-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QSng6CwLnblTIUUqGX3fwXwLqT+0TjvGoSoRspM/GtuBqtFNcers/Jv0d+nGQiNY Gv0MuitkiB97NWv09rHXIA== 0000108703-98-000003.txt : 19980410 0000108703-98-000003.hdr.sgml : 19980410 ACCESSION NUMBER: 0000108703-98-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980409 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WYMAN GORDON CO CENTRAL INDEX KEY: 0000108703 STANDARD INDUSTRIAL CLASSIFICATION: METAL FORGING & STAMPINGS [3460] IRS NUMBER: 041992780 STATE OF INCORPORATION: MA FISCAL YEAR END: 0528 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-03085 FILM NUMBER: 98590797 BUSINESS ADDRESS: STREET 1: 244 WORCHESTER ST STREET 2: BOX 8001 CITY: NORTH GRAFTON STATE: MA ZIP: 01536 BUSINESS PHONE: 5088394441 10-Q 1 WYMAN-GORDON FORM 10-Q 3RD QUARTER FISCAL 1998 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) { X } QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 28, 1998 OR { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to COMMISSION FILE NUMBER 0-3085 WYMAN-GORDON COMPANY (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-1992780 (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) 244 WORCESTER STREET, BOX 8001, NO. GRAFTON, MASSACHUSETTS 01536-8001 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 508-839-4441 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
OUTSTANDING AT CLASS FEBRUARY 28, 1998 Common Stock, $1 Par Value 36,355,535
Page 1 of 29 2 PART I. ITEM 1. FINANCIAL STATEMENTS WYMAN-GORDON COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED FEB. 28, FEB. 28, FEB. 28, FEB. 28, 1998 1997 1998 1997 (000's omitted, except per share data) Revenue $181,764 $153,331 $551,142 $426,222 Less: Cost of goods sold 159,229 124,716 463,415 362,540 Selling, general and administrative expenses 12,958 10,342 39,529 31,444 Other charges(credits) - 2,434 (4,900) 18,213 172,187 137,492 498,044 412,197 Income from operations 9,577 15,839 53,098 14,025 Other deductions (income): Interest expense 3,319 2,671 8,999 8,053 Miscellaneous, net 66 159 790 (4,306) 3,385 2,830 9,789 3,747 Income before income taxes 6,192 13,009 43,309 10,278 Provision (benefit) for income taxes 2,229 - 14,151 (19,680) Income before extraordinary item 3,963 13,009 29,158 29,958 Extraordinary item - net of income tax benefit of $2,920,306 (5,192) - (5,192) - Net income $ (1,229) $ 13,009 $ 23,966 $ 29,958 Basic net income per share: Income before extra- ordinary item $ .11 $ .36 $ .80 $ .84 Net income (.03) .36 .66 .84 Diluted net income per share: Income before extra- ordinary item $ .11 $ .35 $ .78 $ .81 Net income (.03) .35 .64 .81
The accompanying notes to the interim consolidated condensed financial statements are an integral part of these financial statements. -2- 3 WYMAN-GORDON COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS
FEBRUARY 28, MAY 31, 1998 1997 (Unaudited) (000's omitted) ASSETS Cash and cash equivalents $ 59,261 $ 51,971 Accounts receivable 128,705 119,159 Inventories 140,341 92,332 Other current assets 7,303 7,789 Deferred income taxes - 6,500 Total current assets 335,610 277,751 Property, plant and equipment, net 168,714 153,737 Intangible assets 18,727 19,255 Other assets 5,686 3,628 $528,737 $454,371 LIABILITIES Borrowings due within one year $ 477 $ 77 Accounts payable 55,516 62,092 Accrued liabilities and other 42,793 49,377 Total current liabilities 98,786 111,546 Restructuring, integration, disposal and environmental 17,197 18,172 Long-term debt 161,029 96,154 Pension liability 1,107 1,102 Deferred income tax and other 11,406 15,861 Postretirement benefits 45,393 47,138 STOCKHOLDERS' EQUITY Preferred stock - none issued - - Common stock issued - 37,052,720 shares 37,053 37,053 Capital in excess of par value 28,443 27,608 Retained earnings 138,847 114,957 Equity adjustments 3,113 2,763 Less treasury stock at cost February 28, 1998 - 697,185 shares May 31, 1997 - 1,001,199 shares (13,637) (17,983) 193,819 164,398 $528,737 $454,371
The accompanying notes to the interim consolidated condensed financial statements are an integral part of these financial statements. -3- 4 WYMAN-GORDON COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED FEBRUARY 28, FEBRUARY 28, 1998 1997 (000's omitted) Operating activities: Net income $ 23,966 $ 29,958 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss on debt retirement 5,192 - Depreciation and amortization 17,172 15,676 Deferred taxes 6,500 - Other charges - 13,045 Provision for equity investment - 2,734 Changes in assets and liabilities: Accounts receivable (8,626) (11,961) Inventories (48,009) (28,951) Prepaid expenses and other assets (371) (134) Accrued restructuring, disposal and environmental (2,520) (2,545) Income and other taxes (1,195) (4,650) Accounts payable and accrued liabilities (11,400) 9,092 Net cash provided (used) by operating activities (19,291) 22,264 Investing activities: Capital expenditures (32,755) (23,226) Proceeds from sale of fixed assets 660 369 Other, net 752 (927) Net cash provided (used) by investing activities (31,343) (23,784) Financing activities: Payment to Cooper Industries, Inc. (2,300) - Proceeds from Issuance of long-term debt, net of fees 145,793 6,000 Repayment of long-term debt including fees to retire debt (90,750) - Net proceeds from issuance of Common Stock 9,784 5,501 Repurchase of Common Stock (4,603) (2,857) Net cash provided by financing activities 57,924 8,644 Increase in cash 7,290 7,124 Cash, beginning of year 51,971 30,134 Cash, end of period $ 59,261 $ 37,258
The accompanying notes to the interim consolidated condensed financial statements are an integral part of these financial statements. -4- 5 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS February 28, 1998 (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 February 28, 1998 and its results of operations and cash flows for the nine months ended February 28, 1998 and February 28, 1997. 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, 1997 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, 1997 and 1996 and its results of operations and cash flows for the years ended May 31, 1997, 1996 and 1995, in conformity with generally accepted accounting principles. Where appropriate, prior period amounts have been reclassified to permit comparison. NOTE B - ADOPTION OF RECENT ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share"("SFAS 128"). SFAS 128 replaces the previously reported primary and fully diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the SFAS 128 requirements. There is no material impact on earnings per share for the three or nine months ended February 28, 1998 and 1997 calculated under SFAS 128. In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). The implementation of SFAS 130 will require that the components of comprehensive income be reported in the financial statements. The implementation of SFAS 131 will require the disclosure of segment information utilizing the approach that the Company uses to manage its internal organization. The Company is currently assessing the impact that the new standards will have on its financial statements. Implementation of both of these new standards is required for the year ending May 31, 1999 ("fiscal year 1999"). -5- 6 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) February 28, 1998 (Unaudited) NOTE C - INVENTORIES Inventories consisted of:
FEBRUARY 28, 1998 MAY 31, 1997 (000's omitted) Raw material $ 62,158 $ 36,990 Work-in-process 88,203 61,741 Other 6,688 6,906 157,049 105,637 Less progress payments 16,708 13,305 $140,341 $ 92,332
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 $18,262,000 higher than reported at February 28, 1998 and May 31, 1997. There were no LIFO inventory credits or charges to cost of goods sold in the three and nine months ended February 28, 1998 or February 28, 1997. NOTE D - LONG-TERM DEBT On December 15, 1997, 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 were issued at a price of 99.323% of face value and pay interest semi-annually in arrears on June 15 and December 15 of each year, commencing June 15, 1998. 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. The Company used approximately $90,750,000 of the net proceeds from the sale of the 8% Senior Notes to repurchase $84,725,000 (94%) of its outstanding 10 3/4% Senior Notes due 2003 ("10 3/4% Senior Notes"). The balance of the proceeds will be used for additional working capital and other general corporate purposes. In conjunction with the extinguishment of the 10 3/4% Senior Notes, the Company recorded an extraordinary after-tax loss of $5,192,000 or $.14 per share. 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 payable by the Company with respect to the tender offer for the 10 3/4% Senior Notes. -6- 7 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) February 28, 1998 (Unaudited) NOTE E - 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:
THREE MONTHS ENDED NINE MONTHS ENDED FEB. 28, FEB. 28, FEB. 28, FEB. 28, 1998 1997 1998 1997 Shares used to compute basic net income per share 36,314,473 35,924,372 36,278,982 35,795,420 Dilutive effect of stock options 789,599 1,201,750 993,502 1,169,534 Shares used to compute diluted net income per share 37,104,072 37,126,122 37,272,484 36,964,954
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 for the third quarter of fiscal year 1998 and 1997 and for the first nine months of fiscal year 1998 and 1997:
THREE MONTHS ENDED NINE MONTHS ENDED FEB. 28, FEB. 28, FEB. 28, FEB. 28, 1998 1997 1998 1997 Options exceeding average market price 560,066 218,000 243,000 218,000 Exercise price range $19.88 - $21.50 - $25.50 $21.50 - $25.50 $23.00 $23.00
-7- 8 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) February 28, 1998 (Unaudited) NOTE F - COMMITMENTS AND CONTINGENCIES At February 28, 1998, 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 $39,918,000 at February 28, 1998. 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 and nine months ended February 28, 1998 and February 28, 1997 were not material. 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 two others were injured. OSHA conducted an investigation of the accident. On June 18, 1997, WGFI reached an agreement with OSHA, settling citations resulting from the accident. The injured workers and the decedents' families have asserted claims against the Company and WGFI. WGFI has also received claims from several employees of a subcontractor claiming to have been injured at the time of the accident as well as from one current employee. To date, the Company has settled all claims that could be brought by three of the decedent's families on terms acceptable to the Company and its insurance carriers. The Company has also settled most of the claims of the subcontractor employees. The Company thus far has been unable to achieve settlements with the other claimants, and, on October 24, 1997, a lawsuit was filed in the District Court of Harris County, Texas, on behalf of three of -8- 9 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) February 28, 1998 (Unaudited) NOTE F - COMMITMENTS AND CONTINGENCIES, Continued the decedents' families against the Company, WGFI and Cooper- Cameron Corporation. The family of another decedent and one of the injured employees have subsequently filed motions to be included in that lawsuit. Trial of the lawsuit is currently set for October 1998. In general under Texas statutory law, an employee's exclusive remedy against an employer for an on-the-job injury is the benefits of the Texas Workers Compensation Act. WGFI, the employer of the deceased employees, has workers compensation insurance coverage and the injured employees and beneficiaries of the deceased employees are receiving workers compensation payments. Under applicable law, however, statutory beneficiaries of employees killed in the course and scope of their employment may recover punitive (but not compensatory) damages in excess of workers compensation benefits. However, to do so they must prove that the employer was grossly negligent. The protection of the workers compensation exclusive remedy provision may not extend to the Company as parent corporation of WGFI. Therefore, with regard to the October 24, 1997 lawsuit and any future lawsuits brought on behalf of those killed or injured in the Houston accident or their families against the Company, if (i) the court finds that the Company had a legal duty to WGFI and its employees, (ii) the evidence supports a finding that the Company acted negligently in its duty to WGFI and its employees and (iii) such negligence had a causal connection with the accident, the plaintiffs might be able to recover compensatory damages against the Company. If it is shown that the Company's conduct amounted to gross neglect, and that conduct is found to be a cause of the accident, the plaintiffs may be able to recover punitive damages against the Company. It is not possible at this time to determine the extent, if any, to which WGFI or the Company could be held liable in connection with the accident. The Company maintains general liability and employer's liability insurance for itself and its subsidiaries under various policies with aggregate coverage limits of approximately $29 million, a portion of which has been expended in the settlement to date. While WGFI has tendered the defense of the various claims to the Company's insurance carriers, there can be no assurance that the full insurance coverage will be available. Based on the Company's experience in the settlement negotiations to date, the Company believes that there is a substantial risk that the pending and threatened claims will not be settled for an aggregate amount within its insurance coverage limits. The Company anticipates that, as with currently pending lawsuit, any additional lawsuits will include claims for alleged compensatory as well as punitive damages that in the aggregate could substantially exceed the Company's -9- 10 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) February 28, 1998 (Unaudited) NOTE F - COMMITMENTS AND CONTINGENCIES, Continued available insurance coverage. The Company intends to vigorously defend all lawsuits that have been or may be filed relating to the accident. However, if one or more such lawsuits were to be prosecuted successfully by the plaintiffs and a judgment were to be obtained by one or more plaintiffs in such lawsuits and sustained on appeal, litigation costs, including the cost of pursuing any appeals, and the cost of paying such a judgment, to the extent not covered by insurance, could have a material adverse effect on the Company's financial condition and the results of operations, particularly if any such judgment includes awards for punitive damages. On September 25, 1997, the Company received a subpoena from the United States Department of Justice informing it that the United States 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 focus of the investigation is whether the Company failed to comply with required quality control procedures for cast aerospace parts and whether the Company shipped cast components that did not meet applicable specifications, which could be a violation of federal requirements. The investigating agencies have directed the Company to furnish various documents and information relating to the subject of the investigation. The Company is cooperating fully with the investigation and in addition has substantially completed its own investigation, which was supervised by the Company's outside attorneys and conducted by quality and process auditors from another casting facility of the Company and by the Company's internal attorneys. Such investigation has identified certain departures from Company policies and procedures which have been addressed. The federal investigation may result in criminal or civil charges being brought against the Company, which could result in civil damages and penalties and criminal liability, if the Company were found to have violated federal laws. Based on the Company's own investigation to date, 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. -10- 11 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) February 28, 1998 (Unaudited) NOTE G - OTHER CHARGES (CREDITS) In the nine months ended February 28, 1998, the Company recorded other credits of $4,900,000. Such other credits include a credit of $1,900,000 resulting from the disposal of a building held for sale, a credit of $4,000,000 for the recovery of cash surrender value of certain company-owned life insurance policies and a charge of $1,000,000 to provide for costs as a result of the shutdown of the 29,000 ton press at the Company's Houston, Texas forging facility. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments.") In the nine months ended February 28, 1997, the Company recorded other charges of $18,213,000. Such other charges include $8,000,000 to provide for the costs of workforce reductions at the Company's Grafton, Massachusetts facility and the write-off and disposal of certain equipment. Other charges also include $2,300,000 to reduce the carrying value of certain assets of the Company's titanium castings operations, $2,484,000 to recognize the Company's 25.0% share of the net losses of its Australian joint venture and to reduce the carrying value of such joint venture, $250,000 relating to expenditures for an investment in another joint venture, $2,745,000 to reduce the carrying value of the cash surrender value of certain company- owned life insurance policies and $2,434,000 of costs related to the Houston accident. -11- 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY" Certain statements in Management's Discussion and Analysis of Financial Condition and Results of Operations contain "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1995). The words "believe," "expect," "anticipate," "intend," "estimate", "assume" and other similar expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. In addition, information concerning raw material prices and availability, customer orders and pricing, and industry cyclicality and their impact on gross margins and business trends as well as liquidity and sales volume are forward-looking statements. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are in some cases beyond the control of the Company and may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Certain factors that might cause such differences include, but are not limited to, the following: The Company's ability to successfully negotiate long-term contracts with customers and raw materials suppliers at favorable prices and other terms acceptable to the Company; the Company's ability to obtain required raw materials and to supply its customers on a timely basis; and the cyclicality of the aerospace industry. For further discussion identifying important factors that could cause actual results to differ materially from those anticipated in forward-looking statements, see the Company's SEC filings, in particular see the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1997 Part I, Item 1 - "Business - The Company", "Customers", "Marketing and Sales", "Backlog", "Raw Materials", "Energy Usage", "Employees", "Competition", "Environmental Regulations", "Product Liability Exposure" and "Legal Proceedings". RECENT DEVELOPMENTS On December 9, 1997, the Company announced that it had taken the 29,000 ton press at its Houston, Texas facility out of service to repair structural cracking and, while the press is out of service, to install upgrades and process changes on that press to improve reliability, cycle time and throughput capacity. The Company had previously reinstalled a 20,000 ton press at the Houston facility which has the capability of producing approximately 80% of the parts previously produced on the 29,000 ton press. The Company has the capacity to produce the remaining 20% of the parts on its 35,000 ton press in Grafton, Massachusetts and its 30,000 ton press in Livingston, Scotland. -12- 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RECENT DEVELOPMENTS, Continued Production on alternate presses is now 100% of the steady- state production level on the 29,000 ton press before the outage. The 29,000 ton press in Houston produced approximately two-thirds of the Company's aeroturbine forgings during fiscal year 1997. The structural cracks were discovered in the four main columns as a result of an ultrasonic inspection of the 29,000 ton press conducted as part of a preventive maintenance program. At this time, all four damaged columns have been removed from the 29,000 ton press. Based on the repair schedule critical path, the Company expects production on the press to recommence in mid June. Because of production delays and the cost of transferring production to other presses, the Company expects that revenues and net profits for the fourth quarter of fiscal year 1998 will be adversely impacted. On December 15, 1997, the Company issued $150.0 million of 8.0% Senior Notes due 2007 ("8% Senior Notes") under an indenture between the Company and a bank as trustee. The 8% Senior Notes were issued at a price of 99.323% of face value and pay interest semi-annually in arrears on June 15 and December 15 of each year, commencing June 15, 1998. 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. The Company used approximately $90.7 million of the net proceeds from the sale of the 8% Senior Notes to repurchase $84.7 million (94%) of its outstanding 10 3/4% Senior Notes due 2003 ("10 3/4% Senior Notes"). The balance of the proceeds will be used for additional working capital and other general corporate purposes. In conjunction with the extinguishment of the 10 3/4% Senior Notes, the Company recorded an extraordinary after-tax loss of $5,192,000 or $.14 per share. 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 payable by the Company with respect to the tender offer for the 10 3/4% Senior Notes. -13- 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS The principal markets served by the Company are aerospace and energy. Revenue by market for the respective periods was as follows:
THREE MONTHS ENDED FEBRUARY 28, 1998 FEBRUARY 28, 1997 (000's omitted) % OF % OF AMOUNT TOTAL AMOUNT TOTAL Aerospace $146,080 80% $124,618 81% Energy 27,554 15% 20,185 13% Other 8,130 5% 8,528 6% $181,764 100% $153,331 100%
NINE MONTHS ENDED FEBRUARY 28, 1998 FEBRUARY 28, 1997 (000's omitted) % OF % OF AMOUNT TOTAL AMOUNT TOTAL Aerospace $445,132 81% $324,235 76% Energy 82,823 15% 74,639 18% Other 23,187 4% 27,348 6% $551,142 100% $426,222 100%
RESULTS OF OPERATIONS THREE MONTHS ENDED FEBRUARY 28, 1998 ("third quarter of fiscal year 1998") COMPARED TO THREE MONTHS ENDED FEBRUARY 28, 1997 ("third quarter of fiscal year 1997") The Company's revenue increased 18.5% to $181.8 million in the third quarter of fiscal year 1998 from $153.3 million in the third quarter of fiscal year 1997 as a result of higher sales volume and higher sales prices at the Company's Forgings and Castings Divisions. These revenue increases during the third quarter of fiscal year 1998 as compared to the third quarter of fiscal year 1997 are reflected by market as follows: a $21.5 million (17.2%) increase in aerospace, a $7.4 million (36.5%) increase in energy and a $0.4 million (4.7%) decrease in other. The reasons for the strength in the aerospace market were higher airplane and engine build rates and higher demands for spares by aerospace engine prime contractors. Although there were higher shipments to aerospace customers during the third quarter of fiscal year 1998 compared to the third quarter of fiscal year 1997, the shipments to aerospace customers were impacted by the Company's 29,000 ton press being out of service for repairs. The -14- 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS THREE MONTHS ENDED FEBRUARY 28, 1998 ("third quarter of fiscal year 1998") COMPARED TO THREE MONTHS ENDED FEBRUARY 28, 1997 ("third quarter of fiscal year 1997") (Continued) Company expects production on the press to recommence in mid June. The Company has provided alternative capacity to meet the scheduled production levels of the 29,000 ton press. Production on alternate presses, including the recently reinstalled 20,000 ton press, is now 100% of the steady-state production level on the 29,000 ton press before the outage. Because of production delays and the cost of transferring production to other presses, the Company expects that revenues and net profits for the fourth quarter of fiscal year 1998 will be adversely impacted. The increase in energy revenue was a result of higher shipments of extruded pipe and land-based gas turbine products during the third quarter of fiscal year 1998 as compared to the third quarter of fiscal year 1997. Revenues in the third quarter of fiscal year 1997 were negatively impacted as a result of the shutdown of the 35,000 ton vertical extrusion press in the Company's Houston facility as a result of the industrial accident explosion which occurred in December 1996. Production from the press recommenced in March 1997. The Company's backlog has increased to $1,013.2 million at February 28, 1998 from $895.8 million at May 31, 1997 and from $861.8 million at February 28, 1997. The increase from May 31, 1997 and from February 28, 1997 resulted from the following factors: 1. Higher build rates of the Company's engine and airframe customers, 2. Higher prices for the Company's aerospace products, and 3. An increase in overdue orders to customer delivery dates as a result of shipping delays at the Company due to capacity constraints. The Company does not expect that this rate of increase in backlog will continue since it expects that customer orders will not increase at the same rates as in the recent past, and that in- process capacity enhancements at the Company will enable the Company to meet its customer delivery requirements in a more timely fashion. The Company's gross margin was 12.4% in the third quarter of fiscal year 1998 as compared to 18.7% in the third quarter of fiscal year 1997. Gross margin in the third quarter of fiscal year 1998 was negatively affected by the impact of the Company's 29,000 ton press being taken out of service for repairs at the end of November 1997. In the third quarter of fiscal year 1998, -15- 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS THREE MONTHS ENDED FEBRUARY 28, 1998 ("third quarter of fiscal year 1998") COMPARED TO THREE MONTHS ENDED FEBRUARY 28, 1997 ("third quarter of fiscal year 1997") (Continued) approximately 80% of the work scheduled on the 29,000 ton press was performed on alternative presses at a significant cost. Currently, production on these alternative presses is 100% of the steady-state production level on the 29,000 ton press before the outage. Although the Company has been able to meet the demand rate that existed at the time the 29,000 ton press was taken out of operation, the alternative production has not allowed the Company to produce the mix of products required by its customers at the dates they require nor has the Company been able to increase its capacity to meet increased customer requirements as shown by its growing overdues. The Company has estimated that gross margin was negatively impacted by approximately 5.4% as a result of underabsorption, inefficiencies and other items, all of which include extra labor, higher overtime, tooling modifications and higher scrap and rework costs. The Company believes production on these alternative presses will continue to impact gross margins in the fourth quarter of fiscal year 1998. Selling, general and administrative expenses increased 25.9% to $13.0 million during the third quarter of fiscal year 1998 from $10.3 million during the third quarter of fiscal year 1997. Selling, general and administrative expenses as a percentage of revenues increased to 7.2% in the third quarter of fiscal year 1998 from 6.7% in the third quarter of fiscal year 1997. The increase as a percent of revenues was primarily the result of costs associated with relocating employees and development costs associated with the Company's composite operation. During the third quarter of fiscal year 1998, the Company recorded no other credits or charges, while during the same period in fiscal year 1997, the Company recorded $2.4 million of costs relating to the Houston accident. Interest expense increased $0.6 million to $3.3 million in the third quarter of fiscal year 1998 compared to $2.7 million in the third quarter of fiscal year 1997. The increase results from an increase of $150.0 million of 8% Senior Notes due 2003 offset by repayment of $84.7 million 10 3/4% Senior Notes due 2007. Miscellaneous, net was an expense of $0.1 million in the third quarter of fiscal year 1998 as compared to an expense of $0.2 million in the third quarter of fiscal year 1997. The Company recorded a provision for income taxes of $2.2 million in the third quarter of fiscal year 1998 compared to no provision or benefit for income taxes in the third quarter of fiscal year 1997. -16- 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS THREE MONTHS ENDED FEBRUARY 28, 1998 ("third quarter of fiscal year 1998") COMPARED TO THREE MONTHS ENDED FEBRUARY 28, 1997 ("third quarter of fiscal year 1997") (Continued) The Company expects that in fiscal year 1998, income tax provisions will approximate statutory rates subject to utilization of state net operating losses. The effective tax rate in the third quarter of fiscal 1998 was 36%. Net income before extraordinary item was $4.0 million, or $.11 per share (diluted), and net loss, including extraordinary item, was $1.2 million, or $.03 per share (diluted), in the third quarter of fiscal year 1998. In the third quarter of fiscal year 1998, the Company recorded an extraordinary charge of $5.2 million, or $.14 per share (diluted), net of tax, in connection with the extinguishment of $84.7 million of its 10 3/4% Senior Notes due 2003. In the third quarter of fiscal year 1997, the Company reported net income of $13.0 million, or $.35 per share (diluted). RESULTS OF OPERATIONS NINE MONTHS ENDED FEBRUARY 28, 1998 ("first nine months of fiscal year 1998") COMPARED TO NINE MONTHS ENDED FEBRUARY 28, 1997 ("first nine months of fiscal year 1997") The Company's revenue increased 29.3% to $551.1 million in the first nine months of fiscal year 1998 from $426.2 million in the first nine months of fiscal year 1997 as a result of higher sales volume and higher sales prices at the Company's Forgings and Castings Divisions. These revenue increases during the first nine months of fiscal year 1998 as compared to the first nine months of fiscal year 1997 are reflected by market as follows: a $120.9 million (37.3%) increase in aerospace, a $8.2 million (11.0%) increase in energy and a $4.2 million (15.2%) decrease in other. The reasons for the strength in the aerospace market were higher airplane and engine build rates and higher demands for spares by aerospace engine prime contractors. Although there were higher shipments to aerospace customers during the first nine months of fiscal year 1998 compared to the first nine months of fiscal year 1997, the shipments to aerospace customers were impacted by the Company's 29,000 ton press being out of service for repairs. The Company expects production on the press to recommence in mid June. The Company has provided alternative capacity to meet the scheduled production levels of the 29,000 ton press. Production on alternate presses, including the recently reinstalled 20,000 ton press, is now 100% of the steady- state production level on the 29,000 ton press before the outage. Because of production delays and the cost of transferring production to other presses, the Company expects that revenues and net profits for the fourth quarter of fiscal year 1998 will be adversely impacted. The increase in energy revenue was a result of higher shipments of land-based gas turbine products in -17- 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS NINE MONTHS ENDED FEBRUARY 28, 1998 ("first nine months of fiscal year 1998") COMPARED TO NINE MONTHS ENDED FEBRUARY 28, 1997 ("first nine months of fiscal year 1997") (Continued) the first nine months of fiscal year 1998 compared to the first nine months of fiscal year 1997. Revenues during the first nine months of fiscal year 1997 were negatively impacted as a result of the shutdown of the 35,000 ton vertical extrusion press in the Company's Houston facility as a result of the industrial accident explosion which occurred in December 1996. Production from the press recommenced in March 1997. The cause of the decrease in other markets is primarily due to the decline in the titanium golf club head business because of oversupply and cost disadvantages. Revenues in the first nine months of fiscal year 1997 were limited by raw material shortages and production delays caused by capacity constraints of the Company's suppliers. Revenues in the first nine months of fiscal year 1998 were limited due to lower than anticipated productivity of recent equipment and personnel additions, unanticipated repairs of equipment and inconsistencies in raw material deliveries corresponding to customer requirements. The Company's backlog has increased to $1,013.2 million at February 28, 1998 from $895.8 million at May 31, 1997 and from $861.8 million at February 28, 1997. The increase from May 31, 1997 and from February 28, 1997 resulted from the following factors: 1. Higher build rates of the Company's engine and airframe customers, 2. Higher prices for the Company's aerospace products, and 3. An increase in overdue orders to customer delivery dates as a result of shipping delays at the Company due to capacity constraints and raw material unavail- ability. The Company does not expect that this rate of increase in backlog will continue since it expects that customer orders will not increase at the same rates as in the recent past, and that in- process capacity enhancements at the Company will enable the Company to meet its customer delivery requirements in a more timely fashion. The Company's gross margins were 15.9% in the first nine months of fiscal year 1998 as compared to 14.9% in the first nine months of fiscal year 1997. Gross margin in the first nine months of fiscal year 1998 was negatively affected by the impact of the Company's 29,000 ton press being taken out of service for repairs at the end of November 1997. In the third quarter of fiscal year 1998, approximately 80% of the work scheduled on the -18- 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS NINE MONTHS ENDED FEBRUARY 28, 1998 ("first nine months of fiscal year 1998") COMPARED TO NINE MONTHS ENDED FEBRUARY 28, 1997 ("first nine months of fiscal year 1997") (Continued) 29,000 ton press was performed on alternative presses at a significant cost. The Company has estimated that gross margin in the first nine months of fiscal year 1998 was negatively impacted by approximately 1.9% as a result of underabsorption, inefficiencies and other items, all of which include extra labor, higher overtime, tooling modifications and higher scrap and rework costs. The Company believes production on these alternative presses will continue to impact gross margins in the fourth quarter of fiscal year 1998. In addition, gross margin in the first nine months of fiscal year 1998 was negatively affected by other production inefficiency costs related to equipment downtime in the Company's Forgings operations, recent personnel additions and the reinstallation and start-up of two major forge presses. The Company expects that the addition of these presses and current repair and enhancement of the Company's 29,000 ton press in Houston will improve predictability and the Company's ability to meet its customer requirements. Gross margin in the first nine months of fiscal year 1997 was negatively affected by higher raw material costs which could not be passed on to customers as a result of the then existing long-term agreements with customers, and by price and demand declines within the titanium golf club head business. Selling, general and administrative expenses increased 25.7% to $39.5 million during the first nine months of fiscal year 1998 from $31.4 million during the first nine months of fiscal year 1997. Selling, general and administrative expenses as a percentage of revenues improved to 7.2% in the first nine months of fiscal year 1998 from 7.4% in the first nine months of fiscal year 1997. The improvement as a percent of revenues was primarily the result of higher revenues. Selling, general and administrative expense in the first nine months of fiscal year 1998 include higher costs associated with relocating employees and development costs associated with the Company's composite operations. Selling, general and administrative expenses included approximately $3.0 million and $1.1 million of non-cash compensation expense associated with the Company's performance share program in the first nine months of fiscal year 1998 and the first nine months of fiscal year 1997, respectively. During the first nine months of fiscal year 1998, the Company recorded net other credits of $4.9 million. Such other credits include other credits of $1.9 million resulting from the disposal of a building held for sale and $4.0 million for the recovery of cash surrender value of certain company-owned life insurance policies and other charges of $1.0 million to provide for costs as a result of the shutdown of the 29,000 ton press at the Company's Houston, Texas forging facility. -19- 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS NINE MONTHS ENDED FEBRUARY 28, 1998 ("first nine months of fiscal year 1998") COMPARED TO NINE MONTHS ENDED FEBRUARY 28, 1997 ("first nine months of fiscal year 1997") (Continued) During the first nine months of fiscal year 1997, the Company recorded other charges of $18.2 million. Such other charges included $8.0 million to provide for the costs of workforce reductions at the Company's Grafton, Massachusetts facility and the write-off and disposal of certain equipment. Other charges also include $2.3 million to reduce the carrying value of certain assets of the Company's titanium castings operations, $2.5 million to recognize the Company's 25.0% share of the net losses of its Australian joint venture and to reduce the carrying value of such joint venture, $0.3 million relating to expenditures for an investment in another joint venture, $2.7 million to reduce the carrying value of the cash surrender value of certain Company-owned life insurance policies and $2.4 million of costs related to the Houston accident. Interest expense increased $0.9 million to $9.0 million in the first nine months of fiscal year 1998 compared to $8.1 million in the first nine months of fiscal year 1997. The increase results primarily from an issuance of $150.0 million of 8% Senior Notes offset by repayment of $84.7 million 10 3/4% Senior Notes. Miscellaneous, net was an expense of $0.8 million in the first nine months of fiscal year 1998 as compared to income of $4.3 million in the first nine months of fiscal year 1997. Miscellaneous, net in the first nine months of fiscal year 1998 included a $0.6 million loss on the sale of fixed assets. Miscellaneous, net in the first nine months of fiscal 1997 included interest income on a refund of prior years' income taxes amounting to $3.5 million and a $1.7 million gain on the sale of fixed assets. The Company recorded a provision for income taxes of $14.2 million in the first nine months of fiscal year 1998. The Company expects that in fiscal year 1998, income tax provisions will approximate statutory rates subject to utilization of state net operating losses. The effective tax rate in the first nine months of fiscal 1998 was 36% on income before income taxes excluding the $4.0 million recovery of the cash surrender value of certain company-owned life insurance policies. In the first nine months of fiscal year 1997, the Company recognized the net benefit of a refund of prior years' income taxes amounting to $19.7 million. The refund relates to the carryback of tax net operating losses. -20- 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS NINE MONTHS ENDED FEBRUARY 28, 1998 ("first nine months of fiscal year 1998") COMPARED TO NINE MONTHS ENDED FEBRUARY 28, 1997 ("first nine months of fiscal year 1997") (Continued) In the first nine months of fiscal year 1998, net income before extraordinary item was $29.2 million, or $.78 per share (diluted), and net income, including extraordinary item, was $24.0 million, or $.64 per share (diluted). In the first nine months of fiscal year 1998, the Company recorded an extraordinary charge of $5.2 million, or $.14 per share (diluted), net of tax, in connection with the extinguishment of $84.7 million of its 10 3/4% Senior Notes. For the same nine month period of the prior fiscal year, the Company reported net income of $30.0 million, or $.81 per share (diluted). The decrease resulted from the items described above. LIQUIDITY AND CAPITAL RESOURCES The increase in the Company's cash of $7.3 million to $59.3 million at February 28, 1998 from $52.0 million at May 31, 1997 resulted primarily from cash used by operating activities of $19.3 million, capital expenditures of $32.8 million, $2.3 million payment to Cooper Industries, Inc. ("Cooper"), $4.6 million repurchase of common stock and repayment of long-term debt, including fees, of $90.7 million, offset by the net proceeds from the issuance of long-term debt of $145.8 million, issuance of common stock of $9.8 million in connection with employee compensation and benefit plans and $1.4 million of proceeds from the sale of fixed assets. The $2.3 million payment to Cooper was made in accordance with the Company's $4.6 million promissory note payable to Cooper under the terms of the Stock Purchase Agreement with Cooper related to the acquisition of Cameron Forged Products Company in May 1994. The remaining $2.3 million is payable on June 30, 1998, subject to certain conditions. The primary component impacting cash used by operating activities was a $48.0 million increase in inventory over the prior year-end. Inventory levels have increased for the anticipated higher production levels from having the additional capacity of the recently re-installed 20,000 ton press together with the capacity of the 29,000 ton press. During this period of ramping up for production demands, structural cracking was found on the Company's 29,000 ton press causing redirection of 80% of the 29,000 ton production to the 20,000 ton press rather than providing additional capacity. The Company does not expect this rate of increase to continue based on the Company's current inventory reduction program, production on alternative presses reaching 100% of the steady-state production level on the 29,000 ton press before the outage, and production on the 29,000 ton press to recommence in mid June. -21- 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES, Continued The increase in the Company's working capital of $70.6 million to $236.8 million at February 28, 1998 from $166.2 million at May 31, 1997 resulted primarily from (in millions):
Net Income $ 24.0 Decrease in: Long-term restructuring, integration disposal and environmental (1.0) Long-term benefit liabilities (1.8) Deferred taxes and other (4.5) Increase in: Intangible and other assets (1.5) Long-term debt 64.9 Property, plant and equipment, net (15.0) Other changes in stockholders' equity 0.3 Issuance of common stock 5.2 Increase in working capital $ 70.6
Earnings before interest, taxes, depreciation, amortization, other charges (credits)and extraordinary item ("EBITDA") increased $12.4 million to $64.6 million in the first nine months of fiscal year 1998 from $52.2 million in the first nine months of fiscal year 1997. The EBITDA increases reflect higher profitability as discussed above. EBITDA should not be considered a substitute for net income as an indicator of operating performance or as an alternative to cash flow as a measure of liquidity, in each case determined in accordance with generally accepted accounting principles. Investors should be aware that EBITDA as shown above may not be comparable to similarly titled measures presented by other companies, and comparisons could be misleading unless all companies and analysts calculate this measure in the same fashion. As of May 31, 1997, the Company estimated the remaining cash requirements for the 1997 restructuring to be $5.5 million. Of such amount, the Company expects to spend approximately $1.5 million during fiscal year 1998 and $4.0 million thereafter. In the first nine months of fiscal year 1998, spending related to the 1997 restructuring amounted to $1.3 million. -22- 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES, Continued As of May 31, 1997, the Company estimated the remaining cash requirements for the integration of Cameron and direct costs associated with the acquisition of Cameron to be $2.1 million, of which the Company expects to spend approximately $0.7 million during fiscal year 1998 and $1.4 million thereafter. In the first nine months of fiscal year 1998, spending related to the integration of Cameron and associated direct costs amounted to $0.4 million. The Company expects to spend $1.3 million in fiscal year 1998 and $14.9 million thereafter on non-capitalizable environmental activities. In the first nine months of fiscal year 1998, $1.1 million was expended for non-capitalizable environmental projects. The Company from time to time expends cash on capital expenditures for more cost effective operations, environmental projects and joint development programs with customers. In the first nine months of fiscal year 1998, capital expenditures amounted to $32.8 million and are expected to be approximately $35.0 to $40.0 million in fiscal year 1998. On December 15, 1997, the Company issued $150.0 million of 8% Senior Notes due 2007 under an indenture between the Company and a bank as trustee. The 8% Senior Notes were issued at a price of 99.323% of face value and pay interest semi-annually in arrears on June 15 and December 15 of each year, commencing June 15, 1998. 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. The Company used approximately $90.7 million of the net proceeds from the sale of the 8% Senior Notes to repurchase $84.7 million (94%) of its outstanding 10 3/4% Senior Notes due 2003. The balance of the net proceeds will be used for additional working capital and other general corporate purposes. The Company's revolving receivables-backed credit facility (the "Receivables Financing Program") provides the Company with an aggregate maximum borrowing capacity of $65.0 million (subject to a borrowing base), with a letter of credit sub-limit of $35.0 million. The term of the Receivables Financing Program is five years with a renewal option. As of February 28, 1998, the total availability under the Receivables Financing Program was $62.1 million, there were no borrowings and letters of credit amounting to $8.3 million were outstanding. Wyman-Gordon Limited, the Company's subsidiary located in Livingston, Scotland, has a credit agreement with a Scottish bank ("the U.K. Credit Agreement") with an effective date of June 27, 1997. The maximum borrowing capacity under the U.K. Credit Agreement is 2.0 million pounds sterling (approximately $3.2 -23- 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES, Continued million) with a separate letter of credit or guarantee limit of 2.0 million pounds sterling. The term of the U.K. Credit Agreement is one year with a renewal option. There were no borrowings outstanding at February 28, 1998 and the Company had issued 0.9 million pounds sterling (approximately $1.5 million) of letters of credit or guarantees under the U.K. Credit Agreement. The primary sources of liquidity available to the Company to fund operations and other future expenditures include available cash ($59.3 million at February 28, 1998), borrowing availability under the Company's Receivables Financing Program, cash generated by operations and reductions in working capital requirements through planned inventory reductions and accounts receivable management. The Company believes that it has adequate resources to provide for its operations and the funding of restructuring, integration, capital and environmental expenditures. IMPACT OF INFLATION The Company's earnings may be affected by changes in price levels and in particular, changes in the price of basic metals. The Company's contracts generally provide for fixed prices for finished products with limited protection against cost increases. The Company would therefore be affected by changes in prices of the raw materials during the term of any such contract. The Company attempts to minimize this risk by entering into fixed price arrangements with raw material suppliers and, where possible, negotiating price escalators into its customer contracts to offset a portion of raw material cost increases. ACCOUNTING AND TAX MATTERS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaces the previously reported primary and fully diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the SFAS 128 requirements. There is no material impact on earnings per share for the three or nine months ended February 28, 1998 and 1997 calculated under SFAS 128. In June 1997, the Financial Accounting Standards Board issued Statement No. 130 "Reporting Comprehensive Income" ("SFAS 130")and Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). The implementation of SFAS 130 will require that the components of comprehensive income be reported in the financial statements. -24- 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ACCOUNTING AND TAX MATTERS, Continued The implementation of SFAS 131 will require the disclosure of segment information utilizing the approach that the Company uses to manage its internal organization. The Company is currently assessing the impact that the new standards will have on its financial statements. Implementation of both of these new standards is required for the year ending May 31, 1999 ("fiscal year 1999"). The Company is in the process of conducting a review of its computer systems to identify areas that could be affected by the "Year 2000" issue. An implementation plan will then be developed to resolve the issues identified. The Year 2000 issue is the result of computer programs being written using two digits (rather than four) to define the applicable year. This could result in computational errors as dates are compared across the century boundary. The total cost of altering the applicable program code is being determined as part of the Company's implementation plan. The Company, based on a preliminary evaluation, does not currently believe such costs will be material. OTHER MATTERS 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 two others were injured. OSHA conducted an investigation of the accident. On June 18, 1997, WGFI reached an agreement with OSHA, settling citations resulting from the accident. The injured workers and the decedents' families have asserted claims against the Company and WGFI. WGFI has also received claims from several employees of a subcontractor claiming to have been injured at the time of the accident as well as from one current employee. To date, the Company has settled all claims that could be brought by three of the decedent's families on terms acceptable to the Company and its insurance carriers. The Company has also settled most of the claims of the subcontractor employees. The Company thus far has been unable to achieve settlements with the other claimants, and, on October 24, 1997, a lawsuit was filed in the District Court of Harris County, Texas, on behalf of three of the decedents' families against the Company, WGFI and Cooper- Cameron Corporation. The family of another decedent and one of the injured employees have subsequently filed motions to be included in that lawsuit. Trial of the lawsuit is currently set for October 1998. -25- 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) OTHER MATTERS, Continued In general under Texas statutory law, an employee's exclusive remedy against an employer for an on-the-job injury is the benefits of the Texas Workers Compensation Act. WGFI, the employer of the deceased employees, has workers compensation insurance coverage and the injured employees and beneficiaries of the deceased employees are receiving workers compensation payments. Under applicable law, however, statutory beneficiaries of employees killed in the course and scope of their employment may recover punitive (but not compensatory) damages in excess of workers compensation benefits. However, to do so they must prove that the employer was grossly negligent. The protection of the workers compensation exclusive remedy provision may not extend to the Company as parent corporation of WGFI. Therefore, with regard to the October 24, 1997 lawsuit and any future lawsuits brought on behalf of those killed or injured in the Houston accident or their families against the Company, if (i) the court finds that the Company had a legal duty to WGFI and its employees, (ii) the evidence supports a finding that the Company acted negligently in its duty to WGFI and its employees and (iii) such negligence had a causal connection with the accident, the plaintiffs might be able to recover compensatory damages against the Company. If it is shown that the Company's conduct amounted to gross neglect, and that conduct is found to be a cause of the accident, the plaintiffs may be able to recover punitive damages against the Company. It is not possible at this time to determine the extent, if any, to which WGFI or the Company could be held liable in connection with the accident. The Company maintains general liability and employer's liability insurance for itself and its subsidiaries under various policies with aggregate coverage limits of approximately $29 million, a portion of which has been expended in the settlement to date. While WGFI has tendered the defense of the various claims to the Company's insurance carriers, there can be no assurance that the full insurance coverage will be available. Based on the Company's experience in the settlement negotiations to date, the Company believes that there is a substantial risk that the pending and threatened claims will not be settled for an aggregate amount within its insurance coverage limits. The Company anticipates that, as with currently pending lawsuit, any additional lawsuits will include claims for alleged compensatory as well as punitive damages that in the aggregate could substantially exceed the Company's available insurance coverage. The Company intends to vigorously defend all lawsuits that have been or may be filed relating to the accident. However, if one or more such lawsuits were to be prosecuted successfully by the plaintiffs and a judgment were to be obtained by one or more plaintiffs in such lawsuits and sustained on appeal, litigation costs, including the cost of pursuing any appeals, and the cost of paying such a judgment, to the extent not covered by insurance, could have a material -26- 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) OTHER MATTERS, Continued adverse effect on the Company's financial condition and the results of operations, particularly if any such judgment includes awards for punitive damages. On September 25, 1997, the Company received a subpoena from the United States Department of Justice informing it that the United States 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 focus of the investigation is whether the Company failed to comply with required quality control procedures for cast aerospace parts and whether the Company shipped cast components that did not meet applicable specifications, which could be a violation of federal requirements. The investigating agencies have directed the Company to furnish various documents and information relating to the subject of the investigation. The Company is cooperating fully with the investigation and in addition has substantially completed its own investigation, which was supervised by the Company's outside attorneys and conducted by quality and process auditors from another casting facility of the Company and by the Company's internal attorneys. Such investigation has identified certain departures from Company policies and procedures which have been addressed. The federal investigation may result in criminal or civil charges being brought against the Company, which could result in civil damages and penalties and criminal liability, if the Company were found to have violated federal laws. Based on the Company's own investigation to date, 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. -27- 28 PART II. ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K (a) Exhibits The following exhibits are being filed as part of this Form 10-Q:
EXHIBIT NO. DESCRIPTION 27 Financial Data Schedule for the Nine Months Ended February 28, 1998.
(b) On November 19, 1997, the Company filed a Form 8-K dated November 14, 1997 with the Commission for the following purposes: (1) to report that the Company has commenced a cash tender offer for certain of its debt securities and is soliciting to amend the related indenture; (2) to report developments relating to the previously reported industrial accident at the facility of Wyman-Gordon Forgings, Inc. in Houston, Texas; and (3) to report the commencement of an investigation by certain federal agencies involving alleged irregularities at the Company's Tilton, New Hampshire facility. On December 9, 1997, the Company filed a Form 8-K with the Commission to report that the Company had taken the 29,000 ton press at its Houston, Texas facility out of service for repairs. On February 9, 1998, the Company filed a Form 8-K with the Commission to update the status of the 29,000 ton press and to announce an extraordinary one time charge relating to the refinancing of its 10 3/4% Senior Notes due 2003. -28- 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WYMAN-GORDON COMPANY Date: 4/9/98 By: /S/ EDWARD J. DAVIS Edward J. Davis Vice President, Chief Financial Officer and Treasurer Date: 4/9/98 By: /S/ JEFFREY B. LAVIN Jeffrey B. Lavin Corporate Controller -29- EX-27 2 FINANCIAL DATA SCHEDULE
5 Wyman-Gordon Company & Subsidiaries Article 5 of Regulation S-X Y-T-D 02/28/98 and Restated Y-T-D 02/28/97 9-MOS 9-MOS MAY-31-1998 MAY-31-1997 JUN-01-1997 JUN-01-1996 FEB-28-1998 FEB-28-1997 59,261 37,258 7 7 128,272 103,893 0 0 140,341 94,048 335,610 250,323 456,393 421,284 287,679 271,586 528,737 426,367 98,786 101,727 161,029 96,231 0 0 0 0 37,053 37,053 156,766 107,306 528,737 426,367 547,497 424,144 551,142 426,222 463,415 362,540 463,415 362,540 0 0 0 0 8,999 8,053 43,309 10,278 14,151 (19,680) 29,158 29,958 0 0 (5,192) 0 0 0 23,966 29,958 0.66 0.84 0.64 0.81
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