-----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, G+q11Qxt61EtSEU4Rdm8BZDIoTjH2m1NpjKDt8Yo47BrFeCzG8cz3HUUiWR16I/Y 8oXgWOn43vEHcVAaO2Xc0w== 0000108703-99-000004.txt : 19990414 0000108703-99-000004.hdr.sgml : 19990414 ACCESSION NUMBER: 0000108703-99-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990413 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: 99592722 BUSINESS ADDRESS: STREET 1: 244 WORCHESTER ST STREET 2: BOX 8001 CITY: NORTH GRAFTON STATE: MA ZIP: 01536 BUSINESS PHONE: 5088394441 10-Q 1 WYMAN-GORDON FORM 10-Q 3RD QUARTER FISCAL 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 February 28, 1999 OR { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to COMMISSION FILE NUMBER 0-3085 WYMAN-GORDON COMPANY (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-1992780 (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) 244 WORCESTER STREET, BOX 8001, NO. GRAFTON, MASSACHUSETTS 01536-8001 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 508-839-4441 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
OUTSTANDING AT CLASS FEBRUARY 28, 1999 Common Stock, $1 Par Value 35,464,254
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 NINE MONTHS ENDED FEB. 28, FEB. 28, FEB. 28, FEB. 28, 1999 1998 1999 1998 (000's omitted, except per share data) Revenue $211,223 $181,764 $639,716 $551,142 Less: Cost of goods sold 188,506 159,229 547,125 463,415 Selling, general and administrative expenses 14,650 12,958 42,488 39,529 Other charges(credits) 18,990 - 13,990 (4,900) 222,146 172,187 603,603 498,044 Income(loss)from operations (10,923) 9,577 36,113 53,098 Other deductions: Interest expense 3,549 3,319 10,642 8,999 Miscellaneous, net 148 66 612 790 3,697 3,385 11,254 9,789 Income (loss) before income taxes (14,620) 6,192 24,859 43,309 Provision (benefit) for income taxes (5,263) 2,229 7,318 14,151 Income (loss) before extraordinary item (9,357) 3,963 17,541 29,158 Extraordinary item - net of income tax benefit of $2,920,306 - (5,192) - (5,192) Net income (loss) $ (9,357) $ (1,229) $ 17,541 $ 23,966 Basic net income per share: Income (loss) before extraordinary item $ (.26) $ .11 $ .48 $ .80 Net income (loss) $ (.26) $ (.03) $ .48 $ .66 Diluted net income per share: Income (loss) before extraordinary item $ (.26) $ .11 $ .48 $ .78 Net income (loss) $ (.26) $ (.03) $ .48 $ .64 Shares used to compute net income per share: Basic 35,995 36,314 36,326 36,279 Diluted 35,995 37,074 36,798 37,360
The accompanying notes to the interim consolidated condensed financial statements are an integral part of these financial statements. -2- 3 WYMAN-GORDON COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS
FEBRUARY 28, MAY 31, 1999 1998 (Unaudited) (000's omitted) ASSETS Cash and cash equivalents $ 61,630 $ 64,561 Accounts receivable 144,311 124,658 Inventories 116,719 133,134 Prepaid expenses 8,031 6,710 Total current assets 330,691 329,063 Property, plant and equipment, net 211,557 197,363 Intangible and other assets 29,018 25,184 Total assets $571,266 $551,610 LIABILITIES Borrowings due within one year $ 963 $ 3,017 Accounts payable 62,121 51,590 Accrued liabilities and other 56,139 50,692 Total current liabilities 119,223 105,299 Restructuring, integration, disposal and environmental 16,662 17,314 Long-term debt 164,438 162,573 Pension liability 2,893 2,908 Deferred income tax and other 13,830 14,066 Postretirement benefits 42,579 44,630 Total liabilities 359,625 346,790 STOCKHOLDERS' EQUITY Preferred stock - none issued - - Common stock issued - 37,052,720 shares 37,053 37,053 Capital in excess of par value 27,491 28,037 Retained earnings 166,450 148,847 Accumulated other comprehensive income 550 1,465 Less treasury stock at cost February 28, 1999 - 1,588,466 shares May 31, 1998 - 543,077 shares (19,903) (10,582) Total stockholders' equity 211,641 204,820 Total liabilities and stockholders' equity $571,266 $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)
NINE MONTHS ENDED FEBRUARY 28, FEBRUARY 28, 1999 1998 (000's omitted) OPERATING ACTIVITIES: Net income $ 17,541 $ 23,966 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss on debt retirement - 5,192 Depreciation and amortization 20,518 17,172 Deferred income taxes - 6,500 Gain on sale of operating assets (5,000) - Other charges 23,145 - Changes in assets and liabilities: Accounts receivable (19,678) (8,626) Inventories 16,415 (48,009) Prepaid expenses and other assets (5,638) (371) Accrued restructuring, integration disposal and environmental (3,083) (2,520) Income and other taxes payable (4,384) (1,195) Accounts payable and accrued other liabilities (339) (11,400) Net cash provided (used) by operating activities 39,497 (19,291) INVESTING ACTIVITIES: Capital expenditures (37,927) (32,755) Proceeds from sale of fixed assets 5,684 660 Other, net 1,983 752 Net cash provided (used) by investing activities (30,260) (31,343) FINANCING ACTIVITIES: Payment to Cooper Industries, Inc. (2,300) (2,300) Net borrowings (repayments) of debt - 55,043 Net proceeds from issuance of common stock 3,234 9,784 Repurchase of Common Stock (13,102) (4,603) Net cash provided (used) by financing activities (12,168) 57,924 Increase (decrease) in cash (2,931) 7,290 Cash, beginning of year 64,561 51,971 Cash, end of period $ 61,630 $ 59,261
The accompanying notes to the interim consolidated condensed financial statements are an integral part of these financial statements. -4- 5 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS February 28, 1999 (Unaudited) NOTE A - BASIS OF PRESENTATION In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments necessary to present fairly its financial position at February 28, 1999 and its results of operations and cash flows for the nine months ended February 28, 1999 and February 28, 1998. All such adjustments are of a normal recurring nature. The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with Article 10 of Securities and Exchange Commission Regulation S-X and, therefore, do not include all information and footnotes necessary for a fair presentation of the financial position, results of operations and cash flows in conformity with generally accepted accounting principles. In conjunction with its May 31, 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 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 nine month periods ended February 28, 1999 and 1998. 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. Implementation of this standard is required for the year ending May 31, 1999. -5- 6 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) February 28, 1999 (Unaudited) NOTE B - ADOPTION OF RECENT ACCOUNTING STANDARDS, Continued 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:
FEBRUARY 28, 1999 MAY 31, 1998 (000's omitted) Raw material $ 35,951 $ 50,050 Work-in-process 85,325 92,136 Other 2,363 4,221 123,639 146,407 Less progress payments (6,920) (13,273) $116,719 $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 February 28, 1999 and May 31, 1998. There were no LIFO inventory credits or charges to cost of goods sold in the three and nine months ended February 28, 1999 or February 28, 1998. -6- 7 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) February 28, 1999 (Unaudited) NOTE D - NET INCOME PER SHARE There were no adjustments required to be made to net income (loss) for purposes of computing basic and diluted net income per share. A reconciliation of the average number of common shares outstanding used in the calculation of basic and diluted net income per share is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED FEB. 28, FEB. 28, FEB. 28, FEB. 28, 1999 1998 1999 1998 (000's omitted) Shares used to compute basic net income per share 35,995 36,314 36,326 36,279 Dilutive effect of stock options - 760 472 1,081 Shares used to compute diluted net income per share 35,995 37,074 36,798 37,360
NOTE E - 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 the 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. -7- 8 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) February 28, 1999 (Unaudited) NOTE E - STOCKHOLDER'S EQUITY, Continued 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. As of February 28, 1999, the Company had purchased 1.3 million shares under this program. Since the original authorization, the Board of Directors authorized a 2.0 million share increase in the repurchase program and 2.7 million shares are now available for repurchase. NOTE F - COMMITMENTS AND CONTINGENCIES 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 $27,283,000 at February 28, 1999. These contracts hedge certain normal operating purchase and sales transactions. The foreign exchange contracts generally mature within six months and require the Company to exchange U.K. pounds for non-U.K. currencies or non-U.K. currencies for U.K. pounds. Transaction gains and losses included in the Consolidated Condensed Statements of Income for the three and nine months ended February 28, 1999 and February 28, 1998 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 brought lawsuits against the Company and WGFI. Both the Company and WGFI have also been named as defendants in lawsuits brought by 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. -8- 9 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) February 28, 1999 (Unaudited) NOTE F - COMMITMENTS AND CONTINGENCIES, Continued The Company and WGFI have settled the claims of four decedents' families and various other claimants on terms acceptable to the Company and its insurance carriers. Recently, the Company reached agreement with the families of three additional decedents and an injured employee which represents the major portion of the unsettled claims. Settlement of these claims is subject to the execution of mutually satisfactory releases. The amounts to be paid in settlement of all cases will exceed the Company s available liability insurance for the period covering the December 22, 1996 accident. The Company has recorded a charge of $13.8 million in the third quarter of fiscal year 1999 to cover its share of the costs of defending the lawsuits and funding the agreed settlements and its best estimate of future defense and settlement costs. The Company believes that the charge it has recorded will be sufficient to cover such costs and that in the event the Company were required to make payments in excess of such charge, such payments would not be likely to have a material adverse impact on the Company s financial condition or results of operations, although no assurance as to the outcome or impact of the remaining litigation can be given. On September 25, 1997, the Company received a subpoena from the United States Department of Justice informing it that the Department of Defense and other federal agencies had commenced an investigation with respect to the manufacture and sale of investment castings at the Company's Tilton, New Hampshire facility. The Company does not believe that the federal investigation is likely to result in a material adverse impact on the Company's financial condition or results of operations, although no assurance as to the outcome or impact of that investigation can be given. At February 28, 1999, certain lawsuits arising in the normal course of business were pending. In the opinion of management, the outcome of these legal matters will not have a material adverse effect on the Company's financial position and results of operations. -9- 10 WYMAN-GORDON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) February 28, 1999 (Unaudited) NOTE G - OTHER CHARGES (CREDITS) In the nine months ended February 28, 1999, the Company recorded other charges of $13,990,000. Such other charges include a charge of $13,800,000 to provide for the Company's best estimate of the combined current and future defense and settlement costs associated with the Houston industrial accident, $4,100,000 to provide for the costs of Company-wide workforce reductions, a charge of $1,090,000 to reduce the carrying value and dispose of certain assets of the Company's titanium Castings operations and a credit 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 nine months ended February 28, 1998, the Company recorded other credits of $4,900,000. Such other credits include a credit of $1,900,000 resulting from the disposal of a building held for sale, a credit of $4,000,000 for the recovery of cash surrender value of certain company-owned life insurance policies and a charge of $1,000,000 to provide for costs as a result of the shutdown of the 29,000 ton press at the Company's Houston, Texas forging facility. -10- 11 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 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". -11- 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued RECENT DEVELOPMENTS 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. Due to recent settlement proceedings, the Company recorded a charge of $13.8 million during the third quarter of fiscal year 1999 to cover its share of the costs of defending the lawsuits, funding agreed settlements and its best estimate of future defense and settlement costs. See Note F on page 8 for further discussion. During the third quarter of fiscal year 1999, the Company also recorded the following one-time charges: a $5.8 million charge to cost of goods sold related to sales commitments under contractual agreements with certain customers that will result in losses, a $4.1 million charge to provide for the costs of company-wide workforce reductions and a $1.1 million charge to reduce the carrying value and dispose of certain assets of the Company's titanium castings operations. During the first quarter of fiscal year 1999, the Company recorded a $5.0 million gain resulting from the sale of the operating assets of the Company's Millbury, Massachusetts facility to TIMET. Notwithstanding the impact of the items noted above, gross margin, net income (loss) and diluted earnings per share would have been as follows:
THREE MONTHS ENDED NINE MONTHS ENDED FEBRUARY 28, 1999 FEBRUARY 28, 1999 (000's omitted except per share data) EXCLUDING EXCLUDING OTHER OTHER CHARGES CHARGES (CREDITS) (CREDITS) AND AND AS ONE-TIME AS ONE-TIME STATED CHARGES STATED CHARGES Revenues $211,223 $211,223 $639,716 $639,716 Gross margin $ 22,717 $ 28,542 $ 92,591 $ 98,416 Net income (loss) $ (9,357) $ 6,521 $ 17,541 $ 30,219 Net income (loss) per diluted share $ (.26) $ .18 $ .48 $ .82
-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 FEBRUARY 28, 1999 FEBRUARY 28, 1998 (000's omitted) % OF % OF AMOUNT TOTAL AMOUNT TOTAL Aerospace $171,022 81% $146,080 80% Energy 30,272 14% 27,554 15% Other 9,929 5% 8,130 5% $211,223 100% $181,764 100%
NINE MONTHS ENDED FEBRUARY 28, 1999 FEBRUARY 28, 1998 (000's omitted) % OF % OF AMOUNT TOTAL AMOUNT TOTAL Aerospace $525,495 82% $445,132 81% Energy 91,584 14% 82,823 15% Other 22,637 4% 23,187 4% $639,716 100% $551,142 100%
RESULTS OF OPERATIONS THREE MONTHS ENDED FEBRUARY 28, 1999 ("third quarter of fiscal year 1999") COMPARED TO THREE MONTHS ENDED FEBRUARY 28, 1998 ("third quarter of fiscal year 1998") The Company's revenue increased 16.2% to $211.2 million in the third quarter of fiscal year 1999 from $181.8 million in the third 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. 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 third quarter of fiscal year 1999 as compared to the third quarter of fiscal year 1998 are reflected by market as follows: a $24.9 million (17.1%) increase in aerospace, a $2.7 million (9.9%) increase in energy and a $1.8 million (22.1%) increase in other. The increase in aerospace market revenues was 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 FEBRUARY 28, 1999 ("third quarter of fiscal year 1999") COMPARED TO THREE MONTHS ENDED FEBRUARY 28, 1998 ("third quarter of fiscal year 1998") (Continued) improvements on the Company's 29,000 ton press, the 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 third quarter of fiscal year 1999 as compared to the third quarter of fiscal year 1998. Revenues in the third 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 $846.0 million at February 28, 1999 compared to $1,030.1 million at May 31, 1998 and $1,013.2 million at February 28, 1998. The Company attributes the decrease from May 31, 1998 to February 28, 1999 to the following factors: 1.) customer volume adjustments to align with revised 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, $645.0 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 10.8% in the third quarter of fiscal year 1999 as compared to 12.4% in the third quarter of fiscal year 1998. Gross margin was negatively impacted by 2.7% as a result of a one-time charge of $5.8 million related to sales commitments under contractual agreements with certain customers that will result in losses. In the third quarter of fiscal year 1999, the Company's evaluation projected that the fully allocated costs to produce certain 1) aerospace structural products in our Grafton, Massachusetts and 2) aerospace turbine products in its Groton, Connecticut, facilities, exceeded sales prices provided to complete the remainder of these long-term, fixed price contracts. Excluding the $5.8 million charge discussed above, gross margin was 13.5% in the third quarter of fiscal year 1999. Higher production volumes and increased production efficiencies from the Company's Grafton facility favorably impacted gross margins in the third quarter of fiscal year 1999. Although gross margins improved in the third quarter of fiscal year 1999 compared to the third quarter of fiscal year 1998, they were -14- 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS THREE MONTHS ENDED FEBRUARY 28, 1999 ("third quarter of fiscal year 1999") COMPARED TO THREE MONTHS ENDED FEBRUARY 28, 1998 ("third quarter of fiscal year 1998") (Continued) negatively impacted by higher overtime and outsourcing costs related to the reduction of overdue aerospace products and underabsorption in the energy product line at the Company's Houston, Texas facility and by lower margins generated in the Company's Livingston, Scotland forging plant. Gross margin in the third quarter of fiscal year 1998 was negatively affected by an estimated 5.4% due to underabsorption and inefficiencies associated with the Company's 29,000 ton press being taken out of service for repairs. Selling, general and administrative expenses increased 13.1% to $14.7 million during the third quarter of fiscal year 1999 from $13.0 million during the third quarter of fiscal year 1998. Selling, general and administrative expenses as a percentage of revenues decreased to 6.9% in the third quarter of fiscal year 1999 from 7.1% in the third quarter of fiscal year 1998. Although selling, general and administrative expenses as a percentage of revenue improved, the increase in expense was the result of the acquisition of IXP in April, 1998 and entering into a castings joint venture with TIMET in July, 1998. During the third quarter of fiscal year 1999, the Company recorded other charges of $19.0 million which included charges of $13.8 million to provide for the Company's best estimate of the combined current and future defense and settlement costs associated with the Houston industrial accident, $4.1 million to provide for the costs of company-wide workforce reductions and other charges of $1.1 million to reduce the carrying value and dispose of certain assets of the Company's titanium castings operations. Interest expense increased $0.2 million to $3.5 million in the third quarter of fiscal year 1999 compared to $3.3 million in the third quarter of fiscal year 1998. The increase results primarily from an increase in debt associated with the acquisition of IXP in April, 1998. The Company recorded a benefit for income taxes of $5.3 million in the third quarter of fiscal year 1999. The Company recorded a provision for income taxes of $2.2 million in the third quarter of fiscal year 1998. Excluding combined restructuring and one-time charges of $24.8 million, net income for the third quarter of fiscal year 1999 was $6.5 million or $.18 per diluted share versus net income before extraordinary items of $4.0 million or $.11 per diluted share in third quarter of fiscal year 1998. An extraordinary charge of $5.2 was recorded in the third quarter of fiscal year 1998 in connection with the extinguishment of $85.0 million of debt. -15- 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS THREE MONTHS ENDED FEBRUARY 28, 1999 ("third quarter of fiscal year 1999") COMPARED TO THREE MONTHS ENDED FEBRUARY 28, 1998 ("third quarter of fiscal year 1998") (Continued) Net income (loss) after restructuring and one-time charges was $(9.4) million or $(.26) per diluted share in the third quarter of fiscal year 1999 compared to the third quarter of fiscal year 1998 net income (loss), including extraordinary item, of $(1.2) million or $(.03) per diluted share. RESULTS OF OPERATIONS NINE MONTHS ENDED FEBRUARY 28, 1999 ("first nine months of fiscal year 1999") COMPARED TO NINE MONTHS ENDED FEBRUARY 28, 1998 ("first nine months of fiscal year 1998") The Company's revenue increased 16.1% to $639.7 million in the first nine months of fiscal year 1999 from $551.1 million in the first nine 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 IXP in April, 1998 and entering into a castings joint venture with TIMET in July, 1998. These revenue increases during the first nine months of fiscal year 1999 as compared to the first nine months of fiscal year 1998 are reflected by market as follows: a $80.4 million (18.1%) increase in aerospace, a $8.8 million (10.6%) increase in energy and a $0.6 million (2.4%) 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 nine months of fiscal year 1999 compared to the first nine 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 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 nine months of fiscal year 1999 as compared to the first nine months of fiscal year 1998. Revenues in the first nine 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 $846.0 million at February 28, 1999 compared to $1,030.1 million at May 31, 1998 and $1,013.2 million at February 28, 1998. The Company attributes the decrease from May 31, 1998 to February 28, 1999 to -16- 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS NINE MONTHS ENDED FEBRUARY 28, 1999 ("first nine months of fiscal year 1999") COMPARED TO NINE MONTHS ENDED FEBRUARY 28, 1998 ("first nine months of fiscal year 1998") (Continued) the following factors: 1.) customer volume adjustments to align with revised 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, $645.0 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 14.5% in the first nine months of fiscal year 1999 as compared to 15.9% in the first nine months of fiscal year 1998. Gross margin was negatively impacted by 0.9% as a result of a one-time charge of $5.8 million in the third quarter of fiscal year 1999 related to sales commitments under contractual agreements with certain customers that will result in losses. The Company has estimated that gross margin in the first nine months of fiscal year 1999 was negatively affected by approximately $3.1 million, or 0.5%, as a result of production inefficiencies incurred in the first three months of fiscal year 1999 resulting from the recommissioning of the Company's 29,000 ton press. Additionally, gross margins in the first nine months of fiscal year 1999 were negatively impacted by approximately 1.3% primarily relating to overtime and outsourcing costs related to overdues, fixed cost escalations, and underabsorption in the Company's energy product line. Gross margin in the first nine months of fiscal year 1998 was negatively affected by the impact of the Company's 29,000 ton press being taken out of service for repairs and 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 7.5% to $42.5 million during the first nine months of fiscal year 1999 from $39.5 million during the first nine months of fiscal year 1998. Selling, general and administrative expenses as a percentage of revenues improved to 6.6% in the first nine months of fiscal year 1999 from 7.2% in the first nine months of fiscal year 1998. The first nine 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 nine months of fiscal year 1999 were impacted by the acquisition of IXP in April, 1998 and entering into a castings joint venture with TIMET in July, 1998. -17- 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS NINE MONTHS ENDED FEBRUARY 28, 1999 ("first nine months of fiscal year 1999") COMPARED TO NINE MONTHS ENDED FEBRUARY 28, 1998 ("first nine months of fiscal year 1998") (Continued) During the first nine months of fiscal year 1999, the Company recorded other charges of $14.0 million. Such other charges include a charge of $13.8 million to provide for the Company's best estimate of the combined current and future defense and settlement costs associated with the Houston industrial accident, $4.1 million to provide for the costs of company-wide workforce reductions and other charges of $1.1 million to reduce the carrying value and dispose of certain assets of the Company's titanium casting operations, offset by a $5.0 million gain resulting from the sale of the operating assets of the Company's Millbury, Massachusetts facility to TIMET. During the first nine months of fiscal year 1998, the Company recorded net other credits of $4.9 million. Such other credits include other credits of $1.9 million resulting from the disposal of a building held for sale and $4.0 million for the recovery of cash surrender value of certain company-owned life insurance policies and other charges of $1.0 million to provide for costs as a result of the shutdown of the 29,000 ton press at the Company's Houston, Texas forging facility. Interest expense increased $1.6 million to $10.6 million in the first nine months of fiscal year 1999 compared to $9.0 million in the first nine 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. The Company recorded a provision for income taxes of $7.3 million in the first nine 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 $14.2 million in the first nine months of fiscal year 1998. Excluding combined restructuring and one-time charges (credits) of $19.8 million, net income in the first nine months of fiscal year 1999 was $30.2 million or $.82 per diluted share versus net income before extraordinary item and other credits of $24.6 million or $.66 per diluted share in the first nine months of fiscal year 1998. Net income was $17.5 million, or $.48 per diluted share in the first nine months of fiscal year 1999 and $24.0 million, or $.64 per diluted share in the first nine months of fiscal year 1998. -18- 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES The $2.9 million decrease in the Company's cash to $61.6 million at February 28, 1999 from $64.6 million at May 31, 1998 resulted primarily from cash provided by operating activities of $39.5 million, issuance of common stock of $3.2 million in connection with employee compensation and benefit plans, $5.7 million of proceeds from the sale of fixed assets and $2.0 million generated from other, net investing activities, offset by capital expenditures of $37.9 million, $13.1 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 $12.3 million decrease in the Company's working capital to $211.5 million at February 28, 1999 from $223.8 million at May 31, 1998 resulted primarily from (in millions):
Net Income $ 17.5 Decrease in: Long-term restructuring, integration disposal and environmental (0.6) Long-term benefit liabilities (2.1) Deferred taxes and other (0.2) Net repurchase of common stock (9.9) Other changes in stockholders' equity (0.9) Increase in: Intangible and other assets (3.8) Long-term debt 1.9 Property, plant and equipment, net (14.2) Decrease in working capital $(12.3)
Earnings before interest, taxes, depreciation, amortization and other charges (credits) ("EBITDA") increased $5.4 million to $70.0 million in the first nine months of fiscal year 1999 from $64.6 million in the first nine months of fiscal year 1998. The increase in EBITDA reflects increased volume as a result of throughput improvements and improved production efficiency from the Company's Grafton facility as a result of recent equipment repairs and enhancements and reorganization of the 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. -19- 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES, Continued 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 $1.9 million during fiscal year 1999 and $1.6 million thereafter. In the first nine months of fiscal year 1999, spending related to the 1997 restructuring amounted to $1.2 million. The Company expects to spend $1.4 million in fiscal year 1999 and $15.1 million thereafter on non-capitalizable environmental activities. In the first nine months of fiscal year 1999, $0.7 million was expended for non-capitalizable environmental projects. The Company from time to time expends cash on capital expenditures for more cost-effective operations, environmental projects and joint development programs with customers. In the first nine months of fiscal year 1999, capital expenditures amounted to $37.9 million and are expected to be approximately $43.0 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 February 28, 1999, the total availability under the Receivables Financing Program was $55.3 million, there were no borrowings and letters of credit amounting to $9.7 million were outstanding. -20- 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES, Continued 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 February 28, 1999. Wyman-Gordon Limited had outstanding 1.1 million pounds sterling (approximately $1.7 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 ($61.6 million at February 28, 1999), 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 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 nine month periods ended February 28, 1999 and 1998. -21- 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) ACCOUNTING AND TAX MATTERS, 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. 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. 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:
DESCRIPTION STAGE OF ESTIMATED TIMETABLE OF APPROACH COMPLETION FOR COMPLETION Computer Systems: Assess systems for possible Year 2000 impact 100% Completed Modify or replace non-compliant systems 80% September 30, 1999 Test systems with system clocks set at current date 80% September 30, 1999 Test systems off-line with system clocks set at various Year 2000 related critical dates 80% September 30, 1999 Plant Equipment: Computer-dependent plant equipment assessment and compliance procedures performed 80% September 30, 1999
-22- 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) YEAR 2000, Continued 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 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. 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 80% complete and the Company anticipates completing the project by September 30, 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 $1.2 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 $2.0 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. -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 Nine Months Ended February 28, 1999
(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. On April 1, 1999, the Company filed a Form 8-K with the Commission to report the resignation of Edward J. Davis as the Company's Vice President, Chief Financial Officer and Treasurer. On April 9, 1999, the Company filed a Form 8-K with the Commission to report settlement proceedings associated with the previously reported industrial accident on December 22, 1996. -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: 4/13/99 By: /S/ WALLACE F. WHITNEY, JR Wallace F. Whitney, Jr. Vice President, General Counsel and Clerk Date: 4/13/99 By: /S/ DAVID J. SULZBACH David J. Sulzbach Vice President, Finance, Corporate Controller and Principal Accounting Officer -25- EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS MAY-31-1999 JUN-01-1998 FEB-28-1999 61,630 7 143,965 0 116,719 330,691 506,469 294,912 571,266 119,223 164,438 0 0 37,053 174,588 571,266 631,447 639,716 547,125 547,125 0 0 10,642 24,859 7,318 17,541 0 0 0 17,541 .48 .48
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