impact of adverse
foreign currency rate movements through its hedging policy. The
success of the hedging policy in preventing an adverse financial
result on operations in any accounting period cannot be assured.
(ix) Risk factors relating to the Company's Year 2000 date readiness
project are discussed in Management's Discussion and Analysis on page
27 and are incorporated by reference herein.
(x) Risk factors relating to the Company's Euro conversion project are
discussed in Management's Discussion and Analysis on page 28 and are
incorporated by reference herein.
36
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
Exhibit (3) (ii) Amendment to By-Laws setting the number of
directors at eleven
Exhibit 27.1 Financial Data Schedule
Reports on Form 8-K
- -------------------
The Company filed two reports on Form 8-K during the quarter ending
September 30, 1998. On July 9, 1998, a Form 8-K was filed. Included therein
was Item 5, "Other Events", announcing the change of the Company's
corporate headquarter's principal place of business and Item 8, "Change in
Financial Year" from June 30 to December 31. Unaudited historical financial
statements without footnotes were included. On August 4, 1998, a Form 8-K
was filed. Included therein was Item 5, "Other Events", containing the text
of the news release issued August 4, 1998 announcing earnings for the
quarter and fiscal year-end June 30, 1998. Summary financial information
was included.
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.
CORDANT TECHNOLOGIES INC.
(Registrant)
Date: October 19, 1998 /s/ Richard L. Corbin
------------------------------
Richard L. Corbin, Senior Vice
President and Chief Financial Officer
(Principal Financial Officer)
/s/ Michael R. Ayers
------------------------------
Michael R. Ayers,
Vice President and Controller
(Principal Accounting Officer)
EXHIBIT 3(II)
BY-LAW AMENDMENT
RESOLVED, that pursuant to the provisions of Article III, Section 3.2 of
the By-Laws of the Corporatin, the number of directors of the Board of
Directors is hereby fixed at eleven members effective August 20, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CORDANT
TECHNOLOGIES INC. UNAUDITED FINANCIAL STATEMENTS FOR THE QUARTER ENDED
SEPTEMBER 30, 1998, AND 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS. DATA REFLECTS TWO-FOR-ONE STOCK SPLIT PAID AS
A STOCK DIVIDEND, MARCH 1998.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 29 48
<SECURITIES> 0 0
<RECEIVABLES> 291 159
<ALLOWANCES> 8 2
<INVENTORY> 252 84
<CURRENT-ASSETS> 1356 324
<PP&E> 1089 598
<DEPRECIATION> 433 320
<TOTAL-ASSETS> 2812 872
<CURRENT-LIABILITIES> 1212 131
<BONDS> 490 26
0 0
0 0
<COMMON> 41 21
<OTHER-SE> 605 520
<TOTAL-LIABILITY-AND-EQUITY> 2812 872
<SALES> 1786 720
<TOTAL-REVENUES> 1798 756
<CGS> 1360 589
<TOTAL-COSTS> 1394 605
<OTHER-EXPENSES> 148 48
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 21 1
<INCOME-PRETAX> 231 101
<INCOME-TAX> 86 28
<INCOME-CONTINUING> 231 73
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 39 73
<EPS-PRIMARY> 1.05 2.00
<EPS-DILUTED> 1.03 1.95
</TABLE>
