UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________
TO ______________.
Commission file number 1-6179
CORDANT TECHNOLOGIES INC.
Incorporated in the State of Delaware IRS Employer Identification
No. 36-2678716
15 West S. Temple, Suite 1600, Salt Lake City, Utah 84101-1532
Telephone Number: (801) 933-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $1.00 par value, outstanding at September 30, 1999:
36,714,831
<PAGE>
CORDANT TECHNOLOGIES INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 1999
INDEX
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Income - Three months
ended and Nine months ended September 30, 1999 and 1998 3
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 4-5
Consolidated Statements of Cash Flows - Nine
months ended September 30, 1999 and 1998 6
Consolidated Statements of Stockholders' Equity-
Three months ended and Nine months ended
September 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 8-14
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-35
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 35
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 36
ITEM 5 Other Information 36-43
ITEM 6. Exhibits and Reports on Form 8-K 44
SIGNATURES 44
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
CORDANT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 602.6 $ 595.0 $ 1,878.6 $ 1,786.4
Operating expenses:
Cost of sales 462.0 461.6 1,451.2 1,390.1
Selling, general and administrative 46.3 36.6 154.1 129.5
Research and development 7.2 6.0 23.7 22.5
- ----------------------------------------------------------------------------------------------------------------------------
Total operating expenses 515.5 504.2 1,629.0 1,542.1
- ----------------------------------------------------------------------------------------------------------------------------
Income from operations 87.1 90.8 249.6 244.3
Interest income 1.0 4.3 5.8 10.9
Interest expense (10.7) (8.2) (31.0) (21.0)
Other, net (1.3) (1.5) (2.0) (2.9)
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes and
minority interest 76.1 85.4 222.4 231.3
Income taxes (28.2) (32.9) (76.9) (86.3)
- ----------------------------------------------------------------------------------------------------------------------------
Income before minority interest 47.9 52.5 145.5 145.0
Minority interest (5.8) (14.0) (17.7) (32.6)
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 42.1 $ 38.5 $ 127.8 $ 112.4
- ----------------------------------------------------------------------------------------------------------------------------
Net income per share:
Basic $ 1.15 $ 1.05 $ 3.49 $ 3.08
Diluted $ 1.12 $ 1.03 $ 3.41 $ 2.99
- ----------------------------------------------------------------------------------------------------------------------------
Dividends per share $ .10 $ .10 $ .30 $ .30
============================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CORDANT TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
September 30
1999 December 31
(Unaudited) 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 20.3 $ 45.3
Receivables 271.9 240.0
Inventories 255.0 252.3
Deferred income taxes and prepaid expenses 58.6 60.8
Restricted Trust (a) 716.4
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 605.8 1,314.8
Property, plant and equipment, at cost
less allowances for depreciation 726.2 672.3
Other assets
Costs in excess of net assets of businesses
acquired, net 844.6 561.7
Patents and other intangible assets, net 116.3 128.3
Other noncurrent assets 131.5 132.8
- ------------------------------------------------------------------------------------------------------------------------
Total other assets 1,092.4 822.8
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 2,424.4 $ 2,809.9
========================================================================================================================
<FN>
(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.
No Howmet or Cordant funds were used in the payment of the Notes.
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CORDANT TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
September 30
1999 December 31
(Unaudited) 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities
Short-term debt $ 110.4 $ 71.5
Accounts payable 125.1 139.8
Accrued compensation 99.9 81.6
Other accrued expenses 205.1 202.1
Current portion of long-term debt 225.2 8.6
Pechiney Notes (a) 716.4
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 765.7 1,220.0
Noncurrent liabilities
Accrued retiree benefits 172.9 169.0
Deferred income taxes 46.7 52.3
Accrued interest and other noncurrent liabilities 225.3 234.2
Long-term debt 357.1 324.5
- ------------------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 802.0 780.0
Minority interest 72.1 142.0
Stockholders' equity
Common stock (par value $1.00 per share) Authorized - 200 shares
Issued - 41.1 shares at September 30, 1999 and
December 31, 1998 (includes treasury shares) 41.1 41.1
Additional paid-in capital 48.0 47.4
Retained earnings 775.6 658.8
Accumulated other comprehensive income (loss) (8.6) (3.9)
- ------------------------------------------------------------------------------------------------------------------------
856.1 743.4
Less common stock in treasury, at cost
4.4 shares, September 30, 1999 and
4.6 shares, December 31, 1998 (71.5) (75.5)
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 784.6 667.9
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,424.4 $ 2,809.9
- ------------------------------------------------------------------------------------------------------------------------
<FN>
(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.
No Howmet or Cordant funds were used in the payment of the Notes.
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CORDANT TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN MILLIONS)
Nine Months Ended
September 30
-------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 127.8 $ 112.4
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest 17.7 32.6
Depreciation 58.7 52.6
Amortization 28.5 22.6
Changes in operating assets and liabilities:
Receivables (34.8) (25.0)
Inventories (3.2) 12.9
Accounts payable and accrued expenses (16.6) (23.3)
Income taxes 22.7 30.8
Other (4.3) (9.0)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 196.5 206.6
Investing Activities
Acquisitions (385.0) (277.0)
Purchases of property, plant and equipment (115.1) (77.9)
Proceeds from disposal of assets 1.0 4.7
- ----------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (499.1) (350.2)
Financing Activities
Net change in short-term debt 36.2 62.9
Issuance of long-term debt 450.0 336.6
Repayment of long-term debt (200.1) (254.2)
Purchase of common stock for treasury (12.9)
Stock option transactions 4.6 4.7
Dividends paid (11.0) (11.0)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 279.7 126.1
Foreign currency rate changes (2.1) .9
- ----------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (25.0) (16.6)
Cash and cash equivalents at beginning of year 45.3 45.6
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 20.3 $ 29.0
======================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(IN MILLIONS)
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Comprehensive Stockholders'
Stock Capital Earnings Stock Income Equity
- --------------------------------------------------------------------------------------------------------------------
Three months ended September 30
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 $41.1 $46.8 $598.0 $(72.5) $ (3.9) $609.5
Comprehensive income
Net income 38.5 38.5
Other comprehensive income
Cumulative translation adjustment 2.2 2.2
-----------
Total comprehensive income 40.7
===========
Dividends paid (3.7) (3.7)
Treasury stock purchased (.2 shares) (2.1) (2.1)
Stock options exercised and related
income tax benefits (.1 shares) .6 .5 1.1
- --------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 $41.1 $47.4 $632.8 $(74.1) $ (1.7) $645.5
- --------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 $41.1 $47.5 $737.2 $(72.1) $(15.1) $738.6
Comprehensive income
Net income 42.1 42.1
Other comprehensive income
Cumulative translation adjustment 6.5 6.5
------------
Total comprehensive income 48.6
============
Dividends paid (3.7) (3.7)
Stock options exercised and related
income tax benefits (.1 shares) .5 .6 1.1
- --------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 $41.1 $48.0 $775.6 $(71.5) $ (8.6) $784.6
- --------------------------------------------------------------------------------------------------------------------
Nine months ended September 30
Balance, December 31, 1997 $20.5 $46.0 $552.0 $(64.5) $ (3.5) $550.5
Comprehensive income
Net Income 112.4 112.4
Other comprehensive income
Cumulative translation adjustment 1.8 1.8
-------------
Total comprehensive income 114.2
=============
Dividends paid (11.0) (11.0)
Stock Split (2.2 treasury shares and
20.6 common shares) 20.6 (20.6)
Treasury stock purchases (.3 shares) (12.9) (12.9)
Stock options exercised and related
income tax benefits (.1 shares) 1.4 3.3 4.7
- --------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 $41.1 $47.4 $632.8 $(74.1) $ (1.7) $645.5
- --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $41.1 $47.4 $658.8 $(75.5) $ (3.9) $667.9
Comprehensive income
Net income 127.8 127.8
Other comprehensive income
Minimum pension liability .9 .9
Cumulative translation adjustment (5.6) (5.6)
-----------
Total comprehensive income 123.1
===========
Dividends paid (11.0) (11.0)
Stock options exercised and related
income tax benefits (.2 shares) .6 4.0 4.6
- --------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 $41.1 $48.0 $775.6 $(71.5) $ (8.6) $784.6
====================================================================================================================
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Basis of Presentation
The accompanying interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. The balance sheet at December 31, 1998
reflects the Company's audited consolidated balance sheet at that date. In
management's opinion, all adjustments considered necessary for a fair
presentation have been included. Operating results for the nine-months
ended September 30, 1999 are not necessarily indicative of the results to
be expected for the year ending December 31, 1999. The financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's 1999 Notice of Annual Meeting
and Proxy Statement, Financial Information, incorporated by reference in
the Company's Annual Report on Form 10-K for the year ended December 31,
1998.
Certain reclassifications were made to the 1998 financial statements to
conform to the 1999 presentation.
Receivables
<TABLE>
<CAPTION>
The components of receivables are as follows:
September 30
1999 December 31
(in millions) (Unaudited) 1998
----------------------------------------------------------------- --------------------- ---------------------
<S> <C> <C>
Trade accounts receivable $155.0 $159.0
Retained receivables 56.6 32.0
Allowance for doubtful accounts (8.0) (7.8)
----------------------------------------------------------------- --------------------- ---------------------
Total Trade Receivables 203.6 183.2
Receivables under U.S. Government contracts
and subcontracts 68.3 56.8
----------------------------------------------------------------- --------------------- ---------------------
$271.9 $240.0
=============================================================================================================
</TABLE>
Receivables under government contracts and subcontracts include unbilled
costs and accrued profits. Such amounts are billed based on contract terms
and delivery schedules.
Cost and incentive-type contracts and subcontracts are subject to
government audit and review. It is anticipated that adjustments, if any,
will not have a material effect on the Company's results of operations or
financial condition.
<PAGE>
Cost management award fees totaling $147.3 million, at September 30, 1999,
have been recognized on the current Buy 3 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 Buy 3 RSRM contract is expected to be completed
during 2001. Unanticipated program problems which erode cost management
performance could cause some or all of the recognized cost management award
fees to be reversed and would be offset against receivable amounts from the
government or may be directly reimbursed. Circumstances which could erode
cost management performance, and materially impact Company profitability
and cash flow, include failure of a Company-supplied component, performance
problems with the RSRM leading to a major redesign and/or requalification
effort, manufacturing problems, including supplier problems which result in
RSRM production interruptions or delays, and major safety incidents.
Trade accounts receivable primarily relate to sales to well established
corporations, and historically, bad debt expense has been minor.
Howmet has an agreement to sell, on a revolving basis, an undivided
interest in a defined pool of accounts receivable. Howmet has received $55
million from the sale of such receivables and has deducted this amount from
accounts receivable at September 30, 1999. The $56.6 million retained
receivables represents the receivables set aside to replace sold
receivables in the event they are not fully collected.
Inventories
Inventories are stated at the lower of cost or market. Inventories for the
fastening systems segment are determined by the first-in, first-out (FIFO)
method. Inventories for the investment castings segment are determined by
both the FIFO and last-in, first-out (LIFO) method.
Propulsion Systems inventories include estimated recoverable costs related
to long-term fixed price contracts including direct production costs and
allocable indirect costs, less related progress payments received. In
accordance with industry practice, such costs include amounts that are not
expected to be realized within one year. The government may acquire title
to, or a security interest in, certain inventories as a result of progress
payments made on contracts and programs.
<PAGE>
The components of inventories are as follows:
<TABLE>
<CAPTION>
September 30
1999 December 31
(in millions) (Unaudited) 1998
----------------------------------------------------------------- ----------------------- -------------------
<S> <C> <C>
Raw materials and work-in-process $191.4 $161.8
Finished Goods 56.0 87.6
Inventoried costs related to U.S. Government
and other long-term contracts 46.2 28.8
Progress payments received on long-term
contracts (33.0) (22.6)
----------------------------------------------------------------- ----------------------- -------------------
$255.0 $252.3
=============================================================================================================
</TABLE>
At September 30, 1999 and December 31, 1998, inventories include $113.1 and
$111.8 million, respectively, that are valued using LIFO. The LIFO
valuation adjustment approximates the difference between the LIFO carrying
value and current replacement cost.
Purchase of Additional Howmet International Inc. Common Stock
On February 8, 1999, the Company acquired the remaining 22.65 million
shares of Howmet International Inc. common stock owned by Carlyle Blade
Acquisition Partners, L.P. (Carlyle) for $385 million. The acquisition
included a new Carlyle Standstill Agreement and the extension of an
existing covenant not to compete. With this purchase of the Carlyle shares,
the Company's ownership of Howmet International Inc. common stock increased
to approximately 84.6 million shares representing 84.6 percent of Howmet's
outstanding voting common stock. The remaining 15.4 percent of Howmet
common stock is publicly owned. The acquisition was financed with
borrowings under an unsecured bank line of credit established in
conjunction with the stock purchase. As a result of this acquisition, a
one-time tax adjustment was recorded in the first quarter of 1999 reversing
$7.1 million or $.19 per share of a previously accrued accumulated dividend
tax.
Additional detailed financial information about Howmet is available in it's
current Form 10-Q and in Howmet's Notice of 1999 Annual Meeting and Proxy
Statement, Exhibit B, incorporated by reference in Howmet's Annual Report
on Form 10-K for the year ended December 31, 1998.
<PAGE>
FINANCING ARRANGEMENTS
Long term debt is summarized as follows:
<TABLE>
<CAPTION>
September 30
1999 December 31
(in millions) (Unaudited) 1998
- -------------------------------------------------------------------------- --------------------- --------------------
<S> <C> <C> <C>
Cordant Technologies 6.625% senior notes $150.0 $150.0
Cordant Technologies senior revolving credit facilities 375.0 110.0
Howmet senior revolving credit facility 50.0 60.0
Other 7.3 13.1
- -------------------------------------------------------------------------- --------------------- --------------------
582.3 333.1
Less current portion 225.2 8.6
- -------------------------------------------------------------------------- --------------------- --------------------
$357.1 $324.5
=====================================================================================================================
</TABLE>
The Company, excluding Howmet, has credit commitments from a group of banks
aggregating $500 million under revolving credit facilities, of which $125
million was available at September 30, 1999. The funds available under the
credit facilities may be used for any corporate purpose and are available
through November 1999 ($300 million), February 2000 ($50 million), and May
2001 ($150 million). The Company has the option to extend the November 1999
credit facility for an additional nine months. The interest rate on the
revolving credit facilities is based on LIBOR plus a spread, and was 6.2
and 5.9 percent at September 30, 1999 and December 31, 1998, respectively.
The credit agreements and senior notes contain covenants restricting, among
other things, the Company's ability to incur funded debt, limitations on
liens, sale and leaseback transactions, and the sale of assets.
Howmet has credit commitments from a group of banks aggregating $300
million under a revolving credit agreement, of which $242.4 million was
available at September 30, 1999. Howmet had $7.6 million in Letters of
Credit outstanding at September 30, 1999 under the revolving credit
facility. 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 5.6 and 5.8
percent at September 30, 1999 and December 31, 1998, 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.
Cordant Technologies does not have access to Howmet cash balances except
through Howmet's declaring a cash dividend to its shareholders, which
availability may be restricted under the terms of Howmet's revolving credit
facility. Howmet does not currently intend to pay dividends.
On February 17, 1999, Howmet paid $66.4 million to redeem all of its 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 Technologies used the
proceeds to reduce debt under its revolving credit facilities. Earnings per
share
<PAGE>
<TABLE>
The following unaudited table sets forth the computation of basic and
diluted earnings per share:
Three-Months Ended Nine-Months Ended
September 30 September 30
------------------------------------------------------------
(In millions, except per share data) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator for basic and
diluted earnings per share:
Net Income $ 42.1 $ 38.5 $ 127.8 $ 112.4
- ----------------------------------------------------------------------------------------------------------------
Denominator
Denominator for basic earnings
per share--weighted-average
shares 36.7 36.5 36.6 36.5
Effect of dilutive securities
Employee stock options .9 1.0 .9 1.0
- ----------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings
per share--weighted-average
shares and assumed exercises 37.6 37.5 37.5 37.5
- ----------------------------------------------------------------------------------------------------------------
Net income per share:
Basic $ 1.15 $ 1.05 $ 3.49 $ 3.08
Diluted $ 1.12 $ 1.03 $ 3.41 $ 2.99
=================================================================================================================
</TABLE>
Lakewood Closure and Relocation
On June 25, 1999, the Company announced the closing and relocation of
assets at its Lakewood, California aerospace fastener manufacturing plant
to the Company's nearby Carson, California plant. The Lakewood closure is
expected to reduce fixed costs by approximately $6 million pre-tax annually
and allow better utilization of available capacity at Carson. The
consolidated plant will be able to support customers at the peak production
rates experienced during 1998. The Company's second quarter results
included a $5 million pre-tax charge for the plant closing. During
September all manufacturing at Lakewood was transferred to the Carson
facility.
<PAGE>
Accounting Standards
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133." SFAS No. 137 delays the effective date of
SFAS 133 to fiscal years beginning after June 15, 2000. The Company will
adopt the new statement beginning on January 1, 2001. The Company does not
believe that SFAS 137 will have a significant effect on the earnings and
financial position of the Company.
Segment Information
The Company has three reportable segments: Investment Castings, Fastening
Systems, and Propulsion Systems. The Company's reportable segments
manufacture and distribute distinct products with different production
processes.
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.
In accordance with industry practice, a proportionate share of Corporate
general and administrative expense is allocated and reimbursed through
Propulsion Systems government contracts. Inter-segment sales and transfers
are not significant.
1
<PAGE>
Summary unaudited segment information for the three and nine months ended
September 30 follows:
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30 September 30
----------------------------------------------------------------
(in millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales:
Investment Castings $ 355.2 $ 331.6 $ 1,097.6 $ 995.7
Fastening Systems 106.1 116.4 343.2 307.3
Propulsion Systems 141.3 147.0 437.8 483.4
- ---------------------------------------------------------------------------------------------------------------
Total sales $ 602.6 $ 595.0 $ 1,878.6 $ 1,786.4
- ---------------------------------------------------------------------------------------------------------------
Operating income:
Investment Castings $ 57.0 $ 61.6 $ 160.8 $ 154.3
Fastening Systems 12.5 14.8 43.2 44.8
Propulsion Systems 24.0 19.4 66.9 60.7
Unallocated corporate expense (6.4) (5.0) (21.3) (15.5)
- ---------------------------------------------------------------------------------------------------------------
Total operating income 87.1 90.8 249.6 244.3
Interest income 1.0 4.3 5.8 10.9
Interest expense (10.7) (8.2) (31.0) (21.0)
Other, net (1.3) (1.5) (2.0) (2.9)
- ---------------------------------------------------------------------------------------------------------------
Consolidated income before
income taxes and
minority interest $ 76.1 $ 85.4 $ 222.4 $ 231.3
================================================================================================================
</TABLE>
Subsequent Event - Continental/Midland Purchase
Subsequent to the quarter-ended September 30, the Company acquired on
October 1, 1999 all of the outstanding stock of the Continental/Midland
group of companies (Continental/Midland) for $106 million, including $19.2
million of assumed debt. The acquisition was financed with borrowings under
an unsecured bank line of credit. The interest rate on this facility is
based on LIBOR plus a spread, and was 6.28 percent at the time of the
transaction. This acquisition will be accounted for using purchase
accounting. The goodwill associated with this purchase will be amortized
over 40 years using the straight-line method. Continental/Midland, based in
Chicago, Illinois, produces fasteners and fastener systems primarily for
the automotive industry. Continental/Midland's revenues for its fiscal year
ended September 30, 1999 are approximately $81 million. Continental/Midland
and its affiliates will be wholly owned subsidiaries of Huck International,
Inc., and Continental/Midland's results of operations will be included in
the consolidated results of the Company in the Fastening Systems segment.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (UNAUDITED)
Results of Operations
All of the following discussion reflects diluted earnings per share.
Income for the Third Quarter
Net income for the third quarter ended September 30, 1999 was $42.1
million, or $1.12 per share, an increase of 9 percent, compared to the
prior year's quarter net income of $38.5 million or $1.03 per share.
Net income for the current quarter included benefits totaling $3.5 million
or $.09 per share due to a Stock Appreciation Rights (SAR) plan tied to the
price of Howmet's common stock and to another Howmet variable stock
compensation plan tied to the market price of Cordant's common stock
(Howmet Cordant Options Plan). These benefits resulted from recent declines
in Howmet's and Cordant Technologies' common stock prices. Half of this
benefit will reverse in future periods when Howmet's common stock price
rises to $15 per share, and the other half will reverse ratably in future
periods as Cordant's common stock price rises above the September 30, 1999
closing price. Net income for the prior year's quarter included a SAR
benefit at Howmet of $3.9 million or $.11 per share and tax interest income
of $1.8 million or $.05 per share. The prior year's net income also
included an after-tax charge of $1.8 million, or $.05 per share in the
Fastener segment for closing and relocating the Branford facility's assets.
Excluding these items earnings of $1.03 per share increased 12 percent over
last year's earnings of $.92 per share.
<PAGE>
<TABLE>
<CAPTION>
Summary unaudited financial information for the three-months ended
September 30 follows:
Better
(in millions, except per share data) 1999 1998 (Worse) Percent
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales:
Investment Castings $ 355.2 $ 331.6 $ 23.6 7
Fastening Systems 106.1 116.4 (10.3) (9)
Propulsion Systems 141.3 147.0 (5.7) (4)
- ---------------------------------------------------------------------------------------------------------------------
Total sales $ 602.6 $ 595.0 $ 7.6 1
- ---------------------------------------------------------------------------------------------------------------------
Operating income:
Investment Castings (1) $ 57.0 $ 61.6 $ (4.6) (7)
Fastening Systems 12.5 14.8 (2.3) (16)
Propulsion Systems 24.0 19.4 4.6 24
Unallocated corporate expense (6.4) (5.0) (1.4) (28)
- ---------------------------------------------------------------------------------------------------------------------
Total operating income 87.1 90.8 (3.7) (4)
Interest income 1.0 4.3 (3.3) (77)
Interest expense (10.7) (8.2) (2.5) (30)
Other, net (1.3) (1.5) .2 13
Income taxes (28.2) (32.9) 4.7 14
- ---------------------------------------------------------------------------------------------------------------------
Income before minority interest 47.9 52.5 (4.6) (9)
Minority interest (5.8) (14.0) 8.2 59
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 42.1 $ 38.5 $ 3.6 9
- ---------------------------------------------------------------------------------------------------------------------
Net income per share:
Basic $ 1.15 $ 1.05 $ .10 10
Diluted $ 1.12 $ 1.03 $ .09 9
=====================================================================================================================
<FN>
(1) Investment Castings operating income includes goodwill amortization
of $2.9 and $1 million in 1999 and 1998, respectively, associated
with the Howmet common stock purchases in December 1997 and February
1999.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Selected Unaudited Financial Data
Three Months Ended September 30
---------------------------------------------------------------------------------------------
1999 1998
------------------------------------------- ----------------------------------------------
(in millions) Cordant Howmet Consolidated Cordant Howmet Consolidated
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
operating activities $ 20.1 $ 65.4 $ 85.5 $ (.1) $ 74.3 $ 74.2
Capital expenditures (8.7) (30.4) (39.1) (8.9) (18.9) (27.8)
Dividends (3.7) - (3.7) (3.7) - (3.7)
- ---------------------------------------------------------------------------------------------------------------------------
$ 7.7 $ 35.0 $ 42.7 $ (12.7) $ 55.4 $ 42.7
===========================================================================================================================
</TABLE>
<PAGE>
BUSINESS SEGMENT SALES AND INCOME FOR THE QUARTER
Investment Castings
The following unaudited information summarizes Howmet's results, as
separately reported to its shareholders, for the three-months ended
September 30:
<TABLE>
<CAPTION>
(in millions) 1999 1998
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 355.2 $ 331.6
Cost of goods sold 271.5 250.2
Gross profit 83.7 81.4
Operating income 59.9 62.6
Net income $ 37.8 $ 38.1
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Following is a reconciliation of Howmet's contribution to the Company's
income for the three-months ended September 30:
(in millions) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Howmet net income $ 37.8 $ 38.1
Less preferred paid-in-kind dividend (1) (1.4)
- -------------------------------------------------------------------------------------------------------------------
Income available to common shareholders 37.8 36.7
- -------------------------------------------------------------------------------------------------------------------
Company's interest in Howmet income (2) 32.0 22.8
Add preferred paid-in-kind dividend 1.4
- -------------------------------------------------------------------------------------------------------------------
Howmet's contribution to the Company's income 32.0 24.2
Less the Company's 7 percent tax on Howmet income (1.7)
- -------------------------------------------------------------------------------------------------------------------
Howmet's total after-tax contribution to the Company's
income $ 32.0 $ 22.5
===================================================================================================================
<FN>
(1) Howmet's 9 percent paid-in-kind preferred stock owned by the Company was redeemed on February 17, 1999
for $66.4 million.
(2) On February 8, 1999, the Company increased its ownership in Howmet from 62 percent to 84.6 percent.
</FN>
</TABLE>
Howmet's sales increased $23.6 million or 7 percent over the prior year's
quarter, due to volume increases for large Industrial Gas Turbine (IGT)
components used for electrical power generation. Strong demand for
additional electrical power generation capacity is projected to continue.
Sales to the aerospace market were approximately 10 percent lower than the
prior year's quarter with approximately two percent of the decrease due to
price reductions. Such price reductions, as well as similar reductions for
the IGT market, were a function of sharing cost savings with customers.
Howmet continues to experience pressure from all of its major customers for
price reductions and expects such reductions to continue in 2000. The
adverse effect of these price reductions is projected to be offset by cost
savings, including significant efficiency and yield improvements. Such cost
savings can not be assured.
<PAGE>
Howmet's pre-tax income was $57.5 million for the quarter, a 2 percent
decrease from $58.7 million in the prior year's quarter. The current
quarter included a pre-tax SAR benefit of $3.8 million resulting from
Howmet's common stock price falling below $15 per share at September 30,
1999. The current quarter also included a pre-tax benefit on the Howmet
Cordant Options Plan of $2.9 million resulting from a decrease in Cordant's
common stock price. Half of this benefit will reverse in future periods
when Howmet's common stock price rises to $15 per share, and the other half
will reverse ratably in future periods as Cordant's common stock price
rises above the September 30, 1999 closing price. The prior year period
included an $11 million pre-tax SAR benefit. Excluding these items, pre-tax
income in the current quarter of $50.8 million increased 6 percent over the
prior year pre-tax income of $47.7 million. Interest expense was $1.8
million lower than the prior year's quarter due primarily to lower debt
levels.
Howmet's tax rate was 36 percent in the current period compared to 38
percent in the prior year. The lower rate in the current year is due to
higher benefits related to the Foreign Sales Corporation and higher
estimates of research and development tax credits.
Fastening Systems
Huck's fastening systems sales for the quarter decreased by $10.3 million
or 9 percent from last year reflecting a decline in the domestic aerospace
market. Aerospace fasteners declined primarily from major commercial
aerospace customer inventory adjustments in addition to a decline in
production rates. It is difficult for the Company to forecast how long
these inventory adjustments will last, or how deep they will be. Sales in
the industrial market increased 8 percent over the prior year's quarter.
Operating income decreased $5.3 million or 30 percent from last year
excluding the prior year's $3 million pre-tax charge to close and relocate
the Branford industrial fastener operations to Huck's Waco, Texas facility.
Operating income declined due to lower aerospace sales (35 percent), and
period expenses to close and relocate the Lakewood facility. Operating
margins for the quarter were 11.8 percent, compared to 15.3 percent last
year, excluding the prior year's relocation charge.
<TABLE>
<CAPTION>
Fastening systems book-to-bill ratios, defined as period orders divided by
period shipments, for the three months ended September 30, were as follows:
1999 1998
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Aerospace 1.05 .70
Industrial .91 .91
--------------------------------------------------------------------------------------------------------------
Fastening Systems Total .95 .83
==============================================================================================================
</TABLE>
Management uses book-to-bill ratios 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 is not a generally
accepted accounting principle disclosure, other companies may calculate
this ratio differently and utilize the ratio for different purposes.
Management believes the current quarter book to bill on aerospace fasteners
is due to spot demand, and does not represent a new trend in aerospace
demand.
<PAGE>
Propulsion Systems
Propulsion Systems sales for the quarter decreased $5.7 million or 4
percent compared to the prior year primarily from lower sales in the Space
Shuttle Reusable Solid Rocket Motor (RSRM), Missile Defense and Trident
programs. Propulsion Systems operating income increased $4.6 million or 24
percent from the prior year's quarter primarily from higher margins in the
RSRM program, and increased activity in Commercial Launch Motor programs.
Operating margins were 16.9 percent in the current quarter compared to 13.2
percent in 1998.
During the quarter, the RSRM contract accounted for approximately 16
percent of the Company's consolidated net sales and 18 percent of
consolidated operating income. Current year RSRM sales are expected to
decline compared to prior year's sales. The current NASA Buy 3
cost-plus-award-fee contract provides for Company production of the Space
Shuttle solid rocket motors through 2001. Buy 3 profit margins are expected
to improve as the contract approaches completion.
In August 1999 the RSRM Buy 4 contract was signed with NASA. The contract
is a cost-plus-incentive/performance/award-fee contract. The Buy 4 contract
includes 35 flight sets, or 70 motors, and three flight support motors.
This contract provides for over $1.7 billion in sales with contract
completion expected during 2005. 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. Production has begun under the Buy 4 contract.
The contract is subject to annual Congressional funding. While the Buy 4
contract is similar in structure and profit potential to Buy 3, Buy 4
profit margins will be lower than margins currently being recognized on Buy
3 until performance incentives are met.
On February 9, 1999 the Company was notified that NASA intends to
consolidate the Company's RSRM contract into the Space Flight Operations
Contract with United Space Alliance (U.S.A.). This change will mean the
Company will perform RSRM activities under a subcontract to U.S.A. instead
of as a prime contractor to NASA. The target date established by NASA for
the transition is July 1, 2001. The Company does not anticipate any
significant change to its RSRM contract terms or profit potential as a
result of the change.
<PAGE>
Income Year-to-Date
Net income for the nine-months ended September 30, 1999, was $127.8
million, or $3.41 per share, a 14 percent increase, compared to the prior
year's period net income of $112.4 million or $2.99 per share.
Net income for the current nine-month period included a $7.1 million or
$.19 per share tax benefit from reversing a previously accrued accumulated
dividend tax resulting from increased Howmet ownership in February 1999.
Net income for the current period also included a $3.1 million or $.08 per
share charge in the fastener segment for closure and relocation of the
Lakewood, California aerospace fastener facility. The current period also
included SAR and Howmet Cordant Options Plan benefits of $3.5 million or
$.09 per share due to recent declines in Howmet's and Cordant Technologies'
common stock prices. Half of this benefit will reverse in future periods
when Howmet's common stock price rises to $15 per share, and the other half
will reverse ratably in future periods as Cordant's common stock price
rises above the September 30, 1999 closing price. The prior year's net
income included tax refunds and tax interest income of $4.4 million or $.12
per share, and a $1.8 million or $.05 per share relocation charge in the
fastener segment to close the Branford facility. The prior year period also
included a $3.9 million or $.11 per share SAR benefit at Howmet due to
Howmet's stock price being below $15 per share at September 30, 1998.
Excluding these items, earnings per share of $3.21 increased 14 percent
over the prior year period's earnings per share of $2.81.
<TABLE>
<CAPTION>
Summary unaudited financial information for the nine-months ended September
30 follows:
Better
(in millions, except per share data) 1999 1998 (Worse) Percent
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales:
Investment Castings $ 1,097.6 $ 995.7 $ 101.9 10
Fastening Systems 343.2 307.3 35.9 12
Propulsion Systems 437.8 483.4 (45.6) (9)
- ----------------------------------------------------------------------------------------------------------------------
Total sales $ 1,878.6 $ 1,786.4 $ 92.2 5
- ----------------------------------------------------------------------------------------------------------------------
Operating income:
Investment Castings (1) $ 160.8 $ 154.3 $ 6.5 4
Fastening Systems 43.2 44.8 (1.6) (4)
Propulsion Systems 66.9 60.7 6.2 10
Unallocated corporate expense (21.3) (15.5) (5.8) (37)
- ----------------------------------------------------------------------------------------------------------------------
Total operating income 249.6 244.3 5.3 2
Interest income 5.8 10.9 (5.1) (47)
Interest expense (31.0) (21.0) (10.0) (48)
Other, net (2.0) (2.9) .9 31
Income taxes (76.9) (86.3) 9.4 11
- ----------------------------------------------------------------------------------------------------------------------
Income before minority interest 145.5 145.0 .5
Minority interest (17.7) (32.6) 14.9 46
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 127.8 $ 112.4 $ 15.4 14
- ----------------------------------------------------------------------------------------------------------------------
Net income per share:
Basic $ 3.49 $ 3.08 $ .41 13
Diluted $ 3.41 $ 2.99 $ .42 14
======================================================================================================================
<FN>
(1) Investment Castings operating income includes goodwill amortization
of $7.9 and $2.9 million in 1999 and 1998, respectively, associated
with the Howmet common stock purchases in December 1997 and February
1999.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Selected Unaudited Financial Data
Nine Months Ended September 30
---------------------------------------------------------------------------------------------
1999 1998
------------------------------------------------------------------------------------------
(in millions) Cordant Howmet Consolidated Cordant Howmet Consolidated
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
operating activities $ 72.0 $ 124.5 $ 196.5 $ 96.2 $ 110.4 $ 206.6
Capital expenditures (27.4) (87.7) (115.1) (23.2) (54.7) (77.9)
Dividends (11.0) (11.0) (11.0) (11.0)
- ---------------------------------------------------------------------------------------------------------------------------
$ 33.6 $ 36.8 $ 70.4 $ 62.0 $ 55.7 $ 117.7
- ---------------------------------------------------------------------------------------------------------------------------
Total Debt (a) $ 588.0 $ 104.7 $ 692.7 $ 348.9 $ 141.2 $ 490.1
Less cash & cash
Equivalents 2.6 17.7 20.3 7.7 21.3 29.0
- ---------------------------------------------------------------------------------------------------------------------------
$ 585.4 $ 87.0 $ 672.4 $ 341.2 $ 119.9 $ 461.1
===========================================================================================================================
<FN>
(a) Excludes Pechiney note payable in 1998 data.
</FN>
</TABLE>
Investment Castings
<TABLE>
<CAPTION>
The following unaudited information summarizes Howmet's results, as
separately reported to its shareholders, for the nine-months ended
September 30:
(in millions) 1999 1998
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 1,097.6 $ 995.7
Cost of goods sold 839.4 760.2
Gross profit 258.2 235.5
Operating income 168.7 157.2
Net income $ 103.9 $ 90.0
==============================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Following is a reconciliation of Howmet's contribution to the Company's
income for the nine-months ended September 30:
(in millions) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Howmet net income $ 103.9 $ 90.0
Less preferred paid-in-kind dividend (1) (.8) (4.1)
- -------------------------------------------------------------------------------------------------------------------
Income available to common shareholders 103.1 85.9
- -------------------------------------------------------------------------------------------------------------------
Company's interest in Howmet income (2) 85.4 53.3
Add preferred paid-in-kind dividend .8 4.1
- -------------------------------------------------------------------------------------------------------------------
Howmet's contribution to the Company's income 86.2 57.4
Less the Company's 7 percent tax on Howmet income (4.0)
- -------------------------------------------------------------------------------------------------------------------
Howmet's total after-tax contribution to the Company's
income $ 86.2 $ 53.4
===================================================================================================================
<FN>
(1) Howmet's 9 percent paid-in-kind preferred stock owned by the Company was redeemed on February 17, 1999
for $66.4 million.
(2) On February 8, 1999, the Company increased its ownership in Howmet from 62 percent to 84.6 percent.
</FN>
</TABLE>
Howmet's sales for the current nine-month period increased $101.9 million
or 10 percent over the prior year period. The 1999 sales increase is due to
volume increases in the IGT market. Sales to the aerospace market were
approximately 5 percent lower than 1998, including an approximate two
percent price reduction. Such price reductions, as well as similar
reductions for the IGT market, were a function of sharing cost savings with
customers.
Howmet's net income was $103.9 million for the nine-month period, a 15
percent increase from $90 million in the prior year period. The principle
reason for the higher income was the increased revenue in the IGT market.
The SAR, and Howmet Cordant Options Plan and tax rate reduction benefits
discussed in the quarterly comparison also effect the nine-month
comparison. Interest expense was $5.1 million lower than the prior year
period due to lower debt levels.
Starting in late 1998, Howmet discovered certain product testing and
specification non-compliance issues at Cercast's facilities in Montreal,
Quebec and Bethlehem, PA. Howmet notified customers, actively cooperated
with them and government agencies in investigating these matters, and
implemented corrective actions. In addition, Cercast has been, and expects
to continue for some time to be, late in delivery of products to certain
customers. Data collection and analysis must be completed before a
definitive estimate of Howmet's cost to resolve these matters can be
completed. Howmet knows of no in-service problems associated with these
issues. Based on preliminary evaluation, however, Howmet recorded an
estimated loss of $4 million in its consolidated statement of income for
the year ended December 31, 1998. While there is uncertainty associated
with all of the aforementioned matters, the Howmet believes that additional
cost for such matters beyond amounts accrued, if any, would not have a
material adverse effect on the 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.
<PAGE>
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 its Cercast Canadian subsidiary. The
proposed debarment with respect to Howmet's Cercast Canadian subsidiary was
based on the product testing and specification non-compliance issues
discussed above, and improper vendor payments previously disclosed. The Air
Force 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. On August 6,
1999 Howmet entered into a three-year Administrative Agreement with the Air
Force, the terms of which required Howmet to undertake remedial action and
reporting. The proposed debarment of Cercast was also terminated on August
6, 1999.
During the third quarter of 1999, Howmet management learned of similar
quality issues at the Cercast plant in Hillsboro, Texas. These issues have
been reported to the Air Force under the Administrative Agreement. In
addition to and separate from the Administrative Agreement, Howmet
management is seeking that these matters at Hillsboro be addressed under
the government's voluntary disclosure program. The determination as to
whether these disclosures will be covered by this program will be made by
the U.S. Department of Justice and by the Department of Defense, Office of
Inspector General.
Fastening Systems
Fastening Systems sales for the nine-months ended September 30, 1999
increased $35.9 million or 12 percent over the prior year period,
reflecting both the addition of Jacobson Manufacturing's results for the
full nine months in the current year and continued strength in industrial
markets. Industrial sales increased 16 percent over the prior year
excluding Jacobson's results in the current period. Aerospace sales
declined 28 percent from the prior year period primarily as a result of
weak domestic aerospace demand because of inventory adjustments by the
major commercial aerospace customers and a decline in production rates. It
is difficult for the Company to forecast how long or deep these inventory
adjustments will be.
During the current period a $5 million pre-tax charge was taken to close
and relocate the aerospace fastener operations at Lakewood, California to
Huck's nearby Carson, California facility. The Lakewood closure will result
in reduced fixed costs of approximately $6 million pre-tax annually and
allow better utilization of available capacity at Carson. The nine-month
period also included a $1.4 million pre-tax, non-cash charge to write-off
an unused automotive fastener patent. The prior year period included a $3
million pre-tax charge to close and relocate the Branford industrial
fastener plant to the Company's Waco, Texas facility. Operating margins for
the current period excluding the Lakewood charge and patent write-off were
14.4 percent. Operating margins in 1998 were 15.5 percent excluding the
Branford relocation charge. Excluding Jacobson's results, the Lakewood
relocation charge, the Branford patent charge and the Branford relocation
charge in the prior year, Huck's sales and operating income decreased 9 and
17 percent, respectively, from the prior year. The Fastening Systems
plastics operations are experiencing low margins in a highly competitive
market. Such low margins are expected to continue.
<PAGE>
<TABLE>
<CAPTION>
Fastening systems book-to-bill ratios, defined as period orders divided by
period shipments, for the nine months ended September 30, were as follows:
1999 1998
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Aerospace .80 .88
Industrial .99 .97
--------------------------------------------------------------------------------------------------------------
Fastening Systems Total .93 .93
==============================================================================================================
</TABLE>
Management uses book-to-bill ratios 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 is not a generally
accepted accounting principle disclosure, other companies may calculate
this ratio differently and utilize the ratio for different purposes.
Propulsion Systems
Propulsion Systems sales decreased $45.6 million or 9 percent for the
nine-month period ended September 30, 1999, compared to the prior year due
primarily to lower activity in the commercial launch motor, RSRM and
Trident programs. Operating income increased $6.2 million or 10 percent
over the prior year period due primarily to higher RSRM margins. Propulsion
Systems operating margins were 15.3 percent compared to 12.5 percent in
1998.
OTHER MATTERS
Selling, general and administrative
For the quarter and nine-months ended September 30, 1999, selling, general
and administrative expenses increased $9.7 and $24.6 million, respectively,
compared to the prior year. Goodwill amortization increased $3 and $8.3
million for the quarter and nine-month period, respectively, due to the
purchase of an additional 22.6 percent of Howmet common stock in February
1999, and the purchase of Jacobson in mid-June 1998. Selling, general and
administrative expenses for the nine-month period increased $5.7 million,
due to the addition of Jacobson's selling, general and administrative
expenses for the full period and to increased corporate costs and marketing
efforts. Corporate unallocated costs increased due to the higher costs
noted above and fewer costs being allocated to Propulsion Systems
government contracts. Increased sales in the commercial segments reduced
the amount of corporate costs allocable to Propulsion systems.
<PAGE>
Howmet's selling, general and administrative expenses increased $5.2 and
$11 million for the quarter and nine-month period, respectively. The effect
of a higher benefit in the prior year from the SAR and Howmet Cordant
Options Plan accounts for $3.1 and $1.6 million of the third quarter and
nine-month increases, respectively. Howmet's increase in selling, general
and administrative costs also resulted from the costs of systems upgrades
and higher costs necessary to support Howmet's higher sales volume. Half of
this benefit will reverse in future periods when Howmet's common stock
price rises to $15 per share, and the other half will reverse ratably in
future periods as Cordant's common stock price rises above the September
30, 1999 closing price.
Interest Expense
Interest expense increased $2.5 and $10 million for the quarter and
nine-month period, respectively, due to the Company's increased borrowings
related to the 22.6 percent purchase of Howmet common stock and the
Jacobson acquisition.
Income Taxes
The Company had an effective income tax rate of 34.6 percent, compared with
37.3 percent for the same nine-month period in the prior year. The
effective income tax rate for the nine-month period was 38 percent before
reversal of the $7.1 million or $.19 per share dividend tax previously
recorded on the Company's share of Howmet income. Beginning in February
1999, Howmet's taxable income will be included in the Company's
consolidated Federal income tax return, and a dividend tax will no longer
be required on the Company's share of Howmet results. The Company's
effective tax rate for the prior year period would have been higher if not
for a $2.6 million tax refund in the second quarter of 1998, and
recognition of additional research tax credits by Howmet.
Earnings Outlook
On September 22, 1999, management issued a news release projecting that
earnings for 1999 from continuing operations would be approximately $4.00
per share. On October 21, 1999, management reconfirmed in it's 3rd quarter
earnings release that earnings per share for 1999 are projected to be in
the $4.00 to $4.05 per share range and that earnings for 2000 are estimated
to increase by approximately 5 percent.
The Company anticipates revenues for the Investment Castings segment in
2000 to be approximately 4 percent greater than 1999. The Company
anticipates the IGT revenues to increase and commercial aerospace sales to
be essentially flat compared to 1999 levels. Margins are projected to be
consistent with 1999 levels as productivity improvements offset price
declines in long term contracts.
Fastening Systems sales are projected to be approximately $500 million in
2000. This revenue projection includes additional sales from Continental
Midland, an estimated additional 10 percent decline in aerospace sales and
a slight decrease in industrial fastener revenues. Operating margins are
anticipated to be approximately 15 percent.
Propulsion Systems sales for 2000 are projected to be flat compared to 1999
levels, assuming consistent performance and stable launch schedules for the
Space Shuttle Program. Margins will decrease primarily as a result of the
completion of the current RSRM contract. Margins are projected to be in the
12.5 to 13 percent range.
The above forecast assumes that overall economic conditions, including
interest rates, will remain favorable throughout 2000.
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.
2
<PAGE>
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 remedial
action to correct or replace problematic code, with minor exceptions, has
been completed. All central systems have now been placed 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. 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 and equipment requiring corrective action or replacement.
This remediation work is complete for 99 percent of the critical systems at
all plants. Work on the remaining critical systems and devices is being
closely monitored by the central I.S. Year 2000 project team.
Embedded Processor Systems Remediation: The central I.S. organization
provided each plant facility with guidance and support for embedded
processor identification, evaluation, testing and remediation, where
required. The plant teams have tested and/or corrected all of their
critical embedded systems.
Customer and Supplier Readiness: Investment Castings 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. Electronic
interfaces with individual business associates are being 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.
<PAGE>
Risk Assessment, Worst Case Scenarios and Contingency Planning: Investment
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 has developed 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 were 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 a material 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.
Cost Information: The estimated cost at completion for all phases of the
Howmet Castings project is $16.3 million. An estimated $6.7 million (41
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 million
(43 percent) is for software package purchase and implementation costs for
applications that were installed or expedited for Year 2000 purposes. An
additional $2.6 million (16 percent) has been spent for infrastructure
upgrades or replacement. Approximately $15.1 million (93 percent) had been
expended as of September 30, 1999; the estimated $1.2 million (7 percent)
in remaining costs will be expended during the remainder of 1999 and early
2000. 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.
<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 have been moved into production operation.
The production environment will 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. Additionally, all computer and internal
telecommunications hardware systems have been evaluated, upgraded and
tested, as required, and placed into production operation.
Embedded Processor Systems Remediation: Cross-functional teams at each
Thiokol Propulsion facility have inventoried, evaluated, replaced or
renovated, and tested embedded processor systems with potential Year 2000
readiness risks. The 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. 100 percent of the
critical embedded processor systems have been corrected or replaced.
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 Thiokol Propulsion business
information systems and embedded processor systems were completed in the
third quarter 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 one flight planned for the remainder of 1999,
sufficient flight sets of hardware will be in inventory at Kennedy Space
Flight Center by December 1999 to support the shuttle launch schedule
through August 2000. Additionally, in December 1999, 4.5 flight sets of
hardware will be in inventory at Thiokol Propulsion facilities. Risk
assessment and contingency planning are dynamic activities and as such will
be monitored and acted upon on a continual basis as risks are identified.
<PAGE>
Cost Information: The estimated cost at completion for all phases of the
Thiokol Propulsion project is $9 million. These costs were recorded as
incurred over the three-year duration of the project. Approximately $8.9
million (98.5 percent) had been expended through September 30, 1999, and
$.1 million (1.5 percent) in estimated remaining costs will be expended
during the remainder of 1999. Of the total estimated project cost, 58
percent is labor and miscellaneous project-related expense, 12 percent is
for I.S. infrastructure upgrades and replacement, and 30 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 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 information systems.
For many years most Huck locations have used standard commercial,
vendor-supported application software products. As of September 30, 1999,
six locations had been upgraded to versions of these software products that
address virtually all Year 2000 readiness issues. 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. Of the eight sites
scheduled for implementation of this ERP system, all were in production
operation as of September 1, 1999. Additional local and system-wide testing
and minor remediation 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 evaluations
of individual devices have been completed. Less than 5 percent of
production equipment required remediation efforts and the majority of that
work has been completed. Remediation work on the remaining equipment, none
of which is considered business critical, is scheduled for completion by
November 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. An aggressive program is presently underway wherein all
company sites have analyzed and prioritized their respective supplier base.
Critical suppliers have been contacted directly to determine their
readiness status. Any such supplier who has a questionable readiness status
will be monitored and any company site using that supplier will prepare
specific contingency plans. These plans were 50 percent complete as of
September 30, 1999. Any electronic interfaces will be coordinated with
these business associates on a case-by-case basis. Huck's electronic data
interchange (EDI) systems have been replaced with Year 2000 ready products
and were operational as of June 30,1999. Management has 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.
<PAGE>
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 assessments are being used to refine Huck's
approach to risk assessment and contingency planning. Huck headquarters has
completed a basic contingency planning methodology and is working with
individual sites to ensure completion of their respective plans by October
1999. The Automotive Industry Action Group (AIAG), a leader in the
assessment of Year 2000 readiness, has performed periodic reviews and has
recently rated Huck Fasteners as "Green Light" which is considered low
risk.
Cost Information: The estimated total cost at completion for all phases of
the Huck Year 2000 project is $12.8 million. Approximately $8.7 million (68
percent) of that total amount will be capitalized. The estimated $4.1
million (32 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 $11.2 million (87 percent) had been expended as
of September 30, 1999, and the estimated $1.6 million (13 percent) in
remaining cost will be expended in 1999 and early 2000. No major I.S.
initiatives have been adversely affected due to the expenditures needed to
remedy Year 2000 issues. Huck management has concluded that the company
will substantially benefit from these efforts because of the elimination of
several old systems, 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
through December 31, 2001, and after full Euro conversion post July 1,
2002. The Company does not anticipate any material impact from the Euro
conversion on its computer software plans. Computer software changes
necessary to comply with the Year 2000 issue are generally compliant with
the Euro conversion issue. Enterprise Resource Planning (ERP) software
being implemented at Huck as a part of Year 2000 readiness will be Euro
compliant. No additional costs related to Euro compliance are expected for
the ERP software. Some expense is anticipated for minor system
modifications, but is not expected 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 operations' 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.
<PAGE>
Liquidity and Capital Resources
For the current nine-month period, consolidated net cash flows from
operating activities were $196.5 million compared to $206.6 million last
year. The lower cash from operating activities resulted primarily from an
increase in receivables and inventories. The increase in receivables
resulted from collection timing issues related to both Investment Castings
and Propulsion Systems. Inventories increased at Propulsion Systems due
primarily to development costs on the Minuteman program. These costs will
remain in inventory until 2000. Inventories also increased in the
Investment Castings segment due to timing differences in deliveries and
increased inventory levels to support increased sales.
Acquisition activity included $385 million for the remaining 22.65 million
shares of Howmet International Inc. common stock owned by Carlyle Blade
Acquisition Partners, L.P. The acquisition amount included a new Carlyle
Standstill Agreement and extending an existing covenant not to compete.
Consolidated capital spending on property, plant and equipment used $115.1
million in the current period compared to $77.9 million in the prior year.
Howmet used $87.7 million in capital expenditures for capacity expansions
to serve the core business as well as additional expenditures to support
new products and process enhancement activities. The Company's consolidated
capital spending for 1999 is projected to be approximately $150 million.
Subsequent to the quarter ended September 30, the Company acquired on
October 1, 1999, all of the outstanding stock of the Continental/Midland
group of companies for $106 million, including $19.2 million of assumed
debt. The acquisition was financed with borrowings under an unsecured bank
line of credit. The interest rate on this facility is based on LIBOR plus a
spread, and was 6.28 percent at the time of the transaction.
Financing activities for the nine-month period provided $279.7 million of
cash compared to $126.1 million of cash provided in the prior year period.
In February, the Company borrowed $385 million to finance the Howmet common
stock purchase. During the current period the Company repaid $200.1 million
of debt, $75 million being repaid by Howmet.
On February 17, 1999, Howmet paid $66.4 million to redeem all of its 9
percent paid-in-kind preferred stock. The payment was made to Cordant
Technologies, the sole preferred stockholder. Howmet borrowed under its
existing senior revolving credit facility to make this payment and Cordant
Technologies used the proceeds to reduce debt under its senior revolving
credit facilities.
During the nine-month period, the Company did not repurchase any shares of
common stock. In the prior year period, the Company repurchased 319,400
shares of the Company's common stock for $12.9 million. There are
approximately 2.4 million shares available for repurchase under the current
share repurchase authorization. Cordant will repurchase shares when, and in
amounts as it deems appropriate.
<PAGE>
Cordant does not have access to Howmet cash balances except through
Howmet's declaring a cash dividend to its shareholders. Howmet is limited
as to the amount of dividends it can declare under the terms of Howmet's
financing agreements. Howmet does not currently intend to pay dividends.
At December 31, 1998, the Company's balance sheet included $716.4 million
of Pechiney Notes and a related $716.4 million Restricted Trust asset. On
January 4, 1999, Pechiney, S.A. (Howmet's previous owner) paid the Pechiney
Notes in full. As a result, the Restricted Trust, which secured Pechiney,
S.A's agreement to repay the notes was terminated. No Howmet or Cordant
funds were used in the payment of the Notes.
At September 30, 1999 Cordant had $500 million in revolving credit
facilities with $125 million available for use. In addition, on September
30, 1999 Howmet had a $300 million revolving credit facility with $242.4
million available for additional borrowing and/or letters of credit.
Howmet has an agreement to sell, on a revolving basis, an undivided
interest in a defined pool of accounts receivable. Howmet has received $55
million from the sale of such receivables and has deducted this amount from
accounts receivable at September 30, 1999. The $56.6 million retained
receivables represents the receivables set aside to replace sold
receivables in the event they are not fully collected.
<TABLE>
<CAPTION>
The Company's liquidity ratio's were as follows:
September 30 December 31
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Working Capital (in millions) $ 159.9 $ 94.8
Current Ratio .8 1.2
Debt-to-equity 88.3% 60.6%
Debt-to-total capital 48.8% 40.8%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
All of the above ratios for 1998 exclude the Pechiney Notes and the
Restricted Trust which were terminated with Pechiney S.A.'s payment of its
Notes on January 4, 1999. The debt-to-total-capital ratio includes the $55
million receivable facility at Howmet. The current ratio and working
capital decreases resulted primarily from increased 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. The Company expects that its senior revolving credit
facilities will be renegotiated, restructured, or replaced and the Company
continually reviews its options for other types of long-term financing.
<PAGE>
Since December 31, 1998, the cumulative translation adjustment, which is
included in stockholder's equity, changed by $5.6 million. The change is
primarily due to the strengthening of the U.S. dollar relative to the
French franc.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no significant changes in market risks since the end of the
Company's December 31, 1998 year. For more information, please read the
consolidated financial statements and notes thereto included in the
Company's 1999 Notice of Annual Meeting and Proxy Statement, Financial
Information, incorporated by reference in the Annual Report on Form 10-K
for the year ended December 31, 1998.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Investment Castings under the Income Year-to-Date section of
Management's Discussion and Analysis for information relating to the
termination of the proposed debarment proceedings pending against the
Montreal, Quebec facility of Howmet Cercast (Canada), Inc. and the
Bethlehem, Pennsylvania facility of Howmet Cercast (U.S.A.), Inc., the
Administrative Agreement entered into with the U.S. Air Force and the
government's voluntary disclosure program controlled by the Department of
Justice and the Department of Defense Inspector General, which discussion
is incorporated herein by reference. Cercast has been renamed Howmet
Aluminum, but in this discussion will continue to be referred to as
Cercast.
The Company has filed a complaint against the United States in the U.S.
Court of Federal Claims in the amount of $8,149,888 to recover certain
previously approved costs associated with the development of Thiokol
Propulsion's Castor IVA-XL rocket motors. In March 1999, the Government
reversed its longstanding approval of the Company's accounting method and
denied reimbursement.
ITEM 5. OTHER INFORMATION
FORWARD-LOOKING STATEMENTS
This Form 10-Q includes or incorporates by reference forward-looking
statements within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. Forward-looking statements, which are
based on assumptions and describe our future plans, strategies and
expectations, are generally identifiable by the use of the words
"anticipate," "believe," "estimate," "expect," "intend," "project," or
similar expressions. These forward-looking statements are subject to risks,
uncertainties, and assumptions about us. Important factors that could cause
actual results to differ materially from the forward-looking statements we
make are set forth under the caption "Risk Factors" and elsewhere in filing
and the documents incorporated by reference. If one or more of these risks
or uncertainties materialize, or if any underlying assumptions prove
incorrect, our actual results, performance or achievements may vary
materially from any future results, performance or achievements expressed
or implied by these forward-looking statements. All forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the cautionary statements in this paragraph.
We undertake no obligation to publicly update or revise any forward-looking
statements to reflect future events or developments.
RISK FACTORS
Risks which may impact the accuracy of the Company's forward-looking
statements include, but are not necessarily limited to:
<PAGE>
The Company's RSRM contracts with NASA for the Space Shuttle program may be
delayed, terminated or changed by the U.S. government
The Company's RSRM contracts for NASA's Space Shuttle program are subject
to substantial performance and financial risks. Approximately 16 percent of
the Company's current revenues are derived from the reusable solid rocket
motor (or RSRM) contracts. Therefore, any change in, or discontinuance of
RSRM contracts or the benefits received under those contracts could have a
material adverse effect on the Company. The U.S. government may terminate
the contracts for any reason, or Congress may change the funding available
to the contracts. The U.S. government may also delay or extend deliveries
under the contracts at will. The number and the timing of Shuttle launches
can impact the RSRM Shuttle contract. For example, future space shuttle
launches depend upon a number of factors such as the age and condition of
the shuttle fleet and launch demands, and the status of the International
Space Station. Delays in space station components may delay launches and
affect the RSRM production rates. The RSRM contracts are dependent upon
NASA's Space Shuttle program, which is highly dependent upon the viability
of the International Space Station. Should the International Space Station
be cancelled, NASA's Space Shuttle program and the Company's RSRM contracts
would likely be cancelled as well. NASA has also shown initial interest in
developing a liquid fly back booster as an alternative propulsion source or
as a replacement for the RSRM motors, and any development of this or other
alternative propulsion sources would adversely impact the Company in the
future. Additionally, actions by the U.S. government or changes in
performance levels may make the amount of the contract fee already booked
inappropriate, which might cause a retroactive award fee adjustment that
could include reimbursement to the government of fees the government has
paid to the Company.
Current space and defense propulsion contracts as well as future propulsion
programs with the United States government and prime contractors may be
terminated, renegotiated or not funded
The U.S. government and prime contractors may terminate, renegotiate or not
fund non-RSRM space and defense contracts, including the Minuteman regrain
and commercial launch vehicle programs, and may not provide additional
contracts or programs in the future. For example, international treaty
negotiations limiting the deployment of ICBM's may impact the level of
Minuteman production. The termination or discontinuance of funding of a
substantial portion of this business could have a material adverse effect
on the Company.
<PAGE>
The Company cannot assure that it will successfully win new programs or
retain current programs and the failure to do so could have a material
adverse effect on the Company. The Company's ability to successfully
compete for and win new programs or retain current programs may be affected
by:
o the availability of program funding
o competition by others for suchprograms on price, quality, technology,
facilities, delivery, and product performance
o changes in Congressional funding objectives
o federal agency demand and program management, including program
termination, consolidation or privatization
o the degree in which the Company successfully manages current programs
The profitability of such programs with satisfactory return on investment
on lower prices, costs and unit volumes in a shrinking and competitive
government procurement environment may also adversely affect the Company.
The cyclicality of the aerospace market may materially and adversely affect
the Company
Sales of products and services to the domestic and international commercial
aerospace markets are subject to the risks of the cyclical nature of these
markets and the phase of this cycle at any point in time. Fluctuations in
demand for products in the aerospace industry could have a material adverse
effect on the Company. Delay or changes in aircraft and component orders
and build schedules and customer inventories of Company products may impact
the future demand for products and profitability. The Company cannot assure
that there will not be declines in these markets impacting the demand for
products or the delivery schedule for existing orders.
Failure to satisfy the demands of major customers and pricing pressures in
the aerospace market could have a material adverse effect on the Company
The Company's major aerospace customers are large and may exercise their
market power among a number of suppliers competing for their business by
exerting pricing pressure and delivery, inventory, and unit volume
requirements. The ability to maintain both product and manufacturing
qualifications, meet the needs of major customers and regulatory agencies
and maintain or improve margins and return on investment in light of
competitive pricing pressures, unit demand, product qualification and
product substitutions by major customers, will be important to the
Company's success in the aerospace market. The Company's ability to offset
price reductions through cost reductions and with new products and
technologies can not be assured. The inability to maintain product pricing,
as well as availability, delivery, quality, and service could result in
decreased sales or profitability in the aerospace market.
<PAGE>
General economic activity and mature industrial markets may negatively
affect the Company's ability to sell products and services
The products and services sold for domestic and international, and
industrial commercial markets, primarily through Fastening Systems and
Investment Castings segments are subject to the risks of the level of
general economic activity and industry capacity in mature industrial
markets, product applications and technology associated primarily with
aircraft, automotive, transportation, power generation, construction and
other industrial applications. The Fastening Systems segment is subject to
the cyclical and economic nature of the automotive industry and the market
power of large automotive original equipment manufacturers as to
competition among vendors for pricing, delivery, inventory and unit
volumes. The Fastening Systems plastics operations acquired in the Jacobson
Manufacturing acquisition are subject to major customer turnover and
operate in a highly competitive and fragmented industry.
The Company's business can also be affected by factors such as management's
ability to:
o successfully react to changes in market conditions and demand
o expand new and existing product lines o compete successfully with
the consolidation of suppliers by major Fastener Systems customers
o improve margins and returns on investment by successfully
implementing asset management, pricing and cost reduction
strategies
o successfully integrate acquisitions
The ability to maintain competitive products, pricing, availability,
delivery and service are also important factors in maintaining customer
relationships and competing effectively with other manufacturers.
There are risks associated with the ownership of Howmet
The value of Howmet's assets includes significant goodwill. This value may
not be realized by stockholders, if Howmet were sold or liquidated. In
addition, financial covenants and restrictions contained in certain Howmet
credit agreements restrict Howmet's ability to pay cash dividends to
stockholders. As a result, the Company is restricted in access to Howmet's
cash flows and other resources. If the Company is unable to generate
sufficient cash flows from other sources, the ability to repay amounts due
on indebtedness would be materially adversely affected.
The loss or failure to maintain product quality or manufacturing
qualifications may result in loss of markets and business
Supplier and customer product qualifications and product quality are
important to the Company as a purchaser and as a supplier. As a supplier,
loss or failure to maintain product quality or manufacturing qualifications
from major customers including the U.S. government and major commercial
aerospace and aircraft manufacturers and automotive original equipment
manufacturers may result in loss of markets and business, which could have
a material adverse effect on the Company.
<PAGE>
Starting in late 1998, Howmet discovered certain product testing and
specification non-compliance issues at Cercast aluminum casting operations
located in Montreal, Quebec and Bethlehem, Pennsylvania. Howmet notified
customers, actively cooperated with them and government agencies in
investigating these matters, and has implemented corrective action. Howmet
does not know of any in-service problems associated with these products. On
July 23, 1999, Howmet received a customer claim, which was significantly
higher than, and which could possibly be resolved for an amount in excess
of amounts accrued. Howmet is still evaluating this claim but believes it
is excessive. Based on currently known facts, Howmet believes that
additional cost beyond amounts accrued 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 Howmet's operating results in the particular quarter in
which they occur.
On March 3, 1999, Howmet received from the U.S. Air Force a Notice of
Proposed Debarment from future U.S. government contracts and subcontracts
directed at Howmet Corporation, its principal operating subsidiary, and
Howmet Cercast (Canada), Inc. The Air Force unilaterally terminated the
proposed debarment with respect to Howmet Corporation by letter to Howmet
on March 10, 1999, thus permitting Howmet Corporation to resume accepting
U.S. government contracts and subcontracts. The proposed debarment with
respect to Howmet's Cercast Canadian subsidiary was based on the above
testing issues and improper vendor payments that took place at the Cercast
Canadian operations. On August 6, 1999, Howmet entered into a three-year
Administrative Agreement with the Air Force, the terms of which required
Howmet to undertake remedial action and reporting. The proposed debarment
of Cercast was also terminated on August 6, 1999.
During the third quarter of 1999, Howmet management learned of similar
quality issues at the Cercast plant in Hillsboro, Texas. These issues have
been reported to the Air Force under the Administrative Agreement. In
addition to and separate from the Administrative Agreement, Howmet
management is seeking that these matters at Hillsboro be addressed under
the government's voluntary disclosure program. The determination as to
whether these disclosures will be covered by this program will be made by
the U.S. Department of Justice and by the Department of Defense, Office of
Inspector General (DoDIG).
The Administrative Agreement gives the Air Force certain rights and powers
that, if exercised, could have an impact on the operations of Cercast
and/or Howmet. Even absent such actions by the Air Force, the Department of
Justice and/or the DoDIG could refuse to admit the Cercast quality matters
to the voluntary disclosure program and, in this event, could seek to bring
a civil or criminal action against Cercast and/or its employees.
Qualified vendors, component parts, and raw materials qualifications are
important to the Company in the manufacture of products, including major
propulsion systems such as the RSRM. Sources, component parts and raw
materials may be limited, and the loss of a major vendor as a supplier, has
the potential to cause a major and material delay in production or program
performance.
<PAGE>
Shortages or significant price fluctuations of raw materials could have a
material adverse effect on the Company
Raw materials utilized by the Investment Castings and Fastening Systems
segments include a number of metals and minerals, including titanium,
hafnium, aluminum, nickel, cobalt, molybdenum and chromium, among others.
Although significant shortages have not been experienced with supplies and
raw materials, there is no assurance that shortages will not occur in the
future. Any such shortages could have a material adverse effect on the
Company.
Propulsion Systems relies upon a number of raw materials specifically
qualified to customer requirements such as, but not limited to, ammonium
perchlorate, aluminum powder, polymers, and insulating materials that are
produced by a limited number of suppliers; and in many cases by sole source
or single source suppliers. Shortages of these materials could adversely
impact the Company.
Prices of raw materials can be volatile, and the Company ordinarily does
not hedge the price risk of raw materials. Significant raw materials price
fluctuations could have a material adverse effect on the Company. For some
of the supplies and raw materials purchased, including certain metals,
there are no fixed price contracts or arrangements. Commercial deposits of
certain metals, such as cobalt, nickel, titanium, and molybdenum, that are
required for the alloys used in precision castings and aircraft
structurals, are found in only a few parts of the world, and for certain
materials only single sources are readily available. The availability and
prices of these metals and other materials may be influenced by private or
governmental cartels, changes in world politics, unstable governments in
exporting nations, production interruptions, inflation and other factors.
The Company does not hedge the risk of net asset value fluctuations of
foreign investments valued in local currencies and therefore may be exposed
to adverse foreign currency rate changes
The Company does not hedge against net asset values for foreign investments
attributed to foreign subsidiaries valued in local currencies. To the
extent the foreign revenue base grows and net asset base expands as the
result of increased foreign business activity, the exposure to adverse
foreign currency rate movement increases. The foreign currency risk
exposure is also subject to the stability of the foreign currency of the
country where the Company maintains foreign operations or does business.
<PAGE>
Year 2000 related problems may disrupt the business information systems,
production or business operations
The Company has implemented a formal Year 2000 program to address required
remedial action and readiness with respect to business information and
systems with embedded processors to minimize the risk of business
information, production and business operation disruptions resulting from
Year 2000 date logic problems. The Year 2000 readiness program also
includes an assessment of the Year 2000 preparedness of major customers,
suppliers and critical third party support. Developing worst case scenarios
and contingency planning are also a part of this program. Although it is
believed that there will be no material adverse disruptions to the business
information systems, production or business operations, the Company cannot
give assurances there will not be localized business interruption or
disruptions within a business segment as the result of Year 2000 related
problems. Such Year 2000 disruptions or interruptions, should they occur,
are most likely to impact foreign operations or result from a Year 2000
related failure at a supplier or third party providing raw materials,
component parts or services that are required for continuing or supporting
production, business operations and business information systems.
Management believes the likelihood of a major or material Year 2000 problem
is possible but remote. Year 2000 problems, if they should occur, however,
may disrupt or delay production, business operations or business
information systems at a particular location or business segment. Such
disruption may have a material and adverse impact on the Company in the
quarter in which the Year 2000 failure occurs.
Environmental issues could have a material adverse effect on the Company
The Company is subject to comprehensive and changing federal, state, local
and foreign laws, regulations and ordinances that:
o govern activities or operations that may have adverse environmental
effects such as discharges to air and water, as well as handling and
disposal practices for hazardous materials and wastes
o impose liability for the costs of cleaning up, and certain damages
resulting from, sites of past spills, disposals or other releases
of hazardous substances and materials, including liability under
the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, and similar state statutes for the
investigation and remediation of environmental contamination at
properties owned and/or operated by the Company and at off-site
locations where the arrangements have been made for the disposal
of hazardous substances
The Company is involved from time to time in legal proceedings involving
remediation of environmental contamination from past or present operations,
as well as compliance with environmental requirements applicable to ongoing
operations. There is no assurance that material costs or liabilities will
not be incurred in connection with any such proceedings, claims or
compliance requirements or in connection with currently unknown
environmental liabilities.
<PAGE>
Impact of the Euro conversion on Company operations
The Company is currently assessing the impact of the Euro conversion on the
business operations and is currently implementing a strategy intended to
allow for the operation of the Euro environment during the transition
period, January 1, 1999 - December 31, 2001, and after full Euro
conversion, post July 1, 2002. Until the assessment has been completed
related to the Euro conversion impact, there is no assurance that the Euro
conversion will not have a material adverse effect on the Company's overall
business operations.
The Company's European operations began transacting in Euro denominated
contracts requested by customers and suppliers beginning January 1, 1999.
There is no anticipated material impact from the Euro conversion on the
computer software plans. Computer software changes necessary to comply with
the Year 2000 issue generally include compliance with the Euro conversion.
No additional costs have been assessed related to the Euro conversion for
the Enterprise Resource Planning software being implemented at Huck and
Howmet, however, it is anticipated that there will be some immaterial
expense for minor system modifications. The payroll system has not yet been
examined and will require modifications to be Euro-compliant. The costs of
payroll systems modifications have not been determined but it is expected
that those costs will be immaterial. There is no expected Euro conversion
impact to the Thiokol Propulsion segment. No material impact is expected to
occur with the contracting policies or competitive position on the three
business segments as a result of the Euro conversion. The impact of the
Euro conversion on the Company's foreign exchange exposure is being
reviewed and it has been determined that there will be a modest increase in
this exposure as the result of the United Kingdom operation's acceptance of
Euro-denominated contracts. No significant increases are expected in the
foreign exchange exposure except for the United Kingdom operations.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
Exhibit 10 Material Contracts
10.1 Stock Purchase Agreement dated September 7, 1999 by and
among Cordant Technologies Inc.; Continental/Midland,
Inc.; KORE, Inc.; KORE II, Inc.; Robert S. Kaminski,
solely as Trustee of the Robert S. Kaminski Revocable
Trust; Mary Ann Kaminski and Lawrence H. Brenman solely
as Co-Trustees of (A) the David Michael Kaminski Trust;
(B) the Janice Marie Kaminski Trust; and (C) the Robert
Michael Kaminski Trust; and Mary Ann Kaminski.
10.2 Cordant Technologies Inc. Supplemental Executive
Retirement Plan Amended and Restated Effective July 22,
1999.
Reports on Form 8-K
On September 22, 1999, a Form 8-K was filed. Included there in was Item 5,
"Other Events" disclosing the Company's revised earnings estimates for
1999. No financial statements were included.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CORDANT TECHNOLOGIES INC.
(Registrant)
Date: October 21, 1999. /s/ Richard L. Corbin___________
Richard L. Corbin, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer)
/s/ Michael R. Ayers____________
Michael R. Ayers,
Vice President and Controller
(Principal Accounting Officer)
