DSHW-1998-001903 - 0901a0688013a904

Stateof Utah A^ p-j r p«py
DEPARTMENT OF ENVIRONMENTAL QUALITY • ft-l itUf }
DIVISION OF SOLID AND HAZARDOUS WASTE <^f ^QJ,~ 7T
Micliacl O. Leavilt t 288 Nortii 1460 West
Governor . p.Q. Bcx M4880
Dianne R. Nicison, I'h D. .Salt Lnke City, Utah 84114-4880
Executive Dilccioi (ggi) 53S-6170
Dennis R. Downs (801) 5.18-67l.S Fax
(801) 5.-16-4414 T.D.D.
www.dcq..state.ut.us Web
Diicctof
April 19, 1999
Mr. Joe D. Thompson, Director
Environmental, Fire and Security
Thiokol Corporation
P.O. Box 707
Brigham City, UT 84302-0707
RE: Activated Carbon Vents On Accumulation Containers
EPA I.D. #UTD009081357
Dear Mr. Thompson:
The Division of Solid and Hazardous Waste (the Division) received your letter regarding ThiokoLs
proposal to treat two-part adhesives and polymer products (i.e., gel coat) that are currently disposed
of as hazardous wastes. This treatment would be done in the containers in which the waste materials
originally accumulate. Hazardous waste generators may treat hazardous waste in accumulation
containers, without an RCRA treatment permit, provided that the requirements that apply to the use,
management, and accumulation time of containers (40 CFR 262.34 and Part 265, Subpart 1) are met.
Based on the information provided in your letter, and the additional material submitted by FAX, the
two-part adhesive and polymer products include epoxy paint, which consists ofa resin artd activator
(polyamide), and Polycor gel coat. Thiokol has considered these materials to be hazardous waste
when disposed because they are ignitable before the polymerization process is complete, and the
mixed material has cured.
The Polycor gel coat is primarily composed of ignitable styrene monomer and would be treated by
mixing it with methyl ethyl ketone peroxide to initiate the polymerization or curing process. The
epoxy paint cures after mixing the epoxy resin with polyamide. The curing process for these
niaterials results in a hardened material that Thiokol has characterized as non-hazardous.
One requirement for the use and management of hazardous waste storage containers is that they must
be kept closed except when adding or removing waste (40 CFR 265.173), However, the
polymerization process generates a small amount of heat and pressure and therefore requires venting
from the container. In addition, organic vapors are released from organic components oflhe
materials (primarily xylene) before the mixtures have cured. In order to meet the container
Mr.'Joe D. Thompson
April 19, 1999
P
Page 2
requirements, allow venting for the containers while waste is treated, and contain organic vapor
emissions, Thiokol has proposed to equip the lid ofthe container with an activated carbon canister
vent.
It appears, based on the information provided, that the proposed treatment in an accumulation
container, as proposed, is appropriate under the applicable State of Utah Hazardous Waste
Management Rules. Compliance with all other regulations that apply to the management of these
materials, including Land Disposal Restrictions and Air Emission Standards is still required.
If you have any questions regarding this letter, please contact Jeff Vandel at 538-9413.
Sincerely,
)ennis R. Downs; Executive Secretary
Utah Solid and Hazardous Waste Control Board
DRD\JCV\ts
f:\...\jvandeI\\vp\thiokol\tnnink.399
file lo: Thiokol
EU ERNST &YOUNG LIP Suite 800
60 Esst South Temple
Salt Lake City, Utah 84111
Phone: [phone]
Fax: [phone]
Report of Independent Auditors
To the Stockholders and Board of Directors
Cordant Technologies Inc.
We have audited the accompanying consolidated balance sheets of Cordant Technologies
Inc. as of December 31, 1998 and 1997, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in the period
ended December 3L 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are fi-ee of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Cordant Technologies Inc. at December
31, 1998 and 1997, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 1998, in conformity with
generally accepted accoiinting principles.
Our audits were conducted for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The consolidating balance sheet appearing as
supplementary infonnation is presented for purposes of additional analysis and is not a
required part of the consolidated financial statements. Such information has been
subjected to the auditing procedures applied in our audits of the consolidated financial
statements and, in our opinion, is fairly stated in all material respects in relation to the
consolidated financial statements taken as a whole.
^>A/»>^ 't'lJouM^U?
February 8,1999
Ernst & Young LIP is a member of Ernst & Young International, Ltd.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
(in millions, except per share data) 1998 1997 1996
Net sales
Operating expenses:
Cost of sales
General and administrative
Research and development
Restructuring and impairment
$2,426.9
1,894.4
193.6
30.2
,070.1
861.3
90.3
14.8
966.4
103.7
35.3
7.0
(4.0)
(2.2)
$ 864.6
718.4
68.1
12.5
(2.2)
796.8
67.8
15.1
8.1
(3.6)
(.8)
Total operating expenses
Income from operations
Equity income of affiliates
Interest income
Interest expense
Other, net
2,118.2
308.7
.4
12.8
(28.3)
(4.2)
Income before income taxes, minority interest and
extraordinary item
Income taxes
Income before minority interest and extraordinary item
Minority interest
Income before extraordinary item
Extraordinary item - loss on early retirement of debt
Net income
289.4
107.6
181.8
(39.8)
142.0
$ 142.0
139.8
41.4
98.4
(1.8)
96.6
(7.1)
$ 89.5
86.6
25.9
60.7
60.7
$ 60.7
Income per share before extraordinary item:
Basic
Diluted
Net income per share:
Basic
Diluted
$ 3.89
$ 3.79
$ 3.89
$ 3.79
2.64
2.57
2.45
2.38
$ 1.67
$ 1.64
$ 1.67
$ 1.64
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Year Ended December 31
1998 1997 1996
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Restructuring and impairment
Extraordinary item
Minority interest
Depreciation
Amortization
Equity income
Deferred income taxes
Changes In operating assets and liabilities:
Receivables
Inventories
Accounts payable and accrued expenses
Income taxes
Other - net
$ 142.0 $ 89.5 $ 60.7
(2.2)
39.8
71.9
30.1
(.4)
.2
28.1
14.6
.3
19.6
7.0
7.1
1.8
33.8
12.5
(35.3)
(3.4)
25.2
(1.5)
5.1
(12.1)
(12.1)
32.8
11.2
(15.1)
(5.7)
53.1
20.8
5.9
4.5
(3.0)
Net cash provided by operating activities 353.2 110.6 163.0
INVESTING ACTIVITIES
Acquisitions, net of acquired cash
Purchases of property, plant and equipment
Proceeds from disposal of assets
(277.0)
(114.7)
4.7
(156.6)
(36.3)
1.7
(33.0)
1.0
Net cash used for investing activities (387.0) (191.2) (32.0)
FINANCING ACTIVITIES
Net change In short-term debt
Issuance of long-term debt
Repayment of long-term debt
Premiums paid on early retirement of debt
Purchase of common stock for treasury
Stock option transactions
Dividends paid
57.9
336.4
(337.9)
(14.4)
4.8
(14.6)
1.4
336.2
(213.5)
(13.7)
(7.9)
6.1
(14.1)
(98.1)
(.3)
(.3)
2.3
(12.5)
Net cash provided by (used for) financing activities 32.2 94.5 (108.9)
Foreign currency rate changes 1.3 (1.0)
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
(.3)
45.6
12.9
32.7
22.1
10.6
Cash and cash equivalents at end of penod $ 45.3 $ 45.6 $ 32.7
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(in millions)
December 31
1998 1997
ASSETS
Current Assets
Cash and cash equivalents
Receivables
Inventories
Deferred income taxes and prepaid expenses
Restricted Trust (a)
45.3 45.6
240.0
252.3
60.8
716.4
235.7
240.2
50.5
Total Current Assets 1,314.8 572.0
Property, Plant and Equipment
Land
Buildings and improvements
Machinery and equipment
36.9
311.2
768.6
1,116.7
(444.4)
30.0
295.3
602.0
927.3
(376.9)
Total Property, Plant and Equipment
Less allowances for depreciation
Net Property, Plant and Equipment 672.3 550.4
Other Assets
Costs in excess of net assets of businesses acquired, net
Restricted Trust (a)
Patents and other intangible assets, net
Other noncurrent assets
561.7
128.3
132.8
400.3
716.4
131.6
129.1
Total Other Assets 822.8 1,377.4
Total Assets $ 2,809.9 $2,499.8
(a) The Restricted Trust held a note receivable from Pechiney, S.A. and related letters of credit that
secured Pechiney, S.A.'s agreement to repay the Pechiney Notes. Pechiney S.A. (Howmet's
previous owner) paid the notes on January 4, 1999, and the Restricted Trust was terminated. (See
Note 6.)
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
in millions)
December 31
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt
Accounts payable
Accrued compensation
Other accrued expenses
Pechiney Notes (a)
80.1
139.8
81.6
202.1
716.4
$ 8.4
121.8
79.5
174.3
Total Current Liabilities 1.220.0 384.0
Noncurrent Liabilities
Accrued retiree benefits
Deferred income taxes
Accrued interest and other noncurrent liabilities
Long-term debt
Pechiney Notes (a)
169.0
52.3
234.2
324.5
163.9
44.8
213.3
325.9
716.4
Total Noncurrent Liabilities 780.0 1,464.3
Commitments and contingent liabilities
Minority interest
Stockholders' Equity
Common stock (par value $1.00 per share)
Authorized - 200 shares
Issued - 41.1 and 20.5 shares at December 31, 1998 and 1997
respectively, (includes treasury shares)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
142.0 101.0
41.1
47.4
658.8
(3.9)
20.5
46.0
552.0
(3.5
Less common stock In treasury, at cost
(4.6 and 2.2 shares at December 31, 1998 and 1997 respectively)
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
743.4
(75.5)
667.9
$2,809.9
615.0
(64.5)
550.5
$2,499.8
(a) The Restricted Trust held a note receivable from Pechiney, S.A. and related letters of credit that
secured Pechiney, S.A.'s agreement to repay the Pechiney Notes. Pechiney S.A. (Howmet's
previous owner) paid the Notes on January 4, 1999, and the Restricted Trust was terminated (See
Note 6).
See notes to consolidated financial statements.
CONSOUDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions)
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income
Total
Stockholders
Equity
BALANCE, DECEMBER 31, 1995 $20.5 $44.3 $428.4 $(63.0) $430.2
Comprehensive income
Net income
Total comprehensive income
Dividends paid
Treasury stock purchases
Stock options exercised and related
income tax benefits
60.7
(12.5)
(.3)
2.3
60.7
60.7
(12.5)
(.3)
2.3
BALANCE, DECEMBER 31, 1996 20.5 44.3 476.6 (61.0) 480.4
Comprehensive income
Net income
Other comprehensive income
Cumulative translation adjustment
Total comprehensive income
Dividends paid
Treasury stock purchases
Stock options exercised and related
89.5
(14.1]
(7.9)
Comprehensive income
Net income
Other comprehensive income
Minimum pension liability
Cumulative translation adjustment
Total comprehensive income
Dividends paid
Stock split 20.6
Treasury stock purchases
Stock options exercised and related
income tax benefits
142.0
(14.6)
(20.6)
1.4
(14.4)
3.4
$(3.5)
89.5
(3.5)
86.0
(14.1)
(7.9)
income tax benefits
BALANCE, DECEMBER 31, 1997 20.5
1.7
46.0 552.0
4.4
(64.5) (3.5)
6.1
550.5
142.0
(3.1)
2.7
(3.1)
2.7
141.6
(14.6)
(14.4)
4.8
BALANCE, DECEMBER 31, 1998 $41.1 $47.4 $658.8 $(75.5) $(3.9) $667.9
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Name Change: On May 5, 1998, Thiokol Corporation changed its corporate name to Cordant
Technologies Inc. (the Company or Cordant). Two of the Company's three business segments have
retained their corporate names (Huck International, Inc., and Howmet International Inc.) and are operating
as subsidiaries of the Company. The Propulsion Group, now called Thiokol Propulsion, operates as a
division of the Company.
Fiscal Year Change: The Company's Board of Directors amended the Company bylaws changing the
fiscal year-end from June 30 to a calendar year-end. All historical information in this report has been
prepared to conform to a calendar year-end presentation. The Company made the change to coordinate
Cordant and Howmet International Inc. (Howmet) reporting periods and to reduce the confusion that
accompanies a non-calendar year-end. Howmet reports separately on a calendar year basis.
Basis of Consolidation: The consolidated financial statements include the accounts of Cordant
Technologies Inc. and its subsidiaries. The Company increased its ownership in Howmet from 49 percent
to 62 percent on December 2, 1997. Accordingly, beginning with December 1997, Howmet's earnings,
cash flows and its balance sheet have been consolidated with the Company's. Minority interest in income
and equity are also reported for the 38 percent of Howmet the Company does not own. Prior to
December 2, 1997, Howmet's results were accounted for under the equity method. All significant
intercompany accounts and transactions have been eliminated from the consolidated financial
statements.
Use of Estimates: The consolidated financial statements are prepared in conformity with generally
accepted accounting principles which requires management to make estimates and assumptions.
Estimates of contract costs and revenues, valuation accounts and reserves are utilized in the earnings
recognition process that affects reported amounts in the financial statements and accompanying notes.
Actual results may differ from those estimates.
Revenue Recognition Under Long-Term Contracts: Propulsion Systems sales encompass products and
services performed principally under contracts and subcontracts with various United States Government
(government) agencies and aerospace prime contractors. Sales under cost-type contracts are
recognized as costs are incurred and include a portion of total estimated earnings to be realized in the
ratio that costs incurred relate to estimated total costs. Sales under fixed-price-type contracts are
recognized when deliveries are made or upon completion of specified tasks. Cost or performance
incentives are incorporated into certain contracts and are recognized when awards are earned, or when
realization is reasonably assured and amounts can be estimated. The Company participates in teaming
arrangements and records its share of sales and profits related to such ventures on the percentage of
completion method. Adjustments in estimates, which can affect both revenues and earnings, are made
in the period in which the information necessary to make the adjustment becomes available. Provisions
for estimated losses on contracts are recorded when identified.
Cash and Cash Equivalents: Cash and cash equivalents represent cash and short-term investments that
are highly liquid maturing within three months.
Inventories: Inventories are stated at the lower of cost or market. Inventories for the Investment
Castings segment are determined by both the first-in, first-out (FIFO) and last-in, first-out (LIFO)
method. Inventories for the Fastening Systems segment are determined by the FIFO method.
Propulsion Systems segment inventories include estimated recoverable costs related to long-term fixed
price contracts, including direct production costs and allocable indirect costs, less related progress
payments received. In accordance with industry practice, such costs include amounts that are not
expected to be realized within one year. The government may acquire title to, or a security interest in,
certain inventories as a result of progress payments made on contracts and programs.
Property, Plant and Equipment: Property, plant and equipment is carried at cost and depreciated over
the assets' estimated useful lives, using either the straight-line or accelerated methods. Building and
improvements useful lives vary between 10 and 40 years and other assets lives vary between 3 and 20
years.
intangibles: Costs in excess of the net assets acquired (goodwill), patents, and other intangible assets
are being amortized on a straight-line basis over periods between 10 and 40 years. Accumulated
amortization amounted to $74 and $43.9 million at December 31, 1998 and 1997, respectively.
Impairment of Long-Lived Assets: The Company records impairment losses on goodwill and on long-
lived assets used in operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those assets are less than net
book value. The Company also evaluates the amortization periods of assets, including goodwill and
other intangible assets, to determine whether events or circumstances warrant revised estimates of
useful lives.
Contingent Matters: The Company accrues costs for contingent matters when it is probable that a
liability has been incurred and the amount can be reasonably determined. At the time a liability is
recognized, a receivable is recorded for the estimated future recovery from third parties, insurance
carriers, or from the government. Costs allocated to commercial business or not otherwise recoverable
from third parties are expensed when the liability is recorded. Except for current amounts receivable and
payable, contingent amounts are included in "other noncurrent assets" and in "accrued interest and
other noncurrent liabilities".
Foreign Currency Translation: The Company's international business units generally conduct their
business utilizing their local currency as the functional currency. Assets and liabilities of the Company's
foreign subsidiaries are translated at year-end exchange rates. Revenues and expenses are translated
into U.S. dollars at average rates of exchange prevailing during the period. Unrealized currency
translation adjustments are deferred and included in the equity section of the balance sheets, whereas
transaction gains and losses are recognized currently in the statements of income.
Derivative Financial Instruments: Derivative financial instruments are utilized by the Company to
reduce foreign currency risks in accordance with Company policy approved by the Board of Directors.
The Company does not hold or issue derivative financial instruments for trading purposes. The
Company enters into foreign exchange contracts to minimize fluctuations in the value of payments due
international vendors and the value of foreign currency denominated receipts. Forward foreign
exchange contracts obligate the Company to exchange predetermined amounts of specified foreign
currencies at specified exchange rates on specified dates or to make an equivalent U.S. dollar payment
equal to the value of such exchange. The Company enters into economic hedges used to mitigate
fluctuations of anticipated foreign currency commitments. The Company also enters into forward
foreign exchange contracts directly related to a particular asset, liability or transaction for which a
commitment or anticipated commitment is in place.
In accordance with hedge accounting, gains and losses for specifically identified assets, liabilities and
firmly committed transactions are recognized in income and offset the foreign exchange gains and
losses when the underlying transaction is settled. Unrealized changes in fair value of contracts no
longer effective as hedges are recognized in income at such time and marked to market. For economic
hedges utilized for anticipated commitments, forward foreign exchange contract market gains or losses
are reflected in the income statement. The impact on the financial position and results of operations
from likely changes in foreign exchange rates is mitigated by minimizing risk through hedging
transactions related to commitments.
Income Taxes: The provision for income taxes includes, in the current period, the cumulative effect of
any changes in tax rates from those used previously in determining deferred tax assets and liabilities.
Deferred taxes are provided to recognize the income tax effects of amounts which are included in
different reporting periods for financial statement and tax purposes.
New Accounting Standards: In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments and for hedging activities.
This statement will require the Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be
offset against the change in fair value of the hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings.
The Company does not believe that SFAS No. 133 will have a significant effect on the earnings and
financial position of the Company. This statement is effective for fiscal years beginning after June 15,
1999. The Company will adopt the new statement beginning on January 1, 2000.
Reclassification: Reclassifications were made to the 1997 and 1996 financial statements to conform to
the 1998 calendar year presentation.
NOTE 2. RECEIVABLES
The components of receivables are as follows:
December 31
(in millions) 1998 1997
Trade receivables:
Trade accounts receivable $159.0 $147.2
Retained receivables 32.0 20.2
Allowance for doubtful accounts (7.8) (6.3)
Total trade receivables 183.2 161.1
Receivables under U.S. Government contracts and subcontracts 56.8 74.6
$240.0 $235.7
Receivables under U.S. Government contracts and subcontracts contain some unbilled costs and
accrued profits that consist primarily of revenues recognized on contracts that have not been billed.
Such amounts are billed based on contract terms and delivery schedules. According to government
contracting industry.standards, some receivables may not be billed within a year. Cost and incentive-
type contracts and subcontracts are subject to government audit and review. It is anticipated that
adjustments, if any, will not have a material effect on the Company's results of operations or financial
condition.
Cost management award fees totaling $121.9 million at December 31, 1998, have been recognized on
the current Space Shuttle Reusable Solid Rocket Motor (RSRM) contract. Realization of such fees is
reasonably assured based on actual and anticipated contract cost performance. However, all cost
management award fees remain at risk until contract completion and final NASA review. The current
10
RSRM contract is expected to be completed in 2001. Unanticipated program problems which erode
cost management performance could cause some or all of the recognized cost management award fees
to be reversed and would be offset against receivable amounts from the government or be directly
reimbursed. Circumstances which could erode cost management performance include, but are not
limited to, failure of a Company supplied component, performance problems with the RSRM leading to a
major redesign and/or requalification effort, manufacturing problems including supplier problems which
result in RSRM production interruptions or delays, and major safety incidents.
Howmet has an agreement to sell, on a revolving basis, an undivided interest in a defined pool of
accounts receivable. The defined pool of outstanding accounts receivable at December 31, 1998 and
1997, amounted to $87 and $75.2 million, respectively. Howmet has received $55 million from the
sale of such eligible receivables to a master trust and has deducted this amount from accounts
receivable in the December 31, 1998 and 1997 consolidated balance sheets. Losses on the sale of
receivables were $3.8 million for both years ended December 31, 1998 and 1997. These losses are
included in the line captioned "Other, net" in the statements of income. At December 31, 1998 and
1997, the $32 and $20.2 million difference between the total eligible pool and the $55 million sold,
represent retainage on the sale in the event the receivables are not fully collected. Howmet has
retained the responsibility for servicing and collecting the accounts receivable sold or held in the master
trust. Any incremental additional costs related to such servicing and collection efforts are not
significant.
NOTE 3. INVENTORIES
Inventories are summarized as follows:
(in millions)
Raw materials and work-in-process
Finished goods
Inventoried costs related to U.S. Government and other long-term
contracts
Progress payments received on long-term contracts
LIFO valuation adjustment
$252.3 $240.2
At December 31, 1998 and 1997, inventories include $111.8 and $122.7 million, respectively, that
are valued using LIFO. The LIFO valuation adjustment approximates the difference between the LIFO
carrying value and current replacement cost.
NOTE 4. HOWMET INTERNATIONAL INC. PURCHASE
On December 13, 1995, the Company and The Carlyle Group (Carlyie), a private merchant bank,
formed a jointly owned company, Howmet International Inc., to acquire Howmet Corporation and the
Cercast Group of companies, referred to collectively in the financial statements as Howmet. Carlyle
owned 51 percent and Cordant owned 49 percent of the Howmet common stock. The Company's
initial equity investment in Howmet consisted of $96 million in Howmet voting common stock, and $50
million in Howmet 9 percent paid-in-kind, non-voting, preferred stock. As part of this purchase, Howmet
received indemnifications from the seller for liabilities over amounts reserved relating to environmental
and certain other obligations existing at the purchase date. The Company accounted for its 49 percent
minority voting common stock investment in Howmet using the equity method.
11
December 31
1998
$161.8
87.6
28.8
(22.6)
(3.3)
1997
$168.2
72.6
27.3
(24.5)
(3.4)
On December 2, 1997, the Company increased its ownership in Howmet to 62 percent by acquiring an
additional 13 percent of Howmet common stock from Carlyle for approximately $183.8 million.
Simultaneously with this transaction, Carlyle sold 15.35 million shares of Howmet common stock in an
Initial Public Offering. After the transactions, the Company, Carlyle, and the public owned
approximately 62, 22.65 and 15.35 percent, respectively, of Howmet common stock. The Company
held a two-year option beginning in December 1999 to acquire all of Carlyle's shares at market price.
The Company purchased the Carlyle shares on February 8, 1999 (See Note 23). The Company or its
affiliates have agreed not to acquire publicly held Howmet common shares that would reduce public
ownership below 14 percent, unless such purchase is a tender offer to acquire all outstanding public
shares.
Beginning in December 1997, Howmet's financial statements have been consolidated with the
Company's. Operating results for 1997 include eleven months of Howmet's earnings reported under
the equity method and one month of Howmet earnings reported on a consolidated basis. Operating
results for 1998 include twelve months of Howmet's earnings on a consolidated basis. Additional
detailed financial information on Howmet is available in Howmet's 1999 Notice of Annual Meeting and
Proxy Statement incorporated by reference in Howmet's Annual Report on Form 10-K for Howmet's
fiscal year ended December 31, 1998.
The following pro forma information for the year ended December 1 997 is not necessarily indicative of
the results which would have resulted had the acquisition of additional shares in December 1997
occurred at the beginning of 1997 nor is it necessarily indicative of future results.
(In millions, except per share data)
Net sales $2,217.7
Income before
Extraordinary item $ 89.4
Income per diluted share before
Extraordinary item $ 2.37
Net income $ 82.3
Net income per diluted share $ 2.18
NOTE 5. JACOBSON MANUFACTURING PURCHASE
On June 11, 1998, the Company completed the purchase of all the common stock of Jacobson
Manufacturing Company Inc. (Jacobson) for $273.6 million and assumed $7.3 million in liabilities.
Jacobson was merged into Huck International, Inc., and is operated as part of the Fastening Systems
segment. Jacobson manufactures high-quality, custom-designed metal parts and fasteners and
precision-engineered plastic products. The acquisition of Jacobson has been accounted for under the
purchase accounting method. The goodwill associated with the purchase is being amortized over 40
years using the straight-line method. Sales and operating income for Jacobson from June 11 through
December 31 was approximately $78 and $10 million, respectively, and is included in the consolidated
results of the Company with the Fastening Systems segment.
12
NOTE 6. RESTRICTED TRUST AND RELATED PECHINEY NOTES PAYABLE
In 1988, Pechiney Corporation, which was a wholly-owned subsidiary of Pechiney, S.A., issued
indebtedness maturing in 1999 (Pechiney Notes) to third parties in connection with the purchase of
American National Can Company. As a result of the acquisition of Howmet by the Company and
Carlyle, Pechiney Corporation (now named Howmet Holdings Corporation or Holdings), became a
wholly-owned subsidiary of Howmet. The Pechiney Notes remained at Holdings, but Pechiney, S.A.,
which retained American National Can Company, agreed with Howmet to be responsible for all
payments due on or in connection with the Pechiney Notes. Accordingly, Pechiney, S.A. issued its own
note to Holdings in an amount sufficient to satisfy all obligations under the Pechiney Notes. The
Pechiney, S.A. note was deposited in a trust (Restricted Trust) for the benefit of Holdings. Interest
income from the Restricted Trust for the aforementioned period was equal to the interest expense, and
is netted in the financial statements.
Pechiney S.A. paid the Notes in full on January 4, 1999. No Howmet or Cordant funds were used in
the payment of the Notes. As a result, the Restricted Trust has been terminated and like the Pechiney
Notes, subsequent to December 31, 1998, will not be included on the Company's balance sheet.
NOTE 7. FINANCING ARRANGEMENTS
Long term debt is summarized as follows:
(in millions)
Cordant Technologies 6.625% senior notes, due March 1, 2008
Cordant Technologies senior revolving credit facility
Howmet senior revolving credit facility
Other
Less current portion
$324.5 $325.9
The above table excludes the Pechiney Notes, (See Note 6). The Company, excluding Howmet, has
credit commitments from a group of banks aggregating $200 million under revolving credit facilities, of
which $90 million was available at December 31, 1998. The funds available under the credit facilities
may be used for any corporate purpose (See Note 23) and are available through May 1999 ($50 million)
and May 2001 ($150 million). The interest rate on the facilities is based on LIBOR plus a spread, and
was 5.9 and 6.1 percent at December 31, 1998 and 1997, respectively. The credit agreements and
senior notes contain covenants restricting, among other things, the Company's ability to incur funded
debt, liens, sale and leaseback transactions, and the sale of assets. The Company, excluding Howmet,
at December 31, 1998, had $11.1 million in Letters of Credit outstanding.
Howmet has credit commitments from a group of banks aggregating $300 million under a revolving
credit agreement, of which $232.4 million was available at December 31, 1998. The funds available
under the credit facility may be used for any corporate purpose and are available through December
2002. The interest rate on the facility is based on LIBOR plus a spread, and was 5.8 and 6.2 percent
at December 31, 1998 and 1997, respectively. Terms of the revolving credit facility require Howmet
to meet certain interest coverage and leverage ratios and maintain certain minimum net worth amounts.
In addition, there are restrictions that limit indebtedness, the sale of assets, and payments for
acquisitions or investments. At December 31, 1998, Howmet had $9.6 million in Letters of Credit
outstanding.
13
December 31
1998
$150.0
110.0
60.0
13.1
333.1
8.6
1997
$108.0
198.0
20.1
326.1
.2
Cordant does not have access to Howmet cash balances except through Howmet declaring a cash
dividend to its shareholders, which availability may be restricted under the terms of its revolving credit
facility. Howmet does not currently intend to pay dividends.
Howmet also has an agreement to sell, on a revolving basis, an undivided interest in a defined pool of
accounts receivable (See Note 2).
Principal maturities for the succeeding five years ended December 31, are as follows: $8.6 million in
1999, $0 in 2000, $110 million in 2001, $60 million in 2002, and $3 million in 2003. The current
portion of long-term debt is classified in "short-term debt" on the balance sheet.
Short-term debt consisted of borrowings with various domestic and foreign banks. The weighted
average interest rate on short-term debt outstanding was 4.42 percent and 3.38 percent at December
31, 1998 and 1997, respectively. The Company paid interest of $22, $7.2, and $3.8 million in 1998,
1997 and 1996 respectively.
NOTE 8. INCOME TAXES
The provision for taxes on income before extraordinary item follows:
(in millions) 1998 1997 1996
Current Taxes:
Federal
Foreign
State
Deferred Taxes:
Federal
Foreign
State
IA (3,4) {BJl
$107.6 $41.4 $ 25.9
A reconciliation of the United States statutory rate to the effective income tax rate follows:
1998 1997 1996
85.7
12.6
7.9
06.2
(.5)
2.7
(.8)
$ 37.2
1.5
6.1
44.8
(1.9)
(.9)
(.6)
$ 26.2
1.3
4.1
31.6
(4.2)
(1.0)
(.5)
Statutory rate
Effect of:
State taxes, net of federal benefit
R&D and other credits
Tax refund
European restructuring
Dividend received deduction
Unconsolidated subsidiary for tax purposes
Other
Effective rate
35.0%
2.3
(1.9)
(1.1)
(.8)
1.7
2.0
37.2%
35.0%
2.7
(1.7)
(7.1)
.7
29.6%
35.0%
2.7
(.8)
(3.8)
(4.9)
1.7
29.9%
14
Domestic and foreign components of pre-tax income before minority interest and extraordinary item are
as follows:
(in millions)
United States
Foreign
1998
$249.4
40.0
$289.4
1997
$135.1
4.7
$139.8
1996
$ 89.9
(3.3)
$ 86.6
Deferred income taxes arise from differences in the timing of income, expense, and tax credit
recognition for financial reporting and income tax purposes. Deferred income taxes are not provided on
undistributed earnings of international subsidiaries since the earnings are considered to be indefinitely
reinvested. At December 31, 1998, these undistributed earnings were approximately $32 million.
Upon distribution of such earnings in the form of dividends or otherwise, the Company would be subject
to both U.S. income taxes and withholding taxes payable to the various foreign countries. After taking
into account available foreign tax credits the amount of such taxes are immaterial.
The components of deferred tax balances are as follows:
(in millions)
December 31
1998
$ 73.7
4.0
16.4
79.2
38.9
21.0
5.8
1997
$ 69.1
7.9
38.2
77.8
34.5
17.2
8.9
Provision for estimated expenses
Tax credits
State and foreign net operating losses
Accrued retiree benefits other than pensions
Vacation and deferred compensation accruals
Pension liabilities
Other
Gross deferred tax assets
Valuation allowance
239.0
(12.4)
253.6
(31.1)
Total deferred tax assets 226.6 222.5
LIFO inventory
Recognition of income on contracts reported on different
methods for tax purposes than for financial reporting
Property, plant & equipment
Pension benefits
Patents and technology
Unconsolidated subsidiary for tax purposes
Other
(25.6) (27.0)
(56.3)
(95.6)
(19.2)
(19.3)
(7.1)
(8.0)
(52.1)
(95.1)
(23.5)
(21.5)
(1.9)
(3.4)
Total deferred tax liability (231.1) (224.5)
Net deferred tax liability $ (4.5) $ (2.0)
Balance sheet classification:
Current assets
Noncurrent liabilities
$ 47.8
(52.3)
$ 42.8
(44.8)
Net deferred tax liabilities $ (4.5) $ (2.0)
15
At December 31, 1998 and 1997, Howmet had foreign tax benefits of $2.5 million and $6.7 million,
respectively, which will be realized over the next two years. At December 31, 1998 and 1997,
Howmet had $30 million and $131 million, respectively, of state net operating loss carry-forwards. All
of the 1998 state carry-forward amount will expire in 1999. At December 31, 1998 and 1997, the
Company and Howmet combined had approximately $27 million and $26 million, respectively, of
foreign net operating loss carry-forwards, which can only be used to offset foreign taxable income. The
majority of these carry-forwards have no expiration date. Utilization by Howmet of any state net
operating loss and $10.3 million of foreign net operating loss carry-forwards will result in an adjustment
to goodwill.
The valuation allowance at December 31, 1998 and 1997 is equal to the deferred tax asset (net of
liabilities) associated with state and foreign net operating loss carry-forwards. The primary decrease in
the valuation allowance from 1997 to 1998 was due to the expiration of state net operating losses. No
other valuation allowances are provided because management believes future operations will generate
sufficient taxable income to realize all other deferred tax assets.
Total tax payments were $89.1, $54.9, and $23.5 million during 1998, 1997, and 1996, respectively.
During 1998, prior year adjustments, including the completion of an audit of a partnership in which the
Company participates, resulted in tax refunds of $3.2 million, which were applied to reduce 1998
income tax expense. In addition, $4.8 million of interest income related to these adjustments was
recognized.
Tax refunds of $.7 million and $2.5 million were received in 1996 and 1997, respectively. Related
interest refunds of $18.1 million in 1996 and $2.3 million in 1997 were also received. Of those
amounts, $3 million was applied to reduce 1996 income tax expense, and interest income of $7 and
$1.7 million was recognized in 1996 and 1997, respectively. The remaining $11.9 million was used to
increase liabilities for deferred taxes and related interest for future tax payments.
During 1998, the Internal Revenue Service completed its audit of the Howmet federal income tax return
for the year ended December 31, 1995, with no material findings.
NOTE 9. STOCK SPLIT AND CHANGES IN COMMON STOCK SHARES
On January 22, 1 998, the Company's Board of Directors declared a two-for-one stock split in the form
of a stock dividend payable March 13, 1998, for each stockholder of record on February 27, 1998. A
regular quarterly dividend of $.10 per common share, reflecting the split, was also declared payable
March 13, 1998, for each stockholder of record on February 27, 1998. The stock split affected
stockholders' equity in the current year due to reclassifying the par value amount of the common shares
issued from retained earnings to common stock. In addition, all references in the financial statements
to number of shares, per share amounts, stock option data, and market prices of the Company's
common stock have been restated. The following table summarizes common stock activity:
16
Common Treasury
(in millions of shares)
BALANCE, DECEMBER 31, 1995
Stock option exercise and related tax benefits
BALANCE, DECEMBER 31, 1996
Stock option exercise and related tax benefits
Purchase of common stock for treasury
BALANCE, DECEMBER 31, 1997
Stock option exercise and related tax benefits
Stock split (dividend)
Purchase of common stock for treasury
BALANCE, DECEMBER 31, 1998
Stock
20.5
20.5
20.5
20.6
41.1
Stock
(2.4)
.1
(2.3)
.2
(.1)
(2.2)
.2
(2.2)
(.4)
(4.6)
17
NOTE 10. EARNINGS PER SHARE
The Company reports earnings per share in accordance with FASB No. 128, "Earnings per Share". The
following table sets forth the computation of basic and diluted earnings per share:
Year Ended December 31
(In millions, except per share data) 1998 1997 1996
Numerator
Income before minority interest and
extraordinary item
Minority interest
$181.8
(39.8)
$ 98.4
(1.8)
$ 60.7
Numerator for basic and diluted
earnings per share $142.0 $ 96.6 $ 60.7
Denominator
Denominator for basic earnings per
share - weighted-average shares 36.5 36.6 36.4
Effect of dilutive securities
Employee stock options 1.0 1.1
Denominator for diluted earnings per
share - weighted-average shares
and assumed conversions 37.5 37.7 37.1
Income per share before extraordinary item:
Basic
Diluted
Per share effect of extraordinary item:
Basic
Diluted
$ 3.89
$ 3.79
$ 2.64
$ 2.57
$ (.19)
$ (.19)
$ 1.67
$ 1.64
NOTE 11. EXTRAORDINARY ITEM
During December 1997, Howmet refinanced the majority of its debt to take advantage of favorable
interest rates and to reduce restrictive covenants. As a result of the refinancing, Howmet incurred pre-
tax charges of $20.2 million, including a $6.5 million non-cash charge for the write-off of unamortized
debt issuance costs. The income tax benefit associated with the debt refinancing was $8.5 million.
The extraordinary charge shown on the consolidated statements of income has been reduced by $4.6
million related to minority interest. Howmet repaid $146 million of debt at a 10 percent fixed interest
rate and refinanced $198 million of debt under a new revolving bank facility at a substantially lower
variable rate.
18
NOTE 12. RESTRUCTURING AND IMPAIRMENT
The Company's Propulsion and Fastening Systems restructuring programs were completed in the fourth
quarter of 1996. The Propulsion Systems restructuring plan, announced in the first quarter of 1995,
included domestic pre-tax charges of $61.4 million. The Fastening System restructuring plan
announced in the fourth quarter of 1995 included foreign pre-tax charges of $5.9 million. During the
fourth quarter of 1996, the restructuring was substantially completed and excess reserves from both
programs were closed and credited to income. The Propulsion and the Fastening Systems segments
recognized $1.3 million and $.9 million in pre-tax income, respectively, in 1996.
NOTE 13. PREFERRED STOCK PURCHASE RIGHTS
On May 22, 1997, the Board of Directors adopted a new stockholder rights plan and redeemed the
stockholders' rights existing under the old plan. Under the new plan, the Company declared a dividend
distribution of one Preferred Share Purchase Right for each outstanding common share. Each Right
entitles its holder to buy one one-hundredth of a share of a new series of the Company's preferred
stock at an exercise price of $120. The Rights will only become exercisable if a person or group
acquires or makes an offer to acquire 1 5 percent or more of the Company's common stock. If any
person or group acquires 15 percent or more of the Company's common stock, each Right will entitle
the holder (other than such acquirer) to purchase common stock of the Company having a market value
of twice the exercise price of the Right. If the Company is acquired in a merger or other business
combination, after a person has acquired 15 percent or more of the Company's common stock, each
Right will entitle the holder to purchase common stock of the acquiring company having a market value
of twice the exercise price of the Right. The Rights may be redeemed by the Company at the price of
$.005 per Right prior to the acquisition of 15 percent or more of the Company's common stock. The
Rights expire on May 22, 2007.
19
NOTE 14. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company has noncontributory-defined pension plans covering certain employees. The Company
also provides certain nonvested health care and life insurance benefits to most retirees and eligible
dependents (other benefits). The Company's pension and other benefit plans are summarized as
follows:
Pension Benefits Other Benefits
(in millions)
Change in projected benefit obligations:
Beginning projected benefit obligations
Service cost
Interest cost
Amendments
Actuarial losses, net
Benefits paid
Ending projected benefit obligations
Change in plan assets:
Beginning fair value of plan assets
Actual return on plan assets
Employer contributions
Benefits paid
Ending fair value of plan assets
1998
$(714.6)
(25.8)
(53.4)
(11.6)
(88.4)
48.2
$(845.6)
$ 837.6
47.3
17.7
(48.2)
$ 854.4
1997
$(645.3)
(23.1)
(50.5)
(17.4)
(32.9)
54.6
$(714.6)
$ 748.2
118.3
25.7
(54.6)
$ 837.6
1998
$(249.5)
(6.3)
(17.7)
(14.4)
18.3
$(269.6)
$ 21.5
1.9
19.2
(18.3)
$ 24.3
1997
$(211.0)
(6.4)
(16.5)
(4.4)
(27.8)
16.6
$(249.5)
$ 16.4
2.4
19.3
(16.6)
$ 21.5
Reconciliation to balance sheet amounts:
Fair value of plan assets (less than)
exceeds projected benefit obligations
Unrecognized net loss (gain)
Unrecognized prior service (gain) cost
Unrecognized net transition obligation
8.8
77.4
(15.3)
(12.2)
123.0
(26.6)
(28.4)
(15.3)
$(245.3)
66.3
4.0
$(228.0)
53.6
4.5
Net prepaid (accrual) recognized $ 58.7 $ 52.7 $(175.0) $(169.9)
Amounts recognized in the balance sheets:
Prepaid benefit costs $ 109.9
Accrued benefit liabilities (52.4)
Additional minimum liability (12.5)
Intangible asset 8.5
Accumulated other comprehensive income 5.2
$ 102.4
(49.7)
$(175.0) $(169.9)
Net prepaid (accrual) recognized $ 58.7 $ 52.7 $(175.0) $(169.9)
Assets of the Company-sponsored plans are invested primarily in equities and bonds. Certain pension
plans contain restrictions on using excess pension plan assets in the event of a change in control of the
Company.
Pension benefit payments were higher in 1997 due to a voluntary program offering lump sum payments
to terminated employees who had a present value benefit in the plan of less than $1 5,000.
Included in the aggregated data in the above tables are amounts applicable to the Company's pension
plans with accumulated and projected benefit obligations in excess of plan assets. Amounts related to
such plans are as follows:
20
(in millions) 1998 1997
projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
$(149.5)
(139.1)
$ 105.4
$ (47.5)
(39.5)
$ 20.2
Assumptions used in determining net pension cost for all defined benefit pension plans were as follows:
1998 1997 1996
Discount rate
Average rate of increase in compensation
Expected long-term rate of return on assets
6.75%
4.75
9.0
7.5%
4.90
9.0
7.5%
4.90
9.0
Assumptions to measure the accumulated post-retirement obligation and cost for all plans were as
follows:
1998 1997 1996
Discount rate
Before age 65 health care cost trend rate decreasing
to 6% by 2001
Average after age 65 health care cost trend rate
Expected long-term rate of return on assets
6.75% 7.5% 7.5%
9.0
6.8
8.0
10.0
7.2
8.0
11.0
8.0
8.0
The health care cost trend rate to be used in 1999 for before-age-65 benefits is 8 percent, while the
after-age-65 benefits rate remains at 6 percent.
A one-percentage-point change in assumed health care cost trend rates would have the following
effects:
1 percentage 1 percentage
(in millions) point increase point decrease
Effect on total of service and interest
cost components
Effect on postretirement benefit obligation
$ 1.1
$15.0
$ (1.1)
$(13.2)
The annual cost for all Company-sponsored defined benefit pension and other postretirement benefit
plans includes the following components:
(in millions)
Pension Benefits
1998
$ 25.8
53.4
(65.5)
2.7
(1.6)
(3.2)
1997
$ 23.1
50.5
(60.5)
(.7)
2.0
(2.5)
(3.2)
1996
$ 12.7
41.1
(48.9)
(2.6)
(.1)
.5
Other Benefits
1998
$ 6.3
17.7
(1.7)
3.2
.6
1997
$ 6.4
16.5
(1.4)
2.5
.1
.3
$
1996
2.6
8.2
(1.3)
1.5
Components of net periodic benefit cost:
Service cost
Interest cost
Expected return on plan assets
Settlement gain
Amortization of:
Unrecognized net loss (gain)
Unrecognized prior service (gain) cost
Unrecognized net (asset) obligation
Net periodic benefit cost $ 11.6 $ 8.7 $ 2.7 $26.1 $ 24.4 $ 11.0
21
Pension costs charged to and recovered through government contracts approximate amounts
contributed to pension plans. Pension costs for financial statement purposes are calculated in
conformity with SFAS No. 87, "Employers' Accounting for Pensions." Historically, the annual amount
of pension cost recovered through government contracts and included in sales has exceeded the amount
of pension cost included in the financial statements. As a result, the Company has deferred $60.3
million and $51.6 million of revenues as of December 31, 1998 and 1997, respectively, to provide a
better matching of revenues and expenses. This revenue will be recognized when the financial
statement pension cost exceeds amounts charged to contract pension cost. The $60.3 million of
deferred revenue is netted against the pension asset in "Other noncurrent assets" in the balance sheet.
The Company sponsors certain supplemental plan arrangements to provide retirement benefits to
specified groups of participants. Contributions are included in a restricted trust which is subject to the
Company's creditors.
The Company has matching and nonmatching 401 (k) savings plans for eligible employees. Company
contributions to the matching savings plans were $13.1, $6.5, and $6.2 million in 1998, 1997, and
1996, respectively, and are based on a limited percentage of participant contributions. The increase in
contributions from 1998 to 1997 was attributable to the addition of Howmet's contributions for an
entire year.
NOTE 15. CONTINGENT MATTERS
Starting in late 1998 Howmet discovered certain product testing and specification non-compliance
issues at two of its Cercast aluminum casting operations. Howmet notified customers, is actively
cooperating with them and government agencies in the investigation of these matters and is
implementing remedial action. Data collection and analysis must be completed before a definitive
estimate of the cost to resolve these matters can be completed. Customers have asserted no formal
claims, and Howmet knows of no in-service problems associated with these issues. Based on
preliminary evaluation, however, Howmet has recorded an estimated loss of $4 million in its
consolidated statement of income for the year ended December 31, 1998. Based on currently known
facts, Howmet believes that additional costs beyond $4 million, if any, would not have a material
adverse effect on Howmet's financial position, cash flow, or annual operating results. However,
additional cost when and if accrued may have a material adverse impact on the quarter in which it may
be accrued.
The Company is also currently involved in a number of lawsuits and other contingencies which are not
expected individually or in the aggregate to have a material adverse effect upon the Company's financial
position. However, depending on the amount and timing of an unfavorable resolution of these
contingencies, the Company's future results of operations may be materially affected in a particular
quarter.
22
NOTE 16. ENVIRONMENTAL MATTERS
The Company's Thiokol Propulsion division is involved with two Environmental Protection Agency (EPA)
superfund sites designated under the Comprehensive Environmental Response, Compensation and
Liability Act in Morris County, New Jersey. These sites were operated about thirty years ago by the
Company for government contract work. The Company has not incurred any significant costs relating
to these environmental sites. The Company has signed a consent decree with the EPA on the
Rockaway Borough Well Field site and with the state of New Jersey on the Rockaway Township Well
Field site. At the Rockaway Borough site, the Company's estimate for response costs, site remediation,
and future operation and maintenance costs is $5.1 million, of which approximately $1.2 million is
estimated to be spent during 1999. At the Rockaway Township Well Field site, the Company's
estimate for response costs, site remediation, and future operations and maintenance costs is $4.4
million, of which approximately $1.8 million is estimated to be spent during 1999.
Jacobson, acquired by Huck in June 1998, is involved in the Indian Bend Wash (South Area) superfund
site in Tempe, Arizona. Pursuant to the terms of a five-year environmental indemnity contained in the
Stock Purchase Agreement between Huck and the previous owner, Huck is responsible for the first $2
million in environmental liabilities, the previous owner is responsible for environmental liabilities from $2
to $6 million; Huck and the previous owner share the expense of environmental liabilities equally in
excess of $6 million but less than $10 million. The estimated liability associated with Jacobson
environmental remediation is $.5 million.
The Company has recorded a $9.5 million liability for response costs, site remediation, and future
operation and maintenance costs for the above sites. In addition to the above sites, the Company has
ongoing involvement with environmental issues at other locations none of which are expected to have a
material impact on the financial position of the Company.
The Company's Propulsion and Fastening Systems segments' estimated liability for all environmental
remediation is $21 million, and is classified in "Other accrued expenses" and "Accrued interest and
other noncurrent liabilities." The Company believes that any liability exceeding amounts recorded will
not have a material adverse effect on the Company's future results of operations or financial position.
The Company has collected approximately $9.7 million in environmental-related recoveries from
insurance companies through December 31, 1998. The Company estimates it will spend
approximately $5 and $1.6 million of the total liability, respectively, over the next two years.
In connection with the Howmet acquisition, Pechiney, S.A. (Howmet's previous owner) indemnified
Howmet for environmental liabilities relating to Howmet and stemming from events occurring or
conditions existing on or prior to the acquisition, to the extent that such liabilities exceed a cumulative
$6 million. It is probable that changes in any of the following accrued liabilities will result in an equal
change in the amount of the receivable from Pechiney, S.A. pursuant to this indemnification. The
Company believes that any Howmet liability exceeding amounts recorded will not have a material
adverse effect on the Company's future results of operations or financial position.
Howmet has received test results indicating levels of polychlorinated biphenyls ("PCBs") at its Dover,
N.J., plant that will require remediation. Various remedies are possible and could involve expenditures
ranging from $2 million to $22 million or more. Howmet has recorded a $2 million long-term liability for
this matter. In addition to the remediation work required at the Company's Dover, N.J., plant, liabilities
exist for clean-up costs associated with hazardous materials at nine other on-site and off-site waste
disposal facilities. Howmet has been, or may be, named a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act, or similar state laws at these
locations. At December 31, 1998, $4.2 million of accrued environmental liabilities are included in the
consolidated balance sheet for these nine sites. At December 31, 1997, the consolidated balance sheet
23
included $4.4 million of accrued liability related to eight sites. The indemnification discussed above
applies to the costs associated with the Dover, N.J., plant and the nine other locations.
In addition to the above environmental matters, and unrelated to Howmet operations, Howmet and
Pechiney, S.A. are jointly and severally liable for environmental contamination and related costs
associated with certain discontinued mining operations owned and/or operated by a predecessor-in-
interest until the early 1960s. These liabilities include approximately $16 million in remediation and
natural resource damage liabilities at the Blackbird Mine site in Idaho and a minimum of $10 million in
investigation and remediation costs at the Holden Mine site in Washington. Pechiney, S.A. has agreed
to indemnify Howmet for such liabilities. In connection with these environmental matters, Howmet has
recorded a $26 million liability which is classified in "Accrued interest and other noncurrent liabilities,"
and an equal $26 million receivable from Pechiney, S.A., which is classified in "Other noncurrent
assets." At December 31, 1997, $29.3 million of liability and receivables were included in the balance
sheet for these issues. Pechiney, S.A. is currently funding all amounts related to these liabilities.
NOTE 17. LEASE COMMITMENTS
The Company has operating leases that are principally short-term and primarily for building, office space
and other real estate. Rental expense charged was $24, $15.1, and $13.8 million in 1998, 1997 and
1996, respectively. Renewal and purchase options are available on certain of these leases. Future
minimum rental commitments under non-cancelable operating leases total approximately $51.6 million
with $14.8, $12.9, $6.1, and $4.3 million committed in 1999 through 2002 respectively, and $13.5
million thereafter. Certain plant facilities and equipment are provided for use by the government under
short-term or cancelable arrangements.
NOTE 18. STOCK OPTION AND PERFORMANCE UNIT PLANS
The Company's Stock Option Plans provide that grants of stock options, shares of restricted stock, and
other awards may be made to key Company employees and its affiliates in which the Company has a
direct or indirect equity interest. Stock option activity is summarized as follows:
Weighted
Average Per
Shares Share
Options outstanding at December 31, 1995 (1,364,698 exercisable shares) 2,133,498 $12.61
Granted 479,048 $19.73
Lapsed or forfeited (34,800) $17.43
Exercised (175,888) $12.50
Options outstanding at December 31, 1996 (1,567,658 exercisable shares) 2,401,858 $13.97
Granted 229,392 $39.61
Lapsed or forfeited (70,000) $19.30
Exercised (327,952) $13.03
Options outstanding at December 31, 1997 (1,634,898 exercisable shares) 2,233,298 $16.58
Granted 310,756 $39.33
Lapsed or forfeited (40,168) $23.27
Exercised (221,708) $15.34
Options outstanding at December 31, 1998 (1,683,422 exercisable shares) 2,282,178 $19.68
Options outstanding at December 31, 1998 have expiration dates ranging from July 1999 to October
2008.
24
Limited appreciation rights were outstanding covering 143,450 option shares. Limited appreciation
rights are paid automatically in cash in lieu of other related options upon a change in control of the
Company.
During 1995, 460,000 Cordant stock options were contingently granted to certain Howmet employees.
Such options were granted at $17.75 per share (380,000) and $20.47 per share (80,000), the market
price on the date of grant. At December 31, 1998, 360,000 options remained outstanding net of
lapses. These options vest 50 percent on the date Cordant acquires 100 percent ownership of Howmet
prior to December 31, 2001, and vest in increments of 25 percent on the second and third anniversary
date of such acquisition. Such options expire ten years from the date granted. Subsequent to the
initial grant of those options, the participants were granted rights under an alternative plan whereby if
Cordant does not acquire 100 percent of Howmet by December 13, 2001, each participant will vest in
an amount equal to the gain in such Cordant options on such date. Since vesting is assured under the
alternative plan, Howmet is recording compensation expense related to that plan over the six-year
vesting period ending December 13, 2001. During 1998 and 1997, Howmet recorded $.6 and $2.9
million respectively of compensation expense related to these options.
Shares of common stock reserved for both outstanding and future grants of options and other stock-
based awards at December 31, 1998 and 1997 were 3,761,636 and 3,983,344 shares, respectively.
In accordance with the provisions of SFAS No. 123, the Company has elected to continue to account
for stock-based compensation using the intrinsic value method under APB Opinion No. 25 and,
accordingly, does not recognize compensation cost for options issued to employees at market value. If
the Company recognized compensation cost based on the fair value of the options granted at grant
date, as prescribed by SFAS No. 123, net income and earnings per share on a pro forma basis would
have been reduced approximately 2.4 and 2.1 percent in 1998 and 1997 respectively.
Information regarding stock options outstanding and exercisable as of December 31, 1998, is as
follows:
Price Range
$5.84 $12.22 $17.75 $36.13
to $12.06 to $17.19 To $27.84 to $45.59
Options Outstanding:
Number
Weighted average exercise price
Weighted average remaining contractual life
Options Exercisable:
Number
Weighted average exercise price
Howmet Options
Howmet established a stock option plan in 1997, to provide stock options, shares of restricted stock
and Stock Appreciation Rights (SARs) to key Howmet employees. Howmet's plan may grant up to 5
million shares of Howmet common stock to employees and has reserved 5 million common shares for
the plan. In December 1997, 4,377,500 options were granted with a $15.00 exercise price. Activity
for 1998 follows:
459,236
$7.67
3.1 years
459,236
$7.67
672,965
$14.35
5.8 years
672,965
$14.35
663,845
$18.78
7.3 years
483,845
$19.05
486,132
$39.61
9.2 years
67,376
$40.06
25
Weighted
Average Per
Shares Share
Options outstanding at December 31, 1997 (no exercisable shares) 4,377,500 $15.00
Granted 98,000 $14.42
Lapsed or forfeited (162,500) $15.00
Exercised
Options outstanding at December 31, 1998 (no exercisable shares) 4,313,000 $14.98
The Howmet options granted in December 1997 will vest and become exercisable in 25 percent
increments on January 1 of each year beginning in 1999. The options outstanding at December 31,
1998 have exercise prices ranging from $12.22 to $15.66 and a weighted average remaining
contractual life of seven years. Options outstanding at December 31, 1998 expire in December 2005.
Howmet SARs
Certain key Howmet employees participate in a SARs plan. The maximum per share value of the
outstanding SARs is limited to the difference between $15 and the SARs' base price per share
(generally $2). The SARs vest over a five-year period ending 2001 based upon passage of time and the
operating performance of the Company. SARs expense is adjusted quarterly based on the market value
of the stock and vesting. At December 31, 1998 and 1997 there were approximately 4.3 million SARs
outstanding. Howmet recorded $10.8, $31.4 and $6.6 million of expense related to the plan for the
years ended December 31, 1998, 1997 and 1996 respectively. At December 31, 1998 and 1997,
$43.5 and $38 million, respectively, was included in the amount captioned "Accrued interest and other
noncurrent liabilities" in the consolidated balance sheet.
NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used in estimating fair values:
Cash and cash equivalents: The carrying amount approximates fair value.
Receivables: The fair value of receivables approximates the carrying amount. The fair value of certain
receivables, due to the collection of certain receivables over an extended period, is based on the
discounted value of expected future cash flows which difference is insignificant.
Short-term and long-term debt: The carrying value of short-term debt approximates fair value. The fair
value of long-term debt is estimated based on the current borrowing rates for similar issues and also
approximates the carrying amount.
Off-balance-sheet instruments: The Company enters into forward exchange contracts as a hedge
against currency fluctuations of certain foreign currency transactions. At December 31, 1998, the
Company had contracts to buy and sell various currencies with maturity dates ranging from January
1999 through December 1999. The total notional contract value of these transactions in U.S. dollars
was $64.3 million. The fair value of the contracts is the $.2 million of unrecognized gain as of
December 31, 1998. The fair value of these contracts was estimated based on December 31, 1998
foreign exchange rates obtained from dealers. Gains or losses arising from foreign exchange contracts
offset foreign exchange gains or losses on underlying hedged commitments. The impact on the
financial position and results of operations from likely changes in foreign exchange rates is mitigated by
minimizing risk through hedging transactions related to commitments.
26
The Company enters into forward exchange contracts with major dealers and does not require
collateral. If a counterparty was not able to completely fulfill its contract obligations, the Company
would incur a loss equal to the amount of any gain on the contract.
NOTE 20. OPERATIONS BY INDUSTRY SEGMENT
The Company has three reportable segments: Propulsion Systems, Fastening Systems, and Investment
Castings. The Company's reportable segments manufacture and distribute distinct products with
different production processes.
The Propulsion Systems segment consists-of solid rocket propulsion for NASA, the Department of
Defense, and various commercial customers for space applications, as well as, gas generator and
ordnance products, metal and composite components, and services relating to such systems.
The Fastening Systems segment consists of specialty Fastening Systems for a broad range of aerospace
and industrial applications worldwide.
The Investment Castings segment provides products worldwide for both the aerospace and industrial
gas turbine (IGT) markets.
The Conipany evaluates performance and allocates resources based on operating income, which is pre-
tax income before interest income and expense, and excludes any equity income and other non-
operating expenses. The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. In accordance with industry practice, a
proportionate share of Corporate general and administrative expense is allocated and reimbursed
through Propulsion Systems contracts. Intersegment sales and transfers are not significant.
27
The following table summarizes segment information:
(in millions)
Year Ended December 31
1998 1997 1996
Net sales
Investment Castings'"
Propulsion Systems
Fastening Systems
$ 1,350.6
643.0
433.3
105.2
645.5
319.4
611.7
252.9
Consolidated net sales $ 2,426.9 $ 1,070.1 864.6
Segment operating income
Investment Castings'"
Propulsion Systems'^'
Fastening Systems'^'
$ 185.8
82.1
65.2
333.1
(24.4)
.4
12.8
(28.3)
(4.2)
$ 11.7
64.4 :
40.4
116.5
(12.8)
35.3
7.0
(4.0)
(2.2)
S 63.3
8.0
71.3
(3.5)
15.1
8.1
(3.6)
(.8)
Segment operating income
Unallocated corporate expense
Equity income
Interest income
Interest expense
Other, net
Consolidated income before income taxes
minority interest, and extraordinary item $ 289.4 139.8 86.6
Total assets
Investment Castings'"'*'
Propulsion Systems
Fastening Systems
Corporate
$ 1,228.0
292.9
504.3
68.3
$ 1,168.2
327.0
239.3
48.9
335.3
244.8
238.1
Consolidated assets $ 2,093.5 $ 1,783.4 $ 818.2
Depreciation and amortization expense
Investment Castings'"
Propulsion Systems
Fastening Systems
Corporate
64.1
21.5
15.7
.7
$ 6.6
27.4
11.8
.5
$ 29.9
12.5
1.6
Consolidated depreciation and amortization expense 102.0 46.3 44.0
Capital expenditures
Investment Castings'"
Propulsion Systems
Fastening Systems
Corporate
83.0
13.3
13.4
5.0
$ 15.2
9.1
11.6
.4
$ 12.2
12.9
7.9
Consolidated capital expenditures 114.7 $ 36.3 33.0
(1) Consolidation of Investment Castings began with December 1997.
(2) The Propulsion Systems income in 1996 included a $1.3 million restructuring reserve release.
(3) The Fastening Systems income in 1998 included a $3 million relocation charge and income in 1996 included
a $5 million inventory write-off and a $.9 million restructuring reserve release.
(4) Excludes the Restricted Trust (See Note 6).
28
Corporate assets consist principally of cash and cash equivalents, income tax receivable, property,
plant, and equipment, other noncurrent assets, and in 1996, investment in Howmet.
Consolidated revenues from external customers are from the following products:
Year Ended December 31
(in millions) 1998 1997 1996
Net sales by markets and major product lines:
Aerospace castings market
Industrial gas turbine castings market
RSRM
Industrial fastener market
Other propulsion
Aerospace fastener market
Other castings market
802.5
476.1
410.6
237.8
232.4
195.5
72.0
64.3
35.4
395.5
148.6
250.0
170.8
5.5
$374.6
134.5
237.1
118.4
Consolidated net sales $ 2,426.9 $ 1,070.1 $864.6
Net sales under U.S. government contracts and subcontracts, primarily by the Propulsion and
Investment Castings segments, amounted to $730.6, $576.5 and $571.9 million for 1998, 1997 and
1996, respectively. The sales as a percentage of consolidated net sales were 30, 54, and 66 percent
for 1998, 1997 and 1996, respectively. Investment Castings had sales to one customer of $251
million or 10 percent of the Company's consolidated total.
NOTE 21. GEOGRAPHIC INFORMATION
The Company is a multinational entity with operating subsidiaries in four geographic regions: United
States, Europe (including France and the United Kingdom), Canada, and Asia (including Japan, Taiwan,
and Australia). Intercompany transfers between geographic areas are not significant. Allocated long
lived assets exclude the $716.4 million Restricted Trust (See Note 6. Restricted Trust and Related
Pechiney Notes Payable).
(in millions)
Year Ended December 31
1998
$ 1,766.3
481.0
95.8
83.8
$
1997
944.1
79.3
21.2
25.5
1996
$ 785.3
47.0
12.4
19.9
Net Sales
United States
Europe
Canada
Asia
Consolidated net sales $ 2,426.9 $ 1,070.1 864.6
Long lived Assets
United States
Europe
Canada
Asia
$ r 318.1
120.2
37.7
19.1
$ 1,063.9
119.5
27.4
.6
$ 514.7
14.4
.1
.8
Consolidated long lived assets $ 1,495.1 $ 1,211.4 530.0
29
NOTE 22. QUARTERLY FINANCIAL HIGHLIGHTS (Unaudited)
(in millions, except per share data) Dec. 31
$ 640.5
64.5
29.6
.80
.10
44.63
31.38
Calendar Year 1998
Three Months Ended
Sept. 30
$ 595.1
90.8
38.5
1.03
.10
48.38
35.63
June 30
$ 628.6
81.8
41.1
1.09
.10
55.75
44.50
March 31
$ 562.7
71.6
32.8
.87
.10
50.13
39.53
Net sales
Operating income '" '^'
Net income
Net income per share'^'
Cash dividends paid per share '^'
Market price '^'
High
Low
(in millions, except per share data)
Calendar Year 1997
Three Months Ended
Dec. 31 1^'
$ 350.3
36.9
23.5
16.4
.62
.43
.10
47.25
39.88
Sept. 30
$ 237.7
25.8
28.6
28.6
.76
.76
.10
44.13
33.88
June 30
$ 255.6
21.3
23.7
23.7
.63
.63
.10
38.13
27.44
March 31
$ 226.5
19.7
20.8
20.8
.56
.56
.085
30.44
22.25
Net sales
Operating income '''
Income before extraordinary item
Net income'*'
Income per share before extraordinary item '^'
Net income per share'^"*'
Cash dividends paid per share '^'
Market price '^'
High
Low
(1) Previously reported amounts have been reclassified to conform to the 1998 year-end presentation.
(2) All per share data has been adjusted for the two for one stock split that was paid on March 1 3, 1998.
(3) Includes one month of Howmet's results.
(4) The fourth quarter of 1997 included Howmet debt refinancing charges of $20.2 million ($7.1 million or $.19 per share after
tax and minority interest).
(5) Operating income in the third quarter included $8.1 million of SAR benefit. This amount was reversed in the fourth quarter
due to Howmet common stock price fluctuation.
30
NOTE 23. SUBSEQUENT EVENT
On February 8, 1999, the Company acquired for $385 million the remaining 22.65 million shares of
Howmet International Inc. common stock owned by Carlyle and entered into a new Standstill
Agreement and extended an existing covenant not to compete. With this purchase of the Carlyle
shares, the Company's ownership of Howmet International Inc. common stock increases to 84.65
million shares representing 84.65 percent of Howmet's outstanding voting common stock. The
remaining 15.35 million shares of Howmet common stock is publicly owned. The acquisition was
financed with borrowings under a new unsecured $400 million bank line of credit established in
conjunction with the stock purchase. The interest rate on this facility is based on LIBOR plus a spread,
and was 5.75 percent at the time of the transaction. As a result of this acquisition, a one-time tax
adjustment will be recorded in the first quarter of 1999 to reverse $7.1 million or $.19 per share of an
accumulated dividend tax previously accrued.
NOTE 24. EVENT SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT AUDITORS (UNAUDITED)
On March 3, 1999, Howmet received from the U.S. Air Force a Notice of Proposed Debarment from
future government contracts and subcontracts directed at Howmet Corporation and Howmet Cercast
(Canada), Inc. The Air Force unilaterally terminated the proposed debarment with respect to Howmet
Corporation by letter to it on March 10, 1999, thus permitting Howmet Corporation to resume
accepting U.S. government contracts and subcontracts. The continuing proposed debarment with
respect to Howmet's Cercast Canadian subsidiary is based on certain of the above testing issues
discussed in Note 15, and improper vendor payments that took place at the Cercast Canadian
operations. Debarment does not affect existing Cercast contracts, other than extensions. Howmet is
taking steps to have the proposed Cercast debarment withdrawn. In the unlikely event a debarment
were imposed for an extended period of time, such action would negatively impact sales and profits in
future periods. However, the Company believes such impact would be immaterial to results of
operations.
31
Cordant Technologies Inc.
Supplementary [nformation
December 31, 1998
The following Cordant Technologies Inc. (Cordant) Consolidating Balance Sheet schedule at
December 31, 1998, was subjected to audit procedures applied by Ernst & Young LLP in connection
with their audit of the consolidated financial statements of Cordant and included with Cordant's Audited
Financial Statements for the year ended December 31, 1998. The schedule presents Cordant and its
wholly-owned subsidiaries separate from Howmet International Inc. (Howmet). Howmet is a separate
public corporation traded on the New York Stock Exchange. At December 31, 1998, Cordant owned
62% of Howmet and for financial reporting purposes consolidates Howmet with its financial
statements. The financial assurance test schedule was prepared utilizing Cordant and its wholly-owned
subsidiaries' balance sheet data, including Cordant's proportionate share of Howmet's earnings, and
excluding Cordant's goodwill related to the Howmet acquisition. All other Howmet financial data has
been excluded from the calculation for the following reasons:
1. Howmet is legally and financially responsible for its own liabilities including its environmental
liability. Howmet has obtained a letter of credit covering the one site for which Howmet is liable.
2. Cordant and its wholly-owned subsidiaries are legally and financially responsible for only their
liabilities including environmental liabilities.
3. Cordant and its wholly-owned subsidiaries have not guaranteed any debt, liability or any obligation
of Howmet. Howmet has not guaranteed any debt, liability or any obligation of Cordant and its
wholly-owned subsidiaries.
4. All of the environmental sites included in this financial coverage test related only to Cordant and its
wholly-owned subsidiaries.
32
CORDANT TECHNOLOGIES
CONSOLIDATING BALANCE SHEET
DECEMBER 31. 1998
(IN THOUSANDS)
Cordant (a) Howmet (b) Eliminations Consolidated
ASSETS
Current Assets
Cash and cash equivalents
Receivables
Inventories
Deferred income taxes and prepaid
expenses
Restricted Trust
Total Current Assets
Property, Plant and Equipment
Land
Buildings and improvements
Machinery and equipment
Total Property, Plant and Equipment
Less allowances for depreciation
Net Property, Plant and Equipment
Other Assets
Equity investment in Howmet
Costs in excess of net assets of
businesses acquired, net
Patents and other intangible assets, net
Other noncurrent assets
Total Other Assets
Total Assets
$ 7,697
123,942
90,471
41,524
263,634
18,093
233,650
405,197
656,940
(319,508)
337,432
384,199
196,800
13,153
54,529
648,681
$ 1,249,747
$ 37,583
116,079
161,876
19,275
716,386
1,051,199
18,757
77,585
363,422
459,764
(124,870)
334,894
221,138
106,618
86,793
14,549
$1,800,642
(384,199)
143,745
(240,454)
$(240,454)
$ 45,280
240,021
252,347
60,799
716,386
1,314,833
36,850
311,235
768,619
1,116,704
(444,378)
672,326
561,683
119,771
141,322
822,776
$2,809,935
(a) Includes all wholly-owned subsidiaries of Cordant Technologies Inc.
(b) As of December 31, 1998, Cordant owned 62 percent of Howmet International Inc. common stock.
Howmet is a public company traded on the New York Stock Exchange.
33
CORDANT TECHNOLOGIES
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
Cordant (a) Howmet (b) Eliminations Consolidated
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Short-term debt
Accounts payable
Accrued compensation
Other accrued expenses
Pechiney Notes
Total Current Liabilities
Noncurrent Liabilities
Accrued retiree benefits
Deferred income taxes
Accrued interest and other noncurrent liabilities
Long-term debt
$ 52,076
38,386
36,621
48,559
175,642
72,101
50,184
76,902
261,536
$ 27,985
101,459
44,956
153,602
716,386
1,044,388
96,854
2,105
157,368
63,000
$ 80,061
139,845
81,577
202,161
716,386
1,220,030
168,955
52,289
234,270
324,536
Total Noncurrent Liabilities 460,723 319,327 780,050
Commitments and Contingent Liabilities
Minority interest
Redeemable preferred stock 65,596
141,976
(65,596)
141,976
Stockholders' Equity
Common stock (par value $1.00 per share)
Authorized - 200 shares
Issued - 41.1 shares (includes treasury
shares)
Additional paid-in capital
Retained earnings
Cumulative translation adjustment
Less common stock in treasury, at cost
(4.6 shares at December 31,1998)
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
41,076
47,326
601,998
(1,448)
688,952
(75,570)
613,382
$1,249,747
1,000
195,080
177,790
(2,539)
371,331
371,331
$1,800,642
(1,000)
(195,000)
(124,043)
3,209
(316.834)
(316,834)
$ (240,454)
41,076
47,406
655,745
(778)
743,449
(75,570)
667,879
$2,809,935
(a) Includes all wholly-owned subsidiaries of Cordant Technologies Inc.
(b) As of December 31, 1998, Cordant owned 62 percent of Howmet International Inc. common stock.
Howmet is a public company traded on the New York Stock Exchange.
34