-----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, OsyqpUQHODmfZlzlzuiVUGFv4vgu5ozFlTVrG3iJCZK5K4A8BJKJ/Ym9iYmCXWJj JqXTyD+CT64vfpACjryNJQ== 0000108703-98-000004.txt : 19981012 0000108703-98-000004.hdr.sgml : 19981012 ACCESSION NUMBER: 0000108703-98-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981009 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WYMAN GORDON CO CENTRAL INDEX KEY: 0000108703 STANDARD INDUSTRIAL CLASSIFICATION: METAL FORGING & STAMPINGS [3460] IRS NUMBER: 041992780 STATE OF INCORPORATION: MA FISCAL YEAR END: 0528 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-03085 FILM NUMBER: 98723180 BUSINESS ADDRESS: STREET 1: 244 WORCHESTER ST STREET 2: BOX 8001 CITY: NORTH GRAFTON STATE: MA ZIP: 01536 BUSINESS PHONE: 5088394441 10-Q 1 WYMAN-GORDON FORM 10-Q 1ST QUARTER FISCAL 1999 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) { X } QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 31, 1998 OR { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to COMMISSION FILE NUMBER 0-3085 WYMAN-GORDON COMPANY (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-1992780 (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) 244 WORCESTER STREET, BOX 8001, NO. GRAFTON, MASSACHUSETTS 01536-8001 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 508-839-4441 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
OUTSTANDING AT CLASS AUGUST 31, 1998 Common Stock, $1 Par Value 36,560,847
Page 1 of 23 2 PART I. ITEM 1. FINANCIAL STATEMENTS WYMAN-GORDON COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
THREE MONTHS ENDED AUGUST 31, AUGUST 31, 1998 1997 (000's omitted, except per share data) Revenue $189,664 $180,009 Less: Cost of goods sold 161,067 146,764 Selling, general and administrative expenses 13,480 13,395 Other charges(credits) (5,000) (1,900) 169,547 158,259 Income from operations 20,117 21,750 Other deductions: Interest expense 3,529 2,890 Miscellaneous, net 256 331 3,785 3,221 Income before income taxes 16,332 18,529 Provision for income taxes 4,480 6,670 Net income $ 11,852 $ 11,859 Net income per share: Basic $ .32 $ .33 Diluted $ .32 $ .32 Shares used to compute net income per share: Basic 36,542 36,156 Diluted 37,207 37,510
The accompanying notes to the interim consolidated condensed financial statements are an integral part of these financial statements. -2- 3 WYMAN-GORDON COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS
AUGUST 31, MAY 31, 1998 1998 (Unaudited) (000's omitted) ASSETS Cash and cash equivalents $ 66,331 $ 64,561 Accounts receivable 126,049 124,658 Inventories 145,995 133,134 Prepaid expenses 7,317 6,710 Total current assets 345,692 329,063 Property, plant and equipment, net 203,704 197,363 Intangible and other assets 27,043 25,184 $576,439 $551,610 LIABILITIES Borrowings due within one year $ 559 $ 3,017 Accounts payable 62,646 51,590 Accrued liabilities and other 52,092 50,692 Total current liabilities 115,297 105,299 Restructuring, integration, disposal and environmental 17,123 17,314 Long-term debt 165,283 162,573 Pension liability 2,923 2,908 Deferred income tax and other 13,985 14,066 Postretirement benefits 44,018 44,630 STOCKHOLDERS' EQUITY Preferred stock - none issued - - Common stock issued - 37,052,720 shares 37,053 37,053 Capital in excess of par value 27,331 28,037 Retained earnings 160,699 148,847 Accumulated other comprehensive income 2,344 1,465 Less treasury stock at cost August 31, 1998 - 491,873 shares May 31, 1998 - 543,077 shares (9,617) (10,582) 217,810 204,820 $576,439 $551,610
The accompanying notes to the interim consolidated condensed financial statements are an integral part of these financial statements. -3- 4 WYMAN-GORDON COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED AUGUST 31, AUGUST 31, 1998 1997 (000's omitted) OPERATING ACTIVITIES: Net income $ 11,852 $ 11,859 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,799 5,435 Deferred income taxes - 4,000 Gain on sale of operating assets (5,000) - Changes in assets and liabilities: Accounts receivable (471) (6,272) Inventories (12,861) (20,912) Prepaid expenses and other assets (3,561) (2,359) Accrued restructuring, integration disposal and environmental 37 (392) Income and other taxes payable 3,542 1,943 Accounts payable and accrued and other liabilities 10,292 (7,164) Net cash provided (used) by operating activities 10,629 (13,862) INVESTING ACTIVITIES: Capital expenditures (12,573) (13,673) Proceeds from sale of fixed assets 5,283 222 Other, net (215) (716) Net cash provided (used) by investing activities (7,505) (14,167) FINANCING ACTIVITIES: Payment to Cooper Industries, Inc. (2,300) (2,300) Net proceeds from issuance of common stock 946 4,942 Net cash provided (used) by financing activities (1,354) 2,642 Increase (decrease) in cash 1,770 (25,387) Cash, beginning of year 64,561 51,971 Cash, end of period $ 66,331 $ 26,584
The accompanying notes to the interim consolidated condensed financial statements are an integral part of these financial statements. -4- 5 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS August 31, 1998 (Unaudited) NOTE A - BASIS OF PRESENTATION In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments necessary to present fairly its financial position at August 31, 1998 and its results of operations and cash flows for the three months ended August 31, 1998 and August 31, 1997. All such adjustments are of a normal recurring nature. The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with Article 10 of Securities and Exchange Commission Regulation S-X and, therefore, do not include all information and footnotes necessary for a fair presentation of the financial position, results of operations and cash flows in conformity with generally accepted accounting principles. In conjunction with its May 31, 1998 Annual Report on Form 10-K, the Company filed audited consolidated financial statements which included all information and footnotes necessary for a fair presentation of its financial position at May 31, 1998 and 1997 and its results of operations and cash flows for the years ended May 31, 1998, 1997, and 1996, in conformity with generally accepted accounting principles. Where appropriate, prior period amounts have been reclassified to permit comparison. NOTE B - ADOPTION OF RECENT ACCOUNTING STANDARDS Effective February 28, 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaces the previously reported primary and fully diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and, where necessary, restated to conform to the SFAS 128 requirements. There is no material impact on earnings per share for the three months ended August 31, 1998 and 1997 calculated under SFAS 128. Effective June 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for reporting and disclosure of comprehensive income, which is composed of net earnings and certain items of other comprehensive income as defined in the Statement, for all periods presented; however, the adoption of SFAS 130 had no impact on the Company's net income or stockholders' equity. The components of other comprehensive income, both individually and in the aggregate, were not material for the three month periods ended August 31, 1998 and 1997. -5- 6 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) August 31, 1998 (Unaudited) NOTE B - ADOPTION OF RECENT ACCOUNTING STANDARDS, Continued In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). The implementation of SFAS 131 will require the disclosure of segment information utilizing the approach that the Company uses to manage its internal organization. The Company is currently assessing the impact that the new standard will have on its financial statements. Implementation of this Standard is required for the year ending May 31, 1999. In February 1998, the Financial Accounting Standards Board issued Statement No. 132, "Employers' Disclosures about Pensions and Other Post Retirement Benefits" ("SFAS 132"). SFAS 132 standardizes disclosure requirements of Statement Nos. 87, "Employers' Accounting for Pensions", and 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". The Company is currently assessing the impact that the new standard will have on its financial statements. Implementation of this Standard is required for the year ending May 31, 1999. NOTE C - INVENTORIES Inventories consisted of:
AUGUST 31, 1998 MAY 31, 1998 (000's omitted) Raw material $ 50,055 $ 50,050 Work-in-process 100,907 92,136 Other 4,457 4,221 155,419 146,407 Less progress payments (9,424) (13,273) $145,995 $133,134
If all inventories valued at LIFO cost had been valued at the lower of first-in, first-out (FIFO) cost or market, which approximates current replacement cost, inventories would have been $18,262,000 higher than reported at August 31, 1998 and May 31, 1998. There were no LIFO inventory credits or charges to cost of goods sold in the three months ended August 31, 1998 or August 31, 1997. -6- 7 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) August 31, 1998 (Unaudited) NOTE D - LONG-TERM DEBT On December 15, 1997, the Company issued $150,000,000 of 8% Senior Notes due 2007 ("8% Senior Notes") under an indenture between the Company and a bank as trustee. The 8% Senior Notes were issued at a price of 99.323% of face value and pay interest semi-annually in arrears on June 15 and December 15 of each year, commencing June 15, 1998. The 8% Senior Notes are general unsecured obligations of the Company, are non-callable for a five year period, and are senior to any future subordinated indebtedness of the Company. The Company used approximately $90,750,000 of the net proceeds from the sale of the 8% Senior Notes to repurchase $84,725,000 (94%) of its outstanding 10 3/4% Senior Notes due 2003 ("10 3/4% Senior Notes"). NOTE E - NET INCOME PER SHARE There were no adjustments required to be made to net income for purposes of computing basic and diluted net income per share. A reconciliation of the average number of common shares outstanding used in the calculation of basic and diluted net income per share is as follows:
THREE MONTHS ENDED AUGUST 31, AUGUST 31, 1998 1997 Shares used to compute basic net income per share 36,542,318 36,156,042 Dilutive effect of stock options 664,735 1,354,087 Shares used to compute diluted net income per share 37,207,053 37,510,129
There were stock options outstanding that were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares and, therefore would be antidilutive. The following table summarizes all options exceeding average market price for the first quarter of fiscal year 1999 and 1998: -7- 8 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) August 31, 1998 (Unaudited) NOTE E - NET INCOME PER SHARE, Continued
THREE MONTHS ENDED AUGUST 31, AUGUST 31, 1998 1997 Options exceeding average market price 555,570 - Exercise price range $19.00- N/A $25.00
NOTE F - COMMITMENTS AND CONTINGENCIES At August 31, 1998, certain lawsuits arising in the normal course of business were pending. In the opinion of management, the outcome of these legal matters will not have a material adverse effect on the Company's financial position and results of operations. The Company is subject to extensive, stringent and changing federal, state and local environmental laws and regulations, including those regulating the use, handling, storage, discharge and disposal of hazardous substances and the remediation of alleged environmental contamination. Accordingly, the Company is involved from time to time in administrative and judicial inquiries and proceedings regarding environmental matters. Nevertheless, the Company believes that compliance with these laws and regulations will not have a material adverse effect on the Company's operations as a whole. The Company had foreign exchange contracts totaling approximately $42,029,000 at August 31, 1998. These contracts hedge certain normal operating purchase and sales transactions. The foreign exchange contracts generally mature within six months and require the Company to exchange U.K. pounds for non-U.K. currencies or non-U.K. currencies for U.K. pounds. Transaction gains and losses included in the Consolidated Condensed Statements of Income for the three months ended August 31, 1998 and August 31, 1997 were not material. On December 22, 1996, a serious industrial accident occurred at the Houston, Texas facility of Wyman-Gordon Forgings, Inc. ("WGFI"), a wholly-owned subsidiary of the Company, in which eight employees were killed and two others were injured. -8- 9 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) August 31, 1998 (Unaudited) NOTE F - COMMITMENTS AND CONTINGENCIES, Continued OSHA conducted an investigation of the accident. On June 18, 1997, WGFI reached an agreement with OSHA settling citations resulting from the accident. The injured workers and the decedents' families have asserted claims against the Company and WGFI. WGFI has also received claims from several employees of a subcontractor claiming to have been injured at the time of the accident as well as from two current employees. To date, the Company has settled all claims that could be brought by four of the decedent's families on terms acceptable to the Company and its insurance carriers. The Company has also settled most of the claims of the subcontractor employees. The Company thus far has been unable to achieve settlements with the other claimants, and, on October 24, 1997, a lawsuit was filed in the District Court of Harris County, Texas, on behalf of three of the decedents' families against the Company, WGFI and Cooper- Cameron Corporation. Two employees have subsequently filed a motion to be included in the lawsuit. Trial of the lawsuit is currently set for January, 1999. In general under Texas statutory law, an employee's exclusive remedy against an employer for an on-the-job injury is the benefits of the Texas Workers' Compensation Act. WGFI, the employer of the deceased employees, has workers' compensation insurance coverage and the injured employees and beneficiaries of the deceased employees are receiving workers' compensation payments. Under applicable law, however, statutory beneficiaries of employees killed in the course and scope of their employment may recover punitive (but not compensatory) damages in excess of workers compensation benefits. However, to do so, they must prove that the employer was grossly negligent. The protection of the workers compensation exclusive remedy provision may not extend to the Company as parent corporation of WGFI. Therefore, with regard to the October 24, 1997 lawsuit and any future lawsuits brought on behalf of those killed or injured in the Houston accident or their families against the Company, if (i) the court finds that the Company had a legal duty to WGFI and its employees, (ii) the evidence supports a finding that the Company acted negligently in its duty to WGFI and its employees and (iii) such negligence had a causal connection with the accident, the plaintiffs might be able to recover compensatory damages against the Company. If it is shown that the Company's conduct amounted to gross neglect, and that conduct is found to be a cause of the accident, the plaintiffs may be able to recover punitive damages against the Company. -9- 10 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) August 31, 1998 (Unaudited) NOTE F - COMMITMENTS AND CONTINGENCIES, Continued It is not possible at this time to determine the extent, if any, to which WGFI or the Company could be held liable in connection with the accident. The Company maintains general liability and employer's liability insurance for itself and its subsidiaries under various policies with aggregate coverage limits of approximately $29 million, a substantial portion of which has been expended in the settlements to date. While WGFI has tendered the defense of the various claims to the Company's insurance carriers, there can be no assurance that the full insurance coverage will be available. Based on the Company's experience in the settlement negotiations to date, the Company believes that there is a substantial risk that the pending and threatened claims will not be settled for an aggregate amount within its insurance coverage limits. The Company anticipates that, as with the currently pending lawsuit, any additional lawsuits will include claims for alleged compensatory as well as punitive damages that in the aggregate could substantially exceed the Company's available insurance coverage. The Company intends to vigorously defend all lawsuits that have been or may be filed relating to the accident. However, if one or more such lawsuits were to be prosecuted successfully by the plaintiffs and a judgment were to be obtained by one or more plaintiffs in such lawsuits and sustained on appeal, litigation costs, including the cost of pursuing any appeals, and the cost of paying such a judgment, to the extent not covered by insurance, could have a material adverse effect on the Company's financial condition and the results of operations, particularly if any such judgment includes awards for punitive damages. On September 25, 1997, the Company received a subpoena from the United States Department of Justice informing it that the Department of Defense and other federal agencies had commenced an investigation with respect to the manufacture and sale of investment castings at the Company's Tilton, New Hampshire facility. The focus of the investigation is whether the Company failed to comply with required quality control procedures for cast aerospace parts and whether the Company shipped cast components that did not meet applicable specifications. The Company is cooperating fully with the investigation, and in addition, has substantially completed its own investigation, which has identified certain departures from Company policies and procedures which have been addressed. The federal investigation may result in criminal or civil charges being brought against the Company. Based on the Company's own investigation, the Company does not believe that the federal investigation is likely to result in a material adverse impact on the Company's financial condition or results of operations, although no assurance as to the outcome or impact of that investigation can be given. -10- 11 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) August 31, 1998 (Unaudited) NOTE G - OTHER CHARGES (CREDITS) In the three months ended August 31, 1998, the Company recorded other credits of $5,000,000 resulting from the sale of the operating assets of the Company's Millbury, Massachusetts vacuum remelting facility which produced titanium ingots for further processing into finished forgings to Titanium Metals Corporation "TIMET". In the three months ended August 31, 1997, the Company recorded other credits of $1,900,000 resulting from the disposal of a building held for sale. -11- 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY" Certain statements in Management's Discussion and Analysis of Financial Condition and Results of Operations contain "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1995). The words "believe," "expect," "anticipate," "intend," "estimate", "assume" and other similar expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. In addition, information concerning raw material prices and availability, customer orders and pricing, and industry cyclicality and their impact on gross margins and business trends as well as liquidity and sales volume are forward-looking statements. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are in some cases beyond the control of the Company and may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Certain factors that might cause such differences include, but are not limited to, the following: The Company's ability to successfully negotiate long-term contracts with customers and raw materials suppliers at favorable prices and other terms acceptable to the Company, the Company's ability to obtain required raw materials and to supply its customers on a timely basis and the cyclicality of the aerospace industry. For further discussion identifying important factors that could cause actual results to differ materially from those anticipated in forward-looking statements, see the Company's SEC filings, in particular see the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1998 Part I, Item 1 - "Business - The Company," "Customers," "Marketing and Sales," "Backlog," "Raw Materials," "Energy Usage," "Employees," "Competition," "Environmental Regulations," "Product Liability Exposure" and "Legal Proceedings". RECENT DEVELOPMENTS In the first quarter of fiscal year 1999, the Company's Scaled Composites subsidiary launched the first flight of its experimental plane called the Proteus. With the successful first flight of this new aircraft, the Company has begun to capitalize all costs associated with the further advancement of the aircraft. -12- 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RECENT DEVELOPMENTS, Continued The Company has reduced its workforce in the Grafton, Massachusetts plant by approximately 100 people, or 15%. The Company seeks to return the Grafton operations to profitability and has transferred the aerospace turbine work, which was moved to Grafton during the refurbishment of the 29,000 ton press, back to Houston. The Company successfully negotiated a new contract with the bargaining unit representing 616 Houston hourly employees. The contract covers a three-year term expiring August 2001 and provides for a general wage increase of 3% per year. RESULTS OF OPERATIONS The principal markets served by the Company are aerospace and energy. Revenue by market for the respective periods was as follows:
THREE MONTHS ENDED AUGUST 31, 1998 AUGUST 31, 1997 (000's omitted) % OF % OF AMOUNT TOTAL AMOUNT TOTAL Aerospace $150,509 80% $145,747 81% Energy 30,900 16% 26,667 15% Other 8,255 4% 7,595 4% $189,664 100% $180,009 100%
-13- 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS THREE MONTHS ENDED AUGUST 31, 1998 ("first quarter of fiscal year 1999") COMPARED TO THREE MONTHS ENDED AUGUST 31, 1997 ("first quarter of fiscal year 1998") The Company's revenue increased 5.4% to $189.7 million in the first quarter of fiscal year 1999 from $180.0 million in the first quarter of fiscal year 1998 as a result of additional revenues generated from the acquisition of International Extruded Products ("IXP") in April, 1998 and entering into the Castings joint venture with TIMET in July, 1998. These revenue increases during the first quarter of fiscal year 1999 as compared to the first quarter of fiscal year 1998 are reflected by market as follows: a $4.8 million (3.3%) increase in aerospace, a $4.2 million (15.9%) increase in energy and a $0.7 million (8.7%) increase in other. The increase in aerospace market revenues were the result of an increase in aerospace structural sales volume which includes additional revenues generated from entering into the Castings joint venture with TIMET, as noted above. Although aerospace revenues were higher during the first quarter of fiscal year 1999 compared to the first quarter of fiscal year 1998, aerospace revenues were negatively impacted by the overhang of production inefficiencies relating to the recent re- commissioning of the Company's 29,000 ton press. The increase in energy revenue was a result of higher shipments of extruded pipe, produced by IXP, during the first quarter of fiscal year 1999 as compared to the first quarter of fiscal year 1998. Revenues in the first quarter of fiscal year 1998 were limited due to lower than anticipated productivity of recent equipment and personnel additions, unanticipated repairs of equipment and inconsistencies in raw material deliveries corresponding to customer requirements. The Company's backlog continues to be strong with $1,000.9 million at August 31, 1998 compared to $1,030.1 million at May 31, 1998 and $935.3 million at August 31, 1997. The Company attributes the decrease from May 31, 1998 to August 31, 1998 to a reduction in lead times in the supply chain and initiatives by customers to reduce inventory levels. The Company anticipates a leveling off or possible decline in backlog since it does not expect to receive customer orders at the same rates as in the recent past. Additionally, the Company believes that capacity enhancements, equipment refurbishments and additions installed by the Company will enable the Company to meet its customer demands more timely. Of the Company's total current backlog, $767.3 million is shippable in the next twelve months. Because of the additional production capacity generated from equipment enhancements, refurbishments and additions, the Company believes that it will be able to fulfill those twelve-month requirements. -14- 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS THREE MONTHS ENDED AUGUST 31, 1998 ("first quarter of fiscal year 1999") COMPARED TO THREE MONTHS ENDED AUGUST 31, 1997 ("first quarter of fiscal year 1998") (Continued) The Company's gross margin was 15.1% in the first quarter of fiscal year 1999 as compared to 18.5% in the first quarter of fiscal year 1998. The Company has estimated that gross margin in the first quarter of fiscal year 1999 was negatively affected by approximately 1.6% as a result of production inefficiencies resulting from the recent re-commissioning of the Company's 29,000 ton press. Additionally, gross margins were negatively impacted by production inefficiencies at the Company's Groton, Connecticut casting plant and lower margins generated in the Livingston, Scotland forging plant. Gross margin in the first quarter of fiscal year 1998 was negatively affected by production inefficiency costs related to personnel additions and the re- installation and start-up of two major forge presses. Selling, general and administrative expenses increased 0.6% to $13.5 million during the first quarter of fiscal year 1999 from $13.4 million during the first quarter of fiscal year 1998. Selling, general and administrative expenses as a percentage of revenues improved to 7.1% in the first quarter of fiscal year 1999 from 7.4% in the first quarter of fiscal year 1998. The first quarter of fiscal year 1998 included $1.9 million of non- cash compensation expense associated with the Company's performance share program. Selling, general and administrative expenses for the first quarter of fiscal year 1999 were in line with the Company's expectation of higher revenues. During the first quarter of fiscal year 1999, the Company recorded other credits of $5.0 million resulting from the sale of the operating assets of the Company's Millbury, Massachusetts facility to TIMET. In the first quarter of fiscal year 1998, the Company recorded other credits of $1.9 million resulting from the disposal of a building held for sale. Interest expense increased $0.6 million to $3.9 million in the first quarter of fiscal year 1999 compared to $2.9 million in the first quarter of fiscal year 1998. The increase results primarily from an issuance of $150.0 million of 8% Senior Notes offset by repayment of $84.7 million of 10 3/4% Senior Notes. The Company recorded a provision for income taxes of $4.5 million in the first quarter of fiscal year 1999. The provision was recorded net of a $1.4 million tax benefit related to reduction in the tax asset reserve for the capital loss related to the Company's investment in an Australian joint venture. The Company recorded a provision for income taxes of $6.7 million in the first quarter of fiscal year 1998. Net income was $11.9 million, or $.32 per share (diluted), in the first quarters of fiscal year 1999 and 1998. -15- 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES The increase in the Company's cash of $1.7 million to $66.3 million at August 31, 1998 from $64.6 million at May 31, 1998 resulted primarily from cash provided by operating activities of $10.6 million, issuance of common stock of $0.9 million in connection with employee compensation and benefit plans and $5.3 million of proceeds from the sale of fixed assets, offset by capital expenditures of $12.6 million, use of $0.2 million in other, net investing activities and $2.3 million payment to Cooper Industries, Inc. ("Cooper"). The $2.3 million payment to Cooper was the final payment made in accordance with the Company's promissory note payable to Cooper under the terms of the Stock Purchase Agreement with Cooper related to the acquisition of Cameron Forged Products Company in May 1994. The increase in the Company's working capital of $6.6 million to $230.4 million at August 31, 1998 from $223.8 million at May 31, 1998 resulted primarily from (in millions):
Net Income $11.9 Decrease in: Long-term restructuring, integration disposal and environmental (0.2) Long-term benefit liabilities (0.6) Deferred taxes and other (0.1) Increase in: Intangible and other assets (1.9) Long-term debt 2.6 Property, plant and equipment, net (6.3) Other changes in stockholders' equity 0.9 Issuance of common stock 0.3 Increase in working capital $ 6.6
Earnings before interest, taxes, depreciation, amortization and other charges (credits) ("EBITDA") decreased $3.3 million to $21.7 million in the first quarter of fiscal year 1999 from $25.0 million in the first quarter of fiscal year 1998. The decrease in EBITDA reflects the impact of production inefficiencies relating to the re-commissioning of the Company's 29,000 ton press. EBITDA should not be considered a substitute for net income as an indicator of operating performance or as an alternative to cash flow as a measure of liquidity, in each case determined in accordance with generally accepted accounting principles. Investors should be aware that EBITDA as shown above may not be comparable to similarly titled measures presented by other companies, and comparisons could be misleading unless all companies and analysts calculate this measure in the same fashion. -16- 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES, Continued As of May 31, 1998, the Company estimated the remaining cash requirements for the 1997 restructuring to be $3.7 million. Of such amount, the Company expects to spend approximately $2.5 million during fiscal year 1999 and $1.2 million thereafter. In the first quarter of fiscal year 1999, spending related to the 1997 restructuring amounted to $0.7 million. The Company expects to spend $2.0 million in fiscal year 1999 and $14.5 million thereafter on non-capitalizable environmental activities. In the first quarter of fiscal year 1999, $0.1 million was expended for non-capitalizable environmental projects. The Company from time to time expends cash on capital expenditures for more cost-effective operations, environmental projects and joint development programs with customers. In the first quarter of fiscal year 1999, capital expenditures amounted to $12.6 million and are expected to be approximately $40.0 to $45.0 million in fiscal year 1999. On December 15, 1997, the Company issued $150.0 million of 8% Senior Notes due 2007 under an indenture between the Company and a bank as trustee. The 8% Senior Notes were issued at a price of 99.323% of face value and pay interest semi-annually in arrears on June 15 and December 15 of each year, commencing June 15, 1998. The 8% Senior Notes are general unsecured obligations of the Company, are non-callable for a five year period, and are senior to any future subordinated indebtedness of the Company. The Company used approximately $90.7 million of the net proceeds from the sale of the 8% Senior Notes to repurchase $84.7 million (94%) of its outstanding 10 3/4% Senior Notes due 2003. The Company's revolving receivables-backed credit facility (the "Receivables Financing Program") provides the Company with an aggregate maximum borrowing capacity of $65.0 million (subject to a borrowing base), with a letter of credit sub-limit of $35.0 million. The term of the Receivables Financing Program is five years with a renewal option. As of August 31, 1998, the total availability under the Receivables Financing Program was $62.2 million, there were no borrowings and letters of credit amounting to $8.4 million were outstanding. Wyman-Gordon Limited, the Company's subsidiary located in Livingston, Scotland, entered into a credit agreement ("the U.K. Credit Agreement") with Clydesdale Bank PLC ("Clydesdale") effective June 22, 1998. The maximum borrowing capacity under the U.K. Credit Agreement is 2.0 million pounds sterling (approximately $3.2 million) with a separate letter of credit and -17- 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES, Continued guarantee limits of 1.0 million pounds sterling (approximately $1.6 million) each. The term of the U.K. Credit Agreement is one year with a renewal option. There were no borrowings outstanding at August 31, 1998, Wyman-Gordon Limited had outstanding 1.0 million pounds sterling (approximately $1.6 million) of letters of credit or guarantees under the U.K. Credit Agreement. The primary sources of liquidity available to the Company to fund operations and other future expenditures include available cash ($66.3 million at August 31, 1998), borrowing availability under the Company's Receivables Financing Program, cash generated by operations and reductions in working capital requirements through planned inventory reductions and accounts receivable management. The Company believes that it has adequate resources to provide for its operations and the funding of restructuring, integration, capital and environmental expenditures. IMPACT OF INFLATION The Company's earnings may be affected by changes in price levels and in particular, changes in the price of basic metals. The Company's contracts generally provide for fixed prices for finished products with limited protection against cost increases. The Company would therefore be affected by changes in prices of the raw materials during the term of any such contract. The Company attempts to minimize this risk by entering into fixed price arrangements with raw material suppliers and, where possible, negotiating price escalators into its customer contracts to offset a portion of raw material cost increases. ACCOUNTING AND TAX MATTERS Effective February 28, 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaces the previously reported primary and fully diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and, where necessary, restated to conform to the SFAS 128 requirements. There is no material impact on earnings per share for the three months ended August 31, 1998 and 1997 calculated under SFAS 128. -18- 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ACCOUNTING AND TAX MATTERS, Continued Effective June 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for reporting and disclosure of comprehensive income, which is composed of net earnings and certain items of other comprehensive income as defined in the Statement, for all periods presented; however, the adoption of SFAS 130 had no impact on the Company's net income or stockholders' equity. The components of other comprehensive income, both individually and in the aggregate, were not material for the three month periods ended August 31, 1998 and 1997. In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). The implementation of SFAS 131 will require the disclosure of segment information utilizing the approach that the Company uses to manage its internal organization. The Company is currently assessing the impact that the new standard will have on its financial statements. Implementation of this Standard is required for the year ending May 31, 1999. In February 1998, the Financial Accounting Standards Board issued Statement No. 132, "Employers' Disclosures about Pensions and Other Post Retirement Benefits" ("SFAS 132"). SFAS 132 standardizes disclosure requirements of Statement Nos. 87, "Employers' Accounting for Pensions", and 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". The Company is currently assessing the impact that the new standard will have on its financial statements. Implementation of this Standard is required for the year ending May 31, 1999. YEAR 2000 The Year 2000 computer issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the computer programs in the Company's computer systems and plant equipment systems that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculation causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. -19- 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) YEAR 2000, Continued The Company's overall Year 2000 project approach and status is as follows:
ESTIMATED DESCRIPTION STAGE OF TIMETABLE FOR OF APPROACH COMPLETION COMPLETION Computer Systems: Assess systems for possible Year 2000 impact 100% Completed Modify or replace non-compliant systems 50% May 31, 1999 Test systems with system clocks set at current date 50% May 31, 1999 Test systems off-line with system clocks set at various Year 2000 related critical dates 10% May 31, 1999 Plant Equipment: Computer-dependent plant equipment assessment and compliance procedures performed 20% May 31, 1999
The Company has completed a comprehensive inventory of substantially all computer systems and programs. All hardware required for stand alone testing of systems has been installed in order to perform off-line testing for Year 2000 program compliance. The Company has identified all software supplied by outside vendors that are not Year 2000 compliant. With respect to approximately 95% of such non-compliant software the Company has acquired the most recent release and is currently testing such versions for Year 2000 compliance. All software developed in-house has been reviewed and necessary modifications have been completed and are in the final stages of testing. In addition to assessing the Company's Year 2000 readiness, the Company has contacted and sent questionnaires regarding Year 2000 readiness to most of its suppliers. Over 70% have responded thus far and the majority of the Company's top suppliers believe they will be Year 2000 compliant prior to December 31, 1999. Detailed audits of the Company's key suppliers are currently being coordinated in order to assess their Year 2000 systems readiness. -20- 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) YEAR 2000, Continued The Company is using both internal and external resources to reprogram, or replace, and test software for Year 2000 modifications. The Year 2000 project is 50% complete and the Company anticipates completing the project by mid-1999. Maintenance or modification costs will be expensed as incurred, while the costs of new information technology will be capitalized and amortized in accordance with Company policy. The Company is uncertain of the cost of making its computer-dependent plant equipment Year 2000 compliant due to the early stages of this part of the Year 2000 computer project. The estimated cost of the Year 2000 computer project, including software modifications, consultants, replacement costs for non-compliant systems and internal personnel costs, based on presently available information, is not material to the financial operations of the Company and is estimated at approximately $0.8 million. However, if such modifications and conversions are not made, or are not completed in time, the Year 2000 computer issue could have a material impact on the operations of the Company. The Company is currently making Year 2000 contingency plans. The Company has multiple business systems at different locations. In case of the failure of a system at one location, the Company's contingency plan is to evaluate the use of an alternate compliant business system at another location. The Company will continue to assess possible contingency plan solutions. The forecast costs and the date on which the Company believes it will complete its Year 2000 computer modifications are based on its best estimates, which, in turn, were based on numerous assumptions of future events, including third-party modification plans, continued availability of resources and other factors. The Company cannot be sure that these estimates will be achieved and actual results could differ materially from those anticipated. OTHER MATTERS On December 22, 1996, a serious industrial accident occurred at the Houston, Texas facility of Wyman-Gordon Forgings, Inc. ("WGFI"), a wholly-owned subsidiary of the Company, in which eight employees were killed and two others were injured. OSHA conducted an investigation of the accident. On June 18, 1997, WGFI reached an agreement with OSHA settling citations resulting from the accident. The injured workers and the decedents' families have asserted claims against the Company and WGFI. WGFI has also received claims from several employees of a subcontractor claiming to have been injured at the time of the accident as well as from two current employees. See Note F on page 8 for further discussion. -21- 22 PART II. ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K (a) Exhibits The following exhibits are being filed as part of this Form 10-Q:
EXHIBIT NO. DESCRIPTION 27 Financial Data Schedule for the Three Months Ended August 31, 1998.
(b) On August 11, 1998, the Company filed a Form 8-K with the Commission to report that it and Titanium Metals Corporation completed a transaction in which the parties have combined their respective titanium castings businesses into a jointly-owned venture. -22- 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WYMAN-GORDON COMPANY Date: 10/9/98 By: /S/ EDWARD J. DAVIS Edward J. Davis Vice President, Chief Financial Officer and Treasurer Date: 10/9/98 By: /S/ JEFFREY B. LAVIN Jeffrey B. Lavin Corporate Controller -23- EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS MAY-31-1999 JUN-01-1998 AUG-31-1998 66,331 7 125,448 0 145,995 345,692 491,926 288,222 576,439 115,297 165,283 0 0 37,053 180,757 576,439 188,624 189,664 161,067 161,067 0 0 3,529 16,332 4,480 11,852 0 0 0 11,852 0.32 0.32
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