<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
CORDANT TECHNOLOGIES INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
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Notes:
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Notice of Annual Meeting..................................................
Proxy Statement and Solicitation of Proxies............................... 1
Election of Directors..................................................... 2
Voting Securities and Principal Holders Thereof........................... 6
Security Ownership of Directors and Executive Officers.................... 7
Section 16(a) Beneficial Ownership Reporting Compliance................... 8
Executive Compensation.................................................... 8
Termination of Employment and Change of Control Agreements................ 14
Board Compensation and Management Development Committee Report on
Executive Compensation................................................... 14
Performance Graph......................................................... 18
Ratification of Appointment of Independent Auditors....................... 19
Discretionary Voting of Proxies on Other Matters, Stockholder Proposals
for 2000 Annual Meeting,
Annual Report and Form 10-K.............................................. 19
Financial Information..................................................... F-1
Management's Report on Financial Statements............................. F-2
Report of Ernst & Young LLP, Independent Auditors....................... F-3
Consolidated Statements of Income....................................... F-4
Consolidated Statements of Cash Flows................................... F-5
Consolidated Balance Sheets............................................. F-6
Consolidated Statements of Stockholders' Equity......................... F-8
Notes to Consolidated Financial Statements.............................. F-9
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... F-30
Selected Financial Data................................................. F-50
</TABLE>
<PAGE>
Cordant Technologies Inc.
15 W. South Temple
Suite 1600
Salt Lake City, UT 84101-1532
[LOGO OF CORDANT TECHNOLOGIES APPEARS HERE]
March 26, 1999
Dear Stockholder:
We invite you to the Annual Meeting of Stockholders of Cordant Technologies
Inc., which will be held on Thursday, May 13, 1999, at the Company's principal
offices, 15th floor, 15 W. South Temple, Salt Lake City, Utah, commencing at
11:30 a.m. local time. Information about the matters to be voted upon at the
meeting is in the enclosed formal Notice of Meeting and Proxy Statement.
It is important that your shares be represented at this meeting whether or not
you personally plan to attend. Please sign, date and return your proxy promptly
in the enclosed envelope. This will not limit your right to vote in person or
attend the meeting. Stockholders of record may also give proxies by calling the
toll-free telephone number or by using the Internet information as set forth on
the proxy card. The telephone and Internet voting procedures are designed to
authenticate Company stockholders' identities, to allow stockholders to give
their voting instructions, and to confirm that stockholders' instructions have
been recorded properly. Stockholders who wish to vote over the Internet should
be aware that there may be costs associated with electronic access, such as
usage charges from Internet service providers and telephone companies, and that
there may be some risk a stockholder's vote might not be properly recorded or
counted because of an unanticipated electronic malfunction.
The Company's audited financial statements for the year ended December 31,
1998, management's discussion and analysis of financial condition and results
of operations, management's report on financial statements, the independent
auditors report and other related information are included in this Notice of
Annual Meeting and Proxy Statement. The Company's Summary Annual Report is also
enclosed.
/s/ James R. Wilson
James R. Wilson
Chairman of the Board, President
and Chief Executive Officer
<PAGE>
Notice of Annual Meeting of Stockholders to be held on
Thursday, May 13, 1999
To the Stockholders:
The Annual Meeting of Stockholders of Cordant Technologies Inc. (the
"Company") will be held on Thursday, May 13, 1999, at the Company's
principal offices, 15th floor, 15 W. South Temple, Salt Lake City, Utah, at
11:30 a.m. local time, to consider and vote upon:
1. Election of three directors (see page 2);
2. Ratification of appointment of Ernst & Young LLP as the Company's
independent auditors for the year ending December 31, 1999 (see page
19); and
3. Any other business that may properly come before the meeting.
The close of business on March 19, 1999, has been fixed as the record date
for the meeting. All stockholders of record on that date are entitled to be
present and to vote at the meeting.
Attendance at the Annual Meeting will be limited to stockholders of record,
beneficial owners of Company common stock entitled to vote at the meeting
having evidence of ownership, the authorized representative (one only) of
an absent stockholder, and invited guests of management. Any person
claiming to be an authorized representative of a stockholder must, upon
request, produce written evidence of such authorization.
The meeting will be conducted pursuant to the Company's By-Laws and rules
of order prescribed by the chairman of the meeting.
For a ten-day period prior to the date of the 1999 Annual Meeting, a list
of stockholders entitled to vote will be open for examination during normal
business hours at the Company's principal offices, Suite 1600, 15 W. South
Temple, Salt Lake City, Utah, and may be examined by any stockholder for
any purpose germane to the meeting.
March 26, 1999
By Order of the Board of Directors,
Edwin M. North
Vice President and Corporate Secretary
<PAGE>
CORDANT TECHNOLOGIES INC.
15 W. South Temple
Suite 1600
Salt Lake City, UT 84101-1532
PROXY STATEMENT AND SOLICITATION OF PROXIES
March 26, 1999
This Proxy Statement is furnished in connection with the solicitation by the
Company's Board of Directors of proxies for use at its Annual Meeting of
Stockholders to be held on Thursday, May 13, 1999, and at any adjournment or
postponement thereof (the "1999 Annual Meeting").
Shares represented in person or by properly executed and unrevoked proxies
received in proper form in time for the 1999 Annual Meeting will be voted in
accordance with stockholders' instructions on the accompanying proxy. If any
such proxy contains no instructions, the shares will be voted in accordance
with the directors' recommendations, which are noted herein. Any proxy given
may be revoked at any time before it is voted at the meeting.
On March 19, 1999, the record date for the 1999 Annual Meeting, there were
36,578,820 shares of $1.00 par value common stock outstanding, each entitled to
one vote, and there is no cumulative voting. The Company has no other class of
equity securities outstanding.
Pursuant to the amended and restated By-Laws of the Company ("By-Laws"), an
inspector of election and an alternate have been appointed by the Board of
Directors to serve at the 1999 Annual Meeting. In the event the inspector or
the alternate shall not be present at the meeting, the chairman of the meeting
shall appoint an inspector in advance of any voting at such meeting. The
chairman of the meeting shall fix and announce at the meeting the date and time
of the opening and the closing of the polls for each matter upon which the
stockholders will vote at the meeting. The owners of a majority of the
outstanding shares entitled to vote are required for a quorum for the
transaction of business at the 1999 Annual Meeting. Under Delaware corporation
law, abstentions, withheld votes and broker no-votes (i.e., shares held by a
broker or nominee which are represented at the meeting, but with respect to
which such broker or nominee is not empowered to vote on a particular proposal
or proposals) will be considered part of the quorum. Directors will be elected
by a plurality of the votes cast at the 1999 Annual Meeting, which means that
abstentions, withheld votes and broker no-votes will not affect the election of
the candidates. All other proposals, including the ratification of the
appointment of Ernst & Young LLP as the Company's independent auditors, require
the favorable vote of the holders of a majority of the shares present and
entitled to vote on the particular proposal at the 1999 Annual Meeting to pass.
Therefore, abstentions as to a particular proposal will have the same effect as
votes against such proposal and broker no-votes will not be counted as votes
for or against such proposal, and will not be included in counting the number
of votes necessary for approval of the proposal. The approximate mailing date
of the Proxy Statement and proxy to stockholders is March 26, 1999.
The Company will bear the cost of the solicitation. In addition to solicitation
by mail, the Company will request banks, brokers and other custodian nominees
and fiduciaries to supply proxy material to the beneficial owners of the
Company's common stock of whom they have knowledge, and will reimburse them for
their expenses in so doing. Certain directors, officers and other employees of
the Company, not specifically employed for the purpose, may solicit proxies,
without additional remuneration therefor, by personal interview, mail,
Internet, or telephone. In addition, the Company has retained D. F. King & Co.,
Inc. to assist in the solicitation for a fee of $5,000 plus expenses.
Stockholders are urged to sign and date the enclosed proxy card and return it
as promptly as possible in the envelope enclosed for that purpose. Stockholders
of record can also give proxies by calling the toll-free telephone number or by
using the Internet information as set forth on the proxy card. The telephone
and Internet voting procedures are designed to authenticate Company
stockholders' identities, to allow stockholders to give their voting
instructions, and to confirm that stockholders' instructions have been recorded
properly. Stockholders who wish to vote over the Internet should be aware that
there may be costs associated with electronic access, such as usage charges
from Internet service providers and telephone companies, and that there may be
some risk a stockholder's vote might not be properly recorded or counted
because of an unanticipated electronic malfunction.
1
<PAGE>
1. ELECTION OF DIRECTORS
The Board of Directors currently consists of eleven directors. By resolution,
in accordance with the By-Laws of the Company, the Board of Directors'
membership will be reduced from eleven to ten directors effective May 13, 1999
as the result of Charles S. Locke's retirement from the board. The Company's
Restated Certificate of Incorporation and By-Laws provide for the Board to be
divided into three classes. Each class serves for a term of three years. At the
1999 Annual Meeting Neil A. Armstrong, William O. Studeman and Donald C.
Trauscht will stand for election as nominees for directors for a term to expire
at the 2002 Annual Meeting.
If any nominee should become unavailable, an event the Board of Directors does
not anticipate, it is intended that such shares will be voted for such
substitute nominee as may be selected by the Board of Directors, or the Board
may reduce the number of directors. All nominees are presently serving as
directors and have consented to being named herein and to serve if elected.
NOMINEES FOR DIRECTOR
Three-Year Term Expiring at the 2002 Annual Meeting
Neil A. Armstrong, age 68, became a director of the Company in October 1989. He
serves as Chairman of AIL Systems, Inc., an electronics and systems company
with sales primarily to the federal government. He is a director of Cinergy,
Inc., Milacron Inc., RTI International Metals, Inc., and USX Corporation. He
holds a Bachelor of Science degree in Aeronautical Engineering from Purdue
University and a Master of Science degree in Aerospace Engineering from the
University of Southern California.
William O. Studeman, age 59, was elected a director of the Company in January
1996. Admiral Studeman retired from the Navy in 1995 after a distinguished 33-
year career that included serving as Deputy Director of Central Intelligence
from 1992 until his retirement. Admiral Studeman is the Vice President and
Deputy General Manager for Intelligence, TRW Systems and Information Technology
Group of TRW Inc., an automotive, space, defense and information technologies
company, and a director of Paracel Corporation. He holds a Bachelor of Arts
degree from the University of the South and a Masters of Arts from George
Washington University.
Donald C. Trauscht, age 65, was elected a director of the Company in August
1993. Since 1996 he has served as Chairman of BW Capital Corporation, a private
investment company. From 1993 to 1995 he served as Chairman and Chief Executive
Officer of Borg Warner Security Corporation, a supplier of security services.
Mr. Trauscht joined Borg Warner in 1967 and in 1990 he became President of Borg
Warner Corporation, a diversified manufacturer and service company. In 1992 he
became Chairman and Chief Executive Officer of that company. He is a director
of Blue Bird Corporation, Borg Warner Security Corporation, Wynn's
International Company, ESCO Electronics Corporation, Baker-Hughes Inc., and
Hydac International Corporation. Mr. Trauscht holds a Bachelor of Science
degree from St. Mary's University and a Master of Business Administration from
the University of Chicago.
The Board of Directors recommends a vote FOR the nominees.
2
<PAGE>
DIRECTORS CONTINUING IN OFFICE
Three-Year Term Expiring at the 2001 Annual Meeting
Edsel D. Dunford, age 63, was elected a director of the Company in January
1995. He served as President and Chief Operating Officer of TRW Inc., a
manufacturer of automotive, space, defense and information technology, from
1991 until his retirement in December 1994. He served as Executive Vice
President and General Manager of TRW Space and Defense Business from 1987 to
1991. Mr. Dunford is a director of Cooper Tire & Rubber Company, Howmet
International Inc., and National Steel Corporation, and is a trustee at the
University of California at Los Angeles. Mr. Dunford holds a Bachelor of
Science degree from the University of Washington and a Masters of Engineering
degree from the University of California at Los Angeles.
Robert H. Jenkins, age 56, was elected a director of the Company in October
1998. He is the Chairman of the Board, President and Chief Executive Officer of
Sundstrand Corporation, a position held since 1997. From 1995 to 1997 he was
the President and Chief Executive Officer of Sundstrand. From 1990 to 1995 he
was Executive Vice President of Illinois Tool Works Inc., a diversified
manufacturing company. Sundstrand designs and manufactures proprietary
technology-based components and subsystems serving world industrial and
aerospace markets. He is a director of Sundstrand Corporation, AK Steel Holding
Corporation and Solutia, Inc. Mr. Jenkins holds a Bachelor of Science degree
from the University of Wisconsin.
James R. Wilson, age 58, has served as Chairman of the Board, President and
Chief Executive Officer of the Company since October 1995, and served as
President and Chief Executive Officer from October 1993 to October 1995. He has
served as a director of the Company since October 1993. He joined the Company
in 1989 as Vice President and Chief Financial Officer and became Executive Vice
President and Chief Financial Officer in 1992. Mr. Wilson is a director of The
BFGoodrich Company, Cooper Industries, Inc., First Security Corporation and
Howmet International Inc., and is a member of the Board of Trustees of the
College of Wooster. He holds a Bachelors degree from the College of Wooster and
a Masters of Business Administration from Harvard University.
Three-Year Term Expiring at the 2000 Annual Meeting
Michael P.C. Carns, age 61, was elected a director of the Company in January
1995. General Carns retired as Vice Chief of Staff of the United States Air
Force in 1994 with 36 years of distinguished military service. General Carns is
President and Executive Director of the Center of International Political
Economy, a policy research group, and is a director of Mission Research
Corporation, and is a member of the Board of Trustees of the Monterey Institute
of International Studies. He holds a Bachelor of Science degree from the United
States Air Force Academy and a Masters of Business Administration from Harvard
University.
Steven G. Lamb, age 42, was elected a director of the Company in August 1998.
He is the President and Chief Operating Officer of Case Corporation, a
manufacturer of farm and light to medium size construction equipment, a
position held since 1997. Joining Case in 1993, he served in various executive
positions including Executive Vice President and Chief Operating Officer. Mr.
Lamb holds a Bachelor of Science degree from the United States Military Academy
and a Masters of Business Administration from Harvard University.
David J. Lesar, age 45, was elected a director of the Company in August 1998.
He is the President and Chief Operating Officer of Halliburton Company, a
global energy, engineering and services company, a position held since 1997.
Joining Halliburton in 1993, he held various executive positions including
Executive Vice President and Chief Financial Officer. Prior to joining
Halliburton, Mr. Lesar was a Partner with Arthur Andersen LLP. Mr. Lesar holds
a Bachelors of Science degree and Masters of Business Administration from the
University of Wisconsin.
D. Larry Moore, age 62, was elected a director of the Company in June 1997. He
is the retired President and Chief Operating Officer of Honeywell, Inc., an
electronic automation and control
3
<PAGE>
systems manufacturer, a position held from April 1993 to June 1997. Joining
Honeywell in 1986, he served in various executive positions including Executive
Vice President and Chief Operating Officer from 1990 to 1993. Dr. Moore is a
director of Geon Company, Howmet International Inc., and Reynolds Metals
Company. Dr. Moore holds a Doctorate in Economics from Arizona State University
and Bachelor of Science degree and Masters of Business Administration from the
University of Arizona.
Committees of the Board
During 1998, the Board of Directors reorganized the Committees of the Board and
amended the Committee Charters. A Finance Committee was added, increasing the
number of Board Committees to these five: Audit, Compensation and Management
Development, Nominating and Board Governance, Finance and Executive Committees.
The Audit Committee recommends to the Board the independent auditors to be
selected to audit the Company's annual financial statements, reviews the fees
charged for such audits and for any special assignments given the independent
auditors and appraises the independence and general performance of the
independent auditors. The Committee reviews the annual audit and its scope,
including the independent auditors' comment letter and management's responses
and the implementation of management's responses; issues arising under the
Company's business ethics and conflict of interest policies; any major
accounting changes made or contemplated; and the effectiveness and efficiency
of the Company's internal audit program. In addition, the Committee confirms
that no restrictions have been imposed by Company personnel on the scope of the
independent auditors' and the internal auditors' examinations. The Committee
receives any reports pursuant to the Private Securities Litigation Reform Act
of 1995 of independent auditors with respect to illegal acts that have been
detected or otherwise come to its attention. Also, the Committee annually meets
with the Senior Vice President and General Counsel to assess the adequacy and
effectiveness of corporate policies, procedures and monitoring compliance with
legal and regulatory requirements. Members of this Committee appointed by the
Board in October 1998 are Messrs. Donald C. Trauscht (Chairman), Neil A.
Armstrong, Michael P.C. Carns, David J. Lesar, and William O. Studeman. The
Committee met three times and took action by written unanimous consent one time
during calendar year 1998. Each Committee member attended 75 percent or more of
the Committee meetings while a member of the Committee.
The Compensation and Management Development Committee annually reviews and
reports to the Board on the Chairman of the Board, President and Chief
Executive Officer's performance. The Committee makes recommendations to the
Board with respect to the creation and amendment of compensation, retirement
and other benefit plans of the Company and its subsidiaries. The Committee
reviews and approves the Company's executive compensation policies and reviews
and approves the compensation actions for the Chairman of the Board, President
and Chief Executive Officer, Executive Officers and other key employees. The
Committee administers the Company's short and long-term executive bonus
programs, including the approval of performance goals, and the stock option and
awards plans. The Committee reviews and approves the Committee's report for the
proxy statement, retains outside compensation consultants, and determines the
Company's policy concerning the deductibility of the Company's compensation
under the Internal Revenue Code. Members of the Committee appointed by the
Board in October 1998 are Messrs. Charles S. Locke (Chairman), Edsel D.
Dunford, Robert H. Jenkins, D. Larry Moore, and Donald C. Trauscht. The
Committee met four times during calendar year 1998. Each Committee member
attended 75 percent or more of the Committee meetings while a member of the
Committee. The Committee's report on Executive Compensation is set forth below.
The Nominating and Board Governance Committee reviews the size, structure, and
composition of the Board, identifies and evaluates criteria for selecting
directors, evaluates individuals for potential membership on the Board,
including nominees, makes recommendations to the Board of individuals to fill
vacancies or new positions, makes recommendations to the Board of individuals
to be proposed to stockholders for election to the Board at the annual meetings
of stockholders and makes recommendations to the Board regarding Committee
structures and responsibilities. The Committee also reviews and makes
recommendations to the Board as to the compensation and benefits of
non-employee directors and Board committee members. Periodically, the Committee
will report to the
4
<PAGE>
Board on the assessment of the effectiveness of the Board's performance.
Members of the Committee appointed by the Board in October 1998 are Messrs.
Edsel D. Dunford (Chairman), Robert H. Jenkins, Steven G. Lamb, Charles S.
Locke, and D. Larry Moore. The Committee met three times and took action by
written unanimous consent two times during calendar year 1998. Each Committee
member attended 75 percent or more of the Committee meetings while a member of
the Committee.
The Finance Committee makes recommendations to the Board regarding the planning
of the capital structure of the Company and the raising of long-term capital
including the incurrence or redemption of long-term debt. The Committee will
make recommendations to the Board regarding dividend policy and the issuance or
repurchase of the Company's capital stock. The Committee will act and report to
the Board regarding the appointment or changes of investment managers,
trustees, actuaries, or administrative committees and changes in investment
guidelines or actuarial assumptions with respect to the Company's pension and
savings plans. Annually, the Committee will review and report to the Board with
respect to the actuarial assumptions of the Company's retirement plans and
investment performance of the Company's retirement and savings plans. The
Committee will also approve material hedging transactions and review the
Company's corporate income tax practices and investments of cash reserves.
Members of the committee are D. Larry Moore (Chairman), Steven G. Lamb and
David J. Lesar. The Committee, which became operative in October 1998, held one
meeting during calendar year 1998 that all members attended.
The Executive Committee may exercise all of the powers and authority of the
Company's Board, except that the Committee does not have the power to amend the
Company's By-Laws or Certificate of Incorporation (except to fix the
designations, preferences and other terms of any of its preferred stock),
authorize the issuance of stock, declare dividends, adopt an agreement of
merger or consolidation, adopt a certificate of ownership and merger under
Delaware law, or recommend to Company stockholders the sale, lease or exchange
of all or substantially all of its property and assets, a dissolution of the
Company or a revocation of a dissolution. Members of this Committee appointed
by the Board in October 1998 are Messrs. James R. Wilson (Chairman), Edsel D.
Dunford, Charles S. Locke, and Donald C. Trauscht. The Committee met one time,
which all members attended, and took action by written unanimous consent three
times during calendar year 1998.
Board Meeting Attendance and Compensation of Directors
The Company's Board of Directors met five times during calendar year 1998. All
directors were present for 75 percent or more of the total meetings of the
Board while they were Board members.
During 1998, Board compensation practices were reviewed with the assistance of
an independent compensation consultant with respect to providing compensation
at levels to meet competitive conditions for the retention and recruitment of
qualified individuals to serve as directors on the Company's Board of
Directors. As the result of this review, the Board compensation program was
amended effective July 1, 1998, providing that an annual retainer of $20,000 be
paid to directors in the form of restricted stock grants. This is intended to
align a portion of a directors' compensation with the performance of the
Company's common stock. At the October 1998 Annual Meeting, stockholders
approved amendments to the Company's Amended and Restated 1996 Stock Awards
Plan permitting such restricted stock grants to be made from the Plan. The
stock-based retainer is made in addition to the Company's annual $30,000 cash
retainer paid to non-employee directors. A fee of $1,000 and travel expenses is
paid for each meeting attended. Effective July 1, 1998, committee chairmen also
receive an annual retainer of $3,000. Directors who are employees of the
Company receive no compensation for their services as directors. Mr. James R.
Wilson is the only employee serving as a director.
The Company maintains a Deferred Fees Plan under which non-employee directors
may elect to have payment of part or all of their directors' compensation
deferred until such time as they cease to be a director. Under the Plan,
directors may defer their directors' fees into a cash or phantom stock credit
account. Amounts credited to the cash account are credited with increments
(similar to interest), and amounts credited to the phantom stock account are
credited with amounts reflecting the change in the price of the Company's
common stock and payment of dividends. All distributions of a director's cash
or phantom stock account are made only in cash. Edsel D. Dunford, Charles S.
Locke, and D. Larry Moore participate in the Plan's cash account and Robert H.
Jenkins participates in the phantom stock account. Two retired directors with
an interest in the Plan are receiving benefits.
5
<PAGE>
The Company's director restricted stock grants are made contingent upon a
director remaining a member of the Board of Directors. The shares do not vest
until the director's retirement or in the event of disability or death or
change in control of the Company. In the event a director resigns from the
board or otherwise elects not to stand for election as a director, the
restricted shares granted to such director are forfeited unless 80 percent of
the Board of Directors then in office, with the affected director abstaining,
otherwise takes formal action to waive such forfeiture. During the tenure of
such director's service on the board, the shares are restricted with respect to
transferability, assignability or encumbrance, and such restrictions are only
released upon the director's retirement, death or disability unless otherwise
waived by formal action by the Board of Directors, as described above. During
such time as the restrictions apply to the Company's common stock granted to
the director, the director has voting rights and receives dividends and other
distributions or adjustments on such common stock. The number of shares of
director restricted stock granted to each non-employee director is calculated
by dividing the average of the high and low New York Stock Exchange price on
the first trading day of July into the $20,000 stock retainer with each
fractional share rounded up to the next whole share.
Director Retirement at Age 70
The By-Laws of the Company provide that, among other qualifications to serve as
a director, a person must not have attained the age of seventy years. The By-
Laws further provide that whenever any director shall cease to be qualified to
serve as a director, his term shall expire, but he shall continue to serve
until his successor is elected and qualified; provided, however, that no
director's term shall so expire if the Board of Directors waives such
qualification.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The following table sets forth information as of December 31, 1998, with
respect to the shares of the Company's common stock which are held by persons
known to the Company to be beneficial owners of more than five percent of such
stock.
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Name and Address Amount of Nature Percent of
of Beneficial Owners of Beneficial Ownership(/1/) Class
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
FMR Corp. Aggregate Amount: 3,632,180 9.96
82 Devonshire Street Sole Voting Power(/2/): 178,300
Boston, Massachusetts Shared Voting Power: 0
02109 Sole Dispositive Power: 3,632,180 9.96
Shared Dispositive Power: 0
Mellon Bank Corporation Aggregate Amount: 1,874,456 5.14
One Mellon Bank Center Sole Voting Power: 1,601,259 4.39
Pittsburgh, Pennsylvania Shared Voting Power(/2/): 122,625
15258 Sole Dispositive Power: 1,720,151 4.72
Shared Dispositive Power(/2/): 124,025
Morgan Stanley Dean Witter
& Co. Aggregate Amount: 1,833,884 5.03
1221 Avenue of the Sole Voting Power: 0
Americas Shared Voting Power: 1,554,982 4.26
New York, New York 10020 Sole Dispositive Power: 0
Shared Dispositive Power: 1,833,884 5.03
</TABLE>
- --------------------------------------------------------------------------------
(/1/) As reported on Schedule 13G.
(/2/) Less than 1%.
6
<PAGE>
The following table shows the Company's common stock beneficially owned as of
March 26, 1999, by each director and nominee for director and each of the
Executive Officers named in the table on page 8, and the aggregate number of
such shares beneficially owned by all directors and Executive Officers of the
Company as a group (as used in this Proxy Statement the term "Executive
Officer" means all officers of the Company designated as Executive Officers by
the Board of Directors). Unless otherwise indicated in the footnotes, each
named person and member of the group has sole voting and investment power with
respect to the shares shown.
Security Ownership of Directors and Executive Officers
<TABLE>
- ----------------------------------------------------------------------------
<CAPTION>
Name Shares Beneficially Owned(/1/),(/2/)
- ----------------------------------------------------------------------------
<S> <C>
Neil A. Armstrong 2,828(/3/)
- ----------------------------------------------------------------------------
Michael P.C. Carns 946(/3/)
- ----------------------------------------------------------------------------
Richard L. Corbin 74,316
- ----------------------------------------------------------------------------
Robert L. Crippen 23,834
- ----------------------------------------------------------------------------
Edsel D. Dunford 12,428(/3/)
- ----------------------------------------------------------------------------
Robert H. Jenkins 528(/5/)
- ----------------------------------------------------------------------------
Steven G. Lamb 510(/4/)
- ----------------------------------------------------------------------------
David J. Lesar 510(/4/)
- ----------------------------------------------------------------------------
Charles S. Locke 5,552(/3/)
- ----------------------------------------------------------------------------
James E. McNulty 99,563
- ----------------------------------------------------------------------------
D. Larry Moore 1,428(/3/)
- ----------------------------------------------------------------------------
William O. Studeman 828(/3/)
- ----------------------------------------------------------------------------
Donald C. Trauscht 1,228(/3/)
- ----------------------------------------------------------------------------
James R. Wilson 346,078
- ----------------------------------------------------------------------------
Bruce M. Zorich 2,666
- ----------------------------------------------------------------------------
All directors, nominees and Executive
Officers as a group
(19 persons, including those named). 652,575
- ----------------------------------------------------------------------------
</TABLE>
(/1/) Reflects two-for-one stock split paid as a stock dividend in March 1998.
(/2/) Includes shares which may be acquired presently or within 60 days upon
exercise of stock options: Messrs. Corbin 66,866; Crippen 21,666; McNulty
87,666; Wilson 324,633; Zorich 2,666; and all directors, nominees and
Executive Officers as a group 570,779 shares.
(/3/) Including 428 shares contingently granted July 1, 1998, pursuant to the
Directors' Restricted Stock Program.
(/4/) Represents 510 shares contingently granted August 20, 1998, pursuant to
the Directors' Restricted Stock Program.
(/5/) Represents 528 shares contingently granted October 22, 1998, pursuant to
the Directors' Restricted Stock Program.
No individual's beneficial holdings total more than one percent of the
outstanding shares; the holdings of the group represent 1.8 percent of the
outstanding shares with respect to the most recently concluded fiscal year.
7
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To the Company's knowledge based on review of copies of such forms furnished to
the Company and written representations, all Forms 3, 4, and 5 required by
Section 16(a) of the Securities Exchange Act of 1934 have been timely filed
with respect to the most recently concluded fiscal year.
EXECUTIVE COMPENSATION
Compensation of Executive Officers
The Summary Compensation Table sets forth the compensation for the six month
transition period July 1 to December 31, 1998 (1998T) reflecting changes in the
Company's fiscal year-end and for the fiscal years ended June 30, 1998, 1997,
and 1996. The Summary Compensation Table sets forth the compensation for both
long-term and short-term, for services in all capacities earned by those
individuals who were as of December 31, 1998, (i) the Chief Executive Officer
and (ii) the other four most highly compensated Executive Officers of the
Company.
Summary Compensation Table(/1/)
<TABLE>
<CAPTION>
-------------------------------- ----------------------------------------------------
Annual Compensation Long-Term Compensation
--------------- ------------------------------
Awards Payouts
- ------------------------------------------------------------------------------------------------------------------------
Name and Year Salary Bonus(/2/) Other Annual Securities Underlying LTIP All Other
Principal Position Compensation(/3/) Options/ SARs # Payouts(/4/) Compensation(/5/)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
James R. Wilson 1998T $350,000 $490,000 $ 0 50,000 $ 0 $ 0
Chairman of the Board, 1998 575,000 792,750 0 40,000 425,000 4,525
President and Chief 1997 540,000 583,000 0 70,000 850,000 4,800
Executive 1996 500,000 330,860 0 70,000 283,271 4,750
Officer
- ------------------------------------------------------------------------------------------------------------------------
Richard L. Corbin 1998T 157,500 157,500 0 16,100 0 1,494
Executive Vice 1998 255,000 250,000 0 8,000 168,000 4,006
President 1997 235,000 209,250 0 15,000 336,000 4,650
and Chief Financial 1996 225,000 124,454 0 15,200 0 4,725
Officer
- ------------------------------------------------------------------------------------------------------------------------
Robert L. Crippen 1998T 150,000 148,500 0 16,100 0 2,100
Vice President, 1998 290,000 286,260 0 8,000 0 6,002
President 1997 160,417 150,000 0 19,000 0 423
Thiokol Propulsion 1996 0 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------
James E. McNulty 1998T 150,000 150,000 0 16,100 0 1,250
Executive Vice 1998 250,000 243,750 190,234 8,000 146,300 5,875
President Human 1997 225,000 198,450 324,884 15,000 274,000 4,770
Resources and 1996 207,000 102,000 0 13,400 178,072 4,680
Administration
- ------------------------------------------------------------------------------------------------------------------------
Bruce M. Zorich 1998T 137,500 137,500 0 16,100 0 3,363
Vice President 1998 255,962 215,000 0 8,000 0 0
President, Huck 1997 199,487 180,000 0 6,000 0 0
International, 1996 163,439 0 0 13,000 0 0
Inc.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(/1/) During 1998, the Company changed its fiscal year-end from June 30 to
December 31. Executive compensation for the six-month transition period
July 1 to December 31, 1998 is shown as 1998T.
(/2/) Bonuses accrued under the Company's Key Executive Bonus Plan are paid
after the fiscal year in which they are accrued.
(/3/) Amounts paid to Mr. McNulty represent Supplemental Cash Payments made upon
the exercise of stock options pursuant to stock options granted prior to
fiscal year 1992. Such payments reflect tax gross-up amounts pursuant to
the terms of the stock options granted. There are no stock options
remaining unexercised that contain a tax gross-up supplemental payment.
8
<PAGE>
(/4/) The fiscal 1998 LTIP payouts were made in August 1998 from the Company's
Key Executive Long-Term Incentive Plan for the plan period July 1, 1995
through June 30, 1998. The fiscal 1997 and 1996 LTIP Payouts were made,
respectively, in August of the subsequent fiscal year, with regard to the
three-year Plan periods ending June 30, 1997 and June 30, 1996. Messrs.
Crippen and Zorich participate in the Plan, but will not be eligible for
plan benefits prior to completion of the three-year Plan period ending
June 30, 1999. LTIP payments are made 50 percent in cash and 50 percent
Company common stock valued at market on June 30. Reflecting the two-for-
one stock split paid as a stock dividend in March 1998, Messrs. Wilson and
McNulty received 3,744 and 2,430 shares, respectively, in 1996 and Messrs.
Wilson, Corbin, and McNulty received 7,548, 3,078, and 2,080 shares,
respectively, in 1997. Messrs. Wilson, Corbin, and McNulty received 2,209,
1,172, and 861 shares, respectively, in 1998.
(/5/) The amounts are the Company's matching contributions on behalf of each
named individual under the Company's Employee Retirement Savings and
Investment Plan, a 401(k) plan. Amounts deferred are included in Salary
compensation.
9
<PAGE>
Stock Option Grants in 1998T
The table below shows the Company's stock option grants to the named Executive
Officers in 1998T reflecting the six month transition period. The 1996 Stock
Awards Plan, pursuant to which these grants were made, authorizes the
Compensation and Management Development Committee to grant stock options, stock
appreciation rights, shares of restricted stock and other awards valued by
reference to the Company's common stock.
Option/SAR Grants In 1998T
<TABLE>
<CAPTION>
---------------------------------------------------- ----------------------------------
Individual Grants(/1/) Potential Realizable Value at
Assumed Annual Rates of Stock
Price
Appreciation for Option Term(/2/)
- ------------- ---------------------------------------------------- ----------------------------------
Name Number of Percent of Total Exercise or Expiration 5% 10%
Securities Options/SARs Base Price Date
Underlying Granted to Per
Options/SARs Employees in Share
Granted (#) Fiscal Year
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James R. Wilson 50,000 16.71 $39.25 8/20/08 $ 1,236,375 $ 3,120,375
- ----------------------------------------------------------------------------------------------------------
Richard L. Corbin 16,100 5.38 39.25 8/20/08 398,113 1,004,761
- ----------------------------------------------------------------------------------------------------------
Robert L. Crippen 16,100 5.38 39.25 8/20/08 398,113 1,004,761
- ----------------------------------------------------------------------------------------------------------
James E. McNulty 16,100 5.38 39.25 8/20/08 398,113 1,004,761
- ----------------------------------------------------------------------------------------------------------
Bruce M. Zorich 16,100 5.38 39.25 8/20/08 398,113 1,004,761
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(/1/) All stock option grants are issued at market value on the date of grant.
Options issued August 20, 1998 and subsequent thereto are exercisable in
an increment of one third each year of a three year vesting period.
Options issued prior to August 21, 1997 became exercisable one year after
the date of grant. All options have a ten year term. Options lapse three
months after the date of termination of employment except for retirement,
death or disability. For Executive Officers named in the table and other
key employees, the stock option grants prior to October 1993 contain
limited stock appreciation rights exercisable immediately only upon the
change of control of the Company as defined on page 14 under the section
Termination of Employment and Change of Control Agreements.
(/2/) No gain will be realized by an optionee without an increase in the price
of the Company's common stock that will correspondingly increase the value
of the common stock outstanding held by all stockholders. A 5 percent and
a 10 percent gain over the ten-year option period would increase the total
value of the Company's outstanding common stock by $901.8 million and
$2,275.9 million respectively. There can be no assurance that the gains
shown in the table will be realized since any gain is dependent on the
performance of the Company's common stock price which is attributable to
many factors including but not limited to Company performance and stock
market conditions. The value of the realized gains shown in this table is
provided solely for illustrative purposes only in compliance with rules
promulgated by the Securities and Exchange Commission.
10
<PAGE>
Stock Options Exercised During 1998T
The following table presents information regarding the exercise of options held
by the named Executive Officers during 1998T reflecting the six month
transition period, to purchase shares of the Company's common stock and the
value of unexercised stock options.
Aggregated Option/SAR Exercises in 1998T and Year-End Option/SAR Values
<TABLE>
- -------------------------------------------------------------------------------------------
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs Options/SARs at
at Year-End Year-End(/1/)
(#) ($)
- -------------------------------------------------------------------------------------------
Name Shares Acquired Value Exercisable/ Exercisable/
On Exercise (#) Realized ($) Unexercisable Unexercisable
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James R. Wilson 0 0 324,633/76,667 $6,984,242/$0
- -------------------------------------------------------------------------------------------
Richard L. Corbin 0 0 66,866/21,434 1,420,800/0
- -------------------------------------------------------------------------------------------
Robert L. Crippen 0 0 21,666/21,434 266,593/0
- -------------------------------------------------------------------------------------------
James E. McNulty 0 0 87,666/21,434 2,057,717/0
- -------------------------------------------------------------------------------------------
Bruce M. Zorich 0 0 2,666/21,434 0/0
- -------------------------------------------------------------------------------------------
</TABLE>
(/1/) Value is calculated based on the average closing New York Stock Exchange
price of the Company's common stock as of December 31, 1998, minus the
option exercise price.
11
<PAGE>
Long-Term Compensation
The following table sets forth information concerning the named Executive
Officers participating in the Company's Key Executive Long-Term Incentive Plan
for 1998T for the 2.5-year Plan period beginning July 1, 1998, and ending
December 31, 2000.
Long-Term Incentive Plan Awards in 1998T
<TABLE>
<CAPTION>
- --------------------------------- -------------------------
Name Performances or
Other Period Estimated Future Payouts
Until Maturation under Non-Stock Price-
or Payout Based Plans (/1/)
-------------------------
$ $ $
Threshold Target Maximum
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James R. Wilson 2.5 Years 87,500 350,000 700,000
- -----------------------------------------------------------------------------
Richard L. Corbin 2.5 Years 33,469 133,875 267,750
- -----------------------------------------------------------------------------
Robert L. Crippen 2.5 Years 31,875 127,500 255,000
- -----------------------------------------------------------------------------
James E. McNulty 2.5 Years 31,875 127,500 255,000
- -----------------------------------------------------------------------------
Bruce M. Zorich 2.5 Years 29,219 116,875 233,750
- -----------------------------------------------------------------------------
</TABLE>
(/1/) Awards under the Company's Key Executive Long-Term Incentive Plan are
based on attainment of predetermined goals for earnings per share and
return on capital for Executive Officers who are not also operating unit
heads. For Executive Officers and other key employees who are also
operating unit managers participating in the Plan, awards are based on
attainment of predetermined goals, including pretax profit and return on
total investment goals. The Plan bonus opportunities for Mr. Crippen have
been set on the attainment of certain financial and performance targets to
be achieved with respect to the management of Thiokol Propulsion and the
RSRM Shuttle Contract. The Plan provides that bonus payments be paid in a
combination of cash and stock. Estimated future payouts are for the fiscal
year 1998T Plan Period. The Plan's 2.5-year performance period, rather
than the normal three-year period, reflects the change in the Company's
fiscal year-end from June 30 to December 31. The threshold, target and
maximum bonus opportunities for the bonus performance period being July 1,
1998 through December 31, 2000 have been prorated 50 percent by the
Compensation Committee as the result of the Plan's 2.5-year transition
period to the December 31 fiscal year-end. The Plan provides that the
target bonus award at the beginning of each three-year Plan period
beginning July 1, 1997 and the 2.5-year Plan period beginning July 1, 1998
and ending December 31, 2000, resulting from the transition to the
December 31 fiscal year-end, be stated 50 percent in cash and 50 percent
in Company common stock. The common stock is contingently granted subject
to forfeiture if the Plan's target bonus goals are not achieved during the
Plan period. The number of shares in the contingent grant is determined by
dividing the 50 percent of the target bonus opportunity by the average New
York Stock Exchange stock price on the first trading day of the beginning
of each Plan period. The contingent shares granted July 1, 1998 to Messrs.
Wilson, Corbin, Crippen, McNulty, and Zorich were 3,704, 1,417, 1,349,
1,349 and 1,237, respectively. The threshold, target and maximum bonus
opportunities set forth in the table reflect the combined value of the
cash and stock at the beginning of the performance period.
The Plan provides a target bonus opportunity based on a percentage of each
participant's base annual compensation determined by the participant's salary
grade. The opportunity ranges from 65 percent of base annual compensation for
the lowest salary grade covered by the Plan to 100 percent of base annual
compensation for the highest salary grade covered by the Plan. The amount of
the bonus award paid will vary from 25 percent of the target bonus opportunity
being paid if the threshold bonus opportunity goals are achieved; 100 percent
of the target bonus opportunity if the target bonus goals are achieved; and a
maximum bonus of 200 percent of the target bonus opportunity if the maximum
bonus targets are achieved. The bonus opportunities are paid 50 percent in cash
and 50 percent in Company common stock.
12
<PAGE>
Retirement Plan
The Company maintains a defined benefit Pension Plan for non-bargaining unit
employees and funds its entire cost. The following table shows the estimated
annual benefits payable upon retirement (including amounts attributable to the
defined benefit excess plan) for the specified compensation and years of
service.
Pension Plan Table
<TABLE>
----------------------------
<CAPTION>
Years of Service
- -----------------------------------------------------------------
Remuneration 15 20 25 30 35 40
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 200,000 55,681 76,241 97,301 118,362 139,422 154,222
- -----------------------------------------------------------------
400,000 115,081 157,441 200,801 244,162 287,522 317,122
- -----------------------------------------------------------------
600,000 174,481 238,641 304,302 369,962 435,622 480,022
- -----------------------------------------------------------------
800,000 233,881 319,841 407,801 495,762 583,722 642,922
- -----------------------------------------------------------------
1,000,000 293,281 401,041 511,301 621,562 731,822 805,822
- -----------------------------------------------------------------
1,500,000 441,781 604,041 770,051 936,062 1,102,072 1,213,072
- -----------------------------------------------------------------
</TABLE>
As of December 31, 1998, the named Executive Officers had the following
credited service for determining pension benefits: James R. Wilson, 9.6 years;
Richard L. Corbin, 4.8 years; Robert L. Crippen, 2.2 years; and James E.
McNulty, 9.6 years.
Except for Bruce M. Zorich, all of the Executive Officers named in the Summary
Compensation Table participate in the Plan. Pension benefits are based on the
average earnings for the highest five consecutive years of the final ten years
of service. Compensation included in the final average earnings for pension
benefit computation includes base annual salary and annual bonuses but excludes
payments from the Company's Executive Long-Term Incentive Plan and all other
annual compensation shown in the Summary Compensation Table. Unreduced pension
benefits are calculated pursuant to the Plan's benefit formula as a straight
life annuity payable at age 67. Executive Officers of the Company retire at age
65. Benefits may be payable in the form of a joint and survivor or a ten-year
certain option. Also Messrs. Wilson, Corbin, Crippen, and McNulty participate
in an unfunded survivors income benefit plan which provides benefits to a
surviving spouse of approximately 50 percent of a participant's base pay at
death and continues until the participant would have attained age 65.
Because the Pension Plan is subject to the benefit and compensation limits
under the Internal Revenue Code of 1986 (the "Code"), the Company has
established an unfunded Excess Benefit Plan that provides for payment of
amounts that would have been paid to employees under the pension formula absent
the benefit limitations of the Code.
The Company also maintains a Supplemental Executive Retirement Plan ("SERP")
designed to provide unfunded supplemental retirement benefits to certain
Executive Officers and key employees of the Company. The SERP is designed to
provide such selected employees a benefit at retirement equal to 60 percent of
the participant's average five highest consecutive years of compensation during
the last ten years. Plan benefits are offset by amounts the participant
receives from the Company's Retirement Plan, Excess Benefit Plan, and any
pension benefits received from other employer plans including military
pensions. A reduced early retirement benefit is available only at the
discretion of the Chairman of the Board or President. The SERP provides
accelerated benefit accrual, vesting and payment in the event of a change of
control of the Company as defined by the Board of Directors. Messrs. Wilson,
Corbin, Crippen and McNulty participate in the SERP.
The Company may elect to fund and secure all or a part of the Excess Benefit
Plan and SERP benefits through the use of a "Rabbi" Trust meeting the Code
requirements. All such funding is subject to the claims of the Company's
creditors.
13
<PAGE>
Bruce M. Zorich participates in the Huck International, Inc. Personal
Retirement Account Plan ("PRA"), a cash balance plan, providing benefits based
on age and salary. Mr. Zorich's estimated annual retirement benefit at age 65
is $33,345. Mr. Zorich also participates in the Huck International, Inc. Excess
Benefit Plan for Selected Employees ("Plan") which is designated to provide
supplemental benefits in addition to the PRA benefits. Mr. Zorich's estimated
Plan benefit payable from the Excess Benefits Plan in the form of a lump sum at
age 65 is $969,309.
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
The Company has entered into change of control employment agreements with
Messrs. Wilson, Corbin, Crippen, McNulty, Zorich and certain other key
employees. These agreements are intended to provide for continuity of
employment in the event of a change of control as defined by the agreements,
including the following events: (i) acquisition by any person of 20 percent or
more of the voting securities of the Company; (ii) changes of the "incumbent
Board" as defined in the agreements; (iii) reorganization, merger or
consolidation of the Company; or (iv) liquidation or sale of the Company. Each
of the agreements requires continued employment of the executive following a
change of control on a basis equivalent to his employment immediately before
such change. In the event that during the three-year period following a change
of control, the executive terminates his employment for "good reason" (as
defined in the agreements) or for any reason during the 30-day period
commencing one year after the change of control or the Company terminates the
executive's employment "without cause" (as defined in the agreements), the
executive would be entitled to receive a lump sum payment equal to three times
the sum of the executive's salary, average long-term bonus and highest annual
bonus plus service and earnings credits under any Company retirement plan which
would have been earned during the employment period and the continuance of
fringe benefits during the three years after such termination. The agreements
provide that payments from the Company which (a) constitute "parachute
payments" as defined in Section 280G of the Code and (b) would subject the
executive to the 20 percent excise tax (the "Excise Tax") contained in
Section 4999 of the Code, will be "grossed up" by an additional payment in an
amount defined by the agreements which takes into account the Excise Tax, tax
penalties and interest, as the case may be, with respect to any such "parachute
payments." The amounts of such parachute payments, pursuant to the terms
described above, are only determinable with specificity on the date such
payment obligations, if any, are triggered. With respect to the salary, annual
bonuses and long-term bonuses shown in the Summary Compensation Table, the
estimated benefits payable under the foregoing agreements including the SERP or
excess plan benefits and excise tax gross-up for Messrs. Wilson, Corbin,
Crippen, McNulty and Zorich are $12.9, $4.6, $5.5, $4.3, and $1.8 million,
respectively.
BOARD COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE REPORT ON EXECUTIVE
COMPENSATION
Compensation Policy
The Committee's Compensation Policy is designed to provide a competitive
compensation program to attract, retain, motivate and reward talented
individuals as Executive Officers and as key employees of the Company. The key
executive compensation programs are administered by the Committee. The
Committee's policies are implemented by the Company's compensation and benefits
staff under the direction of the Executive Vice President of Human Resources
and Administration. The components of the program include base annual salary,
short and long-term cash and stock based incentives, benefits and perquisites.
Compensation grades, ranges and midpoints adopted by the Committee are set
based upon nationally recognized compensation surveys: (i) the Hewitt
Management Compensation Survey 777 consisting of 316 companies; and (ii) Towers
Perrin Compensation Data Bank consisting of 710 companies. The Committee also
considers the compensation of peer group companies. Base salaries are set to
correspond approximately with the mean of salaries offered for like positions
by comparable companies. Short and long-term incentives are designed to provide
above average total compensation when performance of the Company or an
operating unit exceeds targets set by the Committee. Annual incentives are
related to the Company and operating unit performance and individual
achievement of qualitative individual and strategic goals. Long-term incentives
are
14
<PAGE>
designed to balance management focus between short and long-term goals and to
provide capital accumulation linked to Company or operating unit performance.
Stock-based incentives are designed to align the results achieved for
stockholders in share price performance. The total compensation program is
designed to reflect the overall level of the Company's or operating unit's
financial performance, achievement of strategic goals, and the Company's stock
performance. Total compensation will vary from year to year depending on the
actual performance achieved against the predetermined goals set both
financially and qualitatively and the Company's share price reflected in stock
based compensation awards.
During 1998, the Committee reviewed the Company's compensation structure. The
Committee considered the size of the Company, reflecting the acquisition of the
controlling interest and consolidation of Howmet and the acquisition of
Jacobson Mfg. Co. Inc., an industrial fastener company. The Committee also
reviewed management performance and the competitive market conditions for
recruiting and retaining experienced senior executives. As the result of this
review, the Committee deemed that base salary adjustments were warranted for
the Chief Executive Officer and certain other senior executives. The Committee
also considered needed compensation plan administration adjustments such as in
the setting of bonus targets, payouts and timing of the beginning and ending of
bonus and bonus plan performance periods to reflect the transition in the
Company's fiscal year-end from June 30 to December 31.
The principal elements of the compensation program administered by the
Committee under the Compensation Policy for the Chief Executive Officer, the
Executive Officers, and other key employees are as follows:
Base Annual Salary
Base annual salaries are set against one of seven established salary grades
reflecting the position, duties and level of responsibilities of each Executive
Officer, including the Chief Executive Officer, and other key employees.
Annual Bonus Program
The Key Executive Bonus Plan provides annual cash incentive opportunities to
Executive Officers and other key employees selected by the Committee. Each
bonus amount is based upon the Company or respective operating unit achieving
predetermined earnings goals and the attainment of individual qualitative
strategic goals relative to the participant's position, duties and
responsibilities with the Company ("Target Bonus Goals"). The Board of
Directors sets the Company's earnings goals effective the beginning of the
fiscal year. Subject to Committee review and approval, the Chief Executive
Officer sets the earnings and strategic goals for operating unit participants.
The Plan permits Committee discretion in adjusting incentives for Plan
participants (as well as penalties for non-achievement) of certain
predetermined qualitative strategic, operating, and financial goals not
necessarily tied to earnings of the Company ("Strategic Goals").
The Plan also permits the Committee to designate employees, including Executive
Officers, as special participants to receive discretionary bonus payments made
by the Committee in recognition of outstanding achievements or accomplishments.
Annual bonuses paid during fiscal year 1998 reflect the level of earnings
achieved for corporate or operating unit Plan participants and achievement of
strategic goals against Target Bonus Goals set by the Committee prior to the
changes in the Company's fiscal year-end to December 31. All Executive
Officers, including the Chief Executive Officer, named in the Summary
Compensation Table earned bonuses from the Plan.
For the transition to the December 31, 1998 fiscal year-end, the Committee
established six-month transitional target bonus goals to be achieved by
designated Plan participants including the named Executive Officers. Bonuses
earned and accrued for the six-month transition period ending
15
<PAGE>
December 31, 1998 have been prorated by the Committee to reflect the transition
period. The accrued bonuses were paid during February 1999. Beginning with
January 1, 1999, the Committee will administer the annual bonus plan on a
calendar year basis.
Long-Term Incentive Plan
The Key Executive Long-Term Incentive Plan is designed as a long-term incentive
program for Executive Officers and other key employees in a position to
substantially influence the performance of the Company. The Plan authorizes
payment of incentive bonuses based on achievement of financial goals for the
Company and its operating units predetermined by the Committee at the beginning
of each three-year Plan period. The Plan provides that 50 percent of the Target
Bonus opportunity, ranging from 65 percent to 100 percent of base annual
compensation, be awarded in cash and 50 percent in shares of the Company common
stock. The number of shares of Company common stock awarded is determined at
the beginning of each three-year Plan period. For Executive Officers, including
the Chief Executive Officer, who are not operating unit managers, the financial
goals are based on earnings per share growth and return on total capital of the
Company. Except for Mr. Crippen, for each operating unit manager of the
Company, the financial goals are growth in operating profits and return on
total investment at that unit. Mr. Crippen's goals are specific with respect to
management objectives for Thiokol Propulsion and the RSRM Contract. Messrs.
Wilson, Corbin and McNulty have earned bonuses from the Plan. Robert L. Crippen
and Bruce M. Zorich will be eligible for a bonus payment, if earned, for the
Plan period ending June 30, 1999.
To reflect the change in the Company's fiscal year-end, the Committee adopted a
transition Plan period of 2.5 years instead of the usual three years beginning
July 1, 1998 and ending December 31, 2000. The Target Bonus Opportunity,
threshold and maximum bonus opportunities, including the contingent stock
grants, have been prorated to 50 percent of the Plan's normal target
thresholds. Beginning January 1, 1999, long-term incentive compensation-based
programs' administration cycle will be on a calendar year basis.
Stock Options
The Committee has determined that providing stock based compensation awards to
Executive Officers and other key employees who are in a position to affect the
future performance of the Company is an integral part of the compensation
package. The Company's 1989 and 1996 Stock Awards Plans approved by
stockholders, authorize the Committee to grant stock options, stock
appreciation rights, shares of restricted stock and other stock awards. The
number of shares granted to an individual is based on Committee established
guidelines relating to the recipient's position, salary grade and stock price.
Stock options are granted for a period of ten years and vest over a three-year
period.
Stock Ownership Guidelines
With the objective of more closely aligning the financial interests of the
Company's executives to the performance of the Company's stock, the Committee
has adopted stock ownership guidelines for the Chief Executive Officer and
senior executives who are his direct reports.
Perquisites
The Committee reviews annually the Executive Officers', including the Chief
Executive Officer's, perquisites to determine if they are competitive and
reflect the usual and customary industry practices based on compensation survey
data.
Determination of the Chief Executive Officer's Compensation
The 1998T compensation for Mr. James R. Wilson, Chairman of the Board,
President and Chief Executive Officer, consisted of a base annual salary, an
annual bonus, long-term incentive bonus, stock
16
<PAGE>
option grant, employee benefits provided to salaried employees as a group, and
perquisites that are usual and customary for the position.
The Committee has determined Mr. Wilson's salary grade and salary range based
on his position as Chairman of the Board, President and Chief Executive Officer
using the salary data described above. Considering the financial performance of
the Company, size of the Company resulting from acquiring the controlling
interest in Howmet, recent acquisitions increasing the size of Huck
International, the size of the Company compared to other aerospace and
industrial manufacturing companies and the industries and markets the Company
serves, the Committee increased Mr. Wilson's base compensation, effective July
1, 1998 from $575,000 to $700,000.
Pursuant to the terms of the Key Executive Bonus Plan during the fiscal year-
ended June 30, 1998, Mr. Wilson received an annual bonus award of $792,750 or
200 percent of his Target Bonus Opportunity (the maximum bonus award under the
Plan). This payment reflects the period July 1, 1997 through June 30, 1998 and
the bonus goals set by the Committee before the change in the Company's fiscal
year-end. For the six-month transition period from July 1, 1998 to December 31,
1998, Mr. Wilson earned a bonus of $490,000 or 200 percent of his target bonus
opportunity which was paid during February 1999. The bonuses reflect the
achievement of the maximum earnings per share goal and subjectively measured
qualitative goals under the Plan as reviewed and approved by the Committee for
each bonus period.
Mr. Wilson's 1998 Key Executive Long-Term Incentive Plan bonus payment of
$425,000 represents the achievement of return on capital financial goals
exceeding the target goals established at the beginning of the three year plan
period beginning July 1, 1995 and ending June 30, 1998. This bonus payment was
paid 50 percent in cash and 50 percent in Company common stock based on the
market price on June 30, 1998. Mr. Wilson has been designated a participant in
the Key Executive Long-Term Incentive Plan for the plan period beginning July
1, 1998 and ending December 31, 2000.
Mr. Wilson's compensation and the compensation of the other named Executive
Officers in the Summary Compensation Table reflect the financial performance of
the Company and its operating units through June 30, 1998 and the transition
period from July 1, 1998 to December 31, 1998 reflecting the change in the
Company's fiscal year-end to December 31. The Committee considered the
accomplishments achieved as the result of strategic actions taken to reposition
the Company in commercial markets reducing the Company's dependence on
federally funded defense and aerospace programs, the acquisition of the
controlling interest of Howmet and the acquisition of Jacobson. During the
restated fiscal year, January 1, 1998 through December 31, 1998, the Company's
sales increased 127 percent, from $1.1 to $2.4 billion and net income increased
59 percent from $89.5 to $142.0 million.
1993 Tax Act Compensation Limits
Section 162(m) of the Code restricts the tax deductibility for certain non-
formula performance based executive compensation exceeding $1 million in a
year. Mr. Wilson's compensation exceeded the $1 million compensation limit for
calendar year 1998. To the extent that such compensation in excess of the $1
million limit does not meet the performance based compensation requirements,
the Company may not receive the benefit of a corresponding tax deduction. The
Committee has determined that retaining the flexibility to determine all or
part of the criteria for the Executive Officer incentive compensation awards
outweighs the tax benefit of the corresponding tax deduction that might
otherwise have been received for such compensation meeting Code requirements.
Compensation and Management Development Committee
Charles S. Locke, Chairman
Edsel D. Dunford
Robert H. Jenkins
D. Larry Moore
Donald C. Trauscht
17
<PAGE>
The report of the Compensation Committee and the following stock performance
graph are not deemed to be "soliciting material" or to be "filed" with the
Securities and Exchange Commission or subject to Regulation 14A or 14C or to
the liabilities of Section 18 of the Securities Exchange Act of 1934, as
amended ("Exchange Act") except to the extent the Company specifically requests
that such information be treated as soliciting material or specifically
incorporates it by reference into any filing under the Securities Act of 1933,
as amended, or the Exchange Act.
PERFORMANCE GRAPH
The following graph presents a comparison of the cumulative stockholder return
on the common stock of the Company for the five-year period beginning January
1, 1994, and ending December 31, 1998, as measured against (i) the Standard &
Poor's 500 Stock Index and (ii) the Standard & Poor's Aerospace and Defense
Index.
The returns shown assume that $100 was invested in the Company's common stock
and in each of the two indices starting on January 1, 1994. The returns shown
also assume that all dividends paid during the five-year period were
reinvested. Stockholders are cautioned against drawing any conclusions from the
data contained therein, as past performance is no guarantee of future results.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
1/94 12/94 12/95 12/96 12/97 12/98
------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Cordant Technologies Inc........... $100.00 107.94 133.99 179.79 329.81 307.36
Standard & Poor's 500 Index........ $100.00 101.30 139.25 171.38 228.36 294.00
Standard & Poor's Aerospace/Defense
Index............................. $100.00 108.17 179.01 239.44 246.34 188.84
</TABLE>
18
<PAGE>
2. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
Upon recommendation by the Audit Committee, the Board of Directors has
appointed Ernst & Young LLP ("Ernst & Young") as its independent auditors for
the fiscal year ending December 31, 1999. At the Board's direction, the
appointment of Ernst & Young is being presented to the stockholders for
ratification at the 1999 Annual Meeting. While ratification is not required by
law or the Company's Certificate of Incorporation or By-Laws, the Board
believes that such ratification is desirable. In the event this appointment is
not ratified by stockholders, the Board will consider that fact when it
appoints independent auditors for the next fiscal year.
Ernst & Young was the Company's independent auditors for calendar year 1998 and
for all prior years since 1969. Audit services provided to the Company by Ernst
& Young during 1998 consisted of examination of the financial statements of the
Company and its subsidiaries for that year and the preparation of various
related reports, as well as services relating to filings with the Securities
and Exchange Commission, and pension, savings and welfare plan audits. Ernst &
Young are also the auditors for Howmet International Inc., 84.65 percent owned
by the Company.
Representatives of Ernst & Young are expected to be present at the 1999 Annual
Meeting with the opportunity to make a statement if they so desire and to be
available to respond to appropriate questions relating to that firm's
examination of the Company's financial statements for calendar year 1998.
The Board of Directors recommends a vote FOR the proposal to ratify the
appointment of Ernst & Young.
DISCRETIONARY VOTING OF PROXIES ON OTHER MATTERS
Management does not now intend to bring before the 1999 Annual Meeting any
matters other than those disclosed in the notice of the meeting. Should any
matter requiring a vote of stockholders be properly brought before the meeting
by or at the direction of the Board of Directors, the proxies in the enclosed
form confer upon the person or persons entitled to vote the shares represented
by such proxies discretionary authority to vote such shares in respect of any
such matter in accordance with their best judgment.
For business to be properly brought before the next annual stockholders'
meeting by a stockholder, in accordance with the By-Laws of the Company,
advance written notice must be received by the Corporate Secretary of the
Company at its principal executive offices no earlier than February 14, 2000
and no later than March 15, 2000.
STOCKHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
Stockholder proposals intended for the proxy statement for the 2000 Annual
Stockholders' Meeting must be received by the Corporate Secretary of the
Company at its principal executive offices no later than November 26, 1999.
ANNUAL REPORT AND FORM 10-K
The Company will provide, without charge, upon written request from any person
solicited herein, a copy of the Cordant Technologies Inc. Summary Annual Report
and Form 10-K filed with the Securities and Exchange Commission. Requests
should be directed to the Director of Investor Relations, Cordant Technologies
Inc., 15 W. South Temple, Suite 1600, Salt Lake City, Utah 84101.
By Order of the Board of Directors,
Edwin M. North
Vice President and Corporate Secretary
Salt Lake City, Utah
March 26, 1999
19
<PAGE>
FINANCIAL INFORMATION
<TABLE>
<S> <C>
Management's Report on Financial Statements F-2
Report of Ernst & Young LLP, Independent Auditors F-3
Consolidated Statements of Income F-4
Consolidated Statements of Cash Flows F-5
Consolidated Balance Sheets F-6
Consolidated Statements of Stockholders' Equity F-8
Notes to Consolidated Financial Statements F-9
Management's Discussion and Analysis of Financial Condition and Results
of Operations F-30
Selected Financial Data F-50
</TABLE>
F-1
<PAGE>
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
Management has prepared, and is responsible for, the consolidated financial
statements and all related financial information contained in this report to
stockholders and Board of Directors included in the 1999 Notice of Annual
Meeting and Proxy Statement. The consolidated financial statements, which
include amounts based on estimates and judgments, were prepared in accordance
with generally accepted accounting principles appropriate in the circumstances
and applied on a consistent basis. Other financial information in this proxy
statement is consistent with that in the consolidated financial statements.
Management maintains accounting systems and related internal controls which it
believes provide reasonable assurance, at appropriate cost, that transactions
are properly executed and recorded, that assets are safeguarded, and that
accountability for assets is maintained. An environment that provides an
appropriate level of control is maintained and monitored and includes
examinations by an internal audit staff.
Management recognizes its responsibilities for conducting the Company's affairs
in an ethical and socially responsible manner. The Company has written
standards of business conduct, including its business code of ethics which
emphasizes the importance of personal and corporate conduct, and demands
compliance with federal and state laws governing the Company. The importance of
ethical behavior is regularly communicated to all employees through ongoing
education and review programs designed to create a strong compliance
environment.
The Audit Committee of the Board of Directors is composed of five outside
directors. This Committee meets regularly and also meets separately with
representatives of the independent auditors, Company officers and the internal
auditors to review their activities.
The consolidated financial statements have been audited by Ernst & Young LLP,
independent auditors, whose report follows.
[SIGNATURE APPEARS HERE]
Richard L. Corbin
Executive Vice President and
Chief Financial Officer
F-2
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Cordant Technologies Inc.:
We have audited the accompanying consolidated balance sheets of Cordant
Technologies Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cordant
Technologies Inc. at December 31, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Salt Lake City, Utah
February 8, 1999
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------
(in millions, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $2,426.9 $1,070.1 $864.6
Operating expenses:
Cost of sales 1,894.4 861.3 718.4
General and administrative 193.6 90.3 68.1
Research and development 30.2 14.8 12.5
Restructuring and impairment (2.2)
- --------------------------------------------------------------------------
Total operating expenses 2,118.2 966.4 796.8
Income from operations 308.7 103.7 67.8
Equity income of affiliates .4 35.3 15.1
Interest income 12.8 7.0 8.1
Interest expense (28.3) (4.0) (3.6)
Other, net (4.2) (2.2) (.8)
- --------------------------------------------------------------------------
Income before income taxes, minority interest
and extraordinary item 289.4 139.8 86.6
Income taxes 107.6 41.4 25.9
- --------------------------------------------------------------------------
Income before minority interest and
extraordinary item 181.8 98.4 60.7
Minority interest (39.8) (1.8)
- --------------------------------------------------------------------------
Income before extraordinary item 142.0 96.6 60.7
Extraordinary item--loss on early retirement
of debt (7.1)
- --------------------------------------------------------------------------
Net income $ 142.0 $ 89.5 $ 60.7
- --------------------------------------------------------------------------
Income per share before extraordinary item:
Basic $ 3.89 $ 2.64 $ 1.67
Diluted $ 3.79 $ 2.57 $ 1.64
Net income per share:
Basic $ 3.89 $ 2.45 $ 1.67
Diluted $ 3.79 $ 2.38 $ 1.64
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
(in millions) 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 142.0 $ 89.5 $ 60.7
Adjustments to reconcile net income to net cash
provided by operating activities:
Restructuring and impairment (2.2)
Extraordinary item 7.1
Minority interest 39.8 1.8
Depreciation 71.9 33.8 32.8
Amortization 30.1 12.5 11.2
Equity income (.4) (35.3) (15.1)
Deferred income taxes .2 (3.4) (5.7)
Changes in operating assets and liabilities:
Receivables 28.1 25.2 53.1
Inventories 14.6 (1.5) 20.8
Accounts payable and accrued expenses .3 5.1 5.9
Income taxes 19.6 (12.1) 4.5
Other -- net 7.0 (12.1) (3.0)
- ----------------------------------------------------------------------------
Net cash provided by operating activities 353.2 110.6 163.0
INVESTING ACTIVITIES
Acquisitions, net of acquired cash (277.0) (156.6)
Purchases of property, plant and equipment (114.7) (36.3) (33.0)
Proceeds from disposal of assets 4.7 1.7 1.0
- ----------------------------------------------------------------------------
Net cash used for investing activities (387.0) (191.2) (32.0)
FINANCING ACTIVITIES
Net change in short-term debt 57.9 1.4 (98.1)
Issuance of long-term debt 336.4 336.2
Repayment of long-term debt (337.9) (213.5) (.3)
Premiums paid on early retirement of debt (13.7)
Purchase of common stock for treasury (14.4) (7.9) (.3)
Stock option transactions 4.8 6.1 2.3
Dividends paid (14.6) (14.1) (12.5)
- ----------------------------------------------------------------------------
Net cash provided by (used for) financing
activities 32.2 94.5 (108.9)
Foreign currency rate changes 1.3 (1.0)
- ----------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (.3) 12.9 22.1
Cash and cash equivalents at beginning of year 45.6 32.7 10.6
- ----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 45.3 $ 45.6 $ 32.7
- ----------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
--------------------
(in millions) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 45.3 $ 45.6
Receivables 240.0 235.7
Inventories 252.3 240.2
Deferred income taxes and prepaid expenses 60.8 50.5
Restricted Trust (a) 716.4
- ------------------------------------------------------------------------------
Total Current Assets 1,314.8 572.0
Property, Plant and Equipment
Land 36.9 30.0
Buildings and improvements 311.2 295.3
Machinery and equipment 768.6 602.0
- ------------------------------------------------------------------------------
Total Property, Plant and Equipment 1,116.7 927.3
Less allowances for depreciation (444.4) (376.9)
- ------------------------------------------------------------------------------
Net Property, Plant and Equipment 672.3 550.4
Other Assets
Costs in excess of net assets of businesses acquired, net 561.7 400.3
Restricted Trust (a) 716.4
Patents and other intangible assets, net 128.3 131.6
Other noncurrent assets 132.8 129.1
- ------------------------------------------------------------------------------
Total Other Assets 822.8 1,377.4
- ------------------------------------------------------------------------------
Total Assets $2,809.9 $2,499.8
- ------------------------------------------------------------------------------
</TABLE>
(a) The Restricted Trust held a note receivable from Pechiney, S.A. and
related letters of credit that secured Pechiney, S.A.'s agreement to repay
the Pechiney Notes. Pechiney S.A. (Howmet's previous owner) paid the notes
on January 4, 1999, and the Restricted Trust was terminated. (See Note 6.)
See notes to consolidated financial statements.
F-6
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
------------------
(in millions) 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 80.1 $ 8.4
Accounts payable 139.8 121.8
Accrued compensation 81.6 79.5
Other accrued expenses 202.1 174.3
Pechiney Notes (a) 716.4
- ---------------------------------------------------------------------------
Total Current Liabilities 1,220.0 384.0
Noncurrent Liabilities
Accrued retiree benefits 169.0 163.9
Deferred income taxes 52.3 44.8
Accrued interest and other noncurrent liabilities 234.2 213.3
Long-term debt 324.5 325.9
Pechiney Notes (a) 716.4
- ---------------------------------------------------------------------------
Total Noncurrent Liabilities 780.0 1,464.3
Commitments and contingent liabilities
Minority interest 142.0 101.0
Stockholders' Equity
Common stock (par value $1.00 per share)
Authorized--200 shares
Issued--41.1 and 20.5 shares at December 31, 1998 and
1997 respectively, (includes treasury shares) 41.1 20.5
Additional paid-in capital 47.4 46.0
Retained earnings 658.8 552.0
Accumulated other comprehensive income (loss) (3.9) (3.5)
- ---------------------------------------------------------------------------
743.4 615.0
Less common stock in treasury, at cost
(4.6 and 2.2 shares at December 31, 1998 and 1997 re-
spectively) (75.5) (64.5)
- ---------------------------------------------------------------------------
Total Stockholders' Equity 667.9 550.5
- ---------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $2,809.9 $2,499.8
- ---------------------------------------------------------------------------
</TABLE>
(a) The Restricted Trust held a note receivable from Pechiney, S.A. and related
letters of credit that secured Pechiney, S.A.'s agreement to repay the
Pechiney Notes. Pechiney S.A. (Howmet's previous owner) paid the Notes on
January 4, 1999, and the Restricted Trust was terminated (See Note 6).
See notes to consolidated financial statements.
F-7
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Comprehensive Stockholders'
(in millions) Stock Capital Earnings Stock Income Equity
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $20.5 $44.3 $428.4 $(63.0) $430.2
- ----------------------------------------------------------------------------------------------
Comprehensive income
Net income 60.7 60.7
------------
Total comprehensive income 60.7
------------
Dividends paid (12.5) (12.5)
Treasury stock purchases (.3) (.3)
Stock options exercised and
related income tax benefits 2.3 2.3
- ----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 20.5 44.3 476.6 (61.0) 480.4
- ----------------------------------------------------------------------------------------------
Comprehensive income
Net income 89.5 89.5
Other comprehensive income
Cumulative translation
adjustment $(3.5) (3.5)
------------
Total comprehensive income 86.0
------------
Dividends paid (14.1) (14.1)
Treasury stock purchases (7.9) (7.9)
Stock options exercised and
related income tax benefits 1.7 4.4 6.1
- ----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 20.5 46.0 552.0 (64.5) (3.5) 550.5
- ----------------------------------------------------------------------------------------------
Comprehensive income
Net income 142.0 142.0
Other comprehensive income
Minimum pension
liability (3.1) (3.1)
Cumulative translation
adjustment 2.7 2.7
------------
Total comprehensive income 141.6
------------
Dividends paid (14.6) (14.6)
Stock split 20.6 (20.6)
Treasury stock purchases (14.4) (14.4)
Stock options exercised and
related income tax benefits 1.4 3.4 4.8
- ----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $41.1 $47.4 $658.8 $(75.5) $(3.9) $667.9
- ----------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Name Change: On May 5, 1998, Thiokol Corporation changed its corporate name to
Cordant Technologies Inc. (the Company or Cordant). Two of the Company's three
business segments have retained their corporate names (Huck International,
Inc., and Howmet International Inc.) and are operating as subsidiaries of the
Company. The Propulsion Group, now called Thiokol Propulsion, operates as a
division of the Company.
Fiscal Year Change: The Company's Board of Directors amended the Company bylaws
changing the fiscal year-end from June 30 to a calendar year-end. All
historical information in this report has been prepared to conform to a
calendar year-end presentation. The Company made the change to coordinate
Cordant and Howmet International Inc. (Howmet) reporting periods and to reduce
the confusion that accompanies a non-calendar year-end. Howmet reports
separately on a calendar year basis.
Basis of Consolidation: The consolidated financial statements include the
accounts of Cordant Technologies Inc. and its subsidiaries. The Company
increased its ownership in Howmet from 49 percent to 62 percent on December 2,
1997. Accordingly, beginning with December 1997, Howmet's earnings, cash flows
and its balance sheet have been consolidated with the Company's. Minority
interest in income and equity are also reported for the 38 percent of Howmet
the Company does not own. Prior to December 2, 1997, Howmet's results were
accounted for under the equity method. All significant intercompany accounts
and transactions have been eliminated from the consolidated financial
statements.
Use of Estimates: The consolidated financial statements are prepared in
conformity with generally accepted accounting principles which requires
management to make estimates and assumptions. Estimates of contract costs and
revenues, valuation accounts and reserves are utilized in the earnings
recognition process that affects reported amounts in the financial statements
and accompanying notes. Actual results may differ from those estimates.
Revenue Recognition Under Long-Term Contracts: Propulsion Systems sales
encompass products and services performed principally under contracts and
subcontracts with various United States Government (government) agencies and
aerospace prime contractors. Sales under cost-type contracts are recognized as
costs are incurred and include a portion of total estimated earnings to be
realized in the ratio that costs incurred relate to estimated total costs.
Sales under fixed-price-type contracts are recognized when deliveries are made
or upon completion of specified tasks. Cost or performance incentives are
incorporated into certain contracts and are recognized when awards are earned,
or when realization is reasonably assured and amounts can be estimated. The
Company participates in teaming arrangements and records its share of sales and
profits related to such ventures on the percentage of completion method.
Adjustments in estimates, which can affect both revenues and earnings, are made
in the period in which the information necessary to make the adjustment becomes
available. Provisions for estimated losses on contracts are recorded when
identified.
Cash and Cash Equivalents: Cash and cash equivalents represent cash and short-
term investments that are highly liquid maturing within three months.
Inventories: Inventories are stated at the lower of cost or market. Inventories
for the Investment Castings segment are determined by both the first-in, first-
out (FIFO) and last-in, first-out (LIFO) method. Inventories for the Fastening
Systems segment are determined by the FIFO method. Propulsion Systems segment
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.
Property, Plant and Equipment: Property, plant and equipment is carried at cost
and depreciated over the assets' estimated useful lives, using either the
straight-line or accelerated methods. Building and
F-9
<PAGE>
improvements useful lives vary between 10 and 40 years and other assets lives
vary between 3 and 20 years.
Intangibles: Costs in excess of the net assets acquired (goodwill), patents,
and other intangible assets are being amortized on a straight-line basis over
periods between 10 and 40 years. Accumulated amortization amounted to $74 and
$43.9 million at December 31, 1998 and 1997, respectively.
Impairment of Long-Lived Assets: The Company records impairment losses on
goodwill and on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than net book
value. The Company also evaluates the amortization periods of assets, including
goodwill and other intangible assets, to determine whether events or
circumstances warrant revised estimates of useful lives.
Contingent Matters: The Company accrues costs for contingent matters when it is
probable that a liability has been incurred and the amount can be reasonably
determined. At the time a liability is recognized, a receivable is recorded for
the estimated future recovery from third parties, insurance carriers, or from
the government. Costs allocated to commercial business or not otherwise
recoverable from third parties are expensed when the liability is recorded.
Except for current amounts receivable and payable, contingent amounts are
included in "other noncurrent assets" and in "accrued interest and other
noncurrent liabilities".
Foreign Currency Translation: The Company's international business units
generally conduct their business utilizing their local currency as the
functional currency. Assets and liabilities of the Company's foreign
subsidiaries are translated at year-end exchange rates. Revenues and expenses
are translated into U.S. dollars at average rates of exchange prevailing during
the period. Unrealized currency translation adjustments are deferred and
included in the equity section of the balance sheets, whereas transaction gains
and losses are recognized currently in the statements of income.
Derivative Financial Instruments: Derivative financial instruments are utilized
by the Company to reduce foreign currency risks in accordance with Company
policy approved by the Board of Directors. The Company does not hold or issue
derivative financial instruments for trading purposes. The Company enters into
foreign exchange contracts to minimize fluctuations in the value of payments
due international vendors and the value of foreign currency denominated
receipts. Forward foreign exchange contracts obligate the Company to exchange
predetermined amounts of specified foreign currencies at specified exchange
rates on specified dates or to make an equivalent U.S. dollar payment equal to
the value of such exchange. The Company enters into economic hedges used to
mitigate fluctuations of anticipated foreign currency commitments. The Company
also enters into forward foreign exchange contracts directly related to a
particular asset, liability or transaction for which a commitment or
anticipated commitment is in place.
In accordance with hedge accounting, gains and losses for specifically
identified assets, liabilities and firmly committed transactions are recognized
in income and offset the foreign exchange gains and losses when the underlying
transaction is settled. Unrealized changes in fair value of contracts no longer
effective as hedges are recognized in income at such time and marked to market.
For economic hedges utilized for anticipated commitments, forward foreign
exchange contract market gains or losses are reflected in the income statement.
The impact on the financial position and results of operations from likely
changes in foreign exchange rates is mitigated by minimizing risk through
hedging transactions related to commitments.
Income Taxes: The provision for income taxes includes, in the current period,
the cumulative effect of any changes in tax rates from those used previously in
determining deferred tax assets and liabilities. Deferred taxes are provided to
recognize the income tax effects of amounts which are included in different
reporting periods for financial statement and tax purposes.
New Accounting Standards: In June 1998, the Financial Accounting Standards
Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement
F-10
<PAGE>
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 does not believe that SFAS No.
133 will have a significant effect on the earnings and financial position of
the Company. This statement is effective for fiscal years beginning after June
15, 1999. The Company will adopt the new statement beginning on January 1,
2000.
Reclassification: Reclassifications were made to the 1997 and 1996 financial
statements to conform to the 1998 calendar year presentation.
NOTE 2. RECEIVABLES
The components of receivables are as follows:
<TABLE>
<CAPTION>
December 31
----------------
(in millions) 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Trade receivables:
Trade accounts receivable $159.0 $147.2
Retained receivables 32.0 20.2
Allowance for doubtful accounts (7.8) (6.3)
- -----------------------------------------------------------------------------
Total trade receivables 183.2 161.1
Receivables under U.S. Government contracts and subcontracts 56.8 74.6
- -----------------------------------------------------------------------------
$240.0 $235.7
- -----------------------------------------------------------------------------
</TABLE>
Receivables under U.S. Government contracts and subcontracts contain some
unbilled costs and accrued profits that consist primarily of revenues
recognized on contracts that have not been billed. Such amounts are billed
based on contract terms and delivery schedules. According to government
contracting industry standards, some receivables may not be billed within a
year. 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 $121.9 million at December 31, 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 in 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 include, but are
not limited to, 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.
Howmet has an agreement to sell, on a revolving basis, an undivided interest in
a defined pool of accounts receivable. The defined pool of outstanding accounts
receivable at December 31, 1998 and 1997, amounted to $87 and $75.2 million,
respectively. Howmet has received $55 million from the sale of such eligible
receivables to a master trust and has deducted this amount from accounts
receivable in the December 31, 1998 and 1997 consolidated balance sheets.
Losses on the sale of receivables were $3.8 million for both years ended
December 31, 1998 and 1997. These losses are included in the line captioned
"Other, net" in the statements of income. At December 31, 1998 and 1997, the
$32 and $20.2 million difference between the total eligible pool and the $55
million sold, represent retainage on
F-11
<PAGE>
the sale in the event the receivables are not fully collected. Howmet has
retained the responsibility for servicing and collecting the accounts
receivable sold or held in the master trust. Any incremental additional costs
related to such servicing and collection efforts are not significant.
NOTE 3. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
December 31
-----------------
(in millions) 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Raw materials and work-in-process $161.8 $168.2
Finished goods 87.6 72.6
Inventoried costs related to U.S. Government and other long-
term contracts 28.8 27.3
Progress payments received on long-term contracts (22.6) (24.5)
LIFO valuation adjustment (3.3) (3.4)
- -----------------------------------------------------------------------------
$252.3 $240.2
- -----------------------------------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, inventories include $111.8 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.
NOTE 4. HOWMET INTERNATIONAL INC. PURCHASE
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 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. As part of this purchase, Howmet received indemnifications from the
seller for liabilities over amounts reserved relating to environmental and
certain other obligations existing at the purchase date. 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 percent of Howmet common stock from
Carlyle for approximately $183.8 million. Simultaneously with this transaction,
Carlyle sold 15.35 million shares of Howmet common stock in an Initial Public
Offering. After the transactions, the Company, Carlyle, and the public owned
approximately 62, 22.65 and 15.35 percent, respectively, of Howmet common
stock. The Company held a two-year option beginning in December 1999 to acquire
all of Carlyle's shares at market price. The Company purchased the Carlyle
shares on February 8, 1999 (See Note 23). The Company or its affiliates have
agreed not to acquire publicly held Howmet common shares that would reduce
public ownership below 14 percent, unless such purchase is a tender offer to
acquire all outstanding public shares.
Beginning in December 1997, Howmet's financial statements have been
consolidated with the Company's. Operating results for 1997 include eleven
months of Howmet's earnings reported under the equity method and one month of
Howmet earnings reported on a consolidated basis. Operating results for 1998
include twelve months of Howmet's earnings on a consolidated basis. Additional
detailed financial information on Howmet is available in Howmet's 1999 Notice
of Annual Meeting and Proxy Statement incorporated by reference in Howmet's
Annual Report on Form 10-K for Howmet's fiscal year ended December 31, 1998.
F-12
<PAGE>
The following pro forma information for the year ended December 1997 is not
necessarily indicative of the results which would have resulted had the
acquisition of additional shares in December 1997 occurred at the beginning of
1997 nor is it necessarily indicative of future results.
<TABLE>
<CAPTION>
(In millions, except per share data)
- ------------------------------------------------------------
<S> <C>
Net sales $2,217.7
Income before Extraordinary item 89.4
Income per diluted share before Extraordinary item 2.37
Net income $ 82.3
Net income per diluted share $ 2.18
- ------------------------------------------------------------
</TABLE>
NOTE 5. JACOBSON MANUFACTURING PURCHASE
On June 11, 1998, the Company completed the purchase of all the common stock of
Jacobson Manufacturing Company Inc. (Jacobson) for $273.6 million and assumed
$7.3 million in liabilities. Jacobson was merged into Huck International, Inc.,
and is operated as part of the Fastening Systems segment. Jacobson manufactures
high-quality, custom-designed metal parts and fasteners and precision-
engineered plastic products. The acquisition of Jacobson has been accounted for
under the purchase accounting method. The goodwill associated with the purchase
is being amortized over 40 years using the straight-line method. Sales and
operating income for Jacobson from June 11 through December 31 was
approximately $78 and $10 million, respectively, and is included in the
consolidated results of the Company with the Fastening Systems segment.
NOTE 6. 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 (Pechiney Notes) to third parties in
connection with the purchase of American National Can Company. As a result of
the acquisition of Howmet by the Company and Carlyle, 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. Interest income from the Restricted Trust for the aforementioned
period was equal to the interest expense, and is netted in the financial
statements.
Pechiney S.A. paid the Notes in full on January 4, 1999. No Howmet or Cordant
funds were used in the payment of the Notes. As a result, the Restricted Trust
has been terminated and like the Pechiney Notes, subsequent to December 31,
1998, will not be included on the Company's balance sheet.
NOTE 7. FINANCING ARRANGEMENTS
Long term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31
-------------
<S> <C> <C>
(in millions) 1998 1997
- --------------------------------------------------------------------------
Cordant Technologies 6.625% senior notes, due March 1, 2008 $150.0
Cordant Technologies senior revolving credit facility 110.0 $108.0
Howmet senior revolving credit facility 60.0 198.0
Other 13.1 20.1
- --------------------------------------------------------------------------
333.1 326.1
Less current portion 8.6 .2
- --------------------------------------------------------------------------
$324.5 $325.9
- --------------------------------------------------------------------------
</TABLE>
F-13
<PAGE>
The above table excludes the Pechiney Notes, (See Note 6). The Company,
excluding Howmet, has credit commitments from a group of banks aggregating $200
million under revolving credit facilities, of which $90 million was available
at December 31, 1998. The funds available under the credit facilities may be
used for any corporate purpose (See Note 23) and are available through May 1999
($50 million) and May 2001 ($150 million). The interest rate on the facilities
is based on LIBOR plus a spread, and was 5.9 and 6.1 percent at December 31,
1998 and 1997, respectively. The credit agreements and senior notes contain
covenants restricting, among other things, the Company's ability to incur
funded debt, liens, sale and leaseback transactions, and the sale of assets.
The Company, excluding Howmet, at December 31, 1998, had $11.1 million in
Letters of Credit outstanding.
Howmet has credit commitments from a group of banks aggregating $300 million
under a revolving credit agreement, of which $232.4 million was available at
December 31, 1998. The funds available under the credit facility may be used
for any corporate purpose and are available through December 2002. The interest
rate on the facility is based on LIBOR plus a spread, and was 5.8 and 6.2
percent at December 31, 1998 and 1997, respectively. Terms of the revolving
credit facility require Howmet to meet certain interest coverage and leverage
ratios and maintain certain minimum net worth amounts. In addition, there are
restrictions that limit indebtedness, the sale of assets, and payments for
acquisitions or investments. At December 31, 1998, Howmet had $9.6 million in
Letters of Credit outstanding.
Cordant does not have access to Howmet cash balances except through Howmet
declaring a cash dividend to its shareholders, which availability may be
restricted under the terms of its revolving credit facility. Howmet does not
currently intend to pay dividends.
Howmet also has an agreement to sell, on a revolving basis, an undivided
interest in a defined pool of accounts receivable (See Note 2).
Principal maturities for the succeeding five years ended December 31, are as
follows: $8.6 million in 1999, $0 in 2000, $110 million in 2001, $60 million in
2002, and $3 million in 2003. The current portion of long-term debt is
classified in "short-term debt" on the balance sheet.
Short-term debt consisted of borrowings with various domestic and foreign
banks. The weighted average interest rate on short-term debt outstanding was
4.42 percent and 3.38 percent at December 31, 1998 and 1997, respectively. The
Company paid interest of $22, $7.2, and $3.8 million in 1998, 1997 and 1996
respectively.
NOTE 8. INCOME TAXES
The provision for taxes on income before extraordinary item follows:
<TABLE>
<CAPTION>
(in millions) 1998 1997 1996
- --------------------------------------
<S> <C> <C> <C>
Current Taxes:
Federal $ 85.7 $37.2 $26.2
Foreign 12.6 1.5 1.3
State 7.9 6.1 4.1
- --------------------------------------
106.2 44.8 31.6
Deferred Taxes:
Federal (.5) (1.9) (4.2)
Foreign 2.7 (.9) (1.0)
State (.8) (.6) (.5)
- --------------------------------------
1.4 (3.4) (5.7)
- --------------------------------------
$107.6 $41.4 $25.9
- --------------------------------------
</TABLE>
F-14
<PAGE>
A reconciliation of the United States statutory rate to the effective income
tax rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
Effect of:
State taxes, net of federal benefit 2.3 2.7 2.7
R&D and other credits (1.9) (.8)
Tax refund (1.1) (3.8)
European restructuring (.8) (1.7)
Dividend received deduction (7.1) (4.9)
Unconsolidated subsidiary for tax purposes 1.7
Other 2.0 .7 1.7
- --------------------------------------------------------------
Effective rate 37.2% 29.6% 29.9%
- --------------------------------------------------------------
</TABLE>
Domestic and foreign components of pre-tax income before minority interest and
extraordinary item are as follows:
<TABLE>
<CAPTION>
(in millions) 1998 1997 1996
- -----------------------------------
<S> <C> <C> <C>
United States $249.4 $135.1 $89.9
Foreign 40.0 4.7 (3.3)
- -----------------------------------
$289.4 $139.8 $86.6
- -----------------------------------
</TABLE>
Deferred income taxes arise from differences in the timing of income, expense,
and tax credit recognition for financial reporting and income tax purposes.
Deferred income taxes are not provided on undistributed earnings of
international subsidiaries since the earnings are considered to be indefinitely
reinvested. At December 31, 1998, these undistributed earnings were
approximately $32 million. Upon distribution of such earnings in the form of
dividends or otherwise, the Company would be subject to both U.S. income taxes
and withholding taxes payable to the various foreign countries. After taking
into account available foreign tax credits the amount of such taxes are
immaterial.
F-15
<PAGE>
The components of deferred tax balances are as follows:
<TABLE>
<CAPTION>
December 31
-------------------
(in millions) 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Provision for estimated expenses $ 73.7 $ 69.1
Tax credits 4.0 7.9
State and foreign net operating losses 16.4 38.2
Accrued retiree benefits other than pensions 79.2 77.8
Vacation and deferred compensation accruals 38.9 34.5
Pension liabilities 21.0 17.2
Other 5.8 8.9
- ---------------------------------------------------------------------------
Gross deferred tax assets 239.0 253.6
Valuation allowance (12.4) (31.1)
- ---------------------------------------------------------------------------
Total deferred tax assets 226.6 222.5
LIFO inventory (25.6) (27.0)
Recognition of income on contracts reported on different
methods for
tax purposes than for financial reporting (56.3) (52.1)
Property, plant & equipment (95.6) (95.1)
Pension benefits (19.2) (23.5)
Patents and technology (19.3) (21.5)
Unconsolidated subsidiary for tax purposes (7.1) (1.9)
Other (8.0) (3.4)
- ---------------------------------------------------------------------------
Total deferred tax liability (231.1) (224.5)
- ---------------------------------------------------------------------------
Net deferred tax liability $ (4.5) $ (2.0)
- ---------------------------------------------------------------------------
Balance sheet classification:
Current assets $ 47.8 $ 42.8
Noncurrent liabilities (52.3) (44.8)
- ---------------------------------------------------------------------------
Net deferred tax liabilities $ (4.5) $ (2.0)
- ---------------------------------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, Howmet had foreign tax benefits of $2.5 million
and $6.7 million, respectively, which will be realized over the next two years.
At December 31, 1998 and 1997, Howmet had $30 million and $131 million,
respectively, of state net operating loss carry-forwards. All of the 1998 state
carry-forward amount will expire in 1999. At December 31, 1998 and 1997, the
Company and Howmet combined had approximately $27 million and $26 million,
respectively, of foreign net operating loss carry-forwards, which can only be
used to offset foreign taxable income. The majority of these carry-forwards
have no expiration date. Utilization by Howmet of any state net operating loss
and $10.3 million of foreign net operating loss carry-forwards will result in
an adjustment to goodwill.
The valuation allowance at December 31, 1998 and 1997 is equal to the deferred
tax asset (net of liabilities) associated with state and foreign net operating
loss carry-forwards. The primary decrease in the valuation allowance from 1997
to 1998 was due to the expiration of state net operating losses. No other
valuation allowances are provided because management believes future operations
will generate sufficient taxable income to realize all other deferred tax
assets.
Total tax payments were $89.1, $54.9, and $23.5 million during 1998, 1997, and
1996, respectively.
During 1998, prior year adjustments, including the completion of an audit of a
partnership in which the Company participates, resulted in tax refunds of $3.2
million, which were applied to reduce 1998 income tax expense. In addition,
$4.8 million of interest income related to these adjustments was recognized.
F-16
<PAGE>
Tax refunds of $.7 million and $2.5 million were received in 1996 and 1997,
respectively. Related interest refunds of $18.1 million in 1996 and $2.3
million in 1997 were also received. Of those amounts, $3 million was applied to
reduce 1996 income tax expense, and interest income of $7 and $1.7 million was
recognized in 1996 and 1997, respectively. The remaining $11.9 million was used
to increase liabilities for deferred taxes and related interest for future tax
payments.
During 1998, the Internal Revenue Service completed its audit of the Howmet
federal income tax return for the year ended December 31, 1995, with no
material findings.
NOTE 9. STOCK SPLIT AND CHANGES IN COMMON STOCK SHARES
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. The stock split
affected stockholders' equity in the current year due to reclassifying the par
value amount of the common shares issued from retained earnings to common
stock. In addition, all references in the financial statements to number of
shares, per share amounts, stock option data, and market prices of the
Company's common stock have been restated. The following table summarizes
common stock activity:
<TABLE>
<CAPTION>
Common Treasury
(in millions of shares) Stock Stock
- ---------------------------------------------------------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1995 20.5 (2.4)
- ---------------------------------------------------------------
Stock option exercise and related tax benefits .1
- ---------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 20.5 (2.3)
- ---------------------------------------------------------------
Stock option exercise and related tax benefits .2
Purchase of common stock for treasury (.1)
- ---------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 20.5 (2.2)
- ---------------------------------------------------------------
Stock option exercise and related tax benefits .2
Stock split (dividend) 20.6 (2.2)
Purchase of common stock for treasury (.4)
- ---------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 41.1 (4.6)
- ---------------------------------------------------------------
</TABLE>
F-17
<PAGE>
NOTE 10. EARNINGS PER SHARE
The Company reports earnings per share in accordance with FASB No. 128,
"Earnings per Share". The following table sets forth the computation of basic
and diluted earnings per share:
<TABLE>
<CAPTION>
Year Ended
December 31
-------------------
(In millions, except per share data) 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator
Income before minority interest and extraordinary item $181.8 $98.4 $60.7
Minority interest (39.8) (1.8)
- ----------------------------------------------------------------------------
Numerator for basic and diluted earnings per share $142.0 $96.6 $60.7
- ----------------------------------------------------------------------------
Denominator
Denominator for basic earnings per share--weighted-
average shares 36.5 36.6 36.4
Effect of dilutive securities
Employee stock options 1.0 1.1 .7
- ----------------------------------------------------------------------------
Denominator for diluted earnings per share--weighted-
average shares and assumed conversions 37.5 37.7 37.1
- ----------------------------------------------------------------------------
Income per share before extraordinary item:
Basic $ 3.89 $2.64 $1.67
Diluted $ 3.79 $2.57 $1.64
Per share effect of extraordinary item:
Basic $(.19)
Diluted $(.19)
</TABLE>
NOTE 11. EXTRAORDINARY ITEM
During December 1997, Howmet refinanced the majority of its debt to take
advantage of favorable interest rates and to reduce restrictive covenants. As a
result 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. The income tax benefit associated with the debt refinancing was
$8.5 million. The extraordinary charge shown on the consolidated statements of
income has been reduced by $4.6 million related to minority interest. Howmet
repaid $146 million of debt at a 10 percent fixed interest rate and refinanced
$198 million of debt under a new revolving bank facility at a substantially
lower variable rate.
NOTE 12. RESTRUCTURING AND IMPAIRMENT
The Company's Propulsion and Fastening Systems restructuring programs were
completed in the fourth quarter of 1996. The Propulsion Systems restructuring
plan, announced in the first quarter of 1995, included domestic pre-tax charges
of $61.4 million. The Fastening System restructuring plan announced in the
fourth quarter of 1995 included foreign pre-tax charges of $5.9 million. During
the fourth quarter of 1996, the restructuring was substantially completed and
excess reserves from both programs were closed and credited to income. The
Propulsion and the Fastening Systems segments recognized $1.3 million and $.9
million in pre-tax income, respectively, in 1996.
NOTE 13. PREFERRED STOCK PURCHASE RIGHTS
On May 22, 1997, the Board of Directors adopted a new stockholder rights plan
and redeemed the stockholders' rights existing under the old plan. Under the
new plan, the Company declared a dividend distribution of one Preferred Share
Purchase Right for each outstanding common share. Each Right entitles its
holder to buy one one-hundredth of a share of a new series of the Company's
preferred stock at an exercise price of $120. The Rights will only become
exercisable if a person or group acquires or makes an offer to acquire 15
percent or more of the Company's common stock. If any person or group acquires
15 percent or more of the Company's common stock, each Right will entitle the
holder (other than such acquirer) to purchase common stock of the Company
having a
F-18
<PAGE>
market value of twice the exercise price of the Right. If the Company is
acquired in a merger or other business combination, after a person has acquired
15 percent or more of the Company's common stock, each Right will entitle the
holder to purchase common stock of the acquiring company having a market value
of twice the exercise price of the Right. The Rights may be redeemed by the
Company at the price of $.005 per Right prior to the acquisition of 15 percent
or more of the Company's common stock. The Rights expire on May 22, 2007.
NOTE 14. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
The Company has noncontributory-defined pension plans covering certain
employees. The Company also provides certain nonvested health care and life
insurance benefits to most retirees and eligible dependents (other benefits).
The Company's pension and other benefit plans are summarized as follows:
<TABLE>
<CAPTION>
Pension
Benefits Other Benefits
---------------- ----------------
(in millions) 1998 1997 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in projected benefit obligations:
Beginning projected benefit
obligations $(714.6) $(645.3) $(249.5) $(211.0)
Service cost (25.8) (23.1) (6.3) (6.4)
Interest cost (53.4) (50.5) (17.7) (16.5)
Amendments (11.6) (17.4) (4.4)
Actuarial losses, net (88.4) (32.9) (14.4) (27.8)
Benefits paid 48.2 54.6 18.3 16.6
- -----------------------------------------------------------------------------
Ending projected benefit obligations $(845.6) $(714.6) $(269.6) $(249.5)
- -----------------------------------------------------------------------------
Change in plan assets:
Beginning fair value of plan assets $ 837.6 $ 748.2 $ 21.5 $ 16.4
Actual return on plan assets 47.3 118.3 1.9 2.4
Employer contributions 17.7 25.7 19.2 19.3
Benefits paid (48.2) (54.6) (18.3) (16.6)
- -----------------------------------------------------------------------------
Ending fair value of plan assets $ 854.4 $ 837.6 $ 24.3 $ 21.5
- -----------------------------------------------------------------------------
Reconciliation to balance sheet amounts:
Fair value of plan assets (less than)
exceeds projected benefit obligations $ 8.8 $ 123.0 $(245.3) $(228.0)
Unrecognized net loss (gain) 77.4 (26.6) 66.3 53.6
Unrecognized prior service (gain) cost (15.3) (28.4) 4.0 4.5
Unrecognized net transition obligation (12.2) (15.3)
- -----------------------------------------------------------------------------
Net prepaid (accrual) recognized $ 58.7 $ 52.7 $(175.0) $(169.9)
- -----------------------------------------------------------------------------
Amounts recognized in the balance
sheets:
Prepaid benefit costs $ 109.9 $ 102.4 $(175.0) $(169.9)
Accrued benefit liabilities (52.4) (49.7)
Additional minimum liability (12.5)
Intangible asset 8.5
Accumulated other comprehensive income 5.2
- -----------------------------------------------------------------------------
Net prepaid (accrual) recognized $ 58.7 $ 52.7 $(175.0) $(169.9)
- -----------------------------------------------------------------------------
</TABLE>
Assets of the Company-sponsored plans are invested primarily in equities and
bonds. Certain pension plans contain restrictions on using excess pension plan
assets in the event of a change in control of the Company.
Pension benefit payments were higher in 1997 due to a voluntary program
offering lump sum payments to terminated employees who had a present value
benefit in the plan of less than $15,000.
F-19
<PAGE>
Included in the aggregated data in the above tables are amounts applicable to
the Company's pension plans with accumulated and projected benefit obligations
in excess of plan assets. Amounts related to such plans are as follows:
<TABLE>
<CAPTION>
(in millions) 1998 1997
- ------------------------------------------------
<S> <C> <C>
Projected benefit obligation $(149.5) $(47.5)
Accumulated benefit obligation (139.1) (39.5)
Fair value of plan assets $ 105.4 $ 20.2
- ------------------------------------------------
</TABLE>
Assumptions used in determining net pension cost for all defined benefit
pension plans were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 6.75% 7.5% 7.5%
Average rate of increase in compensation 4.75 4.90 4.90
Expected long-term rate of return on assets 9.0 9.0 9.0
- --------------------------------------------------------------
</TABLE>
Assumptions to measure the accumulated post-retirement obligation and cost for
all plans were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 6.75% 7.5% 7.5%
Before age 65 health care cost trend rate decreasing to 6%
by 2001 9.0 10.0 11.0
Average after age 65 health care cost trend rate 6.8 7.2 8.0
Expected long-term rate of return on assets 8.0 8.0 8.0
- -----------------------------------------------------------------------------
</TABLE>
The health care cost trend rate to be used in 1999 for before-age-65 benefits
is 8 percent, while the after-age-65 benefits rate remains at 6 percent.
A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
<TABLE>
<CAPTION>
1 percentage 1 percentage
(in millions) point increase point decrease
- ---------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost
components $ 1.1 $ (1.1)
Effect on postretirement benefit obligation $15.0 $(13.2)
- ---------------------------------------------------------------------------
</TABLE>
The annual cost for all Company-sponsored defined benefit pension and other
postretirement benefit plans includes the following components:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------- -------------------
(in millions) 1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit
cost:
Service cost $25.8 $23.1 $12.7 $ 6.3 $ 6.4 $ 2.6
Interest cost 53.4 50.5 41.1 17.7 16.5 8.2
Expected return on plan assets (65.5) (60.5) (48.9) (1.7) (1.4) (1.3)
Settlement gain (.7)
Amortization of:
Unrecognized net loss (gain) 2.7 2.0 (2.6) 3.2 2.5 1.5
Unrecognized prior service (gain)
cost (1.6) (2.5) (.1) .6 .1
Unrecognized net (asset)
obligation (3.2) (3.2) .5 .3
- -----------------------------------------------------------------------------
Net periodic benefit cost $11.6 $ 8.7 $ 2.7 $26.1 $24.4 $11.0
- -----------------------------------------------------------------------------
</TABLE>
F-20
<PAGE>
Pension costs charged to and recovered through government contracts approximate
amounts contributed to pension plans. Pension costs for financial statement
purposes are calculated in conformity with SFAS No. 87, "Employers' Accounting
for Pensions." Historically, the annual amount of pension cost recovered
through government contracts and included in sales has exceeded the amount of
pension cost included in the financial statements. As a result, the Company has
deferred $60.3 million and $51.6 million of revenues as of December 31, 1998
and 1997, respectively, to provide a better matching of revenues and expenses.
This revenue will be recognized when the financial statement pension cost
exceeds amounts charged to contract pension cost. The $60.3 million of deferred
revenue is netted against the pension asset in "Other noncurrent assets" in the
balance sheet. The Company sponsors certain supplemental plan arrangements to
provide retirement benefits to specified groups of participants. Contributions
are included in a restricted trust which is subject to the Company's creditors.
The Company has matching and nonmatching 401 (k) savings plans for eligible
employees. Company contributions to the matching savings plans were $13.1,
$6.5, and $6.2 million in 1998, 1997, and 1996, respectively, and are based on
a limited percentage of participant contributions. The increase in
contributions from 1998 to 1997 was attributable to the addition of Howmet's
contributions for an entire year.
NOTE 15. CONTINGENT MATTERS
Starting in late 1998 Howmet discovered certain product testing and
specification non-compliance issues at two of its Cercast aluminum casting
operations. Howmet notified customers, is actively cooperating with them and
government agencies in the investigation of these matters and is implementing
remedial action. Data collection and analysis must be completed before a
definitive estimate of the cost to resolve these matters can be completed.
Customers have asserted no formal claims, and Howmet knows of no in-service
problems associated with these issues. Based on preliminary evaluation,
however, Howmet has recorded an estimated loss of $4 million in its
consolidated statement of income for the year ended December 31, 1998. Based on
currently known facts, Howmet believes that additional costs beyond $4 million,
if any, would not have a material adverse effect on Howmet's financial
position, cash flow, or annual operating results. However, additional cost when
and if accrued may have a material adverse impact on the quarter in which it
may be accrued.
The Company is also currently involved in a number of lawsuits and other
contingencies which are not expected individually or in the aggregate to have a
material adverse effect upon the Company's financial position. However,
depending on the amount and timing of an unfavorable resolution of these
contingencies, the Company's future results of operations may be materially
affected in a particular quarter.
NOTE 16. ENVIRONMENTAL MATTERS
The Company's Thiokol Propulsion division is 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 not incurred any significant costs
relating to these environmental sites. The Company has signed a consent decree
with the EPA on the Rockaway Borough Well Field site and with the state of New
Jersey on the Rockaway Township Well Field site. At the Rockaway Borough site,
the Company's estimate for response costs, site remediation, and future
operation and maintenance costs is $5.1 million, of which approximately $1.2
million is estimated to be spent during 1999. At the Rockaway Township Well
Field site, the Company's estimate for response costs, site remediation, and
future operations and maintenance costs is $4.4 million, of which approximately
$1.8 million is estimated to be spent during 1999.
Jacobson, acquired by Huck in June 1998, is involved in the Indian Bend Wash
(South Area) superfund site in Tempe, Arizona. Pursuant to the terms of a five-
year environmental indemnity contained in the Stock Purchase Agreement between
Huck and the previous owner, Huck is
F-21
<PAGE>
responsible for the first $2 million in environmental liabilities, the previous
owner is responsible for environmental liabilities from $2 to $6 million; Huck
and the previous owner share the expense of environmental liabilities equally
in excess of $6 million but less than $10 million. The estimated liability
associated with Jacobson environmental remediation is $.5 million.
The Company has recorded a $9.5 million liability for response costs, site
remediation, and future operation and maintenance costs for the above sites. In
addition to the above sites, the Company has ongoing involvement with
environmental issues at other locations none of which are expected to have a
material impact on the financial position of the Company.
The Company's Propulsion and Fastening Systems segments' estimated liability
for all environmental remediation is $21 million, and is classified in "Other
accrued expenses" and "Accrued interest and other noncurrent liabilities." 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. The Company has collected approximately $9.7 million in
environmental-related recoveries from insurance companies through December 31,
1998. The Company estimates it will spend approximately $5 and $1.6 million of
the total liability, respectively, over the next two years.
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 probable that changes in any of the following accrued
liabilities will result in an equal change in the amount of the receivable from
Pechiney, S.A. pursuant to this indemnification. The Company believes that any
Howmet liability exceeding amounts recorded will not have a material adverse
effect on the Company's future results of operations or financial position.
Howmet has received test results indicating levels of polychlorinated
biphenyls ("PCBs") at its Dover, N.J., plant that 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 matter. In addition to the remediation work required at the
Company's Dover, N.J., plant, liabilities exist for clean-up costs associated
with hazardous 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 December 31, 1998, $4.2 million of
accrued environmental liabilities are included in the consolidated balance
sheet for these nine sites. At December 31, 1997, the consolidated balance
sheet included $4.4 million of accrued liability related to eight sites. The
indemnification discussed above applies to the costs associated with the Dover,
N.J., plant and the nine other locations.
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 $16
million in remediation and natural resource damage liabilities at the Blackbird
Mine site in Idaho and a minimum of $10 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 $26 million liability which is
classified in "Accrued interest and other noncurrent liabilities," and an equal
$26 million receivable from Pechiney, S.A., which is classified in "Other
noncurrent assets." At December 31, 1997, $29.3 million of liability and
receivables were included in the balance sheet for these issues. Pechiney, S.A.
is currently funding all amounts related to these liabilities.
NOTE 17. LEASE COMMITMENTS
The Company has operating leases that are principally short-term and primarily
for building, office space and other real estate. Rental expense charged was
$24, $15.1, and $13.8 million in 1998, 1997 and 1996, respectively. Renewal and
purchase options are available on certain of these leases. Future
F-22
<PAGE>
minimum rental commitments under non-cancelable operating leases total
approximately $51.6 million with $14.8, $12.9, $6.1, and $4.3 million committed
in 1999 through 2002 respectively, and $13.5 million thereafter. Certain plant
facilities and equipment are provided for use by the government under short-
term or cancelable arrangements.
NOTE 18. STOCK OPTION AND PERFORMANCE UNIT PLANS
The Company's Stock Option Plans provide that grants of stock options, shares
of restricted stock, and other awards may be made to key Company employees and
its affiliates in which the Company has a direct or indirect equity interest.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average Per
Shares Share
- ---------------------------------------------------------------------------
<S> <C> <C>
Options outstanding at December 31, 1995 (1,364,698
exercisable shares) 2,133,498 $12.61
Granted 479,048 $19.73
Lapsed or forfeited (34,800) $17.43
Exercised (175,888) $12.50
- ---------------------------------------------------------------------------
Options outstanding at December 31, 1996 (1,567,658
exercisable shares) 2,401,858 $13.97
Granted 229,392 $39.61
Lapsed or forfeited (70,000) $19.30
Exercised (327,952) $13.03
- ---------------------------------------------------------------------------
Options outstanding at December 31, 1997 (1,634,898
exercisable shares) 2,233,298 $16.58
Granted 310,756 $39.33
Lapsed or forfeited (40,168) $23.27
Exercised (221,708) $15.34
- ---------------------------------------------------------------------------
Options outstanding at December 31, 1998 (1,683,422
exercisable shares) 2,282,178 $19.68
- ---------------------------------------------------------------------------
</TABLE>
Options outstanding at December 31, 1998, have expiration dates ranging from
July 1999 to October 2008.
Limited appreciation rights were outstanding covering 143,450 option shares.
Limited appreciation rights are paid automatically in cash in lieu of other
related options upon a change in control of the Company.
During 1995, 460,000 Cordant stock options were contingently granted to certain
Howmet employees. Such options were granted at $17.75 per share (380,000) and
$20.47 per share (80,000), the market price on the date of grant. At December
31, 1998, 360,000 options remained outstanding net of lapses. These options
vest 50 percent on the date Cordant acquires 100 percent ownership of Howmet
prior to December 31, 2001, and vest in increments of 25 percent on the second
and third anniversary date of such acquisition. Such options expire ten years
from the date granted. Subsequent to the initial grant of those options, the
participants were granted rights under an alternative plan whereby if Cordant
does not acquire 100 percent of Howmet by December 13, 2001, each participant
will vest in an amount equal to the gain in such Cordant options on such date.
Since vesting is assured under the alternative plan, Howmet is recording
compensation expense related to that plan over the six-year vesting period
ending December 13, 2001. During 1998 and 1997, Howmet recorded $.6 and $2.9
million respectively of compensation expense related to these options.
Shares of common stock reserved for both outstanding and future grants of
options and other stock-based awards at December 31, 1998 and 1997 were
3,761,636 and 3,983,344 shares, respectively.
In accordance with the provisions of SFAS No. 123, the Company has elected to
continue to account for stock-based compensation using the intrinsic value
method under APB Opinion No. 25 and, accordingly, does not recognize
compensation cost for options issued to employees at market value. If the
Company recognized compensation cost based on the fair value of the options
granted at grant date, as prescribed by SFAS No. 123, net income and earnings
per share on a pro forma basis would have been reduced approximately 2.4 and
2.1 percent in 1998 and 1997 respectively.
F-23
<PAGE>
Information regarding stock options outstanding and exercisable as of December
31, 1998, is as follows:
<TABLE>
<CAPTION>
Price Range
---------------------------------------
$5.84 $12.22 $17.75 $36.13
to $12.06 to $17.19 to $27.84 to $45.59
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options Outstanding:
Number 459,236 672,965 663,845 486,132
Weighted average exercise price $7.67 $14.35 $18.78 $39.61
Weighted average remaining contractual
life 3.1 years 5.8 years 7.3 years 9.2 years
Options Exercisable:
Number 459,236 672,965 483,845 67,376
Weighted average exercise price $7.67 $14.35 $19.05 $40.06
- -------------------------------------------------------------------------------
</TABLE>
Howmet Options
Howmet established a stock option plan in 1997, to provide stock options,
shares of restricted stock and Stock Appreciation Rights (SARs) to key Howmet
employees. Howmet's plan may grant up to 5 million shares of Howmet common
stock to employees and has reserved 5 million common shares for the plan. In
December 1997, 4,377,500 options were granted with a $15.00 exercise price.
Activity for 1998 follows:
<TABLE>
<CAPTION>
Weighted
Average Per
Shares Share
- --------------------------------------------------------------------
<S> <C> <C>
Options outstanding at December 31, 1997 (no
exercisable shares) 4,377,500 $15.00
Granted 98,000 $14.42
Lapsed or forfeited (162,500) $15.00
Exercised
- --------------------------------------------------------------------
Options outstanding at December 31, 1998 (no
exercisable shares) 4,313,000 $14.98
- --------------------------------------------------------------------
</TABLE>
The Howmet options granted in December 1997 will vest and become exercisable in
25 percent increments on January 1 of each year beginning in 1999. The options
outstanding at December 31, 1998 have exercise prices ranging from $12.22 to
$15.66 and a weighted average remaining contractual life of seven years.
Options outstanding at December 31, 1998 expire in December 2005.
Howmet SARs
Certain key Howmet employees participate in a SARs plan. The maximum per share
value of the outstanding SARs is limited to the difference between $15 and the
SARs' base price per share (generally $2). The SARs vest over a five-year
period ending 2001 based upon passage of time and the operating performance of
the Company. SARs expense is adjusted quarterly based on the market value of
the stock and vesting. At December 31, 1998 and 1997 there were approximately
4.3 million SARs outstanding. Howmet recorded $10.8, $31.4 and $6.6 million of
expense related to the plan for the years ended December 31, 1998, 1997 and
1996 respectively. At December 31, 1998 and 1997, $43.5 and $38 million,
respectively, was included in the amount captioned "Accrued interest and other
noncurrent liabilities" in the consolidated balance sheet.
NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used in estimating fair values:
Cash and cash equivalents: The carrying amount approximates fair value.
Receivables: The fair value of receivables approximates the carrying amount.
The fair value of certain receivables, due to the collection of certain
receivables over an extended period, is based on the discounted value of
expected future cash flows which difference is insignificant.
F-24
<PAGE>
Short-term and long-term debt: The carrying value of short-term debt
approximates fair value. The fair value of long-term debt is estimated based on
the current borrowing rates for similar issues and also approximates the
carrying amount.
Off-balance-sheet instruments: The Company enters into forward exchange
contracts as a hedge against currency fluctuations of certain foreign currency
transactions. At December 31, 1998, the Company had contracts to buy and sell
various currencies with maturity dates ranging from January 1999 through
December 1999. The total notional contract value of these transactions in U.S.
dollars was $64.3 million. The fair value of the contracts is the $.2 million
of unrecognized gain as of December 31, 1998. The fair value of these contracts
was estimated based on December 31, 1998 foreign exchange rates obtained from
dealers. Gains or losses arising from foreign exchange contracts offset foreign
exchange gains or losses on underlying hedged commitments. The impact on the
financial position and results of operations from likely changes in foreign
exchange rates is mitigated by minimizing risk through hedging transactions
related to commitments.
The Company enters into forward exchange contracts with major dealers and does
not require collateral. If a counterparty was not able to completely fulfill
its contract obligations, the Company would incur a loss equal to the amount of
any gain on the contract.
NOTE 20. OPERATIONS BY INDUSTRY SEGMENT
The Company has three reportable segments: Propulsion Systems, Fastening
Systems, and Investment Castings. The Company's reportable segments manufacture
and distribute distinct products with different production processes.
The Propulsion Systems segment consists of solid rocket propulsion for NASA,
the Department of Defense, and various commercial customers for space
applications, as well as, gas generator and ordnance products, metal and
composite components, and services relating to such systems.
The Fastening Systems segment consists of specialty Fastening Systems for a
broad range of aerospace and industrial applications worldwide.
The Investment Castings segment provides products worldwide for both the
aerospace and industrial gas turbine (IGT) markets.
The Company evaluates performance and allocates resources based on operating
income, which is pre-tax income before interest income and expense, and
excludes any equity income and other non-operating expenses. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies. In accordance with industry
practice, a proportionate share of Corporate general and administrative expense
is allocated and reimbursed through Propulsion Systems contracts. Intersegment
sales and transfers are not significant.
F-25
<PAGE>
The following table summarizes segment information:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
(in millions) 1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Net sales
Investment Castings(/1/) $1,350.6 $ 105.2
Propulsion Systems 643.0 645.5 $611.7
Fastening Systems 433.3 319.4 252.9
- -----------------------------------------------------------------------
Consolidated net sales $2,426.9 $1,070.1 $864.6
- -----------------------------------------------------------------------
Segment operating income
Investment Castings(/1/) $ 185.8 $ 11.7
Propulsion Systems(/2/) 82.1 64.4 $ 63.3
Fastening Systems(/3/) 65.2 40.4 8.0
- -----------------------------------------------------------------------
Segment operating income 333.1 116.5 71.3
Unallocated corporate expense (24.4) (12.8) (3.5)
Equity income .4 35.3 15.1
Interest income 12.8 7.0 8.1
Interest expense (28.3) (4.0) (3.6)
Other, net (4.2) (2.2) (.8)
- -----------------------------------------------------------------------
Consolidated income before income taxes,
minority interest, and extraordinary item $ 289.4 $ 139.8 $ 86.6
- -----------------------------------------------------------------------
Total assets
Investment castings(/1/)(/4/) $1,228.0 $1,168.2
Propulsion systems 292.9 327.0 $335.3
Fastening systems 504.3 239.3 244.8
Corporate 68.3 48.9 238.1
- -----------------------------------------------------------------------
Consolidated assets $2,093.5 $1,783.4 $818.2
- -----------------------------------------------------------------------
Depreciation and amortization expense
Investment castings(/1/) $ 64.1 $ 6.6
Propulsion systems 21.5 27.4 $ 29.9
Fastening systems 15.7 11.8 12.5
Corporate .7 .5 1.6
- -----------------------------------------------------------------------
Consolidated depreciation and amortization
expense $ 102.0 $ 46.3 $ 44.0
- -----------------------------------------------------------------------
Capital expenditures
Investment castings(/1/) $ 83.0 $ 15.2
Propulsion systems 13.3 9.1 $ 12.2
Fastening systems 13.4 11.6 12.9
Corporate 5.0 .4 7.9
- -----------------------------------------------------------------------
Consolidated capital expenditures $ 114.7 $ 36.3 $ 33.0
- -----------------------------------------------------------------------
</TABLE>
(/1/) Consolidation of Investment Castings began with December 1997.
(/2/) The Propulsion Systems income in 1996 included a $1.3 million
restructuring reserve release.
(/3/) The Fastening Systems income in 1998 included a $3 million relocation
charge and income in 1996 included a $5 million inventory write-off and a
$.9 million restructuring reserve release.
(/4/) Excludes the Restricted Trust (See Note 6).
F-26
<PAGE>
Corporate assets consist principally of cash and cash equivalents, income tax
receivable, property, plant, and equipment, other noncurrent assets, and in
1996, investment in Howmet.
Consolidated revenues from external customers are from the following products:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
(in millions) 1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Net sales by markets and major product lines:
Aerospace castings market $ 802.5 $ 64.3
Industrial gas turbine castings market 476.1 35.4
RSRM 410.6 395.5 $374.6
Industrial fastener market 237.8 148.6 134.5
Other propulsion 232.4 250.0 237.1
Aerospace fastener market 195.5 170.8 118.4
Other castings market 72.0 5.5
- -----------------------------------------------------------------------
Consolidated net sales $2,426.9 $1,070.1 $864.6
- -----------------------------------------------------------------------
</TABLE>
Net sales under U.S. government contracts and subcontracts, primarily by the
Propulsion and Investment Castings segments, amounted to $730.6, $576.5 and
$571.9 million for 1998, 1997 and 1996, respectively. The sales as a percentage
of consolidated net sales were 30, 54, and 66 percent for 1998, 1997 and 1996,
respectively. Investment Castings had sales to one customer of $251 million or
10 percent of the Company's consolidated total.
NOTE 21. GEOGRAPHIC INFORMATION
The Company is a multinational entity with operating subsidiaries in four
geographic regions: United States, Europe (including France and the United
Kingdom), Canada, and Asia (including Japan, Taiwan, and Australia).
Intercompany transfers between geographic areas are not significant. Allocated
long lived assets exclude the $716.4 million Restricted Trust (See Note 6.
Restricted Trust and Related Pechiney Notes Payable).
<TABLE>
<CAPTION>
Year Ended December 31
(in millions) 1998 1997 1996
- --------------------------------------------------------
<S> <C> <C> <C>
Net Sales
United States $1,766.3 $ 944.1 $785.3
Europe 481.0 79.3 47.0
Canada 95.8 21.2 12.4
Asia 83.8 25.5 19.9
- --------------------------------------------------------
Consolidated net sales $2,426.9 $1,070.1 $864.6
- --------------------------------------------------------
Long lived Assets
United States $1,318.1 $1,063.9 $514.7
Europe 120.2 119.5 14.4
Canada 37.7 27.4 .1
Asia 19.1 .6 .8
- --------------------------------------------------------
Consolidated long lived assets $1,495.1 $1,211.4 $530.0
- --------------------------------------------------------
</TABLE>
F-27
<PAGE>
NOTE 22. QUARTERLY FINANCIAL HIGHLIGHTS (Unaudited)
<TABLE>
<CAPTION>
Calendar Year 1998
Three Months Ended
------------------------------------
Sept. June
(in millions, except per share data) Dec. 31 30 30 March 31
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $640.5 $595.1 $628.6 $562.7
Operating income(/1/)(/5/) 64.5 90.8 81.8 71.6
Net income 29.6 38.5 41.1 32.8
Net income per share(/2/) .80 1.03 1.09 .87
Cash dividends paid per share(/2/) .10 .10 .10 .10
Market price(/2/)
High 44.63 48.38 55.75 50.13
Low 31.38 35.63 44.50 39.53
- ---------------------------------------------------------------------------
<CAPTION>
Calendar Year 1997
Three Months Ended
------------------------------------
Sept. June
(in millions, except per share data) Dec. 31(/3/) 30 30 March 31
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $350.3 $237.7 $255.6 $226.5
Operating income(/1/) 36.9 25.8 21.3 19.7
Income before extraordinary item 23.5 28.6 23.7 20.8
Net income(/4/) 16.4 28.6 23.7 20.8
Income per share before extraordinary
item(/2/) .62 .76 .63 .56
Net income per share(/2/)(/4/) .43 .76 .63 .56
Cash dividends paid per share(/2/) .10 .10 .10 .085
Market price(/2/)
High 47.25 44.13 38.13 30.44
Low 39.88 33.88 27.44 22.25
- ---------------------------------------------------------------------------
</TABLE>
(/1/) Previously reported amounts have been reclassified to conform to the 1998
year-end presentation.
(/2/) All per share data has been adjusted for the two-for-one stock split that
was paid on March 13, 1998.
(/3/) Includes one month of Howmet's results.
(/4/) The fourth quarter of 1997 included Howmet debt refinancing charges of
$20.2 million ($7.1 million or $.19 per share after tax and minority
interest).
(/5/) Operating income in the third quarter included $8.1 million of SAR
benefit. This amount was reversed in the fourth quarter due to Howmet
common stock price fluctuation.
F-28
<PAGE>
NOTE 23. SUBSEQUENT EVENT
On February 8, 1999, the Company acquired for $385 million the remaining 22.65
million shares of Howmet International Inc. common stock owned by Carlyle and
entered into a new Standstill Agreement and extended an existing covenant not
to compete. With this purchase of the Carlyle shares, the Company's ownership
of Howmet International Inc. common stock increases to 84.65 million shares
representing 84.65 percent of Howmet's outstanding voting common stock. The
remaining 15.35 million shares of Howmet common stock is publicly owned. The
acquisition was financed with borrowings under a new unsecured $400 million
bank line of credit established in conjunction with the stock purchase. The
interest rate on this facility is based on LIBOR plus a spread, and was 5.75
percent at the time of the transaction. As a result of this acquisition, a one-
time tax adjustment will be recorded in the first quarter of 1999 to reverse
$7.1 million or $.19 per share of an accumulated dividend tax previously
accrued.
NOTE 24. EVENT SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT AUDITORS (UNAUDITED)
On March 3, 1999, Howmet received from the U.S. Air Force a Notice of Proposed
Debarment from future government contracts and subcontracts directed at Howmet
Corporation and Howmet Cercast (Canada), Inc. The Air Force unilaterally
terminated the proposed debarment with respect to Howmet Corporation by letter
to it on March 10, 1999, thus permitting Howmet Corporation to resume accepting
U.S. government contracts and subcontracts. The continuing proposed debarment
with respect to Howmet's Cercast Canadian subsidiary is based on certain of the
above testing issues discussed in Note 15, and improper vendor payments that
took place at the Cercast Canadian operations. Debarment does not affect
existing Cercast contracts, other than extensions. Howmet is taking steps to
have the proposed Cercast debarment withdrawn. In the unlikely event a
debarment were imposed for an extended period of time, such action would
negatively impact sales and profits in future periods. However, the Company
believes such impact would be immaterial to results of operations.
F-29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
On May 5, 1998, Thiokol Corporation changed its corporate name to Cordant
Technologies Inc. (the Company or Cordant). Two of the Company's three business
segments have retained their names (Huck International, Inc., and Howmet
International Inc.) and operate as subsidiaries of the Company. The Propulsion
Group, now called Thiokol Propulsion, operates as a division of the Company.
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-end. All historical
information in this report has been prepared to conform to a calendar year-end
presentation. The Company made the change to coordinate Cordant and Howmet
International Inc. (Howmet) reporting periods and to reduce the confusion that
accompanies a non-calendar year-end. Howmet reports separately on a calendar
year-end basis.
The Company increased its ownership in Howmet from 49 percent to 62 percent on
December 2, 1997. Accordingly, beginning in December 1997, Howmet's earnings,
cash flows, and its balance sheet have been consolidated with the Company's. As
a result, the operating results for 1997 include eleven months of Howmet's
earnings reported under the equity method and one month of Howmet earnings on a
consolidated basis. Operating results for 1998 include Howmet's 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.
On June 11, 1998, the Company acquired Jacobson Manufacturing Company Inc. for
$273.6 million. Jacobson has contributed from June 11 through December 31, $78
million in sales and $10 million in operating income. Jacobson's results are
included in the consolidated results of the Company within the Fastening
Systems segment.
The Company has adopted Financial Accounting Standards Board (FASB) statement
128 "Earnings per Share," discussed in the notes to the Company's consolidated
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, number of
shares, stock option data and market prices of the Company's common stock have
been restated and adjusted for the two-for-one stock split (dividend) on March
13, 1998.
RESULTS OF OPERATIONS--1998 COMPARED TO 1997
Net income for the year ended December 31, 1998 was $142 million, or $3.79 per
share, a 47 percent increase compared to income before extraordinary item last
year of $96.6 million, or $2.57 per share. Net income increased 59 percent over
the $89.5 million, or $2.38 per share, reported in 1997.
Net income for 1998 included tax interest income and tax refunds of $6.1
million, or $.16 per share. Net income for 1997 included an extraordinary
charge of $7.1 million, or $.19 per share, net of income taxes and minority
interest, related to Howmet's debt refinancing.
F-30
<PAGE>
Summary financial information for the twelve months ended December 31:
<TABLE>
<CAPTION>
(in millions, except per share Better
data) 1998 1997 (Worse) Percent
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales
Investment Castings $1,350.6 $ 105.2 $1,245.4 1,184
Propulsion Systems 643.0 645.5 (2.5)
Fastening Systems 433.3 319.4 113.9 36
- --------------------------------------------------------------------------
Total sales $2,426.9 $1,070.1 $1,356.8 127
- --------------------------------------------------------------------------
Operating income
Investment Castings $ 185.8 $ 11.7 $ 174.1 1,488
Propulsion Systems 82.1 64.4 17.7 27
Fastening Systems 65.2 40.4 24.8 61
Unallocated corporate expense (24.4) (12.8) (11.6) (91)
- --------------------------------------------------------------------------
Total operating income 308.7 103.7 205.0 198
Equity income of affiliates .4 35.3 (34.9) (99)
Interest income 12.8 7.0 5.8 83
Interest expense (28.3) (4.0) (24.3) (608)
Other, net (4.2) (2.2) (2.0) (91)
Income taxes (107.6) (41.4) (66.2) (160)
- --------------------------------------------------------------------------
Income before minority interest and
Extraordinary item 181.8 98.4 83.4 85
Minority interest (39.8) (1.8) (38.0) 2,111
- --------------------------------------------------------------------------
Income before extraordinary item 142.0 96.6 45.4 47
Extraordinary item--loss on early
Retirement of debt (7.1) 7.1 100
- --------------------------------------------------------------------------
Net income $ 142.0 $ 89.5 $ 52.5 59
- --------------------------------------------------------------------------
Per diluted share:
Income before extraordinary item $ 3.79 $ 2.57 $ 1.22 47
Net income $ 3.79 $ 2.38 $ 1.41 59
- --------------------------------------------------------------------------
</TABLE>
Business Segment Sales and Income For 1998
Investment Castings
On December 2, 1997, the Company purchased an additional 13 percent of Howmet
common stock for $183.8 million, increasing the Company's ownership percentage
to 62 percent. Howmet's results have been consolidated in 1998, while 1997
includes consolidated Howmet results for one month at 62 percent and Howmet
equity income at 49 percent for eleven months.
F-31
<PAGE>
Following is a reconciliation of Howmet's contribution to the Company's income
for the twelve months ended December 31:
<TABLE>
<CAPTION>
(in millions) 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Howmet income before extraordinary item $110.4 $72.0
Less preferred paid-in-kind dividend (5.6) (5.1)
- -----------------------------------------------------------------------------
Income before extraordinary item available to common
shareholders 104.8 66.9
- -----------------------------------------------------------------------------
Company's interest in Howmet income before extraordinary item 65.0 33.4
Add preferred paid-in-kind dividend 5.6 5.1
- -----------------------------------------------------------------------------
Howmet's contribution to the Company's income before
extraordinary item 70.6 38.5
Less the Company's 7 percent tax on Howmet income (5.0) (2.7)
- -----------------------------------------------------------------------------
Howmet's total after-tax contribution to the Company's income
before extraordinary item $ 65.6 $35.8
- -----------------------------------------------------------------------------
</TABLE>
Howmet contributed income, after minority interest and taxes, of $65.6 million,
or $1.75 per share in 1998, an 83 percent increase compared to $35.8 million,
or $.95 per share, for the prior year. Cordant Technologies' 13 percent
ownership increase in December 1997 contributed $12.1 million, or
$.32 per share, to the increase.
The following information summarizes Howmet's results, including the 38 percent
minority share, before consolidation for the twelve months ended December 31:
<TABLE>
<CAPTION>
Better Percent
(in millions) 1998 1997 (Worse) Change
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $1,350.6 $1,258.2 $92.4 7
Cost of goods sold 1,039.1 963.8 75.3 8
Gross profit 311.5 294.4 17.1 6
Operating income 189.7 154.5 35.2 23
Income before extraordinary item 110.4 72.0 38.4 53
Net income $ 110.4 $ 59.7 $50.7 85
- -------------------------------------------------------------------
</TABLE>
Howmet's sales for 1998 increased $145.8 million, or 12 percent on a comparable
basis with the prior year, adjusting for the sale of the lower margin
refurbishment business. The sales increase is due to volume increases in the
aerospace and industrial gas turbine (IGT) markets. Also affecting
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 increase in income resulted from the higher revenues and increased
operating margins. Stock Appreciation Rights (SAR) expense also decreased $20.6
million from the prior year. SAR expense is adjusted quarterly based on vesting
and the market value of Howmet's common stock. In the event the market value of
Howmet's common stock drops below a $15.00 per share threshold, income is
recognized in the income statement. See Note 18 of the Company's Consolidated
Financial Statements. Warranty and other provisions of approximately $6.5
million, including the $4 million discussed in the next paragraph, were
recorded in both years, primarily in the fourth quarters. Also contributing to
the income increase were reduced debt levels and lower interest rates that
reduced interest expense by $18.3 million, or 59 percent.
Starting in late 1998 Howmet discovered certain product testing and
specification non-compliance issues at two of its Cercast aluminum casting
operations. Howmet notified customers, is actively cooperating with them and
government agencies in the investigation of these matters and is implementing
remedial action. Data collection and analysis must be completed before a
definitive estimate of the cost to resolve these matters can be completed.
Customers have asserted no formal claims and Howmet knows of no in-service
problems associated with these issues. Based on preliminary evaluation,
however, Howmet has recorded an estimated loss of $4 million in its
consolidated statement of income for the year ended December 31, 1998. Based on
currently known
F-32
<PAGE>
facts, Howmet believes that additional costs beyond $4 million, if any, would
not have a material adverse effect on Howmet's financial position, cash flow,
or annual operating results. However, additional cost when and if accrued may
have a material adverse impact on the quarter in which it may be accrued.
On March 3, 1999 Howmet received from the U.S. Air Force a Notice of Proposed
Debarment directed at Howmet Corporation and Howmet Cercast (Canada), Inc. from
future government contracts and subcontracts. The Air Force unilaterally
terminated the proposed debarment with respect to Howmet Corporation by letter
to it on March 10, 1999, thus permitting Howmet Corporation to resume accepting
U.S. government contracts and subcontracts. The continuing proposed debarment
with respect to Howmet's Cercast Canadian subsidiary is based on certain of the
above testing issues and improper vendor payments that took place at the
Cercast Canadian operations. Debarment does not affect existing Cercast
contracts, other than extensions. Howmet is taking steps to have the proposed
Cercast debarment withdrawn. In the unlikely event a debarment were imposed for
an extended period of time, such action would negatively impact sales and
profits in future periods. However, the Company believes such impact would be
immaterial to results of operations.
Propulsion Systems
Propulsions Systems sales were flat compared to last year. Higher Space Shuttle
Reusable Solid Rocket Motor (RSRM), Missile Defense and Trident program sales
were offset by lower sales in the Demilitarization and Japanese Technology
Transfer programs.
Operating income for Propulsion Systems increased 27 percent from the prior
year. Operating margins increased from 10 percent in 1997 to 12.8 percent in
1998. The higher income resulted primarily from significantly higher Commercial
Launch Motor and RSRM margins.
Fastening Systems
Huck's Fastening Systems sales and operating income for the year were higher
than last year reflecting both the Jacobson Manufacturing acquisition during
the year and continued strength in both commercial aircraft and industrial
markets. During the year a $3 million pre-tax charge was taken to close and
relocate the industrial fastener operations at Branford, Connecticut, to Huck's
facility in Waco, Texas. The Branford closure will result in reduced fixed
costs and allow utilization of available capacity in Waco. Excluding the $3
million relocation charge, operating income increased 69 percent over the prior
year. Operating margins for the year were 15.7 percent, excluding the
relocation charge, compared to 12.6 percent in the prior year. Operating
margins continued to benefit from both ongoing cost control initiatives and
increased revenues. Excluding Jacobson's results, and the Branford charge,
sales and operating income increased 11 and 43 percent, respectively, over the
prior year. Sales were strong in both the aerospace and industrial markets,
particularly in the large truck, trailer, and rail markets.
Fastening Systems book-to-bill ratios, defined as period orders divided by
period shipments, for the twelve months ended December 31, were as follows:
<TABLE>
<CAPTION>
1998 1997
- ---------------------
<S> <C> <C>
Aerospace .84 1.28
Industrial 1.00 1.06
- ---------------------
Total .93 1.17
- ---------------------
</TABLE>
Book to bill ratios are used as an indicator of future sales, but as with all
indicators, such ratios have inherent limitations and actual results may be
different. Since the book to bill ratio used is not a generally accepted
accounting principle disclosure, other companies may calculate this ratio
differently and utilize the ratio for different purposes.
F-33
<PAGE>
Income Taxes and General and Administrative Expense
In 1998, the Company had an effective income tax rate of 37.2 percent, compared
with 29.6 percent before the extraordinary item for 1997. The higher rate in
1998 was due primarily to the consolidation of Howmet, whose effective tax rate
in 1998 was 37 percent. In addition, Cordant is required 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 tax rate during the first
six months of 1998. This lower rate resulted 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 certain European operations enabling the use of tax loss
carry-forward amounts. The effective tax rate for 1999 is expected to be
approximately 39 percent.
General and administrative expense for 1998 increased 114 percent or $103.3
million compared to the prior year. The increase was primarily attributable to
the consolidation of Howmet, whose general and administrative expenses
increased $86 million over the prior year. The increase is due to Howmet having
12 months of activity in Cordant's 1998 consolidated results compared to one
month in 1997. Goodwill amortization increased $5.7 million due to the purchase
of an additional 13 percent of Howmet in December 1997, and the purchase of
Jacobson in June. Fastening Systems general and administrative expenses
increased $7.8 million due primarily to the addition of Jacobson's general and
administrative expenses.
Interest expense increased $24.3 million primarily from the consolidation of
Howmet's results as well as increased borrowings associated with the additional
purchase of 13 percent of Howmet common stock and the Jacobson acquisition.
Selected Financial Data
For the twelve months ended December 31:
<TABLE>
<CAPTION>
1998 1997(/1/)
- ----------------------------------------------------------------------------------
(in millions) Cordant Howmet Consolidated Cordant Howmet Consolidated
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
operating activities $145.8 $207.4 $353.2 $ 85.0 $ 25.6 $110.6
Capital expenditures (31.7) (83.0) (114.7) (21.2) (15.1) (36.3)
Dividends (14.6) (14.6) (14.1) (14.1)
- ----------------------------------------------------------------------------------
$ 99.5 $124.4 $223.9 $ 49.7 $ 10.5 $ 60.2
- ----------------------------------------------------------------------------------
Total debt(/2/) $313.6 $ 91.0 $404.6 $125.9 $208.4 $334.3
Less cash & cash
Equivalents 7.7 37.6 45.3 .2 45.4 45.6
- ----------------------------------------------------------------------------------
$305.9 $ 53.4 $359.3 $125.7 $163.0 $288.7
- ----------------------------------------------------------------------------------
</TABLE>
(/1/) Howmet results were consolidated starting in December 1997.
(/2/) Excludes Pechiney note payable (See Note 6 of the Company's Consolidated
Financial Statements).
F-34
<PAGE>
RESULTS OF OPERATIONS--1997 COMPARED TO 1996
Income before an extraordinary item for 1997 was $96.6 million, or $2.57 per
share, an increase of 59 percent compared to $60.7 million, or $1.64 per share,
in 1996. Net income for 1997 was $89.5 million, or $2.38 per share, a 47
percent increase compared to $60.7 million, or $1.64 per share in 1996. Net
Income for 1997 included Howmet debt refinancing charges of $7.1 million, or
$.19 per share. Net income for 1996 included tax credits of $3.7 million, or
$.10 per share, tax interest income of $4.3 million, or $.12 per share, and
Fastening Systems inventory charges of $3 million, or $.08 per share.
Summary financial information for the twelve months ended December 31:
<TABLE>
<CAPTION>
Better
(in millions) 1997 1996 (Worse) Percent
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales
Propulsion Systems $ 645.5 $611.7 $ 33.8 6
Fastening Systems 319.4 252.9 66.5 26
Investment Castings 105.2 105.2
- -------------------------------------------------------------------------------
Total sales $1,070.1 $864.6 $205.5 24
- -------------------------------------------------------------------------------
Operating income
Propulsion Systems $ 64.4 $ 63.3 $ 1.1 2
Fastening Systems 40.4 8.0 32.4 405
Investment Castings 11.7 11.7
Unallocated corporate expense (12.8) (3.5) (9.3) 266
- -------------------------------------------------------------------------------
Total operating income 103.7 67.8 35.9 53
Equity income of affiliates 35.3 15.1 20.2 134
Interest income 7.0 8.1 (1.1) (14)
Interest expense (4.0) (3.6) (.4) 11
Other, net (2.2) (.8) (1.4) 175
Income taxes (41.4) (25.9) (15.5) 60
- -------------------------------------------------------------------------------
Income before minority interest and
Extraordinary item 98.4 60.7 37.7 62
Minority interest (1.8) (1.8)
- -------------------------------------------------------------------------------
Income before extraordinary item 96.6 60.7 35.9 59
Extraordinary item--loss on early Retirement
of debt (7.1) (7.1)
- -------------------------------------------------------------------------------
Net income $ 89.5 $ 60.7 $ 28.8 47
- -------------------------------------------------------------------------------
Per diluted share:
Income before extraordinary item $ 2.57 $ 1.64 $ .93 57
Net income $ 2.38 $ 1.64 $ .74 45
- -------------------------------------------------------------------------------
</TABLE>
Business Segment Sales and Income For 1997
Propulsion Systems
Propulsion Systems sales and operating income increased $33.8 million and $1.1
million, respectively. The increased sales were due to increases in the
Commercial Launch Motor and Missile Defense programs. The sales increase was
partially offset by lower sales in the Trident program, the closing of the
government owned company operated (GOCO) ammunition plants, and lower flare
production. The increased income included a $1.3 million restructuring reserve
release in 1996. Increased income in the Commercial Launch Motor program was
reduced by lower income in the Trident and the Technology transfer programs as
well as the GOCO ammunition plant closure.
F-35
<PAGE>
Fastening Systems
Fastening Systems sales in 1997 increased $66.5 million or 26 percent over
1996. Aerospace sales increased $52.4 million while industrial sales increased
$14.1 million. The growth reflected stronger worldwide commercial aircraft and
domestic industrial markets. The increased sales, combined with improved
operating efficiencies, resulted in a $32.4 million or 405 percent operating
income increase over 1996. The increase includes a $5 million pre-tax inventory
charge in 1996 which was partially offset by a $.9 restructuring reserve
release also in 1996. Aerospace income increased $24.5 million while industrial
income increased $3.8 million excluding the inventory charge and restructuring
reserve release. Fastening segment margins increased to 12.6 percent in 1997
from 4.8 percent excluding the inventory charge and restructuring reserve
release. The increased margins were primarily the result of continuing cost
control initiatives, pricing increases, and volume growth.
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.
Howmet results for 1997 were consolidated for one month at 62 percent and
reported under the equity method at 49 percent for eleven months. The following
information summarizes Howmet's results before consolidation for the twelve
months ended December 31:
<TABLE>
<CAPTION>
Better Percent
(in millions) 1997 1996 (Worse) Change
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $1,258.2 $1,106.8 $151.4 14
Cost of goods sold 963.8 891.1 72.7 8
Gross profit 294.4 215.7 78.7 36
Operating income 154.5 102.0 52.5 51
Income before extraordinary item 72.0 25.6 46.4 181
Net income $ 59.7 $ 25.6 $ 34.1 133
- -------------------------------------------------------------------
</TABLE>
Following is a reconciliation of Howmet's contribution to the Company's income
for the twelve months ended December 31:
<TABLE>
<CAPTION>
(in millions) 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Howmet income before extraordinary item $72.0 $25.6
Less preferred paid-in-kind dividend (5.1) (4.9)
- ----------------------------------------------------------------------------
Income before extraordinary item available to common
shareholders 66.9 20.7
- ----------------------------------------------------------------------------
Company's interest in Howmet income before extraordinary item 33.4 10.2
Add preferred paid-in-kind dividend 5.1 4.9
- ----------------------------------------------------------------------------
Howmet's contribution to the Company's income
before extraordinary item 38.5 15.1
Less the Company's 7 percent tax on Howmet income (2.7) (1.1)
- ----------------------------------------------------------------------------
Howmet's total after-tax contribution to the Company's income
before extraordinary item $35.8 $14.0
- ----------------------------------------------------------------------------
</TABLE>
Howmet's sales for the twelve months ended December 31, 1997, increased $151.4
million or 14 percent from the prior year. The sales increase came primarily
from the aerospace markets. Howmet's fiscal 1997 sales included an additional
$9.7 million in revenue from a pricing adjustment with a customer that is not
expected to recur in the future.
Howmet's earnings before extraordinary item were $72 million for 1997, an
increase of 181 percent from $25.6 million in 1996. Income benefited from
higher sales volume, improved operating performance, and a lower effective tax
rate. Howmet's results for 1997 include an extraordinary charge of $12.3
million, net of taxes, for debt refinancing to take advantage of favorable
interest rates and to eliminate certain restrictive covenants. Also included in
1997's operating results was an additional $6.5 million pre-tax warranty
expense charge and a pre-tax $9.7 million benefit from the pricing adjustment
mentioned above.
F-36
<PAGE>
Net income for 1997 included $35.8 million or $.95 per share from the Company's
investment in Howmet, excluding the extraordinary item, which was 37 percent of
the Company's total income before extraordinary item. Net income for 1996
included $14 million or $.38 per share from the Company's investment in Howmet,
or 23 percent of the Company's total net income.
General and administrative expense for 1997 of $90.3 million increased 33
percent or $22.2 million compared to 1996. Consolidating Howmet's results for
December 1997 accounted for $15.2 million of the increase while general
corporate expense increased $6.2 million. The higher corporate expense resulted
from increased compensation expense and a $1 million donation to the Cordant
Technologies Foundation. The effective income tax rate for 1997 before the
extraordinary item was 29.6 percent compared to 29.9 percent for 1996.
Restructuring and Impairment
As a result of a comprehensive review of the Company's operating performance in
Europe, a pre-tax restructuring charge of $5.9 million was recognized in the
fourth quarter of 1995 relating to the anticipated shutdown of the fastening
system's Germany operations. During the first quarter of 1996, the Company
notified the 82 affected employees of the Germany plant shutdown. The charge
included $3.6 million of employee severance expense and $1.7 million write down
of long-lived assets.
During the 1993-1994 defense industry down turn, pricing pressures required the
Company to review operations and reduce operating costs to remain competitive.
During the first quarter of 1995, the Board of Directors determined a
consolidation of the Company's manufacturing facilities and associated write
down of assets was required. The Company recorded a $61.4 million pre-tax
defense systems restructuring and related impairment charge including a $20
million write down for impaired long-lived assets and a $23.6 million write
down of goodwill. Fair value of goodwill and fixed asset write-downs was
determined by estimating discounted cash flows from future defense and non-
shuttle vehicle operations. Also included was an estimated restructuring loss
of $10.5 million on the disposition of fixed assets from two manufacturing
facilities (Huntsville and Omneco), and a $7.3 million cash restructuring
charge for costs related to the facility closures including $2.3 million of
employee severance costs. The restructuring included 360 employee terminations.
Fair value of the Huntsville and Omneco assets were based on estimated cash
proceeds from asset sales net of the costs of disposal. During the fourth
quarter of 1996, the restructuring was substantially completed and excess
reserves from both programs were closed and credited to income. The propulsion
and the Fastening Systems segments recognized $1.3 million and $.9 million in
income, respectively. The restructuring plan included charges for certain
issues that have not currently been resolved and the Company believes remaining
reserves will be adequate to cover future costs.
A summary of restructuring reserve activity by program follows:
<TABLE>
<CAPTION>
U.S. German
Plants Plant
(in millions) Shutdown Shutdown Total
- ------------------------------------------------------------
<S> <C> <C> <C>
Reserve Balance at March 31, 1995 $ 17.8 $ 17.8
Fastening Systems restructuring $ 5.9 5.9
Reductions (noncash) (1.2) (1.2)
Payments made (.9) (.9)
- ------------------------------------------------------------
Balance at December 31, 1995 15.7 5.9 21.6
Reductions (noncash) (13.2) (5.0) (18.2)
Payments made (1.2) (1.2)
- ------------------------------------------------------------
Restructuring credit 1996 $ 1.3 $ .9 $ 2.2
- ------------------------------------------------------------
</TABLE>
The Company has successfully negotiated with the government for recovery of
certain of these costs. The Company estimates approximately $9 million to be
recognized in Company profits during 1997 through 2000.
F-37
<PAGE>
FUTURE OPERATIONS/BUSINESS ENVIRONMENT
Investment Castings
The Company operates its largest business segment, Investment Castings, through
its Howmet subsidiary. Howmet manufactures cast components for the aircraft
engine, airframe and industrial gas turbine (IGT) markets through operating
companies located in the United States, France, the United Kingdom, Canada and
Japan. Such castings are made from nickel and cobalt based superalloys, as well
as titanium and aluminum. In the two aircraft related markets, Howmet supplies
parts to both the military and the commercial sectors. Demand for Howmet's
products varies as a function of the strength of the aircraft and IGT markets.
In the commercial aircraft market, from which the majority of Howmet's revenues
are currently derived, production rates are at an all time high. However, 1999
is projected to be the peak production year in the current cycle with
production rates expected to decline through 2002. Despite the reduction in the
new aircraft build rate over this period, Howmet believes that aviation derived
revenues and earnings will grow. This projection is due to (i) increased
aftermarket sales supporting the installed fleet of nearly 13,000 aircraft,
(ii) increased use of technologically advanced, higher revenue components, and
(iii) market share increases with certain key customers. An important
consideration in forecasting aero sales and earnings growth is the fact that
the mix of aircraft Howmet expects to be built over the next several years is
such that those aircraft from which Howmet derives its highest revenue is not
expected to decline as much as the overall decline in aircraft builds. A
further consideration is the comparative strength of the regional jet and
business aircraft market where Howmet has a dominant market position.
Military and defense contractor sales comprised approximately 14 percent of
Howmet's total 1998 sales. Future sales to the U.S. Government could be
negatively impacted pending the outcome of the debarment matter previously
discussed in "Results of Operations."
Industrial gas turbine activity, which represented about 35 percent of Howmet's
revenues in 1998, is now experiencing a sharp increase. Industrial gas
turbines, especially in the larger (greater than 120 MW) size range, are
primarily used to generate electric power. These IGTs are in high demand at
power plants because natural gas is available in large supplies, burns cleanly,
and is comparatively inexpensive. Also, IGTs, especially those incorporating
aero technologies, operate at much higher efficiencies compared to alternatives
such as coal and oil. Further increasing demand is a recently heightened
awareness in the U.S. of insufficient reserve power generating capacity. IGT
power generation installations can be installed and made operational more
quickly than the alternatives. As a result, most of the major IGT OEMs have
significantly increased production rates. Several have sold all their capacity
for 1999 and 2000 and are now accepting orders for 2001. Howmet is the majority
supplier of turbine airfoils at each of the major OEM producers, a position
that is enhanced by the fact that all such OEMs are introducing advanced new
higher technology engines for which Howmet is, for all practical purposes, the
sole provider of the critical turbine blades. As a result of the heightened OEM
demand and expected growth in aftermarket component sales from an expanding
installed base, Howmet expects its IGT business to increase for the next
several years.
Howmet has experienced pressure from all of its major customers for price
reductions. This pressure is the result of the competitive environment which
Howmet's OEM customers are facing in the selling of their products in the
worldwide market. Howmet's strategy to provide added value and service to its
customers has been successful to date in offsetting much of the pricing
pressures.
Since 1992, Howmet has significantly reduced costs and improved productivity,
delivery and cycle times. As a result of these improvements, Howmet has
enhanced its financial performance, and management believes further
improvements can be achieved. Howmet employs specific programs designed to
achieve these improvements. These programs include synchronous manufacturing,
kaizen events (in which solutions to specific operational problems are achieved
by teams of workers in concentrated time periods), quick shop intelligence
(daily meetings of plant staff in which product-specific manufacturing issues
are reviewed and solved), standardization of manufacturing and
F-38
<PAGE>
business processes throughout Howmet's facilities worldwide, specialization by
plants in the production of certain families of castings and inter-facility
manufacturing and technical support, including the sharing of best practices,
under a "One Howmet" concept.
Propulsion Systems
The Propulsion Systems segment produces high-technology solid propellant motors
for space and defense applications. Production of, and services for, the RSRM
represented 17 percent of the Company's 1998 consolidated sales and 18 percent
of consolidated operating income. The current contract with NASA extends the
Company's production of the RSRM through 2001. In December 1998, an agreement
was reached with NASA outlining all significant contractual issues for the RSRM
Buy 4 contract. The final contract signing is expected during the first half of
1999. The Company expects the Buy 4 contract to include 35 flight sets, or 70
motors, and three flight support motors. Contract completion is expected during
2004. Currently, the Company anticipates follow-on contracts for RSRM motors
through the life of the Space Shuttle program. The Space Shuttle program is
expected to continue in service through approximately 2010. The Buy 4 contract
type will be cost-plus-incentive/award-fee. NASA has provided the Company with
long lead material procurement authorization to support Buy 4 production start
in October 1998. The contract is subject to annual Congressional funding.
RSRM Buy 3 contract incentives to reduce costs over the life of the contract
are expected to result in higher incentive fees in 1999 based on actual and
anticipated contract cost performance. Cost management award fees of $121.9
million have been recognized on the current RSRM Buy 3 contract. Realization of
such fees is reasonably expected based on actual and anticipated contract cost
performance. However, all of the cost management award fees remain at risk
until completion of the current contract and final NASA review. 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
to the government. Circumstances that could erode cost management performance
include, but are not limited to: a failure of a Company supplied component;
performance problems with the RSRM leading to a major redesign and/or
requalification effort; manufacturing problems, including supplier problems,
that could result in RSRM production interruptions or delays; and major safety
incidents.
The level of United States government funding of space programs including the
Space Station may impact the Space Shuttle launch schedule. The availability of
Space Station hardware to meet the current schedule may also impact future
launch rates and RSRM production. Significant reductions in the launch schedule
would lower the Company's production rates and reduce related revenue and
profits to the Company. The Company expects its defense sales and income to
stabilize over the next year. Generally the industry is characterized by
significant over capacity. Decreased defense spending has created a highly
competitive pricing environment for tactical programs and has reduced margins
on existing programs and new program opportunities. Propulsion Systems
selection as the propulsion team leader in the Air Force's Minuteman program is
valued at over $1 billion in sales over the next 10-15 years. The primary
production phase of this program is not expected to begin until the year 2001,
at which time there is expected to be an increase in sales. All government
contracts are subject to termination and to annual Congressional funding.
Fastening Systems
The Fastening Systems segment operates in both aerospace and industrial
markets. The aerospace market is greatly influenced by commercial aircraft
build schedules that have increased significantly over the last two years but
are anticipated to decrease beginning in 2000. The Company expects its fastener
systems aircraft sales to decline during 1999 in anticipation of the decrease
in the build schedules. Military aircraft spending is expected to continue at
low production levels. Despite an expected sales decline in 1999, as a result
of efficient manufacturing initiatives and other cost control efforts,
operating margins are expected to decline only slightly.
F-39
<PAGE>
The Fastening Systems industrial product lines, excluding the addition of
Jacobson, saw substantial growth in sales (8 percent) and income (53 percent)
in 1998. This increase was due primarily to the strong heavy-duty truck/trailer
market. The industrial fastener sector is greatly influenced by general
economic conditions. The Company does not expect a significant economic
downturn in the next twelve months. With the recent operational improvements
operating margins are expected to improve.
The Company completed its $273.6 million acquisition of Jacobson Manufacturing
on June 11, 1998. Jacobson is a manufacturer of high-quality, custom-designed
metal parts and fasteners and precision-engineered plastic products and is
reported as part of the Fastening Systems segment. Its products are used in
automotive, construction, consumer products and heavy equipment applications.
Jacobson's injection molded plastic products include a variety of components
and end products used in the computer, telecommunications and medical
industries. These new product lines significantly broaden the Company's
industrial fastener sector and provide new opportunities in a growing market
for precision plastic components. Jacobson has six manufacturing facilities
located in the United States.
OTHER MATTERS
The Company has operating leases, the majority of which are short-term and real
estate related. Rental expense was $24 million in 1998. Renewal and purchase
options are available on certain of these leases. Future minimum rental
commitments under non-cancelable operating leases total approximately $51.6
million with $14.8, $12.9, $6.1 and $4.3 million committed in 1999 through
2002, respectively, and $13.5 million thereafter.
The Company is involved in various legal proceedings and uncertainties
including those related to environmental matters as discussed in Notes 15 and
16 to the Company's consolidated financial statements, none of which are
expected to have a material adverse effect upon the Company's financial
position. However, depending on the amount and timing of an unfavorable
resolution of these contingencies, the Company's future results of operations
may be materially affected in a particular quarter.
ASIAN ECONOMIC CONDITIONS
The adverse Asian economic conditions did not have a material impact on Company
sales or earnings during the year. Propulsion Systems sales in Asia are
minimal. The future impact to Investment Castings and Fastening Systems is
uncertain. To the extent Asian economic conditions impact the commercial
aerospace, heavy-duty truck/trailer and IGT markets, such impact may affect the
Company in the future.
MARKET RISK
The Company's long and short-term debt portfolio consists of both variable and
fixed-rate instruments. The Company currently does not utilize interest rate
derivative contracts. At December 31, 1998, approximately $289 million
(including $55 million from Howmet's receivables securitization facility) of
the Company's debt is tied to the London Interbank Offered Rates (LIBOR)
interest rate. If the interest rate on this variable-rate debt were to change
by 1 percent, net income would hypothetically increase or decrease by $1.2
million. If the interest rate on the Company's fixed-rate debt of $171 million
were to change 1 percent, net income would hypothetically increase or decrease
by $1 million. This hypothetical analysis does not take into consideration the
effects of the economic conditions that would give rise to such an interest
rate change or the Company's response to such hypothetical conditions, nor does
it take into effect changes from the December 31, 1998 debt amounts.
The Company enters into forward exchange contracts to manage certain foreign
currency exposures. These forward exchange contracts are hedges for risk
management and are not used for trading or speculative purposes. Such hedges
comply with Company policies approved by the Board of Directors. To mitigate
the effects of changes in currency exchange rates on that portion of the
foreign
F-40
<PAGE>
operations business conducted in foreign currencies, the Company regularly
hedges by entering into foreign exchange forward contracts to cover near-term
exposures. At December 31, 1998, for hedging purposes, the Company had the
following forward exchange contracts outstanding:
<TABLE>
<CAPTION>
Local Currency
Contract & U.S. Local
Currency Dollar Currency Unrealized
(in millions) Type Equivalent Equivalent Gain
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United Kingdom sterling Buy United States dollar $ 8.2 4.9
United States dollars Buy Canadian dollar 25.2 25.2 $.1
Canadian dollars Buy United States dollar 2.9 4.6
Japanese yen Buy United States dollar 2.5 284.1
French francs Buy United Kingdom sterling 11.9 66.3
French francs Sell United States dollar 12.2 69.3 .1
Miscellaneous 1.4
- -------------------------------------------------------------------------------------
$64.3 $.2
- -------------------------------------------------------------------------------------
</TABLE>
All of the currencies listed above have foreign exchange contracts with
maturity dates ranging from January 1999 through December 1999. The fair value
of these foreign exchange contracts, which is the unrealized gain, was
estimated based on December 31, 1998, foreign exchange rates obtained from
dealers. If the U.S. dollar were to strengthen or weaken against these
currencies by 10 percent, the hypothetical value of the contracts would
increase or decrease by approximately $.4 million.
However, these forward exchange contracts are hedges, consequently any market
value gains or losses arising from these foreign exchange contracts are offset
by foreign exchange losses or gains on the underlying commitments. Calculations
of the above effects assume that each rate changed in the same direction at the
same time relative to the U.S. dollar. The calculations reflect only those
differences resulting from mechanically replacing one exchange rate with
another. They do not factor in any potential effects that changes in currency
exchange rates may have on income statement translation, sales volume and
prices, and on local currency costs of production.
The Company's international operation's net assets totaled $202.1 million at
December 31, 1998. The effect of any change in foreign exchange rates on the
translation of such net assets is reflected in the translation adjustment
recorded in the equity section of the balance sheet. The Company does not hedge
its foreign currency net asset exposures. The Company also has some commodity
price risk but does not currently hedge commodity-related transactions. For
additional information on policies and discussion of the Company's foreign
exchange and financial instruments, see Notes 1 and 19 of the notes to the
Company's consolidated financial statements.
YEAR 2000 REMEDIATION
The Company has a decentralized Information Systems (I.S.) function, wherein
each of its three business segments operates autonomously with its own I.S.
organization. Accordingly, each segment is conducting its own Year 2000 project
that is unique to its particular operating environment. Each of the business
segment projects is similarly organized into four distinct categories of
effort. These four categories include the following: Business Information
Systems Remediation; Embedded Processor Systems Remediation; Customer and
Supplier Readiness; and Risk Assessment, Worst Case Scenarios and Contingency
Planning.
Investment Castings
Business Information Systems Remediation: Investment Castings I.S. organization
has identified virtually all date logic problems on its central mainframe and
distributed server production systems and remediation is currently in process.
This portion of the Year 2000 remediation project, which began in 1996, is
scheduled, with minor exceptions, to be completed by June of 1999. All central
systems will be placed under restrictive change control procedures to ensure
that corrected systems
F-41
<PAGE>
are not inadvertently impacted by further changes. System-wide testing activity
will be conducted periodically throughout 1999. The central I.S. Year 2000
project team also provides oversight for the sixteen small, local I.S. groups
located at Howmet plant facilities. These plant teams have each completed a
Year 2000 readiness assessment that identified all local business systems or
equipment requiring corrective action or replacement. This remediation work is
currently underway at all plants and is scheduled for completion by June of
1999.
Embedded Processor Systems Remediation: The central I.S. organization has
provided each plant facility with guidance and support for embedded processor
identification, evaluation, testing and remediation, where required. All plant
teams are scheduled to complete this project category by June of 1999.
Customer and Supplier Readiness: Howmet I.S. and procurement personnel have
communicated with several hundred of their key customers, suppliers and third
parties regarding their respective Year 2000 readiness status and plans. These
communications have included written inquiries or questionnaires and, in some
instances, on-site meetings. Any electronic interfaces with individual business
associates will be addressed on a case-by-case basis. Management has also
responded appropriately to Year 2000 readiness inquiries from Howmet customers,
suppliers and third parties. Howmet is not aware of any significant readiness
issues at this time.
Risk Assessment, Worst Case Scenarios and Contingency Planning: Howmet Castings
management believes the most likely worst case scenario would be a one or two
week shutdown of individual pieces of critical equipment or computer systems at
one or two manufacturing facilities, disrupting but not totally eliminating
production at those plants. Workaround procedures would be established by the
end of that period. Total remediation of the underlying problem could stretch
over a six-month period. Management further believes that this is more likely
to occur at its foreign facilities than its U.S. plants. Even in this
eventuality, management believes that any loss of revenue during the period
involved would be substantially recovered in later periods due to deferral
rather than cancellation of orders or deliveries.
Howmet is currently developing Year 2000 Contingency Plans in three areas: 1)
business systems processing at Howmet's primary data center; 2) procurement
activities for critical raw materials and services, including transportation;
and 3) local manufacturing processes and systems at each facility. These plans
are expected to be completed during the third quarter of 1999. Howmet expects
to employ various methods of risk mitigation such as: devising alternate manual
processes for critical applications; installing a generator at Howmet's central
computing facility; establishing a corporate command post and providing full
staffing of I.S. and plant maintenance personnel during the year-end weekend;
conducting extensive future date testing; developing an inventory build-up
strategy; imposing extra product quality testing during the new year;
validating customer and supplier electronic interfaces; scheduling shutdowns of
critical equipment on December 31, 1999; and active monitoring, measuring, and
auditing of plant compliance. While every effort has been made to anticipate
and mitigate risks, it is possible that the inability of the Company or certain
of its suppliers, customers or third parties to implement solutions to their
respective Year 2000 issues on a timely and cost effective basis could have a
material adverse effect on the Company.
Cost Information: The estimated cost at completion for all phases of the Howmet
Castings project is $16.5 million. An estimated $6.5 million (39 percent) of
this amount is for I.S. labor and miscellaneous project costs; these costs are
being expensed as routine I.S. systems maintenance as incurred over the three-
year duration of the project. Another $7.5 million (45 percent) is for software
package purchase and implementation costs for applications that were installed
or expedited for Year 2000 purposes. An additional $2.5 million (15 percent)
has been spent for infrastructure upgrades or replacement. Approximately $9.3
million (56 percent) had been expended as of December 31, 1998; the estimated
$7.2 million (44 percent) in remaining costs will be expended in 1999. No major
information systems initiatives have been adversely affected due to staffing
constraints or expenditures needed to remedy Year 2000 issues. Management has
concluded that it will substantially benefit from these efforts because of the
elimination of numerous old systems, implementation of several new state-of-
the-art applications, new and thorough documentation of many older systems, and
the creation of updated and improved business continuity plans.
F-42
<PAGE>
Propulsion Systems
Business Information Systems Remediation: Thiokol Propulsion has completed its
renovation on all major production applications. The objective of the project,
which began in early 1996, was to identify all date-related program logic, to
renovate, replace or eliminate all date processing problems, to validate the
results via integrated system testing, and to implement into production the
corrected application software. All systems that were replaced or renovated are
in the process of validation testing (98 percent complete), which will finish
in the first quarter of 1999 when the final systems will move into production.
The production environment will then be maintained under restrictive change
control procedures to ensure that corrected systems are not inadvertently
impacted by further changes. System-wide testing activity will be conducted
periodically throughout 1999. In addition, all computer and internal
telecommunications hardware systems have been evaluated, upgraded and tested,
as required, and are presently being moved into production. This activity will
be completed in June of 1999 with the replacement of a telephone PBX system at
an offsite location.
Embedded Processor Systems Remediation: Cross-functional teams at each Thiokol
Propulsion facility have inventoried, evaluated, replaced or renovated, and
tested all embedded processor systems with potential Year 2000 readiness risks.
Systems evaluated include programmable process controllers, recording devices,
data collection devices, security and alarm systems, pumps and pumping
stations, power metering systems, elevators, HVAC timers, protective relays and
card readers. To date 99 percent have been corrected or replaced with only
minor issues remaining to be resolved. The scheduled completion for this
category of effort is June of 1999.
Customer and Supplier Readiness: Thiokol Propulsion is actively communicating
with its key customers, suppliers and third parties to help ensure that its
supply chain dependencies and interfaces are or will be Year 2000 ready. This
initiative, which will continue throughout 1999, involves written inquiries or
questionnaires to these business associates regarding the status of their
respective Year 2000 readiness efforts. For certain key customers, critical
suppliers (i.e. railways, sole sources, critical materials and utilities) and
third parties, on-premise meetings have been conducted to review detailed
project plans and timetables. Thiokol has also responded appropriately upon
receipt of such inquiries from its customers, suppliers and third parties.
Management is not aware of any significant readiness issues at this time.
Risk Assessment, Worst Case Scenarios and Contingency Planning: Risk assessment
and contingency planning for the Company's business information systems and
embedded processor systems are expected to be completed by June of 1999.
Additional categories of risk assessment and contingency planning focus on the
external influences that the Company does not directly control. The outcomes of
ongoing external renovation activities will be rigorously monitored with risks
assessed and contingency plans put in place as required. The critical supplier
chain has been addressed and contingency plans put into place, mitigating the
risk of disruption to manufacturing operations for lack of materials or
finished components. The NASA-critical solid rocket motor program risk has been
assessed as minimal. With five flights planned for 1999 and ongoing production,
five flight sets of hardware will be in inventory at Kennedy Space Flight
Center by December 1999. This inventory will support the shuttle launch
schedule through August 2000. Additionally, in December 1999, 3.6 flight sets
of hardware will be in inventory at Thiokol Propulsion facilities. Risk
assessment and contingency planning will be a dynamic activity and as such will
be monitored and acted upon on a continual basis as risks are identified.
Cost Information: The estimated cost at completion for all phases of the
Thiokol Propulsion project is $8.2 million. These costs are recorded as
incurred over the three-year duration of the project. Approximately $7.1
million (87 percent) had been expended through December 31, 1998, and the
$1.1 million (13 percent) in estimated remaining costs will be expended in
1999. Of the total estimated project cost, 64 percent is labor and
miscellaneous project-related expense, 9 percent is for I.S. infrastructure
upgrades and replacement, and 27 percent is for software package
implementations that were performed or expedited to address Year 2000 issues.
No major information systems initiatives have been adversely affected due to
staffing constraints or expenditures needed to remedy Year 2000 issues. On
average, Year 2000 project spending has consumed only 7.5 percent of the annual
I.S. budget and 10-12 percent of I.S. staffing. Thiokol Propulsion management
has concluded
F-43
<PAGE>
that it will substantially benefit from these efforts because of the
elimination of several old systems, the implementation of new state-of-the-art
applications, new and thorough documentation of many older systems, and the
creation of updated and improved business continuity plans.
Fastening Systems
Business Information Systems Remediation: Huck Fasteners is employing a dual
approach to Year 2000 readiness for its business application systems. For many
years most Huck locations have used a standard commercial, vendor-supported
application software product. As of December 31, 1998, approximately one-half
of those locations had been upgraded to a version of the software product that
addresses virtually all Year 2000 readiness issues. One additional location
will be similarly upgraded by March 1999. All remaining Huck locations,
including its international sites and headquarters offices, are implementing a
recently purchased Enterprise Resource Planning (ERP) software product that is
both Year 2000 and Euro ready. The ERP implementation is presently underway at
eight sites, with 50 percent of the sites and 65 percent of the user base
already operational. The new system will be operational at the remainder of the
sites by June 1999. Additional local and system-wide testing activity is being
conducted during the remainder of 1999.
Embedded Processor Systems Remediation: Huck Fasteners has a dedicated Year
2000 program office that supports each site in establishing a cross-functional
team to identify, evaluate, test and, where needed, to modify or replace
embedded processor systems. To date, formal inventories have been completed,
criticality assessments have been made and evaluation of the individual devices
is underway. Project work on this category is scheduled for completion during
September 1999.
Customer and Supplier Readiness: Huck Fasteners has submitted written inquiries
or questionnaires to all major customers, critical suppliers and certain third
parties to determine their respective Year 2000 readiness status and plans. Any
electronic interfaces will be coordinated with these business associates on a
case-by-case basis. Management has also responded appropriately to Year 2000
inquiries made by any of its customers, suppliers and third parties. Huck is
not aware of any significant Year 2000 readiness issues at this time.
Risk Assessment, Worst Case Scenarios and Contingency Planning: Using the
approach of certain major Huck customers, management has contracted with
independent assessors to audit its progress against plan and with respect to
industry benchmarks. Additionally, several customers have provided assessment
teams to evaluate individual sites and Huck's overall Year 2000 readiness and
plans. These independent assessments have addressed both the Industrial and
Aerospace businesses and the feedback is being used to refine Huck's approach
to risk assessment and contingency planning. Work on worst case scenarios and
formal contingency planning is underway, and is expected to be completed during
June of 1999.
Cost Information: The estimated total cost at completion for all phases of the
Huck Year 2000 project is $10.0 million. Approximately $6.1 million (61
percent) of that total amount is for ERP software purchase and implementation
and for infrastructure upgrade and replacement; these costs will be
capitalized. The estimated $3.9 million (39 percent) in remaining cost is
classified as routine I.S. maintenance and is being expensed as incurred over
the three-year life of the project. Approximately $6.5 million (65 percent) had
been expended as of December 31, 1998, and the estimated $3.5 million (35
percent) in remaining costs will be expended in 1999. No major I.S. initiatives
have been adversely affected due to staffing constraints or expenditures needed
to remedy Year 2000 issues. Huck management has concluded that it will
substantially benefit from these efforts because of the elimination of several
old systems, the implementation of new state-of-the-art applications, and the
creation of updated and improved business continuity plans.
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.
F-44
<PAGE>
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 to be significant. The
Company's payroll system has not yet been examined and will require
modifications to be Euro compliant. The cost of payroll systems modifications
is also undetermined. The Company expects no Euro conversion impact to its
Thiokol Propulsion business segment. The Company expects no significant impact
to its contracting policies or competitive position related to 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 and has
determined a modest increase in this exposure due to the Company's United
Kingdom operation's acceptance of Euro denominated contracts. 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.
LIQUIDITY AND CAPITAL RESOURCES
The increase in the Company's Howmet ownership to 62 percent in 1997 and
subsequent consolidation has resulted in consolidating Howmet's cash flows with
that of the Company. Due to the Howmet consolidation, comparison of the current
year to the prior year's cash flows, which has only one month of Howmet
activity, is difficult. Separate cash flow information for Howmet has been
included below for the respective periods being reported.
Cash flow provided by operations in 1998 was $353.2 million compared to $110.6
million in 1997. The current year benefited from increased net income. The
increase in depreciation and amortization over the prior year was due primarily
to the consolidation of Howmet and to the purchase of Jacobson. Lower equity
income resulted from Howmet's operations being consolidated for the entire year
in 1998 while having eleven month's activity reported under the equity method
in 1997. The decrease in inventory resulted primarily from reduced inventory
levels at Huck and Jacobson. The increase in income taxes was due primarily to
Howmet.
Acquisition activity included $273.6 million for the purchase of Jacobson in
June and Howmet's $3.4 million increased investment in the joint venture
company, Komatsu-Howmet, Ltd in July. Capital spending on property, plant and
equipment used $114.7 million of cash in the current year compared to $36.3
million in the prior year. Howmet used $83 million for 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 year provided $32.2 million of cash compared to
$94.5 million used in the prior year. During the year, the Company issued $150
million of 6 5/8 percent senior notes due March 1, 2008, to replace the $138
million of bank debt under its revolving credit agreement incurred for the
purchase of 13 percent of Howmet common stock. 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. In June, the Company borrowed $150 million to finance the purchase of
Jacobson Manufacturing. During the year the Company repaid a total of
$337.9 million in long-term debt, $182 million being repaid by Howmet.
Borrowings for the year totaled $394.3 million.
During the year, the Company repurchased 357,400 shares of the Company's common
stock for $14.4 million. In 1997 the Company repurchased 215,800 shares of the
Company's common stock for $7.9 million. There are approximately 2.4 million
shares available for repurchase under the Company's current share repurchase
authorization. The Company will repurchase shares in amounts as the Company
deems appropriate.
Cordant does not have access to Howmet cash balances except through Howmet
declaring a cash dividend to its shareholders which availability may be
restricted under the terms of its revolving
F-45
<PAGE>
credit facility. Howmet does not currently intend to pay dividends. The initial
public offering of Howmet stock in December 1997, which redistributed ownership
of Howmet from Carlyle to the public, did not generate any cash to Howmet or to
the Company.
The Company's liquidity ratio's were as follows:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------
<S> <C> <C>
Working Capital (in millions) $94.8 $188.0
Current Ratio 1.2 1.5
Debt-to-equity 60.6% 60.7%
Debt-to-total capital 40.8% 41.4%
- ---------------------------------------------
</TABLE>
All of the above ratios exclude the Pechiney Notes and the Restricted Trust,
(See Note 6 to the Company's Consolidated Financial Statements). The debt-to-
total-capital ratio includes the $55 million receivable facility at Howmet (See
Note 2 to the Company's Consolidated Financial Statements). The current ratio
and working capital decreases resulted primarily from increased short-term debt
levels. 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 on both a short and long-term
basis.
At December 31, 1998, the Company had available $200 million in revolving
credit facilities with $90 million unused.
F-46
<PAGE>
HOWMET LIQUIDITY
A comparative cash flow statement for Howmet for the year ended December 31,
follows:
<TABLE>
<CAPTION>
(in millions) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 110.4 $ 59.7
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 60.2 66.9
Equity income (.4) (1.5)
Extraordinary item 12.3
Changes in assets and liabilities:
Receivables (3.5) 8.4
Inventories 2.2 (17.9)
Accounts payable and accrued liabilities 10.3 12.1
Deferred income taxes (2.1) (.3)
Income taxes payable 17.8 16.9
Long-term SARs accrual 5.5 31.4
Other--net 7.0 4.6
- ------------------------------------------------------------------------------
Net cash provided by operating activities 207.4 192.6
INVESTING ACTIVITIES
Proceeds from disposal of fixed assets .4 .2
Purchases of property, plant and equipment (83.0) (56.9)
Payments made for investments and other assets (3.4) (2.0)
Proceeds from sale of refurbishment business, net 44.9
- ------------------------------------------------------------------------------
Net cash used by investing activities (86.0) (13.8)
FINANCING ACTIVITIES
Net change in short-term debt 15.1
Issuance of long-term debt 36.6 326.2
Repayment of long-term debt (182.0) (467.6)
Premiums paid on early retirement of debt (13.7)
- ------------------------------------------------------------------------------
Net cash used by financing activities (130.3) (155.1)
Foreign currency rate changes 1.1 (1.7)
- ------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (7.8) 22.0
Cash and cash equivalents at beginning of period 45.4 23.4
- ------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 37.6 $ 45.4
- ------------------------------------------------------------------------------
</TABLE>
The decrease in inventories in 1998 compared to 1997 resulted from delays in a
major customer's production schedule that caused a temporary inventory increase
at the end of 1997. Also affecting the change in inventory was alloy quantity
and pricing increases in 1997 which were partially reversed in 1998. SAR
accruals were high in 1997 due to per share valuation adjustments resulting
from the initial public offering in December 1997.
Capital expenditures increased in 1998 due to capacity expansions needed to
serve the core business, as well as additional expenditures to support new
products and process enhancement activities. In 1998, Howmet 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 $120 million.
F-47
<PAGE>
Howmet expects future cash flows from operations, current financial resources
and available credit facilities to be adequate to fund its anticipated working
capital requirements and capital expenditures on both a short and long-term
basis.
On February 17, 1999, Howmet paid $66.4 million to redeem all of the 9 percent
preferred stock. The payment was made to Cordant Technologies, the sole
preferred stockholder. Howmet borrowed under its existing revolving credit
facility to make this payment and Cordant used the proceeds to reduce debt
under its revolving credit facilities.
DIVIDENDS AND RECENT MARKET PRICES
Adjusting for the two-for-one stock split, dividends paid were $.40 per share
for 1998. Dividends paid in 1997 were $.385 per share and included a $.005 per
share redemption of stockholder's rights and $.34 per share in 1996.
The high and low market prices of Cordant Technologies common stock for 1998
were $55.75 and $31.38 per share, respectively. The principal market for the
Company's common stock is the New York Stock Exchange and prices are based on
the Composite Tape (ticker symbol CDD).
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting or 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 does not believe that
SFAS No. 133 will have a significant effect on the earnings and financial
position of the Company. This statement is effective for fiscal years beginning
after June 15, 1999. The Company will adopt the new statement beginning on
January 1, 2000.
SUBSEQUENT EVENT
On February 8, 1999, the Company acquired for $385 million, the remaining 22.65
million shares of Howmet International Inc. common stock owned by Carlyle and
entered into a new Standstill Agreement and extended an existing covenant not
to compete. With this purchase of the Carlyle shares, the Company's ownership
of Howmet International Inc. common stock increases to 84.65 million
representing 84.65 percent of Howmet's outstanding voting common stock. The
remaining 15.35 million shares of Howmet common stock are publicly owned. The
acquisition was financed with borrowings under a new unsecured $400 million
bank line of credit established in conjunction with the stock purchase. The
interest rate on this facility is based on LIBOR plus a spread, and was
5.75 percent at the time of the transaction. As a result of this acquisition, a
one-time tax adjustment will be recorded in the first quarter of 1999 to
reverse $7.1 million or $.19 per share of an accumulated dividend tax
previously accrued.
RISK FACTORS
The Company sets forth in Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations of Form 10-K incorporated by
reference herein "Cautionary Statements" with respect to certain statements
herein that the Company believes are "forward looking statements" under the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Many of the factors described therein 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
F-48
<PAGE>
business and financial condition. Certain other risks which may impact the
accuracy of the Company's forward-looking statements include, but are not
necessarily limited to: changing economic and political conditions in the
United States and in other countries, changes in governmental spending and
budgetary policies, governmental laws and regulations surrounding various
matters such as environmental remediation, contract pricing, international
trading restrictions, outcome of union negotiations, changes in competitive
conditions, customer product acceptance, and continued access to capital
markets. All forecasts and projections in this report are "forward-looking
statements," and are based on management's current expectations of the
Company's results, based on current information available pertaining to the
Company and its products including the aforementioned risk factors. Actual
future results and trends may differ materially from projections made herein as
a result of the factors set forth above and other factors.
F-49
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
- -----------------------------------------------------------------------------
<CAPTION>
(dollars in millions,
except per share data) 1998 1997 (/1/) 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net sales by industry
segment
Propulsion Systems $ 643.0 $ 645.5 $611.7 $695.1 $ 802.5
Fastening Systems 433.3 319.4 252.9 237.8 199.8
Investment Castings 1,350.6 105.2
- -----------------------------------------------------------------------------
Consolidated net sales 2,426.9 1,070.1 864.6 932.9 1,002.3
Operating profit by
industry segment
Propulsion Systems (/2/) $ 82.1 $ 64.4 $ 63.3 $ 14.1 $ 77.9
Fastening Systems (/3/) 65.2 40.4 8.0 4.1 18.8
Investment Castings 185.8 11.7
- -----------------------------------------------------------------------------
Segment operating profit 333.1 116.5 71.3 18.2 96.7
Income from operations
(/2/)(/3/) 308.7 103.7 67.8 23.8 101.3
Equity income of affiliates .4 35.3 15.1
Interest income (/4/)(/5/) 12.8 7.0 8.1 74.3 2.8
Interest expense 28.3 4.0 3.6 5.4 12.5
Income before extraordinary
item 142.0 96.6 60.7 62.1 57.1
Net income 142.0 89.5 60.7 57.3 57.1
INCOME PER DILUTED SHARE
(/6/)
Income before extraordinary
item $ 3.79 $ 2.57 $ 1.64 $ 1.66 $ 1.49
Net income $ 3.79 $ 2.38 $ 1.64 $ 1.53 $ 1.49
FINANCIAL
Total assets $2,809.9 $2,499.8 $818.2 $830.4 $ 792.5
Working capital 94.8 188.0 144.2 84.6 226.0
Current ratio (/7/) 1.2 1.5 2.0 1.4 2.8
Short-term and long-term
debt (/7/) $ 404.6 $ 334.3 $ 27.0 $126.9 $ 120.2
Debt-to-equity (/7/) 60.6% 60.7% 5.6% 29.4% 30.2%
Stockholders' equity $ 667.9 $ 550.5 $480.4 $430.9 $ 397.9
Stockholders' equity per
share (/6/) 18.31 15.04 13.16 11.78 10.75
Return on stockholders'
equity (/8/) 25.8% 20.1% 14.1% 16.2% 14.9%
Capital expenditures $ 114.7 $ 36.3 $ 33.0 $ 30.2 $ 33.8
Provision for depreciation 71.9 33.8 32.8 33.2 35.9
Cash dividends paid 14.6 14.1 12.5 12.5 12.8
Cash dividends declared per
share (/6/) .40 .385 .34 .34 .34
GENERAL
Average number of common
and common equivalent
shares outstanding (in
thousands) (/6/) 37,499 37,683 37,162 37,302 38,368
Approximate number of
stockholders of record
(/9/) 5,000 5,300 5,800 6,300 6,800
Approximate number of
employees 18,000 15,900 5,500 6,400 7,600
- -----------------------------------------------------------------------------
</TABLE>
(/1/)Howmet results have been consolidated into the Company's results since
December 2, 1997.
(/2/)Includes pre-tax restructuring charge of $61.4 million in 1995.
(/3/)Includes pre-tax relocation charge of $3 million in 1998, pre-tax
inventory charges of $5 million in 1996, and pre-tax inventory and
restructuring charges of $13.1 million in 1995.
(/4/)Includes interest income from income tax refunds of $4.8, $1.7, and $7
million in 1998, 1997, and 1996, respectively.
(/5/)Includes $71.4 million of interest income related to income taxes in 1995.
(/6/)All per share amounts reflect the two-for-one stock split on March 13,
1998.
(/7/)Excludes the Pechiney Notes in 1998 and 1997.
(/8/)Based on income before extraordinary item in 1997 and 1995 and calculated
on beginning of year stockholders' equity.
(/9/)As of January 31 of the applicable year.
F-50
<PAGE>
Cordant Technologies Inc. PROXY/VOTING INSTRUCTION CARD
Salt Lake City, Utah
- -------------------------------------------------------------------------------
This Proxy is Solicited on Behalf of the Board of Directors for the Annual
Meeting on May 13, 1999.
The undersigned hereby appoints EDSEL D. DUNFORD, D. LARRY MOORE, and JAMES R.
WILSON, or any of them, each with power of substitution, as proxies to vote as
specified on this card all shares of common stock of Cordant Technologies Inc.
(the "Company") owned of record by the undersigned on March 19, 1999, at the
Company's Annual Meeting of Stockholders on May 13, 1999, and at any
adjournment thereof. Said proxies are authorized to vote in their discretion
as to any other business which may properly come before the meeting. If a vote
is not specified, said proxies will vote FOR proposals 1 and 2.
Receipt is acknowledged of the Company's Annual Report to Stockholders for the
year ended December 31, 1998, and notice and Proxy Statement, Audited
Financial Statements and Related Information for the above Annual Meeting.
Nominees for Election as Directors to the Class of Directors whose term
expires with the 2002 Annual Meeting of Stockholders of the Company: (1) Neil
A. Armstrong, (2) William O. Studeman and (3) Donald C. Trauscht.
You are encouraged to specify your choices by marking the appropriate boxes
(SEE REVERSE SIDE) but you need not mark any boxes if you wish to vote in
accordance with the Board of Directors' recommendations. The proxies cannot
vote your shares unless you sign and return this card.
This card also constitutes voting instructions for Company shares held in its
Employee Retirement Savings and Investment Plan.
P R O X Y
<PAGE>
- --------------------------------------------------------------------------------
5262
[X] Please mark your
votes as in this
example.
This Proxy when properly executed will be voted in the
manner herein by the undersigned stockholder(s). If no
direction is made, this proxy will be voted FOR proposals
1 and 2.
The Board of Directors recommends a vote FOR proposals 1 and 2.
- -------------------------------------------------------------------------------
FOR WITHHELD as to ALL Nominees
1. Election of
Directors.
(see reverse side) [_] [_]
2. Proposal to ratify FOR AGAINST ABSTAIN
appointment of
Ernst & Young LLP
as independent [_] [_] [_]
auditors for the
year ended
December 31, 1999.
To withhold authority to vote for
any nominee(s), mark the "FOR" box
and write the name of each such
nominee on line provided below:
- --------------------------------------------------------------------------------
NOTE: Please date and sign as name appears hereon. If shares are held jointly
or by two or more persons, each stockholder named should sign. Executors,
administrators, trustees, etc. should so indicate when signing. If the
signer is a corporation, please sign full corporate name by duly authorized
officer. If a partnership, please sign in partnership name by authorized
person.
------------------------------------------------------------------------------
SIGNATURE(S)
------------------------------------------------------------------------------
DATE
------------------------------------------------------------------------------
FOLD AND DETACH HERE
CORDANT TECHNOLOGIES, INC. stockholders can now vote their
shares over the telephone or the Internet. This eliminates
the need to return the proxy card.
To vote your shares over the telephone or the Internet you
must have your proxy card and Social Security Number
available. The three-part Voter Control Number (including the
# signs) that appears in the box above, just below the
perforation must be used in order to vote by telephone or
over the Internet. These systems can be accessed 24 hours a
day, seven days a week up until the day prior to the meeting.
1. To vote over the telephone:
On a touch-tone telephone call 1-800-OK2-VOTE (1-800-652-8683).
2. To vote over the Internet:
Log on to the Internet and go to the web site
http://www.vote-by-net.com.
Your vote over the telephone or the Internet instructs the
proxies in the same manner as if you marked, signed, dated
and returned your proxy card.
If you choose to vote your shares over the telephone or
Internet, there is no need for you to mail back your proxy
card.
Your vote is important. Thank you for voting.
