<PAGE>
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 DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO
______________.
COMMISSION FILE NUMBER 1-6179
THIOKOL CORPORATION
INCORPORATED IN THE STATE OF DELAWARE IRS EMPLOYER IDENTIFICATION
NO. 36-2678716
2475 WASHINGTON BOULEVARD, OGDEN, UTAH 84401
TELEPHONE NUMBER: (801) 629-2000
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 January 31, 1998: 18,185,000
<PAGE>
THIOKOL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
DECEMBER 31, 1997
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
<S> <C>
ITEM 1. Financial Statements
Consolidated Statements of Operations - Three months
ended and Six months ended December 31, 1997 and 1996 3
Consolidated Balance Sheets -
December 31, 1997 and June 30, 1997 4-5
Consolidated Statements of Cash Flows - Six
months ended December 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7-13
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-26
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 26
ITEM 2. Acquisition of Assets 27
ITEM 5. Other Information 28-31
ITEM 6. Exhibits and Reports on Form 8-K 32
SIGNATURES 33
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
THIOKOL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31 December 31
-------------------------------------------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $350.3 $210.0 $587.9 $407.9
Operating expenses:
Cost of sales 271.0 165.5 460.3 329.2
Selling, general and administrative 37.0 21.2 57.3 40.0
Research and development 5.4 2.7 7.8 5.5
Restructuring - (2.2) - (2.2)
- -----------------------------------------------------------------------------------------------------------
313.4 187.2 525.4 372.5
Income from operations 36.9 22.8 62.5 35.4
Equity income of affiliates 4.3 5.4 15.3 10.5
Interest income 1.8 .3 3.5 7.4
Interest expense (3.2) (.5) (3.5) (1.2)
Other, net (1.1) - (1.1) -
- -----------------------------------------------------------------------------------------------------------
Income before income taxes 38.7 28.0 76.7 52.1
Income taxes 13.4 9.3 22.8 14.2
- -----------------------------------------------------------------------------------------------------------
Income before minority interest and
extraordinary item 25.3 18.7 53.9 37.9
Minority interest (1.8) - (1.8) -
- -----------------------------------------------------------------------------------------------------------
Income before extraordinary item 23.5 18.7 52.1 37.9
Extraordinary item - loss on early
retirement of debt (7.1) - (7.1) -
- -----------------------------------------------------------------------------------------------------------
Net income $16.4 $ 18.7 $ 45.0 $ 37.9
- -----------------------------------------------------------------------------------------------------------
Income per share before extraordinary item:
Basic $1.28 $1.02 $2.84 $2.08
Diluted $1.24 $1.00 $2.75 $2.03
Net income per share:
Basic $ .90 $1.02 $2.46 $2.08
Diluted $ .87 $1.00 $2.38 $2.03
- -----------------------------------------------------------------------------------------------------------
Dividends per share $ .20 $ .17 $ .40 $ .34
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
THIOKOL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
December 31 June 30
1997 (a) 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets (Unaudited)
Current assets
Cash and cash equivalents $ 45.6 $ 51.4
Receivables 235.7 146.4
Inventories 240.2 84.6
Prepaid expenses and other current assets 50.5 29.3
- -------------------------------------------------------------------------------------------------------------------
Total current assets 572.0 311.7
Property, plant and equipment, at cost
less allowances for depreciation 550.4 283.2
Other assets
Equity investment in Howmet - 178.0
Costs in excess of net assets of business
acquired, net 400.3 26.7
Restricted trust (b) 716.4 -
Patents and other intangible assets, net 131.6 14.1
Other noncurrent assets 102.7 40.7
- -------------------------------------------------------------------------------------------------------------------
Total assets $2,473.4 $854.4
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) As of December 2, 1997, Thiokol consolidates the financial statements of its
62 percent ownership interest in Howmet International Inc. Prior to December 2,
1997, Thiokol's interest in Howmet International Inc. was accounted for under
the equity method.
(b) 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. 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.
4
<PAGE>
THIOKOL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
December 31 June 30
1997 (a) 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and stockholders' equity (Unaudited)
Current liabilities
Short-term debt $ 8.2 $ 22.7
Accounts payable 121.8 36.3
Accrued compensation 79.5 43.1
Other accrued expenses 174.5 37.4
- ------------------------------------------------------------------------------------------------
Total current liabilities 384.0 139.5
Noncurrent liabilities
Accrued retiree benefits 163.9 70.4
Deferred income taxes 44.8 41.3
Accrued interest and other noncurrent liabilities 186.9 80.3
Long-term debt 325.9 1.8
Pechiney notes (b) 716.4 -
- ------------------------------------------------------------------------------------------------
Total noncurrent liabilities 1,437.9 193.8
Minority Interest 101.0 -
Stockholders' equity
Common stock (par value $1.00 per share)
Authorized - 200 shares
Issued - 20.5 shares including shares in treasury 20.5 20.5
Additional paid-in capital 46.0 44.7
Retained earnings 552.0 514.3
Cumulative translation adjustment (3.5) -
- ------------------------------------------------------------------------------------------------
615.0 579.5
Less common stock in treasury, at cost
2.2 shares, December 31, 1997 and
2.1 shares, June 30, 1997 (64.5) (58.4)
- ------------------------------------------------------------------------------------------------
Total stockholders' equity 550.5 521.1
- ------------------------------------------------------------------------------------------------
$2,473.4 $854.4
- ------------------------------------------------------------------------------------------------
</TABLE>
(a) As of December 2, 1997, Thiokol consolidates the financial statements of its
62 percent ownership interest in Howmet International Inc. Prior to December 2,
1997, Thiokol's interest in Howmet International Inc. was accounted for under
the equity method.
(b) The Restricted Trust holds a note receivable from Pechiney S.A. and
related letters of credit that secures Pechiney S.A.'s agreement to repay the
Pechiney Notes. 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.
5
<PAGE>
THIOKOL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Six Months Ended
December 31
-------------------------------
1997 (a) 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 45.0 $ 37.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest 1.8 -
Extraordinary item 7.1 -
Restructuring - (2.2)
Depreciation and amortization 25.9 19.8
Equity income (15.3) (10.5)
Changes in operating assets and liabilities:
Receivables 42.8 33.6
Inventories (8.4) (0.7)
Accounts payable and accrued expenses (7.4) (10.6)
Income taxes (6.3) 10.9
Other (9.6) 1.1
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 75.6 79.3
Investing Activities
Acquisitions, net of acquired cash of $27.2 (156.6) -
Purchases of property, plant and equipment (net) (22.6) (18.6)
- ----------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (179.2) (18.6)
Financing Activities
Net change in short-term debt 1.8 (37.6)
Issuance of long-term debt 336.2 -
Repayment of long-term debt (213.5) (.2)
Dividends paid (7.3) (6.2)
Premiums paid on early retirement of debt (13.7) -
Foreign currency rate changes (.9) -
Purchase of common stock for treasury (7.9) -
Stock option transactions 3.1 .9
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 97.8 (43.1)
(Decrease) increase in cash and cash equivalents (5.8) 17.6
Cash and cash equivalents at beginning of year 51.4 15.1
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 45.6 $ 32.7
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) As of December 2, 1997, Thiokol consolidates the financial statements of
its 62 percent ownership interest in Howmet International Inc. Prior to December
2, 1997, Thiokol's interest in Howmet International Inc. was accounted for under
the equity method.
See notes to consolidated financial statements.
6
<PAGE>
THIOKOL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Basis Of Presentation
The accompanying interim consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. The balance sheet at June 30, 1997, reflects the Company's audited
consolidated financial statements 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 December 31, 1997, have been consolidated with the Company's. As a result,
the first six months of operating results for the current year include five
months of Howmet earnings reported under the equity method and one month of
Howmet earnings on a consolidated basis. Minority interest in income and equity
is also reported 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 six months
ended December 31, 1997, are not necessarily indicative of the results to be
expected for the fiscal year ending June 30, 1998. The financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report to Stockholders
incorporated by reference in the Annual Report on Form 10-K for the fiscal year
ended June 30, 1997.
Certain reclassifications were made to the 1997 financial statements to conform
with the 1998 presentation.
Receivables
The components of net receivables are as follows:
<TABLE>
<CAPTION>
December 31 June 30
(in millions) 1997 1997
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Receivables under U.S. Government contracts
and subcontracts $ 74.6 $ 92.4
Trade accounts receivable 140.2 52.8
Retained receivables 20.2 -
Other current receivables .7 1.2
---------------------------------------------------------------------------------------------------------
$235.7 $146.4
---------------------------------------------------------------------------------------------------------
</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.
<PAGE>
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 $93.2 million, at December 31, 1997, 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 in fiscal year 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 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 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 $20.2 million retained receivables
represents the receivables set aside in the event the sold receivables are not
fully collected.
INVENTORIES
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. Inventories
are stated at the lower of cost or market.
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 which 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.
8
<PAGE>
Inventories are summarized as follows:
<TABLE>
<CAPTION>
December 31 June 30
(in millions) 1997 1997
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Finished goods $ 72.6 $ 27.0
Raw materials and work-in-process 168.2 55.7
Inventoried costs related to U.S. Government
and other long-term contracts 27.3 27.8
Progress payments received on long-term contracts (24.5) (25.9)
LIFO valuation adjustment (3.4)
-----------------------------------------------------------------------------------------------
$ 240.2 $ 84.6
-----------------------------------------------------------------------------------------------
</TABLE>
Purchase of Howmet International Inc.
During the second quarter of fiscal year 1996, 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 Thiokol 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% 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 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 own approximately
62, 22.65 and 15.35 percent, respectively, of Howmet common stock. Howmet's
December earnings and cash flows have been consolidated with Thiokol's, and the
balance sheets at December 31, 1997, have also been consolidated. The first six
months of operating results for the current year include five months of Howmet's
earnings reported under the equity method and one month of Howmet earnings on a
consolidated basis. Additional detailed financial information on Howmet is
available in Howmet's Registration Statement on Form S-1, No. 333-37573.
9
<PAGE>
The following pro forma information is not necessarily indicative of the results
which would have resulted had the acquisition occurred at the beginning of each
period presented, nor is it necessarily indicative of future results. The
unaudited consolidated pro forma results of operations for the three months
ended December 31, 1997 and 1996, and for the six months ended December 31, 1997
and 1996, assuming consummation of the purchase as of the beginning of each
period are as follows:
<TABLE>
<CAPTION>
Pro-Forma
------------------------------------------------------------
Three Months Ended Six Months Ended
(In millions, except per December 31 December 31
------------------------------------------------------------
share data) 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $551.3 $492.5 $1,098.0 $968.4
Income before
extraordinary item $ 22.2 $ 16.5 $ 50.2 $ 33.8
Income per diluted share before
extraordinary item $ 1.17 $ .88 $ 2.65 $ 1.81
Net income $ 15.1 $ 16.5 $ 43.1 $ 33.8
Net income per diluted share $ .80 $ .88 $ 2.28 $ 1.81
</TABLE>
Extraordinary item
During December 1977, Howmet refinanced its debt to take advantage of favorable
interest rates. As part of the refinancing, Howmet incurred pre-tax charges of
$20.2 million, including a $6.5 million non-cash charge for the write-off of
unamortized debt issuance costs. Howmet repaid $146 million of debt at a 10
percent fixed interest rate and refinanced $198 million of new debt under a new
revolving bank facility at a substantially lower variable rate.
10
<PAGE>
RESTRICTED TRUST AND RELATED PECHINEY NOTES PAYABLE
In 1988, Pechiney Corporation, which was a wholly-owned subsidiary of Pechiney
S.A., issued indebtedness maturing in 1999 (the "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), "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 for
the benefit of Holdings (the "Restricted Trust"). If Pechiney S.A. fails to make
any payments required by its note, the trustee under the Restricted Trust (the
"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 LIBOR plus 25 basis points (5.98 percent
for the quarter ended December 31, 1997). Interest is paid on the last business
day of each calendar quarter. Interest expense on these notes was $42.8 million
for the year ended December 31, 1997. Interest income from the Restricted Trust
for the aforementioned period was equal to the interest expense, and is netted
in the financial statements.
11
<PAGE>
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share". Statement 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 approximates the Company's previously reported primary earnings per share.
All earnings per share amounts for all periods are presented to conform to the
Statement 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 Six Months Ended
December 31 December 31
------------------------------------------------------------
(In millions, except per share data) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator
- ---------
Income before minority interest and
extraordinary item $25.3 $18.7 $53.9 $37.9
Minority interest (1.8) - (1.8) -
- --------------------------------------------------------------------------------------------------------------
Numerator for basic and diluted
earnings per share $23.5 $18.7 $52.1 $37.9
- --------------------------------------------------------------------------------------------------------------
Denominator
- -----------
Denominator for basic earnings per
share - weighted-average shares 18.3 18.2 18.3 18.2
Effect of dilutive securities
Employee stock options .6 .5 .6 .5
- --------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per
share - weighted-average shares
and assumed conversions 18.9 18.7 18.9 18.7
- --------------------------------------------------------------------------------------------------------------
Income per share before extraordinary item:
Basic $1.28 $1.02 $2.84 $2.08
Diluted $1.24 $1.00 $2.75 $2.03
</TABLE>
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."
12
<PAGE>
Howmet has received test results indicating levels of polychlorinated biphenyls
("PCBs") at its Dover, New Jersey, facility which will require remediation.
Various remedies are possible and could involve expenditures ranging from $2.0
million to $22.0 million or more. Howmet has recorded a $2 million long-term
liability for this facility. In addition, liabilities arising for clean-up costs
associated with hazardous types of materials in several waste disposal
facilities exist. In particular, 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 thirteen on-site and off-site
locations. At December 31, 1997, $4.4 million of accrued environmental
liabilities are included in the consolidated condensed balance sheet for such
matters. The indemnification discussed below applies to the costs associated
with these matters.
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.
It is highly probable that changes in any of the aforementioned accrued
liabilities will result in an equal change in the amount receivable from
Pechiney, S.A. 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.
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 1960's. 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 $8 million in investigation and 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 $29.3 million liability which is classified in
"other accrued expenses" and "accrued interest and other noncurrent
liabilities," and an equal $29.3 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.
In 1996, the American Institute of Certified Public Accountants, (AICPA) issued
Statement of Position (SOP) 96-1 on "Environmental Remediation Liabilities." The
Company is in compliance with this standard.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (UNAUDITED)
RESULTS OF OPERATIONS
The Company increased its ownership in Howmet from 49 percent to 62 percent on
December 2, 1997. Accordingly, Howmet's December earnings, cash flows, and the
balance sheet for Howmet have been consolidated with the Company's. As a result,
the first six months of operating results for the current year include five
months of Howmet earnings reported under the equity method and one month of
Howmet earnings on a consolidated basis. Minority interest in income and equity
is also reported 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 FASB statement 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.
INCOME FOR THE SECOND QUARTER
Income before extraordinary item for the second quarter ended December 31, 1997
was $23.5 million or $1.24 per share, compared to the prior year's quarter of
$18.7 million or $1.00 per share. Net income for the quarter ended December 31,
1997 was $16.4 million, or $.87 per share. The 1997 quarter included an
extraordinary charge of $7.1 million, or $.37 per share, net of income taxes and
minority interest, related to Howmet debt refinancing to take advantage of
favorable interest rates. Howmet's quarter's earnings were reduced by $3.2
million or $.18 per share for IPO expenses and additional stock appreciation
rights (SAR) accruals. The current quarter's net income benefited by $1.9
million or $.11 per share due to reduced income tax rates. The reduced rates
result 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. The prior year quarter's
income included the release of a $1.3 million or $.07 per share of excess
restructuring reserves.
14
<PAGE>
Summary unaudited financial information follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31
--------------------------------------------------------------
Better/
(in millions, except per share data) 1997 1996 (Worse) Percent
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales:
Propulsion systems $160.2 $143.0 $ 17.2 12
Fastening systems 84.9 67.0 17.9 27
Investment castings 105.2 - 105.2 -
- -----------------------------------------------------------------------------------------------------------------------
Total sales $350.3 $210.0 $140.3 67
- -----------------------------------------------------------------------------------------------------------------------
Operating income:
Propulsion systems $ 19.2 $ 19.2 $ - -
Fastening systems 12.4 5.2 7.2 138
Investment castings 11.7 - 11.7 -
Unallocated corporate expense (6.4) (1.6) (4.8) (300)
- -----------------------------------------------------------------------------------------------------------------------
Total operating income 36.9 22.8 14.1 62
Equity income of affiliates 4.3 5.4 (1.1) (20)
Interest income 1.8 0.3 1.5 500
Interest expense (3.2) (0.5) (2.7) (540)
Other, net (1.1) - (1.1) -
Income taxes (13.4) (9.3) (4.1) (44)
- -----------------------------------------------------------------------------------------------------------------------
Income before minority interest and
extraordinary item 25.3 18.7 6.6 35
Minority interest (1.8) - (1.8) -
- -----------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 23.5 18.7 4.8 26
Extraordinary item - loss on early
retirement of debt (7.1) - (7.1) -
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 16.4 $ 18.7 $ (2.3) (12)
- -----------------------------------------------------------------------------------------------------------------------
Income per share before extraordinary item:
Basic $ 1.28 $ 1.02 $ .26 25
Diluted $ 1.24 $ 1.00 $ .24 24
Net income per share:
Basic $ .90 $ 1.02 $ (.12) (12)
Diluted $ .87 $ 1.00 $ (.13) (13)
</TABLE>
BUSINESS SEGMENT SALES AND INCOME FOR THE QUARTER
Propulsion Systems
Propulsion systems sales increased $17.2 million while income remained equal to
last year's quarter. Last year's quarter benefited $1.3 million from the release
of excess restructuring reserves. Excluding the restructuring reserve release
from last year, the current quarter's income increased $1.3 million. Higher
commercial launch motor program sales and income of $14.1 million and $2.1
million respectively accounted for the increase.
15
<PAGE>
During the quarter, the RSRM contract accounted for sales of approximately 25
percent of consolidated net sales and 34 percent of consolidated operating
income. Current year RSRM sales are expected to approximate the prior year's
sales. The NASA cost plus award fee contract provides for the Company's
production of the Space Shuttle solid rocket motors through fiscal year 2001.
The Company is currently responding to a request for a proposal for a follow-on
contract which would extend the program through fiscal year 2005.
FASTENING SYSTEMS
Fastening systems sales for the quarter increased $17.9 million or 27 percent
over last year. Aerospace sales increased $14 million and industrial sales
increased $3.9 million over the prior year. The gain reflects stronger
worldwide commercial aircraft and domestic industrial markets. Fastening system
margins increased to 14.6 percent from 6.4 percent last year, excluding the $.9
million restructuring reserve release in the prior year. The increased margins
were primarily the result of continuing cost control initiatives, pricing
increases, and volume increases.
Operating income for the current quarter increased $8.1 million, excluding the
restructuring reserve release of $.9 million in the prior year. Aerospace and
industrial income increased $6.4 million and $1.7 million respectively over the
prior year. Stronger domestic aerospace and industrial markets provided the
improvement. Production problems of a major customer may slow the current rate
of revenue increases in the commercial aircraft market.
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
quarter includes consolidated Howmet results for one month and Howmet equity
income at 49 percent for two months. The following unaudited information
summarizes Howmet results before consolidation:
<TABLE>
<CAPTION>
Three Months Ended
December 31
--------------------------------------------
(in millions) 1997 1996
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $306.2 $283.5
Cost of goods sold 224.5 214.7
Gross profit 81.7 68.8
Operating income 31.5 27.1
Income before extraordinary item 12.7 9.8
Net income $ .4 $ 9.8
-----------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
Following is a reconciliation of Howmet's contribution to the Company's income
before extraordinary item for the three months ended December 31:
<TABLE>
<CAPTION>
(in millions) 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C>
Howmet income before extraordinary item $12.7 $ 9.8
Less preferred paid-in-kind dividend (1.3) (1.2)
------------------------------------------------------------------------------------------------
Income available to common shareholders 11.4 8.6
------------------------------------------------------------------------------------------------
Company's interest in Howmet income 6.2 4.2
Add preferred paid-in-kind dividend 1.3 1.2
Howmet's contribution to the Company's
income before extraordinary item $ 7.5 $ 5.4
------------------------------------------------------------------------------------------------
</TABLE>
Investment castings sales increased 8 percent to $306.2 million from the prior
year quarter. The sales increase came from the commercial aircraft market.
Investment castings earnings before an extraordinary item were $12.7 million for
the quarter, an increase of 30 percent from $9.8 million in the prior year's
quarter. Income continued to benefit from operational and cost improvements and
lower tax rates. Howmet's current quarter includes an extraordinary charge of
$12.3 million, net of taxes, for debt refinancing to take advantage of favorable
interest rates. Howmet's quarterly earnings were reduced by $5.4 million, net
of taxes, for IPO expenses and additional stock appreciation rights accruals.
INCOME YEAR-TO-DATE
Income for the six months ended December 31, 1997, was $52.1 million or $2.75
per share compared to $37.9 million or $2.03 per share in the prior year. Net
income for the six months ended December 31, 1997 was $45 million or $2.38 per
share, a 19 percent increase compared to $37.9 million or $2.03 per share last
year. The current year included Howmet debt refinancing charges of $7.1 million
or $.37 per share, and IPO and additional stock appreciation rights accruals of
$3.4 million or $.19 per share. The current period benefited by $4.1 million or
$.22 per share from reduced income tax rates. The reduced rates result 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. The prior year's income included federal income tax and
interest refunds of $7.3 million or $.39 per share and release of excess
restructuring reserves of $1.3 million or $.07 per share.
17
<PAGE>
Summary unaudited financial information follows:
<TABLE>
<CAPTION>
Six Months Ended
December 31
--------------------------------------------------------------
Better/
(in millions, except per share data) 1997 1996 (Worse) Percent
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales:
Propulsion systems $319.5 $280.1 $ 39.4 14
Fastening systems 163.2 127.8 35.4 28
Investment casting 105.2 - 105.2 -
- -----------------------------------------------------------------------------------------------------------------------
Total sales $587.9 $407.9 $ 180.0 44
- -----------------------------------------------------------------------------------------------------------------------
Operating income:
Propulsion systems $ 37.6 $ 30.6 $ 7.0 23
Fastening systems 21.4 8.0 13.4 168
Investment castings 11.7 - 11.7 -
Unallocated corporate expense (8.2) (3.2) (5.0) (156)
- -----------------------------------------------------------------------------------------------------------------------
Total operating income 62.5 35.4 27.1 77
Equity income of affiliates 15.3 10.5 4.8 46
Interest income 3.5 7.4 (3.9) (53)
Interest expense (3.5) (1.2) (2.3) (192)
Other, net (1.1) - (1.1) -
Income taxes (22.8) (14.2) (8.6) (61)
- -----------------------------------------------------------------------------------------------------------------------
Income before minority interest and
extraordinary item 53.9 37.9 16.0 42
Minority interest (1.8) - (1.8) -
- -----------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 52.1 37.9 14.2 37
Extraordinary item - loss on early
retirement of debt (7.1) - (7.1) -
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 45.0 $ 37.9 $ 7.1 19
- -----------------------------------------------------------------------------------------------------------------------
Income per share before extraordinary item:
Basic $ 2.84 $ 2.08 $ .76 37
Diluted $ 2.75 $ 2.03 $ .72 35
Net income per share:
Basic $ 2.46 $ 2.08 $ .38 18
Diluted $ 2.38 $ 2.03 $ .35 17
</TABLE>
PROPULSION SYSTEMS
Propulsion systems sales and income increased $39.4 million and $7.0 million
respectively. The prior year six months included a $1.3 million restructuring
reserve release. The sales gains were due to increases in the Commercial Launch
Motor program ($15.7 million), Space Shuttle Reusable Solid Rocket Motor (RSRM)
program ($15.4 million), and Missile Defense programs ($15 million). The higher
income was due to the Commercial Launch Motor program, RSRM program, and Missile
Defense programs.
18
<PAGE>
FASTENING SYSTEMS
Fastening systems sales for the six month period increased $35.4 million or 28
percent over last year. Aerospace sales increased $27.7 million and industrial
sales increased $7.7 million over the prior year. The growth reflects stronger
worldwide commercial aircraft and domestic industrial markets. Fastening system
margins increased to 13.1 percent from 5.6 percent last year, excluding the $.9
million restructuring reserve release in the prior year. The increased margins
were primarily the result of continuing cost control initiatives, pricing
increases, and volume growth.
Operating income for the six month period was $14.3 million higher, excluding
the restructuring reserve release of $.9 million in the prior year. Aerospace
and industrial income increased $11.8 million and $2.5 million respectively over
the prior year. Stronger domestic aerospace and industrial markets provided the
improvement. Production problems of a major customer may slow the current rate
of revenue growth in the commercial aircraft market.
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
six month period includes consolidated Howmet results for one month at 62
percent and Howmet equity income at 49 percent for five months. The following
unaudited information summarizes Howmet's results before consolidation:
<TABLE>
<CAPTION>
Six Months Ended
December 31
------------------------------------------
(in millions) 1997 1996
-----------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $615.2 $562.0
Cost of goods sold 446.1 428.1
Gross profit 169.1 133.9
Operating income 71.5 55.3
Income before extraordinary item 33.9 19.0
Net income $ 21.6 $ 19.0
-----------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Following is a reconciliation of Howmet's contribution to the Company's income
before extraordinary item for the six months ended December 31:
<TABLE>
<CAPTION>
(in millions) 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C>
Howmet income before extraordinary item $33.9 $19.0
Less preferred paid-in-kind dividend (2.6) (2.4)
------------------------------------------------------------------------------------------------
Income available to common shareholders 31.3 16.6
------------------------------------------------------------------------------------------------
Company's interest in Howmet income 15.9 8.1
Add preferred paid-in-kind dividend 2.6 2.4
Howmet's contribution to the Company's income
before extraordinary item $18.5 $10.5
------------------------------------------------------------------------------------------------
</TABLE>
Investment castings sales for the six month period increased 9 percent to $615.2
million from the prior year period. The sales increase came from the commercial
aircraft market.
Investment castings earnings before extraordinary item were $33.9 million for
the period, an increase of 78 percent from $19 million in the prior year's
period. Income continued to benefit from operational and cost improvements.
Howmet's current period includes an extraordinary charge of $12.3 million, net
of taxes to refinancing debt to take advantage of favorable interest rates.
Howmet's six months earnings were reduced by $5.8 million after tax for IPO
expenses and additional stock appreciation rights accruals.
INCOME TAXES AND OTHER ACTIVITIES
The Company had an effective income tax rate of 25 percent, compared with 27
percent for the same six months period in the prior year. The current year
lower rate results 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. In addition, the Company's
overall effective income tax rate was also reduced by taxing five months of
higher Howmet equity income at a 7 percent rate. The Company's tax rate for the
remainder of fiscal 1998 will increase as the result of consolidating Howmet's
financial results, whose tax rate is expected to approximate the statutory 40
percent rate. In addition, Thiokol must continue to provide tax at a 7 percent
rate on its share of Howmet net income. The fiscal year 1999 tax rate is
expected to approximate statutory rates, plus the addition of 7 percent on
Thiokol's share of Howmet net income.
20
<PAGE>
For the quarter and six months ended December 31, 1997, selling, general and
administrative expenses increased $15.8 million and $17.3 million, respectively,
compared to the prior year. The addition of Howmet's general and administrative
expenses accounted for most of the increase for both periods. For the current
six month period, selling and administrative expenses in the fastening segment
also increased as a result of higher sales volume.
The adverse Asian economic conditions caused no material impact to fastening
systems and investment casting sales or earnings during the second quarter.
Propulsion system sales in Asia are minimal. To the extent the Asian economic
conditions impact the commercial aerospace market, such impact may affect the
Company.
The Request for Proposal (RFP) for the RSRM Buy IV contract was received in
February 1998, and the Company's proposal is due to NASA in April 1998. The Buy
IV RFP baseline requests 35 flight sets, or 70 motors, and three flight support
motors with contract completion in approximately fiscal year 2005. NASA has also
requested an alternate proposal for 20 flight sets, or 40 motors, and one flight
support motor, with contract completion in approximately fiscal year 2003. 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. The contract type is anticipated to be a cost plus
incentive/award fee, similar to the current Buy III structure. NASA has provided
the Company with long lead material procurement authorization to support the Buy
IV production start in September 1998. The contract is subject to annual
congressional funding by the U.S. Government.
On December 22, 1997, The Company was selected as the propulsion team leader by
TRW, for the Air Force's Intercontinental Ballistic Missile (ICBM) Prime
Integration Contract. The Company will lead a joint effort with United
Technologies Corporation, Chemical Systems Division (CSD) to provide
remanufactured Minuteman III solid rocket motors for all three stages as well as
propulsion sustaining engineering for the Minuteman and Peacekeeper ICBM weapons
systems. The propulsion program, beginning as early as February 1998, is valued
at over $1 billion to the Company over the expected 15-year life of the
contract. The contract is subject to annual congressional funding by the U.S.
Government.
21
<PAGE>
Subsequent to the quarter end, on January 22, 1998, the Company's Board of
Director's 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. As
a result of the stock split, the associated preferred share purchase rights (the
"Rights") have been adjusted so that each Right, upon proper exercise, entitles
the holder to purchase one two-hundredth of a share of the Company's Series A
Junior Participating Preferred Stock at a purchase price of $120. Until the
acquisition by a person or a group of 15% or more of the outstanding common
stock of the Company, the Rights may be redeemed by the Board of Directors of
the Company at a price of $.005 per Right. A regular quarterly dividend of $.10
(ten cents) per common share, reflecting the split, was also declared payable
March 13, 1998, for each stockholder of record on February 27, 1998.
Subsequent to the quarter-end, the Company determined it will change its fiscal
year from June 30 to a calendar year effective December 31, 1998. The change is
to coordinate the Thiokol and Howmet reporting periods and to reduce the
confusion that accompanies a fiscal year versus a calendar year. Howmet
currently reports on a calendar year basis.
YEAR 2000 COMPLIANCE
Thiokol Corporation has a decentralized Information Systems (I.S.) function,
where each of its three major business segments operate autonomously with its
own I.S. organization. The Propulsion I.S. organization is two years into a
scheduled three-year Year 2000 date compliance project which addresses all major
production applications supported by the Propulsion group. The project is on
schedule and is expected to be completed prior to the year 2000. The estimated
cost for the project is $4.1 million, which is being expensed when incurred over
the three year life of the project.
Huck (Fastening systems) I.S. has engaged an independent consulting firm to
provide a comprehensive assessment of their Year 2000 compliance exposure. The
scope of this engagement is to assess Huck's vulnerability to Year 2000
problems, determine the significance of individual findings and to recommend
specific actions. Huck believes their compliance exposure is minimal, since they
use primarily commercial, vendor-supported application software products. Huck
is currently working with their various software vendors to validate that they
will make their products compliant on a timely basis.
Howmet (Investment castings) I.S. is actively working its Year 2000 compliance
issues. All date logic problems on their central mainframe applications have
been identified and remedial action to correct or replace the problematic code
is currently underway. Work is scheduled to be completed by June 30, 1999.
22
<PAGE>
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. There can be no
guarantee that the systems of other companies on which Howmet's systems rely
will be timely converted and would not have an adverse effect on the Howmet
systems. However, at this point, no material problems have been discovered or
are anticipated.
Howmet expects to incur future incremental costs for such efforts of
approximately $6 million. In addition, Howmet has diverted internal resources
with an annual cost of approximately $600,000 for each of 1997, 1998 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
As previously discussed, the increase in the Company's Howmet ownership to 62
percent and subsequent consolidation has resulted in consolidation of one
month's (December) of Howmet's cash flows with that of the Company. Due to the
consolidation of Howmet, comparison of the two periods' 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 Thiokol's 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 six months, net cash flows from operating activities were $75.6
million compared to $79.3 million for the prior year. The current year benefited
from increased collections of receivables over the prior year and was primarily
due to cash receipts at Howmet, and the settlement of Post Retirement Benefits
(PRB) issues ($8.9 million) at the government-owned, company-operated
facilities. The prior year decrease in receivables was due to timing differences
in cash receipts. The increase in depreciation and amortization over the prior
year was due to the addition of Howmet. The decrease in income taxes was due to
tax payments made by Howmet. The prior year benefited from an increase in income
tax accruals due to lower tax payments.
The purchase of an additional 13 percent of Howmet common stock used $183.8
million, less $27.2 million of acquired cash or $156.6 million. Net capital
spending on property, plant and equipment used $22.6 million in the current
period compared to $18.6 million in the prior year. The increased capital
spending was due to the addition of Howmet, but was partially offset by
decreased capital spending in the other segments of the Company due to timing
issues and lower overall expenditures in the six month period.
23
<PAGE>
Financing activities for the six month period provided $97.8 million of cash
compared to $43.1 million of cash used in the prior year period. The Company
issued $138 million of debt for the purchase of Howmet common stock. The Company
repaid $37.5 million of it's debt. During the period, Howmet refinanced its debt
to take advantage of favorable interest rates. As part of the refinancing,
Howmet incurred pre-tax charges of $20.2 million, including a $6.5 non-cash
million charge for the write-off of unamortized debt issuance costs. Howmet
repaid $146 million of debt at a 10 percent fixed interest rate, and refinanced
$198 million of new debt under a new revolving bank facility at a substantially
lower variable rate.
During the six month period, the Company repurchased 107,900 shares of the
Company's common stock for $7.9 million. The Company did not repurchase shares
in the prior year period. Subsequent to the quarter-end, in January 1998, the
Company repurchased approximately 133,000 shares of the Company's common stock
for $10.8 million. There are approximately 1.3 million shares remaining for
repurchase under the Company's current share repurchase authorization. The
Company will repurchase shares in amounts and timing as the Company deems
appropriate.
The initial public offering of Howmet stock redistributed ownership of Howmet
from Carlyle to the public and Thiokol, and such offering did not generate any
cash to Howmet or to the Company.
On December 31, 1997, the Company's current ratio was 1.49, debt-to-equity ratio
was 60.7 percent, excluding the Pechiney notes payable, and working capital was
$188 million, a $15.8 million increase from June 30, 1997.
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.
At December 31, 1997, Thiokol had available $300 million in revolving credit
facilities with $210 million unused. In addition, on December 31, 1997, Howmet
had available $300 million in revolving credit facilities with $94.4 million
unused. The Company's $300 million shelf registration statement filed with the
Securities and Exchange Commission became effective October 16, 1996, and
permits the Company access to public markets to issue long-term financing with
amounts, type, and timing as considered appropriate.
24
<PAGE>
A comparative cash flow statement for Howmet for the six month period for both
years follows:
Howmet cash flow (unaudited)
(in millions)
<TABLE>
<CAPTION>
Six months ended
December 31
----------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $20.7 $18.2
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 34.6 31.6
Equity income of affiliates (.9) (.7)
Extraordinary item 12.3 -
Changes in operating assets and liabilities:
Accounts receivable 26.4 25.3
Inventories (14.0) 12.2
Accounts payable and accrued expenses 12.8 17.0
Income taxes payable 18.3 1.6
Long-term SAR accrual 15.5 5.8
Other - net 2.4 1.1
- --------------------------------------------------------------------------------
Net cash provided by operating activities 128.1 112.1
INVESTING ACTIVITIES
Purchases of property, plant and equipment - net (38.4) (22.5)
Proceeds from sale of refurbishment business - net of tax 44.9 -
- --------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 6.5 (22.5)
FINANCING ACTIVITIES
Issuance of long-term debt 236.8 51.8
Repayment of long-term debt (315.0) (147.0)
Premiums paid on early retirement of debt (13.7) -
Foreign currency rate changes (.3) (.2)
- --------------------------------------------------------------------------------
Net cash used for financing activities (92.3) (95.4)
Increase (decrease) in cash and cash equivalents 42.4 (5.8)
Cash and cash equivalents at beginning of period 3.0 29.3
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $45.4 $23.5
================================================================================
</TABLE>
25
<PAGE>
Net cash flows provided from operations for the six month period were $128.1
million compared to $112.1 million for the same period in the prior year.
Increases in income taxes payable and other accruals were primarily responsible
for the increase. The 1996 inventory reductions were due to improved
manufacturing controls, scrap alloy sales, continued strong sales, and timing of
deliveries. In 1997, inventories increased to meet increased customer demands.
Net cash used for financing activities totaled $92.3 million for the period.
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 and capital expenditures.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Thiokol Corporation v. The United States of America. In 1996, the Company filed
an action in the United States Court of Federal Claims seeking payment of costs
that arose under its cost reimbursement contracts with the Government for
operation and management of Government-owned, contractor-operated Army
ammunition plants in Texas and Louisiana. The Company sought to recover its
costs of Government-approved benefits that workers earned during their years of
service at these plants. These benefits include: (I) post-retirement health
benefits; (ii) long-term disability benefits; (iii) workers' compensations
benefits; and (iv) severance benefits. On December 30, 1997, this case was
settled out of court. The Government has agreed to forego its' claim to certain
surplus pension assets. The Company has agreed to apply the dollar equivalent of
a portion of future pension contributions to the payment of the benefits that
were the subject of the lawsuit. The Company expects these transactions will not
be material and has agreed to fund any additional costs related to the benefits.
Thiokol Corporation v. Alliant Tech Systems, et al. In 1995, the Company filed
an action in U.S. District Court in Delaware claiming the defendants infringed
the Company's patents on solid rocket motor case insulation. The Company claims
lost profits and/or royalties plus interest. The parties cross motions for
summary judgment were both denied in late 1997. The liability phase of the case
was tried before the judge and concluded January 14, 1998. The judge has not yet
ruled on liability. If the defendants (or one of them) are found to be liable to
the Company, then the judge will schedule a damages phase of trial proceedings.
26
<PAGE>
Sharp v. Thiokol Corporation, et al. Subsequent to the quarter end, on February
5, 1998, the Federal District Court for the District of Utah Combined Division
ruled favorably for the Company on its motion to dismiss with prejudice
plaintiff's class action by shareholders of American Pacific Corporation
(AMPAC), parent of Western Electrochemical Company (WECCO). Plaintiff alleged
the Declaratory judgment action filed by the Company in a 1993 contract dispute
with WECCO was baseless and AMPAC's shareholders suffered a loss in AMPAC's
market value of $136 million as the direct result of the filing of the action by
the Company.
ITEM 2. ACQUISITION OF ASSETS.
During the second quarter of fiscal year 1996, the Company and The Carlyle Group
(Carlyle), a private merchant investment firm, 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 Thiokol owned 49 percent of the Howmet voting
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.
During the second quarter of fiscal 1997, the Company increased its ownership in
Howmet to 62% 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 stock. Beginning with December 1997, Howmet's financial
statements were consolidated with the Company's. Simultaneous with this
transaction, Carlyle sold 15.35 million Howmet common shares in an Initial
Public Offering. After the transactions, the Company, Carlyle, and the public
own approximately 62, 22.65 and 15.35 percent, respectively, of Howmet common
stock.
Under the terms of a Shareholders Agreement with Carlyle, Carlyle has agreed not
to dispose any of its shares of common stock until the earlier of the second
anniversary date of the closing (December 2, 1997), or a change of control of
Howmet. The Company has an additional option and first right of refusal to
acquire all of Carlyle's remaining ownership in Howmet, which may be exercised
during the two year period from December 2, 1999, through December 2, 2001, at
the market trading price on that date. Carlyle is allowed to designate one
member to the Howmet Board of Directors for as long as it owns not less than 5%
of Howmet common stock.
27
<PAGE>
Concurrently with the closing of the IPO, a Management Agreement with the
Company and Howmet was terminated and replaced with a Service Agreement. The
Company will provide certain administrative services to Howmet at the Company's
cost plus a fee in order to control administrative costs and avoid duplication
of administrative functions. Under a Corporate Agreement, Howmet has granted the
Company certain preemptive rights to purchase Howmet common stock in order to
maintain the Company's ownership percentage. Under a Registration Rights
Agreement with Howmet, Carlyle retains certain rights with respect to
registration under the Securities Act of the shares of common stock owned by
Carlyle after closing. Carlyle and the Company have also entered into a
Standstill Agreement and other agreements with respect to Thiokol's and Howmet's
common stock.
ITEM 5. OTHER INFORMATION
The Annual Meeting of Thiokol Corporation Stockholders will be held at 10:00
a.m. local time on October 22, 1998 at the Salt Lake Marriott Hotel, 75 South W.
Temple, Salt Lake City, Utah. Any stockholder who wishes to bring business
before the 1998 Annual Meeting must provide written notice to be received by the
Company on or before May 17, 1998.
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 SEC 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 Company's forward-looking statements include but are
not necessarily limited to the following:
28
<PAGE>
(i) The Company's National Aeronautical and Space Administration (NASA)
Reusable Solid Rocket Motor (RSRM) contract for the 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. 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. The
Company has received a request for proposal from NASA for Buy IV RSRM
motors. The Company will submit its proposal in April 1998 and begin
negotiations with NASA later in the year. If the Company is awarded such
follow-on contract, the profitability and cash flow from such a contract
may not be at current levels. NASA's proposed privatization of the Space
Shuttle program could adversely impact the Company's RSRM contract in the
out-years. NASA has shown initial interest in developing a Liquid Fly Back
Booster (LFBB) as an alternate propulsion source or as a replacement for
the Company's RSRM motors. There will be no impact to the Buy IV contract;
and as a new technology development program the LFBB will be an unlikely
competitor to RSRM for many years, if it is successfully developed.
(ii) The Company's maintenance of non-RSRM space and defense contracts
including the Minuteman regrain and commercial launch vehicles and
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 customer or failure of
such programs to be funded. The Company's ability to successfully compete
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. Risk factors also
include the degree the Company successfully manages 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 of a contracting and competitive procurement
environment.
29
<PAGE>
(iii) 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 aerospace markets and the phase of such cycle at any point
in time. The Company's purchase of the additional 13 percent of Howmet's
common stock increases the Company's exposure to the cyclical nature of
such market. 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 technology and
manufacturing qualifications to 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 and
product qualification, and product substitutions by major customers. The
Company's potential inability to maintain product technology, pricing, as
well as availability, delivery, and service are important risk factors.
(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 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
risks for the Company include management's ability to successfully expand
new and existing product lines, 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
customer and competitor risk factors.
(v) Many of the Company's products and manufacturing processes utilize highly
energetic and hazardous materials. Major liability, employee safety,
production disruptions, and asset destruction or impairment risks exist.
Unknown environmental hazards including the designation of the Company as
a responsible party in a Superfund or similar state enforcement action by
the Environmental Protection Agency and environmental claims by third
parties pose a risk to the Company.
30
<PAGE>
(vi) 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 the Carlyle
Group. Financial covenants and restrictions contained in certain Howmet
credit agreements restricts Howmet's ability to pay cash dividends to
stockholders including the Company. 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 Purchase Notes 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 is
remote, would have a material effect on Howmet's financial condition and
value of the Company's 62 percent equity ownership of Howmet.
(vii) Supplier and customer product qualifications are important to the Company
as a supplier and as a purchaser. 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 may result in loss of markets and business for the Company.
Vendor, 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. Vendor, component parts and raw material
qualifications 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 management.
31
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
Exhibit 10 Material Contracts
10.1 IPO Agreement dated as of October 8, 1997 by and among the Company,
Thiokol Corporation, Thiokol Holding Company and Carlyle-Blade
Acquisition Partners, L.P., incorporated by reference to Exhibit 4.2
to Howmet International Inc., Registration Statement on Form S-1, No.
333-37573.
10.2 Form of Amended and Restated Shareholders Agreement by and among the
Company, Thiokol Corporation, Thiokol Holding Company and Carlyle-
Blade Acquisition Partners, L.P., incorporated by reference to Exhibit
4.3 to Howmet International Inc., Registration Statement on Form S-1,
No. 333-37573.
10.3 Form of Corporate Agreement by and among the Company, Thiokol
Corporation and Thiokol Holding Company, incorporated by reference to
Exhibit 4.4 to Howmet International Inc., Registration Statement on
Form S-1, No. 333-37573.
Exhibit 27.1 Financial Data Schedule.
32
<PAGE>
Reports on Form 8-K
- -------------------
The Company filed one 8-K and one 8-KA report during the quarter ended
December 31, 1997. The 8-K related to item 1 - Purchase of Howmet International
Inc.; no financial statements were filed therewith. The 8-KA was filed on
December 15, 1997 as an amendment to the 8-K filed on December 2, 1997;
financial statements were filed therewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THIOKOL CORPORATION
(Registrant)
Date: February 13, 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)
33
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THIOKOL
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