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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-6179
CORDANT TECHNOLOGIES INC.
Incorporated in the State of Delaware IRS Employer Identification
No. 36-2678716
Principal Executive Offices
15 W. South Temple, Suite 1600, Salt Lake City, UT 84101
Telephone Number: (801) 933-4000
Securities registered pursuant to Section 12(b) of the Act:
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Name of Each Exchange
Title of Each Class On Which Registered
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Common Stock, par value New York Stock Exchange
$1.00 per share Chicago Stock Exchange
Common Stock Purchase Rights
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Securities registered pursuant to Section 12(g) of the Act: NONE
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 than 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
Aggregate market value of Registrant's voting stock held by non-affiliates,
based upon the closing price of said stock on the New York Stock Exchange-
Composite Transaction Listing on March 24, 2000, ($55.8125 per share):
$1,997,814,298
Number of shares of Common Stock outstanding as of February 29, 2000:
36,718,831
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART 1
ITEM 1. BUSINESS
Cordant Technologies Inc., a Delaware corporation (the "Company"), operates
in three business segments. Thiokol Propulsion is a leading producer of high
technology solid rocket motors for space, defense and commercial launch
applications. Huck International, Inc. ("Huck"), a wholly owned subsidiary of
the Company, is a major supplier of precision fastening systems for aerospace
and industrial markets worldwide and custom injection molded plastic products.
The Company's 84.6 percent owned subsidiary, Howmet International Inc.
("Howmet"), is a leading manufacturer of investment cast turbine engine
components for jet aircraft and industrial gas turbine power generation markets,
as well as a leading producer of aluminum investment castings for commercial
aerospace and defense electronics industries.
Originally formed in 1930, the Company has operated in various forms
including a division of Morton Thiokol, Inc. In 1989, the specialty chemicals,
salt and automotive restraint business was spun off to form Morton
International, Inc. In May 1998, the Company's name was changed from Thiokol
Corporation to Cordant Technologies Inc. The Company's solid rocket propulsion
and defense business now operates as a division, Thiokol Propulsion.
Huck operates the Fastening Systems Segment. In 1998 the Company completed
the acquisition of Jacobson Manufacturing Co. ("Jacobson"), a manufacturer of
custom designed metal parts and fasteners and custom injection molded plastic
products used in automotive, construction, consumer products and heavy equipment
applications. Jacobson's operations have been combined with Huck. In October
1999, Huck completed the acquisition of the Continental/Midland ("CMI") group of
companies, a producer of highly engineered fasteners and fastener systems used
primarily in the automotive industry.
In December 1995, the Company and the Carlyle Group, a private merchant
investment firm ("Carlyle"), formed a jointly owned company in which the Company
owned 49 percent and Carlyle 51 percent, to acquire Howmet. In December 1997,
the Company purchased an additional 13 percent of Howmet from Carlyle,
increasing the Company's ownership to 62 percent at which time the Company began
consolidating Howmet's operating results. Carlyle also sold 15.35 percent of
Howmet to the public through an initial public offering. On February 8, 1999,
the Company acquired for $385 million: (i) the remaining 22.65 million shares of
Howmet International Inc. common stock owned by Carlyle; (ii) a new standstill
agreement with Carlyle; and (iii) extension of Carlyle's existing covenant not
to compete. With this purchase of the Carlyle shares, the Company's ownership
of Howmet common stock increased to 84.6 million shares representing 84.6
percent of Howmet's outstanding common stock.
On November 12, 1999, the Company announced it had made a proposal to the
Board of Directors of Howmet to acquire all of the outstanding shares of Howmet
not currently owned by the Company for a price of $17 per share in cash. The
Company requested that Howmet's Board of Directors refer the proposal to its
Committee of Independent Directors for its review and consideration. On March
10, 2000, the Company informed the Committee that it was willing to increase its
offer to $18.75 per share, but following further discussions no agreement was
reached.
On March 14, 2000, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Alcoa Inc., a Pennsylvania corporation ("Alcoa"),
and Omega Acquisition Corp., a Delaware corporation and a wholly owned
subsidiary of Alcoa (the "Purchaser"). Pursuant to the Merger Agreement, on
March 20, 2000, the Purchaser commenced a tender offer (the "Offer") for all of
the outstanding shares of the Company's Common Stock at a purchase price of
$57.00 per share. The Merger Agreement provides that, subject to the
satisfaction or waiver of certain conditions, following completion of the Offer,
the Purchaser will be merged with and into the Company, and at the effective
time of the merger (the "Effective Time") each share of Company Common Stock
outstanding (other than Shares owned by Alcoa, the
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Purchaser, any of their respective subsidiaries, the Company or any of its
subsidiaries, and shares held by stockholders, if any, who did not vote in favor
of the Merger Agreement and who comply with all of the relevant provisions of
Section 262 of the Delaware General Corporation Law relating to dissenters'
rights of appraisal) will be converted into the right to receive $57.00 in cash
or any greater amount per share paid pursuant to the Offer.
Alcoa has advised the Company and Howmet that it intends to enter into
discussions with the Howmet Independent Committee to pursue the acquisition of
the outstanding publicly-held shares of Howmet's stock. See "Alcoa Merger
Agreement" in Item 7 below.
Business Segments
The Company operates in three business segments: (i) Propulsion Systems;
(ii) Fastening Systems; and (iii) Investment Castings. Segment Financial
Information is set forth in Note 20, Operations by Industry Segment, and Note
21, Geographical Information contained in Item 8.
Propulsion Systems. The propulsion systems segment, a division of the
Company operating as Thiokol Propulsion, consists of solid rocket propulsion
systems and related products, research and development and launch support
services for the National Aeronautics and Space Administration ("NASA"),
Department of Defense and commercial space applications. Such systems include
the Reusable Solid Rocket Motor ("RSRM") used for NASA's Space Shuttle.
Deliveries under the Buy 3 Space Shuttle contract awarded to the Company in 1991
are expected to be completed in 2000. Remaining contract activities are
expected to be completed during 2002. The Company has signed the follow-on Buy 4
contract for production of thirty-five flight sets with motor deliveries through
2004. The Buy 3 and Buy 4 contracts are "cost plus award fee" contracts with an
award fee based on the degree of the Company's success, as rated by NASA, at
meeting contract standards relating to program safety management, reliability,
quality assurance, delivery, and hardware flight performance on the contract.
The Company also receives a cost-incentive fee for meeting certain predetermined
cost-reduction targets. The delivery rate and the Company's contract accrual
rate for financial statement purposes are subject to continuing NASA funding,
NASA's shuttle flight schedule and program performance. The NASA contracts are
subject to termination for convenience by the federal government with the
Company retaining such rights of recovery for costs and expenses provided by the
government procurement laws and regulations, and contract terms and conditions.
NASA is continuing to reorganize the shuttle program under one prime contractor,
United Space Alliance, to manage many of the program functions now managed by
NASA. Such restructuring will occur over a transition period of several years.
The Company's position as a contractor to NASA is expected over time to shift to
the role of a subcontractor to United Space Alliance, although the Company
cannot assure that such shift will occur. Currently, Thiokol Propulsion is the
only qualified manufacturer of the RSRM. The Company believes the time and cost
to qualify a second source of supply would be prohibitive in light of the
shuttle flight schedule and current levels of government expenditures for the
Space Shuttle Program. Absent termination of the Space Shuttle Program or
material reductions in future launch rates, the Company expects to retain its
sole source position as the RSRM supplier. The Company retains certain Shuttle
RSRM solid rocket motor launch oversight activities at the Kennedy Space Center.
For defense and commercial space applications, Thiokol Propulsion's family
of CASTOR solid rocket motors is used in the first and second stages of a number
of expendable launch vehicles and as strap-on-boosters. Thiokol Propulsion also
supplies motors for systems and satellite positioning for commercial space and
defense applications and for a variety of international launch programs.
Thiokol Propulsion participates as a subcontractor in various defense
programs providing propulsion systems and related technology for the Theater
Missile Defense Program and propulsion and ordnance for the Trident Submarine
Missile Program through a joint venture with
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Alliant Techsystems Inc.
As the lead propulsion contractor on the Air Force Intercontinental
Ballistic Missile ("ICBM") Prime Integration Contract with TRW, Thiokol
Propulsion, in a joint venture with the Chemical Systems Division of United
Technologies, will provide the propulsion refurbishment for the Minuteman solid
rocket motors. The program's estimated value is $1 billion over a 15-year life.
Low program production rates began during 1999. The level of program activity
is dependent on the level of government funding and is subject to cancellation
or modification at any time. The outcome, if any, of international treaties such
as the START treaty negotiations can impact the number of motors subject to
refurbishment.
Thiokol Propulsion also manufactures infrared and illuminating flares;
provides solid rocket motor propellant reclamation services; and provides aging
and surveillance technologies. Commercial applications are in development for
the Company's composite resin prepreg, composite based resin, gas generants and
igniters. Successful development of these commercial products cannot be
assured.
Federal export laws, controls and regulations impact or otherwise restrict
the export of the Company's propulsion products and technical data. All U.S.
government contracts and subcontracts are subject to termination for the
convenience of the government and may also be impacted by changing levels of
government funding, schedule changes and other changes within the government's
authority.
Fastening Systems. The Company's fastening systems' products consist of
specialty fasteners, installation tools and custom injection molded plastic
products that are sold to customers directly by Huck and through a distribution
network in both domestic and foreign markets. Fasteners made from a variety of
materials, including high strength metals and metal alloys, are threaded and
non-threaded consisting of lock bolts, blind bolts, lock nuts, blind rivets, cap
screws and various other metal products sold under various trade names and
trademarks for aerospace, industrial, automotive and construction industry
applications. Injection molded products consist of custom components and end
products. Fastener installation tools are also manufactured and marketed to
provide customers complete fastener installation systems. The aerospace market
consists of both commercial and military aerospace manufacturing companies,
domestic and foreign. Customer product qualification required by domestic and
foreign regulatory agencies such as the Federal Aviation Administration as to
plant and product quality and lot traceability is important for the aerospace
market acceptance of Huck's fasteners. Huck's fasteners have been qualified by
major domestic and foreign aerospace companies in order for such customers to
use these fasteners in original equipment and aftermarket aircraft products.
Principal domestic and foreign industrial markets include automotive, truck,
trailer, railcar, and mining applications. The construction industry utilizes
Huck's fastening systems for certain structural applications such as bridges and
building structures. Plastic injection molded products are used in the
computer, telecommunications and medical industries.
Investment Castings. The Company, through its 84.6 percent ownership in
Howmet, uses the investment casting process to manufacture super alloy, titanium
and aluminum components for aerospace engine and airframe applications and
industrial gas turbine engine applications for customers worldwide. Howmet
Aluminum (formerly called Cercast) is a producer of high quality aluminum
investment castings used in the defense electronics and commercial aerospace
industries.
Howmet's aerospace castings consist of super alloy and titanium castings
for aircraft turbine engines and airframe and engine structural applications.
Products include individual airfoils consisting of blades (rotating foils) or
vanes (non-rotating foils), as well as integral castings such as turbine rotors
and nozzle rings for smaller engines involving an entire set of blades and
related components cast together. Structural components include support
components of engines, such as engine castings, frames, and bearing housings,
and other airframe components.
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Howmet's aerospace castings are manufactured for commercial and military
applications and sold to original equipment aircraft manufacturers and
aftermarket customers.
Industrial gas turbine engine products consist of airfoils (including
moving blades and stationary vanes) for gas turbines used for power generation
primarily by the electric utility industry and mechanical drive applications for
industrial and pipeline operations, oil and gas processing and offshore
drilling.
The Howmet Aluminum subsidiaries produce aluminum investment castings for
the commercial aerospace and defense markets. Applications include electronic
packaging, electro-optical system housings, engine parts, pumps, compressors and
aircraft structurals.
Starting in late 1998, Howmet discovered certain product testing and
specification non-compliance issues at the Montreal (Canada) and Bethlehem
(Pennsylvania) operations of its Howmet Aluminum Casting subsidiaries. In 1999,
Howmet discovered several additional instances of other testing and
specification non-compliance at its Hillsboro (Texas) aluminum casting facility
and at the Montreal and Bethlehem operations. Howmet has notified customers and
the appropriate government agencies and has substantially completed correction
of these issues. Howmet knows of no in-service problems associated with any of
these issues. In addition, Howmet Aluminum Casting has been, and expects to
continue for some time to be, late in delivery of products to certain customers,
resulting in lower sales.
The Defense Criminal Investigative Service (the "DCIS") in conjunction with
other agents from the Defense Department and NASA, has undertaken an
investigation with respect to certain of the foregoing matters at the Montreal
and Bethlehem facilities. The DCIS has informed Howmet that the investigation
concerns possible violations of the False Claims Act and the False Statements
Act, as well as possible criminal penalties. Howmet is unable to determine
definitively what, if any, civil or criminal penalties might be imposed as a
result of the investigation.
On August 6, 1999, Howmet entered into an Administrative Agreement with the
U.S. Air Force terminating Notices of Proposed Debarment issued on March 1, 1999
relating to certain of the foregoing matters. The Administrative Agreement
permitted the affected facilities to resume accepting new U.S. government
contracts and subcontracts.
See Note 15 ("Contingent Matters") to the Company's Financial Statements
included in Item 8 below.
Howmet currently owns 81 percent of a joint venture in Japan with Komatsu
Ltd. Komatsu manufactures investment cast components for industrial gas turbine
and aerospace customers primarily in Japan. Pursuant to the joint venture
agreement with Komatsu, Howmet has exercised its right to acquire the remaining
19 percent of the joint venture company and Howmet expects this transaction to
close in the second quarter of 2000. Howmet also is the 51 percent partner in a
joint venture in the United States with the Pratt & Whitney division of United
Technologies Corp. that manufactures spray-formed metal components for aircraft
turbine engines.
Competition
Propulsion Systems. Thiokol Propulsion is the sole source supplier of RSRM
solid rocket motors, the only domestic human-rated solid rocket propulsion. The
Company believes that the time and cost to qualify a second source of supply
would be prohibitive in light of the shuttle flight schedule and current levels
of government expenditures on the Space Shuttle Program. The Company expects to
retain its sole source position as the RSRM supplier. The Shuttle Buy 3 and Buy
4 contracts are placed directly by NASA. The Company, as the only qualified
supplier for the RSRM, does not compete with other manufacturers.
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Liquid propulsion systems that may be competitive with the RSRM are under
study, but are not yet developed. The Company, Aerojet Division of GenCorp,
Inc., Alliant Techsystems Inc., and the CSD Division of United Technologies
Corp. are the major suppliers of heavy-lift solid propulsion launch vehicles for
space and strategic applications and are competitive with each other with regard
to medium, light, and strap-on launch vehicles for commercial space
applications. Both foreign governments and foreign private enterprises have
solid rocket propulsion systems competitive with propulsion systems manufactured
by the Company. Liquid propulsion systems and excess strategic ballistic
missile inventory may be competitive with the Company's propulsion systems,
especially in the commercial launch market. For Thiokol Propulsion products
other than the RSRM solid rocket motors sold to the federal government or
federal government prime contractors, the primary method of competition is
through the Company responding to a request for proposal or complying with other
government procurement procedures under federal acquisition regulations in
competition with others. Commercial launch vehicle products are sold primarily
through responding to the terms and conditions of a request for proposal or
negotiated contracts in competition with others. Principal competitive factors
are cost, technical performance, quality, reliability, depth and capability of
personnel and adequacy of facilities. Except for the sole-sourced RSRM solid
rocket motor and other strategic military launch motors, the Company's
propulsion products are sold primarily on the basis of technical performance,
reliability and price. Although the market for strategic and tactical solid
rocket motor programs has stabilized, the competitive pressures on these
products remains intense due to current levels of Defense Department
procurements and the lack of availability of new major programs. The Company's
competitive strength is also affected by the technical performance, quality, and
reliability of its solid propulsion products for space launch applications. The
Company's propulsion systems, services and related products are competitive with
Alliant Techsystems Inc., CSD, Aerojet Division of Gencorp Inc., the ARC
Division of Sequa Corporation and various liquid propulsion systems produced
both domestically and internationally.
Fastening Systems. Fastening systems are manufactured by a number of
competitors with no one manufacturer having a major position in the aerospace or
industrial fastener markets. Alternative fastening methods compete with Huck's
threaded and non-threaded fastener systems. Competition for orders from
aerospace original equipment manufacturers is often dependent on customer
qualification of the Company's fasteners as required by government regulations.
Huck's fastening system products compete not only on price, but also product
quality and the Company's ability to provide customer service and on-time
delivery. Fastening systems applications and installation tools help
differentiate Huck's fastening systems products from those of its competitors.
Aerospace fastener competition is primarily through responding to requests for
quotations made by major aerospace contractors and distributors. Industrial
fastener competition including automotive, railcar and construction industries
is primarily through requests for proposals, purchase order quotations and
negotiated contracts in competition with others. Huck's fastening systems
compete on price, quality, delivery, and ability to provide customer fastening
installation solutions through specific-purpose installation tools and
fasteners. Huck maintains a proprietary patented position for certain of its
fastener designs for which certain limited licenses have been granted to
competitors. Huck also manufactures certain fasteners under licenses from
competitors. Huck's custom plastic injection molding competes on price, quality
and delivery with many custom injection molding competitors.
Investment Castings. Howmet competes against Precision Castparts Corp.
("PCC"), its principal competitor, and other investment casting manufacturers.
Competition in investment casting is based primarily on technological
sophistication, quality, price, service and delivery for orders from large,
well-capitalized customers with significant market power. Howmet believes that
it and PCC account for most of the total aerospace turbine engine and IGT
casting production, except for captive foundries owned by three customers.
Because competition is based to a significant extent on technological
capabilities and innovations, there can be no assurance that PCC or any of the
Howmet's other competitors will not develop products and/or processes that would
give them a competitive advantage in the Howmet's markets.
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Research and Development
Company-sponsored research and development ("R&D") activities relate to new
products, applications and services, improvement of existing products and
services and new and improved production processes. Such Company R&D also
provide customers with improved quality, product performance and cost savings.
The Company's R&D cost was $33.4 million, $30.2 million, and $14.8 million and
represented 1.3 percent, 1.2 percent and 1.4 percent of revenues for the years
1999, 1998, and 1997, respectively; the amount spent during the same periods for
customer-sponsored R&D (including U.S. government-funded) was $73 million, $81.4
million and $51.9 million, respectively.
Environmental Matters
Compliance with federal, state, and local environmental requirements with
respect to the Company's facilities, including formerly owned and operated
facilities, while having the potential to be a significant cost and liability,
are not at this time nor over the next twelve months, absent increases in
environmental liabilities, expected to have a material adverse effect on the
Company's financial condition, results of operation or cash flow or upon the
competitive position of the Company or its subsidiaries. Capital expenditures
and amounts expensed relating to environmental matters were $5.6 million and
$10.4 million, respectively, for 1999 and are currently expected to be $2.2
million and $10.5 million for the year ending December 31, 2000. Estimated 2001
environmental capital expenditures and amounts expensed are $1.6 million and
$10.7 million, respectively, although there can be no assurances that actual
amounts will not vary materially from such estimates. Capital expenditures and
expenses for environmental matters reflect the consolidation of Howmet. The
Company maintains ongoing programs for environmental site evaluations, continues
its cooperation with federal and state agencies in site investigations and
engages in environmental remediation activities at its sites and sites of third
parties where appropriate.
The Company continues to be involved with two Environmental Protection
Agency ("EPA") superfund sites designated under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") in Morris County, New
Jersey. The Company operated these sites about thirty years ago for government
contract work. The Company has negotiated a consent decree with the EPA
concerning the Rockaway Borough Well Field Site. At this site, the Company's
estimated response costs, site remediation, and future operation and maintenance
costs is $2.9 million, of which approximately $.4 million is currently expected
to be spent during 2000. In 1996, the Company negotiated a consent decree with
the State of New Jersey for the Rockaway Township Well Field Site. At this site,
the Company's estimated response costs, site remediation, and future operations
and maintenance costs is $3.8 million, of which approximately $1.9 million is
currently expected to be spent during 2000. Jacobson, acquired by Huck in June
1998, is involved in the Indian Bend Wash (South Area) superfund site at Tempe,
Arizona. Pursuant to the terms of a five-year environmental indemnity contained
in the Stock Purchase Agreement between Huck and the seller, Huck is responsible
for the first $2 million in environmental liabilities, the seller is responsible
for environmental liabilities from $2 to $6 million; and Huck and the seller
share equally the expense of environmental liabilities in excess of $6 million
but less than $10 million. The Company assumes any environmental liabilities
that are $10 million -- an obligation the Company believes is remote. The
currently estimated liability associated with Jacobson environmental remediation
is $.2 million. The stock purchase agreement for the acquisition of the
Continental/Midland Group of companies between the Company and the sellers
contains a four-year environmental indemnity pursuant to which the Company is
responsible for the first $1 million in environmental indemnities; the sellers
are responsible for the next $2 million of environmental indemnities; and the
Company and the sellers share equally the expense of environmental liabilities
from $3 to $5 million. In addition, the former owners of Continental/Midland's
corporate headquarters have indemnified Continental/Midland for certain
environmental costs at that site. The former owners are parties to
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a Consent Decree with the Illinois Environmental Protection Agency (EPA) under
which they are performing and paying for the remediation of the site and some
adjoining properties. Continental/Midland, Inc. is a party to this Consent
Decree but does not have funding obligations.
Howmet has received test results indicating levels of polychlorinated
biphenyls ("PCBs") at its Dover, New Jersey facility which will require
remediation. These levels have been reported to the New Jersey Department of
Environmental Protection (the "NJDEP"), and Howmet is preparing a work plan to
define the risk and to test possible clean-up options. The statement of work
must be approved by the NJDEP pursuant to an Administrative Consent Order
entered into between the Company and the NJDEP on May 20, 1991 regarding clean-
up of the site. Various remedies are possible and could involve expenditures
ranging from $3 million to $22 million or more. Howmet has recorded a $3 million
and $2 million long-term liability, respectively, was recorded for this matter,
as of December 31, 1999 and 1998. The indemnification discussed below applies
to the costs associated with this matter.
In addition to the above, liabilities arising for clean-up costs associated
with hazardous materials in several waste disposal facilities exist. In
particular, Howmet has been or may be named a potentially responsible party
under CERCLA or similar state laws at seven on-site and off-site locations. At
December 31, 1999, $4 million of accrued environmental liabilities are included
in the consolidated balance sheet for such matters. The indemnification
discussed below applies to the costs associated with these matters.
In connection with the Howmet acquisition by the Company and Carlyle,
Pechiney, S.A. is required by the terms of the acquisition agreement to
indemnify Howmet for environmental liabilities and obligations relating to
Howmet Corporation stemming from events occurring or conditions existing prior
to the December 13, 1995 acquisition date to the extent that such liabilities
exceed a cumulative $6 million. This threshold has not yet been reached. This
indemnification applies to all of the Howmet related environmental matters that
arose prior to the acquisition date.
In addition, unrelated to Howmet Corporation's operations, Howmet's
subsidiary, Howmet Holdings Corporation, and Pechiney, S.A., are jointly and
severally liable for environmental contamination and related costs associated
with certain discontinued mining operations owned and/or operated by a
predecessor-in-interest until the early 1960s. These liabilities include
approximately $7 million in remediation and natural resource damage liabilities
at the Blackbird Mine Site in Idaho and at least $10 million in investigation
and remediation costs at the Holden Mine Site in Washington. Pechiney, S.A. has
agreed to indemnify Howmet for such environmental liabilities. Howmet has
recorded a liability and an asset for an equal amount related to these matters
which are reflected in the Company's consolidated balance sheet. In the event
that Pechiney, S.A. does not honor its indemnification obligations, an event
that Howmet does not reasonably expect to occur, Howmet would likely be
responsible for such matters and the cost of addressing those matters could be
material.
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The Company estimates that the eventual cost for site remediation matters
known at this time, including the consolidation of those of Howmet, before any
recoveries from insurance and third party contributions by other responsible
parties including the federal government, will be approximately $41.9 million.
The Company has established a receivable in the amount of $18.8 million for
expected reimbursement or recovery for environmental claims, costs and expenses
from third parties, including the federal government. The Company's policy and
accounting for environmental matters is set forth in Note 1 and Note 16 of the
Notes to the Company's consolidated financial statements set forth in Item 8.
The Company believes that after recoveries from third parties and the federal
government, any net liability for which it may ultimately be responsible in
excess of amounts currently accrued, would not be material to the Company's
financial condition and results of operations.
In the forward pricing on certain of the Company's federal government
contracts, the Company has negotiated an agreement for the Company to recover
certain environmental costs and expenses incurred in connection with the
performance of government contracts.
Employees
The number of business segment employees of the Company including the
consolidation of Howmet and the October 1999 acquisition of Continental/Midland
was 17,200 at December 31, 1999 and 1998 respectively. The table below sets
forth the approximate employment levels for each business segment at December
31.
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1999 1998
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Propulsion Systems 3,900 4,000
Fastening Systems 2,500 2,400
Investment Castings 10,700 10,700
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Propulsion Systems employment levels reflects the stabilization of Thiokol
Propulsion business base. Investment Castings' employment levels reflect
Howmet's stable business base. The number of Investment Casting employees
excludes contract employees. Fastening Systems' employment levels reflect the
addition of Continental/Midland and the closure of its Lakewood plant.
Raw Materials
Although most of the raw materials used by the Company are readily
available, the federal government must approve certain key raw material
suppliers for Thiokol Propulsion (such as suppliers of propellant raw materials
and nozzle and case component materials). With a limited number of such
approved suppliers, delivery of these materials could be disrupted at the
supplier level at any time and have a material adverse impact on production and
delivery schedules until government approval of alternative suppliers is
obtained. Raw materials used by the Company's Investment Castings and Fastening
Systems segments include a number of materials and minerals, including titanium,
hafnium, aluminum, nickel, cobalt, molybdenum and chromium among others.
Commercial deposits of certain metals, such as cobalt, nickel, titanium and
molybdenum, which are required for the alloys used in precision castings and
aircraft fasteners, are found in only a few parts of the world, and for certain
materials only single sources are readily available. These materials and metals
are subject to price fluctuations, and price and supply may be influenced by
private or government cartels, unstable governments in countries exporting
materials and production interruptions.
Seasonality
The business of the Company is not subject to seasonal fluctuations.
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Patents and Trademarks
The Company has 491 patents and patent applications, of which 298 relate to
the Propulsion Systems business segment, 99 relate to the Fastening Systems
business segment, and 94 relate to the Investment Castings business segment. As
a government contractor, the Company conducts independent research and
development ("IR&D") to enable it to maintain its competitive position. Research
and development work is also performed under contracts with the Department of
Defense, NASA, and other government agencies.
Approximately ninety percent of the Company's patents in the Propulsion
Systems business segment were developed under Company-funded IR&D related
budgets. The Company has full ownership interest in its patents developed under
these budgets and lesser rights in the patents it developed under contract R&D
programs.
The Propulsion Systems business segment patent coverage includes propulsion
system design, case, nozzle, and propellants. Patents also cover gas
generators, ordnance, flare-related products, and the Company's fiber resin and
non-sodium azide gas generant technology. Under contracts with the federal
government, licenses have been granted to the government for limited use of
certain patented technology.
Fastening Systems segment patent coverage includes major aerospace
fastening systems including a lightweight grooved proportional lock bolt and the
"Unimatic" blind bolt rivet. Major industrial fastening systems covered by
patents include "Huck-Fit" lock bolts, "Magna-Lok" blind rivets, "Ultra-Twist"
blindbolt for box beam construction applications and "Magna-Grip" lock bolts,
all with patent lives remaining of more than five years. Certain of the
Company's fastener products are manufactured under licenses from competitors.
Investment Castings segment patents cover both materials and processes for
casting of high temperature components for aerospace and industrial gas turbine
applications. Included are advanced casting technologies for superalloys,
intermetallics and composites as well as high temperature alloys, furnace
designs, ceramic materials, and coatings.
The table below sets forth the duration of the Company's patent portfolio
by business segment.
<TABLE>
<CAPTION>
Remaining Patent Life
------------------------------------------------------------------
More than Five to Less than
Ten years Ten Years Five Years
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Propulsion Systems 82% 14% 4%
Fastening Systems 38% 40% 22%
Investment Castings 64% 24% 12%
- ----------------------------------------------------------------------------------------------------
</TABLE>
Although the Company believes that its present competitive position is
enhanced by its patents and its technical expertise, know-how and proprietary
information, no individual patent or group of patents is material to the conduct
of the business of the Company. Proprietary information and processes are
material to the Investment Castings business segment and are protected as trade
secrets.
Trademarks are important for product identification in the Fastening
Systems and Investment Castings segments of the business, but are not
significant to the Company's Propulsion business. The name Cordant Technologies
is important to the corporate identification of the individual business segments
and to the consolidated group.
Competitors in the Company's business lines also hold patents and other
forms of proprietary information, and there is active technical competition in
these business lines. No assurances can be given that one company or another
will not obtain a technological advantage
9
<PAGE>
from time to time, in one aspect of the industry's technology or another.
Customers
Propulsion Systems. The customers of Thiokol Propulsion are primarily the
federal government and its prime contractors and subcontractors. The NASA Buy 3
and Buy 4 contracts are material to the Propulsion Systems business segment.
Beginning in 2001, the Company expects the Minuteman Regrain Contract to be
material to Thiokol Propulsion. Commercial propulsion customers, primarily in
the light and medium launch vehicle market, are being slowly developed, but are
not yet material to the Company's customer base. Federal government contracts
and subcontracts entered into by the Company are by their terms subject to
termination by the government or the prime contractor either for convenience or
default. Such contracts are also subject to funding appropriations by Congress.
Since the federal government provided, directly and indirectly, 28 percent of
the Company's revenues in 1999, the termination or discontinuance of funding of
a substantial portion of such business would have a material adverse effect on
the Company's operations. No single non-government customer is material to
Propulsion Systems' business.
Fastening Systems. Huck's customers consist of industrial and aerospace
original equipment manufacturers and distributors, domestic and foreign.
Foreign customers and a foreign sales base are still developing, but are not yet
material to the Company's customer and sales base. The Boeing Company, Wesco,
Freightliner, TriStar and Ford Motor Company are major fastening systems
customers. Except for The Boeing Company and Ford Motor Company, no other
single customer represents more than 10 percent of Fastening Systems' sales.
Investment Castings. Howmet's top ten customers represented approximately
76 percent of Howmet's net sales in 1999. Howmet's principal customers are The
General Electric Company through its aircraft engine and power systems groups,
ABB Power Generation and United Technologies' Pratt & Whitney aircraft
operations which represent approximately 24% percent, 13% percent and 10%
percent, respectively, of Investment Castings' sales in 1999. No other
Investment Castings' customer represents more than 10 percent of Investment
Castings' sales in 1999.
Orders for Howmet's products are primarily awarded through a competitive
bidding process. Contractual relationships with Howmet's principal customers
vary. Approximately one-half of its casting business is derived from multi-year
contracts, typically three years in length. Under these contracts, Howmet's
customers agree to order from Howmet and Howmet agrees to supply specified
percentages of specified parts at specified pricing over the life of the
contracts. The customers are not required to order fixed numbers of parts,
although pricing may be subject to certain threshold quantities. Some of these
contracts include provisions requiring specified price reductions over the term
of the contract, based on lower production costs as programs mature, shared
benefits from other cost reductions resulting from joint production decisions,
and negotiated reductions. Most major contracts provide Howmet with protection
against substantial changes in prices for elemental metal raw materials. Howmet
typically renegotiates these contracts during the last year of the contract
period and, during the process, customers frequently solicit bids from Howmet's
competitors.
Backlog
The Company's backlog of orders as of December 31, 1999, and December 31,
1998, was $2.8 billion and $1.4 billion, respectively. Propulsion Systems'
backlog as of December 31, 1999 was $1.9 billion compared to $414 million as of
December 31, 1998. This increase in the backlog reflects the RSRM Buy 4
contract signed this year. The Company currently expects that approximately 46
percent of the orders in backlog on December 31, 1999 will be completed by
December 31, 2000. The majority of the remainder thereafter are expected to be
completed through 2004. Although contracts can be changed or canceled, the
Company believes the
10
<PAGE>
backlog consists of firm contracts. The Company does not believe that a material
change or cancellation of a single contract (other than the RSRM) would be
materially significant to its business. The contract backlog consists of a
combination of cost-plus award fee, cost-plus fixed fee, cost-plus incentive
fee, fixed price incentive fee, and firm fixed price contracts. The Investment
Castings backlog of orders as of December 31, 1999 was $765 million and as of
December 31, 1998 was $877 million. The Company's Fastening Systems backlog was
approximately $104 million and $142 million as of December 31, 1999 and December
31, 1998, respectively. Because of the short lead and delivery times often
involved, and because deferrals and cancellations often affect the Company's
Investment Castings and Fastening Systems orders, backlog may not be a
significant indicator of the Company's future performance.
ITEM 2. PROPERTIES
The Company operates manufacturing, research, and development facilities at
52 locations, and has administrative and sales offices, warehouses, and service
centers worldwide. The Company considers its manufacturing facilities,
warehouses, and other properties to be in generally good operating condition and
suitable for their intended purposes. Facilities are considered adequate and
sufficient to meet the operating requirements of the Propulsion Systems and
Fastening Systems business units. During the year, the Company closed Huck's
Lakewood, California fastening systems' facility and relocated production to the
Carson, California facility. The Huck-Jacobson Kenilworth, New Jersey facility
was closed during the third quarter of 1999. Investment Castings has planned
capacity expansion for aero and industrial gas turbine and airfoil production.
A new 120,000 square foot airfoil casting facility at Howmet's Whitehall,
Michigan location is under construction. Expansion and relocation of the
Aluminum Casting-Montreal, Canada operations to new production facilities is
nearing completion. Thermatech Coating and the United Kingdom foundry
facilities have been expanded. Completed and planned facility expansion is
considered sufficient to meet Investment Castings operating needs. All
Company-owned property is held in fee with no material encumbrances. Company
leased property obligations are set forth in Note 17 of the Company's
consolidated financial statements. During 1999, additions to property, plant,
and equipment totaled $152 million.
11
<PAGE>
The following table sets forth the Company's manufacturing locations and
the approximate square footage.
<TABLE>
<CAPTION>
Buildings (000's of square feet)
--------------------------------------------------
Manufacturing Location Company
by Business Segment Owned Leased Total
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PROPULSION SYSTEMS
Northern Utah/1/ 2,643 724 3,367
Elkton, Maryland 378 -- 378
Ogden, Utah -- 106 106
- ------------------------------------------------------------------------------------------------
FASTENING SYSTEMS
Domestic
Altoona, Pennsylvania 150 -- 150
Bensenville, Illinois -- 7 7
Carson, California -- 153 153
Elk Grove Village, Illinois -- 30 30
Kingston, New York/2/ 142 -- 142
Livonia, Michigan -- 40 40
Medina, Ohio 271 -- 271
Millersport, Ohio 32 -- 32
New Braunfels, Texas 126 -- 126
Park Forest, Illinois 250 -- 250
Sanford, North Carolina 50 -- 50
Tempe, Arizona 45 -- 45
Tucson, Arizona 67 -- 67
Waco, Texas 371 -- 371
International
Us, France -- 61 61
Shropshire, U.K. 50 -- 50
- ------------------------------------------------------------------------------------------------
INVESTMENT CASTINGS
Domestic
Bethlehem, Pennsylvania -- 47 47
Branford, Connecticut 138 -- 138
City of Industry, California -- 50 50
Cleveland, Ohio 100 -- 100
Dover, New Jersey, 2 facilities 363 -- 361
Hampton, Virginia, 2 facilities 370 16 409
Hillsboro, Texas -- 68 68
LaPorte, Indiana, 2 facilities 186 -- 186
Morristown, Tennessee 111 -- 111
Whitehall, Michigan, 7 facilities 923 -- 923
Wichita Falls, Texas 255 -- 255
Winsted, Connecticut 81 -- 81
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C> <C>
International
Dives, France (capital lease) 256 -- 256
Evron, France 86 -- 86
Exeter, U.K., 2 facilities 253 67 320
Gennevilliers, France 47 -- 47
Georgetown, Ontario, Canada -- 37 37
Laval, Quebec, Canada 190 -- 190
Le Creusot, France 156 -- 156
Montreal, Quebec, Canada/3/ 11 100 111
Terai, Japan, 3 facilities/4/ 53 -- 53
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C><S>
/1/ The Company occupies an additional 6,000 sq. ft. of government owned property.
/2/ Land is leased.
/3/ Howmet Aluminum's Montreal, Canada aluminum casting operation is in the
process of moving from the Montreal facility listed above to the newly
constructed 189,860 square foot plant in Laval, Quebec. Howmet Aluminum
expects to complete the move by the end of 2000 and vacate the Montreal
premises.
/4/ Factory owned by Howmet's joint venture, Komatsu-Howmet Ltd.
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
Litigation and Regulation
Certain of the Company's products are manufactured and sold under U.S.
government contracts and subcontracts. Consequently, the Company is subject to
various federal statutes and regulations. Depending on the circumstances and the
outcome, a proceeding under these statutes and regulations, including a
proceeding related to the matters described below, could result in fines,
penalties, compensatory and treble damages, the cancellation or suspension of
payments under one or more U.S. Government contracts, debarment or ineligibility
for future contracts or subcontracts funded in whole or in part with federal
funds.
Starting in September 1998, Howmet discovered certain product testing and
specification non-compliance issues at the Montreal (Canada) and Bethlehem
(Pennsylvania) operations of its Howmet Aluminum subsidiary (formerly called
Cercast). In 1999, Howmet discovered several additional instances of other
testing and specification non-compliance at its Hillsboro (Texas) aluminum
casting facility and at the Montreal and Bethlehem operations. Howmet has
notified customers and the appropriate government agencies and has substantially
completed correction of these issues. Howmet knows of no in-service problems
associated with any of these issues. In addition, Howmet Aluminum has been, and
expects to continue for some time to be, late in delivery of products to certain
customers.
The Defense Criminal Investigative Service (the "DCIS") in conjunction with
agents from the Department of Defense and NASA, has undertaken an investigation
with respect to certain of the foregoing matters at the Montreal and Bethlehem
facilities. The DCIS has informed Howmet that the investigation concerns
possible violations of the False Claims Act and the False Statements Act, as
well as possible criminal penalties. Howmet management is unable to determine
definitively what, if any, civil or criminal penalties might be imposed as a
result of the investigation.
All customer claims relating to the foregoing matters either have been
resolved or, in the Company's judgment, will be resolved within existing
reserves.
The Company believes that additional costs for such matters beyond amounts
accrued, if any, would not have a material adverse effect on the Company's
financial position, cash flow, or annual operating results. However, additional
cost, when and if accrued, may have a material
13
<PAGE>
adverse impact on the quarter in which it may be accrued.
On August 6, 1999, Howmet and Howmet Aluminum entered into an
Administrative Agreement with the U.S. Air Force terminating Notices of Proposed
Debarment issued on March 1, 1999 relating to certain of the foregoing matters.
The Administrative Agreement permitted the affected facilities to resume
accepting new U.S. government contracts and subcontracts.
On November 12, 1999, the Company announced that it had made a proposal to
Howmet to purchase all of the outstanding shares of Howmet that the Company does
not already own for $17 per share in cash. Shortly thereafter, eight separate
but nearly identical lawsuits were filed in the Court of Chancery of Delaware
against the Company, Howmet and each member of the Howmet Board of Directors.
The plaintiffs are shareholders of Howmet who complain that the Company's offer
for their shares in Howmet is not for an adequate price. The plaintiffs request
the following relief: Certification as a class action with themselves designated
as Class Representatives; an order enjoining the Company, Howmet and its Board
of Directors from proceeding with the transaction; and money damages and the
costs of bringing the lawsuit. On the motion of the defendants, the Court has
consolidated the cases under the style of "In Re Howmet International
Shareholders Litigation" and directed that the plaintiffs file an Amended
Complaint reflecting the consolidation. The Company is defending these actions
and believes that any outcome will not result in a materially adverse impact to
the financial position of the Company.
The Company has filed a complaint against the United States in the U.S.
Court of Federal Claims in the amount of $8,148,888 to recover certain
previously approved costs associated with the development of Thiokol
Propulsion's Castor IVA-XL rocket motors. In March 1999, the federal government
reversed its longstanding approval of the Company's accounting method and denied
reimbursement.
The Company is also a party to certain pending proceedings regarding
environmental matters (see "Environmental Matters" in Item 1 above).
The Company, in its ordinary course of business, is party to various other
legal actions which management believes are routine in nature and incidental to
its operations. Management believes that the outcome of any proceedings, to
which the Company currently is a party, including the investigation described
above, will not have a material adverse effect upon its results, operations,
financial condition or liquidity.
Depending on the amount and the timing of an unfavorable resolution of
these matters, it is possible that the Company's future results of operations or
cash flows could be materially affected in a particular period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during the
fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information concerning the market for the Company's common equity and
related security holder matters is included in the section "Quarterly Financial
Highlights" in Note 22 to the
14
<PAGE>
Company's Financial Statements included in Item 8 below. As of February 29,
2000, there were 4,498 stockholders of record.
Dividends paid in 1999 and 1998 were $.40 per share, adjusting for the two-
for-one stock split in March 1998. Dividends paid in 1997 were $.385 per share
and included a $.005 per share redemption of stockholder's rights.
The high and low market prices of Cordant Technologies common stock for
1999 were $52.38 and $25.50 per share, respectively. The principal market for
the Company's common stock is the New York Stock Exchange and prices are based
on the Composite Tape (ticker symbol CDD).
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(dollars in millions, except
per share data) 1999 1998 1997(1) 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net sales by industry segment
Propulsion Systems $ 588.0 $ 643.0 $ 645.5 $611.7 $695.1
Fastening Systems 465.2 433.3 319.4 252.9 237.8
Investment Castings 1,459.7 1,350.6 105.2
- -----------------------------------------------------------------------------------------------------
Consolidated net sales 2,512.9 2,426.9 1,070.1 864.6 932.9
Operating profit by industry segment
Propulsion Systems (2) $ 87.9 $ 82.1 $ 64.4 $ 63.3 $ 14.1
Fastening Systems (3) 52.8 65.2 40.4 8.0 4.1
Investment Castings 204.7 185.8 11.7
- -----------------------------------------------------------------------------------------------------
Segment operating profit 345.4 333.1 116.5 71.3 18.2
Income from operations (2)(3) 319.6 308.7 103.7 67.8 23.8
Equity income of affiliates 35.3 15.1
Interest income (4) 7.4 12.8 7.0 8.1 74.3
Interest expense 42.9 28.3 4.0 3.6 5.4
Income before extraordinary item(5) 164.4 142.0 96.6 60.7 62.1
Net income (5) 164.4 142.0 89.5 60.7 57.3
INCOME PER DILUTED SHARE (6)
Income before extraordinary item $ 4.39 $ 3.79 $ 2.57 $ 1.64 $ 1.66
Net income $ 4.39 $ 3.79 $ 2.38 $ 1.64 $ 1.53
FINANCIAL
Total assets $2,482.0 $2,809.9 $2,499.8 $ 818.2 $ 830.4
Working capital 63.6 94.8 188.0 144.2 84.6
Current ratio (7) 1.1 1.2 1.5 2.0 1.4
Short-term and long-term debt (7) $ 684.9 $ 404.6 $ 334.3 $ 27.0 $ 126.9
Debt-to-equity (7) 83.9% 60.6% 60.7% 5.6% 29.4%
Stockholders' equity $ 816.1 $ 667.9 $ 550.5 $ 480.4 $ 430.9
Stockholders' equity per share (6) 22.23 18.31 15.04 13.16 11.78
Return on stockholders' equity (8) 24.6% 25.8% 20.1% 14.1% 16.2%
Capital expenditures $ 152.0 $ 114.7 $ 36.3 $ 33.0 $ 30.2
Provision for depreciation 80.1 71.9 33.8 32.8 33.2
Cash dividends paid 14.7 14.6 14.1 12.5 12.5
Cash dividends declared per share (6) .40 .40 .385 .34 .34
GENERAL
Average number of common
and common equivalent shares
Outstanding (in thousands) (6) 37,455 37,499 37,683 37,162 37,302
Approximate number of stockholders
of record at January 31 of each year 4,500 5,000 5,300 5,800 6,300
Approximate number of full-time
employees 17,200 17,200 15,900 5,500 6,400
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Howmet results have been consolidated into the Company's results since
December 2, 1997.
(2) Includes pre-tax restructuring charge of $61.4 million in 1995.
(3) Includes pre-tax relocation charges of $8 million in 1999 and $3 million in
1998, pre-tax inventory charges of $5 million in 1996, and pre-tax
inventory and restructuring charges of $13.1 million in 1995.
(4) Includes interest income from income tax refunds of $4.8, $1.7, $7, and
$71.4 million in 1998, 1997, 1996, and 1995, respectively.
(5) Includes a $7.1 million tax benefit in 1999 from reversing previously
accrued dividend tax resulting from increased Howmet ownership in February
1999.
(6) All per share amounts reflect the two-for-one stock split on March 13, 1998.
(7) Excludes the Pechiney Notes in 1998 and 1997.
(8) Based on income before extraordinary item in 1997 and 1995 and calculated on
beginning of year stockholders' equity.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company increased its ownership in Howmet from 49 percent to 62 percent
on December 2, 1997 and accordingly, beginning in December 1997, Howmet's
earnings, cash flows, and balance sheet have been consolidated with the
Company's. As a result, the operating results for 1997 include eleven months of
Howmet's earnings reported under the equity method and one month of Howmet
earnings on a consolidated basis. Operating results for 1999 and 1998 include
Howmet's earnings on a consolidated basis. Minority interest in income and
equity is also reported for that portion of Howmet the Company does not own. On
February 8, 1999, the Company increased its ownership in Howmet to 84.6 percent.
Due to the consolidation of Howmet in the Company's financial statements,
comparison of financial information from 1997 to 1998 is difficult and may not
be relevant. In order to facilitate an understanding of the Company's data,
separate Howmet comparative data and analysis have been included below for the
respective periods being reported.
On October 1, 1999, the Company acquired all of the outstanding stock of
the Continental/Midland group of companies ("Continental/Midland") for $106
million, including $22.2 million of assumed debt and other liabilities.
Continental/Midland and its affiliates are now wholly owned subsidiaries of Huck
International, Inc., and Continental/Midland's results of operations are
included in the consolidated results of the Company in the Fastening Systems
segment from the date of acquisition. Continental/Midland, based near Chicago,
Illinois, produces fasteners and fastener systems primarily for the automotive
industry. The acquisition was financed with borrowings under an unsecured bank
line of credit. The goodwill associated with this purchase will be amortized
over 40 years using the straight-line method. The Company expects to complete
the final purchase price allocation of Continental/Midland during the first
quarter of 2000. Continental/Midland's sales and operating income from October
1, 1999 through December 31, 1999 were approximately $21 and $2 million,
respectively.
On June 11, 1998, the Company completed the purchase of all the common
stock of Jacobson Manufacturing Company Inc. ("Jacobson") for $273.6 million and
assumed $7.3 million in liabilities, and it agreed to an election to treat the
transaction as an asset purchase. Jacobson was merged into Huck International,
Inc., and is operated as part of the Fastening Systems segment. Jacobson
manufactures high-quality, custom-designed metal parts and fasteners and
precision-engineered plastic products. The acquisition was financed with
borrowings under an unsecured bank line of credit. The goodwill associated with
the purchase is being amortized over 40 years using the straight-line method.
Jacobson contributed from June 11 through December 31, 1998, approximately $78
and $10 million in sales and operating income, respectively.
All of the following discussion reflects diluted earnings per share, and
all prior year earnings per share amounts, number of shares, stock option data
and market prices of the Company's common stock have been restated and adjusted
to reflect the two-for-one stock split (dividend) on March 13, 1998.
RESULTS OF OPERATIONS - 1999 COMPARED TO 1998
Net income for the year ended December 31, 1999 was $164.4 million, or
$4.39 per diluted share, a 16 percent increase compared to $142 million, or
$3.79 per diluted share, last year. Excluding the special items detailed below,
earnings per diluted share from continuing operations were $4.15, a 12 percent
increase over 1998.
Net income for the current year included a $7.1 million, or $.19 per share,
benefit from reversing taxes on accumulated dividends previously accrued on the
Company's share of Howmet income. This reversal resulted from the increase in
Howmet ownership in February
17
<PAGE>
1999. Current year earnings also included a $5.6 million or $.15 per share
benefit from a two-percent retroactive tax rate adjustment in the fourth
quarter, and relocation charges of $5 million, or $.13 per share, in the
fastener segment to close and relocate the Lakewood, California, aerospace
fastener facility and the selling and marketing office in Japan. The current
year also included a Cordant Technologies stock based incentive benefit at
Howmet of $1.1 million, or $.03 per share, due to declines in the Company's
common stock price. The stock based incentive benefit may reverse in future
periods if the Company's common stock price rises. 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. Excluding these items, earnings per share of
$4.15 increased 12 percent over the prior year's earnings per share of $3.72.
Summary financial information for the twelve months ended December 31:
<TABLE>
<CAPTION>
Better
(in millions, except per share data) 1999 1998 (Worse) Percent
- -----------------------------------------------------------------------------------------------------------
Sales:
<S> <C> <C> <C> <C> <C>
Investment Castings $1,459.7 $1,350.6 $109.1 8
Propulsion Systems 588.0 643.0 (55.0) (9)
Fastening Systems 465.2 433.3 31.9 7
- -----------------------------------------------------------------------------------------------------------
Total sales $2,512.9 $2,426.9 $ 86.0 4
- -----------------------------------------------------------------------------------------------------------
Operating income:
Investment Castings $ 204.7 $ 185.8 $ 18.9 10
Propulsion Systems 87.9 82.1 5.8 7
Fastening Systems 52.8 65.2 (12.4) (19)
Unallocated corporate expense (25.8) (24.4) (1.4) (6)
- ----------------------------------------------------------------------------------------------------------
Total operating income 319.6 308.7 10.9 4
Interest income 7.4 12.8 (5.4) (42)
Interest expense (42.9) (28.3) (14.6) (52)
Other, net (3.5) (3.8) .3 8
Income taxes (93.4) (107.6) 14.2 13
- -----------------------------------------------------------------------------------------------------------
Income before minority interest 187.2 181.8 5.4 3
Minority interest (22.8) (39.8) 17.0 43
- -----------------------------------------------------------------------------------------------------------
Net income $ 164.4 $ 142.0 $ 22.4 16
- -----------------------------------------------------------------------------------------------------------
Net income per share :
Basic $ 4.49 $ 3.89 $ .60 15
Diluted $ 4.39 $ 3.79 $ .60 16
- -----------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
Business Segment Sales and Income For 1999
Investment Castings
In 1999, Howmet contributed income, after minority interest and taxes, of
$121 million, or $3.23 per share, an 84 percent increase compared to $65.6
million, or $1.75 per share, last year. The increase is due to the Company's
ownership increase from 62 percent last year to 84.6 percent in February 1999,
and to Howmet's 24 percent increase in net income.
Following is a reconciliation of Howmet's contribution to the Company's income
for the twelve months ended December 31:
<TABLE>
<CAPTION>
(in millions) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Howmet net income $136.7 $110.4
Less preferred paid-in-kind dividend (1) (.8) (5.6)
- -------------------------------------------------------------------------------------------------------------------
Income available to common shareholders 135.9 104.8
- -------------------------------------------------------------------------------------------------------------------
Company's interest in Howmet income (2) 113.1 65.0
Add preferred paid-in-kind dividend .8 5.6
- -------------------------------------------------------------------------------------------------------------------
Howmet's contribution to the Company's income 113.9 70.6
The Company's 7 percent tax on Howmet income (3) 7.1 (5.0)
- -------------------------------------------------------------------------------------------------------------------
Howmet's total after-tax contribution to the Company's income $121.0 $ 65.6
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
(3) The Company's previously accrued tax on Howmet income was reversed on
February 8, 1999, and since then, Howmet's taxable income has been included
in the Company's consolidated federal income tax return. The 7 percent tax
is no longer required on the Company's share of Howmet income.
The following information summarizes Howmet's results, including the minority
share, before consolidation for the twelve months ended December 31:
<TABLE>
<CAPTION>
Better (Worse) Percent
(in millions) 1999 1998 Change
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $1,459.7 $1,350.6 $109.1 8
Cost of goods sold 1,115.8 1,039.1 (76.7) (7)
Gross profit 343.9 311.5 32.4 10
Operating income 215.4 189.7 25.7 14
Net income $ 136.7 $ 110.4 $ 26.3 24
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Howmet's sales increased 8 percent over the prior year primarily from
increased component demand for large industrial gas turbines ("IGT") used for
electric power generation. IGT sales increased 42 percent over 1998, net of
price reductions of approximately 3 percent. Sales to the aerospace market were
9 percent lower 1998, net of an approximate 2 percent price decrease. The lower
aerospace sales were primarily attributable to decreased commercial build rates
and customer inventory corrections.
The increase in net income resulted primarily from the higher IGT sales.
Stock Appreciation Rights ("SARs") expense decreased $4.5 million from the prior
year. SAR's expense is adjusted quarterly based on vesting and the market value
of Howmet's common
19
<PAGE>
stock. Also contributing to the income increase were reduced debt levels that
reduced interest expense by $6.4 million, or 50 percent.
Starting in late 1998, Howmet discovered certain product testing and
specification non-compliance issues at the Montreal (Canada) and Bethlehem
(Pennsylvania) operations of its Howmet Aluminum subsidiaries (formerly called
Cercast). In 1999, Howmet discovered several additional instances of other
testing and specification non-compliance at its Hillsboro (Texas) aluminum
casting facility and at the Montreal and Bethlehem operations. Howmet has
notified customers and the appropriate government agencies and substantially
completed correction of these issues. Howmet knows of no in-service problems
associated with any of these issues. In addition, during 1999 Howmet Aluminum
has been, and expects to continue for some time to be, late in delivery of
products to certain customers resulting in lower sales.
The Defense Criminal Investigative Service (the "DCIS") in conjunction with
other agents from Department of Defense and NASA, has undertaken an
investigation with respect to certain of the foregoing matters at the Montreal
and Bethlehem facilities. The DCIS has informed Howmet that the investigation
concerns possible violations of the False Claims Act and the False Statements
Act, as well as possible criminal penalties. Howmet management is unable to
determine definitively what, if any, civil or criminal penalties might be
imposed as a result of the investigation.
All customer claims relating to the foregoing matters have either been
resolved, or, in the Company's judgement, will be resolved within existing
reserves.
The Company believes that additional costs for the foregoing matters beyond
amounts accrued, if any, would not have a material adverse effect on the
Company's financial position, cash flow, or annual operating results. However,
additional cost, when and if accrued, may have a material adverse impact on the
quarter in which it may be accrued.
On August 6, 1999, Howmet and Howmet Aluminum entered into an
Administrative Agreement with the U.S. Air Force terminating Notices of Proposed
Debarment issued on March 1, 1999 relating to certain of the foregoing matters.
The Administrative Agreement permitted the affected facilities to resume
accepting new U.S. government contracts and subcontracts.
Propulsion Systems
In 1999, Propulsion Systems sales decreased $55 million, or 9 percent,
compared to last year, primarily from lower sales in the Space Shuttle Reusable
Solid Rocket Motors ("RSRM"), commercial launch motor, and Trident programs.
The lower RSRM sales resulted from continuing cost reductions and the transition
to the Buy 4 contract from the Buy 3 contract. Operating income increased $5.8
million or 7 percent over the prior year. Higher income from increased RSRM Buy
3 and ordnance program margins were partially offset by lower commercial launch
motor and Trident operating income. Propulsion Systems operating margins were
15 percent compared to 12.8 percent in 1998. Margins on the RSRM Buy 3 contract
are expected to increase as the contract nears completion and performance
incentives are met. While the Buy 4 contract is similar in structure and profit
potential to Buy 3, Buy 4 profit margins will be initially lower than margins
currently being recognized on Buy 3.
Fastening Systems
Huck Fastening Systems sales for the year increased by $31.9 million, or 7
percent, from the prior year reflecting the additional sales provided by the
Continental/Midland and Jacobson acquisitions. Sales in the industrial market
increased 11 percent over the prior year excluding the additional sales provided
by the Continental/Midland and Jacobson acquisitions. Excluding the additional
sales provided by the Continental/Midland and Jacobson acquisitions, Fastening
Systems total sales decreased 11 percent from the prior year. Sales in the
aerospace market
20
<PAGE>
decreased 30 percent from the prior year primarily from weak domestic aerospace
demand and due to inventory adjustments by major commercial aerospace customers.
It is difficult for the Company to forecast how long these inventory adjustments
may continue.
During the fourth quarter a $3 million pre-tax relocation charge was taken
to close the selling and marketing office in Japan. Excluding the additional
operating income provided by the Continental/Midland and Jacobson acquisitions,
the current year's $5 million pre-tax charge to close and relocate the Lakewood,
California facility, the $3 million pre-tax Japan closure charge, and the prior
year's $3 million pre-tax charge to close and relocate the Branford facility,
Fastening Systems operating income decreased $17 million or 29 percent from the
prior year. The lower operating income resulted primarily from lower aerospace
sales and margins. Operating margins for the year were 13.4 percent, compared
to 15.7 percent last year, excluding relocation charges in both years.
Fastening Systems book-to-bill ratios, defined as period orders divided by
period shipments, for the twelve months ended December 31, were as follows:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Aerospace .82 .84
Industrial .99 1.00
- ------------------------------------------------------------
Total .94 .93
- ------------------------------------------------------------
</TABLE>
Book-to-bill ratios are used as an indicator of future sales, but as with
all indicators, such ratios have inherent limitations and actual results may be
different. Since the book-to-bill ratio used is not a generally accepted
accounting principle disclosure, other companies may calculate this ratio
differently and utilize the ratio for different purposes.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense for 1999 increased
$21.8 million, or 11 percent, compared to the prior year. SG&A expenses
increased $7.2 million due to the addition of Continental/Midland's expenses for
three month's and Jacobson's expenses for the entire year. Huck's SG&A
expenses, excluding Continental/Midland and Jacobson, were lower due to the
closure of the Lakewood and the Branford facilities. Howmet's SG&A costs
increased $7.1 million primarily from higher costs to support higher volumes,
and including a full year's expense for Howmet's Japanese subsidiary. Goodwill
amortization increased $9.5 million due to the Continental/Midland purchase in
October 1999, the purchase of an additional 22.6 percent of Howmet common stock
in February 1999, and the Jacobson purchase in June 1998.
Income Taxes
In 1999, the Company had an effective income tax rate of 33.3 percent,
compared with 37.2 percent in 1998. The lower tax rate in the current year
resulted from higher foreign sales corporation benefits and the reversal of the
$7.1 million, or $.19 per share, tax on accumulated dividends previously accrued
on the Company's share of Howmet income. Beginning in February 1999, Howmet's
taxable income has been included in the Company's consolidated federal income
tax return, and the dividend tax is no longer required on the Company's share of
Howmet's income. Results also include a two-percent retroactive tax rate change
in the fourth quarter of $5.6 million or $.15 per share resulting from the
higher foreign sales corporation benefits and from legislation extending the
research and development tax credit to June 2004. The effective tax rate for
2000 is currently expected to be approximately 36 percent.
21
<PAGE>
Interest Expense
Interest expense increased $14.6 million due to the Company's increased
borrowings related to the Continental/Midland purchase, the 22.6 percent
purchase of Howmet common stock and the Jacobson acquisition. The weighted
average interest rate for the Company's long-term debt at December 31, 1999 was
7.1 percent compared to 6.2 percent for the prior year.
Selected Financial Data
For the twelve months ended December 31
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------------------------------
(in millions) Cordant (b) Howmet Consolidated Cordant (b) Howmet Consolidated
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
operating activities $133.1 $ 232.9 $ 366.0 $145.8 $207.4 $ 353.2
Capital expenditures (39.1) (112.9) (152.0) (31.7) (83.0) (114.7)
Dividends (14.7) - (14.7) (14.6) - (14.6)
- ----------------------------------------------------------------------------------------------------------------------
$ 79.3 $ 120.0 $ 199.3 $ 99.5 $124.4 $ 223.9
- ----------------------------------------------------------------------------------------------------------------------
Total debt(a) $639.2 $ 45.7 $ 684.9 $313.6 $ 91.0 $ 404.6
Less (plus) cash & cash
Equivalents (2.3) 39.4 37.1 7.7 37.6 45.3
- ----------------------------------------------------------------------------------------------------------------------
$641.5 $ 6.3 $ 647.8 $305.9 $ 53.4 $ 359.3
- ----------------------------------------------------------------------------------------------------------------------
(a) Excludes Pechiney note payable in 1998 (See Note 7 of the Company's Consolidated Financial Statements).
(b) Cordant, exclusive of Howmet.
</TABLE>
RESULTS OF OPERATIONS - 1998 COMPARED TO 1997
Net income for the year ended December 31, 1998 was $142 million, or $3.79
per share, a 47 percent increase compared to income before extraordinary item in
1997 of $96.6 million, or $2.57 per share. Net income increased 59 percent over
the $89.5 million, or $2.38 per share, reported in 1997.
Net income for 1998 included tax interest income and tax refunds of $4.4
million, or $.12 per share. Net income for 1997 included an extraordinary
charge of $7.1 million, or $.19 per share, net of income taxes and minority
interest, related to Howmet's debt refinancing.
On June 11, 1998, the Company acquired Jacobson Manufacturing Company Inc.
for $273.6 million. Jacobson contributed from June 11 through December 31, 1998
approximately $78 and $10 million in sales and operating income, respectively.
Jacobson's results are included in the consolidated results of the Company
within the Fastening Systems segment.
22
<PAGE>
Summary financial information for the twelve months ended December 31:
<TABLE>
<CAPTION>
Better
(in millions, except per share data) 1998 1997 (Worse) Percent
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales:
Investment Castings $1,350.6 $ 105.2 $1,245.4 1,184
Propulsion Systems 643.0 645.5 (2.5)
Fastening Systems 433.3 319.4 113.9 36
- ------------------------------------------------------------------------------------------------------------
Total sales $2,426.9 $1,070.1 $1,356.8 127
- ------------------------------------------------------------------------------------------------------------
Operating income:
Investment Castings $ 185.8 $ 11.7 $ 174.1 1,488
Propulsion Systems 82.1 64.4 17.7 27
Fastening Systems 65.2 40.4 24.8 61
Unallocated corporate expense (24.4) (12.8) (11.6) (91)
- ------------------------------------------------------------------------------------------------------------
Total operating income 308.7 103.7 205.0 198
Equity income of affiliates 35.3 (35.3) (100)
Interest income 12.8 7.0 5.8 83
Interest expense (28.3) (4.0) (24.3) (608)
Other, net (3.8) (2.2) (1.6) (73)
Income taxes (107.6) (41.4) (66.2) (160)
- ------------------------------------------------------------------------------------------------------------
Income before minority interest and
Extraordinary item 181.8 98.4 83.4 85
Minority interest (39.8) (1.8) (38.0) 2,111
- ------------------------------------------------------------------------------------------------------------
Income before extraordinary item 142.0 96.6 45.4 47
Extraordinary item - loss on early
retirement of debt (7.1) 7.1 100
- ------------------------------------------------------------------------------------------------------------
Net income $ 142.0 $ 89.5 $ 52.5 59
- ------------------------------------------------------------------------------------------------------------
Per diluted share:
Income before extraordinary item $ 3.79 $ 2.57 $ 1.22 47
Net income $ 3.79 $ 2.38 $ 1.41 59
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Business Segment Sales and Income For 1998
Investment Castings
On December 2, 1997, the Company purchased an additional 13 percent of Howmet
common stock for $183.8 million, increasing the Company's ownership percentage
to 62 percent. Howmet's results have been consolidated in 1998, while 1997
includes consolidated Howmet results for one month at 62 percent and Howmet
equity income at 49 percent for eleven months.
Following is a reconciliation of Howmet's contribution to the Company's income
for the twelve months ended December 31:
23
<PAGE>
<TABLE>
<CAPTION>
(in millions) 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Howmet income before extraordinary item $110.4 $72.0
Less preferred paid-in-kind dividend (5.6) (5.1)
- -------------------------------------------------------------------------------------------------------------
Income before extraordinary item available to common shareholders 104.8 66.9
- -------------------------------------------------------------------------------------------------------------
Company's interest in Howmet income before extraordinary item 65.0 33.4
Add preferred paid-in-kind dividend 5.6 5.1
- -------------------------------------------------------------------------------------------------------------
Howmet's contribution to the Company's income
before extraordinary item 70.6 38.5
Less the Company's 7 percent tax on Howmet income (5.0) (2.7)
- -------------------------------------------------------------------------------------------------------------
Howmet's total after-tax contribution to the Company's income before
extraordinary item $ 65.6 $35.8
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Howmet contributed income, after minority interest and taxes, of $65.6 million,
or $1.75 per share in 1998, an 83 percent increase compared to $35.8 million, or
$.95 per share, for 1997. Cordant Technologies' 13 percent ownership increase in
December 1997 contributed $12.1 million, or $.32 per share, to the increase.
The following information summarizes Howmet's results, including the minority
share, before consolidation for the twelve months ended December 31:
<TABLE>
<CAPTION>
Better Percent
(in millions) 1998 1997 (Worse) Change
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $1,350.6 $1,258.2 $92.4 7
Cost of goods sold 1,039.1 963.8 75.3 8
Gross profit 311.5 294.4 17.1 6
Operating income 189.7 154.5 35.2 23
Income before extraordinary item 110.4 72.0 38.4 53
Net income $ 110.4 $ 59.7 $50.7 85
- -----------------------------------------------------------------------------------------------------
</TABLE>
Howmet's sales for 1998 increased $145.8 million, or 12 percent on a comparable
basis with 1997, adjusting for the sale in September 1997 of the lower margin
refurbishment business. The sales increase is due to volume increases in the
aerospace and industrial gas turbine (IGT) markets. Also affecting
comparability is $9.7 million of additional revenue in 1997 from a pricing
adjustment with a customer that was not repeated in 1998 and is not expected to
recur in the future.
Howmet's increase in income resulted from the higher revenues and increased
operating margins. Stock Appreciation Rights (SARs) expense also decreased
$20.6 million from 1997. Also contributing to the income increase were reduced
debt levels and lower interest rates that reduced interest expense by $18.3
million, or 59 percent.
Propulsion Systems
Propulsions Systems sales were flat compared to 1997. Higher Space Shuttle
Reusable Solid Rocket Motor (RSRM), Missile Defense and Trident program sales
were offset by lower sales in the Demilitarization and Japanese Technology
Transfer programs.
Operating income for Propulsion Systems increased 27 percent from 1997.
Operating margins increased from 10 percent in 1997 to 12.8 percent in 1998.
The higher income resulted primarily from significantly higher Commercial Launch
Motor and RSRM margins.
24
<PAGE>
Fastening Systems
Huck's Fastening Systems sales and operating income for 1998 were higher
than 1997 reflecting both the Jacobson Manufacturing acquisition during the year
and continued strength in both commercial aircraft and industrial markets. In
1998 a $3 million pre-tax charge was taken to close and relocate the industrial
fastener operations at Branford, Connecticut, to Huck's facility in Waco, Texas.
The Branford closure will result in reduced fixed costs and allow utilization of
available capacity in Waco. Excluding the $3 million relocation charge,
operating income increased 69 percent over 1997. Operating margins for 1998 were
15.7 percent, excluding the relocation charge, compared to 12.6 percent in 1997.
Operating margins continued to benefit from both ongoing cost control
initiatives and increased revenues. Excluding Jacobson's results, and the
Branford charge, sales and operating income increased 11 and 43 percent,
respectively, over 1997. Sales were strong in both the aerospace and industrial
markets, particularly in the large truck, trailer, and rail markets.
Fastening Systems book-to-bill ratios, defined as period orders divided by
period shipments, for the twelve months ended December 31, were as follows:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Aerospace .84 1.28
Industrial 1.00 1.06
- ------------------------------------------------------------------------------
Total .93 1.17
- ------------------------------------------------------------------------------
</TABLE>
Book-to-bill ratios are used as an indicator of future sales, but as with
all indicators, such ratios have inherent limitations and actual results may be
different. Since the book-to-bill ratio used is not a generally accepted
accounting principle disclosure, other companies may calculate this ratio
differently and utilize the ratio for different purposes.
Selling, General and Administrative Expense
Selling, general and administrative expense for 1998 increased 114 percent
or $103.3 million compared to 1997. The increase was primarily attributable to
the consolidation of Howmet, which impacted general and administrative expenses
by $86 million compared to 1997. The increase is due to Howmet having 12 months
of activity in Cordant's 1998 consolidated results compared to one month in
1997. Goodwill amortization increased $5.7 million due to the purchase of an
additional 13 percent of Howmet in December 1997 and the purchase of Jacobson in
June 1998. Fastening Systems general and administrative expenses increased $7.8
million over 1997 due primarily to the addition of Jacobson's general and
administrative expenses.
Interest Expense
Interest expense increased $24.3 million primarily from the consolidation
of Howmet's results as well as increased borrowings associated with the
additional purchase of 13 percent of Howmet common stock and the Jacobson
acquisition.
25
<PAGE>
Selected Financial Data For the twelve months ended December 31
<TABLE>
<CAPTION>
1998 1997(a)
--------------------------------------------------------------------------------------------------
(in millions) Cordant(c) Howmet Consolidated Cordant(c) Howmet Consolidated
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
operating activities $145.8 $207.4 $ 353.2 $ 85.0 $ 25.6 $110.6
Capital expenditures (31.7) (83.0) (114.7) (21.2) (15.1) (36.3)
Dividends (14.6) (14.6) (14.1) (14.1)
- --------------------------------------------------------------------------------------------------------------------------
$ 99.5 $124.4 $ 223.9 $ 49.7 $ 10.5 $ 60.2
- --------------------------------------------------------------------------------------------------------------------------
Total debt(b) $313.6 $ 91.0 $ 404.6 $125.9 $208.4 $334.3
Less cash & cash
Equivalents 7.7 37.6 45.3 .2 45.4 45.6
- --------------------------------------------------------------------------------------------------------------------------
$305.9 $ 53.4 $ 359.3 $125.7 $163.0 $288.7
- --------------------------------------------------------------------------------------------------------------------------
(a) Howmet results were consolidated starting in December 1997.
(b) Excludes Pechiney note payable (See Note 7 of the Company's Consolidated Financial Statements).
(c) Cordant exclusive of Howmet.
</TABLE>
YEAR 2000 REMEDIATION
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 compliant. In late 1999, the Company completed its
remediation and systems testing. As a result of these planning and
implementation efforts, the Company experienced no significant disruptions in
material information technology and non-information technology systems. These
systems successfully responded to the Year 2000 date change. The Company is not
aware of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
Euro Conversion
The Company has not experienced any impact from the Euro conversion on its
business operations. The Company implemented a strategy during 1999, which
would allow it to operate in a Euro environment during the transition period,
January 1, 1999 through December 31, 2001, and after full Euro conversion,
effective 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
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, but not expected to be significant. There
is no Euro conversion impact related to the Propulsion Systems 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. The Company does not expect any significant changes to its foreign
exchange hedging program and does not expect any significant increases in its
foreign exchange exposure.
LIQUIDITY AND CAPITAL RESOURCES
Separate cash flow information for Howmet has been included below for the
respective
26
<PAGE>
periods being reported.
Cash flow provided by operations in 1999 was $366 million compared to
$353.2 million in 1998. In 1999, the Company received a one-time customer
advance on accounts receivable of $40 million at Howmet. This advance will be
applied against accounts receivable beginning in June 2001.
Acquisition activity included $385 million in cash paid for the remaining
22.65 million shares of Howmet common stock owned by Carlyle Blade Acquisition
Partners, L.P. This acquisition included a new Carlyle Standstill Agreement and
extended an existing covenant not to compete. Acquisition activity also
included $83.8 million in cash paid for the Continental/Midland purchase.
Capital spending on property, plant and equipment used $152 million of cash in
the current year compared to $114.7 million in the prior year. Howmet used
$112.9 million for capital expenditures in the current year compared to $83
million in the prior year. Howmet's capital expenditures includes significant
capacity expansions to serve the core business as well as additional
expenditures to support new products and process enhancement activities.
Capital expenditures for 2000 are anticipated to be in the $120 million range,
with Howmet spending approximately $90 million of the consolidated total.
Financing activities for the year provided $248.5 million of cash compared
to $32.2 million in the prior year. In February, the Company borrowed $385
million to finance the Howmet common stock purchase, and in October, the Company
borrowed $100 million to finance the Continental/Midland acquisition. The
Company used this borrowing to pay $83.8 million in cash to
Continental/Midland's shareholders, $13.2 million to retire third party debt at
Continental/Midland and $3 million for general corporate purposes. During the
year the Company repaid a total of $300 million in long-term debt, $128 million
being repaid by Howmet. Borrowings for the year totaled $550 million.
During the year, the Company did not repurchase any shares of the Company's
common stock. In 1998 the Company repurchased 357,400 shares of the Company's
common stock for $14.4 million.
Cordant does not have access to Howmet cash balances except through Howmet
declaring a cash dividend to its shareholders, which availability may be
restricted under the terms of its revolving credit facility. Howmet does not
currently intend to pay dividends. The initial public offering of Howmet stock
in December 1997, which partially redistributed ownership of Howmet from Carlyle
to the public, did not generate any cash to Howmet or to the Company.
The Company's liquidity ratio's were as follows:
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Working Capital (in millions) $63.6 $94.8
Current Ratio 1.1 1.2
Debt-to-equity 83.9% 60.6%
Debt-to-total capital 47.6% 40.8%
- ------------------------------------------------------------------------------------
</TABLE>
All of the above ratios for 1998 exclude the Pechiney Notes and the
Restricted Trust, (See Note 7 to the Company's Consolidated Financial
Statements). The debt-to-total-capital ratio includes the $55 million
receivable facility at Howmet (See Note 2 to the Company's Consolidated
Financial Statements).
On February 9, 2000 the Company terminated its senior bank credit
facilities and replaced them with a new $1 billion senior bank credit facility.
The new facility, will be used to refinance existing bank debt and for general
corporate purposes. The terms of the bank facility include guarantees from
existing and future material domestic subsidiaries for all obligations arising
under the facility. The credit facility matures in February 2001 ($400 million)
and February
27
<PAGE>
2005 ($600 million). Approximately $475 million was drawn on the five-year
facility on February 9, 2000, leaving $525 million available for future use. The
Company has no other principal maturing in the next five years. The interest
rate on the new facility was 6.6 percent on February 9, 2000 and is based on
London Interbank Offered Rate (LIBOR) plus a borrowing spread. This new facility
resulted in reclassifying $300 million of current portion of long-term debt to
long-term debt at December 31, 1999. The new credit agreement and senior notes
require the Company to meet certain interest coverage and leverage ratios and
also contain covenants restricting, among other things, the Company's ability to
incur funded debt, liens, sale and leaseback transactions, and the sale of
assets.
On January 6, 2000 the Company filed a Form S-3 with the Securities and
Exchange Commission to sell from time to time up to $650 million in debt
securities, warrant, common stock and preferred stock.
On November 12, 1999, the Company announced it had made a proposal to the
Board of Directors of Howmet to acquire all of the outstanding shares of Howmet
not currently owned by the Company for a price of $17 per share in cash. On
March 10, 2000, the Company informed the Committee that it was willing to
increase its offer to $18.75 per share, or a total of approximately $288
million, but following further discussions no agreement was reached. Alcoa has
advised the Company and Howmet that it intends to enter into discussions with
the Howmet Independent Committee to pursue the acquisition of the outstanding
publicly-held shares of Howmet stock.
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, stock repurchase program and purchase Howmet's remaining
outstanding common stock, on both a short and long-term basis.
28
<PAGE>
Howmet Liquidity
A comparative cash flow statement for Howmet for the year ended December 31,
follows:
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
- --------------------
<S> <C> <C> <C>
Net income $ 136.7 $ 110.4 $ 59.7
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 66.8 60.2 66.9
Equity income (.4) (1.5)
Extraordinary item 12.3
Changes in assets and liabilities:
Receivables (2.5) (3.5) 8.4
Inventories (4.6) 2.2 (17.9)
Accounts payable and accrued liabilities (12.6) 10.3 12.1
Deferred income taxes (14.8) (2.1) (.3)
Income taxes payable 3.4 17.8 16.9
Long-term SARs accrual 6.3 5.5 31.4
Advance on accounts receivable 40.0
Other - Net 14.2 7.0 4.6
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 232.9 207.4 192.6
INVESTING ACTIVITIES
- --------------------
Purchases of property, plant and equipment (112.9) (83.0) (56.9)
Payments made for investments and other assets (3.0) (1.8)
Proceeds from sale of refurbishment business, net 44.9
- ---------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (112.9) (86.0) (13.8)
FINANCING ACTIVITIES
- --------------------
Net change in short-term debt 14.6 15.1
Issuance of long-term debt 65.0 36.6 326.2
Repayment of long-term debt (128.0) (182.0) (467.6)
Redemption of preferred stock (66.4)
Premiums paid on early retirement of debt (13.7)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (114.8) (130.3) (155.1)
Foreign currency rate changes (3.4) 1.1 (1.7)
- ---------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 1.8 (7.8) 22.0
Cash and cash equivalents at beginning of period 37.6 45.4 23.4
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 39.4 $ 37.6 $ 45.4
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Cash flow provided by operations in 1999 was $232.9 million compared to $207.4
million in 1998. In 1999, Howmet received a one-time customer advance on
accounts receivable of $40 million. This advance will be applied against
accounts receivable beginning in June 2001.
Capital expenditures increased in 1999 primarily from capacity expansions
needed to serve the core business, as well as additional expenditures to support
new products and process enhancement activities. Capital expenditures for 2000
are expected to be approximately $90 million. Capital expenditures for 2000
will be lower than 1999 due to the completion of major capacity expansion
projects.
On February 17, 1999, Howmet paid $66.4 million to redeem all of its 9
percent preferred stock. The payment was made to Cordant, the sole preferred
stockholder. Howmet borrowed
29
<PAGE>
under its existing revolving credit facility to make this payment, and Cordant
used the proceeds to reduce debt under its revolving credit facilities.
On February 9, 2000, Howmet terminated its $300 million revolving credit
facility and replaced it with a $25 million revolving credit facility. On
December 31, 1999, Howmet had no borrowings under the old revolving credit
facility and had no borrowings under the new facility. The funds available under
the new revolving credit facility are available through May 9, 2000. The
interest rate on the new facility is based on LIBOR plus a borrowing spread.
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.
Howmet expects future cash flows from operations, current financial
resources and available credit facilities to be adequate to fund its anticipated
working capital requirements and capital expenditures on both a short and long-
term basis.
New 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 No.
133 to fiscal years beginning after June 15, 2000. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. This statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. Any
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company does not believe that SFAS No. 133 will
have a significant effect on the earnings and financial position of the Company.
The Company will adopt the SFAS No. 133 beginning on January 1, 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements. The
effective date of SAB 101 is the second fiscal quarter of the fiscal year ending
after December 15, 1999. This SAB clarifies proper methods of revenue
recognition given certain circumstances surrounding sales transactions. The
Company continues to evaluate the impact of SAB 101, but believes it is in
compliance with the provisions of the SAB and accordingly, does not expect SAB
101 to have a material effect on its financial statements.
ALCOA MERGER AGREEMENT
On March 14, 2000, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Alcoa Inc., a Pennsylvania corporation ("Alcoa"),
and Omega Acquisition Corp., a Delaware corporation and a wholly owned
subsidiary of Alcoa (the "Purchaser"). Pursuant to the Merger Agreement, on
March 20, 2000, the Purchaser commenced a tender offer (the "Offer") for all of
the outstanding shares of the Company's Common Stock at a purchase price of
$57.00 per share. The Merger Agreement provides that, subject to the
satisfaction or waiver of certain conditions, following completion of the Offer,
the Purchaser will be merged with and into the Company, and at the effective
time of the merger (the "Effective Time") each share of Company Common Stock
outstanding (other than Shares owned by Alcoa, the Purchaser, any of their
respective subsidiaries, the Company or any of its subsidiaries, and shares held
by stockholders, if any, who did not vote in favor of the Merger Agreement and
who comply with all of the relevant provisions of Section 262 of the Delaware
30
<PAGE>
General Corporation Law relating to dissenters' rights of appraisal) will be
converted into the right to receive $57.00 in cash or any greater amount per
share paid pursuant to the Offer.
On November 12, 1999, the Company announced it had made a proposal to the
Board of Directors of Howmet to acquire all of the outstanding shares of Howmet
not currently owned by the Company for a price of $17 per share in cash. On
March 10, 2000, the Company informed the Committee that it was willing to
increase its offer to $18.75 per share, or a total of approximately $288
million, but following further discussions no agreement was reached. Alcoa has
advised the Company and Howmet that it intends to enter into discussions with
the Howmet Independent Committee to pursue the acquisition of the outstanding
publicly-held shares of Howmet's stock.
On March 13, 2000, the Company, a wholly owned subsidiary of the Company
("Holding") and Howmet amended (the "Corporate Agreement Amendment") the
Corporate Agreement entered into by such parties in connection with the initial
public offering of Howmet Shares in December 1997. Under the Corporate Agreement
Amendment, the Company and Holding agreed that neither they nor any of their
affiliates will acquire outstanding Howmet Shares not held by any of them (the
"Publicly Held Howmet Shares") if, after such acquisition, the number of
Publicly Held Howmet Shares would be less than 14% of the total number of
outstanding Howmet Shares, other than: (1) with the consent of a majority (but
not less than two) of the non- employee directors of Howmet who are not
directors or employees of the Company, Holding or their affiliates; or (2) the
purchase of at least a majority of the outstanding Publicly Held Howmet Shares
pursuant to a tender offer to acquire all of the Publicly Held Howmet Shares,
which tender offer (A) is conditioned upon there being tendered and not
withdrawn prior to the expiration of the offer not less than a majority of the
outstanding Publicly Held Howmet Shares (the "Howmet Minimum Tender"), and (B)
provides a commitment for a prompt merger or business combination following the
purchase of Howmet Shares in the tender offer as contemplated by clause (3)
below; or (3) pursuant to a merger or other business combination, within one
year following the completion of a tender offer described in clause (2) above
that satisfied the Howmet Minimum Tender, in which each Publicly Held Howmet
Share outstanding immediately prior to the effective time of such merger or
business combination is converted into the right to receive the same
consideration paid or issued in the tender offer; or (4) pursuant to a merger or
other business combination in which holders of all outstanding Publicly Held
Howmet Shares are treated the same which is approved by the holders of a
majority of the outstanding Publicly Held Howmet Shares. Alcoa and Howmet
entered into a letter agreement on March 13, 2000, pursuant to which Alcoa
agreed with Howmet to be bound by the same limitations on purchasing Publicly
Held Howmet Shares as bind the Company under the Corporate Agreement Amendment.
FORWARD-LOOKING STATEMENTS
This Form 10-K 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 filings 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.
31
<PAGE>
RISK FACTORS
The Company sets forth in Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations of Form 10-K incorporated by
reference herein "Cautionary Statements" with respect to certain statements
herein that the Company believes are "forward looking statements" under the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Many of the factors described therein are discussed in both current and
prior Company Securities and Exchange Commission filings and to the extent not
otherwise discussed in forward-looking statements should be considered in
assessing the various risks associated with the Company's conduct of its
business and financial condition. Certain other risks which may impact the
accuracy of the Company's forward-looking statements include, but are not
necessarily limited to: changing economic and political conditions in the United
States and in other countries, changes in governmental spending and budgetary
policies, governmental laws and regulations surrounding various matters such as
environmental remediation, contract pricing, international trading restrictions,
outcome of union negotiations, changes in competitive conditions, customer
product acceptance, and continued access to capital markets. All forecasts and
projections in this report are "forward-looking statements," and are based on
management's current expectations of the Company's results, based on current
information available pertaining to the Company and its products including the
aforementioned risk factors. Actual future results and trends may differ
materially from projections made herein as a result of the factors set forth
above and other factors. The Company undertakes no obligation to publicly
update or revise any forward-looking statements to reflect future events or
developments. Risks which may impact the accuracy of the Company's forward-
looking statements include, but are not necessarily limited to:
Our RSRM contracts with NASA for the Space Shuttle program may be terminated or
changed by the U.S. government
Our RSRM contracts for NASA's Space Shuttle program are subject to
substantial performance and financial risks. Approximately 15 percent of our
current revenues are derived from the Reusable Solid Rocket Motor (or RSRM)
contracts. Therefore, any change in, or discontinuance of, our RSRM contracts
or the benefits we receive under those contracts could have a material adverse
effect on us. 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. Our
RSRM contracts are dependent upon NASA's Space Shuttle program, which is highly
dependent upon the viability of the International Space Station. Delays in
space station components may delay launches and affect the RSRM production
rates. Should the International Space Station be cancelled, NASA's Space
Shuttle program and our 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 our RSRM motors, and any
development of this or other alternative propulsion sources would adversely
impact us in the future. Additionally, actions by the U.S. government or us 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 us.
Our current space and defense propulsion contracts as well as our 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 our 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
32
<PAGE>
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 us.
We cannot assure that we will successfully win new programs or retain
current programs and the failure to do so could have a material adverse effect
on us. Our ability to successfully compete for and win new programs or retain
current programs may be affected by:
. the availability of program funding;
. competition by others with us for such programs on price, quality,
technology, facilities, delivery, and product performance;
. changes in Congressional funding objectives;
. federal agency demand and program management, including program
termination, consolidation or privatization; and
. the degree to which we successfully manage 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 us.
The cyclicality of the commercial aerospace market may materially and adversely
affect us
Sales of our 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 our products in the aerospace industry could have a material adverse
effect on us. Delay or changes in aircraft and component orders and build
schedules may impact the future demand for our products and our profitability.
We cannot assure that there will not be declines in these markets impacting the
demand for our products or the delivery schedule for existing orders.
Our failure to satisfy the demands of major customers in the aerospace market
could have a material adverse effect on us
Our major aerospace customers are large and may exercise their market power
among a number of suppliers, including us, competing for their business by
exerting pricing pressure and delivery, inventory, and unit volume requirements.
Our ability to maintain both product and manufacturing qualifications, meet the
needs of our 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 our success in the aerospace market. Our inability to maintain
product pricing, as well as availability, delivery, quality, and service could
result in decreased sales or profitability for us in the aerospace market.
General economic activity and mature industrial markets may negatively affect
our ability to sell our products and services
The products and services sold by us for domestic and international, and
industrial commercial markets, primarily through our 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. Our 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.
33
<PAGE>
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.
Our business can also be affected by factors such as management's ability
to:
. successfully react to changes in market conditions and demand;
. expand new and existing product lines;
. Compete successfully with the consolidation of suppliers by major
Fastener Systems customers; and
. improve margins and returns on investment by successfully implementing
asset management, pricing and cost reduction strategies.
Our 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 our ownership of Howmet
The value of Howmet's assets includes significant goodwill. This value may
not be realized by stockholders, including us, 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, including us. As a result, we are restricted in our access to
Howmet's cash flows and other resources. If we are unable to generate
sufficient cash flows from other sources, our ability to repay amounts due on
indebtedness would be materially adversely affected.
Our loss or failure to maintain product quality or manufacturing qualifications
may result in our loss of markets and business
Supplier and customer product qualifications and product quality are
important to us 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 us.
Starting in late 1998, Howmet discovered certain product testing and
specification non-compliance issues at the Montreal (Canada) and Bethlehem
(Pennsylvania) operations of its Howmet Aluminum subsidiary (formerly called
Cercast). In 1999, Howmet discovered several additional instances of other
testing and specification non-compliance at its Hillsboro (Texas) aluminum
casting facility and at the Montreal and Bethlehem operations. Howmet has
notified customers and the appropriate government agencies and has substantially
completed correction of these issues . In addition, Howmet Aluminum has been,
and expects to continue for some time to be, late in delivery of products to
certain customers, resulting in lower sales.
The Defense Criminal Investigative Service (the "DCIS") in conjunction with
agents from the Department of Defense and NASA, has undertaken an investigation
with respect to certain of the foregoing matters at the Montreal and Bethlehem
facilities. The DCIS has informed Howmet that the investigation concerns
possible violations of the False Claims Act and the False Statements Act, as
well as possible criminal penalties. Howmet management is unable to determine
definitively what, if any, civil or criminal penalties might be imposed as a
result of the investigation.
All customer claims relating to the foregoing matters either have been
resolved or, in the Company's judgment, will be resolved within existing
reserves.
34
<PAGE>
The Company believes that additional costs for such matters beyond
amounts accrued, if any, would not have a material adverse effect on the
Company's financial position, cash flow, or annual operating results. However,
additional cost, when and if accrued, may have a material adverse impact on the
quarter in which it may be accrued.
On August 6, 1999, Howmet and Howmet Aluminum entered into an
Administrative Agreement with the U.S. Air Force terminating Notices of proposed
Debarment issued on Mary 3, 1999 relating to certain of the foregoing matters.
The Administrative Agreement permitted the affected facilities to resume
accepting new U.S. government contracts and subcontracts.
Qualified vendors, component parts, and raw materials qualifications are
important to us in the manufacture of our 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.
Shortages or significant price fluctuations of raw materials used by us could
have a material adverse effect on us
Raw materials that our Investment Castings and Fastening Systems segments
use include a number of metals and minerals, including titanium, hafnium,
aluminum, nickel, cobalt, molybdenum and chromium, among others. Although we
have not experienced significant shortages of our supplies and raw materials, we
cannot assure that shortages will not occur in the future. Any such shortages
could have a material adverse effect on us.
Our Propulsion segment 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 we ordinarily do not hedge the
price risk of our raw materials. Significant raw materials price fluctuations
could have a material adverse effect on us. For some of the supplies and raw
materials we purchase, including certain metals, we have 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.
We do not hedge the risk of net asset value fluctuations of our foreign
investments valued in local currencies and therefore may be exposed to adverse
foreign currency rate changes
We do not hedge against net asset values for our foreign investments
attributed to our foreign subsidiaries valued in local currencies. To the
extent our foreign revenue base grows and net asset base expands as the result
of our increased foreign business activity, our exposure to adverse foreign
currency rate movement increases. Our foreign currency risk exposure is also
subject to the stability of the foreign currency of each country where we
maintain foreign operations or do business.
35
<PAGE>
Environmental issues could have a material adverse effect on us
We are subject to comprehensive and changing federal, state, local and
foreign laws, regulations and ordinances that:
. 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, and
. 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 us and at off-site
locations where we have arranged for the disposal of hazardous substances.
We are 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. We cannot assure 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's long and short-term debt portfolio consists of both variable
and fixed-rate instruments. As of December 31, 1999 the Company did not utilize
interest rate derivative contracts. At December 31, 1999 and 1998,
approximately $533 and $289 million, respectively, (including $55 million from
Howmet's receivables securitization facility) of the Company's debt is tied to
LIBOR. If the interest rate on this variable-rate debt were to change by 1
percent, net income would have hypothetically increased or decreased by $3.2 and
$1.2 million in 1999 and 1998, respectively. If the interest rate on the
Company's fixed-rate debt of $152 and $171 million in 1999 and 1998,
respectively, were to change 1 percent, net income would have hypothetically
increased or decreased by $.9 and 1 million in 1999 and 1998, respectively.
This hypothetical analysis does not take into consideration the effects of the
economic conditions that would give rise to such an interest rate change or the
Company's response to such hypothetical conditions, nor does it take into effect
changes from the December 31, 1999, and 1998 debt amounts.
The Company enters into forward exchange contracts to manage certain
foreign currency exposures. These forward exchange contracts are hedges for
risk management and are not used for trading or speculative purposes. Such
hedges comply with Company policies approved by the Board of Directors. To
mitigate the effects of changes in currency exchange rates on that portion of
the foreign operations business conducted in foreign currencies, the Company
regularly hedges by entering into foreign exchange forward contracts to cover
near-term exposures.
36
<PAGE>
At December 31, 1999, for hedging purposes, the Company had the following
forward exchange contracts outstanding:
<TABLE>
<CAPTION>
Contract & U.S. Local
(in millions) Currency Dollar Currency Unrealized
Local Currency Type Equivalent Equivalent Gain (Loss)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United Kingdom sterling Buy United States dollar $18.0 11.0 $ .1
United Kingdom sterling Sell EURO 3.8 2.3 .1
French Franc Sell United States dollar 12.3 79.0 (.1)
French Franc Buy British Sterling 8.8 54.2 .3
Japanese Yen Buy United States dollar 7.2 743.8 (.2)
Japanese Yen Buy British Sterling 5.9 599.6 (.2)
United States dollar Buy Canadian dollar 9.7 9.7 .2
Canadian dollar Buy United States dollar 3.0 4.3 (.1)
Miscellaneous 1.8
- -------------------------------------------------------------------------------------------------------------------------
$70.5 $ .1
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
All of the currencies listed above have foreign exchange contracts with maturity
dates ranging from January 2000 through December 2000.
At December 31, 1998, for hedging purposes, the Company had the following
forward exchange contracts outstanding:
<TABLE>
<CAPTION>
Contract & U.S. Local
(in millions) Currency Dollar Currency Unrealized
Local Currency Type Equivalent Equivalent Gain
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United Kingdom sterling Buy United States dollar $ 8.2 4.9
United States dollars Buy Canadian dollar 25.2 25.2 $.1
Canadian dollars Buy United States dollar 2.9 4.6
Japanese yen Buy United States dollar 2.5 284.1
French francs Buy United Kingdom sterling 11.9 66.3
French francs Sell United States dollar 12.2 69.3 .1
Miscellaneous 1.4
- -------------------------------------------------------------------------------------------------------------------------
$64.3 $.2
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
All of the currencies listed above had foreign exchange contracts with maturity
dates ranging from January 1999 through December 1999.
The fair value of these foreign exchange contracts, which is the unrealized
gain, was estimated based on December 31, 1999, and December 31, 1998 foreign
exchange rates obtained from dealers. If the U.S. dollar were to strengthen or
weaken against these currencies by 10 percent, the hypothetical value of the
contracts would increase or decrease by approximately $.6 and $.4 million in
1999 and 1998, respectively. However, these forward exchange contracts are
hedges, consequently any market value gains or losses arising from these foreign
exchange contracts are offset by foreign exchange losses or gains on the
underlying commitments. Calculations of the above effects assume that each rate
changed in the same direction at the same time relative to the U.S. dollar. The
calculations reflect only those differences resulting from mechanically
replacing one exchange rate with another. They do not factor in any potential
effects that changes in currency exchange rates may have on income statement
translation, sales volume and prices, and on local currency costs of production.
The Company's international operation's net assets totaled $162.4 and
$202.1 million at December 31, 1999 and December 31, 1998, respectively. The
effect of any change in foreign exchange rates on the translation of such net
assets is reflected in the translation adjustment recorded in comprehensive
income. The Company does not hedge its foreign currency net asset exposures. The
Company also has some commodity price risk but does not currently hedge
commodity-related transactions. For additional information on policies and
discussion of the
37
<PAGE>
Company's foreign exchange and financial instruments, see Notes 1 and 19 of the
notes to the Company's consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
Management has prepared, and is responsible for, the consolidated financial
statements and all related financial information contained in this report. The
consolidated financial statements, which include amounts based on estimates and
judgments, were prepared in accordance with generally accepted accounting
principles appropriate in the circumstances and applied on a consistent basis.
Other financial information is consistent with that in the consolidated
financial statements.
Management maintains accounting systems and related internal controls which it
believes provide reasonable assurance, at appropriate cost, that transactions
are properly executed and recorded, that assets are safeguarded, and that
accountability for assets is maintained. An environment that provides an
appropriate level of control is maintained and monitored and includes
examinations by an internal audit staff.
Management recognizes its responsibilities for conducting the Company's affairs
in an ethical and socially responsible manner. The Company has written
standards of business conduct, including its business code of ethics, which
emphasize the importance of personal and corporate conduct that demand
compliance with federal and state laws governing the Company. The importance of
ethical behavior is regularly communicated to all employees through ongoing
education and review programs designed to create a strong compliance
environment. In addition, each member of management is evaluated on his/her
knowledge of and compliance with the Company's code of ethics and standards of
business conduct.
The Audit Committee of the Board of Directors is composed of five outside
directors and meets Securities and Exchange Commission requirements for
independence and financial experience. This Committee meets regularly and also
meets separately with representatives of the independent auditors, Company
officers and the internal auditors to review their activities.
The consolidated financial statements have been audited by Ernst & Young LLP,
independent auditors, whose report follows.
Richard L. Corbin
Executive Vice President and
Chief Financial Officer
38
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Cordant Technologies Inc.:
We have audited the accompanying consolidated balance sheets of Cordant
Technologies Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cordant
Technologies Inc. at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
Salt Lake City, Utah
February 4, 2000,
except for the information regarding the
Company's debt facility discussed in Note 8,
as to which the date is February 9, 2000
39
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
--------------------------------------------
(in millions, except per share data) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $2,512.9 $2,426.9 $1,070.1
Operating expenses:
Cost of sales 1,944.5 1,894.4 861.3
Selling, general and administrative 215.4 193.6 90.3
Research and development 33.4 30.2 14.8
- ---------------------------------------------------------------------------------------------------------
Total operating expenses 2,193.3 2,118.2 966.4
Income from operations 319.6 308.7 103.7
Equity income of affiliates 35.3
Interest income 7.4 12.8 7.0
Interest expense (42.9) (28.3) (4.0)
Other, net (3.5) (3.8) (2.2)
- ---------------------------------------------------------------------------------------------------------
Income before income taxes, minority interest and
extraordinary item 280.6 289.4 139.8
Income taxes (93.4) (107.6) (41.4)
- ---------------------------------------------------------------------------------------------------------
Income before minority interest and extraordinary item 187.2 181.8 98.4
Minority interest (22.8) (39.8) (1.8)
- ---------------------------------------------------------------------------------------------------------
Income before extraordinary item 164.4 142.0 96.6
Extraordinary item - loss on early retirement of debt (7.1)
- ---------------------------------------------------------------------------------------------------------
Net income $ 164.4 $ 142.0 $ 89.5
- ---------------------------------------------------------------------------------------------------------
Income per share before extraordinary item:
Basic $ 4.49 $ 3.89 $ 2.64
Diluted $ 4.39 $ 3.79 $ 2.57
Net income per share:
Basic $ 4.49 $ 3.89 $ 2.45
Diluted $ 4.39 $ 3.79 $ 2.38
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
(in millions) 1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
- --------------------
Net income $ 164.4 $ 142.0 $ 89.5
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary item 7.1
Minority interest 22.8 39.8 1.8
Depreciation 80.1 71.9 33.8
Amortization 38.5 30.1 12.5
Equity income (35.3)
Deferred income taxes (9.9) 1.4 (3.4)
Changes in operating assets and liabilities:
Receivables 9.1 28.1 25.2
Inventories .5 14.6 (1.5)
Accounts payable and accrued expenses (15.5) .3 5.1
Income taxes 12.1 18.4 (12.1)
Advance on accounts receivable 40.0
Other - net 23.9 6.6 (12.1)
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 366.0 353.2 110.6
INVESTING ACTIVITIES
- --------------------
Acquisitions (468.8) (277.0) (156.6)
Purchases of property, plant and equipment (152.0) (114.7) (36.3)
Proceeds from disposal of assets 1.8 4.7 1.7
- ------------------------------------------------------------------------------------------------
Net cash used for investing activities (619.0) (387.0) (191.2)
FINANCING ACTIVITIES
- --------------------
Net change in short-term debt 8.6 57.9 1.4
Issuance of long-term debt 550.0 336.4 336.2
Repayment of long-term debt (300.0) (337.9) (213.5)
Premiums paid on early retirement of debt (13.7)
Purchase of common stock for treasury (14.4) (7.9)
Stock option transactions 4.6 4.8 6.1
Dividends paid (14.7) (14.6) (14.1)
- ------------------------------------------------------------------------------------------------
Net cash provided by financing activities 248.5 32.2 94.5
Foreign currency rate changes (3.7) 1.3 (1.0)
- ------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (8.2) (.3) 12.9
Cash and cash equivalents at beginning of year 45.3 45.6 32.7
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 37.1 $ 45.3 $ 45.6
================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
-----------------------------------
(in millions) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C>
ASSETS
- ------
Current Assets
Cash and cash equivalents $ 37.1 $ 45.3
Receivables 238.0 240.0
Inventories 261.7 252.3
Deferred income taxes and prepaid expenses 67.2 60.8
Restricted Trust (a) 716.4
- ------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 604.0 1,314.8
Property, Plant and Equipment
Land 36.8 36.9
Buildings and improvements 365.0 311.2
Machinery and equipment 857.9 768.6
- ------------------------------------------------------------------------------------------------------------------------------
Total Property, Plant and Equipment 1,259.7 1,116.7
Less allowances for depreciation (504.7) (444.4)
- ------------------------------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 755.0 672.3
Other Assets
Costs in excess of net assets of businesses acquired, net 903.8 561.7
Patents and other intangible assets, net 104.7 128.3
Other noncurrent assets 114.5 132.8
- ------------------------------------------------------------------------------------------------------------------------------
Total Other Assets 1,123.0 822.8
- ------------------------------------------------------------------------------------------------------------------------------
Total Assets $2,482.0 $2,809.9
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Restricted Trust held a note receivable from Pechiney, S.A. and related
letters of credit that secured Pechiney, S.A.'s agreement to repay the
Pechiney Notes. Pechiney S.A. (Howmet's previous owner) paid the notes on
January 4, 1999, and the Restricted Trust was terminated (See Note 7).
See notes to consolidated financial statements.
42
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
---------------------------------
(in millions) 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Short-term debt $ 83.6 $ 80.1
Accounts payable 137.6 139.8
Accrued compensation 102.3 81.6
Other accrued expenses 216.9 202.1
Pechiney Notes (a) 716.4
- ----------------------------------------------------------------------------------------------------------
Total Current Liabilities 540.4 1,220.0
Noncurrent Liabilities
Accrued retiree benefits 174.1 169.0
Deferred income taxes 61.5 52.3
Accrued interest and other noncurrent liabilities 211.6 234.2
Long-term debt 601.3 324.5
- ----------------------------------------------------------------------------------------------------------
Total Noncurrent Liabilities 1,048.5 780.0
Commitments and contingent liabilities
Minority interest 77.0 142.0
Stockholders' Equity
Common stock (par value $1.00 per share)
Authorized - 200 shares
Issued - 41.1 shares at December 31, 1999 and 1998
(includes treasury shares) 41.1 41.1
Additional paid-in capital 48.0 47.4
Retained earnings 808.5 658.8
Accumulated other comprehensive income (loss) (10.0) (3.9)
- ----------------------------------------------------------------------------------------------------------
887.6 743.4
Less common stock in treasury, at cost (4.4 and 4.6 shares
at December 31, 1999 and 1998, respectively) (71.5) (75.5)
- ----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 816.1 667.9
- ----------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $2,482.0 $2,809.9
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Restricted Trust held a note receivable from Pechiney, S.A. and related
letters of credit that secured Pechiney, S.A.'s agreement to repay the
Pechiney Notes. Pechiney S.A. (Howmet's previous owner) paid the Notes on
January 4, 1999, and the Restricted Trust was terminated (See Note 7).
See notes to consolidated financial statements.
43
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Commonon Paid-In Retained Treasury Comprehensive Stockholders'
(in millions) Stock Capital Earnings Stock Income Equity
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $20.5 $44.3 $476.6 $(61.0) $480.4
- -------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income 89.5 89.5
Other comprehensive income
Cumulative translation adjustment $(3.5) (3.5)
--------------
Total comprehensive income 86.0
--------------
Dividends paid (14.1) (14.1)
Treasury stock purchases (7.9) (7.9)
Stock options exercised and related
income tax benefits 1.7 4.4 6.1
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 20.5 46.0 552.0 (64.5) (3.5) 550.5
- -------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income 142.0 142.0
Other comprehensive income
Minimum pension liability (3.1) (3.1)
Cumulative translation adjustment 2.7 2.7
--------------
Total comprehensive income 141.6
--------------
Dividends paid (14.6) (14.6)
Stock split 20.6 (20.6)
Treasury stock purchases (14.4) (14.4)
Stock options exercised and related
income tax benefits 1.4 3.4 4.8
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 41.1 47.4 658.8 (75.5) (3.9) 667.9
- -------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income 164.4 164.4
Other comprehensive income
Minimum pension liability 3.4 3.4
Unrealized gains on securities 1.2 1.2
Cumulative translation adjustment (10.7) (10.7)
--------------
Total comprehensive income 158.3
--------------
Dividends paid (14.7) (14.7)
Stock options exercised and related
income tax benefits .6 4.0 4.6
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $41.1 $48.0 $808.5 $(71.5) $(10.0) $816.1
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Name Change: On May 5, 1998, Thiokol Corporation changed its corporate name to
Cordant Technologies Inc. (the Company or Cordant). Two of the Company's three
business segments have retained their corporate names (Huck International, Inc.,
and Howmet International Inc.) and are operating as subsidiaries of the Company.
The Propulsion Group, now called Thiokol Propulsion, operates as a division of
the Company.
Fiscal Year Change: In 1998, the Company changed its financial reporting fiscal
year end from June 30 to December 31, beginning with the quarterly report for
the quarter ended September 30, 1998. All information in this report has been
prepared to conform to a calendar year-end presentation. Reclassifications were
made to the 1998 and 1997 financial statements to conform to the 1999 calendar
year-end presentation.
Basis of Consolidation: The consolidated financial statements include the
accounts of Cordant Technologies Inc. and its subsidiaries. The Company
increased its ownership in Howmet from 49 percent to 62 percent on December 2,
1997 and to 84.6 percent on February 8, 1999. Accordingly, beginning with
December 1997, Howmet's earnings, cash flows and balance sheet have been
consolidated with the Company's. Minority interest in income and equity are
also reported for the portion of Howmet the Company does not own. Prior to
December 2, 1997, Howmet's results were accounted for under the equity method.
All significant intercompany accounts and transactions have been eliminated from
the consolidated financial statements.
Use of Estimates: The consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the United States
which require management to make estimates and assumptions. Estimates of
contract costs and revenues, valuation accounts and reserves are utilized in the
earnings recognition process that affect reported amounts in the financial
statements and accompanying notes. Actual results may differ from those
estimates.
Revenue Recognition: Revenue is recorded when goods are shipped and title passes
to the customer or when services are performed in accordance with contract
terms.
Revenue Recognition Under Long-Term Contracts: Propulsion Systems sales
encompass products and services performed principally under contracts and
subcontracts with various United States Government (government) agencies and
aerospace prime contractors. Sales under cost-type contracts are recognized as
costs are incurred and include a portion of total estimated earnings to be
realized in the ratio that costs incurred relate to estimated total costs.
Sales under fixed-price-type contracts are recognized when deliveries are made
or upon completion of specified tasks. Cost or performance incentives are
incorporated into certain contracts and are recognized when awards are earned,
or when realization is reasonably assured and amounts can be estimated. The
Company participates in teaming arrangements and records its share of sales and
profits related to such ventures on the percentage of completion method.
Adjustments in estimates, which can affect both revenues and earnings, are made
in the period in which the information necessary to make the adjustment becomes
available. Provisions for estimated losses on contracts are recorded when
identified.
Cash and Cash Equivalents: Cash and cash equivalents represent cash and short-
term investments that are highly liquid maturing within three months.
Inventories: Inventories are stated at the lower of cost or market.
Inventories for the Investment Castings segment are determined by both the
first-in, first-out (FIFO) and last-in, first-out (LIFO) methods. Inventories
for the Fastening Systems segment are determined by the FIFO method. Propulsion
Systems segment inventories include estimated recoverable costs related to long-
term
45
<PAGE>
fixed price contracts, including direct production costs and allocable
indirect costs, less related progress payments received. In accordance with
industry practice, such costs include amounts that are not expected to be
realized within one year. The government may acquire title to, or a security
interest in, certain inventories as a result of progress payments made on
contracts and programs.
Property, Plant and Equipment: Property, plant and equipment is carried at cost
and depreciated over the assets' estimated useful lives, using either the
straight-line or accelerated methods. Building and improvements useful lives
vary between 10 and 40 years and other assets lives vary between 3 and 20 years.
Intangibles: Costs in excess of the net assets acquired (goodwill), patents,
and other intangible assets are being amortized on a straight-line basis over
periods between 10 and 40 years. Accumulated amortization amounted to $135.4
and $96.7 million at December 31, 1999 and 1998, respectively.
Impairment of Long-Lived Assets: The Company records impairment losses on
goodwill and on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than net book
value. The Company also evaluates the amortization periods of assets, including
goodwill and other intangible assets, to determine whether events or
circumstances warrant revised estimates of useful lives.
Contingent Matters: The Company accrues costs for contingent matters when it is
probable that a liability has been incurred and the amount can be reasonably
determined. At the time a liability is recognized, a receivable is recorded for
the estimated future recovery from third parties, insurance carriers, or from
the government. Costs allocated to commercial business or not otherwise
recoverable from third parties are expensed when the liability is recorded.
Except for current amounts receivable and payable, contingent amounts are
included in "other noncurrent assets" and in "accrued interest and other
noncurrent liabilities".
Foreign Currency Translation: The Company's international business units
generally conduct their business utilizing their local currency as the
functional currency. Assets and liabilities of the Company's foreign
subsidiaries are translated at year-end exchange rates. Revenues and expenses
are translated into U.S. dollars at average rates of exchange prevailing during
the period. Unrealized currency translation adjustments are deferred and
included in the equity section of the balance sheets, whereas transaction gains
and losses are recognized currently in the statements of income.
Derivative Financial Instruments: Derivative financial instruments are
utilized by the Company to reduce foreign currency risks in accordance with
Company policy approved by the Board of Directors. The Company does not hold or
issue derivative financial instruments for trading purposes. The Company enters
into foreign exchange contracts to minimize fluctuations in the value of
payments due international vendors and the value of foreign currency denominated
receipts. Forward foreign exchange contracts obligate the Company to exchange
predetermined amounts of specified foreign currencies at specified exchange
rates on specified dates or to make an equivalent U.S. dollar payment equal to
the value of such exchange. The Company enters into economic hedges used to
mitigate fluctuations of anticipated foreign currency commitments. The Company
also enters into forward foreign exchange contracts directly related to a
particular asset, liability or transaction for which a commitment or anticipated
commitment is in place.
In accordance with hedge accounting, gains and losses for specifically
identified assets, liabilities and firmly committed transactions are recognized
in income and offset the foreign exchange gains and losses when the underlying
transaction is settled. Unrealized changes in fair value of contracts no longer
effective as hedges are recognized in income at such time and marked to
46
<PAGE>
market. For economic hedges, forward foreign exchange contract market gains or
losses are reflected in the income statement.
Income Taxes: The provision for income taxes includes, in the current period,
the cumulative effect of any changes in tax rates from those used previously in
determining deferred tax assets and liabilities. Deferred tax assets and
liabilities are determined based on temporary differences between financial
reporting and tax basis of assets and liabilities.
New 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 No. 133 to fiscal years beginning after June 15, 2000. SFAS No.
133 establishes accounting and reporting standards for derivative instruments
and for hedging activities. This statement will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. Any
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company does not believe that SFAS No. 133 will
have a significant effect on the earnings and financial position of the Company.
The Company will adopt SFAS No. 133 beginning on January 1, 2001.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements. The effective
date of SAB 101 is the second fiscal quarter of the fiscal year ending after
December 15, 1999. This SAB clarifies proper methods of revenue recognition
given certain circumstances surrounding sales transactions. The Company
continues to evaluate the impact of SAB 101, but believes it is in compliance
with the provisions of the SAB and accordingly, does not expect SAB 101 to have
a material effect on its financial statements.
NOTE 2. RECEIVABLES
The components of receivables are as follows:
<TABLE>
<CAPTION>
December 31
--------------------------
(in millions) 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Trade receivables:
Trade accounts receivable $160.5 $159.0
Retained receivables 35.6 32.0
Allowance for doubtful accounts (6.0) (7.8)
- -----------------------------------------------------------------------------------------------
Total trade receivables 190.1 183.2
Receivables under U.S. Government contracts and subcontracts 47.9 56.8
$238.0 $240.0
- -----------------------------------------------------------------------------------------------
</TABLE>
Trade accounts receivable primarily relates to sales to well established
corporations, and historically, bad debt expense has been minor.
Receivables under U.S. Government contracts and subcontracts contain some
unbilled costs and accrued profits that consist primarily of revenues recognized
on contracts that have not been billed. Such amounts are billed based on
contract terms and delivery schedules. According to government contracting
industry standards, some receivables may not be billed within a year. Cost and
incentive-type contracts and subcontracts are subject to government audit and
review. It
47
<PAGE>
is anticipated that adjustments, if any, will not have a material
effect on the Company's results of operations or financial condition.
Cost management award fees totaling $153 million at December 31, 1999, have been
recognized on the Space Shuttle Reusable Solid Rocket Motor (RSRM) Buy 3
contract. Realization of such fees is reasonably assured based on actual and
anticipated contract cost performance. However, all cost management award fees
remain at risk until contract completion and final NASA review. The current
RSRM Buy 3 contract is expected to be completed in 2001. Unanticipated program
problems which erode cost management performance could cause some or all of the
recognized cost management award fees to be reversed and would be offset against
receivable amounts from the government or be directly reimbursed. Circumstances
which could erode cost management performance include, but are not limited to,
failure of a Company supplied component, performance problems with the RSRM
leading to a major redesign and/or requalification effort, manufacturing
problems including supplier problems which result in RSRM production
interruptions or delays, and major safety incidents.
Howmet has an agreement to sell, on a revolving basis, an undivided interest in
a defined pool of accounts receivable. The defined pool of outstanding accounts
receivable at December 31, 1999 and 1998, amounted to $90.6 and $87 million,
respectively. Howmet has received $55 million from the sale of such eligible
receivables to a master trust and has deducted this amount from accounts
receivable in the December 31, 1999 and 1998 consolidated balance sheets.
Losses on the sale of receivables were $3.3 and $3.8 million for the years ended
December 31, 1999 and 1998, respectively. These losses are included in the line
captioned "Other, net" in the statements of income. At December 31, 1999 and
1998, the $35.6 and $32 million difference between the total eligible pool and
the $55 million sold, represent retainage on the sale in the event the
receivables are not fully collected. Howmet has retained the responsibility for
servicing and collecting the accounts receivable sold or held in the master
trust. Any incremental additional costs related to such servicing and
collection efforts are not significant.
In 1999, the Company received a customer advance on future contracts of $40
million at Howmet. This advance will be applied against accounts receivable
beginning in June 2001. The advance is included in "Other accrued expenses" on
the balance sheet.
NOTE 3. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
December 31
---------------------------
(in millions) 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Work-in-process $104.0 $109.5
Raw materials and supplies 88.0 78.8
Finished goods 65.4 61.1
Inventoried costs related to U.S. Government and other long-term contracts 31.0 28.8
Progress payments received on long-term contracts (22.3) (22.6)
LIFO valuation adjustment (4.4) (3.3)
- ---------------------------------------------------------------------------------------------------------------
$261.7 $252.3
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1999 and 1998, inventories include $122.2 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.
48
<PAGE>
NOTE 4. HOWMET INTERNATIONAL INC. PURCHASE
On December 13, 1995, the Company and The Carlyle Group (Carlyle), a private
merchant bank, formed a jointly owned company, Howmet International Inc., to
acquire Howmet Corporation and the Cercast Group of companies, referred to
collectively in the financial statements as Howmet. Carlyle owned 51 percent
and Cordant owned 49 percent of the Howmet common stock. The Company's initial
equity investment in Howmet consisted of $96 million in Howmet voting common
stock, and $50 million in Howmet 9 percent paid-in-kind, non-voting, preferred
stock. As part of this purchase, Howmet received indemnifications from the
seller for liabilities over amounts reserved relating to environmental and
certain other obligations existing at the purchase date. The Company accounted
for its 49 percent minority voting common stock investment in Howmet using the
equity method.
On December 2, 1997, the Company increased its ownership in Howmet to 62 percent
by acquiring an additional 13 percent of Howmet common stock from Carlyle for
approximately $183.8 million. Simultaneously with this transaction, Carlyle
sold 15.35 million shares of Howmet common stock in an Initial Public Offering.
After the transactions, the Company, Carlyle, and the public owned approximately
62, 22.65 and 15.35 percent, respectively, of Howmet common stock. The Company
held a two-year option beginning in December 1999 to acquire all of Carlyle's
shares at market price. The Company or its affiliates have agreed not to acquire
publicly held Howmet common shares that would reduce public ownership below 14
percent, unless such purchase is a tender offer to acquire all outstanding
public shares.
Beginning in December 1997, Howmet's financial statements have been consolidated
with the Company's. Operating results for 1997 include eleven months of
Howmet's earnings reported under the equity method and one month of Howmet
earnings reported on a consolidated basis. Operating results for 1999 and 1998
include twelve months of Howmet's earnings on a consolidated basis.
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 accumulated dividends previously
accrued on the Company's share of Howmet income.
On November 12, 1999, the Company made a proposal to Howmet's board of directors
to acquire all of the outstanding shares of Howmet not currently owned by the
Company for a price of $17.00 per share in cash, or a total of approximately
$261 million. The Company requested that Howmet's board of directors refer the
proposal to Howmet's Committee of Independent Directors for its review and
consideration. Howmet's committee of independent directors has selected its own
financial and legal advisors. Discussions are ongoing between the Company and
Howmet's independent directors.
Additional detailed financial information on Howmet is available in Howmet's
Form 10-K for Howmet's fiscal year ended December 31, 1999.
The following pro forma information for the year ended December 1997 is not
necessarily indicative of the results which would have resulted had the
acquisition of additional shares in December 1997 occurred at the beginning of
1997 nor is it necessarily indicative of future results.
49
<PAGE>
<TABLE>
<CAPTION>
(In millions, except per share data)
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Net sales $2,217.7
Income before
Extraordinary item $ 89.4
Income per diluted share before
Extraordinary item $ 2.37
Net income $ 82.3
Net income per diluted share $ 2.18
- -------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 5. JACOBSON MANUFACTURING PURCHASE
On June 11, 1998, the Company completed the purchase of all the common stock of
Jacobson Manufacturing Company Inc. (Jacobson) for $273.6 million and assumed
$7.3 million in liabilities, and agreed to an election to treat the transaction
as an asset purchase. Jacobson was merged into Huck International, Inc., and is
operated as part of the Fastening Systems segment. Jacobson manufactures high-
quality, custom-designed metal parts and fasteners and precision-engineered
plastic products. The acquisition was financed with borrowings under an
unsecured bank line of credit. The goodwill associated with the purchase is
being amortized over 40 years using the straight-line method.
NOTE 6. CONTINENTAL/MIDLAND PURCHASE
On October 1, 1999, the Company acquired all of the outstanding stock of the
Continental/Midland group of companies (Continental/Midland) for $106 million,
including $22.2 million of assumed debt and other liabilities.
Continental/Midland and its affiliates are now wholly owned subsidiaries of Huck
International, Inc., and Continental/Midland's results of operations are
included in the consolidated results of the Company in the Fastening Systems
segment from the date of acquisition. Continental/Midland, based in Chicago,
Illinois, produces fasteners and fastener systems primarily for the automotive
industry. The acquisition was financed with borrowings under an unsecured bank
line of credit. The goodwill associated with this purchase will be amortized
over 40 years using the straight-line method. The Company expects to complete
the final purchase price allocation of Continental/Midland during the first
quarter of 2000. Continental/Midland's sales and operating income from October
1, 1999 through December 31, 1999 were approximately $21 and $2 million,
respectively.
NOTE 7. RESTRICTED TRUST AND RELATED PECHINEY NOTES PAYABLE
In 1988, Pechiney Corporation, which was a wholly-owned subsidiary of Pechiney,
S.A., issued indebtedness maturing in 1999 (Pechiney Notes) to third parties in
connection with the purchase of American National Can Company. As a result of
the acquisition of Howmet by the Company and Carlyle, Pechiney Corporation (now
named Howmet Holdings Corporation or Holdings), became a wholly-owned subsidiary
of Howmet. The Pechiney Notes remained at Holdings, but Pechiney, S.A., which
retained American National Can Company, agreed with Howmet to be responsible for
all payments due on or in connection with the Pechiney Notes. Accordingly,
Pechiney, S.A. issued its own note to Holdings in an amount sufficient to
satisfy all obligations under the Pechiney Notes. The Pechiney, S.A. note was
deposited in a trust (Restricted Trust) for the benefit of Holdings. Interest
income from the Restricted Trust for 1998 and 1997 was equal to interest
expense, and is netted in the consolidated statements of income for these years.
Pechiney S.A. paid the Notes in full on January 4, 1999. No Howmet or Cordant
funds were used in the payment of the Notes. As a result, the Restricted Trust
has been terminated and like the
50
<PAGE>
Pechiney Notes, subsequent to December 31, 1998, is no longer included on the
Company's balance sheet.
NOTE 8. FINANCING ARRANGEMENTS
Long term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31
----------------------------
(in millions) 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cordant Technologies 6.625% senior notes, due March 1, 2008 $150.0 $150.0
Cordant Technologies senior credit facilities 450.0 110.0
Howmet senior credit facility 60.0
Other 1.7 13.1
- -----------------------------------------------------------------------------------------------------------
601.7 333.1
Less current portion .4 8.6
- -----------------------------------------------------------------------------------------------------------
$601.3 $324.5
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The above table excludes the Pechiney Notes in the 1998 data (See Note 7).
On February 9, 2000 the Company terminated its senior bank credit facilities and
replaced them with a new $1 billion senior bank credit facility. The new
facility, will be used to refinance existing bank debt and for general corporate
purposes. The terms of the bank facility include guarantees from existing and
future material domestic subsidiaries for all obligations arising under the
facility. The credit facility matures in February 2001 ($400 million) and
February 2005 ($600 million). Approximately $475 million was drawn on the five-
year facility on February 9, 2000, leaving $525 million available for future
use. The Company has no other principal maturing in the next five years. The
interest rate on the new facility was 6.6 percent on February 9, 2000 and is
based on the London Interbank Offered Rate (LIBOR) plus a borrowing spread. The
new facility resulted in reclassifying $300 million of current portion of long-
term debt to long-term debt at December 31, 1999. The new credit agreement and
senior notes require the Company to meet certain interest coverage and leverage
ratios and also contain covenants restricting, among other things, the Company's
ability to incur funded debt, liens, sale and leaseback transactions, and the
sale of assets. The Company, excluding Howmet, at December 31, 1999, had $13.8
million in Letters of Credit outstanding.
On February 9, 2000, Howmet terminated its $300 million revolving credit
facility and replaced it with a $25 million revolving credit facility. On
December 31, 1999, Howmet had no borrowings under the old revolving credit
facility and had no borrowings under the new facility. The funds available
under the new revolving credit facility are available through May 9, 2000. The
interest rate on the new facility is based on LIBOR plus a borrowing spread.
Terms of the revolving credit facility require Howmet to meet certain interest
coverage and leverage ratios and maintain certain minimum net worth amounts. In
addition, there are restrictions that limit indebtedness, the sale of assets,
and payments for acquisitions or investments. At December 31, 1999, Howmet had
$9.6 million in Letters of Credit outstanding.
Cordant does not have access to Howmet cash balances except through Howmet
declaring a cash dividend to its shareholders, which availability may be
restricted under the terms of its new revolving credit facility. Howmet does
not currently intend to pay dividends.
Howmet also has an agreement to sell, on a revolving basis, an undivided
interest in a defined pool of accounts receivable (See Note 2).
51
<PAGE>
On January 6, 2000 the Company filed a Form S-3 with the Securities and Exchange
Commission (SEC) to sell from time to time up to $650 million in debt
securities, warrants, common stock and preferred stock.
Short-term debt consisted of borrowings with various domestic and foreign banks.
The weighted average interest rate on short-term debt outstanding was 4.86,
4.42, and 3.38 percent in 1999, 1998, and 1997, respectively. The Company paid
interest of $37, $22, and $7.2 million in 1999, 1998, and 1997, respectively.
The current portion of long-term debt is classified in "short-term debt" on the
balance sheet.
NOTE 9. INCOME TAXES
The provision for taxes on income before extraordinary item follows:
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Taxes:
Federal $ 79.5 $ 85.7 $37.2
Foreign 14.2 7.9 1.5
State 9.6 12.6 6.1
- -------------------------------------------------------------------------------------
103.3 106.2 44.8
Deferred Taxes:
Federal (7.6) (.5) (1.9)
Foreign (2.2) 2.7 (.9)
State (.1) (.8) (.6)
- -------------------------------------------------------------------------------------
(9.9) 1.4 (3.4)
- -------------------------------------------------------------------------------------
$ 93.4 $107.6 $41.4
- -------------------------------------------------------------------------------------
</TABLE>
A reconciliation of the United States statutory rate to the effective income tax
rate follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
Effect of:
State taxes, net of federal benefit 2.2 2.3 2.7
R&D and other credits (2.2) (1.9)
Tax refund (.2) (1.1)
Goodwill amortization 2.3 1.3 1.1
European restructuring (.8) (1.7)
Dividend received deduction (7.1)
Foreign Sales Corporation (1.2) (.5)
Unconsolidated subsidiary for tax purposes (2.5) 1.7
Other (.1) 1.2 (.4)
- ----------------------------------------------------------------------------------------------------
Effective rate 33.3% 37.2% 29.6%
- ----------------------------------------------------------------------------------------------------
</TABLE>
Domestic and foreign components of pre-tax income before minority interest and
extraordinary item are as follows:
<TABLE>
<CAPTION>
(in millions) 1999 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $221.7 $249.4 $135.1
Foreign 58.9 40.0 4.7
- ------------------------------------------------------------------------------------
$280.6 $289.4 $139.8
- ------------------------------------------------------------------------------------
</TABLE>
52
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred income taxes
are not provided on undistributed earnings of international subsidiaries since
the earnings are considered to be indefinitely reinvested. At December 31,
1999, these undistributed earnings were approximately $25 million. Upon
distribution of such earnings in the form of dividends or otherwise, the Company
would be subject to both U.S. income taxes and withholding taxes payable to the
various foreign countries. After taking into account available foreign tax
credits, the amount of such taxes is immaterial.
The components of deferred tax balances are as follows:
<TABLE>
<CAPTION>
December 31
--------------------------
(in millions) 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Provision for estimated expenses $ 73.6 $ 73.7
Tax credits 6.2 4.0
State and foreign net operating losses 7.3 16.4
Accrued retiree benefits other than pensions 76.9 79.2
Vacation and deferred compensation accruals 41.7 38.9
Pension liabilities 15.1 21.0
Other 1.9 5.8
- -------------------------------------------------------------------------------------------------
Gross deferred tax assets 222.7 239.0
Valuation allowance (10.5) (12.4)
- -------------------------------------------------------------------------------------------------
Total deferred tax assets 212.2 226.6
LIFO inventory (26.9) (25.6)
Recognition of income on contracts reported on different
methods for tax purposes than for financial reporting (59.8) (56.3)
Property, plant & equipment (98.3) (95.6)
Pension benefits (17.5) (19.2)
Patents and technology (15.4) (19.3)
Unconsolidated subsidiary for tax purposes (7.1)
Other (4.6) (8.0)
- -------------------------------------------------------------------------------------------------
Total deferred tax liabilities (222.5) (231.1)
- -------------------------------------------------------------------------------------------------
Net deferred tax liabilities $ (10.3) $ (4.5)
- -------------------------------------------------------------------------------------------------
Balance sheet classification:
Current assets $ 51.2 $ 47.8
Noncurrent liabilities (61.5) (52.3)
- -------------------------------------------------------------------------------------------------
Net deferred tax liabilities $ (10.3) $ (4.5)
- -------------------------------------------------------------------------------------------------
</TABLE>
The change in deferred tax liabilities for the current year includes a $7.1
million decrease from reversing accrued taxes on accumulated dividends. The
accrual was no longer required after the increase in Howmet ownership in
February of 1999.
At December 31, 1998, Howmet had foreign tax benefits of $2.5 million, which
were realized as 1999 cash receipts with no effect on income tax expense. At
December 31, 1998, Howmet had $30 million of state net operating loss
carryforwards. In 1999, $11.9 million of the state net operating loss
carryforwards expired. At December 31, 1999 and 1998, the Company and Howmet
combined had approximately $9 million and $27 million, respectively, of foreign
net operating loss carryforwards, which can only be used to offset foreign
taxable income. The majority of these carryforwards have no expiration date.
In 1999, Howmet utilized $18.1 million of
53
<PAGE>
state net operating loss carryforwards and $6.5 million of foreign net operating
loss carryforwards, resulting in a $5.1 million reduction in Howmet goodwill.
Utilization by Howmet of its remaining $4.7 million foreign net operating loss
carryforwards will result in an adjustment to goodwill.
The valuation allowance at December 31, 1999 and 1998 relates to the deferred
tax assets (net of liabilities) associated with state and foreign net operating
loss carryforwards and certain foreign tax credits. In 1999, the Howmet
valuation allowance was reduced as a result of the aforementioned utilization
and expiration of net operating loss carryforwards. No other valuation
allowances are provided because management believes future operations will
generate sufficient taxable income to realize all other deferred tax assets.
Total tax payments were $80.5, $89.1, and $54.9 million during 1999, 1998, and
1997, respectively.
During 1998, prior year adjustments, including the completion of an audit of a
partnership in which the Company participates, resulted in tax refunds of $3.2
million, which were applied to reduce 1998 income tax expense. In addition,
$4.8 million of interest income related to these adjustments was recognized.
In February 1999, the Company's ownership of Howmet International Inc. common
stock increased to 84.6 percent of Howmet's outstanding shares. As a result of
the increase in ownership, the Company and Howmet will file consolidated federal
income tax returns beginning in 1999. The consolidated tax liability of the
affiliated group, determined without taking credits into account, will be
allocated based on each company's contribution to consolidated federal taxable
income. All tax credits will be allocated on a pro rata basis equal to each
company's contribution to the consolidated tax credit determined to be available
each year.
During 1998, the Internal Revenue Service (IRS) completed its audit of the
Howmet federal income tax return for the year ended December 31, 1995, with no
material findings. The IRS has completed its audit of the Company's federal
income tax returns through the fiscal year ended June 30, 1995. The Company's
tax returns for the fiscal years ended June 30, 1996 and 1997 are presently
under audit. No material issues have been raised.
NOTE 10. STOCK SPLIT AND CHANGES IN COMMON STOCK SHARES
On January 22, 1998, the Company's Board of Directors declared a two-for-one
stock split in the form of a stock dividend payable March 13, 1998, for each
stockholder of record on February 27, 1998. A regular quarterly dividend of
$.10 per common share, reflecting the split, was also declared payable March 13,
1998, for each stockholder of record on February 27, 1998. The stock split
affected stockholders' equity in 1998 due to reclassifying the par value amount
of the common shares issued from retained earnings to common stock. In
addition, all references in the financial statements to number of shares, per
share amounts, stock option data, and market prices of the Company's common
stock were restated in 1998. The following table summarizes common stock
activity:
54
<PAGE>
<TABLE>
<CAPTION>
Common Treasury
(in millions of shares) Stock Stock
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1996 20.5 (2.3)
- ------------------------------------------------------------------------------------------------------------------------------
Stock option exercise and related tax benefits .2
Purchase of common stock for treasury (.1)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 20.5 (2.2)
- ------------------------------------------------------------------------------------------------------------------------------
Stock option exercise and related tax benefits .2
Stock split (dividend) 20.6 (2.2)
Purchase of common stock for treasury (.4)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 41.1 (4.6)
- ------------------------------------------------------------------------------------------------------------------------------
Stock option exercise and related tax benefits .2
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 41.1 (4.4)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 11. EARNINGS PER SHARE
The Company reports earnings per share in accordance with FASB No. 128,
"Earnings per Share". The following table sets forth the computation of basic
and diluted earnings per share:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------
(In millions, except per share data) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator
- ---------
Numerator for basic and diluted
earnings per share $164.4 $142.0 $96.6
- ---------------------------------------------------------------------------------------------------------------------------------
Denominator
- -----------
Denominator for basic earnings per
share - weighted-average shares 36.6 36.5 36.6
Effect of dilutive securities -
employee stock options .9 1.0 1.1
- ---------------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per
share - weighted-average shares
and assumed conversions 37.5 37.5 37.7
- ---------------------------------------------------------------------------------------------------------------------------------
Income per share before extraordinary item:
Basic $ 4.49 $ 3.89 $2.64
Diluted $ 4.39 $ 3.79 $2.57
Per share effect of extraordinary item:
Basic $(.19)
Diluted $(.19)
</TABLE>
NOTE 12. EXTRAORDINARY ITEM
During December 1997, Howmet refinanced the majority of its debt to take
advantage of favorable interest rates and to reduce restrictive covenants. As a
result of the refinancing, Howmet incurred pre-tax charges of $20.2 million,
including a $6.5 million non-cash charge for the write-off of unamortized debt
issuance costs. The income tax benefit associated with the debt refinancing was
$8.5 million. The extraordinary charge shown on the consolidated statements of
income has been reduced by $4.6 million related to minority interest. Howmet
repaid $146 million
55
<PAGE>
of debt at a 10 percent fixed interest rate and refinanced $198 million of debt
under a new revolving bank facility at a substantially lower variable rate.
NOTE 13. PREFERRED STOCK PURCHASE RIGHTS
On May 22, 1997, the Board of Directors adopted a new stockholder rights plan
and redeemed the stockholders' rights existing under the old plan. Under the new
plan, the Company declared a dividend distribution of one Preferred Share
Purchase Right for each outstanding common share. Each Right entitles its
holder to buy one one-hundredth of a share of a new series of the Company's
preferred stock at an exercise price of $120. The Rights will only become
exercisable if a person or group acquires or makes an offer to acquire 15
percent or more of the Company's common stock. If any person or group acquires
15 percent or more of the Company's common stock, each Right will entitle the
holder (other than such acquirer) to purchase common stock of the Company having
a market value of twice the exercise price of the Right. If the Company is
acquired in a merger or other business combination, after a person has acquired
15 percent or more of the Company's common stock, each Right will entitle the
holder to purchase common stock of the acquiring company having a market value
of twice the exercise price of the Right. The Rights may be redeemed by the
Company at the price of $.005 per Right prior to the acquisition of 15 percent
or more of the Company's common stock. The Rights expire on May 22, 2007.
56
<PAGE>
NOTE 14. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company has noncontributory defined benefit pension plans covering certain
employees. The Company also provides certain nonvested health care and life
insurance benefits to certain retirees and eligible dependents (other benefits).
The Company's pension and other benefit plans are summarized as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------------------------------------
(in millions) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C>
Change in projected benefit obligations:
Beginning projected benefit obligations $(845.6) $(714.6) $(269.6) $(249.5)
Service cost (30.2) (25.8) (8.1) (6.3)
Interest cost (56.0) (53.4) (17.7) (17.7)
Amendments (6.7) (11.6) (.9)
Actuarial gains/(losses) 72.8 (88.4) 7.7 (14.4)
Benefits paid 53.4 48.2 21.2 18.3
- -----------------------------------------------------------------------------------------------------------------------------
Ending projected benefit obligations $(812.3) $(845.6) $(267.4) $(269.6)
- -----------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Beginning fair value of plan assets $ 854.4 $ 837.6 $ 24.3 $ 21.5
Actual return on plan assets 124.6 47.3 3.5 1.9
Employer contributions 14.8 17.7 23.1 19.2
Benefits paid (53.4) (48.2) (21.2) (18.3)
- -----------------------------------------------------------------------------------------------------------------------------
Ending fair value of plan assets $ 940.4 $ 854.4 $ 29.7 $ 24.3
- -----------------------------------------------------------------------------------------------------------------------------
Reconciliation to balance sheet amounts:
Fair value of plan assets exceeds (less
than) projected benefit obligations $ 128.1 $ 8.8 $(237.7) $(245.3)
Unrecognized net (gain) loss (32.2) 77.4 53.1 66.3
Unrecognized prior service (gain) cost (11.5) (15.3) 4.3 4.0
Unrecognized net transition obligation (9.0) (12.2)
- -----------------------------------------------------------------------------------------------------------------------------
Net prepaid (accrual) recognized $ 75.4 $ 58.7 $(180.3) $(175.0)
- -----------------------------------------------------------------------------------------------------------------------------
Amounts recognized in the balance sheets:
Prepaid benefit costs $ 126.9 $ 109.9 $(180.3) $(175.0)
Accrued benefit liabilities (51.9) (52.4)
Additional minimum liability (12.5)
Intangible asset 8.5
Accumulated other comprehensive income .4 5.2
- -----------------------------------------------------------------------------------------------------------------------------
Net prepaid (accrual) recognized $ 75.4 $ 58.7 $(180.3) $(175.0)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Assets of the Company-sponsored plans are invested primarily in equities and
bonds. The pension plan assets benefited from an increase in the market value
of plan assets which resulted in a gain in 1999. The projected benefit
obligation realized an actuarial gain in 1999 resulting from increasing the
discount rate from 6.75 percent in 1998 to 7.5 percent in 1999. Certain pension
plans contain restrictions on using excess pension plan assets in the event of a
change in control of the Company.
57
<PAGE>
Included in the aggregated data in the above tables are amounts applicable to
the Company's pension plans with accumulated and projected benefit obligations
in excess of plan assets. Amounts related to such plans are as follows:
<TABLE>
<CAPTION>
(in millions) 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation $(83.0) $(149.5)
Accumulated benefit obligation (74.0) (139.1)
Fair value of plan assets $ 41.9 $ 105.4
- --------------------------------------------------------------------------------------------
</TABLE>
Assumptions used in determining net pension cost for all defined benefit pension
plans were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.5% 6.75% 7.5%
Average rate of increase in compensation 4.75 4.75 4.90
Expected long-term rate of return on assets 9.0 9.0 9.0
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Assumptions to measure the accumulated post-retirement obligation and cost for
all plans were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.5% 6.75% 7.5%
Before age 65 health care cost trend rate decreasing
to 6% by 2001 8.0 9.0 10.0
Average after age 65 health care cost trend rate 6.4 6.8 7.2
Expected long-term rate of return on assets 8.0 8.0 8.0
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The health care cost trend rate to be used in 2000 for before-age-65 benefits is
7 percent, while the after-age-65 benefits rate will be 6 percent.
A one-percentage-point change in assumed health care cost trend rates would have
the following effects:
<TABLE>
<CAPTION>
1 percentage 1 percentage
(in millions) point increase point decrease
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Effect on total of service and interest
cost components $ 1.0 $ (.8)
Effect on postretirement benefit obligation $15.9 $(13.4)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE>
The annual cost for all Company-sponsored defined benefit pension and other
postretirement benefit plans includes the following components:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------- ---------------------------------
(in millions) 1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 30.2 $ 25.8 $ 23.1 $ 8.1 $ 6.3 $ 6.4
Interest cost 56.0 53.4 50.5 17.7 17.7 16.5
Expected return on plan assets (72.5) (65.5) (60.5) (2.1) (1.7) (1.4)
Settlement gain (.7)
Amortization of:
Unrecognized net loss 2.4 2.7 2.0 3.9 3.2 2.5
Unrecognized prior service (gain) cost (1.3) (1.6) (2.5) .6 .6 .1
Unrecognized net (asset) obligation (3.2) (3.2) (3.2) .3
- -----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 11.6 $ 11.6 $ 8.7 $28.2 $26.1 $24.4
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Pension costs for financial statement purposes are calculated in conformity with
SFAS No. 87, "Employers' Accounting for Pensions." Pension costs charged to and
recovered through government contracts are calculated in accordance with
government cost accounting standards. Historically, the annual amount of
pension cost recovered through government contracts and included in sales has
exceeded the amount of pension cost included in the financial statements. As a
result, the Company has deferred $77.5 million and $60.3 million of revenues as
of December 31, 1999 and 1998, respectively, to provide a better matching of
revenues and expenses. This revenue will be recognized when the financial
statement pension cost exceeds amounts charged to contract pension cost. The
$77.5 million of deferred revenue is netted against the pension asset in "Other
noncurrent assets" in the balance sheet. The Company sponsors certain
supplemental plan arrangements to provide retirement benefits to specified
groups of participants. Contributions are included in a restricted trust which
is subject to the claims of the Company's creditors.
The Company has matching and nonmatching 401(k) savings plans for eligible
employees. Company contributions to the matching savings plans were $14.1,
$13.1, and $6.5 million in 1999, 1998, and 1997, respectively, and are based on
a limited percentage of participant contributions. The increase in
contributions from 1998 to 1997 was attributable to the addition of Howmet's
contributions for an entire year.
NOTE 15. CONTINGENT MATTERS
Starting in late 1998, Howmet discovered certain product testing and
specification non-compliance issues at the Montreal (Canada) and Bethlehem
(Pennsylvania) operations of its Howmet Aluminum subsidiaries (formerly called
Cercast). In 1999, Howmet discovered several additional instances of other
testing and specification non-compliance at its Hillsboro (Texas) aluminum
casting facility and at the Montreal and Bethlehem operations. Howmet has
notified customers and the appropriate government agencies and has substantially
completed correction of these issues. Howmet knows of no in-service problems
associated with any of these issues. In addition, during 1999 Howmet Aluminum
has been, and expects to continue for some time to be, late in delivery of
products to certain customers resulting in lower sales.
The Defense Criminal Investigative Service (the "DCIS") in conjunction with
other agents from the Department of Defense and NASA, has undertaken an
investigation with respect to certain of the foregoing matters at the Montreal
and Bethlehem facilities. The DCIS has informed Howmet that the investigation
concerns possible violations of the False Claims Act and the False Statements
Act, as well as possible criminal penalties. Howmet management is unable to
determine definitively what, if any, civil or criminal penalties might be
imposed as a result of the investigation.
59
<PAGE>
All customer claims relating to the foregoing matters have either been resolved,
or, in the Company's judgement, will be resolved within existing reserves.
The Company believes that additional costs for the foregoing matters beyond
amounts accrued, if any, would not have a material adverse effect on the
Company's financial position, cash flow, or annual operating results. However,
additional cost, when and if accrued, may have a material adverse impact on the
quarter in which it may be accrued.
On August 6, 1999, Howmet and Howmet Aluminum entered into an Administrative
Agreement with the U.S. Air Force terminating Notices of Proposed Debarment
issued on March 1, 1999 relating to certain of the foregoing matters. The
Administrative Agreement permits the affected facilities to resume accepting new
U.S. government contracts and subcontracts.
On November 12, 1999, the Company announced that it had made a proposal to
Howmet to purchase all of the outstanding shares of Howmet that the Company does
not already own for $17 per share in cash. Shortly thereafter, eight separate
but nearly identical lawsuits were filed in the Court of Chancery of Delaware
against the Company, Howmet and each member of the Howmet Board of Directors.
The plaintiffs are shareholders of Howmet who complain that the Company's offer
for their shares in Howmet is not for an adequate price. The plaintiffs request
the following relief: Certification as a class action with themselves designated
as Class Representatives; An order enjoining the Company, Howmet and its Board
of Directors from proceeding with the transaction; and money damages and the
costs of bringing the lawsuit.
On the motion of the defendants, the Court has consolidated the cases under the
style of "In Re Howmet International Shareholders Litigation" and directed that
the plaintiffs file an Amended Complaint reflecting the consolidation. The
Company is defending these actions and believe that any outcome will not result
in a materially adverse impact to the financial position of the Company.
The Company is also currently involved in a number of lawsuits and other
contingencies which are not expected individually or in the aggregate to have a
material adverse effect upon the Company's financial position. However,
depending on the amount and timing of an unfavorable resolution of these
contingencies, the Company's future results of operations may be materially
affected in a particular quarter.
NOTE 16. ENVIRONMENTAL MATTERS
The Company's Thiokol Propulsion division is involved with two Environmental
Protection Agency (EPA) superfund sites designated under the Comprehensive
Environmental Response, Compensation and Liability Act in Morris County, New
Jersey. These sites were operated about thirty years ago by the Company for
government contract work. The Company has not incurred any significant costs
relating to these environmental sites. The Company has signed a consent decree
with the EPA on the Rockaway Borough Well Field site and with the state of New
Jersey on the Rockaway Township Well Field site. At the Rockaway Borough site,
the Company's estimate for response costs, site remediation, and future
operation and maintenance costs is $2.9 million, of which approximately $.4
million is estimated to be incurred during 2000. At the Rockaway Township Well
Field site, the Company's estimate for response costs, site remediation, and
future operations and maintenance costs is $3.8 million, of which approximately
$1.9 million is estimated to be incurred during 2000.
Jacobson, acquired by Huck in June 1998, is involved in the Indian Bend Wash
(South Area) superfund site in Tempe, Arizona. Pursuant to the terms of a five-
year environmental indemnity contained in the Stock Purchase Agreement between
Huck and the previous owner, Huck is responsible for the first $2 million in
environmental liabilities, the previous owner is responsible for
60
<PAGE>
environmental liabilities from $2 to $6 million; Huck and the previous owner
share the expense of environmental liabilities equally in excess of $6 million
but less than $10 million. The estimated liability associated with Jacobson
environmental remediation is $.2 million.
The stock purchase agreement for the acquisition of the Continental/Midland
Group of companies between the Company and the sellers contains a four-year
environmental indemnity pursuant to which the Company is responsible for the
first $1 million in environmental indemnities; the sellers are responsible for
the next $2 million of environmental indemnities; and the Company and sellers
share equally the expense of environmental liabilities from $3 to $5 million.
In addition, the former owners of Continental/Midland's corporate headquarters
have indemnified Continental/Midland for certain environmental costs at that
site. The former owners are parties to a Consent Decree with the Illinois
Environmental Protection Agency (EPA) under which they are performing and paying
for the remediation of the site and some adjoining properties.
Continental/Midland, Inc. is a party to this Consent Decree but does not have
funding obligations.
The Company has recorded a $7 million liability for response costs, site
remediation, and future operation and maintenance costs for the above sites. In
addition to the above sites, the Company has ongoing involvement with
environmental issues at other locations, none of which are expected to have a
material impact on the financial position of the Company.
The Company's Propulsion and Fastening Systems segments' estimated liability for
all environmental remediation is $17.9 million, and is classified in "Other
accrued expenses" and "Accrued interest and other noncurrent liabilities." The
Company believes that any liability exceeding amounts recorded will not have a
material adverse effect on the Company's future results of operations or
financial position. The Company estimates it will spend approximately $3.7 and
$2.1 million of the total liability, respectively, over the next two years.
In connection with the Howmet acquisition, Pechiney, S.A. (Howmet's previous
owner) indemnified Howmet for environmental liabilities relating to Howmet and
stemming from events occurring or conditions existing on or prior to the
acquisition, to the extent that such liabilities exceed a cumulative $6 million.
It is probable that changes in any of the following accrued liabilities will
result in an equal change in the amount of the receivable from Pechiney, S.A.
pursuant to this indemnification. The Company believes that any Howmet
liability exceeding amounts recorded will not have a material adverse effect on
the Company's future results of operations or financial position.
Howmet has received test results indicating levels of polychlorinated biphenyls
("PCBs") at its Dover, N.J., plant that will require remediation. Various
remedies are possible and could involve expenditures ranging from $3 million to
$22 million or more. Howmet has recorded a $3 million long-term liability for
this matter. In addition to the remediation work required at the Company's
Dover, N.J., plant, liabilities exist for clean-up costs associated with
hazardous materials at seven other on-site and off-site waste disposal
facilities. Howmet has been, or may be, named a potentially responsible party
under the Comprehensive Environmental Response, Compensation and Liability Act,
or similar state laws at these locations. At December 31, 1999, and 1998, $4
and $4.2 million, respectively, of accrued environmental liabilities are
included in the consolidated balance sheet for these sites. The indemnification
discussed above applies to the costs associated with the Dover, N.J., plant and
the other locations.
In addition to the above environmental matters, and unrelated to Howmet
operations, Howmet and Pechiney, S.A. are jointly and severally liable for
environmental contamination and related costs associated with certain
discontinued mining operations owned and/or operated by a predecessor-in-
interest until the early 1960s. These liabilities include approximately $7
million in remediation and natural resource damage liabilities at the Blackbird
Mine site in Idaho and a minimum of $10 million in investigation and remediation
costs at the Holden Mine site in Washington. Pechiney, S.A. has agreed to
indemnify Howmet for such liabilities. In connection with these environmental
matters, Howmet has recorded in the December 31, 1999 balance
61
<PAGE>
sheets a $17 million liability which is classified in "Accrued interest and
other noncurrent liabilities," and an equal $17 million receivable from
Pechiney, S.A., which is classified in "Other noncurrent assets." At December
31, 1998, $26 million of liability and receivables were included in the balance
sheet for these issues. Pechiney, S.A. is currently funding all amounts related
to these liabilities.
NOTE 17. LEASE COMMITMENTS
The Company has operating leases that are principally short-term and primarily
for buildings, office space and other real estate. Rental expense was $27.3,
$24, and $15.1 million in 1999, 1998 and 1997, respectively. Renewal and
purchase options are available on certain of these leases. Future minimum
rental commitments under non-cancelable operating leases total approximately
$48.9 million with $17.1, $11, $6.9, and $4.8 million committed in 2000 through
2003 respectively, and a cumulative $9.1 million thereafter. Certain plant
facilities and equipment are provided for use by the government under short-term
or cancelable arrangements.
NOTE 18. STOCK OPTION AND PERFORMANCE UNIT PLANS
The Company's Stock Option Plans provide that grants of stock options, shares of
restricted stock, and other awards may be made to key Company employees and
those of its affiliates in which the Company has a direct or indirect equity
interest. Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average Per
Shares Share
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding at December 31, 1996 (1,567,658 exercisable shares) 2,401,858 $13.97
Granted 229,392 $39.61
Lapsed or forfeited (70,000) $19.30
Exercised (327,952) $13.03
- -------------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1997 (1,634,898 exercisable shares) 2,233,298 $16.58
Granted 310,756 $39.33
Lapsed or forfeited (40,168) $23.27
Exercised (221,708) $15.34
- -------------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1998 (1,683,422 exercisable shares) 2,282,178 $19.68
Granted 1,072,543 $33.67
Lapsed or forfeited (766) $40.06
Exercised (246,405) $12.59
- -------------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1999 (1,441,531 exercisable shares) 3,107,550 $25.06
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Options outstanding at December 31, 1999 have expiration dates ranging from June
2000 to December 2009. Limited appreciation rights were outstanding covering
98,300 option shares. Limited appreciation rights are paid automatically in
cash in lieu of other related options upon a change in control of the Company.
During 1995, 460,000 Cordant stock options were contingently granted to certain
Howmet employees. Such options were granted at $17.75 per share (380,000) and
$20.47 per share (80,000), the market price on the date of grant. At December
31, 1999, 360,000 options remained outstanding, net of lapses. These options
vest 50 percent on the date Cordant acquires 100 percent ownership of Howmet
prior to December 13, 2001, and vest in increments of 25 percent on the second
and third anniversary date of such acquisition. Such options expire ten years
from the date granted. Subsequent to the initial grant of those options, the
participants were granted rights under an alternative plan whereby if Cordant
does not acquire 100 percent of Howmet by December 13, 2001, each participant
will vest in an amount equal to the gain in such
62
<PAGE>
Cordant options on such date. Since vesting is assured under the alternative
plan, Howmet is recording compensation expense related to that plan over the
six-year vesting period ending December 13, 2001. During 1999, 1998 and 1997,
Howmet recorded $.1, $.6 and $2.9 million, respectively, of compensation expense
related to these options.
Shares of common stock reserved for both outstanding and future grants of
options and other stock-based awards at December 31, 1999 and 1998 were
3,515,231 and 3,761,636 shares, respectively.
In accordance with the provisions of SFAS No. 123, the Company has elected to
continue to account for stock-based compensation using the intrinsic value
method under APB Opinion No. 25 and, accordingly, does not recognize
compensation cost for options issued to employees at market value. The fair
value of options granted in 1999, 1998, and 1997 reported below has been
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected life 4 years 4 years 4 years
Risk-free interest rate 5.58% 5.18% 5.62%
Volatility .28 .30 .31
Dividend yield 1.20% 1.02% 1.02%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the use of
subjective assumptions, including the expected stock price volatility and are
not likely to be representative of the effects on reported net income for future
years. The weighted average estimated fair value of employee stock options
granted during 1999, 1998, and 1997 was $9.01, $10.61 and $9.75 per share,
respectively. If the Company had accounted for its stock option plan by
recording compensation expense based on the fair value at the grant date on a
straight line-basis over the vesting period, the pro-forma amounts of the
Company's net income and earning per share are as follows:
63
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------
(in millions, except for share data) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income - as reported $164.4 $142.0 $89.5
Net Income - pro forma 158.5 138.5 88.1
Basic income per share - as reported $ 4.49 $ 3.89 $2.45
Basic income per share - pro forma 4.34 3.79 2.41
Diluted income per share - as reported 4.39 3.79 2.38
Diluted income per share - pro forma 4.24 3.69 2.34
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Information regarding stock options outstanding and exercisable as of December
31, 1999, is as follows:
<TABLE>
<CAPTION>
Price Range
- ----------------------------------------------------------------------------------------------------------------------------
$5.84 $17.19 $23.09 $36.13
to $13.06 to $20.47 to $30.53 to $46.97
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options Outstanding:
Number 681,217 870,392 644,775 911,166
Weighted average exercise price $ 10.68 $ 18.20 $ 30.27 $ 38.69
Weighted average remaining contractual life 3.5 years 6.1 years 9.8 years 8.7 years
Options Exercisable:
Number 681,217 510,392 22,550 227,372
Weighted average exercise price $ 10.68 $ 18.30 $ 23.84 $ 39.76
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Howmet Options
Howmet established a stock awards plan in 1997, to provide stock options, shares
of restricted stock and Stock Appreciation Rights (SARs) to key Howmet
employees. Howmet's plan may grant up to 5 million shares of Howmet common
stock to employees and has reserved 5 million common shares for the plan. In
December 1997, 4,377,500 options were granted with a $15.00 exercise price.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average Per
Shares Share
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding at December 31, 1997 (no exercisable shares) 4,377,500 $15.00
Granted 98,000 $14.42
Lapsed or forfeited (162,500) $15.00
Exercised
- --------------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1998 (no exercisable shares) 4,313,000 $14.98
- --------------------------------------------------------------------------------------------------------------------------
Granted 82,500 $15.32
Lapsed or forfeited (75,875) $15.00
Exercised (18,375) $14.43
- --------------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1999 (1,051,875 exercisable shares) 4,301,250 $15.00
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Howmet options granted in December 1997 will vest and become exercisable in
25 percent increments on January 1 of each year beginning in 1999. The options
outstanding at December 31, 1999 have exercise prices ranging from $12.22 to
$18.19 and a weighted average remaining
64
<PAGE>
contractual life of six years. Options outstanding at December 31, 1999 have
expiration dates ranging from December 2005 to October 2007.
Howmet SARs
Certain key Howmet employees participate in a SARs plan. The maximum per share
value of the outstanding SARs is limited to the difference between $15 and the
base price per share (generally $2). The SARs vest over a five-year period
ending 2001 based upon passage of time and the operating performance of the
Company. The expense is adjusted quarterly based on the market value of the
stock and vesting. At December 31, 1999 and 1998 there were approximately 4.3
million SARs outstanding. Howmet recorded $6.3, $10.8 and $31.4 million of
expense related to the plan for the years ended December 31, 1999, 1998 and 1997
respectively. At December 31, 1999 and 1998, $49.8 and $43.5 million,
respectively, was included in the amount captioned "Accrued interest and other
noncurrent liabilities" in the consolidated balance sheet.
NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used in estimating fair values:
Cash and cash equivalents: The carrying amount approximates fair value.
Receivables: The fair value of receivables approximates the carrying amount.
The fair value of certain receivables, due to the collection of those
receivables over an extended period, is based on the discounted value of
expected future cash flows. Any such discounted amount from the carrying value
is insignificant.
Short-term and long-term debt: The carrying value of short-term debt
approximates fair value. The fair value of the 6.625 percent senior notes are
estimated based on current market value and at December 31, 1999 was $134.5
million. The fair value of the senior credit facility is estimated based on the
current borrowing rates and approximates the carrying amount.
Off-balance-sheet instruments: The Company enters into forward exchange
contracts as a hedge against currency fluctuations of certain foreign currency
transactions. At December 31, 1999, the Company had contracts to buy and sell
various currencies with maturity dates ranging from January 2000 through
December 2000. The total notional contract value of these transactions in U.S.
dollars was $70.5 million. The fair value of the contracts is $.1 million of
unrecognized gain as of December 31, 1999. The fair value of these contracts
was estimated based on December 31, 1999 foreign exchange rates obtained from
dealers. Gains or losses arising from foreign exchange contracts offset foreign
exchange gains or losses on underlying hedged commitments. The impact on the
financial position and results of operations from likely changes in foreign
exchange rates is mitigated by minimizing risk through hedging transactions
related to such commitments.
The Company enters into forward exchange contracts with major dealers and does
not require collateral. If a counterparty was not able to completely fulfill
its contract obligations, the Company may incur a loss equal to the amount of
any gain on the contract.
NOTE 20. OPERATIONS BY INDUSTRY SEGMENT
The Company has three reportable segments: Propulsion Systems, Fastening
Systems, and Investment Castings. The Company's reportable segments manufacture
and distribute distinct products with different production processes.
The Propulsion Systems segment consists of solid rocket propulsion for NASA, the
Department of Defense, and various commercial customers for space applications,
as well as, gas generator and ordnance products, metal and composite components,
and services relating to such systems.
65
<PAGE>
The Fastening Systems segment consists of specialty fastening systems for a
broad range of aerospace and industrial applications worldwide.
The Investment Castings segment provides products worldwide for the commercial
and defense aerospace markets and industrial gas turbine (IGT) markets.
The Company evaluates performance and allocates resources based on operating
income, which is pre-tax income before interest income and expense, and excludes
any equity income and other non-operating expenses. The accounting policies of
the reportable segments are the same as those described in the summary of
significant accounting policies. In accordance with industry practice, a
proportionate share of Corporate general and administrative expense is allocated
and reimbursed through Propulsion Systems contracts. Intersegment sales and
transfers are not significant.
66
<PAGE>
The following table summarizes segment information:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------
(in millions) 1999 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales
Investment Castings(1) $1,459.7 $1,350.6 $ 105.2
Propulsion Systems 588.0 643.0 645.5
Fastening Systems 465.2 433.3 319.4
- ---------------------------------------------------------------------------
Consolidated net sales $2,512.9 $2,426.9 $1,070.1
- ---------------------------------------------------------------------------
Segment operating income
Investment Castings(1) $ 204.7 $ 185.8 $ 11.7
Propulsion Systems 87.9 82.1 64.4
Fastening Systems(2) 52.8 65.2 40.4
- ---------------------------------------------------------------------------
Segment operating income 345.4 333.1 116.5
Unallocated corporate expense (25.8) (24.4) (12.8)
Equity income 35.3
Interest income 7.4 12.8 7.0
Interest expense (42.9) (28.3) (4.0)
Other, net (3.5) (3.8) (2.2)
- ---------------------------------------------------------------------------
Consolidated income before income taxes
minority interest,
and extraordinary item $ 280.6 $ 289.4 $ 139.8
===========================================================================
Total assets
Investment Castings(1)(3) $1,540.7 $1,228.0 $1,168.2
Propulsion Systems 278.6 292.9 327.0
Fastening Systems 596.8 504.3 239.3
Corporate 65.9 68.3 48.9
- ---------------------------------------------------------------------------
Consolidated assets $2,482.0 $2,093.5 $1,783.4
===========================================================================
Depreciation and amortization expense
Investment Castings(1) $ 77.6 $ 64.1 $ 6.6
Propulsion Systems 17.5 21.5 27.4
Fastening Systems 22.6 15.7 11.8
Corporate .9 .7 .5
- ---------------------------------------------------------------------------
Consolidated depreciation and
amortization expense $ 118.6 $ 102.0 $ 46.3
===========================================================================
Capital expenditures
Investment Castings(1) $ 112.9 $ 83.0 $ 15.2
Propulsion Systems 17.4 13.3 9.1
Fastening Systems 21.3 13.4 11.6
Corporate .4 5.0 .4
- ---------------------------------------------------------------------------
Consolidated capital expenditures $ 152.0 $ 114.7 $ 36.3
===========================================================================
</TABLE>
(1) Consolidation of Investment Castings started in December 1997.
(2) Fastening Systems income included relocation charges of $8 and $3 million in
1999 and 1998, respectively.
(3) Excludes the Restricted Trust in 1998 and 1997 (See Note 7).
Corporate assets consist principally of cash and cash equivalents, property,
plant, and equipment, and other noncurrent assets.
67
<PAGE>
Consolidated revenues from external customers are from the following products
and markets:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------
(in millions) 1999 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales by markets and major
product lines:
Aerospace castings market $ 733.7 $ 802.5 $ 64.3
Industrial gas turbine castings
market 677.4 476.1 35.4
RSRM 387.5 410.6 395.5
Industrial fastener market 328.2 237.8 148.6
Other propulsion 200.5 232.4 250.0
Aerospace fastener market 137.0 195.5 170.8
Other castings market 48.6 72.0 5.5
- ---------------------------------------------------------------------------
Consolidated net sales $2,512.9 $2,426.9 $1,070.1
- ---------------------------------------------------------------------------
</TABLE>
Net sales under U.S. government contracts and subcontracts, primarily by the
Propulsion and Investment Castings segments, amounted to $702.4, $730.6 and
$576.5 million for 1999, 1998 and 1997, respectively. The sales as a percentage
of consolidated net sales were 28, 30, and 54 percent for 1999, 1998 and 1997,
respectively.
Investment Castings had sales to one customer in 1999 of $357 million or 14
percent of the Company's consolidated total, and in 1998, $251 million or 10
percent of the Company's consolidated total. Propulsion Systems sales on the
Space Shuttle Reusable Solid Rocket Motor (RSRM) in 1999, 1998, and 1997,
represented 15, 17, and 37 percent, of the consolidated total, respectively.
The RSRM program is under contract with NASA.
NOTE 21. GEOGRAPHIC INFORMATION
The Company is a multinational entity with operating subsidiaries in four
geographic regions: United States, Europe (including France and the United
Kingdom), Canada, and Asia (including Japan and Australia). Intercompany
transfers between geographic areas are not significant. Allocated long lived
assets in 1998 and 1997 exclude the $716.4 million Restricted Trust (See Note
7. Restricted Trust and Related Pechiney Notes Payable).
68
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------
(in millions) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales
United States $1,767.7 $1,766.3 $ 944.1
Europe 526.4 481.0 79.3
Asia 113.2 83.8 25.5
Canada 105.6 95.8 21.2
- ----------------------------------------------------------------------------------------------------------------------------
Consolidated net sales $2,512.9 $2,426.9 $1,070.1
- ----------------------------------------------------------------------------------------------------------------------------
Long lived Assets
United States $1,659.2 $1,318.1 $1,063.9
Europe 149.1 120.2 119.5
Asia 28.7 19.1 .6
Canada 41.0 37.7 27.4
- ----------------------------------------------------------------------------------------------------------------------------
Consolidated long lived assets $1,878.0 $1,495.1 $1,211.4
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 22. QUARTERLY FINANCIAL HIGHLIGHTS (Unaudited)
<TABLE>
<CAPTION>
Calendar Year 1999
Three Months Ended
---------------------------------------------------------------------
(in millions, except per share data) Dec. 31 Sept. 30 June 30 March 31
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $634.3 $602.6 $641.9 $634.1
Operating income (1)(2) 70.0 87.1 78.7 83.8
Net income (3) 36.6 42.1 38.5 47.2
Net income per share .98 1.12 1.03 1.26
Cash dividends paid per share .10 .10 .10 .10
Market price
High 32.94 49.00 52.38 42.88
Low 25.50 30.00 39.56 30.13
- --------------------------------------------------------------------------------------------------------------------------------
Calendar Year 1998
Three Months Ended
-------------------------------------------------------------------------
(in millions, except per share data) Dec. 31 (3) Sept. 30 June 30 March 31
- --------------------------------------------------------------------------------------------------------------------------------
Net sales $640.5 $595.1 $628.6 $562.7
Operating income (4) 64.5 90.8 81.8 71.6
Net income 29.6 38.5 41.1 32.8
Net income per share(5) .80 1.03 1.09 .87
Cash dividends paid per share (5) .10 .10 .10 .10
Market price (5)
High 44.63 48.38 55.75 50.13
Low 31.38 35.63 44.50 39.53
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Operating income in the first quarter included $2.6 million of SARs benefit
due to Howmet common stock price fluctuation. This amount was reversed in
the second quarter.
69
<PAGE>
(2) Operating income in the third quarter included $3.8 million of SARs benefit
and a $2.9 million stock based incentive benefit due to Howmet and Cordant
Technologies common stock price fluctuations. In the fourth quarter all of
the SARs benefit was reversed and $.8 million of the stock based incentive
benefit was reversed.
(3) Net income in the fourth quarter benefited $5.6 million from a two-percent
retroactive tax rate reduction.
(4) Operating income in the third quarter included $11 million of SARs benefit.
This amount was reversed in the fourth quarter due to Howmet common stock
price fluctuation.
(5) All per share data has been adjusted for the two for one stock split that
was paid on March 13, 1998.
NOTE 23. OTHER COMPREHENSIVE INCOME
Items listed under the heading "Other comprehensive income" in the statements of
stockholders' equity were shown net of income taxes. Taxes related to the
changes in accumulated other comprehensive income were as follows:
<TABLE>
<CAPTION>
(In millions) 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum pension liability $(2.0) $ 2.1
Unrealized gains on securities (.8)
- -------------------------------------------------------------------------------------------
Total tax (expense)/benefit $(2.8) $ 2.1
- -------------------------------------------------------------------------------------------
</TABLE>
The accumulated balances for each item in other comprehensive income is as
follows:
<TABLE>
<CAPTION>
(In millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum pension liability $ .3 $(3.1)
Unrealized gains on securities 1.2
Cumulative translation adjustment (11.5) (.8) $(3.5)
- --------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) $(10.0) $(3.9) $(3.5)
- --------------------------------------------------------------------------------------------
</TABLE>
The increased loss in the cumulative translation adjustment resulted primarily
from a strengthening of the United States dollar against the French Franc.
NOTE 24. OTHER INVESTMENTS
The Company has investments in equities and fixed income securities for deferred
compensation plans. These assets are classified as "Other noncurrent assets" on
the balance sheet. Fair market value is determined by quoted market prices and
are carried on the balance sheet at market value. Information concerning these
investments at December 31, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
(In millions) 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fair market value $29.5 $26.5
Unrealized gains on securities 2.0 1.4
Cost of equities 14.5 11.7
Cost of fixed income securities $13.0 $13.4
- ---------------------------------------------------------------------------------------------------------
</TABLE>
70
<PAGE>
NOTE 25. SUBSEQUENT EVENT (UNAUDITED)
On March 14, 2000, the Company entered into a merger agreement with Alcoa Inc.
and a wholly owned subsidiary of Alcoa (the "Purchaser"). Pursuant to the
merger agreement, on March 20, 2000, the Purchaser commenced a tender offer for
all of the outstanding shares of the Company's Common Stock at a purchase price
of $57.00 per share. The Merger Agreement provides that following completion of
the tender offer, the Purchaser will be merged with and into the Company, and at
the effective time of the merger (the "Effective Time") each share of Company
Common Stock outstanding (other than Shares owned by Alcoa, the Purchaser, any
of their respective subsidiaries, the Company or any of its subsidiaries, and
shares held by stockholders, if any, who did not vote in favor of the Merger
Agreement and who comply with all of the relevant provisions of Section 262 of
the Delaware General Corporation Law relating to dissenters' rights of
appraisal) will be converted into the right to receive $57.00 in cash or any
greater amount per share paid pursuant to the Offer. In connection with the
approval of the merger agreement, the Company amended its rights agreement
described in note 13 above to provide that neither Alcoa nor Purchaser will be
deemed to have acquired 15% of the Company's common stock as a result of the
execution, delivery or performance of the merger agreement or the announcement,
making or consummation of the tender offer.
As described above in Note 4, on November 12, 1999, the Company made a proposal
to Howmet's board of directors to acquire all of the outstanding shares of
Howmet not currently owned by the Company for a price of $17.00 per share in
cash. On March 10, 2000, the Company informed the Committee that it was willing
to increase its offer to $18.75 per share, or a total of approximately $288
million, but following further discussions no agreement was reached. Alcoa has
advised the Company and Howmet that it intends to enter into discussions with
the Independent Committee of Howmet's Board of Directors to pursue the
acquisition of the outstanding publicly-held shares of Howmet's stock.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
71
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the executive officers of the Company as of
December 31, 1999:
<TABLE>
<CAPTION>
Name and Age Positions Held and Terms of Office During Past Five years
- ------------------------------------------------------------------------------------------
<C> <S>
James R. Wilson (58) Chairman of the Board, President and Chief Executive
Officer since October 1995; President and Chief
Executive Officer (October 1993-95); director since
October 1993.
Richard L. Corbin (53) Executive Vice President and Chief Financial Officer
since October 1998; Senior Vice President and Chief
Financial Officer (May 1994 - October 1998).
James E. McNulty (55) Executive Vice President Human Resources and
Administration since 1992.
Robert L. Crippen (62) Vice President and President of
Thiokol Propulsion since December 1996; Vice
President of Training Simulator Systems, Lockheed
Martin, an aerospace defense and contractor (April
1995-October 1996); Director of John F. Kennedy
Space Center, (1992-January 1995).
Bruce M. Zorich (45) Vice President and President of Huck International,
Inc. since April 1996; Vice President, Worldwide
Automotive Operations, (1993-1996); Vice President
and General Manager, OEM Products, Senior Flexonics,
a diversified manufacturing company (1989-1993).
Daniel S. Hapke, Jr. (53) Senior Vice President and General Counsel since
October 1997; Vice President and General Counsel
since February 1997; Various positions at General
Dynamics Corporation, a defense contractor (1984-
1997), including Vice President and General Counsel
of its Electric Boat subsidiary (1994-1997).
Michael R. Ayers (49) Vice President and Controller since January 1996;
Vice President Strategic Development (1994-1996);
Director Finance and Administration Space Operations
(1986-1994).
Nicholas J. Iuanow (40). Vice President and Treasurer since October 1997;
Treasurer (1994-October 1997).
Edwin M. North (54) Vice President and Corporate Secretary since October
1997; Secretary since 1990.
</TABLE>
72
<PAGE>
The directors of the Company as of December 31,1999 are as follows:
Michael P.C. Carns, age 62, was elected a director of the Company in January
1995. General Carns is a director of Mission Research Corporation, and is a
member of the Board of Trustees of the Monterey Institute of International
Studies. General Carns retired as Vice Chief of Staff of the United States Air
Force in 1994 with 36 years of distinguished military service. He holds a
Bachelor of Science degree from the United States Air Force Academy and a
Masters of Business Administration from Harvard University.
Steven G. Lamb, age 43, was elected a director of the Company in August 1998. He
is the President and Chief Operating Officer of CNH Global N.V., a manufacturer
of farm and construction equipment created from the merger of Case Corporation
and New Holland N.V., a position held since 1999. Joining Case in 1993, he
served in various executive positions including President and Chief Operating
Officer. Mr. Lamb holds a Bachelor of Science degree from the United States
Military Academy and a Masters of Business Administration from Harvard
University.
David J. Lesar, age 46, was elected a director of the Company in August 1998. He
is the President and Chief Operating Officer of Halliburton Company, a global
energy, engineering and services company, a position held since 1997. Joining
Halliburton in 1993, he held various executive positions including Executive
Vice President and Chief Financial Officer. Prior to joining Halliburton, Mr.
Lesar was a Partner with Arthur Andersen LLP. Mr. Lesar is also a director of
the Southern Company. Mr. Lesar holds a Bachelors of Science degree and Masters
of Business Administration from the University of Wisconsin.
D. Larry Moore, age 63, was elected a director of the Company in June 1997. He
is the retired President and Chief Operating Officer of Honeywell, Inc., an
electronic automation and control systems manufacturer, a position held from
April 1993 to June 1997. Dr. Moore is a director of Geon Company, Howmet
International Inc., and Reynolds Metals Company. Dr. Moore holds a Doctorate in
Economics from Arizona State University and Bachelor of Science degree and
Masters of Business Administration from the University of Arizona.
Neil A. Armstrong, age 69, became a director of the Company in October 1989. He
serves as Chairman of AIL Systems, Inc., an electronics and systems company with
sales primarily to the federal government. He is a director of Cinergy, Inc.,
Milacron Inc., RTI International Metals, Inc., and USX Corporation. He holds a
Bachelor of Science degree in Aeronautical Engineering from Purdue University
and a Master of Science degree in Aerospace Engineering from the University of
Southern California.
William O. Studeman, age 60, was elected a director of the Company in January
1996. Admiral Studeman is the Vice President and Deputy Group General Manager
for Intelligence & Information Superiority, TRW Systems and Information
Technology Group of TRW Inc., an automotive, space, defense and information
technologies company, and a director of Paracel Corporation. Admiral Studeman
retired from the Navy in 1995 after a distinguished 33-year career that included
serving as Deputy Director of Central Intelligence. He holds a Bachelor of Arts
degree from the University of the South and a Masters of Arts from George
Washington University.
Donald C. Trauscht, age 66, was elected a director of the Company in August
1993. Since 1996 he has served as Chairman of BW Capital Corporation, a private
investment company. From 1991 to 1995 he served as Chairman and Chief Executive
Officer of Borg Warner Corporation (and its successor Company), a diversified
manufacturing and service company. He is a director of Blue Bird Corporation,
Burns International Services Corporation, ESCO Electronics Corporation, Wynn's
International Inc., Global Motorsports Inc., and Hydac International
73
<PAGE>
Corporation. Mr. Trauscht holds a Bachelor of Science degree from St. Mary's
University and a Master of Business Administration and the University of
Chicago.
Edsel D. Dunford, age 64, was elected a director of the Company in January 1995.
He served as President and Chief Operating Officer of TRW Inc., a manufacturer
of automotive, space, defense and information technology, from 1991 until his
retirement in December 1994. Mr. Dunford is a director of Cooper Tire & Rubber
Company, Howmet International Inc., and National Steel Corporation, and is a
trustee of the Foundation of the University of California at Los Angeles. Mr.
Dunford holds a Bachelor of Science degree from the University of Washington and
a Masters of Engineering degree from the University of California at Los
Angeles.
Robert H. Jenkins, age 57, was elected a director of the Company in October
1998. He is the retired Chairman of the Board, President and Chief Executive
Officer of Sundstrand Corporation, a position held from 1997 to July 1999. From
1995 to 1997 he was the President and Chief Executive Officer of Sundstrand.
Sundstrand, which merged into United Technologies Company in 1999, designed and
manufactured proprietary technology-based components and subsystems serving
world industrial and aerospace markets. He is a director of AK Steel Holding
Corporation, CLARCOR, Inc., Pella Corporation, Sentry Insurance and Solutia,
Inc. Mr. Jenkins holds a Bachelor of Science degree from the University of
Wisconsin.
James R. Wilson, age 59, has served as Chairman of the Board, President and
Chief Executive Officer of the Company since October 1995, and served as
President and Chief Executive Officer from October 1993 to October 1995. He has
served as a director of the Company since October 1993. Mr. Wilson is a director
of The BFGoodrich Company, Cooper Industries, Inc., First Security Corporation
and Howmet International Inc., and is a member of the Board of Trustees of the
College of Wooster. He holds a Bachelors degree from the College of Wooster and
a Masters of Business Administration from Harvard University.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
Compensation of Executive Officers
The Summary Compensation Table sets forth the compensation for both long-
term and short-term, for services in all capacities earned by those individuals
who were as of December 31, 1999, (i) the Chief Executive Officer and (ii) the
other four most highly compensated Executive Officers of the Company. The
Summary Compensation Table also sets forth the compensation for the six-month
transition period July 1 to December 31, 1998 (1998T) reflecting the change in
the Company's fiscal year-end and for the fiscal years ended June 30, 1998 and
1997.
74
<PAGE>
Summary Compensation Table/(1)/
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
- -----------------------------------------------------------------------------------------------------------------------------------
Awards Payouts
- -----------------------------------------------------------------------------------------------------------------------------------
Securities
Name and Year Salary Bonus/(2)/ Other Annual Underlying LTIP All Other
Principal Position Compensation/(3)/ Options/ SARs # Payouts/(4)/ Compensation/(5)/
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
James R. Wilson
Chairman of the Board, 1999 $735,000 $1,029,000 $ 0 330,450 $1,000,000 $49,100
President and Chief Executive 1998T 350,000 490,000 0 50,000 0 0
Officer 1998 575,000 792,750 0 40,000 425,000 4,525
1997 540,000 583,000 0 70,000 850,000 4,800
- ---------------------------------------------------------------------------------------------------------------------------------
Richard L. Corbin
Executive Vice President 1999 331,000 331,000 0 99,272 360,000 19,860
and Chief Financial Officer 1998T 157,500 157,500 0 16,100 0 1,494
1998 255,000 250,000 0 8,000 168,000 4,006
1997 235,000 209,250 0 15,000 336,000 4,650
- ---------------------------------------------------------------------------------------------------------------------------------
Robert L. Crippen
Vice President, President 1999 315,000 315,000 0 51,550 393,986 18,900
Thiokol Propulsion 1998T 150,000 148,500 0 16,100 0 2,100
1998 290,000 286,260 0 8,000 0 6,002
1997 160,417 150,000 0 19,000 0 423
- ---------------------------------------------------------------------------------------------------------------------------------
James E. McNulty
Executive Vice 1999 315,000 315,000 0 94,500 331,200 18,663
President Human 1998T 150,000 150,000 0 16,100 0 1,250
Resources and 1998 250,000 243,750 190,234 8,000 146,300 5,875
Administration 1997 225,000 198,450 324,884 15,000 274,000 4,770
- ---------------------------------------------------------------------------------------------------------------------------------
Bruce M. Zorich
Vice President 1999 289,000 144,500 0 86,725 320,000 17,340
President, Huck International, 1998T 137,500 137,500 0 16,100 0 3,363
Inc. 1998 255,962 215,000 0 8,000 0 0
1997 199,487 180,000 0 6,000 0 0
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) During 1998, the Company changed its fiscal year-end from June 30 to
December 31. Executive compensation for the six-month transition period
July 1 to December 31, 1998 is shown as 1998T.
(2) Bonuses accrued under the Company's Key Executive Bonus Plan are paid
after the fiscal year in which they are accrued.
(3) Amounts paid to Mr. McNulty represent Supplemental Cash Payments made
upon the exercise of stock options pursuant to stock options granted prior
to fiscal year 1992. Such payments reflect tax gross-up amounts pursuant to
the terms of the stock options granted. There are no stock options
remaining unexercised that contain a tax gross-up supplemental payment.
(4) The fiscal 1999 LTIP payouts were made in July 1999 from the Company's
Key Executive Long-Term Incentive Plan for the plan period July 1, 1996
through June 30, 1999. The fiscal 1998 and 1997 LTIP Payouts were made,
respectively, in August of the subsequent fiscal year, with regard to the
three-year Plan periods ending June 30, 1998 and June 30, 1997. LTIP
payments are made 50 percent in cash and 50 percent Company common stock
valued at market on June 30. Messrs. Wilson, Corbin, Crippen, McNulty and
Zorich received 5,791, 2,084, 2,281, 1991 and 2,050 shares in 1999. Messrs.
Wilson, Corbin and McNulty received 2,209, 1,172, and 861 shares
respectively in 1998 and 7,548, 3,078 and 2,080 shares respectively in
1997. Messrs. Crippen and Zorich first became eligible for payment of Plan
benefits in 1999.
(5) The amounts are the Company's matching contributions on behalf of each
named individual under the Company's Employee Retirement Savings and
Investment Plan, a 401(k) plan and the Company's 401(k) restoration plan, a
non- tax qualified deferred compensation plan. Amounts deferred to the
401(k) plan are included in salary compensation.
75
<PAGE>
Stock Option Grants in 1999
The table below shows the Company's stock option grants to the named
Executive Officers in 1999. The 1996 Stock Awards Plan, pursuant to which these
grants were made, authorizes the Compensation and Management Development
Committee to grant stock options, stock appreciation rights, shares of
restricted stock and other awards valued by reference to the Company's common
stock.
Option/SAR Grants In 1999
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Individual Grants/(1)/ Potential Realizable
Value at
Assumed Annual Rates
of Stock Price
Appreciation for Option Term/(2)/
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Percent of Total
Number of Options/SARs
Securities Granted to
Underlying Employees in Exercise or
Options/SARs Fiscal Year Base Price Expiration
Name Granted (#) ($/Share) Date 5% ($) 10% ($)
- ----------------------------------------------------------------------------------------------------------------------
James R. Wilson 180,450 17.87 $37.40 2/18/09 $4,253.206 $10,732,361
150,000 14.85 30.53 12/10/09 2,885,207 7,281,715
- ----------------------------------------------------------------------------------------------------------------------
Richard L. Corbin 54,150 5.36 37.40 2/18/09 1,276,315 3,220,600
45,125 4.47 30.53 12/10/09 867,966 2,190,582
- -----------------------------------------------------------------------------------------------------------------------
Robert L. Crippen 0 -- -- -- -- --
51,550 5.10 30.53 9/10/09 991,588 2,502,483
----------------------------------------------------------------------------------------------------------------------
James E. McNulty 51,550 5.10 37.40 3/18/09 1,215,033 3,065,965
42,950 4.25 30.53 9/10/09 826,131 2,084,997
- ----------------------------------------------------------------------------------------------------------------------
Bruce M. Zorich 47,300 4.68 37.40 2/18/09 1,114,861 2,813,193
39,425 3.90 30.53 12/10/09 758,328 1,913,877
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) All stock option grants are issued at market value on the date of grant.
Options issued during 1999 are exercisable in an increment of one-fourth
each year of a four-year vesting period. Options issued during 1998 are
exercisable in an increment of one-third each year of a three-year vesting
period. Options issued prior to August 21, 1997 became exercisable one year
after the date of grant. All options have a ten-year term. Options lapse
three months after the date of termination of employment except for
retirement, death or disability.
(2) No gain will be realized by an optionee without an increase in the price
of the Company's common stock that will correspondingly increase the value
of the common stock outstanding held by all stockholders. At December 31,
1999, a 5 percent and a 10 percent gain over the ten-year option period
would increase the total value of the Company's outstanding common stock by
$763.3 million and $1,926.4 million, respectively. There can be no
assurance that the gains shown in the table will be realized since any gain
is dependent on the performance of the Company's common stock price which
is attributable to many factors including but not limited to Company
performance and stock market conditions. The value of the realized gains
shown in this table is provided solely for illustrative purposes only in
compliance with rules promulgated by the Securities and Exchange
Commission.
Stock Options Exercised During 1999
76
<PAGE>
The following table presents information regarding the exercise of options held
by the named Executive Officers during 1999, to purchase shares of the Company's
common stock and the value of unexercised stock options.
Aggregated Option/SAR Exercises in 1999 and Year-End Option/SAR Values
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs Options/SARs at
at Year-End Year-End/(1)/
(#) ($)
- -----------------------------------------------------------------------------------------------------------------------------
Name Shares Acquired Value Exercisable/ Exercisable/
On Exercise (#) Realized ($) Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James R. Wilson 0 0 354,633/377,117 $5,700,130/370,313
- -----------------------------------------------------------------------------------------------------------------------------
Richard L. Corbin 0 0 74,900/112,675 1,155,975/111,402
- -----------------------------------------------------------------------------------------------------------------------------
Robert L. Crippen 0 0 29,700/64,950 188,218/127,264
- -----------------------------------------------------------------------------------------------------------------------------
James E. McNulty 0 0 95,700/107,900 1,675,092/106,033
- -----------------------------------------------------------------------------------------------------------------------------
Bruce M. Zorich 0 0 10,700/100,125 0/97,330
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Value is calculated based on the average closing New York Stock Exchange
price of the Company's common stock as of December 31, 1999, minus the
option exercise price.
Long-Term Compensation
During 1999, the Compensation and Management Development Committee discontinued
the Company's Key Executive Long-Term Incentive Plan ("LTIP") and replaced it
with stock option grants for Messrs. Wilson, Corbin, McNulty and Zorich.
Messrs. Wilson, Corbin, McNulty and Zorich participate in the LTIP for the 2.5
year Plan performance period beginning July 1, 1998 and ending December 31, 2000
and the three-year Plan performance period beginning July 1, 1997 and ending
June 30, 2000. The LTIP remains in place for the Key Executives at Thiokol
Propulsion including Mr. Crippen through the Plan period ending December 31,
2002.
The Plan provides a target bonus opportunity based on a percentage of each
participant's base annual compensation determined by the participant's salary
grade. The opportunity ranges from 65 percent of base annual compensation for
the lowest salary grade covered by the Plan to 100 percent of base annual
compensation for the highest salary grade covered by the Plan. The amount of the
bonus award paid will vary from 25 percent of the target bonus opportunity being
paid if the threshold bonus opportunity goals are achieved; 100 percent of the
target bonus opportunity if the target bonus goals are achieved; and a maximum
bonus of 200 percent of the target bonus opportunity if the maximum bonus
targets are achieved. The bonus earned is paid 50 percent in cash and 50 percent
in Company common stock.
Mr. Crippen participates in the LTIP Plan and received an award for the three-
year period January 1, 1999 through December 31, 2001. The Plan's bonus
opportunity for Mr. Crippen has been set on attainment of certain financial and
performance targets to be achieved with respect to the management of Thiokol
Propulsion and the RSRM shuttle contract. Mr. Crippen's threshold, target and
maximum bonus opportunity set forth in the table reflect the combined value of
the cash and stock contingently granted at the beginning of the three-year
performance period.
77
<PAGE>
Long-Term Incentive Plan Awards in 1999
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Estimated Future Payouts
Performances or under Non-Stock Price-
Other Period Based Plans
Until Maturation -----------------------------
or Payout $ $ $
Name Threshold Target Maximum
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
James R. Wilson --- 0 0 O
- ----------------------------------------------------------------------------------------
Richard L. Corbin --- 0 0 0
- ----------------------------------------------------------------------------------------
Robert L. Crippen 3 Years 66,938 267,750 535,000
- ----------------------------------------------------------------------------------------
James E. McNulty --- 0 0 0
- ----------------------------------------------------------------------------------------
Bruce M. Zorich --- 0 0 0
- ----------------------------------------------------------------------------------------
</TABLE>
Retirement Plan
The Company maintains a defined benefit Pension Plan for non-bargaining unit
employees and funds its entire cost. The following table shows the estimated
annual benefits payable upon retirement (including amounts attributable to the
defined benefit excess plan) for the specified compensation and years of
service.
Pension Plan Table
<TABLE>
<CAPTION>
----------------------------------------------------------------
Years of Service
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Remuneration 15 20 25 30 35 40
- --------------------------------------------------------------------------------------------------------------------
$200,000 $ 55,451 $ 75,435 $ 96,419 $117,403 $ 138,386 $ 153,186
- --------------------------------------------------------------------------------------------------------------------
400,000 114,851 156,135 199,419 242,703 285,986 315,586
- --------------------------------------------------------------------------------------------------------------------
600,000 174,251 236,835 302,419 368,003 433,586 477,986
- --------------------------------------------------------------------------------------------------------------------
800,000 233,651 317,535 405,419 493,303 581,186 640,386
- --------------------------------------------------------------------------------------------------------------------
1,000,000 293,051 398,235 508,603 618,603 728,786 802,786
- --------------------------------------------------------------------------------------------------------------------
1,500,000 441,551 599,985 765,919 931,853 1,097,786 1,208,786
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1999, the named Executive Officers had the following
credited years of service for determining pension benefits: James R. Wilson,
10.6 years; Richard L. Corbin, 5.8 years; Robert L. Crippen, 3.2 years; and
James E. McNulty, 10.6 years.
Except for Bruce M. Zorich, all of the Executive Officers named in the
Summary Compensation Table participate in the Plan. Pension benefits are based
on the average earnings for the highest five consecutive years of the final ten
years of service. Compensation included in the final average earnings for
pension benefit computation includes base annual salary and annual bonuses but
excludes payments from the Company's Executive Long-Term Incentive Plan and all
other annual compensation shown in the Summary Compensation Table. Unreduced
pension benefits are calculated pursuant to the Plan's benefit formula as a
straight life annuity payable at age 67. Executive Officers of the Company
retire at age 65. Benefits may be payable in the form of a joint and survivor or
a ten-year certain option.
Because the Pension Plan is subject to the benefit and compensation limits
under the Internal Revenue Code of 1986 (the "Code"), the Company has
established an unfunded Excess Benefit Plan that provides for payment of amounts
that would have been paid to employees under the pension formula absent the
benefit limitations of the Code.
The Company also maintains a Supplemental Executive Retirement Plan
("SERP") designed to provide unfunded supplemental retirement benefits to
certain Executive Officers and key employees of the Company. The SERP is
designed to provide such selected employees a benefit at retirement equal to 60
percent of the participant's average five highest consecutive years of
compensation during the last ten years. The SERP also pays the benefit that
would otherwise be payable from the Excess Benefit Plan. Plan benefits are
offset by amounts the participant receives from the Company's Retirement Plan
and any pension benefits received from other employer plans including military
pensions. A reduced early retirement benefit is available only at the discretion
of the Chairman of the Board or President. The SERP provides accelerated benefit
accrual, vesting, payment and tax gross up in the event of a change of control
of the
78
<PAGE>
Company as defined by the Board of Directors. Messrs. Wilson, Corbin, Crippen
and McNulty participate in the SERP.
The Company may elect to fund and secure all or a part of the Excess
Benefit Plan and SERP benefits through the use of a "Rabbi" Trust meeting the
Code requirements. All such funding is subject to the claims of the Company's
creditors.
Bruce M. Zorich participates in the Huck International, Inc. Personal
Retirement Account Plan ("PRA"), a cash balance plan, providing benefits based
on age and salary. Mr. Zorich's estimated annual retirement benefit at age 65 is
$41,895. Mr. Zorich also participates in the Huck International, Inc. Excess
Benefit Plan for Selected Employees ("Plan") which is designated to provide
supplemental benefits in addition to the PRA benefits. Mr. Zorich's estimated
Plan benefit payable from the Excess Benefits Plan in the form of a lump sum at
age 65 is $1,298,487.
Termination of Employment and Change of Control Agreements
The Company has entered into change of control employment agreements with
Messrs. Wilson, Corbin, Crippen, McNulty, Zorich and certain other key
employees. These agreements are intended to provide for continuity of employment
in the event of a change of control as defined by the agreements, including the
following events: (i) acquisition by any person of 20 percent or more of the
voting securities of the Company; (ii) changes of the "incumbent Board" as
defined in the agreements; (iii) reorganization, merger or consolidation of the
Company; or (iv) liquidation or sale of the Company. Each of the agreements
requires continued employment of the executive following a change of control on
a basis equivalent to his employment immediately before such change. In the
event that during the three-year period following a change of control, the
executive terminates his employment for "good reason" (as defined in the
agreements) or for any reason during the 30-day period commencing one year after
the change of control or the Company terminates the executive's employment
"without cause" (as defined in the agreements), the executive would be entitled
to receive a lump sum payment equal to three times the sum of the executive's
salary, average long-term bonus and highest annual bonus plus service and
earnings credits under any Company retirement plan which would have been earned
during the employment period and the continuance of fringe benefits during the
three years after such termination. The agreements provide that payments from
the Company which (a) constitute "parachute payments" as defined in Section 280G
of the Code and (b) would subject the executive to the 20 percent excise tax
(the "Excise Tax") contained in Section 4999 of the Code, will be "grossed up"
by an additional payment in an amount defined by the agreements which takes into
account the Excise Tax, tax penalties and interest, as the case may be, with
respect to any such "parachute payments." The amounts of such parachute
payments, pursuant to the terms described above, are only determinable with
specificity on the date such payment obligations, if any, are triggered.
Effects of the Alcoa Offer and Merger under Company Stock Plans and Agreements
between the Company and its Executive Officers
The merger agreement between the Company and Alcoa provides that each
outstanding option to purchase shares of Common Stock (including any related
alternative rights) granted under any stock option or compensation plan or
arrangement of the Company or its subsidiaries (collectively, the "Company
Option Plans") (including those granted to current or former employees and
directors of the Company or any of its subsidiaries) (the "Employee Stock
Options") will become exercisable, and each share of restricted Common Stock
granted under the Company Option Plans will vest in full and become fully
transferable and free of restrictions, either prior to the purchase of shares of
Common Stock pursuant to the Alcoa tender offer or immediately prior to the
effective time of the Merger, as permitted pursuant to the terms and conditions
of the applicable Company Option Plan. The merger agreement provides that the
Company will offer to each holder of an Employee Stock Option that is
outstanding immediately prior to the first purchase of shares pursuant to the
tender offer (whether or not then presently
79
<PAGE>
exercisable or vested) to cancel such Employee Stock Option in exchange for an
amount in cash equal to the product obtained by multiplying (1) the difference
between the price per share paid in the tender offer and the per share exercise
price of such Employee Stock Option, by (2) the number of shares of Common Stock
covered by such Employee Stock Option. Each Employee Stock Option, the holder of
which does not accept such offer, that remains outstanding immediately before
the effective time of the Merger will be assumed by Alcoa and converted,
effective as of the Effective Time, into an option with respect to that number
(the "New Share Number") of shares of common stock, par value $1.00 per share,
of Alcoa ("Alcoa Common Stock") that equals the number of shares of Common Stock
subject to such Employee Stock Option immediately before the Effective Time,
multiplied by an amount equal to the Merger Consideration divided by the Alcoa
Share Value (as defined below), rounded to the nearest whole number, with a per-
share exercise price equal to the aggregate exercise price of such option
immediately before the Effective Time, divided by the New Share Number, rounded
to the nearest whole cent. However, in the case of any such converted Employee
Stock Option that was granted as an "incentive stock option" within the meaning
of Section 422 of the Internal Revenue Code and did not cease to qualify as such
as a result of any acceleration of vesting provided for above or otherwise, the
number of shares subject to the new option will be rounded down to the nearest
whole number in determining the New Share Number, and the new per-share exercise
price will be determined by rounding up to the nearest whole cent. The Alcoa
Share Value means the average of the daily high and low trading prices of the
Alcoa Common Stock on the New York Stock Exchange on each trading day during the
period of 30 days ending the second trading day prior to the effective time of
the Merger.
The purchase of shares pursuant to the tender offer will constitute a
"change of control" for purposes of the change-of-control employment agreements
that the Company has entered into with Messrs. Wilson, Corbin, Crippen, McNulty,
Zorich and certain other key employees, including all of the other executive
officers of the Company. Messrs. Wilson, Corbin, and McNulty and four other
executive officers will have "good reason" to terminate their employment under
their agreements as a result of the consummation of the transactions
contemplated by the merger agreement, and accordingly Alcoa has agreed that the
Company will pay them all cash severance benefits to which they are entitled
under the above agreements immediately upon the consummation of the Merger,
regardless of whether their employment terminates at that time. The cash
severance payable to these individuals, assuming the merger occurs on June 1,
2000, would be: Mr. Wilson, $8,115,515; Mr. Corbin, $3,050,841; Mr. McNulty,
$2,832,678; and the four other executive officers as a group, $3,214,803. The
Company estimates that if the other executive officers' employment were
terminated without cause on June 1, 2000, their cash severance would be: Mr.
Crippen, $3,263,136; and Mr. Zorich, $2,428,034. The executives' non-cash
severance benefits will in all cases be provided at the time their employment
terminates. To the extent that any payments to the executives with change-of-
control employment agreements are subject to the excise tax on excess parachute
payments, the Company will also be required to make them whole for that tax.
In addition, Mr. Wilson and two other executive officers currently meet, or as
a result of the provisions of their agreements will meet, the eligibility
requirements for retiree medical benefits under the Company's retiree medical
plan. Alcoa has therefore agreed that the Company will provide such individuals,
and six other executives, with lifetime retiree medical benefits not less
favorable than those currently in effect for eligible retirees, beginning when
the period of continuation of active employee medical benefits as part of their
severance package (if applicable) expires; provided, that the Company may
satisfy this obligation in full by purchasing insurance coverage providing such
benefits at a cost to the Company not to exceed $450,000 in the aggregate.
Under the Company's Key Executive Long-Term Incentive Plan, all cycles that
are ongoing at the time of the first purchase of Shares pursuant to the tender
offer are required to be paid out based upon target or actual performance,
whichever is better. Assuming that such purchase occurs before June 30, 2000,
the payments under this plan to the executive officers will
80
<PAGE>
be: Mr. Wilson, $2,033,358; Mr. Corbin, $760,434; Mr. Crippen, $1,049,326; Mr.
McNulty, $727,251; Mr. Zorich, $533,374; and all other executive officers as a
group, $668,359. Under the Key Executive Bonus Plan, the awards for 2000 are
required to be paid out upon the first purchase of shares pursuant to the tender
offer, without proration, based upon target or actual performance, whichever is
better. Assuming that such purchase occurs before June 30, 2000, the payments
under this plan to the executive officers will be: Mr. Wilson, $542,500; Mr.
Corbin, $176,000; Mr. Crippen, $167,500; Mr. McNulty, $167,500; Mr. Zorich,
$157,500; and all other executive officers as a group, $248,400.
Under the Company's Supplemental Executive Retirement Plan, participants
will be paid cash lump-sum benefits upon the first purchase of Shares pursuant
to the Offer, based upon their full benefit at normal retirement age, without
offsets except for benefits under the Company's qualified pension plan. In
addition, participants are entitled to receive a gross-up for all federal, state
and local income taxes and excess parachute excise tax imposed on the lump-sum
payments. Assuming that these payments are made on June 1, 2000, the estimated
payments (not including tax gross-ups) will be: Mr. Wilson, $13,589,727; Mr.
Corbin, $5,584,860; Mr. Crippen, $2,260,307; Mr. McNulty, $4,917,777; and all
other executive officers as a group, $5,065,101; and the estimated aggregate
income (but not excise) tax gross-ups for all executive officers will be
$29,059,218.
The Company intends to amend the relocation package to which Mr. Ayers is
currently entitled to provide that Mr. Ayers may elect to have the Company
purchase either the residence in Salt Lake City that he is currently having
built, or his existing residence in Ogden, Utah (currently the relocation
package provides only for the purchase of the Ogden residence).
Director Compensation
The Board's compensation program is designed to provide compensation at
levels to meet competitive conditions for the retention and recruitment of
qualified individuals to serve as directors on the Company's Board of Directors.
The compensation program consists of an annual $30,000 cash retainer and an
annual retainer of $20,000 paid in the form of restricted stock designed to
align a portion of a directors' compensation with the performance of the
Company's common stock.. A fee of $1,000 and travel expenses are paid for each
Board meeting attended. Each Committee chairman also receives an annual retainer
of $3,000. Directors who are employees of the Company receive no compensation
for their services as directors. Mr. James R. Wilson is the only employee
serving as a director.
The Company maintains a Deferred Fees Plan under which non-employee
directors may elect to defer all or part of the payment of their directors'
compensation until such time as they cease to be a director. Directors may elect
to have their deferred account credited with amounts in cash (similar to
interest) or with amounts reflecting the change in the price of the Company's
common stock and payment of dividends. All distributions of a director's account
are made in cash. Edsel D. Dunford, David J. Lesar, D. Larry Moore, and Robert
H. Jenkins participate in the Plan. Two retired directors with an interest in
the Plan are receiving benefits.
The Company's director restricted stock grants are made contingent upon a
director remaining a member of the Board of Directors. The shares do not vest
until the director's retirement or in the event of disability or death or change
in control of the Company. In the event a director resigns from the board or
otherwise elects not to stand for election as a director, the restricted shares
granted to such director are forfeited unless 80 percent of the Board of
Directors then in office, with the affected director abstaining, otherwise takes
formal action to waive such forfeiture. During the tenure of such director's
service on the board, the shares are restricted with respect to transferability,
assignability or encumbrance, and such restrictions are only released upon the
director's retirement, death or disability unless otherwise waived by formal
action by the Board of Directors, as described above. During such time as the
restrictions apply to the Company's common stock granted to the director, the
director has voting rights and receives
81
<PAGE>
dividends and other distributions or adjustments on such common stock. The
number of shares of director restricted stock granted to each non-employee
director is calculated by dividing the average of the high and low New York
Stock Exchange price on the first trading day of July into the $20,000 stock
retainer with each fractional share rounded up to the next whole share.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The following table sets forth information as of December 31, 1999, with respect
to the shares of the Company's common stock which are held by persons known to
the Company to be beneficial owners of more than five percent of such stock.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Name and Address Amount of Nature Percent of
of Beneficial Owners of Beneficial Ownership/(1)/ Class
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FMR Corp. Aggregate Amount: 5,261,540 14.33
82 Devonshire Street Sole Voting Power/(2)/: 377,000
Boston, Massachusetts 02109 Shared Voting Power: 0
Sole Dispositive Power: 5,261,540 14.33
Shared Dispositive Power: 0
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) As reported on Schedule 13G.
(2) Less than 1%.
The following table shows the Company's common stock beneficially owned as of
March 24, 2000, by each director and nominee for director and each of the
Executive Officers named in the Summary Compensation table, and the aggregate
number of such shares beneficially owned by all directors and Executive Officers
of the Company as a group. Unless otherwise indicated in the footnotes, each
named person and member of the group has sole voting and investment power with
respect to the shares shown.
Security Ownership of Directors and Executive Officers
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Name Shares Beneficially
Owned/,(1)/
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Neil A. Armstrong 3,266/(2)/
- ----------------------------------------------------------------------------------------------------------
Michael P.C. Carns 1,384/(2)/
- ----------------------------------------------------------------------------------------------------------
Richard L. Corbin 84,434
- ----------------------------------------------------------------------------------------------------------
Robert L. Crippen 35,300
- ----------------------------------------------------------------------------------------------------------
Edsel D. Dunford 8,004/(2)/
- ----------------------------------------------------------------------------------------------------------
Robert H. Jenkins 966/(4)/
- ----------------------------------------------------------------------------------------------------------
Steven G. Lamb 948/(3)/
- ----------------------------------------------------------------------------------------------------------
David J. Lesar 948/(3)/
- ----------------------------------------------------------------------------------------------------------
James E. McNulty 109,588
- ----------------------------------------------------------------------------------------------------------
D. Larry Moore 3,866/(2)/
- ----------------------------------------------------------------------------------------------------------
William O. Studeman 1,266/(2)/
- ----------------------------------------------------------------------------------------------------------
Donald C. Trauscht 1,666/(2)/
- ----------------------------------------------------------------------------------------------------------
James R. Wilson 381,869
- ----------------------------------------------------------------------------------------------------------
Bruce M. Zorich 12,750
- ----------------------------------------------------------------------------------------------------------
All directors, nominees and Executive Officers as a group
(18 persons, including those named). 738,642
- ----------------------------------------------------------------------------------------------------------
</TABLE>
82
<PAGE>
(1) Includes shares which may be acquired presently or within 60 days upon
exercise of stock options: Messrs. Corbin 74,900; Crippen 29,700; McNulty
95,700; Wilson 354,633; Zorich 10,700; and all directors, nominees and
Executive Officers as a group 644,916 shares.
(2) Includes 866 shares contingently granted pursuant to the Directors'
Restricted Stock Program.
(3) Includes 948 shares contingently granted pursuant to the Directors'
Restricted Stock Program.
(4) Includes 966 shares contingently granted pursuant to the Directors'
Restricted Stock Program.
No individual's beneficial holdings total more than one percent of the
outstanding shares; the holdings of the group represent 2.0 percent of the
outstanding shares with respect to the most recently concluded fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
83
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
1. Financial Statements
The following consolidated financial statements are included in Item 8:
Management's Report on Financial Statements.
Report of Ernst & Young LLP, Independent Auditors.
Consolidated Statements of Income -- Years ended
December 31, 1999, 1998 and 1997.
Consolidated Balance Sheets - December 31, 1999
and December 31, 1998.
Consolidated Statements of Cash Flows -- Years ended
December 31, 1999, 1998 and 1997.
Consolidated Statements of Stockholders' Equity -- Years ended December 31,
1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
84
<PAGE>
2. Financial Statement Schedules
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
CORDANT TECHNOLOGIES INC. (PARENT COMPANY)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------
(in millions, except per share data) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $588.0 $643.0 $645.5
Operating expenses:
Cost of sales 481.9 540.2 554.6
General and administrative 35.8 37.3 33.6
Research and development 8.2 7.9 6.9
- --------------------------------------------------------------------------------------------------------------
Total operating expenses 525.9 585.4 595.1
Income from operations 62.1 57.6 50.4
Equity income of affiliates 143.2 103.5 47.0
Interest income 6.3 11.0 6.9
Interest expense (41.5) (16.7) (1.4)
Other, net 5.3 5.5 7.9
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 175.4 160.9 110.8
Income taxes 11.0 18.9 21.3
- --------------------------------------------------------------------------------------------------------------
Net income $164.4 $142.0 $ 89.5
- --------------------------------------------------------------------------------------------------------------
Income per share before extraordinary item:
Basic $ 4.49 $ 3.89 $ 2.64
Diluted $ 4.39 $ 3.79 $ 2.57
Net income per share:
Basic $ 4.49 $ 3.89 $ 2.45
Diluted $ 4.39 $ 3.79 $ 2.38
- ---------------------------------------------------------------------------------------------------------------
Dividends per share $ .40 $ .40 $ .385
- ---------------------------------------------------------------------------------------------------------------
See note to parent company financial statements.
</TABLE>
85
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
CORDANT TECHNOLOGIES INC. (PARENT COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
----------------------------
December 31
----------------------------
(in millions) 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 1.0 $ 1.1
Receivables 49.8 58.1
Inventories 33.6 30.5
Deferred income taxes and prepaid expenses 64.3 55.9
- ------------------------------------------------------------------------------------------------------
Total Current Assets 148.7 145.6
Property, Plant and Equipment
Land 11.9 11.9
Buildings and improvements 210.1 185.2
Machinery and equipment 213.1 227.7
- ------------------------------------------------------------------------------------------------------
Total Property, Plant and Equipment 435.1 424.8
Less allowances for depreciation (277.4) (266.5)
- ------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 157.7 158.3
Other Assets
Investment in subsidiaries 1,413.8 898.8
Costs in excess of net assets of businesses acquired, net 24.1 25.1
Other noncurrent assets 43.8 54.8
- ------------------------------------------------------------------------------------------------------
Total Other Assets 1,481.7 978.7
- ------------------------------------------------------------------------------------------------------
Total Assets $1,788.1 $1,282.6
- ------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 24.6 $ 36.0
Accounts payable 31.9 22.3
Accrued compensation 27.3 23.9
Other accrued expenses 21.0 42.5
- ------------------------------------------------------------------------------------------------------
Total Current Liabilities 104.8 124.7
Noncurrent Liabilities
Accrued retiree benefits 67.9 68.3
Deferred income taxes 72.1 50.1
Accrued interest and other noncurrent liabilities 66.0 76.7
Long-term debt 600.0 260.0
Inter-company advances from affiliates 61.2 34.9
- ------------------------------------------------------------------------------------------------------
Total Noncurrent Liabilities 867.2 490.0
Commitments and contingent liabilities
Stockholders' Equity
Common stock (par value $1.00 per share)
Authorized - 200 shares
Issued - 41.1 shares at December 31, 1999 and 1998
(includes treasury shares) 41.1 41.1
Additional paid-in capital 48.0 47.4
Retained earnings 808.5 658.8
Accumulated other comprehansive income (loss) (10.0) (3.9)
- ------------------------------------------------------------------------------------------------------
887.6 743.4
Less common stock in treasury, at cost
(4.4 and 4.6 shares at December 31, 1999 and 1998,
respectively) (71.5) (75.5)
- ------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 816.1 667.9
- ------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $1,788.1 $1,282.6
- ------------------------------------------------------------------------------------------------------
</TABLE>
See note to parent company financial statements.
86
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
CORDANT TECHNOLOGIES INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
--------------------------------------------------
Year Ended December 31
--------------------------------------------------
(in millions) 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 164.4 $ 142.0 $ 89.5
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 17.4 18.7 19.9
Amortization 1.0 3.5 8.1
Equity income (143.2) (103.5) (47.0)
Changes in operating assets and
liabilities:
Receivables 8.3 23.6 3.3
Inventories (3.1) (1.6) 4.6
Accounts payable and accrued 2.9 (7.0) 9.4
expenses
Income taxes 11.8 1.9 (19.2)
Other - net (2.4) (14.4) (20.4)
- -------------------------------------------------------------------------------------------------
Net cash provided by operating
activities 57.1 63.2 48.2
INVESTING ACTIVITIES
Investment in Subsidiaries (385.0) (232.5) (171.3)
Purchases of property, plant and equipment (17.8) (18.3) (9.5)
Proceeds from disposal of assets 1.0 2.0 1.4
- -------------------------------------------------------------------------------------------------
Net cash used for investing
activities (401.8) (248.8) (179.4)
FINANCING ACTIVITIES
Net change in short-term debt (11.4) 36.0
Issuance of long-term debt 485.0 300.0 138.0
Repayment of long-term debt (145.0) (148.0) (37.5)
Net loans by subsidiaries 26.3 22.0 17.7
Dividends paid (14.7) (14.6) (14.1)
Purchase of common stock for treasury (14.4) (7.9)
Stock option transactions 4.4 4.7 6.1
- -------------------------------------------------------------------------------------------------
Net cash provided by
(used for) financing
activities 344.6 185.7 102.3
- -------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash
equivalents (.1) .1 (28.9)
Cash and cash equivalents at beginning of
year 1.1 1.0 29.9
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1.0 $ 1.1 $ 1.0
- -------------------------------------------------------------------------------------------------
</TABLE>
See note to parent company financial statements.
NOTE TO PARENT COMPANY FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The condensed financial information of Cordant Technologies Inc. (Parent
Company) presented herein is due to restrictive debt covenants at Howmet
Corporation. The debt covenants require certain net worth ratios to be
maintained; thereby, restricting the payment of cash dividends to Howmet
stockholders including the Company.
The Parent Company only financial statements were prepared with the investments
in its wholly and partially owned subsidiaries stated at cost plus the
undistributed earnings. These statements should be read in conjunction with the
Company's consolidated financial statements, which are included in this report.
Reclassifications were made to the 1998 and 1997 financial statements to conform
to the 1999 presentation.
87
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
CORDANT TECHNOLOGIES INC.
<TABLE>
<CAPTION>
(dollars in millions)
- ----------------------------------------------------------------------------------------------------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS FROM BALANCE AT
DESCRIPTION BEGINNING OF COSTS AND OTHER RESERVES END OF PERIOD
PERIOD EXPENSES ACCOUNTS
- ----------------------------------------------------------------------------------------------------------------
CORDANT TECHNOLOGIES INC. CONSOLIDATED:
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31, 1999
Reserves:
Accounts Receivable $ 7.8 -- -- (1.8) $ 6.0
Warranty Reserves 24.1 3.7 -- (3.4) 24.4
For the Year Ended December 31, 1998
Reserves:
Accounts Receivable 6.3 1.8 -- (.3) 7.8
Warranty Reserves 19.7 7.4 -- (3.0) 24.1
For the Year Ended December 31, 1997
Reserves:
Accounts Receivable 1.5 1.0 4.0 (.2) 6.3
Warranty Reserves $ 1.1 4.9 13.7 -- $19.7
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* Began consolidating Howmet's results in December 1997. The addition of
Howmet's reserves are shown in The "Charged To Other Accounts" column.
All other schedules for which provision is made under the applicable
accounting regulation of the Securities and Exchange Commission are omitted as
they are either not required under the related instructions or are otherwise
inapplicable.
88
<PAGE>
3. Index to Exhibits
Exhibit
Number Description
------- -----------
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession.
2.01 Agreement and Plan of Merger, dated as of March 14, 2000,
among Alcoa Inc., Omega Acquisition Corp. and Cordant
Technologies Inc.: Incorporated by reference to Exhibit 7 to
Amendment No. 2 to the Schedule 13D of Cordant Technologies
Inc. and Cordant Technologies Holding Company with respect to
the shares of common stock of Howmet International Inc., filed
with the Securities and Exchange Commission on March 15, 2000.
2.02 Letter Agreement, dated March 13, 2000, between Alcoa and
Howmet: Incorporated by reference to Exhibit (d)(3) to the
Schedule TO of Alcoa and the Purchaser filed on March 20,
2000.
2.03 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: Incorporated by reference as Exhibit 10 to Form 10-
Q for the quarterly period ended September 30, 1999.
2.04 Stock Purchase Agreement among Huck International, Inc.,
Harvey Jacobson as Trustee to the Harvey Jacobson Revocable
Trust No. 2, dated as of March 13, 1998: Incorporated by
reference to Exhibit 10.30 to the Form 10-K for the fiscal
year ended June 30, 1998.
(3) Certificate of Incorporation and By-Laws.
3.01 Restated Certificate of Incorporation of the Company,
effective July 3, 1989: Incorporated by reference as Exhibit 3
to Form 10-K for fiscal year ended June 30, 1989.
3.02 Amended Certificate of Incorporation effective May 5, 1998:
Incorporated by reference as Exhibit 3(i) to Form 10-Q for the
quarterly period ended March 31, 1998.
3.03 Amended and Restated By-Laws effective July 22, 1999:
Incorporated by reference as Exhibit 3(ii) to Form 10-Q/A for
the quarterly period ended June 30, 1999 .
(4) Instruments defining the rights of security holders including
indentures.
4.01 Rights Agreement between Thiokol Corporation and First Chicago
Trust Company of New York: Incorporated by reference to
Exhibit 4 to Form 8-A dated May 28, 1997.
4.02 Amendment No. 1, dated as of March 14, 2000, to Rights
Agreement, dated as of May 22, 1997, between Cordant
Technologies Inc. and First Chicago Trust Company of New York,
as Rights Agent: Incorporated by reference to Exhibit 2 to
Form 8-A/A dated March 22, 2000.
89
<PAGE>
4.03 Thiokol Corporation $150,000,000 6-5/8% Senior Notes Due 2008:
Incorporated by reference to Form 8-K dated February 9, 1998.
(10) Material contracts.
10.01 /1/1989 Stock Awards Plan: Incorporated by reference to Annex
VI to Proxy Statement/Prospectus dated May 22, 1989, for
special Stockholders Meeting held June 23, 1989.
10.02 /1/1989 Stock Awards Plan as amended by stockholder approval
October 15, 1993: Incorporated by reference to the definitive
Proxy Statement dated September 11, 1992.
10.03 /1/Survivor Income Benefits Plan, amended through March 24,
1983: Incorporated by reference as Exhibit 10 to Form 10-K
for fiscal year ended June 30, 1989.
10.04 /1/Arrangements whereby the Company compensates its
independent auditors for tax services to certain key
executives for which there is no written document:
Incorporated by reference as Exhibit 10 to Form 10-K for
fiscal year ended June 30, 1989.
10.05 /1/Form of Employment Agreement between the Company and
certain of its executive officers including the Chief
Executive Officer and the other four highest paid executive
officers: Incorporated by reference as Exhibit 10 to Form 10-
K for fiscal year ended June 30, 1989.
10.06 /1/Amended Form of Employment Agreement between certain of its
executive officers including the five most highly compensated:
Incorporated by reference as Exhibit 10 to Form 10-K for
fiscal year ended June 30, 1990.
10.07 /1/Thiokol Corporation Pension Plan (Second Restatement
Effective January 1, 1989): Incorporated by reference as
Exhibit 10 to Form 10-K for fiscal year ended June 30, 1994.
10.08 /1/Huck International, Inc. Personal Retirement Account Plan
(Second Restatement Effective as of January 1, 1992):
Incorporated by reference as Exhibit 10 to Form 10-K for
fiscal year ended June 30, 1995.
10.09 /1/Huck International, Inc. Supplemental Executive Retirement
Plan (Effective January 1, 1992): Incorporated by reference
as Exhibit 10 to Form 10-K for fiscal year ended June 30,
1995.
10.10 Registration Rights Agreement by and between Blade Acquisition
Corp., Thiokol Holding Company and Carlyle-Blade Acquisition
Partners, L.P. dated as of December 13, 1995: Incorporated by
reference as Exhibit 10 to Form 10-Q for the quarterly period
ended December 31, 1995.
10.11 Holding Management Agreement by and between Howmet Corporation
and Thiokol Holding Company dated as of December 13, 1995:
Incorporated by reference as Exhibit 10 to Form 10-Q for the
quarterly period ended December 31, 1995.
90
<PAGE>
10.12 Thiokol Transaction Fee Agreement by and between Howmet
Holdings Acquisition Corp. and Thiokol Corporation dated as
of December 13, 1995: Incorporated by reference as Exhibit 10
to Form 10-Q for the quarterly period ended December 31, 1995.
10.13 Standstill Agreement by and among Thiokol Holding Company,
Thiokol Corporation, Carlyle-Blade Acquisition Partners, L.P.
et al. dated as of December 13, 1995: Incorporated by
reference as Exhibit 10 to Form 10-Q for the quarterly period
ended December 31, 1995.
10.14 /1/Form of Amended and Restated Employment Agreement dated
March 1, 1999 by and among Cordant Technologies Inc. and
Messrs. James R. Wilson, Richard L. Corbin, James E. McNulty,
Bruce M. Zorich and certain other executive officers of the
Company: Incorporated by reference as Exhibit 10 to Form 10-Q
for the quarterly period ended March 31, 1999.
10.15 /1/Form Cordant Technologies Inc. 1999 Stock Option Grant
Agreement Incentive Stock Option: Incorporated by reference
as Exhibit 10 to Form 10-Q for the quarterly period ended
March 31, 1999.
10.16 /1/Form Cordant Technologies Inc. 1999 Stock Option Grant
Agreement Non Qualified Stock Option: Incorporated by
reference as Exhibit 10 to Form 10-Q for the quarterly period
ended March 31, 1999.
10.17 /1/Form of Cordant Technologies Inc., Executive Employment
Agreement adopted by the Board of Directors July 22, 1999
covering certain executives of the Company including three
executive officers of the Company: Incorporated by reference
as exhibit 10 to Form 10-Q for the quarterly period ended June
30, 1999.
10.18 /1/Cordant Technologies Inc. Supplemental Executive Retirement
Plan Amended and Restated effective July 22, 1999:
Incorporated by reference as exhibit 10 to Form 10-Q for the
quarterly period ended September 30, 1999.
10.19 /1/Thiokol Corporation Grant Agreement Incentive Stock Option
amended and restated June 16, 1997: Incorporated by reference
to Exhibit 10.26 to Form 10-K for the fiscal year ended June
30, 1998.
10.20 /1/Thiokol Corporation Grant Agreement Non-qualified Stock
Option amended and restated June 16, 1997: Incorporated by
reference to Exhibit 10.27 to Form 10-K for the fiscal year
ended June 30, 1998.
10.21 /1/Cordant Technologies Inc. Directors Restricted Stock
Agreement dated July 1, 1998: Incorporated by reference to
Exhibit 10.28 to Form 10-K for the fiscal year ended June 30,
1998.
10.22 Stock Purchase Agreement among Huck International, Inc.,
Harvey Jacobson as Trustee to the Harvey Jacobson Revocable
Trust No. 2, dated as of March 13, 1998: Incorporated by
reference to Exhibit 10.30 to Form 10-K for the fiscal year
ended June 30, 1998.
91
<PAGE>
10.23 Amendment, dated as of March 13, 2000, to Corporate Agreement,
among Howmet, the Company and Holding: Incorporated by
reference to Exhibit 6 to Amendment No. 2 to Schedule 13D with
respect to the Howmet Shares, filed by the Company and Holding
on March 15, 2000.
10.24 5-Year Revolving Credit Agreement, dated as of February 9,
2000 among Cordant Technologies Inc., the Lenders, Bank One,
NA and the Administrative Agent, ABN AMRO Bank N.V. and
Wachovia BANK, N.A., as Co-Documentation Agents: Incorporated
by reference to Exhibit 10.0 to Form 8-K dated February 11,
2000.
10.25 364-Day Revolving Credit Agreement, dated as of February 9,
2000 among Cordant Technologies Inc. the Lenders, Bank One, NA,
as Administrative Agent, ABN AMRO Bank N.V., as Syndication
Agent and Bank of America, N.A. and Wachovia Bank, N.A., as Co-
Documentation Agents: Incorporated by reference to Exhibit
10.1 to Form 8-K dated February 11, 2000.
(11) Statement re computation of per share earnings (included in Note 11
to Financial Statements included in Item 8).
(21) Subsidiaries of the Company.
(23) Consent of Ernst & Young LLP, independent auditors.
(27) Financial Data Schedule.
___________
/1/Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K
Form 8-K filed November 12, 1999. Item 5 - Other Events - News release
reporting the Company's proposal to purchase Howmet's remaining publicly
held shares.
92
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, as of the 27th day of
February 2000.
CORDANT TECHNOLOGIES INC.
(Registrant)
By /s/ Richard L. Corbin
---------------------------
Richard L. Corbin
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated, as of the 27th day of March 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ James R. Wilson Chairman of the Board, President, Chief
- --------------------------------- Executive Officer and Director
James R. Wilson (Principal Executive Officer)
/s/ Richard L. Corbin Executive Vice President and Chief
- --------------------------------- Financial Officer (Principal Financial
Richard L. Corbin Officer)
/s/ Michael R. Ayers Vice President and Controller
- --------------------------------- (Principal Accounting Officer)
Michael R. Ayers
/s/ Neil A. Armstrong Director
- ---------------------------------
Neil A. Armstrong
/s/ Michael P.C. Carns Director
- ---------------------------------
Michael P.C. Carns
</TABLE>
93
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- --------------------------------- Director
Edsel D. Dunford
/s/ Robert H. Jenkins Director
- ---------------------------------
Robert H. Jenkins
- --------------------------------- Director
Steven G. Lamb
/s/ David J. Lesar Director
- ---------------------------------
David J. Lesar
/s/ D. Larry Moore Director
- ---------------------------------
D. Larry Moore
/s/ William O. Studeman Director
- ---------------------------------
William O. Studeman
Director
/s/ Donald C. Trauscht
- ---------------------------------
Donald C. Trauscht
</TABLE>
94
<PAGE>
Exhibit Index
Exhibit Document
- ------- -------
(21) Subsidiaries of the Company.
(23) Consent of Ernst & Young LLP, independent auditors.
(27) Financial Data Schedule.
95
<PAGE>
EXHIBIT (21)
SUBSIDIARIES OF CORDANT TECHNOLOGIES INC.
The following is a list of operating subsidiary corporations of the Company
as of December 31, 1999. Certain subsidiaries not considered significant have
been omitted.
<TABLE>
<CAPTION>
State or Other
Jurisdiction
Subsidiary of Incorporation
- ---------- ----------------
<S> <C>
Huck International, Inc. Delaware
Huck S.A. France
Huck International Ltd. United Kingdom
Komatsu - Howmet Ltd. Delaware
Howmet International Inc. Delaware/1/
Howmet Corporation Delaware/2/
Howmet Aluminum Castings, Ltd. (Canada) Canada/2/
Howmet Aluminum Castings (U.S.A.) Delaware/2/
Howmet Ltd. United Kingdom/2/
Howmet S.A. France/2/
Howmet TMP Corporation Ohio/2/
Continental/Midland, Inc. Delaware/2/
</TABLE>
(1) The Company owns approximately 84.6% of the outstanding shares of Common
Stock of Howmet International, Inc.
(2) Direct or indirect subsidiary of Howmet International, Inc.
(3) Currently 81% owned by Howmet Corporation; 19% owned by Komatsu K.K. On
December 20, 1999, Howmet announced that it intends to exercise its option to
acquire Komatsu's remaining interest; the acquisition is expected to be
completed in April 2000.
<PAGE>
EXHIBIT (23)
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
Form S-3 Nos. 333-1753 and 333-94179 and Form S-8, Nos. 33-18630, 33-2921, 33-
10316, 2-76672, 2-90885, 33-38322 and 33-22965 pertaining to certain Retirement
Savings and Investment Plans and Stock Option Plans of Cordant Technologies Inc.
of our report dated February 4, 2000 (except for the information regarding the
Company's debt facility discussed in Note 8, as to which the date is February 9,
2000), with respect to the consolidated financial statements of Cordant
Technologies Inc. incorporated by reference in the Annual Report (Form 10-K) of
Cordant Technologies Inc. for the year ended December 31, 1999.
Our audits also included the financial statement schedules of Cordant
Technologies Inc. listed in item 14(a). These schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Salt Lake City, Utah
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Cordant
Technologies Inc. audited financial statements for the year ended December 31,
1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-30-1999
<CASH> 37
<SECURITIES> 0
<RECEIVABLES> 244
<ALLOWANCES> 6
<INVENTORY> 262
<CURRENT-ASSETS> 604
<PP&E> 1,260
<DEPRECIATION> 505
<TOTAL-ASSETS> 2,482
<CURRENT-LIABILITIES> 540
<BONDS> 601
0
0
<COMMON> 41
<OTHER-SE> 775
<TOTAL-LIABILITY-AND-EQUITY> 2,482
<SALES> 2,513
<TOTAL-REVENUES> 2,520
<CGS> 1,945
<TOTAL-COSTS> 2,193
<OTHER-EXPENSES> 4
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43
<INCOME-PRETAX> 281
<INCOME-TAX> 93
<INCOME-CONTINUING> 164
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 164
<EPS-BASIC> 4.49
<EPS-DILUTED> 4.39
</TABLE>
