UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) November 24, 1999
PRECISION CASTPARTS CORP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
State of Oregon 1-10348 93-0460598
- --------------------------------------------------------------------------------
(State or other jurisdiction of (Commission (IRS Employer
incorporation or organization) File No.) Identification No.)
4650 SW Macadam, Suite 440, Portland, Oregon 97201-4254
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(503) 417-4800
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
No Change
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
<PAGE>
Item 2. Acquisition or Disposition of Assets
- --------------------------------------------
On November 24, 1999, Precision Castparts Corp. ("PCC") purchased 98% of the
outstanding shares of common stock of Wyman-Gordon Company ("Wyman-Gordon")
pursuant to a cash tender offer. The transaction, financed from borrowings under
Credit Agreements with Bank of America, N.A., as Agent, was valued at $787
million based on the purchase of Wyman-Gordon's stock and PCC's tender for and
subsequent payment of Wyman-Gordon's 8% Senior Notes due 2007. Wyman-Gordon is a
manufacturer of forgings, investment castings and composite structures,
principally for the aerospace industry. PCC intends that Wyman-Gordon will
continue this business after the acquisition.
Item 7. Financial Statements and Exhibits
- -----------------------------------------
(a) Financial Statements of Business Acquisition
1. Report of Ernst & Young LLP, Independent Auditors
2. Wyman-Gordon Company Consolidated Statements of Income - Years Ended May
31, 1999, 1998 and 1997
3. Wyman-Gordon Company Consolidated Balance Sheets - May 31, 1999 and 1998
4. Wyman-Gordon Company Consolidated Statements of Cash Flows - Years Ended
May 31, 1999, 1998 and 1997
5. Wyman-Gordon Company Consolidated Statements of Stockholders' Equity -
Years Ended May 31, 1999, 1998 and 1997
6. Wyman-Gordon Company Consolidated Statements of Comprehensive Income -
Years Ended May 31, 1999, 1998 and 1997
7. Wyman-Gordon Company Notes to Consolidated Financial Statements
8. Wyman-Gordon Company Consolidated Condensed Statements of Income
(unaudited) - Three Months Ended August 31, 1999 and 1998
9. Wyman-Gordon Company Consolidated Condensed Balance Sheets - August 31,
1999 (unaudited) and May 31, 1999
10. Wyman-Gordon Company Consolidated Condensed Statements of Cash Flows
(unaudited) - Three Months Ended August 31, 1999 and 1998
11. Wyman-Gordon Company Notes to Interim Consolidated Condensed Financial
Statements
2
<PAGE>
Item 7(a) Financial Statements of Business Acquisition
WYMAN-GORDON COMPANY
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Stockholders of Wyman-Gordon Company:
We have audited the accompanying consolidated balance sheets of
Wyman-Gordon Company and subsidiaries as of May 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, cash flows and
comprehensive income for each of the three years in the period ended May 31,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Wyman-Gordon Company and subsidiaries at May 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended May 31, 1999 in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
June 23, 1999
3
<PAGE>
<TABLE>
<CAPTION>
WYMAN-GORDON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR YEAR YEAR
ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31,
1999 1998 1997
-------- -------- --------
(000'S OMITTED, EXCEPT PER-SHARE DATA)
<S> <C> <C> <C>
Revenue $849,261 $752,913 $608,742
-------- -------- --------
Cost of goods sold 715,902 637,267 511,108
Selling, general and
administrative expenses 56,662 51,654 44,229
Other charges (credits) 13,745 (4,900) 23,083
-------- --------- --------
786,309 684,021 578,420
-------- -------- --------
Income from operations 62,952 68,892 30,322
Other deductions (income):
Interest expense 14,234 12,548 10,822
Miscellaneous, net 1,223 907 (4,843)
-------- -------- --------
15,457 13,455 5,979
-------- -------- --------
Income before income taxes 47,495 55,437 24,343
Provision (benefit) for
income taxes 10,467 16,355 (25,680)
-------- -------- --------
Income before extraordinary item 37,028 39,082 50,023
Extraordinary loss, net of income
tax benefit (Note E) - 5,192 -
-------- -------- --------
Net income $ 37,028 $ 33,890 $ 50,023
======== ======== ========
Basic net income per share:
Income before extraordinary
item $ 1.02 $ 1.07 $ 1.40
Extraordinary item, net of tax - (.14) -
-------- -------- --------
Net income $ 1.02 $ .93 $ 1.40
======== ======== ========
Diluted net income per share:
Income before extraordinary
item $ 1.01 $ 1.05 $ 1.35
Extraordinary item, net of tax - (.14) -
-------- -------- --------
Net income $ 1.01 $ .91 $ 1.35
======== ======== ========
Shares used to compute net income per share:
Basic 36,149 36,331 35,825
Diluted 36,589 37,357 37,027
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
WYMAN-GORDON COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, MAY 31,
1999 1998
-------- --------
(000'S OMITTED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 73,867 $ 64,561
Accounts receivable 156,042 124,658
Inventories 97,603 133,134
Prepaid expenses 6,768 6,710
Deferred income taxes 6,400 -
-------- --------
Total current assets 340,680 329,063
-------- --------
Property, plant and equipment, net 214,604 197,363
Intangible assets 18,296 19,461
Other assets 8,130 5,723
-------- --------
Total assets $581,710 $551,610
======== ========
LIABILITIES
Current portion of long-term debt $ 965 $ 3,017
Accounts payable 52,561 51,590
Accrued liabilities and other 57,127 50,692
-------- --------
Total current liabilities 110,653 105,299
-------- --------
Restructuring, integration,
disposal and environmental 15,444 17,314
Long-term debt 164,338 162,573
Pension liability 1,771 2,908
Deferred income taxes and other 13,857 14,066
Postretirement benefits 41,885 44,630
STOCKHOLDERS' EQUITY Preferred stock, no par value:
Authorized 5,000,000 shares;
none issued - -
Common stock, par value $1.00
per share:
Authorized 70,000,000 shares;
issued 37,052,720 37,053 37,053
Capital in excess of par value 27,360 28,037
Retained earnings 185,875 148,847
Accumulated other comprehensive income 1,267 1,465
Treasury stock, 1,417,737 and 543,077
shares at May 31, 1999 and 1998 (17,793) (10,582)
-------- --------
Total stockholders' equity 233,762 204,820
-------- --------
Total liabilities and
stockholders' equity $581,710 $551,610
======== ========
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
WYMAN-GORDON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR YEAR YEAR
ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31,
1999 1998 1997
-------- -------- --------
(000'S OMITTED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 37,028 $ 33,890 $ 50,023
Adjustments to reconcile net
income to net cash provided
by operating activities:
Extraordinary loss on debt
retirement - 5,192 -
Depreciation and amortization 27,576 23,473 20,872
Deferred income taxes (6,400) 6,500 (6,500)
Gain on sale of operating assets (5,000) - -
Other charges 9,779 - 19,145
Losses on equity investment - - 2,734
Change in assets and liabilities:
Accounts receivable (31,409) (1,547) (24,430)
Inventories 35,531 (38,219) (27,235)
Prepaid expenses and other assets (2,421) 727 4,754
Accrued restructuring,
integration, disposal and
environmental (4,385) (3,536) (3,950)
Income and other taxes payable 5,804 (123) (5,241)
Accounts payable and accrued
and other liabilities (6,318) (11,931) 17,839
-------- -------- --------
Net cash provided by
operating activities 59,785 14,426 48,011
-------- -------- --------
INVESTING ACTIVITIES:
Investment in acquired
subsidiaries - (15,460) -
Capital expenditures (47,380) (48,017) (34,123)
Proceeds from sale of fixed assets 6,660 869 559
Other, net 716 (221) (921)
-------- -------- --------
Net cash (used) by investing
activities (40,004) (62,829) (34,485)
-------- -------- --------
FINANCING ACTIVITIES:
Payment to Cooper Industries, Inc. (2,300) (2,300) -
Net borrowings (repayments)
of debt (287) 55,463 5,923
Net proceeds from issuance of
common stock 5,214 12,433 7,325
Repurchase of common stock (13,102) (4,603) (4,937)
-------- -------- --------
Net cash provided (used) by
financing activities (10,475) 60,993 8,311
-------- -------- --------
Increase in cash 9,306 12,590 21,837
Cash, beginning of period 64,561 51,971 30,134
-------- -------- --------
Cash, end of period $ 73,867 $ 64,561 $ 51,971
======== ======== ========
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these financial statements.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
WYMAN-GORDON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK CAPITAL
------------------------ IN
SHARES PAR EXCESS OF RETAINED
ISSUED VALUE PAR VALUE EARNINGS
-------- -------- --------- --------
(000'S OMITTED)
<S> <C> <C> <C> <C>
Balance, May 31, 1996 37,053 $ 37,053 $ 33,291 $64,934
Net income 50,023
Stock plans (5,838)
Stock repurchase
Savings/Investment
Plan match 155
Pension equity
adjustment
Currency translation
-------- -------- -------- --------
Balance, May 31, 1997 37,053 37,053 27,608 114,957
Net income 33,890
Stock plans 12
Stock repurchase
Savings/Investment
Plan match 417
Pension equity
adjustment
Currency translation
-------- -------- -------- --------
Balance, May 31, 1998 37,053 37,053 28,037 148,847
Net income 37,028
Stock plans (311)
Stock repurchase
Savings/Investment
Plan match (366)
Pension equity
adjustment
Currency translation
-------- -------- -------- --------
Balance, May 31, 1999 37,053 $ 37,053 $ 27,360 $185,875
======== ======== ======== ========
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these financial statements.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
WYMAN-GORDON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER
COMPREHENSIVE TREASURY
INCOME STOCK TOTALS
------------- --------- --------
(000'S OMITTED)
<S> <C> <C> <C>
Balance, May 31, 1996 $ 719 $ (26,054) $109,943
Net income 50,023
Stock plans 11,106 5,268
Stock repurchase (4,937) (4,937)
Savings/Investment
Plan match 1,902 2,057
Pension equity
adjustment (23) (23)
Currency translation 2,067 2,067
------- --------- --------
Balance, May 31, 1997 2,763 (17,983) 164,398
Net income 33,890
Stock plans 9,982 9,994
Stock repurchase (4,603) (4,603)
Savings/Investment
Plan match 2,022 2,439
Pension equity
adjustment (901) (901)
Currency translation (397) (397)
------- --------- --------
Balance, May 31, 1998 1,465 (10,582) 204,820
Net income 37,028
Stock plans 2,973 2,662
Stock repurchase (13,102) (13,102)
Savings/Investment
Plan match 2,918 2,552
Pension equity
adjustment 663 663
Currency translation (861) (861)
------- --------- --------
Balance, May 31, 1999 $ 1,267 $ (17,793) $233,762
======= ========= ========
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these financial statements.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
WYMAN-GORDON COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR YEAR YEAR
ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31,
1999 1998 1997
-------- -------- --------
(000'S OMITTED)
<S> <C> <C> <C>
Net income $ 37,028 $ 33,890 $ 50,023
Other comprehensive
income (loss):
Minimum pension liability
adjustment 663 (901) (23)
Foreign currency
translation adjustments (861) (397) 2,067
-------- -------- --------
Total other comprehensive
income (loss) (198) (1,298) 2,044
-------- -------- --------
Total comprehensive income $ 36,830 $ 32,592 $ 52,067
======== ======== ========
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these financial statements.
</TABLE>
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is engaged principally in the design, engineering, production
and marketing of high-technology forged and investment cast metal and composite
components used for a wide variety of aerospace and power generation
applications.
The Company maintains its books using a 52/53 week year ending on the
Saturday nearest to May 31. For purposes of the consolidated financial
statements, the year-end is stated at May 31. The years ended May 31, 1999, 1998
and 1997 consisted of 52 weeks.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and all majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Revenue Recognition: Sales and income are recognized at the time products
are shipped.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Reclassifications: Where appropriate, prior year amounts have been
reclassified to permit comparison.
Cash and Cash Equivalents: Cash equivalents include short-term investments
with maturities of less than three months at the time of investment.
Inventories: Inventories are valued at both the lower of first-in,
first-out (FIFO) cost or market, or for certain forgings raw material and
work-in-process inventories, the last-in, first-out (LIFO) method. On certain
orders, usually involving lengthy raw material procurement and production
cycles, progress payments received from customers are reflected as a reduction
of inventories. Product repair costs are expensed as incurred.
Long-Term, Fixed Price Contracts: A substantial portion of the Company's
revenues is derived from long-term, fixed price contracts with major engine and
aircraft manufacturers. These contracts are typically "requirements" contracts
under which the purchaser commits to purchase a given portion of its
requirements of a particular component from the Company. Actual purchase
quantities are typically not determined until shortly before the year in which
products are to be delivered. Losses on such contracts are provided when
available information indicates that the sales price is less than a fully
allocated cost projection.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciable Assets: Property, plant and equipment, including significant
renewals and betterments, are capitalized at cost and are depreciated on the
straight-line method. Generally, depreciable lives range from 10 to 20 years for
land improvements, 10 to 40 years for buildings and 5 to 15 years for machinery
and equipment. Tooling production costs are primarily classified as machinery
and equipment and are capitalized at cost less associated reimbursement from
customers and depreciated over 5 years. Depreciation expense amounted to
$26,871,000, $22,835,000 and $20,168,000 in the years ended May 31, 1999, 1998
and 1997, respectively.
Bank Fees: Bank fees and related costs of obtaining credit facilities are
recorded as other assets and amortized over the term of the facilities.
Net Income per Share: The Company reports earnings per share in accordance
with Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"). Basic per-share data are computed based on the weighted average
number of common shares outstanding during each year. Diluted per-share data
include common stock equivalents related to outstanding stock options unless
their inclusion would be antidilutive.
Concentration of Credit Risk: Financial instruments that potentially
subject the Company to concentration of credit risk consist primarily of
temporary cash investments and trade receivables. The Company restricts
investment of temporary cash investments to financial institutions with high
credit standing. The Company has approximately 1,140 active customers. However,
the Company's accounts receivable are concentrated with a small number of
Fortune 500 companies with whom the Company has long-standing relationships.
Accordingly, management considers credit risk to be low. Five customers
accounted for 48.6%, 50.5% and 47.7% of the Company's revenues during the years
ended May 31, 1999, 1998 and 1997, respectively.
Currency Translation: For foreign operations, the local currency is the
functional currency. Assets and liabilities are translated at year-end exchange
rates, and statement of income items are translated at the average exchange
rates for the year. Translation adjustments are reported in accumulated other
comprehensive income as a separate component of stockholders' equity, which also
includes exchange gains and losses on certain intercompany balances of a
long-term investment nature.
Research and Development: Research and development expenses, including
related depreciation, amounted to $2,947,000, $3,290,000 and $2,895,000 for the
years ended May 31, 1999, 1998 and 1997, respectively.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangible Assets: Intangible assets consist primarily of costs of acquired
businesses in excess of net assets acquired and are amortized on a straight line
basis over periods up to 35 years. On a periodic basis, the Company estimates
the future undiscounted cash flows of the businesses to which the costs of
acquired businesses in excess of net assets acquired relate in order to ensure
that the carrying value of such intangible asset has not been impaired.
Accounting for Stock-Based Compensation: The Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), in accounting for its employee stock option plans because
the alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, when the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Impairment of Long-Lived Assets: The Company adopted Statement of Financial
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 prescribes
the accounting for the impairment of long-lived assets that are to be held and
used in the business and similar assets to be disposed of. The adoption has not
had a material effect on earnings or the financial position of the Company.
Reporting Comprehensive Income: In fiscal year 1999, the Company adopted
Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"). This statement
establishes standards for reporting and display of comprehensive income and its
components. The Company has reclassified all years presented to reflect
accumulated other comprehensive income and its components in the consolidated
statements of comprehensive income. The components that make up accumulated
other comprehensive income as of May 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
MAY 31, MAY 31, May 31,
1999 1998 1997
------ ------ ------
(000's OMITTED)
<S> <C> <C> <C>
Accumulated Pension liability
adjustment $ (315) $ (976) $ (76)
Accumulated foreign currency
translation 1,582 2,441 2,839
------ ------ ------
Total accumulated other
comprehensive income $1,267 $1,465 $2,763
====== ====== ======
</TABLE>
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
B. ACQUISITIONS
1999
On July 31, 1998, the Company and Titanium Metals Corporation ("TIMET")
combined their respective titanium casting businesses into a jointly-owned
venture. The joint venture, 80.1% owned by Wyman-Gordon and 19.9% owned by
TIMET, consists primarily of Wyman-Gordon's titanium casting business located in
Franklin, New Hampshire, and TIMET's titanium casting business located in
Albany, Oregon. The joint venture produces investment castings primarily for the
aerospace market and seeks to develop new applications for titanium castings.
The joint venture and its operating results from the date of acquisition are not
material to the consolidated financial statements of the Company.
In connection with the formation of the joint venture, Wyman-Gordon
exchanged the operating assets from its Millbury, Massachusetts, vacuum arc
remelting facility, which produces titanium ingots for further processing into
finished forgings, for $5.0 million and similar operating assets of TIMET's
titanium casting business, valued at approximately $7.0 million. The exchange
was treated as a nonmonetary exchange of assets, and a gain was recognized for
the cash received. In addition, Wyman-Gordon and TIMET have entered into a
ten-year supply agreement pursuant to which TIMET will supply a portion of
Wyman-Gordon's requirements for titanium raw materials for its forging and
casting operations.
1998
On April 9, 1998, the Company acquired International Extruded Products, LLC
("IXP"), a specialty manufacturer of extruded seamless wall pipe, for
approximately $15,460,000. The acquisition was financed through operating cash.
The acquisition was accounted for as a purchase and the net assets and results
of operations have been included in the consolidated financial statements since
the date of acquisition. The purchase price was allocated on the basis of the
estimated fair market value of the assets acquired and the liabilities assumed.
This acquisition did not materially impact consolidated results, therefore no
pro forma information is provided.
13
<PAGE>
C. BALANCE SHEET INFORMATION
Components of selected captions in the consolidated balance sheets follow:
<TABLE>
<CAPTION>
MAY 31, MAY 31,
1999 1998
-------- --------
(000'S OMITTED)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT:
Land, buildings and improvements $132,834 $133,401
Machinery and equipment 359,786 330,337
Under construction 23,555 27,065
-------- --------
516,175 490,803
Less: accumulated depreciation 301,571 293,440
-------- --------
$214,604 $197,363
======== ========
INTANGIBLE ASSETS:
Pension intangible $ 1,387 $ 1,847
Costs in excess of net assets acquired 28,786 28,786
Less: accumulated amortization (11,877) (11,172)
-------- --------
$ 18,296 $ 19,461
======== ========
OTHER ASSETS:
Cash surrender value of Company-owned
life insurance policies $ 1,170 $ 1,105
Other 6,960 4,618
-------- --------
$ 8,130 $ 5,723
======== ========
ACCRUED LIABILITIES AND OTHER:
Accrued payroll and benefits $ 13,254 $ 12,520
Restructuring, integration, disposal
and environmental reserves 12,211 5,330
Other 31,662 32,842
-------- --------
$ 57,127 $ 50,692
======== ========
</TABLE>
D. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
MAY 31, MAY 31,
1999 1998
-------- --------
(000'S OMITTED)
<S> <C> <C>
Raw Material $ 36,849 $ 50,050
Work-in-process 65,654 92,136
Other 3,204 4,221
-------- --------
105,707 146,407
Less progress payments 8,104 13,273
-------- --------
$ 97,603 $133,134
======== ========
</TABLE>
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At May 31, 1999 and 1998 approximately 33% and 38%, respectively, of
inventories are valued at LIFO cost. If all inventories valued at LIFO cost had
been valued at FIFO cost or market which approximates current replacement cost,
inventories would have been $16,446,000 and $18,262,000 higher than reported at
May 31, 1999 and 1998, respectively.
LIFO inventory quantities decreased in the year ended May 31, 1999. LIFO
inventory quantities increased in each of the years ended May 31, 1998 and 1997,
respectively. Inflation and deflation have negative and positive effects on
income from operations, respectively. The effects of lower quantities and
deflation (inflation) were as follows:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31,
1999 1998 1997
------- ------- -------
(000'S OMITTED)
<S> <C> <C> <C>
Lower quantities $ 1,398 $ - $ -
Deflation (inflation) 418 - (1,600)
------- ------- -------
Net increase (decrease) to income
from operations $ 1,816 $ - $(1,600)
======= ======= =======
</TABLE>
E. SHORT-TERM AND LONG-TERM DEBT
Short-term and long-term debt consisted of the following:
<TABLE>
<CAPTION>
MAY 31, MAY 31,
1999 1998
-------- --------
(000'S OMITTED)
<S> <C> <C>
Current portion of long-term debt $ 965 $ 3,017
======== ========
Long-term debt:
8% Senior Notes $150,000 $150,000
3/4% Senior Notes 5,275 5,275
Industrial Revenue Bond 4,800 5,600
Revolving Credit Facility, fixed rate
of 6.48% under a swap agreement at
May 31, 1999, variable rate of 5.7%
(LIBOR plus .75%) at June 2, 1999,
expiring fiscal 2002 4,000 -
Other 263 1,698
-------- --------
Total long-term debt $164,338 $162,573
======== ========
</TABLE>
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During fiscal year 1998, the Company issued $150,000,000 of 8% Senior Notes
due 2007 ("8% Senior Notes") under an indenture between the Company and a bank
as trustee. The 8% Senior Notes pay interest semi-annually in arrears on June 15
and December 15 of each year. The 8% Senior Notes are general unsecured
obligations of the Company, are non-callable for a five year period, and are
senior to any future subordinated indebtedness of the Company. Proceeds from the
sale of the 8% Senior Notes were used to repurchase $84,725,000 (94%) of its
outstanding 10 3/4% Senior Notes due 2003 ("10 3/4% Senior Notes").
In conjunction with the extinguishment of the 10 3/4% Senior Notes, the
Company recorded an extraordinary loss, net of income tax benefit of $2,920,000,
amounting to $5,192,000. The extraordinary after-tax loss relates to (i) the
premium related to the retirement of the 10 3/4% Senior Notes, (ii) the
write-off of certain deferred debt issue expenses and (iii) fees and expenses
paid by the Company with respect to the tender offer for the 10 3/4% Senior
Notes.
The estimated fair value of the combined 8% and 10 3/4% Senior Notes was
$151,952,000 and $157,067,000 at May 31, 1999 and 1998, respectively, based on
third party valuations.
During fiscal year 1997, the Company issued an Industrial Revenue Bond (the
"IRB") for the construction of a facility in Montrose, Colorado amounting to
$6,000,000. The IRB bears an interest rate approximating 3.5%, fluctuating
weekly. The fair value approximates market value. The Company maintains a letter
of credit to collateralize the IRB.
On May 20, 1994, the Company initiated, through a subsidiary, Wyman-Gordon
Receivables Corporation ("WGRC"), a revolving credit agreement with a group of
five banks ("Receivables Financing Program"). WGRC is a separate corporate
entity from Wyman-Gordon Company and its other subsidiaries, with its own
separate creditors. WGRC's business is the purchase of accounts receivable from
Wyman-Gordon Company and certain of its subsidiaries ("Sellers"), and neither
WGRC on the one hand nor the Sellers (or subsidiaries or affiliates of the
Sellers) on the other have agreed to pay or make their assets available to pay
creditors of others. WGRC's creditors have a claim on its assets prior to those
assets becoming available to any creditors of any of the Sellers. The facility
provides for a total commitment by the banks of up to $65,000,000, including a
letter of credit sub-facility of up to $35,000,000. Interest on borrowings is
charged at LIBOR plus 0.625% or based on the bank's base rate.
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
There were no borrowings outstanding under the Receivables Financing
Program at May 31, 1999 and 1998. At May 31, 1999 and 1998, the total
availability under the Receivables Financing Program was $65,000,000, there were
no borrowings against the available amounts in either year and letters of credit
amounting to $9,808,000 and $8,373,000 were outstanding, respectively.
Wyman-Gordon Limited, the Company's subsidiary located in Livingston,
Scotland, entered into a credit agreement ("the U.K. Credit Agreement") with
Clydesdale Bank PLC ("Clydesdale") effective June 22, 1998. The maximum
borrowing capacity under the U.K. Credit Agreement is #2,000,000 (approximately
$3,200,000) with separate letter of credit and guarantee limits of #1,000,000
(approximately $1,600,000) each. Borrowings bear interest at 1% over
Clydesdale's base rate. In the event that borrowings by way of overdraft are
allowed to exceed the agreed limit, interest on the excess borrowings will be
charged at the rate of 1.5% per annum over Clydesdale's base rate. The U.K.
Credit Agreement is secured by all present and future assets of Wyman-Gordon
Limited (including without limitation, accounts receivable, inventory, property,
plant and equipment, intellectual property, intercompany loans, and other real
and personal property). The U.K. Credit Agreement contains covenants
representations and warranties customary for such facilities. There were no
borrowings outstanding at May 31, 1999 or May 31, 1998. At May 31, 1999, and May
31, 1998, Wyman-Gordon Limited had outstanding #1,069,000 (approximately
$1,710,000), and #975,000 (approximately $1,590,000) respectively, of letters of
credit or guarantees under the U.K. Credit Agreement.
For the years ended May 31, 1999 and 1998, the weighted average interest
rate on short-term borrowings was 4.4% and 6.5%, respectively.
Annual maturities of long-term debt in the next five years amount to
$965,460 for 2000, $897,707 for 2001, $4,907,732 for 2002, $6,132,978 for 2003,
$800,000 for 2004 and $151,600,000 thereafter. On June 30, 1998, the Company
made a final principal payment of $2,300,000 under the Company's promissory note
to Cooper Industries, Inc. provided under the terms of the Stock Purchase
Agreement with Cooper Industries, Inc.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of interest expense are as follows:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31,
1999 1998 1997
------- ------- -------
(000'S OMITTED)
<S> <C> <C> <C>
Interest on debt $13,069 $11,319 $ 9,795
Capitalized interest - - (528)
Amortization of financing fees
and other 1,165 1,229 1,555
------- ------- -------
Interest expense $14,234 $12,548 $10,822
======= ======= =======
</TABLE>
Total interest paid approximates "Interest on debt" stated in the table
above.
F. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (CREDITS)
Cameron Purchase Cash Costs:
In connection with the acquisition of Cameron Forged Products Company
("Cameron"), the Company recorded $7,000,000 for costs related to the relocation
of Cameron machinery and dies, severance of Cameron personnel and other costs.
All activities associated with these reserves have been completed.
1994 Cameron Integration Costs:
The integration of Cameron in May 1994 resulted in the Company's recording
an integration restructuring charge totalling $24,100,000 to provide for
relocating machinery, equipment, tooling and dies of the Company, relocation and
severance costs of Company personnel and the write-down of certain assets of the
Company. The reserve was comprised of non-cash charges of $15,800,000 which were
fully charged by the end of fiscal year 1995, and a charge of $8,300,000
representing estimated future cash charges. As of May 31, 1999, the Company
estimates future cash outlays of approximately $300,000 in the year ended May
31, 2000 and $200,000 thereafter, in accordance with future payments under
contractual obligations.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 Restructuring:
The Company recorded a charge totalling $11,500,000 which included
$4,600,000 to provide for severance and other personnel costs associated with
workforce reductions at the Company's Grafton, Massachusetts forging facility,
$3,400,000 to write-off and dispose of certain Forging equipment, $2,300,000 to
reduce the carrying value and dispose of certain assets of the Company's
titanium castings operations and $1,200,000 to consolidate the titanium castings
operations. The Company made a total of $3,900,000 of cash charges against these
reserves during the years ended May 31, 1999, 1998 and 1997 and estimates that
the remaining reserves associated with the disposal of Forging equipment and
consolidation of the titanium castings operations will require cash outlays of
$2,200,000 in the year ended May 31, 2000 and $300,000 thereafter.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of charges made or estimated to be made against restructuring,
integration and disposal reserves is as follows:
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED
MAY 31, 1994 YEAR
THROUGH THE ENDED
YEAR ENDED MAY 31,
TOTAL MAY 31, 1997 1998
------- ------------ --------
(000'S OMITTED)
<S> <C> <C> <C>
CAMERON PURCHASE CASH COSTS:
Cost of relocating Cameron's
machinery and equipment
and tooling and dies $ 3,200 $ 2,800 $ 100
Severance of personnel 3,800 3,600 -
------- ------- -------
Total cash charges $ 7,000 $ 6,400 $ 100
======= ======= =======
1994 CAMERON INTEGRATION COSTS:
Movement of machinery,
equipment and tooling and
dies $ 4,300 $ 3,200 $ 400
Severance and other personnel
costs 4,000 3,600 100
------- ------- -------
Total cash charges $ 8,300 $ 6,800 $ 500
======= ======= =======
1997 RESTRUCTURING:
Cash:
Severance and other personnel
costs $ 2,200 $ 200 $ 1,400
Disposal of Forging equipment 2,300 - 400
Castings titanium operations 1,900 700 -
------- ------- -------
Total cash charges 6,400 900 1,800
------- ------- -------
Non-cash:
Severance and other personnel
costs 2,400 2,400 -
Asset write-off and
revaluation 2,700 2,700 -
------- ------- -------
Total non-cash charges 5,100 5,100 -
------- ------- -------
Total 1997 Restructuring
charges $11,500 $ 6,000 $ 1,800
======= ======= =======
</TABLE>
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR
YEAR ENDED
ENDED MAY 31,
MAY 31, 2000 AND
1999 THEREAFTER
------- ----------
(000'S OMITTED)
<S> <C> <C>
CAMERON PURCHASE CASH COSTS:
Cost of relocating Cameron's
machinery and equipment
and tooling and dies $ 300 $ -
Severance of personnel 200 -
------- -------
Total cash charges $ 500 $ -
======= =======
1994 CAMERON INTEGRATION COSTS:
Movement of machinery,
equipment and tooling and
dies $ 200 $ 500
Severance and other personnel
costs 300 -
------- -------
Total cash charges $ 500 $ 500
======= =======
1997 RESTRUCTURING:
Cash:
Severance and other personnel
costs $ 600 $ -
Disposal of Forging equipment 600 1,300
Castings titanium operations - 1,200
------- -------
Total cash charges 1,200 2,500
------- -------
Non-Cash:
Severance and other personnel
costs - -
Asset write-off and
revaluation - -
------- -------
Total non-cash charges - -
------- -------
Total 1997 Restructuring
charges $ 1,200 $ 2,500
======= =======
</TABLE>
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Charges (Credits):
Other charges (credits) are as follows:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31,
1999 1998 1997
------- ------- -------
(000'S OMITTED)
<S> <C> <C> <C>
Write-off of Australian joint
venture $ - $ - $ 2,484
(Recovery) write-off of cash
surrender value of company-
owned life insurance polices - (4,000) 5,745
(Recovery) write-off of building
held for sale - (1,900) 1,900
Houston accident costs - - 1,200
Houston accident claim settlement
costs 12,955 - -
Gain on sale of operating assets
of Millbury facility (5,000) - -
Severance and asset write-down 5,790 - -
Other - 1,000 250
------- ------- -------
$13,745 $(4,900) $11,579
======= ======= =======
</TABLE>
During fiscal year 1999, the Company recorded a charge totalling $5,790,000
which included $4,700,000 to provide for severance and other personnel costs
associated with company-wide headcount reductions and a charge of $1,090,000 to
reduce the carrying value and dispose of certain assets of the Company's
titanium castings operations. The Company made a total of $1,800,000 of cash
charges against this reserve during fiscal year 1999 and estimates the remaining
severance and other personnel costs will require a cash outlay of $2,900,000 in
the year ending May 31, 2000.
G. ENVIRONMENTAL MATTERS
The Company's operations are subject to extensive, stringent and changing
federal, state and local environmental laws and regulations, including those
regulating the use, handling, storage, discharge and disposal of hazardous
substances and the remediation of alleged environmental contamination.
Accordingly, the Company is involved from time to time in administrative and
judicial inquiries and proceedings regarding environmental matters.
Nevertheless, the Company believes that compliance with these laws and
regulations will not have a material adverse effect on the Company's operations
as a whole. However, it is not possible to predict accurately the amount or
timing of costs of any future environmental remediation requirements. The
Company continues to design and implement a system of programs and facilities
for the management of its raw materials, production processes and industrial
waste to promote compliance with
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
environmental requirements. As of May 31, 1999, aggregate environmental reserves
amounted to $15.5 million, which includes expected cleanup costs estimated
between $4.4 million and $5.4 million upon the eventual sale of the Worcester,
Massachusetts facility, certain environmental issues, including the remediation
of on-site landfills, at the Houston, Texas facility amounting to approximately
$3.0 million, $4.4 million in remediation projects at the Grafton, Massachusetts
facility, $0.8 million for remediation at the Buffalo, New York facility and
$1.1 million for various Superfund sites. There can be no assurance that the
actual costs of remediation will not eventually materially exceed the amount
presently accrued.
Pursuant to an agreement entered into with the U.S. Air Force upon the
acquisition of the Grafton facility from the federal government in 1982, the
Company agreed to make expenditures totaling $20.8 million for environmental
management and remediation at that site, of which $3.3 million remained as of
May 31, 1999. Approximately one-half of the remaining Air Force projects are
capital in nature and the remainder are covered by existing reserves. These
expenditures will not resolve all of the Company's obligations to federal and
state regulatory authorities, who are not parties to the agreement, however, and
the Company expects to incur an additional amount, currently estimated at
approximately $2.8 million, to comply with current federal and state
environmental requirements governing the investigation and remediation of
contamination at the site.
The Company's Grafton facility was formerly included in the U.S. Nuclear
Regulatory Commission's ("NRC") May 1992 Site Decommissioning Management Plan
("SDMP") for low-level radioactive waste as the result of the disposal of
magnesium thorium alloys at the facility in the 1960s and early 1970s under
license from the Atomic Energy Commission. On March 31, 1997, the NRC informed
the Company that jurisdiction for the Grafton site had been transferred to the
Commonwealth of Massachusetts Department of Public Health (the "DPH") and that
the Grafton facility had been removed from the SDMP. Although it is unknown what
specific remediation and disposal requirements may be imposed on the Company by
the DPH, the Company believes that a reserve of $1.5 million, included within
the $2.8 million noted above, is sufficient to cover all costs. There can be no
assurance, however, that such reserve will be adequate to cover any obligations
that the DPH may ultimately impose on the Company.
The Company, together with numerous other parties, has been named a PRP
under the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") for the cleanup of the following Superfund sites: Operating
Industries, Monterey Park, California; PSC Resources, Palmer, Massachusetts; the
Harvey GRQ site, Harvey, Illinois; and the Gemme/Fournier site, Leicester,
Massachusetts. The Company believes that a reserve of $1.1 million recorded on
its books is sufficient to cover all costs.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At the Gemme/Fournier site, a proposed agreement would allocate 33% of the
cleanup costs to the Company. In September 1995, a consulting firm retained by
the PRP group made a preliminary remediation cost estimate of $1.4 million to
$2.8 million. The Company's insurance company is defending the Company's
interests, and the Company believes that any recovery against the Company would
be offset by recovery of insurance proceeds.
The Company expects to incur between $4.4 and $5.4 million in cleanup
expenses upon the planned sale of its Worcester, Massachusetts facility to
remedy certain contamination discovered on site. The Massachusetts Department of
Environmental Protection has classified the site as a Tier II site under the
Massachusetts Contingency Plan.
H. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company has a defined benefit pension plan covering substantially all
employees. Benefits are generally based on years of service and a fixed monthly
rate or average earnings during the last years of employment. Pension plan
assets are invested in equity and fixed income securities, pooled funds
including real estate funds and annuities. Company contributions are determined
based upon the funding requirements of U.S. and other governmental laws and
regulations. The Company also provides most retired employees with health care
and life insurance benefits. The majority of these health care and life
insurance benefits are provided through insurance companies, some of whose
premiums are computed on a cost plus basis. The Company has no plans for funding
the liability and will continue to pay for retiree medical costs as they occur.
In fiscal year 1999, the Company adopted Statement No. 132, "Employers'
Disclosures about Pensions and Other Post Retirement Benefits" ("SFAS 132")
which revises disclosures about pension and other postretirement benefits. The
following information is provided in accordance with the requirements of the
statement for the plans discussed above.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. Pension and Postretirement Benefit Plans
<TABLE>
<CAPTION>
POSTRETIREMENTS
PENSION BENEFITS BENEFITS
--------------------------- --------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31, MAY 31,
1999 1998 1999 1998
-------- -------- -------- --------
(000's OMITTED)
<S> <C> <C> <C> <C>
Change in plan assets:
Beginning fair value
of plan assets $195,987 $164,977 $ - $ -
Actual return on
plan assets 12,299 45,296 - -
Benefits paid (14,499) (14,286) - -
-------- -------- -------- --------
Ending fair value
of plan assets $193,787 $195,987 $ - $ -
======== ======== ======== ========
Change in benefit
obligations:
Beginning benefit
obligations $180,707 $169,965 $ 46,638 $ 46,443
Service cost 5,326 4,961 166 160
Interest cost 11,694 12,179 3,063 3,372
Amendments - - (271) -
Special termination
costs (benefits) 522 - (234) -
Actuarial (gains)
losses (1,054) 8,794 657 2,476
Benefits paid (15,490) (15,192) (5,756) (5,813)
-------- -------- -------- --------
Ending benefit
obligations $181,705 $180,707 $ 44,263 $ 46,638
======== ======== ======== ========
Reconciliation to balance sheet amounts:
Funded status of the
plan (underfunded) $ 12,083 $ 15,280 $(44,263) $(46,638)
Unrecognized
actuarial net
(gain) loss (24,057) (28,221) 2,020 1,335
Unrecognized prior
service cost 6,462 7,503 358 673
Unrecognized
transition
obligation 1,271 2,021 - -
-------- -------- -------- --------
Accrued benefit
cost $ (4,241) $ (3,417) $(41,885) $(44,630)
======== ======== ======== ========
</TABLE>
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
POSTRETIREMENTS
PENSION BENEFITS BENEFITS
--------------------------- --------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31, MAY 31,
1999 1998 1999 1998
-------- -------- -------- --------
(000's OMITTED)
<S> <C> <C> <C> <C>
Amounts recognized in the balance sheets:
Prepaid benefit cost $ 3,842 $ 3,750 $ - $ -
Accrued benefit
liability (9,785) (9,990) - -
Pension intangible
asset 1,387 1,847 - -
Accumulated other
comprehensive
(income) loss 315 976 - -
Accrued retirement
benefits obligation - - (41,885) (44,630)
-------- -------- -------- --------
Accrued benefit
cost $ (4,241) $ (3,417) $(41,885) $(44,630)
======== ======== ======== ========
</TABLE>
Included in the aggregated data in the above tables are amounts applicable
to the Company's pension plans with accumulated benefit obligations in excess of
plan assets. The Company maintains two unfunded pension plans and the amounts
related to such plans were as follows:
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
MAY 31, MAY 31,
1999 1998
-------- --------
(000's OMITTED)
<S> <C> <C>
Projected benefit obligation $ 11,952 $ 11,202
Accumulated benefit obligation $ 9,785 $ 9,990
</TABLE>
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The assumptions used in determining the benefit obligations in fiscal years
1999 and 1998 were as follows:
<TABLE>
<CAPTION>
POSTRETIREMENTS
PENSION BENEFITS BENEFITS
--------------------------- --------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31, MAY 31,
1999 1998 1999 1998
-------- -------- -------- --------
(000's OMITTED)
<S> <C> <C> <C> <C>
Discount rate 6.75% 7.00% 6.75% 7.00%
Expected return on
plan assets 10.50% 10.00% - -
Rate of compensation
increase 3.00% 4.00-5.00% - -
</TABLE>
The assumed health care cost trend rate has a significant effect on the
amounts reported. For the year ended May 31, 1999, the medical trend rates for
indemnity and Health Maintenance Organization ("HMO") inflationary costs are
6.0% and 4.0%, respectively. The rates for indemnity and HMO for the year ended
May 31, 2000 are 5.5% and 4.0% and are ultimately estimated at 5.0% and 4.0%,
respectively, for the year ended May 31, 2001.
<TABLE>
<CAPTION>
1 PERCENTAGE 1 PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(000's OMITTED)
<S> <C> <C>
Effect on total of service
and interest cost components $ 235 $ (214)
Effect on postretirement
benefit obligation $ 3,074 $(2,816)
</TABLE>
The net cost for the Company's U.S. pension plans consisted of the
following components:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31,
1999 1998 1997
-------- -------- --------
(000's OMITTED)
<S> <C> <C> <C>
Service cost $ 5,326 $ 4,961 $ 4,298
Interest cost 11,694 12,179 11,302
Expected return on plan assets (17,653) (14,611) (14,658)
Amortization of prior service cost 1,041 1,041 820
Amortization of transitional
(asset) or obligation 750 750 750
Recognized actuarial loss 135 97 6
Enhanced benefit package for
early retirement 522 - 3,775
-------- -------- --------
Net pension cost $ 1,815 $ 4,417 $ 6,293
======== ======== ========
</TABLE>
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The cost of postretirement benefits other than pensions consisted of the
following components:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31,
1999 1998 1997
------ ------ -------
(000's OMITTED)
<S> <C> <C> <C>
Service cost $ 166 $ 160 $ 380
Prior service cost 44 61 -
Benefit from early retirement
package (234) - (1,375)
Interest cost 3,062 3,372 3,550
Net amortization and deferral - - 409
------ ------ -------
Postretirement benefit cost $3,038 $3,593 $ 2,964
====== ====== =======
</TABLE>
U.K. Pension Plan
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
MAY 31, MAY 31,
1999 1998
------- -------
(000's OMITTED)
<S> <C> <C>
Change in Plan Assets:
Beginning fair value of plan
assets $26,686 $21,873
Actual return on plan assets 1,259 4,595
Company contributions 840 776
Plan participants' contributions 418 388
Benefits and expenses paid (1,152) (445)
------- -------
Ending fair value of plan
assets $28,051 $27,187
======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
MAY 31, MAY 31,
1999 1998
------- -------
(000's OMITTED)
<S> <C> <C>
Change in Benefit Obligations:
Beginning benefit obligations $25,306 $21,035
Service cost 896 737
Interest cost 1,568 1,674
Plan participants' contributions 418 388
Liability loss 2,558 2,183
Benefits paid (942) (236)
------- -------
Ending benefit obligation $29,804 $25,781
======= =======
</TABLE>
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
MAY 31, MAY 31,
1999 1998
------- -------
(000's OMITTED)
<S> <C> <C>
Reconciliation to balance sheet amounts:
Funded status of the plan
(underfunded) $(1,753) $ 1,406
Unrecognized net loss/(gain) 2,042 (1,322)
------- -------
Prepaid pension cost $ 289 $ 84
======= =======
</TABLE>
The assumptions used in determining the benefit obligation in fiscal years
1999 and 1998 were as follows:
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
MAY 31, MAY 31,
1999 1998
------- -------
(000's OMITTED)
<S> <C> <C>
Discount rate 5.75% 6.25%
Expected return on plan assets 6.25% 6.25%
Rate of compensation increase 3.25% 3.25%
</TABLE>
Pension expense for the U.K. pension plan consisted of the following
components:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31,
1999 1998 1997
------- ------- -------
(000's OMITTED)
<S> <C> <C> <C>
Service cost $ 924 $ 746 $ 629
Interest cost 1,617 1,695 1,507
Expected return on assets (1,739) (1,800) (1,640)
------- ------- -------
Net pension expense $ 802 $ 641 $ 496
======= ======= =======
</TABLE>
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Defined Contribution Plan
The Company also makes a 401(k) plan available to most full-time employees.
Employer contributions to the defined contribution plan are made at the
Company's discretion and are reviewed periodically. The Company made cash
contribution of $704,000 for the year ended May 31, 1999. There were no cash
contributions in the years ended May 31, 1998 and 1997. Additionally, for the
years ended May 31, 1999, 1998 and 1997, the Company contributed 176,617,
100,409 and 97,696 shares of its common stock from Treasury to its defined
contribution plan, respectively, and recorded expense relating thereto of
$2,552,000, $2,439,000 and $2,057,000, respectively.
I. FEDERAL, FOREIGN AND STATE INCOME TAXES
The components of the net provision (benefit) for income taxes for the
years ended May 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31,
1999 1998 1997
------- ------- -------
(000's OMITTED)
<S> <C> <C> <C>
Current tax provision:
Federal $13,864 $ 5,778 $ 7,900
State 2,000 1,250 680
Foreign 1,003 2,827 2,170
------- ------- --------
16,867 9,855 10,750
Deferred tax (credit) provision:
Federal (5,600) 6,500 (34,080)
State (800) - (480)
Foreign - - (1,870)
------- ------- --------
(6,400) 6,500 (36,430)
------- ------- --------
Net provision (benefit)
for income taxes $10,467 $16,355 $(25,680)
======= ======= ========
</TABLE>
In the year ended May 31, 1999, the Company provided $10,467,000 for income
taxes. In the year ended May 31, 1998, the Company provided $16,355,000 for
income taxes, net of a tax benefit of approximately $1,800,000 relating to the
utilization of NOL carryforwards. In fiscal year 1998, the Company recorded a
$2,920,000 tax benefit against the extraordinary loss of $8,112,000 associated
with the early extinguishment of the Company's 10 3/4% Senior Notes.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes before extraordinary item is at a
rate other than the federal statutory tax rate for the following reasons:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31,
1999 1998 1997
------- ------- -------
(000's OMITTED)
<S> <C> <C> <C>
Provision at the applicable
U.S. federal statutory tax rate $16,623 $19,403 $ 8,442
Benefit from net permanent tax
differences (510) (4,059) -
Benefit of higher statutory tax
rates in applicable prior years
realized in Section 172(f)
carryback claims - - (2,700)
State income taxes 1,300 1,640 200
(Decrease) increase of deferred
tax asset valuation allowance (6,400) 1,168 (30,626)
Other (546) (1,797) (996)
------- ------- --------
Income tax provision (benefit)
before extraordinary loss tax
benefit $10,467 $16,355 $(25,680)
======= ======= ========
</TABLE>
The principal components of deferred tax assets and liabilities were as
follows:
<TABLE>
<CAPTION>
MAY 31, 1999 MAY 31, 1998
------------ ------------
(000'S OMITTED)
<S> <C> <C>
DEFERRED TAX ASSETS
Provision for postretirement
benefits $ 17,173 $ 18,298
Net operating loss carryforwards 6,714 4,667
Restructuring provisions 11,120 8,406
Alternative minimum tax
carryforward credit 2,781 5,964
Other 9,145 8,205
-------- --------
46,933 45,540
Valuation allowance (26,613) (32,269)
-------- --------
20,320 13,271
-------- --------
DEFERRED TAX LIABILITIES
Accelerated depreciation 13,594 12,409
Other 326 862
-------- --------
13,920 13,271
-------- --------
Net deferred tax asset $ 6,400 $ -
======== ========
</TABLE>
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has recorded a valuation allowance for deferred tax assets
because of uncertainties associated with the realization of some of the deferred
tax benefits. The change in the valuation allowance primarily reflects the
expected utilization of AMT credits, use of certain state NOL carryforwards and
credits associated with various other deferred assets.
J. NET INCOME PER SHARE
There were no adjustments required to be made to income before
extraordinary item for purposes of computing basic and diluted net income per
share. A reconciliation of the average number of common shares outstanding used
in the calculation of basic and diluted net income per share is as follows:
<TABLE>
<CAPTION>
MAY 31, MAY 31, MAY 31,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Shares used to compute basic
net income per share 36,149,072 36,331,305 35,824,576
Dilutive effect of stock
options 440,277 1,025,553 1,202,247
---------- ---------- ----------
Shares used to compute
diluted net income per
share 36,589,349 37,356,858 37,026,823
========== ========== ==========
</TABLE>
There were stock options outstanding that were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares and, therefore
would be antidilutive. The following table summarizes all options exceeding
average market price as of the years ended May 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
MAY 31, MAY 31, MAY 31,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Options exceeding
average market price 1,243,145 240,000 185,000
Exercise price range $16.56- $25.50 $23.00
$25.50
</TABLE>
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
K. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
The Company, through administration by the Compensation Committee of the
Company's Board of Directors (the "Committee"), may grant awards under the
Company's Long-Term Incentive Plans in the form of non-qualified stock options
or incentive stock options to those key employees it selects to purchase in the
aggregate up to 3,400,000 shares of newly issued or treasury common stock.
Options expire after 10 years from the date of grant and generally become
exercisable ratably over a three to seven year period commencing from the date
of grant. The exercise price of stock options may not be less than 100% of the
fair market value on the date of grant. Awards of stock appreciation rights
("SAR's") may also be granted, either in tandem with grants of stock options
(and exercisable as an alternative to the exercise of stock options) or
separately.
In addition, the Committee may grant other awards that consist of, are
denominated in or are payable in shares or that are valued by reference to
shares, including, for example, restricted shares, phantom shares, performance
units, performance bonus awards or other awards payable in cash, shares or a
combination thereof at the Committee's discretion.
Information concerning stock options issued to officers and other employees
is presented in the following table.
<TABLE>
<CAPTION>
YEAR WEIGHTED YEAR WEIGHTED
ENDED AVERAGE ENDED AVERAGE
MAY 31, EXERCISE MAY 31, EXERCISE
1999 PRICE 1998 PRICE
------- -------- ------- --------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C>
Number of shares under option:
Outstanding at
beginning of year 2,462 $14.46 2,648 $12.56
Granted 322 13.24 356 24.11
Exercised (141) 10.86 (500) 10.74
Canceled or expired (197) 18.19 (42) 18.95
----- ------ ----- ------
Outstanding at end
of year 2,446 $14.20 2,462 $14.46
===== ====== ===== ======
Exercisable at end
of year 1,723 1,598
===== =====
</TABLE>
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR WEIGHTED
ENDED AVERAGE
MAY 31, EXERCISE
1997 PRICE
------- --------
(SHARES IN THOUSANDS)
<S> <C> <C>
Number of shares under
option:
Outstanding at
beginning of year 2,295 $ 9.46
Granted 817 18.34
Exercised (415) 6.60
Canceled or expired (49) 14.18
----- ------
Outstanding at end
of year 2,648 $12.56
===== ======
Exercisable at end
of year 1,189
</TABLE>
At May 31, 1999 and 1998, 1,186,191 and 1,304,207 shares were available for
future grants, respectively.
The following tables summarize information about stock options outstanding
at May 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ---------------------
WTD. AVG. WTD. WTD.
RANGE OF REMAINING AVG. AVG.
EXERCISE CONTRACTUAL EXER. EXER.
PRICES SHARES LIFE(YRS.) PRICE SHARES PRICE
- ------------- ------- ---------- ------ ------- -------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$ 3.00-$ 7.99 675 2.8 $ 5.77 675 $ 5.77
$ 8.00-$12.99 257 6.4 $12.25 232 $12.51
$13.00-$17.99 1,032 7.3 $15.83 551 $16.68
$18.00-$22.99 104 5.1 $20.20 82 $20.15
$23.00-$27.99 378 7.7 $24.48 183 $24.06
----- --- ------ ----- ------
2,446 5.9 $14.20 1,723 $12.79
===== === ====== ===== ======
</TABLE>
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to stock options, the Company grants performance shares to key
executive employees. There were no performance shares granted during the year
ended May 31, 1999 and 1998. During the year ended May 31, 1997, awards of
118,000 shares of the Company's common stock were made, subject to restrictions
based upon continued employment and the performance of the Company. There was no
compensation expense relating to the awards for the year ended May 31, 1999.
Compensation expense totalling $3,412,000 and $1,403,000 relating to the awards
were recorded during the years ended May 31, 1998 and 1997, respectively.
EMPLOYEE STOCK PURCHASE PLAN
Effective January 1, 1996, the Company adopted a qualified, noncompensatory
Employee Stock Purchase Plan. This plan enables substantially all employees to
subscribe to purchase shares of the Company's common stock on an annual basis.
Such shares are subscribed at the lower of 85% of their fair market value on the
first day of the plan year, January 1, or 85% of their fair market value on the
last business day of the plan year, usually December 31. Each eligible
employee's participation is limited to 10% of base wages and a maximum of
450,000 shares are authorized for subscription. Employee subscriptions for the
twelve months ended December 31, 1998 were 80,147 shares at $8.77 per share
based on 85% of the fair market value on December 31, 1998 ($10.31). Under the
terms of the Merger agreement between Wyman-Gordon Company and Precision
Castparts Corp.("PCC"), the Company terminated the 1999 Employee Stock Purchase
Plan on May 17, 1999. All proceeds received under this plan were used to
purchase shares of the Company's common stock at a price per share equal to 85%
of the $10.31 closing price on December 31, 1998, or $8.77 per share. Employees
have the option of tendering these shares to PCC at a price of $20.00 per share
in accordance with PCC's tender offer. See footnote N. Pending Merger.
Accounting for stock-based plans is in accordance with Accounting
Principles Board Opinion 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation expense has been recognized for fixed stock option
plans or the Employee Stock Purchase Plan.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As required by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company has determined the weighted average fair values of stock-based
arrangements granted during the years ended May 31, 1999, 1998 and 1997 to be
$7.77, $14.94 and $11.28, respectively. The fair values of stock-based
compensation awards granted were estimated using the Black-Scholes model with
the following assumptions.
<TABLE>
<CAPTION>
YEAR EXPECTED RISK-FREE
ENDED GRANT OPTION DIVIDEND INTEREST
MAY 31, DATE TERM VOLATILITY YIELD RATE
- ------ -------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
1999 7/31/98 7 years 50% -- 5.54%
10/21/98 7 years 50% -- 5.54%
1/20/99 7 years 50% -- 5.54%
1998 10/15/97 10 years 41% -- 5.57%
1/14/98 9 years 41% -- 5.57%
2/17/98 10 years 41% -- 5.57%
1997 7/16/96 9 years 38% -- 6.67%
10/16/96 10 years 38% -- 6.67%
1/15/97 10 years 38% -- 6.67%
3/17/97 9 years 38% -- 6.67%
</TABLE>
Had compensation expense for the Company's stock-based plans and Employee
Stock Purchase Plan been accounted for using the fair value method prescribed by
SFAS No. 123, net income and earnings per share would have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(000'S OMITTED, EXCEPT PER-SHARE DATA)
<S> <C> <C> <C>
Net income as reported $37,028 $33,890 $50,023
Pro forma net income under
SFAS No. 123 31,595 32,062 47,399
Net income per share as
reported:
Basic $ 1.02 $ .93 $ 1.40
Diluted 1.01 .91 1.35
Pro forma net income per
share under SFAS No. 123:
Basic $ .87 $ .88 $ 1.32
Diluted .86 .86 1.28
</TABLE>
The effects of applying SFAS No. 123 in the above pro forma disclosure are
not indicative of future amounts.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
L. STOCK PURCHASE RIGHTS
On October 21, 1998, the Company's Board of Directors unanimously adopted a
shareholder rights agreement under which preferred share purchase rights were
distributed as a dividend on shares of Wyman-Gordon Company's common stock. The
rights will be exercisable only if a person or group acquires 15 percent or more
of the Company's common stock or announces a tender offer, the consummation of
which would result in ownership by a person or group of 15 percent or more of
the common stock or the determination by the Board of Directors that any person
is an "Adverse Person." Each right entitles the registered holder thereof to
purchase from the Company a unit consisting of one ten-thousandth of a share of
Series B Junior Participating Cumulative Preferred Stock, at a cash exercise
price of $75 per unit. The dividend distribution was made on November 30, 1998,
payable to stockholders of record on that date.
The rights will expire on November 30, 2008, subject to earlier redemption
or exchange by Wyman-Gordon Company as described in the plan. The rights
distribution is not taxable to stockholders.
During fiscal year 1999, the Company's Board of Directors authorized a
stock repurchase program to acquire up to 4 million shares of Wyman-Gordon
Company's common stock. The shares may be purchased from time-to-time in the
open market. As of May 31, 1999, the Company had purchased 1,273,900 shares, at
an average price of $10.28 per share, under this program.
M. COMMITMENTS AND CONTINGENCIES
At May 31, 1999, certain lawsuits arising in the normal course of business
were pending. In the opinion of management, the outcome of these legal matters
will not have a material adverse effect on the Company's financial position and
results of operations.
The Company has entered into various foreign exchange contracts to manage
its foreign exchange risks. Through its foreign currency hedging activities, the
Company seeks to minimize the risk that the eventual cash flows resulting from
purchase and sale transactions denominated in other than the functional currency
of the operating unit will be affected by changes in exchange rates. Foreign
currency transaction exposures generally are the responsibility of the Company's
individual operating units to manage as an integral part of their business. The
Company hedges its foreign currency transaction exposures based on judgment,
generally through the use of forward exchange contracts. Gains and losses on the
Company's foreign currency transaction hedges are recognized as an adjustment to
the underlying hedged transactions. Deferred gains and losses on
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
foreign exchange contracts were not significant at May 31, 1999 and 1998. The
Company had foreign exchange contracts totaling $13,486,000 at May 31, 1999.
Such contracts include forward contracts of $4,855,000 for the purchase of U.K.
pounds and $8,631,000 for the sale of U.K. pounds. These contracts hedge certain
normal operating purchase and sales transactions, generally mature within six
months and require the Company to exchange U.K. pounds for non-U.K. currencies
or non-U.K. currencies for U.K. pounds. Translation and transaction gains and
losses included in the Consolidated Statements of Net Income and Consolidated
Statements of Comprehensive Income for the years ended May 31, 1999, 1998 and
1997 were not significant.
On December 22, 1996, a serious industrial accident occurred at the
Houston, Texas, facility of Wyman-Gordon Forgings, Inc. ("WGFI"), a wholly-owned
subsidiary of the Company, in which eight employees were killed, and three
employees and several subcontractor employees were injured.
The Company and WGFI have settled the lawsuits brought by all decedents'
families and other claimants on terms acceptable to the Company and its
insurance carriers. The amounts paid in settlement of the lawsuits exceeded the
Company's available liability insurance. The Company recorded a charge of $13.8
million in the third quarter of fiscal year 1999 that covered its share of the
costs of defending the lawsuits and funding the agreed settlements.
On September 25, 1997, the Company received a subpoena from the United
States Department of Justice informing it that the Department of Defense and
other federal agencies had commenced an investigation with respect to the
manufacture and sale of investment castings at the Company's Tilton, New
Hampshire facility. The Company does not believe that the federal investigation
is likely to result in a material adverse impact on the Company's financial
condition or results of operations, although no assurance as to the outcome or
impact of that investigation can be given.
N. PENDING MERGER
On May 17, 1999, Precision Castparts, Corp. ("PCC") and the Company
announced that PCC has agreed to acquire 100 percent of the Company's common
stock in a cash tender offer of $20 per share, valued at approximately
$825,000,000, including the assumption of $104,000,000 of net debt. Upon
completion of the tender offer and subsequent merger, Wyman-Gordon will become a
wholly-owned subsidiary of PCC. The completion of the tender offer is
conditioned upon the tender of at least two-thirds of the outstanding shares of
Wyman-Gordon and certain other conditions, including compliance with the
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976. PCC,
headquartered in Portland, Oregon, is a worldwide manufacturer of complex metal
components and products.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
O. SEGMENT INFORMATION
In fiscal year 1999, the Company adopted Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which revises
reporting and disclosure requirements for operating segments. The Statement
requires that the Company present segment data based on the way that management
organizes the businesses within the Company for making operating decisions and
assessing performance. The three segments, based on markets served, are
Aerospace, Energy and Other.
Aerospace Market
The Aerospace Products Segment produces components utilizing all of the
Company's manufacturing disciplines: forging, investment casting and composites.
The parts produced in this segment are used extensively by the major jet engine
manufacturers and airframe builders within the commercial and military aircraft
industry. A variety of engine parts produced by the Company include fan discs,
compressor discs, turbine discs, seals, shafts, hubs, reversers and valves.
Aerospace airframe components include landing gear, bulkheads, wing spars,
engine mounts, struts, wing and tail flaps and bulkheads. The Company produces
these components from titanium, nickel, steel, aluminum and composite materials.
Energy Market
The Company is a major supplier of products used in nuclear and
fossil-fueled commercial power plants, co-generation projects and retrofit and
life extension applications as well as in the oil and gas industry. Products
produced within the energy product segment include extruded seamless thick wall
pipe, connectors, and valves. The Company produces rotating components, such as
discs and spacers, and valve components for land-based steam turbine and gas
turbine generators.
Other Market
The Company manufactures a variety of products for defense related
applications. Some of the products produced within this segment include steel
casings for bombs and rockets, components for propulsion systems for nuclear
submarines and aircraft carriers as well as pump, valve, structural and
non-nuclear propulsion forgings. The Company manufactures extruded missile,
rocket and bomb casings and supplies extruded products for nuclear submarines
and aircraft carriers, including thick wall piping for nuclear propulsion
systems, torpedo tubes and catapult launch tubes. The Company also manufactures
products for commercial applications such as food processing, semiconductor
manufacturing, diesel turbochargers and sporting equipment.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes segment information:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales
Aerospace products $705,763 $622,718 $475,131
Energy products 117,229 101,353 97,117
Other products 26,269 28,842 36,494
-------- -------- --------
Consolidated net sales $849,261 $752,913 $608,742
======== ======== ========
EBITDA(1)
Aerospace products $101,053 $ 81,175 $ 75,013
Energy products 10,563 11,413 9,563
Other products 2,597 4,775 2,808
Corporate (11,163) (10,805) (8,264)
-------- -------- --------
Total EBITDA 103,050 86,558 79,120
Depreciation and Amortization 27,576 23,473 20,872
Other charges (credit) 13,745 (4,900) 23,083
Interest expense 14,234 12,548 10,822
-------- -------- --------
Income before income taxes
and extraordinary item $ 47,495 $ 55,437 $ 24,343
======== ======== ========
(1) Earnings before interest, taxes, depreciation, amortization, extraordinary
items and other charges (credits).
</TABLE>
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Expenses that are
not directly identifiable to a business market are allocated. Common
administrative expenses are allocated based on revenue, common period costs are
allocated based on value added.
In fiscal year 1998, the Company recorded an extraordinary loss, net of
income tax benefit of $2,920,000, of $5,192,000. The extraordinary loss is not
included in the segment EBITDAs for fiscal year 1998 disclosed above.
The Company's management uses Revenues and EBITDA by business market as its
primary information for decision-making purposes. The Company's revenues are
predominantly generated in the Aerospace market segment. All plants with the
exception of the Buffalo, New York facility, which has approximately $25,783,000
of total assets and generates all of its revenues from the Energy market
segment, generate the majority of its revenues from the Aerospace market.
Certain plants manufacture products for all segments; however, due to the
significance of the Aerospace market segment (83% of revenues), assets of the
Company are not managed by business markets but are managed on a plant-by-plant
basis. Because the Company does not prepare and management does not use asset
information by the segments identified, assets by segments are not presented in
these financial statements.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain information on a geographic basis follows:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31,
1999 1998 1997
-------- -------- --------
(000'S OMITTED)
<S> <C> <C> <C>
REVENUES FROM UNAFFILIATED
CUSTOMERS:
United States (including direct
export sales) $771,961 $676,342 $541,456
United Kingdom 77,300 76,571 67,286
-------- -------- --------
$849,261 $752,913 $608,742
======== ======== ========
EXPORT SALES:
United States direct export sales $139,113 $118,407 $ 88,888
======== ======== ========
IDENTIFIABLE ASSETS (EXCLUDING
INTERCOMPANY):
United States $509,174 $479,181 $390,540
United Kingdom 62,190 63,759 54,777
General Corporate 10,346 8,670 9,054
-------- -------- --------
$581,710 $551,610 $454,371
======== ======== ========
</TABLE>
General Electric Company ("GE") and United Technologies Corporation ("UT")
have currently or historically each accounted for 10%, or more, of the Company's
revenues as follows:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31,
1999 % 1998 % 1997 %
-------- ---- -------- ---- -------- ----
(000's OMITTED, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
GE $213,598 25 $169,894 23 $156,764 26
UT (1) (1) 76,786 10 60,921 10
(1) Revenues for the year ended May 31, 1999 were less than 10%.
</TABLE>
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
P. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the years ended May 31, 1999 and 1998
were as follows:
<TABLE>
<CAPTION>
QUARTER
-------------------------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(000'S OMITTED, EXCEPT PER-SHARE DATA)
<S> <C> <C> <C> <C>
YEAR ENDED MAY 31, 1999
Revenue $189,664 $238,829 $211,223 $209,545
Cost of goods sold 161,067 197,551 188,506 168,778
Other charges (credits) (5,000) - 18,990 (245)
Income (loss) from
operations 20,117 26,920 (10,923) 26,838
Net income (loss) 11,852 15,046 (9,357) 19,487
Net income (loss) per
share:
Basic .32 .41 (.26) .55
Diluted .32 .41 (.26) .54
YEAR ENDED MAY 31, 1998
Revenue $180,009 $189,370 $181,764 $201,771
Cost of goods sold 146,764 157,422 159,229 173,852
Other charges (credits) (1,900) (3,000) - -
Income from operations 21,750 21,771 9,577 15,794
Income before extra-
ordinary item 11,859 13,336 3,963 9,924
Extraordinary item,
net of tax - - (5,192) -
Net income (loss) 11,859 13,336 (1,229) 9,924
Basic net income per
share:
Income before extra-
ordinary item .33 .37 .11 .27
Net income (loss) .33 .37 (.03) .27
Diluted net income per
share:
Income before extra-
ordinary item .32 .36 .11 .27
Net income (loss) .32 .36 (.03) .27
</TABLE>
42
<PAGE>
WYMAN-GORDON COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------
AUGUST 31, AUGUST 31,
1999 1998
---------- ----------
(000's omitted, except per share data)
<S> <C> <C>
Revenue $176,495 $189,664
-------- --------
Less:
Cost of goods sold 147,767 161,067
Selling, general and
administrative expenses 11,976 13,480
Other charges(credits) (1,200) (5,000)
-------- --------
158,543 169,547
-------- --------
Income from operations 17,952 20,117
-------- --------
Other deductions:
Interest expense 3,599 3,529
Miscellaneous, net 305 256
-------- --------
3,904 3,785
-------- --------
Income before income taxes 14,048 16,332
Provision for income taxes 5,057 4,480
-------- --------
Net income $ 8,991 $ 11,852
======== ========
Net income per share:
Basic $ .25 $ .32
Diluted $ .25 $ .32
Shares used to compute net income per share:
Basic 35,911 36,542
======== ========
Diluted 36,557 37,207
======== ========
The accompanying notes to the interim consolidated condensed financial
statements are an integral part of these financial statements.
</TABLE>
43
<PAGE>
WYMAN-GORDON COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
1999 1999
-------- --------
(Unaudited)
(000's omitted)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 74,855 $ 73,867
Accounts receivable 156,112 156,042
Inventories 95,118 97,603
Prepaid expenses 4,386 6,768
Deferred income taxes 6,400 6,400
-------- --------
Total current assets 336,871 340,680
Property, plant and equipment, net 213,629 214,604
Intangible and other assets 30,521 26,426
-------- --------
Total assets $581,021 $581,710
======== ========
LIABILITIES
Borrowings due within one year $ 968 $ 965
Accounts payable 46,904 52,561
Accrued liabilities and other 51,338 57,127
-------- --------
Total current liabilities 99,210 110,653
Restructuring, integration, disposal
and environmental 15,279 15,444
Long-term debt 164,315 164,338
Pension liability 1,605 1,771
Deferred income tax and other 13,890 13,857
Postretirement benefits 41,352 41,885
-------- --------
Total liabilities 335,651 347,948
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock - none issued - -
Common stock issued - 37,052,720 shares 37,053 37,053
Capital in excess of par value 26,467 27,360
Retained earnings 194,866 185,875
Accumulated other comprehensive income 1,264 1,267
Less treasury stock at cost
August 31, 1999 - 950,292 shares
May 31, 1999 - 1,417,737 shares (14,280) (17,793)
-------- --------
Total stockholders' equity 245,370 233,762
-------- --------
Total liabilities and stockholders'
equity $581,021 $581,710
======== ========
The accompanying notes to the interim consolidated condensed financial
statements are an integral part of these financial statements.
</TABLE>
44
<PAGE>
WYMAN-GORDON COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
AUGUST 31, AUGUST 31,
1999 1998
---------- ----------
(000's omitted)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 8,991 $ 11,852
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 7,353 6,799
Gain on sale of operating assets - (5,000)
Changes in assets and liabilities:
Accounts receivable (70) (471)
Inventories 2,485 (12,861)
Prepaid expenses and other assets (1,892) (3,561)
Accrued restructuring, integration
disposal and environmental (4,050) 37
Income and other taxes payable 5,194 3,542
Accounts payable and accrued
other liabilities (13,254) 10,292
-------- --------
Net cash provided (used) by
operating activities 4,757 10,629
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (6,403) (12,573)
Proceeds from sale of fixed assets 159 5,283
Other, net (124) (215)
-------- --------
Net cash provided (used) by
investing activities (6,368) (7,505)
-------- --------
FINANCING ACTIVITIES:
Payment to Cooper Industries, Inc. - (2,300)
Repayments of debt (21) -
Net proceeds from issuance of
common stock 2,620 946
-------- --------
Net cash provided (used) by
financing activities 2,599 (1,354)
-------- --------
Increase (decrease) in cash 988 1,770
Cash, beginning of year 73,867 64,561
-------- --------
Cash, end of period $ 74,855 $ 66,331
======== ========
The accompanying notes to the interim consolidated condensed financial
statements are an integral part of these financial statements.
</TABLE>
45
<PAGE>
WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
August 31, 1999
(Unaudited)
NOTE A - BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments necessary to present
fairly its financial position at August 31, 1999 and its results of operations
and cash flows for the three months ended August 31, 1999 and August 31, 1998.
All such adjustments are of a normal recurring nature.
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with Article 10 of Securities and Exchange
Commission Regulation S-X and, therefore, do not include all information and
footnotes necessary for a fair presentation of the financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. In conjunction with its May 31, 1999 Annual Report on Form 10-K, the
Company filed audited consolidated financial statements which included all
information and footnotes necessary for a fair presentation of its financial
position at May 31, 1999 and 1998 and its results of operations and cash flows
for the years ended May 31, 1999, 1998, and 1997, in conformity with generally
accepted accounting principles. Where appropriate, prior period amounts have
been reclassified to permit comparison.
NOTE B - RECENTLY ISSUED ACCOUNTING STANDARDS
In June, 1998, the Financial Accounting Standards Board issued Statement
No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This Statement requires companies to record derivatives on the balance
sheet as assets and liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. SFAS 133 is not expected to have material impact on the Company's
consolidated financial statements. This Statement is effective for fiscal years
beginning after June 15, 2000. The Company will adopt this accounting standard
as required in fiscal 2002.
46
<PAGE>
WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
August 31, 1999
(Unaudited)
NOTE C - INVENTORIES
Inventories consisted of:
<TABLE>
<CAPTION>
AUGUST 31, 1999 MAY 31, 1999
--------------- ------------
(000's omitted)
<S> <C> <C>
Raw material $ 35,897 $ 36,849
Work-in-process 62,084 65,654
Other 3,970 3,204
-------- --------
101,951 105,707
Less progress payments 6,833 8,104
-------- --------
$ 95,118 $ 97,603
======== ========
</TABLE>
If all inventories valued at LIFO cost had been valued at the lower of
first-in, first-out (FIFO) cost or market, which approximates current
replacement cost, inventories would have been $16,446,000 higher than reported
at August 31, 1999 and May 31, 1999.
There were no LIFO inventory credits or charges to cost of goods sold in
the three months ended August 31, 1999 or August 31, 1998.
NOTE D - NET INCOME PER SHARE
There were no adjustments required to be made to net income (loss) for
purposes of computing basic and diluted net income per share. A reconciliation
of the average number of common shares outstanding used in the calculation of
basic and diluted net income per share is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
AUGUST 31, AUGUST 31,
1999 1998
---------- ---------
<S> <C> <C>
Shares used to compute
basic net income per
share 35,911,474 36,542,318
Dilutive effect of
stock options 645,507 664,735
---------- ----------
Shares used to compute
diluted net income
per share 36,556,981 37,207,053
</TABLE>
47
<PAGE>
WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
August 31, 1999
(Unaudited)
NOTE E - SEGMENT INFORMATION
The following table summarizes segment information by markets served:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
AUGUST 31, AUGUST 31,
1999 1998
---------- ---------
<S> <C> <C>
Net sales
Aerospace products $145,645 $152,951
Energy products 25,735 29,574
Other products 5,115 7,139
-------- --------
Consolidated net sales $176,495 $189,664
======== ========
EBITDA(1)
Aerospace products $ 23,016 $ 19,200
Energy products 2,237 3,066
Other products 491 1,261
Corporate (1,944) (1,867)
-------- --------
Total EBITDA 23,800 21,660
Depreciation and Amortization 7,353 6,799
Other charges (credit) (1,200) (5,000)
Interest expense 3,599 3,529
-------- --------
Income before income taxes $ 14,048 $ 16,332
======== ========
(1) Earnings before interest, taxes, depreciation, amortization, extraordinary
items and other charges (credits).
</TABLE>
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Expenses that are
not directly identifiable to a business market are allocated. Common
administrative expenses are allocated based on revenue, common period costs are
allocated based on value added.
The Company's management uses Revenues and EBITDA by business market as its
primary information for decision-making purposes. The Company's revenues are
predominantly generated in the Aerospace market segment. All plants with the
exception of the Buffalo, New York facility, which has approximately $23,000,000
of total assets and generates most of its revenues from the Energy market
segment, generate the majority of their revenues from the Aerospace market.
Certain plants manufacture products for all segments; however, due to the
significance of the Aerospace market segment (82% of revenues), assets of the
48
<PAGE>
WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
August 31, 1999
(Unaudited)
NOTE E - SEGMENT INFORMATION, Continued
Company are not managed by business markets but are managed on a plant-by-plant
basis. Because the Company does not prepare and management does not use asset
information by the segments identified, assets by segments are not presented in
these financial statements.
NOTE F - COMMITMENTS AND CONTINGENCIES
At August 31, 1999, certain lawsuits arising in the normal course of
business were pending. In the opinion of management, the outcome of these legal
matters will not have a material adverse effect on the Company's financial
position and results of operations.
The Company is subject to extensive, stringent and changing federal, state
and local environmental laws and regulations, including those regulating the
use, handling, storage, discharge and disposal of hazardous substances and the
remediation of alleged environmental contamination. Accordingly, the Company is
involved from time to time in administrative and judicial inquiries and
proceedings regarding environmental matters. Nevertheless, the Company believes
that compliance with these laws and regulations will not have a material adverse
effect on the Company's operations as a whole.
The Company had foreign exchange contracts totaling approximately
$12,541,000 at August 31, 1999. These contracts hedge certain normal operating
purchase and sales transactions. The foreign exchange contracts generally mature
within six months and require the Company to exchange U.K. pounds for non-U.K.
currencies or non-U.K. currencies for U.K. pounds. Transaction gains and losses
included in the Consolidated Condensed Statements of Income for the three months
ended August 31, 1999 and August 31, 1998 were not material.
On September 25, 1997, the Company received a subpoena from the United
States Department of Justice informing it that the Department of Defense and
other federal agencies had commenced an investigation with respect to the
manufacture and sale of investment castings at the Company's Tilton, New
Hampshire facility. The Company does not believe that the federal investigation
is likely to result in a material adverse impact on the Company's financial
condition or results of operations, although no assurance as to the outcome or
impact of that investigation can be given.
49
<PAGE>
WYMAN-GORDON COMPANY AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
August 31, 1999
(Unaudited)
NOTE G - OTHER CHARGES (CREDITS)
In the three months ended August 31, 1999, the Company recorded other
credits of $1,200,000 for the recovery of costs associated with the Houston
industrial accident.
In the three months ended August 31, 1998, the Company recorded other
credits of $5,000,000 resulting from the sale of the operating assets of the
Company's Millbury, Massachusetts vacuum remelting facility which produced
titanium ingots for further processing into finished forgings to Titanium Metals
Corporation "TIMET".
NOTE H - PENDING MERGER
On May 17, 1999, Precision Castparts, Corp. ("PCC") and the Company
announced that PCC has agreed to acquire 100 percent of the Company's common
stock in a cash tender offer of $20 per share, valued at approximately
$825,000,000, including the assumption of $104,000,000 of net debt. Upon
completion of the tender offer and subsequent merger, Wyman-Gordon will become a
wholly-owned subsidiary of PCC. The completion of the tender offer is
conditioned upon the tender of at least two-thirds of the outstanding shares of
Wyman-Gordon and certain other conditions, including compliance with the
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976. PCC,
headquartered in Portland, Oregon, is a worldwide manufacturer of complex metal
components and products.
50
<PAGE>
(b) Pro Forma Financial Information
Pro forma information is not included in this initial Report on Form 8-K. The
required information will be filed as soon as practicable but not later than 60
days after date of this report.
(c) Exhibits
(2) Agreement and Plan of Merger among Precision Castparts Corp., WGC
Acquisition Corp. and Wyman-Gordon Company dated as of May 17, 1999.
Incorporated by reference to Exhibit 3 to Precision Castparts Corp.'s
Quarterly Report on Form 10-Q for the quarter ended June 27, 1999.
(23) Consent of Ernst & Young LLP, Independent Auditors.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: December 8, 1999
PRECISION CASTPARTS CORP.
WILLIAM D. LARSSON
------------------------------------------
William D. Larsson,
Vice President and Chief Financial Officer
51
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
(2) Agreement and Plan of Merger among Precision Castparts Corp.,
WGC Acquisition Corp. and Wyman-Gordon Company dated as of May
17, 1999. Incorporated by reference to Exhibit 3 to Precision
Castparts Corp.'s Quarterly Report on Form 10-Q for the quarter
ended June 27, 1999.
(23) Consent of Ernst & Young LLP, Independent Auditors.
Exhibit 23
Consent of Ernst & Young, LLP, Independent Auditors
We consent to the use of our report dated June 23, 1999, with respect to the
consolidated financial statements of Wyman-Gordon Company included in the Form
8-K of Precision Castparts Corp. filed with the Securities and Exchange
Commission.
ERNST & YOUNG LLP
Boston, Massachusetts
December 1, 1999
