-----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, NmR5Zgr22oPfGmnyVEEkSwSTEwhji5z0SMFWRy3rdMR9qbXpJCIGbxEnvULGB+uF E1bQ7efuxyHRBfTfnhLj/A== 0000108703-97-000007.txt : 19970811 0000108703-97-000007.hdr.sgml : 19970811 ACCESSION NUMBER: 0000108703-97-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970531 FILED AS OF DATE: 19970808 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-03085 FILM NUMBER: 97654639 BUSINESS ADDRESS: STREET 1: 244 WORCHESTER ST STREET 2: BOX 8001 CITY: NORTH GRAFTON STATE: MA ZIP: 01536 BUSINESS PHONE: 5088394441 10-K 1 WYMAN-GORDON CO. FORM 10-K 1 Form 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended May 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) 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 of (I.R.S. Employer incorporation or organization) Identification No.) 244 WORCESTER STREET, BOX 8001, GRAFTON, MASSACHUSETTS 01536-8001 (Address of Principal Executive Offices) (Zip Code) 508-839-4441 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1 Par Value (Title of Class) Indicate by a 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of the voting stock held by non- affiliates of the registrant as of July 26, 1997: $407,376,000 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT JULY 26, 1997 Common Stock, $1 Par Value 36,172,910 Shares -1- 2 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's "Proxy Statement for Annual Meeting of Stockholders" on October 15, 1997 are incorporated into Part III. -2- 3 PART I ITEM 1. BUSINESS THE COMPANY Wyman-Gordon Company is a leading manufacturer of high quality, technologically advanced forging and investment casting components, and composite airframe structures for the commercial aviation, commercial power and defense industries. The Company uses forging and investment casting processes to produce metal components to exacting customer specifications for technically demanding applications such as jet turbine engines, airframes and land-based and marine gas turbine engines. The Company also extrudes seamless thick wall steel pipe for use primarily in the oil and gas industry and commercial power generation plants. The Company produces components for most of the major commercial and U.S. defense aerospace programs. The Company's unique combination of manufacturing facilities and broad range of metallurgical skills allow it to serve its customers effectively and to lead the development and use of new metal technologies for its customers' uses. As used in this report the term "Company" includes Wyman-Gordon Company and its subsidiaries. Forging, a process in which metal is heated and shaped through pressing or extrusion, represented 77% of the Company's total revenues in the year ended May 31, 1997. Casting, a process in which molten metal is poured into molds, represented 21% of the Company's total revenues in the year ended May 31, 1997. The Company's composite business plans, designs, fabricates and tests composite airframe structures for the aerospace market and represented 2% of the Company's total revenues in the year ended May 31, 1997. PERFORMANCE IMPROVEMENTS The Company's operating results have improved in recent years as a result of several factors, including (i) the acquisition of Cameron Forged Products Company ("Cameron") from Cooper Industries, Inc. in May 1994, (ii) a series of strategic initiatives designed to lower the Company's cost structure, consolidate its forging operations, lower inventory requirements and solidify customer relations, and (iii) higher demand for aerospace parts resulting from increasing production rates of commercial aircraft by commercial airframe prime contractors. Industry analysts forecast an estimated $1 trillion or more in new aircraft orders over the next 20 years, which the Company expects will result in continued strong demand for the Company's products. However, the aerospace industry is highly cyclical and there can be no assurance that improved conditions in the commercial aerospace market will be sustained. The acquisition of Cameron, the Company's principal competitor in the production of forgings for use in critical aerospace applications and the Company's subsequent consolidation of forging operations, helped to reduce excess capacity in the -3- 4 industry. The Company has substantially completed the consolidation of Cameron which included refocusing its operations to eliminate duplicative facilities, improving throughput and increasing efficiencies of scale. These changes have resulted in higher utilization rates, better inventory management and cost reductions. The Company estimates that, as a result of cost savings and production efficiencies achieved since the acquisition of Cameron, its total production and selling costs are more than $30 million lower per year than such costs would have been under the cost structures of the Company and Cameron prior to the acquisition. The Company has undertaken the following significant initiatives to maximize its production efficiencies: FOCUSED FACTORIES. The Company has substantially completed the consolidation of the manufacture of rotating parts for jet engines from Grafton, Massachusetts into the Company's Houston, Texas facility. At the same time, the Grafton facility has been focused on the production of large airframe structures and large turbine parts such as components for the GE90 engine and land- based gas turbines. Prior to the acquisition of Cameron, the Company and Cameron both produced isothermal forgings. That business has been combined in the Company's Worcester, Massachusetts facility where the Company has made significant expenditures to improve productivity. The Company now has greater ability to supply its customers with isothermal forgings than the two companies previously had separately. As a result of supply constraints of raw materials in recent years, the Company has increased its production of titanium ingots as its Millbury, Massachusetts melt shop which has allowed a significant increase in its production of aerospace structural forgings. Through the emphasis on focused factories, the Company has been able to eliminate duplicative facilities, improve throughout, and achieve efficiencies of scale. RATIONALIZATION OF FORGING OPERATIONS. Subsequent to the acquisition of Cameron, the Company closed one of the two Cameron forging plants in Houston, Texas. The 20,000 multi-ram ton press that Cameron operated in the closed facility was reinstalled at the Company's existing Houston facility and began operations at the end of fiscal year 1997. This press will give the Company greater capacity to serve its aerospace customers and will allow further focus in the Company's Livingston, Scotland plant as certain valve bodies and other products produced there will be made on the 20,000 ton press in the Houston facility. In addition, the Company has closed its ring-roll operations at its Worcester, Massachusetts facility. The Company also shut down its hammer forging operations in the Worcester facility and entered into an arrangement with Sifco Industries, Inc. ("Sifco") pursuant to which the Company agreed to cooperate in transferring customer relationships to Sifco by sharing technical and product information, joint marketing and transferring dies and Sifco agreed to pay the Company royalties. Finally, the Company has exited the unprofitable aluminum forging business operated at its Grafton, Massachusetts facility, and has entered into an arrangement with Weber Metals, Inc. for the production of -4- 5 aluminum forgings on terms similar to that with Sifco. The result has been improved manufacturing efficiencies, higher utilizations and better inventory management. BEST PRACTICES. The Company has adopted, and will continue to adopt, the best manufacturing practices of the Company and Cameron, resulting in cost reductions from lower material input weights on certain forgings, improved machining practices and more efficient testing procedures. Substantial raw material cost savings in certain of the Company's processes have resulted from utilization of material produced in the Company's Brighton, Michigan powder metal facility and the Company's Houston, Texas vacuum remelting facility. At the Company's Houston facility, average manufacturing cycle times have been reduced from approximately 22 weeks to seven weeks, and by applying the techniques learned in Houston, the Company has achieved similar reductions at its Grafton, Massachusetts facility. STRATEGY The Company intends to strengthen its position in the aerospace market and diversify into new markets by leveraging its manufacturing capabilities and expertise in high performance material. By diversifying its business mix, the Company intends to lessen its reliance on the aerospace industry and mitigate the impact of the cylicality of that industry. The Company intends to achieve its goals through the following initiatives: ENHANCE STRATEGIC ALLIANCES WITH CUSTOMERS AND SUPPLIERS. The Company, its customers and its raw material suppliers have formed teams to undertake numerous initiatives to improve quality, to shorten manufacturing cycle times and to reduce costs at each stage of production. Teams from each of the participating companies meet regularly to share information and to develop plans for streamlining the entire supply chain. FOCUS ON MORE VALUE-ADDED PRODUCTS. The Company plans to become more involved in the design phases for new components and applications, which the Company believes will enable it to provide more value-added products to its customers. Through these efforts, the Company expects to enhance its position as a leading supplier to its customers and to improve its competitive position. DEVELOP NEW APPLICATIONS AND ENTER NEW MARKETS. The Company believes that its expertise in the manufacture of highly specialized metal components with enhanced fatigue and temperature resistant properties gives it the ability to design new applications for existing technologies in its current markets and to utilize existing technologies in new markets. For example, the Company has been able to enter the power generation and energy market where the Company's knowledge of nickel alloys and manufacturing technology utilized for aircraft engines can be applied to manufacture energy efficient, high strength, temperature resistant gas turbines. The Company is applying its casting expertise, particularly in titanium, to new markets such as automotive, marine, sporting goods, power generation, and -5- 6 semiconductor manufacturing. In addition, the Company is expanding its operations internationally, particularly in Russia and the Far East. EXPAND THROUGH SELECTIVE ACQUISITIONS AND JOINT VENTURES. The Company intends to pursue selective acquisitions and joint ventures in its core aerospace business and in new areas that enable the Company to leverage its manufacturing expertise and metallurgical skills. The Company believes that its acquisition of Cameron demonstrates its ability to successfully integrate acquired businesses. LEVERAGE EXPERTISE WITH LARGER AEROSPACE COMPONENTS. The Company believes that its technological leadership in manufacturing large-scale components and experience in producing and utilizing sophisticated alloys will enable it to capitalize on the industry trend toward widebody aircraft with larger and more sophisticated engines. These aircraft, which include the new Boeing 777, require larger airframe structural parts and their engines require high-purity alloys, both of which are particular strengths of the Company. EXPLOIT INTERNATIONAL ALLIANCES AND MARKETS. The Company has increased its purchases of titanium ingot from Salda, a forge company in the Ural Mountains, and is working with Salda to get Salda qualified to produce finished forgings for some of the Company's customers. The Company has opened a representative office in Beijing and is seeking to develop strategic alliances with a leading aerospace forging company and an aerospace casting company with respect to possible joint ventures in China. The Company has also entered into an agreement with Parsan Forge of Istanbul, Turkey for the manufacture of smaller-sized aerospace hammer forgings. MARKETS AND PRODUCTS The principal markets served by the Company are aerospace and energy. Revenue by market for the respective periods were as follows (000's omitted, except percentages):
YEAR ENDED YEAR ENDED MAY 31, 1997 MAY 31, 1996 % OF % OF REVENUE TOTAL REVENUE TOTAL Aerospace $475,131 78% $362,706 73% Energy 97,117 16 92,991 19 Other 36,494 6 43,927 8 Total $608,742 100% $499,624 100%
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YEAR ENDED MAY 31, 1995 % OF REVENUE TOTAL Aerospace $300,143 76% Energy 66,892 17 Other 29,604 7 Total $396,639 100%
AEROSPACE PRODUCTS AEROSPACE TURBINE PRODUCTS. The Company manufactures components from sophisticated titanium and nickel alloys for jet engines manufactured by GE, Pratt & Whitney, Rolls-Royce and CFM International S.A. Such jet engines are used on substantially all commercial aircraft produced by Boeing, McDonnell Douglas and Airbus. The Company's forged engine parts include fan discs, compressor discs, turbine discs, seals, spacers, shafts, hubs and cases. Cast engine parts include thrust reversers, valves and fuel system parts such as combustion chamber swirl guides. Rotating parts such as fan, compressor and turbine discs must be manufactured to precise quality specifications. The Company believes it is the leading producer of these rotating components such as fan compression and turbine discs for use in turbine aircraft engines. Jet engines may produce in excess of 100,000 pounds of thrust and may subject parts produced by the Company to temperatures reaching 1,350 degrees Fahrenheit. Components for such extreme conditions require precision manufacturing and expertise with high-purity titanium and nickel alloys. AEROSPACE STRUCTURAL PRODUCTS. The Company's airframe structural components, such as landing gear, bulkheads and wing spars, are used on the entire fleet of airplanes manufactured by Boeing, including the new 777, the McDonnell Douglas MD-11 and the Airbus A330 and A340. In addition, the Company's structural components are used on a number of military aircraft and other defense-related applications including the McDonnell Douglas C-17 transport and the new F-22 air superiority fighter being jointly developed by Lockheed and Boeing. The Company also produces dynamic rotor forgings for helicopters manufactured by Sikorsky. Aerospace Structural products include wing spars, engine mounts, struts, landing gear beams, landing gear, wing hinges, wing and tail flaps, housings, and bulkheads. These parts may be made of titanium, steel, aluminum and other alloys, as well as composite materials. Forging is particularly well-suited for airframe parts because of its ability to impart greater strength per unit of weight to metal than other manufacturing processes. Investment casting can produce complex shapes to precise, repeatable dimensions. -7- 8 The Company has been a major supplier of the beams that support the main landing gear assemblies on the Boeing 747 for many years and supplies main landing gear beams for the new Boeing 777. The Company forges landing gear and other airframe structural components for the Boeing 737, 747, 757, 767 and 777, the McDonnell Douglas MD-11 and the Airbus A330 and A340. The Company produces structural forgings for the F-15, F-16 and F/A- 18 fighter aircraft and the Black Hawk helicopter produced by Sikorsky. The Company also produces large, one-piece bulkheads for Lockheed/Boeing for the F-22 next generation air superiority fighter aircraft. ENERGY PRODUCTS The Company is a major supplier of extruded seamless thick wall pipe used in critical piping systems in both fossil fuel and nuclear commercial power plants worldwide as well as oil and gas industry applications. The Company believes it is the leading supplier in the U.S. and the U.K. of large diameter, seamless thick wall pipe. The Company produces rotating components, such as discs and spacers, and valves components for land-based steam turbine and gas turbine generators. The Company also manufactures shafts, cases, and compressor and turbine discs for marine gas turbines. The Company believes the energy market provides it with an opportunity to build on its manufacturing capabilities and metallurgical know-how gained from manufacturing products for the aerospace industry. The Company produces a variety of mechanical and structural tubular forged products, primarily in the form of extruded seamless pipe, for the domestic and international energy markets, which include nuclear and fossil fueled power plants, cogeneration projects and retrofit and life extension applications. These tubular forged products also have ordnance and other military applications. Aluminum, steel, and titanium products are manufactured at the Company's Houston, Texas forging facility where one of the world's largest vertical extrusion presses extrudes pipe up to 48 inches in diameter and seven inches in wall thickness and bar stock from six to 32 inches in diameter. Lengths of pipe and bar stock vary from ten to 45 feet with a maximum forged weight of 20 tons. Similar equipment and capabilities are in operation at the Company's Livingston, Scotland forging facility. Additionally, the Houston press extrudes powder billets for use in aircraft turbine engine forgings. OTHER PRODUCTS The Company supplies products to builders of military bombs and missiles. Examples of these products include breech blocks and breech rings for large cannons and forged steel casings for bombs, rockets and expendable launch vehicles. For naval defense applications, the Company supplies components for propulsion systems for nuclear submarine and aircraft carriers as well as pump, valve, structural and non nuclear propulsion forgings. -8- 9 The Company also manufactures extruded missile, rocket and bomb cases 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 extrudes powders for other alloy powder manufacturers. The Company's investment casting operations, which utilize a process of pouring molten metal into a mold, manufacture products for commercial applications such as food processing, semiconductor manufacturing, diesel turbochargers and sporting equipment. The Company is actively seeking to identify alternative applications for its capabilities, such as in the automotive and other commercial markets. CUSTOMERS The Company has approximately 275 active customers that purchase forgings, approximately 800 active customers that purchase investment castings and approximately 20 active customers that purchase composite structures. The Company's principal customers are similar across all of these production processes. Five customers accounted for 48%, 47% and 50% of the Company's revenues for the years ended May 31, 1997, 1996 and 1995, respectively. GE and United Technologies (primarily its Pratt & Whitney division and Sikorsky operation) each accounted for 10%, or more, of revenues for the years ended May 31, 1997, 1996 and 1995.
(In thousands, except percentages) YEAR ENDED YEAR ENDED MAY 31, 1997 MAY 31, 1996 % OF % OF TOTAL TOTAL REVENUE REVENUE REVENUE REVENUE GE $156,764 26% $134,830 27% United Technologies 60,921 10 53,116 11
(In thousands, except percentages) YEAR ENDED MAY 31, 1995 % OF TOTAL REVENUE REVENUE GE $101,261 26% United Technologies 58,873 15
-9- 10 Boeing, McDonnell Douglas and Rolls-Royce are also significant customers of the Company. Because of the relatively small number of customers for some of the Company's principal products, those customers exercise significant influence over the Company's prices and other terms of trade. The Company has organized its operations into product groups which focus on specific customers or groups of customers with similar needs. The Company has become actively involved with its aerospace customers through supply chain management initiatives, joint development relationships and cooperative research and development, engineering, quality control, just-in-time inventory control and computerized design programs. This involvement begins with the design of the tooling and processes to manufacture the customer's components to its precise specifications. MARKETING AND SALES The Company markets its products principally through its own sales engineers and makes only limited use of manufacturers' representatives. Substantially all sales are made directly to original equipment manufacturers. The Company's sales are not subject to significant seasonal fluctuations. A substantial portion of the Company's revenues are 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. The Company has recently increased its efforts to obtain long-term agreements ("LTAs") with customers which contain price adjustments which would compensate the Company for increased raw material costs. BACKLOG The Company's firm backlog includes the sales prices of all undelivered units covered by customers' orders for which the Company has production authorization. The Company's firm backlog in the various markets served by the Company has been as follows:
(000's omitted, except percentages) MAY 31, 1997 MAY 31, 1996 % OF % OF BACKLOG TOTAL BACKLOG TOTAL Aerospace $767,989 86% $499,103 83% Energy 99,172 11 66,341 11 Other 28,664 3 32,994 6 Total $895,825 100% $598,438 100%
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MAY 31, 1995 % OF BACKLOG TOTAL Aerospace $382,982 82% Energy 57,248 12 Other 28,531 6 Total $468,761 100%
At May 31, 1997, approximately $671.6 million of total firm backlog was scheduled to be shipped within one year (compared to $437.0 million at May 31, 1996 and $365.0 million at May 31, 1995) and the remainder in subsequent years. Sales during any period include sales which were not part of backlog at the end of the prior period. Customer orders in firm backlog are subject to rescheduling or termination for customer convenience and as a result of market fluctuations in the commercial aerospace industry. However, in certain cases the Company is entitled to an adjustment in contract amounts. Because of the cyclical nature of order entry experienced by the Company and its dependence on the aerospace industry, there can be no assurance that order entry will continue at current levels or that current firm purchase orders will not be canceled or delayed. MANUFACTURING PROCESSES The Company employs three manufacturing processes: forging, investment casting and composites production. FORGING Forging is the process by which desired shapes, metallurgical characteristics, and mechanical properties are imparted to metal by heating and shaping it through pressing or extrusion. The Company forges titanium and steel alloys, as well as high temperature nickel alloys. The Company believes that it is the leading producer of rotating components for use in turbine aircraft engines. These parts are forged from purchased ingots converted to billet in the Company's cogging presses and from alloy metal powders which are produced, consolidated and extruded into billet entirely at the Company's facilities. Forging is conducted in Massachusetts, Texas and Scotland on a number of hydraulic presses with capacities ranging up to 55,000 tons. The Company forges these engine components primarily from alloys of high-temperature nickel alloys. The Company manufactures most of its forgings at its facilities in Grafton and Worcester, Massachusetts, Houston, Texas and Livingston, Scotland. The Company also operates an alloy powder metal facility in Brighton, Michigan and vacuum remelting facilities in Houston, Texas and Millbury, Massachusetts which produce steel, nickel and titanium ingots, and a plasma arc melting facility for the production of titanium electrodes and ingots in Millbury, Massachusetts. The Company -11- 12 has seven large closed die hydraulic forging presses rated as follows: 18,000 tons, 35,000 tons and 50,000 tons in Grafton Massachusetts; 20,000 tons, 29,000 tons and 35,000 tons in Houston, Texas and 30,000 tons in Livingston, Scotland. The Company reinstalled the 20,000 multi-ram ton press in Houston at a cost of approximately $6 million and began operating it at the end of fiscal year 1997. The press will substantially increase the Company's forging capacity. The 35,000 ton vertical extrusion press in Houston can also be operated as a 55,000 ton hydraulic forging press. The Company also operates an open die cogging press used to convert ingot into billet rated at 2,000 tons at its Grafton, Massachusetts location and has recently restarted production on a 1,375 ton cogging press in Grafton that had been idled since 1992. The Company produces isothermal forgings on its forging press rated at 8,000 tons at its Worcester, Massachusetts location. The Company employs the following forging processes: OPEN-DIE FORGING. In this process, the metal is forged between dies that never completely surround the metal, thus allowing the metal to be observed during the process. Typically, open-die forging is used to create relatively simple, preliminary shapes to be further processed by closed die forging. CLOSED-DIE FORGING. Closed-die forging involves pressing heated metal into the required shapes and size determined by machined impressions in specially prepared dies which exert three dimensional control on the metal. In hot-die forging, a type of closed-die process, the dies are heated to a temperature approaching the transformation temperature of the materials being forged so as to allow the metal to flow more easily within the die cavity which produces forgings with superior surface conditions, metallurgical structures, tighter tolerances, enhanced repeatability of the part shapes and greater metallurgical control. Both titanium and nickel alloys are forged using this process, in which the dies are heated to a temperature of approximately 1,300 degrees Fahrenheit. CONVENTIONAL/MULTI-RAM. The closed-die, multi-ram process featured on the Company's 30,000 and 20,000 ton presses enables the Company to produce extremely complex forgings such as valve bodies with multiple cavities in a single heating and pressing cycle. Dies may be split either on a vertical or a horizontal plane and shaped punches may be operated by side rams, piercing rams, or both. Multi-ram forging enables the Company to produce a wide variety of shapes, sizes, and configurations utilizing less input weight. The process also optimizes grain flow and uniformity of deformation, reduces machining requirements, and minimizes overall costs. ISOTHERMAL FORGING. Isothermal forging is a closed-die process in which the dies are heated to the same temperature as the metal being forged, typically in excess of 1,900 degrees Fahrenheit. The forged material typically consists of nickel alloy powders. Because of the extreme temperatures necessary for forming these alloys, the dies must be made of refractory metal -12- 13 (such as molybdenum) so that the die retains its strength and shape during the forging process. Because the dies may oxidize at these elevated temperatures, the forging process is carried on in a vacuum or inert gas atmosphere. The Company's isothermal press also allows it to produce near-net shape components (requiring less machining by the customer) made from titanium alloys, which can be an important competitive advantage in times of high titanium prices. The Company carries on this process in its 8,000-ton isothermal press. EXTRUSION. The Company's 35,000 ton vertical extrusion press is one of the largest and most advanced presses in the world. Extrusions are produced for applications in the oil and gas industry, including tension leg platforms, riser systems and production manifolds. The extrusion process is facilitated by manipulators capable of handling work pieces weighing up to 20 tons, rotary hearth furnaces and a 14,000 ton blocking press. It is capable of producing thick wall seamless pipe with outside diameters up to 48 inches and wall thicknesses from 1/2 inch up to seven inches. Solid extrusions can be manufactured from six to 32 inches in diameter. Typical lengths vary from ten to 45 feet. Powder materials can also be compacted and extruded into forging billets utilizing this press. The 30,000 ton press in Scotland has similar extrusion capabilities in addition to its multi-ram forging capabilities. TITANIUM AND ALLOY PRODUCTION. The Company operates two vacuum arc remelting ("VAR") furnaces to produce titanium alloy suitable for structural aerospace applications at its Millbury, Massachusetts facility. Titanium produced in this manner is utilized in both the Company's forging and castings operations. The Company's Plasma Arc Melting ("PAM") facility in Millbury is capable of producing high quality titanium ingot and nickel alloy powder. The Company will utilize the PAM primarily to produce titanium electrodes for further processing in its VAR furnaces. During the Company's last fiscal year, the Company increased its rate of production of titanium ingots in Millbury from two to six ingots per week. These ingots are then converted into billets and forged into aerospace structural products at the Company's Grafton, Massachusetts facility. The Company's Brighton, Michigan powder metal facility has the capability to atomize, process, and consolidate (by hot isostatic pressing) alloy metal powders for use in aerospace, medical implant, petrochemical, hostile environment oil and gas drilling and production, and other high technology applications. This facility has an annual production capacity of up to 500,000 pounds of alloy powder. After production of the powder, the Company consolidates the metal by extrusion using its 35,000 ton press in Houston, and the extruded billets are then forged into critical jet engine components on the Company's 8,000 ton isothermal press in Worcester, Massachusetts. The Company's VAR shop in Houston, Texas has five computer- controlled VAR furnaces which process electrodes up to 42 inches in diameter that weigh up to 40,000 pounds. The Houston VAR furnaces are used to remelt purchased electrodes into high purity -13- 14 alloys for internal use in severe applications. In addition, the VAR furnaces are used for toll melting. These vacuum metallurgy techniques provide consistently high levels of purity, low gas content, and precise control over the solidification process. This minimizes segregation in complex alloys and results in improved mechanical properties, as well as hot and cold workability. The Company has entered into a joint venture with Pratt & Whitney and certain Australian investors to produce nickel-based alloy ingots in Perth, Australia. The Company utilizes these ingots as raw materials for its forging and casting products. SUPPORT OPERATIONS. The Company manufactures some of its own forging dies out of high-strength steel and molybdenum. These dies can weigh in excess of 100 tons and can be up to 25 feet in length. In manufacturing its dies, the Company utilizes its customers' drawings and engineers the dies using CAD/CAM equipment and sophisticated metal flow computer models that simulate metal flow during the forging process. This activity improves die design and process control and permits the Company to enhance the metallurgical characteristics of the forging. The Company also has at its three major forging locations machine shops with computer aided profiling equipment, vertical turret lathes and other equipment that it employs to rough machine products to a shape allowing inspection of the products. The Company also operates rotary and car-bottom furnaces for heat treatment to enhance the performance characteristics of the forgings. These furnaces have sufficient capacity to handle all the Company's forged products. The Company subjects its products to extensive quality inspection and contract qualification procedures involving zyglo, chemical etching, ultrasonic, red dye, hardness, and electrical conductivity testing facilities. TESTING. Because the Company's products are for high performance end uses, rigorous testing is necessary and is performed internally by Company engineers. Throughout the manufacturing process, numerous tests and inspections are performed to insure the final quality of each product; statistical process control techniques are also applied throughout the entire manufacturing process. INVESTMENT CASTINGS The Company's investment castings operations use modern, automated, high-volume production equipment and both air-melt and vacuum-melt furnaces to produce a wide variety of complex investment castings. Castings are made of a range of metal alloys including steel, aluminum, nickel, titanium and magnesium. The Company's castings operations are conducted in facilities located in Connecticut, New Hampshire, Nevada and California. These plants house air and vacuum-melt furnaces, wax injection machines and investment dipping tanks. Because of the growth in demand for the Company's high quality titanium castings, the Company has restarted its Franklin, New Hampshire -14- 15 facility. The Company has installed a new state-of-the-art titanium melting furnace in the Franklin plant where it intends to consolidate its titanium castings operations. Additionally, the Company has expanded its facilities in San Leandro, California and Carson City, Nevada for the production of castings. The Company produces its investment castings by the "lost wax" process, a method developed in China over 5,000 years ago. The initial step in producing investing castings is to create a wax form of the ultimate metal part by injecting molten wax into an aluminum mold, known as a "tool." These tools are produced to the specifications of the customer and are primarily purchased from outside die makers, although the Company maintains internal tool-making capabilities. The wax patterns are then mechanically coated with a ceramic slurry in a process known as investment. This forms a ceramic shell which is subsequently air-dried and hardened under controlled environmental conditions. Next, the wax inside this shell is melted and removed in a high temperature steam autoclave and the molten wax is recycled. In the next, or foundry, stage metal is melted in an electric furnace in either an air or vacuum environment and poured into the ceramic shell. After cooling, the ceramic shells are removed by vibration, chipping or various types of water or air blasting. The metal parts are then cleaned in a high temperature caustic bath, followed by water rinsing. In the finishing stage, the castings are finished by grinding and polishing to remove excess metal. The final product then undergoes a lengthy series of testing (radiography, fluorescent penetrant, magnetic particle and dimensional) to ensure quality and consistency. COMPOSITES The Company's composites operation, Scaled Composites, Inc., plans, designs, fabricates and tests composite airframe structures made by layering carbon graphite and other fibers with epoxy resins for the aerospace market. The Company is currently constructing a 120,000 square foot facility in Montrose, Colorado to manufacture airplane components designed by Scaled Composites, Inc. The Company expects to commence operations at this facility in the fall of 1997. OPERATING FACILITIES The following table sets forth certain information with respect to the Company's operating facilities at May 31, 1997, all of which are owned. The Company believes that its operating facilities are well-maintained, are suitable to support the Company's business and are adequate for the Company's present and anticipated needs. On average during the Company's fiscal year 1997, the Company's forging, investment castings and composites facilities were operating at approximately 80%, 75% and 100% of their total productive capacity, respectively. -15- 16
APPROX. SQUARE LOCATION FOOTAGE PRIMARY FUNCTION Brighton, Michigan 34,500 Alloy Powder Production Grafton, Massachusetts 85,420 Administrative Offices Grafton, Massachusetts 843,200 Forging Houston, Texas 1,283,800 Forging Livingston, Scotland 405,200 Forging Millbury, Massachusetts 104,125 Research and Development, Metals Production Worcester, Massachusetts 22,300 Forging Carson City, Nevada 55,000 Casting Franklin, New Hampshire 43,200 Casting Groton, Connecticut (2 plants) 162,550 Casting San Leandro, California 60,000 Casting Tilton, New Hampshire 94,000 Casting Mojave, California 67,000 Composites Montrose, Colorado 120,000 Composites (under construction)
RAW MATERIALS Raw materials used by the Company in its forgings and castings include titanium, nickel, steel, aluminum, magnesium and other metallic alloys. The composites operation uses high strength fibers such as fiberglass or graphite, as well as materials such as foam and epoxy, to fabricate composite structures. The major portion of metal requirements for forged and cast products are purchased from major metal suppliers producing forging and casting quality material as needed to fill customer orders. The Company has two or more sources of supply for all significant raw materials. The Company satisfies some of its titanium requirements internally by producing titanium alloy ingots from titanium scrap and "sponge". The Company's powder metal facility in Brighton, Michigan produces nickel alloy powder and high quality titanium ingots. In addition the Company is a participant a joint venture in Australia to produce nickel alloy ingots, and the Company utilizes a portion of the output of the joint venture for its own use. The titanium and nickel alloys utilized by the Company have a relatively high dollar value. Accordingly, the Company attempts to recover and recycle scrap materials such as machine turnings, forging flash, scrapped forgings, test pieces and casting sprues, risers and gates. In the event of customer cancellation, the Company may, under certain circumstances, obtain reimbursement from the customer if the material cannot be diverted to other uses. Costs of material already on hand, along with any conversion costs incurred, are generally billed to the customer unless transferable to another order. As demand for the Company's products grew during recent fiscal years, and prices of raw -16- 17 materials have risen, the Company has experienced raw material shortages and production delays. Material shortages have had a negative impact on overall revenues. The Company's most significant raw materials consist of nickel and titanium alloys. Its principal suppliers of nickel alloys include Special Metals Corporation, Teledyne Allvac Corporation, and Carpenter Technologies Corporation. Its principal suppliers of titanium alloys are Titanium Metals Corporation, Oregon Metallurgical Corp., and Reactive Metals, Inc. Each of these suppliers has experienced increases in the market prices of the elements (e.g., nickel, titanium, cobalt), that they use in fabricating their products. Because the Company's suppliers generally have alternative markets for their products where they may have greater ability to increase their prices, production has in some cases been diverted to alternative markets. As a result, the Company's lead time for deliveries from its suppliers has expanded from 20 weeks to 50 weeks or more in the case of both titanium and nickel. The Company has sought price increases and other financial considerations from its customers which would permit it to increase the price it pays to suppliers, is producing a greater amount of its requirements in its own facilities, particularly titanium ingots from its Millbury, Massachusetts facility, and has developed alternative sources of supply such as from the Republics formerly comprising the Soviet Union. In addition, the Company, its customers and suppliers have undertaken active programs for supply chain management which should reduce the overall lead times. The Company's results of operations are affected by significant fluctuations in the prices of raw materials used by the Company. Many of the Company's customer contracts have fixed prices for extended time periods and do not provide complete price adjustments for changes in the prices of raw materials such as metals. The Company attempts to reduce its risk with respect to its customer contracts by procuring long-term contracts with suppliers of metal alloys, but the Company's supply contracts typically do not completely insulate the Company from fluctuations in the prices of raw materials. During periods of high demand, such as the current one, when both the Company and its suppliers of metal alloys are operating at close to full capacity, the Company is also exposed to shortages of and delays in the delivery of raw materials. When required raw materials are not delivered at the anticipated time, the Company is required to rearrange its production cycle, which causes loss of efficiency. During the current upturn in the aerospace cycle the Company's ability to satisfy its customers' delivery requirements has been adversely affected by a general lengthening of the delivery times for its principal raw materials, nickel and titanium alloys, and a decline in the reliability of suppliers' delivery schedules. Accordingly, the portion of the Company's backlog consisting of products past their delivery due date has been increasing. Significant increases in the prices or scarcity of supply of raw materials used by the Company may have an adverse impact on the Company's results of operations. -17- 18 ENERGY USAGE The Company is a large consumer of energy. Energy is required primarily for heating metals to be forged and melting metals to be cast, melting of ingots, heat-treating products after forging and casting, operating forging presses, melting furnaces, die-sinking, mechanical manipulation and pollution control equipment and space heating. The Company uses natural gas, oil and electricity in varying amounts at its manufacturing facilities. Supplies of natural gas, oil and electricity have been sufficient and there is no anticipated shortage for the future. EMPLOYEES As of May 31, 1997, the Company had approximately 3,650 employees of whom 910 were executive, administrative, engineering, research, sales and clerical and 2,740 were production and craft. Approximately 50% of the production and craft employees, consisting of employees in the forging business, are represented by unions. The Company has entered into collective bargaining agreements with these union employees as follows:
NUMBER OF EMPLOYEES COVERED BY BARGAINING INITIATION EXPIRATION LOCATION AGREEMENTS DATE DATE Grafton, Millbury and Worcester, Massachusetts 486 April 6, 1997 March 24, 2002 Houston, Texas 589 August 7, 1995 August 9, 1998 37 August 7, 1995 September 27, 1998 Livingston, Scotland 189 December 1, 1995 November 30, 1998 75 February 1, 1996 January 31, 1999 Total 1,376
The Company believes it has good relations with its employees, but there can be no assurances that the Company will not experience a strike or other work stoppage, or that acceptable collective bargaining agreements can be negotiated when the existing collective bargaining agreements expire. RESEARCH AND PATENTS The Company maintains research and development departments at both Millbury, Massachusetts and Houston, Texas which are engaged in applied research and development work primarily relating to the Company's forging operations. The Company works closely with customers, universities and government technical agencies in developing advanced forging and casting materials and processes. The Company's composites operation conducts research and development related to aerospace composite structures at the -18- 19 Mojave, California facility. The Company spent approximately $2.9 million, $1.6 million, and $2.2 million on applied research and development work during the years ended May 31, 1997, 1996 and 1995, respectively. Although the Company owns patents covering certain of its processes, the Company does not consider that these patents are of material importance to the Company's business as a whole. Most of the Company's products are manufactured to customer specifications and, consequently, the Company has few proprietary products. COMPETITION Most of the Company's production capabilities are possessed in varying degrees by other companies in the industry, including both domestic and foreign manufacturers. Competition in each of the Company's current product markets is cyclical, intensifying during upturns and lessening during downturns, but such cyclicality of competition is especially present in aerospace structural products markets because of the cyclical nature of the commercial and defense aerospace industries. In the aerospace turbine products market, the Company's largest competitors are Ladish Co., Inc., Fortech and Thyssen. In the aerospace structural products market, Alcoa Corporation and Schultz are the Company's largest competitors. In the power generation and energy products market, the Company faces mostly international competition from Mannesmann and Sumitomo, among others. In the aerospace castings products market, Howmet and Precision Castparts are the Company's largest competitors. In the future, the Company may face increased competition from international companies which currently have the required manufacturing capabilities, but may lack sufficient technological or financial resources, and may be hampered by lower productivity. International competition in the forging and casting processes may also increase in the future as a result of strategic alliances among aircraft prime contractors and foreign companies, particularly where "offset" or "local content" requirements create purchase obligations with respect to products manufactured in or directed to a particular country. Competition is often intense among the companies currently involved in the industry. Competitive advantages are afforded to those with high quality products, low cost manufacturing, excellent customer service and delivery and engineering and production expertise. The Company believes that it has strength in these areas, but there can be no assurance that the Company can maintain its share of the market for any of its products. ENVIRONMENTAL REGULATIONS 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 -19- 20 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 environmental requirements. As of May 31, 1997, aggregate environmental reserves amounted to $16.2 million and have been provided for expected cleanup expenses estimated between $6.0 million and $7.0 million upon the eventual sale of the Worcester facility, certain environmental issues at Cameron amounting to approximately $3.5 million and the exposures noted in the following paragraphs, which include certain capitalizable amounts for environmental management and remediation projects. 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 during the period 1982 through 1999, of which $5.5 million remained as of May 31, 1997. These expenditures will not resolve 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 $3.5 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 and that the Grafton facility had been removed from the SDMP. Although it is unknown what specific disposal requirements may be placed on the Company by the Massachusetts Department of Public Health, the Company believes that a reserve of $1.5 million recorded on its books is sufficient to cover all costs. The Company, together with numerous other parties, has been named a potentially responsible party ("PRP") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") for the cleanup of the following Superfund sites: Operating Industries, Monterey Park, California; Cedartown Municipal Landfill, Cedartown, Georgia; PSC Resources, Palmer, Massachusetts; the Gemme/Fournier site, Leicester, Massachusetts; and the Salco, Inc. site, Monroe, Michigan. The Company believes that any liability it may incur with respect to these sites will not be material. -20- 21 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. PRODUCT LIABILITY EXPOSURE The Company produces many critical engine and structural parts for commercial and military aircraft. As a result, the Company faces an inherent business risk of exposure to product liability claims. The Company maintains insurance against product liability claims, but there can be no assurance that such coverage will continue to be available on terms acceptable to the Company or that such coverage will be adequate for liabilities actually incurred. The Company has not experienced any material loss from product liability claims and believes that its insurance coverage is adequate to protect it against any claims to which it may be subject. LEGAL PROCEEDINGS In addition to the matters disclosed below, at May 31, 1997, the Company was involved in certain legal proceedings arising in the normal course of its business. The Company believes the outcome of these matters will not have a material adverse effect on the Company. 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. The accident occurred while a crew of ten men was performing maintenance on the accumulator system that supplies hydraulic power for WGFI's 35,000 ton press. The maintenance required that the system be completely depressurized which the crew believed to be the case. However, subsequent examination has shown that a valve on one of the pressure vessels was closed thereby containing pressure in that vessel. The crew was in the process of removing the bolts on the vessel when the few remaining bolts could no longer hold the pressure and the lid was blown off, killing eight crew members and seriously injuring two others. Although no lawsuits have yet been filed, the injured workers and the decedents' families have all retained attorneys to represent them in the matter and who have notified the Company that they intend to assert claims against the Company on behalf of their clients. The Company is cooperating with such attorneys by providing them information and allowing them and their experts access to Company facilities. 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 -21- 22 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 does not extend to WGFI's parent corporation, Wyman-Gordon Company. Therefore, if lawsuits on behalf of the victims in the Houston accident are brought against Wyman-Gordon Company and if the evidence supports a finding that Wyman-Gordon Company acted negligently in its supervision of WGFI and such negligence had a causal connection with the accident, the plaintiffs would be able to recover damages, both compensatory and punitive, if applicable, against the parent company even in the absence of gross negligence. WGFI has also received claims from several employees of a subcontractor claiming to have been injured at the time of the accident. It is not possible at this time to anticipate whether WGFI or Wyman-Gordon Company could be held liable in connection with the accident and, if so, to estimate the amount of damages that could be awarded. 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. 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 or that the Company's ultimate liability resulting from the accident will not exceed available insurance coverage by an amount which could be material to the Company's financial condition or results of operations. Following the accident, the Occupational Safety and Health Administration ("OSHA") conducted an investigation of the accident. On June 18, 1997, OSHA issued a Citation and Notification of Penalty describing violations of the Occupational Safety and Health Act of 1970. OSHA's principal allegations were that (i) WGFI had not complied with the OSHA standard on specific lockout/tagout procedures for the 35,000 ton press and appurtenant equipment, (ii) WGFI failed to train each authorized employee in lockout/tagout procedures, and (iii) there were design flaws in the equipment. Although the Company disagrees with the OSHA findings, on June 18, 1997, WGFI entered into an Informal Settlement with OSHA in order to avoid the cost and burden of litigation and to resolve disputed claims arising from OSHA's inspection. Pursuant to the Informal Settlement, WGFI paid $1.8 million in settlement of the OSHA Citation and agreed not to contest the Citation. Under the terms of the Informal Settlement, WGFI agreed to (i) develop and implement a comprehensive, ongoing energy control program in compliance with the OSHA lockout/tagout standard, (ii) train its employees in safety procedures, (iii) communicate to and involve its employees in the implementation of the Informal Settlement, (iv) retain an independent safety professional to perform a comprehensive safety and health audit, and (v) adhere to the Secretary of Labor's Voluntary Guidelines for Safety and Health Management Program at its plants in Houston and Brighton, Michigan. In addition, the -22- 23 Company agreed to make certain terms of the Informal Settlement applicable to its forging plants in Massachusetts. WGFI also agreed with the International Association of Machinists to strengthen the Joint Management Labor Safety Committee in Houston and to conduct joint employee safety training. The costs of the accident through May 31, 1997 were approximately $11.9 million, including substantial property damage at the Houston facility and costs of business interruption as a result of the 35,000 ton press having been out of operation until the first week of March 1997. The Company has recovered $6.9 million under property damage and business interruption insurance policies it maintains leaving approximately $5.0 million of costs that were recorded in fiscal year 1997. MANAGEMENT The executive officers of the Company are as follows:
NAME AGE POSITION John M. Nelson 65 Chairman of the Board David P. Gruber 55 President, Chief Executive Officer and Director Andrew C. Genor 54 Vice President, Chief Financial Officer and Treasurer Sanjay N. Shah 46 Vice President, Corporate Strategy Planning and Business Development J. Douglas Whelan 57 President, Forging Division Wallace F. Whitney, Jr. 54 Vice President, General Counsel and Clerk Frank J. Zugel 52 President, Investment Castings Division
John M. Nelson was elected Chairman of the Company in May 1994 having previously served as the Company's Chairman of the Board and Chief Executive Officer since May 1991. Prior to that time, he served for many years in a series of executive positions with Norton Company, a manufacturer of abrasives and ceramics based in Worcester, Massachusetts, and was Norton's Chairman and Chief Executive Officer from 1988 to 1990 and its President and Chief Operating Officer from 1986 to 1988. Mr. Nelson is also Chairman of the Board of Directors of the TJX Companies, Inc., a Director of Brown & Sharpe Manufacturing Company, Cambridge Biotechnology, Inc., Commerce Holdings, Inc. and Stocker & Yale, Inc. He is also Chairman of the Board of Trustees of Worcester Polytechnic Institute and Vice President of the Worcester Art Museum. Mr. Nelson will retire as Chairman at the 1997 Annual Meeting of Stockholders. -23- 24 David P. Gruber was elected President and Chief Executive Officer of the Company in May 1994 having previously served as President and Chief Operating Officer since October 1991. Prior to joining the Company, Mr. Gruber served as Vice President, Advanced Ceramics, of Compagnie de Saint Gobain (which acquired Norton Company in 1990), a position he held with Norton Company since 1987. Mr. Gruber previously held various executive and research positions with Norton Company since 1978. He is a Trustee of the Manufacturers' Alliance for Productivity and Innovation, and is a member of the Mechanical Engineering Advisory Committee of Worcester Polytechnic Institute. Mr. Gruber will become Chairman and Chief Executive Officer at the 1997 Annual Meeting of Stockholders. Andrew C. Genor joined the Company as Vice President, Chief Financial Officer and Treasurer in January 1995. Prior to joining the Company, Mr. Genor was Chief Financial and Operating Officer of HNSX Supercomputers, Inc., a Company he co-founded in 1987 to provide support to supercomputer users and vendors. Prior to that time, he spent 20 years at Honeywell, Inc., including service as Vice President and Corporate Treasurer and Vice President, Finance, Administration and Business Development for Honeywell Europe. Sanjay N. Shah was elected Vice President, Corporate Strategy Planning and Business Development in May 1994 having previously served as Vice President and Assistant General Manager of the Company's Aerospace Forgings Division. He has held a number of executive, research, engineering and manufacturing positions at the Company since joining the Company in 1975. J. Douglas Whelan joined the Company in March 1994 and was elected President, Forgings in May 1994. Prior to joining the Company he had served for a short time as the President of Ladish Co., Inc., a forging Company in Cudahy, Wisconsin, and prior thereto had been Vice President, Operations of Cameron with which company and its predecessors he had been employed since 1965 in various executive capacities. Mr. Whelan is Director of SIFCO Industries, Inc. Mr. Whelan will become President and Chief Operating Officer at the 1997 Annual Meeting of Stockholders. Wallace F. Whitney, Jr. joined the Company in 1991. Prior to that time, he had been Vice President, General Counsel and Secretary of Norton Company since 1988, where he had been employed in various legal capacities since 1973. Frank J. Zugel joined the Company in June 1993 when he was elected Vice President-General Manager Investment Castings. Prior to that time, he had served as President of Stainless Steel Products, Inc., a metal fabricator for aerospace applications, since 1992 and before then as Vice President of Pacific Scientific Company, a supplier of components to the aerospace industry, since 1988. -24- 25 ITEM 2. PROPERTIES The response to ITEM 2. PROPERTIES incorporates by reference the paragraphs captioned "Facilities" included in ITEM 1. BUSINESS. ITEM 3. LEGAL PROCEEDINGS The response to ITEM 3. LEGAL PROCEEDINGS incorporates by reference the paragraphs captioned "Environmental Regulations" and "Legal Proceedings" included in ITEM 1. BUSINESS. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the year ended May 31, 1997. -25- 26 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Wyman-Gordon Company's common stock, par value $1.00 per share, is traded in the over-the-counter market and prices of its common stock appear daily in the Nasdaq National Market Quotation System. The table below lists the quarterly price range per share for the years ended May 31, 1997 and 1996. The quarterly price range per share is based on the high and low sales prices. The Company has not paid dividends since the fourth quarter of 1991. At May 31, 1997 there were approximately 1,603 holders of record of the Company's common stock.
YEAR ENDED YEAR ENDED MAY 31, 1997 MAY 31, 1996 HIGH LOW HIGH LOW First quarter $21 1/4 $15 3/8 $13 3/8 $10 3/8 Second quarter 24 3/8 19 5/8 15 1/8 12 3/8 Third quarter 23 3/8 17 7/8 18 3/4 13 Fourth quarter 23 11/16 18 1/8 18 3/4 15 7/8
-26- 27 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data and other operating information of Wyman-Gordon Company. The selected financial data in the table are derived from the consolidated financial statements of Wyman-Gordon Company. The data should be read in conjunction with the consolidated financial statements, related notes, other financial information and Management's Discussion and Analysis of Financial Condition and Results of Operations included herein.
YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1997 1996 1995 (000's omitted, except per-share amounts) STATEMENT OF INCOME DATA(3): Revenues $608,742 $499,624 $396,639 Gross profit 97,634 78,132 49,388 Other charges (credits)(4) 23,083 2,717 (710) Income (loss) from operations 30,322 37,699 13,718 Net income (loss)(5) 50,023 25,234 1,039 PER SHARE DATA: Income (loss) per share before cumulative effect of changes in accounting principles $ 1.36 $ 0.70 $ 0.03 Net income (loss) per share(5) 1.36 0.70 0.03 Dividends paid per share - - - Shares used to compute income (loss) per share 36,879 36,128 35,148 BALANCE SHEET DATA (at end of period)(3): Working capital $166,205 $116,534 $ 93,062 Total assets 454,371 375,890 369,064 Long-term debt 96,154 90,231 90,308 Stockholders' equity 164,398 109,943 80,855 OTHER DATA: Order backlog (at end of period) $895,825 $598,438 $468,721 EBITDA(6) 79,064 56,651 29,478
-27- 28
YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, DEC. 31, DEC. 31, 1994(1) 1993(2) 1992 (Unaudited) (000's omitted, except per-share amounts) STATEMENT OF OPERATIONS DATA(3): Revenues $224,694 $239,761 $298,881 Gross profit 6,878 20,673 55,590 Other charges (credits)(4) 35,003 2,453 - Income (loss) from operations (63,657) (8,428) 27,275 Net income (loss)(5) (72,403) (60,004) 21,795 PER SHARE DATA: Income (loss) per share before cumulative effect of changes in accounting principles $ (4.02) $ (0.95) $ 0.03 Net income (loss) per share(5) (4.02) (3.34) 0.03 Dividends paid per share - - - Shares used to compute income (loss) per share 17,992 17,965 18,078 BALANCE SHEET DATA (at end of period)(3): Working capital $ 91,688 $ 90,685 $ 96,057 Total assets 394,747 286,634 295,156 Long-term debt 90,385 90,461 70,538 Stockholders' equity 72,483 88,349 149,516 OTHER DATA: Order backlog (at end of period) $389,407 $256,259 $309,679 EBITDA(6) (10,377) 11,841 45,191
-28- 29 [FN] (1) On May 24,1994, the Company's Board of Directors voted to change the Company's fiscal year end from one which ended on December 31 to the Saturday nearest to May 31. For financial reporting purposes, the year end is stated as May 31. The Statement of Operations Data for the year ended May 31, 1994 is unaudited. The following table set forth Summary Consolidated Statement of Operations Data, which as been derived from the Company's audited financial statements, for the five months ended May 31, 1994 (000's omitted, except per share amounts): Revenue $ 86,976 Gross profit (4,931) Other charges (credits) and environmental charges 32,550 Income (loss) from operations (55,805) Net income (loss) (61,370) Per share data: Net income (loss) per share $ (3.32) Dividends paid per share - (2) Including Cameron's financial results for the year ended December 31, 1993, the Company's pro forma unaudited revenues, loss before the cumulative effect of changes in accounting principles and net loss would have been $389,300,000, $(39,300,000) and $(82,300,000), respectively. (3) On May 26, 1994, the Company acquired Cameron Forged Products Company ("Cameron") from Cooper Industries, Inc. The Selected Consolidated Financial Data include the accounts of Cameron from the date of the acquisition. Cameron's operating results from May 26, 1994 to May 31, 1994 are not material to the consolidated statement of operations for the year and five month period ended May 31, 1994. (4) In November 1993, the Company sold substantially all of the net assets and business operations of Wyman-Gordon Composites, Inc. and recorded a non-cash charge on the sale of $2,500,000. In May 1994, the Company recorded charges of $6,500,000 related to the closing of a castings facility, $24,100,000 related to restructuring and integration of Cameron and $2,000,000 for environmental investigation and remediation costs. During the year ended May 31, 1996, the Company provided $1,900,000 in order to recognize its 25.0% share of the net losses of its Australian joint venture and to reduce the carrying value of such joint venture. Additionally, the Company provided $800,000 to reduce the carrying value of the cash surrender value of certain company-owned life insurance policies. -29- 30 [FN] During the year ended May 31, 1997, the Company recorded other charges of $23,100,000 which included $4,600,000 to provide for the costs of workforce reductions at the Company's Grafton, Massachusetts Forging facility, $3,400,000 to the write-off and disposal of certain forging equipment, $2,300,000 to reduce the carrying value and dispose of certain assets of the Company's titanium castings operations, $1,200,000 to consolidate the titanium castings operations, $2,500,000 to reduce the carrying value of the Australian joint venture, $5,700,000 to reduce the carrying value of the cash surrender value of certain company-owned life insurance policies, $1,900,000 to reduce the carrying value of a building held for sale and $250,000 to reduce the carrying value of other assets. Other charges (credits) in the year ended May 31, 1997 also included a charge of $1,200,000, net of insurance recovery of $6,900,000, related to the accident at the Houston, Texas facility of Wyman-Gordon Forgings, Inc. in December 1996. (5) Includes a charge of $43,000,000 or $2.39 per share in fiscal year 1993 relating to the Company's adoption of SFAS 106, "Employers' Accounting for Postretirement Benefits other than Pensions" ("SFAS 106") and SFAS 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 106 requires postretirement benefit obligations to be accounted for on an accrual basis rather than the "expense as incurred" basis formerly used. The Company elected to recognize the cumulative effect of these accounting changes in the year ended December 31, 1993. In the year ended May 31, 1997, net tax benefits of $25,680,00 were recognized including a refund of prior years' income taxes amounting to $19,680,000, plus interest of $3,484,000, and $6,500,000 related to the expected realization of NOLs in future years and $10,250,000 related to current NOLs benefit offsetting $10,750,000 of current income tax expense. The refund relates to the carryback of tax net operating losses to tax years 1981, 1984 and 1986 under the applicable provisions of Internal Revenue Code Section 172(f). (6) EBITDA is defined as earnings before interest, taxes, depreciation, amortization, other charges (credits) and changes in accounting principles. EBITDA is presented because it may be used as one indicator of a company's ability to service debt. The Company believes that EBITDA, while providing useful information, should not be considered in isolation or as 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. -30- 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED MAY 31, 1997 ("FISCAL YEAR 1997") COMPARED TO YEAR ENDED MAY 31, 1996 ("FISCAL YEAR 1996") The Company's revenue increased 21.8% to $608.7 million in fiscal year 1997 from $499.6 million in fiscal year 1996 as a result of higher sales volume at the Company's Forgings and Castings Divisions. These sales volume increases during fiscal year 1997 as compared to fiscal year 1996 are reflected by market as follows: a $112.4 million (31.0%) increase in aerospace, a $4.1 million (4.4%) increase in energy and a $7.4 million (16.9%) 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 extruded pipe shipments to energy customers for fiscal 1997, the shipments to energy customers were impacted by the 10 week shutdown of the 35,000 ton vertical extrusion press in Houston due to the industrial accident at the Houston, Texas facility of Wyman-Gordon Forgings, Inc. The cause of the decrease in other markets is primarily due to the decline in the titanium head golf club business because of oversupply, cost disadvantages and decreased demand. Revenues in fiscal year 1996 and, to a lesser extent, in fiscal year 1997, were limited by raw material shortages and production delays caused by capacity constraints of the Company's suppliers. The Company believes that the increase in order activity reflects a continued increase in spares demand and new business resulting from increasing production rates on commercial aircraft by commercial airframe primes. The Company's backlog increased to $895.8 million at May 31, 1997 from $598.4 million at May 31, 1996. This increase 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, particularly as reflected in the new long-term agreements ("LTAs") which went into effect on January 1, 1997, 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 unavailability. 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, that prices will moderate and that capacity additions installed by the Company and its suppliers will enable the Company to meet its customer demands in a more timely fashion. Of the Company's total current backlog, $671.6 million is shippable in the next twelve months. Because of the additional production capacity that the Company and its suppliers are installing, the Company believes that it will be able to fulfill those twelve month requirements. -31- 32 The Company's gross margins were 16.0% in fiscal year 1997 as compared to 15.6% in fiscal year 1996. The improvement in gross margins resulted from higher production volumes, continued emphasis on cost reductions, productivity gains resulting from the Company's continuing efforts toward focusing forging production of rotating parts for jet engines in its Houston, Texas facility and forging production of airframe structures and large turbine parts in its Grafton, Massachusetts facility and continuing realization of cost reductions from synergies associated with the integration of Cameron in fiscal year 1996 and fiscal year 1997. The Company believes that the improvements in gross margin would have been greater except that the Company incurred higher raw material costs which could not be passed on to customers as a result of the then existing LTAs with its customers. Beginning in the second half of fiscal year 1996, higher demand required the Company to purchase certain raw materials under terms not covered by LTAs with its vendors. The current rebound in demand for many of these raw materials, especially nickel and titanium, resulted in significant market price increases which negatively affected the Company's gross margins. The Company began to see pricing relief for its products in early calendar 1997 when certain LTAs that the Company negotiated with its customers went into effect allowing the Company to pass some raw material price increases on to its customers. Gross margins in fiscal year 1997 were also negatively impacted by price and demand declines within the titanium golf club head business because of oversupply, cost disadvantages and decreased demand. Gross margin was negatively impacted by a LIFO charge of $1.6 million in fiscal year 1997 as compared to a favorable impact by a LIFO credit of $4.9 million in fiscal year 1996. Selling, general and administrative expenses increased 17.3% to $44.2 million during fiscal year 1997 from $37.7 million during fiscal year 1996. Selling, general and administrative expenses as a percentage of revenues improved to 7.3% in fiscal year 1997 from 7.6% in fiscal year 1996. The improvement as a percent of revenues is the result of higher revenues. During fiscal year 1997, the Company recorded other charges of $23.1 million. Such other charges include $4.6 million to provide for the costs of workforce reductions at the Company's Grafton, Massachusetts Forging facility, $3.4 million to write- off and dispose of certain Forging equipment, $2.3 million to reduce the carrying value and dispose of certain assets of the Company's titanium castings operations, $1.2 million to consolidate the 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, $5.7 million to reduce the carrying value of the cash surrender value of certain company- owned life insurance policies, $1.2 million of costs, net of insurance recovery of $6.9 million, related to the Houston accident and $1.9 million to reduce the carrying value of the Jackson, Michigan facility being held for sale. -32- 33 As of May 31, 1997, the Company had fully written-off its investment in the Australian joint venture. However, in the future, the Company may make additional capital contributions to the Australian joint venture to satisfy its cash or other requirements and may be required to recognize its share of any additional losses or may write-off such additional capital contributions. During fiscal year 1996, the Company provided $1.9 million in order to recognize its 25.0% share of the net losses of its Australian joint venture and to reserve for amounts loaned to the Australian joint venture during fiscal year 1996 and to provide for expenditures for an investment in an additional joint venture. Additionally, other charges (credits) includes a charge of $0.8 million in fiscal year 1996 to reduce the carrying value of the cash surrender value of certain company-owned life insurance policies. Interest expense was $10.8 million in fiscal year 1997 and $11.3 million in fiscal year 1996. The decrease results from lower borrowings outstanding under the Company's U.K. Credit Agreement. Miscellaneous, net was income of $4.8 million in fiscal year 1997 as compared to an expense of $1.2 million in fiscal year 1996. Miscellaneous, net in fiscal year 1997 includes interest income on the refund of prior years' income taxes amounting to $3.5 million and a $2.0 million gain on the sale of fixed assets. Miscellaneous, net in fiscal year 1996 includes a $0.3 million gain on the sale of marketable securities. Net tax benefits of $25.7 million were recognized in fiscal year 1997 including a refund of prior years' income taxes amounting to $19.7 million and $6.5 million related to the expected realization of NOLs in the future years and $10.3 million related to current NOLs benefit offsetting $10.8 million of current income tax expense. The refund relates to the carryback of tax net operating losses to tax years 1981, 1984 and 1986 under applicable provisions of Internal Revenue Code Section 172(f). There was no provision or benefit recorded for income taxes in fiscal year 1996. The Company expects that in the year ended May 31, 1998, income tax provisions will approximate statutory rates subject to utilization of state NOLs. Net income was $50.0 million, or $1.36 per share, in fiscal year 1997 and $25.2 million, or $.70 per share in fiscal year 1996. The $24.8 million improvement results from the items described above. YEAR ENDED MAY 31, 1996 ("FISCAL YEAR 1996") COMPARED TO YEAR ENDED MAY 31, 1995 ("FISCAL YEAR 1995") The Company's revenues increased 26.0% to $499.6 million in fiscal year 1996 from $396.6 million in fiscal year 1995 due to higher sales volume in the Company's aerospace, energy and other markets. These sales volume increases during fiscal year 1996 as compared to fiscal year 1995 are reflected by market as follows: -33- 34 a $62.6 million (20.8%) increase in aerospace, a $26.1 million (39.0%) increase in energy and a $14.3 million (48.4%) increase in other. The cause of the strength in these markets was higher demands for spares from aerospace engine prime contractors and higher extruded pipe shipments to energy customers. Revenues in fiscal year 1995 and, to a lesser extent, in fiscal year 1996 were limited by raw material shortages and production delays caused by capacity constraints of the Company's suppliers. The revenue increases mentioned above occurred while the Company's backlog grew to $598.4 million at May 31, 1996 from $468.8 million at May 31, 1995. The Company believes that the higher order activity reflected continued higher spares demand and new business resulting from increasing production rates on commercial aircraft by commercial airframe primes. The Company's gross margins were 15.6% in fiscal year 1996, as compared to 12.5% in fiscal year 1995. The Company believes that this improvement resulted from higher production volumes and productivity gains resulting from the Company's efforts toward focusing forging production of rotating parts for jet engines in its Houston, Texas facility and forging production of airframe structures and large turbine parts in its Grafton, Massachusetts facility. Additionally, the Company believes that continuing realization of cost reductions from synergies associated with the integration of Cameron also contributed to this higher ratio. These favorable trends were offset somewhat by production delays resulting from the raw material shortages experienced during fiscal years 1995 and 1996. Additionally, in the second half of fiscal year 1996, the higher spares demand referred to above required the Company to purchase certain raw materials under terms not covered by LTAs with its vendors. The Company simultaneously entered into supply (customer) and purchase (vendor) LTAs in order to minimize its raw material price exposure to an anticipated volume level. To the extent that the demand was greater than anticipated by the LTAs, the Company was required to purchase raw materials at market prices. The rebound in demand for many of these raw materials, especially nickel and titanium, resulted in significant price increases by the Company's vendors which negatively affected the Company's gross margins. Gross margins benefited from LIFO credits of $4.9 million in fiscal year 1996 as compared to $6.2 million in fiscal year 1995. Selling, general and administrative expenses increased 3.7% to $37.7 million in fiscal year 1996 from $36.4 million in fiscal year 1995. Selling, general and administrative expenses improved as a percentage of revenues to 7.6% in fiscal year 1996 from 9.2% in fiscal year 1995. The improvement as a percent of revenues was the result of general company-wide cost containment efforts, cost reductions associated with the integration of Cameron with the Company's forgings operations, and higher revenues. Other charges (credits) includes charges of $1.9 million and $1.4 million in fiscal years 1996 and 1995, respectively, 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. Additionally, other charges (credits) includes a -34- 35 charge of $0.8 million in fiscal year 1996 to reduce the carrying value of the cash surrender value of certain company-owned life insurance policies. The Company recognized a $2.1 million credit in fiscal year 1995 after determining that Cameron integration costs estimates, including severance and other personnel costs, could be lowered. The Company believes that most of the integration activities have been completed or adequate reserves have been provided. Interest expense increased to $11.3 million in fiscal year 1996 from $11.0 million in fiscal year 1995 due to higher interest on borrowings on the Company's U.K. Credit Agreement and lower amounts of capitalizable interest. Miscellaneous, net expense was $1.2 million in fiscal year 1996 and $1.7 million in fiscal year 1995. Miscellaneous, net in fiscal year 1996 includes a $0.3 million gain on the sale of marketable securities. The Company recorded no provision for income taxes in fiscal years 1996 and 1995. (See "Liquidity and Capital Resources"). Net income was $25.2 million, or $.70 per share, in fiscal year 1996 compared to a net income of $1.0 million, or $.03 per share, in fiscal year 1995. The $24.2 million improvement results from the items described above. LIQUIDITY AND CAPITAL RESOURCES The increase in the Company's cash of $21.8 million to $51.9 million at May 31, 1997 from $30.1 million at May 31, 1996 resulted primarily from cash provided by operating activities of $48.0 million, issuance of common stock of $7.3 million, and issuance of new debt of $6.0 million offset by capital expenditures and other investing activities of $34.5 million and the repurchase of common stock of $4.9 million. The increase in the Company's working capital of $49.7 million to $166.2 million as of May 31, 1997 from $116.5 million as of May 31, 1996 resulted primarily from net income of $50.0 million, a decrease in other assets of $8.7 million, an increase in deferred income tax benefit of $6.5 million, a decrease in intangible assets of $0.6 million, net proceeds from the issuance of Common Stock of $7.3 million, other changes in stockholders' equity of $2.0 million, an increase in long-term debt of $6.0 million, and a decrease in long-term benefit liabilities of $2.0 million, offset by net increases in fixed assets of $15.4 million, a decrease in deferred taxes and other of $2.7 million, a decrease in long-term restructuring, integration, disposal and environmental of $0.1 million, and the repurchase of common stock of $4.9 million. Earnings before interest, taxes, depreciation, amortization, other charges (credits) and changes in accounting principles ("EBITDA") increased $22.4 million to $79.1 million in fiscal year 1997 from $56.7 million in fiscal year 1996. This increase reflects higher profitability. -35- 36 In fiscal year 1997, the Company recorded other charges of $23.1 million, of which $15.5 million was non-cash and $7.6 million requires the use of cash. Cash spent for these activities through May 31, 1997 includes $1.2 million, net of insurance recovery of $6.9 million, related to the Houston accident, $0.2 million to pay severance, and $0.7 million to dispose of certain assets of the Company's titanium casting operations. Cash requirements for fiscal year ending May 31, 1998 include $2.0 million to pay severance and other employee costs, $1.2 million to consolidate the titanium casting operations, and $2.0 million to dispose of certain equipment. 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 $0.7 million in fiscal year 1998 and $1.4 million thereafter. The Company spent $0.5 million in fiscal year 1997 for non- capitalizable environmental projects and has a reserve with respect to environmental matters, the balance of which is $16.2 million, of which it expects to expend $0.9 million in fiscal year 1998 and the remainder in future periods on non- capitalizable environmental activities. 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 fiscal year 1997, capital expenditures amounted to $34.1 million and are expected to be approximately $30.0 million in fiscal year 1998. The Company's revolving receivables-backed credit facility (the "Receivables Financing Program") provides the Company with an aggregate maximum borrowing capacity under the Receivables Financing Program 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 May 31, 1997, under the credit facility, the total availability based on eligible receivables was $45.3 million, there were no borrowings and letters of credit amounting to $7.0 million were outstanding. Wyman-Gordon Limited, the Company's subsidiary located in Livingston, Scotland, entered into a credit agreement with a Scottish bank ("the U.K. Credit Agreement"). The maximum borrowing capacity under the U.K. Credit Agreement is 2.0 million pounds sterling (approximately $3.2 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 or letters of credit outstanding at May 31, 1997 and the Company had issued 0.9 million pounds sterling (approximately $1.5 million) of guarantees under the U.K. Credit Agreement. -36- 37 During fiscal year 1997, the Company recognized the net benefit of a refund of prior years' income taxes amounting to $19.7 million, plus interest of $3.5 million. In September of 1996, the Company received $20.3 million relating to such refund. Previously, the Company had received $2.9 million related to certain refund claims filed. The refund relates to the carryback of tax net operating losses to tax years 1981, 1984 and 1986 under applicable provisions of Internal Revenue Code Section 172(f). The amount of net operating losses carried back to such years was approximately $48.5 million. At May 31, 1997, the Company had for income tax reporting purposes, approximately $18.0 million of net operating loss carryforwards available to offset taxable income in fiscal year 1998 and subsequent fiscal years, which begin expiring in the year 2006. In December 1996, the Company borrowed the proceeds of an Industrial Revenue Bond (the "IRB") amounting to $6 million. The IRB bears an interest rate approximating 3.75% fluctuating weekly. Principal on the IRB is payable in annual installments of $0.4 million in December 1998 and $0.8 million thereafter. The Company maintains a letter of credit to collateralize the IRB. The proceeds of the IRB are restricted for the construction of the Scaled Composites, Inc. facility in Montrose, Colorado. As of May 31, 1997, cash and cash equivalents includes $5.2 million restricted for such use. The primary sources of liquidity available to the Company to fund operations and other future expenditures include available cash ($51.9 million at May 31, 1997), 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. ACCOUNTING AND TAX MATTERS Effective June 1, 1996, the Company adopted Statement of Financial Accounting Standards 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 impact on the earnings or the financial position of the Company. -37- 38 Effective June 1, 1996, the Company adopted the Statement of the Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This standard prescribes the accounting and disclosure of compensation related to all stock-based awards to employees. The Company accounts for its stock compensation arrangements under the provisions of APB 25, "Accounting for Stock Issued to Employees," and will continue to do so. OTHER MATTERS During fiscal 1997, the Company and Weber Metals, Inc. entered into a strategic forging alliance which will serve the Company's aluminum structural forgings customers. Under the arrangement, the Company will provide engineering, technical and marketing support to Weber and Weber will manufacture aluminum structural products previously manufactured in the Company's Grafton, Massachusetts facility. 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. For details of the accident, refer to Legal Proceedings on page 21 of this Form 10-K. -38- 39 "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) that involves risk and uncertainty, including discussions of continuing raw material prices and availability and their impact on gross margins and business trends as well as liquidity and sales volume. Actual future results and trends may differ materially depending on a variety of factors, including the Company's successful negotiation of long-term customer pricing contracts and raw material prices and availability. See Part I, Item 1 - "Markets and Products - Aerospace", "Customers", "Marketing and Sales", "Raw Materials", "Employees", "Competition", "Environmental Regulations" and "Product Liability Exposure." -39- 40 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT To the Stockholders of Wyman-Gordon Company: We have prepared the financial statements included herein and are responsible for all information and representations contained therein. Such financial information was prepared in accordance with generally accepted accounting principles appropriate in the circumstances, based on our best estimates and judgements. Wyman-Gordon maintains accounting and internal control systems which are designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use and to produce records adequate for preparation of financial information. These systems are established and monitored in accordance with written policies which set forth management's responsibility for proper internal accounting controls and the adequacy of these controls subject to continuing independent review by our external auditors, Ernst & Young LLP. To assure the effective administration of internal control, we carefully select and train our employees, develop and disseminate written policies and procedures and provide appropriate communication channels. We believe that it is essential for the Company to conduct its business affairs in accordance with the highest ethical standards. The financial statements have been audited by Ernst & Young LLP, Independent Auditors, in accordance with generally accepted auditing standards. In connection with their audit, Ernst & Young LLP has developed an understanding of our accounting and financial controls, and conducted such tests and related procedures as it considers necessary to render their opinion on the financial statements. The financial data contained in these financial statements were subject to review by the Audit Committee of the Board of Directors. The Audit Committee meets periodically during the year with Ernst & Young LLP and with management to review accounting, auditing, internal control and financial reporting matters. We believe that our policies and procedures provide reasonable assurance that operations are conducted in conformity with applicable laws and with our commitment to a high standard of business conduct. /S/ DAVID P. GRUBER David P. Gruber President and Chief Executive Officer /S/ ANDREW C. GENOR Andrew C. Genor Vice President, Chief Financial Officer and Treasurer -40- 41 WYMAN-GORDON COMPANY REPORT OF 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, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended May 31, 1997. Our audits also included the financial statement schedule of Wyman-Gordon Company listed in Item 14(a). These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years ended May 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /S/ERNST & YOUNG LLP Boston, Massachusetts June 23, 1997 -41- 42 Wyman-Gordon Company and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME
YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1997 1996 1995 (000's omitted, except per share data) Revenue $608,742 $499,624 $396,639 Cost of goods sold 511,108 421,492 347,251 Selling, general and administrative expenses 44,229 37,716 36,380 Other charges (credits) 23,083 2,717 (710) 578,420 461,925 382,921 Income from operations 30,322 37,699 13,718 Other deductions (income): Interest expense 10,822 11,272 11,027 Miscellaneous, net (4,843) 1,193 1,652 5,979 12,465 12,679 Income before income taxes 24,343 25,234 1,039 Provision (benefit) for income taxes (25,680) - - Net income $ 50,023 $ 25,234 $ 1,039 Net income per share $ 1.36 $ .70 $ .03 Shares used to compute net income per share 36,879 36,128 35,148
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements. -42- 43 Wyman-Gordon Company and Subsidiaries CONSOLIDATED BALANCE SHEETS
MAY 31, MAY 31, 1997 1996 (000's omitted) ASSETS Cash and cash equivalents $ 51,971 $ 30,134 Accounts receivable 119,159 94,928 Inventories 92,332 65,873 Prepaid expenses 7,789 14,338 Deferred income taxes 6,500 - Total current assets 277,751 205,273 Property, plant and equipment, net 153,737 138,308 Intangible assets 19,255 19,899 Other assets 3,628 12,410 Total assets $454,371 $375,890 LIABILITIES Borrowings due within one year $ 77 $ 77 Accounts payable 62,092 40,484 Accrued liabilities and other 49,377 48,178 Total current liabilities 111,546 88,739 Restructuring, integration, disposal and environmental 18,172 18,275 Long-term debt 96,154 90,231 Pension liability 1,102 871 Deferred income taxes and other 15,861 18,544 Postretirement benefits 47,138 49,287 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 27,608 33,291 Retained earnings 114,957 64,934 Equity adjustments 2,763 719 Treasury stock, 1,001,199 and 1,480,448 shares at May 31, 1997 and 1996 (17,983) (26,054) Total stockholders' equity 164,398 109,943 Total liabilities and stockholders' equity $454,371 $375,890
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements. -43- 44 Wyman-Gordon Company and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR YEAR ENDED ENDED MAY 31, MAY 31, 1997 1996 (000's omitted) OPERATING ACTIVITIES: Net income $ 50,023 $ 25,234 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 20,872 17,428 Deferred income taxes (6,500) - Other charges (credits) 19,145 846 Losses of equity investment 2,734 1,871 Changes in assets and liabilities: Accounts receivable (24,430) (15,709) Inventories (27,235) 12,940 Prepaid expenses and other assets 4,754 3,118 Accrued restructuring, integration, disposal and environmental (3,950) (6,837) Income and other taxes payable (5,241) 3,631 Accounts payable and accrued and other liabilities 17,839 (7,250) Net cash provided by operating activities 48,011 35,272 INVESTING ACTIVITIES: Investment in acquired subsidiaries - - Capital expenditures (34,123) (18,331) Proceeds from sale of fixed assets 559 1,718 Other, net (921) (1,664) Net cash (used) by investing activities (34,485) (18,277) FINANCING ACTIVITIES: Cash paid to Cooper Industries for factored accounts receivable - - Borrowings (repayments) of debt 5,923 (3,915) Net proceeds from issuance of common stock 7,325 3,198 Repurchased common stock (4,937) - Net cash provided (used) by financing activities 8,311 (717) Increase (decrease) in cash 21,837 16,278 Cash, beginning of period 30,134 13,856 Cash, end of period $ 51,971 $ 30,134
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements. -44- 45 Wyman-Gordon Company and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED MAY 31, 1995 (000's omitted) OPERATING ACTIVITIES: Net income $ 1,039 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 18,122 Deferred income taxes - Other charges (credits) (2,100) Losses of equity investment 1,390 Changes in assets and liabilities: Accounts receivable (2,200) Inventories (13,076) Prepaid expenses and other assets 11,542 Accrued restructuring, integration, disposal and environmental (14,646) Income and other taxes payable 628 Accounts payable and accrued and other liabilities 7,073 Net cash provided by operating activities 7,772 INVESTING ACTIVITIES: Investment in acquired subsidiaries (3,591) Capital expenditures (18,714) Proceeds from sale of fixed assets 1,563 Other, net (415) Net cash (used) by investing activities (21,157) FINANCING ACTIVITIES: Cash paid to Cooper Industries for factored accounts receivable (20,561) Borrowings (repayments) of debt 3,761 Net proceeds from issuance of common stock 1,862 Repurchase common stock - Net cash provided (used) by financing activities (14,938) Increase (decrease) in cash (28,323) Cash, beginning of period 42,179 Cash, end of period $ 13,856
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements. -45- 46 Wyman-Gordon Company and Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
COMMON STOCK CAPITAL IN SHARES PAR EXCESS OF RETAINED ISSUED VALUE PAR VALUE EARNINGS (000's omitted) Balance, May 31, 1994 36,903 $36,903 $43,884 $ 38,661 Net income 1,039 Stock plans 150 150 (2,354) Savings/Investment Plan match (1,412) Pension equity adjustment Currency translation Balance, May 31, 1995 37,053 37,053 40,118 39,700 Net income 25,234 Stock plans (6,486) Savings/Investment Plan match (341) Pension equity adjustment Currency translation 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
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements. -46- 47 Wyman-Gordon Company and Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (Continued)
EQUITY TREASURY ADJUSTMENTS STOCK TOTALS (000's omitted) Balance, May 31, 1994 $ (5,408) $(41,557) $ 72,483 Net income 1,039 Stock plans 3,355 1,151 Savings/Investment Plan match 2,123 711 Pension equity adjustment 3,952 3,952 Currency translation 1,519 1,519 Balance, May 31, 1995 63 (36,079) 80,855 Net income 25,234 Stock plans 8,626 2,140 Savings/Investment Plan match 1,399 1,058 Pension equity adjustment 1,403 1,403 Currency translation (747) (747) 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
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements. -47- 48 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, 1997 and 1996 consisted of 52 weeks. The year ended May 31, 1995 consisted of 53 weeks with the additional week included in the first quarter. 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. -48- 49 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 $20,168,000, $16,723,000 and $17,417,000 in the years ended May 31, 1997, 1996 and 1995, 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: Per-share data are computed based on the weighted average number of common shares outstanding during each year. Common stock equivalents related to outstanding stock options are included in per-share computations 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 1,100 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 47.7%, 47.3% and 50.0% of the Company's revenues during the years ended May 31, 1997, 1996 and 1995, respectively. General Electric Company ("GE")and United Technologies Corporation ("UT") each accounted for 10%, or more, of the Company's revenues as follows:
YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1997 % 1996 % 1995 % ($000's omitted, except percentages) GE $156,764 26 $134,830 27 $101,261 26 UT 60,921 10 53,116 11 58,873 15
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 net income items are translated at the average exchange rates for the year. Translation adjustments are reported in equity adjustments as a separate component of stockholders' equity which also includes exchange gains and losses on certain intercompany balances of a long-term investment nature. -49- 50 RESEARCH AND DEVELOPMENT: Research and development expenses, including related depreciation, amounted to $2,895,000, $1,630,000 and $2,213,000 for the years ended May 31, 1997, 1996 and 1995, respectively. 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 options 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: Effective June 1, 1996, 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. -50- 51 B. BALANCE SHEET INFORMATION Components of selected captions in the consolidated balance sheets follow:
MAY 31, MAY 31, 1997 1996 (000's omitted) PROPERTY, PLANT AND EQUIPMENT: Land, buildings and improvements $108,496 $101,356 Machinery and equipment 292,103 282,092 Under construction 21,789 15,160 422,388 398,608 Less accumulated depreciation 268,651 260,300 $153,737 $138,308 INTANGIBLE ASSETS: Pension intangible $ 937 $ 876 Costs in excess of net assets acquired 28,786 28,786 Less: Accumulated amortization (10,468) (9,763) $ 19,255 $ 19,899 OTHER ASSETS: Cash surrender value of company- owned life insurance policies $ 1,041 $ 5,445 Other 2,587 6,965 $ 3,628 $ 12,410 ACCRUED LIABILITIES AND OTHER: Accrued payroll and benefits $ 12,602 $ 10,880 Restructuring, integration, disposal and environmental reserves 7,108 4,755 Payroll and other taxes 1,068 2,258 Loss on long-term contracts - 3,387 Other 28,599 26,898 $ 49,377 $ 48,178
-51- 52 C. INVENTORIES Inventories consisted of the following:
MAY 31, MAY 31, 1997 1996 (000's omitted) Raw material $ 36,990 $21,608 Work-in-process 61,741 51,125 Other 6,906 3,168 105,637 75,901 Less progress payments 13,305 10,028 $ 92,332 $65,873
At May 31, 1997 and 1996 approximately 37.0% and 36.0%, 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 $18,262,000 and $16,662,000 higher than reported at May 31, 1997 and 1996, respectively. LIFO inventory quantities increased in the year ended May 31, 1997. LIFO inventory quantities were reduced in each of the years ended May 31, 1996 and 1995, resulting in the liquidation of LIFO inventories carried at the lower costs prevailing in prior years compared with the cost of current purchases which has a favorable effect on income from operations. Inflation and deflation have negative and positive effects on income from operations, respectively. The effects of lower quantities, inflation or deflation were as follows:
YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1997 1996 1995 (000's omitted) Lower quantities $ - $5,448 $ 7,567 (Inflation) deflation (1,600) (526) (1,393) Net increase (decrease) to income from operations $(1,600) $4,922 $ 6,174
-52- 53 D. SHORT-TERM AND LONG-TERM DEBT Short-term and long-term debt consisted of the following:
MAY 31, MAY 31, 1997 1996 (000's omitted) Borrowings due within one year: Current portion of long-term debt $ 77 $ 77 Total borrowings due within one year $ 77 $ 77 Long-term debt: Senior notes $90,000 $90,000 Industrial revenue bond 6,000 - Other 154 231 Total long-term debt $96,154 $90,231
During 1993, the Company issued $90,000,000 of 10 3/4% Senior Notes due March 2003 (the "Senior Notes") under an indenture between the Company and a bank as trustee. The Senior Notes pay interest semi-annually. The Senior Notes are general unsecured obligations of the Company and are senior to any future subordinated indebtedness of the Company. The Senior Notes are callable beginning March 1998 at a price of $104.78. The call price reduces each year thereafter. The indenture contains certain covenants including limitations on indebtedness, restrictive payments including dividends, liens, and disposition of assets. The estimated fair value of the Senior Notes was $96,300,000 and $94,950,000 at May 31, 1997 and 1996, respectively, based on third party valuations. In December 1996, the Company issued an Industrial Revenue Bond (the "IRB") amounting to $6,000,000. The IRB bears an interest rate approximating 3.90% fluctuating weekly. The Company maintains a letter of credit to collateralize the IRB. The proceeds of the IRB are restricted for the construction of the Scaled Manufacturing, Inc. facility in Montrose, Colorado. As of May 31, 1997, cash and cash equivalents includes $5,279,000 restricted for such use. At May 31, 1997, the carrying value approximates the fair value of the IRB. On May 20, 1994, the Company initiated, through a new 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 -53- 54 subfacility of up to $35,000,000. Interest on borrowings is charged at LIBOR plus 0.625% or based on the bank's base rate. There were no borrowings outstanding under the Receivables Financing Program at May 31, 1997 and 1996. At May 31, 1997 and 1996, the Company had issued $7,007,000 and $9,395,000 of letters of credit under the Receivables Financing Program, respectively. As of May 31, 1997 and 1996, total availability based on eligible receivables was $38,303,000 and $38,521,000, respectively. Wyman-Gordon Limited, the Company's subsidiary located in Livingston, Scotland, entered into a credit agreement ("U.K. Credit Agreement") with a bank ("the Bank") effective February 20, 1996. The maximum borrowing capacity under the U.K. Credit Agreement is 2,000,000 pounds sterling with a separate letter of credit or guarantee limit of 2,000,000 pounds sterling. Borrowings bear interest at 1% over the Bank'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% over the Bank's base rate. The U.K. Credit Agreement is secured by a debenture and standard security from Wyman-Gordon Limited and is senior to any intercompany loans. There were no borrowings outstanding at May 31, 1997 or May 31, 1996. At May 31, 1997 and 1996, the subsidiary had issued 935,000 pounds sterling ($1,534,000) and 669,000 pounds sterling ($1,037,000) of letters of credit or guarantees under the U.K. Credit Agreement. For the years ended May 31, 1997 and 1996, the weighted average interest rate on short-term borrowings was 6.8% and 7.6%, respectively. Annual maturities of long-term debt in the next four years amount to $77,000 for 1998, $477,000 for 1999, $877,000 for 2000, $800,000 for 2001 and 2002, and $93,200,000 thereafter. The Company's promissory note to Cooper Industries, Inc. in the principal amount of $4,600,000, is payable in annual installments beginning on June 30, 1997 and each June 30 thereafter until paid in full in amounts provided under the terms of the "Stock Purchase Agreement" with Cooper Industries, Inc. The Company made a principal payment of $2,300,000 under this note on June 30, 1997.
YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1997 1996 1995 (000's omitted) Interest on debt $ 9,795 $10,003 $ 9,929 Capitalized interest (528) (262) (397) Amortization of financing fees and other 1,555 1,531 1,495 Interest expense $10,822 $11,272 $11,027
Total interest paid approximates "Interest on debt" stated in the table above. -54- 55 E. RESTRUCTURING OF OPERATIONS AND OTHER CHARGES (CREDITS) CAMERON PURCHASE CASH COSTS: On May 26, 1994, the Company acquired Cameron Forged Products Company ("Cameron") from Cooper Industries, Inc. Included as part of the Cameron purchase price allocation, the Company recorded $12,200,000 for direct cash costs related to the acquisition and integration of Cameron, for relocation of Cameron machinery and dies, severance of Cameron personnel and other costs. During the year ended May 31, 1995, the Company made $4,100,000 of cash charges against the reserves and it was determined that the cash costs of the acquisition were $5,200,000 lower than originally estimated. There have been no significant changes to the Company's May 31, 1995 estimates of the remaining integration activities. The Company made $2,300,000 of cash charges against these reserves in the years ended May 31, 1997 and 1996. The remaining activities will require estimated cash outlays of $100,000 in the year ended May 31, 1998 and $500,000 thereafter. 1994 CAMERON INTEGRATION COSTS: Based on the Company's plans for the integration of Cameron, in May 1994, the Company recorded an integration restructuring charge totalling $24,100,000 to provide for relocating machinery, equipment, tooling and dies of the Company as well as relocation and severance costs related to personnel of the Company and the write-down of certain assets of the Company, including portions of metal production facilities and certain forging, machining and testing equipment to net realizable value as a result of consolidating certain systems and facilities, idling certain machinery and equipment, and eliminating certain processes, departments and operations as a result of the acquisition. During the year ended May 31, 1995, after a year of evaluating the combined forgings operations and concluding that most of its integration activities had been completed or were adequately provided for within the remaining integration restructuring reserves, the Company determined that severance and other personnel costs were $1,900,000 lower and movement of machinery, equipment and tooling and dies costs were $2,500,000 lower than originally estimated. Additionally, certain machinery and equipment redundancies as a result of the integration of Cameron's operations with those of the Company's were $2,300,000 higher than original estimates. As a result, the Company took into income from operations in 1995, an integration restructuring credit in the amount of $2,100,000. There have been no significant changes to the Company's May 31, 1995 estimates of the remaining integration activities. The Company made $4,200,000 of cash charges against these reserves in the years ended May 31, 1997 and 1996. At May 31, 1997, the Company estimates these remaining integration activities will require cash outlays of approximately $600,000 in the year ended May 31, 1998 and $900,000 thereafter. Most of these future expenditures represent costs associated with consolidation and reconfiguration of production facilities and relocation or severance costs. -55- 56 1997 RESTRUCTURING: The Company recorded a charge totalling $11,500,000 which included $4,600,000 to provide for the costs of 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 $900,000 of cash charges against these reserves in the year ended May 31, 1997 and estimates that the remaining severance and other personnel costs, disposal of Forging equipment and consolidation of the titanium castings operations will require cash outlays of $5,200,000 in the year ended May 31, 1998 and $300,000 thereafter. A summary of charges made or estimated to be made against restructuring, integration and disposal reserves is as follows: -56- 57
FIVE MONTHS ENDED MAY 31, TOTAL 1994 (000's omitted) CAMERON PURCHASE CASH COSTS: Cost of relocating Cameron's machinery and equipment and tooling and dies $ 3,200 $ - Severance of Cameron personnel 3,800 - Total Cameron Purchase Cash Costs $ 7,000 $ - 1994 CAMERON INTEGRATION COSTS: CASH: Movement of machinery, equipment and tooling and dies $ 4,300 $ - Severance and other personnel costs 4,000 - Total cash charges 8,300 - NON-CASH: Asset revaluation 13,700 11,400 Credits to reserves 2,100 - Total non-cash charges 15,800 11,400 Total 1994 Cameron integration costs $24,100 $11,400 1995 OTHER CHARGES: NON-CASH: Credits to 1994 Cameron integration costs $(2,100) $ - Total 1995 Other Charges $(2,100) $ - 1997 RESTRUCTURING: CASH: Severance and other personnel costs $ 2,200 $ - Disposal of Forging equipment 2,300 - Castings titanium operations 1,900 - Total cash charges 6,400 - NON-CASH: Severance and other personnel costs 2,400 - Asset write-off and revaluation 2,700 - Total non-cash charges 5,100 - Total 1997 Restructuring $11,500 $ -
-57- 58
YEAR YEAR ENDED ENDED MAY 31, MAY 31, 1995 1996 (000's omitted) CAMERON PURCHASE CASH COSTS: Cost of relocating Cameron's machinery and equipment and tooling and dies $ 1,700 $ 300 Severance of Cameron personnel 2,400 1,200 Total Cameron Purchase Cash Costs $ 4,100 $ 1,500 1994 CAMERON INTEGRATION COSTS: CASH: Movement of machinery, equipment and tooling and dies $ 800 $ 1,500 Severance and other personnel costs 1,800 1,600 Total cash charges 2,600 3,100 NON-CASH: Asset revaluation 2,300 - Credits to reserves 2,100 - Total non-cash charges 4,400 - Total 1994 Cameron integration costs $ 7,000 $ 3,100 1995 OTHER CHARGES: NON-CASH: Credits to 1994 Cameron integration costs $(2,100) $ - Total 1995 Other Charges $(2,100) $ - 1997 RESTRUCTURING: CASH: Severance and other personnel costs $ - $ - Disposal of Forging equipment - - Castings titanium operations - - Total cash charges - - NON-CASH: Severance and other personnel costs - - Asset write-off and revaluation - - Total non-cash charges - - Total 1997 Restructuring $ - $ -
-58- 59
YEAR YEAR ENDED ENDED MAY 31, MAY 31, 1998 AND 1997 THEREAFTER (000's omitted) CAMERON PURCHASE CASH COSTS: Cost of relocating Cameron's machinery and equipment and tooling and dies $ 800 $ 400 Severance of Cameron personnel - 200 Total Cameron Purchase Cash Costs $ 800 $ 600 1994 CAMERON INTEGRATION COSTS: CASH: Movement of machinery, equipment and tooling and dies $ 900 $ 1,100 Severance and other personnel costs 200 400 Total cash charges 1,100 1,500 NON-CASH: Asset revaluation - - Credits to reserves - - Total non-cash charges - - Total 1994 Cameron integration costs $ 1,100 $ 1,500 1995 OTHER CHARGES: NON-CASH: Credits to 1994 Cameron integration costs $ - $ - Total 1995 Other Charges $ - $ - 1997 RESTRUCTURING: CASH: Severance and other personnel costs $ 200 $ 2,000 Disposal of Forging equipment - 2,300 Castings titanium operations 700 1,200 Total cash charges 900 5,500 NON-CASH: Severance and other personnel costs 2,400 - Asset write-off and revaluation 2,700 - Total non-cash charges 5,100 - Total 1997 Restructuring $ 6,000 $ 5,500
-59- 60 OTHER CHARGES (CREDITS): Other charges (credits) also include non-cash charges to reduce the carrying value of certain non-operating other assets as follows:
YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1997 1996 1995 (000's omitted) Australian Joint Venture $ 2,484 $1,871 $1,390 Cash surrender value of Company-owned life insurance policies 5,745 846 - Building held for sale 1,900 - - Other 250 - - $10,379 $2,717 $1,390
Other charges (credits) in the year ended May 31, 1997 also includes a net charge of $1,204,000, net of insurance recovery of $6,900,000 for property damage and business interruption claims, related to the accident at the Houston, Texas facility of Wyman- Gordon Forgings, Inc. in December 1996. F. ENVIRONMENTAL MATTERS 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. 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 environmental requirements. As of May 31, 1997, aggregate environmental reserves amounted to $16,230,000 and have been provided for expected cleanup expenses estimated between $6,000,000 and $7,000,000 upon the eventual sale of the Worcester facility, certain environmental issues at Cameron amounting to approximately $3,500,000 and the exposures noted in the following paragraphs, which include certain capitalizable amounts for environmental management and remediation projects. 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 totalling $20,800,000 for environmental management -60- 61 and remediation at the site during the period 1982 through 1999, of which $5,500,000 remained as of May 31, 1997. These expenditures will not resolve 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 $3,500,000, 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 and that the Grafton facility had been removed from the SDMP. Although it is unknown what specific disposal requirements may be placed on the Company by the Massachusetts Department of Public Health, the Company believes that a reserve of $1.5 million recorded on its books is sufficient to cover all costs. The Company, together with numerous other parties, has been named a potentially responsible party ("PRP") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") for the cleanup of the following Superfund sites: Operating Industries, Monterey Park, California; Cedartown Municipal Landfill, Cedartown, Georgia; PSC Resources, Palmer, Massachusetts; the Gemme/Fournier site, Leicester, Massachusetts; and the Salco, Inc. site, Monroe, Michigan. The Company believes that any liability it may incur with respect to these sites will not be material. 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 $1,400,000 to $2,800,000. The Company's insurer is defending the Company's interests, and the Company believes that any recovery against the Company would be offset by recovery of insurance proceeds. -61- 62 G. BENEFIT PLANS The Company and its subsidiaries have pension plans 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. A reconciliation between the amounts recorded on the consolidated balance sheets and the summary tables of the funding status of the pension plans are as follows:
MAY 31, MAY 31, 1997 1996 (000's omitted) Pension liability per balance sheet $(1,102) $ (871) Prepaid pension expense included in prepaid expenses in the balance sheet 95 3,961 U.K. prepaid pension expense (pension liability) 89 (58) Net U.S. prepaid pension expense (pension liability) $ (918) $ 3,032
-62- 63 U.S. PENSION PLANS Effective April 30, 1996, two of the Company's U.S. pension plans which had accumulated benefits exceeding assets were merged into the plan which had assets exceeding the accumulated benefits. Pension expense for the U.S. pension plans included the following components:
YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1997 1996 1995 (000's omitted) Service cost $ 4,298 $ 3,042 $ 2,938 Enhanced benefit package for early retirement 3,775 - - Interest cost on projected benefit obligation 11,302 11,662 10,842 Actual return on assets (17,804) (36,188) (8,205) Net amortization and deferral of actuarial gains (losses) 4,722 23,412 (1,385) Net pension expense $ 6,293 $ 1,928 $ 4,190 Assumed long-term rate of return on plan assets 10.0% 10.0% 9.0%
-63- 64 A summary of the funding status of the U.S. pension plans and a reconciliation to the amounts recorded in the consolidated balance sheets are as follows:
MAY 31, 1997 (000's omitted, except percentages) ASSETS ACCUMULATED EXCEEDING BENEFITS ACCUMULATED EXCEEDING BENEFITS ASSETS TOTAL Actuarial present value of benefit obligations: Vested $146,771 $ 6,965 $153,736 Nonvested 935 392 1,327 Accumulated benefit obligation 147,706 7,357 155,063 Impact of forecasted salary increases during future periods 12,878 2,024 14,902 Projected benefit obligation for employee service to date 160,584 9,381 169,965 Current fair market value of plan assets 164,977 - 164,977 Excess (shortfall) of plan assets over (under) projected benefit obligation 4,393 (9,381) (4,988) Unrecognized net (gain) loss (8,190) 728 (7,462) Unrecognized net (asset) obligation at transition 1,655 1,116 2,771 Unrecognized prior service cost 8,842 1,192 10,034 Adjustment required to recognize minimum liability - (1,013) (1,013) Net periodic pension cost March 30, 1997 to May 31, 1997 (202) (218) (420) Contributions March 30, 1997 to May 31, 1997 - 160 160 Net prepaid pension expense (pension liability) $ 6,498 $ (7,416) $ (918) Estimated annual increase in future salaries 3-5% Weighted average discount rate 7.50%
-64- 65 A summary of the funding status of the U.S. pension plans and a reconciliation to the amounts recorded in the consolidated balance sheets are as follows:
MAY 31, 1996 (000's omitted, except percentages) ASSETS ACCUMULATED EXCEEDING BENEFITS ACCUMULATED EXCEEDING BENEFITS ASSETS TOTAL Actuarial present value of benefit obligations: Vested $144,048 $ 6,738 $150,786 Nonvested 1,004 202 1,206 Accumulated benefit obligation 145,052 6,940 151,992 Impact of forecasted salary increases during future periods 8,585 276 8,861 Projected benefit obligation for employee service to date 153,637 7,216 160,853 Current fair market value of plan assets 159,545 - 159,545 Excess (shortfall) of plan assets over (under) projected benefit obligation 5,908 (7,216) (1,308) Unrecognized net (gain) loss (3,752) (1,565) (5,317) Unrecognized net (asset) obligation at transition 2,170 1,351 3,521 Unrecognized prior service cost 5,509 1,418 6,927 Adjustment required to recognize minimum liability - (929) (929) Net periodic pension cost March 30, 1996 to May 31, 1996 (123) (198) (321) Contributions March 30, 1996 to May 31, 1996 304 155 459 Net prepaid pension expense (pension liability) $ 10,016 $ (6,984) $ 3,032 Estimated annual increase in future salaries 3-5% Weighted average discount rate 7.25%
-65- 66 U.K. PENSION PLAN Pension expense for the U.K. pension plan included the following:
YEAR ENDED YEAR ENDED YEAR ENDED MAY 31, 1997 MAY 31, 1996 MAY 31, 1995 (000's omitted) Service cost $ 629 $ 579 $ 692 Interest cost 1,507 1,300 1,189 Expected return on assets (1,640) (1,283) (1,084) Net pension expense $ 496 $ 596 $ 797
The U.K. pension plan's assets and liabilities were rolled over from the former Cameron plan during fiscal 1996. The funded status of the U.K. pension plan is as follows:
MAY 31, 1997 MAY 31,1996 (000's omitted, except percentages) Fair value of plan assets $22,007 $18,358 Projected benefit obligation 21,164 17,240 Plan assets greater than (less than) projected benefit obligation 843 1,118 Unrecognized net loss (gain) (754) (1,176) Prepaid (accrued) pension cost $ 89 $ (58) Accumulated benefits $19,436 $16,090 Vested benefits $19,436 $16,090 Assumed long-term rate of return on plan assets 8.0% 9.0% Weighted average discount rate 8.0% 9.0% Rate of salary increase 5.0% 6.0%
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. There were no cash contributions in the year ended May 31, 1997. Cash contributions amounted to $26,000 and $136,000 for the years ended May 31, 1996 and 1995, respectively. Additionally, for the years ended May 31, 1997, 1996 and 1995, the Company contributed 97,696; 79,426 and 120,261 shares of common stock from Treasury to its defined contribution plan, respectively, and recorded expense relating thereto of $2,057,000, $1,058,000 and $711,000, respectively. -66- 67 H. OTHER POSTRETIREMENT BENEFITS In addition to providing pension benefits, the Company and its subsidiaries provide 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. Most of the Forgings Division and Corporate retirees and full-time employees are or become eligible for these postretirement health care and life insurance benefits if they meet minimum age and service requirements. There are certain retirees for which Company cost and liability are affected by future increases in health care cost. The liabilities have been developed assuming a medical trend rate for growth in future health care claim levels from the assumed 1994 level. For the year ended May 31, 1997, the medical trend rate for indemnity and Health Maintenance Organization ("HMO") inflationary costs was 7.0% and 5.0%, respectively. The rate for indemnity and HMO for the year ended May 31, 1998 is 6.5% and 4.5% and are ultimately estimated at 5.0% and 4.0%, respectively for the year ended May 31, 2000. The change to the accumulated postretirement benefit obligation for each 1.0% change in these assumptions is $4,266,000. The change in the annual SFAS 106 expense for each 1.0% change in these assumptions is $396,000. The weighted average discount rate used in determining the amortization of the accumulated postretirement benefit obligation was 7.5% and 7.25% at May 31, 1997 and May 31, 1996, respectively, and the average remaining service life was 20 years. Net periodic benefit expense consists of the following components:
YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1997 1996 1995 ($000's omitted) Service cost $ 380 $ 234 $ 350 Benefit from early retirement package (1,375) - - Interest on the accumulated benefit obligation 3,550 4,021 3,990 Net amortization and deferral 409 (53) - Total postretirement benefit expense $ 2,964 $4,202 $4,340
-67- 68 The Company has no plans for funding the liability and will continue to pay for retiree medical costs as they occur. The components of the accumulated postretirement benefit obligation are as follows:
MAY 31, MAY 31, 1997 1996 (000's omitted) Accumulated postretirement benefit obligation: Retirees $40,516 $43,222 Fully eligible active plan participants 3,082 3,564 Other active plan participants 2,845 5,340 Accumulated postretirement benefit obligation in excess of plan assets 46,443 52,126 Unrecognized net gain (loss) from past experience different from that assumed and from changes in assumptions 1,055 885 Prior service cost not yet recognized in net periodic postretirement benefit cost (733) (4,002) Other 373 278 Accrued postretirement benefit cost $47,138 $49,287
I. FEDERAL, FOREIGN AND STATE INCOME TAXES The components of the net credit for income taxes for the year ended May 31, 1997 are as follows:
U.S. U.S. FEDERAL STATE U.K. TOTAL (000's omitted) Current tax expense $ 7,900 $ 680 $ 2,170 $ 10,750 Deferred tax credit (34,080) (480) (1,870) (36,430) Net provision (benefit) for income taxes $(26,180) $ 200 $ 300 $(25,680)
In the year ended May 31, 1997, net tax benefits of $25,680,000 were recognized including a refund of prior years' income taxes amounting to $19,680,000 and $6,500,000 related to the expected realization of NOLs in future years and $10,250,000 related to current NOLs benefit offsetting $10,750,000 of current income tax expense. The refund relates to the carryback of tax net operating losses to tax years 1981, 1984 and 1986 under applicable provisions of Internal Revenue Code Section 172(f). The amount of net operating losses carried back to such years was approximately $48,500,000. -68- 69 At May 31, 1997, the Company had for income tax reporting purposes, approximately $18.0 million of net operating loss carryforwards available to offset taxable income in fiscal year 1998 and subsequent fiscal years, which begin expiring in the year 2006. The benefit (provision) for income taxes is at a rate other than the federal statutory tax rate for the following reasons:
YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1997 1996 1995 (000's omitted) Benefit (provision) at the applicable U.S. federal and U.K. statutory tax rate $ (8,442) $(8,832) $ (363) Recognition of previously unrecognized deferred tax assets 30,626 8,832 1,749 Benefit of higher statutory tax rates in applicable prior years realized in Section 172(f) carryback claims 2,700 - - State income taxes (200) - - Foreign tax carryforwards without current tax benefits - - (1,386) Other 996 - - Income tax benefit (provision) $ 25,680 $ - $ -
The principal components of deferred tax assets and liabilities were as follows:
MAY 31, 1997 MAY 31, 1996 (000's omitted) DEFERRED TAX ASSETS Provision for postretirement benefits $ 19,232 $20,208 Net operating loss carryforwards 17,117 44,142 Restructuring provisions 9,856 10,831 Other 10,315 7,190 56,520 82,371 Valuation allowance (35,934) (71,006) 20,586 11,365 DEFERRED TAX LIABILITIES Accelerated depreciation 11,256 9,879 Other 2,830 1,487 14,086 11,365 Net deferred tax asset (liability) $ 6,500 $ -
-69- 70 J. 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 non-qualified stock options may not be less than 50% of the fair market value of such shares on the date of grant or, in the case of incentive stock options, 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 or are denominated in or 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.
YEAR WEIGHTED YEAR WEIGHTED ENDED AVERAGE ENDED AVERAGE MAY 31, EXERCISE MAY 31, EXERCISE 1997 PRICE 1996 PRICE (Shares in thousands) Number of shares under option: Outstanding at beginning of year 2,295 $ 9.46 1,858 $ 5.90 Granted 817 18.34 861 15.14 Exercised (415) 6.60 (390) 4.81 Canceled or expired (49) 14.18 (34) 11.90 Outstanding at end of year 2,648 $12.56 2,295 $ 9.46 Exercisable at end of year 1,189 1,104
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YEAR WEIGHTED ENDED AVERAGE MAY 31, EXERCISE 1995 PRICE (Shares in thousands) Number of shares under option: Outstanding at beginning of year 1,764 $ 5.87 Granted 387 6.18 Exercised (190) 4.32 Canceled or expired (103) 9.38 Outstanding at end of year 1,858 $ 5.90 Exercisable at end of year 1,203
At May 31, 1997 and 1996, 1,616,845 and 882,000 shares were available for future grants, respectively. The following tables summarizes information about stock options outstanding at May 31, 1997:
(Shares in thousands) OPTIONS OUTSTANDING OPTIONS EXERCISABLE WTD. AVG. WTD. WTD. REMAINING AVG. AVG. RANGE OF CONTRACTUAL EXER. EXER. EXERCISE PRICES SHARES LIFE (YRS.) PRICE SHARES PRICE $ 3.00 - $ 7.99 985 5.05 $ 5.53 880 $ 5.49 $ 8.00 - $12.99 295 8.23 $12.50 90 $12.40 $13.00 - $17.99 1,133 8.90 $16.68 206 $16.63 $18.00 - $23.00 235 8.78 $22.29 13 $19.00 2,648 1,189
During the years ended May 31, 1997, 1996 and 1995, awards of 118,000; 551,000 and 150,000 shares of the Company's common stock were made, respectively, subject to restrictions based upon continued employment and the performance of the Company. Compensation expense totalling $1,403,000, $413,000 and $330,000 relating to the awards was recorded during the years ended May 31, 1997, 1996 and 1995, respectively. -71- 72 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 90% of their fair market value on the first day of the plan year, January 1, or 90% 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, 1996 were 109,550 shares at $12.375 per share based on 90% of the fair market value on January 1, 1996 ($13.75). 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 Employee Stock Purchase Plan. 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, 1997 and 1996 to be $11.28 and $9.34, respectively. The fair values of stock-based compensation awards granted were estimated using the Black-Scholes model with the following assumptions.
YEAR EXPECTED RISK-FREE ENDED GRANT OPTION DIVIDEND INTEREST MAY 31, DATE TERM VOLATILITY YIELD RATE 1997 7/16/96 9 years 38% - 6.67% 10/16/96 10 years 38% - 6.67% 1996 10/18/95 9 years 38% - 6.67% 4/17/96 10 years 38% - 6.67%
-72- 73 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:
1997 1996 (000's omitted, except per share data) Net income as reported $50,023 $25,234 Pro forma net income under SFAS No. 123 47,399 24,957 Income per share as reported $ 1.36 $ .70 Proforma income per share under SFAS No. 123 1.28 .69
The effects of applying SFAS No. 123 in the above pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards granted prior to the year ended May 31, 1996. K. STOCK PURCHASE RIGHTS On October 19, 1988, the Board of Directors of the Company declared a dividend distribution of one right (a "Right") for each outstanding Share to shareholders of record at the close of business on November 30, 1988 pursuant to a Rights Agreement dated as of October 19, 1988 (the "Original Rights Agreement"). On January 10, 1994, in connection with the acquisition of Cameron, the Original Rights Agreement was amended and restated. The description and terms of the Rights are set forth in an Amended and Restated Rights Agreement (the "Rights Agreement"), between the Company and State Street Bank & Trust Company, as Rights Agent. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, no par value (the "Series A Shares"), of the Company at a price of $50 per one one-hundredth of a Series A Share (the "Exercise Price"), subject to adjustment. In the event that the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power is sold after a person or group has become an Acquiring Person (as defined below), proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring Company which at the time of such transaction will have a market value of two times the exercise price of the Right. In the event that any person or group of affiliated or associated persons becomes an Acquiring Person, proper provision shall be made so that each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise that number of Shares having a -73- 74 market value of two times the exercise price of the Right. For purposes of the Rights Agreement, an "Acquiring Person" generally means a person or group of affiliated or associated persons who have acquired beneficial ownership of 20% or more of the outstanding Shares. However, Cooper Industries, Inc. and its affiliates and associates (together, the "Cooper Group") will not be deemed to be an Acquiring Person for so long as (A) the Cooper Group beneficially owns at least 10% or more of the outstanding Shares continuously from and after May 26, 1994 and (B) the Cooper Group does not acquire beneficial ownership of any Shares in breach of the Investment Agreement dated as of January 10, 1994 between Cooper Industries, Inc. and the Company (other than an inadvertent breach which is remedied as promptly as practicable by a transfer of the Shares so acquired to a person which is not a member of the Cooper Group.) The Rights will expire on November 30, 1998 (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by the Company. L. COMMITMENTS AND CONTINGENCIES At May 31, 1997, 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 foreign exchange contracts were not significant at May 31, 1997 and 1996. The Company had foreign exchange contracts totalling $38,228,000 at May 31, 1997. Such contracts include forward contracts of $10,434,000 for the purchase of U.K. pounds and $27,794,000 for the sale of U.K. pounds. These contracts hedge certain normal operating purchase and sales transactions. The exchange contracts have no material fair market value, 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 for the years ended May 31, 1997, 1996 and 1995 were not significant. -74- 75 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. The accident occurred while a crew of ten men was performing maintenance on the accumulator system that supplies hydraulic power for WGFI's 35,000 ton press. The maintenance required that the system be completely depressurized which the crew believed to be the case. However, subsequent examination has shown that a valve on one of the pressure vessels was closed thereby containing pressure in that vessel. The crew was in the process of removing the bolts on the vessel when the few remaining bolts could no longer hold the pressure and the lid was blown off, killing eight crew members and seriously injuring two others. Although no lawsuits have yet been filed, the injured workers and the decedents' families have all retained attorneys to represent them in the matter and who have notified the Company that they intend to assert claims against the Company on behalf of their clients. The Company is cooperating with such attorneys by providing them information and allowing them and their experts access to Company facilities. 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 does not extend to WGFI's parent corporation, Wyman-Gordon Company. Therefore, if lawsuits on behalf of the victims in the Houston accident are brought against Wyman-Gordon Company and if the evidence supports a finding that Wyman-Gordon Company acted negligently in its supervision of WGFI and such negligence had a causal connection with the accident, the plaintiffs would be able to recover damages, both compensatory and punitive, if applicable, against the parent company even in the absence of gross negligence. WGFI has also received claims from several employees of a subcontractor claiming to have been injured at the time of the accident. It is not possible at this time to anticipate whether WGFI or Wyman-Gordon Company could be held liable in connection with the accident and, if so, to estimate the amount of damages that could be awarded. 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. 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 or that the Company's ultimate liability resulting from the accident will not exceed available insurance coverage by an amount which could be material to the Company's financial condition or results of operations. -75- 76 Following the accident, the Occupational Safety and Health Administration ("OSHA") conducted an investigation of the accident. On June 18, 1997, OSHA issued a Citation and Notification of Penalty describing violations of the Occupational Safety and Health Act of 1970. OSHA's principal allegations were that (i) WGFI had not complied with the OSHA standard on specific lockout/tagout procedures for the 35,000 ton press and appurtenant equipment, (ii) WGFI failed to train each authorized employee in lockout/tagout procedures, and (iii) there were design flaws in the equipment. Although the Company disagrees with the OSHA findings, on June 18, 1997, WGFI entered into an Informal Settlement with OSHA in order to avoid the cost and burden of litigation and to resolve disputed claims arising from OSHA's inspection. Pursuant to the Informal Settlement, WGFI paid $1.8 million in settlement of the OSHA Citation and agreed not to contest the Citation. Under the terms of the Informal Settlement, WGFI agreed to (i) develop and implement a comprehensive, ongoing energy control program in compliance with the OSHA lockout/tagout standard, (ii) train its employees in safety procedures, (iii) communicate to and involve its employees in the implementation of the Informal Settlement, (iv) retain an independent safety professional to perform a comprehensive safety and health audit, and (v) adhere to the Secretary of Labor's Voluntary Guidelines for Safety and Health Management Program at its plants in Houston and Brighton, Michigan. In addition, the Company agreed to make certain terms of the Informal Settlement applicable to its forging plants in Massachusetts. WGFI also agreed with the International Association of Machinists to strengthen the Joint Management Labor Safety Committee in Houston and to conduct joint employee safety training. The costs of the accident through May 31, 1997 were approximately $11.9 million, including substantial property damage at the Houston facility and costs of business interruption as a result of the 35,000 ton press having been out of operation until the first week of March 1997. The Company has recovered $6.9 million under property damage and business interruption insurance policies it maintains leaving approximately $5.0 million of costs that were recorded in fiscal year 1997. -76- 77 M. GEOGRAPHIC AND OTHER INFORMATION Transfers between U.S. and international operations, principally inventory transfers, are charged to the receiving organization at prices sufficient to recover manufacturing costs and provide a reasonable return.
Certain information on a geographic basis follows: YEAR YEAR YEAR ENDED ENDED ENDED MAY 31, MAY 31, MAY 31, 1997 1996 1995 (000's omitted) REVENUES FROM UNAFFILIATED CUSTOMERS: United States (including direct export sales) $541,456 $447,515 $365,666 United Kingdom 67,286 52,109 30,973 $608,742 $499,624 $396,639 INTER AREA TRANSFERS: United States $ 378 $ 14 $ 373 United Kingdom 6,244 4,666 2,528 $ 6,622 $ 4,680 $ 2,901 EXPORT SALES: United States direct export sales $ 88,888 $ 71,792 $ 50,235 INCOME (LOSS) FROM OPERATIONS: United States $ 20,578 $ 32,042 $ 14,931 United Kingdom 9,744 5,657 (1,213) $ 30,322 $ 37,699 $ 13,718 IDENTIFIABLE ASSETS (EXCLUDING INTERCOMPANY): United States $390,540 $309,868 $289,649 United Kingdom 54,777 44,287 47,547 General corporate 9,054 21,735 31,868 $454,371 $375,890 $369,064
-77- 78 N. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data for the years ended May 31, 1997 and 1996 were as follows:
QUARTER FIRST SECOND THIRD FOURTH (000's omitted, except per-share data) YEAR ENDED MAY 31, 1997 Revenue $134,235 $138,655 $153,331 $182,521 Cost of goods sold 122,744 115,079 124,716 148,569 Other charges 15,779 - 2,434 4,870 Income (loss) from operations (14,340) 12,527 15,839 16,296 Net income 7,815 9,133 13,009 20,066 Net income per share .21 .25 .35 .54 YEAR ENDED MAY 31, 1996 Revenue $114,077 $118,080 $121,517 $145,950 Cost of goods sold 95,898 99,114 103,210 123,270 Other charges 900 - 110 1,707 Income from operations 8,083 9,494 9,090 11,032 Net income 5,101 6,050 6,077 8,006 Net income per share .14 .17 .17 .22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -78- 79 PART III The information called for by Item 10 (Directors and Executive Officers of the Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management) and Item 13 (Certain Relationships and Related Transactions) is incorporated herein by reference to the registrant's definitive proxy statement to be filed in connection with its 1997 Annual Meeting of Stockholders to be held on October 15, 1997. -79- 80 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents Filed as a Part of this Report PAGES 1. Financial Statements: Report of Management 40 Report of Independent Auditors 41 Consolidated Statements of Operations 42 Consolidated Balance Sheets 43 Consolidated Statements of Cash Flows 44 Consolidated Statements of Stockholders' Equity 46 Notes to Consolidated Financial Statements 48 2. EXHIBITS: Exhibits to the Form 10-K have been included only with the copies of the Form 10-K filed with the Commission. Upon request to the Company and payment of a reasonable fee, copies of the individual exhibits will be furnished.
EXHIBIT INDEX EXHIBIT DESCRIPTION PAGE 3.A Restated Articles of Organization of - Wyman-Gordon Company - incorporated by reference to Exhibit 3A to the Company's Form 10-K for the year ended June 3, 1995. 3.B Bylaws of Wyman-Gordon Company, as amended - through May 24, 1994 - incorporated by reference to Exhibit 3B to the Company's Form 10-K for the year ended June 3, 1995. 4.A Amended and Restated Rights Agreement, dated - as of January 10, 1994 between the Company and State Street Bank & Trust Company, as Rights Agent - incorporated by reference to Exhibit 1 to the Company's Report on Form 8-A/A dated January 21, 1994.
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EXHIBIT INDEX (Continued) EXHIBIT DESCRIPTION PAGE 4.B Indenture dated as of March 16, 1993 among - Wyman-Gordon Company, its Subsidiaries and State Street Bank and Trust Company as Trustee with respect to Wyman-Gordon Company's 10 3/4% Senior Notes due 2003 - incorporated by reference to Exhibit 4C to the Company's Report on Form 10-K for the year ended December 31, 1992. 4.C 10 3/4% Senior Notes due 2003. Supplemental - Indenture dated May 19, 1994 - incorporated by reference to Exhibit 5 to the Company's Report on Form 8-K dated May 26, 1994. 4.D 10 3/4% Senior Notes due 2003. Second - Supplemental Indenture and Guarantee dated May 27, 1994 - incorporated by reference to the Company's Report on Form 8-K dated May 26, 1994. 4.E Instruments defining the rights of holders - of long-term debt are omitted pursuant to paragraph (b)(4)(iii) of Regulation S-K Item 601. The Company agrees to furnish such instruments to the Commission upon request. 10.A Andrew C. Genor, Executive Severance - Agreement dated April 17, 1996 - incorporated by reference to Exhibit 10.A to the Company's Report on Form 10-K dated May 31, 1996. 10.B David P. Gruber, Executive Severance - Agreement dated April 17, 1996 - incorporated by reference to Exhibit 10.B of the Company's Report on Form 10-K dated May 31, 1996. 10.C Sanjay N. Shah, Executive Severance - Agreement dated April 17, 1996 - incorporated by reference to Exhibit 10.C of the Company's Report on Form 10-K dated May 31, 1996. 10.D J. Douglas Whelan, Executive Severance - Agreement dated April 17, 1996 - incorporated by reference to Exhibit 10.D of the Company's Report on Form 10-K dated May 31, 1996. 10.E Wallace F. Whitney, Jr., Executive Severance - Agreement dated April 17, 1996 - incorporated by reference to Exhibit 10.E to the Company's Report on Form 10-K dated May 31, 1996.
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EXHIBIT INDEX (Continued) EXHIBIT DESCRIPTION PAGE 10.F Frank J. Zugel, Executive Severance - Agreement dated April 17, 1996 - incorporated by reference to Exhibit 10.F of the Company's Report on Form 10-K dated May 31, 1996. 10.G Andrew C. Genor, Performance Stock Option - Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.G of the Company's Report on Form 10-K dated May 31, 1996. 10.H David P. Gruber, Performance Stock Option - Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.H of the Company's Report on Form 10-K dated May 31, 1996. 10.I Sanjay N. Shah, Performance Stock Option - Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.I of the Company's Report on Form 10-K dated May 31, 1996. 10.J J. Douglas Whelan, Performance Stock Option - Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.J of the Company's Report on Form 10-K dated May 31, 1996. 10.K Wallace F. Whitney, Jr., Performance Stock - Option Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.K of the Company's Report on Form 10-K dated May 31, 1996. 10.L Frank J. Zugel, Performance Stock Option - Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.L of the Company's Report on Form 10-K dated May 31, 1996. 10.M Andrew C. Genor, Performance Share Agreement - under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.M of the Company's Report on Form 10-K dated May 31, 1996. 10.N David P. Gruber, Performance Share Agreement - under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.N of the Company's Report on Form 10-K dated May 31, 1996.
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EXHIBIT INDEX (Continued) EXHIBIT DESCRIPTION PAGE 10.O Sanjay N. Shah, Performance Share Agreement - under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.O of the Company's Report on Form 10-K dated May 31, 1996. 10.P J. Douglas Whelan, Performance Share Agreement - under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.P of the Company's Report on Form 10-K dated May 31, 1996. 10.Q Wallace F. Whitney, Jr., Performance Share - Agreement under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.Q of the Company's Report on Form 10-K dated May 31, 1996. 10.R Frank J. Zugel, Performance Share Agreement - under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.R of the Company's Report on Form 10-K dated May 31, 1996. 10.S Andrew C. Genor, Stock Option Agreement - under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.S of the Company's Report on Form 10-K dated May 31, 1996. 10.T David P. Gruber, Stock Option Agreement - under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.T of the Company's Report on Form 10-K dated May 31, 1996. 10.U Sanjay N. Shah, Stock Option Agreement - under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.U of the Company's Report on Form 10-K dated May 31, 1996. 10.V J. Douglas Whelan, Stock Option Agreement - under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.V of the Company's Report on Form 10-K dated May 31, 1996. 10.W Wallace F. Whitney, Jr., Stock Option Agreement - under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.W of the Company's Report on Form 10-K dated May 31, 1996.
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EXHIBIT INDEX (Continued) EXHIBIT DESCRIPTION PAGE 10.X Frank J. Zugel, Stock Option Agreement - under the Wyman-Gordon Company Long-term Incentive Plan dated April 17, 1996 - incorporated by reference to Exhibit 10.X of the Company's Report on Form 10-K dated May 31, 1996. 10.Y Amendment to Performance Share Agreement under - the Wyman-Gordon Company Long-term Incentive Plan dated May 24, 1994 between Wyman-Gordon Company and David P. Gruber - incorporated by reference to Exhibit 10.Y of the Company's Report on Form 10-K dated May 31, 1996. 10.Z Stock Purchase Agreement dated as of January 10, - 1994 between Cooper Industries, Inc. and the Company - incorporated by reference to Annex A to the Company's preliminary Proxy Statement filed with the Securities and Exchange Commission on March 8, 1994. 10.AA Investment Agreement dated as of January 10, - 1994 between Cooper Industries, Inc. and the Company - incorporated by reference to Annex B to the Company's preliminary Proxy Statement filed with the Securities and Exchange Commission on March 8, 1994. 10.AB Amendment dated May 26, 1994 to Investment - Agreement dated as of January 10, 1994, between the Company and Cooper - incorporated by reference to the Company's Report on Form 8-K dated May 26, 1994. 10.AC Revolving Credit Agreement dated as of May 20, - 1994 among Wyman-Gordon Receivables Corporation, the Financial Institutions Parties Hereto and Shawmut Bank N.A. as Issuing Bank, as Facility Agent and as Collateral Agent - incorporated by reference to the Company's Report on Form 8-K dated May 26, 1994. 10.AD Receivables Purchase and Sale Agreement dated - as of May 20, 1994 among Wyman-Gordon Company, Wyman-Gordon Investment Castings, Inc. and Precision Founders Inc. as the Sellers, Wyman- Gordon Company as the Servicer and Wyman-Gordon Receivables Corporation as the Purchaser - incorporated by reference to the Company's Report on Form 8-K dated May 26, 1994.
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EXHIBIT INDEX (Continued) EXHIBIT DESCRIPTION PAGE 10.AE Performance Share Agreement under the Wyman- - Gordon Company Long-Term Incentive Plan between the Company and David P. Gruber dated as of May 24, 1994 - incorporated by reference to the Company's Report on Form 8-K dated May 26, 1994. 10.AF Long-term Incentive Plan dated July 19, 1995 - - incorporated by reference to Appendix A of the Company's "Proxy Statement for Annual Meeting of Stockholders" on October 18, 1995. 10.AG Wyman-Gordon Company Non-Employee Director - Stock Option Plan dated January 18, 1995 - incorporated by reference to Appendix C of the Company's "Proxy Statement for Annual Meeting of Stockholders" on October 18, 1995. 10.AH Wyman-Gordon Company Long-Term Incentive Plan dated January 15, 1997 - incorporated by reference to Appendix A of the Company's "Proxy Statement for Annual Meeting of Stockholders" to be held on October 15, 1997. - 21 List of Subsidiaries E-1 23 Consent of Ernst & Young LLP 86 27 Financial Data Schedule E-2 (b) Reports on Form 8-K On April 14, 1997, the Company refiled a Form 8-K, originally filed on January 24, 1997, that included an unaudited Statement of Operations for the twelve months ended December 31, 1996 in accordance with Section 11(a) and Rule 158 of the Securities Act of 1933. -85- 86 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8, File Numbers 2-56547, 2-75980, 33-26980, 33-48068 and 33-64503) pertaining to the Wyman-Gordon Company Executive Long-Term Incentive Program (1975) - Amendment No. 6, the Wyman-Gordon Company Stock Purchase Plan, the Wyman- Gordon Company Savings/Investment Plan, the Wyman-Gordon Company Long-Term Incentive Plan and the Wyman-Gordon Company Employee Stock Purchase Plan; and the Registration Statements (Form S-3, File Numbers 33-63459 and 333-32149) of Wyman-Gordon Company and in the related Prospectuses of our report dated June 23, 1997, with respect to the consolidated financial statements of Wyman-Gordon Company and subsidiaries included in this Annual Report (Form 10-K) for the year ended May 31, 1997. /S/ERNST & YOUNG LLP Boston, Massachusetts August 7, 1997 -86- 87 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Wyman-Gordon Company (REGISTRANT) By /S/ ANDREW C. GENOR August 8, 1997 Andrew C. Genor Date Vice President, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/S/ JOHN M. NELSON Chairman of the August 8, 1997 John M. Nelson Board of Directors Date /S/ DAVID P. GRUBER President, August 8, 1997 David P. Gruber Chief Executive Officer Date and Director /S/ ANDREW C. GENOR Vice President, August 8, 1997 Andrew C. Genor Chief Financial Officer Date and Treasurer and Principal Financial Officer /S/ JEFFREY B. LAVIN Corporate Controller August 8, 1997 Jeffrey B. Lavin and Principal Date Accounting Officer /S/ E. PAUL CASEY Director August 8, 1997 E. Paul Casey Date /S/ WARNER S. FLETCHER Director August 8, 1997 Warner S. Fletcher Date /S/ ROBERT G. FOSTER Director August 8, 1997 Robert G. Foster Date /S/ RUSSELL E. FULLER Director August 8, 1997 Russell E. Fuller Date
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/S/ CHARLES W. GRIGG Director August 8, 1997 Charles W. Grigg Date /S/ M HOWARD JACOBSON Director August 8, 1997 M Howard Jacobson Date /S/ JUDITH S. KING Director August 8, 1997 Judith S. King Date /S/ H. JOHN RILEY, JR. Director August 8, 1997 H. John Riley, Jr. Date /S/ JON C. STRAUSS Director August 8, 1997 Jon C. Strauss Date /S/ DAVID A. WHITE, JR. Director August 8, 1997 David A. White, Jr. Date
-88- EX-21 2 LIST OF SUBSIDIARIES 1 WYMAN-GORDON COMPANY FISCAL 1997 FORM 10-K EXHIBIT 21 WYMAN-GORDON COMPANY AND SUBSIDIARIES The following is a list of Wyman-Gordon's subsidiaries as of May 31, 1997:
PLACE OF INCORPORATION NAME OF SUBSIDIARY OR ORGANIZATION Cameron Forged Products Limited United Kingdom Cameron Pipeline, Inc. Texas ForCast FSC, Ltd. Virgin Islands Precision Founders, Inc. California Reisner Metals, Inc. California Scaled Composites, Inc. California Scaled Manufacturing, Inc. Delaware Wyman-Gordon Composites, Inc. Delaware Wyman-Gordon Composite Technologies, Inc. California Wyman-Gordon Forgings, Inc. Delaware Wyman-Gordon Investment Castings, Inc. Delaware Wyman-Gordon Limited United Kingdom/ Delaware Wyman-Gordon Receivables Corporation Delaware
E-1 EX-27 3 FINANCIAL STATEMENT
5 12-MOS MAY-31-1997 JUN-01-1996 MAY-31-1997 51,971 7 115,569 0 92,332 277,751 422,388 268,651 454,371 111,546 96,154 0 0 37,053 127,345 454,371 605,049 608,742 511,108 511,108 0 0 10,822 24,343 (25,680) 50,023 0 0 0 50,023 1.36 1.35
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