-----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, TeH1RThZqbn+8yh1SmweNsJTe/imJqui2J4WPCC5PKF4J0HHhVFdf+cUhjLKCC0i ZW+ItPUAVd+JTDs0w0kbag== 0000108703-99-000001.txt : 19990112 0000108703-99-000001.hdr.sgml : 19990112 ACCESSION NUMBER: 0000108703-99-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990111 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: 001-14579 FILM NUMBER: 99503967 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 2ND 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 November 30, 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 NOVEMBER 30, 1998 Common Stock, $1 Par Value 36,509,804
Page 1 of 25 2 PART I. ITEM 1. FINANCIAL STATEMENTS WYMAN-GORDON COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED NOV. 30, NOV. 30, NOV. 30, NOV. 30, 1998 1997 1998 1997 (000's omitted, except per share data) Revenue $238,829 $189,370 $428,493 $369,378 Less: Cost of goods sold 197,551 157,422 358,618 304,185 Selling, general and administrative expenses 14,358 13,177 27,839 26,572 Other charges(credits) - (3,000) (5,000) (4,900) 211,909 167,599 381,457 325,857 Income from operations 26,920 21,771 47,036 43,521 Other deductions: Interest expense 3,562 2,791 7,093 5,682 Miscellaneous, net 211 392 465 722 3,773 3,183 7,558 6,404 Income before income taxes 23,147 18,588 39,478 37,117 Provision for income taxes 8,101 5,252 12,581 11,922 Net income $ 15,046 $ 13,336 $ 26,897 $ 25,195 Net income per share: Basic $ .41 $ .37 $ .74 $ .70 Diluted $ .41 $ .36 $ .73 $ .67 Shares used to compute net income per share: Basic 36,545 36,364 36,541 36,258 Diluted 37,015 37,495 37,085 37,500
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
NOVEMBER 30, MAY 31, 1998 1998 (Unaudited) (000's omitted) ASSETS Cash and cash equivalents $ 74,451 $ 64,561 Accounts receivable 153,298 124,658 Inventories 135,367 133,134 Prepaid expenses 8,138 6,710 Total current assets 371,254 329,063 Property, plant and equipment, net 209,208 197,363 Intangible and other assets 28,085 25,184 Total assets $608,547 $551,610 LIABILITIES Borrowings due within one year $ 559 $ 3,017 Accounts payable 86,881 51,590 Accrued liabilities and other 45,390 50,692 Total current liabilities 132,830 105,299 Restructuring, integration, disposal and environmental 16,906 17,314 Long-term debt 165,283 162,573 Pension liability 2,922 2,908 Deferred income tax and other 13,960 14,066 Postretirement benefits 43,596 44,630 Total liabilities 375,497 346,790 STOCKHOLDERS' EQUITY Preferred stock - none issued - - Common stock issued - 37,052,720 shares 37,053 37,053 Capital in excess of par value 27,913 28,037 Retained earnings 175,806 148,847 Accumulated other comprehensive income 2,287 1,465 Less treasury stock at cost November 30, 1998 - 542,916 shares May 31, 1998 - 543,077 shares (10,009) (10,582) Total stockholders' equity 233,050 204,820 Total liabilities and stockholders' equity $608,547 $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)
SIX MONTHS ENDED NOVEMBER 30, NOVEMBER 30, 1998 1997 (000's omitted) OPERATING ACTIVITIES: Net income $ 26,897 $ 25,195 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 13,684 11,185 Deferred income taxes - 6,500 Gain on sale of operating assets (5,000) - Changes in assets and liabilities: Accounts receivable (28,665) (5,741) Inventories (2,233) (24,335) Prepaid expenses and other assets (4,636) (3,935) Accrued restructuring, integration disposal and environmental (982) (1,758) Income and other taxes payable 8,421 279 Accounts payable and accrued and other liabilities 23,301 (13,846) Net cash provided (used) by operating activities 30,787 (6,456) INVESTING ACTIVITIES: Capital expenditures (26,071) (22,688) Proceeds from sale of fixed assets 5,591 471 Other, net 1,435 1,169 Net cash provided (used) by investing activities (19,045) (21,048) FINANCING ACTIVITIES: Payment to Cooper Industries, Inc. (2,300) (2,300) Net proceeds from issuance of common stock 1,812 8,683 Repurchase of Common Stock (1,364) (4,603) Net cash provided (used) by financing activities (1,852) 1,780 Increase (decrease) in cash 9,890 (25,724) Cash, beginning of year 64,561 51,971 Cash, end of period $ 74,451 $ 26,247
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 November 30, 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 November 30, 1998 and its results of operations and cash flows for the six months ended November 30, 1998 and November 30, 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 six months ended November 30, 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 six month periods ended November 30, 1998 and 1997. -5- 6 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) November 30, 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". It does not change the measurement or recognition of those plans. Implementation of this Standard is required for the year ending May 31, 1999. NOTE C - INVENTORIES Inventories consisted of:
NOVEMBER 30, 1998 MAY 31, 1998 (000's omitted) Raw material $ 42,750 $ 50,050 Work-in-process 97,575 92,136 Other 3,839 4,221 144,164 146,407 Less progress payments (8,797) (13,273) $135,367 $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 November 30, 1998 and May 31, 1998. There were no LIFO inventory credits or charges to cost of goods sold in the three and six months ended November 30, 1998 or November 30, 1997. -6- 7 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) November 30, 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 SIX MONTHS ENDED NOV. 30, NOV. 30, NOV. 30, NOV. 30, 1998 1997 1998 1997 Shares used to compute basic net income per share 36,545 36,364 36,541 36,258 Dilutive effect of stock options 470 1,131 544 1,242 Shares used to compute diluted net income per share 37,015 37,495 37,085 37,500
-7- 8 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) November 30, 1998 (Unaudited) NOTE F - STOCKHOLDER'S EQUITY On October 21, 1998, the Company's Board of Directors unanimously adopted a shareholder rights agreement under which preferred share purchase rights were distributed as a dividend on shares of Wyman-Gordon Company's common stock. The rights will be exercisable only if a person or group acquires 15 percent or more of the Company's common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 15 percent or more of the common stock or the determination by the Board of Directors that any person is an "Adverse Person." Each right entitles the registered holder thereof to purchase from the Company a unit consisting of one ten-thousandth of a share of Series B Junior Participating Cumulative Preferred Stock, at a cash exercise price of $75 per unit. The dividend distribution was made on November 30, 1998, payable to stockholders of record on that date. The rights will expire on November 30, 2008, subject to earlier redemption or exchange by Wyman-Gordon Company as described in the plan. The rights distribution is not taxable to stockholders. On August 28, 1998, the Company's Board of Directors authorized a stock repurchase program to acquire up to 2 million shares of Wyman-Gordon Company's common stock. The shares may be purchased from time-to-time in the open market. As of November 30, 1998, the Company had purchased 200,000 shares under this program. NOTE G - COMMITMENTS AND CONTINGENCIES At November 30, 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. -8- 9 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) November 30, 1998 (Unaudited) NOTE G - COMMITMENTS AND CONTINGENCIES, Continued The Company had foreign exchange contracts totaling approximately $32,948,000 at November 30, 1998. These contracts hedge certain normal operating purchase and sales transactions. The foreign exchange contracts generally mature within six months and require the Company to exchange U.K. pounds for non-U.K. currencies or non-U.K. currencies for U.K. pounds. Transaction gains and losses included in the Consolidated Condensed Statements of Income for the three and six months ended November 30, 1998 and November 30, 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. The injured workers and the decedents' families have asserted claims against the Company and WGFI. Both the Company and WGFI have also received claims from several employees of a subcontractor claiming to have been injured at the time of the accident as well as from another WGFI employee who was not a member of the crew. To date, the Company and WGFI have settled all claims of four of the decedents' families on terms acceptable to the Company and its insurance carriers. The Company and WGFI have 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. Three WGFI employees, a person claiming to be a child of the eighth decedent, and three subcontractor employees have subsequently filed lawsuits against the Company, WGFI and Cooper-Cameron Corporation. Trial of the principal lawsuit is currently set for January 25, 1999. The Texas statute of limitations for the bringing of additional claims has expired, but the statute contains exceptions, such as for minors, that would enable claimants to commence lawsuits in the future. 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 -9- 10 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) November 30, 1998 (Unaudited) NOTE G - COMMITMENTS AND CONTINGENCIES, Continued of WGFI employees killed in the course and scope of their employment may recover punitive (but not compensatory) damages in excess of workers compensation benefits. However, to do so, they must prove that the employer was grossly negligent. The protection of the workers compensation exclusive remedy provision may not extend to the Company as parent corporation of WGFI. Therefore, with regard to the October 24, 1997 lawsuit and any future lawsuits brought on behalf of those killed or injured in the Houston accident or their families against the Company, if (i) the court finds that the Company had a legal duty to WGFI and its employees, (ii) the evidence supports a finding that the Company acted negligently in its duty to WGFI and its employees and (iii) such negligence had a causal connection with the accident, the plaintiffs might be able to recover compensatory damages against the Company. If it is shown that the Company's conduct amounted to gross neglect, and that conduct is found to be a cause of the accident, the plaintiffs may be able to recover punitive damages against the Company. It is not possible at this time to determine the extent, if any, to which WGFI or the Company could be held liable in connection with the accident. While the Company maintains general liability and employer's liability insurance for itself and its subsidiaries under various policies and has tendered the defense of the various claims to its insurance carriers, there can be no assurance that the full insurance coverage will be available or that the pending and threatened claims can be settled for an aggregate amount within insurance coverage limits. The Company anticipates that, as with the currently pending lawsuits, 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. -10- 11 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) November 30, 1998 (Unaudited) NOTE G - COMMITMENTS AND CONTINGENCIES, Continued 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. NOTE H - OTHER CHARGES (CREDITS) In the six months ended November 30, 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 six months ended November 30, 1997, the Company recorded other credits of $4,900,000. Such other credits include a credit of $1,900,000 resulting from the disposal of a building held for sale, a credit of $4,000,000 for the recovery of cash surrender value of certain company-owned life insurance policies and a charge of $1,000,000 to provide for costs as a result of the shutdown of the 29,000 ton press at the Company's Houston, Texas forging facility. -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 On December 18, 1998, the Company's shares commenced trading on the New York Stock Exchange under the ticker symbol "WYG". -12- 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS The principal markets served by the Company are aerospace and energy. Revenue by market for the respective periods was as follows:
THREE MONTHS ENDED NOVEMBER 30, 1998 NOVEMBER 30, 1997 (000's omitted) % OF % OF AMOUNT TOTAL AMOUNT TOTAL Aerospace $203,964 85% $153,305 81% Energy 30,412 13% 28,602 15% Other 4,453 2% 7,463 4% $238,829 100% $189,370 100%
SIX MONTHS ENDED NOVEMBER 30, 1998 NOVEMBER 30, 1997 (000's omitted) % OF % OF AMOUNT TOTAL AMOUNT TOTAL Aerospace $354,473 83% $299,052 81% Energy 61,312 14% 55,269 15% Other 12,708 3% 15,057 4% $428,493 100% $369,378 100%
RESULTS OF OPERATIONS THREE MONTHS ENDED NOVEMBER 30, 1998 ("second quarter of fiscal year 1999") COMPARED TO THREE MONTHS ENDED NOVEMBER 30, 1997 ("second quarter of fiscal year 1998") The Company's revenue increased 26.1% to $238.8 million in the second quarter of fiscal year 1999 from $189.4 million in the second quarter of fiscal year 1998 due to increased throughput at the Company's Houston and Grafton facilities as a result of recent equipment refurbishment and enhancements to, and reorganization of, the Grafton facility. Furthermore, a portion of the increase in revenue is attributable to the acquisition of International Extruded Products ("IXP") in April, 1998 and entering into a castings joint venture with TIMET in July, 1998. These revenue increases during the second quarter of fiscal year 1999 as compared to the second quarter of fiscal year 1998 are reflected by market as follows: a $50.7 million (33.0%) increase in aerospace, a $1.8 million (6.3%) increase in energy and a $3.0 million (40.3%) decrease in other. The increase in aerospace market revenues were the result of an increase in aerospace turbine sales volume due to significant throughput -13- 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS THREE MONTHS ENDED NOVEMBER 30, 1998 ("second quarter of fiscal year 1999") COMPARED TO THREE MONTHS ENDED NOVEMBER 30, 1997 ("second quarter of fiscal year 1998") (Continued) improvements on the Company's 29,000 ton press, increased structural sales generated from the joint venture with TIMET and throughput improvements generated from the reorganization of the Grafton facility. The increase in energy revenue was a result of higher shipments of extruded pipe, produced by IXP, during the second quarter of fiscal year 1999 as compared to the second quarter of fiscal year 1998. Revenues in the second 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 $900.1 million at November 30, 1998 compared to $1,030.1 million at May 31, 1998 and $973.4 million at November 30, 1997. The Company attributes the decrease from May 31, 1998 to November 30, 1998 to the following factors: 1.) customer required adjustments to build rates; 2.) reduction in lead times in the supply chain; 3.) initiatives by customers to reduce inventory levels. The Company anticipates a 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, $700.6 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. The Company's gross margin was 17.3% in the second quarter of fiscal year 1999 as compared to 16.9% in the second quarter of fiscal year 1998. The increase in gross margin is the result of significant throughput improvements and increased production efficiency from the Company's Houston, Grafton and Worcester facilities as a result of recent equipment repairs and enhancements and reorganization of the Company's Grafton facility. Although gross margins improved in the second quarter of fiscal year 1999, they were negatively impacted by lower margins generated in the Company's Livingston, Scotland forging plant. Gross margin in the second 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. -14- 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS THREE MONTHS ENDED NOVEMBER 30, 1998 ("second quarter of fiscal year 1999") COMPARED TO THREE MONTHS ENDED NOVEMBER 30, 1997 ("second quarter of fiscal year 1998") (Continued) Selling, general and administrative expenses increased 9.0% to $14.4 million during the second quarter of fiscal year 1999 from $13.2 million during the second quarter of fiscal year 1998. Selling, general and administrative expenses as a percentage of revenues improved to 6.0% in the second quarter of fiscal year 1999 from 6.9% in the second quarter of fiscal year 1998. The improvement as a percent of revenues was primarily the result of higher revenues. The second quarter of fiscal year 1998 included $1.2 million of non-cash compensation expense associated with the Company's performance share program. Selling, general and administrative expenses for the second quarter of fiscal year 1999 were in line with the Company's higher revenues. During the second quarter of fiscal year 1998, the Company recorded net other credits of $3.0 million which included other credits of $4.0 million for the recovery of cash surrender value of certain company-owned life insurance policies and other charges of $1.0 million to provide for costs as a result of the shutdown of the 29,000 ton press at the Company's Houston, Texas forging facility. Interest expense increased $0.8 million to $3.6 million in the second quarter of fiscal year 1999 compared to $2.9 million in the second 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 $8.1 million in the second quarter of fiscal year 1999. The Company recorded a provision for income taxes of $5.3 million in the second quarter of fiscal year 1998. Net income was $15.0 million, or $.41 per share (diluted), in the second quarter of fiscal year 1999 and $13.3 million, or $.36 per share (diluted), in the second quarter of fiscal year 1998. RESULTS OF OPERATIONS SIX MONTHS ENDED NOVEMBER 30, 1998 ("first six months of fiscal year 1999") COMPARED TO SIX MONTHS ENDED NOVEMBER 30, 1997 ("first six months of fiscal year 1998") The Company's revenue increased 16.0% to $428.5 million in the first six months of fiscal year 1999 from $369.4 million in the first six months of fiscal year 1998 due to increased throughput at the Company's Houston and Grafton facilities as a result of recent equipment refurbishment and enhancements to, and reorganization of, the Grafton facility. Furthermore, a portion of the increase in revenue is attributable to the acquisition of -15- 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS SIX MONTHS ENDED NOVEMBER 30, 1998 ("first six months of fiscal year 1999") COMPARED TO SIX MONTHS ENDED NOVEMBER 30, 1997 ("first six months of fiscal year 1998") (Continued) IXP in April, 1998 and entering into a castings joint venture with TIMET in July, 1998. These revenue increases during the first six months of fiscal year 1999 as compared to the first six months of fiscal year 1998 are reflected by market as follows: a $55.4 million (18.5%) increase in aerospace, a $6.0 million (10.9%) increase in energy and a $2.3 million (15.6%) decrease in other. The increase in aerospace market revenues was the result of an increase in aerospace turbine sales volume due to significant throughput improvements on the Company's 29,000 ton press, increased structural sales from the joint venture with TIMET and throughput improvements generated from the reorganization of the Grafton facility. Although aerospace revenues were higher during the first six months of fiscal year 1999 compared to the first six months of fiscal year 1998, aerospace revenues were negatively impacted in the first three months of fiscal year 1999 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 six months of fiscal year 1999 as compared to the first six months of fiscal year 1998. Revenues in the first six months of fiscal year 1998 were limited due to lower than anticipated productivity of 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 $900.1 million at November 30, 1998 compared to $1,030.1 million at May 31, 1998 and $973.4 million at November 30, 1997. The Company attributes the decrease from May 31, 1998 to November 30, 1998 to the following factors: 1.) customer required adjustments to build rates; 2.) reduction in lead times in the supply chain; 3.) initiatives by customers to reduce inventory levels. The Company anticipates a 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, $700.6 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. -16- 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS SIX MONTHS ENDED NOVEMBER 30, 1998 ("first six months of fiscal year 1999") COMPARED TO SIX MONTHS ENDED NOVEMBER 30, 1997 ("first six months of fiscal year 1998") (Continued) The Company's gross margin was 16.3% in the first six months of fiscal year 1999 as compared to 17.7% in the first six months of fiscal year 1998. The Company has estimated that gross margin in the first six months of fiscal year 1999 was negatively affected by approximately 0.7% as a result of production inefficiencies resulting from the recent re-commissioning of the Company's 29,000 ton press. Additionally, gross margins in the first six months of fiscal year 1999 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 six months 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 4.8% to $27.8 million during the first six months of fiscal year 1999 from $26.6 million during the first six months of fiscal year 1998. Selling, general and administrative expenses as a percentage of revenues improved to 6.5% in the first six months of fiscal year 1999 from 7.2% in the first six months of fiscal year 1998. The first six months of fiscal year 1998 included $3.0 million of non-cash compensation expense associated with the Company's performance share program. Selling, general and administrative expenses for the first six months of fiscal year 1999 were in line with the Company's expectation of higher revenues. During the first six months 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. During the first six months of fiscal year 1998, the Company recorded net other credits of $4.9 million. Such other credits include other credits of $1.9 million resulting from the disposal of a building held for sale and $4.0 million for the recovery of cash surrender value of certain company-owned life insurance policies and other charges of $1.0 million to provide for costs as a result of the shutdown of the 29,000 ton press at the Company's Houston, Texas forging facility. Interest expense increased $1.4 million to $7.1 million in the first six months of fiscal year 1999 compared to $5.7 million in the first six months 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. -17- 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS SIX MONTHS ENDED NOVEMBER 30, 1998 ("first six months of fiscal year 1999") COMPARED TO SIX MONTHS ENDED NOVEMBER 30, 1997 ("first six months of fiscal year 1998") (Continued) The Company recorded a provision for income taxes of $12.6 million in the first six months 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 $11.9 million in the first six months of fiscal year 1998. Net income was $26.9 million, or $.73 per share (diluted), in the first six months of fiscal year 1999 and $25.2 million, or $.67 per share (diluted), in the first six months of fiscal year 1998. LIQUIDITY AND CAPITAL RESOURCES The $9.9 million increase in the Company's cash to $74.5 million at November 30, 1998 from $64.6 million at May 31, 1998 resulted primarily from cash provided by operating activities of $30.8 million, issuance of common stock of $1.8 million in connection with employee compensation and benefit plans, $5.6 million of proceeds from the sale of fixed assets and $1.4 million generated from other, net investing activities, offset by capital expenditures of $26.0 million, $1.4 million repurchase of common stock 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 $14.6 million increase in the Company's working capital to $238.4 million at November 30, 1998 from $223.8 million at May 31, 1998 resulted primarily from (in millions):
Net Income $ 26.9 Decrease in: Long-term restructuring, integration disposal and environmental (0.4) Long-term benefit liabilities (1.0) Deferred taxes and other (0.1) Increase in: Intangible and other assets (2.9) Long-term debt 2.7 Property, plant and equipment, net (11.8) Other changes in stockholders' equity 0.8 Issuance of common stock 0.4 Increase in working capital $ 14.6
-18- 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES, Continued Earnings before interest, taxes, depreciation, amortization and other charges (credits) ("EBITDA") increased $6.2 million to $55.3 million in the first six months of fiscal year 1999 from $49.1 million in the first six months of fiscal year 1998. The increase in EBITDA reflects increased volume from significant throughput improvements and increased production efficiency from the Company's Houston, Grafton and Worcester facilities as a result of recent equipment repairs and enhancements and reorganization of the Company's Grafton facility. EBITDA should not be considered a substitute for net income as an indicator of operating performance or as an alternative to cash flow as a measure of liquidity, in each case determined in accordance with generally accepted accounting principles. Investors should be aware that EBITDA as shown above may not be comparable to similarly titled measures presented by other companies, and comparisons could be misleading unless all companies and analysts calculate this measure in the same fashion. As of May 31, 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 six months of fiscal year 1999, spending related to the 1997 restructuring amounted to $0.7 million. The Company expects to spend $1.2 million in fiscal year 1999 and $15.3 million thereafter on non-capitalizable environmental activities. In the first six months of fiscal year 1999, $0.2 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 six months of fiscal year 1999, capital expenditures amounted to $26.0 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. -19- 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES, Continued 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 November 30, 1998, the total availability under the Receivables Financing Program was $56.7 million, there were no borrowings and letters of credit amounting to $8.3 million were outstanding. Wyman-Gordon Limited, the Company's subsidiary located in Livingston, Scotland, 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 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 November 30, 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 ($74.5 million at November 30, 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. -20- 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 six month periods ended November 30, 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 six month periods ended November 30, 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". It does not change the measurement or recognition of those plans. Implementation of this Standard is required for the year ending May 31, 1999. -21- 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. 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 60% May 31, 1999 Test systems with system clocks set at current date 60% May 31, 1999 Test systems off-line with system clocks set at various Year 2000 related critical dates 60% May 31, 1999 Plant Equipment: Computer-dependent plant equipment assessment and compliance procedures performed 40% 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 is 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 are in process. -22- 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) YEAR 2000, Continued 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. Detailed audits of the Company's key suppliers are currently being coordinated in order to assess their Year 2000 systems readiness. 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 estimates it will cost approximately $1.6 million to make its computer-dependent plant equipment Year 2000 compliant. The total 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 $2.4 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 assessing 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. See Note G on page 8 for further discussion. -23- 24 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 Six Months Ended November 30, 1998
(b) On December 4, 1998, the Company filed a Form 8-A with the Commission to report the change of its shares listing from NASDAQ to the NYSE commencing December 18, 1998. On October 29, 1998, the Company filed a Form 8-K with the Commission to report the adoption of certain amendments to the Company's By-laws and a Shareholder Rights Agreement. 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. -24- 25 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: 1/11/99 By: /S/ EDWARD J. DAVIS Edward J. Davis Vice President, Chief Financial Officer and Treasurer Date: 1/11/99 By: /S/ DAVID J. SULZBACH David J. Sulzbach Vice President, Finance and Corporate Controller -25- EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS MAY-31-1999 JUN-01-1998 NOV-30-1998 74,451 7 153,298 0 135,367 371,254 503,834 294,626 608,547 132,830 165,283 0 0 37,053 195,997 608,547 423,256 428,493 358,618 358,618 0 0 7,093 39,478 12,581 26,897 0 0 0 26,897 0.74 0.73
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